CNA FINANCIAL CORPORATION

                               1998 ANNUAL REPORT

                                                                           CNA

                                    PROFILE
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                            CNA Financial Corporation

           is a holding company whose primary subsidiaries consist of

       property/casualty and life insurance companies. Collectively these

           subsidiaries are CNA. CNA is one of the largest writers of

             commercial property/casualty insurance and one of the

           ten largest insurance organizations in the United States.
- - -----------------------------------------------------------------------------

CNA serves  businesses and individuals with a broad range of insurance and other
risk management  products and services.  Insurance products include property and
casualty coverages;  life,  accident and health insurance;  and pension products
and  annuities.  CNA services  include risk  management,  information  services,
health care management and claims administration.  CNA products and services are
marketed   through   agents,   brokers,   general   agents  and  direct   sales.

CNA Financial Corporation,  with 1998 revenues of $17.1 billion, assets of $62.4
billion and  stockholders'  equity of $9.2  billion,  is the holding  company of
Continental  Casualty  Company,  incorporated  in  1897,  Continental  Assurance
Company,  incorporated  in 1911, and The Continental  Corporation,  which is the
holding company of The Continental Insurance Company, incorporated in 1853.

CNA  Financial  Corporation  stock is  traded  primarily  on the New York  Stock
Exchange  and, as of December 31, 1998,  was  approximately  85 percent owned by
Loews Corporation.

                           CNA FINANCIAL CORPORATION
                           -------------------------

                                      CNA

                                TABLE OF CONTENTS
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                                     1998

                                        2
                              FINANCIAL HIGHLIGHTS

                                        4
                      LETTER FROM CNA FINANCIAL CORPORATION
                             CHAIRMAN EDWARD J. NOHA

                                        6
                            LETTER FROM CNA CHAIRMAN
                         AND CEO BERNARD L. HENGESBAUGH

                                        9
                           FINANCIAL SECTION CONTENTS

                                       11
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                       58
                        CONSOLIDATED FINANCIAL STATEMENTS

                                       117
                          INDEPENDENT AUDITORS' REPORT

                                       118
                            COMMON STOCK INFORMATION

                                       119
                               CORPORATE DIRECTORY


                           CNA FINANCIAL CORPORATION
                           -------------------------

                              FINANCIAL HIGHLIGHTS
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                 Results of Operations and Financial Condition


- - -----------------------------------------------------------------------------------------------------------------
As of and for the Year Ended December 31                    1998       1997       1996      1995*       1994

- - -----------------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share data and ratios)
                                                                                            
RESULTS OF OPERATIONS 
- - -----------------------------------------------------------------------------------------------------------------
Revenues                                                    $17,074    $17,072    $16,988    $14,700    $11,000
====================================================================================================
Net operating (loss) income                                    (152)       488        578        463        187
Net realized investment gains (losses)                          434        478        387        294       (151)
- - -----------------------------------------------------------------------------------------------------------------
       NET INCOME                                           $   282    $   966    $   965    $   757    $    36
================================================================================================================= 

EARNINGS PER SHARE
- - -----------------------------------------------------------------------------------------------------------------
Net operating (loss) income                                 $ (0.86)   $  2.59    $  3.08    $  2.46    $  0.98
Net realized investment gains (losses)                         2.35       2.58       2.09       1.59      (0.81)
- - -----------------------------------------------------------------------------------------------------------------
       NET INCOME                                           $  1.49    $  5.17    $  5.17    $  4.05    $  0.17
==================================================================================================================

FINANCIAL CONDITION
- - ------------------------------------------------------------------------------------------------------------------
Invested assets                                             $37,177    $36,203    $35,412    $35,886    $29,943
Total assets                                                 62,359     61,675     60,455     60,360     44,320
Reserves                                                     40,438     39,829     39,981     40,803     28,938
Debt                                                          3,160      2,897      2,765      3,026        914
Stockholders' equity                                          9,157      8,309      7,060      6,736      4,546
Book value per common share                                   47.89      44.01      37.27      35.52      23.71
Return on average stockholders' equity                         3.2%      12.6%      14.0%      13.4%       0.7%
- - ------------------------------------------------------------------------------------------------------------------
STATUTORY SURPLUS
- - ------------------------------------------------------------------------------------------------------------------
Property/casualty companies**                               $ 7,593    $ 7,123    $ 6,349    $ 5,696    $ 3,367
Life companies                                                1,109      1,224      1,163      1,128      1,056
==================================================================================================================
* RESULTS OF OPERATIONS  DATA  INCLUDES THE  CONTINENTAL  CORPORATION  SINCE ITS
ACQUISITION ON MAY 10, 1995.

** SURPLUS  INCLUDES  EQUITY OF  PROPERTY/CASUALTY  COMPANIES  OWNERSHIP IN LIFE
INSURANCE SUBSIDIARIES.


                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       2


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                               Financial Position

This page of CNA Financial Corporation's annual report has four bar graphs which
illustrate the trend in revenues,  assets,  stockholders'  equity and book value
per common share from 1988 through 1998.

CNA FINANCIAL CORPORATION (1988-1998)
($ in billions except per share data)

|-----------------------|----------|---------|---------------|---------------|
|Measurement Period     |          |         |  Stockholders'| Book Value Per|
| (Fiscal Year Covered  | Revenues | Assets  |   Equity      | Common Share* |
|-----------------------|----------|---------|---------------|---------------|
|FYE 12/31/88...........|   8.3    |  25.9   |      3.6      |     18.29     |
|FYE 12/31/89...........|   9.1    |  30.9   |      4.2      |     21.58     |
|FYE 12/31/90...........|   9.9    |  34.7   |      4.5      |     23.41     |
|FYE 12/31/91...........|  11.1    |  39.2   |      5.1      |     26.75     |
|FYE 12/31/92...........|  10.8    |  39.7   |      4.8      |     25.02     |
|FYE 12/31/93...........|  11.0    |  41.9   |      5.4      |     28.22     |
|FYE 12/31/94...........|  11.0    |  44.3   |      4.5      |     23.71     |
|FYE 12/31/95...........|  14.7    |  60.4   |      6.7      |     35.52     |
|FYE 12/31/96...........|  17.0    |  60.5   |      7.1      |     37.27     |
|FYE 12/31/97...........|  17.1    |  61.7   |      8.3      |     44.01     |
|FYE 12/31/98...........|  17.1    |  62.4   |      9.2      |     47.89     |
|-----------------------|----------|---------|---------------|---------------|

*Previous years have been restated for 3 for 1 stock split that occured on 5/98.

                           CNA FINANCIAL CORPORATION
                          ---------------------------
                                       3

                          A LETTER TO OUR SHAREHOLDERS
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                                    1998

FROM CNA FINANCIAL CORPORATION
CHAIRMAN EDWARD J. NOAH

CNA Financial  Corporation  reported  lower earnings in 1998. Net income for the
year was $282  million,  or $1.49 per  share,  compared  with net income of $966
million,  or $5.17 per share, in 1997.  Excluding  after-tax  restructuring  and
other related  charges of $169 million in 1998, net income was $451 million,  or
$2.40 per share.

Net realized  investment  gains for 1998 were $434 million,  or $2.35 per share,
compared with net realized gains of $478 million,  or $2.58 per share, for 1997.
Consolidated revenues were approximately $17.1 billion in both 1998 and 1997.

Net  operating  income for 1998,  excluding  after-tax  restructuring  and other
related  charges,  was $17  million,  or $0.05  per  share,  compared  with $488
million, or $2.59 per share, for 1997.

Key factors that affected net income included intensely competitive  marketplace
conditions,  a change  in  estimate  of prior  year  reserves  of $270  million,
restructuring and related costs of $169 million after tax, increased catastrophe
costs of $140 million, and decreased investment income of $40 million. All these
factors underscore the importance of CNA's conservative financial strategies and
solid financial base.

At year-end 1998,  CNA's total assets  amounted to $62.4 billion.  Stockholders'
equity was $9.2  billion,  up 10% from the previous  year.  Book value per share
increased 9% to $47.89.  In our  investment  portfolio,  93 percent of our fixed
maturity  holdings  were in  investment-grade  bonds.  In  addition,  we began a
capital   enhancement   plan  to  place   additional   capital  in  one  of  the
property/casualty  pools. During the fourth quarter, we began these efforts with
a $200  million  public  debt  offering  and $200  million  of  preferred  stock
purchased by Loews, our majority shareholder.

Also of note, CNA  implemented an officer stock ownership plan during the fourth
quarter.  The senior  officers  purchasing the stock do so  voluntarily  and are
fully at risk for  their  holdings.  Strong  participation  in the plan  further
demonstrates  management's  confidence in the direction of CNA and its prospects
for the long term.

Along with its solid  financial  foundation,  CNA continued to build on a strong
leadership  team. In a succession  plan announced in 1998 and completed  earlier
this year,  Bernard L.  Hengesbaugh,  former  executive vice president and chief
operating  officer,  succeeded  Dennis  H.  Chookaszian  as  chairman  and chief
executive  officer.  Mr.  Hengesbaugh has already  demonstrated  his leadership,
industry knowledge and

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       4

- - -------------------------------------------------------------------------------
                                      1998

organizational  capabilities  as chief  operating  officer  and in his  previous
position as head of our  successful  Specialty  Operations.  We look  forward to
working with him in his new role.

Mr. Chookaszian was elected chairman of the Executive  Committee of the Board of
CNA Financial  Corporation.  Preston R. Tisch, who had served as chairman of the
Executive Committee for the past 25 years, will continue to serve as a committee
member. We appreciate Mr. Chookaszian's contributions during 23 years of service
to CNA, and we will benefit greatly from his continued counsel.

Looking to the future,  we see an insurance  environment  being  transformed  by
consolidation,  convergence  of financial  services,  globalization  and intense
competition. In this tumultuous arena, we are fully focused on improved earnings
and continued growth of shareholder value.

With its solid financial position and strong leadership,  CNA is well positioned
to continue its record of integrity,  growth of long-term  value, and commitment
to customers, employees and business partners.

On behalf of the board of directors, I thank you for your commitment and ongoing
support.

Sincerely,


S/EDWARD J. NOHA
Edward J. Noha
Chairman of the Board
CNA Financial Corporation

                           CNA FINANCIAL CORPORATION
                          ---------------------------
                                       5

                          A LETTER TO OUR SHAREHOLDERS
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                                      1998

FROM CNA CHAIRMAN AND CHIEF EXECUTIVE OFFICER BERNARD L. HENGESBAUGH

The financial results you see in this report underscore two indisputable  facts.
First,  the  conditions  in the  insurance  marketplace  have  never  been  more
competitive.  And second,  our  operating  performance  is  unacceptable  to CNA
management and our board.

CNA began implementing strategies this year to improve operating performance and
we will continue to concentrate our full  management  attention on improving the
Company's  bottom  line.  These   strategies   include  expense   reduction  and
restructuring,  exiting non-core  businesses,  and working with key distribution
partners to achieve adequate rates in middle-market  property/casualty business.
Together, these efforts are designed to build on CNA's strong franchise value by
focusing on core  businesses  and  becoming a provider of choice in our selected
markets.

Early last year, we began a companywide drive to achieve  best-in-class  expense
levels.  We stepped up our  efforts at  mid-year  with the launch of an 18-month
restructuring  plan,  under  which  each  of  the  business  and  support  areas
accelerated their efforts to provide higher quality services on a more efficient
operating platform.

The restructuring  activities resulted in charges of $246 million pre-tax during
the last half of the year,  with an  additional  $100  million  to $150  million
pre-tax in  restructuring-related  costs  anticipated  during  1999.  When fully
implemented, the plan is expected to produce pre-tax annual savings in excess of
$300 million.

CNA  continued a process of focusing all its  resources on  businesses  with the
ability to sustain  profitable,  long-term  growth.  We no longer  believe  that
certain  businesses have long-term profit potential for CNA. For this reason, we
exited the agriculture and certain employer health insurance businesses in 1998.
Early this year, we exited the entertainment insurance market.

Our third major strategy for improved operating  performance relates to our book
of  middle-market  property/casualty  insurance.  In recent  years,  competitive
pressure  has driven  pricing in  workers'  compensation  and other key lines to
unreasonable levels.  During the last half of 1998, CNA reviewed its pricing and
underwriting standards.  Now, in partnership with key agents and brokers, CNA is
working aggressively to improve price adequacy. We are addressing the issue on a
case by case basis,  and are fully  prepared  to walk away from  business if the
market continues to underprice.

While the strategies for improved  operating  performance are critical,  they do
not tell the  whole  story of CNA's  1998  results.  Several  lines of  business
continued to perform well,  including  surety,  directors & officers  liability,
nonmedical professional liability, warranty, individual life, long-term care and
others. CNA UniSource,  our start-up Professional Employer  Organization,  ranks
among

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       6

- - ------------------------------------------------------------------------------
                                      1998

the nation's  fastest  growing PEOs. In addition,  we achieved our goal of
reaching Year 2000  computer  readiness of all internal  application  systems by
December 1, 1998. While some work continues in 1999, the technology  platform is
well prepared to support CNA operations as we move into the next century.

Looking to the rest of 1999,  we  anticipate  another year of  difficult  market
conditions.  Our efforts to improve operating performance will continue to focus
squarely on the fundamentals of our business.

In our businesses that are performing well, we will continue to improve earnings
through  underwriting  discipline,  efficient operations and strong distribution
relationships.

We will complete our expense  reduction and restructuring  efforts,  and we will
carry this approach forward by emphasizing continuous improvement.

We will continue our middle-market  strategy at full speed. Although much of the
work will be done this year, we expect that the positive impact on our operating
results will not be fully  realized  until the year 2000.  Many  accounts do not
come up for renewal until later in 1999,  and with some  accounts,  it will take
several  renewal cycles of disciplined  underwriting  to achieve the right price
levels.

Finally,  we will continue to challenge all our businesses on the basis of their
ability  to  sustain  profitable,  long-term  growth.  In that  regard,  we have
introduced  a new  approach to reporting  CNA  results.  In this report,  we are
providing  financial data and discussion of each of our major business segments.
You will see this approach in the Management's  Discussion and Analysis section.
We believe that segment  reporting will provide a clearer  picture of the way we
manage  our  businesses,  as well as the  progress  that we are  making  in each
segment.

In summary,  CNA is focused on improving  profitability  in the near term, while
continuing to manage for long-term value. In a difficult insurance  environment,
we believe CNA is on the right track. We have the people,  the  strategies,  the
business relationships and the financial strength to emerge as the most improved
player over the next few years.

Thank you for your  continuing  confidence in CNA, and I look forward to sharing
our progress with you in next year's report.



Sincerely,




S/BERNARD L. HENGESBAUGH
Bernard L. Hengesbaugh
Chairman and Chief Executive Officer
CNA


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       7


                                      CNA

                           FINANCIAL SECTION CONTENTS
- - ----------------------------------------------------------------------------
                                     1998

                                       11
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                       58
                           CONSOLIDATED BALANCE SHEETS

                                       60
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                       61
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                       62
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                       64
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       117
                          INDEPENDENT AUDITORS' REPORT

                                       118
                            COMMON STOCK INFORMATION

                                       119
                               CORPORATE DIRECTORY


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       9

                                      CNA

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ----------------------------------------------------------------------------
                              Consolidated Operations
INTRODUCTION

The following discussion highlights  significant factors influencing the results
of operations and financial condition of CNA Financial  Corporation (CNAF). CNAF
together  with its  subsidiaries  is  referred  to as CNA or the  Company.  This
discussion  should  be read  in  conjunction  with  the  consolidated  financial
statements  and the related  notes,  appearing  on pages 58 through 116, and the
five-year summary of selected financial highlights appearing on page 2.

The  discussion  also  includes  an  overview  of  each of the  Company's  seven
operating segments, the products offered, the customers served, the distribution
channels used and an analysis of operating  results.  Since distinct  investment
portfolios  are not maintained  for each  insurance  segment,  the discussion of
investment results,  including  investment income and realized investment gains,
is on a  consolidated  basis and  begins  on page 40.  The 1998  provisions  for
restructuring  and other related charges are discussed  along with  consolidated
operations.
- - -----------------------------------------------------------------------------

CONSOLIDATED OPERATIONS

BUSINESS OVERVIEW

CNA is one of the  largest  insurance  organizations  in the United  States and,
based  on 1997 net  written  premium,  is the  third  largest  property/casualty
company and the thirty-second largest life insurance company.

CNA's  overall  goal is to  create  long-term  enterprise  value by  pursuing  a
strategy of profitable growth in the market segments in which it operates.

CNA conducts its operations  through seven  operating  segments that are briefly
described below:

AGENCY  MARKET  OPERATIONS - provides  small to mid-size  businesses  as well as
individuals a wide range of  property/casualty  products distributed through one
of the broadest independent agency networks in the U.S.

SPECIALTY  OPERATIONS - provides a broad array of  professional,  financial  and
specialty  property/casualty  products and services distributed through brokers,
managing general agencies and independent agencies.

CNA RE - serves as a property/casualty reinsurer, offering primarily traditional
treaty  reinsurance,  with  developing  positions in  facultative  and financial
reinsurance.

GLOBAL  OPERATIONS - provides marine,  property/casualty,  surety,  warranty and
specialty products to both domestic and international customers.

RISK  MANAGEMENT  -  serves  the  property/casualty   needs  of  large  domestic
commercial businesses, offering customized, solution based strategies to address
risk management.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       11


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ------------------------------------------------------------------------------
                        Consolidated Operations (cont.)

GROUP  OPERATIONS  - provides a broad  array of group life and health  insurance
products and services to employers,  affinity groups and other entities that buy
as a group. Group operations also provides  reinsurance for group and individual
life and health insurers.

LIFE OPERATIONS - provides  financial  protection to individuals  through a full
product line of insurance,  including  term life,  universal  life and long term
care as  well as  annuities  and  viatical  settlements.  Life  Operations  also
provides  retirement  products and administration  services to pension plans and
other institutional buyers.

These operating  segments  reflect the way in which CNA distributes its products
to the marketplace and the way in which it manages operations and makes business
decisions. A more detailed description of each segment is included later in this
discussion.

Corporate results consist of interest expense on corporate  borrowings,  certain
run-off insurance operations, asbestos claims related to Fibreboard Corporation,
financial guarantee insurance contracts,  and certain non-insurance  operations,
principally  the  operations  of  Agency  Management  Systems,  Inc.  (AMS),  an
information technology and agency software development subsidiary.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       12

- - -----------------------------------------------------------------------------
                        Consolidated Operations (cont.)
OPERATING RESULTS:

The following chart  summarizes the consolidated  operating  results for each of
the last three years.

CONSOLIDATED OPERATIONS
- - ----------------------------------------------------------------------------
Year Ended December 31                                1998     1997     1996
- - -----------------------------------------------------------------------------
(In millions of dollars)
OPERATING REVENUES 
(EXCLUDING REALIZED INVESTMENT  
GAINS/LOSSES):
   Premiums                                        $13,375  $13,482  $13,525
   Net investment income                             2,146    2,209    2,276
   Other                                               858      628      568
- - -----------------------------------------------------------------------------
     Total operating revenues (excluding realized
     investment gains/losses)                       16,379   16,319   16,369
Restructuring and other related charges                246        -        -
Benefits and other expenses                         16,465   15,689   15,619
- - -----------------------------------------------------------------------------
   Operating (loss) income before income tax         (332)      630      750   
Income tax benefit (expense)                          200      (132)    (163)
- - -----------------------------------------------------------------------------
   Net operating (loss) income (excluding realized 
   investment gains/losses)                          (132)      498      587
Realized investment gains, net of tax                 434       478      387
Minority interest                                     (20)      (10)      (9)
- - -----------------------------------------------------------------------------
   NET INCOME                                      $  282    $  966  $   965  
=============================================================================

REVENUES

Total operating revenues,  which consist of premium,  net investment income, and
other  revenues,  were $16.4  billion,  $16.3  billion and $16.4 billion for the
years ended December 31, 1998, 1997 and 1996, respectively.

Premiums and other operating  revenues,  exclusive of net investment  income and
net realized  investment gains, are discussed and analyzed in the context of the
discussions  of each of the business  segments  that follow.  Benefits and other
operating expenses are also discussed at the segment level.

Premiums  for 1998  declined  by $107  million  when  compared  with 1997.  This
decrease is primarily due to intense  price  competition  facing the  commercial
lines insurance market.

Premiums for 1997 declined by $43 million when compared with 1996. This decrease
is  primarily  due to  reductions  in  premiums  from  involuntary  markets  and
competitive conditions in the commercial lines insurance market.

NET INVESTMENT INCOME

Net investment income was $2.1 billion,  $2.2 billion and $2.3 billion for 1998,
1997 and 1996,  respectively.  Net  investment  income for 1998 decreased by $63
million when compared with 1997.  This decrease is primarily  attributable  to a
lower average level of assets invested in interest-bearing securities in 1998 as
compared with 1997. See discussion on investments on page 40.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       13

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ------------------------------------------------------------------------------
                        Consolidated Operations (cont.)

Net investment income for 1997 decreased by $67 million when compared with 1996.
This decrease is primarily due to lower  interest rates in 1997 as compared with
1996.

REALIZED INVESTMENT GAINS/LOSSES

The Company's  investment  portfolio is managed to maximize after-tax investment
return  while  minimizing  credit  risk with  investments  concentrated  in high
quality securities to support its insurance underwriting results. As a result of
this investment philosophy,  the Company may sell, and has sold, securities from
time to time to take advantage of market  conditions.  Investment gains realized
from  these  sales can be a  significant  component  of the  overall  investment
portfolio performance and the Company's net income. In 1998, realized investment
gains,  net of tax,  amounted  to $434  million  in 1998 as  compared  with $478
million  and $387  million in 1997 and 1996,  respectively.  See  discussion  of
investments on page 40.

RESTRUCTURING AND OTHER RELATED CHARGES

BACKGROUND

During  1998,  the Company  initiated a  comprehensive  review of several of its
business  operations  and  corporate  functions  to  identify  opportunities  to
restructure those operations and/or eliminate  processes and employee positions.
The  objectives  of these  reviews  were to develop  detailed  plans to increase
operating   efficiencies  by  better  use  of  technology  and  streamlining  of
decision-making,  and to exit  businesses  that  were  not  contributing  to the
achievement  of  corporate  financial  objectives,  the net results of which are
expected  to be a  better  focus on the  customer  and the  realization  of cost
savings.

COMPANY PLAN

The Company  finalized and approved a restructuring  plan (the "Plan") in August
1998. In connection with the Plan, the Company  incurred  various  expenses that
were recorded in the third and fourth quarters of 1998. These  restructuring and
other related charges  primarily  related to the following  activities:  planned
reductions in the workforce;  the consolidation of certain  processing  centers;
the exiting of certain  businesses and  facilities;  the  termination of related
lease  obligations;  and  the  writeoff  of  certain  assets  related  to  these
activities.  The Plan  contemplates  a gross  reduction  in  workforce  of 4,500
employees, resulting in a planned net reduction of 2,400 employees. According to
the Plan, the various activities and workforce reductions should be completed by
the end of 1999. Once the Plan is fully executed, it is expected that there will
be cost savings of approximately $300 to $350 million on an annualized basis.

INCOME STATEMENT CHARGES

The  pretax  restructuring  and other  related  charges  were  comprised  of the
following costs and expenses:  a) costs and benefits related to planned employee
terminations  of $98  million,  of which $53 million  related to  severance  and
outplacement  costs,  $24 million related to other employee  transition  related
costs, principally parallel processing  and $21 million related to benefit plan
curtailment  losses;  b) writedown of certain  assets to their fair value of $74
million, of which $59 million related to a writedown of an intangible asset, and
$15 million  related to adjustments  for abandoned  leasehold  improvements  and
other related fixed assets  associated  with leases that were terminated as part
of the restructuring plan; c) lease termination costs of $42 million; and d)
losses incurred on the exiting of certain businesses of $32 million.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       14


- - ------------------------------------------------------------------------------
                        Consolidated Operations (cont.)

The Company  recorded  $220  million of these  restructuring  and other  related
charges in the third quarter of 1998. Other charges such as parallel  processing
costs,  relocation costs, and retention bonuses,  did not qualify for accrual at
the end of the third quarter under generally accepted accounting  principles and
are being  expensed as incurred.  In the fourth  quarter of 1998, $26 million of
these charges were recorded.  Based on the Company's  current  estimates,  it is
expected  that the  Company  will  record an  additional  $100  million  to $150
million, pre-tax, of these costs over approximately the next twelve months. Such
costs are expected to be reported as uses of operating cash.

AGENCY MARKET OPERATIONS

The 1998  pre-tax  restructuring  and other  related  charges for Agency  Market
Operations  totaled  approximately  $96 million.  The charges included  employee
severance  and  outplacement  costs of $34  million  related to the  planned net
reduction in the workforce of approximately  1,200 employees.  Approximately $29
million of lease  termination  costs were also incurred in  connection  with the
consolidation  of four regional offices into two zone offices and a reduction of
the  number  of  claim  processing  offices  from  24 to 8.  The  Agency  Market
Operations  charges also  included  benefit plan costs of $12 million,  parallel
processing  charges  of  $7  million,  and  $5  million  of  other  fixed  asset
writedowns.    Other   charges,   including   travel,   relocation   and   other
transition-related   activity,   which  were   expensed  as  incurred,   totaled
approximately $9 million.

Through December 31, 1998,  approximately 364 Agency Market Operation employees,
the majority of whom were loss  adjusters  and office  support  staff,  had been
released at a cost of $8 million.

RISK MANAGEMENT

The 1998 pre-tax  restructuring  and other related  charges for Risk  Management
totaled  approximately $88 million. The charges included lease termination costs
associated with the consolidation of claim offices in 36 market territories that
totaled   approximately  $8  million.   In  addition,   employee  severance  and
outplacement  costs  relating to the  planned  net  reduction  in  workforce  of
approximately 200 employees were  approximately $10 million and the writedown of
fixed and intangible assets totaled approximately $64 million.
Parallel processing and other charges totaled approximately $6 million.

The  charges  related to fixed and  intangible  assets were  primarily  due to a
writedown of an intangible asset (goodwill)  related to a business that had been
acquired  several years earlier.  As part of the Company's  periodic  reviews of
asset  recoverability  and as a result of several  adverse  events,  the Company
concluded,  based on its  discounted  cash flow analysis  completed in the third
quarter of 1998, that a $59 million  writeoff was necessary.  The adverse events
contributing to this conclusion included operating losses from the business, the
loss  of  several  significant  customers  whose  business  volume  within  this
operation  contributed  a large  portion of the revenue  base,  and  substantial
changes in the overall market demand for the services  offered by this operation
which,  in turn,  had  negative  effects  on the  prospects  for  achieving  the
profitability levels necessary to recover the intangible asset.

Through December 31, 1998,  approximately 152 Risk Management employees had been
released at a cost of $2 million.  The majority of the employees  were adjusters
and office support staff.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       15

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ------------------------------------------------------------------------------
                        Consolidated Operations (cont.)

GROUP OPERATIONS

The 1998 pre-tax  restructuring  and other related charges for Group  Operations
totaled  approximately  $39  million.  The charges  included  approximately  $29
million of costs related to the Company's  decision to exit the Employer  Health
and Affinity lines of business.  These costs represent the Company's estimate of
losses in connection with fulfilling the remaining  obligations  under contracts
related to these lines. Earned premiums for these lines of business approximated
$400 million in 1998.  The 1998 charges also  included  employee  severance  and
outplacement  costs of  approximately  $7  million  related to the  planned  net
reduction  in  workforce  of  approximately  400  employees.  Charges  for lease
termination costs and fixed asset writedowns totaled $3 million.

Through December 31, 1998,  approximately 56 Group Operations employees had been
released at a cost of $1 million.  The majority of the employees were claims and
sales support staff.

OTHER SEGMENTS

For the other segments of the Company,  pre-tax  restructuring and other related
charges totaled approximately $23 million for 1998. Charges related primarily to
the  closing of leased  facilities  ($3  million)  and  employee  severance  and
outplacement  costs  related to planned net  reductions  of 600 employees in the
current  workforce  and benefit  costs  associated  with those  reductions  ($13
million). In addition, there were $4 million in charges related to the writedown
of certain assets and $3 million related to the exiting of certain businesses.

Through December 31, 1998,  approximately 270 employees of these other segments,
most of whom were  underwriters and office support staff, had been released at a
cost of $3 million.

CORPORATE

Corporate results consist of interest expense on corporate  borrowings,  certain
run-off insurance operations, asbestos claims related to Fibreboard Corporation,
financial guarantee insurance contracts,  and certain non-insurance  operations,
principally  the  operations  of  Agency  Management  Systems,  Inc.  (AMS),  an
information technology and agency software development subsidiary.

Operating  losses for 1998  increased by $124 million  compared with 1997.  This
increase is primarily attributed to a net unfavorable change in loss development
on asbestos  claims  related to  Fibreboard  Corporation  of  approximately  $70
million,  an increase in pre-tax  operating  losses  attributable  to AMS of $20
million and a decrease in investment  income and an increase in interest expense
totaling $29 million.

Operating  losses for 1997 increased by $94 million from 1996. This increase was
primarily  attributable  to a net  unfavorable  change  in loss  development  on
run-off operations and financial  guarantee  insurance contracts of $77 million.
The  remaining  increase  was due to  increased  operating  losses  from  AMS of
approximately $12 million, and other items aggregating $5 million.

A discussion of consolidated investment results can be found on page 40.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       16

                       CNA SEGMENT OVERVIEWS AND ANALYSIS
- - ---------------------------------------------------------------------------
                                      1998

                            AGENCY MARKET OPERATIONS
                                       18

                              SPECIALTY OPERATIONS
                                       22

                                     CNA RE
                                       25

                               GLOBAL OPERATIONS
                                       27

                                RISK MANAGEMENT
                                       31

                                GROUP OPERATIONS
                                       34

                                LIFE OPERATIONS
                                       37

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ----------------------------------------------------------------------------
                            Agency Market Operations

BUSINESS OVERVIEW

Agency  Market   Operations   builds  on  the  Company's   long  and  successful
relationship with the independent agency  distribution  system to market a broad
range of  property/casualty  insurance  products and services to both businesses
and individuals.  Business  products include workers'  compensation,  commercial
packages,  general  liability  and  commercial  auto,  as well as a  variety  of
creative  risk  management  services.  Products for  individuals  are  primarily
personal auto and homeowners  insurance.  In addition,  Agency Market Operations
recently launched a professional  employer  organization,  CNA UniSource,  which
provides various employer-related services.

