Annual Report for CNA Financial Corporation

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

(Exact name of registrant as specified in its charter)

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

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

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

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

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

As of March 14, 2003, 223,608,868 shares of common stock were outstanding. The aggregate market value of the common stock of CNA Financial Corporation held by non–affiliates of the registrant as of June 28, 2002 was approximately $592 million based on the closing price of $26.50 per share of the common stock on the New York Stock Exchange on June 28, 2002.

Portions of the CNA Financial Corporation Proxy Statement prepared for the 2003 annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by reference into Part III of this Report.

CNA Financial Corporation (CNAF) was incorporated in 1967 and is an insurance holding company whose primary subsidiaries consist of property and casualty and life and group insurance companies. Collectively, CNAF and its subsidiaries are referred to as CNA or the Company. CNA’s property and casualty insurance operations are conducted by Continental Casualty Company (CCC), incorporated in 1897, and its affiliates, and The Continental Insurance Company (CIC), organized in 1853, and its affiliates. Life and group insurance operations are conducted by Continental Assurance Company (CAC), incorporated in 1911, and its affiliates, Valley Forge Life Insurance Company (VFL), incorporated in 1956, and CNA Group Life Assurance Company (CNAGLA), incorporated in 2000. CIC became an affiliate of the Company in 1995 as a result of the acquisition of The Continental Corporation (Continental). The principal business of Continental is the ownership of a group of property and casualty insurance companies, mainly CIC and its affiliates.

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

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

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

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

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

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

The commercial property and casualty markets continue to realize significant rate increases while simultaneously using stricter underwriting criteria and requiring higher retention amounts for policyholders to further mitigate risk. The markets focus on underwriting profitability and the heightened perception of risk indicate the hard market will likely continue well into 2003. The reinsurance markets are also experiencing rate increases, however, not to the extent experienced by the direct commercial markets.

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

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

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

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

Although the Federal Government and its regulatory agencies do not directly regulate the business of insurance, federal legislative and regulatory initiatives can impact the insurance business in a variety of ways. These initiatives and legislation include tort reform proposals; proposals to overhaul the Superfund hazardous waste removal and liability statutes and various tax proposals affecting insurance companies. In 1999, Congress passed the Financial Services Modernization or “Gramm-Leach-Bliley” Act (GLB Act), which repealed portions of the Glass-Steagall Act and enabled closer relationships between banks and insurers. Although “functional regulation” was preserved by the GLB Act for state oversight of insurance, additional financial services modernization legislation could include provisions for an alternate federal system of regulation for insurance companies.

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

CNAF’s domestic insurance subsidiaries are subject to risk-based capital requirements. Risk-based capital is a method developed by the National Association of Insurance Commissioners (NAIC) to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The formula for determining the amount of risk-based capital specifies various factors, weighted based on the perceived degree of risk, which are applied to certain financial balances and financial activity. The adequacy of a company’s actual capital is evaluated by a comparison to the risk-based capital results, as determined by the formula. Companies below minimum risk-based capital requirements are classified within certain levels, each of which determines a specified level of regulatory attention applicable to a company. As of December 31, 2002 and 2001, all of CNAF’s domestic insurance subsidiaries exceeded the minimum risk-based capital requirements.

Subsidiaries with insurance operations outside the United States are also subject to regulation in the countries in which they operate. CNA has operations in the United Kingdom, Canada, and other countries.

On November 26, 2002, the President of the United States of America, George W. Bush, signed into law the Terrorism Risk Insurance Act of 2002 (the Act), which establishes a program within the Department of the Treasury under which the Federal Government will share the risk of loss from future terrorist attacks with the insurance industry. The Act terminates on December 31, 2005. Each participating insurance company must pay a deductible before Federal Government assistance becomes available. This deductible is based on a percentage of direct earned premiums for commercial insurance lines from the previous calendar year, and rises from 1% from date of enactment to December 31, 2002 (the Transition Period) to 7% during the first subsequent calendar year, 10% in year two and 15% in year three. For losses in excess of a company’s deductible, the Federal Government will cover 90% of the excess losses, while companies retain the remaining 10%. Losses covered by the program will be capped annually at $100 billion; above this amount, insurers are not liable for covered losses and Congress is to determine the procedures for and the source of any payments. Amounts paid by the Federal Government under the program over certain phased limits are to be recouped by the Department of the Treasury through policy surcharges, which cannot exceed 3% of annual premium.

