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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2003
OR  o TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934  For the transition period from  to


Commission File Number 1-5823

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

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


(312) 822-5000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

|                                                 |  |                                                                
|------------------------------------------------ |  | ---------------------------------------------------------------
|Title of each class                              |  | Name of each exchange on
which registered                      
|                                                 |  |                                                                
|Common Stock
with a par value
of $2.50 per share |  | New York Stock Exchange
Chicago Stock Exchange
Pacific Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

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

Yes ü        No....

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation SK is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to
this Form 10K. [ü ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes ü        No....

As of February 23, 2004, 223,617,337 shares of common stock were outstanding.
The aggregate market value of the common stock of CNA Financial Corporation
held by nonaffiliates of the registrant as of June 30, 2003 was approximately
$548 million based on the closing price of $24.60 per share of the common stock
on the New York Stock Exchange on June 30, 2003.

DOCUMENTS INCORPORATED
BY REFERENCE:

Portions of the CNA Financial Corporation Proxy Statement prepared for the 2004
annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by
reference into Part III of this Report.



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TABLE OF CONTENTS



|                                                                           |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                    
|                                                                           | ITEM 1. BUSINESS                                                                             
|                                                                           | ITEM 2. PROPERTIES                                                                           
|                                                                           | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                                           | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                                                   
|                                                                           | ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS             
|                                                                           | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                                                                           | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                           | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                                           | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                                           | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|                                                                           | ITEM 9A. CONTROLS AND PROCEDURES                                                             
|PART III                                                                  
|                                                                           | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                                           | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                                           | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                                           | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                                           | ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES                                              
|PART IV                                                                   
|ITEM 15. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
|SIGNATURES                                                                
|By-Laws                                                                   
|General Release and Full and Settlement Agreement                         
|Capital Support Agreement                                                 
|Primary Subsidiaries                                                      
|Independent Auditors' Consent                                             
|Certification                                                             
|Certification                                                             
|Certification                                                             
|Certification                                                             



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##### Table of Contents



Item
    
    
    
    
    
    PageNumber
    
    
    
    
    
    NumberPART I1.
    
    
    Business
    
    
    32.
    
    
    Properties
    
    
    103.
    
    
    Legal Proceedings
    
    
    114.
    
    
    Submission of Matters to a Vote of Security Holders
    
    
    11PART II5.
    
    
    Market for the Registrants Common Stock and Related Stockholder Matters
    
    
    126.
    
    
    Selected Financial Data
    
    
    147.
    
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    157A.
    
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    998.
    
    
    Financial Statements and Supplementary Data
    
    
    1049.
    
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    1939A.
    
    
    Controls and Procedures
    
    
    193PART III10.
    
    
    Directors and Executive Officers of the Registrant
    
    
    19411.
    
    
    Executive Compensation
    
    
    19412.
    
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    19513.
    
    
    Certain Relationships and Related Transactions
    
    
    19514.
    
    
    Principal Accounting Fees and Services
    
    
    195PART IV15.
    
    
    Financial Statements, Schedules, Exhibits and Reports on Form 8-K
    
    
    196






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PART I




ITEM 1. BUSINESS

CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance
holding company whose primary subsidiaries consist of property and casualty and
life and group insurance companies. Collectively, CNAF and its subsidiaries
are referred to as CNA or the Company. CNAs property and casualty insurance
operations are conducted by Continental Casualty Company (CCC), incorporated in
1897, and its affiliates, and The Continental Insurance Company (CIC),
organized in 1853, and its affiliates. CIC became an affiliate of the Company
in 1995 as a result of the acquisition of The Continental Corporation
(Continental).

CNA serves a wide variety of customers, including small, medium and large
businesses; insurance companies; associations; professionals; and groups and
individuals with a broad range of insurance and risk management products and
services.

Insurance products include property and casualty coverages; life, accident and
health insurance; and retirement products and annuities. CNA services include
risk management, information services, and claims administration. CNA products
and services are marketed through independent agents, brokers, managing general
agents and direct sales.

During 2003, CNA completed a strategic review of its operations and decided to
concentrate efforts on its property and casualty business. As a result of this
review, and the 2003 charges of $1,849 million after-tax ($2,845
million pretax) related to unfavorable
net prior year development and a $396 million after-tax ($610
million pretax) increase in the provision for
reinsurance and insurance receivables, a capital plan was developed to
replenish statutory capital of the property and casualty subsidiaries adversely
impacted by these charges. A summary of the capital plan, related actions, and
other significant 2003 business decisions is discussed below:

The capital plan consists of the sale
in November of 2003 of $750 million of a new series of CNA convertible preferred stock to Loews
Corporation (Loews), the 90% owner of CNAs outstanding shares, and a
commitment from Loews for additional capital support of up to $500 million by
February 27, 2004 through the purchase of surplus notes of CCC, CNAs principal
insurance subsidiary, in the event certain additions to CCCs statutory capital
were not achieved through asset sales. In addition, Loews committed up to an additional
$150 million by March 31, 2004, in a form to be determined,
to support the statutory capital of CCC in the event of additional
shortfalls in relation to business and asset sales.

On December 31, 2003, CNA completed the sale of the majority of its Group
Benefits business to Hartford Financial Services Group, Inc.
(Hartford). The business sold included group life and
accident, short and long term disability and certain other products. CNAs
group long term care and specialty medical businesses were excluded from the
sale. Consideration from the sale was approximately $530 million, of which
$485 million was received on December 31, 2003, resulting in an after-tax
realized investment loss on the sale of $130 million during 2003. See Note P
of the Consolidated Financial Statements included under Item 8 for further
information.

In February of 2004, CNA entered into a definitive agreement to sell its
individual life insurance business to Swiss Re Life & Health America Inc.
(Swiss Re) for approximately $690 million. The business sold includes term,
universal and permanent life insurance policies and individual annuity
products. The transaction is expected to be completed on or before March 31,
2004, subject to certain customary closing

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conditions and regulatory approvals. See Note T of the Consolidated Financial
Statements included under Item 8 for further information.

After consideration of the increase in CCCs statutory surplus resulting from
the sale of the Group Benefits business, Loews purchased $46 million of CCC
surplus notes in February of 2004, pursuant to the capital plan. In addition,
the sale of CNAs individual life business is expected to result in an addition
to CCCs statutory surplus in excess of $400 million. However, the sale of the
individual life business was not consummated by February 26, 2004. As a result,
Loews purchased $300 million of additional CCC surplus notes in February of
2004. Following the consummation of the individual life sale, CNA plans to seek
approval from the insurance regulatory authority for the repayment of the
surplus notes purchased in relation to such sale, although no assurance can be
given that sale of the individual life business will be consummated or that the
regulatory approval will be obtained.

In addition to the asset sales described above, and as part of the decision to
focus on its property and casualty business, CNA withdrew from the assumed
reinsurance business during 2003. In October of 2003, the Company entered into
an agreement to sell the renewal rights for most of the treaty business of CNA
Re to Folksamerica Reinsurance Company (Folksamerica). Under the terms of the
transaction, Folksamerica will compensate CNA based upon the amount of premiums
renewed by Folksamerica over the next two contract renewals. CNA will manage
the run-off of its retained liabilities.

The Group Operations business, individual life and annuity insurance business
and CNA Re absorbed approximately $150 million of the total shared corporate
overhead expenses that are allocated to all of CNAs businesses. The Company
expects that the 2004 consolidated net results will include an approximate $50
million after-tax loss for these three businesses, primarily due to these
corporate overhead expenses. The 2003 expense initiative, discussed below did
not contemplate the sale or exit of these businesses, and therefore the savings
from this initiative will be partially offset by these expenses. The Company
is evaluating its corporate expense structure and anticipates taking actions in
2004 that will reduce these expenses.

The primary components of the expense
initiative are a reduction of the workforce by approximately five percent,
lower commissions and other acquisition costs, principally related to workers
compensation, and reduced spending in other areas. As of December 31, 2003,
the Company has achieved the targeted workforce reduction and approximately $28
million of associated severance and related costs have been recorded in 2003.
Actions related to the commission and other acquisition expenses began in 2003
and will continue through 2004.

During February of 2004, CNA announced the decision to cease sales to new
customers in its structured settlement and institutional markets
businesses. Also, during
2003, CNA ceased sales to new customers in the individual and group long term
care businesses. CNA will continue to accept new deposits and premiums only
from existing customers for the institutional markets business and will service
its existing commitments on all businesses in which new sales were
ceased.
These businesses will be managed as a run-off operation. CCC will
provide credit enhancement to Continental Assurance (CAC) for certain
of CACs investment and specialty medical products.

Competition

The property and casualty and life and health insurance industries are highly
competitive both as to rate and service. CNAs consolidated property and
casualty subsidiaries compete not only with other stock insurance companies,
but also with mutual insurance companies, reinsurance companies and other
entities for both producers and customers. CNA must continuously allocate
resources to refine and improve its insurance products and services.

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Rates among insurers vary according to the types of insurers and methods of
operation. CNA competes for business not only on the basis of rate, but also
on the basis of availability of coverage desired by customers, ratings and
quality of service, including claim adjustment services.

There are approximately 2,400 individual companies that sell property and
casualty insurance and approximately 1,000 individual companies selling life
and health insurance in the United States. CNAs consolidated property and
casualty subsidiaries ranked as the eleventh largest property and casualty
insurance organization in the United States based upon 2002 statutory net
written premiums.

The commercial property and casualty markets continue to realize significant
rate increases, indicative of a hard market, while simultaneously using more
strict underwriting criteria and requiring higher retention amounts for
policyholders to further mitigate risk. The markets focus on underwriting
profitability and the heightened perception of risk indicate the hard market
will likely continue at a reduced level into 2004.

Regulation

The insurance industry is subject to comprehensive and detailed regulation and
supervision throughout the United States. Each state has established
supervisory agencies with broad administrative powers relative to licensing
insurers and agents, approving policy forms, establishing reserve requirements,
fixing minimum interest rates for accumulation of surrender values and maximum
interest rates of policy loans, prescribing the form and content of statutory
financial reports and regulating solvency and the type and amount of
investments permitted. Such regulatory powers also extend to premium rate
regulations, which require that rates not be excessive, inadequate or unfairly
discriminatory. In addition to regulation of dividends by insurance
subsidiaries, intercompany transfers of assets may be subject to prior notice
or approval by the state insurance regulators, depending on the size of such
transfers and payments in relation to the financial position of the insurance
affiliates making the transfer or payment.

Insurers are also required by the states to provide coverage to insureds who
would not otherwise be considered eligible by the insurers. Each state
dictates the types of insurance and the level of coverage that must be provided
to such involuntary risks. CNAs share of these involuntary risks is mandatory
and generally a function of its respective share of the voluntary market by
line of insurance in each state.

Insurance companies are subject to state guaranty fund and other
insurance-related assessments. Guaranty fund and other insurance-related
assessments are levied by the state departments of insurance to cover claims of
insolvent insurers.

Reform of the U.S. tort liability system is another issue facing the insurance
industry. Over the last decade, many states have passed some type of reform,
but more recently, a number of state courts have modified or overturned these
reforms. Additionally, new causes of action and theories of damages continue
to be proposed in state court actions or by legislatures. Continued
unpredictability in the law means that insurance underwriting and rating is
expected to continue to be difficult in commercial lines, professional
liability and some specialty coverages.

Although the Federal Government and its regulatory agencies do not directly
regulate the business of insurance, federal legislative and regulatory
initiatives can impact the insurance industry in a variety of ways. These
initiatives and legislation include tort reform proposals; class action reform
proposals; proposals to establish a privately financed trust to process
asbestos bodily injury claims; proposals to overhaul the Superfund hazardous
waste removal and liability statutes and various tax proposals affecting
insurance companies. In 1999, Congress passed the Financial Services
Modernization or Gramm-Leach-Bliley Act (GLB Act), which repealed portions of
the Glass-Steagall Act and enabled closer

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relationships between banks and insurers. Although functional regulation was
preserved by the GLB Act for state oversight of insurance, additional financial
services modernization legislation could include provisions for an alternate
federal system of regulation for insurance companies.

CNAFs domestic insurance subsidiaries are subject to risk-based capital
requirements. Risk-based capital is a method developed by the National
Association of Insurance Commissioners (NAIC) to determine the minimum amount
of statutory capital appropriate for an insurance company to support its
overall business operations in consideration of its size and risk profile. The
formula for determining the risk-based capital requirements specifies various
factors, weighted based on the perceived degree of risk, which are applied to
certain financial balances and financial activity. The adequacy of a companys
actual capital is evaluated by a comparison to the risk-based capital
requirements, as determined by the formula. Companies below minimum risk-based
capital requirements are classified within certain levels, each of which
determines a specified level of regulatory attention applicable to a company.
As of December 31, 2003 and 2002, all of CNAFs domestic insurance subsidiaries
exceeded the minimum risk-based capital requirements.

Subsidiaries with insurance operations outside the United States are also
subject to regulation in the countries in which they operate. CNA has
operations in the United Kingdom, Canada, and other countries.
Information related to regulation is set forth in the
Managements Discussion and Analysis (MD&A) included under
Item 7.

Terrorism Insurance

Information related to terrorism insurance is set forth in the MD&A included under Item 7.

Reinsurance

Information on CNAs reinsurance activities is set forth in the MD&A included
under Item 7 and in Note H of the Consolidated Financial Statements included
under Item 8.

Employee Relations

As of December 31, 2003, CNA had approximately 12,100 full-time equivalent
(FTE) employees and has experienced satisfactory labor relations. CNA has
never had work stoppages due to labor disputes.

In the second quarter of 2003, the Company announced a $200 million expense
reduction initiative. One of the primary components of the initiative was a
reduction of the workforce by approximately five percent. As of December 31,
2003, the Company has achieved the targeted workforce reduction.

During 2001, CNA announced two restructuring plans, which included FTE
reductions of approximately 1,650 positions. See the MD&A included under Item
7 and Note O of the Consolidated Financial Statements included under Item 8 for
further discussion regarding the expense reduction initiatives and the
restructuring plans.

CNA has comprehensive benefit plans for substantially all of its employees,
including retirement plans, savings plans, disability programs, group life
programs and group healthcare programs. See Note J of the Consolidated
Financial Statements included under Item 8 for further discussion of CNAs
benefit plans.

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Business Segments

In 2003, CNA conducted its operations through five operating segments:
Standard Lines, Specialty Lines, CNA Re, Group Operations and Life Operations.
These segments are managed separately because of differences in their product
lines and markets. In addition to these five operating segments, certain other
activities are managed and reported in the Corporate and Other segment.
Discussions of each segment including the products offered, the customers
served and the distribution channels used are set forth in the MD&A included
under Item 7 and in Note N of the Consolidated Financial Statements included
under Item 8.

Supplementary Insurance Data

The following table sets forth supplementary insurance data:

Supplementary Insurance Data

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions, except ratio information)Trade Ratios  GAAP basis (a)Loss and loss adjustment expense ratio
    
    
    107.1
    %
    
    
    79.4
    %
    
    
    125.2
    %Expense ratio
    
    
    42.2
    
    
    
    29.3
    
    
    
    36.7Dividend ratio
    
    
    1.4
    
    
    
    0.9
    
    
    
    1.5Combined ratio
    
    
    150.7
    %
    
    
    109.6
    %
    
    
    163.4
    %Trade Ratios  Statutory basis (a)Loss and loss adjustment expense ratio
    
    
    112.7
    %
    
    
    79.2
    %
    
    
    126.2
    %Expense ratio
    
    
    32.8
    
    
    
    30.1
    
    
    
    32.3Dividend ratio
    
    
    1.1
    
    
    
    1.0
    
    
    
    1.7Combined Ratio
    
    
    146.6
    %
    
    
    110.3
    %
    
    
    160.2
    %Individual Life and Group Life Insurance InforceIndividual life (b)
    
    $
    330,805
    
    
    $
    345,272
    
    
    $
    426,822Group life
    
    
    58,163
    
    
    
    92,479
    
    
    
    70,910Total
    
    $
    388,968
    
    
    $
    437,751
    
    
    $
    497,732Other Data  Statutory basis (c)Property and casualty companies capital and surplus (d)
    
    $
    6,170
    
    
    $
    6,836
    
    
    $
    6,241Life and group companies capital and surplus
    
    
    707
    
    
    
    1,645
    
    
    
    1,752Property and casualty companies written premiums to surplus ratio
    
    
    1.1
    %
    
    
    1.3
    %
    
    
    1.3
    %Life companies capital and surplus-percent to total liabilities
    
    
    13.0
    %
    
    
    21.0
    %
    
    
    25.3
    %Participating policyholders-percent of gross life insurance inforce
    
    
    0.5
    %
    
    
    0.4
    %
    
    
    0.4
    %




|(a) |  | Trade ratios reflect the results of CNAs property and casualty insurance
subsidiaries. Trade ratios are industry measures of property and casualty
underwriting results. The loss and loss adjustment expense ratio is the
percentage of net incurred claim and claim adjustment expenses to net
earned premiums. The primary difference in this ratio between accounting
principles generally accepted in the United States of America (GAAP) and
statutory accounting practices (SAP) is related to the treatment of active
life reserves (ALR) related to long term care insurance products written
in property and casualty insurance subsidiaries. For GAAP, ALR is
classified as claim and claim adjustment expense reserves whereas for SAP,
ALR is classified as unearned premium reserves. The expense ratio, using
amounts determined in accordance with GAAP, is the percentage of
underwriting and acquisition expenses (including the amortization of
deferred acquisition expenses) to net earned premiums. The expense ratio,
using amounts determined in accordance with SAP, is the percentage of
acquisition and underwriting expenses (with no deferral of acquisition
expenses) to net written premiums. The dividend ratio, using amounts
determined in accordance with GAAP, is the ratio of dividends incurred to
net earned premiums. The dividend ratio, using amounts determined in
accordance with SAP, is the ratio of dividends paid to net earned
premiums. The combined ratio is the sum of the loss and loss adjustment
expense, expense and dividend ratios.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Lapse ratios for individual life insurance, as measured by surrenders and
withdrawals as a percentage of average ordinary life insurance inforce,
were 11.9%, 34.7%, and 8.7% in 2003, 2002 and 2001. (The 2002 lapse ratio
includes the novation of CNAs individual life reinsurance business.
Excluding the novation, the 2002 lapse ratio was 7.6%.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(c) |  | Other data is determined in accordance with SAP. Life and group
statutory capital and surplus as a percent of total liabilities is
determined after excluding separate account liabilities and reclassifying
the statutorily required Asset Valuation Reserve to surplus.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | Surplus includes the property and casualty companies equity ownership of
the life insurance subsidiaries in 2003, and the ownership of life and
group insurance subsidiaries in 2002 and 2001. See Note P of the
Consolidated Financial Statements included under Item 8 for further
details.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table displays the distribution of gross written premiums for
CNAs operations by geographic concentration:

Gross Written Premiums

Percent of TotalYears ended December 31
    
    2003
    
    2002
    
    2001Illinois
    
    
    9.3
    %
    
    
    9.1
    %
    
    
    8.3
    %California
    
    
    8.5
    
    
    
    7.7
    
    
    
    6.8New York
    
    
    7.3
    
    
    
    7.2
    
    
    
    7.9Florida
    
    
    7.6
    
    
    
    6.7
    
    
    
    6.2Texas
    
    
    5.7
    
    
    
    6.2
    
    
    
    5.8New Jersey
    
    
    4.5
    
    
    
    4.6
    
    
    
    4.4Pennsylvania
    
    
    4.2
    
    
    
    4.5
    
    
    
    4.3Massachusetts
    
    
    3.1
    
    
    
    2.8
    
    
    
    2.6All other states, countries or political subdivisions (a)
    
    
    49.8
    
    
    
    51.2
    
    
    
    53.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %




|(a) |  | No other individual state, country or political subdivision accounts for
more than 3.0% of gross written premiums.
|--- |  | ------------------------------------------------------------------------------------------------------------------

Approximately 3.2%, 3.5% and 4.8% of CNAs gross written premiums were derived
from outside of the United States for the years ended December 31, 2003, 2002
and 2001. Gross written premiums from the United Kingdom were approximately
1.8%, 1.7%, and 3.3% of CNAs premiums for the years ended December 31, 2003,
2002 and 2001. Premiums from any individual foreign country excluding the
United Kingdom were not significant.

Property and Casualty Claim and Claim Adjustment Expenses

The following loss reserve development table illustrates the change over time
of reserves established for property and casualty claim and claim adjustment
expenses at the end of the preceding ten calendar years for CNAs property and
casualty insurance operations. The first section shows the reserves as
originally reported at the end of the stated year. The second section, reading
down, shows the cumulative amounts paid as of the end of successive years with
respect to the originally reported reserve liability. The third section,
reading down, shows re-estimates of the originally recorded reserves as of the
end of each successive year, which is the result of the Companys property and
casualty insurance subsidiaries expanded awareness of additional facts and
circumstances that pertain to the unsettled claims. The last section compares
the latest re-estimated reserves to the reserves originally established, and
indicates whether the original reserves were adequate or inadequate to cover
the estimated costs of unsettled claims.

The loss reserve development table for property and casualty companies is
cumulative and, therefore, ending balances should not be added since the amount
at the end of each calendar year includes activity for both the current and
prior years.

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Schedule of Loss Reserve Development

Calendar Year Ended
    
    1993 (a)
    
    1994 (a)
    
    1995 (b)
    
    1996
    
    1997
    
    1998
    
    1999 (c)
    
    2000
    
    2001 (d)
    
    2002 (e)
    
    2003 (f)(In millions)Originally reported gross
reserves for unpaid claim
and claim adjustment
expenses
    
    $
    20,812
    
    
    $
    21,639
    
    
    $
    31,044
    
    
    $
    29,357
    
    
    $
    28,533
    
    
    $
    28,317
    
    
    $
    26,631
    
    
    $
    26,408
    
    
    $
    29,551
    
    
    $
    25,648
    
    
    $
    31,282Originally reported ceded
recoverable
    
    
    2,491
    
    
    
    2,705
    
    
    
    6,089
    
    
    
    5,660
    
    
    
    5,326
    
    
    
    5,424
    
    
    
    6,273
    
    
    
    7,568
    
    
    
    11,798
    
    
    
    10,583
    
    
    
    13,997Originally reported net
reserves for unpaid claim
and claim adjustment
expenses
    
    $
    18,321
    
    
    $
    18,934
    
    
    $
    24,955
    
    
    $
    23,697
    
    
    $
    23,207
    
    
    $
    22,893
    
    
    $
    20,358
    
    
    $
    18,840
    
    
    $
    17,753
    
    
    $
    15,065
    
    
    $
    17,285Cumulative net paid as of:One year later
    
    $
    3,629
    
    
    $
    3,656
    
    
    $
    6,510
    
    
    $
    5,851
    
    
    $
    5,954
    
    
    $
    7,321
    
    
    $
    6,546
    
    
    $
    7,686
    
    
    $
    5,981
    
    
    $
    5,373
    
    
    $
    Two years later
    
    
    6,143
    
    
    
    7,087
    
    
    
    10,485
    
    
    
    9,796
    
    
    
    11,394
    
    
    
    12,241
    
    
    
    11,935
    
    
    
    11,988
    
    
    
    10,355
    
    
    
    
    
    
    
    Three years later
    
    
    8,764
    
    
    
    9,195
    
    
    
    13,363
    
    
    
    13,602
    
    
    
    14,423
    
    
    
    16,020
    
    
    
    15,247
    
    
    
    15,291
    
    
    
    
    
    
    
    
    
    
    
    Four years later
    
    
    10,318
    
    
    
    10,624
    
    
    
    16,271
    
    
    
    15,793
    
    
    
    17,042
    
    
    
    18,271
    
    
    
    18,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Five years later
    
    
    11,378
    
    
    
    12,577
    
    
    
    17,947
    
    
    
    17,736
    
    
    
    18,568
    
    
    
    20,779
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Six years later
    
    
    13,100
    
    
    
    13,472
    
    
    
    19,465
    
    
    
    18,878
    
    
    
    20,573
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Seven years later
    
    
    13,848
    
    
    
    14,394
    
    
    
    20,410
    
    
    
    20,828
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Eight years later
    
    
    14,615
    
    
    
    15,024
    
    
    
    22,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine years later
    
    
    15,161
    
    
    
    15,602
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ten years later
    
    
    15,675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net reserves re-estimated
as of:End of initial year
    
    $
    18,321
    
    
    $
    18,934
    
    
    $
    24,955
    
    
    $
    23,697
    
    
    $
    23,207
    
    
    $
    22,893
    
    
    $
    20,358
    
    
    $
    18,840
    
    
    $
    17,753
    
    
    $
    15,065
    
    
    $
    17,285One year later
    
    
    18,250
    
    
    
    18,922
    
    
    
    24,864
    
    
    
    23,441
    
    
    
    23,470
    
    
    
    23,920
    
    
    
    20,785
    
    
    
    21,306
    
    
    
    17,805
    
    
    
    17,496
    
    
    
    Two years later
    
    
    18,125
    
    
    
    18,500
    
    
    
    24,294
    
    
    
    23,102
    
    
    
    23,717
    
    
    
    23,774
    
    
    
    22,903
    
    
    
    21,377
    
    
    
    20,368
    
    
    
    
    
    
    
    Three years later
    
    
    17,868
    
    
    
    18,088
    
    
    
    23,814
    
    
    
    23,270
    
    
    
    23,414
    
    
    
    25,724
    
    
    
    22,780
    
    
    
    23,890
    
    
    
    
    
    
    
    
    
    
    
    Four years later
    
    
    17,511
    
    
    
    17,354
    
    
    
    24,092
    
    
    
    22,977
    
    
    
    24,751
    
    
    
    25,407
    
    
    
    25,293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Five years later
    
    
    17,082
    
    
    
    17,506
    
    
    
    23,854
    
    
    
    24,105
    
    
    
    24,330
    
    
    
    27,456
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Six years later
    
    
    17,176
    
    
    
    17,248
    
    
    
    24,883
    
    
    
    23,736
    
    
    
    26,037
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Seven years later
    
    
    17,017
    
    
    
    17,751
    
    
    
    24,631
    
    
    
    25,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Eight years later
    
    
    17,500
    
    
    
    17,650
    
    
    
    26,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine years later
    
    
    17,443
    
    
    
    18,193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ten years later
    
    
    17,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net (deficiency)
redundancy
    
    $
    395
    
    
    $
    741
    
    
    $
    (1,068
    )
    
    $
    (1,553
    )
    
    $
    (2,830
    )
    
    $
    (4,563
    )
    
    $
    (4,935
    )
    
    $
    (5,050
    )
    
    $
    (2,615
    )
    
    $
    (2,431
    )
    
    $
    Reconciliation to gross
re-estimated reserves:Net reserves re-estimated
    
    $
    17,926
    
    
    $
    18,193
    
    
    $
    26,023
    
    
    $
    25,250
    
    
    $
    26,037
    
    
    $
    27,456
    
    
    $
    25,293
    
    
    $
    23,890
    
    
    $
    20,368
    
    
    $
    17,496
    
    
    $
    Re-estimated ceded
recoverable
    
    
    2,725
    
    
    
    3,030
    
    
    
    8,367
    
    
    
    7,526
    
    
    
    6,828
    
    
    
    7,163
    
    
    
    9,411
    
    
    
    10,406
    
    
    
    16,037
    
    
    
    15,093
    
    
    
    Total gross re-estimated
reserves
    
    $
    20,651
    
    
    $
    21,223
    
    
    $
    34,390
    
    
    $
    32,776
    
    
    $
    32,865
    
    
    $
    34,619
    
    
    $
    34,704
    
    
    $
    34,296
    
    
    $
    36,405
    
    
    $
    32,589
    
    
    $
    Net (deficiency)
redundancy related to:Asbestos claims
    
    $
    (2,106
    )
    
    $
    (2,073
    )
    
    $
    (2,301
    )
    
    $
    (2,402
    )
    
    $
    (2,300
    )
    
    $
    (2,056
    )
    
    $
    (1,480
    )
    
    $
    (1,414
    )
    
    $
    (642
    )
    
    $
    (642
    )
    
    $
    Environmental and mass
tort claims
    
    
    (909
    )
    
    
    (743
    )
    
    
    (785
    )
    
    
    (729
    )
    
    
    (751
    )
    
    
    (530
    )
    
    
    (629
    )
    
    
    (617
    )
    
    
    (153
    )
    
    
    (153
    )
    
    
    Total asbestos and
environmental
    
    
    (3,015
    )
    
    
    (2,816
    )
    
    
    (3,086
    )
    
    
    (3,131
    )
    
    
    (3,051
    )
    
    
    (2,586
    )
    
    
    (2,109
    )
    
    
    (2,031
    )
    
    
    (795
    )
    
    
    (795
    )
    
    
    Other claims
    
    
    3,410
    
    
    
    3,557
    
    
    
    2,018
    
    
    
    1,578
    
    
    
    221
    
    
    
    (1,977
    )
    
    
    (2,826
    )
    
    
    (3,019
    )
    
    
    (1,820
    )
    
    
    (1,636
    )
    
    
    Total net (deficiency)
redundancy
    
    $
    395
    
    
    $
    741
    
    
    $
    (1,068
    )
    
    $
    (1,553
    )
    
    $
    (2,830
    )
    
    $
    (4,563
    )
    
    $
    (4,935
    )
    
    $
    (5,050
    )
    
    $
    (2,615
    )
    
    $
    (2,431
    )
    
    $
    


9



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##### Table of Contents





|(a) |  | Reflects reserves of CNAs property and casualty insurance subsidiaries,
excluding CIC reserves, which were acquired on May 10, 1995 (the
Acquisition Date). Accordingly, the reserve development (net reserves
recorded at the end of the year, as initially estimated, less net reserves
re-estimated as of subsequent years) does not include CIC.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Includes CIC gross reserves of $9,713 million and net reserves of $6,063
million acquired on the Acquisition Date and subsequent development
thereon.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | Ceded recoverable includes reserves transferred under retroactive
reinsurance agreements of $784 million as of December 31, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------



|(d) |  | Effective January 1, 2001, CNA established a new life insurance company,
CNAGLA. Further, on January 1, 2001 approximately $1,055 million of
reserves were transferred from CCC to CNAGLA.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) |  | Effective October 31, 2002, CNA sold CNA Reinsurance Company Limited (CNA
Re U.K.). As a result of the sale, net reserves were reduced by
approximately $1,316 million. See Note P of the Consolidated Financial
Statements included under Item 8 for further discussion of the sale.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f) |  | Effective December 31, 2003, CNA sold CNAGLA. As a result of the sale,
net reserves were reduced by approximately $1,309 million. See Note P of
the Consolidated Financial Statements included under Item 8 for further
discussion of the sale.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additional information as to CNAs property and casualty claim and claim
adjustment expense reserves and reserve development is set forth in the MD&A
included under Item 7 and in Notes A and F of the Consolidated Financial
Statements included under Item 8.

Investments

Information on the Companys investments is set forth in the MD&A included
under Item 7 and in Notes A, B, C and D of the Consolidated Financial
Statements included under Item 8.

Available Information

CNA files annual, quarterly and current reports, proxy statements and other
documents with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (Exchange Act). The public may read and copy
any materials that CNA files with the SEC at the SECs Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers, including CNA, that file electronically with the SEC. The public can
obtain any documents that CNA files with the SEC at http://www.sec.gov.

CNA also makes available free of charge on or through its internet website
(http://www.cna.com) CNAs Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after CNA electronically files such material with, or
furnishes it to, the SEC. Copies of these reports may also be obtained, free
of charge, upon written request to: CNA Financial Corporation, CNA Plaza, 43
South, Chicago, IL 60685, Attn. Jonathan D. Kantor, Executive Vice President,
General Council and Secretary.

The Charter of the Audit Committee of CNAFs Board of Directors, its Corporate
Governance Guidelines and its Code of Business Conduct & Ethics will also be
available on CNAs internet website and in printed form to any shareholder of
CNAF who requests them.




ITEM 2. PROPERTIES

CNA Plaza, owned by CAC, serves as the home office for CNAF and its
subsidiaries. CNAFs subsidiaries own or lease office space in various cities
throughout the United States and in other

10



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##### Table of Contents



countries. The following table sets forth certain information with respect to
the principal office buildings owned or leased by CNAFs subsidiaries:

Amount (SquareFeet) of BuildingOwned and Occupiedor Leased andLocation
    
    Occupied by CNA
    
    Principal UsageCNA Plaza 333 S. Wabash, Chicago, Illinois
    
    1,144,378(a)
    
    Principal executive offices of CNAF100 CNA Drive, Nashville, Tennessee (c)
    
    251,363(a)
    
    Life insurance offices2405 Lucien Way, Maitland, Florida
    
    178,744(b)
    
    Property and casualty insurance offices3500 Lacey Road, Downers Grove, Illinois
    
    168,793(b)
    
    Property and casualty insurance offices40 Wall Street, New York, New York
    
    168,723(b)
    
    Property and casualty insurance offices600 N. Pearl Street, Dallas, Texas
    
    115,666(b)
    
    Property and casualty insurance offices675 Placentia Avenue, Brea, California
    
    113,133(b)
    
    Property and casualty insurance offices1100 Cornwall Road, Monmouth Junction,
New Jersey
    
    112,926(b)
    
    Property and casualty insurance offices1111 E. Broad Street, Columbus, Ohio
    
    110,411(b)
    
    Property and casualty insurance offices




|(a) |  | Represents property owned by CNAF or its subsidiaries.
|--- |  | ------------------------------------------------------



|(b) |  | Represents property leased by CNAF or its subsidiaries.
|--- |  | -------------------------------------------------------



|(c) |  | Will be sold as part of the February of 2004 sale of the individual life
business.
|--- |  | ----------------------------------------------------------------------------------




ITEM 3. LEGAL PROCEEDINGS

Information on CNAs legal proceedings is set forth in Note F and G of the
Consolidated Financial Statements included under Item 8.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

11



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##### Table of Contents






PART II




ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

CNAFs common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange and the Pacific Exchange, and is traded on the Philadelphia Stock
Exchange under the symbol CNA.

As of February 23, 2004, CNAF had 223,617,337 shares of common stock
outstanding. Approximately 90% of CNAFs outstanding common stock is owned by
Loews. CNAF had 2,356 stockholders of record as of February 23, 2004 according
to the records maintained by the Companys transfer agent.

On November 24, 2003, CNAF sold $750 million of its participating convertible
preferred stock, designated Series I (Series I Issue), to Loews. The Series I
Issue has terms that make it economically equivalent to CNAFs common stock.
The preferred shares will convert into 32,327,015 shares of CNAF common stock,
utilizing a conversion price per share of common stock that was based on
average market prices of CNAF common stock from November 17, 2003 through
November 21, 2003. The terms of the Series I Issue were approved by a special
committee of independent members of CNAFs Board of Directors. Upon conversion,
Loews will own approximately 91% of CNAFs outstanding common stock of
approximately 255.9 million shares. Conversion will take place when the Company
satisfies applicable stock exchange requirements. The proceeds from the Series
I Issue were applied by CNAF to increase the statutory surplus of CNAFs
principal insurance subsidiary, CCC. The issuance of the
Series I Issue was exempt from
registration under Section 4(2) of the Securities Act of 1933.

During 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Series H Issue), to Loews. The
terms of the Series H Issue were approved by a special committee of independent
members of CNAFs Board of Directors.

The Series H Issue accrues cumulative dividends at an initial rate of 8% per
year, compounded annually. It will be adjusted quarterly to a rate equal to
400 basis points above the ten-year U.S. Treasury rate beginning with the
quarterly dividend after the first triggering event to occur of either (i) an
increase by two intermediate rating levels of the financial strength rating of
CCC from its rating at the time of issuance by any of A.M. Best Company,
Standard & Poors or Moodys Investor Services or (ii) one year following an
increase by one intermediate rating level of the financial strength rating of
CCC by any one of those rating agencies. Accrued but unpaid cumulative
dividends cannot be paid on the Series H Issue unless and until one of the two
triggering events described above has occurred. Beginning with the quarter
following an increase of one intermediate rating level in CCCs financial
strength rating, however, current (but not accrued cumulative) quarterly
dividends can be paid. As of December 31, 2003, the Company has $62 million of
undeclared but accumulated dividends.

The Series H Issue is senior to CNAFs common stock and Series I Issue as to
the payment of dividends and amounts payable upon any liquidation, dissolution
or winding up. No dividends may be declared on CNAFs common stock until all
cumulative dividends on the Series H Issue have been paid. CNAF may not issue
any equity securities ranking senior to or on par with the Series H Issue
without the consent of a majority of its stockholders. The Series H Issue is
non-voting and is not convertible into any other securities of CNAF. It may be
redeemed only upon the mutual agreement of CNAF and a majority of the
stockholders of the preferred stock. The issuance of the
Series H Issue was exempt from
registration under Section 4(2) of the Securities Act of 1933.

12



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##### Table of Contents



Of the proceeds of the Series H Issue, $250 million was used to prepay a bank
term loan due in April of 2003 and $250 million was contributed to CCC to
increase its statutory surplus. The remaining proceeds were used to repay other
debt of CNAF and Continental, which matured in 2003 and for other general
corporate purposes.

The table below shows the high and low closing sales prices for CNAFs common
stock based on the New York Stock Exchange Composite Transactions.

Common Stock Information

2003
    
    2002High
    
    Low
    
    High
    
    LowQuarter:Fourth
    
    $
    24.50
    
    
    $
    18.57
    
    
    $
    28.35
    
    
    $
    22.95Third
    
    
    25.65
    
    
    
    20.87
    
    
    
    28.60
    
    
    
    21.45Second
    
    
    26.50
    
    
    
    22.26
    
    
    
    30.99
    
    
    
    25.74First
    
    
    27.35
    
    
    
    21.21
    
    
    
    30.60
    
    
    
    27.00


No dividends have been paid on CNAFs common stock in 2003 or 2002. CNAFs
ability to pay dividends is influenced, in part, by dividend restrictions of
its principal operating insurance subsidiaries as described in the MD&A
included under Item 7 and in Note L to the Consolidated Financial Statements
included under Item 8.

13



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##### Table of Contents






ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data.

Selected Financial Data

As of and for the Years Ended December 31
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999(In millions, except per share data and ratios)Results of Operations:Revenues
    
    $
    11,716
    
    
    $
    12,286
    
    
    $
    13,089
    
    
    $
    15,408
    
    
    $
    16,294(Loss) income from continuing operations
    
    $
    (1,433
    )
    
    $
    247
    
    
    $
    (1,592
    )
    
    $
    1,177
    
    
    $
    1(Loss) income from discontinued
operations, net of tax
    
    
    
    
    
    
    (35
    )
    
    
    11
    
    
    
    5
    
    
    
    4Cumulative effects of changes in
accounting principles, net of tax
    
    
    
    
    
    
    (57
    )
    
    
    (61
    )
    
    
    
    
    
    
    (177
    )Net (loss) income
    
    $
    (1,433
    )
    
    $
    155
    
    
    $
    (1,642
    )
    
    $
    1,182
    
    
    $
    (172
    )(Loss) earnings per Share:(Loss) income from continuing operations
    
    $
    (6.58
    )
    
    $
    1.10
    
    
    $
    (8.20
    )
    
    $
    6.40
    
    
    $
    (0.06
    )(Loss) income from discontinued
operations, net of tax
    
    
    
    
    
    
    (0.16
    )
    
    
    0.06
    
    
    
    0.03
    
    
    
    0.02Cumulative effects of changes in
accounting principles, net of tax
    
    
    
    
    
    
    (0.26
    )
    
    
    (0.32
    )
    
    
    
    
    
    
    (0.96
    )(Loss) earnings per share available to
common stockholders
    
    $
    (6.58
    )
    
    $
    0.68
    
    
    $
    (8.46
    )
    
    $
    6.43
    
    
    $
    (1.00
    )Financial Condition:Total investments
    
    $
    38,100
    
    
    $
    35,293
    
    
    $
    35,826
    
    
    $
    36,059
    
    
    $
    36,935Total assets
    
    
    68,503
    
    
    
    61,731
    
    
    
    65,723
    
    
    
    62,785
    
    
    
    62,390Insurance reserves
    
    
    45,383
    
    
    
    40,179
    
    
    
    43,623
    
    
    
    39,054
    
    
    
    39,271Long and short term debt
    
    
    1,904
    
    
    
    2,292
    
    
    
    2,567
    
    
    
    2,729
    
    
    
    2,881Stockholders equity
    
    
    8,952
    
    
    
    9,401
    
    
    
    8,122
    
    
    
    9,400
    
    
    
    8,723Book value per share
    
    $
    31.80
    
    
    $
    38.68
    
    
    $
    36.33
    
    
    $
    51.29
    
    
    $
    46.42Statutory Surplus:Property and casualty companies (a)
    
    $
    6,170
    
    
    $
    6,836
    
    
    $
    6,241
    
    
    $
    8,373
    
    
    $
    8,679Life and group insurance companies
    
    
    707
    
    
    
    1,645
    
    
    
    1,752
    
    
    
    1,274
    
    
    
    1,222




|(a) |  | Surplus includes the property and casualty companies equity ownership of
the life insurance subsidiaries in 2003, and the ownership of life and
group insurance subsidiaries in 2002 and 2001. See Note P of the
Consolidated Financial Statements included under Item 8 for further
discussion.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Overview

The following discussion highlights significant factors impacting the
consolidated operations and financial condition of CNA Financial Corporation
(CNAF) and its subsidiaries (collectively CNA or the Company). CNA is one of
the largest insurance organizations in the United States and based on 2002
statutory net written premiums, is the eleventh largest property and casualty
company.

Loews Corporation (Loews) owned approximately 90% of the outstanding common
stock and 100% of the Series H and Series I preferred stock of CNAF as of
December 31, 2003. The following discussion should be read in conjunction with
Item 6. Selected Financial Data and Item 8. Financial Statements and
Supplementary Data.

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##### Table of Contents



Managements discussion and analysis of financial condition and results of
operations is comprised of the following sections:

Page No.Consolidated Operations
    
    
    16Net Prior Year Development
    
    
    21Critical Accounting Estimates
    
    
    24Reserves  Estimates and Uncertainties
    
    
    26Reinsurance
    
    
    29World Trade Center Event
    
    
    32Terrorism Insurance
    
    
    33Restructuring
    
    
    34Non-GAAP Financial Measures
    
    
    37Segment Results
    
    
    40Standard Lines
    
    
    40Specialty Lines
    
    
    47CNA Re
    
    
    53Group Operations
    
    
    57Life Operations
    
    
    59Corporate and Other
    
    
    61Asbestos and Environmental Pollution and Mass Tort (APMT) Reserves
    
    
    63Investments
    
    
    74Net Investment Income
    
    
    74Net Realized Investment Gains (Losses)
    
    
    75Valuation and Impairment of Investments
    
    
    78Liquidity and Capital Resources
    
    
    86Cash Flows
    
    
    86Debt
    
    
    87Related Parties
    
    
    88Commitments, Contingencies, and Guarantees
    
    
    89Regulatory Matters
    
    
    91Ratings
    
    
    91Dividends from Subsidiaries
    
    
    93Loews
    
    
    93Accounting Pronouncements
    
    
    95Forward-Looking Statements
    
    
    96


CONSOLIDATED OPERATIONS

During 2003, CNA conducted its operations through five operating segments:
Standard Lines, Specialty Lines and CNA Re (which comprise the property and
casualty segments), Group Operations and Life Operations. In addition to these
five operating segments, certain other activities are reported in the Corporate
and Other segment. These operating segments reflected the way CNA managed its
operations and business decisions.

During 2003, CNA completed a strategic review of its operations and decided to
concentrate efforts on its property and casualty business. As a result of this
review, and the 2003 charges of $1,849 million after-tax ($2,845
million pretax) related to unfavorable
net prior year development and a $396 million after-tax ($610
pretax) increase in the provision for
reinsurance and insurance receivables, a capital plan was developed to
replenish statutory capital of the

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##### Table of Contents



property and casualty subsidiaries adversely impacted by these charges. A
summary of the capital plan, related actions, and other significant 2003
business decisions is discussed below:

The capital plan consists of the sale
in November of 2003 of $750 million of a new series of CNA convertible preferred stock to Loews, and a commitment from Loews for
additional capital support of up to $500 million by February 27, 2004 through
the purchase of surplus notes of Continental Casualty Company (CCC), CNAs
principal insurance subsidiary, in the event certain additions to CCCs
statutory capital were not achieved through asset sales. In addition, Loews
committed up to an additional $150 million by March 31,
2004, in a form to be determined, to support the statutory capital of
CCC in the event of additional shortfalls in relation to business and
asset sales.

On December 31, 2003, CNA completed the sale of the majority of its Group
Benefits business to Hartford Financial Services Group, Inc. (Hartford). The
business sold included group life and accident, short and long term disability
and certain other products. CNAs group long term care and specialty medical
businesses were excluded from the sale. Consideration from the sale was
approximately $530 million, of which $485 million was received on December 31,
2003, resulting in an after-tax realized investment loss on the sale of $130
million during 2003. See Note P of the Consolidated Financial Statements
included under Item 8 for further information.

In February of 2004, CNA entered into a definitive agreement to sell its
individual life insurance business to Swiss Re Life & Health America Inc.
(Swiss Re) for approximately $690 million. The business sold includes term,
universal and permanent life insurance policies and individual annuity
products. The transaction is expected to be completed on or before March 31,
2004, subject to certain customary closing conditions and regulatory approvals.
See Note T of the Consolidated Financial Statements included under Item 8 for
further information.

After consideration of the increase in CCCs statutory surplus resulting from
the sale of the Group Benefits business, Loews purchased $46 million of CCC
surplus notes in February of 2004, pursuant to the capital plan. In addition,
the sale of CNAs individual life business is expected to result in an addition
to CCCs statutory surplus in excess of $400 million. However, the sale of the
individual life business was not consummated by February 26, 2004. As a result,
Loews purchased $300 million of additional CCC surplus notes in February of
2004. Following the consummation of the individual life sale, CNA plans to seek
approval from the insurance regulatory authority for the repayment of the
surplus notes purchased in relation to such sale, although no assurance can be
given that sale of the individual life business will be consummated or that the
regulatory approval will be obtained.

In addition to the asset sales described above, and as part of the decision to
focus on its property and casualty business, CNA withdrew from the assumed
reinsurance business during 2003. In October of 2003, the Company entered into
an agreement to sell the renewal rights for most of the treaty business of CNA
Re to Folksamerica Reinsurance Company (Folksamerica). Under the terms of the
transaction, Folksamerica will compensate CNA based upon the amount of premiums
renewed by Folksamerica over the next two contract renewals. CNA will manage
the run-off of its retained liabilities.

The Group Operations business, individual life and annuity insurance business
and CNA Re absorbed approximately $150 million of the total shared corporate
overhead expenses that are allocated to all of CNAs businesses. The Company
expects that the 2004 consolidated net results will include an approximate $50
million after-tax loss for these three businesses, primarily due to these
corporate overhead expenses. The 2003 expense initiative, discussed below did
not contemplate the sale or exit of these businesses, and therefore the savings
from this initiative will be partially offset by these expenses. The Company
is evaluating its corporate expense structure and anticipates taking actions in
2004 that will reduce these expenses.

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##### Table of Contents



The primary components of the expense
initiative are a reduction of the workforce by approximately five percent,
lower commissions and other acquisition costs, principally related to workers
compensation, and reduced spending in other areas. As of December 31, 2003,
the Company has achieved the targeted workforce reduction and approximately $28
million of associated severance and related costs have been recorded in 2003.
Actions related to the commission and other acquisition expenses have began in
2003 and will continue through 2004.

In February of 2004, CNA announced the decision to cease sales to new customers
in its structured settlement and institutional markets businesses. Also, during 2003, CNA
ceased sales to new customers in the individual and group long term care
businesses. CNA will continue to accept new deposits and premiums only from
existing customers for the institutional markets business and will
service its existing commitments on all businesses in which new sales
were ceased. These businesses
will be managed as a run-off operation.

Throughout this MD&A, the 2003 results of operations include discussion and
results for all of CNAs businesses, including those sold or exited as
described above.

The following tables provide information about CNAs historical results of
operations for the retained and sold businesses.

Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    CorporateConsolidated Net (Loss) Income
    
    Lines
    
    Lines
    
    CNA Re
    
    Operations
    
    Operations
    
    and Other
    
    Total(Year ended December 31, 2003)Net results of businesses not sold
    
    $
    (737
    )
    
    $
    (17
    )
    
    $
    23
    
    
    $
    47
    
    
    $
    25
    
    
    $
    (739
    )
    
    $
    (1,398
    )Net results of businesses sold (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78
    )
    
    
    43
    
    
    
    
    
    
    
    (35
    )Total consolidated net (loss)
income
    
    $
    (737
    )
    
    $
    (17
    )
    
    $
    23
    
    
    $
    (31
    )
    
    $
    68
    
    
    $
    (739
    )
    
    $
    (1,433
    )


Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    CorporateNet Earned Premiums
    
    Lines
    
    Lines
    
    CNA Re (b)
    
    Operations
    
    Operations
    
    and Other
    
    Total(Year ended December 31, 2003)Net earned premiums of businesses
not sold
    
    $
    3,743
    
    
    $
    2,666
    
    
    $
    536
    
    
    $
    234
    
    
    $
    648
    
    
    $
    (72
    )
    
    $
    7,755Net earned premiums of businesses
sold (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,078
    
    
    
    381
    
    
    
    
    
    
    
    1,459Total net earned premiums
    
    $
    3,743
    
    
    $
    2,666
    
    
    $
    536
    
    
    $
    1,312
    
    
    $
    1,029
    
    
    $
    (72
    )
    
    $
    9,214




|(a) |  | Includes the Group Benefits business sold to Hartford on December 31, 2003 and the
February of 2004 definitive agreement to sell the individual life business to
Swiss Re.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                           
|(b) |  | CNA Re is in run-off.                                                                                                                                                     

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The following table includes the consolidated results of operations. For more
detailed components of CNAs business operations, see the segment discussions
within this MD&A.

Consolidated Operations

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions, except per share data)RevenuesNet earned premiums
    
    $
    9,214
    
    
    $
    10,213
    
    
    $
    9,288Net investment income
    
    
    1,647
    
    
    
    1,730
    
    
    
    1,856Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    460
    
    
    
    (252
    )
    
    
    1,262Other revenues
    
    
    395
    
    
    
    595
    
    
    
    683Total revenues
    
    
    11,716
    
    
    
    12,286
    
    
    
    13,089Claims, benefits and expensesInsurance claims and policyholders benefits
    
    
    9,916
    
    
    
    8,392
    
    
    
    11,279Amortization of deferred acquisition costs
    
    
    1,965
    
    
    
    1,791
    
    
    
    1,804Other operating expenses
    
    
    2,057
    
    
    
    1,649
    
    
    
    1,913Restructuring and other related charges
    
    
    
    
    
    
    (37
    )
    
    
    251Interest
    
    
    130
    
    
    
    150
    
    
    
    157Total claims, benefits and expenses
    
    
    14,068
    
    
    
    11,945
    
    
    
    15,404(Loss) income from continuing operations before income tax and minority interest
    
    
    (2,352
    )
    
    
    341
    
    
    
    (2,315
    )Income tax benefit (expense)
    
    
    913
    
    
    
    (68
    )
    
    
    744Minority interest
    
    
    6
    
    
    
    (26
    )
    
    
    (21
    )(Loss) income from continuing operations
    
    
    (1,433
    )
    
    
    247
    
    
    
    (1,592
    )(Loss) income from discontinued operations, net of tax of $0, $9 and $2
    
    
    
    
    
    
    (35
    )
    
    
    11(Loss) income before cumulative effects of changes in accounting principles
    
    
    (1,433
    )
    
    
    212
    
    
    
    (1,581
    )Cumulative effects of changes in accounting principles, net of tax of $0, $7, and $33
    
    
    
    
    
    
    (57
    )
    
    
    (61
    )Net (loss) income
    
    $
    (1,433
    )
    
    $
    155
    
    
    $
    (1,642
    )Basic and diluted (loss) earnings per share:(Loss) income from continuing operations
    
    $
    (6.58
    )
    
    $
    1.10
    
    
    $
    (8.20
    )(Loss) income from discontinued operations, net of tax
    
    
    
    
    
    
    (0.16
    )
    
    
    0.06(Loss) income before cumulative effects of changes in accounting principles
    
    
    (6.58
    )
    
    
    0.94
    
    
    
    (8.14
    )Cumulative effects of changes in accounting principles, net of tax
    
    
    
    
    
    
    (0.26
    )
    
    
    (0.32
    )Basic and diluted (loss) earnings per share available to common stockholders
    
    $
    (6.58
    )
    
    $
    0.68
    
    
    $
    (8.46
    )Weighted average outstanding common stock and common stock equivalents
    
    
    227.0
    
    
    
    223.6
    
    
    
    194.0


2003 Compared with 2002

Net results decreased $1,588 million in 2003 as compared with 2002. The
decline in net results was due primarily to increased unfavorable net prior
year development of $1,837 million after-tax ($2,826 million pretax), a $55
million after-tax ($84 million pretax) increase in catastrophe losses, a $65
million after-tax ($100 million pretax) increase in unallocated loss adjustment
expense (ULAE) reserves, and a $27 million after-tax ($42 million pretax)
increase in dividend development. In addition, net results in 2003 included a
$396 million after-tax ($610 million pretax) increase in the bad debt provision
for insurance and reinsurance receivables, a $69 million after-tax ($104
million pretax) increase in insurance related assessments, and increased
interest expense of $90 million after-tax ($137 million pretax) related to

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additional cessions to the corporate aggregate and other reinsurance treaties.
These items were partially offset by a $434 million after-tax ($712 million
pretax) increase in net realized investment results and increased limited
partnership income of $165 million after-tax ($254 million pretax). Net income
in 2002 also included a $35 million after-tax ($44 million pretax) loss from
discontinued operations and a $57 million after-tax ($64 million pretax) charge
for the cumulative effect of a change in accounting principle.

Net unfavorable prior year development of $2,952 million, including $2,409
million of unfavorable claim and claim adjustment expense reserve development
and $543 million of unfavorable premium development, was recorded in 2003. Net
unfavorable prior year development of $126 million, including $35 million of
unfavorable claim and claim adjustment expense reserve development and $91
million of unfavorable premium development, was recorded in 2002.

Net realized investment results increased $434 million after-tax in 2003 as
compared with 2002. This change was due primarily to $209 million after-tax
reduction in impairment losses for other-than-temporary declines in market
values for fixed maturity and equity securities and increased realized results
related to fixed maturity and derivative securities. These increases were
partially offset by the $130 million after-tax ($176 million pretax) loss on
the sale of the Group Benefits business. See the Investments section of this
MD&A for further details.

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

The cumulative effect of a change in accounting principle in 2002 related to
the adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142). During
2002, the Company completed its initial goodwill impairment testing and
recorded a $57 million after-tax ($64 million pretax) impairment charge. The
impairment charge consisted of a $48 million after-tax ($51 million pretax)
charge in Specialty Lines, an $8 million after-tax ($12 million pretax) charge
in Life Operations, and a $1 million after-tax ($1 million pretax) charge in
Corporate and Other. Net earned premiums decreased $999 million in 2003 as
compared with the same period in 2002. The decrease in net earned premiums was
due primarily to the July 1, 2002 transfer of the National Postal Mail Handlers
Union group benefits plan (the Mail Handlers Plan) to First Health Corporation.
Net earned premiums for the Mail Handlers Plan were $1,151 in 2002. Net
earned premium was also impacted by increased ceded premiums to corporate
aggregate and other reinsurance treaties resulting from unfavorable net prior
year development recorded in 2003. Partially offsetting these adverse premium
items were rate increases, increased retention, and new business, primarily in
Standard Lines and Specialty Lines.

2002 Compared with 2001

Net income in 2002 was $155 million, as compared with a net loss of $1,642
million for 2001. Net results improved in 2002 primarily due to decreased
unfavorable net prior year development of $2,181 million after-tax ($3,356
million pretax), improved underwriting results in the property and casualty
segments, improved results in Life and Group Operations and a $24 million
after-tax reduction ($40 million pretax) of the accrual for restructuring and
other related charges. Net results in 2001 were also adversely effected by the
estimated losses related to the September 11, 2001 World Trade Center Disaster
and related events (WTC event) of $304 million after-tax ($468 million pretax)
and restructuring and other related charges of $165 million after-tax ($251
million pretax). The improvement in the net results in 2002 was partially
offset by lower net investment income, net reserve strengthening for individual
long term care in Life Operations of $23 million after-tax ($35 million
pretax) recorded in 2002 and decreased net realized investment results of $965
million after-tax ($1,514 million pretax).

20



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Unfavorable net prior year development of $126 million, including $35 million
of unfavorable claim and claim adjustment expense reserve development and $91
million of unfavorable premium development, was recorded in 2002. Unfavorable
net prior year development of $3,482 million, including $2,464 million of
unfavorable claim and claim adjustment expense reserve development and $1,018
million of unfavorable premium development, was recorded in 2001.

Net realized investment losses increased $965 million in 2002 as compared with
2001 due primarily to significant realized gains from equity securities in 2001
and increased investment write-downs of fixed maturity and equity securities
across various market sectors in 2002. See the Investments section of the MD&A
for further details. Loss from discontinued operations, net of tax, of $35
million for 2002 and income from discontinued operations, net of tax, of $11
million for 2001 was related to the results of CNA Vida, CNAs Chilean-based
life insurer, which was sold during 2002.

Net income for 2002 includes a charge of $57 million, net of tax, for the
cumulative effect of a change in accounting principle related to the adoption
of Statement of Financial Accounting Standards No. 142 Goodwill and
Other Intangible Assets (SFAS 142). Net income for 2001 includes a
charge of $61 million, net of tax, for the cumulative effect of a change in
accounting principle related to the adoption of Statement of Financial
Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging Activities (SFAS 133).

Net earned premiums increased $925 million in 2002 as compared with 2001. The
increase in net earned premiums was primarily attributable to decreased ceded
premiums related to corporate aggregate and other reinsurance treaties, strong
rate increases, increased new business and decreased unfavorable premium
development. The 2001 unfavorable net prior year premium development was
primarily due to a change in estimate for retrospective premium accruals and a
change in estimate for involuntary market premium accruals. Partially
offsetting the improvements in net earned premiums was the transfer of the
National Postal Mail Handlers Union (the Mail Handlers Plan) in 2002 and
decreased net earned premiums in CNA Re resulting from the 2001 decision to
cease writing new and renewal business at CNA Reinsurance Company Limited (CNA
Re U.K.). Net earned premium for the Mail Handlers Plan was $1,151 million in
2002 as compared with $2,218 million in 2001.

Net Prior Year Development

A significant component of the results of operations for the years ended
December 31, 2003, 2002, and 2001 has been unfavorable net prior year
development recorded for the property and casualty operations, including
corporate and other. Changes in estimates of claim and allocated claim
adjustment expense reserves and premium accruals for net prior accident years
are defined as net prior year development within this MD&A. These changes can
be favorable or unfavorable. The following tables summarize net prior year
development by segment for property and casualty and corporate and other
segments. The net prior year development was recorded for APMT and for various other
property and casualty coverages (core).

21



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##### Table of Contents



The following table summarizes the pretax 2003 net prior year development by
segment.