Agency Market Operations includes four groups.

COMMERCIAL INSURANCE

Commercial  Insurance  (CI)  provides  traditional  property/casualty  insurance
products such as workers' compensation, general and product liability, property,
commercial auto and umbrella coverage to businesses with less than $1 million in
annual  premiums.  The  majority  of CI  customers  are small  and  medium-sized
businesses.  CI is among the market  leaders in applying  industry  segmentation
techniques to design products and services tailored to the needs of its targeted
customer groups.

In early 1998, CI completed an extensive  review of its business and developed a
new, more effective  platform that positions CI as a world class  competitor for
the  next  century.  The  basis  for the  platform  is to  move  decision-making
authority and resources closer to our customers.

That platform consists of 40 branches,  located  throughout the U.S.,  providing
customer  support in the areas of  underwriting,  loss control and sales.  A new
processing center will be responsible for premium  processing and accounting for
all 40  branches,  and will  incorporate  a call center for  increased  customer
service. Eight claim service centers,  located throughout the U.S., will provide
customers and claimants with improved  service  through more  specialized  claim
handling and easier claim reporting.

The  improved  efficiencies  are  expected  to result in  decreased  expenses in
underwriting and claims through the  implementation  of new technology,  process
redesign and centralization.  In addition, CI recognizes that an even lower cost
platform is necessary to be successful in the small commercial  marketplace.  CI
has  developed  underwriting  and sales  tools that  automate  the  underwriting
process,  enabling agents to handle applications,  verify eligibility, price
and issue policies at the point of sale.

PERSONAL INSURANCE

Personal Insurance (PI) sells primarily  personal auto and homeowners  coverages
and also offers excess liability,  separate scheduled property,  boat-owners and
other recreational  vehicle  insurance.  These coverages are sold primarily as a
package  product.  In  addition,  PI is  developing  capabilities  that  support
employer group marketing through independent agencies.

E&S

E&S provides specialized insurance and other financial products for a wide array
of commercial and personal lines  customers.  Risks covered by E&S are generally
viewed as highly perilous and less predictable in exposure than those covered

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       18

- - ----------------------------------------------------------------------------
                        Agency Market Operations (cont.)

by the more traditional  insurance markets.  By combining superior insurance and
financial  expertise with a detailed  understanding  of customer  operations and
future  direction,  E&S is able to  create  and  implement  innovative  business
solutions  that are valued by the  customer.  In addition,  E&S  actively  seeks
business  partners who can  supplement  CNA  resources and enhance value for the
customer.

CNA UNISOURCE

CNA UniSource is a professional  employer  organization that provides integrated
products  and  services to business  owners and their  employees.  Products  and
services  include payroll  processing,  human resource  services,  and access to
workers' compensation and employee benefit insurance. The primary sales force is
comprised of independent insurance agencies that are also contracted with the CI
branches. Payroll processing and human resource services can also be provided on
an unbundled basis.

At December 31, 1998,  CNA  UniSource was licensed in 35 states and the District
of  Columbia.  It expects to be licensed in ten  additional  states by mid-1999.
Currently   325   clients,   representing   over   13,000   employees,   receive
employer-related  services from CNA  UniSource's 25 service  offices.  Continued
growth of enrolled employees is anticipated over the next several years.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       19

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - --------------------------------------------------------------------------
                        Agency Market Operations (cont.)
OPERATING RESULTS
- - ---------------------------------------------------------------------------
Year Ended December 31                         1998      1997       1996
- - ---------------------------------------------------------------------------
(In millions of dollars)

Premiums                                     $5,247    $ 5,092   $ 5,346
Other revenue                                    39         50        13
Restructuring and other related charges         (96)         -        -
Benefits and expenses                        (6,070)    (5,491)   (6,020)
- - ---------------------------------------------------------------------------
   Underwriting loss                           (880)      (349)     (661)
Investment income                               744        787       828
Non-insurance revenues                           68          -         -
Non-insurance expenses                          (91)        (6)        -
- - ---------------------------------------------------------------------------
   Operating (loss) income before income tax   (159)       432       167
Income tax benefit (expense)                    105       (106)      (13)
- - ---------------------------------------------------------------------------
   Net operating (loss) income                  (54)       326       154
Realized investment gains, net of tax           171        187       133
- - ---------------------------------------------------------------------------
   NET INCOME                                $  117    $   513   $   287
===========================================================================

SUMMARY:

Agency  Market   Operations'  1998  results  were   significantly   impacted  by
competitive  pricing in commercial  insurance lines,  catastrophe losses and net
loss reserve strengthening. In addition, 1998 results also reflected significant
restructuring and other related charges.

PREMIUMS:

Premiums for 1998 increased by $155 million,  or  approximately  3%, as compared
with 1997. Premiums for CI increased $94 million and was primarily  attributable
to premiums from involuntary risks.  Excluding involuntary risks, premiums in CI
decreased  by  approximately  $165  million  due to the  continued  soft  market
conditions   throughout  the  commercial   insurance  industry.   Agency  Market
Operations'  participation  in  involuntary  risks is mandatory  and generally a
function  of its  share of the  voluntary  market by line of  insurance  in each
state.  The increase in involuntary  risk premiums in 1998 as compared with 1997
was $259 million and is largely a function of the 1997 involuntary risk premiums
being reduced by a revision of prior years' estimated premiums.  The decrease in
involuntary risk premiums in 1997 stemmed from a greater willingness on the part
of the voluntary  market,  including  Agency Market  Operations,  to write these
types  of  coverages.   This  willingness  was  precipitated  by  improved  loss
experience trends in the involuntary market.

Premiums  for PI grew $61  million in 1998.  Contributing  to the growth was the
strong product  identity of the Personal  Package policy,  a personal  insurance
product providing a wide range of available coverage options and the convenience
of single policy delivery and combined billing.

The  decrease  in premiums  of $254  million in 1997 as  compared  with 1996 was
primarily due to a decrease in premiums of approximately $425 million related to
CI involuntary risks, as previously  discussed,  offset by increases in workers'
compensation premiums.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       20

- - ---------------------------------------------------------------------------
                        Agency Market Operations (cont.)

UNDERWRITING AND NON-INSURANCE RESULTS:

Underwriting  results for 1998  declined by $531 million as compared  with 1997.
Contributing   to  this  decline  were  net  changes  in  reserve   development,
restructuring and other related charges and catastrophe losses.

The increase in underwriting  losses for 1998 is due primarily to an increase in
benefits and expenses of $579 million in 1998 as compared  with 1997, as well as
restructuring and other related charges of $96 million  (discussed on page 15),
partially  offset by the  aforementioned  increase  in  premiums in 1998 of $155
million.  Benefits  and  expenses  increased  due  to  reserve  development  and
increased  catastrophe losses in 1998. Net reserve  development in 1998 was $168
million as compared with favorable reserve  development of $276 million in 1997.
Management  strengthened reserves in 1998 primarily in response to deteriorating
claim experience for asbestos and other mass tort exposures.  Reserves were also
increased  for  construction   defect  claims  and  for  workers'   compensation
reinsurance  bureaus.  In 1997,  actions were taken to mitigate further exposure
from  construction  defect  liabilities  that arose  almost  exclusively  out of
exposures  underwritten  in California.  In 1998,  catastrophe  losses were $131
million higher than the 1997 losses of $68 million.

Underwriting  results for 1997 improved by $312 million compared with 1996. This
improvement  was  primarily  due  to a net  favorable  change  in  loss  reserve
development  of $258  million,  lower  catastrophe  losses of $158  million when
compared to the prior year, and improved  benefits and expenses of approximately
$113  million  associated  with the $254  million  decrease in premiums for 1997
discussed  above.  The  favorable  change in loss  reserve  development  was due
principally to favorable loss development in 1997 of $276 million,  comprised of
$492 million in favorable  development in involuntary risks,  primarily workers'
compensation,  and $80 million of favorable loss  development in PI lines offset
in part by unfavorable development in CI lines of $296 million.

The favorable loss development in involuntary  risks in 1997 was attributable to
better than  expected  results in workers'  compensation  and private  passenger
automobile lines stemming from improved frequency and severity in these lines.

Non-insurance   results  are   attributable  to  CNA  UniSource.   Non-insurance
operations  experienced  a loss of $23  million  for 1998,  an  increase  of $17
million when compared with 1997.  This increase is due to the start-up nature of
CNA UniSource as it develops the volume necessary for generating profits.

A discussion of consolidated investment results can be found on page 40.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       21

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - -----------------------------------------------------------------------------
                              Specialty Operations

BUSINESS OVERVIEW

Specialty  Operations  provides a broad  array of  professional,  financial  and
specialty  property/casualty products and services through a network of brokers,
managing  general  agencies  and  independent  agencies.   Specialty  Operations
provides  creative  solutions  for managing the risks of its clients,  including
architects,    engineers,    lawyers,   healthcare   professionals,    financial
intermediaries and corporate directors and officers.

Specialty Operations is composed of three principal groups.

CNA PRO

CNA Pro is the largest  provider of  professional  liability  insurance and risk
management services for non-medical  professionals and service firms in the U.S.
CNA Pro's customers include four targeted  professions:  architects & engineers,
lawyers, accountants and real estate agents and brokers. In addition, CNA Pro is
focusing  on a  diversified  group of  growing  professions  including  staffing
services and  consultants.  Product  distribution  is primarily  through program
administrators,  although large law firms and the  diversified  professions  are
served through independent insurance brokers.

HEALTHPRO

HealthPro  offers a  comprehensive  set of  specialized  insurance  products and
clinical  risk  management  consulting  services  designed to assist health care
providers in managing the quality-of-care  risks associated with the delivery of
health care. Key customer segments include individual and small group purchasers
of malpractice  insurance,  as well as large  corporate  buyers of  malpractice,
directors & officers,  and errors & omissions coverages related to managed care.
Caronia  Corporation,  acquired  during 1997, also provides  third-party  claims
administration for medical professional liability insureds.

FINANCIAL INSURANCE

Financial  Insurance offers a comprehensive  selection of governance  liability,
fidelity,  credit,  residual value and other financial peril insurance products.
These  products  provide  coverage  for large and small  corporate  clients  and
not-for-profit  organizations.   Governance  liability  (including  directors  &
officers,  errors & omissions,  and employment practices liability) and fidelity
products  are  distributed  on a  national  basis  through  approximately  3,000
independent brokers and agents. Credit, residual value and other financial peril
products  are  distributed  on a national  basis  through a variety of  channels
including brokers, agents and direct sales.

OTHER OPERATIONS

A start-up  venture,  Hedge Financial  Products,  was formed in 1997 to focus on
securitization  of insurance  risk and the  embedding  of financial  protections
within traditional insurance programs.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       22


- - ----------------------------------------------------------------------------
                          Specialty Operations (cont.)


OPERATING RESULTS
- - -----------------------------------------------------------------------
Year Ended December 31                     1998       1997      1996
- - -----------------------------------------------------------------------
(In millions of dollars)

Premiums                                 $ 1,092   $ 1,251   $ 1,217
Other revenue                                 17        11         -
Retructuring and other related charges        (5)        -         -
Benefits and expenses                     (1,277)   (1,398)   (1,403)
- - -----------------------------------------------------------------------
   Underwriting loss                        (173)     (136)     (186)
Investment income                            245       268       273
Non-insurance revenues                        10         3         -
Non-insurance expenses                       (18)       (9)        - 
- - -----------------------------------------------------------------------
   Operating income before income tax         64       126        87
Income tax expense                            (6)      (31)      (15)
- - -----------------------------------------------------------------------
   Net operating income                        58       95        72
Realized investment gains, net of tax          57       63        44
- - -----------------------------------------------------------------------
   NET INCOME                            $    115  $   158   $   116
========================================================================

SUMMARY:

In 1998,  Specialty Operations  (Specialty)  continued to produce strong overall
operating  results.  However,  results  trended  downward  as  rate  competition
stiffened and loss reserves for medical malpractice were strengthened.

Intense  competition in Specialty's markets has resulted in lower premium rates,
despite expanded forms of coverage and higher coverage limits. Specialty remains
committed to conservative  underwriting practices in this difficult environment.
This has  resulted in little  premium  growth in the  segment's  core  financial
insurance,   medical  malpractice  and  professional  liability  businesses.  In
addition,  Specialty  has  decided to exit the  agricultural  and  entertainment
insurance  businesses  after  determining  that  these  markets  did  not  offer
acceptable long-term profitability.

PREMIUMS:

Premiums in 1998 decreased by $159 million,  or approximately 13%, compared with
1997.  The  decrease was largely  attributable  to an  approximate  $100 million
reduction in premiums caused by management's  decision to exit the  agricultural
insurance market. The remaining decline in premiums in 1998 was due to increased
price  competition and management's  resolve not to accept  inadequately  priced
business.

Premiums  in 1997 were 2.8% higher than 1996,  reflecting  modest  growth in the
period.

Specialty's  commitment  to prudent  underwriting  and  responsible  pricing are
expected  to continue to limit  premium  growth  until  general  market  pricing
improves.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       23

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ------------------------------------------------------------------------------
                         Speciality Operations (cont.)

UNDERWRITING AND NON-INSURANCE RESULTS:

Results for 1998 reflect an underwriting  loss of $173 million  compared with an
underwriting  loss of $136 million in 1997. The increase in underwriting  losses
in 1998 of $37 million was primarily attributable to the aforementioned decrease
in  premiums  of $159  million,  offset in part by a decrease  in  benefits  and
expenses of $121 million in 1998 as compared with 1997. The decrease in benefits
and  expenses  was  comprised  of  reduced  losses  and  operating  expenses  of
approximately $222 million relating primarily to the aforementioned  exit of the
agricultural  insurance  lines of business,  as well as  decisions  not to write
inadequately  priced  business.  These decreases were partially  offset by a net
unfavorable  change in reserve  development  of $112  million.  The  increase in
unfavorable  loss reserve  development  in 1998 was due  principally  to adverse
claim experience in the medical malpractice insurance line of business.

The improvement in underwriting  results in 1997 of $50 million as compared with
1996 was  primarily  attributable  to the increase in premiums of $34 million as
well as net favorable  change in reserve  development of $76 million,  offset by
increases in losses and operating expenses related to premium growth.

The non-insurance operations incurred pre-tax operating losses of $8 million and
$6  million  in  1998  and  1997,  respectively.  These  losses  were  primarily
attributable to the start-up activities of Hedge Financial Products.

A discussion of consolidated investment results can be found on page 40.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       24

- - -----------------------------------------------------------------------------
                                     CNA Re

BUSINESS OVERVIEW

CNA Re operates  globally as a reinsurer  in the broker  market,  offering  both
treaty and facultative products through major offices in London and Chicago. CNA
Re's operations include the business of CNA Reinsurance Company, Limited (CNA Re
U.K.), a U.K. company, and U.S. operations based in Chicago.  Major products are
traditional  treaty  reinsurance,  with developing  positions in facultative and
financial  reinsurance.  CNA Re also participates in Lloyd's of London through a
corporate  syndicate,  Syndicate 1229, as well as investments in several similar
syndicates.

Headquartered in London with offices in Amsterdam,  Milan, Singapore and Zurich,
CNA Re U.K. writes both London market and other European business. As one of the
largest  reinsurers  in this market,  CNA Re maintains an A+ (Good)  rating from
Standard and Poor's and an A (Excellent)  rating from A.M.  Best.  CNA Re writes
U.S. and international  treaty and professional  liability  business,  including
medical malpractice, errors & omissions and directors & officers coverages.

Based in Chicago,  the U.S.  operations of CNA Re provide  products to the North
and South American  markets.  Treaty  products  include  working layer property,
working layer casualty,  property catastrophe,  workers' compensation,  products
liability, general liability,  professional liability,  specialty and excess and
surplus lines. In addition,  financial  reinsurance products are offered as well
as property and casualty facultative reinsurance.

OPERATING RESULTS
- - ------------------------------------------------------------------------
Year Ended December 31                   1998          1997        1996
- - ------------------------------------------------------------------------
(In millions of dollars)

Premiums                                 $   944    $   898     $   944
Other revenue                                  3          -           -
Restructuring and other related charges       (1)         -           -
Benefits and expenses                     (1,012)      (993)       (983)
- - -------------------------------------------------------------------------
   Underwriting loss                         (66)       (95)        (39)
Investment income                            163        153         161
Non-insurance revenues                         2          7           7
Non-insurance expenses                        (4)        (3)         (2)
- - -------------------------------------------------------------------------
   Operating income before income tax         95         62         127
Income tax expense                           (27)       (11)        (38)
- - -------------------------------------------------------------------------
   Net operating income                       68         51          89
Realized investment gains, net of tax         27         34          21
- - -------------------------------------------------------------------------
   NET INCOME                            $    95    $    85     $   110
=========================================================================

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       25

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ------------------------------------------------------------------------------
                                 CNA Re (cont.)

SUMMARY:

CNA Re experienced an increase in  profitability  in 1998 due principally to net
favorable  reserve  development  partially  offset by an increase in catastrophe
losses.

PREMIUMS:

Premiums in 1998 increased by $46 million,  or  approximately  5%, compared with
1997. The increase in 1998 premiums over 1997 is primarily a function of adverse
premium development of prior year estimates recorded in 1997.

Premiums  decreased $46 million,  or approximately  5%, in 1997 as compared with
1996.  The  decrease  in  premiums in 1997  included  an  unfavorable  change in
estimates  of prior year  premiums of $88  million,  offset in part by growth in
treaty reinsurance  business.  The prior year movement can be largely attributed
to the competitive insurance marketplace and its effect on CNA Re's clients, who
have not met their own estimated  premium targets.  These shortfalls have had an
effect upon CNA Re's proportional reinsurance book.

UNDERWRITING RESULTS:

The improvement in underwriting results of $29 million in 1998, as compared with
1997, is comprised of an $80 million net favorable  change in estimates of prior
year premiums and related commissions, as well as an improvement in underwriting
expense of $10  million.  These  increases  were  partially  offset by increased
catastrophe losses of $37 million due principally to hurricane activity in 1998,
and a $21  million  net  unfavorable  change in loss  reserve  development.  The
decrease in  underwriting  expenses in 1998 as compared with 1997 is principally
due to the start-up costs associated with expansion into facultative reinsurance
and the establishment of branch offices abroad during 1997.

Underwriting  losses  increased $56 million in 1997 as compared with 1996.  This
increase  is  primarily  due to the $46 million  decrease in premiums  discussed
above, an increase in current year loss experience,  an increase in underwriting
expenses of $33 million and a decrease in catastrophe losses of $20 million. The
increase in  underwriting  expenses  was  primarily  due to the  start-up  costs
discussed above.

A discussion of consolidated investment results can be found on page 40.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       26

- - ---------------------------------------------------------------------------
                             Global Operations

BUSINESS OVERVIEW

Global  Operations  provides  products  and  services to  U.S.-based  customers,
customers  expanding  overseas and foreign  customers.  Product  distribution is
primarily  through  brokers and  independent  agents.  The major  product  lines
include marine, commercial and contract surety, warranty and specialty products,
as well as commercial property and casualty.

Global Operations is composed of five principal groups.

MARINE

Marine  Office of America  Corp.  (MOAC),  a leading  provider  of ocean  marine
insurance in the U.S., offers hull, cargo,  primary and excess marine liability,
offshore energy,  marine claims and recovery products and services.  Business is
sold through national brokers, regional marine specialty brokers and independent
agencies.  These distributors work closely with MOAC's 10 branch offices located
throughout the U.S.

On June 30, 1998, CNA completed the acquisition of Maritime  Insurance Co., Ltd.
in the U.K. and its Canadian  subsidiary,  Eastern  Marine  Underwriters  (EMU),
strengthening  CNA's  position as a global marine  insurer.  Management  expects
growth to come from leveraging the relationships  with CNA's domestic  producers
and providing customers with services and products throughout the world.

SURETY

On October 1,  1997,  Global  Operations  completed  the merger of CNA's  surety
operations with Capsure  Holdings Corp.'s  subsidiaries,  Western Surety Company
and Universal Surety of America to form CNA Surety Corporation (CNA Surety). CNA
owns approximately 61% of CNA Surety.

CNA Surety, traded on the New York Stock Exchange (SUR), is the largest publicly
traded provider of surety bonds, with approximately 9% of that market. Among its
U.S. competitors,  CNA Surety has the most extensive distribution system and one
of the most diverse  surety  product  lines,  offering  small,  medium and large
contract and commercial  surety bonds.  CNA Surety  provides surety and fidelity
bonds in all 50 states  through  a  combined  network  of  approximately  37,000
independent agencies.  Management expects growth to come from CNA Surety's broad
product line and distribution network and cross-selling opportunities.

WARRANTY

CNA Warranty, Inc. (Warranty), is the fourth largest warranty underwriter in the
U.S.,  providing  extended service  contracts,  warranties and related insurance
products  that  protect  the  consumer  or business  from the  financial  burden
associated  with the breakdown,  under-performance  or maintenance of a product.
Warranty's key market segments consist of vehicle,  retail, home, commercial and
original equipment manufacturer. Each market segment distributes its product via
a sales force employed or contracted through a program administrator.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       27

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - -----------------------------------------------------------------------------
                           Global Operations (cont.)

In 1998,  Warranty  expanded into the home warranty segment with the acquisition
of a 90%  interest in Home  Security of America,  Inc.,  one of the largest home
warranty administrators in the U.S.

Warranty expects growth from cross marketing  efforts with other CNA businesses,
increasing product distribution via the CNA agency force and introducing several
warranty products in the international marketplace.

INTERNATIONAL

International  is responsible for  coordinating and managing the direct business
of the foreign  operations of CNA. The business  identifies  and  capitalizes on
strategic indigenous  opportunities  outside the U.S. by continuing to build its
own  capabilities  and  by  initiating  acquisitions,  strategic  alliances  and
start-up operations that allow for expansion into targeted markets. In addition,
International  provides U.S.-based customers that are expanding their operations
overseas with a single source for their commercial insurance needs. To this end,
International has placed underwriters within Commercial Insurance branches.

International  currently oversees foreign  operations in Europe,  Latin America,
Canada and Asia. In Europe,  CNA formed CNA Insurance  Company  (Europe) Limited
(CIE) in 1996, which is based in London. CIE has since opened offices in France,
Germany,   the  Netherlands  and  Denmark.   Through  its  network  of  offices,
International  intends  to build  on the  successes  of  several  CNA  specialty
products (including  warranty,  personal accident and financial lines insurance)
and introduce those products across Europe.

In Latin America, International acquired a 70% interest in Omega A.R.T. in 1997,
the third largest  workers'  compensation  company in  Argentina.  International
plans to expand  its  presence  within  the  region  with  additional  insurance
products.

In Canada, CNA Canada,  formed in 1998, sells a broad array of property/casualty
and specialty insurance products through brokers and managing general agents.

The short to mid-term growth  opportunities  for  International  are in the more
mature  foreign  insurance  markets,  such  as  Europe  and  Canada,  and in the
marketing of specialty insurance products.  In the longer term, emphasis will be
on the emerging insurance markets in Latin America and Asia.

FIRST INSURANCE COMPANY OF HAWAII

First Insurance  Company of Hawaii,  Ltd. (FICOH) is the oldest domestic insurer
in the  state  of  Hawaii,  dating  back to  1911.  FICOH  is also  the  largest
commercial insurance company and the third largest  property/casualty  insurance
company in the state.  FICOH offers  commercial and personal lines solely in the
state of Hawaii.  Distributed through independent agencies,  the business mix is
approximately  65%  commercial  and 35%  personal.  CNA owns  60% of  FICOH  and
foresees growth opportunities through collaborative  partnerships with other CNA
businesses.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       28

- - ------------------------------------------------------------------------------
                           Global Operations (cont.)

OPERATING RESULTS
- - --------------------------------------------------------------------------
Year Ended December 31                      1998         1997       1996
- - -------------------------------------------------------------------------- 
(In millions of dollars)

Premiums                                $    941    $     854   $    945
Other revenue                                  5            1          -
Restructuring and other related charges       (1)           -          -
Benefits and expenses                     (1,007)        (857)      (929)
- - --------------------------------------------------------------------------
   Underwriting (loss) income                (62)          (2)        16
Investment income                            110          117        134
Non-insurance revenues                        77           28         34
Non-insurance expenses                       (64)         (27)       (31)
- - --------------------------------------------------------------------------
   Operating income before income tax         61          116        153
Income tax expense                           (18)         (35)       (44)
- - --------------------------------------------------------------------------
   Net operating income                       43           81        109
Realized investment gains, net of tax         17           20         21
Minority interest                            (25)         (29)        (9)
- - --------------------------------------------------------------------------
   NET INCOME                           $     35    $      72   $    121
==========================================================================

SUMMARY:

Global  Operations' 1998 underwriting  results were adversely impacted primarily
by unfavorable  development in discontinued  pools and  associations  and marine
asbestos reserves.  Recent decisions made are intended to achieve,  sustain, and
augment the established standard of underwriting profitability. Actions included
placing International underwriters in selected Commercial Insurance branches and
establishing   indigenous   overseas   organizations.   Establishment  of  these
organizations  was  accelerated as a result of the  acquisitions of Maritime and
Omega A.R.T.  Actions also  included the strategic  expansion of the  successful
Surety and  Warranty  businesses  and a decision to allow FICOH to reinvest  its
earnings enabling it to grow over 70% since 1996.  Lastly,  MOAC exited non-core
lines and  unprofitable  domestic pools,  and is now focused  exclusively on the
ocean marine market.

PREMIUMS:

Premiums in 1998 increased by $87 million,  or approximately  10%, compared with
1997.  This  increase was  primarily  attributable  to the effects of the recent
acquisitions and mergers.  Omega contributed $48 million,  Maritime  contributed
$37 million and Surety's  business  increased $80 million in 1998 reflecting the
first full year of Capsure  premiums as well as leveraging the expanded  product
line and distribution channels.  Warranty had an increase in premiums in 1998 of
$27 million as compared with 1997.  This increase was primarily due to growth in
Western National,  an automobile warranty business,  which has seen broad market
acceptance of its products and services.  Additionally,  International  premiums
increased  by  $25  million   primarily   attributable  to  growth  in  Canadian
operations.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       29

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ------------------------------------------------------------------------------
                           Global Operations (cont.)

Partially  offsetting  the  growth  through  acquisitions  was the sale of a $47
million book of business.  In addition,  premiums  decreased $84 million in 1998
due to MOAC's strategic decision in 1997 to exit unprofitable  non-core lines by
inland marine,  commercial  property,  boiler and machinery and commercial  auto
physical damage.  Consequently,  MOAC is now focused exclusively on its historic
core  competencies  of ocean  marine  business,  upon  which the  franchise  was
originally built.

Premiums  decreased $91 million in 1997 when compared with 1996. The decision to
exit unprofitable  pools and associations  decreased  voluntary pool premiums by
$180 million in 1997. In addition, an unwillingness to accept inadequate pricing
reduced  MOAC's  premiums by $62 million in 1997.  Decisions to expand  Global's
International  franchise and growth in Surety,  Warranty and FICOH helped offset
these declines by collectively generating growth of $151 million.

UNDERWRITING AND NON-INSURANCE RESULTS:

Global  Operations'  underwriting  results  declined  in 1998 by $60  million as
compared with 1997. The decrease is attributable to the aforementioned growth in
premiums  which was more than offset by increased  benefits and expenses of $150
million.  The  increase in  benefits  and  expenses is due to a net  unfavorable
change in loss development of $64 million, increased expenses of $65 million and
higher catastrophe losses of $21 million.

The  change in net  unfavorable  development  of $64  million  is  comprised  of
approximately  $111  million of  unfavorable  year-over-year  change  related to
Surety, MOAC and discontinued pools, offset in part by favorable  year-over-year
change of approximately $47 million related principally to the CNA International
and Warranty  business.  The increase in expenses is  principally  due to higher
costs associated with the growth in premiums.

The decline in underwriting  income of $18 million in 1997 as compared with 1996
was  attributable  to the  aforementioned  decrease in premiums of $91  million,
offset in part in a decrease  in benefits  and  expenses  of  approximately  $72
million.  The decrease in benefits and expenses in 1997 when  compared with 1996
was principally the result of a net favorable change in loss reserve development
of  approximately   $55  million,   of  which   approximately  $43  million  was
attributable to voluntary pools.

Included in the underwriting  results above were net underwriting  losses of $12
million  related  to the  book of  business  which  was sold by  year-end  1997.
Additionally,  MOAC's  underwriting  losses increased by $17 million in 1997 and
are reflected in the decrease noted above. This increase in underwriting  losses
was a result of large  losses in  MOAC's  property  and  inland  marine  book of
business.  These underwriting losses precipitated  management's decision to exit
these non-core lines of business.

Non-insurance   income  is  primarily   attributable  to  the  Western  National
automobile  warranty business as well as results for Home Security of America, a
90% owned subsidiary  purchased in 1998.  Profit margins in these businesses are
improving as the current  infrastructure  is positioned to handle larger volumes
of business.

A discussion of consolidated investment results can be found on page 40.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       30

- - ----------------------------------------------------------------------------
                                 Risk Management


BUSINESS OVERVIEW

Risk Management (RM) markets and sells insurance  products and services to large
U.S.-based  companies.  These  customers have a minimum of $1 million or more in
casualty  claims each year. It is estimated that there are  approximately  8,500
targeted  companies  within this  market  segment.  RM is one of 11  significant
competitors  and has a very strong  reputation and presence,  particularly  as a
writer of casualty insurance lines.

RM includes two groups.

RISK TRANSFER

Risk Transfer writes casualty and property lines of insurance.

The casualty  insurance  business focuses on workers'  compensation,  commercial
auto liability,  general liability through traditional and innovative  financial
risk products,  and excess coverage needs. The excess products provide umbrella,
excess  workers'  compensation  and high  excess  coverages.  Capacity  has been
increased  for the excess  products to address the casualty  needs of the global
customer.

Over the last two years,  domestic and global  property  capabilities  have been
increased,  providing  primary,  inland marine and excess  property  facilities.
Global property includes a strategic  alliance with Protection Mutual to address
the needs of the highly  protected risk customer.  Global property also includes
Northrock,  a wholly owned subsidiary of CNA,  offering  property excess of loss
insurance coverages.

RSKCo SM

Formed in 1998, RSKCo SM provides total risk management services (integrated and
single  component)  related  to  claims,  loss  control,   cost  management  and
information services to the commercial insurance marketplace.

