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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-K


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended December 31, 2001


OR


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


For the Transition Period From to
------------ -------------


Commission File Number 1-6541


LOEWS CORPORATION
(Exact name of registrant as specified in its charter)


Delaware 13-2646102
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)



667 Madison Avenue, New York, N.Y. 10021-8087
(Address of principal executive offices) (Zip Code)


(212) 521-2000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on
Title of each class which registered
------------------- ------------------------

Loews Common Stock, par value $1.00 per share New York Stock Exchange
Carolina Group Stock, par value $.01 per share New York Stock Exchange
3 1/8% Exchangeable Subordinated Notes Due 2007 New York Stock Exchange

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

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

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

Yes X No
----- -----

As of March 1, 2002, 191,135,800 shares of Loews Common Stock and 40,250,000
shares of Carolina Group tracking stock were outstanding. The aggregate market
value of voting stock held by non-affiliates was approximately $8,455,154,000
for Loews Common Stock and $1,202,267,000 for Carolina Group Stock.

Documents Incorporated by Reference:

Portions of the definitive Loews Corporation Notice of Annual Meeting of
Stockholders and Proxy Statement intended to be filed by Registrant with the
Commission prior to April 30, 2002 are incorporated by reference into Part
III.

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1

LOEWS CORPORATION

INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION

For the Year Ended December 31, 2001



Item Page
No. PART I No.
- ---- ----

1 BUSINESS .......................................................... 3
Issuance Of Carolina Group Tracking Stock ....................... 3
CNA Financial Corporation ....................................... 4
Lorillard, Inc. ................................................. 13
Loews Hotels Holding Corporation ................................ 19
Diamond Offshore Drilling, Inc. ................................. 20
Bulova Corporation .............................................. 22
Other Interests ................................................. 23
2 PROPERTIES ........................................................ 23
3 LEGAL PROCEEDINGS ................................................. 24
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 35
EXECUTIVE OFFICERS OF THE REGISTRANT .............................. 36

PART II

5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS .......................................................... 37
6 SELECTED FINANCIAL DATA ........................................... 38
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................ 39
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 69
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 71
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................. 129

PART III

Information called for by Part III has been omitted as Registrant
intends to file with the Securities and Exchange Commission not later
than 120 days after the close of its fiscal year a definitive Proxy
Statement pursuant to Regulation 14A.

PART IV

14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ... 129



2

PART I

Item 1. Business.

Loews Corporation is a holding company. Its subsidiaries are engaged in the
following lines of business: property, casualty and life insurance (CNA
Financial Corporation, an 89% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of
hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary); the
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc., a 53% owned subsidiary); and the distribution and sale of watches and
clocks (Bulova Corporation, a 97% owned subsidiary).

Unless the context otherwise requires, the terms "Company" and "Registrant"
as used herein mean Loews Corporation excluding its subsidiaries.

Information relating to the major business segments from which the Company's
consolidated revenues and income are derived is contained in Note 18 of the
Notes to Consolidated Financial Statements, included in Item 8.

ISSUANCE OF CAROLINA GROUP TRACKING STOCK

On January 4, 2002 the shareholders of Loews Corporation authorized and
approved the creation of a new class of common stock of the Company, called
Carolina Group stock, and on February 6, 2002 in an initial public offering
the Company issued 40,250,000 shares of Carolina Group stock. See Note 19 of
the Notes to Consolidated Financial Statements, included in Item 8.

The Carolina Group stock, commonly called a tracking stock, is intended to
reflect the economic performance of a defined group of assets and liabilities
of the Company referred to as the Carolina Group. The Company has attributed
the following assets and liabilities to the Carolina Group:

(a) The Company's 100% stock ownership interest in Lorillard, Inc.;

(b) $2.5 billion of notional, intergroup debt owed by the Carolina Group to
the Loews Group, bearing interest at the annual rate of 8.0% and, subject to
optional prepayment, due December 31, 2021;

(c) any and all liabilities, costs and expenses of the Company and
Lorillard, Inc. and the subsidiaries and predecessors of Lorillard, Inc.,
arising out of or related to tobacco or otherwise arising out of the past,
present or future business of Lorillard, Inc. or its subsidiaries or
predecessors, or claims arising out of or related to the sale of any
businesses previously sold by Lorillard, Inc. or its subsidiaries or
predecessors, in each case, whether grounded in tort, contract, statute or
otherwise, whether pending or asserted in the future;

(d) all net income or net losses arising from the assets and liabilities
that are reflected in the Carolina Group and all net proceeds from any
disposition of those assets, in each case, after deductions to reflect
dividends paid to holders of Carolina Group stock or credited to the Loews
Group in respect of its intergroup interest; and

(e) any acquisitions or investments made from assets reflected in the
Carolina Group.

As of March 1, 2002 holders of Carolina Group stock have an approximately
23.17% economic interest in the Carolina Group.

The Loews Group consists of all of the Company's assets and liabilities
other than the 23.17% economic interest in the Carolina Group represented by
the outstanding Carolina Group stock, and includes as an asset the notional
intergroup debt of the Carolina Group referred to above.

The creation of the Carolina Group and the issuance of Carolina Group stock
does not change the Company's ownership of Lorillard, Inc. or Lorillard,
Inc.'s status as a separate legal entity. The Carolina Group and the Loews
Group are notional groups that are intended to reflect the performance of the
defined sets of assets and liabilities of each such group as described above.
The Carolina Group and the Loews Group are not separate legal entities and the
attribution of assets and liabilities of the Company to the Loews Group or the
Carolina Group does not affect title to the assets or responsibility for the
liabilities so attributed.

Holders of the Company's common stock and of Carolina Group stock are
shareholders of Loews Corporation and are subject to the risks related to an
equity investment in Loews Corporation.

3

CNA FINANCIAL CORPORATION

CNA Financial Corporation (together with its subsidiaries, "CNA") was
incorporated in 1967 and is an insurance holding company whose primary
subsidiaries consist of property-casualty and life insurance companies. CNA's
property-casualty insurance operations are conducted by Continental Casualty
Company ("CCC"), incorporated in 1897, and its affiliates, and The Continental
Insurance Company ("CIC"), organized in 1853, and its affiliates. Life
insurance operations are conducted by Continental Assurance Company ("CAC"),
incorporated in 1911, and its affiliates and CNA Group Life Assurance Company
("CNAGLAC"), incorporated in 2000. CIC became an affiliate of CNA in 1995 as a
result of the acquisition of The Continental Corporation ("Continental").
CNA's principal market is the United States with a continued focus on
expanding globally to serve those with growing worldwide interests. CNA
accounted for 68.00%, 73.07% and 76.39% of the Company's consolidated total
revenue for the years ended December 31, 2001, 2000 and 1999, respectively.

CNA conducts its operations through five operating groups: Standard Lines,
Specialty Lines and CNA Re (these groups comprise the Company's Property-
Casualty segment); Group Operations and Life Operations. In addition to these
five operating segments, certain other activities are reported in the Other
Insurance segment.

CNA underwent significant management changes, strategic realignment and
restructuring in the second half of 2001. These management changes as well as
the strategic realignment and restructuring have changed the way CNA manages
its operations and makes business decisions; and therefore, necessitated a
change in CNA's reportable segments.

The changes made to CNA's reportable segments were as follows: (i)
Commercial Insurance and CNA Excess & Select (formerly included in Agency
Market Operations) and Risk Management Operations, were combined into Standard
Lines; (ii) CNA Pro, CNA HealthPro, CNA Guaranty and Credit (formerly included
in Specialty Operations), and Global Operations, were combined into Specialty
Lines; (iii) losses and expenses related to the centralized adjusting and
settlement of environmental pollution and other mass tort and asbestos
("APMT") claims previously included in Commercial Insurance, CNA Excess &
Select, Risk Management and Global Operations are now included in the Other
Insurance segment; and (iv) Personal Insurance, CNA UniSource, agriculture and
entertainment insurance and other financial lines were moved from the various
property-casualty segments to the Other Insurance segment. CNA Re, Group
Operations, and Life Operations remain the same. A more detailed description
of each segment follows.

Property-Casualty Operations

Standard Lines

Standard Lines builds on CNA's relationship with the independent agency
distribution system and network of brokers to market a broad range of
property-casualty insurance products and services to small, mid-size and large
businesses. Also, Standard Lines, primarily through RSKCo, provides total risk
management services relating to claim services, loss control, cost management
and information services to the commercial insurance marketplace.

Standard Lines includes Property and Casualty, Excess & Surplus and RSKCo.

Property and Casualty ("P&C"): P&C provides standard property-casualty
insurance products such as workers' compensation, general and product
liability, property and commercial auto coverages through traditional and
innovative advanced financial risk products to a wide range of businesses. The
majority of P&C customers are small- and middle-market businesses, with less
than $1 million in annual insurance premiums. Most insurance programs are
provided on a guaranteed cost basis; however, P&C has the capability to offer
specialized, loss-sensitive insurance programs to those risks viewed as higher
risk and less predictable in exposure. The target market for these specialized
programs are large accounts within the Fortune 1000 businesses.

P&C has begun streamlining its field structure from 169 branch locations to
five regions consisting of 68 branch locations in 63 cities. Each branch
provides the marketing, underwriting and risk control expertise on the entire
portfolio of products. In addition, these branches provide claim services
through the same regional structure. These branches focus on the total claims
outcome through specialized claims handling and timely claims reporting. A
centralized processing center for small- and middle-market customers located
in Maitland, Florida, handles policy processing and accounting, and also acts
as a call center for all branches to optimize customer service. The branches
and service centers are all located in the United States.

Excess & Surplus ("E&S"): E&S provides specialized insurance and other
financial products for selected commercial risks on both an individual
customer or program basis. Risks insured by E&S are generally viewed as higher
risk and less predictable in exposure than those covered by standard insurance
markets. E&S's products are distributed throughout the United States through
specialist producers, program agents, and P&C's agents and brokers. E&S has
specialized

4

underwriting and claims resources in Chicago, New York City, Denver and
Columbus.

RSKCo operates within the same regionalized organization as P&C and provides
claim, loss control and related services.

Specialty Lines

Specialty Lines provides professional, financial and specialty property-
casualty products and services through a network of brokers, managing general
agencies and independent agencies. Specialty Lines clients include architects,
engineers, lawyers, health care professionals, financial intermediaries and
corporate directors and officers. Product offerings also include surety &
fidelity bonds, ocean marine insurance and vehicle and equipment warranty
services.

Specialty Lines is composed of the following businesses: CNA Pro, CNA
HealthPro, CNA Guaranty and Credit, Surety, CNA Global and Warranty.

CNA Pro: CNA Pro is one of the largest providers of management and
professional liability insurance and risk management services in the United
States. Products include errors and omissions insurance for professional
firms. CNA Pro offers directors and officers, errors and omissions, employment
practices liability, fiduciary and fidelity coverages. CNA Pro is the largest
insurer of architects and engineers, realtors and non-Big Five accounting
firms and is a significant underwriter of law firms.

CNA HealthPro: CNA HealthPro offers insurance products to serve the health
care delivery system. Key customer segments include allied health care
providers, dental professionals and mid-size and large health care facilities
and delivery systems. Additionally, CNA HealthPro offers risk management
consulting services. In addition, Caronia Corporation, an affiliate of CNA
HealthPro, provides third-party claims administration for healthcare providers
and facilities.

CNA Guaranty and Credit: CNA Guaranty and Credit provides credit insurance
on short-term trade receivables for domestic and international clients.
Products are distributed through captive agents. CNA Guaranty provides
reinsurance to insurers who provide financial guarantees to issuers of asset-
backed securities, money market funds and investment grade corporate debt
securities. The Guaranty business underwritten by CNA's insurance affiliates
is currently in run-off, which will be a multi-year process.

Surety: Surety consists primarily of CNA Surety Corporation ("CNA Surety"),
and its insurance subsidiaries. CNA Surety is traded on the New York Stock
Exchange (SUR). CNA Surety provides surety and fidelity bonds in all 50 states
through a combined network of approximately 35,000 independent agencies. CNA
owns approximately 64% of CNA Surety.

CNA Global consists of Marine and Global Standard Lines.

Marine: Marine serves domestic and global ocean marine needs, with markets
extending across North America, Europe and throughout the world. Marine offers
hull, cargo, primary and excess marine liability, marine claims and recovery
products and services. Business is sold through national brokers, regional
marine specialty brokers and independent agencies.

Global Standard Lines: Global Standard Lines is responsible for coordinating
and managing the direct business of the foreign property-casualty operations
of CNA. Global Standard Lines provides United States-based customers expanding
their operations overseas with a single source for their commercial insurance
needs. Global Standard Lines currently oversees operations in Hawaii, Europe,
Latin America, Canada and Asia.

Warranty: Warranty provides vehicle warranty services that protect
individuals and businesses from the financial burden associated with
breakdown, under-performance or maintenance of a product. Products are
distributed via a sales force employed or contracted through a program
administrator. Warranty consists primarily of CNA National Warranty
Corporation, which sells vehicle warranty services in the United States and
Canada.

CNA Re

CNA Re operates globally as a reinsurer in the broker market for treaty
products and in the direct market for facultative products.

CNA Re's operations also include the business of CNA Reinsurance Company
Limited ("CNA Re U.K."), a United Kingdom reinsurance company. As of the third
quarter of 2001, CNA Re's U.K. subsidiaries have ceased new

5

underwriting activities. CNA plans to dispose of the United Kingdom
subsidiaries of CNA Re, with the intent of completing the disposition in 2002.
Such a disposition is subject to regulatory approval. See "Management's
Discussion and Analysis - Investments" included in Item 7 for additional
information.

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

Group Operations

Group Operations provides group life and health insurance products and
services to employers, affinity groups and other entities that purchase
insurance as a group. Products include group term life insurance, short-term
and long-term disability, statutory disability, long-term care and accident
products. Group Operations also provides health insurance to federal
employees.

Group Operations is composed of three principal groups: Group Benefits,
Group Reinsurance and Federal Markets.

Group Operations also assumes reinsurance from unaffiliated entities on
group life, accident and health products, as well as excess medical risk
coverages for self-funded employers.

Group Operations is the second largest provider of health insurance benefits
to federal employees, retirees and their families, insuring nearly one million
members under the Mail Handlers Benefit Plan offered through the Federal
Employees Health Benefit Plan.

Life Operations

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

Life Operations is composed of four principal groups: Individual Life,
Retirement Services, Long Term Care and Other Operations.

Individual Life: Individual Life primarily offers level premium term life
insurance, universal life insurance and related products.

Retirement Services: Retirement Services markets annuities and investment
products and services to both retail and institutional customers.

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

Other Operations: Other Operations businesses include operations in certain
international markets and viatical settlements. Consistent with Life
Operations business strategy to sharpen its focus on insurance products and
services, CNA has decided to cease purchasing new viatical policies
indefinitely.

Other

The Other Insurance segment is principally comprised of Personal Insurance,
losses and expenses related to the centralized adjusting and settlement of
APMT claims, certain run-off insurance operations and other operations.

On October 1, 1999, certain CNA subsidiaries completed a transaction with
The Allstate Corporation ("Allstate") to transfer substantially all of CNA's
Personal Insurance lines of business. See Note 12 of the Notes to Consolidated
Financial Statements included in Item 8 for discussion of the Personal
Insurance transaction.

APMT consists of the losses and expenses related to the centralized
adjusting and settlement of APMT claims that were formerly included in the
property-casualty segments. See Note 7 of the Notes to Consolidated Financial
Statements included in Item 8 for a discussion of APMT reserves.

6

Run-off insurance operations consists of entertainment insurance,
agriculture insurance and other financial lines as well as the direct
financial guarantee business underwritten by CNA's insurance affiliates and
other insurance run-off operations.

Other operations include CNA's interest expense on corporate borrowings,
asbestos claims related to Fibreboard Corporation, eBusiness initiatives, CNA
UniSource and inter-company eliminations. CNA UniSource provides human
resources, information technology, payroll processing and professional
employer organization services.

Supplementary Insurance Data

The following table sets forth supplementary insurance data:



Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions of dollars, except ratio information)


Trade Ratios - GAAP basis (a):
Loss ratio .......................... 125.2% 81.1% 87.1%
Expense ratio ....................... 36.7 30.4 32.4
Combined ratio (before policyholder
dividends) ......................... 161.9 111.5 119.5
Policyholder dividend ratio ......... 1.5 .9 .3

Trade Ratios - Statutory basis (a):
Loss ratio .......................... 126.3% 80.4% 87.3%
Expense ratio ....................... 32.3 33.3 33.5
Combined ratio (before policyholder
dividends) ......................... 158.6 113.7 120.8
Policyholder dividend ratio ......... 1.7 1.2 .3

Gross Life Insurance In-Force:
Life (b) ............................ $426,822.0 $462,799.0 $394,743.0
Group ............................... 70,910.0 71,982.0 75,247.0
- ------------------------------------------------------------------------------
$497,732.0 $534,781.0 $469,990.0
==============================================================================

Other Data - Statutory basis (c):
Property-casualty capital and
surplus* ........................... $ 6,225.0 $ 8,373.0 $ 8,679.0
Life capital and surplus ............ 1,752.0 1,274.0 1,222.0
Property-casualty written premium to
surplus ratio ...................... 1.3 1.1 1.0
Life capital and surplus-percent of
total liabilities .................. 25.3% 24.5% 21.9%
Participating policyholders-percent
of gross life insurance in force ... .4% .4% .5%

* Surplus includes the property-casualty companies' equity ownership of the
life insurance subsidiaries.


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

(b) Lapse ratios for individual life insurance, as measured by surrenders
and withdrawals as a percentage of average ordinary life insurance in-force,
were 8.7%, 12.7% and 10.9% in 2001, 2000 and 1999, respectively.

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

7

The following table displays the distribution of gross written premiums for
CNA's operations:




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------


Illinois ............................... 8.3% 9.2% 8.6%
New York ............................... 7.9 7.3 7.4
California ............................. 6.8 6.0 7.1
Florida ................................ 6.2 4.8 4.6
Texas .................................. 5.8 4.7 5.4
New Jersey ............................. 4.4 3.4 3.5
Pennsylvania ........................... 4.3 3.8 4.1
Maryland ............................... 2.4 5.6 4.5
United Kingdom ......................... 3.3 5.3 5.8
All other states, countries or political
subdivisions (a) ...................... 50.6 49.9 49.0
- ------------------------------------------------------------------------------
100.0% 100.0% 100.0%
==============================================================================

- ---------------
(a) No other individual state, country or political subdivision accounts for
more than 3.0% of gross written premium.

Approximately 4.8%, 8.2% and 7.6% of CNA's gross written premiums are
derived from outside of the United States for the years ended December 31,
2001, 2000 and 1999. Premiums from any individual foreign country excluding
the United Kingdom, which is stated in the table above, were not significant.

Property-Casualty Claim and Claim Adjustment Expenses

The following loss reserve development table illustrates the change over
time of reserves established for property-casualty claims and claim adjustment
expenses at the end of the preceding ten calendar years for CNA's property-
casualty operations. The first section shows the reserves as originally
reported at the end of the stated year. The second section, reading down,
shows the cumulative amounts paid as of the end of successive years with
respect to the originally reported reserve liability. The third section,
reading down, shows re-estimates of the originally recorded reserve as of the
end of each successive year which is the result of CNA's property-casualty
insurance subsidiaries' expanded awareness of additional facts and
circumstances that pertain to the unsettled claims. The last section compares
the latest re-estimated reserves to the reserves originally established, and
indicates whether the original reserves were adequate or inadequate to cover
the estimated costs of unsettled claims. This table is cumulative and,
therefore, ending balances should not be added since the amount at the end of
each calendar year includes activity for both the current and prior years.

8




Schedule of Property-Casualty Loss Reserve Development
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
(a) (a) (a) (a) (b) (c) (d)
- -----------------------------------------------------------------------------------------------------------
(In millions of dollars)


Originally reported
gross reserves for
unpaid claim and
claim expenses ...... 20,812 21,639 31,044 29,357 28,533 28,317 26,631 26,408 $29,551
Originally reported
ceded recoverable ..... 2,491 2,705 6,089 5,660 5,326 5,424 6,273 7,568 11,798
- -----------------------------------------------------------------------------------------------------------
Originally reported net
reserves for
unpaid claim and
claim expenses ....... 14,415 17,167 18,321 18,934 24,955 23,697 23,207 22,893 20,358 18,840 17,753
Cumulative-net paid as
of:
One year later ...... 3,411 3,706 3,629 3,656 6,510 5,851 5,954 7,321 6,546 7,686 -
Two years later ..... 6,024 6,354 6,143 7,087 10,485 9,796 11,394 12,241 11,935 - -
Three years later ... 7,946 8,121 8,764 9,195 13,363 13,602 14,423 16,020 - - -
Four years later .... 9,218 10,241 10,318 10,624 16,271 15,793 17,042 - - - -
Five years later .... 10,950 11,461 11,378 12,577 17,947 17,736 - - - - -
Six years later ..... 11,951 12,308 13,100 13,472 19,465 - - - - - -
Seven years later ... 12,639 13,974 13,848 14,394 - - - - - - -
Eight years later ... 14,271 14,640 14,615 - - - - - - - -
Nine years later .... 14,873 15,319 - - - - - - - - -
Ten years later ..... 15,476 - - - - - - - - - -
Net reserves
re-estimated as of:
End of initial year . 14,415 17,167 18,321 18,934 24,955 23,697 23,207 22,893 20,358 18,840 17,753
One year later ...... 16,032 17,757 18,250 18,922 24,864 23,441 23,470 23,920 20,785 21,306 -
Two years later ..... 16,810 17,728 18,125 18,500 24,294 23,102 23,717 23,774 22,903 - -
Three years later ... 16,944 17,823 17,868 18,088 23,814 23,270 23,414 25,724 - - -
Four years later .... 17,376 17,765 17,511 17,354 24,092 22,977 24,751 - - - -
Five years later .... 17,329 17,560 17,082 17,506 23,854 24,105 - - - - -
Six years later ..... 17,293 17,285 17,176 17,248 24,883 - - - - - -
Seven years later ... 17,069 17,398 17,017 17,751 - - - - - - -
Eight years later ... 17,189 17,354 17,500 - - - - - - - -
Nine years later .... 17,174 17,834 - - - - - - - - -
Ten years later ..... 17,679 - - - - - - - - - -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (3,264) (667) 821 1,183 72 (408)(1,544) (2,831)(2,545) (2,466) -
===========================================================================================================
Reconciliation to
gross re-estimated
reserves:
Net reserves
re-estimated ...... 17,679 17,834 17,500 17,751 24,883 24,105 24,751 25,724 22,903 21,306 -
Re-estimated ceded
recoverable ....... 1,888 2,201 6,191 5,434 4,805 4,925 6,810 8,185 -
- -----------------------------------------------------------------------------------------------------------
Total gross
re-estimated reserves 17,679 17,834 19,388 19,952 31,074 29,539 29,556 30,649 29,713 29,491 -
===========================================================================================================
Net (deficiency)
redundancy related to:
Asbestos claims ..... (3,754) (2,068)(1,469)(1,435) (1,662)(1,763)(1,660) (1,416) (837) (772) -
Environmental claims (1,272) (1,230) (787) (619) (656) (600) (617) (395) (487) (473) -
- -----------------------------------------------------------------------------------------------------------
Total asbestos and
environmental ...... (5,026) (3,298)(2,256)(2,054) (2,318)(2,363)(2,277) (1,811)(1,324) (1,245) -
Other claims ........ 1,762 2,631 3,077 3,237 2,390 1,955 733 (1,020)(1,221) (1,221) -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (3,264) (667) 821 1,183 72 (408)(1,544) (2,831)(2,545) (2,466) -
===========================================================================================================

- ----------------
(a) Reflects reserves of CNA's property and casualty insurance subsidiaries,
excluding Continental reserves which were acquired on May 10, 1995.
Accordingly, the reserve development (net reserves recorded at the end of the
year, as initially estimated, less net reserves re-estimated as of subsequent
years) does not include Continental.
(b) Includes Continental gross reserves of $9,713 million and net reserves
of $6,063 million acquired on May 10, 1995 and subsequent development thereon.
(c) Ceded recoverable includes reserves transferred under retroactive
reinsurance agreements of $784 million, as of December 31, 1999.
(d) Effective January 1, 2001, CNA established a new life insurance company,
CNAGLAC. Further, on January 1, 2001 approximately $1,055 million of reserves
were transferred from CCC to CNAGLAC.

See Notes 1 and 7 of the Notes to Consolidated Financial Statements,
included in Item 8, for information regarding property-casualty claim and
claim adjustment expenses including reserve development for asbestos and
environmental claims.

9

INVESTMENTS

See Notes 2, 3 and 4 of the Notes to Consolidated Financial Statements,
incorporated by reference in Item 8, for information regarding the investment
portfolio.

Additional information as to the Company's investments is set forth in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, and is incorporated by reference.

OTHER

Competition: CNA competes with a large number of stock and mutual insurance
and reinsurance companies and other entities for both producers and customers
and must continuously allocate resources to refine and improve its insurance
and reinsurance products and services.

There are approximately 2,450 individual companies that sell property-
casualty insurance in the United States. CNA's consolidated property-casualty
subsidiaries ranked as the ninth largest property-casualty insurance
organization in the United States based upon 2000 statutory net written
premiums. CNA Re ranked as the 14th largest property-casualty reinsurance
organization in the United States, based upon 2000 statutory net written
premiums, which are significantly higher than net written premiums in 2001.

There are approximately 1,010 companies selling life insurance in the United
States. CNA is ranked as the 40th largest life-health insurance organization
in the United States based on 2000 consolidated statutory premiums written.

Dividends by Insurance Subsidiaries: The payment of dividends to CNA by its
subsidiaries without prior approval of the affiliates' domiciliary state
insurance commissioners is limited by formula. This formula varies by state.
The formula used by the majority of states provides that the greater of 10% of
prior year statutory surplus or prior year statutory net income, less the
aggregate of all dividends paid during the 12 months prior to the date of
payment is available to be paid as a dividend to the parent company.

Dividends from the CCC Pool 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 (the "Department") may be paid only from
earned surplus, which is calculated by removing unrealized gains (which under
statutory accounting includes cumulative earnings of CCC's subsidiaries) from
unassigned surplus. As of December 31, 2001, CCC is in a negative earned
surplus position. In February of 2002, the Department approved an
extraordinary dividend of $117 million to be used to fund CNA's 2002 debt
service requirements. Until CCC is in a positive earned surplus position, all
dividends require prior approval of the Illinois Insurance Department.

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

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

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

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

Reform of the U.S. tort liability system is another issue facing the
insurance industry. Over the last decade, many states have passed some type of
reform, but more recently, a number of state courts have modified or
overturned these

10

reforms. Additionally, new causes of action and theories of damages continue
to be proposed in state court actions or by legislatures. Continued
unpredictability in the law means that insurance underwriting and rating is
expected to be difficult in commercial lines, professional liability and some
specialty coverages.

Although the federal government and its regulatory agencies do not directly
regulate the business of insurance, federal legislative and regulatory
initiatives can impact the insurance business in a variety of ways. These
initiatives and legislation include tort reform proposals; proposals to
overhaul the Superfund hazardous waste removal and liability statute;
additional financial services modernization legislation, which could include
provisions to have an alternate federal system of regulation for insurance
companies; and various tax proposals affecting insurance companies.

CNA's domestic insurance subsidiaries are subject to risk-based capital
requirements. Risk-based capital is a method developed by the National
Association of Insurance Commissioners ("NAIC") to determine the minimum
amount of statutory capital appropriate for an insurance company to support
its overall business operations in consideration of its size and risk profile.
The formula for determining the amount of risk-based capital specifies various
factors, weighted based on the perceived degree of risk, that are applied to
certain financial balances and financial activity. The adequacy of a company's
actual capital is evaluated by a comparison to the risk-based capital results,
as determined by the formula. Companies below minimum risk-based capital
requirements are classified within certain levels, each of which requires
specified corrective action. As of December 31, 2001 and 2000, all of CNA's
domestic insurance subsidiaries exceeded the minimum risk-based capital
requirements.

CNA Re's principal United Kingdom operations are contained in CNA
Reinsurance Company Ltd. The statutory surplus of CNA Reinsurance Company Ltd.
is below the required regulatory minimum surplus level at December 31, 2001.

Subsidiaries with insurance operations outside the United States are also
subject to regulation in the countries in which they operate.

Reinsurance: See Notes 1 and 15 of the Notes to Consolidated Financial
Statements, included in Item 8, for information related to CNA's reinsurance
activities.

11

Properties: CNA Plaza serves as the executive office for CNA and its
insurance subsidiaries. An adjacent building (located at 55 E. Jackson Blvd.),
jointly owned by Continental Casualty Company and Continental Assurance
Company, is partially situated on grounds under leases expiring in 2058.
Approximately 45% of the adjacent building is rented to non-affiliates. CNA
leases office space in various cities throughout the United States and in
other countries. The following table sets forth certain information with
respect to the principal office buildings owned or leased by CNA:




Size
Location (square feet) Principal Usage
- ------------------------------------------------------------------------------------------------

Owned:
CNA Plaza 1,144,378 Principal Executive Offices of CNA
333 S. Wabash
Chicago, Illinois

55 E. Jackson Blvd. 440,292 Principal Executive Offices of CNA
Chicago, Illinois

100 CNA Drive 251,363 Life Insurance Offices
Nashville, Tennessee

1111 E. Broad St. 225,470 Property-Casualty Insurance Offices
Columbus, Ohio

1110 Ward Avenue 186,687 Property-Casualty Insurance Offices
Honolulu, Hawaii

Leased:
40 Wall Street 199,238 Property-Casualty Insurance Offices
New York, New York

2405 Lucien Way 178,744 Property-Casualty Insurance Offices
Maitland, Florida

3500 Lacey Road 168,793 Property-Casualty Insurance Offices
Downers Grove, Illinois

333 Glen Street 164,032 Property-Casualty Insurance Offices
Glens Falls, New York

1100 Cornwall Road 147,884 Property-Casualty Insurance Offices
Monmouth Junction, New Jersey

600 North Pearl Street 139,151 Property-Casualty Insurance Offices
Dallas, Texas


12

LORILLARD, INC.

The Company's wholly owned subsidiary, Lorillard, Inc. ("Lorillard"), is
engaged, through its subsidiaries, in the production and sale of cigarettes.
The principal cigarette brand names of Lorillard are Newport, Kent, True,
Maverick and Old Gold. Lorillard's largest selling brand is Newport, which
accounted for approximately 85% of Lorillard's sales in 2001.

Substantially all of Lorillard's sales are in the United States. Lorillard's
major trademarks outside of the United States were sold in 1977. Lorillard
accounted for 23.32%, 20.43% and 18.96% of the Company's consolidated total
revenue for the years ended December 31, 2001, 2000 and 1999, respectively.

For a number of years Lorillard and other cigarette manufacturers have been
faced with a number of factors which adversely affect Lorillard's business,
including: lawsuits against tobacco manufacturers by private plaintiffs and
governmental agencies, some of which have resulted in substantial jury
verdicts; enacted and proposed legislation and regulation intended to
discourage and restrict the marketing and smoking of cigarettes; and an
overall decline in the social acceptability of smoking; coupled with increased
pressure from anti-tobacco groups.

See Item 3 of this Report for information with respect to litigation against
Lorillard including litigation seeking substantial compensatory and punitive
damages for adverse health effects claimed to have resulted from the use of
cigarettes and smokeless tobacco, and from exposure to tobacco smoke, and
claims brought by cigarette wholesalers and others alleging violations of
antitrust laws.

On November 23, 1998, Lorillard, Philip Morris, R.J. Reynolds, Brown &
Williamson and other manufacturers of tobacco products entered into a Master
Settlement Agreement (the "MSA") with 46 states, the District of Columbia, the
Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and
the Commonwealth of the Northern Mariana Islands (collectively, the "Settling
States") to settle the asserted and unasserted health care cost recovery and
certain other claims of those states and territories. Lorillard and the other
major U.S. tobacco manufacturers had previously settled similar claims brought
by Florida, Texas, Minnesota and Mississippi (together with the MSA, the
"State Settlement Agreements").

Annual payments under the State Settlement Agreements are expected to be in
excess of $1.0 billion in future years. The State Settlement Agreements and
certain ancillary agreements are included as exhibits to this Report (Exhibits
10.06 through 10.21) and are incorporated by reference thereto. See also
Management's Discussion and Analysis - Results of Operations, included in Item
7.

In addition, pursuant to the terms of the MSA, Lorillard and other industry
participants agreed to various restrictions and limitations regarding the
advertising, promotion and marketing of tobacco products in the United States.

Legislation and Regulation: Federal Legislation - The Federal Comprehensive
Smoking Education Act, which became effective in 1985, requires the use on
cigarette packaging and advertising of one of the following four warning
statements, on a rotating basis: (1) "SURGEON GENERAL'S WARNING: Smoking
Causes Lung Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy."
(2) "SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious
Risks to Your Health." (3) "SURGEON GENERAL'S WARNING: Smoking By Pregnant
Women May Result in Fetal Injury, Premature Birth, and Low Birth Weight." (4)
"SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide." This
law also requires that each person who manufactures, packages or imports
cigarettes shall annually provide to the Secretary of Health and Human
Services a list of the ingredients added to tobacco in the manufacture of
cigarettes. This list of ingredients may be submitted in a manner which does
not identify the company which uses the ingredients or the brand of cigarettes
which contain the ingredients.

Prior to the effective date of the Federal Comprehensive Smoking Education
Act, federal law had, since 1965, required that cigarette packaging bear a
warning statement which from 1970 to 1985 was as follows: "Warning: The
Surgeon General Has Determined That Cigarette Smoking Is Dangerous To Your
Health." In addition, in 1972 Lorillard and other cigarette manufacturers
agreed, pursuant to consent orders entered into with the Federal Trade
Commission (the "FTC"), to include this health warning statement in print
advertising, on billboards and on certain categories of point-of-sale display
materials relating to cigarettes. Furthermore, advertising of cigarettes has
been prohibited on radio and television since 1971.

From time to time, bills have been introduced in Congress, among other
things, to end or limit the price supports for leaf tobacco; to prohibit all
tobacco advertising and promotion; to require new health warnings on cigarette
packages and advertising; to authorize the establishment of various anti-
smoking education programs; to provide that current federal law should not be
construed to relieve any person of liability under common or state law; to
permit state and local governments to restrict the sale and distribution of
cigarettes; concerning the placement of advertising of tobacco

13

products; to provide that cigarette advertising not be deductible as a
business expense; to prohibit the mailing of unsolicited samples of cigarettes
and otherwise to restrict the sale or distribution of cigarettes; to impose an
additional, or to increase existing, excise taxes on cigarettes; to require
that cigarettes be manufactured in a manner that will cause them, under
certain circumstances, to be self-extinguishing; and to subject cigarettes to
regulation in various ways by the U.S. Department of Health and Human Services
or other regulatory agencies, including regulation by the FDA under the Food,
Drug and Cosmetics Act.

In 1995, Congress passed legislation prohibiting the sale of cigarettes by
vending machines on certain federal property, and the General Services
Administration has published implementing regulations. In January 1996, the
Substance Abuse and Mental Health Services Administration issued final
regulations implementing a 1992 law (Section 1926 of the Public Health Service
Act), which requires the states to enforce their tobacco sales minimum age
laws as a condition of receiving federal substance abuse block grants.

Food and Drug Administration Regulation of Tobacco Products - In 1996, the
FDA published regulations (the "FDA Regulations") which would have severely
restricted cigarette advertising and promotion and limited the manner in which
tobacco products could be sold. In enacting the FDA Regulations, the FDA
determined that nicotine is a drug and that cigarettes are a nicotine delivery
system and, accordingly, subject to FDA regulatory authority as medical
devices. The FDA premised its regulations on the need to reduce smoking by
under age youth and young adults. The FDA Regulations included the following:

(i) Regulations regarding minimum sales age. These regulations would have
made unlawful the sale of cigarettes to anyone under age 18. These regulations
would have also required proof of age to be demanded from any person under age
27 who attempts to purchase cigarettes.

(ii) Regulations regarding advertising and billboards, vending machines,
self-service displays, sampling premiums, and package labels. These
regulations would have limited all cigarette advertising to black and white,
text only format in most publications and outdoor advertising such as
billboards. The regulations also would have prohibited billboards advertising
cigarettes within 1,000 feet of a school or playground, required that the
established name for the product ("Cigarettes") and an intended use statement
("Nicotine - Delivery Device For Persons 18 or Older") be included on all
cigarette packages and advertising, banned vending machine sales, product
sampling, and the use of cigarette brand names, logos and trademarks on
premium items, and prohibited the furnishing of any premium item in
consideration for the purchase of cigarettes or the redemption of proofs-of-
purchase coupons.

(iii) Regulations which would have prohibited use of cigarette brand names to
sponsor sporting and cultural events and required cigarette manufacturers to
comply with certain stringent FDA regulations (known as "good manufacturing
practices") governing the manufacture and distribution of medical devices.

Lorillard and other cigarette manufacturers filed a lawsuit in the U.S.
District Court in North Carolina challenging the FDA's assertion of
jurisdiction over cigarettes. Lower court rulings in this litigation were
appealed to the U.S. Supreme Court which, on March 21, 2000, held that
Congress did not give the FDA authority to regulate tobacco products under the
Federal Food, Drug and Cosmetic Act and, accordingly, the FDA's assertion of
jurisdiction over tobacco products was impermissible under that Act. Since the
Supreme Court decision, various proposals have been made for federal and state
legislation to regulate cigarette manufacturers.

In September of 2000, former President Clinton appointed a Presidential
commission to collect information and make recommendations regarding changes
in the tobacco farming economy. In May of 2001, the commission issued a final
report recommending, among other things, that "Congress authorize the FDA to
establish fair and equitable regulatory mechanisms over the manufacture, sale,
marketing, distribution and labeling of tobacco products." In addition, the
final report recommended a $0.17 increase in the federal excise tax on each
pack of cigarettes sold in the United States to fund various of the report's
recommendations. Lorillard cannot predict the ultimate outcome of the
commission's recommendations.

Congressional advocates of FDA regulation have introduced legislation that
would give the FDA authority to regulate the manufacture, sale, distribution
and labeling of tobacco products to protect public health for consideration by
the 107th Congress. Lorillard cannot predict the ultimate outcome of this
proposal. In addition, in December of 1999, the FDA requested the Institute of
Medicine, a private, non-profit organization which advises the federal
government on medical issues, to convene a committee of experts to formulate
scientific methods and standards for the assessment of potential reduced-
exposure products ("PREPs"), including conventional and alternative
cigarettes.

On February 22, 2001, the committee issued a draft report recommending that
Congress enact legislation enabling a suitable agency to regulate tobacco-
related products that purport to reduce exposure to one or more tobacco
toxicants or

14

to reduce risk of disease, and to implement other policies designed to reduce
the harm from tobacco use. The report recommended regulation of all tobacco
products, including PREPS. Lorillard cannot predict the ultimate outcome of
the recommendations provided in the committee's report.

Environmental Tobacco Smoke - Studies and reports with respect to the
alleged health risk to nonsmokers of environmental tobacco smoke ("ETS") have
received significant publicity. In 1986, the Surgeon General of the United
States and the National Academy of Sciences reported that ETS exposes
nonsmokers to an increased risk of lung cancer and respiratory illness. In
January of 1993, the United States Environmental Protection Agency released a
report (the "EPA Risk Assessment") concluding that ETS is a human lung
carcinogen in adults, and causes respiratory effects in children, including
increased risk of lower respiratory tract infections, increased prevalence of
fluid in the middle ear and additional episodes and increased severity and
frequency of asthma. Many scientific papers on ETS have been published since
the EPA report, with variable conclusions.

In recent years, many federal, state, local and municipal governments and
agencies, as well as private businesses, have adopted legislation, regulations
or policies which prohibit or restrict, or are intended to discourage,
smoking, including legislation, regulations or policies prohibiting or
restricting smoking in various places such as public buildings and facilities,
stores and restaurants and on airline flights and in the workplace. This trend
has increased significantly since the release of the EPA Risk Assessment.
Additional laws, regulations and policies intended to prohibit, restrict or
discourage smoking are being proposed or considered by various federal, state
and local governments, agencies and private businesses with increasing
frequency. In July of 1998, a federal judge struck down the lung cancer
related portions of the EPA's scientific risk assessment in an opinion which
is currently on appeal.

In September of 1997, the California Environmental Protection Agency
released a report (the "Cal/EPA Report"), concluding that ETS causes specified
development, respiratory, carcinogenic, and cardiovascular effects including
lung and nasal sinus cancer, heart disease, sudden infant death syndrome,
respiratory infections and asthma induction and exacerbation in children. The
Cal/EPA Report was subsequently released as a monograph by the National Cancer
Institute in November of 1999. In May of 2000, the Department of Health and
Human Service's National Toxicology Program listed ETS as "known to be a human
carcinogen." Various public health organizations have also issued statements
on environmental tobacco smoke and its health effects.

The California Air Resources Board is in the early stages of the process of
determining whether to identify ETS as a toxic air contaminant, or "TAC,"
under the Toxic Air Contaminant Identification and Control Act, referred to as
the "Tanner Act." The Children's Environmental Health Protection Act amended
the Tanner Act to require a review of TACs for the purpose of ensuring
adequate protection of children's health, and to tighten existing controls as
needed. If California, on the basis of its assessments of risk and exposure,
identifies ETS as a TAC, California could initiate the control phase of the
Tanner Act, which involves adoption of measures to reduce or eliminate
emissions. These measures could include further restrictions regarding venues
where smoking is permitted or controls on product emissions.

Ingredient Disclosure - On August 2, 1996, the Commonwealth of Massachusetts
enacted legislation requiring each manufacturer of cigarettes and smokeless
tobacco sold in Massachusetts to submit to the Department of Public Health
("DPH") an annual report, beginning in 1997, (1) identifying for each brand
sold certain "added constituents," and (2) providing nicotine yield ratings
and other information for certain brands based on regulations promulgated by
the DPH. The legislation provides for the public release of this information,
which includes trade secret ingredients used in cigarettes.

In 1996, several cigarette and smokeless tobacco manufacturers filed suit in
federal district court in Boston challenging the legislation. On December 10,
1997, the court issued a preliminary injunction, enjoining the required
submission of ingredient data to the DPH. The requirement to submit the
nicotine yield ratings and other information was not enjoined, and the
cigarette and smokeless tobacco manufacturers submitted their data to the DPH
on December 15, 1997 and again on each December 1 since 1998. The district
court ruled on September 7, 2000 that the Massachusetts law and its
implementing regulations were unconstitutional as to the required submission
of ingredient data. The Commonwealth of Massachusetts appealed to the U.S.
Circuit Court for the First Circuit, and a three-judge panel of the First
Circuit reversed the district court's ruling on October 16, 2001. The
cigarette and smokeless tobacco manufacturers filed petitions for an en banc
rehearing on October 30, 2001 and the First Circuit subsequently granted the
petitions. Oral argument on the rehearing occurred on January 7, 2002. The
panel has not yet issued its decision.

Any impact on Lorillard from the legislation and its implementing
regulations cannot now be predicted.

Other similar laws and regulations have been enacted or considered by other
state governments, and could have a material adverse effect on the financial
condition and results of operations of Lorillard and the Company if
implemented without adequate provisions to protect the manufacturers' trade
secrets from being disclosed. The State of Texas has implemented legislation
similar to the Massachusetts measure described above. However, the Texas
legislation does not

15

allow for the public release of trade secret information.

Fire-Safety Standards - In August of 2000, New York State enacted
legislation that requires the State's Office of Fire Prevention and Control to
promulgate by January 1, 2003 fire-safety standards for cigarettes sold in New
York. The legislation requires that cigarettes sold in New York meet ignition
propensity performance standards established by the Office of Fire Prevention
and Control. All cigarettes sold in New York will be required to meet the
established standards within 180 days after the standards are promulgated.
Lorillard cannot predict the impact of this law on its business until the
standards are published. Similar legislation is being considered in other
states and localities and at the federal level.

Advertising and Sales Promotion: Lorillard advertises its products to adult
smokers in magazines, newspapers, direct mail and point-of-sale display
materials. In addition, Lorillard promotes its cigarette brands to adult
smokers through distribution of store coupons, retail price promotions, and
personal contact with distributors and retailers. Lorillard believes that it
conducts these activities in accordance with the terms of the MSA and other
applicable restrictions.

As a general matter, Lorillard allocates its marketing expenditures among
brands on the basis of marketplace opportunity and profitable return. In
particular, Lorillard focuses its marketing efforts on the premium segment of
the U.S. cigarette industry, with a specific focus on Newport.

Advertising of tobacco products through television and radio has been
prohibited since 1971. In addition, advertising and promotion activities by
Lorillard and other major tobacco manufacturers have been severely restricted
by the State Settlement Agreements and could be further restricted by proposed
federal, state and local laws and regulations. Pursuant to the MSA, Lorillard
and the other major tobacco product manufacturers have agreed to various
restrictions and limitations regarding the advertising, promotion and
marketing of tobacco products in the United States. Among other things, the
MSA prohibits the targeting of youth in the advertising, promotion or
marketing of tobacco products; bans the use of cartoon characters in all
tobacco advertising and promotion; limits each tobacco manufacturer to one
event sponsorship during any twelve-month period, which may not include major
team sports or events in which the intended audience includes a significant
percentage of youth; bans all outdoor advertising of tobacco products with the
exception of small signs at retail establishments that sell tobacco products;
bans tobacco manufacturers from offering or selling apparel and other
merchandise that bears a tobacco brand name, subject to specified exceptions;
prohibits the distribution of free samples of tobacco products except within
adult-only facilities; prohibits payments for tobacco product placement in
various media; and bans gift offers based on the purchase of tobacco products
without sufficient proof that the intended gift recipient is an adult.

Many states, cities and counties have enacted legislation or regulations
further restricting tobacco advertising.

There may be additional state and federal legislative and regulatory
initiatives relating to the advertising and sales promotion of cigarettes in
the future. Lorillard cannot predict the impact of such initiatives on its
marketing and sales efforts.

Lorillard has funded and plans to continue to fund a Youth Smoking
Prevention Program, which is designed to discourage youth from smoking. The
program addresses not only youth, but also parents and, through the "We Card"
program, retailers, to prevent purchase of cigarettes by underage purchasers.
In accordance with the MSA, Lorillard has determined not to advertise its
cigarettes in magazines with large readership among people under the age of
18.

Introduction of new brands, brand extensions and packings require the
expenditures of substantial sums for advertising and sales promotion, with no
assurance of consumer acceptance. The advertising media presently used by
Lorillard includes magazines, newspapers, direct mail and point-of-sale
display materials. Sales promotion activities are conducted by distribution of
store coupons, point-of-sale display advertising, advertising of promotions in
print media, and personal contact with distributors, retailers and consumers.

Distribution Methods: Lorillard sells its products primarily to
distributors, who in turn service retail outlets; chain store organizations;
and government agencies, including the U.S. Armed Forces. Upon completion of
the manufacturing process, Lorillard ships cigarettes to public distributing
warehouse facilities for rapid order fulfillment to wholesalers and other
direct buying customers. Lorillard retains a portion of its manufactured
cigarettes at its Greensboro central distribution center and Greensboro cold-
storage facility for future finished goods replenishment.

As of December 31, 2001, Lorillard had approximately 799 direct buying
customers servicing more than 400,000 retail accounts. Lorillard does not sell
cigarettes directly to consumers. During 2001, 2000 and 1999, sales made by
Lorillard to McLane Company, Inc., a wholesale distributor wholly owned by
Wal-Mart Stores, Inc., comprised 15%, 15% and 13%, respectively, of
Lorillard's revenues. No other customer accounted for more than 10% of 2001,
2000 or 1999 sales. Lorillard does not have any backlog orders.

16

Most of Lorillard's customers buy cigarettes on a next-day-delivery basis.
Approximately 90% of Lorillard's customers purchase cigarettes using
electronic funds transfer, which provides immediate payment to Lorillard.

Lorillard's sales personnel monitor inventories, work with retailers on
displays and signs, and enter into promotional arrangements with retailers
from time to time.

Raw Materials and Manufacturing: In its production of cigarettes, Lorillard
uses domestic burley tobacco, flue-cured leaf tobacco grown in the United
States and abroad, and aromatic tobacco grown primarily in Turkey and other
Near Eastern countries. A domestic supplier manufactures all of Lorillard's
reconstituted tobacco.

Lorillard purchases more than 90% of its domestic leaf tobacco from Dimon
International, Inc. Lorillard directs Dimon in the purchase of tobacco
according to Lorillard's specifications for quality, grade, yield, chemistry,
particle size, moisture content and other characteristics. Dimon purchases and
processes the whole leaf and then dries and bundles it for shipment to and
storage at Lorillard's Danville facility.

Dimon historically has procured most of Lorillard's leaf tobacco
requirements through commission buyers at tobacco auctions. However, the
tobacco industry is currently shifting to direct contract purchasing from
tobacco farmers. Dimon has stated in its public filings that it believes it is
well prepared to participate in direct contracting with tobacco farmers in the
United States and that it does not expect any material economic effect from
the progressive shift from the auction system to direct contract buying.
Lorillard entered into a new contract with Dimon to reflect the transition
from auction to direct contract purchasing.

In the event that Dimon becomes unwilling or unable to supply leaf tobacco
to Lorillard, Lorillard believes that it can readily obtain high-quality leaf
tobacco from well-established, alternative industry sources, including
Standard Commercial Corporation and Universal Corporation.

Due to the varying size and quality of annual crops and other economic
factors, including U.S. tobacco production controls, tobacco prices have
historically fluctuated. The U.S. price supports that accompany production
controls have inflated the market price of tobacco. In addition, the
transition in tobacco purchasing from auction markets to direct farmer
contracting may increase the market price of domestically grown tobacco.
However, Lorillard does not believe that this increase, if any, will have a
material effect on its business. Over the past five years, prices paid by
Lorillard for tobacco have risen less than the U.S. rate of inflation, as
measured by the U.S. Consumer Price Index.

Lorillard stores its tobacco in 29 storage warehouses on its 130 acre
Danville facility. To protect against loss, amounts of all types and grades of
tobacco are stored in each warehouse. Because the process of aging tobacco
normally requires approximately two years, Lorillard maintains large
quantities of leaf tobacco at all times. Lorillard believes its current
tobacco supplies are adequately balanced for its present production
requirements. If necessary, Lorillard can purchase aged tobacco in the open
markets to supplement existing inventories.

Lorillard produces cigarettes at its Greensboro manufacturing plant, which
has a production capacity of approximately 193 million cigarettes per day and
approximately 55 billion cigarettes per year. Through various automated
systems and sensors, Lorillard actively monitors all phases of production to
promote quality and compliance with applicable regulations.

Prices: Lorillard believes that the volume of U.S. cigarette sales is
sensitive to price changes. Changes in pricing by Lorillard or other cigarette
manufacturers could have an adverse impact on Lorillard's volume of units
sold, which in turn could have an adverse impact on Lorillard's profits and
earnings. Lorillard makes independent pricing decisions based on a number of
factors. Lorillard cannot predict the potential adverse impact of price
changes on industry volume or Lorillard volume, on the mix between premium and
discount sales, on Lorillard's market share or on Lorillard's profits and
earnings. During 2001, Lorillard increased its net wholesale price of its
cigarettes by an aggregate of $13.58 per thousand cigarettes ($0.27 per pack
of 20 cigarettes).

Taxes: On January 1, 2002, the federal excise tax on cigarettes increased by
$2.50 per thousand cigarettes. Federal excise taxes included in the price of
cigarettes are $19.50 per thousand cigarettes ($0.39 per pack of 20
cigarettes). State excise taxes, which are levied upon and paid by the
distributors, are also in effect in the fifty states, the District of Columbia
and many municipalities. Various states have proposed, and certain states have
recently passed, increases in their state tobacco excise taxes. The state
taxes generally range from $.025 to $1.425 per package of twenty cigarettes.

Properties: Lorillard's manufacturing facility is located on approximately
80 acres in Greensboro, North Carolina. This 942,600 square-foot plant
contains modern high speed cigarette manufacturing machinery. The Greensboro
facility also includes a warehouse with shipping and receiving areas totaling
54,800 square feet. In addition, Lorillard owns tobacco receiving and storage
facilities totaling approximately 1,500,000 square feet in Danville, Virginia.

17

Lorillard's executive offices are located in a 130,000 square-foot, four-
story office building in Greensboro, North Carolina. Its 79,000 square-foot
research facility is also located in Greensboro.

Lorillard's principal properties are owned in fee. With minor exceptions,
Lorillard owns all of the machinery used by it. Lorillard believes that its
properties and machinery are in generally good condition.

Lorillard leases sales offices in major cities throughout the United States,
a cold-storage facility in Greensboro and warehousing space in 34 public
distributing warehouses located throughout the United States.

Competition: Lorillard sells its cigarette products in the United States,
Puerto Rico and certain U.S. territories. Though the domestic U.S. market is
highly competitive, Lorillard believes its ability to compete even more
effectively has been restrained by the Philip Morris Retail Leaders program.
Competition is primarily based on a brand's price, positioning, consumer
loyalty, retail display, promotion, quality and taste. Lorillard's principal
competitors are the three other major U.S. cigarette manufacturers, Philip
Morris, R.J. Reynolds and Brown & Williamson. Lorillard's 9.5% market share of
the 2001 U.S. cigarette industry was fourth highest overall. Philip Morris,
R.J. Reynolds and Brown & Williamson accounted for approximately 50.9%, 22.3%
and 10.9%, respectively, of wholesale shipments in 2001. Among the four major
manufacturers, Lorillard ranked third behind Philip Morris and R.J. Reynolds
with an 11.8% share of the premium segment in 2001. Premium cigarette sales
accounted for 92.4% of Lorillard's total units shipped in 2001.

The following table sets forth cigarette sales data provided by the industry
and by Lorillard to Management Science Associates. For reporting purposes,
unit sales by small manufacturers, selling super price discounted brands, many
of whom are not currently affected to a significant degree by payment
obligations under the State Settlement Agreements are estimated by Management
Science Associates. The table below indicates the relative position of
Lorillard in the industry. The years 2000 and 2001 have been restated to
reflect Management Science Associates' estimates for the small manufacturers'
shipments.



Industry Lorillard Lorillard
Calendar Year (000) (000) to Industry
- -----------------------------------------------------------------------------

2001 ............................... 406,952,000 38,463,000 9.5%
2000 ............................... 420,261,000 41,157,000 9.8%
1999 ............................... 419,455,000 44,257,000 10.6%


- ----------------
Management Science Associates divides the cigarette market into two price
segments, the premium price segment and the discount or reduced price segment.
According to Management Science Associates, the discount segment share of
market decreased from approximately 26.4% in 2000 to 26.1% in 2001. Virtually
all of Lorillard's sales are in the full price segment where Lorillard's share
amounted to approximately 11.8% in 2001 and 11.6% in 2000, as reported by
Management Science Associates.

18

LOEWS HOTELS HOLDING CORPORATION

The subsidiaries of Loews Hotels Holding Corporation ("Loews Hotels"), a
wholly owned subsidiary of the Company, presently operate the following 17
hotels. Loews Hotels accounted for 1.66%, 1.59% and 1.64% of the Company's
consolidated total revenue for the years ended December 31, 2001, 2000 and
1999, respectively.



Number of
Name and Location Rooms Owned, Leased or Managed
- ------------------------------------------------------------------------------------------------

Loews Annapolis 220 Owned
Annapolis, Maryland

Loews Coronado Bay Resort 440 Land lease expiring 2034
San Diego, California

Loews Giorgio 185 Owned
Denver, Colorado

Hard Rock Hotel, 650 Management contract (2)
at Universal Orlando, a Loews Hotel
Orlando, Florida

House of Blues, a Loews Hotel 370 Management contract expiring 2005 (1)
Chicago, Illinois

The Jefferson, a Loews Hotel 100 Management contract expiring 2010 (1)
Washington, D.C.

Loews Le Concorde 405 Land lease expiring 2069
Quebec City, Canada

Loews L'Enfant Plaza 370 Management contract expiring 2003 (1)
Washington, D.C.