2003 Net Prior Year Development

Standard
    
    Specialty
    
    
    
    
    
    CorporateLines
    
    Lines
    
    CNA Re
    
    and Other
    
    Total(In millions)Pretax unfavorable net prior year claim and allocated claim
adjustment expense development excluding the impact of the
corporate aggregate reinsurance treaties:Core (Non-APMT)
    
    $
    1,390
    
    
    $
    454
    
    
    $
    220
    
    
    $
    86
    
    
    $
    2,150APMT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    795
    
    
    
    795Total
    
    
    1,390
    
    
    
    454
    
    
    
    220
    
    
    
    881
    
    
    
    2,945Ceded losses related to corporate aggregate reinsurance treaties
    
    
    (485
    )
    
    
    (56
    )
    
    
    (102
    )
    
    
    
    
    
    
    (643
    )Pretax unfavorable net prior year development before impact of
premium development
    
    
    905
    
    
    
    398
    
    
    
    118
    
    
    
    881
    
    
    
    2,302Unfavorable (favorable) premium development, excluding
impact of corporate aggregate reinsurance treaties
    
    
    218
    
    
    
    
    
    
    
    (26
    )
    
    
    (7
    )
    
    
    185Ceded premiums related to corporate aggregate reinsurance
treaties
    
    
    269
    
    
    
    31
    
    
    
    57
    
    
    
    1
    
    
    
    358Total premium development
    
    
    487
    
    
    
    31
    
    
    
    31
    
    
    
    (6
    )
    
    
    543Total 2003 unfavorable net prior year development (pretax)
    
    $
    1,392
    
    
    $
    429
    
    
    $
    149
    
    
    $
    875
    
    
    $
    2,845Total 2003 unfavorable net prior year development (after-tax)
    
    $
    905
    
    
    $
    279
    
    
    $
    97
    
    
    $
    568
    
    
    $
    1,849


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The following table summarizes the pretax 2002 net prior year development by
segment.

2002 Net Prior Year Development

Standard
    
    Specialty
    
    
    
    
    
    CorporateLines
    
    Lines
    
    CNA Re
    
    and Other
    
    Total(In millions)Pretax unfavorable (favorable) net prior year claim and
allocated claim adjustment expense development excluding the
impact of the corporate aggregate reinsurance treaties:Core (Non-APMT)
    
    $
    (221
    )
    
    $
    123
    
    
    $
    179
    
    
    $
    23
    
    
    $
    104APMT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (221
    )
    
    
    123
    
    
    
    179
    
    
    
    23
    
    
    
    104Ceded losses related to corporate aggregate reinsurance treaties
    
    
    
    
    
    
    (55
    )
    
    
    (93
    )
    
    
    
    
    
    
    (148
    )Pretax (favorable) unfavorable net prior year development
before impact of premium development
    
    
    (221
    )
    
    
    68
    
    
    
    86
    
    
    
    23
    
    
    
    (44
    )Unfavorable
(favorable) premium development, excluding
impact of corporate aggregate reinsurance treaties
    
    
    67
    
    
    
    30
    
    
    
    (104
    )
    
    
    (3
    )
    
    
    (10
    )Ceded premiums related to corporate aggregate reinsurance
treaties
    
    
    
    
    
    
    39
    
    
    
    61
    
    
    
    1
    
    
    
    101Total premium development
    
    
    67
    
    
    
    69
    
    
    
    (43
    )
    
    
    (2
    )
    
    
    91Total 2002 unfavorable (favorable) net prior year development
(pretax)
    
    $
    (154
    )
    
    $
    137
    
    
    $
    43
    
    
    $
    21
    
    
    $
    47Total 2002 unfavorable (favorable) net prior year development
(after-tax)
    
    $
    (100
    )
    
    $
    89
    
    
    $
    28
    
    
    $
    14
    
    
    $
    31


23



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The following table summarizes the pretax 2001 net prior year development by
segment.

2001 Net Prior Year Development

Standard
    
    Specialty
    
    
    
    
    
    CorporateLines
    
    Lines
    
    CNA Re
    
    and Other
    
    Total(In millions)Pretax unfavorable net prior year claim and allocated claim
adjustment expense development excluding the impact of the
corporate aggregate reinsurance treaties:Core (Non-APMT)
    
    $
    347
    
    
    $
    415
    
    
    $
    816
    
    
    $
    72
    
    
    $
    1,650APMT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,241
    
    
    
    1,241Total
    
    
    347
    
    
    
    415
    
    
    
    816
    
    
    
    1,313
    
    
    
    2,891Ceded losses related to corporate aggregate reinsurance treaties
    
    
    (443
    )
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    (500
    )Pretax unfavorable (favorable) net prior year development
before impact of premium development
    
    
    (96
    )
    
    
    415
    
    
    
    759
    
    
    
    1,313
    
    
    
    2,391Unfavorable
(favorable) premium development, excluding impact of corporate
aggregate reinsurance treaties
    
    
    785
    
    
    
    38
    
    
    
    (44
    )
    
    
    9
    
    
    
    788Ceded premiums related to corporate aggregate reinsurance
treaties
    
    
    205
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    230Total premium development
    
    
    990
    
    
    
    38
    
    
    
    (19
    )
    
    
    9
    
    
    
    1,018Total 2001 unfavorable net prior year development (pretax)
    
    $
    894
    
    
    $
    453
    
    
    $
    740
    
    
    $
    1,322
    
    
    $
    3,409Total 2001 unfavorable net prior year development (after-tax)
    
    $
    581
    
    
    $
    294
    
    
    $
    481
    
    
    $
    859
    
    
    $
    2,215


Critical Accounting Estimates

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

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

The accounting estimates discussed below are considered by management to be
critical to an understanding of CNAs Consolidated Financial Statements as
their application places the most significant demands on managements judgment.
Note A of the Consolidated Financial Statements included under Item 8 should
be read in conjunction with this section to assist with obtaining an
understanding of the underlying accounting policies related to these estimates.
Due to the inherent uncertainties involved with this type of judgment, actual
results could differ significantly from estimates and have a material adverse
impact on the Companys results of operations or equity.

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Insurance Reserves

Insurance reserves are established for both short and long-duration insurance
contracts. Short-duration contracts are primarily related to property and
casualty insurance policies where the reserving process is based on actuarial
estimates of the amount of loss, including amounts for known and unknown
claims. Long-duration contracts typically include traditional life insurance
and long term care products and are estimated using actuarial estimates about
mortality and morbidity, as well as assumptions about expected investment
returns. Workers compensation lifetime claim reserves and accident and health
disability claim reserves are calculated using mortality and morbidity
assumptions based on Company and industry experience, and are discounted at
interest rates that range from 3.5% to 6.5% at December 31, 2003. The reserve
for unearned premiums on property and casualty and accident and health
contracts represents the portion of premiums written to the unexpired terms of
coverage. The inherent risks associated with the reserving process are
discussed in Reserves  Estimates and Uncertainties section below.

Reinsurance

Amounts recoverable from reinsurers are estimated in a manner consistent with
claim and claim adjustment expense reserves or future policy benefits reserves
and are reported as receivables in the Consolidated Balance Sheets. The ceding
of insurance does not discharge the primary liability of the Company. An
estimated allowance for doubtful accounts is recorded on the basis of periodic
evaluations of balances due from reinsurers, reinsurer solvency, managements
experience and current economic conditions. Further information on reinsurance
is provided in the Reinsurance section below.

Valuation of Investments and Impairment of Securities

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

The Companys investment portfolio is subject to market declines below book
value that may be other-than-temporary. The Company has an Impairment
Committee (the Committee), which reviews the investment portfolio on a
quarterly basis, with ongoing analysis as new information becomes available.
Any decline that is determined to be other-than-temporary is recorded as an
impairment loss in the results of operations in the period in which the
determination occurred. Further information on the Companys investments is
provided in the Investments section below.

Individual Long Term Care Products

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

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##### Table of Contents



Legal Proceedings

The Company is involved in various legal proceedings that have arisen during
the ordinary course of business. The Company evaluates the facts and
circumstances of each situation, and when the Company determines it necessary,
a liability is estimated and recorded. Further information on the Companys
legal proceedings and related contingent liabilities is provided in Note F and
G of the Consolidated Financial Statements included under Item 8.

Loans to National Contractor

CNAF has made loans through a credit facility provided to a national contractor
to whom CNA Surety Corporation (CNA Surety) provides significant amounts of surety bond insurance
coverage. As of December 31, 2003, the Company has credit exposure of $55
million under the credit facility, net of a participation by Loews, in the
amount of $25 million. The credit facility was established to help the
contractor meet its liquidity needs. The contractor has initiated
restructuring efforts to reduce costs and improve cash flow and is attempting
to develop additional sources of funds. Based on the contractors
restructuring efforts to date, the Company estimates that amounts due under the
credit facility are collectible. Therefore, no valuation allowance has been
established. Further information on this credit agreement is provided in the
Liquidity and Capital Resources section below.

Reserves  Estimates and Uncertainties

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

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

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

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

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



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



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



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



| |  |  | class action litigation relating to claims handling and other
practices;
| | - |  | ------------------------------------------------------------------------



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



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

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

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



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



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



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



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



| |  |  | changes in the volume of asbestos and environmental pollution and
mass tort claims which cannot now be anticipated;
| | - |  | -------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





| |  |  | continued increase in mass tort claims relating to silica and
silica-containing products;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the impact of the exhaustion of primary limits and the resulting
increase in claims on any umbrella or excess policies the Company has
issued;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the Companys ability to recover
reinsurance for asbestos and environmental pollution and mass tort
claims.
| | - |  | -----------------------------------------------------------------------------------------------------------

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

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

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

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The following table presents estimated volatility in carried claim and claim
adjustment expense reserves for the property and casualty and
corporate and other segments.

Estimated Volatility in Gross Carried Loss Reserves by Segment

GrossCarried
    
    EstimatedLoss
    
    Volatility inDecember 31, 2003
    
    Reserves
    
    Reserves(In millions)Standard Lines
    
    $
    12,983
    
    
    
    +/-7
    %Specialty Lines
    
    
    6,470
    
    
    
    +/-7
    %CNA Re
    
    
    2,288
    
    
    
    +/-10
    %Corporate and Other
    
    
    7,046
    
    
    
    +/-25
    %


The estimated volatility noted above does not represent a range around the
actuarial point estimate of the Companys gross loss reserves, and it does not
represent the range of all possible outcomes. The volatility represents an
estimate of the inherent volatility associated with estimating loss reserves
for the specific type of business written by each segment. The primary
characteristics influencing the estimated level of volatility are the length of
the claim settlement period, changes in medical and other claim costs, changes
in the level of litigation or other dispute resolution processes, changes in
the legal environment and the potential for different types of injuries
emerging. Ceded reinsurance arrangements may reduce the volatility. Since
ceded reinsurance arrangements vary by year, volatility in gross reserves may
not result in comparable impacts to underwriting income or equity.

Reinsurance

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

Property and casualty reinsurance coverages are tailored to the specific risk
characteristics of each product line and CNAs retained amount varies by type
of coverage. Treaty reinsurance is purchased to protect specific lines of
business such as property, workers compensation, and professional liability.
Corporate catastrophe reinsurance is also purchased for property and workers
compensation exposure. Most treaty reinsurance is purchased on an excess of
loss basis. CNA also utilizes facultative reinsurance in certain lines.

CNAs ceded life reinsurance includes utilization of coinsurance, yearly
renewable term and facultative programs. A majority of the reinsurance
utilized by the Companys life insurance operations relates to term life
insurance policies. Term life insurance policies issued from 1994 onward are
generally ceded at 60-90% of the face value. Universal life policies issued
from 1998 onward are generally ceded at 75% of the face value.

The Companys overall reinsurance program includes certain property and
casualty contracts, such as the corporate aggregate reinsurance treaties
discussed in more detail later in this section, that are entered into and
accounted for on a funds withheld basis. Under the funds withheld basis, the
Company records the cash remitted to the reinsurer for the reinsurers margin,
or cost of the reinsurance contract, as ceded premiums. The remainder of the
premiums ceded under the reinsurance contract not remitted in cash is recorded
as funds withheld liabilities. 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

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##### Table of Contents



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 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 $344 million, $239 million and $241 million in 2003,
2002 and 2001. The amount subject to interest crediting rates on such
contracts was $2,789 million and $2,766 million at December 31, 2003 and 2002.
Certain funds withheld reinsurance contracts, including the corporate aggregate
reinsurance treaties, require interest on additional premiums arising from
ceded losses as if those premiums were payable at the inception of the
contract. The amount of retroactive interest, included in the totals above,
was $147 million, $10 million and $47 million in 2003, 2002 and 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 and
casualty and life reinsurance ceded to the extent that any reinsurer is unable
to meet the obligations or to the extent that the reinsurer disputes the
liabilities assumed under reinsurance agreements.

The Company has established an allowance for doubtful accounts to provide for
estimated uncollectible reinsurance receivables. The allowance for doubtful
accounts was $573 million and $196 million at December 31, 2003 and 2002. The
reserve increased by $377 million during 2003 in recognition of
deterioration of the financial strength ratings of several reinsurers,
including Trenwick Group Ltd. and Commercial Risk Reinsurance Company Ltd. In
addition, in the third quarter of 2003, the Company updated its reinsurance bad
debt model based on recently published studies of reinsurer insolvencies.
While the Company believes the allowance for doubtful accounts is adequate
based on current collateral and information currently available on the
financial stability of reinsurers, failure of reinsurers to meet their
obligations could have a material adverse impact on CNAs results of operations
and/or equity.

The Company attempts to mitigate its credit risk related to reinsurance by
entering into reinsurance arrangements only with reinsurers that have credit
ratings above certain levels and by obtaining substantial amounts of
collateral. The primary methods of obtaining collateral are through
reinsurance trusts, letters of credit and funds withheld balances. Such
collateral was approximately $5,255 million and $4,754 million at December 31,
2003 and 2002.

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

The Company has reinsurance receivables from several reinsurers who have
recently experienced multiple downgrades of their financial strength ratings,
have announced that they will no longer accept new business and are placing
their books of business into run-off. One of the Companys principal credit
exposures from these recent events arises from reinsurance receivables from
Gerling Global (Gerling).

30



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In 2003, the Company commuted all remaining ceded and assumed reinsurance
contracts with four Gerling entities. The commutations resulted in a pretax
loss of $109 million, which was net of a previously established allowance for
doubtful accounts of $47 million. The Company has no further exposure to the
Gerling companies that are in run-off. The Company estimates that these
commutations will reduce pretax interest expense related to these treaties by
approximately $11 million in 2004.

Amounts receivable from reinsurers were $16,254 million and $12,696 million at
December 31, 2003 and 2002. Of these amounts, $813 million and $957 million
were billed to reinsurers as of December 31, 2003 and 2002, as reinsurance
contracts generally require payment of claims by the ceding company before the
amount can be billed to the reinsurer. The remaining receivable relates to the
estimated case and incurred but not reported (IBNR) reserves and future
policyholder benefits ceded under reinsurance contracts.

CNAs largest recoverables from a single reinsurer at December 31, 2003,
including prepaid reinsurance premiums, were approximately $2,533 million,
$2,033 million, $1,172 million, $977 million, $760 million, and $629 million
from subsidiaries of The Allstate Corporation (Allstate), subsidiaries of
Hannover Reinsurance (Ireland) Ltd., Hartford Life Group Insurance Company,
American Reinsurance Company, European Reinsurance Company of Zurich and
subsidiaries of the Berkshire Hathaway Group.

For 2002, the Company entered into a corporate aggregate reinsurance treaty
covering substantially all of the Companys property and casualty lines of
business (the 2002 Cover). Ceded premium related to the reinsurers margin of
$10 million was recorded in 2002. No losses were ceded during 2002 under this
contract, and the 2002 Cover was commuted as of December 31, 2002.

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

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

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The impact of the Aggregate Cover was as follows:

Impact of Aggregate Cover

Year ended December 31
    
    2003
    
    2002
    
    2001(In millions)Ceded earned premium
    
    $
    (258
    )
    
    $
    
    
    
    $
    (543
    )Ceded claim and claim adjustment expenses
    
    
    500
    
    
    
    
    
    
    
    1,010Interest charges
    
    
    (147
    )
    
    
    (51
    )
    
    
    (81
    )Pretax (expense) benefit
    
    $
    95
    
    
    $
    (51
    )
    
    $
    386


In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property and
casualty lines of business in the Continental Casualty Company pool (the CCC
Cover). The loss protection provided by the CCC Cover has an aggregate limit
of approximately $761 million of ceded losses. The ceded premiums are a
percentage of ceded losses. The ceded premium related to full utilization of
the $761 million of limit is $456 million. The CCC Cover provides continuous
coverage in excess of the second section of the Aggregate Cover discussed
above. During 2003, the CCC Cover was fully utilized. 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. If the aggregate loss ratio would exceed these certain
thresholds, then additional interest charges on funds withheld would be
approximately $27 million in 2004.

The impact of the CCC Cover was as follows:

Impact of CCC Cover

Year ended December 31
    
    2003
    
    2002
    
    2001(In millions)Ceded earned premium
    
    $
    (100
    )
    
    $
    (101
    )
    
    $
    (260
    )Ceded claim and claim adjustment expenses
    
    
    143
    
    
    
    148
    
    
    
    470Interest charges
    
    
    (59
    )
    
    
    (37
    )
    
    
    (20
    )Pretax (expense) benefit
    
    $
    (16
    )
    
    $
    10
    
    
    $
    190


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

Impact of Aggregate Cover and CCC Cover

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Standard Lines
    
    $
    73
    
    
    $
    (52
    )
    
    $
    381Specialty Lines
    
    
    6
    
    
    
    2
    
    
    
    33CNA Re
    
    
    2
    
    
    
    12
    
    
    
    162Corporate and Other
    
    
    (2
    )
    
    
    (3
    )
    
    
    Pretax benefit (expense)
    
    $
    79
    
    
    $
    (41
    )
    
    $
    576


World Trade Center Event (WTC)

During the third quarter of 2001, the Company recorded estimated incurred
losses of $468 million pretax, net of reinsurance, related to the WTC event.
The loss estimate was based on a total industry loss of

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$50 billion and included all lines of insurance. This estimate took into
account CNAs substantial reinsurance agreements, including its catastrophe
reinsurance program and corporate reinsurance programs. The Company has
closely monitored reported losses as well as the collection of reinsurance on
WTC event claims. During both 2003 and 2002, the Company reduced the reserves
related to the WTC event in both the property and casualty and group and life
segments. See the segment discussions of this MD&A for further information.
As of December 31, 2003, the Company believes its remaining recorded reserves,
net of reinsurance, for the WTC event are adequate.

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

WTC Event

PretaxCorporateAggregate
    
    Total
    
    TotalPretax
    
    Reinsurance
    
    Pretax
    
    After-taxFor the year ended December 31, 2001
    
    Gross Losses
    
    Net Impact*
    
    Benefit
    
    Impact
    
    Impact(In millions)Standard Lines
    
    $
    375
    
    
    $
    185
    
    
    $
    108
    
    
    $
    77
    
    
    $
    50Specialty Lines
    
    
    214
    
    
    
    30
    
    
    
    12
    
    
    
    18
    
    
    
    12CNA Re
    
    
    662
    
    
    
    410
    
    
    
    139
    
    
    
    271
    
    
    
    176Group Operations
    
    
    235
    
    
    
    53
    
    
    
    
    
    
    
    53
    
    
    
    35Life Operations
    
    
    75
    
    
    
    22
    
    
    
    
    
    
    
    22
    
    
    
    14Corporate and Other
    
    
    87
    
    
    
    27
    
    
    
    
    
    
    
    27
    
    
    
    17Total
    
    $
    1,648
    
    
    $
    727
    
    
    $
    259
    
    
    $
    468
    
    
    $
    304




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

Terrorism Insurance

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

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

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

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

Reinsurers obligations for terrorism-related losses under reinsurance
agreements are not covered by the Act. The Companys assumed reinsurance
arrangements,beginning with the January 1, 2002 renewal period, either exclude
terrorism coverage or significantly limit the level of coverage.

Restructuring

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

IT Plan

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

As summarized in the following table, during 2001, the Company incurred $62
million pretax, or $40 million after-tax, of restructuring and other related
charges for the IT Plan. During 2002, $4 million pretax, or $3 million
after-tax, of this accrual was reduced. No restructuring and other related
charges related to the IT Plan were incurred in 2003.

IT Plan Pretax Charges by Segment

EmployeeTermination
    
    Impairedand Related
    
    Asset
    
    OtherBenefit Costs
    
    Charges
    
    Costs
    
    Total(In millions)Standard Lines
    
    $
    5
    
    
    $
    1
    
    
    $
    
    
    
    $
    6Specialty Lines
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Life Operations
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    17Corporate and Other
    
    
    22
    
    
    
    14
    
    
    
    1
    
    
    
    37Total
    
    $
    29
    
    
    $
    32
    
    
    $
    1
    
    
    $
    62


In connection with the IT Plan, after the write-off of impaired assets, the
Company accrued $30 million of restructuring and other related charges in 2001
(the IT Plan Initial Accrual). These charges primarily

34



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##### Table of Contents



related to $29 million of workforce reductions of approximately 260 positions
gross and net and $1 million of other costs.

The following table summarizes the IT Plan Initial Accrual and the activity in
that accrual during 2001, 2002 and 2003.

IT Plan Accrual

EmployeeTermination
    
    Impairedand Related
    
    Asset
    
    OtherBenefit Costs
    
    Charges
    
    Costs
    
    Total(In millions)IT Plan initial Accrual
    
    $
    29
    
    
    $
    32
    
    
    $
    1
    
    
    $
    62Costs 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
    
    
    
    11Payments charged against liability in 2002
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Reduction of accrual
    
    
    (3
    )
    
    
    
    
    
    
    (1
    )
    
    
    (4
    )Accrued costs at December 31, 2002
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Payments charged against liability in 2003
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Accrued costs at December 31, 2003
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    3


The remaining accrual relating to employee termination and related benefit
costs is expected to be paid through 2004.

2001 Plan

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

35



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As summarized in the following table, during 2001, the Company incurred $189
million pretax, or $125 million after-tax, of restructuring and other related
charges for the 2001 Plan. During 2002, $32 million pretax, or $21 million
after-tax, of this accrual was reduced. No restructuring and other related
charges related to the 2001 Plan were incurred in 2003.

2001 Plan Pretax Charges by Segment

EmployeeTermination
    
    Lease
    
    Impairedand Related
    
    Termination
    
    Asset
    
    OtherBenefit Costs
    
    Costs
    
    Charges
    
    Costs
    
    Total(In millions)Standard Lines
    
    $
    40
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40Specialty Lines
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7CNA Re
    
    
    2
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    6Group Operations
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    42Life Operations
    
    
    3
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    12Corporate and Other
    
    
    9
    
    
    
    52
    
    
    
    21
    
    
    
    
    
    
    
    82Total
    
    $
    68
    
    
    $
    56
    
    
    $
    30
    
    
    $
    35
    
    
    $
    189


All lease termination costs and impaired asset charges, except lease
termination costs incurred by operations in the United Kingdom and software
write-offs incurred by Life Operations, were charged to the Corporate and Other
segment because office closure and consolidation decisions were not within the
control of the other segments affected. Lease termination costs incurred in
the United Kingdom relate solely to the operations of CNA Re. All other
charges were recorded in the segment benefiting from the services or existence
of an employee or an asset.

In connection with the 2001 Plan, the Company accrued $189 million of these
restructuring and other related charges (the 2001 Plan Initial Accrual). These
charges include employee termination and related benefit costs, lease
termination costs, impaired asset charges and other costs.

36



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The following tables summarize the 2001 Plan Initial Accrual and the activity
in that accrual during 2001, 2002 and 2003 by type of restructuring cost and by
segment.

2001 Plan Initial Accrual

EmployeeTermination
    
    Lease
    
    Impairedand Related
    
    Termination
    
    Asset
    
    OtherBenefit Costs
    
    Costs
    
    Charges
    
    Costs
    
    Total(In millions)2001 Plan Initial Accrual
    
    $
    68
    
    
    $
    56
    
    
    $
    30
    
    
    $
    35
    
    
    $
    189Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (35
    )Payments charged against liability
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Accrued costs December 31, 2001
    
    
    66
    
    
    
    56
    
    
    
    30
    
    
    
    
    
    
    
    152Costs that did not require cash
    
    
    (1
    )
    
    
    (3
    )
    
    
    (9
    )
    
    
    
    
    
    
    (13
    )Payments charged against liability
    
    
    (53
    )
    
    
    (12
    )
    
    
    (4
    )
    
    
    
    
    
    
    (69
    )Reduction of accrual
    
    
    (10
    )
    
    
    (7
    )
    
    
    (15
    )
    
    
    
    
    
    
    (32
    )Accrued costs December 31, 2002
    
    
    2
    
    
    
    34
    
    
    
    2
    
    
    
    
    
    
    
    38Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Payments charged against liability
    
    
    (2
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )Accrued costs December 31, 2003
    
    $
    
    
    
    $
    19
    
    
    $
    1
    
    
    $
    
    
    
    $
    20


2001 Plan Initial Accrual

Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    CorporateLines
    
    Lines
    
    CNA Re
    
    Operations
    
    Operations
    
    and Other
    
    Total(In millions)2001 Plan Initial Accrual
    
    $
    40
    
    
    $
    7
    
    
    $
    6
    
    
    $
    42
    
    
    $
    12
    
    
    $
    82
    
    
    $
    189Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )Payments charged against liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Accrued costs December 31, 2001
    
    
    40
    
    
    
    7
    
    
    
    6
    
    
    
    7
    
    
    
    12
    
    
    
    80
    
    
    
    152Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (13
    )Payments charged against liability
    
    
    (31
    )
    
    
    (5
    )
    
    
    (2
    )
    
    
    (7
    )
    
    
    (11
    )
    
    
    (13
    )
    
    
    (69
    )Reduction of accrual
    
    
    (8
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (22
    )
    
    
    (32
    )Accrued costs December 31, 2002
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    38Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Payments charged against liability
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    (17
    )Accrued costs December 31, 2003
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20
    
    
    $
    20


Approximately $6 million of the remaining accrual for the 2001 Plan, primarily
related to lease termination costs, is expected to be paid in 2004.

Non-GAAP Financial Measures

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

37



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##### Table of Contents



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

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

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

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

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

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

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##### Table of Contents



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

Reconciliation of Underwriting Loss to Net (Loss) Income

Standard
    
    SpecialtyYear ended December 31, 2003
    
    Lines
    
    Lines
    
    CNA Re(In millions)Underwriting loss
    
    $
    (1,896
    )
    
    $
    (512
    )
    
    $
    (132
    )Net investment income
    
    
    336
    
    
    
    287
    
    
    
    72Other revenues
    
    
    198
    
    
    
    116
    
    
    
    7Other expenses
    
    
    (181
    )
    
    
    (111
    )
    
    
    (1
    )Loss before income tax benefit, minority interest and net realized investment gains
    
    
    (1,543
    )
    
    
    (220
    )
    
    
    (54
    )Income tax benefit
    
    
    587
    
    
    
    103
    
    
    
    27Minority interest
    
    
    
    
    
    
    6
    
    
    
    Loss before net realized investment gains
    
    
    (956
    )
    
    
    (111
    )
    
    
    (27
    )Realized investment gains, net of participating policyholders and minority interest
    
    
    338
    
    
    
    144
    
    
    
    73Income tax expense on realized investment gains
    
    
    (119
    )
    
    
    (50
    )
    
    
    (23
    )Net (loss) income
    
    $
    (737
    )
    
    $
    (17
    )
    
    $
    23


Reconciliation of Underwriting Loss to Net Income (Loss)

Standard
    
    SpecialtyYear ended December 31, 2002
    
    Lines
    
    Lines
    
    CNA Re(In millions)Underwriting loss
    
    $
    (178
    )
    
    $
    (203
    )
    
    $
    (58
    )Net investment income
    
    
    398
    
    
    
    253
    
    
    
    144Other revenues
    
    
    323
    
    
    
    146
    
    
    
    2Other expenses
    
    
    (283
    )
    
    
    (110
    )
    
    
    (1
    )Income before income tax expense, minority interest and net realized investment
(losses) gains
    
    
    260
    
    
    
    86
    
    
    
    87Income tax expense
    
    
    (63
    )
    
    
    (32
    )
    
    
    (22
    )Minority interest
    
    
    
    
    
    
    (26
    )
    
    
    Income before net realized investment (losses) gains
    
    
    197
    
    
    
    28
    
    
    
    65Realized investment (losses) gains, net of participating policyholders and
minority interest
    
    
    (86
    )
    
    
    (77
    )
    
    
    81Income tax benefit (expense) on realized investment (losses) gains
    
    
    30
    
    
    
    25
    
    
    
    (10
    )Income (loss) from continuing operations
    
    
    141
    
    
    
    (24
    )
    
    
    136Cumulative effect of a change in accounting principle, net of tax of $3
    
    
    
    
    
    
    (48
    )
    
    
    Net income (loss)
    
    $
    141
    
    
    $
    (72
    )
    
    $
    136


39



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##### Table of Contents



Reconciliation of Underwriting Loss to Net Loss

Standard
    
    SpecialtyYear ended December 31, 2001
    
    Lines
    
    Lines
    
    CNA Re(In millions)Underwriting loss
    
    $
    (1,261
    )
    
    $
    (744
    )
    
    $
    (1,048
    )Net investment income
    
    
    488
    
    
    
    314
    
    
    
    172Other revenues
    
    
    341
    
    
    
    122
    
    
    
    5Other expenses
    
    
    (316
    )
    
    
    (148
    )
    
    
    (3
    )Loss before income tax expense, minority interest and net realized investment
(losses) gains
    
    
    (748
    )
    
    
    (456
    )
    
    
    (874
    )Income tax benefit
    
    
    297
    
    
    
    148
    
    
    
    252Minority interest
    
    
    
    
    
    
    (21
    )
    
    
    Loss before net realized investment gains (losses)
    
    
    (451
    )
    
    
    (329
    )
    
    
    (622
    )Realized investment gains (losses), net of participating policyholders and
minority interest
    
    
    697
    
    
    
    262
    
    
    
    (77
    )Income tax (expense) benefit on realized investment gains (losses)
    
    
    (246
    )
    
    
    (92
    )
    
    
    35Loss from continuing operations
    
    
    
    
    
    
    (159
    )
    
    
    (664
    )Cumulative effect of a change in accounting principle, net of tax of $16, $8 and $3
    
    
    (30
    )
    
    
    (14
    )
    
    
    (5
    )Net loss
    
    $
    (30
    )
    
    $
    (173
    )
    
    $
    (669
    )


Segment Results

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

STANDARD LINES

Business Overview

Standard Lines works with an independent agency distribution system and network
of brokers to market a broad range of property and casualty insurance products
and services to small, middle-market and large businesses. The Standard Lines
operating model focuses on underwriting performance, relationships with
selected distribution sources and understanding customer needs.

Standard Lines includes Property and Casualty and Excess & Surplus.

Property and Casualty(P&C) provides standard property and casualty insurance
products such as workers compensation, general and product liability, property
and commercial auto coverage through traditional and innovative advanced
financial risk products to a wide range of businesses. The majority of P&C
customers are small and middle-market businesses, with less than $1 million in
annual insurance premiums. Most insurance programs are provided on a
guaranteed cost basis; however, P&C has the capability to offer specialized,
loss-sensitive insurance programs to those customers viewed as higher risk and
less predictable in exposure.

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P&Cs field structure consists of 34 branch locations across the country. Each
branch provides the marketing, underwriting and risk control expertise on the
entire portfolio of products. In addition, these branches provide streamlined
claim services utilizing the same regional structure. The Centralized
Processing Operation for small and middle-market customers, located in
Maitland, Florida, handles policy processing and accounting, and also acts as a
call center to optimize customer service. Also, Standard Lines, primarily
through a wholly owned subsidiary, ClaimPlus, Inc., a third party
administrator, began providing total risk management services relating to claim
services, risk control, cost management and information services to the large
commercial insurance marketplace in 2003.

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

Excess & Surplus(E&S) provides specialized insurance and other financial
products for selected commercial risks on both an individual customer and
program basis. Customers insured by E&S are generally viewed as higher risk
and less predictable in exposure than those covered by standard insurance
markets. E&Ss products are distributed throughout the United States through
specialist producers, program agents, and P&Cs agents and brokers. E&S has
specialized underwriting and claim resources in Chicago, New York, Denver and
Columbus.

The following table details results of operations for Standard Lines.

Results of Operations

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Net written premiums
    
    $
    3,802
    
    
    $
    4,020
    
    
    $
    2,984Net earned premiums
    
    
    3,743
    
    
    
    4,018
    
    
    
    2,473Underwriting loss
    
    
    (1,896
    )
    
    
    (178
    )
    
    
    (1,261
    )(Loss) income before net realized investment gains (losses)
    
    
    (956
    )
    
    
    197
    
    
    
    (451
    )Net realized investment gains (losses)
    
    
    219
    
    
    
    (56
    )
    
    
    451Net (loss) income
    
    
    (737
    )
    
    
    141
    
    
    
    (30
    )RatiosLoss and loss adjustment expense
    
    
    102.5
    %
    
    
    72.0
    %
    
    
    97.4
    %Expense
    
    
    45.5
    
    
    
    30.6
    
    
    
    49.0Dividend
    
    
    2.7
    
    
    
    1.8
    
    
    
    4.6Combined
    
    
    150.7
    %
    
    
    104.4
    %
    
    
    151.0
    %


2003 Compared with 2002

Net written premiums for Standard Lines decreased $218 million and net earned
premiums decreased $275 million in 2003 as compared with 2002. These decreases
were due primarily to increased ceded premiums, including premiums ceded to
corporate aggregate and other reinsurance treaties, primarily as a result of
unfavorable net prior year claim and allocated claim adjustment expense reserve
development recorded in 2003. Premiums also decreased as a result of a shift
in the mix of business to high deductible policies, which generally have lower
premiums. Partially offsetting these declines were increased premiums across
most P&C and E&S lines as a result of new business initiatives and rate
increases.

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Standard Lines averaged rate increases of 16%, 27% and 17% in 2003, 2002 and
2001 for the contracts that renewed during those periods. Retention rates of
72%, 68% and 76% were achieved for those contracts that were up for renewal.

Net results decreased $878 million in 2003 as compared with 2002. The decrease
in net results was primarily driven by increased unfavorable net prior year
development of $1,005 million after-tax ($1,546 million pretax), an increase in
the bad debt provision for insurance and reinsurance receivables of $193
million after-tax ($297 million pretax), an increase in certain
insurance-related assessments of $49 million after-tax ($74 million pretax),
and decreased net investment income primarily due to increased interest expense
of $78 million after-tax ($120 million pretax) related to additional cessions
to the corporate aggregate and other reinsurance treaties. Partially
offsetting these decreases were increases in net realized investment gains and
$89 million after-tax ($137 million pretax) of increased limited partnership
income. See the Investments section of this MD&A for further discussion on net
investment income and net realized investment gains (losses).

The combined ratio increased 46.3 points and underwriting results decreased
$1,718 million in 2003 as compared with 2002. The loss ratio increased 30.5
points due principally to the increase in unfavorable net prior year
development in 2003 as compared with 2002, as discussed below, and $96 million
of catastrophe losses which occurred during 2003. Catastrophe losses were $23
million in 2002. Partially offsetting these unfavorable variances was an
improvement in the current net accident year loss ratio.

Unfavorable net prior year development of $1,392 million, including $905
million of unfavorable claim and allocated claim adjustment expense reserve
development and $487 million of unfavorable premium development, was recorded
in 2003. Favorable net prior year development of $154 million, including $221
million of favorable claim and allocated claim adjustment expense reserve
development and $67 million of unfavorable premium development, was recorded in
2002. The gross carried claim and claim adjustment expense reserve was $12,983
million and $11,576 million at December 31, 2003 and 2002. The net carried
claim and claim adjustment expense reserve was $8,067 million and $7,262
million at December 31, 2003 and 2002.

The following discusses net prior year development for Standard Lines recorded
in 2003.

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

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The unfavorable net prior year development recorded related
to construction defect claims was primarily related to accident years 1999 and
prior.

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

Approximately $98 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development recorded in 2003 resulted from a
program covering facilities that provide services to developmentally disabled
individuals. This net prior year development was due to an increase in the
size of known claims and increases in policyholder defense costs. Recent data
shows the average claim increasing at an annual rate of approximately 20%.
Prior data had shown average claim size to be level. Similar to the average
claim size, recent data shows the average policyholder defense cost increasing
at an annual rate of approximately 20%. Prior data had shown average
policyholder defense cost to be level. The net prior year development recorded
was primarily for accident years 2001 and prior.

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

Approximately $73 million of unfavorable net prior year development recorded in
2003 was the result of a commutation of all ceded reinsurance treaties with
Gerling Global Group of companies (Gerling), related to accident years 1999
through 2001, including $41 million of unfavorable claim and allocated claim
adjustment expense development and $32 million of unfavorable premium
development. Further information regarding this commutation is provided in the
Reinsurance section of this MD&A.

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

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

The following premium and claim and allocated claim adjustment expense
development was recorded in 2003 as a result of the elimination of deficiencies
and redundancies in reserve positions within the

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segment. Unfavorable net prior year development of approximately $210 million
related to small and middle market workers compensation exposures and
approximately $110 million related to E&S lines was recorded in 2003.
Offsetting these increases was $210 million of favorable net prior year
development in the property line of business, including $79 million related to
the WTC event.

Also, offsetting the unfavorable premium and claim and allocated claim
adjustment expense development was a $216 million underwriting benefit from
cessions to corporate aggregate reinsurance treaties recorded in 2003. The
benefit is comprised of $485 million of ceded losses and $269 million of ceded
premiums for accident years 2000 and 2001.

The following discusses net prior year development for Standard Lines recorded
in 2002.

Approximately $140 million of favorable net prior year development was
attributable to participation in the Workers Compensation Reinsurance Bureau
(WCRB), a reinsurance pool, and residual markets. The favorable prior year
reserve development for WCRB was the result of information received from the
WCRB that reported the results of a recent actuarial review. This information
indicated that the Companys net required reserves for accident years 1970
through 1996 were $60 million less than the carried reserves. In addition,
during 2002, the Company commuted accident years 1965 through 1969 for a
payment of approximately $5 million to cover carried reserves of approximately
$13 million, resulting in further favorable net prior year claim and allocated
claim adjustment expense development of $8 million. The favorable residual
market net prior year development was the result of lower than expected paid
loss activity during recent periods for accident years dating back to 1984.
The paid losses during 2002 on prior accident years were approximately 60% of
the previously expected amount.

In addition, Standard Lines had favorable net prior year development, primarily
in the package liability and auto liability lines of business due to new claims
initiatives. These new claims initiatives, which included specialized training
on specific areas of the claims adjudication process, enhanced claims
litigation management, enhanced adjuster-level metrics to monitor performance
and more focused metric-based claim file review and oversight, are expected to
produce significant reductions in ultimate claim costs. Based on managements
best estimate of the reduction in ultimate claim costs, approximately $100
million of favorable net prior year development was recorded in 2002.
Approximately one-half of this favorable net prior year development was
recorded in accident years prior to 1999, with the remainder of the favorable
net prior year development recorded in accident years 1999 to 2001.
Approximately $50 million of favorable net prior year development during 2002
was recorded in commercial automobile liability. Most of the favorable
development was from accident year 2000. An actuarial review completed during
2002 showed that underwriting actions have resulted in reducing the number of
commercial automobile liability claims for recent accident years, especially
the number of large losses.

Approximately $45 million of favorable net prior year development was recorded
in property lines during 2002. The favorable net prior year development was
principally from accident years 1999 through 2001, and was the result of the
low number of large losses in recent years. Although property claims are
generally reported relatively quickly, determining the ultimate cost of the
claim can involve a significant amount of time between the occurrence of the
claim and settlement.

Offsetting these favorable net prior year developments were approximately $100
million of unfavorable premium development in middle market workers
compensation, approximately $70 million of unfavorable net prior year claim and
allocated claim adjustment expense development in programs written in CNA E&S,
approximately $30 million of unfavorable net prior year claim and allocated
claim adjustment expense development on a contractors account package policy
program and approximately $20 million of unfavorable net prior year claim and
allocated claim adjustment expense development on middle market general
liability coverages. The unfavorable net prior year development on workers

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compensation was principally due to additional reinsurance premiums for
accident years 1999 through 2001.

A CNA E&S program, covering facilities that provide services to developmentally
disabled individuals, accounts for approximately $50 million of the unfavorable
net prior year development. The net prior year development is due to an
increase in the size of known claims and increases in policyholder defense
costs. These increases became apparent as the result of an actuarial review
completed during 2002, with most of the development from accident years 1999
and 2000. The other program which contributed to the CNA E&S development
covers tow truck and ambulance operators in the 2000 and 2001 accident years.
This program was started in 1999. The Company expected that loss ratios for
this business would be similar to its middle market commercial automobile
liability business. Reviews completed during 2002 resulted in estimated loss
ratios on the tow truck and ambulance business that are 25 points higher than
the middle market commercial automobile liability loss ratios.

The unfavorable net prior year development on contractors account package
policies was the result of a review completed during 2002. Since this program
is no longer being written, the Company expected that the change in reported
losses would decrease each quarterly period. However, in recent quarterly
periods, the change in reported losses has been higher than prior quarters,
resulting in the unfavorable reserve development.

The expense ratio increased 14.9 points due to increased expenses and decreased
net earned premiums in 2003 as compared with 2002. Acquisition expenses were
unfavorably impacted by an increase in the bad debt expense reserve for
reinsurance receivables of $55 million. Based on the Companys credit
exposures to reinsurance receivables, an increase in the bad debt reserve was
deemed appropriate. See the Reinsurance section of this MD&A for additional
information regarding the increase in reinsurance receivables. The Company
also recorded a $242 million increase in the bad debt reserve for insurance
receivables. The increase in the bad debt provision for insurance receivables
was primarily the result of a review of Professional Employer Organization
(PEO) accounts as well as certain accounts that have been turned over to third
parties for collection. During 2002, Standard Lines ceased writing coverages
for PEO businesses, with the last contracts expiring on June 30, 2003. The
review analyzed losses and the related receivable including the associated
collateral held by the Company. Upon completion of the review, it was
determined that the ultimate loss estimates were larger than previously
expected, which increased the amount of uncollateralized receivables. Based on
these factors, an increase in the provision was recorded.

Additionally, acquisition expenses increased as a result of a $44 million
increase in certain insurance-related assessments recorded in 2003 as compared
with a $30 million reduction in accruals for certain insurance-related
assessments resulting from changes, due to legislation, in the basis on which
the assessments were recorded in 2002. Also increasing the expense ratio was
approximately $62 million of expenses related to eBusiness in 2003. The 2002
eBusiness expenses were included in the Corporate and Other segment.

The dividend ratio increased 0.9 points in 2003 as compared with 2002 due
primarily to increased net prior year unfavorable dividend development. The
$42 million increase in unfavorable dividend development was primarily related to
workers compensation products. A review was completed in 2003 indicating
dividend development that was higher than prior expectations. This development
related to accident years 2002 and prior.

2002 Compared with 2001

Net written premiums for Standard Lines increased $1,036 million in 2002 as
compared with 2001. The increase in net written premiums was primarily due to
decreased ceded premiums related to corporate

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aggregate and other reinsurance treaties, strong rate increases, increased new
business across most of Standard Lines and the absence of the change in
estimate for involuntary market premium accruals recorded in 2001. The
additional ceded premiums in 2001 related to corporate aggregate and other
reinsurance treaties was recorded for the unfavorable net prior year
development in 2001 and the WTC Event.

Net earned premiums increased $1,545 million in 2002 as compared with 2001.
Net earned premiums increased as a result of the increases in net written
premiums as described above and the absence of a change in estimate for
retrospective premium accruals recorded in 2001.

Net results improved by $171 million in 2002 as compared with 2001. This
improvement was due to improved underwriting results, decreased unfavorable net
prior year development of $681 million after-tax ($1,048 million pretax), and a
$5 million after-tax ($8 million pretax) reduction of the accrual for
restructuring and other related charges.

In addition, net results in 2001 were adversely impacted by $50 million
after-tax ($77 million pretax) losses related to the WTC event and $30 million
after-tax ($46 million pretax) for restructuring and other related charges.
Partially offsetting these improvements in 2002 net results was decreased net
investment results. See the Investments section of this MD&A for further
discussion of net investment income and net realized gains (losses).

The combined ratio decreased 46.6 points for 2002 as compared with 2001, and
underwriting results improved by $1,083 million as compared with the
underwriting results for the same period in 2001. The loss ratio decreased
25.4 points due primarily to decreased net prior year development and
improvement in the current accident year ratio.

Favorable net prior year development of $154 million, including $221 million of
favorable claim and allocated claim adjustment expense reserve development and
$67 million of unfavorable premium development, was recorded in 2002.
Unfavorable net prior year development of $894 million,
including $96 million of
favorable claim and allocated claim adjustment expense reserve development and
$990 million of unfavorable premium development, was recorded in 2001. The
gross carried claim and claim adjustment expense reserve was $11,576 million
and $12,854 million at December 31, 2002 and 2001. The net carried claim and
claim adjustment expense reserve was $7,262 million and $7,788 million at
December 31, 2002 and 2001.

The discussion of the net prior year development recorded in 2002 was included
in the 2003 compared with 2002 section above.

Approximately $230 million of unfavorable net prior year claim and allocated
claim adjustment expense development recorded in 2001 was a result of several
coverages provided to commercial entities. Reserve analyses performed during
2001 showed unexpected increases in the size of claims for several lines,
including commercial automobile liability, general liability and the liability
portion of commercial multiple-peril coverages. In addition, the number of
commercial automobile liability claims was higher than expected and several
state-specific factors resulted in higher than anticipated losses, including
developments associated with commercial automobile liability coverage in Ohio
and general liability coverage provided to contractors in New York. The
unfavorable net prior year development was driven principally by accident years
1997 through 2000. The remaining unfavorable net prior year development
affecting years prior to 1997 was driven principally by construction defect
claims as described below.

The commercial automobile liability analysis indicated increased ultimate claim
and claim adjustment expense across several accident years due to higher paid
and reported claim and claim adjustment expense

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resulting from several factors. These factors include uninsured/underinsured
motorists coverage in Ohio, a change in the rate at which the average claim
size was increasing and a lack of improvement in the ratio of the number of
claims per exposure unit, the frequency. First, Ohio courts had significantly
broadened the population covered through the uninsured/underinsured motorists
coverage. The broadening of the population covered by this portion of the
policy, and the retrospective nature of this broadening of coverage, resulted
in additional claims for older years. Second, in recent years, the average
claim size had been increasing at less than a 2% annual rate. The available
data indicated that the rate of increase was closer to 8% with only a portion
of this increase explainable by a change in mix of business. Finally, the
review completed during 2001 indicated that the frequency for the 2000 accident
year was 6% higher than 1999. Expectations were that the 2000 frequency would
show an improvement from the 1999 level.

The analyses of general liability and the liability portion of commercial
multiple-peril coverages showed several factors affecting these lines.
Construction defect claims in California and a limited number of other states
have had a significant impact. It was expected that the number of claims being
reported and the average size of those claims would fall quickly due to the
decrease in business exposed to those losses. However, the number of claims
reported during the first six months of 2001 increased from the number of
claims reported during the last six months of 2000. In addition to the effects
of construction defect claims, the average claim associated with New York labor
law has risen to more than $125 thousand from less than $100 thousand, which
was significantly greater than previously 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.
These studies included ground-up reviews of retrospective premium accruals
utilizing a more comprehensive database of retrospectively rated contracts.
This review included application of the policy retrospective rating parameters
to the revised estimate of ultimate loss ratio and consideration of actual
interim cash settlement. This study resulted in a change in the estimated
retrospective premiums receivable balances.

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 $616 million. The studies included the review of all such
retrospectively rated insurance policies and the estimate of ultimate losses.

Approximately $188 million of this amount resulted from a change in estimate in
premiums related to involuntary market facilities, which had an offsetting
impact on net losses and therefore had no impact on the net operating results.
More than one-half of the change in estimate in premiums was attributable to
accident years 1997 through 1999 with the remainder attributable to accident
years prior to 1992. Accruals for ceded premiums related to reinsurance
treaties other than the corporate aggregate reinsurance treaties increased $83
million due to the reserve strengthening. This increase in accruals for ceded
premiums was principally recorded in accident year 2000. The remainder of the
increase in premium accruals relates to the change in estimate of the amount of
retrospective premium receivables as discussed above, which were principally
recorded in accident years prior to 1999.

A $238 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties in 2001, comprised of $443 million of ceded losses and
$205 million of ceded premiums for accident year 1999.

The expense ratio decreased 18.4 points as a result of decreased acquisition
expenses, principally due to reduction in accruals for certain
insurance-related assessments resulting from changes in the regulatory basis on
which the assessments were calculated. Furthermore, the expense ratio
decreased due to reduced head count as a result of the 2001 Plan and due to the
impact of the increased net earned premium base on

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which the ratio is determined. The dividend ratio decreased 2.8 points
primarily due to favorable 2002 accident year dividends.

SPECIALTY LINES

Business Overview

Specialty Lines provides professional, financial and specialty domestic and
international property and casualty products and services through a network of
brokers, managing general agencies and independent agencies. Specialty Lines
provides solutions for managing the risks of its clients, including architects,
engineers, lawyers, healthcare professionals, financial intermediaries and
corporate directors and officers. Product offerings also include surety and
fidelity bonds and vehicle and equipment warranty services.

Specialty Lines includes the following business groups: Professional Liability
Insurance, CNA Global, Surety, Warranty, and CNA Guaranty and Credit.

Professional Liability Insurance(CNA Pro) provides management and professional
liability insurance and risk management services, primarily in the United
States. This unit provides professional liability coverages to various
professional firms, including architects and engineers, realtors, non-Big Four
accounting firms, law firms and technology firms. CNA Pro also has market
positions in directors and officers, errors and omissions, employment
practices, fiduciary and fidelity coverages. Specific areas of focus include
larger firms as well as privately held firms and not-for-profit organizations
where CNA offers tailored products for this client segment. Products within
CNA Pro are distributed through brokers, agents and managing general
underwriters.

CNA Pro, through CNA HealthPro, also offers insurance products to serve the
healthcare delivery system. Products are distributed on a national basis
through a variety of channels including brokers, agents and managing general
underwriters. Key customer segments include long term care facilities, allied
healthcare providers, life sciences, dental professionals and mid-size and
large healthcare facilities and delivery systems. Additionally, CNA HealthPro
offers risk management consulting services to assist customers in managing
quality of care risks associated with the delivery of healthcare. Claim
services are provided to manage and resolve claims.

CNA Globalconsists of Marine and Global Standard Lines.

Marine serves domestic and global ocean marine needs, with markets extending
across North America, Europe and throughout the world. Marine offers hull,
cargo, primary and excess marine liability, marine claims and recovery products
and services. Business is sold through national brokers, regional marine
specialty brokers and independent agencies.

Global Standard Lines is responsible for coordinating and managing the direct
business of CNAs overseas property and casualty operations. This business
identifies and capitalizes on strategic indigenous opportunities and currently
has operations in Hawaii, Europe, Latin America and Canada.

Suretyconsists primarily of CNA Surety and its
insurance subsidiaries and offers small, medium and large contract and
commercial surety bonds. CNA Surety provides surety and fidelity bonds in all
50 states through a combined network of approximately 34,000 independent
agencies. CNA owns approximately 64% of CNA Surety.

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Warrantyprovides warranty service contracts that protect individuals and
businesses from the financial burden associated with breakdown,
under-performance or maintenance of a product. Products are distributed via a
sales force employed or contracted through a program administrator. Warrantys
business activities are primarily performed through the wholly owned
subsidiary, CNA National Warranty Corporation, which sells vehicle service
contracts in the United States and Canada.

CNA Guaranty and Creditprovided credit insurance on short term trade
receivables for domestic and international clients as well as reinsurance to
insurers who provide financial guarantees to issuers of asset-backed
securities, money market funds and investment-grade corporate debt securities.
The Guaranty business underwritten by CNAs insurance affiliates, excluding
CNAs ownership interest in R.V.I. Guaranty Co. Ltd. (RVI), an unconsolidated
affiliate, is currently in run-off. The Credit business underwritten by CNAs
insurance affiliates was sold on December 31, 2002; however, all inforce
business and reserves at the date of sale were retained by CNA. The run-off of
these businesses will occur over several years.

The following table details results of operations for Specialty Lines.

Results of Operations

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Net written premiums
    
    $
    2,809
    
    
    $
    2,383
    
    
    $
    1,951Net earned premiums
    
    
    2,666
    
    
    
    2,178
    
    
    
    1,896Underwriting loss
    
    
    (512
    )
    
    
    (203
    )
    
    
    (744
    )(Loss) income before net realized investment gains (losses)
    
    
    (111
    )
    
    
    28
    
    
    
    (329
    )Net realized investment gains (losses)
    
    
    94
    
    
    
    (52
    )
    
    
    170Net (loss)
    
    
    (17
    )
    
    
    (72
    )
    
    
    (173
    )RatiosLoss and loss adjustment expense
    
    
    84.9
    %
    
    
    77.1
    %
    
    
    97.5
    %Expense
    
    
    34.2
    
    
    
    32.1
    
    
    
    41.5Dividend
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Combined
    
    
    119.2
    %
    
    
    109.3
    %
    
    
    139.2
    %


2003 Compared with 2002

Net written premiums for Specialty Lines increased $426 million and net earned
premiums increased $488 million in 2003 as compared with 2002. These increases
were due primarily to rate increases and increased new business, primarily in
CNA Pro and Global Lines.

Specialty Lines averaged rate increases of 24%, 26% and 13% in 2003, 2002 and
2001 for the contracts that renewed during these years. Retention rates of
79%, 76% and 78% were achieved for those contracts that were up for renewal.

Net loss was $17 million in 2003 as compared with $72 million in 2002. The
improvement in net results was primarily due to improved current net accident
year results primarily attributable to premium rate increases and increased net
realized investment results. See the Investments section of this MD&A for
further discussion of net investment income and net realized gains (losses).
Net loss for 2002 also included a $48 million after-tax ($51 million pretax)
cumulative effect of a change in accounting principle charge related to
goodwill impairment. These improvements were partially offset by increased
unfavorable net prior year development of $190 million after-tax ($292 million
pretax), an increase in the bad debt provision for reinsurance receivables of
$51 million after-tax ($79 million pretax) and increased interest expense of $4
million after-tax ($5 million pretax) related to additional cessions to the
corporate aggregate reinsurance treaties.

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The combined ratio increased 9.9 points and underwriting results decreased by
$309 million in 2003 as compared with 2002. The loss ratio increased 7.8
points due principally to increased unfavorable net prior year development, as
discussed below. Additionally, the loss ratio was negatively impacted by a $28
million increase in ULAE reserves and $49 million of current accident year
losses for Surety, related to large losses in 2003, and $20 million of current
accident year losses for directors and officers exposures in CNA Pro, which
primarily related to recent securities class action cases related to certain
mutual fund firms. These items were partially offset by the improvement in the
current net accident year loss ratio and the impact of higher net earned
premiums.

Unfavorable net prior year development of $429 million, including $398 million
of net unfavorable claim and allocated claim adjustment expense reserve
development and $31 million of unfavorable premium development, was recorded in
2003 for Specialty Lines. Unfavorable net prior year development of $137
million, including $68 million of net unfavorable claim and allocated claim
adjustment expense reserve development and $69 million of unfavorable premium
development, was recorded in 2002 for Specialty Lines. The gross and net
carried claim and claim adjustment expense reserves were $6,470 million and
$3,995 million at December 31, 2003. The gross and net carried claim and claim
adjustment expense reserves for Specialty Lines were $5,874 million and $3,373
million at December 31, 2002.

The following discusses net prior year development for Specialty Lines recorded
in 2003.

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

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

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

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

Approximately $84 million of losses were recorded during 2003 as the result of
a commutation of ceded reinsurance treaties with Gerling, relating to accident
years 1999 through 2002. Further information regarding this commutation is
provided in the Reinsurance section of this MD&A.

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The following net prior year development was recorded in 2003 as a result of
the elimination of deficiencies and redundancies in reserve positions within
the segment. An additional $50 million of unfavorable net prior year claim and
allocated claim adjustment expense reserve development was recorded related to
medical malpractice and long term care facilities. Partially offsetting this
unfavorable claim and allocated claim adjustment expense reserve development
was a $25 million underwriting benefit from cessions to corporate aggregate
reinsurance treaties. The benefit was comprised of $56 million of ceded losses
and $31 million of ceded premiums for accident years 2000 and 2001.

The following discusses net prior year development for Specialty Lines recorded
in 2002.

Unfavorable net prior year development of approximately $180 million was
recorded for CNA HealthPro in 2002 and was driven principally by medical
malpractice excess products provided to hospitals and physicians and coverages
provided to long term care facilities, principally national for-profit nursing
homes. Approximately $100 million of the net prior year unfavorable
development was related to assumed excess products and loss portfolio
transfers, and was primarily driven by unexpected increases in the number of
excess claims in accident years 1999 and 2000. The percentage of total claims
greater than $1 million has increased by 33%, from less than 3% of all claims
to more than 4% of all claims. CNA HealthPro no longer writes assumed excess
products and loss portfolio transfers. Approximately $50 million of the
unfavorable net prior year development was related to long term care
facilities. The unfavorable net prior year development was principally
recorded for accident years 1997 through 2000. The average value of claims
closed during the first several months of 2002 increased by more than 50% when
compared to claims closed during 2001. In response to those trends, CNA
HealthPro has reduced its writings of national for-profit nursing home chains.
Excess products provided to healthcare institutions and physician coverages in
a limited number of states were responsible for the remaining development in
CNA HealthPro. The unfavorable net prior year development on excess products
provided to institutions for accident years 1996 through 1999 resulted from
increases in the size of claims experienced by these institutions. Due to the
increase in the size of claims, more claims were exceeding the point at which
these excess products apply. The unfavorable net prior year development on
physician coverages was recorded for accident years 1999 through 2001 in
Oregon, California, Arizona and Nevada. The average claim size in these states
has increased by 20%, driving the change in losses.

The marine business recorded unfavorable net prior year development of
approximately $65 million during 2002. Approximately $50 million of this
unfavorable net prior year development was due to participation in voluntary
pools. About half of the net prior year development was recorded in accident
years 1999 and 2000 with the remainder attributable to accident years prior to
1999. The reserves were based on recommendations provided by the pools.
Participation in many of these pools has been discontinued. The remaining net
prior year development for the Marine business was due principally to
unfavorable reserve development on hull and liability coverages from accident
years 1999 and 2000 offset by favorable reserve development on cargo coverages
recorded for accident year 2001. Reviews completed during 2002 showed
additional reported losses on individual large accounts and other bluewater
business that drove the unfavorable hull and liability development.

