================================================================================
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 September 30, 1995
------------------
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 November 3, 1995
- -------------------------- -------------------------------
Common stock, $1 par value 58,916,400 shares
================================================================================
Page 1
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
September 30, 1995 and December 31, 1994 ...................... 3
Consolidated Condensed Statements of Income--
Three and nine months ended September 30, 1995 and 1994 ....... 4
Consolidated Condensed Statements of Cash Flows--
Nine months ended September 30, 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 ........................................ 23
Part II. Other Information
Item 1. Legal Proceedings ......................................... 34
Item 6. Exhibits and Reports on Form 8-K .......................... 34
Exhibit 27--Financial Data Schedule for the nine months ended
September 30, 1995 ............................................ 36
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) September 30, December 31,
1995 1994
-----------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities, amortized cost of $26,940,404
and $21,644,672 .............................. $27,523,033 $20,852,079
Equity securities, cost of $807,231 and
$1,270,324 ................................... 997,610 1,438,140
Mortgage loans and notes receivable ........... 128,027 68,004
Policy loans .................................. 175,063 176,231
Other investments ............................. 482,143 104,210
Short-term investments ........................ 9,996,420 8,437,617
-----------------------------
Total investments .......................... 39,302,296 31,076,281
Cash ............................................ 258,892 160,557
Receivables ..................................... 16,420,141 8,068,016
Inventories ..................................... 194,183 244,394
Investments in associated companies ............. 327,214 301,550
Property, plant and equipment-net ............... 1,357,013 1,089,868
Deferred income taxes ........................... 1,555,368 1,679,172
Prepaid reinsurance premiums .................... 567,264 175,146
Other assets .................................... 1,434,724 436,169
Deferred policy acquisition costs of insurance
subsidiaries ................................... 1,478,235 1,024,561
Separate Account business ....................... 5,995,658 6,080,262
-----------------------------
Total assets ............................... $68,890,988 $50,335,976
=============================
Liabilities and Shareholders' Equity:
Insurance reserves and claims ................... $41,133,822 $28,933,767
Accounts payable and accrued liabilities ........ 2,115,271 1,153,033
Payable for securities purchased ................ 3,074,596 489,797
Securities sold under repurchase agreements ..... 2,504,796 4,571,517
Long-term debt, less unamortized discount ....... 4,242,110 2,144,394
Deferred credits and participating policyholders'
equity ......................................... 1,427,189 713,131
Separate Account business ....................... 5,995,658 6,080,262
-----------------------------
Total liabilities .......................... 60,493,442 44,085,901
Minority interest ............................... 1,117,004 844,761
Shareholders' equity ............................ 7,280,542 5,405,314
-----------------------------
Total liabilities and shareholders' equity . $68,890,988 $50,335,976
=============================
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 Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums:
Property and casualty ............... $2,427,861 $1,759,281 $ 6,374,962 $ 5,086,484
Life ................................ 766,739 641,972 2,201,260 1,980,195
Investment income, net of expenses,
principally of insurance subsidiaries 586,121 424,729 1,591,846 1,207,741
Realized investment gains (losses) .... 294,670 (17,915) 701,123 (245,518)
Manufactured products (including excise
taxes of $118,429, $114,368, $338,845
and $324,350) ........................ 565,550 542,358 1,592,525 1,545,994
Other ................................. 318,641 194,879 720,435 568,905
---------------------------------------------------
Total .............................. 4,959,582 3,545,304 13,182,151 10,143,801
---------------------------------------------------
Expenses:
Insurance claims and policyholders'
benefits ............................. 2,959,023 2,324,656 7,988,886 7,011,510
Amortization of deferred policy
acquisition costs .................... 480,063 363,300 1,262,357 1,022,690
Cost of manufactured products sold .... 251,758 247,052 720,426 705,749
Selling, operating, advertising and
administrative expenses .............. 542,243 393,677 1,346,756 1,129,240
Interest .............................. 89,608 42,369 195,399 132,168
---------------------------------------------------
Total .............................. 4,322,695 3,371,054 11,513,824 10,001,357
---------------------------------------------------
636,887 174,250 1,668,327 142,444
---------------------------------------------------
Income taxes (benefits) ............... 223,074 30,126 551,591 (37,445)
Minority interest ..................... 27,408 9,909 96,097 (8,787)
---------------------------------------------------
Total .............................. 250,482 40,035 647,688 (46,232)
---------------------------------------------------
Net income .............................. $ 386,405 $ 134,215 $ 1,020,639 $ 188,676
===================================================
Net income per share .................... $ 3.28 $ 1.12 $ 8.66 $ 1.56
===================================================
Cash dividends per share ................ $ .13 $ .13 $ .38 $ .38
===================================================
Weighted average number of shares
outstanding ............................ 117,833 119,891 117,836 121,177
===================================================
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) Nine Months Ended
September 30,
1995 1994
----------------------------
<S> <C> <C>
Operating Activities:
Net income .................................... $ 1,020,639 $ 188,676
Adjustments to reconcile net income to net
cash provided by operating activities-net .... (338,367) 163,456
Distribution of CBS equity earnings ........... 86,382
Changes in assets and liabilities-net:
Receivables ................................. (1,062,796) (360,685)
Inventories ................................. 50,211 13,565
Prepaid reinsurance premiums ................ 57,883 (5,071)
Deferred policy acquisition costs ........... (147,573) (49,166)
Insurance reserves and claims ............... 756,914 1,316,938
Accounts payable and accrued liabilities .... 105,686 (137,606)
Other-net ................................... 264,998 26,259
---------------------------
707,595 1,242,748
---------------------------
Investing Activities:
Purchases of fixed maturities ................. (25,325,566) (30,471,320)
Proceeds from sales of fixed maturities ....... 23,346,595 22,115,211
Proceeds from maturities of fixed maturities .. 2,306,317 3,837,635
Change in securities sold under repurchase
agreements ................................... (2,066,720) 2,778,105
Purchases of equity securities ................ (805,739) (838,293)
Proceeds from sales of equity securities ...... 1,847,872 714,895
Purchase of The Continental Corporation, net
of cash acquired ............................. (960,400)
Purchase of subsidiary shares ................. (35,450)
Return of investment from CBS tender offer .... 183,991
Change in short-term investments .............. 240,279 894,364
Purchases of property, plant and equipment .... (141,914) (160,862)
Change in other investments ................... (111,966) (21,437)
---------------------------
(1,671,242) (1,003,161)
---------------------------
Financing Activities:
Dividends paid to shareholders ................ (44,186) (45,494)
Purchases of treasury shares .................. (4,331) (161,869)
Issuance of long-term debt .................... 1,831,138
Principal payments on long-term debt .......... (509,130) (51,762)
Net decrease of short-term debt ............... (205,050)
Receipts credited to policyholders ............ 19,417 27,129
Withdrawals of policyholder account balances .. (25,876) (18,967)
---------------------------
1,061,982 (250,963)
---------------------------
Net change in cash .............................. 98,335 (11,376)
Cash, beginning of period ....................... 160,557 155,703
---------------------------
Cash, end of period ............................. $ 258,892 $ 144,327
===========================
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. On May 10, 1995, CNA Financial Corporation ("CNA") acquired all the
outstanding shares of The Continental Corporation ("CIC") for
approximately $1.1 billion or $20 per CIC share. CIC is an insurance
holding company principally engaged through subsidiaries in the business
of property and casualty insurance.
