================================================================================
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 March 31, 1995
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 May 1, 1995
- -------------------------- --------------------------
Common stock, $1 par value 58,916,400 shares
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Page 1
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
March 31, 1995 and December 31, 1994 .......................... 3
Consolidated Condensed Statements of Operations--
Three months ended March 31, 1995 and 1994 .................... 4
Consolidated Condensed Statements of Cash Flows--
Three months ended March 31, 1995 and 1994 .................... 5
Notes to Consolidated Condensed Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 19
Part II. Other Information
Item 1. Legal Proceedings ......................................... 29
Item 6. Exhibits and Reports on Form 8-K .......................... 29
Exhibit 27--Financial Data Schedule for the three months ended
March 31, 1995 ................................................ 31
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) March 31, December 31,
1995 1994
-----------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities, amortized cost of $19,723,016
and $21,644,672 .............................. $19,499,381 $20,852,079
Equity securities, cost of $1,278,805 and
$1,270,324 ................................... 1,601,739 1,438,140
Mortgage loans and notes receivable ........... 65,905 68,004
Policy loans .................................. 176,426 176,231
Other investments ............................. 114,188 104,210
Short-term investments ........................ 8,852,752 8,437,617
-----------------------------
Total investments .......................... 30,310,391 31,076,281
Cash ............................................ 133,610 160,557
Receivables-net ................................. 7,575,046 7,691,084
Receivable for securities sold .................. 1,186,835 376,932
Inventories ..................................... 226,104 244,394
Investments in associated companies ............. 347,699 301,550
Property, plant and equipment-net ............... 1,083,714 1,089,868
Deferred income taxes ........................... 1,361,674 1,679,172
Other assets .................................... 695,500 611,315
Deferred policy acquisition costs of insurance
subsidiaries ................................... 1,053,078 1,024,561
Separate Account business ....................... 6,004,405 6,080,262
-----------------------------
Total assets ............................... $49,978,056 $50,335,976
=============================
Liabilities and Shareholders' Equity:
Insurance reserves and claims ................... $29,120,662 $28,933,767
Accounts payable and accrued liabilities ........ 1,369,004 1,153,033
Payable for securities purchased ................ 757,720 489,797
Securities sold under repurchase agreements ..... 2,824,967 4,571,517
Long-term debt, less unamortized discount ....... 2,142,027 2,144,394
Deferred credits and participating policyholders'
equity ......................................... 771,053 713,131
Separate Account business ....................... 6,004,405 6,080,262
-----------------------------
Total liabilities .......................... 42,989,838 44,085,901
Minority interest ............................... 945,209 844,761
Shareholders' equity ............................ 6,043,009 5,405,314
-----------------------------
Total liabilities and shareholders' equity . $49,978,056 $50,335,976
=============================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 3
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
- --------------------------------------------------------------------------------
(Amounts in thousands, except per share data) Three Months Ended
March 31,
1995 1994
----------------------------
<S> <C> <C>
Revenues:
Insurance premiums:
Property and casualty ....................... $1,784,321 $1,624,569
Life ........................................ 729,894 679,151
Investment income, net of expenses, principally
of insurance subsidiaries .................... 460,938 363,040
Realized investment gains (losses) ............ 64,207 (124,304)
Manufactured products (including excise taxes
of $101,760 and $101,545) .................... 474,332 488,864
Other ......................................... 189,503 173,780
---------------------------
Total ...................................... 3,703,195 3,205,100
---------------------------
Expenses:
Insurance benefits and underwriting expenses .. 2,355,654 2,326,303
Amortization of deferred policy acquisition
costs ........................................ 360,819 322,784
Cost of manufactured products sold ............ 215,670 223,916
Selling, operating, advertising and
administrative expenses ...................... 383,936 364,207
Interest ...................................... 43,079 44,357
---------------------------
Total ...................................... 3,359,158 3,281,567
---------------------------
344,037 (76,467)
---------------------------
Income taxes (benefits) ....................... 103,736 (57,609)
Minority interest ............................. 25,831 (12,993)
---------------------------
Total ...................................... 129,567 (70,602)
---------------------------
Net income (loss) ............................... $ 214,470 $ (5,865)
===========================
Net income (loss) per share ..................... $ 3.64 $ (.10)
===========================
Cash dividends per share ........................ $ .25 $ .25
===========================
Weighted average number of shares outstanding ... 58,921 61,508
===========================
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) Three Months Ended
March 31,
1995 1994
----------------------------
<S> <C> <C>
Operating Activities:
Net income .................................... $ 214,470 $ (5,865)
Adjustments to reconcile net income to net
cash provided by operating activities-net .... (903) 73,591
Changes in assets and liabilities-net:
Receivables ................................. 118,630 (267,168)
Inventories ................................. 18,290 5,530
Deferred policy acquisition costs ........... (28,517) (24,055)
Insurance reserves and claims ............... 186,226 510,860
Accounts payable and accrued liabilities .... 224,087 57,358
Other-net ................................... 44,559 5,038
---------------------------
776,842 355,289
---------------------------
Investing Activities:
Purchases of fixed maturities ................. (5,285,885) (18,090,919)
Proceeds from sales of fixed maturities ....... 5,808,558 14,206,257
Proceeds from maturities of fixed maturities .. 1,079,675 455,892
Change in securities sold under repurchase
agreements ................................... (1,746,550) 3,533,456
Purchases of equity securities ................ (281,484) (190,205)
Proceeds from sales of equity securities ...... 315,140 236,008
Change in short-term investments .............. (590,750) (444,596)
Purchases of property, plant and equipment .... (37,042) (42,933)
Change in other investments ................... (42,363) (37,688)
---------------------------
(780,701) (374,728)
---------------------------
Financing Activities:
Dividends paid to shareholders ................ (14,729) (15,380)
Purchases of treasury shares .................. (4,331) (463)
Principal payments on long-term debt .......... (4,697) (27,437)
Receipts credited to policyholders ............ 9,938 10,804
Withdrawals of policyholder account balances .. (9,269) (7,712)
---------------------------
(23,088) (40,188)
---------------------------
Net change in cash .............................. (26,947) (59,627)
Cash, beginning of period ....................... 160,557 155,703
---------------------------
Cash, end of period ............................. $ 133,610 $ 96,076
===========================
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 1994
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>
March 31, December 31,
1995 1994
-------------------------
(In thousands)
<S> <C> <C>
Leaf tobacco ................................. $115,438 $140,385
Manufactured stock ........................... 90,805 82,902
Materials, supplies, etc. .................... 19,861 21,107
-------------------------
Total ................................... $226,104 $244,394
=========================
</TABLE>
3. Shareholders' equity:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
----------------------------
(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--58,964,900 shares .................. $ 58,965 $ 58,965
Additional paid-in capital ................... 219,137 219,137
Earnings retained in the business ............ 5,669,615 5,469,874
Unrealized appreciation (depreciation) ....... 119,585 (322,700)
Pension liability adjustment ................. (19,962) (19,962)
----------------------------
Total ................................. 6,047,340 5,405,314
Less common stock (48,500 shares) held in
treasury, at cost ........................... 4,331
----------------------------
Total ................................. $6,043,009 $5,405,314
============================
</TABLE>
4. 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.