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

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

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

Information on CNA’s reinsurance activities is set forth in the Management’s Discussion and Analysis (MD&A) included under Item 7 and in Note H of the Consolidated Financial Statements included under Item 8.

As of December 31, 2002, CNA had approximately 15,500 full-time equivalent (FTE) employees and has experienced satisfactory labor relations. CNA has never had work stoppages due to labor disputes. During 2001, CNA announced two restructuring plans, which included FTE reductions of approximately 1,650 positions. See the MD&A included under Item 7 and Note O of the Consolidated Financial Statements included under Item 8 for further discussion regarding the restructuring plans.

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

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

(a)		Restated to reflect an adjustment to the Company’s historical accounting for CNA’s investment in life settlement contracts and the related revenue recognition. See Note T of the Consolidated Financial Statements included under Item 8 for further discussion.

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

(c)		Lapse ratios for individual life insurance, as measured by surrenders and withdrawals as a percentage of average ordinary life insurance inforce, were 34.7%, 8.7% and 12.7% in 2002, 2001 and 2000. (The 2002 lapse ratio includes the novation of CNA's individual life reinsurance business. Excluding the novation, the 2002 lapse ratio was 7.6%. See Note P of the Consolidated Financial Statements included under Item 8 for further discussion.)

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

(e)		Surplus includes the property and casualty companies’ equity ownership of the life and group insurance subsidiaries.

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

(a)

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

Approximately 3.5%, 4.8% and 8.2% of CNA’s gross written premiums were derived from outside of the United States for the years ended December 31, 2002, 2001 and 2000. Premiums from any individual foreign country excluding the United Kingdom, which is stated in the table above, were not significant.

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

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

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

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

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

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

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

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

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

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

CNA also makes available free of charge on or through its Internet website (http://www.cna.com) CNA’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after CNA electronically files such material with, or furnishes it to, the SEC.

CNA Plaza, owned by CAC, serves as the home office for CNAF and its subsidiaries. CNAF’s subsidiaries own or lease office space in various cities throughout the United States and in other countries. The following table sets forth certain information with respect to the principal office buildings owned or leased by CNAF’s subsidiaries:

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

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

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

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

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

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

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

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

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

Of the proceeds of the Preferred Issue, $250 million was used to prepay a bank term loan due in April of 2003 and $250 million was contributed to CCC to improve its statutory surplus. It is expected that the remaining proceeds will be used to repay other debt of CNAF and The Continental Corporation, a controlled subsidiary, maturing in 2003 and used for other general corporate purposes.

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

No dividends have been paid on CNA’s common stock in 2002 or 2001. CNA’s ability to pay dividends is influenced, in part, by dividend restrictions of its principal operating insurance subsidiaries as described in the MD&A included under Item 7 and in Note L to the Consolidated Financial Statements included under Item 8.

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

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

(a)		Restated to reflect an adjustment to the Company’s historical accounting for CNA’s investment in life settlement contracts and the related revenue recognition. See Note T of the Consolidated Financial Statements included under Item 8 for further discussion.

(b)		Surplus includes the property and casualty companies’ equity ownership of the life and group insurance subsidiaries.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Net income in 2002 was $155 million, as compared with a net loss of $1,642 million for 2001. Excluding the 2001 significant items noted in the preceding paragraph, net income decreased $751 million due primarily to an increase in net realized losses from investing activities, partially offset by the improvements in net operating income noted above. Net realized investment gains (losses) decreased $965 million in 2002 as compared with 2001 due primarily to significant realized gains from equity securities in 2001 and increased investment write-downs of fixed maturity and equity securities across various market sectors in 2002. See the Investments section of the MD&A for further details. Loss from discontinued operations, net of tax, of $35 million for 2002 and income from discontinued operations, net of tax, of $11 million for 2001 related to the results of CNA Vida, CNA’s Chilean-based life insurer, which was sold during 2002. Net income for 2002 includes a charge of $57 million, net of tax, for the cumulative effect of a change in accounting principle related to the adoption of Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets (SFAS 142). Net income for 2001

includes a charge of $61 million, net of tax, for the cumulative effect of a change in accounting principle related to the adoption of Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133).