The broad range of RSKCo's SM capabilities includes:

CLAIM SERVICES: Services that allow customers to select from a single source the
desired  level of  service-from  an integrated  claims  package to any component
service.

LOSS  CONTROL:   Pre-loss   prevention   services  include  industrial  hygiene,
laboratory,  ergonomics, field consulting and training, property,  environmental
and  transportation  loss  control.  Driver  training is provided  through Smith
System Driver Improvement Institute, Inc., a wholly owned subsidiary of CNA.

COST  MANAGEMENT:  Post-loss  cost control  services  through  case  management,
medical  bill  review,   preferred  provider   organizations  and  other  unique
partnerships to reduce lost work days through rapid  response,  quality care and
effective coordination.

INFORMATION SERVICES: Data access, reporting tools, information and benchmarking
analysis, consulting and custom reporting services.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       31

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ---------------------------------------------------------------------------
                             Risk Management (cont.)

OPERATING RESULTS
- - -------------------------------------------------------------------------------
Year Ended December 31                                    1998   1997    1996
- - -------------------------------------------------------------------------------
(In millions of dollars)

Premiums                                              $    823   $ 776  $ 572
Benefits and expenses                                   (1,021)   (976)  (649)
- - -------------------------------------------------------------------------------
   Underwriting loss                                      (198)   (200)   (77)
Investment income                                          144     158    179
Non-insurance revenues                                     230     194    222
Non-insurance restructuring and other related charges      (88)      -      -
Non-insurance other expenses                              (224)   (214)  (226)
- - -------------------------------------------------------------------------------
   Operating (loss) income before income tax              (136)    (62)    98
Income tax benefit (expense)                                48      25    (24)
- - -------------------------------------------------------------------------------
   Net operating (loss) income                             (88)    (37)    74
Realized investment gains, net of tax                       31      37     29
- - -------------------------------------------------------------------------------
   NET (LOSS) INCOME                                  $    (57)  $   -  $ 103
===============================================================================

SUMMARY:

RM's 1998 net loss was $57 million,  down from  breakeven  in 1997.  The primary
reason for the  decrease  was an $88  million  restructuring  and other  related
charges.

In 1998, RSKCo SM, a new total risk management  services  company,  was created.
The new service  organization will realize  significant  operating  efficiencies
necessary  to  compete  in a market  place  demanding  comprehensive,  efficient
service delivery.

PREMIUMS:

Premiums in 1998 increased by $47 million, or approximately 6%, as compared with
1997.  The  increase  is due to growth of $30 million in the  property  facility
business, that was introduced in the latter part of 1997, underlying momentum in
Risk Management's core primary casualty business, and new business growth.

Premiums in 1997 increased $204 million as compared with 1996. This increase was
primarily  due to RM's  significant  increase in market  share among the Fortune
500-size  companies,  particularly  in the casualty  business that increased $85
million, growth of $20 million in the property facility business, $60 million of
incremental  premium  1997  renewal  accounts  that moved from large  deductible
insurance  programs to  guaranteed  cost  programs  and $54 million of favorable
premium development.

UNDERWRITING RESULTS:

Underwriting losses remained consistent in 1998 with the aforementioned increase
in premiums  of $47  million  being  offset by a like  increase in benefits  and
expenses as customers moved to guaranteed cost business.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       32

- - ----------------------------------------------------------------------------
                            Risk Management (cont.)

Restructuring  and other  related  charges  in 1998,  as  discussed  on page 15,
totaled $88 million.

The 1997  underwriting  loss  deterioration  of $123 million was  primarily  the
result of the  aforementioned  increase  in premium of $204  million,  offset by
increased  benefits and expenses of $327  million.  The increase in benefits and
expenses in 1997 when  compared  with 1996 was  principally  the result of a net
unfavorable change in reserve  development of $253 million,  increased losses on
premium growth of  approximately  $124 million,  offset by favorable  changes in
policyholders dividends of approximately $50 million.

Total  expenses,  excluding loss and loss adjustment  expense,  decreased by $10
million during the 3 year period ended December 31, 1998, while premiums grew by
44% for the same period.

A discussion of consolidated investment results can be found on page 40.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       33

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ----------------------------------------------------------------------------
                                Group Operations


BUSINESS OVERVIEW

Group  Operations  provides a broad  array of group  life and  health  insurance
products and services to  employers,  affinity  groups and other  entities  that
purchase  insurance  as  a  group.  Its  products  and  services  are  primarily
distributed  through  brokers.  In addition,  Group  Operations  provides health
insurance to postal and other federal  employees,  retirees and their  families;
managed care and self-funded medical excess insurance;  medical provider network
management and  administration  services;  and  reinsurance  for life and health
insurers.

Group Operations includes five principal groups.

SPECIAL BENEFITS

Special  Benefits  provides  group  term  life  insurance,  short  and long term
disability, statutory disability, long term care and accident products. Products
are marketed  through a nationwide  operation of 31 sales  offices,  third party
administrators, managing general agents and insurance consultants.

PROVIDER MARKETS

Provider  Markets is  comprised  of two major  businesses  and a third now under
development. CNA Health Partners provides comprehensive managed care services to
employers and healthcare  provider networks  including  network  development and
management,  medical management, claims administration,  consulting services and
management  services.  Currently  under  development  is a  Management  Services
Organization that will provide a complete set of managed care services to health
care provider  organizations  that are managing  capitated risks.  Services will
include  medical  management,  claims  administration,  consulting  services and
management  services.  Group Reinsurance  writes assumed  reinsurance on health,
life and other related products written on a group basis, as well as excess risk
coverages related to health care.

LIFE REINSURANCE

Life Reinsurance reinsures individual life and health products marketed by other
life insurance companies throughout North America. Sales are through an internal
sales force.

FEDERAL MARKETS

Federal Markets is the second largest provider of health  insurance  benefits to
postal and other federal  employees under the Federal  Employees  Health Benefit
Plan (FEHBP). In addition to insuring over one million members,  Federal Markets
is responsible for all claim management activities under the plan, such as large
case  management,  hospital  and  provider  bill  negotiations,  systems,  fraud
detection activities, vendor contracts and federal government relations.

HEALTH BENEFITS

Health Benefits markets direct mail specialty  products such as accidental death
and dismemberment,  term life and dental insurance to bank customers and federal
employees.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       34

- - ----------------------------------------------------------------------------
                            Group Operations (cont.)

OPERATING RESULTS
- - --------------------------------------------------------------------------
Year Ended December 31                            1998      1997      1996
- - --------------------------------------------------------------------------
(In millions of dollars)

Revenues:
   Premiums                                      $3,712   $ 3,903   $3,816
   Investment income                                133       117      118
   Other                                             24        17        8
- - -------------------------------------------------------------------------- 
   Total operating revenues                       3,869     4,037    3,942
Restructuring and other related charges              39         -        -
Claims and benefits and other operating expenses  3,913     4,055    3,922
- - --------------------------------------------------------------------------
   Operating (loss) income before income tax        (83)      (18)      20
Income tax benefit (expense)                         35        10       (3)
- - ---------------------------------------------------------------------------
   Net operating (loss) income                      (48)       (8)      17
Realized investment gains, net of tax                29        28       21
- - ---------------------------------------------------------------------------
   NET (LOSS) INCOME                             $  (19)  $    20   $   38
===========================================================================

SUMMARY:

In 1998, Group  Operations  experienced a reduction in profitability as a result
of  restructuring  and other related  charges  associated  with exiting  certain
businesses  and the  continued  challenging  market  conditions  in group health
lines.

PREMIUMS:

Premiums decreased by approximately 5% or $191 million, in 1998 as compared with
1997. The decrease was attributable,  in part, to a $166 million decrease in the
medical  lines of coverage in Health  Benefits,  resulting  from the decision to
exit certain  markets.  Additionally,  due to changes in coverage  terms,  FEHBP
premiums  decreased by $90 million.  These  decreases  were offset,  in part, by
premium growth of $65 million across all other lines of business.

During 1997,  premiums grew by $87 million as compared with 1996. Premium growth
was experienced in Special Benefits,  driven by strong sales to employee benefit
plans, and in Health  Benefits,  attributable to sales of credit card accidental
death and dismemberment and other non-medical  insurance products;  other growth
was from sales and  renewal  increases  on  employer  medical  plans.  Partially
offsetting  these  increases were decreases in the Group  Reinsurance  premiums,
resulting from the termination of some small group medical quota share treaties.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       35

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ------------------------------------------------------------------------------
                            Group Operations (cont.)

OPERATING RESULTS:

Pre-tax  operating  income in 1998  deteriorated by $65 million as compared with
1997. The decrease is primarily due to  restructuring  and other related charges
of $39 million  for Group  Operations,  as  discussed  on page 16. In  addition,
increased  losses  of $30  million  on  accident  coverages  contributed  to the
operating   loss.  The  increased   losses  resulted  from  both  adverse  claim
developments  and  unusually  high claim  activity in the  traditional  accident
insurance  line.  During  1998,  CNA decided to exit the  insured  comprehensive
medical  portion of the  employer  and  affinity  markets and a majority of this
inforce business was sold effective January 1, 1999.
Earned premiums for these lines of business approximated $400 million in 1998.

The $38  million  decline in  pre-tax  operating  results  from 1996 to 1997 was
driven  primarily by  deteriorating  group medical claim  experience,  including
increased losses of about $40 million in Health Benefits  (employer and affinity
health),  and $10 million of increased losses on medical stop loss and reinsured
group medical in Provider Markets.  Offsetting these declines, Special Benefits'
results  improved by about $20 million  due to  improved  experience  under both
long-term care and life coverages.

A discussion of consolidated investment results can be found on page 40.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       36

- - ----------------------------------------------------------------------------
                                 Life Operations


BUSINESS OVERVIEW

Life  Operations  provides  financial  protection to individuals  through a full
product line of term life insurance,  universal life  insurance,  long term care
insurance,   annuities  and  other  products.   Life  Operations  also  provides
retirement  services to institutions in the form of various investment  products
and   administration   services.   Life  Operations  has  several   distribution
relationships  and  partnerships  including  managing  general  agencies,  other
independent  agencies working with CNA life sales offices,  a network of brokers
and dealers and various other independent insurance consultants.

Life Operations has three principal groups.

INDIVIDUAL LIFE

Individual Life offers  primarily  level premium term life insurance,  universal
life insurance and related  products.  New sales of term life have placed CNA as
either first or second in the market in each of the last three years.

RETIREMENT SERVICES

Retirement  Services markets  investment and annuity products to both the retail
and institutional markets.

LONG TERM CARE

Long Term Care products provide  reimbursement for covered nursing home and home
health care expenses incurred due to physical or mental disability.

OTHER OPERATIONS

Other  Life  Operations   businesses   include  pre-need   insurance,   viatical
settlements and a developing business in the international arena.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       37

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - --------------------------------------------------------------------------
                             Life Operations (cont.)

OPERATING RESULTS
- - ---------------------------------------------------------------------------
Year Ended December 31                             1998     1997      1996
- - ---------------------------------------------------------------------------
(In millions of dollars)

Revenues:
   Premiums                                      $  684    $  688   $ 654
   Investment income                                525       501     485
   Other                                            115       105     106
- - ---------------------------------------------------------------------------
   Total operating revenues                       1,324     1,294   1,245
Restructuring and other related charges               7         -       -
Claims and benefits and other operating expenses  1,153     1,107   1,028
- - ---------------------------------------------------------------------------
   Operating income before income tax               164       187     217
Income tax expense                                  (58)      (66)    (74)
- - ---------------------------------------------------------------------------
   Net operating income                             106       121     143
Realized investment gains, net of tax                82       124     102
- - ---------------------------------------------------------------------------
   NET INCOME                                    $  188    $  245   $ 245
===========================================================================

SUMMARY:

Life Operations  continued to experience good  profitability  in 1998,  although
results  were lower than 1997 and 1996.  The primary  reasons for the  reduction
were lower realized gains, less favorable mortality  experience in 1998, reduced
income from  decreased  pension  deposits and lower  available  margins on those
sales.

PREMIUMS:

Direct  premiums have continued to show strong growth over the last three years.
Premium revenues,  however, decreased slightly in 1998 to $684 million from $688
million  in  1997,  principally  due to the  increased  use of  reinsurance  for
individual term life insurance products.  Premium revenues increased $34 million
in 1997 as compared with 1996 premium revenues of $654 million, primarily due to
an increase in individual term life premiums.

Individual  Life premium  revenues  were $321 million in 1998,  as compared with
$373 million in 1997. The reason for this decrease in premiums was the increased
use of  reinsurance.  The  current  program  includes a 90%  coinsurance  treaty
covering  policies  issued  from  mid-1994 to mid-1996  and 75%  coinsurance  on
policies  issued  after  September,   1997.  Individual  Life  premium  revenues
increased  from $313  million in 1996 to $373  million in 1997,  primarily  as a
result of growth in individual term life premiums.

Individual  Life  insurance  premiums,  on a direct basis,  were $754 million in
1998, an increase of $111 million from 1997  premiums of $643 million.  Premiums
increased  $148 million in 1997 from 1996 premiums of $495  million.  This trend
reflects CNA's strong market presence in term insurance.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       38

- - ------------------------------------------------------------------------------
                            Life Operations (cont.)

Retirement  Services premium revenues increased slightly in 1998 to $177 million
as compared with $174 million in 1997. Premium revenues increased $24 million in
1997 from $150  million in 1996.  Total sales  volume for  Retirement  Services,
which reflects  deposits and other income which are not included in the premiums
above,  declined from $1,410  million in 1996 to $1,042  million in 1997 to $998
million  in  1998.   The  decreased   sales  volume  is  primarily  due  to  the
discontinuation of fixed individual annuities and the lower volume of guaranteed
investment contracts sold in institutional markets.

Long Term Care premium  revenues  increased $27 million to $137 million over the
two year period ended December 31, 1998.  Long Term Care sales volume  increased
$102 million to $299 million over the two year period ended December 31, 1998.

A discussion of consolidated investment results can be found on page 40.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       39

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - -----------------------------------------------------------------------------
                                   Investments

Investments:
- - ------------

Net investment income, in the table below, was approximately $2.1 billion,  $2.2
billion and $2.3 billion for the years ended  December  31, 1998,  1997 and 1996
respectively.  Lower net investment  income can be attributed to a lower average
level of assets invested in interest-bearing securities in 1998 as compared with
1997.  The decrease in 1997 as compared  with 1996 is primarily due to a decline
in  investment  yields in the bond market.  The bond  segment of the  investment
portfolio  yielded  6.4% in 1998  compared  with 6.4% and 6.6% in 1997 and 1996,
respectively.

Net realized  investment  gains,  in the table below,  were $434  million,  $478
million and $387 million for the years ended  December 31, 1998,  1997 and 1996,
respectively.

NET INVESTMENT INCOME
- - ------------------------------------------------------------------------------
Year Ended December 31                                     1998  1997    1996
- - ------------------------------------------------------------------------------
(In millions of dollars)

Fixed maturities:
   Bonds:
     Taxable                                             $1,490 $1,522  $1,716
     Tax-exempt                                             340    288     273
   Redeemable preferred stocks                                2      7       2
Equity securities                                            33     37      25
Mortgage loans and real estate                                5     10      11
Policy loans                                                 11      6      12
Short-term investments                                      241    321     231
Security repurchase transactions-net                         10      9       4
Other                                                        67     56      45
- - -------------------------------------------------------------------------------
                                                          2,199  2,256   2,319
Investment expense                                          (53)   (47)    (43)
- - -------------------------------------------------------------------------------
  NET INVESTMENT INCOME                                  $2,146 $2,209  $2,276
===============================================================================

ANALYSIS OF INVESTMENT GAINS (LOSSES)
- - -------------------------------------------------------------------------------
  Year Ended December 31                                   1998   1997    1996
- - -------------------------------------------------------------------------------
(In millions of dollars) 

Realized investment gains and (losses):
   Fixed maturities                                      $  467 $  452  $  293
   Equity securities                                         38    103     216
   Derivative securities                                     12     (7)     18
   Other, including guaranteed Separate Account business    178    205*     92
- - -------------------------------------------------------------------------------
                                                            695    753     619
Allocated to participating policyholders                    (14)   (15)    (14)
Income tax expense                                         (247)  (260)   (218)
- - -------------------------------------------------------------------------------
     NET REALIZED INVESTMENT GAINS                       $  434 $  478  $  387
===============================================================================
* INCLUDES $95 MILLION RELATED TO CNA SURETY TRANSACTION.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       40

The following  table  summarizes  CNA's general  account  investments at cost or
amortized cost for each of the last five years.


DISTRIBUTION OF INVESTMENTS - GENERAL ACCOUNT
- - -----------------------------------------------------------------------------------------------------
December 31                      1998    %    1997     %    1996     %    1995      %    1994      %
- - -----------------------------------------------------------------------------------------------------
                                                                  
(In millions of dollars)
Fixed maturities:
  Bonds:
    Taxable                   $23,348  66%  $24,419  69%  $22,631  65%   $25,832   75% $17,484   63%
    Tax-exempt                  6,127  17     4,534  13     4,860  14      3,453   10    3,717   13
  Redeemable 
    preferred stocks               36  --        67  --        49   --        100  --      423    2
Equity securities:
  Common stocks                   734   2       567   2       478    1       734    2      729    3
  Non-redeemable                                    
    preferred stocks              321   1       128  --       224    1         3   --        8   --
Mortgage loans and
  real estate                      62   --       85  --       123   --        122  --       47   --
Policy loans                      177   --      177  --       174   --        177   1      176    1
Other invested assets             806    2      544   2       617    2       483    1      103   --
Short-term investments          4,037   12    4,884  14     5,854   17      3,725  11    5,036   18
- - -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS             $35,648  100% $35,405 100%  $35,010  100%   $34,629 100%  $27,723 100%
=====================================================================================================
INVESTMENTS AT
  CARRYING VALUE*             $37,177       $36,203       $35,412         $35,886       $26,943
=====================================================================================================
*AS REPORTED IN THE CONSOLIDATED BALANCE SHEET


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

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

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       41

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - -----------------------------------------------------------------------------
                              Investments (cont.)


The following table  summarizes  CNA's Separate  Account  investments at cost or
amortized cost for each of the last five years.


DISTRIBUTION OF INVESTMENTS - SEPARATE ACCOUNT
- - ---------------------------------------------------------------------------------------------------
December 31               1998     %     1997    %      1996     %       1995      %    1994   %
- - ---------------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                
Fixed maturities:
   Taxable bonds        $4,061   82%   $4,667   84%   $4,590   82%     $5,385    95%   $5,451   88%
   Redeemable 
     preferred stocks       --   --        --   --         4   --          10    --        18   --
Equity securities:
  Common stocks            171    3       115    2       101    2         167     3       117    2
  Non-redeemable 
    preferred stocks        31    1        22    1        10   --          --    --        --   --
Other invested assets      189    4        94    2        --   --          46     1        38    1
Short-term investments     473   10       629   11       916   16          85     1       533    9
- - -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS       $4,925  100%   $5,527  100%    5,621  100%     $5,693   100%   $6,157  100%
=====================================================================================================
INVESTMENTS AT 
   CARRYING VALUE       $5,143         $5,722         $5,698           $5,872          $5,960 
===================================================================================================== 


Total Separate Account investments at fair value amounted to approximately $5.1
billion and $5.7  billion at  December  31,  1998 and 1997,  respectively,  with
taxable  fixed  maturities  representing  approximately  80.8%  and 83.3% of the
total,  at December  31, 1998 and 1997,  respectively.  Approximately  64.3% and
73.8%  of  Separate   Account   investments  at  December  31,  1998  and  1997,
respectively,  are  used to  fund  guaranteed  investment  contracts  for  which
Continental Assurance Company guarantees principal and a specified return to the
contractholders.  The  duration  of fixed  maturity  securities  included in the
guaranteed  investment  contract  portfolio are matched  approximately  with the
corresponding  payout pattern of the  liabilities  of the guaranteed  investment
contracts.

One  Separate   Account  product  is  an  indexed  group  annuity  contract  for
institutional  investors which guarantees the Standard and Poor's (S&P) 500 rate
of return plus 25 basis  points  annually.  Deposits are taken from the customer
for a three  year  period  with no  payout  until  the  end of the  period.  CNA
mitigates the risk  associated  with the contract  liability by a combination of
purchasing S&P 500 futures contracts in a notional amount equal initially to the
original  customer  deposit and investing the remaining  cash  primarily in high
quality  investments.  The number of futures contracts is adjusted  regularly to
approximate the liability to the contractholder.

CNA  believes  it has the  capacity  to hold its  fixed  maturity  portfolio  to
maturity.  However,  fixed  maturity  securities  may be sold  as part of  CNA's
asset/liability  strategies  or to take  advantage of  investment  opportunities
generated by changing  interest rates, tax and credit  considerations,  or other
similar factors.  Accordingly,  the fixed maturity  securities are classified as
available-for-sale.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       42

- - ----------------------------------------------------------------------------
                               Investments (cont.)

The general account portfolio  consists  primarily of high quality (rated BBB or
higher)  marketable  fixed  maturities,  93.3%  and  95.0% of which are rated as
investment grade at December 31, 1998 and 1997, respectively.

The  following  table  summarizes  the ratings of CNA's  general  account  fixed
maturity bond portfolio at carrying value (fair value):


- - ------------------------------------------------------------------------------------------
December 31                                  1998      %     1997      %     1996       %
- - ------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                 
U.S. government and affiliated securities $ 9,443  31.5%  $13,679  46.4%  $11,623   42.0%
Other AAA rated                            11,595  38.7     8,801  29.9     9,277   33.5
AA and A rated                              4,884  16.3     3,796  12.9     3,786   13.7
BBB rated                                   2,061   6.8     1,695   5.8     1,387    5.0
Below investment grade                      1,996   6.7     1,480   5.0     1,582    5.8
- - ------------------------------------------------------------------------------------------
 TOTAL                                    $29,979   100%  $29,451   100%  $27,655    100%            
==========================================================================================



The  following  table  summarizes  the  ratings of CNA's  guaranteed  investment
contract  separate account fixed maturity bond portfolio at carrying value (fair
value):
- - ------------------------------------------------------------------------------------------
December 31                                  1998      %     1997     %      1996       %
- - ------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                 
U.S. government and affiliated securities $   167   5.2%  $   148   3.9%  $   192    5.0%
Other AAA rated                             1,977  61.2     2,401   62.6    2,279   59.0
AA and A rated                                476  14.8       569   14.8      723   18.7
BBB rated                                     339  10.5       406   10.6      345    8.9
Below investment grade                        269   8.3       310    8.1      324    8.4
- - ------------------------------------------------------------------------------------------
 TOTAL                                    $ 3,228   100%  $ 3,834    100% $ 3,863    100%
==========================================================================================

At year end 1998,  1997 and 1996,  respectively,  83.1%,  89.8% and 92.0% of the
general  account  portfolio  and  76.8%,  82.1%  and  85.7%  of  the  guaranteed
investment  contract  portfolio,  in the  tables  above,  were  rated  by  major
independent rating agencies.

High yield  securities are bonds rated as below  investment grade by bond rating
agencies and other unrated  securities which, in the opinion of management,  are
below investment grade (below BBB). High yield  securities  generally  involve a
greater  degree of risk than  investment  grade  securities.  However,  expected
returns should compensate for the added risk. The risk is also considered in the
interest  rate  assumptions  in  the  underlying   insurance   products.   CNA's
concentration  in high yield  bonds  including  Separate  Account  business  was
approximately  4.0% and 3.2% of total  assets as of December  31, 1998 and 1997,
respectively.

Included in CNA's fixed  maturity  securities  at December 31, 1998 (general and
guaranteed  investment  contract  portfolios)  are $10.3 billion of asset-backed
securities,  at fair value, consisting of approximately 15.9% in U.S. government
agency issued pass-through certificates, 51.8% in collater-

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       43

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - -----------------------------------------------------------------------------
                              Investments (cont.)

alized mortgage obligations (CMOs), 15.0% in corporate asset-backed  obligations
and 17.3% in corporate mortgage-backed  pass-through certificates.  The majority
of  CMOs  held  are  actively  traded  in  liquid  markets  and  are  priced  by
broker-dealers.

CMOs are subject to prepayment  risks that tend to vary with changes in interest
rates.  During periods of declining interest rates, CMOs generally prepay faster
as the underlying mortgages are prepaid and refinanced by the borrowers in order
to take  advantage  of the lower  rates.  Conversely,  during  periods of rising
interest  rates,  prepayments  generally  slow which may result in a decrease in
yield or a loss as a result of the  slower  prepayments.  CNA  limits  the risks
associated with interest rate  fluctuations and prepayments by concentrating its
CMO investments in planned  amortization classes with relatively short principal
repayment  windows.  CNA  avoids  investments  in complex  mortgage  derivatives
without  readily  ascertainable  market  prices.  At December 31, 1998, the fair
value  of  asset-backed  securities  was  greater  than  the  amortized  cost by
approximately  $163 million  compared with net unrealized gains of approximately
$114 million at December 31, 1997.

At December 31, 1998 and 1997,  short-term  investments  primarily  consisted of
U.S.  Treasury  bills and  commercial  paper.  The  components of the short-term
investment portfolio were as follows:


SHORT-TERM INVESTMENTS
- - ---------------------------------------------

December 31                   1998      1997
- - ---------------------------------------------
(In millions of dollars)

Commercial paper             $1,398   $1,850
U.S. treasuries in escrow*    1,011    1,065
U.S. treasuries                 506      558
Money markets                   401      624
Security repurchase             
  collateral                    132      154
Other                           589      633
- - ---------------------------------------------
     TOTAL SHORT-TERM
        INVESTMENTS          $4,037   $4,884
=============================================
*SEE NOTE A TO THE CONSOLIDATED FINANCIAL STATEMENTS.

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

CNA considers  its  derivatives  as being held for purposes  other than trading.
Derivative  securities,  except for interest rate swaps  associated with certain
corporate  borrowings,  are recorded at fair value at the reporting  date,  with
changes in market  value  reflected in realized  gains and losses.  The interest
rate swaps on corporate  borrowings  are accounted for using accrual  accounting
with the  related  income or  expense  recorded  as an  adjustment  to  interest
expense;  the  changes in fair value are not  recorded.  The  Company  also uses
derivatives  to mitigate  the risk  associated  with its indexed  group  annuity
contracts by purchasing S&P 500 futures  contracts in a notional amount equal to
the contract liability relating to S&P 500 exposure.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       44

- - ------------------------------------------------------------------------------
                              Investments (cont.)

CNA's general  account  investments  in bonds and redeemable  preferred  stocks,
carried at their fair value,  were $30.1 billion at December 31, 1998,  compared
with $29.5  billion at December  31, 1997.  At December  31, 1998 and 1997,  net
unrealized gains on fixed maturity  securities  amounted to  approximately  $562
million and $528 million,  respectively.  The gross  unrealized gains and losses
for the fixed  maturity  securities  portfolio at December  31, 1998,  were $818
million  and $256  million,  respectively,  compared  to $644  million  and $116
million, respectively, at December 31, 1997.

Net unrealized  gains on general account bonds include net unrealized  losses on
high yield  securities of $101 million and $2 million,  at December 31, 1998 and
1997,  respectively.  Carrying  values of high yield  securities  in the general
account  were  approximately  $2.0 billion and $1.5 billion at December 31, 1998
and 1997, respectively.

The Company's largest equity holding in a single issuer is Global Crossing, Ltd.
(Global  Crossing)  common  stock.  As of December 31, 1998,  the Company  owned
20,037,584  shares,  or 9.8% of the outstanding  common stock of Global Crossing
which was valued at $904  million at December  31, 1998.  Net  unrealized  gains
associated  with this security  approximated  $841 million at December 31, 1998.
Without  registration or an exemption from registration,  sales to the public of
the  Company's  holdings  of Global  Crossing  are  governed  by Rule 144 of the
Securities Act of 1933 (the Act) and may not commence until August 13, 1999. The
Company  has the right,  after  August 13,  1999 to require  Global  Crossing to
register under the Act up to 25% of the Company's holdings prior to December 31,
1999.

At December  31, 1998 and 1997,  fixed  maturity  securities  in the  guaranteed
investment Separate Account contract portfolio,  carried at fair value, amounted
to $3.2  billion  and $3.8  billion.  Net  unrealized  gains  on fixed  maturity
securities in these Separate  Accounts amounted to approximately $64 million and
$71 million at December 31, 1998 and 1997,  respectively.  The gross  unrealized
gains and losses for the fixed  maturity  securities  portfolio  at December 31,
1998,  were $84 million and $20 million,  respectively,  compared to $87 million
and $16 million, respectively, at December 31, 1997.

At  December  31,  1998,  high yield  securities  in the  guaranteed  investment
Separate Account  contract  portfolio,  were carried at fair value,  amounted to
$269  million,  compared to $310 million at December 31,  1997.  Net  unrealized
losses on high yield  securities held in such Separate  Accounts were $9 million
and $1 million at December 31, 1998 and 1997, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       45


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ----------------------------------------------------------------------------
                                  Market Risk


Market Risk:
- - ------------

Market risk is a broad term related to economic losses due to adverse changes in
the  fair  value of a  financial  instrument.  Market  risk is  inherent  to all
financial instruments,  and accordingly,  the Company's risk management policies
and procedures include all market risk sensitive financial instruments.

According to the  Securities and Exchange  Commission  (SEC)  disclosure  rules,
discussions regarding market risk focus on only one element of market risk-price
risk.  Price  risk  relates  to changes in the level of prices due to changes in
interest  rates,  equity  prices,  foreign  exchange rates or other factors that
relate to market volatility of the rate, index or price underlying the financial
instrument.  The Company's  primary  market risk exposures are due to changes in
interest rates,  although the Company has certain exposures to changes in equity
prices and foreign currency exchange rates.

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

For purposes of this disclosure,  market risk sensitive  instruments are divided
into  two  categories:   instruments  entered  into  for  trading  purposes  and
instruments  entered into for purposes other than trading.  The Company's market
risk  sensitive  instruments  presented  in  the  tables  on  pages  49-50,  are
classified  as held for  purposes  other  than  trading.  The  Company  does not
generally hold or issue derivatives for trading purposes.

INTEREST RATE RISK

The Company has  exposure to economic  losses due to interest  rate risk arising
from changes in the level or volatility of interest rates.  The Company attempts
to  mitigate  its  exposure  to  interest  rate risk  through  active  portfolio
management.  The Company may also reduce this risk by utilizing instruments such
as interest rate swaps, interest rate caps,  commitments to purchase securities,
options,  futures and forwards. This exposure is also mitigated by the Company's
asset/liability matching strategy.