Loews Miami Beach Hotel 790 Land lease expiring 2096
Miami Beach, Florida

The Metropolitan Hotel 720 Owned
New York, New York

Loews Philadelphia Hotel 585 Owned
Philadelphia, Pennsylvania

The Portofino Bay Hotel, 750 Management contract (2)
at Universal Orlando, a Loews Hotel
Orlando, Florida

The Regency, a Loews Hotel 350 Land lease expiring 2013, with
New York, New York renewal option for 47 years

Loews Santa Monica Beach 340 Management contract expiring 2018,
Santa Monica, California with renewal option for 5 years (1)

Loews Vanderbilt Plaza 340 Owned
Nashville, Tennessee

Loews Ventana Canyon Resort 400 Management contract expiring 2004,
Tucson, Arizona with renewal options for 10 years (1)

Loews Hotel Vogue 140 Owned
Montreal, Canada



19

- --------------
(1) These management contracts are subject to termination rights.
(2) A Loews Hotels subsidiary is a 50% owner of the property through a joint
venture, discussed below.

Hotels at Universal Orlando: Loews Hotels has a 50% interest in a joint
venture with Universal Studios and the Rank Group to develop and construct
three hotels having an aggregate of approximately 2,400 rooms at the Universal
Orlando theme park in Florida. The hotels will be constructed on land leased
by the joint venture from the resort's owners and will be operated by Loews
Hotels pursuant to a management contract. The first hotel, the Portofino Bay
Hotel, opened in the fall of 1999. The second hotel, the Hard Rock Hotel, a
650 room hotel opened in January 2001. The third hotel, the 1,000 room Royal
Pacific is scheduled to open in 2002.

The hotels which are operated by Loews Hotels contain shops, a variety of
restaurants and lounges, and some contain parking facilities, swimming pools,
tennis courts and access to golf courses.

The hotels owned by Loews Hotels are subject to mortgage indebtedness
aggregating approximately $147.2 million at December 31, 2001 with interest
rates ranging from 3.9% to 9.1% and maturing between 2002 and 2028. In
addition, certain hotels are held under leases which are subject to formula
derived rental increases, with rentals aggregating approximately $7.7 million
for the year ended December 31, 2001.

Competition from other hotels, motor hotels and inns, including facilities
owned by local interests and by national and international chains, is vigorous
in all areas in which Loews Hotels operates. The demand for hotel rooms in
many areas is seasonal and dependent on general and local economic conditions.
Loews Hotels properties also compete with facilities offering similar services
in locations other than those in which its hotels are located. Competition
among luxury hotels is based primarily on location and service. Competition
among resort and commercial hotels is based on price as well as location and
service. Because of the competitive nature of the industry, hotels must
continually make expenditures for updating, refurnishing and repairs and
maintenance, in order to prevent competitive obsolescence.

DIAMOND OFFSHORE DRILLING, INC.

Diamond Offshore Drilling Inc. ("Diamond Offshore"), is engaged, through its
subsidiaries, in the business of owning and operating drilling rigs that are
used primarily in the drilling of offshore oil and gas wells on a contract
basis for companies engaged in exploration and production of hydrocarbons.
Diamond Offshore operates 45 offshore rigs. Diamond Offshore accounted for
4.85%, 3.40% and 3.95% of the Company's consolidated total revenue for the
years ended December 31, 2001, 2000 and 1999, respectively.

Drilling Units and Equipment: Diamond Offshore currently owns and operates
45 mobile offshore drilling rigs (30 semisubmersible rigs, 14 jack-up rigs and
one drillship) and related equipment. Offshore rigs are mobile units that can
be relocated via either self propulsion or the use of tugs enabling them to be
repositioned based on market demand.

Semisubmersible rigs are supported by large pontoons and are partially
submerged during drilling for greater stability. They are generally designed
for deep water depths of up to 5,000 feet. Semisubmersibles are typically
anchored in position and remain stable for drilling in the semi-submerged
floating position due in part to their wave transparency characteristics at
the water line. Semisubmersibles can also be held in position through the use
of a computer controlled thruster (dynamic-positioning) system to maintain the
rig's position over a drillsite. Diamond Offshore has three such
semisubmersible rigs. These semisubmersibles are larger than many other
semisubmersibles, are capable of working in deep water or harsh environments,
and have other advanced features. Diamond Offshore's 30 semisubmersible rigs
are currently located as follows: 16 in the Gulf of Mexico, four in Brazil,
three in the North Sea and two in Australia, with the remaining rigs located
in various foreign markets.

Jack-up rigs stand on the ocean floor with their drilling platforms "jacked
up" on support legs above the water. They are used extensively for drilling in
water depths from 20 feet to 350 feet. Seven of Diamond Offshore's jack-up
rigs are cantilevered rigs capable of over platform development drilling and
workover as well as exploratory drilling. Of Diamond Offshore's 14 jack-up
rigs, 12 are currently located in the Gulf of Mexico.

Diamond Offshore's drillship is self-propelled and designed to drill in deep
water. Shaped like a conventional vessel, it is the most mobile of the major
rig types. Diamond Offshore's drillship has dynamic-positioning capabilities
and is currently operating in Brazil.

Markets: Diamond Offshore's principal markets for its offshore contract
drilling services are the Gulf of Mexico, Europe, including principally the
U.K. sector of the North Sea, South America, Africa, and Australia/Southeast
Asia. Diamond Offshore actively markets its rigs worldwide.

20

Diamond Offshore contracts to provide offshore drilling services vary in
their terms and provisions. Diamond Offshore often obtains its contracts
through competitive bidding, although it is not unusual for Diamond Offshore
to be awarded drilling contracts without competitive bidding. Drilling
contracts generally provide for a basic drilling rate on a fixed dayrate basis
regardless of whether such drilling results in a productive well. Drilling
contracts may also provide for lower rates during periods when the rig is
being moved or when drilling operations are interrupted or restricted by
equipment breakdowns, adverse weather or water conditions or other conditions
beyond the control of Diamond Offshore. Under dayrate contracts, Diamond
Offshore generally pays the operating expenses of the rig, including wages and
the cost of incidental supplies. Dayrate contracts have historically accounted
for a substantial portion of Diamond Offshore's revenues. In addition, Diamond
Offshore has worked some of its rigs under dayrate contracts pursuant to which
the customer also agrees to pay Diamond Offshore an incentive bonus based upon
performance.

A dayrate drilling contract generally extends over a period of time covering
either the drilling of a single well, a group of wells (a "well-to-well
contract") or a stated term (a "term contract") and may be terminated by the
customer in the event the drilling unit is destroyed or lost or if drilling
operations are suspended for a specified period of time as a result of a
breakdown of equipment or, in some cases, due to other events beyond the
control of either party. In addition, certain of Diamond Offshore's contracts
permit the customer to terminate the contract early by giving notice and in
some circumstances may require the payment of an early termination fee by the
customer. The contract term in many instances may be extended by the customer
exercising options for the drilling of additional wells at fixed or mutually
agreed terms, including dayrates.

The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategies of the offshore
drilling contractor and its customers. In periods of rising demand for
offshore rigs, contractors typically prefer well-to-well contracts that allow
contractors to profit from increasing dayrates. In contrast, during these
periods customers with reasonably definite drilling programs typically prefer
longer term contracts to maintain dayrate prices at a consistent level.
Conversely, in periods of decreasing demand for offshore rigs, contractors
generally prefer longer term contracts to preserve dayrates at existing levels
and ensure utilization, while customers prefer well-to-well contracts that
allow them to obtain the benefit of lower dayrates. In general, Diamond
Offshore seeks to have a foundation of long-term contracts with a reasonable
balance of single well, well-to-well and short-term contracts to minimize the
downside impact of a decline in the market while still participating in the
benefit of increasing dayrates in a rising market.

Customers: Diamond Offshore provides offshore drilling services to a
customer base that includes major and independent oil and gas companies and
government-owned oil companies. Several customers have accounted for 10.0% or
more of Diamond Offshore's annual consolidated revenues, although the specific
customers may vary from year to year. During 2001, Diamond Offshore performed
services for 43 different customers with BP and Petrobraspetroleo Brasileiro
SA ("Petrobras") accounting for 22.0% and 17.9% of Diamond Offshore's annual
total consolidated revenues, respectively. During 2000, Diamond Offshore
performed services for approximately 50 different customers with Petrobras and
BP accounting for 25.4% and 20.0% of Diamond Offshore's annual total
consolidated revenues, respectively. During 1999, Diamond Offshore performed
services for approximately 45 different customers with Petrobras and Shell
companies (including domestic and foreign affiliates) accounting for 15.5% and
14.5% of Diamond Offshore's annual total consolidated revenues, respectively.
During periods of low demand for offshore drilling rigs, the loss of a single
significant customer could have a material adverse effect on Diamond
Offshore's results of operations.

Competition: The contract drilling industry is highly competitive. Customers
often award contracts on a competitive bid basis, and although a customer
selecting a rig may consider, among other things, a contractor's safety
record, crew quality, rig location, and quality of service and equipment, the
historical oversupply of rigs has created an intensely competitive market in
which price is the primary factor in determining the selection of a drilling
contractor. In periods of increased drilling activity, rig availability has,
in some cases, also become a consideration, particularly with respect to
technologically advanced units. Diamond Offshore believes that competition for
drilling contracts will continue to be intense in the foreseeable future.
Contractors are also able to adjust localized supply and demand imbalances by
moving rigs from areas of low utilization and dayrates to areas of greater
activity and relatively higher dayrates. Such movements, reactivations or a
decrease in drilling activity in any major market could depress dayrates and
could adversely affect utilization of Diamond Offshore's rigs.

Governmental Regulation: Diamond Offshore's operations are subject to
numerous federal, state and local laws and regulations that relate directly or
indirectly to its operations, including certain regulations controlling the
discharge of materials into the environment, requiring removal and clean-up
under certain circumstances, or otherwise relating to the protection of the
environment. For example, Diamond Offshore may be liable for damages and costs
incurred in connection with oil spills for which it is held responsible. Laws
and regulations protecting the environment have become increasingly stringent
in recent years and may in certain circumstances impose "strict liability"
rendering a company liable for environmental damage without regard to
negligence or fault on the part of such company. Liability under such laws and
regulations may result from either governmental or citizen prosecution. Such
laws and regulations may expose

21

Diamond Offshore to liability for the conduct of or conditions caused by
others, or for acts of Diamond Offshore that were in compliance with all
applicable laws at the time such acts were performed. The application of these
requirements or the adoption of new requirements could have a material adverse
effect on Diamond Offshore.

The United States Oil Pollution Act of 1990 ("OPA '90"), and similar
legislation enacted in Texas, Louisiana and other coastal states addresses oil
spill prevention and control and significantly expands liability exposure
across all segments of the oil and gas industry. OPA '90, such similar
legislation and related regulations impose a variety of obligations on Diamond
Offshore related to the prevention of oil spills and liability for damages
resulting from such spills. OPA '90 imposes strict and, with limited
exceptions, joint and several liability upon each responsible party for oil
removal costs and a variety of public and private damages.

Indemnification and Insurance: Diamond Offshore's operations are subject to
hazards inherent in the drilling of oil and gas wells such as blowouts,
reservoir damage, loss of production, loss of well control, cratering or
fires, the occurrence of which could result in the suspension of drilling
operations, injury to or death of rig and other personnel and damage to or
destruction of Diamond Offshore's, Diamond Offshore's customers' or a third
party's property or equipment. Damage to the environment could also result
from Diamond Offshore's operations, particularly through oil spillage or
uncontrolled fires. In addition, offshore drilling operations are subject to
perils peculiar to marine operations, including capsizing, grounding,
collision and loss or damage from severe weather. Diamond Offshore has
insurance coverage and contractual indemnification for certain risks, but
there can be no assurance that such coverage or indemnification will
adequately cover Diamond Offshore's loss or liability in many circumstances or
that Diamond Offshore will continue to carry such insurance or receive such
indemnification.

In September of 2001, Diamond Offshore's Hull and Machinery insurance
underwriters notified Diamond Offshore that war risk coverage would be
canceled in its physical damage policies unless Diamond Offshore paid
significant additional insurance premiums for such coverage. In order to avoid
incurring the additional costs, Diamond Offshore has permitted such coverage
to terminate and expects to self-insure against physical damage war risk to
the extent it is required to do so in the future. Most of Diamond Offshore's
drilling contracts did not require Diamond Offshore to carry physical damage
war risk insurance. Four drilling contracts did contain a requirement for such
coverage and have been amended to permit Diamond Offshore to self-insure
against such risks.

Properties: Diamond Offshore owns an eight-story office building located in
Houston, Texas containing approximately 182,000 net rentable square feet,
which is used for its corporate headquarters. Diamond Offshore also owns an
18,000 square foot building and 20 acres of land in New Iberia, Louisiana for
its offshore drilling warehouse and storage facility, and a 13,000 square foot
building and five acres of land in Aberdeen, Scotland for its North Sea
operations. In addition, Diamond Offshore leases various office, warehouse and
storage facilities in Louisiana, Australia, Brazil, Indonesia, Scotland,
Vietnam and Singapore to support its offshore drilling operations.

BULOVA CORPORATION

Bulova Corporation ("Bulova") is engaged in the distribution and sale of
watches, clocks and timepiece parts for consumer use. Bulova accounted for
.75%, .75% and .65% of the Company's consolidated total revenue for the years
ended December 31, 2001, 2000 and 1999, respectively.

In September of 2001, Bulova expanded its product line when it acquired the
Wittnauer watch and clock trademarks, related inventory and receivables, from
Wittnauer International Inc. and Wittnauer Worldwide, L.P., and their
affiliates.

Bulova's principal watch brands are Bulova, Wittnauer, Caravelle and
Accutron. Clocks are principally sold under the Bulova brand name. All watches
and clocks are purchased from foreign suppliers. Bulova's principal markets
are the United States, Canada and Mexico. In most other areas of the world
Bulova has appointed licensees who market watches under Bulova's trademarks in
return for a royalty. The business is seasonal, with the greatest sales coming
in the third and fourth quarters in expectation of the holiday selling season.
The business is intensely competitive. The principal methods of competition
are price, styling, product availability, aftersale service, warranty and
product performance.

Properties: Bulova owns an 80,000 square foot plant in Woodside, New York
which is used for its principal executive and sales office, watch
distribution, service and warehouse purposes, and also owns a 91,000 square
foot plant in Brooklyn, New York for clock service and warehouse purposes. In
addition, Bulova leases a 31,000 square foot plant in Toronto, Canada for
watch and clock sales and service and leases approximately 5,400 square feet
of office space in Mexico, Federal District.

22

OTHER INTERESTS

A subsidiary of the Company, Majestic Shipping Corporation ("Majestic"),
owns a 49% common stock interest in Hellespont Shipping Corporation
("Hellespont"). Hellespont is engaged in the business of owning and operating
five large crude oil tankers that are used primarily to transport crude oil
from the Persian Gulf to a limited number of ports in the Far East, Northern
Europe and the United States.

For information with respect to agreements entered into by Majestic for the
newbuilding of up to four ships, see Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.

EMPLOYEE RELATIONS

The Company, inclusive of its operating subsidiaries as described below,
employed approximately 27,820 persons at December 31, 2001 and considers its
employee relations to be satisfactory.

Lorillard employed approximately 3,300 persons at December 31, 2001.
Approximately 1,230 of these employees are represented by labor unions covered
by three collective bargaining agreements. Two of the collective bargaining
agreements expire in April of 2002; the third agreement expires in March of
2003.

Lorillard has collective bargaining agreements covering hourly rated
production and service employees at various Lorillard plants with the Tobacco
Workers International Union, the International Brotherhood of Firemen and
Oilers, and the International Association of Machinists. Lorillard has
experienced satisfactory labor relations and provides a retirement plan, a
deferred profit sharing plan, and other benefits for its hourly paid employees
who are represented by the foregoing unions. In addition, Lorillard provides
to its salaried employees a retirement plan, group life, disability and health
insurance program and a savings plan.

Loews Hotels employed approximately 2,380 persons at December 31, 2001,
approximately 900 of whom are union members covered under collective
bargaining agreements. Loews Hotels has experienced satisfactory labor
relations and provides comprehensive benefit plans for its hourly paid
employees.

The Company maintains a retirement plan, group life, disability and health
insurance program and a savings plan for salaried employees. Loews Hotels
salaried employees also participate in these benefit plans.

CNA employed approximately 17,270 full-time equivalent employees at December
31, 2001 and has experienced satisfactory labor relations. During 2001, CNA
announced two restructuring plans, which included a reduction of 2,100
positions. CNA and its subsidiaries have comprehensive benefit plans for
substantially all of their employees, including retirement plans, savings
plans, disability programs, group life programs and group health care
programs.

Diamond Offshore employed approximately 4,100 persons at December 31, 2001
(including international crews furnished through labor contractors),
approximately 40 of whom are union members. Diamond Offshore has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees.

Bulova and its subsidiaries employed approximately 520 persons at December
31, 2001, approximately 190 of whom are union members. Bulova and its
subsidiaries have experienced satisfactory labor relations. Bulova has
comprehensive benefit plans for substantially all employees.

Item 2. Properties.

Information relating to the properties of Registrant and its subsidiaries is
contained under Item 1.

23

Item 3. Legal Proceedings.

1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Notes 7 and 17 of the Notes to
Consolidated Financial Statements included in Item 8.

NON-INSURANCE

The following information supplements the description of tobacco litigation
contained in Note 17 of the Notes to Consolidated Financial Statements
included in Item 8, which is incorporated herein by reference.

Tobacco Litigation
- ------------------

Approximately 4,675 product liability cases are pending against cigarette
manufacturers in the United States; Lorillard is a defendant in approximately
4,275 of these cases. Lawsuits continue to be filed against Lorillard and
other manufacturers of tobacco products. Some of the lawsuits also name the
Company as a defendant. In certain of these and other cases, Lorillard has
agreed, in accordance with the law of the applicable jurisdiction, to pay the
cost of defense and to indemnify certain defendants who are not manufacturers
of cigarettes, such as sellers of tobacco products, advertisers and others.
Among the 4,675 product liability cases, are approximately 1,250 cases pending
in a West Virginia court. Another group of approximately 2,835 cases has been
brought by flight attendants alleging injury from exposure to environmental
tobacco smoke in the cabins of aircraft. Lorillard is a defendant in all of
the flight attendant suits and is a defendant in most of the cases pending in
West Virginia.

Excluding the flight attendant and West Virginia suits, approximately 575
product liability cases are pending against U.S. cigarette manufacturers. Of
these 575 cases, Lorillard is a defendant in approximately 260 cases. The
Company is a defendant in approximately 45 of these actions, although it has
not received service of process in approximately 10 of them.

Tobacco litigation includes various types of claims. In these actions,
plaintiffs claim substantial compensatory, statutory and punitive damages, as
well as equitable and injunctive relief, in amounts ranging into the billions
of dollars. These claims are based on a number of legal theories including,
among other theories, theories of negligence, fraud, misrepresentation, strict
liability, breach of warranty, enterprise liability (including claims asserted
under the Racketeering Influenced and Corrupt Organizations Act), civil
conspiracy, intentional infliction of harm, violation of consumer protection
statutes, violation of antitrust statutes, and failure to warn of the harmful
and/or addictive nature of tobacco products.

In addition to the above, claims have been brought against Lorillard seeking
damages resulting from alleged exposure to asbestos fibers which were
incorporated into filter material used in one brand of cigarettes manufactured
by Lorillard for a limited period of time, ending more than 40 years ago.
These cases are generally referred to as "filter cases." Approximately 25 30
filter cases are pending against Lorillard.

CONVENTIONAL PRODUCT LIABILITY CASES -

Conventional product liability cases are cases in which individuals allege
they or their decedents have been injured due to smoking cigarettes, due to
exposure to environmental tobacco smoke, due to use of smokeless tobacco
products, or due to cigarette or nicotine dependence or addiction. Plaintiffs
in most conventional product liability cases seek unspecified amounts in
compensatory damages and punitive damages. Lorillard is a defendant in
approximately 1,300 of these cases. This total includes approximately 1,150
cases pending in West Virginia that are part of a consolidated proceeding.
Additional cases are pending against other cigarette manufacturers. The
Company is a defendant in seven of the cases filed by individuals, although
four of the cases have not been served on the Company. The Company is not a
defendant in any of the conventional product liability cases pending in West
Virginia.

FLIGHT ATTENDANT CASES -

There are approximately 2,835 cases pending in the Circuit Court of Dade
County, Florida against Lorillard and three other U.S. cigarette manufacturers
in which the plaintiffs are present or former flight attendants, or the
estates of deceased flight attendants, who allege injury as a result of
exposure to environmental tobacco smoke in aircraft cabins. The Company is not
a defendant in any of the flight attendant cases.

CLASS ACTION CASES -

Certain cases have been filed against cigarette manufacturers, including
Lorillard, in which plaintiffs purport to seek class certification on behalf
of groups of cigarette smokers. Lorillard is a defendant in approximately 25
of these cases,

24

six of which also name the Company as a defendant. Two cases that name both
the Company and Lorillard as defendants have not been served on any of the
parties. Neither Lorillard nor the Company are defendants in approximately 20
additional class action cases pending against other cigarette manufacturers,
many of which assert claims on behalf of smokers of "light" cigarettes. Most
of the suits in which Lorillard or the Company is a defendant seek class
certification on behalf of residents of the states in which the purported
class action cases have been filed, although some suits seek class
certification on behalf of residents of multiple states. Plaintiffs in all but
two of the purported class action cases seek class certification on behalf of
individuals who smoked cigarettes or were exposed to environmental tobacco
smoke. In one of the two remaining purported class action cases, plaintiffs
seek class certification on behalf of individuals who paid insurance premiums.
Plaintiffs in the other remaining suit seek class certification on behalf of
U.S. residents under the age of 22 who purchased cigarettes as minors and who
do not have personal injury claims. Verdicts have been returned in two of the
cases listed below, Engle v. R.J. Reynolds Tobacco Co., et al. and Blankenship
v. American Tobacco Company, et al. Trial proceedings are underway in the case
of Scott v. The American Tobacco Company, et al. The remaining cases below are
in the pre-trial, discovery stage. Plaintiffs in a few of the reimbursement
cases, which are discussed below, also seek certification of such cases as
class actions.

Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County,
Florida, filed May 5, 1994).

Norton v. RJR Nabisco Holdings Corporation, et al. (Superior Court, Madison
County, Indiana, filed May 3, 1996). The Company is a defendant in the case.

Scott v. The American Tobacco Company, et al. (District Court, Orleans
Parish, Louisiana, filed May 24, 1996). During February of 2002, the Fourth
District of the Louisiana Court of Appeals granted in part defendants' writ
application and ordered the removal of one of the jurors. The time for
defendants to seek further appellate review of the issue has not expired.

Perry v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Tennessee, filed September 30, 1996). Plaintiffs seek class
certification on behalf of Tennessee residents who have paid medical insurance
premiums to a Blue Cross and Blue Shield organization. The court granted
defendants' motion to dismiss the case and entered final judgment in their
favor. Plaintiffs have noticed an appeal from the final judgment to the U.S.
Court of Appeals for the Sixth Circuit.

Connor v. The American Tobacco Company, et al. (Second Judicial District
Court, Bernalillo County, New Mexico, filed October 10, 1996).

Blankenship v. American Tobacco Company, et al. (Circuit Court, County, West
Virginia, filed January 31, 1997). This matter was transferred from the
Circuit Court of Kanawha County, West Virginia to a coordinated proceeding
pending before the Circuit Court of Ohio County, West Virginia.

Muncy v. Philip Morris Incorporated, et al. (Circuit Court, Ohio County,
West Virginia, filed February 4, 1997). This matter was transferred from the
Circuit Court of McDowell County, West Virginia to a coordinated proceeding
pending before the Circuit Court of Ohio County, West Virginia.

Cole v. The Tobacco Institute, Inc., et al. (U.S. District Court, Eastern
District, Texas, Texarkana Division, filed May 5, 1997). During 2000, the
court dismissed the suit and entered final judgment in favor of the
defendants. Plaintiffs noticed an appeal from the judgment to the U.S. Court
of Appeals for the Fifth Circuit. During 2001, the Court of Appeals affirmed
the final judgment. As of March 1, 2002, the deadline for plaintiffs to file a
petition for writ of certiorari with the U.S. Supreme Court had not expired.

Anderson v. The American Tobacco Company, Inc., et al. (U.S. District Court,
Eastern District, Tennessee, filed May 23, 1997). The Company is a defendant
in the case.

Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San
Diego County, California, filed June 10, 1997).

Mahoney v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Southern District, Iowa, filed June 20, 1997). During 2001, the court denied
plaintiffs' motion for class certification. The U.S. Court of Appeals for the
Eighth Circuit declined to review the denial of the class certification motion
at this stage of the case.

Nwanze v. Philip Morris Companies Inc., et al. (U.S. District Court,
Southern District, New York, filed September 29, 1997). The Company is a
defendant in the case. The court denied plaintiffs' motion for class
certification. During 2000, the court granted defendants' motion to dismiss
the complaint and entered final judgment in their favor. Plaintiffs noticed an
appeal from the judgment to the U.S. Court of Appeals for the Second Circuit.
The Second Circuit affirmed the trial court's final judgment during 2001 and
denied plaintiffs' motion for reconsideration of the ruling. The U.S. Supreme

25

Court denied plaintiffs' petition for writ of certiorari during 2001. The U.S.
Supreme Court has not ruled on plaintiffs' motion for reconsideration of the
ruling denying their petition for writ of certiorari.

Badillo v. American Tobacco Company, et al. (U.S. District Court, Nevada,
filed October 8, 1997). The Company is a defendant in the case. During 2001,
the court denied plaintiffs' motion for class certification. Plaintiffs have
asked the U.S. Court of Appeals for the Ninth Circuit to review the class
certification decision. The Ninth Circuit has issued an order to show cause
why the appeal should not be dismissed.

Young v. The American Tobacco Company, et al. (Civil District Court, Orleans
Parish, Louisiana, filed November 12, 1997). The Company is a defendant in the
case.

Jackson v. Philip Morris Incorporated, et al. (U.S. District Court, Central
District, Utah, filed on or about February 13, 1998).

Parsons v. AC&S, et al. (Circuit Court, Ohio County, West Virginia, filed
February 27, 1998). This matter was transferred from the Circuit Court of
Kanawha County, West Virginia to a coordinated proceeding pending before the
Circuit Court of Ohio County, West Virginia.

Daniels v. Philip Morris Companies, Inc., et al. (Superior Court, San Diego
County, California, filed April 2, 1998).

Christensen v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Nevada, filed April 3, 1998). The Company is a defendant in the case. To date,
none of the defendants have received service of process. During 2001, the
court denied plaintiffs' motion for class certification. Plaintiffs have asked
the U.S. Court of Appeals for the Ninth Circuit to review the class
certification decision. The Ninth Circuit has issued an order to show cause
why the appeal should not be dismissed.

Cleary v. Philip Morris Incorporated, et al. (Circuit Court, Cook County,
Illinois, filed June 5, 1998).

Creekmore v. Brown & Williamson Tobacco Corporation, et al. (Superior Court,
Buncombe County, North Carolina, filed July 31, 1998).

Cypret v. The American Tobacco Company, Inc., et al. (Circuit Court, Jackson
County, Missouri, filed December 22, 1998). The Company is a defendant in the
case.

Simon v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, New York, filed April 9, 1999). During 2000, the court denied
plaintiffs' motion for class certification but the court stated that it would
"entertain a prompt motion for certification in Simon II." The court further
stated that "Simon II should be triable without appreciable delay should it be
certified." To date, a trial date has not been set in this matter. This matter
also is a part of the litigation described under the heading "Eastern District
of New York Litigation" in Note 17 of the Notes to Consolidated Financial
Statements, included in Item 8.

Julian v. Philip Morris Companies Inc., et al. (Circuit Court, Montgomery
County, Alabama, filed April 14, 1999).

Decie v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, New York, filed April 21, 2000). This matter also is a part of the
litigation described under the heading "Eastern District of New York
Litigation" in Note 17 of the Notes to Consolidated Financial Statements,
included in Item 8.

Ebert v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, New York, filed August 9, 2000). The Company is named as a defendant
in this matter. To date, none of the defendants have received service of
process. This matter also is a part of the litigation described under the
heading "Eastern District of New York Litigation" in Note 17 of the Notes to
Consolidated Financial Statements, included in Item 8.

Vandermeulen v. Philip Morris Companies, Inc., et al. (Circuit Court, Wayne
County, Michigan, filed September 18, 2000).

Sims v. Philip Morris, Inc., et al. (U.S. District Court, District of
Columbia, filed May 23, 2001).

Johnson v. Newport Lorillard, et al. (U.S. District Court, Southern
District, New York, filed October 31, 2001).

Lowe v. Philip Morris, Incorporated, et al. (U.S. District Court, Oregon,
filed November 19, 2001).

Trivisonno v. Philip Morris, Incorporated, et al. (Court of Common Pleas,
Cuyahoga County, Ohio, filed on or about January 14, 2002). As of March 1,
2002, Lorillard had not received service of process of this matter. The
complaint

26

asserts a mixture of product liability claims and claims contending that the
Master Settlement Agreement violated various Ohio consumer protection
statutes.

REIMBURSEMENT CASES -

Approximately 50 cases are pending that are comprised of cases brought by
the U.S. federal government, county governments, city governments, unions,
American Indian tribes, hospitals or hospital districts, private companies and
foreign governments filing suit in U.S. courts, in which plaintiffs seek
recovery of funds allegedly expended by them to provide health care to
individuals with injuries or other health effects allegedly caused by use of
tobacco products or exposure to cigarette smoke. These cases are based on,
among other things, equitable claims, including injunctive relief, indemnity,
restitution, unjust enrichment and public nuisance, and claims based on
antitrust laws and state consumer protection acts. Plaintiffs in some of these
actions seek certification as class actions. Plaintiffs seek damages in each
case that range from unspecified amounts to the billions of dollars. Most
plaintiffs seek punitive damages and some seek treble damages. Plaintiffs in
some of the cases seek medical monitoring. Lorillard is named as a defendant
in all of the reimbursement cases except for a few of those filed in U.S.
courts by foreign governments. The Company is named as a defendant in
approximately 30 of the pending reimbursement cases, although it has not
received service of four of these matters.

U.S. Federal Government Action - The U.S. federal government filed a
reimbursement suit on September 22, 1999 in the U.S. District Court for the
District of Columbia against Lorillard, other U.S. cigarette manufacturers,
some parent companies and two trade associations. The Company is not a
defendant in this action.

U.S. Local Governmental Reimbursement Cases - Four suits filed by local
governmental entities are pending against cigarette manufacturers. Lorillard
is a defendant in each of the pending matters. The Company is named as a
defendant in two of the matters but has not received service of process of one
of them.

County of Cook v. Philip Morris, Incorporated, et al. (Circuit Court, Cook
County, Illinois, filed April 18, 1997). During 2001, the court granted
defendants' motion to dismiss the complaint and entered final judgment in
their favor. Plaintiff has noticed an appeal from the final judgment to the
Appellate Court of Illinois, First Judicial District. Defendants have noticed
a cross-appeal.

City of St. Louis, et al. v. The American Tobacco Company, Inc., et al.
(Circuit Court, City of St. Louis, Missouri, filed November 25, 1998). The
Company is a defendant in the case. Several Missouri hospitals also are
plaintiffs in the suit. The Missouri Supreme Court has issued a ruling that
the MSA does not impair or impede plaintiffs' ability to protect their
interests and that the MSA does not release their claims.

St. Louis County, Missouri v. American Tobacco Company, Inc., et al.
(Circuit Court, City of St. Louis, Missouri, filed December 3, 1998). The
Company is a defendant in the case but has not received service of process to
date.

County of Wayne v. Philip Morris Incorporated, et al. (U.S. District Court,
Eastern District, Michigan, filed December 6, 1999. The Michigan Supreme
Court, in response to questions certified to it by the trial court, issued an
opinion during January of 2002 that the Michigan Attorney General had the
authority to release plaintiff's claims in the MSA.

Reimbursement Cases filed by Foreign Governments in U.S. Courts - Cases have
been brought in U.S. courts by thirteen nations, 11 Brazilian states, 11
Brazilian cities and one Canadian province. Both the Company and Lorillard are
named as defendants in most of the cases. The Company has not received service
of process of the cases filed by two of the nations and by one of the
Brazilian states.

The Republic of Bolivia v. Philip Morris Companies, Inc., et al. (U.S.
District Court, District of Columbia, filed on January 20, 1999). The U.S.
District Court for the Southern District of Texas transferred this matter sua
sponte to the U.S. District Court for the District of Columbia. The Company is
a defendant in the case. Defendants' motion to transfer this matter to the
United States Panel on Multi-District Litigation has been granted.

Republic of Venezuela v. Philip Morris Companies, et al. (Circuit Court,
Dade County, Florida, filed January 27, 1999). The Company is a defendant in
the case but has not received service of process to date. During 2001, the
court granted defendants' motion for judgment on the pleadings and entered
final judgment in their favor. Plaintiff has noticed an appeal to the Florida
Third District Court of Appeal.

State of Rio de Janeiro of The Federative Republic of Brazil v. Philip
Morris Companies, Inc., et al. (District Court, Angelina County, Texas, filed
July 12, 1999). The Company is a defendant in the case.

The State of Mato Grosso do Sul, Brazil v. Philip Morris Companies, Inc., et
al. (U.S. District Court, District of Columbia, filed July 19, 2000). The
Company is a defendant in the case. The case has been transferred to the
Multi-

27

District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

The Russian Federation v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed August 25, 2000). The
Company is a defendant in the case. The case has been transferred to the
Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.

The Republic of Honduras v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed September 29, 2000). The
Company is a defendant in the case, although it has not received service of
process to date. Defendants have transferred the case to the Multi-District
Litigation Panel pending in the U.S. District Court for the District of
Columbia.

The State of Tocantins, Brazil v. The Brooke Group, Ltd. Inc., et al. (U.S.
District Court, Southern District, Florida, filed October 1, 2000). The
Company is a defendant in the case. Defendants have transferred the case to
the Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.

The State of Piaui, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed December 13, 2000). The
Company is a defendant in the case. Defendants have transferred the case to
the Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.

The Republic of Tajikistan v. The Brooke Group Ltd. Inc., et al., (U.S.
District Court, Southern District, Florida, filed January 22, 2001). The
Company is a defendant in the case. Defendants have transferred the case to
the Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.

The Republic of Belize v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed April 5, 2001). The Company
is a defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

City of Belford Roxo, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed May 8, 2001). The Company is
a defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

City of Belo Horizonte, Brazil v. Philip Morris Companies, Inc., et al.
(U.S. District Court, Southern District, Florida, filed May 8, 2001). The
Company is a defendant in the case. Defendants have transferred the case to
the Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.

City of Carapicuiba, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed May 8, 2001). The Company is
a defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

City of Duque de Caxias, Brazil v. Philip Morris Companies, Inc., et al.
(U.S. District Court, Southern District, Florida, filed May 8, 2001). The
Company is a defendant in the case. Defendants have transferred the case to
the Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.

City of Joao Pessoa, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed May 8, 2001). The Company is
a defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

City of Jundiai, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed May 8, 2001). The Company is
a defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

City of Mage, Brazil v. Philip Morris Companies, Inc., et al. (U.S. District
Court, Southern District, Florida, filed May 8, 2001). The Company is a
defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

City of Nilopolis - RJ, Brazil v. Philip Morris Companies, Inc., et al.
(U.S. District Court, Southern District, Florida, filed May 8, 2001). The
Company is a defendant in the case. Defendants have transferred the case to
the Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.

City of Nova Iguacu, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed May 8, 2001). The Company is
a defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

28

City of Rio de Janeiro, Brazil v. Philip Morris Companies, Inc., et al.
(U.S. District Court, Southern District, Florida, filed May 8, 2001). The
Company is a defendant in the case. Defendants have transferred the case to
the Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.

City of Sao Bernardo do Carmpo, Brazil v. Philip Morris Companies, Inc., et
al. (U.S. District Court, Southern District, Florida, filed May 8, 2001). The
Company is a defendant in the case. Defendants have transferred the case to
the Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.

State of Para, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed May 8, 2001). The Company is
a defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

State of Parana, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed May 8, 2001). The Company is
a defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

State of Rondonia, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed May 8, 2001). The Company is
a defendant in the case. Defendants have transferred the case to the Multi-
District Litigation Panel pending in the U.S. District Court for the District
of Columbia.

State of Pernambuco, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed December 28, 2001). The
Company is a defendant in the case. As of March 1, 2002, neither Lorillard nor
the Company had received service of process of the complaint in this matter.
Defendants have conditionally transferred the case to the Multi-District
Litigation Panel pending in the U.S. District Court for the District of
Columbia.

Private Citizens' Reimbursement Cases - Two suits are pending in which
plaintiffs are private citizens. The Company is named as a defendant in one of
these actions.

Mason v. The American Tobacco Company, et al. (filed in U.S. District Court,
Northern District, Texas; transferred to U.S. District Court, Eastern
District, New York, filed December 23, 1997). The suit is on behalf of
taxpayers of the U.S. as to funds expended by the Medicaid program. During
2000, the U.S. District Court for the Northern District of Texas granted
plaintiffs' motion to transfer the case to the U.S. District Court for the
Eastern District of New York. Defendants' motion to transfer the case to the
U.S. District Court for the District of Columbia has been denied. This matter
also is a part of the litigation described under the heading "Eastern District
of New York Litigation" in Note 17 of the Notes to Consolidated Financial
Statements, included in Item 8.

Temple v. The State of Tennessee, et al. (U.S. District Court, Middle
District, Tennessee, filed as individual smoking and health case on February
7, 2000; amended complaint filed in order to expand plaintiffs' claims,
September 11, 2000). Plaintiffs contend that defendant the State of Tennessee
has no standing to recover the finds paid to it as compensation for the monies
it has paid through its TennCare program for individuals allegedly injured by
a smoking-related disease. Plaintiffs further seek a declaration that the MSA
is unconstitutional. Plaintiffs' amended complaint also includes claims for
class certification on behalf of Tennessee smokers. The Company was named as a
defendant in the amended complaint but has not received service of process to
date.

Reimbursement Cases by American Indian Tribes - American Indian tribes are
the plaintiffs in four pending reimbursement suits. Three of the four cases
have been filed in tribal courts. Lorillard is a defendant in each of the
cases. The Company is not named as a defendant in any of the pending tribal
cases. One of the four cases is pending before a federal court of appeals
following plaintiffs' appeal from an order that granted defendants' motion to
dismiss the complaint.

Crow Creek Sioux Tribe v. The American Tobacco Company, et al. (Tribal
Court, Crow Creek Sioux Tribe, filed September 14, 1997).

The Standing Rock Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Standing Rock Sioux Tribe, Standing Rock Sioux Indian
Reservation, filed May 8, 1998). Plaintiff voluntarily dismissed the case
during February of 2002.

The Sisseton-Wahpeton Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Sisseton-Wahpeton Sioux Tribe, Sisseton-Wahpeton Sioux Indian
Reservation, filed May 12, 1998).

The Navajo Nation v. Philip Morris Incorporated, et al. (District Court,
Navajo Nation, Judicial District of Window Rock, Arizona, filed August 12,
1999).

29

The Alabama Coushatta Tribe of Texas v. American Tobacco Company, et al.
(U.S. District Court, Eastern District, Texas, filed August 30, 2000). During
2001, the court granted defendants' motion to dismiss the complaint and
entered final judgment in their favor. Plaintiff has noticed an appeal from
the final judgment to the U.S. Court of Appeals for the Fifth Circuit.

Reimbursement Cases by Private Companies and Health Plans or Hospitals and
Hospital Districts - As of March 1, 2002, one case was pending against
cigarette manufacturers in which the plaintiff is a not-for-profit insurance
company. Lorillard is a defendant in the pending case. The Company is not a
defendant in this matter. In addition, two cases are pending in which
plaintiffs are hospitals or hospital districts. Lorillard is named as a
defendant in both such cases. The Company is not named as a defendant in
either of the cases filed by hospitals or hospital districts. In one
additional suit, a city governmental entity and several hospitals or hospital
districts are plaintiffs. The Company is a defendant in this case.

Group Health Plan, Inc., et al. v. Philip Morris Incorporated, et al. (U.S.
District Court, Minnesota, filed March 11, 1998). During January of 2002, the
court entered an order granting defendants' motion for summary judgment.
Plaintiffs have noticed an appeal to the U.S. Court of Appeals for the Eighth
Circuit from the order that granted the motion for summary judgment.

Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris,
Incorporated, et al. (U.S. District Court, Eastern District, New York, filed
April 29, 1998). During 2000, the court severed the claims of one of the plan
plaintiffs, Empire Blue and Blue Shield ("Empire"), from those of the other
claimants. On June 4, 2001, the jury returned a verdict awarding damages
against the defendants, including Lorillard. In its June 4, 2001 verdict, the
jury found in favor of the defendants on some of Empire's claims. One of the
jury's findings precluded it from considering Empire's claims for punitive
damages. The jury found in favor of Empire on certain other of plaintiff's
claims. As a result of these findings, Empire is entitled to an award of
approximately $17.8 million in total actual damages, including approximately
$1.5 attributable to Lorillard. The court denied plaintiff's post-verdict
application for trebling of the damages awarded by the jury. On November 1,
2001, the court entered a final judgment that reflects the jury's verdict. In
the final judgment, Empire was awarded approximately $1.5 million in actual
damages and approximately fifty-five thousand dollars in pre-judgment interest
for a total award against Lorillard of approximately $1.6 million. The
defendants, including Lorillard, have noticed an appeal from the final
judgment to the United States Court of Appeals for the Second Circuit.
Plaintiff's counsel has sought an award of $39.0 million in attorneys' fees.
During February of 2002, the court entered an order awarding plaintiffs'
counsel approximately $37.8 million in fees. As of March 1, 2002, the deadline
for defendants to seek appellate review of this ruling had not expired. This
matter also is a part of the litigation described under the heading "Eastern
District of New York Litigation" in Note 17 of the Notes to Consolidated
Financial Statements, included in Item 8.

A.O. Fox Memorial Hospital, et al. v. The American Tobacco Company, et al.
(Supreme Court, Nassau County, New York, filed March 30, 2000). Plaintiffs are
approximately 175 New York hospitals. During 2001, the court granted
defendants' motion to dismiss the complaint and entered final judgment in
their favor. Plaintiffs have noticed an appeal from the final judgment to the
Appellate Division of the Supreme Court of New York, Second Judicial
Department.

County of McHenry, Randolph Hospital District, et al. v. Philip Morris,
Inc., et al. (Circuit Court, Cook County, Illinois, filed July 13, 2000).

Betriebskrankenkasse aktiv, et al. v. Philip Morris, Inc., et al. (U.S.
District Court, Eastern District, New York, filed September 8, 2000).
Plaintiffs were eight private, not-for-profit German health insurance
providers. Plaintiffs voluntarily dismissed the case during February of 2002.

Reimbursement Cases by Labor Unions - Seven reimbursement cases are pending
in various federal or state courts in which the plaintiffs are labor unions,
their trustees or their trust funds. Lorillard is a defendant in each of these
suits. The Company is a defendant in two of the pending suits.

Central Laborers Welfare Fund, et al. v. Philip Morris, Inc., et al.
(Circuit Court, Madison County, Illinois, filed on or about June 9, 1997).

Operating Engineers Local 12 Health and Welfare Trust, et al. v. American
Tobacco Company, et al. (Superior Court, Los Angeles County, California, filed
September 16, 1997). The case was transferred to a coordinated proceeding
before the Superior Court of San Diego County, California. During 2000,
plaintiffs voluntarily dismissed the case with prejudice. Plaintiffs
subsequently noticed an appeal to the California Court of Appeal. In their
notice of appeal, plaintiffs stated they voluntarily dismissed the case due to
the limitations the trial court's pre-trial rulings placed on their claims.
During 2001, the California Court of Appeal affirmed the trial court's final
judgment and interlocutory rulings. During 2002, the California Supreme Court
agreed to consider plaintiffs' appeal.

30

National Asbestos Workers, et al. v. Philip Morris Incorporated, et al.
(U.S. District Court, Eastern District, New York, filed February 27, 1998).
The Company is a defendant in the case. This matter also is a part of the
litigation described under the heading "Eastern District of New York
Litigation" in Note 17 of the Notes to Consolidated Financial Statements,
included in Item 8.

Service Employees International Union Health & Welfare Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, District of Columbia, filed
March 19, 1998). During 2001, the U.S. Court of Appeals for the District of
Columbia issued a ruling that the trial court erred in not granting in its
entirety defendants' motion to dismiss the complaint and remanded the case to
the trial court for further proceedings. An order dismissing the action has
not been entered to date.

S.E.I.U. v. Philip Morris, Inc., et al. (U.S. District Court, District of
Columbia, filed June 22, 1998). To date, none of the defendants have received
service of process. During 2001, the U.S. Court of Appeals for the District of
Columbia issued a ruling that the trial court erred in not granting in its
entirety defendants' motion to dismiss the complaint and remanded the case to
the trial court for further proceedings. An order dismissing the action has
not been entered to date.

Holland, et al., Trustees of United Mine Workers v. Philip Morris
Incorporated, et al. (U.S. District Court, District of Columbia, filed July 9,
1998). During 2001, the U.S. Court of Appeals for the District of Columbia
issued a ruling that the trial court erred in not granting in its entirety
defendants' motion to dismiss the complaint and remanded the case to the trial
court for further proceedings. An order dismissing the action has not been
entered to date.

Bergeron, et al. v. Philip Morris Incorporated, et al. (U.S. District Court,
Eastern District, New York, filed September 29, 1999). The Company is a
defendant in the case. Plaintiffs are the trustees of the Massachusetts State
Carpenters Health Benefits Fund. This matter also is a part of the litigation
described under the heading "Eastern District of New York Litigation" in Note
17 of the Notes to Consolidated Financial Statements, included in Item 8.

Sheet Metal Workers Trust Fund, et al. v. Philip Morris, Inc., et al. (U.S.
District Court, District of Columbia, filed August 31, 1999). During 2001, the
U.S. Court of Appeals for the District of Columbia issued a ruling that the
trial court erred in not granting in its entirety defendants' motion to
dismiss the complaint and remanded the case to the trial court for further
proceedings. An order dismissing the action has not been entered to date.

Post-MSA Cases - In addition to the reimbursement cases, some suits have
been filed contesting, in various methods, the 1998 Master Settlement
Agreement (the "MSA"). Certain other actions have been filed in which
plaintiffs seek to intervene in cases governed by the MSA in order to achieve
a different distribution of the funds allocated by the MSA to the respective
states. Several of these cases have been dismissed in recent years, either
voluntarily by the plaintiffs or on defendants' adversarial motion. Lorillard
is a defendant in one such pending case. The Company is not a party to the
pending post-MSA case.

CONTRIBUTION CLAIMS -

In addition to the foregoing cases, approximately 15 cases are pending in
which private companies seek recovery of funds expended by them to individuals
whose asbestos disease or illness was alleged to have been caused in whole or
in part by smoking-related illnesses. Lorillard is named as a defendant in
each action, although it has not received service of process in one of the
cases. The Company is named as a defendant in four of the cases but has not
received service of process in two of them.

Raymark Industries v. R.J. Reynolds Tobacco Company, et al. (Circuit Court,
Duval County, Florida, filed September 15, 1997). The Company is a defendant
in the case but has not received service of process to date.

Fibreboard Corporation and Owens-Corning v. The American Tobacco Company, et
al. (Superior Court, Alameda County, California, filed December 11, 1997).

Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al.
(Supreme Court, New York County, New York, filed December 19, 1997). The
Company is a defendant in the case.

Raymark Industries v. R.J. Reynolds Tobacco Co., et al. (Circuit Court,
Duval County, Florida, filed December 31, 1997). To date, none of the
defendants have received service of process.

Raymark Industries v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, New York, filed January 30, 1998). This matter also
is a part of the litigation described under the heading "Eastern District of
New York Litigation" in Note 17 of the Notes to Consolidated Financial
Statements, included in Item 8.

Owens Corning v. R.J. Reynolds Tobacco Company, et al., (Circuit Court,
Jefferson County, Mississippi, filed August 21, 1998). The Company is a
defendant in the case. Owens Corning and several individual plaintiffs
asserted claims in

31

the suit. During 2000, the court granted defendants' motion to sever Owens
Corning's from those of the individual plaintiffs. During 2001, the court
granted defendants' motion for summary judgment as to Owens Corning's claims
and entered final judgment in favor of the defendants. Owens Corning has
noticed an appeal from the final judgment to the Mississippi Supreme Court.

UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation,
et al. (Supreme Court, New York County, New York, filed March 12, 1999). The
Company is a defendant in the case but has not received service of process.

Combustion Engineering, Inc., et al. v. RJR Nabisco, Inc., et al. (Circuit
Court, Jefferson County, Mississippi, filed December 18, 2000).

Gasket Holdings, Inc., et al. v. RJR Nabisco, Inc., et al. (Circuit Court,
Jefferson County, Mississippi, filed December 18, 2000).

Kaiser Aluminum & Chemical Corporation, et al. v. RJR Nabisco, Inc., et al.
(Circuit Court, Jefferson County, Mississippi, filed December 18, 2000).

T&N, Ltd., et al. v. RJR Nabisco, Inc., et al. (Circuit Court, Jefferson
County, Mississippi, filed December 18, 2000).

Gasket Holdings, Inc., et al. v. RJR Nabisco, Inc., et al. (Chancery Court,
Claiborne County, Mississippi, filed April 18, 2001).

W.R. Grace & Co. Conn, et al. v. RJR Nabisco, Inc., et al. (Circuit Court,
Jefferson County, Mississippi, filed April 24, 2001).

FILTER CASES -

A number of cases have been filed against Lorillard seeking damages for
cancer and other health effects claimed to have resulted from exposure to
asbestos fibers which were incorporated, for a limited period of time, ending
more than 40 years ago, into the filter material used in one of the brands of
cigarettes manufactured by Lorillard. Approximately 30 filter cases are
pending in federal and state courts against Lorillard. The Company is not a
defendant in any of the pending filter cases.

In certain of these cases, the manufacturer and supplier of the filter
material, Hollingsworth & Vose Company, also is a defendant. In addition, two
matters are pending against Hollingsworth & Vose Company in which Lorillard is
not a party. Lorillard has agreed to indemnify Hollingsworth & Vose Company
with respect to these matters, including the two cases in which Lorillard is
not named as a defendant.

TOBACCO-RELATED ANTITRUST CASES -

Wholesalers and Direct Purchaser Suits - Lorillard and other domestic and
international cigarette manufacturers and their parent companies, including
the Company, were named as defendants in nine separate federal court actions
brought by tobacco product wholesalers for violations of U.S. antitrust laws
and international law. The complaints allege that defendants conspired to fix
the price of cigarettes to wholesalers since 1993 in violation of the Sherman
Act. These actions seek certification of a class including all domestic and
international wholesalers similarly affected by such alleged conduct, and
damages, injunctive relief and attorneys' fees. These actions were
consolidated for pre-trial purposes in the U.S. District Court for the
Northern District of Georgia. The Court has granted class certification for a
four-year class (beginning in 1996 and ending in 2000) of domestic direct
purchasers. In February of 2002, Lorillard and the other defendants filed
motions for summary judgment seeking to dismiss the actions in their entirety.
The Company has been voluntarily dismissed without prejudice from all direct
purchaser cases.

The following suits filed by wholesalers and other direct purchasers of
cigarettes have been served:

The case of Amsterdam Tobacco Company, et al. v. Philip Morris Companies,
Inc., et al. (U.S. District Court, District of Columbia, filed March 6, 2000).
The case has been transferred to a Multi-District Litigation Proceeding
pending in the U.S. District Court for the Northern District of Georgia. The
court has entered the parties' stipulation dismissing the Company from the
case without prejudice. The case continues as to Lorillard.

The case of I. Goldschlack Company v. Philip Morris Companies, Inc., et al.
(U.S. District Court, Eastern District, Pennsylvania, filed March 9, 2000).
The case has been transferred to a Multi-District Litigation Proceeding
pending in the U.S. District Court for the Northern District of Georgia. The
court has entered the parties' stipulation dismissing the Company from the
case without prejudice. The case continues as to Lorillard.

32

The case of Suwanee Swifty Stores, Inc., et al. v. Philip Morris Companies,
Inc., et al. (U.S. District Court, Northern District, Georgia, filed March 14,
2000). The case has been transferred to a Multi-District Litigation Proceeding
pending in the U.S. District Court for the Northern District of Georgia. The
court has entered the parties' stipulation dismissing the Company from the
case without prejudice. The case continues as to Lorillard.

The case of Holiday Markets, Inc., et al. v. Philip Morris Companies, Inc.,
et al. (U.S. District Court, Northern District, Georgia, filed March 17,
2000). The case has been transferred to a Multi-District Litigation Proceeding
pending in the U.S. District Court for the Northern District of Georgia. The
court has entered the parties' stipulation dismissing the Company from the
case without prejudice. The case continues as to Lorillard.

The case of Marcus Distributors v. Philip Morris Companies, Inc., et al.
(U.S. District Court, Southern District, Illinois, filed April 25, 2000). The
court has approved the plaintiffs' motion to voluntarily dismiss the case
without prejudice. The case has been transferred to a Multi-District
Litigation Proceeding pending in the U.S. District Court for the Northern
District of Georgia. The case continues as to Lorillard.

The case of Hartz Foods v. Philip Morris Companies, Inc., et al. (U.S.
District Court, District of Columbia, filed May 10, 2000). The Company was
initially named a defendant, but Plaintiff did not serve the Company. The case
has been transferred to a Multi-District Litigation Proceeding pending in the
U.S. District Court for the Northern District of Georgia. The case continues
as to Lorillard.

In the case of Buffalo Tobacco Products, et al. v. Philip Morris Companies,
Inc., et al. (U.S. District Court, District of Columbia, filed February 8,
2000), the court entered an order granting the parties' stipulation dismissing
the Company without prejudice. The case has been transferred to a Multi-
District Litigation Proceeding pending in the U.S. District Court for the
Northern District of Georgia. The case continues as to Lorillard.

In the case of Rog-Glo Ltd. v. R.J. Reynolds Tobacco Company, et al. (U.S.
District Court, Southern District, New York, filed February 8, 2000),
plaintiff voluntarily dismissed the case without prejudice.

In the case of Williamson Oil Company Inc. v. Philip Morris Companies, Inc.,
et al. (U.S. District Court, Northern District, Georgia, filed February 28,
2000), the court has entered the parties' stipulation dismissing the Company
from the case without prejudice. The case has been transferred to a Multi-
District Litigation Proceeding pending in the U.S. District Court for the
Northern District of Georgia. The case continues as to Lorillard.

The Company and Lorillard were named as defendants in nine direct purchaser
suits alleging price-fixing in connection with the sale of cigarettes and
purporting to represent a class of indirect purchasers. The court has granted
the motion of one of the plaintiffs to voluntary dismiss its complaint. The
remaining direct purchaser actions were transferred by the Judicial Panel on
Multi-District Litigation to the U.S. District Court for the Northern District
of Georgia. Plaintiffs subsequently filed a single amended complaint that
consolidated the claims of the plaintiffs in the transferred cases into a
single class action. The amended complaint names Lorillard but not the Company
as a defendant, and the Company has been voluntarily dismissed from the
action. The case continues as to Lorillard. The court certified a four-year
class of direct purchasers. Pre-trial discovery has been completed.
Defendants' filed motions for summary judgment seeking to dismiss the action
in its entirety.

Indirect Purchaser Suits - Approximately 30 suits are pending in various
state courts alleging violations of state antitrust laws which permit indirect
purchasers, such as retailers and consumers, to sue under price fixing or
consumer fraud statutes. Approximately 18 states permit such suits. Lorillard
is a defendant in all but one of these indirect purchaser cases. Two indirect
purchaser suits, in Arizona and New York, have been dismissed in their
entirety. The Company was also named as a defendant in most of these indirect
purchaser cases but has been voluntarily dismissed without prejudice from all
of them.

The case of Smith v. Philip Morris Companies, Inc., et al. (District Court,
Seward County, Kansas, filed February 7, 2000). The Company has been dismissed
as a defendant in the case. The case continues as to Lorillard. The court
denied defendants' motion to dismiss. The court granted certification of a
class of consumers and pre-trial discovery is ongoing.

The case of Nierman v. Philip Morris Companies, Inc., et al. (Supreme Court,
New York County, New York, filed March 6, 2000). The court dismissed the case
in its entirety as to all defendants.

The case of Sylvester v. Philip Morris Companies, Inc., et al. (Supreme
Court, New York County, New York, filed March 8, 2000). The court dismissed
the case in its entirety as to all defendants.