Page 6
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, CNA receives
collateral primarily in the form of bank letters of credit, securing a large
portion of the recoverables. At March 31, 1995, such collateral totaled
approximately $165,000,000. CNA's largest recoverable from a single
reinsurer, including prepaid reinsurance premiums, at March 31, 1995 was
approximately $354,000,000 with Lloyd's of London.
The effects of reinsurance on written premiums and earned premiums, in
millions, are as follows:
<TABLE>
<CAPTION>
Written Premiums--
Three Months Ended March 31,
-------------- 1995 --------------- -------------- 1994 --------------
Direct Assumed Ceded Net Direct Assumed Ceded Net
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 269.1 $ 31.8 $ 5.1 $ 295.8 $ 120.6 $ 26.9 $ 5.6 $ 141.9
Short Duration 2,144.6 320.1 144.7 2,320.0 2,107.5 345.1 151.8 2,300.8
-------------------------------------------------------------------------
Total ....... $2,413.7 $351.9 $149.8 $2,615.8 $2,228.1 $372.0 $157.4 $2,442.7
=========================================================================
<CAPTION>
Earned Premiums--
Three Months Ended March 31,
-------------- 1995 --------------- -------------- 1994 --------------
Direct Assumed Ceded Net Direct Assumed Ceded Net
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 155.1 $ 31.8 $ 5.1 $ 181.8 $ 105.2 $ 26.9 $ 5.6 $ 126.5
Short Duration 2,162.0 331.4 159.2 2,334.2 2,004.7 340.7 163.0 2,182.4
-------------------------------------------------------------------------
Total ....... $2,317.1 $363.2 $164.3 $2,516.0 $2,109.9 $367.6 $168.6 $2,308.9
=========================================================================
</TABLE>
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $73.5 and $132.8 million for the three months ended March 31,
1995 and 1994, respectively.
5. Legal Proceedings and Contingent Liabilities-
Fibreboard Litigation
---------------------
CNA's primary property and 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
Page 7
Pacific Indemnity have also reached an agreement (the "Trilateral
Agreement"), which is subject to court approval, on a settlement to resolve
the 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. A final
fairness hearing, to determine whether to finally approve the Global
Settlement agreement, commenced on December 12, 1994. During the hearing
various parties presented evidence in opposition to the Global Settlement.
Final arguments concerning the Global Settlement agreement occurred on
February 27, 1995; and on March 30, 1995 the Court issued a Memorandum to
the Parties suggesting that the provisions of the Global Settlement
concerning the Select Counsel for the Beneficiaries should be changed. The
Settling parties have agreed to changes in the Agreement, including
provisions designed to address the concerns of the Court, which will be
submitted to the Court for approval. Assuming additional notice is given to
the class, then the Court's final rulings are expected this summer.
Also pending in the United States District Court for the Eastern District of
Texas is litigation over the Trilateral Agreement. Trial on the issues
raised by this agreement occurred on February 13, 1995, with evidence
submitted to the Court in opposition to final court approval of the
Trilateral Agreement. A final hearing occurred on May 9, 1995 and the Court
ordered briefs to be submitted on May 23, 1995; the Court's rulings on the
Trilateral Agreement are also expected in the summer of 1995.
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, although the policies had a
$500,000 per person limit and a $1,000,000 per occurrence limit, they
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
Page 8
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
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 during the policy period. 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.
Even if Continental were successful on appeal on the dual coverage
Page 9
requirements or the number of occurrences, if the final decision in the
coverage case affirms the trial court's decision on the existence of the
Pacific Indemnity policy, then Continental would still have obligations
under the Continental and Pacific Indemnity Agreement described below.
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 March 31, 1995, Continental, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 137,300 claims, subject to
resolution of the coverage issues, for an estimated settlement amount of
approximately $1.6 billion plus any applicable interest. If neither the
Global Settlement nor the Trilateral Agreement receives final court
approval, Continental's obligation to pay under these 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, may total as much as $773.6 million, of
which $523.5 million was paid through March 31, 1995. 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 the coverage litigation
and all other litigation involving Fibreboard if the 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 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 Indemnity 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 Indemnity
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 for previously
settled claims. Continental's share of such fund would be $1.4 billion
reduced by a portion of an additional payment of $635 million which Pacific
Indemnity has agreed to pay for unsettled present claims and previously
settled claims. Continental has agreed that if either the Global Settlement
Page 10
or the Trilateral Agreement is approved, it will assume responsibility for
the claims that had been settled before August 27, 1993. The additional $635
million to be contributed 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 claims which are not included in the
Global Settlement.
In addition, Continental and Pacific Indemnity have entered into an
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 for unsettled
present claims and presently settled claims (regardless of whether either
such insurer would otherwise have any liability therefor). 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 added $500 million to such claim reserve in the
third quarter of 1993. 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 or 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
Page 11
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 for exposure starting
after 1959. As indicated above, as of March 31, 1995, Continental,
Fibreboard and plaintiff attorneys have reached settlements with respect to
approximately 137,300 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 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
plaintiffs' counsel in August 1993, the expected settlement for
approximately 49,500 claims for exposure to asbestos both prior to and after
1959 is currently averaging approximately $13,400 per claim for the before
1959 claims processed through March 31, 1995. Based on reports by
Fibreboard, between September 1988 and April 1993, 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 rendered 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 is 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 the Company, 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.
