================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
As at March 1, 1996, 117,832,800 shares of Common Stock of the Registrant were
outstanding and the aggregate market value of voting stock held by
non-affiliates was approximately $6,890,870,000.
Documents Incorporated by Reference:
Portions of the Loews Corporation Notice of Annual Meeting of Stockholders and
Proxy Statement dated March 28, 1996 are incorporated by reference into Part
III. (Registrant intends to file a definitive proxy statement with the
Commission prior to April 29, 1996.)
================================================================================
1
LOEWS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Item Page
No. PART I No.
- ---- ----
<S> <C> <C>
1 BUSINESS ............................................................ 3
CNA Financial Corporation ......................................... 3
Lorillard, Inc. ................................................... 16
Loews Hotels Holding Corporation .................................. 22
Diamond Offshore Drilling, Inc. ................................... 23
Bulova Corporation ................................................ 25
Other Interests ................................................... 25
2 PROPERTIES .......................................................... 26
3 LEGAL PROCEEDINGS ................................................... 26
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................. 27
EXECUTIVE OFFICERS OF THE REGISTRANT ................................ 27
PART II
5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS ............................................................ 28
6 SELECTED FINANCIAL DATA ............................................. 28
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................. 29
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......................... 40
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................... 86
PART III
Information called for by Part III has been omitted as Registrant
intends to file with the Securities and Exchange Commission not later
than 120 days after the close of its fiscal year a definitive Proxy
Statement pursuant to Regulation 14A.
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ..... 86
</TABLE>
2
PART I
Item 1. Business.
Loews Corporation is a holding company. Its subsidiaries are engaged in the
following lines of business: property, casualty and life insurance (CNA
Financial Corporation, an 84% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of hotels
(Loews Hotels Holding Corporation, a wholly owned subsidiary); the operation of
oil and gas drilling rigs (Diamond Offshore Drilling, Inc., a 70% owned
subsidiary); and the distribution and sale of watches and clocks (Bulova
Corporation, a 97% owned subsidiary).
Unless the context otherwise requires, the terms "Company" and "Registrant" as
used herein mean Loews Corporation and its subsidiaries, on a consolidated
basis.
Information relating to the major business segments from which the Company's
consolidated revenues and income are derived is contained in Note 21 of the
Notes to Consolidated Financial Statements, included in Item 8.
CNA FINANCIAL CORPORATION
CNA Financial Corporation ("CNA") was incorporated in 1967 as the parent
company of Continental Casualty Company ("CCC"), incorporated in 1897, and
Continental Assurance Company ("CAC") incorporated in 1911. In 1975, CAC became
a wholly owned subsidiary of CCC. On May 10, 1995, CNA acquired all of the
outstanding shares of The Continental Corporation ("CIC") for approximately $1.1
billion, or $20 per CIC share. The Continental Corporation, a New York
corporation incorporated in 1968, is an insurance holding company. Its principal
subsidiary, The Continental Insurance Company, was organized in 1853. Its
principal business is the ownership of a group of property/casualty insurance
companies.
CNA's property/casualty insurance operations are conducted by CCC and its
property/casualty insurance affiliates, and CIC and its property/casualty
insurance affiliates. Life insurance operations are conducted by CAC and its
life insurance affiliate. As a multiple-line insurer, CNA underwrites property,
casualty, life, and accident and health coverages. CNA's principal market for
insurance is the United States. CNA accounted for 78.75%, 81.27% and 80.32% of
the Company's total revenue for the years ended December 31, 1995, 1994, and
1993, respectively.
The following provides information regarding CNA's property/casualty insurance
and life insurance operations.
PROPERTY/CASUALTY INSURANCE
CNA's property/casualty operations market commercial and personal lines of
property/casualty insurance through independent agents and brokers.
CNA and its property/casualty insurance subsidiaries write primarily
commercial lines coverages. Customers include large national corporations,
small- and medium-sized businesses, groups and associations, and professionals.
Coverages are written primarily through traditional insurance contracts under
which risk is transferred to the insurer. Many large commercial account policies
are written under retrospectively-rated contracts which are experience-rated.
Premiums for such contracts may be adjusted, subject to limitations set by
contract, based on loss experience of the insureds. Other experience-rated
policies include provisions for adjustments to dividends based on loss
experience. Experience-rated contracts reduce but do not eliminate risk to the
insurer. Approximately 12% of CNA's property/casualty insurance is written on an
experience-rated basis.
CNA also provides loss control, policy administration and claim administration
services under service contracts for fees. Such services are provided primarily
in the workers' compensation market where retention of more risk by the employer
through self-insurance or high-deductible programs has become increasingly
prevalent.
3
Commercial business includes such lines as workers' compensation, general
liability, professional and specialty, multiple peril, and accident and health
coverages. Professional and specialty coverages include liability coverage for
architects and engineers, lawyers, accountants, medical and dental
professionals; directors and officers liability; and other specialized
coverages. CNA also assumes commercial risks from other insurers. The major
components of CNA's commercial business are workers' compensation, general
liability and professional and specialty coverages, which accounted for 19%, 19%
and 18%, respectively, of 1995 premiums earned.
CNA is required by the various states in which it does business to provide
coverage for risks that would not otherwise be considered under CNA's
underwriting standards. CNA's share of involuntary risks is mandatory and
generally a function of its respective share of the voluntary market by line of
insurance in each state. Premiums for involuntary risks result from mandatory
participation in residual markets.
CNA also markets personal lines of insurance, primarily automobile and
homeowners coverages sold to individuals under monoline and package policies.
The CIC meger made CNA the market leader in package personal lines products.
The following table sets forth supplemental data for the property/casualty
business:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1995 (a) 1994 1993
---------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Commercial Premiums Earned:
General liability .................. $ 1,648.9 $ 1,261.1 $ 1,154.5
Professional and specialty ......... 1,557.7 1,010.1 798.9
Workers' compensation .............. 1,475.8 1,426.3 1,501.5
Multiple peril ..................... 869.9 389.0 368.5
Reinsurance and other .............. 973.9 773.5 712.2
Accident and health ................ 699.1 557.1 428.3
-------------------------------------
$ 7,225.3 $ 5,417.1 $ 4,963.9
=====================================
Personal Premiums Earned:
Personal lines packages ............ $ 781.6 $ 562.6 $ 510.7
Monoline automobile and property
coverages ......................... 325.4 314.2 343.5
Accident and health ................ 107.8 88.9 85.6
-------------------------------------
$ 1,214.8 $ 965.7 $ 939.8
=====================================
Involuntary Risks Premiums Earned (b):
Workers' compensation .............. $ 178.2 $ 350.0 $ 292.3
Commercial passenger auto .......... 19.9 54.3 50.3
Private passenger auto ............. 79.7 46.4 23.2
Property and multiple peril ........ 5.9 5.0 5.5
-------------------------------------
$ 283.7 $ 455.7 $ 371.3
=====================================
Net Investment and Other Income:
Commercial ......................... $ 1,713.1 $ 1,145.2 $ 979.8
Personal ........................... 230.4 177.6 156.1
Involuntary risks .................. 104.3 88.1 75.7
-------------------------------------
$ 2,047.8 $ 1,410.9 $ 1,211.6
=====================================
Underwriting Loss:
Commercial ......................... $ (920.8) $ (945.7) $(1,535.6)
Personal ........................... (101.9) (185.2) (99.7)
Involuntary risks .................. (98.8) (70.3) (156.5)
-------------------------------------
$(1,121.5) $(1,201.2) $(1,791.8)
=====================================
4
Trade Ratios-GAAP basis (c):
Loss ratio ........................ 77.9% 81.9% 96.2%
Expense ratio ...................... 29.4% 28.3% 27.2%
Combined ratio (before policyholder
dividends) ........................ 107.3% 110.2% 123.4%
Policyholder dividend ratio ........ 3.0% 4.8% 3.9%
Trade Ratios-Statutory basis (c):
Loss ratio ......................... 78.6% 82.2% 96.4%
Expense ratio ...................... 29.2% 27.8% 27.1%
Combined ratio (before policyholder
dividends) ........................ 107.8% 110.0% 123.5%
Policyholder dividend ratio ........ 2.1% 3.8% 3.1%
Other Data-Statutory basis (d):
Capital and surplus ................ $5,695.9 $3,367.3 $3,598.4
Written to surplus ratio ........... 1.7 2.0 1.7
</TABLE>
- ----------------
(a) Premiums earned, net investment income and underwriting loss includes the
results of CIC since May 10, 1995.
(b) Property/casualty involuntary risks include mandatory participation in
residual markets, statutory assessments for insolvencies of other insurers and
other involuntary charges.
(c) GAAP trade ratios reflect the results of CCC and its property/casualty
insurance subsidiaries for the whole year, along with the results of CIC since
May 10, 1995. Statutory trade ratios reflect the results of CCC, its
property/casualty insurance subsidiaries and CIC for the entire year of 1995.
Prior year ratios have not been restated to include CIC. Trade ratios are
industry measures of property/casualty underwriting results. The loss ratio is
the percentage of incurred claim and claim adjustment expenses to premiums
earned. Under generally accepted accounting principles, the expense ratio is the
percentage of underwriting expenses, including the change in deferred
acquisition costs, to premiums earned. Under statutory accounting principles,
the expense ratio is the percentage of underwriting expenses (with no deferral
of acquisition costs) to premiums written. The combined ratio before
policyholder dividends is the sum of the loss and expense ratios. The
policyholder dividend ratio is the ratio of dividends incurred to premiums
earned.
(d) Other data is determined on the basis of statutory accounting practices
and reflects a capital contribution from CNA of $475 million in 1993. In
addition, dividends of $325, $175 and $150 million were paid to CNA by CCC in
1995, 1994 and 1993, respectively. Property/casualty insurance subsidiaries have
received reimbursement from CNA for general management and administrative
expenses, unallocated loss adjustment expenses and investment expenses of
$197.0, $169.6 and $167.5 million in 1995, 1994 and 1993, respectively.
The following table displays the distribution of domestic written premium by
state:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
State 1995 1994 1993
----- ------------------------------------
<S> <C> <C> <C>
New York ............................... 10.3% 8.6% 8.4%
California ............................. 9.7 11.4 12.1
Texas .................................. 6.5 6.5 6.2
Pennsylvania ........................... 5.4 5.7 5.9
Illinois ............................... 5.2 4.9 5.1
New Jersey ............................. 4.6 3.2 3.3
Florida ................................ 4.1 4.6 4.1
All other states (a) ................... 48.8 43.2 43.1
Reinsurance assumed:
Voluntary ............................ 3.4 5.9 6.9
Involuntary .......................... 2.0 6.0 4.9
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
- ---------------
(a) No other state accounts for more than 3.0% of gross written premium.
</TABLE>
5
The growth and profitability of CNA's property/casualty insurance business is
dependent on many factors, including competitive and regulatory influences, the
efficiency and costs of operations, underwriting quality, the level of natural
disasters, and investment results.
CNA's property/casualty operations continued to show significant improvement
in profitability during 1995, reflecting both improved investment income and
improved underwriting results. Contributing to the improved underwriting results
were continued favorable claim frequency (rate of claim occurrence) and severity
(average cost per claim) in the workers' compensation line. Legislative reforms
have cut costs in some states, residual market losses have dropped, and the
insurance regulators have sharpened their focus on workers' compensation fraud.
In an effort to maintain growth, CNA has intensified efforts in the political
arena to achieve a more predictable and equitable insurance marketing climate.
CNA's marketing strategies include emphasizing responsible pricing over premium
growth and aggressively adapting to changes in markets such as those in which
self-insurance has become important. CNA has also initiated wide-scale cost
management measures. CNA has continued actions to reduce or stabilize the cost
of doing business, including costs of health care, fraud and tort liability.
Programs include managed health care programs and intensified efforts of
fighting fraud.
Property/Casualty Claim and Claim Expenses: Property/casualty claim and claim
expense reserves, except reserves for structured settlements, workers'
compensation lifetime claims and accident and health disability claims, are
based on undiscounted (a) case basis estimates for losses reported on direct
business, adjusted in the aggregate for ultimate loss expectations, (b)
estimates of unreported losses based upon past experience, (c) estimates of
losses on assumed insurance, and (d) estimates of future expenses to be incurred
in settlement of claims. In establishing these estimates, consideration is given
to current conditions and trends as well as past CNA and industry experience.
The schedule on page 4 provides information on mix of business.
Structured settlements have been negotiated for claims on certain
property/casualty insurance policies. Structured settlements are agreements to
provide periodic payments to claimants, which are fixed and determinable as to
the amount and time of payment. Certain structured settlements are funded by
annuities purchased from CAC. Related annuity obligations are carried in future
policy benefits reserves. Obligations for structured settlements not funded by
annuities are carried at discounted values which approximate the alternative
cost of annuity purchases. Such reserves, discounted at interest rates ranging
from 6.3% to 7.5%, totaled $897.0 and $839.0 million at December 31, 1995 and
1994, respectively. Ultimate payouts under all structured settlements, funded or
unfunded, at December 31, 1995 and 1994 will approximate $3.0 and $2.4 billion,
respectively.
The loss reserve development table below illustrates the change over time of
reserves established for property/casualty claim and claim expenses at the end
of various calendar years. The first section shows the reserves as originally
reported at the end of the stated year. The second section, reading down, shows
the cumulative amounts paid as of the end of successive years with respect to
that reserve liability. The third section, reading down, shows reestimates of
the original recorded reserve as of the end of each successive year which is the
result of CNA's expanded awareness of additional facts and circumstances that
pertain to the unsettled claims. The last section compares the latest
reestimated reserve to the reserve originally established, and indicates whether
or not the original reserve was adequate or inadequate to cover the estimated
costs of unsettled claims.
6
The loss reserve development table is cumulative and, therefore, ending
balances should not be added since the amount at the end of each calendar year
includes activity for both the current and prior years.
<TABLE>
<CAPTION>
Schedule of Property/Casualty Loss Reserve Development
Year Ended December 31
------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995* 1995
------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves for
unpaid claim and
claim expenses ...... - - - - - 16,530 17,712 20,034 20,812 21,639 9,713 31,044
Ceded recoverable ..... - - - - - 3,440 3,297 2,867 2,491 2,705 3,650 6,089
------------------------------------------------------------------------------------
Net reserves for
unpaid claim and
claim expenses ....... 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 6,063 24,955
Net Paid (Cumulative)
as of:
One year later ...... 1,594 1,335 1,763 2,040 2,670 3,285 3,411 3,706 3,629 3,656 1,392 -
Two years later ..... 2,932 2,383 2,961 3,622 4,724 5,623 6,024 6,354 6,143 - - -
Three years later ... 3,022 3,197 4,031 4,977 6,294 7,490 7,946 8,121 - - - -
Four years later .... 3,642 3,963 5,007 6,078 7,534 8,845 9,218 - - - - -
Five years later .... 4,175 4,736 5,801 6,960 8,485 9,726 - - - - - -
Six years later ..... 4,735 5,339 6,476 7,682 9,108 - - - - - - -
Seven years later ... 5,233 5,880 7,061 8,142 - - - - - - - -
Eight years later ... 5,668 6,382 7,426 - - - - - - - - -
Nine years later .... 6,116 6,690 - - - - - - - - - -
Ten years later ..... 6,379 - - - - - - - - - - -
Net Reserves
Reestimated as of:
End of initial year . 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 6,063 24,955
One year later ...... 5,047 6,642 8,086 9,737 11,336 12,984 16,032 17,757 18,250 18,922 6,197 -
Two years later ..... 5,573 6,763 8,345 9,781 11,371 14,693 16,810 17,728 18,125 - - -
Three years later ... 5,788 6,989 8,424 9,796 13,098 15,737 16,944 17,823 - - - -
Four years later .... 6,170 7,166 8,516 11,471 14,118 15,977 17,376 - - - - -
Five years later .... 6,422 7,314 10,196 12,496 14,395 16,441 - - - - - -
Six years later ..... 6,566 9,022 11,239 12,742 14,811 - - - - - - -
Seven years later ... 8,317 10,070 11,480 13,167 - - - - - - - -
Eight years later ... 9,365 10,317 11,898 - - - - - - - - -
Nine years later .... 9,635 10,755 - - - - - - - - - -
Ten years later ..... 10,074 - - - - - - - - - - -
------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (5,201)(4,512)(3,853)(3,615)(3,544) (3,351)(2,961) (656) 196 12 (134) -
====================================================================================
Reconciliation to
Gross Reestimated
Reserves:
Net reserves
reestimated .......... - - - - - 16,441 17,376 17,823 18,125 18,922 6,197 -
Reestimated ceded
recoverable .......... - - - - - 3,029 2,925 2,546 2,522 2,760 3,650 -
------------------------------------------------------------------------------------
Total gross
reestimated reserves - - - - - 19,470 20,301 20,369 20,647 21,682 9,847 -
====================================================================================
Net (Deficiency)
Redundancy Related to:
Asbestos claims ..... (2,937)(2,973)(2,925)(2,868)(2,769) (2,631)(2,583) (894) (294) (258) - -
Environmental claims (957) (957) (943) (937) (910) (899) (853) (806) (360) (181) (60) -
------------------------------------------------------------------------------------
Total asbestos and
environmental ...... (3,894)(3,930)(3,868)(3,805)(3,679) (3,530)(3,436)(1,700) (654) (439) (60) -
Other ............... (1,307) (582) 15 190 135 179 475 1,044 850 451 (74) -
------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (5,201)(4,512)(3,853)(3,615)(3,544) (3,351)(2,961) (656) 196 12 (134) -
====================================================================================
</TABLE>
* Represents CIC reserves acquired on May 10, 1995 and subsequent development
thereon, through December 31, 1995. This balance needs to be combined with
balances reflected in the 1994 column to determine development recorded for the
consolidated CNA property/casualty subsidiaries.
7
Most of CNA's unfavorable reserve development has been due to asbestos and
environmental claims. See Note 10 of the Notes to Consolidated Financial
Statements, included in Item 8, for information regarding property/casualty
claim and claim expenses including reserve development for asbestos and
environmental claims. A discussion of CNA's litigation with Fibreboard
Corporation regarding asbestos-related bodily injury claims can be found in Note
19 of the Notes to Consolidated Financial Statements, included in Item 8.
LIFE INSURANCE
CNA's life insurance operations market individual and group insurance products
through licensed agents, most of whom are independent contractors, who sell life
and/or group insurance for CNA and for other companies on a commission basis.
Individual insurance products include life and annuity products, which are
sold to individuals and small businesses. The individual life products currently
being marketed consist primarily of term, universal and participating life
policies and annuities. The individual accident and health policies currently
being marketed are long-term disability products. Individual annuity products
consist of both single premium annuities and periodic payment annuities.
Group insurance products include life, accident and health and pension
products which are sold to employers, employer associations and trusts, ranging
in size from small local employers to large multinational corporations. The
group accident and health plans are primarily major medical and hospitalization.
Most of the major medical and hospitalization plans are written under
experience-rated contracts or contracts to provide claim administrative services
only. The growth in premium and life insurance in-force is attributable to new
term and permanent life products, as well as annuities.
CNA's products are designed and priced using assumptions CNA management
believes to be reasonably conservative for mortality, morbidity, persistency,
expense levels and investment results. Underwriting practices that CNA
management believes are prudent are followed in selecting the risks that will be
insured. Further, actual experience related to pricing assumptions is monitored
closely so that prospective adjustments to these assumptions may be implemented
as necessary. CNA mitigates the risk related to persistency by including
contractual surrender charge provisions in its ordinary life and annuity
policies in the first five to ten years, thus providing for the recovery of
acquisition expenses. The investment portfolios supporting interest sensitive
products, including universal life and individual annuities, are managed
separately to minimize disintermediation and interest rate risk.
Profitability in the health insurance business continues to be impacted by
intense competition and rising medical costs. CNA has aggressively pursued
expense reduction through increases in automation and other productivity
improvements. Further, increasing costs of health care have resulted in a
continued market shift away from traditional forms of health coverage toward
managed care products and experience-rated plans. CNA's ability to compete in
this market will be increasingly dependent on its ability to control costs
through managed care techniques, innovation, and quality customer focused
service in order to properly position CNA in the evolving health care
environment.
Although comprehensive health care reforms were not enacted in 1995, some
health care initiatives could emerge in 1996. CNA has urged a meaningful role
for the private sector in any proposed plan. The present health care system is
clearly in need of reform, and CNA has emphasized that the competitive strengths
of the insurance industry must be an integral part of a workable solution.
8
The following table sets forth supplemental data for the life insurance
business:
<TABLE>
<CAPTION> Year Ended December 31
----------------------------------
1995 1994 1993
----------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Individual Premiums:
Life and annuities .................. $ 497.1 $ 369.4 $ 312.1
Accident and health ................. 32.7 32.6 30.9
---------------------------------
$ 529.8 $ 402.0 $ 343.0
=================================
Group Premiums:
Life ................................ $ 167.7 $ 138.7 $ 107.2
Accident and health (a) ............. 2,189.8 2,111.2 1,983.0
Annuities ........................... 145.1 26.3 9.0
---------------------------------
$ 2,502.6 $2,276.2 $2,099.2
=================================
Net Investment Income and Other Income:
Individual .......................... $ 247.3 $ 193.8 $ 154.2
Group ............................... 198.1 166.4 142.8
---------------------------------
$ 445.4 $ 360.2 $ 297.0
=================================
Income Excluding Realized Capital
Gains, Before Income Tax:
Individual .......................... $ 65.4 $ 47.3 $ 14.5
Group ............................... 94.9 87.1 51.9
---------------------------------
$ 160.3 $ 134.4 $ 66.4
=================================
Gross Life Insurance in Force:
Individual (b) ...................... $ 113,901 $ 80,560 $ 76,835
Group ............................... 52,146 46,873 35,413
---------------------------------
$ 166,047 $127,433 $112,248
=================================
Other Data-Statutory Basis (c):
Capital and surplus ................. $ 1,127.6 $1,054.6 $1,022.0
Capital and surplus-percent of total
liabilities ........................ 28.2% 29.4% 30.1%
Participating policyholders'-percent
of gross life insurance in force ... .6% .9% 1.1%
- --------------
(a) Group accident and health premiums include contracts involving U.S.
government employees and their dependents amounting to approximately $1.9, $1.8
and $1.7 billion in 1995, 1994 and 1993, respectively.
