10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2002    Commission File Number 1-5823

CNA FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(312) 822-5000
(Registrant’s telephone number, including area code)

     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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ü ] No [  ]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at November 1, 2002
Common Stock, Par value $2.50	223,608,868

TABLE OF CONTENTS

	ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Share Purchase Agreement
Proforma Financial Statements and Footnotes

CNA FINANCIAL CORPORATION
INDEX

Part I.	Financial Information:
	Item 1.	Condensed Consolidated Financial Statements:
		Condensed Consolidated Balance Sheets at September 30, 2002 (Unaudited) and at December 31, 2001	1
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2002 and 2001 (Unaudited)	2
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 (Unaudited)	3
		Notes to Condensed Consolidated Financial Statements	4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	88
	Item 4.	Controls and Procedures	94
Part II.	Other Information
	Item 1.	Legal Proceedings	95
	Item 5.	Other Information	95
	Item 6.	Exhibits and Reports on Form 8-K	95
	Signatures		96

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CNA FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited) September 30, 2002			December 31, 2001
(In millions, except share data)
Assets
Investments:
Fixed maturity securities available-for-sale (amortized cost of $27,793 and $28,970)	$	28,443		$	29,164
Equity securities available-for-sale (cost of $918 and $1,168)		932			1,338
Mortgage loans and real estate (less accumulated depreciation of $54 and $1)		58			35
Policy loans		182			194
Other invested assets		1,380			1,355
Short-term investments		5,185			3,740
Total investments		36,180			35,826
Cash and cash equivalents		259			142
Receivables:
Reinsurance		13,656			13,823
Insurance		3,546			4,006
Less allowance for doubtful accounts		(371	)		(351	)
Accrued investment income		380			385
Receivables for securities sold		776			443
Deferred acquisition costs		2,548			2,424
Prepaid reinsurance premiums		1,417			1,221
Federal income taxes recoverable (includes $0 and $617 due from Loews)		—			611
Deferred income taxes		679			737
Property and equipment at cost (less accumulated depreciation of $761 and $797)		376			444
Intangibles		183			265
Other assets		2,292			2,194
Separate account business		3,147			3,798
Total assets	$	65,068		$	65,968
Liabilities and Stockholders’ Equity
Liabilities:
Insurance reserves:
Claim and claim adjustment expense	$	29,725		$	31,266
Unearned premiums		5,002			4,505
Future policy benefits		7,286			7,306
Policyholders’ funds		567			546
Collateral on loaned securities and derivatives		1,007			923
Payables for securities purchased		836			606
Participating policyholders’ funds		127			118
Debt		2,549			2,567
Reinsurance balances payable		3,032			2,723
Federal income taxes payable (includes $82 and $0 due to Loews)		84			—
Other liabilities		2,773			3,019
Separate account business		3,147			3,798
Total liabilities	$	56,135		$	57,377
Commitments and contingencies (Note D, F, G, H, J and N)
Minority interest		233			224
Stockholders’ equity:
Common stock ($2.50 par value; 500,000,000 shares authorized; 225,850,270 shares issued at September 30, 2002 and December 31, 2001; and 223,608,868 and 223,596,861 shares outstanding at September 30, 2002 and December 31, 2001)		565			565
Additional paid-in capital		1,031			1,031
Retained earnings		6,793			6,683
Accumulated other comprehensive income		451			226
Treasury stock, at cost		(69	)		(70	)
		8,771			8,435
Notes receivable for the issuance of common stock		(71	)		(68	)
Total stockholders’ equity		8,700			8,367
Total liabilities and stockholders’ equity	$	65,068		$	65,968
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
1

CNA FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions, except per share data)
Revenues
Net earned premiums	$	2,262		$	2,515		$	7,925		$	6,600
Net investment income		364			448			1,292			1,357
Realized investment gains (losses), net of participating policyholders’ and minority interests		24			—			(137	)		938
Other revenues		140			162			476			507
Total revenues		2,790			3,125			9,556			9,402
Claims, Benefits and Expenses
Insurance claims and policyholders’ benefits		1,850			2,420			6,542			8,766
Amortization of deferred acquisition costs		448			423			1,350			1,297
Other operating expenses		377			484			1,261			1,462
Restructuring and other related charges		—			—			—			62
Interest		37			38			112			122
Total claims, benefits and expenses		2,712			3,365			9,265			11,709
Income (loss) from continuing operations before income tax and minority interest		78			(240	)		291			(2,307	)
Income tax (expense) benefit		(23	)		86			(78	)		756
Minority interest		(1	)		(6	)		(11	)		(18	)
Income (loss) from continuing operations		54			(160	)		202			(1,569	)
Income (loss) from discontinued operations, net of tax of $0, $1, $9, and $1		—			5			(35	)		8
Income (loss) before cumulative effects of changes in accounting principles		54			(155	)		167			(1,561	)
Cumulative effects of changes in accounting principles, net of tax of $0, $0, $7, and $33		—			—			(57	)		(61	)
Net income (loss)	$	54		$	(155	)	$	110		$	(1,622	)
Basic and Diluted Earnings (Loss) Per Share
Income (loss) from continuing operations	$	0.24		$	(0.86	)	$	0.91		$	(8.52	)
Income (loss) from discontinued operations, net of tax		—			0.02			(0.16	)		0.04
Income (loss) before cumulative effects of changes in accounting principles		0.24			(0.84	)		0.75			(8.48	)
Cumulative effects of changes in accounting principles, net of tax		—			—			(0.26	)		(0.33	)
Basic and diluted earnings (loss) per share available to common stockholders	$	0.24		$	(0.84	)	$	0.49		$	(8.81	)
Weighted average outstanding common stock and common stock equivalents		223.6			185.5			223.6			184.0
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
2

CNA FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine months ended September 30	2002			2001
(In millions)
Cash Flows from Operating Activities
Net income (loss)	$	110		$	(1,622	)
Adjustments to reconcile net income (loss) to net cash flows provided (used) by operating activities:
Cumulative effects of changes in accounting principles, net of tax		57			61
Loss on disposals of property and equipment		17			63
Minority interest		11			18
Deferred income tax provision		(33	)		(217	)
Net realized investment losses (gains)		137			(940	)
Realized loss from discontinued operations, net of tax		37			—
Equity method income		24			(52	)
Amortization of intangibles		—			15
Amortization of bond discount		(98	)		(208	)
Depreciation		74			99
Changes in:
Receivables, net		647			(3,017	)
Deferred acquisition costs		(130	)		(54	)
Accrued investment income		2			10
Federal income taxes recoverable/payable		713			(721	)
Prepaid reinsurance premiums		(196	)		95
Reinsurance balances payable		309			1,303
Insurance reserves		(664	)		4,339
Other, net		(210	)		130
Total adjustments		697			924
Net cash flows provided (used) by operating activities		807			(698	)
Cash Flows from Investing Activities
Purchases of fixed maturity securities		(49,577)			(43,308	)
Proceeds from fixed maturity securities:
Sales		48,195			39,847
Maturities, calls and redemptions		2,025			2,835
Purchases of equity securities		(646	)		(1,066	)
Proceeds from sales of equity securities		816			1,915
Change in short-term investments		(1,394	)		463
Change in collateral on loaned securities and derivatives		84			(293	)
Change in other investments		(146	)		(246	)
Purchases of property and equipment		(61	)		(95	)
Sales of property and equipment		—			273
Dispositions		76			2
Other, net		(8	)		18
Net cash flows (used) provided by investing activities		(636	)		345
Net Cash Flows from Financing Activities
Issuance of Common Stock		—			1,006
Principal payments on debt		(84	)		(646	)
Proceeds from issuance of debt		65			—
Return of policyholder account balances on investment contracts		(36	)		(50	)
Receipts from investment contracts credited to policyholder account balances		—			1
Other		1			(1	)
Net cash flows (used) provided by financing activities		(54	)		310
Net change in cash and cash equivalents		117			(43	)
Cash and cash equivalents, beginning of year		142			163
Cash and cash equivalents, end of period	$	259		$	120
Supplemental Disclosures of Cash Flow Information:
Cash paid (received):
Interest		132			99
Federal income taxes		(627	)		127
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
3

CNA FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A. Basis of Presentation

The Condensed Consolidated Financial Statements (Unaudited) include the accounts of CNA Financial Corporation (CNAF) and its controlled subsidiaries, which include property and casualty insurance companies (principally Continental Casualty Company (CCC) and The Continental Insurance Company (CIC)) and life and group insurance companies (principally Continental Assurance Company (CAC), Valley Forge Life Insurance Company (VFL) and CNA Group Life Assurance Company (CNAGLA)), collectively CNA or the Company. As of September 30, 2002, Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF.

The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in CNAF’s Annual Report to Shareholders for the year ended December 31, 2001 (incorporated by reference in Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2001).

The interim financial data as of September 30, 2002 and 2001 and for the three and nine months ended September 30, 2002 and 2001 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the Company’s results for the interim periods. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany amounts have been eliminated.

Certain amounts applicable to prior periods have been reclassified to conform to the current period presentation.

Note B. Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 changed the accounting for goodwill and indefinite-lived intangible assets from an amortization method to an impairment-only approach. Amortization of goodwill and indefinite-lived intangible assets recorded in past business combinations, ceased upon adoption of SFAS 142, which for CNA was January 1, 2002. Net income for the nine months ended September 30, 2002 does not include amortization expense on goodwill.

4

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

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

Pro Forma Effect of SFAS 142 on 2001 Results
	Three Months						Nine Months
Period ended September 30, 2001	Net Income			Earnings Per Share			Net Income			Earnings Per Share
(In millions, except per share amounts)
Results as reported in prior year	$	(155	)	$	(0.84	)	$	(1,622	)	$	(8.81	)
Add goodwill amortization, after-tax		3			0.02			13			0.07
Adjusted reported results to include the impact of the non-amortization provisions of SFAS 142	$	(152	)	$	(0.82	)	$	(1,609	)	$	(8.74	)

During the third quarter of 2002, the Company completed its initial goodwill impairment testing and recorded a $64 million pretax ($57 million after-tax) impairment charge. In accordance with SFAS 142, the impairment charge, which primarily relates to Specialty Lines and Life Operations, was recorded as a cumulative effect of a change in accounting principle as of January 1, 2002. Any impairment losses incurred after the initial application of this standard will be reported in operating results.

The impact of the goodwill impairment charge on net income and the related basic and diluted per share amounts, for the three months ended March 31, 2002 and the six months ended June 30, 2002, is presented in the table below.

Restatement of 2002 Prior Period Results in Accordance with SFAS 142
	Three months ended March 31, 2002						Six months ended June 30, 2002
	Net Income			Earnings Per Share			Net Income			Earnings Per Share
(In millions, except per share amounts)
Results as reported in prior periods	$	78		$	0.35		$	113		$	0.51
Less cumulative effect of adopting SFAS 142, net of tax		(57	)		(0.26	)		(57	)		(0.26	)
Results as restated	$	21		$	0.09		$	56		$	0.25

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). Effective January 1, 2002, CNA adopted SFAS 144 for impairments of long-lived assets and for long-lived assets to be disposed of on or after January 1, 2002. Certain operations identified for sale prior to January 1, 2002 continue to be accounted for under the provisions of SFAS 121. The adoption of SFAS 144 did not have a significant impact on the net income (loss) or equity of the Company; however, it did impact the income statement presentation of certain operations sold in 2002.

5

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

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

Note C. Earnings Per Share

Earnings per share applicable to common stock is based on weighted average outstanding shares. The computation of earnings per share was as follows.

Earnings (Loss) Per Share
	Three Months					Nine Months
Period ended September 30	2002		2001			2002		2001
(In millions, except per share amounts)
Net income (loss) applicable to common stock	$	54	$	(155	)	$	110	$	(1,622	)
Weighted average outstanding common stock and common stock equivalents		223.6		185.5			223.6		184.0
Effect of dilutive securities, employee stock options		—		—			—		—
Adjusted weighted average outstanding common stock and common stock equivalents assuming conversions		223.6		185.5			223.6		184.0
Basic and diluted earnings (loss) per share available to common stockholders	$	0.24	$	(0.84	)	$	0.49	$	(8.81	)

Note D. Investments

Invested assets are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in risks in the near term would materially affect the amounts reported in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.

The Company classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its equity securities as available-for-sale, and as such, they are carried at fair value. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, which are included in net investment income. Changes in fair value are reported as a component of other comprehensive income. Investments are written down to estimated net realizable values and losses are recognized in income when a decline in value is determined to be other than temporary.

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

6

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

effective yield been applied since the acquisition of the securities. Such adjustments are reflected in net investment income.

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

Other invested assets include investments in limited partnerships and certain derivative securities (See Note E for a discussion of derivative securities). The Company’s limited partnership investments are recorded at fair value, typically reflecting a reporting lag of up to three months, with changes in fair value reported in net investment income. Fair value of the Company’s limited partnership investments represents CNA’s equity in the partnership’s net assets as determined by the general partner. The carrying value of the Company’s limited partnership investments was $1,334 million and $1,307 million as of September 30, 2002 and December 31, 2001.

Limited partnerships are a relatively small portion of the Company’s overall investment portfolio. The majority of the limited partnerships invest in a substantial number of securities that are readily marketable. The Company is a passive investor in such partnerships and does not have influence over the partnerships’ management, who are committed to operate them according to established guidelines and strategies. These strategies may include the use of leverage and hedging techniques that potentially introduce more volatility and risk to the partnerships.

As of September 30, 2002, the Company had committed approximately $157 million for future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnership.

Realized investment losses for the three and nine months ended September 30, 2002, included $222 million and $533 million pretax of impairment losses as compared with $41 million and $124 million of pretax impairment losses for the same periods in 2001.

The impairment losses recorded in 2002 and 2001 were primarily the result of the continued deterioration in the bond and equity markets and the effects on such markets due to the overall slowing of the economy. These impairment losses were related principally to corporate bonds in the taxable securities asset class of fixed maturity securities and in equity securities.

For the three months ended September 30, 2002, the impairment losses related primarily to corporate bonds in the communications sector of the market and equities in the financial industry sector. On an aggregate basis these impairment losses were more than offset by the realized gains in the overall investment portfolio.

For the three months ended September 30, 2001, the impairment losses related to corporate bonds primarily in the internet communications sector of the market.

7

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

For the nine months ended September 30, 2002, the impairment losses included $129 million related to debt securities issued by WorldCom Inc., $74 million related to Adelphia Communications Corporation, and $57 million for AT&T Canada, all of which have recently filed for bankruptcy. The remainder of the impairment losses were primarily in the communications sectors. If the deterioration in this and other industry sectors continues in future periods and the Company continues to hold these securities, the Company is likely to have additional impairment losses in the future.

For the nine months ended September 30, 2001 the impairment losses were primarily in corporate bonds and included $61 million related to the internet communications industry sector. The remainder of the impairment losses were primarily in the equities sector within the medical services industry.

Note E. Derivative Financial Instruments

Effective January 1, 2001, the Company accounts for derivatives and hedging activities in accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The Company’s initial adoption of SFAS 133 did not have a significant impact on the equity of the Company; however, adoption of SFAS 133 resulted in an after-tax decrease to 2001 earnings of $61 million. Of this transition amount, approximately $58 million related to investments and investment-related derivatives. Because the Company already carried its investment and investment-related derivatives at fair value through other comprehensive income, there was an equal and offsetting favorable adjustment of $58 million to stockholders’ equity (accumulated other comprehensive income). The remainder of the transition adjustment is attributable to collateralized debt obligation products that are derivatives under SFAS 133.

8

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

A derivative is typically defined as an instrument whose value is “derived” from an underlying instrument, index or rate, has a notional amount, and can be net settled. Derivatives include, but are not limited to, the following types of investments: interest rate swaps, interest rate caps and floors, put and call options, warrants, futures, forwards and commitments to purchase securities and combinations of the foregoing. Derivatives embedded within non-derivative instruments (such as call options embedded in convertible bonds) must be split from the host instrument and accounted for under SFAS 133 when the embedded derivative is not clearly and closely related to the host instrument. A summary of the recognized (losses) gains related to derivative financial instruments follows.

Derivative Financial Instruments Recognized (Losses) Gains
	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
General account
Swaps	$	(1	)	$	(1	)	$	11		$	(4	)
Interest rate caps		—			(1	)		—			—
Futures sold, not yet purchased		(48	)		(17	)		(49	)		(11	)
Forwards		—			(8	)		(13	)		(10	)
Commitments to purchase government and municipal securities		—			—			(15	)		—
Equity warrants		—			—			(1	)		(3	)
Collateralized debt obligation liabilities		5			(1	)		(11	)		2
Options purchased		—			141			—			140
Options written		—			(143	)		—			5
Options embedded in convertible debt securities		7			(45	)		(57	)		(68	)
Total	$	(37	)	$	(75	)	$	(135	)	$	51
Separate accounts
Futures purchased	$	(114	)	$	(141	)	$	(228	)	$	(232	)
Futures sold, not yet purchased		(1	)		—			(1	)		(1	)
Commitments to purchase government and municipal securities		(1	)		—			1			(1	)
Options purchased		(1	)		—			(3	)		(1	)
Options written		—			(1	)		—			1
Total	$	(117	)	$	(142	)	$	(231	)	$	(234	)

9

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

A summary of the aggregate contractual or notional amounts and estimated fair values related to derivative financial instruments follows.

Derivative Financial Instruments
	Contractual/
	Notional
September 30, 2002	Amount			Asset	(Liability)
(In millions)
General account
Swaps	$	643	$	9	$	—
Interest rate caps		500		1		—
Futures sold, not yet purchased		985		—		(6	)
Forwards		450		—		—
Equity warrants		15		—		—
Collateralized debt obligation liabilities		127		—		(20	)
Options purchased		9		1		—
Options embedded in convertible debt securities		834		122		—
Total	$	3,563	$	133	$	(26	)
Separate accounts
Futures purchased	$	537	$	—	$	(7	)
Futures sold, not yet purchased		10		—		—
Commitments to purchase government and municipal securities		28		—		—
Options purchased		67		—		—
Options written		82		—		(2	)
Total	$	724	$	—	$	(9	)
Derivative Financial Instruments
		Contractual/
		Notional
December 31, 2001	Amount		Asset		(Liability)
(In millions)
General account
Swaps	$	504	$	3	$	—
Interest rate caps		500		2		—
Futures sold, not yet purchased		14		—		—
Forwards		183		—		(2	)
Commitments to purchase government and municipal securities		193		14		—
Equity warrants		15		1		—
Collateralized debt obligation liabilities		170		—		(38	)
Options purchased		10		—		—
Options embedded in convertible debt securities		803		189		—
Total	$	2,392	$	209	$	(40	)
Separate accounts
Futures purchased	$	884	$	—	$	(8	)
Futures sold, not yet purchased		10		—		—
Commitments to purchase government and municipal securities		17		—		—
Options purchased		65		1		—
Options written		70		—		—
Total	$	1,046	$	1	$	(8	)

Options embedded in convertible debt securities are classified as fixed maturity securities in the Condensed Consolidated Balance Sheets, consistent with the host instruments.

10

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Fair Value Hedges

The Company’s hedging activities primarily involve hedging interest rate and foreign currency exposures. The ineffective portion of fair value hedges resulted in realized losses of $2.5 million and $3 million for the three and nine month periods ended September 30, 2002, and $1 million and $0.5 million for the three and nine month periods ended September 30, 2001.

Note F. Legal Proceedings and Contingent Liabilities

IGI Contingency

In 1997, CNA Reinsurance Company Limited (CNA Re Ltd.) entered into an arrangement with IOA Global, Ltd. (IOA), an independent managing general agent based in Philadelphia, Pennsylvania, to develop and manage a book of accident and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies, Ltd. (IGI), a personal accident reinsurance managing general underwriter, was appointed to underwrite and market the book under the supervision of IOA. Between April 1, 1997 and December 1, 1999, IGI underwrote a number of reinsurance arrangements with respect to personal accident insurance worldwide (the IGI Program). Under various arrangements, CNA Re Ltd. both assumed risks as a reinsurer and also ceded a substantial portion of those risks to other companies, including other CNA insurance subsidiaries and ultimately to a group of reinsurers participating in a reinsurance pool known as the Associated Accident and Health Reinsurance Underwriters (AAHRU) Facility. CNA’s Group Operations business unit participated as a pool member in the AAHRU Facility in varying percentages between 1997 and 1999.

CNA has determined that a portion of the premiums assumed under the IGI Program related to United States workers compensation “carve-out” business. Some of these premiums were received from John Hancock Financial Services, Inc. (“John Hancock”). CNA is aware that a number of reinsurers with workers compensation carve-out insurance exposure, including John Hancock, have disavowed their obligations under various legal theories. If one or more such companies are successful in avoiding or reducing their liabilities, then it is likely that CNA’s potential liability will also be reduced. Moreover, based on information known at this time, CNA believes it has strong grounds to successfully challenge its alleged exposure on a substantial portion of its United States workers compensation carve-out business, including all purported exposure derived from John Hancock, through legal action.

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

CNA has established reserves for its estimated exposure under the program, other than that derived from John Hancock, and an estimate for recoverables from retrocessionaires. CNA has not established any reserve for any exposure derived from John Hancock because, as indicated, CNA believes the contract will be rescinded.

The Company is pursuing a number of loss mitigation strategies with respect to the entire IGI Program. Although the results of these various actions to date support the recorded reserves,

11

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

the estimate of ultimate losses is subject to considerable uncertainty due to the complexities described above. As a result of these uncertainties, the results of operations in future years may be adversely affected by potentially significant reserve additions. Management does not believe that any such reserve additions will be material to the equity of the Company, although results of operations may be adversely affected.

California Wage and Hour Litigation

In Ernestine Samora, et al. v. CCC, Case No. BC 242487, Superior Court of California, County of Los Angeles, California and Brian Wenzel v. Galway Insurance Company, Superior Court of California, County of Orange No. BC01CC08868 (coordinated), two former CNA employees, filed lawsuits in Los Angeles Superior Court on behalf of purported classes of CNA employees asserting they worked hours for which they should have been compensated at a rate of 1 1/2 times their base hourly wage over a four-year period. The cases were coordinated and an amended complaint was filed which alleges overtime claims under California law over a four year period. In June 2002, the Company filed a responsive pleading denying the material allegations of the amended complaint. The Company intends to defend this case vigorously. Due to the recent commencement of discovery and the uncertainty of how the courts may interpret California law as applied to the facts of these cases, the extent of losses beyond any amounts that may be accrued are not readily determinable at this time. Based on facts and circumstances presently known, however, in the opinion of management, the outcome will not materially affect the equity of the Company, although results of operations may be adversely affected.

Voluntary Market Premium Litigation

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

Other Litigation

CNA and its subsidiaries are also parties to other litigation arising in the ordinary course of business. Based on the facts and circumstances currently known, such other litigation will not,

12

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

in the opinion of management, materially affect the results of operations or equity of CNA. See Note G for discussion of claims related to environmental pollution, asbestos and mass tort.

Note G. Claim and Claim Adjustment Expense Reserves

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

Establishing loss reserves, including loss reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair, materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the operating results in the period that the need for such adjustments is determined.

Catastrophes are an inherent risk of the property and casualty insurance business, which have contributed to material period-to-period fluctuations in the Company’s results of operations and equity. The level of catastrophe losses experienced in any period cannot be predicted and can be material to the results of operations and equity.

During the third quarter of 2001, the Company experienced a severe catastrophe loss estimated at $468 million pretax, net of reinsurance, related to the September 11, 2001 World Trade Center disaster and related events (WTC event). The loss estimate is based on a total industry loss of $50 billion and includes all lines of insurance. The estimate takes into account CNA’s substantial reinsurance agreements, including its catastrophe reinsurance program and corporate reinsurance programs. The Company has closely monitored reported losses as well as the collection of reinsurance on WTC event claims. Based on experience to date, the Company believes its recorded reserves are adequate.

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

13

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

The following table provides management’s estimate of pretax losses related to this catastrophe on a gross basis (before reinsurance) and a net basis (after reinsurance) by line of business.

WTC Event Losses
Three and nine months ended September 30, 2001	Gross Basis		Net Basis
(In millions)
Property and casualty reinsurance	$	662	$	465
Property		282		159
Workers compensation		112		25
Airline hull		194		6
Commercial auto		1		1
Total property and casualty		1,251		656
Group		322		60
Life		75		22
Total group and life		397		82
Total loss before corporate aggregate reinsurance treaties and reinstatement and additional premiums and other	$	1,648		738
Reinstatement and additional premiums and other				(11	)
Corporate aggregate reinsurance treaties				(259	)
Total			$	468

Environmental Pollution and Mass Tort and Asbestos Reserves (APMT)

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

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

Environmental Pollution and Mass Tort and Asbestos
	September 30, 2002						December 31, 2001
	Environmental Pollution and Mass Tort			Asbestos			Environmental Pollution and Mass Tort			Asbestos
(In millions)
Gross reserves	$	730		$	1,536		$	820		$	1,590
Ceded reserves		(204	)		(320	)		(203	)		(386	)
Net reserves	$	526		$	1,216		$	617		$	1,204

Environmental pollution cleanup is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to cleanup. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern the cleanup and restoration of toxic waste sites and formalize the concept of legal liability for cleanup and

14

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

restoration by “Potentially Responsible Parties” (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs fail to do so, and to assign liability to PRPs. The extent of liability to be allocated to a PRP is dependent upon a variety of factors. Further, the number of waste sites subject to cleanup is unknown. To date, approximately 1,500 cleanup sites have been identified by the Environmental Protection Agency (EPA) and included on its National Priorities List (NPL). State authorities have designated many cleanup sites as well.

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

A number of proposals to reform Superfund have been made by various parties. However, no reforms were enacted by Congress during 2001 or the first nine months of 2002, and it is unclear what positions Congress or the administration will take and what legislation, if any, will result in the future. If there is legislation, and in some circumstances even if there is no legislation, the federal role in environmental cleanup may be significantly reduced in favor of state action. Substantial changes in the federal statute or the activity of the EPA may cause states to reconsider their environmental cleanup statutes and regulations. There can be no meaningful prediction of the pattern of regulation that would result or the effect upon CNA’s results of operations and/or equity.

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

As of September 30, 2002 and December 31, 2001, CNA carried approximately $526 million and $617 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution and mass tort claims. There was no environmental pollution and mass tort net development for the three and nine months ended September 30, 2002 and the three months ended September 30, 2001. Unfavorable environmental pollution and mass tort development for the nine months ended September 30, 2001 amounted to $453 million. The Company paid environmental pollution-related claims and other mass tort related claims, net of reinsurance recoveries, of $91 million and $153 million for the nine months ended September 30, 2002 and 2001.

CNA’s property and casualty insurance subsidiaries also have exposure to asbestos-related claims. Estimation of asbestos-related claim and claim adjustment expense reserves involves many of the same limitations discussed above for environmental pollution claims, such as inconsistency of court decisions, specific policy provisions, allocation of liability among insurers and insureds, and additional factors such as missing policies and proof of coverage. Furthermore, estimation of asbestos-related claims is difficult due to, among other reasons, the

15

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

proliferation of bankruptcy proceedings and attendant uncertainties, the targeting of a broader range of businesses and entities as defendants, the uncertainty as to which other insureds may be targeted in the future, and the uncertainties inherent in predicting the number of future claims.

As of September 30, 2002 and December 31, 2001, CNA carried approximately $1,216 million and $1,204 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported asbestos-related claims. There was no asbestos net claim and claim adjustment expense development for the three and nine months ended September 30, 2002 and the three months ended September 30, 2001. Unfavorable asbestos net claim and claim adjustment reserve development for the nine months ended September 30, 2001 amounted to $769 million. The Company had a net $12 million receipt of cash related to asbestos in the first nine months of 2002 as reinsurance recoveries collected exceeded claim payments. The Company made asbestos-related claim payments, net of reinsurance recoveries, of $78 million for the nine months ended September 30, 2001.

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

Since 1982, at least sixty-two companies that mined asbestos, or manufactured or used asbestos-containing products, have filed for bankruptcy. Of these sixty-two companies, twenty-six companies have filed bankruptcy since January 1, 2000. This phenomenon has prompted plaintiff attorneys to file claims against companies that had only peripheral involvement with asbestos. Many of these defendants were users or distributors of asbestos-containing products, or manufacturers of products in which asbestos was encapsulated. These defendants include equipment manufacturers, brake, gasket, and sealant manufacturers, and general construction contractors. According to a comprehensive report on asbestos litigation recently released by the Rand Corporation, over 6,000 companies have been named as defendants in asbestos lawsuits, with 75 out of 83 different types of industries in the United States impacted by asbestos litigation. The study found that a typical claimant names 70 to 80 defendants, up from an average of 20 in the early years of asbestos litigation.

Some asbestos-related defendants have asserted that their claims for insurance are not subject to aggregate limits on coverage. CNA has such claims from a number of insureds. Some of these claims involve insureds facing exhaustion of products liability aggregate limits in their policies, who have asserted that their asbestos-related claims fall within so-called “non-products” liability coverage contained within their policies rather than products liability coverage, and that the claimed “non-products” coverage is not subject to any aggregate limit. It is difficult to predict the ultimate size of any of the claims for coverage purportedly not subject to aggregate limits or predict to what extent, if any, the attempts to assert “non-products” claims outside the products liability aggregate will succeed. CNA is currently attempting to achieve settlements of several of

16

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

these claims for coverage purportedly not subject to aggregate limits. Nevertheless, there can be no assurance any of these settlement efforts will be successful, or that any such claims can be settled on terms acceptable to CNA. Adverse developments with respect to such matters discussed in this paragraph could have a material adverse effect on CNA’s results of operations and/or equity.

Policyholders have also initiated litigation directly against CNA and other insurers. CNA has been named in Adams v. Aetna, Inc., et. al. (Circuit Court of Kanhwha County, West Virginia), a purported class action against CNA and other insurers, alleging that the defendants violated West Virginia’s Unfair Trade Practices Act in handling and resolving asbestos claims against their policyholders. In addition, lawsuits have been filed in Texas against CNA, and other insurers and non-insurer corporate defendants asserting liability for failing to warn of the dangers of asbestos. (Boson v. Union Carbide Corp., et al. (District Court of Nueces County, Texas)). It is difficult to predict the outcome or financial exposure represented by this type of litigation in light of the broad nature of the relief requested and the novel theories asserted.

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

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

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

Second Quarter 2001 Prior Year Reserve Strengthening

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

17

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

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

Second Quarter 2001 Prior Year Reserve Strengthening
	Total
(In millions)
Net reserve strengthening excluding the impact of the corporate aggregate reinsurance treaty:
APMT	$	1,197
Non-APMT		1,594
Total		2,791
Pretax benefit from corporate aggregate reinsurance treaty on accident year 1999**		(223	)
Accrual for insurance-related assessments		48
Net reserve strengthening and related accruals		2,616
Change in estimate of premium accruals		616
Reduction of related commission accruals		(50	)
Net premium and related accrual reductions		566
Total second quarter 2001 reserve strengthening and related accruals	$	3,182
** $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 warranted.

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 our 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

18

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

limits of the policies; and decisions ruling that carriers’ loss control inspections of their insured’s premises do not give rise to a duty to warn third parties to the dangers of asbestos.

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

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

The non-APMT adverse reserve development 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 is a result of several coverages provided to commercial entities. Reserve analyses performed during 2001 showed unexpected increases in the size of claims for several lines, including commercial automobile liability, general liability and the liability portion of commercial multiple-peril coverages. In addition, the number of commercial automobile liability claims was higher than expected and several state-specific factors resulted in higher than anticipated losses, including developments associated with commercial automobile liability coverage in Ohio and general liability coverage provided to contractors in New York.

The commercial automobile liability analysis indicated increased ultimate loss and allocated loss adjustment expense across several accident years due to higher paid and reported loss and allocated loss 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 is increasing and a lack of improvement in the ratio of the number of claims per exposure unit, the frequency. First, Ohio courts have 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 most recent available data

19

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

indicates that the rate of increase is now 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 $125,000 from less than $100,000, which was significantly greater than previously expected.

An analysis of assumed reinsurance business 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. 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 are 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 include excess of loss liability, professional liability and proportional and retrocessional property.

Approximately $320 million of adverse loss development was due to adverse experience in all other lines, primarily in coverages provided to healthcare-related entities. 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 most recent review indicated that the average loss had increased to over $330,000. Prior to this review, the expectation for the average loss was approximately $250,000.

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.

20

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

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. Accruals for ceded premiums related to other reinsurance treaties increased $83 million due to the reserve strengthening. The remainder of the decrease in premium accruals relates to the change in estimate of the amount of retrospective premium receivables as discussed above.

Note H. Reinsurance

CNA assumes and cedes reinsurance with other insurers and reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk, 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 life reinsurance includes coinsurance, yearly renewable term and facultative programs.

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 liability. 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 Condensed 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 $53 million and $84 million for the three months ended September 30, 2002 and 2001 and $168 million and $206 million for the nine months ended September 30, 2002 and 2001. The amount subject to interest crediting rates on such contracts was $2,904 million and $2,724 million at September 30, 2002 and December 31, 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.

21

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

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

The effects of reinsurance on earned premiums are shown in the following table.

Components of Earned Premiums
Nine months ended September 30	Direct		Assumed			Ceded		Net
(In millions)
2002
Property and casualty	$	7,243	$	872		$	3,022	$	5,093
Accident and health		2,227		166			61		2,332
Life		804		(10	)		294		500
Total earned premiums	$	10,274	$	1,028		$	3,377	$	7,925
2001
Property and casualty	$	6,188	$	937		$	3,781	$	3,344
Accident and health		2,729		121			104		2,746
Life		865		155			510		510
Total earned premiums	$	9,782	$	1,213		$	4,395	$	6,600

For 2002, the Company has entered into an aggregate reinsurance treaty covering substantially all of the Company’s property and casualty lines of business (the 2002 Cover). The loss protection provided by the 2002 Cover is dependent on the level of subject premium, but there is a maximum aggregate limit of $1,125 million of ceded losses. Maximum ceded premium under the contract is $683 million, and premiums, claims recoveries and interest charges other than the reinsurer’s margin and related fees are made on a funds withheld basis. Interest is credited on funds withheld at 8% per annum, and all premiums are deemed to have been paid as of January 1, 2002. Ceded premium related to the reinsurer’s margin in the amount of $2.5 million and $7.5 million was recorded for the 2002 Cover for the three and nine months ended September 30, 2002.

The aggregate reinsurance protection from the 2002 Cover attaches at a defined accident year loss and allocated loss adjustment expense (collectively, losses) ratio. Under the contract, the Company has the right to elect to cede losses to the 2002 Cover when its recorded accident year losses exceed the attachment point. This election period expires March 31, 2004. If no losses are ceded by this date, the contract is considered to be commuted. If the Company elects to cede any losses to the 2002 Cover, it must continue to cede all losses subject to the terms of the contract. As of September 30, 2002, the Company has not recorded any ceded losses related to this cover.

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

22

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

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 accrue at 8% per annum. If the aggregate loss ratio for the three-year period exceeds certain thresholds, additional premiums may be payable and the rate at which interest charges are accrued would increase to 8.25% per annum commencing in 2006.

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

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

Impact of Aggregate Cover on Pretax Operating Results
	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Ceded earned premiums	$	-		$	(83	)	$	-		$	(543	)
Ceded claim and claim adjustment expense		-			288			-			1,010
Interest charges (included in net investment income)		(13	)		(11	)		(38	)		(70	)
Pretax impact on operating results	$	(13	)	$	194		$	(38	)	$	397

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 September 30, 2002.

23

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

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

Impact of CCC Cover on Pretax Operating Results
	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Ceded earned premiums	$	(39	)	$	(232	)	$	(100	)	$	(234	)
Ceded claim and claim adjustment expense		55			427			148			427
Interest charges (included in net investment income)		(11	)		(15	)		(27	)		(15	)
Pretax impact on operating results	$	5		$	180		$	21		$	178

Note I. Debt

Debt is composed of the following obligations.

Debt
	September 30, 2002		December 31, 2001
(In millions)
Variable rate debt:
Credit facility – CNAF, due April 29, 2002	$	—	$	250
Credit facility – CNAF, due April 30, 2004		250		250
Term loan due April 29, 2003		250		—
Credit facility – CNA Surety, due September 30, 2002		—		75
Credit facility – CNA Surety, due September 30, 2003		35		—
Term loan – CNA Surety, due September 30, 2005		30		—
Senior notes:
7.250%, face amount of $128, due March 1, 2003		128		133
6.250%, face amount of $248, due November 15, 2003		248		250
6.500%, face amount of $493, due April 15, 2005		491		491
6.750%, face amount of $250, due November 15, 2006		249		249
6.450%, face amount of $150, due January 15, 2008		149		149
6.600%, face amount of $200, due December 15, 2008		199		199
8.375%, face amount of $70, due August 15, 2012		69		68
6.950%, face amount of $150, due January 15, 2018		149		148
Debenture, 7.250%, face amount of $243, due November 15, 2023		240		240
Capital leases, 8.000%-13.700%, due through December 31, 2011		36		38
Other debt, 1.000%-8.500%, due through 2019		26		27
Total debt	$	2,549	$	2,567

The Company pays a facility fee to the lenders for having funds available for loans under the three-year credit facility with an April 30, 2004 expiration date. The fee varies based on the long-term debt ratings of the Company. At September 30, 2002, the facility fee on the three-year component was 17.5 basis points.

The Company pays interest on any outstanding debt/borrowings under the one-year term loan and three-year facility based on a rate determined using the long-term debt ratings of the Company. The interest rate is equal to the London Interbank Offering Rate (LIBOR) plus 60.0 basis points for the one-year term loan and LIBOR plus 57.5 basis points for the three-year facility. Further, if the Company has outstanding loans greater than 50% of the amounts available under the three-year facility, the Company also will pay a utilization fee of 12.5 basis points on such loans.

24

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

A Moody’s Investors Service (Moody’s) downgrade of the CNAF senior debt rating from Baa2 to Baa3 would increase the facility fee on the three-year component of the facility from 17.5 basis points to 25.0 basis points. The applicable interest rate on the one-year term loan would increase from LIBOR plus 60.0 basis points to LIBOR plus 80.0 basis points and the applicable interest rate on the three-year facility component would increase from LIBOR plus 57.5 basis points to LIBOR plus 75.0 basis points. The utilization fee would remain unchanged on the three-year facility at 12.5 basis points.

On September 30, 2002, CNA Surety Corporation (CNA Surety), a 64% owned and consolidated subsidiary of CNA, entered into a $65 million credit agreement with one bank, which consists of a $35 million 364-day revolving credit facility and a $30 million term loan. As of September 30, 2002, the facility was fully utilized. The credit agreement replaced a $130 million revolving credit facility that terminated September 30, 2002. Under the new agreement, CNA Surety pays a facility fee of 12.5 basis points, interest at LIBOR plus 45.0 basis points, and for utilization greater than 50% of the amount available to borrow an additional fee of 5.0 basis points. On the term loan, CNA Surety pays interest at LIBOR plus 62.5 basis points.

Under the former agreement, CNA Surety paid interest on outstanding borrowings based on, among other rates, LIBOR plus the applicable margin. The applicable margin was determined by the company’s leverage ratio (debt to total capitalization). At the termination date of the facility, the applicable margin was 30.0 basis points, including the 10.0 basis point facility fee.

The terms of the agreement require the assumption by a second bank of $15 million of the credit risk by November 30, 2002 or CNA Surety will be required to repay $15 million to reduce the amount of the credit facility commitment from $35 million to $20 million. CNAF and CNA Surety have entered into an agreement whereby CNAF will lend CNA Surety the amount needed to repay its bank loans, if necessary (See Note P for additional information regarding this agreement).

The terms of CNAF’s and CNA Surety’s credit facilities require CNAF and CNA Surety to maintain certain financial ratios and combined property and casualty company statutory surplus levels. At September 30, 2002 and December 31, 2001, CNAF and CNA Surety were in compliance with all restrictive debt covenants.

In the normal course of business, CNA has obtained letters of credit in favor of various unaffiliated insurance companies, regulatory authorities and other entities. At September 30, 2002 there were approximately $282 million of outstanding letters of credit.

Note J. Commitments and Contingencies

The Company has a commitment to purchase a $100 million floating rate note issued by the California Earthquake Authority in the event California earthquake-related insurance losses exceed $4.9 billion prior to December 31, 2002.

As of September 30, 2002, the Company is obligated to make future payments totaling $470 million for non-cancelable operating leases expiring from 2002 through 2014 primarily for office space and data processing, office and transportation equipment. Estimated future minimum payments under these contracts are as follows: $27 million in 2002; $94 million in 2003; $75 million in 2004; $66 million in 2005; and $208 million in 2006 and beyond.

25

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Additionally, the Company has entered into a limited number of guaranteed payment contracts, primarily relating to telecommunication services, amounting to approximately $25 million. Estimated future minimum purchases under these contracts are as follows: $4 million in 2002; $11 million in 2003; $8 million in 2004; and $2 million in 2005.

Note K. Comprehensive Income

Comprehensive income is composed of all changes to stockholders’ equity, except those changes resulting from transactions with stockholders in their capacity as stockholders. The components of comprehensive income (loss) are shown below.

Comprehensive Income (Loss)
	Three Months						Nine Months
Period ended September 30		2002			2001			2002			2001
(In millions)
Net income (loss)	$	54		$	(155	)	$	110		$	(1,622	)
Other comprehensive income (loss):
Change in unrealized gains/losses on general account investments:
Holding gains/losses arising during the period		395			285			320			421
Less: unrealized gains at beginning of period included in realized gains during the period		41			(16	)		(1	)		(1,139	)
Net change in unrealized gains/losses on general account investments		436			269			319			(718	)
Net change in unrealized gains/losses on separate accounts and other		37			31			49			28
Foreign currency translation adjustment		(23	)		(11	)		(30	)		(16	)
Allocation to participating policyholders’ and minority interests		(12	)		(9	)		(9	)		(12	)
Other comprehensive income (loss), before tax and cumulative effect of a change in accounting principle		438			280			329			(718	)
Deferred income tax (expense) benefit related to other comprehensive income (loss)		(162	)		(104	)		(104	)		249
Other comprehensive income (loss), before cumulative effect of a change in accounting principle		276			176			225			(469	)
Cumulative effect of a change in accounting principle, net of tax of $0, $0, $0 and $31		—			—			—			58
Other comprehensive income (loss), net of tax and cumulative effect of a change in accounting principle		276			176			225			(411	)
Total comprehensive income (loss)	$	330		$	21		$	335		$	(2,033	)

During the second quarter of 2001, the Company sold its Global Crossing Ltd. common stock and the related hedge, which was entered into during early 2000, resulting in a pretax realized gain of $962 million, which was previously reflected as an unrealized gain in accumulated other comprehensive income.

26

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note L. Business Segments

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

During the second quarter of 2002, Group Reinsurance, the business which assumes reinsurance from unaffiliated entities on group life, accident and health products as well as 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. Also, CNA Trust, a limited-operations bank specializing in 401(k) plan administration, was transferred from Life Operations to Group Operations. Segment disclosures of prior periods have been restated to conform to the current period presentation.

The Corporate and Other segment is comprised primarily of losses and expenses related to the centralized adjusting and settlement of APMT claims, certain run-off insurance operations and other operations. The Corporate and Other segment’s results also include interest expense on corporate borrowings, eBusiness initiatives and CNA UniSource.

All significant intrasegment income and expenses have been eliminated. Standard Lines’ other revenues and expenses include revenues for services provided by RSKCo^SM to other units within the Standard Lines segment that are eliminated at the consolidated level. Intrasegment revenue and expenses eliminated at the consolidated level were approximately $33 million and $39 million for the three months ended September 30, 2002 and 2001, and $98 million and $116 million for the nine months ended September 30, 2002 and 2001.

In the following four tables, the caption “net operating income (loss)” is used by the Company as an operating measure of segment performance. Net operating income (loss) is calculated by deducting net realized investment gains or losses (investment gains or losses after deduction of related income taxes 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 and minority interest, from net income. Net realized investment gains or losses are excluded from net operating income because net realized investment gains or losses, other than investment impairment losses, related to the Company’s available-for-sale investment portfolio are largely discretionary, are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance, and are therefore not an indication of trends in operations.

27

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Three months ended September 30, 2002	Standard Lines			Specialty Lines			CNA Re			Group Operations			Life Operations			Corporate and Other			Elimi- nations			Total
(In millions)
Revenues:
Net earned premiums	$	988		$	555		$	157		$	292		$	236		$	40		$	(6	)	$	2,262
Net investment income		66			50			29			44			152			23			—			364
Other revenues		80			33			1			13			45			5			(37	)		140
Total operating revenues		1,134			638			187			349			433			68			(43	)		2,766
Claims, benefits and expenses		980			727			234			310			378			126			(43	)		2,712
Operating income (loss) from continuing operations before income tax and minority interest		154			(89	)		(47	)		39			55			(58	)		—			54
Income tax (expense) benefit		(47	)		23			20			(14	)		(19	)		22			—			(15	)
Minority interest		—			(1	)		—			—			—			—			—			(1	)
Net operating income (loss) from continuing operations		107			(67	)		(27	)		25			36			(36	)		—			38
Realized investment (losses) gains, net of tax and participating policyholders’ and minority interests		(19	)		(9	)		(1	)		7			(16	)		54			—			16
Net income (loss)	$	88		$	(76	)	$	(28	)	$	32		$	20		$	18		$	—		$	54

28

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Three months ended September 30, 2001	Standard Lines			Specialty Lines			CNA Re			Group Operations			Life Operations			Corporate and Other			Elimi- nations			Total
(In millions)
Revenues:
Net earned premiums	$	739		$	474		$	149		$	906		$	234		$	29		$	(16	)	$	2,515
Net investment income		112			75			40			40			141			40			—			448
Other revenues		85			36			3			9			33			38			(42	)		162
Total operating revenues		936			585			192			955			408			107			(58	)		3,125
Claims, benefits and expenses		922			518			419			985			405			174			(58	)		3,365
Operating income (loss) from continuing operations before income tax and minority interest		14			67			(227	)		(30	)		3			(67	)		—			(240	)
Income tax benefit (expense)		5			(22	)		81			11			(3	)		14			—			86
Minority interest		—			(6	)		—			—			—			—			—			(6	)
Net operating income (loss) from continuing operations		19			39			(146	)		(19	)		—			(53	)		—			(160	)
Realized investment (losses) gains, net of tax and participating policyholders’ and minority interests		(11	)		(2	)		(4	)		9			8			—			—			—
Income from discontinued operations, net of tax of $0		—			—			—			—			5			—			—			5
Net income (loss)	$	8		$	37		$	(150	)	$	(10	)	$	13		$	(53	)	$	—		$	(155	)

29

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Nine months ended September 30, 2002	Standard Lines			Specialty Lines			CNA Re			Group Operations			Life Operations			Corporate and Other			Elimi- nations			Total
(In millions)
Revenues:
Net earned premiums	$	3,024		$	1,610		$	462		$	2,016		$	711		$	121		$	(19	)	$	7,925
Net investment income		299			189			112			127			463			102			—			1,292
Other revenues		243			120			2			27			139			55			(110	)		476
Total operating revenues		3,566			1,919			576			2,170			1,313			278			(129	)		9,693
Claims, benefits and expenses		3,360			1,874			525			2,081			1,147			407			(129	)		9,265
Operating income (loss) from continuing operations before income tax and minority interest		206			45			51			89			166			(129	)		—			428
Income tax (expense) benefit		(53	)		(24	)		(10	)		(30	)		(58	)		47			—			(128	)
Minority interest		—			(11	)		—			—			—			—			—			(11	)
Net operating income (loss) from continuing operations		153			10			41			59			108			(82	)		—			289
Realized investment (losses) gains, net of tax and participating policyholders’ and minority interests		(34	)		(30	)		3			7			(55	)		22			—			(87	)
Loss from discontinued operations, net of tax of $9		—			—			—			—			(35	)		—			—			(35	)
Cumulative effect of a change in accounting principle, net of tax of $7		—			(48	)		—			—			(8	)		(1	)		—			(57	)
Net income (loss)	$	119		$	(68	)	$	44		$	66		$	10		$	(61	)	$	—		$	110
Receivables, net	$	6,777		$	3,334		$	2,529		$	263		$	989		$	2,939		$	—		$	16,831
Insurance reserves	$	13,760		$	7,609		$	5,151		$	1,894		$	8,490		$	5,684		$	(8	)	$	42,580

30

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Nine months ended September 30, 2001	Standard Lines			Specialty Lines			CNA Re			Group Operations			Life Operations			Corporate and Other			Elimi- nations			Total
(In millions)
Revenues:
Net earned premiums	$	1,536		$	1,387		$	452		$	2,524		$	677		$	67		$	(43	)	$	6,600
Net investment income		349			240			129			119			413			107			—			1,357
Other revenues		255			85			3			28			143			119			(126	)		507
Total operating revenues		2,140			1,712			584			2,671			1,233			293			(169	)		8,464
Claims, benefits and expenses		2,927			2,020			1,356			2,661			1,112			1,740			(169	)		11,647
Restructuring and other related charges		6			2			—			—			17			37			—			62
Operating (loss) income from continuing operations before income tax and minority interest		(793	)		(310	)		(772	)		10			104			(1,484	)		—			(3,245	)
Income tax benefit (expense)		303			107			275			1			(37	)		496			—			1,145
Minority interest		—			(18	)		—			—			—			—			—			(18	)
Net operating (loss) income from continuing operations		(490	)		(221	)		(497	)		11			67			(988	)		—			(2,118	)
Realized investment gains (losses), net of tax and participating policyholders’ and minority interests		400			148			(216	)		17			99			101			—			549
Income from discontinued operations, net of tax of $1		—			—			—			—			8			—			—			8
Cumulative effect of a change in accounting principle, net of tax of $33		(30	)		(14	)		(5	)		(1	)		(3	)		(8	)		—			(61	)
Net (loss) income	$	(120	)	$	(87	)	$	(718	)	$	27		$	171		$	(895	)	$	—		$	(1,622	)
Receivables, net	$	7,665		$	2,424		$	2,497		$	1,024		$	834		$	2,675		$	—		$	17,119
Insurance reserves	$	14,732		$	6,579		$	5,196		$	2,482		$	8,251		$	6,115		$	—		$	43,355

31

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note M. Restructuring and Other Related Charges

2001 Restructuring

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

IT Plan

The overall goal of the IT Plan was to improve technology for the underwriting function and throughout the Company and to eliminate inefficiencies in the deployment of IT resources. The changes facilitate 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.

For the nine months ended September 30, 2001 the Company incurred $62 million pretax of restructuring and other related charges for the IT Plan primarily related to employee severance charges and the write-off of impaired assets. There were no charges recorded during the three months ended September 30, 2001.

No restructuring and other related charges related to the IT Plan have been incurred in 2002; however, payments were made during the nine months ended September 30, 2002 related to amounts accrued as of December 31, 2001. The following table summarizes the remaining IT Plan accrual at September 30, 2002 and the activity in that accrual since inception.

IT Plan Accrual

	Employee
	Termination			Impaired
	and Related			Asset			Other
	Benefit Costs			Charges			Costs		Total
(In millions)
IT Plan initial accrual	$	29		$	32		$	1	$	62
Costs that did not require cash in 2001		—			(32	)		—		(32	)
Payments charged against liability in 2001		(19	)		—			—		(19	)
Accrued costs at December 31, 2001		10			—			1		11
Payments charged against liability in 2002		(1	)		—			—		(1	)
Accrued costs at September 30, 2002	$	9		$	—		$	1	$	10

The IT Plan is not expected to result in decreased operating expenses in the foreseeable future because savings from the workforce reduction has been used to fund new technology-related initiatives. Employee termination and related benefit payments will continue through 2004 due to employment contract obligations.

32

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

2001 Plan

The overall goal of the 2001 Plan was to create a simplified and leaner organization for customers and business partners. The major components of the plan included a reduction in the number of strategic business units (SBUs) in the property and casualty operations, changes in the strategic focus of the Life Operations and 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 Life Operations included a decision to discontinue writing variable life and annuity business.

No restructuring and other related charges related to the 2001 Plan have been incurred in 2002; however, payments were made during the nine months ended September 30, 2002 related to amounts accrued as of December 31, 2001. The following table summarizes the remaining 2001 Plan accrual as of September 30, 2002 and the activity in that accrual since inception.

2001 Plan Accrual

	Employee
	Termination			Lease			Impaired
	and Related			Termination			Asset			Other
	Benefit Costs			Costs			Charges			Costs			Total
(In millions)
2001 Plan initial accrual	$	68		$	56		$	30		$	35		$	189
Costs that did not require cash in 2001		—			—			—			(35	)		(35	)
Payments charged against liability in 2001		(2	)		—			—			—			(2	)
Accrued costs at December 31, 2001		66			56			30			—			152
Costs that did not require cash in 2002		—			—			(25	)		—			(25	)
Payments charged against liability in 2002		(50	)		(11	)		(1	)		—			(62	)
Accrued costs at September 30, 2002	$	16		$	45		$	4		$	—		$	65

Note N. Significant Transactions

National Postal Mail Handlers Union Contract Termination

During the second quarter of 2002, the Company announced the sale of the Claims Administration Corporation and the transfer of the National Postal Mail Handlers Union group benefits plan (the “Mail Handlers Plan”) to First Health Group Corporation, effective July 1, 2002. In the third quarter of 2002, the Company recognized a $5 million pretax realized loss on the sale of Claims Administration Corporation and $14 million pretax of non-recurring fee income related to the transfer of the Mail Handlers Plan.

The assets and liabilities of the Claims Administration Corporation and the Mail Handlers Plan were $352 million and $350 million at December 31, 2001. The revenues of the Claims Administration Corporation and the Mail Handlers Plan were $3 million and $613 million for the three months ended September 30, 2002 and 2001 and $1,157 million and $1,663 million for the nine months ended September 30, 2002 and 2001.

Net operating income from the Claims Administration Corporation and the Mail Handlers Plan was $5 million, including the non-recurring fee income, and $3 million for the three months

33

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

ended September 30, 2002 and 2001 and $12 million and $9 million for the nine months ended September 30, 2002 and 2001.

CNA Vida Disposition

In March of 2002, the Company completed the sale of the common stock of CNA Holdings Limited and its subsidiaries (CNA Vida), CNA’s life operations in Chile, to Consorcio Financiero S.A. (Consorcio). In connection with the sale, CNA received proceeds of $73 million and recorded an after-tax loss from discontinued operations of $35 million. This loss is composed of $37 million, net of tax, realized loss on the sale of CNA Vida and income of $2 million, net of tax, from CNA Vida’s operations for 2002.

CNA Vida’s assets and liabilities at December 31, 2001 were $442 million and $337 million. CNA Vida’s net earned premiums were $14 million for the three months ended September 30, 2001 and $24 million and $63 million for the nine months ended September 30, 2002 and 2001. Net operating income was $5 million for the three months ended September 30, 2001 and $2 million and $7 million for the nine months ended September 30, 2002 and 2001. CNA Vida’s results of operations, including the loss on sale, are presented as discontinued operations in all periods presented.

Other Dispositions and Planned Dispositions of Certain Businesses

During the second quarter of 2001, the Company announced its intention to sell certain businesses. The assets being held for disposition included the U.K. subsidiaries of CNA Re (CNA Re U.K.) and certain other businesses. Based upon the impairment analyses performed at that time, the Company anticipated that it would realize losses in connection with those planned sales. In determining the anticipated loss from these sales, the Company estimated the net realizable value of each business being held for sale. An estimated after-tax loss of $320 million was initially recorded in the second quarter of 2001. This loss was reported in other realized investment losses.

The Company continues to monitor the impairment losses recorded for these businesses and perform updated impairment analysis. Based on these analyses the impairment loss has been reduced by approximately $170 million, primarily because the net assets of the businesses had been significantly diminished by their operating losses, including adverse loss reserve development recognized by CNA Re U.K. in the fourth quarter of 2001.

In the fourth quarter of 2001, the Company sold certain businesses as planned. The realized after-tax loss applicable to these businesses recognized in the second quarter of 2001 was $38 million. Revenues of these businesses included in the three and nine months ended September 30, 2001 totaled approximately $6 million and $28 million. These businesses contributed approximately $3 million of net operating income and $14 million of losses in the three and nine months ended September 30, 2001.

At September 30, 2002, CNA Re U.K. remained held for sale. On October 31, 2002, the Company completed the sale of CNA Re U.K. to Tawa U.K. Limited, a subsidiary of Artemis Group, a diversified French-based holding company. The sale includes business underwritten since inception by CNA Re U.K., except for certain risks retained by CCC as discussed below. In October, the sale was approved in the United Kingdom by the Financial Services Authority

34

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

(FSA) and by the Illinois Insurance Department. This sale does not impact CNA Re’s on-going U.S.-based operations.

CNA Re U.K. was sold for $1, subject to adjustments that are primarily driven by certain operating results and changes in interest rates between January 1, 2002 and October 31, 2002, and realized foreign currency losses recognized by CNA Re U.K. prior to December 31, 2002. CNAF has also committed to contribute up to $9.6 million to CNA Re U.K. over a four-year period beginning in 2010 should the FSA deem CNA Re U.K. to be undercapitalized. Due to the various components of the completion adjustments, which are initially prepared by the buyer, the final settlement cannot yet be determined. However, based upon information currently available to the Company, management believes there will be a reduction in the previously recognized impairment loss which will be reflected as a realized gain when the completion adjustments are finalized.

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

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

CNA Re U.K. contributed revenues of approximately $14 million and $57 million for the three months ended September 30, 2002 and 2001, and $57 million and $220 million for the nine months ended September 30, 2002 and 2001. CNA Re U.K. contributed net operating income of $9 million and net operating losses of $109 million for the three months ended September 30, 2002 and 2001 and income of $13 million and net operating losses of $176 million for the nine months ended September 30, 2002 and 2001. The assets and liabilities of CNA Re U.K., including the effects of planned concurrent transactions, were approximately $2.7 billion and $2.7 billion as of September 30, 2002 and $2.9 billion and $2.9 billion as of December 31, 2001.

The businesses sold in 2002, excluding CNA Vida, Claims Administration Corporation and the Mail Handlers Plan, and those that continue to be held for disposition as of September 30, 2002, excluding CNA Re U.K., contributed revenues of approximately $6 million and $28 million for the three months ended September 30, 2002 and 2001, and $35 million and $95 million for the nine months ended September 30, 2002 and 2001. Additionally, these businesses contributed net operating losses of $2 million and $2 million for the three months ended September 30, 2002 and 2001 and $14 million and $12 million for the nine months ended September 30, 2002 and 2001. The assets and liabilities of these businesses were approximately $96 million and $83 million as of September 30, 2002 and $126 million and $109 million as of December 31, 2001. All anticipated sales are expected to be completed in 2002.

35

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

Note O. Discontinued Operations

CNA reports net assets of discontinued operations, which primarily consist of run-off operations discontinued in the mid-1990’s, in other assets on the Condensed Consolidated Balance Sheets. The following table provides more detailed information regarding those net assets.

Discontinued Operations
	September 30,			December 31,
(In millions)	2002			2001
Total investments	$	471		$	467
Other assets		279			264
Insurance reserves		(424	)		(412	)
Other liabilities		(25	)		(25	)
Net assets of discontinued operations	$	301		$	294

Note P. Related Party Transactions

CNA reimburses Loews, or pays directly to Loews employees, approximately $18 million annually for management fees, travel and related expenses, and expenses of investment facilities and services provided to CNA.

CNA and its eligible subsidiaries are included in the consolidated federal income tax return of Loews and its eligible subsidiaries. Under a tax allocation agreement with Loews, during the first nine months of 2002, CNA received tax refunds of $639 million from Loews. During the first nine months of 2001, CNA paid Loews $111 million for income taxes.

CNA writes, at standard rates, a limited amount of insurance for Loews and its affiliates. Total premiums from Loews and its affiliates are approximately $6 million on an annual basis.

CNA previously sponsored a stock ownership plan whereby the Company financed the purchase of Company stock by certain officers, including executive officers. Interest charged on the principal amount of these outstanding stock purchase loans is generally equivalent to the long-term applicable federal rate, compounded semi-annually, in effect on the disbursement date of the loan. Loans made pursuant to the plan are generally full recourse with a ten year term and are secured by the stock purchased.

As of September 30, 2002, there were 21 participants remaining in the plan, of whom seven are currently Company officers. The outstanding aggregate loan balance was $10 million for all participants who were officers as of September 30, 2002. Shares purchased with all loans outstanding under the plan totaled 1,640,358, or less than 1% of the Company’s outstanding shares, as of September 30, 2002. The aggregate market value of all stock purchased with outstanding loans under the plan and held as collateral was $30 million below the unpaid aggregate loan balance as of September 30, 2002.

CCC provided an excess of loss reinsurance contract to the insurance subsidiaries of CNA Surety, over a period that expired on December 31, 2000 (the stop loss contract). The stop loss contract limits the net loss ratios for CNA Surety with respect to certain accounts and lines of insurance business. In the event that Surety’s accident year net loss ratio exceeds 24% for

36

CNA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)

1997 through 2000 (the contractual loss ratio), the stop loss contract requires CCC to pay amounts equal to the amount, if any, by which CNA Surety’s actual accident year net loss ratio exceeds the contractual loss ratio multiplied by the applicable net earned premiums. The minority shareholders of CNA Surety do not share in any losses that apply to this contract. There was no reinsurance balances payable under this stop loss contract as of September 30, 2002 as all balances were paid during the first nine months of 2002. Reinsurance balances payable at December 31, 2001 was $22 million.

CNAF and CNA Surety have entered into an agreement whereby CNAF will lend CNA Surety the amount needed to repay its bank loans. If necessary, CNAF will lend CNA Surety up to a maximum of $16 million in order for CNA Surety to reduce the amount of the credit facility commitment from $35 million to $20 million and pay accrued but unpaid interest on the amount of the commitment reduction. Any amounts loaned by CNAF to CNA Surety must be repaid on or before February 28, 2003. (See Note I for additional information regarding the CNA Surety credit facility).

37

CNA FINANCIAL CORPORATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Consolidated Operations

The following discussion highlights significant factors influencing 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 net written premiums, is the ninth largest property and casualty company and the 51st largest life insurance company.

As of September 30, 2002, Loews Corporation (Loews) owned approximately 90% of the outstanding common stock of CNAF. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes found on pages 1 to 37 for the current period and with CNAF’s Annual Report to Shareholders for the year ended December 31, 2001.

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

During the second quarter of 2002, Group Reinsurance, the business which assumes reinsurance from unaffiliated entities on group life, accident and health products as well as 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. Also, CNA Trust, a limited-operations bank specializing in 401(k) plan administration, was transferred from Life Operations to Group Operations. Segment disclosures of prior periods have been restated to conform to the current period presentation.

The consolidated operations for the three months and nine months ended September 30, 2001 were significantly impacted by the second quarter 2001 prior year reserve strengthening, the World Trade Center disaster and related events (WTC event), corporate aggregate reinsurance treaties and restructuring and other related charges. A discussion of these items, along with the Company’s current terrorism exposure and description of reserves is presented before the Company’s operating segment results.

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

38

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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 minority interest), gains or losses from discontinued operations, net of tax, and the cumulative effect of a change in accounting principle, net of tax and minority interest, 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.

39

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Operating Results

The following table summarizes key components of operating results for the three months and nine months ended September 30, 2002 and 2001.