Offsetting this unfavorable net prior year development was favorable net prior
year development in CNA Pro and for Enron related exposures. Programs
providing professional liability coverage to accountants, lawyers and realtors
primarily drove favorable net prior year development of approximately $110
million in CNA Pro. Reviews of this business completed during 2002 showed
little activity for older accident years (principally prior to 1999), which
reduced the need for reserves on these years. The reported losses on these
programs for accident years prior to 1999 increased by approximately $5 million
during 2002. This increase compared to the total reserve at the beginning of
2002 of approximately $180 million, net of reinsurance. Additionally,
favorable net prior year development of $20 million was associated with the
Enron settlement. The Company had established a $20 million reserve for
accident year 2001 for an

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excess layer associated with Enron related surety losses; however the case was
settled for less than the attachment point of this excess layer.

A $16 million underwriting benefit was recorded for cessions to the corporate
aggregate reinsurance treaties in 2002. The benefit was comprised of $55
million of ceded losses and $39 million of ceded premium for accident year
2001.

The expense ratio increased 2.1 points due primarily to increased acquisition
expenses. Expenses were unfavorably impacted by an increase in the bad debt
provision for reinsurance receivables of $79 million. See the Reinsurance
section of this MD&A for additional information regarding the increase in
reinsurance receivables. Additionally, acquisition expenses increased as a
result of an increase in certain insurance related assessments of $14 million
recorded in 2003 as compared with a $1 million reduction in accruals for
certain insurance-related assessments resulting from changes due to
legislation, in the basis on which the assessments were calculated recorded in
2002. The impact of these items on the expense ratio was partially offset by
the increased net earned premium base.

2002 Compared with 2001

Net written premiums for Specialty Lines increased $432 million and net earned
premiums increased $282 million in 2002 as compared with 2001. The increase in
both net written and net earned premiums was primarily due to decreased ceded
premiums related to corporate aggregate and other reinsurance treaties, strong
rate increases and increased new business in most lines of business, including
CNA Pro and Global. The additional ceded premiums recorded in 2001 were the
result of unfavorable net prior year development and the WTC event.

Net loss was $72 million in 2002 as compared with a net loss of $173 million in
2001. The improvement in 2002 net results was primarily due to decreased
unfavorable net prior year development of $205 million after-tax ($316 million
pretax), increased net realized investment results and improved underwriting
results.

Favorable net prior year development of $13 million after-tax ($20 million
pretax) was recorded in 2002 in relation to the Enron exposures previously
recorded as a charge of $30 million after-tax ($46 million pretax) related to
the bankruptcy filing of certain Enron entities in 2001. These 2001 charges
consisted of $17 million after-tax ($26 million pretax) of losses in connection
with surety exposures, including advance payment obligations bonds and $13
million after-tax ($20 million pretax) of other operating expenses in
connection with collateralized debt obligations, a credit enhancement product.

In addition, net results in 2001 were also adversely impacted by $12 million
after-tax ($18 million pretax) of estimated losses related to the WTC event, $6
million after-tax ($9 million pretax) for restructuring and other related
charges and the better alignment of premium earnings with the emergence of
claims in the vehicle warranty line of business, which reduced net results in
2001.

These improvements in net results for 2002 were partially offset by a decline
in net investment income, including a $13 million after-tax ($20 million
pretax) decline in limited partnership income. See the Investments section of
this MD&A for further discussion of net investment income and net realized
gains (losses).

The combined ratio decreased 29.9 points in 2002 as compared with 2001, and the
underwriting results improved $541 million as compared with the underwriting
results for 2001. The loss ratio decreased 20.4 points due principally to
decreased unfavorable net prior year development recorded in 2002, improved
current accident year loss ratios and rate increases across the entire book of
business.

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Unfavorable net prior year development of $137 million, including $68 million
of net unfavorable claim and allocated claim adjustment expense reserve
development and $69 million of unfavorable premium development, was recorded in
2002 for Specialty Lines. Unfavorable net prior year development of $453
million, including $415 million of net unfavorable claim and allocated claim
adjustment expense reserve development and $38 million of unfavorable premium
development, was recorded in 2001 for Specialty Lines. The gross carried
reserve was $5,874 million and $5,668 million at December 31, 2002 and 2001.
The net carried reserve was $3,373 million and $3,461 million at December 31,
2002 and 2001.

The discussion of the net prior year development recorded in 2002 was included
in the 2003 compared with 2002 section above.

Approximately $300 million of unfavorable net prior year development was
primarily due to adverse experience in all other lines, primarily in coverages
provided to healthcare-related entities written by CNA HealthPro. The level of
paid and reported losses associated with coverages provided to national long
term care facilities were higher than expected. The long term care facility
business had traditionally been limited to local facilities. In recent years,
the Company began to provide coverage to large chains of long term care
facilities. Original assumptions were that these chains would exhibit loss
ratios similar to the local facilities. The most recent review of these large
chains indicated an overall loss ratio in excess of 500% versus approximately
100% for the remaining business. In addition, the average size of claims
resulting from coverages provided to physicians and institutions providing
healthcare related services increased more than expected. The review indicated
that the average loss had increased to over $330 thousand. Prior to this
review, the expectation for the average loss was approximately $250 thousand.
Unfavorable net prior year development of $240 million was recorded for
accident years 1997 through 2000. The remaining unfavorable net prior year
development was attributable to accident years prior to 1997.

The expense ratio decreased 9.4 points as a result of the increase in earned
premium base and the 2001 write-off of unrecoverable deferred acquisition costs
in the vehicle warranty line of business and lower underwriting expenses due to
decreased staff levels as a result of the 2001 Plan, and other expense
reduction initiatives.

CNA RE

Business Overview

During October of 2003, CNA sold most of the renewal rights for all treaty
business to Folksamerica Reinsurance Company (Folksamerica), a wholly owned
subsidiary of White Mountains Insurance Group, Ltd. of Hamilton, Bermuda.
Concurrent with the sale, CNA announced its withdrawal from the assumed
reinsurance business. CNA will manage the run-off of its retained liabilities,
including unearned premium reserves. Prior to the sale, CNA Re had offered
treaty, facultative, and financial reinsurance while operating primarily in the
United States and select global markets.

In 2002 and prior, CNA Res operations had also included the business of CNA Re
U.K., a United Kingdom reinsurance company. On October 31, 2002, the Company
completed the sale of CNA Re U.K. to Tawa UK Limited (Tawa), a subsidiary of
the Artemis Group, a diversified French-based holding company. The sale
included business underwritten since inception by CNA Re U.K., except for
certain risks retained by CCC. CNA Res U.K.
subsidiaries ceased new underwriting activities in the third quarter of 2001.
See the Investments section of the MD&A for further details of the sale of CNA
Re U.K.

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The following table details results of operations for CNA Re.

Results of Operations

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Net written premiums
    
    $
    478
    
    
    $
    605
    
    
    $
    524Net earned premiums
    
    
    536
    
    
    
    642
    
    
    
    641Underwriting loss
    
    
    (132
    )
    
    
    (58
    )
    
    
    (1,048
    )(Loss) income before net realized investment gains (losses)
    
    
    (27
    )
    
    
    65
    
    
    
    (622
    )Net realized investment gains (losses)
    
    
    50
    
    
    
    71
    
    
    
    (42
    )Net income (loss)
    
    
    23
    
    
    
    136
    
    
    
    (669
    )RatiosLoss and loss adjustment expense
    
    
    95.2
    %
    
    
    78.4
    %
    
    
    221.2
    %Expense
    
    
    29.5
    
    
    
    30.7
    
    
    
    42.4Combined
    
    
    124.7
    %
    
    
    109.1
    %
    
    
    263.6
    %


2003 Compared with 2002

Net written premiums for CNA Re decreased $127 million and net earned premiums
decreased $106 million in 2003 as compared with 2002. The decrease in net
written and earned premiums was due primarily to reduced levels of premium from
both current and prior underwriting years. The reduction in the current year
premiums was largely attributable to the October 3, 2003 decision to exit the
assumed reinsurance market.

Net income decreased $113 million in 2003 as compared with 2002. The decrease
in net income was primarily related to the decline in underwriting results,
decreased net investment income due primarily to a reduction of invested assets
resulting from the sale of CNA Re U.K., increased interest expense of $8
million after-tax ($12 million pretax) related to additional cessions to the
corporate aggregate reinsurance treaties, and decreased net realized investment
results. See the Investments section of this MD&A for further discussion on
net investment income and net realized gains (losses).

The combined ratio increased 15.6 points and underwriting results decreased $74
million in 2003 as compared with 2002. The loss ratio increased 16.8 points
due principally to increased unfavorable net prior year development and
increased catastrophe losses. Catastrophe losses were $29 million in 2003 for
Texas tornados, Midwest rain storms, Hurricanes Isabel and Claudette, and the
California wild fires. Catastrophe losses were $17 million in 2002. The
expense ratio improved 1.2 points primarily due to the absence of the
unfavorable expense ratio impact from CNA Re U.K. and lower acquisition expenses
that were the result of a ceded profit commission payable due to the
cancellation of a catastrophe reinsurance cover.

Unfavorable net prior year development of $149 million, including $118 million
of net unfavorable claim and allocated claim adjustment expense reserve
development and $31 million of unfavorable premium development, was recorded in
2003 for CNA Re. Unfavorable net prior year development of $43 million,
including $86 million of unfavorable claim and allocated claim adjustment
expense reserve development and $43 million of favorable premium development,
was recorded in 2002. The gross and net carried claim and claim adjustment
expense reserves were $2,288 million and $1,257 million at December 31, 2003.
The gross and net carried claim and claim adjustment expense reserves for CNA
Re were $2,264 million and $1,362 million at December 31, 2002.

The following discusses net prior year development for CNA Re recorded in 2003.

The unfavorable net prior year development for 2003 was primarily a result of a
general change in the pattern of how losses change over time as reported by the
companies that purchased reinsurance from

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CNA Re. Losses have continued to show large increases for accident years in
the late 1990s and into 2000 and 2001. These increases are greater than the
increases indicated by patterns from older accident years and have a similar
effect on several lines of business. Approximately $67 million unfavorable net
prior year development recorded in 2003 was related to proportional liability
exposures, primarily from multi-line and umbrella treaties in accident years
1997 through 2001. Approximately $32 million of unfavorable net prior year
development recorded in 2003 was related to assumed financial reinsurance for
accident years 2001 and prior and approximately $24 million of unfavorable net
prior year development related to professional liability exposures in accident
years 2001 and prior.

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

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

The following premium and claim and allocated claim adjustment expense
development, was recorded in 2003 as a result of the elimination of
deficiencies and redundancies in the reserve positions of individual products
within the segment. Unfavorable net prior year premium and claim and allocated
claim adjustment expense development of approximately $42 million related to
Surety exposures, $32 million related to excess of loss liability exposures and
$12 million related to facultative liability exposures were recorded in the
third quarter of 2003.

Offsetting this unfavorable net prior year development was approximately $55
million of favorable net prior year development related to the WTC event as
well as a $45 million underwriting benefit from cessions to corporate aggregate
reinsurance treaties recorded in 2003. The benefit from cessions to the
corporate aggregate reinsurance treaties was comprised of $102 million of ceded
losses and $57 million of ceded premiums for accident years 2000 and 2001. See
the Reinsurance section of this MD&A for further discussion of the Companys
aggregate reinsurance treaties.

The following discusses net prior year development for CNA Re recorded in 2002.

The unfavorable net prior year development recorded in 2002 was the result of
an actuarial review completed during 2002 and was primarily recorded in the
directors and officers, professional liability errors and omissions, and surety
lines of business. Several large losses, as well as continued increases in the
overall average size of claims for these lines, have resulted in higher than
expected loss ratios.

During 2002, CNA Re revised its estimate of premiums and losses related to the
WTC event. In estimating CNA Res WTC event losses, the Company performed a
treaty-by-treaty analysis of exposure. The Companys original loss estimate
was based on a number of assumptions including the loss to the industry, the
loss to individual lines of business and the market share of CNA Res cedants.
Information that became available in the first quarter of 2002 resulted in CNA
Re increasing its estimate of WTC event related premiums and losses on its
property facultative and property catastrophe business. The impact of
increasing the estimate of gross WTC event losses by $144 million was fully
offset on a net of reinsurance basis (before the impact of the CCC Cover) by
higher reinstatement premiums and a

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reduction of return premiums. Approximately $95 million of CNA Res net WTC
loss estimate was attributable to CNA Re U.K., which was sold in 2002.

A $32 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties in 2002. The benefit was comprised of $93 million of
ceded losses and $61 million of ceded premiums for accident year 2001.

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

2002 Compared with 2001

Net written premiums for CNA Re increased $81 million in 2002 as compared with
2001. Net earned premiums increased $1 million in 2002 as compared with 2001.
Net written premiums increased in 2002 principally as a result of decreased
ceded premiums related to the corporate aggregate and other reinsurance
treaties, clients increasing their premium writings, achieved rate increases,
an increase in new business and $25 million related to the sale of CNA Re U.K.
The additional ceded premiums recorded in 2001 were primarily due to the
additional cessions related to increased unfavorable net prior year development
and the WTC event. These increases were partially offset by the 2001 decision
to cease new and renewal business writings at CNA Re U.K. and the absence of
$89 million of reinstatement premiums related to the WTC event.

Net income was $136 million in 2002 as compared with a net loss of $669 million
in 2001. The improvement in net results in 2002 was primarily due to decreased
unfavorable net prior year development of $453 million after-tax ($697 million
pretax) and increased net realized investment gains.

In addition, net results in 2001 were adversely impacted by $176 million
after-tax ($271 million pretax) due to estimated losses related to the WTC
event, $22 million in after-tax ($34 million pretax) Enron-related losses,
primarily for reinsurance of surety obligations, and $6 million after-tax ($9 million pretax) for
restructuring and other related charges.

The combined ratio decreased 154.5 points in 2002 as compared with 2001, and
underwriting results improved $990 million. The loss ratio decrease of 142.8
points was principally due to lower net prior year development in 2002 as
compared with 2001. The 2001 unfavorable net prior year development includes a
$160 million of unfavorable net prior year claim and allocated claim adjustment
expense reserve development for prior underwriting year reserves for CNA Re
U.K.

Unfavorable net prior year development of $43 million, including $86 million of
net unfavorable claim and allocated claim adjustment expense reserve
development and $43 million of favorable premium development, was recorded in
2002 for CNA Re. Unfavorable net prior year development of $740 million,
including $759 million of net unfavorable claim and allocated claim adjustment
expense reserve development and $19 million of favorable premium development,
was recorded in 2001 for CNA Re. The gross carried reserve was $2,264 million
and $4,644 million at December 31, 2002 and 2001. The net carried reserve was
$1,362 million and $3,013 million at December 31, 2002 and 2001. At the sale
date, the gross and net carried reserves related to CNA Re U.K. were $2,092
million and $1,316 million. At December 31, 2001, the gross and net carried
reserves related to CNA Re U.K. were $2,367 million and $1,265 million.

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The discussion of the net prior year development recorded in 2002 was included
in the 2003 compared with 2002 section above.

An analysis of assumed reinsurance business written by CNA Re showed that the
paid and reported losses for recent accident years were higher than
expectations, which resulted in management recording unfavorable net prior year
development of approximately $690 million. Because of the long and variable
reporting pattern associated with assumed reinsurance as well as uncertainty
regarding possible changes in the reporting methods of the ceding companies,
the carried reserves for assumed reinsurance were based mainly on the pricing
assumptions until experience emerged to show that the pricing assumptions are
no longer valid. The reviews completed during 2001, including analysis at the
individual treaty level, showed that the pricing assumptions were no longer
appropriate. The classes of business with the most significant changes
included excess of loss liability, professional liability and proportional and
retrocessional property. Approximately $470 million of unfavorable net prior
year development was from accident years 1998 through 2000, and approximately
$150 million was from accident years 1996 and 1997. The remaining $70 million
of unfavorable net prior year development was attributable to accident years
prior to 1996.

A $32 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties in 2001, comprised of $57 million of ceded losses and $25
million of ceded premiums for accident year 1999.

The expense ratio decreased 11.7 points primarily as a result of a shift in
business mix resulting in lower commission rates and a reduction in
underwriting expenses relative to the earned premium base.

GROUP OPERATIONS

Business Overview

Group Operations provided group health insurance and investment products and
services to employers, affinity groups and other entities that purchase
insurance as a group.

On December 31, 2003, CNA completed the sale of the majority of its Group
Benefits business to Hartford. The
business sold included group life and accident, short and long term disability
and certain other products. CNAs group long term care and specialty medical
businesses were excluded from the sale. Consideration from the sale was
approximately $530 million, of which $485 million was received on December 31,
2003, resulting in an after-tax realized investment loss on the sale of $130
million during 2003. See Note P of the Consolidated Financial Statements
included under Item 8 for further information.

During February of 2004, CNA announced the decision to cease new sales in its
institutional markets business. CNA will continue to accept new deposits and
premiums only from existing customers and will service its existing
commitments. This business will be managed as a run-off operation.
CCC will provide credit enhancement to Continental Assurance (CAC)
for certain of CACs investment and specialty medical products.

During 2003, CNA also ceased new sales in its group long term care business.
CNA will continue to service its existing commitments, but new written premiums
will be minimal.

Group Operations included three principal business units: Group Benefits,
Federal Markets and Institutional Markets and Other, which includes results
from businesses that CNA exited prior to 2002, including retail variable life
and annuities and life reinsurance.

Group Benefitsoffered group long term care and specialty medical products and
related services. Prior to the sale to Hartford, products had been marketed
through a nationwide operation of 31 sales offices,

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third-party administrators, managing general agents and insurance consultants.
See Note P of the Consolidated Financial Statements included under Item 8 for
further details of this transaction.

Federal Marketsprovided health insurance benefits to federal employees,
retirees and their families, insuring nearly one million members under the Mail Handlers
Plan. On July 1, 2002, the Company sold its federal health plan
administrator, Claims Administration Corporation, and transferred the Mail
Handlers Plan to First Health Group. As a result of this transaction, the
Company recognized a $7 million pretax realized loss on the sale of Claims
Administration Corporation and $15 million of pretax non-recurring fee income
related to the transfer of the Mail Handlers Plan.

Institutional Markets and Otheris a provider of annuities and investment
products to pension plan sponsors and other institutional customers. The
products include traditional and synthetic guaranteed investment contracts
(GICs), indexed contracts, group annuities and funding agreements. CNA offers
an Index 500 product, which is a guaranteed investment contract that is indexed
to the performance of the Standard & Poors 500® (S&P 500®) Index.

Also within Group Operations is CNA Trust, a limited operations bank located in
Costa Mesa, California, which provides full trustee and pension third-party
administrative services to the under 500-life employer markets. Products
include qualified and non-qualified plans and IRAs.

The variable products business was exited in the fourth quarter of 2001. In
July of 2002, the Company entered into an agreement, whereby The Phoenix
Companies, Inc. acquired the variable life and annuity business of VFL through
a coinsurance arrangement, with modified coinsurance on the separate accounts.

The following table details results of operations for Group Operations.

Operating Results

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Net earned premiums
    
    $
    1,312
    
    
    $
    2,327
    
    
    $
    3,378Income before net realized investment gains
    
    
    100
    
    
    
    104
    
    
    
    22Net realized investment (losses) gains
    
    
    (131
    )
    
    
    (39
    )
    
    
    37Net (loss) income
    
    
    (31
    )
    
    
    65
    
    
    
    58


2003 Compared with 2002

Net earned premiums for Group Operations decreased $1,015 million in 2003 as
compared with 2002. The decrease in net earned premiums was due primarily to
the transfer of the Mail Handlers Plan. The Mail Handlers Plan contributed net
earned premiums of $1,151 million in 2002. These premiums were partially
offset by premium growth in the disability, specialty medical, life and
accident and long term care products within Group Benefits due to increased new
sales and rate increases.

Net income decreased by $96 million in 2003 as compared with 2002. The
decrease in net income related primarily to increased net realized investment
losses including a $130 million after-tax ($176 million pretax) loss on the
sale of the Group Benefits business, the absence of net income related to the
Mail Handlers Plan, including the non-recurring fee income received from First
Health Group in the third quarter of 2002 and a change in the discount rate on
prior year disability and life waiver of premium reserves from 6.5% to 6.0%,
resulting in a $14 million after-tax ($22 million pretax) decrease in net
income. The change in discount rate reflects the decreasing portfolio yield
and the current investment environment. See the Investments section of this
MD&A for further discussion on net investment income and net realized gains
(losses). These items were partially offset by the absence of unfavorable net
results

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related to the variable products business which was sold to The Phoenix
Companies, Inc. in the third quarter of 2002, improved operating results in the
single premium group annuity product, increased favorable net prior year
development related to a $7 million after-tax release of WTC event reserves,
favorable results in the specialty medical line, and the impact of premium
growth within Group Benefits.

2002 Compared with 2001

Net earned premiums for Group Operations decreased $1,051 million for 2002 as
compared with 2001. This decline was due primarily to the transfer of the Mail
Handlers Plan partially offset by an increase in premiums in the disability and
long term care products within Group Benefits. Net earned premiums for the
Mail Handlers Plan were $1,151 million as compared with $2,218 million in 2001.

Net income increased by $7 million in 2002 as compared with 2001. Included in
the 2001 results were $35 million after-tax ($53 million pretax) of losses
related to the WTC event and $27 million after-tax ($42 million pretax) related
to restructuring and other related charges. The improvement in net income also
was due to growth in the disability and long term care products, increased net
investment income and diminished losses due to the exit of unprofitable
variable life and annuity lines of business. Net results also improved due to
favorable net prior year development relating to the WTC event of $4 million
after-tax ($6 million pretax) recorded in 2002. Partially offsetting these
improvements was unfavorable reserve strengthening in Group Benefits due to
unfavorable mortality trends and increased net realized losses in 2002. See
the Investments section of this MD&A for further discussion on net investment
income and net realized gains (losses).

LIFE OPERATIONS

Business Overview

Life Operations provides financial protection to individuals through
term life insurance, universal life insurance, individual long term care
insurance, annuities and other products. Life Operations has several
distribution relationships and partnerships including managing general
agencies, other independent agencies working with CNA life sales offices, a
network of brokers and dealers, and other independent insurance consultants.

In February of 2004, CNA entered into a definitive agreement to sell its
individual life insurance business to Swiss Re for approximately $690 million.
The business sold includes term, universal and permanent life insurance
policies and individual annuity products. The transaction is expected to be
completed on or before March 31, 2004, subject to certain customary closing
conditions and regulatory approvals. See Note T of the Consolidated Financial
Statements included under Item 8 for further information.

Also, in February of 2004, CNA ceased new sales in its structured settlement
business, but will continue to service its existing commitments. This business
will be managed as a run-off operation.

During the second quarter of 2003, the Company completed a review of its
individual long term care product offerings. The focus of the review was to
determine whether the current products provide adequate pricing flexibility
under the range of reasonably possible claims experience levels. Based on the
review and current market conditions, the Company decided to significantly
reduce new sales of this product and certain infrastructure costs.

Individual life primarily offers level premium term life insurance, universal
life insurance and related products. Single premium immediate annuities as
well as structured settlement annuities are also offered.

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Individual long term care products provide reimbursement for covered nursing
home and home health care expenses incurred due to physical or mental
disability.

Other operations include operations in certain international markets and life
settlements contract business. The Company decided to cease purchasing new
life settlement policies indefinitely beginning in 2001 and ceased sale of new
policies in its international operations in 2002.

The following table details results of operations for Life Operations.

Operating Results

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Net earned premiums
    
    $
    1,029
    
    
    $
    930
    
    
    $
    873Income before net realized investment gains
    
    
    45
    
    
    
    94
    
    
    
    63Net realized investment gains (losses)
    
    
    23
    
    
    
    (74
    )
    
    
    102Net income (loss)
    
    
    68
    
    
    
    (23
    )
    
    
    173


2003 Compared with 2002

Net earned premiums for Life Operations increased $99 million in 2003 as
compared with 2002. The increase in net earned premiums was due primarily to
higher sales of structured settlement annuities, growth in life insurance
products and rate increases on the individual long term care product inforce
blocks, partially offset by declines in new business primarily due to exiting
the individual long term care market.

Net income increased by $91 million in 2003 as compared with 2002. The
increase in net results related primarily to increased net realized investment
gains, improvement in net results for life settlement contracts, and the
absence of the cumulative effect of a change in accounting principle of $8
million recorded in 2002 relating to the write-down of impaired goodwill.
Partially offsetting these items were increases in individual long term care
reserves of $4 million after-tax ($7 million pretax) due to increased severity
and claim frequency. The increase in reserves for individual long term care
was $42 million pretax in 2003 as compared with $35 million pretax in 2002.
Also partially offsetting the improvements was the write-off of capitalized
software costs of $8 million pretax, lower net investment income, and severance
costs of $3 million after-tax ($4 million pretax) related to the individual
long term care product. See the Investments section of this MD&A for further
discussion on net investment income and net realized gains (losses).

2002 Compared with 2001

Net earned premiums increased $57 million in 2002 as compared with 2001
attributable primarily to growth in the individual long term care product
partially offset by sales declines in structured settlement annuities.

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Net income decreased by $196 million in 2002 as compared with 2001. The
decrease in net income related primarily to increased net realized investment
losses, the cumulative effect of a change in accounting principle of $8 million
after-tax recorded in 2002 relating to write-down of impaired goodwill, and a
$35 million after-tax loss from discontinued operations for the sale of CNA
Vida. Included in the 2001 results were $19 million after-tax ($29 million
pretax) related to restructuring and other related charges and $14 million
after-tax ($22 million pretax) related to the WTC event. Net results decreased
due primarily to net reserve strengthening for individual long term care of $23
million after-tax ($35 million pretax), unfavorable individual long term care
morbidity and increased costs related to the life settlement business in 2002.
These decreases were partially offset by higher net investment income, a
decrease in reinsurance charges, favorable net prior year development relating
to the WTC event of $10 million after-tax ($15 million pretax) recorded in 2002
as compared with 2001.

CORPORATE AND OTHER

Overview

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

APMT consists of the losses and expenses related to the centralized adjusting
and settlement of APMT claims. See the Asbestos and Environmental Pollution
and Mass Tort Reserves section on the following pages for a description of APMT
reserves.

Run-off insurance operations consists of personal insurance, entertainment
insurance, agriculture insurance, group reinsurance and other financial lines
as well as the direct financial guarantee business underwritten by CNAs
insurance affiliates and other insurance run-off operations. Run-off insurance
operations also include assumed business underwritten through a managing
general agent, IOA Global, which consists primarily of certain accident and
health coverages (IGI Program).

On October 1, 1999, CNA sold to The Allstate Corporation (Allstate)
substantially all of CNAs personal insurance lines of business. Concurrent
with the sale, CNA entered into a retroactive reinsurance agreement with
Allstate that covers losses occurring prior to the date of sale.

Other operations also include interest expense on corporate borrowings,
asbestos claims related to Fibreboard Corporation and the operations of CNA
UniSource and inter-company eliminations.

CNA UniSource provided human resources, information technology, payroll
processing and professional employer organization services. During 2002, the
Company decided to exit the lines of business provided by CNA UniSource, ceased
providing professional employer organization services and ceased payroll
processing services.

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The following table details operating results for the Corporate and Other
segment.

Operating Results

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Revenues
    
    $
    50
    
    
    $
    188
    
    
    $
    338Net (loss)
    
    
    (739
    )
    
    
    (92
    )
    
    
    (1,001
    )


2003 Compared with 2002

Revenues decreased $138 million in 2003 as compared with 2002. The decrease in
revenues was due primarily to reduced revenues from CNA UniSource and reduced
net earned premiums in group reinsurance of $117 million, partially offset by
increased pretax realized investment gains of $45 million and increased limited
partnership income of $32 million.

Net results declined $647 million in 2003 as compared with 2002. The decrease
in net results was due primarily to a $554 million after-tax ($854 million
pretax) increase in unfavorable net prior year development primarily regarding
APMT, a $44 million after-tax ($67 million pretax) increase in ULAE reserves, a
$10 million after-tax ($15 million pretax) increase in certain insurance
related assessments, and a $151 million after-tax ($232 million pretax)
increase in the bad debt provision for reinsurance receivables. The 2003 net
results were favorably impacted by increased net realized investment gains of
$29 million after-tax ($45 million pretax) and the absences of $40 million
after-tax ($62 million pretax) of eBusiness expenses and an $18 million
after-tax ($27 million pretax) reduction of the accrual for restructuring and
other related charges. See the Investments section of this MD&A for further
discussion on net investment income and net realized gains (losses).

Unfavorable net prior year development of $875 million, including $881 million
of unfavorable claim and allocated claim adjustment expense reserve development
and $6 million of favorable premium development, was primarily driven by
unfavorable net prior year development of $795 million related to APMT
discussed below. Unfavorable net prior year claim and allocated claim
adjustment expense reserve development of $50 million was recorded related to
the Companys past participation in several insurance pools which is part of
the group reinsurance run-off business. Unfavorable net prior year development
of $21 million, including $23 million of unfavorable claim and allocated claim
adjustment expense reserve development, and $2 million of favorable premium
development, was recorded in 2002. The gross carried claim and claim
adjustment expense reserve was $7,046 million and $4,847 million at December
31, 2003 and 2002. The net carried claim and claim adjustment expense reserve
was $2,624 million and $2,002 million for December 31, 2003 and 2002.

The following discussion of unfavorable net prior year development includes net
unfavorable claim and allocated claim adjustment expense reserve development
and unfavorable premium development recorded in 2002 for Corporate and Other.

Personal insurance recorded unfavorable net prior year development of $35
million in 2002 on accident years 1997 through 1999. The unfavorable net prior
year development was principally due to continuing policyholder defense costs
associated with remaining open personal insurance claims. The unfavorable net
prior year development was partially offset by favorable reserve development on
other run-off business driven principally by financial and mortgage guarantee
coverages from accident years 1997 and prior. The favorable net prior year
development on financial and mortgage guarantee coverages resulted from a
review of the underlying exposures and the outstanding losses, which showed
that salvage and

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subrogation continues to be collected on these types of claims, thereby
reducing estimated future losses net of anticipated reinsurance recoveries.

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

2002 Compared with 2001

Total revenues decreased $150 million in 2002 as compared with 2001. This
decrease was due primarily to reduced revenues for CNA UniSource, due to the
exit of this business, reduced net investment income and pretax realized
investment gains partially offset by increased net earned premiums in group
reinsurance.

Net results increased by $909 million in 2002 as compared with 2001. Net
results improved in 2002 as compared with 2001 primarily due to decreased
unfavorable net prior year development of $846 million after-tax ($1,301
million pretax), reduced expenses for eBusiness initiatives, improved results
for group reinsurance and a $17 million after-tax ($27 million pretax)
reduction in the accrual for restructuring and other related charges recorded
in 2002. In addition, net results in 2001 was adversely impacted by $77
million after-tax ($119 million pretax) of restructuring and other related
charges and $17 million after-tax ($27 million pretax) of estimated losses
related to the WTC event for group reinsurance.

These increases were offset by lower net investment results, principally
resulting from a $6 million after-tax ($9 million pretax) decline in limited
partnership income, higher losses related to the run-off of CNA UniSource and
severance and other costs related to changes in senior management in 2002.

Unfavorable net prior year development of $21 million, including $23 million of
net unfavorable claim and allocated claim adjustment expense reserve
development and $2 million of favorable premium development, was recorded in
2002 for Corporate and Other. Unfavorable net prior year development of $1,322
million, including $1,313 million of net unfavorable claim and allocated claim
adjustment expense reserve development and $9 million of unfavorable premium
development, was recorded in 2001 for Corporate and Other. The gross carried
claim and claim adjustment expense reserve was $4,847 million and $5,043
million at December 31, 2002 and 2001. The net carried claim and claim
adjustment expense reserve was $2,002 million and $2,110 million at December
31, 2002 and 2001.

The unfavorable net prior year development recorded in 2001 was primarily
attributable to $1,241 million of unfavorable net prior year development
related to APMT.

APMT Reserves

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

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

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

CNA regularly performs ground up reviews of all open APMT claims to
evaluate the adequacy of the Companys APMT reserves. In performing its
comprehensive ground up analysis, the Company considers input from its
professionals with direct responsibility for the claims, inside and outside
counsel with responsibility for representation of the Company, and its
actuarial staff. These professionals review, among many factors, the
policyholders present and predicted future exposures, including such factors
as claims volume, trial conditions, prior settlement history, settlement
demands and defense costs; the impact of asbestos defendant bankruptcies on the
policyholder; the policies issued by CNA, including such factors as aggregate
or per occurrence limits, whether the policy is primary, umbrella or excess,
and the existence of policyholder retentions and/or deductibles; the existence
of other insurance; and reinsurance arrangements.

With respect to other court cases and how they might affect the Companys
reserves and reasonable possible losses, the following should be noted. State
and federal courts issue numerous decisions each year, which potentially impact
losses and reserves in both a favorable and unfavorable manner. Examples of
favorable developments include decisions to allocate defense and indemnity
payments in a manner so as to limit carriers obligations to damages taking
place during the effective dates of their policies; decisions holding that
injuries occurring after asbestos operations are completed are subject to the
completed operations aggregate limits of the policies; and decisions ruling
that carriers loss control inspections of their insureds premises do not give
rise to a duty to warn third parties to the dangers of asbestos.

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

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

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

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

Asbestos and Environmental Pollution and Mass Tort Reserves

December 31, 2003
    
    December 31, 2002Environmental
    
    
    
    
    
    EnvironmentalPollution and Mass
    
    
    
    
    
    Pollution and MassAsbestos
    
    Tort
    
    Asbestos
    
    Tort(In millions)Gross reserves
    
    $
    3,347
    
    
    $
    839
    
    
    $
    1,758
    
    
    $
    830Ceded reserves
    
    
    (1,580
    )
    
    
    (262
    )
    
    
    (512
    )
    
    
    (313
    )Net reserves
    
    $
    1,767
    
    
    $
    577
    
    
    $
    1,246
    
    
    $
    517


Asbestos

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

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

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

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

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

As of December 31, 2003 and 2002, CNA carried approximately $1,767 million and
$1,246 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported asbestos-related claims.
Unfavorable asbestos-related net claim and claim adjustment expense reserve
development for 2003, 2002 and 2001 amounted to $642 million, $0 and $773
million. The Company paid asbestos-related claims, net of reinsurance, of $121
million, $21 million and $171 million during the years ended December 31, 2003,
2002 and 2001.

The Company recorded $1,826 million and $642 million in unfavorable gross and
net asbestos prior year development for 2003, principally due to potential
losses from policies issued by CNA with high attachment points, which previous
exposure analysis indicated would not be reached. As part of its review
completed in the third quarter of 2003, the Company examined the claims filing
trends and the projected erosion rates of underlying primary and lower excess
insurance on open asbestos accounts to determine timeframes within which high
excess policies issued by CNA could be reached. Elevated claims volumes,
together with certain adverse court decisions affecting rapidity by which
asbestos claims are paid supported the conclusion that excess policies with
high attachment points previously thought not to be exposed may now potentially
be exposed.

In 2001, CNA noted the continued emergence of adverse loss experience across
several lines of business related to prior years. With respect to asbestos
reserves, throughout 2000, and into 2001, CNA experienced significant increases
in new asbestos bodily injury claims. In light of this development, CNA formed
the view that payments for asbestos claims could be higher in future years than
previously estimated. Moreover, in late 2000 through mid-2001, industry
sources such as rating agencies and actuarial firms released analyses and
studies commenting on the increase in claim volumes and other asbestos
liability developments.

Also in the 2000 to 2001 time period,
a number of significant asbestos defendants filed for bankruptcy,
increasing the likelihood that excess layers of insurance coverage
could be called upon to indemnify policyholders and creating the
potential that novel legal doctrines could be employed. These
developments led the Company to the conclusion that its asbestos
reserves required strengthening of $773 million in 2001.

The Company has resolved a number of its large asbestos accounts by negotiating
settlement agreements. Structured settlement agreements provide for payments
over multiple years as set forth in each individual agreement. At December 31,
2002, CNA had four structured settlement agreements with a reserve of $118
million, net of reinsurance. Since December 31, 2002, CNA has resolved five
additional asbestos accounts through structured settlement agreements. At
December 31, 2003, CNA has structured settlement agreements with nine of its
policyholders for which it has future payment obligations with a reserve, net
of reinsurance, of $188 million related to remaining payment obligations under
these

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agreements. As to the nine structured settlement agreements existing at
December 31, 2003, payment obligations under those settlement agreements are
projected to terminate in 2016.

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

CNA has also used coverage in place agreements to resolve large asbestos
exposures. Coverage in place agreements are typically agreements between CNA
and its policyholders identifying the policies and the terms for payment of
asbestos related liabilities. Claims payments are contingent on presentation of
adequate documentation showing exposure during the policy periods and other
documentation supporting the demand for claims payment. Coverage in place
agreements may have annual payment caps. At December 31, 2002, the Company had
estimated its exposure for its twenty-three coverage in place agreements at $66
million, net of reinsurance. As of December 31, 2003, CNA had negotiated
thirty-two such agreements. Coverage in place agreements are evaluated based
on claims filings trends and severities. Due to adverse claims trends
described in this section, management has increased its estimate of exposure
under current coverage in place agreements. The Company has evaluated these
commitments and the expected reinsurance recoveries under these agreements and
has recorded a reserve of $109 million, net of reinsurance, related to coverage
in place agreements as of December 31, 2003.

The Company categorizes active asbestos accounts as large or small accounts.
CNA defines a large account as an active account with more than $100,000 of
cumulative paid losses. The Company made closing large accounts a significant
management priority. At December 31, 2002, the Company had 150 large accounts
with a reserve of $220 million, net of reinsurance. At December 31, 2003, CNA
has 160 large accounts with a collective reserve of $405 million, net of
reinsurance. Large accounts are typically accounts that have been long
identified as significant asbestos exposures. In its most recent ground up
reserve study, the Company observed that underlying layers of primary, umbrella
and lower layer excess policies were exhausting at accelerated rates due to
increased claims volumes, claims severities and increased defense expense
incurred in litigating claims. Those accounts where the Company had issued high
excess policies were evaluated in the study to determine potential impairment
of the high excess layers of coverage. Management concluded that high excess
coverage previously thought not to be exposed could potentially be exposed
should current adverse claim trends continue.

Small accounts are defined as active accounts with $100,000 or less cumulative
paid losses. At December 31, 2002, the Company had 939 small accounts with
recorded reserves of $90 million, net of reinsurance. At December 31, 2003,
CNA has 1,065 small accounts, approximately 84% of its total active asbestos
accounts and has increased its collective reserve to $147 million, net of
reinsurance, as of December 31, 2003. Small accounts are typically
representative of policyholders with limited connection to asbestos. As
entities which were historic targets in asbestos litigation continue to file
for bankruptcy protection, plaintiffs attorneys are seeking other viable
targets. As a result, companies with few or no previous asbestos claims are
becoming targets in asbestos litigation and nevertheless must be defended by
CNA under its policies. As claims filings continue to increase, costs incurred
in defending small accounts are expected to increase.

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The Company also evaluates its asbestos liabilities arising from its assumed
reinsurance business and its participation in various pools. At December 31,
2002, CNA had recorded a $91 million reserve related to these asbestos
liabilities arising from the Companys assumed reinsurance obligations and
CNAs participation in pools, including Excess & Casualty Reinsurance
Association (ECRA). At December 31, 2003, CNA has increased the reserves to
$157 million, net of reinsurance, related to these liabilities.

At December 31, 2003, CNAs unassigned incurred but not reported (IBNR) reserve
for asbestos was $684 million, net of reinsurance. This IBNR reserve relates to
potential development on accounts that have not settled and potential future
claims from unidentified policyholders. At December 31, 2002, the unassigned
IBNR reserve was $578 million, net of reinsurance.

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The tables below depict CNAs overall pending asbestos accounts and associated
reserves at December 31, 2003 and 2002.

Pending Asbestos Accounts and Associated Reserves

Net paid losses
    
    Net Asbestos
    
    Percent ofNumber of
    
    (recoveries)
    
    reserves
    
    Asbestospolicyholders
    
    (In millions)
    
    (In millions)
    
    Net ReservesAt December 31, 2003Policyholders with settlement agreementsStructured Settlements
    
    
    9
    
    
    $
    20
    
    
    $
    188
    
    
    
    11
    %Wellington
    
    
    5
    
    
    
    2
    
    
    
    23
    
    
    
    1Coverage in place
    
    
    32
    
    
    
    40
    
    
    
    109
    
    
    
    6Fibreboard
    
    
    1
    
    
    
    1
    
    
    
    54
    
    
    
    3Total with settlement agreements
    
    
    47
    
    
    
    63
    
    
    
    374
    
    
    
    21Other policyholders with active accountsLarge asbestos accounts
    
    
    160
    
    
    
    35
    
    
    
    405
    
    
    
    23Small asbestos accounts
    
    
    1,065
    
    
    
    16
    
    
    
    147
    
    
    
    8Total other policyholders
    
    
    1,225
    
    
    
    51
    
    
    
    552
    
    
    
    31Assumed reinsurance and pools
    
    
    
    
    
    
    7
    
    
    
    157
    
    
    
    9Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    684
    
    
    
    39Total
    
    
    1,272
    
    
    $
    121
    
    
    $
    1,767
    
    
    
    100
    %


Pending Asbestos Accounts and Associated Reserves

Net paid losses
    
    Net Asbestos
    
    Percent ofNumber of
    
    (recoveries)
    
    reserves
    
    Asbestospolicyholders
    
    (In millions)
    
    (In millions)
    
    Net ReservesAt December 31, 2002Policyholders with settlement agreementsStructured Settlements
    
    
    4
    
    
    $
    12
    
    
    $
    118
    
    
    
    10
    %Wellington
    
    
    5
    
    
    
    
    
    
    
    28
    
    
    
    3Coverage in place
    
    
    23
    
    
    
    (15
    )
    
    
    66
    
    
    
    5Fibreboard
    
    
    1
    
    
    
    1
    
    
    
    55
    
    
    
    4Total with settlement agreements
    
    
    33
    
    
    
    (2
    )
    
    
    267
    
    
    
    22Other policyholders with active accountsLarge asbestos accounts
    
    
    150
    
    
    
    (8
    )
    
    
    220
    
    
    
    18Small asbestos accounts
    
    
    939
    
    
    
    16
    
    
    
    90
    
    
    
    7Total other policyholders
    
    
    1,089
    
    
    
    8
    
    
    
    310
    
    
    
    25Assumed reinsurance and pools
    
    
    
    
    
    
    15
    
    
    
    91
    
    
    
    7Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    578
    
    
    
    46Total
    
    
    1,122
    
    
    $
    21
    
    
    $
    1,246
    
    
    
    100
    %


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

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

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

CNA is engaged in insurance coverage litigation with underlying plaintiffs who
have asbestos bodily injury claims against the former Robert A. Keasbey Company
(Keasbey) in New York state court (Continental Casualty Co. v.
Nationwide Indemnity Co. et al., No. 601037/03 (N.Y. County)).
Keasbey, a currently dissolved corporation, was a seller and installer of
asbestos-containing insulation products in New York and New Jersey. Thousands
of plaintiffs have filed bodily injury claims against Keasbey; however,
Keasbeys involvement at a number of work sites is a highly contested issue.
Therefore, the defense disputes the percentage of valid claims against Keasbey.
CNA issued Keasbey primary policies for 1970-1987 and excess policies for
1972-1978. CNA has paid an amount substantially equal to the policies
aggregate limits for products and completed operations claims. Claimants
against Keasbey allege, among other things, that CNA owes coverage under
sections of the policies not subject to the aggregate limits, an allegation CNA
vigorously contests in the lawsuit.

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

CIC issued certain primary and excess policies to Bendix Corporation (Bendix),
now part of Honeywell International, Inc. (Honeywell). Honeywell faces
approximately 73,000 pending asbestos bodily injury claims resulting from
alleged exposure to Bendix friction products. CICs primary policies allegedly
covered the period from at least 1939 (when Bendix began to use asbestos in its
friction products) to 1983, although the parties disagree about whether CICs
policies provided product liability coverage
before 1940 and from 1945 to 1956. CIC asserts that it owes no further
material obligations to Bendix

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under any primary policy. Honeywell alleges
that two primary policies issued by CIC covering 1969-1975 contain occurrence
limits but not product liability aggregate limits for asbestos bodily injury
claims. CIC has asserted, among other things, which even if Honeywells
allegation is correct, which CNA denies, its liability is limited to a single
occurrence limit per policy or per year, and in the alternative, a proper
allocation of losses would substantially limit its exposure under the 1969-1975
policies to asbestos claims. These and other issues are being litigated in
Continental Insurance Co., et al. v. Honeywell International
Inc., No. MRS-L-1523-00 (Morris County, New Jersey).

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

CNA has been named in Adams v. Aetna, Inc., et al. (Circuit
Court of Kanawha County, West Virginia), a purported class action against CNA
and other insurers, alleging that the defendants violated West Virginias
Unfair Trade Practices Act in handling and resolving asbestos claims against
their policyholders. A direct action has also been filed in Montana
(Pennock, et al. v. Maryland Casualty, et al. First
Judicial District Court of Lewis & Clark County, Montana) by eight individual
plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace)) and their spouses
against CNA, Maryland Casualty and the State of Montana. This action alleges
that the carriers failed to warn of or otherwise protect W.R. Grace employees
from the dangers of asbestos at a W.R. Grace vermiculite mining facility in
Libby, Montana. The Montana direct action is currently stayed because of W.R.
Graces pending bankruptcy.

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

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



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



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



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

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



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



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



| |  |  | the targeting of a broader range of businesses and entities as defendants
| | - |  | -------------------------------------------------------------------------



| |  |  | the uncertainty as to which other insureds may be targeted in the
future and the uncertainties inherent in predicting the number of
future claims
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



| |  |  | the ability to recover reinsurance.
| | - |  | -----------------------------------

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

Environmental Pollution and Mass Tort

Environmental pollution cleanup is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to cleanup. The insurance industry is involved in extensive litigation
regarding coverage issues. Judicial interpretations in many cases have
expanded the scope of coverage and liability beyond the original intent of the
policies. The Comprehensive Environmental Response Compensation and Liability
Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern
the cleanup and restoration of toxic waste sites and formalize the concept of
legal liability for cleanup and restoration by Potentially Responsible
Parties (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay
for cleanup of waste sites if PRPs fail to do so and 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 1,200 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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##### Table of Contents



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

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

As of December 31, 2003 and 2002, CNA carried approximately $577 million and
$517 million of claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and mass tort
claims. Unfavorable net prior year environmental pollution and mass tort claim
and claim adjustment expense reserve development for the years ended December
31, 2003 and 2001 amounted to $153 million and $468 million. There was no
unfavorable net prior year environmental pollution and mass tort claim and
claim adjustment expense reserve development for the year ended December 31,
2002. The Company paid environmental pollution-related claims and mass
tort-related claims, net of reinsurance recoveries, of $93 million, $116
million and $203 million for years ended December 31, 2003, 2002 and 2001.

CNA recorded $73 million in unfavorable net prior year environmental pollution
development in 2003. This increase was in part due to the emergence of certain
negative legal developments, including several court decisions which have
reduced the effectiveness of the absolute pollution exclusion by limiting its
application to traditional industrial pollution, and which have increased the
scope of damages compensable under policies of insurance and the emergence of
Natural Resource Damage claims under the Superfund and other federal statutes.

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

The Company classifies its environmental pollution accounts into several
categories, which include structured settlements, coverage in place agreements
and active accounts. Structured settlement agreements provide for payments
over multiple years as set forth in each individual agreement. At

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##### Table of Contents



December 31, 2003, CNA has a structured settlement agreement with one of its
policyholders for which it has future payment obligations with a recorded
reserve of $12 million, net of reinsurance.

CNA has also used coverage in place agreements to resolve pollution exposures.
Coverage in place agreements are typically agreements between CNA and its
policyholders identifying the policies and the terms for payment of pollution
related liabilities. Claims payments are contingent on presentation of adequate
documentation of damages during the policy periods and other documentation
supporting the demand for claims payment. Coverage in place agreements may have
annual payment caps. At December 31, 2003, CNA had negotiated six such
agreements in which CNA committed coverage for payment of claims and claim
related adjustment expenses subject to documentation requirements as set forth
in the terms of each specific agreement. At December 31, 2003, CNA has a
recorded reserve of $8 million reserve, net of reinsurance, related to coverage
in place agreements.

The Company categorizes active accounts as large or small accounts in the
pollution area. CNA defines a large account as an active account with more than
$100,000 cumulative paid losses. CNA has 144 large accounts with a collective
reserve of $86 million, net of reinsurance, at December 31, 2003. The Company
has made closing large accounts a significant management priority. Small
accounts are defined as active accounts with $100,000 or less cumulative paid
losses. CNA has 432 small accounts with a collective reserve of $53 million,
net of reinsurance, at December 31, 2003.

The Company also evaluates its environmental pollution exposures arising from
its assumed reinsurance and its participation in various pools, including ECRA.
At December 31, 2003, CNA has a reserve of $38 million related to these
liabilities.

At December 31, 2003, CNAs unassigned IBNR reserve for environmental pollution
was $197 million, net of reinsurance. This IBNR reserve relates to potential
development on accounts that have not settled and potential future claims from
unidentified policyholders.

The chart below depicts CNAs overall pending environmental pollution accounts
and associated reserves at December 31, 2003.

Percent ofTotal Paid
    
    Environmental
    
    EnvironmentalNumber of
    
    in 2003
    
    Pollution Reserves
    
    Pollution NetPolicyholders
    
    (Net)
    
    12/31/03 (Net)
    
    ReservePolicyholders with Settlement AgreementsStructured Settlements
    
    
    1
    
    
    $
    17
    
    
    $
    12
    
    
    
    3
    %Coverage In Place
    
    
    6
    
    
    
    3
    
    
    
    8
    
    
    
    2
    %Total with Settlement Agreements
    
    
    7
    
    
    
    20
    
    
    
    20
    
    
    
    5
    %Other Policyholders with Active AccountsLarge Pollution Accounts
    
    
    144
    
    
    
    21
    
    
    
    86
    
    
    
    22
    %Small Pollution Accounts
    
    
    432
    
    
    
    14
    
    
    
    53
    
    
    
    13
    %Total Other Policyholders
    
    
    576
    
    
    
    35
    
    
    
    139
    
    
    
    35
    %Assumed Reinsurance & Pools
    
    
    
    
    
    
    2
    
    
    
    38
    
    
    
    10
    %Unassigned IBNR
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    50
    %Total
    
    
    583
    
    
    $
    57
    
    
    $
    394
    
    
    
    100
    %


The Company recorded $80 million in unfavorable mass tort net prior year
development in 2003, due in part to the elevated volume of silica claims. In
2003, CNA observed a marked increase in silica claims frequency in Mississippi,
where plaintiff attorneys appear to have filed claims to avoid the effect of
tort

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##### Table of Contents



reform. The most significant silica exposures identified to date include a
relatively small number of accounts with significant numbers of new claims and
substantial insurance limits issued by the Company. Establishing claim and
claim adjustment expense reserves for silica claims is subject to uncertainties
because of disputes concerning medical causation with respect to certain
diseases, including lung cancer, geographical concentration of the lawsuits
asserting the claims, and the large rise in the total number of claims without
underlying epidemiological developments suggesting an increase in disease rates
or plaintiffs. Moreover, judicial interpretations regarding application of
various tort defenses, including application of various theories of joint and
several liability, impede the Companys ability to establish claim and claims
adjustment expense reserves.

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

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

INVESTMENTS

Net Investment Income

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

Net Investment Income

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Fixed maturity securities
    
    $
    1,651
    
    
    $
    1,854
    
    
    $
    1,824Short term investments
    
    
    63
    
    
    
    62
    
    
    
    135Limited partnerships
    
    
    221
    
    
    
    (34
    )
    
    
    47Equity securities
    
    
    19
    
    
    
    66
    
    
    
    37Interest on funds withheld and other deposits
    
    
    (344
    )
    
    
    (239
    )
    
    
    (241
    )Other
    
    
    85
    
    
    
    81
    
    
    
    112Gross investment income
    
    
    1,695
    
    
    
    1,790
    
    
    
    1,914Investment expense
    
    
    (48
    )
    
    
    (60
    )
    
    
    (58
    )Net investment income
    
    $
    1,647
    
    
    $
    1,730
    
    
    $
    1,856


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The Company experienced lower net investment income in 2003 as compared with
2002. This decrease was due primarily to lower investment yields on fixed
maturity securities and increased costs on funds withheld and other deposits.
The interest costs on funds withheld and other deposits increased principally
as a result of additional cessions to the corporate aggregate reinsurance and
other treaties due to adverse net prior year development recorded in 2003. See
the Reinsurance section of the MD&A for additional information for interest
costs on funds withheld and other deposits, which is included in net investment
income. This decrease in net investment income in 2003 was partially offset by
increased limited partnership income. Limited partnership income increased as
a result of improving equity markets and favorable conditions in the fixed
income markets.

The Company experienced lower net investment income in 2002 as compared with
2001. The decrease was due primarily to decreased limited partnership results
and lower investment yields, partially offset by $34 million of dividend income
from Canary Wharf Group plc (Canary Wharf). The decline in limited partnership
income was primarily attributable to many of the same factors that impacted the
broader financial markets. Limited partnership investment performance,
particularly high yield bond and equity strategies, was adversely affected by
overall market volatility including concerns over corporate accounting
practices and credit deterioration.

The bond segment of the investment portfolio yielded 5.1% in 2003, 6.0% in 2002
and 6.4% in 2001.

Net Realized Investment Gains (Losses)

The components of net realized investment gains (losses) are presented in the
following table.

Net Realized Investment Gains (Losses)

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Realized investment gains (losses):Fixed maturity securities:U.S. Government bonds
    
    $
    (70
    )
    
    $
    392
    
    
    $
    233Corporate and other taxable bonds
    
    
    380
    
    
    
    (557
    )
    
    
    (5
    )Tax-exempt bonds
    
    
    97
    
    
    
    48
    
    
    
    54Asset-backed bonds
    
    
    42
    
    
    
    36
    
    
    
    75Redeemable preferred stock
    
    
    (12
    )
    
    
    (28
    )
    
    
    (21
    )Total fixed maturity securities
    
    
    437
    
    
    
    (109
    )
    
    
    336Equity securities
    
    
    114
    
    
    
    (158
    )
    
    
    1,095Derivative securities
    
    
    78
    
    
    
    (52
    )
    
    
    (5
    )Short-term investments
    
    
    3
    
    
    
    12
    
    
    
    (2
    )Other, including dispositions of businesses
    
    
    (168
    )
    
    
    53
    
    
    
    (147
    )Total realized investment gains (losses)
    
    
    464
    
    
    
    (254
    )
    
    
    1,277Allocated to participating policyholders and minority interests
    
    
    (4
    )
    
    
    2
    
    
    
    (15
    )Income tax (expense) benefit
    
    
    (175
    )
    
    
    103
    
    
    
    (446
    )Net realized investment gains (losses)
    
    $
    285
    
    
    $
    (149
    )
    
    $
    816




| |  | Net realized investment results increased $434 million after-tax in 2003 as
compared with 2002. This change was due primarily to a reduction in impairment
losses for other-than-temporary declines in market values for fixed maturity
and equity securities and increased realized results related to fixed maturity,
equity and derivative securities. Partially offsetting these increases in net
realized investment gains was a $130 million after-tax loss resulting from the
sale of the Group Benefits business. See the Group Operations section of the
MD&A for additional information on the sale of the Group Benefits business.
Impairment losses of $209 million after-tax were recorded in 2003 across
various sectors including the
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | airline, healthcare and energy industries. Impairment losses of $578 million
after-tax were recorded primarily in the telecommunications sector in 2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Net realized investment results decreased $965 million after-tax in 2002 as
compared with 2001. This decline was due primarily to the change in net
realized gains (losses) on corporate and other taxable bonds and equity
securities. The $359 million after-tax increase in realized loss of corporate
and other taxable bonds relates primarily to impairment charges of $421 million
after-tax recorded in various market sectors, the most significant being the
telecommunication sector. The $814 million after-tax change in net realized
gains (losses) of equity securities relates primarily to the Companys 2001
gain of $647 million after-tax for the sale of Global Crossing Ltd. common
stock (Global Crossing) and closing of the related hedge agreements. Also,
during 2002, CNA completed the sale of several businesses, including CNA Re
U.K. Included in 2002 net realized investment
results was a $71 million after-tax gain resulting from the sale of CNA Re
U.K., which included a $39 million after-tax reduction of the previously
recognized impairment loss on CNA Re U.K. The impairment loss recorded in 2001
for the sale of CNA Re U.K. and other subsidiaries was $185 million after-tax.
Further details of these transactions are discussed below.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | CNA classifies its fixed maturity securities (bonds and redeemable preferred
stocks) and its equity securities as available-for-sale, and as such, they are
carried at fair value. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity,
which is included in net investment income. The following table provides
further detail of gross realized gains and gross realized losses on fixed
maturity securities and equity securities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Realized Gains and Losses
| |  | -------------------------

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Net realized gains (losses) on fixed maturity securities
and equity securities:Fixed maturity securities:Gross realized gains
    
    $
    1,244
    
    
    $
    1,009
    
    
    $
    936Gross realized losses
    
    
    (807
    )
    
    
    (1,118
    )
    
    
    (600
    )Net realized gains (losses) on fixed maturity securities
    
    
    437
    
    
    
    (109
    )
    
    
    336Equity securities:Gross realized gains
    
    
    143
    
    
    
    251
    
    
    
    1,335Gross realized losses
    
    
    (29
    )
    
    
    (409
    )
    
    
    (240
    )Net realized gains (losses) on equity securities
    
    
    114
    
    
    
    (158
    )
    
    
    1,095Net realized gains (losses) on fixed maturity and equity
securities
    
    $
    551
    
    
    $
    (267
    )
    
    $
    1,431


The largest realized losses from sales of fixed maturities and equity
securities aggregated by issuer for the year ended December 31, 2003 totaled
$242 million. The following table provides details of those largest realized
losses aggregated by issuer including: the fair value of the securities at
sales date, the amount of the loss recorded and the period of time that the
security had been in an unrealized loss position prior to sale. The period of
time that the security had been in an unrealized loss position prior to sale
can vary due to the timing of individual security purchases. Also footnoted is
a narrative providing the industry sector along with the facts and
circumstances giving rise to the loss.

