Document:

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                                                                    EXHIBIT 10.3

                   EMPLOYEE AND DIRECTOR INCENTIVE STOCK PLAN

                                       OF

                          CORNERSTONE REALTY FUND, INC.

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                                TABLE OF CONTENTS

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1.     Purposes of the Plan and Definitions.....................................      1
       1.1    Purposes..........................................................      1
       1.2    Definitions.......................................................      1
2.     Eligible Persons.........................................................      3
3.     Shares of Stock Subject to this Plan.....................................      3
4.     Administration...........................................................      4
       4.1    Committee.........................................................      4
       4.2    Duration, Removal, Etc............................................      4
       4.3    Meetings and Actions of Committee.................................      4
       4.4    Committee's Powers................................................      4
       4.5    Term of Plan......................................................      5
5.     Grant of Options.........................................................      5
       5.1    Written Agreement.................................................      5
       5.2    Annual $100,000 Limitation on ISOs................................      5
6.     Certain Terms and Conditions of Options and Other Awards.................      6
       6.1    All Awards........................................................      6
       6.2    Terms and Conditions to Which Only NQOs Are Subject...............      8
       6.3    Terms and Conditions to Which Only ISOs Are Subject...............      8
       6.4    Surrender of Options..............................................      9
7.     Restricted Stock.........................................................      9
       7.1    Grant.............................................................      9
       7.2    Restrictions......................................................     10
       7.3    Dividends.........................................................     10
       7.4    Forfeiture of Restricted Stock....................................     10
8.     Stock Appreciation Rights................................................     10
9.     Dividend Equivalent Rights...............................................     10
       9.1    General...........................................................     10
       9.2    Rights and Options................................................     10
       9.3    Payments..........................................................     10
       9.4    Termination of Employment.........................................     11
10.        Compliance with Laws.................................................     11
11.        Employment or Other Relationship.....................................     11
12.        Amendment, Suspension and Termination of this Plan...................     11
13.        Liability and Indemnification of the Committee.......................     11
14.        Securities Law Legends...............................................     12
15.        Severability.........................................................     12
16.        Effective Date and Stockholder Approval..............................     12
17.        Miscellaneous........................................................     12
       17.1   Loans.............................................................     12
       17.2   Forfeiture Provisions.............................................     12
       17.3   Limitations Applicable to Section 16..............................     13
       17.4   Effect of Plan Upon Other Incentive and Compensation Plans........     13
       17.5   Section 83(b) Election Prohibited.................................     13
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                   EMPLOYEE AND DIRECTOR INCENTIVE STOCK PLAN
                                       OF
                          CORNERSTONE REALTY FUND, INC.

      1. Purposes of the Plan and Definitions

            1.1 Purposes. The purposes of the Employee and Director Incentive
Stock Plan (the "Plan") of Cornerstone Realty Fund, Inc. (the "Company") are to:

                  (a) provide incentives to individuals chosen to receive
share-based awards because of their ability to improve operations and increase
profits;

                  (b) encourage selected persons to accept or continue
employment with the Company or any Advisor or Affiliate of the Company; and

                  (c) increase the interest of Directors in the Company's
welfare through their participation in the growth in value of the Company's
Stock.

      To accomplish these purposes, this Plan provides a means whereby Employees
of the Company or any Advisor or Affiliate of the Company, Directors and other
enumerated persons may receive Awards.

            1.2 Definitions. For purposes of this Plan, the following terms have
the following meanings:

      "Advisor" means the Person or Persons, if any, appointed, employed or
contracted with by the Company responsible for directing or performing the
day-to-day business affairs of the Company, including any Person to whom the
Advisor subcontracts substantially all of such functions. The initial Advisor is
Cornerstone Advisors, LLC.

      "Affiliate" means any Person (other than an Advisor), whose employees (as
such term is defined in the Form S-8 registration statement under the Securities
Act) are eligible to receive Awards under the Plan. The determination of whether
a Person is an Affiliate shall be made by the Committee acting in its sole and
absolute discretion.

      "Applicable Laws" means the requirements relating to the administration of
Awards under U.S. state corporate laws, U.S. Federal and state securities laws,
the Code, any stock exchange or quotation system on which the shares of Stock
are listed or quoted and the applicable laws of any foreign country or
jurisdiction where Awards are, or will be, granted under the Plan.

      "Articles of Incorporation" means the articles of incorporation of the
Company as the same may be amended from time to time.

      "Award" means any award under this Plan, including any grant of Options,
Restricted Shares, Stock Appreciation Rights or Dividend Equivalent Rights.

      "Award Agreement" means, with respect to each Award, the written agreement
executed by the Company and the Participant or other written document approved
by the Committee setting forth the terms and conditions of the Award.

      "Board" means the Board of Directors of the Company.

      "Cause," unless otherwise defined in an Employee's employment agreement,
means (i) gross negligence or willful misconduct, (ii) an uncured breach of any
of the Employee's material duties under his or her employment agreement, (iii)
fraud or other conduct against the material best interests of his or her
employer or the Company, or (iv) a conviction of a felony, if such conviction
has a material adverse effect on his or her employer. If "Cause" is otherwise
defined in an Employee's employment agreement, the definition in the employment
agreement shall be effective for purposes of the Plan with respect to the
Employee in question.

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      "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor statute.

      "Committee" has the meaning given it in Section 4.1.

      "Common Stock" or "Stock" means common shares of capital stock of the
Company, $0.001 par value per share.

      "Company" has the meaning given it in Section 1.1.

      "Director" means a person elected or appointed and serving as director of
the Company in accordance with the Articles of Incorporation and the Maryland
General Corporation Law.

      "Dividend Equivalent Right" means an Award of rights pursuant to Section
9.

      "Effective Date" has the meaning given it in Section 18.

      "Employee" has the meaning ascribed to it for purposes of Section 3401(c)
of the Code and the Treasury Regulations adopted under that Section. An employee
includes an officer or a Director who is an employee of the Company.

      "Employment Termination" means that a Participant has ceased, for any
reason and with or without Cause, to be an Employee or Director of, or a
consultant to, the Company, the Advisor or any Affiliate of the Company.
However, the term "Employment Termination" shall not include a Non-Employee
Director's ceasing to be a Director or a transfer of a Participant from the
Company to the Advisor or an Affiliate or vice versa, or from one Affiliate to
another, or a leave of absence duly authorized by the Company unless the
Committee has provided otherwise.

      "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

      "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor statute.

      "Exercise Notice" has the meaning given it in Section 6.1(f).

      "Fair Market Value" means with respect to Stock:

            (i) If the Stock is listed on any established stock exchange or a
national market system, including, without limitation, the NASDAQ National
Market System, the Fair Market Value of shares of Stock shall be the closing
sales price for the Stock, or the mean between the high bid and low asked prices
if no sales were reported, as quoted on such system or exchange (or, if the
Stock is listed on more than one exchange, then on the largest such exchange)
for the date the value is to be determined (or if there are no sales or bids for
such date, then for the last preceding business day on which there were sales or
bids), as reported in The Wall Street Journal or similar publication.

            (ii) If the Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, or if there is no market for the
Stock, the Fair Market Value of the shares of Stock shall be determined in good
faith by the Committee, with reference to the Company's net worth, prospective
earning power, dividend-paying capacity and other relevant factors, including
the goodwill of the Company, the economic outlook in the Company's industry, the
Company's position in the industry and its management, and the values of stock
of other enterprises in the same or similar lines of business.

      "Grant Date" has the meaning given it in Section 6.1(d).

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      "Incentive Stock Option" or "ISO" means any Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422 of
the Code, and any successor provision.

      "Non-Employee Director" means a person who is a non-employee director as
defined in Rule 16b-3 or a person who is an outside director as defined in
Treasury Regulation 1.162-27(e)(3).

      "Non-Qualified Share Option" or "NQO" means any Option that is not an
Incentive Stock Option.

      "Option" means an option granted under Section 5.

      "Participant" means an eligible person who is granted an Award.

      "Person" means a corporation, partnership, trust, association or any other
entity.

      "Plan" means this Employee and Director Incentive Stock Plan.

      "Related Corporation" means a parent or subsidiary corporation of the
Company, as those terms are defined in Sections 424(e) and (f) of the Code.

      "Restricted Shares" means an Award granted under Section 7.

      "Rule 16b-3" means Rule 16b-3 adopted under Section 16(b) of the Exchange
Act or any successor rule, as it may be amended from time to time, and
references to paragraphs or clauses of Rules 16b-3 refer to the corresponding
paragraphs or clauses of Rule 16b-3 as it exists at the Effective Date or the
comparable paragraph or clause of Rule 16b-3 or successor rule, as that
paragraph or clause may thereafter be amended.

      "Section 16(b)" means Section 16(b) under the Exchange Act.

      "Securities Act" means the Securities Act of 1933, as amended from time to
time, and any successor statute.

      "Stock Appreciation Right" means an Award granted under Section 8.

      "Ten Percent Stockholder" means any person who, at the time this
definition is being applied, owns, directly or indirectly (or is treated as
owning by reason of attribution rules currently set forth in Code Section 424 or
any successor statute), shares of the Company constituting more than 10% of the
total combined voting power of all classes of outstanding capital stock of the
Company or any Related Corporation.

      2. Eligible Persons

            Every person who, at or as of the Grant Date, is (a) a full-time
Employee of the Company, the Advisor or any Affiliate of the Company, (b) a
Director of the Company or a director of any Affiliate of the Company, or (c)
someone whom the Committee designates as eligible for an Award (other than for
Incentive Stock Options) because the person (i) performs bona fide consulting or
advisory services for the Company, the Advisor or any Affiliate of the Company
pursuant to a written agreement (other than services in connection with the
offer or sale of securities in a capital-raising transaction), and (ii) has a
direct and significant effect on the financial development of the Company or any
Affiliate of the Company, shall be eligible to receive Awards hereunder.

      3. Shares of Stock Subject to this Plan

            The total number of shares of Stock that may be issued under Awards
is a number of shares equal to ten percent (10%) of the Company's outstanding
Stock. The maximum number of shares of Stock with respect to which ISOs may be
granted under the Plan is 5,000,000. Such shares of Stock may consist, in whole
or in part, of authorized and unissued Stock or shares of Stock reacquired in
private transactions or open market purchases, but all shares of Stock issued
under the Plan, regardless of their source, shall be counted against the Stock
limitation. Any

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shares of Stock that are retained by the Company upon exercise or settlement of
an Award in order to satisfy the exercise price in whole or in part, or to pay
withholding taxes due with respect to such exercise or settlement, shall be
treated as issued to the Participant and will thereafter not be available under
the Plan. Any shares of Stock subject to unexercised portions of Options granted
under the Plan which shall have been terminated, cancelled or that have expired
may again be subject to Options hereunder. The number of shares of Stock
reserved for issuance under this Plan is subject to adjustment in accordance
with the provisions for adjustment in Section 6.1.

      4. Administration

            4.1 Committee.

                  (a) In General. This Plan shall be administered by a committee
(the "Committee") appointed by the Board. The number of persons who shall
constitute the Committee shall be determined from time to time by a majority of
all the members of the Board; provided, however, that the Committee shall not
consist of fewer than two persons.

                  (b) Section 162(m). To the extent the Board desires to qualify
Awards granted under this Plan as "performance based compensation" within the
meaning of section 162(m) of the Code, the Plan shall be administered by a
Committee of two or more "outside directors" as defined in Treasury Regulation
1.162-27(e)(3).