Net earned premiums increased $925 million in 2002 as compared with 2001. Included in the 2001 net earned premiums were $1,334 million of ceded premiums related to corporate aggregate reinsurance treaties, additional ceded premiums and a change in estimate for retrospective premium accruals arising from the second quarter 2001 reserve strengthening and a change in estimate for involuntary market premium accruals, partially offset by reinstatement and additional premiums related to the WTC event. Excluding these 2001 significant premium items, net earned premiums decreased $409 million due primarily to the transfer of the National Postal Mail Handlers Union (the Mail Handlers Plan) in 2002 and decreased net earned premiums in CNA Re resulting from the 2001 decision to cease writing new and renewal business at CNA Reinsurance Company Limited (CNA Re U.K.). Net earned premium for the Mail Handlers Plan was $1,151 million in 2002 as compared with $2,218 million in 2001. These decreases were partially offset by strong rate increases, increased new business and decreased use of reinsurance in the property and casualty segments.

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

The net loss in 2001 was $1,642 million as compared with net income of $1,182 million in 2000. Excluding the 2001 significant items noted above, net income decreased $276 million due primarily to the declines in net operating income noted above. Net realized investment gains increased $147 million in 2001 as compared with 2000 due primarily to gains from the sales of fixed maturity securities. Net income for 2001 includes a charge of $61 million, net of tax, for the cumulative effect of a change in accounting principle related to the adoption of SFAS 133.

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

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

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

•		In the third quarter of 2001, the Company recorded the estimated impact of the WTC event, which resulted in $1,648 million of pretax gross losses, and $468 million pretax net of reinsurance and the related corporate aggregate reinsurance treaties benefit. The after-tax estimated impact was $304 million, net of reinsurance and the related corporate aggregate reinsurance treaties benefit. Further details of the WTC event are provided below as well as in the individual segment discussions of operations.

•		In the second quarter of 2001, the Company recorded an after-tax charge of $2,079 million ($3,182 million pretax) related to a change in estimate of prior year net loss reserves and retrospective premium accruals. This amount included the impact of net reserve strengthening, the related increase in the accrual for insurance-related assessments and the ceded premiums and interest cost of the corporate aggregate reinsurance treaty that attached due to the reserve strengthening. Further details related to the reserve strengthening are discussed below as well as in the individual segment discussions of operations.

•		During 2001, the Company recorded ceded premiums, ceded losses and interest charges related to corporate aggregate reinsurance treaties in place for the 1999 through 2001 accident years. The discussion in the Reinsurance section below includes all premiums, losses and interest charges related to these treaties. However, in all other sections of the MD&A the applicable amounts ceded to these treaties as a result of the second quarter 2001 reserve strengthening and WTC event are included in the quantification of those significant items. The ceded premiums, ceded losses and interest charges related to corporate aggregate reinsurance treaties not related to these significant items are described as “Core.”

•		During 2001, the Company recorded after-tax restructuring and other related charges of $165 million related to workforce reductions and asset write-offs resulting from changes in the Company’s organization, which are discussed in more detail below.

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

During the third quarter of 2001, the Company recorded estimated incurred losses of $468 million pretax, net of reinsurance, related to the WTC event. The loss estimate was based on a total industry loss of $50 billion and included all lines of insurance. This estimate took into account CNA’s substantial reinsurance agreements, including its catastrophe reinsurance program and corporate reinsurance programs. The Company has closely monitored reported losses as well as the collection of reinsurance on WTC event claims. As of December 31, 2002, the Company believes its recorded reserves, net of reinsurance, for the WTC event are adequate.

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

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

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

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

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

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

In the area of mass torts, several well-publicized verdicts arising out of bodily injury cases related to allegedly toxic mold led to a significant increase in mold-related claims in 2000 and

the first half of 2001. CNA’s reserve increase in the second quarter of 2001 was caused in part by this increased area of exposure.

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

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

Throughout 2000, and into 2001, CNA experienced significant increases in new asbestos bodily injury claims. In light of this development, CNA formed the view that payments for asbestos claims could be higher in future years than previously estimated. Moreover, in late 2000 through mid-2001, industry sources such as rating agencies and actuarial firms released analyses and studies commenting on the increase in claim volumes and other asbestos liability developments. For example, A.M. Best Company (A.M. Best) released a study in May 2001 increasing its ultimate asbestos reserve estimate 63% from $40 billion to $65 billion, citing an unfunded insurance industry reserve shortfall of $33 billion. In June 2001, Tillinghast raised its asbestos ultimate exposure from $55 billion to $65 billion for the insurance industry and its estimate of the ultimate remaining asbestos liability for all industries was raised to $200 billion.