Consolidated Operations
	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions, except per share data)
Operating revenues:
Net earned premiums	$	2,262		$	2,515		$	7,925		$	6,600
Net investment income		364			448			1,292			1,357
Other revenues		140			162			476			507
Total operating revenues		2,766			3,125			9,693			8,464
Claims, benefits and expenses		2,712			3,365			9,265			11,647
Restructuring and other related charges		—			—			—			62
Operating income (loss) from continuing operations before income tax and minority interest		54			(240	)		428			(3,245	)
Income tax (expense) benefit		(15	)		86			(128	)		1,145
Minority interest		(1	)		(6	)		(11	)		(18	)
Net operating income (loss) from continuing operations		38			(160	)		289			(2,118	)
Realized investment gains (losses), net of tax and minority interest		16			—			(87	)		549
Income (loss) from continuing operations		54			(160	)		202			(1,569	)
Income (loss) from discontinued operations, net of tax of $0, $1, $9 and $1		—			5			(35	)		8
Income (loss) before cumulative effects of changes in accounting principles		54			(155	)		167			(1,561	)
Cumulative effects of changes in accounting principles, net of tax of $0, $0, $7 and $33		—			—			(57	)		(61	)
Net income (loss)	$	54		$	(155	)	$	110		$	(1,622	)
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations	$	0.24		$	(0.86	)	$	0.91		$	(8.52	)
Income (loss) from discontinued operations, net of tax		—			0.02			(0.16	)		0.04
Income (loss) before cumulative effects of changes in accounting principles		0.24			(0.84	)		0.75			(8.48	)
Cumulative effects of changes in accounting principles, net of tax		—			—			(0.26	)		(0.33	)
Basic and diluted earnings (loss) per share available to common stockholders	$	0.24		$	(0.84	)	$	0.49		$	(8.81	)
Weighted average outstanding common stock and common stock equivalents		223.6			185.5			223.6			184.0

40

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

The following table summarizes net operating results by segment for the three months and nine months ended September 30, 2002 and 2001.

Net Operating Income (Loss) by Segment

	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Standard Lines	$	107		$	19		$	153		$	(490	)
Specialty Lines		(67	)		39			10			(221	)
CNA Re		(27	)		(146	)		41			(497	)
Group Operations		25			(19	)		59			11
Life Operations		36			—			108			67
Corporate and Other		(36	)		(53	)		(82	)		(988	)
Net operating income (loss)	$	38		$	(160	)	$	289		$	(2,118	)

Net operating income was $38 million for the third quarter of 2002 as compared with a net operating loss of $160 million for the same period in 2001. The improvement in net operating results was due principally to after-tax losses from the WTC event of $304 million, net of the related corporate aggregate reinsurance treaty benefit, recorded in the third quarter of 2001. Excluding the impact of the WTC event, net operating results decreased $106 million due to lower net investment income, primarily from $60 million lower limited partnership income, and a reduced benefit from the use of reinsurance in 2002. These decreases were partially offset by improved operating results in Life Operations and Group Operations.

The third quarter 2002 results also include net prior year reserve releases in Standard Lines and net prior year reserve strengthening in Specialty Lines and CNA Re. These changes in estimates of prior year reserves, which resulted in net unfavorable reserve development, were not significantly higher than the third quarter of 2001. However, there were larger reserve changes affecting the individual property and casualty segments.

Net income was $54 million for the third quarter of 2002 as compared with a net loss of $155 million for the same period in 2001. Net realized investment gains for the third quarter of 2002 increased $16 million as compared with the same period in 2001. Income from discontinued operations, net of tax, of $5 million for the third quarter of 2001 relates to the operating results of Life Operations’ Chilean-based subsidiaries (CNA Vida), which was sold in the first quarter of 2002.

Net earned premiums decreased $253 million for the third quarter of 2002 as compared with the same period in 2001. Third quarter 2001 net earned premiums were reduced by ceded premiums of $315 million related to the corporate aggregate reinsurance treaties, and were increased by reinstatement and additional premiums of $85 million related to the WTC event. Third quarter 2001 net earned premiums also included $612 million of earned premium related to the National Postal Mail Handlers Union (the Mail Handlers Plan) group benefits plan, which was transferred to First Health Group Corporation, effective July 1, 2002. Excluding these 2001 significant premium items, net earned premiums increased $129 million due primarily to strong rate increases and decreased use of reinsurance in the property and casualty segments.

41

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Net operating income was $289 million for the nine months ended September 30, 2002 as compared with a net operating loss of $2,118 million for the same period in 2001. The net operating loss for the nine months ended September 30, 2001 was due principally to after-tax reserve strengthening of $2,079 million recorded in the second quarter of 2001 related to a change in estimate of prior year net loss reserves and retrospective premium accruals. Additionally, 2001 results included WTC event losses of $304 million after-tax and restructuring and other related charges of $40 million after-tax. Excluding these 2001 significant items, 2002 net operating results decreased $16 million due primarily to lower net investment income and a reduced benefit from the use of reinsurance in 2002 partially offset by improved underwriting results in the property and casualty segments.

Net income was $110 million for the nine months ended September 30, 2002 as compared with a net loss of $1,622 million for the same period in 2001. Net realized investment results for the nine months ended September 30, 2002 decreased $636 million as compared with the same period in 2001. See the discussion of realized investment losses in the Investments section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) for additional information. Loss from discontinued operations, net of tax, of $35 million for the nine months ended September 30, 2002 and income from discontinued operations of $8 million for the same period in 2001 related to the results of CNA Vida, which was sold in the first quarter of 2002. Net income for 2002 includes a charge of $57 million, net of tax, for the cumulative effect of a change in accounting principle for goodwill and indefinite-lived intangible assets. Net income for 2001 includes a charge of $61 million, net of tax, for the cumulative effect of a change in accounting principle for derivative financial instruments.

Net earned premiums increased $1,325 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Year-to-date 2001 net earned premiums were reduced by ceded premiums of $1,308 million related to the 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 increased $17 million due primarily to strong rate increases and decreased use of reinsurance partially offset by the transfer of the Mail Handlers Plan and additional ceded premiums recorded in 2002 for the corporate aggregate reinsurance treaties. The increases were also partially offset by decreased net earned premiums in CNA Re’s U.K. operations resulting from the decision made in the third quarter of 2001 to cease writing new and renewal business in CNA Re U.K.

The year-to-date 2001 net operating loss includes 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, net of the related corporate aggregate reinsurance treaties benefit. The after-tax estimated impact was $304 million, net of reinsurance, including 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.

42

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

• In the second quarter of 2001, the Company recorded an after-tax charge of $2.1 billion ($3.2 billion 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 the nine months ended September 30, 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 the aggregate reinsurance treaties not related to these significant items are described as “Core.”

• During the nine months ended September 30, 2001, the Company recorded after-tax restructuring and other related charges of $40 million related to workforce reductions and asset write-offs resulting from changes in the Company’s information technology organization, which is 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 recorded benefits from corporate aggregate reinsurance treaties for Core operations, therefore the Company will no longer discuss the 2001 underwriting results excluding this benefit in order to provide a comparable presentation. The following table provides the details by segment of 2001 underwriting results as reported and adjusted.

Underwriting Results by Segment

										Property and
	Standard			Specialty						Casualty
For the three months ended September 30, 2001	Lines			Lines			CNA Re			Segments
(In millions)
Underwriting loss, as reported	$	(106	)	$	(12	)	$	(270	)	$	(388	)
Underwriting impact of the WTC event net of the related benefit of the corporate aggregate reinsurance treaties		68			18			263			349
Adjusted underwriting (loss) gain*	$	(38	)	$	6		$	(7	)	$	(39	)

*The 2001 adjusted underwriting loss excludes the impact of the WTC event net of the related benefit of corporate aggregate reinsurance treaties.

43

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Underwriting Results by Segment

										Property and
	Standard			Specialty						Casualty
For the nine months ended September 30, 2001	Lines			Lines			CNA Re			Segments
(In millions)
Underwriting loss, as reported	$	(1,165	)	$	(543	)	$	(904	)	$	(2,612	)
Underwriting impact of second quarter 2001 reserve strengthening net of the related benefit of the corporate aggregate reinsurance treaty		911			410			587			1,908
Underwriting impact of the WTC event net of the related benefit of the corporate aggregate reinsurance treaties		68			18			263			349
Restructuring and other related charges		5			2			—			7
Adjusted underwriting loss*	$	(181	)	$	(113	)	$	(54	)	$	(348	)

*The 2001 adjusted underwriting loss excludes 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.

WTC Event

During the third quarter of 2001, the Company experienced a severe catastrophe loss estimated at $468 million pretax, net of reinsurance, related to the WTC event. The loss estimate is based on a total industry loss of $50 billion and includes all lines of insurance. The estimate takes into account CNA’s substantial reinsurance agreements, including its catastrophe reinsurance program and corporate reinsurance programs. The Company has closely monitored reported losses as well as the collection of reinsurance on WTC event claims. Based on experience to-date, the Company believes its recorded reserves are adequate.

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

44

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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

WTC Event

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

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

Second Quarter 2001 Prior Year Reserve Strengthening

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

45

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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

Second Quarter 2001 Prior Year Reserve Strengthening

	Standard			Specialty					Corporate
For the nine months ended September 30, 2001	Lines			Lines		CNA Re			and Other			Total
(In millions)
Net reserve strengthening excluding the impact of the corporate aggregate reinsurance treaty:
APMT	$	—		$	—	$	57		$	1,140		$	1,197
Non-APMT		523			407		574			90			1,594
Total		523			407		631			1,230			2,791
Pretax benefit from corporate aggregate reinsurance treaty on accident year 1999		(197	)		—		(26	)		—			(223	)*
Accrual for insurance-related assessments		48			—		—			—			48
Net reserve strengthening and related accruals		374			407		605			1,230			2,616
Change in estimate of premium accruals		629			3		(13	)		(3	)		616
Reduction of related commission accruals		(50	)		—		—			—			(50	)
Net premium and related accrual reductions		579			3		(13	)		(3	)		566
Total pretax second quarter 2001 reserve strengthening and other related accruals	$	953		$	410	$	592		$	1,227		$	3,182
Total after-tax second quarter 2001 reserve strengthening and other related accruals	$	619		$	277	$	384		$	799		$	2,079

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

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

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 our 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

46

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

after asbestos operations are completed are subject to the completed operations aggregate limits of the policies; and decisions ruling that carriers’ loss control inspections of their insured’s premises do not give rise to a duty to warn third parties to the dangers of asbestos.

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

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

The non-APMT adverse reserve development 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 is a result of several coverages provided to commercial entities. Reserve analyses performed during 2001 showed unexpected increases in the size of claims for several lines, including commercial automobile liability, general liability and the liability portion of commercial multiple-peril coverages. In addition, the number of commercial automobile liability claims was higher than expected and several state-specific factors resulted in higher than anticipated losses, including developments associated with commercial automobile liability coverage in Ohio and general liability coverage provided to contractors in New York.

The commercial automobile liability analysis indicated increased ultimate loss and allocated loss adjustment expense across several accident years due to higher paid and reported loss and allocated loss 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 is increasing and a lack of improvement in the ratio of the number of claims per exposure unit, the frequency. First, Ohio courts have 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

47

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

claim size had been increasing at less than a 2% annual rate. The most recent available data indicates that the rate of increase is now 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 $125,000 from less than $100,000, which was significantly greater than previously expected.

An analysis of assumed reinsurance business 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. 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 are 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 include excess of loss liability, professional liability and proportional and retrocessional property.

Approximately $320 million of adverse loss development was due to adverse experience in all other lines, primarily in coverages provided to healthcare-related entities. 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 most recent review indicated that the average loss had increased to over $330,000. Prior to this review, the expectation for the average loss was approximately $250,000.

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.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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. Accruals for ceded premiums related to other reinsurance treaties increased $83 million due to the reserve strengthening. The remainder of the decrease in premium accruals relates to the change in estimate of the amount of retrospective premium receivables as discussed above.

Reinsurance

CNA assumes and cedes reinsurance with other insurers and reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk, 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 life reinsurance includes coinsurance, yearly renewable term and facultative programs.

Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefit reserves and are reported as a reinsurance receivable in the Condensed Consolidated Balance Sheets. The Company has a credit risk exposure with respect to these receivables and has established an estimated allowance for doubtful accounts. The allowance is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, management’s experience and current economic conditions.

In the event that a specific reinsurer is experiencing difficulties, the Company may engage in commutation discussions. The outcome of such discussions may result in a settlement that is less than the recoverable, net of the allowance for doubtful accounts, and could have an adverse material impact on the Company’s results of operations and/or equity.

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 a funds withheld liability. 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 Condensed Consolidated Balance Sheets.

49

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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 $53 million and $84 million for the third quarter of 2002 and 2001 and $168 million and $206 million for the nine months ended September 30, 2002 and 2001. The amount subject to interest crediting rates on such contracts was $2,904 million and $2,724 million at September 30, 2002 and December 31, 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.

For 2002, the Company has entered into an aggregate reinsurance treaty covering substantially all of the Company’s property and casualty lines of business (the 2002 Cover). The loss protection provided by the 2002 Cover is dependent on the level of subject premium, but there is a maximum aggregate limit of $1,125 million of ceded losses. Maximum ceded premium under the contract is $683 million, and premiums, claims recoveries and interest charges other than the reinsurer’s margin and related fees are made on a funds withheld basis. Interest is credited on funds withheld at 8% per annum, and all premiums are deemed to have been paid as of January 1, 2002. Ceded premium related to the reinsurer’s margin in the amount of $2.5 million and $7.5 million was recorded for the 2002 Cover for the three months and nine months ended September 30, 2002.

The aggregate reinsurance protection from the 2002 Cover attaches at a defined accident year loss and allocated loss adjustment expense (collectively, losses) ratio. Under the contract, the Company has the right to elect to cede losses to the 2002 Cover when its recorded accident year losses exceed the attachment point. This election period expires March 31, 2004. If no losses are ceded by this date, the contract is considered to be commuted. If the Company elects to cede any losses to the 2002 Cover, it must continue to cede all losses subject to the terms of the contract. As of September 30, 2002, the Company has not recorded any ceded losses related to this cover.

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 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

50

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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.

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

Impact of Aggregate Cover on Pretax Operating Results
	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Ceded earned premiums	$	—		$	(83	)	$	—		$	(543	)
Ceded claim and claim adjustment expense		—			288			—			1,010
Interest charges (included in net investment income)		(13	)		(11	)		(38	)		(70	)
Pretax impact on operating results	$	(13	)	$	194		$	(38	)	$	397

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 the 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 September 30, 2002.

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

Impact of CCC Cover on Pretax Operating Results
	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Ceded earned premiums	$	(39	)	$	(232	)	$	(100	)	$	(234	)
Ceded claim and claim adjustment expense		55			427			148			427
Interest charges (included in net investment income)		(11	)		(15	)		(27	)		(15	)
Pretax impact on operating results	$	5		$	180		$	21		$	178

The impact by operating segment of the 2002 Cover, Aggregate Cover and the CCC Cover on pretax operating results was as follows:

Impact of 2002 Cover, Aggregate Cover and CCC Cover on Pretax Operating Results
	Three Months					Nine Months
Period ended September 30	2002			2001		2002			2001
(In millions)
Standard Lines	$	(15	)	$	201	$	(43	)	$	383
Specialty Lines		8			32		3			26
CNA Re		(3	)		141		16			166
Pretax impact on operating results	$	(10	)	$	374	$	(24	)	$	575

51

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

2001 Restructuring

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

IT Plan

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

For the nine months ended September 30, 2001 the Company incurred $62 million pretax of restructuring and other related charges for the IT Plan, primarily related to employee severance charges and the write-off of impaired assets. There were no charges recorded during the three months ended September 30, 2001.

The following table summarizes the pretax effect of these costs on the Company’s operating segments.

Pretax Restructuring and Other Related Charges
	Nine
For the period ended September 30, 2001	Months
(In millions)
Standard Lines	$	6
Specialty Lines		2
CNA Re		—
Life Operations		17
Corporate and Other		37
Total	$	62

52

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

No restructuring and other related charges related to the IT Plan have been incurred in 2002; however, payments were made during the nine months ended September 30, 2002 related to amounts accrued as of December 31, 2001. The following table summarizes the remaining IT Plan accrual at September 30, 2002 and the activity in that accrual since inception.
Approximately $5 million of the remaining accrual is expected to be paid during the remainder of 2002.

IT Plan Accrual

	Employee
	Termination				Impaired
	and Related				Asset			Other
	Benefit Costs				Charges			Costs		Total
(In millions)
IT Plan initial accrual		$	29		$	32		$	1	$	62
Costs that did not require cash in 2001			—			(32	)		—		(32	)
Payments charged against liability in 2001			(19	)		—			—		(19	)
Accrued costs at December 31, 2001			10			—			1		11
Payments charged against liability in 2002			(1	)		—			—		(1	)
Accrued costs at September 30, 2002		$	9		$	—		$	1	$	10

The IT Plan is not expected to result in decreased operating expenses in the foreseeable future because savings from the workforce reduction will be used to fund new technology-related initiatives. Employee termination and related benefit payments will continue through 2004 due to employment contract obligations.

53

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

2001 Plan

The overall goal of the 2001 Plan was to create a simplified and leaner organization for customers and business partners. The major components of the plan included a reduction in the number of strategic business units (SBUs) in the property and casualty operations, changes in the strategic focus of the Life Operations and 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 Life Operations included a decision to discontinue writing variable life and annuity business.

No restructuring and other related charges related to the 2001 Plan have been incurred in 2002; however, payments were made during the nine months ended September 30, 2002 related to amounts accrued as of December 31, 2001. The following table summarizes the remaining 2001 Plan accrual as of September 30, 2002 and the activity in that accrual since inception. Approximately $29 million of the remaining accrual is expected to be paid during the remainder of 2002.

2001 Plan Accrual

	Employee
	Termination				Lease			Impaired
	and Related				Termination			Asset			Other
	Benefit Costs				Costs			Charges			Costs			Total
(In millions)
2001 Plan initial accrual		$	68		$	56		$	30		$	35		$	189
Costs that did not require cash in 2001			—			—			—			(35	)		(35	)
Payments charged against liability in 2001			(2	)		—			—			—			(2	)
Accrued costs at December 31, 2001			66			56			30			—			152
Costs that did not require cash in 2002			—			—			(25	)		—			(25	)
Payments charged against liability in 2002			(50	)		(11	)		(1	)		—			(62	)
Accrued costs at September 30, 2002		$	16		$	45		$	4		$	—		$	65

Reserves – Estimates and Uncertainties

The Company maintains loss reserves (reserves) to cover its estimated ultimate unpaid liability for losses and loss adjustment expenses, 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. Reserves are reflected as liabilities on the Condensed Consolidated Balance Sheets under the heading “Insurance Reserves.” Changes in estimates of reserves are reflected in the Company’s Condensed Consolidated Statements of Operations, as incurred losses in the period in which the change arises.

The level of 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. 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, economic inflation, the impact of underwriting policy and claims handling practices and the lag time between the

54

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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 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 reserves and could lead to future reserve additions.

The Company’s current reserve levels reflect management’s best estimate of the Company’s ultimate claims and claim adjustment expenses at September 30, 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 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.

55

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Terrorism Exposure

CNA and the insurance industry incurred substantial losses related to the WTC event. For the most part, the Company believes the industry was able to absorb the loss of capital from these losses, but the capacity to withstand the effect of any additional terrorism events was significantly diminished. The public debate following the WTC event centered on the role, if any, the U.S. federal government should play in providing a “terrorism backstop” for the industry. On October 17, 2002, a conference committee of the U.S. Congress produced a bill reconciling two bills formerly passed by the U.S. Senate and House of Representatives. The bill, entitled The Terrorism Risk Insurance Act (the “Act”), establishes a program within the Department of the Treasury, under which the Federal government would share the risk of loss from future terrorist attacks with the insurance industry. The Act terminates on December 31, 2005. Each participating insurance company would pay a deductible before Federal assistance becomes available. This deductible is based on a percentage of direct premiums for commercial insurance lines from the previous calendar year, and rises from 7 percent during the first year to 10 percent in year two and 15 percent in year three. For losses above a company’s deductible, the Federal government will cover 90%, while companies contribute 10%. Losses covered by the program will be capped at $100 billion; above this amount, Congress is to determine the procedures for and the source of any payments. Insurance companies providing commercial property and casualty insurance are required to participate in the program. The Act does not cover life or health insurance products. During the first two years of the program, the bill has a mandatory offer requirement for terrorism coverage by insurers. The Secretary of Treasury has discretion to extend this requirement to the third year of the program.

The Act, if it becomes law, would provide the property and casualty industry with a greater ability to withstand the effect of any terrorist event in the next three years. In addition, the Act may help to encourage reinsurers to offer terrorism coverage on a broader basis than they have been writing following the WTC event.

To date, however, U.S. Congress has not enacted the Act. Without any federal backstop in place, the Company is exposed to potentially material losses arising from a future terrorism event. Accordingly, the Company’s results of operations and equity could be materially adversely impacted by a future terrorism event. The Company is attempting to mitigate this exposure through its underwriting practices, policy terms and conditions, and the use of reinsurance. The Company is generally prohibited from excluding terrorism exposure from its primary workers compensation, individual life and group life and health policies. The Company’s current reinsurance arrangements either exclude terrorism coverage or significantly limit the level of coverage.

56

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Standard Lines

The following table summarizes key components of operating results for Standard Lines.

Operating Results

	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Net written premiums	$	1,027		$	762		$	3,154		$	2,032
Net earned premiums		988			739			3,024			1,536
Underwriting income (loss)		85			(106	)		(119	)		(1,165	)
Net investment income		66			112			299			349
Net operating income (loss)		107			19			153			(490	)
Ratios
Loss and loss adjustment expense		60.3	%		68.3	%		72.0	%		113.1	%
Expense		28.5			41.1			30.0			57.4
Dividend		2.6			5.0			1.9			5.4
Combined		91.4	%		114.4	%		103.9	%		175.9	%
2001 adjusted underwriting loss*				$	(38	)				$	(181	)
2001 adjusted ratios*
Loss and loss adjustment expense					64.1	%					68.4	%
Expense					35.8						35.2
Dividend					4.4						3.4
Combined					104.3	%					107.0	%

* 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 results improved $88 million for the third quarter of 2002 as compared with the same period in 2001. Included in the 2001 results was $50 million of after-tax losses related to the WTC event, net of the related corporate aggregate reinsurance treaties benefit. Excluding this 2001 significant item, net operating results increased $38 million for the third quarter of 2002 as compared with the same period in 2001. This increase was due primarily to improved underwriting results partially offset by decreased net investment income, including a $33 million decrease in limited partnership investment income.

The combined ratio decreased 12.9 points for the third quarter of 2002 as compared with the adjusted combined ratio for the same period in 2001, and underwriting results improved by $123 million as compared with the adjusted underwriting results for the same period in 2001. This change was due to decreases in the loss, expense and dividend ratios. The loss ratio decreased 3.8 points due principally to significant favorable net prior year loss reserve development recorded in the third quarter of 2002 across certain lines of business. In the third quarter of 2002, $108 million of favorable prior year loss reserve development was recorded which was attributable to participation in the Workers Compensation Reinsurance Bureau (WCRB), a reinsurance pool, and residual markets. The favorable prior year loss reserve development for WCRB is the result of information recently received from the WCRB. 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 the third quarter, 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 development of $8 million. The favorable residual market prior year loss reserve development

57

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

was the result of lower than expected paid loss activity during recent periods for older accident years. In addition, Standard Lines had favorable prior year loss reserve development, primarily in the package liability and auto liability lines of business due to new claims initiatives.

These new claims initiatives, which include specialized training on specific areas of the claims adjudication process, enhanced claims litigation management, enhanced adjuster-level metrics to monitor performance and more focused metric-based claim file review and oversight, are expected to produce significant reductions in ultimate claim costs. Based on management’s current best estimate of the reduction in ultimate claim costs, approximately $100 million of favorable prior year reserve development was recorded in the third quarter of 2002. Additional favorable reserve development may be recorded in the future as management continues to monitor these estimates and as additional evidence becomes available to measure the effectiveness of the claim cost containment initiatives and management’s corresponding estimate of such expected ultimate claim cost reductions. While management believes that the estimate of ultimate claim cost reductions as a result of the claim cost containment initiatives is reasonable, there can be no assurance that the ultimate expected claim cost reductions will be achieved, or that any additional favorable development will be recorded as a result of the claim cost containment initiatives described above.

The improvements in the third quarter 2002 loss ratio were partially offset by unfavorable prior year loss reserve development across several lines of business, including contractor package policy business. Additionally, the cost of the Company’s reinsurance programs increased the 2002 loss ratio as compared with a significant benefit from reinsurance in 2001, including a benefit related to the corporate aggregate reinsurance treaties from core operations which was recorded primarily based on increased 2001 accident year losses for the workers compensation line of business.

The expense ratio decreased 7.3 points as a result of decreased acquisition expenses, principally due to reduction in accruals for certain insurance-related assessments resulting from changes in the basis on which the assessments were calculated. Furthermore, the expense ratio decreased due to reduced head count as a result of the 2001 Plan and an increased net earned premium base. The dividend ratio decreased 1.8 points due to favorable current accident year dividends and lower adverse dividend reserve development recorded in 2002.

Net written premiums increased $265 million for the third quarter of 2002 as compared with the same period in 2001. Included in 2001 net written premiums was $159 million of ceded written premiums related to both the WTC event and the corporate aggregate reinsurance treaties from core operations. Excluding these 2001 significant premium items, net written premiums increased $106 million due primarily to strong rate increases and lower ceded premiums due to decreased use of reinsurance in 2002. Net earned premiums increased $249 million for the third quarter of 2002 as compared with the same period in 2001 due primarily to the increases in net written premiums as noted above.

Net operating results improved $643 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in the 2001 results were $619 million related to the second quarter 2001 reserve strengthening, $50 million related to the WTC event and $4 million for restructuring and other related charges. Excluding these 2001 significant items, net operating results declined $30 million for the nine months ended September 30, 2002 as compared with the same period in 2001. This decrease was due primarily to decreased net investment income, partially offset by improved underwriting results.

58

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

The combined ratio decreased 3.1 points for the nine months ended September 30, 2002 as compared with the adjusted combined ratio for the same period in 2001, and underwriting results improved by $62 million as compared with the adjusted underwriting results for the same period in 2001. This change was due to an increase in the loss ratio, more than offset by decreases in the expense and dividend ratios. The loss ratio increased 3.6 points due principally to unfavorable prior year loss reserve development recorded in 2002 across certain lines of business including contractor package policy and excess and surplus lines of business, and the net cost of reinsurance in 2002 as compared with a significant benefit from the use of reinsurance in 2001, including a benefit related to the corporate aggregate reinsurance treaties from core operations that was recorded based on increased 2001 accident year losses primarily for workers compensation business. These increases in the loss ratio were partially offset by significant favorable loss reserve development across many lines of business recorded in the third quarter of 2002 for new claim initiatives throughout Standard Lines and residual markets. The expense ratio decreased 5.2 points as a result of decreased acquisition expenses, principally due to reduction in accruals for certain insurance-related assessments resulting from changes in the basis on which the assessments were calculated. Furthermore, the expense ratio decreased due to reduced head count as a result of the 2001 Plan and increased net earned premium base. The dividend ratio decreased 1.5 points primarily due to favorable current accident year dividends.

Net written premiums increased $1,122 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in the 2001 net written premiums was $815 million of ceded premiums related to the corporate aggregate reinsurance treaties, additional ceded premiums arising from both the reserve strengthening and WTC event, and a change in estimate for involuntary market premium accruals. Excluding these 2001 significant premium items, net written premiums increased $307 million primarily as a result of strong rate increases and lower ceded premiums.

Net earned premiums increased $1,488 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in the 2001 net earned premiums was $1,180 million of ceded premiums related to the corporate aggregate reinsurance treaties, additional ceded premiums and a change in estimate for retrospective premium accruals arising from the reserve strengthening, additional ceded premiums arising from the WTC event, and a change in estimate for involuntary market premium accruals. Excluding these 2001 significant premium items, net earned premiums increased $308 million primarily as a result of the increases in net written premiums as described above.

Standard Lines achieved an average rate increase of 28% in the third quarter of 2002 for contracts that renewed during the period and had a retention rate of 68% for those contracts that were up for renewal. Standard Lines achieved an average rate increase of 18% in the third quarter of 2001 for contracts that were renewed during the period and had a retention rate of 80% for those contracts that were up for renewal.

59

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Specialty Lines

The following table summarizes key components of operating results for Specialty Lines.

Operating Results

	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Net written premiums	$	634		$	520		$	1,758		$	1,453
Net earned premiums		555			474			1,610			1,387
Underwriting loss		(143	)		(12	)		(178	)		(543	)
Net investment income		50			75			189			240
Net operating (loss) income		(67	)		39			10			(221	)
Ratios
Loss and loss adjustment expense		91.0	%		62.2	%		77.8	%		96.4	%
Expense		34.5			40.2			33.1			42.6
Dividend		0.2			0.2			0.1			0.2
Combined		125.7	%		102.6	%		111.0	%		139.2	%
2001 adjusted underwriting gain (loss)*				$	6					$	(113	)
2001 adjusted ratios*
Loss and loss adjustment expense					60.3	%					66.2	%
Expense					38.5						41.6
Dividend					0.2						0.2
Combined					99.0	%					108.0	%

* 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 results decreased $106 million for the third quarter of 2002 as compared with the same period in 2001. Included in the 2001 results was $12 million of after-tax losses related to the WTC event, net of the related corporate aggregate reinsurance treaties benefit. Excluding this 2001 significant item, net operating results decreased $118 million for the third quarter of 2002 as compared with the same period in 2001. This decrease was due primarily to decreases in both underwriting results and net investment income, including a $13 million decrease in limited partnership income.

The combined ratio increased 26.7 points for the third quarter of 2002 as compared with the adjusted combined ratio for the same period in 2001, and underwriting results decreased by $149 million as compared with the adjusted underwriting results for the same period in 2001. This change was due to an increase in the loss ratio, partially offset by a decrease in the expense ratio. The loss ratio increased 30.7 points due principally to increased adverse prior year loss reserve development recorded in the third quarter of 2002 primarily in CNA HealthPro, voluntary pools and the European operations. The adverse prior year loss reserve development of approximately $150 million for CNA HealthPro was driven principally by medical malpractice excess products provided to hospitals and physicians and coverages provided to long term care facilities, principally nursing homes. $100 million of the prior year loss reserve development was related to assumed excess products and loss portfolio transfers, and was primarily driven by unexpected increases in the number of excess claims in recent accident years. The most recent review of this business indicated that the percentage of total claims greater than one million dollars has increased by 33%, from less than 3% of all claims to more than 4% of all claims. CNA Health Pro no longer writes loss portfolio transfers and assumed excess products.

60

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

The remaining $50 million of the prior year loss reserve development was related to long-term care facilities primarily as a result of a review completed during the third quarter of 2002 that indicated that the average value of claims closed during the first several months of 2002 had increased by more then 50% when compared to claims closed during 2001. In response to those trends, CNA Health Pro has reduced its writings of national for-profit nursing home chains.

The increase in the loss ratio was also due to increased current year catastrophe losses, including $17 million of catastrophe losses for the European floods. In 2002, there was a net cost for reinsurance as compared with a significant benefit from the use of reinsurance in 2001, including a benefit related to the corporate aggregate reinsurance treaties from core operations which was recorded based on 2001 accident year losses. These adverse results were partially offset by favorable prior year loss reserve development recorded in 2002 in CNA Pro, rate increases across the entire book of business and the increased benefit related to additional cessions to the CCC Cover as a result of the prior year loss reserve development recorded in the third quarter of 2002. The favorable prior year loss reserve development in CNA Pro was primarily driven by approximately $100 million of favorable prior year loss reserve development on programs providing professional liability coverage to accountants, lawyers and realtors. Recent reviews of this business have found that the average claim size for older accident years has not been increasing as expected. Previous reviews had expected claim size trend of 5% to 6%. The expense ratio decreased 4.0 points as a result of lower underwriting expenses due to decreased staff levels as a result of the 2001 Plan, other expense reduction initiatives and increased net earned premium base.

Net written premiums increased $114 million for the third quarter of 2002 as compared with the same period in 2001. Included in 2001 net written premiums was $34 million of ceded written premiums related to both the WTC event and the corporate aggregate reinsurance treaties from core operations. Excluding these 2001 significant premium items, net written premiums increased $80 million due primarily to growth in CNA Pro and CNA HealthPro resulting from strong rate increases and increased new business, partially offset by increased ceded premiums related to the additional cessions to the CCC Cover. Net earned premiums increased $81 million for the third quarter of 2002 as compared with the same period in 2001 due primarily to the increases in net written premiums noted above.

Net operating results improved $231 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in the 2001 results were $277 million related to the second quarter 2001 reserve strengthening, $12 million related to the WTC event and $1 million for restructuring and other related charges. Excluding these 2001 significant items, net operating results decreased $59 million for the nine months ended September 30, 2002 as compared with the same period in 2001. This decrease was due primarily to a decline in both underwriting results and net investment income partially offset by the impact of better aligning premium earnings patterns with the emergence of claims in the vehicle warranty line of business, which reduced operating results in 2001.

61

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

The combined ratio increased 3.0 points for the nine months ended September 30, 2002 as compared with the adjusted combined ratio for the same period in 2001, and underwriting results decreased $65 million as compared with the adjusted underwriting results for the same period in 2001. This change was due to an increase in the loss ratio, partially offset by decreases in the expense and dividend ratios. The loss ratio increased 11.6 points primarily due to the third quarter 2002 activity discussed in the quarterly results discussion above. The expense ratio decreased 8.5 points as a result of the 2001 write-off of unrecoverable deferred acquisition costs in the vehicle warranty line of business and lower underwriting expenses due to decreased staff levels as a result of the 2001 Plan, and other expense reduction initiatives.

Net written premiums increased $305 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in 2001 net written premiums was $57 million related to the corporate aggregate reinsurance treaties, additional ceded premiums arising from both the reserve strengthening and WTC event, and a change in estimate for involuntary market premium accruals. Excluding these 2001 significant premium items, net written premiums increased $248 million primarily as a result of growth in CNA Pro, CNA HealthPro and Marine due to strong rate increases and increased new business.

Net earned premiums increased $223 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in 2001 net earned premiums was $71 million related to the corporate aggregate reinsurance treaties, additional ceded premiums and a change in estimate for retrospective premium accruals arising from the reserve strengthening, additional ceded premiums arising from the WTC event and a change in estimate for involuntary market premium accruals. Excluding these 2001 significant premium items, net written premiums increased $152 million primarily as a result of the increases in net written premiums as noted above.

Specialty Lines achieved an average rate increase of 30% in the third quarter of 2002 for contracts that renewed during the period and had a retention rate of 77% for those contracts that were up for renewal. Specialty Lines achieved an average rate increase of 21% in the third quarter of 2001 for contracts that renewed during the period and had a retention rate of 75% for those contracts that were up for renewal. Retention rates above apply to Specialty Lines excluding the CNA Guaranty and Credit, Surety and Warranty businesses.

62

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

CNA Re

The following table summarizes key components of operating results for CNA Re.

Operating Results

	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Net written premiums	$	167		$	108		$	494		$	378
Net earned premiums		157			149			462			452
Underwriting loss		(75	)		(270	)		(61	)		(904	)
Net investment income		29			40			112			129
Net operating (loss) income		(27	)		(146	)		41			(497	)
Ratios
Loss and loss adjustment expense		116.1	%		237.0	%		80.6	%		257.3	%
Expense		31.7			44.5			32.7			42.3
Combined		147.8	%		281.5	%		113.3	%		299.6	%
2001 adjusted underwriting loss*				$	(7	)				$	(54	)
2001 adjusted ratios*
Loss and loss adjustment expense					68.0	%					72.5	%
Expense					36.3						38.4
Combined					104.3	%					110.9	%

* 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 results improved $119 million for the third quarter of 2002 as compared with the same period in 2001. Included in the 2001 results was $176 million of after-tax losses related to the WTC event, net of the related corporate aggregate reinsurance treaties benefit. Excluding this 2001 significant item, net operating results decreased $57 million for the third quarter of 2002 as compared with the same period in 2001. This decrease was due primarily to declines in underwriting results and net investment income, including a $7 million decrease in limited partnership income.

The combined ratio increased 43.5 points for the third quarter of 2002 as compared with the adjusted combined ratio for the same period in 2001, and underwriting results decreased by $68 million as compared with the adjusted underwriting results for the same period in 2001. This change was due to an increase in the loss ratio, partially offset by improvement in the expense ratio. The loss ratio increased 48.1 points due principally to increased adverse prior year loss reserve development recorded in 2002. This increase in adverse prior year loss reserve development was the result of a review completed during the third quarter of 2002 and was primarily recorded in the professional liability and surety lines of business. Several large losses as well as continued increases in the overall average size of claims for these lines have resulted in higher than expected loss ratios. The expense ratio decreased 4.6 points primarily as a result of a shift in business mix resulting in lower commission rates and a reduction in underwriting expenses relative to the earned premium base.

63

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Net written premiums increased $59 million for the third quarter of 2002 as compared with the same period in 2001. Included in 2001 net written premiums was $125 million of ceded written premiums related to both the WTC event and the corporate aggregate reinsurance treaties from core operations, partially offset by $89 million of reinstatement premiums related to the WTC event. Excluding these 2001 significant premium items, net written premiums increased $23 million principally as a result of clients increasing their premium writings, achieved rate increases and an increase in new business. These increases were partially offset by the decision made in the third quarter of 2001 to cease new and renewal business writings in CNA Re U.K. Net earned premiums increased $8 million for the third quarter of 2002 as compared with the same period in 2001, due primarily to the increases in net written premiums noted above.

Net operating results improved $538 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in the 2001 results were $384 million related to the second quarter 2001 reserve strengthening and $176 million of after-tax losses related to the WTC event, net of related corporate aggregate reinsurance treaties benefit. Excluding these 2001 significant items, net operating results decreased $22 million for the nine months ended September 30, 2002 as compared with the same period in 2001. This decrease was due to a decrease in underwriting results and net investment income, partially offset by an increased benefit related to the additional cessions to the CCC Cover as a result of the increase in WTC related losses recorded in the first quarter of 2002.

The combined ratio increased 2.4 points for the nine months ended September 30, 2002 as compared with the adjusted combined ratio for the same period in 2001, and underwriting results decreased $7 million as compared with the adjusted underwriting results for the same period in 2001. This change was due to an increase in the loss ratio, partially offset by a decrease in the expense ratio. The loss ratio increased 8.1 points due principally to an increase in adverse prior year loss reserve development recorded in the third quarter of 2002 and the additional premiums and losses recorded as a result of the re-estimation of the WTC event in the first quarter of 2002. This increase in adverse prior year loss reserve development was the result of a review completed during the third quarter of 2002 and was primarily recorded in the directors and officers, professional liability errors and omissions, and surety lines of business. Several large losses as well as continued increases in the overall average size of claims for these lines have resulted in higher than expected loss ratios. These increases were partially offset by a $32 million net underwriting benefit related to the corporate aggregate reinsurance treaties. The expense ratio decreased 5.7 points primarily as a result of the a shift in business mix resulting in lower commission rates and a reduction in underwriting expenses relative to the earned premium base.

64

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Net written premiums increased $116 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in 2001 net written premiums was $59 million related to the corporate aggregate reinsurance treaties and additional ceded premiums arising from both the reserve strengthening and WTC event. These reductions in net written premiums were more than offset by $89 million of reinstatement premiums related to the WTC event. Excluding these 2001 significant premium items, net written premiums increased $146 million principally as a result of clients increasing their premium writings, achieved rate increases and an increase in new business. These increases were partially offset by the decision made in the third quarter of 2001 to cease new and renewal business writings in CNA Re U.K. Net earned premiums increased $10 million for the nine months ended September 30, 2002 as compared with the same period in 2001, due primarily to the increases in net written premiums noted above.

On July 15, 2002, the Company announced that it signed a share purchase agreement to sell CNA Re U.K. The sale was completed on October 31, 2002. See the discussion of realized investment losses in the Investments section of the MD&A for additional information.

Group Operations

The following table summarizes key components of operating results for Group Operations.

Operating Results
	Three Months					Nine Months
Period ended September 30	2002		2001			2002		2001
(In millions)
Net earned premiums	$	292	$	906		$	2,016	$	2,524
Net investment income		44		40			127		119
Net operating income (loss)		25		(19	)		59		11

During the second quarter of 2002, the Company announced the sale of the Claims Administration Corporation and the transfer of the National Postal Mail Handlers Union group benefits plan (the Mail Handlers Plan) to First Health Group Corporation, effective July 1, 2002. In the third quarter of 2002, the Company recognized a $5 million pretax realized loss on the sale of Claims Administration Corporation and $14 million pretax of non-recurring fee income related to the transfer of the Mail Handlers Plan.

Net operating results improved $44 million for the third quarter of 2002 as compared with the same period in 2001. Included in the 2001 results was a $35 million loss related to the WTC event. Excluding this 2001 significant item, net operating results improved $9 million due primarily to increased net investment income and the non-recurring fee income related to the transfer of the Mail Handlers Plan.

Net earned premiums decreased $614 million for the third quarter of 2002 as compared with the same period in 2001. This decline was due primarily to the transfer of the Mail Handlers Plan.

Net operating income improved $48 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in the 2001 results was a $35 million loss related to the WTC event. Excluding this 2001 significant item, net operating results improved $13 million due primarily to increased net investment income and the non-recurring fee income related to the transfer of the Mail Handlers Plan.

65

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Net earned premiums decreased $508 million for the nine months ended September 30, 2002 as compared with the same period in 2001. This decline was due primarily to the transfer of the Mail Handlers Plan partially offset by an increase in premiums in the disability and long term care products within Group Benefits.

Life Operations

The following table summarizes key components of operating results for Life Operations.

Operating Results
	Three Months				Nine Months
Period ended September 30	2002		2001		2002		2001
(In millions)
Sales volume*	$	475	$	592	$	1,326	$	2,021
Net earned premiums		236		234		711		677
Net investment income		152		141		463		413
Net operating income		36		0		108		67

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

Net operating results improved $36 million for the third quarter of 2002 as compared with the same period in 2001. Included in the 2001 results was a $14 million loss related to the WTC event. Excluding this 2001 significant item, net operating results improved $22 million due primarily to improved 2002 Individual Life mortality experience and a decrease in reinsurance charges as compared with 2001, partially offset by unfavorable Long Term Care morbidity in 2002.

Sales volume decreased $117 million for the third quarter of 2002 as compared with the same period in 2001. This decrease was attributable primarily to lower sales of synthetic guaranteed investment contracts and structured settlement annuities, along with reduced sales in the variable products business, which the Company decided to exit in the fourth quarter of 2001. These decreases were partially offset by increased sales in the Long Term Care business. Net earned premiums increased $2 million for the third quarter of 2002 as compared with the same period in 2001, attributable primarily to growth in the Long Term Care business partially offset by sales declines in structured settlements.

Net operating results improved $41 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in the 2001 results was a $14 million loss related to the WTC event and an $11 million loss related to restructuring and other related charges. Excluding these 2001 significant items, net operating results improved $16 million due primarily to higher net investment income and a decrease in reinsurance charges as compared with 2001, partially offset by unfavorable Long Term Care morbidity in 2002.

66

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Sales volume decreased $695 million for the nine months ended September 30, 2002 as compared with the same period in 2001. This decrease was attributable primarily to lower sales of synthetic guaranteed investment contracts and structured settlement annuities, along with reduced sales in the variable products business, which the Company decided to exit in the fourth quarter 2001. These decreases were partially offset by increased sales in the Long Term Care business. Net earned premiums increased $34 million for the nine months ended September 30, 2002 as compared with the same period in 2001 attributable primarily to growth in the Long Term Care business partially offset by sales declines in structured settlements and the Retirement Services business.

Corporate and Other

The following table summarizes key components of operating results for Corporate and Other.

Operating Results
	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Net investment income	$	23		$	40		$	102		$	107
Operating revenues		68			107			278			293
Net operating loss		(36	)		(53	)		(82	)		(988	)

Net operating results improved $17 million for the third quarter of 2002 as compared with the same period in 2001. Included in the 2001 results was a $17 million loss related to the WTC event related to Group Reinsurance. Excluding the impact of the WTC event, net operating results were comparable to the same period in the prior year. Reduced expenses for e-Business initiatives and improved results for Group Reinsurance were offset by lower net investment income, higher losses related to CNA UniSource and severance and other costs related to changes in senior management during the third quarter of 2002.

Operating revenues decreased $39 million for the third quarter 2002 as compared with the same period in 2001. This decrease was due primarily to reduced revenues for CNA UniSource and reduced net investment income partially offset by increased net earned premiums in Group Reinsurance.

Net operating results improved $906 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Included in the 2001 results were $799 million related to the second quarter 2001 reserve strengthening, including $741 million for APMT, $17 million related to the WTC event and $24 million of restructuring and other related charges. Excluding these 2001 significant items, net operating results improved $66 million for the nine months ended September 30, 2002 as compared with the same period in 2001. Reduced expenses for e-Business initiatives and improved results for Group Reinsurance were offset by lower net investment income, higher losses related to CNA UniSource and severance and other costs related to changes in senior management during the third quarter of 2002.

Operating revenues decreased $15 million for the nine months ended September 30, 2002 as compared with the same period in 2001. This decrease was due primarily to reduced revenues for CNA UniSource and reduced net investment income partially offset by increased net earned premiums in Group Reinsurance.

67

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

In the second quarter of 2001, CNA planned the disposition of CNA UniSource, a payroll processor and professional employer organization (PEO). After exploring possible transactions to dispose of its PEO business, CNA UniSource exited the PEO business as of March 31, 2002. As of that date, substantially all existing PEO client contracts were terminated. After exploring possible transactions to dispose of its payroll business, CNA UniSource has decided to exit the payroll processing business as of December 31, 2002. All obligations related to the PEO operation are being run-off in an orderly manner and the associated costs are included in continuing operations. The Company anticipates additional operating losses from the PEO run-off and payroll operations run-off for the remainder of 2002 and into the first half of 2003.

Environmental Pollution and Mass Tort and Asbestos Reserves

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

Environmental pollution cleanup is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to cleanup. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies. The Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund) and comparable state statutes (mini-Superfunds) govern the cleanup and restoration of toxic waste sites and formalize the concept of legal liability for cleanup and restoration by “Potentially Responsible Parties” (PRPs). Superfund and the mini-Superfunds establish mechanisms to pay for cleanup of waste sites if PRPs fail to do so, and to assign liability to PRPs. The extent of liability to be allocated to a PRP is dependent upon a variety of factors. Further, the number of waste sites subject to cleanup is unknown. To date, approximately 1,500 cleanup sites have been identified by the Environmental Protection Agency (EPA) and included on its National Priorities List (NPL). State authorities have designated many cleanup sites as well.

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

A number of proposals to reform Superfund have been made by various parties. However, no reforms were enacted by Congress during 2001 or the first nine months of 2002, and it is unclear what positions Congress or the administration will take and what legislation, if any, will result in the future. If there is legislation, and in some circumstances even if there is no legislation, the federal role in environmental cleanup may be significantly reduced in favor of state action. Substantial changes in the federal statute or the activity of the EPA may cause states to reconsider their environmental cleanup statutes and regulations. There can be no

68

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

meaningful prediction of the pattern of regulation that would result or the effect upon CNA’s results of operations and/or equity.

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

As of September 30, 2002 and December 31, 2001, CNA carried approximately $526 million and $617 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution and mass tort claims. There was no environmental pollution and mass tort net development for the three and nine months ended September 30, 2002 and the three months ended September 30, 2001. Unfavorable environmental pollution and mass tort development for the nine months ended September 30, 2001 amounted to $453 million. The Company paid environmental pollution-related claims and other mass tort related claims, net of reinsurance recoveries, of $91 million and $153 million for the nine months ended September 30, 2002 and 2001.

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

As of September 30, 2002 and December 31, 2001, CNA carried approximately $1,216 million and $1,204 million of claim and claim adjustment expense reserves, net of reinsurance recoverables, for reported and unreported asbestos-related claims. There was no asbestos net claim and claim adjustment expense development for the three and nine months ended September 30, 2002 and the three months ended September 30, 2001. Unfavorable asbestos net claim and claim adjustment reserve development for the nine months ended September 30, 2001 amounted to $769 million. The Company had a net $12 million receipt of cash related to asbestos in the first nine months of 2002 as reinsurance recoveries collected exceeded claim payments. The Company made asbestos-related claim payments, net of reinsurance recoveries, of $78 million for the nine months ended September 30, 2001.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

have ordered that so-called “unimpaired” claimants may not recover unless at some point the claimant’s condition worsens to the point of impairment.

Since 1982, at least sixty-two companies that mined asbestos, or manufactured or used asbestos-containing products, have filed for bankruptcy. Of these sixty-two companies, twenty-six companies have filed bankruptcy since January 1, 2000. This phenomenon has prompted plaintiff attorneys to file claims against companies that had only peripheral involvement with asbestos. Many of these defendants were users or distributors of asbestos-containing products, or manufacturers of products in which asbestos was encapsulated. These defendants include equipment manufacturers, brake, gasket, and sealant manufacturers, and general construction contractors. According to a comprehensive report on asbestos litigation recently released by the Rand Corporation, over 6,000 companies have been named as defendants in asbestos lawsuits, with 75 out of 83 different types of industries in the United States impacted by asbestos litigation. The study found that a typical claimant names 70 to 80 defendants, up from an average of 20 in the early years of asbestos litigation.

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

Policyholders have also initiated litigation directly against CNA and other insurers. CNA has been named in Adams v. Aetna, Inc., at. al. (Circuit Court of Kanhwha County, West Virginia), a purported class action against CNA and other insurers, alleging that the defendants violated West Virginia’s Unfair Trade Practices Act in handling and resolving asbestos claims against their policyholders. In addition, lawsuits have been filed in Texas against CNA and other insurers and non-insurer corporate defendants asserting liability for failing to warn of the dangers of asbestos. (Boson v. Union Carbide Corp., et al. (District Court of Nueces County, Texas)). It is difficult to predict the outcome or financial exposure represented by this type of litigation in light of the broad nature of the relief requested and the novel theories asserted.

Due to the uncertainties created by volatility in claim numbers and settlement demands, the effect of bankruptcies, the extent to which non-impaired claimants can be precluded from making claims and the efforts by insureds to obtain coverage not subject to aggregate limits, the ultimate liability of CNA for asbestos-related claims may vary substantially from the amount currently recorded. Other variables that will influence CNA’s ultimate exposure to asbestos-related claims will be medical inflation trends, jury attitudes, the strategies of plaintiff attorneys to broaden the scope of defendants, the mix of asbestos-related diseases presented, CNA’s abilities to recover reinsurance, future court decisions and the possibility of legislative reform.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Adverse developments with respect to such matters discussed in this paragraph could have a material adverse effect on CNA’s results of operations and/or equity.

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

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

Investments

The components of net investment income for the three and nine months ended September 30, 2002 and 2001 are presented in the following table.

Net Investment Income
	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Fixed maturity securities:
Bonds:
Taxable	$	412		$	438		$	1,284		$	1,247
Tax-exempt		49			24			120			86
Limited partnerships		(72	)		20			(28	)		52
Short-term investments		17			34			44			113
Other, including interest on funds withheld and other deposits		(21	)		(50	)		(81	)		(94	)
Gross investment income		385			466			1,339			1,404
Investment expense		(21	)		(18	)		(47	)		(47	)
Net investment income	$	364		$	448		$	1,292		$	1,357

The Company experienced lower net investment income for the three and nine months ended September 30, 2002 as compared with the same periods in 2001. The decrease was due primarily to decreased limited partnership results and lower investment yields, partially offset by reduced interest costs on funds withheld reinsurance contracts. Other investment income includes interest cost on funds withheld reinsurance contracts. See the Reinsurance section of the MD&A for additional information. The interest cost on these contracts increased significantly in the second and third quarters of 2001 because of ceded losses resulting from the second quarter 2001 reserve strengthening and the WTC event. The decline in limited partnership income was primarily attributable to many of the same factors that impacted the broader financial markets. Limited partnership investment performance, particularly high yield bond and equity strategies, was adversely affected by overall market volatility including concerns over corporate accounting practices and credit deterioration. Based upon current trends, the

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Company expects limited partnership losses in the fourth quarter of 2002 will likely be less than that reported in the third quarter of 2002. In future quarters, the Company expects to reallocate a portion of its investment in limited partnerships to other investments. The bond segment of the investment portfolio yielded 6.0% in the first nine months of 2002 as compared with 6.4% during the same period in 2001.

The components of net realized investment gains (losses) for the three and nine months ended September 30, 2002 and 2001 are presented in the following table.

Net Realized Investment Gains (Losses)
	Three Months						Nine Months
Period ended September 30	2002			2001			2002			2001
(In millions)
Realized investment gains (losses):
Fixed maturity securities:
U.S. Government bonds	$	214		$	49		$	263		$	156
Corporate and other taxable bonds		(165	)		(73	)		(414	)		(80	)
Tax-exempt bonds		41			7			57			45
Asset-backed bonds		14			—			42			55
Redeemable preferred stock		(13	)		—			(28	)		(21	)
Total fixed maturity securities		91			(17	)		(80	)		155
Equity securities		(17	)		39			32			1,126
Derivative securities		(44	)		(29	)		(78	)		(26	)
Other invested assets		1			10			(3	)		(304	)
Total realized investment gains (losses)		31			3			(129	)		951
Allocated to participating policyholders’ and minority interests		(7	)		(2	)		(8	)		(12	)
Income tax (expense) benefit		(8	)		(1	)		50			(390	)
Net realized investment gains (losses)	$	16		$	—		$	(87	)	$	549

Net realized investment gains increased $16 million for the three months ended September 30, 2002 compared with the same period in 2001. This increase was due primarily to gains on sales of fixed maturities and equity securities, partially offset by increased investment impairment losses.

Net realized investment gains decreased $636 million for the nine months ended September 30, 2002 compared with the same period in 2001. This decline was due primarily to a $266 million after-tax increase in impairment losses recorded in 2002 principally on corporate bonds, contrasted with large gains realized in the second quarter of 2001 from closing out the hedge agreements, entered into in early 2000, related to the Company’s investment in Global Crossing Ltd. common stock.

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

Substantially all invested assets are marketable securities classified as available-for-sale in the accompanying financial statements. Accordingly, changes in fair value for these securities are reported in other comprehensive income.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Invested assets are exposed to various risks, such as interest rate, market and credit. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the value of these assets, it is possible that changes in risks in the near term may materially affect the amounts reported in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.

The Company’s Impairment Committee (the Committee) reviews the investment portfolio no less frequently than quarterly for potentially troubled securities. The Committee (comprised of representatives appointed by the Company’s Chief Financial Officer) determines which securities are impaired and the extent of the impairment. Each quarter a screening list is prepared consisting of the securities which fall below certain thresholds. Each security on the list is analyzed by the Committee in light of specific facts and circumstances that may be unique to that security including, but not limited to, the current market value relative to book value, the length of time that the security’s market value has been less than book value, the current view of the security’s market sector, its underlying circumstances and near term prospects, and the Company’s intended holding period. The Committee evaluates available information and concludes if impairment losses are warranted. The Committee members continue to analyze new information, as it becomes available.

Realized investment losses for the three and nine months ended September 30, 2002, included $222 million and $533 million pretax of impairment losses as compared with $41 million and $124 million of pretax impairment losses for the same periods in 2001.

The impairments recorded in 2002 and 2001 were primarily the result of the continued deterioration in the bond and equity markets and the effects on such markets due to the overall slowing of the economy. These impairment losses were related principally to corporate bonds in the taxable securities asset class of fixed maturity securities and in equity securities.

For the three months ended September 30, 2002, the impairment losses related primarily to corporate bonds in the communications sector of the market and equities in the financial industry sector. On an aggregate basis, these impairment losses were more than offset by the realized gains in the overall investment portfolio.

For the three months ended September 30, 2001, the impairment losses related to corporate bonds primarily in the internet communications sector of the market.

For the nine months ended September 30, 2002 the impairment losses included $129 million related to debt securities issued by WorldCom Inc., $74 million related to Adelphia Communication Corporation, and $57 million for AT&T Canada, all of which recently filed for bankruptcy. The remainder of the impairment losses were primarily in the communications sector. If the deterioration in this and other industry sectors continues in future periods and the Company continues to hold these securities, the Company is likely to have additional impairment losses in the future.

For the nine months ended September 30, 2001 the impairment losses were primarily in corporate bonds and included $61 million related to the internet communications industry sector. The remainder of the impairment losses were primarily in the equities sector within the medical services industry.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

During the second quarter of 2001, the Company announced its intention to sell certain businesses. The assets being held for disposition included the U.K. subsidiaries of CNA Re (CNA Re U.K.) and certain other businesses. Based upon the impairment analyses performed at that time, the Company anticipated that it would realize losses in connection with those planned sales. In determining the anticipated loss from these sales, the Company estimated the net realizable value of each business being held for sale. An estimated after-tax loss of $320 million was initially recorded in the second quarter of 2001. This loss was reported in other realized investment losses.

The Company continues to monitor the impairment losses recorded for these businesses and perform updated impairment analysis. Based on these analyses the impairment loss has been reduced by approximately $170 million, primarily because the net assets of the businesses had been significantly diminished by their operating losses, including adverse loss reserve development recognized by CNA Re U.K. in the fourth quarter of 2001.

In the fourth quarter of 2001, the Company sold certain businesses as planned. The realized after-tax loss applicable to these businesses recognized in the second quarter of 2001 was $38 million. Revenues of these businesses included in the three and nine months ended September 30, 2001 totaled approximately $6 million and $28 million. These businesses contributed approximately $3 million of net operating income and $14 million of losses in the three and nine months ended September 30, 2001.

At September 30, 2002, CNA Re U.K. remained held for sale. On October 31, 2002, the Company completed the sale of CNA Re U.K. to Tawa U.K. Limited, a subsidiary of Artemis Group, a diversified French-based holding company. The sale includes business underwritten since inception by CNA Re U.K., except for certain risks retained by CCC as discussed below. In October, the sale was approved in the United Kingdom by the Financial Services Authority (FSA) and by the Illinois Insurance Department. This sale does not impact CNA Re’s on-going U.S.-based operations.

CNA Re U.K. was sold for $1, subject to adjustments that are primarily driven by certain operating results and changes in interest rates between January 1, 2002 and October 31, 2002, and realized foreign currency losses recognized by CNA Re U.K. prior to December 31, 2002. CNAF has also committed to contribute up to $9.6 million to CNA Re U.K. over a four-year period beginning in 2010 should the FSA deem CNA Re U.K. to be undercapitalized. Due to the various components of the completion adjustments, which are initially prepared by the buyer, the final settlement cannot yet be determined. However, based upon information currently available to the Company, management believes there will be a reduction in the previously recognized impairment loss, which will be reflected as a realized gain when the completion adjustments are finalized.

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

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

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

CNA Re U.K. contributed revenues of approximately $14 million and $57 million for the three months ended September 30, 2002 and 2001, and $57 million and $220 million for the nine months ended September 30, 2002 and 2001. CNA Re U.K. contributed net operating income of $9 million and net operating losses of $109 million for the three months ended September 30, 2002 and 2001 and net operating income of $13 million and net operating losses of $176 million for the nine months ended September 30, 2002 and 2001. The assets and liabilities of CNA Re U.K., including the effects of planned concurrent transactions, were approximately $2.7 billion and $2.7 billion as of September 30, 2002 and $2.9 billion and $2.9 billion as of December 31, 2001.

The businesses sold in 2002, excluding CNA Vida, Claims Administration Corporation and the Mail Handlers Plan, and those that continue to be held for disposition as of September 30, 2002, excluding CNA Re U.K., contributed revenues of approximately $6 million and $28 million for the three months ended September 30, 2002 and 2001, and $35 million and $95 million for the nine months ended September 30, 2002 and 2001. Additionally, these businesses contributed net operating losses of $2 million and $2 million for the three months ended September 30, 2002 and 2001 and $14 million and $12 million for the nine months ended September 30, 2002 and 2001. The assets and liabilities of these businesses were approximately $96 million and $83 million as of September 30, 2002 and $126 million and $109 million as of December 31, 2001. All anticipated sales are expected to be completed in 2002.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

The following table presents the carrying values of the Company’s investments at September 30, 2002 and December 31, 2001, and the change in unrealized gains/losses of those securities included in other comprehensive income for the nine months ended September 30, 2002.

General Account Investments
	September 30, 2002		December 31, 2001		Nine Months Ended September 30, 2002 Change in Unrealized Gains/ Losses
(In millions)
Fixed maturity securities:
U.S. Treasury securities and obligations of government agencies	$	3,697	$	5,081	$	250
Asset-backed securities		7,643		7,723		199
Tax-exempt securities		4,785		2,720		233
Corporate securities		8,389		9,587		(13	)
Other debt securities		3,781		3,816		(213	)
Redeemable preferred stock		26		48		(1	)
Options embedded in convertible debt securities		122		189		—
Total fixed maturity securities		28,443		29,164		455
Equity securities:
Common stock		633		996		(123	)
Non-redeemable preferred stock		299		342		(32	)
Total equity securities		932		1,338		(155	)
Short-term investments		5,185		3,740		19
Other investments, primarily limited partnerships		1,620		1,584		—
Total investments	$	36,180	$	35,826		319
Separate account business and other						40
Change in unrealized gains/losses reported in other comprehensive income					$	359

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

Investments in the general account had a total net unrealized gain of $664 million at September 30, 2002 compared with $345 million at December 31, 2001. The unrealized position at September 30, 2002 was composed of a net unrealized gain of $650 million for fixed maturities and a net unrealized gain of $14 million for equity securities. The unrealized position at December 31, 2001 was composed of a net unrealized gain of $194 million for fixed maturities, a net unrealized gain of $170 million for equity securities and a net unrealized loss of $19 million for short-term securities.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Unrealized Gains (Losses) on Fixed Maturity and Equity
    Securities

September 30, 2002	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Net Unrealized Gain/(Loss)
(In millions)
Fixed maturity securities:
U.S. Treasury securities and obligations of government agencies	$	3,369	$	328	$	—	$	328
Asset-backed securities		7,323		345		25		320
Tax-exempt securities		4,580		242		37		205
Corporate securities		8,384		496		491		5
Other debt securities		3,989		162		370		(208	)
Redeemable preferred stock		26		—		—		—
Options embedded in convertible debt securities		122		—		—		—
Total fixed maturity securities		27,793		1,573		923		650
Equity securities:
Common stock		580		188		135		53
Non-redeemable preferred stock		338		4		43		(39	)
Total equity securities		918		192		178		14
Total fixed maturity and equity securities	$	28,711	$	1,765	$	1,101	$	664

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities

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

At September 30, 2002 the Company held fixed maturity and equity securities with a net unrealized gain of $664 million. Included in this amount were gross unrealized losses of $1,101 million which were more than offset by gross unrealized gains of $1,765 million. As previously described, the Company’s Impairment Committee continually reviews the makeup of securities in an unrealized position for potential impairments. At September 30, 2002 the average market value of the securities in an unrealized loss position was 82% of cost or amortized cost as applicable.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

At December 31, 2001 the Company held fixed maturity and equity securities with an aggregate net unrealized gain of $364 million. Included in this amount were gross unrealized losses of $646 million, which were more than offset by gross unrealized gains of $1,010 million. At December 31, 2001 the average market value of the securities in an unrealized loss position was 94% of cost or amortized cost as applicable.

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

The general account portfolio consists primarily of high quality (rated BBB or higher) bonds, 92% of which were rated as investment grade at both September 30, 2002 and December 31, 2001. The following table summarizes the ratings of CNA’s general account bond portfolio at carrying value.

General Account Bond Ratings
	September 30, 2002		%			December 31, 2001		%
(In millions)
U.S. Government and affiliated agency securities	$	4,075		14	%	$	5,715		20	%
Other AAA rated		10,436		37			9,204		32
AA and A rated		6,181		22			6,127		21
BBB rated		5,275		19			5,583		19
Below investment-grade		2,450		8			2,487		8
Total	$	28,417		100	%	$	29,116		100	%

At both September 30, 2002 and December 31, 2001, approximately 97% of the general account portfolio were U.S. Government agencies or were rated by Standard & Poor’s (S&P) or Moody’s Investors Service (Moody’s). The remaining bonds were rated by other rating agencies, outside brokers or Company management.

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

Included in CNA’s general account fixed maturity securities at September 30, 2002 are $7,643 million of asset-backed securities, at fair value, consisting of approximately 73% in collateralized mortgage obligations (CMOs), 13% in corporate asset-backed obligations, 9% in U.S. Government agency issued pass-through certificates and 5% in corporate mortgage-backed pass-through certificates. The majority of CMOs held are actively traded in liquid markets and are priced by broker-dealers.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Other invested assets include investments in limited partnerships and certain derivative securities. The Company’s limited partnership investments are recorded at fair value and typically reflect a reporting lag of up to three months. Fair value of the Company’s limited partnership investments represents CNA’s equity in the partnership’s net assets as determined by the general partner. The carrying value of the Company’s limited partnership investments was $1,334 million and $1,307 million as of September 30, 2002 and December 31, 2001.