The acquisition of CIC has been accounted for as a purchase, therefore
CIC's operations are included in the Consolidated Condensed Financial
Statements as of May 10, 1995. CNA has completed its preliminary purchase
accounting analysis. The purchase of CIC currently reflects goodwill of
approximately $366 million which will be amortized over twenty years at an
annual charge of $18 million. Evaluation and appraisal of the net assets
is continuing and allocation of the purchase price may be adjusted.
To finance the acquisition of CIC (including the refinancing of $205
million of CIC debt) CNA entered into a five-year $1.3 billion revolving
credit facility (the "Bank Facility") involving 16 banks led by The First
National Bank of Chicago and The Chase Manhattan Bank, N.A. The interest
rate is based on the one, two, three or six month London Interbank Offered
Rate ("LIBOR"), as elected, plus 25 basis points or other negotiated
rates. Additionally, there is a facility fee of 10 basis points. Under the
terms of the facility, CNA may prepay the debt without penalty.
To offset the variable rate characteristics of the facility, CNA entered
into five year interest rate swap agreements with several banks. These
agreements which terminate from May 2000 to July 2000 effectively convert
variable rate debt based on three month LIBOR into fixed rate debt
resulting in fixed rates on notional amounts aggregating $950 million. The
weighted average fixed swap rate at September 30, 1995 was 6.4%.
On August 10 1995, to take advantage of favorable interest rate spreads,
CNA established a Commercial Paper Program, borrowing $500 million from
investors to reduce a like amount of bank financing. The weighted average
yield on commercial paper at September 30, 1995 was 6.0%. The commercial
paper borrowings are classified as long-term debt as $500 million of the
committed Bank Facility will support the commercial paper program (at an
undrawn cost of 10 basis points). Standard and Poor's and Moody's issued
short-term debt ratings of A2 and P2, respectively, for CNA's Commercial
Paper Program.
Page 6
The pro forma consolidated condensed results of operations presented below
assume the above transaction had occurred at the beginning of the periods
presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
----------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues ......................... $4,959,582 $4,770,343 $14,669,744 $13,963,546
===================================================
Realized gains (losses) included
in revenue ...................... $ 294,670 $ (21,883) $ 821,192 $ (224,084)
===================================================
Income (loss) before taxes and
minority interest ............... $ 636,887 $ (428,353) $ 1,696,898 $ (604,143)
Income tax (expense) benefit ..... (223,074) 224,411 (575,032) 325,694
Minority interest ................ (27,408) 47,728 (96,958) 85,947
---------------------------------------------------
Income (loss) from continuing
operations ...................... $ 386,405 $ (156,214) $ 1,024,908 $ (192,502)
===================================================
Per share ........................ $ 3.28 $ (1.30) $ 8.70 $ (1.59)
===================================================
</TABLE>
The pro forma consolidated condensed financial information is not
necessarily indicative either of the results of operations that would have
occurred had these transactions been consummated at the beginning of the
periods presented or of future operations of the combined companies.
3. The Company's inventories are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
--------------------------
(In thousands)
<S> <C> <C>
Leaf tobacco .............................. $100,745 $140,385
Manufactured stock ........................ 73,193 82,902
Materials, supplies, etc. ................. 20,245 21,107
----------------------
Total ................................... $194,183 $244,394
======================
</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.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after
Page 7
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 domiciliary states, CNA
receives collateral primarily in the form of bank letters of credit,
securing a large portion of the recoverables.
The effects of reinsurance on written premiums and earned premiums, in
millions, are as follows:
<TABLE>
<CAPTION>
Written Premiums--
Nine Months Ended September 30,
-------------- 1995 ----------------- -------------- 1994 ----------------
Direct Assumed Ceded Net Direct Assumed Ceded Net
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 506.2 $ 88.5 $ 16.9 $ 577.8 $ 382.5 $ 85.1 $ 19.0 $ 448.6
Short Duration 6,823.5 950.1 491.3 7,282.3 6,306.0 1,030.1 457.0 6,879.1
---------------------------------------------------------------------------
Total ...... $7,329.7 $1,038.6 $ 508.2 $7,860.1 $6,688.5 $1,115.2 $476.0 $7,327.7
===========================================================================
<CAPTION>
Three Months Ended September 30,
-------------- 1995 ----------------- -------------- 1994 ----------------
Direct Assumed Ceded Net Direct Assumed Ceded Net
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 173.9 $ 28.0 $ 6.4 $ 195.5 $ 122.7 $ 27.2 $ 7.0 $ 142.9
Short Duration 2,301.1 377.9 190.4 2,488.6 2,121.4 302.2 143.1 2,280.5
---------------------------------------------------------------------------
Total ...... $2,475.0 $ 405.9 $ 196.8 $2,684.1 $2,244.1 $ 329.4 $150.1 $2,423.4
===========================================================================
<CAPTION>
Earned Premiums--
Nine Months Ended September 30,
-------------- 1995 ----------------- -------------- 1994 ----------------
Direct Assumed Ceded Net Direct Assumed Ceded Net
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 451.5 $ 88.5 $ 16.9 $ 523.1 $ 315.9 $ 85.1 $ 19.0 $ 382.0
Short Duration 8,069.4 1,014.2 1,025.6 8,058.0 6,127.0 1,025.2 451.9 6,700.3
---------------------------------------------------------------------------
Total ...... $8,520.9 $1,102.7 $1,042.5 $8,581.1 $6,442.9 $1,110.3 $470.9 $7,082.3
===========================================================================
<CAPTION>
Three Months Ended September 30,
-------------- 1995 ----------------- -------------- 1994 ----------------
Direct Assumed Ceded Net Direct Assumed Ceded Net
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contracts:
Long Duration . $ 156.5 $ 28.0 $ 6.4 $ 178.1 $ 92.7 $ 27.2 $ 7.0 $ 112.9
Short Duration 3,176.8 378.4 537.1 3,018.1 2,130.7 316.2 153.3 2,293.6
---------------------------------------------------------------------------
Total ...... $3,333.3 $ 406.4 $ 543.5 $3,196.2 $2,223.4 $ 343.4 $160.3 $2,406.5
===========================================================================
</TABLE>
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $782.8, $229.9, $1,112.8 and $489.7 million for the three
and nine months ended September 30, 1995 and 1994, respectively.