Also in the 2000 to 2001 time period, a number of significant asbestos defendants filed for bankruptcy, increasing the likelihood that excess layers of insurance coverage could be called upon to indemnify policyholders and creating the potential that novel legal doctrines could be employed, which could accelerate the time when such indemnification payments could be due.

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

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

Approximately $600 million of the adverse loss development was a result of several coverages provided to commercial entities. The gross and net carried claim and claim adjustment expense reserves for Standard Lines at the beginning of 2001 was $12,070 million and $9,129 million. Reserve analyses performed during 2001 showed unexpected increases in the size of claims for several lines, including commercial automobile liability, general liability and the liability portion of commercial multiple-peril coverages. In addition, the number of commercial automobile liability claims was higher than expected and several state-specific factors resulted in higher than anticipated losses, including developments associated with commercial automobile liability coverage in Ohio and general liability coverage provided to contractors in New York. The

unfavorable development was driven principally by accident years 1997 through 2000. The remaining development affecting years prior to 1997 was driven principally by construction defect claims as described below.

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

The analyses of general liability and the liability portion of commercial multiple-peril coverages showed several factors affecting these lines. Construction defect claims in California and a limited number of other states have had a significant impact. It was expected that the number of claims being reported and the average size of those claims would fall quickly due to the decrease in business exposed to those losses. However, the number of claims reported during the first six months of 2001 increased from the number of claims reported during the last six months of 2000. In addition to the effects of construction defect claims, the average claim associated with New York labor law has risen to more than $125 thousand from less than $100 thousand, which was significantly greater than previously expected.

An analysis of assumed reinsurance business written by CNA Re showed that the paid and reported losses for recent accident years were higher than expectations, which resulted in management recording net unfavorable development on prior year loss reserves of approximately $560 million. The gross and net claim and claim adjustment expense reserves at the beginning of 2001 for CNA Re was $4,238 million and $2,735 million. Because of the long and variable reporting pattern associated with assumed reinsurance as well as uncertainty regarding possible changes in the reporting methods of the ceding companies, the carried reserves for assumed reinsurance was based mainly on the pricing assumptions until experience emerges to show that the pricing assumptions are no longer valid. The reviews completed during the second quarter of 2001, including analysis at the individual treaty level, showed that the pricing assumptions were no longer appropriate. The classes of business with the most significant changes included excess of loss liability, professional liability and proportional and retrocessional property. The unfavorable reserve development was driven principally by accident years 1996 through 2000.

Approximately $320 million of adverse loss development was due to adverse experience in all other lines, primarily in coverages provided to healthcare-related entities written by CNA HealthPro. The gross and net claim and claim adjustment expense reserves at the beginning of 2001 for Specialty Lines was approximately $4,813 million and $3,429 million. The level of paid and reported losses associated with coverages provided to national long term care facilities were higher than expected. The long term care facility business had traditionally been limited to local facilities. In recent years, the Company began to provide coverage to large chains of long

term care facilities. Original assumptions were that these chains would exhibit loss ratios similar to the local facilities. The most recent review of these large chains indicated an overall loss ratio in excess of 500% versus approximately 100% for the remaining business. In addition, the average size of claims resulting from coverages provided to physicians and institutions providing healthcare related services increased more than expected. The review indicated that the average loss had increased to over $330 thousand. Prior to this review, the expectation for the average loss was approximately $250 thousand. Unfavorable reserve development of $240 million was recorded for accident years 1997 through 2000. The remaining unfavorable reserve development was attributable to accident years prior to 1997.

Concurrent with the Company’s review of loss reserves, the Company completed comprehensive studies of estimated premium receivable accruals on retrospectively rated insurance policies and involuntary market facilities. These studies included ground-up reviews of retrospective premium accruals utilizing a more comprehensive database of retrospectively rated contracts. This review included application of the policy retrospective rating parameters to the revised estimate of ultimate loss ratio and consideration of actual interim cash settlement. This study resulted in a change in the estimated retrospective premiums receivable balances.