Limited partnerships are a relatively small portion of the Company’s overall investment portfolio. The majority of the limited partnerships invest in a substantial number of securities that are readily marketable. The Company is a passive investor in such partnerships and does not have influence over the partnerships’ management, who are committed to operate them according to established guidelines and strategies. These strategies may include the use of leverage and hedging techniques that potentially introduce more volatility and risk to the partnerships.

CNA invests in certain derivative financial instruments primarily to reduce its exposure to market risk (principally interest rate, equity price and foreign currency risk). CNA considers the derivatives in its general account to be held for purposes other than trading. Derivative securities are recorded at fair value at the reporting date.

Most derivatives in separate accounts are held for trading purposes. The Company uses these derivatives to mitigate market risk by purchasing Standard & Poor’s 500 ^R (S&P 500^R) index futures in a notional amount equal to the contract liability relating to Life Operations’ Index 500 guaranteed investment contract product.

Short-term investments at September 30, 2002 and December 31, 2001 consisted primarily of commercial paper and money market funds. The carrying value of the components of the general account short-term investment portfolio are presented in the following table.

Short-term Investments
	September 30, 2002		December 31, 2001
(In millions)
Commercial paper	$	775	$	1,194
U.S. Treasury securities		2,254		175
Money market funds		918		1,641
Other		1,238		730
Total short-term investments	$	5,185	$	3,740

Liquidity and Capital Resources

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

For the nine months ended September 30, 2002 net cash provided by operating activities was $807 million as compared with net cash used by operating activities of $698 million for the same period in 2001. The improvement related primarily to federal tax refunds received in 2002 as compared to taxes paid in 2001 and decreased net payments for insurance claims in the first nine months of 2002 as compared to 2001.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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

For the nine months ended September 30, 2002, net cash used by investing activities was $636 million as compared with net cash provided by investing activities of $345 million for the same period in 2001. This decrease was due primarily to purchases of fixed maturity securities and $264 million of net proceeds related to the sale of 180 Maiden Lane, New York facility in 2001.

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

For the nine months ended September 30, 2002, net cash used by financing activities was $54 million as compared with net cash provided by financing activities of $310 million for the same period in 2001. Cash provided by financing activities in 2001 includes the completion of a common stock rights offering on September 26, 2001, successfully raising $1 billion (40.3 million shares sold at $25 per share). Additionally, CNAF repaid debt of $646 million in 2001.

The Company is monitoring the cash flows related to claims and reinsurance recoverables from the WTC event. It is anticipated that significant claim payments will be made prior to receipt of the corresponding reinsurance recoverables. The Company does not anticipate any liquidity problems resulting from these payments. Approximately 37%, 36% and 22% of the reinsurance recoverables on the estimated losses related to the WTC event are from companies with S&P ratings of AAA, AA or A, respectively. As of November 1, 2002, the Company has paid $438 million in claims and recovered $229 million from reinsurers.

The Company’s debt and capital lease obligations are composed of the following.

Debt
	September 30, 2002		December 31, 2001
(In millions)
Variable rate debt:
Credit facility – CNAF, due April 29, 2002	$	—	$	250
Credit facility – CNAF, due April 30, 2004		250		250
Term loan due April 29, 2003		250		—
Credit facility – CNA Surety, due September 30, 2002		—		75
Credit facility – CNA Surety, due September 30, 2003		35		—
Term loan – CNA Surety, due September 30, 2005		30		—
Senior notes:
7.250%, face amount of $128, due March 1, 2003		128		133
6.250%, face amount of $248, due November 15, 2003		248		250
6.500%, face amount of $493, due April 15, 2005		491		491
6.750%, face amount of $250, due November 15, 2006		249		249
6.450%, face amount of $150, due January 15, 2008		149		149
6.600%, face amount of $200, due December 15, 2008		199		199
8.375%, face amount of $70, due August 15, 2012		69		68
6.950%, face amount of $150, due January 15, 2018		149		148
Debenture, 7.250%, face amount of $243, due November 15, 2023		240		240
Capital leases, 8.000%-13.700%, due through December 31, 2011		36		38
Other debt, 1.000%-8.500%, due through 2019		26		27
Total debt	$	2,549	$	2,567

80

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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

CNA is currently evaluating various capital raising alternatives. Any capital raised in the near-term would be used to refinance debt, which matures in 2003, and to enhance the overall capital position of the Company’s insurance subsidiaries. The effects on net income of any near-term capital raising activities on future operations is currently uncertain.

The Company pays a facility fee to the lenders for having funds available for loans under the three-year credit facility with an April 30, 2004 expiration date. The fee varies based on the long-term debt ratings of the Company. At September 30, 2002, the facility fee on the three-year component was 17.5 basis points.

The Company pays interest on any outstanding debt/borrowings under the one-year term loan and three-year facility based on a rate determined using the long-term debt ratings of the Company. The interest rate is equal to the London Interbank Offering Rate (LIBOR) plus 60.0 basis points for the one-year term loan and LIBOR plus 57.5 basis points for the three-year facility. Further, if the Company has outstanding loans greater than 50% of the amounts available under the three-year facility, the Company will also pay a utilization fee of 12.5 basis points on such loans.

A Moody’s downgrade of the CNAF senior debt rating from Baa2 to Baa3 would increase the facility fee on the three-year component of the facility from 17.5 basis points to 25.0 basis points. The applicable interest rate on the one-year term loan would increase from LIBOR plus 60.0 basis points to LIBOR plus 80.0 basis points and the applicable interest rate on the three-year facility component would increase from LIBOR plus 57.5 basis points to LIBOR plus 75.0 basis points. The utilization fee would remain unchanged on the three-year facility at 12.5 basis points.

On September 30, 2002, CNA Surety Corporation (CNA Surety), a 64% owned and consolidated subsidiary of CNA, entered into a $65 million credit agreement with one bank, which consists of a $35 million 364-day revolving credit facility and a $30 million term loan. As of September 30, 2002, the facility was fully utilized. The credit agreement replaced a $130 million revolving credit facility that terminated September 30, 2002. Under the new agreement, CNA Surety pays a facility fee of 12.5 basis points, interest at LIBOR plus 45.0 basis points, and for utilization greater than 50% of the amount available to borrow an additional fee of 5.0 basis points. On the term loan, CNA Surety pays interest at LIBOR plus 62.5 basis points.

Under the former agreement, CNA Surety paid interest on outstanding borrowings based on, among other rates, LIBOR plus the applicable margin. The applicable margin was determined by the company’s leverage ratio (debt to total capitalization). At the termination date of the facility, the applicable margin was 30.0 basis points, including the 10.0 basis point facility fee.

The terms of the agreement require the assumption by a second bank of $15 million of the credit risk by November 30, 2002 or CNA Surety will be required to repay $15 million to reduce the amount of the credit facility commitment from $35 million to $20 million. CNAF and CNA

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

Surety have entered into an agreement whereby CNAF will lend CNA Surety the amount needed to repay its bank loans, if necessary. CNA Surety is exploring other capital opportunities to repay or refinance $15 million of loans, and currently believes that it is reasonably possible that CNAF may be required to perform on some portion of its guaranty.

The terms of CNAF’s and CNA Surety’s credit facilities require CNAF and CNA Surety to maintain certain financial ratios and combined property and casualty company statutory surplus levels. At September 30, 2002 and December 31, 2001, CNAF and CNA Surety were in compliance with all restrictive debt covenants.

In the normal course of business, CNA has obtained letters of credit in favor of various unaffiliated insurance companies, regulatory authorities and other entities. At September 30, 2002 there were approximately $282 million of outstanding letters of credit.

As of September 30, 2002, the Company had committed approximately $157 million for future capital calls from various third-party limited partnership investments in exchange for an ownership interest in the related partnerships.

The Company has a commitment to purchase a $100 million floating rate note issued by the California Earthquake Authority in the event California earthquake-related insurance losses exceed $4.9 billion prior to December 31, 2002.

As of September 30, 2002, the Company is obligated to make future payments totaling $470 million for non-cancelable operating leases expiring from 2002 through 2014 primarily for office space and data processing, office and transportation equipment. Estimated future minimum payments under these contracts are as follows: $27 million in 2002; $94 million in 2003; $75 million in 2004; $66 million in 2005; and $208 million in 2006 and beyond. Additionally, the Company has entered into a limited number of guaranteed payment contracts, primarily relating to telecommunication services, amounting to approximately $25 million. Estimated future minimum purchases under these contracts are as follows: $4 million in 2002; $11 million in 2003; $8 million in 2004; and $2 million in 2005.

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

82

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

The table below reflects ratings issued by A.M. Best, S&P, Moody’s and Fitch as of November 13, 2002 for the CCC Pool, the Continental Insurance Company (CIC) Pool, Continental Assurance Corporation (CAC) Pool and CNA Group Life Assurance Company (CNAGLA). Also rated were CNAF’s senior debt and The Continental Corporation (Continental) senior debt.

Insurance Financial Strength Ratings

Debt Ratings

Property & Casualty

Life & Group

CNAF

Continental

CCC Pool

CIC Pool

CAC Pool

CNAGLA

Senior Debt

Senior Debt

A.M. Best

A

A

A

A

BBB

BBB-

Fitch

A

A

AA-

A+

BBB

BBB

Moody’s

A3

A3

A2

NR

Baa2

Baa3

(Negative)*

S&P

A-

A-

A+

NR

BBB-

BBB-

NR = Not Rated

* CAC and Valley Forge Life Insurance Company (VFL) are rated separately by Moody’s and both have an A2 rating.

During the second quarter, the assignment of a new insurance financial strength rating to CNAGLA was the only rating action. A.M. Best assigned an “A” rating and Fitch assigned an “A+” rating with a stable outlook to CNAGLA. Currently, group life and health policies are written in CCC, CAC, and VFL and then assumed through reinsurance by CNAGLA. With the addition of these separate entity specific ratings, CNAGLA has commenced direct writing group insurance policies.

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

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

83

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

CCC is the lead insurance company subsidiary within the CCC Pool and is the main source of CNAF dividends. All other insurance companies within the CCC Pool are subsidiaries of CCC and are subject to the dividend rules of their applicable state of domicile. Dividends from CCC are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval of the Illinois Department of Insurance (Illinois Department), may be paid only from earned surplus, which is calculated by removing unrealized gains (under which statutory accounting includes the undistributed cumulative earnings of CCC’s subsidiaries) from unassigned surplus. As of September 30, 2002, CCC is in a negative earned surplus position. In February 2002, the Illinois Department approved an extraordinary dividend in the amount of $117 million to be used to fund CNAF’s 2002 debt service requirements. Until CCC is in a positive earned surplus position, all dividends require prior approval of the Illinois Department.

Prompted, in part, by the negative earned surplus position described above, the Company has embarked on a capital realignment initiative within the CCC Pool which is expected to restore CCC’s earned surplus to a positive position. This initiative involves the payment of dividends to CCC from the cumulative undistributed earnings of its insurance subsidiaries during the fourth quarter of 2002. This capital realignment initiative is pending regulatory approval from the applicable domiciliary state insurance departments of CCC’s insurance subsidiaries. As a result of this initiative, it is anticipated that CCC’s earned surplus will be restored to a positive level by December 31, 2002.

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

Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 changed the accounting for goodwill and indefinite-lived intangible assets from an amortization method to an impairment-only approach. Amortization of goodwill and indefinite-lived intangible assets recorded in past business combinations, ceased upon adoption of SFAS 142, which for CNA was January 1, 2002. Net income for the nine months ended September 30, 2002 does not include amortization expense on goodwill.

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CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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

Pro Forma Effect of SFAS 142 on 2001 Results
	Three Months						Nine Months
Period ended September 30, 2001	Net Income			Earnings Per Share			Net Income			Earnings Per Share
(In millions, except per share amounts)
Results as reported in prior year	$	(155	)	$	(0.84	)	$	(1,622	)	$	(8.81	)
Add goodwill amortization, after-tax		3			0.02			13			0.07
Adjusted reported results to include the impact of the non-amortization provisions of SFAS 142	$	(152	)	$	(0.82	)	$	(1,609	)	$	(8.74	)

During the third quarter of 2002, the Company completed its initial goodwill impairment testing and recorded a $64 million pretax ($57 million after-tax) impairment charge. In accordance with SFAS 142, the impairment charge, which primarily relates to Specialty Lines and Life Operations, was recorded as a cumulative effect of a change in accounting principle as of January 1, 2002. Any impairment losses incurred after the initial application of this standard will be reported in operating results.

The impact of the goodwill impairment charge on net income and the related basic and diluted per share amounts, for the three months ended March 31, 2002 and the six months ended June 30, 2002, is presented in the table below.

Restatement of 2002 Prior Period Results in Accordance with SFAS 142
	Three months ended March 31, 2002						Six months ended June 30, 2002
	Net Income			Earnings Per Share			Net Income			Earnings Per Share
(In millions, except per share amounts)
Results as reported in prior periods	$	78		$	0.35		$	113		$	0.51
Less cumulative effect of adopting SFAS 142, net of tax		(57	)		(0.26	)		(57	)		(0.26	)
Results as restated	$	21		$	0.09		$	56		$	0.25

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). Effective January 1, 2002, CNA adopted this statement for impairments of long-lived assets and for long-lived assets to be disposed of on or after January 1, 2002. Certain operations identified for sale prior to January 1, 2002 continue to be accounted for under the provisions of SFAS 121. The adoption of SFAS 144 did not have a significant impact on the net income or equity of the Company; however, it did impact the income statement presentation of certain operations sold in 2002.

85

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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

FORWARD-LOOKING STATEMENTS

This quarterly report includes a number of statements which relate to anticipated future events (forward-looking statements) rather than actual present conditions or historical events. You can identify forward-looking statements because generally they include words such as “believes”, “expects”, “intends”, “anticipates”, “estimates”, and similar expressions. Forward-looking statements in this quarterly report include expected developments in the Company’s insurance business, including losses for asbestos, environmental pollution and mass tort claims; the Company’s expectations concerning its revenues, earnings, expenses and investment activities; expected cost savings and other results from the Company’s restructuring activities; and the Company’s proposed actions in response to trends in its business.

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

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

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

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

• changes in foreign or domestic political, social and economic conditions;

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

• regulatory limitations and restrictions upon the Company;

• the impact of competitive products, policies and pricing and the competitive environment in which the Company operates, including changes in the Company’s books of business;

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

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

86

CNA FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued

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

• the performance of reinsurance companies under reinsurance contracts with the Company;

• results of financing efforts, including the availability of bank credit facilities;

• changes in the Company’s composition of operating segments;

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

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

• the occurrence of epidemics;

• exposure to liabilities due to claims made by insureds and others relating to asbestos remediation and health-based asbestos impairments, and exposure to liabilities for environmental pollution and mass tort claims;

• the sufficiency of the Company’s loss reserves and the possibility of future increases in reserves;

• the level of success in integrating acquired businesses and operations, and in consolidating existing ones;

• the possibility of changes in the Company’s ratings by ratings agencies and changes in rating agency policies and practices; and

• the actual closing of contemplated transactions and agreements.

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

87

CNA FINANCIAL CORPORATION

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Market risk is a broad term related to changes in the fair value of a financial instrument. Discussions herein regarding market risk focus on only one element of market risk - price risk. Price risk relates to changes in the level of prices due to changes in interest rates, equity prices, foreign exchange rates or other factors that relate to market volatility of the rate, index or price underlying the financial instrument. The Company’s primary market risk exposures are due to changes in interest rates, although the Company has certain exposures to changes in equity prices and foreign currency exchange rates. The fair value of the financial instruments is adversely affected when interest rates rise, equity markets decline and the dollar strengthens against foreign currency.

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

For purposes of this disclosure, market risk sensitive instruments are divided into two categories: (1) instruments entered into for trading purposes and (2) instruments entered into for purposes other than trading. The Company’s general account market risk sensitive instruments presented are classified as held for purposes other than trading.

Sensitivity Analysis

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

The sensitivity analysis estimates the decline in the market value of the Company’s interest sensitive assets and liabilities that were held on September 30, 2002 and December 31, 2001 due to instantaneous parallel increases in the period end yield curve of 100 and 150 basis points.

The sensitivity analysis also assumes an instantaneous 10% and 20% decline in the foreign currency exchange rates versus the United States dollar from their levels at September 30, 2002 and December 31, 2001, with all other variables held constant.

88

CNA FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued

Equity price risk was measured assuming an instantaneous 10% and 25% decline in the S&P 500 Index (Index) from its level at September 30, 2002 and December 31, 2001 with all other variables held constant. The Company’s equity holdings were assumed to be highly and positively correlated with the Index. At September 30, 2002, a 10% and 25% decrease in the Index would result in a $258 million and $645 million decrease compared to $366 million and $914 million decrease at December 31, 2001, in the market rate of the Company’s equity investments.

Of these amounts, under the 10% and 25% scenarios, $104 million and $260 million at September 30, 2002 and $163 million and $407 million at December 31, 2001 pertained to decreases in the market value of the separate account investments. These decreases would substantially be offset by decreases in related separate account liabilities to customers. Similarly, increases in the market value of the separate account equity investments would also be offset by increases in the same related separate account liabilities by the same approximate amounts.

89

CNA FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued

The following tables present the estimated effects on the market value of the Company’s financial instruments at September 30, 2002 and December 31, 2001, due to an increase in interest rates of 100 basis points, a 10% decline in foreign currency exchange rates and a 10% decline in the Index.

Market Risk Scenario 1

			Increase (Decrease)
September 30, 2002	Market Value		Interest Rate Risk			Currency Risk			Equity Risk
(In millions)
Held for Other Than Trading Purposes:
General account:
Fixed maturity securities	$	28,443	$	(1,776	)	$	(98	)	$	(7	)
Equity securities		932		—			(25	)		(92	)
Short-term investments		5,185		(8	)		(8	)		—
Limited partnerships		1,334		52			—			(55	)
Other invested assets		275		—			—			—
Interest rate caps		1		1			—			—
Interest rate swaps		9		1			—			—
Other derivative securities		1		45			(13	)		—
Total general account		36,180		(1,685	)		(144	)		(154	)
Separate accounts:
Fixed maturity securities		1,947		(105	)		—			—
Equity securities		106		—			—			(11	)
Short-term investments		104		—			—			—
Other invested assets		384		—			—			(38	)
Total separate accounts		2,541		(105	)		—			(49	)
Total securities held for other than trading purposes		38,721		(1,790	)		(144	)		(203	)
Held for Trading Purposes:
Separate accounts:
Fixed maturity securities		172		(4	)		—			—
Equity securities		9		—			—			—
Short-term investments		109		—			—			—
Limited partnerships		318		—			—			(2	)
Equity indexed futures		—		1			—			(53	)
Other derivative securities		1		2			—			—
Total securities held for trading purposes		609		(1	)		—			(55	)
Total securities	$	39,330	$	(1,791	)	$	(144	)	$	(258	)
Debt (carrying value)	$	2,549	$	(89	)	$	—		$	—

90

CNA FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued

Market Risk Scenario 1

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

91

CNA FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued

The following tables present the estimated effects on the market value of the Company’s financial instruments at September 30, 2002 and December 31, 2001, due to an increase in interest rates of 150 basis points, a 20% decline in foreign currency exchange rates and a 25% decline in the Index.

Market Risk Scenario 2

			Increase (Decrease)
September 30, 2002	Market Value		Interest Rate Risk			Currency Risk			Equity Risk
(In millions)
Held for Other Than Trading Purposes:
General account:
Fixed maturity securities	$	28,443	$	(2,681	)	$	(196	)	$	(18	)
Equity securities		932		—			(50	)		(230	)
Short-term investments		5,185		(12	)		(16	)		—
Limited partnerships		1,334		79			—			(137	)
Other invested assets		275		—			—			—
Interest rate caps		1		1			—			—
Interest rate swaps		9		1			—			—
Other derivative securities		1		67			(26	)		—
Total general account		36,180		(2,545	)		(288	)		(385	)
Separate accounts:
Fixed maturity securities		1,947		(156	)		—			—
Equity securities		106		—			—			(26	)
Short-term investments		104		—			—			—
Other invested assets		384		—			—			(96	)
Total separate accounts		2,541		(156	)		—			(122	)
Total securities held for other than trading purposes		38,721		(2,701	)		(288	)		(507	)
Held for Trading Purposes:
Separate accounts:
Fixed maturity securities		172		(5	)		—			(1	)
Equity securities		9		—			—			—
Short-term investments		109		—			—			—
Limited partnerships		318		—			—			(6	)
Equity indexed futures		—		2			—			(131	)
Other derivative securities		1		2			—			—
Total securities held for trading purposes		609		(1	)		—			(138	)
Total securities	$	39,330	$	(2,702	)	$	(288	)	$	(645	)
Debt (carrying value)	$	2,549	$	(128	)	$	—		$	—

92

CNA FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued

Market Risk Scenario 2

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

93

CNA FINANCIAL CORPORATION

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company’s management on a timely basis to allow decisions regarding required disclosure.

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

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

94

CNA FINANCIAL CORPORATION

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Information on CNA’s legal proceedings is set forth in Note F and Note G of the Condensed Consolidated Financial Statements in Part I.

Item 5. Other Information

On October 31,2002 CNA Financial Corporation (“CNA”) consummated the sale of its wholly owned United Kingdom subsidiaries of CNA Re (CNA Re U.K.) to Tawa U.K. Limited, a subsidiary of Artemis Group, a French conglomerate pursuant to the share purchase agreement dated July 15, 2002. The Company has prepared proforma financial statements in accordance with Item 2 of Form 8-K. See Item 6 for a list of exhibits related to this transaction.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

	Exhibit
Description of Exhibit	Number
Share Purchase Agreement dated as of October 31, 2002 by and between CNA and Tawa U.K. Limited	2.1
Proforma Financial Statements and Footnotes	99.01
Proforma Condensed Consolidated Balance Sheet, September 30, 2002 (Unaudited)
Proforma Statement of Consolidated Operations for the Year Ended December 31, 2001 (Unaudited)
Proforma Statement of Consolidated Operations for the Nine Months Ended September 30, 2002 (Unaudited)

(b) Reports on Form 8-K:

On August 13, 2002, the chief executive officer and chief financial officer of the Company each submitted to the Commission the written certification required by 18 U.S.C. § 1350 (as adopted by Section 906 of the Sarbanes-Oxley Act of 2002) with respect to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

95

CNA FINANCIAL CORPORATION
PART II OTHER INFORMATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CNA FINANCIAL CORPORATION
Date: November 13, 2002	By:	/s/ ROBERT V. DEUTSCH
		Robert V. Deutsch
		Executive Vice President and
		Chief Financial Officer

96

CERTIFICATION

I, Stephen W. Lilienthal, Chief Executive Officer of CNA Financial Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CNA Financial Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

Date: November 13, 2002

  /s/ STEPHEN W. LILIENTHAL

Stephen W. Lilienthal

Chief Executive Officer

CERTIFICATION

I, Robert V. Deutsch, Chief Financial Officer of CNA Financial Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CNA Financial Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

