##### Table of Contents



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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, 2002
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                                                       |  | 36-6169860                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|CNA Plaza                                                      |  |                                     
|Chicago, Illinois                                              |  | 60685                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

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

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 March 14, 2003, 223,608,868 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 28, 2002 was approximately $592
million based on the closing price of $26.50 per share of the common stock on
the New York Stock Exchange on June 28, 2002.

DOCUMENTS INCORPORATED
BY REFERENCE:

Portions of the CNA Financial Corporation Proxy Statement prepared for the
2003 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 
|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. CONTROLS AND PROCEDURES                                                             
|PART IV       
|               | ITEM 15. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K                   
|SIGNATURES    
|CERTIFICATIONS



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|       |  |                                                                                       |  |       
|------ |  | ------------------------------------------------------------------------------------- |  | ------
|Item   |  |                                                                                       |  | Page  
|Number |  |                                                                                       |  | Number
|       |  |                                                                                       |  |       
|       |  | PART I                                                                                |  |       
|1.     |  | Business                                                                              |  | 3     
|2.     |  | Properties                                                                            |  | 11    
|3.     |  | Legal Proceedings                                                                     |  | 11    
|4.     |  | Submission of Matters to a Vote of Security Holders                                   |  | 11    
|       |  | PART II                                                                               |  |       
|5.     |  | Market for the Registrants Common Stock and Related Stockholder
Matters              |  | 12    
|6.     |  | Selected Financial Data                                                               |  | 14    
|7.     |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  | 15    
|7A.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 90    
|8.     |  | Financial Statements and Supplementary Data                                           |  | 96    
|9.     |  | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure  |  | 182   
|       |  | PART III                                                                              |  |       
|10.    |  | Directors and Executive Officers of the Registrant                                    |  | 183   
|11.    |  | Executive Compensation                                                                |  | 184   
|12.    |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 184   
|13.    |  | Certain Relationships and Related Transactions                                        |  | 184   
|14.    |  | Controls and Procedures                                                               |  | 184   
|       |  | PART IV                                                                               |  |       
|15.    |  | Financial Statements, Schedules, Exhibits and Reports on Form 8-K                     |  | 185   





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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. Life and group insurance operations are
conducted by Continental Assurance Company (CAC), incorporated in 1911, and its
affiliates, Valley Forge Life Insurance Company (VFL), incorporated in 1956,
and CNA Group Life Assurance Company (CNAGLA), incorporated in 2000. CIC
became an affiliate of the Company in 1995 as a result of the acquisition of
The Continental Corporation (Continental). The principal business of
Continental is the ownership of a group of property and casualty insurance
companies, mainly CIC and its affiliates.

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; retirement products and annuities; and property and casualty
reinsurance. CNA services include risk management, information services,
healthcare claims management, and claims administration. CNA products and
services are marketed through independent agents, brokers, managing general
agents and direct sales.

Competition

The property and casualty and life and health insurance industry is highly
competitive both as to rate and service. CNAF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. CNAF must continuously allocate
resources to refine and improve its insurance and reinsurance products and
services.

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

There are approximately 2,400 individual companies that sell property and
casualty insurance in the United States. CNAFs consolidated property and
casualty subsidiaries ranked as the ninth largest property and casualty
insurance organization in the United States based upon 2001 statutory net
written premiums. CNA Re, the Companys principal property and casualty
assumed reinsurance operation, ranked as the 14th largest property and casualty
reinsurance organization in the United States based upon 2001 statutory net
written premiums.

There are approximately 990 companies selling life and heath insurance in the
United States. CNAs consolidated life insurance companies are ranked as the
51st largest life-health insurance organization in the United States based on
2001 statutory net written premiums.

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The commercial property and casualty markets continue to realize significant
rate increases while simultaneously using stricter 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 well into 2003. The
reinsurance markets are also experiencing rate increases, however, not to the
extent experienced by the direct commercial markets.

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 payments.

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 business in a variety of ways. These
initiatives and legislation include tort reform proposals; 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
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.

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CNA and the insurance industry incurred substantial losses related to the
September 11, 2001 World Trade Center disaster and related events. For the
most part, the Company believes the industry was able to absorb the loss of
capital from these losses, but the capacity to withstand the effect of any
additional terrorism events was significantly diminished.

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 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 determines a
specified level of regulatory attention applicable to a company. As of
December 31, 2002 and 2001, 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.

Terrorism

On November 26, 2002, the President of the United States of America, George W.
Bush, signed into law the Terrorism Risk Insurance Act of 2002 (the Act), which
establishes a program within the Department of the Treasury under which the
Federal Government will share the risk of loss from future terrorist attacks
with the insurance industry. The Act terminates on December 31, 2005. Each
participating insurance company must pay a deductible before Federal Government
assistance becomes available. This deductible is based on a percentage of
direct earned premiums for commercial insurance lines from the previous
calendar year, and rises from 1% from date of enactment to December 31, 2002
(the Transition Period) to 7% during the first subsequent calendar year, 10% in
year two and 15% in year three. 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.

Insurance companies providing commercial property and casualty insurance are
required to participate in the program, but it does not cover life or health
insurance products. State law limitations applying to premiums and policies
for terrorism coverage are not generally affected under the program, but they
are pre-empted in relation to prior approval requirements for rates and forms.
The Act has policyholder notice requirements in order for insurers to be
reimbursed for terrorism-related losses and, from the date of enactment until
December 31, 2004, a mandatory offer requirement for terrorism coverage,
although it may be rejected by insureds. 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 during the next three
years, 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, and is also prohibited from excluding coverage
for fire losses following a terrorist event in a number of states.

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

Reinsurance

Information on CNAs reinsurance activities is set forth in the Managements
Discussion and Analysis (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, 2002, CNA had approximately 15,500 full-time equivalent
(FTE) employees and has experienced satisfactory labor relations. CNA has
never had work stoppages due to labor disputes. 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
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.

Business Segments

CNA conducts 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.

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Supplementary Insurance Data

The following table sets forth supplementary insurance data:

Supplementary Insurance Data

|                                                 |                                                                            |   |         |         |      |              |         |              |   |   |         |         |  
|------------------------------------------------ | -------------------------------------------------------------------------- | - | ------- | ------- | ---- | ------------ | ------- | ------------ | - | - | ------- | ------- | -
|                                                 |                                                                            |   | 2002    |         | 2001 |              | 2000   
|Years ended December 31                          |                                                                            |   |         |         |      |             
|(In millions, except ratio information)          |                                                                            |   |         |         |      | Restated (a) |         | Restated (a)
|Trade Ratios  GAAP basis (b)                    |                                                                            |   |         |         |      |              |         |              |   |   |         |        
|                                                 | Loss and loss adjustment expense ratio                                     |   |         | 79.4    | %    |              |         | 125.2        | % |   |         | 81.1    | %
|                                                 | Expense ratio                                                              |   |         | 29.3    |      |              |         | 36.7         |   |   |         | 30.4    |  
|                                                 | Dividend ratio                                                             |   |         | 0.9     |      |              |         | 1.5          |   |   |         | 0.9     |  
|                                                 |                                                                            |   |         |         |      |              |         |              |   |   |         |         |  
|                                                 | Combined ratio                                                             |   |         | 109.6   | %    |              |         | 163.4        | % |   |         | 112.4   | %
|                                                 |                                                                            |   |         |         |      |              |         |              |   |   |         |         |  
|Trade Ratios  Statutory basis (b)               |                                                                            |   |         |         |      |              |         |              |   |   |         |        
|                                                 | Loss and loss adjustment expense ratio                                     |   |         | 79.2    | %    |              |         | 126.2        | % |   |         | 80.4    | %
|                                                 | Expense ratio                                                              |   |         | 30.1    |      |              |         | 32.3         |   |   |         | 33.3    |  
|                                                 | Dividend ratio                                                             |   |         | 1.0     |      |              |         | 1.7          |   |   |         | 1.2     |  
|                                                 |                                                                            |   |         |         |      |              |         |              |   |   |         |         |  
|                                                 | Combined Ratio                                                             |   |         | 110.3   | %    |              |         | 160.2        | % |   |         | 114.9   | %
|                                                 |                                                                            |   |         |         |      |              |         |              |   |   |         |         |  
|Individual Life and Group Life Insurance Inforce |                                                                            |   |         |         |      |              |         |              |   |   |         |        
|                                                 | Individual life (c)                                                        |   | $       | 345,272 |      |              | $       | 426,822      |   |   | $       | 462,799 |  
|                                                 | Group life                                                                 |   |         | 92,479  |      |              |         | 70,910       |   |   |         | 71,982  |  
|                                                 |                                                                            |   |         |         |      |              |         |              |   |   |         |         |  
|Total                                            |                                                                            | $ | 437,751 |         |      | $            | 497,732 |              |   | $ | 534,781 |        
|                                                 |                                                                            |   |         |         |      |              |         |              |   |   |         |         |  
|Other Data  Statutory basis (d)                 |                                                                            |   |         |         |      |              |         |              |   |   |         |        
|                                                 | Property and casualty companies capital and surplus (e)                   |   | $       | 6,836   |      |              | $       | 6,241        |   |   | $       | 8,373   |  
|                                                 | Life and group companies capital and surplus                              |   |         | 1,645   |      |              |         | 1,752        |   |   |         | 1,274   |  
|                                                 | Property and casualty companies written premiums to surplus ratio         |   |         | 1.3     |      |              |         | 1.3          |   |   |         | 1.1     |  
|                                                 | Life and group companies capital and surplus-percent to total
liabilities |   |         | 21.0    | %    |              |         | 25.3         | % |   |         | 24.5    | %
|                                                 | Participating policyholders-percent of gross life insurance inforce        |   |         | 0.5     | %    |              |         | 0.4          | % |   |         | 0.4     | %



|(a) |  | Restated to reflect an adjustment to the Companys historical accounting
for CNAs investment in life settlement contracts and the related revenue
recognition. See Note T of the Consolidated Financial Statements included
under Item 8 for further discussion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | 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 loss and loss 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 principles (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.
|   
|(c) |  | Lapse ratios for individual life insurance, as measured by surrenders and
withdrawals as a percentage of average ordinary life insurance inforce,
were 34.7%, 8.7% and 12.7% in 2002, 2001 and 2000. (The 2002 lapse ratio includes the
novation of CNA's individual life reinsurance business. Excluding the
novation, the 2002 lapse ratio was 7.6%. See Note P of the
Consolidated Financial Statements included under Item 8 for further
discussion.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(d) |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(e) |  | Surplus includes the property and casualty companies equity ownership of
the life and group insurance subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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

Gross Written Premiums

|                                                          |  |                  |       |      |  |      |       |   |  |  |       |  
|--------------------------------------------------------- |  | ---------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                          |  | Percent of Total
|                                                          |  |                 
|Years ended December 31                                   |  | 2002             |       | 2001 |  | 2000
|                                                          |  |                  |       |      |  |     
|Illinois                                                  |  |                  | 9.1   | %    |  |      | 8.3   | % |  |  | 9.2   | %
|California                                                |  |                  | 7.7   |      |  |      | 6.8   |   |  |  | 6.0   |  
|New York                                                  |  |                  | 7.2   |      |  |      | 7.9   |   |  |  | 7.3   |  
|Florida                                                   |  |                  | 6.7   |      |  |      | 6.2   |   |  |  | 4.8   |  
|Texas                                                     |  |                  | 6.2   |      |  |      | 5.8   |   |  |  | 4.7   |  
|New Jersey                                                |  |                  | 4.6   |      |  |      | 4.4   |   |  |  | 3.4   |  
|Pennsylvania                                              |  |                  | 4.5   |      |  |      | 4.3   |   |  |  | 3.8   |  
|Maryland                                                  |  |                  | 2.3   |      |  |      | 2.4   |   |  |  | 5.6   |  
|United Kingdom                                            |  |                  | 1.7   |      |  |      | 3.3   |   |  |  | 5.3   |  
|All other states, countries or political subdivisions (a) |  |                  | 50.0  |      |  |      | 50.6  |   |  |  | 49.9  |  
|                                                          |  |                  |       |      |  |      |       |   |  |  |       |  
|Total                                                     |  |                  | 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 3.5%, 4.8% and 8.2% of CNAs gross written premiums were derived
from outside of the United States for the years ended December 31, 2002, 2001
and 2000. Premiums from any individual foreign country excluding the United
Kingdom, which is stated in the table above, 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

|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        | 
|--------------------------------------------------------------------------------- | --------------------------------- | - | -------- | ------ | -------- | - | -------- | ------ | -------- | - | ------ | ------ | ---- | - | ------ | ------ | -------- | - | ------ | ------ | -------- | - | -------- | ------ | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | 
|                                                                                  |                                   |   | 1992 (a) |        | 1993 (a) |   | 1994 (a) |        | 1995 (b) |   | 1996   |        | 1997 |   | 1998   |        | 1999 (c) |   | 2000   |        | 2001 (d) |   | 2002 (e)
|Calendar Year Ended                                                               |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |  
|(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 |       
|Originally reported ceded
recoverable                                             |                                   |   |          |        |          |   | 2,491    |        |          |   | 2,705  |        |      |   | 6,089  |        |          |   | 5,660  |        |          |   | 5,326    |        |   |   | 5,424  |        |   |   | 6,273  |        |   |   | 7,568  |        |   |   | 11,798 |        |   |   | 10,583 |       
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|Originally reported net
reserves for unpaid claim
and claim adjustment
expenses   |                                   | $ | 17,167   |        |          | $ | 18,321   |        |          | $ | 18,934 |        |      | $ | 24,955 |        |          | $ | 23,697 |        |          | $ | 23,207   |        |   | $ | 22,893 |        |   | $ | 20,358 |        |   | $ | 18,840 |        |   | $ | 17,753 |        |   | $ | 15,065 |       
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|Cumulative net paid as of:                                                        |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|                                                                                  | One year later                    |   | $        | 3,706  |          |   | $        | 3,629  |          |   | $      | 3,656  |      |   | $      | 6,510  |          |   | $      | 5,851  |          |   | $        | 5,954  |   |   | $      | 7,321  |   |   | $      | 6,546  |   |   | $      | 7,686  |   |   | $      | 5,981  |   |   | $      |       | 
|                                                                                  | Two years later                   |   |          | 6,354  |          |   |          | 6,143  |          |   |        | 7,087  |      |   |        | 10,485 |          |   |        | 9,796  |          |   |          | 11,394 |   |   |        | 12,241 |   |   |        | 11,935 |   |   |        | 11,988 |   |   |        |       |   |   |        |       | 
|                                                                                  | Three years later                 |   |          | 8,121  |          |   |          | 8,764  |          |   |        | 9,195  |      |   |        | 13,363 |          |   |        | 13,602 |          |   |          | 14,423 |   |   |        | 16,020 |   |   |        | 15,247 |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Four years later                  |   |          | 10,241 |          |   |          | 10,318 |          |   |        | 10,624 |      |   |        | 16,271 |          |   |        | 15,793 |          |   |          | 17,042 |   |   |        | 18,271 |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Five years later                  |   |          | 11,461 |          |   |          | 11,378 |          |   |        | 12,577 |      |   |        | 17,947 |          |   |        | 17,736 |          |   |          | 18,568 |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Six years later                   |   |          | 12,308 |          |   |          | 13,100 |          |   |        | 13,472 |      |   |        | 19,465 |          |   |        | 18,878 |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Seven years later                 |   |          | 13,974 |          |   |          | 13,848 |          |   |        | 14,394 |      |   |        | 20,410 |          |   |        |       |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Eight years later                 |   |          | 14,640 |          |   |          | 14,615 |          |   |        | 15,024 |      |   |        |       |          |   |        |       |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Nine years later                  |   |          | 15,319 |          |   |          | 15,161 |          |   |        |       |      |   |        |       |          |   |        |       |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Ten years later                   |   |          | 15,805 |          |   |          |       |          |   |        |       |      |   |        |       |          |   |        |       |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|Net reserves re-estimated
as of:                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|                                                                                  | End of initial year               |   | $        | 17,167 |          |   | $        | 18,321 |          |   | $      | 18,934 |      |   | $      | 24,955 |          |   | $      | 23,697 |          |   | $        | 23,207 |   |   | $      | 22,893 |   |   | $      | 20,358 |   |   | $      | 18,840 |   |   | $      | 17,753 |   |   | $      | 15,065 | 
|                                                                                  | One year later                    |   |          | 17,757 |          |   |          | 18,250 |          |   |        | 18,922 |      |   |        | 24,864 |          |   |        | 23,441 |          |   |          | 23,470 |   |   |        | 23,920 |   |   |        | 20,785 |   |   |        | 21,306 |   |   |        | 17,805 |   |   |        |       | 
|                                                                                  | Two years later                   |   |          | 17,728 |          |   |          | 18,125 |          |   |        | 18,500 |      |   |        | 24,294 |          |   |        | 23,102 |          |   |          | 23,717 |   |   |        | 23,774 |   |   |        | 22,903 |   |   |        | 21,377 |   |   |        |       |   |   |        |       | 
|                                                                                  | Three years later                 |   |          | 17,823 |          |   |          | 17,868 |          |   |        | 18,088 |      |   |        | 23,814 |          |   |        | 23,270 |          |   |          | 23,414 |   |   |        | 25,724 |   |   |        | 22,780 |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Four years later                  |   |          | 17,765 |          |   |          | 17,511 |          |   |        | 17,354 |      |   |        | 24,092 |          |   |        | 22,977 |          |   |          | 24,751 |   |   |        | 25,407 |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Five years later                  |   |          | 17,560 |          |   |          | 17,082 |          |   |        | 17,506 |      |   |        | 23,854 |          |   |        | 24,105 |          |   |          | 24,330 |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Six years later                   |   |          | 17,285 |          |   |          | 17,176 |          |   |        | 17,248 |      |   |        | 24,883 |          |   |        | 23,736 |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Seven years later                 |   |          | 17,398 |          |   |          | 17,017 |          |   |        | 17,751 |      |   |        | 24,631 |          |   |        |       |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Eight years later                 |   |          | 17,354 |          |   |          | 17,500 |          |   |        | 17,650 |      |   |        |       |          |   |        |       |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Nine years later                  |   |          | 17,834 |          |   |          | 17,443 |          |   |        |       |      |   |        |       |          |   |        |       |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  | Ten years later                   |   |          | 17,805 |          |   |          |       |          |   |        |       |      |   |        |       |          |   |        |       |          |   |          |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       | 
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|Total net (deficiency)
redundancy                                                 |                                   | $ | (638     | )      |          | $ | 878      |        |          | $ | 1,284  |        |      | $ | 324    |        |          | $ | (39    | )      |          | $ | (1,123   | )      |   | $ | (2,514 | )      |   | $ | (2,422 | )      |   | $ | (2,537 | )      |   | $ | (52    | )      |   | $ |       |       
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|Reconciliation to gross
re-estimated reserves:                                    |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|                                                                                  | Net reserves
re-estimated         |   | $        | 17,805 |          |   | $        | 17,443 |          |   | $      | 17,650 |      |   | $      | 24,631 |          |   | $      | 23,736 |          |   | $        | 24,330 |   |   | $      | 25,407 |   |   | $      | 22,780 |   |   | $      | 21,377 |   |   | $      | 17,805 |   |   | $      |       | 
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|                                                                                  | Re-estimated ceded
recoverable    |   |          |        |          |   |          | 1,784  |          |   |        | 2,074  |      |   |        | 6,688  |          |   |        | 5,927  |          |   |          | 5,195  |   |   |        | 5,507  |   |   |        | 7,618  |   |   |        | 7,852  |   |   |        | 11,985 |   |   |        |       | 
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|                                                                                  | Total gross
re-estimated reserves |   |          |        |          |   | $        | 19,227 |          |   | $      | 19,724 |      |   | $      | 31,319 |          |   | $      | 29,663 |          |   | $        | 29,525 |   |   | $      | 30,914 |   |   | $      | 30,398 |   |   | $      | 29,229 |   |   | $      | 29,790 |   |   | $      |       | 
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|Net (deficiency)
redundancy related to:                                           |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|                                                                                  | Asbestos claims                   |   | $        | (2,063 | )        |   | $        | (1,466 | )        |   | $      | (1,433 | )    |   | $      | (1,660 | )        |   | $      | (1,761 | )        |   | $        | (1,659 | ) |   | $      | (1,415 | ) |   | $      | (838   | ) |   | $      | (773   | ) |   | $      |       |   |   | $      |       | 
|                                                                                  | Environmental claims              |   |          | (1,215 | )        |   |          | (772   | )        |   |        | (604   | )    |   |        | (645   | )        |   |        | (589   | )        |   |          | (608   | ) |   |        | (388   | ) |   |        | (483   | ) |   |        | (468   | ) |   |        |       |   |   |        |       | 
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|                                                                                  | Total asbestos and
environmental  |   |          | (3,278 | )        |   |          | (2,238 | )        |   |        | (2,037 | )    |   |        | (2,305 | )        |   |        | (2,350 | )        |   |          | (2,267 | ) |   |        | (1,803 | ) |   |        | (1,321 | ) |   |        | (1,241 | ) |   |        |       |   |   |        |       | 
|                                                                                  | Other claims                      |   |          | 2,640  |          |   |          | 3,116  |          |   |        | 3,321  |      |   |        | 2,629  |          |   |        | 2,311  |          |   |          | 1,144  |   |   |        | (711   | ) |   |        | (1,101 | ) |   |        | (1,296 | ) |   |        | (52    | ) |   |        |       | 
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|Total net (deficiency)
redundancy                                                 |                                   | $ | (638     | )      |          | $ | 878      |        |          | $ | 1,284  |        |      | $ | 324    |        |          | $ | (39    | )      |          | $ | (1,123   | )      |   | $ | (2,514 | )      |   | $ | (2,422 | )      |   | $ | (2,537 | )      |   | $ | (52    | )      |   | $ |       |       
|                                                                                  |                                   |   |          |        |          |   |          |        |          |   |        |        |      |   |        |        |          |   |        |        |          |   |          |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |       

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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.                                                                

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.

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##### Table of Contents






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

|                                                  |  |                    |  |                                        
|------------------------------------------------- |  | ------------------ |  | ---------------------------------------
|                                                  |  | Amount (Square     |  |                                        
|                                                  |  | Feet) of Building  |  |                                        
|                                                  |  | Owned and Occupied |  |                                        
|                                                  |  | or Leased and      |  |                                        
|Location                                          |  | Occupied by CNA    |  | Principal Usage                        
|                                                  |  |                    |  |                                        
|CNA Plaza 333 S. Wabash, Chicago,
Illinois        |  | 1,144,378 (a)      |  | Principal executive offices of CNAF    
|100
CNA Drive, Nashville, Tennessee               |  | 251,363 (a)        |  | Life insurance offices                 
|40
Wall Street, New York, New York                |  | 196,438 (b)        |  | Property and casualty insurance offices
|2405
Lucien Way, Maitland, Florida                |  | 178,744 (b)        |  | Property and casualty insurance offices
|3500
Lacey Road, Downers Grove, Illinois          |  | 168,793 (b)        |  | Property and casualty insurance offices
|1100 Cornwall Road, Monmouth Junction,
New Jersey |  | 112,926 (b)        |  | Property and casualty insurance offices
|1100
Ward Avenue, Honolulu, Hawaii                |  | 100,075 (a)        |  | Property and casualty insurance offices



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




ITEM 3. LEGAL PROCEEDINGS

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




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

None.

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##### Table of Contents






PART II




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

CNA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 March 14, 2003, CNA had 223,608,868 shares of common stock outstanding.
Approximately 90% of CNAs outstanding common stock is owned by Loews
Corporation (Loews). CNA had 2,407 stockholders of record as of March 14, 2003
according to the records maintained by the Companys transfer agent.

On December 19, 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Preferred Issue), to Loews.
The terms of the Preferred Issue were approved by a special committee of
independent members of CNAFs Board of Directors.

The Preferred Issue 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 ratings levels of the financial strength rating of
CCC from its current rating 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 Preferred Issue unless and until one of the two triggering events
described above has occurred. Beginning with the quarter following an increase
of one intermediate ratings level in CCCs financial strength rating, however,
current (but not accrued cumulative) quarterly dividends can be paid.

The Preferred Issue is senior to CNAFs common stock as to the payment of
dividends and amounts payable upon any liquidation, dissolution or winding up.
No dividends may be declared on CNAFs common stock until all cumulative
dividends on the Preferred Issue have been paid. CNAF may not issue any equity
securities ranking senior to or on par with the Preferred Issue without the
consent of a majority of its stockholders. The Preferred 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 Preferred Issue is exempt from registration under
Section 4(2) of the Securities Act of 1933.

Of the proceeds of the Preferred 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. It is expected that the remaining proceeds will
be used to repay other debt of CNAF and The Continental Corporation, a
controlled subsidiary, maturing in 2003 and used for other general corporate
purposes.

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

Common Stock Information

|         |        |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------- | ------ |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|         |        |  | 2002 |       | 2001
|         |        |  |      |       |     
|         |        |  | High |       | Low  |  | High |       | Low
|         |        |  |      |       |      |  |      |       |    
|Quarter: |        |  |      |       |      |  |      |       |     |  |   |       |  |  |   |      
|         | Fourth |  | $    | 28.35 |      |  | $    | 22.95 |     |  | $ | 29.19 |  |  | $ | 24.81 | 
|         | Third  |  |      | 28.60 |      |  |      | 21.45 |     |  |   | 39.69 |  |  |   | 23.00 | 
|         | Second |  |      | 30.99 |      |  |      | 25.74 |     |  |   | 40.25 |  |  |   | 33.81 | 
|         | First  |  |      | 30.60 |      |  |      | 27.00 |     |  |   | 39.19 |  |  |   | 32.13 | 

No dividends have been paid on CNAs common stock in 2002 or 2001. CNA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.

Equity Compensation Plan

The table below provides the securities authorized for issuance under equity
compensation plans.

Executive Compensation Information
December 31, 2002

|                                                           |  |                            |           |                              |  |                           |       |                       |  |                         |         | 
|---------------------------------------------------------- |  | -------------------------- | --------- | ---------------------------- |  | ------------------------- | ----- | --------------------- |  | ----------------------- | ------- | 
|                                                           |  |                            |           |                              |  |                           |       |                       |  | Number of securities   
|                                                           |  |                            |           |                              |  |                           |       |                       |  | remaining available for
|                                                           |  | Number of securities to be |           |                              |  |                           |       | future issuance under
|                                                           |  | issued upon exercise of    |           | Weighted-average exercise    |  | equity compensation plans
|                                                           |  | outstanding options,       |           | price of outstanding         |  | (excluding securities    
|                                                           |  | warrants and rights        |           | options, warrants and rights |  | reflected in column (a)) 
|                                                           |  | (a)                        |           | (b)                          |  | (c)                      
|                                                           |  |                            |           |                              |  |                          
|Plan Category                                              |  |                            |           |                              |  |                           |       |                       |  |                         |         | 
|Equity compensation plans
approved by security holders     |  |                            | 1,146,850 |                              |  | $                         | 31.80 |                       |  |                         | 841,225 | 
|Equity compensation plans not
approved by security holders |  |                            |          |                              |  |                           |      |                       |  |                         |        | 
|                                                           |  |                            |           |                              |  |                           |       |                       |  |                         |         | 
|Total                                                      |  |                            | 1,146,850 |                              |  | $                         | 31.80 |                       |  |                         | 841,225 | 
|                                                           |  |                            |           |                              |  |                           |       |                       |  |                         |         | 

See Note J to the Consolidated Financial Statements included under Item 8 for a
discussion of securities authorized for issuance under equity compensation
plans.

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##### Table of Contents






ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data.

Selected Financial Data

|                                                                   |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|------------------------------------------------------------------ |  | ---- | ------ | ---- |  | ------------ | ------ | ------------ |  | ------------ | ------ | ------------ |  | - | ------ | - |  | - | ------ | -
|                                                                   |  | 2002 |        | 2001 |  | 2000         |        | 1999         |  | 1998        
|As of and for the Years
Ended December 31                          |  |      |        |      |  |              |        |              |  |             
|(In millions, except per share data and ratios)                    |  |      |        |      |  | Restated (a) |        | Restated (a) |  | Restated (a) |        | Restated (a)
|Results of Operations:                                             |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|Revenues                                                           |  | $    | 12,286 |      |  | $            | 13,089 |              |  | $            | 15,408 |              |  | $ | 16,294 |   |  | $ | 17,093 |  
|                                                                   |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                           |  | $    | 247    |      |  | $            | (1,592 | )            |  | $            | 1,177  |              |  | $ | 1      |   |  | $ | 228    |  
|(Loss) income from discontinued
operations, net of tax             |  |      | (35    | )    |  |              | 11     |              |  |              | 5      |              |  |   | 4      |   |  |   |       |  
|Cumulative effects of changes in
accounting principles, net of tax |  |      | (57    | )    |  |              | (61    | )            |  |              |       |              |  |   | (177   | ) |  |   |       |  
|                                                                   |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|Net income (loss)                                                  |  | $    | 155    |      |  | $            | (1,642 | )            |  | $            | 1,182  |              |  | $ | (172   | ) |  | $ | 228    |  
|                                                                   |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|Earnings (Loss) per Share:                                         |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                           |  | $    | 1.10   |      |  | $            | (8.20  | )            |  | $            | 6.40   |              |  | $ | (0.06  | ) |  | $ | 1.19   |  
|(Loss) income from discontinued
operations, net of tax             |  |      | (0.16  | )    |  |              | 0.06   |              |  |              | 0.03   |              |  |   | 0.02   |   |  |   |       |  
|Cumulative effects of changes in
accounting principles, net of tax |  |      | (0.26  | )    |  |              | (0.32  | )            |  |              |       |              |  |   | (0.96  | ) |  |   |       |  
|                                                                   |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|Earnings (loss) per share available to
common stockholders         |  | $    | 0.68   |      |  | $            | (8.46  | )            |  | $            | 6.43   |              |  | $ | (1.00  | ) |  | $ | 1.19   |  
|                                                                   |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|Financial Condition:                                               |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|Total investments                                                  |  | $    | 35,293 |      |  | $            | 35,826 |              |  | $            | 36,059 |              |  | $ | 36,935 |   |  | $ | 38,828 |  
|Total assets                                                       |  |      | 61,731 |      |  |              | 65,723 |              |  |              | 62,785 |              |  |   | 62,390 |   |  |   | 63,929 |  
|Insurance reserves                                                 |  |      | 40,179 |      |  |              | 43,623 |              |  |              | 39,054 |              |  |   | 39,271 |   |  |   | 40,509 |  
|Debt                                                               |  |      | 2,292  |      |  |              | 2,567  |              |  |              | 2,729  |              |  |   | 2,881  |   |  |   | 3,160  |  
|Stockholders equity                                               |  |      | 9,401  |      |  |              | 8,122  |              |  |              | 9,400  |              |  |   | 8,723  |   |  |   | 8,984  |  
|Book value per share                                               |  | $    | 38.68  |      |  | $            | 36.33  |              |  | $            | 51.29  |              |  | $ | 46.42  |   |  | $ | 46.92  |  
|Return on average stockholders equity                             |  |      | 1.8    | %    |  |              | -18.7  | %            |  |              | 13.0   | %            |  |   | -1.9   | % |  |   | 2.7    | %
|Statutory Surplus:                                                 |  |      |        |      |  |              |        |              |  |              |        |              |  |   |        |   |  |   |        |  
|Property and casualty companies (b)                                |  | $    | 6,836  |      |  | $            | 6,241  |              |  | $            | 8,373  |              |  | $ | 8,679  |   |  | $ | 7,593  |  
|Life and group insurance companies                                 |  |      | 1,645  |      |  |              | 1,752  |              |  |              | 1,274  |              |  |   | 1,222  |   |  |   | 1,109  |  



|(a) |  | Restated to reflect an adjustment to the Companys historical accounting
for CNAs investment in life settlement contracts and the related revenue
recognition. See Note T of the Consolidated Financial Statements included
under Item 8 for further discussion.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Surplus includes the property and casualty companies equity ownership of
the life and group insurance subsidiaries.                                                                                                                                             

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##### Table of Contents






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

CONSOLIDATED OPERATIONS

The following discussion highlights significant factors impacting the
consolidated operations and financial condition of CNA Financial Corporation
(CNAF) and its controlled subsidiaries (collectively CNA or the Company). CNA
is one of the largest insurance organizations in the United States and based on
2001 statutory net written premiums, is the ninth largest property and casualty
company and the 51st largest life insurance company.

Loews Corporation (Loews) owned approximately 90% of the outstanding common
stock of CNAF as of December 31, 2002. The following discussion should be read
in conjunction with Item 6. Selected Financial Data and Item 8. Financial
Statements and Supplementary Data.

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

During 2002, CNA underwent management changes and strategic realignment. These
events have changed the way CNA manages its operations and makes business
decisions and, therefore, necessitated a change in the Companys reportable
segments. The financial results for the following segment changes are
reflected throughout the Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A).

CNA Trust, a limited-operations bank specializing in 401(k) plan
administration, and Institutional Markets, which provides guaranteed return
investment products for qualified and non-qualified institutional buyers, was
transferred from Life Operations to Group Operations. Group reinsurance, the
business which assumes reinsurance from unaffiliated entities on group life,
accident and health products and excess medical risk coverages for self-funded
employers, was transferred from Group Operations to Corporate and Other to be
included as part of run-off insurance operations. The Environmental Pollution
and Mass Tort and Asbestos Reserves (APMT) related to assumed reinsurance,
along with the assumed business underwritten through a managing general agent,
IOA Global, which consists primarily of certain accident and health coverages,
was transferred from CNA Re to Corporate and Other. The U.S. zone of Global
business, which primarily offers international insurance to U.S. based
corporations and U.S. insurance to foreign corporations, was transferred from
Specialty Lines to Standard Lines.

Subsequent to the issuance of the Companys 2001 Consolidated Financial
Statements and, as a result of a routine review of the Companys periodic
filings by the Division of Corporation Finance of the Securities and Exchange
Commission (SEC), the Company has revised the historical accounting for its
investment in life settlement contracts and the related revenue recognition.
The Company has restated its previously reported financial statements as of
December 31, 2001 and for the years ended December 31, 2001 and 2000 as well as
its interim financial data for the first three quarters of 2002 and
all interim periods of 2001.

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

The adjustment related to life settlement contracts reduced both net operating
income and net income for the year ended December 31, 2002 by $9 million. The
comparable impact in the prior period increased both net operating income and
net income by $2 million for the year ended December 31, 2001. For the year
ended December 31, 2000, net operating income and net income decreased $32
million as a result of the adjustment related to life settlement contracts.
Additionally, the Consolidated Statements of Stockholders Equity reflects a
decrease in the Companys retained earnings of $215 million as of January 1,
2000. The MD&A gives effect to the restatement of the
Consolidated Financial Statements for the years ended December 31,
2001 and 2000.

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

Insurance Reserves

Insurance reserves are established for both short and long-duration insurance
contracts. Short-duration contracts are primarily related to property and
casualty policies where the reserving process is based on actuarial estimates
of the amount of loss, including amounts for known and unknown claims.
Long-duration contracts typically include traditional life insurance and long

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term care products and are estimated using actuarial estimates about mortality
and morbidity, as well as assumptions about expected investment returns. The
inherent risks associated with the reserving process are discussed in the
Reserves  Estimates and Uncertainties section of the MD&A. Additionally, a
review of the segment results, Environmental Pollution and Mass Tort and
Asbestos Reserves and Second Quarter 2001 Reserve Strengthening sections of the
MD&A is necessary to understand the sensitivity of managements estimate.

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 a receivable in the Consolidated Balance Sheets. The cost
of reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies. The ceding of insurance
does not discharge the primary liability of the Company. An estimated
allowance for doubtful accounts is recorded on the basis of periodic
evaluations of balances due from reinsurers, reinsurer solvency, managements
experience and current economic conditions. Further information on reinsurance
is provided in the Reinsurance section of the MD&A.

Valuation of Investments and
Impairment of Securities

The Companys investment portfolio is subject to market declines below book
value that may be other-than-temporary. The Company has an Impairment
Committee (the 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 period in which the determination occurred. Further
information on the Companys investments is provided in the Investments section
of the MD&A.

Operating Results

The discussion of underwriting results and ratios reflect the underlying
business results of CNAs property and casualty insurance subsidiaries.
Underwriting results are net earned premiums less net incurred claims and the
cost incurred to settle these claims, acquisition expenses and underwriting
expenses. Underwriting 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 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 and loss adjustment
expense, expense and dividend ratios.

The following discussion of operating results focuses on net operating income
(loss). Net operating income (loss) is calculated by deducting net realized
investment gains or losses (investment gains or losses after deduction of
related income taxes and participating policyholders and minority interest),
gains or losses from discontinued operations, net of tax, and the cumulative
effect of a change in accounting principle, net of tax, from net income. Net
operating income (loss), as defined above, is used in managements discussion
of the results of operations because net realized investment gains or losses,
other than investment impairment losses, related to the Companys
available-for-sale investment portfolio are largely discretionary,

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##### Table of Contents



are generally driven by economic factors that are not necessarily consistent
with key drivers of underwriting performance, and are therefore not an
indication of trends in operations.

The following table summarizes key components of operating results.

Consolidated Operations

|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |        | 
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | - | ------ | ------ | ---- | - | ------ | ----- | - | - | ------ | ------ | 
|                                                                                                      |                                                        |   | 2002   |        | 2001 |   | 2000  
|Years ended December 31                                                                               |                                                        |   |        |        |      |  
|(In millions, except per share data)                                                                  |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Operating revenues:                                                                                   |                                                        |   |        |        |      |   |        |       |   |   |        |       
|                                                                                                      | Net earned premiums                                    |   | $      | 10,213 |      |   | $      | 9,288 |   |   | $      | 11,388 | 
|                                                                                                      | Net investment income                                  |   |        | 1,730  |      |   |        | 1,856 |   |   |        | 2,247  | 
|                                                                                                      | Other revenues                                         |   |        | 595    |      |   |        | 683   |   |   |        | 744    | 
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Total operating revenues                                                                              |                                                        |   | 12,538 |        |      |   | 11,827 |       |   |   | 14,379 |       
|Claims, benefits and expenses                                                                         |                                                        |   | 11,982 |        |      |   | 15,153 |       |   |   | 13,653 |       
|Restructuring and other related charges                                                               |                                                        |   | (37    | )      |      |   | 251    |       |   |   |       |       
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Operating income (loss) from continuing operations before income tax and
minority interest            |                                                        |   | 593    |        |      |   | (3,577 | )     |   |   | 726    |       
|Income tax (expense) benefit                                                                          |                                                        |   | (171   | )      |      |   | 1,190  |       |   |   | (190   | )     
|Minority interest                                                                                     |                                                        |   | (26    | )      |      |   | (21    | )     |   |   | (28    | )     
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Net operating income (loss) from continuing operations                                                |                                                        |   | 396    |        |      |   | (2,408 | )     |   |   | 508    |       
|Realized investment (losses) gains, net of tax and participating
policyholders and minority interest |                                                        |   | (149   | )      |      |   | 816    |       |   |   | 669    |       
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Income (loss) from continuing operations                                                              |                                                        |   | 247    |        |      |   | (1,592 | )     |   |   | 1,177  |       
|(Loss) income from discontinued operations, net of tax of $9, $2 and $0                               |                                                        |   | (35    | )      |      |   | 11     |       |   |   | 5      |       
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Income (loss) before cumulative effects of changes in accounting principles                           |                                                        |   | 212    |        |      |   | (1,581 | )     |   |   | 1,182  |       
|Cumulative effects of changes in accounting principles, net of tax of $7,
$33 and $0                  |                                                        |   | (57    | )      |      |   | (61    | )     |   |   |       |       
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Net income (loss)                                                                                     |                                                        | $ | 155    |        |      | $ | (1,642 | )     |   | $ | 1,182  |       
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Basic and diluted earnings (loss) per share:                                                          |                                                        |   |        |        |      |   |        |       |   |   |        |       
|                                                                                                      | Income (loss) from continuing operations               |   | $      | 1.10   |      |   | $      | (8.20 | ) |   | $      | 6.40   | 
|                                                                                                      | (Loss) income from discontinued operations, net of tax |   |        | (0.16  | )    |   |        | 0.06  |   |   |        | 0.03   | 
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Income (loss) before cumulative effects of changes in accounting principles                           |                                                        |   | 0.94   |        |      |   | (8.14  | )     |   |   | 6.43   |       
|Cumulative effects of changes in accounting principles, net of tax                                    |                                                        |   | (0.26  | )      |      |   | (0.32  | )     |   |   |       |       
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |        | 
|Basic and diluted earnings (loss) per share available to common
stockholders                          |                                                        | $ | 0.68   |        |      | $ | (8.46  | )     |   | $ | 6.43   |       
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       
|Weighted average outstanding common stock and common stock equivalents                                |                                                        |   | 223.6  |        |      |   | 194.0  |       |   |   | 183.6  |       
|                                                                                                      |                                                        |   |        |        |      |   |        |       |   |   |        |       

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The following table summarizes net operating results by segment.

Net Operating Income (Loss) from
Continuing Operations by Segment

|                                                       |  |      |     |      |  |      |        |   |  |   |      |  
|------------------------------------------------------ |  | ---- | --- | ---- |  | ---- | ------ | - |  | - | ---- | -
|                                                       |  | 2002 |     | 2001 |  | 2000
|Years ended December 31                                |  |      |     |      |  |     
|(In millions)                                          |  |      |     |      |  |      |        |   |  |   |      |  
|Standard Lines                                         |  | $    | 197 |      |  | $    | (451   | ) |  | $ | 205  |  
|Specialty Lines                                        |  |      | 28  |      |  |      | (329   | ) |  |   | 196  |  
|CNA Re                                                 |  |      | 65  |      |  |      | (622   | ) |  |   | 92   |  
|Group Operations                                       |  |      | 104 |      |  |      | 22     |   |  |   | 85   |  
|Life Operations                                        |  |      | 94  |      |  |      | 63     |   |  |   | 119  |  
|Corporate and Other                                    |  |      | (92 | )    |  |      | (1,091 | ) |  |   | (189 | )
|                                                       |  |      |     |      |  |      |        |   |  |   |      |  
|Net
operating income (loss) from Continuing Operations |  | $    | 396 |      |  | $    | (2,408 | ) |  | $ | 508  |  
|                                                       |  |      |     |      |  |      |        |   |  |   |      |  

2002 Compared with 2001

Net operating income was $396 million in 2002 as compared with a net operating
loss of $2,408 million in 2001. The net operating loss for 2001 included
$2,079 million after-tax related to reserve strengthening recorded in the
second quarter of 2001 resulting from a change in estimate of prior year net
loss reserves and retrospective premium accruals. Additionally, 2001 results
included estimated losses related to the September 11, 2001 World Trade Center
Disaster and related events (WTC event) of $304 million after-tax and
restructuring and other related charges of $165 million after-tax. Excluding
these 2001 significant items, 2002 net operating results increased $256 million
due primarily to improved underwriting results in the property and casualty
segments and improved results in Group and Life Operations, partially offset by
lower net investment income, net reserve strengthening for individual long term
care in Life Operations and a reduced benefit from the use of reinsurance in
2002, including the reduced benefit from corporate aggregate reinsurance
treaties. In 2002, the benefit from core corporate aggregate reinsurance
treaties was $28 million as compared to a benefit of $61 million in 2001. The
ceded premiums, ceded losses and interest charges related to corporate
aggregate reinsurance treaties not related to the second quarter 2001 reserve
strengthening and the WTC event are described as Core. Also contributing to
the improvement was a $24 million after-tax reduction of the accrual for
restructuring and other related charges in 2002. Net unfavorable reserve
development, including premium and unallocated loss adjustment expense
development, was $90 million after-tax in 2002 as compared to $236 million
after-tax in 2001, excluding the second quarter 2001 reserve strengthening.

Net income in 2002 was $155 million, as compared with a net loss of $1,642
million for 2001. Excluding the 2001 significant items noted in the preceding
paragraph, net income decreased $751 million due primarily to an increase in
net realized losses from investing activities, partially offset by the
improvements in net operating income noted above. Net realized investment
gains (losses) decreased $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 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

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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.
Included in the 2001 net earned premiums were $1,334 million of ceded premiums
related to corporate aggregate reinsurance treaties, additional ceded premiums
and a change in estimate for retrospective premium accruals arising from the
second quarter 2001 reserve strengthening and a change in estimate for
involuntary market premium accruals, partially offset by reinstatement and
additional premiums related to the WTC event. Excluding these 2001 significant
premium items, net earned premiums decreased $409 million due primarily to 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. These
decreases were partially offset by strong rate increases, increased new
business and decreased use of reinsurance in the property and casualty
segments.

2001 Compared with 2000

The net operating loss was $2,408 million in 2001 as compared with net
operating income of $508 million in 2000. The decline in net operating results
was due principally to reserve strengthening of $2,079 million after-tax
recorded in the second quarter of 2001 related to a change in estimate of prior
year net loss reserves and retrospective premium accruals; estimated losses
related to the WTC event of $304 million after-tax, and the related corporate
aggregate reinsurance treaties benefit; and restructuring and other related
charges of $165 million after-tax. Excluding these 2001 significant items, net
operating results decreased $368 million due primarily to a $160 million
after-tax charge primarily to strengthen prior underwriting year loss reserves
for CNA Re U.K. Additionally, the underwriting results for the London-based commercial
and marine operations were unfavorable in 2001. Net
operating income also decreased $52 million after-tax from losses related to
the bankruptcy filing by certain Enron entities and $159 million after-tax due
to a decline in limited partnership income.

The net loss in 2001 was $1,642 million as compared with net income of $1,182
million in 2000. Excluding the 2001 significant items noted above, net income
decreased $276 million due primarily to the declines in net operating income
noted above. Net realized investment gains increased $147 million in 2001 as
compared with 2000 due primarily to gains from the sales of fixed maturity
securities. 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 SFAS 133.

Net earned premiums decreased $2,100 million in 2001 as compared with 2000.
Included in the 2001 net earned premiums were $1,334 million of ceded premium
related to corporate aggregate reinsurance treaties, additional ceded premiums
and a change in estimate for retrospective premium accruals arising from the
second quarter 2001 reserve strengthening and a change in estimate for
involuntary market premium accruals, partially offset by reinstatement and
additional premiums related to the WTC event. Excluding these 2001 significant
premium items, net earned premiums decreased $766 million due primarily to
increased ceded premiums and decreased net earned premiums in CNA Re resulting
from the decision made in 2001 to cease writing new and renewal business in CNA
Re U.K. In addition, net earned premiums declined in Group Operations, related
primarily to the sale of Life Reinsurance, CNAs individual

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life reinsurance business, which was sold via an indemnity reinsurance
agreement on December 31, 2000.

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



| |  | In the third quarter of 2001, the Company recorded the estimated
impact of the WTC event, which resulted in $1,648 million of pretax
gross losses, and $468 million pretax net of reinsurance and the
related corporate aggregate reinsurance treaties benefit. The
after-tax estimated impact was $304 million, net of reinsurance and
the related corporate aggregate reinsurance treaties benefit. Further
details of the WTC event are provided below as well as in the
individual segment discussions of operations.                                                                                                                                                                                                             
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | In the second quarter of 2001, the Company recorded an after-tax
charge of $2,079 million ($3,182 million pretax) related to a change
in estimate of prior year net loss reserves and retrospective premium
accruals. This amount included the impact of net reserve
strengthening, the related increase in the accrual for
insurance-related assessments and the ceded premiums and interest cost
of the corporate aggregate reinsurance treaty that attached due to the
reserve strengthening. Further details related to the reserve
strengthening are discussed below as well as in the individual segment
discussions of operations.                                                                                             
| 
| |  | During 2001, the Company recorded ceded premiums, ceded losses and
interest charges related to corporate aggregate reinsurance treaties
in place for the 1999 through 2001 accident years. The discussion in
the Reinsurance section below includes all premiums, losses and
interest charges related to these treaties. However, in all other
sections of the MD&A the applicable amounts ceded to these treaties as
a result of the second quarter 2001 reserve strengthening and WTC
event are included in the quantification of those significant items.
The ceded premiums, ceded losses and interest charges related to
corporate aggregate reinsurance treaties not related to these
significant items are described as Core.
| 
| |  | During 2001, the Company recorded after-tax restructuring and other
related charges of $165 million related to workforce reductions and
asset write-offs resulting from changes in the Companys organization,
which are discussed in more detail below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Based upon the significance of the second quarter 2001 reserve strengthening,
the WTC event and restructuring and other related charges, the underwriting
impact of these items is discussed in the aggregate in the following sections.
When the Company discusses its 2001 underwriting results and ratios for its
property and casualty segments, the discussion will compare 2001 underwriting
results and ratios excluding the effect of these significant items. In the
Companys previous filings, the discussion of 2001 underwriting results
excluded the benefit from corporate aggregate reinsurance treaties for Core
operations. During 2002, the Company has also recorded benefits from corporate
aggregate reinsurance treaties for Core operations; therefore, in order to
provide a comparable presentation, the 2001 adjusted underwriting loss does not
exclude the benefit from corporate aggregate reinsurance treaties from Core
operations. The following table provides the details by segment of 2001
underwriting results as adjusted.

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Underwriting Results by Segment

|                                                                                                                                   |  |          |        |           |  |        |      |          |  |                     |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------ | --------- |  | ------ | ---- | -------- |  | ------------------- | ------ | - |  | - | ------ | -
|                                                                                                                                   |  | Standard |        | Specialty |  |        |      |          |  | Property & Casualty
|For the year ended December 31, 2001                                                                                               |  | Lines    |        | Lines     |  | CNA Re |      | Segments
|(In millions)                                                                                                                      |  |          |        |           |  |        |      |         
|Underwriting loss                                                                                                                  |  | $        | (1,261 | )         |  | $      | (744 | )        |  | $                   | (1,048 | ) |  | $ | (3,053 | )
|Underwriting impact of second quarter
2001 reserve strengthening and the
related benefit of corporate aggregate
reinsurance treaty |  |          | 914    |           |  |        | 407  |          |  |                     | 527    |   |  |   | 1,848  |  
|Underwriting impact of the WTC event
and the related benefit of corporate
aggregate reinsurance treaties                           |  |          | 68     |           |  |        | 18   |          |  |                     | 263    |   |  |   | 349    |  
|Restructuring and other related charges                                                                                            |  |          | 36     |           |  |        | 9    |          |  |                     | 6      |   |  |   | 51     |  
|                                                                                                                                   |  |          |        |           |  |        |      |          |  |                     |        |   |  |   |        |  
|Adjusted underwriting loss                                                                                                         |  | $        | (243   | )         |  | $      | (310 | )        |  | $                   | (252   | ) |  | $ | (805   | )
|                                                                                                                                   |  |          |        |           |  |        |      |          |  |                     |        |   |  |   |        |  

World Trade Center Event

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 $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.
As of December 31, 2002, the Company believes its 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

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

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Second Quarter 2001 Prior Year Reserve Strengthening

During the second quarter of 2001, the Company noted the continued emergence of
adverse loss experience across several lines of business related to prior
years, which are discussed in further detail below. The Company completed a
number of reserve studies during the second quarter of 2001 for many of its
lines of business, including those in which these adverse trends were noted.

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

Second Quarter 2001 Prior Year Reserve Strengthening

|                                                                                              |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |       |       | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ----- | ---- | -------- | --- | --------- | - | ------ | --- | --------- | --- | --------- | --- |  | -- | ----- | ----- |  | ---- | ----- | ----- | 
|                                                                                              |                                                                                      |       |      | Standard |     | Specialty |   |        |     |           |     | Corporate |     |  |    |      
|                                                                                              |                                                                                      |       |      | Lines    |     | Lines     |   | CNA Re |     | and Other |     | Total    
|                                                                                              |                                                                                      |       |      |          |     |           |   |        |     |           |     |          
|(In millions)                                                                                 |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |      
|Net reserve strengthening excluding the impact
of the corporate aggregate reinsurance treaty: |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |      
|                                                                                              | APMT                                                                                 |       | $    |         |     |           | $ |       |     |           | $   |          |     |  | $  | 1,197 |       |  | $    | 1,197 |      
|                                                                                              | Non-APMT                                                                             |       |      | 523      |     |           |   | 407    |     |           |     | 571       |     |  |    | 93    |       |  |      | 1,594 |      
|                                                                                              |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |      
|                                                                                              |                                                                                      | Total |      |          | 523 |           |   |        | 407 |           |     |           | 571 |  |    |       | 1,290 |  |      |       | 2,791 | 
|Pretax benefit from corporate aggregate
reinsurance treaty on accident year 1999              |                                                                                      |       | (197 | )        |     |           |  |        |     |           | (26 | )         |     |  |   |       |       |  | (223 | )*   
|Accrual for insurance-related assessments                                                     |                                                                                      |       | 48   |          |     |           |  |        |     |           |    |           |     |  |   |       |       |  | 48   |      
|                                                                                              |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |      
|                                                                                              | Net reserve strengthening and related accruals                                       |       |      | 374      |     |           |   | 407    |     |           |     | 545       |     |  |    | 1,290 |       |  |      | 2,616 |      
|                                                                                              |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |      
|Change in estimate of premium accruals                                                        |                                                                                      |       | 632  |          |     |           |  |        |     |           | (13 | )         |     |  | (3 | )     |       |  | 616  |      
|Reduction of related commission accruals                                                      |                                                                                      |       | (50  | )        |     |           |  |        |     |           |    |           |     |  |   |       |       |  | (50  | )    
|                                                                                              |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |      
|                                                                                              | Net premium and related accrual reductions                                           |       |      | 582      |     |           |   |       |     |           |     | (13       | )   |  |    | (3    | )     |  |      | 566   |      
|                                                                                              |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |      
|                                                                                              | Total pretax second quarter 2001 reserve
strengthening and other related accruals    |       | $    | 956      |     |           | $ | 407    |     |           | $   | 532       |     |  | $  | 1,287 |       |  | $    | 3,182 |      
|                                                                                              |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |      
|                                                                                              | Total after-tax second quarter 2001 reserve
strengthening and other related accruals |       | $    | 621      |     |           | $ | 275    |     |           | $   | 346       |     |  | $  | 837   |       |  | $    | 2,079 |      
|                                                                                              |                                                                                      |       |      |          |     |           |   |        |     |           |     |           |     |  |    |       |       |  |      |      



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

With respect to environmental 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 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

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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.

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.

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. For example, A.M. Best Company (A.M. Best) released a
study in May 2001 increasing its ultimate asbestos reserve estimate 63% from
$40 billion to $65 billion, citing an unfunded insurance industry reserve
shortfall of $33 billion. In June 2001, Tillinghast raised its asbestos
ultimate exposure from $55 billion to $65 billion for the insurance industry
and its estimate of the ultimate remaining asbestos liability for all
industries was raised to $200 billion.