Page 12
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.
The Comprehensive Environmental Response Compensation and Liability Act of
1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern
the clean-up and restoration of abandoned toxic waste sites and formalize
the concept of legal liability for clean-up and restoration by "Responsible
Parties" ("RP's"). Superfund and the mini-Superfunds (Environmental Clean-up
Laws or "ECLs") establishes a mechanism to pay for clean-up of waste sites
if RP's fail to do so, and to assign liability to RP's. The extent of
liability to be allocated to an RP 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 its National Priorities List. 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 will require clean-up under ECLs. 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 many such claims. Key coverage
issues include whether Superfund response costs 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.
A number of proposals to reform Superfund have been made by various parties,
however no reforms were enacted by Congress in 1994. The Superfund taxing
authority will expire at the end of 1995 and will, therefore, need to be
addressed by the 104th Congress. While Congress may address this issue, no
predictions can be made as to what positions the Congress or the
Administration will take and what legislation, if any, will result. If there
is legislation, and in some circumstances even if there is no legislation,
the federal role in environmental clean-up may be materially reduced in
favor of state action. Substantial changes in the federal statute or the
activity of the EPA may cause states to reconsider their environmental
clean-up statutes and regulations. There can be no meaningful prediction of
the pattern of regulation that would result.
Due to the inherent uncertainties described above, including the
inconsistency of court decisions, the number of waste sites subject to
clean-up, and the standards for clean-up and liability, the exposure to CNA
for environmental pollution claims cannot be meaningfully quantified. As of
March 31, 1995 and December 31, 1994, CNA carried approximately $503 and
$506 million, respectively, of claim and claim expense reserves for reported
and unreported environmental pollution claims. CNA has not attributed any
reinsurance to reserves for unreported claims. The reserves for reported
claims reflect reinsurance recoverable of $3 million at March 31, 1995 and
December 31, 1994. Claim and claim expense reserves represent management's
estimates of ultimate liabilities based on currently available facts and
law. However, in addition to the uncertainties previously discussed,
Page 13
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 500 claims were reported in the first quarter of
1995 and approximately 20,500 claims have been reported to date. Pending
claims totaled approximately 9,800 and 9,900 at March 31, 1995 and December
31, 1994, respectively. Approximately 10,700 claims were closed through
March 31, 1995, of which approximately 9,700 claims were settled without
payment, except for claim expenses of $28 million. Settlements for the
remaining 1,000 claims totaled $154 million, plus claim expenses of $42
million (net of reinsurance recoveries of $35 and $4 million for claim and
claim expenses, respectively). The foregoing claims statistics represent
claims for accident years 1988 and prior, which coincides with CNA's
adoption of the Simplified Commercial General Liability coverage form which
included an absolute pollution exclusion.
The results of operations in future years may continue to be adversely
affected by environmental pollution claim and claim expenses. Management
will continue to monitor potential liabilities and make further adjustments
as warranted.
Tobacco Litigation
------------------
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 an individual's use of
cigarettes or exposure to tobacco smoke. Plaintiffs have asserted claims
based on, among other things, theories of negligence, fraud,
misrepresentation, strict liability, breach of warranty, enterprise
liability, civil conspiracy, intentional infliction of harm, and failure to
warn of the allegedly harmful and/or addictive nature of tobacco products.
Plaintiffs seek unspecified amounts in compensatory and punitive damages in
many cases, and in other cases damages are stated to amount to as much as
$100 million in compensatory damages and $600 million in punitive damages.
Presently, 59 such cases are pending in the United States federal and state
courts against manufacturers of tobacco products generally; Lorillard is a
named defendant in 20 of these cases and the Company is a defendant in three
of these cases. Twenty-five of these cases have been commenced since January
1, 1994; Lorillard is a named defendant in eight of the cases filed since
January 1, 1994.
In addition to cases brought by individuals, five purported class actions
are pending against Lorillard and other cigarette manufacturers, and the
Company is a defendant in one of these cases. Plaintiffs in four of the
purported class actions seek damages for alleged nicotine addiction and
health effects claimed to have resulted from the use of cigarettes, and
plaintiffs in one of the purported class actions allege health effects from
exposure to tobacco smoke. Theories of liability include a broad range of
product liability theories, theories based upon consumer protection statutes
and fraud and misrepresentation. Four of the purported class actions have
been filed since January 1, 1994. These purported class actions are more
fully described below.
In Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Dade
County, Florida, filed October 31, 1991), the purported class consists of
flight attendants claiming injury as a result of exposure to environmental
Page 14
tobacco smoke in the cabins of aircraft. Plaintiffs seek an unspecified
amount in compensatory damages and $5 billion in punitive damages. The trial
court granted plaintiffs' motion for class certification on December 12,
1994. Defendants have appealed this ruling to the Florida Court of Appeal.
In Castano v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed March 29, 1994), the purported class
consists of individuals in the United States who are allegedly nicotine
dependent and the estates and heirs of individuals in the United States who
were allegedly nicotine dependent. Plaintiffs in this action are represented
by a well-funded and coordinated consortium of over 60 law firms from around
the United States. Plaintiffs seek unspecified amounts in actual damages and
punitive damages. The court issued an order on February 17, 1995 that
granted in part plaintiffs' motion for class certification. Defendants have
filed a motion seeking leave to file an interlocutory appeal from the order
granting the motion for class certification.
In Granier v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed September 26, 1994), plaintiffs seek
certification of a class to be comprised of all residents of the United
States who are addicted to nicotine, and of survivors who claim their
decedents were addicted to nicotine. Plaintiffs seek unspecified dollar
amounts in actual damages and punitive damages and the creation of a medical
monitoring fund to monitor the health of individuals allegedly injured by
their addiction to nicotine. Plaintiffs' motion to consolidate this action
with Castano, above, has not been decided by the court.
In Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County,
Florida, filed May 5, 1994). the purported class consists of citizens and
residents of the United States, and the purported survivors of citizens and
residents of the United States, who have had, presently have, or have died
from diseases and medical conditions allegedly caused by smoking cigarettes
containing nicotine. Plaintiffs in this case seek actual and punitive
damages in excess of $100 billion each, and the creation of a medical fund
to compensate individuals for future health care costs. Plaintiffs' motion
for class certification was granted by the court on October 31, 1994.
Defendants have appealed this ruling to the Florida Court of Appeal.
In the fifth purported class action, Lacey v. Lorillard Tobacco Company, et
al. (U.S. District Court, Northern District, Alabama, filed March 15, 1994),
plaintiff alleges that the defendants, Lorillard and two other cigarette
manufacturers, did not disclose to the plaintiff or other cigarette smokers
in the State of Alabama the nature, type, extent and identity of additives,
additions, or additional substances that the defendants allegedly caused or
allowed to be made a part of cigarettes or cigarette components. Plaintiff
requests injunctive relief requiring defendants to list the additives,
additions or additional substances that defendants have caused or allowed to
be placed onto or within cigarettes or cigarette components manufactured for
sale and sold in the State of Alabama. Plaintiff seeks monetary damages on
behalf of his individual claim and on behalf of each member of the purported
class arising out of the complaint's allegation not to exceed $48,500 for
the individual claim or for any individual member of the class.
In addition to the foregoing cases, four actions have been initiated in
which states or state agencies seek recovery of funds expended by the states
or state agencies to provide health care to eligible citizens 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 indemnity, restitution, unjust enrichment and
public nuisance, and claims based on antitrust laws and state consumer
protection acts. Lorillard is named as a defendant in each of these four
Page 15
state or state agency actions and the Company is named as a defendant in
three of them.
The case of Moore v. The American Tobacco Company, et al. (Chancery Court,
Jackson County, Mississippi, filed May 23, 1994), was filed by the Attorney
General of Mississippi. The case of McGraw v. The American Tobacco Company,
et al. (Circuit Court, Kanawha County, West Virginia, filed on September 20,
1994), was filed by the Attorney General of West Virginia. The case of State
of Minnesota v. Philip Morris Incorporated, et al. (District Court, Ramsey
County, Minnesota, filed August 17, 1994), was filed by the Attorney General
of Minnesota and Blue Cross and Blue Shield of Minnesota.
The case of The State of Florida, et al. v. The American Tobacco Company, et
al. (Circuit Court, Palm Beach County, Florida, filed February 22, 1995),
was filed by the State of Florida, the Governor of Florida, and two state
agencies. Plaintiffs in this case seek reimbursement under a specific
Florida statute 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. 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. An action
for declaratory judgment has been commenced in Florida state court by
companies and trade associations in several potentially affected industries
challenging this statute. Lorillard also understands that elements of the
Florida business community have initiated an effort to repeal or modify the
statute in a future legislative session. It is impossible at this time to
predict the ultimate outcome of this action 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 a fifth 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. No action has been
brought to date by the State of Massachusetts.
The states pursuing the foregoing efforts are doing so at the urging and
with the assistance of well known members of the plaintiffs bar and these
lawyers have been meeting with attorneys general in other states to
encourage them to file similar suits.
In addition to the foregoing cases, one pending case, Cordova v. Liggett
Group, Inc., et al. Superior Court San Diego County, California, filed May
12, 1992), alleges that Lorillard and other named defendants, including
other manufacturers of tobacco products, engaged in unfair and fraudulent
business practices in connection with activities relating to the Council for
Tobacco Research-USA, Inc., of which Lorillard is a sponsor, in violation of
a California state consumer protection law by misrepresenting to or
concealing from the public information concerning the health aspects of
smoking. Plaintiff seeks an injunction ordering defendants to undertake a
"corrective advertising campaign" in California to warn consumers of the
health hazards associated with smoking, to provide restitution to the public
for funds "unlawfully, unfairly, or fraudulently" obtained by defendants,
and to "disgorge" all revenues and profits acquired as a result of
defendants' "unlawful, unfair and/or fraudulent business practices." An
adverse development in this case could encourage the filing of additional
actions in other states with consumer protection laws similar to
California's.
In addition to the foregoing cases, several cases have been filed against
Page 16
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
11 such cases are pending in federal and state courts against Lorillard. The
Company is not named as a defendant in any of these cases. Six such cases
have been filed since January 1, 1994. Allegations of liability against
Lorillard include negligence, strict liability, fraud, misrepresentation and
breach of warranty. Plaintiffs seek unspecified amounts in compensatory and
punitive damages in many cases, and in other cases damages are stated to
amount to as much as $10 million in compensatory damages and $100 million in
punitive damages. Six of these cases are currently set for trial in 1995.
One of the defenses raised by Lorillard in certain cases is preemption by
the Federal Cigarette Labeling and Advertising Act (the "Labeling Act"). In
the case of Cipollone v. Liggett Group, Inc., et al., the United States
Supreme Court, in a plurality opinion issued on June 24, 1992, held that the
Labeling Act as enacted in 1965 does not preempt common law damage claims
but that the Labeling Act, as amended in 1969, does preempt claims against
tobacco companies arising after July 1, 1969, which assert that the tobacco
companies failed to adequately warn of the alleged health risks of
cigarettes, sought to undermine or neutralize the Labeling Act's mandatory
health warnings, or concealed material facts concerning the health effects
of smoking in their advertising and promotion of cigarettes. The Supreme
Court held that claims against tobacco companies based on fraudulent
misrepresentation, breach of express warranty, or conspiracy to misrepresent
material facts concerning the alleged health effects of smoking are not
preempted by the Labeling Act. The Supreme Court in so holding did not
consider whether such common law damage actions were valid under state law.
The effect of the Supreme Court's decision on pending and future cases
against Lorillard and other tobacco companies will likely be the subject of
further legal proceedings. Additional litigation involving claims such as
those held to be preempted by the Supreme Court in Cipollone could be
encouraged if legislative proposals to eliminate the federal preemption
defense, pending in Congress since 1991, are enacted. It is not possible to
predict whether any such legislation will be enacted.
