================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
-------------
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) 545-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
--------- ---------
Class Outstanding at August 5, 1994
- -------------------------- -----------------------------
Common stock, $1 par value 59,985,000 shares
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Page 1
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
June 30, 1994 and December 31, 1993 ........................... 3
Consolidated Condensed Statements of Income--
Three and Six months ended June 30, 1994 and 1993 ............. 4
Consolidated Condensed Statements of Cash Flows--
Six months ended June 30, 1994 and 1993 ....................... 5
Notes to Consolidated Condensed Financial Statements ............ 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 15-26
Part II. Other Information
Item 1. Legal Proceedings ......................................... 26
Item 4. Submission of Matters to a Vote of Security Holders ....... 27-28
Item 6. Exhibits and Reports on Form 8-K .......................... 28
Exhibit 11--Statement Re Computation of Per Share Earnings
Assuming Full Dilution for the three and six months ended June
30, 1993 ....................................................... 30
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
- --------------------------------------------------------------------------------
(Amounts in thousands of dollars) June 30, December 31,
1994 1993
-----------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale, amortized
cost of $21,036,256 and $17,132,086 ......... $20,664,852 $17,657,856
Equity securities available for sale, cost of
$1,137,422 and $1,028,733 ................... 1,289,815 1,240,256
Mortgage loans and notes receivable ........... 118,360 121,439
Policy loans .................................. 175,178 173,606
Other investments ............................. 99,480 72,085
Short-term investments ........................ 9,340,943 8,025,201
----------------------------
31,688,628 27,290,443
Cash ............................................ 133,835 155,703
Receivables-net ................................. 8,130,325 7,474,753
Inventories ..................................... 211,520 241,287
Investments in associated companies ............. 507,060 490,654
Property, plant and equipment-net ............... 1,063,055 1,038,179
Deferred income taxes ........................... 1,450,207 1,074,410
Other assets .................................... 645,299 564,600
Deferred policy acquisition costs of insurance
subsidiaries ................................... 1,029,693 979,166
Separate Account business ....................... 5,843,256 6,540,557
----------------------------
Total assets ............................... $50,702,878 $45,849,752
============================
Liabilities and Shareholders' Equity:
Insurance reserves and claims ................... $28,257,877 $27,439,003
Accounts payable and accrued liabilities ........ 850,848 705,034
Payable for securities purchased ................ 2,485,564 190,138
Securities sold under repurchase agreements ..... 3,735,463 613,250
Accrued taxes ................................... 183,640 209,861
Long-term debt, less unamortized discount ....... 2,138,248 2,195,670
Separate Account business ....................... 5,843,256 6,540,557
Deferred credits and participating policyholders'
equity ......................................... 799,100 795,767
----------------------------
Total liabilities .......................... 44,293,996 38,689,280
Minority interest ............................... 918,911 1,033,274
Shareholders' equity ............................ 5,489,971 6,127,198
----------------------------
Total liabilities and shareholders' equity . $50,702,878 $45,849,752
============================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 3
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Income
- -------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums:
Property and casualty ............... $1,702,634 $1,536,850 $3,327,203 $3,006,987
Life ................................ 659,072 574,066 1,338,223 1,182,959
Investment income, net of expenses,
principally of insurance subsidiaries 419,972 342,490 783,012 704,118
Realized investment (losses) gains .... (103,299) 152,943 (227,603) 616,703
Manufactured products (including excise
taxes of $108,437, $96,525, $209,982
and $175,254) ........................ 514,772 581,920 1,003,636 1,059,901
Other ................................. 200,246 186,810 374,026 347,541
----------------------------------------------------
Total .............................. 3,393,397 3,375,079 6,598,497 6,918,209
----------------------------------------------------
Expenses:
Insurance benefits and underwriting
expenses ............................. 2,360,551 2,174,135 4,686,854 4,317,832
Amortization of deferred policy
acquisition costs .................... 336,606 289,721 659,390 563,561
Cost of manufactured products sold .... 234,781 216,906 458,697 399,098
Selling, operating, advertising and
administrative expenses .............. 371,356 384,275 735,563 766,697
Interest .............................. 45,442 42,292 89,799 80,674
----------------------------------------------------
Total .............................. 3,348,736 3,107,329 6,630,303 6,127,862
----------------------------------------------------
44,661 267,750 (31,806) 790,347
----------------------------------------------------
Income taxes (benefits) ............... (9,962) 50,724 (67,571) 178,024
Minority interest ..................... (5,703) 13,383 (18,696) 66,990
----------------------------------------------------
Total .............................. (15,665) 64,107 (86,267) 245,014
----------------------------------------------------
Net income .............................. $ 60,326 $ 203,643 $ 54,461 $ 545,333
====================================================
Net income per share .................... $ 1.00 $ 3.16 $ .89 $ 8.42
====================================================
Cash dividends per share ................ $ .25 $ .25 $ .50 $ .50
====================================================
Weighted average number of shares
outstanding ............................ 60,329 64,527 60,915 64,795
====================================================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 4
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
- --------------------------------------------------------------------------------
(Amounts in thousands) Six Months Ended June 30,
1994 1993
------------------------------
<S> <C> <C>
Operating Activities:
Net income ................................... $ 54,461 $ 545,333
Adjustments to reconcile net income to net
cash provided by operating activities-net ... 177,592 (560,838)
Changes in assets and liabilities-net:
Receivables ................................ (432,744) 84,338
Inventories ................................ 29,767 (29,128)
Deferred policy acquisition costs .......... (50,527) (73,492)
Insurance reserves and claims .............. 814,037 521,080
Accounts payable and accrued liabilities ... 147,234 319,144
Accrued taxes .............................. (75,103) 192,750
Other-net .................................. (25,422) (53,171)
-----------------------------
639,295 946,016
-----------------------------
Investing Activities:
Purchases of fixed maturities ................ (25,890,394) (17,634,873)
Proceeds from sales of fixed maturities ...... 18,981,613 18,692,356
Proceeds from maturities of fixed maturities . 3,158,216 1,140,155
Securities sold under repurchase agreements .. 3,122,213 (610,987)
Purchases of equity securities ............... (579,377) (530,215)
Proceeds from sales of equity securities ..... 447,302 551,036
Change in short-term investments ............. 436,239 (2,348,478)
Purchases of property, plant and equipment ... (97,268) (62,896)
Change in other investments .................. (17,742) 29,814
-----------------------------
(439,198) (774,088)
-----------------------------
Financing Activities:
Dividends paid to shareholders ............... (30,498) (32,443)
Purchases of treasury shares ................. (137,261) (104,179)
Issuance of long-term debt ................... 293,322
Principal payments on long-term debt ......... (59,093) (359,931)
Receipts credited to policyholders ........... 21,338 25,833
Withdrawals of policyholder account balances . (16,451) (7,891)
-----------------------------
(221,965) (185,289)
-----------------------------
Net change in cash ............................. (21,868) (13,361)
Cash, beginning of period ...................... 155,703 105,308
-----------------------------
Cash, end of period ............................ $ 133,835 $ 91,947
=============================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 5
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
- --------------------------------------------------------------------------------
1. Reference is made to Notes to Consolidated Financial Statements in the 1993
Annual Report to Shareholders which should be read in conjunction with these
consolidated condensed financial statements.
2. The Company's inventories are comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-----------------------------
(In thousands)
<S> <C> <C>
Leaf tobacco ................................ $ 87,795 $ 145,259
Manufactured stock .......................... 103,614 76,946
Materials, supplies, etc. ................... 20,111 19,082
-----------------------------
Total .................................. $ 211,520 $ 241,287
=============================
</TABLE>
3. CNA assumes and cedes insurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes
reinsurance arrangements to limit its maximum loss, to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of
each product line with CNA's retained amount varying by type of coverage.
Generally, reinsurance coverage for property risks is on an excess of loss,
per risk basis. Liability coverages are generally reinsured on a quota share
basis in excess of CNA's retained risk.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after
careful review of the nature of the contract and a thorough assessment of
the reinsurers' credit quality and claim settlement performance. Further,
for carriers that are not authorized reinsurers in Illinois (Continental
Casualty Company's state of domicile), CNA receives collateral primarily in
the form of bank letters of credit, securing a large portion of the
recoverables. At June 30, 1994, such collateral totaled approximately
$162,000,000. CNA's largest recoverable from a single reinsurer, including
prepaid reinsurance premiums, at June 30, 1994 was approximately
$432,000,000 with Lloyd's of London. The recoverable from Lloyd's of London
is dispersed among thousands of individual members who have unlimited
liability.