                  (c) Rule 16b-3. To the extent desirable to qualify
transactions under this Plan as exempt under Rule 16b-3, a Committee consisting
solely of two or more "non-employee directors" as defined in Rule 16b-3, must
approve such transactions.

            4.2 Duration, Removal, Etc. The members of the Committee shall serve
at the pleasure of the Board, which shall have the power, at any time and from
time to time, to remove members from or add members to the Committee. Removal
from the Committee may be with or without cause. Any individual serving as a
member of the Committee shall have the right to resign from the Committee by
giving at least three days' prior written notice to the Board. The Board, and
not the remaining members of the Committee, shall have the power and authority
to fill vacancies on the Committee, however caused. The Board shall promptly
fill any vacancy that causes the number of members of the Committee to be fewer
than two or any other minimum number required to comply with Rule 16b-3 or
section 162(m) of the Code, (unless the Board expressly determines not to have
Awards under the Plan comply with Rule 16b-3 or section 162(m) of the Code,
respectively).

            4.3 Meetings and Actions of Committee. The Board shall designate
which of the Committee members shall be the chairperson of the Committee. If the
Board fails to designate a chairperson for the Committee, the members of the
Committee shall elect one of the Committee members as chairperson, who shall act
as chairperson until he or she ceases to be a member of the Committee or until
the Board (or the Committee) elects a new chairperson. The Committee may make
any rules and regulations for the conduct of its business that are not
inconsistent with this Plan, the Articles of Incorporation, the Bylaws of the
Company or Applicable Laws.

            4.4 Committee's Powers. Subject to the express provisions of this
Plan, the Committee shall have the authority, in its sole discretion:

                  (a) to adopt, amend and rescind administrative and
interpretive rules and regulations relating to the Plan;

                  (b) to determine the eligible persons to whom, and the time or
times at which, Awards shall be granted;

                  (c) to determine the number of shares of Stock that shall be
the subject of each Award;

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                  (d) to determine the terms and provisions of each Award
Agreement (which need not be identical) and any amendments thereto, including
provisions defining or otherwise relating to:

                        (i) the period or periods and extent of exercisability
of any Option or Stock Appreciation Right;

                        (ii) the methods by which the exercise price of an
Option may be paid, the form of payment, including, without limitation, cash,
Stock, or other property (including "cashless exercise" arrangements), and the
methods by which Stock shall be delivered or deemed to be delivered to
Participants; provided, however, that if Stock is used to pay the exercise price
of an Option, such Stock must have been held by the Participant for at least six
months;

                        (iii) the extent to which the transferability of shares
of Stock issued or transferred pursuant to any Award is restricted;

                        (iv) the effect of Employment Termination on an Award;
and

                        (v) the effect of approved leaves of absence;

                  (e) to accelerate the time of exercisability of any Option,
Dividend Equivalent Right or Stock Appreciation Right;

                  (f) to construe the respective Award Agreements and the Plan;

                  (g) to make determinations of the Fair Market Value of shares
of Stock;

                  (h) to waive any provision, condition or limitation set forth
in an Award Agreement;

                  (i) to delegate its duties under the Plan to such agents as it
may appoint from time to time; provided, however, that the Committee may not
delegate its duties with respect to making or exercising discretion with respect
to Awards to eligible persons if such delegation would cause Awards not to
qualify for the exemptions provided by Rule 16b-3 or section 162(m) of the Code
(unless the Board expressly determines not to have Awards under the Plan comply
with Rule 16b-3 or section 162(m) of the Code, respectively); and

                  (j) to make all other determinations, perform all other acts
and exercise all other powers and authority necessary or advisable for
administering the Plan, including the delegation of those ministerial acts and
responsibilities as the Committee deems appropriate.

                  The Committee may discriminate among Eligible Participants and
Participants and among Awards granted to a Participant in exercising its
discretion pursuant to this Plan. The Committee may correct any defect, supply
any omission or reconcile any inconsistency in the Plan, in any Award or in any
Award Agreement in the manner and to the extent it deems necessary or desirable
to implement the Plan, and the Committee shall be the sole and final judge of
that necessity or desirability. The determinations of the Committee on the
matters referred to in this Section 4.4 shall be final and conclusive.

            4.5 Term of Plan. No Awards shall be granted under this Plan after
10 years from the Effective Date of this Plan.

      5. Grant of Options

            5.1 Written Agreement. Each Option shall be evidenced by an Award
Agreement. The Award Agreement shall specify whether each Option it evidences is
an NQO or an ISO.

            5.2 Annual $100,000 Limitation on ISOs. To the extent that the
aggregate Fair Market Value of shares of Stock with respect to which ISOs first
become exercisable by a Participant in any calendar year exceeds $100,000,
taking into account ISOs granted under this Plan and any other plan of the
Company or any Related

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Corporation, the Options covering such additional shares of Stock becoming
exercisable in that year shall cease to be ISOs and thereafter be NQOs. For this
purpose, the Fair Market Value of shares of Stock subject to Options shall be
determined as of the date the Options were granted. In reducing the number of
Options treated as ISOs to meet this $100,000 limit, the most recently granted
Options shall be reduced first.

      6. Certain Terms and Conditions of Options and Other Awards

            Each Option shall be designated as an ISO or an NQO and shall be
subject to the terms and conditions set forth in Section 6.1. Notwithstanding
the foregoing, the Committee may provide for different terms and conditions in
any Award Agreement or amendment thereto as provided in Section 4.4.

            6.1 All Awards. All Options and other Awards shall be subject to the
following terms and conditions:

                  (a) Changes in Capital Structure. If the number of outstanding
shares of Stock is increased by means of a share dividend payable in shares of
Stock, a share split or other subdivision or by a reclassification of Stock,
then, from and after the record date for such dividend, subdivision or
reclassification, the number of shares of Stock and class of Stock subject to
this Plan and each outstanding Award shall be increased in proportion to such
increase in outstanding Stock and the then-applicable exercise price of each
outstanding Award shall be correspondingly decreased. If the number shares of
outstanding Stock is decreased by means of a share split or other subdivision or
by a reclassification of Stock, then, from and after the record date for such
split, subdivision or reclassification, the number of shares of Stock and class
of Stock subject to this Plan and each outstanding Award shall be decreased in
proportion to such decrease in outstanding Stock and the then-applicable
exercise price of each outstanding Award shall be correspondingly increased.

                  (b) Certain Corporate Transactions. In the case of any
reclassification or change of outstanding Stock issuable upon exercise of an
outstanding Award or in the case of any consolidation or merger of the Company
with or into another entity (other than a merger in which the Company is the
surviving entity and which does not result in any reclassification or change in
the then-outstanding Stock) or in the case of any sale or conveyance to another
entity of the property of the Company as an entirety or substantially as an
entirety, then, as a condition of such reclassification, change, consolidation,
merger, sale or conveyance, the Company or such successor or purchasing entity,
as the case may be, shall make lawful and adequate provision whereby the holder
of each outstanding Award shall thereafter have the right, on exercise of such
Award, to receive the kind and amount of securities, property and/or cash
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of securities issuable upon exercise of
such Award immediately before such reclassification, change, consolidation,
merger, sale or conveyance. Such provision shall include adjustments that shall
be as nearly equivalent as may be practicable to the adjustments provided for in
Section 6.1(a). Notwithstanding the foregoing, if such a transaction occurs, in
lieu of causing such rights to be substituted for outstanding Awards, the
Committee may, upon 20 days' prior written notice to Participants in its sole
discretion: (i) shorten the period during which Awards are exercisable, provided
they remain exercisable, to the extent otherwise exercisable, for at least 20
days after the date the notice is given, or (ii) cancel an Award upon payment to
the Participant in cash, with respect to each Award to the extent then
exercisable, of an amount which, in the sole discretion of the Committee, is
determined to be equivalent to the amount, if any, by which the Fair Market
Value (at the effective time of the transaction) of the consideration that the
Participant would have received if the Award had been exercised before the
effective time exceeds the exercise price of the Award. The actions described in
this Section 6.1(b) may be taken without regard to any resulting tax
consequences to the Participant.

                  (c) Grant Date. Each Award Agreement shall specify the date as
of which it shall be effective (the "Grant Date").

                  (d) Time of Exercise; Vesting. Awards may, in the sole
discretion of the Committee, be exercisable or may vest, and restrictions may
lapse, as the case may be, at such times and in such amounts as may be specified
by the Committee in the grant of the Award.

                  (e) Nonassignability of Rights. Awards shall not be
transferable other than with the consent of the Committee (which consent will
not be granted in the case of ISOs unless the conditions for transfer of

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ISOs specified in the Code have been satisfied) or by will or the laws of the
descent and distribution. Awards requiring exercise shall be exercisable only by
the Participant, assignees that were approved by the Committee, executors,
administrators or beneficiaries of the Participant (who are the permitted
transferees hereunder), guardians or members of a committee for an incompetent
Participant, or similar persons duly authorized by law to administer the estate
or assets of a Participant.

                  (f) Notice and Payment. To the extent it is exercisable, an
Award shall be exercisable only by written or recorded electronic notice of
exercise, in the manner specified by the Committee from time to time, delivered
to the Company or its designated agent during the term of the Award (the
"Exercise Notice"). The Exercise Notice shall: (i) state the number of shares of
Stock with respect to which the Award is being exercised; (ii) be signed by the
holder of the Award or by the person authorized to exercise the Award pursuant
to Section 6.1(e); and (iii) include such other information, instruments and
documents as may be required to satisfy any other condition to exercise set
forth in the Award Agreement. Except as provided below, payment in full, in cash
or check, shall be made for all shares of Stock purchased at the time notice of
exercise of an Award is given to the Company. The proceeds of any payment shall
constitute general funds of the Company. At the time an Award is granted or
before it is exercised, the Committee, in the exercise of its sole discretion,
may authorize any one or more of the following additional methods of payment:

                        (i) for all Participants other than officers and
Directors, acceptance of each such Participant's full recourse promissory note
for some or all (to the extent permitted by law) of the exercise price of the
Stock being acquired, payable on such terms and rate of interest as determined
by the Committee, and secured in such manner, if at all, as the Committee shall
approve, including, without limitation, by a security interest in the Stock
which are the subject of the Award or other securities;

                        (ii) for all Participants, delivery by each such
Participant of Stock already owned by such Participant for all or part of the
exercise price of the Award being exercised, provided that the Fair Market Value
of such Stock is equal on the date of exercise to the exercise price of the
Award being exercised, or such portion thereof as the Participant is authorized
to pay and elects to pay by delivery of such shares of Stock;

                        (iii) for all Participants, surrender by each such
Participant, or withholding by the Company from the Stock issuable upon exercise
of the Award, of a number of shares of Stock subject to the Award being
exercised with a Fair Market Value equal to some or all of the exercise price of
the Stock being acquired, together with such documentation as the Committee and
the broker, if applicable, shall require; or

                        (iv) for all Participants, payment may be made pursuant
to a cashless exercise arrangement approved by the Committee.

      If the exercise price is satisfied in whole or in part by the delivery of
Stock pursuant to paragraph (ii) above, and provided that all such Stock have
been held by the Participant for at least six months, the Committee may issue
the Participant an additional Option, with terms identical to those set forth in
the option agreement governing the exercised Option, except for the exercise
price which shall be the fair market value used for such delivery and the number
of shares of Stock subject to such additional Option shall be the number of
shares of Stock so delivered.