EQUITY PRICE RISK

The  Company is exposed to equity  price risk as a result of its  investment  in
equity securities and equity derivatives. Equity price risk results from changes
in the level or  volatility  of equity  prices  which affect the value of equity
securities  or  instruments  which  derive their value from such  securities  or
indexes.  CNA  attempts to mitigate  its  exposure to such risks by limiting its
investment in any one security or index.

FOREIGN EXCHANGE RISK

Foreign  exchange rate risk arises from the possibility  that changes in foreign
currency  exchange  rates will impact the value of  financial  instruments.  The
Company has foreign exchange  exposure when it buys or sells foreign  currencies
or  financial  instruments  denominated  in a foreign  currency.  The  Company's
foreign  transactions  are primarily  denominated in Canadian  Dollars,  British
Pounds, German Deutsche Marks, Chilean

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       46

- - ------------------------------------------------------------------------------
                              Market Risk (cont.)

Pesos,  Argentinean  Pesos and Japanese  Yen.  This exposure is mitigated by the
Company's  asset/liability matching strategy and through the use of forwards for
those instruments which are not matched.

SENSITIVITY ANALYSIS

CNA monitors its  sensitivity  to interest rate risk by evaluating the change in
its financial assets and liabilities relative to fluctuations in interest rates.
The  evaluation  is made  using an  instantaneous  change in  interest  rates of
varying  magnitudes  on a static  balance  sheet to determine  the effect such a
change  in  rates  would  have on the  Company's  market  value  at risk and the
resulting effect on stockholders'  equity. The analysis presents the sensitivity
of the market value of the Company's  financial  instruments to selected changes
in market rates and prices.  The range of changes chosen  reflects the Company's
view of  changes  which are  reasonably  possible  over a one-year  period.  The
selection of the range of values chosen to represent  changes in interest  rates
should not be construed as the Company's prediction of future market events, but
rather an illustration of the impact of such events.

The  sensitivity  analysis  estimates  the  change  in the  market  value of the
Company's  interest-sensitive  assets and liabilities that were held on December
31, 1998 and 1997 due to  instantaneous  parallel  changes in the year-end yield
curve.  Also the interest rates on certain types of assets and  liabilities  may
fluctuate in advance of changes in market interest  rates,  while interest rates
on other types may lag behind changes in market rates. Accordingly, the analysis
may not be  indicative  of, is not  intended to provide,  and does not provide a
precise  forecast  of the  effect of  changes  of market  interest  rates on the
Company's  income or  stockholders'  equity.  Further,  the  computations do not
contemplate  any actions CNA would  undertake in response to changes in interest
rates.

The  sensitivity  analysis  assumes an  instantaneous  shift in market  interest
rates,  with scenarios of interest  rates  increasing and decreasing 100 and 150
basis  points  from their  levels at  December  31, 1998 and 1997 with all other
variables held constant.  A 100 and 150 basis point increase in market  interest
rates would result in a pre-tax decrease in the financial instrument position of
$1.7 billion and $2.6 billion,  respectively,  at December 31, 1998, compared to
$1.6 billion and $2.4 billion,  respectively, at December 31, 1997. Similarly, a
100 and 150 basis point  decrease  in market  interest  rates would  result in a
pre-tax  increase in the net financial  instrument  position of $1.6 billion and
$2.4 billion, respectively, for both periods under comparison.

The Company's debt, including certain related interest rate swap agreements,  as
of December 31, 1998 and 1997, is denominated in U.S.  dollars.  At December 31,
1998  and  1997,  approximately  93% and  91%,  respectively,  of the  Company's
long-term debt has been issued at or effectively  converted to fixed rates,  and
as such,  interest  expense would not be impacted by interest  rate shifts.  The
impact of a 100 and 150 basis point increase in interest rates on the fixed rate
debt would  result in a decrease in the market value of the debt by $157 million
and $229 million,  respectively,  at December 31, 1998, compared to $117 million
and $176 million,  respectively,  at December 31, 1997.  The impact of a 100 and
150 basis point  decrease in the  interest  rates would result in an increase in
the  market  value  of  fixed  rate  debt  by $174  million  and  $268  million,
respectively,  at current year end,  compared to $117 million and $176  million,
respectively,  at  December  31,  1997.  The impact of a 100 and 150 basis point
increase in interest rates on the

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       47

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - -----------------------------------------------------------------------------
                              Market Risk (cont.)

variable  rate  debt at  December  31,  1998  would  result  in an
additional  $2 million and $3  million,  respectively,  in interest  expense per
year, compared to $3 million and $4 million,  respectively,  in interest expense
per year at December 31, 1997. Similarly,  a 100 and 150 basis point decrease in
interest rates would result in like decreases in interest expense per year.

Equity price risk was measured  assuming an instantaneous  10% and 25% change in
the  Standard & Poor's 500 Index (the Index) from its level of December 31, 1998
and 1997, with all other variables held constant.  The Company's equity holdings
were assumed to be positively correlated with the Index. At December 31, 1998, a
10% and 25%  decrease  in the  Index  would  result in a $320  million  and $795
million  decrease,  respectively,  compared  to $177  million  and $441  million
decrease,  respectively,  at  December  31,  1997,  in the  market  rate  of the
Company's equity  investments.  Of these amounts,  $92 million and $229 million,
respectively,   in  the  current  year,   and  $66  million  and  $166  million,
respectively,  in the prior year would be offset by decreases in  liabilities to
customers under variable annuity  contracts.  Similarly,  increases in the Index
would  result in like  increases  in the market  value of the  Company's  equity
investments  and increases in  liabilities to customers  under variable  annuity
contracts.

The sensitivity analysis also assumes an instantaneous 10% and 20% change in the
foreign  currency  exchange  rates  versus the U.S.  dollar from their levels at
December 31, 1998 and 1997, with all other variables held constant.  At December
31, 1998, a 10% and 20% strengthening of the U.S. dollar versus other currencies
would result in decreases of $220 million and $441 million, respectively, in the
market value of certain  financial  instruments  that are denominated in foreign
currencies,  compared to $47 million and $94 million,  respectively, at December
31, 1997.  Weakening of the U.S. dollar versus all other currencies would result
in like increases in the market value of certain financial  instruments that are
denominated in foreign currencies.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       48

- - ----------------------------------------------------------------------------
                               Market Risk (cont.)

The following  tables  reflect the estimated  effects on the market value of the
Company's  financial  instruments  at  December  31,  1998 and  1997,  due to an
increase in  interest  rates of 100 basis  points,  a 10% decline in the S&P 500
index, and a decline of 10% in foreign currency exchange rates.

HELD FOR OTHER THAN TRADING PURPOSES
- - -----------------------------------------------------------------------------
December 31, 1998                      Market   Interest   Currency   Equity
                                       Value   Rate Risk    Risk       Risk
- - -----------------------------------------------------------------------------
(In millions of dollars)
General Account:
  Fixed maturity securities           $30,073  $(1,549)    $(156)     $   -
  Equity securities                     1,970        -       (21)      (197)
  Short term investments                4,037      (21)      (43)         -
  Interest rate swaps                     (20)       9         -          -
  Interest rate caps                        1        1         -          -
  Other derivative securities               5        9        21          2
- - -----------------------------------------------------------------------------
    TOTAL GENERAL ACCOUNT              36,066   (1,551)     (199)      (195)
- - -----------------------------------------------------------------------------
Separate Account Business:
  Fixed maturity securities             4,155     (176)      (20)        (3)
  Equity securities                       297        -         -        (30)
  Short term investments                  473        -        (1)         -
  Equity index futures                      2        4         -        (92)
  Other derivative securities               2       (1)        -          -
- - -----------------------------------------------------------------------------
      TOTAL SEPARATE ACCOUNT BUSINESS   4,929     (173)      (21)      (125)
- - -----------------------------------------------------------------------------
      TOTAL ALL SECURITIES            $40,995  $(1,724)    $(220)     $(320)
=============================================================================
DEBT                                  $(3,160) $   157     $   -      $   -
=============================================================================

HELD FOR OTHER THAN TRADING PURPOSES
- - -----------------------------------------------------------------------------
December 31, 1997                     Market     Interest  Currency   Equity
                                      Value     Rate Risk    Risk       Risk
- - -----------------------------------------------------------------------------
(In millions of dollars)

General Account:
  Fixed maturity securities           $29,548   $(1,409)   $ (20)     $ (10)
  Equity securities                       814         -       (7)       (82)
  Short term investments                4,884       (11)     (21)         -
  Interest rate swaps                     (12)       20        -          -
  Interest rate caps                        4         4        -          -
  Other derivative securities               2         1        1          3
- - -----------------------------------------------------------------------------
    TOTAL GENERAL ACCOUNT              35,240    (1,395)     (47)       (89)
- - -----------------------------------------------------------------------------
Separate Account Business:
  Fixed maturity securities             4,769      (190)       -         (1)
  Equity securities                       206         -        -        (21)
  Short term investments                  629        (1)       -          -
  Equity index futures                      -         1        -        (66)
  Other derivative securities               -        (3)       -          -
- - -----------------------------------------------------------------------------
    TOTAL SEPARATE ACCOUNT BUSINESS     5,604      (193)       -        (88)
- - -----------------------------------------------------------------------------
    TOTAL ALL SECURITIES              $40,844   $(1,588)   $ (47)     $(177)
=============================================================================
DEBT                                  $(2,897)  $   117    $   -      $   -
=============================================================================
                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       49

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ------------------------------------------------------------------------------
                              Market Risk (cont.)

The following  tables  reflect the estimated  effects on the market value of the
Company's  financial  instruments  at  December  31,  1998 and  1997,  due to an
increase in  interest  rates of 150 basis  points,  a 25% decline in the S&P 500
index, and a decline of 20% in foreign currency exchange rates.

HELD FOR OTHER THAN TRADING PURPOSES
- - ------------------------------------------------------------------------------
December 31, 1998                     Market     Interest  Currency   Equity
                                      Value     Rate Risk    Risk      Risk
- - ------------------------------------------------------------------------------
(In millions of dollars)

General Account:
  Fixed maturity securities           $30,073   $(2,347)   $(313)     $   -
  Equity securities                     1,970         -      (42)      (493)
  Short term investments                4,037       (31)     (85)         -
  Interest rate swaps                     (20)       14        -          -
  Interest rate caps                        1         1        -          -
  Other derivative securities               5        14       42         10
- - ------------------------------------------------------------------------------
    TOTAL GENERAL ACCOUNT              36,066    (2,349)    (398)      (483)
- - ------------------------------------------------------------------------------
Separate Account Business:
  Fixed maturity securities             4,155      (272)     (41)        (9)
  Equity securities                       297         -        -        (74)
  Short term investments                  473        (1)      (2)         -
  Equity index futures                      2         6        -       (229)
  Other derivative securities               2        (1)       -          -
- - ------------------------------------------------------------------------------
    TOTAL SEPARATE ACCOUNT BUSINESS     4,929      (268)     (43)      (312)
- - ------------------------------------------------------------------------------
    TOTAL ALL SECURITIES              $40,995   $(2,617)   $(441)     $(795)
==============================================================================
DEBT                                  $(3,160)  $   229    $   -      $   -
==============================================================================




December 31, 1997                     Market     Interest  Currency   Equity
                                      Value     Rate Risk   Risk       Risk
- - ------------------------------------------------------------------------------
(In millions of dollars)
General Account:
  Fixed maturity securities           $29,548   $(2,113)   $ (39)     $ (24)
  Equity securities                       814         -      (14)      (204)
  Short term investments                4,884       (17)     (43)         -
  Interest rate swaps                     (12)       30        -          -
  Interest rate caps                        4         7        -          -
  Other derivative securities               2         1        2          7
- - -----------------------------------------------------------------------------
     TOTAL GENERAL ACCOUNT             35,240    (2,092)     (94)      (221)
- - -----------------------------------------------------------------------------
Separate Account Business:
  Fixed maturity securities             4,769      (285)       -         (3)
  Equity securities                       206         -        -        (51)
  Short term investments                  629        (1)       -          -
  Equity index futures                      -         2        -       (166)
  Other derivative securities               -        (5)       -          -
- - -----------------------------------------------------------------------------
     TOTAL SEPARATE ACCOUNT BUSINESS    5,604      (289)       -       (220)
- - -----------------------------------------------------------------------------
     TOTAL ALL SECURITIES             $40,844   $(2,381)   $ (94)     $(441)
=============================================================================
DEBT                                  $(2,897)  $   176    $   -      $   -
=============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       50

- - ------------------------------------------------------------------------------
                                   Year 2000

Year 2000:
- - ----------

IMPACT OF YEAR 2000 ON THE COMPANY

The  widespread  use of  computer  programs,  both  in  the  United  States  and
internationally,  that rely on two digit date fields to perform computations and
decision-making  functions  may  cause  computer  systems  to  malfunction  when
processing  information  involving dates  beginning in 1999.  Such  malfunctions
could lead to business delays and disruptions. The Company renovated or replaced
many of its legacy systems and upgraded its systems to accommodate  business for
the Year 2000 and beyond. In addition,  the Company is checking embedded systems
in computer  hardware and other  infrastructure  such as elevators,  heating and
ventilating systems, and security systems.

Based upon its current assessment,  CNA estimates that the total cost to replace
and upgrade its systems to  accommodate  Year 2000  processing is expected to be
approximately $60 to $70 million. As of December 31, 1998, the Company has spent
approximately  $59 million on Year 2000  readiness  matters.  However,  prior to
1997, the Company did not specifically separate technology charges for Year 2000
from other  information  technology  charges.  In addition,  while some hardware
charges  are  included  in the budget  figures,  the  Company's  hardware  costs
typically  are  included  as  part  of  ongoing   technology   updates  and  not
specifically  as part of the Year 2000 project.  All funds spent and to be spent
have been or will be financed from current operating funds. The Company believes
that it will be able to resolve  the Year 2000 issue in a timely  manner.  As of
December 31, 1998, CNA has internally certified all of its internal applications
and systems as being ready for the year 2000. However, due to the interdependent
nature of  computer  systems,  there may be an adverse  impact on the Company if
banks,   independent   agents,   vendors,    insurance   agents,   third   party
administrators,  various governmental  agencies and other business partners fail
to successfully address the Year 2000 issue. In addition,  certain non-insurance
affiliates  are not yet Year 2000 ready,  but they are expected to be ready on a
timely basis. In the event that they are not, it is unclear at this time whether
the impact on the Company  would be  material.  To  mitigate  this  impact,  the
Company is  communicating  with these various  entities to coordinate  Year 2000
conversion.  The Company already has sent Year 2000 information packages to more
than 12,000  independent agents to encourage them to become Year 2000 ready on a
timely basis.  The Company also has sent Year 2000 information to almost 300,000
business  policyholders  to  increase  their  awareness  of the Year 2000 issue.
Similar information packages have been sent to healthcare providers, lawyers and
others  with  whom  the  Company  has  business  relationships.  Because  of the
interdependent  nature of the issue,  the Company cannot be sure that there will
not be a disruption in its business.

The Company  also has  developed  business  resumption  plans to ensure that the
Company is able to continue critical  processes through other means in the event
that it becomes necessary to do so. Formal strategies have been developed within
each  business unit and support  organization  to include  appropriate  recovery
processes and use of alternative  vendors.  More than 200  strategies  have been
developed to address all the recovery  plans for  approximately  400  processes.
These plans are being updated quarterly.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       51

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ----------------------------------------------------------------------------
                               Year 2000 (cont.)

In addition,  property/casualty  insurance  companies  may have an  underwriting
exposure  related  to the  Year  2000  issue.  There  can be no  assurance  that
policyholders  will not suffer losses  resulting  from Year 2000 issues and seek
indemnification under insurance policies underwritten by the Company.  Coverage,
if any,  will  depend  on the  facts  and  circumstances  of the  claim  and the
provisions  of the  policy.  It is  impossible  to  estimate  with any degree of
accuracy the extent to which various types of policies issued by the Company may
afford  coverage  for losses or claims.  At this time,  the Company is unable to
forecast the nature and range of the losses,  the  availability  of coverage for
the losses, or the likelihood of significant claims. As a result, the Company is
unable to determine  whether the adverse impact,  if any, in connection with the
foregoing circumstances would be material to the Company.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       52

- - -----------------------------------------------------------------------------
                         Liquidity and Capital Resources

Liquidity and Capital Resources:
- - --------------------------------

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

Net cash flows from operations are primarily invested in marketable  securities.
Investment strategies employed by CNA's insurance subsidiaries consider the cash
flow  requirements of the insurance  products sold and the tax attributes of the
various types of marketable investments.

For the year ended December 31, 1998, net cash used in operating activities was
$949  million,  compared with net cash used of $193 million in 1997 and net cash
provided of $620 million in 1996.

The  Company  had  substantially  lower  operating  cash flows in 1998 and 1997,
primarily due to increases in insurance receivables.

On December 24, 1998,  CNAF filed a Registration  Statement on Form S-3 with the
Securities  and  Exchange  Commission  relating  to $600  million  in senior and
subordinated debt, junior debt, common stock,  preferred stock and warrants.  As
of December 31, 1998, this registration was not effective.

CNAF has a $795 million  revolving credit facility that expires in May 2001. The
amount  available  is  reduced by CNAF's  outstanding  commercial  paper.  As of
December 31, 1998, outstanding loans under the credit facility were $235 million
and  outstanding  commercial  paper was $500  million.  There was $60 million of
unused borrowing capacity under the facility at year end 1998. The interest rate
on the bank loans is based on the London Interbank Offered Rate (LIBOR), plus 16
basis points. Additionally,  there is a facility fee of 9 basis points annually.
The  average  interest  rate on the bank  loans  under the  credit  facility  at
December 31, 1998, 1997 and 1996, respectively was 5.49%, 6.16% and 5.72%.

On December 23, 1998,  CNAF sold $200 million of preferred stock to its majority
shareholder, Loews Corporation.

In 1998, CNAF issued $1 billion of senior notes under a $1 billion  Registration
Statement  on Form S-3 filed with the  Securities  and  Exchange  Commission  on
August 18, 1997. This shelf registration incorporated $250 million of securities
remaining available for issuance from a prior shelf  registration.  Since filing
this shelf registration, CNAF has issued in four separate offerings senior notes
with an  aggregate  principal  amount of $1  billion.  Proceeds  from these debt
issues  were  used to  repay or  refinance  existing  debt,  provide  funds  for
acquisitions, and increase the capital of Continental Casualty Company.

On November  15,  1996,  CNAF  issued $250  million,  6.75% Senior  Notes,  due
November 15, 2006. On March 1, 1996, CNAF paid, at the due date, $250 million of
8.625% senior notes.

To offset the variable rate characteristics of the credit facility, CNAF entered
into interest rate swap agreements with several banks.  These agreements convert
variable  debt into fixed debt  resulting in fixed rates on notional  amounts of
$650 million as of December 31, 1998.  The effect of these  interest  rate swaps
was to increase interest expense by approximately $2 million,  $4 million and $7
million for the years ended December 31, 1998, 1997 and 1996, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       53

                     MANAGEMENTS'S DISCUSSION AND ANALYSIS
- - ----------------------------------------------------------------------------
                    Liquidity and Capital Resources (cont.)

CNAF has a commercial paper program in place, in which it borrows from investors
and  replaces a like amount of bank  financing.  As of December  31,  1998,  the
commercial  paper program  totaled $500 million as compared with $675 million as
of December 31, 1997. The weighted-average interest rate on commercial paper was
5.89%,  6.05% and 5.67% at December 31, 1998, 1997 and 1996  respectively.  The
commercial paper borrowings are classified as long-term,  as borrowing  capacity
under the revolving  credit  facility will support the commercial  paper program
(at an undrawn  cost of 9 basis  points).  The  weighted-average  interest  rate
(interest and facility fees) on the revolving credit facility,  commercial paper
and the  effect  of the  interest  rate  swaps,  was  6.36%,  6.35% and 6.28% at
December 31, 1998, 1997 and 1996 respectively.

The table below  reflects  ratings  issued by A.M.  Best,  Standard  and Poor's,
Moody's  and  Duff  &  Phelps  for  CNA's  Continental  Casualty  Company  (CCC)
Intercompany  Pool,  Continental  Insurance Company (CIC)  Intercompany Pool and
Continental  Assurance Company (CAC)  Intercompany  Pool. Also rated were CNAF's
senior  debt,   commercial   paper  and  preferred  stock  and  The  Continental
Corporation's (Continental) senior debt.

|-----------------|---------------------|------------------------------------|
|                 | INSURANCE RATINGS   |       DEBT AND STOCK RATINGS       |
|                 |---------------------|------------------------------------|
|                 |  Financial Strength |                                    | 
|                 |---------------------|                                    |
|                 |     |     |         |         CNA             Continental|
|                 |     |     |         |-----------------|---------|--------|
|                 | CCC | CAC |  CIC    |Senior|Commercial|Prefered | Senior |
|                 |     |     |         |Debt  |   Paper  | Stock   |  Debt  |
|                 |-----|-----|---------|------|----------|---------|--------| 
|A.M. Best        |  A  |  A  |   A-    |   -  |    -     |    -    |   -    |
|Moody's          |  A1 |  A1*|   A2    |   A3 |    P2    |    a3   |  Baa1  |
|Standard & Poor's|  A+ |  AA-|   A-    |   A- |    A2    |   BBB   |  BBB-  |
|                 |-----|-----|---------|      |          |         |        |
|                 |Claims Paying Ability|      |          |         |        | 
|                 |-----|---------------|      |          |         |        |  
|Duff & Phelps    |  AA-|  AA |   -     |   A- |     -    |   BBB+  |   -    |
|-----------------|-----|-----|---------|------|----------|---------|--------|
*APPLIES TO CONTINENTAL ASSURANCE COMPANY ONLY.
                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       54

- - ----------------------------------------------------------------------------
                         Accounting Standards

Accounting Standards:
- - ---------------------

ACCOUNTING BY INSURANCE AND OTHER ENTERPRISES FOR INSURANCE-RELATED ASSESSMENTS

In December  1997,  the  American  Institute of  Certified  Public  Accountants'
Accounting  Standards  Executive  Committee  issued  Statement of Position (SOP)
97-3,  "Accounting  by Insurance  and Other  Enterprises  for  Insurance-Related
Assessments."   SOP  97-3  requires  that  entities  recognize  liabilities  for
insurance-related  assessments when all of the following criteria have been met:
an  assessment  has been imposed or it is probable  that an  assessment  will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial  statements;  and the amount
of the  assessment  can be  reasonably  estimated.  This  SOP is  effective  for
financial  statements  for fiscal years  beginning  after December 15, 1998. The
effects of this SOP will  result in CNA  recording  an  after-tax  charge in the
first  quarter of 1999  between  $145  million and $175  million as a cumulative
effect of a change in accounting principle.

ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE

In  March  1998,  the  American  Institute  of  Certified  Public   Accountants'
Accounting  Standards Executive  Committee issued SOP 98-1,  "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." For purposes
of this SOP, internal-use software is software acquired, internally developed or
modified  solely to meet the entity's  internal  needs for which no  substantive
plan exists or is being developed to market the software  externally  during the
software's   development  or  modification.   Accounting   treatment  for  costs
associated  with software  developed or obtained for internal use, as defined by
this SOP, is based upon a number of factors,  including the point in time during
the project that costs are incurred as well as the types of costs incurred. This
SOP is effective  for  financial  statements  for fiscal years  beginning  after
December  15,  1998 and will be  adopted in the first  quarter  of 1999.  CNA is
currently evaluating the effects of this SOP.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting Standard 133,  "Accounting for Derivative  Instruments and
Hedging  Activities."  This  statement  requires  that an entity  recognize  all
derivatives  as either  assets or  liabilities  in the  statement  of  financial
position and measure those instruments at fair value. If certain  conditions are
met, a derivative may be specifically  designated as (a) a hedge of the exposure
to  changes  in  the  fair  value  of a  recognized  asset  or  liability  or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction,  or (c) a hedge of the foreign currency exposure of
a net investment in a foreign  operation,  an unrecognized  firm commitment,  an
available-for-sale  security,  or  a   foreign-currency-denominated   forecasted
transaction.  The  accounting  for  changes  in the fair  value of a  derivative
depends on the intended use of the  derivative  and the  resulting  designation.
This  Statement is effective for all fiscal  quarters of fiscal years  beginning
after June 15, 1999.  CNA is currently  evaluating the effects of this Statement
on  its  accounting   and  reporting  for  derivative   securities  and  hedging
activities.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       55

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
- - --------------------------------------------------------------------------
                          Accounting Standards (cont.)

REPORTING ON THE COSTS OF START-UP ACTIVITIES

In  April  1998,  the  American  Institute  of  Certified  Public   Accountants'
Accounting  Standards  Executive  Committee  issued SOP 98-5,  "Reporting on the
Costs of Start-Up  Activities."  This SOP requires costs of start-up  activities
and  organization  costs,  as defined,  to be expensed as incurred.  SOP 98-5 is
effective for  financial  statements in 1999.  Initial  application  of this SOP
should be reported as a change in accounting principle,  and will,  accordingly,
involve a cumulative adjustment.  CNA does not expect the adoption of the SOP to
have a significant impact on the results of operations or equity of CNA.

ACCOUNTING  FOR  INSURANCE  AND  REINSURANCE  CONTRACTS  THAT  DO  NOT  TRANSFER
INSURANCE RISK

In October  1998,  the  American  Institute  of  Certified  Public  Accountants'
Accounting  Standards  Executive  Committee  issued  SOP 98-7,  "Accounting  for
Insurance and Reinsurance  Contracts That Do Not Transfer  Insurance Risk." This
guidance  excludes  long-duration  life and health insurance  contracts from its
scope.  This SOP is effective  for financial  statements in the year 2000,  with
early adoption encouraged. CNA is currently evaluating the effects of this SOP.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       56

- - -----------------------------------------------------------------------------
                           Forward-Looking Statements


Forward-Looking Statements:
- - ---------------------------

The statements  contained in this management's  discussion and analysis that are
not  historical  facts are  forward-looking  statements.  When  included in this
management's discussion and analysis, the words "believe," "expects," "intends,"
"anticipates,"  "estimates," and analogous  expressions are intended to identify
forward-looking  statements. Such statements inherently are subject to a variety
of risks and uncertainties  that could cause actual results to differ materially
from those projected.  Such risks and uncertainties  include,  among others, the
impact of competitive products,  policies and pricing; product and policy demand
and market responses; development of claims and the effect on loss reserves; the
performance  of  reinsurance  companies  under  reinsurance  contracts  with the
Company; general economic and business conditions;  changes in financial markets
(interest  rate,  credit,  currency,  commodities and stocks) or in the value of
specific investments held by the Company; changes in foreign,  political, social
and economic conditions; regulatory initiatives and compliance with governmental
regulations;   judicial  decisions  and  rulings;  rating  agency  policies  and
practices;  the results of financing efforts; the actual closing of contemplated
transactions  and  agreements and various other matters and risks (many of which
are beyond the Company's control) detailed in the CNAF's Securities and Exchange
Commission filings.  These forward-looking  statements speak only as of the date
of this report. The Company expressly disclaims any obligation or undertaking to
release  publicly  any updates or  revisions  to any  forward-looking  statement
contained herein to reflect any change in the Company's expectations with regard
thereto  or any  change in  events,  conditions  or  circumstances  on which any
statement is based.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       57



                            CONSOLIDATED FINANCIAL STATEMENTS
- - -----------------------------------------------------------------------------------------------
                               CONSOLIDATED BALANCE SHEETS

ASSETS
- - -----------------------------------------------------------------------------------------------
December 31                                                                   1998      1997
- - -----------------------------------------------------------------------------------------------
(In millions of dollars, 
                                                                                    
Investments:
  Fixed maturities available for sale
     (cost: $29,511 and $29,020).............................................$30,073   $29,548
  Equity securities available for sale
     (cost: $1,055 and $695).................................................  1,970       814
  Mortgage loans and real estate (less accumulated 
     depreciation: $1 and $1)................................................     62        85
  Policy loans...............................................................    177       177
  Other invested assets......................................................    858       695
  Short-term investments ....................................................  4,037     4,884
- - -----------------------------------------------------------------------------------------------
        TOTAL INVESTMENTS                                                     37,177    36,203
- - -----------------------------------------------------------------------------------------------
Cash.........................................................................    217       383
Receivables:
  Reinsurance................................................................  6,365     6,057
  Insurance .................................................................  6,504     6,224
  Other .....................................................................    300       208
  Less allowance for doubtful accounts.......................................   (328)     (303)
Deferred acquisition costs...................................................  2,422     2,142
Prepaid reinsurance premiums.................................................    331       202
Accrued investment income....................................................    392       389
Receivables for securities sold..............................................    255       744
Federal income taxes recoverable (includes $234
  and $26 due from Loews)....................................................    251        18
Deferred income taxes........................................................    995     1,070
Property and equipment at cost
  (less accumulated depreciation: $695 and $553).............................    824       747
Intangibles, net of accumulated amortization.................................    368       620
Other assets.................................................................  1,083     1,159
Separate Account business....................................................  5,203     5,812
- - -----------------------------------------------------------------------------------------------
        TOTAL ASSETS                                                         $62,359   $61,675
===============================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       58



- - -----------------------------------------------------------------------------------------------
                       CONSOLIDATED BALANCE SHEETS (CONT.)