As a result of this review and changes in premiums associated with the change in estimates for loss reserves, the Company recorded a pretax reduction in premium accruals of $566 million. The effect on net earned premiums was $616 million offset by a reduction of accrued commissions of $50 million. The studies included the review of all such retrospectively rated insurance policies and the estimate of ultimate losses.

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

CNA assumes and cedes reinsurance with other insurers, reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk, minimize exposures on larger risks and to exit certain lines of business. Reinsurance coverages are tailored to the specific risk characteristics of each product line and CNA’s retained amount varies by type of coverage. Generally, property risks are reinsured on an excess of loss, per risk basis. Liability coverages are generally reinsured on a quota share basis in excess of CNA’s retained risk. CNA’s ceded life reinsurance includes utilization of coinsurance, yearly renewable term and facultative programs. A majority of the reinsurance utilized by the Company’s life insurance operations relates to term life insurance policies. Term life insurance policies issued from 1994 onward are generally ceded at 60%-90% of the face value. Universal Life policies issued from 1998 onward are generally ceded at 75% of the face value.

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

Interest cost on these contracts is credited during all periods in which a funds withheld liability exists. Interest cost, which is included in other net investment income, was $239 million, $241 million and $87 million in 2002, 2001 and 2000. The amount subject to interest crediting rates on such contracts was $2,766 million and $2,724 million at December 31, 2002 and 2001.

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

The ceding of insurance does not discharge the primary liability of the Company. Therefore, a credit exposure exists with respect to property and casualty and life reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under reinsurance agreements.

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

The Company attempts to mitigate its credit risk related to reinsurance by entering into reinsurance arrangements only with reinsurers that have credit ratings above certain levels and by obtaining substantial amounts of collateral. The primary methods of obtaining collateral are through reinsurance trusts, letters of credit and funds withheld balances. Such collateral was approximately $4,825 million and $3,696 million at December 31, 2002 and 2001.

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

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

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

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

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

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

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

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

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

In 2001, the Company entered into a one-year aggregate reinsurance treaty related to the 2001 accident year covering substantially all property and casualty lines of business in the Continental Casualty Company pool (the CCC Cover). The loss protection provided by the CCC Cover has an aggregate limit of approximately $760 million of ceded losses. The ceded premiums are a percentage of ceded losses. The ceded premium related to full utilization of the $760 million of limit is $456 million. The CCC Cover provides continuous coverage in excess of the second section of the Aggregate Cover discussed above. Under the CCC Cover, interest charges on the funds withheld generally accrue at 8% per annum. The interest rate increases to 10% per annum if the aggregate loss ratio exceeds certain thresholds. Losses of $618 million have been ceded under the CCC Cover through December 31, 2002.

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

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

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

As summarized in the following table, during 2001, the Company incurred $62 million pretax, or $40 million after-tax, of restructuring and other related charges for the IT Plan. During 2002, $4 million pretax, or $3 million after-tax, of this accrual was reduced.

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

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

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

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

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

As summarized in the following table, during 2001, the Company incurred $189 million pretax, or $125 million after-tax, of restructuring and other related charges for the 2001 Plan. During 2002, $32 million pretax, or $21 million after-tax, of this accrual was reduced.

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

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

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

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

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

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

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

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

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

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

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

The Company maintains reserves to cover its estimated ultimate unpaid liability for claim and claim adjustment expenses and future policy benefits, including the estimated cost of the claims adjudication process, for claims that have been reported but not yet settled and claims that have been incurred but not reported. Claim and claim adjustment expense and future policy benefit reserves are reflected as liabilities on the Consolidated Balance Sheets under the heading “Insurance Reserves.” Changes in estimates of Insurance Reserves are reflected in the Company’s Consolidated Statements of Operations, in the period in which the change arises.

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

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

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

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

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

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

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

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

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

from date of enactment to December 31, 2002 (the Transition Period) to 7% during the first subsequent calendar year, 10% in year two and 15% in year three. For losses in excess of a company’s deductible, the Federal Government will cover 90% of the excess losses, while companies retain the remaining 10%. Losses covered by the program will be capped annually at $100 billion; above this amount, insurers are not liable for covered losses and Congress is to determine the procedures for and the source of any payments. Amounts paid by the Federal Government under the program over certain phased limits are to be recouped by the Department of the Treasury through policy surcharges, which cannot exceed 3% of annual premium.