(b) Lapse ratios, for individual life insurance, as measured by surrenders and
withdrawals as a percentage of average ordinary life insurance in force were
9.4%, 9.7% and 9.7%, in 1995, 1994 and 1993, respectively.
(c) Other Data is determined on the basis of statutory accounting practices.
Life insurance subsidiaries have received reimbursement from CNA for general
management and administrative expenses and investment expenses in the amounts of
$21.3, $24.7 and $25.6 million in 1995, 1994 and 1993, respectively. Statutory
capital and surplus as a percent of total liabilities is determined after
excluding Separate Account liabilities and reclassifying the Asset Valuation and
Interest Maintenance Reserves (statutorily defined as created reserves) as
surplus.
</TABLE>
9
Guaranteed Investment Contracts
CAC writes the majority of its group pension products as guaranteed investment
contracts ("GIC's") in a fixed Separate Account, which is permitted by Illinois
insurance statutes. CAC guarantees principal and a specified return to GIC
contract holders. This guarantee affords the contract holders additional
security, in the form of CAC's general account surplus, which supports the
principal and interest payments.
CNA manages the liquidity and interest rate risks on the GIC portfolio by
matching the duration of fixed maturity securities included in the guaranteed
investment contract portfolio with the corresponding payout pattern of the
contracts, and assessing market value surrender charges on the majority of the
contracts.
The table below shows a comparison of the duration of assets and contracts,
weighted average investment yield, weighted average interest crediting rates and
withdrawal characteristics of the GIC portfolio.
<TABLE>
<CAPTION>
December 31
-----------------------------------
1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Duration in years:
Assets ............................. 3.12 3.23 2.68
Contracts .......................... 2.98 2.99 2.73
---------------------------------
Difference ...................... .14 .24 (.05)
=================================
Weighted average investment yield .... 7.58% 7.67% 7.11%
=================================
Weighted average interest crediting
rates ............................... 7.45% 7.53% 7.74%
=================================
Withdrawal Characteristics:
With market value adjustment ....... 92% 79% 81%
Non-withdrawable ................... 8 15 13
Without market value adjustment .... 6 6
---------------------------------
Total ........................... 100% 100% 100%
=================================
</TABLE>
As shown above, the investment yields at December 31, 1995 and 1994 were more
than the average crediting rate. The investment yield at December 31, 1993 was
less than the average crediting rate. This resulted from the reinvestment of
proceeds from security sales that generated substantial gains, at rates that
were lower than those of the securities sold. However, because the security
sales created a larger asset base to reinvest, the aggregate future cash flows
from interest and principal were substantially unchanged and sufficient to meet
the contract obligations.
INVESTMENTS
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 maturity portfolio to maturity. However,
securities may be sold as part of CNA's asset/liability strategies or to take
advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, or other similar factors.
Accordingly, the fixed maturity securities are classified as available-for-sale.
CNA's portfolio is managed based on the following investment strategies: (i)
diversification is used to limit exposures to any one issue or issuer, and (ii)
in general, the public market is used in order to provide liquidity.
Historically, CNA has maintained short-term assets at a level that provided
for liquidity to meet its short-term obligations, principally anticipated claim
payments. At December 31, 1995, short-term investments primarily consisted of
U.S. treasury bills and high-grade commercial paper. The major components of the
short-term investment portfolio were $0.8 billion of collateral for securities
sold under agreements to repurchase, $1.0 billion in an escrow account (see Note
1 of the Notes to Consolidated Financial Statements, included in Item 8) and
approximately $1.9 billion of other short-term investments.
10
The following summarizes CNA's distribution of general account investments:
<TABLE>
<CAPTION>
December 31
---------------------
1995 1994
---------------------
(In millions)
<S> <C> <C>
Fixed maturities:
Tax-exempt bonds ................................... $ 3,603 $ 3,770
Taxable bonds ...................................... 26,725 16,629
Redeemable preferred stocks ........................ 116 429
Equity securities:
Common stocks ...................................... 915 755
Non-redeemable preferred stocks .................... 3
Mortgage loans and real estate ....................... 122 47
Policy loans ......................................... 177 176
Other invested assets ................................ 500 101
Short-term investments ............................... 3,725 5,036
---------------------
Total investments ............................... $35,886 $26,943
=====================
</TABLE>
CNA's general account fixed income portfolio has consistently been of high
quality as illustrated in the following table using the Standard & Poor's
ratings convention (see Note below).
<TABLE>
<CAPTION>
December 31
---------------------
1995 1994
---------------------
<S> <C> <C>
AAA .................................................. 78% 82%
AA ................................................... 5 6
A .................................................... 6 5
BBB .................................................. 5 2
Below BBB ............................................ 6 5
-------------------
Total ........................................... 100% 100%
===================
</TABLE>
CNA's Separate Account investment portfolio is managed to specifically support
the underlying insurance products (see the discussion of GIC's in "Life
Insurance" above). Approximately 85%, or $5.0 billion, of Separate Account
investments are used to fund GIC's; the remaining investments are used to fund
variable products. Approximately 96% of the GIC investment portfolio is
comprised of taxable fixed income securities. The quality of the GIC fixed
maturity portfolio is as follows (see Note below):
<TABLE>
<CAPTION>
December 31
--------------------
1995 1994
--------------------
<S> <C> <C>
AAA .................................................. 54% 49%
AA ................................................... 5 5
A .................................................... 14 13
BBB .................................................. 7 9
Below BBB ............................................ 20 24
------------------
Total ........................................... 100% 100%
==================
</TABLE>
Note: The bond ratings shown in the two tables above are primarily from
Standard & Poor's (93% of the general account portfolio and 95% of the GIC
portfolio in 1995). In the case of private placements and other unrated
securities, comparable internal ratings are developed by CNA. These ratings are
derived by management using available information on the issuer to assess the
credit risk. Reference also may be made to similar instruments of the issuer
that are rated by Standard & Poor's. In the case of unrated municipal bonds, an
AAA rating may be assigned to issues with financial guarantee insurance.
11
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. CNA's concentration in high yield bonds
including Separate Accounts was approximately 4.7% of its total assets. In 1995,
the level of high yield investments within the GIC portfolio decreased $158
million to $944 million at year end. This decrease is a result of the relative
attractiveness of other investment opportunities in comparison to the high yield
investment market during the year.
At December 31, 1995 and 1994, high yield securities within the general and
GIC portfolios were carried at fair value and amounted to $2.8 and $2.1 billion,
respectively. Market value exceeded amortized cost for high yield securities by
approximately $53 million at December 31, 1995 compared to December 31, 1994
when amortized cost exceeded market value by $138 million.
Included in CNA's 1995 AAA-rated fixed income securities (general and GIC
portfolios) are $8.5 billion of asset-backed securities, consisting of
approximately 57% in U.S. government agency issued pass-through certificates,
32% in collateralized mortgage obligations ("CMO's") and 11% in corporate
asset-backed obligations. The majority of CMO's held are U.S. government agency
issues which are actively traded in liquid markets and are priced by
broker-dealers. CNA limits the risks associated with interest rate fluctuations
and prepayment by concentrating its CMO investments in planned amortization
classes with relatively short principal repayment windows. CNA generally does
not invest in complex mortgage derivatives without readily ascertainable market
prices.
CNA invests from time to time in certain derivative financial instruments to
increase investment returns and to eliminate the impact of changes in interest
rates on certain corporate borrowings. Financial instruments used for such
purposes include interest rate swaps, put and call options, commitments to
purchase securities, and short sale of common stock. The gross notional
principal or contractual amounts of these instruments at December 31, 1995,
totaled $2,769.8 million compared to $127.9 million at December 31, 1994. See
Note 4 of the Notes to the Consolidated Financial Statements, included in Item
8, for further discussion.
OTHER
Competition: All aspects of the insurance business are highly competitive.
CNA's insurance operations compete with a large number of stock and mutual
insurance companies and other entities for both producers and customers and must
continuously allocate resources to refine and improve insurance products and
services. There are approximately 3,300 companies that sell property/casualty
insurance in the United States, approximately 900 of which operate in all or
most states. CNA's consolidated property/casualty subsidiaries (including CIC on
a proforma basis) would have been ranked as the third largest property/casualty
insurance organization based on statutory premiums written in 1994. There are
approximately 1,800 companies selling life insurance (including health insurance
and pension products) in the United States. CAC is ranked as the twenty-fourth
largest life insurance organization based on consolidated statutory premium
volume in 1994.
Dividends by Insurance Subsidiaries: The payment of dividends to CNA by its
insurance affiliates without prior approval of the affiliate's domiciliary state
insurance commissioners is limited to amounts determined by formula in
accordance with the accounting practices prescribed or permitted by the states'
insurance departments. This formula varies by state. The formula for the
majority of states is the greater of 10% of prior year statutory surplus or
prior year statutory net income, less the aggregate of all dividends paid during
the twelve months prior to the date of payment. Some states, however, have an
additional stipulation that dividends cannot exceed prior year earned surplus.
Based upon the various states formulas, approximately $860 million in dividends
could be paid to CNA by its insurance affiliates in 1996 without prior approval.
All dividends must be reported to the insurance department prior to declaration
and payment.
12
Regulation: The insurance industry is subject to comprehensive and detailed
regulation and supervision throughout the United States. Each state has
established supervisory agencies with broad administrative power relative to
licensing insurers and agents, approving policy forms, establishing reserve
requirements, fixing minimum interest rates for accumulation of surrender values
and maximum interest rates of policy loans, prescribing the form and content of
statutory financial reports, regulating solvency and the type and amount of
investments permitted. Regulatory powers also extend to premium rate regulations
which require that rates not be excessive, inadequate or unfairly
discriminatory. In addition to regulation of dividends by insurance subsidiaries
discussed above, intercompany transfers of assets may be subject to prior notice
or approval, depending on the size of such transfers and payments in relation to
the financial position of the insurance affiliates making the transfer.
There has been a growing legislative trend, particularly for personal lines
products and workers' compensation, directly impacting insurance rate
development, rate application and the ability of insurers to cancel or renew
insurance policies.
Insurers are also required by the states to provide coverage to insureds who
would not otherwise be considered eligible by the insurers. Each state dictates
the types of insurance and the level of coverage which must be provided to such
involuntary risks. CNA's insurance subsidiaries' share of these involuntary
risks is mandatory and generally a function of its respective share of the
voluntary market by line of insurance in each state.
In recent years, insolvencies of a few large insurers previously believed to
be on solid financial ground by many rating agencies and state regulators led to
increased scrutiny of state regulated insurer solvency requirements by certain
members of the U.S. Congress. Had Congress formally adopted initiatives in the
103rd Congress, insurers would have been subject to federal solvency regulation.
In response to this challenge, the National Association of Insurance
Commissioners ("NAIC") developed industry minimum Risk-Based Capital ("RBC")
requirements, established a formal state accreditation process designed to more
closely regulate for solvency, minimize the diversity of approved statutory
accounting and actuarial practices, and increased the annual statutory statement
disclosure requirements.
The RBC formulas are designed to identify an insurer's minimum capital
requirements based upon the inherent risks (e.g., asset default, credit and
underwriting) of its operations. In addition to the minimum capital
requirements, the RBC formula and related regulations identify various levels of
capital adequacy and corresponding actions that the state insurance departments
should initiate. The level of capital adequacy below which insurance departments
would take action is defined as the Company Action Level. As of December 31,
1995, all of CNA's life insurance affiliates and property/casualty affiliates
have adjusted capital amounts in excess of Company Action Levels.
The NAIC also maintains the Insurance Regulatory Information System ("IRIS"),
which assists state insurance departments in overseeing the financial condition
of both life and property/casualty insurers through application of a number of
financial ratios. These ratios have a range of results characterized as "usual"
by the NAIC. The NAIC IRIS user guide regarding these ratios specifically states
that "Falling outside the usual range is not considered a failing result..." and
"...in some years it may not be unusual for financially sound companies to have
several ratios with results outside the usual range." It is important,
therefore, that IRIS ratio test results be reviewed carefully in conjunction
with all other financial information.
CCC had no IRIS ratios with unusual values in 1995. The one ratio with an
unusual value in 1994 was the two-year overall operating ratio. The three IRIS
ratios with unusual values in 1993 were the two-year overall operating,
investment yield, and the two-year reserve development ratios. Catastrophe
losses and reserve increases associated with Fibreboard Corporation litigation
(see Note 19 of the Notes to Consolidated Financial Statements included in Item
8) recorded in 1992 and 1993 triggered the unusual values for the operating
ratios generated in 1993 and 1994 and reserve development ratios generated in
1993. Additionally, lower interest rates in 1993, coupled with a proportionately
large short-term investment portfolio, triggered the unusual value for the
investment yield ratio.
13
CIC had three IRIS ratios with unusual values in 1995. These ratios were
change in writings, two-year overall operating ratio, and the two-year reserve
development to surplus. The overall decline in premiums written is attributable
to CIC's efforts to shift its business mix towards more profitable lines. The
two-year overall operating and the two-year reserve development to surplus
ratios were adversely impacted by the establishment of environmental reserves of
$400 million for incurred but not reported losses in 1994 and $200 million in
other loss reserve development, principally in workers' compensation. Further,
in 1994, results were adversely affected by catastrophe losses.
CAC had no IRIS ratios with unusual values in 1995 or 1994. CAC had two
unusual values for IRIS ratios in 1993, which were net gain to total income and
change in net written premium. CAC's reported statutory net income was adversely
affected in 1993 by depressed investment earnings. The unusual value for the
change in premium ratio primarily related to decreases in the Separate Account
annuity products fund deposits.
The potential for health care reform had been widely publicized and debated in
1994. Although these legislative reforms failed in 1994, and none were enacted
in 1995, some federal or state health care reform could emerge in the future.
Federal regulation of the insurance industry and repeal of the McCarran-Ferguson
anti-trust exemptions for the insurance industry were widely discussed topics in
the 103rd Congress but have not been of interest in the first session of the
104th Congress in 1995, and are not anticipated to be of interest in the second
session in 1996.
Although the courts and legislatures are often asked to expand liability,
there is a growing trend among business and professional organizations to wage
campaigns, which in several instances have been successful, aimed at limiting
their liability risks. A number of states have adopted some "tort reform"
measures which, among other things, limit non-economic and punitive damages and
otherwise limit damage awards in product liability and malpractice cases.
Illinois and Texas adopted substantial tort reform in 1995 limiting non-economic
damages and the amount of punitive damages in all civil actions. Arizona,
Colorado, Connecticut, Indiana, Michigan, Montana, New Jersey, North Carolina,
North Dakota, Oklahoma, Oregon, South Dakota and Wisconsin all adopted some
measure of tort reform.
Environmental 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. See Note
10 of the Notes to Consolidated Financial Statements, included in Item 8, for
further discussion.
Reinsurance: CNA assumes and cedes insurance with other insurers and
reinsurers. CNA utilizes reinsurance arrangements to limit its maximum loss, to
provide greater diversification of risk and to minimize aggregate exposures. The
reinsurance coverages are tailored to the specific risk characteristics of each
product line with CNA's retained amount varying by type of coverage. Generally,
reinsurance coverage for property risks is on an excess of loss, per risk basis.
Liability coverages are generally reinsured on a quota share basis in excess of
CNA's retained risk.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after careful
review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance. Further, for
carriers that are not authorized reinsurers in its states of domiciles, CNA
receives collateral, primarily in the form of bank letters of credit, securing a
large portion of the recoverables. Such collateral totaled approximately $1,300
and $165 million at December 31, 1995 and 1994, respectively. CNA's largest
billed recoverable from a single reinsurer, including prepaid reinsurance
premiums, was approximately $435 and $348 million with Lloyd's of London at
December 31, 1995 and 1994, respectively.
14
Properties: CNA leases office space in various cities throughout the United
States and in other countries. The following table sets forth certain
information with respect to the principal office buildings owned or leased by
CNA:
<TABLE>
<CAPTION>
Size
Location (square feet) Principal Usage
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Owned:
CNA Plaza 1,421,000 Principal Executive Offices of CNA,
333 S. Wabash Insurance Operations and Asset Management
Chicago, Illinois
180 Maiden Lane 605,777 Property/Casualty Insurance Offices
New York, New York
55 E. Jackson Blvd. 399,100 Property/Casualty Insurance Offices
Chicago, Illinois
401 Penn Street 251,691 Property/Casualty Insurance Offices
Reading, Pennsylvania
100 CNA Drive 251,363 Life Insurance Offices
Nashville, Tennessee
1100 Ward Avenue 95,450 First Insurance Company of Hawaii Ltd.
Honolulu, Hawaii Headquarters
Leased:
1 Continental Drive 490,993 Property/Casualty Insurance Offices
Cranbury, New Jersey
200 S. Wacker Drive 290,104 Property/Casualty Insurance Offices
Chicago, Illinois
7361 Calhoun Place 224,175 Life Insurance Offices
Rockville, Maryland
1111 E. Broad St. 197,537 Property/Casualty Insurance Offices
Columbus, Ohio
333 Glen Street 158,700 Property/Casualty Insurance Offices
Glen Falls, New York Residual Market Center
3501 State Highway 129,965 Data Processing Facilities
No. 66, Neptune
New Jersey
15400 Calhoun Drive 106,848 Life Insurance Offices
Rockville, Maryland
1431 Opus Place 100,991 Property/Casualty, Surety Insurance
Downers Grove, Illinois Offices
</TABLE>
15
LORILLARD, INC.
The Company's wholly owned subsidiary, Lorillard, Inc. ("Lorillard"), is
engaged, through its subsidiaries, in the production and sale of cigarettes. The
principal cigarette brand names of Lorillard are Newport, Kent and True.
Lorillard's largest selling brands are the Newport and Kent brands, which
accounted for approximately 70% and 11%, respectively, of Lorillard's sales in
1995.
In 1996, Lorillard entered into an agreement with Brown & Williamson Tobacco
Corporation ("B&W") to acquire certain of B&W's discount cigarette brands.
Together, these brands represented approximately 1% of the U.S. cigarette market
in 1995, according to the Maxwell Consumer Report. This acquisition is subject
to approval by the Federal Trade Commission and there can be no assurance that
such approval will be obtained.
Substantially all of Lorillard's sales are in the United States. Lorillard's
major trademarks outside of the United States were sold in 1977. Lorillard
accounted for 11.00%, 14.29% and 13.95% of the Company's total revenue for the
years ended December 31, 1995, 1994 and 1993, respectively.
Smoking and Health and Related Matters: For a number of years reports of the
asserted harmful health effects of cigarette smoking have engendered significant
adverse publicity for the cigarette industry, have caused a decline in the
social acceptability of cigarette smoking and have resulted in the
implementation of numerous restrictions on the marketing, advertising and use of
cigarettes. Along with significant increases in federal and state excise taxes
on cigarettes, these actions have, and are likely to continue to have, an
adverse effect on cigarette sales.
Litigation: A large number of lawsuits, including lawsuits brought by
individual plaintiffs and purported class actions, and lawsuits brought on
behalf of states and state agencies ("State Reimbursement Cases"), have been
commenced against Lorillard and other tobacco manufacturers seeking substantial
compensatory and punitive damages for adverse health effects claimed to have
resulted from cigarette smoking or exposure to tobacco smoke. For information
with respect to such litigation pending as of February 1996, see Note 19 of the
Notes to Consolidated Financial Statements included in Item 8 of this Report and
incorporated herein by reference.
In March 1996 there have been the following additional developments:
On March 13, 1996 the Attorney General of Louisiana commenced Ieyoub v. The
American Tobacco Company, et al., (District Court, Calcasieu Parish, Louisiana).
This is the sixth action by a state or state agency seeking recovery of funds
expended to provide health care to individuals with injuries or other health
effects allegedly caused by use of tobacco products or exposure to cigarette
smoke. Lorillard understands that additional attorneys general may file similar
actions in the near future.
On March 15, 1996 a jury returned a verdict against Lorillard in a case
seeking damages for cancer and other health effects claimed to have resulted
from exposure to asbestos fibers which were incorporated, for a limited period
of time ending 40 years ago, into the filter material used in one of the brands
of cigarettes manufactured by Lorillard. The jury awarded plaintiff damages of
$140,000. The time for Lorillard to notice an appeal from or otherwise seek
review of this judgment has not expired.
In March 1996 Liggett Group Inc. ("Liggett Group"), the smallest of the major
U.S. cigarette manufacturers, reported that it had entered into settlement
agreements with plaintiffs in Castano v. The American Tobacco Company, et al.,
one of the purported class actions referred to in Note 19 of the Notes to
Consolidated Financial Statements, and with plaintiffs in five of the six State
Reimbursement Cases. Lorillard understands that, as part of the settlement
Liggett Group agreed to comply with certain features of the proposed rulemaking
by the federal Food and Drug Administration (the "FDA"); see "Legislation and
Regulation," below. In the settlement of Castano, Liggett Group also agreed (1)
to pay half of the cost of certain smoking cessation programs for purported
class members; (2) to pay "reasonable" attorneys fees and expenses; and (3) to
pay the named plaintiffs an "appropriate and reasonable amount." Lorillard
understands that no monies are to be paid to other members of the purported
class and that Liggett Group may withdraw from the agreement for a number of
reasons. The settlement agreement in Castano is subject to court approval. In
settling the State Reimbursement Cases, Lorillard understands Liggett Group also
agreed (1) to pay $5 million over the next nine years to defray the taxpayer
costs of treating state Medicaid patients with allegedly smoking-related
illnesses; (2) to make annual payments to the states amounting to 2.5 percent of
its pretax profits over the next twenty-five years; and (3) if there is no
merger
16
between Liggett Group and another tobacco company, to make an additional payment
to the states of $5 million over a twenty-five year period.