In addition to the defenses based on preemption under the Supreme Court
decision referred to above, Lorillard believes that it has a number of other
valid defenses to pending cases. These defenses, where applicable, include,
among others, statutes of limitations or repose, assumption of the risk,
comparative fault, the lack of proximate causation, and the lack of any
defect in the product alleged by a plaintiff. Lorillard believes, and has
been so advised by counsel, that some or all of these defenses may, in any
of the pending or anticipated cases, be found by a jury or court to bar
recovery by a plaintiff. Application of valid defenses, including those of
preemption, are likely to be the subject of further legal proceedings in the
class action cases and in the actions brought by states or state agencies.
Smoking and health related litigation has been brought by plaintiffs against
Lorillard and other manufacturers of tobacco products for many years. While
Lorillard intends to defend vigorously all such actions 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. An unfavorable
outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation.
Management 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
Page 17
particular quarterly or annual period or its financial position could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation. Management believes, however, that the ultimate outcome of
pending litigation should not have a material adverse effect on the
Company's financial position.
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.
6. 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
March 31, 1995 and December 31, 1994 and the results of operations and
changes in cash flows for the three months ended March 31, 1995 and 1994,
respectively.
Results of operations for the first quarter of each of the years is not
necessarily indicative of results of operations for that entire year.
7. Subsequent Event--
As previously reported, CNA reached an agreement to acquire The Continental
Corporation ("CIC"). On May 10, 1995, CNA acquired all the outstanding
shares of CIC for approximately $1.1 billion or $20 per CIC share.
Page 18
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 84% owned
subsidiary of the Company--
As previously reported, CNA reached an agreement in late 1994 to acquire The
Continental Corporation ("CIC"). On May 10, 1995, CNA acquired all the
outstanding shares of CIC for approximately $1.1 billion or $20 per CIC share.
The acquisition created the seventh largest U.S. insurance organization. CNA is
the third largest U.S. property-casualty organization and the largest U.S.
commercial lines insurance group, based on 1994 premium volume.
CNA has financed the transaction (including the refinancing of $205 million of
CIC debt) through a five-year $1.3 billion revolving credit facility with 16
banks led by The First National Bank of Chicago and The Chase Manhattan Bank,
N.A. The interest rate is based on the 1,2,3, or 6 month London Interbank
Offered Rate ("LIBOR") plus 35 basis points; the initial rate is 6.4%. Under the
terms of the facility, CNA may prepay the debt without penalty, giving CNA
flexibility to arrange longer-term financing on more favorable terms.
In May 1995, CNA also entered into five year interest rate swap transactions
with First Chicago and Chase Manhattan for notional amounts of $300 and $200
million, respectively. These swap transactions have the effect of converting
$500 million of variable rate debt into fixed rate debt at annual interest rates
of 6.6% and 6.5%, respectively.
Recently, A.M. Best, Standard and Poor's Moody's, and Duff & Phelps issued
revised ratings for CNA's Continental Casualty Company Intercompany Pool,
Continental Insurance Company Intercompany Pool and Continental Assurance
Company Intercompany Pool. Also rated were the senior debt of both CNA Financial
and Continental Corporation and CNA Financial's preferred stock.
In some cases the rating agencies affirmed the previous ratings. In others,
the ratings were lowered because of the increased level of debt associated with
the CIC acquisition.
Page 19
The chart below lists the current and previous ratings:
Insurance Ratings Debt And Stock Ratings
---------------------- --------------------------------
CNA CIC CNA CIC
--------------- --------------------- ------
Casualty Life Senior Preferred Senior
Debt Stock Debt
Financial Strength
----------------------
A.M. Best
New A A A- - - -
Previous A A+ A- - - -
Moody's
New A1 A1 A2 A3 a3 Baa1
Previous Aa2 Aa3 Baa1 A1 a1 Baa3
Claims Paying Ability
----------------------
Standard & Poor's
New A+ AA A- A- A- BBB-
Previous AA- AA+ A- A+ A+ BBB-
Duff & Phelps
New AA- AA - A- A- -
Previous AA AA+ - A+ A -
The revenues and net income of CIC for the three months ended March 31, 1995
were $1.1 billion and $48.9 million, respectively. Total assets were $15.0
billion at March 31, 1995.
The following information for CNA does not give effect to the CIC acquisition.
For the first three months of 1995, statutory surplus of the property and
casualty insurance subsidiaries increased 2.7% to approximately $3.5 billion.
The increase resulted primarily from improved net income. The statutory surplus
of the life insurance subsidiaries remained at $1.0 billion.
As discussed in Note 5 of the Notes to Consolidated Condensed Financial
Statements, Continental Casualty Company substantially eliminated 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.
On July 29, 1994 the United States District Court for the Eastern District of
Texas preliminarily approved the Global Settlement agreement. A final fairness
hearing to determine whether to finally approve the Global Settlement agreement
commenced on December 12, 1994. During the hearing various parties presented
evidence in opposition to the Global Settlement. Final arguments concerning the
Global Settlement agreement occurred on February 27, 1995; and on March 30, 1995
the Court issued a Memorandum to the Parties suggesting that the provisions of
the Global Settlement concerning the Select Counsel for the Beneficiaries should
be changed. The Settling parties have agreed to changes in the Agreement,
including provisions designed to address the concerns of the Court, which will
be submitted to the court for approval. Assuming additional notice is given to
the class, then the Court's final rulings are expected this summer.
Page 20
Also pending in the United States District Court for the Eastern District of
Texas is litigation over the Trilateral Agreement. Trial on the issues raised by
this agreement occurred on February 13, 1995, with evidence submitted to the
Court in opposition to final court approval of the Trilateral Agreement. A final
hearing occurred on May 9, 1995 and the Court ordered briefs to be submitted on
May 23, 1995; the Court's rulings on the Trilateral Agreement are also expected
in the summer of 1995.
CNA and the other parties to the Global Settlement agreement and the
Trilateral Agreement completed a comprehensive court approved notice program to
provide potential claimants information about their rights and possible benefits
under the Global Settlement agreement and Trilateral Agreement.
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 5 of the Notes to Consolidated Condensed Financial Statements for a
further discussion of environmental pollution exposures.