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Largest Realized Losses from Securities Sold at a Loss

Fair
    
    
    
    
    
    Months inValue
    
    
    
    
    
    UnrealizedIssuer Description and
Discussion
    
    Date of
    
    Loss
    
    Loss PriorSale
    
    On Sale
    
    To Sale(In millions)Various securities issued by the United States Treasury. (a)
    
    $
    5,727
    
    
    $
    173
    
    
    
    0-6Issues and sells mortgage backed securities. Issuer was
chartered by United States Congress to facilitate housing
ownership for low to middle income Americans. (a)
    
    
    1,679
    
    
    
    29
    
    
    
    0-6A food retailer of supermarkets and discount stores in the
U.S. and Europe. Also supplies food to institutional
foodservice companies. (b)
    
    
    34
    
    
    
    12
    
    
    
    0-6Savings bonds issued by the German Federal Republic. (a)
    
    
    627
    
    
    
    11
    
    
    
    0-6A company which manufactures rubber and rubber-related
chemicals. They also manufacture and distribute tires
(c)
    
    
    23
    
    
    
    9
    
    
    Various, 0-24A company which provides wholesale financing and capital
loans to auto retail dealerships and vehicle leasing
companies. (d)
    
    
    124
    
    
    
    8
    
    
    Various, 0-12$
    8,214
    
    
    $
    242




|(a) |  | Volatility of interest rates prompted movement to other asset classes.
|--- |  | ----------------------------------------------------------------------



|(b) |  | The company is under investigation for accounting fraud. Losses relate
to trades that took place to reduce issuer exposure.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------



|(c) |  | These losses relate to trades that took place to reduce issuer exposure.
|--- |  | ------------------------------------------------------------------------



|(d) |  | The issuers financial condition is in good standing and is investment
grade quality. A decision was made to reduce the portfolios overall
exposure to this issuer.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Valuation and Impairment of Investments

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

Carrying Value of Investments

December 31,
    
    
    
    
    
    December 31,2003
    
    %
    
    2002
    
    %(In millions)General account investments:Fixed maturity securities:U.S. Treasury securities and obligations of government agencies
    
    $
    1,900
    
    
    
    5
    %
    
    $
    1,376
    
    
    
    4
    %Asset-backed securities
    
    
    8,757
    
    
    
    23
    
    
    
    8,208
    
    
    
    23States, municipalities and political subdivisions  tax-exempt
    
    
    7,970
    
    
    
    21
    
    
    
    5,074
    
    
    
    14Corporate securities
    
    
    6,482
    
    
    
    17
    
    
    
    7,591
    
    
    
    22Other debt securities
    
    
    3,264
    
    
    
    9
    
    
    
    3,827
    
    
    
    11Redeemable preferred stock
    
    
    104
    
    
    
    
    
    
    
    69
    
    
    
    Options embedded in convertible debt securities
    
    
    201
    
    
    
    
    
    
    
    130
    
    
    
    Total fixed maturity securities
    
    
    28,678
    
    
    
    75
    
    
    
    26,275
    
    
    
    74Equity securities:Common stock
    
    
    383
    
    
    
    1
    
    
    
    461
    
    
    
    1Non-redeemable preferred stock
    
    
    144
    
    
    
    
    
    
    
    205
    
    
    
    1Total equity securities
    
    
    527
    
    
    
    1
    
    
    
    666
    
    
    
    2Short term investments
    
    
    7,538
    
    
    
    20
    
    
    
    7,008
    
    
    
    20Limited partnerships
    
    
    1,117
    
    
    
    3
    
    
    
    1,060
    
    
    
    3Other
    
    
    240
    
    
    
    1
    
    
    
    284
    
    
    
    1Total general account investments
    
    $
    38,100
    
    
    
    100
    %
    
    $
    35,293
    
    
    
    100
    %Separate account investments:Fixed maturity securities:U.S. Treasury securities and obligations of government agencies
    
    $
    167
    
    
    
    5
    %
    
    $
    166
    
    
    
    5
    %Asset-backed securities
    
    
    761
    
    
    
    21
    
    
    
    869
    
    
    
    28Corporate securities
    
    
    978
    
    
    
    27
    
    
    
    812
    
    
    
    26Other debt securities
    
    
    202
    
    
    
    6
    
    
    
    165
    
    
    
    5Redeemable preferred stock
    
    
    5
    
    
    
    
    
    
    
    2
    
    
    
    Total fixed maturity securities
    
    
    2,113
    
    
    
    59
    
    
    
    2,014
    
    
    
    64Equity securities:Common stock
    
    
    117
    
    
    
    3
    
    
    
    112
    
    
    
    4Non-redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    Total equity securities
    
    
    117
    
    
    
    3
    
    
    
    118
    
    
    
    4Short term investments
    
    
    496
    
    
    
    14
    
    
    
    276
    
    
    
    9Limited partnerships
    
    
    419
    
    
    
    12
    
    
    
    327
    
    
    
    10Other investments
    
    
    415
    
    
    
    12
    
    
    
    387
    
    
    
    13Total separate account investments
    
    $
    3,560
    
    
    
    100
    %
    
    $
    3,122
    
    
    
    100
    %


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

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Investments in the general account had a total net unrealized gain of $1,348
million at December 31, 2003 compared with $887 million at December 31, 2002.
The unrealized position at December 31, 2003 was composed of a net unrealized
gain of $1,114 million for fixed maturities and a net unrealized gain of $234
million for equity securities. The unrealized position at December 31, 2002
was composed of a net unrealized gain of $742 million for fixed maturities, a
net unrealized gain of $147 million for equity securities and a net unrealized
loss of $2 million for short term securities.

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities

Cost or
    
    Gross
    
    Gross Unrealized Losses
    
    NetAmortized
    
    Unrealized
    
    Less than
    
    Greater than
    
    UnrealizedDecember 31, 2003
    
    Cost
    
    Gains
    
    12 Months
    
    12 Months
    
    Gain/(Loss)(In millions)Fixed maturity securities:U.S. Treasury securities and
obligations of government agencies
    
    $
    1,823
    
    
    $
    91
    
    
    $
    10
    
    
    $
    4
    
    
    $
    77Asset-backed securities
    
    
    8,634
    
    
    
    146
    
    
    
    22
    
    
    
    1
    
    
    
    123States, municipalities and political
subdivisions  tax-exempt
    
    
    7,787
    
    
    
    207
    
    
    
    22
    
    
    
    2
    
    
    
    183Corporate securities
    
    
    6,061
    
    
    
    475
    
    
    
    40
    
    
    
    14
    
    
    
    421Other debt securities
    
    
    2,961
    
    
    
    311
    
    
    
    4
    
    
    
    4
    
    
    
    303Redeemable preferred stock
    
    
    97
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Options embedded in convertible debt
securities
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturity securities
    
    
    27,564
    
    
    
    1,237
    
    
    
    98
    
    
    
    25
    
    
    
    1,114Equity securities:Common stock
    
    
    163
    
    
    
    222
    
    
    
    2
    
    
    
    
    
    
    
    220Non-redeemable preferred stock
    
    
    130
    
    
    
    16
    
    
    
    2
    
    
    
    
    
    
    
    14Total equity securities
    
    
    293
    
    
    
    238
    
    
    
    4
    
    
    
    
    
    
    
    234Total fixed maturity and equity securities
    
    $
    27,857
    
    
    $
    1,475
    
    
    $
    102
    
    
    $
    25
    
    
    $
    1,348


Unrealized Gains (Losses) on Fixed Maturity and Equity Securities

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


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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.

At December 31, 2003, the carrying value of the general account fixed
maturities was $28,678 million, representing 75% of the total investment
portfolio. The net unrealized gain of this fixed maturity portfolio was $1,114
million, comprising gross unrealized gains of $1,237 million and gross
unrealized losses of $123 million. Gross unrealized losses were across various
sectors, the largest of which was corporate bonds. Within corporate bonds, the
largest industry sectors were financial, consumer-cyclical and
consumer-non-cyclical, which as a percentage of total gross unrealized losses
were 33%, 18% and 17%. Gross unrealized losses in any single issuer was less
than 1% of the carrying value of the total general account fixed maturity
portfolio.

The following table provides the composition of fixed maturity securities with
an unrealized loss at December 31, 2003 in relation to the total of all fixed
maturity securities with an unrealized loss by contractual maturities.

Contractual Maturity

Percent of
    
    Percent ofMarket
    
    UnrealizedValue
    
    LossDue in one year or less
    
    
    1
    %
    
    
    5
    %Due after one year through five years
    
    
    8
    
    
    
    20Due after five years through ten years
    
    
    7
    
    
    
    11Due after ten years
    
    
    35
    
    
    
    45Asset-backed securities
    
    
    49
    
    
    
    19Total
    
    
    100
    %
    
    
    100
    %


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

Unrealized Loss Aging

December 31, 2003GrossEstimated
    
    UnrealizedFair Value
    
    Loss(In millions)Fixed maturity securities:Investment grade:0-6 months
    
    $
    4,138
    
    
    $
    507-12 months
    
    
    834
    
    
    
    3613-24 months
    
    
    76
    
    
    
    11Greater than 24 months
    
    
    51
    
    
    
    3Total investment grade
    
    
    5,099
    
    
    
    100Non-investment grade:0-6 months
    
    
    134
    
    
    
    57-12 months
    
    
    60
    
    
    
    713-24 months
    
    
    16
    
    
    
    1Greater than 24 months
    
    
    105
    
    
    
    10Total non-investment grade
    
    
    315
    
    
    
    23Total fixed maturity securities
    
    
    5,414
    
    
    
    123Equity securities:0-6 months
    
    
    23
    
    
    
    27-12 months
    
    
    10
    
    
    
    213-24 months
    
    
    3
    
    
    
    Greater than 24 months
    
    
    6
    
    
    
    Total equity securities
    
    
    42
    
    
    
    4Total fixed maturity and equity securities
    
    $
    5,456
    
    
    $
    127


A significant judgment in the valuation of investments is the determination of
when an other-than-temporary decline in value has occurred. The Company
follows a consistent and systematic process for impairing securities that
sustain other-than-temporary declines in value. The Company has established a
committee responsible for the impairment process. This committee, referred to
as the Impairment Committee, is made up of three officers appointed by the
Companys Chief Financial Officer. The Impairment Committee is responsible for
analyzing watch list securities on at least a quarterly basis. The watch list
includes individual securities that fall below certain thresholds or that
exhibit evidence of impairment indicators including, but not limited to, a
significant adverse change in the financial condition and near term prospects
of the investment or a significant adverse change in legal factors, the
business climate or credit ratings.

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

The decision to impair a security incorporates both quantitative criteria and
qualitative information. The Impairment Committee considers a number of
factors including, but not limited to: (a) the length of time and the extent
to which the market value has been less than book value, (b) the financial
condition and

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near term prospects of the issuer, (c) the intent and ability of the Company to
retain its investment for a period of time sufficient to allow for any
anticipated recovery in value, (d) whether the debtor is current on interest
and principal payments and (e) general market conditions and industry or sector
specific factors.

The Impairment Committees decision to impair a security is primarily based on
whether the securitys fair value is likely to remain significantly below its
book value in light of all of the factors considered. For securities that are
impaired, the security is written down to fair value and the resulting losses
are recognized in realized gains/losses in the Consolidated Statements of
Operations.

Realized investment losses included $321 million, $890 million and $129 million
of pretax impairment losses for the three years ended December 31, 2003, 2002
and 2001. The impairments were primarily the result of the continued credit
deterioration on specific issuers in the bond and equity markets and the
effects on such markets due to the overall slowing of the economy.

For the year ended December 31, 2003, the impairment losses recorded related
primarily to corporate bonds in the airline, healthcare and energy industries.

For the year ended December 31, 2002, the impairment losses recorded related
primarily to corporate bonds in the communications industry sectors including
$129 million related to WorldCom Inc., $74 million related to Adelphia
Communication Corporation, $60 million for Charter Communications, $57 million
for AT&T Canada and $53 million for Telewest PLC.

For the year ended December 31, 2001, the impairment losses recorded related
primarily to corporate bonds and equities in the communications industry sector
including $31 million for MedicaLogic/Medscape, Inc. and $27 million for At
Home Corporation.

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

The Companys non-investment grade fixed maturity securities held as of
December 31, 2003 that were in an unrealized loss position had a fair value of
$315 million. As discussed previously, a significant judgment in the valuation
of investments is the determination of when an other-than-temporary impairment
has occurred. The Companys Impairment Committee analyzes securities placed on
the watch list on at least a quarterly basis. Part of this analysis is to
monitor the length of time and severity of the decline below book value of the
watch list securities. The following table summarizes the fair value and gross
unrealized loss of non-investment grade securities categorized by the length of
time those securities have been in a continuous unrealized loss position and
further categorized by the severity of the unrealized loss position in 10%
increments as of December 31, 2003.

Unrealized Loss Aging for Non-investment Grade Securities

Fair Value as a Percentage of Book ValueEstimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnrealizedDecember 31, 2003
    
    Fair Value
    
    90-99%
    
    80-89%
    
    70-79%
    
    <70%
    
    Loss(In millions)Fixed maturity securities:Non-investment grade:0-6 months
    
    $
    134
    
    
    $
    2
    
    
    $
    1
    
    
    $
    
    
    
    $
    2
    
    
    $
    57-12 months
    
    
    60
    
    
    
    1
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    713-24 months
    
    
    16
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Greater than 24 months
    
    
    105
    
    
    
    4
    
    
    
    1
    
    
    
    5
    
    
    
    
    
    
    
    10Total non-investment grade
    
    $
    315
    
    
    $
    8
    
    
    $
    8
    
    
    $
    5
    
    
    $
    2
    
    
    $
    23


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As part of the ongoing impairment monitoring process, the Impairment Committee
has evaluated the facts and circumstances based on available information for
each of these non-investment grade securities and determined that no further
impairments were necessary at December 31, 2003. This determination was based
on a number of factors that the Committee regularly considers including, but
not limited to: the issuers ability to meet current and future interest and
principal payments, an evaluation of the issuers financial condition and near
term prospects, the Companys sector outlook and estimates of the fair value of
any underlying collateral. In all cases where a decline in value is judged to
be temporary, the Company had the intent and ability to hold these securities
for a period of time sufficient to recover the book value of its investment
through a recovery in the market value of such securities or by holding the
securities to maturity. In many cases, the securities held are matched to
liabilities as part of ongoing asset/liability duration management. As such
the Impairment Committee continually assesses its ability to hold securities
for a time sufficient to recover any temporary loss in value or until maturity.
The Company maintains sufficient levels of liquidity so as to not impact the
asset/liability management process.

The Companys equity securities held as of December 31, 2003 that were in an
unrealized loss position had a fair value of $42 million. The Companys
Impairment Committee, under the same process as fixed maturity securities,
monitors the equity securities for other-than-temporary declines in value. In
all cases where a decline in value is judged to be temporary, the Company
expects to recover the book value of its investment through a recovery in the
market value of the security.

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 realized
investment gains/losses.

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 year ended December 31, 2001 totaled approximately $30 million. These
businesses contributed approximately $11 million of net losses in the year
ended December 31, 2001.

The Company regularly updates its impairment analyses and adjusts its loss as
necessary. Based on these updated analyses the impairment loss was reduced by
approximately $170 million after-tax in the fourth quarter of 2001, primarily
because the net assets of the businesses had been significantly diminished by
their operating losses, including unfavorable net prior year development
recognized by CNA Re U.K. in the fourth quarter of 2001. The reduction of the
impairment was included in realized investment gains/losses.

On October 31, 2002, the Company completed the sale of CNA Re U.K. to Tawa.
The sale includes business underwritten since inception by CNA Re U.K., except
for certain risks retained by CCC as discussed below. The purchase price was
$1, subject to adjustments based primarily upon the results of operations and
realized foreign currency losses of CNA Re U.K. Under the terms of the
purchase price adjustment, CCC is entitled to receive $5 million from Tawa
after Tawa is able to legally withdraw funds from the former CNA Re U.K.
entities; at December 31, 2003, CNA has received approximately $2 million. CCC
has also committed to contribute up to $5 million to the former CNA Re U.K.
entities over a four-year period beginning in 2010 should the Financial
Services Authority (FSA) deem those entities

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to be undercapitalized. The purchase price adjustment related to foreign
currency losses resulted in CNA contributing additional capital to CNA Re U.K.
of $11 million. As the sale and related agreements have now been completed,
the Company has finalized its impairment analysis based upon the terms of the
completed transactions and reduced the impairment loss by approximately $39
million after-tax. The reduction of the impairment was included in net
realized investment gains in 2002.

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

CNA Re U.K. had revenues of approximately $48 million and $280 million for the
two years ended December 31, 2002 and 2001. CNA Re U.K. had net losses of $22
million and $374 million for the years ended December 31, 2002 and 2001. The
assets and liabilities of CNA Re U.K., including the effects of the concurrent
transactions, were approximately $2,442 million and $2,357 million at the date
of sale and $2,557 million and $2,541 million as of December 31, 2001.

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 general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 93% and 89% of which were rated as investment grade at December
31, 2003 and 2002. The following table summarizes the ratings of CNAs general
account bond portfolio at carrying value.

General Account Bond Ratings

December 31
    
    2003
    
    %
    
    2002
    
    %(In millions)U.S. Government and affiliated agency securities
    
    $
    2,818
    
    
    
    10
    %
    
    $
    1,908
    
    
    
    7
    %Other AAA rated
    
    
    12,779
    
    
    
    45
    
    
    
    10,856
    
    
    
    41AA and A rated
    
    
    6,329
    
    
    
    22
    
    
    
    5,730
    
    
    
    22BBB rated
    
    
    4,631
    
    
    
    16
    
    
    
    4,930
    
    
    
    19Non investment-grade
    
    
    2,017
    
    
    
    7
    
    
    
    2,782
    
    
    
    11Total
    
    $
    28,574
    
    
    
    100
    %
    
    $
    26,206
    
    
    
    100
    %


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

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The following table summarizes the bond ratings of the investments supporting
those separate account products, which guarantee principal and a specified rate
of interest.

Separate Account Bond Ratings

December 31
    
    2003
    
    %
    
    2002
    
    %(In millions)U.S. Government and affiliated agency securities
    
    $
    166
    
    
    
    9
    %
    
    $
    161
    
    
    
    9
    %Other AAA rated
    
    
    737
    
    
    
    41
    
    
    
    898
    
    
    
    48AA and A rated
    
    
    374
    
    
    
    21
    
    
    
    327
    
    
    
    18BBB rated
    
    
    443
    
    
    
    24
    
    
    
    414
    
    
    
    22Non investment-grade
    
    
    89
    
    
    
    5
    
    
    
    68
    
    
    
    3Total
    
    $
    1,809
    
    
    
    100
    %
    
    $
    1,868
    
    
    
    100
    %


At December 31, 2003 and 2002, 98% and 99% of the separate account portfolio
was U.S. Government agencies or was rated by S&P or Moodys. The remaining
bonds were rated by other rating agencies or Company management.

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

The carrying value of non-traded securities at December 31, 2003 was $270
million which represents 0.7% of the Companys total investment portfolio.
These securities were in a net unrealized gain position of $61 million at
December 31, 2003. Of the non-traded securities, 48% are priced by unrelated
third party sources.

Included in CNAs general account fixed maturity securities at December 31,
2003 are $8,757 million of asset-backed securities, at fair value, consisting
of approximately 37% in collateralized mortgage obligations (CMOs), 8% in
corporate asset-backed obligations, 11% in U.S. Government agency issued
pass-through certificates and 44% in corporate mortgage-backed pass-through
certificates. The majority of CMOs held are actively traded in liquid markets
and are priced by broker-dealers.

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

Short term Investments

December 31
    
    2003
    
    2002(In millions)Commercial paper
    
    $
    4,458
    
    
    $
    1,141U.S. Treasury securities
    
    
    1,068
    
    
    
    2,756Money market funds
    
    
    1,230
    
    
    
    2,161Other
    
    
    782
    
    
    
    950Total short term investments
    
    $
    7,538
    
    
    $
    7,008


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

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underlying obligor). CNA considers the derivatives in its general account to
be held for purposes other than trading. Derivative securities are recorded at
fair value at the reporting date.

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

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

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

For the year ended December 31, 2003, net cash provided by operating activities
was $1,760 million as compared with net cash provided by operating activities
of $1,040 million in 2002. The increase in cash provided by operating
activities related primarily to a decrease in paid claims, and increased net premium collections in 2003 as compared with
2002.

For the year ended December 31, 2002, net cash provided by operating activities
was $1,040 million as compared with net cash used of $599 million in 2001. The
improvement related primarily to federal tax refunds received in 2002 as
compared to taxes paid in 2001 and decreased net payments for insurance claims.

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

For the year ended December 31, 2003, net cash used for investing activities
was $2,133 million as compared with $1,488 million in 2002. Cash flows used
for investing related principally to purchases of fixed maturity securities.

For the year ended December 31, 2002, net cash used for investing activities
was $1,488 million as compared with net cash used of $205 million in 2001.
Cash flows used by investing activities were related principally to increased
purchases of invested assets due to positive operating cash flow and cash
provided by financing activities.

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

For the year ended December 31, 2003, net cash provided from financing
activities was $386 million as compared with $432 million in 2002. For the
year ended December 31, 2002, net cash provided from financing activities was
$432 million as compared with $783 million in 2001.

The Company is closely managing 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. As of December 31, 2003, the Company
has paid $712 million in claims and recovered $436 million from reinsurers.

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CNAs estimated gross pretax losses for the WTC event recorded in 2001,were
$1,648 million pretax ($1,071 million after-tax). Net pretax losses before the
effect of corporate aggregate reinsurance treaties were $727 million.
Approximately 1%, 60% and 33% 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.

Effective January 30, 2001, the Company sold the 180 Maiden Lane, New York,
facility. The sale of this property provided additional liquidity to the
Company with net sale proceeds of $264 million.

Debt

Debt is composed of the following obligations.

Debt

December 31
    
    2003
    
    2002(In millions)Variable rate debt:Credit facility  CNAF, due April 30, 2004
    
    $
    250
    
    
    $
    250Credit facility  CNA Surety, due September 30, 2005
    
    
    30
    
    
    
    30Term loan  CNA Surety, due through September 30, 2005
    
    
    20
    
    
    
    30Senior notes:7.250%, face amount of $128, due March 1, 2003
    
    
    
    
    
    
    1286.250%, face amount of $248, due November 15, 2003
    
    
    
    
    
    
    2486.500%, face amount of $493, due April 15, 2005
    
    
    492
    
    
    
    4916.750%, face amount of $250, due November 15, 2006
    
    
    249
    
    
    
    2496.450%, face amount of $150, due January 15, 2008
    
    
    149
    
    
    
    1496.600%, face amount of $200, due December 15, 2008
    
    
    199
    
    
    
    1998.375%, face amount of $70, due August 15, 2012
    
    
    69
    
    
    
    696.950%, face amount of $150, due January 15, 2018
    
    
    149
    
    
    
    148Debenture, 7.250%, face amount of $243, due November 15, 2023
    
    
    241
    
    
    
    240Capital
leases, 10.400%-11.500%, due through December 31, 2011
    
    
    33
    
    
    
    36Other debt, 1.000%-6.600%, due through 2019
    
    
    23
    
    
    
    25Total debt
    
    $
    1,904
    
    
    $
    2,292Short term debt
    
    $
    263
    
    
    $
    420Long term debt
    
    
    1,641
    
    
    
    1,872Total debt
    
    $
    1,904
    
    
    $
    2,292


The Company has a $250 million three-year bank credit facility with an April
30, 2004 expiration date. The Company has adequate capital resources to fund
this obligation.

The Company pays a facility fee to the lenders for having funds available for
loans under the three-year credit facility maturing April 30, 2004. The fee
varies based on the long term debt ratings of the Company. At December 31,
2003, the facility fee on the three-year component was 25.0 basis points.

The Company pays interest on any outstanding debt/borrowings under the
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 75.0 basis points. 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.
At December 31, 2003 and 2002, the weighted-average interest rate on the
borrowings under the facility, including facility fees and utilization fees,
was 2.3%.

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A Moodys downgrade of the CNAF senior debt rating
from Baa2 to Baa3 on November 12, 2003, increased 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 increased from LIBOR plus 57.5 basis
points to LIBOR plus 75.0 basis points. The utilization fee remained unchanged
on the three-year facility at 12.5 basis points.

On September 30, 2003, CNA Surety, a 64% owned and consolidated subsidiary of
CNA, entered into a $50 million credit agreement, which consisted of a $30
million, two-year revolving credit facility and a $20 million two-year term
loan, payable semi-annually at a rate of $5 million. The credit agreement is
an amendment to a $65 million credit agreement, extending the revolving loan
termination date from September 30, 2003 to September 30, 2005. The new
revolving credit facility was fully utilized at inception.

Under the new credit facility agreement, CNA Surety pays a facility fee of 35.0
basis points, interest at LIBOR plus 90 basis points, and for utilization
greater than 50% of the amount available to borrow an additional fee of 5.0
basis points. On the term loan, CNA Surety pays interest at LIBOR plus 62.5
basis points. At December 31, 2003, the weighted-average interest rate on the
$50 million of outstanding borrowings under the credit agreement, including
facility fees and utilization fees was 2.6%. Effective January 30, 2003, CNA
Surety entered into a swap agreement on the term loan portion of the agreement
which uses the 3-month LIBOR to determine the swap increment. As a result, the
effective interest rate on the $20 million in outstanding borrowings on the
term loan was 2.76% at December 31, 2003. On the $30 million revolving credit
agreement, the effective interest rate at December 31, 2003 was 2.55%.

The terms of CNAFs and CNA Suretys credit facilities require CNAF and CNA
Surety to maintain certain financial ratios and combined property and casualty
company statutory surplus levels. At December 31, 2003 and 2002, CNAF and CNA
Surety were in compliance with all restrictive debt covenants, except for the
fixed charge coverage ratio for which CNA
Surety obtained a waiver from the lenders effective
September 30, 2003. As a result, CNAF and CNA Surety were in
compliance with all restrictive debt covenants at December 31,
2003. The lenders amended the CNA Surety
Credit Facility to replace the fixed charge coverage ratio for the next three
quarters with a minimum earnings requirement.

Related Parties

CNAF has entered into a credit agreement with a large national contractor that
undertakes projects for the construction of government and private facilities
to provide an $86 million credit facility. CNA Surety has provided significant
surety bond protection for projects by this contractor through surety bonds
underwritten by CCC or its affiliates. The loans were provided by
CNAF to help the contractor meet its liquidity needs. The credit facility and all loans under
it will mature in March of 2006. Advances under the credit facility bear interest at the prime rate plus 6%.
Payment of 3% of the interest is deferred until the credit facility matures,
and the remainder is to be paid monthly in cash. Loans under the credit
facility are secured by a pledge of substantially all of the assets of the
contractor and certain affiliates.

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

In March of 2003, CNAF purchased the contractors outstanding bank debt for $16
million. The contractor purchased the bank debt and retired it, with $11
million of the purchase price being funded

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under the new credit facility and $5 million from money loaned to the
contractor by its shareholders. Under its purchase agreement with the banks,
CNAF is also required to reimburse the banks for any draws upon outstanding
letters of credit issued by the banks for the contractors benefit. Of these
letters of credit, a replacement due to expire in August of 2004 remains in the
amount of $3 million. Any CNAF reimbursements for draws upon the banks letters
of credit will become obligations of the contractor to CNAF as draws upon the
credit facility. As of December 31, 2003, CNAF has credit exposure
of $55 million under the credit facility, net of participation
by Loews, in the amount of $25 million for total outstanding of $80 million. As of February 27, 2004, $83 million was the total outstanding under the
credit facility, including deferred interest.

The contractor has initiated a restructuring plan that is intended to reduce
costs and improve cash flow, and a chief restructuring officer has been
appointed to manage execution of the plan. CNAF, through its affiliate CNA
Surety, intends to continue to provide surety bonds on behalf of the contractor
during this restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards. Any losses to CNA
Surety arising from bonds issued to the contractor or assumed are excluded from
CNA Suretys $40 million excess of $20 million per principal reinsurance
program with unaffiliated reinsurers in place in 2002. As a result, CNA Surety
retains the first $60 million of losses on bonds written with an effective date
of September 30, 2002 and prior, and CCC will incur 100% of losses above that
retention level on bonds with effective dates prior to September 30, 2002.
Through facultative reinsurance contracts with CCC, CNA Suretys exposure on
bonds written from October 1, 2002 through October 31, 2003 has been limited
to $20 million per bond. For bonds written subsequent to November 1, 2003, and for bonds CNA Surety may write
in 2004, CNA Suretys exposure is limited to $14.5 million per bond subject to an aggregate
limit of $150 million under all such reinsurance contracts. Effective January 1, 2004, CCC and CNA Surety
entered into a $40 million excess of $60 million reinsurance contract that
provides coverage to CNA Surety exclusively for the contractor. This
reinsurance will be in effect through December 31, 2004. The premium for this
contract is $3 million, plus an additional premium if a loss is ceded under it.
Effective January 1, 2004 through December 31, 2004, CNA Surety and CCC also entered into a $50
million excess of $100 million contract that provides coverage to CNA Surety for the contractor,
as well as other CNA Surety risks. The premium for this contract is $6.0 million plus an additional premium if a loss is ceded to this contract.

Indemnification and subrogation rights, including rights to contract proceeds
on construction projects in the event of default, exist that reduce CNA
Suretys and ultimately the Companys exposure to loss. While CNAF believes
that the contractors restructuring efforts may be successful and provide
sufficient cash flow for its operations, the contractors failure to achieve
its restructuring plan or perform its contractual obligations under the credit
facility and underlying all of the Companys surety bonds could have a material
adverse effect on the Companys results of operations. If such failures occur,
the Company estimates the surety loss, net of indemnification and subrogation
recoveries, but before the effects of minority interest could be up to $200
million. In addition, such failures could cause the full amount due under the
credit facility to be uncollectible.

Commitments, Contingencies, and Guarantees

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 December 31, 2003 and 2002 there were approximately $58 million
and $222 million of outstanding letters of credit.

The Company has provided guarantees related to irrevocable standby letters of
credit for certain of its subsidiaries. Certain of these subsidiaries have
been sold; however, the irrevocable standby letter of credit guarantees remain
in effect. The Company would be required to make payment on the letters of
credit in question if the primary obligor drew down on these letters of credit
and failed to repay such loans in accordance with the terms of the letters of
credit. The maximum potential amount of future payments that CNA could be
required to pay under these guarantees are approximately $30 million at
December 31, 2003.

As of December 31, 2003 and 2002, the Company had committed approximately $154
million and $141 million to future capital calls from various third-party
limited partnership investments in exchange for an ownership interest in the
related partnerships.

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In the normal course of investing activities, CCC had committed approximately
$51 million as of December 31, 2003 to future capital calls from certain of its
unconsolidated affiliates in exchange for an ownership interest in such
affiliates.

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

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

In the event that the other parties to the joint venture are unable to meet
their commitments in funding the operations of this joint venture, the Company
would be required to assume the obligation for the entire office building
operating lease. The maximum potential future lease payments at December 31,
2003 that the Company could be required to pay under this guarantee is
approximately $347 million. If CNA was required to assume the entire lease
obligation, the Company would have the right to pursue reimbursement from the
other shareholders and would have the right to all sublease revenues.

The Company invests in multiple bank loan participations as part of its overall
investment strategy and has committed to additional future purchases and sales.
The purchase and sale of these investments are recorded on the date that the
legal agreements are finalized and cash settlement is made. As of December 31,
2003, the Company had commitments to purchase $53 million and commitments to
sell $1 million of various bank loan participations.

In the course of selling business entities and assets to third parties, the
Company has agreed to indemnify purchasers for losses arising out of breaches
of representation and warranties with respect to the business entities or
assets being sold, including, in certain cases, losses arising from undisclosed
liabilities or certain named litigation. Such indemnification provisions
generally survive for periods ranging from nine months following the applicable
closing date to the expiration of the relevant statutes of limitation. As of
December 31, 2003, the aggregate amount of quantifiable indemnification
agreements in effect for sales of business entities and assets was $580
million.

In addition, the Company has agreed to provide indemnification to third party
purchasers for certain losses associated with sold business entities or assets
that are not limited by a contractual monetary amount. As of December 31,
2003, the Company had outstanding unlimited indemnifications in connection with
the sales of certain of its business entities or assets for tax liabilities
arising prior to a purchasers ownership of an entity or asset, defects in
title at the time of sale, employee claims arising prior to closing and in some
cases losses arising from certain litigation and undisclosed liabilities.
These indemnification agreements survive until the applicable statutes of
limitation expire, or until the agreed upon contract terms expire. As of
December 31, 2003, the Company has recorded approximately $16 million of
liabilities related to these indemnification agreements.

Cash and securities with carrying values of approximately $22 million and $37
million were deposited with financial institutions as collateral for letters of
credit as of December 31, 2003 and 2002. In addition, cash and securities were
deposited in trusts with financial institutions to secure reinsurance
obligations with various third parties. The carrying values of these deposits
were approximately $118 million and $70 million as of December 31, 2003 and
2002.

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A summary of the Companys commitments as of December 31, 2003 is presented in
the following table.

Commitments

December 31, 2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total(In millions)Debt (a)
    
    $
    260
    
    
    $
    533
    
    
    $
    251
    
    
    $
    8
    
    
    $
    350
    
    
    $
    477
    
    
    $
    1,879Capital leases
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    4
    
    
    
    4
    
    
    
    16
    
    
    
    33Lease obligations
    
    
    68
    
    
    
    57
    
    
    
    48
    
    
    
    39
    
    
    
    31
    
    
    
    73
    
    
    
    316Guaranteed payment
contracts (b)
    
    
    13
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18Total
    
    $
    344
    
    
    $
    598
    
    
    $
    302
    
    
    $
    51
    
    
    $
    385
    
    
    $
    566
    
    
    $
    2,246




|(a) |  | Does not include original issue discount of $8 million.
|--- |  | -------------------------------------------------------
|   
|(b) |  | Primarily relating to telecommunications services.     

Regulatory Matters

The Company has established a plan to reorganize and streamline its U.S.
property and casualty insurance legal entity structure. One phase of this
multi-year plan was completed during 2003. This phase served to consolidate
the Companys U.S. property and casualty insurance risks into CCC, as well as
realign the capital supporting these risks. As part of this phase, the Company
implemented in the fourth quarter a 100% quota share reinsurance agreement,
effective January 1, 2003, ceding all of the net insurance risks of CIC and its
14 affiliated insurance companies (CIC Group) to CCC. Additionally, the
ownership of the CIC Group was transferred to CCC in the fourth quarter of 2003
in order to properly align the insurance risks with the supporting capital. In
subsequent phases of this plan, the Company will continue its efforts to reduce
both the number of U.S. property and casualty insurance entities it maintains
and the number of states in which such entities are domiciled. In order to
facilitate the execution of this plan, the Company, CCC and CIC have agreed to
participate in a working group consisting of several states of the National
Association of Insurance Commissioners.

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

Pursuant to its participation in the working group referenced above, the
Company has agreed to certain time frames and informational provisions in
relation to the reorganization plan. The Company has also agreed that any
proceeds from the sale of any member of the CIC pool, net of transaction
expenses, will be retained in CIC or one of its subsidiaries until the dividend
stipulation discussed below expires.

Ratings

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

The actions that can be taken by rating agencies are changes in ratings or
modifiers. On Review, Credit Watch and Rating Watch are modifiers used
by the ratings agencies to alert those parties

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relying on the Companys ratings of the possibility of a rating change in the
near term. Modifiers are utilized when the agencies are uncertain as to the
impact of a Company action or initiative, which could prove to be material to
the current rating level. Modifiers are generally used to indicate a possible
change in rating within 90 days. Outlooks accompanied with ratings are
additional modifiers used by the rating agencies to alert those parties relying
on the Companys ratings of the possibility of a rating change in the longer
term. The time frame referenced in an outlook is not necessarily limited to
ninety days as defined in the Credit-Watch category.

The table below reflects the various group ratings issued by A.M. Best, S&P,
Moodys and Fitch as of February 12, 2004 for the Property and Casualty and
Life companies. The table also includes the ratings for CNAFs senior debt and
Continental senior debt.

Insurance Financial Strength Ratings
    
    Debt RatingsProperty & Casualty (a)
    
    Life
    
    CNAF
    
    ContinentalCCC
    
    CIC
    
    CAC
    
    VFL
    
    Senior
    
    SeniorGroup
    
    Group
    
    (b)
    
    (c)
    
    Debt
    
    DebtA.M. Best
    
    
    A
    
    
    
    A
    
    
    
    A-
    
    
    
    A
    
    
    bbb
    
    bbb-Fitch
    
    
    A-
    
    
    
    A-
    
    
    
    A-
    
    
    
    A+
    
    
    BBB-
    
    BBB-Moodys
    
    
    A3
    
    
    
    A3
    
    
    Baa1
    
    Baa1
    
    Baa3
    
    Baa3S&P
    
    
    A-
    
    
    
    A-
    
    
    
    A
    
    
    
    A
    
    
    BBB-
    
    BBB-




|(a) |  | All modifiers for the property & casualty companies insurance
financial strength and holding company debt ratings as evaluated by S&P are
Credit Watch with negative implications; the property & casualty companies
financial strength and holding company debt ratings have a negative outlook
from A. M. Best, Fitch and Moodys.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | S&Ps modifier to CACs rating is Credit Watch with negative implications;
A.M. Best and Moodys have a stable outlook while Fitch has a negative outlook
on the CAC rating.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | VFLs rating modifiers are Under Review with Developing Implications,
Rating Watch Positive, On Review for Upgrade and Credit Watch Developing by
A.M. Best, Fitch, Moodys and S&P.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Following the February 5, 2004 announcement regarding the sale of CNAs
individual life and annuity business and the decision to cease new sales in the
structured settlement and institutional market business, the following rating
actions were taken on CNAs life insurance companies:

A.M. Best lowered the rating of CAC from A to A- and established a stable
outlook. VFLs rating outlook was changed from Negative to an Under Review
with Developing Implications. Fitch lowered the rating of CAC from A+ to A-
and kept a negative outlook. VFLs rating outlook was changed from Negative to
Rating Watch Positive. Moodys retained their Baa1 ratings on CAC and VFL. The
rating agency changed CACs outlook from negative to stable and placed VFLs
rating On Review for Upgrade. Standard & Poors did not change their A ratings
on CAC and VFL, but revised VFLs modifier to CreditWatch Developing from
CreditWatch with Negative Implications.

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

The Institutional Markets business unit of Group Operations, which was not
included in the sale of CNAs group benefits business to Hartford and provides
investment products to pension plan sponsors and other institutional customers,
would be significantly impacted by a downgrade of CAC/VFL.

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The Company has entered into several settlement agreements and assumed
reinsurance contracts that require collateralization of future payment
obligations and assumed reserves if the Companys ratings or other specific
criteria fall below certain thresholds. The ratings triggers are generally
more than one level below the Companys February 12, 2004 ratings.

Dividends from Subsidiaries

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

Dividends from CCC are subject to the insurance holding company laws of the
State of Illinois, the domiciliary state of CCC. Under these laws, ordinary
dividends, or dividends that do not require prior approval of the Illinois
Department of Insurance (the Department), may be paid only from earned surplus,
which is calculated by removing unrealized gains from unassigned surplus. As
of December 31, 2003, CCC is in a negative earned surplus position. Until CCC
is in a positive earned surplus position, all dividends require prior approval
of the Department. In January of 2004, the Department approved extraordinary
dividend capacity in the amount of approximately $312 million to be used to
fund the CNAFs 2004 debt service and principal repayment requirements.

By agreement with the New Hampshire Insurance Department, the CIC
Group may not pay dividends to CCC until after January 1, 2006.

CNAs domestic insurance subsidiaries are subject to risk-based capital
requirements. Risk-based capital is a method developed by the NAIC to
determine the minimum amount of statutory capital appropriate for an insurance
company to support its overall business operations in consideration of its size
and risk profile. The formula for determining the amount of risk-based capital
specifies various factors, weighted based on the perceived degree of risk,
which are applied to certain financial balances and financial activity. The
adequacy of a companys actual capital is evaluated by a comparison to the
risk-based capital results, as determined by the formula. Companies below
minimum risk-based capital requirements are classified within certain levels,
each of which requires specified corrective action. As of December 31, 2003
and 2002, all of CNAs domestic insurance subsidiaries exceeded the minimum
risk-based capital requirements.

Loews

During 2003, CNA completed a strategic review of its operations and decided to
concentrate efforts on its property and casualty business. As a result of this
review, and 2003 charges of $1,849 million after-tax ($2,845 million pretax) related to unfavorable net
prior year development and a $396 million after-tax ($610
million pretax) increase in the provision for
reinsurance and insurance receivables, a capital plan was developed to
replenish statutory capital of the property and casualty subsidiaries adversely
impacted by these charges. A summary of the capital plan, related actions, and
other significant 2003 business decisions is discussed below:

The capital plan, which was announced in November of 2003, consists of the sale
of $750 million of a new series of CNA convertible preferred stock to Loews
Corporation (Loews), the 90% owner of CNAs outstanding shares, and the Loews
commitment of additional capital support of up to $500 million by February 27,
2004 through the purchase of surplus notes of Continental Casualty Company
(CCC), CNAs principal insurance subsidiary, in the event certain additions to
CCCs statutory capital are not achieved through asset sales. The assets sales
included in the capital plan are the Group Benefits business

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and the individual life insurance business as described below. In addition,
Loews committed to an additional $150 million by March 31,
2004, in a form to be determined, to support the statutory capital of
CCC in the event of additional shortfalls in relation to business and
asset sales.

As a result of the sale of the Group
Benefits business, Loews purchased $46
million of CCC surplus notes in February of 2004, pursuant to such commitment.
In addition, the sale of CNAs individual life business is expected to result
in an addition to CCCs statutory surplus in excess of $400 million. However,
the sale of the individual life business, which is subject to customary closing
conditions and regulatory approvals, was not consummated by February 26, 2004.
As a result, Loews purchased $300 million of additional CCC surplus notes in
February of 2004. Following the consummation of the individual life sale, CNA
plans to seek approval from the insurance regulatory authority for the
repayment of the surplus notes purchased in relation to such sale, although no
assurance can be given that sale of the individual life business will be
consummated or that the regulatory approval will be obtained.

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

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

On November 24, 2003, CNAF sold $750 million of its participating convertible
preferred stock, designated Series I (Series I Issue), to Loews. The Series I
Issue has terms that make it economically equivalent to CNAFs common stock.
The preferred shares will convert into 32,327,015 shares of CNAF common stock,
utilizing a conversion price per share of common stock that was based on
average market prices of CNAF common stock from November 17, 2003 through
November 21, 2003. The terms of the Series I Issue were approved by a special
committee of independent members of CNAFs Board of Directors.
Upon conversion, Loews will own approximately 91% of CNAFs outstanding common stock
of approximately 255.9 million shares. Conversion will take place when the
Company satisfies applicable stock exchange requirements.

The proceeds from
the Series I Issue were applied by CNAF to increase the statutory surplus of
CNAFs principal insurance subsidiary, CCC.

The Series H Issue is senior to
CNAFs common stock and Series I Issue as to the payment of dividends and amounts payable
upon any liquidation, dissolution or winding up. No dividends may be declared on
CNAFs common stock until all cumulative dividends on the Series H Issue
have been paid. CNAF may not issue any equity securities ranking senior to or on par
with the Series H Issue without the consent of a majority of its stockholders.
The Series H Issue is non-voting and is not convertible into any other
securities of CNAF. It may be redeemed only upon the mutual agreement of CNAF and
a majority of the stockholders of the preferred stock.

Of the proceeds of the Series H Issue, $250 million was used to prepay a bank
term loan due in April of 2003 and $250 million was contributed to CCC to
improve its statutory surplus. The remaining proceeds were used to repay other
debt of CNAF and Continental, which matured in 2003 and for other general
corporate purposes.

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

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connection with the rights offering for $957 million, and an additional 0.8
million shares in the open market.

Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51 (FIN 46). In December 2003, FASB
revised FIN 46, which clarifies the application of Accounting Research Bulletin
No. 51 Consolidated Financial Statements (ARB 51). As per
ARB 51, a general rule for preparation of consolidated financial statements of
a parent and its subsidiary is ownership by the parent, either directly or
indirectly, of over fifty percent of the outstanding voting shares of a
subsidiary. However, application of the majority voting interest requirement
of ARB 51 to certain types of entities may not identify the party with a
controlling financial interest because the controlling financial interest may
be achieved through arrangements that do not involve voting interest. FIN 46
clarifies applicability of ARB 51 to entities in which the equity investors do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. FIN 46 requires an entity to
consolidate a variable interest entity (VIE) even though the entity does not,
either directly or indirectly, own over fifty percent of the outstanding voting
shares.

FIN 46 is applicable for financial statements issued for reporting periods that
end after March 15, 2004. The Company is in the process of reviewing the
recent revisions to FIN 46. Any potential changes as a result of
implementation of FIN 46 are not expected to have a significant impact on the
results of operations or equity of the Company.

In July of 2003, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position 03-01, Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate
Accounts (SOP 03-01). SOP 03-01 provides guidance on accounting and
reporting by insurance enterprises for certain nontraditional long-duration
contracts and for separate accounts. SOP 03-01 is effective for financial
statements for fiscal years beginning after December 15, 2003. SOP 03-01 may
not be applied retroactively to prior years financial statements, and initial
application should be as of the beginning of an entitys fiscal year. CNA will
adopt SOP 03-01 as of January 1, 2004. The adoption of SOP 03-01 is not
anticipated to have a significant impact on the results of operations or equity
of the Company, but will affect the classification and presentation of certain
balance sheet and income statement items.

In December of 2003, the FASB revised SFAS No.132, Employers
Disclosures about Pensions and Other Postretirement Benefits(SFAS
132) to require additional disclosures related to pensions and post retirement
benefits. While retaining the existing disclosure requirements for pensions
and postretirement benefits, additional disclosures are required related to
pension plan assets, obligations, contributions and net benefit costs,
beginning with fiscal years ending after December 15, 2003. Additional
disclosures pertaining to benefit payments are required for fiscal years ending
after June 30, 2004. The SFAS 132 revisions also include additional disclosure
requirements for interim financial reports beginning after December 15, 2003.
CNA has implemented the revised disclosures required for fiscal years ending
after December 15, 2003, beginning with the 2003 annual financial statements
and will implement the interim disclosure requirements and annual benefit
payment disclosures in all subsequent interim and annual financial statements.

In November of 2003, the Emerging Issues Task Force (EITF) reached consensus on
EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (EITF 03-1) that certain quantitative and
qualitative disclosures are required for equity and fixed maturity
securities that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized. The guidance requires
companies to disclose the aggregate amount of

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unrealized losses and the related
fair value of investments with unrealized losses for securities that have been
in an unrealized loss position for less than 12 months and separately for those
that have been in an unrealized loss position for over 12 months, by investment
category. The Company has adopted the disclosure requirements in these
financial statements. Further discussion on the meaning of
other-than-temporary impairments for EITF 03-1 is expected at a future EITF
meeting.

FORWARD-LOOKING STATEMENTS

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

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



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



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



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



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



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



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



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



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

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 fair value at risk
and the resulting effect on stockholders equity. The analysis presents the
sensitivity of the fair 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 fair value of the
Companys interest sensitive assets and liabilities that were held on December
31, 2003 and December 31, 2002 due to instantaneous parallel increases in the
period end yield curve of 100 and 150 basis points.

The sensitivity analysis also assumes an instantaneous 10% and 20% decline in
the foreign currency exchange rates versus the United States dollar from their
levels at December 31, 2003 and December 31, 2002, with all other variables
held constant.

Equity price risk was measured assuming an instantaneous 10% and 25% decline in
the S&P 500 Index (Index) from its level at December 31, 2003 and December 31,
2002 with all other variables held constant. The Companys equity holdings
were assumed to be highly and positively correlated with the Index. At
December 31, 2003, a 10% and 25% decrease in the Index would result in a $245
million and $612 million decrease compared to $234 million and $585 million
decrease at December 31, 2002, in the market value of the Companys equity
investments.

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Of these amounts, under the 10% and 25% scenarios, $168 million and $418
million at December 31, 2003 and $113 million and $284 million at December 31,
2002 pertained to decreases in the market value of the separate account
investments. These decreases would substantially be offset by decreases in
related separate account liabilities to customers. Similarly, increases in the
market value of the separate account equity investments would also be offset by
increases in the same related separate account liabilities by the same
approximate amounts.

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

Market Risk Scenario 1

Increase (Decrease)Fair
    
    Interest
    
    Currency
    
    EquityDecember 31, 2003
    
    Value
    
    Rate Risk
    
    Risk
    
    Risk(In millions)Held for Other Than Trading Purposes:General account:Fixed maturity securities
    
    $
    28,678
    
    
    $
    (1,979
    )
    
    $
    (35
    )
    
    $
    (13
    )Equity securities
    
    
    527
    
    
    
    
    
    
    
    (26
    )
    
    
    (51
    )Short term investments
    
    
    7,538
    
    
    
    (5
    )
    
    
    (16
    )
    
    
    Limited partnerships
    
    
    1,117
    
    
    
    5
    
    
    
    
    
    
    
    (13
    )Other invested assets
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    Interest rate caps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (5
    )
    
    
    3
    
    
    
    
    
    
    
    Other derivative securities
    
    
    12
    
    
    
    (108
    )
    
    
    1
    
    
    
    Total general account
    
    
    38,100
    
    
    
    (2,084
    )
    
    
    (76
    )
    
    
    (77
    )Separate accounts:Fixed maturity securities
    
    
    1,809
    
    
    
    (113
    )
    
    
    
    
    
    
    Equity securities
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Short term investments
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    (41
    )Total separate accounts
    
    
    2,423
    
    
    
    (113
    )
    
    
    
    
    
    
    (53
    )Total securities held for other than trading purposes
    
    
    40,523
    
    
    
    (2,197
    )
    
    
    (76
    )
    
    
    (130
    )Held for Trading Purposes:Separate accounts:Fixed maturity securities
    
    
    304
    
    
    
    (4
    )
    
    
    
    
    
    
    (1
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short term investments
    
    
    414
    
    
    
    
    
    
    
    
    
    
    
    Limited partnerships
    
    
    419
    
    
    
    2
    
    
    
    
    
    
    
    (3
    )Equity indexed futures
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (111
    )Other derivative securities
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    Total securities held for trading purposes
    
    
    1,137
    
    
    
    (1
    )
    
    
    
    
    
    
    (115
    )Total securities
    
    $
    41,660
    
    
    $
    (2,198
    )
    
    $
    (76
    )
    
    $
    (245
    )Debt (carrying value)
    
    $
    1,904
    
    
    $
    (70
    )
    
    $
    
    
    
    $
    


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Market Risk Scenario 1

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


101



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

Market Risk Scenario 2

Increase (Decrease)Fair
    
    Interest
    
    Currency
    
    EquityDecember 31, 2003
    
    Value
    
    Rate Risk
    
    Risk
    
    Risk(In millions)Held for Other Than Trading Purposes:General account:Fixed maturity securities
    
    $
    28,678
    
    
    $
    (2,896
    )
    
    $
    (71
    )
    
    $
    (32
    )Equity securities
    
    
    527
    
    
    
    
    
    
    
    (52
    )
    
    
    (129
    )Short term investments
    
    
    7,538
    
    
    
    (7
    )
    
    
    (32
    )
    
    
    Limited partnerships
    
    
    1,117
    
    
    
    7
    
    
    
    
    
    
    
    (33
    )Other invested assets
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    Interest rate caps
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Interest rate swaps
    
    
    (5
    )
    
    
    4
    
    
    
    
    
    
    
    Other derivative securities
    
    
    12
    
    
    
    (184
    )
    
    
    3
    
    
    
    Total general account
    
    
    38,100
    
    
    
    (3,075
    )
    
    
    (152
    )
    
    
    (194
    )Separate accounts:Fixed maturity securities
    
    
    1,809
    
    
    
    (165
    )
    
    
    
    
    
    
    Equity securities
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    (29
    )Short term investments
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    Other invested assets
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    (103
    )Total separate accounts
    
    
    2,423
    
    
    
    (165
    )
    
    
    
    
    
    
    (132
    )Total securities held for other than trading purposes
    
    
    40,523
    
    
    
    (3,240
    )
    
    
    (152
    )
    
    
    (326
    )Held for Trading Purposes:Separate accounts:Fixed maturity securities
    
    
    304
    
    
    
    (6
    )
    
    
    
    
    
    
    (2
    )Equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Short term investments
    
    
    414
    
    
    
    (1
    )
    
    
    
    
    
    
    Limited partnerships
    
    
    419
    
    
    
    3
    
    
    
    
    
    
    
    (7
    )Equity indexed futures
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    (277
    )Other derivative securities
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    Total securities held for trading purposes
    
    
    1,137
    
    
    
    (1
    )
    
    
    
    
    
    
    (286
    )Total securities
    
    $
    41,660
    
    
    $
    (3,241
    )
    
    $
    (152
    )
    
    $
    (612
    )Debt (carrying value)
    
    $
    1,904
    
    
    $
    (102
    )
    
    $
    
    
    
    $
    


102



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##### Table of Contents



Market Risk Scenario 2

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


103



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CNA Financial Corporation
Consolidated Statements of Operations

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions, except per share data)Revenues:Net earned premiums
    
    $
    9,214
    
    
    $
    10,213
    
    
    $
    9,288Net investment income
    
    
    1,647
    
    
    
    1,730
    
    
    
    1,856Realized investment gains (losses), net of participating
policyholders and minority interests
    
    
    460
    
    
    
    (252
    )
    
    
    1,262Other revenues
    
    
    395
    
    
    
    595
    
    
    
    683Total revenues
    
    
    11,716
    
    
    
    12,286
    
    
    
    13,089Claims, Benefits and Expenses:Insurance claims and policyholders benefits
    
    
    9,916
    
    
    
    8,392
    
    
    
    11,279Amortization of deferred acquisition costs
    
    
    1,965
    
    
    
    1,791
    
    
    
    1,804Other operating expenses
    
    
    2,057
    
    
    
    1,649
    
    
    
    1,913Restructuring and other related charges
    
    
    
    
    
    
    (37
    )
    
    
    251Interest
    
    
    130
    
    
    
    150
    
    
    
    157Total claims, benefits and expenses
    
    
    14,068
    
    
    
    11,945
    
    
    
    15,404(Loss) income from continuing operations before income tax
and minority interest
    
    
    (2,352
    )
    
    
    341
    
    
    
    (2,315
    )Income tax benefit (expense)
    
    
    913
    
    
    
    (68
    )
    
    
    744Minority interest
    
    
    6
    
    
    
    (26
    )
    
    
    (21
    )(Loss) income from continuing operations
    
    
    (1,433
    )
    
    
    247
    
    
    
    (1,592
    )(Loss) income from discontinued operations, net of tax of
$0, $9, and $2
    
    
    
    
    
    
    (35
    )
    
    
    11(Loss) income before cumulative effects of changes in
accounting principles
    
    
    (1,433
    )
    
    
    212
    
    
    
    (1,581
    )Cumulative effects of changes in accounting principles,
net of tax of $0, $7, and $33
    
    
    
    
    
    
    (57
    )
    
    
    (61
    )Net (loss) income
    
    $
    (1,433
    )
    
    $
    155
    
    
    $
    (1,642
    )Basic and diluted (loss) earnings per share:(Loss) income from continuing operations
    
    $
    (6.58
    )
    
    $
    1.10
    
    
    $
    (8.20
    )(Loss) income from discontinued operations, net of tax
    
    
    
    
    
    
    (0.16
    )
    
    
    0.06(Loss) income before cumulative effects of changes in
accounting principles
    
    
    (6.58
    )
    
    
    0.94
    
    
    
    (8.14
    )Cumulative effects of changes in accounting principles, net
of tax
    
    
    
    
    
    
    (0.26
    )
    
    
    (0.32
    )Basic and diluted (loss) earnings per share available to
common stockholders
    
    $
    (6.58
    )
    
    $
    0.68
    
    
    $
    (8.46
    )Weighted average outstanding common stock and common stock
equivalents
    
    
    227.0
    
    
    
    223.6
    
    
    
    194.0


The accompanying Notes are an
integral part of these Consolidated Financial Statements.

104



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CNA Financial Corporation
Consolidated Balance Sheets

December 31
    
    2003
    
    2002(In millions, except share data)AssetsInvestments:Fixed maturity securities available-for-sale, at fair value, (amortized cost of $27,564 and $25,533)
    
    $
    28,678
    
    
    $
    26,275Equity securities available-for-sale, at fair value, (cost of $293 and $519)
    
    
    527
    
    
    
    666Mortgage loans and real estate (less accumulated depreciation of $10 and $55)
    
    
    25
    
    
    
    57Policy loans
    
    
    175
    
    
    
    180Limited partnership investments
    
    
    1,117
    
    
    
    1,060Other invested assets
    
    
    40
    
    
    
    47Short term investments, at cost which approximates fair value
    
    
    7,538
    
    
    
    7,008Total investments
    
    
    38,100
    
    
    
    35,293Cash
    
    
    139
    
    
    
    126Reinsurance receivables (less allowance for doubtful accounts of $573 and $196)
    
    
    15,681
    
    
    
    12,500Insurance receivables (less allowance for doubtful accounts of $375 and $156)
    
    
    2,695
    
    
    
    3,007Accrued investment income
    
    
    323
    
    
    
    300Receivables for securities sold
    
    
    836
    
    
    
    455Deferred acquisition costs
    
    
    2,533
    
    
    
    2,551Prepaid reinsurance premiums
    
    
    1,252
    
    
    
    1,345Federal income taxes recoverable (includes $594 and $0 due from Loews Corporation)
    
    
    607
    
    
    
    Deferred income taxes
    
    
    600
    
    
    
    723Property and equipment at cost (less accumulated depreciation of $727 and $771)
    
    
    314
    
    
    
    369Goodwill and other intangible assets
    
    
    162
    
    
    
    174Other assets
    
    
    1,583
    
    
    
    1,785Separate account business
    
    
    3,678
    
    
    
    3,103Total assets
    
    $
    68,503
    
    
    $
    61,731


105



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##### Table of Contents



2003
    
    2002Liabilities and Stockholders EquityLiabilities:Insurance reserves:Claim and claim adjustment expenses
    
    $
    31,730
    
    
    $
    27,370Unearned premiums
    
    
    4,891
    
    
    
    4,820Future policy benefits
    
    
    8,161
    
    
    
    7,409Policyholders funds
    
    
    601
    
    
    
    580Collateral on loaned securities and derivatives
    
    
    442
    
    
    
    552Payables for securities purchased
    
    
    1,902
    
    
    
    464Participating policyholders funds
    
    
    118
    
    
    
    119Short term debt
    
    
    263
    
    
    
    420Long term debt
    
    
    1,641
    
    
    
    1,872Reinsurance balances payable
    
    
    3,432
    
    
    
    2,763Federal income taxes payable (includes $0 and $13 due to Loews Corporation)
    
    
    
    
    
    
    29Other liabilities
    
    
    2,436
    
    
    
    2,573Separate account business
    
    
    3,678
    
    
    
    3,103Total liabilities
    
    
    59,295
    
    
    
    52,074Commitments and contingencies (Notes A, B, F, G, I, K and S)Minority interest
    
    
    256
    
    
    
    256Stockholders equity:Preferred stock (12,500,000
shares authorized)Series H Issue (no par value; $100,000 stated value; 7,500 shares issued; held by Loews Corporation)Series I Issue (no par value: $23,200 stated value: 32,327 shares issued
convertible to 32,327,015 shares of common stock; held by Loews
Corporation)
    
    
    1,500
    
    
    
    750Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,270
shares issued; and 223,617,337 and 223,608,868 shares outstanding)
    
    
    565
    
    
    
    565Additional paid-in capital
    
    
    1,031
    
    
    
    1,031Retained earnings
    
    
    5,160
    
    
    
    6,593Accumulated other comprehensive income
    
    
    841
    
    
    
    604Treasury stock (2,232,933 and 2,241,402 shares), at cost
    
    
    (69
    )
    
    
    (70
    )9,028
    
    
    
    9,473Notes receivable for the issuance of common stock
    
    
    (76
    )
    
    
    (72
    )Total stockholders equity
    
    
    8,952
    
    
    
    9,401Total liabilities and stockholders equity
    
    $
    68,503
    
    
    $
    61,731


The accompanying Notes are an
integral part of these Consolidated Financial Statements.