LIABILITIES AND STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------------
December 31                                                                   1998      1997
- - -----------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                                
Liabilities:                                                                                
   Insurance reserves:                                                                     
      Claim and claim adjustment expense ....................................$29,192   $29,558
      Unearned premiums......................................................  5,039     4,700
      Future policy benefits.................................................  5,418     4,829
      Policyholders' funds...................................................    789       742
   Collateral on loaned securities...........................................    130       153
   Payables for securities purchased.........................................    316       648
   Participating policyholders' equity.......................................    140       132
   Debt......................................................................  3,160     2,897
   Other liabilities.........................................................  3,611     3,723
   Separate Account business.................................................  5,203     5,812
- - -----------------------------------------------------------------------------------------------
        TOTAL LIABILITIES                                                     52,998    53,194
- - -----------------------------------------------------------------------------------------------
Commitments and contingent liabilities  - Notes A, B, C, E, F, and G
Minority Interest............................................................    204       172
Stockholders' equity:                                                                       
   Common stock, $2.50 par value;                             
     Authorized - 200,000,000 shares;
     Issued - 185,525,907 shares;
     Outstanding as of December 31, 1998 -183,889,569 shares
     Outstanding as of December 31, 1997 -185,394,786 shares.................    464       464
   Preferred stock...........................................................    350       150
   Additional paid-in capital................................................    126       126
   Retained earnings.........................................................  7,258     6,983
   Accumulated other comprehensive income....................................  1,064       589
   Treasury stock, at cost...................................................    (61)       (3)
- - -----------------------------------------------------------------------------------------------
                                                                               9,201     8,309
    Notes receivable from officer stockholders...............................    (44)        -
- - -----------------------------------------------------------------------------------------------
        TOTAL STOCKHOLDERS' EQUITY                                             9,157     8,309
- - -----------------------------------------------------------------------------------------------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                           $62,359   $61,675
===============================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       59

                        CONSOLIDATED FINANCIAL STATEMENTS
- - -----------------------------------------------------------------------------
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                                                              
- - -----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31                          1998      1997     1996
- - -----------------------------------------------------------------------------
(In millions of dollars, except per share data)
- - -----------------------------------------------------------------------------
Revenues:
  Premiums.....................................$13,375  $13,482  $13,525
  Net investment income........................  2,146    2,209    2,276
  Realized investment gains....................    695      753      619
  Other........................................    858      628      568
- - -----------------------------------------------------------------------------
                                                17,074   17,072   16,988
- - -----------------------------------------------------------------------------
Claims, benefits and expenses:
  Insurance claims and
      policyholders' benefits.................. 11,717   11,268   11,371
  Amortization of deferred acquisition costs...  2,180    2,138    1,856
  Restructuring and other related charges .....    246        -        -
  Other operating expenses.....................  2,363    2,100    2,207
  Interest expense.............................    219      198      200
- - -----------------------------------------------------------------------------
                                                16,725   15,704   15,634
- - -----------------------------------------------------------------------------
      Income before income tax.................    349    1,368    1,354
Income tax expense.............................     47      392      380
Minority interest..............................     20       10        9
=============================================================================
    NET INCOME                                 $   282  $   966  $   965
- - -----------------------------------------------------------------------------
EARNINGS PER SHARE                             $  1.49  $  5.17  $  5.17
=============================================================================
WEIGHTED AVERAGE OUTSTANDING SHARES
 OF COMMON STOCK (IN MILLIONS OF SHARES)         184.9    185.4    185.4
=============================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       60

- - ------------------------------------------------------------------------------
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


                                                                                                 Notes
                                                                           Accumulated          Receivable
                                         Additional                          Other               From      Total
                        Common Preferred Paid in Comprehensive Retained Comprehensive Treasury Officer Stockholders'
                        Stock   Stock    Capital   Income      Earnings     Income    Stock  Stockholders Equity
- - --------------------------------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                                
Balance, January 1, 1996    $464  $150     $126                  $5,066     $   933       $  (3)   $  -     $6,736
Comprehensive income:
Net income..............       -     -        -     $  965          965           -           -       -        965
Other comprehensive
loss....................       -     -        -       (634)           -        (634)          -       -       (634)
                                                    -------
     Total comprehensive
      income............                            $  331
                                                    =======
Preferred dividends.....       -     -        -                      (7)          -           -       -         (7)
- - --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996   464   150      126                   6,024         299          (3)      -      7,060
Comprehensive income:
Net income..............       -     -        -     $  966          966           -           -       -        966
Other comprehensive
income..................       -     -        -        290            -         290           -       -        290
                                                    --------
     Total comprehensive
      income............                            $1,256
                                                    ========
Preferred dividends.....       -     -        -                      (7)          -           -       -         (7)
- - --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997   464   150      126                   6,983         589          (3)      -      8,309
Comprehensive income:
Net income..............       -     -        -     $  282          282           -           -       -        282
Other comprehensive 
income..................       -     -        -        475            -         475           -       -        475
                                                    --------
     Total comprehensive
      income............                            $  757
                                                    ========
Issuance of preferred
stock...................      -    200        -                       -           -           -       -        200
Purchase of treasury
stock...................      -      -        -                       -           -        (102)      -       (102)
Sale of treasury stock
and issuance of notes
   receivable
   from officer
   stockholders.........      -      -        -                       -           -          44      (44)        -
Preferred dividends.....      -      -        -                      (7)          -           -        -        (7)
- - --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $464   $350     $126                  $7,258      $1,064        $(61)    $(44)    $9,157
====================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       61

                       CONSOLIDATED FINANCIAL STATEMENTS
- - ---------------------------------------------------------------------------
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

- - ---------------------------------------------------------------------------
Year Ended December 31                     1998        1997       1996
- - ---------------------------------------------------------------------------
(In millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
- - -------------------------------------
Net income ..............................  $    282   $    966    $    965
                                           -------------------------------- 
Adjustments  to  reconcile  net  income
  to  net  cash  flows  from  operating
  activities:
  Minority Interest .....................        20         10           9
  Deferred income tax provision..........        47        144         352
  Participating policyholders' interest..        14          8          (5)
  Net realized investment gains, pre-tax.      (695)      (753)       (619)
  Amortization of intangibles............        93         30          25
  Amortization of bond discount..........      (208)      (100)       (178)
  Depreciation...........................       166        158         138
  Changes in:                                              
    Receivables, net.....................      (655)       147          84
    Deferred acquisition costs...........      (280)      (288)       (361)
    Accrued investment income............        (3)       119          38
    Federal income taxes recoverable.....      (233)       116          (1)
    Prepaid reinsurance premiums.........      (129)        93         200
    Insurance reserves...................       624       (133)       (358)
    Other liabilities....................         1       (641)        790
    Other, net...........................         7        (69)       (459)
- - ---------------------------------------------------------------------------
      Total adjustments ..................   (1,231)    (1,159)       (345)
- - ---------------------------------------------------------------------------
      NET CASH FLOWS FROM
        OPERATING ACTIVITIES ............. $   (949)   $  (193)   $    620
- - ---------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       62

- - ---------------------------------------------------------------------------
                 CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)

- - ---------------------------------------------------------------------------
Year Ended December 31                     1998        1997       1998
- - ---------------------------------------------------------------------------
(In millions of dollars)
CASH FLOWS FROM INVESTING ACTIVITIES:
- - -------------------------------------
Purchases of fixed maturities............  $(39,039)  $(42,492)   $(34,312)
Proceeds from fixed maturities:                                                 
   Sales.................................    35,480     38,429      34,864
   Maturities, calls and redemptions.....     3,564      2,997       1,796
Purchases of equity securities...........    (1,071)    (1,323)       (972)
Proceeds from sale of equity securities..       848      1,406       1,077
Change in short-term investments.........       823      1,112      (2,029)
Purchases of property and equipment .....      (261)      (280)       (205)
Change in securities sold under 
repurchase agreements....................       (23)        53        (674)
Change in other investments..............        62        421         146
Acquisitions, (net of cash of $1 and $4).      (120)      (104)          -
Other, net...............................       180         (7)         21
                                                                             
   NET CASH FLOWS FROM INVESTING ACTIVITIES     443        212        (288)
- - ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- - -------------------------------------
Dividends paid to preferred shareholders..       (7)        (6)         (6)
Purchase of treasury stock................     (102)         -           -
Receipts from investment contracts credited
  to policyholder account balances.........     (20)         7          11
Return of policyholder account
  balances on investment contracts..........      6        (26)        (41)
Change in short-term debt...................      -          -        (257)
Principal payments on long-term debt........   (730)        (5)       (254)
Proceeds from issuance of long-term debt....    993        137         250
Issuance of preferred stock ................    200          -           -
- - ---------------------------------------------------------------------------
   NET CASH FLOWS FROM  FINANCING ACTIVITIES    340        107        (297)
- - ---------------------------------------------------------------------------
   NET CASH FLOWS...........................   (166)       126          35
Cash at beginning of period.................    383        257         222
- - ---------------------------------------------------------------------------
CASH AT END OF PERIOD                        $  217   $    383       $ 257
===========================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 
- - --------------------------------------------------
Cash (paid) received:
  Interest expense......................... $  (210)  $   (201)      $(211)
  Federal income taxes.....................    (143)       (95)         16
Non-cash transactions:
  Notes receivable from officer stockholders
    for sale of treasury stock..............    (44)         -           -
===========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       63

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
                    Note A -- Significant Accounting Policies
                                     
Note A - Significant Accounting Policies:
- - -----------------------------------------

BASIS OF PRESENTATION
- - ---------------------
The Consolidated  Financial Statements include CNA Financial  Corporation (CNAF)
and  its  subsidiaries  which  include  property/casualty   insurance  companies
(principally Continental Casualty Company and The Continental Insurance Company)
and life insurance  companies  (principally  Continental  Assurance  Company and
Valley Forge Life Insurance  Company),  collectively CNA, or the Company.  Loews
Corporation  (Loews) owns  approximately 85% of the outstanding  common stock of
CNAF.

The  accompanying  Consolidated  Financial  Statements  have  been  prepared  in
conformity  with  generally  accepted  accounting  principles.  Certain  amounts
applicable to prior years have been  reclassified to conform to  classifications
followed in 1998. All material intercompany amounts have been eliminated.

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

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

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

INSURANCE
- - -----------------------
PREMIUM REVENUES 
Insurance  premiums  on  property/casualty  and  accident  and health  insurance
contracts are earned ratably over the terms of the policies after  provision for
estimated adjustments on retrospectively rated policies and deductions for ceded
insurance.  Revenues on universal  life-type contracts are comprised of contract
charges  and fees which are  recognized  over the  coverage  period.  Other life
insurance  premiums  and  annuities  are  recognized  as revenue  when due after
deductions for ceded insurance premiums.

CLAIM AND CLAIM ADJUSTMENT  EXPENSE  RESERVES
Claim and claim expense  reserves,  except reserves for structured  settlements,
workers' compensation lifetime claims and accident and health disability claims,
are not discounted and are based on (a) case basis estimates for losses reported
on direct  business,  adjusted in the aggregate for ultimate loss  expectations,
(b) estimates of unreported

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       64

- - -------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)

losses,  (c)  estimates  of losses on assumed  insurance,  and (d)  estimates of
future expenses to be incurred in settlement of claims.  In  establishing  these
estimates,  consideration  is given to current  conditions and trends as well as
past Company and industry  experience.  The effects of  inflation,  which can be
significant,  are implicitly considered in the reserving process and are part of
the recorded reserve balance.

Claim and claim adjustment expense reserves represent  management's estimates of
ultimate  liabilities  based on currently  available  facts and case law and the
ultimate  liability may vary  significantly  from such estimates.  CNA regularly
reviews its reserves and any adjustments to the previously  established reserves
are  reflected in operating  income in the period the need for such  adjustments
becomes apparent.

Structured   settlements   have  been   negotiated   for   claims   on   certain
property/casualty  insurance policies.  Structured settlements are agreements to
provide periodic  payments to claimants,  which are fixed and determinable as to
the amount and time of payment.  Certain  structured  settlements  are funded by
annuities  purchased from  Continental  Assurance  Company for which the related
annuity  obligations are reflected as part of future policy  benefits  reserves.
Obligations  for structured  settlements not funded by annuities are included in
claim and expense  reserves and carried at the present values  determined  using
interest  rates  ranging  from 6.0% to 7.5%.  At December  31, 1998 and 1997 the
discounted  reserves for unfunded  structured  settlements were $893 million and
$913 million,  respectively  (reflecting a discount of $1,511 million and $1,527
million, respectively).

Workers' compensation lifetime claim reserves and accident and health disability
claim reserves are discounted at interest rates allowed by insurance  regulators
that range from 3.5% to 6.0% with mortality and morbidity assumptions reflecting
the Company's and current  industry  experience.  At December 31, 1998 and 1997,
such discounted reserves totaled $2,277 million and $2,196 million, respectively
(reflecting a discount of $869 million and $882 million, respectively).

FUTURE POLICY BENEFITS RESERVES
Reserves for traditional life insurance  products (whole and term life products)
are computed based upon the net level premium method using actuarial assumptions
as to interest rates, mortality, morbidity,  withdrawals and expenses. Actuarial
assumptions  include a margin for adverse  deviation and generally vary by plan,
age at  issue  and  policy  duration.  Interest  rates  range  from 3% to 9% and
mortality,  morbidity  and  withdrawal  assumptions  reflect  CNA  and  industry
experience  prevailing  at the time of issue.  Expense  assumptions  include the
estimated  effects of inflation and expenses  beyond the premium  paying period.
Reserves for universal  life-type  contracts  are equal to the account  balances
that accrue to the benefit of the policyholders. Interest crediting rates ranged
from 4.30% to 7.25% for the three years ended December 31, 1998.

INVOLUNTARY RISKS
CNA's share of  involuntary  risks is mandatory  and generally a function of its
share of the  voluntary  market by line of insurance in each state.  CNA records
the estimated effects of its mandatory  participation on an accrual basis, using
either claim  payments or premiums  written in the current year depending on the
assessment basis. CNA currently records assessments for insolvencies as they are
paid.  In 1999,  CNA will  account  for these  assessments  in  compliance  with
Statement of Position  (SOP) 97-3. SOP-97-3

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       65

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)

requires that insurance  companies recognize  liabilities for  insurance-related
assessments  when an assessment is probable and will be imposed,  when it can be
reasonably estimated, and when the event obligating the entity to pay an imposed
or probable assessment has occurred on or before the date of the financials.  In
the first  quarter of 1999,  CNA will record an  after-tax  charge  between $145
million  and $175  million  as a  cumulative  effect of a change  in  accounting
principle.

REINSURANCE
CNA assumes and cedes  insurance  with other insurers and reinsurers and members
of  various  reinsurance  pools  and  associations.   CNA  utilizes  reinsurance
arrangements to limit its maximum loss, provide greater  diversification of risk
and minimize  exposures on larger risks. The reinsurance  coverages are tailored
to the specific risk  characteristics  of each product line with CNA's  retained
amount varying by type of coverage. Generally, reinsurance coverage for property
risks is on an excess of loss, per risk basis. Liability coverages are generally
reinsured on a quota share basis in excess of CNA's  retained  risk.  CNA's life
reinsurance  includes   coinsurance,   yearly  renewable  term  and  facultative
programs.  Amounts  recoverable  from  reinsurers  are  estimated  in  a  manner
consistent with the claim or policy reserve liability and shown as a recoverable
in the balance sheet.

DEFERRED ACQUISITION COSTS
Costs of acquiring  property/casualty insurance business which vary with and are
primarily  related to the production of such business are deferred and amortized
ratably over the period the related premiums are recognized.  Such costs include
commissions,  premium taxes and certain  underwriting and policy issuance costs.
Anticipated  investment  income  is  considered  in  the  determination  of  the
recoverability of deferred acquisition costs.

Life  acquisition  costs are  capitalized  and  amortized  based on  assumptions
consistent with those used for computing  policy benefit  reserves.  Acquisition
costs on traditional life business are amortized over the assumed premium paying
periods.   Universal  life  and  annuity  acquisition  costs  are  amortized  in
proportion  to the present  value of estimated  gross profits over the products'
assumed   durations.   To  the  extent  that  unrealized   gains  or  losses  on
available-for  sale securities  would result in an adjustment of deferred policy
acquisition costs had those gains or losses actually been realized,  the related
unamortized  deferred policy  acquisition costs are recorded as an adjustment of
the unrealized gains or losses included in stockholders' equity.

PARTICIPATING BUSINESS
Participating  business  represented 0.5%, 0.7% and 0.5% of gross life insurance
in force and 0.7%,  0.7% and 0.7% of life  insurance  premium  income  for 1998,
1997, and 1996, respectively.  Participating policyholders' equity is determined
by allocating 90% of the net income or loss and unrealized  investment  gains or
losses  related to such business as allowed by applicable  laws,  less dividends
determined by the Board of Directors. Revenues and benefits and expenses include
amounts related to participating  policies;  the net income or loss allocated to
participating  policyholders'  equity is a  component  of  insurance  claims and
policyholders' benefits.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       66

- - -------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)

INVESTMENTS
- - -------------------------------------
VALUATION OF INVESTMENTS
CNA classifies its fixed maturities (bonds and redeemable  preferred stocks) and
its equity  securities as  available-for-sale,  and as such, they are carried at
fair value.  The amortized cost of fixed maturities is adjusted for amortization
of premiums  and  accretion  of discounts  to  maturity.  The  amortization  and
accretion are included in investment income.

CNA  accounts  for its  derivative  securities  under the fair value  method and
includes  them  in  other  invested  assets,  except  for  interest  rate  swaps
associated with certain corporate borrowings.  Under this method, the derivative
securities are recorded in the balance sheet at fair value at the reporting date
with changes in fair value  reflected in realized  investment  gains and losses.
For interest rate swaps associated with certain  corporate  borrowings,  amounts
due or payable  under these  swaps are  recorded  as an  adjustment  to interest
expense  and  changes  in the fair value of the swaps are not  reflected  in the
Company's financial statements.

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

Other invested  assets include joint  ventures,  limited  partnerships,  certain
derivative  securities  and other  investments.  The joint  ventures and limited
partnerships  are carried at cost plus CNA's  equity  interest in changes in the
investee's  net assets.  CNA's  equity  interest in such changes is reflected in
investment income,  realized investment  gains/losses and unrealized  investment
gains/losses, as appropriate.

The  Company  may from time to time  invest in  securities  which have a limited
market or the sale of which may be restricted  in whole or in part.  The Company
carries these  securities at fair value,  with unrealized  investment  gains and
losses  reflected as a separate  component of  accumulated  other  comprehensive
income.

INVESTMENT GAINS AND LOSSES
All securities  transactions are recorded on the trade date. Realized investment
gains  and  losses  are  determined  on the basis of the  amortized  cost of the
specific securities sold. Investments are written down to estimated fair values,
and losses are  charged to income  when a decline in value is  considered  to be
other than temporary.

Unrealized  investment gains and losses on fixed maturity  securities and equity
securities  are reflected as part of  stockholders'  equity  (accumulated  other
comprehensive  income),  net of minority  interest,  applicable  deferred income
taxes and participating policyholders' interest.

EQUITY IN AFFILIATES
CNA uses the equity method of accounting  for  investments in companies in which
its  ownership  interest is at least  twenty  percent but not greater than fifty
percent.  Equity in operating  income of these  affiliates is reflected in other
income.  Equity in investment  gains/losses  is included in realized  investment
gains/losses or unrealized investment gains/losses as appropriate.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       67

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)


SECURITIES LENDING ACTIVITIES
CNA has a  securities  lending  program  where  securities  are  loaned to third
parties,  primarily major brokerage  firms.  Borrowers of these  securities must
deposit 100% of the fair value of the  securities if the  collateral is cash, or
102%, if the collateral is securities. Cash deposits from these transactions are
invested in short-term  investments  (primarily commercial paper). CNA continues
to receive the  interest on loaned debt  securities  as  beneficial  owner,  and
accordingly,   loaned  debt   securities  are  included  within  fixed  maturity
securities.

RESTRICTED INVESTMENTS
On December 30, 1993, CNA deposited $987 million in an escrow account,  pursuant
to the  Fibreboard  Global  Settlement  Agreement,  as  discussed in Note F. The
majority of the funds are included in  short-term  investments  and are invested
primarily in U.S.  Treasury  securities.  The escrow account  amounted to $1,130
million and $1,098 million at December 31, 1998 and 1997, respectively.

SEPARATE ACCOUNT BUSINESS
- - --------------------------------
Continental  Assurance  Company and Valley Forge Life  Insurance  Company  write
certain investment and annuity contracts.  The supporting assets and liabilities
of  these  contracts  are  legally   segregated  and  reflected  as  assets  and
liabilities  of  Separate  Account  business.   Continental   Assurance  Company
guarantees   principal  and  a  specified  return  to  the   contractholders  on
approximately  64% and 74% of the Separate Account business at December 31, 1998
and  1997,  respectively.  Substantially  all  assets  of the  Separate  Account
business are carried at fair value.  Separate Account liabilities are carried at
contract values.

INCOME TAXES  ----------------------------------  The provision for income taxes
includes  deferred  taxes,  resulting  from  temporary  differences  between the
financial  statement  and tax return bases of assets and  liabilities  under the
liability method.  Temporary  differences primarily relate to insurance reserves
(principally  claim reserve  discounting  and unearned  premium  reserves),  net
unrealized investment gains/losses and deferred acquisition costs.

PROPERTY AND EQUIPMENT
- - -------------------------------------
Property  and  equipment  are  carried  at cost less  accumulated  depreciation.
Depreciation  is based on the estimated  useful lives of the various  classes of
property and equipment and determined  principally on accelerated  methods.  The
cost of  maintenance  and  repairs  is  charged  to  income as  incurred;  major
improvements are capitalized.

MANAGEMENT SERVICES
- - --------------------------------------
CNA  reimburses  Loews or pays  directly  for  management  services,  travel and
similar expenses, and expenses of investment facilities and services provided to
CNA. Such reimbursements  amounted to approximately $13 million, $11 million and
$15 million in 1998, 1997 and 1996, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       68

- - -------------------------------------------------------------------------------
                Note A - Significant Accounting Policies (cont.)

EARNINGS PER SHARE
- - ----------------------------------------

Earnings  per share  applicable  to common  stock are based on weighted  average
outstanding shares, retroactively adjusted to reflect all stock splits. CNAF has
no stock options or warrants;  therefore,  basic and fully diluted  earnings per
share are the same.

The  computation of earnings per share for December 31, 1998,  1997 and 1996 was
as follows:

- - ----------------------------------------------------------------
Year Ended December 31                  1998     1997    1996
- - ----------------------------------------------------------------
(In millions, except per share amounts)

Net income                              $ 282    $ 966   $ 965
Less: Preferred dividend                   (7)      (7)     (7)
- - ----------------------------------------------------------------
 Net income applicable
  to common stock                       $ 275    $ 959   $ 958
Weighted average
  outstanding
  common shares                         184.9    185.4   185.4
- - ----------------------------------------------------------------
EARNINGS PER SHARE                      $1.49    $5.17   $5.17
================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       69

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -----------------------------------------------------------------------------
                              Note B -- Investments

Note B - Investments:
- - ---------------------
NET INVESTMENT INCOME
- - -----------------------------------------------------------------------------
Year Ended December 31                       1998        1997        1996
- - -----------------------------------------------------------------------------
(In millions of dollars)

Fixed maturities:
   Bonds:
     Taxable                               $1,490     $1,522       $1,716
     Tax-exempt                               340        288          273
   Redeemable preferred stocks                  2          7            2
Equity securities                              33         37           25
Mortgage loans and real estate                  5         10           11
Policy loans                                   11          6           12
Short-term investments                        241        321          231
Security repurchase transactions-net           10          9            4
Other                                          67         56           45
- - -----------------------------------------------------------------------------
                                            2,199      2,256        2,319
Investment expense                            (53)       (47)         (43)
- - -----------------------------------------------------------------------------
         NET INVESTMENT INCOME             $2,146     $2,209       $2,276
=============================================================================


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       70

- - ----------------------------------------------------------------------------
                          Note B -- Investments (cont.)


ANALYSIS OF INVESTMENT GAINS (LOSSES)
- - ----------------------------------------------------------------------------
Year Ended December 31                                  1998   1997   1996
- - ----------------------------------------------------------------------------
(In millions of dollars)

Realized investment gains and (losses):
  Fixed maturities                                      $467   $452   $293
  Equity securities                                       38    103    216
  Derivative securities                                   12     (7)    18
  Other, including guaranteed Separate Account business  178    205*    92
                                                        --------------------
                                                         695    753    619
Allocated to participating policyholders                 (14)   (15)   (14)
Income tax expense                                      (247)  (260)  (218)
- - ----------------------------------------------------------------------------
        Net realized investment gains                    434    478    387
- - ----------------------------------------------------------------------------
Change in net unrealized investment gains and (losses):
  Fixed maturities                                        34    347   (878)
  Equity securities                                      796    (38)   (24)
  Other, including guaranteed Separate Account business (107)    72   (122)
                                                        --------------------
                                                         723    381 (1,024)
Minority interest                                         (6)    (5)     5
Allocated to participating policyholders                   -     (4)    18
Income tax (expense) benefit                            (249)  (101)   357
- - ----------------------------------------------------------------------------
   Change in net unrealized investment gains (losses)    468    271   (644)
- - ----------------------------------------------------------------------------
        NET REALIZED AND UNREALIZED                               
          INVESTMENT GAINS (LOSSES)                     $902   $749  $(257)
============================================================================
*INCLUDES $95 MILLION RELATED TO THE CNA SURETY TRANSACTION.

SUMMARY OF PROCEEDS FROM SALES AND GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
- - ----------------------------------------------------------------------------


                                1998                    1997                    1996
                        ---------------------  -----------------------  -----------------------

                         Fixed       Equity      Fixed       Equity       Fixed      Equity
Year Ended December 31  Maturities  Securities  Maturities  Securities  Maturities  Securities
- - -----------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                 
Proceeds from sales      $35,480       $848       $38,429     $1,406     $34,864    $1,077
===============================================================================================
Gross realized gains     $   621       $119       $   651     $  137     $   412    $  241
Gross realized losses       (154)       (81)         (199)       (34)       (119)      (25)
- - -----------------------------------------------------------------------------------------------
     NET REALIZED GAINS
       ON SALES          $   467       $ 38       $   452     $  103     $   293    $  216
===============================================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       71

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------------------------------------
                          Note B - Investments (cont.)


ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------
                                         1998                           1997
                            -------------------------------   ---------------------------
December 31                   Gains      Losses       Net       Gains   Losses     Net
- - -----------------------------------------------------------------------------------------
(In millions of dollars)
                                                      
Fixed maturities             $  818      $  (256)    $   562     $  644  $  (116) $  528
Equity securities             1,051         (136)        915        190      (71)    119
Other, including guaranteed
 Separate Account business      217         (166)         51        268     (110)    158
                             --------------------------------------------------------------
                             $2,086      $  (558)      1,528     $1,102  $  (297)    805
                             ====================                ================  
Minority Interest                                         (6)                         -
Allocated to participating
 policyholders                                            (4)                         (4)
Deferred income taxes                                   (527)                       (278)
- - --------------------------------------------------------------------------------------------
         NET UNREALIZED
        INVESTMENT GAINS                             $   991                      $  523
============================================================================================


SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- - ------------------------------------------------------------------------------
                                                   Gross       Gross
                                      Amortized Unrealized  Unrealized  Market
December 31, 1998                       Cost       Gains       Losses    Value
- - ------------------------------------------------------------------------------
(In millions of dollars)

United States Treasury securities and 
  obligations of government agencies  $ 7,568   $  183      $ 17      $ 7,734
Asset-backed securities                 8,096      130        12        8,214
States, municipalities and political
  subdivisions - tax-exempt           $ 6,127      206        12        6,321
Corporate securities                    5,074      135       143        5,066
Other debt securities                   2,610      104        70        2,644
Redeemable preferred stocks                36       60         2           94
- - -----------------------------------------------------------------------------
   Total fixed maturities              29,511      818       256       30,073
Equity securities                       1,055    1,051       136        1,970
- - ------------------------------------------------------------------------------
   TOTAL                              $30,566   $1,869      $392      $32,043
==============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       72

- - -----------------------------------------------------------------------------
                          Note B - Investments (cont.)


SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
- - ------------------------------------------------------------------------------
                                                    Gross      Gross
                                       Amortized  Unrealized Unrealized Market
December 31, 1997                        Cost       Gains       Losses   Value
- - ------------------------------------------------------------------------------
(In millions of dollars)

United States Treasury securities and 
  obligations of government agencies   $12,883    $119       $ 22      $12,980
Asset-backed securities                  4,716      98         10        4,804
States, municipalities and political
  subdivisions - tax-exempt              4,534     194          4        4,724
Corporate securities                     5,253     142         49        5,346
Other debt securities                    1,567      61         31        1,597
Redeemable preferred stocks                 67      30          -           97
- - ------------------------------------------------------------------------------
       Total fixed maturities           29,020     644        116       29,548
Equity securities                          695     190         71          814
- - ------------------------------------------------------------------------------
       TOTAL                           $29,715    $834       $187      $30,362
==============================================================================

SUMMARY OF INVESTMENTS IN FIXED MATURITIES
BY CONTRACTUAL MATURITY
- - -----------------------------------------------------------------------------
                                               1998              1997
                                       ------------------- ------------------
                                       Amortized  Market   Amortized  Market
December 31                              Cost     Value     Cost      Value
- - -----------------------------------------------------------------------------
(In millions of dollars)

Due in one year or less                $ 3,167    $ 3,273  $ 2,058    $ 2,077
Due after one year through five years    5,419      5,437   11,520     11,525
Due after five years through ten years   5,380      5,353    3,323      3,373
Due after ten years                      7,449      7,796    7,403      7,769
Asset-backed securities not due
   at a single maturity date             8,096      8,214    4,716      4,804
- - -----------------------------------------------------------------------------
         TOTAL                         $29,511    $30,073  $29,020    $29,548
=============================================================================

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

The carrying value of investments  (other than equity  securities) that have not
produced  income for the last twelve months is $23 million at December 31, 1998.
At December 31, 1998,  there were no investments in a single issuer,  other than
the U.S. government, that, when aggregated exceeded 10% of stockholders' equity.

The Company's largest equity holding in a single issuer is Global Crossing, Ltd.
(Global Crossing) common stock. On December 31, 1998, the

                            CNA FINANCIAL CORPORATION
                            -------------------------
                                       73

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
                          Note B - Investments (cont.)

Company owned  20,037,584  shares,  or 9.8% of the  outstanding  common stock of
Global  Crossing  which  was  valued  at  $904  million.  Net  unrealized  gains
associated  with this security  approximated  $841 million at December 31, 1998.
Without  registration or an exemption from registration,  sales to the public of
the  Company's  holdings  of Global  Crossing  are  governed  by Rule 144 of the
Securities Act of 1933 (the Act) and may not commence until August 13, 1999. The
Company  has the right  after  August 13,  1999 to require  Global  Crossing  to
register under the Act up to 25% of the Company's holdings prior to December 31,
1999.

STATUTORY DEPOSITS
- - -----------------------------------
Cash and securities  with carrying  values of $1.7 billion and $2.1 billion were
deposited by CNAF's subsidiaries under requirements of regulatory authorities as
of December 31, 1998 and 1997, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       74

- - -----------------------------------------------------------------------------
                         Note C - Financial Instruments

NOTE C - Financial Instruments:
- - ------------------------------
In the normal  course of  business,  CNA  invests in various  financial  assets,
incurs  various  financial  liabilities,  and enters into  agreements  involving
derivative securities, including off-balance sheet financial instruments.