The case of Taylor v. Philip Morris Companies, et al. (Superior Court,
Cumberland County, Maine, filed March 24, 2000). The court has approved the
parties' stipulation dismissing the Company from the case without prejudice.
The case

33

continues as to Lorillard. The court denied defendants' motion to dismiss.

The case of Belch v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed April 11, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.

The case of Belmonte v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Alameda County, California, filed April 11, 2000). The Company was
named as a defendant in the case but is no longer a party to the suit. The
case continues as to Lorillard. The case has been assigned to a coordinated
proceeding in the Superior Court of Alameda County, California.

The case of Shafer v. Philip Morris Companies, Inc., et al. (District Court,
South Central Judicial District, Morton County, North Dakota, filed April 18,
2000). The Company was a defendant in the case. The court has entered an order
approving plaintiff's motion voluntarily dismissing the Company without
prejudice from the case. The court has entered final judgment in favor of the
Company reflecting the dismissal order. The case continues as to Lorillard.

The case of Swanson v. Philip Morris Companies, Inc., et al. (Circuit Court,
Hughes County, South Dakota, filed April 18, 2000). The court has approved the
parties' stipulation dismissing the Company from the case without prejudice.
The case continues as to Lorillard.

The case of Kissel v. Philip Morris Companies, Inc., et al. (Circuit Court,
Brooke County, West Virginia, filed May 2, 2000). The court has approved the
parties' stipulation dismissing the Company from the case without prejudice.
The case continues as to Lorillard. The court denied defendants' motion to
dismiss.

The case of Cusatis v. Philip Morris Companies, Inc., et al. (Circuit Court,
Milwaukee County, Wisconsin, filed May 5, 2000). The court has entered an
order granting plaintiff's motion to voluntarily dismiss the Company from the
case without prejudice. The case continues as to Lorillard.

The case of Barnes v. Philip Morris Companies, Inc., et al. (Superior Court,
District of Columbia, filed May 11, 2000). The court has entered an order
granting plaintiff's motion to voluntarily dismiss the Company from the case
without prejudice. The case continues as to Lorillard.

The case of Aguayo v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed May 15, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.

The case of Campe v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed May 15, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.

The case of Phillips v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Alameda County, California, filed May 15, 2000). The Company was named
as a defendant in the case but is no longer a party to the suit. The case
continues as to Lorillard. The case has been assigned to a coordinated
proceeding in the Superior Court of Alameda County, California.

The case of Lau v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed May 25, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.

The case of Unruh v. R.J. Reynolds Tobacco Company, et al. (Second Judicial
District Court, Washoe County, Nevada, filed June 9, 2000). The Company is not
named as a defendant in this matter. The case continues as to Lorillard. The
complaint was amended and the case was renamed Pooler v. R.J. Reynolds Tobacco
Co., et al. The court denied defendants' motion to dismiss.

The case of Baker v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed June 15, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.

34

The case of In re Cigarette Antitrust Cases, (Judicial Counsel Coordination
Proceeding 4114, Superior Court of Alameda County, California). Approximately
twenty indirect purchaser suits under California state law were filed in state
courts in various California counties. The Company and Lorillard were named as
defendants in each of the cases. The actions were subsequently transferred for
coordination to the Superior Court for Alameda County, California. Plaintiffs
have filed a single amended class action complaint with each of the plaintiffs
who brought the original complaints named as plaintiffs. The amended complaint
names Lorillard as a defendant but did not name the Company, which plaintiffs
had dismissed from each of the underlying suits. The case continues as to
Lorillard.

In the case of Brownstein v. Philip Morris Companies, Inc., et al. (Circuit
Court, Broward County, Florida, filed February 8, 2000), the court has entered
a stipulation dismissing the Company from the case without prejudice. The case
continues as to Lorillard.

In the case of Del Serrone v. Philip Morris Companies, Inc., et al. (Circuit
Court, Wayne County, Michigan, filed February 8, 2000), the court has entered
a stipulation dismissing the Company from the case without prejudice. The case
continues as to Lorillard. The court denied defendants' motion to dismiss.
Pre-trial discovery has been completed. Class certification proceedings
pending and defendants' have filed motions for summary judgment.

In the case of Gray v. Philip Morris Companies, Inc., et al. (Superior
Court, Pima County, Arizona, filed February 11, 2000), the court dismissed the
case in its entirety as to all defendants. The case is on appeal.

In the case of Lennon v. Philip Morris Companies, Inc., et al. (Supreme
Court, New York County, New York, filed February 9, 2000), the court dismissed
the case in its entirety as to all defendants.

In the case of Ludke v. Philip Morris Companies, Inc., et al. (District
Court, Hennepin County, Minnesota, filed February 14, 2000), the court has
entered the parties' stipulation dismissing the Company from the case without
prejudice. The case continues as to Lorillard. The court granted defendants'
motion to dismiss claims under Minnesota's consumer fraud statute and
deceptive trade practices statute. The claim under Minnesota's state antitrust
statute remains. The court denied class certification.

In the case of Romero v. Philip Morris Companies, Inc., et al. (U.S.
District Court, New Mexico, filed February 9, 2000), the court has entered the
parties' stipulation dismissing the Company from the case without prejudice.
The case continues as to Lorillard. The court dismissed the claim under New
Mexico's deceptive trade practices statute. The claim under New Mexico's state
antitrust statute remains.

In the case of Withers v. Philip Morris Companies, Inc., et al. (Circuit
Court, Jefferson County, Tennessee, filed February 9, 2000), plaintiffs
voluntarily dismissed the case against all defendants without prejudice when
the named plaintiff died. The plaintiffs refiled the case, but did not name
Lorillard or the Company as a defendant.

Tobacco Growers Suit - DeLoach v. Philip Morris Inc., et al. (U.S. District
Court, Middle District of North Carolina, filed February 16, 2000). Lorillard
is named as a defendant in a lawsuit that, after several amendments, alleges
only antitrust violations. The other major domestic tobacco companies are also
presently named as defendants, and the plaintiffs have now added the major
leaf buyers as defendants. This case was originally filed in U.S. District
Court, District of Columbia, and transferred to a North Carolina federal court
upon motion by the defendants. Plaintiffs seek certification of a class
including all tobacco growers and quota holders (the licenses that a farmer
must either own or rent to sell the crop), who sold tobacco or held quota
under the federal tobacco leaf price support program since February of 1996.
The plaintiffs' claims relate to the conduct of the companies in the purchase
of tobacco through the auction system under the federal program. The suit
seeks an unspecified amount of actual damages, trebled under the antitrust
laws, and injunctive relief.

Item 4. Submission of Matters to a Vote of Security Holders.

Set forth below is information relating to the 2002 Special Meeting of
Shareholders of the Company.

The special meeting was called to order at 11:00 A.M., January 4, 2002.
Represented at the meeting, in person or by proxy, were 165,334,181 shares,
approximately 86.3% of the issued and outstanding shares entitled to vote.

The following business was transacted:

Approval of an amendment to the Company's Certificate of Incorporation
- -----------------------------------------------------------------------
creating Carolina Group Stock
- -----------------------------

Approved - 127,671,823 shares voted to approve an amendment to the Company's
Certificate of Incorporation by which the Company's Carolina Group Stock was
created. 35,760,806 shares voted against, and 1,901,552 shares abstained.

35

Approval of the Carolina Group 2002 Stock Option Plan
- -----------------------------------------------------

Approved - 116,458,210 shares voted to approve the adoption of the Carolina
Group 2002 Stock Option Plan. 47,253,405 shares voted against, and 1,622,565
shares abstained. In addition, there was one share as to which brokers
indicated that they did not have authority to vote.




EXECUTIVE OFFICERS OF THE REGISTRANT

First
Became
Name Position and Offices Held Age Officer
- ------------------------------------------------------------------------------

Susan Becker ............ Vice President-Tax 41 2002
Jason Boxer ............. Vice President-Real Estate 31 2001
Gary W. Garson .......... Vice President and 55 1988
Assistant Secretary
Barry Hirsch ............ Senior Vice President and 68 1971
Secretary
Herbert C. Hofmann ...... Senior Vice President 59 1979
Peter W. Keegan ......... Senior Vice President and 57 1997
Chief Financial Officer
John J. Kenny ........... Treasurer 64 1991
Guy A. Kwan ............. Controller 59 1987
Alan Momeyer ............ Vice President-Human Resources 54 1996
Richard E. Piluso ....... Vice President-Internal Audit 63 1990
Arthur L. Rebell ........ Senior Vice President and 60 1998
Chief Investment Officer
Andrew H. Tisch ......... Office of the President and 52 1985
Chairman of the Executive
Committee
James S. Tisch .......... Office of the President, 49 1981
President and Chief Executive
Officer
Jonathan M. Tisch ....... Office of the President 48 1987
Laurence A. Tisch ....... Co-Chairman of the Board 79 1959
Preston R. Tisch ........ Co-Chairman of the Board 75 1960


Laurence A. Tisch and Preston R. Tisch are brothers. Andrew H. Tisch and
James S. Tisch are sons of Laurence A. Tisch and Jonathan M. Tisch is a son of
Preston R. Tisch. None of the other officers or directors of Registrant is
related to any other.

All executive officers of Registrant, except Jason Boxer and Arthur L.
Rebell, have been engaged actively and continuously in the business of
Registrant for more than the past five years. Prior to being named Vice
President - Real Estate in February 2001, Jason Boxer served in various
capacities within the Registrant's real estate department since 1998. Prior
thereto, he had been an associate attorney with the law firm of Battle Fowler,
LLP since 1995. Arthur L. Rebell has been a senior vice president of the
Company since June of 1998. Prior to joining Loews, during 1997 and 1998 he
was an associate professor of Mergers and Acquisitions at New York University,
a Managing Director of Highview Capital and a Partner in Strategic Investors.
Prior to that he was a Managing Director of Schroders. Prior to being named
Vice President-Tax in 2002, Susan Becker held various positions in
Registrant's tax department, most recently as an Assistant Vice President.

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

36

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.

Price Range of Common Stock*

Loews Corporation's common stock is listed on the New York Stock Exchange.
The following table sets forth the reported consolidated tape high and low
sales prices in each calendar quarter of 2001 and 2000:



2001 2000
------------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------

First Quarter ............ $59.95 $44.00 $ 30.56 $19.13
Second Quarter ........... 72.50 56.51 34.06 24.63
Third Quarter ............ 63.82 41.05 44.38 29.81
Fourth Quarter ........... 58.00 44.55 52.47 37.25


Dividend Information*

The Company has paid quarterly cash dividends on its common stock in each
year since 1967. Regular dividends of $.13 per share of common stock were paid
in each calendar quarter of 2000 and in the first calendar quarter of 2001.
The Company increased its dividend to $.15 per share beginning in the second
calendar quarter of 2001.

Approximate Number of Equity Security Holders

The Company has approximately 2,100 holders of record of Loews Common Stock
and 5 holders of record of Carolina Group stock.

* Per share amounts have been adjusted to give retroactive effect to the two-
for-one stock split effective March 21, 2001.

37

Item 6. Selected Financial Data.





Year Ended December 31 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------
(In millions, except per share data)



Results of Operations:
Revenues(1) . . . . . . . . . . $19,417.2 $21,251.2 $21,442.7 $21,296.0 $20,266.6
(Loss) income before taxes,
minority interest and
cumulative effect of
accounting changes-net . . . . $ (813.1) $ 3,205.9 $ 944.2 $ 1,077.4 $ 1,593.2
(Loss) income before cumulative
effect of accounting changes . $ (535.8) $ 1,876.7 $ 521.1 $ 464.8 $ 793.6
Cumulative effect of changes in
accounting principles-net . . (53.3) (157.9)
- ------------------------------------------------------------------------------------------------
Net (loss) income . . . . . . . $ (589.1) $ 1,876.7 $ 363.2 $ 464.8 $ 793.6
================================================================================================

(Loss) Income Per Share (2):

(Loss) income before cumulative
effect of accounting changes . $ (2.75) $ 9.44 $ 2.40 $ 2.03 $ 3.45
Cumulative effect of changes in
accounting principles-net . . (.27) (.73)
- ------------------------------------------------------------------------------------------------
Net (loss) income . . . . . . . $ (3.02) $ 9.44 $ 1.67 $ 2.03 $ 3.45
================================================================================================

Financial Position:

Investments . . . . . . . . . . $41,159.1 $41,332.7 $40,633.0 $ 42,705.2 $41,619.1
Total assets . . . . . . . . . . 75,251.1 71,841.5 69,463.7 70,979.4 69,983.1
Long-term debt . . . . . . . . . 5,920.3 6,040.0 5,706.3 5,966.7 5,752.6
Shareholders' equity . . . . . . 9,649.3 11,191.1 9,977.7 10,201.2 9,665.1
Cash dividends per share (2) . . .58 .50 .50 .50 .50
Book value per share (2) . . . . 50.39 56.74 47.75 45.31 42.02
Shares of common stock
Outstanding (2). . . . . . . . 191.5 197.2 209.0 225.2 230.0
- ------------------------------------------------------------------------------------------------

(1) Certain amounts applicable to prior periods have been reclassified to conform to the
presentation followed in 2001.

(2) Share and per share amounts have been adjusted to give retroactive effect to the two-for-
one stock split effective March 21, 2001.


38


Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.


OVERVIEW

Loews Corporation reported a loss for the year ended 2001 of $589.1 million or
$3.02 per share, compared to net income of $1,876.7 million or $9.44 per share
in 2000. The net loss was primarily attributable to CNA's second quarter
reserve charge of $1.8 billion and losses of $264.6 million at CNA related to
the World Trade Center attack and related events, as well as the fourth
quarter restructuring and other charges at CNA, and a charge of $121.0 million
after-taxes at Lorillard in the second quarter related to the agreement with
the Engle class.

The net loss in 2001 includes net investment gains of $792.2 million or $4.06
per share compared to gains of $577.1 million or $2.90 per share in the prior
year. The net loss also includes a charge for an accounting change of $53.3
million or $.27 per share, related to the adoption by CNA of a new accounting
standard for derivative instruments.

Net operating income (loss) is calculated by deducting net investment gains or
losses (investment gains or losses after deduction of related income taxes and
minority interests) and the cumulative effect of a change in accounting
principle, net of tax and minority interest, from net income (loss). Analysts
following our stock have advised us that such information is meaningful in
assisting them in measuring the performance of our insurance subsidiaries. In
addition, it is used in management's discussion of the results of operations
for the insurance related segments due to the significance of the amount of
net investment gains or losses. Net operating income (loss) is also a common
measure throughout the insurance industry. Net realized investment gains are
excluded from this operating measure because investment gains or losses
related to CNA's available-for-sale investment portfolio are largely
discretionary, are generally driven by economic factors that are not
necessarily consistent with key drivers of underwriting performance, and are
therefore not an indication of trends in operations.

Net income for the quarter ended December 31, 2001 was $188.1 million or $.98
per share, compared to $502.9 million or $2.55 per share in 2000. Net
investment gains amounted to $236.7 million in the fourth quarter of 2001,
compared to gains of $172.6 million in the fourth quarter of 2000.

Net operating loss, which excludes net investment gains and losses, for the
fourth quarter was $48.6 million or $.26 per share, compared to net operating
income of $330.3 million or $1.67 per share in 2000. The lower results in the
current quarter are primarily due to charges of $110.8, $46.1 and $61.2
million, after-taxes and minority interest, at CNA related to restructuring
and other related charges, Enron related losses, and reserve strengthening
primarily for the current accident year, respectively.

Revenues for the year ended 2001 were $19.4 billion, compared to $21.3 billion
in 2000. Revenues for the year ended 2001 declined due primarily to lower
earned premiums for CNA's Property-Casualty business.

At year end 2001, Loews Corporation had a book value of $50.39 per share
compared to $56.74 per share in 2000.

Issuance Of Carolina Group Tracking Stock

On January 4, 2002 the shareholders of Loews Corporation authorized and
approved the creation of a new class of common stock of the Company, called
Carolina Group stock and on February 6, 2002 in an initial public offering the
Company issued 40.3 million shares of Carolina Group stock.

The Carolina Group stock, commonly called a tracking stock, is intended to
reflect the economic performance of a defined group of assets and liabilities
of the Company referred to as the Carolina Group. The Company has attributed
the following assets and liabilities to the Carolina Group:

(a) The Company's 100% stock ownership interest in Lorillard, Inc.;

(b) $2.5 billion of notional, intergroup debt owed by the Carolina Group to
the Loews Group, bearing interest at the annual rate of 8.0% and, subject to
optional prepayment, due December 31, 2021;

(c) any and all liabilities, costs and expenses of the Company and
Lorillard, Inc. and the subsidiaries and predecessors of Lorillard, Inc.,
arising out of or related to tobacco or otherwise arising out of the past,
present or future business of Lorillard, Inc. or its subsidiaries or
predecessors, or claims arising out of or related to the sale of any
businesses previously sold by Lorillard, Inc. or its subsidiaries or
predecessors, in each case, whether grounded in tort, contract, statute or
otherwise, whether pending or asserted in the future;

(d) all net income or net losses arising from the assets and liabilities
that are reflected in the Carolina Group and all net proceeds from any
disposition of those assets, in each case, after deductions to reflect
dividends paid to holders of Carolina Group stock or credited to the Loews
Group in respect of its intergroup interest; and

(e) any acquisitions or investments made from assets reflected in the
Carolina Group.

Holders of Carolina Group stock have an approximately 23.17% economic interest
in the Carolina Group.

The Loews Group consists of all of the Company's assets and liabilities other
than the 23.17% economic interest in the Carolina Group represented by the
outstanding Carolina Group stock, and includes as an asset the notional
intergroup debt of the Carolina Group referred to above.

The creation of the Carolina Group and the issuance of Carolina Group stock
does not change the Company's ownership of Lorillard, Inc. or Lorillard,
Inc.'s status as a separate legal entity. The Carolina Group and the Loews
Group are notional groups that are intended to reflect the performance of the
defined sets of assets and liabilities

39

of each such group as described above. The Carolina Group and the Loews Group
are not separate legal entities and the attribution of assets and liabilities
to the Loews Group or the Carolina Group does not affect title to the assets
or responsibility for the liabilities.

Holders of the Company's common stock and of Carolina Group stock are
shareholders of Loews Corporation and are subject to the risks related to an
equity investment in Loews Corporation.



RESULTS OF OPERATIONS BY BUSINESS SEGMENT

CNA

Insurance operations are conducted by subsidiaries of CNA Financial
Corporation ("CNA"). CNA is an 89% owned subsidiary of the Company.

CNA underwent significant management changes, strategic realignment and
restructuring in the second half of 2001. These management changes as well as
the strategic realignment and restructuring have changed the way CNA manages
its operations and makes business decisions; and therefore, necessitated a
change in CNA's reportable segments.

The changes made to CNA's reportable segments were as follows: (i) Commercial
Insurance and CNA Excess & Select (formerly included in Agency Market
Operations) and Risk Management Operations, were combined into Standard Lines;
(ii) CNA Pro, CNA HealthPro, CNA Guaranty and Credit (formerly included in
Specialty Operations) and Global Operations were combined into Specialty
Lines; (iii) losses and expenses related to the centralized adjusting and
settlement of environmental pollution and other mass tort and asbestos
("APMT") claims previously included in Commercial Insurance, CNA Excess &
Select, Risk Management and Global Operations are now included in the Other
Insurance segment; and (iv) Personal Insurance, CNA UniSource, agriculture
insurance, entertainment insurance and other financial lines were moved from
the various property-casualty segments to the Other Insurance segment. CNA Re,
Group Operations and Life Operations are unchanged from the prior segment
presentation.

CNA now conducts its operations through five operating groups: Standard Lines,
Specialty Lines and CNA Re (these groups comprise the Company's Property-
Casualty segment); Group Operations and Life Operations. In addition to these
five operating segments, certain other activities are reported in the Other
Insurance segment. These segments reflect the way CNA manages its operations
and makes business decisions. Segment disclosures of prior periods have been
modified to conform with the current year presentation.

World Trade Center Event

During the third quarter of 2001, CNA experienced a severe catastrophe loss
estimated at $468.0 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 $50.0 billion
and includes all lines of insurance. The current estimate takes into account
CNA's substantial reinsurance agreements, including its catastrophe
reinsurance program and corporate reinsurance programs. These loss estimates
are subject to considerable uncertainty. Subsequent developments on claims
arising out of the WTC event, as well as the collectibility of reinsurance
recoverables, could result in an increase in the total estimated net loss,
which could be material to CNA's results of operations.

The following table provides management's estimate of losses related to the
WTC event on a gross basis (before reinsurance) and a net basis (after
reinsurance) on CNA's operating segments:




Net of
Tax
Pretax Aggregate Total and
Gross Net Reinsurance Pretax Minority
Year Ended December 31, 2001 Losses Impact (a) Benefit Impact Interest
- ------------------------------------------------------------------------------------------------
(In millions)



Standard Lines $ 375.0 $ 185.0 $108.0 $ 77.0 $ 44.0
Specialty Lines 214.0 30.0 12.0 18.0 11.0
CNA Re 662.0 410.0 139.0 271.0 154.0
- ------------------------------------------------------------------------------------------------
Total Property and Casualty 1,251.0 625.0 259.0 366.0 209.0
Group Operations 322.0 80.0 80.0 46.0
Life Operations 75.0 22.0 22.0 12.0
- ------------------------------------------------------------------------------------------------

Total $1,648.0 $ 727.0 $259.0 $468.0 $267.0
================================================================================================

(a) Pretax impact of the WTC event before the corporate aggregate reinsurance treaties. The net
impact includes $85.0 of reinstatement and additional premiums.


40

Second Quarter 2001 Prior Year Reserve Strengthening

During the second quarter of 2001, CNA noted the continued emergence of
adverse loss experience across several lines of business related to prior
years that are discussed in further detail below. CNA completed a number of
reserve studies during the second quarter of 2001 for many of its lines of
business, including those in which these adverse trends were noted. With
respect to APMT reserves, CNA reviewed internal claims data as well as studies
generated by external parties, including a significant industry analysis of
asbestos and environmental pollution exposures by an international rating
agency. As a result of these various reviews, management concluded that
ultimate losses, including losses for APMT claims, would be higher in the
range of possible outcomes than previously estimated. CNA recorded charges of
$2.6 billion ($1.5 billion after-tax and minority interest), net of the
related corporate aggregate reinsurance treaty benefit, to strengthen reserves
associated with a change in estimate of prior year net loss reserves,
including $1.2 billion pretax ($.7 billion after-tax and minority interest)
related to APMT.

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




Standard Specialty Other
Year Ended December 31, 2001 Lines Lines CNA Re Insurance Total
- ------------------------------------------------------------------------------------------------
(In millions)


Net reserve strengthening excluding
the impact of the corporate aggregate
reinsurance treaty:
APMT $ 57.0 $ 1,140.0 $1,197.0
Non-APMT $ 523.0 $407.0 574.0 90.0 1,594.0
- ------------------------------------------------------------------------------------------------

Total 523.0 407.0 631.0 1,230.0 2,791.0
Pretax benefit from corporate aggregate
reinsurance treaty on accident year 1999 (197.0) (26.0) (223.0)*
Accrual for insurance-related assessments 48.0 48.0
- ------------------------------------------------------------------------------------------------

Net reserve strengthening and related
accruals 374.0 407.0 605.0 1,230.0 2,616.0
- ------------------------------------------------------------------------------------------------

Change in estimate of premium accruals 629.0 3.0 (13.0) (3.0) 616.0
Reduction of related commission accruals (50.0) (50.0)
- ------------------------------------------------------------------------------------------------

Net premium and related accrual reductions 579.0 3.0 (13.0) (3.0) 566.0
- ------------------------------------------------------------------------------------------------

Total pretax second quarter 2001 reserve
strengthening and other related accruals $ 953.0 $410.0 $ 592.0 $ 1,227.0 $3,182.0
================================================================================================

Total after-tax and minority interest
second quarter 2001 reserve strengthening
and other related accruals $ 539.0 $241.0 $ 334.0 $ 695.0 $1,809.0
================================================================================================
* $500.0 of ceded losses reduced by $230.0 of ceded premiums and $47.0 of interest charges.


The non-APMT adverse loss development was the result of recent 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 health care-related coverages. A brief summary of
these lines of business and the associated reserve development is discussed
below and in more detail in the discussion of CNA's segments.

Approximately $600.0 million of the adverse loss development, excluding the
impact of the corporate aggregate reinsurance treaty, is a result of analyses
of several coverages provided to commercial entities written by various
segments of CNA. These analyses 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. In addition,
the number of commercial automobile liability claims was higher than expected.
Finally, 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.

An analysis of CNA Re's assumed reinsurance business showed that the paid and
reported losses for recent accident years were higher than expectations and
resulted in an increase of net reserves of approximately $560.0 million,
excluding the impact of the corporate aggregate reinsurance treaty. The
estimated ultimate loss ratios for these recent accident years have been
revised to reflect the paid and reported losses.

Approximately $320.0 million of adverse loss development, excluding the impact
of the corporate aggregate reinsurance treaty, occurred in

41

Specialty Lines and was caused by coverages provided to health care-related
entities. The level of paid and reported losses associated with coverages
provided to national long-term care facilities was higher than expected. In
addition, the average size of claims resulting from coverages provided to
physicians and institutions providing health care-related services increased
more than expected.

Concurrent with CNA's review of loss reserves, CNA completed comprehensive
studies of estimated premium receivable accruals on retrospectively rated
insurance policies and involuntary market facilities. As a result, CNA
recorded a $.6 billion pretax ($.3 billion after-tax and minority interest)
charge related to retrospective premium and other premium accruals ("premium
accruals"). The studies included the review of all such retrospectively rated
insurance policies and the current estimate of ultimate losses.

As a result of this review and changes in premiums associated with the change
in estimates for loss reserves, CNA recorded a pretax reduction in premium
accruals of $566.0 million. The effect on net earned premiums was $616.0
million offset by a reduction of accrued commissions of $50.0 million.
Approximately $188.0 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
for the year. Accruals for ceded premiums related to other reinsurance
treaties increased $83.0 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.

Aggregate Reinsurance Treaties

In 1999, CNA entered into an aggregate reinsurance treaty related to the 1999
through 2001 accident years covering substantially all of CNA's property-
casualty lines of business (the "Aggregate Cover"). CNA has two sections of
coverage under the terms of the Aggregate Cover. These coverages attach at
defined loss and allocated loss adjustment expense (collectively, "losses")
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 $500.0 million of ceded losses with an
aggregate limit of $1.0 billion of ceded losses for the three-year period. The
ceded premiums are a percentage of ceded losses and for each $500.0 million of
limit the premium is $230.0 million. The second section of the Aggregate
Cover, which is only available for accident year 2001, provides additional
coverage of up to $510.0 million of ceded losses for a maximum ceded premium
of $310.0 million. Under the Aggregate Cover, interest charges on the funds
withheld accrue at 8.0% 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 8.3% per
annum.

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 during 2001, the $500.0 million limit
on the 1999 accident year under the first section was also fully utilized. No
losses have been ceded to the remaining $500.0 million of limit on accident
years 2000 and 2001 under the first section.

In 2001, CNA entered into a one-year aggregate reinsurance treaty related to
the 2001 accident year covering substantially all property-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
$760.0 million of ceded losses. 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 8.0% per
annum. The interest rate increases to 10.0% per annum if the aggregate loss
ratio exceeds certain thresholds.

The impact of the Aggregate and CCC Cover on pretax operating results for the
year ended December 31, 2001, was as follows:




Aggregate CCC
Cover Cover Total
- ------------------------------------------------------------------------------
(In millions)

Ceded earned premiums $ (543.0) $(260.0) $ (803.0)
Ceded losses 1,010.0 470.0 1,480.0
Interest charges (81.0) (20.0) (101.0)
- ------------------------------------------------------------------------------
Pretax benefit on operating results $ 386.0 $ 190.0 $ 576.0
==============================================================================


42

The pretax benefit from the Aggregate Cover and CCC Cover by operating segment
on estimated losses related to the second quarter 2001 reserve strengthening,
the WTC event and Core operations for the year ended December 31, 2001, was as
follows:




Second
Quarter 2001
Reserve WTC Core
Strengthening Event Operations Total
- ------------------------------------------------------------------------------
(Amounts in millions)


Standard Lines $197.0 $108.0 $76.0 $381.0
Specialty Lines 12.0 21.0 33.0
CNA Re 26.0 139.0 (3.0) 162.0
- ------------------------------------------------------------------------------

Pretax benefit on operating results $223.0 $259.0 $94.0 $576.0
==============================================================================


2001 Restructuring

In 2001, CNA finalized and approved two separate restructuring plans. The
first plan, which related to CNA's Information Technology operations (the "IT
Plan"), was approved in June of 2001. The second plan, which principally
relates to restructuring the Property-Casualty segments and Life Operations,
discontinuation of variable life and annuity business and consolidation of
real estate locations (the "2001 Plan"), was approved in December of 2001.

IT Plan

The overall goal of the IT Plan was to improve technology for the underwriting
function throughout CNA 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 include 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 includes common architecture and platform
standards that directly support CNA's strategies.

As summarized in the following table, CNA incurred $62.0 million, pretax, of
restructuring and other related charges in 2001 for the IT Plan. CNA does not
expect to incur significant amounts of additional charges with respect to the
IT Plan in any future period and, as a result, does not intend to separately
classify such expenses as restructuring and other related charges when they
occur.

IT Plan charges by segment for the year ended December 31, 2001, are as
follows:





Employee
Termination Impaired
and Related Asset Other
Benefit Costs Charges Costs Total
- ------------------------------------------------------------------------------
(In millions)


Standard Lines $ 5.0 $ 1.0 $ 6.0
Specialty Lines 2.0 2.0
- ------------------------------------------------------------------------------
Total Property-Casualty 7.0 1.0 8.0
Life Operations 17.0 17.0
Other Insurance 22.0 14.0 $1.0 37.0
- ------------------------------------------------------------------------------

Total $29.0 $32.0 $1.0 $62.0
==============================================================================


43

In connection with the IT Plan after the write-off of impaired assets, CNA
accrued $30.0 million of restructuring and other related charges in 2001 (the
"IT Plan Initial Accrual"). These charges primarily related to $29.0 million
of workforce reductions of approximately 260 positions gross and 249 positions
net and $1.0 million of other costs.

The following table summarizes the IT Plan Initial Accrual and the activity in
that accrual during 2001. Approximately $8.0 million of the remaining accrual
is expected to be paid out during 2002.




Employee
Termination Impaired
and Related Asset Other
Benefit Costs Charges Costs Total
- ------------------------------------------------------------------------------
(In millions)


Initial accrual $29.0 $ 32.0 $1.0 $ 62.0
Cost that did not require cash (32.0) (32.0)
Payments charged against liability (19.0) (19.0)
- ------------------------------------------------------------------------------
Accrued costs $10.0 $1.0 $11.0
==============================================================================


Through December 31, 2001, approximately 249 employees were released due to
the IT Plan, nearly all of whom were technology support staff.

The IT Plan is not expected to result in decreased operating expense in the
foreseeable future. This is because savings from the workforce reduction will
be offset by new technology-related initiatives.

2001 Plan

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

As summarized in the following table, CNA incurred $189.0 million, pretax, of
restructuring and other related charges for the 2001 Plan. CNA does not expect
to incur significant amounts of additional charges with respect to the 2001
Plan in any future period and, as a result, does not intend to separately
classify such expenses as restructuring and other related charges when they
occur.

2001 Plan charges by segment for the year ended December 31, 2001, are as
follows:




Employee
Termination Lease Impaired
and Related Termination Asset Other
Benefit Costs Costs Charges Costs Total
- ------------------------------------------------------------------------------
(In millions)


Standard Lines $40.0 $ 40.0
Specialty Lines 7.0 $ 4.0 7.0
CNA Re 2.0 6.0
- ------------------------------------------------------------------------------
Total Property-
Casualty 49.0 4.0 53.0
Group Operations 1.0 1.0
Life Operations 9.0 $ 9.0 $35.0 53.0
Other Insurance 9.0 52.0 21.0 82.0
- ------------------------------------------------------------------------------

Total $68.0 $56.0 $30.0 $35.0 $189.0
==============================================================================


44

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

The 2001 Plan charges incurred by Standard Lines were $40.0 million, related
entirely to employee termination and related benefit costs for planned
reductions in the workforce of 1,063 positions, gross and net, of which $27.0
million related to severance and outplacement costs and $13.0 million related
to other salary costs. Through December 31, 2001, approximately 510 employees
were released due to the 2001 Plan. Approximately 272 of these employees were
administrative, technology or financial support staff; approximately 164 of
these employees were underwriters, claim adjusters and related insurance
services staff; and approximately 74 of these employees were in various other
positions.

The 2001 Plan charges incurred by Specialty Lines were $7.0 million, related
entirely to employee termination and related benefit costs for planned
reductions in the workforce of 177 positions, gross and net, of which $5.0
million related to severance and outplacement costs and $2.0 million related
to other salary costs. Through December 31, 2001, approximately 107 employees
were released due to the 2001 Plan. Approximately 47 of these employees were
administrative, technology or financial support staff; approximately 45 of
these employees were underwriters, claim adjusters, and related insurance
services staff; and approximately 15 of these employees were in various
positions.

The 2001 Plan charges incurred by CNA Re were $6.0 million. Costs related to
employee termination and related benefit costs for planned reductions in the
workforce of 33 positions, gross and net, amounted to $2.0 million, all of
which related to severance and outplacement costs. Through December 31, 2001
no employees in CNA Re were released due to the 2001 Plan. The remaining $4.0
million of charges incurred by CNA Re related to lease termination costs.

The 2001 Plan charges incurred by Group Operations were $1.0 million, related
entirely to employee termination and related benefit costs for planned
reductions in the workforce of 38 positions, gross and net. Through December
31, 2001 no employees in Group Operations were released due to the 2001 Plan.

The 2001 Plan charges incurred by Life Operations were $53.0 million. Costs
related to employee termination and related benefit costs for planned
reductions in the workforce of 356 positions, gross and net, amounted to $9.0
million, of which $8.0 million related to severance and outplacement costs and
$1.0 million related to other salary costs. Through December 31, 2001,
approximately seven positions were released due to the 2001 Plan which were
primarily administrative, technology and financial support staff positions.
Life Operations incurred $9.0 million of impaired asset charges related to
software. Other costs of $35.0 million in Life Operations relate to a write-
off of deferred acquisition costs on in-force variable life and annuity
contracts as CNA believes that the decision to discontinue these products will
negatively impact the persistency of the business.

The 2001 Plan charges incurred by the Other Insurance segment were $82.0
million. Costs related to employee termination and related benefit costs for
planned reductions in the workforce of 194 positions, gross and net, amounted
to $9.0 million, of which $6.0 million related to severance and outplacement
costs and $3.0 million related to other salary costs. Through December 31,
2001, 129 employees were released due to the 2001 Plan. Approximately 114 of
these employees were administrative, technology or financial support staff;
and approximately 15 of these employees were in various other positions. The
Other Insurance segment also incurred $73.0 million of lease termination and
asset impairment charges related to office closure and consolidation decisions
not within the control of the other segments affected.

In connection with the 2001 Plan, CNA accrued $189.0 million of these
restructuring and other related charges (the "2001 Plan Initial Accrual").
These charges include employee termination and related benefit costs, lease
termination costs, impaired asset charges and other costs. The following table
summarizes the 2001 Plan Initial Accrual and the activity in that accrual
during 2001. Approximately $94.0 million of the remaining accrual is expected
to be paid out during 2002.

45




Employee
Termination Lease Impaired
and Related Termination Asset Other
Benefit Costs Costs Charges Costs Total
- ------------------------------------------------------------------------------
(In millions)


Initial accrual $68.0 $ 56.0 $ 30.0 $ 35.0 $ 189.0
Cost that did not
require cash (35.0) (35.0)
Payments charged
against liability (2.0) (2.0)
- ------------------------------------------------------------------------------

Accrued costs $66.0 $56.0 $ 30.0 $ 152.0
==============================================================================


The majority of the positions impacted by the restructuring that were not
released by December 31, 2001 are expected to be released in the first quarter
of 2002. The real estate consolidation will occur throughout 2002, however the
full level of savings from the consolidation will not be realized until the
fourth quarter. Management anticipates that the restructuring activities in
2001 will result in cost savings of approximately $100.0 million in 2002.

Additionally, at December 31, 2000, an accrual of $7.0 million for lease
termination costs remained related to the August 1998 restructuring ("1998
Plan"). Approximately $6.0 million of these costs were paid in 2001, resulting
in a remaining accrual of $1.0 million at December 31, 2001. No restructuring
and other related charges related to the 1998 Plan were incurred during 2001
or 2000. Restructuring and other related charges for the 1998 Plan amounted to
$83.0 million in 1999.

Terrorism Exposure

CNA and the insurance industry incurred substantial losses related to the
tragic events of September 11, 2001. For the most part, CNA 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 September 11 centered on
the role, if any, the U.S. federal government should play in providing a
"terrorism backstop" for the industry. Several legislative proposals were
introduced, but as yet, Congress has not enacted any of the proposed
solutions.

Without any federal backstop in place, CNA's businesses are exposed to losses
arising from terrorism events. CNA is attempting to mitigate this exposure
through its underwriting practices, policy terms and conditions, and use of
reinsurance.

While the unexpired portion of CNA's current reinsurance program generally
provides coverage for terrorism events, CNA expects that future property-
casualty and certain group life and accident reinsurance renewals will either
exclude coverage or be significantly limited with respect to terrorism events.
CNA does not expect any terrorism exclusion to be included in future
individual life reinsurance renewals.

CNA is generally including a terrorism exclusion or sub-limit in its primary
and reinsurance assumed policy forms and contracts for large property risks in
selected geographic areas. General liability and commercial auto policies for
large commercial customers also generally exclude terrorism where permissible
by law. The primary property and casualty policy forms applicable to new and
renewal policies for small and middle market commercial customers will
generally include a terrorism exclusion; however, these policy forms have not
yet been approved in all states. CNA is generally prohibited, from excluding
terrorism exposure from its primary workers' compensation, individual life and
group life and health policies.

2002 Reinsurance Considerations

In addition to the terrorism coverage issues discussed, CNA expects other
significant changes related to the reinsurance environment in 2002. Due to the
significant increase in reinsurance costs for several lines of insurance, CNA
expects to purchase less reinsurance protection in 2002 than in 2001. The
amount of reinsurance purchased has a direct impact on the level of gross and
net exposure that CNA is willing to underwrite in certain lines. For example,
the net retention on a substantial portion of Standard Lines' workers'
compensation exposure will generally increase from $500,000 per each loss
occurrence in 2001 to $10.0 million per each loss occurrence in 2002. CNA
expects to retain approximately $60.0 million more premium in 2002 as a result
of this increase in retention in workers' compensation exposure. Other
property-casualty exposures expected to be significantly impacted by changes
in the level, cost and availability of reinsurance purchased in 2002 include,
but are not limited to, surety, workers' compensation, catastrophe and
professional liability. CNA has purchased less finite reinsurance in 2002 than
in prior years.

The reduced level of reinsurance purchased in 2002 will likely increase the
volatility of reported losses; however, CNA will also retain more premium than
in prior years.

CNA is currently finalizing its aggregate reinsurance protection for 2002 for
a substantial portion of its property-casualty business. The reinsurance
protection will be handled on a funds withheld basis.

46

Property-Casualty

CNA conducts its property-casualty operations through the following operating
segments: Standard Lines, Specialty Lines, and CNA Re.

The following table summarizes key components of the Property-Casualty segment
operating results for the years ended December 31, 2001, 2000 and 1999.



Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)


Net earned premiums $ 5,010.0 $6,927.0 $ 7,359.0
Underwriting loss (3,122.0) (672.0) (1,147.0)
Net operating (loss) income (1,249.1) 412.6 111.3

Ratios:
Loss and loss adjustment expense ratio 114.6% 77.0% 83.0%
Expense ratio 45.4 31.5 32.2
Dividend ratio 2.3 1.2 .4
- ------------------------------------------------------------------------------

Combined ratio 162.3% 109.7% 115.6%
==============================================================================

2001 adjusted ratios*

Loss and loss adjustment expense ratio 77.8%
Expense ratio 35.3
Dividend ratio 1.8
- -------------------------------------------------------

Combined ratio 114.9%
=======================================================

Adjusted underwriting loss* $ (946.0)
=======================================================


*The adjusted results exclude the impact of the second quarter 2001 reserve
strengthening, the WTC event, corporate aggregate reinsurance treaties and
restructuring and other related charges.

2001 Compared with 2000

The net operating loss for the Property-Casualty segment was $1,249.1 million
in 2001 as compared with net operating income of $412.6 million in 2000. The
decline in net operating results was principally due to prior year reserve
strengthening of $1,113.7 million recorded in the second quarter of 2001
related to a change in estimate of prior year net loss reserves and
retrospective premium accruals, net of the related corporate aggregate
reinsurance treaty benefit; estimated losses related to the WTC event of
$209.0 million, net of the related corporate aggregate reinsurance treaty
benefit, and restructuring and other related charges of $36.8 million recorded
in 2001. In addition, net operating results for 2001 decreased $97.1 million
due to a decline in investment income from limited partnerships and $61.2
million for reserve strengthening primarily for the current accident year, in
the London-based primary commercial and marine operations. Net operating
income also decreased $46.1 million related to the recent bankruptcy filing by
certain Enron entities recorded in the fourth quarter of 2001. These declines
were partially offset by lower prior year adverse loss reserve development
(excluding the second quarter 2001 reserve development) and a $52.5 million
benefit related to corporate aggregate reinsurance treaties for core
operations. Net operating results in 2000 benefited from a change in estimate
for certain insurance-related assessments of $52.0 million in 2000.

Net operating results also decreased due to a $141.8 million after-tax charge
to strengthen prior underwriting year loss reserves for CNA Reinsurance
Company Limited ("CNA Re U.K."). There was no tax benefit related to this
charge due to the inability to recover further tax benefits related to the
underwriting losses of CNA Re U.K. During the fourth quarter, CNA updated its
impairment analysis of subsidiaries held for sale, including the United
Kingdom subsidiaries of CNA Re. The updated impairment analysis indicated that
the $248.0 million after-tax and minority interest realized loss recorded in
the second quarter of 2001 should be reduced by $141.8 million, primarily
because the net assets of CNA Re U.K. had been significantly diminished by its
operating losses in the second half of 2001. In addition, CNA updated its
estimate of disposal costs, including anticipated capital contributions, to
reflect changes in the planned structure of the anticipated sale. The sale of
the United Kingdom insurance subsidiaries will be subject to regulatory
approval and all sales are expected to be completed in 2002.

Based upon the significance of the charges related to the second quarter 2001
reserve strengthening, WTC event, corporate aggregate reinsurance treaties,
and restructuring and other related charges, these items are discussed in the
aggregate in the preceding sections. The following discussion compares
underwriting results and ratios excluding the effect of these items. The
adjusted combined ratio increased 5.2 points in 2001 as compared with 2000 and
the adjusted underwriting results for the Property-Casualty segment declined
$274.0 million. The adjusted loss ratio increased 0.8 points as a result of
the reduced net earned premiums base, losses related to Enron, favorable loss
development recorded in 2000 for the architects and engineers business not
present in 2001, declined underwriting results in global and marine lines
related to current accident year reserve strengthening as discussed above, and
the prior underwriting year reserve strengthening of CNA Re U.K. These
declines were partially offset by improved underwriting results across most
standard lines,

47

particularly the automobile and packages lines, due to earned rate achievement
and re-underwriting efforts undertaken last year, and lower prior year adverse
loss development (excluding the second quarter 2001 reserve strengthening).
The increase in the adjusted expense ratio of 3.8 points was primarily
attributable to the decrease in the net earned premium base, the write-off of
unrecoverable deferred acquisition costs in the vehicle warranty line of
business, an increase in the accrual for guaranty fund assessments related to
the Reliance insolvency, and the decreased impact of the change in estimate
for certain insurance-related assessments. The adjusted dividend ratio
increased 0.6 points primarily due to adverse development in dividend reserves
in Standard Lines in 2001 compared with favorable development taken in 2000.

Net earned premiums for the Property-Casualty segment decreased $1,917.0
million for 2001 compared with 2000. This decline was comprised of decreases
in Standard Lines of $1,516.0 million and CNA Re of $448.0 million, partially
offset by increased net earned premiums for Specialty Lines of $47.0 million.

Net earned premiums for Standard Lines decreased primarily as a result of
$564.0 million of ceded premiums related to the corporate aggregate
reinsurance treaties, additional ceded premiums other than the corporate
aggregate reinsurance treaties, increased adverse premium development
excluding the second quarter 2001 reserve strengthening, a change in estimate
for involuntary market premium accruals and additional adverse experience in
retrospective premium accruals. The change in estimate related to
retrospective premium receivables was based upon CNA's completion of
comprehensive studies related to estimated premium receivable accruals on
retrospectively rated insurance policies and involuntary market facilities.
The studies included the review of all such retrospectively rated insurance
policies and the current estimate of ultimate losses.

Net earned premiums for CNA Re decreased as a result of $161.0 million of
ceded premiums related to the corporate aggregate reinsurance treaties. In
addition, premiums decreased as a result of the announced intention to sell
the United Kingdom insurance subsidiaries. These declines were partially
offset by reinstatement and additional premiums of $89.0 million related to
the WTC event.

Net earned premiums for Specialty Lines increased due to increases in the law
firms, the long-term care and architects and engineers products as well as
increased rate achievement in Europe, primarily in property lines, the reserve
for retrospective premium increase recorded in 2000 and decreased ceded
premiums related to reinsurance for the medical professional liability line of
business. Partially offsetting these improvements was $77.0 million in
additional ceded premiums related to the corporate aggregate reinsurance
treaties, declines in the warranty line of business and adverse experience in
retrospective premium accruals recorded in the second quarter of 2001 reserve
strengthening.

2000 Compared with 1999

Net operating income improved $301.3 million for 2000 as compared with 1999.
The net operating income improvements were primarily driven by improved
underwriting results partially offset by decreased investment income. In
addition, net operating income in both 2000 and 1999 benefited from a change
in estimate for certain insurance-related assessments resulting from
regulatory changes in the basis on which certain of these assessments are
calculated. The after-tax impact of this change was $52.0 million in 2000 and
$43.7 million in 1999.

Underwriting results improved $475.0 million for 2000 as compared with 1999.
The combined ratio decreased 5.9 points for the Property-Casualty segment for
2000 as compared with 1999. This decrease reflects an improvement in the loss
ratio of 6.0 points which is primarily attributable to significant rate
increases across the entire book of business, favorable catastrophe
experience, reduced prior year reserve strengthening and the increased use of
reinsurance. Catastrophe losses for 2000 improved by $195.0 million for the
Property-Casualty segment. In addition to the decrease in the loss ratio,
there was a decrease of 0.7 points in the expense ratio to 31.5% due
principally to the absence of restructuring-related charges that occurred in
1999 but did not recur in 2000. The dividend ratio increased 0.8 points
relating to reduced favorable development in dividend reserves for Standard
Lines in 2000 as compared to 1999.

Net earned premiums for the Property-Casualty segment decreased $432.0 million
in 2000 as compared with 1999. This decline in net earned premiums was
comprised of decreases in Standard Lines of $271.0 million, Specialty Lines of
$74.0 million and CNA Re of $87.0 million.

The decrease in net earned premiums in Standard Lines was primarily
attributable to continued efforts to re-underwrite business and obtain
adequate rates for exposure underwritten and increased use of reinsurance. The
net earned premiums decline for Specialty Lines was related principally to (i)
active decisions to renew only those accounts which meet current underwriting
guidelines supporting the ongoing commitment to underwriting discipline, (ii)
an increase in the retrospective return premium relating to favorable loss
experience in the retrospectively rated architects' and engineers' business,
and (iii) a $30.0 million decline due to the increased use of reinsurance for
the medical professional liability lines of CNA HealthPro. These declines were
partially offset by growth in the commercial casualty and property lines in
the European operations, as well as growth in the commercial warranty and
surety lines.

CNA Re experienced a decrease in net earned premiums that reflects decisions
not to renew contracts that management believed did not meet profitability
targets, partially offset by modest rate increases.

48

Group

Group Operations provides group life and health insurance products and
services to employers, affinity groups and other entities that purchase
insurance as a group. Group Operations also provides health insurance to
federal employees, as well as life and health reinsurance.

2001 Compared with 2000

Net operating income decreased by $32.0 million in 2001 as compared with 2000.
This decrease is related primarily to estimated losses of $45.3 million after-
tax and minority interest as a result of the WTC event. Net operating income
also declined $20.1 million as a result of the sale of Life Reinsurance and
$11.4 million due to a decline in limited partnership income. Life Reinsurance
contributed net operating income of $19.0 million in 2000. Partially
offsetting these declines were improvements as a result of exiting
unprofitable lines of approximately $35.0 million, and increased income in
other product lines, primarily the disability and group long-term care lines
of $10.0 million.

Net earned premiums for Group Operations decreased $217.0 million in 2001 as
compared with 2000. Net earned premiums declined $228.0 million as a result of
the sale of Life Reinsurance and $163.0 million in Group Reinsurance
primarily as a result of terminating unprofitable contracts with independent
underwriting agencies in 2000. These declines were partially offset by
increases in Federal Markets of $116.0 million due to increased medical cost
trends and growth in Group Benefits of $58.0 million, particularly in the
disability and group long term care lines of business.

Group Operations achieved rate increases in 2001 that averaged approximately
4.0% for the disability line of business. Premium persistency rates were in
the mid 80 percent range. For the group life line of business, rate increases
averaged 1.0% to 2.0%. Premium persistency rates were in the lower 80% range.

2000 Compared with 1999

Net operating income increased $44.5 million in 2000 as compared with 1999.
This increase relates to a $20.9 million improvement in Federal Markets due to
the 1999 exit of unprofitable medical lines, a $29.5 million improvement in
Group Reinsurance, a $3.5 million improvement in Life Reinsurance and a $6.1
million increase in limited partnership income. These improvements were
partially offset by a $15.7 million decline in Group Benefits due to favorable
1999 loss experience in the group life line of business. The improvement
associated with Group Reinsurance relates to adverse experience and loss
development for the personal accident business recorded in 1999, which
exceeded $6.0 million of exit costs incurred from the Management Services
Organization ("MSO") business and $11.0 million of adverse development on the
medical stop loss business in 2000. The decision to shut down the MSO business
was based on lack of demand as providers were backing away from risk
contracting.

Net earned premiums for Group Operations in 2000 increased $104.0 million as
compared with 1999. This increase was principally a result of a $41.0 million
increase in Group Benefits, primarily related to the group life line of
business; a $35.0 million increase in Life Reinsurance; an $18.0 million
increase in Group Reinsurance, and a $10.0 million increase in Federal
Markets. The increases in Group Benefits and Life Reinsurance relate to new
business production.

Life

Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long term care
insurance, annuities and other products. Life Operations also provides
retirement services products to institutions in the form of various investment
products and administration services.

2001 Compared with 2000

Net operating income decreased by $98.5 million in 2001 as compared with 2000.
This decrease relates primarily to restructuring and other related charges of
$39.4 million, decreased net investment income from limited partnerships of
$19.3 million, estimated losses related to the WTC event of $12.3 million and
adverse mortality in the viatical settlement business of $8.8 million.
Included in the restructuring and other related charges was a $20.1 million
write-off of deferred acquisition costs on in-force variable life and annuity
contracts, as CNA believes that its decision to discontinue these products
will negatively impact the persistency of the business.

Sales volume for Life Operations decreased by $167.0 million in 2001 as
compared with 2000. This decline was driven primarily by declines in the sales
of variable annuities and as a result of the decision to cease purchasing new
viatical policies. These declines were partially offset by increased renewals
and increased new sales in Long Term Care products. Net earned premiums
increased $78.0 million in 2001 as compared with 2000. This improvement is
attributable primarily to improved sales of structured settlements because of
favorable pricing conditions and Long Term Care products, partially offset by
a decrease in new Individual Life business.

2000 Compared with 1999

Net operating income increased $31.1 million in 2000 as compared with 1999.
The increase was attributable principally to increased earnings in the Index
500 product, the continued growth of Individual Life insurance in-force,
favorable investment results in Individual Life and the Retirement Services
and increased income from limited partnerships of $7.8 million.

Sales volume for Life Operations declined $478.0 million in 2000 as compared
with 1999. Sales volume decreased because of a reduction in Retirement
Services' products sold to institutions. These products tend to be "large
case" institutional markets' sales, which can be sporadic, opportunistic and
sensitive to independent agency ratings. Despite the overall decline, Life
Operations' competitively priced product portfolio enabled most of its
businesses to experience growth in 2000. Individual Life and Long Term Care
products had an increasing base of direct premiums, and variable investment
contracts experienced growth of $270.0 million to reach an annual sales level
of $380.0 million in 2000. Net earned premiums declined $60.0 million in 2000
as compared with 1999. This decline was attributable primarily to sales
declines in structured settlements and single premium group annuities due to a
competitive pricing environment.

49

These declines were partially offset by a growing in-force block of Long Term
Care and annuity products.

Other Insurance

The Other insurance segment contains CNA's corporate interest expense, certain
run-off insurance operations, including Personal Insurance, losses and
expenses related to the centralized adjusting and settlement of APMT claims,
direct financial guarantee business underwritten by CNA's insurance
affiliates, certain non-insurance operations, including eBusiness initiatives
and CNA UniSource, and eliminations.

2001 Compared with 2000

Net operating results declined $777.5 million in 2001 as compared with 2000.
The after-tax impact of the second quarter 2001 reserve strengthening on the
Other Insurance segment was $695.2 million, including $644.7 million for APMT.
See the following Environmental Pollution and Other Mass Tort and Asbestos
Reserves section for a discussion of this charge. Net operating income for
2001 also decreased by $67.4 million for restructuring and other related
charges, $39.0 million for the non-recurring ceding commission included in
2000 results related to the transfer of the Personal Insurance business to
Allstate in 1999, $30.6 million related to increased eBusiness initiatives in
2001, and $12.3 million due to decreased limited partnership income. These
declines were partially offset by lower interest expense on corporate
borrowings in 2001 as compared with 2000 and a non-recurring favorable
adjustment of expense recoveries under a service contract related to Personal
Insurance.

Total operating revenues, excluding eliminations, decreased $104.0 million in
2001 as compared with 2000. This decline was due to a decrease in net
investment income and net earned premiums from run-off insurance operations,
particularly the entertainment and agriculture insurance lines.

2000 Compared with 1999

Net operating results improved $165.9 million for 2000 as compared with 1999.
This improvement is due to lower adverse development related to asbestos
claims in 2000 as compared with 1999 and improvements in Personal Insurance,
including $45.0 million for non-recurring ceding commission in 2000 as
compared with $33.0 million in 1999, partially offset by expenses for CNA's
eBusiness initiatives.

Total operating revenues, excluding eliminations, decreased $1,578.0 million
in 2000 as compared with 1999. This decline is driven primarily by a $1,421.0
million decrease in net earned premiums attributable primarily to the sale of
Personal Insurance to Allstate in 1999. Net earned premiums for 1999 included
$1,354.0 million of premiums related to Personal Insurance. The remaining
decline in net earned premiums was primarily a result of CNA exiting the
entertainment insurance and other financial lines of business. Additionally,
operating revenues declined as a result of decreased net investment income.

Environmental Pollution and Other Mass Tort and Asbestos Reserves

CNA's property-casualty insurance subsidiaries have potential exposures
related to APMT 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. 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, 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 financial position.

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.

50

As of December 31, 2001 and 2000, CNA carried approximately $617.0 and $347.0
million of claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and other
mass tort claims. Unfavorable environmental pollution and other mass tort net
claim and claim adjustment expense reserve development for the year ended
December 31, 2001 and 2000 amounted to $473.0 and $17.0 million. Favorable
environmental pollution and other mass tort net claim and claim adjustment
expense reserve development for the year ended December 31, 1999 amounted to
$84.0 million. The Company made environmental pollution-related claim payments
and other mass tort-related claim payments, net of reinsurance recoveries, of
$203.0, $135.0 and $236.0 million during the years ended December 31, 2001,
2000 and 1999, respectively.

The reserve development during 2001 for environmental pollution and other mass
tort reserves was due to reviews completed during the year, which indicated
that paid and reported losses were higher than expectations based on prior
reviews. Factors that have led to this development include a number of
declaratory judgments filed this year due to an increasingly favorable legal
environment for policyholders in certain courts and other unfavorable
decisions regarding cleanup issues.