In connection with the settlements, Lorillard understands Liggett has agreed
to withdraw from Coyne Beahm, Inc., et al v. United States Food & Drug
Administration, et al, a lawsuit challenging the FDA's proposed regulation of
tobacco products; see "Legislation and Regulation," below. In so doing, however,
Liggett Group did not agree that such assertion of jurisdiction was legal or
proper.
Lorillard has stated that it has no plans to settle any cigarette product
liability litigation and will continue to vigorously defend all product
liability claims against it.
Other Legal Proceedings: In addition to the litigation referred to above,
Lorillard has been notified of several governmental investigations pending
against Lorillard and other tobacco manufacturers, which are described below.
A grand jury investigation commenced in 1992 by the United States Attorney's
Office for the Eastern District of New York regarding possible fraud by
Lorillard and other tobacco companies relating to smoking and health research
undertaken or administered by the Council for Tobacco Research - USA, Inc.
Although there has been a recent press report that this investigation has been
reactivated, Lorillard does not in fact know whether the investigation is still
continuing, and is unable to predict its outcome. An adverse outcome of this
investigation could result in criminal, administrative or other proceedings
against Lorillard.
Lorillard received Civil Investigative Demands ("CIDs") in January, June and
November 1994 from the Antitrust Division of the United States Department of
Justice. The CIDs, which request certain information, documents and testimony,
were issued in the course of an antitrust investigation to determine whether
Section 1 of the Sherman Act, 15 U.S.C. Section 1, may have been violated by
joint activity to restrain competition in the manufacture and sale of cigarettes
with reduced ignition propensity (so-called "fire safe" cigarettes), including
joint activity to limit or restrain research and development or product
innovation. Lorillard has responded or is in the process of responding to the
CIDs. It is impossible at this time to predict the ultimate outcome of this
investigation. An adverse outcome in this investigation could result in other
proceedings against Lorillard.
In March 1996, the Company and Lorillard each received a grand jury subpoena
duces tecum from the United States Attorney's Office for the Southern District
of New York seeking documents, advertisements or related materials distributed
by the Company and Lorillard to members of the general public relating to, among
other things, the health effects of cigarettes, nicotine or tobacco products,
the addictiveness of such products, and Congressional hearings relating to
cigarettes or the tobacco industry. The Company and Lorillard intend to respond
to and comply with the subpoena. It is impossible at this time to predict the
ultimate outcome of this investigation.
Legislation and Regulation: The Federal Comprehensive Smoking Education Act,
which became effective in 1985, requires the use on cigarette packaging and
advertising of one of the following four warning statements, on a rotating
basis: (1) "SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart
Disease, Emphysema, and May Complicate Pregnancy." (2) "SURGEON GENERAL'S
WARNING: Quitting Smoking Now Greatly Reduces Serious Risks to Your Health." (3)
"SURGEON GENERAL'S WARNING: Smoking By Pregnant Women May Result in Fetal
Injury, Premature Birth, and Low Birth Weight." (4) "SURGEON GENERAL'S WARNING:
Cigarette Smoke Contains Carbon Monoxide." Four shortened versions of these
statements are required, on a rotating basis, for use on billboards. This law
also requires that each person who manufactures, packages or imports cigarettes
shall annually provide to the Secretary of Health and Human Services a list of
the ingredients added to tobacco in the manufacture of cigarettes. Such list of
ingredients may be submitted in a manner which does not identify the company
which uses the ingredients or the brand of cigarettes which contains the
ingredients.
Prior to the effective date of the Comprehensive Smoking Education Act,
federal law had, since 1965, required that cigarette packaging bear a warning
statement which from 1971 to 1985 was as follows: "Warning: The Surgeon General
Has Determined That Cigarette Smoking Is Dangerous To Your Health." In addition,
in 1972 Lorillard and other cigarette manufacturers had agreed, pursuant to
consent orders entered into with the Federal Trade Commission ("FTC"), to
include this health warning statement in print advertising, on billboards and on
certain categories of point-of-sale display materials relating to cigarettes. In
addition, advertising of cigarettes has
17
been prohibited on radio and television since 1971.
Studies with respect to the alleged health risk to nonsmokers of environmental
tobacco smoke ("ETS") have received significant publicity. In 1986, the Surgeon
General of the United States and the National Academy of Sciences reported that
ETS puts nonsmokers at an increased risk of lung cancer and respiratory illness.
In January 1993, the United States Environmental Protection Agency released a
report (the "EPA Risk Assessment") concluding that ETS is a human lung
carcinogen in adults, causes increased respiratory tract disease, middle ear
disorders and increases the severity and frequency of asthma in children.
In recent years, many federal, state, local and municipal governments and
agencies, as well as private businesses, have adopted legislation or regulations
which prohibit or restrict, or are intended to discourage, smoking, including
legislation or regulations prohibiting or restricting smoking in various places
such as public buildings and facilities, stores and restaurants, on domestic
airline flights and in the workplace, and the sale of cigarettes in vending
machines. This trend has increased significantly since the release of the EPA
Risk Assessment. Additional laws, regulations and policies intended to prohibit,
restrict or discourage smoking are being proposed or considered by various
federal, state and local governments, agencies and private businesses with
increasing frequency.
In 1994, the Occupational Safety and Health Administration published proposed
rule making on air quality in indoor workplaces. The proposed rule would require
employers in the United States to prohibit smoking indoors or to restrict
smoking to a separate room with outside exhaust and negative air pressure. A
period of public comment on the proposed rules has ended. Hearings on the
proposed rules were conducted in late 1994 and early 1995. It is impossible at
this time to predict whether or in what form the proposed rules will be adopted.
From time to time, bills have been introduced in Congress, among other things,
to end or limit the price supports for leaf tobacco; to prohibit all tobacco
advertising and promotion; to require new health warnings on cigarette packages
and advertising; to subject cigarettes generally to regulation under the
Consumer Products Safety Act or the Food, Drug and Cosmetics Act; to authorize
the establishment of various anti-smoking education programs; to provide that
current federal law should not be construed to relieve any person of liability
under common or state law; to permit state and local governments to restrict the
sale and distribution of cigarettes and the placement of billboard and transit
advertising of tobacco products; to provide that cigarette advertising not be
deductible as a business expense; to prohibit the mailing of unsolicited samples
of cigarettes and otherwise to restrict the sale or distribution of cigarettes;
to impose an additional excise tax on cigarettes; to require that cigarettes be
manufactured in a manner that will cause them, under certain circumstances, to
be self-extinguishing; and to subject cigarettes to regulation in various ways
by the U.S. Department of Health and Human Services, including regulation by the
Food and Drug Administration.
A 1984 federal law established a Technical Study Group to conduct a study and
report to the Congress regarding the technical and commercial feasibility of
developing cigarettes that will have a minimum propensity to ignite upholstered
furniture or mattresses. The Technical Study Group concluded in 1987 that it was
technically feasible and may be commercially feasible to develop such
cigarettes. In accordance with a 1990 federal law the Consumer Product Safety
Commission issued a report in August 1993, concluding that, while it is
practicable to develop a performance standard to reduce cigarette ignition
propensity, it is unclear that such a standard will effectively address the
number of cigarette ignited fires. Several states also are considering
legislation in this area.
In 1995, Congress passed legislation prohibiting the sale of cigarettes by
vending machines on certain federal property, and the General Services
Administration has published implementing regulations. In January 1996, the
Substance Abuse and Mental Health Services Administration("SAMHSA") issued final
regulations implementing a 1992 law (Section 1926 of the Public Health Service
Act), which requires the states to enforce their minimum sales-age laws as a
condition of receiving federal substance abuse block grants.
Early in 1994, the Energy and Commerce Subcommittee on Health and the
Environment of the U.S. House of Representatives (the "Subcommittee") launched
an oversight investigation into tobacco products, including possible regulation
of nicotine-containing cigarettes as drugs. During the course of such
investigation, the Subcommittee held hearings at which executives of each of the
major tobacco manufacturers testified. Following the November 1994 elections,
the incoming Chairman of the Energy and Commerce Committee indicated that this
investigation by the Subcommittee would not continue, and on December 20, 1994,
the outgoing majority staff of the Subcommittee issued two final reports. One of
these reports questioned the scientific practices of what it
18
characterized as the tobacco industry's "long-running campaign" related to ETS,
but reached no final conclusions. The second report asserted that documents
obtained from American Tobacco Company, a competitor of Lorillard's, "reflect an
intense research and commercial interest in nicotine."
It has been reported that the U.S. Department of Justice is investigating
allegations of perjury in connection with the testimony provided by one or more
tobacco industry executives to the Subcommittee. It is impossible at this time
to predict the outcome of this investigation.
On August 10, 1995 President Clinton announced that he had authorized the FDA
to assert regulatory jurisdiction over cigarettes and smokeless tobacco products
for the purpose of curbing tobacco use among children and teenagers. On August
11, the FDA issued a notice of proposed rule making. 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 anti-smoking education programs. Lorillard,
the four other major cigarette manufacturers and the Tobacco Institute filed
joint comments with the FDA on January 2, 1996.
Lorillard and four other cigarette manufacturers also 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 (as noted above, Liggett Group has
agreed to withdraw from this lawsuit). 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 rule making 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
court has granted the government's request to stay briefing on the summary
judgment motions until it has ruled on the government's motions to dismiss.
Accordingly, any impact on Lorillard from any regulations which may ultimately
be issued by the FDA cannot be predicted at this time. 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.
Certain of these and other similar laws, regulations and policies being
proposed or considered by various federal, state and local governments and
agencies could, if adopted, have a material adverse effect on the financial
condition and results of operations of the Company.
Advertising and Sales Promotion: Lorillard's principal brands are advertised
and promoted extensively. Introduction of new brands, brand extensions and
packings require the expenditures of substantial sums for advertising and sales
promotion, with no assurance of consumer acceptance. The advertising media
presently used by Lorillard include magazines, newspapers, out-of-home
advertising, direct mail and point-of-sale display materials. Sales promotion
activities are conducted by distribution of samples and store coupons,
point-of-sale display advertising, advertising of promotions in print media, and
personal contact with distributors, retailers and consumers.
Distribution Methods: Lorillard distributes its products through direct sales
to distributors, who in turn service retail outlets, and through chain store
organizations and vending machine operators, many of whom purchase their
requirements directly, and by direct sales to the U.S. Armed Forces. Lorillard's
tobacco products are stored in public warehouses throughout the country to
provide for rapid distribution to customers.
Lorillard has approximately 1,500 direct customers and is not dependent on any
one customer or group of customers. Lorillard does not have any backlog orders.
19
Tobacco and Tobacco Prices: The two main classes of tobacco grown in the
United States are flue-cured tobacco, grown mostly in Virginia, North Carolina,
South Carolina, Georgia and Florida; and burley, grown mostly in Kentucky and
Tennessee. Lorillard purchases flue-cured tobacco and burley tobacco for use in
cigarettes. Most of the tobacco of these classes used by Lorillard is purchased
by commission buyers at tobacco auctions. Lorillard also purchases various types
of Near Eastern tobacco, grown in Turkey and eight other Near Eastern countries.
In addition, Lorillard purchases substantial quantities of aged tobacco from
various sources, including cooperatives financed under the Commodity Credit
Corporation program, to supplement tobacco inventories.
Due to the varying size and quality of annual crops and other economic
factors, tobacco prices in the past have been subject to fluctuation. Among the
economic factors are federal government control of acreage and poundage in the
flue-cured producing areas and poundage control in the burley areas. These
controls together with support prices have substantially affected the market
prices of tobacco. The approximate average auction prices per pound for
flue-cured tobacco were $1.698 in 1994 and $1.794 in 1995 and for burley tobacco
were $1.841 in 1994 and $1.854 in 1995. The prices paid by Lorillard have
generally been consistent with this trend. Lorillard believes that its current
leaf inventories are adequately balanced for its present production
requirements. Because the process of aging tobacco normally requires
approximately two years, Lorillard at all times has on hand large quantities of
leaf tobacco. See Note 1 of the Notes to Consolidated Financial Statements,
included in Item 8, for inventory costing method.
Prices: In May 1995 Lorillard increased the wholesale price of its king size
and 100/120 millimeter cigarettes by $1.50 per thousand in the aggregate.
Taxes: Federal excise taxes included in the price of cigarettes are $12.00 per
thousand cigarettes. Excise taxes, which are levied upon and paid by the
distributors, are also in effect in the fifty states, the District of Columbia
and many municipalities. The state taxes generally range from 2.5 cents to 81.5
cents per package of twenty cigarettes.
Properties: The properties of Lorillard are employed principally in the
processing and storage of tobacco and in the manufacture and storage of
cigarettes. Its principal properties are owned in fee. With minor exceptions,
all machinery used by Lorillard is owned by it. All properties are in good
condition. Lorillard's manufacturing plant is located on approximately 79 acres
in Greensboro, North Carolina. This 942,600 square foot plant contains modern
high speed cigarette manufacturing machinery. A warehouse was added in early
1995 with shipping and receiving areas totaling 54,800 square feet. Lorillard
also has facilities for receiving and storing leaf tobacco in Danville,
Virginia, containing approximately 1,500,000 square feet. A modern research
facility containing approximately 82,000 square feet is also located at
Greensboro.
Lorillard leases a corporate office in Orangeburg, New York, an executive
office in New York City and sales offices in major cities throughout the United
States. In March 1996, Lorillard announced that it would relocate its New York
executive office to Greensboro, North Carolina. This move will allow Lorillard
to consolidate its operations in Greensboro, the site of its manufacturing
facility. Lorillard plans to build a 125,000 square foot office building for
this purpose.
Competition: Substantially all of Lorillard's products are sold within the
United States in highly competitive markets where its principal competitors are
the four other major U.S. cigarette manufacturers (Philip Morris, R.J. Reynolds
("RJR"), Brown & Williamson and Liggett Group). According to the Maxwell
Consumer Report, a quarterly statistical survey of the cigarette industry, in
calendar year 1995 Lorillard ranked fourth in the industry with an 8.0% share of
the market. Philip Morris and RJR accounted for approximately 46.1% and 25.7%,
respectively, of the U.S. cigarette market, according to the Maxwell Consumer
Report.
20
The following table sets forth cigarette sales in the United States by the
industry and by Lorillard, as reported in the Maxwell Consumer Report. This
table indicates the relative position of Lorillard in the industry:
<TABLE>
<CAPTION>
Industry Lorillard Lorillard
Calendar Year (000) (000) to Industry
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 ................................. 481,110,000 38,580,000 8.0%
1994 ................................. 489,600,000 36,610,000 7.5%
1993 ................................. 461,180,000 32,650,000 7.1%
</TABLE>
- ---------------
The Bureau of Alcohol, Tobacco and Firearms reports Lorillard's share of total
taxable factory removals of all cigarettes to be 7.5% and 7.1% for 1994 and
1993, respectively. Data for 1995 is not currently available.
The Maxwell Consumer Report divides the cigarette market into two price
segments, the premium price segment and the discount or reduced price segment.
According to the Maxwell Consumer Report the reduced price segment decreased in
1995 to approximately 30.0% from approximately 32.5% of the market in 1994.
Virtually all of Lorillard's sales are in the premium price segment where
Lorillard's share increased from 10.6% in 1994 to 10.9% in 1995, according to
the Maxwell Consumer Report.
21
LOEWS HOTELS HOLDING CORPORATION
The subsidiaries of Loews Hotels Holding Corporation ("Loews Hotels"), a
wholly owned subsidiary of the Company, presently operate the following 14
hotels. Loews Hotels accounted for 1.17%, 1.61% and 1.35% of the Company's total
revenue for the years ended December 31, 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
Number of
Rooms (Year
Name and Location Type Opened) Owned, Leased or Managed
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loews Annapolis Luxury Hotel 217 Owned
Annapolis, Maryland (1986(2))
Loews Coronado Bay Resort Luxury Hotel 450 Management contract expiring 2011,
San Diego, California (1991) with renewal options for 10 years (3)
Loews Giorgio Luxury Hotel 197 Owned
Denver, Colorado (1986(2))
Howard Johnson Hotel (1) Commercial Hotel 300 Owned
New York, New York (1962)
Loews Le Concorde Luxury Hotel 424 Land lease expiring 2069
Quebec City, Canada (1974(2))
Loews L'Enfant Plaza Luxury Hotel 372 Management contract expiring 2003 (3)
Washington, D.C. (1973)
Loews Monte Carlo Resort Hotel 622 Lease expiring 2002, with renewal
Monte Carlo, Monaco (1975) options for 20 years
Loews New York First Class Hotel 765 Owned
New York, New York (1961)
Days Hotel (1) Commercial Hotel 366 Owned
New York, New York (1962)
Regency Luxury Hotel 496 Land Lease expiring 2013, with
New York, New York (1963) renewal options for 47 years
Loews Santa Monica Beach Luxury Hotel 350 Management contract expiring 2007,
Santa Monica, California (1989) with renewal options for 10 years
Loews Vanderbilt Plaza Luxury Hotel 342 Owned
Nashville, Tennessee (1984(2))
Loews Ventana Canyon Resort Resort Hotel 398 Management contract expiring 2004,
Tucson, Arizona (1984) with renewal options for 10 years (3)
Loews Vogue Luxury Hotel 154 Owned
Montreal, Canada (1990(2))
- -------------
(1) Operated by Loews Hotels under license agreements pursuant to which Loews
Hotels pays royalty fees on sales, as defined in the agreements, for the use of
the respective trade names, trademarks and other rights.
(2) The Le Concorde, Giorgio, Vanderbilt Plaza, Annapolis and Vogue Hotels
were acquired by Loews Hotels in 1987, 1989, 1989, 1990 and 1995, respectively.
(3) These management contracts are subject to termination rights.
</TABLE>
22
The hotels which are operated by Loews Hotels contain shops, a variety of
restaurants and lounges, and some contain parking facilities, swimming pools,
tennis courts and access to golf courses.
The hotels owned by Loews Hotels are subject to mortgage indebtedness
aggregating approximately $42.7 million at December 31, 1995 with interest rates
ranging from 9% to 11%, and maturing between 1998 and 1999. In addition, certain
hotels are held under leases which are subject to formula derived rental
increases, with rentals aggregating approximately $7.5 million for the year
ended December 31, 1995.
Competition from other hotels, motor hotels and inns, including facilities
owned by local interests and by national and international chains, is vigorous
in all areas in which Loews Hotels operates. The demand for hotel rooms in many
areas is seasonal and dependent on general and local economic conditions. Loews
Hotels properties also compete with facilities offering similar services in
locations other than those in which the company's hotels are located.
Competition among luxury hotels is based primarily on location and service.
Competition among resort and commercial hotels is based on price as well as
location and service. Because of the competitive nature of the industry, hotels
must continually make expenditures for updating, refurnishing and repairs and
maintenance, in order to prevent competitive obsolescence.
DIAMOND OFFSHORE DRILLING, INC.
Diamond Offshore Drilling Inc. ("Diamond Offshore"), is engaged, through its
subsidiaries, in the business of owning and operating drilling rigs that are
used primarily in drilling of oil and gas wells on a contract basis for
companies engaged in exploration and production of hydrocarbons. The Company
entered the drilling business in 1989 and, through a series of acquisitions,
operates 37 offshore rigs and 10 land rigs. Diamond Offshore accounted for
1.82%, 2.25% and 2.11% of the Company's total revenue for the years ended
December 31, 1995, 1994 and 1993, respectively.
In October 1995 Diamond Offshore sold 14,950,000 shares of its common stock
through an initial public offering at $24 per share. As a result of the
offering, the Company's ownership interest in Diamond Offshore declined to
approximately 70% and the Company recorded a pre-tax gain of approximately
$192.9 million.
On February 9, 1996 Diamond Offshore and Arethusa (Off-Shore) Limited
("Arethusa"), executed a definitive agreement to merge the two companies. The
agreement provides that holders of Arethusa stock will receive 17.9 million
shares of common stock to be issued by Diamond Offshore based on a ratio of
.88 shares for each share of Arethusa common stock. The merger is subject to
requisite shareholder approval and is anticipated to close in the spring of
1996. Upon consummation of the merger, the Company would recognize a gain of
approximately $187 million and its interest in Diamond Offshore would decline to
approximately 52%. Arethusa owns and/or operates a fleet of thirteen mobile
offshore drilling rigs and provides drilling services worldwide to domestic,
international and state-owned oil and gas companies. The fleet consists of eight
semisubmersible rigs located in the Gulf of Mexico and South America and five
jackup rigs located in India, Indonesia, Egypt, the Dutch sector of the North
Sea, and the Gulf of Mexico.
Drilling Units and Equipment: Diamond Offshore currently owns and operates 37
mobile offshore drilling rigs (14 jackup rigs, 22 semisubmersible rigs and one
drillship), 10 land rigs and related equipment. One additional semisubmersible
rig, which is inactive, is currently held for sale. Offshore rigs are mobile
units that can be relocated via either self propulsion or by the use of tugs
enabling them to be repositioned based on market demand.
Jackup rigs stand on the ocean floor with their drilling platforms "jacked up"
on support legs above the water. They are best suited for drilling in water
depths of less than 300 feet. Nine of Diamond Offshore's jackup rigs are
cantilevered rigs capable of over platform development drilling and workover as
well as exploratory drilling. Of Diamond Offshore's 14 jackup rigs, 13 are
currently located in the Gulf of Mexico and one is currently in South America.
Semisubmersible rigs are supported by large pontoons and are partially
submerged during drilling for greater stability. They are generally designed for
deep water depths of up to 6,000 feet. Diamond Offshore operates three of the
world's thirteen fourth-generation semisubmersible rigs. These rigs are equipped
with advanced drilling equipment, are capable of operations in ultra deep waters
in severe weather environments, and command high premiums from operators.