106



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CNA Financial Corporation
Consolidated Statements of Cash Flows

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Cash Flows from Operating Activities:Net (loss) income
    
    $
    (1,433
    )
    
    $
    155
    
    
    $
    (1,642
    )Adjustments to reconcile net income (loss) to net cash flows used by
operating activities:Cumulative effects of changes in accounting principles, net of tax
    
    
    
    
    
    
    57
    
    
    
    61Changes in bad debt provision for insurance and reinsurance receivables
    
    
    602
    
    
    
    40
    
    
    
    57Loss on disposal of property and equipment
    
    
    22
    
    
    
    24
    
    
    
    83Minority interest
    
    
    (6
    )
    
    
    26
    
    
    
    21Deferred income tax provision
    
    
    67
    
    
    
    7
    
    
    
    62Realized investment (gains) losses, net of participating
policyholders and minority interests
    
    
    (460
    )
    
    
    252
    
    
    
    (1,265
    )Equity method (income) loss
    
    
    (220
    )
    
    
    25
    
    
    
    (58
    )Realized loss from discontinued operations, net of tax
    
    
    
    
    
    
    37
    
    
    
    Amortization of intangibles
    
    
    
    
    
    
    
    
    
    
    17Amortization of bond discount
    
    
    (79
    )
    
    
    (143
    )
    
    
    (268
    )Depreciation
    
    
    86
    
    
    
    98
    
    
    
    136Changes in:Receivables, net
    
    
    (3,535
    )
    
    
    986
    
    
    
    (3,406
    )Deferred acquisition costs
    
    
    (62
    )
    
    
    (162
    )
    
    
    (17
    )Accrued investment income
    
    
    (49
    )
    
    
    69
    
    
    
    19Federal income taxes recoverable/payable
    
    
    (642
    )
    
    
    655
    
    
    
    (596
    )Prepaid reinsurance premiums
    
    
    93
    
    
    
    (124
    )
    
    
    224Reinsurance balances payable
    
    
    670
    
    
    
    145
    
    
    
    1,342Insurance reserves
    
    
    6,710
    
    
    
    (931
    )
    
    
    4,616Other, net
    
    
    (4
    )
    
    
    (176
    )
    
    
    15Total adjustments
    
    
    3,193
    
    
    
    885
    
    
    
    1,043Net cash flows provided (used) by operating activities
    
    $
    1,760
    
    
    $
    1,040
    
    
    $
    (599
    )Cash Flows from Investing Activities:Purchases of fixed maturity securities
    
    $
    (61,419
    )
    
    $
    (63,167
    )
    
    $
    (56,979
    )Proceeds from fixed maturity securities:Sales
    
    
    52,805
    
    
    
    61,919
    
    
    
    51,112Maturities, calls and redemptions
    
    
    6,435
    
    
    
    3,108
    
    
    
    3,930Purchases of equity securities
    
    
    (281
    )
    
    
    (814
    )
    
    
    (1,287
    )Proceeds from sales of equity securities
    
    
    578
    
    
    
    1,197
    
    
    
    2,311Change in short term investments
    
    
    (845
    )
    
    
    (3,249
    )
    
    
    2,028Change in collateral on loaned securities and derivatives
    
    
    (111
    )
    
    
    (371
    )
    
    
    (1,322
    )Change in other investments
    
    
    300
    
    
    
    167
    
    
    
    (182
    )Purchases of property and equipment
    
    
    (65
    )
    
    
    (88
    )
    
    
    (124
    )Proceeds from sales of property and equipment
    
    
    
    
    
    
    
    
    
    
    264Acquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (19
    )Dispositions
    
    
    422
    
    
    
    (178
    )
    
    
    7Other, net
    
    
    48
    
    
    
    (12
    )
    
    
    56Net cash flows used by investing activities
    
    $
    (2,133
    )
    
    $
    (1,488
    )
    
    $
    (205
    )


107



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2003
    
    2002
    
    2001Cash Flows from Financing Activities:Issuance of preferred stock
    
    $
    750
    
    
    $
    750
    
    
    $
    Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    1,006Principal payments on debt
    
    
    (387
    )
    
    
    (341
    )
    
    
    (664
    )Proceeds from issuance of debt
    
    
    
    
    
    
    65
    
    
    
    500Return of policyholder account balances on investment contracts
    
    
    25
    
    
    
    (44
    )
    
    
    (66
    )Receipts from investment contracts credited to policyholder account balances
    
    
    1
    
    
    
    1
    
    
    
    2Other
    
    
    (3
    )
    
    
    1
    
    
    
    5Net cash flows provided by financing activities
    
    
    386
    
    
    
    432
    
    
    
    783Net change in cash
    
    
    13
    
    
    
    (16
    )
    
    
    (21
    )Cash, beginning of year
    
    
    126
    
    
    
    142
    
    
    
    163Cash, end of year
    
    $
    139
    
    
    $
    126
    
    
    $
    142Supplemental Disclosures of Cash Flow Information:Cash paid (received):Interest
    
    $
    134
    
    
    $
    195
    
    
    $
    147Federal income taxes
    
    
    (369
    )
    
    
    (612
    )
    
    
    (288
    )Non-cash transactions:Notes receivable for the issuance of common stock
    
    
    4
    
    
    
    4
    
    
    
    4


The accompanying Notes are an
integral part of these Consolidated Financial Statements.

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CNA Financial Corporation
Consolidated Statements of Stockholders Equity

NotesAccumulated
    
    
    
    
    
    ReceivableAdditional
    
    
    
    
    
    Other
    
    
    
    
    
    For the
    
    TotalPreferred
    
    Common
    
    Paid-in
    
    Retained
    
    Comprehensive
    
    Treasury
    
    Issuance of
    

StockholdersStock
    
    Stock
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    Stock
    
    Common Stock
    
    Equity(In millions)Balance, January 1, 2001
    
    $
    
    
    
    $
    464
    
    
    $
    126
    
    
    $
    8,080
    
    
    $
    873
    
    
    $
    (71
    )
    
    $
    (72
    )
    
    $
    9,400Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,642
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,642
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (647
    )
    
    
    
    
    
    
    
    
    
    
    (647
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,289
    )Issuance of common stock
    
    
    
    
    
    
    101
    
    
    
    905
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,006Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Decrease in notes receivable from
issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Balance, December 31, 2001
    
    
    
    
    
    
    565
    
    
    
    1,031
    
    
    
    6,438
    
    
    
    226
    
    
    
    (70
    )
    
    
    (68
    )
    
    
    8,122Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    
    
    
    
    378Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    533Issuance of Series H preferred stock
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Increase in notes receivable from
issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Balance, December 31, 2002
    
    
    750
    
    
    
    565
    
    
    
    1,031
    
    
    
    6,593
    
    
    
    604
    
    
    
    (70
    )
    
    
    (72
    )
    
    
    9,401Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,433
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,433
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    237Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,196
    )Issuance of Series I preferred stock
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Increase in notes receivable from
issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Balance, December 31, 2003
    
    $
    1,500
    
    
    $
    565
    
    
    $
    1,031
    
    
    $
    5,160
    
    
    $
    841
    
    
    $
    (69
    )
    
    $
    (76
    )
    
    $
    8,952


The accompanying Notes are an integral part of these Consolidated Financial Statements

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Notes to Consolidated Financial Statements

Note A. Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements include the accounts of CNA Financial
Corporation (CNAF) and its controlled subsidiaries. Collectively, CNAF and its
subsidiaries are referred to as CNA or the Company. CNAs property and
casualty insurance operations are primarily conducted by Continental Casualty
Company (CCC) and The Continental Insurance Company (CIC). CNAs life and
group insurance operations are primarily conducted by Continental Assurance
Company (CAC) and Valley Forge Life Insurance Company (VFL). CNA Group Life
Assurance Company (CNAGLA) was sold to Hartford Financial Services Group, Inc.
(Hartford) on December 31, 2003. For further information see Note P. Loews
Corporation (Loews) owned approximately 90% of the outstanding common stock and
100% of the Series H and Series I preferred stock of CNAF as of December 31,
2003.

The accompanying Consolidated Financial Statements have been prepared in
conformity with accounting principles generally accepted in the United States
of America (GAAP). All significant intercompany amounts have been eliminated.
Certain amounts applicable to prior years have been reclassified to conform to
the current year presentation.

The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.

Business

During 2003, CNA completed a strategic review of its operations and decided to
concentrate efforts on its property and casualty business. As a result of this
review, and 2003 charges of $1,849 million after-tax ($2,845 million pretax) related to unfavorable net prior
year development and a $396 million after-tax ($610 million pretax) increase in the provision for reinsurance
and insurance receivables, a capital plan was developed to replenish statutory
capital of the property and casualty subsidiaries adversely impacted by these
charges. A summary of the capital plan, related actions, and other significant
2003 business decisions is discussed below:

The capital plan, consists of the sale
in November of 2003 of $750 million of a new series of CNA convertible preferred stock to Loews
Corporation (Loews), the 90% owner of CNAs outstanding shares, and a
commitment from Loews for additional capital support of up to $500 million by
February 27, 2004 through the purchase of surplus notes of CCC, CNAs principal
insurance subsidiary, in the event certain additions to CCCs statutory capital
were not achieved through asset sales. In addition, Loews committed to an additional
$150 million by March 31, 2004, in a form to be determined,
to support the statutory capital of CCC in the event of additional
shortfalls in relation to business and asset sales.

On December 31, 2003, CNA completed the sale of the majority of its Group
Benefits business to Hartford. The business sold included group life and
accident, short and long term disability and certain other products. CNAs
group long term care and specialty medical businesses were excluded from the
sale. Consideration from the sale was approximately $530 million, of which
$485 million was received

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on December 31, 2003, resulting in an after-tax realized investment loss on the
sale of $130 million during 2003. See Note P for further information.

In February of 2004, CNA entered into a definitive agreement to sell its
individual life insurance business to Swiss Re Life & Health America Inc.
(Swiss Re). See Note T for further information.

As part of the capital plan, Loews
purchased $346 million of CCC surplus notes in February of 2004. See
Note L for further information.

In addition to the asset sales described above, and as part of the decision to
focus on its property and casualty business, CNA withdrew from the assumed
reinsurance business during 2003. In October of 2003, the Company entered into
an agreement to sell the renewal rights for most of the treaty business of CNA
Re to Folksamerica Reinsurance Company (Folksamerica). Under the terms of the
transaction, Folksamerica will compensate CNA based upon the amount of premiums
renewed by Folksamerica over the next two contract renewals. CNA will manage
the run-off of its retained liabilities.

Insurance Operations

Premiums:Insurance premiums on property and casualty and accident and health
insurance contracts are recognized in proportion to the underlying risk insured
which principally is earned ratably over the duration of the policies after
deductions for ceded insurance premiums. The reserve for unearned premiums on
these contracts represents the portion of premiums written relating to the
unexpired terms of coverage.

An estimated allowance for doubtful accounts is recorded on the basis of
periodic evaluations of balances due from insurers, managements experience and
current economic conditions.

Property and casualty contracts that are retrospectively rated contain
provisions that result in an adjustment to the initial policy premium depending
on the contract provisions and loss experience of the insured during the
experience period. For such contracts, the Company estimates the amount of
ultimate premiums that the Company may earn upon completion of the experience
period and recognizes either an asset or a liability for the difference between
the initial policy premium and the estimated ultimate premium. The Company
adjusts such estimated ultimate premium amounts during the course of the
experience period based on actual results to date. The resulting adjustment is
recorded as either a reduction of or an increase to the earned premiums for the
period.

Revenues on interest-sensitive life insurance contracts are composed of
contract charges and fees, which are recognized over the coverage period.
Premiums for other life insurance products and annuities are recognized as
revenue when due after deductions for ceded insurance premiums.

Claim and claim adjustment expense reserves:Claim and claim adjustment
expense reserves, except reserves for structured settlements not associated
with asbestos and environmental pollution and mass tort (APMT), workers
compensation lifetime claims and accident and health disability claims, are not
discounted and are based on 1) case basis estimates for losses reported on
direct business, adjusted in the aggregate for ultimate loss expectations; 2)
estimates of incurred but not reported losses; 3) estimates of losses on
assumed reinsurance; 4) estimates of future expenses to be incurred in the
settlement of claims; and 5) estimates of salvage and subrogation recoveries.
Management considers current conditions and trends as well as past Company and
industry experience in establishing these estimates. The effects of inflation,
which can be significant, are implicitly considered in the reserving process
and are part of the

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recorded reserve balance. Ceded claim and claim adjustment expense reserves
are reported as a component of reinsurance receivables in the Consolidated
Balance Sheets.

Structured settlements have been negotiated for certain property and casualty
insurance claims. Structured settlements are agreements to provide fixed
periodic payments to claimants. Certain structured settlements are funded by
annuities purchased from CAC for which the related annuity obligations are
reported in future policy benefits reserves. Obligations for structured
settlements not funded by annuities are included in claim and claim adjustment
expense reserves and carried at present values determined using interest rates
ranging from 4.7% to 7.5% at December 31, 2003. At December 31, 2003 and 2002,
the discounted reserves for unfunded structured settlements were $898 million
and $884 million, net of discount of $1,429 million and $1,466 million.

Workers compensation lifetime claim reserves and accident and health disability
claim reserves are calculated using mortality and morbidity assumptions based
on Company and industry experience, and are discounted at interest rates that
range from 3.5% to 6.5% at December 31, 2003. At December 31, 2003 and 2002,
such discounted reserves totaled $2,835 million and $2,537 million, net of
discount of $851 million and $974 million.

Future policy benefits reserves:Reserves for traditional life insurance
products (whole and term life products) and long term care products are
computed using the net level premium method, which incorporates actuarial
assumptions as to interest rates, mortality, morbidity, persistency,
withdrawals and expenses. Actuarial assumptions generally vary by plan, age at
issue and policy duration, and include a margin for adverse deviation.
Interest rates range from 2.3% to 9.4%, and mortality, morbidity and withdrawal
assumptions are based on Company and industry experience prevailing at the time
of issue. Expense assumptions include the estimated effects of inflation and
expenses to be incurred beyond the premium paying period. Reserves for
interest-sensitive contracts are equal to the account balances that accrue to
the benefit of the policyholders. Interest crediting rates ranged from 3.9% to
6.5% for the three years ended December 31, 2003.

Policyholders funds reserves:Policyholders funds reserves include reserves
for universal life insurance contracts and investment contracts without life
contingencies. The liability for policy benefits for universal life-type
contracts is equal to the balance that accrues to the benefit of policyholders,
including credited interest, amounts that have been assessed to compensate the
Company for services to be performed over future periods, and any amounts
previously assessed against policyholders that are refundable on termination of
the contract. For investment contracts, policyholder liabilities are equal to
the accumulated policy account values, which consist of an accumulation of
deposit payments plus credited interest, less withdrawals and amounts assessed
through the end of the period.

Guaranty fund and other insurance-related assessments:CNA accounts for
guaranty fund and other insurance assessments in accordance with Statement of
Position No. 97-3, Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments. Liabilities for guaranty fund and
other insurance-related assessments are accrued when an assessment is probable,
when it can be reasonably estimated, and when the event obligating the entity
to pay an imposed or probable assessment has occurred. Liabilities for
guaranty funds and other insurance-related assessments are not discounted and
are included as part of other liabilities in the Consolidated Balance Sheets.
As of December 31, 2003 and 2002, the liability balance was $70 million and $63
million. As of December 31, 2003 and 2002, included in other assets were $7
million and $32 million of related assets for premium tax offsets. The related
asset is limited to the amount that is able to be assessed on future premium
collections or policy surcharges from business written or committed to be
written.

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

Reinsurance contracts that do not effectively transfer the underlying economic
risk of loss on policies written by the Company are recorded using the deposit
method of accounting, which requires that premium paid or received by the
ceding company or assuming company be accounted for as a deposit asset or
liability. The Company primarily records these deposits as either reinsurance
receivables or other assets for ceded recoverables and reinsurance balances
payable or other liabilities for assumed liabilities. At December 31, 2003 and
2002, the Company had approximately $380 million and $618 million recorded as
deposit assets and $369 million and $569 million recorded as deposit
liabilities.

Income on reinsurance contracts accounted for under the deposit method is
recognized using an effective yield based on the anticipated timing of
payments and the remaining life of the contract. When the estimate of timing
of payments changes, the effective yield is recalculated to reflect actual
payments to date and the estimated timing of future payments. The deposit
asset or liability is adjusted to the amount that would have existed had the
new effective yield been applied since the inception of the contract. This
adjustment is reflected in other revenue or other operating expense as
appropriate.

Participating insurance:Policyholder dividends are accrued using an estimate
of the amount to be paid based on underlying contractual obligations under
policies and applicable state laws. When limitations exist on the amount of
net income from participating life insurance contracts that may be distributed
to policyholders, the policyholders share of net income on those contracts
that cannot be distributed is excluded from stockholders equity by a charge to
operations and the establishment of a corresponding liability.

Deferred acquisition costs:Costs, including commissions, premium taxes and
certain underwriting and policy issuance costs, which vary with and are related
primarily to the acquisition of property and casualty insurance business, are
deferred and amortized ratably over the period the related premiums are earned.
Anticipated investment income is considered in the determination of the
recoverability of deferred acquisition costs.

The excess of first-year commissions over renewal commissions and other
first-year costs of acquiring life insurance business, such as agency and
policy issuance expenses, which vary with and are related primarily to the
production of new and renewal business, have been deferred and are amortized
with interest over the expected life of the related contracts. The excess of
first-year ceded expense allowances over renewal ceded expense allowances
reduces applicable unamortized deferred acquisition costs.

Deferred acquisition costs related to non-participating traditional life
insurance and accident and health insurance are amortized over the
premium-paying period of the related policies using assumptions consistent with
those used for computing future policy benefits reserves for such contracts.
Assumptions as to anticipated premiums are made at the date of policy issuance
or acquisition and are consistently applied during the lives of the contracts.
Deviations from estimated experience are included in results of operations when
they occur. For these contracts, the amortization period is typically the
estimated life of the policy.

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For universal life and cash value annuity contracts, the amortization of
deferred acquisition costs is recorded in proportion to the present value of
estimated gross margins or profits. The gross margins or profits result from
actual earned interest minus actual credited interest, actual costs of
insurance (mortality charges) minus expected mortality, actual expense charges
minus expected maintenance expenses and surrender charges. Amortization
interest rates are based on rates in effect at the inception or acquisition of
the contracts or the latest revised rate applied to the remaining benefit
period, according to product line. Actual gross margins or profits can vary
from the Companys estimates resulting in increases or decreases in the rate of
amortization. When appropriate, the Company revises its assumptions of the
estimated gross margins or profits of these contracts, and the cumulative
amortization is re-estimated and adjusted through current results of
operations. To the extent that unrealized gains or losses on
available-for-sale securities would result in an adjustment of deferred
acquisition costs had they actually been realized, an adjustment is recorded to
deferred acquisition costs and to unrealized investment gains or losses within
stockholders equity.

Deferred acquisition costs are recorded net of ceding commissions and other
ceded acquisition costs. The Company evaluates deferred acquisition costs for
recoverability; adjustments, if necessary, are recorded in current results of
operations.

Investments in life settlement contracts and related revenue recognition:The
Company has purchased investments in life settlement contracts. Under a life
settlement contract, CNA obtains the rights of being the owner and beneficiary
to an underlying life insurance policy. The carrying value of each contract at
purchase and at the end of each reporting period is equal to the cash surrender
value of the policy in accordance with Financial Accounting Standards Board
(FASB) Technical Bulletin 85-4 Accounting for Purchases of Life
Insurance (FTB 85-4). Amounts paid to purchase these contracts that
are in excess of the cash surrender value, at the date of purchase, are
expensed immediately. Periodic maintenance costs, such as premiums, necessary
to keep the underlying policy inforce are expensed as incurred and are included
in other operating expenses. Revenue is recognized and included in other
revenue in the Consolidated Statements of Operations when the life insurance
policy underlying the life settlement contract matures.

Separate Account Business

CAC and VFL write investment and annuity contracts. The supporting assets and
liabilities of certain of these contracts are legally segregated and reported
as assets and liabilities of separate account business. CAC and VFL guarantee
principal and a specified return to the contract holders on approximately 47%
and 58% of the separate account business at December 31, 2003 and 2002.
Substantially all assets of the separate account business are carried at fair
value. Separate account liabilities are carried at contract values.

During July of 2002, the Company entered into an agreement, whereby The Phoenix
Companies, Inc. (Phoenix) acquired the variable life and annuity business of
VFL through a coinsurance arrangement, with modified coinsurance on the
separate accounts.

Investments

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

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a component of other comprehensive income. Investments are written down to
fair value and losses are recognized in income when a decline in value is
determined to be other-than-temporary.

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

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

The Companys limited partnership investments are recorded at fair value and
typically reflect a reporting lag of up to three months. Fair value represents
CNAs equity in the partnerships net assets as determined by the General
Partner. Changes in fair value, which represents changes in partnerships net
assets, are recorded within net investment income. 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.

Cash equivalents are short-term, highly liquid investments that are both
readily convertible into known amounts of cash and so near to maturity that
they present insignificant risk of changes in value due to changing interest
rates.

Other invested assets include certain derivative securities. Investments in
derivative securities are carried at fair value with changes in fair value
reported as a component of realized gains or losses or other comprehensive
income, depending on their hedge designation. Changes in the fair value of
derivative securities which are not designated as hedges, are reported as a
component of realized gains or losses.

Realized Investment gains and losses:All securities sold resulting in
investment gains and losses are recorded on the trade date. Realized investment
gains and losses are determined on the basis of the cost or amortized cost of
the specific securities sold.

Equity in unconsolidated affiliates:CNA uses the equity method of accounting
for investments in companies in which its ownership interest of the voting
shares of an investee company enables CNA to influence the operating or
financial decisions of the investee company, but CNA is without a controlling
financial interest. CNAs proportionate share of equity in net income of these
unconsolidated affiliates is reported in other revenues.

Securities lending activities:CNA lends securities to unrelated parties,
primarily major brokerage firms. Borrowers of these securities must deposit
collateral with CNA of at least 102% of the fair value of the securities loaned
if the collateral is cash or securities. CNA maintains effective control over
all loaned securities and, therefore, continues to report such securities as
fixed maturity securities in the Consolidated Balance Sheets.

Cash collateral received on these transactions is invested in short term
investments with an offsetting liability recognized for the obligation to
return the collateral. Non-cash collateral, such as securities or

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letters of credit, received by the Company are not reflected as assets of the
Company as there exists no right to sell or repledge the collateral. The fair
value of collateral held and included in short term investments was $430
million and $544 million at December 31, 2003 and 2002. The fair value of
non-cash collateral was $505 million and $777 million at December 31, 2003 and
2002.

Derivative Financial Instruments

Effective January 1, 2001, the Company accounts for derivatives and hedging
activities in accordance with Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended. The initial adoption of SFAS 133
did not have a significant impact on the equity of the Company; however,
adoption of SFAS 133 resulted in an after-tax decrease to 2001 net income of
$61 million. Of this transition amount, approximately $58 million related to
investments and investment-related derivatives. Because the Company already
carried its investment and investment-related derivatives at fair value through
other comprehensive income, there was an equal and offsetting favorable
adjustment of $58 million to stockholders equity (accumulated other
comprehensive income). The remainder of the transition adjustment is primarily
attributable to collateralized debt obligation (CDOs) products that are
classified as derivatives under 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, requires
little or no initial investment and can be net settled. Derivatives include,
but are not limited to, the following types of financial instruments: interest
rate swaps, interest rate caps and floors, put and call options, warrants,
futures, forwards, 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 in accordance with SFAS 133 when the embedded
derivative is not clearly and closely related to the host instrument. In
addition, non-investment instruments, including certain types of insurance
contracts, mainly CDOs and synthetic guaranteed investment contracts (synthetic
GICs) that have historically not been considered derivatives, may be
derivatives or contain embedded derivatives under SFAS 133.

CDOs represent a credit enhancement product that is typically structured in the
form of a swap. The Company has determined that this product is a derivative
under SFAS 133. Changes in the estimated fair value of CDOs, like other
derivative financial instruments with no hedge designation, are recorded in
realized gains or losses as appropriate. The net impact of CDOs was a loss
of $1 million and $6 million for the years ended December 31, 2003 and 2002 and
income of $5 million for the year ended December 31, 2001. The Company no
longer issues this product.

In the normal course of business, the Company, through Group Operations,
markets synthetic GICs to institutional customers. These contracts are
accounted for as derivative financial instruments. Synthetic GICs are
guaranteed investment contracts that simulate the performance of a traditional
GIC through the use of financial instruments. A key difference between a
synthetic GIC and a traditional GIC is that the contract owner owns the
financial instruments underlying the synthetic GIC; whereas, the contract owner
owns only the contract itself with a traditional GIC. The Company mitigates
its exposure under these contracts by maintaining the ability to reset the
crediting rate on a monthly/quarterly basis. This rate reset effectively
passes any cash flow volatility and asset underperformance back to the contract
owner.

SFAS 133 requires that all derivatives be accounted for on a fair value basis.
The Companys derivatives are reported as other invested assets, with the
exception of CDOs and synthetic GICs, which are reported as other assets and/or
other liabilities. Embedded derivative instruments subject to bifurcation are
also accounted for on a fair value basis and reported together with the host
contract. If certain criteria are met, a derivative may be specifically
designated as a hedge of exposures to changes in fair value, cash flows or

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foreign currency exchange rates. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the nature of
any hedge designation thereon.

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

The Companys accounting for changes in the fair value of general account
derivatives is as follows:

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


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

CNA uses investment derivatives in the normal course of business, primarily to
attempt to reduce its exposure to market risk (principally interest rate risk,
equity stock price risk and foreign currency risk) stemming from various assets
and liabilities and credit risk (the ability of an obligor to make timely
payment of principal and/or interest). The Companys principal objective under
such risk strategies is to achieve the desired reduction in economic risk, even
if the position will not receive hedge accounting treatment.

The Companys use of derivatives is limited by statutes and regulations
promulgated by the various regulatory bodies to which it is subject, and by its
own derivative policy. The derivative policy limits the authorization to
initiate derivative transactions to certain personnel. The policy generally
prohibits the use of derivatives with a maturity greater than 18 months, unless
the derivative is matched with assets or liabilities having a longer maturity.
The policy prohibits the use of derivatives containing greater than one-to-one
leverage with respect to changes in the underlying price, rate or index. The
policy also prohibits the use of borrowed funds, including funds obtained
through repurchase transactions, to engage in derivative transactions.

Credit exposure associated with non-performance by the counterparties to
derivative instruments is generally limited to the uncollateralized fair value of the
asset related to the instruments recognized in the Consolidated Balance Sheets.
The Company attempts to mitigate the risk of non-performance by monitoring the
creditworthiness of counterparties and diversifying derivatives to multiple
counterparties.

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The Company generally requires collateral from its derivative investment
counterparties depending on the amount of the exposure and the credit rating of
the counterparty.

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

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

The Company has exposure to credit risk arising from the uncertainty associated
with a financial instrument obligors ability to make timely principal and/or
interest payments. The Company attempts to mitigate this risk by limiting
credit concentrations, practicing diversification, and frequently monitoring
the credit quality of issuers and counterparties. In addition the Company may
utilize credit derivatives such as credit default swaps to modify the credit
risk inherent in certain investments. Credit default swaps involve a transfer
of credit risk from one party to another in exchange for periodic payments.
The Company infrequently designates these types of instruments as hedges
against specific assets.

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

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

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Income Taxes

The Company and its eligible subsidiaries are included in the consolidated
Federal income tax return of Loews and its eligible subsidiaries. The Company
accounts for income taxes under the asset and liability method. Under the
asset and liability method, deferred income taxes are recognized for temporary
differences between the financial statement and tax return bases of assets and
liabilities. Future tax benefits are recognized to the extent that realization
of such benefits is more likely than not.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation.
Depreciation is based on the estimated useful lives of the various classes of
property and equipment and is determined principally on the straight-line
method.

Goodwill and Other Intangible Assets

Goodwill of $146 million and $154 million as of December 31, 2003 and 2002
represents the excess of purchase price over fair value of the net assets of
acquired entities. Other intangible assets were $16 million and $20 million as
of December 31, 2003 and 2002. CNA adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142) on January 1, 2002. SFAS 142 changed the accounting for goodwill
and indefinite-lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill and indefinite-lived
intangible assets recorded in past business combinations ceased upon adoption
of SFAS 142. Accordingly, net (loss) income for the years ended December 31,
2003 and 2002 does not include amortization expense on goodwill or
indefinite-lived intangible assets. Goodwill and indefinite-lived intangible
assets are tested for impairment annually or when certain triggering events
require such tests.

During 2003, the Company sold certain businesses. Accordingly, the goodwill
associated with these sold businesses decreased CNAs goodwill by $2 million in
Standard Lines and $1 million in Group Operations and a reduction in CNAs
indefinite-lived intangible assets of $4 million in Group Operations. See Note
P for further discussion. Additionally, a $5 million pretax impairment charge
was recorded in Specialty Lines. No other impairments were identified during
2003.

During 2002, the Company completed its initial goodwill impairment testing and
recorded a $64 million pretax, or $57 million after-tax, impairment charge. In
accordance with SFAS 142, the impairment charge, which consisted of a $51
million pretax, or $48 million after-tax, charge in Specialty Lines, a $12
million pretax, or $8 million after-tax, charge in Life Operations, and a $1
million pretax, or $1 million after-tax, charge in Corporate and Other, was
recorded as a cumulative effect of a change in accounting principle as of
January 1, 2002. Any impairment losses incurred after the initial application
of this standard are reported in operating results.

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Had the Company not amortized goodwill and indefinite-lived intangible assets
in 2001, net loss and the related basic and diluted loss per share amounts
would have been as follows:

Pro Forma Effect of SFAS 142 on Results

Basic and DilutedYear ended December 31, 2001
    
    Net Loss
    
    Loss Per Share(In millions, except per share amounts)Reported results
    
    $
    (1,642
    )
    
    $
    (8.46
    )Add goodwill and indefinite-lived
intangible assets amortization,
after-tax
    
    
    17
    
    
    
    0.09Adjusted reported results to include
the impact of the non-amortization
provisions of SFAS 142
    
    $
    (1,625
    )
    
    $
    (8.37
    )


Prior to the adoption of SFAS 142, goodwill and indefinite-lived intangible
assets were amortized on a straight-line basis over the period of expected
benefit, generally ranging from 15 to 30 years.

Earnings per Share Data

(Loss) earnings per share available to common stockholders is based on
weighted-average outstanding shares. Basic and diluted earnings per share is
computed by dividing income available to common stockholders by the
weighted-average number of shares outstanding for the period of common stock or
common stock equivalents assuming conversion. The weighted average number of
shares outstanding for computing basic and diluted earnings per share was 227.0
million, 223.6 million and 194.0 million for the years ended December 31, 2003,
2002 and 2001. Included in the weighted-average outstanding shares in 2003 is
the additional effect of the convertible preferred shares sold during the
period. The Series I Issue preferred stock has terms that make it economically
equivalent to common stock. See Note L for further discussion of the Series I
Issue preferred stock.

Diluted earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For the year ended December 31, 2003, approximately 1
million shares attributable to the exercise of outstanding options were
excluded from the calculation of diluted earnings per share because the effect
was antidilutive. No shares were excluded from the calculation of diluted
earnings per share for the year ended December 31, 2002. For the year ended
December 31, 2001, approximately 1 million shares attributable to the exercise
of outstanding options were excluded from the calculation of diluted earnings
per share because the effect was antidilutive. No adjustments were made to
reported net income in the computation of earnings per share.

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The computation of (loss) earnings per share is as follows:

(Loss) Earnings per Share

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions, except per share amounts)(Loss) income from continuing operations
    
    $
    (1,433
    )
    
    $
    247
    
    
    $
    (1,592
    )Less: preferred stock dividend
    
    
    (60
    )
    
    
    (2
    )
    
    
    (Loss) income from continuing operations available to common stockholders
    
    
    (1,493
    )
    
    
    245
    
    
    
    (1,592
    )(Loss) income from discontinued operations, net of tax
    
    
    
    
    
    
    (35
    )
    
    
    11Cumulative effects of changes in accounting principles, net of tax
    
    
    
    
    
    
    (57
    )
    
    
    (61
    )Net (loss) income available to common stockholders
    
    $
    (1,493
    )
    
    $
    153
    
    
    $
    (1,642
    )Weighted-average outstanding common stock and common stock equivalents
    
    
    227.0
    
    
    
    223.6
    
    
    
    194.0Effect of dilutive securities, employee stock options
    
    
    
    
    
    
    
    
    
    
    Adjusted weighted-average outstanding common stock and common stock
equivalents assuming conversions
    
    
    227.0
    
    
    
    223.6
    
    
    
    194.0Basic and diluted (loss) earnings per share available to common stockholders
    
    $
    (6.58
    )
    
    $
    0.68
    
    
    $
    (8.46
    )


The Company has stock-based compensation plans which are detailed in Note J.
The Company applies intrinsic value method by following Accounting Policy Board
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations, in accounting for its stock-based
compensation plan. Under the recognition and measurement principles of APB 25,
no stock-based compensation cost has been recognized as the exercise price of
the granted options equaled the market price of the underlying stock at the
grant date.

The following table illustrates the effect on net (loss) income and earnings
per share data if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), to stock-based employee
compensation under the Companys stock-based compensation plans.

Pro Forma Effect of SFAS 123 on Results

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions, except per share amounts)Net (loss) income
    
    $
    (1,433
    )
    
    $
    155
    
    
    $
    (1,642
    )Less: Total stock-based compensation cost determined
under the fair value method, net of tax
    
    
    (2
    )
    
    
    (1
    )
    
    
    (1
    )Pro forma net (loss) income
    
    $
    (1,435
    )
    
    $
    154
    
    
    $
    (1,643
    )Basic and diluted (loss) earnings per share, as reported
    
    $
    (6.58
    )
    
    $
    0.68
    
    
    $
    (8.46
    )Basic and diluted (loss) earnings per share, pro forma
    
    $
    (6.59
    )
    
    $
    0.67
    
    
    $
    (8.47
    )


Accounting Pronouncements

In March of 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS 140). SFAS
140 superceded SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS 140
revised the standards
for accounting for

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securitizations and other transfers of financial assets and
collateral and requires certain disclosures. The initial adoption of SFAS 140
did not have a significant impact on the results of operations or equity of the
Company.

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

In June of 2001, the FASB issued SFAS No. 141, Business
Combinations (SFAS 141). SFAS 141 requires companies to use the
purchase method of accounting for business combinations initiated after June
30, 2001 and prohibits the use of the pooling-of-interests method of
accounting. CNA has adopted this standard for all business combinations
initiated subsequent to June 30, 2001. The initial adoption of SFAS 141 did
not have a significant impact on the results of operations or equity of the
Company.

In August of 2001, the FASB issued SFAS 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 SFAS 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 SFAS 144 for impairments
of long-lived assets and for long-lived assets to be disposed of on or after
January 1, 2002. The initial adoption of SFAS 144 did not have a significant
impact on the results of operations or equity of the Company; however, it did
impact the income statement presentation of certain operations sold in 2002.

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

In November of 2002, the FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (an interpretation of
FASB Statements of Financial Accounting Standards No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34) (FIN 45). FIN 45 clarifies
the requirements of SFAS No. 5, Accounting for Contingencies
(SFAS 5) relating to a guarantors accounting for, and disclosure of, the
issuance of certain types of guarantees. FIN 45 specifies additional
disclosure requirements related to guarantees, which are effective for
financial periods ending after December 15, 2002. Additionally, FIN 45
outlines provisions for initial recognition and measurement of the liability
incurred in providing a guarantee. These provisions are to be applied on a
prospective basis to guarantees issued or modified after December 31, 2002.
The initial adoption for the recognition and measurement requirements of FIN 45
did not have a significant impact on the results of operations or equity of the
Company.

In December of 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure (SFAS 148). SFAS
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
SFAS 148 also amends the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation,to require
prominent disclosures in both annual and interim financial statements about the

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method of accounting for stock-based employee compensation and the effect of
the method used on reported results. CNA adopted this disclosure standard in
its annual and interim financial statements but did not adopt fair value
accounting in 2003.

In January of 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51 (FIN 46). In December of 2003, FASB revised FIN 46, which
clarifies the application of Accounting Research Bulletin No. 51
Consolidated Financial Statements (ARB 51). As per ARB 51,
a general rule for preparation of consolidated financial statements of a parent
and its subsidiary is ownership by the parent, either directly or indirectly,
of over fifty percent of the outstanding voting shares of a subsidiary.
However, application of the majority voting interest requirement of ARB 51 to
certain types of entities may not identify the party with a controlling
financial interest because the controlling financial interest may be achieved
through arrangements that do not involve voting interest. FIN 46 clarifies
applicability of ARB 51 to entities in which the equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. FIN 46 requires an entity to
consolidate a variable interest entity (VIE) even though the entity does not,
either directly or indirectly, own over fifty percent of the outstanding voting
shares.

FIN 46 is applicable for financial statements issued for reporting periods that
end after March 15, 2004. The Company is in the process of reviewing the
recent revisions to FIN 46. Any potential changes as a result of
implementation of FIN 46 are not expected to have a significant impact on the
results of operations or equity of the Company.

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

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

In December of 2003, the FASB revised SFAS No.132, Employers
Disclosures about Pensions and Other Postretirement Benefits(SFAS
132) to require additional disclosures related to pensions and post retirement
benefits. While retaining the existing disclosure requirements for pensions
and postretirement benefits, additional disclosures are required related to
pension plan assets, obligations, contributions and net benefit costs,
beginning with fiscal years ending after December 15, 2003.
Additional disclosures pertaining to benefit payments are required for fiscal
years ending after June 30, 2004. The SFAS 132 revisions also include
additional disclosure requirements for interim financial reports beginning
after December 15, 2003. CNA has implemented the revised disclosures required
for fiscal years ending after

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December 15, 2003 in these financial statements
and will implement the interim disclosure requirements and annual benefit
payment disclosures in all subsequent interim and annual financial statements.

In November of 2003, the EITF reached consensus on EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments (EITF 03-1) that certain quantitative and qualitative disclosures
are required for equity and fixed maturity securities that are impaired at the
balance sheet date but for which an other-than-temporary impairment has not
been recognized. The guidance requires companies to disclose the aggregate
amount of unrealized losses and the related fair value of investments with
unrealized losses for securities that have been in an unrealized loss position
for less than 12 months and separately for those that have been in an
unrealized loss position for over 12 months, by investment category. The
Company has adopted the disclosure requirements in these financial statements.

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Note B. Investments

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

Net Investment Income

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Fixed maturity securities
    
    $
    1,651
    
    
    $
    1,854
    
    
    $
    1,824Short term investments
    
    
    63
    
    
    
    62
    
    
    
    135Limited partnerships
    
    
    221
    
    
    
    (34
    )
    
    
    47Equity securities
    
    
    19
    
    
    
    66
    
    
    
    37Interest on funds withheld and other deposits
    
    
    (344
    )
    
    
    (239
    )
    
    
    (241
    )Other
    
    
    85
    
    
    
    81
    
    
    
    112Gross investment income
    
    
    1,695
    
    
    
    1,790
    
    
    
    1,914Investment expense
    
    
    (48
    )
    
    
    (60
    )
    
    
    (58
    )Net investment income
    
    $
    1,647
    
    
    $
    1,730
    
    
    $
    1,856


Net realized investment gains (losses) and net change in unrealized
appreciation (depreciation) in investments were as follows:

Net Investment Appreciation

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Net realized investment gains (losses):Fixed maturity securities:Gross realized gains
    
    $
    1,244
    
    
    $
    1,009
    
    
    $
    936Gross realized losses
    
    
    (807
    )
    
    
    (1,118
    )
    
    
    (600
    )Net realized gains (losses) on fixed maturity securities
    
    
    437
    
    
    
    (109
    )
    
    
    336Equity securities:Gross realized gains
    
    
    143
    
    
    
    251
    
    
    
    1,335Gross realized losses
    
    
    (29
    )
    
    
    (409
    )
    
    
    (240
    )Net realized gains (losses) on equity securities
    
    
    114
    
    
    
    (158
    )
    
    
    1,095Other realized investment (losses) gains
    
    
    (87
    )
    
    
    13
    
    
    
    (154
    )Net realized investment gains (losses) before allocation to participating
policyholders and minority interests
    
    
    464
    
    
    
    (254
    )
    
    
    1,277Allocation to participating policyholders and minority interests
    
    
    (4
    )
    
    
    2
    
    
    
    (15
    )Net realized investment gains (losses)
    
    
    460
    
    
    
    (252
    )
    
    
    1,262Net change in unrealized appreciation (depreciation) in general account investments:Fixed maturity securities
    
    
    372
    
    
    
    548
    
    
    
    93Equity securities
    
    
    87
    
    
    
    (23
    )
    
    
    (1,127
    )Other
    
    
    2
    
    
    
    17
    
    
    
    (19
    )Total net change in unrealized appreciation (depreciation) in general account
investments
    
    
    461
    
    
    
    542
    
    
    
    (1,053
    )Net change in unrealized appreciation on separate accounts and other
    
    
    6
    
    
    
    53
    
    
    
    7Cumulative effects of changes in accounting principles, net of tax of $31
    
    
    
    
    
    
    
    
    
    
    58Allocation to participating policyholders and minority interests
    
    
    (7
    )
    
    
    (19
    )
    
    
    (4
    )Deferred income tax (expense) benefit
    
    
    (159
    )
    
    
    (182
    )
    
    
    355Net change in unrealized appreciation (depreciation) in investments
    
    
    301
    
    
    
    394
    
    
    
    (637
    )Net realized gains and change in unrealized appreciation in investments
    
    $
    761
    
    
    $
    142
    
    
    $
    625


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

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

The Companys investment policies 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.

A significant judgment in the valuation of investments is the determination of
when an other-than-temporary decline in value has occurred. The Company
follows a consistent and systematic process for impairing securities that
sustain other-than-temporary declines in value. The Company has established a
committee responsible for the impairment process. This committee, referred to
as the Impairment Committee, is made up of three officers appointed by the
Companys Chief Financial Officer. The Impairment Committee is responsible for
analyzing watch list securities on at least a quarterly basis. The watch list
includes individual securities that fall below certain thresholds or that
exhibit evidence of impairment indicators including, but not limited to, a
significant adverse change in the financial condition and near term prospects
of the investment or a significant adverse change in legal factors, the
business climate or credit ratings.

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

The decision to impair a security incorporates both quantitative criteria and
qualitative information. The Impairment Committee considers a number of
factors including, but not limited to: (a) the length of time and the extent to
which the fair value has been less than book value, (b) the financial condition
and near term prospects of the issuer, (c) the intent and ability of the
Company to retain its investment for a period of time sufficient to allow for
any anticipated recovery in value, (d) whether the debtor is current on
interest and principal payments and (e) general market conditions and industry
or sector specific factors.

The Impairment Committees decision to impair a security is primarily based on
whether the securitys fair value is likely to remain significantly below its
book value in light of all of the factors considered. For securities that are
impaired, the security is adjusted to fair value and the resulting losses are
recognized in realized gains/losses in the Consolidated Statements of
Operations.

Realized investment losses included $321 million, $890 million and $129 million
of pretax impairment losses for the three years ended December 31, 2003, 2002
and 2001. The impairments recorded were primarily the result of the continued
credit deterioration on specific issuers in the bond and equity markets and the
effects on such markets due to the overall slowing of the economy.

Other realized investment gains (losses) for the years ended December 31, 2003,
2002 and 2001 include gains and losses related to the sales and losses
associated with the anticipated sales of certain operations or affiliates. See
Note P for further details.

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The following tables provide a summary of fixed maturity and equity securities
investments.

Summary of Fixed Maturity and
Equity Securities

Gross Unrealized LossesCost or
    
    Gross
    
    
    
    EstimatedAmortized
    
    Unrealized
    
    Less than
    
    Greater than
    
    FairDecember 31, 2003
    
    Cost
    
    Gains
    
    12 Months
    
    12 Months
    
    Value(In millions)Fixed maturity securities:U.S. Treasury securities and
obligations of government
agencies
    
    $
    1,823
    
    
    $
    91
    
    
    $
    10
    
    
    $
    4
    
    
    $
    1,900Asset-backed securities
    
    
    8,634
    
    
    
    146
    
    
    
    22
    
    
    
    1
    
    
    
    8,757States, municipalities and
political subdivisions 
tax-exempt
    
    
    7,787
    
    
    
    207
    
    
    
    22
    
    
    
    2
    
    
    
    7,970Corporate securities
    
    
    6,061
    
    
    
    475
    
    
    
    40
    
    
    
    14
    
    
    
    6,482Other debt securities
    
    
    2,961
    
    
    
    311
    
    
    
    4
    
    
    
    4
    
    
    
    3,264Redeemable preferred stock
    
    
    97
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    104Options embedded in
convertible debt securities
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201Total fixed maturity securities
    
    
    27,564
    
    
    
    1,237
    
    
    
    98
    
    
    
    25
    
    
    
    28,678Equity securities:Common stock
    
    
    163
    
    
    
    222
    
    
    
    2
    
    
    
    
    
    
    
    383Non-redeemable preferred stock
    
    
    130
    
    
    
    16
    
    
    
    2
    
    
    
    
    
    
    
    144Total equity securities
    
    
    293
    
    
    
    238
    
    
    
    4
    
    
    
    
    
    
    
    527Total
    
    $
    27,857
    
    
    $
    1,475
    
    
    $
    102
    
    
    $
    25
    
    
    $
    29,205


Cost or Amortized
    
    Gross Unrealized
    
    Gross Unrealized
    
    Estimated FairCost
    
    Gains
    
    Losses
    
    ValueDecember 31, 2002Fixed maturity securities:U.S. Treasury securities and obligations of government agencies
    
    $
    1,266
    
    
    $
    114
    
    
    $
    4
    
    
    $
    1,376Asset-backed securities
    
    
    7,888
    
    
    
    336
    
    
    
    16
    
    
    
    8,208States, municipalities and political subdivisions  tax-exempt
    
    
    4,966
    
    
    
    151
    
    
    
    43
    
    
    
    5,074Corporate securities
    
    
    7,439
    
    
    
    487
    
    
    
    335
    
    
    
    7,591Other debt securities
    
    
    3,780
    
    
    
    284
    
    
    
    237
    
    
    
    3,827Redeemable preferred stock
    
    
    64
    
    
    
    5
    
    
    
    
    
    
    
    69Options embedded in convertible debt securities
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    130Total fixed maturity securities
    
    
    25,533
    
    
    
    1,377
    
    
    
    635
    
    
    
    26,275Equity securities:Common stock
    
    
    310
    
    
    
    166
    
    
    
    15
    
    
    
    461Non-redeemable preferred stock
    
    
    209
    
    
    
    3
    
    
    
    7
    
    
    
    205Total equity securities
    
    
    519
    
    
    
    169
    
    
    
    22
    
    
    
    666Total
    
    $
    26,052
    
    
    $
    1,546
    
    
    $
    657
    
    
    $
    26,941


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

Unrealized Loss Aging

December 31, 2003GrossEstimated
    
    UnrealizedFair Value
    
    Loss(In millions)Fixed maturity securities:Investment grade:0-6 months
    
    $
    4,138
    
    
    $
    507-12 months
    
    
    834
    
    
    
    3613-24 months
    
    
    76
    
    
    
    11Greater than 24 months
    
    
    51
    
    
    
    3Total investment grade
    
    
    5,099
    
    
    
    100Non-investment grade:0-6 months
    
    
    134
    
    
    
    57-12 months
    
    
    60
    
    
    
    713-24 months
    
    
    16
    
    
    
    1Greater than 24 months
    
    
    105
    
    
    
    10Total non-investment grade
    
    
    315
    
    
    
    23Total fixed maturity securities
    
    
    5,414
    
    
    
    123Equity securities:0-6 months
    
    
    23
    
    
    
    27-12 months
    
    
    10
    
    
    
    213-24 months
    
    
    3
    
    
    
    Greater than 24 months
    
    
    6
    
    
    
    Total equity securities
    
    
    42
    
    
    
    4Total fixed maturity and equity securities
    
    $
    5,456
    
    
    $
    127


Contractual Maturity

Cost or
    
    EstimatedAmortized
    
    FairCost
    
    Value(In millions)Due in one year or less
    
    $
    275
    
    
    $
    275Due after one year through five years
    
    
    2,544
    
    
    
    2,605Due after five years through ten years
    
    
    3,596
    
    
    
    3,886Due after ten years
    
    
    12,515
    
    
    
    13,155Asset-backed securities
    
    
    8,634
    
    
    
    8,757Total
    
    $
    27,564
    
    
    $
    28,678


Actual maturities may differ from contractual maturities because certain
securities may be called or prepaid with or without call or prepayment
penalties.

The carrying value of fixed maturity investments that did not produce income
during 2003 and 2002 was $41 million and $88 million. At December 31, 2003 and
2002, no investments, other than investments in U.S. government agency
securities, exceeded 10% of stockholders equity.

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As of December 31, 2003 and 2002, the Company had committed approximately $154
million and $141 million to future capital calls from various third-party
limited partnership investments in exchange for an ownership interest in the
related partnerships.

In the normal course of investing activities, CCC had committed approximately
$51 million as of December 31, 2003 to future capital calls from certain of its
unconsolidated affiliates in exchange for an ownership interest in such
affiliates.

In March of 2000, the Company entered into hedge agreements related to its
investment in Global Crossing Ltd. common stock (Global Crossing). The
unrealized appreciation on the stock that was preserved by the hedge was
reflected as an unrealized gain in accumulated other comprehensive income at
December 31, 2000. The hedge agreements were closed out in 2001, resulting in
the recognition of a realized gain of $962 million pretax.

Changes in the Companys investment in Global Crossing, on a pretax basis, were
as follows:

Changes in Net Realized Gains and Unrealized Appreciation (Depreciation) for Global Crossing

Year ended December 31
    
    2001(In millions)Decrease in unrealized gain on common stock
    
    $
    (239
    )Cumulative effect of a change in accounting principle
    
    
    (60
    )(Decrease) increase in unrealized gain on options collar
    
    
    (663
    )Net decrease in unrealized gain on position in Global Crossing
    
    $
    (962
    )Realized gains on sales of Global Crossing
    
    $
    962


Restricted Investments

The Company may from time to time invest in securities that may be restricted
in whole or in part. As of December 31, 2003 and 2002, the Company did not
hold any significant positions in investments whose sale was restricted.

Cash and securities with carrying values of approximately $2.0 billion and $1.8
billion were deposited by the Companys insurance subsidiaries under
requirements of regulatory authorities as of December 31, 2003 and 2002.

The Companys investments in limited partnerships contain withdrawal provisions
that typically require advanced written notice of up to 90 days for
withdrawals. The carrying value of these investments reported as a separate
line item in the Consolidated Balance Sheet is $1,117 million and $1,060 million
at December 31, 2003 and 2002.

Cash and securities with carrying values of approximately $22 million and $37
million were deposited with financial institutions as collateral for letters of
credit as of December 31, 2003 and 2002. In addition, cash and securities were
deposited in trusts with financial institutions to secure reinsurance
obligations with various third parties. The carrying values of these deposits
were approximately $118 million and $70 million as of December 31, 2003 and
2002.

During July of 2002, the Company entered into an agreement, whereby Phoenix
acquired the variable life and annuity business of VFL through a coinsurance
arrangement, with modified coinsurance on the separate accounts. Securities
with carrying values of approximately $492 million and $479 million

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continue to be held by the Company and are reported in separate account
business in the assets section of the Consolidated Balance Sheet at December
31, 2003 and 2002.

Note C. Derivative Financial Instruments

A summary of the aggregate contractual or notional amounts, estimated fair
values and recognized gains (losses) related to derivative financial
instruments follows.

Derivative Instruments

Contractual/
    
    Estimated
    
    Estimated
    
    RecognizedNotional
    
    Fair Value
    
    Fair Value
    
    GainsAs of and for the year ended December 31, 2003
    
    Amount
    
    Asset
    
    (Liability)
    
    (Losses)(In millions)General accountSwaps
    
    $
    856
    
    
    $
    
    
    
    $
    (5
    )
    
    $
    87Interest rate caps
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    Futures sold, not yet purchased
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    (9
    )Forwards
    
    
    16
    
    
    
    
    
    
    
    (1
    )
    
    
    2Commitments to purchase government and municipal securities
    
    
    3,318
    
    
    
    12
    
    
    
    
    
    
    
    (1
    )Equity warrants
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    Options purchased
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Options written
    
    
    515
    
    
    
    
    
    
    
    (2
    )
    
    
    Collateralized debt obligation liabilities
    
    
    110
    
    
    
    
    
    
    
    (14
    )
    
    
    (1
    )Synthetic guaranteed investment contracts
    
    
    280
    
    
    
    
    
    
    
    
    
    
    
    Options embedded in convertible debt securities
    
    
    681
    
    
    
    201
    
    
    
    
    
    
    
    36Total
    
    $
    6,034
    
    
    $
    213
    
    
    $
    (22
    )
    
    $
    114Separate accountsFutures purchased
    
    $
    1,106
    
    
    $
    3
    
    
    $
    
    
    
    $
    208Futures sold, not yet purchased
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    Options purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Options written
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    2Total
    
    $
    1,130
    
    
    $
    3
    
    
    $
    
    
    
    $
    209


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##### Table of Contents



Contractual/
    
    Estimated
    
    Estimated
    
    RecognizedNotional
    
    Fair Value
    
    Fair Value
    
    GainsAs of and for the year ended December 31, 2002
    
    Amount
    
    Asset
    
    (Liability)
    
    (Losses)(In millions)General accountSwaps
    
    $
    553
    
    
    $
    
    
    
    $
    
    
    
    $
    12Interest rate caps
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    Futures sold, not yet purchased
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    (36
    )Forwards
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    (19
    )Commitments to purchase government and municipal securities
    
    
    1,289
    
    
    
    14
    
    
    
    
    
    
    
    (1
    )Equity warrants
    
    
    10
    
    
    
    8
    
    
    
    
    
    
    
    (1
    )Options purchased
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Collateralized debt obligation liabilities
    
    
    126
    
    
    
    
    
    
    
    (14
    )
    
    
    (6
    )Synthetic guaranteed investment contracts
    
    
    481
    
    
    
    
    
    
    
    
    
    
    
    Options embedded in convertible debt securities
    
    
    843
    
    
    
    130
    
    
    
    
    
    
    
    (38
    )Total
    
    $
    3,831
    
    
    $
    152
    
    
    $
    (14
    )
    
    $
    (90
    )Separate accountsFutures purchased
    
    $
    614
    
    
    $
    1
    
    
    $
    
    
    
    $
    (187
    )Futures sold, not yet purchased
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Commitments to purchase government and municipal securities
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    1Options purchased
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Options written
    
    
    51
    
    
    
    
    
    
    
    (1
    )
    
    
    2Total
    
    $
    719
    
    
    $
    1
    
    
    $
    (1
    )
    
    $
    (188
    )


Immediately following the adoption of SFAS 133 on January 1, 2001, which did
not impact derivatives included in separate account investments, the Companys
general account derivative holdings were as follows:

CumulativeEffect of aContractual/
    
    Estimated
    
    Estimated
    
    Change inNotional
    
    Fair Value
    
    Fair Value
    
    AccountingJanuary 1, 2001
    
    Amount
    
    Asset
    
    (Liability)
    
    Principle(In millions)General accountSwaps
    
    $
    5
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest rate caps
    
    
    500
    
    
    
    1
    
    
    
    
    
    
    
    Futures sold, not yet purchased
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    Forwards
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Equity warrants
    
    
    10
    
    
    
    4
    
    
    
    
    
    
    
    (1
    )Options purchased
    
    
    18
    
    
    
    1
    
    
    
    
    
    
    
    Options purchased  Global Crossing
    
    
    1,000
    
    
    
    664
    
    
    
    
    
    
    
    420Options written  Global Crossing
    
    
    1,256
    
    
    
    
    
    
    
    (1
    )
    
    
    243Collateralized debt obligation liabilities
    
    
    170
    
    
    
    
    
    
    
    (18
    )
    
    
    (6
    )Synthetic guaranteed investment contracts
    
    
    1,779
    
    
    
    
    
    
    
    
    
    
    
    Options embedded in convertible debt securities
    
    
    845
    
    
    
    231
    
    
    
    
    
    
    
    231Total
    
    $
    5,676
    
    
    $
    901
    
    
    $
    (19
    )
    
    
    887Unrealized loss on Global Crossing common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (723
    )Adjustment on convertible debt securities with embedded options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94
    )Tax benefit on cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (61
    )


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##### Table of Contents



Fair Value Hedges

As of January 1, 2001, the Companys collar position, which was entered into
during 2000, related to its investment in Global Crossing was the only
derivative position that had been designated as a hedge for accounting
purposes. The nature of the transition adjustment related to this hedge was
such that the $962 million unrealized gain that existed on Global Crossing when
the hedge was established was preserved in accumulated other comprehensive
income. During 2001, the Companys collar position related to Global Crossing
was terminated and the related stock was sold.

The effectiveness of this hedge was measured based on changes in the intrinsic
value of the collar in relation to changes in the fair value of Global
Crossing. Changes in the time value component of the collars fair value were
excluded from the hedge designation and measurement of effectiveness. Up to
the date of the sale, the Global Crossing hedge was 100% effective. The change
in the time value component of the collar was a pretax gain of $33 million for
the year ended December 31, 2001, and was reflected as a realized investment
gain in the Consolidated Statements of Operations.

The Companys other hedging activities that are designated as a hedge for
accounting purposes primarily involve hedging interest rate and foreign
currency risks on various assets and liabilities. There was no gain or loss on
the ineffective portion of the fair value hedges for the year ended December
31, 2003, because the Company held no fair value hedges in 2003. The
ineffective portion of the fair value hedges resulted in a realized loss of
approximately $4 million and $1 million for the years ended December 31, 2002
and 2001.

Note D. Financial Instruments

In the normal course of business, CNA invests in various financial assets,
incurs various financial liabilities and enters into agreements involving
derivative securities.

Fair values are disclosed for all financial instruments, for which it is
practicable to estimate fair value, whether or not such values are recognized
in the Consolidated Balance Sheets. Management attempts to obtain quoted
market prices for these disclosures. Where quoted market prices are not
available, fair values are estimated using present value or other valuation
techniques. These techniques are significantly affected by managements
assumptions, including discount rates and estimates of future cash flows.
Potential taxes and other transaction costs have not been considered in
estimating fair values. The estimates presented herein are not necessarily
indicative of the amounts that CNA would realize in a current market exchange.

Non-financial instruments such as real estate, deferred acquisition costs,
property and equipment, deferred income taxes and intangibles, and certain
financial instruments such as insurance reserves and leases are excluded from
the fair value disclosures. Therefore, the fair value amounts cannot be
aggregated to determine the underlying economic value of the Company.