Page 6
The effects of reinsurance on written premiums and earned premiums in
millions are as follows:
<TABLE>
<CAPTION>
Written Premium
Six Months Ended June 30,
-------------- 1994 --------------- -------------- 1993 --------------
Direct Ceded Assumed Net Direct Ceded Assumed Net
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 259.9 $ 11.9 $ 57.8 $ 305.8 $ 198.2 $ 10.2 $ 79.6 $ 267.6
Short Duration 4,075.8 314.0 728.0 4,489.8 3,696.1 251.9 631.0 4,075.2
-------------------------------------------------------------------------
Total ....... $4,335.7 $325.9 $785.8 $4,795.6 $3,894.3 $262.1 $710.6 $4,342.8
=========================================================================
<CAPTION>
Three Months Ended June 30,
-------------- 1994 --------------- -------------- 1993 -------------
Direct Ceded Assumed Net Direct Ceded Assumed Net
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 139.2 $ 6.4 $ 31.0 $ 163.8 $ 100.6 $ 5.6 $ 46.8 $ 141.8
Short Duration 1,968.4 162.2 382.8 2,189.0 1,923.3 114.0 318.1 2,127.4
-------------------------------------------------------------------------
Total ....... $2,107.6 $168.6 $413.8 $2,352.8 $2,023.9 $119.6 $364.9 $2,269.2
=========================================================================
<CAPTION>
Earned Premium
Six Months Ended June 30,
-------------- 1994 --------------- -------------- 1993 --------------
Direct Ceded Assumed Net Direct Ceded Assumed Net
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 223.2 $ 11.9 $ 57.8 $ 269.1 $ 167.1 $ 10.2 $ 76.6 $ 233.5
Short Duration 3,996.3 298.7 709.1 4,406.7 3,646.6 250.3 571.7 3,968.0
-------------------------------------------------------------------------
Total ....... $4,219.5 $310.6 $766.9 $4,675.8 $3,813.7 $260.5 $648.3 $4,201.5
=========================================================================
<CAPTION>
Three Months Ended June 30,
---------------1994---------------- ---------------1993---------------
Direct Ceded Assumed Net Direct Ceded Assumed Net
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 117.9 $ 6.4 $ 31.0 $ 142.5 $ 88.0 $ 5.6 $ 44.3 $ 126.7
Short Duration 1,991.7 135.7 368.4 2,224.4 1,748.8 112.4 353.6 1,990.0
-------------------------------------------------------------------------
Total ....... $2,109.6 $142.1 $399.4 $2,366.9 $1,836.8 $118.0 $397.9 $2,116.7
=========================================================================
</TABLE>
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $259.8 and $159.4 million for the six months ended June 30,
1994 and 1993, respectively.
Page 7
4. Net income per share assuming full dilution is not presented for the three
and six months ended June 30, 1993 since such dilution was not material.
5. Shareholders' equity:
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
----------------------------
(In thousands of dollars)
<S> <C> <C>
Preferred stock, $.10 par value,
Authorized--25,000,000 shares
Common stock, $1 par value:
Authorized--200,000,000 shares
Issued--61,524,700 shares ................. $ 61,525 $ 61,525
Additional paid-in capital .................. 209,935 210,289
Earnings retained in the business ........... 5,500,623 5,476,660
Unrealized (depreciation) appreciation ...... (116,839) 406,736
Pension liability adjustment ................ (28,012) (28,012)
--------------------------
Total ................................ 5,627,232 6,127,198
Less common stock (1,539,700 shares) held
in treasury, at cost ....................... 137,261
--------------------------
Total ................................ $5,489,971 $6,127,198
==========================
</TABLE>
The $523.6 million decrease in unrealized appreciation reflects the impact
that the rise in interest rates has had on the Company's fixed income
investments.
6. Pending litigation includes claims seeking damages for cancer and other
health effects claimed to have resulted from use of tobacco products. It is
not possible to predict the outcome of pending litigation; however, on the
basis of the facts presently known to it, management does not believe the
actions pending will have a material adverse effect upon the financial
condition or results of operations of the Company. Should additional facts
arise in the future indicating a probable adverse determination of any such
actions, such ultimate determination might have a material adverse effect
upon the Company's financial condition.
Fibreboard Litigation--As previously reported in Note 16 of the Notes to the
Consolidated Financial Statements in the 1993 Annual Report to Shareholders,
CNA's primary property/casualty subsidiary, Continental Casualty Company
("Continental"), is party to litigation with Fibreboard Corporation
("Fibreboard") involving coverage for certain asbestos-related claims and
defense costs (San Francisco Superior Court, Judicial Council Coordination
Proceeding 1072). As described below, Continental, Fibreboard, another
insurer ("Pacific Indemnity"), a subsidiary of the Chubb Corporation, and a
negotiating committee of asbestos claimant attorneys have reached a Global
Settlement (the "Global Settlement") to resolve all future asbestos-related
bodily injury claims involving Fibreboard. Continental, Fibreboard and
Pacific Indemnity have also reached an agreement, which is subject to court
approval (the "Trilateral Agreement"), on a settlement to resolve the
Page 8
coverage litigation in the event the Global Settlement does not obtain final
court approval. The implementation of the Global Settlement or the
Trilateral Agreement would have the effect of settling Continental's
litigation with Fibreboard.
On July 29, 1994 the United States District Court for the Eastern District
of Texas preliminarily approved the Global Settlement agreement, and ordered
that a fairness hearing be held on December 12, 1994 to determine whether to
finally approve the Global Settlement agreement. CNA and other parties to
the Global Settlement agreement will be initiating a comprehensive
communication program in August 1994 to ensure that all potential claimants
have notice of their rights and possible benefits under the Global
Settlement.
Coverage Litigation--Between 1928 and 1971, Fibreboard manufactured
insulation products containing asbestos. Since the 1970's, thousands of
claims have been filed against Fibreboard by individuals claiming bodily
injury as a result of asbestos exposure.
Continental insured Fibreboard under a comprehensive general liability
policy between May 4, 1957 and March 15, 1959. Fibreboard disputed the
coverage positions taken by its insurers and, in 1979, Fireman's Fund,
another of Fibreboard's insurers, brought suit with respect to coverage for
defense and indemnity costs. In January 1990, the San Francisco Superior
Court (Judicial Council Coordination Proceeding 1072) rendered a decision
against the insurers including Continental and Pacific Indemnity. The court
held that the insurers owed a duty to defend and indemnify Fibreboard for
certain of the asbestos-related bodily injury claims asserted against
Fibreboard (in the case of Continental, for all claims involving exposure to
Fibreboard's asbestos products if there was exposure to asbestos at any time
prior to 1959 including years prior to 1957, regardless of when the claims
were asserted or injuries manifested) and that the policies contained no
aggregate limit of liability in relation to such claims. The judgment was
appealed.
The Court of Appeal entered an opinion on November 15, 1993, as modified on
December 13, 1993, which substantially affirmed the lower court's decisions
on scope of coverage and trigger of coverage issues, as described below. The
Court of Appeal withheld its ruling on the issues discrete to Continental
and Pacific Indemnity pending final court approval of either the Global
Settlement or the Trilateral Agreement described below. On January 27, 1994,
the California Supreme Court granted a Petition for Review, filed by several
insurers, including Continental, of, among other things, the trigger and
scope of coverage issues. The order granting review has no effect on the
Court of Appeal's order severing the issues unique to Continental and
Pacific Indemnity. Continental cannot predict the time frame within which
the issues before the California Supreme Court may be resolved. If neither
the Global Settlement nor the Trilateral Agreement is approved, it is
anticipated that Continental and Pacific Indemnity will resume the appeal
process. Continental's appeal of the coverage judgment raises many legal
issues. Key issues on appeal under the policy are trigger of coverage, scope
of coverage, dual coverage requirements and number of occurrences:
. The trial court adopted a continuous trigger of coverage theory under
which all insurance policies in effect at any time from first exposure to
asbestos until the date of the claim filing or death are triggered. The
Court of Appeal endorsed the continuous trigger theory, but modified the
ruling to provide that policies are triggered by a claimant's first
exposure to the policyholder's products, as opposed to the first exposure
Page 9
to any asbestos product. Therefore, an insurance policy is not triggered
if a claimant's first exposure to the policyholder's product took place
after the policy period. The court, however, placed the burden on the
insurer to prove the claimant was not exposed to its policyholder's
product before or during the policy period. The trigger of coverage issue
is now on appeal to the California Supreme Court.