Page 8
5. Shareholders' equity:
<TABLE>
<CAPTION>
September 30, 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--117,929,800 and 58,964,900 shares $ 117,930 $ 58,965
Additional paid-in capital ................ 170,138 219,137
Earnings retained in the business ......... 6,446,327 5,469,874
Unrealized appreciation (depreciation) .... 550,478 (322,700)
Pension liability adjustment .............. (19,962)
----------------------------
Total ................................. 7,284,873 5,405,314
Less common stock (97,000 shares) held in
treasury, at cost ........................ 4,331
----------------------------
Total ................................. $7,280,542 $5,405,314
============================
</TABLE>
6. Legal Proceedings and Contingent Liabilities-
Fibreboard Litigation
---------------------
CNA's primary property and casualty subsidiary, Continental Casualty
Company ("Casualty"), 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, Casualty, Fibreboard, another
insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation), and a
negotiating committee of asbestos claimant attorneys (collectively
referred to as "Settling Parties") have reached a Global Settlement (the
"Global Settlement") to resolve all future asbestos-related bodily injury
claims involving Fibreboard. Casualty, Fibreboard and 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 Casualty's litigation with
Fibreboard.
On July 27, 1995 the United States District Court for the Eastern District
of Texas entered judgment approving the Global Settlement Agreement and
the Trilateral Agreement. As expected, appeals have been filed as respects
both of these decisions. Briefs will be filed with the United States Fifth
Circuit Court of Appeals in New Orleans this fall. The Court has scheduled
oral arguments for December 6 and 7, 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.
Page 9
Casualty 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 Casualty 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 Casualty, 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 Casualty 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 Casualty, 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 Casualty and Pacific Indemnity. On October 19, 1995 the
California Supreme Court transferred the case back to the Court of Appeal
with directions to vacate its decision and reconsider the case in light of
the Supreme Court's decision in Montrose Chemical Corp. v. Admiral Ins.
Co. (1995) 10 Cal.4th 645, where the Court adopted a continuous trigger in
litigation over the duty to defend bodily injury and property damage due
to exposure to D.D.T. Additional briefs will be filed in the Court of
Appeal by November 20, 1995. Casualty cannot predict the time frame within
which the issues before the California courts may be resolved. The appeal
of issues such as trigger of coverage and scope of coverage are in process
notwithstanding the pending proceedings to approve the Global and
Trilateral Agreements. If neither the Global Settlement nor the Trilateral
Agreement is finally approved, it is anticipated that Casualty and Pacific
Indemnity will resume the appeal process of the issues discrete to them.
Casualty'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.
Casualty'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
Page 10
until actual physical symptoms and associated functional impairment
manifest themselves. Thus, Casualty's position is that there would be
no coverage under Casualty'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, but is
now again before the Court due to the Supreme Court's transfer order.
Casualty'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, Casualty would only be liable
for that proportion of the bodily injury that occurred during the
22-month period its policy was in force.
. Casualty 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, Casualty's position is that coverage under the
Casualty 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.
. Casualty's policy had a $1 million per occurrence limit. Casualty
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
manufacture and sale of the product. Because the manufacture and sale
proceeded from two locations, Casualty 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 Casualty were successful on appeal on the dual coverage
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 Casualty would still have obligations under
the Casualty and Pacific Indemnity Agreement described below.
Under various reinsurance agreements, Casualty has asserted a right to
reimbursement for a portion of its potential exposure to Fibreboard. The
reinsurers have disputed Casualty's right to reimbursement and have taken
the position that any claim by Casualty 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 Casualty will be successful in obtaining a significant recovery under
its reinsurance agreements.
On April 9, 1993, Casualty 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 September 30, 1995, Casualty, Fibreboard and plaintiff attorneys
had reached settlements with respect to approximately 137,500 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
Page 11
court approval, Casualty'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 $793 million,
of which $556 million had been paid through September 30, 1995. Casualty
may negotiate other agreements with various classes of claimants including
groups who may have previously reached agreement with Fibreboard.
Casualty 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, Casualty, 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 Casualty 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 approval is subject to 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, Casualty,
Fibreboard and Pacific Indemnity entered into the Trilateral Agreement
which would, subject to court approval, settle the coverage case in the
event the Global Settlement approval by the trial court is not upheld on
appeal. In such case, Casualty 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 claims settled before August 23, 1993.
Casualty'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.
Casualty has agreed that if either the Global Settlement or the Trilateral
Agreement is finally 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, Casualty would be released by Fibreboard from any
further liability under the comprehensive general liability policy written
for Fibreboard by Casualty, including but not limited to liability for
asbestos-related claims against Fibreboard. The Trilateral Agreement
approval by the trial court is subject to possible appeal.
Casualty 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 trial court's
approval of the Global Settlement is upheld on appeal and also governs
certain obligations between the parties in the event the Global Settlement
is upheld on appeal including the payment of claims which are not included
in the Global Settlement.
In addition, Casualty and Pacific Indemnity have entered into an agreement
(the "Casualty-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 finally approved.
Page 12
Under the Casualty-Pacific Agreement, Casualty 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 finally approved, Casualty 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 finally approved, Pacific
Indemnity's share for unsettled present claims and presently settled
claims will be $635 million.
Reserves--In the fourth quarter of 1992, Casualty 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, Casualty added $500 million to such claim reserve in
the third quarter of 1993. The Fibreboard litigation represents the major
portion of Casualty'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 approved by the trial
court are subject to appeal. 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 Casualty's potential
liability for such future claimants if neither the approval of the Global
Settlement nor the Trilateral Agreement is upheld on appeal, keeping in
mind that Casualty'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
September 30, 1995, Casualty, Fibreboard and plaintiff attorneys have
reached settlements with respect to approximately 137,500 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 Casualty 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
Page 13
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 $13,300 per claim for the
before 1959 claims processed through September 30, 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 Casualty.