CNA's property-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 December 31, 2001 and 2000, CNA carried approximately $1,204.0 and
$603.0 million of net claim and claim adjustment expense reserves, net of
reinsurance recoverables, for reported and unreported asbestos-related claims.
Unfavorable asbestos-related net claim and claim adjustment expense reserve
development for the years ended December 31, 2001, 2000 and 1999 amounted to
$772.0, $65.0 and $560.0 million, respectively. CNA made asbestos-related
claim payments, net of reinsurance, of $171.0, $126.0 and $161.0 million
during the years ended December 31, 2001, 2000 and 1999, respectively,
excluding payments made in connection with the 1993 settlement of litigation
related to Fibreboard Corporation. CNA has attempted to manage its asbestos-
related exposures by aggressively resolving old accounts.

The reserve development during 2001 for asbestos-related claims was based on a
management review of developments with respect to these exposures conducted
during the year. This analysis indicated a significant increase in claim
counts for asbestos-related claims. The factors that have led to the
deterioration in claim counts include, among other things, intensive
advertising campaigns by lawyers for asbestos claimants and the addition of
new defendants such as the distributors and installers of products containing
asbestos. New claim filings increased significantly in 2000 over 1999 and that
trend continued during 2001. The volume of new claims has caused the
bankruptcies of numerous asbestos defendants. Those bankruptcies also may
result in increased liability for remaining defendants under principles of
joint and several liability.

In addition, some asbestos-related defendants have asserted that their claims
for insurance are not subject to aggregate limits on coverage. CNA currently
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 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.

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 include medical inflation trends, jury attitudes, the
strategies of plaintiff attorneys to broaden the scope of defendants, the mix
of asbestos-related diseases presented and the possibility of legislative
reform. Adverse developments with respect to such matters discussed herein
could have a material adverse effect on CNA's results of operations and/or
financial condition.

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

51

Lorillard

Lorillard, Inc. and subsidiaries ("Lorillard"). Lorillard, Inc. is a wholly
owned subsidiary of the Company.

2001 Compared with 2000

Revenues increased by $186.1 million, or 4.3% and net income decreased $81.7
million, or 10.8%, respectively, in 2001 as compared to 2000.

Net sales increased due to higher average unit prices which would have
resulted in an aggregate increase of approximately $543.5 million, or 12.8%,
partially offset by a decrease of approximately $336.0 million, or 7.9%,
reflecting lower unit sales volume for 2001 as compared to 2000. During 2001,
Lorillard increased its net wholesale price of cigarettes by an average of
$13.58 per thousand cigarettes ($.27 per pack of 20 cigarettes), or 12.8%.
Federal excise taxes are included in the price of cigarettes and have remained
constant at $17.00 per thousand units, or $.34 per pack of 20 cigarettes. On
January 1, 2002, the federal excise tax on cigarettes increased by $2.50 per
thousand cigarettes ($0.05 per pack of 20 cigarettes). All of the states also
levy excise taxes on cigarettes. Various states have proposed, and certain
states have recently passed, increases in their state tobacco excise taxes.
Such actions may adversely affect Lorillard's volume, operating revenues and
operating income.

Lorillard's overall unit sales volume decreased by 6.5% in 2001, as compared
to 2000. Newport's unit sales volume increased by .04% for 2001, primarily as
a result of the introduction of the Newport Medium line extension and
strengthened promotional support, as compared to 2000. The decrease in
Lorillard's overall unit sales volume reflects lower unit sales of its
Maverick and Old Gold brands in the discount market segment due primarily to
increased competition in the discount segment and continued limitations
imposed by Philip Morris's merchandising arrangements and general competitive
conditions. Overall, industry unit sales volume decreased by 3.2% for the year
ended December 31, 2001.

Lorillard's share of wholesale cigarette shipments was 9.5% in 2001, as
compared to 9.8% for 2000. Newport, a premium brand, accounted for
approximately 85% of Lorillard's unit sales for the year ended December 31,
2001 compared to 79% in 2000. Newport's market share of the premium segment
was 10.9% for the year ended December 31, 2001 compared to 10.5% in 2000.

Lorillard recorded pretax charges of $1,140.4 and $1,076.5 million ($694.2 and
$642.3 million after-taxes), for the years ended December 31, 2001 and 2000,
respectively, to accrue its obligations under various settlement agreements.
Lorillard's portion of ongoing adjusted payments and legal fees is based on
its share of domestic cigarette shipments in the year preceding that in which
the payment is due. Accordingly, Lorillard records its portions of ongoing
settlement payments as part of cost of manufactured products sold as the
related sales occur. Funds required for the industry payment obligations have
been provided by Lorillard's operating activities. See Note 17 of the Notes to
Consolidated Financial Statements.

The State Settlement Agreements impose a stream of future payment obligations
on Lorillard and the other major U.S. cigarette manufacturers and the Master
Settlement Agreement places significant restrictions on their ability to
market and sell cigarettes. The Company believes that the implementation of
the State Settlement Agreements will materially adversely affect its
consolidated results of operations and cash flows in future periods. The
degree of the adverse impact will depend, among other things, on the rates of
decline in U.S. cigarette sales in the premium and discount segments,
Lorillard's share of the domestic premium and discount segments, and the
effect of any resulting cost advantage of manufacturers not subject to the
State Settlement Agreements.

Net income declined for the year ended December 31, 2001, due to a charge of
$121.0 million (net of taxes) to record the effect of the Engle agreement
discussed in Liquidity and Capital Resources. Excluding this charge, net
income would have increased by $39.3 million, or 5.2%, for the year ended
December 31, 2001, as compared to 2000. This increase in net income was
primarily due to the impact of wholesale price increases, partially offset by
lower unit sales volume and increased sales promotional expenses, mostly in
the form of coupons and other discounts provided to retailers and passed
through to the consumer.

In accordance with industry practice, promotional support in the form of
coupons and other discounts is recorded as an expense under "Other operating
expenses" rather than reducing net sales. In the first quarter of 2002,
Lorillard will be required to adopt the provisions of the FASB's Emerging
Issues Task Force Issues No. 00-14, "Accounting for Certain Sales Incentives,"
and No. 00-25, "Vendor Income Statement Characterization of Consideration from
a Vendor to a Retailer." As a result of both issues, promotional expenses
historically included in other operating expenses will be reclassified to cost
of manufactured products sold, or as reductions of net sales. Beginning with
the first quarter of 2002, prior period amounts will be reclassified for
comparative purposes.

2000 Compared with 1999

Revenues and net income increased by $277.9 and $102.0 million, or 6.8% and
15.6%, respectively, in 2000 as compared to 1999.

Net sales increased as compared to 1999, by approximately $550.3 million, or
13.8%, due to higher average unit prices, including $200.1 million from the
increase in federal excise tax, partially offset by a decrease of
approximately $307.8 million, or 7.7%, reflecting lower unit sales volume in
2000. Net investment income contributed $35.9 million to the increased
revenues.

During 2000, Lorillard increased the wholesale price of its cigarettes by an
aggregate of $16.50 per thousand cigarettes ($0.33 per pack of 20 cigarettes).
Federal excise taxes included in the price of cigarettes are $17.00 per
thousand cigarettes ($0.34 per pack of 20 cigarettes).

Net income increased due primarily to the increased revenues discussed above,
partially offset by the charges for tobacco litigation settlements and higher
legal expenses. Net income for the years ended

52

December 31, 2000 and 1999 includes pretax charges of $1,076.5 and $1,065.8
million ($642.3 and $637.3 million after-taxes), respectively, related to the
settlement of tobacco litigation. Lorillard's portion of ongoing adjusted
payments and legal fees is based on its share of domestic cigarette shipments
in the year preceding that in which the payment is due. Accordingly, Lorillard
records its portions of ongoing settlement payments as part of cost of
manufactured products sold as the related sales occur. Funds required to meet
the industry payment obligations have been provided by Lorillard's operating
activities.

Lorillard's overall unit sales volume decreased by 7.0% as compared to 1999.
Newport, a full price brand, which accounted for approximately 79% of
Lorillard's unit sales in 2000, increased by 1.5% as compared to 1999.
Newport's increase in unit sales volume reflects increased promotional
activities to the extent practicable in light of existing limitations due to
competitive conditions. The decrease in Lorillard's overall unit sales volume
reflects lower unit sales of its Maverick and Old Gold brands in the discount
market segment. Discount brand sales have remained relatively constant at
26.3%, 26.4% and 26.2% as a percentage of industry sales for 2000, 1999 and
1998, respectively.

Newport's market share increased 0.1% to 7.7% in 2000, as compared to 7.6% in
1999. Overall industry unit sales volume is up by .02% in 2000, as compared to
1999.

Loews Hotels

Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews
Hotels Holding Corporation is a wholly owned subsidiary of the Company.

2001 Compared with 2000

Revenues and net income decreased by $16.7 and $7.3 million, or 4.9% and
27.2%, respectively, in 2001 compared to 2000.

Revenues decreased primarily due to lower occupancy rates and lower average
room rates, partially offset by the addition of the Philadelphia hotel, which
commenced operations in spring of 2000. The decline in revenues reflects the
continued economic weakness and the impact that the September 11, 2001 World
Trade Center attack had on the travel industry. Net income decreased due
primarily to lower revenues and increased depreciation expenses related to the
Philadelphia hotel, partially offset by lower advertising and administrative
expenses and lower pre-opening costs.

2000 Compared with 1999

Revenues and income before cumulative effect of changes in accounting
principles decreased by $13.4 and $43.7 million, or 3.8% and 62.0%,
respectively, in 2000 as compared to 1999. Included in 1999 is a gain of $85.1
million ($52.0 million after-taxes) from the sale of two franchised
properties. Excluding this gain, revenues and income before cumulative effect
of changes in accounting principles increased by $71.7 and $8.3 million,
respectively.

Revenues and income before cumulative effect of changes in accounting
principles increased due primarily to increased overall average room rates and
the addition of two luxury properties to the Loews Hotels portfolio,
offsetting the 1999 sale of the two franchised properties. Overall occupancy
rates remained at approximately 78%, essentially unchanged from 1999. Income
also benefited from improved operating results of an unconsolidated joint
venture whose operations commenced in 1999.

Diamond Offshore

Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore"). Diamond
Offshore Drilling, Inc. is a 53% owned subsidiary of the Company.

2001 Compared with 2000

Revenues increased by $218.7 million, or 30.2%, and net income increased by
$39.0 million, in 2001 as compared to 2000. Revenues and net income included a
gain from the sale of a drilling rig of $13.9 and $4.7 million, respectively,
for the year ended December 31, 2000.

Revenues from high specification floaters and other semisubmersible rigs
increased by $179.3 million, or 24.8%, in 2001 as compared to 2000. These
increases reflect higher utilization ($23.6 million) and dayrates ($94.2
million) for 2001 as compared 2000. Revenue generated by the Ocean Confidence,
which began a five-year drilling program in the Gulf of Mexico on January 5,
2001 after completion of a conversion to a high specification semisubmersible
drilling unit ($61.5 million), also contributed to the increase in revenues.

Revenues from jack-up rigs increased by $55.6 million, or 7.7%, due primarily
to increased dayrates ($63.6 million) for 2001, partially offset by lower
utilization in 2001.

53

Net income increased due primarily to the increased revenues discussed above,
partially offset by increased interest and depreciation expenses. Depreciation
expenses increased in 2001 primarily due to the Ocean Confidence, which
completed its conversion from an accommodation vessel to a high specification
semisubmersible drilling unit and commenced operations in January 2001.
Interest expense increased due also to the Ocean Confidence as a result of
less interest capitalized.

2000 Compared with 1999

Revenues and net income decreased by $123.3 and $40.7 million, or 14.6% and
56.0%, respectively, in 2000 as compared to 1999.

Revenues decreased due principally to lower operating dayrates ($143.9
million) and reduced utilization ($50.6 million) for Diamond Offshore's
semisubmersible rigs, partially offset by increased utilization ($35.1
million) and higher dayrates ($26.4 million) for jack-up rigs during 2000, as
compared to 1999. Revenues also declined by $17.1 million due to the sale of a
jack-up rig and $6.0 million due to the mobilization of rigs to new markets
during 2000. These declines were partially offset by increased investment
income ($14.5 million) and a gain from the sale of a drilling rig of $13.9
million ($4.7 million after-taxes and minority interest) in 2000.

Net income declined due primarily to the lower revenues discussed above and
the fact that contract drilling costs remained relatively unchanged. Operating
expenses generally are not affected by changes in dayrates, nor are they
significantly affected by fluctuations in utilization. For instance, if a rig
is to be idle for a short period of time, Diamond Offshore realizes few
decreases in operating expenses since the rig is typically maintained in a
prepared state with a full crew. In addition, when a rig is idle, Diamond
Offshore is responsible for certain operating expenses such as rig fuel and
supply boat costs, which are typically charged to the operator under drilling
contracts. However, if the rig is to be idle for an extended period of time,
Diamond Offshore may reduce the size of a rig's crew and take steps to "cold
stack" the rig, which lowers expenses and partially offsets the impact on
operating income.

Bulova

Bulova Corporation and subsidiaries ("Bulova"). Bulova Corporation is a 97%
owned subsidiary of the Company.

2001 Compared with 2000

Revenues and net income decreased by $14.0 and $4.9 million, or 8.7% and
32.7%, respectively, in 2001 compared to 2000. Revenues and net income
decreased due primarily to royalty income of $5.5 and $3.0 million,
respectively, reported in 2000 related to the settlement of a contract
dispute. The remaining decline in revenues for 2001 reflects lower watch and
clock unit sales volume due primarily to the continued economic downturn,
partially offset by higher watch unit prices.

Net income decreased due to the lower revenues and costs incurred during
business process reengineering of Bulova's information systems, partially
offset by improved gross margins attributable to Bulova's product sales mix.

2000 Compared with 1999

Revenues and net income increased by $21.4 and $.9 million, or 15.4% and 6.4%,
respectively, in 2000 as compared to 1999.

Revenues increased due to an increase in royalty income of $5.5 million from
the settlement of a contract dispute, and higher watch unit sales volume.
These increases were partially offset by lower watch prices and lower clock
unit sales in 2000, as compared to 1999. Watch prices declined due primarily
to a change in sales mix.

Net income increased due primarily to the higher revenues discussed above,
partially offset by increased brand support and advertising expenses, and a
lower effective income tax rate in 1999 due to a valuation allowance
adjustment related to prior years.

Corporate

Corporate operations consist primarily of investment income, including
investment gains (losses) from non-insurance subsidiaries, as well as equity
earnings from a shipping joint venture, corporate interest expenses and other
corporate administrative costs.

The components of investment gains (losses) included in Corporate operations
are as follows:




Year ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)


Derivative instruments (a) $18.2 $(146.5) $(424.1)
Equity securities, including short
positions (a) 69.1 125.1 (56.5)
Short-term investments 28.5 (3.3) 9.4
Other 12.6 17.3 (1.6)
- ------------------------------------------------------------------------------
128.4 (7.4) (472.8)
Income tax (expense) benefit (45.0) 2.6 172.1
Minority interest (8.3)
- ------------------------------------------------------------------------------
Net gain (loss) $75.1 $ (4.8) $(300.7)
==============================================================================


(a) Includes losses on short sales, equity index futures and options
aggregating $533.6 for the year ended December 31, 1999. Substantially all
of the index short positions were closed during the second quarter of
2000. See "Quantitative and Qualitative Disclosures About Market Risk."

2001 Compared with 2000

Exclusive of investment gains (losses), revenues decreased $19.1 million and
net loss increased $3.0 million, or 11.5% and 21.1%, respectively, in 2001
compared to 2000, due primarily to lower investment income. This change was
partially offset by increased operating results from a shipping joint venture
reflecting increased demand and charter rates in the crude oil tanker markets.

2000 Compared with 1999

Exclusive of investment gains (losses), revenues increased by $42.7 million
and net loss decreased by $15.9 million, or 34.7% and 52.0%, respectively, due
to higher investment income reflecting an increased base of invested assets,
and improved results from a shipping joint venture, partially offset by
increased administrative and interest expenses.

54

LIQUIDITY AND CAPITAL RESOURCES

CNA

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

For the year ended December 31, 2001, net cash used for operating activities
was $599.0 million as compared with net cash used of $1,345.5 and $2,823.0
million in 2000 and 1999, respectively. The improvement related primarily to
decreased paid claims. The improvement in 2000 relates primarily to
significant payments in 1999 for (i) $1.1 billion in cash to Allstate in
connection with the transaction involving CNA's Personal Insurance business
and (ii) $1.1 billion of claim payments from escrow pursuant to the Fibreboard
settlement. See Note 12 of the Notes to Consolidated Financial Statements for
discussion of the Personal Insurance transaction. Excluding these significant,
non-recurring transactions from 1999, CNA's 2000 cash outflow from operations
declined by approximately $600.0 million to an outflow of approximately $1.4
billion. The operating cash flows forgone in 2000 due to the transfer of
Personal Insurance in 1999 was approximately $250.0 million. The remainder of
the decline related primarily to increased payments of claims and decreased
receipts of premiums.

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

For the year ended December 31, 2001, net cash used for investment activities
was $205.1 million as compared with net cash inflows of $1,842.0 million in
2000. Cash flows for investing activities were related principally to
increased net purchases of invested assets related to investing $1.0 billion
of proceeds from the common stock rights offering completed in the third
quarter of 2001.

For the year ended December 31, 2000, net cash inflows from investment
activities were $1,842.0 million as compared with $3,317.0 million in 1999.
Cash flows from investing activities were particularly high in 1999 due to
sales of investments to fund the outflows related to the Personal Insurance
transaction and Fibreboard claim payments.

Cash flows from financing activities include proceeds from the issuance of
debt or equity securities, outflows for dividends or repayment of debt and
outlays to reacquire equity instruments. For the year ended December 31, 2001,
net cash provided from financing activities was $783.0 million as compared
with $487.0 million of net cash used in 2000. CNA completed a common stock
rights offering on September 26, 2001, successfully raising $1.0 billion (40.3
million shares sold at $25 per share). Loews purchased 38.3 million shares
issued in connection with the rights offering for $957.1 million, and an
additional .8 million shares in the open market, increasing its ownership
percentage of CNA to 89%. Additionally, CNA borrowed $500.0 million against
its bank credit facility. Partially offsetting these cash inflows were
reductions to CNA's commercial paper borrowings of $627.0 million.

For the year ended December 31, 2000, net cash used for financing activities
was $487.0 million as compared with $558.0 million in 1999. During 2000 and
1999, cash flows for financing activities included the repurchase of preferred
and common equity instruments, the retirement or repurchase of senior debt
securities and mortgages, the repayment of bank loans and the payment of
preferred dividends.

CNA is closely managing the cash flows related to claims and reinsurance
recoverables from the WTC event. It is anticipated that significant claim
payments will be made prior to receipt of the corresponding reinsurance
recoverables. CNA does not anticipate any liquidity problems resulting from
these payments. As of March 1, 2002, CNA has paid $273.0 million in claims and
recovered $90.0 million from reinsurers.

CNA's estimated gross pretax losses for the WTC event were $1,648.0 million,
($937.2 million after-tax and minority interest). Net pretax losses before the
effect of the corporate aggregate reinsurance treaties were $727.0 million.
Approximately 41.0%, 40.0% and 17.0% 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.

Effective January 30, 2001, CNA sold the 180 Maiden Lane, New York, facility.
The sale of this property provided additional liquidity to CNA with net sale
proceeds of $264.0 million.

During 2001, CNA discontinued its commercial paper program and repaid all
loans outstanding under the program. The funds used to retire the outstanding
commercial paper debt were obtained through the draw down of the full amount
available under CNA's $500.0 million revolving credit facility. The facility
is composed of two parts: a $250.0 million component with a 364-day expiration
date (with an option to convert into a one-year term loan) and a $250.0
million component with a three-year expiration date.

CNA pays a facility fee to the lenders for having funds available for loans
under both components of the facility; the fee varies based on the long-term
debt ratings of CNA. At December 31, 2001 the facility fee on the 364-day
component was 15 basis points and the facility fee on the three-year component
was 17.5 basis points.

In addition to the facility fees, CNA pays interest on outstanding
debt/borrowings under the facility based on a rate determined using the long-
term debt ratings of CNA. The current interest rate is equal to the London
Interbank Offering Rate ("LIBOR") plus 60 basis points for the 364-day
component and LIBOR plus 57.5 basis points for the

55

three-year component. Further, if CNA has outstanding loans greater than 50%
of the amounts available under the facility, CNA also pays a utilization fee
of 12.5 basis points on such loans.

A Moody's downgrade of the CNA senior debt rating from Baa2 to Baa3 would
increase the facility fee on the 364-day component of the facility from 15
basis points to 20 basis points, and the facility fee on the three-year
component would increase from 17.5 basis points to 25 basis points. The
applicable interest rate on the 364-day component would increase from LIBOR
plus 60 basis points to LIBOR plus 80 basis points and the applicable interest
rate on the three-year component would increase from LIBOR plus 57.5 basis
points to LIBOR plus 75 basis points. The utilization fee would remain
unchanged on both components at 12.5 basis points.

The $500.0 million revolving credit facility replaced CNA's $750.0 million
revolving credit facility (the "Prior Facility"), which was scheduled to
expire on May 10, 2001. No loans were outstanding under the Prior Facility
anytime during 2001. To offset the variable rate characteristics of the Prior
Facility and the interest rate risk associated with periodically reissuing
commercial paper, in 1999 and 2000 CNA entered into interest rate swap
agreements with several banks. These agreements required CNA to pay interest
at a fixed rate in exchange for the receipt of the three-month LIBOR. The
effect of the interest rate swap agreements was to decrease interest expense
by approximately $2.0 million for the year ended December 31, 2000 and
increase interest expense by $4.0 million for the year ended December 31,
1999.

The terms of CNA's credit facility requires CNA to maintain certain financial
ratios and combined property-casualty company statutory surplus levels. At
December 31, 2001 and 2000, CNA was in compliance with all restrictive debt
covenants.

Following the announcement of second quarter 2001 earnings, CNA's commercial
paper rating was placed under review by S&P. During the review period, CNA,
through an affiliated company held varying amounts of its commercial paper
with the intent to put it back into the market after the review was completed.
On October 10, 2001, S&P lowered CNA's commercial paper rating from A2 to A3,
and maintained the CreditWatch Negative status. On December 28, 2001, Moody's
lowered the long-term debt rating from Baa1 to Baa2 and affirmed the P2 short-
term debt rating.

The commercial paper rating downgrade, the impacts of the WTC event and an
overall decline in the market made it difficult to maintain a commercial paper
program. Following consultation with CNA's commercial and investment bankers,
management determined that the most economical way to replace the commercial
paper was to draw on the revolving bank credit facility.

In the normal course of business, CNA has obtained letters of credit in favor
of various unaffiliated insurance companies, regulatory authorities and other
entities. At December 31, 2001 there were approximately $270.0 million of
outstanding letters of credit, of which approximately $30.0 million are
collateralized with cash and securities.

CNA has committed approximately $152.0 million to future capital calls from
various third party limited partnership investments in exchange for an
ownership interest in the related partnerships.

CNA has a commitment to purchase a $100.0 million floating rate note issued by
the Californian Earthquake Authority in the event California earthquake
related insurance losses exceed $4.9 billion prior to December 31, 2002.

CNA has entered into a limited number of guaranteed payment contracts. These
relate primarily to telecom service contracts and amount to payments of
approximately $41.0 million guaranteed for 2002 through 2005. Additionally,
CNA is obligated to future payments totaling $596.0 million for non-cancelable
operating leases expiring from 2002 through 2014 primarily for office space,
data processing, office and transportation equipment.

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.

The table below reflects ratings issued by A.M. Best, S&P, Moody's and Fitch
as of February 13, 2002 for the Continental Casualty Company ("CCC") Pool, the
Continental Insurance Company ("CIC") Pool and the Continental Assurance
Company ("CAC") Pool. Also rated were CNA's senior debt and commercial paper
and The Continental Corporation's ("Continental") senior debt.




Debt Ratings
------------------------------------
Insurance Ratings CNA
------------------------------- ----------------------- Continental
Financial Strength
------------------------------- Senior Commercial Senior
CCC Pool CAC Pool CIC Pool Debt Paper Debt
- ------------------------------------------------------------------------------------------------


A.M. Best A A A BBB AMB-2 BBB-
Fitch A AA- NR BBB NR NR
Moody's A3 A2 (Negative)* A3 Baa2 P2 Baa3
S&P A- A+ A- BBB- A3 BBB-
- ------------------------------------------------------------------------------------------------
NR = Not Rated
* CAC and Valley Forge Life Insurance Company ("VFL") are rated separately by Moody's and both
have an A2 rating.


56

On February 13, 2002, Fitch removed the rating watch negative status and
affirmed the insurance financial strength rating of CCC and the senior debt
rating of CNA. On September 24, 2001, following the WTC event, Fitch affirmed
the ratings of CAC and placed CCC under review.

On February 1, 2002 S&P affirmed the debt and financial strength ratings of
CNA and the CNA insurance companies. The outlook was changed from CreditWatch
Negative to stable. This action occurred after management's discussions with
S&P in early January of 2002, and upon completion of their evaluation of
additional information provided to them with respect to the WTC event reserve
estimate (including additional sensitivity analyses of the reserve estimates)
and other capital adequacy analyses. Additionally, CNA and S&P-London have
agreed to a guarantee of the Continental Insurance Company of Europe
("CIE")/Maritime Insurance Co., Ltd. liabilities by CCC in order to maintain
their present rating of "A-". This matter is expected to be concluded by the
second quarter of 2002, as the guarantee requires the approval of the Illinois
Department of Insurance (the "Department").

On December 28, 2001, Moody's lowered the insurance financial strength rating
of the CCC Pool to A3 (stable). In addition, Moody's lowered the CNA long-term
debt and preferred stock ratings to Baa2 and Ba1, and the Continental senior
debt rating to Baa3. The previously affirmed ratings of CIC, CAC and
commercial paper remained unchanged with the rating action. These rating
actions concluded the review begun on August 2, 2001 in connection with the
second quarter 2001 reserve strengthening. In light of subsequent events,
management further discussed with Moody's the WTC event and the fourth quarter
restructuring charge. All of these items were contemplated in their current
rating opinion and outlook.

CNA held $275.0 million of Continental preferred shares. The $29.0 million
annual Continental preferred share dividend was funded by CIC. Although the
capital position of the CIC Pool remains strong, CIC's ability to dividend
funds to its parent, Continental, is limited by regulatory constraints. In
order to alleviate intercompany dividend requirements, the Continental
preferred stock has been converted to Continental common stock in the fourth
quarter of 2001.

CNA's ability to pay dividends and other credit obligations is significantly
dependent on receipt of dividends from its subsidiaries. The payment of
dividends to CNA 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.

Dividends from the CCC Pool are subject to the insurance holding company laws
of the State of Illinois, the domiciliary state of CCC. Under these laws,
ordinary dividends, or dividends that do not require prior approval of the
Department, may be paid only from earned surplus, which is calculated by
removing unrealized gains (which under statutory accounting includes
cumulative earnings of CCC's subsidiaries) from unassigned surplus. As of
December 31, 2001, CCC is in a negative earned surplus position. In February
of 2002, the Department approved an extraordinary dividend in the amount of
$117.0 million to be used to fund CNA's 2002 debt service requirements. Until
CCC is in a positive earned surplus position, all dividends require prior
approval of the Department.

In addition, by agreement with the New Hampshire Insurance Department, as well
as certain other state insurance departments, dividend payments for the CIC
Pool are restricted to internal and external debt service requirements through
September 2003 up to a maximum of $85.0 million annually, without the prior
approval of the New Hampshire Insurance Department.

Lorillard

Lorillard and other cigarette manufacturers continue to be confronted with
substantial litigation and regulatory issues. Lawsuits continue to be filed
against Lorillard and other manufacturers of tobacco products. Approximately
4,675 product liability cases are pending against cigarette manufacturers in
the United States. Of these, approximately 1,250 cases are pending in a West
Virginia court, and approximately 2,850 cases are brought by flight attendants
alleging injury from exposure to environmental tobacco smoke in the cabins of
aircraft. Lorillard is a defendant in all of the flight attendant suits served
to date and is a defendant in most of the cases pending in West Virginia.

On July 14, 2000, the jury in Engle v. R.J. Reynolds Tobacco Co., et al.
awarded a total of $145.0 billion in punitive damages against all defendants,
including $16.3 billion against Lorillard. The judgment also provides that the
jury's awards bear interest at the rate of 10% per year. Lorillard remains of
the view that the Engle case should not have been certified as a class action.
That certification is inconsistent with the majority of federal and state
court decisions which have held that mass smoking and health claims are
inappropriate for class treatment. Lorillard has challenged class
certification, as well as other numerous legal errors that it believes
occurred during the trial. The Company and Lorillard believe that an appeal of
these issues on the merits should prevail.

Lorillard noticed an appeal from the final judgment to the Third District of
the Florida Court of Appeal and posted its appellate bond in the amount of
$100.0 million pursuant to Florida legislation limiting the amount of an
appellate bond required to be posted in order to stay execution of a judgment
for punitive damages in a certified class action. While Lorillard believes
this legislation is valid and that any challenges to the possible application
or constitutionality of this legislation would fail, during May of 2001,
Lorillard and two other defendants jointly contributed a total of $709.0
million to a fund that will not be recoverable by them even if challenges to
the judgment are resolved in favor of the defendants. As a result, the class
has agreed to a stay of execution on its punitive damages judgment until
appellate review is completed, including any review by the U.S. Supreme Court.
However, if Lorillard, Inc.'s balance sheet net worth (as determined in
accordance

57

with generally accepted accounting principles in effect as of July 14, 2000)
falls below $921.2 million, the stay pursuant to the agreement would terminate
and the class would be free to challenge the separate stay granted in favor of
Lorillard pursuant to Florida legislation. The Florida legislation limits to
$100.0 million the amount of an appellate bond required to be posted in order
to stay execution of a judgment for punitive damages in a certified class
action. Lorillard contributed a total of $200.0 million to this fund, which
included the $100.0 million that was initially posted as its appellate bond.
Accordingly, results of operations for the year ended December 31, 2001,
include Lorillard's second quarter pretax charge of $200.0 million.

The terms of the State Settlement Agreements (see Note 17 of the Notes to
Consolidated Financial Statements) require significant payments to be made to
the Settling States which began in 1998 and continue in perpetuity. Lorillard
expects the cash payment to be made under the State Settlement Agreements in
2001 to be approximately $1.1 billion. See Note 17 of the Notes to
Consolidated Financial Statements for additional information regarding this
settlement and other litigation matters.

The principal source of liquidity for Lorillard's business and operating needs
is internally generated funds from its operations. Lorillard generated net
cash flow from operations of approximately $709.7 million for the year ended
December 31, 2001, compared to $550.4 million for the prior year. The
increased cash flow in 2001 reflects timing differences related to the cash
payments for estimated taxes partially offset by the lower net income and
additional cash payments related to the Engle agreement. Lorillard believes
that cash flows from operating activities will be sufficient for the
foreseeable future to enable it to meet its obligations under the State
Settlement Agreements and to fund its capital expenditures. Lorillard cannot
predict its cash requirements related to any future settlements or judgments,
including cash required to bond any appeals, if necessary, and can make no
assurance that it will be able to meet all of those requirements.

Loews Hotels

In 2001, Loews Hotels, with its partners, opened a second hotel at Universal
Orlando in Florida and is developing a third hotel which is scheduled to open
in 2002. Capital expenditures in relation to these hotel projects are being
funded by a combination of equity from Loews Hotels and its partners, and
mortgages.

Funds from operations continue to exceed operating requirements. Funds for
other capital expenditures and working capital requirements are expected to be
provided from existing cash balances and operations.

Diamond Offshore

There has historically been a strong correlation between the price of oil and
natural gas and the demand for offshore drilling services. As natural gas
prices started to decline during the third quarter of 2001, demand for Diamond
Offshore's jack-up fleet in the Gulf of Mexico began to soften. Although
Diamond Offshore has maintained jack-up fleet utilization higher than the
industry average, operating dayrates earned by the fleet have deteriorated.
Utilization of Diamond Offshore's intermediate semisubmersible fleet in the
Gulf of Mexico, which had begun to improve during mid-year 2001, declined
again during the fourth quarter. Contract renewal dayrates for these rigs have
also been lower.

Utilization for Diamond Offshore's high specification floaters has remained
strong throughout 2001. However, towards the end of the year, some deep-water
capacity has become available in the market, and dayrates have declined
slightly. In the international markets, demand has been strong and dayrates
have remained at high levels. Diamond Offshore believes that continued
strength in both high specification and international markets will depend, in
large part, on product prices remaining at current levels. Significant
relocations of drilling rigs from the weaker Gulf of Mexico to international
markets could also lower dayrates in non-U.S. markets.

At December 31, 2001, cash and marketable securities totaled $1.1 billion, up
from $862.1 million at December 31, 2000. Cash provided by operating
activities for the year ended December 31, 2001 increased by $177.5 million to
$374.0 million, as compared to 2000. The increase in cash flow was primarily
due to improved results of operations in 2001.

On April 6, 2001, Diamond Offshore redeemed all of its outstanding 3.75%
Convertible Subordinated Notes (the "Notes") in accordance with the indenture
under which the Notes were issued. Prior to April 6, 2001, $12.4 million
principal amount of the Notes had been converted into 307,071 shares of
Diamond Offshore's common stock at the stated conversion price of $40.50 per
share. The remaining $387.6 million principal amount of the Notes was redeemed
at 102.08% of the principal amount, plus accrued interest, for a total cash
payment of $397.7 million.

On April 11, 2001, Diamond Offshore issued $460.0 million principal amount of
1.5% convertible senior debentures (the "1.5% Debentures") due April 15, 2031.
The 1.5% Debentures are convertible into shares of Diamond Offshore's common
stock at an initial conversion rate of 20.3978 shares per each $1,000
principal amount, subject to adjustment in certain circumstances. Upon
conversion, Diamond Offshore has the right to deliver cash in lieu of shares
of its common stock. The transaction resulted in net proceeds of approximately
$449.1 million.

During 2001, Diamond Offshore purchased 1,403,900 shares of its common stock
at an aggregate cost of $37.8 million. Depending on market conditions, Diamond
Offshore may, from time to time, purchase shares of its common stock in the
open market.

During the year ended December 31, 2001, Diamond Offshore expended $160.4
million, including capitalized interest expense, for rig upgrades. These
expenditures were primarily for the deepwater upgrades of the Ocean Baroness
($114.3 million) and the Ocean

58

Rover ($20.7 million). Included in this amount was $12.6 million for
accommodation and stability enhancement upgrades of the Ocean Nomad which were
completed in April 2001. In addition, the pre-fabrication of equipment
required for the upgrade of six of Diamond Offshore's jack-up rigs accounted
for $7.2 million of 2001 rig upgrade expenditures. Diamond Offshore expects to
spend approximately $275.0 million for rig upgrade capital expenditures during
2002 which are primarily costs associated with upgrades of the Ocean Rover and
six jack-up rigs. Approximately $34.0 million of this amount is expected to be
used for the completion of the Ocean Baroness upgrade.

The significant upgrade of Diamond Offshore's semisubmersible, the Ocean
Baroness, to high specification capabilities will be completed in early 2002.
The approximate cost of the upgrade was $170.0 million. In January 2002, the
Ocean Rover arrived at a shipyard in Singapore for a major upgrade to water
depths and specifications similar to the enhanced Ocean Baroness. The
estimated cost of this upgrade is approximately $200.0 million with
approximately $140.0 million to be spent in 2002. The upgrade is expected to
take approximately 19 months to complete with delivery estimated to occur in
the third quarter of 2003.

Diamond Offshore also plans to spend approximately $93.0 million over the next
two years to upgrade six of its jack-up rigs. The equipment necessary for
these upgrades will be pre-fabricated and installation is planned to occur
during idle time or scheduled surveys to minimize downtime. Diamond Offshore
expects to finance these upgrades through the use of existing cash balances or
internally generated funds.

During the year ended December 31, 2001, Diamond Offshore expended $108.2
million for its continuing rig enhancement program and other corporate
requirements. Diamond Offshore has budgeted $107.1 million for 2002 capital
expenditures associated with these items.

Cash required to meet Diamond Offshore's capital commitments is determined by
evaluating rig upgrades to meet specific customer requirements and by
evaluating Diamond Offshore's continuing rig enhancement program, including
water depth and drilling capability upgrades. It is management's opinion that
operating cash flows and Diamond Offshore's cash reserves will be sufficient
to meet these capital commitments; however, periodic assessments will be made
based on industry conditions. In addition, Diamond Offshore may, from time to
time, issue debt or equity securities, or a combination thereof, to finance
capital expenditures, the acquisition of assets and businesses, or for general
corporate purposes. Diamond Offshore's ability to effect any such issuance
will be dependent on its results of operations, its current financial and
market conditions, and other factors beyond its control.

Bulova

For the year ended December 31, 2001, net cash provided for operating
activities was $15.9 million as compared with net cash used of $15.9 million
in 2000. Bulova's cash and cash equivalents, and investments amounted to $18.9
million at December 31, 2001, compared to $16.9 million in 2000. The increase
in net cash flow is primarily the result of a decrease in inventory purchases
and a higher collection of accounts receivables as compared to the prior year,
partially offset by a change in the timing of accounts payable and accrued
expenses. Funds for capital expenditures and working capital requirements are
expected to be provided from operations and existing cash balances. No
material capital expenditures are anticipated during 2002.

Majestic Shipping

Subsidiaries of Majestic Shipping Corporation ("Majestic"), a wholly owned
subsidiary of the Company, entered into agreements with a Korean shipyard for
the new building of four 442,500 deadweight ton, ultra-large crude carrying
ships ("ULCCs"). Hellespont Shipping Corporation ("Hellespont"), a 49% owned
subsidiary of Majestic, also entered into agreements with another Korean
shipyard for the new building of four 303,000 deadweight ton, very large crude
carrying ships ("VLCCs"). In 2001, Hellespont sold its contracts for
construction of four supertankers. The gain on the transaction was not
material. The total cost of the four remaining ships to be purchased by the
subsidiaries of Majestic is estimated to amount to approximately $360.0
million. The financing for these ships will be provided through equity
contributions by the Company and bank debt guaranteed by Majestic. The Company
has agreed to provide credit support for Majestic's bank debt by making
available to the borrowers limited operating cash flow credit facilities.

Parent Company

During 2001, the Company purchased 5,746,600 shares of its outstanding Common
Stock at an aggregate cost of $282.2 million. Depending on market conditions,
the Company from time to time purchases shares of its, and its subsidiaries',
outstanding common stock in the open market or otherwise.

In September of 2001, the Company paid $957.1 million to purchase 38.3 million
shares of CNA common stock at $25 per share in connection with a rights
offering. The Company purchased an additional 836,500 shares of CNA common
stock for $21.6 million. As result, the Company's ownership percentage of CNA
increased to 89%.

On February 6, 2002, the Company sold 40.3 million shares of a new class of
its common stock referred to as "Carolina Group" stock for net proceeds of
$1.1 billion. Proceeds from this sale have been allocated to the Loews Group
and will be used for general corporate purposes.

The Company continues to pursue conservative financial strategies while
seeking opportunities for responsible growth. These include the expansion of
existing businesses, full or partial acquisitions and dispositions, and
opportunities for efficiencies and economies of scale.

59

INVESTMENTS

Investment activities of non-insurance companies include investments in fixed
income securities, equity securities including short sales, derivative
instruments and short-term investments, and are carried at fair value. Equity
securities, which are considered part of the Company's trading portfolio,
short sales and derivative instruments are marked to market and reported as
investment gains or losses in the Consolidated Statements of Operations.

The Company enters into short sales and invests in certain derivative
instruments for a number of purposes, including: (i) asset and liability
management activities, (ii) income enhancements for its portfolio management
strategy, and (iii) to benefit from anticipated future movements in the
underlying markets. If such movements do not occur as anticipated, then
significant losses may occur.

Monitoring procedures include senior management review of daily detailed
reports of existing positions and valuation fluctuations to ensure that open
positions are consistent with the Company's portfolio strategy.

The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these transactions with large financial
institutions and considers the risk of nonperformance to be remote.

The Company does not believe that any of the derivative instruments utilized
by it are unusually complex, nor do these instruments contain embedded
leverage features which would expose the Company to a higher degree of risk.
See "Results of Operations," "Quantitative and Qualitative Disclosures about
Market Risk" and Note 4 of the Notes to Consolidated Financial Statements for
additional information with respect to derivative instruments, including
recognized gains and losses on these instruments.

Insurance

The components of CNA's net investment income for the years ended December 31,
2001, 2000 and 1999 are presented in the following table.




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)


Fixed maturity securities:
Bonds:
Taxable $1,742.0 $1,549.0 $1,509.0
Tax-exempt 112.0 216.0 267.0
Redeemable preferred stocks 1.0 1.0
Limited Partnerships 47.0 293.0 115.0
Equity securities 39.0 52.0 36.0
Mortgage loans and real estate 2.0 4.0 4.0
Policy loans 12.0 12.0 11.0
Short-term investments 135.0 201.0 188.0
Securities lending transactions, net 29.0 22.0 25.0
Other, including interest on funds withheld
and other deposits (164.0) (16.0) 80.0
- ------------------------------------------------------------------------------
Gross investment income 1,955.0 2,334.0 2,235.0
Investment expense (58.0) (48.0) (41.0)
- ------------------------------------------------------------------------------

Net investment income $1,897.0 $2,286.0 $2,194.0
==============================================================================


During 2001, CNA reclassified equity method income from limited partnership
investments. Effective in 2001, equity method income from limited partnership
investments is classified in net investment income and amounts in 2000 and
1999 have been reclassified to conform to the new presentation. This income
was previously classified in realized investment gains, net of participating
policyholders' and minority interests. Income from limited partnership
investments decreased $246.0 million for 2001 compared with 2000 and increased
$178.0 million for 2000 compared with 1999. During 2000 market conditions
allowed for favorable investment results relative to the investment strategies
of certain limited partnership investments. In addition, certain partnerships
that were very successful during 2000 have been dissolved. Investment results
for the same periods in 2001 were, in general, less than expected.

CNA's reinsurance program includes certain property-casualty contracts, such
as the corporate aggregate treaties, that are entered into and accounted for
on a funds withheld basis. Under these contracts, CNA records a funds withheld
liability for substantially all of the ceded premiums. The reinsurance
contract requires CNA to increase the funds withheld balance at a defined
interest-crediting rate. The funds withheld liability is reduced by any
cumulative claim payments made by CNA in excess of CNA's retention under the
reinsurance contract. If the funds withheld liability is exhausted, additional
claim payments are recoverable from the reinsurer.

60

During 2001, CNA reclassified interest on funds withheld and other deposits.
This expense was previously classified in other operating expenses and is now
classified in net investment income. Interest on funds withheld and other
deposits was $241.0 million in 2001, $87.0 million in 2000 and $22.0 million
in 1999.

The amount subject to interest crediting rates on such contracts was $2,724.0
million and $522.0 million at December 31, 2001 and 2000.

CNA experienced lower net investment income in 2001 as compared with 2000 due
primarily to the decrease in limited partnership income as well as the
increase in interest on funds withheld and other deposits. Net investment
income increased in 2000 as compared with 1999 principally as a result of an
increase in limited partnership income, partially offset by an increase in
interest expense on funds withheld and other deposits. The bond segment of the
investment portfolio yielded 6.4% in 2001, 6.7% in 2000 and 6.1% in 1999.

The components of CNA's net investment gains (losses) for the years ended
December 31, 2001, 2000 and 1999 are presented in the following table:




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)


Investment gains (losses):
Fixed maturity securities:
U.S. Government bonds $ 233.4 $ 95.8 $(177.3)
Corporate and other taxable bonds (3.8) (171.1) (78.0)
Tax-exempt bonds 53.9 13.2 (44.5)
Asset-backed bonds 75.6 (65.0) (13.0)
Redeemable Preferred Stock (21.5) (3.2) 1.3
- ------------------------------------------------------------------------------

Total fixed maturity securities 337.6 (130.3) (311.5)
Equity securities 1,096.4 1,116.0 366.3
Derivative securities (5.0) 10.5 38.6
Other invested assets (163.7) 32.3 105.9
- ------------------------------------------------------------------------------

Total realized investment gains 1,265.3 1,028.5 199.3
Income tax expense (446.2) (358.5) (82.6)
Minority interest (102.0) (88.1) (16.8)
- ------------------------------------------------------------------------------

Net investment gains $ 717.1 $ 581.9 $ 99.9
==============================================================================


Net realized investment gains increased $135.2 million in 2001 as compared
with 2000. This increase was due primarily to gains (after-tax and minority
interest) from the sale of Global Crossing Ltd. common stock ("Global
Crossing") and its related hedge of $566.0 million in 2001 as compared with
$274.0 million in 2000, as well as gains of $47.9 million resulting from the
sale of a New York real estate property and gains from the sale of fixed
maturity security investments. The gains from Global Crossing reported in 2001
are from recognition of hedge arrangements that were entered into in March of
2000. This improvement was partially offset by estimated losses recorded for
the planned dispositions of certain operations, principally CNA Re's U.K.
subsidiaries described in more detail below as well as decreases in gains from
the sale of Canary Wharf Group plc common stock ("Canary Wharf") of $30.0
million (after-tax and minority interest) in 2001 as compared with $251.0
million in 2000.

During the second quarter of 2001, CNA announced its intention to sell certain
subsidiaries. The assets being held for disposition include the U.K.
subsidiaries of CNA Re and certain other subsidiaries. Based upon the
impairment analyses, CNA anticipated that it would realize losses in
connection with those planned sales. In determining the anticipated loss from
these sales, CNA estimated the net realizable value of each subsidiary being
held for sale. An estimated realized loss of $278.4 million (after-tax and
minority interest) was initially recorded in the second quarter of 2001 in
connection with these planned dispositions.

CNA completed the sale of certain subsidiaries during the fourth quarter of
2001 and updated its impairment analyses of subsidiaries still held for sale,
including the United Kingdom subsidiaries of CNA Re. The subsidiaries sold
resulted in realized losses of $33.1 million (after-tax and minority
interest), all of which was previously recognized as part of the initial
impairment loss recorded in the second quarter. The updated impairment
analyses indicated that the $278.4 million realized loss (after-tax and
minority interest) recorded in the second quarter of 2001 should be reduced,
primarily because the net assets of CNA Re U.K. had been significantly
diminished by its operating losses in the second half of 2001. In addition,
CNA updated its estimate of disposal costs, including anticipated capital
contributions, to reflect changes in the planned structure of the anticipated
sale. These updated impairment analyses reduced the realized loss by $153.4
million (after-tax and minority interest), including $141.8

61

million related to the U.K. subsidiaries of CNA Re. The anticipated sale of
the U.K. insurance subsidiaries will be subject to regulatory approval and all
anticipated sales are expected to be completed in 2002.

Net realized investment gains increased $482.0 million in 2000 as compared
with 1999. This increase is related principally to realized gains from Global
Crossing and Canary Wharf. The increase in net realized gains for 2000 as
compared with 1999 was $149.0 million for Global Crossing and $182.0 million
for Canary Wharf. Additionally, a favorable change in market conditions
contributed to the results for the bond sector.

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

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

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

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

Other invested assets include investments in limited partnerships and certain
derivative securities. CNA's limited partnership investments are recorded at
fair value and typically reflect a reporting lag of up to three months. Fair
value represents CNA's equity in the partnership's net assets as determined by
the General Partner.

Limited partnerships are a small portion of CNA's overall investment
portfolio. The majority of the limited partnerships invest in a substantial
number of securities that are readily marketable. CNA is a passive investor
and does not have influence over the management of these partnerships that
operate 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.

Investments in derivative securities are carried at fair value with changes in
fair value reported as a component of realized gains or losses or other
comprehensive income, depending on its hedge designation.

62

The following table details the carrying value of CNA's general and separate
account investment portfolios as of the end of each of the last two years.




General and Separate Account Investments

December 31 2001 % 2000 %
- ------------------------------------------------------------------------------
(In millions of dollars)


General account investments

Fixed maturity securities:
Bonds:
Taxable $26,396.0 74.0% $23,249.0 64.0%
Tax-exempt 2,720.0 8.0 3,349.0 9.0
Redeemable preferred stocks 48.0 54.0
Equity securities:
Common stocks 996.0 3.0 2,216.0 6.0
Non-redeemable preferred stocks 342.0 1.0 196.0 1.0
Mortgage loans and real estate 35.0 26.0
Policy loans 194.0 193.0 1.0
Other invested assets 1,355.0 4.0 1,116.0 3.0
Short-term investments 3,740.0 10.0 5,660.0 16.0
- ------------------------------------------------------------------------------

Total general account investments $35,826.0 100.0% $36,059.0 100.0%
==============================================================================

Separate account investments

Fixed maturity securities:
Taxable bonds $2,347.0 62.0% $ 2,703.0 65.0%
Equity securities:
Common stocks 149.0 4.0 212.0 5.0
Non-redeemable preferred stocks 12.0 3.0
Other invested assets 876.0 23.0 849.0 20.0
Short-term investments 394.0 11.0 407.0 10.0
- ------------------------------------------------------------------------------

Total separate account investments $3,778.0 100.0% $4,174.0 100.0%
==============================================================================


Total separate accounts investments at fair value were approximately $3.7 and
$4.1 billion at December 31, 2001 and 2000, respectively, with taxable fixed
maturities representing approximately 62.0% and 65.0% of the totals,
respectively. Approximately 53.0% and 57.0% of separate accounts investments
at December 31, 2001 and 2000, respectively, are used to fund guaranteed
investment contracts for which Continental Assurance Company and Valley Forge
Life Insurance Company guarantee principal and a specified return to the
contract holders (guaranteed investment contracts). The duration of fixed
maturity securities included in the guaranteed investment contract portfolio
is matched approximately with the corresponding payout pattern of the
liabilities of the guaranteed investment contracts.

CNA's investment policies for both the general and separate accounts
portfolios 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, 92.0% and 93.0% of which are rated as investment-grade at
December 31, 2001 and 2000, respectively.

63

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




December 31 2001 2000
- ------------------------------------------------------------------------------------------------
(In millions of dollars)


U.S. government and affiliated agency securities $ 5,715.0 19.6% $ 8,689.0 32.7%
Other AAA rated 9,204.0 31.6 7,120.0 26.8
AA and A rated 6,127.0 21.0 5,954.0 22.4
BBB rated 5,583.0 19.2 3,066.0 11.5
Below investment-grade 2,487.0 8.6 1,769.0 6.6
- ------------------------------------------------------------------------------------------------
Total $29,116.0 100.0% $26,598.0 100.0%
================================================================================================

The following table summarizes the bond ratings of the investments supporting CNA's separate
accounts products which guarantee principal and a specified rate of interest:

December 31 2001 2000
- ------------------------------------------------------------------------------------------------
(In millions of dollars)


U.S. government and affiliated agency securities $ 214.0 10.5% $ 224.0 9.8%
Other AAA rated 1,017.0 49.9 1,248.0 54.5
AA and A rated 310.0 15.2 374.0 16.3
BBB rated 421.0 20.6 397.0 17.3
Below investment-grade 77.0 3.8 49.0 2.1
- ------------------------------------------------------------------------------------------------
Total $ 2,039.0 100.0% $ 2,292.0 100.0%
================================================================================================


At December 31, 2001 and 2000, approximately 98.0% of the general account bond
portfolio, was U.S. government agency securities or was rated by Standard &
Poor's or Moody's Investors Service. Approximately 100.0% and 99.0% of the
guaranteed investment contract portfolio bonds were U.S. government agency
securities or were rated by S & P or Moody's Investors Service at December 31,
2001 and 2000. The remaining bonds were rated by other rating agencies,
outside brokers or CNA's management.

High yield securities are bonds rated as below investment-grade (below BBB) by
bond rating agencies and 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 in the underlying insurance
products.

CNA's concentration in high yield bonds was approximately 8.0% and 6.6% of the
general account portfolio and 4.0% and 2.1% of the guaranteed investment
contract portion of CNA's separate account bond portfolio as of December 31,
2001 and 2000, respectively.

Included in CNA's general account fixed maturity securities at December 31,
2001 are $7,723.0 million of asset-backed securities, at fair value,
consisting of approximately 69.0% in collateralized mortgage obligations
("CMOs"), 14.0% in corporate asset-backed obligations, 13.0% in U.S.
government agency issued pass-through certificates, and 4.0% in corporate
mortgage-backed pass-through certificates. The majority of CMOs held are
actively traded in liquid markets and are priced by broker-dealers.

At December 31, 2001 and 2000, short-term investments consisted primarily of
commercial paper and money market funds.

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 hedging purposes. CNA uses
these derivatives to mitigate market risk by purchasing Standard and Poor's
500 index futures contracts in a notional amount equal to the contract
liability relating to Life Operations' Index 500 guaranteed investment
contract product.

64

ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill and
intangible assets with indefinite lives from an amortization method to an
impairment-only approach. Amortization of goodwill and intangible assets with
indefinite lives, including goodwill recorded in past business combinations,
will cease upon adoption of SFAS No. 142, which for the Company will be
January 1, 2002. The transition adjustment resulting from adoption must be
reported in net income as the cumulative effect of a change in accounting
principle. In accordance with the transition guidance provided in SFAS No.
142, the Company is in the process of completing goodwill and indefinite-lived
intangible asset impairment tests that will be finalized by June 30, 2002.
Amortization of goodwill and intangible assets amounted to $22.2, $27.2 and
$30.5 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 applies to the accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a long-
lived asset, except for certain obligations of lessees. Adoption of this
Statement is required for fiscal years beginning after June 15, 2002. Adoption
of these provisions will not have a material impact on the financial position
or results of operations of the Company.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 essentially applies one
accounting model for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and broadens the presentation of
discontinued operations to include more disposal transactions. Adoption of
this Statement is required for fiscal years beginning after December 15, 2001.
Adoption of these provisions will not have a material impact on the financial
position or results of operations of the Company.

In 2002, the Company is required to implement the provisions of the FASB's
Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain
Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer." EITF Issue No.
00-14 addresses the recognition, measurement, and income statement
characterization of sales incentives, including rebates, coupons and free
products or services, offered voluntarily by a vendor without charge to the
customer that can be used in, or that are exercisable by a customer as a
result of, a single exchange transaction. EITF Issue No. 00-25 addresses
whether consideration from a vendor to a reseller of the vendor's products is
(i) an adjustment of the selling prices of the vendor's products and,
therefore, should be deducted from revenue when recognized in the vendor's
income statement or (ii) a cost incurred by the vendor for assets or services
received from the reseller and, therefore, should be included as a cost or an
expense when recognized in the vendor's income statement. As a result of both
issues, promotional expenses historically included in other operating expenses
will be reclassified to cost of manufactured products sold, or as reductions
of revenues from manufactured products. Prior period amounts will be
reclassified for comparative purposes. Adoption of these provisions will not
have a material impact on the financial position or results of operations of
the Company.

65

FORWARD-LOOKING STATEMENTS

Certain statements made or incorporated by reference by the Company in this
Report are "forward-looking" statements within the meaning of the federal
securities laws. Forward-looking statements include, without limitation, any
statement that may project, indicate or imply future results, events,
performance or achievements, and may contain the words "expect", "intend",
"plan", "anticipate", "estimate", "believe", "will be", "will continue", "will
likely result", and similar expressions. Statements in this report that
contain forward-looking statements include, but are not limited to, statements
regarding CNA's insurance business relating to asbestos, pollution and mass
tort claims, expected cost savings and other results from restructuring
activities; statements regarding insurance reserves and statements regarding
planned disposition of certain businesses; statements regarding litigation and
developments affecting Lorillard's tobacco business including, among other
things statements regarding claims, litigation and settlement, and statements
regarding regulation of the industry; statements regarding Diamond Offshore's
business including, without limitation, statements with respect to
expenditures for rig conversion and upgrade, and oil and gas price levels,
exploration and production activity.