Continental's position is that its policy is triggered under California
law by manifestation of appreciable harm. The bodily injury cannot be said
to occur within the meaning of the policy until actual physical symptoms
and associated functional impairment manifest themselves. Thus,
Continental's position is that if existing California law were applied,
there would be no coverage under Continental's policy.
. The scope of coverage decision imposed a form of "joint and several"
liability that makes each triggered policy liable in whole for each
covered claim, regardless of the length of the period the policy was in
effect. This decision was affirmed by the Court of Appeal, and is now on
appeal to the California Supreme Court. Continental's position is that
liability for asbestos claims should be shared not jointly, but severally
and on a pro rata basis between the insurers and insured. Under this
theory, Continental would only be liable for that proportion of the bodily
injury that occurred during the 22-month period its policy was in force.
. Continental maintains that both the occurrence and the injury resulting
therefrom must happen during the policy period for the policy to be
triggered. Consequently, if the court holds that the occurrence is
exposure to asbestos, Continental's position is that coverage under the
Continental policy is restricted to those who actually inhaled Fibreboard
asbestos fibers and suffered injury from May 4, 1957 to March 15, 1959.
The Court of Appeal withheld ruling on this issue, as noted above.
. Continental's policy had a $1 million per occurrence limit. Continental
contends the number of occurrences under California law must be determined
by the general cause of the injuries, not the number of claimants, and
that the cause of the injury was the continuous sale and manufacture of
the product. Because the manufacture and sale proceeded from two
locations, Continental maintains that there were only two occurrences and
thus only $2 million of coverage under the policy. However, the per
occurrence limit was interpreted by the trial court to mean that each
claim submitted by each individual constituted a separate occurrence. The
Court of Appeal withheld ruling on this issue, as noted above.
Under various reinsurance agreements, Continental has asserted a right to
reimbursement for a portion of its potential exposure to Fibreboard. The
reinsurers have disputed Continental's right to reimbursement and have taken
the position that any claim by Continental is subject to arbitration under
provisions in the reinsurance agreement. A federal court has ruled that the
dispute must be resolved by arbitration. There can be no assurance that
Continental will be successful in obtaining a recovery under its reinsurance
agreements.
On April 9, 1993, Continental and Fibreboard entered into an agreement
pursuant to which, among other things, the parties agreed to use their best
efforts to negotiate and finalize a global class action settlement with
asbestos-related bodily injury and death claimants.
Through June 30, 1994, Continental, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 127,500 claims, subject to
Page 10
resolution of the coverage issues, for a maximum settlement amount of
approximately $1.48 billion. If neither the Global Settlement nor the
Trilateral Agreement receive final court approval, Continental's obligation
to pay under all settlements will be partially subject to the results of the
pending appeal in the coverage litigation. Minimum amounts payable under all
such agreements, regardless of the outcome of coverage litigation, total
approximately $695.6 million, of which $352.7 million was paid through June
30, 1994. Continental may negotiate other agreements with various classes of
claimants including groups who may have previously reached agreement with
Fibreboard.
Continental will continue to pursue its appeals in respect of the coverage
litigation and all other litigation involving Fibreboard if a Global
Settlement or the Trilateral Agreement cannot be implemented.
Global Settlement--On August 27, 1993, Continental, Pacific Indemnity,
Fibreboard and a negotiating committee of asbestos claimant attorneys
reached an agreement in principle for an omnibus settlement to resolve all
future asbestos-related bodily injury claims involving Fibreboard. The
Global Settlement was executed on December 23, 1993. The agreement calls for
contribution by Continental and Pacific Indemnity of an aggregate of $1.525
billion to a trust fund for a class of all future asbestos claimants,
defined generally as those persons whose claims against Fibreboard were
neither filed nor settled on or before August 27, 1993. An additional $10
million is to be contributed to the fund by Fibreboard. The Global
Settlement is subject to court approval and possible appeals. As noted
below, there is limited precedent with settlements which determine the
rights of future claimants to seek relief.
Subsequent to the announcement of the agreement in principle, Continental,
Fibreboard and Pacific entered into the Trilateral Agreement which sets
forth the parties' obligations in the event the Global Settlement is not
approved by the court. In such case, Continental and Pacific would
contribute to a settlement fund an aggregate of $2 billion, less certain
adjustments. Such fund would be devoted to the payment of Fibreboard's
asbestos liabilities other than liabilities in respect of previously settled
claims. Continental's share of such fund would be $1.44 billion, reduced by
a portion of the additional payment of $635 million, which Pacific Indemnity
has agreed to pay in respect of unsettled present claims and previously
settled claims. Continental has agreed that if either the Global Settlement
or the Trilateral Agreement is approved, it will assume responsibility for
the claims that had been settled and paid on or before August 27, 1993. A
portion of the additional $635 million payment by Pacific Indemnity would be
applied to the payment of such claims as well. As a part of the Global
Settlement and the Trilateral Agreement, Continental would be released by
Fibreboard from any further liability under the comprehensive general
liability policy written for Fibreboard by Continental, including but not
limited to liability for asbestos-related claims against Fibreboard. The
Trilateral Agreement is subject to court approval and possible appeals.
Continental and Fibreboard have entered into a supplemental agreement (the
"Supplemental Agreement") which governs the interim arrangements and
obligations between the parties until such time as the Global Settlement is
either approved or disapproved by the court and also governs certain
obligations between the parties in the event the Global Settlement is
approved, including the payment of present claims which have been filed or
settled and not included in the Global Settlement.
In addition, Continental and Pacific Indemnity have entered into an
Page 11
agreement (the "Continental-Pacific Agreement") which sets forth the
parties' agreement with respect to the means for allocating among themselves
responsibility for payments arising out of the Fibreboard insurance policies
whether or not the Global Settlement or the Trilateral Agreement is
approved. Under the Continental-Pacific Agreement, Continental and Pacific
Indemnity have agreed to pay 64.71% and 35.29%, respectively, of the $1.525
billion plus expenses and interest accrued in escrow to be used to satisfy
the claims of future claimants. If neither the Global Settlement nor the
Trilateral Agreement is approved, Continental and Pacific Indemnity would
share, in the same percentages, most but not all liabilities and costs of
either insurer including, but not limited to, liabilities in respect of
unsettled present claims and presently settled claims. If either the
Trilateral Agreement or the Global Settlement is approved by the court,
Pacific Indemnity's share for unsettled present claims and presently settled
claims will be $635 million.
Reserves--In the fourth quarter of 1992, Continental increased its reserve
with respect to potential exposure to asbestos-related bodily injury cases
by $1.5 billion. In connection with the agreement in principle announced on
August 27, 1993, Continental determined to add $500 million to such claim
reserve. The Fibreboard litigation represents the major portion of
Continental's asbestos-related claim exposure.
There are inherent uncertainties in establishing a reserve for complex
litigation of this type. Courts have tended to impose joint and several
liability, and because the number of manufacturers who remain potentially
liable for asbestos-related injuries has diminished on account of
bankruptcies, as has the potential number of insurers due to operation of
policy limits, the liability of the remaining defendants is difficult to
estimate. Further, a recent trend by courts to consolidate like cases into
mass tort trials limits the discovery ability of insurers, generally does
not allow for individual claim adjudication, restricts the identification of
appropriate allocation methods and thereby results in an increasing
likelihood for fraud and disproportionate and potentially excessive
judgments. Additionally, management believes that recent court decisions
would appear to be based on social of other considerations irrespective of
the facts and legal issues involved.
The Global Settlement and the Trilateral Agreement are subject to court
approval. There is limited precedent with settlements which determine the
rights of future claimants to seek relief. It is extremely difficult to
assess the magnitude of Continental's potential liability in respect of such
future claimants if neither the Global Settlement nor the Trilateral
Agreement is approved and upheld, keeping in mind that Continental's
potential liability is limited to persons exposed to asbestos prior to the
termination of the policy in 1959.
Projections by experts of future trends differ widely, based upon different
assumptions with respect to a host of complex variables. Some recently
published studies, not specifically related to Fibreboard, conclude that the
number of future asbestos-related bodily injury claims against asbestos
manufacturers could be several times the number of claims brought to date.
Such studies include claims asserted against asbestos manufacturers for all
years, including claims filed or projected to be filed in respect of periods
after 1959. As indicated above Continental, Fibreboard and plaintiff
attorneys have reached settlements with respect to approximately 127,500
claims, subject to the resolution of coverage issues. Such amount does not
include presently pending or unsettled claims, claims previously dismissed
or claims settled pursuant to agreements to which Continental is not a
Page 12
party.