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                  (g) Termination of Employment from the Company, the Advisor or
any Affiliate of the Company; Removal of a Director for Cause. Any Award or
portion thereof which has not vested on or before the date of a Participant's
Employment Termination shall expire on the date of such Employment Termination.
As to an Award or portion thereof that has vested by the time of Employment
Termination, the Committee shall establish, in respect of each Award when
granted, the effect of an Employment Termination on the rights and benefits
thereunder and in so doing may, but need not, make distinctions based upon the
cause of termination (such as retirement, death, disability or other factors) or
which party effected the termination (the employer or the Employee). All Awards
granted to a Director whether or not an Employee will lapse on the date the
Director ceases to be a Director of the Company as a result of his removal for
Cause. Notwithstanding any other provision in this Plan or the Award Agreement,
the Committee may decide in its discretion at the time of any Employment
Termination (or within a reasonable time thereafter) to extend the exercise
period of an Award (but not beyond the period specified in Section 6.2(b) or
6.3(b), as applicable) and not decrease the number of shares of Stock covered by
the Award with respect to which the Award is exercisable or vested. A transfer
of a Participant from the Company to the Advisor or an Affiliate or vice versa,
or from one Affiliate to another, or a leave of absence duly authorized by the
Company, shall not be deemed an Employment Termination or a break in continuous
employment unless the Committee has provided otherwise.

                  (h) Death, Disability or Retirement. Any Award or portion
thereof which has not vested on or before the date of the Participant's death,
disability or retirement shall expire on the date of such Participant's death,
disability or retirement. As to an Award or portion thereof that has vested by
the date of death, disability or retirement of the Participant, such Awards or
portions thereof must be exercised within two years of the date of the
Participant's death, disability or retirement by the Participant or a person
authorized under this Plan to exercise such Award.

                  (i) Other Provisions. Each Award Agreement may contain such
other terms, provisions and conditions not inconsistent with this Plan, as may
be determined by the Committee, and each ISO granted under this Plan shall
include such provisions and conditions as are necessary to qualify such Option
as an "incentive stock option" within the meaning of Section 422 of the Code.

                  (j) Withholding and Employment Taxes. At the time of exercise
of an Award, the lapse of restrictions on an Award or a disqualifying
disposition of shares of Stock issued under an ISO (within the meaning of
Section 6.3(c)), the Participant shall remit to the Company in cash all
applicable Federal and state withholding and employment taxes. If and to the
extent authorized and approved by the Committee in its sole discretion, a
Participant may elect, by means of a form of election to be prescribed by the
Committee, to have shares of Stock which are acquired upon exercise of an Award
withheld by the Company or tender other shares of Stock owned by the Participant
to the Company at the time that the amount of such taxes is determined, in order
to pay the amount of such tax obligations, subject to any limitations as the
Committee determines are necessary or appropriate. Any shares of Stock so
withheld or tendered shall be valued by the Company as of the date they are
withheld or tendered. If shares of Stock are tendered to satisfy such
withholding tax obligation, the Committee may issue the Participant an
additional Option, with terms identical to those set forth in the option
agreement governing the Option exercised, except that the exercise price shall
be the Fair Market Value used by the Company in accepting the tender of shares
of Stock for such purpose and the number of shares of Stock subject to the
additional Option shall be the number of shares of Stock tendered by the
Participant.

            6.2 Terms and Conditions to Which Only NQOs Are Subject. Options
granted under this Plan which are designated as NQOs shall be subject to the
following terms and conditions:

                  (a) Exercise Price. The exercise price of an NQO shall be
determined by the Committee; provided, however, that the exercise price of an
NQO shall not be less than the Fair Market Value of the Stock subject to the
Option on the Grant Date.

                  (b) Option Term. Unless the Committee specifies an earlier
expiration date at the Grant Date, each NQO shall expire 10 years after the
Grant Date.

            6.3 Terms and Conditions to Which Only ISOs Are Subject. Options
granted under this Plan which are designated as ISOs shall be subject to the
following terms and conditions:

                                      -8-
<PAGE>

                  (a) Exercise Price. The exercise price of an ISO shall be
determined in accordance with the applicable provisions of the Code and shall in
no event be less than the Fair Market Value of the Stock covered by the ISO at
the Grant Date; provided, however, that the exercise price of an ISO granted to
a Ten Percent Stockholder shall not be less than 110% of such fair market value.

                  (b) Option Term. Unless an earlier expiration date is
specified by the Committee at the Grant Date, each ISO shall expire 10 years
after the Grant Date; provided, however, that an ISO granted to a Ten Percent
Stockholder shall expire no later than five years after the Grant Date.

                  (c) Disqualifying Dispositions. If shares of Stock acquired by
exercise of an ISO are disposed of within two years after the Grant Date or
within one year after the transfer of the Stock to the optionee, the holder of
the Stock immediately before the disposition shall promptly notify the Company
in writing of the date and terms of the disposition, shall provide such other
information regarding the disposition as the Company may reasonably require and
shall pay the Company any withholding and employment taxes which the Company in
its sole discretion deems applicable to the disposition.

                  (d) Termination of Employment. Notwithstanding Section 6.1(i),
all vested ISOs must be exercised within three months of the Employment
Termination of the optionee, or at any time otherwise permissible in the case of
a Participant who dies within three months of Employment Termination, unless
such Employment Termination is due to the employee's being disabled (within the
meaning of Section 22(e)(3) of the Code), in which case the ISO shall be
exercised within one year of the Employment Termination, notwithstanding Section
6.1(i).

            6.4 Surrender of Options. The Committee, acting in its sole
discretion, may include a provision in an Award Agreement allowing the optionee
to surrender the Option covered by the agreement, in whole or in part in lieu of
exercise in whole or in part, on any date that the Fair Market Value of the
Stock subject to the Option exceeds the exercise price and the Option is
exercisable (to the extent being surrendered). The surrender shall be effected
by the delivery of the Award Agreement, together with a signed statement which
specifies the number of shares of Stock as to which the optionee is surrendering
the Option, together with a request for such type of payment. Upon such
surrender, the optionee shall receive (subject to any limitations imposed by
Rule 16b-3), at the election of the Committee, payment in cash or shares of
Stock, or a combination of the two, equal to (or equal in Fair Market Value to)
the excess of the Fair Market Value of the shares of Stock covered by the
portion of the Option being surrendered on the date of surrender over the
exercise price for such shares of Stock. The Committee, acting in its sole
discretion, shall determine the form of payment, taking into account such
factors as it deems appropriate. To the extent necessary to satisfy Applicable
Laws, the Committee may terminate an optionee's rights to receive payments in
cash for fractional shares of Stock. Any Award Agreement providing for such
surrender privilege shall also incorporate such additional restrictions on the
exercise or surrender of Options as may be necessary to satisfy Applicable Law.

      7. Restricted Stock

            Restricted Stock shall be subject to the following terms and
conditions:

            7.1 Grant. The Committee may grant one or more Awards of Restricted
Stock to any Participant. Each Award of Restricted Stock shall specify the
number of shares of Stock to be issued to the Participant, the date of issuance
and the restrictions imposed on the shares of Stock including the conditions of
release or lapse of such restrictions. Unless the Committee provides otherwise,
the restrictions shall not lapse earlier than six months after the date of the
Award. Pending the lapse of restrictions, certificates evidencing Restricted
Stock (if any) shall bear a legend referring to the restrictions and shall be
held by the Company. Prior to the issuance of any Restricted Stock, the
Participant receiving such Restricted Stock shall pay to the Company an amount
of cash equal to the exercise price of the Restricted Stock, which at a minimum
shall be the par value per share of Restricted Stock multiplied by the number of
shares of Restricted Stock to be issued. The exercise price of Restricted Stock
shall be stated in the applicable Award Agreement. Upon the issuance of
Restricted Stock, the Participant may be required to furnish such additional
documentation or other assurances as the Committee may require in order to
enforce the restrictions applicable thereto.

                                      -9-
<PAGE>

            7.2 Restrictions. Except as specifically provided elsewhere in this
Plan or the Award Agreement regarding Restricted Stock, Restricted Stock may not
be sold, assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily, until the restrictions have lapsed and the
rights to the shares of Restricted Stock have vested. The Committee may in its
sole discretion provide for the lapse of such restrictions in installments and
may accelerate or waive such restrictions, in whole or in part, based on
service, performance or such other factors or criteria as the Committee may
determine.

            7.3 Dividends. Unless otherwise determined by the Committee, cash
dividends with respect to Restricted Stock shall be paid to the recipient of the
Award of Restricted Stock on the normal dividend payment dates, and dividends
payable in shares of Stock shall be paid in the form of Restricted Stock having
the same terms as the Restricted Stock upon which such dividend is paid. Each
Award Agreement for Awards of Restricted Stock shall specify whether and, if so,
the extent to which the Participant shall be obligated to return to the Company
any cash dividends paid with respect to any shares of Restricted Stock which are
subsequently forfeited.

            7.4 Forfeiture of Restricted Stock. Except to the extent otherwise
provided in the governing Award Agreement, when a Participant's Employment
Termination occurs, the Participant shall automatically forfeit all Restricted
Stock still subject to restriction.

      8. Stock Appreciation Rights

            The Committee may grant Stock Appreciation Rights to eligible
persons. A Stock Appreciation Right shall entitle its holder to receive from the
Company, at the time of exercise of the right, an amount in cash equal to (or,
at the Committee's discretion, shares of Stock equal in Fair Market Value to)
the excess of the Fair Market Value (at the date of exercise) of a share of
Stock over a specified price fixed by the Committee in the governing Award
Agreement multiplied by the number of shares of Stock as to which the holder is
exercising the Stock Appreciation Right. The specified price fixed by the
Committee shall not be less than the Fair Market Value of the shares of Stock on
the Grant Date of the Stock Appreciation Right. Stock Appreciation Rights may be
granted in tandem with any previously or contemporaneously granted Option or
independent of any Option. The specified price of a tandem Stock Appreciation
Right shall be the exercise price of the related Option. Any Stock Appreciation
Rights granted in connection with an ISO shall contain such terms as may be
required to comply with Section 422 of the Code.

      9. Dividend Equivalent Rights

            9.1 General. The Committee shall have the authority to grant
Dividend Equivalent Rights to Participants upon such terms and conditions as it
shall establish, subject in all events to the following limitations and
provisions of general application set forth in this Plan. Each Dividend
Equivalent Right shall entitle a holder to receive, for a period of time to be
determined by the Committee, a payment equal to the periodic dividends declared
and paid by the Company on one share of Stock. If the Dividend Equivalent Right
relates to a specific Option, the period shall not extend beyond the earliest of
the date the Option is exercised, the date any Stock Appreciation Right related
to the Option is exercised, or the expiration date set forth in the Option.

            9.2 Rights and Options. Each Dividend Equivalent Right may relate to
a specific Option granted under this Plan and may be granted to the optionee
either concurrently with the grant of such Option or at such later time as
determined by the Committee, or each Dividend Equivalent Right may be granted
independent of any Option.

            9.3 Payments. The Committee shall determine at the time of grant
whether payment pursuant to a Dividend Equivalent Right shall be immediate or
deferred and if immediate, the Company shall make payments pursuant to each
Dividend Equivalent Right concurrently with the payment of the periodic
dividends to holders of Common Shares. If deferred, the payments shall not be
made until a date or the occurrence of an event specified by the Committee and
then shall be made within 30 days after the occurrence of the specified date or
event, unless the Dividend Equivalent Right is forfeited under the terms of the
Plan or applicable Award Agreement. The Committee shall also determine in its
sole discretion whether any portion of any payment shall be made in shares of
Stock.