Such statements inherently are subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those anticipated or
projected. Such risks and uncertainties include, among others, the impact of
competitive products, policies and pricing; product and policy availability
and demand and market responses, including the effect of the absence of
applicable terrorism legislation on coverages; development of claims and the
effect on loss reserves; exposure to liabilities due to claims made by insured
and others relating to asbestos remediation and health-based asbestos
impairments, and exposure to liabilities for environmental pollution and other
mass tort claims; the sufficiency of CNA's loss reserves and the possibility
of future increases in reserves; the performance of reinsurance companies
under reinsurance contracts; the effects of the Enron bankruptcy on energy and
capital markets, and on the markets for directors & officers and errors &
omissions coverages; limitations upon CNA's ability to receive dividends from
its insurance subsidiaries imposed by state regulatory agencies; regulatory
limitations and restrictions upon CNA and its insurance subsidiaries
generally; judicial decisions and rulings; the possibility of downgrades in
CNA's ratings by ratings agencies and changes in rating agency policies and
practices, and the results of financing efforts.

The tobacco industry continues to be subject to health concerns relating to
the use of tobacco products and exposure to environmental tobacco smoke,
legislation, including actual and potential excise tax increases, increasing
marketing and regulatory restrictions, governmental regulation, privately
imposed smoking restrictions, litigation, including risks associated with
adverse jury and judicial determinations, courts reaching conclusions at
variance with the general understandings of applicable law, bonding
requirements and the absence of adequate appellate remedies to get timely
relief from any of the foregoing, and the effects of price increases related
to concluded tobacco litigation settlements and excise tax increases on
consumption rates.

In addition to the factors noted above, all aspects of the operations of the
Company and its subsidiaries are affected by the impact of general economic
and business conditions, changes in financial markets (interest rate, credit,
currency, commodities and equities) or in the value of specific investments;
changes in domestic and foreign political, social and economic conditions, the
economic effects of the September 11, 2001 terrorist attacks, the impact of
judicial rulings and jury verdicts, regulatory initiatives and compliance with
governmental regulations and various other matters, many of which are beyond
the control of the Company and its subsidiaries.

Developments in any of these areas, which are more fully described elsewhere
in this Report could cause the Company's results to differ materially from
results that have been or may be anticipated or projected by or on behalf of
the Company and its subsidiaries. These forward-looking statements speak only
as of the date of this Report. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any forward-
looking statement contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.

SUPPLEMENTAL FINANCIAL INFORMATION

The following supplemental condensed financial information reflects the
financial position, results of operations and cash flows of Loews Corporation
with its investments in CNA and Diamond Offshore accounted for on an equity
basis rather than as consolidated subsidiaries. It does not purport to present
the financial position, results of operations and cash flows of the Company
in accordance with generally accepted accounting principles because it does
not comply with SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries." Management believes, however, that this disaggregated financial
data enhances an understanding of the consolidated financial statements by
providing users with a format that management uses in assessing the Company.

66




Condensed Balance Sheet Information


Loews Corporation and Subsidiaries
(Including CNA and Diamond Offshore on the Equity Method)

December 31 2001 2000
- ------------------------------------------------------------------------------
(In millions)

Assets:


Current assets $ 1,537.2 $ 579.7
Investments, primarily short-term instruments 4,202.8 4,417.1
- ------------------------------------------------------------------------------

Total current assets and investments in securities 5,740.0 4,996.8
Investment in CNA 7,408.0 8,407.1
Investment in Diamond Offshore 1,033.5 975.8
Other assets 1,078.9 1,119.4
- ------------------------------------------------------------------------------

Total assets $15,260.4 $15,499.1
==============================================================================

Liabilities and Shareholders' Equity:


Current liabilities $ 2,365.7 $ 1,543.3
Securities sold under agreements to repurchase 480.4
Long-term debt, less current maturities
and unamortized discount 2,427.6 2,450.8
Other liabilities 337.4 313.9
- ------------------------------------------------------------------------------

Total liabilities 5,611.1 4,308.0
Shareholders' equity 9,649.3 11,191.1
- ------------------------------------------------------------------------------

Total liabilities and shareholders' equity $15,260.4 $15,499.1
==============================================================================


Condensed Statements of Operations Information


Loews Corporation and Subsidiaries
(Including CNA and Diamond Offshore on the Equity Method)




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)

Revenues:


Manufactured products and other $4,947.6 $4,751.5 $4,485.9
Investment income 199.1 258.5 198.1
Investment gains (losses) 101.2 (7.4) (461.7)
- ------------------------------------------------------------------------------

Total 5,247.9 5,002.6 4,222.3
- ------------------------------------------------------------------------------

Expenses:

Cost of manufactured products sold
and other 3,890.9 3,593.5 3,374.0
Interest 136.6 140.3 143.4
Income tax expense 470.1 492.1 299.7
- ------------------------------------------------------------------------------

Total 4,497.6 4,225.9 3,817.1
- ------------------------------------------------------------------------------

Income from operations 750.3 776.7 405.2
Equity in (loss) income of:
CNA (1,366.5) 1,068.0 43.2
Diamond Offshore 80.4 32.0 72.7
- ------------------------------------------------------------------------------

(Loss) income before cumulative
effect of changes in accounting
principles (535.8) 1,876.7 521.1
Cumulative effect of changes
in accounting principles-net (53.3) (157.9)
- ------------------------------------------------------------------------------

Net (loss) income $ (589.1) $1,876.7 $ 363.2
==============================================================================


67

Condensed Statements of Cash Flow Information


Loews Corporation and Subsidiaries
(Including CNA and Diamond Offshore on the Equity Method)




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)

Operating Activities:


Net (loss) income $ (589.1) $1,876.7 $ 363.2
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Undistributed loss (earnings)
of CNA and Diamond Offshore 1,321.2 (1,064.9) (75.4)
Cumulative effect of changes
in accounting principles 53.3 157.9
Investment (gains) losses (101.2) 7.4 461.7
Other (48.5) 12.5 (23.8)
Changes in assets and liabilities-net 186.7 (88.0) (376.3)
- ------------------------------------------------------------------------------

Total 822.4 743.7 507.3
- ------------------------------------------------------------------------------

Investing Activities:

Net decrease in short-term investments 243.6 193.2 242.9
Securities sold under agreements
to repurchase 480.4 (347.8) (101.9)
Purchases of CNA common stock (978.7) (107.0)
Redemption of CNA preferred stock 200.0
Other (155.7) (198.1) (62.0)
- ------------------------------------------------------------------------------

Total (410.4) (352.7) 172.0
- ------------------------------------------------------------------------------

Financing Activities:

Dividends paid to shareholders (112.5) (99.7) (108.9)
(Decrease) increase in long-term debt-net (18.2) 26.1 20.5
Purchases of treasury shares (282.2) (305.7) (601.6)
Issuance of common stock .4
- ------------------------------------------------------------------------------

Total (412.5) (379.3) (690.0)
- ------------------------------------------------------------------------------

Net change in cash (.5) 11.7 (10.7)
Cash, beginning of year 21.6 9.9 20.6
- ------------------------------------------------------------------------------

Cash, end of year $ 21.1 $ 21.6 $ 9.9
==============================================================================


68

7A. Quantitative and Qualitative Disclosures About Market Risk.


The Company is a large diversified financial services company. As such, it and
its subsidiaries have significant amounts of financial instruments that
involve market risk. The Company's measure of market risk exposure represents
an estimate of the change in fair value of its financial instruments. Changes
in the trading portfolio would be recognized as investment gains (losses) in
the Consolidated Statements of Operations. Market risk exposure is presented
for each class of financial instrument held by the Company at December 31,
assuming immediate adverse market movements of the magnitude described below.
The Company believes that the various rates of adverse market movements
represent a measure of exposure to loss under hypothetically assumed adverse
conditions. The estimated market risk exposure represents the hypothetical
loss to future earnings and does not represent the maximum possible loss nor
any expected actual loss, even under adverse conditions, because actual
adverse fluctuations would likely differ. In addition, since the Company's
investment portfolio is subject to change based on its portfolio management
strategy as well as in response to changes in the market, these estimates are
not necessarily indicative of the actual results which may occur.

Exposure to market risk is managed and monitored by senior management. Senior
management approves the overall investment strategy employed by the Company
and has responsibility to ensure that the investment positions are consistent
with that strategy and the level of risk acceptable to it. The Company may
manage risk by buying or selling instruments or entering into offsetting
positions.

Equity Price Risk - The Company has exposure to equity price risk as a result
of its investment in equity securities and equity derivatives. Equity price
risk results from changes in the level or volatility of equity prices which
affect the value of equity securities or instruments that derive their value
from such securities or indexes. Equity price risk was measured assuming an
instantaneous 25% change in the underlying reference price or index from its
level at December 31, 2001 and 2000, with all other variables held constant.

Interest Rate Risk - The Company has exposure to interest rate risk arising
from changes in the level or volatility of interest rates. The Company
attempts to mitigate its exposure to interest rate risk by utilizing
instruments such as interest rate swaps, interest rate caps, commitments to
purchase securities, options, futures and forwards. The Company monitors its
sensitivity to interest rate risk by evaluating the change in the value of its
financial assets and liabilities due to fluctuations in interest rates. The
evaluation is performed by applying an instantaneous change in interest rates
by varying magnitudes on a static balance sheet to determine the effect such a
change in rates would have on the recorded market value of the Company's
investments and the resulting effect on shareholders' equity. The analysis
presents the sensitivity of the market value of the Company's financial
instruments to selected changes in market rates and prices which the Company
believes are reasonably possible over a one-year period.

The sensitivity analysis estimates the change in the market value of the
Company's interest sensitive assets and liabilities that were held on December
31, 2001 and 2000 due to instantaneous parallel shifts in the yield curve of
100 basis points, with all other variables held constant.

The interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Accordingly the analysis may not
be indicative of, is not intended to provide, and does not provide a precise
forecast of the effect of changes of market interest rates on the Company's
earnings or shareholders' equity. Further, the computations do not contemplate
any actions the Company could undertake in response to changes in interest
rates.

The Company's long-term debt, including interest rate swap agreements, as of
December 31, 2001 and 2000 is denominated in U.S. Dollars. The Company's debt
has been primarily issued at fixed rates, and as such, interest expense would
not be impacted by interest rate shifts. The impact of a 100 basis point
increase in interest rates on fixed rate debt would result in a decrease in
market value of $395.0 and $352.0 million, respectively. A 100 basis point
decrease would result in an increase in market value of $464.6 and $398.8
million, respectively.

Foreign Exchange Rate Risk - Foreign exchange rate risk arises from the
possibility that changes in foreign currency exchange rates will impact the
value of financial instruments. The Company has foreign exchange rate exposure
when it buys or sells foreign currencies or financial instruments denominated
in a foreign currency. This exposure is mitigated by the Company's
asset/liability matching strategy and through the use of futures for those
instruments which are not matched. The Company's foreign transactions are
primarily denominated in Canadian Dollars, British Pounds and the European
Monetary Unit. The sensitivity analysis also assumes an instantaneous 20%
change in the foreign currency exchange rates versus the U.S. Dollar from
their levels at December 31, 2001 and 2000, with all other variables held
constant.

Commodity Price Risk - The Company has exposure to commodity price risk as a
result of its investments in gold options. Commodity price risk results from
changes in the level or volatility of commodity prices that impact instruments
which derive their value from such commodities. Commodity price risk was
measured assuming an instantaneous change of 20% from their levels at December
31, 2001 and 2000.

69

The following tables present the Company's market risk by category (equity
markets, interest rates, foreign currency exchange rates and commodity prices)
on the basis of those entered into for trading purposes and other than trading
purposes.



Trading portfolio:

Category of risk exposure: Fair Value Asset (Liability) Market Risk
- ------------------------------------------------------------------------------------------------
December 31 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------
(In millions)



Equity markets (1):
Equity securities $ 290.1 $ 248.2 $(73.0) $ (62.0)
Options - purchased 17.5 22.7 6.0 4.0
- written (7.8) (17.5) (3.0) (3.0)
Index futures - long (2.0)
- short 1.0
Short sales (193.4) (201.1) 48.0 50.0
Separate accounts - Equity securities (a) 11.7 2.7 (2.0) (1.0)
- Other invested assets 342.1 404.3 (6.0) (7.0)
Interest rate (2):
Options on government securities - short (2.5) (2.0)
Futures - long (75.0) 17.0
- short 16.0 (52.0)
Separate accounts - Fixed maturity
securities 308.4 410.1 (5.0) 19.0
Gold Options (3) - purchased 2.6 11.8 (3.0) (12.0)
- written (.4)
- -----------------------------------------------------------------------------------------------

Note: The calculation of estimated market risk exposure is based on assumed adverse changes in
the underlying reference price or index of (1) a decrease in equity prices of 25%, (2) an
increase in interest rates of 100 basis points at December 31, 2001 and a decrease in
interest rates of 100 basis points at December 31, 2000 and (3) an increase in gold prices
of 20%. Adverse changes on options which differ from those presented above would not
necessarily result in a proportionate change to the estimated market risk exposure.

(a) In addition, the Separate accounts carry positions in equity index futures. A decrease in
equity prices of 25% would result in market risk amounting to $(217.0) and $(245.0) at
December 31, 2001 and 2000, respectively. This market risk would be offset by decreases in
liabilities to customers under variable insurance contracts.




Other than trading portfolio:


Category of risk exposure: Fair Value Asset (Liability) Market Risk
- ------------------------------------------------------------------------------------------------
December 31 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------
(In millions)



Equity markets (1):
Equity securities:
General accounts (a) $1,338.4 $ 2,411.6 $ (322.0) $(456.0)
Separate accounts 148.6 212.4 (37.0) (53.0)
Other invested assets 1,306.9 1,333.0 (134.0) (112.0)
Separate accounts - Other invested assets 533.0 443.4 (133.0) (111.0)
Interest rate (2):
Fixed maturities (a) (b) 31,191.0 27,244.3 (1,560.0) (1,458.0)
Short-term investments (a) 6,734.8 10,037.4 (1.0) (4.0)
Other derivative instruments 16.3 .7 (19.0) 1.0
Separate accounts (a):
Fixed maturities 2,038.8 2,292.5 (120.0) (118.0)
Short-term investments 98.0 177.0
Long-term debt (5,399.0) (5,747.0)
- ------------------------------------------------------------------------------------------------

Note: The calculation of estimated market risk exposure is based on assumed adverse changes in
the underlying reference price or index of (1) a decrease in equity prices of 25% and (2)
an increase in interest rates of 100 basis points.


(a) Certain securities are denominated in foreign currencies. An assumed 20% decline in the
underlying exchange rates would result in an aggregate foreign currency exchange rate risk
of $(114.0) and $(581.0) at December 31, 2001 and 2000, respectively.

(b) Certain fixed maturities positions include options embedded in convertible debt securities.
A decrease in underlying equity prices of 25% would result in market risk amounting to
$(50.0) and $(56.0) at December 31, 2001 and 2000, respectively.


70

Item 8. Financial Statements and Supplementary Data.

Consolidated Balance Sheets



- ------------------------------------------------------------------------------
Assets:
- ------------------------------------------------------------------------------

December 31 2001 2000
- ------------------------------------------------------------------------------
(Dollar amounts in millions)


Investments (Notes 1, 2, 3 and 4):

Fixed maturities, amortized cost of
$31,004.1 and $27,167.5 $31,191.0 $27,244.3

Equity securities, cost of $1,457.3
and $1,462.5 1,646.0 2,682.5

Other investments 1,587.3 1,368.5

Short-term investments 6,734.8 10,037.4
- ------------------------------------------------------------------------------

Total investments 41,159.1 41,332.7

Cash 181.3 195.2

Receivables-net (Notes 1 and 5) 19,452.8 15,301.6

Property, plant and equipment-net
(Notes 1 and 6) 3,075.3 3,206.3

Deferred income taxes (Note 9) 607.0 404.0

Goodwill and other intangible assets-net (Note 1) 323.8 378.7

Other assets (Notes 1, 12, 14 and 15) 4,229.8 4,291.3

Deferred acquisition costs of insurance
subsidiaries (Note 1) 2,423.9 2,417.8

Separate account business (Notes 1 and 3) 3,798.1 4,313.9
- ------------------------------------------------------------------------------

Total assets $ 75,251.1 $ 71,841.5
==============================================================================

See Notes to Consolidated Financial Statements.

71

Consolidated Balance Sheets



- ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
- ------------------------------------------------------------------------------

December 31 2001 2000
- ------------------------------------------------------------------------------
(Dollar amounts in millions)


Insurance reserves (Notes 1 and 7):

Claim and claim adjustment expense $31,266.2 $26,962.7
Future policy benefits 7,306.4 6,669.5
Unearned premiums 4,505.3 4,820.6
Policyholders' funds 546.0 601.5
- ------------------------------------------------------------------------------

Total insurance reserves 43,623.9 39,054.3
Payable for securities purchased (Note 4) 1,365.6 971.4
Securities sold under agreements to repurchase
(Notes 1 and 2) 1,602.4 2,245.5
Long-term debt, less unamortized discounts
(Notes 3 and 10) 5,920.3 6,040.0
Reinsurance balances payable 2,722.9 1,381.2
Other liabilities (Notes 1, 3 and 14) 4,595.2 4,436.2
Separate account business (Notes 1 and 3) 3,798.1 4,313.9
- ------------------------------------------------------------------------------

Total liabilities 63,628.4 58,442.5
- ------------------------------------------------------------------------------

Minority interest 1,973.4 2,207.9
- ------------------------------------------------------------------------------

Commitments and contingent liabilities
(Notes 1, 2, 4, 7, 8, 9, 10, 12, 13, 14,
15 and 17)

Shareholders' equity (Notes 1, 2, 10 and 11):
Common stock, $1 par value:
Authorized - 600,000,000 and 400,000,000
shares
Issued and outstanding - 191,493,300
and 98,614,000 shares 191.5 98.6
Additional paid-in capital 48.2 144.2
Earnings retained in the business 9,214.9 10,191.6
Accumulated other comprehensive income 194.7 756.7
- ------------------------------------------------------------------------------

Total shareholders' equity 9,649.3 11,191.1
- ------------------------------------------------------------------------------

Total liabilities and shareholders' equity $75,251.1 $71,841.5
==============================================================================



72

Consolidated Statements of Operations




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions, except per share data)



Revenues (Note 1):

Insurance premiums (Note 15) $ 9,361.4 $11,471.7 $13,276.7
Investment income, net of expenses (Note 2) 2,144.9 2,593.8 2,425.3
Investment gains (losses) (Note 2) 1,393.7 1,021.1 (273.5)
Manufactured products (including excise
taxes of $618.1, $667.9 and $512.6) 4,584.1 4,383.6 4,125.3
Other 1,933.1 1,781.0 1,888.9
- ------------------------------------------------------------------------------

Total 19,417.2 21,251.2 21,442.7
- ------------------------------------------------------------------------------

Expenses (Note 1):

Insurance claims and policyholders'
benefits (Notes 7 and 15) 11,382.8 9,830.8 11,890.3
Amortization of deferred acquisition
costs 1,803.9 1,879.8 2,142.6
Cost of manufactured products sold (Note 17) 2,237.1 2,251.1 2,116.4
Other operating expenses 4,223.5 3,726.7 3,911.9
Restructuring and other related
charges (Note 13) 251.0 83.0
Interest 332.0 356.9 354.3
- ------------------------------------------------------------------------------

Total 20,230.3 18,045.3 20,498.5
- ------------------------------------------------------------------------------

(813.1) 3,205.9 944.2
- ------------------------------------------------------------------------------

Income tax (benefit) expense (Note 9) (175.4) 1,106.9 305.5
Minority interest (101.9) 222.3 117.6
- ------------------------------------------------------------------------------

Total (277.3) 1,329.2 423.1
- ------------------------------------------------------------------------------

(Loss) income before cumulative effect of
changes in accounting principles (535.8) 1,876.7 521.1
Cumulative effect of changes in accounting
principles-net (Note 1) (53.3) (157.9)
- ------------------------------------------------------------------------------

Net (loss) income $ (589.1) $ 1,876.7 $363.2
==============================================================================

Net (loss) income per share (Note 11):
(Loss) income before cumulative effect
of changes in accounting principles $(2.75) $9.44 $2.40

Cumulative effect of changes in
accounting principles-net (.27) (.73)
- ------------------------------------------------------------------------------

Net (loss) income $(3.02) $9.44 $ 1.67
==============================================================================

See Notes to Consolidated Financial Statements.

73

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY




Earnings Accumulated Common
Additional Retained Other Stock
Comprehensive Common Paid-in in the Comprehensive Held in
Income Stock Capital Business Income Treasury
- ------------------------------------------------------------------------------------------------
(In millions, except per share data)


Balance, December
31, 1998 $112.6 $162.3 $ 9,033.5 $ 892.8
Comprehensive income:
Net income $ 363.2 363.2
Other comprehensive
income (Note 11) 123.8 123.8
---------
Comprehensive income $ 487.0
=========
Dividends paid, $.50
per share (108.9)
Purchases of common stock $ (601.6)
Retirement of treasury stock (8.1) (11.6) (581.9) 601.6
- ------------------------------------------------------------------------------------------------

Balance, December
31, 1999 104.5 150.7 8,705.9 1,016.6
Comprehensive income:
Net income $ 1,876.7 1,876.7
Other comprehensive
losses (Note 11) (259.9) (259.9)
---------
Comprehensive income $ 1,616.8
=========
Dividends paid, $.50
per share (99.7)
Purchases of common stock (305.7)
Retirement of treasury stock (5.9) (8.5) (291.3) 305.7
Equity in certain transactions
of subsidiary companies 2.0
- ------------------------------------------------------------------------------------------------

Balance, December
31, 2000 98.6 144.2 10,191.6 756.7
Comprehensive loss:
Net loss $ (589.1) (589.1)
Other comprehensive
losses (Note 11) (562.0) (562.0)
----------
Comprehensive losses $(1,151.1)
==========
Two-for-one stock split 98.6 (98.6)
Dividends paid, $.58 per share (112.5)
Issuance of common stock .4
Purchases of common stock (282.2)
Retirement of treasury stock (5.7) (1.4) (275.1) 282.2
Equity in certain transactions
of subsidiary companies 3.6
- ------------------------------------------------------------------------------------------------

Balance, December 31, 2001 $ 191.5 $ 48.2 $ 9,214.9 $194.7
================================================================================================

See Notes to Consolidated Financial Statements.

74

Consolidated Statements of Cash Flows




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)



Operating Activities:

Net (loss) income $ (589.1) $ 1,876.7 $ 363.2
Adjustments to reconcile net (loss)
income to net cash used by operating
activities:
Cumulative effect of changes in
accounting principles 53.3 157.9
Investment (gains) losses (1,393.7) (1,021.1) 273.5
Provision for minority interest (101.9) 222.3 117.6
Amortization of investments (316.0) (370.5) (301.2)
Depreciation and amortization 374.7 356.6 395.3
Provision for deferred income taxes 76.4 532.7 153.5
Other non-cash items 11.7 (275.1) (1.8)
Changes in assets and liabilities-net:
Reinsurance receivables (4,426.1) (1,729.2) 615.9
Other receivables 403.1 74.1 (602.8)
Prepaid reinsurance premiums 224.6 10.7 (152.1)
Deferred acquisition costs (17.3) (132.2) (220.8)
Insurance reserves and claims 4,615.8 (127.6) (1,192.9)
Reinsurance balances payable 1,341.8 717.1 215.9
Other liabilities 55.5 (269.9) 418.8
Trading securities 312.5 (157.5) (759.0)
Transfer of business-reinsurance (41.3) (1,149.2)
Other-net (86.4) (104.6) (289.1)
- ------------------------------------------------------------------------------
538.9 (438.8) (1,957.3)
- ------------------------------------------------------------------------------

Investing Activities:

Purchases of fixed maturities (75,150.6) (60,838.3) (58,532.7)
Proceeds from sales of fixed maturities 67,877.4 58,345.0 57,211.8
Proceeds from maturities of fixed maturities 3,929.7 4,222.3 2,995.5
Purchases of equity securities (1,287.2) (1,858.0) (1,575.4)
Proceeds from sales of equity securities 2,325.2 2,941.6 1,803.4
Purchases of property and equipment (502.5) (667.2) (708.2)
Proceeds from sales of property and
equipment 278.4 36.1 99.4
Securities sold under agreements to
repurchase (643.1) (776.8) 791.8
Change in short-term investments 3,412.6 (687.3) 783.3
Change in other investments (175.9) 272.2 59.5
- ------------------------------------------------------------------------------
64.0 989.6 2,928.4
- ------------------------------------------------------------------------------


75

Consolidated Statements of Cash Flows




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)



Financing Activities:

Dividends paid to shareholders $ (112.5) $ (99.7) $(108.9)
Dividends paid to minority interests (31.5) (33.5) (40.1)
Purchases of treasury shares (282.2) (305.7) (601.6)
Purchases of treasury shares by subsidiaries (37.8) (127.9)
Redemption of preferred stock by subsidiary (150.0)
Issuance of common stock .4
Issuance of common stock by subsidiary 49.2
Principal payments on long-term debt (1,138.2) (166.6) (478.1)
Issuance of long-term debt 1,000.1 476.9 225.1
Receipts credited to policyholders 1.7 4.8 7.0
Withdrawals of policyholder account balances (66.0) (137.8) (78.0)
- ------------------------------------------------------------------------------
(616.8) (539.5) (1,074.6)
- ------------------------------------------------------------------------------

Net change in cash (13.9) 11.3 (103.5)
Cash, beginning of year 195.2 183.9 287.4
- -----------------------------------------------------------------------------

Cash, end of year $ 181.3 $195.2 $183.9
==============================================================================

See Notes to Consolidated Financial Statements.

76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)

Note 1. Summary of Significant Accounting Policies

Principles of consolidation - The consolidated financial statements include
all significant subsidiaries and all material intercompany accounts and
transactions have been eliminated. Unless the context otherwise requires, the
term "Company" means Loews Corporation and its consolidated subsidiaries. The
equity method of accounting is used for investments in associated companies in
which the Company generally has an interest of 20% to 50%.

Accounting estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and the related
notes. Actual results could differ from those estimates.

Accounting changes - In the first quarter of 2001, the Company adopted the
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" (collectively referred to as SFAS
No. 133). The initial adoption of SFAS No. 133 did not have a significant
impact on the equity of the Company; however, adoption of SFAS No. 133
resulted in a charge to 2001 earnings of $53.3, net of income taxes and
minority interest of $33.0 and $8.0, respectively, to reflect the change in
accounting principle. Of this transition amount, approximately $50.5, net of
income taxes and minority interest, related to CNA Financial Corporation's
("CNA"), an 89% owned subsidiary, investments and investment-related
derivatives. Because CNA already carried its investment and investment-related
derivatives at fair value through other comprehensive income, there was an
equal and offsetting favorable adjustment of $50.5 to shareholders' equity
(accumulated other comprehensive income). The remainder of the transition
adjustment is attributable to collateralized debt obligation products that are
derivatives under SFAS No. 133. See Note 4 for a complete discussion of the
Company's adoption of these accounting pronouncements.

On April 1, 2001 the Company adopted the FASB's Emerging Issues Task Force
("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets."
EITF Issue No. 99-20 establishes how a transferor that retains an interest in
securitized financial assets or an enterprise that purchases a beneficial
interest in securitized financial assets should account for interest income
and impairment. The adoption of EITF 99-20 did not have a significant impact
on the results of operations or equity of the Company.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 requires companies to use the purchase method of accounting for business
combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method of accounting. The Company has adopted this
standard for all business combinations subsequent to June 30, 2001.

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

Effective January 1, 1999, the Company adopted SOP 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments," and SOP
98-5, "Reporting on the Costs of Start-Up Activities." SOP 97-3 requires
insurance companies to recognize liabilities for insurance-related assessments
when an assessment is probable, when it can be reasonably estimated, and when
the event obligating an entity to pay an imposed or probable assessment has
occurred on or before the date of the financial statements.

SOP 98-5 requires costs of start-up activities and organization costs, as
defined, to be expensed as incurred. The Company had previously deferred
recognition of these costs and amortized them over a period following the
completion of the start-up activities.

The pro forma effect of adoption on reported results for prior periods is not
significant.

The cumulative effect of these accounting changes resulted in a charge
effective January 1, 1999, as follows:





Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments (net of income taxes
and minority interest of $95.4 and $26.5) $150.8
Costs of Start-Up Activities (net of income taxes of $3.8) 7.1
------
$157.9
======


Investments - Investments in securities, which are held principally by
insurance subsidiaries of CNA are carried as follows:

The Company classifies fixed maturity securities (bonds and redeemable
preferred stocks) and its equity securities held by insurance subsidiaries as
available-for-sale, and are carried at fair value. Changes in fair value are
recorded as a component of accumulated

77

other comprehensive income in shareholders' equity, net of applicable deferred
income taxes and participating policyholders' and minority interest. 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. Investments are written down to estimated fair values and
losses are recognized in income when a decline in value is determined to be
other than temporary.

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

Equity securities in the parent company's investment portfolio are classified
as trading securities in order to reflect the Company's investment philosophy.
These investments are carried at fair value with the net unrealized gain or
loss included in the Consolidated Statements of Operations.

Short-term investments consist primarily of U.S. government securities,
repurchase agreements and commercial paper. These investments are generally
carried at fair value, which approximates amortized cost.

All securities transactions are recorded on the trade date. The cost of
securities sold is determined by the identified certificate method.
Investments are written down to estimated fair values, and losses are charged
to income when a decline in value is considered to be other than temporary.

Other invested assets include investments in limited partnerships and certain
derivative securities. CNA's limited partnership investments are recorded at
fair value and typically reflect a reporting lag of up to three months. Fair
value represents CNA's equity in the partnership's net assets as determined by
the General Partner.

Limited partnerships are a small portion of CNA's overall investment
portfolio. The majority of the limited partnerships invest in a substantial
number of securities that are readily marketable. CNA is a passive investor
and does not have influence over the management of these partnerships that
operate 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.

Investments in derivative securities are carried at fair value with changes in
fair value reported as a component of realized gains or losses or other
comprehensive income, depending on its hedge designation.

Derivative financial investments - Effective January 1, 2001, the Company
accounts for derivative instruments and hedging activities in accordance with
SFAS No. 133. A derivative is typically defined as an instrument whose value
is "derived" from an underlying instrument, index or rate, has a notional
amount, requires no or little initial investment, 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 in accordance with SFAS No. 133
when the embedded derivative is not clearly and closely related to the host
instrument. In addition, non-investment instruments, including certain types
of insurance contracts that have historically not been considered derivatives,
may be derivatives or contain embedded derivatives under SFAS No. 133.

SFAS No. 133 requires that all derivative instruments be recorded in the
balance sheet at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge of exposures to changes in fair value,
cash flows or foreign currency exchange rates. The accounting for changes in
the fair value of a derivative instrument depends on the intended use of the
derivative and the nature of any hedge designation thereon. The Company's
accounting for changes in the fair value of derivative instruments is as
follows:




Derivative's Change in Fair Value
Nature of Hedge Designation Reflected in:
--------------------------- -------------------------------------


No hedge designation Realized investment gains (losses).

Fair value Realized investment gains (losses),
along with the change in fair value
of the hedged asset or liability.

Cash flow Other comprehensive income (loss),
with subsequent reclassification to
earnings when the hedged transaction,
asset or liability impacts earnings.

Foreign currency Consistent with fair value or cash
flow above, depending on the nature
of the hedging relationship.


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

Securities sold under agreements to repurchase - The Company lends securities
to unrelated parties, primarily major brokerage firms. Borrowers of these
securities must deposit collateral with the Company of at least 102% of the
fair value of the securities loaned, if the

78

collateral is cash or securities. The Company maintains effective control over
all loaned securities and, therefore, continues to report such securities as
fixed maturity securities in the Consolidated Balance Sheets. Cash collateral
received on these transactions is invested in short-term investments with an
offsetting liability recognized for the obligation to return the collateral.
The fair value of collateral held and included in short-term investments was
$1,591.5 and $1,822.0 at December 31, 2001 and 2000, respectively. Non-cash
collateral, such as securities or letters of credit, received by the Company
are not reflected as assets of the Company as there exists no right to sell or
repledge the collateral. The fair value of non-cash collateral was $413.0 and
$391.0 at December 31, 2001 and 2000.

Insurance Operations - Insurance premiums - Insurance premiums on property-
casualty, and accident and health insurance contracts are earned ratably over
the duration of the policies after deductions for ceded insurance. The reserve
for unearned premium on these contracts represents the portion of premiums
written relating to the unexpired terms of coverage.

Property-casualty contracts that are retrospectively rated contain provisions
that result in an adjustment to the initial policy premium depending on the
contract provisions and loss experience of the insured during the experience
period. For such contracts, CNA estimates the amount of ultimate premiums that
CNA may earn upon completion of the experience period and recognizes either an
asset or a liability for the difference between the initial policy premium and
the estimated ultimate premium. CNA adjusts such estimated ultimate premium
amounts during the course of the experience period based on actual results to
date. The resulting adjustment is recorded as either a reduction of or an
increase to the earned premium for the period.

Revenues on interest sensitive contracts are comprised of contract charges and
fees, which are recognized over the coverage period. Premiums for other life
insurance products and annuities are recognized as revenue when due, after
deductions for ceded insurance premiums.

Claim and claim adjustment expense reserves - Claim and claim adjustment
expense reserves, except reserves for structured settlements, workers'
compensation lifetime claims and accident and health disability claims, are
not discounted and are based on (i) case basis estimates for losses reported
on direct business, adjusted in the aggregate for ultimate loss expectations,
(ii) estimates of incurred but not reported losses ("IBNR"), (iii) estimates
of losses on assumed reinsurance, (iv) estimates of future expenses to be
incurred in settlement of claims, and (v) estimates of salvage and subrogation
recoveries. Management considers current conditions and trends as well as past
company and industry experience in establishing these estimates. The effects
of inflation, which can be significant, are implicitly considered in the
reserving process and are part of the recorded reserve balance. Reinsurance
receivables are reported as an asset in the Consolidated Balance Sheets.

Structured settlements have been negotiated for certain property-casualty
insurance claims. Structured settlements are agreements to provide fixed
periodic payments to claimants. Certain structured settlements are funded by
annuities purchased from CNA's life insurance subsidiary for which the related
annuity obligations are recorded in future policy benefits reserves.
Obligations for structured settlements not funded by annuities are included in
claim and claim adjustment expense reserves and carried at present values
determined using interest rates ranging from 6.0% to 7.5%. At December 31,
2001 and 2000, the discounted reserves for unfunded structured settlements
were $887.0 and $884.0, respectively (net of discounts of $1,478.0 and
$1,473.0, respectively).

Workers' compensation lifetime claim reserves and accident and health
disability claim reserves are calculated using mortality and morbidity
assumptions based on CNA's and industry experience, and are discounted at
interest rates allowed by insurance regulators that range from 3.5% to 6.5%.
At December 31, 2001 and 2000, such discounted reserves totaled $2,384.0 and
$2,205.0, respectively (net of discounts of $978.0 and $940.0, respectively).

Future policy benefits reserves - Reserves for traditional life insurance
products (whole and term life products) and long-term care products are
computed using the net level premium method, which incorporates actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions generally vary by plan, age at issue and
policy duration and include a margin for adverse deviation. Interest rates
range from 3.0% to 9.0%, and mortality, morbidity and withdrawal assumptions
are based on CNA and industry experience prevailing at the time of issue.
Expense assumptions include the estimated effects of inflation and expenses to
be incurred beyond the premium paying period. Reserves for interest sensitive
contracts are equal to the account balances that accrue to the benefit of the
policyholders. Interest crediting rates ranged from 4.3% to 6.5% for the three
years ended December 31, 2001.

Guaranty fund and other insurance-related assessments - Effective January 1,
1999, in accordance with SOP 97-3, CNA records liabilities for guaranty fund
and other insurance-related assessments when an assessment is probable, when
it can be reasonably estimated, and when the event obligating the entity to
pay an imposed or probable assessment has occurred on or before the date of
the financial statements. Liabilities for guaranty funds and other insurance-
related assessments are not discounted or recorded net of premium taxes. These
liabilities are included as part of other liabilities in the Consolidated
Balance Sheets.

Reinsurance - Amounts recoverable from reinsurers are estimated in a manner
consistent with claim and claim adjustment expense reserves or future policy
benefits reserves and are reported as a receivable in the Consolidated Balance
Sheets. An estimated allowance for doubtful accounts is recorded on the basis
of periodic evaluations of balances due from reinsurers, reinsurer solvency,
management's experience and current economic conditions.

79

Reinsurance contracts that do not meet the criteria for risk transfer are
recorded using the deposit method of accounting, which requires that premium
paid or received by the ceding company or assuming company be accounted for as
a deposit asset or liability. CNA primarily records these deposits as
reinsurance receivables for ceded recoverables and other liabilities for
assumed liabilities.

Income or reinsurance contracts that do not meet the criteria for risk
transfer is recognized using a constant effective yield based on the
anticipated timing of payments and the remaining life of the contract. When
the estimate of timing of payments changes, the effective yield is
recalculated to reflect actual payments to date and the estimated timing of
future payments. The deposit asset or liability is adjusted to the amount that
would have existed had the new effective yield been applied since the
inception of the contract. This adjustment is reflected in other revenue or
other operating expense as appropriate.

Deferred acquisition costs - Costs including commissions, premium taxes, and
certain underwriting and policy issuance costs that vary with and are related
primarily to the acquisition of property-casualty insurance business are
deferred and amortized ratably over the period the related premiums are
earned. Anticipated investment income is considered in the determination of
the recoverability of deferred acquisition costs.

The excess of first year commissions over renewal commissions, and other first
year costs of acquiring life insurance business such as agency and policy
issuance expenses, that vary with and are related primarily to the production
of new and renewal business, have been deferred and are amortized with
interest over the expected life of the related contracts. As an offset to
this, the excess of first year costs over renewal ceded expense allowances
that also vary with and are related primarily to the production of new and
renewal business, have been amortized with interest over the expected life of
the related contracts.

Acquisition costs related to non-participating traditional life insurance and
accident and health insurance are being amortized over the premium-paying
period of the related policies using assumptions consistent with those used
for computing future policy benefits reserves for such contracts. Assumptions
as to anticipated premiums are made at the date of policy issuance or
acquisition and are consistently applied during the lives of the contracts.
Deviations from estimated experience are included in operations when they
occur. For these contracts, the amortization period is typically the estimated
life of the policy.

For universal life and cash value annuity contracts, the amortization of
deferred acquisition costs is recorded in proportion to the present value of
estimated gross margins or profits. The gross margins or profits result from
actual earned interest minus actual credited interest, actual costs of
insurance ("mortality") charges minus expected mortality, actual expense
charges minus maintenance expenses and surrender charges. Amortization
interest rates are based on rates in effect at the inception or acquisition of
the contracts. Actual gross margins or profits can vary from CNA's estimates
resulting in increases or decreases in the rate of amortization. When
appropriate, CNA revises its assumptions of the estimated gross margins or
profits of these contracts, and the cumulative amortization is re-estimated
and adjusted through current operations. To the extent that unrealized gains
or losses on available-for-sale securities would result in an adjustment of
deferred acquisition costs had they actually been realized, an adjustment is
recorded to deferred acquisition costs and to unrealized investment gains or
losses.

Acquisition costs deferred are recorded net of ceding commissions and other
ceded acquisition costs. CNA periodically evaluates deferred acquisition costs
for recoverability; adjustments, if necessary, are recorded in current
operations.

Investments in life settlement contracts and related revenue recognition - CNA
has purchased life insurance policies in the form of life settlement
contracts. Under a life settlement contract, CNA purchases an in-force life
insurance contract at a substantial discount from the face value of the
policy. The carrying value of each contract is determined at the end of each
reporting period as the present value of expected proceeds reduced by the
present value of future premiums based upon actuarial models that incorporate
mortality and interest rate assumptions. The carrying values of these
contracts are included in other assets with adjustments to increase the
carrying values reflected as other revenues. Mortality and interest rate
assumptions are reviewed periodically and adjusted if deemed necessary.

Separate account business - CNA's life insurance subsidiaries, Continental
Assurance Company ("CAC") and Valley Forge Life Insurance Company ("VFL"),
write investment and annuity contracts. The supporting assets and liabilities
of certain of these contracts are legally segregated and reported in the
accompanying Consolidated Balance Sheets as assets and liabilities of separate
account business. CAC and VFL guarantee principal and a specified return to
the contract holders on approximately 53% and 57% of the separate account
business at December 31, 2001 and 2000, respectively. Substantially all assets
of the separate account business are carried at fair value. Separate account
liabilities are carried at contract values.

Statutory accounting practices - CNA's insurance subsidiaries are domiciled in
various jurisdictions. These subsidiaries prepare statutory financial
statements in accordance with accounting practices prescribed or permitted by
their respective jurisdiction's insurance regulators. Prescribed statutory
accounting practices are set forth in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state
laws, regulations and general administrative rules. CNA's insurance
subsidiaries follow two significant permitted accounting practices related to
discounting of certain non-tabular workers' compensation claims and the phase
in from valuing at par to a market valuation method for recording an
affiliated promissory note between CCC ("lender") and Viaticus, Inc.

80

("borrower"), a wholly owned subsidiary of CNA.

The impact of the permitted practice related to discounting of certain non-
tabular workers' compensation claims was to increase statutory surplus by
approximately $47.0, $71.0 and $95.0 at December 31, 2001, 2000 and 1999,
respectively. This practice was followed by an acquired company, and CNA
received permission to eliminate the effect of the permitted practice after a
10-year period, which ends in 2003.

CCC has filed for approval with the Illinois Department of Insurance (the
"Department") the affiliated promissory note between CCC and Viaticus, Inc.
Review of this note is still ongoing by the Department and formal approval has
yet to be received. Therefore, the Department has granted a permitted practice
that expires on June 30, 2002 to carry this note at a value of approximately
$449.0 as of December 31, 2001. The par value of this note at December 31,
2001 was approximately $464.0. CNA does not believe that the outcome of the
Department's review will have a material impact on CCC's results of operations
or financial position.

CNA's domestic insurance subsidiaries are subject to risk-based capital
requirements. Risk-based capital is a method developed by the NAIC to
determine the minimum amount of statutory capital appropriate for an insurance
company to support its overall business operations in consideration of its
size and risk profile. The formulas for determining the amount of risk-based
capital specifies various factors, weighted based on the perceived degree of
risk, that are applied to certain financial balances and financial activity.
The adequacy of a company's actual capital is evaluated by a comparison to the
risk-based capital results, as determined by the formulas. Companies below
minimum risk-based capital requirements are classified within certain levels,
each of which requires specified corrective action. As of December 31, 2001
and 2000, all of CNA's domestic insurance subsidiaries exceeded the minimum
risk-based capital requirements.

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





Statutory Capital
and Surplus Statutory Net Income (Loss)
-----------------------------------------------------------
December 31 Year Ended December 31
-----------------------------------------------------------
(Unaudited) 2001 2000 2001 2000 1999
- ------------------------------------------------------------------------------------------------


Property and casualty companies* $ 6,225.0 $ 8,373.0 $(1,650.0) $1,067.0 $ 361.0
Life insurance companies 1,752.0 1,274.0 56.0 (47.0) 77.0
- ------------------------------------------------------------------------------------------------

*Surplus includes the property and casualty companies' equity ownership of the life insurance
subsidiaries.


At December 31, 2001 and 2000, CNA maintained statutory deposits of cash and
securities, with carrying values of approximately $2,000.0 and $1,900.0,
respectively, under requirements of regulatory authorities.

Cash and securities with carrying values of approximately $30.0 and $41.0 were
deposited with financial institutions as collateral for letters of credit at
December 31, 2001 and 2000. See Note 17 of the Notes to Consolidated Financial
Statements.

Tobacco product inventories - These inventories, aggregating $285.7 and $269.3
at December 31, 2001 and 2000, respectively, are stated at the lower of cost
or market, using the last-in, first-out (LIFO) method and primarily consist of
leaf tobacco. If the average cost method of accounting had been used for
tobacco inventories instead of the LIFO method, such inventories would have
been $210.2 and $205.7 higher at December 31, 2001 and 2000, respectively.

Watch and clock inventories - These inventories, aggregating $48.8 and $56.1
at December 31, 2001 and 2000, respectively, are stated at the lower of cost
or market, using the first-in, first-out (FIFO) method.

Goodwill and other intangible assets - Goodwill, representing the excess of
purchase price over fair value of the net assets of acquired entities, is
generally amortized on a straight-line basis over the period of expected
benefit ranging from 15 to 30 years. Other intangible assets are amortized on
a straight-line basis over their estimated economic lives. Accumulated
amortization at December 31, 2001 and 2000 was $464.2 and $442.0,
respectively. Intangible assets are periodically reviewed to determine whether
an impairment in value has occurred.

Property, plant and equipment - Property, plant and equipment is carried at
cost less accumulated depreciation. Depreciation is computed principally by
the straight-line method over the estimated useful lives of the various
classes of properties. Leaseholds and leasehold improvements are depreciated
or amortized over the terms of the related leases (including optional renewal
periods where appropriate) or the estimated lives of improvements, if less
than the lease term.

The principal service lives used in computing provisions for depreciation are
as follows:




Years
--------


Buildings and building equipment 40
Building fixtures 10 to 20
Machinery and equipment 5 to 12
Hotel equipment 4 to 12
Offshore drilling equipment 10 to 25


81

Impairment of long-lived assets - The Company reviews its long-lived assets
for impairment when changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Long-lived assets and certain intangibles,
under certain circumstances, are reported at the lower of carrying amount or
fair value. Assets to be disposed of and assets not expected to provide any
future service potential to the Company are recorded at the lower of carrying
amount or fair value less cost to sell.

Supplementary cash flow information - Cash payments made for interest on long-
term debt, including capitalized interest and commitment fees, amounted to
approximately $312.3, $361.3 and $336.9 for the years ended December 31, 2001,
2000 and 1999, respectively. Cash payments made for federal, foreign, state
and local income taxes, net of refunds, amounted to approximately $420.7,
$227.9 and $205.2 for the years ended December 31, 2001, 2000 and 1999,
respectively. In 1999, CNA exchanged its interest in Canary Wharf Limited
Partnership into the common stock of Canary Wharf Group, plc. valued at
approximately $539.0.

Accounting pronouncements - In 2002, the Company is required to implement the
provisions of EITF Issue No. 00-14, "Accounting for Certain Sales Incentives"
and EITF Issue No. 00-25, "Vendor Income Statement Characterization of
Consideration from a Vendor to a Retailer." EITF Issue No. 00-14 addresses the
recognition, measurement, and income statement characterization of sales
incentives, including rebates, coupons and free products or services, offered
voluntarily by a vendor without charge to the customer that can be used in, or
that are exercisable by a customer as a result of, a single exchange
transaction. EITF Issue No. 00-25 addresses whether consideration from a
vendor to a reseller of the vendor's products is (i) an adjustment of the
selling prices of the vendor's products and, therefore, should be deducted
from revenue when recognized in the vendor's income statement or (ii) a cost
incurred by the vendor for assets or services received from the reseller and,
therefore, should be included as a cost or an expense when recognized in the
vendor's income statement. As a result of both issues, promotional expenses
historically included in other operating expenses will be reclassified to cost
of manufactured products sold, or as reductions of revenues from manufactured
products. Prior period amounts will be reclassified for comparative purposes.
Adoption of these provisions will not have a material impact on the financial
position or results of operations of the Company.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill and intangible
assets with indefinite lives from an amortization method to an impairment-only
approach. Amortization of goodwill and intangible assets with indefinite
lives, including goodwill recorded in past business combinations, will cease
upon adoption of SFAS No. 142, which for the Company will be January 1, 2002.
Amortization of goodwill and intangible assets amounted to $22.2, $27.2 and
$30.5 for the years ended December 31, 2001, 2000 and 1999, respectively.
Additionally, in accordance with the transition guidance provided in SFAS No.
142, the Company will complete goodwill and other acquired intangible asset
impairment tests by June 30, 2002. Any resulting asset impairments will be
recorded as a cumulative effect of a change in accounting principle as of
January 1, 2002.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 applies to the accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a long-
lived asset, except for certain obligations of lessees. Adoption of this
Statement is required for fiscal years beginning after June 15, 2002. Adoption
of these provisions will not have a material impact on the financial position
or results of operations of the Company.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 essentially applies one
accounting model for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and broadens the presentation of
discontinued operations to include more disposal transactions. Adoption of
this Statement is required for fiscal years beginning after December 15, 2001.
Adoption of these provisions will not have a material impact on the financial
position or results of operations of the Company.

Reclassification - Certain amounts applicable to prior periods have been
reclassified to conform to the classifications followed in 2001. During 2001,
the Company reclassified equity method income from limited partnership
investments. This income was previously classified in realized investment
gains and is now classified in net investment income.

82

Note 2. Investments




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------

Investment income consisted of:


Fixed maturity securities $ 1,880.2 $ 1,798.0 $ 1,814.8
Short-term investments 299.9 420.2 362.4
Other 36.7 425.8 306.3
- ------------------------------------------------------------------------------
Total investment income 2,216.8 2,644.0 2,483.5
Investment expenses (71.9) (50.2) (58.2)
- ------------------------------------------------------------------------------
Investment income-net $ 2,144.9 $ 2,593.8 $ 2,425.3
==============================================================================

Investment gains (losses) are as follows:

Trading securities:
Derivative instruments (a) $ 18.2 $ (135.9) $ (385.1)
Equity securities, including short
positions (a) 62.7 131.2 (47.0)
- ------------------------------------------------------------------------------
80.9 (4.7) (432.1)

Other than trading:
Fixed maturities 350.1 (113.0) (313.1)
Equity securities (b) 1,102.8 1,109.9 356.7
Short-term investments 26.5 (2.4) 19.5
Other, including guaranteed separate
account business (c) (166.6) 31.3 95.5
- ------------------------------------------------------------------------------
Investment gains (losses) 1,393.7 1,021.1 (273.5)
Income tax (expense) benefit (491.1) (356.0) 89.5
Minority interest (110.4) (88.0) (16.8)
- ------------------------------------------------------------------------------
Investment gains (losses)-net $ 792.2 $ 577.1 $ (200.8)
- ------------------------------------------------------------------------------

(a) Includes losses on short sales, equity index futures and options
aggregating $533.6 for the year ended December 31, 1999. Substantially all
of the index short positions were closed during the second quarter of
2000.
(b) Includes gains on sales of Global Crossing Ltd. ("Global Crossing") common
stock of $962.0, $484.9 and $222.1 for the years ended December 31, 2001,
2000 and 1999, respectively, and gains on sales of Canary Wharf of $51.7,
$443.9 and $121.9 for the years ended December 31, 2001, 2000 and 1999,
respectively. In March of 2000, the Company entered into a hedge
arrangement related to its Global Crossing stock. The unrealized
appreciation on the stock that was preserved by the hedge was reflected as
an unrealized gain in accumulated other comprehensive income at December
31, 2000. The hedge agreements were closed out in 2001 resulting in the
realized gain of $962 million.
(c) Includes losses of $136.6 (after-tax and minority interest) related to
the planned disposition of certain subsidiary operations, principally the
U.K. subsidiaries of CNA Re, for the year ended December 31,
2001.


The carrying value of investments (other than equity securities) that did not
produce income for the last twelve months is $186.0 at December 31, 2001.

Investment gains of $2,383.2, $1,826.3 and $854.0 and losses of $903.8, $831.8
and $790.9 were realized on securities available for sale for the years ended
December 31, 2001, 2000 and 1999, respectively. Investment gains (losses) in
2001, 2000 and 1999 also include $18.2 of net unrealized gains, and $16.5 and
$306.4 of net unrealized losses on equity securities in the Company's trading
portfolio.

83

The amortized cost and market values of securities are as follows:




Unrealized
Amortized ------------------ Market
December 31, 2001 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------


U.S. government and obligations of
government agencies $ 7,005.4 $ 113.7 $ 41.5 $7,077.6
Asset-backed 7,602.9 139.1 18.9 7,723.1
States, municipalities and political
subdivisions-tax exempt 2,748.4 19.1 47.5 2,720.0
Corporate 9,741.4 277.4 259.4 9,759.4
Other debt 3,857.9 172.1 167.1 3,862.9
Redeemable preferred stocks 48.1 .6 .7 48.0
- ------------------------------------------------------------------------------------------------
Total fixed maturities available for sale 31,004.1 722.0 535.1 31,191.0
Equity securities available for sale 1,168.0 343.8 173.3 1,338.5
Equity securities, trading portfolio 289.3 44.0 25.8 307.5
Short-term investments available for sale 6,753.3 1.3 19.8 6,734.8
- ------------------------------------------------------------------------------------------------
$39,214.7 1,111.1 754.0 39,571.8
================================================================================================

December 31, 2000
- ------------------------------------------------------------------------------------------------

U.S. government and obligations of
government agencies $ 5,666.1 $ 202.9 $ 2.9 $ 5,866.1
Asset-backed 7,548.5 99.8 25.2 7,623.1
States, municipalities and political
subdivisions-tax exempt 3,279.3 79.2 9.1 3,349.4
Corporate 7,262.4 149.2 344.0 7,067.6
Other debt 3,357.2 62.5 135.3 3,284.4
Redeemable preferred stocks 54.0 .2 .5 53.7
- ------------------------------------------------------------------------------------------------
Total fixed maturities available for sale 27,167.5 593.8 517.0 27,244.3
Equity securities available for sale 1,175.1 1,400.1 163.6 2,411.6
Equity securities, trading portfolio 287.4 58.3 74.8 270.9
Short-term investments available for sale 10,037.8 .6 1.0 10,037.4
- ------------------------------------------------------------------------------------------------
$38,667.8 $2,052.8 $ 756.4 $39,964.2
================================================================================================


The amortized cost and market value of fixed maturities at December 31, 2001
and 2000 are shown below by contractual maturity. Actual maturities may differ
from contractual maturities because securities may be called or prepaid with
or without call or prepayment penalties.




2001 2000
--------------------------------------------------
Amortized Market Amortized Market
December 31 Cost Value Cost Value
- ------------------------------------------------------------------------------------------------


Due in one year or less $ 331.5 $ 367.0 $ 1,217.4 $ 1,209.4
Due after one year through five years 6,865.0 6,831.2 5,049.8 5,015.4
Due after five years through ten years 9,662.2 9,667.1 7,241.0 7,138.7
Due after ten years 6,542.5 6,602.6 6,110.8 6,257.7
Asset-backed securities not due at a
single maturity date 7,602.9 7,723.1 7,548.5 7,623.1
- ------------------------------------------------------------------------------------------------
$31,004.1 $31,191.0 $27,167.5 $27,244.3
================================================================================================


84

Note 3. Fair Value of Financial Instruments




2001 2000
--------------------------------------------------
Carrying Estimated Carrying Estimated
December 31 Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------


Financial assets:
Other investments $1,580.0 $ 1,572.0 $1,363.0 $1,351.0
Separate account business:
Fixed maturities securities 2,347.0 2,347.0 2,703.0 2,703.0
Equity securities 161.0 161.0 215.0 215.0
Other 876.0 876.0 849.0 849.0
Financial liabilities:
Premium deposits and annuity contracts 1,465.0 1,395.0 1,486.0 1,419.0
Long-term debt 5,882.4 5,399.0 6,000.0 5,747.0
Collateralized debt obligation 38.0 38.0
Financial guarantee contracts 98.0 96.0 150.0 128.0
Separate account business:
Guaranteed investment contracts 469.0 492.0 882.0 880.0
Variable separate accounts 1,146.0 1,146.0 1,387.0 1,387.0
Other 622.0 622.0 623.0 623.0
- ------------------------------------------------------------------------------------------------


In cases where quoted market prices are not available, fair values are
estimated using present value or other valuation techniques. These techniques
are significantly affected by management's assumptions, including discount
rates and estimates of future cash flows. The estimates presented herein are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The amounts reported in the Consolidated Balance
Sheet for fixed maturities securities, equity securities, derivative
instruments, short-term investments and securities sold under agreements to
repurchase are at fair value. As such, these financial instruments are not
shown in the table above. See Note 4 for the value of derivative instruments.
Since the disclosure excludes certain financial instruments and nonfinancial
instruments such as real estate and insurance reserves, the aggregate fair
value amounts cannot be summed to determine the underlying economic value of
the Company.

The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:

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

Other investments consist of mortgage loans and notes receivable, policy
loans, investments in limited partnerships and various miscellaneous assets.
Valuation techniques to determine fair value of other investments and other
separate account assets consisted of discounting cash flows and obtaining
quoted market prices of the investments, comparable instruments, or underlying
assets of the investments.

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

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

The fair value of guaranteed investment contracts of the separate accounts
business were estimated using discounted cash flow calculations, based on
interest rates currently being offered for similar contracts with similar
maturities. The fair value of the liabilities for variable separate account
business was based on the quoted market values of the underlying assets of
each variable separate account. The fair value of other separate account
business liabilities approximates carrying value because of their short-term
nature.