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, which
could accelerate the time when such indemnification payments could be due.

These developments led the Company to the conclusion that its asbestos reserves
required strengthening.

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

Approximately $600 million of the adverse loss development was a result of
several coverages provided to commercial entities. The gross and net carried
claim and claim adjustment expense reserves for Standard Lines at the beginning
of 2001 was $12,070 million and $9,129 million. 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

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unfavorable 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.

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 net unfavorable
development on prior year loss reserves of approximately $560 million. The
gross and net claim and claim adjustment expense reserves at the beginning of
2001 for CNA Re was $4,238 million and $2,735 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 the second
quarter of 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. The
unfavorable reserve development was driven principally by accident years 1996
through 2000.

Approximately $320 million of adverse loss development was due to adverse
experience in all other lines, primarily in coverages provided to
healthcare-related entities written by CNA HealthPro. The gross and net claim
and claim adjustment expense reserves at the beginning of 2001 for Specialty
Lines was approximately $4,813 million and $3,429 million. 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

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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 reserve development of $240 million was recorded for accident years
1997 through 2000. The remaining unfavorable reserve development was
attributable to accident years prior to 1997.

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 other 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.

Reinsurance

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

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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 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 other net
investment income, was $239 million, $241 million and $87 million in 2002, 2001
and 2000. The amount subject to interest crediting rates on such contracts was
$2,766 million and $2,724 million at December 31, 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.

Amounts receivable from reinsurers were $12,696 million and $13,823 million at
December 31, 2002 and 2001. Of these amounts, $957 million and $838 million
were billed to reinsurers as of December 31, 2002 and 2001, 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 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 $4,825 million and $3,696 million at December 31,
2002 and 2001.

CNAs largest recoverables from a single reinsurer at December 31, 2002,
including prepaid reinsurance premiums, were approximately $2,090 million,
$1,456 million, $890 million, $616 million, $598 million, and $541 million from
subsidiaries of The Allstate Corporation (Allstate), subsidiaries of Hannover
Reinsurance (Ireland) Ltd., American Reinsurance Company, European Reinsurance
Company of Zurich, subsidiaries of Gerling Global Reinsurance Corporation, and
Lloyds Underwriters.

The Company has reinsurance receivables from several reinsurers who have
recently experienced multiple downgrades of their financial strength ratings,
have announced that they

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will no longer accept new business and are placing
their books of business into run-off. The Companys principal credit exposures
from these recent events arise from reinsurance receivables from Gerling Global
(Gerling), Trenwick and Commercial Risk insurance groups. At December 31,
2002, the Company had approximately $926 million of reinsurance receivables
from these reinsurers, of which $384 million was not supported by collateral.
The majority of the uncollateralized receivables were due from U.S.-domiciled
insurers. Of the $384 million of reinsurance recoverables unsupported by
collateral, $170 million relates to Gerling. Gerling has
stated that the Company transfer approximately $204 million of funds withheld balances
on three treaties relating to CNA HealthPro to a trust established by Gerling
for the benefit of the company, or in the absence of such transfer,
that these treaties be commuted. CNA has taken Gerlings
statement under advisement.

In certain circumstances, including significant deterioration of a reinsurers
financial strength ratings, the Company may engage in commutation discussions
with an individual reinsurer. 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, including any related to Gerling, could have an adverse material impact on the Companys results of operations or
equity.

The Company has established an
allowance for doubtful accounts to provide for estimated
uncollectible reinsurance receivables. The allowance for doubtful
accounts was $196 million and $170 million at December 31, 2002 and
2001. While the Company believes the allowance for doubtful accounts
is adequate based on current collateral and information currently
available, failure of reinsurers to meet their obligations could have
a material adverse impact on CNA's results of operations or equity.

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.

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

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exceeds certain thresholds,
additional premiums may be payable and the rate at which interest charges are
accrued would increase to 8.25% per annum commencing in 2006.

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

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

Impact of Aggregate Cover on Pretax Operating Results

|                                              |  |      |     |      |  |   |       |  
|--------------------------------------------- |  | ---- | --- | ---- |  | - | ----- | -
|Year ended December 31                        |  | 2002 |     | 2001
|(In millions)                                 |  |      |     |     
|Ceded earned premium                          |  | $    |    |      |  | $ | (543  | )
|Ceded claim and claim adjustment expenses     |  |      |    |      |  |   | 1,010 |  
|Interest charges                              |  |      | (51 | )    |  |   | (81   | )
|                                              |  |      |     |      |  |   |       |  
|Pretax (expense) benefit on operating results |  | $    | (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 $760 million of ceded losses. The ceded premiums are a
percentage of ceded losses. The ceded premium related to full utilization of
the $760 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. Losses of $618 million have
been ceded under the CCC Cover through December 31, 2002.

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

Impact of CCC Cover on Pretax Operating Results

|                                          |  |      |      |      |  |   |      |   |  |  |  |  |  |  |  | 
|----------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | - |  |  |  |  |  |  |  | 
|Year ended December 31                    |  | 2002 |      | 2001 |  |   |      |   |  |  |  | 
|(In millions)                             |  |      |      |      |  |   |      |   |  |  |  | 
|Ceded earned premiums                     |  | $    | (101 | )    |  | $ | (260 | )
|Ceded claim and claim adjustment expenses |  |      | 148  |      |  |   | 470  |  
|Interest charges                          |  |      | (37  | )    |  |   | (20  | )
|                                          |  |      |      |      |  |   |      |  
|Pretax benefit on operating results       |  | $    | 10   |      |  | $ | 190  |  
|                                          |  |      |      |      |  |   |      |  

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

Impact of Aggregate Cover and CCC Cover on Pretax Operating Results

|                                   |  |      |     |      |  |   |     | 
|---------------------------------- |  | ---- | --- | ---- |  | - | --- | 
|Years ended December 31            |  | 2002 |     | 2001
|(In millions)                      |  |      |     |     
|Standard Lines                     |  | $    | (52 | )    |  | $ | 381 | 
|Specialty Lines                    |  |      | 2   |      |  |   | 33  | 
|CNA Re                             |  |      | 12  |      |  |   | 162 | 
|Corporate and Other                |  |      | (3  | )    |  |   |    | 
|                                   |  |      |     |      |  |   |     | 
|Pretax impact on operating results |  | $    | (41 | )    |  | $ | 576 | 
|                                   |  |      |     |      |  |   |     | 

2001 Restructuring

In 2001, the Company finalized and approved two separate restructuring plans.
The first plan related to the Companys Information Technology operations (the
IT Plan). The second plan related to restructuring the property 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.

IT Plan Pretax Charges by Segment

|                    |  |               |    |          |  |       |    |       |  |   |   |  |  |   |    | 
|------------------- |  | ------------- | -- | -------- |  | ----- | -- | ----- |  | - | - |  |  | - | -- | 
|                    |  | Employee      |    |          |  |       |    |       |  |   |   |  |  |  
|                    |  | Termination   |    | Impaired |  |       |    |       |  |   |   | 
|                    |  | and Related   |    | Asset    |  | Other |    |       |  |  
|                    |  | Benefit Costs |    | Charges  |  | Costs |    | Total
|(In millions)       |  |               |    |          |  |       |    |      
|Standard Lines      |  | $             | 5  |          |  | $     | 1  |       |  | $ |  |  |  | $ | 6  | 
|Specialty Lines     |  |               | 2  |          |  |       |   |       |  |   |  |  |  |   | 2  | 
|Life Operations     |  |               |   |          |  |       | 17 |       |  |   |  |  |  |   | 17 | 
|Corporate and Other |  |               | 22 |          |  |       | 14 |       |  |   | 1 |  |  |   | 37 | 
|                    |  |               |    |          |  |       |    |       |  |   |   |  |  |   |    | 
|Total               |  | $             | 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).

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These charges primarily 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 and 2002.

IT Plan Accrual

|                                           |  |               |     |          |  |       |     |       |  |   |    |   |  |   |     |  
|------------------------------------------ |  | ------------- | --- | -------- |  | ----- | --- | ----- |  | - | -- | - |  | - | --- | -
|                                           |  | Employee      |     |          |  |       |     |       |  |   |    |   |  |  
|                                           |  | Termination   |     | Impaired |  |       |     |       |  |   |    |  
|                                           |  | and Related   |     | Asset    |  | Other |     |       |  |  
|                                           |  | Benefit Costs |     | Charges  |  | Costs |     | Total
|(In millions)                              |  |               |     |          |  |       |     |      
|IT Plan initial Accrual                    |  | $             | 29  |          |  | $     | 32  |       |  | $ | 1  |   |  | $ | 62  |  
|Costs that did not require cash in 2001    |  |               |    |          |  |       | (32 | )     |  |   |   |   |  |   | (32 | )
|Payments charged against liability in 2001 |  |               | (19 | )        |  |       |    |       |  |   |   |   |  |   | (19 | )
|                                           |  |               |     |          |  |       |     |       |  |   |    |   |  |   |     |  
|Accrued costs at December 31, 2001         |  |               | 10  |          |  |       |    |       |  |   | 1  |   |  |   | 11  |  
|Payments charged against liability in 2002 |  |               | (2  | )        |  |       |    |       |  |   |   |   |  |   | (2  | )
|Reduction of accrual                       |  |               | (3  | )        |  |       |    |       |  |   | (1 | ) |  |   | (4  | )
|                                           |  |               |     |          |  |       |     |       |  |   |    |   |  |   |     |  
|Accrued costs at December 31, 2002         |  | $             | 5   |          |  | $     |    |       |  | $ |   |   |  | $ | 5   |  
|                                           |  |               |     |          |  |       |     |       |  |   |    |   |  |   |     |  

Through December 31, 2002, 249 employees were released due to the IT Plan,
nearly all of whom were technology support staff. In December of 2002, the
accrual was reduced by $4 million in the Corporate and Other segment primarily
related to employee termination costs. The remaining $5 million of the accrual
relating to employee termination and related benefit costs is expected to be
paid through 2005.

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.

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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.

2001 Plan Pretax Charges by Segment

|                    |  |               |    |             |  |          |    |       |  |       |    |  |  |   |    |  |  |   |     | 
|------------------- |  | ------------- | -- | ----------- |  | -------- | -- | ----- |  | ----- | -- |  |  | - | -- |  |  | - | --- | 
|                    |  | Employee      |    |             |  |          |    |       |  |       |    |  |  |   |    |  |  |  
|                    |  | Termination   |    | Lease       |  | Impaired |    |       |  |       |    |  |  |  
|                    |  | and Related   |    | Termination |  | Asset    |    | Other |  |       |    | 
|                    |  | Benefit Costs |    | Costs       |  | Charges  |    | Costs |  | Total
|                    |  |               |    |             |  |          |    |       |  |      
|(In millions)       |  |               |    |             |  |          |    |       |  |       |    |  |  |   |    |  |  |   |     | 
|Standard Lines      |  | $             | 40 |             |  | $        |   |       |  | $     |   |  |  | $ |   |  |  | $ | 40  | 
|Specialty Lines     |  |               | 7  |             |  |          |   |       |  |       |   |  |  |   |   |  |  |   | 7   | 
|CNA Re              |  |               | 2  |             |  |          | 4  |       |  |       |   |  |  |   |   |  |  |   | 6   | 
|Group Operations    |  |               | 7  |             |  |          |   |       |  |       |   |  |  |   | 35 |  |  |   | 42  | 
|Life Operations     |  |               | 3  |             |  |          |   |       |  |       | 9  |  |  |   |   |  |  |   | 12  | 
|Corporate and Other |  |               | 9  |             |  |          | 52 |       |  |       | 21 |  |  |   |   |  |  |   | 82  | 
|                    |  |               |    |             |  |          |    |       |  |       |    |  |  |   |    |  |  |   |     | 
|Total               |  | $             | 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.

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

2001 Plan Initial Accrual

|                                   |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|---------------------------------- |  | ------------- | --- | ----------- |  | -------- | --- | ----- |  | ----- | --- | - |  | - | --- | - |  | - | --- | -
|                                   |  | Employee      |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |  
|                                   |  | Termination   |     | Lease       |  | Impaired |     |       |  |       |     |   |  |  
|                                   |  | and Related   |     | Termination |  | Asset    |     | Other |  |       |     |  
|                                   |  | Benefit Costs |     | Costs       |  | Charges  |     | Costs |  | Total
|(In millions)                      |  |               |     |             |  |          |     |       |  |      
|2001 Plan Initial Accrual          |  | $             | 68  |             |  | $        | 56  |       |  | $     | 30  |   |  | $ | 35  |   |  | $ | 189 |  
|Costs that did not require cash    |  |               |    |             |  |          |    |       |  |       |    |   |  |   | (35 | ) |  |   | (35 | )
|Payments charged against liability |  |               | (2  | )           |  |          |    |       |  |       |    |   |  |   |    |   |  |   | (2  | )
|                                   |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|Accrued costs December 31, 2001    |  |               | 66  |             |  |          | 56  |       |  |       | 30  |   |  |   |    |   |  |   | 152 |  
|Costs 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   |   |  | $ |    |   |  | $ | 38  |  
|                                   |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  

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The following table summarizes the reduction of the accrual by segment in 2002.

Reduction of Accrual by Segment

|                    |  |               |     |             |  |          |    |       |  |       |     |   |  |   |   |  |  |   |     |  
|------------------- |  | ------------- | --- | ----------- |  | -------- | -- | ----- |  | ----- | --- | - |  | - | - |  |  | - | --- | -
|                    |  | Employee      |     |             |  |          |    |       |  |       |     |   |  |   |   |  |  |  
|                    |  | Termination   |     | Lease       |  | Impaired |    |       |  |       |     |   |  |  
|                    |  | and Related   |     | Termination |  | Asset    |    | Other |  |       |     |  
|                    |  | Benefit Costs |     | Costs       |  | Charges  |    | Costs |  | Total
|(In millions)       |  |               |     |             |  |          |    |       |  |      
|Standard Lines      |  | $             | (8  | )           |  | $        |   |       |  | $     |    |   |  | $ |  |  |  | $ | (8  | )
|Specialty Lines     |  |               | (1  | )           |  |          |   |       |  |       |    |   |  |   |  |  |  |   | (1  | )
|Life Operations     |  |               |    |             |  |          |   |       |  |       | (1  | ) |  |   |  |  |  |   | (1  | )
|Corporate and Other |  |               | (1  | )           |  |          | (7 | )     |  |       | (14 | ) |  |   |  |  |  |   | (22 | )
|                    |  |               |     |             |  |          |    |       |  |       |     |   |  |   |   |  |  |   |     |  
|Total               |  | $             | (10 | )           |  | $        | (7 | )     |  | $     | (15 | ) |  | $ |  |  |  | $ | (32 | )
|                    |  |               |     |             |  |          |    |       |  |       |     |   |  |   |   |  |  |   |     |  

The 2001 Plan charges incurred and accrued by Standard Lines were $40 million
in 2001, related entirely to employee termination and related benefit costs for
planned reductions in the workforce of 1,063 positions gross and net, of which
$27 million related to severance and outplacement costs and $13 million related
to other salary costs. Through December 31, 2002, approximately 882 employees
net were released due to the 2001 Plan. Approximately 39% of these employees
were administrative, technology or financial support staff; approximately 52%
of these employees were underwriters, claim adjusters and related insurance
services staff; and approximately 9% of these employees were in various other
positions. During December of 2002, $8 million of accrual was reduced
primarily due to successful redeployment of employees to other positions within
the organization. An accrual of $1 million remained at December 31, 2002
relating to employee termination costs which will be paid in 2003.

The 2001 Plan charges incurred and accrued by Specialty Lines were $7 million
in 2001, related entirely to employee termination and related benefit costs for
planned reductions in the workforce of 177 positions gross and net, of which $5
million related to severance and outplacement costs and $2 million related to
other salary costs. Through December 31, 2002, approximately 126 employees net
were released due to the 2001 Plan. Approximately 26% of these employees were
administrative, technology or financial support staff; approximately 63% of
these employees were underwriters, claim adjusters and related insurance
services staff; and approximately 11% of these employees were in various other
positions. During December of 2002, the accrual was reduced by $1 million. An
accrual of $1 million remained at December 31, 2002 relating to employee
termination costs which will be paid in 2003.

The 2001 Plan charges incurred and accrued by CNA Re were $6 million. Costs
related to employee termination and related benefit costs for planned
reductions in the workforce of 33 positions gross and net, amounted to $2
million, all of which related to severance and outplacement costs. Payments of
$1 million were made in 2002 for approximately 15 employees net released
through December 31, 2002 due to the 2001 Plan. The remaining $4 million of
charges incurred by CNA Re related to lease termination costs. Approximately
$1 million was paid in 2002 related to lease termination costs. As a result of
the sale of CNA Re U.K., the remaining accrual related to CNA Re of $4 million
was reduced. See the Investments section of the MD&A for further details.

The 2001 Plan charges incurred and accrued by Group Operations were $42
million. Costs related to employee termination and related benefit costs for
planned reductions in the workforce of 187 positions, gross and net, amounted
to $7 million. Through December 31, 2002, 82 employees net in Group Operations
were released due to the 2001 Plan.

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Approximately 28% of these employees were
administrative, technology or financial support staff; and approximately 72% of
these employees were underwriters, claim adjusters and related insurance
services staff. Other costs of $35 million in Group Operations relate to a
write-off of deferred acquisition costs on inforce variable life and annuity
contracts, as the company believes that the decision to discontinue these
products will negatively impact the persistency of the business.

The 2001 Plan charges incurred and accrued by Life Operations were $12 million.
Costs related to employee termination and related benefit costs for planned
reductions in workforce of 207 positions gross and net, amounted to $3 million,
which related primarily to severance and outplacement costs. Through December
31, 2002, approximately 144 employees net were released due to the 2001 Plan.
Approximately 23% of these employees were administrative, technology or
financial support staff; approximately 65% of these employees were
underwriters, claim adjusters and related insurance services staff; and
approximately
12% of these employees were in various other positions. Life Operations
incurred and accrued $9 million of impaired asset charges related to software
in 2001. In December of 2002, the remaining $1 million of this accrual was
reduced.

The 2001 Plan charges incurred and accrued by the Corporate and Other segment
were $82 million. Costs related to employee termination and related benefit
costs for planned reductions in the workforce of 194 positions gross and net,
amounted to $9 million, of which $6 million related to severance and
outplacement costs and $3 million related to other salary costs. Through
December 31, 2002, 157 employees net were released due to the 2001 Plan.
Approximately 63% of these employees were administrative, technology or
financial support staff; approximately 28% of these employees were
underwriters, claim adjusters and related insurance services staff; and
approximately 9% of these employees were in various other positions. In
December of 2002, $1 million of the accrual was reduced for employee
termination and related benefit costs. The Corporate and Other segment also
incurred $73 million of lease termination and asset impairment charges related
to office closure and consolidation decisions not within the control of the
other segments affected. Additionally, $7 million was reversed and included in
2002 net income relating to lease obligations and $14 million relating to
impaired asset charges. The Companys original plan contained a timeline to
consolidate and reduce the number of office locations. Due to unfavorable
conditions in the commercial real estate market, certain office relocations and
consolidations occurred later than planned. As a result of such delays, a
portion of the planned leasehold write-offs and vacant office space were
expensed as period costs, resulting in an excess initial accrual. Of the
remaining $36 million accrual relating to lease termination costs and impaired
asset charges, approximately $18 million is expected to be paid in 2003.

At December 31, 2001, an accrual of $1 million for lease termination costs
remained related to the August 1998 restructuring (1998 Plan). In December of
2002, this accrual was reduced.

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. Changes in estimates of Insurance Reserves
are reflected in the Companys Consolidated Statements of Operations, in the
period in which the change arises.

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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 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. Some
of the many uncertain future events about which the Company makes assumptions
and estimates are claims severity, frequency of claims, mortality, morbidity,
expected interest rates, economic inflation, the impact of underwriting policy
and claims handling practices and the lag time between the occurrence of an
insured event and the time it is ultimately settled (referred to in the
insurance industry as the tail).

The Companys experience has been that the inherent uncertainties of estimating
Insurance Reserves are generally greater for casualty coverages (particularly
long-tail casualty risks such as APMT losses) than for property coverages.
Estimates of the cost of future APMT claims are highly complex and include an
assessment of, among other things, whether certain costs are covered under the
policies and whether recovery limits apply, allocation of liability among
numerous parties, some of whom are in bankruptcy proceedings, inconsistent
court decisions and developing legal theories and tactics of plaintiffs
lawyers. Reserves for property-related catastrophes, both natural disasters
and man-made catastrophes such as terrorist acts, are also difficult to
estimate. See the discussion of the Second Quarter 2001 Prior Year Reserve
Strengthening, the WTC Event, and Environmental Pollution and Mass Tort and
Asbestos Reserves in the MD&A for further information.

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

The Companys current Insurance Reserve levels reflect managements best
estimate of the Companys ultimate claims and claim adjustment expenses and
future policy benefits at December 31, 2002, based upon known facts and current
law. However, in light of the many uncertainties associated with making the
estimates and assumptions necessary to establish reserve levels, the Company
reviews its reserve estimates on a regular and ongoing basis and makes changes
as experience develops. The Company may in the future determine that its
recorded Insurance Reserves are not sufficient and may increase its reserves by
amounts that may be material, which could materially adversely affect the
Companys business and financial

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condition. Any such increase in reserves
would be recorded as a charge against the Companys earnings for the period in
which the change in estimate arises.

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

Estimated Volatility in Gross Carried Loss Reserves by Segment

|                    |  |          |        |               |  |  |       |  
|------------------- |  | -------- | ------ | ------------- |  |  | ----- | -
|                    |  | Gross    |        |               |  | 
|                    |  | Carried  |        | Estimated    
|                    |  | Loss     |        | Volatility in
|December 31, 2002   |  | Reserves |        | Reserves     
|(In millions)       |  |          |        |              
|Standard Lines      |  | $        | 11,576 |               |  |  | +/-5  | %
|Specialty Lines     |  |          | 5,874  |               |  |  | +/-7  | %
|CNA Re              |  |          | 2,264  |               |  |  | +/-15 | %
|Corporate and Other |  |          | 4,847  |               |  |  | +/-20 | %

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.

The Companys insurance loss reserves are recorded at managements best
estimate, which is based on the reviews and analyses performed by the Companys
actuaries and managements judgment as to the responsiveness of these reviews
and analyses to the factors affecting the Companys loss and loss adjustment
expense loss reserves. Management considers factors such as changes in
inflation, changes in claims handling and case reserving, changes in
underwriting and pricing, and changes in the legal environment. Management
considers different specific factors for each situation since the factors
affect each type of business differently.

Terrorism Exposure

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

On November 26, 2002, the President of the United States of America, George W.
Bush, signed into law the Terrorism Risk Insurance Act of 2002 (the Act), which
establishes a program within the Department of the Treasury under which the
Federal Government will share the risk of loss from future terrorist attacks
with the insurance industry. The Act terminates on December 31, 2005. Each
participating insurance company must pay a deductible before Federal Government
assistance becomes available. This deductible is based on a percentage of
direct earned premiums for commercial insurance lines from the previous
calendar year, and rises from 1%

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from date of enactment to December 31, 2002
(the Transition Period) to 7% during the first subsequent calendar year, 10% in
year two and 15% in year three. 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.

Insurance companies providing commercial property and casualty insurance are
required to participate in the program, but it does not cover life or health
insurance products. State law limitations applying to premiums and policies
for terrorism coverage are not generally affected under the program, but they
are pre-empted in relation to prior approval requirements for rates and forms.
The Act has policyholder notice requirements in order for insurers to be
reimbursed for terrorism-related losses and, from the date of enactment until
December 31, 2004, a mandatory offer requirement for terrorism coverage,
although it may be rejected by insureds. The Secretary of the Department of
the Treasury has discretion to extend this offer requirement until December 31,
2005.

While the Act provides the property and casualty industry with an increased
ability to withstand the effect of a terrorist event during the next three
years, 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, and is also prohibited from excluding coverage
for fire losses following a terrorist event in a number of states.

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

The following discussion is of 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, exposure based pricing,
relationships with selected distribution sources and understanding customers.

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

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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 risks viewed as higher risk and less
predictable in exposure.

P&Cs field structure consists of 68 branch locations in 63 cities. 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. A centralized processing
center 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. The
branches and processing center are all located in the United States.

Also, Standard Lines, primarily
through RSKCoSM, provides total risk management
services relating to claim services, risk control, cost management and
information services to the commercial insurance marketplace.

Excess & Surplus(E&S) provides specialized insurance and other financial
products for selected commercial risks on both an individual customer and
program basis. Risks 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. The target market for
these specialized programs are large accounts within Fortune 1000 businesses.
E&S has specialized underwriting and claim resources in Chicago, New York,
Denver and Columbus.

The following table details operating results for Standard Lines.

Operating Results

|                                 |                                  |      |       |       |   |      |        |       |   |   |       |       |  
|-------------------------------- | -------------------------------- | ---- | ----- | ----- | - | ---- | ------ | ----- | - | - | ----- | ----- | -
|Years ended December 31          |                                  | 2002 |       | 2001  |   | 2000
|(In millions)                    |                                  |      |       |       |   |     
|Net written premiums             |                                  | $    | 4,020 |       |   | $    | 2,984  |       |   | $ | 3,890 |      
|Net earned premiums              |                                  |      | 4,018 |       |   |      | 2,473  |       |   |   | 3,991 |      
|Underwriting loss                |                                  |      | (178  | )     |   |      | (1,261 | )     |   |   | (513  | )    
|Net investment income            |                                  |      | 398   |       |   |      | 488    |       |   |   | 743   |      
|Net operating income (loss)      |                                  |      | 197   |       |   |      | (451   | )     |   |   | 205   |      
|                                
|Ratios                           |                                  |      |       |       |   |      |        |       |   |   |       |      
|                                 | Loss and loss adjustment expense |      |       | 72.0  | % |      |        | 97.4  | % |   |       | 80.4  | %
|                                 | Expense                          |      |       | 30.6  |   |      |        | 49.0  |   |   |       | 30.3  |  
|                                 | Dividend                         |      |       | 1.8   |   |      |        | 4.6   |   |   |       | 2.1   |  
|                                 |                                  |      |       |       |   |      |        |       |   |   |       |      
|                                 | Combined                         |      |       | 104.4 | % |      |        | 151.0 | % |   |       | 112.8 | %
|                                 |                                  |      |       |       |   |      |        |       |   |   |       |      
|2001 adjusted underwriting loss* |                                  |      |       |       |   | $    | (243   | )     |   |   |       |      
|                                 |                                  |      |       |       |   |      |        |       |   |   |       |      
|2001 adjusted ratios*            |                                  |      |       |       |   |      |        |       |   |   |       |      
|                                 | Loss and loss adjustment expense |      |       |       |   |      |        | 69.0  | % |   |       |       |  
|                                 | Expense                          |      |       |       |   |      |        | 34.8  |   |   |       |       |  
|                                 | Dividend                         |      |       |       |   |      |        | 3.3   |   |   |       |       |  
|                                 |                                  |      |       |       |   |      |        |       |   |   |       |      
|Combined                         |                                  |      |       |       |   |      | 107.1  | %     |   |   |       |      
|                                 |                                  |      |       |       |   |      |        |       |   |   |       |      



|* |  | The 2001 adjusted underwriting loss and adjusted ratios exclude the impact of
the second quarter 2001 reserve strengthening, the WTC event, both net of the
related benefit of corporate aggregate reinsurance treaties, and restructuring
and other related charges.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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2002 Compared with 2001

Net operating income was $197 million in 2002 as compared with a net operating
loss of $451 million in 2001. The after-tax impact of the second quarter 2001
reserve strengthening, net of the related corporate aggregate reinsurance
treaty benefit, was $621 million for Standard Lines. The reserve strengthening
related primarily to commercial multiple-peril, general liability, commercial
automobile liability coverages, large account liability coverages and related
retrospective premium accruals. The strengthening was based upon detailed
claim reviews, assessments of legal developments affecting these coverages and
actuarial analyses completed in the second quarter of 2001. In response to the
adverse trends indicated by the reviews, changes were made to more closely
involve legal counsel on claims affected by legal developments and to
discontinue writing classes of business where adequate pricing could not be
achieved for the exposure.

In addition to the impact of the second quarter 2001 reserve strengthening, net
operating results in 2001 include $50 million related to the WTC event and $30
million for restructuring and other related charges. Excluding these 2001
significant items, net operating results declined $53 million in 2002 as
compared with 2001. This decrease was due primarily to decreased net
investment income, principally as a result of a
$34 million decline in limited partnership income. This decline was partially
offset by improved underwriting results, and a $5 million after-tax reduction
of the accrual for restructuring and other related charges in 2002.

The combined ratio decreased 2.7 points for 2002 as compared with 2001, and
underwriting results improved by $65 million as compared with the underwriting
results for the same period in 2001. This change was due to decreases in the
expense and dividend ratios, partially offset by an increase in the loss ratio.
The loss ratio increased 3.0 points due principally to increased costs of the
Companys reinsurance programs in 2002 as compared with a significant benefit
from reinsurance in 2001, including a benefit related to corporate aggregate
reinsurance treaties from core operations which was recorded primarily on
increased 2001 accident year losses for the workers compensation line of
business.

Partially offsetting these declines were both improved current gross accident
year loss ratios and favorable net reserve development in 2002. Favorable net
reserve development, including premium development, of $154 million was
recorded in 2002 as compared with unfavorable net reserve development of $24
million recorded in 2001, excluding the second quarter 2001 reserve
strengthening. 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.

Approximately $140 million of favorable prior year reserve 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 reserve
development of $8 million. The favorable residual market prior year reserve
development was the result of lower than expected paid loss activity during
recent

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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 prior year reserve 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 prior year reserve development
was recorded in the third quarter of 2002. Approximately one-half of this
favorable reserve development was recorded in accident years prior to 1999,
with the remainder of the favorable reserve development recorded in accident
years 1999 to 2001. Additional favorable reserve development may be recorded
in the future as management continues to monitor these estimates and as
additional evidence becomes available to measure the effectiveness of the claim
cost containment initiatives and managements corresponding estimate of such
expected ultimate claim cost reductions. While management believes that the
estimate of ultimate claim cost reductions as a result of the claim cost
containment initiatives is reasonable, there can be no assurance that the
ultimate expected claim cost reductions will be achieved, or that any
additional favorable development will be recorded as a result of the claim cost
containment initiatives described above.

Approximately $50 million of favorable prior year reserve 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 reserve development was recorded in
property lines during 2002. The favorable reserve 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 reserve developments were approximately $100 million
of unfavorable reserve development in middle market workers compensation,
approximately $70 million of unfavorable reserve development in programs
written in CNA E&S, approximately $30 million of unfavorable reserve
development on a contractors account package policy program and approximately
$20 million of unfavorable development on middle market general liability
coverages.

The unfavorable reserve development on workers 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
reserve development. The 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

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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 reserve 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 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 decreased 4.2 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 increased
net earned premium base. The dividend ratio decreased 1.5 points primarily due
to favorable current accident year dividends.

Net written premiums for Standard Lines increased $1,036 million in 2002 as
compared with 2001. Included in the 2001 net written premiums were $830
million of ceded premiums related to corporate aggregate reinsurance treaties,
additional ceded premiums arising from both the second quarter 2001 reserve
strengthening and the WTC event, and a change in estimate for involuntary
market premium accruals. Excluding these 2001 significant premium items, net
written premiums increased $206 million primarily as a result of strong rate
increases, increased new business and lower ceded premiums.

Net earned premiums increased $1,545 million in 2002 as compared with 2001.
Included in the 2001 net earned premiums were $1,195 million of ceded premiums
related to corporate aggregate reinsurance treaties, additional ceded premiums
and a change in estimate for retrospective premium accruals arising from the
second quarter 2001 reserve strengthening, additional ceded premiums arising
from the WTC event, and a change in estimate for involuntary market premium
accruals. Excluding these 2001 significant premium items, net earned premiums
increased $350 million primarily as a result of the increases in net written
premiums as described above.

Standard Lines achieved average rate increases of 27%, 17% and 13% in 2002,
2001 and 2000 for the contracts that renewed during these years and had
retention rates of 68%, 76% and 68% for those contracts that were up for
renewal.

2001 Compared with 2000

The net operating loss was $451 million in 2001 as compared with net operating
income of $205 million in 2000. Included in the 2001 results were $621 million
related to the second quarter 2001 reserve strengthening, $50 million related
to the WTC event and $30 million for restructuring and other related charges.
Excluding these significant items, net operating results increased $45 million
due to improved
underwriting results across most lines, except workers compensation. Net
operating income in 2000 benefited from a reduction of accruals for certain
insurance-related assessments due to changes in the basis on which the
assessments were calculated. The after-tax impact of this change was $60
million in 2000. This improvement was partially offset by decreased net
investment income, principally as a result of a $69 million

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decline in limited partnership income and increased interest expense for finite
reinsurance other than corporate aggregate reinsurance treaties.

The combined ratio decreased 5.7 points in 2001 as compared with 2000, and the
underwriting results improved $270 million. The change in the underwriting
results and the combined ratio was driven by a decrease in the loss ratio,
partially offset by increases in both the expense and dividend ratios. The
loss ratio decline of 11.4 points reflects lower prior year adverse loss
reserve development, excluding the second quarter 2001 reserve strengthening,
and improved current year underwriting results across most lines, particularly
the automobile and package lines, due to earned rate achievement and
re-underwriting efforts undertaken in 2000. The expense ratio increased 4.5
points due primarily to the reduced net earned premium base in 2001, an
increase in the accrual for guarantee fund assessments related to the Reliance
insolvency and the decreased benefit from the change in the assessment base for
certain insurance-related assessments discussed above. These declines were
partially offset by lower acquisition expenses due to higher ceding
commissions. The dividend ratio increased 1.2 points due primarily to adverse
development in dividend reserves in 2001 compared with favorable reserve
development recorded in 2000.

Net written premiums for Standard Lines decreased $906 million in 2001 as
compared with 2000. Included in the 2001 net written premiums were $830
million of ceded premiums related to corporate aggregate reinsurance treaties,
additional ceded premiums arising from both the second quarter 2001 reserve
strengthening and the WTC event, and a change in estimate for involuntary
market premium accruals. Excluding these 2001 significant premium items, net
written premiums decreased $76 million primarily due to increased adverse
premium development, excluding the second quarter 2001 reserve strengthening,
increased ceded premiums for reinsurance treaties other than corporate
aggregate reinsurance treaties and $119 million due to a change in the timing
of recording written premiums for policies with future effective dates. The
change for policies with future effective dates was made in conjunction with
statutorily required changes in recording written premiums and had no impact on
net earned premiums or net income. Partially offsetting these decreases was
increased new business in the primary property and small and middle-market
lines.

Net earned premiums decreased $1,518 million in 2001 as compared with 2000.
Included in the 2001 net earned premiums were $1,195 million of ceded premiums
related to corporate aggregate reinsurance treaties, additional ceded premiums
and a change in estimate for retrospective premium accruals arising from the
reserve strengthening, additional ceded premiums arising from the WTC event,
and a change in estimate for involuntary market premium accruals. Excluding
these 2001 significant premium items, net earned premiums decreased $323
million due primarily to the changes noted above in net written premiums.

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.

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

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 for architects
and engineers, realtors, non-Big Four accounting firms and law firms. CNA Pro
also has market positions in directors and officers, employment practices,
fiduciary and fidelity coverages. Specific areas of focus include privately
held firms and not-for-profit organizations where CNA offers products.
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, 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. In addition, Caronia Corporation, an affiliate
of CNA HealthPro, provides third-party claims administration for healthcare
providers and facilities.

CNA Guaranty and Creditprovides 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.

RVI is the largest monoline residual value insurer in the world, offering
coverages to protect the insured against a decrease in the market value of a
properly maintained asset at the termination of a lease.

Suretyconsists primarily of CNA Surety Corporation (CNA Surety), and its
insurance subsidiaries. CNA Surety is traded on the New York Stock Exchange
(SUR) and is the largest publicly traded provider of surety bonds, with
approximately 9.6% of that market, based upon 2001 A.M. Best written premium
data. CNA Surety 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.

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

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strategic indigenous opportunities and currently has operations in Hawaii,
Europe, Latin America and Canada.

Warrantyprovides warranty services 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 consists primarily of
CNA National Warranty Corporation, which sells vehicle warranty services in the
United States and Canada.

The following table details operating results for Specialty Lines.

|                                 |                                  |      |       |       |   |      |       |       |   |   |       |       |  
|-------------------------------- | -------------------------------- | ---- | ----- | ----- | - | ---- | ----- | ----- | - | - | ----- | ----- | -
|Operating Results                |                                  |      |       |       |   |      |       |       |   |   |       |      
|                                 |                                  | 2002 |       | 2001  |   | 2000
|                                 |                                  |      |       |       |   |     
|Years ended December 31          |                                  |      |       |       |   |     
|(In millions)                    |                                  |      |       |       |   |      |       |       |   |   |       |      
|Net written premiums             |                                  | $    | 2,383 |       |   | $    | 1,951 |       |   | $ | 1,932 |      
|Net earned premiums              |                                  |      | 2,178 |       |   |      | 1,896 |       |   |   | 1,847 |      
|Underwriting loss                |                                  |      | (203  | )     |   |      | (744  | )     |   |   | (63   | )    
|Net investment income            |                                  |      | 253   |       |   |      | 314   |       |   |   | 376   |      
|Net operating income (loss)      |                                  |      | 28    |       |   |      | (329  | )     |   |   | 196   |      
|                                
|Ratios                           |                                  |      |       |       |   |      |       |       |   |   |       |      
|                                 | Loss and loss adjustment expense |      |       | 77.1  | % |      |       | 97.5  | % |   |       | 67.2  | %
|                                 | Expense                          |      |       | 32.1  |   |      |       | 41.5  |   |   |       | 36.1  |  
|                                 | Dividend                         |      |       | 0.1   |   |      |       | 0.2   |   |   |       | 0.1   |  
|                                 |                                  |      |       |       |   |      |       |       |   |   |       |      
|                                 | Combined                         |      |       | 109.3 | % |      |       | 139.2 | % |   |       | 103.4 | %
|                                 |                                  |      |       |       |   |      |       |       |   |   |       |      
|2001 adjusted underwriting loss* |                                  |      |       |       |   | $    | (310  | )     |   |   |       |      
|                                 |                                  |      |       |       |   |      |       |       |   |   |       |      
|2001 adjusted ratios*            |                                  |      |       |       |   |      |       |       |   |   |       |      
|                                 | Loss and loss adjustment expense |      |       |       |   |      |       | 75.3  | % |   |       |       |  
|                                 | Expense                          |      |       |       |   |      |       | 40.7  |   |   |       |       |  
|                                 | Dividend                         |      |       |       |   |      |       | 0.2   |   |   |       |       |  
|                                 |                                  |      |       |       |   |      |       |       |   |   |       |      
|Combined                         |                                  |      |       |       |   |      | 116.2 | %     |   |   |       |      
|                                 |                                  |      |       |       |   |      |       |       |   |   |       |      

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

2002 Compared with 2001

Net operating income was $28 million in 2002 as compared with a net operating
loss of $329 million in 2001. The after-tax impact of the second quarter 2001
reserve strengthening on Specialty Lines was $275 million. The reserve
strengthening related primarily to medical malpractice and national for-profit
nursing home chains with exposure in Florida and Texas. This strengthening was
necessitated by the continuing emergence of reported losses in excess of
expectations and a thorough review of claim exposures. In response to these
adverse trends, Specialty Lines withdrew from writing these coverages in
certain states and instituted necessary rate increases. Additionally, reserve
strengthening related to the marine business resulted from an increase in large
claim frequency in marine cargo and hull coverages for accident years 1998
through 2000. Specialty Lines also strengthened reserves due to higher than
expected losses arising from the high-hazard commercial auto business.
Specialty Lines has taken rate action and reduced its exposure to unprofitable
marine cargo and hull classes of business and has exited the high hazard
commercial auto business.

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Net operating results in 2001 were adversely impacted by $12 million of
estimated losses related to the WTC event and $6 million for restructuring and
other related charges. Excluding these 2001 significant items, net operating
results increased $64 million for 2002 as compared with 2001. This increase
was due primarily to an improvement in the 2002 underwriting results and the
better alignment of premium earnings with the emergence of claims in the
vehicle warranty line of business, which reduced operating results in 2001, and
a $1 million after-tax reduction of the accrual for restructuring and other
related charges in 2002 partially offset by a decline in net investment income,
including a $13 million decline in limited partnership income.

Favorable reserve development of $13 million after-tax was recorded in 2002 in
relation to the Enron exposures previously recorded as a charge of $30 million
after-tax related to the bankruptcy filing of certain Enron entities in 2001.
These charges consisted of $17 million after-tax of losses in connection with
surety exposures, including advance payment obligations bonds and $13 million
after-tax of other operating expenses in connection with collateralized debt
obligations, a credit enhancement product. Additionally, the
underwriting results for the London-based
commercial and marine operations were unfavorable in 2001 as compared with
2002.

The combined ratio decreased 6.9 points in 2002 as compared with 2001, and the
underwriting results improved $107 million as compared with the underwriting
results for 2001. The change in the underwriting results and the combined
ratio was driven by a decrease in the expense and dividend ratios, partially
offset by an increase in the loss ratio. The loss ratio increased 1.8 points
due principally to increased unfavorable net reserve development recorded in
2002. Partially offsetting these declines were improved current gross accident
year loss ratios and rate increases across the entire book of business and the
increased benefit related to additional cessions to the CCC Cover as a result
of the prior year reserve development recorded in the third quarter of 2002.
Net unfavorable reserve development, including premium development, of $137
million was recorded in 2002 as compared to unfavorable net reserve development
of $46 million recorded in 2001, excluding the second quarter 2001 reserve
strengthening. 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.

Unfavorable prior year reserve 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 prior year unfavorable reserve
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 prior year unfavorable reserve development was
related to long term care facilities. The 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 reserve 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

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excess products apply. The unfavorable reserve 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 reserve development of approximately
$65 million during 2002. Approximately $50 million of this unfavorable reserve
development was due to participation in voluntary pools. About half of the
reserve 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 reserve 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 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 reserve development was favorable development in CNA
Pro and for Enron related exposures. Programs providing professional liability
coverage to accountants, lawyers and realtors primarily drove favorable prior
year reserve 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 $180
million, net of reinsurance. Additionally, favorable reserve 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. Also recorded in 2001 was
reserve strengthening for the London-based commercial and marine operations and
losses related to Enron entities as discussed above.

The expense ratio decreased 8.6 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.

Net written premiums for Specialty Lines increased $432 million in 2002 as
compared with 2001. Included in 2001 net written premiums were $68 million of
ceded premium related to corporate aggregate reinsurance treaties, additional
ceded premiums arising from both the reserve strengthening and WTC event, and a
change in estimate for involuntary market premium accruals. Excluding these
2001 significant premium items, net written premiums increased $364 million
primarily as a result of growth in most lines of business, including CNA Pro
and Global, due to strong rate increases and increased new business.

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Net earned premiums increased $282 million in 2002 as compared with 2001.
Included in 2001 net earned premiums were $82 million related to corporate
aggregate reinsurance treaties, additional ceded premiums and a change in
estimate for retrospective premium accruals arising from the reserve
strengthening, additional ceded premiums arising from the WTC event and a
change in estimate for involuntary market premium accruals. Excluding these
2001 significant premium items, net earned premiums increased $200 million
primarily as a result of the increases in net written premiums as noted above.

Specialty Lines achieved average rate increases of 26%, 13% and 5% in 2002,
2001 and 2000 for the contracts that renewed during these years and had
retention rates of 76%, 78% and 78% for those contracts that were up for
renewal. The retention rates above apply to Specialty Lines excluding the CNA
Guaranty and Credit, Surety and Warranty businesses.

2001 Compared with 2000

The net operating loss was $329 million in 2001 as compared with net operating
income of $196 million in 2000. Included in the 2001 results were $275 million
related to the second quarter 2001 reserve strengthening, $12 million related
to the WTC event and $6 million for restructuring and other related charges.

Excluding these significant items, net operating results decreased $232 million
for 2001 as compared with 2000. This decrease was due primarily to
unfavorable 2001 underwriting results for the London-based commercial and marine
operations compared to 2000 and $30 million of after-tax losses related to Enron, as described
above, in the fourth quarter of 2001. Additionally, net operating results
declined as a result of the write-off of unrecoverable deferred acquisition
costs and better alignment of premium earnings patterns with the emergence of
claims in the vehicle warranty line of business, a decreased benefit from the
use of finite reinsurance and decreased net investment income, principally
resulting from a $29 million decline in limited partnership income.

The combined ratio increased by 12.8 points in 2001 as compared with 2000 and
the underwriting results declined by $247 million. This change is due to
increases in both the loss and expense ratios. The loss ratio increased 8.1
points primarily as a result of losses related to Enron, favorable loss reserve
development recorded in 2000 for the architects and engineers business not
present in 2001, and unfavorable underwriting results in global and marine
lines related to the current accident year reserve strengthening discussed
above. The increase in the expense ratio is due primarily to the write-off of
unrecoverable deferred acquisition costs in the vehicle warranty line of
business and increased expenses in the European operations.

Net written premiums for Specialty Lines increased $19 million in 2001 as
compared with 2000. Included in 2001 net written premiums were $68 million
related to corporate aggregate reinsurance treaties, additional ceded premiums
arising from both the reserve strengthening and WTC event, and a change in
estimate for involuntary market premium accruals. Excluding these 2001
significant premium items, net written premiums increased $87 million primarily
as a result of strong production in coverage for law firms, long term care, and
architects and engineers products as well as increased rate achievement in
Europe, primarily in property lines and decreased ceded premiums related to
finite reinsurance for the medical professional liability lines. Partially
offsetting these increases was $77 million resulting from additional ceded
premiums related to core corporate aggregate reinsurance treaties, as well as
declines in the warranty and guaranty lines. Net written premiums also
decreased $23 million due to a change in the timing of recording written
premiums for policies with future effective dates. This change

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was made in conjunction with statutorily required changes in recording written
premiums and has no impact on net earned premiums or net income.

Net earned premiums increased $49 million in 2001 as compared with 2000.
Included in 2001 net earned premiums were $82 million related to corporate
aggregate reinsurance treaties, additional ceded premiums and a change in
estimate for retrospective premium accruals arising from the reserve
strengthening, additional ceded premiums arising from the WTC event and a
change in estimate for involuntary market premium accruals. Excluding these
2001 significant premium items, net earned premiums increased $131 million
related primarily to the reasons noted above as well as the reserve for
retrospective premium increase recorded in 2000.

CNA RE

Business Overview

CNA Re offers treaty, facultative, and financial reinsurance, and operates
primarily in the United States and select global markets as a reinsurer in the
broker market for treaty products and in the direct market for facultative
products.

Both treaty and facultative operations are headquartered in Chicago. CNA Re
also operates Facultative branch offices in Atlanta, Chicago, Cleveland,
Dallas, Hartford, New York, Philadelphia and Phoenix.

CNA Res operations 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 includes business
underwritten since inception by CNA Re U.K., except for certain risks retained
by Continental Casualty Company (CCC). See the Investments section of the MD&A
for further details of the sale of CNA Re U.K. CNA Res U.K. subsidiaries
ceased new underwriting activities in the third quarter of 2001. This sale
does not impact CNA Res on-going U.S.-based operations.

CNA Re markets products in the following Treaty business segments: standard
lines, global catastrophe, specialty, surplus lines and financial reinsurance.
In addition, CNA Re markets property and casualty facultative products directly
to clients through its facultative offices as well as through smartfac.com, its
on-line facultative submission site.

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The following table details operating results for CNA Re.

|                                 |                                  |      |     |       |   |      |        |       |   |   |       |       |  
|-------------------------------- | -------------------------------- | ---- | --- | ----- | - | ---- | ------ | ----- | - | - | ----- | ----- | -
|Operating Results                |                                  |      |     |       |   |      |        |       |   |   |       |      
|                                 |                                  | 2002 |     | 2001  |   | 2000
|                                 |                                  |      |     |       |   |      |       
|Years ended December 31          |                                  |      |     |       |   |     
|(In millions)                    |                                  |      |     |       |   |      |        |       |   |   |       |      
|Net written premiums             |                                  | $    | 605 |       |   | $    | 524    |       |   | $ | 951   |      
|Net earned premiums              |                                  |      | 642 |       |   |      | 641    |       |   |   | 1,089 |      
|Underwriting loss                |                                  |      | (58 | )     |   |      | (1,048 | )     |   |   | (68   | )    
|Net investment income            |                                  |      | 144 |       |   |      | 172    |       |   |   | 211   |      
|Net operating income (loss)      |                                  |      | 65  |       |   |      | (622   | )     |   |   | 92    |      
|                                
|Ratios                           |                                  |      |     |       |   |      |        |       |   |   |       |      
|                                 | Loss and loss adjustment expense |      |     | 78.4  | % |      |        | 221.2 | % |   |       | 79.1  | %
|                                 | Expense                          |      |     | 30.7  |   |      |        | 42.4  |   |   |       | 27.2  |  
|                                 |                                  |      |     |       |   |      |        |       |   |   |       |      
|                                 | Combined                         |      |     | 109.1 | % |      |        | 263.6 | % |   |       | 106.3 | %
|                                 |                                  |      |     |       |   |      |        |       |   |   |       |      
|2001 adjusted underwriting loss* |                                  |      |     |       |   | $    | (252   | )     |   |   |       |      
|                                 |                                  |      |     |       |   |      |        |       |   |   |       |      
|2001 adjusted ratios*            |                                  |      |     |       |   |      |        |       |   |   |       |      
|                                 | Loss and loss adjustment expense |      |     |       |   |      |        | 98.3  | % |   |       |       |  
|                                 | Expense                          |      |     |       |   |      |        | 38.5  |   |   |       |       |  
|                                 |                                  |      |     |       |   |      |        |       |   |   |       |      
|Combined                         |                                  |      |     |       |   |      | 136.8  | %     |   |   |       |      
|                                 |                                  |      |     |       |   |      |        |       |   |   |       |      

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

2002 Compared with 2001

Net operating income was $65 million in 2002 as compared with a net operating
loss of $622 million in 2001. The after-tax impact, net of the related
corporate aggregate reinsurance treaty benefit, of the second quarter 2001
reserve strengthening on CNA Re was $346 million. The strengthening was based
upon second quarter 2001 reviews that showed the emergence of higher than
expected reported losses. The reserve strengthening related to a number of
lines, including excess of loss liability and professional liability, in
accident years 1997 to 2000.

Net operating results decreased $176 million in 2001 due to estimated losses
related to the WTC event, net of related corporate aggregate reinsurance
treaties benefit and $6 million for restructuring and other related charges.
Excluding these 2001 significant items, net operating results improved $159
million for 2002 as compared with 2001. This increase was due to improved
underwriting results and an increased benefit related to the additional
cessions to CCC Cover as a result of the increase in WTC related losses
recorded in the first quarter of 2002, as discussed below, partially offset by
a decrease in net investment income, principally resulting from a $7 million
decline in limited partnership income.

Additionally, net operating results in 2001 included a $160 million charge to
strengthen prior underwriting year loss reserves for CNA Re U.K. There was no
tax benefit related to this charge due to the inability to recover further tax
benefits related to the underwriting losses of CNA Re U.K. Also included in
2001 were Enron-related losses of $22 million, primarily for reinsurance of
surety obligations.

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

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CNA Res cedants. Information that became available in the first quarter of
2002 resulted in CNA Re increasing its estimate of WTC event related premiums
and losses on its property facultative and property catastrophe business. The
impact of increasing the estimate of gross WTC event losses by $144 million was
fully offset on a net of reinsurance basis (before the impact of the CCC Cover)
by higher reinstatement premiums and a reduction of return premiums.
Approximately $95 million of CNA Res net WTC loss estimate was attributable to
CNA Re U.K., which was sold in 2002.

The combined ratio decreased 27.7 points in 2002 as compared with 2001, and
underwriting results improved $194 million. The improvement in underwriting
results and the combined ratio was driven by decreases in the loss and expense
ratios. The loss ratio decrease of 19.9 points is principally due to lower net
prior year reserve strengthening in 2002 as compared with 2001 and a net $32
million net underwriting benefit related to corporate aggregate reinsurance
treaties recorded in 2002 and improved current accident year results. The 2001
net prior year reserve strengthening includes a $160 million after-tax charge
to strengthen prior underwriting year reserves for CNA Re U.K. recorded in
2001. Net unfavorable reserve development, including premium development, of
$43 million was recorded in 2002 as compared with $214 million of unfavorable
development recorded in 2001, excluding the second quarter 2001 reserve
strengthening. 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.

The prior year reserve strengthening
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.

The expense ratio decreased 7.8 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.

Net written premiums for CNA Re increased $81 million in 2002 as compared with
2001. Included in 2001 net written premiums were $59 million related to
corporate aggregate reinsurance treaties and additional ceded premiums arising
from both the reserve strengthening and WTC event. These reductions in net
written premiums were more than offset by $89 million of reinstatement premiums
related to the WTC event. Excluding these 2001 significant premium items, net
written premiums increased $111 million principally as a result of 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. These increases
were partially offset by the 2001 decision to cease new and renewal business
writings at CNA Re U.K. Net earned premiums increased $1 million in 2002 as
compared with 2001.

2001 Compared with 2000

The net operating loss was $622 million in 2001 as compared with net operating
income of $92 million in 2000. Included in the 2001 results were $346 million
related to the second quarter 2001 reserve strengthening, $176 million of
losses related to the WTC event, net of related corporate aggregate reinsurance
treaties benefit, and $6 million for restructuring and other

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related charges. Excluding these significant items, net operating results
decreased $186 million in 2001 as compared with 2000 due primarily to a $160
million charge to strengthen prior underwriting year reserves for CNA Re U.K.
Additionally, net operating results decreased as a result of Enron-related
losses of $22 million primarily for reinsurance of surety obligations, and
decreased net investment income, including a $13 million decline in limited
partnership income. These declines were partially offset by improved current
accident year results.

The combined ratio increased 30.5 points in 2001 as compared with 2000 and the
underwriting results declined $184 million. The change in the combined ratio
and underwriting results is due to increases in both the loss and expense
ratios. The loss ratio increased 19.2 points due to prior underwriting year
adverse loss reserve development and Enron-related losses discussed above.
Partially offsetting this increase was a decrease in losses as a result of
improvement in the current accident year loss ratios in the domestic and U.K.
operations. While operating expenses have decreased for 2001 as compared with
2000, the expense ratio has increased due to the reduced net earned premium
base.