                                      -10-
<PAGE>

            9.4 Termination of Employment. In the event of Employment
Termination, any Dividend Equivalent Right held by such Participant on the date
of Employment Termination shall automatically be forfeited, unless otherwise
expressly provided by the Committee.

      10. Compliance with Laws

            This Plan, the granting and vesting of Awards under this Plan, the
issuance and delivery of Stock, and the payment of money or other consideration
allowable under this Plan or under Awards awarded hereunder are subject to
compliance with all applicable federal and state laws, rules and regulations
(including, but not limited to, state and federal securities laws and federal
margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Committee, the
Board or the Company, be necessary or advisable in connection therewith. Any
securities delivered under this Plan shall be subject to such restrictions, and
the person acquiring such securities shall, if requested by the Company, provide
such assurances and representations to the Company as the Committee, the Board
or the Company may deem necessary or desirable to assure compliance with all
applicable legal requirements. To the extent permitted by applicable law, the
Plan shall be deemed amended to the extent necessary to conform to such laws,
rules and regulations. Nothing in this Plan or in any Award or Award Agreement
shall require the Company to issue any Stock with respect to any Award if, in
the opinion of counsel for the Company, that issuance could constitute a
violation of any Applicable Laws. As a condition to the grant or exercise of any
Award, the Company may require the Participant (or, in the event of the
Participant's death, the Participant's legal representatives, heirs, legatees or
distributees) to provide written representations concerning the Participant's
(or such other person's) intentions with regard to the retention or disposition
of the Stock covered by the Award and written covenants as to the manner of
disposal of such Stock as may be necessary or useful to ensure that the grant,
exercise or disposition thereof will not violate the Securities Act, any other
law or any rule of any applicable securities exchange or securities association
then in effect. The Company shall not be required to register any Stock under
the Securities Act or register or qualify any Stock under any state or other
securities laws.

      11. Employment or Other Relationship

            Nothing in this Plan or any Award shall in any way interfere with or
limit the right of the Company, the Advisor or any Affiliate of the Company to
terminate any Participant's employment or status as a consultant or Director at
any time, nor confer upon any Participant any right to continue in the employ
of, or as a Director or consultant of, the Company, the Advisor or any Affiliate
of the Company.

      12. Amendment, Suspension and Termination of this Plan

            The Board may at any time amend, suspend or discontinue this Plan
provided that such amendment, suspension or discontinuance meets the
requirements of Applicable Laws, including without limitation, the requirements
for stockholder approval. Notwithstanding the above, an amendment, alteration,
suspension or discontinuation shall not be made if it would impair the rights of
any Participant under any Award previously granted, without the Participant's
consent, except to conform this Plan and Awards granted to the requirements of
Applicable Laws. The provisions of the Plan relating to Awards for Non-Employee
Directors may not be amended more than once each six months.

      13. Liability and Indemnification of the Committee

            No person constituting, or member of the group constituting, the
Committee shall be liable for any act or omission on such person's part,
including but not limited to the exercise of any power or discretion given to
such member under this Plan, except for those acts or omissions resulting from
such member's gross negligence or willful misconduct. The Company shall
indemnify each present and future person constituting, or member of the group
constituting, the Committee against, and each person or member of the group
constituting the Committee shall be entitled without further act on his or her
part to indemnity from the Company for, all expenses (including the amount of
judgments and the amount of approved settlements made with a view to the
curtailment of costs of

                                      -11-
<PAGE>

litigation) reasonably incurred by such person in connection with or arising out
of any action, suit or proceeding to the fullest extent permitted by law and by
the Articles of Incorporation and Bylaws of the Company.

      14. Securities Law Legends

            Certificates of shares of Stock and Restricted Stock, if issued, may
have the following legend and statements of other applicable restrictions
endorsed thereon:

            THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
            REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
            STATE LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED,
            TRANSFERRED OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF
            PROVIDES EVIDENCE SATISFACTORY TO THE ISSUER (WHICH, IN THE SOLE
            DISCRETION THE ISSUER, MAY INCLUDE AN OPINION OF COUNSEL
            SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE, PLEDGE, TRANSFER
            OR OTHER DISPOSITION WILL NOT VIOLATE ANY APPLICABLE FEDERAL OR
            STATE SECURITIES LAWS.

This legend shall not be required for any shares of Stock issued pursuant to an
effective registration statement under the Securities Act.

      15. Severability

            If any provision of this Plan is held to be illegal or invalid for
any reason, that illegality or invalidity shall not affect the remaining
portions of the Plan, but such provision shall be fully severable and the Plan
shall be construed and enforced as if the illegal or invalid provision had never
been included in this Plan. Such an illegal or invalid provision shall be
replaced by a revised provision that most nearly comports to the substance of
the illegal or invalid provision. If any of the terms or provisions of this Plan
or any Award Agreement conflict with the requirements of Applicable Laws, those
conflicting terms or provisions shall be deemed inoperative to the extent they
conflict with Applicable Law.

      16. Effective Date and Stockholder Approval

            This Plan was originally approved by the Company's Board on December
6, 2004. It was approved in that form by the holder of the Company's voting
Stock on December 6, 2004 (the "Effective Date").

      17. Miscellaneous

            17.1 Loans. An employer may, in its discretion, extend one or more
loans to Employees in connection with the exercise or receipt of an Award
granted under this Plan. The terms and conditions of any such loan shall be set
by the board of directors of the employer.

            17.2 Forfeiture Provisions. Pursuant to its general authority to
determine the terms and conditions applicable to Awards granted under the Plan,
the Committee shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of an Award
Agreement, or by separate written instrument, that (i) any proceeds, gains or
other economic benefit actually or constructively received by a Participant upon
the receipt or exercise of the Award, or upon the receipt or resale of any Stock
underlying such Award, must be paid to the Company, and (ii) the Award shall
terminate and any unexercised portion of such Award (whether or not vested)
shall be forfeited, if (a) Employment Termination occurs prior to a specified
date, or within a specified time period following receipt or exercise of the
Award, or (b) the Participant, at any time, or during a specified time period,
engages in any activity in competition with his employer or the Company, or
which is inimical, contrary or harmful to the interests of his employer or the
Company, as may be further defined from time to time by the Committee.

                                      -12-
<PAGE>

            17.3 Limitations Applicable to Section 16. Notwithstanding any other
provision of this Plan, this Plan, and any Award granted to any individual who
is then subject to Section 16 of the Exchange Act, shall be subject to any
additional limitations set forth in any applicable exemptive rule under Section
16 of the Exchange Act (including any amendment to Rule 16b-3) that are
requirements for the application of such exemptive rule. To the extent permitted
by applicable law, the Plan shall be deemed amended to the extent necessary to
conform to such applicable exemptive rule.

            17.4 Effect of Plan Upon Other Incentive and Compensation Plans. The
adoption of this Plan shall not affect any other options or compensation or
incentive plans in effect for the Company. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for employees of the Company, the Advisor or its
Affiliates, or (ii) to grant or assume options or other rights or awards
otherwise than under this Plan in connection with any proper corporate purpose
including, but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise of the business, stock or assets of any corporation, partnership,
limited liability company, firm or association.

            17.5 Section 83(b) Election Prohibited. No Participant may make an
election under Section 83(b) of the Code with respect to any Award granted under
this Plan without the Company's consent.

                                      -13-<PAGE>

                                  $549,000,000

                            CNA FINANCIAL CORPORATION

                              5.85% NOTES DUE 2014

                             UNDERWRITING AGREEMENT

December 8, 2004

<PAGE>

                                                                December 8, 2004

Merrill Lynch, Pierce, Fenner & Smith
           Incorporated
     4 World Financial Center
     New York, New York 10080

Morgan Stanley & Co. Incorporated
     1585 Broadway
     New York, New York 10036

Dear Sirs and Mesdames:

         CNA Financial Corporation, a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "UNDERWRITERS") $549,000,000 principal amount of its 5.85% Notes due
December 15, 2014 (the "SECURITIES") to be issued pursuant to the provisions of
an Indenture dated as of March 1, 1991, between the Company and J. P. Morgan
Trust Company, National Association (formerly known as The First National Bank
of Chicago), as Trustee (the "TRUSTEE"), which was supplemented by the first
supplemental indenture dated as of October 15, 1993 (as so supplemented, the
"BASE INDENTURE"), as supplemented by the second supplemental indenture to be
dated as of December 15, 2004 between the Company and the Trustee (the
"SUPPLEMENTAL INDENTURE" and together with the Base Indenture, the "INDENTURE").

         1. Representations and Warranties. The Company represents and warrants
to and agrees with each of the Underwriters that:

                  (a) A registration statement on Form S-3 with respect to
         various securities of the Company (collectively, the "SHELF
         SECURITIES"), has (i) been prepared by the Company in conformity in all
         material respects with the requirements of the Securities Act of 1933,
         as amended (the "SECURITIES ACT"), and the rules and regulations (the
         "RULES AND REGULATIONS") of the Securities and Exchange Commission (the
         "COMMISSION") thereunder, (ii) been filed with the Commission under the
         Securities Act and (iii) become effective under the Securities Act. The
         registration statement includes a prospectus relating to the Shelf
         Securities. In addition, the Company has filed, or will file within the
         applicable time period set forth in the Rules and Regulations, with the
         Commission, a prospectus supplement specifically relating to the
         Securities pursuant to Rule 424 of the Rules and Regulations. The term

<PAGE>

         "REGISTRATION STATEMENT" means the registration statement as amended to
         the date of this Agreement. The term "BASIC PROSPECTUS" means the
         prospectus included in the Registration Statement. The term
         "PROSPECTUS" means the Basic Prospectus together with the prospectus
         supplement (other than a preliminary prospectus supplement)
         specifically relating to the Securities (the "PROSPECTUS SUPPLEMENT"),
         in the form first used to confirm sales of the Securities. The term
         "PRELIMINARY PROSPECTUS" means a preliminary prospectus supplement
         specifically relating to the Securities, together with the Basic
         Prospectus. As used herein, the terms "REGISTRATION STATEMENT", "BASIC
         PROSPECTUS", "PROSPECTUS" and "PRELIMINARY PROSPECTUS" shall include,
         in each case, the material, if any, incorporated or deemed to be
         incorporated by reference therein; "EFFECTIVE TIME" means the date and
         time as of which the Registration Statement, or the most recent
         post-effective amendment thereto, if any, was declared effective by the
         Commission; "EFFECTIVE DATE" means the date of the Effective Time; and
         the terms "SUPPLEMENT", "AMEND" and "AMENDMENT", as used in this
         Agreement with respect to the Registration Statement or the Prospectus,
         shall include all documents subsequently filed by the Company with the
         Commission pursuant to the Securities Exchange Act of 1934, as amended
         (the "EXCHANGE ACT"), that are deemed to be incorporated by reference
         in the Prospectus. If the Company has filed an abbreviated registration
         statement to register additional Securities pursuant to Rule 462(b)
         under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then
         any reference herein to the term "REGISTRATION STATEMENT" shall be
         deemed to include such Rule 462 Registration Statement. The Commission
         has not issued any order preventing or suspending the use of any
         Preliminary Prospectus.