Diamond Offshore's 22 semisubmersible rigs are currently located as follows: 11
in
23
the Gulf of Mexico, five in the North Sea, three in Southeast Asia, two in
Brazil and one in Nigeria.
Diamond Offshore's drillship is self-propelled and designed to drill in deep
water. Shaped like a conventional vessel, it is the most mobile of the major rig
types. Diamond Offshore's drillship is located in the Red Sea.
Diamond Offshore's land rigs are all located in Texas and are also capable of
mobilizing to different drilling sites.
Drilling Contracts and Rig Utilization: Contracts for Diamond Offshore's
drilling rigs are offered worldwide for either a fixed term, which may range
from a few months to several years, or on a well-to-well basis.
The following table sets forth the size and utilization rate of Diamond
Offshore's fleet for the years ended December 31, 1995, 1994 and 1993. The
utilization rate for a period is based on the ratio of days in the period during
which the rigs were earning revenues to the total days in the period during
which the rigs were available to work.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Jackups:
Rigs in fleet at year-end .......... 14 14 16
Utilization during the year ........ 75.2% 81.8% 79.6%
Semisubmersibles:
Rigs in fleet at year-end .......... 22 23 22
Utilization during the year ........ 68.6% 64.1% 71.9%
Land:
Rigs in fleet at year-end .......... 10 10 19
Utilization during the year ........ 85.2% 60.5% 44.3%
</TABLE>
Competition: The contract drilling industry is highly competitive. Customers
often award contracts on a competitive bid basis, and although a customer
selecting a rig may consider, among other things, a contractor's safety record,
crew quality and quality of service and equipment, the oversupply of rigs has
created an intensely competitive market in which price is the primary factor in
determining the selection of a drilling contractor. Diamond Offshore believes
that competition for drilling contracts will continue to be intense for the
foreseeable future because of the worldwide oversupply of drilling rigs and the
ability of contractors to move rigs from areas of low utilization and dayrates
to areas of greater activity and relatively higher dayrates. In addition, there
are inactive non-marketed rigs that could be reactivated to meet an increase in
demand for drilling rigs in any given market. Such movement or reactivation or a
decrease in drilling activity in any major market could depress dayrates and
could adversely affect utilization of Diamond Offshore rigs.
Operating Risks and Regulation: Diamond Offshore's operations are subject to
the usual hazards incident to the drilling of oil and gas wells, such as
blowouts, cratering and fires. Diamond Offshore's offshore operations are also
subject to perils peculiar to marine operations, such as capsizing, collision,
grounding and adverse weather and seas. Any of these hazards can seriously
damage or destroy equipment, suspend drilling operations, and, through oil
spillage, cause pollution damage to offshore or inland waters or the property of
others. Diamond Offshore currently maintains insurance covering these risks,
including expropriation, confiscation and nationalization of certain equipment
in foreign waters. There is no assurance that insurance coverage will continue
to be available at rates considered reasonable or that the insurance will be
adequate to protect against liability and loss or damage resulting from all the
consequences of a significant incident.
Diamond Offshore is subject to stringent laws relating to the equipment and
operation of vessels and drilling practices and methods. Additional governmental
legislation and regulations involving the petroleum industry could significantly
affect Diamond Offshore's operations.
Properties: Diamond Offshore owns an eight-story office building located in
Houston, Texas containing approximately 182,000 net rentable square feet, which
is used for its corporate headquarters. A portion of the building is currently
occupied by other tenants under leases which expire through 2005. Diamond
Offshore also
24
owns an 18,000 square foot building and 20 acres of land in New Iberia,
Louisiana for its offshore drilling warehouse and storage facility, a 13,000
square foot building and five acres of land in Aberdeen, Scotland for its North
Sea operations and a 15,000 square foot building and 10 acres of land in Alice,
Texas for its onshore drilling office, warehouse and storage facility. In
addition, Diamond Offshore leases additional office, warehouse and storage
facilities and lots in Louisiana, Scotland, Australia and Brazil to support its
offshore drilling operations.
BULOVA CORPORATION
Bulova Corporation ("Bulova") is engaged in the distribution and sale of
watches, clocks and watch parts for consumer use. Bulova accounted for .59%,
1.12% and 1.12% of the Company's total revenue for the years ended December 31,
1995, 1994 and 1993, respectively.
Bulova distributes and sells analog and analog-digital quartz crystal watches,
jewelry and various types of clocks. All watches and clocks are purchased from
foreign suppliers. Watches are sold by Bulova principally in the United States
and Canada. In most other areas of the world Bulova has appointed licensees who
market watches under Bulova's trademarks in return for a royalty. The business
is seasonal, with the greatest sales coming in the third and fourth quarters in
expectation of the holiday selling season. The business is intensely
competitive. The principal methods of competition are price, styling, aftersale
service, warranty and product performance.
Properties: Bulova leases its facilities which consist of an 80,000 square
foot plant in Woodside, New York for its principal executive and sales office,
watch distribution, service and warehouse purposes, a 71,000 square foot plant
in Maspeth, New York for clock service and warehouse purposes and a 25,000
square foot plant in Toronto, Canada for watch and clock sales and service.
OTHER INTERESTS
The Company owns a 49% common stock interest in a joint venture which is
engaged in the business of owning and operating six large crude oil tankers that
are used primarily to transport crude oil from the Persian Gulf to a limited
number of ports in the Far East, Northern Europe and the United States.
EMPLOYEE RELATIONS
The Company, inclusive of its operating subsidiaries as described below,
employed approximately 34,700 persons at December 31, 1995 and considers its
employee relations to be satisfactory.
Lorillard employed approximately 3,500 persons at December 31, 1995.
Approximately 1,400 of these employees are represented by labor unions under
separate contracts with many local unions expiring at varying times and
severally renegotiated and renewed.
Lorillard has collective bargaining agreements covering hourly rated
production and service employees at various Lorillard plants with the Tobacco
Workers International Union, the International Brotherhood of Firemen and
Oilers, and the International Association of Machinists. Lorillard has
experienced satisfactory labor relations and provides a retirement plan, a
deferred profit sharing plan, and other benefits for its hourly paid employees
who are represented by the foregoing unions.
Loews Hotels employed approximately 2,900 persons at December 31, 1995,
approximately 770 of whom are union members covered under collective bargaining
agreements. Loews Hotels has experienced satisfactory labor relations and
provides comprehensive benefit plans for its hourly paid employees.
The Company maintains a retirement plan, group life, disability and health
insurance program and a savings plan for salaried employees. Lorillard and Loews
Hotels salaried employees also participate in these benefit plans.
CNA and its subsidiaries employ approximately 25,000 full-time equivalent
persons and has experienced satisfactory labor relations. CNA and its
subsidiaries have comprehensive benefit plans for substantially all of their
employees, including a retirement plan, a savings plan, a disability program, a
group life program and a group health care program.
25
Diamond Offshore employed approximately 2,500 persons at December 31, 1995,
approximately 260 of whom are union members. Diamond Offshore has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees.
Bulova and its subsidiaries employ approximately 430 persons, approximately
120 of whom are union members. Bulova and its subsidiaries have experienced
satisfactory labor relations. Bulova has comprehensive benefit plans for
substantially all employees.
Item 2. Properties.
Information relating to the properties of Registrant and its subsidiaries is
contained under Item 1.
Item 3. Legal Proceedings.
1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Notes 10 and 19 of the Notes to
Consolidated Financial Statements included in Item 8.
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
regarding such lawsuits is contained in Note 19 of the Notes to Consolidated
Financial Statements included in Item 8. Information regarding other legal
proceedings involving Lorillard is contained in the section entitled Lorillard,
Inc. in Item 1, which is incorporated herein by refernece.
26
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
First
Became
Name Position and Offices Held Age Officer
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gary W. Garson .......... Vice President and 49 1988
Assistant Secretary
Robert J. Hausman ....... Vice President 72 1973
Barry Hirsch ............ Senior Vice President and 62 1971
Secretary
Herbert C. Hofmann ...... Senior Vice President 53 1979
John J. Kenny ........... Treasurer 58 1991
Guy A. Kwan ............. Controller 53 1987
John G. Malino .......... Vice President-Real Estate 56 1985
Alan Momeyer ............ Vice President-Human Resources 48 1996
Stuart B. Opotowsky ..... Vice President-Tax 61 1987
Richard E. Piluso ....... Vice President-Internal Audit 57 1990
Roy E. Posner ........... Senior Vice President and 62 1973
Chief Financial Officer
Dennis Smith ............ Vice President-Management 49 1990
Information Services
Andrew H. Tisch ......... Chairman of the Management 46 1985
Committee
James S. Tisch .......... President and Chief Operating 43 1981
Officer
Jonathan M. Tisch ....... Vice President 42 1987
Laurence A. Tisch ....... Co-Chairman of the Board and 73 1959
Co-Chief Executive Officer
Preston R. Tisch ........ Co-Chairman of the Board and 69 1960
Co-Chief Executive Officer
</TABLE>
Laurence A. Tisch and Preston R. Tisch are brothers. Andrew H. Tisch and James
S. Tisch are sons of Laurence A. Tisch and Jonathan M. Tisch is a son of Preston
R. Tisch. None of the other officers or directors of Registrant is related to
any other.
All executive officers of Registrant have been engaged actively and
continuously in the business of Registrant for more than the past five years.
Mr. Momeyer served as Director of Personnel Services for more than five years
prior to his appointment as Vice President-Human Resources. Andrew H. Tisch
served as Chairman of the Board and Chief Executive Officer of Lorillard Tobacco
Company from December 29, 1989 to May 31, 1995. Prior thereto he had served as
Vice President-Strategic Planning since 1985.
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
27
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Price Range of Common Stock*
Loews Corporation's common stock is listed on the New York Stock Exchange. The
following table sets forth the reported consolidated tape high and low sales
prices in each calendar quarter of 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
--------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter ............ $49.88 $43.31 $51.38 $44.63
Second Quarter ........... 61.00 49.38 46.44 42.25
Third Quarter ............ 73.50 57.88 46.94 43.06
Fourth Quarter ........... 79.88 69.56 45.75 42.63
</TABLE>
Dividend Information*
The Company has paid quarterly cash dividends on its common stock in each year
since 1967. Regular dividends of $.12 1/2 per share of common stock outstanding
were paid in each calendar quarter of 1994 and in each of the first three
quarters of 1995. In the fourth quarter of 1995 the Company increased its
dividend to $.25 per share.
Approximate Number of Equity Security Holders
The Company has approximately 3,700 holders of record of Common Stock.
Item 6. Selected Financial Data.*
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Revenues .................. $18,677.4 $13,515.2 $13,686.8 $13,691.5 $13,620.3
Income (loss) before
cumulative effect of
accounting changes ....... 1,765.7 267.8 594.1 (22.1) 904.3
Per share ................. 14.98 2.22 4.63 (.17) 6.57
Net income ................ 1,765.7 267.8 594.1 122.6 904.3
Per share ................. 14.98 2.22 4.63 .93 6.57
Financial Position:
Total assets .............. 65,058.2 50,336.0 45,849.8 43,555.5 42,684.2
Long-term debt ............ 4,248.2 2,144.4 2,195.7 1,759.6 1,944.7
Shareholders' equity ...... 8,238.7 5,405.3 6,127.2 5,527.0 5,667.1
Cash dividends per share .. .63 .50 .50 .50 .50
Book value per share ...... 69.92 45.84 49.79 42.45 42.09
Shares of common stock
outstanding .............. 117.8 117.9 123.0 130.2 134.6
</TABLE>
In 1993 the Company changed its method of accounting for certain investments
in debt and equity securities. See Note 1 of the Notes to Consolidated Financial
Statements included in Item 8.
- ---------------
*Per share amounts have been adjusted to give retroactive effect to the
two-for-one stock split effective December 1, 1995.
28
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
Insurance
Property and casualty and life insurance operations are wholly owned
subsidiaries of CNA Financial Corporation ("CNA"). CNA is an 84% owned
subsidiary of the Company.
As previously reported, on May 10, 1995, CNA consummated the acquisition of all
the outstanding shares of The Continental Corporation ("CIC") for approximately
$1.1 billion, or $20 per CIC share. As a result of the acquisition, CNA became
the sixth largest U.S. insurance organization, the third largest U.S. property
and casualty organization and the largest U.S. commercial lines insurance group,
based on 1994 premiums.
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. Additionally, there is a facility fee of 10 basis points. The average
interest rate at December 31, 1995 was 6.12%. Under the terms of the Bank
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 Bank Facility, CNA entered
into five year interest rate swap agreements with several banks. These
agreements effectively convert variable rate debt into fixed rate debt on
notional amounts aggregating $1.2 billion. The weighted average fixed swap rate
at December 31, 1995 was 6.29%.
On August 10, 1995, to take advantage of favorable interest rate spreads, CNA
established a commercial paper program, borrowing $500 million from investors to
replace a like amount of the Bank Facility. The weighted average yield on
commercial paper at December 31, 1995 was 6.05%. 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.
The weighted average interest rate on the acquisition debt, which includes the
Bank Facility, commercial paper and the effect of the interest rate swaps, was
6.50% at December 31, 1995.
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 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.
29
The chart below lists the current ratings:
<TABLE>
<CAPTION>
Insurance Ratings Debt and Stock Ratings
--------------------- ----------------------------------------
CNA CIC CNA CIC
------------- --- ------------------------------ ------
Senior Commercial Preferred Senior
CCC CAC Debt Paper Stock Debt
- -------------------------------------------------------------------------------------------
Financial Strength
---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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- -
- --------------------------------------------------------------------------------------------
</TABLE>
CNA's property and casualty insurance subsidiaries' statutory surplus grew from
$3.1 billion in 1992 to $5.7 billion in 1995. In 1993, property and casualty
surplus rose to approximately $3.6 billion due to substantial capital gains and
a capital contribution by CNA of $475 million, offset by a $500 million increase
in asbestos reserves relating to the Fibreboard litigation (see Note 19 of the
Notes to Consolidated Financial Statements included in Item 8). In 1994, surplus
declined to $3.4 billion, primarily attributable to realized investment losses.
In 1995, surplus rose $2.3 billion to $5.7 billion due to the acquisition of CIC
($1.7 billion) and improved net income. Dividends of $325, $175 and $150 million
were paid to CNA by CCC in 1995, 1994 and 1993, respectively.
Statutory surplus of CNA's life insurance subsidiaries grew from $1,003 million
at December 31, 1992 to $1,128 million at December 31, 1995.
CNA's investment portfolio increased by $8.9 billion, or 33.2%, over the 1994
level of $26.9 billion including $7.4 billion related to CIC.
The liquidity requirements of CNA, excluding the acquisition of CIC, have been
met primarily by funds generated from operations. The principal cash flow
sources of CNA's property and casualty and life insurance subsidiaries are
premiums, investment income and sales and maturities of investments. The primary
operating cash flow uses are payments for claims, policy benefits and operating
expenses.
For the year ended December 31, 1995, CNA's operating activities generated net
cash flows of $875.0 million compared to $982.2 million in 1994 and $1,272.1
million in 1993. CNA believes that future liquidity needs will be met primarily
from operations.
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 securities.
Cigarettes
Lorillard, Inc. and subsidiaries ("Lorillard"). Lorillard is a wholly owned
subsidiary of the Company.
Funds from operations continue to exceed operating requirements. Lorillard
generated net cash flow from operations of approximately $319 million for the
year ended December 31, 1995, compared to $364 million for the prior year.
Lorillard's cash flow from operations declined in 1995 due primarily to its
decision to contribute $183.8 million to fund completely a pension
30
plan which had been underfunded.
In 1996, Lorillard entered into an agreement with Brown & Williamson Tobacco
Corporation ("B&W") to acquire certain of B&W's discount cigarette brands.
Together, these brands represented approximately 1% of the U.S. cigarette market
in 1995. This acquisition is subject to approval by the Federal Trade Commission
and there can be no assurance that such approval will be obtained. The funds
required for this acquisition will be provided by operations. No other material
capital expenditures are anticipated during 1996.
Virtually all of Lorillard's sales are in the full price brand category. With
the industry-wide list price reduction of full price brands, effective August 9,
1993, the market share of discount brands has declined and Lorillard's product
line has benefited in terms of unit sales. Discount brand sales have decreased
from an average of 37% of industry sales during 1993 to an average of 30% during
1995. At December 31, 1995, they represented 29.2% of industry sales. In May
1995, Lorillard increased its wholesale prices by $1.50 per thousand cigarettes,
or 2.7%.
Numerous 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 a
number of these cases the Company is named as a defendant. Pending litigation
includes conventional smoking and health cases, purported class actions, state
attorney general/medicaid reimbursement actions, and filter cases, most of which
claim very substantial damages. These actions are described in Note 19 of the
Notes to Consolidated Financial Statements included in Item 8.
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 tobacco use
among children and teenagers. On August 11, the FDA issued a notice of proposed
rule making. 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 anti-smoking
education programs. Lorillard, the four other major cigarette manufacturers and
the Tobacco Institute filed joint comments with the FDA on January 2, 1996.
Lorillard and four other cigarette manufacturers also 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 rule making 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
court has granted the government's request to stay briefing on the summary
judgment motions until it has ruled on the government's motions to dismiss.
Accordingly, any impact on Lorillard from any regulations which may ultimately
be issued by the FDA cannot be predicted at this time. In addition, it is
uncertain whether the proposed regulations will be modified before they are
promulgated in final form,
31
whether Congress will pass legislation that would moot the proposed regulations
and whether the manufacturers will succeed in securing judicial relief.
Hotels
Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews Hotels
is a wholly owned subsidiary of the Company.
Funds from operations continue to exceed operating requirements. Loews Hotels
has been selected by the City of Miami Beach to develop a new 800 room property,
Loews Miami Beach Hotel. Definitive agreements are currently being finalized and
construction is scheduled to commence in 1996. In addition to equity which will
be provided to Loews Hotels under an arrangement with the Company, this project
will be financed through a first mortgage and funds provided by the City of
Miami Beach. Funds for other capital expenditures and working capital
requirements are expected to be provided from operations. Funds for any hotel
acquisitions would be expected to be provided through the Company.
Drilling
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore"). Diamond
Offshore is a 70% owned subsidiary of the Company.
In October 1995 Diamond Offshore, then a wholly owned subsidiary, 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 $338.4 million to fund the
repayment of its debt to the Company. As a result of the offering, the Company's
ownership interest in Diamond Offshore declined to approximately 70% and the
Company recorded a pre-tax gain of $192.9 million.
Increased demand for Diamond Offshore's semisubmersible rigs reflect improvement
in the deep water and harsh environment markets where these rigs operate. This
is due in part to the increasing impact of technological advances, including 3-D
seismic, horizontal, and subsea completion procedures. In order to effectively
compete in this market, Diamond Offshore is required to incur significant
capital expenditures to meet customer requirements as well as fund its own rig
enhancement program. Diamond Offshore expects to spend approximately $200
million during 1996 for rig upgrades in connection with contract requirements.
In addition, it has budgeted $40 million for 1996 capital expenditures
associated with its continuing rig enhancement program.
Diamond Offshore generated net cash flow from operations of approximately $52.8
million for the year ended December 31, 1995, compared to $42.6 million for the
prior year. Funds for capital expenditures and working capital requirements will
be provided by cash flow from operations as well as funds available under a $150
million five year revolving line of credit.
Historically, the offshore contract drilling market has been highly competitive
and cyclical, and Diamond Offshore cannot predict the extent to which current
conditions will continue.
On February 9, 1996 Diamond Offshore and Arethusa (Off-Shore) Limited
("Arethusa") executed a definitive agreement to merge the two companies. The
agreement provides that holders of Arethusa stock will receive 17.9 million
shares of common stock to be issued by Diamond Offshore based on a ratio of .88
shares for each share of Arethusa common stock. The merger is subject to
requisite shareholder approval and is anticipated to close in the spring of
1996. Upon consummation of the merger, the Company would recognize a gain of
approximately $187 million and its interest in Diamond Offshore would decline to
approximately 52%.
32
Watches and Clocks
Bulova Corporation and subsidiaries ("Bulova"). Bulova is a 97% owned subsidiary
of the Company.
Competition and oversupply of watch products continue to adversely affect
Bulova. The proceeds from Bulova's sale of its industrial and defense
manufacturing business in January 1995 provided for the repayment of its debt to
the Company. Bulova may require working capital advances from the Company from
time to time. While the Company has no obligation to enter into or maintain
arrangements for any funding requirements, it is anticipated that it would be
provided through various arrangements with Bulova.
Parent Company
On October 17, 1995, the Board of Directors declared a two-for-one stock split,
by way of a stock dividend, effective December 1, 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 1995, Westinghouse Electric Corporation completed its acquisition of CBS Inc.
and the Company received proceeds of $901.7 million for its shares of CBS Inc.
During 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.
Depending on market conditions, the Company from time to time may purchase
additional shares in the open market or otherwise.
Strategically, the Company continues to seek expansion of existing businesses
and significant acquisitions of new businesses.
Investments
Insurance
CNA's general account investment portfolio is managed to maximize after tax
investment return, while minimizing credit risks. Investments are concentrated
in high quality securities to support its insurance underwriting operations.
CNA has the capacity to hold its fixed income portfolio to maturity. However,
securities may be sold as part of CNA's asset/liability strategies or to take
advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, or other similar factors.
Accordingly, the fixed income securities are classified as available for sale.
The general account portfolio consists primarily of high quality marketable debt
securities, 94% of which are rated as investment grade. At December 31, 1995,
62% of the general account's debt securities portfolio was invested in U.S.
government and affiliated securities, 15% in other AAA rated securities and 12%
in AA and A rated securities. CNA's guaranteed investment fixed income portfolio
is comprised of 36% U.S. government and affiliated securities, 17% other AAA
rated securities and 19% in AA and A rated securities. These ratings are
primarily from Standard & Poor's (93% of the general account portfolio and 95%
of the guaranteed investment portfolio). In addition, CNA's investments in
mortgage loans and real estate are substantially less than industry averages,
based upon those investments as a percentage of total assets.