Net written premiums for CNA Re decreased $427 million in 2001 as compared with
2000. Included in 2001 net written premiums were $59 million related to
corporate aggregate reinsurance treaties and additional ceded premiums arising
from both the reserve strengthening and WTC event. These reductions in net
written premiums were more than offset by $89 million of reinstatement premiums
related to the WTC event. Excluding these 2001 significant premium items, net
written premiums decreased $457 million as a result of $161 million of ceded
premiums related to corporate aggregate reinsurance treaties and the announced
intention to sell the U.K. subsidiaries. Net earned premiums decreased $448
million in 2001 as compared with 2000 related primarily to the reasons noted
above.

GROUP OPERATIONS

Business Overview

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,
Federal Markets and Institutional Markets and Other, which also includes
results from businesses that CNA has exited; retail variable life and annuities
and life reinsurance.

Group Benefitsis in the employee benefits marketplace and offers group term
life and accident insurance, short term and long term disability, statutory
disability, long term care and specialty medical products and related services.
Target employers range from small private companies to large public
corporations. Specific areas of opportunity include the small case market as
well as under-served industries. Products are marketed through a nationwide
operation of 31 sales offices, third-party administrators, managing general
agents and insurance consultants.

Federal Marketsprovided health insurance benefits to federal employees,
retirees and their families, insuring nearly one million members under the
National Postal Mail Handlers Union group benefits plan (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

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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. Products are marketed
through life insurers and mutual fund companies.

The variable products business was exited in the fourth quarter of 2001.
During July 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 life reinsurance business was sold on December 31, 2000.

The following table details operating results for Group Operations.

|                        |  |      |       |      |  |      |       |  |  |   |       | 
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|Operating Results       |  |      |       |      |  |      |       |  |  |   |       | 
|Years ended December 31 |  | 2002 |       | 2001 |  | 2000
|                        |  |      |       |      |  |     
|(In millions)           |  |      |       |      |  |      |       |  |  |   |       | 
|Net earned premiums     |  | $    | 2,327 |      |  | $    | 3,378 |  |  | $ | 3,444 | 
|Deposits*               |  |      | 210   |      |  |      | 251   |  |  |   | 547   | 
|Net investment income   |  |      | 252   |      |  |      | 241   |  |  |   | 267   | 
|Net operating income    |  |      | 104   |      |  |      | 22    |  |  |   | 85    | 

*Primary measure of production for wealth accumulation products.

2002 Compared with 2001

Net operating income increased by $82 million in 2002 as compared with 2001.
Included in the 2001 results were $35 million related to the WTC event and $27
million related to restructuring and other related charges. Excluding these
2001 significant items, net operating results improved $20 million due
primarily 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
operating results also improved due to favorable reserve development relating
to the WTC event of $4 million after-tax recorded in 2002. Partially
offsetting these improvements was net unfavorable reserve strengthening in
Group Benefits due to unfavorable mortality trends.

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 was $1,151 million as compared with $2,218 million in 2001.
Deposits for Group Operations decreased $41 million for 2002 as compared with
2001 primarily due to reduced sales of S&P 500 ® contracts in Institutional
Markets.

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Group Operations achieved rate increases that averaged approximately 5%, 6% and
3% in 2002, 2001 and 2000 for the disability, accident and life lines of
business within Group Benefits. Premium persistency rates were approximately
81%, 81% and 84% in 2002, 2001 and 2000.

2001 Compared with 2000

Net operating income decreased by $63 million in 2001 as compared with 2000.
Included in the 2001 results were $35 million related to the WTC event and $27
million related to restructuring and other related charges. Included in the
restructuring and other related charges was a $23 million write-off of deferred
acquisition costs on inforce variable life and annuity contracts as the Company
believed that its decision to discontinue these products would negatively
impact the persistency of the business. Excluding these 2001 significant
items, net operating results decreased $1 million primarily as a result of the
sale of life reinsurance and a decrease in limited partnership income of $15
million. Life reinsurance contributed net operating income of $22 million in
2000. Partially offsetting these declines were improvements realized by
exiting unprofitable lines of approximately $18 million and increased income in
other product lines, primarily the single premium guaranteed annuity, GIC and
disability and group long term care lines, of $18 million.

Net earned premiums for Group Operations decreased $66 million for 2001 as
compared with 2000. Net earned premiums declined $228 million as a result of
the sale of life reinsurance. This decline was partially offset by increases
in Federal Markets of $138 million due to increased medical cost trends and
growth in Group Benefits of $36 million, particularly in the disability and
group long term care lines of business. Deposits for Group Operations
decreased $296 million in 2001 as compared to 2000 due to reduced sales of GIC
and S&P 500 ® contracts in Institutional Markets.

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.

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. 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.

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The following table details operating results for Life Operations.

|                        |  |      |       |      |  |      |       |  |  |   |       | 
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|Operating Results       |  |      |       |      |  |      |       |  |  |   |       | 
|                        |  | 2002 |       | 2001 |  | 2000
|                        |  |      |       |      |  |     
|Years ended December 31 |  |      |       |      |  |     
|(In millions)           |  |      |       |      |  |      |       |  |  |   |       | 
|Sales volume:*          |  | $    | 1,562 |      |  | $    | 1,575 |  |  | $ | 1,442 | 
|Net earned premiums     |  |      | 930   |      |  |      | 873   |  |  |   | 773   | 
|Net investment income   |  |      | 540   |      |  |      | 486   |  |  |   | 467   | 
|Net operating income    |  |      | 94    |      |  |      | 63    |  |  |   | 119   | 

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

2002 Compared with 2001

Net operating income increased by $31 million in 2002 as compared with 2001.
Included in the 2001 results were $19 million related to restructuring and
other related charges and $14 million related to the WTC event. Excluding
these 2001 significant items, net operating results decreased $2 million due
primarily to net reserve strengthening for individual long term care,
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
reserve development relating to the WTC event of $10 million after-tax recorded
in 2002 as compared with 2001, and a $1 million after-tax reduction of the
accrual for restructuring and other related charges recorded in 2002.

Sales volume for Life Operations decreased by $13 million in 2002 as compared
with 2001. This decrease was attributable primarily to lower sales of
structured settlement annuities, partially offset by increased sales in the
individual long term care product. 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.

As a result of recent experience and the fourth quarter reserve strengthening
of $35 million pretax for individual long term care, the Company is undertaking
a full review of its product offerings in this line. The focus is to determine
whether the current products provide adequate pricing flexibility under the
range of reasonably possible claims experience levels. Until this review is
completed, the Company intends to significantly reduce new sales of this
product. Premium will continue to be received on inforce business, but the
actions to reduce new business will lower the rate of overall premium growth
for this line. The outcome of the Companys review and potential future
actions could have a material adverse effect on CNAs results of operations.

2001 Compared with 2000

Net operating income decreased by $56 million in 2001 as compared with 2000.
Included in the 2001 results were $19 million related to restructuring and
other related charges and $14 million related to the WTC event. Excluding
these 2001 significant items, net operating results decreased $23 million due
primarily to decreased net investment income from limited partnerships of $21
million.

Sales volume for Life Operations increased by $133 million in 2001 as compared
with 2000. This increase was driven primarily by improved sales in structured
settlements and increased

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renewals and new sales in individual long term care products. Net earned
premiums increased $100 million in 2001 as compared with 2000. This
improvement is attributable primarily to improved sales of structured
settlement annuities due to favorable pricing conditions and individual long
term care products, partially offset by a decrease in new individual life
business.

CORPORATE AND OTHER

Business 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 operations and other operations.

APMT consists of the losses and expenses related to the centralized adjusting
and settlement of APMT claims that were formerly included in the property and
casualty segments. See the Environmental Pollution and Mass Tort and Asbestos
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 includes 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, certain CNA subsidiaries completed a transaction with
Allstate to transfer substantially all of CNAs personal insurance lines of
business.

Other operations include interest expense on corporate borrowings, asbestos
claims related to Fibreboard Corporation, eBusiness initiatives, 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.
Effective March 31, 2002, CNA UniSource ceased providing professional employer
organization services. Effective December 31, 2002, CNA UniSource ceased
payroll processing services.

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

|                        |  |      |     |      |  |      |        |   |  |   |      |  
|----------------------- |  | ---- | --- | ---- |  | ---- | ------ | - |  | - | ---- | -
|Operating Results       |  |      |     |      |  |      |        |   |  |   |      |  
|                        |  | 2002 |     | 2001 |  | 2000
|                        |  |      |     |      |  |     
|Years ended December 31 |  |      |     |      |  |     
|(In millions)           |  |      |     |      |  |      |        |   |  |   |      |  
|Net investment income   |  | $    | 143 |      |  | $    | 155    |   |  | $ | 183  |  
|Operating revenues      |  |      | 371 |      |  |      | 402    |   |  |   | 656  |  
|Net operating loss      |  |      | (92 | )    |  |      | (1,091 | ) |  |   | (189 | )

2002 Compared with 2001

Net operating results increased by $999 million in 2002 as compared with 2001.
The after-tax impact of the second quarter 2001 reserve strengthening on the
Corporate and Other segment

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was $837 million, including $778 million for APMT. See the Environmental
Pollution and Mass Tort and Asbestos Reserves section following for a
discussion of this charge. Net operating income in 2001 also
decreased by $77
million of restructuring and other related charges and $17 million related to
the WTC event for group reinsurance.

Excluding these 2001 significant items, net operating results improved $68
million in 2002 as compared with 2001. Reduced expenses for e-Business
initiatives and improved results for group reinsurance were offset by lower net
investment income, principally resulting from a $6 million decline in limited
partnership income, higher losses related to the runoff of CNA UniSource and
severance and other costs related to changes in senior management in 2002.
Also contributing to the improvement was a $17 million after-tax reduction in
the accrual for restructuring and other related charges recorded in 2002.

During 2002, favorable net reserve development, including premium development,
of $23 million was recorded in the Corporate and Other segment as compared with
unfavorable net reserve development of $63 million recorded in 2001, excluding
the second quarter 2001 reserve strengthening. 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.

Personal insurance recorded unfavorable reserve development of $35 million on
accident years 1997 through 1999. These losses were subject to retroactive
reinsurance agreements with Allstate that covers losses occurring prior to
October 1, 1999. These reinsurance agreements were entered into as part of the
sale of the Companys personal insurance business to Allstate. CNA shares in
indemnity and claim and allocated claim adjustment expenses if payments related
to losses incurred prior to October 1, 1999 on the CNA policies transferred to
Allstate exceed the claim and allocated claim adjustment expense reserves of
approximately $1 billion at the date of sale. The Company must
begin to reimburse Allstate for claim and allocated claim adjustment
expense payments when cumulative claim payments after October 1, 1999
on losses occurring prior to that date exceed the $1 billion. The
Companys remaining obligation valued under this loss sharing
provision as of October 1, 2003, will be settled 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 are expected to
exceed $1 billion during 2003. The Company has established
reserves for its estimated liability under this loss sharing arrangement. The
unfavorable reserve 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 reserve development on personal insurance was offset by
favorable reserve development on other runoff business driven principally by
financial and mortgage guarantee coverages from accident years 1997 and prior.
The favorable reserve development on financial and mortgage 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.

Total operating revenues decreased $31 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, and reduced net investment income partially offset
by increased net earned premiums in group reinsurance.

2001 Compared with 2000

Net operating results declined $902 million in 2001 as compared with 2000. The
after-tax impact of the second quarter 2001 reserve strengthening on the
Corporate and Other segment

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was $837 million, including $778 million for APMT. See the Environmental
Pollution and Mass Tort and Asbestos Reserves section following for a
discussion of this charge. Net operating income for 2001 also
decreased by $77
million for restructuring and other related charges and $17 million related to
the WTC event for group reinsurance.

Excluding these 2001 significant items, net operating results increased $29
million primarily as a result of lower interest expense on corporate borrowings
in 2001 as compared with 2000 and a non-recurring favorable adjustment of
expense recoveries under a service contract related to personal insurance.
These increases were partially offset by $45 million for non-recurring ceding
commissions included in 2000 results related to the transfer of the personal
insurance line of business to Allstate in 1999, $35 million related to
increased eBusiness initiatives in 2001 and $12 million due to decreased
limited partnership income.

Total operating revenues decreased $254 million in 2001 as compared with 2000.
This decline was due to a decrease in net investment income and net earned
premiums from run-off insurance operations, particularly the entertainment and
agriculture insurance lines.

Environmental Pollution and Mass Tort and Asbestos (APMT) Reserves

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

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

Environmental Pollution and Mass Tort and Asbestos

|               |  |                   |      |                   |  |      |       |               |  |   |      |   |  |   |       |  
|-------------- |  | ----------------- | ---- | ----------------- |  | ---- | ----- | ------------- |  | - | ---- | - |  | - | ----- | -
|               |  | December 31, 2002 |      | December 31, 2001
|               |  |                   |      |                  
|               |  | Environmental     |      |                   |  |      |       | Environmental |  |   |      |  
|               |  | Pollution         |      |                   |  |      |       | Pollution     |  |   |      |  
|               |  | and Mass          |      |                   |  |      |       | and Mass      |  |   |      |  
|               |  | Tort              |      | Asbestos          |  | Tort |       | Asbestos     
|               |  |                   |      |                   |  |      |       |              
|(In millions)  |  |                   |      |                   |  |      |       |               |  |   |      |   |  |   |       |  
|Gross reserves |  | $                 | 830  |                   |  | $    | 1,758 |               |  | $ | 837  |   |  | $ | 1,644 |  
|Ceded reserves |  |                   | (313 | )                 |  |      | (527  | )             |  |   | (204 | ) |  |   | (392  | )
|               |  |                   |      |                   |  |      |       |               |  |   |      |   |  |   |       |  
|Net reserves   |  | $                 | 517  |                   |  | $    | 1,231 |               |  | $ | 633  |   |  | $ | 1,252 |  
|               |  |                   |      |                   |  |      |       |               |  |   |      |   |  |   |       |  

There was no asbestos or environmental pollution and mass tort-related net
claim and claim adjustment expense reserve development for the year ended
December 31, 2002. As a result of a change in estimate resulting from the
Companys semi-annual ground-up review of APMT accounts, gross and ceded APMT
reserves were increased. The settlement scenarios that supported higher
estimated gross and higher estimated ceded reserves were judged to be the most
appropriate. However, net reserves remained unchanged. The estimation of
reinsurance recoverables on accounts is highly dependent on the allocation of
each accounts estimated ultimate losses to the available historical insurance
coverage. This allocation becomes more refined as accounts and their insurers
enter more serious settlement negotiations.

During 2002, net reserves were
identified relating to APMT related claim and claim adjustment
expense reserves for assumed reinsurance pools, which reflects
improvements in the identification of APMT activity from assumed
reinsurance and pools. The inclusion of these additional APMT
reserves increased the APMT reserves and decreased other reserves,
resulting in no net change in the Company's overall carried claim and
claim adjustment expense reserves.

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

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industry is involved in extensive litigation regarding coverage issues.
Judicial interpretations in many cases have expanded the scope of coverage and
liability beyond the original intent of the policies. The Comprehensive
Environmental Response Compensation and Liability Act of 1980 (Superfund) and
comparable state statutes (mini-Superfunds) govern the cleanup and restoration
of toxic waste sites and formalize the concept of legal liability for cleanup
and restoration by Potentially Responsible Parties (PRPs). Superfund and the
mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs
fail to do so, and to assign liability to PRPs. The extent of liability to be
allocated to a PRP is dependent upon a variety of factors. Further, the number
of waste sites subject to cleanup is unknown. To date, approximately 1,200
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 reform Superfund have been made by various parties.
In 2002, no reforms were enacted by Congress. 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 impact upon CNAs results of operations or equity.

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, court decisions that continue to restrict the scope and
applicability of the absolute pollution exclusion contained in policies issued
by the Company post 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, 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.

As of December 31, 2002 and 2001, CNA carried approximately $517 million and
$633 million of claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and mass tort
claims. There was no environmental and mass tort net claim and claim
adjustment expense reserve development for the year ended December 31, 2002.
Unfavorable environmental pollution and mass tort net claim and claim
adjustment expense reserve development for the years ended December 31, 2001
and 2000 amounted to $468 million and $15 million. The Company paid
environmental pollution-related claims and mass tort-related claims, net of
reinsurance recoveries, of $116 million, $203 million and $135 million during
the years ended December 31, 2002, 2001 and 2000.

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Asbestos

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

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

As of December 31, 2002 and 2001, CNA carried approximately $1,231 million and
$1,252 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported asbestos-related claims.

There was no asbestos-related net claim and claim adjustment expense reserve
development for the year ended December 31, 2002. Unfavorable asbestos-related
net claim and claim adjustment expense reserve development for the years ended
December 31, 2001 and 2000 amounted to $773 million and $65 million. The
Company paid asbestos-related claims, net of reinsurance, of $20 million, $171
million and $126 million during the years ended December 31, 2002, 2001 and
2000, excluding payments made in connection with the 1993 settlement of
litigation related to Fibreboard Corporation.

CNA has structured settlement agreements with four of its policyholders for
which it has future payment obligations. Structured settlement agreements
provide for payments of sums certain over multiple years as set forth in each
individual agreement. As to the four structured settlement agreements existing
at December 31, 2002, payment obligations under those settlement agreements are
projected to terminate in 2016. For these four structured settlement
agreements, CNA has reserved $118 million, net of reinsurance.

CNA, through its acquisition of The Continental Insurance Company (CIC) in
1995, acquired obligations under the Wellington Agreement. In 1985, 47
asbestos producers and their insurers, including CIC, executed the Wellington
Agreement. The agreement intended to resolve all

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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.
With respect to the five remaining unpaid Wellington obligations, CNA has
evaluated its exposure under these agreements and has established a $28 million
reserve, net of reinsurance, for Wellington obligations.

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, CNA had
negotiated 23 such agreements in which CNA committed coverage for payment of
claims and claim related adjustment expenses subject to documentation
requirements as set forth in the terms of each specific agreement. The Company
has evaluated these commitments and has established a $66 million reserve, net
of reinsurance, to fund coverage in place agreements based on current
projections of claims volumes and severities.

At December 31, 2002, CNAs total IBNR reserve for asbestos was $729 million,
net of reinsurance. For asbestos exposure, CNA classifies its IBNR reserve as
assigned or unassigned. In circumstances where CNA has executed a settlement
agreement with its policyholder, CNA assigns IBNR reserve to that account to
cover the projected value of the settlement. At December 31, 2002, the
assigned IBNR reserve was $166 million, net of reinsurance. The unassigned
IBNR reserve relates to potential development on accounts that have not settled
and potential future claims for unidentified policyholders. At December 31,
2002, CNAs unassigned IBNR reserve was $563 million, net of reinsurance.

At December 31, 2002, the Company categorized active accounts as large or small
accounts. CNA defined a large account as an active account with more than $100
thousand cumulative paid losses through December 31, 2002. CNA had 150 large
accounts with a collective reserve of $220 million, net of reinsurance. The
Company made closing large accounts a significant management priority. Small
accounts were defined as active accounts with $100 thousand or less cumulative
paid losses through December 31, 2002. CNA had 939 small accounts with a
collective reserve of $90 million, net of reinsurance.

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The chart below depicts CNAs overall pending asbestos accounts and associated
reserves at December 31, 2002.

|                                                  |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |    |  
|------------------------------------------------- | ----------------------- |  | ------------- | --- | ------------- | --------------- | ------------- | ------------ | -------- | ---------- | ----- | --- |  |  | --- | -- | -
|Pending Asbestos Accounts and Associated Reserves |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |   
|                                                 
|At December 31, 2002                              |                         |  |               |     |               | Net paid losses |               | Net Asbestos |          | Percent of
|                                                  |                         |  | Number of     |     | (recoveries)  |                 | reserves      |              | Asbestos
|                                                  |                         |  | policyholders |     | (In millions) |                 | (In millions) |              | Reserves
|                                                  |                         |  |               |     |               |                 |               |              |         
|Policyholders
with settlement agreements          |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |   
|                                                  | Structured Settlements  |  |               | 4   |               |                 | $             | 12           |          |            | $     | 118 |  |  |     | 10 | %
|                                                  | Wellington              |  |               | 5   |               |                 |               |             |          |            |       | 28  |  |  |     | 3  |  
|                                                  | Coverage in place       |  |               | 23  |               |                 |               | (15          | )        |            |       | 66  |  |  |     | 5  |  
|                                                  | Fibreboard              |  |               | 1   |               |                 |               | 1            |          |            |       | 55  |  |  |     | 4  |  
|                                                  |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |   
|Total with settlement agreements                  |                         |  | 33            |     |               |                 | (2            | )            |          |            | 267   |     |  |  | 22  |   
|                                                  |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |   
|Other policyholders with active accounts          |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |   
|                                                  | Large asbestos accounts |  |               | 150 |               |                 |               | (8           | )        |            |       | 220 |  |  |     | 18 |  
|                                                  | Small asbestos accounts |  |               | 939 |               |                 |               | 16           |          |            |       | 90  |  |  |     | 7  |  
|                                                  |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |   
|Total other policyholders                         |                         |  | 1,089         |     |               |                 | 8             |              |          |            | 310   |     |  |  | 25  |   
|                                                  |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |   
|Assumed reinsurance and pools                     |                         |  |              |     |               |                 | 15            |              |          |            | 91    |     |  |  | 7   |   
|Unassigned IBNR                                   |                         |  |              |     |               |                 |              |              |          |            | 563   |     |  |  | 46  |   
|                                                  |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |   
|Total                                             |                         |  | 1,122         |     |               | $               | 21            |              |          | $          | 1,231 |     |  |  | 100 | % 
|                                                  |                         |  |               |     |               |                 |               |              |          |            |       |     |  |  |     |   

In 2002, at least 15 companies filed for bankruptcy protection citing costs
associated with asbestos claims litigation as a basis for filing. Since 1982,
at least 67 companies, including the 15 companies that filed in 2002, that
mined asbestos, or manufactured or used asbestos-containing products, have
filed for bankruptcy. This phenomenon has prompted plaintiff attorneys to file
claims against companies that had only peripheral involvement with asbestos.
Many of these defendants were users or distributors of asbestos-containing
products, or manufacturers of products in which asbestos was encapsulated.
These defendants include equipment manufacturers, brake, gasket, and sealant
manufacturers, and general construction contractors. According to a
comprehensive report on asbestos litigation recently released by the Rand
Corporation, over 6,000 companies have been named as defendants in asbestos
lawsuits, with 75 out of 83 different types of industries in the United States
impacted by asbestos litigation. The study found that a typical claimant names
70 to 80 defendants, up from an average of 20 in the early years of asbestos
litigation.

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

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On February 13, 2003, CNA announced it had resolved asbestos related coverage
litigation and claims involving A.P. Green Industries, A.P. Green Services and
Bigelow  Liptak Corporation. Under the agreement, CNA will be required to pay
$74 million, net of reinsurance recoveries, over a ten year period. The
settlement resolves CNAs liabilities for all pending and future asbestos
claims involving A.P. Green Industries, Bigelow-Liptak Corporation and related
subsidiaries, including alleged non-products exposure. The settlement is
subject to bankruptcy court approval and confirmation of a bankruptcy plan
containing a channeling injunction to protect CNA from any future claims. The
Companys recorded reserves as of December 31, 2002, included reserves for this
exposure.

CNA is engaged in insurance coverage litigation with Robert A. Keasbey Company
(Keasbey) and associated claimants in New York state court (Continental
Casualty Company vs. Robert A. Keasbey Company et al., Supreme Court State of
New York  County of New York, No. 401621/02).Keasbey was a seller and
installer of asbestos products in the New York and New Jersey area. CNA paid
its full product liability limits to Keasbey in prior years. Claimants against
Keasbey now claim CNA owes additional coverage under the operations section of
policies issued to it by CNA. CNA is also a party to insurance coverage
litigation between Burns & Roe Enterprises, Inc. (Burns & Roe) and its
insurance carriers related to asbestos bodily injury and wrongful death claims
(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 various
engineering and related services in connection with construction projects.
Burns & Roe is currently in bankruptcy. There are numerous factual and legal
issues to be resolved in connection with these cases and it is difficult to
predict the outcome or financial exposure represented by these matters in light
of the novel theories asserted by policyholders and their counsel.

Policyholders have also initiated litigation directly against CNA and other
insurers. CNA has been named in Adams v. Aetna, Inc., et al. (Circuit Court of
Kanhwha County, West Virginia), a purported class action against CNA and other
insurers, alleging that the defendants violated West Virginias Unfair Trade
Practices Act in handling and resolving asbestos claims against their
policyholders. In addition, lawsuits have 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)). It is difficult to predict the
outcome or financial exposure represented by this type of litigation in light
of the broad nature of the relief requested and the novel theories asserted.

CNA reviews each active asbestos account every six months to determine whether
changes in reserve estimates may be necessary. The Company considers input
from its analyst professionals with direct responsibility for the claims,
inside and outside counsel with responsibility for representation of the
Company, and its actuarial staff. These professionals review, among many
factors, the policyholders present and future exposures (including such
factors as claims volume, disease mix, trial conditions, settlement demands and
defense costs); the policies issued by CNA (including such factors as aggregate
or per occurrence limits, whether the policy is primary, umbrella or excess,
and the existence of policyholder retentions and/or deductibles); the existence
of other insurance; and reinsurance arrangements.

Due to the uncertainties created by volatility in claim numbers and settlement
demands, the effect of bankruptcies, the extent to which non-impaired claimants
can be precluded from making claims and the efforts by insureds to obtain
coverage not subject to aggregate limits, the ultimate liability of CNA for
asbestos-

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related claims may vary substantially from the amount currently
recorded. Other variables that will influence CNAs ultimate exposure to
asbestos-related claims will be medical inflation trends, jury attitudes, the
strategies of plaintiff attorneys to broaden the scope of defendants, the mix
of asbestos-related diseases presented, CNAs abilities to recover reinsurance,
future court decisions and the possibility of legislative reform. Adverse
developments with respect to such matters discussed in this paragraph could
have a material adverse impact on CNAs results of operations or equity.

With respect to environmental 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 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.

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.

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. For example, A.M. Best released a study in May 2001
increasing its ultimate asbestos reserve estimate 63% from $40 billion to $65
billion, citing an unfunded insurance industry reserve shortfall of $33
billion. In June 2001, Tillinghast raised its asbestos ultimate exposure from
$55 billion to $65 billion for the insurance industry and its estimate of the
ultimate remaining asbestos liability for all industries was raised to $200
billion.

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

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upon to indemnify policyholders and
creating the potential that novel legal doctrines could be employed, which
could accelerate the time when such indemnification payments could be due.

These developments led the Company to the conclusion that its asbestos reserves
required strengthening.

The results of operations or equity of CNA in future years may be adversely
impacted by environmental pollution and mass tort and asbestos claim and claim
adjustment expenses. Management will continue to review and monitor these
liabilities and make further adjustments, including the potential for further
reserve strengthening, as necessary.

INVESTMENTS

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

|                                              |  |      |       |      |  |      |       |   |  |   |       |  
|--------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|Net Investment Income                         |  |      |       |      |  |      |       |   |  |   |       |  
|                                              |  | 2002 |       | 2001 |  | 2000
|                                              |  |      |       |      |  |     
|Years ended December 31                       |  |      |       |      |  |     
|(In millions)                                 |  |      |       |      |  |      |       |   |  |   |       |  
|Fixed maturity securities                     |  | $    | 1,854 |      |  | $    | 1,824 |   |  | $ | 1,739 |  
|Short term investments                        |  |      | 62    |      |  |      | 135   |   |  |   | 200   |  
|Limited partnerships                          |  |      | (34   | )    |  |      | 47    |   |  |   | 293   |  
|Equity securities                             |  |      | 66    |      |  |      | 37    |   |  |   | 51    |  
|Interest on funds withheld and other deposits |  |      | (239  | )    |  |      | (241  | ) |  |   | (87   | )
|Other                                         |  |      | 81    |      |  |      | 112   |   |  |   | 99    |  
|                                              |  |      |       |      |  |      |       |   |  |   |       |  
|Gross investment income                       |  |      | 1,790 |      |  |      | 1,914 |   |  |   | 2,295 |  
|Investment expense                            |  |      | (60   | )    |  |      | (58   | ) |  |   | (48   | )
|                                              |  |      |       |      |  |      |       |   |  |   |       |  
|Net investment income                         |  | $    | 1,730 |      |  | $    | 1,856 |   |  | $ | 2,247 |  
|                                              |  |      |       |      |  |      |       |   |  |   |       |  

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). 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. The interest costs on
these contracts increased significantly in 2001 because of ceded losses
resulting from the second quarter 2001 reserve strengthening and the WTC event.
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 Company experienced lower net investment income in 2001 as compared with
2000 due primarily to the decrease in limited partnership income as well as the
increase in interest on funds withheld and other deposits.
The decline in limited partnership income was primarily attributable
to many of the same factors that impacted the broader financial markets.

The bond segment of the investment portfolio yielded 6.0% in 2002, 6.4% in 2001
and 6.7% in 2000.

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

|                                                                 |                                   |      |      |      |   |      |       |     |   |   |       |      |  
|---------------------------------------------------------------- | --------------------------------- | ---- | ---- | ---- | - | ---- | ----- | --- | - | - | ----- | ---- | -
|Net Realized Investment Gains (Losses)                           |                                   |      |      |      |   |      |       |     |   |   |       |     
|                                                                 |                                   | 2002 |      | 2001 |   | 2000
|                                                                 |                                   |      |      |      |   |      |      
|Years ended December 31                                          |                                   |      |      |      |   |     
|(In millions)                                                    |                                   |      |      |      |   |      |       |     |   |   |       |     
|Realized investment gains (losses):                              |                                   |      |      |      |   |      |       |     |   |   |       |     
|Fixed maturity securities:                                       |                                   |      |      |      |   |      |       |     |   |   |       |     
|                                                                 | U.S. Government bonds             |      | $    | 392  |   |      | $     | 233 |   |   | $     | 96   |  
|                                                                 | Corporate and other taxable bonds |      |      | (557 | ) |      |       | (5  | ) |   |       | (171 | )
|                                                                 | Tax-exempt bonds                  |      |      | 48   |   |      |       | 54  |   |   |       | 13   |  
|                                                                 | Asset-backed bonds                |      |      | 36   |   |      |       | 75  |   |   |       | (65  | )
|                                                                 | Redeemable preferred stock        |      |      | (28  | ) |      |       | (21 | ) |   |       | (3   | )
|                                                                 |                                   |      |      |      |   |      |       |     |   |   |       |     
|Total fixed maturity securities                                  |                                   |      | (109 | )    |   |      | 336   |     |   |   | (130  | )   
|Equity securities                                                |                                   |      | (158 | )    |   |      | 1,095 |     |   |   | 1,116 |     
|Derivative securities                                            |                                   |      | (52  | )    |   |      | (5    | )   |   |   | 10    |     
|Other invested assets                                            |                                   |      | 65   |      |   |      | (149  | )   |   |   | 37    |     
|                                                                 |                                   |      |      |      |   |      |       |     |   |   |       |     
|Total realized investment (losses) gains                         |                                   |      | (254 | )    |   |      | 1,277 |     |   |   | 1,033 |     
|Allocated to participating policyholders and minority interests |                                   |      | 2    |      |   |      | (15   | )   |   |   | (4    | )   
|Income tax benefit (expense)                                     |                                   |      | 103  |      |   |      | (446  | )   |   |   | (360  | )   
|                                                                 |                                   |      |      |      |   |      |       |     |   |   |       |     
|Net realized investment (losses) gains                           |                                   | $    | (149 | )    |   | $    | 816   |     |   | $ | 669   |     
|                                                                 |                                   |      |      |      |   |      |       |     |   |   |       |     

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
included was $157 million after-tax of 2002 impairments recorded in various
market sectors.

Also, during 2002, CNA completed the sale of several businesses, including CNA
Re U.K., the London-based reinsurer. 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.

Net realized investment gains increased $147 million in 2001 as compared with
2000. This increase was due primarily to after-tax gains from closing the
hedge agreements, which were entered into during March 2000, related to the
Companys investment in Global Crossing of $647 million in 2001 as compared
with $315 million in 2000 as well as gains of $58 million, resulting from the
sale of a New York real estate property and gains from the sale of fixed
maturity security investments. This improvement was partially offset by
estimated losses recorded for the planned dispositions of certain operations,
principally CNA Re U.K., described in more detail below as well as decreases in
after-tax gains from the sale of Canary Wharf of $34 million in 2001 as
compared with $289 million in 2000.

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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. Changes in fair value are reported
as a component of other comprehensive income.

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

|                                                                                |                                                          |                       |      |      |        |      |       |       |       |   |     |       |       |  
|------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------- | ---- | ---- | ------ | ---- | ----- | ----- | ----- | - | --- | ----- | ----- | -
|Realized Gains and Losses                                                       |                                                          |                       |      |      |        |      |       |       |       |   |     |      
|                                                                                |                                                          | 2002                  |      | 2001 |        | 2000
|                                                                                |                                                          |                       |      |      |        |      |       |      
|Years ended December 31                                                         |                                                          |                       |      |      |        |     
|(In millions)                                                                   |                                                          |                       |      |      |        |      |       |       |       |   |     |      
|Net realized gains (losses) on fixed maturity securities
and equity securities: |                                                          |                       |      |      |        |      |       |       |       |   |     |      
|                                                                                | Fixed maturity securities:                               |                       |      |      |        |      |       |       |       |   |     |       |      
|                                                                                |                                                          | Gross realized gains  |      | $    | 1,009  |      |       | $     | 936   |   |     | $     | 434   |  
|                                                                                |                                                          | Gross realized losses |      |      | (1,118 | )    |       |       | (600  | ) |     |       | (564  | )
|                                                                                |                                                          |                       |      |      |        |      |       |       |       |   |     |      
|                                                                                | Net realized (losses) gains on fixed maturity securities |                       |      | (109 | )      |      |       | 336   |       |   |     | (130  | )    
|                                                                                |                                                          |                       |      |      |        |      |       |       |       |   |     |      
|                                                                                | Equity securities:                                       |                       |      |      |        |      |       |       |       |   |     |       |      
|                                                                                |                                                          | Gross realized gains  |      |      | 251    |      |       |       | 1,335 |   |     |       | 1,336 |  
|                                                                                |                                                          | Gross realized losses |      |      | (409   | )    |       |       | (240  | ) |     |       | (220  | )
|                                                                                |                                                          |                       |      |      |        |      |       |       |       |   |     |      
|                                                                                | Net realized (losses) gains on equity securities         |                       |      | (158 | )      |      |       | 1,095 |       |   |     | 1,116 |      
|                                                                                |                                                          |                       |      |      |        |      |       |       |       |   |     |      
|Net realized (losses) gains on fixed maturity and equity
securities             |                                                          | $                     | (267 | )    |        | $    | 1,431 |       |       | $ | 986 |      
|                                                                                |                                                          |                       |      |      |        |      |       |       |       |   |     |      

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The largest realized losses from sales of securities aggregated by issuer for
the twelve months ended December 31, 2002 totaled $254 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.

|                                                                                                                                     |  |         |       |         |  |            |     |            |  |                |     | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------- | ----- | ------- |  | ---------- | --- | ---------- |  | -------------- | --- | 
|Largest Realized Losses from Securities Sold at a Loss                                                                               |  |         |       |         |  |            |     |            |  |                |     | 
|                                                                                                                                     |  | Fair    |       |         |  |            |     | Months in 
|                                                                                                                                     |  | Value   |       |         |  |            |     | Unrealized
|                                                                                                                                     |  | Date of |       | Loss    |  | Loss Prior
|Issuer Description and Discussion                                                                                                    |  | Sale    |       | On Sale |  | To Sale   
|                                                                                                                                     |  |         |       |         |  |           
|(In millions)                                                                                                                        |  |         |       |         |  |            |     |            |  |                |     | 
|US Treasury (a)                                                                                                                      |  | $       | 7,738 |         |  |            | 61  |            |  | Various, 1-24+
|An industrial power producer (IPP) and trader of deregulated energy
commodities and energy-related risk management products (b)      |  |         | 113   |         |  |            | 46  |            |  | Various, 0-12 
|A company, which operated moderately-priced restaurants in the United States
and has filed bankruptcy (c)                            |  |         | 0     |         |  |            | 28  |            |  |                | 24+ | 
|A wireless communication company that offers an integrated tool with digital
cellular, text paging and two-way radio feature (d)     |  |         | 39    |         |  |            | 18  |            |  | Various, 7-24+
|A major U.S. airline carrier that filed for bankruptcy in December of 2002 (e)                                                       |  |         | 11    |         |  |            | 17  |            |  | Various, 0-24+
|A large telecommunication company that primarily provides wired and wireless
telephone services (f)                                  |  |         | 182   |         |  |            | 15  |            |  | Various, 0-12 
|A telecommunication equipment company that builds, designs and delivers
network communication (g)                                    |  |         | 17    |         |  |            | 15  |            |  |                | 0-6 | 
|A telephone company located in Canada and is a subsidiary of a U.S. company
(h)                                                      |  |         | 5     |         |  |            | 15  |            |  | Various, 0-12 
|A large cable and telecommunications company located in the U.S. (i)                                                                 |  |         | 37    |         |  |            | 14  |            |  |                | 0-6 | 
|A provider of employee health and welfare products, administration services,
insurance brokerage and related consulting services (j) |  |         | 37    |         |  |            | 13  |            |  |                | 0-6 | 
|A major domestic automobile manufacturer (k)                                                                                         |  |         | 371   |         |  |            | 12  |            |  | Various, 0-12 
|                                                                                                                                     |  |         |       |         |  |            |     |            |  |                |     | 
|                                                                                                                                     |  | $       | 8,550 |         |  | $          | 254 |            |  |                |     | 
|                                                                                                                                     |  |         |       |         |  |            |     |            |  |                |     | 



|(a) |  | During 2002, the losses recorded in this asset class were due to changes
in interest rates and certain trading for duration management purposes.
Treasury bonds are used in many portfolios as duration management tools
and for liquidity in the course of asset/liability portfolio management.                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The pressure to the IPP sector began in April of 2002. At July 31, 2002,
this issuers financial condition was in good standing. A decision was
made to reduce the portfolios overall exposure to this sector including
this issuer.                                                                                                                                   
|   
|(c) |  | The security had been previously impaired and continued to be held in
anticipation of proceeds from asset sales and liquidation of restaurant
holdings that did not materialize.                                                                                                                                                                                        
|   
|(d) |  | The issuer anticipated participating in proposed spectrum reallocation
that was being reviewed by the Federal Communications Commission. This
process was held up in the courts and took longer than expected. The
trades that generated the losses took place in the fourth quarter of 2002.
The sales were the result of a program to reduce exposures in this
sector.
|   
|(e) |  | Securities currently held have been impaired. These losses relate to
trades that took place prior to impairment to reduce issuer exposure and
securities with less desirable collateral.                                                                                                                                                                                

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|(f) |  | These losses were primarily attributable to the sale of fixed income and
convertible preferred securities. The bonds were sold in a rapidly
deteriorating market due to sector and issuer pressures.                                                                                                                                                                                                                         
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(g) |  | These losses were generated by positions primarily held in convertible
preferred stock holdings. The price decline reflects the pressures of the
issuer, sector and general equity market conditions.                                                                                                                                                                                                                        
|   
|(h) |  | A portion of these securities were sold to reduce the overall position in
the telecom sector. The issuer reported a deterioration of their
financial condition and lost the financial support of their parent. The
remaining securities held were impaired when new financial information was
revealed in 2002.                                                                                                              
|   
|(i) |  | The losses are related to the sale of securities on early news of alleged
fraud and improper accounting practices. The value of securities held
fell rapidly and were impaired prior to the issuer filing bankruptcy.                                                                                                                                                                                                        
|   
|(j) |  | The original holding was a private convertible preferred stock. The
issuer went public and all equity holders were required to convert to the
new common stock. At the time of the IPO, market conditions negatively
affected the transaction as originally planned. These losses reflect the
difference in the market value of the new common shares at the time of
issue and the basis of the original invested securities.
|   
|(k) |  | Losses realized were attributable to reducing exposure to the credit and
exchanging owned bonds for newly issued bonds with more desirable maturity
structures. Losses represent 3% of the consideration for bonds sold.                                                                                                                                                                                                     

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

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

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Realized investment losses included $890 million, $129 million and $72 million
of pretax impairment losses for the three years ended December 31, 2002, 2001
and 2000. The impairments recorded in 2002 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, 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.

For the year ended December 31, 2000, the impairment losses recorded related
primarily to corporate bonds and equities and were largely spread amongst the
consumer, financial, and communications industry sectors including $14 million
for Specialty Foods 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.

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 Consolidated Statements of
Operations.

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 years ended December 31, 2001 and 2000 totaled approximately $30 million
and $37 million. These businesses contributed approximately $11 million and $8
million of net losses in the years ended December 31, 2001 and 2000.

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 in the Consolidated Statements of Operations.

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

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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. In October, the sale was
approved in the United Kingdom by the Financial Services Authority (FSA) and by
the Illinois Insurance Department. This sale does not impact CNA Res on-going
U.S.-based operations.

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. The
final purchase price adjustments were prepared by Tawa and have been agreed to
by the Company. 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. 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 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. 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. As such, in the fourth quarter of 2002, the impairment
loss was reduced 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, $280 million and $605
million for the three years ended December 31, 2002, 2001 and 2000. CNA Re
U.K. had net losses of $22 million, $374 million and $158 million for the years
ended December 31, 2002, 2001 and 2000. 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.

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

|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |    |    |  
|---------------------------------- | -------------------------- | --------------------------------------------------------------- | ------ | ------------ | ------ | - | --- | ---- | -- | ------------ | ------ | ----- | ------ |  | --- | -- | -- | -
|Carrying Value of Investments      |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   |                            |                                                                 |        | December
31, |        |   |     |      |    | December
31, |        |       |        | 
|                                   |                            |                                                                 |        | 2002         |        | % |     | 2001 |    | %           
|                                   |                            |                                                                 |        |              |        |   |     |      |    |             
|(In millions)                      |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|General account investments:       |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   | Fixed maturity securities: |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |    |   
|                                   |                            | U.S. Treasury securities and obligations of government
agencies |        | $            | 1,376  |   |     |      | 4  | %            |        | $     | 5,081  |  |     |    | 14 | %
|                                   |                            | Asset-backed securities                                         |        |              | 8,208  |   |     |      | 23 |              |        |       | 7,723  |  |     |    | 22 |  
|                                   |                            | States, municipalities and political subdivisions  tax-exempt  |        |              | 5,074  |   |     |      | 14 |              |        |       | 2,720  |  |     |    | 8  |  
|                                   |                            | Corporate securities                                            |        |              | 7,591  |   |     |      | 22 |              |        |       | 9,587  |  |     |    | 27 |  
|                                   |                            | Other debt securities                                           |        |              | 3,827  |   |     |      | 11 |              |        |       | 3,816  |  |     |    | 11 |  
|                                   |                            | Redeemable preferred stock                                      |        |              | 69     |   |     |      |   |              |        |       | 48     |  |     |    |   |  
|                                   |                            | Options embedded in convertible debt securities                 |        |              | 130    |   |     |      |   |              |        |       | 189    |  |     |    |   |  
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   |                            | Total fixed maturity securities                                 |        |              | 26,275 |   |     |      | 74 |              |        |       | 29,164 |  |     |    | 82 |  
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   | Equity securities:         |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |    |   
|                                   |                            | Common stock                                                    |        |              | 461    |   |     |      | 1  |              |        |       | 996    |  |     |    | 3  |  
|                                   |                            | Non-redeemable preferred stock                                  |        |              | 205    |   |     |      | 1  |              |        |       | 342    |  |     |    | 1  |  
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   | Total equity securities    |                                                                 |        | 666          |        |   |     | 2    |    |              |        | 1,338 |        |  |     | 4  |   
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   |                            | Short term investments                                          |        |              | 7,008  |   |     |      | 20 |              |        |       | 3,740  |  |     |    | 10 |  
|                                   |                            | Limited partnerships                                            |        |              | 1,060  |   |     |      | 3  |              |        |       | 1,307  |  |     |    | 4  |  
|                                   |                            | Other investments                                               |        |              | 284    |   |     |      | 1  |              |        |       | 277    |  |     |    |   |  
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|Total general account investments  |                            | $                                                               | 35,293 |              |        |   | 100 | %    |    | $            | 35,826 |       |        |  | 100 | % 
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|Separate account investments:      |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   | Fixed maturity securities: |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |    |   
|                                   |                            | U.S. Treasury securities and obligations of government
agencies |        | $            | 166    |   |     |      | 5  | %            |        | $     | 244    |  |     |    | 6  | %
|                                   |                            | Asset-backed securities                                         |        |              | 869    |   |     |      | 28 |              |        |       | 1,022  |  |     |    | 27 |  
|                                   |                            | Corporate securities                                            |        |              | 812    |   |     |      | 26 |              |        |       | 925    |  |     |    | 25 |  
|                                   |                            | Other debt securities                                           |        |              | 165    |   |     |      | 5  |              |        |       | 156    |  |     |    | 4  |  
|                                   |                            | Redeemable preferred stock                                      |        |              | 2      |   |     |      |   |              |        |       |       |  |     |    |   |  
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   |                            | Total fixed maturity securities                                 |        |              | 2,014  |   |     |      | 64 |              |        |       | 2,347  |  |     |    | 62 |  
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   | Equity securities:         |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |    |   
|                                   |                            | Common stock                                                    |        |              | 112    |   |     |      | 4  |              |        |       | 149    |  |     |    | 4  |  
|                                   |                            | Non-redeemable preferred stock                                  |        |              | 6      |   |     |      |   |              |        |       | 12     |  |     |    |   |  
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   | Total equity securities    |                                                                 |        | 118          |        |   |     | 4    |    |              |        | 161   |        |  |     | 4  |   
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|                                   | Short term investments     |                                                                 |        | 276          |        |   |     | 9    |    |              |        | 394   |        |  |     | 11 |   
|                                   | Limited partnerships       |                                                                 |        | 327          |        |   |     | 10   |    |              |        | 342   |        |  |     | 9  |   
|                                   | Other investments          |                                                                 |        | 387          |        |   |     | 13   |    |              |        | 534   |        |  |     | 14 |   
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   
|Total separate account investments |                            | $                                                               | 3,122  |              |        |   | 100 | %    |    | $            | 3,778  |       |        |  | 100 | % 
|                                   |                            |                                                                 |        |              |        |   |     |      |    |              |        |       |        |  |     |   

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

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Investments in the general account had a total net unrealized gain of $887
million at December 31, 2002 compared with $345 million at December 31, 2001.
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. The unrealized position at December 31, 2001 was composed of
a net unrealized gain of $194 million for fixed maturities, a net unrealized
gain of $170 million for equity securities and a net unrealized loss of $19
million for short term securities.

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

|                                                                  |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |     |  
|----------------------------------------------------------------- | --------------------------------------------------------------- | - | --------- | ----- | ---------- | - | ---------- | --- | ----------- | - | --- | --- |  | - | --- | --- | -
|Unrealized Gains (Losses) on Fixed Maturity and Equity Securities |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |     |  
|                                                                  |                                                                 |   | Cost or   |       | Gross      |   | Gross      |     | Net        
|                                                                  |                                                                 |   | Amortized |       | Unrealized |   | Unrealized |     | Unrealized 
|                                                                  |                                                                 |   | Cost      |       | Gains      |   | Losses     |     | Gain/(Loss)
|December 31, 2001                                                 |                                                                 |   |           |       |            |   |            |    
|(In millions)                                                     |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |    
|Fixed maturity securities:                                        |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |    
|                                                                  | U.S. Treasury securities and obligations of government
agencies |   | $         | 5,002 |            |   | $          | 109 |             |   | $   | 30  |  |   | $   | 79  |  
|                                                                  | Asset-backed securities                                         |   |           | 7,603 |            |   |            | 139 |             |   |     | 19  |  |   |     | 120 |  
|                                                                  | States, municipalities and political subdivisions  tax-exempt  |   |           | 2,748 |            |   |            | 19  |             |   |     | 47  |  |   |     | (28 | )
|                                                                  | Corporate securities                                            |   |           | 9,569 |            |   |            | 247 |             |   |     | 229 |  |   |     | 18  |  
|                                                                  | Other debt securities                                           |   |           | 3,811 |            |   |            | 152 |             |   |     | 147 |  |   |     | 5   |  
|                                                                  | Redeemable preferred stocks                                     |   |           | 48    |            |   |            | 1   |             |   |     | 1   |  |   |     |    |  
|                                                                  | Options embedded in convertible debt securities                 |   |           | 189   |            |   |            |    |             |   |     |    |  |   |     |    |  
|                                                                  |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |    
|Total fixed maturity securities                                   |                                                                 |   | 28,970    |       |            |   | 667        |     |             |   | 473 |     |  |   | 194 |    
|                                                                  |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |    
|Equity securities:                                                |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |    
|                                                                  | Common stock                                                    |   |           | 820   |            |   |            | 326 |             |   |     | 150 |  |   |     | 176 |  
|                                                                  | Non-redeemable preferred stock                                  |   |           | 348   |            |   |            | 17  |             |   |     | 23  |  |   |     | (6  | )
|                                                                  |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |    
|Total equity securities                                           |                                                                 |   | 1,168     |       |            |   | 343        |     |             |   | 173 |     |  |   | 170 |    
|                                                                  |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |    
|Total fixed maturity and equity securities                        |                                                                 | $ | 30,138    |       |            | $ | 1,010      |     |             | $ | 646 |     |  | $ | 364 |    
|                                                                  |                                                                 |   |           |       |            |   |            |     |             |   |     |     |  |   |     |    

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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, 2002 the carrying value of the general account fixed maturities
was $26,275 million, representing 74% of the total investment portfolio. The
net unrealized gain of this fixed maturity portfolio was $742 million,
comprising gross unrealized gains of $1,377 million and gross unrealized losses
of $635 million. The gross unrealized losses were primarily in corporate bonds
with the largest industry sectors being utilities, communications and
consumer-cyclical, which as a percentage of total gross unrealized losses were
23%, 17% and 16%. Gross unrealized losses in any single issuer did not exceed
0.2% 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, 2002 in relation to the total of all fixed
maturity securities with an unrealized loss by contractual maturities.

Contractual Maturity

|                                       |  |  |    |       |  |            |     |            |  |  |     |  
|-------------------------------------- |  |  | -- | ----- |  | ---------- | --- | ---------- |  |  | --- | -
|                                       |  |  |    |       |  | Percent of |     | Percent of
|                                       |  |  |    |       |  | Market     |     | Unrealized
|                                       |  |  |    |       |  | Value      |     | Loss      
|                                       |  |  |    |       |  |            |     |           
|Due in one year or less                |  |  | 3  | %     |  |            | 2   | %         
|Due after one year through five years  |  |  | 18 |       |  |            | 14  |           
|Due after five years through ten years |  |  | 28 |       |  |            | 39  |           
|Due after ten years                    |  |  | 45 |       |  |            | 43  |           
|Asset-backed securities                |  |  | 6  |       |  |            | 2   |           
|                                       |  |  |    |       |  |            |     |           
|                                       |  |  |    | Total |  |            | 100 | %          |  |  | 100 | %
|                                       |  |  |    |       |  |            |     |           

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

Unrealized Loss Aging

|                                           |                            |                        |       |                   |       |            |     |       |     | 
|------------------------------------------ | -------------------------- | ---------------------- | ----- | ----------------- | ----- | ---------- | --- | ----- | --- | 
|                                           |                            |                        |       | December 31, 2002
|                                           |                            |                        |       |                  
|                                           |                            |                        |       |                   |       |            |     | Gross
|                                           |                            |                        |       | Estimated         |       | Unrealized
|                                           |                            |                        |       | Fair Value        |       | Loss      
|                                           |                            |                        |       |                   |       |           
|(In millions)                              |                            |                        |       |                   |       |            |     |      
|Fixed maturity securities:                 |                            |                        |       |                   |       |            |     |      
|                                           | Investment grade:          |                        |       |                   |       |            |     |       |    
|                                           |                            | 0-6 months             |       | $                 | 2,632 |            |     | $     | 100 | 
|                                           |                            | 7-12 months            |       |                   | 361   |            |     |       | 30  | 
|                                           |                            | 13-24 months           |       |                   | 163   |            |     |       | 21  | 
|                                           |                            | Greater than 24 months |       |                   | 172   |            |     |       | 20  | 
|                                           |                            |                        |       |                   |       |            |     |      
|                                           | Total investment grade     |                        |       | 3,328             |       |            |     | 171   |    
|                                           |                            |                        |       |                   |       |            |     |      
|                                           | Non-investment grade:      |                        |       |                   |       |            |     |       |    
|                                           |                            | 0-6 months             |       |                   | 892   |            |     |       | 119 | 
|                                           |                            | 7-12 months            |       |                   | 473   |            |     |       | 115 | 
|                                           |                            | 13-24 months           |       |                   | 458   |            |     |       | 157 | 
|                                           |                            | Greater than 24 months |       |                   | 169   |            |     |       | 73  | 
|                                           |                            |                        |       |                   |       |            |     |      
|                                           | Total non-investment grade |                        |       | 1,992             |       |            |     | 464   |    
|                                           |                            |                        |       |                   |       |            |     |      
|Total fixed maturity securities            |                            |                        | 5,320 |                   |       |            | 635 |      
|                                           |                            |                        |       |                   |       |            |     |      
|Equity securities:                         |                            |                        |       |                   |       |            |     |      
|                                           | 0-6 months                 |                        |       | 119               |       |            |     | 13    |    
|                                           | 7-12 months                |                        |       | 79                |       |            |     | 9     |    
|                                           | 13-24 months               |                        |       | 4                 |       |            |     |      |    
|                                           | Greater than 24 months     |                        |       | 4                 |       |            |     |      |    
|                                           |                            |                        |       |                   |       |            |     |      
|Total equity securities                    |                            |                        | 206   |                   |       |            | 22  |      
|                                           |                            |                        |       |                   |       |            |     |      
|Total fixed maturity and equity securities |                            | $                      | 5,526 |                   |       | $          | 657 |      
|                                           |                            |                        |       |                   |       |            |     |      

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The Companys non-investment grade fixed maturity securities held as of
December 31, 2002 that were in an unrealized loss position had a fair value of
approximately $2 billion. 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, 2002.

Unrealized Loss Aging for Non-investment Grade Securities

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

The non-investment grade securities that were in an unrealized loss severity of
less than 70% for longer than six months as of December 31, 2002 primarily
consisted of securities in the utilities, communication and transportation
sectors representing 35%, 21% and 17% of the gross unrealized loss. The
non-investment grade securities that were in an unrealized loss severity of
less than 70% for greater than 24 months as of December 31, 2002 primarily
consisted of securities in the communications and transportation sector
representing 40% and 34% of the unrealized loss. Unrealized losses in
the communication sector are predominately attributable to a European leader in
telecommunication services. The unrealized losses on securities held in the
transportation sector are primarily comprised of debt issued from a major
domestic airline.