                  (b) As of the date hereof, when the Prospectus is first filed
         pursuant to Rule 424 under the Securities Act, when, prior to the
         Closing Date (as hereinafter defined), any amendment to the
         Registration Statement becomes effective (including the filing of any
         document incorporated by reference in the Registration Statement)
         (unless the term "Basic Prospectus," "Preliminary Prospectus" or
         "Prospectus", as the case may be, refers to a "Basic Prospectus",
         "Preliminary Prospectus" or "Prospectus", as the case may be, which has
         been provided to the Underwriters by the Company for use in connection
         with the offering of the Securities and which differs from the
         prospectus on file at the Commission at the time the Registration
         Statement becomes effective, in which case at the time it is first
         provided to the Underwriters for such use), when any supplement to the
         Prospectus is filed with the Commission and at the Closing Date, (i)
         the Registration Statement, as amended as of any such time, and the
         Prospectus, as amended or supplemented as of any such time, complied
         and will comply in all material respects with the applicable
         requirements of the Securities Act, and the Exchange Act and the

                                       2
<PAGE>

         respective Rules and Regulations thereunder and (ii) neither the
         Registration Statement, as amended as of any such time, nor the
         Prospectus, as amended or supplemented as of any such time, contained
         or will contain any untrue statement of a material fact or omitted or
         will omit to state any material fact required to be stated therein or
         necessary to make the statements therein not misleading; provided,
         however, that the Company makes no representations or warranties as to
         (i) that part of the Registration Statement which shall constitute the
         Statement of Eligibility (Form T-1) under the Trust Indenture Act of
         1939, as amended (the "TRUST INDENTURE Act"), of the Trustee or (ii)
         the information contained in or omitted from the Registration Statement
         or the Prospectus or any amendment thereof or supplement thereto in
         reliance upon and in conformity with information furnished in writing
         to the Company by or on behalf of any Underwriter through you
         specifically for use in connection with the preparation of the
         Registration Statement and the Prospectus.

                  (c) The documents incorporated by reference in the Prospectus
         pursuant to Item 12 of Form S-3 under the Securities Act, at the date
         hereof and the Closing Date, complied and will comply in all material
         respects with the requirements of the Exchange Act and the Rules and
         Regulations thereunder; and any documents deemed to be incorporated by
         reference in the Prospectus, at the date hereof and the Closing Date,
         complied and will comply in all respects with the requirements of the
         Exchange Act and the Rules and Regulations thereunder.

                  (d) The Company has been duly incorporated, is validly
         existing as a corporation in good standing under the laws of the
         jurisdiction of its incorporation, has the corporate power and
         authority to own its property and to conduct its business as described
         in the Prospectus and is duly qualified to transact business and is in
         good standing in each jurisdiction in which the conduct of its business
         or its ownership or leasing of property requires such qualification,
         except to the extent that the failure to be so qualified or be in good
         standing would not have a material adverse effect on the Company and
         its subsidiaries, taken as a whole.

                  (e) Each subsidiary of the Company set forth on Schedule II
         hereto (each, a "DESIGNATED SUBSIDIARY" and, collectively, the
         "DESIGNATED SUBSIDIARIES") has been duly incorporated, is validly
         existing as a corporation in good standing under the laws of the
         jurisdiction of its incorporation, has the corporate power and
         authority to own its property and to conduct its business as described
         in the Prospectus and is duly qualified to transact business and is in
         good standing in each jurisdiction in which the conduct of its business
         or its ownership or leasing of property requires such qualification,
         except to the extent that the failure to be so qualified or be in good
         standing would not have a material adverse effect on the Company and
         its subsidiaries, taken as a whole; all

                                       3
<PAGE>

         of the issued shares of capital stock of each Designated Subsidiary
         owned directly or indirectly by the Company have been duly and validly
         authorized and issued, are fully paid and non-assessable and are owned
         directly or indirectly by the Company, free and clear of all liens,
         encumbrances, equities or claims; for purposes of this Agreement,
         Schedule II hereto includes each subsidiary of the Company that is a
         "significant subsidiary" (as such term is defined in Rule 1-02 of
         Regulation S-X promulgated by the Commission).

                  (f) The authorized capital stock of the Company conforms as to
         legal matters in all material respects to the description thereof
         contained in the Prospectus.

                  (g) This Agreement has been duly authorized, executed and
         delivered by the Company.

                  (h) The Indenture has been duly qualified under the Trust
         Indenture Act of 1939, as amended (the "TRUST INDENTURE ACT"), and has
         been duly authorized, executed and delivered by the Company and is a
         valid and binding agreement of the Company, enforceable in accordance
         with its terms, subject to applicable bankruptcy, insolvency or
         similar laws affecting creditors' rights generally and general
         principles of equity. The Base Indenture conforms, and the
         Supplemental Indenture, when executed and delivered, will conform, in
         all material respects to the description thereof in the Registration
         Statement and Prospectus.

                  (i) The Securities have been duly authorized and, when
         executed and authenticated in accordance with the provisions of the
         Indenture and delivered to and paid for by the Underwriters in
         accordance with the terms of this Agreement, will be entitled to the
         benefits of the Indenture and will be valid and binding obligations of
         the Company, enforceable in accordance with their terms, subject to
         applicable bankruptcy, insolvency or similar laws affecting creditors'
         rights generally and general principles of equity. The Securities, when
         issued, authenticated and delivered, will conform in all material
         respects to the description thereof in the Registration Statement and
         Prospectus.

                  (j) The execution and delivery by the Company of, and the
         performance by the Company of its obligations under, this Agreement
         will not contravene any provision of applicable law or the certificate
         of incorporation or by-laws of the Company or any agreement or other
         instrument binding upon the Company or any of its subsidiaries that is
         material to the Company and its subsidiaries, taken as a whole, or any
         judgment, order or decree of any governmental body, agency or court
         having jurisdiction over the Company or any subsidiary, and no
         consent, approval, authorization or order of, or qualification with,
         any

                                       4
<PAGE>

         governmental body or agency is required for the performance by the
         Company of its obligations under this Agreement, except such as have
         been obtained under the Securities Act and such as may be required by
         the securities or Blue Sky laws of the various states in connection
         with the offer and sale of the Securities.

                  (k) Since the respective dates as of which information is
         given in the Registration Statement and the Prospectus, except as
         otherwise stated therein, (i) there has been no material adverse change
         in the condition (financial or other), earnings, business or properties
         of the Company and its subsidiaries, taken as a whole, whether or not
         arising from transactions in the ordinary course of business, and (ii)
         there have been no transactions entered into by the Company or any of
         its subsidiaries, other than those in the ordinary course of business,
         which are material with respect to the Company and its subsidiaries,
         taken as a whole.

                  (l) There is no action, suit or proceeding before or by any
         court or governmental agency or body, domestic or foreign, now pending,
         or, to the knowledge of the Company, threatened, against or affecting
         the Company or any of its subsidiaries, which is required to be
         disclosed in the Registration Statement or the Prospectus (other than
         as disclosed therein), or which might, singly or in the aggregate,
         materially and adversely affect the properties or assets thereof or
         which is reasonably likely to materially and adversely affect the
         consummation of the transactions contemplated by this Agreement.

                  (m) Each prospectus filed as part of the Registration
         Statement as originally filed or as part of any amendment thereto, or
         filed pursuant to Rule 424 under the Securities Act, complied when so
         filed in all material respects with the Securities Act and the
         applicable rules and regulations of the Commission thereunder.

                  (n) No holders of securities of the Company have rights to the
         registration of such securities under the Registration Statement.

                  (o) The Company is not, and after giving effect to the
         offering and sale of the Securities and the application of the proceeds
         thereof as described in the Prospectus will not be, required to
         register as an "investment company" as such term is defined in the
         Investment Company Act of 1940, as amended.

                  (p) The Company and its subsidiaries possess all licenses,
         certificates, authorities or permits issued by the appropriate
         governmental or regulatory agencies or bodies necessary to own, lease
         and operate their respective properties and to carry on their
         respective businesses as

                                       5
<PAGE>

         presently conducted and which are material to the Company and its
         subsidiaries considered as one enterprise.

                  (q) There are no contracts, agreements or understandings
         between the Company and any person granting such person the right to
         require the Company to file a registration statement under the
         Securities Act with respect to any securities of the Company or to
         require the Company to include such securities with the Securities
         registered pursuant to the Registration Statement.

                  (r) The Company and its Designated Subsidiaries have good and
         marketable title in fee simple to all real property and good and
         marketable title to all personal property owned by them, in each case
         free and clear of all liens, encumbrances and defects except such as
         are described in the Prospectus or would not, singly or in the
         aggregate, have a material adverse effect on the Company and its
         subsidiaries, taken as a whole; and any real property and buildings
         held under lease by the Company and its subsidiaries are held by them
         under valid, subsisting and enforceable leases except such as are
         described in the Prospectus or would not, singly or in the aggregate,
         have a material adverse effect on the Company and its subsidiaries,
         taken as a whole.

                  (s) The Company and its Designated Subsidiaries own or
         possess, or can acquire on reasonable terms, all material patents,
         patent rights, licenses, inventions, copyrights, know-how (including
         trade secrets and other unpatented and/or unpatentable proprietary or
         confidential information, systems or procedures), trademarks, service
         marks and trade names currently employed by them in connection with the
         business now operated by them, except where the failure to so own,
         possess or be able to acquire on reasonable terms would not, singly or
         in the aggregate, have a material adverse effect on the Company and its
         subsidiaries, taken as a whole, and neither the Company nor any of its
         subsidiaries has received any notice of infringement of or conflict
         with asserted rights of others with respect to any of the foregoing
         which, singly or in the aggregate, would have a material adverse effect
         on the Company and its subsidiaries, taken as a whole.

                  (t) No labor dispute with the employees of the Company or any
         of its subsidiaries exists, except as described in the Prospectus, or,
         to the knowledge of the Company, is imminent, except where such
         dispute would not, singly or in the aggregate, have a material adverse
         effect on the Company and its subsidiaries, taken as a whole.

                  (u) Each Designated Subsidiary of the Company that is engaged
         in the business of insurance or reinsurance (each an "INSURANCE
         SUBSIDIARY", collectively the "INSURANCE SUBSIDIARIES") is licensed or

                                       6
<PAGE>

         authorized to conduct an insurance or reinsurance business, as the
         case may be, under the insurance statutes of each jurisdiction in
         which the conduct of its business requires such licensing or
         authorization, except for such jurisdictions in which the failure of
         the Insurance Subsidiary to be so licensed or authorized would not,
         singly or in the aggregate, have a material adverse effect on the
         Company and its subsidiaries, taken as a whole. The Company and the
         Insurance Subsidiaries have made all required filings under applicable
         insurance statutes in each jurisdiction where such filings are
         required, except for such filings the failure of which to make would
         not, singly or in the aggregate, have a material adverse effect on the
         Company and its subsidiaries, taken as a whole. Each of the Insurance
         Subsidiaries has all other necessary authorizations, approvals,
         orders, consents, certificates, permits, registrations and
         qualifications ("AUTHORIZATIONS"), of and from all insurance
         regulatory authorities necessary to conduct their respective existing
         businesses as described in the Prospectus, except where the failure to
         have such Authorizations would not, singly or in the aggregate, have a
         material adverse effect on the Company and its subsidiaries, taken as
         a whole, and no Insurance Subsidiary has received any notification
         from any insurance regulatory authority to the effect that any
         additional Authorizations are needed to be obtained by any Insurance
         Subsidiary in any case where it could reasonably be expected that the
         failure to obtain such additional Authorizations or the limiting of
         the writing of such business would have a material adverse effect on
         the Company and its subsidiaries, taken as a whole, and, except as
         described in the Prospectus, no insurance regulatory authority having
         jurisdiction over any Insurance Subsidiary has issued any order or
         decree impairing, restricting or prohibiting (i) the payment of
         dividends by any Insurance Subsidiary to its parent, other than those
         restrictions applicable to insurance or reinsurance companies under
         such jurisdiction generally or imposed in connection with the
         Reorganization and contemplated in the Prospectus, or (ii) the
         continuation of the business of the Company or any of the Insurance
         Subsidiaries in all material respects as presently conducted, in each
         case except where such orders or decrees would not, singly or in the
         aggregate, have a material adverse effect on the Company and its
         subsidiaries, taken as a whole.