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

Property and Casualty (P&C) provides standard property and casualty insurance products such as workers compensation, general and product liability, property and commercial auto coverage through traditional and innovative advanced financial risk products to a wide range of

businesses. The majority of P&C customers are small and middle-market businesses, with less than $1 million in annual insurance premiums. Most insurance programs are provided on a guaranteed cost basis; however, P&C has the capability to offer specialized, loss-sensitive insurance programs to those risks viewed as higher risk and less predictable in exposure.

P&C’s field structure consists of 68 branch locations in 63 cities. Each branch provides the marketing, underwriting and risk control expertise on the entire portfolio of products. In addition, these branches provide streamlined claim services utilizing the same regional structure. A centralized processing center for small and middle-market customers, located in Maitland, Florida, handles policy processing and accounting, and also acts as a call center to optimize customer service. The branches and processing center are all located in the United States.

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

Excess & Surplus (E&S) provides specialized insurance and other financial products for selected commercial risks on both an individual customer and program basis. Risks insured by E&S are generally viewed as higher risk and less predictable in exposure than those covered by standard insurance markets. E&S’s products are distributed throughout the United States through specialist producers, program agents, and P&C’s agents and brokers. The target market for these specialized programs are large accounts within Fortune 1000 businesses. E&S has specialized underwriting and claim resources in Chicago, New York, Denver and Columbus.

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

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

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

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

Partially offsetting these declines were both improved current gross accident year loss ratios and favorable net reserve development in 2002. Favorable net reserve development, including premium development, of $154 million was recorded in 2002 as compared with unfavorable net reserve development of $24 million recorded in 2001, excluding the second quarter 2001 reserve strengthening. The gross carried claim and claim adjustment expense reserve was $11,576 million and $12,854 million at December 31, 2002 and 2001. The net carried claim and claim adjustment expense reserve was $7,262 million and $7,788 million at December 31, 2002 and 2001.

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

periods for accident years dating back to 1984. The paid losses during 2002 on prior accident years were approximately 60% of the previously expected amount.

In addition, Standard Lines had favorable prior year reserve development, primarily in the package liability and auto liability lines of busi


Delaware		36-6169860
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

CNA Plaza
Chicago, Illinois		60685
(Address of principal executive offices)		(Zip Code)


Title of each class		Name of each exchange on which registered

Common Stock with a par value of $2.50 per share		New York Stock Exchange Chicago Stock Exchange Pacific Exchange


PART I
	ITEM 1. BUSINESS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. CONTROLS AND PROCEDURES
PART IV
	ITEM 15. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS


Item		Page
Number		Number

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


		2002			2001			2000
Years ended December 31
(In millions, except ratio information)					Restated (a)			Restated (a)
Trade Ratios – GAAP basis (b)
	Loss and loss adjustment expense ratio		79.4	%		125.2	%		81.1	%
	Expense ratio		29.3			36.7			30.4
	Dividend ratio		0.9			1.5			0.9

	Combined ratio		109.6	%		163.4	%		112.4	%

Trade Ratios – Statutory basis (b)
	Loss and loss adjustment expense ratio		79.2	%		126.2	%		80.4	%
	Expense ratio		30.1			32.3			33.3
	Dividend ratio		1.0			1.7			1.2

	Combined Ratio		110.3	%		160.2	%		114.9	%

Individual Life and Group Life Insurance Inforce
	Individual life (c)	$	345,272		$	426,822		$	462,799
	Group life		92,479			70,910			71,982

Total		$	437,751		$	497,732		$	534,781

Other Data – Statutory basis (d)
	Property and casualty companies’ capital and surplus (e)	$	6,836		$	6,241		$	8,373
	Life and group companies’ capital and surplus		1,645			1,752			1,274
	Property and casualty companies’ written premiums to surplus ratio		1.3			1.3			1.1
	Life and group companies’ capital and surplus-percent to total liabilities		21.0	%		25.3	%		24.5	%
	Participating policyholders-percent of gross life insurance inforce		0.5	%		0.4	%		0.4	%