The liquidity requirements of CNA, excluding the acquisition of CIC, have been
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 three months of 1995, CNA's operating activities generated net
cash flows of $561 million, compared to $164 million for the same period in
1994. The increase in cash flows is due primarily to an increase in investment
income of $226 million and improved insurance subsidiaries underwriting cash
flow of $107 million for the first three months of 1995, as compared to the same
period in 1994. 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.
Cigarettes
- ----------
Lorillard, Inc. and subsidiaries ("Lorillard")--
Lorillard continues to be negatively impacted by the August 1993 industry wide
price reduction of approximately 25%. While the price reduction has slowed the
rapid growth of discount cigarettes, unit sales volume gains have not
compensated for the reduced selling prices. Virtually all of Lorillard's sales
are in the premium priced segment. In May 1995, Lorillard increased its
wholesale prices by $1.50 per thousand cigarettes.
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 exposure to tobacco smoke. In
several of these cases the Company is named as a defendant. Pending litigation
includes actions commenced by individuals and purported class actions brought by
state governments, most of which claim very substantial damages. These actions
are described in Note 5 of the Notes to Consolidated Condensed Financial
Statements.
Corporate
- ---------
During the three months ended March 31, 1995 the Company purchased 48,500
shares of its outstanding Common Stock at an aggregate cost of approximately
$4.3 million. The funds required for such purchases were provided from working
Page 21
capital. Depending on market conditions, the Company, from time to time,
purchases shares in the open market or otherwise.
Investments:
- -----------
Insurance
A summary of CNA's general account fixed income securities portfolio and
short-term investments are as follows:
<TABLE>
<CAPTION>
Change in
March 31, December 31, Unrealized
1995 1994 Gains
------------------------------------
(In millions)
<S> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and
obligations of government agencies .. $10,056 $10,782 $351
Asset-backed securities ................ 2,388 2,564 90
Tax exempt securities ................ 3,372 3,770 60
Taxable .............................. 3,662 3,712 68
-------------------------------
Total fixed income securities ... 19,478 20,828 569
Stocks ................................. 802 755 41
Short-term and other investments........ 7,645 5,360 81
-------------------------------
Total ........................... $27,925 $26,943 $691
===============================
Short-term investments:
Security repurchase collateral ....... $ 2,726 $ 2,479
Escrow ............................... 1,020 1,010
Others ............................... 3,567 1,547
Other investments ...................... 332 324
---------------------
Total short-term and other
investments .................... $ 7,645 $ 5,360
=====================
</TABLE>
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.
CNA holds a small amount of derivative financial investments for purposes of
enhancing income and total return. The derivative securities are marked-to-
market and reported as realized investment gains and losses. CNA's investment
in, and risk in relation to, derivative securities is not significant.
The general account portfolio consists primarily of high quality marketable
debt securities, approximately 94% of which are rated as investment grade. At
Page 22
March 31, 1995, tax exempt securities and short-term investments excluding
collateral for securities sold under repurchase agreements, comprised
approximately 12% and 16%, respectively, of the general account's total
investment portfolio compared to 14% and 9%, respectively, at December 31, 1994.
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 March 31, 1995, the
major components of the short-term investment portfolio were approximately $2.4
billion of high grade commercial paper and $1.7 billion of U.S. Treasury bills.
Collateral for securities sold under repurchase agreements increased $247
million to $2.7 billion and were invested in high grade commercial paper.
Debt security carrying values are highly susceptible to changes in interest
rates and were favorably affected as a general decline in interest rates
occurred in the first quarter of 1995. Interest rates have continued to decline
throughout April resulting in additional unrealized investment gains in the bond
portfolio, primarily relating to government securities.
As of March 31, 1995, the market value of CNA's general account investments in
bonds and redeemable preferred stocks was $19.5 billion and was less than
amortized cost by approximately $226 million. This compares to $795 million of
net unrealized investment losses at December 31, 1994. The gross unrealized
investment gains and losses for the fixed income securities portfolio at March
31, 1995, were $292 and $518 million, respectively, compared to $194 and $989
million, respectively, at December 31, 1994.
Net unrealized investment losses on general account bonds at March 31, 1995
include net unrealized investment losses on high yield securities of $9 million,
compared to net unrealized investment losses of $30 million at December 31,
1994. 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 $1.2 billion at March 31, 1995, compared
to $1.0 billion at December 31, 1994.
At March 31, 1995, total Separate Account cash and investments amounted to
$6.0 billion with taxable debt securities representing approximately 94% 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
$4.9 billion compared to $4.6 billion at December 31, 1994. At March 31, 1995,
amortized cost exceeded fair values by approximately $117 million. This compares
to $195 million at December 31, 1994. The gross unrealized investment gains and
losses for the GIC fixed income securities portfolio at March 31, 1995 were $47
and $164 million, respectively.
Carrying values of high yield securities in the GIC portfolio were $1.1
billion at March 31, 1995 and December 31, 1994. Net unrealized investment
losses on high yield securities held in such Separate Accounts were $97 million
at March 31, 1995, compared to $108 million at December 31, 1994.
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 March 31, 1995, 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.
Page 23
Included in CNA's fixed income securities at March 31, 1995 (general and GIC
portfolios) are $4.5 billion of asset-backed securities, consisting of
approximately 47% in collateralized mortgage obligations ("CMO's"), 20% in
corporate asset-backed obligations, and 33% 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 March 31, 1995, the fair values of asset-backed securities
was less than amortized cost by approximately $47 million compared to unrealized
investment losses of $181 million at December 31, 1994. 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
insurance company invested assets. At March 31, 1995, 63% of the general
account's debt securities portfolio was invested in U.S. government securities,
17% in other AAA rated securities and 11% in AA and A rated securities. CNA's
GIC fixed income portfolio is comprised of 31% U.S. government securities, 19%
other AAA rated securities and 18% in AA and A rated securities. These ratings
are primarily from nationally recognized rating agencies (95% for both the
general account and GIC portfolios).