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, 2002. 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.

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The Companys equity securities held as of December 31, 2002 that were in an
unrealized loss position had a fair value of $206 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.

The general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 89% and 92% of which were rated as investment grade at December
31, 2002 and 2001. The following table summarizes the ratings of CNAs general
account bond portfolio at carrying value.

|                                                 |  |      |        |   |  |      |     |   |  |   |        |  |  |  |     |  
|------------------------------------------------ |  | ---- | ------ | - |  | ---- | --- | - |  | - | ------ |  |  |  | --- | -
|General Account Bond Ratings                     |  |      |        |   |  |      |     |   |  |   |        |  |  |  |     |  
|                                                
|                                                 |  | 2002 |        | % |  | 2001 |     | %
|December 31                                      |  |      |        |   |  |      |     |  
|(In millions)                                    |  |      |        |   |  |      |     |   |  |   |        |  |  |  |     |  
|U.S. Government and affiliated agency securities |  | $    | 1,908  |   |  |      | 7   | % |  | $ | 5,715  |  |  |  | 20  | %
|Other AAA rated                                  |  |      | 10,856 |   |  |      | 41  |   |  |   | 9,204  |  |  |  | 32  |  
|AA and A rated                                   |  |      | 5,730  |   |  |      | 22  |   |  |   | 6,127  |  |  |  | 21  |  
|BBB rated                                        |  |      | 4,930  |   |  |      | 19  |   |  |   | 5,583  |  |  |  | 19  |  
|Non investment-grade                             |  |      | 2,782  |   |  |      | 11  |   |  |   | 2,487  |  |  |  | 8   |  
|                                                 |  |      |        |   |  |      |     |   |  |   |        |  |  |  |     |  
|Total                                            |  | $    | 26,206 |   |  |      | 100 | % |  | $ | 29,116 |  |  |  | 100 | %
|                                                 |  |      |        |   |  |      |     |   |  |   |        |  |  |  |     |  

At December 31, 2002 and 2001, 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.

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                    |  |      |       |   |  |      |     |   |  |   |       |  |  |  |     |  
|                                                
|                                                 |  | 2002 |       | % |  | 2001 |     | %
|December 31                                      |  |      |       |   |  |      |     |  
|(In millions)                                    |  |      |       |   |  |      |     |   |  |   |       |  |  |  |     |  
|U.S. Government and affiliated agency securities |  | $    | 161   |   |  |      | 9   | % |  | $ | 214   |  |  |  | 10  | %
|Other AAA rated                                  |  |      | 898   |   |  |      | 48  |   |  |   | 1,017 |  |  |  | 50  |  
|AA and A rated                                   |  |      | 327   |   |  |      | 18  |   |  |   | 310   |  |  |  | 15  |  
|BBB rated                                        |  |      | 414   |   |  |      | 22  |   |  |   | 421   |  |  |  | 21  |  
|Non investment-grade                             |  |      | 68    |   |  |      | 3   |   |  |   | 77    |  |  |  | 4   |  
|                                                 |  |      |       |   |  |      |     |   |  |   |       |  |  |  |     |  
|Total                                            |  | $    | 1,868 |   |  |      | 100 | % |  | $ | 2,039 |  |  |  | 100 | %
|                                                 |  |      |       |   |  |      |     |   |  |   |       |  |  |  |     |  

At December 31, 2002 and 2001, more than 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

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

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

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

|                             |  |      |       |      |  |   |       | 
|---------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|Short term Investments       |  |      |       |      |  |   |       | 
|                            
|                             |  | 2002 |       | 2001
|December 31                  |  |      |       |     
|(In millions)                |  |      |       |      |  |   |       | 
|Commercial paper             |  | $    | 1,141 |      |  | $ | 1,194 | 
|U.S. Treasury securities     |  |      | 2,756 |      |  |   | 175   | 
|Money market funds           |  |      | 2,161 |      |  |   | 1,641 | 
|Other                        |  |      | 950   |      |  |   | 730   | 
|                             |  |      |       |      |  |   |       | 
|Total short term investments |  | $    | 7,008 |      |  | $ | 3,740 | 
|                             |  |      |       |      |  |   |       | 

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 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

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, 2002, net cash provided by operating activities
was $1,040 million as compared with net cash used in operating activities 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.

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For the year ended December 31, 2001, net cash used for operating activities
was $599 million as compared with net cash used of $1,345 million in 2000. The
improvement related primarily to decreased paid claims.

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

For the year ended December 31, 2002, net cash used for investing activities
was $1,488 million as compared with $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.

For the year ended December 31, 2001, net cash used for investing activities
was $205 million as compared with net cash inflows of $1,842 million in 2000.
Cash flows for investing activities were related principally to increased net
purchases of invested assets related to investing $1 billion of proceeds from
the common stock rights offering completed in the third quarter of 2001.

Cash flows from financing activities include proceeds from the issuance of debt
or equity securities, outflows for dividends or repayment of debt and outlays
to reacquire equity instruments. For the year ended December 31, 2002, net
cash provided from financing activities was $432 million as compared with $783
million in 2001.

For the year ended December 31, 2001, net cash provided from financing
activities was $783 million as compared with $487 million of net cash used in
2000.

On December 19, 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Preferred Issue), to Loews.
The terms of the Preferred Issue were approved by a special committee of
independent members of CNAFs Board of Directors.

The Preferred Issue 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 ratings levels of the financial strength rating of
CCC from its current rating by any of A.M. Best, S&P or Moodys 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 Preferred Issue unless and until one
of the two triggering events described above has occurred. Beginning with the
quarter following an increase of one intermediate ratings level in CCCs
financial strength rating, however, current (but not accrued cumulative)
quarterly dividends can be paid.

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

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upon the mutual agreement of CNAF and a majority of the stockholders of
the preferred stock. The Preferred Issue is exempt from registration under
Section 4(2) of the Securities Act of 1933.

Of the proceeds of the Preferred 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. It is expected that the remaining proceeds will
be used to repay other debt of CNAF and The Continental Corporation
(Continental), a controlled subsidiary, maturing in 2003 and used 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 connection with the
rights offering for $957 million, and an additional 0.8 million shares in the
open market, increasing its ownership percentage of CNA to 88.8%.
Additionally, CNAF borrowed $500 million against its bank credit facility.
Partially offsetting these cash inflows were reductions to the Companys
commercial paper borrowings of $627 million.

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 March 14, 2003, the Company has
paid $488 million in claims and recovered $237 million from reinsurers.

CNAs estimated gross pretax losses for the WTC event 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%,
73% and 20% 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.

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Debt is composed of the following obligations.

|                                                              |                                                        |   |       |     |      |   |       |     | 
|------------------------------------------------------------- | ------------------------------------------------------ | - | ----- | --- | ---- | - | ----- | --- | 
|Debt                                                          |                                                        |   |       |     |      |   |       |    
|                                                             
|                                                              |                                                        |   | 2002  |     | 2001
|December 31                                                   |                                                        |   |       |    
|(In millions)                                                 |                                                        |   |       |     |      |   |       |    
|Variable rate debt:                                           |                                                        |   |       |     |      |   |       |    
|                                                              | Credit facility  CNAF, due April 29, 2002             |   | $     |    |      |   | $     | 250 | 
|                                                              | Credit facility  CNAF, due April 30, 2004             |   |       | 250 |      |   |       | 250 | 
|                                                              | Credit facility  CNA Surety, due September 30, 2002   |   |       |    |      |   |       | 75  | 
|                                                              | Credit facility  CNA Surety, due September 30, 2003   |   |       | 30  |      |   |       |    | 
|                                                              | Term loan  CNA Surety, due through September 30, 2005 |   |       | 30  |      |   |       |    | 
|Senior notes:                                                 |                                                        |   |       |     |      |   |       |    
|                                                              | 7.250%, face amount of $128, due March 1, 2003         |   |       | 128 |      |   |       | 133 | 
|                                                              | 6.250%, face amount of $248, due November 15, 2003     |   |       | 248 |      |   |       | 250 | 
|                                                              | 6.500%, face amount of $493, due April 15, 2005        |   |       | 491 |      |   |       | 491 | 
|                                                              | 6.750%, face amount of $250, due November 15, 2006     |   |       | 249 |      |   |       | 249 | 
|                                                              | 6.450%, face amount of $150, due January 15, 2008      |   |       | 149 |      |   |       | 149 | 
|                                                              | 6.600%, face amount of $200, due December 15, 2008     |   |       | 199 |      |   |       | 199 | 
|                                                              | 8.375%, face amount of $70, due August 15, 2012        |   |       | 69  |      |   |       | 68  | 
|                                                              | 6.950%, face amount of $150, due January 15, 2018      |   |       | 148 |      |   |       | 148 | 
|Debenture, 7.250%, face amount of $243, due November 15, 2023 |                                                        |   | 240   |     |      |   | 240   |    
|Capital leases, 8.000%-13.700%, due through December 31, 2011 |                                                        |   | 36    |     |      |   | 38    |    
|Other debt, 1.000%-6.600%, due through 2019                   |                                                        |   | 25    |     |      |   | 27    |    
|                                                              |                                                        |   |       |     |      |   |       |    
|Total debt                                                    |                                                        | $ | 2,292 |     |      | $ | 2,567 |    
|                                                              |                                                        |   |       |     |      |   |       |    
|Short term debt                                               |                                                        | $ | 420   |     |      | $ | 329   |    
|Long term debt                                                |                                                        |   | 1,872 |     |      |   | 2,238 |    
|                                                              |                                                        |   |       |     |      |   |       |    
|Total debt                                                    |                                                        | $ | 2,292 |     |      | $ | 2,567 |    
|                                                              |                                                        |   |       |     |      |   |       |    

The combined aggregate maturities for debt at December 31, 2002 are presented
in the following table.

|                             |  |   |       |  
|---------------------------- |  | - | ----- | -
|Maturity of Debt             |  |   |       |  
|                             |  |   |      
|(In millions)                |  |   |       |  
|2003                         |  | $ | 420   |  
|2004                         |  |   | 264   |  
|2005                         |  |   | 506   |  
|2006                         |  |   | 254   |  
|2007                         |  |   | 12    |  
|Thereafter                   |  |   | 846   |  
|Less original issue discount |  |   | (10   | )
|                             |  |   |       |  
|Total                        |  | $ | 2,292 |  
|                             |  |   |       |  

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

The Company has a $250 million three-year bank credit facility with an April
30, 2004 expiration date. The Company previously had a $250 million 364-day
facility with an expiration date of April 29, 2002. An option to convert the
364-day facility to a one-year term loan was exercised in April of 2002. The
term loan was subsequently prepaid on December 23, 2002.

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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,
2002, the facility fee on the three-year component was 17.5 basis points.

The Company pays interest on any outstanding debt/borrowings under the
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 57.5 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, 2002 and 2001, the weighted-average interest rate on the
borrowings under the facility, including facility fees and utilization fees,
was 2.3% and 3.1%.

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

On September 30, 2002, CNA Surety, a 64% owned and consolidated subsidiary of
CNA, entered into a $65 million credit agreement with one bank, which consisted
of a $35 million 364-day revolving credit facility and a $30 million three-year
term loan, payable semi-annually at a rate of $5 million. The credit agreement
replaced a $130 million five-year revolving credit facility that terminated
September 30, 2002. The new revolving credit facility was fully utilized at
inception.

The terms of the new credit facility agreement required the assumption by a
second bank of $15 million of the credit risk by November 30, 2002 or CNA
Surety would be required to repay $15 million to reduce the amount of the
credit facility commitment from $35 million to $20 million. On November 29,
2002, CNA Surety repaid $11 million of the outstanding borrowings and arranged
for the due date on the remaining $4 million to be delayed to March 31, 2003.
A second bank subsequently assumed $10 million of the credit risk resulting in
an additional $6 million of outstanding borrowings, leaving the credit facility
commitment at $30 million. As of December 31, 2002, the revolving credit
facility was fully utilized.

Under the new credit facility agreement, CNA Surety pays a facility fee of 12.5
basis points, interest at LIBOR plus 45.0 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, 2002, the weighted-average interest rate on the
$60 million of outstanding borrowings under the credit agreement, including
facility fees and utilization fees was 2.0%.

Under the former credit facility agreement, CNA Surety paid interest on
outstanding borrowings based on, among other rates, LIBOR plus the applicable
margin. The applicable margin was determined by the companys leverage ratio
(debt to total capitalization). At the termination date of the old facility,
the applicable margin was 30.0 basis points, including the 10.0 basis point
facility fee. At December 31, 2001, the weighted-average interest rate on the
borrowings under the facility, including facility fees, was 2.6%.

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

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levels. At December 31, 2002 and 2001, CNAF and CNA
Surety were in compliance with all restrictive debt covenants.

In December of 2002 and January of 2003, CNAF provided loans in an aggregate
amount of approximately $45 million to a large national contractor that
undertakes projects for the construction of government and private facilities.
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 loans are evidenced by demand notes and currently accrue interest at 10%
until replaced by the credit facility described below. The contractor and
certain of its affiliates have pledged to CNAF substantially all of their
assets as collateral for these loans.

In March of 2003, CNAF entered into an agreement with the contractor to provide
an $86.4 million credit facility, which amount includes the already advanced
$45 million described above. The credit facility and all loans under it will
mature in March of 2006. Advances under the credit facility, including the
already funded $45 million, 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 new credit facility, on a dollar-for-dollar basis, up to
a maximum of $25 million. Although Loews does
not have rights against the contractor directly under the participation
agreement, it shares recoveries and certain fees under the facility
proportionally with CNAF.

In March of 2003, CNAF also purchased the contractors outstanding bank debt for
$16.4 million. Under the new credit facility, the contractor agreed to
purchase from CNAF and retire the bank debt for $16.4 million, 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 approximately $6.5 million in outstanding letters of credit
issued by the banks for the contractors benefit that expire between May and
August of 2003. 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.

The contractor has initiated a restructuring plan that is intended to reduce
costs and improve cash flow, and a chief restructuring officer has been
appointed to manage execution of the plan. CNAF, through its affiliate CNA
Surety, intends to continue to provide surety bonds on behalf of the contractor
during this restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards. Any losses arising
from bonds issued or assumed by the insurance subsidiaries of CNA Surety to the
contractor are excluded from CNA Suretys $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
December 31, 2002 has been limited to $20 million per bond.

Indemnification and subrogation rights, including rights to contract proceeds
on construction projects in the event of default, exist that reduce CNA
Suretys and ultimately the Companys exposure to loss. While CNAF believes
that the contractors restructuring efforts may be successful and provide
sufficient cash flow for its operations and repayment of its borrowings under
the credit facility, 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 future results of operations. If such failures occur, the Company
estimates the surety loss, net of indemnification and subrogation recoveries,
but before the effects of corporate aggregate reinsurance treaties, if any, and
minority interest could be up to $200 million.

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, 2002 and 2001 there were approximately $222 million
and $270 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 remit prompt payment on the
letters of credit in question if the primary obligor drew down on these letters
of credit and failed to repay such loans in accordance with the terms of the
letters of credit. The maximum potential amount of future payments that CNA
could be required to pay under these guarantees are approximately $30 million
at December 31, 2002.

As of December 31, 2002 and 2001, the Company had committed approximately $141
million and $152 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, 2002 to future capital calls from certain of its
unconsolidated affiliates in exchange for an ownership interest in such
affiliates.

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

As of December 31, 2002, the Company is obligated to make future payments
totaling $394 million for non-cancelable operating leases expiring from 2003
through 2014 primarily for office space and data processing, office and
transportation equipment. Estimated future minimum payments under these
contracts are as follows: $79 million in 2003; $61 million in 2004; $56
million in 2005; $45 million in 2006; and $153 million in 2007 and beyond.
Additionally, the Company has entered into a limited number of guaranteed
payment contracts, primarily relating to telecommunication services, amounting
to approximately $24 million. Estimated future minimum purchases under these
contracts are as follows: $13 million in 2003; $9 million in 2004; and $2
million in 2005.

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In certain circumstances CNA provides guarantees of the indebtedness of certain
of its independent insurance producers, which expire in 2003. The Company
would be required to remit prompt and complete payment when due, should the
primary obligor default. In the event of default on the part of the primary
obligor, the Company 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 are approximately $7
million at December 31, 2002.

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 the Company could be
required to pay under these guarantees are approximately $8 million at December
31, 2002.

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,
2002 that the Company could be required to pay under this guarantee is
approximately $333 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 has recorded a liability of approximately $10 million for its share
of estimated future operating deficits of this joint venture through 2016.

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

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The table below reflects ratings issued by A.M. Best, S&P, Moodys and Fitch as
of February 24, 2003 for the CCC Pool, the CIC Pool, Continental Assurance
Corporation (CAC) Pool and CNA Group Life Assurance Company (CNAGLA). Also
rated were CNAFs senior debt and Continental senior debt.

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



|  |  | NR = Not Rated                                                                                               
|- |  | -------------------------------------------------------------------------------------------------------------
| 
|  |  | All rating outlooks on the above ratings are stable unless otherwise noted.                                  
| 
|* |  | CAC and Valley Forge Life Insurance Company (VFL) are rated separately by
Moodys and both have an A2 rating.

During the fourth quarter of 2002, A.M. Best and Fitch affirmed the existing
financial strength ratings of each of the insurance pools and the debt ratings
of CNAF, as noted in the above table.

In February of 2003, S&P affirmed the ratings of the property and casualty
pools, CCC and CIC, and downgraded the life pool, CAC, by one notch from A+ to
A. S&P cited that the downgrade of the life operations was primarily because
S&P wanted to bring the ratings on all the companies in the group closer
together and because the companies business profile has changed over the past
two years.

Corporate bonds comprise a significant portion of the Companys investment
portfolio. The Company regularly reviews the market value of these securities,
and challenges whether an other-than-temporary decline in value has occurred
for securities that are trading below cost (see Investments section of MD&A).
In light of the current volatility in the financial markets and the dramatic
impact that several recent accounting scandals have had on specific issuers,
the Company may be subject to future impairment losses that could materially
adversely impact its results of operations. Any future impairment losses would
not have a material impact on the Companys overall equity. See the discussion
of CNAs impairment committee in the investment section of the MD&A.

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 Department,
may be paid only from earned surplus, which is calculated by removing
unrealized gains from unassigned surplus. As of December 31, 2002, CCCs
earned surplus is in a positive position, thereby enabling CCC to pay
approximately $1,069 million of dividend payments during 2003 that would not be
subject to the Departments prior approval. The actual level of dividends paid
in any year is determined after an assessment

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of available dividend capacity,
holding company liquidity and cash needs as well as the impact the dividends
will have on the statutory surplus of the applicable insurance company.

CCCs positive earned surplus at December 31, 2002 is contrasted to its
negative earned surplus position at December 31, 2001. Prompted, in part, by
the negative earned surplus position at December 31, 2001, the Company embarked
on a capital realignment initiative within the CCC intercompany reinsurance
pool (Pool) during 2002, the benefits of which included the restoration of
CCCs earned surplus to a positive position. This initiative involved the
payment of dividends to CCC from its insurance subsidiaries during the fourth
quarter of 2002. As a result of this distribution of the cumulative earnings
of CCCs insurance subsidiaries, CCCs earned surplus was restored to a
positive level at December 31, 2002, approximating $1,069 million.

This initiative involved a change to the underwriting structure of CCC and
eight of its subsidiaries from the Pool structure to a structure in which CCC
assumes 100% of the net underwriting risks of the group of companies formerly
comprising the pool. This is the Companys first step in a multi-year project
to reduce duplicative legal entities, thereby facilitating more efficient
operations and cost savings.

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

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, 2002
and 2001, all of CNAs domestic insurance subsidiaries exceeded the minimum
risk-based capital requirements.

Accounting Pronouncements

In September of 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (SFAS 140). SFAS 140 supercedes SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures. The adoption of SFAS 140 on March 31, 2001 did
not have a significant impact on the results of operations or equity of the
Company.

Effective January 1, 2001, the Company accounts for derivatives and hedging
activities in accordance with SFAS 133. 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

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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.

On April 1, 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
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 Statement of Financial Accounting Standards
No. 141, Business Combinations (SFAS 141). SFAS 141 requires companies to use
the purchase method of accounting for business combinations initiated after
June 30, 2001 and prohibits the use of the pooling-of-interests method of
accounting. CNA has adopted this standard for all business combinations
initiated subsequent to June 30, 2001. The adoption of SFAS 141 did not have a
significant impact on the results of operations or equity of the Company.

On January 1, 2002, CNA adopted SFAS 142. 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 income for the year ended December 31, 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 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 primarily consists 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 will be reported in operating results.

In October of 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144). SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121).
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 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 Statement of Financial Accounting Standards
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 supercedes Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for

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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
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 FASB
Statement of Financial Accounting Standards No. 5, Accounting for Contingencies
(SFAS 5) relating to a guarantors accounting for, and disclosure of, the
issuance of certain types of guarantees. FIN 45 provides for additional
disclosure requirements related to guarantees, which 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.
CNA has implemented the disclosure requirements of FIN 45 and will adopt the
provisions for initial recognition and measurement for all guarantees issued or
modified after December 31, 2002. The initial adoption for the recognition and
measurement requirements of FIN 45 is not expected to have a significant impact
on the results of operations or equity of the Company.

In December of 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation, Transition and
Disclosure (SFAS 148). SFAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS 148 also amends the disclosure requirements of
SFAS 123, Accounting for Stock-Based Compensation,to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. CNA has adopted this standard beginning with the
2002 annual financial statements and will implement the disclosure requirements
in all subsequent annual and interim financial statements. The Company has not
determined if it will 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 Accounting Research
Bulletin No. 51 (ARB 51) (FIN 46). As a general rule, ownership by the parent,
either directly or indirectly, of over 50% of the outstanding voting shares of
a subsidiary is a condition requiring the preparation of consolidated financial
statements of the parent and its subsidiary. FIN 46 clarifies the exceptions
to this general rule, as enunciated in paragraph two of ARB 51. FIN 46
requires an entity to consolidate a variable interest entity (VIE) even though
the entity does not, either directly or indirectly, own over 50% of the
outstanding voting shares.

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

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

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 for asbestos, environmental pollution and
mass tort claims; the Companys expectations
concerning its revenues, earnings, expenses and investment activities; expected
cost savings and other results from the Companys restructuring activities; and
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 and restrictions upon the Company;                                                                                                                                                                                                                                                                         
| 
| |  | the impact of competitive products, policies and pricing and the competitive environment in which the Company operates,
including changes in the Companys books of business;                                                                                                                                                     
| 
| |  | product and policy availability and demand and market responses, including the level of ability to obtain rate increases
and decline or non-renew underpriced accounts, to achieve premium targets and profitability and to realize growth and
retention estimates;                                                               
| 
| |  | development of claims and the impact on loss reserves, including changes in claim settlement practices;                                                                                                                                                                                                                           
| 
| |  | the effectiveness of current initiatives by claims management to reduce loss and expense ratio through more efficacious
claims handling techniques;                                                                                                                                                                               

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| |  | the performance of reinsurance companies under reinsurance contracts with the Company;                                                                                                                                 
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | results of financing efforts, including the availability of bank credit facilities;                                                                                                                                    
| 
| |  | changes in the Companys composition of operating segments;                                                                                                                                                            
| 
| |  | weather and other natural physical events, including the severity and frequency of storms, hail, snowfall and other winter
conditions, as well as of natural disasters such as hurricanes and earthquakes;             
| 
| |  | man-made disasters, including the possible occurrence of terrorist attacks and the effect of the absence of applicable
terrorism legislation on coverages;                                                             
| 
| |  | the occurrence of epidemics;                                                                                                                                                                                           
| 
| |  | exposure to liabilities due to claims made by insureds and others relating to asbestos remediation and health-based
asbestos impairments, and exposure to liabilities for environmental pollution and mass tort claims;
| 
| |  | the sufficiency of the Companys loss reserves and the possibility of future increases in reserves;                                                                                                                    
| 
| |  | the level of success in integrating acquired businesses and operations, and in consolidating existing ones;                                                                                                            
| 
| |  | the possibility of changes in the Companys ratings by ratings agencies and changes in rating agency policies and
practices; and                                                                                       
| 
| |  | the actual closing of contemplated transactions and agreements.                                                                                                                                                        

Any forward-looking statements made in this 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 market value at risk
and the resulting effect on stockholders equity. The analysis presents the
sensitivity of the market value of the Companys financial instruments to
selected changes in market rates and prices. The range of change chosen
reflects the Companys view of changes that are reasonably possible over a
one-year period. The selection of the range of values chosen to represent
changes in interest rates should not be construed as the Companys prediction
of future market events, but rather an illustration of the impact of such
events.

The sensitivity analysis estimates the decline in the market value of the
Companys interest sensitive assets and liabilities that were held on December
31, 2002 and December 31, 2001 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, 2002 and December 31, 2001, with all other variables
held constant.

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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, 2002 and December 31,
2001 with all other variables held constant. The Companys equity holdings
were assumed to be highly and positively correlated with the Index. At
December 31, 2002, a 10% and 25% decrease in the Index would result in a $234
million and $585 million decrease compared to $366 million and $914 million
decrease at December 31, 2001, in the market value of the Companys equity
investments.

Of these amounts, under the 10% and 25% scenarios, $113 million and $284
million at December 31, 2002 and $163 million and $407 million at December 31,
2001 pertained to decreases in the market value of the separate account
investments. These decreases would substantially be offset by decreases in
related separate account liabilities to customers. Similarly, increases in the
market value of the separate account equity investments would also be offset by
increases in the same related separate account liabilities by the same
approximate amounts.

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

Market Risk Scenario 1

|                                                      |                             |                         |        |        |        |           |        |                     |        |        |     |     |     |   |      |     |      |  
|----------------------------------------------------- | --------------------------- | ----------------------- | ------ | ------ | ------ | --------- | ------ | ------------------- | ------ | ------ | --- | --- | --- | - | ---- | --- | ---- | -
|                                                      |                             |                         |        |        |        |           |        | Increase (Decrease)
|                                                      |                             |                         |        |        |        |           |        |                    
|                                                      |                             |                         |        | Market |        | Interest  |        | Currency            |        | Equity
|                                                      |                             |                         |        | Value  |        | Rate Risk |        | Risk                |        | Risk  
|December 31, 2002                                     |                             |                         |        |        |        |           |        |                    
|(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    | )                   |        | $      |    |     |     | $ |     |    
|                                                      |                             |                         |        |        |        |           |        |                     |        |        |     |     |     |   |      |    

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Market Risk Scenario 1

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

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

Market Risk Scenario 2

|                                                      |                             |                         |        |        |        |           |        |                     |        |        |      |     |      |   |      |      |      |  
|----------------------------------------------------- | --------------------------- | ----------------------- | ------ | ------ | ------ | --------- | ------ | ------------------- | ------ | ------ | ---- | --- | ---- | - | ---- | ---- | ---- | -
|                                                      |                             |                         |        |        |        |           |        | Increase (Decrease)
|                                                      |                             |                         |        |        |        |           |        |                    
|                                                      |                             |                         |        | Market |        | Interest  |        | Currency            |        | Equity
|                                                      |                             |                         |        | Value  |        | Rate Risk |        | Risk                |        | Risk  
|December 31, 2002                                     |                             |                         |        |        |        |           |        |                    
|(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   | )                   |        | $      |     |     |      | $ |     |     
|                                                      |                             |                         |        |        |        |           |        |                     |        |        |      |     |      |   |      |     

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Market Risk Scenario 2

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CNA Financial Corporation
Consolidated Balance Sheets

|                                                                                   |                                                                                                        |   |        |        |      |              |        |        | 
|---------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | - | ------ | ------ | ---- | ------------ | ------ | ------ | 
|                                                                                   |                                                                                                        |   | 2002   |        | 2001
|December 31                                                                        |                                                                                                        |   |        |       
|(In millions, except share data)                                                   |                                                                                                        |   |        |        |      | Restated (a)
|Assets                                                                             |                                                                                                        |   |        |        |      |              |        |       
|Investments:                                                                       |                                                                                                        |   |        |        |      |              |        |       
|                                                                                   | Fixed maturity securities available-for-sale, at market value, (amortized cost
of $25,533 and $28,970) |   | $      | 26,275 |      |              | $      | 29,164 | 
|                                                                                   | Equity securities available-for-sale, at market value, (cost of $519 and $1,168)                       |   |        | 666    |      |              |        | 1,338  | 
|                                                                                   | Mortgage loans and real estate (less accumulated depreciation of $55 and $1)                           |   |        | 57     |      |              |        | 35     | 
|                                                                                   | Policy loans                                                                                           |   |        | 180    |      |              |        | 194    | 
|                                                                                   | Limited partnership investments                                                                        |   |        | 1,060  |      |              |        | 1,307  | 
|                                                                                   | Other invested assets                                                                                  |   |        | 47     |      |              |        | 48     | 
|                                                                                   | Short term investments, cost approximates market value                                                 |   |        | 7,008  |      |              |        | 3,740  | 
|                                                                                   |                                                                                                        |   |        |        |      |              |        |       
|Total investments                                                                  |                                                                                                        |   | 35,293 |        |      |              | 35,826 |       
|Cash                                                                               |                                                                                                        |   | 126    |        |      |              | 142    |       
|Reinsurance receivables (less allowance for doubtful accounts of $196 and $170)    |                                                                                                        |   | 12,500 |        |      |              | 13,653 |       
|Insurance receivables (less allowance for doubtful accounts of $156 and $181)      |                                                                                                        |   | 3,007  |        |      |              | 3,825  |       
|Accrued investment income                                                          |                                                                                                        |   | 300    |        |      |              | 385    |       
|Receivables for securities sold                                                    |                                                                                                        |   | 455    |        |      |              | 443    |       
|Deferred acquisition costs                                                         |                                                                                                        |   | 2,551  |        |      |              | 2,424  |       
|Prepaid reinsurance premiums                                                       |                                                                                                        |   | 1,345  |        |      |              | 1,221  |       
|Federal income taxes recoverable (includes $0 and $617 due from Loews Corporation) |                                                                                                        |   |       |        |      |              | 611    |       
|Deferred income taxes                                                              |                                                                                                        |   | 723    |        |      |              | 869    |       
|Property and equipment at cost (less accumulated depreciation of $771 and $797)    |                                                                                                        |   | 369    |        |      |              | 444    |       
|Goodwill
and other intangible assets                                               |                                                                                                        |   | 174    |        |      |              | 265    |       
|Other assets                                                                       |                                                                                                        |   | 1,785  |        |      |              | 1,817  |       
|Separate account business                                                          |                                                                                                        |   | 3,103  |        |      |              | 3,798  |       
|                                                                                   |                                                                                                        |   |        |        |      |              |        |       
|Total assets                                                                       |                                                                                                        | $ | 61,731 |        |      | $            | 65,723 |       
|                                                                                   |                                                                                                        |   |        |        |      |              |        |       

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

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

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|                                                             |                                                                                                                                                               |                                    |        |       |        |      |        |              |        | 
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ------ | ----- | ------ | ---- | ------ | ------------ | ------ | 
|                                                             |                                                                                                                                                               |                                    |        | 2002  |        | 2001
|                                                             |                                                                                                                                                               |                                    |        |       |        |     
|                                                             |                                                                                                                                                               |                                    |        |       |        |      |        | Restated (a)
|Liabilities and Stockholders Equity                         |                                                                                                                                                               |                                    |        |       |        |      |        |             
|Liabilities:                                                 |                                                                                                                                                               |                                    |        |       |        |      |        |             
|                                                             | Insurance reserves:                                                                                                                                           |                                    |        |       |        |      |        |              |       
|                                                             |                                                                                                                                                               | Claim and claim adjustment expense |        | $     | 27,370 |      |        | $            | 31,266 | 
|                                                             |                                                                                                                                                               | Unearned premiums                  |        |       | 4,820  |      |        |              | 4,505  | 
|                                                             |                                                                                                                                                               | Future policy benefits             |        |       | 7,409  |      |        |              | 7,306  | 
|                                                             |                                                                                                                                                               | Policyholders funds               |        |       | 580    |      |        |              | 546    | 
|                                                             | Collateral on loaned securities and derivatives                                                                                                               |                                    |        | 552   |        |      |        | 923          |       
|                                                             | Payables for securities purchased                                                                                                                             |                                    |        | 464   |        |      |        | 606          |       
|                                                             | Participating policyholders funds                                                                                                                            |                                    |        | 119   |        |      |        | 118          |       
|                                                             | Short term debt                                                                                                                                               |                                    |        | 420   |        |      |        | 329          |       
|                                                             | Long term debt                                                                                                                                                |                                    |        | 1,872 |        |      |        | 2,238        |       
|                                                             | Reinsurance balances payable                                                                                                                                  |                                    |        | 2,763 |        |      |        | 2,723        |       
|                                                             | Federal income taxes payable
(includes $13 and $0 due to Loews Corporation)                                                                                   |                                    |        | 29    |        |      |        |             |       
|                                                             | Other liabilities                                                                                                                                             |                                    |        | 2,573 |        |      |        | 3,019        |       
|                                                             | Separate account business                                                                                                                                     |                                    |        | 3,103 |        |      |        | 3,798        |       
|                                                             |                                                                                                                                                               |                                    |        |       |        |      |        |             
|Total liabilities                                            |                                                                                                                                                               |                                    | 52,074 |       |        |      | 57,377 |             
|                                                             |                                                                                                                                                               |                                    |        |       |        |      |        |             
|Commitments and contingencies
(Notes A, B, F, G, I, K and S) |                                                                                                                                                               |                                    |        |       |        |      |        |             
|Minority interest                                            |                                                                                                                                                               |                                    | 256    |       |        |      | 224    |             
|Stockholders equity:                                        |                                                                                                                                                               |                                    |        |       |        |      |        |             
|                                                             | Preferred stock (Series H, no par value;
$100,000 stated value; 12,500,000
shares authorized; 7,500 shares issued and
outstanding, held by Loews
Corporation) |                                    |        | 750   |        |      |        |             |       
|                                                             | Common stock ($2.50 par value;
500,000,000 shares authorized; 225,850,270
shares issued; and 223,608,868 and
223,596,861 shares outstanding)                  |                                    |        | 565   |        |      |        | 565          |       
|                                                             | Additional paid-in capital                                                                                                                                    |                                    |        | 1,031 |        |      |        | 1,031        |       
|                                                             | Retained earnings                                                                                                                                             |                                    |        | 6,593 |        |      |        | 6,438        |       
|                                                             | Accumulated other comprehensive income                                                                                                                        |                                    |        | 604   |        |      |        | 226          |       
|                                                             | Treasury stock (2,241,402 and 2,253,409 shares),
at cost                                                                                                      |                                    |        | (70   | )      |      |        | (70          | )     
|                                                             |                                                                                                                                                               |                                    |        |       |        |      |        |             
|                                                             |                                                                                                                                                               |                                    | 9,473  |       |        |      | 8,190  |             
|                                                             | Notes receivable for the issuance of common stock                                                                                                             |                                    |        | (72   | )      |      |        | (68          | )     
|                                                             |                                                                                                                                                               |                                    |        |       |        |      |        |             
|Total stockholders equity                                   |                                                                                                                                                               |                                    | 9,401  |       |        |      | 8,122  |             
|                                                             |                                                                                                                                                               |                                    |        |       |        |      |        |             
|Total liabilities and stockholders equity                   |                                                                                                                                                               | $                                  | 61,731 |       |        | $    | 65,723 |             
|                                                             |                                                                                                                                                               |                                    |        |       |        |      |        |             

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

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

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CNA Financial Corporation
Consolidated Statements of Operations

|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |        | 
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---- | ------ | ------ | - | ------------ | ------ | ------------ |  | - | ------ | ------ | 
|                                                                                 |                                                                                                | 2002 |        | 2001   |   | 2000        
|Years ended
December 31                                                          |                                                                                                |      |        |        |   |             
|(In millions, except per share data)                                             |                                                                                                |      |        |        |   | Restated (a) |        | Restated (a)
|Revenues:                                                                        |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|                                                                                 | Net earned premiums                                                                            |      | $      | 10,213 |   |              | $      | 9,288        |  |   | $      | 11,388 | 
|                                                                                 | Net investment income                                                                          |      |        | 1,730  |   |              |        | 1,856        |  |   |        | 2,247  | 
|                                                                                 | Realized investment (losses) gains,
net of participating
policyholders and minority interests |      |        | (252   | ) |              |        | 1,262        |  |   |        | 1,029  | 
|                                                                                 | Other revenues                                                                                 |      |        | 595    |   |              |        | 683          |  |   |        | 744    | 
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Total revenues                                                                   |                                                                                                |      | 12,286 |        |   |              | 13,089 |              |  |   | 15,408 |       
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Claims, Benefits and Expenses:                                                   |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|                                                                                 | Insurance claims and policyholders
benefits                                                   |      |        | 8,392  |   |              |        | 11,279       |  |   |        | 9,720  | 
|                                                                                 | Amortization of deferred acquisition costs                                                     |      |        | 1,791  |   |              |        | 1,804        |  |   |        | 1,880  | 
|                                                                                 | Other operating expenses                                                                       |      |        | 1,649  |   |              |        | 1,913        |  |   |        | 1,847  | 
|                                                                                 | Restructuring and other related charges                                                        |      |        | (37    | ) |              |        | 251          |  |   |        |       | 
|                                                                                 | Interest                                                                                       |      |        | 150    |   |              |        | 157          |  |   |        | 206    | 
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Total claims, benefits and expenses                                              |                                                                                                |      | 11,945 |        |   |              | 15,404 |              |  |   | 13,653 |       
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Income (loss) from continuing
operations before income tax
and minority interest |                                                                                                |      | 341    |        |   |              | (2,315 | )            |  |   | 1,755  |       
|Income tax (expense) benefit                                                     |                                                                                                |      | (68    | )      |   |              | 744    |              |  |   | (550   | )     
|Minority interest                                                                |                                                                                                |      | (26    | )      |   |              | (21    | )            |  |   | (28    | )     
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Income (loss) from continuing
operations                                         |                                                                                                |      | 247    |        |   |              | (1,592 | )            |  |   | 1,177  |       
|(Loss) income from discontinued
operations, net of tax of
$9, $2, and $0         |                                                                                                |      | (35    | )      |   |              | 11     |              |  |   | 5      |       
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Income (loss) before cumulative
effects of changes in
accounting principles      |                                                                                                |      | 212    |        |   |              | (1,581 | )            |  |   | 1,182  |       
|Cumulative effects of changes in
accounting principles,
net of tax of $7 and $33 |                                                                                                |      | (57    | )      |   |              | (61    | )            |  |   |       |       
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Net income (loss)                                                                |                                                                                                | $    | 155    |        |   | $            | (1,642 | )            |  | $ | 1,182  |       
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Basic and Diluted Earnings
(Loss) per Share:                                     |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Income (loss) from continuing
operations                                         |                                                                                                | $    | 1.10   |        |   | $            | (8.20  | )            |  | $ | 6.40   |       
|(Loss) income from discontinued
operations, net of tax                           |                                                                                                |      | (0.16  | )      |   |              | 0.06   |              |  |   | 0.03   |       
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Income (loss) before cumulative
effects of changes in
accounting principles      |                                                                                                |      | 0.94   |        |   |              | (8.14  | )            |  |   | 6.43   |       
|Cumulative effects of changes
in accounting principles, net
of tax               |                                                                                                |      | (0.26  | )      |   |              | (0.32  | )            |  |   |       |       
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Basic and diluted earnings (loss)
per share available to
common stockholders     |                                                                                                | $    | 0.68   |        |   | $            | (8.46  | )            |  | $ | 6.43   |       
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       
|Weighted average outstanding common
stock and common stock
equivalents           |                                                                                                |      | 223.6  |        |   |              | 194.0  |              |  |   | 183.6  |       
|                                                                                 |                                                                                                |      |        |        |   |              |        |              |  |   |        |       

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

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

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CNA Financial Corporation
Consolidated Statements of Cash Flows

|                                                       |                                                                                            |                                                                                                |                                          |         |        |              |       |              |        |        |        |         |        |        |  
|------------------------------------------------------ | ------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ---------------------------------------- | ------- | ------ | ------------ | ----- | ------------ | ------ | ------ | ------ | ------- | ------ | ------ | -
|                                                       |                                                                                            | 2002                                                                                           |                                          | 2001    |        | 2000        
|Years ended
December 31                                |                                                                                            |                                                                                                |                                          |         |        |             
|(In millions)                                          |                                                                                            |                                                                                                |                                          |         |        | Restated (a) |       | Restated (a)
|Cash Flows from Operating Activities:                  |                                                                                            |                                                                                                |                                          |         |        |              |       |              |        |        |        |        
|                                                       | Net income (loss)                                                                          |                                                                                                | $                                        | 155     |        |              | $     | (1,642       | )      |        | $      | 1,182   |       
|                                                       | 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     |              |       |              | 61     |        |        |         |       |       
|                                                       |                                                                                            | Loss on disposal of property and equipment                                                     |                                          |         | 24     |              |       |              | 83     |        |        |         | 28     |       
|                                                       |                                                                                            | Minority interest                                                                              |                                          |         | 26     |              |       |              | 21     |        |        |         | 28     |       
|                                                       |                                                                                            | Deferred income tax provision                                                                  |                                          |         | 7      |              |       |              | 62     |        |        |         | 476    |       
|                                                       |                                                                                            | Realized investment losses (gains),
net of participating
policyholders and minority interests |                                          |         | 252    |              |       |              | (1,265 | )      |        |         | (1,028 | )     
|                                                       |                                                                                            | Equity method loss (income)                                                                    |                                          |         | 25     |              |       |              | (58    | )      |        |         | (299   | )     
|                                                       |                                                                                            | Realized loss from discontinued
operations, net of tax                                         |                                          |         | 37     |              |       |              |       |        |        |         |       |       
|                                                       |                                                                                            | Amortization of intangibles                                                                    |                                          |         |       |              |       |              | 17     |        |        |         | 21     |       
|                                                       |                                                                                            | Amortization of bond discount                                                                  |                                          |         | (143   | )            |       |              | (268   | )      |        |         | (309   | )     
|                                                       |                                                                                            | Depreciation                                                                                   |                                          |         | 98     |              |       |              | 136    |        |        |         | 155    |       
|                                                       |                                                                                            | Changes in:                                                                                    |                                          |         |        |              |       |              |        |        |        |         |        |       
|                                                       |                                                                                            |                                                                                                | Receivables, net                         |         |        | 1,017        |       |              |        | (3,376 | )      |         |        | (1,664 | )
|                                                       |                                                                                            |                                                                                                | Deferred acquisition costs               |         |        | (162         | )     |              |        | (17    | )      |         |        | (132   | )
|                                                       |                                                                                            |                                                                                                | Accrued investment income                |         |        | 69           |       |              |        | 19     |        |         |        | (17    | )
|                                                       |                                                                                            |                                                                                                | Federal income taxes recoverable/payable |         |        | 655          |       |              |        | (596   | )      |         |        | 254    |  
|                                                       |                                                                                            |                                                                                                | Prepaid reinsurance premiums             |         |        | (124         | )     |              |        | 224    |        |         |        | 11     |  
|                                                       |                                                                                            |                                                                                                | Reinsurance balances payable             |         |        | 145          |       |              |        | 1,342  |        |         |        | 717    |  
|                                                       |                                                                                            |                                                                                                | Insurance reserves                       |         |        | (931         | )     |              |        | 4,616  |        |         |        | (128   | )
|                                                       |                                                                                            |                                                                                                | Transfer of business via reinsurance     |         |        |             |       |              |        |       |        |         |        | (41    | )
|                                                       |                                                                                            |                                                                                                | Other, net                               |         |        | (167         | )     |              |        | 42     |        |         |        | (599   | )
|                                                       |                                                                                            |                                                                                                |                                          |         |        |              |       |              |        |        |        |        
|Total adjustments                                      |                                                                                            |                                                                                                | 885                                      |         |        |              | 1,043 |              |        |        | (2,527 | )      
|                                                       |                                                                                            |                                                                                                |                                          |         |        |              |       |              |        |        |        |        
|Net cash flows provided (used) by
operating activities |                                                                                            | $                                                                                              | 1,040                                    |         |        | $            | (599  | )            |        | $      | (1,345 | )      
|                                                       |                                                                                            |                                                                                                |                                          |         |        |              |       |              |        |        |        |        
|Cash Flows from Investing Activities:                  |                                                                                            |                                                                                                |                                          |         |        |              |       |              |        |        |        |        
|                                                       | Purchases of fixed maturity securities                                                     |                                                                                                | $                                        | (63,167 | )      |              | $     | (56,979      | )      |        | $      | (40,975 | )     
|                                                       | Proceeds from fixed maturity securities:                                                   |                                                                                                |                                          |         |        |              |       |              |        |        |        |         |       
|                                                       |                                                                                            | Sales                                                                                          |                                          |         | 61,919 |              |       |              | 51,112 |        |        |         | 38,502 |       
|                                                       |                                                                                            | Maturities, calls and redemptions                                                              |                                          |         | 3,108  |              |       |              | 3,930  |        |        |         | 4,222  |       
|                                                       | Purchases of equity securities                                                             |                                                                                                |                                          | (814    | )      |              |       | (1,287       | )      |        |        | (1,858  | )     
|                                                       | Proceeds from sales of equity securities                                                   |                                                                                                |                                          | 1,197   |        |              |       | 2,311        |        |        |        | 2,935   |       
|                                                       | Change in short term investments                                                           |                                                                                                |                                          | (3,249  | )      |              |       | 2,028        |        |        |        | (686    | )     
|                                                       | Change in collateral on loaned securities
and derivatives                                  |                                                                                                |                                          | (371    | )      |              |       | (1,322       | )      |        |        | (429    | )     
|                                                       | Change in other investments                                                                |                                                                                                |                                          | 167     |        |              |       | (182         | )      |        |        | 313     |       
|                                                       | Purchases of property and equipment                                                        |                                                                                                |                                          | (88     | )      |              |       | (124         | )      |        |        | (152    | )     
|                                                       | Proceeds from sales of property and equipment                                              |                                                                                                |                                          |        |        |              |       | 264          |        |        |        |        |       
|                                                       | Acquisitions, net of cash acquired                                                         |                                                                                                |                                          |        |        |              |       | (19          | )      |        |        | (2      | )     
|                                                       | Dispositions                                                                               |                                                                                                |                                          | (178    | )      |              |       | 7            |        |        |        |        |       
|                                                       | Other, net                                                                                 |                                                                                                |                                          | (12     | )      |              |       | 56           |        |        |        | (28     | )     
|                                                       |                                                                                            |                                                                                                |                                          |         |        |              |       |              |        |        |        |        
|Net cash flows (used) provided by
investing activities |                                                                                            | $                                                                                              | (1,488                                   | )       |        | $            | (205  | )            |        | $      | 1,842  |        
|                                                       |                                                                                            |                                                                                                |                                          |         |        |              |       |              |        |        |        |        

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

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

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|                                                       |                                                                              |                                                   |     |      |      |      |     |              |      |              |      |      |      |  
|------------------------------------------------------ | ---------------------------------------------------------------------------- | ------------------------------------------------- | --- | ---- | ---- | ---- | --- | ------------ | ---- | ------------ | ---- | ---- | ---- | -
|                                                       |                                                                              |                                                   |     | 2002 |      | 2001 |     | 2000        
|                                                       |                                                                              |                                                   |     |      |      |      |     |             
|                                                       |                                                                              |                                                   |     |      |      |      |     | Restated (a) |      | Restated (a)
|Cash Flows from Financing Activities:                  |                                                                              |                                                   |     |      |      |      |     |              |      |              |      |     
|                                                       | Issuance of preferred stock                                                  |                                                   | $   | 750  |      |      | $   |             |      |              | $    |     |     
|                                                       | Redemption of preferred stock                                                |                                                   |     |     |      |      |     |             |      |              |      | (150 | )   
|                                                       | Dividends paid to preferred stockholders                                     |                                                   |     |     |      |      |     |             |      |              |      | (1   | )   
|                                                       | Issuance of common stock                                                     |                                                   |     |     |      |      |     | 1,006        |      |              |      |     |     
|                                                       | Principal payments on debt                                                   |                                                   |     | (341 | )    |      |     | (664         | )    |              |      | (164 | )   
|                                                       | Proceeds from issuance of debt                                               |                                                   |     | 65   |      |      |     | 500          |      |              |      |     |     
|                                                       | Return of policyholder account balances
on investment contracts              |                                                   |     | (44  | )    |      |     | (66          | )    |              |      | (138 | )   
|                                                       | Purchase of treasury stock                                                   |                                                   |     |     |      |      |     |             |      |              |      | (35  | )   
|                                                       | Receipts from investment contracts
credited to policyholder account balances |                                                   |     | 1    |      |      |     | 2            |      |              |      | 5    |     
|                                                       | Other                                                                        |                                                   |     | 1    |      |      |     | 5            |      |              |      | (4   | )   
|                                                       |                                                                              |                                                   |     |      |      |      |     |              |      |              |      |     
|Net cash flows provided (used) by
financing activities |                                                                              |                                                   | 432 |      |      |      | 783 |              |      |              | (487 | )   
|                                                       |                                                                              |                                                   |     |      |      |      |     |              |      |              |      |     
|Net change in cash                                     |                                                                              |                                                   | (16 | )    |      |      | (21 | )            |      |              | 10   |     
|Cash, beginning of year                                |                                                                              |                                                   | 142 |      |      |      | 163 |              |      |              | 153  |     
|                                                       |                                                                              |                                                   |     |      |      |      |     |              |      |              |      |     
|Cash, end of year                                      |                                                                              | $                                                 | 126 |      |      | $    | 142 |              |      | $            | 163  |     
|                                                       |                                                                              |                                                   |     |      |      |      |     |              |      |              |      |     
|Supplemental Disclosures of Cash
Flow Information:     |                                                                              |                                                   |     |      |      |      |     |              |      |              |      |     
|                                                       | Cash paid (received):                                                        |                                                   |     |      |      |      |     |              |      |              |      |      |     
|                                                       |                                                                              | Interest                                          |     | $    | 195  |      |     | $            | 147  |              |      | $    | 205  |  
|                                                       |                                                                              | Federal income taxes                              |     |      | (612 | )    |     |              | (288 | )            |      |      | (154 | )
|                                                       | Non-cash transactions:                                                       |                                                   |     |      |      |      |     |              |      |              |      |      |     
|                                                       |                                                                              | Notes receivable for the issuance
of common stock |     |      | 4    |      |     |              | 4    |              |      |      | 10   |  

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

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

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CNA Financial Corporation
Consolidated Statements of Stockholders Equity

|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |        |  
|---------------------------------------------------------- | -------------------------- | - | --------- | - | ------ | - | ------- | - | -------- | - | ------------- | - | -------- | - | ------------ | ------ | ------------- | - | ----------- | ---- | - | - | ------- | - | ---------- | - | ----- | - |  | - | ------ | ------ | -
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   | Notes |   |  |   |       
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   | Accumulated |      |   |   |         |   | Receivable |   |       |   | 
|                                                           |                            |   |           |   |        |   |         |   |          |   | Additional    |   |          |   |              |        | Other         |   |             |      |   |   | For the |   | Total     
|                                                           |                            |   | Preferred |   | Common |   | Paid-in |   | Retained |   | Comprehensive |   | Treasury |   | Issuance of  |        | Stockholders'
|                                                           |                            |   | Stock     |   | Stock  |   | Capital |   | Earnings |   | Income (Loss) |   | Stock    |   | Common Stock |        | Equity       
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |              
|(In millions)                                              |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Balance,
January 1, 2000 (As previously
reported)          |                            | $ | 150       |   |        | $ | 464     |   |          | $ | 126           |   |          | $ | 7,114        |        |               | $ | 1,188       |      |   | $ | (41     | ) |            | $ | (63   | ) |  | $ | 8,938  |       
|Prior period adjustment (a)                                |                            |   |          |   |        |   |        |   |          |   |              |   |          |   | (215         | )      |               |   |            |      |   |   |        |   |            |   |      |   |  |   | (215   | )     
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Balance,
January 1, 2000 (Restated (a))                    |                            |   | 150       |   |        |   | 464     |   |          |   | 126           |   |          |   | 6,899        |        |               |   | 1,188       |      |   |   | (41     | ) |            |   | (63   | ) |  |   | 8,723  |       
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Comprehensive income:                                      |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|                                                           | Net
income (Restated (a))  |   |           |  |        |   |         |  |          |   |               |  |          |   |              | 1,182  |               |   |             |     |   |   |         |  |            |   |       |  |  |   |        | 1,182  |  
|                                                           | Other comprehensive loss   |   |           |  |        |   |         |  |          |   |               |  |          |   |              |       |               |   |             | (315 | ) |   |         |  |            |   |       |  |  |   |        | (315   | )
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Total comprehensive income                                 |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   | 867    |       
|Redemption of preferred stock                              |                            |   | (150      | ) |        |   |        |   |          |   |              |   |          |   |             |        |               |   |            |      |   |   |        |   |            |   |      |   |  |   | (150   | )     
|Purchase of treasury stock                                 |                            |   |          |   |        |   |        |   |          |   |              |   |          |   |             |        |               |   |            |      |   |   | (35     | ) |            |   |      |   |  |   | (35    | )     
|Increase in notes receivable from
issuance of common stock |                            |   |          |   |        |   |        |   |          |   |              |   |          |   |             |        |               |   |            |      |   |   | 5       |   |            |   | (9    | ) |  |   | (4     | )     
|Preferred dividends                                        |                            |   |          |   |        |   |        |   |          |   |              |   |          |   | (1           | )      |               |   |            |      |   |   |        |   |            |   |      |   |  |   | (1     | )     
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Balance,
December 31, 2000 (Restated (a))                  |                            |   |          |   |        |   | 464     |   |          |   | 126           |   |          |   | 8,080        |        |               |   | 873         |      |   |   | (71     | ) |            |   | (72   | ) |  |   | 9,400  |       
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Comprehensive income:                                      |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|                                                           | Net
loss (Restated (a))    |   |           |  |        |   |         |  |          |   |               |  |          |   |              | (1,642 | )             |   |             |     |   |   |         |  |            |   |       |  |  |   |        | (1,642 | )
|                                                           | Other comprehensive loss   |   |           |  |        |   |         |  |          |   |               |  |          |   |              |       |               |   |             | (647 | ) |   |         |  |            |   |       |  |  |   |        | (647   | )
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Total comprehensive loss                                   |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   | (2,289 | )     
|Issuance of common stock                                   |                            |   |          |   |        |   | 101     |   |          |   | 905           |   |          |   |             |        |               |   |            |      |   |   |        |   |            |   |      |   |  |   | 1,006  |       
|Stock options exercised                                    |                            |   |          |   |        |   |        |   |          |   |              |   |          |   |             |        |               |   |            |      |   |   | 1       |   |            |   |      |   |  |   | 1      |       
|Decrease in notes receivable from
issuance of common stock |                            |   |          |   |        |   |        |   |          |   |              |   |          |   |             |        |               |   |            |      |   |   |        |   |            |   | 4     |   |  |   | 4      |       
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Balance,
December 31, 2001 (Restated (a))                  |                            |   |          |   |        |   | 565     |   |          |   | 1,031         |   |          |   | 6,438        |        |               |   | 226         |      |   |   | (70     | ) |            |   | (68   | ) |  |   | 8,122  |       
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Comprehensive income:                                      |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|                                                           | Net income                 |   |           |  |        |   |         |  |          |   |               |  |          |   |              | 155    |               |   |             |     |   |   |         |  |            |   |       |  |  |   |        | 155    |  
|                                                           | Other comprehensive income |   |           |  |        |   |         |  |          |   |               |  |          |   |              |       |               |   |             | 378  |   |   |         |  |            |   |       |  |  |   |        | 378    |  
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Total comprehensive income                                 |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   | 533    |       
|Issuance of preferred stock                                |                            |   | 750       |   |        |   |        |   |          |   |              |   |          |   |             |        |               |   |            |      |   |   |        |   |            |   |      |   |  |   | 750    |       
|Increase in notes receivable from
issuance of common stock |                            |   |          |   |        |   |        |   |          |   |              |   |          |   |             |        |               |   |            |      |   |   |        |   |            |   | (4    | ) |  |   | (4     | )     
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       
|Balance, December 31, 2002                                 |                            | $ | 750       |   |        | $ | 565     |   |          | $ | 1,031         |   |          | $ | 6,593        |        |               | $ | 604         |      |   | $ | (70     | ) |            | $ | (72   | ) |  | $ | 9,401  |       
|                                                           |                            |   |           |   |        |   |         |   |          |   |               |   |          |   |              |        |               |   |             |      |   |   |         |   |            |   |       |   |  |   |        |       

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

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, which include property and
casualty insurance companies (principally Continental Casualty Company (CCC)
and The Continental Insurance Company (CIC)) and life and group insurance
companies (principally Continental Assurance Company (CAC), Valley Forge Life
Insurance Company (VFL) and CNA Group Life Assurance Company (CNAGLA)),
collectively CNA or the Company. Loews Corporation (Loews) owned approximately
90% of the outstanding common stock of CNAF as of December 31, 2002.