Fair values are required to be disclosed for all financial instruments,  whether
or not recognized in the consolidated balance sheet, for which it is practicable
to estimate that value.  In cases where quoted market prices are not  available,
fair values may be based on estimates  using  present  value or other  valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rates and estimates of future cash flows. Potential taxes
and other  transaction  costs have not been considered in estimating fair value.
The estimates  presented herein are subjective in nature and are not necessarily
indicative of the amounts that CNA could realize in a current  market  exchange.

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

The carrying  amounts reported in the  consolidated  balance sheet  approximates
fair  value  for  cash,  short-term  investments,   accrued  investment  income,
receivables for securities sold,  federal income taxes  recoverable,  securities
sold under repurchase agreements,  payables for securities purchased and certain
other  assets  and  other  liabilities   because  of  their  short-term  nature.
Accordingly,  these  assets  and  liabilities  are not  listed in the  following
tables.

The  carrying  amounts  and  estimated  fair  values  of CNA's  other  financial
instrument assets and liabilities are listed in the following tables. Derivative
instruments are shown in a separate table.

                           CNA FINANICIAL CORPORATION
                           --------------------------
                                       75

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
                     Note C -- Financial Instruments (cont.)


FINANCIAL ASSETS
- - -------------------------------------------------------------------------------------
                                                   1998                1997
                                           --------------------- --------------------
                                           Carrying  Estimated   Carrying  Estimated
December 31                                 Amount   Fair Value   Amount   Fair Value
- - -------------------------------------------------------------------------------------
(In millions of dollars)
                                                                   
Investments:
   Fixed maturities                        $ 30,073   $ 30,073    $ 29,548  $ 29,548
   Equity securities                          1,970      1,970         814       814
   Mortgage loans                                57         61          80        83
   Policy loans                                 177        173         177       168
   Other invested assets                        858        858         695       695
Separate Account business:
   Fixed maturities                           4,155      4,155       4,769     4,769
   Equity securities                            297        297         206       206
   Other                                        216        216         117       117
Notes receivable from officer shareholders       44         39           -         -
- - -------------------------------------------------------------------------------------


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

Fixed  maturity  securities  and equity  securities  were based on quoted market
prices,  where available.  For securities not actively traded,  fair values were
estimated  using values obtained from  independent  pricing  services,  costs to
settle or quoted market prices of comparable instruments.

The fair  values for  mortgage  loans and  policy  loans  were  estimated  using
discounted  cash flow analyses at interest rates  currently  offered for similar
loans  to  borrowers  with  comparable   credit  ratings.   Loans  with  similar
characteristics were aggregated for purposes of the calculations.

Valuation  techniques to determine fair value of other invested assets and other
Separate  Account  business assets consisted of discounted cash flows and quoted
market prices of the investments, comparable instruments or underlying assets of
the investments.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       76

- - -------------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)
FINANCIAL LIABILITIES
- - -------------------------------------------------------------------------------
                                              1998                 1997
                                       -------------------- -------------------
                                       Carrying  Estimated  Carrying Estimated
December 31                            Amount    Fair Value  Amount  Fair Value
- - -------------------------------------------------------------------------------
(In millions of dollars) 

Premium deposits and annuity contracts $ 1,259   $ 1,205    $ 1,194  $ 1,145
Debt                                     3,160     3,179      2,897    2,928
Financial guarantee contracts              240       231        382      373
Separate Account business:
   Guaranteed investment contracts       2,423     2,478      3,414    3,448
   Variable separate accounts            1,268     1,268        997      997
   Deferred annuities                       85       102         73       90
   Other                                   600       600        614      614
- - ------------------------------------------------------------------------------

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

CNA's Senior Notes and debentures were valued based on quoted market prices. The
fair value for other  long-term debt was estimated  using  discounted  cash flow
analyses,  based on current  incremental  borrowing  rates for similar  types of
borrowing arrangements.

The fair value of the liability for financial  guarantee  contracts was based on
discounted  cash flows  utilizing  interest  rates  currently  being offered for
similar contracts.

The fair values of guaranteed investment contracts and deferred annuities of the
Separate   Account   business  were  estimated   using   discounted   cash  flow
calculations,  based on  interest  rates  currently  being  offered  for similar
contracts  with  similar  maturities.  The fair  values of the  liabilities  for
variable Separate Account business are based on the quoted market values of the
underlying  assets of each variable  Separate  Account.  The fair value of other
Separate Account business liabilities approximated their carrying value.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       77

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)

DERIVATIVE FINANCIAL INSTRUMENTS
- - --------------------------------------------
CNA invests in derivative financial instruments in the normal course of business
primarily  to reduce its  exposure to market risk  (principally  interest  rate,
equity stock price and foreign  currency risk).  Financial  instruments used for
such  purposes  include  interest rate swaps,  interest rate caps,  put and call
options,  commitments to purchase securities,  futures and forwards. The Company
generally does not hold or issue these  instruments  for trading  purposes.  CNA
also uses  derivatives  to mitigate the risk  associated  with its indexed group
annuity  contracts by purchasing S&P 500 futures  contracts in a notional amount
equal to the portion of the customer liability related to S&P 500 exposure.

The gross  notional  principal or  contractual  amounts of derivative  financial
instruments in the general  account at December 31, 1998 and 1997 totaled $1,667
million  and $1,609  million,  respectively.  The gross  notional  principal  or
contractual amounts of derivative financial instruments in the Separate Accounts
totaled  $1,193  million  and $956  million  at  December  31,  1998  and  1997,
respectively.  The  contractual  or notional  amounts are used to calculate  the
exchange of contractual payments under the agreements and are not representative
of the potential for gain or loss on these agreements.

The fair values associated with derivative  financial  instruments are generally
affected by interest rates,  equity prices and foreign currency  exchange rates.
The credit exposure  associated with these  instruments is generally  limited to
the  unrealized  fair  value  of the  instruments  and  will  vary  based on the
creditworthiness of the  counterparties.  Although the Company is exposed to the
aforementioned  credit  risk,  it does not  expect any  counterparty  to fail to
perform as contracted based on the  creditworthiness of the counterparties.  Due
to the  nature  of the  derivative  securities,  the  Company  does not  require
collateral.

The fair value of derivatives  generally reflects the estimated amounts that CNA
would receive or pay upon  termination  of the contracts at the reporting  date.
Dealer quotes are  available for  substantially  all of CNA's  derivatives.  For
securities not actively traded,  fair values are estimated using values obtained
from independent  pricing  services,  costs to settle or quoted market prices of
comparable instruments.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       78

- - -------------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)

A summary of the  aggregate  contractual  or notional  amounts,  estimated  fair
values and gains or losses related to derivative financial instruments as of and
for the year ended December 31, 1998 and 1997 are presented below.



- - ---------------------------------------------------------------------------------------------



                                              CONTRACTUAL/     ASSET/(LIABILITY)  RECOGNIZED
DECEMBER 31, 1998                            NOTIONAL AMOUNT     FAIR VALUE       GAIN (LOSS)
- - ---------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                         
General Account
  Interest rate swaps - corporate borrowings $  650             $(10)              $  --
  Interest rate swaps - other                    78              (10)                (30)
  Interest rate caps                            500                1                  (2)
  Futures - short                               158               --                  (3)
  Forwards                                      211               (1)                 (6)
  Options purchased                              70                3                  51
  Options written                                --               --                   2
- - ---------------------------------------------------------------------------------------------
     TOTAL                                   $1,667             $(17)              $  12
=============================================================================================
Separate Accounts
  Futures - long                             $  928             $  2               $ 156*
  Futures - short                                51               --                  (1)
  Forwards                                        2               --                  --
  Commitments to purchase government
   and municipal securities                      69                1                   4
  Options purchased                              77                1                  (1)
  Options written                                66               --                   2
- - ---------------------------------------------------------------------------------------------
     TOTAL                                   $1,193             $  4               $ 160
=============================================================================================
*AMOUNT IS OFFSET BY AN INCREASE IN THE LIABILITY TO PARTICIPANTS.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       79

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -----------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)


- - -----------------------------------------------------------------------------------------------
                                              CONTRACTUAL/     ASSET/(LIABILITY)  RECOGNIZED
DECEMBER 31, 1997                            NOTIONAL AMOUNT     FAIR VALUE       GAIN (LOSS)
- - -----------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                             
General Account
  Interest rate swaps - corporate borrowings $  950             $ (4)              $   --
  Interest rate swaps - other                    59               (8)                  (8)
  Interest rate caps                            500                4                   (1)
  Futures - short                                21               --                   (1)
  Forwards                                       11               --                    7
  Commitments to purchase government
   and municipal securities                      --               --                    1
  Options purchased                              67                2                   (5)
  Options written                                 1               --                   --
- - -------------------------------------------------------------------------------------------------
    TOTAL                                    $1,609             $ (6)              $   (7)
=================================================================================================
Separate Accounts
  Futures - long                             $  663             $ --               $  112*
  Futures - short                                48               --                   --
  Forwards                                        1               --                   --
  Commitments to purchase government
   and municipal securities                      80               --                    1
  Options purchased                              91               --                   (1)
  Options written                                73               --                    2
- - --------------------------------------------------------------------------------------------------
    TOTAL                                    $  956             $ --               $  114
==================================================================================================
*AMOUNT IS OFFSET BY AN INCREASE IN THE LIABILITY TO PARTICIPANTS.



An interest rate swap is an agreement in which two parties agree to exchange, at
specified  intervals,  interest  payment  streams  calculated on an  agreed-upon
notional  principal  amount  with at least one  stream  based  upon a  specified
floating  rate index.  CNAF has entered into  interest  rate swap  agreements to
convert the variable rate of the borrowing  under the revolving  credit facility
and the commercial paper program to a fixed rate. At December 31, 1998 and 1997,
CNAF had  outstanding  interest rate swap agreements with several banks having a
total notional principal amount of $650 million and $950 million,  respectively.
Those  agreements,  which terminate from May 2000 to December 2000,  effectively
fixed CNAF's interest rate exposure on $650 million and $950 million of variable
rate debt, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       80

- - -----------------------------------------------------------------------------
                     Note C - Financial Instruments (cont.)

CNA also has outstanding  trading interest rate swaps which primarily  represent
an exchange of the 90-day treasury bill rate for the change in the Goldman Sachs
Commodities Index.

Futures  are  contracts  to buy or sell a  standard  quantity  and  quality of a
commodity, financial instrument or index at a specified future date and price.

Forwards  are  contracts  between two  parties to  purchase  and sell a specific
quantity  of a  commodity,  government  security,  foreign  currency,  or  other
financial  instrument at a price specified at contract inception,  with delivery
and settlement at a specified future date.

Commitments to purchase  government  and municipal  securities are agreements to
purchase securities in the future at a predetermined price.

Options are  contracts  that grant the  purchaser,  for a premium  payment,  the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.

An  interest  rate  cap  consists  of a  guarantee  given by the  issuer  to the
purchaser in exchange for the payment of a premium.  This guarantee  states that
if  interest  rates  rise  above a  specified  rate the  issuer  will pay to the
purchaser the difference  between the then current market rate and the specified
rate on the notional principal amount.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       81

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -----------------------------------------------------------------------------
                             Note D -- Income Taxes

Note D - Income Taxes:
- - ----------------------
CNAF  and  its  eligible  subsidiaries  (CNA  Tax  Group)  are  included  in the
consolidated  Federal income tax return of Loews and its eligible  subsidiaries.
Loews and CNAF have agreed that for each taxable  year,  CNA will (i) be paid by
Loews the amount,  if any, by which the Loews  consolidated  Federal  income tax
liability  is  reduced  by virtue of the  inclusion  of the CNA Tax Group in the
Loews consolidated Federal income tax return, or (ii) pay to Loews an amount, if
any,  equal to the Federal  income tax which would have been  payable by the CNA
Tax Group  filing a separate  consolidated  tax return.  In the event that Loews
should have a net operating loss in the future computed on the basis of filing a
separate consolidated tax return without the CNA Tax Group, CNAF may be required
to repay tax recoveries  previously  received from Loews. This agreement between
Loews and CNAF may be canceled by either party upon thirty days written notice.

For 1998, the inclusion of the CNA Tax Group in the consolidated  Federal income
tax return of Loews has resulted in a decreased Federal income tax liability for
Loews. Accordingly, Loews has paid or will pay to CNAF approximately $83 million
for 1998.  In 1997 and 1996,  the  inclusion of the CNA Tax Group  increased the
Federal  income  tax  liability  for  Loews.  Accordingly,  CNAF has paid  Loews
approximately $210 million for 1997 and $99 million for 1996.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       82

- - -------------------------------------------------------------------------------
                         Note D -- Income Taxes (cont.)

A  reconciliation  between  the  statutory  Federal  income  tax rate and  CNA's
effective  income tax rate as a percentage of income before income taxes,  after
giving effect to minority interest, is as follows:

- - ---------------------------------------------------------------------------
Year Ended December 31                               1998    1997    1996
- - ---------------------------------------------------------------------------

Income taxes at statutory rates                       35.0%  35.0%   35.0%
Tax exempt interest and dividends received deduction (31.3)  (6.7)   (6.4)
State income taxes                                     8.3    1.5     0.7
Other                                                  2.3   (0.9)   (1.0)
- - ---------------------------------------------------------------------------
         EFFECTIVE INCOME TAX RATE                    14.3%  28.9%   28.3%
===========================================================================

The composition of CNA's total income tax expense  allocated  between  operating
income and realized investment gains and losses is as follows:

- - ---------------------------------------------------------------------------
Year Ended December 31                               1998    1997    1996
- - ---------------------------------------------------------------------------
(In millions of dollars)

Income tax (benefit) expense on operating income     $(200)  $132    $162
Income tax expense on realized investment gains        247    260     218
- - ---------------------------------------------------------------------------
         TOTAL INCOME TAX EXPENSE                    $  47   $392    $380
===========================================================================

The current and deferred components of CNA's income tax expense are as follows:

- - ---------------------------------------------------------------------------
Year Ended December 31                               1998    1997    1996
- - ---------------------------------------------------------------------------
(In millions of dollars)

Current tax expense                                  $   -   $248    $ 28
Deferred tax expense                                    47    144     352
- - ---------------------------------------------------------------------------
         TOTAL INCOME TAX EXPENSE                    $  47   $392    $380
===========================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       83

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
                         Note D - Income Taxes (cont.)

CNA's  deferred  income taxes  reflect the net effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
CNA's  deferred  tax assets and  liabilities  as of December  31, 1998 and 1997,
respectively,  are set forth in the table  below.  The 1998  amounts  reflect an
increase in certain  components  of net  deferred  tax assets as a result of the
finalization of an Internal Revenue Service examination.  Such increase resulted
in a corresponding reduction of intangible assets.

- - -----------------------------------------------------------------
Year Ended December 31                        1998         1997
- - -----------------------------------------------------------------
(In millions of dollars)
Insurance reserves:                                   
   Property/casualty claim reserves         $1,183      $ 1,101
   Unearned premium reserves                   372          283
   Life reserves                               195          157
   Other insurance reserves                     27           22
Deferred acquisition costs                    (748)        (667)
Postretirement benefits other than pensions    142          149
Net unrealized gains                          (527)        (278)
Restructuring costs                             56            -
Other, net                                     295          303
- - -----------------------------------------------------------------
       NET DEFERRED TAX ASSETS              $  995      $ 1,070
=================================================================

At December 31, 1998,  gross  deferred  tax assets and  liabilities  amounted to
approximately $2.7 billion and $1.7 billion, respectively. At December 31, 1997,
gross deferred tax assets and liabilities amounted to approximately $2.7 billion
and $1.6 billion, respectively.

CNA has a history of profitability and as such, CNA's management  believes it is
more likely than not that the net deferred tax assets will be realized.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       84

- - ------------------------------------------------------------------------------
       Note E --Liability for Unpaid Claims and Claim Adjustment Expenses

Note E - Liability for Unpaid Claims and Claim Adjustment Expenses:
- - -------------------------------------------------------------------

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

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

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       85

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
  Note E -- Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)

The table below provides a reconciliation between beginning and ending claim and
claim adjustment expense reserve balances for 1998, 1997 and 1996.

CHANGES IN RESERVES FOR PROPERTY/CASUALTY
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
- - -------------------------------------------------------------------------------
Year Ended December 31                                   1998    1997    1996
- - -------------------------------------------------------------------------------
(In millions of dollars)

Reserves at beginning of year:
  Gross                                               $28,571  $29,395 $31,044
  Ceded                                                 5,326    5,660   6,089
- - -------------------------------------------------------------------------------
       Net reserves at beginning of year               23,245   23,735  24,955
Net reserves of acquired insurance companies at date  
  of acquisition                                          122       57      --
- - -------------------------------------------------------------------------------
       Total net reserves                              23,367   23,792  24,955
- - -------------------------------------------------------------------------------
Net incurred claims and claim adjustment expenses:
  Provision for insured events of current year          7,903    7,942   7,922
  Increase (decrease) in provision for insured 
    events of prior years                                 263     (256)    (91)
  Amortization of discount                                143      143     149
- - -------------------------------------------------------------------------------
       Total net incurred                               8,309    7,829   7,980
- - -------------------------------------------------------------------------------
Net payments attributable to:
   Current year events                                  2,791    2,514   2,676
   Prior year events                                    5,954    5,862   6,524
- - -------------------------------------------------------------------------------
       Total net payments                               8,745    8,376   9,200 
- - -------------------------------------------------------------------------------
Net reserves at end of year                            22,931   23,245  23,735
Ceded at end of year                                    5,424    5,326   5,660
- - -------------------------------------------------------------------------------
       GROSS RESERVES AT END OF YEAR*                 $28,355  $28,571 $29,395
===============================================================================
* EXCLUDES LIFE CLAIM AND CLAIM EXPENSE RESERVES AND  INTERCOMPANY  ELIMINATIONS
OF $837 MILLION,  $987 MILLION AND $1 BILLION AS OF DECEMBER 31, 1998,  1997 AND
1996, RESPECTIVELY, INCLUDED IN THE CONSOLIDATED BALANCE SHEET.

The increase  (decrease) in provision for insured events of prior years (reserve
development) is comprised of the following components:

RESERVE DEVELOPMENT-adverse/(favorable)
- - -------------------------------------------------------------------------------
Year Ended December 31                                   1998     1997    1996
- - -------------------------------------------------------------------------------
(In millions of dollars)

Asbestos                                              $ 243    $   105  $   51
Environmental pollution and other mass tort             227         --      65
Other                                                  (207)      (361)   (207)
- - -------------------------------------------------------------------------------
       TOTAL                                          $ 263    $  (256) $  (91)
===============================================================================

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                       86

- - -------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)

ENVIRONMENTAL, OTHER MASS TORT AND ASBESTOS RESERVES
- - ----------------------------------------------------

Environmental  pollution  clean-up  is the  subject  of both  federal  and state
regulation.  By some  estimates,  there are  thousands of potential  waste sites
subject to clean-up.  The insurance industry is involved in extensive litigation
regarding coverage issues. Judicial  interpretations in many cases have expanded
the scope of coverage and liability beyond the original intent of the policies.

The Comprehensive  Environmental Response Compensation and Liability Act of 1980
(Superfund) and comparable state statutes  (mini-Superfund)  govern the clean-up
and  restoration  of abandoned  toxic waste sites and  formalize  the concept of
legal liability for clean-up and restoration by Potentially  Responsible Parties
(PRPs).  Superfund  and  the  mini-Superfunds  establish  mechanisms  to pay for
clean-up of waste sites if PRPs fail to do so, and to assign  liability to PRPs.
The extent of  liability  to be  allocated to a PRP is dependent on a variety of
factors.  Further,  the number of waste sites subject to clean-up is unknown. To
date,   approximately   1,300  clean-up  sites  have  been   identified  by  the
Environmental  Protection  Agency on its  National  Priorities  List (NPL).  The
addition of new clean-up sites to the NPL has slowed in recent years.
Many clean-up sites have been designated by state authorities as well.

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

A number of proposals  to reform  Superfund  have been made by various  parties.
However,  no reforms  were  enacted by  Congress in 1998 and it is unclear as to
what  positions  the  Congress  or  the   Administration   will  take  and  what
legislation,  if  any,  will  result.  If  there  is  legislation,  and in  some
circumstances even if there is no legislation, the federal role in environmental
clean-up may be materially reduced in favor of state action. Substantial changes
in the federal statute or the activity of the EPA may cause states to reconsider
their  environmental  clean-up  statutes  and  regulations.  There  can  be  no
meaningful prediction of the regulation that would result.

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

As of December  31, 1998 and 1997,  CNA carried  approximately  $787 million and
$773 million,  respectively, of claim and claim adjustment expense reserves, net
of reinsurance recoverables, for reported and unreported environmental pollution
and other mass tort claims. In 1998 CNA

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       87

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
   Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)

recorded $227 million of adverse development compared to no development in 1997.
The  additional  strengthening  in 1998 was based upon the Company's  continuous
review of these types of  exposures,  as well as its  internal  study and annual
analysis of  environmental  pollution and other mass tort claims.  This analysis
indicated deterioration in claim experience related to pollution claims, as well
as some emerging mass tort exposures.

CNAF's insurance subsidiaries have exposure to asbestos claims,  including those
attributable  to  CNA's  litigation  with  Fibreboard  Corporation.  A  detailed
discussion  of  CNA's   litigation   with   Fibreboard   Corporation   regarding
asbestos-related  bodily  injury  claims can be found in Note F.  Estimation  of
asbestos claim reserves  involves many of the same  limitations  discussed above
for  environmental  pollution  claims such as  inconsistency of court decisions,
specific policy  provisions,  allocation of liability  among  insurers,  missing
policies  and proof of coverage.  As of December 31, 1998 and 1997,  CNA carried
approximately  $1,456  million and $1,400  million,  respectively,  of claim and
claim adjustment expense reserves, net of reinsurance recoverables, for reported
and unreported  asbestos-related  claims.  In 1998, CNA recorded $243 million of
adverse development  compared to $105 million of adverse development in 1997. As
with the  Company's  exposure  to  environmental  pollution  and other mass tort
exposures,  the additional  reserve  strengthening in 1998 for  asbestos-related
claims,  was a result of  management's  continuous  review of  development  with
respect to these exposures,  as well as a review of the results of the Company's
annual  analysis of these claims which was  completed  in  conjunction  with the
study of  environmental  pollution  and other mass tort  claims.  This  analysis
indicated   deterioration   in   claims   experience   and  claim   counts   for
asbestos-related claims.

The results of operations in future years may continue to be adversely  affected
by environmental  pollution and asbestos claims and claim  adjustment  expenses.
Management  will  continue  to  monitor  these   liabilities  and  make  further
adjustments as warranted.

OTHER PROPERTY AND CASUALTY RESERVES
- - -------------------------------------------------
Other lines favorable loss and loss adjustment  expense reserve  development for
1998 of $207 million was due to favorable loss development of approximately $100
million in commercial lines business and approximately $105 million of favorable
loss  development in personal lines business.  The favorable  development in the
commercial lines business was primarily  attributable to improved  frequency and
severity in the commercial auto lines, as well as some continued  improvement in
workers' compensation.  The favorable development in the personal lines business
was attributable to improved trends, particularly in personal auto liability.

Other lines favorable loss and loss adjustment  expense reserve  development for
1997 of $361 million was due to favorable  loss  development  of $540 million in
workers'  compensation  involuntary  risks and $200  million of  favorable  loss
development in personal lines. This favorable  development was offset in part by
unfavorable development in other commercial lines of $379 million.

The favorable loss  development in involuntary  risks is  attributable to better
than expected results in workers'  compensation and private passenger automobile
lines  stemming  from  improved  frequency  and  severity in these  lines.  This
favorable loss development was offset in part by unfavorable premium development
of $340 million as estimates of premiums for prior years were reduced.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       88

- - ------------------------------------------------------------------------------
Note E - Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)

The favorable loss  development in personal lines was  attributable  to improved
trends particularly in personal auto lines.

The  unfavorable  development  in other  commercial  lines was  attributable  to
approximately  $240 million in general liability lines as well as adverse trends
in  construction  defect  coverages,  approximately  $130 million in  commercial
multiperil,  and adverse loss adjustment  expense  development of  approximately
$215 million, offset in part by favorable development of $206 million, primarily
in  workers'   compensation  and  reinsurance   lines.   This  unfavorable  loss
development was offset in part by favorable premium development of $170 million.

The other favorable  development during 1996 of $207 million was principally due
to favorable experience in the workers' compensation line of business.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       89

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
  Note E -- Liability for Unpaid Claims and Claim Adjustment Expenses (cont.)

The following  tables  provide  additional  data related to CNA's  environmental
pollution, other mass tort and asbestos-related claims activity.


RESERVE SUMMARY
- - --------------------------------------------------------------------------------------
December 31                                1998                        1997
                               --------------------------  ---------------------------
                               Environmental               Environmental
                               Pollution and               Pollution and
                               Other Mass Tort   Asbestos  Other Mass Tort   Asbestos
- - --------------------------------------------------------------------------------------
(In millions of dollars)
                                                                
Reported claims:
  Gross reserves                     $291        $1,305         $279         $1,198
  Less reinsurance recoverable        (41)          (91)         (36)          (117)
                               -------------------------------------------------------
  Net reported claims                 250         1,214          243          1,081
Net unreported claims                 537           242          530            319
- - --------------------------------------------------------------------------------------
        NET RESERVES                 $787        $1,456         $773         $1,400
======================================================================================

ENVIRONMENTAL POLLUTION AND
OTHER MASS TORT
CHANGES IN RESERVES
- - ------------------------------------------------------------------
Year ended December 31               1998        1997      1996
- - ------------------------------------------------------------------
(In millions of dollars)

Net reserves at beginning of year   $  773     $  908    $1,063

Reserve strengthening                  227         --        65

Less: Gross payments                   274        258       304
      Reinsurance recoveries           (61)      (123)      (84)
                                    ------------------------------
      Net payments                     213        135       220
- - ------------------------------------------------------------------
        NET RESERVES AT END OF YEAR $  787     $  773    $  908
================================================================== 
ASBESTOS CHANGES IN RESERVES
- - ------------------------------------------------------------------
Year ended December 31               1998        1997      1996
- - ------------------------------------------------------------------
(In millions of dollars)

Net reserves at beginning of year   $1,400     $1,506    $2,191

Reserve strengthening                  243        105        51

Less: Gross payments                   239        268       787
      Reinsurance recoveries           (52)       (57)      (51)
                                    -------------------------------
      Net payments                     187        211       736
- - --------------------------------------------------------------------
        NET RESERVES AT END OF YEAR $1,456     $1,400    $1,506
====================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       90

- - -----------------------------------------------------------------------------
             Note F -- Legal Proceedings and Contingent Liabilities

Note F - Legal Proceedings and Contingent Liabilities:
- - ------------------------------------------------------

FIBREBOARD LITIGATION
- - ----------------------------------------
CNAF's  primary  property/casualty  subsidiary,   Continental  Casualty  Company
(Casualty),   has  been  party  to  litigation   with   Fibreboard   Corporation
(Fibreboard) involving coverage for certain  asbestos-related claims and defense
costs (San Francisco Superior Court,  Judicial Council  Coordination  Proceeding
1072).  As described  below,  Casualty,  Fibreboard,  another  insurer  (Pacific
Indemnity,  a subsidiary of the Chubb Corporation),  and a negotiating committee
of asbestos claimant attorneys  (collectively referred to as "Settling Parties")
have   reached  a  Global   Settlement   Agreement   to   resolve   all   future
asbestos-related bodily injury claims involving Fibreboard,  which is subject to
court approval.

Casualty,  Fibreboard and Pacific  Indemnity have also reached an agreement (the
"Trilateral  Agreement")  on a settlement to resolve the coverage  litigation in
the event the Global Settlement Agreement does not obtain final court approval.

On July 27, 1995, the United States  District Court for the Eastern  District of
Texas  entered  judgment  approving  the  Global  Settlement  Agreement  and the
Trilateral Agreement. As expected,  appeals were filed as respects both of these
decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of
Appeals in New Orleans  affirmed the judgment  approving  the Global  Settlement
Agreement by a 2 to 1 vote and affirmed the judgment  approving  the  Trilateral
Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and Suggestions
for  Rehearing  by the entire  Fifth  Circuit  Court of Appeals as respects  the
decision on the Global  Settlement  Agreement  were denied.  Two  petitions  for
certiorari  were filed in the Supreme  Court as respects  the Global  Settlement
Agreement. On June 27, 1997, the Supreme Court granted these petitions,  vacated
the Fifth Circuit's  judgment as respects the Global Settlement  Agreement,  and
remanded  the matter to the Fifth  Circuit for  reconsideration  in light of the
Supreme Court's decision in Amchem Products Co. v. Windsor.
                            -------------------------------

On January 27, 1998, a panel of the United States Fifth Circuit Court of Appeals
again  approved the Global  Settlement  Agreement by a 2 to 1 vote.  Two sets of
Objectors filed  petitions for  certiorari,  which were docketed on April 16 and
17, 1998,  by the United States  Supreme  Court.  On June 22, 1998,  the Supreme
Court granted the petition for  certiorari  filed by one set of  Objectors.  The
Supreme Court heard oral  arguments on December 8, 1998. No opinion has yet been
released.

No further appeal was filed with respect to the Trilateral Agreement; therefore,
court approval of the Trilateral Agreement has become final.

SETTLEMENT AGREEMENTS
On April 9, 1993,  Casualty and Fibreboard entered into an agreement pursuant to
which,  among  other  things,  the parties  agreed to use their best  efforts to
negotiate and finalize a global class action  settlement  with  asbestos-related
bodily injury and death claimants.

On August 27, 1993, the Settling  Parties  reached an agreement in principle for
an omnibus settlement to resolve all future asbestos-related bodily

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       91

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
         Note F - Legal Proceedings and Contingent Liabilities (cont.)

injury claims involving Fibreboard. The Global Settlement Agreement was executed
on December 23,  1993.  The  agreement  calls for  contribution  by Casualty and
Pacific  Indemnity of an aggregate of $1.53  billion to a trust fund for a class
of all future  asbestos  claimants,  defined  generally as those  persons  whose
claims against Fibreboard were neither filed nor settled before August 27, 1993.
(As used in this note,  "present"  claims  generally  refers to asbestos  claims
filed  against  Fibreboard on or before  August 27,  1993).  An  additional  $10
million is to be contributed to the fund by Fibreboard.  As indicated above, the
Global  Settlement  Agreement  has been  approved by the Fifth  Circuit a second
time,  but the Supreme Court granted a petition for  certiorari and is currently
reviewing the Fifth Circuit decision.