Date: November 13, 2002

  /s/ ROBERT V. DEUTSCH

Robert V. Deutsch

Chief Financial Officer

EX-2.1 3 c72872exv2w1.txt SHARE PURCHASE AGREEMENT EXHIBIT 2.1 CONFORMED COPY (AS AMENDED ON 30.08.02) DATED 15TH JULY 2002 CONTINENTAL CASUALTY COMPANY AND TAWA UK LIMITED SHARE PURCHASE AGREEMENT for the sale and purchase of the entire issued share capital of CNA RE MANAGEMENT COMPANY LIMITED LEBOEUF, LAMB, GREENE & MACRAE UNITED STATES LAWYERS & ENGLISH SOLICITORS 1 TABLE OF CONTENTS 1. DEFINITIONS AND INTERPRETATION.................................................................5 2. SALE AND PURCHASE.............................................................................20 3. COMPLETION ADJUSTMENTS........................................................................21 4. CONDITIONS TO COMPLETION......................................................................30 5. COMPLETION....................................................................................37 6. SELLER'S WARRANTIES...........................................................................39 7. REMEDIES FOR BREACH...........................................................................42 8. LIMITATIONS ON SELLER'S LIABILITY.............................................................43 9. SELLER'S UNDERTAKINGS.........................................................................49 10. BUYER'S UNDERTAKINGS..........................................................................55 11. BUYER'S WARRANTIES............................................................................57 12. PENSIONS......................................................................................59 13. NOVATION......................................................................................60 14. RESTRUCTURING.................................................................................61 15. GOVERNING LAW AND DISPUTES....................................................................63 16. MISCELLANEOUS PROVISIONS......................................................................66 SCHEDULE 1.......................................................................................74 INFORMATION ABOUT THE TARGET COMPANY AND THE TARGET SUBSIDIARY...................................74 SCHEDULE 2.......................................................................................74 ITEMS FOR DELIVERY BY THE SELLER AT COMPLETION...................................................74 SCHEDULE 3.......................................................................................74 WARRANTIES.......................................................................................74 2 SCHEDULE 4......................................................................................74 ACTION PENDING COMPLETION.......................................................................74 SCHEDULE 5......................................................................................74 THE REAL PROPERTIES.............................................................................74 SCHEDULE 6......................................................................................74 INTELLECTUAL PROPERTY...........................................................................74 SCHEDULE 7......................................................................................75 PART I - COMPLETION ADJUSTMENT..................................................................75 PART II - WORKED EXAMPLE........................................................................87 SCHEDULE 8......................................................................................87 NOVATION AGREEMENT..............................................................................87 SCHEDULE 9......................................................................................87 MAC THRESHOLDS - (MAC 4.6 ILLUSTRATION 19_6.XLS)................................................87 SCHEDULE 10.....................................................................................87 PENSION SUBSTITUTION DEED.......................................................................87 SCHEDULE 11.....................................................................................88 REINSURANCE RECOVERABLES........................................................................88 AGREED FORM DOCUMENTS 1. Tax Deed 2. Management Fee Security Deed 3. Distribution Security Deed 4. Stop Loss Contract 5. Pro Forma Balance Sheet 3 6. Management Agreement 7. Settlement with respect to Allianz Stop Loss from 1999, 2000 and 2001 accident years 8. Settlement of 100 per cent quota share for 1987 and prior underwriting years 9. Settlement of aggregate stop loss providing $125,000,000 of cover in respect of underwriting years 1997, 1998 and 1999 10. Commutation of CRG reinsurance facility 11. Commutation of BU2 reinsurance facility 12. Retrocession contract in respect of CNA Re (UK) net exposure in respect of the IGI portfolio 13. Agreement with respect to Underwriters Re Stop Loss for 2000 and 2001 accident years 14. 2002 outwards reinsurance treaty where cover does not survive change of control (Swiss Re) 15. 2002 outwards reinsurance treaty where cover does not survive change of control (other) 16. Retrocession contract in respect of CNA Re (UK) net exposure in respect of liabilities settled under the PPG settlement agreement 17. Trade Mark Licence Agreement 18. Broker Ledger Settlement Deed 19. IGI Transfer of Balance Agreement 4 THIS AGREEMENT is made on 15th July 2002 BETWEEN: (1) CONTINENTAL CASUALTY COMPANY, a corporation incorporated under the laws of the State of Illinois, USA, whose principal place of business is at CNA Plaza, 333 South Wabash Avenue, Chicago, Illinois 60685, USA (the "SELLER"); and (2) TAWA UK LIMITED, a company incorporated under the laws of England and Wales under number 4200676, whose registered office is at No.1 Minster Court, Mincing Lane, London EC3R 7AA (the "BUYER"). RECITAL: The Seller wishes to sell and the Buyer wishes to purchase the entire issued share capital of CNA Re Management Company Limited (the "TARGET COMPANY") on the terms and subject to the conditions of this Agreement. IT IS AGREED as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 SPECIFIC DEFINITIONS In this Agreement: "ACCOUNTS" means each Target Group Company's individual accounts (as that term is used in section 226 of the Companies Act) and the Target Group's group accounts (as that term is used in section 227 of the Companies Act) for the financial year ended on the Last Accounting Date, the auditors' reports on those accounts and the directors' report of each Target Group Company for that year; "ADDITIONAL CONSIDERATION" means the additional consideration referred to in Clause 3.5.1; "ANNUAL REGULATORY RETURNS" means the returns of the Target Subsidiary for the years ended 31 December 2001, 31 December 2000 and 31 December 1999 together with all exhibits and schedules thereto, as furnished to HM Treasury or the FSA, as the case may be, pursuant to the ICA or FSMA, as appropriate; "ALLIANZ CONTRACT" means the agreement with respect to the Allianz Stop Loss Contract from the 1999, 2000 and 2001 accident years in the Agreed Form; "APPROVED" is defined in paragraph 19.1 of Schedule 3; "APPROVED SETTLEMENTS" is defined in Clause 4.6.2(d); 5 "ASSUMED REINSURANCE" means reinsurance assumed by the Target Subsidiary from any ceding insurer or reinsurer; "BUYER'S ADDITIONAL CAPITAL" is defined in Clause 3.1.1(a); "BUYER'S SOLICITORS" means LeBoeuf, Lamb, Greene & MacRae of No. 1 Minster Court, Mincing Lane, London EC3R 7AA; "CEDED REINSURANCE" means reinsurance ceded by the Target Subsidiary to any reinsurer; "CHF" shall mean Swiss Franc; "CLOSING F/X ADJUSTMENT" shall mean the sum of (i) the lesser of (a) one-half of the Net F/X Losses or (b) one-half of the foreign currency loss/gain shown in Ending Foreign Currency Statement and (ii) the Excess Net F/X Loss if the Seller has given an undertaking to contribute the Excess Net F/X Loss in order to avoid a Material Adverse Change. "COMPLETION" means completion of the sale and purchase of the Sale Shares in accordance with this Agreement; "COMPLETION ACCOUNTS" is defined in Clause 1(b) of Schedule 7; "COMPLETION ADJUSTMENT" is defined in Clause 4.2.1 of Schedule 7; "COMPLETION BALANCE" is defined in Clause 3.1.1(b); "COMPLETION DATE" means the date on which Completion takes place in accordance with Clause 5.1; "COMPUTER PROGRAMS" means current versions of existing (i) computer programs, including all object code, all executables, and all available source code, (ii) descriptions, flow-charts and other work product used to design, plan, organise and develop any of the foregoing, and (iii) documentation, including user manuals and training materials, relating to any of the foregoing; "CONFIDENTIAL BUSINESS INFORMATION" means all information relating to the business written by the Target Subsidiary and all claims arising thereunder; "CONVERTED REVALUED AMOUNTS" shall mean the aggregate of the negative amounts set out against the line "Excess assets over liabilities at 31/12/01" in Appendix 1 to the First Amendment Letter converted into the amounts of their respective Foreign Currencies using the exchange rate as at 31 December 2001 set out in Appendix 1 to the First Amendment Letter, and then reconverted to a USD amount using the Prescribed Exchange Rate; "CURRENT USE" means in relation to each Real Property, the use specified as the current use of that Real Property in Schedule 5; 6 "DATA" means any data or information solely used by or for the sole benefit of a Target Group Company at any time and stored electronically at any time; "DATA ROOM" means the forty seven files of documents and information relating to the Target Group identified as such and initialled by the parties for identification on the front of each such file and the index of such files also initialled by the parties for identification "DEFAULTING PARTY" is defined in Clause 7.1; "DISCLOSED SCHEME" is defined in paragraph 19.1 of Schedule 3; "DISCLOSURE LETTER" means the letter from the Seller to the Buyer in relation to the Warranties having the same date as this Agreement; "DISTRIBUTIONS" means: (a) all profits of the Target Subsidiary available for distribution and resolved to be distributed in accordance with applicable laws and any required approvals of the relevant authorities; and (b) all repayments of capital (including reductions which result in repayments of capital) of the Target Subsidiary and all repurchases of shares by the Target Subsidiary made in accordance with applicable laws and any required approvals of the relevant authorities and, if necessary, sanctioned by a court; "DISTRIBUTION SECURITY" means the security deed in the Agreed Form pursuant to which the Buyer grants the Seller a first charge over the Sale Shares; "DKK" shall mean Danish Krone; "EMPLOYEE" is defined in paragraph 19.1 of Schedule 3; "ENDING FOREIGN CURRENCY STATEMENT" shall mean the statement referred to in paragraph 4.1 of Schedule 4; "ESCROW AMOUNT" is defined in Clause 3.8.1(a); "ESTIMATED COMPLETION ADJUSTMENT" means the amount which the Completion Adjustment would be if the criteria in paragraph 4 of Schedule 7 were applied on the last day of the month preceding the delivery of the calculation pursuant to Clause 4.4.1; "EUR" shall mean Euros; "EXCESS NET F/X LOSS" shall mean the amount of the Net F/X Losses in excess of $40 million ($40,000,000); 7 "FIRST AMENDMENT LETTER" shall mean the letter between the Buyer and the Seller dated 30 August 2002 amending this Agreement; "FOREIGN CURRENCY" shall mean a currency other than USD displayed in Appendix 1 of the First Amendment Letter; "GBP" shall mean pounds Sterling; "HARDWARE" means any computer equipment owned by and solely used by or for the sole benefit of a Target Group Company at any time including, without limitation, PCs, servers, mainframes, screens, terminals, keyboards, disks, printers, cabling, associated and peripheral electronic equipment but excluding all Computer Programs; "IGI RETROCESSION" means the Aggregate Retrocession Agreement of the IGI Loss Portfolio in the Agreed Form; "INITIAL CONSIDERATION" means the initial consideration referred to in Clause 2.2.2; "INSURANCE CONTRACT" means any contract by which a person has provided insurance to another person; "INVESTED ASSETS" means transferable shares and other transferable variable yield securities and transferable units in unit trusts, transferable debt securities and other transferable fixed income securities; "INVESTMENT INCOME ADJUSTMENT" is defined in Clause 3.1.1(d); "INVESTMENT INCOME DEDUCTION" is defined in Clause 3.1.1(c); "INVESTMENT POLICIES" means the overall investment policies used in the management of a person's investment portfolio, including policies with respect to duration, liquidity, currency, asset allocation and asset quality; "KEY EMPLOYEES" means Cathy Pierce, Debra Lynn McClenahan, Ralph Richard Mueller and Marcia Munn provided that such persons are employed by the Seller or one of its Affiliates at the time that their services are required under this Agreement, and such other persons as may be agreed between the Buyer and the Seller from time to time; "LAST ACCOUNTING DATE" means 31 December 2001; "LEASE" is defined in paragraph 11.9 of Schedule 3; "LICENSED COMPUTER PROGRAMS" shall have the meaning given in paragraph 7.4.2(b) of Schedule 3; "LOSS CALCULATION" means the adjustment for any loss which would be recognised if the criteria in paragraph 5.2(e)(ii) of Schedule 7 were applied on the last day of the month preceding the delivery of the calculation pursuant to Clause 4.5; 8 "LOSS TERMINATION NOTICE" is defined in Clause 4.5.2; "MAC MANAGEMENT ACCOUNTS" is defined in Clause 4.6.2; "MAJOR CLAIM" means any Relevant Claim or a claim for a breach of Clause 6.4(a) which exceeds $6,000,000 (six million dollars); "MANAGEMENT ACCOUNTS" means the Target Group's unaudited profit and loss account for the period starting on the day after the Last Accounting Date and ending on, and the Target Group's unaudited balance sheet as at, 31 March 2002; "MANAGEMENT AGREEMENT" means the agreement in the Agreed Form to be entered into between the Manager, the Target Company and the Target Subsidiary for the management of the run off of the Target Subsidiary; "MANAGEMENT AGREEMENT VARIATION" is defined in Clause 3.11.1; "MANAGEMENT FEE" means the gross amount of all payments (whether in respect of fees, charges, interest, costs, disbursements or howsoever otherwise characterised) made by the Target Subsidiary to the Manager, the Target Company or any Affiliate of the Buyer whether pursuant to the Management Agreement or any other agreement or arrangement whatsoever including fees due to the Manager pursuant to paragraph 1.1 of Schedule 2 to the Management Agreement but excluding: (i) third party costs and expenses incurred by the Target Subsidiary in accordance with paragraph 3.1 of Schedule 2 to the Management Agreement provided that such costs and expenses have been necessarily and properly incurred and in the case of Affiliates are at rates no less favourable to the Target Subsidiary than arms-length rates; (ii) costs necessarily and properly incurred by the Target Company in providing services pursuant to the Management Agreement and reimbursable by the Target Subsidiary to the Target Company pursuant to paragraph 1.1 of Schedule 3 to the Management Agreement, provided that such costs are at commercially reasonable rates; (iii) any fees and expenses paid by the Target Subsidiary to an Affiliate in respect of services (including legal services) falling outside the scope of the Management Agreement and which are necessarily and properly incurred by the Target Subsidiary at rates no less favourable to the Target Subsidiary than: (a) arms-length rates; or (b) inter company rates charged for similar services to other Affiliates of the Buyer and provided such rates are commercially reasonable; (iv) any amounts due under the VATA; and (v) Distributions made by the Target Subsidiary, including distributions as are otherwise made to the shareholders of the Target Subsidiary, whether of 9 profits or capital, made by any unlawful means (including pursuant to a members' voluntary winding-up). For the purposes of this definition, "AFFILIATE" includes any associated undertaking of the Buyer or any holding company of the Buyer; "MANAGEMENT FEE SECURITY" means the security deed in the Agreed Form pursuant to which the Manager assigns by way of security to the Seller, and grants the Seller a first charge over, certain of its rights to payment of the Management Fee; "MANAGER" means Tawa Management Limited; "MARK TO MARKET" is defined in paragraph 1(c) of Schedule 7; "MATERIAL ADVERSE CHANGE" means either: (a) any material adverse change in the business, operations, assets, liabilities or financial condition of the Target Group Companies taken as a whole but excluding: (i) any adverse change or effect that is caused by or that arises out of conditions affecting the economy or financial, banking, currency or capital markets in general; and (ii) any adverse change or effect that is caused by or that arises out of an event or conditions affecting the insurance and reinsurance industry generally unless that adverse change or effect falls outside paragraph (i) and materially impairs the ability of the Seller or any of the Seller's Affiliates or any other reinsurer of the Target Subsidiary which individually represents 5% or more of the reinsurers' share of the Target Subsidiary's technical provisions as at the Last Accounting Date to fulfill its obligations in respect of reinsurance contracts ceded by the Target Subsidiary and remaining in force at Completion; and (iii) any adverse change or effect resulting from the proposal or announcement of the transaction as contemplated by this Agreement; or (b) a material adverse change having been deemed to have occurred in accordance with Clause 4.6; or (c) where (i) the Net F/X Losses exceed $40 million and (ii) the Seller has not, within two business days of the determination of the Net F/X Losses, given an irrevocable undertaking to contribute the Net F/X Losses in excess of $40 million ($40,000,000) as provided by Schedule 4; "NET F/X LOSSES" shall mean the aggregate of (i) the Converted Revalued Amounts, (ii) the Net Settled Gains and Losses and (iii) the Option Fee; 10 "NET SETTLED GAINS AND LOSSES" shall mean USD 1,501,175 or such other figure as the parties shall agree in respect of the lines "Other forex gains" and "Forex sales in 2002" in Appendix 1 of the First Amendment Letter; "NET SETTLEMENTS" is defined in Clause 4.6.3; "NEW BUYER" is defined in Clause 13.1; "NEWCO" is defined in Clause 14.1.1; "NOK" shall mean Norway Krone; "NON DEFAULTING PARTY" is defined in Clause 7.1; "NON-UK PENSION ARRANGEMENT" is defined in paragraph 19.1 of Schedule 3; "OPTION FEE" shall mean the fee, if any, paid by the Target Subsidiary on option contracts comprised in the Hedge Transactions; "OUTSTANDING COMPLETION BALANCE" is defined in Clause 3.1.1(e); "OWNER" means in relation to each Real Property, the company that is named as the owner in Schedule 5; "PAYMENT AMOUNT" is defined in Clause 3.1.1(f); "PAST SUBSIDIARIES" means CNA Underwriting Agencies Limited, CNA Corporate Capital Limited and London Market Reinsurance Services Limited; "PERMIT" means a permit, licence, consent, approval, certificate, qualification, specification, registration or other authorisation, or a filing of a notification, report or assessment, necessary in any jurisdiction for the effective operation of a Target Group Company's business, its ownership, possession, occupation or use of an asset or its execution or performance of this Agreement; "POLICIES" is defined in paragraph 10.1 of Schedule 3; "POST-COMPLETION 1987 AND PRIOR AMOUNTS" is defined in Clause 3.13.1(b); "POST-COMPLETION OTHER AMOUNTS" is defined in Clause 3.1.1(h); "PRE-COMPLETION 1987 AND PRIOR AMOUNTS" is defined in Clause 3.13.1(a); "PRE-COMPLETION OTHER AMOUNTS" is defined in Clause 3.1.1(g); "PRE-CONTRACT AGREEMENTS" means the letter of intent dated 15 March 2002 between the Seller and the Buyer, the confidentiality agreement dated 12 October 2001 between the Seller and the Buyer and the exclusivity agreement (and each extension thereto), dated 29 January 2002 between the Seller and the Buyer; 11 "PRESCRIBED EXCHANGE RATE" shall mean: (i) for GBP and EUR, the weighted average strike value of the Hedge Transactions for that Foreign Currency; or (ii) for other Foreign Currencies, the foreign exchange rate against USD provided by Bloomberg on the historical pricing screen on the date the last Hedge Transaction is effected; "PRO FORMA BALANCE SHEET" means the pro forma balance sheet for the Target Group Companies in the Agreed Form; "REAL PROPERTY" means the property or properties details of which are set out in Schedule 5 and includes an individual property and a part of an individual property but for the purposes of paragraphs 11.2 to 11.9 of Schedule 3, means only the properties at the London Underwriting Centre and the Corn Exchange London; "REINSURANCE CONTRACT" means any contract, treaty or associated trust agreement, by which a person has provided reinsurance to any ceding insurer; "REINSURANCE RECOVERABLES" is defined in Clause 3.1.1(i); "RELEVANT CLAIM" means a claim by the Buyer in respect of a breach of Clause 6.1; "RELEVANT CONTRACT" is defined in paragraph 8.1.1 of Schedule 3; "RELEVANT F/X PERIOD" shall mean the period from 1 January 2002 to 6 January 2003 inclusive, or, if any of the Hedge Transactions are terminated prior to 31 December 2002 without the Seller's written consent, the period from 1 January 2002 to the date three days after the date of the first such termination; "RELEVANT MONTH END" is defined in Clause 4.6.1; "RELEVANT PERCENTAGE" is defined in Clause 3.1.1(j); "RELEVANT PERIOD" means (i) the period from the Completion Date to the last day of the Quarter in which the Completion Date occurs, inclusive of each date; and (ii) each subsequent Quarter; "RESTRUCTURING" is defined in Clause 14.1; "RETROCESSION CONTRACT" means any contract, treaty or associated trust agreement, by which any person has reinsured a Reinsurance Contract; "SALE SHARES" means 332,067,741 fully-paid ordinary shares of Pound Sterling 1.00 each of the Target Company comprising the whole of the issued share capital of the Target Company; 12 "SECTION 107 TAX LOSSES" means the reduction in tax losses attributable to the making of an election by the Target Subsidiary under Section 107 of the Finance Act 2000; "SEK" shall mean Swedish Krona; "SELLER'S ADDITIONAL CAPITAL" is defined in Clause 3.1.1(k); "SELLER'S SCHEME" is defined in Clause 19.1 of Schedule 3; "SELLER'S SOLICITORS" means Lovells of 65 Holborn Viaduct, London EC1A 2DY; "SHRINK WRAP COMPUTER PROGRAMS" shall have the meaning given in paragraph 7.4.2(c) of Schedule 3; "STAKEHOLDER" is defined in Clause 3.7.1; "STOP LOSS CONTRACT" means the stop loss contract between the Seller and the Target Subsidiary in the Agreed Form; "SUBSCRIPTION AMOUNT" is defined in Clause 3.1.1(l); "TARGET COMPANY" means CNA Re Management Company Limited, a company incorporated in England and Wales (registered number 1681059), whose registered office is at Corn Exchange, Mark Lane, London EC3R 7NE; "TARGET GROUP" means the Target Company and the Target Subsidiary; "TARGET GROUP COMPANY" means the Target Company or the Target Subsidiary; "TARGET SUBSIDIARY" means CNA Reinsurance Company Limited, a company incorporated in England and Wales (registered number 1086556), whose registered office is at Corn Exchange, Mark Lane, London EC3R 7NE; "TAX AUTHORITY" is defined in the Tax Deed; "TAX DEED" means the tax deed between the Seller and the Buyer in the Agreed Form; "TERMINATION NOTICE" is defined in Clause 4.4.2; "TERMINATION OBJECTION NOTICE" is defined in Clause 4.4.3; "THRESHOLD AMOUNT" is defined in Clause 3.1.1(m); "TOTAL CASH FLOW" is defined in Clause 4.6.2(a); "TOTAL SETTLEMENTS" is defined in Clause 4.6.2(b); "TRIGGER DISTRIBUTIONS" means Distributions (and distributions as are otherwise made to the shareholders of the Target Subsidiary, whether of profits or capital, made by any 13 lawful means, including pursuant to a members' voluntary winding-up) which have actually been received by the Target Company and are either: (i) paid by the Target Company to the Buyer; or (ii) legally capable of being paid by the Target Company to the Buyer and which the Target Company has resolved to distribute in accordance with Clause 10.1; "UNDERWRITERS RE CONTRACT" means the Agreement with respect to the Underwriters Re Stop Loss Contract from the 2000 and 2001 accident years in the Agreed Form; "USD" shall mean United States Dollars; "W" is defined in Clause 3.1.1(n); "WARRANTY" means a statement contained in Schedule 3; and "WTC SETTLEMENTS" is defined in Clause 4.6.2(c). 1.2 GENERAL DEFINITIONS In this Agreement: "AFFILIATE" means, in relation to a company: (a) a company which is, on or after the date of this Agreement, its subsidiary or holding company, or a subsidiary of such holding company; and (b) an undertaking which is, on or after the date of this Agreement, its subsidiary undertaking or parent undertaking, or a subsidiary undertaking of such parent undertaking; an "AGREED FORM" document means the form of the document most recently agreed by the parties and initialled and dated by them for identification on or prior to the date of this Agreement; "THIS AGREEMENT" means this agreement together with all its recitals and its Schedules; "BUSINESS DAY" means a day (other than a Saturday and a Sunday) on which banks generally are open for business in London and Chicago, and (if the phrase is used in the context of a reference to a day on which the payment or purchase of any sum in any currency is due) in the principal financial centre of the country of such currency; "COMPANIES ACT" means the Companies Act 1985; 14 "COMPANIES ACTS" means the Companies Act 1985, the Companies Consolidation (Consequential Provisions) Act 1985, the Companies Act 1989 and Part V of the Criminal Justice Act 1993; "CONTROLLING INTEREST" means, with respect to a person that is a corporation having voting securities, the beneficial ownership, directly or indirectly, of more than 50 per cent of the voting securities of such person or, with respect to a person that is not such a corporation, the power to direct the management or policies of such person, whether by operation of law, by contract or otherwise; "CREDIT INSTITUTION" has the meaning attributed to it in section 262(1) of the Companies Act; "CRTP ACT" is defined in Clause 16.12.3; "DAY" means a period of 24 hours beginning and ending on 00.00 midnight; "DISPUTE" means a dispute between the parties under, arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination; "$" and "DOLLARS" denote the lawful currency of the United States of America; "ENCUMBRANCE" means a mortgage, charge, pledge, lien or other encumbrance securing any obligation of any person or any other type of preferential arrangement (including title transfer and retention arrangements) having a similar effect; "ERA" means Employment Rights Act 1996; "EXPERT" means an independent firm of chartered accountants or consulting actuaries agreed upon by the parties or (failing agreement) selected (at the instance of either party) by, in the case of a firm of chartered accountants, the President for the time being of the Institute of Chartered Accountants for England and Wales, and in the case of a firm of consulting actuaries, the President for the time being of the Institute of Actuaries; "FSA" means the Financial Services Authority; "FSMA" means the Financial Services and Markets Act 2000; "HOLDING COMPANY" is as defined in section 736 of the Companies Act; "ICA" means the Insurance Companies Act 1982; "INDEBTEDNESS" means and includes any obligation (whether incurred as principal or surety) for the payment or repayment of money, whether present or future, actual or contingent; 15 "INSURANCE REGULATIONS" means any regulations, orders or rules made pursuant to the Companies Act, ICA or FSMA in each case insofar as they apply to insurance companies or the carrying on of insurance business; "IPT" means insurance premium tax; "LIBOR" means, in respect of each Relevant Period, the rate per annum equal to the arithmetic mean (rounded upwards, if not already such a multiple, to the nearest whole multiple of one-sixteenth per cent.) of the average of the offered quotations of the Reference Banks, which appear on the relevant page (as defined in Clause 1.3.3) for a 12 month period at or about 11.00 am on the second business day before the first day of such Relevant Period; "MONTH" means a calendar month; "PART IV PERMISSION" means permission to carry on one or more regulated activities pursuant to Part IV of FSMA; "PAYMENT ACCOUNT DETAILS" means, in relation to any payment to be made under or pursuant to this Agreement, the same account number, sort code, account location and other details specified by the payee and necessary to effect payment (whether by cheque, bankers draft, telegraphic or other electronic means of transfer) to the payee; "PARENT UNDERTAKING" shall be construed in accordance with section 258 of the Companies Act; "PARTY" means, subject to any express contrary indication, a party to this Agreement; "PERSON" means any person, firm, company, corporation, society, trust, government, state or agency of a state or any association or partnership (whether or not having separate legal personality) or two or more of these; "PROCEEDINGS" means any suit, action or proceedings arising out of or in connection with this Agreement; "QUARTER" means each period of three months commencing on 1 January, 1 April, 1 July and 1 October in each year; "REFERENCE BANKS" means the relevant principal offices of the National Westminster Bank Plc, Barclays Bank PLC and HSBC Bank plc (or such other bank or banks as the parties may from time to time select with the approval of the other party, such approval not to be unreasonably withheld, conditioned or delayed), provided that, if any Reference Bank does not give a quotation required at the time relevant for the purposes of calculating any exchange rate or interest rate hereunder, then such exchange rate or, as the case may be, interest rate shall be determined by reference to the quotations which are so given by the remaining Reference Banks; "REFERENCE EXCHANGE RATE" means the average of the quotations given, at approximately 11:00 hours time 2 business days before the relevant date, by the 16 Reference Banks for the rate (including all commission, charges, fees and expenses payable) at which each of them would sell the first currency (as defined in Clause 1.3.1(j)) in exchange for the second currency (as defined in Clause 1.3.1(j)) on the relevant date, in the relevant amount; "SERVICE DOCUMENT" means a writ, application, claim, summons, petition, order, award, judgment or other document relating to any Proceedings; "POUND STERLING" and "STERLING" denote the lawful currency of the United Kingdom; "SUBSIDIARY" is as defined in section 736 of the Companies Act; "SUBSIDIARY UNDERTAKING" shall be construed in accordance with section 258 of the Companies Act; "TAX" and "TAXATION" each mean any form of tax or taxation as contained in the definition of "Taxation" in the Tax Deed; "TAXES ACT" means the Income and Corporation Taxes Act 1988; "TCGA" means the Taxation of Chargeable Gains Act 1992; "TRADE UNION" is as defined in section 1 TULRCA; "TULRCA" means the Trade Union and Labour Relations (Consolidation) Act 1992; "TUPE" means the Transfer of Undertakings (Protection of Employment) Regulations 1981; "VATA" means, in the United Kingdom, the Value Added Tax Act 1994 and, in a jurisdiction outside the United Kingdom, any equivalent legislation; and "WEEK" means a period of 7 consecutive days from a defined date. 1.3 INTERPRETATION 1.3.1 In this Agreement, subject to any express contrary indication: (a) words (including the definitions in Clauses 1.1 and 1.2) importing the singular shall include the plural and vice versa; (b) any reference to a person shall be construed as including a reference to its successors, permitted transferees and permitted assignees in accordance with their respective interests; (c) any reference to this Agreement or any other agreement or document shall be construed as a reference to that agreement or document as it may have been, or may from time to time be, amended, varied, novated, replaced or supplemented; 17 (d) any reference to a "CLAUSE" shall be construed as a reference to a Clause of this Agreement; (e) "INCLUDE" and "INCLUDING" shall be construed without limitation and general words shall not be given a restrictive meaning by reason of the fact that they are followed by particular examples intended to be embraced by the general words; (f) any references to "IN WRITING" shall include any modes of reproducing words in a legible and non-transitory form; (g) any reference to a "PARAGRAPH" shall be construed as a reference to a paragraph of the Schedule in which such reference appears; (h) any reference to a "SCHEDULE" shall be construed as a reference to a Schedule to this Agreement; (i) any reference to a statute or enactment shall be construed as a reference to such statute as it may have been, or may from time to time be, amended or re-enacted and any subordinate legislation made or thing done, or may from time to time be done, under the statute or enactment; (j) any reference to the "EQUIVALENT" on any given date in any currency (the "FIRST CURRENCY") of an amount denominated in another currency (the "SECOND CURRENCY") is a reference to the amount of the second currency which could be purchased with the amount of the first currency at the Reference Exchange Rate; (k) any reference to any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official, or any legal concept or thing shall in respect of any jurisdiction other than England be deemed to include what most nearly approximates in that jurisdiction to the English legal term; (l) references to times of day are to London time; and (m) where any of the Warranties is qualified by the expression "so far as the Seller is aware" or any other similar expression in determining whether the Seller has the knowledge referred to in that Warranty it shall be treated as knowing only those matters that are known to any of its directors or to the following persons: Debra McClenahan, Ralph Richard Mueller, Cathy Pierce, Marcia Munn, Kenneth S. De Vries, Edward J. Lavin, Dennis R. Hemme, Stephen Baxter and Ron Swanstrom. 1.3.2 Tables of contents and all headings in this Agreement are for ease of reference only and shall not affect the interpretation of this Agreement. 1.3.3 For the purposes of the definition of LIBOR "RELEVANT PAGE" means the page of the Reuters Monitor Rates Service designated for the display of London Interbank Offered Rates for the currency of the relevant amount (being currently "LIBO" in the case of Dollars) or, if such page or such service ceases to be available, such other page or such 18 other service (as the case may be) for the purpose of displaying London Interbank Offered Rates for such currency as the parties may agree or, in the absence of agreement, as the Expert, after consultation with the parties shall, on the application of either party, select. 19 2. SALE AND PURCHASE 2.1 AGREEMENT TO SELL THE SALE SHARES 2.1.1 The Seller agrees to sell with full title guarantee and the Buyer agrees to buy the Sale Shares and all rights attaching or accruing to the Sale Shares (including the right to receive all dividends, distributions or any return on capital declared, paid or made by the Target Company) at or after the date of this Agreement, free of any encumbrance. 2.1.2 The Seller waives all rights of pre-emption over any of the Sale Shares conferred on it by the articles of association of the Target Company or in any other way and undertakes to take, and procure the taking of, all steps necessary to ensure that any rights of pre-emption are waived. 2.2 PURCHASE PRICE 2.2.1 The purchase price of the Sale Shares shall be the aggregate of the Initial Consideration and, if any, the Additional Consideration. 2.2.2 The Initial Consideration shall be $1.00 payable on Completion to the Seller in the manner prescribed by Clause 5.3(a). 2.2.3 The Additional Consideration (if any) shall be calculated in accordance with Clause 3.2 or Clause 3.3.3 or Clause 2A.3(2) of the Tax Deed (as appropriate) and be payable in accordance with Clause 3.6 provided that the Additional Consideration and any interest thereon shall not exceed $118,999,999 (one hundred and eighteen million, nine hundred and ninety nine thousand and nine hundred and ninety nine dollars). 2.3 STAMP DUTY 2.3.1 The Seller shall pay any stamp duty in respect of the transfer of the Sale Shares to the Buyer. 2.3.2 At Completion, the Seller shall retain the executed transfer(s) in respect of the Sale Shares to the Buyer or its nominee(s). The Seller undertakes that it shall within 10 business days of execution of the transfer(s) of the Sale Shares apply for adjudication for stamp duty in respect of the transfer(s). The Seller undertakes to discharge promptly any stamp duty payable in respect of the transfer(s) and to deliver to the Buyer the duly stamped transfer(s) on receipt of the same from the Stamp Office. 2.3.3 The Seller shall have conduct of the application for adjudication in respect of stamp duty on the transfer(s) of the Sale Shares and in respect of any dispute in relation to such application subject to considering any reasonable comments or requests of the Buyer. The Seller shall provide copies of all correspondence with the Inland Revenue in relation to the application and any related dispute to the Buyer. The Buyer shall provide the Seller (at Seller's cost) with such assistance as may be reasonably required for the purposes of the application and any related dispute. 20 3. COMPLETION ADJUSTMENTS 3.1 DEFINITIONS 3.1.1 For the purposes of this Clause 3, the following definitions shall apply: (a) "BUYER'S ADDITIONAL CAPITAL" means any ordinary shares which may be required to be subscribed by the Buyer pursuant to Clause 3.2; (b) "COMPLETION BALANCE" means the amount by which the Completion Adjustment is greater than zero; (c) "INVESTMENT INCOME DEDUCTION" means the amount by which the Investment Income Adjustment is greater than $15,000,000 (fifteen million dollars); (d) "INVESTMENT INCOME ADJUSTMENT" means Investment Income (as defined in paragraph 4.2.2(a) of Schedule 7) less Administrative Expenses (as defined in paragraph 4.2.2(b) of Schedule 7) taken into account in the Completion Accounts; (e) "OUTSTANDING COMPLETION BALANCE" means, at any point in time: (i) the Completion Balance which has not been paid by the Buyer to the Seller under Clause 3.3.3; plus (ii) interest which has been accrued at that time in accordance with Clause 3.5.1 (if any); plus (iii) any amount outstanding from the Buyer to the Seller pursuant to clause 2A.3(2) of the Tax Deed; plus (iv) the aggregate Post-Completion Other Amounts to be included pursuant to clause 3.4; plus (v) the amount of any net gain shown in the Closing F/X Adjustment; (f) "PAYMENT AMOUNT" means the amount by which the Investment Income Adjustment is greater than $27,000,000 (twenty seven million dollars); (g) "PRE-COMPLETION OTHER AMOUNTS" means the amount of Reinsurance Recoverables arising in relation to underwriting years 1988 and subsequent received by the Target Subsidiary prior to or on the Completion Date; (h) "POST-COMPLETION OTHER AMOUNTS" means: (i) 100 per cent. of the amount of any Reinsurance Recoverables arising in relation to underwriting years 1988 and subsequent, where the reinsurer is the Seller or an Affiliate of the Seller, which is received by the Target Subsidiary after the Completion Date; and 21 (ii) 90 per cent. of the amount of any Reinsurance Recoverables arising in relation to underwriting years 1988 and subsequent, where the reinsurer is an entity other than the Seller or an Affiliate of the Seller, which is received by the Target Subsidiary after the Completion Date; (i) "REINSURANCE RECOVERABLES" means any amount recoverable from a reinsurer as a result of corrections to the Senator proportional reinsurance module included in Schedule 11; (j) "RELEVANT PERCENTAGE" means: (i) 80 per cent., to the extent that the Buyer has not yet paid to the Seller at least $25,000,000 (twenty-five million dollars) of the principal of the Completion Balance; or (ii) 50 per cent., to the extent that the Buyer has paid to the Seller $25,000,000 (twenty-five million dollars) or more of the principal of the Completion Balance; (k) "SELLER'S ADDITIONAL CAPITAL" is defined in Clause 3.3.2(a); (l) "SUBSCRIPTION AMOUNT" means $25,000,000 (twenty five million dollars), less the Pre-Completion Other Amounts; (m) "THRESHOLD AMOUNT" shall be as provided in Clause 3.2.1(b), 3.2.2(b), 3.2.3(c) or 3.2.4(b), as appropriate; and (n) "W" shall be as provided in Clause 3.2.1(c), 3.2.2(c), 3.2.3(d) or 3.2.4(c), as appropriate. 3.2 INVESTMENT INCOME ADJUSTMENT 3.2.1 If the Investment Income Adjustment is equal to or less than $15,000,000 (fifteen million dollars): (a) the Buyer shall subscribe for one ordinary share in the Target Company at par for every Pound Sterling1.00 (or its equivalent) of the Subscription Amount; (b) the Buyer shall pay to the Seller an amount equal to the Pre-Completion Other Amounts up to a maximum amount of $25,000,000 (twenty five million dollars); (c) the Threshold Amount shall be $12,000,000 (twelve million dollars); and (d) "W" shall be $20,200,000 (twenty million and two hundred thousand dollars) plus an amount equal to the amount (if any) by which the Pre-Completion Other Amounts exceeds $25,000,000 (twenty five million dollars). 3.2.2 If the Investment Income Adjustment is greater than $15,000,000 (fifteen million dollars) but is less than or equal to $27,000,000 (twenty seven million dollars): 22 (a) the Buyer shall subscribe for one ordinary share in the Target Company at par for every Pound Sterling1.00 (or its equivalent) of the Subscription Amount; (b) the Buyer shall pay to the Seller an amount equal to the Pre-Completion Other Amounts up to a maximum amount of $25,000,000 (twenty five million dollars); (c) the Threshold Amount shall be $12,000,000 (twelve million dollars) less the Investment Income Deduction; and (d) "W" shall be $32,200,000 (thirty two million two hundred thousand dollars) less the Threshold Amount, and plus an amount equal to the amount (if any) by which the Pre-Completion Other Amounts exceeds $25,000,000 (twenty five million dollars). 3.2.3 If the Investment Income Adjustment is greater than $27,000,000 (twenty seven million dollars) but is less than or equal to $52,000,000 (fifty two million dollars): (a) the Buyer shall subscribe for one ordinary share in the Target Company at par for every Pound Sterling1.00 (or its equivalent) of the Subscription Amount less the Payment Amount; (b) the Buyer shall pay to the Seller an amount equal to the aggregate of the Payment Amount and the Pre-Completion Other Amounts up to an aggregate maximum of $25,000,000 (twenty five million dollars); (c) the Threshold Amount shall be nil; and (d) "W" shall be $32,200,000 (thirty two million two hundred thousand dollars) plus an amount equal to the amount (if any) by which the sum of the Pre-Completion Other Amounts and the Payment Amount exceeds $25,000,000 (twenty five million dollars). 3.2.4 If the Investment Income Adjustment is greater than $52,000,000 (fifty two million dollars): (a) the Buyer shall pay to the Seller $25,000,000 (twenty five million dollars); (b) the Threshold Amount shall be nil; and (c) "W" shall be $32,200,000 (thirty two million two hundred thousand dollars) plus the amount by which the Investment Income Adjustment exceeds an amount which is equal to the difference of $52,000,000 (fifty two million dollars) less the Pre-Completion Other Amounts. 3.2.5 If the Buyer is required to subscribe for the Buyer's Additional Capital pursuant to this Clause 3.2, the Buyer shall procure that, immediately upon the issue of the Buyer's Additional Capital, the Target Company subscribes for ordinary shares in the Target Subsidiary of an amount equal to the Buyer's Additional Capital. 23 3.3 COMPLETION ADJUSTMENT 3.3.1 The Buyer and the Seller shall agree and/or there shall be determined the Completion Adjustment in accordance with Schedule 7. 3.3.2 If the Completion Adjustment is less than zero: (a) the Seller shall subscribe for one ordinary share in the Target Company at a premium equal to the absolute value of the amount of the Completion Adjustment (or its equivalent) (the "SELLER'S ADDITIONAL CAPITAL"); (b) the Buyer shall procure that the Target Company issues the Seller's Additional Capital to the Seller upon payment. Immediately upon issue of the Seller's Additional Capital the Seller shall transfer the Seller's Additional Capital to the Buyer in consideration for the payment by the Buyer to the Seller of $1.00; and (c) the Buyer shall procure that the Target Company subscribes for one ordinary share in the Target Subsidiary at a premium equal to the total amount received by the Target Company for the Seller's Additional Capital. 3.3.3 If at any time following the Completion Date the Outstanding Completion Balance is greater than zero and: (a) the Target Subsidiary pays a Management Fee, then the Buyer shall, subject to Clause 3.3.4, within 5 business days of the receipt by the Manager of the Management Fee, pay to the Seller an amount equal to 50 per cent. of the Management Fee; and/or (b) the Target Subsidiary pays a Trigger Distribution, then the Buyer shall, subject to Clause 3.3.4, within 5 business days of such payment, pay to the Seller an amount equal to the Relevant Percentage of such Trigger Distribution; (c) the Buyer or any of its Affiliates disposes of a controlling interest in the Target Company (other than pursuant to clause 13 or clause 14) then the Buyer shall, within 5 business days of the receipt of the consideration, pay 100 per cent. of the consideration received for any such controlling interest; and/or (d) the Target Company or any of its Affiliates: (i) disposes of a controlling interest in the Target Subsidiary; and/or (ii) disposes of all or substantially all of its assets; and/or (iii) procures that the Target Subsidiary disposes of all or substantially all of its assets, (in each case other than pursuant to clause 13 or clause 14) then the Buyer shall, within 5 business days of the receipt of the consideration, whether by the Buyer, 24 the Target Company or the Target Subsidiary, pay to the Seller 100 per cent. of the consideration received for any such controlling interest or assets, provided that, the aggregate of the payments made by the Buyer to the Seller pursuant to this Clause 3.3.3 shall not exceed the Outstanding Completion Balance. 3.3.4 The Buyer shall only be obliged to make payments to the Seller pursuant to Clauses 3.3.3(a) and 3.3.3(b) to the extent that the aggregate of the payments by the Target Subsidiary described in Clauses 3.3.3(a) and 3.3.3(b) exceed the Threshold Amount plus an amount in respect of interest on the Threshold Amount calculated from the Completion Date and in accordance with Clause 3.5.1. 3.4 POST COMPLETION OTHER AMOUNTS 3.4.1 If any Post Completion Other Amounts arise after the Completion Date, the amount of those Post Completion Other Amounts shall be added to the amount of the Outstanding Completion Balance on the day which is two business days after the receipt of those Post Completion Other Amounts by the Target Subsidiary. 3.5 INTEREST 3.5.1 The Outstanding Completion Balance and/or any Additional Consideration will bear interest from the Completion Date to the date of payment (inclusive of each date) at a rate equal to the one-year LIBOR plus 1.00 per cent. per annum. The interest shall accrue daily and be calculated at the end of each Relevant Period on the actual number of days elapsed in that Relevant Period and a 360 day year. The interest shall be compounded quarterly in arrears on the last day of each Relevant Period. The one-year LIBOR shall be re-set at the Completion Date and on each anniversary date of the Completion Date and such rate shall be used for all subsequent calculations until the next anniversary date. The Seller shall determine the one-year LIBOR at each re-set date and shall give the Buyer written notice of each such determination on the first business day following the Completion Date and each anniversary thereafter. Any payments in accordance with Clauses 3.3.2, 3.3.3 and 3.6.1 shall be applied first to outstanding interest calculated in accordance with this Clause 3.5.1. 3.6 ADDITIONAL CONSIDERATION 3.6.1 Any amount payable by the Buyer to the Seller pursuant to Clause 3.2 or Clause 3.3.3 or Clause 2A.3(2) of the Tax Deed is deemed to be additional consideration for the purchase of the Sale Shares and is, in each case, referred to as "ADDITIONAL CONSIDERATION". 3.7 PAYMENTS 3.7.1 Within 5 business days after the Completion Adjustment being agreed or finally determined pursuant to the provisions of Schedule 7, the Additional Consideration payable pursuant to clause 3.2 shall be paid (net of any applicable withholding tax) in 25 accordance with Clause 16.15. The Additional Consideration will bear interest calculated in accordance with Clause 3.5.1. 3.7.2 No withholding tax shall be deducted from any payment under this Clause 3.7 where the payor has been directed by the Inland Revenue under Regulation 2 of the Double Taxation Relief (Taxes or Income) (General) Regulations 1970 that tax shall not be deducted or may be deducted at a lower rate of withholding tax or where the Inland Revenue has issued a provisional authority for interest to be paid gross or at a lower rate of withholding tax and whilst such provisional authority remains in force. 3.7.3 The recipient of any payment shall cooperate with the payer in obtaining any clearances and complying with any procedural formalities necessary in order for the payer to make such payment without deduction of any withholding tax or at a lower rate of withholding tax under the applicable double taxation agreement. The recipient of the payment shall provide to the payer copies of all documents obtained from the relevant Tax Authority responsible for the double taxation agreement in both countries which are relevant to the payer making such payment without deduction of any withholding tax or at a lower rate of withholding tax under the applicable double taxation agreement. 3.8 ESCROW 3.8.1 At Completion the Subscription Amount shall be paid by the Buyer to the Buyer's solicitors as stakeholder (the "STAKEHOLDER"), who shall, at the same time, be irrevocably instructed by the Seller and the Buyer: (a) to place $25,000,000 (twenty five million dollars) (the "ESCROW AMOUNT") in an interest bearing designated bank deposit account maintained in a branch of an English high street clearing bank in the name of the Stakeholder; (b) within 5 business days after the Completion Adjustment being agreed or finally determined pursuant to the provisions of Schedule 7: (i) if Clauses 3.2.1 or 3.2.2 apply: (1) pay that part of the Escrow Amount which is equal to the Subscription Amount to the Target Company (which shall be deemed to be payment in fulfilment of the Buyer's obligations under Clauses 3.2.1(a) or 3.2.2(a) as appropriate); (2) pay the balance of the Escrow Amount to the Seller (which shall be deemed to be payment in fulfilment of the Buyer's obligations under Clauses 3.2.1(b) or 3.2.2(b) as appropriate) (ii) if Clause 3.2.3 applies, pay that part of the Escrow Amount which is equal to the amount calculated in accordance with Clause 3.2.3(a) to the Target 26 Company (which shall be deemed to be payment in fulfilment of the Buyer's obligation under Clause 3.2.3(a)), and pay the balance of the Escrow Amount to the Seller (which shall be deemed to be payment in fulfilment of the Buyer's obligations under Clause 3.2.3(b); and (iii) if Clause 3.2.4 applies, pay the Escrow Amount to the Seller (which shall be deemed to be payment in fulfilment of the Buyer's obligations under Clause 3.2.4(a)); and (c) to pay an amount equal to any interest received by the Stakeholder on the Escrow Amount (less any tax thereon for which the Stakeholder may be accountable and any charges and expenses incurred by the Stakeholder) to the Buyer (or as it may direct) and/or to the Seller (or as it may direct) in proportion to the amounts finally payable to them respectively, otherwise than in respect of costs. 3.9 SUBSCRIPTIONS 3.9.1 The Buyer's Additional Capital shall be subscribed for and paid for in full within 5 business days of receipt of the amounts to be paid to it by the Stakeholder under Clause 3.8.1(b)(i) or (ii), as appropriate. 3.9.2 The Seller's Additional Capital shall be subscribed for and paid for in full within 5 business days after the Completion Adjustment being finally agreed or finally determined pursuant to the provisions of Schedule 7. 3.10 COMPLETION BALANCE SECURITY 3.10.1 If Clause 3.3.3 shall apply, the Buyer shall: (a) execute the Distribution Security in favour of the Seller; and (b) procure that the Manager executes the Management Fee Security in favour of the Seller, within 5 business days after the Completion Adjustment has been agreed or finally determined pursuant to the provisions of clause 3.3.1 and Schedule 7. 3.11 MANAGEMENT FEE 3.11.1 The Buyer shall provide a statement of the amounts paid to the Affiliates of the Buyer (as defined in the definition of "MANAGEMENT FEE") and of the amounts so paid not falling within the Management Fee together with a copy of the audited accounts of the Target Subsidiary within 120 days of the end of each financial year and a certificate of an officer of the Target Subsidiary of the accuracy of the statement. 27 3.12 MANAGEMENT FEE VARIATION 3.12.1 If, at any time during the term of the Management Agreement, the board of directors of the Target Subsidiary determines that the amount of the Management Fee to be paid by the Target Subsidiary is too high having regard to the financial condition of the Target Subsidiary or any requirements of the Financial Services Authority, then the Buyer shall immediately notify the Seller in writing and the Target Subsidiary may seek to reach agreement with the Manager to reduce the Management Fee by an agreed amount over an agreed period. If the Target Subsidiary and the Manager reach such an agreement (a "MANAGEMENT AGREEMENT VARIATION") the Buyer shall immediately notify the Seller and shall provide the Seller with a detailed and reasoned explanation for the Management Agreement Variation and the Seller hereby agrees: (a) to agree to the Management Agreement Variation in its capacity as assignee of the rights to payment of the Management Fee under the terms of the Management Fee Security; and (b) not to enforce its rights under the Management Fee Security in connection with the Management Agreement Variation, Provided that the Seller shall not be obliged to agree to that variation if: (i) the result of the variation is that any provider of debt or equity finance to the Target Subsidiary would rank ahead of the Seller with respect to payments or distributions; (ii) any Affiliate of the Target Subsidiary receives payments or distributions from the Target Subsidiary during the period for which the variation is effective ("VARIATION PERIOD") other than payments excluded from the definition of Management Fee and permitted to be paid under the Management Fee Security and the Distribution Security; or (iii) the Seller has not received $25,000,000 or more of the Completion Balance and the financial condition of the Target Subsidiary or the requirements of the Financial Services Authority, which have brought about the reduction in the Management Fee, has resulted from requirements of operations in which the Target Subsidiary was not engaged as at the date of Completion, and provided also that, at the end of the Variation Period, the Management Fee shall be restored to the original amount. 3.13 1987 AND PRIOR AMOUNTS 3.13.1 For the purposes of this Clause 3.13, the following definitions shall apply: (a) "PRE-COMPLETION 1987 AND PRIOR AMOUNTS" means the amount of Reinsurance Recoverables arising in respect of the Target Subsidiary's underwriting years 28 1987 and prior which is received by the Target Subsidiary after the date of this Agreement but prior to or on the Completion Date; and (b) "POST-COMPLETION 1987 AND PRIOR AMOUNTS" means: (i) 100 per cent. of the amount of any Reinsurance Recoverables arising in respect of the Target Subsidiary's underwriting years 1987 and prior, where the reinsurer is the Seller or an Affiliate of the Seller, which is received by the Target Subsidiary after the Completion Date; and (ii) 90 per cent. of the amount of any Reinsurance Recoverables arising in respect of the Target Subsidiary's underwriting years 1987 and prior where the reinsurer is an entity other than the Seller or an Affiliate of the Seller, which is received by the Target Subsidiary after the Completion Date. 3.13.2 The Buyer acknowledges that prior to Completion the Seller may procure that the Target Subsidiary shall pay to the Seller any Pre-Completion 1987 and Prior Amounts within two business days of receipt by the Target Subsidiary of the same. 3.13.3 The Buyer agrees to procure that the Target Subsidiary shall pay to the Seller any Post Completion 1987 and Prior Amounts within two business days of receipt by the Target Subsidiary of the same. 3.13.4 The payments to be made pursuant to Clause 13.3.2 and 13.3.3 are to be made to the Seller as corrections of billing errors which arose in relation to the 100 per cent. quota share for 1987 and prior underwriting years between the Seller and the Target Subsidiary. 29 4. CONDITIONS TO COMPLETION 4.1 CONDITIONS Completion is conditional on the following conditions being satisfied, or in the case of the conditions in paragraphs (b), (d) or (f) below, waived by the Buyer, on or before the Completion Date: (a) the Buyer having received a notice of approval from the FSA of all persons who will acquire control of the Target Subsidiary on Completion in accordance with section 184 FSMA (on such terms or conditions, if any, as are reasonably acceptable to the Seller and the Buyer in so far as such terms or conditions affect the Seller and the Buyer respectively) and such approval not having been revoked and being in full force and effect on the Completion Date or, in the absence of receipt of such notice, the period during which the FSA may serve notice of objection pursuant to section 186 FSMA having elapsed without the FSA having served any such notice of objection on the Buyer; (b) subject to Clause 4.2.6 an application having been made by the Target Subsidiary to the FSA to vary the Target Subsidiary's permission under FSMA ("PART IV PERMISSION") so as to remove its permission to effect contracts of insurance on the basis that such variation shall only be effective if Completion takes place; (ba) the FSA having confirmed to the Target Subsidiary (on such terms or conditions, if any, as are reasonably acceptable to the Seller and the Buyer in so far as such conditions affect the Seller and the Buyer respectively) that the FSA has no objections to the Target Subsidiary and the Seller entering into the Settlement of 100 per cent. quota share for 1987 and prior underwriting years in the Agreed Form, the Settlement of aggregate stop loss providing $125,000,000 of cover in respect of underwriting years 1997, 1998, and 1999 in the Agreed Form, the CRG Commutation in the Agreed Form and the BU2 Commutation in the Agreed Form having been notified of the same pursuant to the Notice of Requirements dated 26 November 2001 addressed to the Target Subsidiary, and no condition of the FSA excludes or unduly burdens performance by the Target Subsidiary of the Allianz Contract and the Underwriters Re Contract; (c) the FSA not: (i) withdrawing or giving notice to withdraw any permission (except in relation to the variation of the Target Subsidiary's Part IV Permission referred to in paragraph (b) above) required for, or in connection with, the carrying on of the business of the Target Subsidiary; (ii) imposing, or giving notice that it intends to impose, any restriction or requirement on, or on the business of, the Target Subsidiary other than that which (aa) might reasonably be expected for a transaction of this type and size and (bb) would not have a material adverse effect on the ability of the 30 Buyer to carry on the business of the Target Subsidiary after Completion in the same manner as it is carried on at the date of this Agreement; or (iii) requiring additional capital to be contributed to the Target Subsidiary by Seller; (d) the Target Subsidiary having made an election under section 107 of the Finance Act 2000 in respect of the years ended 31 December 2000 and 31 December 2001; (e) the Seller having received a written notice of approval from the Illinois Department of Insurance in respect of the matters referred to in this Agreement, including, but not limited to, approval of the entry by the Seller into any of the Agreed Form documents for which Illinois regulatory approval is required (on such terms or conditions, if any, as are reasonably acceptable to the Seller and the Buyer in so far as such terms or conditions affect the Seller and the Buyer respectively); and (f) there having been no Material Adverse Change. 4.2 SATISFACTION OF CONDITIONS 4.2.1 The Buyer hereby undertakes to the Seller to make, as soon as is reasonably practicable, an application to the FSA pursuant to section 178 FSMA in respect of all persons who will acquire control of the Target Subsidiary on Completion. 4.2.2 Subject to Clauses 4.2.6 and 4.2.7, the Seller agrees that it will use its reasonable endeavours to procure that the Target Subsidiary will apply for the variation of the Target Subsidiary's Part IV Permission described in Clause 4.1(b) above. 4.2.3 The Seller and the Buyer hereby undertake, each to the other, to use their respective reasonable endeavours to procure that the conditions set out in Clause 4.1(a), (b) and (ba) are fulfilled as soon as reasonably practicable after the date hereof and in any event within 120 days of the date of this Agreement. 4.2.4 The Buyer shall give notice to the Seller of the satisfaction of the condition of Clause 4.1(a) within two business days of becoming aware of the same. 4.2.5 The Seller shall give notice to the Buyer of the satisfaction of the conditions of Clauses 4.1(b), (ba), (d) and (e) within two business days of becoming aware of the same. 4.2.6 If the Seller acting reasonably determines that in respect of Insurance Contracts or Reinsurance Contracts which have been entered into by the Target Subsidiary at or before the date of this Agreement there is a requirement of the FSA that the Target Subsidiary's Part IV Permission continue to include permission to effect contracts of insurance, the Seller may give notice of this fact to the Buyer and upon the giving of such notice: (a) the condition in Clause 4.1(b) shall be deemed to have been satisfied; and 31 (b) the Seller's obligations under Clause 4.2.2 shall cease to apply. In the event that the Seller makes such a determination, it shall provide the Buyer with reasonable details of the basis upon which it has made such a determination. 4.2.7 If the Seller or the Buyer acting reasonably determines that the application to vary the Target Subsidiary's Part IV Permission pursuant to Clause 4.1(b) having been made shall cause satisfaction of any of the other conditions in Clause 4.1 to be delayed beyond the period that would be expected if such application had not been made and that withdrawal of the application would remove such delay, the party making such determination may give notice of this fact to the other and upon the giving of such notice the Seller shall procure that the Target Subsidiary shall promptly notify the FSA of the withdrawal of its application to vary its Part IV Permission. In the event that a party makes such a determination, it shall provide to the other reasonable details of the basis upon which it has made such a determination. For the avoidance of doubt, the making of an application pursuant to Clause 4.1(b) shall be sufficient to satisfy the condition in Clause 4.1(b) even if the application has been withdrawn pursuant to this Clause 4.2.7. 4.3 WAIVER OR TERMINATION 4.3.1 At any time the Buyer may waive a condition set out in paragraphs (b), (d) or (f) of Clause 4.1 by notice to the Seller, on any terms it decides. 4.3.2 If a condition set out in Clause 4.1 has not been satisfied (or, in the case of the conditions set out in Clause 4.1(b), (d) or (f), waived by the Buyer) by 5 pm on 31 December 2002 this Agreement shall terminate and have no further effect (subject only to Clauses 15 (Governing law and disputes) and 16 (Miscellaneous) which shall continue in force). 4.3.3 If this Agreement terminates pursuant to Clause 4.3.2 each party's further rights and obligations under this Agreement will (save as mentioned in Clause 4.3.2) cease immediately on termination, but termination will not affect any liability of either party to the other arising from a breach of this Agreement before the date of such termination. 4.4 SELLER'S CONDITION 4.4.1 On any one occasion during the period from the date of this Agreement to the tenth business day before the Completion Date the Seller may give the Buyer its calculation of the Estimated Completion Adjustment, together with the management accounts upon which the Estimated Completion Adjustment is based and such working papers used in connection with the preparation of the same as are necessary or appropriate to understand and agree the calculation of the Estimated Completion Adjustment. 4.4.2 If the Estimated Completion Adjustment is greater than $50,000,000 (fifty million dollars) or less than zero, the Seller may at the same time as it provides the Buyer with its calculation of the Estimated Completion Adjustment, give the Buyer notice that it wishes to terminate this Agreement (the "TERMINATION NOTICE"). 32 4.4.3 Unless the Buyer shall within seven business days of receipt of the Termination Notice (and the related management accounts and working papers) serve a notice in writing on the Seller that it objects to the Estimated Completion Adjustment (identifying the reason for any objection and the amount(s) or item(s) in the Estimated Completion Adjustment calculation, the relevant management accounts and/or associated working papers which is/are in dispute) (such notification being, for the purposes of this Clause 4.4, a "TERMINATION OBJECTION NOTICE") the Buyer shall be deemed to have agreed the Estimated Completion Adjustment and this Agreement shall automatically terminate in accordance with Clause 4.4.8. 4.4.4 The Buyer shall only be entitled to serve a Termination Objection Notice if the basis of its objection is that the calculation of the Estimated Completion Adjustment should result in an amount which is greater than zero and equal to or less than $50,000,000 (fifty million dollars). 4.4.5 If, within the period referred to in Clause 4.4.3, the Buyer shall give the Seller a Termination Objection Notice then the Buyer or the Seller shall be entitled, within five business days of the date of such a notice, to refer the matter(s) in dispute to Ernst & Young, unless Ernst & Young are not at the relevant time independent of each of the parties in which case the matter(s) shall be referred to an independent firm of chartered accountants agreed upon between them or (failing agreement within four days of one party giving notice to the other that it desires an independent expert to be appointed) to be selected (at the instance of either party) by the President for the time being of the Institute of Chartered Accountants for England and Wales. 4.4.6 Ernst & Young or such other independent firm of chartered accountants shall act as experts not as arbitrators and shall determine the matter or matters in dispute and their decision shall, save in the event of fraud or manifest error, be binding. The independent firm of accountants shall have the right to seek such professional assistance and advice as it may require in fulfilling its duties. The cost of the independent firm of accountants shall be borne by the Seller and the Buyer equally. 4.4.7 Upon the resolution of any dispute by the independent firm of accountants, the Estimated Completion Adjustment shall be amended to accord with such resolution and the Estimated Completion Adjustment shall thereafter be final and binding as between the parties, for the purposes of this Agreement. If, on this basis, the Estimated Completion Adjustment is less than zero or exceeds $50,000,000 (fifty million dollars) this Agreement shall automatically terminate in accordance with Clause 4.4.8. Otherwise this Agreement shall continue in full force and effect. 4.4.8 If this Agreement terminates pursuant to Clause 4.4.3 or Clause 4.4.7 each party's further rights and obligations under this Agreement will cease immediately on termination (subject only to Clause 15 (Governing law and disputes) and 16 (Miscellaneous) which shall continue in force), but termination will not affect any liability of either party to the other arising from a breach of this Agreement before the date of such termination. 4.4.9 If the Buyer serves a Termination Objection Notice and, but for the provisions of this Clause 4.4.9, the Completion Date would have occurred before the resolution of any 33 dispute as provided for in Clause 4.4.5, the Completion Date shall be automatically postponed to the last business day in the month in which the Estimated Completion Adjustment is finally determined in accordance with Clause 4.4.5. 4.5 BUYER'S CONDITION 4.5.1 On any one occasion during the period from the date of this Agreement to the tenth business day before the Completion Date the Buyer may require the Seller to give the Buyer sufficient information (including the management accounts for the Target Group Companies for the immediately preceding month end) as will enable the Buyer to carry out the Loss Calculation. Seller shall be allowed twenty days from the date of Buyer's notice to provide the requested information. As soon as the Buyer has received such information and calculated the loss calculation the Buyer shall give the Seller its calculation of the Loss Calculation, together with the management accounts upon which the Loss Calculation is based and such working papers used in connection with the preparation of the same as are necessary or appropriate to understand and agree the calculation of the Loss Calculation. 4.5.2 If the Loss Calculation is greater than $14,000,000 (fourteen million dollars) the Buyer may at the same time as it provides the Seller with its calculation of the Loss Calculation, give the Seller notice that it wishes to terminate this Agreement (the "LOSS TERMINATION NOTICE"). 4.5.3 Unless the Seller shall within seven business days of receipt of the Loss Termination Notice (and the related working papers) serve a notice in writing on the Buyer that it objects to the Loss Calculation (identifying the reason for any objection and the amount(s) or item(s) in the Loss Calculation and/or associated working papers which is/are in dispute) (such notification being, for the purposes of this Clause 4.5, a "LOSS TERMINATION OBJECTION NOTICE") the Seller shall be deemed to have agreed the Loss Calculation and this Agreement shall automatically terminate in accordance with Clause 4.5.8. 4.5.4 The Seller shall only be entitled to serve a Loss Termination Objection Notice if the basis of its objection is that the calculation of the Loss Calculation should result in an amount which is equal to or less than $14,000,000 (fourteen million dollars). 4.5.5 If, within the period referred to in Clause 4.5.3, the Seller shall give the Buyer a Loss Termination Objection Notice then the Buyer or the Seller shall be entitled, within five business days of the date of such a notice, to refer the matter(s) in dispute to Ernst & Young, unless Ernst & Young are not at the relevant time independent of each of the parties in which case the matter(s) shall be referred to an independent firm of chartered accountants agreed upon between them or (failing agreement within four days of one party giving notice to the other that it deserves an independent expert to be appointed) to be selected (at the instance of either party) by the President for the time being of the Institute of Chartered Accountants for England and Wales. 4.5.6 Ernst & Young or such other independent firm of chartered accountants shall act as experts not as arbitrators and shall determine the matter or matters in dispute and their decision shall, save in the event of fraud or manifest error, be binding. The 34 independent firm of accountants shall have the right to seek such professional assistance and advice as it may require in fulfilling its duties. The cost of the independent firm of accountants shall be borne by the Seller and the Buyer equally. 4.5.7 Upon the resolution of any dispute by the independent firm of accountants, the Loss Calculation shall be amended to accord with such resolution and the Loss Calculation shall thereafter be final and binding as between the parties, for the purposes of this Agreement. If, on this basis, the Loss Calculation exceeds $14,000,000 (fourteen million dollars) this Agreement shall automatically terminate in accordance with Clause 4.5.8. Otherwise this Agreement shall continue in full force and effect. 4.5.8 If this Agreement terminates pursuant to Clause 4.5.3 or Clause 4.5.7 each party's further rights and obligations under this Agreement will cease immediately on termination (subject only to Clause 15 (Governing law and disputes) and 16 (Miscellaneous) which shall continue in force), but termination will not affect any liability of either party to the other arising from a breach of this Agreement before the date of such termination. 4.5.9 If the Buyer serves a request for information to enable Buyer to carry out the Loss Calculation, or if Seller serves a Loss Termination Objection Notice and, but for the provisions of this Clause 4.5.9, the Completion Date would have occurred before the completion of the Loss Calculation and expiration of Seller's right to object thereto in accordance with Clause 4.5.3, or, if applicable, the resolution of any dispute as provided for in Clause 4.5.5, the Completion Date shall be automatically postponed to the last business day in the month in which the Loss Calculation is finally determined in accordance with Clause 4.5.5. 4.6 DEEMED MATERIAL ADVERSE CHANGE 4.6.1 The Seller shall procure that the Target Group Companies prepare and provide the Buyer with the MAC Management Accounts within three business days of the last business day of each month between the date of this Agreement and the Completion Date (the "RELEVANT MONTH END"), provided that where the last Relevant Month End is also the Completion Date, such Relevant Month End shall be deemed to end five business days before the Completion Date. 4.6.2 For the purposes of this Clause 4.6, the "MAC MANAGEMENT ACCOUNTS" shall mean the management accounts prepared by the Target Group with due care and attention which show an accurate view of: (a) the actual cumulative cash flows (excluding those arising from Invested Assets) of the Target Group in the form of the tab "MAC" in the spread sheet entitled "MAC 4.6 ILLUSTRATION 19_6.XLS" set out in Schedule 9 from the end of the period starting on the Last Accounting Date and ending on the relevant Month End (the "TOTAL CASH FLOW"); (b) the aggregate amount of the Total Cash Flow which is attributable to LPC, Other Inwards, Outwards Expenses/other inwards in the format given in the tab "ACT CASH OUTFLOWS TO 17 MAY" in the spread sheet entitled "MAC 4.6 ILLUSTRATION 35 19_6.XLS" set out in Schedule 9 plus actual cash flows from 18 May through the Completion Date determined in the same manner as that shown in the tab "ACT CASH OUTFLOWS TO 17 MAY" in that spread sheet (collectively the "TOTAL SETTLEMENTS"); (c) the aggregate amount of the Total Settlements which has been paid by the Target Group Companies in respect of claims arising as a direct consequence of the terrorist attacks on the Pentagon and the World Trade Centre on 11 September 2001 (the "WTC SETTLEMENTS"); and (d) the aggregate amount of the Total Settlements which have been paid by the Target Group Companies: (i) following the written approval of that payment by the Buyer; or (ii) in accordance with paragraph (n) of Schedule 4, (the "APPROVED SETTLEMENTS"). 4.6.3 For the purposes of this Clause 4.6, in respect of each set of MAC Management Accounts, the Total Settlements, less the sum of the WTC Settlements and the Approved Settlements, is referred to as the "NET SETTLEMENTS". 4.6.4 If, either: (a) the Seller fails to comply with its obligations under this Clause 4.6; or (b) the MAC Management Accounts for 30 June 2002 show that the Net Settlements exceed $195m; or (c) the MAC Management Accounts for 31 July 2002 show that the Net Settlements exceed $227.5m; or (d) the MAC Management Accounts for 31 August 2002 show that the Net Settlements exceed $260m; or (e) the MAC Management Accounts for 30 September 2002 show that the Net Settlements exceed $292.5m; or (f) The MAC Management Accounts 31 October 2002 show that the Net Settlements exceed $325m; or (g) The MAC Management Accounts for 30 November 2002 show that the Net Settlements exceed $357.5m; or (h) the MAC Management Accounts for 31 December 2002 show that the Net Settlements exceed $390m, then a material adverse change shall be deemed to have occurred. 36 5. COMPLETION 5.1 TIME AND VENUE Completion shall take place at the London offices of the Seller's Solicitors on the last business day of the month during which the conditions set out in Clause 4.1 are satisfied or waived (or, if the last of such conditions to be satisfied or waived is satisfied or waived in the last five business days of such month) on the last business day of the next following month. 5.2 SELLER'S COMPLETION OBLIGATIONS 5.2.1 At Completion the Seller shall: (a) give to the Buyer each item specified in Schedule 2; and (b) with the Buyer, give the Stakeholder the instructions set out in Clause 3.7. 5.2.2 At Completion the Seller shall procure that: (a) the Target Company's directors hold a meeting of the board of directors of the Target Company at which the directors: (i) vote in favour of the registration of the Buyer or its nominee(s) as member(s) of the Target Company in respect of the Sale Shares (subject to the production of properly stamped transfers); (ii) if requested by the Buyer, change the Target Company's registered office to a place nominated by the Buyer; and (iii) appoint a person nominated by the Buyer as secretary of the Target Company with effect from the end of the meeting; (b) such persons as the Buyer may nominate are appointed as directors of the Target Company; (c) the Target Subsidiary's directors hold a meeting of the board of directors of the Target Subsidiary at which the directors: (i) if requested by the Buyer, change the Target Subsidiary's registered office to a place nominated by the Buyer; and (ii) appoint a person nominated by the Buyer as secretary of the Target Subsidiary with effect from the end of the meeting; and (d) such persons as the Buyer may nominate are appointed as directors of the Target Subsidiary provided that the Buyer has provided the Seller with evidence 37 acceptable to the Seller, acting reasonably, that such persons have been approved by the FSA to perform such controlled functions. 5.3 BUYER'S COMPLETION OBLIGATIONS At Completion the Buyer shall give to the Seller evidence in a form reasonably satisfactory to the Seller (by way of a certificate of the Buyer's Solicitors or otherwise) of satisfaction of the conditions set out in paragraph (a) of Clause 4.1 and shall: (a) pay the amount stated in Clause 2.2.2 to the Seller or as the Seller directs in writing in cash; (b) with the Seller, give the Stakeholder the instructions set out in Clause 3.7; (c) pay the Subscription Amount to the Stakeholder in accordance with Clause 3.7; and (d) give the Seller the Tax Deed executed by the Buyer and the Management Agreement executed by the parties thereto. 5.4 RIGHT TO DEFER OR TERMINATE 5.4.1 Neither the Seller nor the Buyer is obliged to complete this Agreement unless: (a) the other complies with all its obligations under Clause 5.2 or 5.3 (as the case may be); and (b) the purchase of all the Sale Shares is completed simultaneously. 5.4.2 If Completion does not take place on the Completion Date because either party (the "FIRST PARTY") fails to comply with any material obligation under Clause 5.2 or 5.3 (as the case may be), the other party (the "SECOND PARTY") may by notice to the First Party: (a) postpone Completion to a date not more than 20 business days after the Completion Date; or (b) terminate this Agreement. 5.4.3 If the Second Party postpones Completion to another date in accordance with Clause 5.4.2(a), the provisions of this Agreement apply as if that other date is the Completion Date. 5.4.4 If the Second Party terminates the Agreement pursuant to Clause 5.4.2(b), each party's further rights and obligations under this Agreement will cease immediately on termination (subject only to Clauses 15 (Governing law and disputes) and 16 (Miscellaneous) which shall continue in force), but termination will not affect any liability of either party to the other arising from a breach of this Agreement before the date of such termination. 38 6. SELLER'S WARRANTIES 6.1 WARRANTIES 6.1.1 The Seller warrants to the Buyer in the terms of the Warranties. Immediately before the time of Completion, the Seller is deemed to warrant to the Buyer in the terms of the Warranties at the date of Completion. For this purpose only, where in a Warranty there is an express or implied reference to the "DATE OF THIS AGREEMENT", that reference is to be construed as a reference to the "COMPLETION DATE". 6.1.2 Each Warranty is to be construed independently and (except where this Agreement expressly provides to the contrary) is not limited by a provision of this Agreement or another Warranty. 6.1.3 The Seller acknowledges that the Buyer is entering into this Agreement in reliance on each Warranty. 6.2 DISCLOSURE LETTER The Warranties other than those set out in paragraphs 1.1, 1.2, 3.1, 3.2.2 or 3.2.3 of Schedule 3 are qualified by the matters fairly disclosed in the Disclosure Letter and/or in the Data Room in sufficient detail to enable a reasonable purchaser to evaluate their relevance to the Warranties. No other knowledge of the Buyer (or an agent or Affiliate) relating to a Target Group Company (actual, constructive or imputed) prevents or limits a claim made by the Buyer for breach of Clause 6.1. The Seller may not invoke the Buyer's knowledge (or the knowledge of the Buyer's agents or Affiliates) (actual, constructive or imputed) of a fact or circumstances which might make a Warranty untrue, inaccurate, incomplete or misleading as a defence to a claim for a breach of Clause 6.1. However, the Buyer acknowledges and confirms that it and its advisers have carried out such due diligence as is reasonably necessary and at the time of entering into this Agreement it is not aware of any matter or thing which constitutes a breach of any of the Warranties as qualified in accordance with this Clause 6.2. 6.3 WAIVER OF RIGHTS The Seller waives and may not enforce a right which it may have in respect of a misrepresentation, inaccuracy or omission in or from information or advice supplied or given by a Target Group Company or a director, officer or employee of a Target Group Company for the purpose of assisting the Seller to make a representation, give a Warranty, prepare the Disclosure Letter or covenant under the Tax Deed. 6.4 SELLER'S OBLIGATIONS Between the execution of this Agreement and Completion the Seller shall: (a) procure that each Target Group Company complies with Schedule 4; 39 (b) notify the Buyer immediately if it becomes aware of a fact or circumstance which constitutes a breach of Clause 6.1.1 or paragraph (a) above or has caused, or will or might cause, a Warranty to become untrue, inaccurate, incomplete or misleading at any time before Completion; (c) procure that the Buyer and its agents will, at the Buyer's expense and upon reasonable notice, be allowed access to, and to take copies of, the books and records of each Target Group Company in the possession or control of either Target Group Company or the Seller provided that the obligations of the Seller under this Clause shall not extend to allowing access to information which is reasonably regarded as confidential to the activities of the Seller otherwise than in connection with the Target Group Companies; and (d) procure that such representatives and advisers as the Buyer requests may be designated to work with the Seller at the sole expense of the Buyer with regard to the management and operations of the Target Group Companies. The Seller will consult, and will cause the Target Group Companies to consult, with such representatives and advisers with respect to any action that may materially affect the Target Group. The Seller will furnish and will cause the Target Group Companies to provide to such representatives and advisers such information as they may reasonably request for this purpose. 6.5 UPDATES TO DISCLOSURE LETTER 6.5.1 Each party shall give prompt notice to the other party of (i) the occurrence, or failure to occur, of any event or the existence of any condition that has caused or could reasonably be expected to cause any of its representations or warranties contained in this Agreement to be untrue or inaccurate in any material respect at any time after the date of this Agreement, up to and including the Completion Date (except to the extent such representations and warranties are given as of a particular date or period and relate solely to such particular date or period), and (ii) any failure on its part to comply with or satisfy, in any material respect, any covenant, condition or agreement to be complied with or satisfied by it under this Agreement. 6.5.2 The Seller may, no less than 5 business days prior to Completion by written notice to the Buyer, supplement the Disclosure Letter to reflect: (a) retirements and replacements of a Target Group Company's assets, including normal upgrades or replacements of Computer Programs (other than replacements of Computer Programs constituting the lead applications for key line operations such as in line business functions of the business of the Target Subsidiary including but not limited to processing Reinsurance Contracts, underwriting and recording and processing losses); (b) the hiring, resignation and termination of employees; (c) any act which the Seller is required to perform under the terms of this Agreement; 40 (d) any act which the Seller is required to perform in order to comply with any applicable law; and (e) actions specified in Schedule 4 which have been effected without breaching the obligations of the Seller pursuant to Clause 6.4(a) and Schedule 4 in any material respect; which: (i) in the case of paragraphs (a) and (b) above are in the normal course of business of the Target Group Companies; (ii) occur after the date of this Agreement; and (iii) in the case of paragraphs (a) and (b) above are otherwise in accordance with terms of this Agreement, and in particular the Seller's obligations under Clause 6.4(a) and Schedule 4; and provided that any such supplements to the Disclosure Letter shall only be effective to qualify the Warranties given at the date of Completion. 41 7. REMEDIES FOR BREACH 7.1 NON DEFAULTING PARTY'S RIGHTS If, on or before the Completion Date, a party (the "NON DEFAULTING PARTY") considers that the other party (the "DEFAULTING PARTY") is in breach of any provision of this Agreement, the Non Defaulting Party shall promptly notify the Defaulting Party in writing, specifying the relevant breach. If the relevant breach is capable of being remedied the Defaulting Party may prior to the Completion Date remedy such breach to the satisfaction of the Non Defaulting Party, acting reasonably. If the breach is not capable of remedy or, if capable of remedy, is not remedied to the satisfaction of the Non Defaulting Party acting reasonably prior to the Completion Date, then the Non Defaulting Party may by notice to the Defaulting Party elect to proceed to Completion or, if the breach would result in a valid Major Claim, terminate this Agreement. 7.2 TERMINATION BY NON DEFAULTING PARTY If the Non Defaulting Party terminates this Agreement pursuant to Clause 7.1: (a) the Defaulting Party shall indemnify the Non Defaulting Party against all its costs up to but not exceeding $1,500,000 (one million five hundred thousand dollars) in the aggregate incurred at any time after 15 March 2002 relating to the negotiation, preparation, execution or termination of this Agreement or the satisfaction of a condition set out in Clause 4.1; and (b) each party's further rights and obligations under this Agreement will cease immediately on termination (subject only to Clauses 15 (Governing law and disputes) and 16 (Miscellaneous) which shall continue in force), but termination will not affect any liability of either party to the other arising from a breach of this Agreement before the date of such termination. 7.3 INDEMNIFICATION BY SELLER 7.3.1 If the Buyer proceeds to Completion and there is a breach of Clause 6.1 or there is a breach of Clause 5.2.1 and: (a) the value of an asset of a Target Group Company is or becomes less than the value would have been had the breach not occurred; or (b) a Target Group Company is subject to or incurs a liability or an increase in a liability which it would not have been subject to or would not have incurred had the breach not occurred, the Buyer shall be entitled to recover from the Seller by way of indemnity (as its sole remedy) in relation to the breach an amount equal to the reduction in the value of the asset or, as the case may be, the liability or increased liability. 42 8. LIMITATIONS ON SELLER'S LIABILITY 8.1 MINIMUM CLAIM THRESHOLD The Seller shall not be liable in respect of any Relevant Claim or a claim under Clause 2 of the Tax Deed unless: (a) the amount payable in respect of that claim exceeds $100,000 (one hundred thousand dollars) in which case the whole amount of that claim and not just the excess over $100,000 (one hundred thousand dollars) shall, subject to the limitation in paragraph (b) below, be recoverable; and (b) the amounts payable in respect of that claim and all other Relevant Claims and claims under Clause 2 of the Tax Deed in aggregate exceed $2,000,000 (two million dollars) (the "AGGREGATE THRESHOLD") and, subject to the limitation in paragraph (a) above, the Seller shall only be liable in respect of the amount by which the amounts payable in aggregate exceed the Aggregate Threshold. For the purposes of determining whether the Aggregate Threshold has been reached or exceeded, there shall be disregarded: (i) the limitation in paragraph (a) above; and (ii) the first $10,000 (ten thousand dollars) of the amount of any Relevant Claim or any claim under Clause 2 of the Tax Deed. 8.2 MAXIMUM LIABILITY The Seller's total liability in respect of all Relevant Claims and claims under the Tax Deed is limited to an aggregate of $100,000,000 (one hundred million dollars) (or its equivalent), but the amount of a claim under Clause 2A.1 of the Tax Deed is not counted for this purpose. 8.3 TIME LIMITS The Seller is not liable for a claim for a breach of this Agreement or the Tax Deed unless the Buyer has given the Seller notice of the claim, stating in reasonable detail the nature of the claim and, if practicable, the amount claimed: (a) in respect of a claim under the Tax Deed or for breach of a Warranty contained in paragraph 24 of Schedule 3: (i) no later than one month after the expiry of the period during which a Target Group Company may be assessed by a Tax Authority in respect of Tax for which the Target Group Company would not have been liable but for the Target Group Company having been a member of a group for Tax purposes, or controlled by any person, at any time before Completion (and 43 for this purpose "control" has the same meaning as in section 767A of the Taxes Act); and (ii) except where Clause 8.3(a)(i) applies, on or before 31 January 2009; and (b) in respect of any other Relevant Claim, on or before 30 June 2004, and has in any such case served proceedings in respect thereof within 12 months of the date of such written notice. 8.4 RECOVERY FROM THIRD PARTIES If the Seller pays to or for the benefit of the Buyer an amount in respect of any Relevant Claim and any of the Buyer, or a Target Group Company subsequently receives from any other person any payment in respect of the matter giving rise to the Relevant Claim, the Buyer shall thereupon pay to the Seller an amount equal to the payment received, after having taken into account any cost, liability (including tax liability) or expense in respect thereof and except to any extent that the liability of the Seller in respect of the Relevant Claim was reduced to take account of such payment. 8.5 NO REPRESENTATIONS The Buyer confirms that it has not entered into this Agreement or any document entered into hereunder or referred to herein in reliance upon any representation, warranty or undertaking other than those expressly contained herein and acknowledges that it has not relied on, and will make no Relevant Claim in respect of any such representation, warranty or undertaking made or supplied by or on behalf of the Seller. Without limiting the general nature of the foregoing, the Buyer confirms that it has not relied on and will make no claim in respect of any budget, forecast or other projection of any nature made or supplied by or on behalf of the Seller. 8.6 ACTIONS AFTER COMPLETION The Seller shall have no liability in respect of any Relevant Claim to the extent that such Relevant Claim arises or is increased in circumstances in which the Buyer or a Target Group Company acts or omits to act, other than pursuant to a legally binding commitment created on or before Completion by a Target Group Company and it or any of its advisers, employees, directors, officers or agents knows that such act or omission would give rise to or increase such Relevant Claim and a reasonable alternative course of action was available to the Buyer or the relevant Target Group Company which could have been expected not to have given rise to such Relevant Claim or to a Relevant Claim of such amount and which would not require the Buyer to incur any expenditure or any liability or otherwise materially prejudice it, on or after Completion. 8.7 SUBSEQUENT LEGISLATION, ETC. The Seller shall not be liable in respect of any Relevant Claim to the extent that liability for such Relevant Claim occurs or is increased as a result of any legislation, 44 regulation or regulatory requirement not in force on or prior to the Completion Date or as a result of the withdrawal of any published extra-statutory concession or other published agreement or arrangement having general application on the Completion Date granted by or made with any governmental or regulatory authority or any tax authority or as a result of any change, after the Completion Date, of any generally accepted interpretation or application of any legislation, regulation or regulatory requirement or as a result of the introduction of, or any change in, any enforcement policy, practice or requirement of any relevant authority after the Completion Date or as a result of the withdrawal after the Completion Date of any extra-statutory concession or any other formal agreement or arrangements with any tax authority (whether or not having the force of law) currently granted by or made with any tax authority, unless in respect of any of the above events the Seller was at the date of this Agreement actively supporting or attempting to secure the enactment or adoption thereof. 8.8 INSURANCE CLAIMS If, in respect of any matter that would give rise to a Relevant Claim, either Target Group Company is entitled to coverage under any policy of insurance, any net recovery on behalf of the Target Group Company shall reduce the amount of the Relevant Claim which the Seller is obligated to pay to the Buyer. The Buyer shall when giving notice of the Relevant Claim to the Seller provide the Seller with notice of the policies of insurance under which coverage of such Relevant Claim may be provided, but the potential availability of insurance coverage shall not relieve or delay the Seller's obligation to pay the Relevant Claim. The appropriate member of the Buyer's group shall make a claim against such insurer or insurers with respect to the Relevant Claim and shall notify the Seller of such claim. The Buyer shall use reasonable endeavours to collect such claim. The Seller may, upon not less than 5 business days' notice, assume the collection of the insurance claim and upon such assumption the Buyer shall execute such assignments or other documents as are necessary to enable the Seller to assume such collection or, if such assignment is not recognised by the insurer, will facilitate the Seller's collection in the Buyer's name, including, but not limited to, representation in litigation. 8.9 RESERVES, ETC. For the avoidance of doubt, none of the Warranties, nor the Tax Deed, nor any other provision of this Agreement shall be construed as a representation or warranty of any judgment based on actuarial principles by whomsoever made or as to the fulfilment of any assumption. In particular, and without prejudice to the generality of the foregoing, the Buyer acknowledges and agrees with the Seller that based on information provided by the Seller and its advisers the Buyer has made its own assessment of the adequacy of the amount of the technical reserves of the Target Subsidiary ("RESERVES") as at the Last Accounting Date and thereafter. No representation or warranty is made by the Seller or any of the Seller's Affiliates as to the adequacy of the Reserves to meet the liabilities of the Target Subsidiary to which the Reserves relate (the "RESERVING ADEQUACY"). Notwithstanding anything otherwise contained in this Agreement, no provision of this Agreement or the Tax Deed shall be construed as constituting or 45 implying, directly or indirectly, the Reserving Adequacy and neither the Seller nor any of the Seller's Affiliates nor any of their respective officers, employees or advisers shall be under any liability to the Buyer or any other person if (for whatever reason) the amount of the Reserves is not adequate. However, this Clause 8.9 shall not operate to exclude any liability that the Seller may have in respect of the failure of the records of the Target Subsidiary (in respect of the Reserves, which the Seller has made available to the Buyer) to reflect each contract and claim which should in accordance with generally accepted UK actuarial standards have been reflected in such records. In the event of any conflict between the provisions of this Clause 8.9 and any other provision in this Agreement, the provisions of this Clause 8.9 shall prevail. 8.10 DEBTORS For the avoidance of doubt, none of the Warranties, nor the Tax Deed, nor any other provision of this Agreement shall be construed as a representation or warranty as to the recoverability of any amount from any debtor of the Target Subsidiary. Neither the Seller nor any of the Seller's Affiliates shall be under any liability to the Buyer or any other person (for whatever reason) in respect of any sum not being recoverable from any debtor of the Target Subsidiary. However, this Clause 8.10 shall not operate to exclude any liability that the Seller may have in respect of the failure of the records of the Target Subsidiary (in respect of the debtors of the Target Subsidiary) which the Seller has made available to the Buyer to record such debtors in accordance with generally accepted UK accounting standards. In the event of any conflict between the provisions of this Clause 8.10 and any other provision in this Agreement, the provisions of this Clause 8.10 shall prevail. 8.11 CONTINGENT LIABILITIES If any breach of the Warranties arises by reason of some liability of any Target Group Company which, at the time such breach or Relevant Claim is notified to the Seller, is contingent only or otherwise not capable of being quantified, then the Seller shall not be under any obligation to make any payment in respect of such breach or Relevant Claim unless and until such liability ceases to be contingent or becomes capable of being quantified, as the case may be provided that this clause shall not operate to avoid a claim made in reasonable particularity in respect of a contingent liability within the applicable time limit specified in Clause 8.3. 8.12 BUYER'S ASSISTANCE If the Buyer becomes aware of any circumstance which gives rise to a Relevant Claim and if the claim in question is as a result of or in connection with a claim by or liability to a third party (a "THIRD PARTY CLAIM"), the Buyer shall give written notice of that circumstance to the Seller forthwith and, the Seller shall be entitled, by a notice in writing addressed to the Buyer, to require the Buyer to take or to procure that the Target Group takes all such reasonable steps and proceedings as the Seller may consider necessary in order to obtain any payment, or relief in respect of or in connection with the Third Party Claim, and the Buyer will, at the request of the Seller allow the Seller at its expense to have the conduct of all correspondence and/or proceedings arising in connection with the Third Party Claim. The Seller may 46 thereafter require the Target Group or the Buyer to take all such reasonable steps or proceedings as the Seller may consider necessary in order to mitigate any loss arising in connection with the Third Party Claim and the Buyer undertakes to procure that the Target Group shall so act. For the purpose of enabling the Seller to exercise its rights under this Clause 8.12, the Buyer shall: (a) make or procure to be made available to the Seller or its duly authorised representatives, and (if so requested by the Seller) provide copies of, all relevant books of account, records and correspondence of the Target Group and permit the Seller to ascertain or extract any relevant information therefrom; and (b) not admit any liability or agree any Third Party Claim which may give rise or has given rise to a Relevant Claim without the prior written consent of the Seller provided that: (i) for the purposes of this clause 8.12, a "Relevant Claim" does not include a Relevant Claim for a breach of a warranty contained in paragraph 24 of Schedule 3; and (ii) the Seller shall indemnify the Buyer or the Target Group Companies concerned against all properly incurred costs, charges and expenses and all liabilities that such companies may incur as a result of the Seller exercising its rights under this Clause 8.12. The Seller agrees to keep the Buyer fully informed as to the progress of any such Third Party Claim and the defence thereof. 8.13 NO DOUBLE COUNTING - TAX DEED The Seller shall not be liable in respect of any breach of any Warranty or in respect of any claim under the Tax Deed if and to the extent that the loss occasioned thereby has been recovered under the same or any other Warranty or under the Tax Deed or has otherwise been made good or compensated for without cost to the Buyer or the Target Group. 8.14 NO DOUBLE COUNTING - ACCOUNTS AND COMPLETION ACCOUNTS The Seller shall not be liable in respect of a Relevant Claim to the extent of: (a) any amount which is included as a liability which is the subject matter of such Relevant Claim; or (b) any amount by which the valuation of any asset has been reduced to take account of the subject matter of such Relevant Claim; in the Accounts or in the Completion Accounts. If any Relevant Claim is made the Buyer shall use all its endeavours to procure that the Seller and its advisers are given 47 reasonable access to the working papers underlying the Accounts and the Completion Accounts for the purposes of ascertaining whether any, and if so what, amount is applicable to the Relevant Claim for the purposes of this Clause 8.14. 8.15 CHANGE IN ACCOUNTING POLICY The Seller shall not be liable in respect of any Relevant Claim in respect of any matters resulting from a change of accounting policy or practice or the length of any accounting period of the Buyer or the Target Group introduced after Completion. 8.16 EXCLUSION OF LIABILITY IN RESPECT OF IGI Save as provided in the IGI Retrocession, the Seller shall have no liability whatsoever whether to the Buyer, any Target Group Company or otherwise under this Agreement including the Warranties (save in respect of the Warranty contained in paragraph 1 of Schedule 3) or the documents referred to herein (other than the IGI Retrocession) in respect of the business referred to in the definition of "Business Covered" in the IGI Retrocession. In the event of any conflict between the provisions of this Clause 8.16 and any other provision in this Agreement, the provisions of this Clause 8.16 shall prevail. 8.17 MITIGATION OF LOSS Nothing contained in this Clause 8 shall limit the Buyer's obligation at common law or the obligation of the Target Group to mitigate any loss or damage resulting from or arising as a consequence of any circumstances giving rise to any Relevant Claim. 8.18 UNLIMITED LIABILITY 8.18.1 This Clause 8 shall not apply in relation to any Relevant Claim arising out of any fraud or dishonesty on the part of the Seller or its agents or advisers or in respect of a Relevant Claim involving or relating to breach of Clause 6.1 in respect of a Warranty contained in paragraphs 1 or 3 of Schedule 3. 48 9. SELLER'S UNDERTAKINGS 9.1 CONFIDENTIAL BUSINESS INFORMATION 9.1.1 Before and after Completion the Seller shall: (a) not disclose to a person Confidential Business Information it has or acquires; and (b) make every effort to prevent the disclosure by its employees of Confidential Business Information. 9.1.2 The Seller shall procure that each of its Affiliates complies with Clause 9.1.1. 9.1.3 Clause 9.1.1 does not apply to: (a) disclosure of Confidential Business Information to a director, officer or employee of the Buyer or a Target Group Company whose function requires him to have the Confidential Business Information; (b) disclosure of Confidential Business Information required to be disclosed by law or any applicable regulation having the force of law; (c) disclosure of Confidential Business Information to an adviser for the purpose of advising the Seller but only on terms that Clause 9.1.1 applies to disclosure by the adviser; or (d) Confidential Business Information that becomes publicly known except by the Seller's breach of Clause 9.1.1 or 9.1.2. 9.2 NON-COMPETITION 9.2.1 The Seller shall not directly or indirectly: (a) seek to induce any reinsurer, cedent or other business relation of a Target Group Company to cease doing business with a Target Group Company or interfere with any such relationship; or (b) for two years starting on the date of this Agreement engage, employ, solicit, or contact with a view to his engagement or employment by another person, any individual who is at that time a director, officer, employee or manager of a Target Group Company. 9.2.2 Each restriction in Clause 9.2.1 constitutes an entirely independent restriction on the Seller. 9.2.3 The Seller shall use reasonable endeavours to procure that each of its Affiliates complies with Clause 9.2.1. 49 9.2.4 On receiving the Buyer's reasonable request the Seller shall give to the Buyer all information it possesses as at the date of this Agreement and which it still possesses as at the date of such request relating solely to a Target Group Company's business and allow the Buyer to copy any document containing that information, provided the obligations of the Seller under this Clause shall not extend to allowing access to, or the copying of, information which is, in the reasonable opinion of the Seller, regarded as confidential to the activities of the Seller otherwise than in connection with the Target Group Companies. Each party shall bear its own costs in respect of the provision of such information to the Buyer, unless the Seller provides services beyond simply supplying available information (such as processing or analysing such information or preparing any reports) in which case the Buyer shall reimburse the Seller for its reasonable costs. 9.3 POST COMPLETION ASSISTANCE 9.3.1 For the period of one year after the Completion Date, the Seller shall allow, and procure that each Affiliate of the Seller shall allow, the Buyer's representatives reasonable access, upon 48 hours' written notice, to the Key Employees, and shall procure that such Key Employees assist the Buyer with its enquiries and provide the Buyer with such information about the Target Group Companies held by the Seller or its Affiliates as the Buyer may reasonably require to assist it to run off the business of the Target Subsidiary in an efficient manner or otherwise conduct the affairs of the Target Group Companies properly, provided the obligations of the Seller under this clause shall not extend to allowing access to information which is in the reasonable opinion of the Seller regarded as confidential to the activities of the Seller otherwise than in connection with the Target Group Companies. 9.3.2 The Buyer shall: (a) bear all of its own costs in implementing clause 9.3.1; and (b) subject to clause 9.3.3 reimburse the Seller and/or its Affiliates for its reasonable out-of-pocket expenses incurred in implementing clause 9.3.1 provided that: (i) such costs are agreed in advance in writing with the Buyer and the Seller and/or its Affiliates, as applicable; and (ii) the Seller shall provide reasonable evidence of such costs before the Buyer shall be obliged to reimburse it or its Affiliates. 9.3.3 To the extent that the Buyer requires any Key Employees to prepare reports or similar work beyond responding to brief routine enquiries, the Buyer shall pay to the Seller or its Affiliates, as appropriate, the then amount of the Key Employee's hourly pay rate multiplied by 130 per cent. (for these purposes such hourly rate being equal to the employee's then current annualised salary, including any target bonus, divided by 2080) for the services of the relevant Key Employees as agreed between the Buyer and the Seller in writing in advance. 9.4 COMPUTER PROGRAMS 9.4.1 The obligations of the Seller and the Buyer with respect to Computer Programs used in the business of the Target Subsidiary shall be satisfied on Completion as follows: 50 (a) with respect to each Licensed Computer Program and Shrink Wrap Computer Program that is licensed by the licensor thereof to the Seller or any of the Seller's Affiliates (except those Computer Programs that are solely licensed to a Target Group Company), the Seller shall provide to the Target Subsidiary the rights described in Paragraph 7.4.2(d) of Schedule 3; (b) the Seller shall be responsible for 50% of the expenses related to obtaining such rights provided that the aggregate of such shared expenses, whether incurred prior to or after Completion shall not exceed $500,000 unless the Buyer and Seller mutually agree; (c) the Target Group shall be exclusively responsible for payment of continuing use charges, upgrade fees and maintenance fees, and for performance of other contractual obligations arising with respect to use by the Buyer and the Target Group after the Completion Date of the Computer Programs licensed or assigned to the Target Subsidiary pursuant to this Clause 9.4. 9.5 INTRA GROUP CONTRACTS 9.5.1 The Seller undertakes to the Buyer that, after the date of Completion in respect of any Relevant Contracts entered into between the Target Subsidiary and the Seller or any of the Seller's Affiliates, it will not adopt a position in relation to any claim against the Target Subsidiary or defence to a claim brought by the Target Subsidiary which is (i) materially different to the position it has adopted before the date of this Agreement; and (ii) detrimental to the position of the Target Subsidiary. 9.5.2 The Buyer shall procure that, after the date of Completion in respect of any Relevant Contracts entered into between the Target Subsidiary and the Seller or any of the Seller's Affiliates, the Target Subsidiary will not adopt a position in relation to any claim against the Seller or any of the Seller's Affiliates or a defence to a claim brought by the Seller or any of the Seller's Affiliates, which is: (i) materially different to the position it has adopted before the date of this Agreement; and (ii) detrimental to the position of the Seller, or, as the case may be, the Seller's Affiliates. 9.6 ACCOUNTS The Seller shall provide the Buyer with a copy of each bank mandate of each Target Group Company and details of each bank account of each Target Group Company at least three business days before Completion. 9.7 CLAIMS 9.7.1 From the date of this Agreement until Completion, in paying claims, the Seller shall procure that the Target Subsidiary shall, unless prior notice is given to the Buyer and the Buyer's consent is obtained: (a) follow the claim settlements approved by the lead reinsurer on any contract of Assumed Reinsurance; 51 (b) adhere to the Target Subsidiary's internal claim authorisation limits as disclosed to the Buyer prior to the date of this Agreement; and (c) determine settlement amounts consistently with the Target Subsidiary's practices in effect during the 2002 calendar year prior to the date of this Agreement. 9.8 PRE-COMPLETION TRANSACTIONS 9.8.1 For the purposes of this Clause 9.8: "LUC GUARANTEE" means the guarantee given by the Target Subsidiary (and others) in respect of the obligations of Marketing Building Limited, LUC Holdings Limited and London Underwriting Centre Limited contained in the superior lease of the London Underwriting Centre dated 17 March 1994 and made between (1) The Prudential Assurance Company Limited (2) Market Building Limited and (3) the 20 guarantors listed therein, the Development Agreement dated 27 February 1990 made between (1) The Prudential Assurance Company Limited (2) Market Building Limited (3) Market Building Management Services Limited (4) the 20 guarantors listed therein and (5) Prudential Development Management Limited, the underlease of the Common Parts dated 17 March 1994 made between (1) Market Building Limited and (2) The London Underwriting Centre Limited and in the Shareholder's Agreement relating to LUC Holdings Limited (registered number 3182700) and in any documents supplemental or collateral to them; "OVERSEAS PROPERTIES" means the Real Property situated outside the UK, the details of which are set out in Schedule 5; "RESIDENTIAL PROPERTIES" means those properties at Millers Wharf in London registered under Title Numbers EGL 299483 (6 Miller's Wharf) and EGL 271573 (11 Miller's Wharf); and "COMPAQ LEASE AGREEMENT" means the Master Lease Agreement number UKCHQ0206 dated 22 August 2000 between Compaq Financial Services Company and the Target Subsidiary (including each schedule and any amendments to that agreement). 9.8.2 Prior to Completion the Seller shall use reasonable endeavours to procure that: (a) each Target Group Company: (i) transfers any interests that it may have in the Overseas Properties to the Seller, one of the Seller's Affiliates or a third party, or surrenders any interest it holds in any such Overseas Properties back to the owner of the superior interest in that Overseas Property; (ii) transfers any interests that it may have in the Residential Properties to the Seller, one of the Seller's Affiliates or a third party for an aggregate price equal to $2,300,000; 52 (iii) obtains a release from any obligations that it may have under the LUC Guarantee; and (iv) transfers all of the shares held by any Target Group Company in LUC Holdings Limited to the Seller or as the Seller shall direct and obtains a complete discharge and release of the relevant Target Group Company from any liabilities and claims under the shareholders agreement referred to in the definition of LUC Guarantee in Clause 9.8.1 above (the "SHAREHOLDERS AGREEMENT") in consideration for the payment by the Target Subsidiary to the Seller (or an Affiliate of the Seller) of $1,000,000 (one million dollars); and (b) the Target Subsidiary obtains consent from Compaq Financial Services Company to the change in control of the Target Subsidiary pursuant to Clause 17.1(e) of the Compaq Lease Agreement. 9.8.3 If, at Completion, notwithstanding the use of its reasonable endeavours, the Seller has been unable to procure any of the events described in Clause 9.8.2 (the "OUTSTANDING EVENTS") the Seller shall be required to continue to use reasonable endeavours, after Completion, to enable the Target Subsidiary and/or the Target Company, as appropriate to fulfil the Outstanding Events on terms not materially adverse to the Buyer. 9.8.4 If, following Completion, the Buyer or a Target Group Company incurs or is subject to any costs, claims, damages, expenses, losses, liabilities or penalties or is required to make any payment (including any rent or other outgoings) in connection with the Overseas Properties, the Residential Properties, the LUC Guarantee, the Shareholders Agreement or the failure of the Seller to obtain the consent referred to under Clause 9.8.2 in relation to the Compaq Lease Agreement, the Seller hereby agrees to pay to the Buyer on demand an amount equal to any such costs, claims, damages, expenses, losses, liabilities, penalties or payments. The Seller shall be entitled to deduct from such amount such sums as the Buyer has received from any third parties in respect of the same matters and shall be entitled to recover from the Buyer any amounts paid by the Seller to the Buyer that the Buyer recovers from any third parties in respect of the same matters. 9.8.5 The Buyer shall at the request and cost of the Seller provide the Seller with and procure that the Target Subsidiary offers the Seller all reasonable assistance in connection with the fulfilment of any Outstanding Event. 9.8.6 The Seller's obligation to use its reasonable endeavours to procure the release referred to in clause 9.8.2(c) shall include the obligation to enter into a guarantee in the place of the Target Subsidiary on the same or similar terms to the LUC Guarantee. 9.9 INVESTED ASSETS 9.9.1 Seven days before Completion the Seller shall provide the Buyer with a list of the Invested Assets in which the Target Subsidiary has a beneficial interest. The list shall include details of the issuer, the relevant security, its CUSIP, its nominal value, its 53 credit ratings by the Credit Raters as at the date of the list, and such other information as the Seller shall reasonably require. 9.9.2 The Seller shall procure that on the Completion Date the Target Subsidiary does not have a beneficial interest in any Invested Asset which has a rating of below BBB- by Standard & Poor's a division of the McGraw-Hill Companies and Baa3 by Moody's Investors Services, Inc (together the "CREDIT RATERS") . 54 10. BUYER'S UNDERTAKINGS 10.1 POLICY FOR DISTRIBUTIONS The Buyer agrees that, following Completion, and until the payment in full of the Completion Balance, it will use all reasonable endeavours to maximise the amount of Distributions and as and when Distributions or such distributions as are otherwise made to the shareholders of the Target Subsidiary, whether of profits or of capital, made by any lawful means, including pursuant to a members' voluntary winding-up are paid by the Target Subsidiary to the Target Company, it will use its best endeavours in its capacity as a shareholder in the Target Company to procure that the Target Company pays such amounts to the Buyer either by way of dividend or by a share repurchase or reduction and repayment of capital, but in each case subject to applicable laws and after making appropriate provision for its tax and appropriate reserves for working capital and provided always that if it is not possible for a Target Group Company to pay a Distribution by way of dividend, the Buyer's obligations under this Clause 10.1 shall be subject to the Buyer's reasonable discretion in determining the timing of the implementation of any other mechanism for the payment of the Distribution having regard to the amount of the potential Distribution and the time and cost of implementing the relevant mechanism. 10.2 CHANGE OF NAME 10.2.1 The Buyer shall procure that as soon as reasonably practicable after the Completion Date, and in any event within 30 days of the Completion Date, all of the business letters, notices, bills, cheques, orders, invoices, receipts and other correspondence of the Target Group Companies are amended so as to remove any trading name or trade mark which: (i) includes the acronym "CNA" or any acronym or words similar thereto; or (ii) is likely to cause a third party to believe that the Target Group Companies are connected with or have an interest in the business of the Seller. The Buyer shall further procure that, as soon as reasonably practicable after the Completion Date (but in no event more than 30 days after the Completion Date), the names of the Target Group Companies are changed so as not to include the acronym "CNA" or any acronym or words similar thereto. 10.2.2 The Seller shall grant the Buyer the right to use the acronym "CNA" on the terms of the Trade Mark Licence Agreement in the Agreed Form for the specific use set out therein. 10.2.3 The Buyer agrees that prior to the Completion Date the Seller shall be entitled to arrange for the transfer from the Target Group Companies to the Seller or its Affiliates of any and all registered trade marks and domain names currently registered or held in the name of the Target Company or the Target Subsidiary. 10.3 SELLER'S ACCESS TO RECORDS 55 For a period of one year after the Completion Date, the Buyer shall procure that the Target Group Companies shall allow the Seller's representatives reasonable access upon 48 hours written notice, to the books and records of the Target Group to the extent that such access may reasonably be required by the Seller in connection with matters related to or affected by the operations of the Target Group prior to the Completion Date (provided that such access shall be procured by the Buyer for a period of six years after Completion where such access may be required by the Seller in connection with the taxation of the Seller or any of its Affiliates). Such access shall be afforded during normal business hours. The obligations of the Buyer under this clause shall not extend to allowing access to information which is in the reasonable opinion of the Buyer regarded as confidential to the activities of the Target Group or is otherwise than in connection with the Target Group Companies. The Seller shall: (a) bear all of its own costs in implementing this Clause 10.3; and (b) reimburse the Buyer and/or its Affiliates for its out-of-pocket expenses properly incurred in implementing this Clause 10.3 provided that: (i) such costs are agreed in advance in writing with the Seller and/or its Affiliates, as applicable; and (ii) the Buyer shall provide reasonable evidence of such costs before the Seller shall be obliged to reimburse it or its Affiliate. If the Buyer wishes to dispose of any of such books and records prior to the expiration of the six year period referred to above the Buyer shall, prior to doing so, give the Seller a reasonable opportunity, at the Seller's expense, to segregate and remove such books and records as the Seller may select. 56 11. BUYER'S WARRANTIES The Buyer warrants that: 11.1 INCORPORATION AND EXISTENCE The Buyer is a limited company incorporated under English law and has been in continuous existence since incorporation. 11.2 RIGHT, POWER, AUTHORITY AND ACTION 11.2.1 The Buyer has the right, power and authority and has taken all action necessary to execute and deliver, and to exercise its rights and perform its obligations under, this Agreement and each document to be executed at or before Completion. 11.2.2 The Buyer has the right, power and authority to conduct its business as conducted at the date of this Agreement. 11.3 BINDING AGREEMENTS The Buyer's obligations under this Agreement and each document to be executed at or before Completion are, or when the relevant document is executed will be, enforceable in accordance with their terms. 11.4 WINDING UP AND ADMINISTRATION No order has been made, petition presented or resolution passed for the winding up of the Buyer or for the appointment of a provisional liquidator to the Buyer or for an administration order in respect of the Buyer. 11.5 RECEIVERSHIP No receiver or receiver and manager has been appointed of the whole or part of the Buyer's business or assets. 11.6 VOLUNTARY ARRANGEMENTS No voluntary arrangement has been proposed under section 1 of the Insolvency Act 1986 in respect of the Buyer. No compromise or arrangement has been proposed, agreed to or sanctioned under section 425 of the Act in respect of the Buyer. 11.7 INSOLVENCY The Buyer is not insolvent or unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986. 11.8 PAYMENT OF DEBTS The Buyer has not stopped paying its debts as they fall due. 57 11.9 DISTRESS ETC. No distress, execution or other process has been levied on an asset of the Buyer. 11.10 UNSATISFIED JUDGMENTS There is no unsatisfied judgment or court order outstanding against the Buyer. 11.11 STRIKING OUT No action is being taken by the registrar of companies to strike the Buyer off the register under section 652 of the Companies Act. 11.12 FSA In respect of the Buyer's application to the FSA which is to be made pursuant to Clause 4.2.1 of this Agreement, the Buyer knows of no matter not described in the letter from the Buyer to the Seller of even date herewith relating to any proposed controller, director of a proposed controller or proposed approved person in respect of whom details are to be given to the FSA by the Buyer which might cause the FSA to refuse to give its approval for the purposes of Clause 4.1(a) of this Agreement. 58 12. PENSIONS 12.1 A deed substituting CNA Europe Holdings Limited for the Target Company as principal employer in relation to the CNA Re Management Company Limited Retirement Benefits Plan (1977) is attached to this Agreement, signed by the trustees of the Seller's Scheme and will take effect on Completion. The Seller shall procure that the Target Company and CNA Europe Holdings Limited execute this deed before Completion. The Seller shall use its best endeavours and take whatever steps may be necessary to procure that the approval of the Inland Revenue is given to the substitution prior to Completion. 12.2 If the Inland Revenue shall confirm that the substitution is satisfactory from their point of view and does not affect the Seller's Scheme's exempt approved status then, following Completion, the Seller shall procure that the Inland Revenue Contributions Agency is notified of the cessation of participation of the Target Company and that the contracting out certificate held by the Target Company shall, from Completion, be held by CNA Europe Holdings Limited. The Buyer shall, and shall procure that the Target Company shall, co-operate with the Seller to procure this result. 12.3 If the Inland Revenue confirms that the substitution is not satisfactory from their point of view, then the Target Company shall remain the principal employer of the Seller's Scheme. However: (a) accrual of benefits under the Seller's Scheme shall cease effective on Completion and the parties shall give (or procure the giving of) such notices to effect this as may be required; (b) the Buyer shall procure that the Target Company shall take such steps, sign such notices and deeds and resolutions as the Seller shall require in relation to the Seller's Scheme and shall generally act in accordance with the instructions of the Seller in relation to the Seller's Scheme, in each case provided that such actions would not be in breach of any applicable laws, Inland Revenue requirements or any duties of the Target Company to the members of the Seller's Scheme. 12.4 In either case (but provided, if Clause 12.3 applies, that the Target Company has materially complied with the Seller's instructions) the Seller shall indemnify the Buyer and the Buyer as trustee for the Target Company against any liability (including any liability under section 75 of the Pensions Act 1995) on the Buyer or the Target Company to make any further payments to the Seller's Scheme or to the trustees of the Seller's Scheme on or after the Completion Date and, if clause 12.3 applies, against any liability which may otherwise arise on the Target Company in relation to the Seller's Scheme, including the Target Company's own reasonable costs and expenses and any liability to pay expenses incurred by the trustees. 59 13. NOVATION 13.1 If, following Completion, the Buyer at its sole election notifies the Seller that it intends to transfer the Sale Shares to one of its Affiliates (the "NEW BUYER") and to exercise its rights if it so desires to novate this Agreement to the New Buyer in accordance with Clause 16.5.4, notwithstanding any other provision of this Agreement: 13.1.1 at the request of the Buyer the Seller shall promptly take all steps necessary to release the Sale Shares from the Distribution Security; and 13.1.2 upon the transfer of the Sale Shares to the New Buyer the Buyer shall procure that the New Buyer executes a security deed pursuant to which the New Buyer will grant the Seller a first charge over the Sale Shares in the same form as the Distribution Security, Provided that the Seller shall not be obliged to agree to that novation: (a) if the result of the novation is that any provider of debt or equity finance to the Target Subsidiary would rank ahead of the Seller with respect to payments or distributions; and (b) unless the Buyer provides the Seller with a legal opinion of a reputable law firm in terms reasonably satisfactory to the Seller confirming that the new distribution security to be granted by the New Buyer will be a valid first charge and enforceable in accordance with its terms. 13.2 In the event that the Buyer transfers the Sale Shares to the New Buyer and exercises its rights to novate this Agreement to the New Buyer pursuant to Clause 13.1 (the "BUYER'S TRANSFER"), then where: 13.2.1 the New Buyer is required by law to make a deduction or withholding when the Buyer would not have been required by law to have made such deduction or withholding had the Buyer made the payment where the Buyer's Transfer had not occurred, then the New Buyer shall pay to the Seller a sum equal to the amount that the Seller would otherwise have received in the absence of any such deduction or withholding; and 13.2.2 any payment made by the New Buyer to the Seller is subject to tax in the hands of the Seller, then where such payment would not have been subject to tax if it had been made by the Buyer where the Buyer's Transfer had not occurred, then the New Buyer shall pay to the Seller such amount as will ensure that the net amount received in respect of such payment by the Seller after such tax is the same as it would have been were the payment not so subject to such tax. 60 14. RESTRUCTURING 14.1 Following Completion, the Buyer may wish at its sole election to implement a restructuring involving one or more of the following actions (the "RESTRUCTURING"): 14.1.1 the incorporation of a new company ("NEWCO") by the Buyer or one of its Affiliates; 14.1.2 the novation of the Management Agreement from the Manager, the Target Company and the Target Subsidiary to the Manager, NewCo and the Target Subsidiary; 14.1.3 the transfer of employees and certain operating assets of the Target Company to NewCo; 14.1.4 the transfer by the Target Company to the Buyer of all of the shares it holds in the Target Subsidiary; and 14.1.5 the member's voluntary winding-up of the Target Company. 14.2 The Seller acknowledges that the Buyer may wish to implement the Restructuring, and the parties hereby agree that, in connection with a Restructuring and, notwithstanding any other provision of this Agreement: 14.2.1 at the request of the Buyer, the Seller shall promptly take all steps necessary to release the Sale Shares from the Distribution Security; 14.2.2 promptly following the Restructuring, the Buyer shall execute a Security Deed pursuant to which the Buyer will grant to the Seller a first charge over the entire issued share capital of the Target Subsidiary in the same form as the Distribution Security; 14.2.3 if appropriate the definition of "MANAGEMENT AGREEMENT" in Clause 1.1 of this Agreement shall be substituted by the following: ""MANAGEMENT AGREEMENT" means the agreement entered into between the Target Subsidiary, the Manager and NewCo;" 14.2.4 at the request of the Buyer, the Seller shall take all steps necessary to re-assign the rights assigned by the Manager to the Seller pursuant to the Management Fee Security and shall release and discharge the Management Fee Security; 14.2.5 if appropriate promptly following the Re-structuring, the Manager shall execute a security deed pursuant to which the Manager will assign by way of security to the Seller, and grant the Seller a first charge over, certain of its rights to payment of the Management Fee in the same form as the Management Fee Security; 14.2.6 if appropriate the definition of "MANAGEMENT FEE" in Clause 1.1 of this Agreement shall be amended by substituting paragraph (ii) of that definition by the following: 61 "costs necessarily and properly incurred by NewCo in providing services pursuant to the Management Agreement and reimbursement by the Target Subsidiary to NewCo pursuant to Paragraph 1.1 of Schedule 3 to the Management Agreement provided that such costs are at commercially reasonable rates;" 14.2.7 if appropriate the definition of "TRIGGER DISTRIBUTIONS" in Clause 1.1 of this Agreement shall be substituted by the following: "TRIGGER DISTRIBUTIONS" means Distributions (and distributions as are otherwise made to the shareholders of the Target Subsidiary, whether of profits or capital, made by any lawful means, including pursuant to a members' voluntary winding-up);" 14.2.8 if appropriate Clause 10.1 of this Agreement shall be substituted by the following: "The Buyer agrees that, following Completion and until the payment in full of the Completion Balance, it will use all reasonable endeavors to maximize the amount of Distributions provided always that if it is not possible for the Target Subsidiary to pay a Distribution by way of dividend, the Buyer's obligations under this Clause 10.1 shall be subject to the Buyer's reasonable discretion in determining the timing of the implementation of any other mechanism for the payment of the Distribution having regard to the amount of the potential Distribution and the time and cost of implementing the relevant mechanism." 14.2.9 The Seller shall not be obliged to agree to any restructuring: (a) if the result of the Restructuring is that any provider of debt or equity finance to the Target Subsidiary would rank ahead of the Seller with respect to payments or distributions; and (b) unless the Buyer provides the Seller with a legal opinion of a reputable law firm in terms reasonably satisfactory to the Seller confirming that the new distribution security to be granted by the Buyer and the new management fee security will each be a valid first charge and enforceable in accordance with its terms. 62 15. GOVERNING LAW AND DISPUTES 15.1 GOVERNING LAW This Agreement and all matters arising from or connected with it are governed by, and shall be construed in accordance with, the laws of England. 15.2 RESOLUTION BY THE COURTS 15.2.1 Save where this Agreement provides for the reference of disputed matters to an Expert, the courts of England shall have exclusive jurisdiction to settle any Disputes and hear and decide any Proceedings. 15.2.2 The parties agree that the courts referred to in Clause 15.2.1 are the most appropriate and convenient courts to settle any Disputes and hear and decide any Proceedings and, accordingly, that they will not argue to the contrary. 15.3 SERVICE OF PROCESS 15.3.1 The Seller irrevocably agrees with the Buyer that any Service Document may be sufficiently and effectively served on it in connection with any Proceedings in England and Wales by service on its process agent provided that a copy of the Service Document is also sent by fax on the same day and in accordance with Clause 16.16 to the General Counsel of the Seller. 15.3.2 For the purposes of this Clause, the Seller appoints as its process agent in connection with Proceedings in England and Wales, Sisec Limited of 21 Holborn Viaduct, London EC1A 2DY. 15.3.3 The Seller agrees to maintain the appointment of its process agent (and any replacement process agent appointed pursuant to this Clause) and that it shall not withdraw the appointment of any such process agent until its replacement shall have been validly appointed and the name and address of the replacement process agent notified to the Buyer. 15.3.4 If the process agent referred to in Clause 15.3.2 (or any replacement process agent appointed pursuant to this Clause) at any time ceases for any reason to act as such, the Seller shall appoint a replacement process agent with an address for service in England or Wales, and shall notify the Buyer of the name and address of the replacement process agent. If the Seller fails to appoint a replacement process agent or notify the Buyer of the name and address of a replacement process agent as required by this Clause, the Buyer shall be entitled by notice to the Seller to appoint such a replacement process agent to act on the Seller's behalf. The Seller shall bear all the costs and expenses of appointing a replacement process agent by the Buyer in these circumstances. 63 15.3.5 Any Service Document served pursuant to this Clause shall be marked for the attention of the process agent appointed pursuant to this Clause and addressed to the address set out in Clause 15.3.2 or to his address notified pursuant to Clause 15.3.4. 15.3.6 Any Service Document marked for the attention of the process agent and addressed to the address set out in Clause 15.3.2 or at the address notified pursuant to Clause 15.3.4 shall be deemed to have been duly served if: (a) left at such address, when it is left; or (b) sent by first class post to such address, 2 business days after the date of posting. 15.3.7 The Buyer shall send by post to the Seller in accordance with Clause 16.16 a copy of any Service Document served by it (or on its behalf) on a process agent pursuant to this Clause, but no failure or delay in doing so shall prejudice the effectiveness of service of the Service Document in accordance with this Clause. 15.3.8 The Seller agrees that failure by any process agent to give notice of any process to it or give a copy of any Service Document served on it shall not impair the validity of such service or of any Proceedings based on that process. 15.3.9 Nothing contained in Clause 15.3.1 affects the right to serve a Service Document in another manner permitted by law. 15.4 CONSENT TO ENFORCEMENT Each party hereby consents generally in respect of any Proceedings to the giving of any relief or the issue of any process in connection with such Proceedings including the making, enforcement or execution against any property (irrespective of its use or intended use) of any order or judgment which may be made or given in such Proceedings. 15.5 CURRENCY INDEMNITY 15.5.1 If any sum due from one party (the "FIRST PARTY") to the other party (the "SECOND PARTY") under this Agreement or any award, order or judgment given or made in relation to this Agreement has to be converted from the currency (the "FIRST CURRENCY") in which it is payable under this Agreement or under such order or judgment into another currency (the "SECOND CURRENCY") for the purposes of: (a) making or filing a claim or proof against either party; or (b) obtaining an award, order or judgment in any court or other tribunal; or (c) enforcing any award, order or judgment given or made in relation to this Agreement, then, the first party shall, if practicable, on the day of receipt of such sum paid to it in satisfaction, in whole or in part of such award, order or judgment, or if not practicable 64 on such day, as soon as is reasonably practicable thereafter, convert such sum from the second currency into the first currency at the best rate or rates of exchange (taking into account the amount to be exchanged and the location in which such exchange is effected) reasonably available to the second party on the day of conversion, and if the amount resulting from such conversion (net of all commissions, charges, fees and expenses paid): (i) is less than the amount of the award, order or judgment in the first currency, then the second party shall pay such difference to the first party within 15 days of a demand for it; or (ii) is more than the amount of the award, order or judgment in the first currency, then the first party shall pay such difference to the second party within 15 days of a demand for the same. 15.5.2 Each demand submitted by a party pursuant to Clause 15.5.1 shall be accompanied by a calculation of the computation made together with such supporting evidence to substantiate the demand. 65 16. MISCELLANEOUS PROVISIONS 16.1 ANNOUNCEMENTS 16.1.1 Neither party may, during the period commencing on the date of this Agreement and ending on the Completion Date or earlier termination of this Agreement, make or send a public announcement, communication or circular concerning the transactions referred to in this Agreement or in relation to its provisions unless it has first obtained the other party's written consent. 16.1.2 The restrictions in this Clause shall not apply to a public announcement, communication or circular: (a) if made or sent to any Affiliate of such party; or (b) if made or sent to any outside consultants or advisers engaged by or on behalf of such party and acting in that capacity; or (c) to the extent required by the rules of a relevant and recognised stock exchange or regulatory or governmental body to which the relevant party submits, whether or not the requirement for information has the force of law, if the party required to make or send it has, if practicable, first consulted and taken into account the reasonable requirements of the other party; or (d) to the extent required by any applicable laws or pursuant to an order of any court of competent jurisdiction if the party required to make or send it has, if practicable, first consulted and taken into account the reasonable requirements of the other party; or (e) if made or sent to any insurer under a policy of insurance; or (f) if made or sent to directors, employees and officers of such party or of its Affiliates. 16.2 CONFIDENTIALITY 16.2.1 Each party shall at all times: (a) use its reasonable endeavours to keep all data or information (whether technical, commercial or financial) acquired under or pursuant to this Agreement (including information relating to the other party's products, operations, processes, plans or intention, product information, know-how, trade secrets, market opportunities and business affairs) strictly confidential and shall not disclose this to any other person; and 66 (b) not use any data or information referred to in paragraph (a) above for any purpose other than in relation to the proper performance of its obligations and exercise of its rights under this Agreement. 16.2.2 The provisions of this Clause shall not apply to: (a) any information in the public domain at the time of disclosure, otherwise than by breach of this Agreement; (b) information which passes into the public domain after disclosure through no act or default of the recipient party; (c) information in the possession of, or independently generated by, a party before that information was disclosed to it by or on behalf of the other party and which was not obtained under, or generated in breach of, any obligation of confidentiality; and (d) information obtained from a third party who is free to disclose the same, and which is not obtained under any obligation of confidentiality. 16.2.3 Following Completion, the Buyer shall not, and shall procure that its Affiliates do not, disclose information contained in the CNA Re Pricing Handbook, an example of which, dated October 2000, has been made available to the Buyer during its investigation of the Target Group to any third party or use such information other than for the purpose of running off the business of the Target Subsidiary. 16.2.4 A party shall be entitled to disclose any data or information referred to above without the prior written consent of the other party if such disclosure is made in good faith: (a) to any Affiliate of such party, having made it aware of the requirements of this Clause; or (b) to any outside consultants or advisers engaged by or on behalf of such party and acting in that capacity, having made them aware of the requirements of this Clause; or (c) to the extent required by the rules of a relevant and recognised stock exchange or regulatory or governmental body to which the relevant party submits, whether or not the requirement for information has the force of law; or (d) to the extent required by any applicable laws or pursuant to an order of any court of competent jurisdiction; or (e) to any insurer under a policy of insurance; or (f) to directors, employees and officers of such party having made them aware of the requirements of this Clause, provided that: 67 (i) any such information disclosed pursuant to paragraph (c) or (d) above, shall be disclosed only if the party has, if practicable, first consulted and taken into account the reasonable requirements of the other party; and (ii) such disclosure is necessary to enable such party to perform this Agreement or to protect or enforce its rights under this Agreement or any other agreement referred to in it. 16.2.5 The restrictions contained in this Clause 16.2 shall continue to apply after the date of this Agreement without limit in time. 16.3 THE EURO 16.3.1 In this Clause: (a) the "EURO" means the single or unified European currency (whether known as the euro or otherwise) as contemplated in the Treaty of Rome of 25 March 1957, as amended by the Single European Act 1986 and the Treaty on European Union which was signed at Maastricht on 1 February 1992; (b) the "EMU REGULATIONS" means Regulation No. 1103/97 adopted by the European Council on 20 June 1997 and Regulation No. 974/98 adopted by the European Council on 2 May 1998; and (c) the expression "EXTENSION OF EMU" means: (i) the extension of European economic and monetary union to any part of the European Union; (ii) the extension of the introduction at any time of the euro to any part of the European Union; or (iii) any events associated with any of the matters described in paragraphs (a) and (b) above, in each case, as contemplated in the Treaty of Rome of 25 March 1957, as amended by the Single European Act 1986 and the Treaty on European union which was signed at Maastricht on 1 February 1992 and "NON-EXTENSION OF EMU" shall be construed accordingly. 16.3.2 The parties agree that the extension of EMU (or the non-extension of EMU) shall not result in the discharge, cancellation, rescission or termination, in whole or in part, of this Agreement or give any party the right to cancel, rescind, terminate or vary this Agreement, in whole or in part. 16.3.3 Unless the parties agree otherwise, at any time at which it is so permitted under any relevant law (including the EMU Regulations), a party may not make any payment under or in connection with this Agreement which is expressed to be payable in dollars in euro. 68 16.3.4 If at any time the euro is introduced to the United Kingdom and as a result sterling is replaced by the euro, then the amounts of sterling referred to in this Agreement shall be deemed converted into units of the euro at the rate prescribed by the EMU Regulations or any other implementing regulation or directive which prescribes the rate of such conversion. 16.3.5 The parties shall from time to time amend the provisions of this Agreement, if either party notifies the other that any amendments are necessary (including with respect to the definitions of "Business Day", "Reference Banks", and "Reference Exchange Rate") as a result of the occurrence of EMU. All such amendments shall be made on the basis that, following such amendments, each party will be in the same financial position as it would have been had the occurrence of EMU not taken place. 16.3.6 If the parties are unable to agree any amendments to this Agreement to be made pursuant to this Clause, either party may refer the matter in dispute to the Expert for determination in accordance with this Agreement. 16.4 LATE PAYMENTS AND DEFAULT INTEREST If a party fails to pay any amount payable by it under this Agreement, it shall forthwith on demand by the party to whom the payment was due to be made pay interest on the overdue amount from the due date up to the date of actual payment, after as well as before judgment, at LIBOR plus 3 per cent. Such interest shall accrue on a daily basis and be compounded quarterly. 16.5 ASSIGNMENTS AND NOVATION 16.5.1 Except as provided in Clauses 16.5.2, 16.5.3 and 16.5.4, a party shall not assign, transfer, create any encumbrance in or over, or deal in any other manner with this Agreement or a right or obligation under this Agreement (or purport to do any of these things) without having first obtained the other party's written consent (which consent shall not be unreasonably withheld, conditioned or delayed). Each party is entering into this Agreement for its benefit and not for the benefit of another person. 16.5.2 The Buyer shall be entitled at any time after Completion to assign its rights under this Agreement to any of its Affiliates provided that such party shall procure that any such Affiliate to whom it assigns any of its rights under this Agreement shall assign such rights back to that party immediately prior to it ceasing to be an Affiliate. Any assignment by a party under this Clause shall: (a) be subject to the condition that the assigning party shall not be relieved of any of its obligations under this Agreement; and (b) be made on terms that the assignee acknowledges that the other party may continue to deal exclusively with the assigning party in respect of all matters relating to this Agreement at all times unless and until the assignee notifies both parties that it is exercising its rights as assignee. 69 16.5.3 This Agreement shall be binding upon, and inure to the benefit of the parties and their respective successors and their permitted assignees. 16.5.4 Subject to Clauses 13 and 14, the Seller agrees that, upon the request of the Buyer of its successors or permitted assignees, this Agreement may be novated (in whole) in favour of any Affiliate of the Buyer (which, if such novation is completed after the Completion Date, is the beneficial owner for the time being of the Sale Shares) and the Seller shall execute a novation agreement substantially in the terms set out in Schedule 8. 16.6 FURTHER ASSURANCE Each party shall do and execute, or arrange for the doing and executing of, each necessary act, document and thing reasonably within its power and as may be reasonably requested of it by the other party by written notice to implement this Agreement. 16.7 COSTS Except where this Agreement provides otherwise, each party shall pay its own costs relating to the negotiation, preparation, execution and implementation by it of this Agreement and of each document referred to in it. 16.8 AMENDMENTS This Agreement may not be amended except by written agreement between the parties and no other purported amendment shall be effective. 16.9 NO WAIVER 16.9.1 No waiver by either party of any default or defaults by the other party in the performance of any of the provisions of this Agreement: (a) shall operate or be construed as a waiver of any other or further default or defaults whether of a like or different character; or (b) shall be effective unless in writing duly executed by a duly authorised representative of such party. 16.9.2 Neither the failure by either party to insist on any occasion upon the performance of the terms, conditions, and provisions of this Agreement nor time or other indulgence granted by one party to the other shall act as a waiver of such breach or acceptance of any variation or the relinquishment of any such right or any other right under this Agreement, which shall remain in full force and effect. 16.10 DISCRETION Except where this Agreement expressly requires a party to act fairly or reasonably (including any provision which does not allow a party to unreasonably withhold, 70 condition or delay its consent or approval), a party may exercise any discretion given to it under this Agreement in its absolute discretion and the exercise of that discretion shall not be challengeable on grounds that the party did not exercise its discretion fairly or reasonably and shall not be subject to the dispute resolution procedures in this Agreement. 16.11 ENTIRETY 16.11.1 This Agreement and the Schedules are intended by the parties as the final expression of their agreement and are intended also as a complete and exclusive statement of the terms of their agreement. 16.11.2 All prior written or oral understandings, offers or other communications of every kind pertaining to this Agreement are abrogated and withdrawn. 16.11.3 The Pre-Contract Agreements shall cease to have effect from the date of this Agreement except that termination does not affect any liability of either party to the other arising from a breach of any legally binding provision of a Pre-Contract Agreement before the date of such termination. 16.12 LIABILITIES, RIGHTS AND REMEDIES 16.12.1 Except where this Agreement expressly provides to the contrary, the rights and remedies contained in this Agreement are cumulative and not exclusive of rights and remedies provided by law. 16.12.2 Except to the extent they have been performed and except where this Agreement expressly provides to the contrary, the obligations (including all warranties, representations and indemnities) contained in this Agreement remain in force notwithstanding Completion of this Agreement. 16.12.3 The parties do not intend any term of this Agreement to be enforceable pursuant to the Contracts (Rights of Third Parties) Act 1999 (the "CRTP ACT") by any person who is not a party to this Agreement. 16.13 COUNTERPARTS 16.13.1 This Agreement may be executed in any number of counterparts each of which when executed and delivered is an original, but all the counterparts together constitute the same document. 16.13.2 If this Agreement is subject to stamp duty and counterparts or duplicates of this Agreement are executed, the Buyer shall, as soon as practicable after the date of this Agreement, procure that all the counterparts or duplicates are duly stamped and as soon as they are so stamped shall deliver a counterpart or duplicate to the Seller. 71 16.14 SEVERABILITY If any provision of this Agreement is held to be illegal or unenforceable, wholly or partly, under any applicable law, such provision, or, as the case may be, part of such provision, shall to that extent be deemed not to form part of this Agreement. The enforceability of the remainder of this Agreement, however, shall not be affected. 16.15 PAYMENTS Wherever in this Agreement provision is made for the payment by one party to another, such payment shall be effected by crediting the account specified in the Payment Account Details of the party entitled to payment by way of CHAPS on or before the due date for payment unless the payee by notice to the payer, not later than three business days prior to the due date for payment, elects to be paid by banker's draft drawn on any international bank reasonably acceptable to the payer and having an office in London. Payment of such sum shall be a good discharge to the payer of its obligation to make such payment. 16.16 NOTICES 16.16.1 Save as otherwise provided in this Agreement, all notices which are required or permitted under this Agreement shall: (a) be in writing; (b) be in the English language; and (c) be delivered personally or sent by registered post or pre-paid recorded delivery or fax, addressed as follows: If to the Seller: CNA Plaza 333 South Wabash Avenue Chicago Illinois 60685 USA Attention: The Secretary Fax No.: 001 312 822 1297 If to the Buyer: Tawa UK Limited 10 Fenchurch Avenue London EC3M 5BN 72 Attention: (1) The Chairman; and (2) The Chief Executive Officer Fax No.: +44 20 7665 6501 with a copy to: LeBoeuf, Lamb, Greene & MacRae No. 1 Minster Court Mincing Lane London EC3R 7AA Fax No.: +44 20 7459 5099 Attention: William C. Marcoux 16.16.2 In the absence of evidence of earlier receipt, a notice or communication shall be deemed given: (a) if delivered personally, when left at the address referred to above; (b) if sent by prepaid recorded delivery, or registered post at 10.00 a.m. on the third business day following the date of posting; and (c) if sent by fax, at the time of transmission (provided that the transmission is validly receipted). 16.16.3 A party may by notice of at least 10 business days to the other party change the address or fax numbers to which such notices and communications to it are to be delivered. 16.17 EXECUTION AND DELIVERY OF DOCUMENTS All agreements or certificates delivered in connection with the transactions contemplated by this Agreement shall be deemed to be delivered by the companies executing the same, and the individual officers executing the same shall not be personally liable thereon. 73 SCHEDULE 1 INFORMATION ABOUT THE TARGET COMPANY AND THE TARGET SUBSIDIARY [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] SCHEDULE 2 [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] ITEMS FOR DELIVERY BY THE SELLER AT COMPLETION [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] SCHEDULE 3 WARRANTIES [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] SCHEDULE 4 ACTION PENDING COMPLETION [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] SCHEDULE 5 THE REAL PROPERTIES [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] SCHEDULE 6 INTELLECTUAL PROPERTY [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] 74 SCHEDULE 7 PART I COMPLETION ADJUSTMENT 1. INTERPRETATION In this Schedule, where the context admits: (a) the "ACCOUNTS" and the "PRO FORMA BALANCE SHEET" and any other defined term used in this Schedule shall have the same meanings as in the Agreement and the Schedules; (b) "COMPLETION ACCOUNTS" means the accounts prepared in accordance with Clause 2 and agreed or determined in accordance with Clause 3.5; (c) the "MARK TO MARKET" of Invested Assets on any particular day means the determination of a market price of Invested Assets agreed or determined in accordance with Clause 3.2: (i) in a consistent process to that employed by the Seller at 31 December, 2001, by reference to the respective pricing source (trustee or money manager), except that all such pricing sources shall be directed to utilize a bid price methodology ; or (ii) to the extent that the pricing source is unable to provide a bid price they shall be directed to utilize a generally recognised approximation of a bid price methodology and "MARKED TO MARKET" shall be construed accordingly; and (d) "CLAUSE" refers to the relevant paragraph of this Schedule 7, unless otherwise stated. 2. COMPLETION ACCOUNTS 2.1 PREPARATION The Buyer shall as soon as practicable, and in any event within 45 days after Completion, procure that accounts be prepared as of the Completion Date (which shall be as of the last day of a calendar month) for the Target Group Companies in accordance with this Schedule 7. 75 2.2 DESCRIPTION The Completion Accounts shall consist of a consolidated balance sheet (which shall be in the form of the Pro Forma Balance Sheet, analysed between the relevant headings/columns as shown in tab "Treatment of Proforma Balance Sheet" in the Worked Example, unless agreed otherwise in writing by the Buyer and the Seller) of the Target Company and the Target Subsidiary as at the close of business on the Completion Date and a consolidated profit and loss account of the Target Company and the Target Subsidiary in respect of the period from 1 January 2002 to the Completion Date (both dates inclusive). 2.3 REQUIREMENTS 2.3.1 Except to the extent otherwise expressly required or provided in the Agreement, or in the Pro Forma Balance Sheet, the Completion Accounts shall: (a) subject to Clauses 2.3.1(f) to (h), 2.3.2 and 2.3.3: (i) be prepared on a proper basis and consistent with the bases and policies of accounting as applied or adopted in preparing the Accounts (including, for the avoidance of doubt, those bases and policies applied or adopted in establishing the bad debt allowance in the Accounts); (ii) be prepared in accordance with the law and applicable standards, principles and practices generally accepted in the United Kingdom (including the Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers in 1998); and (iii) be prepared in accordance with the applicable requirements of the Companies Act applying to insurance companies as interpreted by the Target Company and Target Subsidiary as at 31 December 2001, excluding required notes and related disclosures thereto (subject to Clause 2.3.1(d) below); (b) show a true and fair view of the consolidated assets, liabilities and state of affairs of the Target Group as at the Completion Date and the consolidated profit (or loss) of the Target Company and the Target Subsidiary for the period from 1 January 2002 to the Completion Date; (c) contain the reconciliation between the consolidated audited balance sheet of the Target Group as at 31 December 2001 and the Pro Forma Balance Sheet and the Completion Accounts shall assume the opening position as at 1 January 2002 for calculating the consolidated profit (or loss) of the Target Group for the period 1 January 2002 to the Completion Date as the Pro Forma Balance Sheet; 76 (d) include the information necessary for the calculation of the Completion Adjustment, including a version of tab "Illustrative unwinding of proforma balance sheet" in the worked example using actual data; (e) identify and take into account inwards payments and outwards receipts arising from all commutations; (f) value the Invested Assets (excluding accrued but unpaid interest) of the Target Group Companies as at the Completion Date at their Marked to Market value as determined in accordance with Clause 3.2; (g) not include any deferred tax assets; and (h) not include any equalisation provision as required by Schedule 9A to the Companies Act 1985. 2.3.2 The liability for restructuring of $6,500,000 (six million and five hundred thousand dollars) included in the Target Group's Accounts will be recalculated in the Completion Accounts as follows: (a) the provisions in respect of the continuing obligations under or related to Overseas Properties will be released to the profit and loss account (as the Buyer and the Seller have reached an agreement) in respect of such obligations as set out in Clause 9.8 of the Agreement); (b) the provisions in respect of all of the leases of space in the London Underwriting Centre shall be included at $151,000 per month multiplied by the number of months remaining on the relevant lease, discounted at a rate of 5.0%; (c) the provision in respect of the book loss on sales of excess Hardware and payments to be made by the Target Company in respect of lease obligations in relation to Hardware shall be included at $200,000; and (d) the provision for employee redundancy payments will be calculated to take into account employees (if any) that the Buyer has determined, prior to Completion, will be made redundant within ninety days (or their contractual notice period if longer) after Completion. The redundancy payment calculation will be consistent with Target Group's policy in effect prior to Completion, and the Buyer will represent that actual payments to the relevant employees will be so calculated. Settlement of all employee redundancy and other termination benefits paid in the period 1 January 2002 to the Completion Date will be charged against the portion of the provision for restructuring included in the Target Group's Accounts that relates to redundancy and other termination benefits (totalling $1.8 million). Any amounts paid relating to this Clause 2.3.2(d) that exceed such provision as at 31 December 2001 will be provided for in the Completion Accounts; 77 2.3.3 The only employee incentive costs accrued in the Completion Accounts will be as follows: (a) amounts accrued as at the Completion Date under the Annual Incentive Bonus Plan, the Supplemental Annual Incentive Bonus Plan, Staff Incentive Plan, the Supplementary Staff Incentive Plan, the Deferred Profit Sharing Plan, and the Long Term Incentive Plan which will be determined by the Seller for each employee employed by the Target Group at the Completion Date and will be communicated to the Buyer within five business days after the Completion Date. Such amounts will be paid to employees in accordance with their entitlement under the relevant scheme or plan as and when due following the Completion Date; (b) amounts accrued as at the Completion Date under the Performance Incentive and Loyalty Scheme will be limited to any unpaid amounts achieved, and not deferred, in accordance with the relevant scheme (being the 4% of base salary achieved during the quarter in which Completion occurs). Amounts achieved for each employee will be determined by the Seller and will be communicated to Buyer within five business days after the Completion Date. Such amounts will be paid to the employees in accordance with their entitlement under the Performance Incentive and Loyalty Scheme as and when due following the Completion Date; and 2.3.4 No accruals will be made in the Completion Accounts for amounts payable under the Performance Incentive and Loyalty Scheme for amounts achieved after the Completion Date (being the 20% of base salary achieved after the Completion Date) and those amounts achieved prior to the Completion Date but which payments are deferred. Amounts achieved for each employee will be determined by the Buyer and will be communicated to the Seller 15 days prior to payment to the relevant employee. Such amounts will be paid to the employees in accordance with their entitlement under the Performance Incentive and Loyalty Scheme as and when due following the Completion Date. The Seller will reimburse the Target Group for these amounts payable under these schemes within 14 days after payment to the relevant employees. 2.3.5 Any unreconciled difference between the Peoplesoft general ledger and the Senator broker ledger systems as at the Completion Date will be eliminated through adjustment of the Peoplesoft general ledger. The Comfort letter provided by the Seller to the Target Subsidiary in respect of such unreconciled difference will be terminated. 2.3.6 The Completion Adjustment shall not be taken into account in preparing the Completion Accounts. 78 3. PROCEDURE 3.1 SUBMISSION OF DRAFT (a) As soon as the Completion Accounts have been prepared, the Buyer shall calculate the Completion Adjustment and the Buyer shall send a copy of the Completion Accounts and the calculation of the Completion Adjustment to the Seller together with such working papers used in connection with the preparation of the same to understand and agree the Completion Accounts and the calculation of the Completion Adjustment. (b) Unless the Seller shall within 28 days of receipt of the Completion Accounts and Completion Adjustment calculation (and associated papers as provided in Clause 3.1(a)) serve a notice in writing on the Buyer that it objects to the Completion Accounts and/or the Completion Adjustment calculation (identifying the reason for any objection and the amount(s) or item(s) in the Completion Accounts and/or Completion Adjustment calculation which is/are in dispute, provided always that no objection shall be raised in relation to the Mark to Market and Realised Investment Gain/Loss Adjustment in the Completion Accounts other than pursuant to, and in accordance with Clause 3.2 below), (such notification being, for the purposes of this Clause 3, an "OBJECTION NOTICE") the Seller shall be deemed to have agreed to the Completion Accounts and the Buyer's calculation of the Completion Adjustment for all purposes of this Agreement. 3.2 AGREEMENT OF MARKED TO MARKET VALUATIONS (a) As soon as practicable after Completion, however in any event within 14 days, the Buyer shall determine and/or shall procure Marked to Market valuation of each of the Invested Assets as at the Completion Date. Upon receipt of the Marked to Market valuations of each of the Invested Assets, the Buyer shall aggregate those valuations (the "INITIAL PRICING"); (b) As soon as the Buyer has the Initial Pricing it shall send a copy of the Initial Pricing to the Seller, together with such working papers used in connection with the preparation of the same as are necessary or appropriate to understand the Initial Pricing. Unless the Seller and/or the Buyer shall within 14 days of the Seller's receipt of the Initial Pricing serve a notice in writing on the other (a "PRICING NOTICE") that it wishes to obtain an independent Marked to Market valuation of the Invested Assets (an "INDEPENDENT PRICING"), the Seller and the Buyer shall be deemed to have agreed to the Initial Pricing for the purposes of the Mark to Market and Realised Investment Gain/Loss Adjustment in the Completion Accounts, and the Initial Pricing shall be final and binding on the parties. (c) If the Buyer and/or the Seller serves a Pricing Notice the Buyer and/or Seller may, as appropriate, within 14 days of the service of the Pricing Notice obtain a Marked to Market valuation of the Invested Assets from an independent reputable investment manger, bank or securities house (such 79 valuation being the "BUYER'S PRICING" or the "SELLER'S PRICING", as appropriate). If the aggregate difference between the Initial Pricing on the one hand and either the Buyer's Pricing or the Seller's Pricing on the other: (i) exceeds 25 basis points of the aggregate value of the Initial Pricing then either the Buyer and/or the Seller, as appropriate, may elect to follow the procedure under Clause 3.2(d) below to determine the Marked to Market valuation of the Invested Assets; or (ii) does not exceed 25 basis points of the aggregate value of the Initial Pricing, then the Initial Pricing shall be used for the purposes of Mark to Market and Realised Investment Gain/Loss Adjustment in the Completion Accounts and the Initial Pricing shall be final and binding on the parties. (d) If Clause 3.2(c)(i) applies, and the Buyer and/or the Seller elects to implement this Clause: (i) the Buyer and Seller shall appoint two mutually acceptable independent third parties (the "INDEPENDENT VALUERS"). For the avoidance of doubt, each party is not prohibited from proposing the entity it used to obtain its own pricing under paragraph (c) above as an Independent Valuer, Independent Valuers may obtain prices or pricing information from other third party professionals in their absolute discretion; (ii) if the parties fail to reach agreement on the identity of either one or both of the Independent Valuers within 10 days of an election to implement this Clause, then, at the instance of each party such Independent Valuers that have not been agreed shall be selected by the President for the time being of the Institute of Chartered Accountants for England and Wales; (iii) a list of individual securities prioritised based on the absolute difference measured in market value and with a price difference in excess of 25 basis points between the Initial Pricing and the Buyer's Pricing and/or the Initial Pricing and the Seller's Pricing will be provided by the Buyer and/or Seller to the Independent Valuers (the "RELEVANT SECURITIES"); (iv) the Independent Valuers will each Mark to Market each of the Relevant Securities as at the Completion Date in sequence starting with the largest absolute market value difference, subject to the following, for each Relevant Security the average of the two Independent Valuers' valuations will become the new valuation for that Relevant Security and the Initial Pricing will be recalculated to reflect that valuation; 80 (v) the Initial Pricing as adjusted by the valuation of each such Relevant Security is referred to as the "ADJUSTED INITIAL PRICING". The process of such valuation will continue until the sooner of (x) the difference between the Initial Pricing and the Adjusted Initial Pricing becomes less than 25 basis points, and (y) all of the Relevant Securities have been priced (the "FINAL ADJUSTED INITIAL PRICING"); and (vi) the Final Adjusted Initial Pricing shall be deemed to have been agreed upon completion of this process and for the purposes of the Mark to Market and Realised Investment Gain Loss Adjustment in the Completion Accounts and the Final Adjustment Initial Pricing shall be final and binding on the parties. 3.3 REPORT If the Seller accepts, or is deemed to accept, that the said draft Completion Accounts comply with Clause 2, and the draft Completion Adjustment is correctly calculated in accordance with Clauses 4 and 5, the Seller shall sign a report to that effect and any Completion Accounts and Completion Adjustment so reported on, or (if Clause 3.6 shall apply) the final draft of the Completion Accounts and the Completion Adjustment as determined by the independent accountant, shall be the Completion Accounts and the Completion Adjustment for the purposes of this Agreement and shall be final and binding on the parties. 3.4 INFORMATION AND EXPLANATIONS The Buyer shall provide such cooperation, information, documentation and written and verbal explanations from appropriate personnel relating to the draft Completion Accounts and the Completion Adjustment and their preparation as the Seller, or any independent chartered accountant appointed pursuant to Clause 3.6, shall reasonably require. 3.5 AGREEMENT OF DRAFT If within the period referred to in Clause 3.1(b), the Seller shall give the Buyer an Objection Notice then the Buyer and the Seller shall use their best endeavours to reach agreement upon adjustments to the draft and the value of the Completion Adjustment. 3.6 INDEPENDENT ACCOUNTANT If the Seller and the Buyer are unable to reach agreement within 28 days following service of the Objection Notice, either the Seller or the Buyer shall be entitled to refer the matter or matters in dispute, only to the extent that such matters may potentially impact the Completion Adjustment, to Ernst & Young, unless Ernst & Young are not at the relevant time independent of each of the parties in which case the matter or matters shall be referred to an independent firm of chartered accountants agreed upon between them or (failing agreement within seven days of one party giving notice to the other that it desires an independent expert to be appointed) to be selected (at the 81 instance of either party) by the President for the time being of the Institute of Chartered Accountants for England and Wales. Ernst & Young or such other independent firm of chartered accountants shall act as experts not as arbitrators and shall determine the matter or matters in dispute and their decision shall, save in the event of fraud or manifest error, be binding. The parties will use all reasonable endeavours to co-operate with the independent firm of accountants in resolving such disagreement or dispute. The independent firm of accountants shall have the right to seek such professional assistance and advice as it may require in fulfilling its duties. The costs of the independent firm of accountants shall be borne by the Seller and the Buyer equally. Upon the resolution of any dispute by the independent firm of accountants, the Completion Accounts and the calculation of the Completion Adjustment shall be amended to accord with such resolution and the Completion Accounts and the Completion Adjustment as so amended shall thereafter be final and binding as between the parties for all purposes of this Agreement. 4. COMPLETION ADJUSTMENT 4.1 GENERAL 4.1.1 The following provisions of this Clause 4.1.1 set out the general methodology relating to the calculation of the Completion Adjustment which is subject to the specific calculations and methodology provided for in Clauses 4.2, 5.2 and 5.3. (a) The Buyer's purchase price for the Target Group is predicated upon: (i) the Target Group holding at the Completion Date Invested Assets (which, on Marked to Market valuations, could be used to purchase Risk Free Investments, exclusive of transactional costs), cash and net Non-Technical Assets and Liabilities sufficient to meet the Buyer's estimate of the net present value, as at the Completion Date, of the Actual Matched Portfolio, and (ii) Adjustment "W" in Clause 4.2. (b) The amount of any difference between: (i) the aggregate Marked to Market value of the Invested Assets, cash and Non-Technical Assets and Liabilities at the Completion Date, and (ii) the Actual Matched Portfolio, is to be a completion adjustment, calculated in accordance with this Clause 4 and settled in accordance with Clause 3 of the Agreement. (c) This is achieved through Adjustment "W" and the Mark to Market and Realised Investment Gain / Loss Adjustment set out in this Clause 4 and the Matched Portfolio Adjustment set out in Clause 5; 82 (d) The Assumed Matched Portfolio was calculated as at 31 December 2001 in accordance with Clause 5.2(a). The Target Group has continued to trade in the period 1 January 2002 to the Completion Date inclusive. During this period, it is agreed that profits and losses of the Target Group are for the Buyer's account, except as provided in this Agreement. (e) Profits and losses recognised in the period 1 January 2002 to the Completion Date inclusive with respect to Non-Technical Assets and Liabilities (except to the extent that such profits and losses arise from accrued Investment Income, which is dealt with in Adjustment "W" in Clause 4.2, and commutations, which are for the Buyer's account) are for the Seller's account, in accordance with Clause 5 below. 4.2 CALCULATION 4.2.1 Upon preparation of the Completion Accounts, the Buyer shall calculate the completion adjustment (the "COMPLETION ADJUSTMENT") as follows: W + X + Y = Z where: "W" is as provided in Clause 3.2.1(d), 3.2.2(d), 3.2.3(d) or 3.2.4(c) of the Agreement as appropriate "X" is the Matched Portfolio Adjustment "Y" is the Mark to Market and Realised Investment Gain / Loss Adjustment "Z" is the Completion Adjustment A worked example of the above formula, together with certain schedules relevant in format and/or content to the Agreement, is set out in Part II of this Schedule 7 (the "WORKED EXAMPLE"). The Completion Adjustment shall be calculated in accordance with the principles and definitions described in Clause 2.3 above, and amounts determined shall therefore be gross of any withholding or other taxes. 4.2.2 For the purposes of this Clause 4.2: (a) "INVESTMENT INCOME" is the amount disclosed as such in the notes to the Completion Accounts, which comprises income received from Invested Assets, plus the change in accrued investment income between 31 December 2001 and Completion Date inclusive, gross of any withholding or income tax; (b) "ADMINISTRATIVE EXPENSES" is the amount disclosed as such in the notes to the Completion Accounts (which includes depreciation, but this shall exclude any profit and loss in respect of Non-Technical Assets and Liabilities of the Target Group as at 31 December 2001, recognised in the 83 period from 1 January 2002 to the Completion Date which is adjusted in accordance with Clause 5.2(e)(ii) below); (c) "MATCHED PORTFOLIO ADJUSTMENT" means the adjustment determined in accordance with Clause 5 below; (d) "MARK TO MARKET AND REALISED INVESTMENT GAIN / LOSS ADJUSTMENT" means the aggregate of unrealized investment gains / losses and realised investment gains / losses as disclosed in consolidated profit and loss of the Completion Accounts, where a net credit to the profit and loss account is treated as a positive and a net debit to the profit and loss account is treated as a negative; and (e) "NON-TECHNICAL ASSETS AND LIABILITIES" means those items identified as such in the tab "Treatment of Proforma Balance Sheet" in the Worked Example. 5. MATCHED PORTFOLIO ADJUSTMENT 5.1 GENERAL For the purposes of this Clause 5, "RISK FREE INVESTMENT" means investments in US Dollars which are bonds, debentures, treasury bills, notes or any other security representing a first rank debt of, and issued or directly and unconditionally guaranteed by the government of the United States of America. 5.2 METHODOLOGY The Buyer and Seller agree that the following is the methodology to be used to calculate the Matched Portfolio Adjustment: (a) The Buyer has estimated, as at 31 December 2001, all future cash flows of the Target Subsidiary, but excluding those arising from Investment Income and realizations of Invested Assets and Non-Technical Assets and Liabilities, after taking into account the adjustments made in deriving the Pro Forma Balance Sheet (the "ASSUMED PAYMENT PROFILE"). (b) On the basis of the Assumed Payment Profile, the Buyer has assumed a portfolio consisting of Risk Free Investments and cash the cashflows of which (together with the assumed cashflows arising from realizations of the Non-Technical Assets and Liabilities of the Target Subsidiary) will exactly match the Assumed Payment Profile (the "ASSUMED MATCHED PORTFOLIO"). (c) The Buyer has calculated the net present value of the Assumed Matched Portfolio as $1,519,800,000 (one billion, five hundred and nineteen million and eight hundred thousand dollars), being the net present value of the Assumed Matched Portfolio based on an average weighted investment yield of 4.5 per cent per annum as at 31 December 2001 (the "NPV OF THE ASSUMED MATCHED PORTFOLIO"). 84 (d) The Buyer shall calculate the Actual Matched Portfolio (in accordance with Clause 5.2(e) below) and the NPV of the Actual Matched Portfolio (in accordance with Clause 5.2(g) below). (e) The "ACTUAL MATCHED PORTFOLIO" shall be calculated in the same way as the Assumed Matched Portfolio using: (i) the Assumed Payment Profile; and (ii) an adjustment for the profit or loss recognised in respect of Non-Technical Assets and Liabilities as at 31 December 2001 of the Target Subsidiary in the period from 1 January 2002 to the Completion Date (excluding the change in accrued investment income in that period, which is adjusted through Clause 5.2(g)(iii) below) so that any such profit reduces, and any such loss increases, the amount of the Actual Matched Portfolio. (f) For the purposes of Clause 5.2(e)(ii) above: (i) an adjustment for profit or loss in respect of Non-Technical Assets and Liabilities in relation to bad debts will only be recognised if: (1) the principal debtor or creditor concerned becomes Insolvent ("INSOLVENT" shall mean a reinsurer that has been declared insolvent by any court with competent jurisdiction or has been placed into liquidation or receivership (whether voluntary or involuntary) or there has been instituted against the reinsurer proceedings for the appointment of a receiver, liquidator (including a provisional liquidator), administrator (subsequent to formal court proceedings, and only for the time that such reinsurer is in administration), rehabilitator, conservator, or trustee in bankruptcy, or other agent known by whatever name, to take possession of the reinsurer's assets or control of the reinsurer's operation) between 1 January 2002 and the Completion Date inclusive; (2) it arises due to a new claims position that the London market has adopted between 1 January 2002 and the Completion Date; (3) it arises in accordance with Clause 2.3.5 above; (4) it arises from an amount due from or to an Affiliate of the Seller not being realised at book value as at 31 December 2001 (except to the extent recognised under Clause 5.2(f)(i)(3); (ii) The stipulated accounting treatment of restructuring provisions and employee incentive payments set out in Clauses 2.3.2 and 2.3.3 above applies. (iii) Except in relation to 5.2(f)(i)(4) and (ii) above, the maximum net loss to be taken into account will be $14 million, with the first $7 million of loss to 85 be disregarded (i.e., the maximum loss adjustment to the Completion Adjustment is $7 million). (g) The "NPV OF THE ACTUAL MATCHED PORTFOLIO" shall be the net present value of the Actual Matched Portfolio as at 31 December 2001, calculated as the sum of (i) and (ii) less (iii) below: (i) for years 2003 and subsequent the respective assumed cash flows, which are assumed to occur on 30 June of each calendar year, contained in the Actual Matched Portfolio, discounted as at the Completion Date using the U.S. Government Treasury strip yield curve (interpolated on a straight-line basis for dates not identified on the curve), annualized, as reported by Bloomberg on the Fair Market Yield Curve History Page as at close of business on the Completion Date or the last business day prior to the Completion Date if the Completion Date is not on a business day; (ii) for 2002 the Assumed Payment Profile cash flow of $376,800,000 (three hundred and seventy six million and eight hundred thousand dollars), will be divided equally into 12 amounts of $31,400,000 (thirty one million and four hundred thousand dollars) ("MONTHLY Payment"). For 2002 the net present value is the sum of (a) the numbers of months in 2002 through completion multiplied by the undiscounted Monthly Payment, and (b) the remaining Monthly Payments assumed to occur on the fifteenth day of the month, discounted to the Completion Date using the U.S. Government Treasury strip yield curve, derived as in Clause 5.2(g)(i) above, except using the relevant monthly rate (interpolated on a straight line basis as appropriate); (iii) the amount of the actual Investment Income reported in the Completion Accounts for the period from 1 January 2002 to the Completion Date inclusive. 5.3 CALCULATION 5.3.1 If the NPV of the Assumed Matched Portfolio is: (a) greater than the NPV of the Actual Matched Portfolio, then the amount of the difference shall be the Matched Portfolio Adjustment, which for the purposes of the formula in Clause 4.1 shall be deemed to be a positive; or (b) less than the NPV of the Actual Matched Portfolio, then the amount of the difference shall be the Matched Portfolio Adjustment, which for purposes of the formula in Clause 4.1 shall be deemed to be a negative. 5.4 PAYMENT The Completion Adjustment shall be paid by the Buyer or the Seller (as appropriate) in accordance with the provisions of Clause 3 of this Agreement. 5.5 MANIFEST ERROR In the event of a manifest error in the Pro Forma Balance Sheet or Worked Example, correcting adjustments will be made. 5.6 INTERACTION WITH OTHER PROVISIONS 5.6.1 Subject to the due performance of Clause 3.6, if either party shall have any claim against the other party under this Agreement in respect of any liability or deficiency which is taken into account in the Completion Accounts the amount of such liability or deficiency so taken into account shall be deducted from the amount of such party's claim but, save as aforesaid, preparation and acceptance of the Completion Accounts by either party shall be without prejudice to any claim which either party may have against the other party under or in respect of any breach of this Agreement. 86 PART II WORKED EXAMPLE [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] SCHEDULE 8 NOVATION AGREEMENT [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] SCHEDULE 9 MAC THRESHOLDS - (MAC 4.6 ILLUSTRATION 19_6.XLS) [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] SCHEDULE 10 PENSION SUBSTITUTION DEED [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] 87 SCHEDULE 11 REINSURANCE RECOVERABLES [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said Exhibit/Schedule to the Commission upon request.] EXECUTED by the parties: Signed by ROBERT DEUTSCH duly authorised representative of /for and on behalf of CONTINENTAL CASUALTY COMPANY Signed by COLIN GRAHAM BIRD duly authorised representative of /for and on behalf of TAWA UK LIMITED LN235275.15 88 EX-99.01 4 c72872exv99w01.txt PROFORMA FINANCIAL STATEMENTS AND FOOTNOTES CNA FINANCIAL CORPORATION EXHIBIT 99.01 CNA FINANCIAL CORPORATION UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information presents CNA Financial Corporation's (the Company or CNAF) pro forma unaudited condensed consolidated balance sheet as of September 30, 2002 and the Company's pro forma unaudited condensed consolidated statements of operations for the year ended December 31, 2001 and for the nine months ended September 30, 2002. On October 31, 2002, the Company completed the sale of the shares of CNA Re Management Company Limited and its wholly-owned subsidiary CNA Reinsurance Company Limited (collectively referred to hereinafter as CNA Re U.K.) to Tawa U.K. Limited. The sale includes business underwritten since inception by CNA Re U.K. except for certain risks retained by Continental Casualty Company (CCC), a wholly-owned subsidiary of the Company, as discussed below. This sale does not impact CNA Re's on-going U.S.-based operations. CNA Re U.K. was sold for $1, subject to adjustments that are primarily driven by certain operating results and changes in interest rates between January 1, 2002 and October 31, 2002, and realized foreign currency losses recognized by CNA Re U.K. prior to December 31, 2002. Due to the various components of the completion adjustments, which are initially prepared by the buyer, the final purchase price cannot yet be determined. However, based upon information currently available to the Company, management believes there will be a reduction in the previously recognized impairment loss, which will be reflected as a realized gain when the completion adjustments are finalized. The anticipated realized gain on sale is not reflected in the pro forma adjustments. Concurrent with the sale, several reinsurance agreements under which CCC provided retrocessional protection to CNA Re U.K. will be terminated. As part of the sale, CNA Re U.K.'s net exposure to all IGI Program liabilities, as described in note B2 below, will be ceded to CCC. Further, CCC will provide a $100 million stop loss reinsurance cover attaching at carried reserves on CNA Re U.K.'s 2001 underwriting year exposures for which CCC received premium of $25 million. The pro forma adjustments are presented as if they had occurred, as of September 30, 2002 for the purposes of the pro forma unaudited Condensed Consolidated Balance Sheet, and as of the beginning of the respective period presented for the purposes of the pro forma unaudited Condensed Consolidated Statements of Operations. This pro forma unaudited financial information does not purport to represent what the Company's actual financial position and results of operations would have been had such events actually occurred on the aforementioned dates. The pro forma unaudited financial information also does not purport to serve as a forecast of the Company's financial position or results of operations for any future periods. The pro forma adjustments are based on currently available information and upon certain assumptions that management believes are reasonable in the circumstances. This pro forma financial information should be read in conjunction with the Company's audited consolidated financial statements as of and for the year ended December 31, 2001 appearing in the Company's Annual Report on form 10-K for the year ended December 31, 2001, and the unaudited condensed consolidated financial statements as of September 30, 2002 and for the nine-month period then ended appearing in the Company's Quarterly Report on Form 10-Q for the quarter then ended. CNA FINANCIAL CORPORATION EXHIBIT 99.01 CNA FINANCIAL CORPORATION PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2002 (UNAUDITED)