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.

As a result of a routine review of the Companys periodic filings by the
Division of Corporation Finance of the Securities and Exchange Commission
(SEC), the Company has restated its financial statements. The restated
financial statements reflect an adjustment to the Companys historical
accounting for its investment in life settlement contracts and the related
revenue recognition. See Note T for further discussion.

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

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

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; retirement products and annuities; and property and casualty
reinsurance. CNA services include risk management, information services,
healthcare claims management, and claims administration. CNAs products and
services are marketed through independent agents, brokers, managing general
agents and direct sales.

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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.

Property and casualty contracts that are retrospectively rated contain contract
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 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 environmental pollution and mass tort and asbestos (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 recorded reserve balance. Insurance and reinsurance
receivables are reported as assets 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 6.0% to 7.5%. At December 31, 2002 and 2001, the discounted
reserves for unfunded structured settlements were $884 million and $887
million, net of discount of $1,466 million and $1,478 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
allowed by insurance regulators that range from 3.5% to 6.5%. At December 31,
2002 and 2001, such discounted reserves totaled $2,537 million and $2,384
million, net of discount of $974 million and $978 million.

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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, 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 9.8%, 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 4.4% to 6.5% for the three
years ended December 31, 2002.

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: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, 2002 and 2001, the liability balance was
$63 million and $94 million. As of December 31, 2002 and 2001, included in
other assets were $32 million and $24 million of related assets for premium tax
offsets or policy surcharges. The related asset is limited to the amount that
is determined based on future premium collections or policy surcharges from
policies in force.

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 a receivable in the Consolidated Balance
Sheets. The cost of reinsurance related to long-duration contracts is
accounted for over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying policies.
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 meet the criteria for risk transfer 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, 2002 and 2001, the Company had approximately $618 million and $693
million recorded as deposit assets and $569 million and $511 million recorded
as deposit liabilities.

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Income on reinsurance contracts accounted for under the deposit method is
recognized using a constant 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 stockholders, 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 being 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 operations when they
occur. For these contracts, the amortization period is typically the estimated
life of the policy.

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 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.

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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 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 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 58%
and 53% of the separate account business at December 31, 2002 and 2001.
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. See Note P for further details of this agreement.

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 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 a constant 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.

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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.

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.

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.

Investment gains and losses:All securities transactions 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 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 $544
million and $912
million at December 31, 2002 and 2001. The fair value of non-cash collateral
was $777 million and $413 million at December 31, 2002 and 2001.

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).
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

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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 Company did not incur any default
losses in 2002. The Company incurred approximately $25 million and $13 million
of default losses on these products for the years ended December 31, 2001 and
2000. The Company is no longer writing 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
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.

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

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

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

CNA uses investment derivatives in the normal course of business, primarily to
reduce its exposure to market risk (principally interest rate risk, equity
stock price risk and foreign currency risk) stemming from various assets and
liabilities 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 also
uses derivatives for purposes of income enhancement, primarily via the sale of
covered call options.

The Companys use of derivatives is limited by statutes and regulations
promulgated by the various regulatory bodies to which it is subject, and by its
own derivative policy. The derivative policy limits 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 gross fair value of the
asset related to the instruments recognized in the Consolidated Balance Sheets.
The Company mitigates the risk of non-performance by monitoring the
creditworthiness of counterparties and diversifying derivatives to multiple
counterparties. 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

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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.

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

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and
liabilities. Future tax benefits are recognized to the extent that realization
of such benefits are 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 in the amount of $154
million and $245 million as of December 31, 2002 and 2001 represents the excess of purchase
price over fair value of the net assets of acquired entities. 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 income for the year ended
December 31, 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.

Had the Company not amortized goodwill in 2001 and 2000, net income and the
related basic and diluted earnings per share amounts would have been as
follows:

Pro Forma Effect of SFAS 142 on Results

|                                                                                               |  |            |        |                    |  |      |       |      |  |                   |       |   |  |   |      | 
|---------------------------------------------------------------------------------------------- |  | ---------- | ------ | ------------------ |  | ---- | ----- | ---- |  | ----------------- | ----- | - |  | - | ---- | 
|                                                                                               |  |            |        |                    |  |      |       |      |  | Basic and Diluted
|                                                                                               |  | Net Income |        | Earnings Per Share
|                                                                                               |  |            |        |                   
|                                                                                               |  | 2001       |        | 2000               |  | 2001 |       | 2000
|Years ended December 31                                                                        |  |            |        |                    |  |      |       |     
|(In millions, except per share amounts)                                                        |  |            |        |                    |  |      |       |      |  |                   |       |   |  |   |      | 
|Results                                                                                        |  | $          | (1,642 | )                  |  | $    | 1,182 |      |  | $                 | (8.46 | ) |  | $ | 6.43 | 
|Add goodwill amortization, after-tax                                                           |  |            | 17     |                    |  |      | 21    |      |  |                   | 0.09  |   |  |   | 0.11 | 
|                                                                                               |  |            |        |                    |  |      |       |      |  |                   |       |   |  |   |      | 
|Adjusted reported results to include
the impact of the non-amortization
provisions of SFAS 142 |  | $          | (1,625 | )                  |  | $    | 1,203 |      |  | $                 | (8.37 | ) |  | $ | 6.54 | 
|                                                                                               |  |            |        |                    |  |      |       |      |  |                   |       |   |  |   |      | 

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 primarily consists 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 will be reported in operating results.

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.

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Earnings per Share

Earnings (loss) per share available to common stockholders is based on
weighted-average outstanding shares. The computation of earnings (loss) per
share is as follows:

Earnings (Loss) per Share

|                                                                                                     |  |      |       |      |  |      |        |   |  |   |       |  
|---------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                                                                                     |  | 2002 |       | 2001 |  | 2000
|Years ended December 31                                                                              |  |      |       |      |  |     
|(In millions, except per share amounts)                                                              |  |      |       |      |  |      |        |   |  |   |       |  
|Income (loss) from continuing operations                                                             |  | $    | 247   |      |  | $    | (1,592 | ) |  | $ | 1,177 |  
|Less preferred stock dividend                                                                        |  |      | (2    | )    |  |      |       |   |  |   | (1    | )
|                                                                                                     |  |      |       |      |  |      |        |   |  |   |       |  
|Income (loss) from continuing operations available to common
stockholders                            |  |      | 245   |      |  |      | (1,592 | ) |  |   | 1,176 |  
|(Loss) income from discontinued operations, net of tax                                               |  |      | (35   | )    |  |      | 11     |   |  |   | 5     |  
|Cumulative effects of changes in accounting principles, net of tax                                   |  |      | (57   | )    |  |      | (61    | ) |  |   |      |  
|                                                                                                     |  |      |       |      |  |      |        |   |  |   |       |  
|Net income (loss) available to common stockholders                                                   |  | $    | 153   |      |  | $    | (1,642 | ) |  | $ | 1,181 |  
|                                                                                                     |  |      |       |      |  |      |        |   |  |   |       |  
|Weighted-average outstanding common stock and common stock equivalents                               |  |      | 223.6 |      |  |      | 194.0  |   |  |   | 183.6 |  
|Effect of dilutive securities, employee stock options                                                |  |      |      |      |  |      |       |   |  |   |      |  
|                                                                                                     |  |      |       |      |  |      |        |   |  |   |       |  
|Adjusted weighted-average outstanding common stock and common stock
equivalents assuming conversions |  |      | 223.6 |      |  |      | 194.0  |   |  |   | 183.6 |  
|                                                                                                     |  |      |       |      |  |      |        |   |  |   |       |  
|Basic and diluted earnings (loss) per share available to common
stockholders                         |  | $    | 0.68  |      |  | $    | (8.46  | ) |  | $ | 6.43  |  
|                                                                                                     |  |      |       |      |  |      |        |   |  |   |       |  

The Company has stock-based compensation plans which are detailed in Note J.
The Company applies 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 income and earnings per share
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

|                                                                                             |  |      |      |      |  |      |        |   |  |   |       |  
|-------------------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                                                                             |  | 2002 |      | 2001 |  | 2000
|Years ended December 31                                                                      |  |      |      |      |  |     
|(In millions, except per share amounts)                                                      |  |      |      |      |  |      |        |   |  |   |       |  
|Net income (loss)                                                                            |  | $    | 155  |      |  | $    | (1,642 | ) |  | $ | 1,182 |  
|Less: Total stock-based compensation cost determined
under the fair value method, net of tax |  |      | (1   | )    |  |      | (1     | ) |  |   | (1    | )
|                                                                                             |  |      |      |      |  |      |        |   |  |   |       |  
|Pro forma net income (loss)                                                                  |  | $    | 154  |      |  | $    | (1,643 | ) |  | $ | 1,181 |  
|                                                                                             |  |      |      |      |  |      |        |   |  |   |       |  
|Basic and diluted earnings (loss) per share                                                  |  | $    | 0.68 |      |  | $    | (8.46  | ) |  | $ | 6.43  |  
|                                                                                             |  |      |      |      |  |      |        |   |  |   |       |  
|Basic and diluted earnings (loss) per share, pro forma                                       |  | $    | 0.67 |      |  | $    | (8.47  | ) |  | $ | 6.42  |  
|                                                                                             |  |      |      |      |  |      |        |   |  |   |       |  

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Accounting Pronouncements

In September of 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (SFAS 140). SFAS 140 supercedes SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS 140 revises the standards for accounting
for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
The adoption of SFAS 140 on March 31, 2001 did not have a significant impact on
the results of operations or equity of the Company.

On April 1, 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
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 Statement of Financial Accounting Standards
No. 141, Business Combinations (SFAS 141). SFAS 141 requires companies to use
the purchase method of accounting for business combinations initiated after
June 30, 2001 and prohibits the use of the pooling-of-interests method of
accounting. CNA has adopted this standard for all business combinations
initiated subsequent to June 30, 2001. The adoption of SFAS 141 did not have a
significant impact on the results of operations or equity of the Company.

In October of 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144). SFAS 144 addresses accounting and reporting for the impairment or
disposal of long-lived assets. This statement supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121).
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 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 Statement of Financial Accounting Standards
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 supercedes Emerging Issues Task
Force (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
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 FASB
Statement of Financial Accounting Standards No. 5, Accounting for Contingencies
(SFAS 5) relating to a guarantors accounting for, and disclosure of, the
issuance of certain types of guarantees. FIN 45 provides for additional
disclosure requirements related to

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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.
CNA has implemented the disclosure requirements of FIN 45 and will adopt the
provisions for initial recognition and measurement for all guarantees issued or
modified after December 31, 2002. The initial adoption for the recognition and
measurement requirements of FIN 45 is not expected to have a significant impact
on the results of operations or equity of the Company.

In December of 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation, Transition and
Disclosure (SFAS 148). SFAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS 148 also amends the disclosure requirements of
SFAS 123, Accounting for Stock-Based Compensation,to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. CNA has adopted this standard beginning with the
2002 annual financial statements and will implement the disclosure requirements
in all subsequent annual and interim financial statements. The Company has not
determined if it will 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 Accounting Research
Bulletin No. 51 (ARB 51) (FIN 46). As a general rule, ownership by the parent,
either directly or indirectly, of over 50% of the outstanding voting shares of
a subsidiary is a condition requiring the preparation of consolidated financial
statements of the parent and its subsidiary. FIN 46 clarifies the exceptions
to this general rule, as enunciated in paragraph two of ARB 51. FIN 46
requires an entity to consolidate a variable interest entity (VIE) even though
the entity does not, either directly or indirectly, own over 50% of the
outstanding voting shares.

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

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

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Note B. Investments

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

Net Investment Income

|                                              |  |      |       |      |  |      |       |   |  |   |       |  
|--------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                              |  | 2002 |       | 2001 |  | 2000
|Years ended December 31                       |  |      |       |      |  |     
|(In millions)                                 |  |      |       |      |  |      |       |   |  |   |       |  
|Fixed maturity securities                     |  | $    | 1,854 |      |  | $    | 1,824 |   |  | $ | 1,739 |  
|Short term investments                        |  |      | 62    |      |  |      | 135   |   |  |   | 200   |  
|Limited partnerships                          |  |      | (34   | )    |  |      | 47    |   |  |   | 293   |  
|Equity securities                             |  |      | 66    |      |  |      | 37    |   |  |   | 51    |  
|Interest on funds withheld and other deposits |  |      | (239  | )    |  |      | (241  | ) |  |   | (87   | )
|Other                                         |  |      | 81    |      |  |      | 112   |   |  |   | 99    |  
|                                              |  |      |       |      |  |      |       |   |  |   |       |  
|Gross investment income                       |  |      | 1,790 |      |  |      | 1,914 |   |  |   | 2,295 |  
|Investment expense                            |  |      | (60   | )    |  |      | (58   | ) |  |   | (48   | )
|                                              |  |      |       |      |  |      |       |   |  |   |       |  
|Net investment income                         |  | $    | 1,730 |      |  | $    | 1,856 |   |  | $ | 2,247 |  
|                                              |  |      |       |      |  |      |       |   |  |   |       |  

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

Net Investment Appreciation

|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |        |    |       |       |  
|--------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------------------------------------- | --------------------- | -------------------------------------------------------- | -- | ------ | ------ | ------ | ---- | ----- | ----- | ------ | -- | ----- | ----- | -
|                                                                                                                |                            | 2002                                     |                       | 2001                                                     |    | 2000  
|Years ended December 31                                                                                         |                            |                                          |                       |                                                          |    |       
|(In millions)                                                                                                   |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|Net realized investment (losses) gains:                                                                         |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|                                                                                                                | Fixed maturity securities: |                                          |                       |                                                          |    |        |        |        |      |       |       |        |   
|                                                                                                                |                            |                                          | Gross realized gains  |                                                          | $  | 1,009  |        |        | $    | 936   |       |        | $  | 434   |      
|                                                                                                                |                            |                                          | Gross realized losses |                                                          |    | (1,118 | )      |        |      | (600  | )     |        |    | (564  | )    
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|                                                                                                                |                            |                                          |                       | Net realized (losses) gains on fixed maturity securities |    |        | (109   | )      |      |       | 336   |        |    |       | (130  | )
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|                                                                                                                | Equity securities:         |                                          |                       |                                                          |    |        |        |        |      |       |       |        |   
|                                                                                                                |                            |                                          | Gross realized gains  |                                                          |    | 251    |        |        |      | 1,335 |       |        |    | 1,336 |      
|                                                                                                                |                            |                                          | Gross realized losses |                                                          |    | (409   | )      |        |      | (240  | )     |        |    | (220  | )    
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|                                                                                                                |                            |                                          |                       | Net realized (losses) gains on equity securities         |    |        | (158   | )      |      |       | 1,095 |        |    |       | 1,116 |  
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|                                                                                                                |                            | Other realized investment gains (losses) |                       |                                                          | 13 |        |        |        | (154 | )     |       |        | 47 |      
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|Net realized investment (losses) gains before allocation to
participating policyholders and minority interests |                            |                                          | (254                  | )                                                        |    |        | 1,277  |        |      |       | 1,033 |       
|Allocation to participating policyholders and minority interests                                               |                            |                                          | 2                     |                                                          |    |        | (15    | )      |      |       | (4    | )     
|Income tax benefit (expense)                                                                                    |                            |                                          | 103                   |                                                          |    |        | (446   | )      |      |       | (360  | )     
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|Net realized investment (losses) gains                                                                          |                            |                                          | (149                  | )                                                        |    |        | 816    |        |      |       | 669   |       
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|Net change in unrealized appreciation (depreciation) in general account
investments:                            |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|                                                                                                                | Fixed maturity securities  |                                          |                       | 548                                                      |    |        |        | 93     |      |       |       | 773    |   
|                                                                                                                | Equity securities          |                                          |                       | (23                                                      | )  |        |        | (1,127 | )    |       |       | (1,223 | ) 
|                                                                                                                | Other                      |                                          |                       | 17                                                       |    |        |        | (19    | )    |       |       | (52    | ) 
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|Total net change in unrealized appreciation (depreciation) in general
account investments                       |                            |                                          | 542                   |                                                          |    |        | (1,053 | )      |      |       | (502  | )     
|Net change in unrealized appreciation on separate accounts and other                                            |                            |                                          | 53                    |                                                          |    |        | 7      |        |      |       | 66    |       
|Cumulative effects of changes in accounting principles, net of tax of $31                                       |                            |                                          |                      |                                                          |    |        | 58     |        |      |       |      |       
|Allocation to participating policyholders and minority interests                                               |                            |                                          | (19                   | )                                                        |    |        | (4     | )      |      |       | (12   | )     
|Deferred income tax (expense) benefit                                                                           |                            |                                          | (182                  | )                                                        |    |        | 355    |        |      |       | 161   |       
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|Net change in unrealized appreciation (depreciation) in investments                                             |                            |                                          | 394                   |                                                          |    |        | (637   | )      |      |       | (287  | )     
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       
|Net realized gains and change in unrealized appreciation in investments                                         |                            | $                                        | 245                   |                                                          |    | $      | 179    |        |      | $     | 382   |       
|                                                                                                                |                            |                                          |                       |                                                          |    |        |        |        |      |       |       |       

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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. This activity will produce realized gains and losses.

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.

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 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 $890 million $129 million and
$72 million of pretax impairment losses for the three years ended
December 31, 2002, 2001 and 2000. The impairments recorded in 2002
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, 2002,
2001 and 2000 include gains and losses related to the sale and losses
associated with the anticipated sale of certain operations or affiliates. See
Note P for further details.

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

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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.

The unrealized gain on the Companys position in Global Crossing, including the
fair market value of the related hedge discussed in Note C, was $902 million at
December 31, 2000.

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

|                                                               |  |      |      |      |  |   |        |  
|-------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | ------ | -
|                                                               |  | 2001 |      | 2000
|Years ended December 31                                        |  |      |      |     
|(In millions)                                                  |  |      |      |      |  |   |        |  
|Decrease in unrealized gain on common stock                    |  | $    | (239 | )    |  | $ | (1,525 | )
|Cumulative effect of a change in accounting principle          |  |      | (60  | )    |  |   |       |  
|(Decrease) increase in unrealized gain on options collar       |  |      | (663 | )    |  |   | 663    |  
|                                                               |  |      |      |      |  |   |        |  
|Net decrease in unrealized gain on position in Global Crossing |  | $    | (962 | )    |  | $ | (862   | )
|                                                               |  |      |      |      |  |   |        |  
|Realized gains on sales of Global Crossing                     |  | $    | 962  |      |  | $ | 485    |  
|                                                               |  |      |      |      |  |   |        |  

The following tables provide a summary of investments in fixed maturity and
equity securities available-for-sale.

Summary of Fixed Maturity and Equity Securities

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

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|                                |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |       | 
|------------------------------- | --------------------------------------------------------------- | - | ------ | ----- |  | - | ----- | --- |  | - | --- | --- |  | - | ------ | ----- | 
|December 31, 2001               |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |      
|                                |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |      
|Fixed maturity securities:      |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |      
|                                | U.S. Treasury securities and obligations of government
agencies |   | $      | 5,002 |  |   | $     | 109 |  |   | $   | 30  |  |   | $      | 5,081 | 
|                                | Asset-backed securities                                         |   |        | 7,603 |  |   |       | 139 |  |   |     | 19  |  |   |        | 7,723 | 
|                                | States, municipalities and political subdivisions  tax-exempt  |   |        | 2,748 |  |   |       | 19  |  |   |     | 47  |  |   |        | 2,720 | 
|                                | Corporate securities                                            |   |        | 9,569 |  |   |       | 247 |  |   |     | 229 |  |   |        | 9,587 | 
|                                | Other debt securities                                           |   |        | 3,811 |  |   |       | 152 |  |   |     | 147 |  |   |        | 3,816 | 
|                                | Redeemable preferred stock                                      |   |        | 48    |  |   |       | 1   |  |   |     | 1   |  |   |        | 48    | 
|                                | Options embedded in convertible debt securities                 |   |        | 189   |  |   |       |    |  |   |     |    |  |   |        | 189   | 
|                                |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |      
|Total fixed maturity securities |                                                                 |   | 28,970 |       |  |   | 667   |     |  |   | 473 |     |  |   | 29,164 |      
|                                |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |      
|Equity securities:              |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |      
|                                | Common stock                                                    |   |        | 820   |  |   |       | 326 |  |   |     | 150 |  |   |        | 996   | 
|                                | Non-redeemable preferred stock                                  |   |        | 348   |  |   |       | 17  |  |   |     | 23  |  |   |        | 342   | 
|                                |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |      
|Total equity securities         |                                                                 |   | 1,168  |       |  |   | 343   |     |  |   | 173 |     |  |   | 1,338  |      
|                                |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |      
|Total                           |                                                                 | $ | 30,138 |       |  | $ | 1,010 |     |  | $ | 646 |     |  | $ | 30,502 |      
|                                |                                                                 |   |        |       |  |   |       |     |  |   |     |     |  |   |        |      

The following table summarizes fixed maturity securities, including embedded
derivative financial instruments, by contractual maturity at December 31, 2002.

|                                       |  |           |        |           |  |   |        | 
|-------------------------------------- |  | --------- | ------ | --------- |  | - | ------ | 
|Contractual Maturity                   |  | Cost or   |        | Estimated
|                                       |  | Amortized |        | Fair     
|                                       |  | Cost      |        | Value    
|                                       |  |           |        |          
|(In millions)                          |  |           |        |           |  |   |        | 
|Due in one year or less                |  | $         | 245    |           |  | $ | 238    | 
|Due after one year through five years  |  |           | 2,571  |           |  |   | 2,581  | 
|Due after five years through ten years |  |           | 5,335  |           |  |   | 5,433  | 
|Due after ten years                    |  |           | 9,494  |           |  |   | 9,815  | 
|Asset-backed securities                |  |           | 7,888  |           |  |   | 8,208  | 
|                                       |  |           |        |           |  |   |        | 
|Total                                  |  | $         | 25,533 |           |  | $ | 26,275 | 
|                                       |  |           |        |           |  |   |        | 

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 2002 and 2001 was $88 million and $186 million. At December 31, 2002
and 2001, no investments, other than investments in U.S. government agency
securities, exceeded 10% of stockholders equity.

As of December 31, 2002 and 2001, the Company had committed approximately $141
million and $152 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, 2002 to future capital calls from certain of its
unconsolidated affiliates in exchange for an ownership interest in such
affiliates.

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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, 2002 and 2001, the Company did not
hold any significant positions in investments whose sale was restricted.

Cash and securities with carrying values of approximately $1.8 billion and $2.0
billion were deposited by the Companys insurance subsidiaries under
requirements of regulatory authorities as of December 31, 2002 and 2001.

Cash and securities with carrying values of approximately $37 million and $30
million were deposited with financial institutions as collateral for letters of
credit as of December 31, 2002 and 2001. See Note K further details.

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 $479 million 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, 2002. See Note P for further
details of this agreement.

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 Financial Instruments

|                                               |                                                             |   |              |       |       |   |             |     |          |   |     |     |            |   |      |      |  
|---------------------------------------------- | ----------------------------------------------------------- | - | ------------ | ----- | ----- | - | ----------- | --- | -------- | - | --- | --- | ---------- | - | ---- | ---- | -
|                                               |                                                             |   | Contractual/ |       |       |   |             |     |          |   |     |     | Recognized
|                                               |                                                             |   | Notional     |       |       |   |             |     |          |   |     |     | Gains     
|                                               |                                                             |   | Amount       |       | Asset |   | (Liability) |     | (Losses)
|As of and for the year ended December 31, 2002 |                                                             |   |              |       |       |   |             |    
|(In millions)                                  |                                                             |   |              |       |       |   |             |     |          |   |     |     |            |   |      |     
|General account                                |                                                             |   |              |       |       |   |             |     |          |   |     |     |            |   |      |     
|                                               | Swaps                                                       |   | $            | 553   |       |   | $           |    |          |   | $   |    |            |   | $    | 12   |  
|                                               | Interest 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 accounts                              |                                                             |   |              |       |       |   |             |     |          |   |     |     |            |   |      |     
|                                               | Futures purchased                                           |   | $            | 614   |       |   | $           | 1   |          |   | $   |    |            |   | $    | (187 | )
|                                               | Futures sold, not yet purchased                             |   |              | 10    |       |   |             |    |          |   |     |    |            |   |      | (1   | )
|                                               | Commitments to purchase government and
municipal securities |   |              | 11    |       |   |             |    |          |   |     |    |            |   |      | 1    |  
|                                               | Options purchased                                           |   |              | 33    |       |   |             |    |          |   |     |    |            |   |      | (3   | )
|                                               | Options written                                             |   |              | 51    |       |   |             |    |          |   |     | (1  | )          |   |      | 2    |  
|                                               |                                                             |   |              |       |       |   |             |     |          |   |     |     |            |   |      |     
|Total                                          |                                                             | $ | 719          |       |       | $ | 1           |     |          | $ | (1  | )   |            | $ | (188 | )   
|                                               |                                                             |   |              |       |       |   |             |     |          |   |     |     |            |   |      |     

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Derivative Financial Instruments

|                                               |                                                             |   |              |     |       |   |             |     |          |   |     |     |            |   |      |      |  
|---------------------------------------------- | ----------------------------------------------------------- | - | ------------ | --- | ----- | - | ----------- | --- | -------- | - | --- | --- | ---------- | - | ---- | ---- | -
|                                               |                                                             |   | Contractual/ |     |       |   |             |     |          |   |     |     | Recognized
|                                               |                                                             |   | Notional     |     |       |   |             |     |          |   |     |     | Gains     
|                                               |                                                             |   | Amount       |     | Asset |   | (Liability) |     | (Losses)
|As of and for the year ended December 31, 2001 |                                                             |   |              |     |       |   |             |    
|(In millions)                                  |                                                             |   |              |     |       |   |             |     |          |   |     |     |            |   |      |     
|General account                                |                                                             |   |              |     |       |   |             |     |          |   |     |     |            |   |      |     
|                                               | Swaps                                                       |   | $            | 504 |       |   | $           | 3   |          |   | $   |    |            |   | $    | 1    |  
|                                               | Interest rate caps                                          |   |              | 500 |       |   |             | 2   |          |   |     |    |            |   |      | 1    |  
|                                               | Futures sold, not yet purchased                             |   |              | 14  |       |   |             |    |          |   |     |    |            |   |      | (11  | )
|                                               | Forwards                                                    |   |              | 183 |       |   |             |    |          |   |     | (2  | )          |   |      | (9   | )
|                                               | Commitments to purchase government and
municipal securities |   |              | 193 |       |   |             | 14  |          |   |     |    |            |   |      | 16   |  
|                                               | Equity warrants                                             |   |              | 15  |       |   |             | 1   |          |   |     |    |            |   |      | (3   | )
|                                               | Options purchased                                           |   |              | 10  |       |   |             |    |          |   |     |    |            |   |      | (5   | )
|                                               | Options purchased  Global Crossing                         |   |              |    |       |   |             |    |          |   |     |    |            |   |      | 143  |  
|                                               | Options written                                             |   |              |    |       |   |             |    |          |   |     |    |            |   |      | 5    |  
|                                               | Collateralized debt obligation liabilities                  |   |              | 170 |       |   |             |    |          |   |     | (38 | )          |   |      | 5    |  
|                                               | Synthetic guaranteed investment contracts                   |   |              | 789 |       |   |             |    |          |   |     |    |            |   |      |     |  
|                                               | Options embedded in convertible debt securities             |   |              | 803 |       |   |             | 189 |          |   |     |    |            |   |      | 10   |  
|                                               |                                                             |   |              |     |       |   |             |     |          |   |     |     |            |   |      |     
|Total                                          |                                                             | $ | 3,181        |     |       | $ | 209         |     |          | $ | (40 | )   |            | $ | 153  |     
|                                               |                                                             |   |              |     |       |   |             |     |          |   |     |     |            |   |      |     
|Separate accounts                              |                                                             |   |              |     |       |   |             |     |          |   |     |     |            |   |      |     
|                                               | Futures purchased                                           |   | $            | 884 |       |   | $           |    |          |   | $   | (8  | )          |   | $    | (157 | )
|                                               | Futures sold, not yet purchased                             |   |              | 10  |       |   |             |    |          |   |     |    |            |   |      | (1   | )
|                                               | Commitments to purchase government and
municipal securities |   |              | 17  |       |   |             |    |          |   |     |    |            |   |      | (2   | )
|                                               | Options purchased                                           |   |              | 65  |       |   |             | 1   |          |   |     |    |            |   |      | (1   | )
|                                               | Options written                                             |   |              | 70  |       |   |             |    |          |   |     |    |            |   |      | 2    |  
|                                               |                                                             |   |              |     |       |   |             |     |          |   |     |     |            |   |      |     
|Total                                          |                                                             | $ | 1,046        |     |       | $ | 1           |     |          | $ | (8  | )   |            | $ | (159 | )   
|                                               |                                                             |   |              |     |       |   |             |     |          |   |     |     |            |   |      |     

Realized investment gains and losses from derivative financial instruments
included in separate accounts assets/liabilities are not included in the
Companys realized investment gains/losses.

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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:

Derivative Financial Instruments

|                                                                     |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   |             |     |  
|-------------------------------------------------------------------- | ----------------------------------------------- | - | ------------ | ----- | ----- | - | ----------- | --- | --------- | - | --- | --- | ---------- | - | ----------- | --- | -
|                                                                     |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   | Cumulative 
|                                                                     |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   | Effect of a
|                                                                     |                                                 |   | Contractual/ |       |       |   |             |     |           |   |     |     | Change in 
|                                                                     |                                                 |   | Notional     |       |       |   |             |     |           |   |     |     | Accounting
|                                                                     |                                                 |   | Amount       |       | Asset |   | (Liability) |     | Principle
|January 1, 2001                                                      |                                                 |   |              |       |       |   |             |    
|(In millions)                                                        |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   |             |    
|General account                                                      |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   |             |    
|                                                                     | Swaps                                           |   | $            | 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 |           |   |     |    |            |   |             | 420 |  
|                                                                     | Options written  Global Crossing               |   |              | 1,256 |       |   |             |    |           |   |     | (1  | )          |   |             | 243 |  
|                                                                     | Collateralized debt obligation liabilities      |   |              | 170   |       |   |             |    |           |   |     | (18 | )          |   |             | (6  | )
|                                                                     | Synthetic guaranteed investment contracts       |   |              | 1,779 |       |   |             |    |           |   |     |    |            |   |             |    |  
|                                                                     | Options embedded in convertible debt securities |   |              | 845   |       |   |             | 231 |           |   |     |    |            |   |             | 231 |  
|                                                                     |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   |             |    
|Total                                                                |                                                 | $ | 5,676        |       |       | $ | 901         |     |           | $ | (19 | )   |            |   | 887         |    
|                                                                     |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   |             |    
|Unrealized 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 |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   | 33          |    
|                                                                     |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   |             |    
|Cumulative effect of a change in accounting principle, net of tax    |                                                 |   |              |       |       |   |             |     |           |   |     |     |            | $ | (61         | )  
|                                                                     |                                                 |   |              |       |       |   |             |     |           |   |     |     |            |   |             |    

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

The Companys other hedging activities primarily involve hedging interest rate
and foreign currency risks on various assets and liabilities. 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.

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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 for financial assets and liabilities.

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.

Premium deposits and annuity contracts were valued based on cash surrender
values and the outstanding fund balances.

Valuation techniques to determine fair value of limited partnership
investments, 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.

CNA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.

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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.

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.

The carrying amount and estimated fair value of CNAs financial instrument
assets and liabilities are listed in the following table. Additional detail
related to derivative financial instruments is also provided in a separate
table. See Note C for further discussion.

Financial Assets and Liabilities

|                                                  |                                 |      |          |        |       |   |           |        |       |   |       |        |           |   |       |        | 
|------------------------------------------------- | ------------------------------- | ---- | -------- | ------ | ----- | - | --------- | ------ | ----- | - | ----- | ------ | --------- | - | ----- | ------ | 
|December 31                                       |                                 | 2002 |          | 2001  
|                                                  |                                 |      |          |        |      
|                                                  |                                 |      |          |        |       |   | Estimated |        |       |   |       |        | Estimated
|                                                  |                                 |      | Carrying |        | Fair  |   | Carrying  |        | Fair 
|                                                  |                                 |      | Amount   |        | Value |   | Amount    |        | Value
|                                                  |                                 |      |          |        |       |   |           |        |      
|(In millions)                                     |                                 |      |          |        |       |   |           |        |       |   |       |        |           |   |       |       
|Financial assets                                  |                                 |      |          |        |       |   |           |        |       |   |       |        |           |   |       |       
|Investments:                                      |                                 |      |          |        |       |   |           |        |       |   |       |        |           |   |       |       
|                                                  | Fixed maturity securities       |      | $        | 26,275 |       |   | $         | 26,275 |       |   | $     | 29,164 |           |   | $     | 29,164 | 
|                                                  | Equity securities               |      |          | 666    |       |   |           | 666    |       |   |       | 1,338  |           |   |       | 1,338  | 
|                                                  | Mortgage loans                  |      |          | 28     |       |   |           | 29     |       |   |       | 31     |           |   |       | 31     | 
|                                                  | Policy loans                    |      |          | 180    |       |   |           | 175    |       |   |       | 194    |           |   |       | 186    | 
|                                                  | Limited partnership investments |      |          | 1,060  |       |   |           | 1,060  |       |   |       | 1,307  |           |   |       | 1,307  | 
|                                                  | Other invested assets           |      |          | 47     |       |   |           | 47     |       |   |       | 48     |           |   |       | 48     | 
|Separate account business:                        |                                 |      |          |        |       |   |           |        |       |   |       |        |           |   |       |       
|                                                  | Fixed maturity securities       |      |          | 2,014  |       |   |           | 2,014  |       |   |       | 2,347  |           |   |       | 2,347  | 
|                                                  | Equity securities               |      |          | 118    |       |   |           | 118    |       |   |       | 161    |           |   |       | 161    | 
|                                                  | Limited partnership investments |      |          | 327    |       |   |           | 327    |       |   |       | 342    |           |   |       | 342    | 
|                                                  | Other                           |      |          | 387    |       |   |           | 387    |       |   |       | 534    |           |   |       | 534    | 
|Notes receivable for the issuance of common stock |                                 |      | 72       |        |       |   | 83        |        |       |   | 68    |        |           |   | 78    |       
|                                                 
|Financial liabilities                             |                                 |      |          |        |       |   |           |        |       |   |       |        |           |   |       |       
|Premium deposits and annuity contracts            |                                 | $    | 1,285    |        |       | $ | 1,233     |        |       | $ | 1,465 |        |           | $ | 1,395 |       
|Long term and short term debt                     |                                 |      | 2,292    |        |       |   | 2,290     |        |       |   | 2,567 |        |           |   | 2,277 |       
|Collateralized debt obligation liabilities        |                                 |      | 14       |        |       |   | 14        |        |       |   | 38    |        |           |   | 38    |       
|Financial guarantee contracts                     |                                 |      | 56       |        |       |   | 55        |        |       |   | 98    |        |           |   | 96    |       
|Separate account business:                        |                                 |      |          |        |       |   |           |        |       |   |       |        |           |   |       |       
|                                                  | Guaranteed investment contracts |      |          | 276    |       |   |           | 296    |       |   |       | 469    |           |   |       | 492    | 
|                                                  | Variable separate accounts      |      |          | 779    |       |   |           | 779    |       |   |       | 1,146  |           |   |       | 1,146  | 
|                                                  | Other                           |      |          | 673    |       |   |           | 673    |       |   |       | 622    |           |   |       | 622    | 

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

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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.

In 2002, the inclusion of the CNA Tax Group in the consolidated federal income
tax return of Loews resulted in an increased federal income tax liability for
Loews. Accordingly, CNA has paid to Loews, or will pay to Loews, approximately
$94 million for 2002. For 2001, the inclusion of the CNA Tax Group in the
consolidated federal income tax return of Loews decreased the Loews federal
income tax liability. Accordingly, Loews has paid CNA approximately $908
million for 2001. In 2000, the inclusion of the CNA Tax Group in the
consolidated federal income tax return of Loews increased the Loews federal
income tax liability. As a result, CNA paid Loews approximately $64 million
for 2000.

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

|                                                      |  |      |      |      |  |      |     |   |  |   |      |  
|----------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | --- | - |  | - | ---- | -
|                                                      |  | 2002 |      | 2001 |  | 2000
|Years ended December 31                               |  |      |      |      |  |     
|(In millions)                                         |  |      |      |      |  |      |     |   |  |   |      |  
|Income tax (expense) benefit at statutory rates       |  | $    | (110 | )    |  | $    | 818 |   |  | $ | (604 | )
|Foreign net operating loss carry-forward              |  |      | (2   | )    |  |      | (90 | ) |  |   |     |  
|Tax benefit from tax exempt income                    |  |      | 53   |      |  |      | 37  |   |  |   | 71   |  
|Other benefit (expense), including state income taxes |  |      | (9   | )    |  |      | (21 | ) |  |   | (17  | )
|                                                      |  |      |      |      |  |      |     |   |  |   |      |  
|Effective income tax (expense) benefit                |  | $    | (68  | )    |  | $    | 744 |   |  | $ | (550 | )
|                                                      |  |      |      |      |  |      |     |   |  |   |      |  

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 carry forwards reflected above pertain to
those foreign subsidiaries for which no tax benefit is expected to be realized.

The composition of CNAs total income tax (expense) benefit allocated between
operating results and realized investment gains and losses, excluding
discontinued operations and the cumulative effects of changes in accounting
principles, is as follows:

Components of Tax Provision

|                                                                   |  |      |      |      |  |      |       |   |  |   |      |  
|------------------------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                                                                   |  | 2002 |      | 2001 |  | 2000
|Years ended December 31                                            |  |      |      |      |  |     
|(In millions)                                                      |  |      |      |      |  |      |       |   |  |   |      |  
|Income tax (expense) benefit on operating results                  |  | $    | (171 | )    |  | $    | 1,190 |   |  | $ | (190 | )
|Income tax benefit (expense) on realized
investment (losses) gains |  |      | 103  |      |  |      | (446  | ) |  |   | (360 | )
|                                                                   |  |      |      |      |  |      |       |   |  |   |      |  
|Total income tax (expense) benefit                                 |  | $    | (68  | )    |  | $    | 744   |   |  | $ | (550 | )
|                                                                   |  |      |      |      |  |      |       |   |  |   |      |  

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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

|                                   |  |      |     |      |  |      |     |   |  |   |      |  
|---------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | ---- | -
|                                   |  | 2002 |     | 2001 |  | 2000
|Years ended December 31            |  |      |     |      |  |     
|(In millions)                      |  |      |     |      |  |      |     |   |  |   |      |  
|Current tax (expense) benefit      |  | $    | (61 | )    |  | $    | 806 |   |  | $ | (74  | )
|Deferred tax expense               |  |      | (7  | )    |  |      | (62 | ) |  |   | (476 | )
|                                   |  |      |     |      |  |      |     |   |  |   |      |  
|Total income tax (expense) benefit |  | $    | (68 | )    |  | $    | 744 |   |  | $ | (550 | )
|                                   |  |      |     |      |  |      |     |   |  |   |      |  

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

|                                            |                                                                   |   |      |     |      |   |      |     | 
|------------------------------------------- | ----------------------------------------------------------------- | - | ---- | --- | ---- | - | ---- | --- | 
|                                            |                                                                   |   | 2002 |     | 2001
|December 31                                 |                                                                   |   |      |    
|(In millions)                               |                                                                   |   |      |     |      |   |      |    
|Deferred tax assets (liabilities)           |                                                                   |   |      |     |      |   |      |    
|Insurance reserves:                         |                                                                   |   |      |     |      |   |      |    
|                                            | Property and casualty claim and claim adjustment expense reserves |   | $    | 620 |      |   | $    | 697 | 
|                                            | Unearned premium reserves                                         |   |      | 332 |      |   |      | 332 | 
|                                            | Life reserves                                                     |   |      | 205 |      |   |      | 231 | 
|                                            | Other insurance reserves                                          |   |      | 19  |      |   |      | 18  | 
|Deferred acquisition costs                  |                                                                   |   | (783 | )   |      |   | (743 | )  
|Net unrealized gains                        |                                                                   |   | (331 | )   |      |   | (138 | )  
|Postretirement benefits other than pensions |                                                                   |   | 119  |     |      |   | 125  |    
|Life settlement contracts                   |                                                                   |   | 115  |     |      |   | 117  |    
|Foreign affiliate(s)                        |                                                                   |   | 28   |     |      |   | 69   |    
|Receivables                                 |                                                                   |   | 104  |     |      |   | 100  |    
|Accrued assessments and guarantees          |                                                                   |   | 40   |     |      |   | 53   |    
|Restructuring costs                         |                                                                   |   |     |     |      |   | 44   |    
|AMT credit carried forward                  |                                                                   |   |     |     |      |   | 40   |    
|Investment valuation differences            |                                                                   |   | 228  |     |      |   | (32  | )  
|Other, net                                  |                                                                   |   | 27   |     |      |   | (44  | )  
|                                            |                                                                   |   |      |     |      |   |      |    
|Net deferred tax asset                      |                                                                   | $ | 723  |     |      | $ | 869  |    
|                                            |                                                                   |   |      |     |      |   |      |    

The gross deferred tax assets and liabilities amounted to approximately $2.0
billion and $1.3 billion at December 31, 2002 and $2.1 billion and $1.2 billion
at December 31, 2001. 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 operating income and reversal of existing temporary
differences and available tax planning strategies. As a result, no valuation
allowance was recorded at December 31, 2002 and 2001.

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

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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. Adjustments to prior year reserve estimates, if necessary, are
reflected in operating results 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 or equity. The level of catastrophe losses
experienced in any period cannot be predicted and can be material to the
results of operations or equity of the Company.

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 is based on
a total industry loss of $50 billion and includes all lines of insurance. The
estimate takes 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. As of December 31, 2002, the Company believes its recorded reserves,
net of reinsurance, for the WTC event are adequate.

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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.

World Trade Center Event

|                                                                                                   |  |       |       |       |  |   |      |  
|-------------------------------------------------------------------------------------------------- |  | ----- | ----- | ----- |  | - | ---- | -
|                                                                                                   |  | Gross |       | Net  
|                                                                                                   |  | Basis |       | Basis
|Year ended December 31, 2001                                                                       |  |       |       |      
|(In millions)                                                                                      |  |       |       |       |  |   |      |  
|Property and casualty assumed reinsurance                                                          |  | $     | 662   |       |  | $ | 465  |  
|Property                                                                                           |  |       | 282   |       |  |   | 159  |  
|Workers compensation                                                                               |  |       | 112   |       |  |   | 25   |  
|Airline hull                                                                                       |  |       | 194   |       |  |   | 6    |  
|Commercial auto                                                                                    |  |       | 1     |       |  |   | 1    |  
|                                                                                                   |  |       |       |       |  |   |      |  
|Total property and casualty                                                                        |  |       | 1,251 |       |  |   | 656  |  
|                                                                                                   |  |       |       |       |  |   |      |  
|Group                                                                                              |  |       | 322   |       |  |   | 60   |  
|Life                                                                                               |  |       | 75    |       |  |   | 22   |  
|                                                                                                   |  |       |       |       |  |   |      |  
|Total group and life                                                                               |  |       | 397   |       |  |   | 82   |  
|                                                                                                   |  |       |       |       |  |   |      |  
|Total loss before corporate aggregate reinsurance, reinstatement and additional premiums and other |  | $     | 1,648 |       |  |   | 738  |  
|                                                                                                   |  |       |       |       |  |   |      |  
|Corporate 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

|                                                  |                                                                                                               |   |        |        |      |   |        |        |   |   |        |        |  
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                  |                                                                                                               |   | 2002   |        | 2001 |   | 2000  
|As of and for the years ended December 31         |                                                                                                               |   |        |        |      |  
|(In millions)                                     |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|Reserves, beginning of year:                      |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|                                                  | Gross                                                                                                         |   | $      | 31,266 |      |   | $      | 26,962 |   |   | $      | 27,356 |  
|                                                  | Ceded                                                                                                         |   |        | 12,105 |      |   |        | 7,848  |   |   |        | 6,395  |  
|                                                  |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|Net reserves, beginning of year                   |                                                                                                               |   | 19,161 |        |      |   | 19,114 |        |   |   | 20,961 |       
|                                                  |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|Reduction of net reserves (a)                     |                                                                                                               |   | (1,316 | )      |      |   |       |        |   |   |       |       
|Net incurred claim and claim adjustment expenses: |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|                                                  | Provision for insured events of current year                                                                  |   |        | 8,248  |      |   |        | 8,660  |   |   |        | 8,929  |  
|                                                  | Increase in provision for insured events of prior years                                                       |   |        | 35     |      |   |        | 2,464  |   |   |        | 427    |  
|                                                  | Amortization of discount                                                                                      |   |        | 72     |      |   |        | 107    |   |   |        | 158    |  
|                                                  |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|Total net incurred                                |                                                                                                               |   | 8,355  |        |      |   | 11,231 |        |   |   | 9,514  |       
|                                                  |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|Net payments attributable to:                     |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|                                                  | Current year events                                                                                           |   |        | 3,137  |      |   |        | 3,997  |   |   |        | 4,171  |  
|                                                  | Prior year events                                                                                             |   |        | 6,553  |      |   |        | 7,437  |   |   |        | 7,560  |  
|                                                  | Reinsurance recoverable against net reserve transferred
under retroactive reinsurance agreements (See Note P) |   |        | (133   | )    |   |        | (250   | ) |   |        | (370   | )
|                                                  |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|Total net payments                                |                                                                                                               |   | 9,557  |        |      |   | 11,184 |        |   |   | 11,361 |       
|                                                  |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|Net reserves, end of year                         |                                                                                                               |   | 16,643 |        |      |   | 19,161 |        |   |   | 19,114 |       
|Ceded reserves, end of year                       |                                                                                                               |   | 10,727 |        |      |   | 12,105 |        |   |   | 7,848  |       
|                                                  |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       
|Gross reserves, end of year                       |                                                                                                               | $ | 27,370 |        |      | $ | 31,266 |        |   | $ | 26,962 |       
|                                                  |                                                                                                               |   |        |        |      |   |        |        |   |   |        |       



|(a) |  | 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 the sale.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The changes in provision for insured events of prior years (reserve
development) is composed of the following components. For the years ended
December 31, 2002, 2001 and 2000, the net unfavorable reserve development was
$35 million, $2,464 million and $427 million.

Reserve Development

|                                      |  |      |    |      |  |      |       |  |  |   |     | 
|------------------------------------- |  | ---- | -- | ---- |  | ---- | ----- |  |  | - | --- | 
|                                      |  | 2002 |    | 2001 |  | 2000
|Years ended December 31               |  |      |    |      |  |     
|(In millions)                         |  |      |    |      |  |      |       |  |  |   |     | 
|Environmental pollution and mass tort |  | $    |   |      |  | $    | 468   |  |  | $ | 15  | 
|Asbestos                              |  |      |   |      |  |      | 773   |  |  |   | 65  | 
|Other                                 |  |      | 35 |      |  |      | 1,223 |  |  |   | 347 | 
|                                      |  |      |    |      |  |      |       |  |  |   |     | 
|Total                                 |  | $    | 35 |      |  | $    | 2,464 |  |  | $ | 427 | 
|                                      |  |      |    |      |  |      |       |  |  |   |     | 

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Environmental Pollution and Mass Tort and Asbestos (APMT) Reserves

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

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

Environmental Pollution and Mass Tort and Asbestos

|               |  |                    |      |                   |  |      |       |                    |  |   |      |   |  |   |       |  
|-------------- |  | ------------------ | ---- | ----------------- |  | ---- | ----- | ------------------ |  | - | ---- | - |  | - | ----- | -
|               |  | December 31, 2002  |      | December 31, 2001
|               |  |                    |      |                  
|               |  | Environmental      |      |                   |  |      |       | Environmental      |  |   |      |  
|               |  | Pollution and Mass |      |                   |  |      |       | Pollution and Mass |  |   |      |  
|               |  | Tort               |      | Asbestos          |  | Tort |       | Asbestos          
|               |  |                    |      |                   |  |      |       |                   
|(In millions)  |  |                    |      |                   |  |      |       |                    |  |   |      |   |  |   |       |  
|Gross reserves |  | $                  | 830  |                   |  | $    | 1,758 |                    |  | $ | 837  |   |  | $ | 1,644 |  
|Ceded reserves |  |                    | (313 | )                 |  |      | (527  | )                  |  |   | (204 | ) |  |   | (392  | )
|               |  |                    |      |                   |  |      |       |                    |  |   |      |   |  |   |       |  
|Net reserves   |  | $                  | 517  |                   |  | $    | 1,231 |                    |  | $ | 633  |   |  | $ | 1,252 |  
|               |  |                    |      |                   |  |      |       |                    |  |   |      |   |  |   |       |  

There was no asbestos or environmental pollution and mass tort-related net
claim and claim adjustment expense reserve development for the year ended
December 31, 2002. As a result of a change in estimate resulting from the
Companys semi-annual ground-up review of APMT accounts, gross and ceded APMT
reserves were increased. The settlement scenarios that supported higher
estimated gross and higher estimated ceded reserves were judged to be the most
appropriate. However, net reserves remained unchanged. The estimation of
reinsurance recoverables on accounts is highly dependent on the allocation of
each accounts estimated ultimate losses to the available historical insurance
coverage. This allocation becomes more refined as accounts and their insurers
enter more serious settlement negotiations.

During 2002, net reserves were
identified relating to APMT related claim and claim adjustment
expense reserves for assumed reinsurance pools, which reflects
improvements in the identification of APMT activity from assumed
reinsurance and pools. The inclusion of these additional APMT
reserves increased the APMT reserves and decreased other reserves,
resulting in no net change in the Company's overall carried claim and
claim adjustment expense reserves.

Environmental Pollution and Mass Tort

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

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the industry as an absolute pollution exclusion. CNA and the insurance
industry are disputing coverage for many such claims. Key coverage issues
include whether cleanup costs are considered damages under the policies,
trigger of coverage, allocation of liability among triggered policies,
applicability of pollution exclusions and owned property exclusions, the
potential for joint and several liability and the definition of an occurrence.
To date, courts have been inconsistent in their rulings on these issues.

A number of proposals to reform Superfund have been made by various parties.
In 2002, no reforms were enacted by Congress. 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.

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, court decisions that continue to restrict the scope and
applicability of the absolute pollution exclusion contained in policies issued
by the Company post 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, 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.

As of December 31, 2002 and 2001, CNA carried approximately $517 million and
$633 million of claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and mass tort
claims. There was no environmental and mass tort net claim and claim
adjustment expense reserve development for the year ended December 31, 2002.
Unfavorable environmental pollution and mass tort net claim and claim
adjustment expense reserve development for the years ended December 31, 2001
and 2000 amounted to $468 million and $15 million. The Company paid
environmental pollution-related claims and mass tort-related claims, net of
reinsurance recoveries, of $116 million, $203 million and $135 million during
the years ended December 31, 2002, 2001 and 2000.

Asbestos

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

In the past several years, CNA has experienced significant increases in claim
counts for asbestos-related claims. The factors that led to these increases
included, among other things, intensive advertising campaigns by lawyers for
asbestos claimants, mass medical screening programs sponsored by plaintiff
lawyers, and the addition of new defendants such as the

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distributors and installers of products containing asbestos. Currently, the
majority of asbestos bodily injury claims are filed by persons exhibiting few,
if any, disease symptoms. It is estimated that approximately 90% of the
current non-malignant asbestos claimants do not meet the American Medical
Associations definition of impairment. Some courts, including the federal
district court responsible for pre-trial proceedings in all federal asbestos
bodily injury actions, have ordered that so-called unimpaired claimants may
not recover unless at some point the claimants condition worsens to the point
of impairment.

As of December 31, 2002 and 2001, CNA carried approximately $1,231 million and
$1,252 million of claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported asbestos-related claims.

There was no asbestos-related net claim and claim adjustment expense reserve
development for the year ended December 31, 2002. Unfavorable asbestos-related
net claim and claim adjustment expense reserve development for the years ended
December 31, 2001 and 2000 amounted to $773 million and $65 million. The
Company paid asbestos-related claims, net of reinsurance, of $20 million, $171
million and $126 million during the years ended December 31, 2002, 2001 and
2000, excluding payments made in connection with the 1993 settlement of
litigation related to Fibreboard Corporation.