High yield securities generally involve a greater degree of risk than investment
grade securities. Expected returns should, however, compensate for the added
risk. The risk is also considered in the interest rate assumptions in the
33
underlying insurance products. As of December 31, 1995, CNA's concentration in
high yield bonds including Separate Accounts was approximately 4.7% of its total
assets.
Included in CNA's fixed income securities at December 31, 1995 (general and
guaranteed investment portfolios) are $8.5 billion of asset-backed securities,
consisting of approximately 57% in U.S. government agency issued pass-through
certificates, 32% in collateralized mortgage obligations ("CMO's"), and 11% in
corporate asset-backed obligations. The majority of CMO's held are U.S.
government agency issues, which are actively traded in liquid markets and are
priced by broker-dealers.
CNA limits the risks associated with interest rate fluctuations and prepayment
by concentrating its CMO investments in planned amortization classes with
relatively short principal repayment windows. CNA avoids investments in complex
mortgage derivatives without readily ascertainable market prices. At December
31, 1995, the fair value of asset-backed securities was in excess of amortized
cost by approximately $200 million, as compared to amortized cost in excess of
fair value of approximately $181 million for the comparable period a year ago.
At December 31, 1995 and 1994, short-term investments primarily consisted of
U.S. treasury bills and commercial paper.
CNA invests from time to time in certain derivative financial instruments to
increase investment returns and to reduce the impact of changes in interest
rates on certain corporate borrowings. CNA considers its derivative securities
as held for trading purposes, except for interest rate swaps associated with
corporate borrowings and as such, are recorded at fair value at the reporting
date. The interest rate swaps on corporate borrowings are accounted for as an
adjustment to interest expense.
As of December 31, 1995 CNA's general account investments in bonds and
redeemable preferred stocks were carried at a fair value of $30.4 billion,
compared to $20.8 billion at December 31, 1994. At December 31, 1995, net
unrealized gains on fixed income securities amounted to approximately $1,059.3
million. This compares to $795 million of net unrealized losses at December 31,
1994. The gross unrealized gains and losses for the fixed maturity securities
portfolio at December 31, 1995 were $1,136.4 and $77.1 million, respectively,
compared to $194 and $989 million, respectively, at December 31, 1994.
Net unrealized gains on general account bonds at December 31, 1995 include net
unrealized gains on high yield securities of $67 million, compared to 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. Carrying and fair values of high yield securities in the general account
were $1.9 billion at December 31, 1995, compared to $1.0 billion at December 31,
1994.
At December 31, 1995, total Separate Account cash and investments amounted to
$5.9 billion with taxable debt securities representing approximately 94% of the
Separate Accounts portfolio. Approximately 85% of Separate Account investments
are used to fund guaranteed investments for which Continental Assurance Company
guarantees principal and a specified return to the contract holders. The
duration of fixed maturity securities included in the guaranteed investment
portfolio are matched approximately with the corresponding payout pattern of the
liabilities of the guaranteed investment contracts. At December 31, 1995, all
fixed income securities in the guaranteed investment portfolio were carried at
fair value and amounted to $4.8 billion. At December 31, 1995, net unrealized
gains on fixed income securities amounted to approximately $62.6 million.
34
This compares to net unrealized losses of $195 million at December 31, 1994. The
gross unrealized gains and losses for the fixed income securities portfolio at
December 31, 1995 were $122.1 and $59.5 million, respectively, compared to $34
and $229 million, respectively, at December 31, 1994.
High yield securities in the guaranteed investment portfolio are carried at fair
value and amounted to $944 and $1,102 million at December 31, 1995 and 1994,
respectively. Net unrealized losses on high yield securities held in such
Separate Accounts were $14 million at December 31, 1995, compared to $108
million at December 31, 1994.
Other
Investment activities of non-insurance companies include investments in fixed
income 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 $51.1 million
at December 31, 1995, compared to $146.2 million at December 31, 1994. Effective
January 1, 1996, equity securities added to the parent company's investment
portfolio will be classified as trading securities in order to reflect the
Company's investment philosophy. These investments will be carried at fair value
with the net unrealized gain or loss included in the income statement.
The Company invests in certain derivative instruments for income enhancements as
part of its portfolio management strategy. These instruments include various
swaps, forwards and futures contracts as well as both purchased and written
options.
These investments subject the Company to market risk for positions where the
Company does not hold an offsetting security. The Company controls this risk
through monitoring procedures which include daily detailed reports of existing
positions and valuation fluctuations. These reports are reviewed by members of
senior management to ensure that open positions are consistent with the
Company's portfolio strategy.
The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these transactions with large financial
institutions and considers the risk of nonperformance to be remote. In addition,
the amounts subject to credit risk are substantially mitigated by collateral
requirements in many of these transactions.
The Company does not believe that any of the derivative instruments utilized by
it are unusually complex or volatile, or expose the Company to a higher degree
of risk. These derivative instruments have not had, and are expected not to
have, a material adverse impact on the results of operations. See Note 4 of the
Notes to Consolidated Financial Statements, included in Item 8, for additional
information with respect to derivative instruments, including recognized gains
and losses on these 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. In the
first quarter of 1995, the Company closed these positions and recognized net
investment gains of $17.8 million.
35
Results of Operations
Revenues increased by $5.2 and $5.0 billion, or 38.2% and 36.5%, in each case as
compared to 1994 and 1993, respectively. Net income increased by $1,497.9 and
$1,171.6 million as compared to 1994 and 1993, respectively.
Insurance
Property and casualty operations continued to show significant improvement in
1995 and reflect both improved investment income and underwriting results.
Property and casualty revenues increased by $3.0 and $2.9 billion, or 37.1% and
35.9%, as compared to 1994 and 1993, respectively.
Property and casualty premium revenues increased by $1.9 and $2.5 billion, or
27.6% and 39.1%, as compared to 1994 and 1993, respectively. Property and
casualty premiums include $1.7 billion from the acquisition of CIC on May 10,
1995 as well as increases in other CNA business including small and medium
commercial accounts, mass marketing and reinsurance. These increases were
partially offset by declines in large account premium business due to the
continued shift to high deductible insurance contracts and decreases in
involuntary residual markets.
Property and casualty investment income increased by $459.4 and $640.0 million,
or 37.0% and 60.4%, as compared to 1994 and 1993, respectively. Investment
income increased primarily due to the acquisition of CIC, continued strong
positive cash flow and higher yielding investments resulting from a shift late
in the first quarter of 1994 to longer term securities. Interest rates on debt
securities generally rose throughout 1994, but have generally declined in 1995.
The bond segment of the investment portfolio yielded 6.88% in 1995 compared with
6.40% in 1994.
Pre-tax realized investment gains (losses) amounted to $320.6, $(164.1) and
$674.5 million for the years 1995, 1994 and 1993, respectively.
Net income excluding net realized investment gains (losses) of CNA's property
and casualty insurance subsidiaries was $355.3 million for 1995, compared to
$125.6 million in 1994 and a net loss of $217.1 million for 1993. Net realized
investment gains for 1995 were $174.8 million, compared to net realized losses
of $86.6 million in 1994 and net realized gains of $362.9 million for 1993.
Property and casualty underwriting losses were $1,121.5 million in 1995,
compared to $1,201.2 and $1,791.8 million in 1994 and 1993, respectively. The
combined ratio was 110.3 for 1995, compared with 115.0 and 127.3 for 1994 and
1993, respectively. Contributing to the 1995 improvement in underwriting results
were continued favorable loss trends in the workers' compensation line and lower
catastrophe losses. The primary reason for the 1993 poor operating results was
the reserve addition of $500 million related to litigation with Fibreboard in
1993 (see Note 19 of the Notes to Consolidated Financial Statements included in
Item 8). Such loss provision increased the combined ratio by 8.0% in 1993.
Catastrophe losses for 1995 on a pre-tax basis were approximately $149 million,
compared with $283 million in 1994 and $74 million in 1993. CNA's 1995
catastrophe losses related primarily to tropical storms and hail storms in
Texas. CNA's 1994 catastrophe losses related primarily to the Northridge
earthquake near Los Angeles and severe winter storms in the Northeast.
CNA, consistent with sound insurance reserving practices, regularly adjusts its
reserve estimates in subsequent reporting periods as new facts and circumstances
emerge that indicate the previous estimates need to be modified. These
adjustments, referred to as "reserve development," are inevitable given the
complexities of the reserving process and are recorded in the income statement
in the period the need for the adjustments become apparent. The property and
casualty underwriting losses include net adverse (favorable)
36
reserve development of $122, $(71) and $590 million for 1995, 1994 and 1993,
respectively.
This adverse (favorable) reserve development reflects the effects of
management's ongoing evaluation of reserve levels and is comprised of the
following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Environmental $ 241 $ 181 $ 446
Asbestos 258 37 601
Other (377) (289) (457)
-------------------------
Total $ 122 $ (71) $ 590
=========================
</TABLE>
Management believes its reserves for environmental and asbestos claims are
appropriately established based upon known facts and current case law. However,
due to the inconsistencies of court coverage decisions, the number of waste
sites subject to clean-up, the standards for clean-up and liability, and other
factors, the ultimate exposure to CNA for these claims may vary materially from
the amounts currently recorded, resulting in a potential increase in the claim
reserves recorded. In addition issues related to, among other things, specific
policy provisions, multiple insurers and allocation of liability among insurers,
consequences of conduct of the insured, missing policies and proof of coverage
make quantification of liabilities exceptionally difficult and subject to
adjustment based upon newly available data. Due to the uncertainties and factors
described above, management believes it is not practicable to develop a
meaningful range for any such additional reserves that may be required. See Note
10 of the Notes to Consolidated Financial Statements, included in Item 8, for
further discussion of environmental pollution and asbestos reserves.
Adverse 1995 environmental asbestos reserve development of $241 million includes
$60 million related to CIC and results from CNA's ongoing monitoring of current
settlement patterns, current pending cases and potential future claims. Adverse
asbestos reserve development of $258 million in 1995 is based on management's
assessment of the effects of 1995 payments and settlement activity as well as an
ongoing review of pending asbestos cases and related legal decisions. Other 1995
reserve development, which nets to $377 million of favorable reserve
development, is principally due to favorable claim frequency (rate of claim
occurrence) and severity (average cost per claim) experience in the workers'
compensation line of business. The 1993 environmental development includes an
allocation of reserves for incurred but not reported environmental claims of
$340 million. The 1993 asbestos development includes $500 million related to
Fibreboard. See Note 19 of the Notes to Consolidated Financial Statements,
included in Item 8, for further discussion of the Fibreboard litigation.
Life insurance revenues increased by $713.2 and $793.7 million, or 24.6% and
28.1%, as compared to 1994 and 1993, respectively. Life premium revenues
increased by $390.0 and $614.5 million, or 14.9% and 25.7%, as compared to 1994
and 1993, respectively. Life insurance and annuity premiums for 1995 were up
13.2% and 24.2% from 1994 and 1993, respectively. The premium growth in 1995 was
principally attributable to increases in new business in individual life
operations. The premium growth in 1994 was $236 million and was principally
attributable to increases in new business in group operations and pension
operations. Life investment income increased by approximately 18.9% due to
continued strong positive cash flow and higher yielding investments resulting
from a shift in 1994 to longer term securities. The bond segment of the life
investment portfolio yielded 6.97% in 1995, compared to 6.59% in 1994.
CNA's life insurance subsidiaries' net income excluding net realized investment
gains (losses) was $91.3 million for 1995, compared to $68.4 and $34.0 million
for 1994 and 1993, respectively. Profits increased primarily due
37
to increased investment income and improved mortality experience and increased
interest rate spreads on interest sensitive products, as well as increased
product sales. Net realized investment gains for 1995 were $71.9 million,
compared to net realized losses of $37.8 million for 1994 and net realized gains
of $60.3 million for 1993.
Cigarettes
Revenues increased by $138.7 and $145.4 million, or 7.2% and 7.6%, as compared
to 1994 and 1993, respectively. Net income increased by $15.3 and $22.6 million,
or 4.4% and 6.6%, as compared to 1994 and 1993, respectively.
Revenues increased, as compared to 1994, by approximately $103.4 million, or
5.3%, due to an increase in unit sales volume and an increase of approximately
$33.7 million, or 1.8%, due to increased unit prices. Compared to 1993, revenues
increased by approximately $331.5 million, or 17.4%, due to increased sales
volume, partially offset by a decrease of approximately $188.5 million, or 9.9%,
due to lower unit prices reflecting the industry-wide price reduction in August
1993.
Lorillard's unit sales volume increased by 5.3% and 19.3% as compared to 1994
and 1993, respectively. Unit sales volume of the U.S. cigarette industry has
decreased by 1.7% and increased 4.3% over the same periods. Newport, a full
price brand which accounts for approximately 70% of Lorillard's unit sales,
increased by 7.4% and 21.1% as compared to 1994 and 1993, respectively.
Net income improved due primarily to the increased revenues discussed above and,
as compared to 1993, lower advertising and sales promotion expenses, partially
offset by higher cost of sales.
Increased cost of sales reflect Lorillard's leaf tobacco purchases during 1995.
In prior years, Lorillard utilized more leaf tobacco in its operations than it
had purchased. Accordingly, under the LIFO valuation method, this had the effect
of reducing cost of sales in 1994 and 1993. In addition, in 1995 Lorillard
purchased more leaf tobacco than it used in its manufacturing operations due to
unit volume increases. This added to the increased cost of sales in 1995, as
compared to 1994 and 1993.
Although Lorillard has benefited from an increase in unit sales volume, the
overall impact of the industry-wide price reduction in August 1993 reduced
profit margins. In addition, it is expected that lower consumer cigarette
consumption will continue to influence overall industry unit volume and that the
discount category will continue to be a significant influence in overall sales.
Hotels
Revenues increased by $0.6 and $32.7 million, or 0.3% and 17.6%, as compared to
1994 and 1993, respectively. Net income decreased by $2.8 million and increased
by $16.0 million, as compared to 1994 and 1993, respectively.
Revenues increased due primarily to a gain of $14.5 million in connection with
the transfer of the Monte Carlo casino operations as well as improved occupancy
and average room rates. These increases were offset in 1994 by a gain on sale of
two hotel properties leased to others amounting to $30.2 million.
Net income declined, as compared to 1994, due to an after tax gain of $15.4
million related to the sale of two hotels leased to others. Exclusive of this
transaction, net income increased, as compared to the prior years, due to the
increased revenues discussed above, partially offset by a write-off of a
pre-opening advance.
Drilling
Revenues increased by $35.8 and $51.2 million, or 11.8% and 17.8%, as compared
to 1994 and 1993, respectively. Net loss decreased by $27.1 and $7.7 million, or
75.3%
38
and 46.4%, as compared to 1994 and 1993, respectively.
Revenues increased and net loss decreased, as compared to the prior years, due
primarily to higher utilization and dayrates for semisubmersible rigs operating
in both the North Sea and the Gulf of Mexico. These increases were partially
offset by lower results from Diamond Offshore's jackup rigs operating in the
Gulf of Mexico due to lower natural gas prices as well as an oversupply of rigs.
As previously discussed, Diamond Offshore sold shares of its common stock
through an initial public offering in October 1995, the proceeds of which were
used to retire intercompany debt. Accordingly, operating results in 1995
benefited from lower interest expense as compared to the prior year.
Watches and Clocks
Revenues decreased by $42.0 and $44.0 million, or 27.7% and 28.7%, as compared
to 1994 and 1993, respectively. Net income increased by $1.7 and $0.1 million,
as compared to 1994 and 1993, respectively.
In January 1995, Bulova sold its industrial and defense manufacturing business,
Bulova Technologies, Inc. ("BTI"), and recognized a pre-tax and after tax gain
of $0.6 and $0.4 million, respectively.
Exclusive of BTI, revenues increased $10.7 and $8.4 million, or 10.8% and 8.3%,
and net income increased by $2.0 and $0.7 million, as compared to 1994 and 1993,
respectively. Revenues and net income in 1995 include interest income of $4.2
million and a tax expense of $3.2 million resulting from a tax audit adjustment.
Bulova also benefited from a favorable change in its product sales mix and lower
interest expense, partially offset by gain on asset dispositions in 1993.
Other
Revenues increased by $1,312.4 and $1,079.3 million, as compared to 1994 and
1993, respectively. Net income increased by $832.8 and $672.0 million as
compared to 1994 and 1993, respectively. Other operations consist primarily of
investment income of non-insurance companies and the Company's investment in CBS
Inc.
Revenues and net income increased due primarily to realized investment gains
from securities transactions. Pre-tax realized investment gains (losses)
amounted to $1,120.2, $(201.9) and $62.5 million for the years ended December
31, 1995, 1994 and 1993, respectively. Realized investment gains (losses) after
tax amounted to $726.5, $(131.3) and $38.7 million for the respective periods.
Pre-tax realized investment gains in 1995 include $579.2, $372.9 and $192.9
million related to the sale by the Company of its CBS common shares, its
disposition of a substantial portion of its holdings of Champion International
and a gain recognized from Diamond Offshore's initial public offering,
respectively.
Exclusive of securities transactions, other revenues decreased by $9.7 million
and increased by $21.6 million, or 7.1% and 20.5%, as compared to 1994 and 1993,
respectively. Revenues declined in 1995 due primarily to lower earnings
(accounted for under the equity method) of CBS Inc. This decline was partially
offset by higher investment income reflecting increased levels of invested
assets. Revenues increased, as compared to 1993, due to the higher investment
income, partially offset by the lower earnings of CBS Inc. Net income decreased
by $25.0 and $15.8 million due primarily to higher interest expense and lower
earnings from CBS Inc., partially offset by increased investment income.