Other
- -----
Investment activities of non-insurance companies include investments in fixed
maturities securities, equity securities, derivative instruments and short-term
investments. Derivative instruments are marked-to-market and reported as
realized investment gains or losses in the statement of operations. The
remaining securities are carried at fair value with a net unrealized gain of
$264.9 million at March 31, 1995, compared to $146.2 million at December 31,
1994.
The Company invests in certain derivative instruments for income enhancements
as part of its portfolio management strategy. These instruments include various
swaps, forwards and futures contracts as well as both purchased and written
options.
These investments subject the Company to market risk for positions where the
Company does not hold an offsetting security. The Company controls this risk
through monitoring procedures which include daily detailed reports of existing
positions and valuation fluctuations. These reports are reviewed by members of
senior management 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. In addition,
the amounts subject to credit risk are substantially mitigated by collateral
requirements in many of these transactions.
The Company does not believe that any of the derivative instruments utilized
by it are unusually complex or volatile, or expose the Company to a higher
degree of risk. These derivative instruments have not had, and are expected not
to have, an adverse impact on the results of operations. See Note 5 of the Notes
to Consolidated Financial Statements in the 1994 Annual Report on Form 10-K for
additional information with respect to derivative instruments.
The Company's short-term investments portfolio included $2.1 billion of
proceeds from securities sold under agreements to repurchase at December 31,
Page 24
1994. These proceeds were invested in U.S. government treasury securities.
During the first quarter of 1995, the Company closed these positions and
recognized net investment gains of $17.8 million.
Results of Operations:
- ----------------------
Revenues and net income for the quarter increased by $498.1 million, or 15.5%,
and $220.3 million, respectively, as compared to the prior year first quarter.
The following table sets forth the major sources of the Company's consolidated
revenues and net income.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1995 1994
----------------------
(In thousands)
<S> <C> <C>
Revenues (a):
Property and casualty insurance .................... $2,197,978 $1,883,734
Life insurance ..................................... 854,333 718,686
Cigarettes ......................................... 452,249 457,627
Hotels ............................................. 41,245 39,076
Watches and other timing devices ................... 24,476 32,649
Drilling ........................................... 75,233 73,862
Investment income-net (non-insurance companies) .... 58,314 (3,818)
Equity in income of CBS Inc. ....................... 1,847 11,444
Other and eliminations--net ........................ (2,480) (8,160)
----------------------
$3,703,195 $3,205,100
======================
Net income (loss) (a):
Property and casualty insurance .................... $ 106,907 $ (51,093)
Life insurance ..................................... 31,901 (4,992)
Cigarettes ......................................... 70,561 78,371
Hotels ............................................. (3,338) (3,159)
Watches and other timing devices ................... 414 (122)
Drilling ........................................... (7,901) (6,462)
Investment income-net (non-insurance companies) .... 37,175 (2,931)
Equity in income of CBS Inc. ....................... 1,470 10,242
Interest expense and other--net .................... (22,719) (25,719)
----------------------
$ 214,470 $ (5,865)
======================
Page 25
(a) Includes realized investment gains (losses) as follows:
<CAPTION>
Three Months Ended
March 31,
----------------------
1995 1994
----------------------
<S> <C> <C>
Revenues:
Property and casualty insurance .................... $ 16,842 $ (64,371)
Life insurance ..................................... 18,050 (41,120)
Investment income-net .............................. 29,315 (18,813)
----------------------
$ 64,207 $ (124,304)
======================
Net income (loss):
Property and casualty insurance .................... $ 7,651 $ (34,566)
Life insurance ..................................... 9,698 (16,104)
Investment income-net .............................. 18,914 (12,252)
----------------------
$ 36,263 $ (62,922)
======================
</TABLE>
Insurance
- ---------
Property and casualty revenues, excluding realized investment gains (losses),
increased by $233.0 million, or 12.0%, for the three months ended March 31,
1995, as compared to the same period a year ago.
Property and casualty premium revenues increased by $159.8 million, or 9.8%,
from the prior year's comparable period. The increase was principally
attributable to increases in medium commercial accounts ($49 million), small
commercial business ($39 million), personal lines ($20 million), specialty lines
($19 million) and reinsurance ($81 million) offset in part by decreases in large
account premium business due to the continued shift to high deductibles and
involuntary residual markets. Investment income increased $65.6 million, or
23.6%, for the three months compared with the same period a year ago.
Investment income increased primarily due to higher yielding investments and a
shift late in the 1994 first quarter to longer term securities. Interest rates
on debt securities generally rose throughout 1994, but have declined since
January 1995. The bond segment of the investment portfolio yielded 6.6% in the
first quarter of 1995 compared with 5.4% for the same period a year ago.
Life insurance revenues, excluding realized investment gains (losses),
increased by $76.5 million, or 10.1%, as compared to the same period a year ago.
Life premium revenues increased by $50.7 million, or 7.5%, for the three months
ended March 31, 1995 with the primary growth in annuities ($26 million), new
term business ($9 million) and group business ($12 million). Life investment
income increased by $18.2 million, or 26.2%, for the three months ended March
31, 1995, compared to the same period a year ago primarily due to the same
reasons described above for the property and casualty operations. The bond
segment of the life investment portfolio yielded 6.8% in the first quarter of
1995 compared with 5.7% for the same period a year ago.
Property and casualty underwriting losses for the three months ended March 31,
1995 were $197.7 million, compared to $354.8 million for the same period in
1994. The statutory combined ratios for the three months ended March 31, 1995
Page 26
were 109.9, compared with 119.9 for the same period in 1994. Contributing to the
improvement in underwriting results were continued favorable trends in the
workers' compensation line, reduced operating expenses and sharply lower
catastrophe costs. Pre-tax catastrophe losses for the three months ended March
31, 1995 were $23 million, compared with $100 million in 1994. The 1994
catastrophe claims stemmed from the California earthquake and severe winter
storms throughout the northeastern part of the United States.