PRO FORMA ADJUSTMENTS ------------------------ AS REPORTED DECREASE (INCREASE) PRO FORMA CNAF CNAF BALANCE CNA RE U.K. OTHER BALANCE (In millions) SHEET [A] [B] NOTES SHEET ----------- ----------- ------- -------- --------- ASSETS: Investments and cash $36,439 $ 1,116 $ 286 B1,B2,B3 $35,037 Receivables 16,831 1,330 (77) B2 15,578 Deferred acquisition costs 2,548 1 - 2,547 Other assets 6,103 28 - 6,075 Separate account business 3,147 - - 3,147 ------- ------- ------- ------- Total assets $65,068 $ 2,475 $ 209 $62,384 ======= ======= ======= ======= LIABILITIES: Insurance reserves $42,580 $ 2,179 $ 308 B1,B2 $40,093 Debt 2,549 - - 2,549 Reinsurance balances payable 3,032 104 (35) B2 2,963 Other liabilities 4,827 192 (64) B1,B2,B3 4,699 Separate account business 3,147 - - 3,147 ------- ------- ------- ------- Total liabilities 56,135 2,475 209 53,451 ------- ------- ------- ------- Minority interest 233 - - 233 Stockholders' equity 8,700 - - 8,700 ------- ------- ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $65,068 $ 2,475 $ 209 $62,384 ======= ======= ======= =======

CNA FINANCIAL CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 (UNAUDITED)

PRO FORMA ADJUSTMENTS -------------------------- DECREASE (INCREASE) RESTATED PRO FORMA CNAF CNAF (In millions, except per share data) STATEMENT OF CNA RE U.K. OTHER STATEMENT OF OPERATIONS [C] [D] [E] OPERATIONS ------------- ----------- -------- ------------ REVENUES Net earned premiums $ 9,288 $ 224 $ - $ 9,064 Net investment income 1,856 59 15 1,782 Realized investment gains (losses), net of participating policyholders' and minority interests 1,262 (3) - 1,265 Other revenues 676 - - 676 -------- -------- -------- -------- Total revenues 13,082 280 15 12,787 -------- -------- -------- -------- CLAIMS, BENEFITS AND EXPENSES Insurance claims and benefits 11,279 467 - 10,812 Amortization of deferred acquisition costs 1,804 63 - 1,741 Other operating expenses 1,909 51 - 1,860 Restructuring and other related charges 251 6 - 245 Interest 157 - - 157 -------- -------- -------- -------- Total claims, benefits and expenses 15,400 587 - 14,813 -------- -------- -------- -------- Loss from continuing operations before income tax and minority interest (2,318) (307) 15 (2,026) Income tax benefit (expense) 745 (67) (5) 817 Minority interest (21) - - (21) -------- -------- -------- -------- (Loss) income from continuing operations $ (1,594) $ (374) $ 10 $ (1,230) ======== ======== ======== ======== BASIC AND DILUTED (LOSS) EARNINGS PER SHARE FROM CONTINUING OPERATIONS $ (8.22) $ (6.34) ======== ======== WEIGHTED AVERAGE OUTSTANDING COMMON STOCK AND COMMON STOCK EQUIVALENTS 194.0 194.0 ======== ========

CNA FINANCIAL CORPORATION EXHIBIT 99.01 CNA FINANCIAL CORPORATION PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)

PRO FORMA ADJUSTMENTS -------------------------- DECREASE (INCREASE) RESTATED PRO FORMA CNAF CNAF (In millions, except per share data) STATEMENT OF CNA RE U.K. OTHER STATEMENT OF OPERATIONS [D] [E] OPERATIONS ------------- ----------- -------- ------------ REVENUES Net earned premiums $ 7,925 $ 13 $ - $ 7,912 Net investment income 1,292 32 7 1,253 Realized investment (losses) gains, net of participating policyholders' and minority interests (137) 11 - (148) Other revenues 476 - - 476 ------- ------- ------- ------- Total revenues 9,556 56 7 9,493 ------- ------- ------- ------- CLAIMS, BENEFITS AND EXPENSES Insurance claims and benefits 6,542 15 - 6,527 Amortization of deferred acquisition costs 1,350 5 - 1,345 Other operating expenses 1,261 12 - 1,249 Restructuring and other related charges - - - - Interest 112 - - 112 ------- ------- ------- ------- Total claims, benefits and expenses 9,265 32 - 9,233 ------- ------- ------- ------- Income from continuing operations before income tax and minority interest 291 24 7 260 Income tax expense (78) (1) (3) (74) Minority interest (11) - - (11) ------- ------- ------- ------- Income from continuing operations $ 202 $ 23 $ 4 $ 175 ======= ======= ======= ======= BASIC AND DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS $ 0.91 $ 0.78 ======= ======= WEIGHTED AVERAGE OUTSTANDING COMMON STOCK AND COMMON STOCK EQUIVALENTS 223.6 223.6 ======= =======

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS [A] This column of pro forma adjustments represents the balance sheet of CNA Re U.K. as included in the CNAF Condensed Consolidated Balance Sheet as of September 30, 2002 as reported. [B] This column of pro forma adjustments includes the transfer of certain assets and liabilities between CNA Re U.K. and its parent, CCC, arising from several concurrent completion transactions as more fully described below. [B1] Represents the impact of the termination of four intercompany reinsurance agreements under which, CNA Re U.K. ceded losses to CCC. These terminations result in a transfer of insurance reserves of $337 million and cash of $262 million from CCC to CNA Re U.K. [B2] In 1997, CNA Re U.K. entered into an arrangement with IOA Global, Ltd. (IOA), an independent managing general agent based in Philadelphia, Pennsylvania, to develop and manage a book of accident and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies, Ltd. (IGI), a personal accident reinsurance managing general underwriter, was appointed to underwrite and CNA FINANCIAL CORPORATION EXHIBIT 99.01 market the book under the supervision of IOA. Between April 1, 1997 and December 1, 1999, IGI underwrote a number of reinsurance arrangements with respect to personal accident insurance worldwide (the IGI Program). This pro forma adjustment reflects the retrocession to CCC of CNA Re U.K.'s remaining net exposure relating to the IGI Program. This retrocession includes a transfer of insurance reserves of $29 million, receivables of $77 million, related liabilities of $35 million and cash of $2 million. [B3] Represents the impact of other aspects of the transaction including estimated foreign currency losses and other estimated future completion adjustments, which decreases cash by $22 million and decreases other liabilities by $22 million. [C] The CNAF Condensed Consolidated Statement of Operations for the year ended December 31, 2001 is restated to reclassify the results of CNA Vida as discontinued operations. [D] These columns of pro forma adjustments represent the results of operations of CNA Re U.K. as included in the CNAF Condensed Consolidated Statements of Operations for the respective periods presented. [E] This column of pro forma adjustments represents the estimated reduction of investment income assuming the cash related to CNAF's completion transactions in pro forma note B, was transferred to CNA Re U.K. as of January 1, 2001. This estimated reduction of interest income totals $15 million, which is based on the approximate two-year U.S. Treasury yield of 5% as of January 1, 2001. [F] This column of pro forma adjustments represents the estimated reduction of investment income assuming the cash related to completion transactions in pro forma note B, was transferred to CNA Re U.K. as of January 1, 2002. This estimated reduction of interest income totals $7 million, which is based on the approximate two-year U.S. Treasury yield of 3% as of January 1, 2002. -----END PRIVACY-ENHANCED MESSAGE-----

EX-2.1

                                                                     EXHIBIT 2.1

                                                                  CONFORMED COPY
                                                        (AS AMENDED ON 30.08.02)





                              DATED 15TH JULY 2002








                          CONTINENTAL CASUALTY COMPANY





                                       AND





                                 TAWA UK LIMITED








                            SHARE PURCHASE AGREEMENT


                          for the sale and purchase of
                       the entire issued share capital of


                        CNA RE MANAGEMENT COMPANY LIMITED











                         LEBOEUF, LAMB, GREENE & MACRAE


                   UNITED STATES LAWYERS & ENGLISH SOLICITORS



                                       1


                                TABLE OF CONTENTS


                                                                                                
1.    DEFINITIONS AND INTERPRETATION.................................................................5

2.    SALE AND PURCHASE.............................................................................20

3.    COMPLETION ADJUSTMENTS........................................................................21

4.    CONDITIONS TO COMPLETION......................................................................30

5.    COMPLETION....................................................................................37

6.    SELLER'S WARRANTIES...........................................................................39

7.    REMEDIES FOR BREACH...........................................................................42

8.    LIMITATIONS ON SELLER'S LIABILITY.............................................................43

9.    SELLER'S UNDERTAKINGS.........................................................................49

10.   BUYER'S UNDERTAKINGS..........................................................................55

11.   BUYER'S WARRANTIES............................................................................57

12.   PENSIONS......................................................................................59

13.   NOVATION......................................................................................60

14.   RESTRUCTURING.................................................................................61

15.   GOVERNING LAW AND DISPUTES....................................................................63

16.   MISCELLANEOUS PROVISIONS......................................................................66

   SCHEDULE 1.......................................................................................74

   INFORMATION ABOUT THE TARGET COMPANY AND THE TARGET SUBSIDIARY...................................74

   SCHEDULE 2.......................................................................................74

   ITEMS FOR DELIVERY BY THE SELLER AT COMPLETION...................................................74

   SCHEDULE 3.......................................................................................74

   WARRANTIES.......................................................................................74




                                       2


                                                                                                
   SCHEDULE 4......................................................................................74

   ACTION PENDING COMPLETION.......................................................................74

   SCHEDULE 5......................................................................................74

   THE REAL PROPERTIES.............................................................................74

   SCHEDULE 6......................................................................................74

   INTELLECTUAL PROPERTY...........................................................................74

   SCHEDULE 7......................................................................................75

   PART I - COMPLETION ADJUSTMENT..................................................................75

   PART II - WORKED EXAMPLE........................................................................87

   SCHEDULE 8......................................................................................87

   NOVATION AGREEMENT..............................................................................87

   SCHEDULE 9......................................................................................87

   MAC THRESHOLDS - (MAC 4.6 ILLUSTRATION 19_6.XLS)................................................87

   SCHEDULE 10.....................................................................................87

   PENSION SUBSTITUTION DEED.......................................................................87

   SCHEDULE 11.....................................................................................88

   REINSURANCE RECOVERABLES........................................................................88




                              AGREED FORM DOCUMENTS

1.      Tax Deed

2.      Management Fee Security Deed

3.      Distribution Security Deed

4.      Stop Loss Contract

5.      Pro Forma Balance Sheet



                                       3


6.      Management Agreement

7.      Settlement with respect to Allianz Stop Loss from 1999, 2000 and 2001
        accident years

8.      Settlement of 100 per cent quota share for 1987 and prior underwriting
        years

9.      Settlement of aggregate stop loss providing $125,000,000 of cover in
        respect of underwriting years 1997, 1998 and 1999

10.     Commutation of CRG reinsurance facility

11.     Commutation of BU2 reinsurance facility

12.     Retrocession contract in respect of CNA Re (UK) net exposure in respect
        of the IGI portfolio

13.     Agreement with respect to Underwriters Re Stop Loss for 2000 and 2001
        accident years

14.     2002 outwards reinsurance treaty where cover does not survive change of
        control (Swiss Re)

15.     2002 outwards reinsurance treaty where cover does not survive change of
        control (other)

16.     Retrocession contract in respect of CNA Re (UK) net exposure in respect
        of liabilities settled under the PPG settlement agreement

17.     Trade Mark Licence Agreement

18.     Broker Ledger Settlement Deed

19.     IGI Transfer of Balance Agreement



                                       4


        THIS AGREEMENT is made on 15th July 2002

        BETWEEN:

        (1)     CONTINENTAL CASUALTY COMPANY, a corporation incorporated under
                the laws of the State of Illinois, USA, whose principal place of
                business is at CNA Plaza, 333 South Wabash Avenue, Chicago,
                Illinois 60685, USA (the "SELLER"); and

        (2)     TAWA UK LIMITED, a company incorporated under the laws of
                England and Wales under number 4200676, whose registered office
                is at No.1 Minster Court, Mincing Lane, London EC3R 7AA (the
                "BUYER").