Another aspect of the complexity in establishing a reserve arises from the
widely disparate values that have been ascribed to claims by courts and in
the context of settlements. Under the terms of a settlement reached with
plaintiff counsel in August 1993, the expected settlement for approximately
49,500 claims for exposure to asbestos prior to 1959 is currently averaging
approximately $12,900 per claim for claims processed through June 30, 1994.
Based on reports by Fibreboard, since September 1988, Fibreboard resolved
approximately 40,000 claims, approximately 45% of which involved no cost to
Fibreboard other than defense costs, with the remaining claims involving the
payment of approximately $11,000 per claim. On the other hand, a trial court
in Texas in 1990 tendered a verdict in which Fibreboard's liability in
respect of 2,300 claims was found to be approximately $310,000 per claim
including interest and punitive damages. Fibreboard entered into a
settlement of such claims by means of an assignment of its potential
proceeds from its policy with Continental. Continental intervened and
settled these claims for approximately $77,000 on average, with a portion of
the payment contingent on approval of the Global Settlement or the
Trilateral Agreement, and if neither is approved, subject to resolution of
the coverage appeal.
Continental believes that as a result of the Global Settlement and the
Trilateral Agreement it has greatly reduced the uncertainty of its exposure
with respect to the Fibreboard matter. However, if neither the Global
Settlement nor the Trilateral Agreement are approved and upheld, in light of
the factors discussed herein, the range of Continental's potential liability
cannot be meaningfully estimated and there can be no assurance that the
reserves established would be sufficient to pay all amounts which ultimately
could become payable in respect of asbestos-related bodily injury
liabilities.
While it is possible that the ultimate outcome of this matter could have a
material adverse impact on the equity of CNA, management does not believe
that a further loss material to equity is probable. Management will continue
to monitor the potential liabilities with respect to asbestos-related bodily
injury claims and will make adjustments to the claim reserves if warranted.
Environmental Pollution--Potential exposures exist for claims involving
environmental pollution, including toxic waste clean-up. Environmental
pollution clean-up is the subject of both federal and state regulation. By
some estimates, there are thousands of potential waste sites subject to
clean-up. The insurance industry is involved in extensive litigation
regarding coverage issues. Judicial interpretations in many cases have
expanded the scope of coverage and liability beyond the original intent of
the policies.
Under federal regulation, the Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("Superfund") governs the clean-up
and restoration of abandoned toxic waste sites and formalizes the concept of
legal liability for clean-up and restoration by "Potentially Responsible
Parties" ("PRP's"). Superfund establishes a mechanism to pay for clean-up of
waste sites if PRP's fail to do so, and to assign liability to PRP's. The
extent of liability to be allocated to a PRP is dependent on a variety of
factors. Further, the number of waste sites subject to clean-up is unknown.
To date, approximately 1,300 clean-up sites have been identified by the
Environmental Protection Agency ("EPA"). On the other hand, the
Congressional Budget Office is estimating that there will be 4,500 National
Priority List sites and other estimates project as many as 30,000 sites that
Page 13
will require clean-up. Very few sites have been subject to clean-up to date.
The extent of clean-up necessary and the assignment of liability has not
been established.
CNA and the insurance industry are disputing coverage for many such claims.
Key coverage issues include whether Superfund response cost are considered
damages under the policies, trigger of coverage, applicability of pollution
exclusions, the potential for joint and several liability and definition of
an occurrence. Similar coverage issues exist for clean-up of waste sites not
covered under Superfund. To date, courts have been inconsistent in their
rulings on these issues.
The Superfund legislation must be reauthorized in 1994. A number of
proposals to reform Superfund have been made by various parties. It is too
early to determine the future impact of these proposals on CNA and the
insurance industry.
Due to the inherent uncertainties described above, including the
inconsistency of court decisions, the number of waste sites subject to
clean-up, and the standards for clean-up and liability, the exposure to CNA
for environmental pollution claims cannot be meaningfully quantified. CNA
identified reserves only for reported environmental pollution claims. In
1993, CNA allocated approximately $340 million of claims and claims expense
reserves for unreported environmental pollution claims in addition to the
$94 million of reserves recorded for reported claims. At June 30, 1994,
reserves for reported and unreported claims were $98 and $335 million,
respectively. Claims and claims expense reserves represent management's
estimates of ultimate liabilities based on currently available facts and
law. However, in addition to the uncertainties previously discussed,
additional issues related to, among other things, specific policy
provisions, multiple insurers and allocation of liability among insurers,
consequences of conduct by the insured, missing policies and proof of
coverage make quantification of liabilities exceptionally difficult and
subject to later adjustment based on new data.
The number of claims filed for environmental pollution coverage continues to
increase. Approximately 1,125 claims were reported in the first six months
of 1994 and approximately 20,300 claims have been reported to date. Pending
claims totaled approximately 10,600 at both June 30, 1994 and December 31,
1993. Approximately 9,700 claims were closed through June 30, 1994, of which
approximately 8,700 claims were settled without payment, except for claim
expenses of $24 million. Settlements for the remaining 1,000 claims totaled
$113 million, plus claim expenses of $27 million. Reserve development for
environmental claims totaled $54 and $38 million for the six months ended
June 30, 1994 and 1993, respectively. The results of operations in future
years may continue to be adversely affected by environmental pollution
claims and claims expenses. Management will continue to monitor potential
liabilities and make further adjustments as warranted.
7. In the opinion of Management, the accompanying consolidated condensed
financial statements reflect all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
June 30, 1994 and December 31, 1993 and the results of operations for the
three and six months and the changes in its cash flows for the six months
ended June 30, 1994 and 1993, respectively.
Results of operations for the second quarter and first six months of each of
the years is not necessarily indicative of results of operations for that
entire year.
Page 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources:
- -------------------------------
Insurance
- ---------
Property and casualty and life insurance operations are wholly owned
subsidiaries of CNA Financial Corporation ("CNA"). CNA is an 83% owned
subsidiary of the Company
The factors that depressed earnings last year in much of the insurance
industry did not change significantly in the first half of 1994. These include
the prolonged soft market in commercial property/casualty lines and low interest
rates that reduced investment income.
The U.S. property/casualty industry had a net after-tax loss of $1.2 billion
in the first quarter of 1994, primarily because of record-breaking catastrophe
losses estimated at $6.5 billion. In spite of these losses, there have not been
substantial increases in rates, except in certain geographic regions and lines
of property insurance. In addition, complex and costly litigation has been
continuing, fueled by the tendency of the courts to interpret insurance
contracts beyond their stated intent.
On a more positive note, the workers' compensation environment has improved in
some states, largely because of reform legislation that CNA actively supported.
In life insurance, pricing has become more disciplined, particularly in setting
rates for interest-sensitive products. Considerable uncertainty surrounds the
health insurance marketplace because of legislative proposals for national
health care reform. Still, the upward spiral in health care costs has diminished
in the past 18 months, largely through the efforts of insurers and employers.
In this challenging environment, CNA remains among the strongest and most
competitive multiline organizations in the insurance industry. During the first
half of 1994, CNA took action on many fronts to become even more competitive in
its various businesses.
One of these has been to continue to focus on the risk characteristics and
premium rates in commercial lines. CNA will continue to seek business in lines
where it has a sizable market share, substantial experience, and foresees clear
profit potential over the long term. At the same time, however, the emphasis is
on reasonable rates rather than volume growth.
Net operating income for the life segment increased, although negatively
affected by intense competition and high health care costs which have resulted
in a continued market shift away from traditional indemnity forms of health
coverage toward managed care products. The federal government's initiative to
control health care costs and provide universal access to quality health care
may impact both individual and group accident and health, workers' compensation,
automobile liability and medical malpractice businesses of CNA. With national
health care still the subject of intense debate, CNA advocates a responsible
role for the insurance industry in any program that may be adopted. CNA believes
the public is best served by a system that relies on the private sector's
competence and competitiveness rather than on rigid, governmental dictates.
CNA's ability to compete in this market will be increasingly dependent on its
ability to control costs through managed care techniques, innovation, and
quality customer-focused service in order to properly position CNA in the
evolving health care environment.
During the first half of 1994, property and casualty insurance subsidiaries'
statutory surplus decreased 8.2% to approximately $3.3 billion. The decrease
resulted from the aforementioned catastrophe losses and realized investment
losses. The statutory surplus of the life insurance subsidiaries remained at
Page 15
$1.0 billion.