The carrying amounts reported in the Consolidated Balance Sheets for cash,
short term investments, accrued investment income, receivables for securities
sold, federal income taxes recoverable/payable, collateral on loaned securities
and derivatives, payables for securities purchased, and certain other assets
and other liabilities approximate fair value because of the short term nature
of these items. These assets and liabilities are not listed in the following
tables.

The following methods and assumptions were used by CNA in estimating the fair
value of financial assets and liabilities.

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##### Table of Contents



The fair values of fixed maturity and equity securities were based on quoted
market prices, where available. For securities not actively traded, fair
values were estimated using values obtained from independent pricing services
or quoted market prices of comparable instruments.

The fair values for mortgage loans and policy loans were estimated using
discounted cash flows utilizing interest rates currently offered for similar
loans to borrowers of comparable credit quality. Loans with similar
characteristics were aggregated for purposes of these calculations.

The fair value of limited partnership investments represents CNAs equity in
the partnerships net assets as determined by the general partner. Valuation
techniques to determine fair value of other invested assets and other separate
account business assets consisted of discounting cash flows, obtaining quoted
market prices of the investments and comparing the investments to similar
instruments or to the underlying assets of the investments.

The carrying amount and estimated fair value of CNAs financial instrument
assets and liabilities are listed in the table below. Additional detail
related to derivative financial instruments is also provided in Note C.

The fair values of notes receivable for the issuance of common stock were
estimated using discounted cash flows utilizing interest rates currently
offered for obligations securitized with similar collateral.

Premium deposits and annuity contracts were valued based on cash surrender
values and the outstanding fund balances.

CNAFs senior notes and debentures were valued based on quoted market prices.
The fair value for other long term debt was estimated using discounted cash
flows based on current incremental borrowing rates for similar borrowing
arrangements.

The fair values of CDOs were determined largely based on managements estimates
using default probabilities of the debt securities underlying the contract,
which were obtained from a rating agency, the term of each contract, and actual
default losses recorded on the contract.

The fair values of financial guarantee contracts were estimated using
discounted cash flows utilizing interest rates currently offered for similar
contracts.

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The fair values of guaranteed investment contracts of the separate account
business were estimated using discounted cash flow calculations based on
interest rates currently offered for similar contracts with similar maturities.
The fair values of the liabilities for variable separate account business were
based on the quoted market values of the underlying assets of each variable
separate account. The fair values of other separate account liabilities
approximate their carrying value because of their short term nature.

Financial Assets and Liabilities

2003
    
    2002Estimated
    
    
    
    
    
    EstimatedCarrying
    
    Fair
    
    Carrying
    
    FairDecember 31
    
    Amount
    
    Value
    
    Amount
    
    Value(In millions)Financial assetsInvestments:Fixed maturity securities
    
    $
    28,678
    
    
    $
    28,678
    
    
    $
    26,275
    
    
    $
    26,275Equity securities
    
    
    527
    
    
    
    527
    
    
    
    666
    
    
    
    666Mortgage loans
    
    
    15
    
    
    
    16
    
    
    
    28
    
    
    
    29Policy loans
    
    
    175
    
    
    
    176
    
    
    
    180
    
    
    
    175Limited partnership investments
    
    
    1,117
    
    
    
    1,117
    
    
    
    1,060
    
    
    
    1,060Other invested assets
    
    
    40
    
    
    
    40
    
    
    
    47
    
    
    
    47Separate account business:Fixed maturity securities
    
    
    2,114
    
    
    
    2,114
    
    
    
    2,014
    
    
    
    2,014Equity securities
    
    
    117
    
    
    
    117
    
    
    
    118
    
    
    
    118Limited partnership investments
    
    
    419
    
    
    
    419
    
    
    
    327
    
    
    
    327Other
    
    
    415
    
    
    
    415
    
    
    
    387
    
    
    
    387Notes receivable for the issuance of common stock
    
    
    76
    
    
    
    87
    
    
    
    72
    
    
    
    83Financial liabilitiesPremium deposits and annuity contracts
    
    $
    1,282
    
    
    $
    1,261
    
    
    $
    1,266
    
    
    $
    1,214Long term debt
    
    
    1,641
    
    
    
    1,712
    
    
    
    1,872
    
    
    
    1,870Short-term debt
    
    
    263
    
    
    
    263
    
    
    
    420
    
    
    
    420Collateralized debt obligation liabilities
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    14Financial guarantee contracts
    
    
    50
    
    
    
    50
    
    
    
    56
    
    
    
    55Separate account business:Guaranteed investment contracts
    
    
    211
    
    
    
    229
    
    
    
    276
    
    
    
    296Variable separate accounts
    
    
    540
    
    
    
    540
    
    
    
    603
    
    
    
    603Other
    
    
    2,449
    
    
    
    2,449
    
    
    
    1,884
    
    
    
    1,884


Note E. Income Taxes

CNA and its eligible subsidiaries (CNA Tax Group) are included in the
consolidated Federal income tax return of Loews and its eligible subsidiaries.
Loews and CNA have agreed that for each taxable year, CNA will 1) be paid by
Loews the amount, if any, by which the Loews consolidated Federal income tax
liability is reduced by virtue of the inclusion of the CNA Tax Group in the
Loews consolidated Federal income tax return, or 2) pay to Loews an amount, if
any, equal to the Federal income tax that would have been payable by the CNA
Tax Group filing a separate consolidated tax return. In the event that Loews
should have a net operating loss in the future computed on the basis of filing
a separate consolidated tax return without the CNA Tax Group, CNA may be
required to repay tax recoveries previously received from Loews. This
agreement may be canceled by either party upon 30 days written notice.

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A reconciliation between CNAs
Federal income tax (expense) benefit at statutory rates and the recorded income tax (expense) benefit, after giving effect to
minority interest, but before giving effect to discontinued operations and the
cumulative effects of changes in accounting principles, is as follows:

Tax Rate Reconciliation

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Income tax benefit (expense) at statutory rates
    
    $
    823
    
    
    $
    (110
    )
    
    $
    818Foreign net operating benefit (loss) carryforward
    
    
    7
    
    
    
    (2
    )
    
    
    (90
    )Tax benefit from tax exempt income
    
    
    101
    
    
    
    53
    
    
    
    37Other benefit (expense), including state income taxes
    
    
    (18
    )
    
    
    (9
    )
    
    
    (21
    )Effective income tax benefit (expense)
    
    $
    913
    
    
    $
    (68
    )
    
    $
    744


Provision has been made for the expected U.S. Federal income tax liabilities
applicable to undistributed earnings of subsidiaries, except for certain
subsidiaries for which the Company intends to invest the undistributed earnings
indefinitely, or recover such undistributed earnings tax-free. Adjustments
related to foreign net operating loss carryforwards reflected above pertain to
those foreign subsidiaries for which no tax benefit is expected to be realized.

The current and deferred components of CNAs income tax (expense) benefit,
excluding taxes on discontinued operations and the cumulative effects of the
changes in accounting principles, are as follows:

Current and Deferred Taxes

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Current tax benefit (expense)
    
    $
    980
    
    
    $
    (61
    )
    
    $
    806Deferred tax expense
    
    
    (67
    )
    
    
    (7
    )
    
    
    (62
    )Total income tax benefit (expense)
    
    $
    913
    
    
    $
    (68
    )
    
    $
    744


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The deferred tax effects of the significant components of CNAs deferred tax
assets and liabilities are set forth in the table below.

Components of Net Deferred Tax Assets

December 31
    
    2003
    
    2002(In millions)Deferred tax assets (liabilities)Insurance reserves:Property and casualty claim and claim adjustment expense reserves
    
    $
    711
    
    
    $
    620Unearned premium reserves
    
    
    288
    
    
    
    332Life reserves
    
    
    228
    
    
    
    205Other insurance reserves
    
    
    30
    
    
    
    19Deferred acquisition costs
    
    
    (790
    )
    
    
    (783
    )Net unrealized gains
    
    
    (508
    )
    
    
    (331
    )Postretirement benefits other than pensions
    
    
    122
    
    
    
    119Life settlement contracts
    
    
    108
    
    
    
    115Minimum pension liability
    
    
    69
    
    
    
    8Foreign affiliate(s)
    
    
    (148
    )
    
    
    28Receivables
    
    
    293
    
    
    
    104Accrued assessments and guarantees
    
    
    68
    
    
    
    40Net
operating loss and tax credits carried forward
    
    
    158
    
    
    
    Investment
valuation differences
    
    
    19
    
    
    
    228Other,
net
    
    
    (48
    )
    
    
    19Net deferred tax asset
    
    $
    600
    
    
    $
    723


The gross deferred tax assets and liabilities amounted to approximately $2.4
billion and $1.8 billion at December 31, 2003 and $2.0 billion and $1.3 billion
at December 31, 2002. Although realization of deferred tax assets is not
assured, management believes it is more likely than not that deferred tax
assets will be realized through future earnings, including but not limited to
the generation of future income from continuing operations, reversal of
existing temporary differences and available tax planning strategies. As a
result, no valuation allowance was recorded at December 31, 2003 and 2002.

At December 31, 2003, the CNA Tax
Group has a net operating loss carryforward of approximately $169
million which expires in 2023.  In addition, the CNA Tax Group has an
alternative minimum tax credit carryforward of approximately $99
million which can be carried forward indefinitely. It is expected
that both the net operating loss carryforward and tax credit
carryforward will be fully utilized.

Note F. Claim and Claim Adjustment Expense Reserves

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

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

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Adjustments to prior year reserve estimates, if necessary, are reflected in the
results of operations in the period that the need for such adjustments is
determined.

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

During 2001, the Company recorded estimated incurred losses of $468 million,
pretax, net of reinsurance, related to the September 11, 2001 World Trade
Center disaster and related events (WTC event). The loss estimate was based on
a total industry loss of $50 billion and includes all lines of insurance. The
estimate took into account CNAs substantial reinsurance agreements, including
its catastrophe reinsurance program and corporate reinsurance programs. See
Note H for further discussion of reinsurance. The Company has closely
monitored reported losses as well as the collection of reinsurance on WTC event
claims. During both 2003 and 2002, the Company reduced the reserves related to
the WTC event in both the property and casualty and group and life segments,
which are described below in net prior year development. As of December 31, 2003, the
Company believes its remaining recorded reserves, net of reinsurance, for the
WTC event are adequate.

The following table provides managements estimate of pretax losses related to
the WTC event on a gross basis (before reinsurance) and a net basis (after
reinsurance) by line of business as initially estimated in 2001.

World Trade Center Event

Gross
    
    NetYear ended December 31, 2001
    
    Basis
    
    Basis(In millions)Property and casualty assumed reinsurance
    
    $
    662
    
    
    $
    465Property
    
    
    282
    
    
    
    159Workers compensation
    
    
    112
    
    
    
    25Airline hull
    
    
    194
    
    
    
    6Commercial auto
    
    
    1
    
    
    
    1Total property and casualty
    
    
    1,251
    
    
    
    656Group
    
    
    322
    
    
    
    60Life
    
    
    75
    
    
    
    22Total group and life
    
    
    397
    
    
    
    82Total loss before corporate aggregate reinsurance, reinstatement and additional premiums and other
    
    $
    1,648
    
    
    
    738Corporate aggregate reinsurance
    
    
    
    
    
    
    (259
    )Reinstatement and additional premiums and other
    
    
    
    
    
    
    (11
    )Total
    
    
    
    
    
    $
    468


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The table below provides a reconciliation between beginning and ending claim
and claim adjustment expense reserves including claim and claim adjustment
expense reserves of the life and group companies.

Reconciliation of Claim and Claim Adjustment Expense Reserves

As of and for the years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Reserves, beginning of year:Gross
    
    $
    27,370
    
    
    $
    31,266
    
    
    $
    26,962Ceded
    
    
    10,727
    
    
    
    12,105
    
    
    
    7,848Net reserves, beginning of year
    
    
    16,643
    
    
    
    19,161
    
    
    
    19,114Reduction of net reserves (a)
    
    
    
    
    
    
    (1,316
    )
    
    
    Reduction of net reserves (b)
    
    
    (1,309
    )
    
    
    
    
    
    
    Net incurred claim and claim adjustment expenses:Provision for insured events of current year
    
    
    6,745
    
    
    
    8,248
    
    
    
    8,660Increase in provision for insured events of prior years
    
    
    2,409
    
    
    
    35
    
    
    
    2,464Amortization of discount
    
    
    115
    
    
    
    72
    
    
    
    107Total net incurred
    
    
    9,269
    
    
    
    8,355
    
    
    
    11,231Net payments attributable to:Current year events
    
    
    2,192
    
    
    
    3,137
    
    
    
    3,997Prior year events
    
    
    4,936
    
    
    
    6,553
    
    
    
    7,437Reinsurance recoverable against net reserve transferred
under retroactive reinsurance agreements (See Note P)
    
    
    (39
    )
    
    
    (133
    )
    
    
    (250
    )Total net payments
    
    
    7,089
    
    
    
    9,557
    
    
    
    11,184Net reserves, end of year
    
    
    17,514
    
    
    
    16,643
    
    
    
    19,161Ceded reserves, end of year
    
    
    14,216
    
    
    
    10,727
    
    
    
    12,105Gross reserves, end of year
    
    $
    31,730
    
    
    $
    27,370
    
    
    $
    31,266




|(a) |  | In 2002, the net reserves were reduced by $1,316 million as a
result of the sale of CNA Reinsurance Company Limited (CNA Re U.K.).
See Note P for further discussion of this sale.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | In 2003, the net reserves were reduced by $1,309 million as a
result of the sale of CNAGLA. See Note P for further discussion of
this sale.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

The changes in provision for insured events of prior years (net prior year
claim and claim adjustment expense reserve development) are composed of the
following components. For the years ended December 31, 2003, 2002 and 2001,
the unfavorable net prior year claim and claim adjustment expense reserve
development was $2,409 million, $35 million and $2,464 million.

Reserve Development

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Environmental pollution and mass tort
    
    $
    153
    
    
    $
    
    
    
    $
    468Asbestos
    
    
    642
    
    
    
    
    
    
    
    773Other
    
    
    1,614
    
    
    
    35
    
    
    
    1,223Total
    
    $
    2,409
    
    
    $
    35
    
    
    $
    2,464


Asbestos, Environmental Pollution and Mass Tort (APMT) Reserves

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

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

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

CNA has regularly performed ground up reviews of all open APMT claims to
evaluate the adequacy of the Companys APMT reserves. In performing its
comprehensive ground up analysis, the Company considers input from its
professionals with direct responsibility for the claims, inside and outside
counsel with responsibility for representation of the Company, and its
actuarial staff. These professionals review, among many factors, the
policyholders present and predicted future exposures, including such factors
as claims volume, trial conditions, prior settlement history, settlement
demands and defense costs; the impact of asbestos defendant bankruptcies on the
policyholder; the policies issued by CNA, including such factors as aggregate
or per occurrence limits, whether the policy is primary, umbrella or excess,
and the existence of policyholder retentions and/or deductibles; the existence
of other insurance; and reinsurance arrangements.

With respect to other court cases and how they might affect the Companys
reserves and reasonable possible losses, the following should be noted. State
and federal courts issue numerous decisions each year, which potentially impact
losses and reserves in both a favorable and unfavorable manner. Examples of
favorable developments include decisions to allocate defense and indemnity
payments in a manner so as to limit carriers obligations to damages taking
place during the effective dates of their policies; decisions holding that
injuries occurring after asbestos operations are completed are subject to the
completed operations aggregate limits of the policies; and decisions ruling
that carriers loss control inspections of their insureds premises do not give
rise to a duty to warn third parties to the dangers of asbestos.

Examples of unfavorable developments include decisions limiting the application
of the absolute pollution exclusion; and decisions holding carriers liable
for defense and indemnity of asbestos and pollution claims on a joint and
several basis. The Companys ultimate liability for its environmental

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

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

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

APMT Reserves

December 31, 2003
    
    December 31, 2002Environmental
    
    
    
    
    
    EnvironmentalPollution and Mass
    
    
    
    
    
    Pollution and MassAsbestos
    
    Tort
    
    Asbestos
    
    Tort(In millions)Gross reserves
    
    $
    3,347
    
    
    $
    839
    
    
    $
    1,758
    
    
    $
    830Ceded reserves
    
    
    (1,580
    )
    
    
    (262
    )
    
    
    (512
    )
    
    
    (313
    )Net reserves
    
    $
    1,767
    
    
    $
    577
    
    
    $
    1,246
    
    
    $
    517


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Asbestos

CNAs property and casualty insurance subsidiaries have exposure to
asbestos-related claims. Estimation of asbestos-related claim and claim
adjustment expense reserves involve limitations 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 December 31, 2003 and 2002, CNA carried approximately $1,767 million and
$1,246 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables for reported and unreported asbestos-related claims.
Unfavorable asbestos-related net claim and claim adjustment expense reserve
development for the years ended December 31, 2003, 2002 and 2001 amounted to
$642 million, $0 and $773 million. The Company paid asbestos-related claims,
net of reinsurance recoveries, of $121 million, $21 million and $171 million
during the years ended December 31, 2003, 2002 and 2001.

The Company recorded $1,826 million and $642 million in unfavorable gross and
net prior year development for the year ended December 31, 2003 for reported
and unreported asbestos-related claims, principally due to potential losses
from policies issued by CNA with high attachment points, which previous
exposure analysis indicated would not be reached. The Company examined the
claims filing trends and the projected erosion rates of underlying primary and
lower excess insurance on open asbestos accounts to determine timeframes within
which high excess policies issued by CNA could be reached. Elevated claims
volumes, together with certain adverse court decisions affecting rapidity by
which asbestos claims are paid supported the conclusion that excess policies
with high attachment points previously thought not to be exposed may now
potentially be exposed.

In 2001, CNA noted the continued emergence of adverse loss experience across
several lines of business related to prior years. With respect to asbestos
reserves, throughout 2000, and into 2001, CNA experienced significant increases
in the number of new asbestos bodily injury claims. In light of this
development, CNA formed the view that payments for asbestos claims could be
higher in future years than previously estimated. Moreover, in late 2000
through mid-2001, industry sources such as rating agencies and actuarial firms
released analyses and studies commenting on the increase in claim volumes and
other asbestos liability developments.

Also in the 2000 to 2001 time period, a number of significant asbestos
defendants filed for bankruptcy, increasing the likelihood that excess layers
of insurance coverage could be called upon to indemnify policyholders and
creating the potential that novel legal doctrines could be employed. These
developments led the Company to the conclusion that its asbestos reserves
required strengthening in 2001 resulting in unfavorable net prior year
development of $773 million.

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

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Company has attempted to manage its asbestos exposure by aggressively seeking
to settle claims on acceptable terms. There can be no assurance that any of
these settlement efforts will be successful, or that any such claims can be
settled on terms acceptable to CNA. Where CNA cannot settle a claim on
acceptable terms, the Company aggressively litigates the claim. Adverse
developments with respect to such matters could have a material adverse effect
on CNAs results of operations and/or equity.

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

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

CNA is engaged in insurance coverage litigation with underlying plaintiffs who
have asbestos bodily injury claims against the former Robert A. Keasbey Company
(Keasbey) in New York state court (Continental Casualty Co. v.
Nationwide Indemnity Co. et al., No. 601037/03 (N.Y. County)).
Keasbey, a currently dissolved corporation, was a seller and installer of
asbestos-containing insulation products in New York and New Jersey. Thousands
of plaintiffs have filed bodily injury claims against Keasbey; however,
Keasbeys involvement at a number of work sites is a highly contested issue.
Therefore, the defense disputes the percentage of valid claims against Keasbey.
CNA issued Keasbey primary policies for 1970-1987 and excess policies for
1972-1978. CNA has paid an amount substantially equal to the policies
aggregate limits for products and completed operations claims. Claimants
against Keasbey allege, among other things, that CNA owes coverage under
sections of the policies not subject to the aggregate limits, an allegation CNA
vigorously contests in the lawsuit.

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

CIC issued certain primary and excess policies to Bendix Corporation (Bendix),
now part of Honeywell International, Inc. (Honeywell). Honeywell faces
approximately 73,000 pending asbestos bodily injury claims resulting from
alleged exposure to Bendix friction products. CICs primary policies allegedly
covered the period from at least 1939 (when Bendix began to use asbestos in its
friction products) to 1983, although the parties disagree about whether CICs
policies provided product liability coverage before 1940 and from 1945 to 1956.
CIC asserts that it owes no further material obligations to Bendix under any
primary policy. Honeywell alleges that two primary policies issued by CIC
covering 1969-1975 contain occurrence limits but not product liability
aggregate limits for asbestos bodily injury claims. CIC has asserted, among
other things, which even if Honeywells allegation is correct, which CNA
denies, its liability is limited to a single occurrence limit per policy or per
year, and in the alternative, a proper allocation of losses would substantially
limit its exposure under the 1969-1975 policies to asbestos claims. These and
other issues are being litigated in Continental Insurance Co., et al.
v. Honeywell International Inc., No. MRS-L-1523-00 (Morris County,
New Jersey).

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

CNA has been named in Adams v. Aetna, Inc., et al. (Circuit
Court of Kanawha County, West Virginia), a purported class action against CNA
and other insurers, alleging that the defendants violated West Virginias
Unfair Trade Practices Act in handling and resolving asbestos claims against
their policyholders. A direct action has also been filed in Montana
(Pennock, et al. v. Maryland Casualty, et al. First
Judicial District Court of Lewis & Clark County, Montana) by eight individual
plaintiffs (all employees of W.R. Grace & Co. (W.R. Grace)) and their spouses
against CNA, Maryland Casualty and the State of Montana. This action alleges
that the carriers failed to warn of or otherwise protect W.R. Grace employees
from the dangers of asbestos at a W.R. Grace vermiculite mining facility in
Libby, Montana. The Montana direct action is currently stayed as to CNA because
of W.R. Graces pending bankruptcy.

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

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

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Environmental Pollution and Mass Tort

Environmental pollution cleanup is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to cleanup. The insurance industry is involved in extensive litigation
regarding coverage issues. Judicial interpretations in many cases have
expanded the scope of coverage and liability beyond the original intent of the
policies. The Comprehensive Environmental Response Compensation and Liability
Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern
the cleanup and restoration of toxic waste sites and formalize the concept of
legal liability for cleanup and restoration by Potentially Responsible
Parties (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay
for cleanup of waste sites if PRPs fail to do so and 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 1,200 cleanup sites have been identified by the
Environmental Protection Agency (EPA) and included on its National Priorities
List (NPL). State authorities have designated many cleanup sites as well.

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

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

As of December 31, 2003 and 2002, CNA carried approximately $577 million and
$517 million of claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and mass tort
claims. Unfavorable environmental pollution and mass tort net prior year claim
and claim adjustment expense reserve development of $153 million, $0 million
and $468 million were recorded for the years ended December 31, 2003, 2002 and
2001. The Company paid environmental pollution-related claims and mass
tort-related claims, net of reinsurance recoveries, of $93 million, $116
million and $203 million for years ended December 31, 2003, 2002 and 2001.

CNA recorded $73 million in unfavorable net prior year environmental pollution
claim and claim adjustment expense reserve development in 2003. This increase
was in part due to the emergence of certain negative legal developments,
including several court decisions which have reduced the effectiveness of the
absolute pollution exclusion by limiting its application to traditional
industrial pollution, and which have increased the scope of damages compensable
under policies of insurance and the emergence of Natural Resource Damage claims
under the Superfund and other federal statutes.

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

The Company recorded $80 million in unfavorable net prior year mass tort claim
and claim adjustment expense development in 2003, due in part to the elevated
volume of silica claims. In 2003, CNA observed a marked increase in silica
claims frequency in Mississippi, where plaintiff attorneys appear to have filed
claims to avoid the effect of a tort reform. The most significant silica
exposures identified to date include a relatively small number of accounts with
significant numbers of new claims and substantial insurance limits issued by
the Company. Establishing claim and claim adjustment expense reserves for
silica claims is subject to uncertainties because of disputes concerning
medical causation with respect to certain diseases, including lung cancer,
geographical concentration of the lawsuits asserting the claims, and the large
rise in the total number of claims without underlying epidemiological
developments suggesting an increase in disease rates or plaintiffs. Moreover,
judicial interpretations regarding application of various tort defenses,
including application of various theories of joint and several liability,
impede the Companys ability to estimate its ultimate liability for such
claims.

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

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

Net Prior Year Development

2003 Net Prior Year Development

Unfavorable net prior year development of $2,952 million, including $2,409
million of unfavorable claim and claim adjustment expense reserve development
and $543 million of unfavorable premium development, was recorded in 2003. The
development discussed below includes premium development due to the direct
relationship of unfavorable premium development to the corporate aggregate and
other reinsurance treaties.

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Unfavorable net prior year development of $1,392 million, including $905
million of unfavorable claim and allocated claim adjustment expense reserve
development and $487 million of unfavorable premium development, was recorded
in 2003 for Standard Lines. The gross and net carried claim and claim
adjustment expense reserves were $12,983 million and $8,067 million at December
31, 2003. The gross and net carried claim and claim adjustment expense
reserves for Standard Lines were $11,576 million and $7,262 million at December
31, 2002.

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

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

Approximately $98 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development recorded in 2003, resulted from a
program covering facilities that provide services to developmentally disabled
individuals. This unfavorable net prior year development was due to an
increase in the size of known claims and increases in policyholder defense
costs. With regard to average claim size, recent data shows the average claim
increasing at an annual rate of approximately 20%. Prior data had shown
average claim size to be level. Similar to the average claim size, recent data
shows the average policyholder defense cost increasing at an annual rate of
approximately 20%. Prior data had shown average policyholder defense cost to
be level. The unfavorable net prior year claim and allocated claim adjustment
expense reserve development recorded was primarily for accident years 2001 and
prior.

Approximately $40 million of unfavorable net prior year claim and allocated
claim adjustment expense reserve development recorded in 2003 was for excess
workers compensation coverages due to increasing

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severity. The increase in severity means that a higher percentage of the total
loss dollars will be the Companys responsibility since more claims will exceed
the point at which the Companys coverage begins. The unfavorable net prior
year development recorded was primarily for accident year 2000.

Approximately $73 million of unfavorable net prior year development recorded in
2003 was the result of a commutation of all ceded reinsurance treaties with
Gerling Global Group of companies (Gerling), related to accident years 1999
through 2001, including $41 million of unfavorable net prior year claim and
allocated claim adjustment expense development and $32 million of unfavorable
net prior year premium development. See Note H for further information
regarding this commutation.

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

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

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

Also, offsetting the unfavorable net prior year development was a $216 million
underwriting benefit from cessions to corporate aggregate reinsurance treaties
recorded in 2003. The benefit is comprised of $485 million of ceded losses and
$269 million of ceded premiums for accident years 2000 and 2001.

Unfavorable net prior year development of $429 million, including $398 million
of unfavorable net claim and allocated claim adjustment expense reserve
development and $31 million of unfavorable premium development, was recorded in
2003 for Specialty Lines. The gross and net carried claim and claim adjustment
expense reserves were $6,470 million and $3,995 million at December 31, 2003.
The gross and net carried claim and claim adjustment expense reserves for
Specialty Lines were $5,874 million and $3,373 million at December 31, 2002.

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

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

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

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

Approximately $84 million of net prior year claim and claim adjustment expense
development was recorded during 2003 as the result of a commutation of ceded
reinsurance treaties with Gerling, relating to accident years 1999 through
2002.

The following net prior year claim and allocated claim adjustment expense
reserve development was recorded in 2003 as a result of the elimination of
deficiencies and redundancies in reserve positions within the segment. An
additional $50 million of unfavorable net prior year claim and allocated claim
adjustment expense reserve development was recorded related to medical
malpractice and long term care facilities. Partially offsetting this
unfavorable net prior year claim and allocated claim adjustment expense reserve
development was a $25 million underwriting benefit from cessions to corporate
aggregate reinsurance treaties. The benefit was comprised of $56 million of
ceded losses and $31 million of ceded premiums for accident years 2000 and
2001. See Note H for further discussion of the Companys aggregate reinsurance
treaties.

Unfavorable net prior year development of $149 million, including $118 million
of net unfavorable claim and allocated claim adjustment expense reserve
development and $31 million of unfavorable premium development, was recorded in
2003 for CNA Re. The gross and net carried claim and claim adjustment expense
reserves were $2,288 million and $1,257 million at December 31, 2003. The
gross and net carried claim and claim adjustment expense reserves for CNA Re
were $2,264 million and $1,362 million at December 31, 2002.

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

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

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

The following net prior year premium and claim and allocated claim adjustment
expense development, was recorded in 2003 as a result of the elimination of
deficiencies and redundancies in the reserve positions of individual products
within the segment. Unfavorable net prior year premium and claim and allocated
claim adjustment expense development of approximately $42 million related to
Surety exposures, $32 million related to excess of loss liability exposures and
$12 million related to facultative liability. Partially offsetting this
unfavorable net prior year premium and claim and allocated claim adjustment
expense development was approximately $55 million of favorable net prior year
development related to the WTC event as well as a $45 million underwriting
benefit from cessions to the corporate aggregate reinsurance treaties. The
benefit was comprised of $102 million of ceded losses and $57 million of ceded
premiums for accident years 2000 and 2001. See Note H for further discussion
of the Companys aggregate reinsurance treaties.

Unfavorable net prior year development of $875 million, including $881 million
of net unfavorable claim and allocated claim adjustment expense reserve
development and $6 million of favorable premium development was recorded in
2003 for Corporate and Other. The gross and net carried claim and claim
adjustment expense reserves were $7,046 million and $2,625 million at December
31, 2003. The gross and net carried claim and claim adjustment expense
reserves for Corporate and Other were $4,847 million and $2,002 million at
December 31, 2002.

This unfavorable net prior year development was principally driven by
unfavorable net prior year claim and allocated claim adjustment expense
development of $795 million related to APMT, which was previously discussed in
the APMT section above. Unfavorable net prior year claim and allocated claim
adjustment expense development of $50 million was recorded in 2003 relating to
the Companys past participation in several insurance pools that is part of the
group reinsurance run-off business.

2002 Net Prior Year Development

Unfavorable net prior year development of $126 million including $35 million of
unfavorable claim and claim adjustment expense reserve development and $91
million of unfavorable premium development was recorded in 2002. The
development discussed below includes premium development due to the direct
relationship of unfavorable premium development to the corporate aggregate and
other reinsurance treaties.

Favorable net prior year development of $154 million, including $221 million of
favorable claim and allocated claim adjustment expense reserve development and
$67 million of unfavorable premium development, was recorded in 2002 for
Standard Lines. The gross and net carried claim and claim adjustment expense
reserves for Standard Lines were $12,854 million and $7,788 million at December
31, 2001.

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Approximately $140 million of favorable net prior year development was
attributable to participation in the Workers Compensation Reinsurance Bureau
(WCRB), a reinsurance pool, and residual markets. The favorable net prior year
development for WCRB was the result of information received from the WCRB that
reported the results of a recent actuarial review. This information indicated
that the Companys net required reserves for accident years 1970 through 1996
were $60 million less than the carried reserves. In addition, during 2002, the
Company commuted accident years 1965 through 1969 for a payment of
approximately $5 million to cover carried reserves of approximately $13
million, resulting in further favorable net prior year development of $8
million. The favorable residual market net prior year development was the
result of lower than expected paid loss activity during recent periods for
accident years dating back to 1984. The paid losses during 2002 on prior
accident years were approximately 60% of the previously expected amount.

In addition, Standard Lines had favorable net prior year development, primarily
in the package liability and auto liability lines of business due to new claims
initiatives. Based on managements best estimate of the reduction in ultimate
claim costs, approximately $100 million of favorable prior year reserve
development was recorded in 2002. Approximately one-half of this favorable net
prior year development was recorded in accident years prior to 1999, with the
remainder of the favorable net prior year development recorded in accident
years 1999 to 2001.

Approximately $50 million of favorable net prior year development during 2002
was recorded in commercial automobile liability. Most of the favorable net
prior year development was from accident year 2000. Actuarial reviews in 2002
showed that underwriting actions have resulted in reducing the number of
commercial automobile liability claims for recent accident years, especially
the number of large losses.

Approximately $45 million of favorable net prior year development was recorded
in property lines during 2002. The favorable net prior year development was
principally from accident years 1999 through 2001, and was the result of the
low number of large losses in recent years. Although property claims are
generally reported relatively quickly, determining the ultimate cost of the
claim can involve a significant amount of time between the occurrence of the
claim and settlement.

Offsetting this favorable net prior year reserve development was approximately
$100 million of unfavorable premium development in middle market workers
compensation, approximately $70 million of unfavorable net prior year
development in programs written in CNA E&S, approximately $30 million of
unfavorable net prior year development on a contractors account package policy
program and approximately $20 million of unfavorable net prior year development
on middle market general liability coverages.

A CNA E&S program, covering facilities that provide services to developmentally
disabled individuals, accounts for approximately $50 million of the unfavorable
net prior year development. The unfavorable net prior year development was due
to an increase in the size of known claims and increases in policyholder
defense costs. These increases became apparent as the result of an actuarial
review completed during 2002, with most of the development recorded in accident
years 1999 and 2000. The other program which contributed to the CNA E&S
unfavorable net prior year development covers tow truck and ambulance operators
in the 2000 and 2001 accident years. This program was started in 1999. The
Company expected that loss ratios for this business would be similar to its
middle market commercial automobile liability business. Reviews completed
during the year resulted in estimated loss ratios on the tow truck and
ambulance business that are 25 points higher than the middle market commercial
automobile liability loss ratios.

The unfavorable net prior year development on contractors account package
policies was the result of an actuarial review completed during 2002. Since
this program is no longer being written, the Company

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expected that the change in reported losses would decrease each quarterly
period. However, in then recent quarterly periods, the change in reported
losses has been higher than prior quarters, resulting in the unfavorable net
prior year development.

Unfavorable net prior year development of $137 million, including $68 million
of unfavorable claim and allocated claim adjustment expense reserve development
and $69 million of unfavorable premium development, was recorded in 2002 for
Specialty Lines. The gross and net carried claim and claim adjustment expense
reserves for Specialty Lines were $5,668 million and $3,461 million at December
31, 2001.

Unfavorable net prior year development of approximately $180 million was
recorded for CNA HealthPro in 2002 and was driven principally by medical
malpractice excess products provided to hospitals and physicians and coverages
provided to long term care facilities, principally national for-profit nursing
homes. Approximately $100 million of the unfavorable net prior year
development was related to assumed excess products and loss portfolio
transfers, and was primarily driven by unexpected increases in the number of
excess claims in accident years 1999 and 2000. The percentage of total claims
greater than $1 million has increased by 33%, from less than 3% of all claims
to more than 4% of all claims. CNA HealthPro no longer writes assumed excess
products and loss portfolio transfers. Approximately $50 million of the
unfavorable net prior year unfavorable development was related to long term
care facilities. The unfavorable net prior year development principally
impacted accident years 1997 through 2000. The average value of claims closed
during the first several months of 2002 increased by more than 50% when
compared to claims closed during 2001. In response to those trends, CNA
HealthPro has reduced its writings of national for-profit nursing home chains.
Excess products provided to healthcare institutions and physician coverages in
a limited number of states was responsible for the remaining development in CNA
HealthPro. The unfavorable net prior year development on excess products
provided to institutions for accident years 1996 through 1999 resulted from
increases in the size of claims experienced by these institutions. Due to the
increase in the size of claims, more claims were exceeding the point at which
these excess products apply. The unfavorable net prior year development on
physician coverages was recorded for accident years 1999 through 2001 in
Oregon, California, Arizona and Nevada. The average claim size in these states
has increased by 20%, driving the change in losses.

The marine business recorded unfavorable net prior year development of
approximately $65 million during 2002. Approximately $50 million of this
unfavorable net prior year development was due to participation in voluntary
pools. About half of the net prior year development was recorded in accident
years 1999 and 2000 with the remainder attributable to accident years prior to
1999. The reserves were based on recommendations provided by the pools.
Participation in many of these pools has been discontinued. The remaining
unfavorable net prior year development for the Marine business was due
principally to unfavorable net prior year development on hull and liability
coverages from accident years 1999 and 2000 offset by favorable reserve
development on cargo coverages recorded for accident year 2001. Reviews
completed during 2002 showed additional reported losses on individual large
accounts and other bluewater business that drove the unfavorable hull and
liability reserve development. These additional losses during the first nine
months of 2002 for accident years 1999 and 2000 were almost 75% higher than the
provision that had been established at the end of 2001.

Offsetting the unfavorable net prior year development was favorable net prior
year development in CNA Pro and for Enron-related exposures. Programs
providing professional liability coverage to accountants, lawyers and realtors
primarily drove favorable net prior year development of approximately $110
million in CNA Pro. Reviews of this business completed during 2002 have shown
little activity for older accident years (principally prior to 1999), which
reduced the need for reserves on these years. The reported losses on these
programs for accident years prior to 1999 increased by approximately $5 million
during 2002. This increase compared to the total reserve at the beginning of
2002 of approximately

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$180 million, net of reinsurance. Additionally, favorable net prior year
development of $20 million was associated with the Enron settlement. The
Company had established a $20 million reserve for accident year 2001 for an
excess layer associated with Enron related surety losses; however the case has
settled for less than the attachment point of this excess layer.

A $16 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties in 2002, comprised of $55 million of ceded losses and $39
million of ceded premiums for accident year 2001.

Unfavorable net prior year development of $43 million, including $86 million of
unfavorable claim and allocated claim adjustment expense reserve development
and $43 million of favorable premium development, was recorded in 2002 for CNA
Re. The gross and net carried claim and claim adjustment expense reserves for
CNA Re were $4,644 million and $3,013 million for the December 31, 2001.

Unfavorable net prior year development was recorded as a result of an actuarial
review completed during 2002 and was primarily recorded in the directors and
officers, professional liability errors and omissions, and surety lines of
business. Several large losses, as well as continued increases in the overall
average size of claims for these lines, have resulted in higher than expected
loss ratios.

A $32 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties in 2002. The benefit was comprised of $93 million of
ceded losses and $61 million of ceded premiums for accident year 2001.

During 2002, CNA Re revised its estimate of premiums and losses related to the
WTC event. In estimating CNA Res WTC event losses, the Company performed a
treaty-by-treaty analysis of exposure. The Companys loss estimate was based
on a number of assumptions including the loss to the industry, the loss to
individual lines of business and the market share of CNA Res cedants.
Information available in 2002 resulted in CNA Re increasing its estimate of WTC
event related premiums and losses on its property facultative and property
catastrophe business. The impact of increasing the estimate of gross WTC event
losses by $144 million was fully offset on a net of reinsurance basis (before
the impact of the CCC Cover) by higher reinstatement premiums and a reduction
of return premiums.

Approximately $95 million of CNA Res net WTC loss estimate was attributable to
its United Kingdom subsidiary, CNA Re U.K., which was sold in 2002. See Note P
for further discussion of the sale.

Unfavorable net prior year development of $21 million, including $23 million of
unfavorable claim and allocated claim adjustment expense reserve development
and $2 million of favorable premium development, was recorded in 2002 for
Corporate and Other. The gross and net carried claim and claim adjustment
expense reserves for the Corporate and Other segment were $5,043 million and
$2,110 million at December 31, 2001.

Personal insurance recorded unfavorable net prior year development of $35
million on accident years 1997 through 1999. These losses were subject to a
retroactive ceded reinsurance agreement with Allstate that covers losses
occurring prior to October 1, 1999. This ceded reinsurance agreement was
entered into as part of the sale of the Companys personal insurance business
to Allstate. The unfavorable net prior year development was principally due to
continuing policyholder defense costs associated with remaining open claims.
At the end of 2002, approximately 4,800 claims remain open. It was anticipated
these claims would be closed more quickly, eliminating further defense coverage
costs.

The unfavorable net prior year development on personal insurance was offset by
favorable net prior year development on other run-off business driven
principally by financial and mortgage guarantee coverages from accident years
1997 and prior. The favorable net prior year development on financial and
mortgage

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guarantee coverages resulted from a review of the underlying exposures and the
outstanding losses. This review showed that salvage and subrogation continues
to be collected on these types of claims, thereby reducing estimated future
losses net of anticipated reinsurance recoveries.

2001 Net Prior Year Development

Unfavorable net prior year development of $3,482 million including $2,464
million of unfavorable claim and claim adjustment expense reserve development
and $1,018 million of unfavorable premium development was recorded in 2001.
The development discussed below includes premium development due to the direct
relationship of unfavorable premium development to the corporate aggregate and
other reinsurance treaties.

Unfavorable net prior year development of $894 million, including $96 million
of favorable claim and allocated claim adjustment expense reserve development
and $990 million of unfavorable premium development was recorded in 2001 for
Standard Lines. The gross and net carried claim and claim adjustment expense
reserves for the Standard Lines business at December 31, 2000 were $12,070
million and $9,129 million.

Approximately $230 million of the unfavorable net prior year development was a
result of several coverages provided to commercial entities. Reserve analyses
performed during 2001 showed unexpected increases in the size of claims for
several lines, including commercial automobile liability, general liability and
the liability portion of commercial multiple-peril coverages. In addition, the
number of commercial automobile liability claims was higher than expected and
several state-specific factors resulted in higher than anticipated losses,
including developments associated with commercial automobile liability coverage
in Ohio and general liability coverage provided to contractors in New York.
The unfavorable net prior year development was driven principally by accident
years 1997 through 2000. The remaining development affecting years prior to
1997 was driven principally by construction defect claims as described below.

The commercial automobile liability analysis indicated increased ultimate claim
and claim adjustment expense across several accident years due to higher paid
and reported claim and claim adjustment expense resulting from several factors.
These factors include uninsured/underinsured motorists coverage in Ohio, a
change in the rate at which the average claim size was increasing and a lack of
improvement in the ratio of the number of claims per exposure unit, the
frequency. First, Ohio courts had significantly broadened the population
covered through the uninsured/underinsured motorists coverage. The broadening
of the population covered by this portion of the policy, and the retrospective
nature of this broadening of coverage, resulted in additional claims for older
years. Second, in recent years, the average claim size had been increasing at
less than a 2% annual rate. The available data indicated that the rate of
increase was closer to 8% with only a portion of this increase explainable by a
change in mix of business. Finally, the review completed during the second
quarter of 2001 indicated that the frequency for the 2000 accident year was 6%
higher than 1999. Expectations were that the 2000 frequency would show an
improvement from the 1999 level.

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

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A $238 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties in 2001. The underwriting benefit was comprised of $443
million of ceded losses and $205 million of ceded premium for accident year
1999.

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

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

Approximately $188 million of this amount resulted from a change in estimate in
premiums related to involuntary market facilities, which had an offsetting
impact on net losses and therefore had no impact on the net operating results.
More than one-half of the change in estimate in premiums was attributable to
accident years 1997 through 1999 with the remainder attributable to accident
years prior to 1992. Accruals for ceded premiums related to reinsurance
treaties other than the corporate aggregate reinsurance treaties increased $83
million due to the reserve strengthening. This increase in accruals for ceded
premiums was principally recorded in accident year 2000. The remainder of the
decrease in premium accruals relates to the change in estimate of the amount of
retrospective premium receivables as discussed above, which were principally
recorded in accident years prior to 1999.

Unfavorable net prior year development of $453 million, including $415 million
of unfavorable claim and allocated claim adjustment expense reserve development
and $38 million of unfavorable premium development, was recorded in 2001 for
Specialty Lines. The gross and net claim and claim adjustment expense reserve
at December 31, 2000 for Specialty Lines were $4,813 million and $3,429
million.

Approximately $300 million of unfavorable net prior year development was due
primarily to coverages provided to healthcare-related entities written by CNA
HealthPro. The level of paid and reported losses associated with coverages
provided to national long term care facilities were higher than expected. The
long term care facility business had traditionally been limited to local
facilities. In recent years, the Company began to provide coverage to large
chains of long term care facilities. Original assumptions were that these
chains would exhibit loss ratios similar to the local facilities. The most
recent review of these large chains indicated an overall loss ratio in excess
of 500% versus approximately 100% for the remaining business. In addition, the
average size of claims resulting from coverages provided to physicians and
institutions providing healthcare related services increased more than
expected. The review indicated that the average loss had increased to over
$330 thousand. Prior to this review, the expectation for the average loss was
approximately $250 thousand. Unfavorable net prior year development of $240
million was recorded for accident years 1997 through 2000. The remaining
unfavorable net prior year development was attributable to accident years prior
to 1997.

Unfavorable net prior year development of $740 million, including $759 million
of unfavorable claim and allocated claim adjustment expense reserve development
and $19 million of favorable premium development, was recorded in 2001 for CNA
Re. The gross and net claim and claim adjustment expense reserves at December
31, 2000 for CNA Re were $4,238 million and $2,735 million.

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An analysis of assumed reinsurance business written by CNA Re showed that the
paid and reported losses for recent accident years were higher than
expectations, which resulted in management recording unfavorable net prior year
development of approximately $690 million. Because of the long and variable
reporting pattern associated with assumed reinsurance as well as uncertainty
regarding possible changes in the reporting methods of the ceding companies,
the carried reserves for assumed reinsurance was based mainly on the pricing
assumptions until experience emerges to show that the pricing assumptions are
no longer valid. The reviews completed during 2001, including analysis at the
individual treaty level, showed that the pricing assumptions were no longer
appropriate. The classes of business with the most significant changes
included excess of loss liability, professional liability and proportional and
retrocessional property. Approximately $470 million of the unfavorable net
prior year development was from accident years 1998 through 2000, and
approximately $150 million was from accident years 1996 and 1997. The
remaining $70 million of unfavorable net prior year development was
attributable to accident years prior to 1996.

A $32 million underwriting benefit was recorded for the corporate aggregate
reinsurance treaties in 2001. The underwriting benefit was comprised of $57
million of ceded losses and $25 million of ceded premium for accident year
1999.

Unfavorable net prior year development of $1,322 million, including $1,313
million of net unfavorable claim and allocated claim adjustment expense reserve
development and $9 million of unfavorable premium development, was recorded in
2001 for Corporate and Other. This unfavorable net prior year development was
principally attributable to $1,241 million related to APMT.

Note G. Legal Proceedings and Related Contingent Liabilities

IGI Contingency

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

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

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

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

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

California Wage and Hour Litigation

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 are purported class actions on behalf of
present and former CNA employees, asserting they worked hours for which they should have been compensated at a
rate of one and one-half times their base hourly wage over a four-year period.
The Company has denied the material allegations of the
amended complaint and intends to vigorously contest the claims. Based on facts and circumstances presently known in the
opinion of management, an unfavorable outcome would not materially
adversely 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 twelve
cases, including eleven purported class actions, brought by large policyholders which generally allege that the
defendants, as part of an industry-wide conspiracy, included improper charges
in their retrospectively rated and other loss-sensitive insurance programs.
Among the claims asserted are violations of state antitrust laws, breach of
contract, fraud and unjust enrichment. In one federal
court case Sandwich Chef of Texas, Inc. v.
Reliance National Indemnity Insurance Co., 202 F.R.D. 480 (S.D. Tex. 2001),
revd, 319 F.3d 205 (5th Cir. 2003), cert. denied, 72 USLW 3235 (U.S. Oct 6,
2003), the United States Court of Appeals for the Fifth Circuit
reversed a decision by the District Court for the Southern District of Texas
certifying a multi-state class. The Company intends to vigorously
contest these claims.  Based

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on facts and circumstances presently
known in the
opinion of management an unfavorable outcome will not materially affect the equity of the
Company, although results of operations may be adversely affected.

APMT Litigation

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

Other Litigation

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

Note H. Reinsurance

CNA assumes and cedes reinsurance to other insurers, reinsurers and members of
various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of
risk, minimize exposures on larger risks and to exit certain lines of business.
The ceding of insurance does not discharge the primary liability of the
Company.

Property and casualty reinsurance coverages are tailored to the specific risk
characteristics of each product line and CNAs retained amount varies by type
of coverage. Treaty reinsurance is purchased to protect specific lines of
business such as property, workers compensation, and professional liability.
Corporate catastrophe reinsurance is also purchased for property and workers
compensation exposure. Most treaty reinsurance is purchased on an excess of
loss basis. CNA also utilizes facultative reinsurance in certain lines.

CNAs ceded life reinsurance includes utilization of coinsurance, yearly
renewable term and facultative programs. A majority of the reinsurance
utilized by the Companys life insurance operations relates to term life
insurance policies. Term life insurance policies issued from 1994 onward are
generally ceded at 60-90% of the face value. Universal life policies issued
from 1998 onward are generally ceded at 75% of the face value.

The Companys overall reinsurance program includes certain property and
casualty contracts, such as the corporate aggregate reinsurance treaties
discussed in more detail below, 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 not remitted in cash is recorded as funds
withheld liabilities. 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
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 net
investment income, was $344 million, $239 million and $241 million in 2003,
2002 and 2001. The amount subject to interest crediting rates on such
contracts
was $2,789 million and $2,766 million at December 31, 2003 and 2002. Certain
funds withheld

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reinsurance contracts, including the corporate aggregate
reinsurance treaties, require interest on additional premiums arising from
ceded losses as if those premiums were payable at the inception of the
contract. The amount of retroactive interest, included in the totals above,
was $147 million, $10 million and $47 million in 2003, 2002 and 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 and
casualty and life reinsurance ceded to the extent that any reinsurer is unable
to meet the obligations assumed under reinsurance agreements.

The Company has reinsurance receivables from several reinsurers who have
recently experienced multiple downgrades of their financial strength ratings,
have announced that they will no longer accept new business and are placing
their books of business into run-off. One of the Companys principal credit
exposures from these recent events arises from reinsurance receivables from
Gerling Global (Gerling).

In 2003, the Company commuted all remaining ceded and assumed reinsurance
contracts with four Gerling entities. The commutations resulted in a pretax
loss of $109 million, which was net of a previously established allowance for
doubtful accounts of $47 million. The Company has no further exposure to the
Gerling companies that are in run-off.

Amounts receivable from reinsurers were $16,254 million and $12,696 million at
December 31, 2003 and 2002. Of these amounts, $813 million and $957 million
were billed to reinsurers as of December 31, 2003 and 2002, as reinsurance
contracts generally require payment of claims by the ceding company before the
amount can be billed to the reinsurer. The remaining receivable relates to the
estimated case and IBNR reserves and future policyholder benefits ceded under
reinsurance contracts.

The Company has established an allowance for doubtful accounts to provide for
estimated uncollectible reinsurance receivables. The allowance for doubtful
accounts was $573 million and $196 million at December 31, 2003 and 2002. The
reserve increased $377 million in 2003 primarily in
recognition of deterioration of the financial strength ratings of several
reinsurers, including Trenwick Group Ltd. and Commercial Risk Reinsurance
Company Ltd. In addition, in the third quarter of 2003, the Company updated
its reinsurance bad debt model based on recently published studies of reinsurer
insolvencies.

The Company attempts to mitigate its credit risk related to reinsurance by
entering into reinsurance arrangements only with reinsurers that have credit
ratings above certain levels and by obtaining substantial amounts of
collateral. The primary methods of obtaining collateral are through
reinsurance trusts, letters of credit and funds withheld balances. Such
collateral was approximately $5,255 million and $4,754 million at December 31,
2003 and 2002.

CNAs largest recoverables from a single reinsurer at December 31, 2003,
including prepaid reinsurance premiums, were approximately $2,533 million,
$2,033 million, $1,172 million, $977 million, $760 million, and $629 million
from subsidiaries of The Allstate Corporation (Allstate), subsidiaries of
Hannover Reinsurance (Ireland) Ltd., Hartford Life Group Insurance Company,
American Reinsurance Company, European Reinsurance Company of Zurich and
subsidiaries of the Berkshire Hathaway Group.

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Insurance claims and policyholders benefits reported in the Consolidated
Statements of Operations are net of reinsurance recoveries of $6,328 million,
$4,164 million and $7,221 million for 2003, 2002 and 2001.

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The effects of reinsurance on earned premiums and written premiums for the
years ended December 31, 2003, 2002 and 2001 are shown in the following tables.

Components of Earned Premiums

Assumed/Direct
    
    Assumed
    
    Ceded
    
    Net
    
    Net %(In millions)2003 Earned PremiumsProperty and casualty
    
    $
    10,661
    
    
    $
    726
    
    
    $
    4,452
    
    
    $
    6,935
    
    
    
    10.5
    %Accident and health
    
    
    1,602
    
    
    
    92
    
    
    
    59
    
    
    
    1,635
    
    
    
    5.6Life
    
    
    1,102
    
    
    
    7
    
    
    
    465
    
    
    
    644
    
    
    
    1.0Total earned premiums
    
    $
    13,365
    
    
    $
    825
    
    
    $
    4,976
    
    
    $
    9,214
    
    
    
    9.0
    %2002 Earned PremiumsProperty and casualty
    
    $
    9,694
    
    
    $
    946
    
    
    $
    3,812
    
    
    $
    6,828
    
    
    
    13.9
    %Accident and health
    
    
    2,612
    
    
    
    153
    
    
    
    15
    
    
    
    2,750
    
    
    
    5.6Life
    
    
    1,089
    
    
    
    (5
    )
    
    
    449
    
    
    
    635
    
    
    
    (0.7
    )Total earned premiums
    
    $
    13,395
    
    
    $
    1,094
    
    
    $
    4,276
    
    
    $
    10,213
    
    
    
    10.7
    %2001 Earned PremiumsProperty and casualty
    
    $
    8,708
    
    
    $
    1,228
    
    
    $
    4,983
    
    
    $
    4,953
    
    
    
    24.8
    %Accident and health
    
    
    3,644
    
    
    
    176
    
    
    
    136
    
    
    
    3,684
    
    
    
    4.8Life
    
    
    1,179
    
    
    
    217
    
    
    
    745
    
    
    
    651
    
    
    
    33.3Total earned premiums
    
    $
    13,531
    
    
    $
    1,621
    
    
    $
    5,864
    
    
    $
    9,288
    
    
    
    17.5
    %


Components of Written Premiums

Assumed/Direct
    
    Assumed
    
    Ceded
    
    Net
    
    Net %(In millions)2003 Written PremiumsProperty and casualty
    
    $
    10,880
    
    
    $
    649
    
    
    $
    4,450
    
    
    $
    7,079
    
    
    
    9.2
    %Accident and health
    
    
    1,601
    
    
    
    92
    
    
    
    59
    
    
    
    1,634
    
    
    
    5.6Life
    
    
    1,098
    
    
    
    6
    
    
    
    465
    
    
    
    639
    
    
    
    1.0Total written premiums
    
    $
    13,579
    
    
    $
    747
    
    
    $
    4,974
    
    
    $
    9,352
    
    
    
    8.0
    %2002 Written PremiumsProperty and casualty
    
    $
    9,978
    
    
    $
    953
    
    
    $
    3,936
    
    
    $
    6,995
    
    
    
    13.6
    %Accident and health
    
    
    2,618
    
    
    
    187
    
    
    
    13
    
    
    
    2,792
    
    
    
    6.7Life
    
    
    1,091
    
    
    
    (5
    )
    
    
    449
    
    
    
    637
    
    
    
    (0.7
    )Total written premiums
    
    $
    13,687
    
    
    $
    1,135
    
    
    $
    4,398
    
    
    $
    10,424
    
    
    
    10.9
    %2001 Written PremiumsProperty and casualty
    
    $
    9,132
    
    
    $
    1,435
    
    
    $
    5,173
    
    
    $
    5,394
    
    
    
    26.6
    %Accident and health
    
    
    3,637
    
    
    
    193
    
    
    
    137
    
    
    
    3,693
    
    
    
    5.2Life
    
    
    1,182
    
    
    
    217
    
    
    
    745
    
    
    
    654
    
    
    
    33.2Total written premiums
    
    $
    13,951
    
    
    $
    1,845
    
    
    $
    6,055
    
    
    $
    9,741
    
    
    
    18.9
    %


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The impact of reinsurance on life insurance inforce at December 31, 2003, 2002
and 2001 is shown in the following table.

Components of Life Insurance Inforce

Direct
    
    Assumed
    
    Ceded
    
    Net(In millions)2003
    
    $
    388,380
    
    
    $
    588
    
    
    $
    295,659
    
    
    $
    93,3092002
    
    
    423,151
    
    
    
    14,600
    
    
    
    340,520
    
    
    
    97,2312001
    
    
    395,167
    
    
    
    102,564
    
    
    
    331,156
    
    
    
    166,575


For 2002, the Company entered into a corporate aggregate reinsurance treaty
covering substantially all of the Companys property and casualty lines of
business (the 2002 Cover). Ceded premium related to the reinsurers margin of
$10 million was recorded in 2002. No losses were ceded under this contract,
and the 2002 Cover was commuted as of December 31, 2002.

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

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

The impact of the Aggregate Cover was as follows:

Impact of Aggregate Cover

Year ended December 31
    
    2003
    
    2002
    
    2001(In millions)Ceded earned premium
    
    $
    (258
    )
    
    $
    
    
    
    $
    (543
    )Ceded claim and claim adjustment expenses
    
    
    500
    
    
    
    
    
    
    
    1,010Interest charges
    
    
    (147
    )
    
    
    (51
    )
    
    
    (81
    )Pretax benefit (expense)
    
    $
    95
    
    
    $
    (51
    )
    
    $
    386


In 2001, the Company entered into a one-year aggregate reinsurance treaty
related to the 2001 accident year covering substantially all property and
casualty lines of business in the Continental Casualty

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Company pool (the CCC Cover). The loss protection provided by the CCC Cover
has an aggregate limit of approximately $761 million of ceded losses. The
ceded premiums are a percentage of ceded losses. The ceded premium related to
full utilization of the $761 million of limit is $456 million. The CCC Cover
provides continuous coverage in excess of the second section of the Aggregate
Cover discussed above. Under the CCC Cover, interest charges on the funds
withheld generally accrue at 8% per annum. The interest rate increases to 10%
per annum if the aggregate loss ratio exceeds certain thresholds. During 2003,
as a result of unfavorable development related to accident year 2001, the CCC
Cover was fully utilized.

The impact of the CCC Cover was as follows:

Impact of CCC Cover

Year ended December 31
    
    2003
    
    2002
    
    2001(In millions)Ceded earned premium
    
    $
    (100
    )
    
    $
    (101
    )
    
    $
    (260
    )Ceded claim and claim adjustment expenses
    
    
    143
    
    
    
    148
    
    
    
    470Interest charges
    
    
    (59
    )
    
    
    (37
    )
    
    
    (20
    )Pretax (expense) benefit
    
    $
    (16
    )
    
    $
    10
    
    
    $
    190


Note I. Debt

Debt is composed of the following obligations.