Casualty intervened and settled these claims for approximately $77,000 on
average, with a portion of the payment contingent on final approval on
appeal of the Global Settlement or the Trilateral Agreement, and if
neither is finally approved, subject to resolution of the coverage appeal.
Casualty 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 upheld on appeal, in
light of the factors discussed herein the range of Casualty'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.
Environmental Pollution and Asbestos
------------------------------------
The CNA property/casualty insurance companies have potential exposures
related to environmental pollution, asbestos-related and other toxic tort
claims.
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") establish 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
Page 14
estimates 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.
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, 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. As of September 30, 1995 and December 31,
1994, CNA carried approximately $986 and $509 million, respectively, of
claim and claim expense reserves, before reinsurance recoverable, for
reported and unreported environmental pollution claims. Included in the
September 30, 1995 reserves are $380 million related to CIC, whose
financial results are included in the accompanying financial statements
for the period May 10, 1995 through September 30, 1995. Unfavorable
reserve development for the nine months ended September 30, 1995 and the
year ended December 31, 1994 totaled $145 and $180 million, respectively.
The foregoing reserve information includes 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.
CNA has exposure to asbestos-related claims, including those attributable
to Fibreboard, and other toxic tort claims. Estimation of asbestos-related
and other toxic tort claim reserves encounter many of the same limitations
discussed above for environmental pollution claims such as inconsistency
of court decisions, specific policy provisions, multiple insurers and
allocation of liability among insurers, missing policies and proof of
coverage. As of September 30, 1995 and December 31, 1994, CNA carried
approximately $2,305 and $2,049 million, respectively, of claim and claim
expense reserves, before reinsurance recoverable, for reported and
Page 15
unreported asbestos-related and other toxic tort claims. Included in the
September 30, 1995 reserves are $319 million related to CIC, whose
financial results are included in the accompanying financial statements
for the period May 10, 1995 through September 30, 1995. Unfavorable
reserve development for the nine months ended September 30, 1995 and the
year ended December 31, 1994 totaled $105 and $37 million, respectively.
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.
The following table summarizes the reserves for environmental pollution,
asbestos-related and other toxic tort claims.
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------------------
(In thousands)
<S> <C> <C>
Environmental pollution ................... $ 986,000 $ 509,000
Asbestos and other toxic tort including
Fibreboard ............................... 2,305,000 2,049,000
-------------------------
3,291,000 2,558,000
Reinsurance recoverable ................... (161,000) (113,000)
-------------------------
Net reserves ............................ $3,130,000 $2,445,000
=========================
</TABLE>
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. As of October 31, 1995, 106 such cases were pending in
the United States federal and state courts against manufacturers of
tobacco products generally; Lorillard is a named defendant in 39 of these
cases and the Company is a defendant in two of these cases.
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
Page 16
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. 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
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. The United States Court of Appeals for the Fifth Circuit
granted defendants' motion for leave to file an interlocutory appeal from
this order, and defendant's appeal is pending.
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
Page 17
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 state or state agency actions and the Company is named as a
defendant in two 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. In the case of McGraw v. The American Tobacco Company, et
al., the court entered an order during June 1995 that granted defendants'
motion to dismiss eight of the ten counts of the complaint. The motion to
dismiss was not directed to plaintiff's two remaining claims of antitrust
and consumer fraud. At plaintiff's request, the court has entered final
judgment as to the dismissed claims to enable plaintiff to seek an appeal.
In the case of State of Minnesota v. Philip Morris Incorporated, et al.,
the Minnesota Supreme Court has agreed to hear defendants' appeal
contending that plaintiff Blue Cross and Blue Shield of Minnesota lacks
standing to assert claims and to seek damages from the defendants.
Plaintiff Blue Cross and Blue Shield of Minnesota seeks damages from the
defendants on its own behalf as a purchaser of health care services, and
on behalf of its fully insured groups with whom it has contracts, who have
allegedly been required to pay increased premiums for health insurance.
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. In June 1995, a ruling was
issued by a Florida state court that granted in part this motion for
declaratory judgment. The ruling declared that certain portions of the
statute on which the lawsuit against cigarette companies was based
violated the constitution of the State of Florida. The defendants in the
declaratory judgment action have noticed an appeal of the June 1995 order
to the Florida Court of Appeal. Plaintiffs have noticed a cross-appeal.
The appeals have been certified to the Florida Supreme Court, which heard
argument in the appeals on November 6, 1995. The Florida legislature has
passed legislation repealing the statute on which the lawsuit against the
cigarette companies is based, but the Governor of the State of Florida has
Page 18
signed a veto of the legislation repealing the statute. It is impossible
at this time to predict whether the Florida legislature will take further
action to repeal the statute on which the lawsuit against the cigarette
companies is based. 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
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. As of October 31, 1995, 13 such cases were pending in federal
and state courts against Lorillard. The Company is not named as a
defendant in any of these cases. 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. Trials were held in two of
these cases during 1995 and a trial in a third case is currently in
progress. In one of the cases, the jury returned a verdict in favor of
Lorillard. In the second case, the jury returned a verdict in favor of
plaintiffs and awarded a total of $2,000,000 in actual damages and
punitive damages. The verdict requires Lorillard to pay an amount between
$1,750,000 and $2,000,000. The precise amount to be paid by Lorillard will
be determined at a later date if the verdict withstands review by the
trial court and by appellate courts. Lorillard has filed with the trial
court a motion for judgment notwithstanding the verdict and for a new
trial. Lorillard intends to notice an appeal from the judgment in
plaintiffs' favor if the motion for judgment notwithstanding the verdict
and for a new trial is not successful. Lorillard is unable to predict the
Page 19
outcome of the motion for judgment notwithstanding the verdict and for a
new trial. Lorillard also is unable to predict the outcome of any
forthcoming appeal.
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 particular quarterly or annual period or its financial
position could be materially affected by an ultimately 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.
Page 20
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.