On October 12, 1993, Casualty, Pacific Indemnity and Fibreboard entered into the
Trilateral  Agreement to settle the coverage  litigation to operate in the event
that the Global Settlement  Agreement is disapproved.  The Trilateral  Agreement
calls for  payment by  Casualty  and  Pacific  Indemnity  of an  aggregate  $2.0
billion,  of  which  Casualty's  portion  is  approximately  $1.46  billion,  to
Fibreboard  to resolve  all  claims by  Fibreboard  and all  future and  certain
present  asbestos  claimants  arising  under the policy  issued to Fibreboard by
Casualty.

Under  either the  Global  Settlement  Agreement  or the  Trilateral  Agreement,
Casualty is also obligated to pay prior  settlements of present asbestos claims.
As a result of the final approval of the Trilateral  Agreement,  such obligation
has become final.

Through  December 31, 1998,  Casualty,  Fibreboard  and plaintiff  attorneys had
reached  settlements  with  respect  to  approximately  134,000  claims,  for an
estimated  settlement amount of approximately  $1.63 billion plus any applicable
interest. Final court approval of the Trilateral Agreement obligated Casualty to
pay under these settlements.  Approximately $1.69 billion (including interest of
$185  million) was paid  through  December 31,  1998.  Such  payments  have been
partially  recovered  from  Pacific  Indemnity.  Casualty  may  negotiate  other
agreements for unsettled claims.

Final court  approval of the  Trilateral  Agreement and its  implementation  has
substantially  resolved  Casualty's  exposure  with  respect to asbestos  claims
involving Fibreboard.  While there does exist the possibility of further adverse
developments with respect to Fibreboard  claims,  management does not anticipate
subsequent reserve adjustments, if any, to materially affect the equity of CNAF.
Management  will continue to monitor the potential  liabilities  with respect to
Fibreboard  asbestos  claims  and will make  adjustments  to claim  reserves  if
warranted.

TOBACCO LITIGATION
- - -------------------------------------
CNA's primary  property/casualty  subsidiaries  have been named as defendants as
part of a "direct  action"  lawsuit,  Richard P. Ieyoub v. The American  Tobacco
                                      ------------------------------------------
Company,  et. al., filed by the Attorney General for the State of Louisiana,  in
- - -----------------
                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       92

- - ------------------------------------------------------------------------------
          Note F - Legal Proceedings & Contingent Liabilities (cont.)

state court,  Calcasieu Parish,  Louisiana.  In that suit, filed against certain
tobacco  manufacturers and distributors (the "Tobacco  Defendants") and over 100
insurance  companies,  the State of Louisiana seeks to recover medical  expenses
allegedly incurred by the State as a result of tobacco-related illnesses.

The original  suit was filed on March 13, 1996,  against the Tobacco  Defendants
only.  The  insurance  companies  were  added to the suit in March  1997 under a
"direct  action"  statute in  Louisiana.  Under the direct action  statute,  the
Louisiana  Attorney  General is pursuing  liability  claims  against the Tobacco
Defendants and their insurers in the same suit,  even though none of the Tobacco
Defendants has made a claim for insurance coverage.

In June of 1997, the above case was removed to the United States  District Court
for the Western  District of Louisiana.  The district court's decision denying a
motion  to  remand  the case to the state  court is  currently  on appeal to the
United  States Fifth Circuit Court of Appeals.  During the pending  appeal,  all
proceedings in state court and in the federal district court are stayed.

On November 23, 1998, the cigarette  manufacturers and the attorneys general for
46 states (including Louisiana),  and six other governmental entities reached an
agreement regarding the resolution of their Medicaid  reimbursement  claims. The
cigarette  manufacturers  have  agreed to make annual  payments  in  perpetuity,
including a total of $206 billion  through  2025.  In exchange,  the states have
agreed to release  their claims  against the  cigarette  manufacturers  and have
further  agreed to  release  any  claims  that they may have  against  cigarette
distributors,  retailers,  component part manufacturers and their insurers. None
of these latter entities are parties to the settlement  agreement.  The Attorney
General  of  Louisiana  and  the   defendants  in  the  Ieyoub   litigation  are
implementing  procedures  to  secure  dismissal  of the  Ieyoub  litigation  and
resolution  of the  Attorney  General's  claims.  Thus,  the  litigation  may be
dismissed with prejudice in the near future.

However,  in other  states,  third  parties have  challenged  the November  1998
settlement agreement,  and the Medicaid  reimbursement  lawsuits in those states
may not be resolved for some time.  In addition,  the November  1998  settlement
does not  preclude  the  cigarette  manufacturers,  or other  entities  named as
defendants in the various Medicaid reimbursement lawsuits, from seeking coverage
under  the  insurance  policies  issued  to  those  defendants.  Because  of the
uncertainties  inherent in assessing  the risk of  liability  at this  juncture,
management is unable to make a meaningful estimate of the amount or range of any
loss that could result from an  unfavorable  outcome of the pending  litigation.
However, management believes that the ultimate outcome of the pending litigation
should not materially affect the results of operations or equity of CNAF.

OTHER LITIGATION
- - ----------------------------
CNAF and its subsidiaries  are also parties to other  litigation  arising in the
ordinary course of business.  The outcome of this other  litigation will not, in
the opinion of management, materially affect the results of operations or equity
of CNAF.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       93

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -----------------------------------------------------------------------------
                              Note G -- Reinsurance

Note G -- Reinsurance
- - ---------------------

The ceding of insurance does not discharge the primary liability of the original
insurer. CNA places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough  assessment of the reinsurers'  credit
quality and claim  settlement  performance.  Further,  for carriers that are not
authorized  reinsurers  in CNA's  states of domicile,  CNA receives  collateral,
primarily  in the  form of bank  letters  of  credit.  Such  collateral  totaled
approximately  $774  million  and $857  million at  December  31, 1998 and 1997,
respectively.

CNA's largest recoverable from a single reinsurer, including prepaid reinsurance
premiums,  is with  Lloyds of London  and  approximated  $416  million  and $451
million at December 31, 1998 and 1997, respectively.

Insurance  claims and  policyholders'  benefits  expense  is net of  reinsurance
recoveries of $994 million, $1,309 million and $1,220 million for 1998, 1997 and
1996, respectively.

In the tables below,  life premiums are primarily from long duration  contracts,
property/casualty  premiums are from short duration contracts,  and accident and
health premiums are primarily from short duration contracts.

The effects of reinsurance on earned premiums are shown in the following tables:

- - -----------------------------------------------------------------------
                                          Earned              Assumed/
                                         Premiums                Net
                          ----------------------------------       %
Year Ended December 31     Direct  Assumed  Ceded     Net          
- - -----------------------------------------------------------------------
(In millions of dollars)
1998
  Property/casualty       $ 8,327  $ 1,549  $   897   $ 8,979  17.3%
  Accident and health       3,584      181      261     3,504   5.2
  Life                      1,014      159      281       892  17.8
- - ----------------------------------------------------------------------
     TOTAL PREMIUMS       $12,925  $ 1,889  $ 1,439   $13,375  14.1%
======================================================================

1997
  Property/casualty       $ 8,528  $ 1,101  $   612   $ 9,017  12.2%
  Accident and health       3,603      111      154     3,560   3.1
  Life                        908      128      131       905  14.1
- - ----------------------------------------------------------------------
     TOTAL PREMIUMS       $13,039  $ 1,340  $   897   $13,482   9.9%
======================================================================

1996
  Property/casualty       $ 9,003  $ 1,123  $   989   $ 9,137  12.3%
  Accident and health       3,575      187      176     3,586   5.2
  Life                        736      121       55       802  15.1
- - ----------------------------------------------------------------------
     TOTAL PREMIUMS       $13,314  $ 1,431  $ 1,220   $13,525  10.6%
======================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       94

- - ------------------------------------------------------------------------------
                          Note G - Reinsurance (cont.)

The  effects of  reinsurance  on  written  premiums  are shown in the  following
tables:

- - -----------------------------------------------------------------------
                                          Written             Assumed/
                                         Premiums                Net
                          ---------------------------------        %
                                             
Year Ended December 31     Direct  Assumed  Ceded     Net        
- - -----------------------------------------------------------------------
(In millions of dollars)
1998
  Property/casualty       $ 8,765  $ 1,429  $   969   $ 9,225   15.5%
  Accident and health       3,785      178      257     3,706    4.8
  Life                      1,014      159      281       892   17.8
- - -----------------------------------------------------------------------
     TOTAL PREMIUMS       $13,564  $ 1,766  $ 1,507   $13,823   12.8%
=======================================================================
1997
  Property/casualty       $ 8,576  $ 1,262  $   693   $ 9,145   13.8%
  Accident and health       3,592      133      155     3,570    3.7
  Life                        908      128      131       905   14.1
- - ----------------------------------------------------------------------
     TOTAL PREMIUMS       $13,076  $ 1,523  $   979   $13,620   11.2%
======================================================================
1996
  Property/casualty       $ 9,078  $ 1,197  $   852   $ 9,423   12.7%
  Accident and health       3,708      188      183     3,713    5.1
  Life                        736      121       55       802   15.1
- - ----------------------------------------------------------------------
     TOTAL PREMIUMS       $13,522  $ 1,506  $ 1,090   $13,938   10.8%
======================================================================

The impact of reinsurance  on life insurance  in-force is shown in the following
schedule:

- - --------------------------------------------------------------------------
                                  Life Insurance In-Force
                          ------------------------------------
                                                                 Assumed/
(In millions of dollars)   Direct   Assumed   Ceded      Net      Net %
- - --------------------------------------------------------------------------
DECEMBER 31, 1998         $297,488  $96,906  $128,896  $265,498   36.5%
December 31, 1997          235,468   76,130    74,262   237,336   32.1
December 31, 1996          171,715   65,294    32,561   204,448   31.9
==========================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       95

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
                               Note H -- Debt

Note H - Debt:
- - --------------


DEBT
- - -----------------------------------------------------------------------------------------
December 31                                                           1998          1997
- - -----------------------------------------------------------------------------------------
(In millions of dollars)
                                                                               
   Variable Rate Debt:
       Commercial Paper                                                $  500     $  675
       Credit Facility - CNAF                                             235        400
       Credit Facility - CNA Surety                                       113        118
   Senior Notes:
       8.875%, due March 1, 1998                                           --        150
       8.25%, due April 15, 1999                                          100        102
       7.25%, due March 1, 2003                                           147        146
       6.25%, due November 15, 2003                                       249        249
       6.50% , due April 15, 2005                                         497         --
       6.75%, due November 15, 2006                                       248        248
       6.45%, due January 15, 2008                                        149         --
       6.60%, due December 15, 2008                                       199         --  
       8.375%, due August 15, 2012                                         98         98
       6.95%, due January 15, 2018                                        148         --
   7.25%  Debenture, due November 15, 2023                                247        247
   11.0% Secured Mortgage Notes, due June 30, 2013                        157        389
   6.9% - 16.29% Secured Capital Leases, due through December 31, 2011     46         47
   Other debt, due through 2019 (rates of 1.0% to 12.71%)                  27         28
- - -----------------------------------------------------------------------------------------
       TOTAL DEBT                                                      $3,160     $2,897
=========================================================================================


CNAF has a $795 million  revolving credit facility that expires in May 2001. The
amount available is reduced by CNAF's  outstanding  commercial paper borrowings.
As of December  31,  1998,  there was $60 million of unused  borrowing  capacity
under the  facility.  The interest rate on the bank loans is based on the London
Interbank Offered Rate (LIBOR), plus 16 basis points.  Additionally,  there is a
facility fee of 9 basis points  annually.  The average interest rate on the bank
loans under the credit  facility at December 31, 1998, 1997 and 1996, was 5.49%,
6.16% and 5.72%, respectively.

To offset the variable rate  characteristics of the facility,  CNAF entered into
interest  rate  swap  agreements  with  several  banks  having a total  notional
principal amount at December 31, 1998 and 1997 of $650 million and $950 million,
respectively,  which terminate from May 2000 to December 2000.  These agreements
provide that CNAF pay interest at a fixed rate,  averaging 6.07% at December 31,
1998 and 6.20% for both  December 31, 1997 and 1996,  respectively,  in exchange
for the receipt of  interest at the three month LIBOR rate.  The effect of these
interest  rate  swaps was to  increase  interest  expense  by  approximately  $2
million,  $4 million and $7 million for the years ended December 31, 1998,  1997
and 1996, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       96

- - -------------------------------------------------------------------------------
                             Note H - Debt (cont.)

The  commercial  paper  borrowings are classified as long-term as the program is
fully supported by the committed credit facility.  The weighted average interest
rate on  commercial  paper at December 31, 1998 was 5.89%  compared to 6.05% and
5.67% at December 31, 1997 and 1996, respectively.

The weighted  average interest rate (interest and facility fees) on the combined
revolving credit  facility,  commercial paper borrowings and interest rate swaps
was 6.36%, 6.35% and 6.28% at December 31, 1998, 1997 and 1996, respectively.

In 1998, CNAF issued $1 billion of senior notes under a $1 billion  Registration
Statement  on Form S-3 filed with the  Securities  and  Exchange  Commission  on
August 18, 1997. This shelf registration incorporated $250 million of securities
remaining available for issuance from a prior shelf  registration.  Since filing
the shelf  registration,  the Company has issued  senior notes in four  separate
offerings senior notes with an aggregate principal amount of $1 billion.

On September 30, 1997, CNA Surety, a 61% owned subsidiary of CNAF,  entered into
a $130 million, 5 year revolving credit facility.  The interest rate on facility
borrowings  is based on LIBOR  plus 20 basis  points.  Additionally,  there is a
facility fee of 10 basis  points  annually.  At December 31, 1998 and 1997,  the
outstanding  borrowings  under this  facility were $113 million and $118 million
and the weighted average interest rate was 5.53% and 6.17%, respectively.

The following table shows the future minimum principal payments on debt:

FUTURE MINIMUM PRINCIPAL PAYMENTS
- - ---------------------------------------
(In millions of dollars)

1999                           $  103
2000                                3
2001                              739
2002                              116
2003                              403
Thereafter                      1,814
Less: original issue discount     (18)
- - ---------------------------------------
      TOTAL                    $3,160
=======================================


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       97

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------
                             Note I -- Benefit Plans

Note I - Benefit Plans:
- - -----------------------

PENSION PLANS
- - -------------------------
CNA has noncontributory pension plans covering all full-time employees age 21 or
over who have completed at least one year of service. While the benefits for the
plans  vary,  they are  generally  based on years of  credited  service  and the
employee's highest sixty consecutive months of compensation.

CNA's funding  policy is to make  contributions  in accordance  with  applicable
governmental  regulatory  requirements.  The  assets of the  plans are  invested
primarily  in  U.S.  government   securities  with  the  balance  in  short-term
investments, common stocks and other fixed income securities.

Effective  January 1, 1996,  the  retirement  plans  redefined  compensation  to
include base pay, overtime and bonuses. This amendment generated an unrecognized
prior service cost of $20 million.

POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
- - ------------------------------------------------------
CNA provides certain health care benefits for eligible retirees, through age 64,
and provides life  insurance and  reimbursement  of Medicare Part B premiums for
all  eligible  retired  persons.  Funding  for these plans is  generally  to pay
covered expenses as they are incurred.

In 1998, CNA amended the Continental  post-retirement  plan to make the benefits
available to Continental  retirees  equivalent to the benefits  available to CNA
retirees. As a result of this amendment, CNA's postretirement benefit obligation
was reduced by $99 million.

As a result of the Company's  restructuring  activities discussed in Note N, the
Company recorded curtailment charges of approximately $19 million related to its
pension and post-retirement plans. Additionally these curtailments resulted in a
reduction of the pension and postretirement  benefit  obligations of $88 million
and $34 million, respectfully.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       98

- - ----------------------------------------------------------------------------
                         Note I - Benefit Plans (cont.)

The following provides a reconciliation of benefit obligations:

- - -------------------------------------------------------------------------------
                                                                POSTRETIREMENT 
                                               PENSION BENEFITS    BENEFITS
- - -------------------------------------------------------------------------------
December 31                                    1998     1997    1998   1997
- - -------------------------------------------------------------------------------
(In millions of dollars) 

Change in benefit obligation:
 Benefit obligation at January 1                 $1,780  $1,567 $  377 $  319
 Service cost                                        58      54     11     10
 Interest cost                                      126     119     28     25
 Participants' contributions                          -       -      5      2
 Plan amendments                                      -       1    (99)     -
 Actuarial loss                                     118     122     67     41
 Curtailment                                        (88)      -    (34)     -
 Benefits paid                                      (94)    (83)   (34)   (20)
- - -------------------------------------------------------------------------------
        Benefit obligation at December 31         1,900   1,780    321    377
- - -------------------------------------------------------------------------------

Change in plan assets:
 Fair value of plan assets at January 1           1,313   1,206      -      -
 Actual return on plan assets                       105     104      -      -
 Company contributions                              100      86     29     19
 Participants' contributions                          -       -      5      2
 Benefits paid                                      (94)    (83)   (34)   (21)
- - -------------------------------------------------------------------------------
        Fair value of plan assets at December 31  1,424   1,313      -      -
- - -------------------------------------------------------------------------------
 Funded status                                     (476)   (467)  (321)  (377)
 Unrecognized net actuarial loss                    239     218     51     19
 Unrecognized prior service cost (benefit)           60      88    (97)     -
 Unrecognized net transition obligation               -      (2)     -      -
- - -------------------------------------------------------------------------------
        ACCRUED BENEFIT COST                     $ (177) $ (163) $(367) $(358)
===============================================================================

NET PERIODIC BENEFIT COSTS
- - ------------------------------------------------------------------------------
                                                              POSTRETIREMENT 
                                            PENSION BENEFITS     BENEFITS
- - ------------------------------------------------------------------------------
December 31                               1998   1997  1996  1998  1997  1996
- - ------------------------------------------------------------------------------
(In millions of dollars)

   Service cost - benefits attributed to  
      employee service during the year    $ 58   $ 54  $ 55  $11   $10   $12
   Interest cost on projected
      benefit obligation                   126    119   111   28    25    24
   Expected return on plan assets          (97)   (98)  (91)   -     -     -
   Prior service cost amortization          10     11    10   (4)    -     -
   Actuarial loss                            4      6     5    1     -     -
   Transition amount amortization           (2)    (5)   (6)   -     -     -
   Curtailment loss                         17      -     -    2     -     -
- - ------------------------------------------------------------------------------
     NET PERIODIC BENEFIT COST            $116   $ 87  $ 84  $38   $35   $36
==============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                       99

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------------------------------------
                         Note I -- Benefit Plans (cont.)

Actuarial assumptions are set forth in the following table:

- - ---------------------------------------------------------------------------
                                                          POSTRETIREMENT 
                                   PENSION BENEFITS          BENEFITS
- - ---------------------------------------------------------------------------
December 31                     1998   1997    1996     1998   1997   1996
- - ---------------------------------------------------------------------------

 Discount rate                  6.75%  7.25%   7.50%    6.75%  7.25%  7.50%
 Expected return on plan assets 7.00   7.50  7.75-8.50  N/A    N/A    N/A
 Rate of compensation increases 5.70   5.70    5.70     N/A    N/A    N/A
- - ---------------------------------------------------------------------------

The  assumed  health  care cost trend  rate used in  measuring  the  accumulated
postretirement  benefit obligation was 8% in 1998, declining to an ultimate rate
of 5% in 2002.  The health  care cost trend rate  assumption  has a  significant
effect on the amount of the benefit  obligation and periodic cost  reported.  An
increase  in the  assumed  health  care cost trend rate of 1% in each year would
increase the accumulated  postretirement  benefit  obligation as of December 31,
1998 by $16 million and the aggregate net periodic  postretirement  benefit cost
for 1998 by $3 million. A decrease in the assumed health care cost trend rate of
1% in each year would decrease the accumulated postretirement benefit obligation
as of  December  31,  1998  by  $14  million  and  the  aggregate  net  periodic
postretirement benefit cost for 1998 by $3 million.

SAVINGS PLANS
- - -------------------------------
CNA has savings  plans,  which are  generally  contributory  plans,  which allow
employees  to  make  regular  contributions  of up to 6% of  their  salary.  CNA
contributes  an  additional  amount  equal  to  70% of  the  employee's  regular
contribution.  Employees may also make additional  contributions of up to 10% of
their salaries for which there is no additional contribution by CNA.

Contributions by the Company to the savings plans were $25 million,  $23 million
and $24 million in 1998, 1997 and 1996, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      100

- - -----------------------------------------------------------------------------
                                Note J -- Leases

Note J - Leases:
- - ----------------
CNA occupies  facilities  under lease  agreements  that expire at various  dates
through  2011.  CNA's home office is partially  situated on grounds under leases
expiring in 2058. In addition,  data  processing  and office and  transportation
equipment are leased under agreements that expire at various dates through 2003.

Most leases contain  renewal  options that provide for rent  increases  based on
prevailing market  conditions.  Lease expense,  net of sublease income,  for the
years ended December 31, 1998, 1997 and 1996 was $130 million,  $100 million and
$85 million, respectively.

The table  below  shows the  future  minimum  lease  payments  to be made  under
non-cancelable leases at December 31, 1998.

- - ----------------------------------------------
        Future Minimum Lease Payments
- - ----------------------------------------------
(IN MILLIONS OF DOLLARS)

1999                                     $100
2000                                       87
2001                                       76
2002                                       63
2003                                       45
Thereafter                                126
- - ----------------------------------------------
      TOTAL                              $497
==============================================


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      101

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ---------------------------------------------------------------------------
     Note K -- Stockholders' Equity and Statutory Financial Information

Note K - Stockholders' Equity and Statutory Financial Information:
- - ------------------------------------------------------------------

SUMMARY OF CAPITAL STOCK
- - -----------------------------------------------------------------------------
                                                       Number of Shares
                                                   --------------------------
December 31                                            1998            1997
- - -----------------------------------------------------------------------------
Preferred stock, without par value, non-voting:
   Authorized                                    12,500,000      12,500,000
Money market cumulative preferred stock,
   without par value, non-voting;
   Issued and outstanding:
     Series E (stated value $100,000 per share)         750             750
     Series F (stated value $100,000 per share)         750             750
Cumulative, exchangeable preferred stock,
   without par value, non-voting;
     Series G (stated value $100,000 per share)       2,000              --
Common stock with par value of $2.50;
   Authorized                                   200,000,000     200,000,000
   Issued                                       185,525,907     185,525,907
   Outstanding                                  183,889,569     185,394,786
   Treasury stock                                 1,636,338         131,121
- - -----------------------------------------------------------------------------

On May 6, 1998,  CNAF's Board of  Directors  approved a  three-for-one  split of
CNAF's common stock and  authorized a commensurate  increase in the  outstanding
common shares from  61,798,262 to  185,394,786.  The shares were  distributed on
June 1,  1998 at a rate of three  shares  for each one held by  shareholders  of
record at the close of business on May 22,  1998.  The table above  reflects the
effect of this stock split as if it had occurred on December 31, 1997.

The dividend rate on money market  preferred  stock is determined  approximately
every 49 days by auction.  The money market  preferred  stock is  redeemable  at
CNAF's  option,  as a whole or in part,  at $100,000  per share plus accrued and
unpaid  dividends.  As of December 31, 1998,  preferred  dividends  declared and
payable were approximately $7 million.

On August  5,  1998,  CNAF's  Board of  Directors  approved  a plan  (the  Share
Repurchase  Program)  to  purchase,  in the open  market  or  through  privately
negotiated transactions,  its outstanding common stock from time to time, as the
Company's  management deems appropriate.  During 1998, pursuant to the announced
Share Repurchase  Program,  CNAF purchased  2,734,800 shares of its common stock
for approximately $102 million. Total shares purchased by CNAF and classified on
the  December  31, 1998  balance  sheet as treasury  stock are  1,636,338  for a
decrease in stockholders' equity of approximately $61 million.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      102

- - ------------------------------------------------------------------------------
Note K - Stockholders' Equity and Statutory Financial Information (cont.)

On October 9, 1998,  CNAF filed a  Registration  Statement  on Form S-8 with the
Securities and Exchange  Commission  registering  $60 million of $2.50 par value
common stock,  to be offered  pursuant to the CNAF Officer Stock Ownership Plan.
On October 9, 1998,  prior to the opening of the trading session on the New York
Stock  Exchange,  CNAF sold  1,229,583  shares of common stock that were held in
treasury  to certain  senior  officers of CNAF at the average of the highest and
lowest sale price on the New York Stock Exchange, composite transactions,  which
was a price of $34.91 per share.  The purchases  were financed by full recourse,
collateralized   loans  from  CNAF  which,   at  December  31,   1998,   totaled
approximately $44 million,  including  accrued interest.  The loans are ten year
notes,  which bear  interest at the  Applicable  Federal  Rate for October  1998
(5.39%), compounding semi-annually.

On  December  23,  1998,  CNAF  issued  2,000  shares  of  Series G  cumulative,
exchangeable preferred stock to Loews for $200 million. The dividend rate on the
exchangeable  preferred  stock is reset quarterly at a rate equal to the 3 month
London Interbank Offering Rate (LIBOR) on the reset date plus four basis points.
On the fifth anniversary of the stocks' issuance, the interest rate increases to
the 3 month LIBOR on the reset date plus one hundred and four basis points.  The
preferred  stock is  redeemable at the end of each  calendar  quarter  without a
premium at CNAF's option.  After the fifth year, the stock is also exchangeable,
at CNAF's option,  into notes maturing on the tenth  anniversary of the issuance
of the Series G preferred stock and bearing a market rate of interest.

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                      103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -----------------------------------------------------------------------------
Note K - Stockholders' Equity and Statutory Financial Information (cont.)

STATUTORY ACCOUNTING PRACTICES
- - ------------------------------------------
CNAF's  insurance  subsidiaries  are domiciled in various  jurisdictions.  These
subsidiaries   prepare  statutory   financial   statements  in  accordance  with
accounting  practices  prescribed  or  otherwise  permitted  by  the  respective
jurisdiction's  insurance  regulator.  Prescribed statutory accounting practices
are set  forth in a variety  of  publications  of the  National  Association  of
Insurance  Commissioners  as  well  as  state  laws,  regulations,  and  general
administrative  rules.  The Company's  insurance  subsidiaries  have no material
permitted accounting practices.

CNAF's  ability to pay dividends to its  stockholders  is affected,  in part, by
receipt of dividends from its subsidiaries.  The payment of dividends to CNAF by
its insurance subsidiaries without prior approval of the insurance department of
each subsidiaries' domiciliary jurisdiction is limited to formula amounts. As of
December  31,  1998,  approximately  $663  million of dividend  payments are not
subject to insurance department's pre-approval.

Statutory  capital and surplus and net income,  determined  in  accordance  with
accounting  practices  prescribed  by the  regulation  and  statute  of  various
insurance regulators,  for property/casualty and life insurance subsidiaries are
as follows:

- - -------------------------------------------------------------------------------
                      Statutory Capital and Surplus  Statutory Net Income(Loss)
- - -------------------------------------------------------------------------------
                               December 31            Year Ended December 31
- - -------------------------------------------------------------------------------
(Unaudited)                  1998     1997            1998     1997      1996
- - -------------------------------------------------------------------------------
(In millions of dollars)

Property/casualty companies*  $7,593  $7,123          $161     $1,043  $1,208
Life insurance companies       1,109   1,224           (57)        43      58
- - -------------------------------------------------------------------------------
* SURPLUS  INCLUDES  EQUITY OF  PROPERTY/CASUALTY  COMPANIES' OWNERSHIP  IN LIFE
INSURANCE SUBSIDIARIES.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      104

- - ----------------------------------------------------------------------------
                Note L -- Accumulated Other Comprehensive Income

Note L -- Accumulated Other Comprehensive Income:
- - ------------------------------------------------
Comprehensive  income is  comprised  of all  changes  to  stockholders'  equity,
including net income,  except those changes  resulting  from  investments by and
distributions to stockholders. The change in the components of accumulated other
comprehensive income are shown below:

- - ------------------------------------------------------------------------------
                                              Pre-tax   Tax (expense)  Net
Year ended December 31                        amount      benefit     Amount
- - ------------------------------------------------------------------------------
(In millions of dollars)

1998
Net unrealized gains (losses) on investments: 
  Gains arising during the period             $ 933     $(327)         $ 606
  Allocated to minority interest                 (9)        3             (6)
  Reclassification adjustment for (gains)
    included in net income                     (207)       75           (132)
Foreign currency translation adjustment           7        --              7
- - ------------------------------------------------------------------------------
     TOTAL OTHER COMPREHENSIVE INCOME         $ 724     $(249)         $ 475
==============================================================================

- - ------------------------------------------------------------------------------
                                              Pre-tax   Tax (expense)  Net
Year ended December 31                        amount      benefit     Amount
- - ------------------------------------------------------------------------------
(In millions of dollars)

1997
Net unrealized gains (losses) on investments:
  Gains arising during the period             $ 570     $(171)         $ 399
  Allocated to minority interest                 (8)        3             (5)
  Allocated to participating policyholders'      (4)       --             (4)
  Reclassification adjustment for (gains) 
    included in net income                     (186)       67           (119)
Foreign currency translation adjustment          19        --             19
- - ------------------------------------------------------------------------------
     TOTAL OTHER COMPREHENSIVE INCOME         $ 391     $(101)         $ 290
==============================================================================

- - ------------------------------------------------------------------------------
                                              Pre-tax   Tax (expense)  Net
Year ended December 31                        amount      benefit     Amount
- - ------------------------------------------------------------------------------
(In millions of dollars)

1996
Net unrealized gains (losses) on investments:
  Losses arising during the period            $(368)    $ 129          $(239)
  Allocated to minority interest                  8        (3)             5
  Allocated to participating policyholders'      18        --             18
  Reclassification adjustment for (gains)
    included in net income                     (659)      231           (428)
Foreign currency translation adjustment          10        --             10
- - ------------------------------------------------------------------------------
     TOTAL OTHER COMPREHENSIVE LOSS           $(991)    $ 357          $(634)
==============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      105

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -----------------------------------------------------------------------------
            Note L - Accumulated Other Comprehensive Income (cont.)