        RECITAL:

        The Seller wishes to sell and the Buyer wishes to purchase the entire
        issued share capital of CNA Re Management Company Limited (the "TARGET
        COMPANY") on the terms and subject to the conditions of this Agreement.

        IT IS AGREED as follows:

1.      DEFINITIONS AND INTERPRETATION

1.1     SPECIFIC DEFINITIONS

        In this Agreement:

        "ACCOUNTS" means each Target Group Company's individual accounts (as
        that term is used in section 226 of the Companies Act) and the Target
        Group's group accounts (as that term is used in section 227 of the
        Companies Act) for the financial year ended on the Last Accounting Date,
        the auditors' reports on those accounts and the directors' report of
        each Target Group Company for that year;

        "ADDITIONAL CONSIDERATION" means the additional consideration referred
        to in Clause 3.5.1;

        "ANNUAL REGULATORY RETURNS" means the returns of the Target Subsidiary
        for the years ended 31 December 2001, 31 December 2000 and 31 December
        1999 together with all exhibits and schedules thereto, as furnished to
        HM Treasury or the FSA, as the case may be, pursuant to the ICA or FSMA,
        as appropriate;

        "ALLIANZ CONTRACT" means the agreement with respect to the Allianz Stop
        Loss Contract from the 1999, 2000 and 2001 accident years in the Agreed
        Form;

        "APPROVED" is defined in paragraph 19.1 of Schedule 3;

        "APPROVED SETTLEMENTS" is defined in Clause 4.6.2(d);



                                       5


        "ASSUMED REINSURANCE" means reinsurance assumed by the Target Subsidiary
        from any ceding insurer or reinsurer;

        "BUYER'S ADDITIONAL CAPITAL" is defined in Clause 3.1.1(a);

        "BUYER'S SOLICITORS" means LeBoeuf, Lamb, Greene & MacRae of No. 1
        Minster Court, Mincing Lane, London EC3R 7AA;

        "CEDED REINSURANCE" means reinsurance ceded by the Target Subsidiary to
        any reinsurer;

        "CHF" shall mean Swiss Franc;

        "CLOSING F/X ADJUSTMENT" shall mean the sum of (i) the lesser of (a)
        one-half of the Net F/X Losses or (b) one-half of the foreign currency
        loss/gain shown in Ending Foreign Currency Statement and (ii) the Excess
        Net F/X Loss if the Seller has given an undertaking to contribute the
        Excess Net F/X Loss in order to avoid a Material Adverse Change.

        "COMPLETION" means completion of the sale and purchase of the Sale
        Shares in accordance with this Agreement;

        "COMPLETION ACCOUNTS" is defined in Clause 1(b) of Schedule 7;

        "COMPLETION ADJUSTMENT" is defined in Clause 4.2.1 of Schedule 7;

        "COMPLETION BALANCE" is defined in Clause 3.1.1(b);

        "COMPLETION DATE" means the date on which Completion takes place in
        accordance with Clause 5.1;

        "COMPUTER PROGRAMS" means current versions of existing (i) computer
        programs, including all object code, all executables, and all available
        source code, (ii) descriptions, flow-charts and other work product used
        to design, plan, organise and develop any of the foregoing, and (iii)
        documentation, including user manuals and training materials, relating
        to any of the foregoing;

        "CONFIDENTIAL BUSINESS INFORMATION" means all information relating to
        the business written by the Target Subsidiary and all claims arising
        thereunder;

        "CONVERTED REVALUED AMOUNTS" shall mean the aggregate of the negative
        amounts set out against the line "Excess assets over liabilities at
        31/12/01" in Appendix 1 to the First Amendment Letter converted into the
        amounts of their respective Foreign Currencies using the exchange rate
        as at 31 December 2001 set out in Appendix 1 to the First Amendment
        Letter, and then reconverted to a USD amount using the Prescribed
        Exchange Rate;

        "CURRENT USE" means in relation to each Real Property, the use specified
        as the current use of that Real Property in Schedule 5;



                                       6


        "DATA" means any data or information solely used by or for the sole
        benefit of a Target Group Company at any time and stored electronically
        at any time;

        "DATA ROOM" means the forty seven files of documents and information
        relating to the Target Group identified as such and initialled by the
        parties for identification on the front of each such file and the index
        of such files also initialled by the parties for identification

        "DEFAULTING PARTY" is defined in Clause 7.1;

        "DISCLOSED SCHEME" is defined in paragraph 19.1 of Schedule 3;

        "DISCLOSURE LETTER" means the letter from the Seller to the Buyer in
        relation to the Warranties having the same date as this Agreement;

        "DISTRIBUTIONS" means:

        (a)     all profits of the Target Subsidiary available for distribution
                and resolved to be distributed in accordance with applicable
                laws and any required approvals of the relevant authorities; and

        (b)     all repayments of capital (including reductions which result in
                repayments of capital) of the Target Subsidiary and all
                repurchases of shares by the Target Subsidiary made in
                accordance with applicable laws and any required approvals of
                the relevant authorities and, if necessary, sanctioned by a
                court;

        "DISTRIBUTION SECURITY" means the security deed in the Agreed Form
        pursuant to which the Buyer grants the Seller a first charge over the
        Sale Shares;

        "DKK" shall mean Danish Krone;

        "EMPLOYEE" is defined in paragraph 19.1 of Schedule 3;

        "ENDING FOREIGN CURRENCY STATEMENT" shall mean the statement referred to
        in paragraph 4.1 of Schedule 4;

        "ESCROW AMOUNT" is defined in Clause 3.8.1(a);

        "ESTIMATED COMPLETION ADJUSTMENT" means the amount which the Completion
        Adjustment would be if the criteria in paragraph 4 of Schedule 7 were
        applied on the last day of the month preceding the delivery of the
        calculation pursuant to Clause 4.4.1;

        "EUR" shall mean Euros;

        "EXCESS NET F/X LOSS" shall mean the amount of the Net F/X Losses in
        excess of $40 million ($40,000,000);



                                       7


        "FIRST AMENDMENT LETTER" shall mean the letter between the Buyer and the
        Seller dated 30 August 2002 amending this Agreement;

        "FOREIGN CURRENCY" shall mean a currency other than USD displayed in
        Appendix 1 of the First Amendment Letter;

        "GBP" shall mean pounds Sterling;

        "HARDWARE" means any computer equipment owned by and solely used by or
        for the sole benefit of a Target Group Company at any time including,
        without limitation, PCs, servers, mainframes, screens, terminals,
        keyboards, disks, printers, cabling, associated and peripheral
        electronic equipment but excluding all Computer Programs;

        "IGI RETROCESSION" means the Aggregate Retrocession Agreement of the IGI
        Loss Portfolio in the Agreed Form;

        "INITIAL CONSIDERATION" means the initial consideration referred to in
        Clause 2.2.2;

        "INSURANCE CONTRACT" means any contract by which a person has provided
        insurance to another person;

        "INVESTED ASSETS" means transferable shares and other transferable
        variable yield securities and transferable units in unit trusts,
        transferable debt securities and other transferable fixed income
        securities;

        "INVESTMENT INCOME ADJUSTMENT" is defined in Clause 3.1.1(d);

        "INVESTMENT INCOME DEDUCTION" is defined in Clause 3.1.1(c);

        "INVESTMENT POLICIES" means the overall investment policies used in the
        management of a person's investment portfolio, including policies with
        respect to duration, liquidity, currency, asset allocation and asset
        quality;

        "KEY EMPLOYEES" means Cathy Pierce, Debra Lynn McClenahan, Ralph Richard
        Mueller and Marcia Munn provided that such persons are employed by the
        Seller or one of its Affiliates at the time that their services are
        required under this Agreement, and such other persons as may be agreed
        between the Buyer and the Seller from time to time;

        "LAST ACCOUNTING DATE" means 31 December 2001;

        "LEASE" is defined in paragraph 11.9 of Schedule 3;

        "LICENSED COMPUTER PROGRAMS" shall have the meaning given in paragraph
        7.4.2(b) of Schedule 3;

        "LOSS CALCULATION" means the adjustment for any loss which would be
        recognised if the criteria in paragraph 5.2(e)(ii) of Schedule 7 were
        applied on the last day of the month preceding the delivery of the
        calculation pursuant to Clause 4.5;



                                       8


        "LOSS TERMINATION NOTICE" is defined in Clause 4.5.2;

        "MAC MANAGEMENT ACCOUNTS" is defined in Clause 4.6.2;

        "MAJOR CLAIM" means any Relevant Claim or a claim for a breach of Clause
        6.4(a) which exceeds $6,000,000 (six million dollars);

        "MANAGEMENT ACCOUNTS" means the Target Group's unaudited profit and loss
        account for the period starting on the day after the Last Accounting
        Date and ending on, and the Target Group's unaudited balance sheet as
        at, 31 March 2002;

        "MANAGEMENT AGREEMENT" means the agreement in the Agreed Form to be
        entered into between the Manager, the Target Company and the Target
        Subsidiary for the management of the run off of the Target Subsidiary;

        "MANAGEMENT AGREEMENT VARIATION" is defined in Clause 3.11.1;

        "MANAGEMENT FEE" means the gross amount of all payments (whether in
        respect of fees, charges, interest, costs, disbursements or howsoever
        otherwise characterised) made by the Target Subsidiary to the Manager,
        the Target Company or any Affiliate of the Buyer whether pursuant to the
        Management Agreement or any other agreement or arrangement whatsoever
        including fees due to the Manager pursuant to paragraph 1.1 of Schedule
        2 to the Management Agreement but excluding:

                (i)     third party costs and expenses incurred by the Target
                        Subsidiary in accordance with paragraph 3.1 of Schedule
                        2 to the Management Agreement provided that such costs
                        and expenses have been necessarily and properly incurred
                        and in the case of Affiliates are at rates no less
                        favourable to the Target Subsidiary than arms-length
                        rates;

                (ii)    costs necessarily and properly incurred by the Target
                        Company in providing services pursuant to the Management
                        Agreement and reimbursable by the Target Subsidiary to
                        the Target Company pursuant to paragraph 1.1 of Schedule
                        3 to the Management Agreement, provided that such costs
                        are at commercially reasonable rates;

                (iii)   any fees and expenses paid by the Target Subsidiary to
                        an Affiliate in respect of services (including legal
                        services) falling outside the scope of the Management
                        Agreement and which are necessarily and properly
                        incurred by the Target Subsidiary at rates no less
                        favourable to the Target Subsidiary than: (a)
                        arms-length rates; or (b) inter company rates charged
                        for similar services to other Affiliates of the Buyer
                        and provided such rates are commercially reasonable;

                (iv)    any amounts due under the VATA; and

                (v)     Distributions made by the Target Subsidiary, including
                        distributions as are otherwise made to the shareholders
                        of the Target Subsidiary, whether of



                                       9

                        profits or capital, made by any unlawful means
                        (including pursuant to a members' voluntary winding-up).


        For the purposes of this definition, "AFFILIATE" includes any associated
        undertaking of the Buyer or any holding company of the Buyer;

        "MANAGEMENT FEE SECURITY" means the security deed in the Agreed Form
        pursuant to which the Manager assigns by way of security to the Seller,
        and grants the Seller a first charge over, certain of its rights to
        payment of the Management Fee;

        "MANAGER" means Tawa Management Limited;

        "MARK TO MARKET" is defined in paragraph 1(c) of Schedule 7;

        "MATERIAL ADVERSE CHANGE" means either:

        (a)     any material adverse change in the business, operations, assets,
                liabilities or financial condition of the Target Group Companies
                taken as a whole but excluding:

                (i)     any adverse change or effect that is caused by or that
                        arises out of conditions affecting the economy or
                        financial, banking, currency or capital markets in
                        general; and

                (ii)    any adverse change or effect that is caused by or that
                        arises out of an event or conditions affecting the
                        insurance and reinsurance industry generally unless that
                        adverse change or effect falls outside paragraph (i) and
                        materially impairs the ability of the Seller or any of
                        the Seller's Affiliates or any other reinsurer of the
                        Target Subsidiary which individually represents 5% or
                        more of the reinsurers' share of the Target Subsidiary's
                        technical provisions as at the Last Accounting Date to
                        fulfill its obligations in respect of reinsurance
                        contracts ceded by the Target Subsidiary and remaining
                        in force at Completion; and

                (iii)   any adverse change or effect resulting from the proposal
                        or announcement of the transaction as contemplated by
                        this Agreement; or

        (b)     a material adverse change having been deemed to have occurred in
                accordance with Clause 4.6; or

        (c)     where (i) the Net F/X Losses exceed $40 million and (ii) the
                Seller has not, within two business days of the determination of
                the Net F/X Losses, given an irrevocable undertaking to
                contribute the Net F/X Losses in excess of $40 million
                ($40,000,000) as provided by Schedule 4;

        "NET F/X LOSSES" shall mean the aggregate of (i) the Converted Revalued
        Amounts, (ii) the Net Settled Gains and Losses and (iii) the Option Fee;


                                       10


        "NET SETTLED GAINS AND LOSSES" shall mean USD 1,501,175 or such other
        figure as the parties shall agree in respect of the lines "Other forex
        gains" and "Forex sales in 2002" in Appendix 1 of the First Amendment
        Letter;

        "NET SETTLEMENTS" is defined in Clause 4.6.3;

        "NEW BUYER" is defined in Clause 13.1;

        "NEWCO" is defined in Clause 14.1.1;

        "NOK" shall mean Norway Krone;

        "NON DEFAULTING PARTY" is defined in Clause 7.1;

        "NON-UK PENSION ARRANGEMENT" is defined in paragraph 19.1 of Schedule 3;

        "OPTION FEE" shall mean the fee, if any, paid by the Target Subsidiary
        on option contracts comprised in the Hedge Transactions;

        "OUTSTANDING COMPLETION BALANCE" is defined in Clause 3.1.1(e);

        "OWNER" means in relation to each Real Property, the company that is
        named as the owner in Schedule 5;

        "PAYMENT AMOUNT" is defined in Clause 3.1.1(f);

        "PAST SUBSIDIARIES" means CNA Underwriting Agencies Limited, CNA
        Corporate Capital Limited and London Market Reinsurance Services
        Limited;

        "PERMIT" means a permit, licence, consent, approval, certificate,
        qualification, specification, registration or other authorisation, or a
        filing of a notification, report or assessment, necessary in any
        jurisdiction for the effective operation of a Target Group Company's
        business, its ownership, possession, occupation or use of an asset or
        its execution or performance of this Agreement;

        "POLICIES" is defined in paragraph 10.1 of Schedule 3;

        "POST-COMPLETION 1987 AND PRIOR AMOUNTS" is defined in Clause 3.13.1(b);

        "POST-COMPLETION OTHER AMOUNTS" is defined in Clause 3.1.1(h);

        "PRE-COMPLETION 1987 AND PRIOR AMOUNTS" is defined in Clause 3.13.1(a);

        "PRE-COMPLETION OTHER AMOUNTS" is defined in Clause 3.1.1(g);

        "PRE-CONTRACT AGREEMENTS" means the letter of intent dated 15 March 2002
        between the Seller and the Buyer, the confidentiality agreement dated 12
        October 2001 between the Seller and the Buyer and the exclusivity
        agreement (and each extension thereto), dated 29 January 2002 between
        the Seller and the Buyer;



                                       11


        "PRESCRIBED EXCHANGE RATE" shall mean:

                (i)     for GBP and EUR, the weighted average strike value of
                        the Hedge Transactions for that Foreign Currency; or

                (ii)    for other Foreign Currencies, the foreign exchange rate
                        against USD provided by Bloomberg on the historical
                        pricing screen on the date the last Hedge Transaction is
                        effected;

        "PRO FORMA BALANCE SHEET" means the pro forma balance sheet for the
        Target Group Companies in the Agreed Form;

        "REAL PROPERTY" means the property or properties details of which are
        set out in Schedule 5 and includes an individual property and a part of
        an individual property but for the purposes of paragraphs 11.2 to 11.9
        of Schedule 3, means only the properties at the London Underwriting
        Centre and the Corn Exchange London;

        "REINSURANCE CONTRACT" means any contract, treaty or associated trust
        agreement, by which a person has provided reinsurance to any ceding
        insurer;

        "REINSURANCE RECOVERABLES" is defined in Clause 3.1.1(i);

        "RELEVANT CLAIM" means a claim by the Buyer in respect of a breach of
        Clause 6.1;

        "RELEVANT CONTRACT" is defined in paragraph 8.1.1 of Schedule 3;

        "RELEVANT F/X PERIOD" shall mean the period from 1 January 2002 to 6
        January 2003 inclusive, or, if any of the Hedge Transactions are
        terminated prior to 31 December 2002 without the Seller's written
        consent, the period from 1 January 2002 to the date three days after the
        date of the first such termination;

        "RELEVANT MONTH END" is defined in Clause 4.6.1;

        "RELEVANT PERCENTAGE" is defined in Clause 3.1.1(j);

        "RELEVANT PERIOD" means (i) the period from the Completion Date to the
        last day of the Quarter in which the Completion Date occurs, inclusive
        of each date; and (ii) each subsequent Quarter;

        "RESTRUCTURING" is defined in Clause 14.1;

        "RETROCESSION CONTRACT" means any contract, treaty or associated trust
        agreement, by which any person has reinsured a Reinsurance Contract;

        "SALE SHARES" means 332,067,741 fully-paid ordinary shares of Pound
        Sterling 1.00 each of the Target Company comprising the whole of the
        issued share capital of the Target Company;



                                       12


        "SECTION 107 TAX LOSSES" means the reduction in tax losses attributable
        to the making of an election by the Target Subsidiary under Section 107
        of the Finance Act 2000;

        "SEK" shall mean Swedish Krona;

        "SELLER'S ADDITIONAL CAPITAL" is defined in Clause 3.1.1(k);

        "SELLER'S SCHEME" is defined in Clause 19.1 of Schedule 3;

        "SELLER'S SOLICITORS" means Lovells of 65 Holborn Viaduct, London EC1A
        2DY;

        "SHRINK WRAP COMPUTER PROGRAMS" shall have the meaning given in
        paragraph 7.4.2(c) of Schedule 3;

        "STAKEHOLDER" is defined in Clause 3.7.1;

        "STOP LOSS CONTRACT" means the stop loss contract between the Seller and
        the Target Subsidiary in the Agreed Form;

        "SUBSCRIPTION AMOUNT" is defined in Clause 3.1.1(l);

        "TARGET COMPANY" means CNA Re Management Company Limited, a company
        incorporated in England and Wales (registered number 1681059), whose
        registered office is at Corn Exchange, Mark Lane, London EC3R 7NE;

        "TARGET GROUP" means the Target Company and the Target Subsidiary;

        "TARGET GROUP COMPANY" means the Target Company or the Target
        Subsidiary;

        "TARGET SUBSIDIARY" means CNA Reinsurance Company Limited, a company
        incorporated in England and Wales (registered number 1086556), whose
        registered office is at Corn Exchange, Mark Lane, London EC3R 7NE;

        "TAX AUTHORITY" is defined in the Tax Deed;

        "TAX DEED" means the tax deed between the Seller and the Buyer in the
        Agreed Form;

        "TERMINATION NOTICE" is defined in Clause 4.4.2;

        "TERMINATION OBJECTION NOTICE" is defined in Clause 4.4.3;

        "THRESHOLD AMOUNT" is defined in Clause 3.1.1(m);

        "TOTAL CASH FLOW" is defined in Clause 4.6.2(a);

        "TOTAL SETTLEMENTS" is defined in Clause 4.6.2(b);

        "TRIGGER DISTRIBUTIONS" means Distributions (and distributions as are
        otherwise made to the shareholders of the Target Subsidiary, whether of
        profits or capital, made by any



                                       13


        lawful means, including pursuant to a members' voluntary winding-up)
        which have actually been received by the Target Company and are either:

        (i)     paid by the Target Company to the Buyer; or

        (ii)    legally capable of being paid by the Target Company to the Buyer
                and which the Target Company has resolved to distribute in
                accordance with Clause 10.1;

        "UNDERWRITERS RE CONTRACT" means the Agreement with respect to the
        Underwriters Re Stop Loss Contract from the 2000 and 2001 accident years
        in the Agreed Form;

        "USD" shall mean United States Dollars;

        "W" is defined in Clause 3.1.1(n);

        "WARRANTY" means a statement contained in Schedule 3; and

        "WTC SETTLEMENTS" is defined in Clause 4.6.2(c).

1.2     GENERAL DEFINITIONS

        In this Agreement:

        "AFFILIATE" means, in relation to a company:

        (a)     a company which is, on or after the date of this Agreement, its
                subsidiary or holding company, or a subsidiary of such holding
                company; and

        (b)     an undertaking which is, on or after the date of this Agreement,
                its subsidiary undertaking or parent undertaking, or a
                subsidiary undertaking of such parent undertaking;

        an "AGREED FORM" document means the form of the document most recently
        agreed by the parties and initialled and dated by them for
        identification on or prior to the date of this Agreement;

        "THIS AGREEMENT" means this agreement together with all its recitals and
        its Schedules;

        "BUSINESS DAY" means a day (other than a Saturday and a Sunday) on which
        banks generally are open for business in London and Chicago, and (if the
        phrase is used in the context of a reference to a day on which the
        payment or purchase of any sum in any currency is due) in the principal
        financial centre of the country of such currency;

        "COMPANIES ACT" means the Companies Act 1985;



                                       14


        "COMPANIES ACTS" means the Companies Act 1985, the Companies
        Consolidation (Consequential Provisions) Act 1985, the Companies Act
        1989 and Part V of the Criminal Justice Act 1993;

        "CONTROLLING INTEREST" means, with respect to a person that is a
        corporation having voting securities, the beneficial ownership, directly
        or indirectly, of more than 50 per cent of the voting securities of such
        person or, with respect to a person that is not such a corporation, the
        power to direct the management or policies of such person, whether by
        operation of law, by contract or otherwise;

        "CREDIT INSTITUTION" has the meaning attributed to it in section 262(1)
        of the Companies Act;

        "CRTP ACT" is defined in Clause 16.12.3;

        "DAY" means a period of 24 hours beginning and ending on 00.00 midnight;

        "DISPUTE" means a dispute between the parties under, arising out of or
        in connection with this Agreement, including any question regarding its
        existence, validity or termination;

        "$" and "DOLLARS" denote the lawful currency of the United States of
        America;

        "ENCUMBRANCE" means a mortgage, charge, pledge, lien or other
        encumbrance securing any obligation of any person or any other type of
        preferential arrangement (including title transfer and retention
        arrangements) having a similar effect;

        "ERA" means Employment Rights Act 1996;

        "EXPERT" means an independent firm of chartered accountants or
        consulting actuaries agreed upon by the parties or (failing agreement)
        selected (at the instance of either party) by, in the case of a firm of
        chartered accountants, the President for the time being of the Institute
        of Chartered Accountants for England and Wales, and in the case of a
        firm of consulting actuaries, the President for the time being of the
        Institute of Actuaries;

        "FSA" means the Financial Services Authority;

        "FSMA" means the Financial Services and Markets Act 2000;

        "HOLDING COMPANY" is as defined in section 736 of the Companies Act;

        "ICA" means the Insurance Companies Act 1982;

        "INDEBTEDNESS" means and includes any obligation (whether incurred as
        principal or surety) for the payment or repayment of money, whether
        present or future, actual or contingent;



                                       15


        "INSURANCE REGULATIONS" means any regulations, orders or rules made
        pursuant to the Companies Act, ICA or FSMA in each case insofar as they
        apply to insurance companies or the carrying on of insurance business;

        "IPT" means insurance premium tax;

        "LIBOR" means, in respect of each Relevant Period, the rate per annum
        equal to the arithmetic mean (rounded upwards, if not already such a
        multiple, to the nearest whole multiple of one-sixteenth per cent.) of
        the average of the offered quotations of the Reference Banks, which
        appear on the relevant page (as defined in Clause 1.3.3) for a 12 month
        period at or about 11.00 am on the second business day before the first
        day of such Relevant Period;

        "MONTH" means a calendar month;

        "PART IV PERMISSION" means permission to carry on one or more regulated
        activities pursuant to Part IV of FSMA;

        "PAYMENT ACCOUNT DETAILS" means, in relation to any payment to be made
        under or pursuant to this Agreement, the same account number, sort code,
        account location and other details specified by the payee and necessary
        to effect payment (whether by cheque, bankers draft, telegraphic or
        other electronic means of transfer) to the payee;

        "PARENT UNDERTAKING" shall be construed in accordance with section 258
        of the Companies Act;

        "PARTY" means, subject to any express contrary indication, a party to
        this Agreement;

        "PERSON" means any person, firm, company, corporation, society, trust,
        government, state or agency of a state or any association or partnership
        (whether or not having separate legal personality) or two or more of
        these;

        "PROCEEDINGS" means any suit, action or proceedings arising out of or in
        connection with this Agreement;

        "QUARTER" means each period of three months commencing on 1 January, 1
        April, 1 July and 1 October in each year;

        "REFERENCE BANKS" means the relevant principal offices of the National
        Westminster Bank Plc, Barclays Bank PLC and HSBC Bank plc (or such other
        bank or banks as the parties may from time to time select with the
        approval of the other party, such approval not to be unreasonably
        withheld, conditioned or delayed), provided that, if any Reference Bank
        does not give a quotation required at the time relevant for the purposes
        of calculating any exchange rate or interest rate hereunder, then such
        exchange rate or, as the case may be, interest rate shall be determined
        by reference to the quotations which are so given by the remaining
        Reference Banks;

        "REFERENCE EXCHANGE RATE" means the average of the quotations given, at
        approximately 11:00 hours time 2 business days before the relevant date,
        by the



                                       16


        Reference Banks for the rate (including all commission, charges, fees
        and expenses payable) at which each of them would sell the first
        currency (as defined in Clause 1.3.1(j)) in exchange for the second
        currency (as defined in Clause 1.3.1(j)) on the relevant date, in the
        relevant amount;

        "SERVICE DOCUMENT" means a writ, application, claim, summons, petition,
        order, award, judgment or other document relating to any Proceedings;

        "POUND STERLING" and "STERLING" denote the lawful currency of the United
        Kingdom;

        "SUBSIDIARY" is as defined in section 736 of the Companies Act;

        "SUBSIDIARY UNDERTAKING" shall be construed in accordance with section
        258 of the Companies Act;

        "TAX" and "TAXATION" each mean any form of tax or taxation as contained
        in the definition of "Taxation" in the Tax Deed;

        "TAXES ACT" means the Income and Corporation Taxes Act 1988;

        "TCGA" means the Taxation of Chargeable Gains Act 1992;

        "TRADE UNION" is as defined in section 1 TULRCA;

        "TULRCA" means the Trade Union and Labour Relations (Consolidation) Act
        1992;

        "TUPE" means the Transfer of Undertakings (Protection of Employment)
        Regulations 1981;

        "VATA" means, in the United Kingdom, the Value Added Tax Act 1994 and,
        in a jurisdiction outside the United Kingdom, any equivalent
        legislation; and

        "WEEK" means a period of 7 consecutive days from a defined date.

1.3     INTERPRETATION

1.3.1   In this Agreement, subject to any express contrary indication:

        (a)     words (including the definitions in Clauses 1.1 and 1.2)
                importing the singular shall include the plural and vice versa;

        (b)     any reference to a person shall be construed as including a
                reference to its successors, permitted transferees and permitted
                assignees in accordance with their respective interests;

        (c)     any reference to this Agreement or any other agreement or
                document shall be construed as a reference to that agreement or
                document as it may have been, or may from time to time be,
                amended, varied, novated, replaced or supplemented;



                                       17


        (d)     any reference to a "CLAUSE" shall be construed as a reference to
                a Clause of this Agreement;

        (e)     "INCLUDE" and "INCLUDING" shall be construed without limitation
                and general words shall not be given a restrictive meaning by
                reason of the fact that they are followed by particular examples
                intended to be embraced by the general words;

        (f)     any references to "IN WRITING" shall include any modes of
                reproducing words in a legible and non-transitory form;

        (g)     any reference to a "PARAGRAPH" shall be construed as a reference
                to a paragraph of the Schedule in which such reference appears;

        (h)     any reference to a "SCHEDULE" shall be construed as a reference
                to a Schedule to this Agreement;

        (i)     any reference to a statute or enactment shall be construed as a
                reference to such statute as it may have been, or may from time
                to time be, amended or re-enacted and any subordinate
                legislation made or thing done, or may from time to time be
                done, under the statute or enactment;

        (j)     any reference to the "EQUIVALENT" on any given date in any
                currency (the "FIRST CURRENCY") of an amount denominated in
                another currency (the "SECOND CURRENCY") is a reference to the
                amount of the second currency which could be purchased with the
                amount of the first currency at the Reference Exchange Rate;

        (k)     any reference to any English legal term for any action, remedy,
                method of judicial proceeding, legal document, legal status,
                court, official, or any legal concept or thing shall in respect
                of any jurisdiction other than England be deemed to include what
                most nearly approximates in that jurisdiction to the English
                legal term;

        (l)     references to times of day are to London time; and

        (m)     where any of the Warranties is qualified by the expression "so
                far as the Seller is aware" or any other similar expression in
                determining whether the Seller has the knowledge referred to in
                that Warranty it shall be treated as knowing only those matters
                that are known to any of its directors or to the following
                persons: Debra McClenahan, Ralph Richard Mueller, Cathy Pierce,
                Marcia Munn, Kenneth S. De Vries, Edward J. Lavin, Dennis R.
                Hemme, Stephen Baxter and Ron Swanstrom.

1.3.2   Tables of contents and all headings in this Agreement are for ease of
        reference only and shall not affect the interpretation of this
        Agreement.

1.3.3   For the purposes of the definition of LIBOR "RELEVANT PAGE" means the
        page of the Reuters Monitor Rates Service designated for the display of
        London Interbank Offered Rates for the currency of the relevant amount
        (being currently "LIBO" in the case of Dollars) or, if such page or such
        service ceases to be available, such other page or such



                                       18


        other service (as the case may be) for the purpose of displaying London
        Interbank Offered Rates for such currency as the parties may agree or,
        in the absence of agreement, as the Expert, after consultation with the
        parties shall, on the application of either party, select.



                                       19


2.      SALE AND PURCHASE

2.1     AGREEMENT TO SELL THE SALE SHARES

2.1.1   The Seller agrees to sell with full title guarantee and the Buyer agrees
        to buy the Sale Shares and all rights attaching or accruing to the Sale
        Shares (including the right to receive all dividends, distributions or
        any return on capital declared, paid or made by the Target Company) at
        or after the date of this Agreement, free of any encumbrance.

2.1.2   The Seller waives all rights of pre-emption over any of the Sale Shares
        conferred on it by the articles of association of the Target Company or
        in any other way and undertakes to take, and procure the taking of, all
        steps necessary to ensure that any rights of pre-emption are waived.

2.2     PURCHASE PRICE

2.2.1   The purchase price of the Sale Shares shall be the aggregate of the
        Initial Consideration and, if any, the Additional Consideration.

2.2.2   The Initial Consideration shall be $1.00 payable on Completion to the
        Seller in the manner prescribed by Clause 5.3(a).

2.2.3   The Additional Consideration (if any) shall be calculated in accordance
        with Clause 3.2 or Clause 3.3.3 or Clause 2A.3(2) of the Tax Deed (as
        appropriate) and be payable in accordance with Clause 3.6 provided that
        the Additional Consideration and any interest thereon shall not exceed
        $118,999,999 (one hundred and eighteen million, nine hundred and ninety
        nine thousand and nine hundred and ninety nine dollars).

2.3     STAMP DUTY

2.3.1   The Seller shall pay any stamp duty in respect of the transfer of the
        Sale Shares to the Buyer.

2.3.2   At Completion, the Seller shall retain the executed transfer(s) in
        respect of the Sale Shares to the Buyer or its nominee(s). The Seller
        undertakes that it shall within 10 business days of execution of the
        transfer(s) of the Sale Shares apply for adjudication for stamp duty in
        respect of the transfer(s). The Seller undertakes to discharge promptly
        any stamp duty payable in respect of the transfer(s) and to deliver to
        the Buyer the duly stamped transfer(s) on receipt of the same from the
        Stamp Office.

2.3.3   The Seller shall have conduct of the application for adjudication in
        respect of stamp duty on the transfer(s) of the Sale Shares and in
        respect of any dispute in relation to such application subject to
        considering any reasonable comments or requests of the Buyer. The Seller
        shall provide copies of all correspondence with the Inland Revenue in
        relation to the application and any related dispute to the Buyer. The
        Buyer shall provide the Seller (at Seller's cost) with such assistance
        as may be reasonably required for the purposes of the application and
        any related dispute.



                                       20


3.      COMPLETION ADJUSTMENTS

3.1     DEFINITIONS

3.1.1   For the purposes of this Clause 3, the following definitions shall
        apply:

        (a)     "BUYER'S ADDITIONAL CAPITAL" means any ordinary shares which may
                be required to be subscribed by the Buyer pursuant to Clause
                3.2;

        (b)     "COMPLETION BALANCE" means the amount by which the Completion
                Adjustment is greater than zero;

        (c)     "INVESTMENT INCOME DEDUCTION" means the amount by which the
                Investment Income Adjustment is greater than $15,000,000
                (fifteen million dollars);

        (d)     "INVESTMENT INCOME ADJUSTMENT" means Investment Income (as
                defined in paragraph 4.2.2(a) of Schedule 7) less Administrative
                Expenses (as defined in paragraph 4.2.2(b) of Schedule 7) taken
                into account in the Completion Accounts;

        (e)     "OUTSTANDING COMPLETION BALANCE" means, at any point in time:

                (i)     the Completion Balance which has not been paid by the
                        Buyer to the Seller under Clause 3.3.3; plus

                (ii)    interest which has been accrued at that time in
                        accordance with Clause 3.5.1 (if any); plus

                (iii)   any amount outstanding from the Buyer to the Seller
                        pursuant to clause 2A.3(2) of the Tax Deed; plus

                (iv)    the aggregate Post-Completion Other Amounts to be
                        included pursuant to clause 3.4; plus

                (v)     the amount of any net gain shown in the Closing F/X
                        Adjustment;

        (f)     "PAYMENT AMOUNT" means the amount by which the Investment Income
                Adjustment is greater than $27,000,000 (twenty seven million
                dollars);

        (g)     "PRE-COMPLETION OTHER AMOUNTS" means the amount of Reinsurance
                Recoverables arising in relation to underwriting years 1988 and
                subsequent received by the Target Subsidiary prior to or on the
                Completion Date;

        (h)     "POST-COMPLETION OTHER AMOUNTS" means:

                (i)     100 per cent. of the amount of any Reinsurance
                        Recoverables arising in relation to underwriting years
                        1988 and subsequent, where the reinsurer is the Seller
                        or an Affiliate of the Seller, which is received by the
                        Target Subsidiary after the Completion Date; and



                                       21


                (ii)    90 per cent. of the amount of any Reinsurance
                        Recoverables arising in relation to underwriting years
                        1988 and subsequent, where the reinsurer is an entity
                        other than the Seller or an Affiliate of the Seller,
                        which is received by the Target Subsidiary after the
                        Completion Date;

        (i)     "REINSURANCE RECOVERABLES" means any amount recoverable from a
                reinsurer as a result of corrections to the Senator proportional
                reinsurance module included in Schedule 11;

        (j)     "RELEVANT PERCENTAGE" means:

                        (i)     80 per cent., to the extent that the Buyer has
                                not yet paid to the Seller at least $25,000,000
                                (twenty-five million dollars) of the principal
                                of the Completion Balance; or

                        (ii)    50 per cent., to the extent that the Buyer has
                                paid to the Seller $25,000,000 (twenty-five
                                million dollars) or more of the principal of the
                                Completion Balance;

        (k)     "SELLER'S ADDITIONAL CAPITAL" is defined in Clause 3.3.2(a);

        (l)     "SUBSCRIPTION AMOUNT" means $25,000,000 (twenty five million
                dollars), less the Pre-Completion Other Amounts;

        (m)     "THRESHOLD AMOUNT" shall be as provided in Clause 3.2.1(b),
                3.2.2(b), 3.2.3(c) or 3.2.4(b), as appropriate; and

        (n)     "W" shall be as provided in Clause 3.2.1(c), 3.2.2(c), 3.2.3(d)
                or 3.2.4(c), as appropriate.

3.2     INVESTMENT INCOME ADJUSTMENT

3.2.1   If the Investment Income Adjustment is equal to or less than $15,000,000
        (fifteen million dollars):

        (a)     the Buyer shall subscribe for one ordinary share in the Target
                Company at par for every Pound Sterling1.00 (or its equivalent)
                of the Subscription Amount;

        (b)     the Buyer shall pay to the Seller an amount equal to the
                Pre-Completion Other Amounts up to a maximum amount of
                $25,000,000 (twenty five million dollars);

        (c)     the Threshold Amount shall be $12,000,000 (twelve million
                dollars); and

        (d)     "W" shall be $20,200,000 (twenty million and two hundred
                thousand dollars) plus an amount equal to the amount (if any) by
                which the Pre-Completion Other Amounts exceeds $25,000,000
                (twenty five million dollars).

3.2.2   If the Investment Income Adjustment is greater than $15,000,000 (fifteen
        million dollars) but is less than or equal to $27,000,000 (twenty seven
        million dollars):



                                       22


        (a)     the Buyer shall subscribe for one ordinary share in the Target
                Company at par for every Pound Sterling1.00 (or its equivalent)
                of the Subscription Amount;

        (b)     the Buyer shall pay to the Seller an amount equal to the
                Pre-Completion Other Amounts up to a maximum amount of
                $25,000,000 (twenty five million dollars);

        (c)     the Threshold Amount shall be $12,000,000 (twelve million
                dollars) less the Investment Income Deduction; and

        (d)     "W" shall be $32,200,000 (thirty two million two hundred
                thousand dollars) less the Threshold Amount, and plus an amount
                equal to the amount (if any) by which the Pre-Completion Other
                Amounts exceeds $25,000,000 (twenty five million dollars).

3.2.3   If the Investment Income Adjustment is greater than $27,000,000 (twenty
        seven million dollars) but is less than or equal to $52,000,000 (fifty
        two million dollars):

        (a)     the Buyer shall subscribe for one ordinary share in the Target
                Company at par for every Pound Sterling1.00 (or its equivalent)
                of the Subscription Amount less the Payment Amount;

        (b)     the Buyer shall pay to the Seller an amount equal to the
                aggregate of the Payment Amount and the Pre-Completion Other
                Amounts up to an aggregate maximum of $25,000,000 (twenty five
                million dollars);

        (c)     the Threshold Amount shall be nil; and

        (d)     "W" shall be $32,200,000 (thirty two million two hundred
                thousand dollars) plus an amount equal to the amount (if any) by
                which the sum of the Pre-Completion Other Amounts and the
                Payment Amount exceeds $25,000,000 (twenty five million
                dollars).

3.2.4   If the Investment Income Adjustment is greater than $52,000,000 (fifty
        two million dollars):

        (a)     the Buyer shall pay to the Seller $25,000,000 (twenty five
                million dollars);

        (b)     the Threshold Amount shall be nil; and

        (c)     "W" shall be $32,200,000 (thirty two million two hundred
                thousand dollars) plus the amount by which the Investment Income
                Adjustment exceeds an amount which is equal to the difference of
                $52,000,000 (fifty two million dollars) less the Pre-Completion
                Other Amounts.

3.2.5   If the Buyer is required to subscribe for the Buyer's Additional Capital
        pursuant to this Clause 3.2, the Buyer shall procure that, immediately
        upon the issue of the Buyer's Additional Capital, the Target Company
        subscribes for ordinary shares in the Target Subsidiary of an amount
        equal to the Buyer's Additional Capital.



                                       23


3.3     COMPLETION ADJUSTMENT

3.3.1   The Buyer and the Seller shall agree and/or there shall be determined
        the Completion Adjustment in accordance with Schedule 7.

3.3.2   If the Completion Adjustment is less than zero:

        (a)     the Seller shall subscribe for one ordinary share in the Target
                Company at a premium equal to the absolute value of the amount
                of the Completion Adjustment (or its equivalent) (the "SELLER'S
                ADDITIONAL CAPITAL");

        (b)     the Buyer shall procure that the Target Company issues the
                Seller's Additional Capital to the Seller upon payment.
                Immediately upon issue of the Seller's Additional Capital the
                Seller shall transfer the Seller's Additional Capital to the
                Buyer in consideration for the payment by the Buyer to the
                Seller of $1.00; and

        (c)     the Buyer shall procure that the Target Company subscribes for
                one ordinary share in the Target Subsidiary at a premium equal
                to the total amount received by the Target Company for the
                Seller's Additional Capital.

3.3.3   If at any time following the Completion Date the Outstanding Completion
        Balance is greater than zero and:

        (a)     the Target Subsidiary pays a Management Fee, then the Buyer
                shall, subject to Clause 3.3.4, within 5 business days of the
                receipt by the Manager of the Management Fee, pay to the Seller
                an amount equal to 50 per cent. of the Management Fee; and/or

        (b)     the Target Subsidiary pays a Trigger Distribution, then the
                Buyer shall, subject to Clause 3.3.4, within 5 business days of
                such payment, pay to the Seller an amount equal to the Relevant
                Percentage of such Trigger Distribution;

        (c)     the Buyer or any of its Affiliates disposes of a controlling
                interest in the Target Company (other than pursuant to clause 13
                or clause 14) then the Buyer shall, within 5 business days of
                the receipt of the consideration, pay 100 per cent. of the
                consideration received for any such controlling interest; and/or

        (d)     the Target Company or any of its Affiliates:

                        (i)     disposes of a controlling interest in the Target
                                Subsidiary; and/or

                        (ii)    disposes of all or substantially all of its
                                assets; and/or

                        (iii)   procures that the Target Subsidiary disposes of
                                all or substantially all of its assets,

                (in each case other than pursuant to clause 13 or clause 14)
                then the Buyer shall, within 5 business days of the receipt of
                the consideration, whether by the Buyer,



                                       24


                the Target Company or the Target Subsidiary, pay to the Seller
                100 per cent. of the consideration received for any such
                controlling interest or assets,

                provided that, the aggregate of the payments made by the Buyer
                to the Seller pursuant to this Clause 3.3.3 shall not exceed the
                Outstanding Completion Balance.

3.3.4   The Buyer shall only be obliged to make payments to the Seller pursuant
        to Clauses 3.3.3(a) and 3.3.3(b) to the extent that the aggregate of the
        payments by the Target Subsidiary described in Clauses 3.3.3(a) and
        3.3.3(b) exceed the Threshold Amount plus an amount in respect of
        interest on the Threshold Amount calculated from the Completion Date and
        in accordance with Clause 3.5.1.

3.4     POST COMPLETION OTHER AMOUNTS

3.4.1   If any Post Completion Other Amounts arise after the Completion Date,
        the amount of those Post Completion Other Amounts shall be added to the
        amount of the Outstanding Completion Balance on the day which is two
        business days after the receipt of those Post Completion Other Amounts
        by the Target Subsidiary.

3.5     INTEREST

3.5.1   The Outstanding Completion Balance and/or any Additional Consideration
        will bear interest from the Completion Date to the date of payment
        (inclusive of each date) at a rate equal to the one-year LIBOR plus 1.00
        per cent. per annum. The interest shall accrue daily and be calculated
        at the end of each Relevant Period on the actual number of days elapsed
        in that Relevant Period and a 360 day year. The interest shall be
        compounded quarterly in arrears on the last day of each Relevant Period.
        The one-year LIBOR shall be re-set at the Completion Date and on each
        anniversary date of the Completion Date and such rate shall be used for
        all subsequent calculations until the next anniversary date. The Seller
        shall determine the one-year LIBOR at each re-set date and shall give
        the Buyer written notice of each such determination on the first
        business day following the Completion Date and each anniversary
        thereafter. Any payments in accordance with Clauses 3.3.2, 3.3.3 and
        3.6.1 shall be applied first to outstanding interest calculated in
        accordance with this Clause 3.5.1.

3.6     ADDITIONAL CONSIDERATION

3.6.1   Any amount payable by the Buyer to the Seller pursuant to Clause 3.2 or
        Clause 3.3.3 or Clause 2A.3(2) of the Tax Deed is deemed to be
        additional consideration for the purchase of the Sale Shares and is, in
        each case, referred to as "ADDITIONAL CONSIDERATION".

3.7     PAYMENTS

3.7.1   Within 5 business days after the Completion Adjustment being agreed or
        finally determined pursuant to the provisions of Schedule 7, the
        Additional Consideration payable pursuant to clause 3.2 shall be paid
        (net of any applicable withholding tax) in



                                       25


        accordance with Clause 16.15. The Additional Consideration will bear
        interest calculated in accordance with Clause 3.5.1.

3.7.2   No withholding tax shall be deducted from any payment under this Clause
        3.7 where the payor has been directed by the Inland Revenue under
        Regulation 2 of the Double Taxation Relief (Taxes or Income) (General)
        Regulations 1970 that tax shall not be deducted or may be deducted at a
        lower rate of withholding tax or where the Inland Revenue has issued a
        provisional authority for interest to be paid gross or at a lower rate
        of withholding tax and whilst such provisional authority remains in
        force.

3.7.3   The recipient of any payment shall cooperate with the payer in obtaining
        any clearances and complying with any procedural formalities necessary
        in order for the payer to make such payment without deduction of any
        withholding tax or at a lower rate of withholding tax under the
        applicable double taxation agreement. The recipient of the payment shall
        provide to the payer copies of all documents obtained from the relevant
        Tax Authority responsible for the double taxation agreement in both
        countries which are relevant to the payer making such payment without
        deduction of any withholding tax or at a lower rate of withholding tax
        under the applicable double taxation agreement.

3.8     ESCROW

3.8.1   At Completion the Subscription Amount shall be paid by the Buyer to the
        Buyer's solicitors as stakeholder (the "STAKEHOLDER"), who shall, at the
        same time, be irrevocably instructed by the Seller and the Buyer:

        (a)     to place $25,000,000 (twenty five million dollars) (the "ESCROW
                AMOUNT") in an interest bearing designated bank deposit account
                maintained in a branch of an English high street clearing bank
                in the name of the Stakeholder;

        (b)     within 5 business days after the Completion Adjustment being
                agreed or finally determined pursuant to the provisions of
                Schedule 7:

                (i)     if Clauses 3.2.1 or 3.2.2 apply:

                        (1)     pay that part of the Escrow Amount which is
                                equal to the Subscription Amount to the Target
                                Company (which shall be deemed to be payment in
                                fulfilment of the Buyer's obligations under
                                Clauses 3.2.1(a) or 3.2.2(a) as appropriate);

                        (2)     pay the balance of the Escrow Amount to the
                                Seller (which shall be deemed to be payment in
                                fulfilment of the Buyer's obligations under
                                Clauses 3.2.1(b) or 3.2.2(b) as appropriate)

                (ii)    if Clause 3.2.3 applies, pay that part of the Escrow
                        Amount which is equal to the amount calculated in
                        accordance with Clause 3.2.3(a) to the Target



                                       26


                        Company (which shall be deemed to be payment in
                        fulfilment of the Buyer's obligation under Clause
                        3.2.3(a)), and pay the balance of the Escrow Amount to
                        the Seller (which shall be deemed to be payment in
                        fulfilment of the Buyer's obligations under Clause
                        3.2.3(b); and

                (iii)   if Clause 3.2.4 applies, pay the Escrow Amount to the
                        Seller (which shall be deemed to be payment in
                        fulfilment of the Buyer's obligations under Clause
                        3.2.4(a)); and

        (c)     to pay an amount equal to any interest received by the
                Stakeholder on the Escrow Amount (less any tax thereon for which
                the Stakeholder may be accountable and any charges and expenses
                incurred by the Stakeholder) to the Buyer (or as it may direct)
                and/or to the Seller (or as it may direct) in proportion to the
                amounts finally payable to them respectively, otherwise than in
                respect of costs.

3.9     SUBSCRIPTIONS

3.9.1   The Buyer's Additional Capital shall be subscribed for and paid for in
        full within 5 business days of receipt of the amounts to be paid to it
        by the Stakeholder under Clause 3.8.1(b)(i) or (ii), as appropriate.

3.9.2   The Seller's Additional Capital shall be subscribed for and paid for in
        full within 5 business days after the Completion Adjustment being
        finally agreed or finally determined pursuant to the provisions of
        Schedule 7.

3.10    COMPLETION BALANCE SECURITY

3.10.1  If Clause 3.3.3 shall apply, the Buyer shall:

        (a)     execute the Distribution Security in favour of the Seller; and

        (b)     procure that the Manager executes the Management Fee Security in
                favour of the Seller,

         within 5 business days after the Completion Adjustment has been agreed
         or finally determined pursuant to the provisions of clause 3.3.1 and
         Schedule 7.

3.11    MANAGEMENT FEE

3.11.1  The Buyer shall provide a statement of the amounts paid to the
        Affiliates of the Buyer (as defined in the definition of "MANAGEMENT
        FEE") and of the amounts so paid not falling within the Management Fee
        together with a copy of the audited accounts of the Target Subsidiary
        within 120 days of the end of each financial year and a certificate of
        an officer of the Target Subsidiary of the accuracy of the statement.



                                       27


3.12    MANAGEMENT FEE VARIATION

3.12.1  If, at any time during the term of the Management Agreement, the board
        of directors of the Target Subsidiary determines that the amount of the
        Management Fee to be paid by the Target Subsidiary is too high having
        regard to the financial condition of the Target Subsidiary or any
        requirements of the Financial Services Authority, then the Buyer shall
        immediately notify the Seller in writing and the Target Subsidiary may
        seek to reach agreement with the Manager to reduce the Management Fee by
        an agreed amount over an agreed period.

        If the Target Subsidiary and the Manager reach such an agreement (a
        "MANAGEMENT AGREEMENT VARIATION") the Buyer shall immediately notify the
        Seller and shall provide the Seller with a detailed and reasoned
        explanation for the Management Agreement Variation and the Seller hereby
        agrees:

        (a)     to agree to the Management Agreement Variation in its capacity
                as assignee of the rights to payment of the Management Fee under
                the terms of the Management Fee Security; and

        (b)     not to enforce its rights under the Management Fee Security in
                connection with the Management Agreement Variation,

        Provided that the Seller shall not be obliged to agree to that variation
        if:

                (i)     the result of the variation is that any provider of debt
                        or equity finance to the Target Subsidiary would rank
                        ahead of the Seller with respect to payments or
                        distributions;

                (ii)    any Affiliate of the Target Subsidiary receives payments
                        or distributions from the Target Subsidiary during the
                        period for which the variation is effective ("VARIATION
                        PERIOD") other than payments excluded from the
                        definition of Management Fee and permitted to be paid
                        under the Management Fee Security and the Distribution
                        Security; or

                (iii)   the Seller has not received $25,000,000 or more of the
                        Completion Balance and the financial condition of the
                        Target Subsidiary or the requirements of the Financial
                        Services Authority, which have brought about the
                        reduction in the Management Fee, has resulted from
                        requirements of operations in which the Target
                        Subsidiary was not engaged as at the date of Completion,

                and provided also that, at the end of the Variation Period, the
                Management Fee shall be restored to the original amount.

3.13    1987 AND PRIOR AMOUNTS

3.13.1  For the purposes of this Clause 3.13, the following definitions shall
        apply:

        (a)     "PRE-COMPLETION 1987 AND PRIOR AMOUNTS" means the amount of
                Reinsurance Recoverables arising in respect of the Target
                Subsidiary's underwriting years



                                       28


                1987 and prior which is received by the Target Subsidiary after
                the date of this Agreement but prior to or on the Completion
                Date; and

        (b)     "POST-COMPLETION 1987 AND PRIOR AMOUNTS" means:

                (i)     100 per cent. of the amount of any Reinsurance
                        Recoverables arising in respect of the Target
                        Subsidiary's underwriting years 1987 and prior, where
                        the reinsurer is the Seller or an Affiliate of the
                        Seller, which is received by the Target Subsidiary after
                        the Completion Date; and

                (ii)    90 per cent. of the amount of any Reinsurance
                        Recoverables arising in respect of the Target
                        Subsidiary's underwriting years 1987 and prior where the
                        reinsurer is an entity other than the Seller or an
                        Affiliate of the Seller, which is received by the Target
                        Subsidiary after the Completion Date.

3.13.2  The Buyer acknowledges that prior to Completion the Seller may procure
        that the Target Subsidiary shall pay to the Seller any Pre-Completion
        1987 and Prior Amounts within two business days of receipt by the Target
        Subsidiary of the same.

3.13.3  The Buyer agrees to procure that the Target Subsidiary shall pay to the
        Seller any Post Completion 1987 and Prior Amounts within two business
        days of receipt by the Target Subsidiary of the same.

3.13.4  The payments to be made pursuant to Clause 13.3.2 and 13.3.3 are to be
        made to the Seller as corrections of billing errors which arose in
        relation to the 100 per cent. quota share for 1987 and prior
        underwriting years between the Seller and the Target Subsidiary.



                                       29


4.      CONDITIONS TO COMPLETION

4.1     CONDITIONS

        Completion is conditional on the following conditions being satisfied,
        or in the case of the conditions in paragraphs (b), (d) or (f) below,
        waived by the Buyer, on or before the Completion Date:

        (a)     the Buyer having received a notice of approval from the FSA of
                all persons who will acquire control of the Target Subsidiary on
                Completion in accordance with section 184 FSMA (on such terms or
                conditions, if any, as are reasonably acceptable to the Seller
                and the Buyer in so far as such terms or conditions affect the
                Seller and the Buyer respectively) and such approval not having
                been revoked and being in full force and effect on the
                Completion Date or, in the absence of receipt of such notice,
                the period during which the FSA may serve notice of objection
                pursuant to section 186 FSMA having elapsed without the FSA
                having served any such notice of objection on the Buyer;

        (b)     subject to Clause 4.2.6 an application having been made by the
                Target Subsidiary to the FSA to vary the Target Subsidiary's
                permission under FSMA ("PART IV PERMISSION") so as to remove its
                permission to effect contracts of insurance on the basis that
                such variation shall only be effective if Completion takes
                place;

        (ba)    the FSA having confirmed to the Target Subsidiary (on such terms
                or conditions, if any, as are reasonably acceptable to the
                Seller and the Buyer in so far as such conditions affect the
                Seller and the Buyer respectively) that the FSA has no
                objections to the Target Subsidiary and the Seller entering into
                the Settlement of 100 per cent. quota share for 1987 and prior
                underwriting years in the Agreed Form, the Settlement of
                aggregate stop loss providing $125,000,000 of cover in respect
                of underwriting years 1997, 1998, and 1999 in the Agreed Form,
                the CRG Commutation in the Agreed Form and the BU2 Commutation
                in the Agreed Form having been notified of the same pursuant to
                the Notice of Requirements dated 26 November 2001 addressed to
                the Target Subsidiary, and no condition of the FSA excludes or
                unduly burdens performance by the Target Subsidiary of the
                Allianz Contract and the Underwriters Re Contract;

        (c)     the FSA not:

                (i)     withdrawing or giving notice to withdraw any permission
                        (except in relation to the variation of the Target
                        Subsidiary's Part IV Permission referred to in paragraph
                        (b) above) required for, or in connection with, the
                        carrying on of the business of the Target Subsidiary;

                (ii)    imposing, or giving notice that it intends to impose,
                        any restriction or requirement on, or on the business
                        of, the Target Subsidiary other than that which (aa)
                        might reasonably be expected for a transaction of this
                        type and size and (bb) would not have a material adverse
                        effect on the ability of the



                                       30


                        Buyer to carry on the business of the Target Subsidiary
                        after Completion in the same manner as it is carried on
                        at the date of this Agreement; or

                (iii)   requiring additional capital to be contributed to the
                        Target Subsidiary by Seller;

        (d)     the Target Subsidiary having made an election under section 107
                of the Finance Act 2000 in respect of the years ended 31
                December 2000 and 31 December 2001;

        (e)     the Seller having received a written notice of approval from the
                Illinois Department of Insurance in respect of the matters
                referred to in this Agreement, including, but not limited to,
                approval of the entry by the Seller into any of the Agreed Form
                documents for which Illinois regulatory approval is required (on
                such terms or conditions, if any, as are reasonably acceptable
                to the Seller and the Buyer in so far as such terms or
                conditions affect the Seller and the Buyer respectively); and

        (f)     there having been no Material Adverse Change.

4.2     SATISFACTION OF CONDITIONS

4.2.1   The Buyer hereby undertakes to the Seller to make, as soon as is
        reasonably practicable, an application to the FSA pursuant to section
        178 FSMA in respect of all persons who will acquire control of the
        Target Subsidiary on Completion.

4.2.2   Subject to Clauses 4.2.6 and 4.2.7, the Seller agrees that it will use
        its reasonable endeavours to procure that the Target Subsidiary will
        apply for the variation of the Target Subsidiary's Part IV Permission
        described in Clause 4.1(b) above.

4.2.3   The Seller and the Buyer hereby undertake, each to the other, to use
        their respective reasonable endeavours to procure that the conditions
        set out in Clause 4.1(a), (b) and (ba) are fulfilled as soon as
        reasonably practicable after the date hereof and in any event within 120
        days of the date of this Agreement.

4.2.4   The Buyer shall give notice to the Seller of the satisfaction of the
        condition of Clause 4.1(a) within two business days of becoming aware of
        the same.

4.2.5   The Seller shall give notice to the Buyer of the satisfaction of the
        conditions of Clauses 4.1(b), (ba), (d) and (e) within two business days
        of becoming aware of the same.