39
Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Assets:
- -------------------------------------------------------------------------------------------------
December 31 1995 1994
- -------------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C>
Investments (Notes 1, 2, 3 and 4):
Fixed maturities, amortized cost of $29,403.5 and $21,644.7 $30,467.7 $20,852.1
Equity securities, cost of $990.9 and $1,270.3 1,213.6 1,438.1
Mortgage loans and notes receivable 132.3 68.0
Policy loans 177.2 176.3
Other investments 503.1 104.1
Short-term investments 7,137.0 8,437.6
- ------------------------------------------------------------------------------------------------
Total investments 39,630.9 31,076.2
Cash 241.7 160.6
Receivables-net (Notes 1 and 7) 13,128.6 8,068.0
Property, plant and equipment-net (Notes 1 and 8) 1,437.5 1,089.9
Deferred income taxes (Note 11) 1,205.2 1,679.2
Prepaid reinsurance premiums (Note 18) 495.4 175.1
Goodwill and other intangible assets-net (Note 1) 481.8 92.8
Other assets (Notes 6, 9 and 14) 1,075.7 889.3
Deferred policy acquisition costs of insurance subsidiaries (Note 1) 1,493.3 1,024.6
Separate Account business (Notes 1 and 3) 5,868.1 6,080.3
- ------------------------------------------------------------------------------------------------
Total assets $65,058.2 $50,336.0
================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
40
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
- -------------------------------------------------------------------------------------------------
December 31 1995 1994
- -------------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C>
Insurance reserves (Notes 1 and 10):
Claim and claim expense $32,032.4 $22,564.7
Future policy benefits 3,515.9 3,046.1
Unearned insurance premiums 4,549.5 2,690.7
Policyholders' funds 705.0 632.3
- ------------------------------------------------------------------------------------------------
Total insurance reserves 40,802.8 28,933.8
Accounts payable and accrued liabilities 1,941.8 1,153.0
Payable for securities purchased 435.3 489.8
Securities sold under agreements to repurchase (Notes 1 and 2) 774.1 4,571.5
Long-term debt, less unamortized discount (Notes 3 and 13) 4,248.2 2,144.4
Deferred credits and other liabilities (Notes 1 and 14) 1,409.9 713.1
Separate Account business (Notes 1 and 3) 5,868.1 6,080.3
- ------------------------------------------------------------------------------------------------
Total liabilities 55,480.2 44,085.9
- ------------------------------------------------------------------------------------------------
Minority interest 1,339.3 844.8
- ------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
(Notes 1, 2, 4, 10, 11, 12, 13, 14, 18, 19 and 22)
Shareholders' equity (Notes 1, 2, 6, 13, 14 and 15):
Common stock, $1 par value:
Authorized - 200,000,000 shares
Issued and outstanding - 117,832,800 and 58,964,900 shares 117.8 59.0
Additional paid-in capital 170.0 219.1
Earnings retained in the business 7,157.8 5,469.9
Unrealized appreciation (depreciation) 793.1 (322.7)
Pension liability adjustment (20.0)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 8,238.7 5,405.3
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $65,058.2 $50,336.0
================================================================================================
</TABLE>
41
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED INCOME
- -------------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data)
Revenues (Note 1):
<S> <C> <C> <C>
Insurance premiums (Note 18):
Property and casualty $ 8,723.8 $ 6,837.1 $ 6,273.6
Life 3,006.5 2,616.5 2,392.0
Investment income, net of expenses (Note 2) 2,211.5 1,671.3 1,377.8
Realized investment gains (losses) (Notes 2 and 6) 1,387.1 (447.0) 862.8
Manufactured products (including excise taxes of
$455.0, $431.7 and $379.4) 2,152.2 2,061.4 2,055.1
Gain on sale of subsidiary's stock (Note 16) 192.9
Other 1,003.4 775.9 725.5
- -------------------------------------------------------------------------------------------------
Total 18,677.4 13,515.2 13,686.8
- -------------------------------------------------------------------------------------------------
Expenses (Note 1):
Insurance claims and policyholders' benefits
(Notes 10 and 18) 10,893.1 9,246.4 9,271.5
Amortization of deferred policy acquisition costs 1,843.5 1,373.1 1,193.4
Cost of manufactured products sold 964.1 929.4 864.1
Selling, operating, advertising and administrative
expenses 1,854.9 1,525.6 1,506.1
Interest 282.5 174.6 162.3
- -------------------------------------------------------------------------------------------------
Total 15,838.1 13,249.1 12,997.4
- -------------------------------------------------------------------------------------------------
2,839.3 266.1 689.4
- -------------------------------------------------------------------------------------------------
Income taxes (benefits) (Note 11) 945.3 (9.0) 46.6
Minority interest 128.3 7.3 48.7
- -------------------------------------------------------------------------------------------------
Total 1,073.6 (1.7) 95.3
- -------------------------------------------------------------------------------------------------
Net income $ 1,765.7 $ 267.8 $ 594.1
=================================================================================================
Net income per share (Note 15) $ 14.98 $ 2.22 $ 4.63
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
42
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------
Earnings Common
Additional Retained Unrealized Pension Stock
Common Paid-in in the Appreciation Liability Held in
Stock Capital Business (Depreciation) Adjustment Treasury
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 65.1 $163.1 $5,267.0 $ 31.8
Net income 594.1
Dividends paid, $.50 per share (64.3)
Purchases of common stock $ 336.3
Retirement of treasury stock (3.6) (12.6) (320.1) (336.3)
Accounting change (Note 1) 367.9
Net unrealized appreciation 7.0
Pension liability adjustment
(Note 14) $(28.0)
Equity in certain transactions of
subsidiary companies (Note 6) 59.8
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1993 61.5 210.3 5,476.7 406.7 (28.0)
Net income 267.8
Dividends paid, $.50 per share (60.2)
Purchases of common stock 226.8
Retirement of treasury stock (2.5) (9.9) (214.4) (226.8)
Net unrealized depreciation (729.4)
Pension liability adjustment
(Note 14) 8.0
Equity in certain transactions of
subsidiary companies (Note 6) 18.7
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1994 59.0 219.1 5,469.9 (322.7) (20.0)
Net income 1,765.7
Two-for-one stock split 59.0 (59.0)
Dividends paid, $.63 per share (73.8)
Purchases of common stock 4.3
Retirement of treasury stock (.2) (.1) (4.0) (4.3)
Net unrealized appreciation 1,115.8
Pension liability adjustment
(Note 14) 20.0
Equity in certain transactions of
subsidiary companies 10.0
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $117.8 $170.0 $7,157.8 $ 793.1
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
43
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED CASH FLOWS
- -------------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
Operating Activities:
<S> <C> <C> <C>
Net income $ 1,765.7 $ 267.8 $ 594.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings from unconsolidated
companies (14.4) (30.1) (50.0)
Distribution of CBS equity earnings 4.4 91.6 3.8
Provision for minority interest 128.3 7.3 48.7
Amortization of investments (141.4) (120.0) (95.3)
Depreciation and amortization 225.8 160.7 135.1
Realized investment (gains) losses (1,580.0) 447.0 (862.8)
Provision for deferred income taxes 302.3 (112.1) (181.6)
Changes in assets and liabilities-net:
Reinsurance receivables (41.4) (236.0) 298.2
Other receivables (164.5) (369.6) 350.0
Prepaid reinsurance premiums 129.7 (7.9) (15.0)
Deferred policy acquisition costs (162.6) (45.4) (92.2)
Insurance reserves and claims 431.0 1,484.4 1,229.5
Accounts payable and accrued liabilities 290.3 78.8 403.0
Other-net 122.7 (117.2) (104.8)
- -------------------------------------------------------------------------------------------------
1,295.9 1,499.3 1,660.7
- -------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of fixed maturities (29,275.3) (34,282.1) (42,893.4)
Proceeds from sales of fixed maturities 24,093.6 25,398.7 41,339.8
Proceeds from maturities of fixed maturities 2,855.2 4,506.3 2,349.4
Purchases of equity securities (1,479.3) (1,195.1) (957.8)
Proceeds from sales of equity securities 2,317.9 1,034.1 874.4
Purchase of The Continental Corporation-net
of cash acquired (960.4)
Proceeds from sale of CBS stock 901.7
Proceeds from Diamond Offshore initial public
offering 338.4
Return of investment from CBS tender offer 184.0
Purchases of property and equipment (257.9) (209.1) (159.5)
Proceeds from sales of property and equipment 16.5 97.7 20.3
Securities sold under agreements to repurchase (3,797.4) 3,958.3 2.3
Change in short-term investments 2,998.8 (594.9) (2,259.3)
Change in other investments (1.5) (63.4) 8.1
- -------------------------------------------------------------------------------------------------
(2,249.7) (1,165.5) (1,675.7)
- -------------------------------------------------------------------------------------------------
44
<CAPTION>
STATEMENTS OF CONSOLIDATED CASH FLOWS
- -----------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
Financing Activities:
<S> <C> <C> <C>
Dividends paid to shareholders (73.8) (60.2) (64.3)
Purchases of treasury shares (6.0) (225.1) (336.3)
Principal payments on long-term debt (8.8) (54.5) (745.2)
Issuance of long-term debt 1,337.0 0.5 1,181.9
Net decrease in short-term debt (201.9)
Receipts credited to policyholders 22.6 32.8 47.5
Withdrawals of policyholder account balances (34.2) (22.4) (18.2)
- -------------------------------------------------------------------------------------------------
1,034.9 (328.9) 65.4
- -------------------------------------------------------------------------------------------------
Net change in cash 81.1 4.9 50.4
Cash, beginning of year 160.6 155.7 105.3
- -------------------------------------------------------------------------------------------------
Cash, end of year $ 241.7 $ 160.6 $ 155.7
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
45
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Note 1. Summary of Significant Accounting Policies -
Principles of consolidation - The consolidated financial statements include all
significant subsidiaries and all material intercompany accounts and transactions
have been eliminated. The equity method of accounting is used for investments in
associated companies in which the Company generally has an interest of 20% to
50%.
Accounting estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Accounting changes - Effective December 31, 1993, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This Statement requires that
investments in debt and equity securities classified as available for sale be
carried at fair value. Previously, fixed income securities classified as
available for sale were carried at the lower of aggregate amortized cost or fair
value. Unrealized gains and losses are reflected as a separate component of
shareholders' equity, net of deferred income taxes, participating policyholders'
and minority interests. The effect of adopting this Statement was to increase
shareholders' equity by $367.9 (net of $294.0 in deferred income taxes,
participating policyholders' and minority interests). The adoption of this
Statement did not impact net income. Separate Account assets invested in debt
securities have also been classified as available for sale and are carried at
fair value.
Investments - Investments in securities, which are held principally by insurance
subsidiaries of CNA Financial Corporation ("CNA"), an 84% owned subsidiary, are
carried as follows:
The Company believes it has the ability to hold all fixed income investments
until maturity. However, securities may be sold to take advantage of investment
opportunities generated by changing interest rates, prepayments, tax and credit
considerations, as part of the Company's asset/liability strategy, or for other
similar factors. As a result, the Company considers its fixed maturity
securities (bonds and redeemable preferred stocks) and equity securities as
available for sale and they are carried at fair value. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Effective January 1, 1996, equity securities added to the parent company's
investment portfolio will be classified as trading securities in order to
reflect the Company's investment philosophy. These investments will be carried
at fair value with the net unrealized gain or loss included in the income
statement.
Derivative instruments are generally held for trading purposes and as such, are
marked to market and gains or losses are included in realized investment gains
or losses. Interest rate swaps which are used to manage the Company's exposure
to variable rate long-term debt are not considered held for trading purposes.
Such swaps are accounted for as an adjustment to interest expense.
Mortgage loans are carried at unpaid principal balances, including unamortized
premium or discount. Real estate is carried at depreciated cost. Policy loans
are carried at unpaid balances. Short-term investments include U.S. government
securities, commercial paper and time deposits and are carried at fair value,
which approximates amortized cost.
All securities transactions are recorded on the trade date. The cost of
securities sold is determined by the identified certificate method. Unrealized
appreciation (depreciation) in shareholders' equity reflects the unrealized gain
or loss on investments which are available for sale and carried at fair value,
net of applicable deferred income taxes and participating policyholders' and
minority interests. Investments are written down to estimated fair values and
losses are charged to income when a decline in value is considered to be other
than temporary.
Securities sold under agreements to repurchase - The Company has a securities
lending program where securities are loaned to third parties, primarily major
brokerage firms. Borrowers of these securities must deposit 100% of the market
value of these securities if
46
the collateral is cash, or 102% if the collateral is securities. Cash deposits
from these transactions have been invested in short-term investments (primarily
U.S. government securities and commercial paper). Securities sold under
repurchase agreements are recorded at their contracted repurchase amounts. The
Company continues to receive the interest on the loaned debt securities, as
beneficial owner, and accordingly, the loaned debt securities are included in
fixed maturity securities.
Insurance Operations - Premium revenue - Insurance premiums on property and
casualty and health insurance contracts (included in life premiums) are earned
ratably over the terms of the policies after provision for estimated adjustments
on retrospectively rated policies and deductions for ceded insurance. Revenues
on universal life type contracts comprise contract charges and fees which are
recognized over the coverage period. Other life insurance premiums are
recognized as revenue when due after deductions for ceded insurance.
Claim and claim expense reserves - Claim and claim expense reserves, except
reserves for structured settlements, workers' compensation lifetime claims and
accident and health disability claims, are based on undiscounted (a) case basis
estimates for losses reported on direct business, adjusted in the aggregate for
ultimate loss expectations, (b) estimates of unreported losses based upon past
experience, (c) estimates of losses on assumed insurance, and (d) estimates of
future expenses to be incurred in settlement of claims. In establishing these
estimates, consideration is given to current conditions and trends as well as
past company and industry experience.
Claim and claim expense reserves are based on estimates and the ultimate
liability may vary significantly from such estimates. CNA regularly reviews its
reserves, and any adjustments that are made to the reserves are reflected in
operating income in the period the need for such adjustments become apparent.
See Note 10 for a further discussion of claim and claim expense reserves.
Structured settlements have been negotiated for claims on certain property and
casualty insurance policies. Structured settlements are agreements to provide
periodic payments to claimants, which are fixed and determinable as to the
amount and time of payment. Certain structured settlements are funded by
annuities purchased from CNA's life insurance subsidiary. Related annuity
obligations are carried in future policy benefits reserves. Obligations for
structured settlements not funded by annuities are carried at discounted values
which approximate the alternative cost of annuity purchases. Such reserves,
discounted at interest rates ranging from 6.3% to 7.5%, totaled $897.0 and
$839.0 at December 31, 1995 and 1994, respectively.
Workers' compensation lifetime claims and accident and health disability claim
reserves are discounted at interest rates ranging from 3.5% to 6.0% with
mortality and morbidity assumptions reflecting CNA's and current industry
experience. Such discounted reserves totaled $2,688.2 and $1,114.9 at December
31, 1995 and 1994, respectively.
Future policy benefits reserves - Reserves for traditional life insurance
products are computed based upon net level premium methods using actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions include a margin for adverse deviations and
generally vary by plan, age at issue and policy duration. Interest rates range
from 3% to 10.5%, and mortality, morbidity and withdrawal assumptions reflect
CNA and industry experience prevailing at the time of issue. Renewal expense
estimates include the estimated effects of inflation and expenses beyond the
premium paying period.
Involuntary risks - CNA's share of involuntary risks is mandatory and generally
a function of its share of the voluntary market by line of insurance in each
state. CNA records the estimated effects of its mandatory participation in
residual markets on an accrual basis. CNA records assessments for insolvencies
as they are paid. Accrual of such assessments is not practical, as past
experience is not a reliable indicator of future activity.
Reinsurance - 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, provide greater
diversification of risk and 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
47
coverage. Generally, reinsurance coverage for property risks is on excess of
loss, per risk basis. Liability coverages are generally reinsured on a quota
share basis in excess of CNA's retained risk. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim liability.
Deferred policy acquisition costs - Costs of acquiring property and casualty
insurance business, which vary with and are primarily related to the production
of such business, are deferred and amortized ratably over the period the related
premiums are recognized. Such costs include commissions, premium taxes, and
certain underwriting and policy issuance costs. Anticipated investment income is
considered in the determination of the recoverability of deferred policy
acquisition costs. Life acquisition costs are capitalized and amortized based on
assumptions consistent with those used for computing policy benefit reserves.
Acquisition costs on ordinary life business are amortized over the assumed
premium paying periods. Universal life and investment annuity acquisition costs
are amortized in proportion to the present value of estimated gross profits over
the products' assumed durations, which are regularly evaluated and adjusted, as
appropriate. To the extent that unrealized gains or losses on securities
available for sale would result in an adjustment of deferred policy acquisition
costs had those gains or losses actually been realized, the related unamortized
deferred policy acquisition costs are recorded as an adjustment of the
unrealized gains or losses included in shareholders' equity.
Restricted investments - On December 30, 1993, CNA deposited $986.8 in an escrow
account, pursuant to the Fibreboard Global Settlement Agreement, as discussed in
Note 19. The funds are included in short-term investments and are invested in
U.S. treasury securities. The escrow account amounted to $1,044.6 and $1,009.9
at December 31, 1995 and 1994, respectively.
Participating business - Participating business represented 0.6%, 0.9% and 1.1%
of CNA's gross life insurance in force and 0.8%, 1.0% and 1.1% of life insurance
premium income for 1995, 1994 and 1993, respectively. Participating
policyholders' equity is determined by allocating 90% of related net income or
loss and unrealized investment gains or losses to such business, less dividends
determined by CNA's Board of Directors. In the accompanying Statements of
Consolidated Income, revenues and benefits and expenses include amounts related
to participating policies; the net income or loss allocated to participating
policyholders' equity is a component of insurance claims and policyholders'
benefits.
Separate Account business - CNA's life insurance subsidiary, Continental
Assurance Company ("CAC"), issues certain investment and annuity contracts, the
assets and liabilities of which are legally segregated and reflected in the
accompanying Consolidated Balance Sheets as assets and liabilities of Separate
Account business. CAC guarantees principal and a specified return to the
contract holders of approximately 85% of the Separate Account business.
Substantially all assets of the Separate Accounts are carried at fair value.
48
Statutory capital and surplus - Statutory capital and surplus and net income,
determined in accordance with accounting practices prescribed by the regulations
and statutes of various state insurance departments, for property and casualty
and life insurance subsidiaries are as follows:
<TABLE>
<CAPTION>
Statutory Capital
and Surplus Statutory Net Income
------------------- -------------------------
December 31 Year Ended December 31
------------------- -------------------------
1995 1994* 1995** 1994* 1993*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and casualty $5,695.9 $3,367.3 $1,208.3 $67.3 $120.7
Life 1,127.6 1,054.6 30.2 65.1 0.1
- --------------------------------------------------------------------------------
* Excludes results for The Continental Corporation.
** Includes the results of The Continental Corporation for the full year.
</TABLE>
Statutory accounting practices - CNA's insurance affiliates are domiciled in
various states including Illinois, California, Connecticut, Delaware, Hawaii,
Indiana, Massachusetts, Missouri, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Puerto Rico and Texas. These affiliates prepare their statutory
financial statements in accordance with accounting practices specifically
"prescribed" or otherwise permitted by the respective state's insurance
department. Prescribed statutory accounting practices are set forth in a variety
of publications of the National Association of Insurance Commissioners, as well
as state laws, regulations and general administrative rules. CNA has no material
permitted accounting practices.
Inventories -
Tobacco products - These inventories, aggregating $192.2 and $171.5 at December
31, 1995 and 1994, respectively, are stated at the lower of cost or market,
using the last-in, first-out (LIFO) method.
Watches and clocks - These inventories, aggregating $38.9 and $57.0 at December
31, 1995 and 1994, respectively, are stated at the lower of cost or market,
using the first-in, first-out (FIFO) method.
Property, Plant and Equipment - Property, plant and equipment is carried at cost
less accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the various classes of
properties. Leaseholds and leasehold improvements are depreciated or amortized
over the terms of the related leases (including optional renewal periods where
appropriate) or the estimated lives of improvements, if less than the lease
term.
The principal service lives used in computing provisions for depreciation are as
follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and building equipment 40
Building fixtures 10 to 20
Machinery and equipment 5 to 12
Hotel equipment 4 to 12
Drilling equipment 10 to 25
</TABLE>
Goodwill and other intangible assets - Goodwill, representing the excess of the
purchase price over the fair value of the net assets of the acquired entities,
is generally amortized on a straight-line basis over the period of expected
benefit of twenty years. Other intangible assets are amortized on a
straight-line basis over their estimated economic lives. Accumulated
amortization at December 31, 1995 and 1994 was $207.1 and $181.5, respectively.
Amortization expense amounted to $25.6, $9.1 and $8.8 for the years ended
December 31, 1995, 1994 and 1993, respectively. Intangible assets are
periodically reviewed to determine whether an impairment in value has occurred.
Research and Development Costs - Research and development costs are charged to
expense as incurred and amounted to $11.8, $11.8 and $11.9 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Reclassification - Certain amounts applicable to prior periods have been
reclassified to conform to the classifications followed in 1995.
49
<TABLE>
<CAPTION>
Note 2. Investments -
Investment income consisted of:
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
Tax exempt $ 264.3 $ 333.8 $ 504.9
Taxable 1,512.1 1,019.1 539.7
Redeemable preferred stocks 3.9 13.5 21.2
Equity securities 55.5 28.2 16.5
Mortgage loans 15.2 6.2 15.4
Policy loans 12.6 10.5 10.4
Security repurchase transactions 215.5 271.2 11.2
Short-term investments 302.3 174.1 276.9
Other 49.0 25.8 12.1
- -------------------------------------------------------------------------------------------------
Total investment income 2,430.4 1,882.4 1,408.3
Investment expenses 46.1 24.0 24.7
Security repurchase transactions 172.8 187.1 5.8
- -------------------------------------------------------------------------------------------------
Investment income-net $2,211.5 $1,671.3 $1,377.8
=================================================================================================
<CAPTION>
Realized investment gains (losses) are as follows:
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 222.4 $ (314.8) $ 765.9
Equity securities 1,075.5 41.6 92.1
Derivative instruments (31.4) (14.6) 0.1
Short-term investments 47.5 (164.7) 1.1
Other, principally Separate Accounts 73.1 5.5 3.6
- -------------------------------------------------------------------------------------------------
1,387.1 (447.0) 862.8
Gain on sale of subsidiary's stock 192.9
- -------------------------------------------------------------------------------------------------
1,580.0 (447.0) 862.8
Income tax (expense) benefit (552.3) 155.3 (300.0)
Allocated to participating policyholders (7.8) 10.9 (13.1)
Minority interest (46.7) 25.1 (87.8)
- -------------------------------------------------------------------------------------------------
Realized investment gains (losses)-net $ 973.2 $ (255.7) $ 461.9
=================================================================================================
</TABLE>
50
The carrying value of investments (other than equity securities) that have not
produced income for the last twelve months is $98.3 at December 31, 1995.
Investment gains of $1,135.2, $322.4 and $1,020.7 and losses of $369.0, $760.3
and $161.6 were realized on securities available for sale for the years ended
December 31, 1995, 1994 and 1993, respectively.
The amortized cost and market values of securities available for sale are as
follows:
<TABLE>
<CAPTION>
Unrealized
Amortized ---------------------- Market
December 31, 1995 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and obligations of
government agencies $13,064.0 $ 479.5 $ 1.3 $13,542.2
Asset-backed 5,939.7 160.3 13.8 6,086.2
States, municipalities and political
subdivisions-tax exempt 3,452.8 163.7 13.4 3,603.1
Corporate 4,540.4 215.2 39.9 4,715.7
Other debt 2,306.3 105.4 7.5 2,404.2
Redeemable preferred stocks 100.3 17.2 1.2 116.3
- -------------------------------------------------------------------------------------------------
Total fixed maturities 29,403.5 1,141.3 77.1 30,467.7
Equity securities 990.9 247.3 24.6 1,213.6
Short-term investments 7,117.0 20.0 7,137.0
- -------------------------------------------------------------------------------------------------
$37,511.4 $1,408.6 $ 101.7 $38,818.3
=================================================================================================
December 31, 1994
- -------------------------------------------------------------------------------------------------
U.S. government and obligations of
government agencies $11,395.2 $ 15.6 $ 629.1 $10,781.7
Asset-backed 2,693.2 11.2 140.9 2,563.5
States, municipalities and political
subdivisions-tax exempt 3,716.7 121.8 68.9 3,769.6
Corporate 1,956.5 19.9 104.7 1,871.7
Other debt 1,459.3 23.3 45.8 1,436.8
Redeemable preferred stocks 423.8 8.2 3.2 428.8
- -------------------------------------------------------------------------------------------------
Total fixed maturities 21,644.7 200.0 992.6 20,852.1
Equity securities 1,270.3 228.4 60.6 1,438.1
Short-term investments 8,448.1 1.1 11.6 8,437.6
- -------------------------------------------------------------------------------------------------
$31,363.1 $ 429.5 $1,064.8 $30,727.8
=================================================================================================
</TABLE>
51
The amortized cost and market value of fixed maturities at December 31, 1995 and
1994 are shown below by contractual maturity. Actual maturities differ from
contractual maturities because securities may be called or prepaid with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
1995 1994
---------------------- --------------------------
Amortized Market Amortized Market
December 31 Cost Value Cost Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 862.7 $ 866.5 $ 1,618.9 $ 1,610.8
Due after one year through five years 11,916.2 12,124.0 7,484.0 7,083.7
Due after five years through ten years 4,542.5 4,767.2 4,718.2 4,409.2
Due after ten years 6,155.3 6,637.3 5,130.5 5,184.9
Asset-backed securities not due at a
single maturity date 5,926.8 6,072.7 2,693.1 2,563.5
- -------------------------------------------------------------------------------------------------
$29,403.5 $30,467.7 $21,644.7 $20,852.1
=================================================================================================
</TABLE>
Note 3. Fair Value of Financial Instruments -
<TABLE>
<CAPTION>
1995 1994
----------------------- --------------------------
Carrying Estimated Carrying Estimated
December 31 Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Investments:
Mortgage loans and notes
receivable $ 132.3 $ 128.9 $ 68.0 $ 67.5
Policy loans 177.2 166.6 176.3 155.2
Other investments 499.9 543.4 101.1 102.1
Separate Account assets:
Fixed maturities available for sale 5,499.3 5,499.3 5,250.2 5,250.2
Equity securities available for sale 242.7 242.7 139.5 139.5
Other 126.1 133.2 690.6 691.8
Financial liabilities:
Premium deposits and annuity contracts 825.5 776.8 603.0 593.6
Long-term debt 4,189.9 4,305.5 2,132.1 1,957.8
Financial guarantee liabilities 479.6 472.8 441.8 425.2
Separate Account liabilities:
Guaranteed investment contracts 4,315.8 4,455.5 4,747.9 4,874.6
Deferred annuities 74.1 108.2 62.5 89.0
Variable Separate Accounts 228.0 228.0 168.4 168.4
Other 585.8 585.8 658.6 658.6
- -------------------------------------------------------------------------------------------------
</TABLE>
52
In cases where quoted market prices are not available, fair values may be based
on estimates using present value or other valuation techniques. These techniques
are significantly affected by the assumptions used, including the discount rates
and estimates of future cash flows. Accordingly, the estimates presented herein
are subjective in nature and are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The amounts reported in
the balance sheet for fixed maturities securities, equity securities, derivative
instruments, short-term investments and securities sold under agreements to
repurchase are at fair value. As such, these financial instruments are not shown
in the table above. See Note 4 for the fair value of derivative instruments.