                  (v) Except as described in the Prospectus, (i) all ceded
         reinsurance and retrocessional treaties, contracts, agreements and
         arrangements ("REINSURANCE Contracts") to which the Company or any
         Insurance Subsidiary is a party and as to which any of them reported
         recoverables, premiums due or other amounts in its most recent
         statutory financial statements are in full force and effect, except
         where the failure of such Reinsurance Contracts to be in full force
         and effect would not, singly or in the aggregate, have a material
         adverse effect on the Company and its subsidiaries, taken as a whole,
         and (ii) neither the Company nor any

                                       7
<PAGE>

         Reinsurance Subsidiary has received any notice from any other party to
         any Reinsurance Contract that such other party intends not to perform
         such Reinsurance Contract in any material respect, and the Company has
         no knowledge that any of the other parties to such Reinsurance
         Contracts will be unable to perform its obligations thereunder in any
         material respect, except where (A) the Company or the Insurance
         Subsidiary has established reserves in its financial statements which
         it deems adequate for potential uncollectible reinsurance or (B) such
         nonperformance would not have a material adverse effect on the Company
         and its subsidiaries, taken as a whole.

                  (w)  Except as described in the Prospectus, the Company has no
         knowledge of any threatened or pending downgrading of the Company's or
         any of its subsidiaries' claims-paying ability rating or financial
         strength rating by A.M. Best Company, Inc., Standard & Poor's Rating
         Group, Moody's Investor Service, Inc., Fitch Ratings, Ltd. or any
         other "nationally recognized statistical rating organizations," as
         such term is defined for purposes of Rule 436(g)(2) under the
         Securities Act, which currently has publicly released a rating of the
         claims-paying ability or financial strength of the Company or any
         subsidiary.

                  (x) The Company and each of its Designated Subsidiaries
         maintain a system of internal accounting controls sufficient to
         provide reasonable assurance that (i) transactions are executed in
         accordance with management's general or specific authorizations; (ii)
         transactions are recorded as necessary to permit preparation of
         financial statements in conformity with generally accepted accounting
         principles and to maintain asset accountability; (iii) access to
         assets is permitted only in accordance with management's general or
         specific authorization; and (iv) the recorded accountability for
         assets is compared with the existing assets at reasonable intervals
         and appropriate action is taken with respect to any differences.

                  (y) The statements set forth in the Basic Prospectus under
         the caption "Description of the Debt Securities" and set forth in the
         Prospectus Supplement under the caption "Description of Notes", insofar
         as they purport to constitute a summary of the terms of the Securities,
         in each case insofar as they purport to describe the provisions of the
         laws and documents referred to therein, fairly summarize in all
         material respects the matters described therein.

                  (z) Deloitte & Touche LLP, whose report is included in the
         Prospectus, is an independent certified public accountant with respect
         to the Company and its combined subsidiaries within the meaning of the
         Securities Act and the rules and regulations adopted by the Commission
         thereunder. The financial statements of the Company and its combined
         subsidiaries (including the related notes and supporting schedules)

                                       8
<PAGE>

         included in the Registration Statement and the Prospectus present
         fairly in all material respects the financial condition, results of
         operations and cash flows of the entities purported to be shown
         thereby at the dates and for the periods indicated and have been
         prepared in accordance with United States generally accepted
         accounting principles applied on a consistent basis throughout the
         periods indicated and conform in all material respects with the Rules
         and Regulations under the Securities Act; and the supporting schedules
         included in the Registration Statement present fairly in all materials
         respects the information required to be stated therein.

                  (aa) The statutory financial statements of the Insurance
         Subsidiaries, from which certain ratios and other statistical data
         included or incorporated by reference in the Registration Statement
         have been derived have for each relevant period been prepared in
         conformity with statutory accounting practices required or permitted by
         the insurance laws of their respective states of domicile, and the
         rules and regulations promulgated thereunder, and such statutory
         accounting practices have been applied on a consistent basis throughout
         the periods involved, except as may otherwise be indicated therein or
         in the notes thereto.

         2. Agreements to Sell and Purchase. The Company hereby agrees to sell
to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective principal amounts of Securities set forth in Schedule I
hereto opposite its name at 99.325% of their principal amount plus accrued
interest, if any, from December 15, 2004 to the date of payment and delivery.

         During the period beginning on the date hereof and continuing to and
including the Closing Date, the Company hereby agrees not to offer, sell,
contract to sell or otherwise dispose of any debt securities of the Company or
warrants to purchase or otherwise acquire debt securities of the Company
substantially similar to the Securities (other than the Securities and
commercial paper issued in the ordinary course of business), without your prior
written consent on behalf of the Underwriters.

         3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Securities as soon after the effective date of this Agreement as in your
judgment is advisable. The Company is further advised by you that the Securities
are to be offered to the public initially at 99.925% of their principal amount
(the "PUBLIC OFFERING PRICE") plus accrued interest, if any, from December 15,
2004 to the date of payment and delivery and to certain dealers selected by you
at a price that represents a concession not in excess of 0.35% of their
principal amount, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in

                                       9
<PAGE>

excess of 0.25% of their principal amount, to any Underwriter or to certain
other dealers.

         4. Payment and Delivery. Payment for the Securities shall be made to
the Company in Federal or other funds immediately available in New York City
against delivery of the Securities for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on December 15, 2004, or at such
other time on the same or such other date, not later than December 17, 2004, as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "CLOSING DATE." Securities shall be registered in
such names and in such denominations as you shall request in writing not less
than two full business days prior to the Closing Date, with any transfer taxes
payable in connection with the transfer of the Securities to the Underwriters
duly paid.

         5. Conditions to the Underwriters' Obligations. The obligations of the
Underwriters to purchase the Underwriters' Securities shall be subject to the
accuracy of the representations and warranties on the part of the Company
contained herein as of the date hereof, as of the date of the effectiveness of
any amendment to the Registration Statement filed prior to the Closing Date
(including the filing of any document incorporated by reference therein) and as
of the Closing Date, to the accuracy of the statements of the Company made in
any certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions:

                  (a) No stop order suspending the effectiveness of the
         Registration Statement, as amended from time to time, shall have been
         issued and no proceedings for that purpose shall have been instituted
         or threatened; and the Prospectus shall have been filed with the
         Commission pursuant to Rule 424 not later than 5:30 p.m., New York City
         time, on the business day following the date hereof.

                  (b)  Subsequent to the execution and delivery of this
         Agreement and prior to the Closing Date:

                           (i) there shall not have occurred any downgrading,
                  nor shall any notice have been given of any intended or
                  potential downgrading or of any review for a possible change
                  that does not indicate the direction of the possible change,
                  in the rating accorded any of the Company's securities or
                  the Company's financial strength or claims paying ability by
                  A.M. Best Company, Inc., Standard & Poor's Rating Group,
                  Moody's Investor Service, Inc., Fitch Ratings, Ltd. or any
                  other "nationally recognized statistical rating organization,"
                  as such term is defined for purposes of Rule 436(g)(2) under
                  the Securities Act; and

                                       10
<PAGE>

                           (ii)there shall not have occurred any change, or any
                  development involving a prospective change, in the condition,
                  financial or otherwise, or in the earnings, business or
                  properties of the Company and its subsidiaries, taken as a
                  whole, from that set forth in the Prospectus (exclusive of
                  any amendments or supplements thereto subsequent to the date
                  of this Agreement) that, in your judgment, is material and
                  adverse and that makes it, in your judgment, impracticable to
                  market the Securities on the terms and in the manner
                  contemplated in the Prospectus.

                  (c) The Underwriters shall have received on the Closing Date a
         certificate, dated the Closing Date and signed by an executive officer
         of the Company, to the effect set forth in Section 5(b)(i) above and
         to the effect that the representations and warranties of the Company
         contained in this Agreement are true and correct as of the Closing
         Date and that the Company has complied with all of the agreements and
         satisfied all of the conditions on its part to be performed or
         satisfied hereunder on or before the Closing Date.

         The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.

                  (d) The Underwriters shall have received on the Closing Date
         an opinion of Jonathan D. Kantor, Executive Vice President, General
         Counsel and Secretary for the Company, dated the Closing Date, to the
         effect that:

                           (i) the Company has been duly incorporated, is
                  validly existing as a corporation in good standing under the
                  laws of the jurisdiction of its incorporation, has the
                  corporate power and authority to own its property and to
                  conduct its business as described in the Prospectus and is
                  duly qualified to transact business and is in good standing
                  in each jurisdiction in which the conduct of its business or
                  its ownership or leasing of property requires such
                  qualification, except to the extent that the failure to be so
                  qualified or be in good standing would not have a material
                  adverse effect on the Company and its subsidiaries, taken as
                  a whole;

                           (ii) each Designated Subsidiary has been duly
                  incorporated and is validly existing as an insurance company
                  (other than The Continental Corporation, which is validly
                  existing as a New York business corporation) and is authorized
                  to transact its appropriate business under the insurance code
                  of its domiciliary state, with full corporate power and
                  authority to own its properties and conduct its business as
                  described in the Final

                                       11
<PAGE>

                  Prospectus, and is duly licensed to do business as a foreign
                  insurer and is authorized to transact its appropriate business
                  under the laws of each jurisdiction which requires such
                  licensure wherein it owns or leases material properties or
                  conducts material business where the failure to be so licensed
                  would materially and adversely affect the business or
                  properties of the Company and its subsidiaries taken as a
                  whole;

                           (iii) all the outstanding shares of capital stock of
                  each Designated Subsidiary have been duly and validly
                  authorized and issued and are fully paid and nonassessable,
                  and, except as otherwise set forth in the Final Prospectus,
                  all outstanding shares of capital stock of the Designated
                  Subsidiaries are owned by the Company either directly or
                  through wholly owned subsidiaries (except for CNA Surety
                  Corporation, of which the Company owns 64%) free and clear of
                  any perfected security interest and, to the knowledge of such
                  counsel, after due inquiry, any other security interests,
                  claims, liens or encumbrances;

                           (iv) this Agreement has been duly authorized,
                  executed and delivered by the Company;

                           (v) the execution and delivery by the Company of, and
                  the performance by the Company of its obligations under, this
                  Agreement will not contravene any provision of applicable law
                  or the certificate of incorporation or by-laws of the Company
                  or, to the best of such counsel's knowledge, any agreement or
                  other instrument binding upon the Company or any of its
                  subsidiaries that is material to the Company and its
                  subsidiaries, taken as a whole, or, to the best of such
                  counsel's knowledge, any judgment, order or decree of any
                  governmental body, agency or court having jurisdiction over
                  the Company or any subsidiary, and no consent, approval,
                  authorization or order of, or qualification with, any
                  governmental body or agency is required for the performance by
                  the Company of its obligations under this Agreement, except
                  such as have been obtained under the Securities Act and such
                  as may be required by the securities or Blue Sky laws of the
                  various states in connection with the offer and sale of the
                  Securities and such other approvals as have been obtained;