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	Percent of Total

Years ended December 31	2002			2001			2000

Illinois		9.1	%		8.3	%		9.2	%
California		7.7			6.8			6.0
New York		7.2			7.9			7.3
Florida		6.7			6.2			4.8
Texas		6.2			5.8			4.7
New Jersey		4.6			4.4			3.4
Pennsylvania		4.5			4.3			3.8
Maryland		2.3			2.4			5.6
United Kingdom		1.7			3.3			5.3
All other states, countries or political subdivisions (a)		50.0			50.6			49.9

Total		100.0	%		100.0	%		100.0	%


		1992 (a)			1993 (a)			1994 (a)			1995 (b)			1996			1997			1998			1999 (c)			2000			2001 (d)			2002 (e)
Calendar Year Ended
(In millions)
Originally reported gross reserves for unpaid claim and claim adjustment expenses					$	20,812		$	21,639		$	31,044		$	29,357		$	28,533		$	28,317		$	26,631		$	26,408		$	29,551		$	25,648
Originally reported ceded recoverable						2,491			2,705			6,089			5,660			5,326			5,424			6,273			7,568			11,798			10,583

Originally reported net reserves for unpaid claim and claim adjustment expenses		$	17,167		$	18,321		$	18,934		$	24,955		$	23,697		$	23,207		$	22,893		$	20,358		$	18,840		$	17,753		$	15,065

Cumulative net paid as of:
	One year later	$	3,706		$	3,629		$	3,656		$	6,510		$	5,851		$	5,954		$	7,321		$	6,546		$	7,686		$	5,981		$	–
	Two years later		6,354			6,143			7,087			10,485			9,796			11,394			12,241			11,935			11,988			–			–
	Three years later		8,121			8,764			9,195			13,363			13,602			14,423			16,020			15,247			–			–			–
	Four years later		10,241			10,318			10,624			16,271			15,793			17,042			18,271			–			–			–			–
	Five years later		11,461			11,378			12,577			17,947			17,736			18,568			–			–			–			–			–
	Six years later		12,308			13,100			13,472			19,465			18,878			–			–			–			–			–			–
	Seven years later		13,974			13,848			14,394			20,410			–			–			–			–			–			–			–
	Eight years later		14,640			14,615			15,024			–			–			–			–			–			–			–			–
	Nine years later		15,319			15,161			–			–			–			–			–			–			–			–			–
	Ten years later		15,805			–			–			–			–			–			–			–			–			–			–
Net reserves re-estimated as of:
	End of initial year	$	17,167		$	18,321		$	18,934		$	24,955		$	23,697		$	23,207		$	22,893		$	20,358		$	18,840		$	17,753		$	15,065
	One year later		17,757			18,250			18,922			24,864			23,441			23,470			23,920			20,785			21,306			17,805			–
	Two years later		17,728			18,125			18,500			24,294			23,102			23,717			23,774			22,903			21,377			–			–
	Three years later		17,823			17,868			18,088			23,814			23,270			23,414			25,724			22,780			–			–			–
	Four years later		17,765			17,511			17,354			24,092			22,977			24,751			25,407			–			–			–			–
	Five years later		17,560			17,082			17,506			23,854			24,105			24,330			–			–			–			–			–
	Six years later		17,285			17,176			17,248			24,883			23,736			–			–			–			–			–			–
	Seven years later		17,398			17,017			17,751			24,631			–			–			–			–			–			–			–
	Eight years later		17,354			17,500			17,650			–			–			–			–			–			–			–			–
	Nine years later		17,834			17,443			–			–			–			–			–			–			–			–			–
	Ten years later		17,805			–			–			–			–			–			–			–			–			–			–

Total net (deficiency) redundancy		$	(638	)	$	878		$	1,284		$	324		$	(39	)	$	(1,123	)	$	(2,514	)	$	(2,422	)	$	(2,537	)	$	(52	)	$	–

Reconciliation to gross re-estimated reserves:
	Net reserves re-estimated	$	17,805		$	17,443		$	17,650		$	24,631		$	23,736		$	24,330		$	25,407		$	22,780		$	21,377		$	17,805		$	–

	Re-estimated ceded recoverable					1,784			2,074			6,688			5,927			5,195			5,507			7,618			7,852			11,985			–

	Total gross re-estimated reserves				$	19,227		$	19,724		$	31,319		$	29,663		$	29,525		$	30,914		$	30,398		$	29,229		$	29,790		$	–