The following  tables  display the changes in and the  components of accumulated
other  comprehensive  income  included  in the  consolidated  balance  sheet and
statements of stockholders' equity for 1998 and 1997.

- - -------------------------------------------------------------------------------
                                                                   TOTAL
                                      FOREIGN        NET         ACCUMULATED
                                      CURRENCY    UNREALIZED       OTHER
                                     TRANSLATION  GAINS/(LOSSES) COMPREHENSIVE
                                     ADJUSTMENT   ON INVESTMENTS   INCOME
- - -------------------------------------------------------------------------------
(In millions of dollars)

Beginning Balance January 1, 1997      $47          $252           $  299

Current Period Change                   19           271              290
- - ------------------------------------------------------- -----------------------
    Ending balance December 31, 1997    66           523              589

Current Period Change                    7           468              475
- - -------------------------------------------------------------------------------
    ENDING BALANCE DECEMBER 31, 1998   $73          $991           $1,064
===============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      106

- - -----------------------------------------------------------------------------
                           Note M -- Business Segments

Note M - Business Segments:
- - ----------------------------
The Company's  reportable segments are strategic businesses that offer different
types of products and services.

The Company has seven operating  segments:  Agency Market Operations,  Specialty
Operations,  CNA Re, Global  Operations,  Risk Management,  Group Operations and
Life   Operations.   Agency   Market   Operations   provides  a  wide  range  of
property/casualty  products to  individuals  and small to  mid-size  businesses.
Specialty  Operations  provides a broad  array of  professional,  financial  and
specialty  property/casualty  products  and  services.  CNA Re offers  primarily
traditional  property/casualty  treaty  reinsurance.  Global Operations provides
marine,  casualty,  surety,  warranty and specialty  products.  Risk  Management
serves  the  property/casualty  needs of large  domestic  commercial  businesses
offering customized, solution-based strategies to address risk management needs.
Group  Operations  offers a broad array of group life and health  insurance  and
reinsurance  products to  employers,  affinity  groups and other  entities  that
purchase insurance as a group. Life Operations provides financial  protection to
individuals  through a full product line of term life insurance,  universal life
insurance,  long-term care insurance,  annuities and provides retirement service
products to institutional markets.

Corporate results consist of interest expense on corporate  borrowings,  certain
run-off insurance operations, asbestos claims related to Fibreboard Corporation,
financial guarantee insurance contracts,  and certain non-insurance  operations,
principally the operations of Agency  Management  Systems,  Inc., an information
technology and agency software development subsidiary.

The accounting  policies of the segments are the same as those  described in the
summary of significant  accounting polices.  The Company manages its assets on a
legal entity basis while segment operations are conducted across legal entities,
as such assets are not readily  identifiable by individual segment. In addition,
distinct  investment  portfolios  are  not  maintained  for  each  segment,  and
accordingly,  allocation of assets to each segment is not  performed.  Therefore
investment  income and realized  investment  gains/losses are allocated based on
each segment's carried insurance reserves, as adjusted.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      107

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------------------------------------
                       Note M -- Business Segments (cont.)

All intercompany income and expense as well as intercompany  dividends have been
eliminated.

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

Approximately 96% of the Company's  premiums are derived from the United States.
Premiums from any individual foreign country are not significant.

Through  August 1, 1989,  CNA's  property/casualty  operations  wrote  financial
guarantee insurance  contracts.  These contracts primarily represent  industrial
development bond guarantees and equity guarantees  typically  extending from ten
to thirteen years. For these guarantees,  CNA received an advance premium, which
is  recognized  over the exposure  period and in  proportion  to the  underlying
exposure insured.

At December 31, 1998 and 1997, gross exposure of financial  guarantee  insurance
contracts amounted to $507 million and $553 million, respectively. The degree of
risk attached to this exposure is  substantially  reduced  through  reinsurance,
diversification of exposures and collateral requirements.  In addition, security
interests in the real estate are also obtained. Approximately 36% and 39% of the
risks were ceded to  reinsurers  at December  31,  1998 and 1997,  respectively.
Total exposure, net of reinsurance, amounted to $323 million and $337 million at
December  31,  1998 and  1997,  respectively.  At  December  31,  1998 and 1997,
collateral consisting of letters of credit and debt service reserves amounted to
$38 million and $23 million, respectively.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      108

- - ----------------------------------------------------------------------------
                       Note M -- Business Segments (cont.)

Gross  unearned  premium  reserves for  financial  guarantee  contracts  were $7
million and $5 million at December 31, 1998 and 1997, respectively.  Gross claim
and claim expense reserves totaled $232 million and $377 million at December 31,
1998 and 1997, respectively.

Group segment  revenues  include $2.0 billion,  $2.1 billion and $2.1 billion in
1998,  1997 and 1996,  respectively,  under contracts  covering U.S.  government
employees and their dependents (FEHBP).


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      109

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------------------------------------
                       Note M - Business Segments (cont.)


- - --------------------------------------------------------------------------------------------------------------
                                                        Agency Market     Specialty                 Global
YEAR ENDED DECEMBER 31, 1998                             Operations      Operations      CNA Re    Operations
- - --------------------------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                                         
Revenues, excluding realized investment gains:
   Premiums                                             $5,247          $1,092           $  944    $  941
   Net investment income                                   744             245              163       110
   Other                                                   107              27                5        82
- - --------------------------------------------------------------------------------------------------------------
   Total revenues, excluding realized investment gains   6,098           1,364            1,112     1,133    
Benefits and expenses:
   Insurance claims and policyholder benefits            4,431             951              707       585        
   Amortization of deferred acquisition costs            1,239             175              252       224  
   Interest expense                                         --              --               --        11 
   Restructuring and other related charges                  96               5                1         1
   Other                                                   491             169               57       251
- - --------------------------------------------------------------------------------------------------------------
   Total benefits and expenses                           6,257           1,300            1,017     1,072  
- - --------------------------------------------------------------------------------------------------------------
          Operating income before income tax              (159)             64               95        61
Income tax (expense) benefit                               105              (6)             (27)      (18) 
- - --------------------------------------------------------------------------------------------------------------
          Net operating income (excluding realized
           investment gains/losses)                        (54)             58               68        43
Realized investment gains, net of tax                      171              57               27        17        
Minority interest                                           --              --               --       (25) 
- - --------------------------------------------------------------------------------------------------------------
          NET INCOME                                    $  117          $  115            $  95    $   35
==============================================================================================================




- - --------------------------------------------------------------------------------------------------------------
                                                        Agency Market     Specialty                 Global
Year Ended December 31, 1997                             Operations      Operations      CNA Re    Operations
- - --------------------------------------------------------------------------------------------------------------
(In millions of dollars)
                                                                              
Revenues, excluding realized investment gains:
   Premiums                                             $5,092          $1,251           $  898    $  854    
   Net investment income                                   787             268              153       117    
   Other                                                    50              14                5        29 
- - --------------------------------------------------------------------------------------------------------------
   Total revenues, excluding realized investment gains   5,929           1,533            1,058     1,000
Benefits and expenses:                                  
   Insurance claims and policyholder benefits            3,871           1,011              670       490  
   Amortization of deferred acquisition costs            1,242             247              247       173   
   Interest expense                                         --              --               --        -- 
   Other                                                   384             149               79       221 
- - --------------------------------------------------------------------------------------------------------------
   Total benefits and expenses                           5,497           1,407              996       884       
- - --------------------------------------------------------------------------------------------------------------
          Operating income before income tax               432             126               62       116
Income tax (expense) benefit                              (106)            (31)             (11)      (35)  
- - --------------------------------------------------------------------------------------------------------------
         Net operating income (excluding realized
           investment gains/losses)                        326              95               51        81
Realized investment gains, net of tax                      187              63               34        20  
Minority interest                                           --              --               --       (29) 
- - --------------------------------------------------------------------------------------------------------------
         Net  income                                    $  513          $  158           $   85    $   72   
==============================================================================================================




- - --------------------------------------------------------------------------------------------------------------
                                                        Agency Market     Specialty                 Global
Year Ended December 31, 1996                             Operations      Operations      CNA Re    Operations
- - --------------------------------------------------------------------------------------------------------------
                                                                                  
Revenues, excluding realized investment gains:
   Premiums                                             $5,346          $1,217           $  944    $  945    
   Net investment income                                   828             273              161       134        
   Other                                                    13              --                7        34     
- - --------------------------------------------------------------------------------------------------------------
   Total revenues, excluding realized investment gains   6,187           1,490            1,112     1,113
Benefits and expenses:
   Insurance claims and policyholder benefits            4,277           1,092              694       594   
   Amortization of deferred acquisition cost             1,183             232              119       221  
   Interest expense                                         --              --               --        --
   Other                                                   560              79              172       145   
- - --------------------------------------------------------------------------------------------------------------
   Total benefits and expenses                           6,020           1,403              985       960
- - --------------------------------------------------------------------------------------------------------------
            Operating income before income tax             167              87              127       153      
 Income tax (expense) benefit                              (13)            (15)             (38)      (44)          
- - --------------------------------------------------------------------------------------------------------------
            Net operating income (excluding realized
              investment gains/losses)                     154              72               89        109  
Realized investment gains, net of tax                      133              44               21         21   
Minority interest                                           --              --               --         (9)          
- - --------------------------------------------------------------------------------------------------------------
      Net  income                                       $  287          $  116           $  110    $   121      
=============================================================================================================

                           CNA FINANCIAL CORPORATION
                           --------------------------
                                      110

- - ---------------------------------------------------------------------------
                       Note M - Business Segments (cont.)

- - ---------------------------------------------------------------------------
   Risk       Group          Life                                  Total
Management  Operations    Operations   Corporate   Eliminations   Segments
- - ---------------------------------------------------------------------------


$  823        $3,712       $  684      $ (27)      $(41)         $13,375
   144           133          525         82         --            2,146
   230            24          115        298        (30)             858
- - ---------------------------------------------------------------------------
 1,197         3,869        1,324        353        (71)          16,379

   909         3,177          871        127        (41)          11,717
    98             5          178          9         --            2,180
     4            --           14        219        (29)             219
    88            39            7          9         --              246
   234   --      731          104        326         --            2,363
- - ---------------------------------------------------------------------------
 1,333         3,952        1,174        690        (70)          16,725
- - ---------------------------------------------------------------------------
  (136)          (83)         150       (337)        (1)            (346)  
    48            35          (58)       121         --              200
- - ---------------------------------------------------------------------------

   (88)          (48)          92       (216)        (1)            (146)
    31            29           96         20         --              448
    --            --           --          5         --              (20)
- - ---------------------------------------------------------------------------
$  (57)       $  (19)      $  188      $(191)       $(1)         $   282     
===========================================================================

- - ---------------------------------------------------------------------------
   Risk       Group          Life                                  Total
Management  Operations    Operations   Corporate   Eliminations   Segments
- - ---------------------------------------------------------------------------

$  776        $3,093       $  688      $  20        $--          $13,482
   158           117          501        108         --            2,209
   194            17          105        236        (24)             628
- - ---------------------------------------------------------------------------
 1,128         4,037        1,294        364        (24)          16,319

   893         3,375          855        103         --           11,268
   101            --          120          8         --            2,138
    --            --           --        222        (24)             198
   196           680          147        244         --            2,100
- - ---------------------------------------------------------------------------
 1,190         4,055        1,122        577        (24)          15,704
- - ---------------------------------------------------------------------------
   (62)          (18)         172       (213)        --              615
    25            10          (66)        82         --             (132)
- - ---------------------------------------------------------------------------

   (37)           (8)         106       (131)        --              483
    37            28          139        (15)        --              493
    --            --           --         19         --              (10)
- - ---------------------------------------------------------------------------
$   --        $   20       $  245      $(127)       $--          $   966
===========================================================================

- - ---------------------------------------------------------------------------
   Risk       Group          Life                                  Total
Management  Operations    Operations   Corporate   Eliminations   Segments
- - ---------------------------------------------------------------------------

$  572        $3,816       $  654      $  53       $(22)         $13,525
   179           118          485         98         --            2,276
   222             8          106        190        (12)             568
- - ---------------------------------------------------------------------------
   973         3,942        1,245        341        (34)          16,369

   567         3,272          838         59        (22)          11,371
    60           (24)          61          4         --            1,856
    --            --           --        212        (12)             200
   248           674          144        185         --            2,207
- - ---------------------------------------------------------------------------
   875         3,922        1,043        460        (34)          15,634
- - ---------------------------------------------------------------------------
    98            20          202       (119)        --              735
   (24)           (3)         (74)        48         --             (163)
- - ---------------------------------------------------------------------------

    74            17          128        (71)        --              572
    29            21          117         16         --              402
    --            --           --         --         --               (9)
- - ---------------------------------------------------------------------------
$  103        $   38       $  245      $ (55)       $--          $   965
===========================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      111

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------------------------------------------
               Note N - Restructuring and Other Related Charges

Note N -- Restructuring and Other Related Charges:
- - --------------------------------------------------

The Company  finalized and approved a restructuring  plan (the "Plan") in August
1998. In connection with the Plan, the Company  incurred  various  expenses that
were recorded in the third and fourth quarters of 1998. These  restructuring and
other related charges  primarily  related to the following  activities:  planned
reductions in the workforce;  the consolidation of certain  processing  centers;
the exiting of certain  businesses and  facilities;  the  termination of related
lease  obligations;  and  the  writeoff  of  certain  assets  related  to  these
activities.  The Plan  contemplates  a gross  reduction  in  workforce  of 4,500
employees,   resulting  in  a  planned  net  reduction  of  approximately  2,400
employees.   According  to  the  Plan,  the  various  activities  and  workforce
reductions should be completed by the end of 1999.

The  restructuring  and other  related  charges were  comprised of the following
costs  and  expenses:   a)  costs  and  benefits  related  to  planned  employee
terminations  of $98  million,  of which $53 million  related to  severance  and
outplacement costs and $24 million related to other employee  transition related
costs and $21 million related to benefit plan curtailment  losses;  b) writedown
of  certain  assets to their  fair value of $74  million,  of which $59  million
related  to a  writedown  of an  intangible  asset,  and $15  million  abandoned
leasehold  improvements  and other related fixed assets  associated  with leases
that were  terminated as part of the  restructuring  plan; c) lease  termination
costs of $42 million; d) losses incurred on the exiting of certain businesses of
$32 million.

The Company  recorded  $220  million of these  restructuring  and other  related
charges in the third quarter of 1998. Other charges such as parallel  processing
costs,  relocation costs, and retention bonuses,  did not qualify for accrual at
the end of the third quarter under generally accepted accounting  principles and
are being  expensed as incurred.  In the fourth  quarter of 1998, $26 million of
these charges were recorded.

The 1998  restructuring  and other related charges for Agency Market  Operations
totaled  approximately $96 million.  The charges included employee severance and
outplacement  costs of $34 million  related to the planned net  reduction in the
workforce of approximately  1,200 employees.  Approximately $29 million of lease
termination  costs were also incurred in connection  with the  consolidation  of
four  regional  offices  into two zone  offices and a reduction of the number of
claim processing offices from 24 to 8. The Agency Market Operations charges also
included benefit plan costs of $12 million,  parallel  processing  charges of $7
million and $5 million of other fixed asset writedowns. Other charges, including
travel, relocation and other transition-related activity, which were expensed as
incurred, totaled approximately $9 million.

Through December 31, 1998, approximately 364 Agency Market Operations employees,
the majority of whom were loss  adjusters  and office  support  staff,  had been
released at a cost of $8 million.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      112

- - -----------------------------------------------------------------------------
            Note N - Restructuring and Other Related Charges (cont.)

The 1998  restructuring  and other related charges for Risk  Management  totaled
approximately  $88  million.   The  charges  included  lease  termination  costs
associated with the consolidation of claim offices in 36 market territories that
totaled   approximately  $8  million.   In  addition,   employee  severance  and
outplacement  costs  relating to the  planned  net  reduction  in  workforce  of
approximately 200 employees were  approximately $10 million and the writedown of
fixed  and  intangible  assets  totaled  approximately  $64  million.   Parallel
processing and other charges totaled approximately $6 million.

The  charges  related to fixed and  intangible  assets were  primarily  due to a
writedown of an intangible asset (goodwill)  related to a business that had been
acquired  several years earlier.  As part of the Company's  periodic  reviews of
asset  recoverability  and as a result of several  adverse  events,  the Company
concluded,  based on its  discounted  cash flow analysis  completed in the third
quarter of 1998, that a $59 million  writeoff was necessary.  The adverse events
contributing to this conclusion included operating losses from the business, the
loss of several significant  customers whose business volume with this operation
constituted a large portion of the revenue base, and substantial  changes in the
overall market demand for the services offered by this operation which, in turn,
had negative  effects on the prospects for  achieving the  profitability  levels
necessary to recover the intangible asset.

Through December 31, 1998,  approximately 152 Risk Management employees had been
released at a cost of $2 million.  The majority of the employees  were adjusters
and office support staff.

The 1998  restructuring  and other related charges for Group Operations  totaled
approximately  $39 million.  The charges included  approximately  $29 million of
costs related to the Company's decision to exit the Employer Health and Affinity
lines of business.  These costs  represent the  Company's  estimate of losses in
connection with fulfilling the remaining  obligations under contracts related to
these  lines.  Earned  premiums  for these lines of business  approximated  $400
million  in  1998.  The  1998  charges  also  included  employee  severance  and
outplacement  costs of  approximately  $7  million  related to the  planned  net
reduction  in  workforce  of  approximately  400  employees. Charges  for  lease
termination costs and fixed asset writedowns totaled $3 million.

Through December 31, 1998,  approximately 56 Group Operations employees had been
released at a cost of $1 million.  The majority of the employees were claims and
sales support staff.

For the other segments of the Company,  restructuring  and other related charges
totaled  approximately  $23 million for 1998.  Charges related  primarily to the
closing  of  leased  facilities  were $3  million  and  employee  severance  and
outplacement  costs  related to planned net  reductions  of 600 employees in the
current  workforce and benefit costs  associated with those  reductions were $13
million. In addition,  there were charges of $4 million related to the writedown
of certain assets and $3 million related to the exiting of certain businesses.

Through December 31, 1998,  approximately 270 employees of these other segments,
most of whom were  underwriters and office support staff, had been released at a
cost of $3 million.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      113

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
            Note N - Restructuring and Other Related Charges (cont.)

The following table sets forth the major categories of  restructuring  and other
related charges that were initially  accrued and recorded upon the  finalization
and  approval of the Plan and the  activity in the accrual for such costs during
1998.

- - -------------------------------------------------------------------------------
                            Employee                       
                         Termination and              Lease     Business
                         Related Benefit  Writedown Termination   Exit     
                            Costs         of Assets   Costs      Costs   Total
                         ------------------------------------------------------
Initial charge recorded
in third quarter of 1998    $ 72           $ 74       $ 42      $ 32    $ 220

Less payments charged 
against liability            (14)            --         --        --      (14)
                                                                           
Less costs that do not
use cash                     (21)           (74)        --        --      (95)
- - -------------------------------------------------------------------------------
     ACCRUED COSTS AT
     DECEMBER 31, 1998      $ 37           $ --       $ 42      $ 32    $ 111
===============================================================================

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      114

- - -----------------------------------------------------------------------------
                  Note O -- Merger with Capsure Holdings Corp.

Note O - Merger with Capsure Holdings Corp:
- - -------------------------------------------

In the fourth quarter of 1996, CNA entered into a merger  agreement with Capsure
Holdings  Corp.  (Capsure) to merge CNA's surety  business  with the business of
Capsure and form a new stock company, CNA Surety Corporation ("CNA Surety"),  in
which CNA has an approximate 61% interest.  The transaction  closed on September
30, 1997 and was accounted for as a sale of approximately  39% of CNA's previous
surety  business  and a purchase  of 61% of  Capsure.  In  conjunction  with the
closing of the transaction,  CNA realized an investment gain of $95 million. CNA
Surety's results of operations have been included in CNA's consolidated  results
of  operations,  net of minority  interest  subsequent to September 30, 1997. At
December 31, 1997,  total assets of CNA Surety were $727  million.  CNA Surety's
revenues  and net income  for the three  months  ended  December  31,  1997 were
approximately $71 million and $11 million, respectively.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      115

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------------------------------------
                  Note P -- Unaudited Quarterly Financial Data

Note P - Unaudited Quarterly Financial Data:
- - --------------------------------------------
- - ------------------------------------------------------------------------------
                                   First   Second  Third   Fourth    Year
- - ------------------------------------------------------------------------------
(In millions of dollars, except per share data)

1998 QUARTERS
Revenues                          $4,328   $4,429  $4,129  $4,188    $17,074

Net operating income (loss)
  Excluding realized gains/losses    117       64     (70)   (263)      (152)
Net realized investment gains        116      146      56     116        434
                                  --------------------------------------------
 Net income (loss)                   233      210     (14)   (147)       282
                                  --------------------------------------------
 Earnings (loss) per share          1.25     1.12   (0.09)  (0.81)      1.49

1997 QUARTERS
Revenues                          $4,132   $4,243  $4,309  $4,388    $17,072

Net operating income
  Excluding realized gains/losses    136      126     121     105        488
Net realized investment gains         42      109     153     174        478
                                  --------------------------------------------
  Net income                         178      235     274     279        966
                                  --------------------------------------------
  Earnings per share                0.95     1.26    1.47    1.49       5.17

1996 QUARTERS
Revenues                          $4,315   $4,095  $4,256  $4,322    $16,988

Net operating income
  Excluding realized gains/losses    145      152     161     120        578
Net realized investment gains        184       50      78      75        387
                                  --------------------------------------------
  Net income                         329      202     239     195        965
                                  --------------------------------------------
  Earnings per share                1.77     1.08    1.28    1.04       5.17
- - ------------------------------------------------------------------------------

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      116

                          INDEPENDENT AUDITORS' REPORT
- - ----------------------------------------------------------------------------

THE BOARD OF DIRECTORS AND STOCKHOLDERS CNA FINANCIAL CORPORATION

We have audited the consolidated balance sheets of CNA Financial Corporation (an
affiliate of Loews  Corporation)  and  subsidiaries  as of December 31, 1998 and
1997,  and the related  consolidated  statements  of  operations,  stockholders'
equity,  and cash flows for each of the three years in the period ended December
31, 1998.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position of CNA Financial  Corporation  and
subsidiaries  as of  December  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

S/DELOITTE & TOUCHE LLP
Chicago, Illinois
February 10, 1999


                            CNA FINANCIAL CORPORATION
                           ---------------------------
                                      117

                            COMMON STOCK INFORMATION
- - ---------------------------------------------------------------------------


CNA's  common stock is listed on the New York Stock,  Chicago  Stock and Pacific
Exchanges and is also traded on the Philadelphia  Stock Exchange.  The number of
holders of record of CNA's  common stock as of March 1, 1999,  was 2,732.  As of
March 1,  1999,  Loews  Corporation  owned  approximately  85  percent  of CNA's
outstanding common stock.

The table  below  sets  forth the high and low  closing  sales  prices for CNA's
common stock based on the New York Stock  Exchange  Composite  Transactions.  No
dividends  have been paid on CNA's common stock in order to develop and maintain
a strong surplus position for CNA's insurance  subsidiaries,  which is necessary
to support  business growth in an increasingly  competitive  environment.  CNA's
ability to pay dividends is influenced, in part, by dividend restrictions of its
principal  operating  insurance  subsidiaries  as  described  in  Note  K to the
Consolidated Financial Statements.

COMMON STOCK INFORMATION
- - --------------------------------------------------------------------
                                1998                 1997
                          ------------------------------------------
Quarter                     High      Low       High      Low
- - --------------------------------------------------------------------
Fourth                    44 11/16   34 1/2     43 15/16   39 23/32
Third                     47         35 1/8     43 3/8     35 31/32
Second                    53 5/16    45 1/2     35 5/32    32 5/16
First                     51         42 1/6     38 1/4     34 3/8
- - --------------------------------------------------------------------
Invitation to the Annual Meeting
- - --------------------------------
Shareholders  are  cordially  invited to attend  the  annual  meeting at 10 a.m.
Wednesday,  May 5, 1999,  in Room  207N,  CNA Plaza,  333 South  Wabash  Avenue,
Chicago.  Shareholders unable to attend are requested to exercise their right to
vote by  proxy.  Proxy  material  will be mailed  to  shareholders  prior to the
meeting.

Form 10-K
- - -------------------------------------
A copy of CNA Financial Corporation's annual report on Form 10-K, which is filed
with the Securities and Exchange  Commission,  will be furnished to shareholders
without charge upon written request to:

Jonathan D. Kantor
Senior Vice President,
General Counsel and Secretary
CNA Financial Corporation
CNA Plaza, 43 South
Chicago, Illinois 60685

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      118

                              CORPORATE DIRECTORY
- - -----------------------------------------------------------------------------

DIRECTORS                                                                  
- - ------------------------------------------

Antoinette Cook Bush
Partner; Skadden, Arps, Slate, Meagher & Flom

Dennis H. Chookaszian*
Chairman of the Executive Committee,
CNA Financial Corporation

Philip L. Engel
President,
CNA

Robert P. Gwinn
Retired Chairman and Chief Executive Officer,
Encyclopedia Britannica

Bernard L. Hengesbaugh*
Chairman and Chief Executive Officer,
CNA

Walter F. Mondale
Partner; Dorsey & Whitney, LLP

Edward J. Noha
Chairman of the Board,
CNA Financial Corporation

Joseph Rosenberg
Senior Investment Strategist, 
Loews Corporation

Richard L. Thomas**
Chairman, Audit Committee;
Retired Chairman of the Board,
First Chicago NBD Corporation and
The First National Bank of Chicago

James S. Tisch
Chairman, Finance Committee;
Chief Executive Officer and President,
Loews Corporation

Laurence A. Tisch
Chief Executive Officer of CNA Financial Corporation,
Co-Chairman of the Board
Loews Corporation

Preston R. Tisch
Co-Chairman of the Board,
Loews Corporation

Marvin Zonis
Professor of International Political Economy,
Graduate School of Business University of Chicago


- - ------------------------------------------------------------------------------
*Mr.  Chookaszian  resigned as Chairman of the Board and Chief Executive Officer
of CNA effective February 9, 1999. He was replaced by Mr. Hengesbaugh.

**Mr. Thomas will not stand for re-election in May 1999.

***Mr. Tisch retired as Chairperson effective February 10, 1999 and was replaced
by Mr. Chookaszian.

****Ms. Bush resigned as Chairperson effective February 12, 1999.

                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      119

                              CORPORATE DIRECTORY
- - ---------------------------------------------------------------------------


EXECUTIVE COMMITTEE                 
- - ----------------------------------------
Preston R. Tisch ***
Antoinette Cook Bush
Dennis H. Chookaszian***
Philip L. Engel
Robert P. Gwinn
Bernard L. Hengesbaugh
Walter F. Mondale
Edward J. Noha
Joseph Rosenberg
Richard L. Thomas**
James S. Tisch
Laurence A. Tisch
Marvin Zonis

FINANCE COMMITTEE                    
- - ---------------------------------------------
James S. Tisch, Chairperson
Antoinette Cook Bush
Dennis H. Chookaszian
Philip L. Engel
Robert P. Gwinn
Bernard L. Hengesbaugh
Walter F. Mondale
Edward J. Noha
Joseph Rosenberg
Richard L. Thomas**
Laurence A. Tisch
Preston R. Tisch
Marvin Zonis

AUDIT COMMITTEE                     
- - --------------------------------------------------
Richard L. Thomas, Chairperson**
Antoinette Cook Bush
Robert P. Gwinn
Walter F. Mondale
Marvin Zonis


INCENTIVE COMPENSATION COMMITTEE
- - --------------------------------------------------
Antoinette Cook Bush, Chairperson ****
Robert P. Gwinn
Richard L. Thomas**
Marvin Zonis

OFFICERS                   
- - ----------------------------------------------------

Laurence A. Tisch
Chief Executive Officer,
CNA Financial Corporation

Dennis H. Chookaszian *
Chairman and Chief Executive Officer,
CNA

Philip L. Engel
President,
CNA

Bernard L. Hengesbaugh*
Chairman and Chief Executive Officer,
CNA

Jonathan D. Kantor
Senior Vice President,
General Counsel and Secretary,
CNA Financial Corporation

W. James MacGinnitie
Senior Vice President and Chief Financial Officer,
CNA Financial Corporation

CNA ADMINISTRATIVE OFFICES          
- - ------------------------------------------------------------------
CNA Plaza
Chicago, Illinois 60685
312-822-5000

TRANSFER AGENT AND REGISTRAR        
- - ------------------------------------------------------------------
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500

INDEPENDENT AUDITORS       
- - ------------------------------------------------------------------
Deloitte & Touche LLP
180 North Stetson Avenue
Chicago, Illinois 60601

- - -----------------------------------------------------------------------------
*Mr.  Chookaszian  resigned as Chairman of the Board and Chief Executive Officer
of CNA effective February 9, 1999. He was replaced by Mr. Hengesbaugh.

**Mr. Thomas will not stand for re-election in May 1999.

***Mr. Tisch retired as Chairperson effective February 10, 1999 and was 
replaced by Mr. Chookaszian.

****Ms. Bush resigned as Chairperson effective February 12, 1999.


                           CNA FINANCIAL CORPORATION
                           -------------------------
                                      120

                           CNA FINANCIAL CORPORATION
                                    APPENDIX
                        OMITTED GRAPH MATERIAL AND OTHER

Exhibit 13.1 - CNA Financial Corporation Annual Report:
*  Bar graphs of:

    -  Revenues for the period 1988 through 1998.
    -  Assets for the period 1988 through 1998.
    -  Stockholders' equity for the period 1988 through 1998.
    -  Book value per common share 1988 through 1998.

(See page 3 of Exhibit  13.1 for a table  showing  the data  points  used in the
above graphs.

* The following  are  outquotes  located in the margins from the "Letters to Our
Shareholders", found on pages 4 through 7 of the annual report.

Page      Outquotes

 4        We see an insurance  environment being transformed by consolidation,
          convergence  of  financial   services,   gloabalization   and  intense
          competition

 5        We are fully focused on improved  earnings and  continued  growth of
          shareholder value.

 6        We will  continue to  concentrate  our full  management  attention  on
          improving the Company's bottom line.

 7        We will continue to challenge all our businesses on the basis of their
          ability to sustain profitable, long-term growth.