Since the disclosure excludes certain financial instruments and all nonfinancial
instruments such as real estate and insurance reserves, the aggregate fair value
amounts cannot be summed to determine the underlying economic value of the
Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Fixed maturity securities, equity securities and separate account securities are
based on quoted market prices, where available. For securities not actively
traded, fair values are estimated using values obtained from independent pricing
services or quoted market prices of comparable instruments adjusted for
differences between the quoted instruments and the instruments being valued.
Fair value for mortgage loans and notes receivable and policy loans are
estimated using discounted cash flow analyses, at interest rates currently being
offered for similar loans to borrowers with comparable credit ratings. Loans
with similar characteristics are aggregated for purposes of the calculations.
Other investments and other Separate Account assets consist of investments in
limited partnerships and various miscellaneous assets. Valuation techniques to
determine fair value consist of discounted cash flows and quoted market prices
of (a) the investments, (b) comparable instruments or (c) underlying assets of
the investments.
Premium deposits and annuity contracts are valued based on cash surrender values
and the outstanding fund balances.
The fair value of the liability for financial guarantee contracts is based on
discounted cash flows utilizing interest rates currently being offered for
similar contracts or spot interest rates.
Guaranteed investment contracts and deferred annuities of the Separate Accounts
are estimated using discounted cash flow calculations, based on interest rates
currently being offered for similar contracts with similar maturities. The fair
value of the liabilities for variable Separate Accounts are based on the quoted
market values of the underlying assets of each variable Separate Account. The
fair value of other Separate Account liabilities approximates carrying value.
Fair value of long-term debt traded on securities exchanges is based on quoted
market prices. The fair values for other long-term debt are based on quoted
market prices of comparable instruments adjusted for differences between the
quoted instruments and the instruments being valued or are estimated using
discounted cash flow analyses, based on current incremental borrowing rates for
similar types of borrowing arrangements.
53
Note 4. Off-Balance-Sheet and Derivative Financial Instruments -
The Company enters into various transactions involving off-balance-sheet
financial instruments through a variety of futures, swaps, options, forwards and
other contracts (the "Contracts") as part of its investing activities. These
Contracts are commonly referred to as derivative instruments since their
underlying values may be linked to interest rates, exchange rates, prices of
securities and financial or commodity indexes. The Company uses these Contracts
for its asset and liability management activities as well as income enhancements
for its portfolio management strategy. Entering into these Contracts involves
not only the risk of dealing with counterparties and their ability to meet the
terms of the Contracts but also the market risk associated with those positions
where the Company does not hold an offsetting security. Exposure to market risk
is managed in accordance with risk limits set by senior management by buying or
selling instruments or entering into offsetting positions.
The notional amounts of derivatives shown in the following table does not
represent amounts exchanged in these transactions and, therefore, are not a
measure of the exposure the Company has through its use of derivative
instruments. In addition, notional amounts are presented gross and do not
reflect the net effect of offsetting positions. The amounts exchanged are
calculated on the basis of the notional amounts and the other terms of the
derivative instruments.
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 Contracts 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 many of the
Contracts' collateral requirements.
The Company's investments in derivative instruments are as follows:
<TABLE>
<CAPTION>
Fair Value
Asset (Liability)
Contractual/ -------------------- Estimated
Notional Average for Potential Recognized
December 31, 1995 Value Year-End the Year Exposure Gain (Loss)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate swaps $ 93.0 $ 10.0 $ 1.1 $ 9.1
Options on equities and equity index 3,455.1 39.2 19.4 $ (5.6)(1) (59.3)
Options on foreign currency 434.7 37.8 10.4 72.5
Options on treasury securities 1,111.6 (12.1) (3.4) (176.5)(2) (1.8)
Financial futures and forwards:
Foreign currency 508.6 (.5) .3 (20.8)(3) (3.9)
Equity index and other 717.1 (140.7)(1) (44.0)
Commodity:
Swaps 262.1 (31.4) (33.2) (46.1)(1) (2.8)
Options 596.5 2.5 3.0 (2.9)
Futures 7.9 (1.6)(1)
Purchase obligations 88.0 (14.4) (19.6) (14.7)(1) 1.7
- ------------------------------------------------------------------------ -----------
Total $7,274.6 $ 31.1 $(22.0) $(31.4)
=================================================================================================
54
Note: The calculation of estimated potential exposure is based on assumed
adverse changes in the underlying reference price or index of (1) 20%,
(2) 15% or (3) 10%. Adverse changes on options which differ from those
presented above would not necessarily result in a proportionate change to
the estimated potential exposure.
<CAPTION>
Fair Value
Asset (Liability)
Contractual/ -------------------- Estimated
Notional Average for Potential Recognized
December 31, 1994 Value Year-End the Year Exposure Gain (Loss)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate swaps $ 75.0 $ 0.5 $ (1.3) $ (7.6)(1) $ (8.9)
Options on equities and equity index 712.0 (1.3) (0.6) (8.2)(1) 32.5
Options on foreign currency 75.0 0.1 1.4 (3.0)
Financial futures and forwards:
Foreign currency 586.8 (0.5) (14.2) (5.6)(1) (3.8)
Equity index and other 78.9 0.1 0.1 (7.9)(1) (25.3)
Commodity:
Swaps 295.6 (29.0) (27.0) (53.3)(2) (5.8)
Options 208.5 0.2 5.5 1.4
Futures 9.1 0.2 (0.5)(3) 0.1
Forwards 4.5
Purchase obligations 88.0 (16.2) (13.5) (14.4)(2) (6.3)
- ----------------------------------------------------------------------- -----------
Total $2,128.9 $(46.1) $(49.4) $(14.6)
=================================================================================================
Note: The calculation of estimated potential exposure is based on assumed adverse changes in the
underlying reference price or index of (1) 10%, (2) 20% or (3) 5%. Adverse changes on
options which differ from those presented above would not necessarily result in a
proportionate change to the estimated potential exposure.
</TABLE>
The notional values presented in the tables above include purchased options of
$3,324.1 and $475.8 at December 31, 1995 and 1994, respectively.
The Company's measure of exposure represents an estimate of net losses that
would be recognized on each class of derivative instrument held by the Company
at December 31, assuming immediate adverse market movements of the magnitude
described above. The Company believes that the various rates of adverse market
movements represent a measure of exposure to loss under hypothetically assumed
adverse conditions. The estimated market exposure represents the hypothetical
loss to future earnings and does not represent the maximum possible loss nor any
expected actual loss, even under adverse conditions, because actual adverse
fluctuations would likely differ. In addition, since the Company's investment
portfolio is subject to change based on its portfolio management strategy as
well as in response to changes in the market, these estimates are not
necessarily indicative of the actual results which may occur.
CNA has entered into interest rate swap agreements to convert the variable rate
of the borrowing under the bank credit facility and the commercial paper program
to a fixed rate. Since these interest rate swaps are not held for trading
purposes, they are not included in the preceding tables. At December 31, 1995,
CNA had outstanding interest rate swap agreements with several banks having a
total notional principle amount of $1,200 and a fair value liability of $28.7.
Those agreements, which terminate from May 2000 to December 2000, effectively
fix the Company's interest rate exposure on $1,200 of variable rate debt.
The Company also enters into short sales as part of its portfolio management
strategy. These sales resulted in proceeds of $182.4 and $117.9 with fair value
liabilities of $188.5 and $144.5 at December 31, 1995 and 1994, respectively.
Estimated fair values approximate carrying values and are based on quoted market
prices, where available.
For securities not actively traded, fair values are estimated using values
obtained from independent pricing services, quoted market prices of comparable
instruments or present value models.
55
Through August 1, 1989, CNA's property and casualty operations wrote financial
guarantee insurance contracts. These contracts primarily represent industrial
development bond guarantees and equity guarantees typically extending from ten
to thirteen years. For these guarantees, CNA received an advance premium which
is recognized over the exposure period and in proportion to the underlying
exposure insured.
At December 31, 1995 and 1994, gross exposure of financial guarantee insurance
contracts amounted to $707 and $630, respectively. The degree of risk attached
to this exposure is substantially reduced through reinsurance, collateral
requirements and diversification of exposures. At December 31, 1995 and 1994,
collateral consisting of letters of credit and debt service reserves amounted to
$39 and $45, respectively. In addition, security interests in real estate are
also obtained. Approximately 44% and 38% of the risks were ceded to reinsurers
at December 31, 1995 and 1994, respectively. Total exposure, net of reinsurance,
amounted to $395 and $393 at December 31, 1995 and 1994, respectively. Gross
unearned premium reserves for financial guarantee contracts were $17 and $22 at
December 31, 1995 and 1994, respectively. Gross claim and claim expense reserves
totaled $463 and $420 at December 31, 1995 and 1994, respectively.
Note 5. Purchase of Business -
On May 10, 1995, CNA acquired all the outstanding shares of The Continental
Corporation ("CIC") for approximately $1,100, or $20 per CIC share. To finance
the acquisition, CNA entered into a five year $1,325 revolving credit facility
(see Note 13). 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, and CIC's
operations are included in the Consolidated Financial Statements as of May 10,
1995. The purchase of CIC reflects goodwill of approximately $366 which will be
amortized over twenty years at an annual charge of $18.3.
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>
Year Ended December 31 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $20,132.5 $18,622.2
=================================================================================================
Realized gains (losses) included in revenue $ 1,699.0 $ (371.0)
=================================================================================================
Income (loss) before taxes and minority interest $ 2,881.4 $ (830.9)
Income tax (expense) benefit (975.8) 400.8
Minority interest (130.2) 104.9
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 1,775.4 $ (325.2)
=================================================================================================
Per Share $ 15.07 $ (2.70)
=================================================================================================
</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.
56
Note 6. Investment in CBS Inc. -
On November 24, 1995, Westinghouse Electric Corporation completed its
acquisition of CBS Inc. ("CBS") for cash consideration of $82.06 per share. The
Company received proceeds of $901.7 for its CBS shares and recorded (as part of
its realized investment gains) a pre-tax and after tax gain of $579.2 and
$376.5, respectively, in the fourth quarter of 1995. Previously, the Company
held approximately 18% of the outstanding common shares of CBS and accounted for
it on the equity method.
The Company's equity in the earnings of CBS after giving effect to purchase
value adjustments amounted to $15.7, $45.8 and $59.0 before taxes and $11.3,
$30.8 and $52.6 after taxes for the years ended December 31, 1995, 1994 and
1993, respectively. Dividends received amounted to $4.4, $5.2 and $3.8 for the
respective periods.
At December 31, 1994, the Company's carrying value, included in other assets,
and market value for its investment in CBS was $294.3 and $607.0, respectively.
At September 1, 1994, CBS completed a cash tender offer at an amount exceeding
its net book value per share for repurchase of its common stock aggregating
approximately $1,137.5, or 22% of its common shares. The Company tendered its
shares and received cash amounting to $270.4, comprised of $86.4 realization of
previously undistributed earnings and $184.0 representing a return of the
Company's investment. As a result of the tender, the Company's ownership in CBS
decreased from approximately 20% to 18% and the Company's additional paid-in
capital increased by $11.5.
In May 1993, $389.6 of CBS 5% convertible debentures were converted for
1,947,975 shares of common stock. The difference between the amount of debt
converted and the average cost of the treasury shares issued, net of unamortized
issue costs related to this debt, was credited to additional paid-in capital. As
a result, the Company's ownership in CBS decreased from approximately 23% to 20%
and the Company's additional paid-in capital increased by $58.9.
Note 7. Receivables -
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Reinsurance $ 7,169.1 $3,755.0
Other insurance 5,302.4 3,294.1
Security sales 187.7 376.9
Accrued investment income 578.8 440.2
Federal income taxes 166.8
Other 193.2 175.0
- -------------------------------------------------------------------------------------------------
Total 13,431.2 8,208.0
Less allowance for doubtful accounts and cash discounts 302.6 140.0
- -------------------------------------------------------------------------------------------------
Receivables-net $13,128.6 $8,068.0
=================================================================================================
</TABLE>
57
Note 8. Property, Plant and Equipment -
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 123.1 $ 33.4
Buildings and building equipment 564.5 423.4
Machinery and equipment 1,573.3 1,317.9
Leaseholds and leasehold improvements 32.6 27.0
- -------------------------------------------------------------------------------------------------
Total, at cost 2,293.5 1,801.7
Less accumulated depreciation and amortization 856.0 711.8
- -------------------------------------------------------------------------------------------------
Property, plant and equipment-net $1,437.5 $1,089.9
=================================================================================================
</TABLE>
Depreciation and amortization expense and capital expenditures, by business
segment, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------ ------------------ ------------------
Depr. & Capital Depr. & Capital Depr. & Capital
Year Ended December 31 Amort. Expend. Amort. Expend. Amort. Expend.
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property and casualty insurance $101.8 $ 99.7 $ 49.6 $ 99.3 $ 24.4 $ 84.1
Life insurance 18.9 26.5 16.7 10.2 21.9 5.4
Cigarettes 28.4 43.1 22.5 31.2 22.0 27.0
Hotels 18.5 21.1 17.5 19.9 16.0 18.1
Drilling 52.9 66.7 49.9 46.2 43.9 70.3
Watches and clocks .6 .1 1.8 1.2 2.3 1.3
- -------------------------------------------------------------------------------------------------
Total business segments 221.1 257.2 158.0 208.0 130.5 206.2
Corporate 4.7 .7 2.7 1.1 4.6 1.3
- -------------------------------------------------------------------------------------------------
Total $225.8 $257.9 $160.7 $209.1 $135.1 $207.5
=================================================================================================
</TABLE>
58
Note 9. Inventories -
Inventories, included in other assets, are as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Leaf tobacco $160.7 $140.4
Manufactured stock 64.9 82.9
Materials, supplies, etc. 21.8 21.1
- -------------------------------------------------------------------------------------------------
Total $247.4 $244.4
=================================================================================================
</TABLE>
If the average cost method of accounting had been used for tobacco inventories
instead of the LIFO method, such inventories would have been $203.3 and $190.7
higher at December 31, 1995 and 1994, respectively.
Note 10. Liability for Unpaid Claims and Claim Adjustment Expenses -
CNA's property and casualty insurance claims and claims expense reserve
represents the estimated amounts necessary to settle all outstanding claims,
including claims which are incurred but not reported, as of the reporting date.
The Company's reserve projections are based primarily on detailed analysis of
the facts in each case, CNA's experience with similar cases, and various
historical development patterns. Consideration is given to such historical
patterns as field reserving trends, loss payments, pending levels of unpaid
claims and product mix, as well as court decisions, economic conditions and
public attitudes. All of these can affect the estimation of reserves. The
effects of inflation, which can be significant, are implicitly considered in the
reserving process and are part of the recorded reserve balance. Reserves are not
present valued except in the case of workers' compensation lifetime claims and
accident and health disability claims where the reserves are explicitly
discounted at rates allowed by insurance regulators that range from 3.5% to 6.0%
and structured settlements where such reserves are discounted at interest rates
ranging from 6.3% to 7.5%.
Estimating loss reserves is a difficult process as there are many factors that
can ultimately affect the final settlement of a claim and, therefore, the
reserve that is needed. Changes in the law, results of litigation, medical
costs, the cost of repair materials and labor rates can all impact ultimate
claim costs. In addition, time can be a critical part of reserving
determinations since the longer the span between the incidence of a loss and the
payment or settlement of the claim, the more variable the ultimate settlement
amount can be. Accordingly, short-tail claims, such as property damage claims,
tend to be more reasonably predictable than long-tail claims, such as general
liability and professional liability claims.
59
The table below provides a reconciliation between beginning and ending claim and
claim expense reserve balances for 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves at beginning of year:
Gross $21,639 $20,812 $20,034
Ceded reinsurance 2,705 2,491 2,867
- -------------------------------------------------------------------------------------------------
Net reserves at beginning of year 18,934 18,321 17,167
CIC reserves at acquisition-net 6,063
- -------------------------------------------------------------------------------------------------
Net 24,997 18,321 17,167
- -------------------------------------------------------------------------------------------------
Net incurred claim and claim expenses:
Provision for insured events of current year 6,787 5,611 5,388
(Decrease) increase in provision for insured
events of prior years(a) 122 (71) 590
Amortization of discounts 106 100 94
- -------------------------------------------------------------------------------------------------
Total net incurred 7,015 5,640 6,072
- -------------------------------------------------------------------------------------------------
Net payments attributable to:
Current year events 2,000 1,388 1,202
Prior year events 5,048 3,629 3,706
Amortization of discounts 9 10 10
- -------------------------------------------------------------------------------------------------
Total net payments 7,057 5,027 4,918
- -------------------------------------------------------------------------------------------------
Net reserves at end of year 24,955 18,934 18,321
Ceded reinsurance at end of year 6,089 2,705 2,491
- -------------------------------------------------------------------------------------------------
Gross reserves at end of year (b) $31,044 $21,639 $20,812
=================================================================================================
(a) Includes $500 related to Fibreboard for the year ended December 31, 1993.
(b) Excludes life claim and claim expense reserves and intercompany eliminations of $988, $926
and $858 as of December 31, 1995, 1994 and 1993, respectively, included in the Consolidated
Balance Sheets.
</TABLE>
60
Environmental Pollution and Asbestos - The CNA property/casualty insurance
companies have potential exposures related to environmental pollution, other
toxic tort and asbestos-related 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 potentially
responsible parties ("PRP's"). Superfund and the mini-Superfunds (Environmental
Clean-up Laws or "ECLs") establishes a mechanism to pay for clean-up of waste
sites if PRP's fail to do so, and to assign liability to PRP's. The extent of
liability to be allocated to a PRP is dependent on a variety of factors.
Further, the number of waste sites subject to clean-up is unknown. To date,
approximately 1,300 clean-up sites have been identified by the Environmental
Protection Agency on its National Priorities List. On the other hand, the
Congressional Budget Office 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 coverage for 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.
Despite Superfund taxing authority expiring at the end of 1995, no reforms have
been enacted by Congress. While the next 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 ultimate 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 December 31,
1995 and 1994, CNA carried approximately $1,177 and $516, respectively, of claim
and claim expense reserves, before reinsurance recoverable, for reported and
unreported environmental pollution claims. Unfavorable reserve development for
the years ended December 31, 1995 and 1994 totaled $241 and $181, 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 the
litigation with Fibreboard Corporation (see Note 19). Estimation of
asbestos-related 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
61
among insurers, missing policies and proof of coverage. As of December 31, 1995
and 1994, CNA carried approximately $2,322 and $2,068, respectively, of claim
and claim expense reserves, before reinsurance recoverable, for reported and
unreported asbestos-related claims. Unfavorable reserve development for the
years ended December 31, 1995 and 1994 totaled $258 and $37, 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.
CNA, consistent with sound reserving practices, regularly adjusts its reserve
estimates in subsequent reporting periods as new facts and circumstances emerge
that indicate the previous estimates need to be modified. The following tables
provides additional data related to CNA's environmental pollution, other toxic
tort and asbestos-related claims activity. Claims activity for CIC is included
for the period May 10, 1995 through December 31, 1995.
The following tables summarize activity for environmental pollution, other toxic
tort and asbestos claims.