7. The Company's receivables are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------------------------
(In thousands)
<S> <C> <C>
Reinsurance ................................. $ 7,454,034 $3,754,980
Other insurance ............................. 5,785,885 3,294,142
Security sales .............................. 2,593,616 376,932
Federal income taxes ........................ 64,171 166,782
Other ....................................... 745,538 615,185
--------------------------
Total ..................................... 16,643,244 8,208,021
Less allowance for doubtful accounts and cash
discounts .................................. 223,103 140,005
--------------------------
Receivables-net ........................... $16,420,141 $8,068,016
==========================
</TABLE>
8. On August 1, 1995 CBS Inc. ("CBS") entered into an Agreement and Plan of
Merger with Westinghouse Electric Corporation ("WEC") and a subsidiary of
WEC (the "Subsidiary") pursuant to which the Subsidiary would be merged
with CBS and each share of common stock of CBS would be exchanged for cash
consideration of $81 per share plus interest thereon at the rate of 6% per
annum from August 31, 1995. The Company has entered into an agreement
dated August 1, 1995 with WEC pursuant to which the Company agreed to vote
its shares of common stock of CBS in favor of the proposed merger. In
addition to approval by the shareholders of CBS (a special meeting of
CBS's shareholders is scheduled for November 16, 1995), consummation of
the merger is subject to various regulatory approvals. Upon consummation
of the merger, the Company would realize gross proceeds of approximately
$890 million (without giving effect to any possible increase based on the
interest adjustment referred to above). Based on the carrying value of CBS
at September 30, 1995, the Company would recognize a pre-tax gain of
approximately $568 million. The actual gain recognized upon consummation
of the merger will vary based on the actual proceeds received as well as
any additional undistributed earnings recognized by the Company.
9. 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 September 30, 1995 and December 31, 1994 and the results of operations
for the three and nine months and the changes in its cash flows for the
nine months ended September 30, 1995 and 1994, respectively.
Results of operations for the third quarter and first nine months of each
of the years is not necessarily indicative of results of operations for
that entire year.
Page 21
10. Subsequent Events-
In October 1995 the Company's subsidiary, Diamond Offshore Drilling, Inc.
("Diamond Offshore"), sold 14,950,000 shares of its common stock through
an initial public offering at $24 per share. Diamond Offshore used the net
proceeds of approximately $338 million to fund the repayment of its
intercompany debt as well as a dividend to the Company. As a result of the
offering, the Company's ownership interest in Diamond Offshore declined to
approximately 70.1% and the Company will record a pre-tax gain of
approximately $195 million in the fourth quarter of 1995.
On October 17, 1995, the Board of Directors declared a two-for-one stock
split, by way of a stock dividend, distributable December 1, 1995, to
holders of record on November 3, 1995. All per share amounts included in
Parts I and II have been restated to reflect the stock split.
Page 22
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--
Acquisition of The Continental Corporation ("CIC")
--------------------------------------------------
As previously reported, on May 10, 1995, CNA consummated the acquisition of
all the outstanding shares of CIC for approximately $1.1 billion or $20 per CIC
share. As a result of the acquisition, CNA is the sixth largest U.S. insurance
organization, 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 (the "Bank
Facility") involving 16 banks led by The First National Bank of Chicago and The
Chase Manhattan Bank, N.A. The interest rate is based on the one, two, three or
six month London Interbank Offered Rate ("LIBOR"), as elected, plus 25 basis
points or other negotiated rates. Additionally, there is a facility fee of 10
basis points. 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.
To offset the variable rate characteristics of the facility, CNA entered into
five year interest rate swap agreements with several banks. These agreements
which terminate from May 2000 to July 2000 effectively convert variable rate
debt based on three month LIBOR into fixed rate debt resulting in fixed rates on
notional amounts aggregating $950 million. The weighted average fixed swap rate
at September 30, 1995 was 6.4%.
On August 10 1995, to take advantage of favorable interest rate spreads, CNA
established a Commercial Paper Program, borrowing $500 million from investors to
reduce a like amount of bank financing. The weighted average yield on commercial
paper at September 30, 1995 was 6.0%. The commercial paper borrowings are
classified as long-term debt as $500 million of the committed Bank Facility will
support the commercial paper program (at an undrawn cost of 10 basis points).
Standard and Poor's and Moody's issued short-term debt ratings of A2 and P2,
respectively, for CNA's Commercial Paper Program.
CNA has completed its preliminary purchase accounting analysis and the Company
filed pro forma financial information with the Securities and Exchange
Commission on July 24, 1995 on Form 8-K/A. Evaluation and appraisal of the net
assets is continuing and allocation of the purchase price may be adjusted. The
purchase adjustments resulted in goodwill of approximately $366 million that
will be amortized over twenty years at an annual charge of $18 million.
As a result of the CIC acquisition, A.M. Best, Moody's, Standard and Poor's
and Duff & Phelps issued revised ratings for CNA's Continental Casualty Company
("CCC") Intercompany Pool, Continental Insurance Company ("CIC") Intercompany
Pool and Continental Assurance Company ("CAC") Intercompany Pool. Also rated
were the senior debt of both CNA and CIC and CNA's preferred stock. In some
Page 23
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.
The chart below lists the current ratings:
Insurance Ratings Debt And Stock Ratings
---------------------- -------------------------------------
CNA CIC CNA CIC
--------------- --- --------------------------- ------
CCC CAC Senior Commercial Preferred Senior
Debt Paper Stock Debt
Financial Strength
----------------------
A.M. Best A A A- - - - -
Moody's A1 A1 A2 A3 P2 a3 Baa1
Claims Paying Ability
----------------------
Standard & Poor's A+ AA A- A- A2 A- BBB-
Duff & Phelps AA- AA - A- - A- -
General
-------
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, 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 nine months of 1995, CNA's operating activities generated net
cash flows of $409 million, compared to $745 million for the same period in
1994. The decrease in cash flows is due primarily to CIC activities, namely the
impact in 1995 from the 1994 sale of $408 million in receivables and increased
claim payments. 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.
The statutory surplus of the property/casualty subsidiaries amounts to $5.6
billion, including $1.7 billion for CIC's insurance subsidiaries, compared to a
pro forma combined $4.8 billion at December 31, 1994. The increase, excluding
that caused by the addition of CIC, resulted primarily from net income. The
statutory surplus of the life insurance subsidiaries is approximately $1.1
billion.
Page 24
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, or 2.7%.
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, purported class actions and actions
brought by state governments, most of which claim very substantial damages.
These actions are described in Note 6 of the Notes to Consolidated Condensed
Financial Statements.