Fair value of long-term debt was based on quoted market prices when available.
The fair value for other long-term debt was based on quoted market prices of
comparable instruments adjusted for differences between the quoted instruments
and the instruments being valued or is estimated using discounted cash flow
analyses, based on current incremental borrowing rates for similar types of
borrowing arrangements.

The fair values of collateralized debt obligation liability contracts are
determined largely based on management's estimates using default probabilities
of the debt securities underlying the contract, which are obtained from a
rating agency, and the term of the contract.

85

Note 4. Derivative Financial Instruments

The Company invests in certain derivative instruments for a number of
purposes, including: (i) for its asset and liability management activities,
(ii) for income enhancements for its portfolio management strategy, and (iii)
to benefit from anticipated future movements in the underlying markets. If
such movements do not occur as anticipated, then significant losses may occur.

Monitoring procedures include senior management review of daily detailed
reports of existing positions and valuation fluctuations to ensure that open
positions are consistent with the Company's portfolio strategy.

The Company does not believe that any of the derivative instruments utilized
by it are unusually complex, nor do these instruments contain embedded
leverage features which would expose the Company to a higher degree of risk.

CNA invests in derivative financial instruments in the normal course of
business, primarily to reduce its exposure to market risk (principally
interest rate risk, equity stock price risk and foreign currency risk)
stemming from various assets and liabilities. CNA's principal objective under
such market risk strategies is to achieve the desired reduction in economic
risk, even if the position will not receive hedge accounting treatment. CNA
may also use derivatives for purposes of income enhancement, primarily via the
sale of covered call options.

CNA's use of derivatives is limited by statutes and regulations promulgated by
the various regulatory bodies to which it is subject, and by its own
derivative policy. The derivative policy limits authorization to initiate
derivative transactions to certain personnel. The policy generally prohibits
the use of derivatives with a maturity greater than eighteen months, unless
the derivative is matched with assets or liabilities having a longer maturity.
The policy also prohibits the use of derivatives containing greater than one-
to-one leverage with respect to changes in the underlying price, rate or
index. Also, the policy prohibits the use of borrowed funds, including funds
obtained through repurchase transactions, to engage in derivative
transactions.

Credit exposure associated with non-performance by the counterparties to
derivative instruments is generally limited to the gross fair value of the
asset related to the instruments recognized in the Consolidated Balance
Sheets. The Company mitigates the risk of non-performance by using multiple
counterparties and by monitoring their creditworthiness. The Company generally
requires collateral from its derivative investment counterparties depending on
the amount of the exposure and the credit rating of the counterparty.

The Company has exposure to economic losses due to interest rate risk arising
from changes in the level of, or volatility of, interest rates. The Company
attempts to mitigate its exposure to interest rate risk through active
portfolio management, which includes rebalancing its existing portfolios of
assets and liabilities, as well as changing the characteristics of investments
to be purchased or sold in the future. In addition, various derivative
financial instruments are used to modify the interest rate risk exposures of
certain assets and liabilities. These strategies include the use of interest
rate swaps, interest rate caps and floors, options, futures, forwards, and
commitments to purchase securities. These instruments are generally used to
lock interest rates or unrealized gains, to shorten or lengthen durations of
fixed maturity securities or investment contracts, or to hedge (on an economic
basis) interest rate risks associated with investments, variable rate debt and
life insurance liabilities. The Company has used these types of instruments as
hedges against specific assets or liabilities on an infrequent basis.

The Company is exposed to equity price risk as a result of its investment in
equity securities and equity derivatives. Equity price risk results from
changes in the level or volatility of equity prices, which affect the value of
equity securities, or instruments that derive their value from such
securities. The Company attempts to mitigate its exposure to such risks by
limiting its investment in any one security or index. The Company may also
manage this risk by utilizing instruments such as options, swaps, futures and
collars to protect appreciation in securities held. CNA uses derivatives in
one of its separate accounts to mitigate equity price risk associated with its
indexed group annuity contracts by purchasing Standard & Poor's 500 ("S&P
500") index futures contracts in a notional amount equal to the contract
holder liability, which is calculated using the S&P 500 rate of return.

Foreign exchange rate risk arises from the possibility that changes in foreign
currency exchange rates will impact the fair value of financial instruments
denominated in a foreign currency. The Company's foreign transactions are
primarily denominated in Canadian Dollars, British Pounds and the European
Monetary Unit. The Company manages this risk via asset/liability matching and
through the use of foreign currency futures and forwards. The Company has
infrequently designated these types of instruments as hedges against specific
assets or liabilities.

The contractual or notional amounts for derivatives are used to calculate the
exchange of contractual payments under the agreements and are not
representative of the potential for gain or loss on these instruments.
Interest rates, equity prices and foreign currency exchange rates affect the
fair value of derivatives. The fair values generally represent the estimated
amounts that the Company would expect to receive or pay upon termination of
the contracts at the reporting date. Dealer quotes are available for
substantially all of the Company's derivatives. For derivative instruments not
actively traded, fair values are estimated using values obtained from
independent pricing services, costs to settle or quoted market prices of
comparable instruments.

86




Contractual/ Fair Value Recognized
Notional Asset (Loss)
December 31, 2001 Value (Liability) Gain
- ------------------------------------------------------------------------------------------------


Equity markets:
Options
Purchased $ 145.5 $ 17.8 $ 126.8
Written 161.1 (7.8) 24.4
Index futures - long 7.8 (.6)
Equity warrants 14.8 .7 (2.6)
Options embedded in convertible debt securities 803.0 188.7 9.9
Separate accounts - options purchased 65.4 1.0 (1.3)
- options written 69.6 (.2) 2.4
- equity index futures-long 867.6 (157.3)
- euro dollar futures 16.2 .1
Currency forwards - long (16.1)
- short 182.7 (1.5) (5.2)
Interest rate risk:
Commitments to purchase government and
municipal securities 213.0 16.0 16.0
Interest rate swaps 600.1 .7 .7
Interest rate caps 500.0 1.6 1.5
Collateralized debt obligation liabilities 170.0 (38.0) 5.0
Options on government securities - short 255.0 (2.5) 12.2
Futures - long 947.2 11.1
- short 217.0 (19.0)
Separate accounts - commitments to purchase
government and municipal securities 17.0 (.5) (1.8)
- futures-short 9.8 (1.0)
Commodities:
Gold options - purchased 122.3 2.6 (.9)
- written 73.5 (.4) 2.3
Other 4.4 .1
- ------------------------------------------------------------------------------------------------
Total $5,463.0 $178.2 $ 6.7
================================================================================================


87




Contractual/ Fair Value Recognized
Notional Asset (Loss)
December 31, 2000 Value (Liability) Gain
- ------------------------------------------------------------------------------------------------


Equity markets:
Options
Purchased - Global Crossing $ 1,000.0 $ 664.0
- other 173.0 23.7 $ (166.3)
Written - Global Crossing 1,256.0 (1.0)
- other 269.6 (17.5) 39.8
Index futures - long (2.7)
- short 2.3 .8
Equity warrants 10.0(a) 4.0
Options embedded in convertible debt securities 845.0(a) 231.0
Separate accounts - options purchased 110.0 .3 (2.0)
- options written 118.0 (1.0) 4.0
- equity index futures-long 996.0 (172.0)
Interest rate risk:
Commitments to purchase government and
municipal securities 5.0
Interest rate swaps 50.0 (1.4) 12.0
Interest rate caps 500.0 1.0 (3.0)
Collateralized debt obligation liabilities 170.0(a) (18.0)
Futures - long 229.0 7.9
- short 806.2 (25.8)
Foreign currency forwards 13.0 44.3
Separate accounts - commitments to purchase
government and municipal securities 111.0 1.0 4.0
- futures-short 76.0 (4.0)
Commodities:
Oil:
Swaps (2.1)
Options 2.8
Gold Options - purchased 232.5 11.8 2.4
- written (5.2)
Other 3.6 1.9
- ------------------------------------------------------------------------------------------------
Total $ 6,971.2 $ 897.9 $ (258.2)
================================================================================================

(a) As of January 1, 2001



88





Contractual/ Fair Value Recognized
Notional Asset (Loss)
December 31, 1999 Value (Liability) Gain
- ------------------------------------------------------------------------------------------------


Equity markets:
Options - purchased $ 5,279.3 $ 188.9 $ (562.9)
- written 1,097.1 (25.8) 42.1
Index futures - long 204.1 72.3
- short 22.1 (16.7)
Interest rate risk:
Commitments to purchase government and
municipal securities 127.0 (1.0) (1.0)
Interest rate caps 500.0 4.0 4.0
Futures - long 151.4 (3.6)
- short 560.1 15.1
Foreign currency forwards 591.0 9.0 21.0
Commodities:
Oil:
Swaps 6.4 .2 .6
Options 33.0 (.7) .4
Energy purchase obligations 10.3
Gold Options - purchased 434.5 15.6 5.5
- written 242.9 (5.2) 6.1
Other 94.9 2.9 21.7
- ------------------------------------------------------------------------------------------------
Total $ 9,343.8 $ 187.9 $ (385.1)
================================================================================================



Collateralized debt obligation liabilities ("CDOs") represent a credit
enhancement product that is typically structured in the form of a swap. CNA
has determined that this product is a derivative under SFAS No. 133. Changes
in the estimated fair value of CDOs, like other derivative financial
instruments with no hedge designation, are recorded in realized gains or
losses as appropriate, while reported claims incurred on these instruments are
recorded in other expense. CNA incurred approximately $25.0 and $13.0 in
claims on these products for the years ended December 31, 2001 and 2000,
respectively. There were no claims on these products during 1999. CNA is no
longer writing this product.

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

Fair Value Hedges

As of the adoption date of SFAS No. 133, CNA's collar position related to its
investment in Global Crossing common stock was the only derivative position
that had been designated as a hedge for accounting purposes. In March of 2000,
the Company entered into a hedge arrangement related to its Global Crossing
stock. The unrealized appreciation on the stock that was preserved by the
hedge was reflected as an unrealized gain in accumulated other comprehensive
income at December 31, 2000. The hedge agreements were closed out in 2001
resulting in the realized gain of $962 million.

The effectiveness of this hedge was measured based on changes in the intrinsic
value of the collar in relation to changes in the fair value of Global
Crossing common stock. Changes in the time value component of the collar's
fair value were excluded from the hedge designation and measurement of
effectiveness. Up to the date of the sale, the Global Crossing hedge was 100%
effective. The change in the time value component of the collar was a pretax
gain of $33.0 for the year ended December 31, 2001, and has been recorded as a
realized investment gain in the Consolidated Statements of Operations.

CNA's other hedging activities involve primarily hedging risk exposures to
interest rate and foreign currency risks. The ineffective portion of the fair
value hedges that under SFAS No. 133 meet the criteria for hedge accounting
was approximately $0.6 for the year ended December 31, 2001.

The Company also enters into short sales as part of its portfolio management
strategy. Short sales are commitments to sell a financial instrument not owned
at the time of sale, usually done in anticipation of a price decline. These
sales resulted in proceeds of $183.7 and $224.7 with fair value liabilities of
$193.4 and $201.1 at December 31, 2001 and 2000, respectively. These positions
are marked to market and investment gains or losses are included in the
Consolidated Statements of Operations.

89

Note 5. Receivables




December 31 2001 2000
- ------------------------------------------------------------------------------


Reinsurance $13,823.4 $ 9,397.3
Other insurance 4,006.4 5,026.3
Security sales 648.1 470.5
Accrued investment income 398.3 424.3
Federal income taxes 586.6
Other 353.7 331.9
- ------------------------------------------------------------------------------
Total 19,816.5 15,650.3
Less allowance for doubtful accounts
and cash discounts 363.7 348.7
- ------------------------------------------------------------------------------
Receivables-net $19,452.8 $15,301.6
==============================================================================


Reinsurance receivables have increased by $4,426.1 during 2001 primarily due
to $1,480.0 related to corporate aggregate reinsurance treaties, $663.0
related to the second quarter of 2001 reserve adjustment (excluding corporate
aggregate reinsurance) and $921.0 related to the estimated loss reserves for
the WTC event (excluding corporate aggregate reinsurance).

Note 6. Property, Plant and Equipment




December 31 2001 2000
- ------------------------------------------------------------------------------------------------


Land $ 126.5 $ 128.8
Buildings and building equipment 591.0 831.5
Offshore drilling rigs and equipment 2,948.4 2,682.9
Machinery and equipment 1,407.4 1,381.3
Leaseholds and leasehold improvements 149.7 123.2
- -----------------------------------------------------------------------------------------------
Total, at cost 5,223.0 5,147.7
Less accumulated depreciation and amortization 2,147.7 1,941.4
- ------------------------------------------------------------------------------------------------
Property, plant and equipment-net $3,075.3 $3,206.3
================================================================================================


Depreciation and amortization expense, including amortization of intangibles,
and capital expenditures, are as follows:




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Depr. & Capital Depr. & Capital Depr. & Capital
Amort. Expend. Amort. Expend. Amort. Expend.
- ------------------------------------------------------------------------------------------------


CNA Financial $ 138.4 $ 124.0 $ 151.0 $ 151.8 $ 199.5 $ 250.2
Lorillard 27.4 41.2 25.0 30.1 23.9 20.7
Loews Hotels 28.4 14.2 24.8 129.1 19.8 110.1
Diamond Offshore 175.3 268.6 148.8 323.9 145.3 324.1
Bulova .9 1.9 .9 1.1 .7 .7
Corporate 4.3 52.6 6.1 31.2 6.1 2.4
- ------------------------------------------------------------------------------------------------
Total $ 374.7 $ 502.5 $ 356.6 $ 667.2 $ 395.3 $ 708.2
================================================================================================


In January 2001, CNA sold the 180 Maiden Lane, New York, facility for net
sales proceeds of $264.0, resulting in a gain of $47.9 (after-tax and minority
interest).

In January 2000, Diamond Offshore sold a jack-up drilling rig for $32.0
resulting in a gain of $13.9 ($4.7 after-tax and minority interest).

In December 1999, Loews Hotels sold two franchised hotel properties with net
book values of $9.0. Gain on these sales amounted to $85.1 ($52.0 after taxes)
for the year ended December 31, 1999.

90

Note 7. Claim and Claim Adjustment Expense Reserves

CNA's property-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.
CNA'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 operating results in the period that the need for such
adjustments is determined.

Catastrophes are an inherent risk of the property-casualty insurance business
and have contributed to material period-to-period fluctuations in the
Company's results of operations and financial position. The level of
catastrophe losses experienced in any period cannot be predicted and can be
material to the results of operations and/or financial position of the
Company.

During 2001, CNA experienced a severe catastrophe loss estimated at $468.0
pretax, net of reinsurance, related to the WTC event. The loss estimate is
based on a total industry loss of $50,000.0 and includes all lines of
insurance, including assumed reinsurance. The current estimate takes into
account CNA's substantial ceded reinsurance agreements, including its
catastrophe reinsurance program and corporate reinsurance programs. These loss
estimates are subject to considerable uncertainty. Subsequent developments on
claims arising from the WTC event, as well as the collectibility of
reinsurance recoverables, could result in changes in the total estimated net
loss, which could be material to the Company's results of operations.

The following table provides management's estimate of pretax losses related to
the WTC event on a gross basis (before reinsurance) and a net basis (after
reinsurance) by line of business for the year ended December 31, 2001:




- ------------------------------------------------------------------------------
Gross Net
Basis Basis
- ------------------------------------------------------------------------------


Property-casualty assumed reinsurance $ 662.0 $ 465.0
Property 282.0 159.0
Workers' compensation 112.0 25.0
Airline hull 194.0 6.0
Commercial auto 1.0 1.0
- ------------------------------------------------------------------------------

Total Property-Casualty 1,251.0 656.0
- ------------------------------------------------------------------------------

Group 322.0 60.0
Life 75.0 22.0
- ------------------------------------------------------------------------------

Total Group and Life 397.0 82.0
- ------------------------------------------------------------------------------

Total loss before items below $1,648.0 738.0
=================================================================

Corporate aggregate reinsurance (259.0)
Reinstatement and additional premiums and other (11.0)
- ------------------------------------------------------------------------------

Net $ 468.0
==============================================================================


91

The table below provides a reconciliation between beginning and ending claim
and claim adjustment expense reserves for 2001, 2000 and 1999:




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------



Reserves at beginning of year:
Gross $26,408.0 $26,631.0 $28,317.0
Ceded 7,568.0 6,273.0 5,424.0
- ------------------------------------------------------------------------------------------------
Net reserves at beginning of year 18,840.0 20,358.0 22,893.0
- ------------------------------------------------------------------------------------------------

Net reserves transferred under retroactive
reinsurance agreements (1,024.0)
Net reserves transferred to CNA Group Life
Assurance Company (a) (1,055.0)
- ------------------------------------------------------------------------------------------------
Total net adjustments (1,055.0) (1,024.0)
- ------------------------------------------------------------------------------------------------

Net incurred claim and claim adjustment expenses:
Provision for insured events of current year 7,192.0 6,331.0 7,287.0
Increase in provision for insured events of prior years 2,466.0 427.0 1,027.0
Amortization of discount 107.0 158.0 139.0
- ------------------------------------------------------------------------------------------------
Total net incurred 9,765.0 6,916.0 8,453.0
- ------------------------------------------------------------------------------------------------

Net payments attributable to:
Current year events 2,111.0 1,888.0 2,744.0
Prior year events 7,936.0 6,916.0 7,460.0
Reinsurance recoverable against net reserves
transferred under retroactive reinsurance
agreements (see Note 12) (250.0) (370.0) (240.0)
- ------------------------------------------------------------------------------------------------
Total net payments 9,797.0 8,434.0 9,964.0
- ------------------------------------------------------------------------------------------------

Net reserves at end of year 17,753.0 18,840.0 20,358.0
Ceded reserves at end of year 11,798.0 7,568.0 6,273.0
- ------------------------------------------------------------------------------------------------
Gross reserves at end of year (b) $29,551.0 $26,408.0 $26,631.0
================================================================================================

(a) Effective January 1, 2001, CNA established a new life insurance
company, CNAGLAC. Approximately $1,055.0 of accident and health reserves
were transferred from CCC to CNAGLAC on January 1, 2001.
(b) Excludes life claim and claim adjustment expense reserves of $1,715.2,
$554.7 and $724.9 as of December 31, 2001, 2000 and 1999, respectively,
included in the Consolidated Balance Sheets.


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




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------


Environmental pollution and other mass tort $ 473.0 $ 17.0 $ (84.0)
Asbestos 772.0 65.0 560.0
Other 1,221.0 345.0 551.0
- ------------------------------------------------------------------------------
Total $2,466.0 $427.0 $1,027.0
==============================================================================


Environmental Pollution and Other Mass Tort and Asbestos Reserves

CNA's property-casualty insurance subsidiaries have potential exposures
related to environmental pollution and other mass tort and asbestos claims.

The following table provides data related to CNA's environmental pollution,
other mass tort and asbestos claim and claim adjustment expense reserves:




December 31 2001 2000
- ------------------------------------------------------------------------------------------------

Environmental Environmental
Pollution and Pollution and
Other Mass Other Mass
Tort Asbestos Tort Asbestos
- ------------------------------------------------------------------------------------------------


Gross reserves $ 820.0 $1,590.0 $ 493.0 $ 848.0
Less ceded reserves (203.0) (386.0) (146.0) (245.0)
- ------------------------------------------------------------------------------------------------
Net reserves $ 617.0 $1,204.0 $ 347.0 $ 603.0
================================================================================================


92

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. 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. 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, 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 the Company's results of
operations and/or financial position.

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 December 31, 2001 and 2000, CNA carried approximately $617.0 and $347.0
of claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and other
mass tort claims. Unfavorable environmental pollution and other mass tort net
claim and claim adjustment expense reserve development for the years ended
December 31, 2001 and 2000 amounted to $473.0 and $17.0. Favorable
environmental pollution and other mass tort net claim and claim adjustment
expense reserve development for the year ended December 31, 1999 amounted to
$84.0. CNA made environmental pollution-related claim payments and other mass
tort-related claim payments, net of reinsurance recoveries, of $203.0, $135.0
and $236.0 during the years ended December 31, 2001, 2000 and 1999.

The reserve development during 2001 for environmental pollution and other mass
tort reserves is due to reviews completed during the year, which indicated
that paid and reported losses were higher than expectations based on prior
reviews. Factors that have led to this development include a number of
declaratory judgments filed this year due to an increasingly favorable legal
environment for policyholders in certain courts and other unfavorable
decisions regarding cleanup issues.

CNA's property-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 December 31, 2001 and 2000, CNA carried approximately $1,204.0 and
$603.0 of net claim and claim adjustment expense reserves, net of reinsurance
recoverables, for reported and unreported asbestos-related claims. Unfavorable
asbestos-related net claim and claim adjustment expense reserve development
for the years ended December 31, 2001, 2000 and 1999 amounted to $772.0, $65.0
and $560.0. CNA made asbestos-related claim payments, net of reinsurance, of
$171.0, $126.0 and $161.0 during the years ended December 31, 2001, 2000 and
1999, excluding payments made in connection with the 1993 settlement of
litigation related to Fibreboard Corporation. CNA has attempted to manage its
asbestos-related exposures by aggressively resolving old accounts.

The reserve development during 2001 for asbestos-related claims was based on a
management review of developments with respect to these exposures conducted
during the year. This analysis indicated a significant increase in claim
counts for asbestos-related claims. The factors that have led to the
deterioration in claim counts include, among other things, intensive
advertising campaigns by lawyers for asbestos claimants and the addition of
new defendants such as the distributors and installers of products containing
asbestos. New claim filings increased significantly in 2000 over 1999, and
that trend continued during 2001. The volume of new claims has caused the
bankruptcies of numerous asbestos defendants. Those bankruptcies also may
result in increased liability for

93

remaining defendants under principles of joint and several liability.

In addition, some asbestos-related defendants have asserted that their claims
for insurance are not subject to aggregate limits on coverage. CNA currently
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 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.

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 includes medical inflation trends, jury attitudes, the
strategies of plaintiff attorneys to broaden the scope of defendants, the mix
of asbestos-related diseases presented and the possibility of legislative
reform. Adverse developments with respect to such matters discussed herein
could have a material adverse effect on the Company's results of operations
and/or financial condition.

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

Other Reserves

Unfavorable net claim and claim adjustment expense reserve development for
other reserves in 2001 of $1,221.0 resulted from several coverages provided to
commercial entities underwritten by several segments of CNA.

Approximately $230.0 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.

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 reserves of
approximately $690.0.

Approximately $300.0 of adverse loss development was due to adverse experience
in all other lines, primarily in coverages provided to health care-related
entities. The level of paid and reported losses associated with coverages
provided to national long-term care facilities were higher than expected. In
addition, the average size of claims resulting from coverages provided to
physicians and institutions providing health care-related services increased
more than expected.

Unfavorable net claim and claim adjustment expense reserve development for
other reserves in 2000 of $345.0 was due to unfavorable loss experience in
standard commercial lines, assumed reinsurance and accident and health lines.
These unfavorable changes were partially offset by favorable development in
non-medical professional liability and other casualty lines. The unfavorable
development in standard commercial lines can be attributed to adverse claim
experience for recent accident years in the commercial auto liability,
commercial multiple-peril and workers' compensation lines of business. The
unfavorable development in the assumed reinsurance and accident and health
lines also resulted from adverse claims experience.

Unfavorable net claim and claim adjustment expense reserve development for
other reserves in 1999 of $551.0 was due to unfavorable loss development of
approximately $540.0 for standard commercial lines, approximately $60.0 for
medical malpractice and approximately $70.0 for accident and health. These
unfavorable changes were partially offset by favorable development of
approximately $120.0 in non-medical professional liability and assumed
reinsurance on older accident years. The unfavorable development in standard
commercial lines was due to commercial automobile liability and workers'
compensation losses being higher than expected in recent accident years. In
addition, the number of claims reported for commercial multiple-peril
liability claims from older accident years did not decrease as much as
expected. The unfavorable development for medical malpractice was also due to
losses being higher than expected for recent accident years. The accident and
health unfavorable development was due to higher than expected claim reporting
on assumed personal accident coverage in recent accident years.

CNA also has exposure to construction defect losses, principally in its
general liability and commercial multiple-peril lines. This exposure relates
to claims involving property damage alleging loss of use, damage, destruction
or deterioration of land, buildings and other structures involving new
construction or major rehabilitation of real property. Many of these claims
involve multiple defects and multiple defendants. The majority of losses have
been concentrated in a limited number of states, including California. CNA has
taken several underwriting actions to mitigate this exposure in the future.
Estimation of construction defect losses is subject to a high level of
uncertainty due to the long period of time between the accident date and the

94

reporting of the claim, emerging case law, changing regulatory rules and the
allocation of damages to the multiple defendants. Due to the inherent
uncertainties noted above, the ultimate liability for construction defect
claims may vary substantially from the amount currently recorded.

Financial Guarantee Reserves

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

As of December 31, 2001 and 2000, gross exposure on assumed financial
guarantee insurance contracts, credit enhancement products, financial
guarantee surety bonds and insured equity policies was approximately $82.0 and
$335.0. The degree of risk to CNA related to this exposure is substantially
reduced through reinsurance, diversification of exposures and collateral
requirements. In addition, security interests in improved real estate are also
commonly obtained on these risks. Approximately 26% and 29% of the risks were
ceded to reinsurers at December 31, 2001 and 2000. Total exposure, net of
reinsurance, amounted to $61.0 and $237.0 as of December 31, 2001 and 2000. At
December 31, 2001 and 2000, collateral consisting of letters of credit, cash
reserves and debt service reserves amounted to $6.0 and $7.0.

Gross unearned premium reserves for these contracts were $2.0 and $11.0 at
December 31, 2001 and 2000. Gross claim and claim adjustment expense reserves
totaled $103.0 and $127.0 as of December 31, 2001 and 2000.

Note 8. Leases

The Company's hotels in some instances are constructed on leased land. Other
leases cover office facilities, computer and transportation equipment. Rent
expense amounted to $108.8, $93.7 and $94.0 for the years ended December 31,
2001, 2000 and 1999. The table below presents the future minimum lease
payments to be made under non-cancelable operating leases along with lease and
sublease minimum receipts to be received on owned and leased properties.




Future Minimum Future Minimum
Year Ended December 31 Lease Payments Lease Receipts
- ------------------------------------------------------------------------------------------------


2002 $130.0 $ 26.4
2003 108.5 17.9
2004 88.6 14.5
2005 78.5 10.0
2006 60.9 9.3
Thereafter 279.2 41.4
- ------------------------------------------------------------------------------------------------
Total $745.7 $119.5
================================================================================================


Note 9. Income Taxes




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------


Income tax (benefit) expense:
Federal:
Current $(358.2) $ 489.5 $ 17.2
Deferred 90.9 536.1 180.0
State and city:
Current 91.9 83.2 133.7
Deferred (14.5) (3.4) (26.5)
Foreign 14.5 1.5 1.1
- ------------------------------------------------------------------------------------------------
Total $(175.4) $1,106.9 $305.5
===============================================================================================


95




Deferred tax assets (liabilities) are as follows:

December 31 2001 2000
- ------------------------------------------------------------------------------


Insurance reserves:
Property and casualty claim reserves $ 697.3 $ 864.1
Unearned premium reserves 331.9 294.2
Life reserve differences 231.2 187.4
Others 18.4 20.9
Deferred acquisition costs (743.2) (762.9)
Postretirement benefits other than pensions 176.4 197.4
Property, plant and equipment (347.7) (243.7)
Investments (141.5) (89.2)
Foreign affiliates related 69.3 110.0
Tobacco litigation settlements 373.4 286.0
Unrealized appreciation (142.1) (472.6)
Accrued assessments and guarantees 52.6 43.1
Receivables 100.4 82.5
Restructuring costs 43.9 20.0
AMT credit carried forward 40.0
Other-net (153.3) (133.2)
- ------------------------------------------------------------------------------
Deferred tax assets-net $ 607.0 $ 404.0
==============================================================================


Gross deferred tax assets amounted to $2,604.7 and $2,484.7 and liabilities
amounted to $1,997.7 and $2,080.7 for the years ended December 31, 2001 and
2000, respectively.

The Company has a history of profitability and as such, management believes it
is more likely than not that the net deferred tax assets will be realized. The
Company expects to fully utilize its 2001 net operating loss carrybacks.

Total income tax (benefit) expense for the years ended December 31, 2001, 2000
and 1999, was different than the amounts of $(284.6), $1,122.1 and $330.5,
computed by applying the statutory U.S. federal income tax rate of 35% to
income before income taxes and minority interest for each of the years.

A reconciliation between the statutory federal income tax rate and the
Company's effective income tax rate as a percentage of income (loss) before
income tax (benefit) expense and minority interest is as follows:




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------


Statutory rate (35)% 35% 35%
(Decrease) increase in income tax rate resulting from:
Exempt interest and dividends received deduction (5) (2) (9)
Foreign net operating loss carryforward 11
State and city income taxes 6 2 7
Other 1 (1)
- ------------------------------------------------------------------------------------------------
Effective income tax rate (22)% 35% 32%
================================================================================================


Foreign net operating loss carryforwards reflected above pertain to those
foreign subsidiaries for which no tax benefit is expected to be realized.

The Company has entered into a separate tax allocation agreement with CNA, a
majority-owned subsidiary in which its ownership exceeds 80% (the
"Subsidiary"). The agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the
Company's return, or (ii) be paid by the Subsidiary an amount, if any, equal
to the federal income tax that would have been payable by the Subsidiary if it
had filed a separate consolidated return.

Under this agreement, CNA will receive approximately $908.0 for 2001. In 2000
and 1999, CNA paid $64.0 and received $288.0, respectively. The agreement
may be canceled by either of the parties upon thirty days' written notice.

The Company's federal income tax returns have been examined through 1997 and
settled through 1994. Years 1998 through 2000 are currently under examination.
While tax liabilities for subsequent years are subject to audit and final
determination, in the opinion of management the amount accrued in the
Consolidated Balance Sheet is believed to be adequate to cover any additional
assessments which may be made by federal, state and local tax authorities and
should not have a material effect on the financial condition or results of
operations of the Company.

96

Note 10. Long-Term Debt




Unamortized Current
December 31, 2001 Principal Discount Net Maturities
- ------------------------------------------------------------------------------


Loews Corporation $2,325.0 $31.4 $2,293.6
CNA 2,578.5 11.6 2,566.9 $329.1
Diamond Offshore 931.1 18.5 912.6 10.4
Other 147.2 147.2 13.1
- ------------------------------------------------------------------------------
Total $5,981.8 $61.5 $5,920.3 $352.6
==============================================================================





December 31 2001 2000
- ------------------------------------------------------------------------------------------------


Loews Corporation (Parent Company):
Senior:
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $300) $ 300.0 $ 300.0
8.9% debentures due 2011 (effective interest rate of 9.0%)
(authorized, $175) 175.0 175.0
7.6% notes due 2023 (effective interest rate of 7.8%)
(authorized, $300) (a) 300.0 300.0
7.0% notes due 2023 (effective interest rate of 7.2%)
(authorized, $400) (b) 400.0 400.0
Subordinated:
3.1% exchangeable subordinated notes due 2007 (effective interest
rate of 3.4%) (authorized, $1,150) (c) 1,150.0 1,150.0
CNA Financial Corporation:
Senior:
6.3% notes due 2003 (effective interest rate of 6.4%)
(authorized, $250) 250.0 250.0
7.3% notes due 2003 (effective interest rate of 7.8%)
(authorized, $150) 134.0 134.0
6.5% notes due 2005 (effective interest rate of 6.6%)
(authorized, $500) 492.8 492.8
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $250) 250.0 250.0
6.5% notes due 2008 (effective interest rate of 6.6%)
(authorized, $150) 150.0 150.0
6.6% notes due 2008 (effective interest rate of 6.7%)
(authorized, $200) 200.0 200.0
8.4% notes due 2012 (effective interest rate of 8.6%)
(authorized, $100) 69.6 69.6
7.0% notes due 2018 (effective interest rate of 7.1%)
(authorized, $150) 150.0 150.0
7.3% debentures due 2023 (effective interest rate of 7.3%)
(authorized, $250) 243.0 243.0
Commercial Paper (weighted average yield of 7.2%) 627.1
Revolving credit facility due 2002 through 2004
(effective interest rate of 3.1%) 500.0
Revolving credit facility due 2002
(effective interest rate of 2.5% and 7.0%) 75.0 100.0
Other senior debt (effective interest rates approximate 7.9% and 7.9%) 64.1 75.6
Diamond Offshore Drilling, Inc.:
Senior:
Zero coupon convertible debentures due 2020, net of discount
of $380.3 and $394.8 (effective interest rate of 3.6%) (d) 424.7 410.2
1.5% convertible senior debentures due 2031
(effective interest rate of 1.6%) (authorized $460) (e) 460.0
Subordinated:
3.8% convertible subordinated notes due 2007
(effective interest rate of 3.9%) (authorized, $400) 400.0
Other subordinated debt due 2005 (effective interest rate of 7.1%) 46.4 56.1
Other senior debt, principally mortgages
(effective interest rates approximate 6.4% and 8.5%) 147.2 166.2
- ------------------------------------------------------------------------------------------------
5,981.8 6,099.6
Less unamortized discount 61.5 59.6
- ------------------------------------------------------------------------------------------------
Long-term debt, less unamortized discount $5,920.3 $6,040.0
================================================================================================

(a) Redeemable in whole or in part at June 1, 2003 at 103.8%, and decreasing percentages
thereafter.
(b) Redeemable in whole or in part at October 15, 2003 at 102.4%, and decreasing percentages
thereafter.
(c) The notes are exchangeable into 15.376 shares of Diamond Offshore's common stock per one
thousand dollars principal amount of notes, at a price of $65.04 per share. Redeemable
in whole or in part at September 15, 2002 at 101.6%, and decreasing percentages thereafter.
(d) The debentures are convertible into Diamond Offshore's common stock at the rate of 8.6075
shares per one thousand dollars principal amount, subject to adjustment. Each debenture
will be purchased by Diamond Offshore at the option of the holder on the fifth, tenth and
fifteenth anniversaries of issuance at the accreted value through the date of repurchase.
Diamond Offshore, at its option, may elect to pay the purchase price in cash or
shares of common stock, or in certain combinations thereof. The debentures are redeemable
at the option of Diamond Offshore at any time after June 6, 2005, at prices which reflect a
yield of 3.5% to the holder.
(e) The Debentures are convertible into Diamond Offshore's common stock at an initial conversion
rate of 20.3978 shares per one thousand dollars principal amount, subject to adjustment
in certain circumstances. Upon conversion, Diamond Offshore has the right to deliver cash
in lieu of shares of its common stock. Diamond Offshore may redeem all or a portion of the
Debentures at any time on or after April 15, 2008 at a price equal to 100% of the principal
amount.


97

On April 6, 2001, Diamond Offshore redeemed all of its outstanding 3.75%
Convertible Subordinated Notes (the "Notes") in accordance with the indenture
under which the Notes were issued. Prior to April 6, 2001, $12.4 principal
amount of the Notes had been converted into 307,071 shares of Diamond
Offshore's common stock at the stated conversion price of $40.50 per share.
The remaining $387.6 principal amount of the Notes was redeemed at 102.1% of
the principal amount, plus accrued interest, for a total cash payment of
$397.7.

On April 11, 2001, Diamond Offshore issued $460.0 principal amount of 1.5%
convertible senior debentures (the "1.5% Debentures") due April 15, 2031. The
transaction resulted in net proceeds of approximately $449.1. Diamond Offshore
will pay contingent interest to holders of the 1.5% Debentures during any six-
month period commencing after April 15, 2008 if the average market price of a
1.5% Debenture for a measurement period preceding that six-month period equals
120% or more of the principal amount of such 1.5% Debenture and Diamond
Offshore pays a regular cash dividend during the six-month period. The
contingent interest payable per one thousand dollars principal amount of 1.5%
Debentures in respect of any quarterly period will equal 50% of regular cash
dividends paid by Diamond Offshore per share on its common stock during that
quarterly period multiplied by the conversion rate.

During 2001, CNA discontinued its commercial paper program and repaid all
loans outstanding under the program. The weighted average interest rate on
commercial paper was 7.2% at December 31, 2000. The funds used to retire the
outstanding commercial paper debt were obtained through the draw down of the
full amount available under CNA's $500.0 revolving credit facility. The
facility is composed of two parts: a $250.0 component with a 364-day
expiration date (with an option enabling CNA to convert borrowings into a one-
year term loan) and a $250.0 component with a three-year expiration date.

CNA pays a facility fee to the lenders for having funds available for loans
under both components of the facility. The fee varies based on the long-term
debt ratings of CNA. At December 31, 2001, the facility fee on the 364-day
component was 15 basis points and the facility fee on the three-year component
was 17.5 basis points.

In addition to the facility fees, CNA pays interest on any outstanding
debt/borrowings under the facility based on a rate determined using the long-
term debt ratings of CNA. The interest rate is equal to the London Interbank
Offering Rate ("LIBOR") plus 60 basis points for the 364-day component and
LIBOR plus 57.5 basis points for the three-year component. Further, if CNA has
outstanding loans greater than 50% of the amounts available under the
facility, CNA also will pay a utilization fee of 12.5 basis points on such
loans. At December 31, 2001, the weighted average interest rate on the
borrowings under the facility, including facility and utilization fees, was
3.1%.

A Moody's Investors Service ("Moody's") downgrade of the CNA senior debt
rating from Baa2 to Baa3 would increase the facility fee on the 364-day
component of the facility from 15 basis points to 20 basis points, and the
facility fee on the three-year component would increase from 17.5 basis points
to 25 basis points. The applicable margin on the 364-day component would
increase from LIBOR plus 60 basis points to LIBOR plus 80 basis points and the
applicable margin on the three-year component would increase from LIBOR plus
57.5 basis points to LIBOR plus 75 basis points. The utilization fee would
remain unchanged on both components at 12.5 basis points.

The $500.0 revolving credit facility replaced CNA's $750.0 revolving credit
facility (the "Prior Facility"), which was scheduled to expire on May 10,
2001. No loans were outstanding under the Prior Facility anytime during 2001.
To offset the variable rate characteristics of the Prior Facility and the
interest rate risk associated with periodically reissuing commercial paper, in
1999 and 2000, CNA entered into interest rate swap agreements with several
banks. These agreements required CNA to pay interest at a fixed rate, in
exchange for the receipt of the three month LIBOR. The effect of the interest
rate swap agreements decreased interest expense by approximately $2.0 for the
year ended December 31, 2000 and increased interest expense by approximately
$4.0 for the year ended December 31, 1999.

The combined weighted average interest rate of all short-term debt, including
facility fees and commercial paper borrowings of CNA was 7.4% at December 31,
2000.

CNA Surety Corporation ("CNA Surety"), a 64% owned subsidiary of CNA, has a
$130.0 revolving credit facility that expires on September 30, 2002. The
interest rate on facility borrowings is based on LIBOR plus 20 basis points.
Additionally, there is an annual facility fee of 10 basis points on the entire
facility. The weighted average interest rate on the borrowings under this
facility, including facility fees, was 2.6% and 7.0% at December 31, 2001 and
2000.

The terms of both CNA and CNA Surety's credit facilities require the
respective company to maintain certain financial ratios and combined property-
casualty company statutory surplus levels. At December 31, 2001 and 2000, both
CNA and CNA Surety were in compliance with all restrictive debt covenants.

The aggregate of long-term debt maturing in each of the next five years is
approximately as follows: $352.6 in 2002, $388.6 in 2003, $256.0 in 2004,
$554.0 in 2005 and $605.5 in 2006.

Payment of dividends by insurance subsidiaries of CNA without prior
regulatory approval is limited to certain formula-derived amounts.
Dividends in excess of these amounts are subject to prior approval by the
respective state insurance departments.

Dividends from the CCC Pool are subject to the insurance holding company laws
of the State of Illinois, the domiciliary state of CCC. Under these laws,
ordinary dividends, or dividends that do not require prior approval of the
Department, may be paid only from earned surplus, which is calculated by
removing unrealized gains (which under statutory accounting includes
cumulative earnings of CCC's subsidiaries) from unassigned surplus.

98

As of December 31, 2001, CCC is in a negative earned surplus position. In
February 2002, the Department approved an extraordinary dividend in the amount
of $117.0 to be used to fund CNA's 2002 debt service requirements. Until CCC
is in a positive earned surplus position, all dividends require prior approval
of the Department.

In addition, by agreement with the New Hampshire Insurance Department, as well
as certain other state insurance departments, dividend payments for the CIC
Pool are restricted to internal and external debt service requirements through
September 2003 up to a maximum of $85.0 annually, without the prior approval
of the New Hampshire Insurance Department.

Note 11. Shareholders' Equity and Earnings Per Share

In addition to its common stock, the Company has authorized 100,000,000 shares
of preferred stock, $.10 par value.

On February 20, 2001, The Board of Directors declared a two-for-one stock
split by way of a stock dividend, effective March 21, 2001. Accordingly,
certain share and per share data has been restated to retroactively effect the
stock split.

Companies with complex capital structures are required to present basic and
diluted income (loss) per share. Basic income (loss) per share excludes
dilution and is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Diluted income
(loss) per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. Income (loss) per common share assuming
dilution, is not presented because the impact of securities that could
potentially dilute basic income (loss) per share would have been
antidilutive or insignificant for the periods presented.

Basic income (loss) per share is based on the weighted average number of
shares outstanding during each year (195,328,041, 198,732,827 and 217,066,741
for the years ended December 31, 2001, 2000 and 1999, respectively).

The components of accumulated other comprehensive income (loss) are as
follows:





Accumulated
Other
Unrealized Minimum Comprehensive
Gains (Losses) Foreign Pension Income
on Investments Currency Liability (Loss)
- ------------------------------------------------------------------------------------------------


Balance, December 31, 1998 $ 838.8 $ 59.6 $ (5.6) $ 892.8
Unrealized holding gains, net of tax of $250.8 381.1 381.1
Adjustment for items included in net income,
net of tax of $138.8 (224.2) (224.2)
Foreign currency translation adjustment, net
of tax of $.1 (35.1) (35.1)
Minimum pension liability adjustment, net of
tax of $1.1 2.0 2.0
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1999 995.7 24.5 (3.6) 1,016.6
Unrealized holding gains, net of tax of $149.4 271.4 271.4
Adjustment for items included in net income,
net of tax of $312.9 (506.8) (506.8)
Foreign currency translation adjustment, net
of tax of $.9 (24.2) (24.2)
Minimum pension liability adjustment, net of
tax of $.2 (.3) (.3)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 2000 760.3 .3 (3.9) 756.7
Unrealized holding losses, net of tax
of $.8 (1.8) (1.8)
Adjustment for items included in net loss, net
of tax of $367.3 (595.8) (595.8)
Foreign currency translation adjustment, net
of tax of $.4 4.7 4.7
Minimum pension liability adjustment, net of
tax of $13.0 (19.6) (19.6)
Cumulative effect of changes in accounting
principles, net of tax of $31.0 50.5 50.5
- ------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $213.2 $5.0 $(23.5) $194.7
================================================================================================


99

Note 12. Significant Transactions

Dispositions and Planned Dispositions of Certain Subsidiaries

During the second quarter of 2001, CNA announced its intention to sell certain
subsidiaries. The assets being held for disposition include the United Kingdom
subsidiaries of CNA Re and certain other subsidiaries. Based upon impairment
analyses, CNA anticipated that it would realize losses in connection with
those planned sales. In determining the anticipated loss from these planned
dispositions, CNA estimated the net realizable value of each subsidiary held
for sale. An estimated realized loss of $278.4 (after-tax and minority
interest) was initially recorded in the second quarter of 2001 in connection
with these planned dispositions. This loss is reported in other investment
losses.

CNA completed the sale of certain subsidiaries during the fourth quarter of
2001 and updated its impairment analyses of subsidiaries still held for sale,
including the United Kingdom subsidiaries of CNA Re. The subsidiaries sold
resulted in realized losses of $33.1 (after-tax and minority interest), all of
which was previously recognized as part of the initial impairment loss
recorded during the second quarter of 2001. The updated impairment analyses
performed in the fourth quarter of 2001 indicated that the $278.4 loss (after-
tax and minority interest) recorded in the second quarter of 2001 should be
reduced, primarily because the net assets of the United Kingdom subsidiaries
of CNA Re had been significantly diminished by their operating losses in the
second half of 2001. In addition, CNA also updated its estimate of disposal
costs, including anticipated capital contributions, to reflect changes in the
planned structure of the anticipated sale. These updated impairment analyses
reduced the realized loss by $153.4 (after-tax and minority interest),
including $141.8 related to the United Kingdom subsidiaries of CNA Re. The
anticipated sale of the United Kingdom insurance subsidiaries will be subject
to regulatory approval and all sales are expected to be completed in 2002.

CNA Re's principal United Kingdom operations are contained in CNA Reinsurance
Company Ltd. The statutory surplus of CNA Reinsurance Company Ltd. is below
the required regulatory minimum surplus level at December 31, 2001. CNA is
currently pursuing the sale of the United Kingdom subsidiaries of CNA Re and
CNA anticipates that additional capital contributions will be made in
connection with the planned sale.

The subsidiaries held for sale (including those sold in the second half of
2001), consisting primarily of the United Kingdom subsidiaries of CNA Re,
contributed revenues of approximately $419.0 and net operating losses of
$337.8 (after-tax and minority interest) for the year ended December 31, 2001.
The assets and liabilities of these subsidiaries were approximately $2,622.0
and $2,617.0 as of December 31, 2001.

Individual Life Reinsurance Transaction

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

MARC assumed approximately $294.0 of liabilities (primarily future policy
benefits and claim reserves) and approximately $209.0 in assets (primarily
uncollected premiums and deferred acquisition costs). The net gain from the
reinsurance transaction, which is subject to certain post-closing adjustments,
has been recorded as deferred revenue, and will be recognized in income over
the next six months as CNA Life Re's assumed contracts are novated to MARC.

The CNA Life Re business contributed net earned premiums of $229.0 and $194.0,
and net operating income of $22.0 and $18.0 for the years ended December 31,
2000 and 1999, respectively.

Personal Insurance Transaction

On October 1, 1999, certain subsidiaries of CNA completed a transaction with
The Allstate Corporation ("Allstate"), whereby CNA's Personal Insurance lines
of business and related employees were transferred to Allstate. Approximately
$1,100.0 of cash and $1,100.0 of additional assets (primarily premium
receivables and deferred acquisition costs) were transferred to Allstate, and
Allstate assumed $2,200.0 of claim and claim adjustment expense reserves and
unearned premium reserves. Additionally, CNA received $140.0 in cash which
consisted of (i) $120.0 in ceding commission for the reinsurance of the CNA
personal insurance business by Allstate, and (ii) $20.0 for an option
exercisable during 2002 to purchase 100% of the common stock of five CNA
insurance subsidiaries at a price equal to the GAAP carrying value as of the
exercise date. Also, CNA invested $75.0 in a 10-year equity-linked note issued
by Allstate.

As of December 10, 2001, Allstate and CNA agreed to modify a number of the
original terms of the transaction. This modified agreement is pending
regulatory approval. The following is an overview of the significant
modifications to the terms of the original agreement:

(a) CNA has substituted subsidiaries for the originally named subsidiaries and
extended the purchase option period for the substituted subsidiaries
through 2004. CNA has compensated Allstate for the postponement of its
right to exercise the option due to the substitution of companies in the
amount of $6.0, reducing the original payment from Allstate of $20.0 to
approximately $14.0. The $14.0 will continue to be deferred and will not
be recognized until Allstate exercises its option, at which time it will
be recorded as a realized gain.

100

(b) The $75.0 10-year equity-linked note issued by Allstate in October 1999
will be redeemed by Allstate at par plus accrued interest.

CNA will continue to write new and renewal personal insurance policies and to
reinsure this business with Allstate companies until such time as Allstate
exercises its option to buy the CNA subsidiaries. CNA continues to have
primary liability on policies reinsured by Allstate. Through 2005, CNA will
continue to receive a royalty fee based on the volume of personal insurance
business sold through CNA agents using the terms of the original agreement.

CNA also shares in any reserve development related to claim and claim
adjustment expense reserves transferred to Allstate at the transaction date.
Under the reserve development sharing agreement, 80% of any favorable or
unfavorable reserve development up to $40.0 and 90% of any favorable or
unfavorable reserve development in excess of $40.0 inures to CNA. CNA's
obligation with respect to unallocated loss adjustment expense reserves was
settled at the transaction date and is therefore not subject to the reserve
sharing arrangement.

The retroactive portion of the reinsurance transaction, consisting primarily
of the cession of claim and claim adjustment expense reserves approximating
$1,000.0, was not recognized as reinsurance because the criteria for risk
transfer were not met for this portion of the transaction. The related
consideration paid was recorded as a deposit and is included in reinsurance
receivables in the Consolidated Balance Sheets. The prospective portion of the
transaction, which as of the transaction date consisted primarily of the
cession of $1,100.0 of unearned premium reserves, has been recorded as
reinsurance. The related consideration paid was recorded as prepaid
reinsurance premiums. Premiums ceded after the transaction date follows this
same treatment.

CNA recognized a realized loss of approximately $39.0 (after-tax and minority
interest) in 1999 related to the transaction, consisting primarily of the
accrual of lease obligations and the write-down of assets that related
specifically to the Personal Insurance lines of business. The $120.0 ceding
commission related to the prospective portion of the transaction has been
recognized in proportion to the recognition of the unearned premium reserve to
which it relates. Ceding commission earned was $69.0 and $51.0 in 2000 and
1999. Royalty fees earned in 2001, 2000 and 1999 were approximately $26.0,
$27.0 and $7.0.

The Personal Insurance lines transferred to Allstate contributed net earned
premiums of $1,354.0 and pretax operating income of $89.0 for the year ended
December 31, 1999.

Note 13. Restructuring and Other Related Charges

In 2001, CNA finalized and approved two separate restructuring plans. The
first plan, which related to CNA's Information Technology operations (the "IT
Plan"), was approved in June of 2001. The second plan relates to restructuring
the Property-Casualty segment and Life Operations, discontinuation of variable
life and annuity business and consolidation of real estate locations (the
"2001 Plan"), was approved in December of 2001.

IT Plan

The overall goal of the IT Plan was to improve technology for the underwriting
function and throughout CNA 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 include 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 includes common architecture and platform
standards that directly support CNA's strategies.

As summarized in the following table, CNA incurred $62.0 of pretax
restructuring and other related charges for the IT Plan. CNA does not expect
to incur significant amounts of additional charges with respect to the IT Plan
in any future period and, as a result, does not intend to separately classify
such expenses as restructuring and related charges when they occur.




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


Standard Lines $ 5.0 $ 1.0 $ 6.0
Specialty Lines 2.0 2.0
- ------------------------------------------------------------------------------

Total Property-Casualty 7.0 1.0 8.0
Life Operations 17.0 17.0
Other Insurance 22.0 14.0 $1.0 37.0
- ------------------------------------------------------------------------------
Total $29.0 $32.0 $1.0 $62.0
==============================================================================


101

In connection with the IT Plan, after the write-off of impaired assets, CNA
accrued $30.0 of restructuring and other related charges in 2001 (the "IT Plan
Initial Accrual"). These charges primarily related to $29.0 of workforce
reductions of approximately 260 positions gross and 249 positions net and $1.0
of other costs.

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




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


IT Plan Initial Accrual $ 29.0 $ 32.0 $ 1.0 $ 62.0
Costs that did not require cash (32.0) (32.0)
Payments charged against liability (19.0) (19.0)
- ------------------------------------------------------------------------------

Accrued costs $10.0 $ 1.0 $ 11.0
==============================================================================


Through December 31, 2001, 249 employees were released due to the IT Plan,
nearly all of whom were technology support staff.

2001 Plan

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

As summarized in the following table, CNA incurred $189.0 of pretax
restructuring and other related charges in 2001. CNA does not expect to incur
significant amounts of additional charges with respect to the 2001 Plan in any
future period and, as a result, does not intend to separately classify such
expenses as restructuring and related charges when they occur.




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


Standard Lines $ 40.0 $ 40.0
Specialty Lines 7.0 7.0
CNA Re 2.0 $ 4.0 6.0
- ------------------------------------------------------------------------------------------------

Total Property-Casualty 49.0 4.0 53.0
Group Operations 1.0 1.0
Life Operations 9.0 $ 9.0 $35.0 53.0
Other Insurance 9.0 52.0 21.0 82.0
- ------------------------------------------------------------------------------------------------

Total $ 68.0 $56.0 $30.0 $35.0 $189.0
================================================================================================


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

The 2001 Plan charges incurred by Standard Lines were $40.0, related entirely
to employee termination and related benefit costs for planned reductions in
the workforce of 1,063 positions, gross and net, of which $27.0 related to
severance and outplacement costs and $13.0 related to other salary costs.
Through December 31, 2001, approximately 510 employees were released due to
the 2001 Plan. Approximately 272 of these employees were administrative,
technology or financial support staff; approximately 164 of these employees
were underwriters, claim adjusters and related insurance services staff; and
approximately 74 employees were in various other positions.

The 2001 Plan charges incurred by Specialty Lines were $7.0, related entirely
to employee termination and related benefit costs for planned reductions in
the workforce of 177 positions, gross and net, of which $5.0 related to
severance and outplacement costs and $2.0 related to other salary costs.
Through December 31, 2001, approximately 107 employees were released due to
the 2001 Plan. Approximately 47 of these employees were administrative,
technology or financial support staff; approximately 45 of these employees
were underwriters, claim adjusters and related insurance services staff; and
approximately 15 of these employees were in various other positions.

102

The 2001 Plan charges incurred by CNA Re were $6.0. Costs related to employee
termination and benefit costs for planned reductions in the workforce of 33
positions, gross and net, amounted to $2.0, all of which related to severance
and outplacement costs. Through December 31, 2001 no employees in CNA Re were
released due to the 2001 Plan. The remaining $4.0 of charges incurred by CNA
Re related to lease termination costs.

The 2001 Plan charges incurred by Group Operations were $1.0, related entirely
to employee termination and related benefit costs for planned reductions in
the workforce of 38 positions, gross and net. Through December 31, 2001, no
employees in Group Operations were released due to the 2001 Plan.

The 2001 Plan charges incurred by Life Operations were $53.0. Costs related to
employee termination and related benefit costs for planned reductions in
workforce of 356 positions, gross and net, amounted to $9.0, of which $8.0
related to severance and outplacement costs and $1.0 related to other salary
costs. Through December 31, 2001, seven employees were released due to the
2001 Plan, which were primarily administration, technology, and financial
support staff positions. Life Operations incurred $9.0 of impaired asset
charges related to software. Other costs of $35.0 in Life Operations related
to a write-off of deferred acquisition costs on in-force variable life and
annuity contracts, as CNA believes that the decision to discontinue these
products will negatively impact the persistency of the business.

The 2001 Plan charges incurred by the Other Insurance segment were $82.0.
Costs related to employee termination and related benefit costs for planned
reductions in workforce of 194 positions, gross and net, amounted to $9.0, of
which $6.0 related to severance and outplacement costs and $3.0 related to
other salary costs. Through December 31, 2001, 129 employees were released due
to the 2001 Plan. Approximately 114 of these employees were administrative,
technology or financial support staff and approximately 15 of these employees
were in other positions. The Other Insurance segment also incurred $73.0 of
lease termination and asset impairment charges related to office closure and
consolidation decisions not within the control of the other segments affected.

In connection with the 2001 Plan, CNA accrued $189.0 of these restructuring
and other related charges (the "2001 Plan Initial Accrual"). These charges
include employee termination and related benefit costs, lease termination
costs, impaired asset charges and other costs.

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





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


2001 Plan Initial Accrual $ 68.0 $ 56.0 $ 30.0 $ 35.0 $ 189.0
Cost that did not require cash (35.0) (35.0)
Payments charged against liability (2.0) (2.0)
- ------------------------------------------------------------------------------------------------

Accrued costs $ 66.0 $ 56.0 $ 30.0 $ 152.0
================================================================================================


Additionally, at December 31, 2000, an accrual of $7.0 for lease termination
costs remained related to the August 1998 restructuring ("1998 Plan").
Approximately $6.0 of these costs were paid in 2001, resulting in a remaining
accrual of $1.0 at December 31, 2001. No restructuring and other related
charges were incurred for the 1998 Plan during 2001 or 2000. Restructuring and
other related charges for the 1998 Plan amounted to $83.0 in 1999.