CNA has structured settlement agreements with four of its policyholders for
which it has future payment obligations. Structured settlement agreements
provide for payments of sums certain over multiple years as set forth in each
individual agreement. As to the four structured settlement agreements existing
at December 31, 2002, payment obligations under those settlement agreements are
projected to terminate in 2016. For these four structured settlement
agreements, CNA has reserved $118 million, net of reinsurance.

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

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, CNA had
negotiated 23 such agreements in which CNA committed coverage for payment of
claims

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and claim related adjustment expenses subject to documentation requirements as
set forth in the terms of each specific agreement. The Company has evaluated
these commitments and has established a $66 million reserve, net of
reinsurance, to fund coverage in place agreements based on current projections
of claims volumes and severities.

At December 31, 2002, CNAs total IBNR reserve for asbestos was $729 million,
net of reinsurance. For asbestos exposures, CNA classifies its IBNR reserve as
assigned or unassigned. In circumstances where CNA has executed a settlement
agreement with its policyholder, CNA assigns IBNR reserve to that account to
cover the projected value of the settlement. At December 31, 2002, the
assigned IBNR reserve was $166 million, net of reinsurance. The unassigned
IBNR reserve relates to potential development on accounts that have not settled
and potential future claims for unidentified policyholders. At December 31,
2002, CNAs unassigned IBNR reserve was $563 million, net of reinsurance.

At December 31, 2002, the Company categorized active accounts as large or small
accounts. CNA defined a large account as an active account with more than $100
thousand cumulative paid losses through December 31, 2002. CNA had 150 large
accounts with a collective reserve of $220 million, net of reinsurance. Small
accounts were defined as active accounts with $100 thousand or less cumulative
paid losses through December 31, 2002. CNA had 939 small accounts with a
collective reserve of $90 million, net of reinsurance.

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

On February 13, 2003, CNA announced it had resolved asbestos related coverage
litigation and claims involving A.P. Green Industries, A.P. Green Services and
Bigelow  Liptak Corporation. Under the agreement, CNA will be required to pay
$74 million, net of reinsurance recoveries, over a ten year period. The
settlement resolves CNAs liabilities for all pending and future asbestos
claims involving A.P. Green Industries, Bigelow-Liptak Corporation and related
subsidiaries, including alleged non-products exposures. The settlement is
subject to bankruptcy court approval and confirmation of a bankruptcy plan
containing a channeling injunction to protect CNA from any future claims. The
Companys recorded reserves as of December 31, 2002, included reserves for this
exposure.

CNA is engaged in insurance coverage litigation with Robert A. Keasbey Company
(Keasbey) and associated claimants in New York state court (Continental
Casualty Company vs. Robert A. Keasbey Company et al.,Supreme Court State of
New York  County of New York, No. 401621/02).Keasbey was a seller and
installer of asbestos products in the New York and New Jersey area. CNA paid
its full product liability limits to Keasbey in prior years. Claimants against
Keasbey now claim CNA owes additional coverage under the operations section of
policies

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issued to it by CNA. CNA is also a party to insurance coverage litigation
between Burns & Roe Enterprises, Inc. (Burns & Roe) and its insurance carriers
related to asbestos bodily injury and wrongful death claims (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 various engineering and
related services in connection with construction projects. Burns & Roe is
currently in bankruptcy. There are numerous factual and legal issues to be
resolved in connection with these cases and it is difficult to predict the
outcome or financial exposure represented by these matters in light of the
novel theories asserted by policyholders and their counsel.

Policyholders have also initiated litigation directly against CNA and other
insurers. CNA has been named in Adams v. Aetna, Inc., et al. (Circuit Court of
Kanhwha County, West Virginia), a purported class action against CNA and other
insurers, alleging that the defendants violated West Virginias Unfair Trade
Practices Act in handling and resolving asbestos claims against their
policyholders. In addition, lawsuits have 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)). It is difficult to predict the
outcome or financial exposure represented by this type of litigation in light
of the broad nature of the relief requested and the novel theories asserted.

CNA reviews each active asbestos account every six months to determine whether
changes in reserve estimates may be necessary. The Company considers input
from its analyst professionals with direct responsibility for the claims,
inside and outside counsel with responsibility for representation of the
Company, and its actuarial staff. These professionals review, among many
factors, the policyholders present and future exposures (including such
factors as claims volume, disease mix, trial conditions, settlement demands and
defense costs); the policies issued by CNA (including such factors as aggregate
or per occurrence limits, whether the policy is primary, umbrella or excess,
and the existence of policyholder retentions and/or deductibles); the existence
of other insurance; and reinsurance arrangements.

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

During the second quarter of 2001, the Company noted the continued emergence of
adverse loss experience across several lines of business related to prior
years, which are discussed in further detail below. The Company completed a
number of reserve studies during the second quarter of 2001 for many of its
lines of business, including those in which these adverse trends were noted.

With respect to environmental 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

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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
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.

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.

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, which
could accelerate the time when such indemnification payments could be due.

These developments led the Company to the conclusion that its asbestos reserves
required strengthening.

The results of operations or equity of CNA in future years may be adversely
affected by environmental pollution and mass tort and asbestos claim and claim
adjustment expenses. Management will continue to review and monitor these
liabilities and make further adjustments, including the potential for further
reserve strengthening, as necessary.

Other Reserves

Unfavorable net claim and claim adjustment expense reserve development for
other reserves in 2002 of $35 million was the result of analyses of several
lines of business. This development

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related principally to the property and casualty companies. A brief summary of
these lines of business and the associated reserve development is discussed
below.

The gross and net carried claim and claim adjustment expense reserves for
Standard Lines were $12,854 million and $7,788 million at the beginning of the
year of 2002.

Approximately $140 million of favorable prior year reserve 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 reserve
development of $8 million. The favorable residual market prior year reserve
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 prior year reserve 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 reserve development was recorded in accident years prior to 1999,
with the remainder of the favorable reserve development recorded in accident
years 1999 to 2001.

Approximately $50 million of favorable prior year reserve development during
2002 was recorded in commercial automobile liability. Most of the favorable
development was from accident year 2000. The most recent actuarial review
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 reserve development was recorded in
property lines during 2002. The favorable reserve 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 reserve developments were approximately $70 million
of unfavorable reserve development in programs written in CNA Excess & Surplus
(E&S), approximately $30 million of unfavorable reserve development on a
contractors account package policy program and approximately $20 million of
unfavorable 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
reserve development. The 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 development covers tow truck and
ambulance operators in the 2000 and 2001 accident years. This program was
started in

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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 reserve 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 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 gross and net carried claim and claim adjustment expense reserves for
Specialty Lines were $5,668 million and $3,461 million for the beginning of the
year of 2002.

Unfavorable prior year reserve 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 prior year unfavorable reserve
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 prior year unfavorable reserve development was
related to long term care facilities. The 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 reserve 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 reserve 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 reserve development of approximately
$65 million during 2002. Approximately $50 million of this unfavorable reserve
development was due to participation in voluntary pools. About half of the
reserve 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 reserve 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 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.

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Offsetting the unfavorable reserve development was favorable reserve
development in CNA Pro and for Enron-related exposures. Programs providing
professional liability coverage to accountants, lawyers and realtors primarily
drove favorable prior year reserve 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 $180 million, net of reinsurance. Additionally, favorable
reserve 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.

The gross and net carried claim and claim adjustment expense reserves for CNA
Re were $4,644 million and $3,013 million for the beginning of the year of
2002.

Prior year unfavorable reserve development was recorded in 2002 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.

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.

The gross and net carried claim and claim adjustment expense reserves for the
Corporate and Other segment, excluding the gross and net carried claim and
claim adjustment expense reserves for APMT, were $2,562 million and $225
million for the beginning of the year of 2002.

Personal insurance recorded unfavorable reserve 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 reserve 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 reserve development on personal insurance was offset by
favorable reserve development on other runoff business driven principally by
financial and mortgage guarantee

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coverages from accident years 1997 and prior. The favorable reserve
development on financial and mortgage 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.

Unfavorable net claim and claim adjustment expense reserve development for
other reserves in 2001 of $1,223 million was the result of analyses of several
lines of business. This development related principally to commercial
insurance coverages including automobile liability and multiple-peril, as well
as assumed reinsurance and healthcare-related coverages. A brief summary of
these lines of business and the associated reserve development is discussed
below.

Approximately $230 million of the adverse loss development was a result of
several coverages provided to commercial entities. The gross and net carried
claim and claim adjustment expense reserves for the Standard Lines business at
the beginning of 2001 were $12,070 million and $9,129 million. 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 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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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 net unfavorable
development on prior year loss reserves of approximately $690 million. The
gross and net claim and claim adjustment expense reserves at the beginning of
2001 for CNA Re were $4,238 million and $2,735 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 the second
quarter of 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 total unfavorable 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
development was attributable to accident years prior to 1996.

Approximately $300 million of adverse loss development was due to adverse
experience in all other lines, primarily in coverages provided to
healthcare-related entities written by CNA HealthPro. The gross and net claim
and claim adjustment expense reserve at the beginning of 2001 for Specialty
Lines were $4,813 million and $3,429 million. 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
reserve development of $240 million was recorded for accident years 1997
through 2000. The remaining unfavorable reserve development was attributable
to accident years prior to 1997.

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

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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 other 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 claim and claim adjustment expense reserve development for
other reserves in 2000 of $347 million was due to unfavorable loss experience
in standard commercial lines, assumed reinsurance and accident and health
lines. These unfavorable changes were partially offset by favorable
development in non-medical professional liability and other casualty lines.
The unfavorable development in standard commercial lines can be attributed to
adverse claim experience for recent accident years in the commercial auto
liability, commercial multi-peril and workers compensation lines of business.
The unfavorable development in the assumed reinsurance and accident and health
lines also resulted from adverse claims experience.

CNAs insurance subsidiaries also have exposure to construction defect losses,
principally in its general liability and commercial multiple-peril lines. This
exposure relates to claims involving property damage alleging loss of use,
damage, destruction or deterioration of land, buildings and other structures
involving new construction or major rehabilitation of real property. Many of
these claims involve multiple defects and multiple defendants. The majority of
losses have been concentrated in a limited number of states, including
California. The Company has recorded several underwriting actions to mitigate
this exposure in the future. Estimation of construction defect losses is
subject to a high level of uncertainty due to the long period of time between
the accident date and the reporting of the claim, emerging case law, changing
regulatory rules and the allocation of damages to the multiple defendants. Due
to the inherent uncertainties noted above, the ultimate liability for
construction defect claims may vary substantially from the amount currently
recorded.

Financial Guarantee Reserves

CNA, through assumed reinsurance contracts, provided financial guarantees to
issuers of asset-backed securities, motion picture finance and money market
funds. Premiums were received throughout the exposure period and were
recognized as revenue in proportion to the underlying risk insured. In
addition, CNAs property and casualty subsidiaries wrote financial guarantee
insurance in the form of surety bonds and also insured equity policies through
August 1, 1989. These bonds represented primarily industrial development bond
guarantees and, in the case of insured equity policies, typically extended in
initial terms from 10 to 13 years. For these guarantees and policies CNA
received an advance premium that was recognized over the exposure period and in
proportion to the underlying risk insured.

As of December 31, 2002 and 2001, gross exposure on assumed financial guarantee
insurance contracts, credit enhancement products, financial guarantee surety
bonds and insured equity policies was approximately $7 million and $82 million.
The degree of risk to CNA related to this exposure is substantially reduced
through reinsurance, diversification of exposures and collateral requirements.
In addition, security interests in improved real estate are also commonly
obtained on these risks. Approximately 14% and 26% of the risks were ceded to
reinsurers at December 31, 2002 and 2001. Total exposure, net of reinsurance,
amounted to $6 million and $61 million as of December 31, 2002 and 2001. At
December 31, 2002 and

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2001, collateral consisting of letters of credit, cash reserves and debt
service reserves amounted to $1 million and $6 million.

Gross unearned premium reserves for these contracts were $2 million and $2
million at December 31, 2002 and 2001. Gross claim and claim adjustment
expense reserves totaled $50 million and $103 million as of December 31, 2002
and 2001.

Note G. Legal Proceedings and Contingent Liabilities

IGI Contingency

In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.), a subsidiary of CNA Re
U.K., 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.

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

CNA has established reserves for its estimated exposure under the program,
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

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described above. As a result of these uncertainties, the results of operations
in future years may be adversely affected by potentially significant reserve
additions. Management does not believe that any such reserve additions will be
material to the equity of the Company, 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 U.K. in 2002. See Note P for further
discussion of the sale.

California Wage and Hour Litigation

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

Voluntary Market Premium Litigation

CNA, along with dozens of other insurance companies, is a defendant in sixteen
purported class action cases brought by large policyholders, which generally
allege that the defendants, as part of an industry-wide conspiracy, included
improper charges in their retrospectively rated and other loss-sensitive
insurance premiums. Fourteen lawsuits were brought as class actions in state
courts and two in federal court. Among the claims asserted were violations of
state antitrust laws, breach of contract, fraud and unjust enrichment. In two
of the cases, the defendants won dismissals on motions and, in four others,
class certification was denied after hearing. Plaintiffs voluntarily dismissed
their claims in four states. In the federal court case, Sandwich Chef of
Texas, Inc., et al. v. Reliance National Indemnity Insurance Company,
et al.,
Civil Action No. H-98-1484, United States District Court for the Southern
District of Texas, the district court certified a multi-state class but was
reversed on interlocutory appeal by the U.S. Court of Appeals for the Fifth
Circuit. Due to the uncertainty of how the courts may interpret state and
federal law as applied to the facts of the cases, the extent of potential
losses beyond any amounts that may be accrued are not readily determinable at
this time. Based on facts and circumstances presently known, however, in the
opinion of management the outcome will not materially affect the equity of the
Company, although results of operations may be adversely affected.

Other Litigation

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

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Note F for discussion of other pending litigation and claims related to
environmental pollution, asbestos and mass tort cases.

Note H. Reinsurance

CNA assumes and cedes reinsurance with other insurers, reinsurers and members
of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, provide greater diversification of
risk, minimize exposures on larger risks and to exit certain lines of business.
Reinsurance coverages are tailored to the specific risk characteristics of
each product line and CNAs retained amount varies by type of coverage.
Generally, property risks are reinsured on an excess of loss, per risk basis.
Liability coverages are generally reinsured on a quota share basis in excess of
CNAs retained risk. CNAs 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 note, that are entered into and
accounted for on a funds withheld basis. Under the funds withheld basis, the
Company records the cash remitted to the reinsurer for the reinsurers margin,
or cost of the reinsurance contract, as ceded premiums. The remainder of the
premiums ceded under the reinsurance contract is recorded as 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 other net
investment income, was $239 million, $241 million and $87 million in 2002, 2001
and 2000. The amount subject to interest crediting rates on such contracts was
$2,766 million and $2,724 million at December 31, 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.

Amounts receivable from reinsurers were $12,696 million and $13,823 million at
December 31, 2002 and 2001. Of these amounts, $957 million and $838 million
were billed to reinsurers as of December 31, 2002 and 2001, as reinsurance
contracts generally require payment of claims by the ceding company before the
amount can be billed to the reinsurer. The remaining receivable

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relates to the estimated case and IBNR reserves and future policyholder
benefits ceded under reinsurance contracts.

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 $4,825 million and $3,696 million at December 31,
2002 and 2001.

CNAs largest recoverables from a single reinsurer at December 31, 2002,
including prepaid reinsurance premiums, were approximately $2,090 million,
$1,456 million, $890 million, $616 million, $598 million, and $541 million from
subsidiaries of The Allstate Corporation (Allstate), subsidiaries of Hannover
Reinsurance (Ireland) Ltd., American Reinsurance Company, European Reinsurance
Company of Zurich, subsidiaries of Gerling Global Reinsurance Corporation, and
Lloyds Underwriters.

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. The Companys principal credit exposures
from these recent events arise from reinsurance receivables from Gerling Global
(Gerling), Trenwick and Commercial Risk insurance groups. At December 31,
2002, the Company had approximately $926 million of reinsurance receivables
from these reinsurers, of which $384 million was not supported by collateral.
The majority of the uncollateralized receivables were due from U.S.-domiciled
insurers. Of the $384 million of reinsurance receivables unsupported by
collateral, $170 million relates to Gerling. Gerling has stated that the
Company transfer approximately $204 million of funds withheld balances on three
treaties relating to CNA HealthPro to a trust established by Gerling for the
benefit of the Company, or in the absence of such transfer, that these
treaties be commuted. CNA has taken Gerlings statement
under advisement.

The Company has established an allowance for doubtful accounts to provide for
estimated uncollectible reinsurance receivables. The allowance for doubtful
accounts was $196 million and $170 million at December 31, 2002 and 2001.

Insurance claims and policyholders benefits reported in the Consolidated
Statements of Operations are net of reinsurance recoveries of $4,164 million,
$7,221 million and $3,755 million for 2002, 2001 and 2000.

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

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The effects of reinsurance on earned premiums and written premiums for the
years ended December 31, 2002, 2001 and 2000 are shown in the following tables.

Components of Earned Premiums

|                      |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|--------------------- |  | ------ | ------ | ------- |  | ----- | ----- | --- |  | ----- | ----- |  |  | - | ------ |  |  | -------- | ---- | -
|                      |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  | Assumed/
|                      |  | Direct |        | Assumed |  | Ceded |       | Net |  | Net %
|                      |  |        |        |         |  |       |       |     |  |      
|(In millions)         |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|2002 Earned Premiums  |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Property and casualty |  | $      | 9,694  |         |  | $     | 946   |     |  | $     | 3,812 |  |  | $ | 6,828  |  |  |          | 13.9 | %
|Accident and health   |  |        | 2,612  |         |  |       | 153   |     |  |       | 15    |  |  |   | 2,750  |  |  |          | 5.6  |  
|Life                  |  |        | 1,089  |         |  |       | (5    | )   |  |       | 449   |  |  |   | 635    |  |  |          | (0.7 | )
|                      |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Total earned premiums |  | $      | 13,395 |         |  | $     | 1,094 |     |  | $     | 4,276 |  |  | $ | 10,213 |  |  |          | 10.7 | %
|                      |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|2001 Earned Premiums  |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Property and casualty |  | $      | 8,708  |         |  | $     | 1,228 |     |  | $     | 4,983 |  |  | $ | 4,953  |  |  |          | 24.8 | %
|Accident and health   |  |        | 3,644  |         |  |       | 176   |     |  |       | 136   |  |  |   | 3,684  |  |  |          | 4.8  |  
|Life                  |  |        | 1,179  |         |  |       | 217   |     |  |       | 745   |  |  |   | 651    |  |  |          | 33.3 |  
|                      |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Total earned premiums |  | $      | 13,531 |         |  | $     | 1,621 |     |  | $     | 5,864 |  |  | $ | 9,288  |  |  |          | 17.5 | %
|                      |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|2000 Earned Premiums  |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Property and casualty |  | $      | 8,389  |         |  | $     | 1,955 |     |  | $     | 3,421 |  |  | $ | 6,923  |  |  |          | 28.2 | %
|Accident and health   |  |        | 3,644  |         |  |       | 484   |     |  |       | 487   |  |  |   | 3,641  |  |  |          | 13.3 |  
|Life                  |  |        | 1,141  |         |  |       | 220   |     |  |       | 537   |  |  |   | 824    |  |  |          | 26.7 |  
|                      |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Total earned premiums |  | $      | 13,174 |         |  | $     | 2,659 |     |  | $     | 4,445 |  |  | $ | 11,388 |  |  |          | 23.3 | %
|                      |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  

Components of Written Premiums

|                       |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|---------------------- |  | ------ | ------ | ------- |  | ----- | ----- | --- |  | ----- | ----- |  |  | - | ------ |  |  | -------- | ---- | -
|                       |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  | Assumed/
|                       |  | Direct |        | Assumed |  | Ceded |       | Net |  | Net %
|                       |  |        |        |         |  |       |       |     |  |      
|(In millions)          |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|2002 Written Premiums  |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Property and casualty  |  | $      | 9,978  |         |  | $     | 953   |     |  | $     | 3,936 |  |  | $ | 6,995  |  |  |          | 13.6 | %
|Accident and health    |  |        | 2,618  |         |  |       | 187   |     |  |       | 13    |  |  |   | 2,792  |  |  |          | 6.7  |  
|Life                   |  |        | 1,091  |         |  |       | (5    | )   |  |       | 449   |  |  |   | 637    |  |  |          | (0.7 | )
|                       |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Total written premiums |  | $      | 13,687 |         |  | $     | 1,135 |     |  | $     | 4,398 |  |  | $ | 10,424 |  |  |          | 10.9 | %
|                       |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|2001 Written Premiums  |  |        |        |         |  |       |       |     |  |       |       |  |  |   |       
|Property and casualty  |  | $      | 9,132  |         |  | $     | 1,435 |     |  | $     | 5,173 |  |  | $ | 5,394  |  |  |          | 26.6 | %
|Accident and health    |  |        | 3,637  |         |  |       | 193   |     |  |       | 137   |  |  |   | 3,693  |  |  |          | 5.2  |  
|Life                   |  |        | 1,182  |         |  |       | 217   |     |  |       | 745   |  |  |   | 654    |  |  |          | 33.2 |  
|                       |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Total written premiums |  | $      | 13,951 |         |  | $     | 1,845 |     |  | $     | 6,055 |  |  | $ | 9,741  |  |  |          | 18.9 | %
|                       |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|2000 Written Premiums  |  |        |        |         |  |       |       |     |  |       |       |  |  |   |       
|Property and casualty  |  | $      | 8,412  |         |  | $     | 1,787 |     |  | $     | 3,444 |  |  | $ | 6,755  |  |  |          | 26.5 | %
|Accident and health    |  |        | 3,598  |         |  |       | 468   |     |  |       | 489   |  |  |   | 3,577  |  |  |          | 13.1 |  
|Life                   |  |        | 1,143  |         |  |       | 220   |     |  |       | 537   |  |  |   | 826    |  |  |          | 26.6 |  
|                       |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  
|Total written premiums |  | $      | 13,153 |         |  | $     | 2,475 |     |  | $     | 4,470 |  |  | $ | 11,158 |  |  |          | 22.2 | %
|                       |  |        |        |         |  |       |       |     |  |       |       |  |  |   |        |  |  |          |      |  

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The impact of reinsurance on life insurance inforce at December 31, 2002, 2001
and 2000 is shown in the following table.

Components of Life Insurance Inforce

|              |  |        |         |         |  |       |         |     |  |   |         |  |  |   |         | 
|------------- |  | ------ | ------- | ------- |  | ----- | ------- | --- |  | - | ------- |  |  | - | ------- | 
|              |  | Direct |         | Assumed |  | Ceded |         | Net
|              |  |        |         |         |  |       |         |    
|(In millions) |  |        |         |         |  |       |         |     |  |   |         |  |  |   |         | 
|2002          |  | $      | 423,151 |         |  | $     | 14,600  |     |  | $ | 340,520 |  |  | $ | 97,231  | 
|2001          |  |        | 395,167 |         |  |       | 102,564 |     |  |   | 331,156 |  |  |   | 166,575 | 
|2000          |  |        | 391,847 |         |  |       | 142,934 |     |  |   | 363,893 |  |  |   | 170,888 | 

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.

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

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

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

Impact of Aggregate Cover on Pretax Operating Results

|                                              |  |      |     |      |  |   |       |  
|--------------------------------------------- |  | ---- | --- | ---- |  | - | ----- | -
|                                              |  | 2002 |     | 2001
|Year ended December 31                        |  |      |     |     
|(In millions)                                 |  |      |     |      |  |   |       |  
|Ceded earned premium                          |  | $    |    |      |  | $ | (543  | )
|Ceded claim and claim adjustment expenses     |  |      |    |      |  |   | 1,010 |  
|Interest charges                              |  |      | (51 | )    |  |   | (81   | )
|                                              |  |      |     |      |  |   |       |  
|Pretax (expense) benefit on operating results |  | $    | (51 | )    |  | $ | 386   |  
|                                              |  |      |     |      |  |   |       |  

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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 $760 million of ceded losses. The ceded premiums are a
percentage of ceded losses. The ceded premium related to full utilization of
the $760 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. Losses of $618 million have
been ceded under the CCC Cover through December 31, 2002.

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

Impact of CCC Cover on Pretax Operating Results

|                                          |  |      |      |      |  |   |      |  
|----------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                          |  | 2002 |      | 2001
|Year ended December 31                    |  |      |      |     
|(In millions)                             |  |      |      |      |  |   |      |  
|Ceded earned premiums                     |  | $    | (101 | )    |  | $ | (260 | )
|Ceded claim and claim adjustment expenses |  |      | 148  |      |  |   | 470  |  
|Interest charges                          |  |      | (37  | )    |  |   | (20  | )
|                                          |  |      |      |      |  |   |      |  
|Pretax benefit on operating results       |  | $    | 10   |      |  | $ | 190  |  
|                                          |  |      |      |      |  |   |      |  

Note I. Debt

Debt is composed of the following obligations.

Debt

|                                                              |                                                        |   |       |     |      |   |       |     | 
|------------------------------------------------------------- | ------------------------------------------------------ | - | ----- | --- | ---- | - | ----- | --- | 
|                                                              |                                                        |   | 2002  |     | 2001
|December 31                                                   |                                                        |   |       |    
|(In millions)                                                 |                                                        |   |       |     |      |   |       |    
|Variable rate debt:                                           |                                                        |   |       |     |      |   |       |    
|                                                              | Credit facility  CNAF, due April 29, 2002             |   | $     |    |      |   | $     | 250 | 
|                                                              | Credit facility  CNAF, due April 30, 2004             |   |       | 250 |      |   |       | 250 | 
|                                                              | Credit facility  CNA Surety, due September 30, 2002   |   |       |    |      |   |       | 75  | 
|                                                              | Credit facility  CNA Surety, due September 30, 2003   |   |       | 30  |      |   |       |    | 
|                                                              | Term loan  CNA Surety, due through September 30, 2005 |   |       | 30  |      |   |       |    | 
|Senior notes:                                                 |                                                        |   |       |     |      |   |       |    
|                                                              | 7.250%, face amount of $128, due March 1, 2003         |   |       | 128 |      |   |       | 133 | 
|                                                              | 6.250%, face amount of $248, due November 15, 2003     |   |       | 248 |      |   |       | 250 | 
|                                                              | 6.500%, face amount of $493, due April 15, 2005        |   |       | 491 |      |   |       | 491 | 
|                                                              | 6.750%, face amount of $250, due November 15, 2006     |   |       | 249 |      |   |       | 249 | 
|                                                              | 6.450%, face amount of $150, due January 15, 2008      |   |       | 149 |      |   |       | 149 | 
|                                                              | 6.600%, face amount of $200, due December 15, 2008     |   |       | 199 |      |   |       | 199 | 
|                                                              | 8.375%, face amount of $70, due August 15, 2012        |   |       | 69  |      |   |       | 68  | 
|                                                              | 6.950%, face amount of $150, due January 15, 2018      |   |       | 148 |      |   |       | 148 | 
|Debenture, 7.250%, face amount of $243, due November 15, 2023 |                                                        |   | 240   |     |      |   | 240   |    
|Capital leases, 8.000%-13.700%, due through December 31, 2011 |                                                        |   | 36    |     |      |   | 38    |    
|Other debt, 1.000%-6.600%, due through 2019                   |                                                        |   | 25    |     |      |   | 27    |    
|                                                              |                                                        |   |       |     |      |   |       |    
|Total debt                                                    |                                                        | $ | 2,292 |     |      | $ | 2,567 |    
|                                                              |                                                        |   |       |     |      |   |       |    
|Short term debt                                               |                                                        | $ | 420   |     |      | $ | 329   |    
|Long term debt                                                |                                                        |   | 1,872 |     |      |   | 2,238 |    
|                                                              |                                                        |   |       |     |      |   |       |    
|Total debt                                                    |                                                        | $ | 2,292 |     |      | $ | 2,567 |    
|                                                              |                                                        |   |       |     |      |   |       |    

The Company has a $250 million three-year bank credit facility with an April
30, 2004 expiration date. The Company previously had a $250 million 364-day
facility with an expiration date of

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April 29, 2002. An option to convert the 364-day facility to a one-year term
loan was exercised in April of 2002. The term loan was subsequently prepaid on
December 23, 2002.

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,
2002, the facility fee on the three-year component was 17.5 basis points.

The Company pays interest on any outstanding debt/borrowings under the
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 57.5 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, 2002 and 2001, the weighted-average interest rate on the
borrowings under the facility, including facility fees and utilization fees,
was 2.3% and 3.1%.

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

On September 30, 2002, CNA Surety Corporation (CNA Surety), a 64% owned and
consolidated subsidiary of CNA, entered into a $65 million credit agreement
with one bank, which consisted of a $35 million 364-day revolving credit
facility and a $30 million three-year term loan, payable semi-annually at a
rate of $5 million. The credit agreement replaced a $130 million five-year
revolving credit facility that terminated September 30, 2002. The new
revolving credit facility was fully utilized at inception.

The terms of the new credit facility agreement required the assumption by a
second bank of $15 million of the credit risk by November 30, 2002 or CNA
Surety would be required to repay $15 million to reduce the amount of the
credit facility commitment from $35 million to $20 million. On November 29,
2002, CNA Surety repaid $11 million of the outstanding borrowings and arranged
for the due date on the remaining $4 million to be delayed to March 31, 2003.
A second bank subsequently assumed $10 million of the credit risk resulting in
an additional $6 million of outstanding borrowings, leaving the credit facility
commitment at $30 million. As of December 31, 2002, the revolving credit
facility was fully utilized.

Under the new credit facility agreement, CNA Surety pays a facility fee of 12.5
basis points, interest at LIBOR plus 45.0 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, 2002, the weighted-average interest rate on the
$60 million of outstanding borrowings under the credit agreement, including
facility fees and utilization fees was 2.0%.

Under the former credit facility agreement, CNA Surety paid interest on
outstanding borrowings based on, among other rates, LIBOR plus the applicable
margin. The applicable margin was determined by the companys leverage ratio
(debt to total capitalization). At the termination date of the old facility,
the applicable margin was 30.0 basis points, including the 10.0 basis point
facility fee. At December 31, 2001, the weighted-average interest rate on the
borrowings under the facility, including facility fees, was 2.6%.

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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, 2002 and 2001, CNAF and CNA
Surety were in compliance with all restrictive debt covenants.

The combined aggregate maturities for debt at December 31, 2002 are presented
in the following table.

|                             |  |   |       |  
|---------------------------- |  | - | ----- | -
|Maturity of Debt             |  |   |       |  
|                             |  |   |       |  
|(In millions)                |  |   |       |  
|2003                         |  | $ | 420   |  
|2004                         |  |   | 264   |  
|2005                         |  |   | 506   |  
|2006                         |  |   | 254   |  
|2007                         |  |   | 12    |  
|Thereafter                   |  |   | 846   |  
|Less original issue discount |  |   | (10   | )
|                             |  |   |       |  
|Total                        |  | $ | 2,292 |  
|                             |  |   |       |  

The Company has provided guarantees related to irrevocable standby letters of
credit for certain of its subsidiaries. Certain of these subsidiaries have
been sold; however, the irrevocable standby letter of credit guarantees remain
in effect. The Company would be required to remit prompt payment on the
letters of credit in question if the primary obligor drew down on these letters
of credit and failed to repay such loans in accordance with the terms of the
letters of credit. The maximum potential amount of future payments that CNA
could be required to pay under these guarantees are approximately $30 million
at December 31, 2002.

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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 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

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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.

The following table provides a reconciliation of benefit obligations.

Benefit Obligations and Accrued Benefit Costs

|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |      |      |  
|------------------------------------------------------ | ----------------------------------------- | -------------------------------------- | ----- | ---------------- | --- | ----------------------- | ----- | ---- | --- | ---- | ---- | ---- | ---- | - | ---- | ---- | ---- | -
|                                                       |                                           |                                        |       | Pension Benefits |     | Postretirement Benefits
|                                                       |                                           |                                        |       |                  |     |                        
|                                                       |                                           |                                        |       | 2002             |     | 2001                    |       | 2002 |     | 2001
|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |     
|(In millions)                                          |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|Benefit obligation at January 1                        |                                           | $                                      | 2,055 |                  |     | $                       | 1,882 |      |     | $    | 348  |      |      | $ | 313  |     
|Changes in benefit obligation:                         |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|                                                       | Service cost                              |                                        |       | 34               |     |                         |       | 38   |     |      |      | 5    |      |   |      | 6    |     
|                                                       | Interest cost                             |                                        |       | 141              |     |                         |       | 138  |     |      |      | 25   |      |   |      | 23   |     
|                                                       | Participants contributions               |                                        |       |                 |     |                         |       |     |     |      |      | 7    |      |   |      | 5    |     
|                                                       | Plan amendments                           |                                        |       |                 |     |                         |       |     |     |      |      | 11   |      |   |      |     |     
|                                                       | Actuarial loss                            |                                        |       | 104              |     |                         |       | 130  |     |      |      | 22   |      |   |      | 39   |     
|                                                       | Curtailment                               |                                        |       | 16               |     |                         |       | (1   | )   |      |      |     |      |   |      | (7   | )   
|                                                       | Benefits paid                             |                                        |       | (153             | )   |                         |       | (132 | )   |      |      | (33  | )    |   |      | (31  | )   
|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|Benefit obligations at December 31                     |                                           |                                        | 2,197 |                  |     |                         | 2,055 |      |     |      | 385  |      |      |   | 348  |     
|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|Fair value of plan assets at January 1                 |                                           |                                        | 1,844 |                  |     |                         | 1,684 |      |     |      |     |      |      |   |     |     
|Change in plan assets:                                 |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|                                                       | Actual return on plan assets              |                                        |       | 173              |     |                         |       | 148  |     |      |      |     |      |   |      |     |     
|                                                       | Company contributions                     |                                        |       | 26               |     |                         |       | 144  |     |      |      | 26   |      |   |      | 25   |     
|                                                       | Participants contributions               |                                        |       |                 |     |                         |       |     |     |      |      | 7    |      |   |      | 6    |     
|                                                       | Curtailment                               |                                        |       | 19               |     |                         |       |      |     |      |      |      |      |   |      |      |     
|                                                       | Benefits paid                             |                                        |       | (153             | )   |                         |       | (132 | )   |      |      | (33  | )    |   |      | (31  | )   
|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|Fair value of plan assets at December 31               |                                           |                                        | 1,909 |                  |     |                         | 1,844 |      |     |      |     |      |      |   |     |     
|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|                                                       | Funded status                             |                                        |       | (288             | )   |                         |       | (211 | )   |      |      | (385 | )    |   |      | (348 | )   
|                                                       | Unrecognized net actuarial loss           |                                        |       | 298              |     |                         |       | 217  |     |      |      | 127  |      |   |      | 109  |     
|                                                       | Unrecognized prior service cost (benefit) |                                        |       | 14               |     |                         |       | 16   |     |      |      | (71  | )    |   |      | (97  | )   
|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|Prepaid (accrued) benefit cost                         |                                           | $                                      | 24    |                  |     | $                       | 22    |      |     | $    | (329 | )    |      | $ | (336 | )   
|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|Amounts recognized in the Consolidated Balance Sheets: |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|                                                       |                                           | Prepaid benefit cost                   |       | $                | 85  |                         |       | $    | 84  |      |      | $    |     |   |      | $    |     |  
|                                                       |                                           | Accrued benefit liability              |       |                  | (83 | )                       |       |      | (86 | )    |      |      | (329 | ) |      |      | (336 | )
|                                                       |                                           | Accumulated other comprehensive income |       |                  | 22  |                         |       |      | 24  |      |      |      |     |   |      |      |     |  
|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     
|Prepaid (accrued) benefit cost                         |                                           | $                                      | 24    |                  |     | $                       | 22    |      |     | $    | (329 | )    |      | $ | (336 | )   
|                                                       |                                           |                                        |       |                  |     |                         |       |      |     |      |      |      |      |   |      |     

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The components of net periodic benefit costs are presented in the following table.

Benefit Obligations and Accrued Benefit Costs

|                                              |  |      |      |      |  |      |      |   |  |   |      |  
|--------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|Years ended December 31                       |  | 2002 |      | 2001 |  | 2000
|(In millions)                                 |  |      |      |      |  |     
|Pension benefits                              |  |      |      |      |  |      |      |   |  |   |      |  
|Service cost                                  |  | $    | 34   |      |  | $    | 38   |   |  | $ | 31   |  
|Interest cost on projected benefit obligation |  |      | 141  |      |  |      | 138  |   |  |   | 131  |  
|Expected return on plan assets                |  |      | (141 | )    |  |      | (134 | ) |  |   | (120 | )
|Prior service cost amortization               |  |      | 3    |      |  |      | 3    |   |  |   | 3    |  
|Actuarial loss                                |  |      | 4    |      |  |      | 2    |   |  |   | 1    |  
|Curtailment (gain) loss                       |  |      | (8   | )    |  |      | 3    |   |  |   | 13   |  
|Settlement loss                               |  |      | 11   |      |  |      |     |   |  |   |     |  
|                                              |  |      |      |      |  |      |      |   |  |   |      |  
|Net periodic pension cost                     |  | $    | 44   |      |  | $    | 50   |   |  | $ | 59   |  
|                                              |  |      |      |      |  |      |      |   |  |   |      |  
|Postretirement benefits                       |  |      |      |      |  |      |      |   |  |   |      |  
|Service cost                                  |  | $    | 5    |      |  | $    | 6    |   |  | $ | 7    |  
|Interest cost on projected benefit obligation |  |      | 25   |      |  |      | 23   |   |  |   | 22   |  
|Prior service cost amortization               |  |      | (16  | )    |  |      | (16  | ) |  |   | (16  | )
|Actuarial loss                                |  |      | 5    |      |  |      | 3    |   |  |   | 2    |  
|Curtailment gain                              |  |      |     |      |  |      | (4   | ) |  |   |     |  
|                                              |  |      |      |      |  |      |      |   |  |   |      |  
|Net periodic postretirement cost              |  | $    | 19   |      |  | $    | 12   |   |  | $ | 15   |  
|                                              |  |      |      |      |  |      |      |   |  |   |      |  

Weighted-average actuarial assumptions are set forth in the following table.

Weighted-Average Actuarial Assumptions

|                               |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|December 31                    |  | 2002 |      | 2001 |  | 2000
|                               |  |      |      |      |  |     
|Pension benefits               |  |      |      |      |  |      |      |   |  |  |      |  
|Discount rate                  |  |      | 6.75 | %    |  |      | 7.25 | % |  |  | 7.50 | %
|Expected return on plan assets |  |      | 8.00 | %    |  |      | 8.00 | % |  |  | 7.75 | %
|Rate of compensation increases |  |      | 5.83 | %    |  |      | 5.83 | % |  |  | 5.83 | %
|Postretirement benefits        |  |      |      |      |  |      |      |   |  |  |      |  
|Discount rate                  |  |      | 6.75 | %    |  |      | 7.25 | % |  |  | 7.50 | %

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 2002. 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 2002
as the cost-of-living adjustment is estimated to be 4% which is the maximum. 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,
2002 by $13 million and the aggregate net periodic postretirement benefit cost
for 2002 by $1 million.

Savings Plans

CNA sponsors savings plans, which are generally contributory plans that allow
most employees, including employees of RSKCoSM, a subsidiary of CNA that
provides total risk management

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services related to claims, risk control, cost management and information
services, 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 $51 million, $53 million
and $51 million in 2002, 2001 and 2000.

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, 2002, was approximately 0.5 million.

The following table presents activity under the LTI Plan during 2002, 2001 and
2000.

Option Plan Activity

|                                                         |  |           |           |           |  |           |       |           |  |           |          |           |  |   |       |  |  |           |         |   |  |   |       | 
|-------------------------------------------------------- |  | --------- | --------- | --------- |  | --------- | ----- | --------- |  | --------- | -------- | --------- |  | - | ----- |  |  | --------- | ------- | - |  | - | ----- | 
|                                                         |  | 2002      |           | 2001      |  | 2000     
|                                                         |  |           |           |           |  |          
|                                                         |  |           |           |           |  | Weighted- |       |           |  |           |          | Weighted- |  |   |       |  |  | Weighted-
|                                                         |  |           |           |           |  | Average   |       |           |  |           |          | Average   |  |   |       |  |  | Average  
|                                                         |  |           |           |           |  | Option    |       |           |  |           |          | Option    |  |   |       |  |  | Option   
|                                                         |  | Number    |           | Price per |  | Number    |       | Price per |  | Number    |          | Price per
|                                                         |  | Of Shares |           | Share     |  | Of Shares |       | Share     |  | Of Shares |          | Share    
|                                                         |  |           |           |           |  |           |       |           |  |           |          |          
|Balance at January 1                                     |  |           | 892,100   |           |  | $         | 33.43 |           |  |           | 553,275  |           |  | $ | 33.56 |  |  |           | 291,300 |   |  | $ | 35.21 | 
|Options granted                                          |  |           | 440,200   |           |  |           | 28.93 |           |  |           | 514,000  |           |  |   | 33.36 |  |  |           | 318,300 |   |  |   | 32.15 | 
|Options exercised                                        |  |           |          |           |  |           |      |           |  |           | (8,625   | )         |  |   | 35.09 |  |  |           | (3,300  | ) |  |   | 35.09 | 
|Options forfeited                                        |  |           | (185,450  | )         |  |           | 32.79 |           |  |           | (166,550 | )         |  |   | 33.59 |  |  |           | (53,025 | ) |  |   | 34.02 | 
|                                                         |  |           |           |           |  |           |       |           |  |           |          |           |  |   |       |  |  |           |         |   |  |   |       | 
|Balance at December 31                                   |  |           | 1,146,850 |           |  | $         | 31.80 |           |  |           | 892,100  |           |  | $ | 33.43 |  |  |           | 553,275 |   |  | $ | 33.56 | 
|                                                         |  |           |           |           |  |           |       |           |  |           |          |           |  |   |       |  |  |           |         |   |  |   |       | 
|Options exercisable at December 31                       |  |           | 306,975   |           |  | $         | 33.63 |           |  |           | 144,102  |           |  | $ | 34.13 |  |  |           | 63,575  |   |  | $ | 35.23 | 
|                                                         |  |           |           |           |  |           |       |           |  |           |          |           |  |   |       |  |  |           |         |   |  |   |       | 
|Weighted-average fair value per
share of options granted |  |           |           |           |  | $         | 6.45  |           |  |           |          |           |  | $ | 7.76  |  |  |           |         |   |  | $ | 12.10 | 
|                                                         |  |           |           |           |  |           |       |           |  |           |          |           |  |   |       |  |  |           |         |   |  |   |       | 

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The weighted-average remaining contractual life of options outstanding as of
December 31, 2002, was eight years, and the range of exercise prices on those
options was $26.39 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, 2002, 2001 and 2000
was $3 million, $4 million and $4 million. The following weighted-average
assumptions were used for the years ended December 31, 2002, 2001 and 2000:
risk free interest rate of 4.0%, 4.5%, and 6.2%; expected dividend yield of 0%;
and expected option life of five years. The weighted-average assumption for
the expected stock price volatility was 25.2%, 26.4% and 29.2% for the years
ended December 31, 2002, 2001 and 2000.

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 0.9
million shares available for which options may be granted. At December 31,
2002, approximately 1.7 million options were outstanding under these plans.

Note K. Operating Leases and Other Commitments and Contingencies

Operating Leases

CNA occupies office facilities under lease agreements that expire at various
dates. CNAs home office is partially situated on grounds under
leases expiring in 2058. In addition, data processing, office and
transportation equipment is leased under agreements that expire at various
dates through 2006. Most leases contain renewal options that provide for rent
increases based on prevailing market conditions. Lease expense for the years
ended December 31, 2002, 2001 and 2000 was $78 million, $89 million and $83
million. Lease and sublease revenues for the years ended December 31, 2002,
2001 and 2000 were $9 million, $21 million and $45 million.

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, 2002.

Future Minimum Lease Payments and Sublease Receipts

|              |  |          |     |          |  |   |    | 
|------------- |  | -------- | --- | -------- |  | - | -- | 
|              |  | Future   |     | Future  
|              |  | Minimum  |     | Minimum 
|              |  | Lease    |     | Sublease
|              |  | Payments |     | Receipts
|(In millions) |  |          |     |         
|2003          |  | $        | 79  |          |  | $ | 9  | 
|2004          |  |          | 61  |          |  |   | 5  | 
|2005          |  |          | 56  |          |  |   | 3  | 
|2006          |  |          | 45  |          |  |   | 2  | 
|2007          |  |          | 36  |          |  |   |   | 
|Thereafter    |  |          | 117 |          |  |   |   | 
|              |  |          |     |          |  |   |    | 
|Total         |  | $        | 394 |          |  | $ | 19 | 
|              |  |          |     |          |  |   |    | 

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

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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, 2002.

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,
2002 that the Company could be required to pay under this guarantee is
approximately $333 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 has recorded a liability of approximately $10 million for its share
of estimated future operating deficits of this joint venture through 2016.

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, 2002 and 2001, there were approximately $222 million
and $270 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
$24 million. Estimated future minimum payments under these contracts are as
follows: $13 million in 2003; $9 million in 2004; and $2 million in 2005.

In certain circumstances CNA provides guarantees of the indebtedness of certain
of its independent insurance producers, which expire in 2003. The Company
would be required to remit prompt and complete payment when due, should the
primary obligor default. In the event of default on the part of the primary
obligor, the Company 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 are approximately $7
million at December 31, 2002.

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

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Note L. Stockholders Equity and Statutory Financial Information

Capital stock (in whole numbers) is composed of the following:

Summary of Capital Stock

|                                               |                                                           |      |             |       |  |  |             |   | 
|---------------------------------------------- | --------------------------------------------------------- | ---- | ----------- | ----- |  |  | ----------- | - | 
|December 31                                    |                                                           | 2002 |             | 2001 
|                                               |                                                           |      |             |      
|Preferred stock, without par value, non-voting |                                                           |      |             |       |  |  |             |  
|Authorized                                     |                                                           |      | 12,500,000  |       |  |  | 12,500,000  |  
|Issued and outstanding:                        |                                                           |      |             |       |  |  |             |  
|                                               | Series H (stated value $100,000 per share, held by Loews) |      |             | 7,500 |  |  |             |  | 
|Common stock, par value $2.50                  |                                                           |      |             |       |  |  |             |  
|Authorized                                     |                                                           |      | 500,000,000 |       |  |  | 500,000,000 |  
|Issued                                         |                                                           |      | 225,850,270 |       |  |  | 225,850,270 |  
|Outstanding                                    |                                                           |      | 223,608,868 |       |  |  | 223,596,861 |  
|Treasury stock                                 |                                                           |      | 2,241,402   |       |  |  | 2,253,409   |  

On December 19, 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Preferred Issue), to Loews.
The terms of the Preferred Issue were approved by a special committee of
independent members of CNAFs Board of Directors.

The Preferred Issue 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 ratings levels of the financial strength rating of
CCC from its current rating by any of A.M. Best Company, Standard & Poors or
Moodys 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
Preferred Issue unless and until one of the two triggering events described
above has occurred. Beginning with the quarter following an increase of one
intermediate ratings level in CCCs financial strength rating, however, current
(but not accrued cumulative) quarterly dividends can be paid.

The Preferred Issue is senior to CNAFs common stock as to the payment of
dividends and amounts payable upon any liquidation, dissolution or winding up.
No dividends may be declared on CNAFs common stock until all cumulative
dividends on the Preferred Issue have been paid. CNAF may not issue any equity
securities ranking senior to or on par with the Preferred Issue without the
consent of a majority of its stockholders. The Preferred 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 Preferred Issue is exempt from registration under
Section 4(2) of the Securities Act of 1933.

Of the proceeds of the Preferred 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. It is expected that the remaining proceeds will
be used to repay other debt of CNAF and The Continental Corporation, a
controlled subsidiary, maturing in 2003 and used 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

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the rights offering amounted to $1,006 million. In connection with the rights
offering, Loews purchased 38,281,644 shares.

During 2000, the Company redeemed for $150 million all outstanding shares of
its money market preferred stock at its stated value of $100 thousand per share
plus accrued dividends.

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. During
2000, CNA purchased 1,272,700 shares of its common stock for approximately $35
million. No shares of common stock were purchased during 2002 or 2001.

During 2000, CNA sold 126,342 shares of common stock that were held in treasury
to certain senior officers of CNA, at the average of the highest and lowest
sale prices on the New York Stock Exchange composite transactions, for the
dates of the sales. Each of these purchases by senior officers was financed by
collateralized loans from CNA that, at origination, amounted to $4 million for
the year ended December 31, 2000. The loans are ten-year notes, which bear
interest at the applicable federal rate for the month in which they originated,
compounding semiannually and due at maturity along with accrued interest. The
interest rates range from 5.23% to 6.14% at December 31, 2002. No shares of
common stock were sold to senior officers of CNA during 2002 or 2001.

Statutory Accounting Practices (Unaudited)

CNAs insurance subsidiaries are domiciled in various jurisdictions. These
subsidiaries prepare statutory financial statements in accordance with
accounting practices prescribed or permitted by the respective jurisdictions
insurance regulators. Prescribed statutory accounting practices are set forth
in a variety of publications of the National Association of Insurance
Commissioners (NAIC) as well as state laws, regulations and general
administrative rules. The Companys insurance subsidiaries follow 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 and $47 million at December 31, 2002 and 2001. This practice was
followed by an acquired company, and CNA received permission to eliminate the
effect of the permitted practice over a ten-year period, which ends in 2003.

In 2001, CCC filed for approval with the Illinois Department of Insurance (the
Department) the affiliated promissory note between CCC and Viaticus, Inc., a
wholly owned subsidiary of CNAF. Review of this note was still ongoing by the
Department at December 31, 2001 so, the Department granted a permitted practice
that expired on June 30, 2002 to carry this note at a value of approximately
$449 million as of December 31, 2001. The par value of this note at December
31, 2001 was approximately $464 million. The Department approved the note and
the valuation basis in 2002.

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.

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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 Department,
may be paid only from earned surplus, which is calculated by removing
unrealized gains from unassigned surplus. As of December 31, 2002, CCCs
earned surplus is in a positive position, thereby enabling CCC to pay
approximately $1,069 million of dividend payments during 2003 that would not be
subject to the Departments prior approval. The actual level of dividends paid
in any year is determined after an assessment of available dividend capacity,
holding company liquidity and cash needs as well as the impact the dividends
will have on the statutory surplus of the applicable insurance company.

CCCs positive earned surplus at December 31, 2002 is contrasted to its
negative earned surplus position at December 31, 2001. Prompted, in part, by
the negative earned surplus position at December 31, 2001, the Company embarked
on a capital realignment initiative within the CCC intercompany reinsurance
pool (Pool) during 2002, the benefits of which included the restoration of
CCCs earned surplus to a positive position. This initiative involved the
payment of dividends to CCC from its insurance subsidiaries during the fourth
quarter of 2002. As a result of this distribution of the cumulative earnings
of CCCs insurance subsidiaries, CCCs earned surplus was restored to a
positive level at December 31, 2002, approximating $1,069 million.

This initiative involved a change to the underwriting structure of CCC and
eight of its subsidiaries from the Pool structure to a structure in which CCC
assumes 100% of the net underwriting risks of the group of companies formerly
comprising the pool. This is the Companys first step in a multi-year project
to reduce duplicative legal entities, thereby facilitating more efficient
operations and cost savings.

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

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, 2002
and 2001, all of CNAs domestic insurance subsidiaries exceeded the minimum
risk-based capital requirements.

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Combined statutory capital and surplus and net income (loss), determined in
accordance with accounting practices prescribed or permitted by the regulations
and statutes of various insurance regulators for the property and casualty and
the life and group insurance subsidiaries, were as follows.