As discussed in Note 6 of the Notes to Consolidated Condensed Financial
Statements, Casualty greatly reduced a major source of financial uncertainty by
reaching a Global Settlement to resolve all future asbestos-related bodily
injury claims involving Fibreboard, a former asbestos manufacturer. The
agreement, executed in December 1993, was reached with Fibreboard, Pacific
Indemnity Company ("Pacific") (a subsidiary of the Chubb Company) and a
negotiating committee of asbestos claimant attorneys. The agreement calls for
Casualty and Pacific to contribute an aggregate of $1.525 billion to an escrow
account for a class of all future asbestos claimants. CNA funded its obligations
under the escrow account with approximately $1.0 billion at the end of 1993. The
escrow account is included in its short-term investment portfolio. CNA believes
the reserves established pursuant to this agreement will be sufficient to cover
all asbestos-related Fibreboard claims. While the Fibreboard agreement must
receive court approval and meet other conditions, settlement of this litigation
greatly reduces the uncertainty about CNA's exposure to future asbestos-related
liabilities.
On July 29, 1994 the United States District Court for the Eastern District of
Texas preliminarily approved the Global Settlement agreement, and ordered that a
fairness hearing be held on December 12, 1994 to determine whether to finally
approve the Global Settlement agreement. CNA and other parties to the Global
Settlement agreement will be initiating a comprehensive communication program in
August 1994 to ensure that all potential claimants have notice of their rights
and possible benefits under the Global Settlement.
CNA and the insurance industry are exposed to an unknown amount of liability
for environmental pollution, primarily related to toxic waste site clean-up. See
Note 6 of the Notes to Consolidated Condensed Financial Statements for a further
discussion of environmental pollution exposures.
The liquidity requirements of CNA are met primarily by funds generated from
operations. The principal operating cash flow sources of CNA's property and
casualty and life insurance subsidiaries are premiums and investment income. The
primary operating cash flow uses are payments for claims, policy benefits and
operating expenses.
For the first six months of 1994, CNA's operating activities generated net
cash flows of $330 million, compared to $711 million for the same period in
1993. The decrease in cash flows is due primarily to Fibreboard claim payments,
catastrophe claim payments and a decline in tax recoveries.
Net cash flows are invested in marketable securities. Investment strategies
employed by CNA's insurance subsidiaries consider the cash flow requirements of
the insurance products sold and the tax attributes of the various types of
marketable investments.
Page 16
Investments
- -----------
A summary of CNA's general account fixed income securities portfolio and
short-term investments are as follows:
<TABLE>
<CAPTION>
Change in
June 30, December 31, Unrealized
1994 1993 (Losses)Gains
--------------------------------------
(In millions)
<S> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and
obligations of government agencies ................... $ 10,388 $ 6,554 $ (446)
Asset-backed securities ............................... 2,413 2,547 (114)
Tax exempt securities ................................. 4,343 5,015 (168)
Other ................................................. 3,479 3,491 (156)
------------------------------------
Total fixed income securities .................... 20,623 17,607 (884)
Stocks .................................................. 588 508 (35)
Short-term and other investments......................... 6,875 7,248 14
------------------------------------
Total ............................................ $ 28,086 $ 25,363 $ (905)
====================================
Short-term investments:
Security repurchase collateral ........................ $ 3,886 $ 623
Escrow ................................................ 993 987
Others ................................................ 1,672 5,334
Other investments ....................................... 324 304
----------------------
Total short-term and other investments ........... $ 6,875 $ 7,248
======================
</TABLE>
Debt security carrying values are highly susceptible to changes in interest
rates and were adversely affected as a general rise in interest rates occurred
in the first half of 1994.
CNA's general account investment portfolio is managed to maximize after tax
investment return, while minimizing credit risks, with investments concentrated
in high quality securities to support its insurance underwriting operations.
CNA has the capacity to hold its fixed income portfolio to maturity. However,
securities may be sold as part of CNA's asset/liability strategies or to take
advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, or other similar factors.
Accordingly, fixed income securities are classified as available for sale.
During the first six months of 1994, CNA's consolidated investments increased
by $2.7 billion, to $28.1 billion. This increase is due to a $3.3 billion
increase in collateral related to securities sold under agreements to
repurchase. The general account portfolio consists primarily of high quality
marketable debt securities, approximately 95% of which are rated as investment
grade. At June 30, 1994, tax exempt securities and short-term investments
excluding collateral for securities sold under repurchase agreements, comprised
approximately 15% and 9%, respectively, of the general account's total
investment portfolio compared to 19% and 28%, respectively, at December 31,
1993. Historically, CNA has maintained short-term assets at a level that
provided for liquidity to meet its short-term obligations, as well as reasonable
contingencies and anticipated claim payout patterns. At June 30, 1994, the major
component of the short-term investment portfolio was approximately $1.7 billion
of U.S. Treasury bills. Collateral for securities sold under repurchase
Page 17
agreements totaled $3.9 billion and were invested in high grade commercial
paper.
As of June 30, 1994, the market value of CNA's general account investments in
bonds and redeemable preferred stocks was $20.6 billion and was less than
amortized cost by approximately $379 million. This compares to $504 million of
net unrealized investment gains at December 31, 1993. The unrealized losses are
the result of a general increase in interest rates. Interest rates on U.S.
government securities due in one year increased 190 basis points while the rates
on five and ten year U.S. government bonds rose 175 and 153 basis points,
respectively, from year-end 1993 levels. The gross unrealized investment gains
and losses for the fixed income securities portfolio at June 30, 1994, were $254
and $633 million, respectively, compared to $564 and $60 million, respectively,
at December 31, 1993.
Net unrealized investment losses on general account bonds at June 30, 1994
include net unrealized investment losses on high yield securities of $70
million, compared to net unrealized investment gains of $15 million at December
31, 1993. High yield securities are bonds rated as below investment grade by
bond rating agencies, plus private placements and other unrated securities
which, in the opinion of management, are below investment grade. Fair values of
high yield securities in the general account were $1.0 billion at June 30, 1994,
compared to $727 million at December 31, 1993.
At June 30, 1994, total Separate Account cash and investments amounted to $5.8
billion with taxable debt securities representing approximately 93% of the
Separate Accounts' portfolio. Approximately 87% of Separate Account investments
are used to fund guaranteed investment contracts ("GIC's") for which CNA's life
insurance affiliate guarantees principal and a specified return to the contract
holders. The fair value of all fixed income securities in the GIC portfolio was
$4.8 billion compared to $5.4 billion at December 31, 1993. At June 30, 1994,
amortized cost exceeded fair values by approximately $80 million. This compares
with fair values exceeding amortized cost by approximately $148 million at
December 31, 1993. The gross unrealized investment gains and losses for the GIC
fixed income securities portfolio at June 30, 1994 were $68 and $148 million,
respectively.
Carrying values of high yield securities in the GIC portfolio were $1.3
billion at June 30, 1994, compared to $1.1 billion at December 31, 1993. Net
unrealized investment losses on high yield securities held in such Separate
Accounts were $52 million at June 30, 1994, compared to net unrealized gains of
$56 million at December 31, 1993.
High yield securities generally involve a greater degree of risk than that of
investment grade securities. Expected returns should, however, compensate for
the added risk. The risk is also considered in the interest rate assumptions in
the underlying insurance products. At June 30, 1994, CNA's concentration in high
yield bonds, including Separate Accounts, was approximately 5.1% of its total
assets. In addition, CNA's investment in mortgage loans and investment real
estate are substantially below the industry average, representing less than one
quarter of one percent of its total assets.
Included in CNA's fixed income securities at June 30, 1994 (general and GIC
portfolios) are $4.0 billion of asset-backed securities, consisting of
approximately 54% in collateralized mortgage obligations ("CMO's"), 15% in
corporate asset-backed obligations, and 31% in U.S. government agency issued
pass-through certificates. The majority of CMO's held are U.S. government agency
issues, which are actively traded in liquid markets and are priced monthly by
broker-dealers. At June 30, 1994, the fair values of asset-backed securities was
less than amortized cost by approximately $124 million compared to unrealized
investment gains of $87 million at December 31, 1993. CNA limits the risks
associated with interest rate fluctuations and prepayment by concentrating its
CMO investments in early planned amortization classes with wide bands and
relatively short principal repayment windows.