Note 14. Benefit Plans

Pension Plans - The Company has several non-contributory defined benefit plans
for eligible employees. The benefits for certain plans which cover salaried
employees and certain union employees are based on formulas which include,
among others, years of service and average pay. The benefits for one plan
which covers union workers under various union contracts and certain salaried
employees are based on years of service multiplied by a stated amount.
Benefits for another plan are determined annually based on a specified
percentage of annual earnings (based on the participant's age) and a specified
interest rate (which is established annually for all participants) applied to
accrued balances.

The Company's funding policy is to make contributions in accordance with
applicable governmental regulatory requirements. The assets of the plans are
invested primarily in interest-bearing obligations and for one plan with an
insurance subsidiary of CNA, in its separate account business.

Other Postretirement Benefit Plans - The Company has several postretirement
benefit plans covering eligible employees and retirees. Participants generally
become eligible after reaching age 55 with required years of service. Actual
requirements for coverage vary by plan. Benefits for retirees who were covered
by bargaining units vary by each unit and contract. Benefits for certain
retirees are in the form of a Company health care account.

Benefits for retirees reaching age 65 are generally integrated with Medicare.
Other retirees, based on plan provisions, must use Medicare

103

as their primary coverage, with the Company reimbursing a portion of the
unpaid amount; or are reimbursed for the Medicare Part B premium or have no
Company coverage. The benefits provided by the Company are basically health
and, for certain retirees, life insurance type benefits.

The Company does not fund any of these benefit plans and accrues
postretirement benefits during the active service of those employees who would
become eligible for such benefits when they retire.

In 2000, CNA recorded pretax curtailment charges of approximately $13.0
related to employee's elections regarding participation in a defined benefit
pension plan. This change resulted in a reduction of the pension benefit
obligation of $37.0.

In 1999, CNA recorded pretax curtailment and other related charges of
approximately $8.0 related to the transfer of personal lines insurance
business to Allstate as discussed in Note 12. This transaction resulted in a
reduction of the pension and postretirement benefit obligations of $44.0 and
$2.0, respectively.

In 1999, CNA amended certain plans to change, among other things, early
retirement eligibility and the level of employer contributions. These actions
resulted in a reduction in pension and postretirement benefit obligations of
approximately $10.0 and $48.0, respectively.

The weighted average rates used in the actuarial assumptions were:




Pension Benefits Other Postretirement Benefits
--------------------------------------- -----------------------------

Year Ended December 31 2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------


Discount rate 7.3% 7.5% 7.8% to 8.0% 7.3% 7.5% 7.8% to 8.0%
Expected return
on plan assets 7.5% to 9.0% 7.8% to 8.0% 6.8% to 8.0%
Rate of compensation
increase 5.3% to 5.8% 5.5% to 5.8% 5.5% to 5.7%
- ------------------------------------------------------------------------------------------------


Net periodic benefit cost components:




Pension Benefits Other Postretirement Benefits
-------------------------- -----------------------------
Year Ended December 31 2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------


Service cost $ 51.4 $ 45.1 $ 79.6 $ 9.5 $ 10.1 $ 14.8
Interest cost 195.2 187.4 180.9 33.8 33.0 31.4
Expected return on plan assets (194.5) (172.2) (145.3)
Amortization of unrecognized net asset .5 5.6 5.6
Amortization of unrecognized
net loss (gain) 2.8 2.5 11.9 (2.7) (4.4) (3.4)
Amortization of unrecognized prior
service cost 7.6 7.7 9.9 (17.8) (17.6) (14.3)
Curtailment loss 2.8 12.9 8.0
Special termination benefit 1.7
- ------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 67.5 $ 89.0 $150.6 $ 22.8 $ 21.1 $ 28.5
================================================================================================


For measurement purposes, a trend rate for covered costs from 4.0% to 9.0%
pre-65 and 11.0% post-65, was used. These trend rates are expected to decrease
gradually to an ultimate rate of 4.0% to 5.0% at a rate of .5% per annum. The
health care cost trend rate assumption has a significant effect on the amount
of the benefit obligation and periodic cost reported. An increase (or
decrease) in the assumed health care cost trend rate of 1% would increase (or
decrease) the postretirement benefit obligation as of December 31, 2001 by
$24.8 (or $22.9) and the total of service and interest cost components of
net periodic postretirement benefit cost for 2001 by $1.9 (or $2.0).

The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with an accumulated benefit obligation
in excess of plan assets were $2,202.2, $1,938.3 and $1,951.7, respectively,
at December 31, 2001 and $2,019.4, $1,788.4 and $1,779.4, respectively, at
December 31, 2000.

104

The following provides a reconciliation of benefit obligations:




Other
Pension Postretirement
Benefits Benefits
------------------------------------------
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------


Change in benefit obligation:
Benefit obligation at January 1 $ 2,668.2 $ 2,533.0 $ 458.6 $ 411.9
Service cost 51.4 45.1 9.5 10.1
Interest cost 195.2 187.4 33.8 33.0
Plan participants' contributions 9.8 8.0
Amendments 4.6 (.7) (2.8)
Actuarial loss 156.1 108.2 43.3 38.6
Benefits paid from plan assets (185.6) (173.1) (43.5) (40.2)
Curtailment (1.3) (37.0) (7.0)
Special termination benefits 1.7
- ------------------------------------------------------------------------------------------------
Benefit obligation at December 31 2,885.7 2,668.2 503.8 458.6
- ------------------------------------------------------------------------------------------------

Change in plan assets:
Fair value of plan assets at January 1 2,481.1 2,104.9
Actual return on plan assets 213.6 310.4
Company contributions 214.5 238.9 33.7 32.2
Plan participants' contributions 9.8 8.0
Benefits paid from plan assets (185.6) (173.1) (43.5) (40.2)
- ------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 2,723.6 2,481.1
- ------------------------------------------------------------------------------------------------

Benefit obligation over plan assets (162.1) (187.1) (503.8) (458.6)
Unrecognized net actuarial loss (gain) 319.7 188.6 33.6 (5.5)
Unrecognized prior service cost (benefit) 42.1 50.7 (105.7) (126.3)
Unrecognized net obligation .4
- ------------------------------------------------------------------------------------------------
Accrued benefit cost $ 199.7 $ 52.6 $(575.9) $(590.4)
================================================================================================

Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost $ 278.4 $ 147.0
Accrued benefit liability (104.0) (100.6) $ (575.9) $(590.4)
Intangible asset .2 .2
Accumulated other comprehensive income 25.1 6.0
- ------------------------------------------------------------------------------------------------
Net amount recognized $ 199.7 $ 52.6 $ (575.9) $(590.4)
================================================================================================


Savings Plans - The Company and its subsidiaries have several contributory
savings plans which allow employees to make regular contributions based upon a
percentage of their salaries. Matching contributions are made up to specified
percentages of employees' contributions. The contributions by the Company and
its subsidiaries to these plans amounted to $67.2, $61.6 and $39.6 for the
years ended December 31, 2001, 2000 and 1999, respectively.

Stock Option Plans - In 2000, shareholders approved the Loews Corporation 2000
Stock Option Plan (the "Plan"). The aggregate number of shares of Common Stock
for which options may be granted under the Plan is 2,000,000; and the maximum
number of shares of Common Stock with respect to which options may be granted
to any individual in any calendar year is 400,000. The exercise price per
share may not be less than the fair market value of the Common Stock on the
date of grant. Generally, options vest ratably over a four-year period and
expire in ten years. The Company has elected to follow Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its employee stock options and
awards. Under APB No. 25, no compensation expense is recognized when the
exercise prices of options equals the fair value (market price) of the
underlying stock on the date of grant.

105

A summary of the Company's stock option transactions follows:




2001 2000
---------------------------------------------

Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
- ------------------------------------------------------------------------------------------------


Options outstanding, January 1 264,000 $30.140
Granted 284,800 46.918 264,000 $30.140
Exercised (11,900) 30.140
Canceled (1,200) 55.860
- ------------------------------------------------------------ ---------

Options outstanding, December 31 535,700 $39.002 264,000 $30.140
================================================================================================

Options exercisable, December 31 66,850 $32.776
================================================================================================

Shares available for grant, December 31 1,452,400 1,736,000
================================================================================================


The following table summarizes information about the Company's stock options
outstanding at December 31, 2001:




Options Outstanding Options Exercisable
------------------------------------ -------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Range of exercise prices 2001 Life Price 2001 Price
- -----------------------------------------------------------------------------------------------


$30.14 252,100 7.9 $30.140 58,750 $30.140
$46.705 270,600 8.9 46.705 2,100 46.705
$45.14 - $63.42 13,000 9.0 50.526 6,000 53.716


SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company
to disclose pro forma information regarding option grants made to its
employees. SFAS No. 123 specifies certain valuation techniques that produce
estimated compensation charges for purposes of valuing stock option grants.
These amounts have not been included in the Company's Consolidated Statements
of Operations, because APB No. 25 specifies that no compensation charge
arises when the price of the employees' stock options equal the market
value of the underlying stock at the grant date. Several of the Company's
subsidiaries also maintain their own stock option plans. The pro forma
effect of applying SFAS No. 123 includes the Company's share of expense
related to the subsidiaries' plans as well. The Company's pro forma net
(loss) income for the years ended December 31, 2001 and 2000, was $(591.5)
and $1,875.2 or $(3.03) and $9.44 per share, respectively.

The fair value of granted options was estimated at the grant date using the
Black-Scholes option pricing model. The weighted average fair value per
share of options granted during 2001 and 2000 was $16.90 and $10.73,
respectively. The following weighted average assumptions were used for the
years ended December 31, 2001 and 2000: risk free interest rate of 5.3% and
6.7%; expected dividend yield of 1.1% and 1.6%; expected option life of 5
years; and expected stock price volatility of 35.2% and 33.4%, respectively.

Note 15. 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
utilization of coinsurance, yearly renewable term and facultative programs. A
majority of the reinsurance utilized by CNA's life insurance operations
relates to term life insurance policies. Term life insurance policies issued
from 1994 onward are generally ceded at 60% to 90% of the face value from
first dollar. Universal Life policies issued from 1998 onward are generally
ceded at 75% of the face value from first dollar.

CNA's overall reinsurance program includes certain property-casualty
contracts, such as the corporate aggregate treaties discussed in more detail
later in this section, that are entered into and accounted for on a "funds
withheld" basis. Under these contracts, CNA records a funds

106

withheld liability, which is included in reinsurance balances payable for
substantially all of the ceded premiums. These reinsurance contracts require
CNA to increase the funds withheld balance at stated interest crediting rates.
The funds withheld liability is reduced by any cumulative claim payments made
by CNA in excess of CNA's retention under the reinsurance contract. If the
funds withheld liability is exhausted, additional claim payments are
recoverable from the reinsurer.

Interest cost on these contracts, which is included in other net investment
income, was $241.0, $87.0 and $22.0 in 2001, 2000 and 1999. The amount subject
to interest crediting rates on such contracts was $2,724.0 and $522.0 at
December 31, 2001 and 2000.

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

Amounts receivable from reinsurers were $13,823.4 and $9,397.3 at December 31,
2001 and 2000. Of these amounts, $838.0 and $821.0 were billed to reinsurers
as of December 31, 2001 and 2000, as reinsurance contracts generally require
payment of claims by the ceding company before the amount can be billed to the
reinsurer. The remaining receivable relates to the estimated case and IBNR
reserves and future policyholder benefits ceded under reinsurance contracts.

CNA attempts to mitigate its credit risk related to reinsurance by entering
into reinsurance arrangements only with reinsurers that have credit ratings
above certain levels and by obtaining substantial amounts of collateral. The
primary methods of obtaining collateral are through reinsurance trusts,
letters of credit and funds withheld balances. Such collateral was
approximately $3,677.0 and $1,566.0 at December 31, 2001 and 2000. The
allowance for doubtful accounts related to reinsurance receivables was $170.0
and $179.0 at December 31, 2001 and 2000.

CNA's largest recoverables from a single reinsurer, including prepaid
reinsurance premiums, were approximately $1,487.0, $1,374.0, $889.0 and $463.0
at December 31, 2001 from Hannover Reinsurance (Ireland) Ltd., Allstate
Insurance Corporation, American Reinsurance Company, and European Reinsurance
Company of Zurich.

Insurance claims and policyholders' benefits reported in the Consolidated
Statements of Operations are net of reinsurance recoveries of $7,288.0,
$4,863.0 and $3,224.0 for the years ended December 31, 2001, 2000 and 1999.

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

The effects of reinsurance on earned premiums are as follows:




Direct Assumed Ceded Net
- ------------------------------------------------------------------------------------------------

Year Ended December 31, 2001


Property-casualty $ 8,708.0 $1,228.0 $4,983.0 $ 4,953.0
Accident and health 3,644.0 176.0 136.0 3,684.0
Life 1,256.0 217.0 745.0 728.0
- ------------------------------------------------------------------------------------------------
Total $13,608.0 $1,621.0 $5,864.0 $ 9,365.0
================================================================================================

Year Ended December 31, 2000

Property-casualty $ 8,389.0 $1,955.0 $3,421.0 $ 6,923.0
Accident and health 3,644.0 484.0 487.0 3,641.0
Life 1,227.0 220.0 537.0 910.0
- ------------------------------------------------------------------------------------------------
Total $13,260.0 $2,659.0 $4,445.0 $11,474.0
================================================================================================

Year Ended December 31, 1999

Property-casualty $ 9,158.0 $1,816.0 $2,199.0 $ 8,775.0
Accident and health 3,730.0 198.0 397.0 3,531.0
Life 1,174.0 222.0 420.0 976.0
- ------------------------------------------------------------------------------------------------
Total $14,062.0 $2,236.0 $3,016.0 $13,282.0
================================================================================================


107

In 1999, CNA entered into an aggregate reinsurance treaty related to the 1999
through 2001 accident years covering substantially all of CNA's property-
casualty lines of business (the "Aggregate Cover"). CNA has two sections of
coverage under the terms of the Aggregate Cover. These coverages attach at
defined loss and allocated loss adjustment expense (collectively, "losses")
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 $500.0 of ceded losses with an aggregate limit
of $1,000.0 of ceded losses for the three-year period. The ceded premiums are
a percentage of ceded losses and for each $500.0 of limit the ceded premium is
$230.0. The second section of the Aggregate Cover, which is only available for
accident year 2001, provides additional coverage of up to $510.0 of ceded
losses for a maximum ceded premium of $310.0. Under the Aggregate Cover,
interest charges on the funds withheld accrue at 8.0% 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 8.3% per annum.

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 during 2001, the $500.0 limit on the
1999 accident year under the first section was also fully utilized. No losses
have been ceded to the remaining $500.0 of limit on accident years 2000 and
2001 under the first section.

The impact of the Aggregate Cover for the year ended December 31, 2001 was as
follows:





Ceded earned premiums $ (543.0)
Ceded claim and claim adjustment expenses 1,010.0
Interest charges (81.0)
- ------------------------------------------------------------------------------
Pretax benefit on operating results $ 386.0
==============================================================================


In 2001, CNA entered into a one-year aggregate reinsurance treaty related to
the 2001 accident year covering substantially all property-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
$760.0 of ceded losses. 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 8.0% per
annum. The interest rate increases to 10.0% per annum if the aggregate loss
ratio exceeds certain thresholds.

The impact of the CCC Cover for the year ended December 31, 2001 was as
follows:





Ceded earned premiums $(260.0)
Ceded claim and claim adjustment expenses 470.0
Interest charges (20.0)
- ------------------------------------------------------------------------------
Pretax benefit on operating results $ 190.0
==============================================================================


Note 16. Quarterly Financial Data (Unaudited)




2001 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------------------------


Total revenues $5,153.8 $4,840.9 $ 4,318.5 $5,104.0
Income (loss) before cumulative effect
of changes in accounting principles 188.1 165.7 (1,415.2) 525.6
Per share .98 .85 (7.18) 2.67
Net income (loss) 188.1 165.7 (1,415.2) 472.3
Per share .98 .85 (7.18) 2.40

2000 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------------------------

Total revenues $5,524.2 $5,757.3 $ 5,314.0 $4,655.7
Net income 502.9 679.6 510.6 183.6
Per share 2.55 3.45 2.59 .90
- ------------------------------------------------------------------------------------------------


108

Note 17. Legal Proceedings and Contingent Liabilities

INSURANCE RELATED

Tobacco Litigation - Four CNA insurance subsidiaries are defendants in a
lawsuit arising out of policies allegedly issued to Liggett Group, Inc.
("Liggett"). The lawsuit was filed by Liggett and its current parent, Brooke
Group Holding Inc., in the Delaware Superior Court, New Castle County, on
January 26, 2000. The lawsuit, which involves numerous insurers, concerns
coverage issues relating to over 1,000 tobacco-related claims asserted against
Liggett over the past 20 years. However, Liggett only began submitting claims
for coverage under the policies in January 2000. The trial court granted the
CNA insurance subsidiaries' summary judgment motions asserting that they have
no duty to defend or to indemnify as to a number of representative lawsuits.
The Delaware Supreme Court has accepted an appeal of these rulings. CNA
believes its coverage defenses are strong; and therefore, based on facts and
circumstances currently known, management believes that the ultimate outcome
of the pending litigation will not materially affect the results of operations
and/or financial position of CNA.

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 small portion of the premiums assumed under the IGI
Program related to United States workers' compensation "carve-out" business.
CNA is aware that a number of reinsurers with workers' compensation carve-out
insurance exposure 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 liability will also be
reduced. Moreover, based on information known at this time, CNA reasonably
believes it has strong grounds for avoiding a substantial portion of its
United States workers' compensation carve-out exposure 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 and
an estimate for recoverables from retrocessionaires.

CNA is pursuing a number of loss mitigation strategies. Although the results
of these various actions to date support the recorded reserves, the estimate
of ultimate losses is subject to considerable uncertainty. 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 CNA.

Other Contingencies

In the normal course of business, CNA has obtained letters of credit in favor
of various unaffiliated insurance companies, regulatory authorities and other
entities. At December 31, 2001 there were approximately $270.0 of outstanding
letters of credit.

CNA has committed approximately $152.0 to future capital calls from various
third party limited partnership investments in exchange for an ownership
interest in the related partnerships.

CNA has a commitment to purchase a $100.0 floating rate note issued by the
Californian Earthquake Authority in the event California earthquake related
insurance losses exceed $4,900.0 prior to December 31, 2002.

CNA has entered into a limited number of guaranteed payment contracts
primarily relating to telecommunication services amounting to approximately
$41.0. Estimated future minimum purchases under these contracts are as
follows: $14.0 in 2002; $14.0 in 2003; $10.0 in 2004; and $3.0 in 2005.

TOBACCO RELATED

Approximately 4,675 product liability cases are pending against cigarette
manufacturers in the United States; Lorillard is a defendant in approximately
4,275 of these cases. Lawsuits continue to be filed against Lorillard and
other manufacturers of tobacco products. Some of the lawsuits also name the
Company as a defendant. Among the 4,675 product liability cases, approximately
1,250 cases are pending in a West Virginia court. Another group of
approximately 2,835 cases has been brought by flight attendants alleging
injury from exposure to environmental tobacco smoke in the cabins of aircraft.
Lorillard is a defendant in all of the flight attendant suits and is a
defendant in most of the cases pending in West Virginia.

Excluding the flight attendant and West Virginia suits, approximately 575
product liability cases are pending against U.S. cigarette

108

manufacturers. Of these 575 cases, Lorillard is a defendant in approximately
275 cases. The Company is a defendant in approximately 45 of these actions,
although it has not received service of process in approximately 10 of them.

Tobacco litigation includes various types of claims. In these actions,
plaintiffs claim substantial compensatory, statutory and punitive damages, as
well as equitable and injunctive relief, in amounts ranging into the billions
of dollars. These claims are based on a number of legal theories including,
among other theories, theories of negligence, fraud, misrepresentation, strict
liability, breach of warranty, enterprise liability (including claims asserted
under the Racketeering Influenced and Corrupt Organizations Act), civil
conspiracy, intentional infliction of harm, violation of consumer protection
statutes, violation of antitrust statutes, and failure to warn of the harmful
and/or addictive nature of tobacco products.

Some cases have been brought by individual plaintiffs who allege cancer and/or
other health effects resulting from an individual's use of cigarettes and/or
smokeless tobacco products, addiction to smoking or exposure to environmental
tobacco smoke. These cases are generally referred to as "conventional product
liability cases." In other cases, plaintiffs have brought claims as purported
class actions on behalf of large numbers of individuals for damages allegedly
caused by smoking. These cases are generally referred to as "purported class
action cases." In other cases, plaintiffs are U.S. and foreign governmental
entities or entities such as labor unions, private companies, hospitals or
hospital districts, American Indian tribes, or private citizens suing on
behalf of taxpayers. Plaintiffs in these cases seek reimbursement of health
care costs allegedly incurred as a result of smoking, as well as other alleged
damages. These cases are generally referred to as "reimbursement cases." In
addition, there are claims for contribution and/or indemnity in relation to
asbestos claims filed by asbestos manufacturers or the insurers of asbestos
manufacturers. These cases are generally referred to as "claims for
contribution."

In addition to the above, claims have been brought against Lorillard seeking
damages resulting from alleged exposure to asbestos fibers which were
incorporated into filter material used in one brand of cigarettes manufactured
by Lorillard for a limited period of time, ending more than 40 years ago.
These cases are generally referred to as "filter cases." Approximately 30
filter cases are pending against Lorillard.

SIGNIFICANT RECENT DEVELOPMENTS - During December of 2001, the Florida Third
District Court of Appeal denied defendants' motion for rehearing, for
rehearing en banc, and for certification to the Florida Supreme Court of a
ruling by the trial court from October of 2000 in the product liability
litigation relating to present or former flight attendants. The October of
2000 decision may be construed to hold that the flight attendants are not
required to prove the substantive liability elements of their claims for
negligence, strict liability and breach of implied warranty in order to
recover damages. During January of 2002, the defendants, which include
Lorillard, filed a notice to invoke the discretionary jurisdiction of the
Florida Supreme Court in order to seek review of the trial court's October of
2000 ruling and the orders by the Florida Third District Court of Appeal that
affirmed the October of 2000 decision.

During November of 2001, a jury in the Circuit Court of Ohio County, West
Virginia returned a verdict in favor of the defendants, including Lorillard,
in the case of Blankenship v. American Tobacco Company, et al. (Circuit Court,
Ohio County, West Virginia, filed January 31, 1997), a class action case. The
court has denied plaintiffs' motion for new trial. The time for plaintiffs to
appeal has not expired.

During November of 2001, the California Court of Appeal, First Appellate
District, affirmed the trial court's final judgment in favor of the plaintiff
in the case of Henley v. Philip Morris Inc., a conventional product liability
case. During 1999, a jury in the Superior Court of California, San Francisco
County, found in favor of plaintiff at trial and awarded her $1.5 in actual
damages and $50.0 in punitive damages. The trial court subsequently reduced
the punitive damages award to $25.0. Philip Morris has filed a petition for
review with the California Supreme Court. The California Supreme Court has
accepted the case for review. Neither the Company nor Lorillard is a defendant
in this matter.

On October 5, 2001, a jury returned a verdict in favor of the defendants in
Tompkin v. The American Tobacco Company, et al., a conventional product
liability case in the United States District Court for the Northern District
of Ohio. Lorillard was a defendant in the case. The court has denied
plaintiff's motion for new trial and entered final judgment in favor of the
defendants. Plaintiff has noticed an appeal from the judgment to the U.S.
Court of Appeals for the Sixth Circuit.

On June 6, 2001, a jury awarded $5.5 in compensatory damages and $3,000.0 in
punitive damages to the plaintiff in Boeken v. Philip Morris, Inc., a
conventional product liability case in the Superior Court of Los Angeles
County, California. The court ruled that it would grant in part Philip
Morris's motion for a new trial and hold a new trial limited to plaintiff's
punitive damages claim if plaintiff did not consent to a reduction of the
award to $100.0. Plaintiff accepted the reduced award and the trial court
entered an amended judgment awarding plaintiff $100.0 in punitive damages.
Philip Morris has noticed an appeal from the amended judgment to the
California Court of Appeals. Neither the Company nor Lorillard was a defendant
in this matter.

On June 4, 2001, the jury in the case of Blue Cross and Blue Shield of New
Jersey, Inc., et al. v. Philip Morris, Incorporated, et al., a health plan
reimbursement case pending in the U.S. District Court for the Eastern District
of New York, returned a verdict awarding damages against the defendants,
including Lorillard. In this trial, the jury heard evidence as to the claims
of only one of the plan plaintiffs, Empire Blue Cross and Blue Shield,
referred to as Empire. In its June 4, 2001 verdict, the jury found in favor of
the defendants on some of Empire's claims, one of which findings precluded the
jury from considering Empire's claims for punitive damages. The jury found in
favor of Empire on certain other of plaintiff's claims. As a result of these

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findings, Empire is entitled to an award of approximately $17.8 in total
actual damages, including approximately $1.5 attributable to Lorillard. The
court denied plaintiff's post-verdict application for trebling of the damages
awarded by the jury. On November 1, 2001, the court entered a final judgment
that reflects the jury's verdict. In the final judgment, Empire was awarded
approximately $1.5 in actual damages and approximately fifty-five thousand
dollars in pre-judgment interest for a total award against Lorillard of
approximately $1.6. The defendants, including Lorillard, have noticed an
appeal from the final judgment to the United States Court of Appeals for the
Second Circuit. Plaintiff's counsel has sought an award of $39.0 in attorneys'
fees. This matter also is a part of the litigation described under the heading
"Eastern District of New York Litigation" discussed below.

SETTLEMENT OF STATE REIMBURSEMENT CASES - On November 23, 1998, Lorillard,
Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J.
Reynolds Tobacco Company, the "Original Participating Manufacturers," entered
into a Master Settlement Agreement with 46 states, the District of Columbia,
the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa
and the Commonwealth of the Northern Mariana Islands to settle the asserted
and unasserted health care cost recovery and certain other claims of those
states. These settling entities are generally referred to as the "Settling
States." The Original Participating Manufacturers had previously settled
similar claims brought by Mississippi, Florida, Texas and Minnesota, which
together with the Master Settlement Agreement are generally referred to as the
"State Settlement Agreements."

The State Settlement Agreements provide that the agreements are not
admissions, concessions or evidence of any liability or wrongdoing on the part
of any party, and were entered into by Lorillard and the other participating
manufacturers to avoid the further expense, inconvenience, burden and
uncertainty of litigation.

The State Settlement Agreements also include provisions relating to
significant advertising and marketing restrictions, public disclosure of
certain industry documents, limitations on challenges to tobacco control and
underage use laws, and other provisions.

In addition, as part of the Master Settlement Agreement, the Original
Participating Manufacturers committed to work cooperatively with the tobacco
growing community to address concerns about the potential adverse economic
impact on that community. On January 21, 1999, the Original Participating
Manufacturers reached an agreement to establish a $5,150.0 trust fund payable
between 1999 and 2010 to compensate the tobacco growing communities in 14
states. Payments to the trust fund are to be allocated among the Original
Participating Manufacturers according to their relative market share of
domestic cigarette shipments, except that Philip Morris paid more than its
market share in 1999 but will have its payment obligations reduced in 2009 and
2010 to make up for the overpayment. Of the total $5,150.0, a total of $989.0
was paid in 1999, 2000 and 2001, $79.9 of which was paid by Lorillard.
Lorillard believes its remaining payments under the agreement will total
approximately $435.0. All payments will be adjusted for inflation, changes in
the unit volume of domestic cigarette shipments, and the effect of new
increases in state or federal excise taxes on tobacco products that benefit
the tobacco growing community.

Lorillard believes that the State Settlement Agreements will materially
adversely affect its cash flows and operating income in future years. The
degree of the adverse impact will depend, among other things, on the rates of
decline in U.S. cigarette sales in the premium price and discount price
segments, Lorillard's share of the domestic premium price and discount price
cigarette segments, and the effect of any resulting cost advantage of
manufacturers not subject to significant payment obligations under the State
Settlement Agreements. Almost all domestic manufacturers have agreed to become
subject to the terms of the Master Settlement Agreement.

Lorillard recorded pretax charges of $1,140.4, $1,076.5 and $1,065.8 for the
years ended December 31, 2001, 2000 and 1999, respectively, to account for its
obligations under the State Settlement Agreements. Lorillard's portion of
ongoing adjusted payments and legal fees is based on its share of domestic
cigarette shipments in the year preceding that in which the payment is due.
Accordingly, Lorillard records its portions of ongoing settlement payments as
part of cost of manufactured products sold as the related sales occur.

CONVENTIONAL PRODUCT LIABILITY CASES - Conventional product liability cases
are cases in which individuals allege they or their decedents have been
injured due to smoking cigarettes, due to exposure to environmental tobacco
smoke, due to use of smokeless tobacco products, or due to cigarette or
nicotine dependence or addiction. Plaintiffs in most conventional product
liability cases seek unspecified amounts in compensatory damages and punitive
damages. Lorillard is a defendant in approximately 1,300 of these cases. This
total includes approximately 1,150 cases pending in West Virginia that are
part of a consolidated proceeding. Additional cases are pending against other
cigarette manufacturers. The Company is a defendant in seven of the cases
filed by individuals, although four of the cases have not been served on the
Company. The Company is not a defendant in any of the conventional product
liability cases pending in West Virginia.

Since January 1, 2000, 13 cases filed by individual plaintiffs have been
tried. Lorillard was a defendant in three of the 13 cases, and juries returned
verdicts in favor of the defendants in each of these three matters. The
Company was not a defendant in any of the 13 conventional product liability
cases tried since January 1, 2000. Trial is proceeding in one matter filed by
individuals. Neither Lorillard nor the Company were defendants in this matter.

Lorillard was not a defendant in ten of the individual cases tried since
January 1, 2000. Juries have returned verdicts in favor of the defendants in
four of the cases. In a fifth case, a court granted the defendant's motion for
directed verdict. Five cases have been decided in plaintiffs' favor. Due to
various factors, including the filing of

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appeals, plaintiffs have not been able to execute on any of the judgments
reflecting the adverse verdicts. In a 2002 case, a Kansas jury awarded a
plaintiff $0.2 in actual damages and found that plaintiff had presented
evidence that entitles him to recover an award for punitive damages. The
determination of the punitive damages award will be decided by the court at a
later date. No challenges to this verdict have been filed to date. In 2001, a
Florida jury awarded a plaintiff $0.17 in actual damages but declined to award
punitive damages. The court has not ruled to date on the defendant's post-
trial motions. During 2001, a California jury awarded a plaintiff
approximately $5.5 in actual damages and $3,000.0 in punitive damages,
although the court subsequently reduced the punitive damages award to $100.0.
The defendant has noticed an appeal from the final judgment. During 2000, a
California jury awarded plaintiffs $21.5. The defendants have noticed an
appeal from the final judgment. During 2000, a Florida jury awarded a
plaintiff $0.2 in actual damages but it declined to award punitive damages.
The trial court subsequently granted the defendant's post-trial motion and
entered a final judgment in favor of the defendant. The plaintiff has noticed
an appeal.

Appeals also are pending in two cases in which adverse verdicts were returned
prior to January 1, 2000. Neither Lorillard nor the Company are defendants in
either of these matters. In one of these matters, the California Supreme Court
issued a ruling during January of 2002 that accepted for review the
defendant's appeal from a 1999 judgment by a California court that reflects an
award to a plaintiff of $26.5. The California Court of Appeal, in rulings
issued during 2001, affirmed this judgment and subsequently denied the
defendant's motion for rehearing. In the second of these matters, the Oregon
Court of Appeals, during October of 2001, took under advisement the appeal
from the judgment reflecting an award to an Oregon plaintiff of $32.8.

During 2001, another cigarette manufacturer, Brown & Williamson Tobacco
Corporation, paid $1.1 in damages and interest to a former smoker and his
spouse for injuries incurred as a result of smoking. Carter v. Brown &
Williamson Tobacco Corporation (Circuit Court, Duval County, Florida, filed
February 10, 1995). In the 1996 trial of that case, the jury awarded
plaintiffs a total of $0.8 in damages. Plaintiffs did not seek punitive
damages. In 1998, the Florida Court of Appeal reversed the judgment, holding
that plaintiffs' claims were barred by the statute of limitations. The Florida
Supreme Court, however, reinstated the jury's damages award during 2000 and
denied Brown & Williamson's motion for rehearing during 2001. Brown &
Williamson's motion to stay the mandate pending the resolution of its petition
for writ of certiorari to the U.S. Supreme Court was denied. Brown &
Williamson therefore paid approximately $1.1 in damages and interest to the
plaintiffs during 2001. Brown & Williamson subsequently filed a petition for
writ of certiorari with the U.S. Supreme Court. On June 29, 2001, the U.S.
Supreme Court declined to accept for review the petition for writ of
certiorari. Lorillard was not a defendant in this matter.

Some cases against U.S. cigarette manufacturers and manufacturers of smokeless
tobacco products are scheduled for trial during 2002 and beyond. These trials
include a consolidated trial of the cases brought by approximately 1,250 West
Virginia smokers or users of smokeless tobacco products that is scheduled to
begin during September of 2002. Lorillard is a defendant in some of the cases
set for trial, including the consolidated West Virginia trial. The trial dates
are subject to change.

The California Supreme Court is reviewing decisions by the California Court of
Appeals as to whether a California statute bars claims against cigarette
manufacturers if the claims accrued between 1988 and 1998. The California
Attorney General has filed an amicus brief with the Supreme Court that
supports the position of the plaintiffs in these suits.

Flight Attendant Cases - There are approximately 2,835 cases pending in the
Circuit Court of Dade County, Florida against Lorillard and three other U.S.
cigarette manufacturers in which the plaintiffs are present or former flight
attendants, or the estates of deceased flight attendants, who allege injury as
a result of exposure to environmental tobacco smoke in aircraft cabins. The
Company is not a defendant in any of the flight attendant cases.

The suits were filed as a result of a settlement agreement on October 10, 1997
by the parties to Broin v. Philip Morris Companies, Inc., et al. (Circuit
Court, Dade County, Florida, filed October 31, 1991), a class action brought
on behalf of flight attendants claiming injury as a result of exposure to
environmental tobacco smoke. The settlement agreement was approved by the
trial court on February 3, 1998. Pursuant to the settlement agreement, among
other things, Lorillard and three other U.S. cigarette manufacturers paid
approximately $300.0 to create and endow a research institute to study
diseases associated with cigarette smoke. In addition, the settlement
agreement permitted the plaintiff class members to file individual suits.
These individuals may not seek punitive damages for injuries that arose prior
to January 15, 1997.

During October of 2000, the Circuit Court of Dade County, Florida entered an
order that may be construed to hold that the flight attendants are not
required to prove the substantive liability elements of their claims for
negligence, strict liability and breach of implied warranty in order to
recover damages. The court further ruled that the trials of these suits are to
address whether the plaintiffs' alleged injuries were caused by their exposure
to environmental tobacco smoke and, if so, the amount of damages to be
awarded. It is not clear how the trial judges will apply this order. The
Florida Third District Court of Appeal dismissed as premature defendants'
appeal from the October of 2000 decision. The Court of Appeal denied
defendants' motion for rehearing and for rehearing en banc or, in the
alternative, for certification of the October of 2000 ruling to the Florida
Supreme Court. During January of 2002, the defendants, which include
Lorillard, filed a notice to invoke the discretionary jurisdiction of the
Florida Supreme Court in order to seek review of the trial court's

112

October of 2000 ruling and the orders by the Florida Third District Court of
Appeal that affirmed the October of 2000 decision.

Trial has been held in one of the flight attendant cases. On April 5, 2001, a
jury in the Circuit Court of Dade County, Florida returned a verdict in favor
of Lorillard and the other defendants in the case of Fontana v. Philip Morris
Incorporated, et al. The court has entered final judgment in favor of the
defendants and has denied plaintiff's post-trial motions. Plaintiff has
noticed an appeal to the Florida Third District Court of Appeal.

Additional flight attendant cases are set for trial. Approximately 15 such
cases are scheduled for trial between April and October of 2002.

CLASS ACTION CASES - Certain cases have been filed against cigarette
manufacturers, including Lorillard, in which plaintiffs purport to seek class
certification on behalf of groups of cigarette smokers. Lorillard is a
defendant in approximately 25 of these cases, six of which also name the
Company as a defendant. Two cases that name both the Company and Lorillard as
defendants have not been served on any of the parties. Neither Lorillard nor
the Company are defendants in approximately 20 additional class action cases
pending against other cigarette manufacturers, many of which assert claims on
behalf of smokers of "light" cigarettes. As discussed under "Significant
Recent Developments," a verdict was returned in favor of defendants in one of
those matters, Blankenship v. American Tobacco Company, et al. during November
of 2001. Trial proceedings are underway in the case of Scott v. The American
Tobacco Company, et al. The remaining cases that are pending before trial
courts are in the pre-trial, discovery stage. Most of the suits in which
Lorillard or the Company were defendants seek class certification on behalf of
residents of the states in which the purported class action cases have been
filed, although some suits seek class certification on behalf of residents of
multiple states. Plaintiffs in all but two of the purported class action cases
seek class certification on behalf of individuals who smoked cigarettes or
were exposed to environmental tobacco smoke. In one of the two remaining
purported class action cases, plaintiffs seek class certification on behalf of
individuals who paid insurance premiums. Plaintiffs in the other remaining
suit seek class certification on behalf of U.S. residents under the age of 22
who purchased cigarettes as minors and who do not have personal injury claims.
Plaintiffs in a few of the reimbursement cases, which are discussed below,
also seek certification of such cases as class actions.

Various courts have ruled on motions for class certification in smoking and
health-related cases. In 12 state court cases, which were pending in five
states and the District of Columbia, courts have denied plaintiffs' class
certification motions. In another 15 cases, cigarette manufacturers have
defeated motions for class certification before either federal trial courts or
courts of appeal from cases pending in 13 states and the Commonwealth of
Puerto Rico. The denial of class certification in a New York federal court
case, however, was due to the court's interest in preserving judicial
resources for a potentially broader class certification ruling in In re Simon
(II) Litigation, which is discussed below. In six cases in which Lorillard is
a defendant, plaintiffs' motions for class certification have been granted and
appeals either have been rejected at the interlocutory stage, or, in one case,
plaintiffs' claims were resolved through a settlement agreement. These six
cases are Broin (which is the matter concluded by a settlement agreement and
discussed under "Conventional Product Liability Cases -- Flight Attendant
Cases"), Engle, Blankenship, Scott, Daniels and Brown. In addition to these
six cases, motions for class certification have been granted in as many as
five of the "light" cigarette cases. Neither Lorillard nor the Company are
defendants in these matters.


Theories of liability asserted in the purported class action cases include a
broad range of product liability theories, including those based on consumer
protection statutes and fraud and misrepresentation. Plaintiffs seek damages
in each case that range from unspecified amounts to the billions of dollars.
Most plaintiffs seek punitive damages and some seek treble damages. Plaintiffs
in many of the cases seek medical monitoring. Plaintiffs in some of the
purported class action cases are represented by a well-funded and coordinated
consortium of law firms throughout the United States.

The Engle Case - Trial began during July of 1998 in the case of Engle v. R.J.
Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida, filed May
5, 1994). The trial court, as amended by the Florida Court of Appeal, granted
class certification on behalf of Florida residents and citizens, and survivors
of such individuals, who have been injured or have died from medical
conditions allegedly caused by their addiction to cigarettes containing
nicotine.

The case is being tried in three phases. The first phase began during July of
1998 and involved consideration of certain issues claimed to be common to the
members of the class and their asserted causes of action.

On July 7, 1999, the jury returned a verdict against defendants, including
Lorillard, at the conclusion of the first phase. The jury found, among other
things, that cigarette smoking is addictive and causes lung cancer and a
variety of other diseases, that the defendants concealed information about the
health risks of smoking, and that defendants' conduct rose to a level that
would permit a potential award or entitlement to punitive damages. The verdict
permitted the trial to proceed to a second phase. The jury was not asked to
award damages in the Phase One verdict.

By order dated July 30, 1999 and supplemented on August 2, 1999, together, the
"Punitive Damages Order," the trial judge amended the trial plan with respect
to the manner of determining punitive damages. The Punitive Damages Order
provided that the jury would determine punitive damages, if any, on a lump-sum
dollar amount basis for the entire qualified class. The Third District of the
Florida Court of Appeal rejected as premature defendants' appeals from the
Punitive Damages Order, and the Florida Supreme Court declined to review the
Punitive Damages Order at that time.

113

The first portion of Phase Two of the trial began on November 1, 1999 before
the same jury that returned the verdict in Phase One. In the first part of
Phase Two, the jury determined issues of specific causation, reliance,
affirmative defenses, and other individual-specific issues related to the
claims of three named plaintiffs and their entitlement to damages, if any.

On April 7, 2000, the jury found in favor of the three plaintiffs and awarded
them a total of $12.5 in economic damages, pain and suffering damages and
damages for loss of consortium. After awarding damages to one of the three
plaintiffs, the jury appeared to find that his claims were barred by the
statute of limitations. The final judgment entered by the trial court on
November 6, 2000 reflected the damages award, and held that only a portion of
this plaintiff's claims were barred by the statute of limitations.

The second part of Phase Two of the trial began on May 22, 2000 and was heard
by the same jury that heard the trial's prior phases and considered evidence
as to the punitive damages to be awarded to the class. On July 14, 2000, the
jury awarded approximately $145,000.0 in punitive damages against all
defendants, including $16,250.0 against Lorillard.

On November 6, 2000, the Circuit Court of Dade County, Florida, entered a
final judgment in favor of the plaintiffs. The judgment also provides that the
jury's awards bear interest at the rate of 10% per year. The court's final
judgment denied various of defendants' post-trial motions, which included a
motion for new trial and a motion seeking reduction of the punitive damages
award. Lorillard has noticed an appeal from the final judgment to the Florida
Third District Court of Appeal and has posted its appellate bond in the amount
of $100.0 pursuant to Florida legislation enacted in May of 2000 limiting the
amount of an appellate bond required to be posted in order to stay execution
of a judgment for punitive damages in a certified class action. While
Lorillard believes this legislation is valid and that any challenges to the
possible application or constitutionality of this legislation would fail,
during May of 2001, Lorillard and two other defendants jointly contributed a
total of $709.0 to a fund (held for the benefit of the Engle plaintiffs) that
will not be recoverable by them even if challenges to the judgment are
resolved in favor of the defendants. As a result, the class has agreed to a
stay of execution, referred to as the Engle agreement, on its punitive damages
judgment until appellate review is completed, including any review by the U.S.
Supreme Court. Lorillard contributed a total of $200.0 to this fund, which
included the $100.0 that was posted as collateral for its appellate bond.
Accordingly, Lorillard has recorded a pretax charge of $200.0 in the year
ended December 31, 2001.

In the event that Lorillard, Inc.'s balance sheet net worth falls below $921.2
(as determined in accordance with generally accepted accounting principles in
effect as of July 14, 2000), the stay granted in favor of Lorillard in the
Engle agreement would terminate and the class would be free to challenge the
Florida legislation.

In addition, the Engle agreement requires Lorillard to obtain the written
consent of class counsel or the court prior to selling any trademark of or
formula comprising a cigarette brand having a U.S. market share of 0.5% or
more during the preceding calendar year. The Engle agreement also requires
Lorillard to obtain the written consent of the Engle class counsel or the
court to license to a third party the right to manufacture or sell such a
cigarette brand unless the cigarettes to be manufactured under the license
will be sold by Lorillard.

Now that the jury has awarded punitive damages and final judgment has been
entered, Lorillard believes that it is unclear how the Punitive Damages Order
will be implemented. The Punitive Damages Order provides that the lump-sum
punitive damages amount, if any, will be allocated equally to each class
member and acknowledges that the actual size of the class will not be known
until the last case has withstood appeal, i.e., the punitive damages amount,
if any, determined for the entire qualified class, would be divided equally
among those plaintiffs who are ultimately successful. The Punitive Damages
Order does not address whether defendants would be required to pay the
punitive damages award, if any, prior to a determination of claims of all
class members, which is Phase Three of the trial plan, a process that could
take years to conclude. The final judgment entered by the court on November 6,
2000 directs that the amounts awarded by the jury are to be paid immediately.
Phase Three would address potentially hundreds of thousands of other class
members' claims, including issues of specific causation, reliance, affirmative
defenses and other individual-specific issues regarding entitlement to
damages, in individual trials before separate juries.

Lorillard has been named in six separate lawsuits that are pending in the
Florida courts in which the plaintiffs claim that they are members of the
Engle class, that all liability issues associated with their claims were
resolved in the earlier phases of the Engle proceedings, and that trials on
their claims should proceed immediately. Lorillard is opposing trials of these
actions on the grounds that they should be considered during Phase Three of
the Engle case and should be stayed while the Engle appeal is proceeding.

Lorillard remains of the view that the Engle case should not have been
certified as a class action. Lorillard believes that class certification in
the Engle case is inconsistent with the majority of federal and state court
decisions which have held that mass smoking and health claims are
inappropriate for class treatment. Lorillard has challenged the class
certification, as well as numerous other legal errors that it believes
occurred during the trial. Lorillard believes that an appeal of these issues
on the merits should prevail.

Other Class Action Cases - On November 14, 2001, a jury in the Circuit Court
of Ohio County, West Virginia returned a verdict in favor of the defendants,
including Lorillard, in the case of Blankenship v. American Tobacco Company,
et al. (Circuit Court, Ohio County, West Virginia, filed January 31, 1997).
The court has denied plaintiffs' motion for new trial. The time for plaintiffs
to appeal has not expired. During 2000, the court granted plaintiffs' motion
for class certification.

114

The court ruled that the class consisted of West Virginia residents who were
cigarette smokers on or after January 31, 1995; who had a minimum of a five
pack-year smoking history as of December 4, 2000; who had not been diagnosed
with certain medical conditions; and who had not received health care funded
by the State of West Virginia. The West Virginia Supreme Court of Appeals
declined to review defendants' petition for a writ of prohibition against the
class certification ruling. Plaintiffs sought the creation of a fund, the
purpose of which would be to pay for class members to receive medical
monitoring for chronic obstructive pulmonary disease, emphysema and lung
cancer. Lorillard was a defendant in the case.

Jury selection began during June of 2001 in the case of Scott v. The American
Tobacco Company, et al. (District Court, Orleans Parish, Louisiana, filed May
24, 1996). A twelve-member jury and ten alternate jurors were selected, but
the Louisiana Court of Appeals and the Louisiana Court of Appeals, in response
to writ applications initiated by the defendants, excused a total of nine
jurors or alternate jurors. The Supreme Court directed the trial court to re-
open the jury selection process in order to select additional jurors. In their
writ applications, defendants contended that several selected jurors had
family members who were potential members of the class certified by the trial
court, and that the selected jury was biased against the defendants. Nine new
alternate jurors were selected by the court in proceedings that concluded
during December of 2001. Defendants subsequently filed an application for
supervisory writ with the Fourth District of Louisiana Court of Appeals
regarding errors in the jury selection process. Defendants contend that some
of the newly selected alternate jurors have family members that could benefit
from an award to the class certified by the court, and that these jurors have
indicated that they want their family members to receive the relief plaintiffs
are requesting. The court has not announced when the jury as finally
constituted would begin hearing evidence in the trial. The trial court has
certified a class comprised of residents of the State of Louisiana who desire
to participate in medical monitoring or smoking cessation programs and who
began smoking prior to September 1, 1988, or who began smoking prior to May
24, 1996 and allege that defendants undermined compliance with the warnings on
cigarette packages. Lorillard is a defendant in the case.

During December of 2000, the Superior Court of San Diego County, California
issued an order in the case of Daniels v. Philip Morris, Incorporated, et al.
that granted plaintiffs' motion for class certification on behalf of
California residents who, while minors, smoked at least one cigarette between
April 1994 and December 31, 1999. Trial in this matter is scheduled to begin
during July of 2002. Lorillard is a defendant in the case.

During April of 2001, the Superior Court of San Diego County, California in
the case of Brown v. The American Tobacco Company, Inc., et al., granted in
part plaintiff's motion for class certification and certified a class
comprised of adult residents of California who smoked at least one of
defendants' cigarettes during the applicable time period and who were exposed
to defendants' marketing and advertising activities in California.
Certification was granted as to plaintiff's claims that defendants violated
California Business and Professions Code sections 17200 and 17500. The court
subsequently defined the applicable class period for plaintiff's claims,
pursuant to a stipulation submitted by the parties, as June 10, 1993 through
April 23, 2001. Trial is scheduled to begin during October of 2002. Lorillard
is a defendant in the case.

REIMBURSEMENT CASES - In addition to the cases settled by the State Settlement
Agreements described above, approximately 50 other suits are pending,
comprised of cases brought by the U.S. federal government, county governments,
city governments, unions, American Indian tribes, hospitals or hospital
districts, private companies and foreign governments filing suit in U.S.
courts, in which plaintiffs seek recovery of funds allegedly expended by them
to provide health care to individuals with injuries or other health effects
allegedly caused by use of tobacco products or exposure to cigarette smoke.
These cases are based on, among other things, equitable claims, including
injunctive relief, indemnity, restitution, unjust enrichment and public
nuisance, and claims based on antitrust laws and state consumer protection
acts. Plaintiffs in some of these actions seek certification as class actions.
Plaintiffs seek damages in each case that range from unspecified amounts to
the billions of dollars. Most plaintiffs seek punitive damages and some seek
treble damages. Plaintiffs in some of the cases seek medical monitoring.
Lorillard is named as a defendant in all of the reimbursement cases except for
a few of those filed in U.S. courts by foreign governments. The Company is
named as a defendant in approximately 30 of the pending reimbursement cases,
although it has not received service of four of these matters.

U.S. Federal Government Action - The U.S. federal government filed a
reimbursement suit on September 22, 1999 in the U.S. District Court for the
District of Columbia against Lorillard, other U.S. cigarette manufacturers,
some parent companies and two trade associations. The Company is not a
defendant in this action. Plaintiff asserted claims under the Medical Care
Recovery Act, the Medicare as Secondary Payer provisions of the Social
Security Act, and the Racketeer Influenced and Corrupt Organizations Act. The
government alleges in the complaint that it has incurred costs of more than
$20,000.0 annually in providing health care costs under several federal
programs, including Medicare, military and veterans' benefits programs, and
the Federal Employee Health Benefits Program. The federal government seeks to
recover an unspecified amount of health care costs, and various types of other
relief, including disgorgement of profits, injunctive relief and declaratory
relief that defendants are liable for the government's future costs of
providing health care resulting from the defendants' alleged wrongful conduct.

During September of 2000, the court granted in part and denied in part
defendants' motion to dismiss the complaint. The court dismissed plaintiff's
claims asserted under the Medical Care Recovery Act as well as those under the
Medicare as Secondary Payer provisions of the

115

Social Security Act. The court denied the motion as to plaintiff's claims
under the Racketeering Influenced and Corrupt Organizations Act. Plaintiff
sought modification of the trial court's order as it related to the dismissal
of the Medical Care Recovery Act claim. In an amended complaint filed during
February of 2001, plaintiff attempted to replead the Medicare as Secondary
Payer claim. In a July of 2001 decision, the court reaffirmed its dismissal of
the Medical Care Recovery Act claims. The court also dismissed plaintiff's
reasserted claims under the Medicare as Secondary Payer Act. Trial in this
matter is scheduled to begin during June of 2003. The court has denied a
motion for intervention and a proposed complaint in intervention filed by the
Cherokee Nation Tribe on behalf of a purported nationwide class of American
Indian tribes.

In June of 2001, the government invited defendants in the lawsuit, including
Lorillard, to meet to discuss the possibility of a settlement of the
government's case. Lorillard participated in one such meeting and no further
meetings are scheduled.

Reimbursement Cases filed by Foreign Governments in U.S. Courts - Cases have
been brought in U.S. courts by 13 nations, 11 Brazilian states, 11 Brazilian
cities and one Canadian province. Both the Company and Lorillard are named as
defendants in most of the cases. The Company has not received service of
process of the cases filed by two of the nations and by one of the Brazilian
states. Four of the cases have been voluntarily dismissed. During 2001, a
federal court of appeal affirmed orders dismissing three of the cases, and the
U.S. Supreme Court denied plaintiffs' petitions for writ of certiorari. During
2001, a Florida court dismissed two of the suits, and the plaintiff in one of
the two actions has noticed an appeal. In addition, Lorillard and the Company
were dismissed from three suits that remain pending against other defendants.

In 1977, Lorillard sold substantially all of its trademarks outside of the
United States and the international business associated with those brands.
Performance by Lorillard of obligations under the 1977 agreement reflecting
the sale was guaranteed by the Company. Lorillard and the Company have
received notice from Brown & Williamson Tobacco Corporation, which claims to
be a successor to the purchaser, that indemnity will be sought under certain
indemnification provisions of the 1977 agreement with respect to suits brought
by various of the foregoing foreign jurisdictions, and in certain cases
brought in foreign countries by individuals concerning periods prior to June
1977 and during portions of 1978.

Reimbursement Cases by American Indian Tribes - American Indian tribes are the
plaintiffs in four pending reimbursement suits. Most of these cases have been
filed in tribal courts. Lorillard is a defendant in each of the cases. The
Company is not named as a defendant in any of the pending tribal cases. One of
the four cases is pending before a federal court of appeals following
plaintiffs' appeal from an order that granted defendants' motion to dismiss
the complaint. The remaining three cases are in the pre-trial, discovery
stage.

Reimbursement Cases by Private Companies and Health Plans or Hospitals and
Hospital Districts - As of March 1, 2002, one case was pending against
cigarette manufacturers in which the plaintiff is a not-for-profit insurance
company. Lorillard is a defendant in the pending case. The Company is not a
defendant in this matter.

On June 4, 2001, trial concluded in the case of Blue Cross and Blue Shield of
New Jersey as to certain of the claims asserted by one of the plan plaintiffs,
Empire Blue Cross and Blue Shield. For a discussion of this case, see
"Significant Recent Developments."

In addition, one case is pending in which the plaintiff is a group of Illinois
hospital districts. Another suit filed by a group of New York hospitals or
hospital districts was dismissed by the court during December of 2001, and the
plaintiffs have noticed an appeal. Lorillard is named as a defendant in both
such cases. The Company is not named as a defendant in either of the cases
filed by hospitals or hospital districts. In one additional suit, a city
governmental entity and several hospitals or hospital districts are
plaintiffs. The Company is a defendant in this case.

Reimbursement Cases by Labor Unions - Seven reimbursement cases are pending in
various federal or state courts in which the plaintiffs are labor unions,
their trustees or their trust funds. Lorillard is a defendant in each of these
suits. The Company is a defendant in two of the pending suits. Approximately
75 union cases have been dismissed in recent years. Some of these cases were
dismissed voluntarily, while others were dismissed as a result of defendants'
motions. Appeals were sought from some of these dismissal rulings and
defendants have prevailed in each of these appeals. The Second, Third, Fifth,
Seventh, Eighth, Ninth and Eleventh Circuit Courts of Appeal have found in
favor of the defendants in each of the appeals from dismissal orders entered
by the federal trial courts that were submitted to them, and the U.S. Supreme
Court has denied petitions for writ of certiorari that sought review of some
of these decisions. During 2001, an intermediate California court of appeal
affirmed the final judgment entered in favor of the defendants in a union case
pending in the state. The plaintiffs have sought review of the case by the
California Supreme Court. In addition, the Circuit Court of Appeals for the
District of Columbia entered a ruling in 2001 that reversed a decision by a
district court refusing to dismiss a union case. Several cases pending in
state courts also have been dismissed.