On August 10, 1995, President Clinton announced that he had authorized the
Food and Drug Administration ("FDA") to assert regulatory jurisdiction over
cigarettes and smokeless tobacco products for the purpose of curbing smoking
among children and teenagers. On August 11, the FDA issued a notice of proposed
rulemaking. Among other things, the FDA's proposed rules would severely restrict
cigarette advertising and promotion, limit the manner in which tobacco products
can be sold and require cigarette manufacturers to finance antismoking education
programs. Comment on the FDA's proposed regulations must be filed on or before
January 2, 1996.
Lorillard and four other cigarette manufacturers have filed a lawsuit in the
United States District Court for the Middle District of North Carolina
challenging the FDA's assertion of jurisdiction over cigarettes and seeking both
preliminary and permanent injunctive relief. The complaint in the case, Coyne
Beahm, Inc., et al. v. United States Food & Drug Administration, et al., asserts
that the FDA lacks authority to regulate cigarettes and that the proposed rules
violate the Federal Food, Drug and Cosmetic Act, the Federal Cigarette Labeling
and Advertising Act and the United States Constitution. Lawsuits challenging the
FDA's rulemaking also have been filed in the same court by several smokeless
tobacco manufacturers, several national advertising trade associations and the
National Association of Convenience Stores.
The cigarette manufacturers and smokeless tobacco manufacturers have moved for
summary judgment, and the government has moved to dismiss the complaints. The
government has asked the court to stay briefing on the summary judgment motions
until it has ruled on the government's motions to dismiss.
Lorillard is assessing the impact, if any, of the FDA's proposed rules. In
addition, it is uncertain whether the proposed regulations will be modified
before they are promulgated in final form, whether Congress will pass
legislation that would moot the proposed regulations and whether the
manufacturers will succeed in securing judicial relief. Accordingly, the impact,
if any, of the FDA's proposed regulations on Lorillard cannot be predicted at
this time.
Corporate
- ---------
On October 17, 1995, the Board of Directors declared a two-for-one stock
split, by way of a stock dividend, distributable December 1, 1995, to holders of
Page 25
record on November 3, 1995. In addition, the Board declared a quarterly dividend
of $.25 per common share, on the post-split shares, effectively doubling the
Company's annual dividend rate.
In October 1995 the Company's subsidiary, Diamond Offshore Drilling, Inc.
("Diamond Offshore"), sold 14,950,000 shares of its common stock through an
initial public offering at $24 per share. Diamond Offshore used the net proceeds
of approximately $338 million to fund the repayment of its intercompany debt as
well as a dividend to the Company. As a result of the offering, the Company's
ownership interest in Diamond Offshore declined to approximately 70.1% and the
Company will record a pre-tax gain of approximately $195 million in the fourth
quarter of 1995.
On August 1, 1995 CBS Inc. ("CBS") entered into an Agreement and Plan of
Merger with Westinghouse Electric Corporation ("WEC") and a subsidiary of WEC
(the "Subsidiary") pursuant to which the Subsidiary would be merged with CBS and
each share of common stock of CBS would be exchanged for cash consideration of
$81 per share plus interest thereon at the rate of 6% per annum from August 31,
1995. The Company has entered into an agreement dated August 1, 1995 with WEC
pursuant to which the Company agreed to vote its shares of common stock of CBS
in favor of the proposed merger. In addition to approval by the shareholders of
CBS (a special meeting of CBS's shareholders is scheduled for November 16,
1995), consummation of the merger is subject to various regulatory approvals.
Upon consummation of the merger, the Company would realize gross proceeds of
approximately $890 million (without giving effect to any possible increase based
on the interest adjustment referred to above). Based on the carrying value of
CBS at September 30, 1995, the Company would recognize a pre-tax gain of
approximately $568 million. The actual gain recognized upon consummation of the
merger will vary based on the actual proceeds received as well as any additional
undistributed earnings recognized by the Company.
In the first quarter of 1995 the Company purchased 97,000 shares of its
outstanding Common Stock (on a post-split basis) at an aggregate cost of
approximately $4.3 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 26
Investments:
- -----------
Insurance
A summary of CNA's general account fixed income securities portfolio and
short-term investments are as follows:
<TABLE>
<CAPTION>
Change in
September 30, December 31, Unrealized
1995 1994 Gains
--------------------------------------
(In millions)
<S> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and
obligations of government agencies .. $12,501 $10,782 $ 839
Asset-backed securities .............. 4,955 2,564 196
Tax exempt securities ................ 3,419 3,770 47
Taxable .............................. 6,630 3,712 293
----------------------------------
Total fixed income securities ... 27,505 20,828 1,375
Stocks ................................. 743 755 123
Short-term and other investments........ 8,442 5,360
----------------------------------
Total ........................... $36,690 $26,943 $1,498
==================================
<CAPTION>
September 30, December 31,
1995 1994
--------------------------
(In millions)
<S> <C> <C>
Short-term investments:
Security repurchase collateral ....... $ 2,508 $ 2,479
Escrow ............................... 1,035 1,010
Others ............................... 4,134 1,547
Other investments ...................... 765 324
-----------------------
Total short-term and other
investments .................... $ 8,442 $ 5,360
=======================
</TABLE>
CNA's investment portfolio increased by $9.7 billion from December 31, 1994 to
September 30, 1995. This increase includes $7.4 billion related to the
acquisition of CIC.
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,
Page 27
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 instruments 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
September 30, 1995, short-term investments excluding collateral for securities
sold under repurchase agreements, comprised approximately 14% of the general
account's total investment portfolio compared to 9% at December 31, 1994.
Historically, CNA has maintained short-term assets at a level that provided for
liquidity to meet its short-term obligations. In the first nine months of 1995,
short-term investments have increased well above such levels as positive cash
flows, including proceeds from sales of securities, have not been invested in
long-term securities; currently, short-term interest rates are relatively
attractive compared to longer-term rates. At September 30, 1995, the major
components of the short-term investment portfolio were approximately $4.5
billion of high grade commercial paper and $2.0 billion of U.S. Treasury bills.
Collateral for securities sold under repurchase agreements remained at $2.5
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 nine months of 1995.
As of September 30, 1995, the market value of CNA's general account
investments in bonds and redeemable preferred stocks was $27.5 billion and
exceeded amortized cost by approximately $579 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 September 30, 1995, were $787 and $208 million, respectively, compared to
$194 and $989 million, respectively, at December 31, 1994.
Net unrealized investment gains on general account bonds at September 30, 1995
include net unrealized investment gains on high yield securities of $57 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 $1.7 billion at September 30, 1995,
compared to $1.0 billion at December 31, 1994.