Over the last few years, much concern has been raised regarding the quality of
Page 18
insurance company invested assets. At June 30, 1994, 62% of the general
account's debt securities portfolio was invested in U.S. Government securities,
19% in other AAA rated securities and 12% in AA and A rated securities. CNA's
GIC fixed income portfolio is comprised of 22% U.S. Government securities, 17%
other AAA rated securities and 20% in AA and A rated securities. These ratings
are primarily from nationally recognized rating agencies (95% of the general
account portfolio and 94% of the GIC portfolio).
Cigarettes
- ----------
Lorillard, Inc. and subsidiaries ("Lorillard")
For a number of years through 1992 leading cigarette marketers, including
Lorillard, had increased the price of their premium brands. For the period 1982
to 1992 the annual price increase for Lorillard's premium brands averaged
approximately 10%. Lorillard's cash flows from operations during this period
benefited significantly from these price increases since virtually all of
Lorillard's sales are in the premium priced segment, with Newport accounting for
more than two-thirds of Lorillard's total unit sales.
Effective August 9, 1993 in response to new lower pricing policies and
promotions by its competitors Lorillard reduced its premium brand wholesale
cigarette unit prices by approximately 25% to maintain its competitive position.
These price moves have established two price tiers for the industry, eliminating
much of the price confusion in the market place, and substantially narrowing the
price gap between premium and discount cigarettes. These developments appear to
have slowed the rapid growth of discount cigarettes. While promotional spending
can be reduced, the overall impact of the new lower pricing has substantially
reduced Lorillard's revenues, income contribution and cash flow.
Smoking and Health and Related Matters--As previously noted, from time to time
bills have been introduced in Congress which would, among other things, subject
cigarettes to regulation in various ways by the U.S. Department of Health &
Human Services. Early in 1994, and in connection with one such bill, the Energy
and Commerce Subcommittee on Health and the Environment of the U.S. House of
Representatives ("the Subcommittee") began an ongoing oversight investigation
into tobacco products, including possible regulation of nicotine-containing
cigarettes as drugs. The Food and Drug Administration of the U.S. Department of
Health & Human Services is also investigating whether the agency should regulate
nicotine-containing cigarettes as drugs. These investigations have included
requests to Lorillard and other cigarette manufacturers for documents and
information, and with respect to the Subcommittee investigation, have included
hearings in which representatives of Lorillard and other cigarette manufacturers
have testified. It is impossible at this time to predict the ultimate outcome of
these investigations.
By letter of June 6, 1994, Dr. Michael Eriksen, Director of the Office on
Smoking and Health of the Centers for Disease Control of the Department of
Health & Human Services (the "CDC"), requested that Lorillard, as well as each
of the other major U.S. cigarette manufacturers, voluntarily submit to his
office certain information regarding cigarette ingredients, including the
identity and amount of each ingredient added to each brand of cigarettes,
analytical methods of measuring ingredients, the identity of substances added to
nontobacco components of cigarette products, and citations to studies relied
upon to evaluate the safety of ingredients. Discussions are proceeding with the
CDC regarding the content and timing of the response to this request, and with
respect to appropriate confidentiality protections for any ingredient
information submitted. However, it is impossible at this time to predict the
ultimate outcome of this inquiry.
On July 1, 1994, legislation in the state of Florida became effective that
permits the state to sue a manufacturer to recover Medicaid costs incurred by
the state that are claimed to result from the use of the manufacturer's product.
Page 19
This new law significantly increases the likelihood that Lorillard will be sued
by the state of Florida for recovery of Medicaid costs that may be alleged to
have been incurred as a result of the use of its products. In any such suit, the
statute permits causation and damages to be proven by statistical analysis,
abrogates all affirmative defenses, adopts a "market share" liability theory,
applies joint and several liability and eliminates the statute of repose.
Although no actions has been brought to date, the Governor of Florida has
threatened to use this new law primarily to recover damages from cigarette
manufacturers. An action for declaratory judgment has been commenced in Florida
state court by companies in several potentially affected industries challenging
the Florida law. Lorillard also understands that elements of the Florida
business community have initiated an effort to repeal or modify this law in a
future legislative session. It is impossible at this time to predict the
ultimate outcome of this lawsuit or such efforts. Lorillard understands that
several other states, and the Congress, have considered or are considering
legislation similar to that passed in Florida.
In one state, Massachusetts, the Governor on July 10, 1994 signed legislation
authorizing that state's attorney general to bring an action against tobacco
manufacturers to recover medical assistance payments for which such companies
may be liable under existing law. The state of Mississippi, also relying upon
existing law, filed a suit on May 23, 1994 against the major U.S. cigarette
manufacturers, including Lorillard, to recover Medicaid costs claimed to have
resulted from use of tobacco products, See Part II, Item 1, Legal Proceedings,
below.
Corporate
- ---------
During the six months ended June 30, 1994 the Company purchased 1,539,700
shares of its outstanding Common Stock at an aggregate cost of approximately
$137.3 million. The funds required for such purchases were provided from working
capital. Depending on market conditions, the Company, from time to time,
purchases shares in the open market or otherwise.
Page 20
Results of Operations:
- ----------------------
Revenues for the quarter and six months ended June 30, 1994, increased by
$18.3 million, or .5%, and declined by $319.7 million, or 4.6%, respectively, as
compared to the prior year. Net income decreased by $143.3 million, or 70.4%,
and $490.9 million, or 90.0%, respectively, for the quarter and six months ended
June 30, 1994, as compared to the prior year. The following table sets forth the
major sources of the Company's consolidated revenues and net income.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
1994 1993 1994 1993
----------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues (a):
Property and casualty insurance ..... $1,994,373 $1,930,851 $3,878,107 $4,119,853
Life insurance ...................... 737,398 694,984 1,456,084 1,411,479
Cigarettes .......................... 480,974 554,120 938,601 998,238
Hotels .............................. 52,103 50,181 91,179 92,609
Watches and other timing devices .... 35,371 32,129 68,020 67,187
Drilling ............................ 74,951 68,013 148,813 130,783
Investment income-net (non-insurance
companies) ......................... 4,311 24,770 493 71,343
Equity in income of CBS Inc. ........ 19,262 21,568 30,706 31,200
Other and eliminations--net ......... (5,346) (1,537) (13,506) (4,483)
----------------------------------------------------
$3,393,397 $3,375,079 $6,598,497 $6,918,209
====================================================
Net income (a):
Property and casualty insurance ..... $ (27,442) $ 37,557 $ (78,535) $ 273,457
Life insurance ...................... 7,967 29,435 2,975 53,559
Cigarettes .......................... 90,615 128,209 168,986 205,249
Hotels .............................. 2,977 1,845 (182) (407)
Watches and other timing devices .... 83 (27) (39) 159
Drilling ............................ (7,935) (7,091) (14,397) (13,905)
Investment income-net (non-insurance
companies) ......................... 2,850 15,928 (81) 45,333
Equity in income of CBS Inc. ........ 17,240 20,100 27,482 29,078
Interest expense and other--net ..... (26,029) (22,313) (51,748) (47,190)
----------------------------------------------------
$ 60,326 $ 203,643 $ 54,461 $ 545,333
====================================================
Page 21
(a) Includes realized investment (losses) gains as follows:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
1994 1993 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance ..... $ (56,393) $ 97,357 $ (120,764) $ 498,498
Life insurance ...................... (17,262) 43,303 (58,382) 72,738
Investment income-net ............... (29,644) 12,283 (48,457) 45,467
----------------------------------------------------
$ (103,299) $ 152,943 $ (227,603) $ 616,703
====================================================
Net income:
Property and casualty insurance ..... $ (33,831) $ 53,542 $ (68,397) $ 273,604
Life insurance ...................... (9,542) 19,456 (25,646) 34,694
Investment income-net ............... (19,028) 8,106 (31,280) 28,934
----------------------------------------------------
$ (62,401) $ 81,104 $ (125,323) $ 337,232
====================================================
</TABLE>
Insurance
- ---------
Property and casualty revenues, excluding realized investment (losses) gains,
increased by $217.3 and $377.5 million, or 11.9% and 10.4%, for the three and
six months ended June 30, 1994, as compared to the same periods a year ago.
Property and casualty premium revenues increased by $165.8 and $320.2 million,
or 10.8% and 10.6%, respectively, for the three and six months ended June 30,
1994, from the prior year's comparable period. The increase was principally
attributable to increases in commercial affiliation marketing, professional
liability and treaty reinsurance. Investment income increased $41.5 and $38.1
million, or 15.8% and 7.0%, for the three and six months compared with the same
periods a year ago. Investment income increased primarily due to the change in
portfolio mix from shorter term taxable securities to longer maturities,
primarily in government bonds.