                           (vi) there is no pending or, to the best knowledge of
                  such counsel, threatened, action, suit or proceeding before
                  any court or governmental agency, authority or body or any
                  arbitrator involving the Company or any of its subsidiaries,
                  of a character required to be disclosed in the Registration
                  Statement which is not adequately disclosed in the Prospectus,
                  and there is no franchise,

                                       12
<PAGE>

                  contract or other document of a character required to be
                  described in the Registration Statement or Prospectus, or to
                  be filed as an exhibit, which is not described or filed as
                  required; and the statements included or incorporated in the
                  Prospectus describing any legal proceedings or material
                  contracts or agreements relating to the Company or any of its
                  subsidiaries fairly summarize such matters in all material
                  respects;

                           (vii) no holders of securities of the Company have
                  rights to the registration of such securities under the
                  Registration Statement;

                           (viii) the Company is not, and after giving effect to
                  the offering and sale of the Securities and the application of
                  the proceeds thereof as described in the Prospectus will not
                  be, required to register as an "investment company" as such
                  term is defined in the Investment Company Act of 1940, as
                  amended;

                           (ix) the Registration Statement and any amendments
                  thereto have become effective under the Securities Act; to the
                  best knowledge of such counsel, no stop order suspending the
                  effectiveness of the Registration Statement has been issued,
                  no proceedings for that purpose have been instituted or
                  threatened, and the Registration Statement, the Prospectus and
                  each amendment thereof or supplement thereto as of their
                  respective effective or issue dates (other than the financial
                  statements and other financial information contained therein
                  and in the Form T-1, as to which such counsel need express no
                  opinion) complied as to form in all material respects with the
                  applicable requirements of the Securities Act and the Exchange
                  Act and the respective rules and regulations thereunder; and

                           (x) (A) in the opinion of such counsel, (1) each
                  document filed pursuant to the Exchange Act and incorporated
                  by reference in the Registration Statement and the Prospectus
                  (except for the financial statements and financial schedules
                  and other financial data included therein and in the Form T-1,
                  as to which such counsel need not express any opinion) appears
                  on its face to be appropriately responsive in all material
                  respects with the requirements of the Exchange Act and the
                  applicable rules and regulations of the Commission thereunder,
                  and (2) the Registration Statement or the Prospectus (except
                  for the financial statements and financial schedules and other
                  financial data included therein and in the Form T-1, as to
                  which such counsel need not express any opinion) appear on
                  their face to be appropriately responsive in all material
                  respects with the

                                       13
<PAGE>

                  requirements of the Securities Act and the applicable rules
                  and regulations of the Commission thereunder, and (B) nothing
                  has come to the attention of such counsel that causes such
                  counsel to believe that (1) the Registration Statement or the
                  prospectus included therein (except for the financial
                  statements and financial schedules and other financial data
                  included therein and in the Form T-1, as to which such counsel
                  need not express any opinion) at the time the Registration
                  Statement became effective contained an untrue statement of a
                  material fact or omitted to state a material fact required to
                  be stated therein or necessary to make the statements therein
                  not misleading or (2) the Prospectus (except for the financial
                  statements and financial schedules and other financial data
                  included therein and in the Form T-1, as to which such counsel
                  need not express any opinion) as of its date or as of the
                  Closing Date contained or contains an untrue statement of a
                  material fact or omitted or omits to state a material fact
                  necessary in order to make the statements therein, in the
                  light of the circumstances under which they were made, not
                  misleading.

         With respect to Section 5(d)(x) above, Jonathan D. Kantor may state
that his beliefs are based upon his participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and documents incorporated therein by reference and review and discussion of the
contents thereof, but are without independent check or verification, except as
specified.

                  (e) The Underwriters shall have received on the Closing Date
         an opinion of Mayer, Brown, Rowe & Maw LLP, outside counsel for the
         Company, dated the Closing Date, to the effect that:

                           (i) the Company has been duly incorporated, is
                  validly existing as a corporation in good standing under the
                  laws of the jurisdiction of its incorporation;

                           (ii) the authorized capital stock of the Company
                  conforms as to legal matters in all material respects to the
                  description thereof contained in the Prospectus;

                           (iii) the Securities and the Indenture conform in all
                  material respects to the descriptions thereof contained in the
                  Prospectus;

                           (iv) the Indenture has been duly authorized, executed
                  and delivered, has been duly qualified under the Trust
                  Indenture Act, and constitutes a legal, valid and binding
                  agreement of the Company, enforceable against the Company in
                  accordance with

                                       14
<PAGE>

                  its terms (except that, (A) the enforceability thereof may be
                  subject to bankruptcy, insolvency, reorganization, moratorium
                  or other similar laws, now or hereafter in effect, relating to
                  creditors' rights generally and (B) the remedy of specific
                  performance and injunctive and other forms of equitable relief
                  may be subject to equitable defenses and to the discretion of
                  the court before which any proceeding therefor may be
                  brought);

                           (v) the Securities have been duly authorized and,
                  when executed and authenticated in accordance with the
                  provisions of the Indenture and delivered to and paid for by
                  the Underwriters pursuant to this Agreement will constitute
                  legal, valid and binding obligations of the Company entitled
                  to the benefits of the Indenture (except that, (A) the
                  enforceability thereof may be subject to bankruptcy,
                  insolvency, reorganization, moratorium or other similar laws,
                  now or hereafter in effect, relating to creditors' rights
                  generally and (B) the remedy of specific performance and
                  injunctive and other forms of equitable relief may be subject
                  to equitable defenses and to the discretion of the court
                  before which any proceeding therefor may be brought);

                           (vi)this Agreement has been duly authorized, executed
                  and delivered by the Company;

                           (vii) the execution and delivery by the Company of,
                  and the performance by the Company of its obligations under,
                  this Agreement will not contravene any provision of applicable
                  law or the certificate of incorporation or by-laws of the
                  Company, and no consent, approval, authorization or order of,
                  or qualification with, any governmental body or agency is
                  required for the performance by the Company of its obligations
                  under this Agreement, except such as may be required by the
                  securities or Blue Sky laws of the various states in
                  connection with the offer and sale of the Securities;

                           (viii) the statements relating to legal matters,
                  documents or proceedings included in the Basic Prospectus
                  under the caption "Description of the Debt Securities," and in
                  the Prospectus Supplement under the caption "Description of
                  Notes," in each case fairly summarize in all material respects
                  such matters, documents or proceedings;

                           (ix) the Company is not, and after giving effect to
                  the offering and sale of the Securities and the application of
                  the proceeds thereof as described in the Prospectus will not
                  be,

                                       15
<PAGE>
                   required to register as an "investment company" as such term
                   is defined in the Investment Company Act of 1940, as amended;

                                 (x) the Registration Statement and any
                   amendments thereto have become effective under the Securities
                   Act; to the knowledge of such counsel, no stop order
                   suspending the effectiveness of the Registration Statement,
                   as amended, has been issued, no proceedings for that purpose
                   have been instituted or threatened, and the Registration
                   Statement, the Prospectus and each amendment thereof or
                   supplement thereto as of their respective effective or issue
                   dates (other than the financial statements and other
                   financial information contained therein and in the Form T-1,
                   as to which such counsel need express no opinion) complied as
                   to form in all material respects with the applicable
                   requirements of the Securities Act and the Exchange Act and
                   the respective rules and regulations thereunder; and

                                 (xi)(A) in the opinion of such counsel, the
                   Registration Statement or the Prospectus (except for the
                   financial statements and financial schedules and other
                   financial data included therein and in the Form T-1, as to
                   which such counsel need not express any opinion) appear on
                   their face to be appropriately responsive in all material
                   respects with the requirements of the Securities Act and the
                   applicable rules and regulations of the Commission
                   thereunder, and (B) nothing has come to the attention of such
                   counsel that causes such counsel to believe that (1) the
                   Registration Statement or the prospectus included therein
                   (except for the financial statements and financial schedules
                   and other financial data included therein and in the Form
                   T-1, as to which such counsel need not express any opinion)
                   at the time the Registration Statement became effective
                   contained an untrue statement of a material fact or omitted
                   to state a material fact required to be stated therein or
                   necessary to make the statements therein not misleading or
                   (2) the Prospectus (except for the financial statements and
                   financial schedules and other financial data included
                   therein, as to which such counsel need not express any
                   opinion) as of its date or as of the Closing Date contained
                   or contains an untrue statement of a material fact or omitted
                   or omits to state a material fact necessary in order to make
                   the statements therein, in the light of the circumstances
                   under which they were made, not misleading.

                   With respect to Section 5(e)(xi) above, Mayer, Brown, Rowe &
         Maw LLP may state that their beliefs are based upon their participation
         in the preparation of the Registration Statement and Prospectus and any
         amendments or supplements thereto (other than the documents

                                       16
<PAGE>

         incorporated by reference) and upon review and discussion of the
         contents thereof (including documents incorporated by reference), but
         are without independent check or verification, except as specified.

                  The opinion of Mayer, Brown, Rowe & Maw LLP shall be rendered
         to the Underwriters at the request of the Company and shall so state
         therein.

                      (f) The Underwriters shall have received on the Closing
         Date an opinion of Davis Polk & Wardwell, counsel for the Underwriters,
         dated the Closing Date, in form and substance reasonably satisfactory
         to the Underwriters.

                      (g) The Underwriters shall have received, on each of the
         date hereof and the Closing Date, a letter dated the date hereof or the
         Closing Date, as the case may be, in form and substance satisfactory to
         the Underwriters, from Deloitte & Touche LLP, independent public
         accountants, containing statements and information of the type
         ordinarily included in accountants' "comfort letters" to underwriters
         with respect to the financial statements and certain financial
         information contained in or incorporated by reference into the
         Registration Statement and the Prospectus; provided that the letter
         delivered on the Closing Date shall use a "cut-off date" not earlier
         than the date hereof.

         6. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:

                      (a) To furnish to you, without charge, one conformed copy
         of the Registration Statement (including exhibits thereto) and for
         delivery to each other Underwriter a conformed copy of the Registration
         Statement (without exhibits thereto) and to furnish to you in New York
         City, without charge, prior to 10:00 a.m. New York City time on the
         second business day next succeeding the date of this Agreement and
         during the period mentioned in Section 6(c) below, as many copies of
         the Prospectus and any supplements and amendments thereto or to the
         Registration Statement as you may reasonably request.

                      (b) Until the earlier of (X) the termination of the
         offering of the Securities, and (Y) six months from the date of this
         Agreement, the Company will not file any amendment (other than
         amendments resulting from the filing of the documents incorporated by
         reference pursuant to Item 12 of Form S-3 under the Securities Act) of
         the Registration Statement or supplement (including the Prospectus) to
         the Basic Prospectus unless the Company has furnished you a copy for
         your review prior to filing and will not file any such proposed
         amendment or

                                       17
<PAGE>

         supplement to which you reasonably object in writing. Subject to the
         foregoing sentence, the Company will cause the Prospectus to be filed
         with the Commission pursuant to Rule 424. The Company will promptly
         advise you (A) when the Prospectus shall have been filed with the
         Commission pursuant to Rule 424, (B) when any amendment to the
         Registration Statement relating to the Securities shall have become
         effective, (C) of any request by the Commission for any amendment of
         the Registration Statement or amendment of or supplement to the
         Prospectus or for any additional information, (D) of the issuance by
         the Commission of any stop order suspending the effectiveness of the
         Registration Statement or the institution or threatening of any
         proceeding for that purpose and (E) of the receipt by the Company of
         any notification with respect to the suspension of the qualification of
         the Securities for sale in any jurisdiction or the initiation or
         threatening of any proceeding for such purpose. The Company will use
         its best efforts to prevent the issuance of any such stop order and, if
         issued, to obtain as soon as possible the withdrawal thereof.