Statutory Information

|                                    |  |                               |       |                             |  |      |       |      |  |      |     |  |  |   |        |   |  |   |       |  
|----------------------------------- |  | ----------------------------- | ----- | --------------------------- |  | ---- | ----- | ---- |  | ---- | --- |  |  | - | ------ | - |  | - | ----- | -
|                                    |  | Statutory Capital and Surplus |       | Statutory Net (Loss) Income
|                                    |  |                               |       |                            
|                                    |  | December 31                   |       | Years Ended December 31    
|                                    |  |                               |       |                            
|                                    |  | 2002                          |       | 2001                        |  | 2002 |       | 2001 |  | 2000
|(In millions)                       |  |                               |       |                             |  |      |       |      |  |     
|Property and casualty companies (a) |  | $                             | 6,836 |                             |  | $    | 6,241 |      |  | $    | 731 |  |  | $ | (1,650 | ) |  | $ | 1,067 |  
|Life and group insurance companies  |  |                               | 1,645 |                             |  |      | 1,752 |      |  |      | 37  |  |  |   | 56     |   |  |   | (47   | )



|(a) |  | Surplus includes the property and casualty companies equity ownership of
the life and group insurance subsidiaries.
|--- |  | --------------------------------------------------------------------------------------------------------------------

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                                                                                  |                                                                   | 2002                                                                                                         |      | 2001 |     | 2000
|(In millions)                                                                                            |                                                                   |                                                                                                              |      |      |     |     
|Net income (loss)                                                                                        |                                                                   | $                                                                                                            | 155  |      |     | $    | (1,642 | ) |        | $ | 1,182 |  
|                                                                                                         |                                                                   |                                                                                                              |      |      |     |      |        |   |        |   |       |  
|Other comprehensive income (loss):                                                                       |                                                                   |                                                                                                              |      |      |     |      |        |   |        |   |       |  
|                                                                                                         | Change in unrealized gains/losses on general account investments: |                                                                                                              |      |      |     |      |        |   |        |   |       |   |     
|                                                                                                         |                                                                   | Holding gains (losses) arising during the period                                                             |      |      | 305 |      |        |   | (35    | ) |       |   | 403  |  
|                                                                                                         |                                                                   | Less: net unrealized gains/losses at beginning of period
included in realized gains/losses during the period |      |      | 237 |      |        |   | (1,018 | ) |       |   | (905 | )
|                                                                                                         |                                                                   |                                                                                                              |      |      |     |      |        |   |        |   |       |  
|                                                                                                         |                                                                   | Net change in unrealized gains/losses on general account
investments                                         |      |      | 542 |      |        |   | (1,053 | ) |       |   | (502 | )
|                                                                                                         |                                                                   | Net change in unrealized gains on separate accounts and other                                                |      |      | 53  |      |        |   | 7      |   |       |   | 66   |  
|                                                                                                         |                                                                   | Foreign currency translation adjustment                                                                      |      |      | (18 | )    |        |   | 6      |   |       |   | (28  | )
|                                                                                                         |                                                                   | Minimum pension liability adjustment                                                                         |      |      | 2   |      |        |   | (24    | ) |       |   |     |  
|                                                                                                         |                                                                   | Allocation to participating policyholders and minority interests                                            |      |      | (19 | )    |        |   | (4     | ) |       |   | (12  | )
|                                                                                                         |                                                                   |                                                                                                              |      |      |     |      |        |   |        |   |       |  
|Other comprehensive income (loss), before tax and cumulative
effects of changes in accounting principles |                                                                   |                                                                                                              | 560  |      |     |      | (1,068 | ) |        |   | (476  | )
|Deferred income tax (expense) benefit related to other
comprehensive income (loss)                       |                                                                   |                                                                                                              | (182 | )    |     |      | 363    |   |        |   | 161   |  
|                                                                                                         |                                                                   |                                                                                                              |      |      |     |      |        |   |        |   |       |  
|Other comprehensive income (loss), before cumulative effect of a
change in accounting principle          |                                                                   |                                                                                                              | 378  |      |     |      | (705   | ) |        |   | (315  | )
|Cumulative
effect of a change in accounting principle, net of tax of
$31                                 |                                                                   |                                                                                                              |     |      |     |      | 58     |   |        |   |      |  
|                                                                                                         |                                                                   |                                                                                                              |      |      |     |      |        |   |        |   |       |  
|Other comprehensive income (loss), net of tax and cumulative effect
of a change in accounting principle  |                                                                   |                                                                                                              | 378  |      |     |      | (647   | ) |        |   | (315  | )
|                                                                                                         |                                                                   |                                                                                                              |      |      |     |      |        |   |        |   |       |  
|Total comprehensive income (loss)                                                                        |                                                                   | $                                                                                                            | 533  |      |     | $    | (2,289 | ) |        | $ | 867   |  
|                                                                                                         |                                                                   |                                                                                                              |      |      |     |      |        |   |        |   |       |  

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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                                                                                                                |  | 2002 |     | 2001
|(In millions)                                                                                                              |  |      |     |     
|Cumulative foreign currency translation adjustment                                                                         |  | $    | (9  | )    |  | $ | 9   |  
|Minimum pension liability adjustment, net of tax                                                                           |  |      | (14 | )    |  |   | (16 | )
|Net unrealized gains on investments and other,
including cumulative effect of a change in
accounting principle, net of tax |  |      | 627 |      |  |   | 233 |  
|                                                                                                                           |  |      |     |      |  |   |     |  
|Accumulated other comprehensive income                                                                                     |  | $    | 604 |      |  | $ | 226 |  
|                                                                                                                           |  |      |     |      |  |   |     |  

Note N. Business Segments

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

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

CNA Trust, a limited-operations bank specializing in 401(k) plan
administration, and Institutional Markets, which provides guaranteed return
investment products for qualified and non-qualified institutional buyers, was
transferred from Life Operations to Group Operations. Group reinsurance, the
business which assumes reinsurance from unaffiliated entities on group life,
accident and health products and excess medical risk coverages for self-funded
employers, was transferred from Group Operations to Corporate and Other to be
included as part of run-off insurance operations. The APMT reserves related to
assumed reinsurance, along with the assumed business underwritten through a
managing general agent, IOA Global, which consists primarily of certain
accident and health coverages, was transferred from CNA Re to Corporate and
Other. The U.S. zone of Global business, which primarily offers international
insurance to U.S. based corporations and U.S. insurance to foreign
corporations, was transferred from Specialty Lines to Standard Lines.

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.

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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
Guaranty and Credit, Surety, CNA Global and Warranty.

CNA Re operates 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. CNA Re markets products in the following treaty
business segments: standard lines, global catastrophe, specialty surplus lines,
and financial reinsurance. In addition, CNA Re markets property and casualty
facultative products directly to clients.

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.

Group Operations also provided life and health insurance to federal employees.
During 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. Group Operations revenues include $1,151
million, $2,231 million and $2,088 million in 2002, 2001 and 2000 under
contracts covering U.S. government employees and their dependents. See Note P
for further discussion of the Claims Administration Corporation and the Mail
Handlers Plan.

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.

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 operations and other operations including interest expense on
corporate borrowings, asbestos claims related to Fibreboard Corporation and
eBusiness initiatives.

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
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
RSKCoSM to other units within the Standard Lines segment that are eliminated at
the consolidated level. Intrasegment

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revenue and expenses eliminated at the consolidated level were approximately
$130 million, $154 million and $159 million for the years ended December 31,
2002, 2001 and 2000.

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

Approximately 3.5%, 4.8% and 8.2% of CNAs gross written premiums were derived
from outside the United States, primarily the United Kingdom, for the years
ended December 31, 2002, 2001 and 2000. In third quarter of 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 1.7%, 3.3%, and
5.3% of CNAs premiums for the years ended December 31, 2002, 2001 and 2000.
Gross written premiums from any individual foreign country, other than the
United Kingdom, were not significant.

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

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|                                                                                               |                                    |                          |       |          |       |           |       |            |       |            |       |           |     |         |       |           |       |        |       |       |       |   |       |       |     |   |      |     |      |   |        |        |        | 
|---------------------------------------------------------------------------------------------- | ---------------------------------- | ------------------------ | ----- | -------- | ----- | --------- | ----- | ---------- | ----- | ---------- | ----- | --------- | --- | ------- | ----- | --------- | ----- | ------ | ----- | ----- | ----- | - | ----- | ----- | --- | - | ---- | --- | ---- | - | ------ | ------ | ------ | 
|                                                                                               |                                    |                          |       | 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  | )   |      | $ | 10,213 |       
|Net investment income                                                                          |                                    |                          | 398   |          |       |           | 253   |            |       |            | 144   |           |     |         | 252   |           |       |        | 540   |       |       |   | 143   |       |     |   |     |     |      |   | 1,730  |       
|Other revenues                                                                                 |                                    |                          | 323   |          |       |           | 146   |            |       |            | 2     |           |     |         | 92    |           |       |        | 106   |       |       |   | 72    |       |     |   | (146 | )   |      |   | 595    |       
|                                                                                               |                                    |                          |       |          |       |           |       |            |       |            |       |           |     |         |       |           |       |        |       |       |       |   |       |       |     |   |      |     |      |   |        |       
|                                                                                               |                                    | Total operating revenues |       |          | 4,739 |           |       |            | 2,577 |            |       |           | 788 |         |       |           | 2,671 |        |       |       | 1,576 |   |       |       | 371 |   |      |     | (184 | ) |        |        | 12,538 | 
|Claims, benefits and expenses                                                                  |                                    |                          | 4,487 |          |       |           | 2,492 |            |       |            | 701   |           |     |         | 2,514 |           |       |        | 1,431 |       |       |   | 541   |       |     |   | (184 | )   |      |   | 11,982 |       
|Restructuring 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  | )     |     |   |     |     |      |   | 593    |       
|Income 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   | )     |     |   |     |     |      |   | 396    |       
|Realized 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    |       |       |   |      |       |     |   |     |     |      |   | 103    |       
|Loss 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   | )     |     | $ |     |     |      | $ | 155    |       
|                                                                                               |                                    |                          |       |          |       |           |       |            |       |            |       |           |     |         |       |           |       |        |       |       |       |   |       |       |     |   |      |     |      |   |        |       
|Reinsurance and insurance receivables, net                                                     |                                    | $                        | 6,987 |          |       | $         | 3,214 |            |       | $          | 1,170 |           |     | $       | 275   |           |       | $      | 954   |       |       | $ | 2,907 |       |     | $ |     |     |      | $ | 15,507 |       
|Insurance reserves:                                                                            |                                    |                          |       |          |       |           |       |            |       |            |       |           |     |         |       |           |       |        |       |       |       |   |       |       |     |   |      |     |      |   |        |       
|                                                                                               | Claim and claim adjustment expense |                          | $     | 11,576   |       |           | $     | 5,874      |       |            | $     | 2,264     |     |         | $     | 1,400     |       |        | $     | 1,409 |       |   | $     | 4,847 |     |   |      |    |      |   | $      | 27,370 |       
|                                                                                               | Unearned premiums                  |                          |       | 1,811    |       |           |       | 1,763      |       |            |       | 195       |     |         |       | 7         |       |        |       | 149   |       |   |       | 908   |     |   |      | (13 | )    |   |        | 4,820  |       
|                                                                                               | Future policy benefits             |                          |       |         |       |           |       |           |       |            |       |          |     |         |       | 571       |       |        |       | 6,503 |       |   |       | 335   |     |   |      |    |      |   |        | 7,409  |       
|                                                                                               | Policyholders funds               |                          |       | 47       |       |           |       | 3          |       |            |       |          |     |         |       | 470       |       |        |       | 63    |       |   |       | (3    | )   |   |      |    |      |   |        | 580    |       
|Deferred acquisition costs                                                                     |                                    | $                        | 421   |          |       | $         | 319   |            |       | $          | 47    |           |     | $       | 107   |           |       | $      | 1,657 |       |       | $ |      |       |     | $ |     |     |      | $ | 2,551  |       

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|                                                                                               |                                    |                          |       |          |       |           |       |            |       |            |       |           |     |         |       |           |       |        |       |       |       |   |        |       |     |   |      |   |      |   |        |        |        | 
|---------------------------------------------------------------------------------------------- | ---------------------------------- | ------------------------ | ----- | -------- | ----- | --------- | ----- | ---------- | ----- | ---------- | ----- | --------- | --- | ------- | ----- | --------- | ----- | ------ | ----- | ----- | ----- | - | ------ | ----- | --- | - | ---- | - | ---- | - | ------ | ------ | ------ | 
|                                                                                               |                                    |                          |       | 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  | ) |      | $ | 9,288  |       
|Net investment income                                                                          |                                    |                          | 488   |          |       |           | 314   |            |       |            | 172   |           |     |         | 241   |           |       |        | 486   |       |       |   | 155    |       |     |   |     |   |      |   | 1,856  |       
|Other revenues                                                                                 |                                    |                          | 341   |          |       |           | 122   |            |       |            | 5     |           |     |         | 104   |           |       |        | 121   |       |       |   | 158    |       |     |   | (168 | ) |      |   | 683    |       
|                                                                                               |                                    |                          |       |          |       |           |       |            |       |            |       |           |     |         |       |           |       |        |       |       |       |   |        |       |     |   |      |   |      |   |        |       
|                                                                                               |                                    | Total operating revenues |       |          | 3,302 |           |       |            | 2,332 |            |       |           | 818 |         |       |           | 3,723 |        |       |       | 1,480 |   |        |       | 402 |   |      |   | (230 | ) |        |        | 11,827 | 
|Claims, benefits and expenses                                                                  |                                    |                          | 4,004 |          |       |           | 2,779 |            |       |            | 1,686 |           |     |         | 3,654 |           |       |        | 1,353 |       |       |   | 1,907  |       |     |   | (230 | ) |      |   | 15,153 |       
|Restructuring and other related charges                                                        |                                    |                          | 46    |          |       |           | 9     |            |       |            | 6     |           |     |         | 42    |           |       |        | 29    |       |       |   | 119    |       |     |   |     |   |      |   | 251    |       
|                                                                                               |                                    |                          |       |          |       |           |       |            |       |            |       |           |     |         |       |           |       |        |       |       |       |   |        |       |     |   |      |   |      |   |        |       
|Operating (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    |       |     |   |     |   |      |   | 1,190  |       
|Minority 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    |       |     |   |     |   |      |   | 1,262  |       
|Income 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    |       |       |   |       |       |     |   |     |   |      |   | 11     |       
|Cumulative 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 | )     
|                                                                                               |                                    |                          |       |          |       |           |       |            |       |            |       |           |     |         |       |           |       |        |       |       |       |   |        |       |     |   |      |   |      |   |        |       
|Reinsurance and insurance receivables, net                                                     |                                    | $                        | 7,140 |          |       | $         | 3,038 |            |       | $          | 2,045 |           |     | $       | 956   |           |       | $      | 829   |       |       | $ | 3,470  |       |     | $ |     |   |      | $ | 17,478 |       
|Insurance reserves                                                                             |                                    |                          |       |          |       |           |       |            |       |            |       |           |     |         |       |           |       |        |       |       |       |   |        |       |     |   |      |   |      |   |        |       
|                                                                                               | Claim and claim adjustment expense |                          | $     | 12,854   |       |           | $     | 5,668      |       |            | $     | 4,644     |     |         | $     | 1,714     |       |        | $     | 1,343 |       |   | $      | 5,043 |     |   | $    |  |      |   | $      | 31,266 |       
|                                                                                               | Unearned premiums                  |                          |       | 1,825    |       |           |       | 1,449      |       |            |       | 201       |     |         |       | 10        |       |        |       | 134   |       |   |        | 886   |     |   |      |  |      |   |        | 4,505  |       
|                                                                                               | Future policy benefits             |                          |       |         |       |           |       |           |       |            |       |          |     |         |       | 635       |       |        |       | 6,330 |       |   |        | 341   |     |   |      |  |      |   |        | 7,306  |       
|                                                                                               | Policyholders funds               |                          |       | 54       |       |           |       | 3          |       |            |       | 2         |     |         |       | 452       |       |        |       | 38    |       |   |        | (3    | )   |   |      |  |      |   |        | 546    |       
|Deferred acquisition costs                                                                     |                                    | $                        | 397   |          |       | $         | 255   |            |       | $          | 56    |           |     | $       | 117   |           |       | $      | 1,598 |       |       | $ | 1      |       |     | $ |     |   |      | $ | 2,424  |       

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|                                                                                           |                          |       |          |       |           |        |       |            |  |            |       |           |      |         |           |       |        |   |       |       |  |   |      |     |  |   |      |      |   |   |        |        | 
|------------------------------------------------------------------------------------------ | ------------------------ | ----- | -------- | ----- | --------- | ------ | ----- | ---------- |  | ---------- | ----- | --------- | ---- | ------- | --------- | ----- | ------ | - | ----- | ----- |  | - | ---- | --- |  | - | ---- | ---- | - | - | ------ | ------ | 
|                                                                                           |                          |       | Standard |       | Specialty |        |       |            |  |            | Group |           | Life |         | Corporate |       | Elimi- |   |       |       | 
|Year ended December 31, 2000                                                               |                          | Lines |          | Lines |           | CNA Re |       | Operations |  | Operations |       | and Other |      | nations |           | Total
|(In millions)                                                                              |                          |       |          |       |           |        |       |            |  |            |       |           |      |         |           |      
|Net earned premiums                                                                        |                          | $     | 3,991    |       |           | $      | 1,847 |            |  | $          | 1,089 |           |      | $       | 3,444     |       |        | $ | 773   |       |  | $ | 290  |     |  | $ | (46  | )    |   | $ | 11,388 |       
|Net investment income                                                                      |                          |       | 743      |       |           |        | 376   |            |  |            | 211   |           |      |         | 267       |       |        |   | 467   |       |  |   | 183  |     |  |   |     |      |   |   | 2,247  |       
|Other revenues                                                                             |                          |       | 344      |       |           |        | 139   |            |  |            | 5     |           |      |         | 130       |       |        |   | 116   |       |  |   | 183  |     |  |   | (173 | )    |   |   | 744    |       
|                                                                                           |                          |       |          |       |           |        |       |            |  |            |       |           |      |         |           |       |        |   |       |       |  |   |      |     |  |   |      |      |   |   |        |       
|                                                                                           | Total operating revenues |       |          | 5,078 |           |        |       | 2,362      |  |            |       | 1,305     |      |         |           | 3,841 |        |   |       | 1,356 |  |   |      | 656 |  |   |      | (219 | ) |   |        | 14,379 | 
|Claims, benefits and expenses                                                              |                          |       | 4,812    |       |           |        | 2,053 |            |  |            | 1,162 |           |      |         | 3,701     |       |        |   | 1,181 |       |  |   | 963  |     |  |   | (219 | )    |   |   | 13,653 |       
|                                                                                           |                          |       |          |       |           |        |       |            |  |            |       |           |      |         |           |       |        |   |       |       |  |   |      |     |  |   |      |      |   |   |        |       
|Operating income (loss) from continuing
operations before income tax and minority
interest |                          |       | 266      |       |           |        | 309   |            |  |            | 143   |           |      |         | 140       |       |        |   | 175   |       |  |   | (307 | )   |  |   |     |      |   |   | 726    |       
|Income tax (expense) benefit on operating income                                           |                          |       | (61      | )     |           |        | (89   | )          |  |            | (51   | )         |      |         | (55       | )     |        |   | (56   | )     |  |   | 122  |     |  |   |     |      |   |   | (190   | )     
|Minority interest                                                                          |                          |       |         |       |           |        | (24   | )          |  |            |      |           |      |         |          |       |        |   |      |       |  |   | (4   | )   |  |   |     |      |   |   | (28    | )     
|                                                                                           |                          |       |          |       |           |        |       |            |  |            |       |           |      |         |           |       |        |   |       |       |  |   |      |     |  |   |      |      |   |   |        |       
|Net operating income (loss) from continuing
operations                                     |                          |       | 205      |       |           |        | 196   |            |  |            | 92    |           |      |         | 85        |       |        |   | 119   |       |  |   | (189 | )   |  |   |     |      |   |   | 508    |       
|Realized investment gains, net of participating
policyholders and minority interests      |                          |       | 498      |       |           |        | 265   |            |  |            | 96    |           |      |         | 39        |       |        |   | 35    |       |  |   | 96   |     |  |   |     |      |   |   | 1,029  |       
|Income tax (expense) benefit on realized
investment gains                                  |                          |       | (173     | )     |           |        | (93   | )          |  |            | (33   | )         |      |         | (10       | )     |        |   | (14   | )     |  |   | (37  | )   |  |   |     |      |   |   | (360   | )     
|Income from discontinued operations, net of tax
of $0                                      |                          |       |         |       |           |        |      |            |  |            |      |           |      |         |          |       |        |   | 5     |       |  |   |     |     |  |   |     |      |   |   | 5      |       
|                                                                                           |                          |       |          |       |           |        |       |            |  |            |       |           |      |         |           |       |        |   |       |       |  |   |      |     |  |   |      |      |   |   |        |       
|Net income (loss)                                                                          |                          | $     | 530      |       |           | $      | 368   |            |  | $          | 155   |           |      | $       | 114       |       |        | $ | 145   |       |  | $ | (130 | )   |  | $ |     |      |   | $ | 1,182  |       
|                                                                                           |                          |       |          |       |           |        |       |            |  |            |       |           |      |         |           |       |        |   |       |       |  |   |      |     |  |   |      |      |   |   |        |       

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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     |                                  | 2002 |        | 2001  |  | 2000
|(In millions)               |                                  |      |        |       |  |     
|Standard Lines              |                                  |      |        |       |  |      |        |       |  |   |        |      
|                            | Property and Casualty            |      | $      | 3,012 |  |      | $      | 2,955 |  |   | $      | 3,823 | 
|                            | Excess & Surplus                 |      |        | 1,641 |  |      |        | 1,044 |  |   |        | 1,753 | 
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|Standard Lines revenue      |                                  |      | 4,653  |       |  |      | 3,999  |       |  |   | 5,576  |      
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|Specialty Lines             |                                  |      |        |       |  |      |        |       |  |   |        |      
|                            | Professional Liability Insurance |      |        | 1,083 |  |      |        | 1,120 |  |   |        | 1,157 | 
|                            | CNA Global                       |      |        | 773   |  |      |        | 787   |  |   |        | 781   | 
|                            | CNA Guaranty & Credit            |      |        | 35    |  |      |        | 61    |  |   |        | 49    | 
|                            | Surety                           |      |        | 325   |  |      |        | 346   |  |   |        | 332   | 
|                            | Warranty                         |      |        | 284   |  |      |        | 280   |  |   |        | 308   | 
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|Specialty Lines revenue     |                                  |      | 2,500  |       |  |      | 2,594  |       |  |   | 2,627  |      
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|CNA Re                      |                                  |      | 869    |       |  |      | 741    |       |  |   | 1,401  |      
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|Group Operations            |                                  |      |        |       |  |      |        |       |  |   |        |      
|                            | Group Benefits                   |      |        | 1,325 |  |      |        | 1,337 |  |   |        | 1,334 | 
|                            | Institutional Markets & Other    |      |        | 135   |  |      |        | 214   |  |   |        | 458   | 
|                            | Federal Markets                  |      |        | 1,151 |  |      |        | 2,231 |  |   |        | 2,088 | 
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|Group Operations revenue    |                                  |      | 2,611  |       |  |      | 3,782  |       |  |   | 3,880  |      
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|Life Operations revenue     |                                  |      | 1,465  |       |  |      | 1,635  |       |  |   | 1,391  |      
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|Corporate and Other revenue |                                  |      | 372    |       |  |      | 568    |       |  |   | 752    |      
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|Intersegment eliminations   |                                  |      | (184   | )     |  |      | (230   | )     |  |   | (219   | )    
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      
|Total revenue               |                                  | $    | 12,286 |       |  | $    | 13,089 |       |  | $ | 15,408 |      
|                            |                                  |      |        |       |  |      |        |       |  |   |        |      

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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.

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.

IT Plan Pretax Charges by Segment

|                    |  |               |    |          |  |       |    |       |  |   |   |  |  |   |    | 
|------------------- |  | ------------- | -- | -------- |  | ----- | -- | ----- |  | - | - |  |  | - | -- | 
|                    |  | Employee      |    |          |  |       |    |       |  |   |   |  |  |  
|                    |  | Termination   |    | Impaired |  |       |    |       |  |   |   | 
|                    |  | and Related   |    | Asset    |  | Other |    |       |  |  
|                    |  | Benefit Costs |    | Charges  |  | Costs |    | Total
|(In millions)       |  |               |    |          |  |       |    |      
|Standard Lines      |  | $             | 5  |          |  | $     | 1  |       |  | $ |  |  |  | $ | 6  | 
|Specialty Lines     |  |               | 2  |          |  |       |   |       |  |   |  |  |  |   | 2  | 
|Life Operations     |  |               |   |          |  |       | 17 |       |  |   |  |  |  |   | 17 | 
|Corporate and Other |  |               | 22 |          |  |       | 14 |       |  |   | 1 |  |  |   | 37 | 
|                    |  |               |    |          |  |       |    |       |  |   |   |  |  |   |    | 
|Total               |  | $             | 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 related to $29 million
of workforce reductions of approximately 260 positions gross and net and $1
million of other costs.

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

IT Plan Accrual

|                                           |  |               |     |          |  |       |     |       |  |   |    |   |  |   |     |  
|------------------------------------------ |  | ------------- | --- | -------- |  | ----- | --- | ----- |  | - | -- | - |  | - | --- | -
|                                           |  | Employee      |     |          |  |       |     |       |  |   |    |   |  |  
|                                           |  | Termination   |     | Impaired |  |       |     |       |  |   |    |  
|                                           |  | and Related   |     | Asset    |  | Other |     |       |  |  
|                                           |  | Benefit Costs |     | Charges  |  | Costs |     | Total
|                                           |  |               |     |          |  |       |     |      
|(In millions)                              |  |               |     |          |  |       |     |       |  |   |    |   |  |   |     |  
|IT Plan Initial Accrual                    |  | $             | 29  |          |  | $     | 32  |       |  | $ | 1  |   |  | $ | 62  |  
|Costs that did not require cash in 2001    |  |               |    |          |  |       | (32 | )     |  |   |   |   |  |   | (32 | )
|Payments charged against liability in 2001 |  |               | (19 | )        |  |       |    |       |  |   |   |   |  |   | (19 | )
|                                           |  |               |     |          |  |       |     |       |  |   |    |   |  |   |     |  
|Accrued costs at December 31, 2001         |  |               | 10  |          |  |       |    |       |  |   | 1  |   |  |   | 11  |  
|Payments charged against liability in 2002 |  |               | (2  | )        |  |       |    |       |  |   |   |   |  |   | (2  | )
|Reduction of accrual                       |  |               | (3  | )        |  |       |    |       |  |   | (1 | ) |  |   | (4  | )
|                                           |  |               |     |          |  |       |     |       |  |   |    |   |  |   |     |  
|Accrued costs at December 31, 2002         |  | $             | 5   |          |  | $     |    |       |  | $ |   |   |  | $ | 5   |  
|                                           |  |               |     |          |  |       |     |       |  |   |    |   |  |   |     |  

Through December 31, 2002, 249 employees were released due to the IT Plan,
nearly all of whom were technology support staff. In December of 2002, the
accrual was reduced by $4 million in the Corporate and Other segment primarily
related to employee termination costs.

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.

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.

2001 Plan Pretax Charges by Segment

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

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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.

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

2001 Plan Initial Accrual

|                                   |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|---------------------------------- |  | ------------- | --- | ----------- |  | -------- | --- | ----- |  | ----- | --- | - |  | - | --- | - |  | - | --- | -
|                                   |  | Employee      |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |  
|                                   |  | Termination   |     | Lease       |  | Impaired |     |       |  |       |     |   |  |  
|                                   |  | and Related   |     | Termination |  | Asset    |     | Other |  |       |     |  
|                                   |  | Benefit Costs |     | Costs       |  | Charges  |     | Costs |  | Total
|                                   |  |               |     |             |  |          |     |       |  |      
|(In millions)                      |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|2001 Plan Initial Accrual          |  | $             | 68  |             |  | $        | 56  |       |  | $     | 30  |   |  | $ | 35  |   |  | $ | 189 |  
|Costs that did not require cash    |  |               |    |             |  |          |    |       |  |       |    |   |  |   | (35 | ) |  |   | (35 | )
|Payments charged against liability |  |               | (2  | )           |  |          |    |       |  |       |    |   |  |   |    |   |  |   | (2  | )
|                                   |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  
|Accrued costs December 31, 2001    |  |               | 66  |             |  |          | 56  |       |  |       | 30  |   |  |   |    |   |  |   | 152 |  
|Costs 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   |   |  | $ |    |   |  | $ | 38  |  
|                                   |  |               |     |             |  |          |     |       |  |       |     |   |  |   |     |   |  |   |     |  

The following table summarizes the reduction of the accrual by segment in 2002.

Reduction of Accrual by Segment

|                    |  |               |     |             |  |          |    |       |  |       |     |   |  |   |   |  |  |   |     |  
|------------------- |  | ------------- | --- | ----------- |  | -------- | -- | ----- |  | ----- | --- | - |  | - | - |  |  | - | --- | -
|                    |  | Employee      |     |             |  |          |    |       |  |       |     |   |  |   |   |  |  |  
|                    |  | Termination   |     | Lease       |  | Impaired |    |       |  |       |     |   |  |  
|                    |  | and Related   |     | Termination |  | Asset    |    | Other |  |       |     |  
|                    |  | Benefit Costs |     | Costs       |  | Charges  |    | Costs |  | Total
|                    |  |               |     |             |  |          |    |       |  |      
|(In millions)       |  |               |     |             |  |          |    |       |  |       |     |   |  |   |   |  |  |   |     |  
|Standard Lines      |  | $             | (8  | )           |  | $        |   |       |  | $     |    |   |  | $ |  |  |  | $ | (8  | )
|Specialty Lines     |  |               | (1  | )           |  |          |   |       |  |       |    |   |  |   |  |  |  |   | (1  | )
|Life Operations     |  |               |    |             |  |          |   |       |  |       | (1  | ) |  |   |  |  |  |   | (1  | )
|Corporate and Other |  |               | (1  | )           |  |          | (7 | )     |  |       | (14 | ) |  |   |  |  |  |   | (22 | )
|                    |  |               |     |             |  |          |    |       |  |       |     |   |  |   |   |  |  |   |     |  
|Total               |  | $             | (10 | )           |  | $        | (7 | )     |  | $     | (15 | ) |  | $ |  |  |  | $ | (32 | )
|                    |  |               |     |             |  |          |    |       |  |       |     |   |  |   |   |  |  |   |     |  

The 2001 Plan charges incurred and accrued by Standard Lines were $40 million
in 2001, related entirely to employee termination and related benefit costs for
planned reductions in the workforce of 1,063 positions gross and net, of which
$27 million related to severance and outplacement costs and $13 million related
to other salary costs. Through December 31, 2002, approximately 882 employees
net were released due to the 2001 Plan. Approximately 39% of

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these employees
were administrative, technology or financial support staff; approximately 52%
of these employees were underwriters, claim adjusters and related insurance
services staff; and approximately 9% of these employees were in various other
positions. During December of 2002, $8 million of accrual was reduced
primarily due to successful redeployment of employees to other positions within
the organization. An accrual of $1 million remained at December 31, 2002
relating to employee termination costs which will be paid in 2003.

The 2001 Plan charges incurred and accrued by Specialty Lines were $7 million
in 2001, related entirely to employee termination and related benefit costs for
planned reductions in the workforce of 177 positions gross and net, of which $5
million related to severance and outplacement costs and $2 million related to
other salary costs. Through December 31, 2002, approximately 126 employees net
were released due to the 2001 Plan. Approximately 26% of these employees were
administrative, technology or financial support staff; approximately 63% of
these employees were underwriters, claim adjusters and related insurance
services staff; and approximately 11% of these employees were in various other
positions. During December of 2002, the accrual was reduced by $1 million. An
accrual of $1 million remained at December 31, 2002 relating to employee
termination costs which will be paid in 2003.

The 2001 Plan charges incurred and accrued by CNA Re were $6 million. Costs
related to employee termination and related benefit costs for planned
reductions in the workforce of 33 positions gross and net, amounted to $2
million, all of which related to severance and outplacement costs. Payments of
$1 million were made in 2002 for approximately 15 employees net released
through December 31, 2002 due to the 2001 Plan. The remaining $4 million of
charges incurred by CNA Re related to lease termination costs. Approximately
$1 million was paid in 2002 related to lease termination costs. As a result of
the sale of CNA Re U.K., the remaining accrual related to CNA Re of $4 million
was reduced. See Note P for further discussion of the sale.

The 2001 Plan charges incurred and accrued by Group Operations were $42
million. Costs related to employee termination and related benefit costs for
planned reductions in the workforce of 187 positions, gross and net, amounted
to $7 million. Through December 31, 2002, 82 employees net in Group Operations
were released due to the 2001 Plan. Approximately 28% of these employees were
administrative, technology or financial support staff; and approximately 72% of
these employees were underwriters, claim adjusters and related insurance
services staff. Other costs of $35 million in Group Operations relate to a
write-off of deferred acquisition costs on inforce variable life and annuity
contracts, as the company believes that the decision to discontinue these
products will negatively impact the persistency of the business.

The 2001 Plan charges incurred and accrued by Life Operations were $12 million.
Costs related to employee termination and related benefit costs for planned
reductions in workforce of 207 positions gross and net, amounted to $3 million,
which related primarily to severance and outplacement costs. Through December
31, 2002, approximately 144 employees net were released due to the 2001 Plan.
Approximately 23% of these employees were administrative, technology or
financial support staff; approximately 65% of these employees were
underwriters, claim adjusters and related insurance services staff; and
approximately 12% of these employees were in various other positions. Life
Operations incurred and accrued $9 million of impaired asset charges related to
software in 2001. In December of 2002, the remaining $1 million of this
accrual was reduced.

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The 2001 Plan charges incurred and accrued by the Corporate and Other segment
were $82 million. Costs related to employee termination and related benefit
costs for planned reductions in the workforce of 194 positions gross and net,
amounted to $9 million, of which $6 million related to severance and
outplacement costs and $3 million related to other salary costs. Through
December 31, 2002, 157 employees net were released due to the 2001 Plan.
Approximately 63% of these employees were administrative, technology or
financial support staff; approximately 28% of these employees were
underwriters, claim adjusters and related insurance services staff; and
approximately 9% of these employees were in various other positions. In
December of 2002, $1 million of the accrual was reduced for employee
termination and related benefit costs. The Corporate and Other segment also
incurred $73 million of lease termination and asset impairment charges related
to office closure and consolidation decisions
not within the control of the other segments affected. Additionally, $7
million was reversed and included in 2002 net income relating to lease
obligations and $14 million relating to impaired asset charges. The Companys
original plan contained a timeline to consolidate and reduce the number of
office locations. Due to unfavorable conditions in the commercial real estate
market, certain office relocations and consolidations occurred later than
planned. As a result of such delays, a portion of the planned leasehold
write-offs and vacant office space were expensed as period costs, resulting in
an excess initial accrual.

At December 31, 2001, an accrual of $1 million for lease termination costs
remained related to the August 1998 restructuring (1998 Plan). In December of
2002, this accrual was reduced.

Note P. Significant Transactions

Variable Life and Annuity Transaction

In 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.

As a result of this agreement, Phoenix assumed net assets of $6 million. At
December 31, 2002, approximately $479 million of separate account assets and
$479 million of separate account policy reserves related to the variable life
and annuity business continue to be held by the Company and are reported in
separate account business in the assets and liabilities sections of the
Consolidated Balance Sheet. The assets and liabilities of the variable life
and annuity business were $637 million (primarily separate account assets) and
$637 million (primarily separate account policy reserves) as of December 31,
2001.

The variable life and annuity business premiums and fee income were $8
million, $11 million and $5 million for the years ended December 31, 2002, 2001
and 2000. Net loss was $5 million, $44 million and $12 million for the years
ended December 31, 2002, 2001 and 2000.

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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, $2,231 million and $2,081 million for the years ended December
31, 2002, 2001 and 2000.

Net income from Claims Administration Corporation and Mail Handlers Plan was $5
million, including the non-recurring fee income, $16 million and $6 million for
the years ended December 31, 2002, 2001 and 2000.

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, $77 million,
and $86 million for the years ended December 31, 2002, 2001 and 2000. Net
income was $2 million, $11 million, and $5 million for the years ended 2002,
2001 and 2000. CNA Vidas results of operations, including the loss on sale,
are presented as discontinued operations in all periods presented.

Individual Life Reinsurance Transaction

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

MARC assumed approximately $294 million of liabilities (primarily future policy
benefits and claim reserves) and approximately $209 million in assets
(primarily uncollected premiums and deferred acquisition costs). The net gain
of approximately $2 million from the reinsurance transaction has been recorded
as deferred revenue and will be recognized in income as CNA Life Res assumed
contracts are novated to MARC.

The CNA Life Re business contributed net earned premiums of $229 million and
net income of $18 million for the year ended December 31, 2000.

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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 Consolidated Statements of
Operations.

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 years ended December 31, 2001 and 2000 totaled approximately $33 million
and $37 million. These businesses contributed approximately $11 million and $8
million of net losses in the years ended December 31, 2001 and 2000.

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 in the Consolidated
Statements of Operations.

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

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. In
October, the sale was approved in the United Kingdom by the Financial Services
Authority (FSA) and by the Illinois Insurance Department. This sale does not
impact CNA Res on-going U.S.-based operations.

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. The
final purchase price adjustments were prepared by Tawa and have been agreed to
by the Company. 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. 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 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. 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. As such, in the fourth quarter of 2002, the impairment
loss was reduced 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

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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, $280 million and $605
million for the three years ended December 31, 2002, 2001 and 2000. CNA Re
U.K. had net losses of $22 million, $374 million and $158 million for the years
ended December 31, 2002, 2001 and 2000. 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.

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.

As of December 10, 2001, 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.

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.

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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 under this loss
sharing provision as of October 1, 2003, will be settled 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 loss adjustment expenses
on such policies are expected to exceed $1 billion during 2003. The Company
has established reserves for its estimated liability under this loss sharing
arrangement.

The retroactive portion of the reinsurance transaction, consisting primarily of
the cession of claim and claim adjustment expense reserves approximating $1.0
billion, was not recognized as reinsurance because the criteria for risk
transfer were not met for this portion of the transaction. The related
consideration paid was recorded as a deposit and is included in reinsurance
receivables in the Consolidated Balance Sheets. The prospective portion of the
transaction, which as of the transaction date consisted primarily of the
cession of $1.1 billion of unearned premium reserves, has been recorded as
reinsurance. The related consideration paid was recorded as prepaid
reinsurance premiums. Premiums ceded after the transaction date follow this
same treatment.

CNA recognized an after-tax realized loss of approximately $39 million in 1999
related to the transaction, consisting primarily of the accrual of lease
obligations and the write-down of assets that related specifically to the
Personal Insurance lines of business. The $120 million ceding commission
related to the prospective portion of the transaction has been recognized in
proportion to the recognition of the unearned premium reserves to which it
relates. Ceding commission earned was $69 million and $51 million in 2000 and
1999. Royalty fees earned in 2002, 2001 and 2000 were approximately $27
million, $26 million and $27 million.

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                           |  | 2002 |      | 2001
|                                      |  |      |      |     
|(In millions)                         |  |      |      |      |  |   |      |  
|Total investments                     |  | $    | 443  |      |  | $ | 467  |  
|Other assets                          |  |      | 295  |      |  |   | 264  |  
|Insurance reserves                    |  |      | (402 | )    |  |   | (412 | )
|Other liabilities                     |  |      | (32  | )    |  |   | (25  | )
|                                      |  |      |      |      |  |   |      |  
|Net assets of discontinued operations |  | $    | 304  |      |  | $ | 294  |  
|                                      |  |      |      |      |  |   |      |  

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Note R. Quarterly Financial Data (Unaudited)

The following tables set forth unaudited quarterly financial data for the years
ended December 31, 2002 and 2001.

Quarterly Financial Data

|                                                                      |  |              |       |              |  |              |       |        |  |      |       |   |  |   |       |  |  |   |        |  
|--------------------------------------------------------------------- |  | ------------ | ----- | ------------ |  | ------------ | ----- | ------ |  | ---- | ----- | - |  | - | ----- |  |  | - | ------ | -
|                                                                      |  | First (a)    |       | Second       |  | Third        |       | Fourth |  | Year
|                                                                      |  |              |       |              |  |              |       |        |  |     
|(In millions, except per share data)                                  |  | Restated (b) |       | Restated (b) |  | Restated (b) |       |        |  |      |       |   |  |  
|2002 Quarters                                                         |  |              |       |              |  |              |       |        |  |      |       |   |  |   |       |  |  |   |        |  
|Revenues                                                              |  | $            | 3,446 |              |  | $            | 3,312 |        |  | $    | 2,787 |   |  | $ | 2,741 |  |  | $ | 12,286 |  
|                                                                      |  |              |       |              |  |              |       |        |  |      |       |   |  |   |       |  |  |   |        |  
|Income from continuing operations
before income tax                   |  | $            | 163   |              |  | $            | 33    |        |  | $    | 76    |   |  | $ | 43    |  |  | $ | 315    |  
|Income tax expense                                                    |  |              | (51   | )            |  |              | (2    | )      |  |      | (22   | ) |  |   | 7     |  |  |   | (68    | )
|                                                                      |  |              |       |              |  |              |       |        |  |      |       |   |  |   |       |  |  |   |        |  
|Income from continuing operations                                     |  |              | 112   |              |  |              | 31    |        |  |      | 54    |   |  |   | 50    |  |  |   | 247    |  
|Loss 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    |  |  | $ | 155    |  
|                                                                      |  |              |       |              |  |              |       |        |  |      |       |   |  |   |       |  |  |   |        |  
|Basic and diluted earnings per share
available to common stockholders |  | $            | 0.09  |              |  | $            | 0.14  |        |  | $    | 0.24  |   |  | $ | 0.21  |  |  | $ | 0.68   |  
|                                                                      |  |              |       |              |  |              |       |        |  |      |       |   |  |   |       |  |  |   |        |  

Quarterly Financial Data

|                                                                             |  |              |       |              |  |              |        |              |  |              |       |   |  |   |       |   |  |   |        |  
|---------------------------------------------------------------------------- |  | ------------ | ----- | ------------ |  | ------------ | ------ | ------------ |  | ------------ | ----- | - |  | - | ----- | - |  | - | ------ | -
|                                                                             |  | First        |       | Second       |  | Third        |        | Fourth       |  | Year        
|                                                                             |  |              |       |              |  |              |        |              |  |             
|(In millions, except per share data)                                         |  | Restated (b) |       | Restated (b) |  | Restated (b) |        | Restated (b) |  | Restated (b)
|2001 Quarters                                                                |  |              |       |              |  |              |        |              |  |              |       |   |  |   |       |   |  |   |        |  
|Revenues                                                                     |  | $            | 3,567 |              |  | $            | 2,709  |              |  | $            | 3,130 |   |  | $ | 3,683 |   |  | $ | 13,089 |  
|                                                                             |  |              |       |              |  |              |        |              |  |              |       |   |  |   |       |   |  |   |        |  
|Income (loss) from continuing
operations before income tax                   |  | $            | 536   |              |  | $            | (2,622 | )            |  | $            | (240  | ) |  | $ | (10   | ) |  | $ | (2,336 | )
|Income tax (expense) benefit                                                 |  |              | (183  | )            |  |              | 856    |              |  |              | 84    |   |  |   | (13   | ) |  |   | 744    |  
|                                                                             |  |              |       |              |  |              |        |              |  |              |       |   |  |   |       |   |  |   |        |  
|Income (loss) from continuing operations                                     |  |              | 353   |              |  |              | (1,766 | )            |  |              | (156  | ) |  |   | (23   | ) |  |   | (1,592 | )
|Income from discontinued operations,
net of tax                              |  |              |      |              |  |              | 3      |              |  |              | 5     |   |  |   | 3     |   |  |   | 11     |  
|Cumulative effect of a change in
accounting principle, net of tax            |  |              | (61   | )            |  |              |       |              |  |              |      |   |  |   |      |   |  |   | (61    | )
|                                                                             |  |              |       |              |  |              |        |              |  |              |       |   |  |   |       |   |  |   |        |  
|Net income (loss)                                                            |  | $            | 292   |              |  | $            | (1,763 | )            |  | $            | (151  | ) |  | $ | (20   | ) |  | $ | (1,642 | )
|                                                                             |  |              |       |              |  |              |        |              |  |              |       |   |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per
share available to common stockholders |  | $            | 1.59  |              |  | $            | (9.62  | )            |  | $            | (0.82 | ) |  | $ | (0.08 | ) |  | $ | (8.46  | )
|                                                                             |  |              |       |              |  |              |        |              |  |              |       |   |  |   |       |   |  |   |        |  



|(a) |  | During the third quarter of 2002, the Company completed its initial
goodwill impairment test and recorded a $57 million after-tax impairment
charge. The impairment charge was recorded as a cumulative effect of a
change in accounting principle as of January 1, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | As restated, see Note T.                                                                                                                                                                                                                                                 

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The following tables set forth unaudited quarterly financial data for the years
ended December 31, 2002 and 2001 as previously reported before a restatement to
reflect a change in the accounting for the Companys investment in life
settlement contracts. See Note T for further discussion.

Quarterly Financial Data

|                                                                      |  |           |       |        |  |       |       |   |  |   |       |  
|--------------------------------------------------------------------- |  | --------- | ----- | ------ |  | ----- | ----- | - |  | - | ----- | -
|                                                                      |  | First (a) |       | Second |  | Third
|                                                                      |  |           |       |        |  |      
|(In millions, except per share data)                                  |  |           |       |        |  |       |       |   |  |   |       |  
|2002 Quarters                                                         |  |           |       |        |  |       |       |   |  |   |       |  
|Revenues                                                              |  | $         | 3,448 |        |  | $     | 3,318 |   |  | $ | 2,790 |  
|                                                                      |  |           |       |        |  |       |       |   |  |   |       |  
|Income from continuing operations
before income tax                   |  | $         | 164   |        |  | $     | 39    |   |  | $ | 77    |  
|Income tax expense                                                    |  |           | (51   | )      |  |       | (4    | ) |  |   | (23   | )
|                                                                      |  |           |       |        |  |       |       |   |  |   |       |  
|Income from continuing operations                                     |  |           | 113   |        |  |       | 35    |   |  |   | 54    |  
|Loss from discontinued operations, net
of tax                         |  |           | (35   | )      |  |       |      |   |  |   |      |  
|Cumulative effect of a change in
accounting principle, net of tax     |  |           | (57   | )      |  |       |      |   |  |   |      |  
|                                                                      |  |           |       |        |  |       |       |   |  |   |       |  
|Net income                                                            |  | $         | 21    |        |  | $     | 35    |   |  | $ | 54    |  
|                                                                      |  |           |       |        |  |       |       |   |  |   |       |  
|Basic and diluted earnings per share
available to common stockholders |  | $         | 0.09  |        |  | $     | 0.16  |   |  | $ | 0.24  |  
|                                                                      |  |           |       |        |  |       |       |   |  |   |       |  

Quarterly Financial Data

|                                                                             |  |       |       |        |  |       |        |        |  |      |       |   |  |   |       |   |  |   |        |  
|---------------------------------------------------------------------------- |  | ----- | ----- | ------ |  | ----- | ------ | ------ |  | ---- | ----- | - |  | - | ----- | - |  | - | ------ | -
|                                                                             |  | First |       | Second |  | Third |        | Fourth |  | Year
|                                                                             |  |       |       |        |  |       |        |        |  |     
|(In millions, except per share data)                                         |  |       |       |        |  |       |        |        |  |      |       |   |  |   |       |   |  |   |        |  
|2001 Quarters                                                                |  |       |       |        |  |       |        |        |  |      |       |   |  |   |       |   |  |   |        |  
|Revenues                                                                     |  | $     | 3,569 |        |  | $     | 2,708  |        |  | $    | 3,125 |   |  | $ | 3,680 |   |  | $ | 13,082 |  
|                                                                             |  |       |       |        |  |       |        |        |  |      |       |   |  |   |       |   |  |   |        |  
|Income (loss) from continuing
operations before income tax                   |  | $     | 541   |        |  | $     | (2,620 | )      |  | $    | (246  | ) |  | $ | (14   | ) |  | $ | (2,339 | )
|Income tax (expense) benefit                                                 |  |       | (185  | )      |  |       | 855    |        |  |      | 86    |   |  |   | (11   | ) |  |   | 745    |  
|                                                                             |  |       |       |        |  |       |        |        |  |      |       |   |  |   |       |   |  |   |        |  
|Income (loss) from continuing operations                                     |  |       | 356   |        |  |       | (1,765 | )      |  |      | (160  | ) |  |   | (25   | ) |  |   | (1,594 | )
|Income from discontinued operations,
net of tax                              |  |       |      |        |  |       | 3      |        |  |      | 5     |   |  |   | 3     |   |  |   | 11     |  
|Cumulative effect of a change in
accounting principle, net of tax            |  |       | (61   | )      |  |       |       |        |  |      |      |   |  |   |      |   |  |   | (61    | )
|                                                                             |  |       |       |        |  |       |        |        |  |      |       |   |  |   |       |   |  |   |        |  
|Net income (loss)                                                            |  | $     | 295   |        |  | $     | (1,762 | )      |  | $    | (155  | ) |  | $ | (22   | ) |  | $ | (1,644 | )
|                                                                             |  |       |       |        |  |       |        |        |  |      |       |   |  |   |       |   |  |   |        |  
|Basic and diluted earnings (loss) per
share available to common stockholders |  | $     | 1.61  |        |  | $     | (9.61  | )      |  | $    | (0.84 | ) |  | $ | (0.10 | ) |  | $ | (8.48  | )
|                                                                             |  |       |       |        |  |       |        |        |  |      |       |   |  |   |       |   |  |   |        |  



|(a) |  | During the third quarter of 2002, the Company completed its initial
goodwill impairment test and recorded a $57 million after-tax impairment
charge. The impairment charge was recorded as a cumulative effect of a
change in accounting principle as of January 1, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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 $19 million, $18
million and $14 million for the years ended December 31, 2002, 2001 and 2000.
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 affiliates were $4 million, $6 million and $5
million for the years ended December 31, 2002, 2001 and 2000.

On December 19, 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Preferred Issue), to Loews.
The terms of the Preferred Issue were approved by a special committee of
independent members of CNAFs Board of Directors. 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. See
Note L for further details of this transaction.

CNA assumes the risk for a limited amount of insurance from R.V.I. Guaranty
Company, Inc. (RVI), an unconsolidated affiliate. CNA assumed approximately
$0.3 million, $2 million and $11 million in written premiums from RVI during
2002, 2001 and 2000.

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. See Note L for a detailed
discussion of this plan.

In December of 2002 and January of 2003, CNAF provided loans in an aggregate
amount of approximately $45 million to a large national contractor that
undertakes projects for the construction of government and private facilities.
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 loans are evidenced by demand notes and currently accrue interest at 10%
until replaced by the credit facility described below. The contractor and
certain of its affiliates have pledged to CNAF substantially all of their
assets as collateral for these loans.

In March of 2003, CNAF entered into an agreement with the contractor to provide
an $86.4 million credit facility, which amount includes the already advanced
$45 million described above. The credit facility and all loans under it will
mature in March of 2006. Advances under the credit facility, including the
already funded $45 million, 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.

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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 new credit facility, on a dollar-for-dollar basis, up to
a maximum of $25 million. Although Loews does
not have rights against the contractor directly under the participation
agreement, it shares recoveries and certain fees under the facility
proportionally  with CNAF.

In March of 2003, CNAF also purchased the contractors outstanding bank debt for
$16.4 million. Under the new credit facility, the contractor agreed to
purchase from CNAF and retire the bank debt for $16.4 million, 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 approximately $6.5 million in outstanding letters of credit
issued by the banks for the contractors benefit that expire between May and
August of 2003. 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.

The contractor has initiated a restructuring plan that is intended to reduce
costs and improve cash flow, and a chief restructuring officer has been
appointed to manage execution of the plan. CNAF, through its affiliate CNA
Surety, intends to continue to provide surety bonds on behalf of the contractor
during this restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards. Any losses arising
from bonds issued or assumed by the insurance subsidiaries of CNA Surety to the
contractor are excluded from CNA Suretys $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
December 31, 2002 has been limited to $20 million per bond.

Indemnification and subrogation rights, including rights to contract proceeds
on construction projects in the event of default, exist that reduce CNA
Suretys and ultimately the Companys exposure to loss. While CNAF believes
that the contractors restructuring efforts may be successful and provide
sufficient cash flow for its operations and repayment of its borrowings under
the credit facility, 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 future results of operations. If such failures occur, the Company
estimates the surety loss, net of indemnification and subrogation recoveries,
but before the effects of corporate aggregate reinsurance treaties, if any, and
minority interest could be up to $200 million.

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 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. Reinsurance
balances payable under this stop loss contract were approximately $22 million
as of December 31, 2001. There were no reinsurance balances payable under this
stop loss contract as of December 31, 2002.

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CCC provided an Excess of Loss Contract to the insurance subsidiaries of CNA
Surety with the capacity to underwrite large surety bond exposures. The Excess
of Loss Contract provided $75 million of coverage in excess of the $40 million
of coverage provided to the insurance subsidiaries of CNA Surety in 2002 by
third party reinsurers, which is in turn in excess of the $20 million of per
principal losses retained by the CNA Surety insurance subsidiaries.
Subsequent to September 30, 1997, CNA Surety entered into a second excess of
loss contract with CCC (Second Excess of Loss Contract). The Second Excess of
Loss Contract provides additional coverage for principal losses that exceed the
foregoing coverage of $75 million per principal provided by the Excess of Loss
Contract, or aggregate losses per principal in excess of $135 million. CCC is
also obligated to act as a joint insurer, or co-surety, for business covered
by the Excess of Loss Contract when requested by the CNA Surety insurance
subsidiaries. In consideration for the reinsurance coverage provided by the
Excess of Loss Contracts, the insurance subsidiaries of CNA Surety paid to CCC,
on a quarterly basis, a premium equal to 1% of the net written premiums
applicable to the Excess of Loss Contract, subject to a minimum premium of $20
thousand and $5 thousand per quarter under the Excess of Loss Contract and
Second Excess of Loss Contract, respectively. The two Excess of Loss Contracts
collectively provide coverage for losses discovered on surety bonds in force as
of September 30, 1997 and for losses discovered on new and renewal business
written during the term of the Excess of Loss Contracts. Both Excess of Loss
Contracts commenced immediately following September 30, 1997 and continue for a
period of five years from September 30, 1997 or until September 30, 2002. The
discovery period for losses covered by the Excess of Loss Contracts extends
until three years after the September 30, 2002 expiration date of the
contracts.

CCC, effective October 1, 2002, has secured replacement excess of loss
protection for new and renewal bonds for CNA Surety for per principal exposures
that exceed $60 million since October 1, 2002 in two parts  a) $40 million
excess of $60 million and b) $50 million excess of $100 million for CNA Surety.
This excess of loss protection is primarily necessary 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
will pay to CCC, on a quarterly basis, a premium equal to $3 million. In 2002,
the insurance subsidiaries of CNA Surety paid $4 million in premium to CCC in
consideration of the coverage provided by the $50 million excess of $100
million.

Note T. Restatement For Life Settlement Contracts

Subsequent to the issuance of the Companys 2001 Consolidated Financial
Statements and, as a result of a routine review of the Companys periodic
filings by the Division of Corporation Finance of the SEC, the Company has
revised the historical accounting for its investment in life settlement
contracts and the related revenue recognition. The Company has restated its
previously reported financial statements as of December 31, 2001 and for the
years ended December 31, 2001 and 2000 as well as its interim
financial data for the first three quarters of 2002 and all interim periods of
2001.

The SEC concluded that FASB Technical Bulletin 85-4 Accounting for Purchases of
Life Insurance (FTB 85-4) should have been applied to the Companys investment
in life settlement contracts. Under FTB 85-4, the carrying value of each
contract at purchase and at the end of each reporting period is equal to the
cash surrender value of the policy. Amounts paid to purchase these contracts
that are in excess of the cash surrender value, at the date of purchase, are
expensed immediately. Periodic maintenance costs, such as premiums, necessary
to keep the underlying policy inforce are expensed as incurred and included in
other

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operating expense. 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. The Companys historical
accounting was to record an asset for the amount paid to acquire the life
settlement contract along with other direct acquisition costs, and to recognize
revenue over the period the contract was held. Additionally, the
Consolidated Statements of Stockholders' Equity reflect a decrease
in the Company's retained earnings of $215 million as of January 1,
2000.