4.2.6   If the Seller acting reasonably determines that in respect of Insurance
        Contracts or Reinsurance Contracts which have been entered into by the
        Target Subsidiary at or before the date of this Agreement there is a
        requirement of the FSA that the Target Subsidiary's Part IV Permission
        continue to include permission to effect contracts of insurance, the
        Seller may give notice of this fact to the Buyer and upon the giving of
        such notice:

        (a)     the condition in Clause 4.1(b) shall be deemed to have been
                satisfied; and



                                       31


        (b)     the Seller's obligations under Clause 4.2.2 shall cease to
                apply.

        In the event that the Seller makes such a determination, it shall
        provide the Buyer with reasonable details of the basis upon which it has
        made such a determination.

4.2.7   If the Seller or the Buyer acting reasonably determines that the
        application to vary the Target Subsidiary's Part IV Permission pursuant
        to Clause 4.1(b) having been made shall cause satisfaction of any of the
        other conditions in Clause 4.1 to be delayed beyond the period that
        would be expected if such application had not been made and that
        withdrawal of the application would remove such delay, the party making
        such determination may give notice of this fact to the other and upon
        the giving of such notice the Seller shall procure that the Target
        Subsidiary shall promptly notify the FSA of the withdrawal of its
        application to vary its Part IV Permission. In the event that a party
        makes such a determination, it shall provide to the other reasonable
        details of the basis upon which it has made such a determination. For
        the avoidance of doubt, the making of an application pursuant to Clause
        4.1(b) shall be sufficient to satisfy the condition in Clause 4.1(b)
        even if the application has been withdrawn pursuant to this Clause
        4.2.7.

4.3     WAIVER OR TERMINATION

4.3.1   At any time the Buyer may waive a condition set out in paragraphs (b),
        (d) or (f) of Clause 4.1 by notice to the Seller, on any terms it
        decides.

4.3.2   If a condition set out in Clause 4.1 has not been satisfied (or, in the
        case of the conditions set out in Clause 4.1(b), (d) or (f), waived by
        the Buyer) by 5 pm on 31 December 2002 this Agreement shall terminate
        and have no further effect (subject only to Clauses 15 (Governing law
        and disputes) and 16 (Miscellaneous) which shall continue in force).

4.3.3   If this Agreement terminates pursuant to Clause 4.3.2 each party's
        further rights and obligations under this Agreement will (save as
        mentioned in Clause 4.3.2) cease immediately on termination, but
        termination will not affect any liability of either party to the other
        arising from a breach of this Agreement before the date of such
        termination.

4.4     SELLER'S CONDITION

4.4.1   On any one occasion during the period from the date of this Agreement to
        the tenth business day before the Completion Date the Seller may give
        the Buyer its calculation of the Estimated Completion Adjustment,
        together with the management accounts upon which the Estimated
        Completion Adjustment is based and such working papers used in
        connection with the preparation of the same as are necessary or
        appropriate to understand and agree the calculation of the Estimated
        Completion Adjustment.

4.4.2   If the Estimated Completion Adjustment is greater than $50,000,000
        (fifty million dollars) or less than zero, the Seller may at the same
        time as it provides the Buyer with its calculation of the Estimated
        Completion Adjustment, give the Buyer notice that it wishes to terminate
        this Agreement (the "TERMINATION NOTICE").



                                       32


4.4.3   Unless the Buyer shall within seven business days of receipt of the
        Termination Notice (and the related management accounts and working
        papers) serve a notice in writing on the Seller that it objects to the
        Estimated Completion Adjustment (identifying the reason for any
        objection and the amount(s) or item(s) in the Estimated Completion
        Adjustment calculation, the relevant management accounts and/or
        associated working papers which is/are in dispute) (such notification
        being, for the purposes of this Clause 4.4, a "TERMINATION OBJECTION
        NOTICE") the Buyer shall be deemed to have agreed the Estimated
        Completion Adjustment and this Agreement shall automatically terminate
        in accordance with Clause 4.4.8.

4.4.4   The Buyer shall only be entitled to serve a Termination Objection Notice
        if the basis of its objection is that the calculation of the Estimated
        Completion Adjustment should result in an amount which is greater than
        zero and equal to or less than $50,000,000 (fifty million dollars).

4.4.5   If, within the period referred to in Clause 4.4.3, the Buyer shall give
        the Seller a Termination Objection Notice then the Buyer or the Seller
        shall be entitled, within five business days of the date of such a
        notice, to refer the matter(s) in dispute to Ernst & Young, unless Ernst
        & Young are not at the relevant time independent of each of the parties
        in which case the matter(s) shall be referred to an independent firm of
        chartered accountants agreed upon between them or (failing agreement
        within four days of one party giving notice to the other that it desires
        an independent expert to be appointed) to be selected (at the instance
        of either party) by the President for the time being of the Institute of
        Chartered Accountants for England and Wales.

4.4.6   Ernst & Young or such other independent firm of chartered accountants
        shall act as experts not as arbitrators and shall determine the matter
        or matters in dispute and their decision shall, save in the event of
        fraud or manifest error, be binding. The independent firm of accountants
        shall have the right to seek such professional assistance and advice as
        it may require in fulfilling its duties. The cost of the independent
        firm of accountants shall be borne by the Seller and the Buyer equally.

4.4.7   Upon the resolution of any dispute by the independent firm of
        accountants, the Estimated Completion Adjustment shall be amended to
        accord with such resolution and the Estimated Completion Adjustment
        shall thereafter be final and binding as between the parties, for the
        purposes of this Agreement. If, on this basis, the Estimated Completion
        Adjustment is less than zero or exceeds $50,000,000 (fifty million
        dollars) this Agreement shall automatically terminate in accordance with
        Clause 4.4.8. Otherwise this Agreement shall continue in full force and
        effect.

4.4.8   If this Agreement terminates pursuant to Clause 4.4.3 or Clause 4.4.7
        each party's further rights and obligations under this Agreement will
        cease immediately on termination (subject only to Clause 15 (Governing
        law and disputes) and 16 (Miscellaneous) which shall continue in force),
        but termination will not affect any liability of either party to the
        other arising from a breach of this Agreement before the date of such
        termination.

4.4.9   If the Buyer serves a Termination Objection Notice and, but for the
        provisions of this Clause 4.4.9, the Completion Date would have occurred
        before the resolution of any



                                       33


        dispute as provided for in Clause 4.4.5, the Completion Date shall be
        automatically postponed to the last business day in the month in which
        the Estimated Completion Adjustment is finally determined in accordance
        with Clause 4.4.5.

4.5     BUYER'S CONDITION

4.5.1   On any one occasion during the period from the date of this Agreement to
        the tenth business day before the Completion Date the Buyer may require
        the Seller to give the Buyer sufficient information (including the
        management accounts for the Target Group Companies for the immediately
        preceding month end) as will enable the Buyer to carry out the Loss
        Calculation. Seller shall be allowed twenty days from the date of
        Buyer's notice to provide the requested information. As soon as the
        Buyer has received such information and calculated the loss calculation
        the Buyer shall give the Seller its calculation of the Loss Calculation,
        together with the management accounts upon which the Loss Calculation is
        based and such working papers used in connection with the preparation of
        the same as are necessary or appropriate to understand and agree the
        calculation of the Loss Calculation.

4.5.2   If the Loss Calculation is greater than $14,000,000 (fourteen million
        dollars) the Buyer may at the same time as it provides the Seller with
        its calculation of the Loss Calculation, give the Seller notice that it
        wishes to terminate this Agreement (the "LOSS TERMINATION NOTICE").

4.5.3   Unless the Seller shall within seven business days of receipt of the
        Loss Termination Notice (and the related working papers) serve a notice
        in writing on the Buyer that it objects to the Loss Calculation
        (identifying the reason for any objection and the amount(s) or item(s)
        in the Loss Calculation and/or associated working papers which is/are in
        dispute) (such notification being, for the purposes of this Clause 4.5,
        a "LOSS TERMINATION OBJECTION NOTICE") the Seller shall be deemed to
        have agreed the Loss Calculation and this Agreement shall automatically
        terminate in accordance with Clause 4.5.8.

4.5.4   The Seller shall only be entitled to serve a Loss Termination Objection
        Notice if the basis of its objection is that the calculation of the Loss
        Calculation should result in an amount which is equal to or less than
        $14,000,000 (fourteen million dollars).

4.5.5   If, within the period referred to in Clause 4.5.3, the Seller shall give
        the Buyer a Loss Termination Objection Notice then the Buyer or the
        Seller shall be entitled, within five business days of the date of such
        a notice, to refer the matter(s) in dispute to Ernst & Young, unless
        Ernst & Young are not at the relevant time independent of each of the
        parties in which case the matter(s) shall be referred to an independent
        firm of chartered accountants agreed upon between them or (failing
        agreement within four days of one party giving notice to the other that
        it deserves an independent expert to be appointed) to be selected (at
        the instance of either party) by the President for the time being of the
        Institute of Chartered Accountants for England and Wales.

4.5.6   Ernst & Young or such other independent firm of chartered accountants
        shall act as experts not as arbitrators and shall determine the matter
        or matters in dispute and their decision shall, save in the event of
        fraud or manifest error, be binding. The



                                       34


        independent firm of accountants shall have the right to seek such
        professional assistance and advice as it may require in fulfilling its
        duties. The cost of the independent firm of accountants shall be borne
        by the Seller and the Buyer equally.

4.5.7   Upon the resolution of any dispute by the independent firm of
        accountants, the Loss Calculation shall be amended to accord with such
        resolution and the Loss Calculation shall thereafter be final and
        binding as between the parties, for the purposes of this Agreement. If,
        on this basis, the Loss Calculation exceeds $14,000,000 (fourteen
        million dollars) this Agreement shall automatically terminate in
        accordance with Clause 4.5.8. Otherwise this Agreement shall continue in
        full force and effect.

4.5.8   If this Agreement terminates pursuant to Clause 4.5.3 or Clause 4.5.7
        each party's further rights and obligations under this Agreement will
        cease immediately on termination (subject only to Clause 15 (Governing
        law and disputes) and 16 (Miscellaneous) which shall continue in force),
        but termination will not affect any liability of either party to the
        other arising from a breach of this Agreement before the date of such
        termination.

4.5.9   If the Buyer serves a request for information to enable Buyer to carry
        out the Loss Calculation, or if Seller serves a Loss Termination
        Objection Notice and, but for the provisions of this Clause 4.5.9, the
        Completion Date would have occurred before the completion of the Loss
        Calculation and expiration of Seller's right to object thereto in
        accordance with Clause 4.5.3, or, if applicable, the resolution of any
        dispute as provided for in Clause 4.5.5, the Completion Date shall be
        automatically postponed to the last business day in the month in which
        the Loss Calculation is finally determined in accordance with Clause
        4.5.5.

4.6     DEEMED MATERIAL ADVERSE CHANGE

4.6.1   The Seller shall procure that the Target Group Companies prepare and
        provide the Buyer with the MAC Management Accounts within three business
        days of the last business day of each month between the date of this
        Agreement and the Completion Date (the "RELEVANT MONTH END"), provided
        that where the last Relevant Month End is also the Completion Date, such
        Relevant Month End shall be deemed to end five business days before the
        Completion Date.

4.6.2   For the purposes of this Clause 4.6, the "MAC MANAGEMENT ACCOUNTS" shall
        mean the management accounts prepared by the Target Group with due care
        and attention which show an accurate view of:

        (a)     the actual cumulative cash flows (excluding those arising from
                Invested Assets) of the Target Group in the form of the tab
                "MAC" in the spread sheet entitled "MAC 4.6 ILLUSTRATION
                19_6.XLS" set out in Schedule 9 from the end of the period
                starting on the Last Accounting Date and ending on the relevant
                Month End (the "TOTAL CASH FLOW");

        (b)     the aggregate amount of the Total Cash Flow which is
                attributable to LPC, Other Inwards, Outwards Expenses/other
                inwards in the format given in the tab "ACT CASH OUTFLOWS TO 17
                MAY" in the spread sheet entitled "MAC 4.6 ILLUSTRATION



                                       35


                19_6.XLS" set out in Schedule 9 plus actual cash flows from 18
                May through the Completion Date determined in the same manner as
                that shown in the tab "ACT CASH OUTFLOWS TO 17 MAY" in that
                spread sheet (collectively the "TOTAL SETTLEMENTS");

        (c)     the aggregate amount of the Total Settlements which has been
                paid by the Target Group Companies in respect of claims arising
                as a direct consequence of the terrorist attacks on the Pentagon
                and the World Trade Centre on 11 September 2001 (the "WTC
                SETTLEMENTS"); and

        (d)     the aggregate amount of the Total Settlements which have been
                paid by the Target Group Companies:

                (i)     following the written approval of that payment by the
                        Buyer; or

                (ii)    in accordance with paragraph (n) of Schedule 4,

                (the "APPROVED SETTLEMENTS").

4.6.3   For the purposes of this Clause 4.6, in respect of each set of MAC
        Management Accounts, the Total Settlements, less the sum of the WTC
        Settlements and the Approved Settlements, is referred to as the "NET
        SETTLEMENTS".

4.6.4   If, either:

        (a)     the Seller fails to comply with its obligations under this
                Clause 4.6; or

        (b)     the MAC Management Accounts for 30 June 2002 show that the Net
                Settlements exceed $195m; or

        (c)     the MAC Management Accounts for 31 July 2002 show that the Net
                Settlements exceed $227.5m; or

        (d)     the MAC Management Accounts for 31 August 2002 show that the Net
                Settlements exceed $260m; or

        (e)     the MAC Management Accounts for 30 September 2002 show that the
                Net Settlements exceed $292.5m; or

        (f)     The MAC Management Accounts 31 October 2002 show that the Net
                Settlements exceed $325m; or

        (g)     The MAC Management Accounts for 30 November 2002 show that the
                Net Settlements exceed $357.5m; or

        (h)     the MAC Management Accounts for 31 December 2002 show that the
                Net Settlements exceed $390m,

then a material adverse change shall be deemed to have occurred.



                                       36


5.      COMPLETION

5.1     TIME AND VENUE

        Completion shall take place at the London offices of the Seller's
        Solicitors on the last business day of the month during which the
        conditions set out in Clause 4.1 are satisfied or waived (or, if the
        last of such conditions to be satisfied or waived is satisfied or waived
        in the last five business days of such month) on the last business day
        of the next following month.

5.2     SELLER'S COMPLETION OBLIGATIONS

5.2.1   At Completion the Seller shall:

        (a)     give to the Buyer each item specified in Schedule 2; and

        (b)     with the Buyer, give the Stakeholder the instructions set out in
                Clause 3.7.

5.2.2   At Completion the Seller shall procure that:

        (a)     the Target Company's directors hold a meeting of the board of
                directors of the Target Company at which the directors:

                (i)     vote in favour of the registration of the Buyer or its
                        nominee(s) as member(s) of the Target Company in respect
                        of the Sale Shares (subject to the production of
                        properly stamped transfers);

                (ii)    if requested by the Buyer, change the Target Company's
                        registered office to a place nominated by the Buyer; and

                (iii)   appoint a person nominated by the Buyer as secretary of
                        the Target Company with effect from the end of the
                        meeting;

        (b)     such persons as the Buyer may nominate are appointed as
                directors of the Target Company;

        (c)     the Target Subsidiary's directors hold a meeting of the board of
                directors of the Target Subsidiary at which the directors:

                (i)     if requested by the Buyer, change the Target
                        Subsidiary's registered office to a place nominated by
                        the Buyer; and

                (ii)    appoint a person nominated by the Buyer as secretary of
                        the Target Subsidiary with effect from the end of the
                        meeting; and

        (d)     such persons as the Buyer may nominate are appointed as
                directors of the Target Subsidiary provided that the Buyer has
                provided the Seller with evidence



                                       37


                acceptable to the Seller, acting reasonably, that such persons
                have been approved by the FSA to perform such controlled
                functions.

5.3     BUYER'S COMPLETION OBLIGATIONS

        At Completion the Buyer shall give to the Seller evidence in a form
        reasonably satisfactory to the Seller (by way of a certificate of the
        Buyer's Solicitors or otherwise) of satisfaction of the conditions set
        out in paragraph (a) of Clause 4.1 and shall:

        (a)     pay the amount stated in Clause 2.2.2 to the Seller or as the
                Seller directs in writing in cash;

        (b)     with the Seller, give the Stakeholder the instructions set out
                in Clause 3.7;

        (c)     pay the Subscription Amount to the Stakeholder in accordance
                with Clause 3.7; and

        (d)     give the Seller the Tax Deed executed by the Buyer and the
                Management Agreement executed by the parties thereto.

5.4     RIGHT TO DEFER OR TERMINATE

5.4.1   Neither the Seller nor the Buyer is obliged to complete this Agreement
        unless:

        (a)     the other complies with all its obligations under Clause 5.2 or
                5.3 (as the case may be); and

        (b)     the purchase of all the Sale Shares is completed simultaneously.

5.4.2   If Completion does not take place on the Completion Date because either
        party (the "FIRST PARTY") fails to comply with any material obligation
        under Clause 5.2 or 5.3 (as the case may be), the other party (the
        "SECOND PARTY") may by notice to the First Party:

        (a)     postpone Completion to a date not more than 20 business days
                after the Completion Date; or

        (b)     terminate this Agreement.

5.4.3   If the Second Party postpones Completion to another date in accordance
        with Clause 5.4.2(a), the provisions of this Agreement apply as if that
        other date is the Completion Date.

5.4.4   If the Second Party terminates the Agreement pursuant to Clause
        5.4.2(b), each party's further rights and obligations under this
        Agreement will cease immediately on termination (subject only to Clauses
        15 (Governing law and disputes) and 16 (Miscellaneous) which shall
        continue in force), but termination will not affect any liability of
        either party to the other arising from a breach of this Agreement before
        the date of such termination.



                                       38


6.      SELLER'S WARRANTIES

6.1     WARRANTIES

6.1.1   The Seller warrants to the Buyer in the terms of the Warranties.
        Immediately before the time of Completion, the Seller is deemed to
        warrant to the Buyer in the terms of the Warranties at the date of
        Completion. For this purpose only, where in a Warranty there is an
        express or implied reference to the "DATE OF THIS AGREEMENT", that
        reference is to be construed as a reference to the "COMPLETION DATE".

6.1.2   Each Warranty is to be construed independently and (except where this
        Agreement expressly provides to the contrary) is not limited by a
        provision of this Agreement or another Warranty.

6.1.3   The Seller acknowledges that the Buyer is entering into this Agreement
        in reliance on each Warranty.

6.2     DISCLOSURE LETTER

        The Warranties other than those set out in paragraphs 1.1, 1.2, 3.1,
        3.2.2 or 3.2.3 of Schedule 3 are qualified by the matters fairly
        disclosed in the Disclosure Letter and/or in the Data Room in sufficient
        detail to enable a reasonable purchaser to evaluate their relevance to
        the Warranties. No other knowledge of the Buyer (or an agent or
        Affiliate) relating to a Target Group Company (actual, constructive or
        imputed) prevents or limits a claim made by the Buyer for breach of
        Clause 6.1. The Seller may not invoke the Buyer's knowledge (or the
        knowledge of the Buyer's agents or Affiliates) (actual, constructive or
        imputed) of a fact or circumstances which might make a Warranty untrue,
        inaccurate, incomplete or misleading as a defence to a claim for a
        breach of Clause 6.1. However, the Buyer acknowledges and confirms that
        it and its advisers have carried out such due diligence as is reasonably
        necessary and at the time of entering into this Agreement it is not
        aware of any matter or thing which constitutes a breach of any of the
        Warranties as qualified in accordance with this Clause 6.2.

6.3     WAIVER OF RIGHTS

        The Seller waives and may not enforce a right which it may have in
        respect of a misrepresentation, inaccuracy or omission in or from
        information or advice supplied or given by a Target Group Company or a
        director, officer or employee of a Target Group Company for the purpose
        of assisting the Seller to make a representation, give a Warranty,
        prepare the Disclosure Letter or covenant under the Tax Deed.

6.4     SELLER'S OBLIGATIONS

        Between the execution of this Agreement and Completion the Seller shall:

        (a)     procure that each Target Group Company complies with Schedule 4;



                                       39


        (b)     notify the Buyer immediately if it becomes aware of a fact or
                circumstance which constitutes a breach of Clause 6.1.1 or
                paragraph (a) above or has caused, or will or might cause, a
                Warranty to become untrue, inaccurate, incomplete or misleading
                at any time before Completion;

        (c)     procure that the Buyer and its agents will, at the Buyer's
                expense and upon reasonable notice, be allowed access to, and to
                take copies of, the books and records of each Target Group
                Company in the possession or control of either Target Group
                Company or the Seller provided that the obligations of the
                Seller under this Clause shall not extend to allowing access to
                information which is reasonably regarded as confidential to the
                activities of the Seller otherwise than in connection with the
                Target Group Companies; and

        (d)     procure that such representatives and advisers as the Buyer
                requests may be designated to work with the Seller at the sole
                expense of the Buyer with regard to the management and
                operations of the Target Group Companies. The Seller will
                consult, and will cause the Target Group Companies to consult,
                with such representatives and advisers with respect to any
                action that may materially affect the Target Group. The Seller
                will furnish and will cause the Target Group Companies to
                provide to such representatives and advisers such information as
                they may reasonably request for this purpose.

6.5     UPDATES TO DISCLOSURE LETTER

6.5.1   Each party shall give prompt notice to the other party of (i) the
        occurrence, or failure to occur, of any event or the existence of any
        condition that has caused or could reasonably be expected to cause any
        of its representations or warranties contained in this Agreement to be
        untrue or inaccurate in any material respect at any time after the date
        of this Agreement, up to and including the Completion Date (except to
        the extent such representations and warranties are given as of a
        particular date or period and relate solely to such particular date or
        period), and (ii) any failure on its part to comply with or satisfy, in
        any material respect, any covenant, condition or agreement to be
        complied with or satisfied by it under this Agreement.

6.5.2   The Seller may, no less than 5 business days prior to Completion by
        written notice to the Buyer, supplement the Disclosure Letter to
        reflect:

        (a)     retirements and replacements of a Target Group Company's assets,
                including normal upgrades or replacements of Computer Programs
                (other than replacements of Computer Programs constituting the
                lead applications for key line operations such as in line
                business functions of the business of the Target Subsidiary
                including but not limited to processing Reinsurance Contracts,
                underwriting and recording and processing losses);

        (b)     the hiring, resignation and termination of employees;

        (c)     any act which the Seller is required to perform under the terms
                of this Agreement;



                                       40



        (d)     any act which the Seller is required to perform in order to
                comply with any applicable law; and

        (e)     actions specified in Schedule 4 which have been effected without
                breaching the obligations of the Seller pursuant to Clause
                6.4(a) and Schedule 4 in any material respect;

        which:

                (i)     in the case of paragraphs (a) and (b) above are in the
                        normal course of business of the Target Group Companies;

                (ii)    occur after the date of this Agreement; and

                (iii)   in the case of paragraphs (a) and (b) above are
                        otherwise in accordance with terms of this Agreement,
                        and in particular the Seller's obligations under Clause
                        6.4(a) and Schedule 4; and


        provided that any such supplements to the Disclosure Letter shall only
        be effective to qualify the Warranties given at the date of Completion.



                                       41


7.      REMEDIES FOR BREACH

7.1     NON DEFAULTING PARTY'S RIGHTS

        If, on or before the Completion Date, a party (the "NON DEFAULTING
        PARTY") considers that the other party (the "DEFAULTING PARTY") is in
        breach of any provision of this Agreement, the Non Defaulting Party
        shall promptly notify the Defaulting Party in writing, specifying the
        relevant breach. If the relevant breach is capable of being remedied the
        Defaulting Party may prior to the Completion Date remedy such breach to
        the satisfaction of the Non Defaulting Party, acting reasonably. If the
        breach is not capable of remedy or, if capable of remedy, is not
        remedied to the satisfaction of the Non Defaulting Party acting
        reasonably prior to the Completion Date, then the Non Defaulting Party
        may by notice to the Defaulting Party elect to proceed to Completion or,
        if the breach would result in a valid Major Claim, terminate this
        Agreement.

7.2     TERMINATION BY NON DEFAULTING PARTY

        If the Non Defaulting Party terminates this Agreement pursuant to Clause
        7.1:

        (a)     the Defaulting Party shall indemnify the Non Defaulting Party
                against all its costs up to but not exceeding $1,500,000 (one
                million five hundred thousand dollars) in the aggregate incurred
                at any time after 15 March 2002 relating to the negotiation,
                preparation, execution or termination of this Agreement or the
                satisfaction of a condition set out in Clause 4.1; and

        (b)     each party's further rights and obligations under this Agreement
                will cease immediately on termination (subject only to Clauses
                15 (Governing law and disputes) and 16 (Miscellaneous) which
                shall continue in force), but termination will not affect any
                liability of either party to the other arising from a breach of
                this Agreement before the date of such termination.

7.3     INDEMNIFICATION BY SELLER

7.3.1   If the Buyer proceeds to Completion and there is a breach of Clause 6.1
        or there is a breach of Clause 5.2.1 and:

        (a)     the value of an asset of a Target Group Company is or becomes
                less than the value would have been had the breach not occurred;
                or

        (b)     a Target Group Company is subject to or incurs a liability or an
                increase in a liability which it would not have been subject to
                or would not have incurred had the breach not occurred,

        the Buyer shall be entitled to recover from the Seller by way of
        indemnity (as its sole remedy) in relation to the breach an amount equal
        to the reduction in the value of the asset or, as the case may be, the
        liability or increased liability.



                                       42


8.      LIMITATIONS ON SELLER'S LIABILITY

8.1     MINIMUM CLAIM THRESHOLD

        The Seller shall not be liable in respect of any Relevant Claim or a
        claim under Clause 2 of the Tax Deed unless:

        (a)     the amount payable in respect of that claim exceeds $100,000
                (one hundred thousand dollars) in which case the whole amount of
                that claim and not just the excess over $100,000 (one hundred
                thousand dollars) shall, subject to the limitation in paragraph
                (b) below, be recoverable; and

        (b)     the amounts payable in respect of that claim and all other
                Relevant Claims and claims under Clause 2 of the Tax Deed in
                aggregate exceed $2,000,000 (two million dollars) (the
                "AGGREGATE THRESHOLD") and, subject to the limitation in
                paragraph (a) above, the Seller shall only be liable in respect
                of the amount by which the amounts payable in aggregate exceed
                the Aggregate Threshold.

        For the purposes of determining whether the Aggregate Threshold has been
        reached or exceeded, there shall be disregarded:

                (i)     the limitation in paragraph (a) above; and

                (ii)    the first $10,000 (ten thousand dollars) of the amount
                        of any Relevant Claim or any claim under Clause 2 of the
                        Tax Deed.

8.2     MAXIMUM LIABILITY

        The Seller's total liability in respect of all Relevant Claims and
        claims under the Tax Deed is limited to an aggregate of $100,000,000
        (one hundred million dollars) (or its equivalent), but the amount of a
        claim under Clause 2A.1 of the Tax Deed is not counted for this purpose.

8.3     TIME LIMITS

        The Seller is not liable for a claim for a breach of this Agreement or
        the Tax Deed unless the Buyer has given the Seller notice of the claim,
        stating in reasonable detail the nature of the claim and, if
        practicable, the amount claimed:

        (a)     in respect of a claim under the Tax Deed or for breach of a
                Warranty contained in paragraph 24 of Schedule 3:

                (i)     no later than one month after the expiry of the period
                        during which a Target Group Company may be assessed by a
                        Tax Authority in respect of Tax for which the Target
                        Group Company would not have been liable but for the
                        Target Group Company having been a member of a group for
                        Tax purposes, or controlled by any person, at any time
                        before Completion (and



                                       43


                        for this purpose "control" has the same meaning as in
                        section 767A of the Taxes Act); and

                (ii)    except where Clause 8.3(a)(i) applies, on or before 31
                        January 2009; and

        (b)     in respect of any other Relevant Claim, on or before 30 June
                2004,

        and has in any such case served proceedings in respect thereof within 12
        months of the date of such written notice.

8.4     RECOVERY FROM THIRD PARTIES

        If the Seller pays to or for the benefit of the Buyer an amount in
        respect of any Relevant Claim and any of the Buyer, or a Target Group
        Company subsequently receives from any other person any payment in
        respect of the matter giving rise to the Relevant Claim, the Buyer shall
        thereupon pay to the Seller an amount equal to the payment received,
        after having taken into account any cost, liability (including tax
        liability) or expense in respect thereof and except to any extent that
        the liability of the Seller in respect of the Relevant Claim was reduced
        to take account of such payment.

8.5     NO REPRESENTATIONS

        The Buyer confirms that it has not entered into this Agreement or any
        document entered into hereunder or referred to herein in reliance upon
        any representation, warranty or undertaking other than those expressly
        contained herein and acknowledges that it has not relied on, and will
        make no Relevant Claim in respect of any such representation, warranty
        or undertaking made or supplied by or on behalf of the Seller. Without
        limiting the general nature of the foregoing, the Buyer confirms that it
        has not relied on and will make no claim in respect of any budget,
        forecast or other projection of any nature made or supplied by or on
        behalf of the Seller.

8.6     ACTIONS AFTER COMPLETION

        The Seller shall have no liability in respect of any Relevant Claim to
        the extent that such Relevant Claim arises or is increased in
        circumstances in which the Buyer or a Target Group Company acts or omits
        to act, other than pursuant to a legally binding commitment created on
        or before Completion by a Target Group Company and it or any of its
        advisers, employees, directors, officers or agents knows that such act
        or omission would give rise to or increase such Relevant Claim and a
        reasonable alternative course of action was available to the Buyer or
        the relevant Target Group Company which could have been expected not to
        have given rise to such Relevant Claim or to a Relevant Claim of such
        amount and which would not require the Buyer to incur any expenditure or
        any liability or otherwise materially prejudice it, on or after
        Completion.

8.7     SUBSEQUENT LEGISLATION, ETC.

        The Seller shall not be liable in respect of any Relevant Claim to the
        extent that liability for such Relevant Claim occurs or is increased as
        a result of any legislation,



                                       44


        regulation or regulatory requirement not in force on or prior to the
        Completion Date or as a result of the withdrawal of any published
        extra-statutory concession or other published agreement or arrangement
        having general application on the Completion Date granted by or made
        with any governmental or regulatory authority or any tax authority or as
        a result of any change, after the Completion Date, of any generally
        accepted interpretation or application of any legislation, regulation or
        regulatory requirement or as a result of the introduction of, or any
        change in, any enforcement policy, practice or requirement of any
        relevant authority after the Completion Date or as a result of the
        withdrawal after the Completion Date of any extra-statutory concession
        or any other formal agreement or arrangements with any tax authority
        (whether or not having the force of law) currently granted by or made
        with any tax authority, unless in respect of any of the above events the
        Seller was at the date of this Agreement actively supporting or
        attempting to secure the enactment or adoption thereof.

8.8     INSURANCE CLAIMS

        If, in respect of any matter that would give rise to a Relevant Claim,
        either Target Group Company is entitled to coverage under any policy of
        insurance, any net recovery on behalf of the Target Group Company shall
        reduce the amount of the Relevant Claim which the Seller is obligated to
        pay to the Buyer. The Buyer shall when giving notice of the Relevant
        Claim to the Seller provide the Seller with notice of the policies of
        insurance under which coverage of such Relevant Claim may be provided,
        but the potential availability of insurance coverage shall not relieve
        or delay the Seller's obligation to pay the Relevant Claim.

        The appropriate member of the Buyer's group shall make a claim against
        such insurer or insurers with respect to the Relevant Claim and shall
        notify the Seller of such claim. The Buyer shall use reasonable
        endeavours to collect such claim. The Seller may, upon not less than 5
        business days' notice, assume the collection of the insurance claim and
        upon such assumption the Buyer shall execute such assignments or other
        documents as are necessary to enable the Seller to assume such
        collection or, if such assignment is not recognised by the insurer, will
        facilitate the Seller's collection in the Buyer's name, including, but
        not limited to, representation in litigation.

8.9     RESERVES, ETC.

        For the avoidance of doubt, none of the Warranties, nor the Tax Deed,
        nor any other provision of this Agreement shall be construed as a
        representation or warranty of any judgment based on actuarial principles
        by whomsoever made or as to the fulfilment of any assumption. In
        particular, and without prejudice to the generality of the foregoing,
        the Buyer acknowledges and agrees with the Seller that based on
        information provided by the Seller and its advisers the Buyer has made
        its own assessment of the adequacy of the amount of the technical
        reserves of the Target Subsidiary ("RESERVES") as at the Last Accounting
        Date and thereafter. No representation or warranty is made by the Seller
        or any of the Seller's Affiliates as to the adequacy of the Reserves to
        meet the liabilities of the Target Subsidiary to which the Reserves
        relate (the "RESERVING ADEQUACY"). Notwithstanding anything otherwise
        contained in this Agreement, no provision of this Agreement or the Tax
        Deed shall be construed as constituting or


                                       45


        implying, directly or indirectly, the Reserving Adequacy and neither the
        Seller nor any of the Seller's Affiliates nor any of their respective
        officers, employees or advisers shall be under any liability to the
        Buyer or any other person if (for whatever reason) the amount of the
        Reserves is not adequate. However, this Clause 8.9 shall not operate to
        exclude any liability that the Seller may have in respect of the failure
        of the records of the Target Subsidiary (in respect of the Reserves,
        which the Seller has made available to the Buyer) to reflect each
        contract and claim which should in accordance with generally accepted UK
        actuarial standards have been reflected in such records. In the event of
        any conflict between the provisions of this Clause 8.9 and any other
        provision in this Agreement, the provisions of this Clause 8.9 shall
        prevail.

8.10    DEBTORS

        For the avoidance of doubt, none of the Warranties, nor the Tax Deed,
        nor any other provision of this Agreement shall be construed as a
        representation or warranty as to the recoverability of any amount from
        any debtor of the Target Subsidiary. Neither the Seller nor any of the
        Seller's Affiliates shall be under any liability to the Buyer or any
        other person (for whatever reason) in respect of any sum not being
        recoverable from any debtor of the Target Subsidiary. However, this
        Clause 8.10 shall not operate to exclude any liability that the Seller
        may have in respect of the failure of the records of the Target
        Subsidiary (in respect of the debtors of the Target Subsidiary) which
        the Seller has made available to the Buyer to record such debtors in
        accordance with generally accepted UK accounting standards. In the event
        of any conflict between the provisions of this Clause 8.10 and any other
        provision in this Agreement, the provisions of this Clause 8.10 shall
        prevail.

8.11    CONTINGENT LIABILITIES

        If any breach of the Warranties arises by reason of some liability of
        any Target Group Company which, at the time such breach or Relevant
        Claim is notified to the Seller, is contingent only or otherwise not
        capable of being quantified, then the Seller shall not be under any
        obligation to make any payment in respect of such breach or Relevant
        Claim unless and until such liability ceases to be contingent or becomes
        capable of being quantified, as the case may be provided that this
        clause shall not operate to avoid a claim made in reasonable
        particularity in respect of a contingent liability within the applicable
        time limit specified in Clause 8.3.

8.12    BUYER'S ASSISTANCE

        If the Buyer becomes aware of any circumstance which gives rise to a
        Relevant Claim and if the claim in question is as a result of or in
        connection with a claim by or liability to a third party (a "THIRD PARTY
        CLAIM"), the Buyer shall give written notice of that circumstance to the
        Seller forthwith and, the Seller shall be entitled, by a notice in
        writing addressed to the Buyer, to require the Buyer to take or to
        procure that the Target Group takes all such reasonable steps and
        proceedings as the Seller may consider necessary in order to obtain any
        payment, or relief in respect of or in connection with the Third Party
        Claim, and the Buyer will, at the request of the Seller allow the Seller
        at its expense to have the conduct of all correspondence and/or
        proceedings arising in connection with the Third Party Claim. The Seller
        may



                                       46


        thereafter require the Target Group or the Buyer to take all such
        reasonable steps or proceedings as the Seller may consider necessary in
        order to mitigate any loss arising in connection with the Third Party
        Claim and the Buyer undertakes to procure that the Target Group shall so
        act. For the purpose of enabling the Seller to exercise its rights under
        this Clause 8.12, the Buyer shall:

        (a)     make or procure to be made available to the Seller or its duly
                authorised representatives, and (if so requested by the Seller)
                provide copies of, all relevant books of account, records and
                correspondence of the Target Group and permit the Seller to
                ascertain or extract any relevant information therefrom; and

        (b)     not admit any liability or agree any Third Party Claim which may
                give rise or has given rise to a Relevant Claim without the
                prior written consent of the Seller

        provided that:

                (i)     for the purposes of this clause 8.12, a "Relevant Claim"
                        does not include a Relevant Claim for a breach of a
                        warranty contained in paragraph 24 of Schedule 3; and

                (ii)    the Seller shall indemnify the Buyer or the Target Group
                        Companies concerned against all properly incurred costs,
                        charges and expenses and all liabilities that such
                        companies may incur as a result of the Seller exercising
                        its rights under this Clause 8.12. The Seller agrees to
                        keep the Buyer fully informed as to the progress of any
                        such Third Party Claim and the defence thereof.

8.13    NO DOUBLE COUNTING - TAX DEED

        The Seller shall not be liable in respect of any breach of any Warranty
        or in respect of any claim under the Tax Deed if and to the extent that
        the loss occasioned thereby has been recovered under the same or any
        other Warranty or under the Tax Deed or has otherwise been made good or
        compensated for without cost to the Buyer or the Target Group.

8.14    NO DOUBLE COUNTING - ACCOUNTS AND COMPLETION ACCOUNTS

        The Seller shall not be liable in respect of a Relevant Claim to the
        extent of:

        (a)     any amount which is included as a liability which is the subject
                matter of such Relevant Claim; or

        (b)     any amount by which the valuation of any asset has been reduced
                to take account of the subject matter of such Relevant Claim;

        in the Accounts or in the Completion Accounts. If any Relevant Claim is
        made the Buyer shall use all its endeavours to procure that the Seller
        and its advisers are given



                                       47


        reasonable access to the working papers underlying the Accounts and the
        Completion Accounts for the purposes of ascertaining whether any, and if
        so what, amount is applicable to the Relevant Claim for the purposes of
        this Clause 8.14.

8.15    CHANGE IN ACCOUNTING POLICY

        The Seller shall not be liable in respect of any Relevant Claim in
        respect of any matters resulting from a change of accounting policy or
        practice or the length of any accounting period of the Buyer or the
        Target Group introduced after Completion.

8.16    EXCLUSION OF LIABILITY IN RESPECT OF IGI

        Save as provided in the IGI Retrocession, the Seller shall have no
        liability whatsoever whether to the Buyer, any Target Group Company or
        otherwise under this Agreement including the Warranties (save in respect
        of the Warranty contained in paragraph 1 of Schedule 3) or the documents
        referred to herein (other than the IGI Retrocession) in respect of the
        business referred to in the definition of "Business Covered" in the IGI
        Retrocession. In the event of any conflict between the provisions of
        this Clause 8.16 and any other provision in this Agreement, the
        provisions of this Clause 8.16 shall prevail.

8.17    MITIGATION OF LOSS

        Nothing contained in this Clause 8 shall limit the Buyer's obligation at
        common law or the obligation of the Target Group to mitigate any loss or
        damage resulting from or arising as a consequence of any circumstances
        giving rise to any Relevant Claim.

8.18    UNLIMITED LIABILITY

8.18.1  This Clause 8 shall not apply in relation to any Relevant Claim arising
        out of any fraud or dishonesty on the part of the Seller or its agents
        or advisers or in respect of a Relevant Claim involving or relating to
        breach of Clause 6.1 in respect of a Warranty contained in paragraphs 1
        or 3 of Schedule 3.


                                       48


9.      SELLER'S UNDERTAKINGS

9.1     CONFIDENTIAL BUSINESS INFORMATION

9.1.1   Before and after Completion the Seller shall:

        (a)     not disclose to a person Confidential Business Information it
                has or acquires; and

        (b)     make every effort to prevent the disclosure by its employees of
                Confidential Business Information.

9.1.2   The Seller shall procure that each of its Affiliates complies with
        Clause 9.1.1.

9.1.3   Clause 9.1.1 does not apply to:

        (a)     disclosure of Confidential Business Information to a director,
                officer or employee of the Buyer or a Target Group Company whose
                function requires him to have the Confidential Business
                Information;

        (b)     disclosure of Confidential Business Information required to be
                disclosed by law or any applicable regulation having the force
                of law;

        (c)     disclosure of Confidential Business Information to an adviser
                for the purpose of advising the Seller but only on terms that
                Clause 9.1.1 applies to disclosure by the adviser; or

        (d)     Confidential Business Information that becomes publicly known
                except by the Seller's breach of Clause 9.1.1 or 9.1.2.

9.2     NON-COMPETITION

9.2.1   The Seller shall not directly or indirectly:

        (a)     seek to induce any reinsurer, cedent or other business relation
                of a Target Group Company to cease doing business with a Target
                Group Company or interfere with any such relationship; or

        (b)     for two years starting on the date of this Agreement engage,
                employ, solicit, or contact with a view to his engagement or
                employment by another person, any individual who is at that time
                a director, officer, employee or manager of a Target Group
                Company.

9.2.2   Each restriction in Clause 9.2.1 constitutes an entirely independent
        restriction on the Seller.

9.2.3   The Seller shall use reasonable endeavours to procure that each of its
        Affiliates complies with Clause 9.2.1.


                                       49


9.2.4   On receiving the Buyer's reasonable request the Seller shall give to the
        Buyer all information it possesses as at the date of this Agreement and
        which it still possesses as at the date of such request relating solely
        to a Target Group Company's business and allow the Buyer to copy any
        document containing that information, provided the obligations of the
        Seller under this Clause shall not extend to allowing access to, or the
        copying of, information which is, in the reasonable opinion of the
        Seller, regarded as confidential to the activities of the Seller
        otherwise than in connection with the Target Group Companies. Each party
        shall bear its own costs in respect of the provision of such information
        to the Buyer, unless the Seller provides services beyond simply
        supplying available information (such as processing or analysing such
        information or preparing any reports) in which case the Buyer shall
        reimburse the Seller for its reasonable costs.

9.3     POST COMPLETION ASSISTANCE

9.3.1   For the period of one year after the Completion Date, the Seller shall
        allow, and procure that each Affiliate of the Seller shall allow, the
        Buyer's representatives reasonable access, upon 48 hours' written
        notice, to the Key Employees, and shall procure that such Key Employees
        assist the Buyer with its enquiries and provide the Buyer with such
        information about the Target Group Companies held by the Seller or its
        Affiliates as the Buyer may reasonably require to assist it to run off
        the business of the Target Subsidiary in an efficient manner or
        otherwise conduct the affairs of the Target Group Companies properly,
        provided the obligations of the Seller under this clause shall not
        extend to allowing access to information which is in the reasonable
        opinion of the Seller regarded as confidential to the activities of the
        Seller otherwise than in connection with the Target Group Companies.

9.3.2   The Buyer shall:

        (a)     bear all of its own costs in implementing clause 9.3.1; and

        (b)     subject to clause 9.3.3 reimburse the Seller and/or its
                Affiliates for its reasonable out-of-pocket expenses incurred in
                implementing clause 9.3.1 provided that: (i) such costs are
                agreed in advance in writing with the Buyer and the Seller
                and/or its Affiliates, as applicable; and (ii) the Seller shall
                provide reasonable evidence of such costs before the Buyer shall
                be obliged to reimburse it or its Affiliates.

9.3.3   To the extent that the Buyer requires any Key Employees to prepare
        reports or similar work beyond responding to brief routine enquiries,
        the Buyer shall pay to the Seller or its Affiliates, as appropriate, the
        then amount of the Key Employee's hourly pay rate multiplied by 130 per
        cent. (for these purposes such hourly rate being equal to the employee's
        then current annualised salary, including any target bonus, divided by
        2080) for the services of the relevant Key Employees as agreed between
        the Buyer and the Seller in writing in advance.

9.4     COMPUTER PROGRAMS

9.4.1   The obligations of the Seller and the Buyer with respect to Computer
        Programs used in the business of the Target Subsidiary shall be
        satisfied on Completion as follows:



                                       50


        (a)     with respect to each Licensed Computer Program and Shrink Wrap
                Computer Program that is licensed by the licensor thereof to the
                Seller or any of the Seller's Affiliates (except those Computer
                Programs that are solely licensed to a Target Group Company),
                the Seller shall provide to the Target Subsidiary the rights
                described in Paragraph 7.4.2(d) of Schedule 3;

        (b)     the Seller shall be responsible for 50% of the expenses related
                to obtaining such rights provided that the aggregate of such
                shared expenses, whether incurred prior to or after Completion
                shall not exceed $500,000 unless the Buyer and Seller mutually
                agree;

        (c)     the Target Group shall be exclusively responsible for payment of
                continuing use charges, upgrade fees and maintenance fees, and
                for performance of other contractual obligations arising with
                respect to use by the Buyer and the Target Group after the
                Completion Date of the Computer Programs licensed or assigned to
                the Target Subsidiary pursuant to this Clause 9.4.

9.5     INTRA GROUP CONTRACTS

9.5.1   The Seller undertakes to the Buyer that, after the date of Completion in
        respect of any Relevant Contracts entered into between the Target
        Subsidiary and the Seller or any of the Seller's Affiliates, it will not
        adopt a position in relation to any claim against the Target Subsidiary
        or defence to a claim brought by the Target Subsidiary which is (i)
        materially different to the position it has adopted before the date of
        this Agreement; and (ii) detrimental to the position of the Target
        Subsidiary.

9.5.2   The Buyer shall procure that, after the date of Completion in respect of
        any Relevant Contracts entered into between the Target Subsidiary and
        the Seller or any of the Seller's Affiliates, the Target Subsidiary will
        not adopt a position in relation to any claim against the Seller or any
        of the Seller's Affiliates or a defence to a claim brought by the Seller
        or any of the Seller's Affiliates, which is: (i) materially different to
        the position it has adopted before the date of this Agreement; and (ii)
        detrimental to the position of the Seller, or, as the case may be, the
        Seller's Affiliates.

9.6     ACCOUNTS

        The Seller shall provide the Buyer with a copy of each bank mandate of
        each Target Group Company and details of each bank account of each
        Target Group Company at least three business days before Completion.

9.7     CLAIMS

9.7.1   From the date of this Agreement until Completion, in paying claims, the
        Seller shall procure that the Target Subsidiary shall, unless prior
        notice is given to the Buyer and the Buyer's consent is obtained:

        (a)     follow the claim settlements approved by the lead reinsurer on
                any contract of Assumed Reinsurance;



                                       51


        (b)     adhere to the Target Subsidiary's internal claim authorisation
                limits as disclosed to the Buyer prior to the date of this
                Agreement; and

        (c)     determine settlement amounts consistently with the Target
                Subsidiary's practices in effect during the 2002 calendar year
                prior to the date of this Agreement.

9.8     PRE-COMPLETION TRANSACTIONS

9.8.1   For the purposes of this Clause 9.8:

        "LUC GUARANTEE" means the guarantee given by the Target Subsidiary (and
        others) in respect of the obligations of Marketing Building Limited, LUC
        Holdings Limited and London Underwriting Centre Limited contained in the
        superior lease of the London Underwriting Centre dated 17 March 1994 and
        made between (1) The Prudential Assurance Company Limited (2) Market
        Building Limited and (3) the 20 guarantors listed therein, the
        Development Agreement dated 27 February 1990 made between (1) The
        Prudential Assurance Company Limited (2) Market Building Limited (3)
        Market Building Management Services Limited (4) the 20 guarantors listed
        therein and (5) Prudential Development Management Limited, the
        underlease of the Common Parts dated 17 March 1994 made between (1)
        Market Building Limited and (2) The London Underwriting Centre Limited
        and in the Shareholder's Agreement relating to LUC Holdings Limited
        (registered number 3182700) and in any documents supplemental or
        collateral to them;

        "OVERSEAS PROPERTIES" means the Real Property situated outside the UK,
        the details of which are set out in Schedule 5;

        "RESIDENTIAL PROPERTIES" means those properties at Millers Wharf in
        London registered under Title Numbers EGL 299483 (6 Miller's Wharf) and
        EGL 271573 (11 Miller's Wharf); and

        "COMPAQ LEASE AGREEMENT" means the Master Lease Agreement number
        UKCHQ0206 dated 22 August 2000 between Compaq Financial Services Company
        and the Target Subsidiary (including each schedule and any amendments to
        that agreement).

9.8.2   Prior to Completion the Seller shall use reasonable endeavours to
        procure that:

        (a)     each Target Group Company:

                (i)     transfers any interests that it may have in the Overseas
                        Properties to the Seller, one of the Seller's Affiliates
                        or a third party, or surrenders any interest it holds in
                        any such Overseas Properties back to the owner of the
                        superior interest in that Overseas Property;

                (ii)    transfers any interests that it may have in the
                        Residential Properties to the Seller, one of the
                        Seller's Affiliates or a third party for an aggregate
                        price equal to $2,300,000;



                                       52


                (iii)   obtains a release from any obligations that it may have
                        under the LUC Guarantee; and

                (iv)    transfers all of the shares held by any Target Group
                        Company in LUC Holdings Limited to the Seller or as the
                        Seller shall direct and obtains a complete discharge and
                        release of the relevant Target Group Company from any
                        liabilities and claims under the shareholders agreement
                        referred to in the definition of LUC Guarantee in Clause
                        9.8.1 above (the "SHAREHOLDERS AGREEMENT") in
                        consideration for the payment by the Target Subsidiary
                        to the Seller (or an Affiliate of the Seller) of
                        $1,000,000 (one million dollars); and

        (b)     the Target Subsidiary obtains consent from Compaq Financial
                Services Company to the change in control of the Target
                Subsidiary pursuant to Clause 17.1(e) of the Compaq Lease
                Agreement.

9.8.3   If, at Completion, notwithstanding the use of its reasonable endeavours,
        the Seller has been unable to procure any of the events described in
        Clause 9.8.2 (the "OUTSTANDING EVENTS") the Seller shall be required to
        continue to use reasonable endeavours, after Completion, to enable the
        Target Subsidiary and/or the Target Company, as appropriate to fulfil
        the Outstanding Events on terms not materially adverse to the Buyer.

9.8.4   If, following Completion, the Buyer or a Target Group Company incurs or
        is subject to any costs, claims, damages, expenses, losses, liabilities
        or penalties or is required to make any payment (including any rent or
        other outgoings) in connection with the Overseas Properties, the
        Residential Properties, the LUC Guarantee, the Shareholders Agreement or
        the failure of the Seller to obtain the consent referred to under Clause
        9.8.2 in relation to the Compaq Lease Agreement, the Seller hereby
        agrees to pay to the Buyer on demand an amount equal to any such costs,
        claims, damages, expenses, losses, liabilities, penalties or payments.
        The Seller shall be entitled to deduct from such amount such sums as the
        Buyer has received from any third parties in respect of the same matters
        and shall be entitled to recover from the Buyer any amounts paid by the
        Seller to the Buyer that the Buyer recovers from any third parties in
        respect of the same matters.

9.8.5   The Buyer shall at the request and cost of the Seller provide the Seller
        with and procure that the Target Subsidiary offers the Seller all
        reasonable assistance in connection with the fulfilment of any
        Outstanding Event.

9.8.6   The Seller's obligation to use its reasonable endeavours to procure the
        release referred to in clause 9.8.2(c) shall include the obligation to
        enter into a guarantee in the place of the Target Subsidiary on the same
        or similar terms to the LUC Guarantee.

9.9     INVESTED ASSETS

9.9.1   Seven days before Completion the Seller shall provide the Buyer with a
        list of the Invested Assets in which the Target Subsidiary has a
        beneficial interest. The list shall include details of the issuer, the
        relevant security, its CUSIP, its nominal value, its


                                       53


        credit ratings by the Credit Raters as at the date of the list, and such
        other information as the Seller shall reasonably require.

9.9.2   The Seller shall procure that on the Completion Date the Target
        Subsidiary does not have a beneficial interest in any Invested Asset
        which has a rating of below BBB- by Standard & Poor's a division of the
        McGraw-Hill Companies and Baa3 by Moody's Investors Services, Inc
        (together the "CREDIT RATERS") .



                                       54


10.     BUYER'S UNDERTAKINGS

10.1    POLICY FOR DISTRIBUTIONS

        The Buyer agrees that, following Completion, and until the payment in
        full of the Completion Balance, it will use all reasonable endeavours to
        maximise the amount of Distributions and as and when Distributions or
        such distributions as are otherwise made to the shareholders of the
        Target Subsidiary, whether of profits or of capital, made by any lawful
        means, including pursuant to a members' voluntary winding-up are paid by
        the Target Subsidiary to the Target Company, it will use its best
        endeavours in its capacity as a shareholder in the Target Company to
        procure that the Target Company pays such amounts to the Buyer either by
        way of dividend or by a share repurchase or reduction and repayment of
        capital, but in each case subject to applicable laws and after making
        appropriate provision for its tax and appropriate reserves for working
        capital and provided always that if it is not possible for a Target
        Group Company to pay a Distribution by way of dividend, the Buyer's
        obligations under this Clause 10.1 shall be subject to the Buyer's
        reasonable discretion in determining the timing of the implementation of
        any other mechanism for the payment of the Distribution having regard to
        the amount of the potential Distribution and the time and cost of
        implementing the relevant mechanism.

10.2    CHANGE OF NAME

10.2.1  The Buyer shall procure that as soon as reasonably practicable after the
        Completion Date, and in any event within 30 days of the Completion Date,
        all of the business letters, notices, bills, cheques, orders, invoices,
        receipts and other correspondence of the Target Group Companies are
        amended so as to remove any trading name or trade mark which: (i)
        includes the acronym "CNA" or any acronym or words similar thereto; or
        (ii) is likely to cause a third party to believe that the Target Group
        Companies are connected with or have an interest in the business of the
        Seller. The Buyer shall further procure that, as soon as reasonably
        practicable after the Completion Date (but in no event more than 30 days
        after the Completion Date), the names of the Target Group Companies are
        changed so as not to include the acronym "CNA" or any acronym or words
        similar thereto.

10.2.2  The Seller shall grant the Buyer the right to use the acronym "CNA" on
        the terms of the Trade Mark Licence Agreement in the Agreed Form for the
        specific use set out therein.

10.2.3  The Buyer agrees that prior to the Completion Date the Seller shall be
        entitled to arrange for the transfer from the Target Group Companies to
        the Seller or its Affiliates of any and all registered trade marks and
        domain names currently registered or held in the name of the Target
        Company or the Target Subsidiary.

10.3    SELLER'S ACCESS TO RECORDS



                                       55


        For a period of one year after the Completion Date, the Buyer shall
        procure that the Target Group Companies shall allow the Seller's
        representatives reasonable access upon 48 hours written notice, to the
        books and records of the Target Group to the extent that such access may
        reasonably be required by the Seller in connection with matters related
        to or affected by the operations of the Target Group prior to the
        Completion Date (provided that such access shall be procured by the
        Buyer for a period of six years after Completion where such access may
        be required by the Seller in connection with the taxation of the Seller
        or any of its Affiliates). Such access shall be afforded during normal
        business hours. The obligations of the Buyer under this clause shall not
        extend to allowing access to information which is in the reasonable
        opinion of the Buyer regarded as confidential to the activities of the
        Target Group or is otherwise than in connection with the Target Group
        Companies. The Seller shall:

        (a)     bear all of its own costs in implementing this Clause 10.3; and

        (b)     reimburse the Buyer and/or its Affiliates for its out-of-pocket
                expenses properly incurred in implementing this Clause 10.3
                provided that:

                (i)     such costs are agreed in advance in writing with the
                        Seller and/or its Affiliates, as applicable; and

                (ii)    the Buyer shall provide reasonable evidence of such
                        costs before the Seller shall be obliged to reimburse it
                        or its Affiliate.

        If the Buyer wishes to dispose of any of such books and records prior to
        the expiration of the six year period referred to above the Buyer shall,
        prior to doing so, give the Seller a reasonable opportunity, at the
        Seller's expense, to segregate and remove such books and records as the
        Seller may select.



                                       56


11.     BUYER'S WARRANTIES

        The Buyer warrants that:

11.1    INCORPORATION AND EXISTENCE

        The Buyer is a limited company incorporated under English law and has
        been in continuous existence since incorporation.

11.2    RIGHT, POWER, AUTHORITY AND ACTION

11.2.1  The Buyer has the right, power and authority and has taken all action
        necessary to execute and deliver, and to exercise its rights and perform
        its obligations under, this Agreement and each document to be executed
        at or before Completion.

11.2.2  The Buyer has the right, power and authority to conduct its business as
        conducted at the date of this Agreement.

11.3    BINDING AGREEMENTS

        The Buyer's obligations under this Agreement and each document to be
        executed at or before Completion are, or when the relevant document is
        executed will be, enforceable in accordance with their terms.

11.4    WINDING UP AND ADMINISTRATION

        No order has been made, petition presented or resolution passed for the
        winding up of the Buyer or for the appointment of a provisional
        liquidator to the Buyer or for an administration order in respect of the
        Buyer.

11.5    RECEIVERSHIP

        No receiver or receiver and manager has been appointed of the whole or
        part of the Buyer's business or assets.

11.6    VOLUNTARY ARRANGEMENTS

        No voluntary arrangement has been proposed under section 1 of the
        Insolvency Act 1986 in respect of the Buyer. No compromise or
        arrangement has been proposed, agreed to or sanctioned under section 425
        of the Act in respect of the Buyer.

11.7    INSOLVENCY

        The Buyer is not insolvent or unable to pay its debts within the meaning
        of section 123 of the Insolvency Act 1986.

11.8    PAYMENT OF DEBTS

        The Buyer has not stopped paying its debts as they fall due.



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11.9    DISTRESS ETC.

        No distress, execution or other process has been levied on an asset of
        the Buyer.

11.10   UNSATISFIED JUDGMENTS

        There is no unsatisfied judgment or court order outstanding against the
        Buyer.

11.11   STRIKING OUT

        No action is being taken by the registrar of companies to strike the
        Buyer off the register under section 652 of the Companies Act.

11.12   FSA

        In respect of the Buyer's application to the FSA which is to be made
        pursuant to Clause 4.2.1 of this Agreement, the Buyer knows of no matter
        not described in the letter from the Buyer to the Seller of even date
        herewith relating to any proposed controller, director of a proposed
        controller or proposed approved person in respect of whom details are to
        be given to the FSA by the Buyer which might cause the FSA to refuse to
        give its approval for the purposes of Clause 4.1(a) of this Agreement.



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12.     PENSIONS

12.1    A deed substituting CNA Europe Holdings Limited for the Target Company
        as principal employer in relation to the CNA Re Management Company
        Limited Retirement Benefits Plan (1977) is attached to this Agreement,
        signed by the trustees of the Seller's Scheme and will take effect on
        Completion. The Seller shall procure that the Target Company and CNA
        Europe Holdings Limited execute this deed before Completion. The Seller
        shall use its best endeavours and take whatever steps may be necessary
        to procure that the approval of the Inland Revenue is given to the
        substitution prior to Completion.

12.2    If the Inland Revenue shall confirm that the substitution is
        satisfactory from their point of view and does not affect the Seller's
        Scheme's exempt approved status then, following Completion, the Seller
        shall procure that the Inland Revenue Contributions Agency is notified
        of the cessation of participation of the Target Company and that the
        contracting out certificate held by the Target Company shall, from
        Completion, be held by CNA Europe Holdings Limited. The Buyer shall, and
        shall procure that the Target Company shall, co-operate with the Seller
        to procure this result.

12.3    If the Inland Revenue confirms that the substitution is not satisfactory
        from their point of view, then the Target Company shall remain the
        principal employer of the Seller's Scheme. However:

        (a)     accrual of benefits under the Seller's Scheme shall cease
                effective on Completion and the parties shall give (or procure
                the giving of) such notices to effect this as may be required;

        (b)     the Buyer shall procure that the Target Company shall take such
                steps, sign such notices and deeds and resolutions as the Seller
                shall require in relation to the Seller's Scheme and shall
                generally act in accordance with the instructions of the Seller
                in relation to the Seller's Scheme, in each case provided that
                such actions would not be in breach of any applicable laws,
                Inland Revenue requirements or any duties of the Target Company
                to the members of the Seller's Scheme.

12.4    In either case (but provided, if Clause 12.3 applies, that the Target
        Company has materially complied with the Seller's instructions) the
        Seller shall indemnify the Buyer and the Buyer as trustee for the Target
        Company against any liability (including any liability under section 75
        of the Pensions Act 1995) on the Buyer or the Target Company to make any
        further payments to the Seller's Scheme or to the trustees of the
        Seller's Scheme on or after the Completion Date and, if clause 12.3
        applies, against any liability which may otherwise arise on the Target
        Company in relation to the Seller's Scheme, including the Target
        Company's own reasonable costs and expenses and any liability to pay
        expenses incurred by the trustees.



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13.     NOVATION

13.1    If, following Completion, the Buyer at its sole election notifies the
        Seller that it intends to transfer the Sale Shares to one of its
        Affiliates (the "NEW BUYER") and to exercise its rights if it so desires
        to novate this Agreement to the New Buyer in accordance with Clause
        16.5.4, notwithstanding any other provision of this Agreement:

13.1.1  at the request of the Buyer the Seller shall promptly take all steps
        necessary to release the Sale Shares from the Distribution Security; and

13.1.2  upon the transfer of the Sale Shares to the New Buyer the Buyer shall
        procure that the New Buyer executes a security deed pursuant to which
        the New Buyer will grant the Seller a first charge over the Sale Shares
        in the same form as the Distribution Security,

        Provided that the Seller shall not be obliged to agree to that novation:

        (a)     if the result of the novation is that any provider of debt or
                equity finance to the Target Subsidiary would rank ahead of the
                Seller with respect to payments or distributions; and

        (b)     unless the Buyer provides the Seller with a legal opinion of a
                reputable law firm in terms reasonably satisfactory to the
                Seller confirming that the new distribution security to be
                granted by the New Buyer will be a valid first charge and
                enforceable in accordance with its terms.

13.2    In the event that the Buyer transfers the Sale Shares to the New Buyer
        and exercises its rights to novate this Agreement to the New Buyer
        pursuant to Clause 13.1 (the "BUYER'S TRANSFER"), then where:

13.2.1  the New Buyer is required by law to make a deduction or withholding when
        the Buyer would not have been required by law to have made such
        deduction or withholding had the Buyer made the payment where the
        Buyer's Transfer had not occurred, then the New Buyer shall pay to the
        Seller a sum equal to the amount that the Seller would otherwise have
        received in the absence of any such deduction or withholding; and

13.2.2  any payment made by the New Buyer to the Seller is subject to tax in the
        hands of the Seller, then where such payment would not have been subject
        to tax if it had been made by the Buyer where the Buyer's Transfer had
        not occurred, then the New Buyer shall pay to the Seller such amount as
        will ensure that the net amount received in respect of such payment by
        the Seller after such tax is the same as it would have been were the
        payment not so subject to such tax.



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14.     RESTRUCTURING

14.1    Following Completion, the Buyer may wish at its sole election to
        implement a restructuring involving one or more of the following actions
        (the "RESTRUCTURING"):

14.1.1  the incorporation of a new company ("NEWCO") by the Buyer or one of its
        Affiliates;

14.1.2  the novation of the Management Agreement from the Manager, the Target
        Company and the Target Subsidiary to the Manager, NewCo and the Target
        Subsidiary;

14.1.3  the transfer of employees and certain operating assets of the Target
        Company to NewCo;

14.1.4  the transfer by the Target Company to the Buyer of all of the shares it
        holds in the Target Subsidiary; and

14.1.5  the member's voluntary winding-up of the Target Company.