Debt

December 31
    
    2003
    
    2002(In millions)Variable rate debt:Credit facility  CNAF, due April 30, 2004
    
    $
    250
    
    
    $
    250Credit facility  CNA Surety, due September 30, 2005
    
    
    30
    
    
    
    30Term loan  CNA Surety, due through September 30, 2005
    
    
    20
    
    
    
    30Senior notes:7.250%, face amount of $128, due March 1, 2003
    
    
    
    
    
    
    1286.250%, face amount of $248, due November 15, 2003
    
    
    
    
    
    
    2486.500%, face amount of $493, due April 15, 2005
    
    
    492
    
    
    
    4916.750%, face amount of $250, due November 15, 2006
    
    
    249
    
    
    
    2496.450%, face amount of $150, due January 15, 2008
    
    
    149
    
    
    
    1496.600%, face amount of $200, due December 15, 2008
    
    
    199
    
    
    
    1998.375%, face amount of $70, due August 15, 2012
    
    
    69
    
    
    
    696.950%, face amount of $150, due January 15, 2018
    
    
    149
    
    
    
    148Debenture, 7.250%, face amount of $243, due November 15, 2023
    
    
    241
    
    
    
    240Capital
leases, 10.400%-11.500%, due through December 31, 2011
    
    
    33
    
    
    
    36Other debt, 1.000%-6.600%, due through 2019
    
    
    23
    
    
    
    25Total debt
    
    $
    1,904
    
    
    $
    2,292Short term debt
    
    $
    263
    
    
    $
    420Long term debt
    
    
    1,641
    
    
    
    1,872Total debt
    
    $
    1,904
    
    
    $
    2,292


The Company has a $250 million three-year bank credit facility with an April
30, 2004 expiration date.

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The Company pays a facility fee to the lenders for having funds available for
loans under the three-year credit facility maturing April 30, 2004. The fee
varies based on the long term debt ratings of the Company. At December 31,
2003, the facility fee on the three-year component was 25.0 basis points.

The Company pays interest on any outstanding debt/borrowings under the
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 75.0 basis points. 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.
At December 31, 2003 and 2002, the weighted-average interest rate on the
borrowings under the facility, including facility fees and utilization fees,
was 2.3%.

A Moodys Investors Service (Moodys) downgrade of the CNAF senior debt rating
from Baa2 to Baa3 on November 12, 2003, increased 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 increased from LIBOR plus 57.5 basis
points to LIBOR plus 75.0 basis points. The utilization fee remained unchanged
on the three-year facility at 12.5 basis points.

On September 30, 2003, CNA Surety Corporation (CNA Surety), a 64% owned and
consolidated subsidiary of CNA, entered into a $50 million credit agreement,
which consisted of a $30 million, two-year revolving credit facility and a $20
million two-year term loan, payable semi-annually at a rate of $5 million. The
credit agreement is an amendment to a $65 million credit agreement, extending
the revolving loan termination date from September 30, 2003 to September 30,
2005. The new revolving credit facility was fully utilized at inception.

Under the new credit facility agreement, CNA Surety pays a facility fee of 35.0
basis points, interest at LIBOR plus 90 basis points, and for utilization
greater than 50% of the amount available to borrow an additional fee of 5.0
basis points. On the term loan, CNA Surety pays interest at LIBOR plus 62.5
basis points. At December 31, 2003, the weighted-average interest rate on the
$50 million of outstanding borrowings under the credit agreement, including
facility fees and utilization fees, was 2.6%. Effective January 30, 2003, CNA
Surety entered into a swap agreement on the term loan portion of the agreement
which uses the 3-month LIBOR to determine the swap increment. As a result, the
effective interest rate on the $20 million in outstanding borrowings on the
term loan was 2.76% at December 31, 2003. On the $30 million revolving credit
agreement, the effective interest rate at December 31, 2003 was 2.55%.

The terms of CNAFs and CNA Suretys credit facilities require CNAF and CNA
Surety to maintain certain financial ratios and combined property and casualty
company statutory surplus levels. At December 31, 2003 and 2002, CNAF and CNA
Surety were in compliance with all restrictive debt covenants, except for the
fixed charge coverage ratio for which CNA
Surety obtained a waiver from the lenders effective
September 30, 2003. The lenders amended the CNA Surety
Credit Facility to replace the fixed charge coverage ratio. As a
result, CNAF and CNA Surety were in compliance with all restrictive
debt covenants at December 31, 2003.

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The combined aggregate maturities for debt at December 31, 2003 are presented
in the following table.

Maturity of Debt

(In millions)2004
    
    $
    2632005
    
    
    5362006
    
    
    2542007
    
    
    122008
    
    
    354Thereafter
    
    
    493Less original issue discount
    
    
    (8
    )Total
    
    $
    1,904


Note J. Benefit Plans

Pension and Postretirement Healthcare and Life Insurance Benefit Plans

CNAF and certain subsidiaries sponsor noncontributory pension plans typically
covering full-time employees age 21 or over who have completed at least one
year of service. While the terms of the plans vary, benefits are generally
based on years of credited service and the employees highest 60 consecutive
months of compensation. CNA uses December 31 as the measurement date for the
majority of its plans.

CNAs funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plans are invested
primarily in U.S. government securities with the balance in mortgage-backed
securities, equity investments, limited partnerships and short term
investments.

CNA provides certain healthcare and life insurance benefits to eligible retired
employees, their covered dependents and their beneficiaries. The funding for
these plans is generally to pay covered expenses as they are incurred.

In 2000, employees of CCC (approximately 79% of CNAs employees) who were
employed at December 31, 1999, and were still employed at April 24, 2000, were
required to make a choice regarding their continued participation in the
defined benefit pension plan. These employees were given two choices: 1) to
continue earning additional benefits in the defined benefit pension plan or 2)
to convert the present value of their accrued benefit in the pension plan to an
accrued pension account (APA) that would be credited with interest at the
30-year Treasury rate and to receive enhanced employer contributions to the
Savings and Capital Accumulation Plan (S-CAP) (see Savings Plan discussion
below). Approximately 60% of eligible employees elected the latter choice,
resulting in a curtailment charge of approximately $13 million pretax.
Additionally, this change in benefit plan participation resulted in a reduction
of the pension benefit obligation of $37 million at December 31, 2000.

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The following table provides a reconciliation of benefit obligations.

Benefit Obligations and Accrued Benefit Costs

Pension Benefits
    
    Postretirement Benefits2003
    
    2002
    
    2003
    
    2002(In millions)Benefit obligation at January 1
    
    $
    2,197
    
    
    $
    2,055
    
    
    $
    385
    
    
    $
    348Changes in benefit obligation:Service cost
    
    
    30
    
    
    
    34
    
    
    
    6
    
    
    
    5Interest cost
    
    
    143
    
    
    
    141
    
    
    
    22
    
    
    
    25Participants contributions
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    7Plan amendments
    
    
    1
    
    
    
    
    
    
    
    (30
    )
    
    
    11Actuarial loss
    
    
    146
    
    
    
    104
    
    
    
    (16
    )
    
    
    22Curtailment/settlement
    
    
    (25
    )
    
    
    16
    
    
    
    
    
    
    
    Benefits paid
    
    
    (149
    )
    
    
    (153
    )
    
    
    (31
    )
    
    
    (33
    )Benefit obligations at December 31
    
    
    2,343
    
    
    
    2,197
    
    
    
    345
    
    
    
    385Fair value of plan assets at January 1
    
    
    1,909
    
    
    
    1,844
    
    
    
    
    
    
    
    Change in plan assets:Actual return on plan assets
    
    
    196
    
    
    
    173
    
    
    
    
    
    
    
    Company contributions
    
    
    21
    
    
    
    26
    
    
    
    23
    
    
    
    26Participants contributions
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    7Curtailment/settlement
    
    
    (28
    )
    
    
    19
    
    
    
    
    
    
    
    Benefits paid
    
    
    (149
    )
    
    
    (153
    )
    
    
    (31
    )
    
    
    (33
    )Fair value of plan assets at December 31
    
    
    1,949
    
    
    
    1,909
    
    
    
    
    
    
    
    Funded status
    
    
    (394
    )
    
    
    (288
    )
    
    
    (345
    )
    
    
    (385
    )Unrecognized net actuarial loss
    
    
    368
    
    
    
    298
    
    
    
    108
    
    
    
    127Unrecognized prior service cost (benefit)
    
    
    13
    
    
    
    14
    
    
    
    (85
    )
    
    
    (71
    )Prepaid (accrued) benefit cost
    
    $
    (13
    )
    
    $
    24
    
    
    $
    (322
    )
    
    $
    (329
    )Amounts recognized in the Consolidated Balance Sheets:Prepaid benefit cost
    
    $
    11
    
    
    $
    85
    
    
    $
    
    
    
    $
    Accrued benefit liability
    
    
    (235
    )
    
    
    (83
    )
    
    
    (322
    )
    
    
    (329
    )Intangible assets
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    198
    
    
    
    22
    
    
    
    
    
    
    
    Prepaid (accrued) benefit cost
    
    $
    (13
    )
    
    $
    24
    
    
    $
    (322
    )
    
    $
    (329
    )


The accumulated benefit obligation for all defined benefit pension plans was
$2,173 and $1,965 at December 31, 2003 and 2002.

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The components of net periodic benefit costs are presented in the following
table.

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Pension benefitsService cost
    
    $
    30
    
    
    $
    34
    
    
    $
    38Interest cost on projected benefit obligation
    
    
    143
    
    
    
    141
    
    
    
    138Expected return on plan assets
    
    
    (145
    )
    
    
    (141
    )
    
    
    (134
    )Prior service cost amortization
    
    
    3
    
    
    
    3
    
    
    
    3Actuarial loss
    
    
    7
    
    
    
    4
    
    
    
    2Curtailment (gain) loss
    
    
    
    
    
    
    (8
    )
    
    
    3Settlement loss
    
    
    8
    
    
    
    11
    
    
    
    Net periodic pension cost
    
    $
    46
    
    
    $
    44
    
    
    $
    50Postretirement benefitsService cost
    
    $
    6
    
    
    $
    5
    
    
    $
    6Interest cost on projected benefit obligation
    
    
    22
    
    
    
    25
    
    
    
    23Prior service cost amortization
    
    
    (16
    )
    
    
    (16
    )
    
    
    (16
    )Actuarial loss
    
    
    4
    
    
    
    5
    
    
    
    3Curtailment gain
    
    
    
    
    
    
    
    
    
    
    (4
    )Net periodic postretirement cost
    
    $
    16
    
    
    $
    19
    
    
    $
    12Pension benefitsIncrease in minimum liability included in
other comprehensive income
    
    $
    176
    
    
    $
    (2
    )
    
    $
    24


Weighted-average actuarial assumptions used at December 31, 2003, 2002, and
2001 to determine benefit obligations are set forth in the following table.

Weighted-Average Actuarial Assumptions for
Benefit Obligations

2003
    
    2002
    
    2001December 31Pension benefitsDiscount rate
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    7.25
    %Expected return on plan assets
    
    
    8.00
    
    
    
    8.00
    
    
    
    8.00Rate of compensation increases
    
    
    5.83
    
    
    
    5.83
    
    
    
    5.83Postretirement benefitsDiscount rate
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    7.25
    %


Weighted-average actuarial assumptions used to determine net cost for the years
ended December 31, 2003, 2002 and 2001 are set forth in the following table.

Weighted-Average Actuarial Assumptions for Net Cost

2003
    
    2002
    
    2001December 31Pension benefitsDiscount rate
    
    
    6.75
    %
    
    
    7.25
    %
    
    
    7.50
    %Expected return on plan assets
    
    
    8.00
    
    
    
    8.00
    
    
    
    7.75Rate of compensation increases
    
    
    5.83
    
    
    
    5.83
    
    
    
    5.83Postretirement benefitsDiscount rate
    
    
    6.75
    %
    
    
    7.25
    %
    
    
    7.50
    %


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The long term rate of return for plan assets is determined using a building
block approach based on widely-accepted capital market principles, long term
return analysis for global fixed income and equity markets as well as the
active total return oriented portfolio management style. Long term trends are
evaluated relative to current market factors such as inflation, interest rates
and fiscal and monetary policies, in order to assess the capital market
assumptions as applied to the plan. Consideration of diversification needs and
rebalancing is maintained.

The Company has limited its share of the health care trend rate to a
cost-of-living adjustment not to exceed 4% per year. The assumed healthcare
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 4% per year in 2003. The healthcare cost trend rate assumption
has a significant effect on the amount of the benefit obligation and periodic
cost reported. An increase in the assumed healthcare cost trend rate of 1% in
each year would have no impact on the accumulated postretirement benefit
obligation or the aggregate net periodic postretirement benefit cost for 2003
as the cost-of-living adjustment is estimated to be 4% which is the maximum
contractual benefit. A decrease in the assumed healthcare cost trend rate of
1% in each year would decrease the accumulated postretirement benefit
obligation as of December 31, 2003 by $10 million and the aggregate net
periodic postretirement benefit cost for 2003 by $2 million.

The Companys pension plan weighted-average asset allocation at December 31,
2003 and 2002, by asset category are as follows:

Pension Plan Assets

Percentage of Plan AssetsDecember 31,2003
    
    2002Asset CategoryFixed maturity securities
    
    
    56
    %
    
    
    40
    %Equity securities
    
    
    13
    
    
    
    10Limited Partnerships
    
    
    11
    
    
    
    8Other
    
    
    20
    
    
    
    42Total
    
    
    100
    %
    
    
    100
    %


CNA employs a total return approach whereby a mix of equity and fixed maturity
securities are used to maximize the long term return of plan assets for a
prudent level of risk. The intent of this strategy is to minimize plan expenses
by outperforming plan liabilities over the long run. Risk tolerance is
established through careful consideration of the plan liabilities, plan funded
status and corporate financial conditions. The investment portfolio contains a
diversified blend of U.S. and non-U.S. fixed maturity and equity securities.
Alternative investments, including hedge funds, are used judiciously to enhance
risk adjusted long term returns while improving portfolio diversification.
Derivatives may be used to gain market exposure in an efficient and timely
manner. Investment risk is measured and monitored on an ongoing basis through
annual liability measurements, periodic asset/liability studies and quarterly
investment portfolio reviews.

CNA expects to contribute $12 million to its pension plan and $22 million to
its postretirement healthcare and life insurance benefit plans in 2004.

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Savings Plans

CNA sponsors savings plans, which are generally contributory plans that allow
most employees to contribute a maximum of 20% of their eligible compensation,
subject to certain limitations prescribed by the Internal Revenue Service. The
Company contributes matching amounts to participants, amounting to 70% of the
first 6% (35% of the first 6% in the first year of employment) of eligible
compensation contributed by the employee. Employees vest in these
contributions ratably over five years.

As noted above, during 2000, CCC employees were required to make a choice
regarding their continued participation in CCCs defined benefit pension plan.
Employees who elected to forego earning additional benefits in the defined
benefit pension plan and all employees hired by CCC on or after January 1, 2000
receive a Company contribution of 3% or 5% of their eligible compensation,
depending on their age.

In addition, these employees are eligible to receive additional discretionary
contributions of up to 2% of eligible compensation and an additional Company
match of up to 80% of the first 6% of eligible compensation contributed by the
employee. These contributions are made at the discretion of management and are
contributed to participant accounts in the first quarter of the year following
managements determination of the discretionary amounts. Employees do not vest
in these contributions until reaching five years of service.

Benefit expense for the Companys savings plans was $57 million, $51 million
and $53 million in 2003, 2002 and 2001.

Stock Options

The Board of Directors approved the CNA Long Term Incentive Plan (the LTI Plan)
during 1999 and subsequently merged it with the CNA Financial Corporation
Incentive Compensation Plan in February 2000. The LTI Plan authorizes the
grant of options to certain management personnel for up to 2.0 million shares
of the Companys common stock. All options granted have ten-year terms and
vest ratably over the four-year period following the date of grant. The number
of shares available for the granting of options under the LTI Plan as of
December 31, 2003, was approximately 0.1 million.

The following table presents activity under the LTI Plan during 2003, 2002 and
2001.

Option Plan Activity

2003
    
    2002
    
    2001Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageOption
    
    
    
    
    
    Option
    
    
    
    
    
    OptionNumber
    
    Price per
    
    Number
    
    Price per
    
    Number
    
    Price perOf Shares
    
    Share
    
    Of Shares
    
    Share
    
    Of Shares
    
    ShareBalance at January 1
    
    
    1,146,850
    
    
    $
    31.80
    
    
    
    892,100
    
    
    $
    33.43
    
    
    
    553,275
    
    
    $
    33.56Options granted
    
    
    384,000
    
    
    
    24.61
    
    
    
    440,200
    
    
    
    28.93
    
    
    
    514,000
    
    
    
    33.36Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,625
    )
    
    
    35.09Options forfeited
    
    
    (96,050
    )
    
    
    30.51
    
    
    
    (185,450
    )
    
    
    32.79
    
    
    
    (166,550
    )
    
    
    33.59Balance at December 31
    
    
    1,434,800
    
    
    $
    29.97
    
    
    
    1,146,850
    
    
    $
    31.80
    
    
    
    892,100
    
    
    $
    33.43Options exercisable at December 31
    
    
    551,575
    
    
    $
    32.73
    
    
    
    306,975
    
    
    $
    33.63
    
    
    
    144,102
    
    
    $
    34.13Weighted-average fair value per
share of options granted
    
    
    
    
    
    $
    5.43
    
    
    
    
    
    
    $
    6.45
    
    
    
    
    
    
    $
    7.76


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The weighted-average remaining contractual life of options outstanding as of
December 31, 2003, was eight years, and the range of exercise prices on those
options was $23.73 to $37.45.

The fair value of granted options was estimated at the grant date using the
Black-Scholes option-pricing model. The weighted-average fair value of options
granted during each of the three years ended December 31, 2003, 2002 and 2001
was $2 million, $3 million and $4 million. The following weighted-average
assumptions were used for the years ended December 31, 2003, 2002 and 2001:
risk free interest rate of 2.7%, 4.0%, and 4.5%; expected dividend yield of 0%;
and expected option life of five years. The weighted-average assumption for
the expected stock price volatility was 25.0%, 25.2% and 26.4% for the years
ended December 31, 2003, 2002 and 2001.

CNA Surety has reserved shares of its common stock for issuance to directors,
officers and employees of CNA Surety through incentive stock options,
non-qualified stock options and stock appreciation rights under separate plans
(CNA Surety Plans). The CNA Surety Plans have an aggregate number of 0.7
million shares available for which options may be granted. At December 31,
2003, approximately 1.7 million options were outstanding under these plans.

Note K. Operating Leases, Other Commitments and Contingencies, and Guarantees

Operating Leases

CNA occupies office facilities under lease agreements that expire at various
dates. In addition, data processing, office and transportation equipment is
leased under agreements that expire at various dates through 2008. Most leases
contain renewal options that provide for rent increases based on prevailing
market conditions. Lease expense for the years ended December 31, 2003, 2002
and 2001 was $66 million, $78 million, and $89 million. Lease and sublease
revenues for the years ended December 31, 2003, 2002 and 2001 were $6 million,
$9 million, and $21 million. In connection with the May of 2003
disposition of the improvements and real property located at 55 East Jackson
Boulevard, Chicago, Illinois building, CCC and CAC agreed to remain
liable under the two ground leases covering a portion of this property.
Although the two leases expire in 2058, CCC and CAC have certain collateral, as
well as certain contractual rights and remedies, in place to minimize any
exposure that may arise from the new owners failure to comply with its
obligations under the ground leases.

The table below presents the future minimum lease payments to be made under
non-cancelable operating leases along with future minimum sublease receipts to
be received on owned and leased properties at December 31, 2003.

Future Minimum Lease Payments and Sublease Receipts

Future
    
    FutureMinimum
    
    MinimumLease
    
    SubleasePayments
    
    Receipts(In millions)2004
    
    $
    68
    
    
    $
    82005
    
    
    57
    
    
    
    32006
    
    
    48
    
    
    
    22007
    
    
    39
    
    
    
    12008
    
    
    31
    
    
    
    1Thereafter
    
    
    73
    
    
    
    6Total
    
    $
    316
    
    
    $
    21


CNAF has provided parent company guarantees, which expire in 2015, related to
lease obligations of certain subsidiaries. Certain of those subsidiaries have
been sold; however, the lease obligation

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guarantees remain in effect. CNAF would be required to remit prompt payment on
leases in question if the primary obligor fails to observe and perform its
covenants under the lease agreements. The maximum potential amount of future
payments that the Company could be required to pay under these guarantees are
approximately $8 million at December 31, 2003.

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

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

In the event that the other parties to the joint venture are unable to meet
their commitments in funding the operations of this joint venture, the Company
would be required to assume the obligation for the entire office building
operating lease. The maximum potential future lease payments at December 31,
2003 that the Company could be required to pay under this guarantee is
approximately $347 million. If CNA was required to assume the entire lease
obligation, the Company would have the right to pursue reimbursement from the
other shareholders and would have the right to all sublease revenues.

Other Commitments and Contingencies

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 December 31, 2003 and 2002, there were approximately $58 million
and $222 million of outstanding letters of credit.

The Company has entered into a limited number of guaranteed payment contracts,
primarily relating to telecommunication services, amounting to approximately
$18 million. Estimated future minimum payments under these contracts are as
follows: $13 million in 2004, and $5 million in 2005.

The Company invests in multiple bank loan participations as part of its overall
investment strategy and has committed to additional future purchases and sales.
The purchase and sale of these investments are recorded on the date that the
legal agreements are finalized and cash settlement is made. As of December 31,
2003, the Company had commitments to purchase $53 million and commitments to
sell $1 million of various bank loan participations.

Guarantees

The Company has provided guarantees related to irrevocable standby letters of
credit for certain of its subsidiaries. Certain of these subsidiaries have
been sold; however, the irrevocable standby letter of credit guarantees remain
in effect. The Company would be required to make payment on the letters of
credit in question if the primary obligor drew down on these letters of credit
and failed to repay such loans in accordance with the terms of the letters of
credit. The maximum potential amount of future payments that CNA could be
required to pay under these guarantees is approximately $30 million at December
31, 2003.

CNA has provided guarantees of the indebtedness of certain of its independent
insurance producers, which expire in 2008. The Company would be required to
remit prompt and complete payment when due, should the primary obligor default.
In the event of default on the part of the primary obligor, the

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Company holds an interest in and to any and all shares of common stock of the
primary obligor. The maximum potential amount of future payments that CNA
could be required to pay under these guarantees is approximately $7 million at
December 31, 2003.

In the course of selling business entities and assets to third parties, the
Company has agreed to indemnify purchasers for losses arising out of breaches
of representation and warranties with respect to the business entities or
assets being sold, including, in certain cases, losses arising from undisclosed
liabilities or certain named litigation. Such indemnification provisions
generally survive for periods ranging from nine months following the applicable
closing date to the expiration of the relevant statutes of limitation. As of
December 31, 2003, the aggregate amount of quantifiable indemnification
agreements in effect for sales of business entities and assets was $580
million.

In addition, the Company has agreed to provide indemnification to third party
purchasers for certain losses associated with sold business entities or assets
that are not limited by a contractual monetary amount. As of December 31,
2003, the Company had outstanding unlimited indemnifications in connection with
the sales of certain of its business entities or assets for tax liabilities
arising prior to a purchasers ownership of an entity or asset, defects in
title at the time of sale, employee claims arising prior to closing and in some
cases losses arising from certain litigation and undisclosed liabilities.
These indemnification agreements survive until the applicable statutes of
limitation expire, or until the agreed upon contract terms expire. As of
December 31, 2003, the Company has recorded approximately $16 million of
liabilities related to these indemnification agreements.

Note L. Stockholders Equity and Statutory Financial Information

Capital stock (in whole numbers) is composed of the following:

Summary of Capital Stock

2003
    
    2002December 31Preferred stock, without par value, non-votingAuthorized
    
    
    12,500,000
    
    
    
    12,500,000Issued and outstanding:Series H (stated value $100,000 per share, held by Loews)
    
    
    7,500
    
    
    
    7,500Series I (stated value $23,200 per share, held by Loews)
    
    
    32,327
    
    
    
    Common stock, par value $2.50Authorized
    
    
    500,000,000
    
    
    
    500,000,000Issued
    
    
    225,850,270
    
    
    
    225,850,270Outstanding
    
    
    223,617,337
    
    
    
    223,608,868Treasury stock
    
    
    2,232,933
    
    
    
    2,241,402


On November 24, 2003, CNAF sold $750 million of its participating convertible
preferred stock, designated Series I (Series I Issue), to Loews. The Series I
Issue has terms that make it economically equivalent to CNAFs common stock.
The Series I Issue will convert into 32,327,015 shares of CNAF common stock,
utilizing a conversion price per share of common stock that was based on
average market prices of CNAF common stock from November 17, 2003 through
November 21, 2003. The terms of the Series I Issue were approved by a special
committee of independent members of CNAFs Board of Directors. Upon
conversion, Loews will own approximately 91% of CNAFs outstanding common stock
of approximately 255.9 million shares. Conversion will take place when the
Company satisfies applicable stock exchange requirements. The proceeds from
the Series I Issue were applied by CNAF to increase the statutory surplus of
CNAFs principal insurance subsidiary, CCC.

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During 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Series H Issue), to Loews. The
terms of the Series H Issue were approved by a special committee of independent
members of CNAFs Board of Directors.

The Series H Issue accrues cumulative dividends at an initial rate of 8% per
year, compounded annually. It will be adjusted quarterly to a rate equal to
400 basis points above the ten-year U.S. Treasury rate beginning with the
quarterly dividend after the first triggering event to occur of either (i) an
increase by two intermediate rating levels of the financial strength rating of
CCC from its rating at the time of issuance by any of A.M. Best Company,
Standard & Poors or Moodys or (ii) one year following an increase by one
intermediate rating level of the financial strength rating of CCC by any one of
those rating agencies. Accrued but unpaid cumulative dividends cannot be paid
on the Series H Issue unless and until one of the two triggering events
described above has occurred. Beginning with the quarter following an increase
of one intermediate rating level in CCCs financial strength rating, however,
current (but not accrued cumulative) quarterly dividends can be paid. As of
December 31, 2003, the Company has $62 million of undeclared but accumulated
dividends.

The Series H Issue is senior to CNAFs common stock and Series I Issue as to
the payment of dividends and amounts payable upon any liquidation, dissolution
or winding up. No dividends may be declared on CNAFs common stock until all
cumulative dividends on the Series H Issue have been paid. CNAF may not issue
any equity securities ranking senior to or on par with the Series H Issue
without the consent of a majority of its stockholders. The Series H Issue is
non-voting and is not convertible into any other securities of CNAF. It may be
redeemed only upon the mutual agreement of CNAF and a majority of the
stockholders of the preferred stock.

Of the proceeds of the Series H Issue, $250 million was used to prepay a bank
term loan due in April of 2003 and $250 million was contributed to CCC to
improve its statutory surplus. The remaining proceeds were used to repay other
debt of CNAF and Continental, which matured in 2003 and for other general
corporate purposes.

During 2001, CNA issued and sold 40,324,363 shares of common stock for $25 per
share through a rights offering to stockholders of record on August 23, 2001.
The net proceeds from the rights offering amounted to $1,006 million. In
connection with the rights offering, Loews purchased 38,281,644 shares.

CNAs Board of Directors has approved the Share Repurchase Program to purchase,
in the open market or through privately negotiated transactions, its
outstanding common stock, as Company management deems appropriate. No shares
of common stock were purchased during 2003 or 2002.

Statutory Accounting Practices (Unaudited)

CNAs insurance subsidiaries maintain their accounts in conformity with
accounting practices prescribed or permitted by state insurance regulatory
authorities which vary in certain respects from GAAP. In converting from
statutory to GAAP, typical adjustments include deferral of policy acquisition
costs and the inclusion of net realized holding gains or losses in
shareholders equity relating to fixed maturity securities. The National
Association of Insurance Commissioners (NAIC) developed a codified version of
statutory accounting principles, designed to foster more consistency among the
states for accounting guidelines and reporting.

CNAs insurance subsidiaries are domiciled in various jurisdictions. These
subsidiaries prepare statutory financial statements in accordance with
accounting practices prescribed or permitted by the respective jurisdictions
insurance regulators. Prescribed statutory accounting practices are set forth
in a variety of

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publications of the NAIC as well as state laws, regulations and general
administrative rules. The Companys insurance subsidiaries followed one
significant permitted accounting practice at December 31, 2002, related to
discounting of certain non-tabular workers compensation claims. The impact of
this permitted practice was to increase statutory surplus by approximately $24
million at December 31, 2002. This practice was followed by an acquired
company, and CNA received permission to eliminate the effect of the permitted
practice over a period of years, which ended in 2003.

In 2003, two of the Companys insurance subsidiaries received approval from
their respective domiciliary state insurance departments for two permitted
practices related to the statutory provision for reinsurance, or the
uncollectible reinsurance reserve. One permitted practice allows CCC to record
an additional uncollectible reinsurance reserve amount through a different
financial statement line item than the prescribed statutory convention. The
other permitted practice allows CCC to reflect in its financial statements the
statutory provision for reinsurance attributable to CIC as a result of the
reinsurance agreement implemented in the fourth quarter of 2003 between these
two companies. These two permitted practices had no effect on the combined
surplus for the Companys property-casualty insurance subsidiaries.

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

Dividends from CCC are subject to the insurance holding company laws of the
State of Illinois, the domiciliary state of CCC. Under these laws, ordinary
dividends, or dividends that do not require prior approval of the Illinois
Department of Insurance (the Department), may be paid only from earned surplus,
which is calculated by removing unrealized gains from unassigned surplus. As
of December 31, 2003, CCC is in a negative earned surplus position. Until CCC
is in a positive earned surplus position, all dividends require prior approval
of the Department. In January of 2004, the Department approved extraordinary
dividend capacity in the amount of approximately $312 million to be used to
fund the CNAFs 2004 debt service and principal repayment requirements.

In addition, by agreement with the New Hampshire Insurance Department, the CIC
Group may not pay dividends to CCC until after January 1, 2006.

CNAs domestic insurance subsidiaries are subject to risk-based capital
requirements. Risk-based capital is a method developed by the NAIC to
determine the minimum amount of statutory capital appropriate for an insurance
company to support its overall business operations in consideration of its size
and risk profile. The formula for determining the amount of risk-based capital
specifies various factors, weighted based on the perceived degree of risk,
which are applied to certain financial balances and financial activity. The
adequacy of a companys actual capital is evaluated by a comparison to the
risk-based capital results, as determined by the formula. Companies below
minimum risk-based capital requirements are classified within certain levels,
each of which requires specified corrective action. As of December 31, 2003
and 2002, all of CNAs domestic insurance subsidiaries exceeded the minimum
risk-based capital requirements.

As a result of the adverse 2003 charges, a capital plan was developed to
replenish the statutory capital of CNAs principal insurance subsidiaries. As a
result of the sale of the Group Benefits business, Loews purchased $46 million
of CCC surplus notes in February of 2004, pursuant to such commitment. In
addition, the sale of CNAs individual life business is expected to result in
an addition to CCCs statutory surplus in excess of $400 million. However, the
sale of the individual life business, which is subject to

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customary closing conditions and regulatory approvals, was not consummated by
February 26, 2004. As a result, Loews purchased $300 million of additional CCC
surplus notes in February of 2004. Following the consummation of the individual
life sale, CNA plans to seek approval from the insurance regulatory authority
for the repayment of the surplus notes purchased in relation to such sale,
although no assurance can be given that sale of the individual life business
will be consummated or that the regulatory approval will be obtained

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

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

Combined statutory capital and surplus and net income (loss), determined in
accordance with accounting practices prescribed or permitted by insurance
regulatory authorities for the property and casualty and the life and group
insurance subsidiaries, were as follows.

Statutory Information

Statutory Capital and Surplus
    
    Statutory Net (Loss) IncomeDecember 31 (a)
    
    Years Ended December 312003
    
    2002
    
    2003
    
    2002
    
    2001(In millions)Property and casualty companies
    
    $
    6,170
    
    
    $
    6,836
    
    
    $
    (1,484
    )
    
    $
    731
    
    
    $
    (1,650
    )Life and group insurance companies
    
    
    707
    
    
    
    1,645
    
    
    
    115
    
    
    
    37
    
    
    
    56




|(a) |  | Surplus includes the property and casualty companies equity ownership of
the life insurance subsidiaries in 2003, and the life and group insurance
subsidiaries in 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Note M. Comprehensive Income

Comprehensive income (loss) 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)

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Net (loss) income
    
    $
    (1,433
    )
    
    $
    155
    
    
    $
    (1,642
    )Other comprehensive income (loss):Change in unrealized gains/losses on general account investments:Holding gains (losses) arising during the period
    
    
    262
    
    
    
    305
    
    
    
    (35
    )Net unrealized gains/losses at beginning of period included in
realized gains/losses during the period
    
    
    199
    
    
    
    237
    
    
    
    (1,018
    )Net change in unrealized gains/losses on general account
investments
    
    
    461
    
    
    
    542
    
    
    
    (1,053
    )Net change in unrealized gains on separate accounts and other
    
    
    6
    
    
    
    53
    
    
    
    7Foreign currency translation adjustment
    
    
    50
    
    
    
    (18
    )
    
    
    6Minimum pension liability adjustment
    
    
    (176
    )
    
    
    2
    
    
    
    (24
    )Allocation to participating policyholders and minority interests
    
    
    (7
    )
    
    
    (19
    )
    
    
    (4
    )Other comprehensive income (loss), before tax and cumulative
effects of changes in accounting principles
    
    
    334
    
    
    
    560
    
    
    
    (1,068
    )Deferred income tax (expense) benefit related to other
comprehensive income (loss)
    
    
    (97
    )
    
    
    (182
    )
    
    
    363Other comprehensive income (loss), before cumulative effect of a
change in accounting principle
    
    
    237
    
    
    
    378
    
    
    
    (705
    )Cumulative effect of a change in accounting principle, net of tax
of $31
    
    
    
    
    
    
    
    
    
    
    58Other comprehensive income (loss), net of tax and cumulative
effect of a change in accounting principle
    
    
    237
    
    
    
    378
    
    
    
    (647
    )Total comprehensive (loss) income
    
    $
    (1,196
    )
    
    $
    533
    
    
    $
    (2,289
    )


In the preceding table, deferred income tax benefit and expense related to
other comprehensive income is attributable to each of the components of other
comprehensive income in equal proportion except for the foreign currency
translation adjustment, for which there are no deferred taxes.

The following table displays the components of accumulated other comprehensive
income included in the Consolidated Balance Sheets.

Accumulated Other Comprehensive Income

December 31
    
    2003
    
    2002(In millions)Cumulative foreign currency translation adjustment
    
    $
    41
    
    
    $
    (9
    )Minimum pension liability adjustment, net of tax of $69 and $8
    
    
    (129
    )
    
    
    (14
    )Net unrealized gains on investments and other, including
cumulative effect of a change in accounting principle, net of
tax
    
    
    929
    
    
    
    627Accumulated other comprehensive income
    
    $
    841
    
    
    $
    604


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Note N. Business Segments

In 2003, CNA conducted its operations through five operating segments:
Standard Lines, Specialty Lines and CNA Re (which comprise the property and
casualty segments), Group Operations and Life Operations. In addition to the
five operating segments, certain other activities are reported in the Corporate
and Other segment. These operating segments reflect the way CNA manages its
operations and makes business decisions.

Standard Lines works with an independent agency system and network of brokers
to market a broad range of property and casualty insurance products and
services to small, middle-market and large businesses. The Standard Lines
operating model focuses on underwriting performance, exposure based pricing,
relationships with selective distribution sources and understanding customers.
Standard Lines includes Property and Casualty and Excess & Surplus.

Specialty Lines provides professional, financial and specialty domestic and
international property and casualty products and services through a network of
brokers, managing general agencies and independent agencies. Specialty Lines
provides solutions for managing the risks of its clients, including architects,
engineers, lawyers, healthcare professionals, financial intermediaries and
corporate directors and officers. Product offerings also include surety and
fidelity bonds and vehicle and equipment warranty services. Specialty Lines
includes the following business groups: Professional Liability Insurance, CNA
Global, Surety, Warranty and CNA Guaranty and Credit.

In October of 2003, CNA sold most of the renewal rights for almost all of its
treaty business of CNA Re to Folksamerica, a wholly owned subsidiary of White
Mountains Insurance Group, Ltd. of Hamilton, Bermuda. See Note P for further
details of this transaction. Prior to the aforementioned sale, CNA Re had
operated primarily in the United States and in select global markets as a
reinsurer in the broker market for treaty products and in the direct market for
facultative products.

Group Operations provides group life, group health insurance and investment
products and services to employers, affinity groups, and other entities that
purchase insurance as a group. Group Operations includes three principal
business units: Group Benefits, Institutional Markets, and Federal Markets.
On December 31, 2003, CNA completed the sale of the majority of its Group
Benefits business to Hartford. The business sold included group life and
accident, short and long term disability and certain other products. CNAs
group long term care and specialty medical businesses were excluded from the
sale. Consideration from the sale was approximately $530 million, of which
$485 million was received on December 31, 2003, resulting in an after-tax
realized investment loss on the sale of $130 million during 2003. See Note P
of the Consolidated Financial Statements included under Item 8 for further
information.

During February of 2004, CNA also ceased new sales in its institutional markets
business. CNA will continue to accept new deposits and premiums only from
existing customers and will service its existing commitments. These businesses
will be managed as a run-off operation. CCC will provide credit enhancement
to Continental Assurance Company (CAC) for certain of CACs
investment and specialty medical products.

During 2003, CNA also ceased new sales
in its group long term care business. CNA will continue to service
its existing commitments.

Life Operations provides financial protection to individuals through term life
insurance, universal life insurance, individual long term care insurance,
annuities and other products. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers, and other independent insurance consultants.

In February of 2004, CNA entered into a definitive agreement to sell its
individual life insurance business to Swiss Re Life & Health America Inc.
(Swiss Re) for approximately $690 million. The business sold

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includes term, universal and permanent life insurance policies and individual
annuity products. The transaction is expected to be completed on or before
March 31, 2004, subject to certain customary closing conditions and regulatory
approvals. See Note T of the Consolidated Financial Statements included under
Item 8 for further information.

During February of 2004, CNA also ceased new sales in its structured settlement
business and will service its existing commitments. These businesses will be
managed as a run-off operation.

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

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

All significant intrasegment income and expense has been eliminated. Standard
Lines other revenues and expenses include revenues for services provided by
CNA ClaimsPlus and RSKCo 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 $116 million, $130
million and $154 million for the years ended December 31, 2003, 2002 and 2001.

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

Approximately 3.2%, 3.5% and 4.8% of CNAs gross written premiums were derived
from outside the United States, primarily the United Kingdom, for the years
ended December 31, 2003, 2002 and 2001. In 2001, the decision was made to
cease new and renewal business writings in CNA Re U.K. Gross written
premiums from the United Kingdom were approximately 1.8%, 1.7%, and 3.3% of
CNAs premiums for the years ended December 31, 2003, 2002 and 2001. Gross
written premiums from any individual foreign country, other than the United
Kingdom, were not significant.

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

Net operating income is calculated by excluding from net income the after-tax
effects of 1) net realized investment gains or losses, 2) gains or losses from
discontinued operations and 3) cumulative effects of changes in accounting
principles. In the calculation of net operating income, management excludes
after-tax net realized investment gains or losses because net realized
investment gains or losses related to the Companys available-for-sale
investment portfolio are largely discretionary, except for losses related to

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other-than-temporary impairments, are generally driven by economic factors that
are not necessarily consistent with key drivers of underwriting performance,
and are therefore not an indication of trends in insurance operations.

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

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Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    Corporate
    
    Elimi-Year ended December 31, 2003
    
    Lines
    
    Lines
    
    CNA Re
    
    Operations
    
    Operations
    
    and Other
    
    nations
    
    Total(In millions)Net earned premiums
    
    $
    3,743
    
    
    $
    2,666
    
    
    $
    536
    
    
    $
    1,312
    
    
    $
    1,029
    
    
    $
    42
    
    
    $
    (114
    )
    
    $
    9,214Net investment income
    
    
    336
    
    
    
    287
    
    
    
    72
    
    
    
    263
    
    
    
    524
    
    
    
    165
    
    
    
    
    
    
    
    1,647Other revenues
    
    
    198
    
    
    
    116
    
    
    
    7
    
    
    
    60
    
    
    
    103
    
    
    
    30
    
    
    
    (119
    )
    
    
    395Total operating revenues
    
    
    4,277
    
    
    
    3,069
    
    
    
    615
    
    
    
    1,635
    
    
    
    1,656
    
    
    
    237
    
    
    
    (233
    )
    
    
    11,256Claims, benefits and expenses
    
    
    5,820
    
    
    
    3,289
    
    
    
    669
    
    
    
    1,487
    
    
    
    1,597
    
    
    
    1,439
    
    
    
    (233
    )
    
    
    14,068Operating (loss) income from continuing
operations before income tax and minority
interest
    
    
    (1,543
    )
    
    
    (220
    )
    
    
    (54
    )
    
    
    148
    
    
    
    59
    
    
    
    (1,202
    )
    
    
    
    
    
    
    (2,812
    )Income tax benefit (expense) on operating income
    
    
    587
    
    
    
    103
    
    
    
    27
    
    
    
    (48
    )
    
    
    (14
    )
    
    
    433
    
    
    
    
    
    
    
    1,088Minority interest
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Net operating (loss) income from continuing
operations
    
    
    (956
    )
    
    
    (111
    )
    
    
    (27
    )
    
    
    100
    
    
    
    45
    
    
    
    (769
    )
    
    
    
    
    
    
    (1,718
    )Realized investment gains (losses), net of
participating policyholders and minority
interests
    
    
    338
    
    
    
    144
    
    
    
    73
    
    
    
    (177
    )
    
    
    36
    
    
    
    46
    
    
    
    
    
    
    
    460Income tax (expense) benefit on realized
investment gains (losses)
    
    
    (119
    )
    
    
    (50
    )
    
    
    (23
    )
    
    
    46
    
    
    
    (13
    )
    
    
    (16
    )
    
    
    
    
    
    
    (175
    )Net (loss) income
    
    $
    (737
    )
    
    $
    (17
    )
    
    $
    23
    
    
    $
    (31
    )
    
    $
    68
    
    
    $
    (739
    )
    
    $
    
    
    
    $
    (1,433
    )Reinsurance receivables
    
    $
    5,097
    
    
    $
    2,714
    
    
    $
    1,046
    
    
    $
    1,591
    
    
    $
    1,028
    
    
    $
    4,778
    
    
    $
    
    
    
    $
    16,254Insurance receivables
    
    
    2,063
    
    
    
    515
    
    
    
    186
    
    
    
    127
    
    
    
    56
    
    
    
    123
    
    
    
    
    
    
    
    3,070Insurance reserves:Claim and claim adjustment expense
    
    $
    12,983
    
    
    $
    6,470
    
    
    $
    2,288
    
    
    $
    1,404
    
    
    $
    1,539
    
    
    $
    7,046
    
    
    $
    
    
    
    $
    31,730Unearned premiums
    
    
    1,916
    
    
    
    1,874
    
    
    
    133
    
    
    
    1
    
    
    
    152
    
    
    
    815
    
    
    
    
    
    
    
    4,891Future policy benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654
    
    
    
    7,173
    
    
    
    334
    
    
    
    
    
    
    
    8,161Policyholders funds
    
    
    79
    
    
    
    3
    
    
    
    
    
    
    
    455
    
    
    
    67
    
    
    
    (3
    )
    
    
    
    
    
    
    601Deferred acquisition costs
    
    $
    415
    
    
    $
    342
    
    
    $
    31
    
    
    $
    48
    
    
    $
    1,697
    
    
    $
    
    
    
    $
    
    
    
    $
    2,533


179



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##### Table of Contents



Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    Corporate
    
    Elimi-Year ended December 31, 2002
    
    Lines
    
    Lines
    
    CNA Re
    
    Operations
    
    Operations
    
    and Other
    
    nations
    
    Total(In millions)Net earned premiums
    
    $
    4,018
    
    
    $
    2,178
    
    
    $
    642
    
    
    $
    2,327
    
    
    $
    930
    
    
    $
    156
    
    
    $
    (38
    )
    
    $
    10,213Net investment income
    
    
    398
    
    
    
    253
    
    
    
    144
    
    
    
    252
    
    
    
    540
    
    
    
    143
    
    
    
    
    
    
    
    1,730Other revenues
    
    
    323
    
    
    
    146
    
    
    
    2
    
    
    
    92
    
    
    
    106
    
    
    
    72
    
    
    
    (146
    )
    
    
    595Total operating revenues
    
    
    4,739
    
    
    
    2,577
    
    
    
    788
    
    
    
    2,671
    
    
    
    1,576
    
    
    
    371
    
    
    
    (184
    )
    
    
    12,538Claims, benefits and expenses
    
    
    4,487
    
    
    
    2,492
    
    
    
    701
    
    
    
    2,514
    
    
    
    1,431
    
    
    
    541
    
    
    
    (184
    )
    
    
    11,982Restructuring and other related charges
    
    
    (8
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (27
    )
    
    
    
    
    
    
    (37
    )Operating income (loss) from continuing operations
before income tax and minority interest
    
    
    260
    
    
    
    86
    
    
    
    87
    
    
    
    157
    
    
    
    146
    
    
    
    (143
    )
    
    
    
    
    
    
    593Income tax (expense) benefit on operating income
    
    
    (63
    )
    
    
    (32
    )
    
    
    (22
    )
    
    
    (53
    )
    
    
    (52
    )
    
    
    51
    
    
    
    
    
    
    
    (171
    )Minority interest
    
    
    
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )Net operating income (loss) from continuing
operations
    
    
    197
    
    
    
    28
    
    
    
    65
    
    
    
    104
    
    
    
    94
    
    
    
    (92
    )
    
    
    
    
    
    
    396Realized investment (losses) gains, net of
participating policyholders and minority
interests
    
    
    (86
    )
    
    
    (77
    )
    
    
    81
    
    
    
    (60
    )
    
    
    (111
    )
    
    
    1
    
    
    
    
    
    
    
    (252
    )Income tax benefit (expense) on realized
investment (losses) gains
    
    
    30
    
    
    
    25
    
    
    
    (10
    )
    
    
    21
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    103Loss from discontinued operations, net of tax of $9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )Cumulative effect of a change in accounting
principle, net of tax of $7
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (1
    )
    
    
    
    
    
    
    (57
    )Net income (loss)
    
    $
    141
    
    
    $
    (72
    )
    
    $
    136
    
    
    $
    65
    
    
    $
    (23
    )
    
    $
    (92
    )
    
    $
    
    
    
    $
    155Reinsurance receivables
    
    $
    5,096
    
    
    $
    2,678
    
    
    $
    930
    
    
    $
    201
    
    
    $
    911
    
    
    $
    2,880
    
    
    $
    
    
    
    $
    12,696Insurance receivables
    
    
    1,977
    
    
    
    580
    
    
    
    252
    
    
    
    79
    
    
    
    47
    
    
    
    228
    
    
    
    
    
    
    
    3,163Insurance reserves:Claim and claim adjustment expense
    
    $
    11,576
    
    
    $
    5,874
    
    
    $
    2,264
    
    
    $
    1,400
    
    
    $
    1,409
    
    
    $
    4,847
    
    
    $
    
    
    
    $
    27,370Unearned premiums
    
    
    1,811
    
    
    
    1,763
    
    
    
    195
    
    
    
    7
    
    
    
    149
    
    
    
    908
    
    
    
    (13
    )
    
    
    4,820Future policy benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    571
    
    
    
    6,503
    
    
    
    335
    
    
    
    
    
    
    
    7,409Policyholders funds
    
    
    47
    
    
    
    3
    
    
    
    
    
    
    
    470
    
    
    
    63
    
    
    
    (3
    )
    
    
    
    
    
    
    580Deferred acquisition costs
    
    $
    421
    
    
    $
    319
    
    
    $
    47
    
    
    $
    107
    
    
    $
    1,657
    
    
    $
    
    
    
    $
    
    
    
    $
    2,551


180



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##### Table of Contents



Standard
    
    Specialty
    
    
    
    
    
    Group
    
    Life
    
    Corporate
    
    Elimi-Year ended December 31, 2001
    
    Lines
    
    Lines
    
    CNA Re
    
    Operations
    
    Operations
    
    and Other
    
    nations
    
    Total(In millions)Net earned premiums
    
    $
    2,473
    
    
    $
    1,896
    
    
    $
    641
    
    
    $
    3,378
    
    
    $
    873
    
    
    $
    89
    
    
    $
    (62
    )
    
    $
    9,288Net investment income
    
    
    488
    
    
    
    314
    
    
    
    172
    
    
    
    241
    
    
    
    486
    
    
    
    155
    
    
    
    
    
    
    
    1,856Other revenues
    
    
    341
    
    
    
    122
    
    
    
    5
    
    
    
    104
    
    
    
    121
    
    
    
    158
    
    
    
    (168
    )
    
    
    683Total operating revenues
    
    
    3,302
    
    
    
    2,332
    
    
    
    818
    
    
    
    3,723
    
    
    
    1,480
    
    
    
    402
    
    
    
    (230
    )
    
    
    11,827Claims, benefits and expenses
    
    
    4,004
    
    
    
    2,779
    
    
    
    1,686
    
    
    
    3,654
    
    
    
    1,353
    
    
    
    1,907
    
    
    
    (230
    )
    
    
    15,153Restructuring and other related charges
    
    
    46
    
    
    
    9
    
    
    
    6
    
    
    
    42
    
    
    
    29
    
    
    
    119
    
    
    
    
    
    
    
    251Operating (loss) income from continuing operations
before income tax and minority interest
    
    
    (748
    )
    
    
    (456
    )
    
    
    (874
    )
    
    
    27
    
    
    
    98
    
    
    
    (1,624
    )
    
    
    
    
    
    
    (3,577
    )Income tax benefit (expense) on operating income
    
    
    297
    
    
    
    148
    
    
    
    252
    
    
    
    (5
    )
    
    
    (35
    )
    
    
    533
    
    
    
    
    
    
    
    1,190Minority interest
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )Net operating (loss) income from continuing
operations
    
    
    (451
    )
    
    
    (329
    )
    
    
    (622
    )
    
    
    22
    
    
    
    63
    
    
    
    (1,091
    )
    
    
    
    
    
    
    (2,408
    )Realized investment gains (losses), net of
participating policyholders and minority interests
    
    
    697
    
    
    
    262
    
    
    
    (77
    )
    
    
    59
    
    
    
    155
    
    
    
    166
    
    
    
    
    
    
    
    1,262Income tax (expense) benefit on realized investment
gains (losses)
    
    
    (246
    )
    
    
    (92
    )
    
    
    35
    
    
    
    (22
    )
    
    
    (53
    )
    
    
    (68
    )
    
    
    
    
    
    
    (446
    )Income from discontinued operations, net of tax of $2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    11Cumulative effect of a change in accounting
principle, net of tax of $33
    
    
    (30
    )
    
    
    (14
    )
    
    
    (5
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (8
    )
    
    
    
    
    
    
    (61
    )Net (loss) income
    
    $
    (30
    )
    
    $
    (173
    )
    
    $
    (669
    )
    
    $
    58
    
    
    $
    173
    
    
    $
    (1,001
    )
    
    $
    
    
    
    $
    (1,642
    )


181



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##### Table of Contents



The following table provides revenue by line of business for each reportable
segment. Revenues are comprised of operating revenues and realized investment
gains and losses, net of participating policyholders and minority interests.

Revenue by Line of Business

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Standard LinesProperty and Casualty
    
    $
    3,145
    
    
    $
    3,012
    
    
    $
    2,955Excess & Surplus
    
    
    1,470
    
    
    
    1,641
    
    
    
    1,044Standard Lines revenue
    
    
    4,615
    
    
    
    4,653
    
    
    
    3,999Specialty LinesProfessional Liability Insurance
    
    
    1,612
    
    
    
    1,083
    
    
    
    1,120CNA Global
    
    
    932
    
    
    
    773
    
    
    
    787CNA Guaranty & Credit
    
    
    10
    
    
    
    35
    
    
    
    61Surety
    
    
    346
    
    
    
    325
    
    
    
    346Warranty
    
    
    313
    
    
    
    284
    
    
    
    280Specialty Lines revenue
    
    
    3,213
    
    
    
    2,500
    
    
    
    2,594CNA Re
    
    
    688
    
    
    
    869
    
    
    
    741Group OperationsGroup Benefits
    
    
    1,317
    
    
    
    1,325
    
    
    
    1,337Institutional Markets & Other
    
    
    141
    
    
    
    135
    
    
    
    214Federal Markets
    
    
    
    
    
    
    1,151
    
    
    
    2,231Group Operations revenue
    
    
    1,458
    
    
    
    2,611
    
    
    
    3,782Life Operations revenue
    
    
    1,692
    
    
    
    1,465
    
    
    
    1,635Corporate and Other revenue
    
    
    283
    
    
    
    372
    
    
    
    568Intersegment eliminations
    
    
    (233
    )
    
    
    (184
    )
    
    
    (230
    )Total revenue
    
    $
    11,716
    
    
    $
    12,286
    
    
    $
    13,089


Note O. Restructuring and Other Related Charges

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

IT Plan

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

182



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##### Table of Contents



The following table summarizes the IT Plan accrual and the activity in that
accrual since inception.

IT Plan Accrual

EmployeeTermination
    
    Impairedand Related
    
    Asset
    
    OtherBenefit Costs
    
    Charges
    
    Costs
    
    Total(In millions)IT Plan Initial Accrual
    
    $
    29
    
    
    $
    32
    
    
    $
    1
    
    
    $
    62Costs 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
    
    
    
    11Payments charged against liability in 2002
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Reduction of accrual
    
    
    (3
    )
    
    
    
    
    
    
    (1
    )
    
    
    (4
    )Accrued costs at December 31, 2002
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Payments charged against liability in 2003
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Accrued costs at December 31, 2003
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    3


During 2001, the Company incurred $62 million pretax, or $40 million after-tax,
of restructuring and other related charges for the IT Plan. During 2002, $4
million pretax, or $3 million after-tax, of this accrual was reduced. No
restructuring and other related charges related to the IT Plan were incurred in
2003.

2001 Plan

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

183



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##### Table of Contents



The following table summarizes the 2001 Plan accrual and the activity in that
accrual since inception.

2001 Plan Accrual

EmployeeTermination
    
    Lease
    
    Impairedand Related
    
    Termination
    
    Asset
    
    OtherBenefit Costs
    
    Costs
    
    Charges
    
    Costs
    
    Total(In millions)2001 Plan Initial Accrual
    
    $
    68
    
    
    $
    56
    
    
    $
    30
    
    
    $
    35
    
    
    $
    189Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (35
    )Payments charged against liability
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )Accrued costs December 31, 2001
    
    
    66
    
    
    
    56
    
    
    
    30
    
    
    
    
    
    
    
    152Costs that did not require cash
    
    
    (1
    )
    
    
    (3
    )
    
    
    (9
    )
    
    
    
    
    
    
    (13
    )Payments charged against liability
    
    
    (53
    )
    
    
    (12
    )
    
    
    (4
    )
    
    
    
    
    
    
    (69
    )Reduction of accrual
    
    
    (10
    )
    
    
    (7
    )
    
    
    (15
    )
    
    
    
    
    
    
    (32
    )Accrued costs December 31, 2002
    
    
    2
    
    
    
    34
    
    
    
    2
    
    
    
    
    
    
    
    38Costs that did not require cash
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Payments charged against liability
    
    
    (2
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )Accrued costs December 31, 2003
    
    $
    
    
    
    $
    19
    
    
    $
    1
    
    
    $
    
    
    
    $
    20


During 2001, the Company incurred $189 million pretax, or $125 million
after-tax, of restructuring and other related charges for the 2001 Plan.
During 2002, $32 million pretax, or $21 million after-tax, of this accrual was
reduced. No restructuring and other related charges related to the 2001 Plan
were incurred in 2003.

Note P. Significant Transactions

Group Benefits Sale

On December 31, 2003, the Company completed the sale of the majority of its
Group Benefits business through the sale of CNAGLA to Hartford Financial
Services Group, Inc. (Hartford). The business sold included group life and
accident, short and long term disability and certain other products. CNAs
group long term care and specialty medical businesses were excluded from the
sale. In connection with the sale, CNA will receive consideration of
approximately $530 million and recorded an after-tax realized investment loss
on the sale of $130 million. Also as part of the sale, approximately 1,200
employees were transferred to Hartford.

As a result of this agreement, Hartford assumed assets and liabilities of $2.4
billion and $1.6 billion at December 31, 2003. The assets and liabilities of
the CNA Group Benefits business sold were $2.2 billion and $1.6 billion at
December 31, 2002. The revenues of the Group Benefits business were $1,204
million, $1,137 million and $1,098 million for the years ended December 31,
2003, 2002 and 2001. Net income was $52 million, $38 million and $19 million
for the years ended December 31, 2003, 2002 and 2001.

Assumed Reinsurance Renewal Rights Sale

In October of 2003, the Company entered into an agreement to sell the renewal
rights for most of the treaty business of CNA Re to Folksamerica Reinsurance
Company (Folksamerica). Under the terms of the transaction, Folksamerica will
compensate CNA based upon the amount of premiums renewed by

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Folksamerica over the next two contract renewals. The renewal rights
transaction did not have a material effect on results of operations.
Concurrent with the sale, CNA withdrew from the assumed reinsurance business
(the CNA Re segment) and will manage the run-off of its retained liabilities.

National Postal Mail Handlers Union Contract Termination

During the second quarter of 2002, the Company sold Claims Administration
Corporation and transferred the National Postal Handlers Union group benefits
plan (the Mail Handlers Plan) to First Health Group Corporation. As a result
of this transaction, the Company recognized a $7 million pretax realized loss
on the sale of Claims Administration Corporation and $15 million of pretax
non-recurring fee income, related to the transfer of the Mail Handlers Plan.

The assets and liabilities of Claims Administration Corporation and the Mail
Handlers Plan were $352 million and $350 million at December 31, 2001. The
revenues of Claims Administration Corporation and the Mail Handlers Plan were
$1,151 million and $2,231 million for the years ended December 31, 2002 and
2001.

Net income from Claims Administration Corporation and Mail Handlers Plan was $5
million, including the non-recurring fee income, and $16 million for the years
ended December 31, 2002 and 2001.

CNA Re U.K. and Other 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 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 realized
investment gains/losses.

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 year ended December 31, 2001 totaled approximately $33 million. These
businesses contributed approximately $11 million of net loss in the year ended
December 31, 2001.

The Company regularly updates its impairment analyses and adjusts its loss as
necessary. Based on these updated analyses the impairment loss was reduced by
approximately $170 million after-tax in the fourth quarter of 2001, 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. The reduction of the impairment
was included in realized investment gains/losses.

On October 31, 2002, the Company completed the sale of CNA Re U.K. to Tawa UK
Limited (Tawa), a subsidiary of Artemis Group, a diversified French-based
holding company. The sale includes business underwritten since inception by
CNA Re U.K., except for certain risks retained by CCC as discussed below.

The purchase price was $1, subject to adjustments based primarily upon the
results of operations and realized foreign currency losses of CNA Re U.K.
Under the terms of the purchase price adjustment, CCC is entitled to receive $5
million from Tawa after Tawa is able to legally withdraw funds from the former
CNA Re U.K. entities; at December 31, 2003, CNA has received approximately $2
million. CCC has

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also committed to contribute up to $5 million to the former CNA Re U.K.
entities over a four-year period beginning in 2010 should the Financial
Services Authority (FSA) deem those entities to be undercapitalized. The
purchase price adjustment related to foreign currency losses resulted in CNA
contributing additional capital to CNA Re U.K. of $11 million. The Company
finalized its impairment analysis based upon the terms of the completed
transactions and reduced the impairment loss by approximately $39 million
after-tax. The reduction of the impairment was included in net realized
investment gains.