Eastern District Of New York Litigation - On April 18, 2000, a federal judge
in the Eastern District of New York issued an order that consolidates, for
settlement purposes only, ten pending cases involving Lorillard as well as
other industry defendants. These cases include three contribution cases
(Falise v. The American Tobacco Company, et al., H.K. Porter Company, Inc. v.
The American Tobacco Company, Inc., et al. and Raymark Industries, Inc. v. The
American Tobacco Company, Inc., et al.), two union cases (Bergeron, et al. v.
Philip Morris, Inc., et al. and The National Asbestos Workers Medical Fund, et
al. v. Philip Morris Incorporated, et al.), one private company case (Blue
Cross and Blue Shield of New Jersey, Inc., et al. v. Philip

116

Morris Incorporated, et al.), two smoking and health class actions that have
been served on defendants (Decie v. The American Tobacco Company, Inc., et al.
and Simon v. Philip Morris Incorporated, et al.), one smoking and health class
action in which none of the defendants has received service of process (Ebert
v. Philip Morris Incorporated, et al.) and one case that contains elements of
both a smoking and health class action and a private citizen reimbursement
case (Mason v. The American Tobacco Company, Inc., et al.). The Falise and
H.K. Porter cases have been voluntarily dismissed. The judge's order invited
the federal government to join in the settlement discussions. On July 31,
2000, the federal judge orally proposed the formation of a national punitive
damages class action for the purposes of settlement. Pursuant to the judge's
proposal, Lorillard entered into discussions with a committee of counsel
representing a broad-based group of plaintiffs in an effort to arrive at a
comprehensive settlement of all exemplary and punitive damage claims,
including claims involved in the Engle class action in Florida described
above. The parties were unable to reach an understanding and the negotiations
were suspended in late 2000.

The federal judge directed that a combined suit be filed encompassing all of
the claims pending before him that name cigarette manufacturers as defendants.
This matter is styled In re Simon (II) Litigation (U.S. District Court,
Eastern District, New York, filed September 6, 2000). The Company and
Lorillard are defendants in this proceeding. In a November of 2000 ruling, the
court stated that Simon II should be triable without appreciable delay should
it be certified. During March of 2001, the court heard argument of plaintiffs'
motion for class certification, plaintiffs' motion for appointment of class
counsel, and defendants' motion to dismiss the complaint. During December of
2001, the plaintiffs proposed to the court that a test case comprising the
claims of 15 individual plaintiffs be tried. Plaintiffs were directed to file
a complaint during January of 2002 that asserts claims on behalf of a group of
individuals. On January 31, 2002, a complaint on behalf of 13 individual
smokers, or the estates of deceased smokers, was filed. Lorillard is named as
a defendant in this suit. The Company is not named as a defendant. A trial
date of this case has not been scheduled.

Trial was held in two of the matters during 2001. During January of 2001, the
court declared a mistrial in the case of Falise v. The American Tobacco
Company, et al., a contribution case. The plaintiffs, who were the trustees of
the Johns Manville Trust, voluntarily dismissed the case during 2001 and
relinquished their right to seek a re-trial. During June of 2001, a verdict
was returned in the case of Blue Cross and Blue Shield of New Jersey (trial
was limited to the claims of only one plan plaintiff), a reimbursement case
described above. Following conclusion of the Blue Cross trial, the U.S.
District Judge stayed the claims asserted in the suit by the other plan
plaintiffs pending resolution of defendants' appeal. The U.S. District Judge
also stayed several of the cases involving cigarette manufacturers pending
before the judge.

CONTRIBUTION CLAIMS - In addition to the foregoing cases, approximately 15
cases are pending in which private companies seek recovery of funds expended
by them to individuals whose asbestos disease or illness was alleged to have
been caused in whole or in part by smoking-related illnesses. Lorillard is
named as a defendant in each action, although it has not received service of
process in one of the cases. The Company is named as a defendant in three of
the cases but has not received service of process in one of them. As noted
under "Eastern District of New York Litigation," plaintiffs in the Falise case
dismissed their suit against all defendants and gave up their right to file
suit again in the future. The remaining cases are in the pre-trial, discovery
stage.

FILTER CASES - A number of cases have been filed against Lorillard seeking
damages for cancer and other health effects claimed to have resulted from
exposure to asbestos fibers which were incorporated, for a limited period of
time, ending more than 40 years ago, into the filter material used in one of
the brands of cigarettes manufactured by Lorillard. Approximately 30 filter
cases are pending in federal and state courts against Lorillard. In certain of
these cases, the manufacturer and supplier of the filter material,
Hollingsworth & Vose Company, also is a defendant. In addition, two matters
are pending against Hollingsworth & Vose Company in which Lorillard is not a
party. Lorillard has agreed to indemnify Hollingsworth & Vose Company with
respect to these matters, including the two cases in which Lorillard is not
named as a defendant. The Company is not a defendant in any of the pending
filter cases. Allegations of liability include negligence, strict liability,
fraud, misrepresentation and breach of warranty. Plaintiffs in most of these
cases seek unspecified amounts in compensatory and punitive damages.

Trials have been held in 15 such cases. Five such trials have been held since
January 1, 1999. Juries have returned verdicts in favor of Lorillard in 11 of
the 15 trials. Four verdicts have been returned in plaintiffs' favor. In a
1995 trial, a California jury awarded plaintiffs approximately $1.2 in actual
damages and approximately $0.7 in punitive damages. In a 1996 trial, another
California jury awarded plaintiff approximately $0.1 in actual damages. In a
1999 trial, a Maryland jury awarded plaintiff approximately $2.2 in actual
damages. In a 2000 trial, a California jury awarded plaintiffs $1.1 in actual
damages and the case was settled prior to a determination of punitive damages.

TOBACCO-RELATED ANTITRUST CASES - Wholesalers and Direct Purchaser Suits -
Lorillard and other domestic and international cigarette manufacturers and
their parent companies, including the Company, were named as defendants in
nine separate federal court actions brought by tobacco product wholesalers for
violations of U.S. antitrust laws and international law. The complaints allege
that defendants conspired to fix the price of cigarettes to wholesalers since
1993 in violation of the Sherman Act. These actions seek certification of a
class including all domestic and international wholesalers similarly affected
by such alleged conduct, and damages, injunctive relief and attorneys' fees.
These actions were consolidated for pre-trial purposes in the U.S. District
Court for the Northern District of Georgia. The Court has granted class
certification for a four-year class (beginning in 1996 and ending in 2000) of
domestic direct purchasers. In February 2002, Lorillard and the other
defendants filed motions for summary judgment seeking to dismiss the actions
in their entirety. The Company has been voluntarily dismissed without
prejudice from all direct purchaser cases.

117

Indirect Purchaser Suits - Approximately 30 suits are pending in various state
courts alleging violations of state antitrust laws which permit indirect
purchasers, such as retailers and consumers, to sue under price fixing or
consumer fraud statutes. Approximately 18 states permit such suits. Lorillard
is a defendant in all but one of these indirect purchaser cases. Two indirect
purchaser suits, in Arizona and New York, have been dismissed in their
entirety. While one court has granted plaintiffs motion to certify a class of
consumers in one of these cases, another court has refused to do so, and other
motions seeking class certification have been deferred by other courts pending
resolution of the federal case discussed above. The Company was also named as
a defendant in most of these indirect purchaser cases but has been voluntarily
dismissed without prejudice from all of them.

Tobacco Growers Suit - DeLoach v. Philip Morris Inc., et al. (U.S. District
Court, Middle District of North Carolina, filed February 16, 2000). Lorillard
is named as a defendant in a lawsuit that, after several amendments, alleges
only antitrust violations. The other major domestic tobacco companies are also
presently named as defendants, and the plaintiffs have now added the major
leaf buyers as defendants. This case was originally filed in U.S. District
Court, District of Columbia, and transferred to a North Carolina federal court
upon motion by the defendants. Plaintiffs seek certification of a class
including all tobacco growers and quota holders (the licenses that a farmer
must either own or rent to sell the crop), who sold tobacco or held quota
under the federal tobacco leaf price support program since February of 1996.
The plaintiffs' claims relate to the conduct of the companies in the purchase
of tobacco through the auction system under the federal program. The suit
seeks an unspecified amount of actual damages, trebled under the antitrust
laws, and injunctive relief.

* * * *

Lorillard believes that it has valid defenses to the cases pending against it.
Lorillard also believes it has valid bases for appeal of the adverse verdicts
against it. To the extent the Company is a defendant in any of the lawsuits
discussed above, the Company believes that it is not a proper defendant in
these matters and has moved or will move for dismissal of such claims against
it. Lorillard will continue to maintain a vigorous defense in all such
litigation. Lorillard may enter into discussions in an attempt to settle
particular cases if it believes it is appropriate to do so.

While Lorillard intends to defend vigorously all smoking and health related
litigation which may be brought against it, it is not possible to predict the
outcome of any of this litigation. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably.

In addition, adverse developments in relation to smoking and health, including
the release in 1998 of industry documents, have received widespread media
attention. These developments may reflect adversely on the tobacco industry
and, together with adverse outcomes in pending cases, could have adverse
effects on the ability of Lorillard to prevail in smoking and health
litigation and could prompt the filing of additional litigation.

Except for the impact of the State Settlement Agreements as described above,
Lorillard is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending litigation. It
is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an unfavorable outcome of certain pending litigation.

OTHER TOBACCO-RELATED LITIGATION

Cigarette Smuggling Litigation - Lorillard and other domestic cigarette
manufacturers and their parent companies, including the Company, were named as
defendants in cases filed in a Florida court by the Republic of Ecuador, the
Republic of Honduras and the Republic of Belize. Plaintiffs alleged that the
defendants evaded cigarette taxation by engaging in a scheme to smuggle
cigarettes into each nation. Plaintiffs contended defendants sold cigarettes
to distributors who in turn sold the cigarettes to smugglers. Plaintiffs seek
unspecified amounts in actual damages, treble damages, punitive damages and
equitable relief in each of the three suits. Lorillard and the Company
received service of process in each of the three suits but amended complaints
filed in each of the three cases during December of 2001 dropped claims
against both Lorillard and the Company. While each of the three matters
remains pending against other defendants, neither Lorillard nor the Company is
a party to the actions.

Cigarette Advertising Suit - On June 28, 2001, the U.S. Supreme Court voided
in large part a Massachusetts law that placed restrictions on cigarette
advertising and promotional practices. The Court held that the Federal
Cigarette Labeling and Advertising Act preempts many of Massachusetts'
regulations governing outdoor and point-of-sale cigarette advertising. The
Court also ruled that Massachusetts' outdoor and point-of-sale advertising
regulations relating to smokeless tobacco and cigars violate the First
Amendment and are unconstitutional. However, the Court held that the
prohibition of self-service promotional displays relating to cigarettes,
cigars and smokeless tobacco products is constitutional. Such regulations
include those designed to prevent the sale of cigarettes to minors or to
regulate conduct as it relates to the sale or use of cigarettes.

OTHER LITIGATION

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

118

Note 18. Business Segments

Loews Corporation is a holding company. Its subsidiaries are engaged in the
following lines of business: property, casualty and life insurance (CNA
Financial Corporation, an 89% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of
hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary); the
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc., a 53% owned subsidiary); and the distribution and sale of watches and
clocks (Bulova Corporation, a 97% owned subsidiary). Each operating entity is
responsible for the operation of its specialized business and is headed by a
chief executive officer having the duties and authority commensurate with that
position.

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

Lorillard's principal products are marketed under the brand names of Newport,
Kent, True, Maverick and Old Gold with substantially all of its sales in the
United States.

Loews Hotels owns and/or operates 17 hotels, 15 of which are in the United
States and two are in Canada. There is also a property in the United States
under development with an opening date scheduled in 2002.

Diamond Offshore's business primarily consists of operating 45 offshore
drilling rigs that are chartered on a contract basis for fixed terms by
companies engaged in exploration and production of hydrocarbons. Offshore rigs
are mobile units that can be relocated based on market demand. As of December
31, 2001, 28 of these rigs were located in the Gulf of Mexico, 5 were located
in Brazil and the remaining 12 were located in various foreign markets.

Bulova distributes and sells watches and clocks under the brand names of
Bulova, Wittnauer, Caravelle and Accutron with substantially all of its sales
in the United States and Canada. All watches and clocks are purchased from
foreign suppliers.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. In addition, CNA does not maintain
a distinct investment portfolio for each of its insurance segments, and
accordingly, allocation of assets to each segment is not performed. Therefore,
investment income and investment gains (losses) are allocated based on each
segment's carried insurance reserves, as adjusted.

The following tables set forth the Company's consolidated revenues, income and
assets by business segment:




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------

Revenues (a):


CNA Financial:
Property-Casualty $ 7,337.5 $ 9,604.7 $ 9,250.5
Life 1,959.9 1,701.0 1,577.8
Group (b) 3,688.4 3,949.4 3,747.3
Other 217.0 272.5 1,804.8
- ------------------------------------------------------------------------------------------------
Total CNA Financial 13,202.8 15,527.6 16,380.4
Lorillard 4,528.5 4,342.4 4,064.5
Loews Hotels (c) 321.8 338.5 351.9
Diamond Offshore (d) 942.3 723.6 846.9
Bulova (e) 146.1 160.1 138.7
Corporate 275.7 159.0 (339.7)
- ------------------------------------------------------------------------------------------------
Total $19,417.2 $21,251.2 $21,442.7
================================================================================================


119




Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------

(Loss) income before taxes and minority interest and cumulative effect of changes in accounting
principles (a)(f):


CNA Financial:
Property-Casualty $(1,260.6) $ 1,550.4 $ 323.3
Life 287.6 285.8 178.0
Group 53.4 134.2 (10.1)
Other (1,369.7) (141.5) (490.5)
- ------------------------------------------------------------------------------------------------
Total CNA Financial (2,289.3) 1,828.9 .7
Lorillard 1,104.3 1,223.9 1,079.6
Loews Hotels (c) 29.8 47.6 112.5
Diamond Offshore (d) 228.1 107.7 238.0
Bulova (e) 17.8 27.1 20.8
Corporate 96.2 (29.3) (507.4)
- ------------------------------------------------------------------------------------------------
Total $ (813.1) $ 3,205.9 $ 944.2
================================================================================================

Net (loss) income (a)(f):

CNA Financial:
Property-Casualty $ (740.3) $ 898.3 $ 206.4
Life 164.3 166.0 97.5
Group 34.7 78.8 (1.5)
Other (825.2) (75.1) (259.2)
- ------------------------------------------------------------------------------------------------
Total CNA Financial (1,366.5) 1,068.0 43.2
Lorillard 672.2 753.9 651.9
Loews Hotels (c) 19.5 26.8 70.5
Diamond Offshore (d) 71.0 32.0 72.7
Bulova (e) 10.1 15.0 14.1
Corporate 57.9 (19.0) (331.3)
- ------------------------------------------------------------------------------------------------
(535.8) 1,876.7 521.1
Cumulative effect of changes in accounting principles (53.3) (157.9)
- ------------------------------------------------------------------------------------------------
Total $ (589.1) $ 1,876.7 $ 363.2
================================================================================================





Investments Receivables Total Assets
----------------------------------------------------------------------

December 31 2001 2000 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------


CNA Financial $35,826.3 $36,059.4 $18,917.4 $14,945.1 $65,914.1 $63,001.6
Lorillard 1,628.9 1,640.9 45.9 68.4 2,769.4 2,671.8
Loews Hotels 98.5 96.5 26.6 42.2 617.9 639.1
Diamond Offshore 1,129.6 851.8 193.7 153.5 3,551.9 3,122.5
Bulova 13.5 12.5 77.4 70.7 194.5 186.7
Corporate and eliminations 2,462.3 2,671.6 191.8 21.7 2,203.3 2,219.8
- ------------------------------------------------------------------------------------------------
Total $41,159.1 $41,332.7 $19,452.8 $15,301.6 $75,251.1 $71,841.5
================================================================================================


120




(a) Investment gains (losses) included in Revenues, Pretax (loss) income and Net (loss) income
are as follows:

Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------

Revenues and pretax (loss) income:


CNA Financial:
Property-Casualty $ 883.5 $ 860.1 $ 170.7
Life 188.2 12.8 (42.8)
Group 40.9 62.2 (1.2)
Other 152.7 93.4 72.6
- ------------------------------------------------------------------------------------------------
Total CNA Financial 1,265.3 1,028.5 199.3
Corporate and other 128.4 (7.4) (472.8)
- ------------------------------------------------------------------------------------------------
$1,393.7 $1,021.1 $(273.5)
================================================================================================

Net (loss) income:

CNA Financial:
Property-casualty $ 508.8 $ 485.7 $ 95.1
Life 105.2 8.4 (29.0)
Group 23.0 35.1 (.7)
Other 80.1 52.7 34.5
- ------------------------------------------------------------------------------------------------
Total CNA Financial 717.1 581.9 99.9
Corporate and other 75.1 (4.8) (300.7)
- ------------------------------------------------------------------------------------------------
$792.2 $577.1 $(200.8)
================================================================================================

(b) Includes $2,218.0, $2,100.0 and $2,100.0 under contracts covering U.S.
government employees and their dependents for the respective periods.
(c) Includes gain from the sale of hotel properties of $85.1 ($52.0 after
taxes) for the year ended December 31, 1999.
(d) Includes a gain from the sale of a drilling rig of $13.9 ($4.7 after taxes
and minority interest) for the year ended December 31, 2000.
(e) Includes a gain of $5.5 from settlement of a contract dispute ($3.0 after
taxes and minority interest) for the year ended December 31, 2000.
(f) Income taxes and interest expense are as follows:





2001 2000 1999
----------------------------------------------------------
Income Interest Income Interest Income Interest
Year Ended December 31 Taxes Expense Taxes Expense Taxes Expense
- ------------------------------------------------------------------------------------------------


CNA Financial:
Property-Casualty $ (415.5) $ 5.5 $ 557.8 $ 17.2 $ (44.3) $ 13.4
Life 99.1 25.8 94.6 .1 64.1 3.3
Group 13.8 .2 43.6 .3 (8.3) .2
Other (435.7) 125.9 (122.2) 188.7 (95.5) 184.8
- ------------------------------------------------------------------------------------------------
Total CNA Financial (738.3) 157.4 573.8 206.3 (84.0) 201.7
Lorillard 432.1 .7 469.8 1.5 427.7 14.9
Loews Hotels 10.3 15.2 20.8 11.2 42.0 2.2
Diamond Offshore 83.2 38.1 41.0 10.3 89.8 9.2
Bulova 7.3 11.6 6.1
Corporate 30.0 120.6 (10.1) 127.6 (176.1) 126.3
- ------------------------------------------------------------------------------------------------
Total $ (175.4) $332.0 $1,106.9 $356.9 $ 305.5 $354.3
================================================================================================


121

Note 19. Subsequent Event

On February 6, 2002, the Company sold 40,250,000 shares of a new class of its
common stock, referred to as "Carolina Group" stock, for net proceeds of
$1,070.5. This stock is designed to track the performance of the Carolina
Group, which will initially consist of: the Company's ownership interest in
its wholly owned subsidiary, Lorillard, Inc.; $2,500.0 of notional, intergroup
debt owed by the Carolina Group to the Loews Group, bearing interest at the
annual rate of 8.0% and, subject to optional prepayment, due December 31,
2021; and any and all liabilities, costs and expenses of Loews Corporation and
Lorillard, Inc. arising out of the past, present or future business of
Lorillard, Inc. The assets and liabilities of the Carolina Group also include
all net income or net losses from the assets and liabilities attributed to the
Carolina Group. Each outstanding share of Carolina Group stock has 1/10 of a
vote per share. Holders of Carolina Group stock are common stockholders of
Loews Corporation.

The issuance of Carolina Group stock has resulted in a two class common stock
structure for Loews Corporation. The outstanding Carolina Group stock
represents a 23.17% economic interest in the performance of the Carolina
Group. The Loews Group consists of all Loews's assets and liabilities other
than the ownership interest represented by the outstanding Carolina Group
stock, and will include as an asset the notional, intergroup debt of the
Carolina Group.

Consolidating financial statements of Loews Corporation for the years ended
December 31, 2001, 2000 and 1999 follows:




CONSOLIDATING STATEMENTS OF OPERATIONS


Adjustments Consolidated
Carolina Loews and Loews
Year Ended December 31, 2001 Group Group Eliminations Corporation
- ------------------------------------------------------------------------------------------------


Revenues:
Insurance premiums $ 9,361.4 $ 9,361.4
Investment income, net of expenses $ 79.9 2,065.0 2,144.9
Investment gains 1.1 1,392.6 1,393.7
Manufactured products 4,441.3 142.8 4,584.1
Other 7.3 1,925.8 1,933.1
- ------------------------------------------------------------------------------------------------
Total 4,529.6 14,887.6 19,417.2
- ------------------------------------------------------------------------------------------------

Expenses:
Insurance claims and
policyholders' benefits 11,382.8 11,382.8
Amortization of deferred
acquisition costs 1,803.9 1,803.9
Cost of manufactured products sold 2,168.9 68.2 2,237.1
Other operating expenses (a) 1,255.0 2,968.5 4,223.5
Restructuring and other related charges 251.0 251.0
Interest .7 331.3 332.0
- ------------------------------------------------------------------------------------------------
Total 3,424.6 16,805.7 20,230.3
- ------------------------------------------------------------------------------------------------
1,105.0 (1,918.1) (813.1)
- ------------------------------------------------------------------------------------------------

Income tax (benefit) expense 432.3 (607.7) (175.4)
Minority interest (101.9) (101.9)
- ------------------------------------------------------------------------------------------------
Total 432.3 (709.6) (277.3)
- ------------------------------------------------------------------------------------------------

Income (loss) from operations 672.7 (1,208.5) (535.8)
Equity in earnings of the Carolina Group 672.7 $(672.7) (b)
- ------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
changes in accounting principles 672.7 (535.8) (672.7) (535.8)
Cumulative effect of changes in accounting
principles - net (53.3) (53.3)
- ------------------------------------------------------------------------------------------------

Net income (loss) $ 672.7 $ (589.1) $(672.7) $ (589.1)
================================================================================================

(a) Includes $2.6 of expenses allocated by the Carolina Group to the Loews Group for computer
related charges and $0.2 of expenses allocated by Loews Group to the Carolina Group for
services provided pursuant to a services agreement, which eliminate in these consolidating
statements.
(b) To eliminate the Loews Group's intergroup interest in the earnings of the Carolina.


122




CONSOLIDATING STATEMENTS OF OPERATIONS


Adjustments Consolidated
Carolina Loews and Loews
Year Ended December 31, 2000 Group Group Eliminations Corporation
- ------------------------------------------------------------------------------------------------


Revenues:
Insurance premiums $11,471.7 $11,471.7
Investment income, net of expenses $ 101.7 2,492.1 2,593.8
Investment (losses) gains (0.6) 1,021.7 1,021.1
Manufactured products 4,233.8 149.8 4,383.6
Other 6.9 1,774.1 1,781.0
- ------------------------------------------------------------------------------------------------
Total 4,341.8 16,909.4 21,251.2
- ------------------------------------------------------------------------------------------------

Expenses:
Insurance claims and policyholders'
benefits 9,830.8 9,830.8
Amortization of deferred
acquisition costs 1,879.8 1,879.8
Cost of manufactured products sold 2,178.2 72.9 2,251.1
Other operating expenses (a) 939.8 2,786.9 3,726.7
Interest 1.5 355.4 356.9
- ------------------------------------------------------------------------------------------------
Total 3,119.5 14,925.8 18,045.3
- ------------------------------------------------------------------------------------------------
1,222.3 1,983.6 3,205.9
- ------------------------------------------------------------------------------------------------

Income taxes 469.5 637.4 1,106.9
Minority interest 222.3 222.3
- ------------------------------------------------------------------------------------------------
Total 469.5 859.7 1,329.2
- ------------------------------------------------------------------------------------------------

Income from operations 752.8 1,123.9 1,876.7
Equity in earnings of the Carolina Group 752.8 $(752.8) (b)
- ------------------------------------------------------------------------------------------------

Net income $ 752.8 $1,876.7 $(752.8) $1,876.7
================================================================================================

(a) Includes $2.6 of expenses allocated by the Carolina Group to the Loews Group for computer
related charges and $0.2 of expenses allocated by the Loews Group to the Carolina Group for
services provided pursuant to a services agreement, which eliminate in these consolidating
statements.
(b) To eliminate the Loews Group's intergroup interest in the earnings of the Carolina Group.


123




CONSOLIDATING STATEMENT OF OPERATIONS


Adjustments Consolidated
Carolina Loews and Loews
Year Ended December 31, 1999 Group Group Eliminations Corporation
- ------------------------------------------------------------------------------------------------


Revenues:
Insurance premiums $13,276.7 $13,276.7
Investment income, net of expenses $ 65.7 2,359.6 2,425.3
Investment (losses) gains 1.0 (274.5) (273.5)
Manufactured products 3,991.3 134.0 4,125.3
Other 6.5 1,882.4 1,888.9
- ------------------------------------------------------------------------------------------------
Total 4,064.5 17,378.2 21,442.7
- ------------------------------------------------------------------------------------------------

Expenses:
Insurance claims and policyholders'
benefits 11,890.3 11,890.3
Amortization of deferred
acquisition costs 2,142.6 2,142.6
Cost of manufactured products sold 2,050.5 65.9 2,116.4
Other operating expenses (a) 919.7 2,992.2 3,911.9
Restructuring and other related charges 83.0 83.0
Interest 14.9 339.4 354.3
- ------------------------------------------------------------------------------------------------
Total 2,985.1 17,513.4 20,498.5
- ------------------------------------------------------------------------------------------------
1,079.4 (135.2) 944.2
- ------------------------------------------------------------------------------------------------

Income tax (benefit) expense 427.6 (122.1) 305.5
Minority interest 117.6 117.6
- ------------------------------------------------------------------------------------------------
Total 427.6 (4.5) 423.1
- ------------------------------------------------------------------------------------------------

Income (loss) from operations 651.8 (130.7) 521.1
Equity in earnings of the Carolina Group 651.8 $(651.8) (b)
- ------------------------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 651.8 521.1 (651.8) 521.1
Cumulative effect of changes in accounting
principles - net (157.9) (157.9)
- ------------------------------------------------------------------------------------------------

Net income $ 651.8 $ 363.2 $(651.8) $ 363.2
================================================================================================

(a) Includes $2.9 of expenses allocated by the Carolina Group to the Loews Group for computer
related charges and $0.1 of expenses allocated by the Loews Group to the Carolina Group
for services provided pursuant to a services agreement, which eliminate in these
consolidating statements.
(b) To eliminate the Loews Group's intergroup interest in the earnings of the Carolina Group.


124




CONSOLIDATING BALANCE SHEET


Adjustments Consolidated
Carolina Loews and Loews
December 31, 2001 Group Group Eliminations Corporation
- ------------------------------------------------------------------------------------------------


Assets:

Investments $1,628.9 $39,530.2 $41,159.1
Cash 1.7 179.6 181.3
Receivables-net 45.9 19,406.9 19,452.8
Property, plant and equipment-net 181.2 2,894.1 3,075.3
Deferred income taxes 426.6 180.4 607.0
Goodwill and other intangible
assets-net 323.8 323.8
Other assets 485.1 3,744.7 4,229.8
Investment in combined attributed
net assets of the Carolina Group 1,274.5 $(1,274.5) (a)
Deferred acquisition costs of insurance
subsidiaries 2,423.9 2,423.9
Separate account business 3,798.1 3,798.1
- ------------------------------------------------------------------------------------------------
Total assets $2,769.4 $73,756.2 $(1,274.5) $75,251.1
================================================================================================

Liabilities and Shareholders' Equity:

Insurance reserves $43,623.9 $43,623.9
Payable for securities purchased 1,365.6 1,365.6
Securities sold under agreements
to repurchase 1,602.4 1,602.4
Long-term debt, less unamortized
discounts 5,920.3 5,920.3
Reinsurance balances payable 2,722.9 2,722.9
Other liabilities $1,494.9 3,100.3 4,595.2
Separate account business 3,798.1 3,798.1
- ------------------------------------------------------------------------------------------------
Total liabilities 1,494.9 62,133.5 63,628.4
- ------------------------------------------------------------------------------------------------

Minority interest 1,973.4 1,973.4
- ------------------------------------------------------------------------------------------------

Shareholders' equity:
Common stock, $1 par value $ 191.5 (b) 191.5
Additional paid-in capital 48.2 (b) 48.2
Earnings retained in the business 9,214.9 (b) 9,214.9
Accumulated other comprehensive
income 194.7 (b) 194.7
Combined attributed net assets 1,274.5 9,649.3 (10,923.8) (b)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 1,274.5 9,649.3 (1,274.5) 9,649.3
- ------------------------------------------------------------------------------------------------

Total liabilities and shareholders'
equity $2,769.4 $73,756.2 $(1,274.5) $75,251.1
================================================================================================

(a) To eliminate the Loews Group's 100% equity interest in the combined attributed net assets of
the Carolina Group.
(b) To eliminate the combined attributed net assets of the Carolina Group and the Loews Group,
and to record the Loews Corporation consolidated equity accounts at the balance sheet date.


125




CONSOLIDATING BALANCE SHEET

Adjustments Consolidated
Carolina Loews and Loews
December 31, 2000 Group Group Eliminations Corporation
- ------------------------------------------------------------------------------------------------


Assets:

Investments $1,640.9 $39,691.8 $41,332.7
Cash 1.4 193.8 195.2
Receivables-net 68.4 15,233.2 15,301.6
Property, plant and equipment-net 199.5 3,006.8 3,206.3
Deferred income taxes 344.8 59.2 404.0
Goodwill and other intangible
assets-net 0.6 378.1 378.7
Other assets 416.2 3,875.1 4,291.3
Investment in combined attributed
net assets of the Carolina Group 1,376.8 $(1,376.8) (a)
Deferred acquisition costs of
insurance subsidiaries 2,417.8 2,417.8
Separate account business 4,313.9 4,313.9
- ------------------------------------------------------------------------------------------------
Total assets $2,671.8 $70,546.5 $(1,376.8) $71,841.5
================================================================================================

Liabilities and Shareholders' Equity:

Insurance reserves $39,054.3 $39,054.3
Payable for securities purchased 971.4 971.4
Securities sold under agreements
to repurchase 2,245.5 2,245.5
Long-term debt, less unamortized
discounts $ 4.0 6,036.0 6,040.0
Reinsurance balances payable 1,381.2 1,381.2
Other liabilities 1,291.0 3,145.2 4,436.2
Separate account business 4,313.9 4,313.9
- ------------------------------------------------------------------------------------------------
Total liabilities 1,295.0 57,147.5 58,442.5
- ------------------------------------------------------------------------------------------------

Minority interest 2,207.9 2,207.9
- ------------------------------------------------------------------------------------------------

Shareholders' equity:
Common stock, $1 par value $ 98.6 (b) 98.6
Additional paid-in capital 144.2 (b) 144.2
Earnings retained in the business 10,191.6 (b) 10,191.6
Accumulated other comprehensive
income 756.7 (b) 756.7
Combined attributed net assets 1,376.8 11,191.1 (12,567.9) (b)
- ------------------------------------------------------------------------------------------------

Total shareholders' equity 1,376.8 11,191.1 (1,376.8) 11,191.1
- ------------------------------------------------------------------------------------------------

Total liabilities and shareholders'
equity $2,671.8 $70,546.5 $(1,376.8) $71,841.5
================================================================================================

(a) To eliminate the Loews Group's 100% equity interest in the combined attributed net assets of
the Carolina Group.
(b) To eliminate the combined attributed net assets of the Carolina Group and the Loews Group,
and to record the Loews Corporation consolidated equity accounts at the balance sheet date.


126




CONSOLIDATING STATEMENT OF CASH FLOWS


Adjustments Consolidated
Carolina Loews and Loews
Year Ended December 31, 2001 Group Group Eliminations Corporation
- ------------------------------------------------------------------------------------------------


Net cash provided (used) by
operating activities $ 709.7 $ 579.2 $ (750.0) $ 538.9
- ------------------------------------------------------------------------------------------------

Investing activities:
Purchases of property and equipment (41.2) (461.3) (502.5)
Proceeds from sales of property
and equipment 9.1 269.3 278.4
Change in short-term investments 72.7 3,339.9 3,412.6
Other investing activities (3,124.5) (3,124.5)
- ------------------------------------------------------------------------------------------------
40.6 23.4 64.0
- ------------------------------------------------------------------------------------------------

Financing activities:
Dividends paid to shareholders (750.0) (112.5) 750.0 (112.5)
Other financing activities (504.3) (504.3)
- ------------------------------------------------------------------------------------------------
(750.0) (616.8) 750.0 (616.8)
- ------------------------------------------------------------------------------------------------

Net change in cash 0.3 (14.2) (13.9)
Cash, beginning of year 1.4 193.8 195.2
- ------------------------------------------------------------------------------------------------

Cash, end of year $ 1.7 $ 179.6 $ 181.3
================================================================================================






Year Ended December 31, 2000
- ------------------------------------------------------------------------------------------------


Net cash provided (used) by
operating activities $ 550.4 $ (689.2) $(300.0) $ (438.8)
- ------------------------------------------------------------------------------------------------

Investing activities:
Purchases of property and equipment (30.1) (637.1) (667.2)
Proceeds from sales of property
and equipment 1.4 34.7 36.1
Change in short-term investments (222.2) (465.1) (687.3)
Other investing activities 2,308.0 2,308.0
- ------------------------------------------------------------------------------------------------
(250.9) 1,240.5 989.6
- ------------------------------------------------------------------------------------------------

Financing activities:
Dividends paid to shareholders (300.0) (99.7) 300.0 (99.7)
Other financing activities (0.1) (439.7) (439.8)
- ------------------------------------------------------------------------------------------------
(300.1) (539.4) 300.0 (539.5)
- ------------------------------------------------------------------------------------------------

Net change in cash (0.6) 11.9 11.3
Cash, beginning of year 2.0 181.9 183.9
- ------------------------------------------------------------------------------------------------

Cash, end of year $ 1.4 $ 193.8 $ 195.2
================================================================================================


127




CONSOLIDATING STATEMENT OF CASH FLOWS


Adjustments Consolidated
Carolina Loews and Loews
Year Ended December 31, 1999 Group Group Eliminations Corporation
- ------------------------------------------------------------------------------------------------


Net cash provided (used) by
operating activities $1,024.9 $(2,682.2) $(300.0) $(1,957.3)
- ------------------------------------------------------------------------------------------------

Investing activities:
Purchases of property and equipment (20.7) (687.5) (708.2)
Proceeds from sales of property
and equipment 2.2 97.2 99.4
Change in short-term investments (706.1) 1,489.4 783.3
Other investing activities 2,753.9 2,753.9
- ------------------------------------------------------------------------------------------------
(724.6) 3,653.0 2,928.4
- ------------------------------------------------------------------------------------------------

Financing activities:
Dividends paid to shareholders (300.0) (108.9) 300.0 (108.9)
Other financing activities (0.1) (965.6) (965.7)
- ------------------------------------------------------------------------------------------------
(300.1) (1,074.5) 300.0 (1,074.6)
- ------------------------------------------------------------------------------------------------

Net change in cash 0.2 (103.7) (103.5)
Cash, beginning of year 1.8 285.6 287.4
- ------------------------------------------------------------------------------------------------

Cash, end of year $ 2.0 $ 181.9 $183.9
================================================================================================


128

* * *

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Information called for by Part III has been omitted as Registrant intends to
file with the Securities and Exchange Commission not later than 120 days after
the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) 1. Financial Statements:

The financial statements appear above under Item 8. The following additional
financial data should be read in conjunction with those financial statements.
Schedules not included with these additional financial data have been omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or notes to consolidated financial
statements.



Page
2. Financial Statement Schedules: Number
------


Independent Auditors' Report ......................................... L-1
Loews Corporation and Subsidiaries:
Schedule I-Condensed financial information of Registrant for the
years ended December 31, 2001, 2000 and 1999 ...................... L-2
Schedule II-Valuation and qualifying accounts for the years ended
December 31, 2001, 2000 and 1999 .................................. L-6
Schedule V-Supplemental information concerning property-casualty
insurance operations for the years ended December 31, 2001, 2000
and 1999 .......................................................... L-7

3. Exhibits:


Exhibit
Description Number
----------- -------


(3) Articles of Incorporation and By-Laws

Restated Certificate of Incorporation of the Registrant,
dated October 20, 1987 ......................................... 3.01*

Certificate of Amendment of Certificate of Incorporation
of Registrant, dated May 16, 1996 .............................. 3.02*

Certificate of Amendment of Certificate of Incorporation
of Registrant, dated May 8, 2001 ............................... 3.03*

Certificate of Amendment of Certificate of Incorporation
of Registrant, dated January 30, 2002 .......................... 3.04*

By-Laws of the Registrant as amended through February 20, 2001,
incorporated herein by reference to Exhibit 3.02 to Registrant's
Report on Form 10-K for the year ended December 31, 2000 ....... 3.05



Exhibit
Description Number
----------- -------


(4) Instruments Defining the Rights of Security Holders, Including
Indentures

The Registrant hereby agrees to furnish to the Commission upon
request copies of instruments with respect to long-term debt,
pursuant to Item 601(b)(4)(iii) of Regulation S-K.

129



Exhibit
Description Number
----------- -------

(10) Material Contracts

Employment Agreement between Registrant and Laurence A. Tisch
dated March 1, 1971 as amended through January 1, 2001,
incorporated herein by reference to Exhibit 10.1 to Registrant's
Report on Form 10-K for the year ended December 31, 2000 ....... 10.01

Employment Agreement between Registrant and Preston R. Tisch
dated as of March 1, 1988 as amended through January 1, 2001,
incorporated herein by reference to Exhibit 10.2 to Registrant's
Report on Form 10-K for the year ended December 31, 2000 ....... 10.02

Continuing Service Agreement between a subsidiary of Registrant
and Edward J. Noha, dated February 27, 1991, incorporated
herein by reference to Exhibit 10.04 to Registrant's Report on
Form 10-K for the year ended December 31, 1990 ................. 10.03

Loews Corporation Deferred Compensation Plan as amended and
restated as of December 31, 1995, incorporated herein by
reference to Exhibit 10.05 to Registrant's Report on Form 10-K
for the year ended December 31, 1996 ........................... 10.04

Incentive Compensation Plan, incorporated herein by reference to
Exhibit 10.15 to Registrant's Report on Form 10-K for the year
ended December 31, 1996 ........................................ 10.05

Comprehensive Settlement Agreement and Release with the State of
Florida to settle and resolve with finality all present and
future economic claims by the State and its subdivisions
relating to the use of or exposure to tobacco products,
incorporated herein by reference to Exhibit 10 to
Registrant's Report on Form 8-K filed September 5, 1997 ........ 10.06

Comprehensive Settlement Agreement and Release with the State
of Texas to settle and resolve with finality all present and
future economic claims by the State and its subdivisions
relating to the use of or exposure to tobacco products,
incorporated herein by reference to Exhibit 10 to Registrant's
Report on Form 8-K filed February 3, 1998 ...................... 10.07

State of Minnesota Settlement Agreement and Stipulation for
Entry of Consent Judgment to settle and resolve with finality
all claims of the State of Minnesota relating to the subject
matter of this action which have been or could have been
asserted by the State, incorporated herein by reference
to Exhibit 10.1 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.08

State of Minnesota Consent Judgment relating to the settlement
of tobacco litigation, incorporated herein by reference to
Exhibit 10.2 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.09



Exhibit
Description Number
----------- -------

State of Minnesota Settlement Agreement and Release relating
to the settlement of tobacco litigation, incorporated herein
by reference to Exhibit 10.3 to Registrant's Report on Form
10-Q for the quarter ended March 31, 1998 ...................... 10.10

Agreement to Pay State of Minnesota Attorneys' Fees and Costs
relating to the settlement of tobacco litigation, incorporated
herein by reference to Exhibit 10.4 to Registrant's Report on
Form 10-Q for the quarter ended March 31, 1998 ................. 10.11

Agreement to Pay Blue Cross and Blue Shield of Minnesota
Attorneys' Fees and Costs relating to the settlement of
tobacco litigation, incorporated herein by reference to
Exhibit 10.5 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.12

State of Minnesota State Escrow Agreement relating to the
settlement of tobacco litigation, incorporated herein by
reference to Exhibit 10.6 to Registrant's Report on Form 10-Q
for the quarter ended March 31, 1998 ........................... 10.13

130



Exhibit
Description Number
----------- -------

Stipulation of Amendment to Settlement Agreement and For Entry
of Agreed Order, dated July 2, 1998, regarding the settlement
of the State of Mississippi health care cost recovery action,
incorporated herein by reference to Exhibit 10.1 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.14

Mississippi Fee Payment Agreement, dated July 2, 1998,
regarding the payment of attorneys' fees, incorporated herein
by reference to Exhibit 10.2 to Registrant's Report on Form
10-Q for the quarter ended June 30, 1998 ....................... 10.15

Mississippi MFN Escrow Agreement, dated July 2, 1998,
incorporated herein by reference to Exhibit 10.3 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.16

Stipulation of Amendment to Settlement Agreement and For Entry
of Consent Decree, dated July 24, 1998, regarding the
settlement of the Texas health care cost recovery action,
incorporated herein by reference to Exhibit 10.4 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.17

Texas Fee Payment Agreement, dated July 24, 1998, regarding
the payment of attorneys' fees, incorporated herein by
reference to Exhibit 10.5 to Registrant's Report on Form 10-Q
for the quarter ended June 30, 1998 ............................ 10.18

Stipulation of Amendment to Settlement Agreement and For Entry
of Consent Decree, dated September 11, 1998, regarding the
settlement of the Florida health care cost recovery action,
incorporated herein by reference to Exhibit 10.1 to Registrant's
Report on Form 10-Q for the quarter ended September 30, 1998 ... 10.19

Florida Fee Payment Agreement, dated September 11, 1998,
regarding the payment of attorneys' fees, incorporated herein
by reference to Exhibit 10.2 to Registrant's Report on Form
10-Q for the quarter ended September 30, 1998 .................. 10.20

Master Settlement Agreement with 46 states, the District of
Columbia, the Commonwealth of Puerto Rico, Guam, the U.S.
Virgin Islands, American Samoa and the Northern Marianas to
settle the asserted and unasserted health care cost recovery
and certain other claims of those states, incorporated herein
by reference to Exhibit 10 to Registrant's Report on Form 8-K
filed November 25, 1998 ........................................ 10.21

Employment Agreement dated as of January 1, 1999 between
Registrant and Andrew H. Tisch is incorporated herein by
reference to Exhibit 10.31 to Registrant's Report on Form 10-K
for the year ended December 31, 1998 and an amendment dated
January 1, 2002 is filed herewith .............................. 10.22*

Employment Agreement dated as of January 1, 1999 between
Registrant and James S. Tisch is incorporated herein by
reference to Exhibit 10.32 to Registrant's Report on Form 10-K
for the year ended December 31, 1998 and an amendment dated
January 1, 2002 is filed herewith .............................. 10.23*

Employment Agreement dated as of January 1, 1999 between
Registrant and Jonathan M. Tisch is incorporated herein by
reference to Exhibit 10.33 to Registrant's Report on Form 10-K
for the year ended December 31, 1998 and an amendment dated
January 1, 2002 is filed herewith .............................. 10.24*

Supplemental Retirement Agreement dated September 21, 1999
between Registrant and Arthur Rebell is incorporated herein
by reference to Exhibit 10.28 to Registrant's Report on Form
10-K for the year ended December 31, 1999....................... 10.25

Loews Corporation 2000 Stock Option Plan is incorporated herein
by reference to Exhibit A to Registrant's Definitive Proxy
Statement filed on March 29, 2000 .............................. 10.26

131



Exhibit
Description Number
----------- -------


First Amendment to Supplemental Retirement Agreement dated
March 24, 2000 between Registrant and Arthur L. Rebell is
incorporated herein by reference to Exhibit 10.2 to
Registrant's Report on Form 10-Q for the quarter ended
March 31, 2000 ................................................. 10.27

Second Amendment to Supplemental Retirement Agreement dated
March 28, 2001 between Registrant and Arthur L. Rebell ......... 10.28*

Carolina Group 2002 Stock Option Plan .......................... 10.29*

Supplemental Retirement Agreement dated January 1, 2002
between Registrant and Andrew H. Tisch ......................... 10.30*

Supplemental Retirement Agreement dated January 1, 2002
between Registrant and James S. Tisch .......................... 10.31*

Supplemental Retirement Agreement dated Januaury 1, 2002
between Registrant and Jonathan M. Tisch ....................... 10.32*

Third Amendment to Supplemental Retirement Agreement dated
February 28, 2002 between Registrant and Arthur L. Rebell ...... 10.33*

(21) Subsidiaries of the Registrant

List of subsidiaries of Registrant ............................. 21.01*

(23) Consents of Experts and Counsel

Consent of Deloitte & Touche LLP ............................... 23.01*



* Filed herewith

(b) Reports on Form 8-K - On October 17, 2001 Registrant filed a report on
Form 8-K regarding a preliminary proxy statement to create the Carolina Group
tracking stock to reflect the performance of Lorillard, Inc., its wholly owned
subsidiary.

On December 5, 2001 Registrant filed a report on Form 8-K regarding its
subsidiary, CNA Financial Corporation issuing a press release that CNA will
record fourth quarter charges relating to restructuring of its Property-
Casualty and Life Operations, discontinuation of variable life and annuity
business and consolidation of real estate locations and related corporate
staff reductions. A second report release announced CNA's estimate for
potential losses associated with recent filing by bankrupt Enron entities.

132

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

LOEWS CORPORATION



Dated: March 8, 2002 By /s/ Peter W. Keegan
-------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



Dated: March 8, 2002 By /s/ James S. Tisch
-------------------------------
(James S. Tisch, President
and Chief Executive Officer)


Dated: March 8, 2002 By /s/ Peter W. Keegan
-------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)


Dated: March 8, 2002 By /s/ Guy A. Kwan
-------------------------------
(Guy A. Kwan, Controller)


Dated: March 8, 2002 By /s/ Joseph L. Bower
-------------------------------
(Joseph L. Bower, Director)


Dated: March 8, 2002 By /s/ John Brademas
-------------------------------


(John Brademas, Director)


Dated: March 8, 2002 By /s/ Paul Fribourg
-------------------------------
(Paul Fribourg, Director)


Dated: March 8, 2002 By /s/ Bernard Myerson
-------------------------------
(Bernard Myerson, Director)

133

Dated: March 8, 2002 By /s/ Edward J. Noha
-------------------------------
(Edward J. Noha, Director)


Dated: March 8, 2002 By /s/ Michael F. Price
------------------------------
(Michael F. Price, Director)


Dated: March 8, 2002 By /s/ Gloria R. Scott
-------------------------------
(Gloria R. Scott, Director)


Dated: March 8, 2002 By /s/ Andrew H. Tisch
-------------------------------
(Andrew H. Tisch, Director)


Dated: March 8, 2002 By /s/ Jonathan M. Tisch
-------------------------------
(Jonathan M. Tisch, Director)


Dated: March 8, 2002 By /s/ Laurence A. Tisch
-------------------------------
(Laurence A. Tisch, Director)


Dated: March 8, 2002 By /s/ Preston R. Tisch
-------------------------------
(Preston R. Tisch, Director)


Dated: March 8, 2002 By /s/ Fred Wilpon
-------------------------------
(Fred Wilpon, Director)

134

INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of Loews Corporation:

We have audited the accompanying consolidated balance sheets of Loews
Corporation and its subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a)2. These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Loews Corporation and its
subsidiaries at December 31, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivative instruments and
hedging activities.






Deloitte & Touche LLP
New York, New York
February 14, 2002

L-1

SCHEDULE I


Condensed Financial Information of Registrant

LOEWS CORPORATION

BALANCE SHEETS

ASSETS





December 31 2001 2000
- ------------------------------------------------------------------------------
(In millions)


Current assets, principally investment in short-term
instruments ....................................... $ 2,290.9 $ 2,430.2
Investments in securities .......................... 985.3 280.7
Investments in capital stocks of subsidiaries, at
equity ............................................ 10,180.1 11,095.4
Other assets ....................................... 30.5 273.8
- ------------------------------------------------------------------------------

Total assets .................................. $13,486.8 $14,080.1
==============================================================================


LIABILITIES AND SHAREHOLDERS' EQUITY


Accounts payable and accrued liabilities ........... $ 475.7 $ 376.7
Securities sold under agreements to repurchase ..... 480.4
Long-term debt, less current maturities (a) ........ 2,293.6 2,291.0
Deferred income tax and other ...................... 587.8 221.3
- ------------------------------------------------------------------------------

Total liabilities ............................. 3,837.5 2,889.0
Shareholders' equity ............................... 9,649.3 11,191.1
- ------------------------------------------------------------------------------

Total liabilities and shareholders' equity .... $13,486.8 $14,080.1
==============================================================================


L-2

SCHEDULE I
(Continued)


Condensed Financial Information of Registrant

LOEWS CORPORATION

STATEMENTS OF OPERATIONS





Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)


Revenues:
Equity in (losses) income of
subsidiaries (b) .................... $ (528.3) $1,905.9 $ 867.2
Investment gains (losses) ............ 100.6 (6.6) (462.6)
Interest and other ................... 118.1 149.8 126.3
- ------------------------------------------------------------------------------

Total ............................. (309.6) 2,049.1 530.9
- ------------------------------------------------------------------------------

Expenses:
Administrative ....................... 54.8 53.7 40.4
Interest ............................. 133.8 128.2 125.9
- ------------------------------------------------------------------------------

Total ............................. 188.6 181.9 166.3
- ------------------------------------------------------------------------------

(498.2) 1,867.2 364.6
Income tax (benefit) expense (c) ....... 37.6 (9.5) (156.5)
- ------------------------------------------------------------------------------
(Loss) income before cumulative effect
of changes in accounting principles ... (535.8) 1,876.7 521.1
Cumulative effect of changes in
accounting principles-net ............. (53.3) (157.9)
- ------------------------------------------------------------------------------

Net (loss) income ...................... $ (589.1) $1,876.7 $ 363.2
==============================================================================


L-3

SCHEDULE I
(Continued)


Condensed Financial Information of Registrant

LOEWS CORPORATION

STATEMENTS OF CASH FLOWS





Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)


Operating Activities:
Net (loss) income ..................... $ (589.1) $ 1,876.7 $ 363.2
Adjustments to reconcile net (loss)
income to net cash provided (used) by
operating activities:
Cumulative effect of changes in
accounting principles .............. 53.3 157.9
Undistributed losses (earnings) of
affiliates ......................... 1,360.9 (1,556.2) (498.8)
Investment (gains) losses ........... (100.6) 6.6 462.6
Provision for deferred income taxes . 1.6 12.5 119.0
Changes in assets and liabilities-net:
Receivables ......................... (190.2) 37.3 (17.7)
Accounts payable and accrued
liabilities ........................ (4.6) (3.5) 6.0
Federal income taxes ................ (104.3) 411.3 (46.1)
Trading securities .................. 340.5 (157.4) (759.0)
Other-net ........................... 3.0 (5.2) 5.0
- ------------------------------------------------------------------------------

770.5 622.1 (207.9)
- ------------------------------------------------------------------------------

Investing Activities:
Investments in and advances to
subsidiaries ......................... (101.0) (281.5) (293.6)
Reduction of investments and advances
to subsidiaries ...................... 26.7 41.4 208.5
Net decrease in short-term investments,
primarily U.S. government securities . 202.3 353.3 1,057.6
Securities sold under agreements to
repurchase ........................... 480.4 (347.8) (101.9)
Purchases of CNA common stock ......... (978.7)
Change in other investments ........... (1.2) 17.7 15.2
- ------------------------------------------------------------------------------

(371.5) (216.9) 885.8
- ------------------------------------------------------------------------------


Financing Activities:
Dividends paid to shareholders ........ (112.5) (99.7) (108.9)
Purchases of treasury shares .......... (282.2) (305.7) (601.6)
Issuance of common stock .............. .4
- ------------------------------------------------------------------------------
(394.3) (405.4) (710.5)
- ------------------------------------------------------------------------------

Net change in cash ...................... 4.7 (.2) (32.6)
Cash, beginning of year ................. 10.2 10.4 43.0
- ------------------------------------------------------------------------------

Cash, end of year ....................... $ 14.9 $ 10.2 $ 10.4
==============================================================================


L-4

SCHEDULE I
(Continued)


Condensed Financial Information of Registrant

- --------------
Notes:

(a) Long-term debt consisted of:




December 31 2001 2000
- ------------------------------------------------------------------------------


6.8% notes due 2006 (effective interest rate
of 6.8%) (authorized, $300) ................ $ 300.0 $ 300.0
3.1% exchangeable subordinated notes due 2007
(effective interest rate of 3.4%)
(authorized $1,150) (1) .................... 1,150.0 1,150.0
8.9% debentures due 2011 (effective interest
rate of 9.0%) (authorized, $175) ........... 175.0 175.0
7.6% notes due 2023 (effective interest rate
of 7.8%) (authorized, $300) (2) ............ 300.0 300.0
7% notes due 2023 (effective interest rate of
7.2%) (authorized, $400) (3) ............... 400.0 400.0
- ------------------------------------------------------------------------------

2,325.0 2,325.0
Less unamortized discount ................... 31.4 34.0
- ------------------------------------------------------------------------------

$ 2,293.6 $ 2,291.0
==============================================================================

(1) Redeemable in whole or in part at September 15, 2002, at 101.6%, and
decreasing percentages thereafter. The notes are exchangeable into
15.376 shares of Diamond Offshore's common stock per $1,000
principal amount of notes, at a price of $65.04 per share.
(2) Redeemable in whole or in part at June 1, 2003 at 103.8%, and
decreasing percentages thereafter.
(3) Redeemable in whole or in part at October 15, 2003 at 102.4%, and
decreasing percentages thereafter.


(b) Cash dividends paid to the Company by affiliates amounted to $807.1,
$356.7 and $368.4 for the years ended December 31, 2001, 2000 and 1999,
respectively.

(c) The Company is included in a consolidated federal income tax return with
certain of its subsidiaries and, accordingly, participates in the allocation
of certain components of the consolidated provision for federal income taxes.
Such taxes are generally allocated on a separate return bases.

The Company has entered into a separate tax allocation agreement with CNA, a
majority-owned subsidiary in which its ownership exceeds 80% (the
"Subsidiary"). The agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the
Company's return, or (ii) be paid by the Subsidiary an amount, if any, equal
to the federal income tax which would have been payable by the Subsidiary if
it had filed a separate consolidated return.

Under these agreements, CNA will receive approximately $908.0 for 2001. In
2000 and 1999, CNA paid $64.0 and received $288.0, respectively. The agreement
may be canceled by either of the parties upon thirty days' written notice. See
Note 9 of the Notes to Consolidated Financial Statements of Loews Corporation
and subsidiaries included in Item 8.

L-5

SCHEDULE II

LOEWS CORPORATION AND SUBSIDIARIES

Valuation and Qualifying Accounts




Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------------------------------------------------------
(In millions)


For the Year Ended December 31, 2001


Deducted from assets:
Allowance for
discounts ......... $ 2.7 $1746.1 $1746.7(1) $
2.1
Allowance for
doubtful accounts 345.7 50.5 34.7 361.5
------------------------------------------------------

Total .......... $ 348.4 $224.6 $209.4 $363.6
======================================================


For the Year Ended December 31, 2000


Deducted from assets:
Allowance for
discounts ......... $ 2.7 $165.4 $165.4(1) $ 2.7
Allowance for
doubtful accounts 334.1 19.5 7.9 345.7
------------------------------------------------------

Total .......... $ 336.8 $184.9 $173.3 $348.4
======================================================

For the Year Ended December 31, 1999


Deducted from assets:
Allowance for
discounts ......... $ 1.6 $156.8 $155.7(1) $ 2.7
Allowance for
doubtful accounts 342.2 13.2 21.3 334.1
------------------------------------------------------

Total .......... $ 343.8 $170.0 $177.0 $336.8
======================================================

- --------------
Notes: (1) Discounts allowed.


L-6

SCHEDULE V

LOEWS CORPORATION AND SUBSIDIARIES

Supplemental Information Concerning Property-Casualty Insurance Operations





Consolidated Property-Casualty Entities
- ------------------------------------------------------------------------------

Year Ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------
(In millions)


Deferred policy acquisition costs .... $ 1,103 $ 1,121
Reserves for unpaid claim and claim
adjustment expenses ................. 29,551 26,408
Discount deducted from claim and
claim adjustment expenses reserves
above (based on interest rates
ranging from 3.5% to 7.5%) .......... 2,456 2,413
Unearned premiums .................... 4,505 4,821
Net earned premiums .................. 7,598 8,847 $ 9,964
Net investment income ................ 1,260 1,740 1,725
Incurred claim and claim adjustment
expenses related to current year .... 7,192 6,331 7,287
Incurred claim and claim adjustment
expenses related to prior years ..... 2,466 427 1,027
Amortization of deferred acquisition
costs ............................... 1,748 1,729 2,005
Paid claim and claim expenses ........ 9,797 8,434 9,964
Net written premiums ................. 8,014 8,640 8,941


L-7