The components of CNA's realized investment gains (losses) are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1995 1994
----------------------
(In millions)
<S> <C> <C>
Bonds:
U.S. Government..................................... $ 9.9 $(138.5)
Tax exempt.......................................... 16.7 18.6
Asset-backed........................................ 9.9 12.3
Taxable............................................. (24.8) (3.4)
----------------------
Total bonds................................... 11.7 (111.0)
Stocks............................................... 17.6 12.5
Derivative and Other................................. 5.6 (7.0)
----------------------
Total realized investment gains (losses) ..... $ 34.9 $(105.5)
======================
</TABLE>
For the three months ended March 31, 1995, CNA sold approximately $7 billion
of fixed income and equity securities, realizing pre-tax gains of $24.4 million.
Of the $7 billion of securities sold, approximately $3 and $2 billion,
respectively, were from the U.S. Treasury and Government mortgage-backed bond
portfolios.
Cigarettes
- ----------
Revenues and net income decreased by $5.4 and $7.8 million, or 1.2% and 10.0%,
respectively, as compared to the prior year first quarter.
The decrease in revenues is primarily composed of a decrease of approximately
$9.7 million, or 2.1%, due to lower unit sales volume for the 1995 first
quarter, partially offset by an increase of approximately $3.6 million, or .8%,
reflecting higher average unit prices as compared to the corresponding first
quarter of the prior year. Net income declined during the three month period due
to the lower unit sales, an increase in manufacturing costs and higher selling
expenses.
Hotels
- ------
Revenues for the quarter increased by $2.2 million, or 5.6%, as compared to
the prior year first quarter. Net loss increased by $.2 million, or 5.7%, for
the quarter ended March 31, 1995, as compared to the prior year.
Page 27
Revenues increased in the first quarter of 1995, as compared to the prior
year, due primarily to higher overall occupancy rates and increased average room
rates, partially offset by lower occupancy rates at the Loews Monte Carlo Hotel.
Net loss increased for the quarter ended March 31, 1995, as compared to the
prior year, due primarily to poor results at the Loews Monte Carlo Hotel and
increased advertising expenses, partially offset by improved results at the
division's New York properties.
Watches and Other Timing Devices
- --------------------------------
Revenues for the quarter decreased by $8.2 million, or 25.0%, and net income
increased by $.5 million, as compared to the prior year first quarter. In
January 1995, Bulova sold its industrial and defense manufacturing business,
Bulova Technologies, Inc. ("BTI"), and recognized a pre-tax and after tax gain
of $558,000 and $351,000, respectively.
Exclusive of BTI, revenues and net income increased $3.3 and $.2 million, or
15.8% and 133.9%, respectively. Revenues increased due primarily to higher unit
sales in the 1995 first quarter, partially offset by a decline of approximately
$.2 million in royalty income. Net income increased as a result of the higher
revenues discussed above, partially offset by increased advertising expenses.
Drilling
- --------
Revenues increased by $1.4 million, or 1.9%, and net loss increased by $1.4
million, or 22.3%, as compared to the prior year first quarter.
Revenues for the first quarter of 1995 increased by $3.8 million, or 5.2%, due
to higher utilization rates, partially offset by a decline of $3.1 million, or
4.2%, due to lower day rates. Revenues from Diamond Offshore's turnkey division
increased $1.0 million, or 1.3%, as compared to the prior year first quarter.
The decline in day rates is primarily associated with the depressed condition
of natural gas prices and its impact on the domestic jackup rig market. Day
rates for Gulf of Mexico jackup rigs declined by approximately $8,000 per day,
or 31.6%, from the prior year. However, while day rates for domestic jackup rigs
have decreased, day rates for fourth generation semisubmersible rigs have
increased by approximately $14,000 per day, or 27.0%, from the prior year.
Revenues from international locations for the first quarter increased $4.9
million, or 22.5%, as compared to the prior year. The three semisubmersibles
added to Diamond Offshore's international fleet in the third quarter of 1994
contributed revenues of $5.1 million for the quarter ended March 31, 1995.
Other
- -----
Revenues and net income for the first quarter of 1995 increased by $58.2 and
$34.3 million, respectively, as compared to the prior year first quarter. Other
operations consist primarily of investment income of non-insurance companies and
the Company's investment in CBS Inc.
Revenues and net income increased due primarily to realized investment gains
of $29.3 and $18.9 million, respectively, for the quarter ended March 31, 1995,
as compared to realized investment losses of $18.8 and $12.3 million,
respectively, in the prior year first quarter.
Exclusive of securities transactions, revenues and net income increased $10.1
Page 28
and $3.2 million, or 55.2% and 51.5%, respectively, due primarily to increased
investment income, partially offset by lower results from the Company's
investment in CBS Inc.
Accounting Standards
- --------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. This Statement applies to financial statements for
fiscal years beginning after December 15, 1995 and will not have a significant
impact on the Company.
PART II. OTHER INFORMATION
Item 1. 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 Note 5 of the Notes to Consolidated
Condensed Financial Statements in Part I.
2. Lorillard is involved in various lawsuits involving 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. Information
involving such lawsuits is incorporated by reference to Note 5 of the Notes to
Consolidated Condensed Financial Statements in Part I.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits--
(27) Financial Data Schedule for the three months ended March 31, 1995.
(b) Current reports on Form 8-K--There were no reports on Form 8-K filed for
the three months ended March 31, 1995.
Page 29
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: May 15, 1995 By Roy E. Posner
-------------------------
ROY E. POSNER
Senior Vice President and
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
Page 30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 133,610
<SECURITIES> 29,953,872
<RECEIVABLES> 8,901,871
<ALLOWANCES> 139,990
<INVENTORY> 226,104
<CURRENT-ASSETS> 0
<PP&E> 1,810,502
<DEPRECIATION> 726,788
<TOTAL-ASSETS> 49,978,056
<CURRENT-LIABILITIES> 0
<BONDS> 2,142,027
<COMMON> 58,965
0
0
<OTHER-SE> 5,984,044
<TOTAL-LIABILITY-AND-EQUITY> 49,978,056
<SALES> 474,332
<TOTAL-REVENUES> 3,703,195
<CGS> 215,670
<TOTAL-COSTS> 2,716,473
<OTHER-EXPENSES> 383,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,079
<INCOME-PRETAX> 344,037
<INCOME-TAX> 103,736
<INCOME-CONTINUING> 214,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 214,470
<EPS-PRIMARY> 3.64
<EPS-DILUTED> 0
</TABLE>