                      (c) If, during such period after the first date of the
         public offering of the Securities as in the reasonable opinion of
         counsel for the Underwriters the Prospectus is required by law to be
         delivered in connection with sales by an Underwriter or dealer, any
         event shall occur or condition exist as a result of which it is
         necessary to amend or supplement the Prospectus in order to make the
         statements therein, in the light of the circumstances when the
         Prospectus is delivered to a purchaser, not misleading, or if, in the
         reasonable opinion of counsel for the Underwriters, it is necessary to
         amend or supplement the Prospectus to comply with applicable law,
         forthwith to prepare, file with the Commission and furnish, at its own
         expense, to the Underwriters and to the dealers (whose names and
         addresses you will furnish to the Company) to which Securities may have
         been sold by you on behalf of the Underwriters and to any other dealers
         upon request, either amendments or supplements to the Prospectus so
         that the statements in the Prospectus as so amended or supplemented
         will not, in the light of the circumstances when the Prospectus is
         delivered to a purchaser, be misleading or so that the Prospectus, as
         amended or supplemented, will comply with law.

                      (d) To endeavor to qualify the Securities for offer and
         sale under the securities or Blue Sky laws of such jurisdictions as you
         shall reasonably request; provided, however, the Company shall not be
         obligated to file any general consent to service of process under the
         laws of any such jurisdiction, subject itself to taxation as doing
         business in any such jurisdiction, or qualify to do business as a
         foreign corporation in any such jurisdiction. The Company will pay all
         expenses (including fees and disbursements of counsel) in connection
         with such qualification (such expenses, fees and disbursements not to
         exceed in the aggregate $5,000).

                                       18

<PAGE>
                      (e) To make generally available to the Company's security
         holders and to you as soon as practicable an earning statement covering
         the twelve-month period ending December 31, 2005 that satisfies the
         provisions of Section 11(a) of the Securities Act and the rules and
         regulations of the Commission thereunder.

                      (f) Whether or not the transactions contemplated in this
         Agreement are consummated or this Agreement is terminated, to pay or
         cause to be paid all expenses incident to the performance of its
         obligations under this Agreement, including: (i) the fees,
         disbursements and expenses of the Company's counsel and the Company's
         accountants in connection with the registration and delivery of the
         Securities under the Securities Act and all other fees or expenses in
         connection with the preparation and filing of the Registration
         Statement, any preliminary prospectus, the Prospectus and amendments
         and supplements to any of the foregoing, including all printing costs
         associated therewith, and the mailing and delivering of copies thereof
         to the Underwriters and dealers, in the quantities hereinabove
         specified, (ii) all costs and expenses related to the transfer and
         delivery of the Securities to the Underwriters, including any transfer
         or other taxes payable thereon, (iii) the cost of printing or producing
         any Blue Sky or Legal Investment memorandum in connection with the
         offer and sale of the Securities under state securities laws and all
         expenses in connection with the qualification of the Securities for
         offer and sale under state securities laws as provided in Section 6(d)
         hereof, including filing fees and the reasonable fees and disbursements
         of counsel for the Underwriters in connection with such qualification
         and in connection with the Blue Sky or Legal Investment memorandum (not
         to exceed $5,000), (iv) all filing fees and the reasonable fees and
         disbursements of counsel to the Underwriters incurred in connection
         with the review and qualification of the offering of the Securities by
         the National Association of Securities Dealers, Inc., (v) the cost of
         printing certificates representing the Securities, (vi) the costs and
         charges of any transfer agent, registrar or depositary, (vii) the costs
         and expenses of the Company relating to investor presentations on any
         "road show" undertaken in connection with the marketing of the offering
         of the Securities, including, without limitation, expenses associated
         with the production of road show slides and graphics, fees and expenses
         of any consultants engaged in connection with the road show
         presentations with the prior approval of the Company, travel and
         lodging expenses of the representatives and officers of the Company and
         any such consultants, and the Company's proportionate share of the cost
         of any aircraft chartered in connection with the road show, (viii) the
         expenses associated with printing this Agreement and (ix) all other
         costs and expenses incident to the performance of the obligations of
         the Company hereunder for which provision is not otherwise made in this
         Section. It is understood, however, that except as provided in this

                                       19
<PAGE>

         Section, Section 7 entitled "Indemnity and Contribution", and the last
         paragraph of Section 9 below, the Underwriters will pay all of their
         costs and expenses, including fees and disbursements of their counsel,
         stock transfer taxes payable on resale of any of the Securities by them
         and any advertising expenses connected with any offers they may make.

         7. Indemnity and Contribution. (a) The Company agrees to indemnify and
hold harmless each Underwriter, each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, and each affiliate of any Underwriter within the
meaning of Rule 405 under the Securities Act and each of its officers,
directors, employees, agents and representatives from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein; provided, however, that, in connection with any loss,
claim, damage or liability arising from any untrue statement or omission or
alleged untrue statement or omission contained in any Preliminary Prospectus,
this indemnity agreement shall not inure to the benefit of any Underwriter with
respect to the sale of the Securities to any person by that Underwriter if that
Underwriter failed to send or give a copy of the Prospectus, as the same may be
amended or supplemented, to that person within the time required by the
Securities Act, and the untrue statement or omission or alleged untrue statement
or omission contained in such Preliminary Prospectus was eliminated or corrected
in the final Prospectus.

         (b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.

         (c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be

                                       20
<PAGE>

sought pursuant to Section 7(a) or 7(b), such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by you, in the case of parties indemnified pursuant to
Section 7(a), and by the Company, in the case of parties indemnified pursuant to
Section 7(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.

         (d) To the extent the indemnification provided for in Section 7(a) or
7(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder,

                                       21
<PAGE>

shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other hand from the offering of the
Securities or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and of the Underwriters on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other hand in connection with the offering of the
Securities shall be deemed to be in the same respective proportions as the net
proceeds from the offering of the Securities (before deducting expenses)
received by the Company and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate Public Offering Price of the
Securities. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the respective number of
Securities they have purchased hereunder, and not joint.

         (e) The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(d). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this

                                       22
<PAGE>

Section 7 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.

         (f) The indemnity and contribution provisions contained in this Section
7 and the representations, warranties and other statements of the Company
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation made
by or on behalf of any Underwriter, any person controlling any Underwriter or
any affiliate of any Underwriter or by or on behalf of the Company, its officers
or directors or any person controlling the Company and (iii) acceptance of and
payment for any of the Securities.

         8. Termination. The Underwriters may terminate this Agreement by notice
given by you to the Company, if after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on, or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the Nasdaq National Market,
the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the
Chicago Board of Trade, (ii) trading of any securities of the Company shall have
been suspended on any exchange or in any over-the-counter market, (iii) a
material disruption in securities settlement, payment or clearance services in
the United States shall have occurred, (iv) any moratorium on commercial banking
activities shall have been declared by Federal or New York State authorities or
(v) there shall have occurred any outbreak or escalation of hostilities, or any
change in financial markets or any calamity or crisis that, in your judgment, is
material and adverse and which, singly or together with any other event
specified in this clause (v), makes it, in your judgment, impracticable or
inadvisable to proceed with the offer, sale or delivery of the Securities on the
terms and in the manner contemplated in the Prospectus.

         9. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.

         If, on the Closing Date, any one or more of the Underwriters shall fail
or refuse to purchase Securities that it has or they have agreed to purchase
hereunder on such date, and the aggregate principal amount of Securities which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase is not more than one-tenth of the aggregate principal amount of the
Securities to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the principal amount of Securities
set forth opposite their respective names in Schedule I bears to the principal
amount of Securities set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Securities which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date; provided that in no event shall the
principal amount of Securities that any Underwriter has agreed to purchase
pursuant to this Agreement be increased

                                       23
<PAGE>

pursuant to this Section by an amount in excess of one-ninth of such principal
amount of Securities without the written consent of such Underwriter. If, on the
Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase
Securities and the aggregate principal amount of Securities with respect to
which such default occurs is more than one-tenth of the aggregate principal
amount of Securities to be purchased on such date, and arrangements satisfactory
to you and the Company for the purchase of such Securities are not made within
36 hours after such default, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter or the Company. In any such case
either you or the Company shall have the right to postpone the Closing Date, but
in no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. Any action taken under this paragraph
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.

         If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the reasonable fees and disbursements of their
counsel) reasonably incurred by such Underwriters in connection with this
Agreement or the offering contemplated hereunder.

         10. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.

         11. Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York.

         12. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.

                                       24
<PAGE>

                                        Very truly yours,

                                        CNA FINANCIAL CORPORATION

                                        By:  /s/ Robert M. Mann
                                             -----------------------------------
                                             Name:  Robert M. Mann
                                             Title: Senior Vice President

Accepted as of the date hereof

Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley & Co. Incorporated

Acting severally on behalf of themselves
      and the several Underwriters named
      in Schedule I hereto.

By:      Merrill Lynch, Pierce, Fenner &
         Smith Incorporated

By:      /s/ Scott G. Primrose
         ---------------------------------------------
         Name:  Scott G. Primrose
         Title: Authorized Signatory

By:      Morgan Stanley & Co. Incorporated

By:      /s/ Michael Fusco
         ---------------------------------------------
         Name:  Michael Fusco
         Title: Executive Director

<PAGE>

                                                                      SCHEDULE I

<TABLE>
<CAPTION>
                                                                                   PRINCIPAL AMOUNT OF
                                                                                     SECURITIES TO BE
                UNDERWRITER                                                             PURCHASED
-------------------------------------------------------                            --------------------
<S>                                                                                <C>
Merrill Lynch, Pierce, Fenner & Smith                                                  $ 219,600,000
                    Incorporated...............................
Morgan Stanley & Co. Incorporated..............................                          219,600,000
Lehman Brothers Inc............................................                           54,900,000
UBS Securities LLC.............................................                           54,900,000
         Total:................................................                        $ 549,000,000
                                                                                       =============
</TABLE>

<PAGE>

                                                                     SCHEDULE II

                         LIST OF DESIGNATED SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                  JURISDICTION OF
          DESIGNATED SUBSIDIARY                                    INCORPORATION
-------------------------------------------------                 ---------------
<S>                                                               <C>
American Casualty Company of Reading, Pennsylvania                  Pennsylvania

CNA Insurance Company (Europe) Ltd.                                 United Kingdom

CNA Surety Corporation                                              Delaware

Continental Assurance Company                                       Illinois

Continental Casualty Company                                        Illinois

Continental Insurance Company of Newark, New Jersey                 New Jersey

Firemen's Insurance Company of Newark, New Jersey                   New Jersey

National Fire Insurance Company of Hartford                         Connecticut

The Buckeye Union Insurance Company                                 Ohio

The Continental Insurance Company                                   South Carolina

The Continental Corporation                                         New York

The Glens Falls Insurance Company                                   Delaware

Transcontinental Insurance Company                                  New York
</TABLE>

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