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

CNA Re U.K. had revenues of approximately $48 million and $280 million for the
two years ended December 31, 2002 and 2001. CNA Re U.K. had net losses of $22
million and $374 million for the years ended December 31, 2002 and 2001. The
assets and liabilities of CNA Re U.K., including the effects of the concurrent
transactions, were approximately $2,442 million and $2,357 million at the date
of sale.

Personal Insurance Transaction

On October 1, 1999, certain subsidiaries of CNA completed a transaction with
The Allstate Corporation (Allstate), whereby CNAs Personal Insurance lines of
business and related employees were transferred to Allstate. Approximately
$1.1 billion of cash and $1.1 billion of additional assets (primarily premium
receivables and deferred acquisition costs) were transferred to Allstate, and
Allstate assumed $2.2 billion of claim and claim adjustment expense reserves
and unearned premium reserves. Additionally, CNA received $140 million in
cash, which consisted of 1) $120 million in ceding commission for the
reinsurance of the CNA personal insurance business by Allstate and 2) $20
million for an option exercisable during 2002 to purchase 100% of the common
stock of five CNA insurance subsidiaries at a price equal to the GAAP carrying
value as of the exercise date. Also, CNA invested $75 million in a ten-year
equity-linked note issued by Allstate.

Subsequent to the sale, Allstate and CNA agreed to modify a number of the
original terms of the transaction. The following is an overview of the
significant modifications to the terms of the original agreement:



|1) |  | CNA has substituted subsidiaries for the originally named subsidiaries
and extended the purchase option period for the substituted subsidiaries
through 2005. The Company has compensated Allstate for the postponement
of its right to exercise the option due to the substitution of companies
in the amount of $7 million, reducing the original payment from Allstate
of $20 million to approximately $13 million. The $13 million will
continue to be deferred and will not be recognized until Allstate
exercises its option, at which time it will be recorded as a realized
gain.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2) |  | The $75 million ten-year equity-linked note issued by Allstate in October
of 1999 was redeemed by Allstate at par plus accrued interest.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------

An amendment to the December of 2001 Option Agreement was signed by both
Allstate and CNA in December of 2002. The amendment modified certain terms and
provisions of the Option Agreement related to the option companies and licenses
needed to be acquired, and substituted payment for certain of the licenses in
one of the option companies provided for in the December 10, 2001 transaction.

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CNA will continue to write new and renewal personal insurance policies and to
reinsure this business with Allstate companies until such time as Allstate
exercises its option to buy the CNA subsidiaries. CNA continues to have
primary liability on policies reinsured by Allstate. Through 2005, CNA will
continue to receive a royalty fee based on the volume of personal insurance
business sold through CNA agents using the terms of the original agreement.
Royalty fees earned in 2003, 2002 and 2001 were approximately $27 million, $27
million and $26 million.

CNA shares in indemnity and claim and allocated claim adjustment expenses if
payments related to losses incurred prior to October 1, 1999 on the CNA
policies transferred to Allstate exceed the claim and allocated claim
adjustment expense reserves of approximately $1 billion at the date of sale.
CNAs obligation with respect to unallocated claim adjustment expenses was
settled at the transaction date and is therefore not subject to the sharing
arrangement. CNA must reimburse Allstate for 80% of the first $40 million of
payments in excess of $1 billion, and for 90% of any additional payments in
excess of the first $40 million. The Company must begin to reimburse Allstate
for claim and allocated claim adjustment expense payments when cumulative claim
payments after October 1, 1999 on losses occurring prior to that date exceed
the $1 billion. The Companys remaining obligation valued as of October 1,
2003 will be settled in 2004, under a time schedule established by the parties,
by agreement of the parties or by an independent actuarial review of the unpaid
claim liabilities as of that date. Cumulative payments of indemnity and
allocated loss adjustment expenses on such policies exceeded $1 billion during
the second quarter of 2003. The Company has established reserves for its
estimated liability under this loss sharing arrangement.

Note Q. 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
Consolidated Balance Sheets. The following table provides more detailed
information regarding those net assets.

Discontinued Operations

December 31
    
    2003
    
    2002(In millions)Total investments
    
    $
    458
    
    
    $
    443Other assets
    
    
    186
    
    
    
    295Insurance reserves
    
    
    (335
    )
    
    
    (402
    )Other liabilities
    
    
    (1
    )
    
    
    (32
    )Net assets of discontinued operations
    
    $
    308
    
    
    $
    304


CNA Vida Disposition

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

CNA Vidas assets and liabilities at December 31, 2001 were $442 million and
$337 million. CNA Vidas net earned premiums were $24 million and $77 million
for the years ended December 31, 2002 and 2001. Net income was $2 million and
$11 million for the years ended 2002 and 2001. CNA Vidas

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results of operations, including the loss on sale, are presented as
discontinued operations in all periods presented.

Note R. Quarterly Financial Data (Unaudited)

The following tables set forth unaudited quarterly financial data for the years
ended December 31, 2003 and 2002.

Quarterly Financial Data

First
    
    Second
    
    Third
    
    Fourth
    
    Year(In millions, except per share data)2003 QuartersRevenues
    
    $
    2,845
    
    
    $
    3,099
    
    
    $
    2,725
    
    
    $
    3,047
    
    
    $
    11,716Income (loss) from continuing
operations before income tax
    
    $
    101
    
    
    $
    75
    
    
    $
    (2,766
    )
    
    $
    244
    
    
    $
    (2,346
    )Income tax (expense) benefit
    
    
    (18
    )
    
    
    (5
    )
    
    
    1,006
    
    
    
    (70
    )
    
    
    913Income (loss) from continuing operations
    
    
    83
    
    
    
    70
    
    
    
    (1,760
    )
    
    
    174
    
    
    
    (1,433
    )Net income (loss)
    
    $
    83
    
    
    $
    70
    
    
    $
    (1,760
    )
    
    $
    174
    
    
    $
    (1,433
    )Basic and diluted earnings (loss) per
share available to common stockholders
    
    $
    0.30
    
    
    $
    0.25
    
    
    $
    (7.94
    )
    
    $
    0.67
    
    
    $
    (6.58
    )2002 QuartersRevenues
    
    $
    3,446
    
    
    $
    3,312
    
    
    $
    2,787
    
    
    $
    2,741
    
    
    $
    12,286Income from continuing operations
before income tax
    
    $
    163
    
    
    $
    33
    
    
    $
    76
    
    
    $
    43
    
    
    $
    315Income tax (expense) benefit
    
    
    (51
    )
    
    
    (2
    )
    
    
    (22
    )
    
    
    7
    
    
    
    (68
    )Income from continuing operations
    
    
    112
    
    
    
    31
    
    
    
    54
    
    
    
    50
    
    
    
    247Loss from discontinued operations, net
of tax
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )Cumulative effect of a change in
accounting principle, net of tax
    
    
    (57
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )Net income
    
    $
    20
    
    
    $
    31
    
    
    $
    54
    
    
    $
    50
    
    
    $
    155Basic and diluted earnings per share
available to common stockholders
    
    $
    0.09
    
    
    $
    0.14
    
    
    $
    0.24
    
    
    $
    0.21
    
    
    $
    0.68


Note S. Related Party Transactions

CNA reimburses Loews, or pays directly, for management fees, travel and related
expenses and expenses of investment facilities and services provided to CNA.
The amounts reimbursed or paid by CNA were approximately $18 million, $19
million and $18 million for the years ended December 31, 2003, 2002 and 2001.
In addition, CNAF and its eligible subsidiaries are included in the
consolidated federal income tax return of Loews and its eligible subsidiaries.
See Note E for a detailed description of the income tax agreement and tax
payments made between the Company and Loews. Also, CNA writes, at standard
rates, a limited amount of insurance for Loews and its affiliates. The total
premiums from Loews and its

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affiliates were $4 million, $4 million and $6 million for the years ended
December 31, 2003, 2002 and 2001.

On November 24, 2003, CNAF sold $750 million of its participating convertible
preferred stock, designated Series I (Series I Issue), to Loews. The Series I
Issue has terms that make it economically
equivalent to CNAs common stock. See note L for further details of this
transaction.

During 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Series H Issue), to Loews. The
terms of the Series H Issue were approved by a special committee of independent
members of CNAFs Board of Directors. See Note L for further details of this
transaction.

During 2001, CNA issued and sold 40,324,363 shares of common stock for $25 per
share through a rights offering to stockholders of record on August 23, 2001.
The net proceeds from the rights offering amounted to $1,006 million. In
connection with the rights offering, Loews purchased 38,281,644 shares.

CNA previously sponsored a stock ownership plan whereby the Company financed
the purchase of Company stock by certain officers, including executive
officers. Interest charged on the principal amount of these outstanding stock
purchase loans is generally equivalent to the long term applicable federal
rate, compounded semi-annually, in effect on the disbursement date of the loan.
Loans made pursuant to the plan are generally full recourse with a ten year
term and are secured by the stock purchased. The balance of the loans as of
December 31, 2003 exceeds the related collateral by $36 million.

CNAF has entered into a credit agreement with a large national contractor that
undertakes projects for the construction of government and private facilities
to provide an $86 million credit facility. CNA Surety has provided significant
surety bond protection for projects by this contractor through surety bonds
underwritten by CCC or its affiliates. The loans were provided by
CNAF to help the contractor meet its liquidity needs. The credit facility and all loans under
it will mature in March of 2006. Advances under the credit facility bear interest at the prime rate plus 6%.
Payment of 3% of the interest is deferred until the credit facility matures,
and the remainder is to be paid monthly in cash. Loans under the credit
facility are secured by a pledge of substantially all of the assets of the
contractor and certain affiliates.

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

In March of 2003, CNAF purchased the contractors outstanding bank debt for $16
million. The contractor purchased the bank debt and retired it, with $11
million of the purchase price being funded under the new credit facility and $5
million from money loaned to the contractor by its shareholders. Under its
purchase agreement with the banks, CNAF is also required to reimburse the banks
for any draws upon outstanding letters of credit issued by the banks for the
contractors benefit. Of these letters of credit, a replacement due to expire
in August of 2004 remains in the amount of $3 million. Any CNAF reimbursements
for draws upon the banks letters of credit will become obligations of the
contractor to CNAF as draws upon the credit facility. As of
December 31, 2003, CNAF has credit exposure of $55 million
under the credit facility, net of participation by Loews, in the
amount of $25 million.

The contractor has initiated a restructuring plan that is intended to reduce
costs and improve cash flow, and a chief restructuring officer has been
appointed to manage execution of the plan. CNAF, through its affiliate CNA
Surety, intends to continue to provide surety bonds on behalf of the contractor
during this restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys

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underwriting standards. Any losses to CNA Surety arising from bonds issued to
the contractor or assumed are excluded from CNA Suretys $40 million excess of
$20 million per principal reinsurance program with unaffiliated reinsurers in
place in 2002. As a result, CNA Surety retains the first $60 million of losses
on bonds written with an effective date of September 30, 2002 and prior, and
CCC will incur 100% of losses above that retention level. Through facultative
reinsurance contracts with CCC, CNA Suretys exposure on bonds written from
October 1, 2002 through October 31, 2003 has been limited to $20 million per
bond. For bonds written subsequent to November 1, 2003, CNA
Suretys exposure is limited to $14.5 million per bond subject
to aggregate limit of $150 million under all facultative
insurance coverage and two excess of loss treaties between CNA Surety
and CCC. Both excess of loss contracts are effective January 1, 2004.
The first excess of loss contract, $40 million excess of $60 million,
provides CNA Surety coverage exclusively for the national contractor,
while the second excess of loss contract, $50 million excess of $100
million, provides CNA Surety with coverage for the national
contractor as well as other CNA Surety risks.

Indemnification and subrogation rights, including rights to contract proceeds
on construction projects in the event of default, exist that reduce CNA
Suretys and ultimately the Companys exposure to loss. While CNAF believes
that the contractors restructuring efforts may be successful and provide
sufficient cash flow for its operations, the contractors failure to achieve
its restructuring plan or perform its contractual obligations under the credit
facility and underlying all of the Companys surety bonds could have a material
adverse effect on the Companys results of operations. If such failures occur,
the Company estimates the surety loss, net of indemnification and subrogation
recoveries, but before the effects of minority interest could be up to $200
million. In addition, such failures could cause the full amount due under the
credit facility to be uncollectible.

CNA Surety Corporation

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

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

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

Note T. Subsequent Events

In February of 2004, CNA entered into a definitive agreement to sell its
individual life insurance business to Swiss Re for approximately $690 million.
The business sold includes term, universal and permanent life insurance
policies and individual annuity products. CNAs individual long term care and
structured settlement businesses are excluded from the sale. Additionally, the
Nashville, Tennessee insurance

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servicing and administration building will be acquired by Swiss Re as part of
the sale. Under terms of the agreement, CNA will stop accepting new
applications for individual life and annuity products as of March 5, 2004. The
transaction is expected to be completed on or before March 31, 2004, subject to
certain customary closing conditions and regulatory approvals. Upon completion
of the sale, it is anticipated that approximately 300 employees will transfer
to Swiss Re.

The purchase price is subject to certain adjustments including changes in the
level of statutory surplus through the closing date. The sale is expected to
provide additional statutory surplus in excess of $400 million to CNAs principal
insurance subsidiary, CCC, as contemplated in CNAs recently announced capital
plan. CNA expects to recognize an after-tax realized loss of approximately
$300 million on the sale in the first quarter of 2004; however, this amount
will fluctuate for changes in the market value of the investments supporting
this business.

The assets and liabilities of the
individual life business were $6.6 billion and $5.4 billion at December 31, 2003. The revenues of the individual life
business were $625 million, $652 million and $620 million for the years ended
December 31, 2003, 2002 and 2001. The net income for this business was $43
million, $55 million, and $78 million for the years ended
December 31, 2003, 2002 and 2001.

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INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders of
CNA Financial Corporation

We have audited the consolidated balance sheets of CNA Financial Corporation
(an affiliate of Loews Corporation) and subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three years in
the period ended December 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CNA Financial Corporation and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for goodwill and indefinite-lived intangible
assets in 2002.

Deloitte & Touche LLP
Chicago, Illinois
February 26, 2004

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.




ITEM 9A. CONTROLS AND PROCEDURES

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

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

Management, in consultation with the Companys independent accountants,
previously identified deficiencies in certain aspects of initial policy set-up
and processing for large account property and casualty business in the Standard
Lines segment which constituted a Reportable Condition under standards
established by the American Institute of Certified Public Accountants. These
deficiencies impacted the quality of the claim data used by the Companys
actuaries as the basis for their comprehensive actuarial reviews, which
hampered the timeliness of these reviews. Subsequent to December 31, 2003, the
Company completed its remediation efforts and has cured the aforementioned
deficiencies.

This matter and its resolution have been discussed with the Companys Audit
Committee.

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

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PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS OF THE REGISTRANT

FIRST BECAMEPOSITION AND OFFICES
    
    
    
    
    
    EXECUTIVE OFFICERNAME
    
    HELD WITH REGISTRANT
    
    AGE
    
    OF CNA
    
    PRINCIPAL OCCUPATION DURING PAST FIVE YEARSStephen W. Lilienthal
    
    Chief Executive
Officer, CNA
Financial
Corporation
    
    
    54
    
    
    
    2001
    
    
    Chief Executive Officer of CNA Financial
Corporation and subsidiaries since August,
2002. Prior to that, President and Chief
Executive Officer, Property and Casualty
Operations of the CNA insurance companies
since July 2001. From June 1993 to June
1998, senior officer of USF&G Corporation
(USF&G). In April 1998, USF&G was
acquired by the St. Paul Companies. Mr.
Lilienthal was Executive Vice President of
the St. Paul Companies until July 2001.Robert V. Deutsch
    
    Executive Vice
President and Chief
Financial Officer,
CNA Financial
Corporation
    
    
    44
    
    
    
    1999
    
    
    Executive Vice President and Chief
Financial Officer of CNA Financial
Corporation and subsidiaries since August
1999. From June 1987 until August 1999,
Mr. Deutsch was Executive Vice President,
Chief Financial Officer, Chief Actuary and
Assistant Secretary of Executive Risk,
Inc.Jonathan D. Kantor
    
    Executive Vice
President, General
Counsel and
Secretary
    
    
    48
    
    
    
    1997
    
    
    Executive Vice President, General Council
and Secretary of CNA Financial Corporation
since March, 1998. Executive Vice
President, General Council and Secretary
of the CNA insurance companies since
April, 1997 to current date.James R. Lewis
    
    President and Chief
Executive Officer,
Property and
Casualty
Operations, CNA
insurance companies
    
    
    55
    
    
    
    2002
    
    
    President and Chief Executive Officer,
Property and Casualty Operations of the
CNA insurance companies since August,
2002. From August 2001 to August 2002,
Executive Vice President, U.S. Insurance
Operations, Property and Casualty
Operations of the CNA insurance companies.
From November 1992 to August 2001, Senior
Vice President of USF&G Corporation.Robert L. McGinnis
    
    President and Chief
Executive Officer,
Life & Group
Operations
    
    
    37
    
    
    
    2003
    
    
    President and Chief Executive Officer,
Life and Group Operations since August
2003. Prior to that time, Executive Vice
President, Group Operations, since April
2001. From May 1995 until January, 2001,
Chief Operating Officer, Small Business,
United Healthcare.


Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.

Additional information required in Item 10, Part III has been omitted as the
Registrant intends to file a definitive proxy statement pursuant to Regulation
14A with the Securities and Exchange Commission not later than 120 days after
the close of its fiscal year.




ITEM 11. EXECUTIVE COMPENSATION

Information required in Item 11, Part III has been omitted as the Registrant
intends to file a definitive proxy statement pursuant to Regulation 14A with
the Securities and Exchange Commission not later than 120 days after the close
of its fiscal year.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Equity Compensation Plan

The table below provides the securities authorized for issuance under equity
compensation plans.

Executive Compensation Information

Number of securitiesNumber of securities to
    
    
    
    
    
    remaining available forbe issued upon
    
    Weighted-average exercise
    
    future issuance underexercise of outstanding
    
    price of outstanding
    
    equity compensation plansoptions, warrants and
    
    options, warrants and
    
    (excluding securitiesrights
    
    rights
    
    reflected in column (a))(a)
    
    (b)
    
    (c)December 31, 2003Plan CategoryEquity compensation plans
approved by security holders
    
    
    1,434,800
    
    
    $
    29.97
    
    
    
    553,275Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,434,800
    
    
    $
    29.97
    
    
    
    553,275


Additional Information required in Item 12, Part III has been omitted as the
Registrant intends to file a definitive proxy statement pursuant to Regulation
14A with the Securities and Exchange Commission not later than 120 days after
the close of its fiscal year.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required in Item 13, Part III has been omitted as the Registrant
intends to file a definitive proxy statement pursuant to Regulation 14A with
the Securities and Exchange Commission not later than 120 days after the close
of its fiscal year.




ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information
required in Item 14, Part III has been omitted as the Registrant intends to
file a definitive proxy statement pursuant to Regulation 14A with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year.

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PART IV




ITEM 15. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON
FORM 8-K

PageNumber(a
    )
    
    
    1.
    
    
    FINANCIAL STATEMENTS:Consolidated Statements of Operations  Years Ended December 31, 2003, 2002 and 2001
    
    
    97Consolidated Balance Sheets  December 31, 2003 and 2002
    
    
    98Consolidated Statements of Cash Flows  Years Ended December 31, 2003, 2002 and 2001
    
    
    100Consolidated Statements of Stockholders Equity  Years Ended December 31, 2003, 2002 and 2001
    
    
    102Notes to Condensed Financial Statements
    
    
    103Independent Auditors Report
    
    
    182(a
    )
    
    
    2.
    
    
    FINANCIAL STATEMENT SCHEDULES:Schedule I   Summary of Investments
    
    
    188Schedule II  Condensed Financial Information of Registrant (Parent Company)
    
    
    189Schedule III Supplementary Insurance Information
    
    
    199Schedule IV Reinsurance
    
    
    200Schedule V  Valuation and Qualifying Accounts
    
    
    200Schedule VI Supplementary Information Concerning Property and Casualty Insurance Operations
    
    
    200Independent Auditors Report
    
    
    201(a
    )
    
    
    3.
    
    
    EXHIBITS:


ExhibitDescription of Exhibit
    
    Number(3
    )
    
    Articles of incorporation and by-laws:Certificate of Incorporation of CNA Financial Corporation, as amended May 20, 1999
(Exhibit 3.1 to 1999 Form 10-K incorporated herein by reference.)
    
    
    3.1By-Laws of CNA Financial Corporation, as amended February 11, 2004
    
    
    3.2(4
    )
    
    Instruments defining the rights of security holders, including indentures:CNA Financial Corporation hereby agrees to furnish to the
Commission upon request copies of instruments with respect to long
term debt, pursuant to Item 601(b) (4) (iii) of Regulation S-K
    
    
    4.1


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ExhibitDescription of Exhibit
    
    Number(10
    )
    
    Material contracts:Federal Income Tax Allocation Agreement, dated February 29, 1980
between CNA Financial Corporation and Loews Corporation (Exhibit 10.2
to 1987 Form 10-K incorporated herein by reference.)
    
    
    10.1CNA
Employees Supplemental Savings Plan, as amended through January
1, 1994 (Exhibit 10.3 to 1999 Form
10-K, incorporated herein by reference.)
    
    
    10.2CNA
Employees Retirement Benefit Equalization Plan, as amended through January
1, 1994 (Exhibit 10.4 to 1999 Form 10-K incorporated herein by
reference.)
    
    
    10.3Continental
Casualty Company CNA
Annual Incentive Bonus Plan Provisions, (Exhibit 10.1 to 1994 Form 10-K incorporated
herein by reference.)
    
    
    10.4CNA
Financial Corporation 2000 Long Term Incentive Plan, dated
August 4, 1999 (Exhibit 4.1 to 1999 Form S-8 filed
August 4, 1999, incorporated herein by
reference.)
    
    
    10.5Employment
Agreement between CNA Financial Corporation and Robert V. Deutsch, dated August
16, 1999 (Exhibit 10 to September 30, 1999 Form 10-Q
incorporated herein by reference.)
    
    
    10.6Sale
and Purchase Agreement between CNA Financial Corporation and PGI-WvF
180, L.P., dated October 13, 2000 for the sale of real property
commonly known as 180 Maiden Lane (Exhibit 10.11 to the 2000 Form
10-K incorporated herein by reference.)
    
    
    10.7Share
Purchase Agreement between CNA and TAWA UK Limited, dated July 15,
2002 for the entire issued share capital of CNA Re Management Company Limited
(Exhibit 2.1 to the September 30, 2002
Form 10-Q incorporated herein by reference.)
    
    
    10.8Employment
Agreement between CNA Financial Corporation and Stephen W.
Lilienthal, dated July 25, 2002 (Exhibit 10.10 to
December 31, 2002
Form 10-K incorporated herein by reference.)
    
    
    10.9Employment Agreement between CNA Financial Corporation
and James R. Lewis, dated August 9, 2002 (Exhibit 10.11 to
December 31, 2002 Form 10-K incorporated herein by reference)
    
    
    10.10Continuing
Services Agreement between CNA Financial Corporation
and Bernard Hengesbaugh, dated August 26, 2002
(Exhibit 10.12 to
December 31, 2002 Form 10-K incorporated herein by reference)
    
    
    10.11(10
    )
    

Material
contracts: (continued):


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##### Table of Contents



ExhibitDescription of Exhibit
    
    NumberAmendment to Employment Agreement between CNA Financial Corporation
and Robert V. Deutsch, dated February 25, 2003 (Exhibit 10.13 to December
31, 2002 Form 10-K incorporated herein by reference)
    
    
    10.12Employment
Agreement between CNA Financial Corporation and Jonathan D. Kantor,
dated March 20, 2003 (Exhibit 10.14 to March 31, 2003 Form 10-Q
incorporated herein by reference)
    
    
    10.13General
Release in Full and Settlement Agreement between CNA Financial
Corporation and Debra L. McClenahan, dated December 15, 2003
    
    
    10.14Capital
Support Agreement among CNA Financial Corporation, Loews Corporation
and Continental Casualty Company, dated November 12, 2003
    
    
    10.15(21
    )
    
    Primary Subsidiaries of CNAF
    
    
    21.1(23
    )
    
    Independent Auditors Consent
    
    
    23.1(b
    )
    
    
    
    
    

Reports
on Form 8-K:On
October 3, 2003 CNA Financial Corporation issued a press release
providing information of CNAs withdrawal from the assumed
reinsurance business.On
November 12, 2003 CNA Financial Corporation issued a press
release and financial supplement providing information on its results
of operations for the third quarter of 2003.On
November 17, 2003 CNA Financial Corporation provided a summary
of the impact of net reserve development on its results of operations
for the third quarter 2003.On
November 24, 2003 CNA Financial Corporation issued a press
release announcing the completion of CNAs previously announced
sale of $750 million of its participating convertible preferred
stock to Loews Corporation, the owner of approximately 90% of
CNAs outstanding common stock.On
December 1, 2003 CNA Financial Corporation issued a press
release announcing that it has entered into a binding agreement to
sell its Group Benefits business to Hartford Financial Services
Group, Inc. for approximately $500 million.(c
    )
    
    
    
    
    
    Exhibits:None.(d
    )
    
    
    
    
    
    Condensed Financial Information of Unconsolidated Subsidiaries:None.


The above exhibits are not included in this Form 10-K, but are
on file with the Securities and Exchange Commission.

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##### Table of Contents



SCHEDULE I. SUMMARY OF INVESTMENTS
 OTHER THAN INVESTMENTS IN RELATED PARTIES

December 31, 2003Cost or
    
    EstimatedAmortized
    
    Fair
    
    CarryingCost
    
    Value
    
    Value(In millions)Fixed maturity securities available-for-sale:Bonds:United States Government and government agencies and authorities  taxable
    
    $
    2,982
    
    
    $
    3,097
    
    
    $
    3,097States, municipalities and political subdivisions  tax exempt
    
    
    7,787
    
    
    
    7,970
    
    
    
    7,970Foreign governments and political subdivisions
    
    
    1,642
    
    
    
    1,772
    
    
    
    1,772Public utilities
    
    
    1,337
    
    
    
    1,506
    
    
    
    1,506All other corporate bonds
    
    
    13,719
    
    
    
    14,229
    
    
    
    14,229Redeemable preferred stocks
    
    
    97
    
    
    
    104
    
    
    
    104Total fixed maturity securities available-for-sale
    
    
    27,564
    
    
    
    28,678
    
    
    
    28,678Equity securities available-for-sale:Common stocks:Banks, trusts and insurance companies
    
    
    3
    
    
    
    4
    
    
    
    4Industrial and other
    
    
    160
    
    
    
    379
    
    
    
    379Non-redeemable preferred stocks
    
    
    130
    
    
    
    144
    
    
    
    144Total equity securities available-for-sale
    
    
    293
    
    
    $
    527
    
    
    
    527Mortgage Loans
    
    
    15
    
    
    
    
    
    
    
    15Real estate
    
    
    21
    
    
    
    
    
    
    
    10Policy loans
    
    
    175
    
    
    
    
    
    
    
    175Limited partnership investments
    
    
    1,117
    
    
    
    
    
    
    
    1,117Other invested assets
    
    
    34
    
    
    
    
    
    
    
    40Short term investments
    
    
    7,538
    
    
    
    
    
    
    
    7,538Total investments
    
    $
    36,757
    
    
    
    
    
    
    $
    38,100


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SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)

CNA Financial Corporation
Statements of Operations

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Revenues:Net investment income
    
    $
    16
    
    
    $
    8
    
    
    $
    18Realized investment (losses) gains
    
    
    (3
    )
    
    
    3
    
    
    
    (5
    )Other income
    
    
    12
    
    
    
    13
    
    
    
    13Total revenues
    
    
    25
    
    
    
    24
    
    
    
    26Expenses:Administrative and general
    
    
    7
    
    
    
    3
    
    
    
    161Interest
    
    
    120
    
    
    
    131
    
    
    
    140Total expenses
    
    
    127
    
    
    
    134
    
    
    
    301Loss from operations before income taxes, equity in net income
of subsidiaries and the cumulative effects of changes in
accounting principles
    
    
    (102
    )
    
    
    (110
    )
    
    
    (275
    )Income tax benefit
    
    
    36
    
    
    
    39
    
    
    
    96Loss before equity in net income of subsidiaries and the
cumulative effects of changes in accounting principles
    
    
    (66
    )
    
    
    (71
    )
    
    
    (179
    )Equity in net (loss) income of subsidiaries
    
    
    (1,367
    )
    
    
    227
    
    
    
    (1,461
    )Cumulative effect of changes in accounting principles, net of tax
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )Net (loss) income
    
    $
    (1,433
    )
    
    $
    155
    
    
    $
    (1,642
    )


See accompanying Notes to Condensed Financial Information.

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##### Table of Contents



CNA Financial Corporation
Balance Sheets

December 31
    
    2003
    
    2002(In millions)Assets:Investment in subsidiaries
    
    $
    10,509
    
    
    $
    10,648Fixed maturity securities available-for-sale, at fair value, (amortized
cost of $131 and $30)
    
    
    131
    
    
    
    30Equity securities available-for-sale, at fair value, (cost of $1 and $1)
    
    
    1
    
    
    
    1Other invested assets
    
    
    (1
    )
    
    
    1Short term investments, at cost which approximates fair value
    
    
    37
    
    
    
    386Receivables for securities sold
    
    
    1
    
    
    
    93Amounts due from affiliates
    
    
    18
    
    
    
    17Notes receivable from affiliates
    
    
    
    
    
    
    309Other
    
    
    1
    
    
    
    2Total assets
    
    $
    10,697
    
    
    $
    11,487Liabilities and Stockholders Equity:Liabilities:Payables for securities purchased
    
    $
    
    
    
    $
    91Short term debt
    
    
    252
    
    
    
    248Long term debt
    
    
    1,480
    
    
    
    1,729Other
    
    
    13
    
    
    
    18Total Liabilities
    
    
    1,745
    
    
    
    2,086Stockholders equity:Preferred stock (12,500,000
shares authorized)Series H Issue (no par value; $100,000 stated value; 7,500 shares issued; held by Loews Corporation)Series I Issue (no par value; $23,200 stated value; 35,327 shares
issued convertible to 32,327,015 shares of common stock; held by
Loews Corporation)
    
    
    1,500
    
    
    
    750Common stock ($2.50 par value; 500,000,000 shares authorized;
225,850,270 shares issued; and 223,617,337 and 223,608,868 shares
outstanding)
    
    
    565
    
    
    
    565Additional paid-in capital
    
    
    1,031
    
    
    
    1,031Retained earnings
    
    
    5,160
    
    
    
    6,593Accumulated other comprehensive income
    
    
    841
    
    
    
    604Treasury stock (2,232,933 and 2,241,402 shares), at cost
    
    
    (69
    )
    
    
    (70
    )9,028
    
    
    
    9,473Notes receivable for the issuance of common stock
    
    
    (76
    )
    
    
    (72
    )Total stockholders equity
    
    
    8,952
    
    
    
    9,401Total liabilities and stockholders equity
    
    $
    10,697
    
    
    $
    11,487


See accompanying Notes to Condensed Financial Information.

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CNA Financial Corporation
Statements of Cash Flows

Years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Cash flows from operating activities:Net (loss) income
    
    $
    (1,433
    )
    
    $
    155
    
    
    $
    (1,642
    )Adjustments to reconcile net income (loss) to net cash flows from
operating activities:Loss (income) of subsidiaries
    
    
    1,367
    
    
    
    (227
    )
    
    
    1,461Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    1
    
    
    
    2Dividends received from subsidiaries
    
    
    93
    
    
    
    118
    
    
    
    493Realized losses (gains)
    
    
    3
    
    
    
    (3
    )
    
    
    5Changes in:Federal income taxes recoverable (amounts due to/from affiliates)
    
    
    (1
    )
    
    
    
    
    
    
    Other, net
    
    
    107
    
    
    
    148
    
    
    
    102Total Adjustments
    
    
    1,569
    
    
    
    37
    
    
    
    2,063Net cash flows (used) provided by operating activities
    
    
    136
    
    
    
    192
    
    
    
    421Cash flows from investing activities:Sales of fixed maturity securities
    
    
    236
    
    
    
    428
    
    
    
    Purchases of fixed maturity securities
    
    
    (244
    )
    
    
    (440
    )
    
    
    (15
    )Purchases of equity securities
    
    
    2
    
    
    
    (1
    )
    
    
    (1
    )Change in short term investments
    
    
    349
    
    
    
    (381
    )
    
    
    (5
    )Capital contributions to subsidiaries
    
    
    (1,201
    )
    
    
    (304
    )
    
    
    (1,416
    )Return of capital from subsidiaries
    
    
    5
    
    
    
    
    
    
    
    15Change in notes receivable from affiliates
    
    
    309
    
    
    
    32
    
    
    
    113Other, net
    
    
    (94
    )
    
    
    (19
    )
    
    
    4Net cash flows used by investing activities
    
    
    (638
    )
    
    
    (685
    )
    
    
    (1,305
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    
    
    
    
    
    
    
    
    500Principal payments on debt
    
    
    (245
    )
    
    
    (252
    )
    
    
    (627
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    1,006Issuance of cumulative Series I preferred stock
    
    
    
    
    
    
    750
    
    
    
    Issuance of cumulative Series H preferred stock
    
    
    750
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    1
    
    
    
    
    
    
    
    1Other, net
    
    
    (4
    )
    
    
    (5
    )
    
    
    4Net cash flows provided by financing activities
    
    
    502
    
    
    
    493
    
    
    
    884Net change in cash
    
    
    
    
    
    
    
    
    
    
    Cash, beginning of year
    
    
    
    
    
    
    
    
    
    
    Cash, end of year
    
    $
    
    
    
    $
    
    
    
    $
    Supplemental disclosures of cash flow information:Cash paid (received):Interest
    
    $
    123
    
    
    $
    133
    
    
    $
    137Federal income taxes
    
    
    (369
    )
    
    
    (616
    )
    
    
    (288
    )Non-cash transactions:Notes receivable for the issuance of common stock
    
    
    4
    
    
    
    4
    
    
    
    4


See accompanying Notes to Condensed Financial Information.

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Notes to Condensed Financial Information

A. Basis of Presentation

The condensed financial information of CNA Financial Corporation (CNAF or the
Parent Company) should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in Part II, Item 8 of this Form 10-K.
CNAFs subsidiaries are accounted for using the equity method of accounting.
Equity in net income of these affiliates is reported as equity in net income of
subsidiaries.

Certain amounts applicable to prior years have been reclassified to conform to
classifications followed in 2003.

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

B. Investments

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

All securities transactions are recorded on the trade date except for new
issuances and mortgage backed securities which are recorded on the settlement
date. Realized investment gains and losses are determined on the basis of the
cost or amortized cost of the specific securities sold.

CNAFs investments in fixed maturity securities are composed entirely of
corporate bonds and corporate mortgage backed securities and obligations of
government agencies.

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C. Debt

Debt is composed of the following obligations.

Debt

December 31
    
    2003
    
    2002(In millions)Variable rate debt:Credit facility due April 30, 2004
    
    $
    250
    
    
    $
    250Senior notes:6.25%, face amount of $248, due November 15, 2003
    
    
    
    
    
    
    2486.50%, face amount of $493, due April 15, 2005
    
    
    492
    
    
    
    4916.75%, face amount of $250, due November 15, 2006
    
    
    249
    
    
    
    2496.45%, face amount of $150, due January 15, 2008
    
    
    149
    
    
    
    1496.60%, face amount of $200, due December 15, 2008
    
    
    199
    
    
    
    1996.95%, face amount of $150, due January 15, 2018
    
    
    149
    
    
    
    148Debenture, 7.25%, face amount of $243, due November 15, 2023
    
    
    241
    
    
    
    240Urban Development Action Grant, 1.00%, due May 7, 2019
    
    
    3
    
    
    
    3Total
    
    $
    1,732
    
    
    $
    1,977Short term debt
    
    $
    252
    
    
    $
    248Long term debt
    
    
    1,480
    
    
    
    1,729Total
    
    $
    1,732
    
    
    $
    1,977


The Company has a $250 million three-year bank credit facility with an April
30, 2004 expiration date. The Company pays a facility fee to the lenders for
having funds available for loans under the three-year credit facility maturing
April 30, 2004. The fee varies based on the long term debt ratings of the
Company. At December 31, 2003, the facility fee on the three-year component
was 25.0 basis points.

The Company pays interest on any outstanding debt/borrowings under the
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 75.0 basis points. 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.
At December 31, 2003 and 2002, the weighted-average interest rate on the
borrowings under the facility, including facility fees and utilization fees,
was 2.3%.

A Moodys Investors Service (Moodys) downgrade of the CNAF senior debt rating
from Baa2 to Baa3 on November 12, 2003, increased 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 increased from LIBOR plus 57.5 basis
points to LIBOR plus 75.0 basis points. The utilization fee remained unchanged
on the three-year facility at 12.5 basis points.

D. Management and Administrative Expenses

CNAF has reimbursed its subsidiaries for certain general management and
administrative expenses, certain extra contractual obligations and certain
investment expenses of $159 million in 2001. Beginning in 2002, these expenses
were charged directly to CNAFs subsidiaries. Certain administrative expenses
resulting principally from shareholder expenses, consulting and fees and dues
to states of incorporation of $7 million and $3 million were paid directly by
CNAF in 2003 and 2002.

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E. Commitments and Contingencies

In the normal course of business, CNAF guarantees the indebtedness of certain
of its subsidiaries, which expire through 2025. These guarantees arise in the
normal course of business and are given to induce a lender to enter into an
agreement with CNAFs subsidiaries. CNAF would be required to remit prompt and
complete payment when due, should the primary obligor default. The maximum
potential amount of future payments that CNAF could be required to pay under
these guarantees are approximately $20 million at December 31, 2003.

CNAF has provided parent company guarantees, which expire in 2015, related to
lease obligations of certain subsidiaries. Certain of those subsidiaries have
been sold; however, the lease obligation guarantees remain in effect. CNAF
would be required to remit prompt payment on leases in question if the primary
obligor fails to observe and perform its covenants under the lease agreements.
The maximum potential amount of future payments that CNAF could be required to
pay under these guarantees are approximately $8 million at December 31, 2003.

CNAF has also committed to contribute up to $5 million to the former CNA Re
U.K. entities over a four-year period beginning in 2010 should the Financial
Services Authority deem those entities to be undercapitalized.

CNAF has entered into a credit agreement with a large national contractor that
undertakes projects for the construction of government and private facilities
to provide an $86 million credit facility. CNA Surety has provided
significant surety bond protection for projects by this contractor through
surety bonds underwritten by CCC or its affiliates. The loans were provided by CNAF to help the contractor meet its liquidity needs. The credit facility and
all loans under it will mature in March of 2006. Advances under the credit
facility bear interest at the prime
rate plus 6%. Payment of 3% of the interest is deferred until the credit
facility matures, and the remainder is to be paid monthly in cash. Loans under
the credit facility are secured by a pledge of substantially all of the assets
of the contractor and certain affiliates.

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

In March of 2003, CNAF purchased the contractors outstanding bank debt for
$16.4 million. The contractor purchased the bank debt and retired it, with
$11.4 million of the purchase price being funded under the new credit facility
and $5 million from money loaned to the contractor by its shareholders. Under
its purchase agreement with the banks, CNAF is also required to reimburse the
banks for any draws upon outstanding letters of credit issued by the banks for
the contractors benefit. Of these letters of credit, a replacement due to
expire in August of 2004 remains in the amount of $3.4 million. Any CNAF
reimbursements for draws upon the banks letters of credit will become
obligations of the contractor to CNAF as draws upon the credit facility. As of
December 31, 2003, CNAF has credit exposure of $55 million under the credit facility, net of participation by Loews, in the amount of $25 million.

The contractor has initiated a restructuring plan that is intended to reduce
costs and improve cash flow, and a chief restructuring officer has been
appointed to manage execution of the plan. CNAF, through its affiliate CNA
Surety, intends to continue to provide surety bonds on behalf of the contractor
during this restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards. Any losses to CNA
Surety arising from bonds issued to the contractor or assumed are excluded from
CNA Suretys $40 million excess of $20 million per principal reinsurance
program

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with unaffiliated reinsurers in place in 2002. As a result, CNA Surety retains
the first $60 million of losses on bonds written with an effective date of
September 30, 2002 and prior, and CCC will incur 100% of losses above that
retention level. Through facultative reinsurance contracts with CCC, CNA
Suretys exposure on bonds written from October 1, 2002
through October 31,
2003 has been limited to $20 million per bond. For bonds written
subsequent to November 1, 2003, CNA Suretys exposure is limited
to $14.5 million per bond subject to an aggregate limit of $150
million under all under facultative insurance coverage and two excess
of loss treaties between CNA Surety and CCC. Both excess of loss
contracts are effective January 1, 2004. The first excess of loss
contract, $40 million excess of $60 million, provides CNA Surety
coverage exclusively for the national contractor, while the second
excess of loss contract, $50 million excess of $100 million, provides
CNA Surety with coverage for the national contractor as well as other
CNA Surety risks.

Indemnification and subrogation rights, including rights to contract proceeds
on construction projects in the event of default, exist that reduce CNA
Suretys and ultimately the Companys exposure to loss. While CNAF believes
that the contractors restructuring efforts may be successful and provide
sufficient cash flow for its operations, the contractors failure to achieve
its restructuring plan or perform its contractual obligations under the credit
facility and underlying all of the Companys surety bonds could have a material
adverse effect on the Companys results of operations. If such failures occur,
the Company estimates the surety loss, net of indemnification and subrogation
recoveries, but before the effects of minority interest could be up to $200
million. In addition, such failures could cause the full amount due under the
credit facility to be uncollectible.

In certain circumstances, CNAF provides guarantees of the indebtedness of
certain of its subsidiaries independent insurance producers, which expire in
2008. CNAF would be required to remit prompt and complete payment when due,
should the primary obligor default. In the event of default on the part of the
primary obligor, CNAF holds an interest in and to any and all shares of common
stock of the primary obligor. The maximum potential amount of future payments
that CNAF could be required to pay under these guarantees are approximately $7
million at December 31, 2003.

In the normal course of business, CNAF has provided guarantees to holders of
structured settlement annuities (SSA) provided by certain of its subsidiaries,
which expire through 2120. CNAF would be required to remit SSA payments due to
claimants if the primary obligor failed to perform on these contracts. The
maximum potential amount of future payments that CNAF could be required to pay
under these guarantees are approximately $1,651 million at December 31, 2003.

F. Capital Transactions with Subsidiaries

In 2003, 2002 and 2001, CNAF contributed capital of approximately $1,201
million, $304 million and $1,416 million to its subsidiaries. In 2003, CNAF
subsidiaries returned capital of approximately $5 million. In 2001, CNAF
subsidiaries returned capital of approximately $15 million. In 2002, there
were no returns of capital from subsidiaries.

G. Dividends from Subsidiaries and Affiliates

In 2003, 2002 and 2001, CNAF received approximately $93 million, $118 million
and $493 million in dividends from subsidiaries.

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

Dividends from CCC are subject to the insurance holding company laws of the
State of Illinois, the domiciliary state of CCC. Under these laws, ordinary
dividends, or dividends that do not require prior approval of the Illinois
Department of Insurance (the Department), may be paid only from earned surplus,

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which is calculated by removing unrealized gains from unassigned surplus. As
of December 31, 2003, CCC is in a negative earned surplus position. Until CCC
is in a positive earned surplus position, all dividends require prior approval
of the Department. In January of 2004, the Department approved extraordinary
dividend capacity in the amount of approximately $312 million to be used to
fund the CNAFs 2004 debt service and principal repayment requirements.

In addition, by agreement with the New Hampshire Insurance Department, the CIC
Group may not pay dividends to CCC until after January 1, 2006.

CNAs domestic insurance subsidiaries are subject to risk-based capital
requirements. Risk-based capital is a method developed by the NAIC to
determine the minimum amount of statutory capital appropriate for an insurance
company to support its overall business operations in consideration of its size
and risk profile. The formula for determining the amount of risk-based capital
specifies various factors, weighted based on the perceived degree of risk,
which are applied to certain financial balances and financial activity. The
adequacy of a companys actual capital is evaluated by a comparison to the
risk-based capital results, as determined by the formula. Companies below
minimum risk-based capital requirements are classified within certain levels,
each of which requires specified corrective action. As of December 31, 2003
and 2002, all of CNAs domestic insurance subsidiaries exceeded the minimum
risk-based capital requirements.

H. Preferred Stock

On November 24, 2003, CNAF sold $750 million of its participating convertible
preferred stock, designated Series I (Series I Issue), to Loews. The Series I
Issue has terms that make it economically equivalent to CNAFs common stock.
The preferred shares will convert into 32,327,015 shares of CNAF common stock,
utilizing a conversion price per share of common stock that was based on
average market prices of CNAF common stock from November 17, 2003 through
November 21, 2003. The terms of the Series I Issue were approved by a special
committee of independent members of CNAFs Board of Directors. Upon
conversion, Loews will own approximately 91% of CNAFs outstanding common stock
of approximately 255.9 million shares. Conversion will take place when the
Company satisfies applicable stock exchange requirements. The proceeds from
the Series I Issue sale will be applied by CNAF to increase the statutory
surplus of CNAFs principal insurance subsidiary, CCC.

During 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Series H Issue), to Loews. The
terms of the Series H Issue were approved by a special committee of independent
members of CNAFs Board of Directors.

The Series H Issue accrues cumulative dividends at an initial rate of 8% per
year, compounded annually. It will be adjusted quarterly to a rate equal to
400 basis points above the ten-year U.S. Treasury rate beginning with the
quarterly dividend after the first triggering event to occur of either (i) an
increase by two intermediate rating levels of the financial strength rating of
CCC from its rating at the time of issuance by any of A.M. Best Company,
Standard & Poors or Moodys Investor Services or (ii) one year following an
increase by one intermediate ratings level of the financial strength rating of
CCC by any one of those rating agencies. Accrued but unpaid cumulative
dividends cannot be paid on the Series H Issue unless and until one of the two
triggering events described above has occurred. Beginning with the quarter
following an increase of one intermediate rating level in CCCs financial
strength rating, however, current (but not accrued cumulative) quarterly
dividends can be paid. As of December 31, 2003, the Company has $62 million of
undeclared but accumulated dividends.

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The Series H Issue is senior to CNAFs common stock and Series I Issue as to
the payment of dividends and amounts payable upon any liquidation, dissolution
or winding up. No dividends may be declared on CNAFs common stock until all
cumulative dividends on the Series H Issue have been paid. CNAF may not issue
any equity securities ranking senior to or on par with the Series H Issue
without the consent of a majority of its stockholders. The Series H Issue is
non-voting and is not convertible into any other securities of CNAF. It may be
redeemed only upon the mutual agreement of CNAF and a majority of the
stockholders of the preferred stock.

Of the proceeds of the Series H, $250 million was used to prepay a bank term
loan due in April of 2003 and $250 million was contributed to CCC to improve
its statutory surplus. It is expected that the remaining proceeds will be used
to repay other debt of CNAF and Continental maturing in 2003 and for other
general corporate purposes.

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SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION

Gross Insurance ReservesInsurance
    
    Amortiz-Claims and
    
    ationDeferred
    
    Claim
    
    Future
    
    
    
    
    
    Policy-
    
    
    
    
    
    Net
    
    Policy-
    
    of Deferred
    
    Other
    
    NetAcquisition
    
    And Claim
    
    Policy
    
    Unearned
    
    holders
    
    Net Earned
    
    Investment
    
    holders'
    
    Acquisition
    
    Operating
    
    Written Pre-Costs
    
    Expense
    
    Benefits
    
    Premium
    
    Funds
    
    Premiums
    
    Income (a)
    
    Benefits
    
    Costs
    
    Expenses
    
    miums (b)(In millions)December 31, 2003Standard Lines
    
    $
    415
    
    
    $
    12,983
    
    
    $
    
    
    
    $
    1,916
    
    
    $
    79
    
    
    $
    3,743
    
    
    $
    336
    
    
    $
    3,936
    
    
    $
    991
    
    
    $
    893
    
    
    $
    3,802Specialty Lines
    
    
    342
    
    
    
    6,470
    
    
    
    
    
    
    
    1,874
    
    
    
    3
    
    
    
    2,666
    
    
    
    287
    
    
    
    2,266
    
    
    
    623
    
    
    
    400
    
    
    
    2,809CNA Re
    
    
    31
    
    
    
    2,288
    
    
    
    
    
    
    
    133
    
    
    
    
    
    
    
    536
    
    
    
    72
    
    
    
    510
    
    
    
    127
    
    
    
    32
    
    
    
    478Group Operations
    
    
    48
    
    
    
    1,404
    
    
    
    654
    
    
    
    1
    
    
    
    455
    
    
    
    1,312
    
    
    
    263
    
    
    
    1,006
    
    
    
    19
    
    
    
    462
    
    
    
    15Life Operations
    
    
    1,697
    
    
    
    1,539
    
    
    
    7,173
    
    
    
    152
    
    
    
    67
    
    
    
    1,029
    
    
    
    524
    
    
    
    1,273
    
    
    
    201
    
    
    
    124
    
    
    
    519Corporate and Other
    
    
    
    
    
    
    7,046
    
    
    
    334
    
    
    
    815
    
    
    
    (3
    )
    
    
    42
    
    
    
    165
    
    
    
    1,040
    
    
    
    4
    
    
    
    394
    
    
    
    10Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114
    )
    
    
    
    
    
    
    (115
    )
    
    
    
    
    
    
    (118
    )
    
    
    (16
    )Consolidated Operations
    
    $
    2,533
    
    
    $
    31,730
    
    
    $
    8,161
    
    
    $
    4,891
    
    
    $
    601
    
    
    $
    9,214
    
    
    $
    1,647
    
    
    $
    9,916
    
    
    $
    1,965
    
    
    $
    2,187
    
    
    $
    7,617December 31, 2002Standard Lines
    
    $
    421
    
    
    $
    11,576
    
    
    $
    
    
    
    $
    1,811
    
    
    $
    47
    
    
    $
    4,018
    
    
    $
    398
    
    
    $
    2,965
    
    
    $
    931
    
    
    $
    583
    
    
    $
    4,020Specialty Lines
    
    
    319
    
    
    
    5,874
    
    
    
    
    
    
    
    1,763
    
    
    
    3
    
    
    
    2,178
    
    
    
    253
    
    
    
    1,682
    
    
    
    554
    
    
    
    255
    
    
    
    2,383CNA Re
    
    
    47
    
    
    
    2,264
    
    
    
    
    
    
    
    195
    
    
    
    
    
    
    
    642
    
    
    
    144
    
    
    
    503
    
    
    
    144
    
    
    
    54
    
    
    
    605Group Operations
    
    
    107
    
    
    
    1,400
    
    
    
    571
    
    
    
    7
    
    
    
    470
    
    
    
    2,327
    
    
    
    252
    
    
    
    1,956
    
    
    
    13
    
    
    
    545
    
    
    
    1,149Life Operations
    
    
    1,657
    
    
    
    1,409
    
    
    
    6,503
    
    
    
    149
    
    
    
    63
    
    
    
    930
    
    
    
    540
    
    
    
    1,118
    
    
    
    151
    
    
    
    161
    
    
    
    496Corporate and Other
    
    
    
    
    
    
    4,847
    
    
    
    335
    
    
    
    908
    
    
    
    (3
    )
    
    
    156
    
    
    
    143
    
    
    
    209
    
    
    
    (2
    )
    
    
    307
    
    
    
    38Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (143
    )
    
    
    (38
    )Consolidated Operations
    
    $
    2,551
    
    
    $
    27,370
    
    
    $
    7,409
    
    
    $
    4,820
    
    
    $
    580
    
    
    $
    10,213
    
    
    $
    1,730
    
    
    $
    8,392
    
    
    $
    1,791
    
    
    $
    1,762
    
    
    $
    8,653December 31, 2001Standard Lines
    
    $
    397
    
    
    $
    12,854
    
    
    $
    
    
    
    $
    1,825
    
    
    $
    54
    
    
    $
    2,473
    
    
    $
    488
    
    
    $
    2,511
    
    
    $
    938
    
    
    $
    601
    
    
    $
    2,984Specialty Lines
    
    
    255
    
    
    
    5,668
    
    
    
    
    
    
    
    1,449
    
    
    
    3
    
    
    
    1,896
    
    
    
    314
    
    
    
    1,850
    
    
    
    538
    
    
    
    400
    
    
    
    1,951CNA Re
    
    
    56
    
    
    
    4,644
    
    
    
    
    
    
    
    201
    
    
    
    2
    
    
    
    641
    
    
    
    172
    
    
    
    1,418
    
    
    
    205
    
    
    
    69
    
    
    
    524Group Operations
    
    
    117
    
    
    
    1,714
    
    
    
    635
    
    
    
    10
    
    
    
    452
    
    
    
    3,378
    
    
    
    241
    
    
    
    2,979
    
    
    
    (13
    )
    
    
    730
    
    
    
    2,182Life Operations
    
    
    1,598
    
    
    
    1,343
    
    
    
    6,330
    
    
    
    134
    
    
    
    38
    
    
    
    873
    
    
    
    486
    
    
    
    1,107
    
    
    
    131
    
    
    
    144
    
    
    
    438Corporate and Other
    
    
    1
    
    
    
    5,043
    
    
    
    341
    
    
    
    886
    
    
    
    (3
    )
    
    
    89
    
    
    
    155
    
    
    
    1,479
    
    
    
    5
    
    
    
    542
    
    
    
    (3
    )Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (65
    )
    
    
    
    
    
    
    (165
    )
    
    
    (62
    )Consolidated Operations
    
    $
    2,424
    
    
    $
    31,266
    
    
    $
    7,306
    
    
    $
    4,505
    
    
    $
    546
    
    
    $
    9,288
    
    
    $
    1,856
    
    
    $
    11,279
    
    
    $
    1,804
    
    
    $
    2,321
    
    
    $
    8,014




|(a) |  | Investment income is allocated based on each segments net carried
insurance reserves as adjusted.
|--- |  | --------------------------------------------------------------------------------------------------



|(b) |  | Net written premiums relate to business in property and casualty companies
only.
|--- |  | --------------------------------------------------------------------------------

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SCHEDULE IV. REINSURANCE

Incorporated herein by reference from Note H of the Consolidated Financial
Statements included under Item 8.

SCHEDULE V. VALUATION AND QUALIFYING ACCOUNTS

Balance at
    
    Charged to
    
    Charged toBeginning
    
    Costs and
    
    Other
    
    
    
    
    
    Balance atof Period
    
    Expenses
    
    Accounts (a)
    
    Deductions (b)
    
    End of Period(In millions)Year ended December 31, 2003Deducted from assets:Allowance for doubtful accounts:Insurance and reinsurance
receivables
    
    $
    352
    
    
    $
    602
    
    
    $
    3
    
    
    $
    9
    
    
    $
    948Year ended December 31, 2002Deducted from assets:Allowance for doubtful accounts:Insurance and reinsurance
receivables
    
    $
    351
    
    
    $
    40
    
    
    $
    7
    
    
    $
    46
    
    
    $
    352




|(a) |  | Amount includes effects of foreign currency translation.
|--- |  | --------------------------------------------------------



|(b) |  | For 2002, amount includes $30 million related to the sale of CNA Re U.K.,
see Note P of the Consolidated Financial Statements included under Item 8 for
further discussion of the sale.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS

Consolidated Property and Casualty OperationsAs of and for the years ended December 31
    
    2003
    
    2002
    
    2001(In millions)Deferred acquisition costs
    
    $
    1,321
    
    
    $
    1,257
    
    
    $
    1,103Reserves for unpaid claim and claim adjustment expenses
    
    
    31,282
    
    
    
    25,648
    
    
    
    29,551Discount deducted from claim and claim adjustment expense reserves
above (based on interest rates ranging from 3.5% to 7.5%)
    
    
    2,280
    
    
    
    2,440
    
    
    
    2,456Unearned premiums
    
    
    4,891
    
    
    
    4,813
    
    
    
    4,495Net written premiums
    
    
    7,617
    
    
    
    8,653
    
    
    
    8,014Net earned premiums
    
    
    7,469
    
    
    
    8,438
    
    
    
    7,598Net investment income
    
    
    1,532
    
    
    
    1,422
    
    
    
    1,261Incurred claim and claim adjustment expenses related to current year
    
    
    4,747
    
    
    
    6,722
    
    
    
    7,192Incurred claim and claim adjustment expenses related to prior years
    
    
    2,431
    
    
    
    52
    
    
    
    2,466Amortization of deferred acquisition costs
    
    
    1,827
    
    
    
    1,660
    
    
    
    1,748Paid claim and claim adjustment expenses
    
    
    5,075
    
    
    
    8,218
    
    
    
    10,852


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INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders of
CNA Financial Corporation

We have audited the consolidated financial statements of CNA Financial
Corporation (an affiliate of Loews Corporation) and subsidiaries (the Company)
as of December 31, 2003 and 2002, and for each of the three years in the period
ended December 31, 2003, and have issued our report thereon dated February 26,
2004 (which report expresses an unqualified opinion and includes an explanatory
paragraph concerning the adoption of a new accounting principle relating to a
change in method of accounting for goodwill and indefinite-lived intangible
assets in 2002); such consolidated financial statements and report are included
in Item 8 of this Form 10-K. Our audits also included the financial statement
schedules of CNA Financial Corporation and subsidiaries, listed in Item
15. These financial statement schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements included in Item 8 of this Form
10-K taken as a whole, present fairly in all material respects the information
set forth therein.

Deloitte & Touche LLP
Chicago, Illinois
February 26, 2004

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

CNA Financial CorporationDated: February 27, 2004
    
    By
    
    /s/ Stephen W. LilienthalStephen W. LilienthalChief Executive Officer(Principal Executive Officer)By
    
    /s/ Robert V. DeutschRobert V. DeutschExecutive Vice President andChief Financial Officer(Principal Accounting Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

Dated: February 27, 2004
    
    By
    
    /s/ Walter L. Harris(Walter L. Harris, Director)Dated: February 27, 2004
    
    By
    
    /s/ Bernard L. Hengesbaugh(Bernard L.
Hengesbaugh,Chairman of the Board and Director)Dated: February 27, 2004
    
    By
    
    /s/ Stephen W. Lilienthal(Stephen W.
Lilienthal,Chief Executive Officer and Director)Dated: February 27, 2004
    
    By
    
    /s/ Paul J. Liska(Paul J. Liska, Director)Dated: February 27, 2004
    
    By
    
    /s/ Don M. Randel(Don M. Randel, Director)Dated: February 27, 2004
    
    By
    
    /s/ Joseph Rosenberg(Joseph Rosenberg, Director)Dated: February 27, 2004
    
    By
    
    /s/ James S. Tisch(James S. Tisch, Director)Dated: February 27, 2004
    
    By
    
    /s/ Preston R. Tisch(Preston R. Tisch, Director)Dated: February 27, 2004
    
    By
    
    /s/ Marvin Zonis(Marvin Zonis, Director)


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