At September 30, 1995, total Separate Account cash and investments amounted to
$6.0 billion with taxable debt securities representing approximately 92% of the
Separate Accounts' portfolio. Approximately 86% 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 September 30,
1995, fair values exceeded amortized cost by approximately $14 million. This
compares to $195 million of net unrealized losses at December 31, 1994. The
gross unrealized investment gains and losses for the GIC fixed income securities
portfolio at September 30, 1995 were $89 and $75 million, respectively, compared
to $34 and $229 million, respectively, at December 31, 1994.
Carrying values of high yield securities in the GIC portfolio were $1.0 and
$1.1 billion at September 30, 1995 and December 31, 1994. Net unrealized
investment losses on high yield securities held in such Separate Accounts were
Page 28
$26 million at September 30, 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 September 30, 1995, CNA's concentration in
high yield bonds, including Separate Accounts, was approximately 4.2% 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 half of one percent of its total assets.
Included in CNA's fixed income securities at September 30, 1995 (general and
GIC portfolios) are $7.4 billion of asset-backed securities, consisting of
approximately 33% in collateralized mortgage obligations ("CMO's"), 27% in
corporate asset-backed obligations, and 40% 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. At September 30, 1995, the
fair value of asset-backed securities exceeded amortized cost by approximately
$95 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 September 30, 1995, 61% of the general
account's debt securities portfolio was invested in U.S. government securities,
15% in other AAA rated securities and 12% in AA and A rated securities. CNA's
GIC fixed income portfolio is comprised of 32% U.S. government securities, 19%
other AAA rated securities and 17% in AA and A rated securities. These ratings
are primarily from nationally recognized rating agencies (92% of the general
account portfolio and 95% of the GIC portfolio).
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 income statement. The remaining
securities are carried at fair value with a net unrealized gain of $44.8 million
at September 30, 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.
Page 29
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.
At December 31, 1994 the Company's short-term investments portfolio included
$2.1 billion of proceeds from securities sold under agreements to repurchase.
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 increased by $1,414.3 and $3,038.4 million, or 39.9% and 30.0%, and
net income increased $252.2 and $832.0 million, respectively, for the quarter
and nine months ended September 30, 1995 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 Nine Months Ended
September 30, September 30,
-----------------------------------------------------
1995 1994 1995 1994
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues (a):
Property and casualty insurance ....... $3,104,736 $2,110,394 $ 8,069,225 $ 5,988,501
Life insurance ........................ 890,208 728,250 2,634,739 2,184,334
Cigarettes ............................ 539,756 506,139 1,524,567 1,444,740
Hotels ................................ 65,852 49,430 169,327 140,609
Watches and other timing devices ...... 27,117 38,063 77,160 106,083
Drilling .............................. 92,025 79,212 240,103 228,025
Investment income-net (non-insurance
companies) ........................... 237,085 28,174 460,723 28,667
Equity in income of CBS Inc. .......... 4,008 9,243 13,032 39,949
Other and eliminations--net ........... (1,205) (3,601) (6,725) (17,107)
---------------------------------------------------
$4,959,582 $3,545,304 $13,182,151 $10,143,801
===================================================
Net income (a):
Property and casualty insurance ....... $ 119,679 $ 40,819 $ 399,554 $ (37,716)
Life insurance ........................ 42,280 12,853 136,221 15,828
Cigarettes ............................ 95,171 93,858 268,029 262,844
Hotels ................................ 11,369 2,390 14,445 2,208
Watches and other timing devices ...... 834 65 1,913 26
Drilling .............................. 169 (8,799) (12,922) (23,196)
Investment income-net (non-insurance
companies) ........................... 139,086 16,829 296,053 16,748
Equity in income of CBS Inc. .......... 2,875 (503) 9,279 26,979
Interest expense and other--net ....... (25,058) (23,297) (91,933) (75,045)
---------------------------------------------------
$ 386,405 $ 134,215 $ 1,020,639 $ 188,676
===================================================
Page 30
(a) Includes realized investment gains (losses) as follows:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
1995 1994 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance ..... $ 80,830 $ (7,035) $215,482 $(127,799)
Life insurance ...................... 14,578 (10,988) 119,796 (69,370)
Investment income-net ............... 199,262 108 365,845 (48,349)
----------------------------------------------------
$294,670 $(17,915) $701,123 $(245,518)
====================================================
Net income:
Property and casualty insurance ..... $ 44,259 $ (3,560) $116,489 $ (71,957)
Life insurance ...................... 7,639 (5,555) 61,425 (31,201)
Investment income-net ............... 129,241 (376) 237,252 (31,656)
----------------------------------------------------
$181,139 $ (9,491) $415,166 $(134,814)
====================================================
</TABLE>
Insurance
- ---------
Property and casualty revenues, excluding realized investment gains (losses),
increased by $906.5 and $1,737.4 million, or 42.8% and 28.4%, respectively, for
the quarter and nine months ended September 30, 1995, as compared to the same
periods a year ago.
Property and casualty premium revenues increased by $668.6 and $1,288.5
million, or 38.0% and 25.3%, respectively, for the quarter and nine months ended
September 30, 1995 from the prior year's comparable period. The quarter and nine
months ended September 30, 1995 included premiums of $672 and $1,137 million,
respectively, from the acquisition of CIC. Other factors contributing to the
change in revenues were increases in small and medium commercial accounts, mass
marketing and reinsurance offset in part by decreases in large account premium
business due to the continued shift to high deductibles and decreases in
involuntary residual markets. Investment income increased $147.7 and $332.3
million, or 47.2% and 37.1%, for the quarter and nine months compared with the
same periods a year ago. Investment income increased primarily due to the
acquisition of CIC ($106.5 and $171.2 million for the quarter and nine months
ended September 30, 1995) continued strong positive cash flow and higher
yielding investments resulting from 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 7.0% in the first nine months of 1995 compared with
6.3% for the same period a year ago.
Life insurance revenues, excluding realized investment gains (losses),
increased by $136.4 and $261.2 million, or 18.5% and 11.6%, as compared to the
same periods a year ago. Life premium revenues increased by $124.8 and $221.1
million, or 19.4% and 11.2%, for the quarter and nine months ended September 30,
1995 with the primary growth in annuities, term life products and group
business. The increase was due primarily to new life products introduced in
1995. Life investment income increased by $9.1 and $37.8 million, or 11.4% and
16.6%, for the quarter and nine months ended September 30, 1995, compared to the
same periods 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 7.0% in the first nine months of 1995 compared with 6.5% for
the same period a year ago.