The effect of the restatement is as follows:

Restatement

|                                                                              |                                  |   |               |        |          |   |               |        |          |   |      |        |   |   |      |        |  
|----------------------------------------------------------------------------- | -------------------------------- | - | ------------- | ------ | -------- | - | ------------- | ------ | -------- | - | ---- | ------ | - | - | ---- | ------ | -
|                                                                              |                                  |   | As Previously |        | As       |   | As Previously |        | As      
|                                                                              |                                  |   | Reported      |        | Restated |   | Reported      |        | Restated
|                                                                              |                                  |   | 2001          |        | 2001     |   | 2000          |        | 2000    
|As of and for the years ended December 31                                     |                                  |   |               |        |          |   |               |       
|(In millions, except per share data)                                          |                                  |   |               |        |          |   |               |        |          |   |      |        |   |   |      |       
|Consolidated balance sheet:                                                   |                                  |   |               |        |          |   |               |        |          |   |      |        |   |   |      |       
|                                                                              | Other assets                     |   | $             | 2,194  |          |   | $             | 1,817  |          |   |      |        |   |   |      |        |  
|                                                                              | Deferred income taxes            |   |               | 737    |          |   |               | 869    |          |   |      |        |   |   |      |        |  
|                                                                              | Retained earnings                |   |               | 6,683  |          |   |               | 6,438  |          |   |      |        |   |   |      |        |  
|Consolidated statements of operations:                                        |                                  |   |               |        |          |   |               |        |          |   |      |        |   |   |      |       
|                                                                              | Other revenues                   |   | $             | 676    |          |   | $             | 683    |          |   | $    | 739    |   |   | $    | 744    |  
|                                                                              | Other
operating expenses (a)     |   |               | (1,909 | )        |   |               | (1,913 | )        |   |      | (1,792 | ) |   |      | (1,847 | )
|                                                                              | Income
tax benefit (expense) (a) |   |               | 745    |          |   |               | 744    |          |   |      | (568   | ) |   |      | (550   | )
|                                                                              | Net (loss) income                |   |               | (1,644 | )        |   |               | (1,642 | )        |   |      | 1,214  |   |   |      | 1,182  |  
|Basic and Diluted (loss) earnings per
share available to common stockholders: |                                  | $ | (8.48         | )      |          | $ | (8.46         | )      |          | $ | 6.61 |        |   | $ | 6.43 |       

|    |  |                                                                                                                                                      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Amounts previously reported
have been revised to reflect the presentation of CNA Vida as a
discontinued operation. See Note P for further discussion.

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INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders of
CNA Financial Corporation

We have audited the accompanying consolidated balance sheets of CNA Financial
Corporation (an affiliate of Loews Corporation) and subsidiaries (the Company)
as of December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three years in
the period ended December 31, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note T to the consolidated financial statements, the
accompanying 2001 and 2000 consolidated financial statements have been
restated.

Also, as discussed in Note A to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and indefinite-lived
intangible assets and in 2001 the Company changed its method of accounting for
derivative instruments and hedging activities.

Deloitte & Touche LLP
Chicago, Illinois
March 19, 2003

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS OF THE REGISTRANT

|                      |  |                                                                                                  |  |     |    |        |  |                                             |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------------------- |  | ------------------------------------------------------------------------------------------------ |  | --- | -- | ------ |  | ------------------------------------------- | ---- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |  |                                                                                                  |  |     |    |        |  | FIRST BECAME                                |      | 
|                      |  | POSITION AND OFFICES                                                                             |  |     |    |        |  | EXECUTIVE OFFICER                           |      | 
|NAME                  |  | HELD WITH REGISTRANT                                                                             |  | AGE |    | OF CNA |  | PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
|                      |  |                                                                                                  |  |     |    |        |  |                                            
|Stephen W. Lilienthal |  | Chief Executive
Officer, CNA
Financial
Corporation                                               |  |     | 53 |        |  |                                             | 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                  |  |     | 43 |        |  |                                             | 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                                          |  |     | 47 |        |  |                                             | 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 |  |     | 54 |        |  |                                             | 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.                                                                                              
|                      |  |                                                                                                  |  |     |    |        |  |                                             |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Debra L. McClenahan   |  | President and Chief
Executive Officer,
CNA Re Operations,
CNA insurance
companies                |  |     | 50 |        |  |                                             | 2002 |  |  | President and Chief Executive Officer, CNA
Re Operations of the CNA insurance
companies since February 2002. From 1993
to December 2001, Ms. McClenahan has held
various officer positions with the CNA
insurance companies.                                                                                                                                                                                                                                  
|                      |  |                                                                                                  |  |     |    |        |  |                                             |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Robert W. Patin       |  | President and Chief
Executive Officer,
CNA Life and Group
Operations, CNA
insurance companies    |  |     | 60 |        |  |                                             | 2001 |  |  | President and Chief Executive Officer, CNA
Life and Group Operations of the CNA
insurance companies since January 2001.
Prior to that, Mr. Patin was President and
Chief Operating Officer of Big Idea
Productions from 1998 to 2001. From 1988
until 1998, he was Chairman of the Board
and Chief Executive Officer of Washington
National Corp.                                                                                                             

Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.

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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.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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. 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 chief executive officer and chief financial officer have
conducted an evaluation of the Companys disclosure controls and procedures as
of a date within 90 days prior to the date of this report. Based on this
evaluation, the Companys chief executive officer and chief financial officer
have each concluded that the Companys disclosure controls and procedures are
effective for their intended purpose.

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

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PART IV




ITEM 15. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K

|    |  |  |    |  |  |                                                                                                                      |  |       
|--- |  |  | -- |  |  | -------------------------------------------------------------------------------------------------------------------- |  | ------
|    |  |  |    |  |  |                                                                                                                      |  | Page  
|    |  |  |    |  |  |                                                                                                                      |  | Number
|    |  |  |    |  |  |                                                                                                                      |  |       
|(a) |  |  | 1. |  |  | FINANCIAL STATEMENTS:                                                                                                |  |       
|    |  |  |    |  |  | Consolidated Balance Sheets  December 31, 2002 and 2001 (Restated)                                                  |  | 96    
|    |  |  |    |  |  | Consolidated Statements of Operations  Years Ended December 31, 2002, 2001(Restated) and 2000 (Restated)            |  | 98    
|    |  |  |    |  |  | Consolidated Statements of Cash Flows  Years Ended December 31, 2002, 2001 (Restated) and 2000 (Restated)           |  | 99    
|    |  |  |    |  |  | Consolidated Statements of
Stockholders Equity  Years Ended December 31, 2002, 2001 (Restated) and 2000 (Restated) |  | 101   
|    |  |  |    |  |  | Notes to Condensed Financial Statements                                                                              |  | 102   
|    |  |  |    |  |  | Independent Auditors Report                                                                                         |  | 181   
|(a) |  |  | 2. |  |  | FINANCIAL STATEMENT SCHEDULES:                                                                                       |  |       
|    |  |  |    |  |  | Schedule I Summary of Investments                                                                                    |  | 188   
|    |  |  |    |  |  | Schedule II Condensed Financial Information (Restated) of Registrant (Parent Company)                                |  | 189   
|    |  |  |    |  |  | Schedule III Supplementary Insurance Information (Restated)                                                          |  | 198   
|    |  |  |    |  |  | Schedule IV Reinsurance                                                                                              |  | 199   
|    |  |  |    |  |  | Schedule V Valuation and Qualifying Accounts                                                                         |  | 199   
|    |  |  |    |  |  | Schedule VI Supplementary
Information Concerning Property and Casualty Insurance Operations                          |  | 199   
|    |  |  |    |  |  | Independent Auditors Report                                                                                         |  | 200   
|(a) |  |  | 3. |  |  | EXHIBITS:                                                                                                            |  |       

| |    |   |  |                                                                                                                                                                                             |                        |      |  |        
| | -- | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ---- |  | -------
| |    |   |  |                                                                                                                                                                                             |                        |      |  | Exhibit
| |    |   |  |                                                                                                                                                                                             | Description 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.)                                        |                        | 3.1 
| |    |   |  | By-Laws of CNA Financial Corporation, as amended February 12, 2003                                                                                                                          |                        | 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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| |     |   |  |                                                                                                                                                                                                                                                     |  |       
| | --- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------
| | (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.)                                                         |  | 10.1  
| |     |   |  | Continuing Services Agreement between CNA Financial Corporation
and Edward J. Noha, dated February 27, 1991 (Exhibit 6.0 to 1991
Form 8-K, filed March 18, 1991, incorporated herein by reference.)                                                 |  | 10.2  
| |     |   |  | CNA Employees Supplemental Savings Plan, as amended through
January 1, 1994 (Exhibit 10.3 to 1999 Form 10-K incorporated
herein by reference.)                                                                                                     |  | 10.3  
| |     |   |  | CNA Employees Retirement Benefit Equalization Plan, as amended
through January 1, 1994 (Exhibit 10.4 to 1999 Form 10-K
incorporated herein by reference.)                                                                                          |  | 10.4  
| |     |   |  | Continental Casualty Company CNA Annual Incentive Bonus Plan
Provisions (Exhibit 10.1 to 1994 Form 10-K incorporated herein by
reference.)                                                                                                        |  | 10.5  
| |     |   |  | CNA 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.)                                                                                |  | 10.6  
| |     |   |  | Employment 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.)                                                                  |  | 10.7  
| |     |   |  | Sale 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.) |  | 10.8  
| |     |   |  | Share 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 September 30, 2002
Form 10-Q incorporated herein by reference.)              |  | 10.9  
| |     |   |  | Employment Agreement between CNA Financial Corporation
and Stephen W. Lilienthal, dated July 25, 2002                                                                                                                                               |  | 10.10*
| |     |   |  | Employment Agreement between CNA Financial Corporation
and James R. Lewis, dated August 9, 2002                                                                                                                                                     |  | 10.11*
| |     |   |  | Continuing Services Agreement between CNA Financial Corporation and
Bernard Hengesbaugh, dated August 26, 2002                                                                                                                                      |  | 10.12*

186



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| |     |   |  |                                                                                                                    |  |       
| | --- | - |  | ------------------------------------------------------------------------------------------------------------------ |  | ------
| | (10 | ) |  | Material contracts (continued):                                                                                    |  |       
| |     |   |  | Amendment to Employment Agreement between CNA Financial Corporation
and Robert V. Deutsch, dated February 25, 2003 |  | 10.13*
| | (21 | ) |  | Primary Subsidiaries of CNAF                                                                                       |  | 21.1* 
| | (23 | ) |  | Independent Auditors Consent                                                                                      |  | 23.1* 
| |     |   |  | *Filed herewith                                                                                                    |  |       



|(b) |  | Reports on Form 8-K:                                                                                                                                                                                   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On December 19, 2002 CNA Financial Corporation sold 7,500 shares
of its Series H Cumulative Preferred Stock to Loews Corporation,
the owner of 90% of CNAs outstanding common stock, for $750
million.
|   
|(c) |  | Exhibits:
          None.                                                                                                                                                                              
|   
|(d) |  | Condensed Financial Information of Unconsolidated Subsidiaries:
          None.                                                                                                                        

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SCHEDULE I. SUMMARY OF INVESTMENTS  OTHER THAN INVESTMENTS IN RELATED PARTIES

|                                                   |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |     |        | 
|-------------------------------------------------- | ------------------------------- | -------------------------------------------------------------------------- | ------ | ----------------- | ------ | --------- | ------ | -------- | ------ | - | ------ | --- | ------ | 
|                                                   |                                 |                                                                            |        | December 31, 2002
|                                                   |                                 |                                                                            |        |                  
|                                                   |                                 |                                                                            |        | Cost or           |        | Estimated |        |          |        |  
|                                                   |                                 |                                                                            |        | Amortized         |        | Fair      |        | Carrying
|                                                   |                                 |                                                                            |        | Cost              |        | Value     |        | Value   
|                                                   |                                 |                                                                            |        |                   |        |           |        |         
|(In millions)                                      |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |    
|Fixed maturity securities available-for-sale:      |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |    
|                                                   | Bonds:                          |                                                                            |        |                   |        |           |        |          |        |   |        |     |       
|                                                   |                                 | United States Government and government agencies and
authorities  taxable |        | $                 | 2,066  |           |        | $        | 2,224  |   |        | $   | 2,224  | 
|                                                   |                                 | States, municipalities and political subdivisions  tax exempt             |        |                   | 4,966  |           |        |          | 5,074  |   |        |     | 5,074  | 
|                                                   |                                 | Foreign governments and political subdivisions                             |        |                   | 1,901  |           |        |          | 1,913  |   |        |     | 1,913  | 
|                                                   |                                 | Public utilities                                                           |        |                   | 1,806  |           |        |          | 1,831  |   |        |     | 1,831  | 
|                                                   |                                 | Convertibles and bonds with warrants attached                              |        |                   | 9      |           |        |          | 9      |   |        |     | 9      | 
|                                                   |                                 | All other corporate bonds                                                  |        |                   | 14,721 |           |        |          | 15,155 |   |        |     | 15,155 | 
|                                                   | Redeemable preferred stocks     |                                                                            |        | 64                |        |           |        | 69       |        |   |        | 69  |       
|                                                   |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |     |        | 
|Total fixed maturity securities available-for-sale |                                 |                                                                            | 25,533 |                   |        |           | 26,275 |          |        |   | 26,275 |    
|                                                   |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |     |        | 
|Equity securities available-for-sale:              |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |    
|                                                   | Common stocks:                  |                                                                            |        |                   |        |           |        |          |        |   |        |     |       
|                                                   |                                 | Banks, trusts and insurance companies                                      |        |                   | 17     |           |        |          | 20     |   |        |     | 20     | 
|                                                   |                                 | Industrial and other                                                       |        |                   | 293    |           |        |          | 441    |   |        |     | 441    | 
|                                                   | Non-redeemable preferred stocks |                                                                            |        | 209               |        |           |        | 205      |        |   |        | 205 |       
|                                                   |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |     |        | 
|Total equity securities available-for-sale         |                                 |                                                                            | 519    |                   |        | $         | 666    |          |        |   | 666    |    
|                                                   |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |     |        | 
|Mortgage Loans                                     |                                 |                                                                            | 28     |                   |        |           |        |          |        |   | 28     |    
|Real estate                                        |                                 |                                                                            | 29     |                   |        |           |        |          |        |   | 29     |    
|Policy loans                                       |                                 |                                                                            | 180    |                   |        |           |        |          |        |   | 180    |    
|Limited partnership investments                    |                                 |                                                                            | 1,060  |                   |        |           |        |          |        |   | 1,060  |    
|Other invested assets                              |                                 |                                                                            | 34     |                   |        |           |        |          |        |   | 47     |    
|Short term investments                             |                                 |                                                                            | 7,010  |                   |        |           |        |          |        |   | 7,008  |    
|                                                   |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |    
|Total investments                                  |                                 | $                                                                          | 34,393 |                   |        |           |        |          |        | $ | 35,293 |    
|                                                   |                                 |                                                                            |        |                   |        |           |        |          |        |   |        |    

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SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)

|                                           |                                                                                                |                                                                                                                                                               |        |        |       |              |        |       |       |  
|------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------ | ----- | ------------ | ------ | ----- | ----- | -
|CNA Financial Corporation                  |                                                                                                |                                                                                                                                                               |        |        |       |              |        |      
|Balance Sheets                             |                                                                                                |                                                                                                                                                               |        |        |       |              |        |      
|                                           |                                                                                                | 2002                                                                                                                                                          |        | 2001  
|December 31                                |                                                                                                |                                                                                                                                                               |        |       
|(In millions)                              |                                                                                                |                                                                                                                                                               |        |        |       | Restated (a)
|Assets:                                    |                                                                                                |                                                                                                                                                               |        |        |       |              |        |      
|                                           | Investment in subsidiaries                                                                     |                                                                                                                                                               | $      | 10,648 |       |              | $      | 9,960 |      
|                                           | Fixed maturity securities available-for-sale, at market value, (amortized
cost of $30 and $15) |                                                                                                                                                               |        | 30     |       |              |        | 15    |      
|                                           | Equity securities available-for-sale, at market value, (cost of $1 and $1)                     |                                                                                                                                                               |        | 1      |       |              |        | 1     |      
|                                           | Other invested assets                                                                          |                                                                                                                                                               |        | 1      |       |              |        |      |      
|                                           | Short term investments, cost approximates market value                                         |                                                                                                                                                               |        | 386    |       |              |        | 5     |      
|                                           | Receivables for securities sold                                                                |                                                                                                                                                               |        | 93     |       |              |        |      |      
|                                           | Amounts due from affiliates                                                                    |                                                                                                                                                               |        | 17     |       |              |        | 41    |      
|                                           | Notes receivable from affiliates                                                               |                                                                                                                                                               |        | 309    |       |              |        | 341   |      
|                                           | Other                                                                                          |                                                                                                                                                               |        | 2      |       |              |        | 3     |      
|                                           |                                                                                                |                                                                                                                                                               |        |        |       |              |        |       |      
|Total assets                               |                                                                                                | $                                                                                                                                                             | 11,487 |        |       | $            | 10,366 |      
|                                           |                                                                                                |                                                                                                                                                               |        |        |       |              |        |       |      
|Liabilities and Stockholders Equity:      |                                                                                                |                                                                                                                                                               |        |        |       |              |        |      
|Liabilities:                               |                                                                                                |                                                                                                                                                               |        |        |       |              |        |      
|                                           | Payables for securities purchased                                                              |                                                                                                                                                               | $      | 91     |       |              | $      |      |      
|                                           | Short term debt                                                                                |                                                                                                                                                               |        | 248    |       |              |        | 250   |      
|                                           | Long term debt                                                                                 |                                                                                                                                                               |        | 1,729  |       |              |        | 1,979 |      
|                                           | Other                                                                                          |                                                                                                                                                               |        | 18     |       |              |        | 15    |      
|                                           |                                                                                                |                                                                                                                                                               |        |        |       |              |        |       |      
|Total Liabilities                          |                                                                                                |                                                                                                                                                               | 2,086  |        |       |              | 2,244  |      
|                                           |                                                                                                |                                                                                                                                                               |        |        |       |              |        |       |      
|Stockholders equity:                      |                                                                                                |                                                                                                                                                               |        |        |       |              |        |      
|                                           |                                                                                                | Preferred stock (Series H, no par value; $100,000 stated value;
12,500,000 shares authorized; 7,500 shares issued and outstanding, held
by Loews Corporation) |        |        | 750   |              |        |       |      |  
|                                           |                                                                                                | Common stock ($2.50 par value; 500,000,000 shares authorized;
225,850,270 shares issued; and 223,608,868 and 223,596,861 shares
outstanding)                  |        |        | 565   |              |        |       | 565   |  
|                                           |                                                                                                | Additional paid-in capital                                                                                                                                    |        |        | 1,031 |              |        |       | 1,031 |  
|                                           |                                                                                                | Retained earnings                                                                                                                                             |        |        | 6,593 |              |        |       | 6,438 |  
|                                           |                                                                                                | Accumulated other comprehensive income                                                                                                                        |        |        | 604   |              |        |       | 226   |  
|                                           |                                                                                                | Treasury stock (2,241,402 and 2,253,409 shares), at cost                                                                                                      |        |        | (70   | )            |        |       | (70   | )
|                                           |                                                                                                |                                                                                                                                                               |        |        |       |              |        |       |      
|                                           |                                                                                                |                                                                                                                                                               | 9,473  |        |       |              | 8,190  |      
|                                           |                                                                                                | Notes receivable for the issuance of common stock                                                                                                             |        |        | (72   | )            |        |       | (68   | )
|                                           |                                                                                                |                                                                                                                                                               |        |        |       |              |        |       |      
|Total stockholders equity                 |                                                                                                |                                                                                                                                                               | 9,401  |        |       |              | 8,122  |      
|                                           |                                                                                                |                                                                                                                                                               |        |        |       |              |        |       |      
|Total liabilities and stockholders equity |                                                                                                | $                                                                                                                                                             | 11,487 |        |       | $            | 10,366 |      
|                                           |                                                                                                |                                                                                                                                                               |        |        |       |              |        |       |      



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

See accompanying Notes to Condensed Financial Information.

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|                                                                                                                                              |                                    |                |      |      |     |              |        |              |     |   |       |     |     | 
|--------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | -------------- | ---- | ---- | --- | ------------ | ------ | ------------ | --- | - | ----- | --- | --- | 
|CNA Financial Corporation                                                                                                                     |                                    |                |      |      |     |              |        |              |     |   |       |    
|Statements of Operations                                                                                                                      |                                    |                |      |      |     |              |        |              |     |   |       |    
|                                                                                                                                              |                                    | 2002           |      | 2001 |     | 2000        
|Years ended December 31                                                                                                                       |                                    |                |      |      |     |             
|(In millions)                                                                                                                                 |                                    |                |      |      |     | Restated (a) |        | Restated (a)
|Revenues:                                                                                                                                     |                                    |                |      |      |     |              |        |              |     |   |       |    
|                                                                                                                                              | Net investment income              |                | $    | 8    |     |              | $      | 18           |     |   | $     | 11  |    
|                                                                                                                                              | Realized investment gains (losses) |                |      | 3    |     |              |        | (5           | )   |   |       | (4  | )  
|                                                                                                                                              | Other income                       |                |      | 13   |     |              |        | 13           |     |   |       | 38  |    
|                                                                                                                                              |                                    |                |      |      |     |              |        |              |     |   |       |     |    
|                                                                                                                                              |                                    | Total revenues |      |      | 24  |              |        |              | 26  |   |       |     | 45  | 
|                                                                                                                                              |                                    |                |      |      |     |              |        |              |     |   |       |     |    
|Expenses:                                                                                                                                     |                                    |                |      |      |     |              |        |              |     |   |       |    
|                                                                                                                                              | Administrative and general         |                |      | 3    |     |              |        | 161          |     |   |       | 208 |    
|                                                                                                                                              | Interest                           |                |      | 131  |     |              |        | 140          |     |   |       | 175 |    
|                                                                                                                                              |                                    |                |      |      |     |              |        |              |     |   |       |     |    
|                                                                                                                                              |                                    | Total expenses |      |      | 134 |              |        |              | 301 |   |       |     | 383 | 
|                                                                                                                                              |                                    |                |      |      |     |              |        |              |     |   |       |     |    
|Loss from operations before income taxes, equity in net income of
subsidiaries and the cumulative effects of changes in accounting
principles |                                    |                | (110 | )    |     |              | (275   | )            |     |   | (338  | )  
|Income tax benefit                                                                                                                            |                                    |                | 39   |      |     |              | 96     |              |     |   | 118   |    
|                                                                                                                                              |                                    |                |      |      |     |              |        |              |     |   |       |     |    
|Loss before equity in net income of subsidiaries and the
cumulative effects of changes in accounting principles                               |                                    |                | (71  | )    |     |              | (179   | )            |     |   | (220  | )  
|Equity in net income (loss) of subsidiaries                                                                                                   |                                    |                | 227  |      |     |              | (1,461 | )            |     |   | 1,402 |    
|Cumulative
effects of changes in accounting principles, net of tax                                                                            |                                    |                | (1   | )    |     |              | (2     | )            |     |   |      |    
|                                                                                                                                              |                                    |                |      |      |     |              |        |              |     |   |       |     |    
|Net income (loss)                                                                                                                             |                                    | $              | 155  |      |     | $            | (1,642 | )            |     | $ | 1,182 |    
|                                                                                                                                              |                                    |                |      |      |     |              |        |              |     |   |       |     |    



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

See accompanying Notes to Condensed Financial Information.

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|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |      |      |  
|------------------------------------------------------ | --------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------- | ---- | ---- | ------------ | ------ | ------------ | ----- | ----- | ---- | ----- | ---- | ---- | -
|CNA Financial Corporation                              |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |      
|Statements of Cash Flows                               |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |      
|                                                       |                                                                                         | 2002                                                              |                   | 2001 |      | 2000        
|Years ended December 31                                |                                                                                         |                                                                   |                   |      |      |             
|(In millions)                                          |                                                                                         |                                                                   |                   |      |      | Restated (a) |        | Restated (a)
|Cash flows from operating activities:                  |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |      
|                                                       | Net income (loss)                                                                       |                                                                   | $                 | 155  |      |              | $      | (1,642       | )     |       | $    | 1,182 |     
|                                                       | Adjustments to reconcile net income (loss) to net cash flows from
operating activities: |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|                                                       |                                                                                         | (Income) loss of subsidiaries, net of distributions               |                   |      | (109 | )            |        |              | 1,954 |       |      |       | (973 | )   
|                                                       |                                                                                         | Cumulative effect of a change in accounting principle, net of tax |                   |      | 1    |              |        |              | 2     |       |      |       |     |     
|                                                       |                                                                                         | Realized (gains) losses                                           |                   |      | (3   | )            |        |              | 5     |       |      |       | 4    |     
|                                                       | Changes in:                                                                             |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|                                                       |                                                                                         | Other, net                                                        |                   |      | 148  |              |        |              | 102   |       |      |       | 183  |     
|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|                                                       |                                                                                         |                                                                   | Total Adjustments |      |      | 37           |        |              |       | 2,063 |      |       |      | (786 | )
|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|Net cash flows provided by operating activities        |                                                                                         |                                                                   | 192               |      |      |              | 421    |              |       |       | 396  |      
|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|Cash flows from investing activities:                  |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |      
|                                                       | Sales of fixed maturity securities                                                      |                                                                   |                   | 428  |      |              |        |             |       |       |      |      |     
|                                                       | Purchases of fixed maturity securities                                                  |                                                                   |                   | (440 | )    |              |        | (15          | )     |       |      |      |     
|                                                       | Purchases of equity securities                                                          |                                                                   |                   | (1   | )    |              |        | (1           | )     |       |      |      |     
|                                                       | Change in short term investments                                                        |                                                                   |                   | (381 | )    |              |        | (5           | )     |       |      | 3     |     
|                                                       | Capital contributions to subsidiaries, net                                              |                                                                   |                   | (304 | )    |              |        | (1,401       | )     |       |      | (165  | )   
|                                                       | Change in notes receivable from affiliates                                              |                                                                   |                   | 32   |      |              |        | 113          |       |       |      | 80    |     
|                                                       | Other, net                                                                              |                                                                   |                   | (19  | )    |              |        | 4            |       |       |      | 9     |     
|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|Net cash flows used by investing activities            |                                                                                         |                                                                   | (685              | )    |      |              | (1,305 | )            |       |       | (73  | )    
|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|Cash flows from financing activities:                  |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |      
|                                                       | Dividends paid to preferred shareholders                                                |                                                                   |                   |     |      |              |        |             |       |       |      | (1    | )   
|                                                       | Proceeds from issuance of debt                                                          |                                                                   |                   |     |      |              |        | 500          |       |       |      |      |     
|                                                       | Principal payments on debt                                                              |                                                                   |                   | (252 | )    |              |        | (627         | )     |       |      | (137  | )   
|                                                       | Issuance of common stock                                                                |                                                                   |                   |     |      |              |        | 1,006        |       |       |      |      |     
|                                                       | Redemption of cumulative Series G preferred stock                                       |                                                                   |                   |     |      |              |        |             |       |       |      | (150  | )   
|                                                       | Issuance of cumulative Series H preferred stock                                         |                                                                   |                   | 750  |      |              |        |             |       |       |      |      |     
|                                                       | Purchase of treasury stock                                                              |                                                                   |                   |     |      |              |        | 1            |       |       |      | (35   | )   
|                                                       | Other, net                                                                              |                                                                   |                   | (5   | )    |              |        | 4            |       |       |      | (4    | )   
|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|Net cash flows provided (used) by financing activities |                                                                                         |                                                                   | 493               |      |      |              | 884    |              |       |       | (327 | )    
|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|Net change in cash and cash equivalents                |                                                                                         |                                                                   |                  |      |      |              |       |              |       |       | (4   | )    
|Cash and cash equivalents, beginning of year           |                                                                                         |                                                                   |                  |      |      |              |       |              |       |       | 4    |      
|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|Cash and cash equivalents, end of year                 |                                                                                         | $                                                                 |                  |      |      | $            |       |              |       | $     |     |      
|                                                       |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|Supplemental disclosures of cash flow information:     |                                                                                         |                                                                   |                   |      |      |              |        |              |       |       |      |      
|                                                       | Cash paid (received):                                                                   |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|                                                       |                                                                                         | Interest                                                          |                   | $    | 133  |              |        | $            | 137   |       |      | $     | 168  |     
|                                                       |                                                                                         | Federal income taxes                                              |                   |      | (616 | )            |        |              | (288  | )     |      |       | (154 | )   
|                                                       | Non-cash transactions:                                                                  |                                                                   |                   |      |      |              |        |              |       |       |      |       |     
|                                                       |                                                                                         | Notes receivable for the issuance of common stock                 |                   |      | 4    |              |        |              | 4     |       |      |       | 10   |     



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

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 2002.

As a result of a routine review of CNAs periodic filings by the Division of
Corporation Finance of the Securities and Exchange Commission (SEC), a
subsidiary has restated its previously reported financial statements as of December 31, 2001 and
for the years ended December 31, 2001 and 2000 as well as its interim financial
data for the first three quarters of 2002 and all interim
periods of 2001. As a
result, the financial statements for CNAF have been restated. See Note T of
the Consolidated Financial Statements included under Item 8.

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. Changes in fair value are
reported as a component of other comprehensive 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. 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 U.S.
Treasury securities and obligations of government agencies.

CNAF may enter into investment derivatives in the normal course of business,
primarily to reduce its subsidiaries 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). CNAF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.

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C. Debt

Debt is composed of the following obligations.

|                                                             |                                                   |      |       |      |  |   |       |     | 
|------------------------------------------------------------ | ------------------------------------------------- | ---- | ----- | ---- |  | - | ----- | --- | 
|Debt                                                         |                                                   |      |       |      |  |   |       |    
|                                                             |                                                   | 2002 |       | 2001
|December 31                                                  |                                                   |      |       |     
|(In millions)                                                |                                                   |      |       |      |  |   |       |    
|Variable rate debt:                                          |                                                   |      |       |      |  |   |       |    
|                                                             | Credit facility due April 29, 2002                |      | $     |     |  |   | $     | 250 | 
|                                                             | Credit facility due April 30, 2004                |      |       | 250  |  |   |       | 250 | 
|Senior notes:                                                |                                                   |      |       |      |  |   |       |    
|                                                             | 6.25%, face amount of $248, due November 15, 2003 |      |       | 248  |  |   |       | 250 | 
|                                                             | 6.50%, face amount of $493, due April 15, 2005    |      |       | 491  |  |   |       | 491 | 
|                                                             | 6.75%, face amount of $250, due November 15, 2006 |      |       | 249  |  |   |       | 249 | 
|                                                             | 6.45%, face amount of $150, due January 15, 2008  |      |       | 149  |  |   |       | 149 | 
|                                                             | 6.60%, face amount of $200, due December 15, 2008 |      |       | 199  |  |   |       | 199 | 
|                                                             | 6.95%, face amount of $150, due January 15, 2018  |      |       | 148  |  |   |       | 148 | 
|Debenture, 7.25%, face amount of $243, due November 15, 2023 |                                                   |      | 240   |      |  |   | 240   |    
|Urban Development Action Grant, 1.00%, due May 7, 2019       |                                                   |      | 3     |      |  |   | 3     |    
|                                                             |                                                   |      |       |      |  |   |       |     | 
|Total                                                        |                                                   | $    | 1,977 |      |  | $ | 2,229 |    
|                                                             |                                                   |      |       |      |  |   |       |     | 
|Short term debt                                              |                                                   | $    | 248   |      |  | $ | 250   |    
|Long term debt                                               |                                                   |      | 1,729 |      |  |   | 1,979 |    
|                                                             |                                                   |      |       |      |  |   |       |     | 
|Total                                                        |                                                   | $    | 1,977 |      |  | $ | 2,229 |    
|                                                             |                                                   |      |       |      |  |   |       |     | 

CNAF has a $250 million three-year bank credit facility with an April 30, 2004
expiration date. CNAF previously also had a $250 million 364-day facility with
an expiration date of April 29, 2002. An option to convert the 364-day
facility to a one-year term loan was exercised in April 2002. The term loan
was subsequently prepaid on December 23, 2002.

CNAF pays a facility fee to the lenders for having funds available for loans
under the three-year credit facility. The fee varies based on the long term
debt ratings of CNAF. At December 31, 2002, the facility fee on the three-year
component was 17.5 basis points.

CNAF pays interest on any outstanding debt/borrowings under the three-year
facility based on a rate determined using the long term debt ratings of CNAF.
The interest rate is equal to the London Interbank Offering Rate (LIBOR) plus
57.5 basis points. Further, if CNAF has outstanding loans greater than 50% of
the amounts available under the three-year facility, CNAF also will pay a
utilization fee of 12.5 basis points on such loans. At December 31, 2002 and
2001, the weighted-average interest rate on the borrowings under the facility,
including facility fees and utilization fees, was 2.3% and 3.1%.

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

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The terms of CNAFs credit facilities require CNAF to maintain certain
financial ratios and its subsidiaries to maintain combined property and
casualty company statutory surplus levels. At December 31, 2002 and 2001, CNAF
was in compliance with all restrictive debt covenants.

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 and $200 million in 2001 and 2000.
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 $3 million
were paid directly by CNAF in 2002.

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, 2002.

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, 2002.

An affiliate of CNAF, Continental Casualty Company (CCC), 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, CCC 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, CCC 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, CCC would be
required to assume the obligation for the entire office building operating
lease. The maximum potential future lease payments at December 31, 2002 that
CCC could be required to pay under this guarantee is approximately $333
million. If CCC was required to assume the entire lease obligation, CCC would
have the right to pursue reimbursement from the other shareholders and would
have the right to all sublease revenues.

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CCC has recorded a liability of approximately $10 million for its share of
estimated future operating deficits of this joint venture through 2016.

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 deem those entities to be undercapitalized.

In December of 2002 and January of 2003, CNAF provided loans in an aggregate
amount of approximately $45 million to a large national contractor that
undertakes projects for the construction of government and private facilities.
CNA Surety Corporation (CNA Surety), a 64% owned and consolidated subsidiary of CNAF, 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 loans are evidenced by demand notes and currently accrue interest at 10%
until replaced by the credit facility described below. The contractor and
certain of its affiliates have pledged to CNAF substantially all of their
assets as collateral for these loans.

In March of 2003, CNAF entered into an agreement with the contractor to provide
an $86.4 million credit facility, which amount includes the already advanced
$45 million described above. The credit facility and all loans under it will
mature in March of 2006. Advances under the credit facility, including the
already funded $45 million, 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 Corporation (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 new credit facility, on a dollar-for-dollar basis, up to
a maximum of $25 million. Although Loews does
not have rights against the contractor directly under the participation
agreement, it shares recoveries and certain fees under the facility
proportionally  with CNAF.

In March of 2003, CNAF also purchased the contractors outstanding bank debt for
$16.4 million. Under the new credit facility, the contractor agreed to
purchase from CNAF and retire the bank debt for $16.4 million, 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 approximately $6.5 million in outstanding letters of credit
issued by the banks for the contractors benefit that expire between May and
August of 2003. 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.

The contractor has initiated a restructuring plan that is intended to reduce
costs and improve cash flow, and a chief restructuring officer has been
appointed to manage execution of the plan. CNAF, through its affiliate CNA
Surety, intends to continue to provide surety bonds on behalf of the contractor
during this restructuring period, subject to the contractors initial and
ongoing compliance with CNA Suretys underwriting standards. Any losses arising
from bonds issued or assumed by the insurance subsidiaries of CNA Surety to the
contractor are excluded from CNA Suretys $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
December 31, 2002 has been limited to $20 million per bond.

Indemnification and subrogation rights, including rights to contract proceeds
on construction projects in the event of default, exist that reduce CNA
Suretys and ultimately the Companys exposure to loss. While CNAF believes
that the contractors restructuring efforts may be successful and provide
sufficient cash flow for its operations and repayment of its borrowings under
the credit facility, 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 future results of operations. If such failures occur, the Company
estimates the surety loss, net of indemnification and subrogation recoveries,
but before the effects of corporate aggregate reinsurance treaties, if any, and
minority interest could be up to $200 million.

In certain circumstances CNAF provides guarantees of the indebtedness of
certain of its subsidiaries independent insurance producers, which expire in
2003. 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, 2002.

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 2119. 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 $1,535 million at December 31, 2002.

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

F. Capital Transactions with Subsidiaries

In 2002, 2001 and 2000, CNAF contributed capital of approximately $304 million,
$1,416 million and $171 million to its subsidiaries. In 2001 and 2000, CNAF
subsidiaries returned capital of approximately $15 million and $6 million. In
2002, there were no returns of capital from subsidiaries.

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G. Dividends from Subsidiaries and Affiliates

In 2002, 2001 and 2000, CNAF received approximately $118 million, $493 million
and $429 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 Department,
may be paid only from earned surplus, which is calculated by removing
unrealized gains from unassigned surplus. As of December 31, 2002, CCCs
earned surplus is in a positive position, thereby enabling CCC to pay
approximately $1,069 million of dividend payments during 2003 that would not be
subject to insurance department prior approval. The actual level of dividends
paid in any year is determined after an assessment of available dividend
capacity, holding company liquidity and cash needs as well as the impact the
dividends will have on the statutory surplus of the applicable insurance
company.

CCCs positive earned surplus at December 31, 2002 is contrasted to its
negative earned surplus position at December 31, 2001. Prompted, in part, by
the negative earned surplus position at December 31, 2001, the Company embarked
on a capital realignment initiative within the CCC intercompany reinsurance
pool (Pool) during 2002, the benefits of which included the restoration of
CCCs earned surplus to a positive position. This initiative involved the
payment of dividends to CCC from its insurance subsidiaries during the fourth quarter
of 2002. As a result of this distribution of the cumulative earnings of CCCs
insurance subsidiaries, CCCs earned surplus was restored to a positive level
at December 31, 2002, approximating $1,069 million.

This initiative involved a change to the underwriting structure of CCC and
eight of its subsidiaries from a Pool structure to a structure in which CCC
assumes 100% of the net underwriting risks of the group of companies formerly
comprising the pool. This is the Companys first step in a multi-year project
to reduce duplicative legal entities, thereby facilitating more efficient
operations and cost savings.

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

H. Preferred Stock

On December 19, 2002, CNAF sold $750 million of a new issue of preferred stock,
designated Series H Cumulative Preferred Issue (Preferred Issue), to Loews. The terms of the Preferred Issue were approved by a special
committee of independent members of CNAFs Board of Directors.

The Preferred Issue 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 ratings levels of the financial strength rating of
CCC from its current rating 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 Preferred Issue unless and until one of the two triggering events
described above has occurred. Beginning with the quarter following an increase
of one intermediate ratings level in CCCs financial strength rating, however,
current (but not accrued cumulative) quarterly dividends can be paid.

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

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upon the mutual agreement of CNAF and a majority of the stockholders of
the preferred stock. The Preferred Issue is exempt from registration under
Section 4(2) of the Securities Act of 1933.

Of the proceeds of the Preferred 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. It is expected that the remaining proceeds will
be used to repay other debt of CNAF and The Continental Corporation, a
controlled subsidiary, maturing in 2003 and used for other general corporate
purposes.

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SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION

|                        |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   |              |       |      |   |   |       |       |  
|----------------------- | ------------------- | - | ----------- | ----- | --------- | - | ------------------------ | ------ | -------- | - | ------- | ----- | ---------- | - | ---------- | ----- | ---------- | - | ----------- | --- | --------- | - | ------------ | ----- | ----- | - | ----- | --- |  | - | ------ | ----- | - | - | ----- | --- | - | ------------ | ----- | ---- | - | - | ----- | ----- | -
|                        |                     |   |             |       |           |   | Gross Insurance Reserves |        |          |   |         |       |            |   |            |       | Insurance  |   | Amortiz-    |     |           |   |              |       |       |   |      
|                        |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       | Claims and |   | ation       |     |           |   |              |       |       |   |      
|                        |                     |   | Deferred    |       | Claim     |   | Future                   |        |          |   |         |       | Policy-    |   |            |       |            |   | Net         |     | Policy-   |   | of Deferred  |       | Other |   | Net  
|                        |                     |   | Acquisition |       | 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 (c)   
|                        |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |             
|(In millions)           |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   | Restated (b) |       |      |   |  
|December 31, 2002       |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   |              |       |      |   |   |       |      
|                        | Standard Lines      |   | $           | 421   |           |   | $                        | 11,576 |          |   | $       |      |            |   | $          | 1,811 |            |   | $           | 47  |           |   | $            | 4,018 |       |   | $     | 398 |  |   | $      | 2,965 |   |   | $     | 931 |   |              | $     | 583  |   |   | $     | 4,020 |  
|                        | Specialty Lines     |   |             | 319   |           |   |                          | 5,874  |          |   |         |      |            |   |            | 1,763 |            |   |             | 3   |           |   |              | 2,178 |       |   |       | 253 |  |   |        | 1,682 |   |   |       | 554 |   |              |       | 255  |   |   |       | 2,383 |  
|                        | CNA Re              |   |             | 47    |           |   |                          | 2,264  |          |   |         |      |            |   |            | 195   |            |   |             |    |           |   |              | 642   |       |   |       | 144 |  |   |        | 503   |   |   |       | 144 |   |              |       | 54   |   |   |       | 605   |  
|                        | Group Operations    |   |             | 107   |           |   |                          | 1,400  |          |   |         | 571   |            |   |            | 7     |            |   |             | 470 |           |   |              | 2,327 |       |   |       | 252 |  |   |        | 1,956 |   |   |       | 13  |   |              |       | 545  |   |   |       | 1,149 |  
|                        | Life Operations     |   |             | 1,657 |           |   |                          | 1,409  |          |   |         | 6,503 |            |   |            | 149   |            |   |             | 63  |           |   |              | 930   |       |   |       | 540 |  |   |        | 1,118 |   |   |       | 151 |   |              |       | 161  |   |   |       | 496   |  
|                        | Corporate and Other |   |             |      |           |   |                          | 4,847  |          |   |         | 335   |            |   |            | 908   |            |   |             | (3  | )         |   |              | 156   |       |   |       | 143 |  |   |        | 209   |   |   |       | (2  | ) |              |       | 307  |   |   |       | 38    |  
|                        | Eliminations        |   |             |      |           |   |                          |       |          |   |         |      |            |   |            | (13   | )          |   |             |    |           |   |              | (38   | )     |   |       |    |  |   |        | (41   | ) |   |       |    |   |              |       | (143 | ) |   |       | (14   | )
|                        |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   |              |       |      |   |   |       |      
|Consolidated Operations |                     | $ | 2,551       |       |           | $ | 27,370                   |        |          | $ | 7,409   |       |            | $ | 4,820      |       |            | $ | 580         |     |           | $ | 10,213       |       |       | $ | 1,730 |     |  | $ | 8,392  |       |   | $ | 1,791 |     |   | $            | 1,762 |      |   | $ | 8,677 |      
|                        |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   |              |       |      |   |   |       |      
|December 31, 2001       |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   |              |       |      |   |   |       |      
|                        | Standard Lines      |   | $           | 397   |           |   | $                        | 12,854 |          |   | $       |      |            |   | $          | 1,825 |            |   | $           | 54  |           |   | $            | 2,473 |       |   | $     | 488 |  |   | $      | 2,511 |   |   | $     | 938 |   |              | $     | 601  |   |   | $     | 2,984 |  
|                        | Specialty Lines     |   |             | 255   |           |   |                          | 5,668  |          |   |         |      |            |   |            | 1,449 |            |   |             | 3   |           |   |              | 1,896 |       |   |       | 314 |  |   |        | 1,850 |   |   |       | 538 |   |              |       | 400  |   |   |       | 1,951 |  
|                        | CNA Re              |   |             | 56    |           |   |                          | 4,644  |          |   |         |      |            |   |            | 201   |            |   |             | 2   |           |   |              | 641   |       |   |       | 172 |  |   |        | 1,418 |   |   |       | 205 |   |              |       | 69   |   |   |       | 524   |  
|                        | Group Operations    |   |             | 117   |           |   |                          | 1,714  |          |   |         | 635   |            |   |            | 10    |            |   |             | 452 |           |   |              | 3,378 |       |   |       | 241 |  |   |        | 2,979 |   |   |       | (13 | ) |              |       | 730  |   |   |       | 2,182 |  
|                        | Life Operations     |   |             | 1,598 |           |   |                          | 1,343  |          |   |         | 6,330 |            |   |            | 134   |            |   |             | 38  |           |   |              | 873   |       |   |       | 486 |  |   |        | 1,107 |   |   |       | 131 |   |              |       | 144  |   |   |       | 438   |  
|                        | Corporate 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 |      
|                        |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   |              |       |      |   |   |       |      
|December 31, 2000       |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   |              |       |      |   |   |       |      
|                        | Standard Lines      |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   | $            | 3,991 |       |   | $     | 743 |  |   | $      | 3,289 |   |   | $     | 972 |   |              | $     | 551  |   |   | $     | 3,890 |  
|                        | Specialty Lines     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              | 1,847 |       |   |       | 376 |  |   |        | 1,242 |   |   |       | 458 |   |              |       | 353  |   |   |       | 1,933 |  
|                        | CNA Re              |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              | 1,089 |       |   |       | 211 |  |   |        | 861   |   |   |       | 263 |   |              |       | 38   |   |   |       | 951   |  
|                        | Group Operations    |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              | 3,444 |       |   |       | 267 |  |   |        | 2,942 |   |   |       | 25  |   |              |       | 734  |   |   |       | 1,407 |  
|                        | Life Operations     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              | 773   |       |   |       | 467 |  |   |        | 890   |   |   |       | 166 |   |              |       | 125  |   |   |       | 388   |  
|                        | Corporate and Other |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              | 290   |       |   |       | 183 |  |   |        | 542   |   |   |       | (4  | ) |              |       | 425  |   |   |       | 117   |  
|                        | Eliminations        |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              | (46   | )     |   |       |    |  |   |        | (46   | ) |   |       |    |   |              |       | (173 | ) |   |       | (46   | )
|                        |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   |              |       |      |   |   |       |      
|Consolidated Operations |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           | $ | 11,388       |       |       | $ | 2,247 |     |  | $ | 9,720  |       |   | $ | 1,880 |     |   | $            | 2,053 |      |   | $ | 8,640 |      
|                        |                     |   |             |       |           |   |                          |        |          |   |         |       |            |   |            |       |            |   |             |     |           |   |              |       |       |   |       |     |  |   |        |       |   |   |       |     |   |              |       |      |   |   |       |      



|(a) |  | Investment income is allocated based on each segments net carried
insurance reserves as adjusted.
|--- |  | --------------------------------------------------------------------------------------------------
|   
|(b) |  | As restated, see Note T of the Consolidated Financial Statements included
under Item 8.           
|   
|(c) |  | 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 to   |    |                |  |               |   |            |  |  
|                             |                       |                                  |                                       |  | Beginning  |     | Costs and  |  | Other        |    |                |  |               |   | Balance at
|                             |                       |                                  |                                       |  | of Period  |     | Expenses   |  | Accounts (a) |    | Deductions (b) |  | End of Period
|                             |                       |                                  |                                       |  |            |     |            |  |              |    |                |  |              
|(In millions)                |                       |                                  |                                       |  |            |     |            |  |              |    |                |  |               |   |            |  |   |    |  | 
|Year ended December 31, 2002 |                       |                                  |                                       |  |            |     |            |  |              |    |                |  |               |   |            |  |   |    |  | 
|                             | Deducted from assets: |                                  |                                       |  |            |     |            |  |              |    |                |  |               |   |            |  |   |    |  |  |  
|                             |                       | Allowance for doubtful accounts: |                                       |  |            |     |            |  |              |    |                |  |               |   |            |  |   |    |  |  |   |    
|                             |                       |                                  | Insurance and reinsurance
receivables |  | $          | 351 |            |  | $            | 40 |                |  | $             | 7 |            |  | $ | 46 |  |  | $ | 352 | 
|                             |                       |                                  |                                       |  |            |     |            |  |              |    |                |  |               |   |            |  |   |    |  |  |   |     | 
|Year ended December 31, 2001 |                       |                                  |                                       |  |            |     |            |  |              |    |                |  |               |   |            |  |   |    |  | 
|                             | Deducted from assets: |                                  |                                       |  |            |     |            |  |              |    |                |  |               |   |            |  |   |    |  |  |  
|                             |                       | Allowance for doubtful accounts: |                                       |  |            |     |            |  |              |    |                |  |               |   |            |  |   |    |  |  |   |    
|                             |                       |                                  | Insurance and reinsurance
receivables |  | $          | 321 |            |  | $            | 57 |                |  | $             |  |            |  | $ | 27 |  |  | $ | 351 | 
|                             |                       |                                  |                                       |  |            |     |            |  |              |    |                |  |               |   |            |  |   |    |  |  |   |     | 

(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 Operations
|                                                                                                                             |  |                                              
|                                                                                                                             |  | 2002                                          |        | 2001 |  | 2000
|As of and for the years ended December 31                                                                                    |  |                                               |        |      |  |     
|(In millions)                                                                                                                |  |                                               |        |      |  |      |        |  |  |   |       | 
|Deferred acquisition costs                                                                                                   |  | $                                             | 1,257  |      |  | $    | 1,103  |  |  |   |       | 
|Reserves for unpaid claim and claim adjustment expenses                                                                      |  |                                               | 25,648 |      |  |      | 29,551 |  |  |   |       | 
|Discount deducted from claim and claim adjustment expense reserves
above (based on interest rates ranging from 3.5% to 7.5%) |  |                                               | 2,440  |      |  |      | 2,456  |  |  |   |       | 
|Unearned premiums                                                                                                            |  |                                               | 4,813  |      |  |      | 4,495  |  |  |   |       | 
|Net written premiums                                                                                                         |  |                                               | 8,677  |      |  |      | 8,014  |  |  | $ | 8,640 | 
|Net earned premiums                                                                                                          |  |                                               | 8,461  |      |  |      | 7,598  |  |  |   | 8,847 | 
|Net investment income                                                                                                        |  |                                               | 1,453  |      |  |      | 1,261  |  |  |   | 1,740 | 
|Incurred claim and claim adjustment expenses related to current year                                                         |  |                                               | 6,722  |      |  |      | 7,192  |  |  |   | 6,332 | 
|Incurred claim and claim adjustment expenses related to prior years                                                          |  |                                               | 52     |      |  |      | 2,466  |  |  |   | 427   | 
|Amortization of deferred acquisition costs                                                                                   |  |                                               | 1,660  |      |  |      | 1,748  |  |  |   | 1,729 | 
|Paid claim and claim adjustment expenses                                                                                     |  |                                               | 8,218  |      |  |      | 10,852 |  |  |   | 8,434 | 

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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, 2002 and 2001, and for each of the three years in the period
ended December 31, 2002, and have issued our report thereon dated March 19,
2003, which report includes explanatory paragraphs as to the restatement
described in Note T to the consolidated financial statements and certain
accounting changes described in Note A to the consolidated financial
statements; such consolidated financial statements and report are included
elsewhere in 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 taken as a whole, present fairly
in all material respects the information set forth therein.

Deloitte & Touche LLP
Chicago, Illinois
March 19, 2003

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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 Corporation
|                      |  |                           |  |                                   
|Dated: March 24, 2003 |  | By                        |  | /s/ Stephen W. Lilienthal         
|                      |  |                           |  |                                   
|                      |  |                           |  | Stephen W. Lilienthal             
|                      |  |                           |  | Chief Executive Officer           
|                      |  |                           |  | (Principal Executive Officer)     
|                      |  |                           |  |                                   
|                      |  | By                        |  | /s/ Robert V. Deutsch             
|                      |  |                           |  |                                   
|                      |  |                           |  | Robert V. Deutsch                 
|                      |  |                           |  | Executive Vice President and      
|                      |  |                           |  | Chief 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: March 24, 2003 |  | By |  | /s/ Antoinette Cook Bush                                     
|                      |  |    |  |                                                              
|                      |  |    |  | (Antoinette Cook Bush, Director)                             
|                      |  |    |  |                                                              
|Dated: March 24, 2003 |  | By |  | /s/ Walter L. Harris                                         
|                      |  |    |  |                                                              
|                      |  |    |  | (Walter L. Harris, Director)                                 
|                      |  |    |  |                                                              
|Dated: March 24, 2003 |  | By |  | /s/ Bernard L. Hengesbaugh                                   
|                      |  |    |  |                                                              
|                      |  |    |  | (Bernard L. Hengesbaugh, Chairman of the Board and Director) 
|                      |  |    |  |                                                              
|Dated: March 24, 2003 |  | By |  | /s/ Stephen W. Lilienthal                                    
|                      |  |    |  |                                                              
|                      |  |    |  | (Stephen W. Lilienthal, Chief Executive Officer and Director)

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|                      |  |    |  |                                                                
|--------------------- |  | -- |  | ---------------------------------------------------------------
|Dated: March 24, 2003 |  | By |  | /s/ Edward J. Noha                                             
|                      |  |    |  |                                                                
|                      |  |    |  | (Edward J. Noha, Chairman (Emeritus) of the Board and Director)
|                      |  |    |  |                                                                
|Dated: March 24, 2003 |  | By |  | /s/ Don M. Randel                                              
|                      |  |    |  |                                                                
|                      |  |    |  | (Don M. Randel, Director)                                      
|                      |  |    |  |                                                                
|Dated: March 24, 2003 |  | By |  | /s/ Joseph Rosenberg                                           
|                      |  |    |  |                                                                
|                      |  |    |  | (Joseph Rosenberg, Director)                                   
|                      |  |    |  |                                                                
|Dated: March 24, 2003 |  | By |  | /s/ James S. Tisch                                             
|                      |  |    |  |                                                                
|                      |  |    |  | (James S. Tisch, Director)                                     
|                      |  |    |  |                                                                
|Dated: March 24, 2003 |  | By |  | /s/ Laurence A. Tisch                                          
|                      |  |    |  |                                                                
|                      |  |    |  | (Laurence A. Tisch, Director)                                  
|                      |  |    |  |                                                                
|Dated: March 24, 2003 |  | By |  | /s/ Preston R. Tisch                                           
|                      |  |    |  |                                                                
|                      |  |    |  | (Preston R. Tisch, Director)                                   
|                      |  |    |  |                                                                
|Dated: March 24, 2003 |  | By |  | /s/ Marvin Zonis                                               
|                      |  |    |  |                                                                
|                      |  |    |  | (Marvin Zonis, Director)                                       

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##### Table of Contents






CERTIFICATIONS

I, Stephen W. Lilienthal, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of CNA Financial Corporation;                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                               



| | a) |  | Designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report (the Evaluation Date); and                                                                                                    
|
| | c) |  | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | All significant deficiencies in the design or operation of internal controls which could adversely
affect the registrants ability to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |    |  |                              
|--------------------- |  | -- |  | -----------------------------
|Dated: March 24, 2003 |  | By |  | /s/ Stephen W. Lilienthal    
|                      |  |    |  |                              
|                      |  |    |  | Stephen W. Lilienthal        
|                      |  |    |  | Chief Executive Officer      
|                      |  |    |  | (Principal Executive Officer)

203



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##### Table of Contents



CERTIFICATIONS

I, Robert V. Deutsch, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of CNA Financial Corporation;                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                               



| | a) |  | Designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report (the Evaluation Date); and                                                                                                    
|
| | c) |  | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | All significant deficiencies in the design or operation of internal controls which could adversely
affect the registrants ability to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |    |  |                               
|--------------------- |  | -- |  | ------------------------------
|Dated: March 24, 2003 |  | By |  | /s/ Robert V. Deutsch         
|                      |  |    |  |                               
|                      |  |    |  | Robert V. Deutsch             
|                      |  |    |  | Executive Vice President and  
|                      |  |    |  | Chief Financial Officer       
|                      |  |    |  | (Principal Accounting Officer)

204