Life insurance revenues, excluding realized investment (losses) gains,
increased by $103.0 and $175.7 million, or 15.8% and 13.1%, as compared to the
same period a year ago. Life premium revenues increased by $85.0 and $155.3
million, or 14.8% and 13.1%, respectively, for the three and six months ended
June 30, 1994 with the primary growth in group and pension operations. Life
investment income increased by $12.0 and $15.1 million, or 17.9% and 11.3%,
respectively, for the three and six months ended June 30, 1994, compared to the
same periods a year ago primarily due to the first quarter shift out of short-
term investments described earlier.
Property and casualty underwriting losses for the three and six months ended
June 30, 1994 were $335.0 and $689.8 million, compared to $357.1 and $691.3
million for the same periods in 1993. The statutory combined ratio for the three
and six months ended June 30, 1994 was 115.2 and 117.5, respectively, compared
with 121.0 for the same periods in 1993.
Catastrophe losses for the quarter and six months ended June 30, 1994 were $66
and $166 million, compared with $19 and $45 million for the same periods in
1993. The catastrophe claims stem from the California earthquake and severe
winter storms throughout the northeastern part of the United States.
Page 22
The components of CNA's realized investment (losses) gains are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
1994 1993 1994 1993
-----------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Bonds:
U.S. Government....................... $ (6.7) $ 32.2 $ (145.2) $ 63.3
Tax exempt............................ 4.5 21.0 23.1 305.5
Asset-backed.......................... (56.7) 27.7 (44.4) 79.3
Taxable............................... (35.8) 43.0 (39.2) 74.8
----------------------------------------------------
Total bonds...................... (94.7) 123.9 (205.7) 522.9
Stocks.................................. 20.2 14.9 32.7 50.6
Other................................... .9 1.8 (6.1) (2.3)
----------------------------------------------------
Total realized investment
(losses) gains.................. $ (73.6) $ 140.6 $ (179.1) $ 571.2
====================================================
</TABLE>
In early 1994, CNA began to reposition its portfolios to longer maturities.
The repositioning of the portfolios was undertaken in order to improve future
overall investment returns. As a result, both the Casualty and Life Groups
shifted out of their short-term portfolios into five and ten year government
securities resulting in a decrease in short-term investments. Short-term
investments (excluding investments relating to loaned securities) for the
Casualty Group decreased from $5.1 billion at December 31, 1993 to $2.5 billion
at June 30, 1994, while the Life Group's decreased from $1.2 billion at December
31, 1993 to $195.7 million at June 30, 1994. These actions were taken in a
period of rising interest rates which resulted in realized losses in the
investment portfolio.
For the six months ended June 30, 1994, Casualty sold approximately $19
billion of fixed income and equity securities since December 31, 1993, realizing
pre-tax losses of $131.2 million. Of the $19 billion of securities sold,
approximately $11 and $5 billion, respectively, were from the U.S. government
and asset-backed bond portfolios.
Cigarettes
- ----------
Revenues for the quarter and six months ended June 30, 1994 decreased by $73.1
and $59.6 million, or 13.2% and 6.0%, and net income decreased by $37.6 and
$36.3 million, or 29.3% and 17.7%, respectively, as compared to the
corresponding periods of the prior year.
Cigarette unit sales volume increased 11.3% and 19.5% for the quarter and six
months ended June 30, 1994, as compared to the prior year, due primarily to the
new lower pricing discussed above and, for the six month period, extremely light
shipments in early 1993 resulting from increased unit purchases in December 1992
in anticipation of a federal excise tax increase. Despite the increased sales
volume, revenues declined as a result of the industry price reduction of premium
price brands, effective August 9, 1993.
For the second quarter, total domestic industry sales units increased 11.1%
with the overwhelming majority of the increase being in the premium price
segment. The discount brand category's share of industry sales decreased from
40.7% in the 1993 second quarter to averaging approximately 32.1% during the
Page 23
first six months of 1994.
The decrease in revenues is composed of a decline of approximately $122.0 and
$212.6 million, or 22.0% and 21.3%, reflecting a reduction in unit prices,
partially offset by an increase of approximately $48.9 and $153.0 million, or
8.8% and 15.3%, due to higher unit sales volume for the quarter and six months
ended June 30, 1994, as compared to the corresponding periods of the prior year.
Net income decreased due primarily to the lower revenues as discussed above,
partially offset by an approximately 30% reduction in advertising and sales
promotion expenses.
It is expected that lower consumer cigarette consumption will continue to
influence overall industry unit volume and the discount category will be a
significant influence in overall sales.
The current administration's efforts to reduce the federal deficit and to
enact health care reform has led to several proposals to increase the excise
tax. The effects of any additional federal tax increases, as well as increases
by state and local taxing authorities, or manufacturers' price increases cannot
be determined, but it is likely they would add to the overall industry decline
and the growth in the discount category.
Hotels
- ------
Revenues for the quarter and six months ended June 30, 1994, increased by $1.9
million, or 3.8%, and decreased by $1.4 million, or 1.5%, respectively, as
compared to the prior year. Results from operations increased by $1.1 and $.2
million or 61.4% and 55.3%, for the quarter and six months ended June 30, 1994,
as compared to the prior year.
Revenues increased for the quarter ended June 30, 1994, as compared to the
prior year, due primarily to higher occupancy rates, partially offset by lower
average room rates at the Loews Monte Carlo Hotel. Revenues decreased during the
six months ended June 30, 1994, as compared to the prior year, due primarily to
lower average room rates at the Loews Monte Carlo Hotel, partially offset by
higher occupancy rates.
Results from operations increased for the quarter and six months ended June
30, 1994, as compared to the prior year, due to the increased occupancy rates,
partially offset by the lower revenues for the six month period as noted above.
Watches and Other Timing Devices
- --------------------------------
Revenues for the quarter and six months ended June 30, 1994 increased by $3.2
and $.8 million, or 10.1% and 1.2%, and results from operations increased $.1
million and decreased by $.2 million, respectively, as compared to the prior
year.
Revenues increased for the quarter and six months ended June 30, 1994, as
compared to the prior year, due primarily to increased defense sales related to
shipments to the U.S. government of the M762 fuze, partially offset by lower
royalty income and a $1.6 million favorable settlement of contract claims with
the U.S. government in 1993. Bulova continues to expect, however, that
industrial and defense revenues will not improve significantly over the prior
year due primarily to the decline in U.S. government defense spending. In
addition, the quarter and six months ended June 30, 1993 includes a pre-tax gain
of $2.9 million from the sale of Bulova's Valley Stream property.
Results from operations improved during the second quarter ended June 30,
1994, as compared to the prior year, due primarily to the increased revenues
described above, as well as an adjustment to gross margin which increased pre-
tax income by approximately $1.6 million, partially offset by a $.3 million
accrual for an enviornmental liability. Results from operations for the six
months ended June 30, 1994 declined, as compared to the prior year, due
Page 24
primarily to gain on asset disposition recognized in 1993, partially offset by
the increased revenues and lower interest expense.
Drilling
- --------
Revenues for the quarter and six months ended June 30, 1994 increased by $6.9
and $18.0 million, or 10.2% and 13.8%, and net loss increased by $.8 and $.5
million, or 11.9% and 3.5%, respectively, as compared to the prior year.
Revenues for the quarter and six months ended June 30, 1994 increased by $16.6
and $26.2 million, or 24.4% and 20.0%, due to higher dayrates, partially offset
by a decline of $16.7 and $15.2 million, or 24.5% and 11.6%, due to lower
utilization rates. Revenues from Diamond Offshore's turnkey division increased
$7.0 and $7.0 million, or 10.3% and 5.4%, respectively, for the quarter and six
months ended June 30, 1994, as compared to the prior year.
The decline in utilization is associated with both international and domestic
activity. Utilization rates for Diamond Offshore's international rigs were 54.8%
for the second quarter of 1994, as compared to 71.6% for the prior year quarter.
Gulf of Mexico utilization remains stronger but has decreased significantly from
the prior year primarily as a result of the continuing volatility of crude oil
prices. Utilization rates for Diamond Offshore's domestic rigs was 70.7% for the
second quarter of 1994 as compared to 91.4% for the prior year quarter.