Net (deficiency) redundancy related to:
	Asbestos claims	$	(2,063	)	$	(1,466	)	$	(1,433	)	$	(1,660	)	$	(1,761	)	$	(1,659	)	$	(1,415	)	$	(838	)	$	(773	)	$	–		$	–
	Environmental claims		(1,215	)		(772	)		(604	)		(645	)		(589	)		(608	)		(388	)		(483	)		(468	)		–			–

	Total asbestos and environmental		(3,278	)		(2,238	)		(2,037	)		(2,305	)		(2,350	)		(2,267	)		(1,803	)		(1,321	)		(1,241	)		–			–
	Other claims		2,640			3,116			3,321			2,629			2,311			1,144			(711	)		(1,101	)		(1,296	)		(52	)		–

Total net (deficiency) redundancy		$	(638	)	$	878		$	1,284		$	324		$	(39	)	$	(1,123	)	$	(2,514	)	$	(2,422	)	$	(2,537	)	$	(52	)	$	–


	Amount (Square
	Feet) of Building
	Owned and Occupied
	or Leased and
Location	Occupied by CNA	Principal Usage

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


		2002				2001

		High		Low		High		Low

Quarter:
	Fourth	$	28.35	$	22.95	$	29.19	$	24.81
	Third		28.60		21.45		39.69		23.00
	Second		30.99		25.74		40.25		33.81
	First		30.60		27.00		39.19		32.13


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

Adjusted underwriting loss	$	(243	)	$	(310	)	$	(252	)	$	(805	)


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

Total	$	1,648	$	727	$	259	$	468	$	304


Year ended December 31	2002			2001
(In millions)
Ceded earned premium	$	–		$	(543	)
Ceded claim and claim adjustment expenses		–			1,010
Interest charges		(51	)		(81	)

Pretax (expense) benefit on operating results	$	(51	)	$	386


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

Total	$	29	$	32	$	1	$	62


	Employee
	Termination		Lease		Impaired
	and Related		Termination		Asset		Other
	Benefit Costs		Costs		Charges		Costs		Total

(In millions)
Standard Lines	$	40	$	–	$	–	$	–	$	40
Specialty Lines		7		–		–		–		7
CNA Re		2		4		–		–		6
Group Operations		7		–		–		35		42
Life Operations		3		–		9		–		12
Corporate and Other		9		52		21		–		82

Total	$	68	$	56	$	30	$	35	$	189


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


	2002			2001			2000			1999			1998
As of and for the Years Ended December 31
(In millions, except per share data and ratios)				Restated (a)			Restated (a)			Restated (a)			Restated (a)
Results of Operations:
Revenues	$	12,286		$	13,089		$	15,408		$	16,294		$	17,093

Income (loss) from continuing operations	$	247		$	(1,592	)	$	1,177		$	1		$	228
(Loss) income from discontinued operations, net of tax		(35	)		11			5			4			–
Cumulative effects of changes in accounting principles, net of tax		(57	)		(61	)		–			(177	)		–

Net income (loss)	$	155		$	(1,642	)	$	1,182		$	(172	)	$	228

Earnings (Loss) per Share:
Income (loss) from continuing operations	$	1.10		$	(8.20	)	$	6.40		$	(0.06	)	$	1.19
(Loss) income from discontinued operations, net of tax		(0.16	)		0.06			0.03			0.02			–
Cumulative effects of changes in accounting principles, net of tax		(0.26	)		(0.32	)		–			(0.96	)		–

Earnings (loss) per share available to common stockholders	$	0.68		$	(8.46	)	$	6.43		$	(1.00	)	$	1.19

Financial Condition:
Total investments	$	35,293		$	35,826		$	36,059		$	36,935		$	38,828
Total assets		61,731			65,723			62,785			62,390			63,929
Insurance reserves		40,179			43,623			39,054			39,271			40,509
Debt		2,292			2,567			2,729			2,881			3,160
Stockholders’ equity		9,401			8,122			9,400			8,723			8,984
Book value per share	$	38.68		$	36.33		$	51.29		$	46.42		$	46.92
Return on average stockholders’ equity		1.8	%		-18.7	%		13.0	%		-1.9	%		2.7	%
Statutory Surplus:
Property and casualty companies (b)	$	6,836		$	6,241		$	8,373		$	8,679		$	7,593
Life and group insurance companies		1,645			1,752			1,274			1,222			1,109