Page 31
Property and casualty underwriting losses for the quarter and nine months
ended September 30, 1995 were $273.8 and $737.8 million, compared to $293.3 and
$983.1 million for the same periods in 1994. The statutory combined ratio for
the quarter and nine months ended September 30, 1995 was 110.3% compared with
112.9% and 115.9%, respectively, for the same periods in 1994. Contributing to
the improvement in underwriting results were continued favorable trends in the
workers' compensation line and a lower level of catastrophe losses. Pre-tax
catastrophe losses for the quarter and nine months ended September 30, 1995 were
approximately $38 and $116 million, compared with $47 and $213 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 Nine Months Ended
September 30, September 30,
-----------------------------------------------------
1995 1994 1995 1994
-----------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Bonds:
U.S. Government....................... $ 1.3 $ (9.9) $ 99.2 $ (155.1)
Tax exempt............................ 5.7 (1.9) 23.6 21.2
Asset-backed.......................... 1.8 (16.5) 35.7 (60.9)
Taxable............................... (12.9) (1.7) (17.6) (40.9)
----------------------------------------------------
Total bonds...................... (4.1) (30.0) 140.9 (235.7)
Stocks.................................. 74.6 4.7 126.3 37.4
Derivative instruments ................. 8.0 6.6 .8 9.8
Other .................................. 16.9 .6 67.3 (8.7)
----------------------------------------------------
Total realized investment
gains (losses) ................. $ 95.4 $ (18.1) $335.3 $ (197.2)
====================================================
</TABLE>
For the nine months ended September 30, 1995, CNA's property/casualty group
sold approximately $25 billion of fixed income and equity securities, realizing
pre-tax gains of $206.5 million. Of the $25 billion of securities sold,
approximately $13 and $5 billion, respectively, were from the U.S. Treasury and
government mortgage-backed bond portfolios.
Cigarettes
- ----------
Revenues increased by $33.6 and $79.8 million, or 6.6% and 5.5%, and net
income increased by $1.3 and $5.2 million, or 1.4% and 2.0%, respectively, for
the quarter and nine months ended September 30, 1995 as compared to the
corresponding periods of the prior year.
The increase in revenues is primarily composed of an increase of approximately
$20.1 and $56.3 million, or 4.0% and 3.9%, due to higher unit sales volume and
an increase of approximately $13.9 and $23.8 million, or 2.8% and 1.6%,
reflecting higher average unit prices for the quarter and nine months ended
September 30, 1995, respectively, as compared to the corresponding periods of
the prior year. The increase in net income primarily reflects the higher
revenues, partially offset by increased sales promotion expenses and an
adjustment to state taxes in the prior year.
Page 32
Hotels
- ------
Revenues increased by $16.4 and $28.7 million, or 33.2% and 20.4%, and net
income increased by $9.0 and $12.2 million, respectively, for the quarter and
nine months ended September 30, 1995, as compared to the prior year.
Revenues and net income increased for the quarter and nine months ended
September 30, 1995, as compared to the prior year, due primarily to a pre-tax
and after tax gain of $14.5 and $9.5 million related to the division's cessation
of casino operations at its Monte Carlo hotel. Revenues and net income also
reflect higher occupancy and average room rates, and favorable foreign currency
fluctuations, partially offset by increased advertising expenses.
Watches and Other Timing Devices
- --------------------------------
Revenues decreased by $10.9 and $28.9 million, or 28.8% and 27.3%, and net
income increased by $.8 and $1.9 million, respectively, for the quarter and nine
months ended September 30, 1995 as compared to the corresponding periods in the
prior year. In January 1995, Bulova Corporation 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 increased $.3 and $8.4 million, or 1.1% and 12.1%,
and net income increased by $.7 and $2.1 million, respectively, for the quarter
and nine months ended September 30, 1995. Revenues and net income for the 1995
nine month period included interest income of $4.2 million and a tax expense of
$3.2 million resulting from a tax audit adjustment. Revenues for the quarter and
nine months ended September 30, 1995 also reflect increased unit sales volume
and price increases, partially offset by lower royalty income.
Drilling
- --------
Revenues increased by $12.8 and $12.1 million, or 16.2% and 5.3%, and results
from operations increased $9.0 and $10.3 million, respectively, for the quarter
and nine months ended September 30, 1995 as compared to the prior year.
Revenues for the quarter and nine months ended September 30, 1995 increased
due primarily to higher dayrates and utilization rates recognized by Diamond
Offshore's semisubmersible rigs located in the North Sea and the Gulf of Mexico.
These increases were partially offset by lower dayrates for jack-up rigs
operating in the Gulf of Mexico.
Results from operations for the quarter and nine months ended September 30,
1995 increased due primarily to the higher revenues discussed above, partially
offset by increased interest expense.
Other
- -----
Revenues increased by $206.1 and $415.5 million and net income increased by
$123.9 and $244.7 million, for the quarter and nine months ended September 30,
1995, 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.
Revenues include realized investment gains of $199.3 and $365.8 million,
respectively, for the quarter and nine months ended September 30, 1995, as
compared to a realized investment gain of $.1 million and losses of $48.3
Page 33
million, respectively, in the prior year. Net income includes realized
investment gains of $129.2 and $237.3 million, respectively, as compared to
losses of $.4 and $31.7 million, respectively, in the prior year. Realized
investment gains for the quarter and nine months ended September 30, 1995
include revenues of $227.5 and $372.9 million and net income of $147.9 and
$242.4 million related to the sale by the Company of most of its holdings of
Champion International Corporation.
Exclusive of securities transactions, revenues increased $6.9 and $1.3
million, or 20.5% and 1.3%, and net loss increased $5.7 and $24.2 million,
respectively, for the quarter and nine months ended September 30, 1995. Revenues
increased due primarily to higher investment income partially offset by lower
results from the Company's investment in CBS. Net loss increased due to lower
results from the Company's investment in CBS during the nine month period as
well as lower results from CNA's non-insurance operations.
Accounting Standards
- --------------------
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 6 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 6 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 nine months ended September 30, 1995.
(b) Current reports on Form 8-K--
On July 24, 1995, the Company filed an amendment to its report on Form 8-K
dated May 10, 1995 in order to provide the required financial statements and pro
forma financial information in relation to CNA's acquisition of CIC.
Page 34
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: November 14, 1995 By Roy E. Posner
-------------------------
ROY E. POSNER
Senior Vice President and
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
Page 35
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