In response to a change in customer demand, in May 1993 Diamond Offshore began
offering a portfolio of drilling and production services to complement its
offshore daywork contract drilling business. These services include overall
project management and drilling and/or production operations on a turnkey or
modified-turnkey basis. During the quarter ended June 30, 1994, Diamond Offshore
completed or was in the completion phase of five such turnkey wells, which
generated $8.1 million in revenues and $.7 million of net income for the
quarter.
Other
- -----
Revenues for the quarter and six months ended June 30, 1994, decreased by
$26.6 and $80.4 million, or 59.3% and 82.0%, and net income decreased by $19.7
and $51.6 million, respectively, as compared to the prior year. Other operations
consist primarily of investment income of non-insurance companies and the
Company's investment in CBS Inc.
Revenues and net income decreased due primarily to pre-tax realized investment
losses of $29.6 and $48.5 million ($19.0 and $31.3 million after tax) for the
quarter and six months ended June 30, 1994, respectively, as compared to pre-tax
realized investment gains of $12.3 and $45.5 million ($8.1 and $28.9 million
after tax) in the prior year.
Exclusive of securities transactions, other revenues increased $15.4 and $13.6
million, or 47.2% and 25.8%, due primarily to increased investment income of
$21.5 and $23.1 million for the quarter and six months ended June 30, 1994,
respectively, as compared to the prior year. These increased revenues were
partially offset by losses reported in the Company's shipping operations.
Exclusive of securities transactions, net income from other operations
increased by $7.5 and $8.6 million for the quarter and six months ended June 30,
1994, respectively, as compared to the prior year, due primarily to the
increased revenues discussed above as well as lower interest expense resulting
from premium paid on redemption of debt in the second quarter of 1993.
Page 25
Accounting Standards
- --------------------
In May 1993, the Financial Accounting Standards Board issued Statement No.
114, "Accounting by Creditors for Impairment of a Loan." This Statement applies
to financial statements for fiscal years beginning after December 15, 1994 and
will not have a significant impact on the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- -------------------------
Reference is made to Note 6 to the Notes to Consolidated Condensed Financial
Statements in Part I, Item 1, Financial Statements.
In addition to the matters disclosed in Item 3, Legal Proceedings, of the
Company's 1993 annual report on Form 10-K, and in Part II, Item 1, Legal
Proceedings on Form 10-Q for the quarter ended March 31, 1994 (to each of which
reference is hereby made), the case of Moore v. The American Tobacco Company, et
al. (U.S. District Court, Southern District, Mississippi, filed May 23, 1994),
has been filed against Lorillard and other cigarette manufacturers. In this
action, the Attorney General of the State of Mississippi seeks an unspecified
amount for restitution of the funds that state has paid under its Medicaid
program to provide health care to its citizens for diseases or illnesses
allegedly caused by the use of tobacco products, and an unspecified amount for
restitution of such funds that Mississippi will pay in the future. In addition,
plaintiff seeks an unspecified amount in punitive damages.
The petition for intervention (Riddle v. The American Tobacco Company, et al.,
filed April 11, 1994) in the Castano action, described in Part II, Item 1, Legal
Proceedings of Form 10-Q for the quarter ended March 31, 1994, was denied by the
United States District Court for the Eastern District of Louisiana on June 1,
1994.
As previously noted a number of lawsuits have been filed against Lorillard and
other manufacturers of tobacco products seeking damages for cancer and other
health effects claimed to have resulted from the use of cigarettes or from
exposure to tobacco smoke. Presently, 60 such cases are pending in the United
States federal and state courts against manufacturers of tobacco products
generally; Lorillard is a named defendant in 21 of these cases, including six
cases in which the Company is also named as a defendant. Twenty-one of these
cases, including eight against Lorillard (of which three also include the
Company), have been commenced since January 1, 1994.
In addition, as previously noted several additional 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, almost forty years ago, into the filter material used in
one of the brands of cigarettes manufactured by Lorillard. Presently 10 such
cases are pending in federal and state courts against Lorillard. Two such cases
have been filed since January 1, 1994.
Lorillard intends to defend vigorously all such actions which may be brought
against it.
Page 26
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Set forth below is information relating to the 1994 Annual Meeting of
Shareholders of the Registrant:
The annual meeting was called to order at 11:00 A.M., May 10, 1994.
Represented at the meeting, in person or by proxy, were 52,816,509 shares,
approximately 85.9% of the issued and outstanding shares entitled to vote.
The following business was transacted:
Election of Directors
- --------------------------------------------------------------------------------
Over 99% of the votes cast for directors were voted for the election of the
following directors. The number of votes cast for and withheld with respect to
each director was as follows:
Votes For Votes Withheld
--------- --------------
Charles B. Benenson 52,272,621 543,888
John Brademas 51,151,221 1,665,288
Bernard Myerson 51,163,775 1,652,734
Edward J. Noha 52,234,992 581,517
Lester Pollack 51,146,191 1,670,318
Gloria R. Scott 52,242,649 573,860
Andrew H. Tisch 52,242,990 573,519
James S. Tisch 52,250,041 566,468
Jonathan M. Tisch 52,248,900 567,609
Laurence A. Tisch 52,266,736 549,773
Preston R. Tisch 52,267,218 549,291
Ratification of the appointment of Independent Certified Public Accountants
- --------------------------------------------------------------------------------
Approved--52,603,878 shares, approximately 99.6% of the shares voting, voted
to ratify the appointment of Deloitte & Touche as independent certified public
accountants for the Company. 129,966 shares, approximately 0.2% of the shares
voting, against, and 82,665 shares, approximately 0.2% of the shares voting,
abstained.
Shareholder proposal relating to cumulative voting
- --------------------------------------------------------------------------------
Rejected--35,377,564 shares, approximately 73.4% of the shares voting, voted
against this shareholder proposal. 12,546,577 shares, approximately 26.1% of the
shares voting, were cast for, and 259,593 shares, approximately 0.5% of the
shares voting, abstained. In addition, there were 4,632,775 shares as to which
brokers indicated that they did not have authority to vote ("broker non-votes").
Shareholder proposal relating to annual meeting location
- --------------------------------------------------------------------------------
Rejected--45,620,664 shares, approximately 94.7% of the shares voting, voted
against this shareholder proposal. 1,778,668 shares, approximately 3.7% of the
shares voting, were cast for, and 784,203 shares, approximately 1.6% of the
shares voting, abstained. In addition, there were 4,632,974 broker non-votes.
Page 27
Shareholder proposal relating to cigarette warning statement
- --------------------------------------------------------------------------------
Rejected--44,021,079 shares, approximately 91.3% of the shares voting, voted
against this shareholder proposal. 2,777,848 shares, approximately 5.8% of the
shares voting, were cast for, and 1,385,940 shares, approximately 2.9% of the
shares voting, abstained. In addition, there were 4,631,642 broker non-votes.
Shareholder proposal relating to tobacco and insurance
- --------------------------------------------------------------------------------
Rejected--43,796,968 shares, approximately 90.9% of the shares voting, voted
against this shareholder proposal. 2,821,753 shares, approximately 5.9% of the
shares voting, were cast for, and 1,564,714 shares, approximately 3.2% of the
shares voting, abstained. In addition, there were 4,633,074 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits--
(11) Statement Re Computation of Per Share Earnings Assuming Full Dilution
for the three and six months ended June 30, 1993.
(b) Current reports on Form 8-K--There were no reports on Form 8-K filed for
the three months ended June 30, 1994.
Page 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOEWS CORPORATION
-----------------
(Registrant)
Dated: August 15, 1994 By Roy E. Posner
-------------------------
ROY E. POSNER
Senior Vice President and
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
Page 29
EXHIBIT 11
Loews Corporation and Subsidiaries
Statement Re Computation of Per Share Earnings Assuming Full Dilution
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except per share data)
------- June 30, 1993 -------
Three Months Six Months
Ended Ended
-----------------------------
<S> <C> <C>
Computation of Fully Diluted Net Income:
Net income ................................... $ 203,643 $ 545,333
Reduction of interest and debt expenses
related to notes assumed converted, net of
applicable federal income taxes ............. 3,961 7,742
-----------------------------
Fully diluted net income ..................... $ 207,604 $ 553,075
=============================
Computation of Fully Diluted Shares:
Weighted average shares outstanding .......... 64,527 64,795
Add shares assumed to be issued upon
conversion of notes ......................... 2,151 2,151
-----------------------------
Fully diluted shares ......................... 66,678 66,946
=============================
Net income per share assuming full dilution .... $ 3.11 $ 8.26
=============================
Page 30
</TABLE>