14.2    The Seller acknowledges that the Buyer may wish to implement the
        Restructuring, and the parties hereby agree that, in connection with a
        Restructuring and, notwithstanding any other provision of this
        Agreement:

14.2.1  at the request of the Buyer, the Seller shall promptly take all steps
        necessary to release the Sale Shares from the Distribution Security;

14.2.2  promptly following the Restructuring, the Buyer shall execute a Security
        Deed pursuant to which the Buyer will grant to the Seller a first charge
        over the entire issued share capital of the Target Subsidiary in the
        same form as the Distribution Security;

14.2.3  if appropriate the definition of "MANAGEMENT AGREEMENT" in Clause 1.1 of
        this Agreement shall be substituted by the following:

        ""MANAGEMENT AGREEMENT" means the agreement entered into between the
        Target Subsidiary, the Manager and NewCo;"

14.2.4  at the request of the Buyer, the Seller shall take all steps necessary
        to re-assign the rights assigned by the Manager to the Seller pursuant
        to the Management Fee Security and shall release and discharge the
        Management Fee Security;

14.2.5  if appropriate promptly following the Re-structuring, the Manager shall
        execute a security deed pursuant to which the Manager will assign by way
        of security to the Seller, and grant the Seller a first charge over,
        certain of its rights to payment of the Management Fee in the same form
        as the Management Fee Security;

14.2.6  if appropriate the definition of "MANAGEMENT FEE" in Clause 1.1 of this
        Agreement shall be amended by substituting paragraph (ii) of that
        definition by the following:



                                       61


        "costs necessarily and properly incurred by NewCo in providing services
        pursuant to the Management Agreement and reimbursement by the Target
        Subsidiary to NewCo pursuant to Paragraph 1.1 of Schedule 3 to the
        Management Agreement provided that such costs are at commercially
        reasonable rates;"

14.2.7  if appropriate the definition of "TRIGGER DISTRIBUTIONS" in Clause 1.1
        of this Agreement shall be substituted by the following:

        "TRIGGER DISTRIBUTIONS" means Distributions (and distributions as are
        otherwise made to the shareholders of the Target Subsidiary, whether of
        profits or capital, made by any lawful means, including pursuant to a
        members' voluntary winding-up);"

14.2.8  if appropriate Clause 10.1 of this Agreement shall be substituted by the
        following:

        "The Buyer agrees that, following Completion and until the payment in
        full of the Completion Balance, it will use all reasonable endeavors to
        maximize the amount of Distributions provided always that if it is not
        possible for the Target Subsidiary to pay a Distribution by way of
        dividend, the Buyer's obligations under this Clause 10.1 shall be
        subject to the Buyer's reasonable discretion in determining the timing
        of the implementation of any other mechanism for the payment of the
        Distribution having regard to the amount of the potential Distribution
        and the time and cost of implementing the relevant mechanism."

14.2.9  The Seller shall not be obliged to agree to any restructuring:

        (a)     if the result of the Restructuring is that any provider of debt
                or equity finance to the Target Subsidiary would rank ahead of
                the Seller with respect to payments or distributions; and

        (b)     unless the Buyer provides the Seller with a legal opinion of a
                reputable law firm in terms reasonably satisfactory to the
                Seller confirming that the new distribution security to be
                granted by the Buyer and the new management fee security will
                each be a valid first charge and enforceable in accordance with
                its terms.



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15.     GOVERNING LAW AND DISPUTES

15.1    GOVERNING LAW

        This Agreement and all matters arising from or connected with it are
        governed by, and shall be construed in accordance with, the laws of
        England.

15.2    RESOLUTION BY THE COURTS

15.2.1  Save where this Agreement provides for the reference of disputed matters
        to an Expert, the courts of England shall have exclusive jurisdiction to
        settle any Disputes and hear and decide any Proceedings.

15.2.2  The parties agree that the courts referred to in Clause 15.2.1 are the
        most appropriate and convenient courts to settle any Disputes and hear
        and decide any Proceedings and, accordingly, that they will not argue to
        the contrary.

15.3    SERVICE OF PROCESS

15.3.1  The Seller irrevocably agrees with the Buyer that any Service Document
        may be sufficiently and effectively served on it in connection with any
        Proceedings in England and Wales by service on its process agent
        provided that a copy of the Service Document is also sent by fax on the
        same day and in accordance with Clause 16.16 to the General Counsel of
        the Seller.

15.3.2  For the purposes of this Clause, the Seller appoints as its process
        agent in connection with Proceedings in England and Wales, Sisec Limited
        of 21 Holborn Viaduct, London EC1A 2DY.

15.3.3  The Seller agrees to maintain the appointment of its process agent (and
        any replacement process agent appointed pursuant to this Clause) and
        that it shall not withdraw the appointment of any such process agent
        until its replacement shall have been validly appointed and the name and
        address of the replacement process agent notified to the Buyer.

15.3.4  If the process agent referred to in Clause 15.3.2 (or any replacement
        process agent appointed pursuant to this Clause) at any time ceases for
        any reason to act as such, the Seller shall appoint a replacement
        process agent with an address for service in England or Wales, and shall
        notify the Buyer of the name and address of the replacement process
        agent. If the Seller fails to appoint a replacement process agent or
        notify the Buyer of the name and address of a replacement process agent
        as required by this Clause, the Buyer shall be entitled by notice to the
        Seller to appoint such a replacement process agent to act on the
        Seller's behalf. The Seller shall bear all the costs and expenses of
        appointing a replacement process agent by the Buyer in these
        circumstances.



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15.3.5  Any Service Document served pursuant to this Clause shall be marked for
        the attention of the process agent appointed pursuant to this Clause and
        addressed to the address set out in Clause 15.3.2 or to his address
        notified pursuant to Clause 15.3.4.

15.3.6  Any Service Document marked for the attention of the process agent and
        addressed to the address set out in Clause 15.3.2 or at the address
        notified pursuant to Clause 15.3.4 shall be deemed to have been duly
        served if:

        (a)     left at such address, when it is left; or

        (b)     sent by first class post to such address, 2 business days after
                the date of posting.

15.3.7  The Buyer shall send by post to the Seller in accordance with Clause
        16.16 a copy of any Service Document served by it (or on its behalf) on
        a process agent pursuant to this Clause, but no failure or delay in
        doing so shall prejudice the effectiveness of service of the Service
        Document in accordance with this Clause.

15.3.8  The Seller agrees that failure by any process agent to give notice of
        any process to it or give a copy of any Service Document served on it
        shall not impair the validity of such service or of any Proceedings
        based on that process.

15.3.9  Nothing contained in Clause 15.3.1 affects the right to serve a Service
        Document in another manner permitted by law.

15.4    CONSENT TO ENFORCEMENT

        Each party hereby consents generally in respect of any Proceedings to
        the giving of any relief or the issue of any process in connection with
        such Proceedings including the making, enforcement or execution against
        any property (irrespective of its use or intended use) of any order or
        judgment which may be made or given in such Proceedings.

15.5    CURRENCY INDEMNITY

15.5.1  If any sum due from one party (the "FIRST PARTY") to the other party
        (the "SECOND PARTY") under this Agreement or any award, order or
        judgment given or made in relation to this Agreement has to be converted
        from the currency (the "FIRST CURRENCY") in which it is payable under
        this Agreement or under such order or judgment into another currency
        (the "SECOND CURRENCY") for the purposes of:

        (a)     making or filing a claim or proof against either party; or

        (b)     obtaining an award, order or judgment in any court or other
                tribunal; or

        (c)     enforcing any award, order or judgment given or made in relation
                to this Agreement,

        then, the first party shall, if practicable, on the day of receipt of
        such sum paid to it in satisfaction, in whole or in part of such award,
        order or judgment, or if not practicable



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        on such day, as soon as is reasonably practicable thereafter, convert
        such sum from the second currency into the first currency at the best
        rate or rates of exchange (taking into account the amount to be
        exchanged and the location in which such exchange is effected)
        reasonably available to the second party on the day of conversion, and
        if the amount resulting from such conversion (net of all commissions,
        charges, fees and expenses paid):

        (i)     is less than the amount of the award, order or judgment in the
                first currency, then the second party shall pay such difference
                to the first party within 15 days of a demand for it; or

        (ii)    is more than the amount of the award, order or judgment in the
                first currency, then the first party shall pay such difference
                to the second party within 15 days of a demand for the same.

15.5.2  Each demand submitted by a party pursuant to Clause 15.5.1 shall be
        accompanied by a calculation of the computation made together with such
        supporting evidence to substantiate the demand.



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16.     MISCELLANEOUS PROVISIONS

16.1    ANNOUNCEMENTS

16.1.1  Neither party may, during the period commencing on the date of this
        Agreement and ending on the Completion Date or earlier termination of
        this Agreement, make or send a public announcement, communication or
        circular concerning the transactions referred to in this Agreement or in
        relation to its provisions unless it has first obtained the other
        party's written consent.

16.1.2  The restrictions in this Clause shall not apply to a public
        announcement, communication or circular:

        (a)     if made or sent to any Affiliate of such party; or

        (b)     if made or sent to any outside consultants or advisers engaged
                by or on behalf of such party and acting in that capacity; or

        (c)     to the extent required by the rules of a relevant and recognised
                stock exchange or regulatory or governmental body to which the
                relevant party submits, whether or not the requirement for
                information has the force of law, if the party required to make
                or send it has, if practicable, first consulted and taken into
                account the reasonable requirements of the other party; or

        (d)     to the extent required by any applicable laws or pursuant to an
                order of any court of competent jurisdiction if the party
                required to make or send it has, if practicable, first consulted
                and taken into account the reasonable requirements of the other
                party; or

        (e)     if made or sent to any insurer under a policy of insurance; or

        (f)     if made or sent to directors, employees and officers of such
                party or of its Affiliates.

16.2    CONFIDENTIALITY

16.2.1  Each party shall at all times:

        (a)     use its reasonable endeavours to keep all data or information
                (whether technical, commercial or financial) acquired under or
                pursuant to this Agreement (including information relating to
                the other party's products, operations, processes, plans or
                intention, product information, know-how, trade secrets, market
                opportunities and business affairs) strictly confidential and
                shall not disclose this to any other person; and



                                       66


        (b)     not use any data or information referred to in paragraph (a)
                above for any purpose other than in relation to the proper
                performance of its obligations and exercise of its rights under
                this Agreement.

16.2.2  The provisions of this Clause shall not apply to:

        (a)     any information in the public domain at the time of disclosure,
                otherwise than by breach of this Agreement;

        (b)     information which passes into the public domain after disclosure
                through no act or default of the recipient party;

        (c)     information in the possession of, or independently generated by,
                a party before that information was disclosed to it by or on
                behalf of the other party and which was not obtained under, or
                generated in breach of, any obligation of confidentiality; and

        (d)     information obtained from a third party who is free to disclose
                the same, and which is not obtained under any obligation of
                confidentiality.

16.2.3  Following Completion, the Buyer shall not, and shall procure that its
        Affiliates do not, disclose information contained in the CNA Re Pricing
        Handbook, an example of which, dated October 2000, has been made
        available to the Buyer during its investigation of the Target Group to
        any third party or use such information other than for the purpose of
        running off the business of the Target Subsidiary.

16.2.4  A party shall be entitled to disclose any data or information referred
        to above without the prior written consent of the other party if such
        disclosure is made in good faith:

        (a)     to any Affiliate of such party, having made it aware of the
                requirements of this Clause; or

        (b)     to any outside consultants or advisers engaged by or on behalf
                of such party and acting in that capacity, having made them
                aware of the requirements of this Clause; or

        (c)     to the extent required by the rules of a relevant and recognised
                stock exchange or regulatory or governmental body to which the
                relevant party submits, whether or not the requirement for
                information has the force of law; or

        (d)     to the extent required by any applicable laws or pursuant to an
                order of any court of competent jurisdiction; or

        (e)     to any insurer under a policy of insurance; or

        (f)     to directors, employees and officers of such party having made
                them aware of the requirements of this Clause,

                provided that:



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                (i)     any such information disclosed pursuant to paragraph (c)
                        or (d) above, shall be disclosed only if the party has,
                        if practicable, first consulted and taken into account
                        the reasonable requirements of the other party; and

                (ii)    such disclosure is necessary to enable such party to
                        perform this Agreement or to protect or enforce its
                        rights under this Agreement or any other agreement
                        referred to in it.

16.2.5  The restrictions contained in this Clause 16.2 shall continue to apply
        after the date of this Agreement without limit in time.

16.3    THE EURO

16.3.1  In this Clause:

        (a)     the "EURO" means the single or unified European currency
                (whether known as the euro or otherwise) as contemplated in the
                Treaty of Rome of 25 March 1957, as amended by the Single
                European Act 1986 and the Treaty on European Union which was
                signed at Maastricht on 1 February 1992;

        (b)     the "EMU REGULATIONS" means Regulation No. 1103/97 adopted by
                the European Council on 20 June 1997 and Regulation No. 974/98
                adopted by the European Council on 2 May 1998; and

        (c)     the expression "EXTENSION OF EMU" means:

                (i)     the extension of European economic and monetary union to
                        any part of the European Union;

                (ii)    the extension of the introduction at any time of the
                        euro to any part of the European Union; or

                (iii)   any events associated with any of the matters described
                        in paragraphs (a) and (b) above,

        in each case, as contemplated in the Treaty of Rome of 25 March 1957, as
        amended by the Single European Act 1986 and the Treaty on European union
        which was signed at Maastricht on 1 February 1992 and "NON-EXTENSION OF
        EMU" shall be construed accordingly.

16.3.2  The parties agree that the extension of EMU (or the non-extension of
        EMU) shall not result in the discharge, cancellation, rescission or
        termination, in whole or in part, of this Agreement or give any party
        the right to cancel, rescind, terminate or vary this Agreement, in whole
        or in part.

16.3.3  Unless the parties agree otherwise, at any time at which it is so
        permitted under any relevant law (including the EMU Regulations), a
        party may not make any payment under or in connection with this
        Agreement which is expressed to be payable in dollars in euro.



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16.3.4  If at any time the euro is introduced to the United Kingdom and as a
        result sterling is replaced by the euro, then the amounts of sterling
        referred to in this Agreement shall be deemed converted into units of
        the euro at the rate prescribed by the EMU Regulations or any other
        implementing regulation or directive which prescribes the rate of such
        conversion.

16.3.5  The parties shall from time to time amend the provisions of this
        Agreement, if either party notifies the other that any amendments are
        necessary (including with respect to the definitions of "Business Day",
        "Reference Banks", and "Reference Exchange Rate") as a result of the
        occurrence of EMU. All such amendments shall be made on the basis that,
        following such amendments, each party will be in the same financial
        position as it would have been had the occurrence of EMU not taken
        place.

16.3.6  If the parties are unable to agree any amendments to this Agreement to
        be made pursuant to this Clause, either party may refer the matter in
        dispute to the Expert for determination in accordance with this
        Agreement.

16.4    LATE PAYMENTS AND DEFAULT INTEREST

        If a party fails to pay any amount payable by it under this Agreement,
        it shall forthwith on demand by the party to whom the payment was due to
        be made pay interest on the overdue amount from the due date up to the
        date of actual payment, after as well as before judgment, at LIBOR plus
        3 per cent. Such interest shall accrue on a daily basis and be
        compounded quarterly.

16.5    ASSIGNMENTS AND NOVATION

16.5.1  Except as provided in Clauses 16.5.2, 16.5.3 and 16.5.4, a party shall
        not assign, transfer, create any encumbrance in or over, or deal in any
        other manner with this Agreement or a right or obligation under this
        Agreement (or purport to do any of these things) without having first
        obtained the other party's written consent (which consent shall not be
        unreasonably withheld, conditioned or delayed). Each party is entering
        into this Agreement for its benefit and not for the benefit of another
        person.

16.5.2  The Buyer shall be entitled at any time after Completion to assign its
        rights under this Agreement to any of its Affiliates provided that such
        party shall procure that any such Affiliate to whom it assigns any of
        its rights under this Agreement shall assign such rights back to that
        party immediately prior to it ceasing to be an Affiliate. Any assignment
        by a party under this Clause shall:

        (a)     be subject to the condition that the assigning party shall not
                be relieved of any of its obligations under this Agreement; and

        (b)     be made on terms that the assignee acknowledges that the other
                party may continue to deal exclusively with the assigning party
                in respect of all matters relating to this Agreement at all
                times unless and until the assignee notifies both parties that
                it is exercising its rights as assignee.


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16.5.3  This Agreement shall be binding upon, and inure to the benefit of the
        parties and their respective successors and their permitted assignees.

16.5.4  Subject to Clauses 13 and 14, the Seller agrees that, upon the request
        of the Buyer of its successors or permitted assignees, this Agreement
        may be novated (in whole) in favour of any Affiliate of the Buyer
        (which, if such novation is completed after the Completion Date, is the
        beneficial owner for the time being of the Sale Shares) and the Seller
        shall execute a novation agreement substantially in the terms set out in
        Schedule 8.

16.6    FURTHER ASSURANCE

        Each party shall do and execute, or arrange for the doing and executing
        of, each necessary act, document and thing reasonably within its power
        and as may be reasonably requested of it by the other party by written
        notice to implement this Agreement.

16.7    COSTS

        Except where this Agreement provides otherwise, each party shall pay its
        own costs relating to the negotiation, preparation, execution and
        implementation by it of this Agreement and of each document referred to
        in it.

16.8    AMENDMENTS

        This Agreement may not be amended except by written agreement between
        the parties and no other purported amendment shall be effective.

16.9    NO WAIVER

16.9.1  No waiver by either party of any default or defaults by the other party
        in the performance of any of the provisions of this Agreement:

        (a)     shall operate or be construed as a waiver of any other or
                further default or defaults whether of a like or different
                character; or

        (b)     shall be effective unless in writing duly executed by a duly
                authorised representative of such party.

16.9.2  Neither the failure by either party to insist on any occasion upon the
        performance of the terms, conditions, and provisions of this Agreement
        nor time or other indulgence granted by one party to the other shall act
        as a waiver of such breach or acceptance of any variation or the
        relinquishment of any such right or any other right under this
        Agreement, which shall remain in full force and effect.

16.10   DISCRETION

        Except where this Agreement expressly requires a party to act fairly or
        reasonably (including any provision which does not allow a party to
        unreasonably withhold,



                                       70


        condition or delay its consent or approval), a party may exercise any
        discretion given to it under this Agreement in its absolute discretion
        and the exercise of that discretion shall not be challengeable on
        grounds that the party did not exercise its discretion fairly or
        reasonably and shall not be subject to the dispute resolution procedures
        in this Agreement.

16.11   ENTIRETY

16.11.1 This Agreement and the Schedules are intended by the parties as the
        final expression of their agreement and are intended also as a complete
        and exclusive statement of the terms of their agreement.

16.11.2 All prior written or oral understandings, offers or other communications
        of every kind pertaining to this Agreement are abrogated and withdrawn.

16.11.3 The Pre-Contract Agreements shall cease to have effect from the date of
        this Agreement except that termination does not affect any liability of
        either party to the other arising from a breach of any legally binding
        provision of a Pre-Contract Agreement before the date of such
        termination.

16.12   LIABILITIES, RIGHTS AND REMEDIES

16.12.1 Except where this Agreement expressly provides to the contrary, the
        rights and remedies contained in this Agreement are cumulative and not
        exclusive of rights and remedies provided by law.

16.12.2 Except to the extent they have been performed and except where this
        Agreement expressly provides to the contrary, the obligations (including
        all warranties, representations and indemnities) contained in this
        Agreement remain in force notwithstanding Completion of this Agreement.

16.12.3 The parties do not intend any term of this Agreement to be enforceable
        pursuant to the Contracts (Rights of Third Parties) Act 1999 (the "CRTP
        ACT") by any person who is not a party to this Agreement.

16.13   COUNTERPARTS

16.13.1 This Agreement may be executed in any number of counterparts each of
        which when executed and delivered is an original, but all the
        counterparts together constitute the same document.

16.13.2 If this Agreement is subject to stamp duty and counterparts or
        duplicates of this Agreement are executed, the Buyer shall, as soon as
        practicable after the date of this Agreement, procure that all the
        counterparts or duplicates are duly stamped and as soon as they are so
        stamped shall deliver a counterpart or duplicate to the Seller.



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16.14   SEVERABILITY

        If any provision of this Agreement is held to be illegal or
        unenforceable, wholly or partly, under any applicable law, such
        provision, or, as the case may be, part of such provision, shall to that
        extent be deemed not to form part of this Agreement. The enforceability
        of the remainder of this Agreement, however, shall not be affected.

16.15   PAYMENTS

        Wherever in this Agreement provision is made for the payment by one
        party to another, such payment shall be effected by crediting the
        account specified in the Payment Account Details of the party entitled
        to payment by way of CHAPS on or before the due date for payment unless
        the payee by notice to the payer, not later than three business days
        prior to the due date for payment, elects to be paid by banker's draft
        drawn on any international bank reasonably acceptable to the payer and
        having an office in London. Payment of such sum shall be a good
        discharge to the payer of its obligation to make such payment.

16.16   NOTICES

16.16.1 Save as otherwise provided in this Agreement, all notices which are
        required or permitted under this Agreement shall:

        (a)     be in writing;

        (b)     be in the English language; and

        (c)     be delivered personally or sent by registered post or pre-paid
                recorded delivery or fax, addressed as follows:

        If to the Seller:  CNA Plaza

                           333 South Wabash Avenue

                           Chicago

                           Illinois 60685

                           USA

        Attention:         The Secretary

        Fax No.:           001 312 822 1297

        If to the Buyer:   Tawa UK Limited

                           10 Fenchurch Avenue

                           London  EC3M 5BN



                                       72


        Attention:         (1) The Chairman; and (2) The Chief Executive Officer

        Fax No.:           +44 20 7665 6501

        with a copy to:    LeBoeuf, Lamb, Greene & MacRae

                           No. 1 Minster Court

                           Mincing Lane

                           London  EC3R 7AA

        Fax No.:           +44 20 7459 5099

        Attention:         William C. Marcoux

16.16.2 In the absence of evidence of earlier receipt, a notice or communication
        shall be deemed given:

        (a)     if delivered personally, when left at the address referred to
                above;

        (b)     if sent by prepaid recorded delivery, or registered post at
                10.00 a.m. on the third business day following the date of
                posting; and

        (c)     if sent by fax, at the time of transmission (provided that the
                transmission is validly receipted).

16.16.3 A party may by notice of at least 10 business days to the other party
        change the address or fax numbers to which such notices and
        communications to it are to be delivered.

16.17   EXECUTION AND DELIVERY OF DOCUMENTS

        All agreements or certificates delivered in connection with the
        transactions contemplated by this Agreement shall be deemed to be
        delivered by the companies executing the same, and the individual
        officers executing the same shall not be personally liable thereon.



                                       73


                                   SCHEDULE 1

         INFORMATION ABOUT THE TARGET COMPANY AND THE TARGET SUBSIDIARY

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]

                                   SCHEDULE 2

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]

                 ITEMS FOR DELIVERY BY THE SELLER AT COMPLETION

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]

                                   SCHEDULE 3

                                   WARRANTIES

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]

                                   SCHEDULE 4

                            ACTION PENDING COMPLETION

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]

                                   SCHEDULE 5

                               THE REAL PROPERTIES

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]

                                   SCHEDULE 6

                              INTELLECTUAL PROPERTY

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]


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                                   SCHEDULE 7

                                     PART I

                              COMPLETION ADJUSTMENT




1.      INTERPRETATION


        In this Schedule, where the context admits:

                (a)     the "ACCOUNTS" and the "PRO FORMA BALANCE SHEET" and any
                        other defined term used in this Schedule shall have the
                        same meanings as in the Agreement and the Schedules;

                (b)     "COMPLETION ACCOUNTS" means the accounts prepared in
                        accordance with Clause 2 and agreed or determined in
                        accordance with Clause 3.5;

                (c)     the "MARK TO MARKET" of Invested Assets on any
                        particular day means the determination of a market price
                        of Invested Assets agreed or determined in accordance
                        with Clause 3.2:

                        (i)     in a consistent process to that employed by the
                                Seller at 31 December, 2001, by reference to the
                                respective pricing source (trustee or money
                                manager), except that all such pricing sources
                                shall be directed to utilize a bid price
                                methodology ; or

                        (ii)    to the extent that the pricing source is unable
                                to provide a bid price they shall be directed to
                                utilize a generally recognised approximation of
                                a bid price methodology


                        and "MARKED TO MARKET" shall be construed accordingly;
                        and

                (d)     "CLAUSE" refers to the relevant paragraph of this
                        Schedule 7, unless otherwise stated.

2.      COMPLETION ACCOUNTS

2.1     PREPARATION

        The Buyer shall as soon as practicable, and in any event within 45 days
        after Completion, procure that accounts be prepared as of the Completion
        Date (which shall be as of the last day of a calendar month) for the
        Target Group Companies in accordance with this Schedule 7.



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2.2     DESCRIPTION

        The Completion Accounts shall consist of a consolidated balance sheet
        (which shall be in the form of the Pro Forma Balance Sheet, analysed
        between the relevant headings/columns as shown in tab "Treatment of
        Proforma Balance Sheet" in the Worked Example, unless agreed otherwise
        in writing by the Buyer and the Seller) of the Target Company and the
        Target Subsidiary as at the close of business on the Completion Date and
        a consolidated profit and loss account of the Target Company and the
        Target Subsidiary in respect of the period from 1 January 2002 to the
        Completion Date (both dates inclusive).

2.3     REQUIREMENTS

2.3.1   Except to the extent otherwise expressly required or provided in the
        Agreement, or in the Pro Forma Balance Sheet, the Completion Accounts
        shall:

                (a)     subject to Clauses 2.3.1(f) to (h), 2.3.2 and 2.3.3:

                        (i)     be prepared on a proper basis and consistent
                                with the bases and policies of accounting as
                                applied or adopted in preparing the Accounts
                                (including, for the avoidance of doubt, those
                                bases and policies applied or adopted in
                                establishing the bad debt allowance in the
                                Accounts);

                        (ii)    be prepared in accordance with the law and
                                applicable standards, principles and practices
                                generally accepted in the United Kingdom
                                (including the Statement of Recommended Practice
                                on Accounting for Insurance Business issued by
                                the Association of British Insurers in 1998);
                                and

                        (iii)   be prepared in accordance with the applicable
                                requirements of the Companies Act applying to
                                insurance companies as interpreted by the Target
                                Company and Target Subsidiary as at 31 December
                                2001, excluding required notes and related
                                disclosures thereto (subject to Clause 2.3.1(d)
                                below);

                (b)     show a true and fair view of the consolidated assets,
                        liabilities and state of affairs of the Target Group as
                        at the Completion Date and the consolidated profit (or
                        loss) of the Target Company and the Target Subsidiary
                        for the period from 1 January 2002 to the Completion
                        Date;

                (c)     contain the reconciliation between the consolidated
                        audited balance sheet of the Target Group as at 31
                        December 2001 and the Pro Forma Balance Sheet and the
                        Completion Accounts shall assume the opening position as
                        at 1 January 2002 for calculating the consolidated
                        profit (or loss) of the Target Group for the period 1
                        January 2002 to the Completion Date as the Pro Forma
                        Balance Sheet;



                                       76


                (d)     include the information necessary for the calculation of
                        the Completion Adjustment, including a version of tab
                        "Illustrative unwinding of proforma balance sheet" in
                        the worked example using actual data;

                (e)     identify and take into account inwards payments and
                        outwards receipts arising from all commutations;

                (f)     value the Invested Assets (excluding accrued but unpaid
                        interest) of the Target Group Companies as at the
                        Completion Date at their Marked to Market value as
                        determined in accordance with Clause 3.2;

                (g)     not include any deferred tax assets; and

                (h)     not include any equalisation provision as required by
                        Schedule 9A to the Companies Act 1985.

2.3.2   The liability for restructuring of $6,500,000 (six million and five
        hundred thousand dollars) included in the Target Group's Accounts will
        be recalculated in the Completion Accounts as follows:

                (a)     the provisions in respect of the continuing obligations
                        under or related to Overseas Properties will be released
                        to the profit and loss account (as the Buyer and the
                        Seller have reached an agreement) in respect of such
                        obligations as set out in Clause 9.8 of the Agreement);

                (b)     the provisions in respect of all of the leases of space
                        in the London Underwriting Centre shall be included at
                        $151,000 per month multiplied by the number of months
                        remaining on the relevant lease, discounted at a rate of
                        5.0%;

                (c)     the provision in respect of the book loss on sales of
                        excess Hardware and payments to be made by the Target
                        Company in respect of lease obligations in relation to
                        Hardware shall be included at $200,000; and

                (d)     the provision for employee redundancy payments will be
                        calculated to take into account employees (if any) that
                        the Buyer has determined, prior to Completion, will be
                        made redundant within ninety days (or their contractual
                        notice period if longer) after Completion. The
                        redundancy payment calculation will be consistent with
                        Target Group's policy in effect prior to Completion, and
                        the Buyer will represent that actual payments to the
                        relevant employees will be so calculated. Settlement of
                        all employee redundancy and other termination benefits
                        paid in the period 1 January 2002 to the Completion Date
                        will be charged against the portion of the provision for
                        restructuring included in the Target Group's Accounts
                        that relates to redundancy and other termination
                        benefits (totalling $1.8 million). Any amounts paid
                        relating to this Clause 2.3.2(d) that exceed such
                        provision as at 31 December 2001 will be provided for in
                        the Completion Accounts;


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2.3.3   The only employee incentive costs accrued in the Completion Accounts
        will be as follows:

                (a)     amounts accrued as at the Completion Date under the
                        Annual Incentive Bonus Plan, the Supplemental Annual
                        Incentive Bonus Plan, Staff Incentive Plan, the
                        Supplementary Staff Incentive Plan, the Deferred Profit
                        Sharing Plan, and the Long Term Incentive Plan which
                        will be determined by the Seller for each employee
                        employed by the Target Group at the Completion Date and
                        will be communicated to the Buyer within five business
                        days after the Completion Date. Such amounts will be
                        paid to employees in accordance with their entitlement
                        under the relevant scheme or plan as and when due
                        following the Completion Date;

                (b)     amounts accrued as at the Completion Date under the
                        Performance Incentive and Loyalty Scheme will be limited
                        to any unpaid amounts achieved, and not deferred, in
                        accordance with the relevant scheme (being the 4% of
                        base salary achieved during the quarter in which
                        Completion occurs). Amounts achieved for each employee
                        will be determined by the Seller and will be
                        communicated to Buyer within five business days after
                        the Completion Date. Such amounts will be paid to the
                        employees in accordance with their entitlement under the
                        Performance Incentive and Loyalty Scheme as and when due
                        following the Completion Date; and

2.3.4   No accruals will be made in the Completion Accounts for amounts payable
        under the Performance Incentive and Loyalty Scheme for amounts achieved
        after the Completion Date (being the 20% of base salary achieved after
        the Completion Date) and those amounts achieved prior to the Completion
        Date but which payments are deferred. Amounts achieved for each employee
        will be determined by the Buyer and will be communicated to the Seller
        15 days prior to payment to the relevant employee. Such amounts will be
        paid to the employees in accordance with their entitlement under the
        Performance Incentive and Loyalty Scheme as and when due following the
        Completion Date. The Seller will reimburse the Target Group for these
        amounts payable under these schemes within 14 days after payment to the
        relevant employees.

2.3.5   Any unreconciled difference between the Peoplesoft general ledger and
        the Senator broker ledger systems as at the Completion Date will be
        eliminated through adjustment of the Peoplesoft general ledger. The
        Comfort letter provided by the Seller to the Target Subsidiary in
        respect of such unreconciled difference will be terminated.

2.3.6   The Completion Adjustment shall not be taken into account in preparing
        the Completion Accounts.



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3.      PROCEDURE

3.1     SUBMISSION OF DRAFT

                (a)     As soon as the Completion Accounts have been prepared,
                        the Buyer shall calculate the Completion Adjustment and
                        the Buyer shall send a copy of the Completion Accounts
                        and the calculation of the Completion Adjustment to the
                        Seller together with such working papers used in
                        connection with the preparation of the same to
                        understand and agree the Completion Accounts and the
                        calculation of the Completion Adjustment.

                (b)     Unless the Seller shall within 28 days of receipt of the
                        Completion Accounts and Completion Adjustment
                        calculation (and associated papers as provided in Clause
                        3.1(a)) serve a notice in writing on the Buyer that it
                        objects to the Completion Accounts and/or the Completion
                        Adjustment calculation (identifying the reason for any
                        objection and the amount(s) or item(s) in the Completion
                        Accounts and/or Completion Adjustment calculation which
                        is/are in dispute, provided always that no objection
                        shall be raised in relation to the Mark to Market and
                        Realised Investment Gain/Loss Adjustment in the
                        Completion Accounts other than pursuant to, and in
                        accordance with Clause 3.2 below), (such notification
                        being, for the purposes of this Clause 3, an "OBJECTION
                        NOTICE") the Seller shall be deemed to have agreed to
                        the Completion Accounts and the Buyer's calculation of
                        the Completion Adjustment for all purposes of this
                        Agreement.

3.2     AGREEMENT OF MARKED TO MARKET VALUATIONS

                (a)     As soon as practicable after Completion, however in any
                        event within 14 days, the Buyer shall determine and/or
                        shall procure Marked to Market valuation of each of the
                        Invested Assets as at the Completion Date. Upon receipt
                        of the Marked to Market valuations of each of the
                        Invested Assets, the Buyer shall aggregate those
                        valuations (the "INITIAL PRICING");

                (b)     As soon as the Buyer has the Initial Pricing it shall
                        send a copy of the Initial Pricing to the Seller,
                        together with such working papers used in connection
                        with the preparation of the same as are necessary or
                        appropriate to understand the Initial Pricing. Unless
                        the Seller and/or the Buyer shall within 14 days of the
                        Seller's receipt of the Initial Pricing serve a notice
                        in writing on the other (a "PRICING NOTICE") that it
                        wishes to obtain an independent Marked to Market
                        valuation of the Invested Assets (an "INDEPENDENT
                        PRICING"), the Seller and the Buyer shall be deemed to
                        have agreed to the Initial Pricing for the purposes of
                        the Mark to Market and Realised Investment Gain/Loss
                        Adjustment in the Completion Accounts, and the Initial
                        Pricing shall be final and binding on the parties.

                (c)     If the Buyer and/or the Seller serves a Pricing Notice
                        the Buyer and/or Seller may, as appropriate, within 14
                        days of the service of the Pricing Notice obtain a
                        Marked to Market valuation of the Invested Assets from
                        an independent reputable investment manger, bank or
                        securities house (such



                                       79


                        valuation being the "BUYER'S PRICING" or the "SELLER'S
                        PRICING", as appropriate). If the aggregate difference
                        between the Initial Pricing on the one hand and either
                        the Buyer's Pricing or the Seller's Pricing on the
                        other:

                        (i)     exceeds 25 basis points of the aggregate value
                                of the Initial Pricing then either the Buyer
                                and/or the Seller, as appropriate, may elect to
                                follow the procedure under Clause 3.2(d) below
                                to determine the Marked to Market valuation of
                                the Invested Assets; or

                        (ii)    does not exceed 25 basis points of the aggregate
                                value of the Initial Pricing, then the Initial
                                Pricing shall be used for the purposes of Mark
                                to Market and Realised Investment Gain/Loss
                                Adjustment in the Completion Accounts and the
                                Initial Pricing shall be final and binding on
                                the parties.

                (d)     If Clause 3.2(c)(i) applies, and the Buyer and/or the
                        Seller elects to implement this Clause:

                        (i)     the Buyer and Seller shall appoint two mutually
                                acceptable independent third parties (the
                                "INDEPENDENT VALUERS"). For the avoidance of
                                doubt, each party is not prohibited from
                                proposing the entity it used to obtain its own
                                pricing under paragraph (c) above as an
                                Independent Valuer, Independent Valuers may
                                obtain prices or pricing information from other
                                third party professionals in their absolute
                                discretion;

                        (ii)    if the parties fail to reach agreement on the
                                identity of either one or both of the
                                Independent Valuers within 10 days of an
                                election to implement this Clause, then, at the
                                instance of each party such Independent Valuers
                                that have not been agreed shall be selected by
                                the President for the time being of the
                                Institute of Chartered Accountants for England
                                and Wales;

                        (iii)   a list of individual securities prioritised
                                based on the absolute difference measured in
                                market value and with a price difference in
                                excess of 25 basis points between the Initial
                                Pricing and the Buyer's Pricing and/or the
                                Initial Pricing and the Seller's Pricing will be
                                provided by the Buyer and/or Seller to the
                                Independent Valuers (the "RELEVANT SECURITIES");

                        (iv)    the Independent Valuers will each Mark to Market
                                each of the Relevant Securities as at the
                                Completion Date in sequence starting with the
                                largest absolute market value difference,
                                subject to the following, for each Relevant
                                Security the average of the two Independent
                                Valuers' valuations will become the new
                                valuation for that Relevant Security and the
                                Initial Pricing will be recalculated to reflect
                                that valuation;



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                        (v)     the Initial Pricing as adjusted by the valuation
                                of each such Relevant Security is referred to as
                                the "ADJUSTED INITIAL PRICING". The process of
                                such valuation will continue until the sooner of
                                (x) the difference between the Initial Pricing
                                and the Adjusted Initial Pricing becomes less
                                than 25 basis points, and (y) all of the
                                Relevant Securities have been priced (the "FINAL
                                ADJUSTED INITIAL PRICING"); and

                        (vi)    the Final Adjusted Initial Pricing shall be
                                deemed to have been agreed upon completion of
                                this process and for the purposes of the Mark to
                                Market and Realised Investment Gain Loss
                                Adjustment in the Completion Accounts and the
                                Final Adjustment Initial Pricing shall be final
                                and binding on the parties.

3.3     REPORT

        If the Seller accepts, or is deemed to accept, that the said draft
        Completion Accounts comply with Clause 2, and the draft Completion
        Adjustment is correctly calculated in accordance with Clauses 4 and 5,
        the Seller shall sign a report to that effect and any Completion
        Accounts and Completion Adjustment so reported on, or (if Clause 3.6
        shall apply) the final draft of the Completion Accounts and the
        Completion Adjustment as determined by the independent accountant, shall
        be the Completion Accounts and the Completion Adjustment for the
        purposes of this Agreement and shall be final and binding on the
        parties.

3.4     INFORMATION AND EXPLANATIONS

        The Buyer shall provide such cooperation, information, documentation and
        written and verbal explanations from appropriate personnel relating to
        the draft Completion Accounts and the Completion Adjustment and their
        preparation as the Seller, or any independent chartered accountant
        appointed pursuant to Clause 3.6, shall reasonably require.

3.5     AGREEMENT OF DRAFT

        If within the period referred to in Clause 3.1(b), the Seller shall give
        the Buyer an Objection Notice then the Buyer and the Seller shall use
        their best endeavours to reach agreement upon adjustments to the draft
        and the value of the Completion Adjustment.

3.6     INDEPENDENT ACCOUNTANT

        If the Seller and the Buyer are unable to reach agreement within 28 days
        following service of the Objection Notice, either the Seller or the
        Buyer shall be entitled to refer the matter or matters in dispute, only
        to the extent that such matters may potentially impact the Completion
        Adjustment, to Ernst & Young, unless Ernst & Young are not at the
        relevant time independent of each of the parties in which case the
        matter or matters shall be referred to an independent firm of chartered
        accountants agreed upon between them or (failing agreement within seven
        days of one party giving notice to the other that it desires an
        independent expert to be appointed) to be selected (at the



                                       81


        instance of either party) by the President for the time being of the
        Institute of Chartered Accountants for England and Wales. Ernst & Young
        or such other independent firm of chartered accountants shall act as
        experts not as arbitrators and shall determine the matter or matters in
        dispute and their decision shall, save in the event of fraud or manifest
        error, be binding.

        The parties will use all reasonable endeavours to co-operate with the
        independent firm of accountants in resolving such disagreement or
        dispute. The independent firm of accountants shall have the right to
        seek such professional assistance and advice as it may require in
        fulfilling its duties. The costs of the independent firm of accountants
        shall be borne by the Seller and the Buyer equally.

        Upon the resolution of any dispute by the independent firm of
        accountants, the Completion Accounts and the calculation of the
        Completion Adjustment shall be amended to accord with such resolution
        and the Completion Accounts and the Completion Adjustment as so amended
        shall thereafter be final and binding as between the parties for all
        purposes of this Agreement.

4.      COMPLETION ADJUSTMENT

4.1     GENERAL

4.1.1   The following provisions of this Clause 4.1.1 set out the general
        methodology relating to the calculation of the Completion Adjustment
        which is subject to the specific calculations and methodology provided
        for in Clauses 4.2, 5.2 and 5.3.

                (a)     The Buyer's purchase price for the Target Group is
                        predicated upon:

                        (i)     the Target Group holding at the Completion Date
                                Invested Assets (which, on Marked to Market
                                valuations, could be used to purchase Risk Free
                                Investments, exclusive of transactional costs),
                                cash and net Non-Technical Assets and
                                Liabilities sufficient to meet the Buyer's
                                estimate of the net present value, as at the
                                Completion Date, of the Actual Matched
                                Portfolio, and

                        (ii)    Adjustment "W" in Clause 4.2.

                (b)     The amount of any difference between:

                        (i)     the aggregate Marked to Market value of the
                                Invested Assets, cash and Non-Technical Assets
                                and Liabilities at the Completion Date, and

                        (ii)    the Actual Matched Portfolio,

                        is to be a completion adjustment, calculated in
                        accordance with this Clause 4 and settled in accordance
                        with Clause 3 of the Agreement.

                (c)     This is achieved through Adjustment "W" and the Mark to
                        Market and Realised Investment Gain / Loss Adjustment
                        set out in this Clause 4 and the Matched Portfolio
                        Adjustment set out in Clause 5;



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                (d)     The Assumed Matched Portfolio was calculated as at 31
                        December 2001 in accordance with Clause 5.2(a). The
                        Target Group has continued to trade in the period 1
                        January 2002 to the Completion Date inclusive. During
                        this period, it is agreed that profits and losses of the
                        Target Group are for the Buyer's account, except as
                        provided in this Agreement.

                (e)     Profits and losses recognised in the period 1 January
                        2002 to the Completion Date inclusive with respect to
                        Non-Technical Assets and Liabilities (except to the
                        extent that such profits and losses arise from accrued
                        Investment Income, which is dealt with in Adjustment "W"
                        in Clause 4.2, and commutations, which are for the
                        Buyer's account) are for the Seller's account, in
                        accordance with Clause 5 below.

4.2     CALCULATION

4.2.1   Upon preparation of the Completion Accounts, the Buyer shall calculate
        the completion adjustment (the "COMPLETION ADJUSTMENT") as follows:

        W + X + Y = Z

        where:

        "W" is as provided in Clause 3.2.1(d), 3.2.2(d), 3.2.3(d) or 3.2.4(c) of
        the Agreement as appropriate

        "X" is the Matched Portfolio Adjustment

        "Y" is the Mark to Market and Realised Investment Gain / Loss Adjustment

        "Z" is the Completion Adjustment

        A worked example of the above formula, together with certain schedules
        relevant in format and/or content to the Agreement, is set out in Part
        II of this Schedule 7 (the "WORKED EXAMPLE"). The Completion Adjustment
        shall be calculated in accordance with the principles and definitions
        described in Clause 2.3 above, and amounts determined shall therefore be
        gross of any withholding or other taxes.

4.2.2   For the purposes of this Clause 4.2:

                (a)     "INVESTMENT INCOME" is the amount disclosed as such in
                        the notes to the Completion Accounts, which comprises
                        income received from Invested Assets, plus the change in
                        accrued investment income between 31 December 2001 and
                        Completion Date inclusive, gross of any withholding or
                        income tax;

                (b)     "ADMINISTRATIVE EXPENSES" is the amount disclosed as
                        such in the notes to the Completion Accounts (which
                        includes depreciation, but this shall exclude any profit
                        and loss in respect of Non-Technical Assets and
                        Liabilities of the Target Group as at 31 December 2001,
                        recognised in the



                                       83


                        period from 1 January 2002 to the Completion Date which
                        is adjusted in accordance with Clause 5.2(e)(ii) below);

                (c)     "MATCHED PORTFOLIO ADJUSTMENT" means the adjustment
                        determined in accordance with Clause 5 below;

                (d)     "MARK TO MARKET AND REALISED INVESTMENT GAIN / LOSS
                        ADJUSTMENT" means the aggregate of unrealized investment
                        gains / losses and realised investment gains / losses as
                        disclosed in consolidated profit and loss of the
                        Completion Accounts, where a net credit to the profit
                        and loss account is treated as a positive and a net
                        debit to the profit and loss account is treated as a
                        negative; and

                (e)     "NON-TECHNICAL ASSETS AND LIABILITIES" means those items
                        identified as such in the tab "Treatment of Proforma
                        Balance Sheet" in the Worked Example.

5.      MATCHED PORTFOLIO ADJUSTMENT

5.1     GENERAL

        For the purposes of this Clause 5, "RISK FREE INVESTMENT" means
        investments in US Dollars which are bonds, debentures, treasury bills,
        notes or any other security representing a first rank debt of, and
        issued or directly and unconditionally guaranteed by the government of
        the United States of America.

5.2     METHODOLOGY

        The Buyer and Seller agree that the following is the methodology to be
        used to calculate the Matched Portfolio Adjustment:

                (a)     The Buyer has estimated, as at 31 December 2001, all
                        future cash flows of the Target Subsidiary, but
                        excluding those arising from Investment Income and
                        realizations of Invested Assets and Non-Technical Assets
                        and Liabilities, after taking into account the
                        adjustments made in deriving the Pro Forma Balance Sheet
                        (the "ASSUMED PAYMENT PROFILE").

                (b)     On the basis of the Assumed Payment Profile, the Buyer
                        has assumed a portfolio consisting of Risk Free
                        Investments and cash the cashflows of which (together
                        with the assumed cashflows arising from realizations of
                        the Non-Technical Assets and Liabilities of the Target
                        Subsidiary) will exactly match the Assumed Payment
                        Profile (the "ASSUMED MATCHED PORTFOLIO").

                (c)     The Buyer has calculated the net present value of the
                        Assumed Matched Portfolio as $1,519,800,000 (one
                        billion, five hundred and nineteen million and eight
                        hundred thousand dollars), being the net present value
                        of the Assumed Matched Portfolio based on an average
                        weighted investment yield of 4.5 per cent per annum as
                        at 31 December 2001 (the "NPV OF THE ASSUMED MATCHED
                        PORTFOLIO").



                                       84


                (d)     The Buyer shall calculate the Actual Matched Portfolio
                        (in accordance with Clause 5.2(e) below) and the NPV of
                        the Actual Matched Portfolio (in accordance with Clause
                        5.2(g) below).

                (e)     The "ACTUAL MATCHED PORTFOLIO" shall be calculated in
                        the same way as the Assumed Matched Portfolio using:

                        (i)     the Assumed Payment Profile; and

                        (ii)    an adjustment for the profit or loss recognised
                                in respect of Non-Technical Assets and
                                Liabilities as at 31 December 2001 of the Target
                                Subsidiary in the period from 1 January 2002 to
                                the Completion Date (excluding the change in
                                accrued investment income in that period, which
                                is adjusted through Clause 5.2(g)(iii) below) so
                                that any such profit reduces, and any such loss
                                increases, the amount of the Actual Matched
                                Portfolio.

                (f)     For the purposes of Clause 5.2(e)(ii) above:

                        (i)     an adjustment for profit or loss in respect of
                                Non-Technical Assets and Liabilities in relation
                                to bad debts will only be recognised if:

                                (1)     the principal debtor or creditor
                                        concerned becomes Insolvent ("INSOLVENT"
                                        shall mean a reinsurer that has been
                                        declared insolvent by any court with
                                        competent jurisdiction or has been
                                        placed into liquidation or receivership
                                        (whether voluntary or involuntary) or
                                        there has been instituted against the
                                        reinsurer proceedings for the
                                        appointment of a receiver, liquidator
                                        (including a provisional liquidator),
                                        administrator (subsequent to formal
                                        court proceedings, and only for the time
                                        that such reinsurer is in
                                        administration), rehabilitator,
                                        conservator, or trustee in bankruptcy,
                                        or other agent known by whatever name,
                                        to take possession of the reinsurer's
                                        assets or control of the reinsurer's
                                        operation) between 1 January 2002 and
                                        the Completion Date inclusive;

                                (2)     it arises due to a new claims position
                                        that the London market has adopted
                                        between 1 January 2002 and the
                                        Completion Date;

                                (3)     it arises in accordance with Clause
                                        2.3.5 above;

                                (4)     it arises from an amount due from or to
                                        an Affiliate of the Seller not being
                                        realised at book value as at 31 December
                                        2001 (except to the extent recognised
                                        under Clause 5.2(f)(i)(3);

                        (ii)    The stipulated accounting treatment of
                                restructuring provisions and employee incentive
                                payments set out in Clauses 2.3.2 and 2.3.3
                                above applies.

                        (iii)   Except in relation to 5.2(f)(i)(4) and (ii)
                                above, the maximum net loss to be taken into
                                account will be $14 million, with the first $7
                                million of loss to



                                       85


                                be disregarded (i.e., the maximum loss
                                adjustment to the Completion Adjustment is $7
                                million).

                (g)     The "NPV OF THE ACTUAL MATCHED PORTFOLIO" shall be the
                        net present value of the Actual Matched Portfolio as at
                        31 December 2001, calculated as the sum of (i) and (ii)
                        less (iii) below:

                        (i)     for years 2003 and subsequent the respective
                                assumed cash flows, which are assumed to occur
                                on 30 June of each calendar year, contained in
                                the Actual Matched Portfolio, discounted as at
                                the Completion Date using the U.S. Government
                                Treasury strip yield curve (interpolated on a
                                straight-line basis for dates not identified on
                                the curve), annualized, as reported by Bloomberg
                                on the Fair Market Yield Curve History Page as
                                at close of business on the Completion Date or
                                the last business day prior to the Completion
                                Date if the Completion Date is not on a business
                                day;

                        (ii)    for 2002 the Assumed Payment Profile cash flow
                                of $376,800,000 (three hundred and seventy six
                                million and eight hundred thousand dollars),
                                will be divided equally into 12 amounts of
                                $31,400,000 (thirty one million and four hundred
                                thousand dollars) ("MONTHLY Payment"). For 2002
                                the net present value is the sum of (a) the
                                numbers of months in 2002 through completion
                                multiplied by the undiscounted Monthly Payment,
                                and (b) the remaining Monthly Payments assumed
                                to occur on the fifteenth day of the month,
                                discounted to the Completion Date using the U.S.
                                Government Treasury strip yield curve, derived
                                as in Clause 5.2(g)(i) above, except using the
                                relevant monthly rate (interpolated on a
                                straight line basis as appropriate);

                        (iii)   the amount of the actual Investment Income
                                reported in the Completion Accounts for the
                                period from 1 January 2002 to the Completion
                                Date inclusive.

5.3     CALCULATION

5.3.1   If the NPV of the Assumed Matched Portfolio is:

                (a)     greater than the NPV of the Actual Matched Portfolio,
                        then the amount of the difference shall be the Matched
                        Portfolio Adjustment, which for the purposes of the
                        formula in Clause 4.1 shall be deemed to be a positive;
                        or

                (b)     less than the NPV of the Actual Matched Portfolio, then
                        the amount of the difference shall be the Matched
                        Portfolio Adjustment, which for purposes of the formula
                        in Clause 4.1 shall be deemed to be a negative.

5.4     PAYMENT

        The Completion Adjustment shall be paid by the Buyer or the Seller (as
        appropriate) in accordance with the provisions of Clause 3 of this
        Agreement.

5.5     MANIFEST ERROR

        In the event of a manifest error in the Pro Forma Balance Sheet or
        Worked Example, correcting adjustments will be made.

5.6     INTERACTION WITH OTHER PROVISIONS

5.6.1   Subject to the due performance of Clause 3.6, if either party shall have
        any claim against the other party under this Agreement in respect of any
        liability or deficiency which is taken into account in the Completion
        Accounts the amount of such liability or deficiency so taken into
        account shall be deducted from the amount of such party's claim but,
        save as aforesaid, preparation and acceptance of the Completion Accounts
        by either party shall be without prejudice to any claim which either
        party may have against the other party under or in respect of any breach
        of this Agreement.



                                       86


                                     PART II

                                 WORKED EXAMPLE

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]


                                   SCHEDULE 8

                               NOVATION AGREEMENT

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]


                                   SCHEDULE 9

                MAC THRESHOLDS - (MAC 4.6 ILLUSTRATION 19_6.XLS)

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]


                                   SCHEDULE 10

                            PENSION SUBSTITUTION DEED

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]




                                       87


                                   SCHEDULE 11

                            REINSURANCE RECOVERABLES

   [Exhibit/Schedule omitted. Registrant undertakes to provide a copy of said
               Exhibit/Schedule to the Commission upon request.]



EXECUTED by the parties:



        Signed by

        ROBERT DEUTSCH

        duly authorised representative
        of /for and on behalf of


        CONTINENTAL
        CASUALTY COMPANY








        Signed by

        COLIN GRAHAM BIRD

        duly authorised representative
        of /for and on behalf of


        TAWA UK LIMITED


LN235275.15





                                       88

EX-99.01

CNA FINANCIAL CORPORATION
EXHIBIT 99.01

                            CNA FINANCIAL CORPORATION
                   UNAUDITED PRO FORMA FINANCIAL INFORMATION


The following unaudited pro forma financial information presents CNA Financial
Corporation's (the Company or CNAF) pro forma unaudited condensed consolidated
balance sheet as of September 30, 2002 and the Company's pro forma unaudited
condensed consolidated statements of operations for the year ended December 31,
2001 and for the nine months ended September 30, 2002.

On October 31, 2002, the Company completed the sale of the shares of CNA Re
Management Company Limited and its wholly-owned subsidiary CNA Reinsurance
Company Limited (collectively referred to hereinafter as CNA Re U.K.) to Tawa
U.K. Limited. The sale includes business underwritten since inception by CNA Re
U.K. except for certain risks retained by Continental Casualty Company (CCC), a
wholly-owned subsidiary of the Company, as discussed below. This sale does not
impact CNA Re's on-going U.S.-based operations.

CNA Re U.K. was sold for $1, subject to adjustments that are primarily driven by
certain operating results and changes in interest rates between January 1, 2002
and October 31, 2002, and realized foreign currency losses recognized by CNA Re
U.K. prior to December 31, 2002. Due to the various components of the completion
adjustments, which are initially prepared by the buyer, the final purchase price
cannot yet be determined. However, based upon information currently available to
the Company, management believes there will be a reduction in the previously
recognized impairment loss, which will be reflected as a realized gain when the
completion adjustments are finalized. The anticipated realized gain on sale is
not reflected in the pro forma adjustments.

Concurrent with the sale, several reinsurance agreements under which CCC
provided retrocessional protection to CNA Re U.K. will be terminated. As part of
the sale, CNA Re U.K.'s net exposure to all IGI Program liabilities, as
described in note B2 below, will be ceded to CCC. Further, CCC will provide a
$100 million stop loss reinsurance cover attaching at carried reserves on CNA Re
U.K.'s 2001 underwriting year exposures for which CCC received premium of $25
million.

The pro forma adjustments are presented as if they had occurred, as of September
30, 2002 for the purposes of the pro forma unaudited Condensed Consolidated
Balance Sheet, and as of the beginning of the respective period presented for
the purposes of the pro forma unaudited Condensed Consolidated Statements of
Operations.

This pro forma unaudited financial information does not purport to represent
what the Company's actual financial position and results of operations would
have been had such events actually occurred on the aforementioned dates. The pro
forma unaudited financial information also does not purport to serve as a
forecast of the Company's financial position or results of operations for any
future periods.

The pro forma adjustments are based on currently available information and upon
certain assumptions that management believes are reasonable in the
circumstances. This pro forma financial information should be read in
conjunction with the Company's audited consolidated financial statements as of
and for the year ended December 31, 2001 appearing in the Company's Annual
Report on form 10-K for the year ended December 31, 2001, and the unaudited
condensed consolidated financial statements as of September 30, 2002 and for the
nine-month period then ended appearing in the Company's Quarterly Report on Form
10-Q for the quarter then ended.



CNA FINANCIAL CORPORATION
EXHIBIT 99.01

CNA FINANCIAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(UNAUDITED)


                                                                 PRO FORMA ADJUSTMENTS
                                                               ------------------------
                                                AS REPORTED       DECREASE (INCREASE)                    PRO FORMA
                                                    CNAF                                                   CNAF
                                                  BALANCE      CNA RE U.K.       OTHER                    BALANCE
(In millions)                                      SHEET           [A]            [B]         NOTES        SHEET
                                                -----------    -----------      -------      --------    ---------
                                                                                          
ASSETS:

Investments and cash                              $36,439        $ 1,116        $   286      B1,B2,B3     $35,037
Receivables                                        16,831          1,330            (77)     B2            15,578
Deferred acquisition costs                          2,548              1              -                     2,547
Other assets                                        6,103             28              -                     6,075
Separate account business                           3,147              -              -                     3,147
                                                  -------        -------        -------                   -------
Total assets                                      $65,068        $ 2,475        $   209                   $62,384
                                                  =======        =======        =======                   =======


LIABILITIES:

Insurance reserves                                $42,580        $ 2,179        $   308      B1,B2        $40,093
Debt                                                2,549              -              -                     2,549
Reinsurance balances payable                        3,032            104            (35)     B2             2,963
Other liabilities                                   4,827            192            (64)     B1,B2,B3       4,699
Separate account business                           3,147              -              -                     3,147
                                                  -------        -------        -------                   -------
Total liabilities                                  56,135          2,475            209                    53,451
                                                  -------        -------        -------                   -------

Minority interest                                     233              -              -                       233

Stockholders' equity                                8,700              -              -                     8,700
                                                  -------        -------        -------                   -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $65,068        $ 2,475        $   209                   $62,384
                                                  =======        =======        =======                   =======




CNA FINANCIAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)


                                                                        PRO FORMA ADJUSTMENTS
                                                                     --------------------------
                                                                         DECREASE (INCREASE)
                                                      RESTATED                                         PRO FORMA
                                                        CNAF                                              CNAF
(In millions, except per share data)                STATEMENT OF     CNA RE U.K.        OTHER         STATEMENT OF
                                                    OPERATIONS [C]       [D]             [E]           OPERATIONS
                                                    -------------    -----------       --------       ------------
                                                                                          
REVENUES
Net earned premiums                                  $  9,288         $    224         $      -         $  9,064
Net investment income                                   1,856               59               15            1,782
Realized investment gains (losses), net of
  participating policyholders' and minority
  interests                                             1,262               (3)               -            1,265
Other revenues                                            676                -                -              676
                                                     --------         --------         --------         --------
Total revenues                                         13,082              280               15           12,787
                                                     --------         --------         --------         --------

CLAIMS, BENEFITS AND EXPENSES
Insurance claims and benefits                          11,279              467                -           10,812
Amortization of deferred acquisition costs              1,804               63                -            1,741
Other operating expenses                                1,909               51                -            1,860
Restructuring and other related charges                   251                6                -              245
Interest                                                  157                -                -              157
                                                     --------         --------         --------         --------
Total claims, benefits and expenses                    15,400              587                -           14,813
                                                     --------         --------         --------         --------

Loss from continuing operations before income
   tax and minority interest                           (2,318)            (307)              15           (2,026)
Income tax benefit (expense)                              745              (67)              (5)             817
Minority interest                                         (21)               -                -              (21)
                                                     --------         --------         --------         --------

(Loss) income from continuing operations             $ (1,594)        $   (374)        $     10         $ (1,230)
                                                     ========         ========         ========         ========

BASIC AND DILUTED (LOSS) EARNINGS PER SHARE
  FROM CONTINUING OPERATIONS                         $  (8.22)                                          $  (6.34)
                                                     ========                                           ========
WEIGHTED AVERAGE OUTSTANDING COMMON STOCK AND
  COMMON STOCK EQUIVALENTS                              194.0                                              194.0
                                                     ========                                           ========



CNA FINANCIAL CORPORATION
EXHIBIT 99.01

CNA FINANCIAL CORPORATION
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)



                                                                        PRO FORMA ADJUSTMENTS
                                                                     --------------------------
                                                                         DECREASE (INCREASE)
                                                      RESTATED                                         PRO FORMA
                                                        CNAF                                              CNAF
(In millions, except per share data)                STATEMENT OF     CNA RE U.K.        OTHER         STATEMENT OF
                                                     OPERATIONS          [D]             [E]           OPERATIONS
                                                    -------------    -----------       --------       ------------
                                                                                         
REVENUES
Net earned premiums                                    $ 7,925         $    13         $     -         $ 7,912
Net investment income                                    1,292              32               7           1,253
Realized investment (losses) gains, net of
   participating policyholders' and minority
   interests                                              (137)             11               -            (148)
Other revenues                                             476               -               -             476
                                                       -------         -------         -------         -------
Total revenues                                           9,556              56               7           9,493
                                                       -------         -------         -------         -------

CLAIMS, BENEFITS AND EXPENSES
Insurance claims and benefits                            6,542              15               -           6,527
Amortization of deferred acquisition costs               1,350               5               -           1,345
Other operating expenses                                 1,261              12               -           1,249
Restructuring and other related charges                      -               -               -               -
Interest                                                   112               -               -             112
                                                       -------         -------         -------         -------
Total claims, benefits and expenses                      9,265              32               -           9,233
                                                       -------         -------         -------         -------

Income from continuing operations before income
   tax and minority interest                               291              24               7             260
Income tax expense                                         (78)             (1)             (3)            (74)
Minority interest                                          (11)              -               -             (11)
                                                       -------         -------         -------         -------

Income from continuing operations                      $   202         $    23         $     4         $   175
                                                       =======         =======         =======         =======

BASIC AND DILUTED EARNINGS PER SHARE
  FROM CONTINUING OPERATIONS                           $  0.91                                         $  0.78
                                                       =======                                         =======
WEIGHTED AVERAGE OUTSTANDING COMMON STOCK AND
  COMMON STOCK EQUIVALENTS                               223.6                                           223.6
                                                       =======                                         =======



    NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

[A]  This column of pro forma adjustments represents the balance sheet of CNA Re
     U.K. as included in the CNAF Condensed Consolidated Balance Sheet as of
     September 30, 2002 as reported.

[B]  This column of pro forma adjustments includes the transfer of certain
     assets and liabilities between CNA Re U.K. and its parent, CCC, arising
     from several concurrent completion transactions as more fully described
     below.

     [B1] Represents the impact of the termination of four intercompany
          reinsurance agreements under which, CNA Re U.K. ceded losses to CCC.
          These terminations result in a transfer of insurance reserves of $337
          million and cash of $262 million from CCC to CNA Re U.K.

     [B2] In 1997, CNA Re U.K. entered into an arrangement with IOA Global, Ltd.
          (IOA), an independent managing general agent based in Philadelphia,
          Pennsylvania, to develop and manage a book of accident and health
          coverages. Pursuant to this arrangement, IGI Underwriting Agencies,
          Ltd. (IGI), a personal accident reinsurance managing general
          underwriter, was appointed to underwrite and


CNA FINANCIAL CORPORATION
EXHIBIT 99.01


          market the book under the supervision of IOA. Between April 1, 1997
          and December 1, 1999, IGI underwrote a number of reinsurance
          arrangements with respect to personal accident insurance worldwide
          (the IGI Program).

          This pro forma adjustment reflects the retrocession to CCC of CNA Re
          U.K.'s remaining net exposure relating to the IGI Program. This
          retrocession includes a transfer of insurance reserves of $29 million,
          receivables of $77 million, related liabilities of $35 million and
          cash of $2 million.

     [B3] Represents the impact of other aspects of the transaction including
          estimated foreign currency losses and other estimated future
          completion adjustments, which decreases cash by $22 million and
          decreases other liabilities by $22 million.

[C]  The CNAF Condensed Consolidated Statement of Operations for the year ended
     December 31, 2001 is restated to reclassify the results of CNA Vida as
     discontinued operations.

[D]  These columns of pro forma adjustments represent the results of operations
     of CNA Re U.K. as included in the CNAF Condensed Consolidated Statements of
     Operations for the respective periods presented.

[E]  This column of pro forma adjustments represents the estimated reduction of
     investment income assuming the cash related to CNAF's completion
     transactions in pro forma note B, was transferred to CNA Re U.K. as of
     January 1, 2001. This estimated reduction of interest income totals $15
     million, which is based on the approximate two-year U.S. Treasury yield of
     5% as of January 1, 2001.

[F]  This column of pro forma adjustments represents the estimated reduction of
     investment income assuming the cash related to completion transactions in
     pro forma note B, was transferred to CNA Re U.K. as of January 1, 2002.
     This estimated reduction of interest income totals $7 million, which is
     based on the approximate two-year U.S. Treasury yield of 3% as of January
     1, 2002.