Reserve Recapitulation:
<TABLE>
<CAPTION>
1995 1994
-------------------------- --------------------------
Environmental Environmental
Pollution and Pollution and
December 31 Other Toxic Tort Asbestos Other Toxic Tort Asbestos
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross reserves:
Reported claims $ 336.9 $1,963.3 $ 89.1 $1,954.1
Unreported claims 839.7 358.3 427.0 114.0
- -------------------------------------------------------------------------------------------------
1,176.6 2,321.6 516.1 2,068.1
Less reinsurance recoverable (146.7) (97.4) (10.4) (129.4)
- -------------------------------------------------------------------------------------------------
Net reserves $1,029.9 $2,224.2 $505.7 $1,938.7
=================================================================================================
</TABLE>
Environmental Pollution and Other Toxic Tort:
<TABLE>
<CAPTION>
Changes in Reserves
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net reserves at beginning of year $ 505.7 $ 432.6 $ 58.6
CIC net reserves at acquisition 410.0
Reserve strengthening 240.9 180.6 445.9
Less:
Gross payments (188.2) (131.8) (75.0)
Reinsurance recoveries 61.5 24.3 3.1
- -------------------------------------------------------------------------------------------------
Net reserves at end of year $1,029.9 $ 505.7 $432.6
=================================================================================================
</TABLE>
62
Asbestos:
<TABLE>
<CAPTION>
Changes in Reserves
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net reserves at beginning of year $1,938.7 $2,080.0 $1,682.8
CIC net reserves at acquisition 203.5
Reserve strengthening 258.0 36.8 601.4
Less:
Gross payments (239.8) (245.9) (204.3)
Reinsurance recoveries 63.8 67.8 0.1
- -------------------------------------------------------------------------------------------------
Net reserves at end of year $2,224.2 $1,938.7 $2,080.0
=================================================================================================
</TABLE>
Note 11. Income Taxes -
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes (benefits):
Federal:
Current $595.8 $ 82.2 $ 175.7
Deferred 302.3 (112.1) (181.6)
State, city and other, principally current 47.2 20.9 52.5
- -------------------------------------------------------------------------------------------------
Total $945.3 $ (9.0) $ 46.6
=================================================================================================
</TABLE>
63
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31 1995 (a) 1994 1993 1992
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Insurance reserves:
Property and casualty claim reserve discounting $1,328.0 $1,027.4 $990.2 $861.3
Unearned premium reserves 251.0 137.4 125.5 147.9
Life reserve differences 153.4 115.9 144.1 140.1
Others 22.8 10.3 (12.1) 4.7
Deferred policy acquisition costs (457.2) (312.6) (310.2) (280.9)
Employee benefits 202.9 157.1 144.6 128.1
Property, plant and equipment (56.5) (133.2) (132.8) (148.5)
Investments 74.8 111.7 143.3 61.3
Alternative minimum tax credit 239.6 165.2 151.0
Net operating loss carryforward 298.0
Foreign tax credits 14.0
Other-net 259.8 60.7 44.4 55.6
Valuation allowance (250.0)
- -------------------------------------------------------------------------------------------------
1,841.0 1,414.3 1,302.2 1,120.6
Unrealized (appreciation) depreciation (579.9) 282.4 (257.8) (15.6)
Other-net (55.9) (17.5) 30.0 4.5
- -------------------------------------------------------------------------------------------------
Deferred tax assets-net $1,205.2 $1,679.2 $1,074.4 $1,109.5
=================================================================================================
(a) CIC deferred tax assets at May 10, 1995, amounted to $729.0.
</TABLE>
Gross deferred tax assets amounted to $2,449.1, $2,290.3 and $1,895.7 and
liabilities amounted to $1,243.9, $611.1 and $821.3, for the years ended
December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995, the Company has net operating loss carryforwards of $850
for income tax purposes that expire in years 2000 through 2010. Those
carryforwards resulted from CNA's 1995 acquisition of CIC.
The Company has a past history of profitability and anticipates sufficient
future taxable income to fully support recognition of its deferred tax balance
at December 31, 1995, including but not limited to the reversal of existing
temporary differences and the implementation of tax planning strategies, if
needed.
A valuation allowance is maintained due to the uncertainty regarding the
realization of deferred tax assets related to the acquisition of CIC.
Accordingly, any subsequent adjustment of the valuation allowance will be
reflected as an adjustment to intangible assets.
Total income tax expense (benefit) for the years ended December 31, 1995, 1994
and 1993 was different than the amounts of $993.8, $93.1 and $241.3, computed by
applying the statutory U.S. federal income tax rate of 35% to income before
income taxes and minority interest for each of the years.
64
A reconciliation between the statutory federal income tax rate and the Company's
effective income tax rate as a percentage of income before income taxes and
minority interest is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35 % 35 % 35 %
(Decrease) increase in income tax rate resulting from:
Exempt interest and dividends received deduction (3) (42) (28)
State and city income taxes 1 4 7
Tax rate change (5)
Other (2)
- -------------------------------------------------------------------------------------------------
Effective income tax rate 33 % (3)% 7 %
=================================================================================================
</TABLE>
Federal, foreign, state and local income tax payments, net of refunds, amounted
to approximately $386.5, $194.9 and $10.3 for the years ended December 31, 1995,
1994 and 1993, respectively.
The Company has entered into separate tax allocation agreements with Bulova and
CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiaries"). Each agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the Company's
return, or (ii) be paid by the Subsidiary an amount, if any, equal to the
federal income tax which would have been payable by the Subsidiary if it had
filed a separate consolidated return. Under these agreements, the federal income
tax (expense) benefit to CNA amounted to approximately $(35.0), $84.0 and $17.0
for the years ended December 31, 1995, 1994 and 1993, respectively, and the
federal income tax benefit to Bulova amounted to approximately $0.8, $0.1 and
$2.5 for the years ended December 31, 1995, 1994 and 1993, respectively. Each
agreement may be cancelled by either of the parties upon thirty days' written
notice.
The Company's federal income tax returns have been examined through 1990 and
settled through 1986, and the years 1991 through 1994 are currently under
examination. While tax liabilities for subsequent years are subject to audit and
final determination, in the opinion of management the amount accrued in the
consolidated balance sheet is believed to be adequate to cover any additional
assessments which may be made by federal, state and local tax authorities and
should not have a material effect on the financial condition or results of
operations of the Company.
In 1993 the Company increased its deferred tax asset by $31.6 due to a 1%
increase in the corporate tax rate.
Note 12. Leases -
The Company's hotels in some instances are constructed on leased land or are
leased. Other leases cover office facilities, computer and transportation
equipment. Rent expense amounted to $118.9, $78.1 and $84.9 for the years ended
December 31, 1995, 1994 and 1993, respectively. It is expected, in the normal
course of business, that leases which expire will be renewed or replaced by
leases on other properties; therefore, it is believed that future minimum annual
rental commitments will not be less than the amount of rental expense incurred
in 1995. At December 31, 1995 future aggregate minimum rental payments
approximated $633.0.
65
Note 13. Long-Term Debt -
<TABLE>
<CAPTION>
Unamortized Current
December 31, 1995 Principal Discount Net Maturities
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loews Corporation $1,192.8 $22.6 $1,170.2
CNA 3,023.4 5.6 3,017.8 $295.5
Other 60.2 60.2 2.4
- -------------------------------------------------------------------------------------------------
Total $4,276.4 $28.2 $4,248.2 $297.9
=================================================================================================
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Loews Corporation (Parent Company):
8.5% notes due 1998 (effective interest rate of 8.6%)
(authorized, $125)(a) $ 117.8 $ 117.8
8.3% debentures due 2007 (effective interest rate of 8.4%)
(authorized, $200)(b) 200.0 200.0
8.9% debentures due 2011 (effective interest rate of 9.0%)
(authorized, $175) 175.0 175.0
7.6% notes due 2023 (effective interest rate of 7.8%)
(authorized, $300)(c) 300.0 300.0
7.0% notes due 2023 (effective interest rate of 7.2%)
(authorized, $400)(d) 400.0 400.0
CNA Financial Corporation:
8.6% notes due 1996 (effective interest rate of 8.8%)
(authorized, $250) 250.0 250.0
8.9% notes due 1998 (effective interest rate of 9.2%)
(authorized, $150) 150.0 150.0
8.3% notes due 1999 (effective interest rate of 7.3%)
(authorized, $100) 102.8
6.3% notes due 2003 (effective interest rate of 6.4%)
(authorized, $250) 250.0 250.0
7.3% notes due 2003 (effective interest rate of 7.8%)
(authorized, $150) 145.4
8.4% notes due 2012 (effective interest rate of 8.6%)
(authorized, $100) 97.9
7.3% debentures due 2023 (effective interest rate of 7.3%)
(authorized, $250) 250.0 250.0
Commercial Paper (weighted average yield 6.1%) 500.0
Bank revolving credit due 2000 (effective interest rate of 6.1%) 825.0
Mortgage notes at 11%, due 2013 386.6
Other senior debt (effective interest rates approximate 8.4% and 5.0%) 65.7 18.4
Other senior debt, principally mortgages (effective interest rates
approximate 9.4% and 9.3%) 60.2 62.8
- -------------------------------------------------------------------------------------------------
4,276.4 2,174.0
Less unamortized discount 28.2 29.6
- -------------------------------------------------------------------------------------------------
Long-term debt, less unamortized discount $4,248.2 $2,144.4
=================================================================================================
(a) Net of $7.2 held by the Company.
(b) Redeemable in whole or in part at January 15, 1997 at 104%, and decreasing percentages
thereafter.
(c) Redeemable in whole or in part at June 1, 2003 at 104%, and decreasing percentages
thereafter.
(d) Redeemable in whole or in part at October 15, 2003 at 102%, and decreasing percentages
thereafter.
</TABLE>
66
To finance the acquisition of CIC, CNA entered into a five-year $1,325 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. Additionally, there is a facility
fee of 10 basis points. The average interest rate on the borrowings under the
Bank Facility at December 31, 1995 was 6.1%. Under the terms of the facility,
CNA may prepay the debt without penalty.
To offset the variable rate characteristics of the Bank Facility, CNA entered
into five year interest rate swap agreements with several banks. These
agreements which terminate from May 2000 to December 2000 effectively convert
variable rate debt into fixed rate debt resulting in fixed rates on notional
amounts aggregating $1,200. The weighted average fixed swap rate at December 31,
1995 was 6.3%.
On August 10, 1995, to take advantage of favorable interest rate spreads, CNA
established a commercial paper program borrowing $500 from investors to replace
a like amount of bank financing. The weighted average yield on commercial paper
at December 31, 1995 was 6.1%. The commercial paper borrowings are classified as
long-term debt as $500 of the committed Bank Facility will support the
commercial paper program. Standard and Poor's and Moody's issued short-term debt
ratings of A2 and P2, respectively, for CNA's commercial paper program.
The weighted average interest rate (interest and facility fees) on the
acquisition debt, which includes the Bank Facility, commercial paper and the
effect of the interest rate swaps, was 6.5% on December 31, 1995.
The aggregate of long-term debt maturing in each of the next five years is
approximately as follows: $297.9 in 1996, $62.9 in 1997, $322.6 in 1998, $191.8
in 1999 and $1,388.3 in 2000. The Company paid interest expenses of
approximately $276.0, $168.9 and $219.1 for the years ended December 31, 1995,
1994 and 1993, respectively.
Payment of dividends by insurance subsidiaries of CNA without prior regulatory
approval is limited to certain formula-derived amounts. At December 31, 1995,
$1,137.4 of retained earnings of subsidiaries was not available for dividends to
the Company.
Note 14. Benefit Plans -
Pension Plans - The Company and its subsidiaries have several non-contributory
defined benefit plans for eligible employees. The benefits for certain plans
which cover salaried employees and certain union employees are based on formulas
which include among others, years of service and average pay. The benefits for
one plan which covers union workers under various union contracts and certain
salaried employees are based on years of service multiplied by a stated amount.
Pension cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned $ 54.6 $ 43.4 $ 37.1
Interest cost 129.0 86.3 81.8
Return on plan assets-actual (240.2) 16.6 (54.1)
Net amortization and deferrals 149.8 (65.5) (7.1)
- -------------------------------------------------------------------------------------------------
Net pension cost $ 93.2 $ 80.8 $ 57.7
=================================================================================================
</TABLE>
67
The following table sets forth the funded status of the Company's pension plans:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
Overfunded Underfunded Overfunded Underfunded
December 31 Plans Plans* Plans Plans
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation $ 852.9 $ 930.0 $ 421.5 $477.0
=================================================================================================
Accumulated vested benefit obligation $ 798.5 $ 893.5 $ 383.3 $436.3
=================================================================================================
Projected benefit obligation $1,121.4 $1,121.5 $ 644.1 $529.6
Plan assets at fair value 969.9 737.2 508.8 336.6
- -------------------------------------------------------------------------------------------------
Projected benefit obligation over plan assets 151.5 384.3 135.3 193.0
Unrecognized prior service cost (62.1) (87.9) (16.1) (15.3)
Unrecognized net (obligation) asset, January 1 (15.4) (1.0) 17.3 (34.2)
Unrecognized net loss (226.9) (64.2) (169.3) (67.2)
Additional minimum liability 78.1
- -------------------------------------------------------------------------------------------------
Net pension (asset) liability recognized in
the balance sheet $ (152.9) $ 231.2 $ (32.8) $154.4
=================================================================================================
* Includes CIC retirement plans.
</TABLE>
At December 31, 1994, the Company's minimum pension liability exceeded its
unrecognized prior service cost and net transition obligation by $30.7. This
excess is recorded as a reduction to shareholders' equity of $20.0, net of tax
benefits of $10.7.
The rates used in the actuarial assumptions were:
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.0% to 7.3% 8.5% to 8.8% 7.3% to 7.5%
Rate of compensation increase 2.8% to 5.5% 4.0% to 6.3% 4.5% to 5.8%
Expected long-term rate of return on assets 7.5% to 8.8% 7.5% to 8.8% 7.5% to 8.5%
- -------------------------------------------------------------------------------------------------
</TABLE>
The Company's funding policy is to make contributions in accordance with
applicable governmental regulatory requirements. The assets of the plans are
invested primarily in interest-bearing obligations and for one plan with an
insurance subsidiary of the Company, in its Separate Account business. In 1995,
the Company made contributions totaling approximately $186.0 to fund completely
certain plans which had been underfunded.
68
Other Postretirement Benefit Plans - The Company and its subsidiaries have
several postretirement benefit plans covering eligible employees and retirees.
Participants generally become eligible after reaching age 55 with required years
of service. Actual requirements for coverage vary by plan. Benefits for retirees
who were covered by bargaining units vary by each unit and contract. Benefits
for certain retirees are in the form of a company health care account.
Benefits for retirees reaching age 65 are generally integrated with Medicare.
Other retirees, based on plan provisions, must use Medicare as their primary
coverage, with the Company reimbursing a portion of the unpaid amount; or are
reimbursed for the Medicare Part B premium or have no Company coverage. The
benefits provided by the Company are basically health and, for certain retirees,
life insurance type benefits.
The Company does not fund any of these benefit plans and accrues postretirement
benefits during the active service of those employees who would become eligible
for such benefits when they retire.
The rates used in the actuarial assumptions were:
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net periodic postretirement benefit cost 8.5% to 8.8% 7.3% to 7.5%
Accumulated postretirement benefit liability 7.0% to 7.3% 8.5% to 8.8%
- -------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the postretirement benefit plans' status:
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $288.4 $130.2
Fully eligible active plan participants 86.4 81.5
Other active plan participants 130.1 89.4
- -------------------------------------------------------------------------------------------------
504.9 301.1
Unrecognized prior service cost (9.8) (10.2)
Unrecognized net gain 60.7 77.0
- -------------------------------------------------------------------------------------------------
Accrued postretirement benefit liability $555.8 $367.9
=================================================================================================
</TABLE>
Postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service costs $10.3 $13.7 $10.9
Interest costs 28.5 24.8 25.2
- -------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $38.8 $38.5 $36.1
=================================================================================================
</TABLE>
69
For measurement purposes, a trend rate for covered costs of 13.0% pre-65 and
10.0% post-65, was used. These trend rates are expected to decrease gradually to
5% and 6.5% at rates from 0.5% to 1.0% per annum. An increase of one percentage
point in assumed health care cost trend rates would increase the accumulated
postretirement benefit obligation by approximately $34.2 and the net periodic
postretirement benefit cost by approximately $3.5.
Savings Plans - The Company and its subsidiaries have several contributory
savings plans which allow employees to make regular contributions based upon a
percentage of their salary. The Company's contributions to these plans amounted
to $25.9, $21.2 and $21.1 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Note 15. Capital Stock and Earnings Per Share -
In addition to its common stock, the Company has authorized 25,000,000 shares of
preferred stock, $.10 par value.
On October 17, 1995, the Board of Directors declared a two-for-one stock split,
by way of a stock dividend, effective December 1, 1995. Accordingly, certain
share and per share data has been restated to retroactively reflect the stock
split.
Earnings per share are based on the weighted average number of shares
outstanding during each year (117,835,000, 120,383,000 and 128,217,000 for the
years ended December 31, 1995, 1994 and 1993, respectively).
Note 16. Gain on Sale of Subsidiary's Stock -
In October 1995 the Company's wholly owned 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 $338.4 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 recorded a gain of approximately $192.9 ($125.4 after provision
for deferred income taxes) in the fourth quarter of 1995.
Note 17. Quarterly Financial Data (Unaudited) -
<TABLE>
<CAPTION>
1995 Quarters Ended Dec. 31 * Sept. 30 June 30 March 31
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $5,495.3 $4,959.6 $4,519.3 $3,703.2
Net income 745.1 386.4 419.7 214.5
Per share 6.32 3.28 3.56 1.82
1994 Quarters Ended Dec. 31 Sept. 30 June 30 March 31
- -------------------------------------------------------------------------------------------------
Total revenues $3,371.4 $3,545.3 $3,393.4 $3,205.1
Net income (loss) 79.1 134.2 60.3 (5.8)
Per share .67 1.12 .50 (.05)
- -------------------------------------------------------------------------------------------------
* Revenues and net income for the fourth quarter of 1995 include realized investment gains of
$772.1 and $501.9, respectively, from the sale of shares of CBS Inc. and Diamond Offshore
Drilling, Inc.
</TABLE>
70
Note 18. Reinsurance -
<TABLE>
<CAPTION>
The effects of reinsurance on earned premiums are as follows:
%
Direct Assumed Ceded Net Assumed
- -------------------------------------------------------------------------------------------------
Year Ended December 31, 1995:
<S> <C> <C> <C> <C> <C>
Life $ 701 $ 109 $ 21 $ 789 13.8%
Accident and health 3,012 125 106 3,031 4.1
Property and casualty 7,868 1,335 1,293 7,910 16.9
- -------------------------------------------------------------------------------------------------
Total $11,581 $1,569 $1,420 $11,730 13.4%
=================================================================================================
Year Ended December 31, 1994:
Life $ 408 $ 107 $ 23 $ 492 21.7%
Accident and health 2,678 158 45 2,791 5.7
Property and casualty 5,601 1,251 661 6,191 20.2
- -------------------------------------------------------------------------------------------------
Total $ 8,687 $1,516 $ 729 $ 9,474 16.0%
=================================================================================================
Year Ended December 31, 1993:
Life $ 312 $ 108 $ 20 $ 400 27.0%
Accident and health 2,413 149 32 2,530 5.9
Property and casualty 5,228 1,027 496 5,759 17.8
- -------------------------------------------------------------------------------------------------
Total $ 7,953 $1,284 $ 548 $ 8,689 14.8%
=================================================================================================
</TABLE>
The ceding of insurance does not discharge the primary liability of the original
insurer. CNA places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance. Further, for carriers that are not
authorized reinsurers in its states of domiciles, CNA receives collateral,
primarily in the form of bank letters of credit, securing a large portion of the
recoverables. Such collateral totaled approximately $1,300 and $165 at December
31, 1995 and 1994, respectively. CNA's largest billed recoverable from a single
reinsurer, including prepaid reinsurance premiums, was approximately $435 and
$348 with Lloyd's of London at December 31, 1995 and 1994, respectively.
Insurance claims and policyholders' benefits are net of reinsurance recoveries
of $934.8, $827.9 and $177.6 for the years ended December 31, 1995, 1994 and
1993, respectively.
71
Note 19. 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, which is subject to court approval.
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 or is subsequently successfully attacked. 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 were filed as respects both of these
decisions. The last briefs have been filed with the United States Fifth Circuit
Court of Appeals in New Orleans on December 18, 1995, and the Court heard oral
arguments on March 5 and 6, 1996. Decisions regarding these appeals are possible
by the third quarter of 1996.
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.
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 $0.5 per person limit and a $1.0 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 had 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 were filed in the Court of Appeal on December 20, 1995 and a
decision by the court is expected by the end of May, 1996. Casualty cannot
predict the time frame within which the issues before the California courts will
finally 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
72
Settlement nor the Trilateral Agreement is finally approved, it is anticipated
that Casualty and Pacific Indemnity will resume the coverage 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 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 for injuries which were first manifest outside the policy period.
. 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 $1.0 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 $2.0 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 and were thereby to limit its liability, 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.
73
Through 1995, Casualty, Fibreboard and plaintiff attorneys had reached
settlements with respect to approximately 137,700 claims, subject to resolution
of the coverage issues, for an estimated settlement amount of approximately
$1,620 plus any applicable interest. If neither the Global Settlement nor the
Trilateral Agreement receives final 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 approximately $788, of which approximately $582 was paid through 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 Agreement was
executed on December 23, 1993. The agreement calls for contribution by Casualty
and Pacific Indemnity of an aggregate of $1,525 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 is to be contributed to the fund by Fibreboard. As indicated
above, the Global Settlement approval has been appealed and oral arguments were
heard on March 5 and 6, 1996. 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, subject
to court approval which would, among other things, 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 $2,000, 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 $1,440 reduced by a portion of an additional payment of $635 which
Pacific Indemnity has agreed to pay for claims either filed or settled before
August 27, 1993. 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. A portion of the additional
$635 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. As noted above, the Trilateral Agreement approval by the
trial court has also been appealed as noted above and oral arguments were heard
on March 5 and 6, 1996.
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 coverage case is finally resolved,
either through final court approval of one or both of the Global Settlement
Agreement and Trilateral Agreement or through a final decision in the California
courts. It 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. Under the
Casualty-Pacific Agreement, Casualty and Pacific Indemnity have agreed to pay
64.71% and 35.29%, respectively, of the $1,525 to be used to satisfy the claims
of future claimants, plus certain expenses. The $1,525 has already
74
been deposited into an escrow for such purpose. 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.
Reserves - In the fourth quarter of 1992, Casualty increased its reserve with
respect to potential exposure to asbestos-related bodily injury cases by $1,500.
In connection with the agreement in principle announced on August 27, 1993,
Casualty added $500 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
have been appealed as noted above and oral arguments were heard on March 5 and
6, 1996. 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 December 31, 1995, Casualty, Fibreboard and plaintiff
attorneys have reached settlements with respect to approximately 137,700 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 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 thirteen thousand three hundred dollars per claim for the before
1959 claims processed through December 31, 1995. Based on reports by Fibreboard,
between September 1988 and April 1993, Fiberboard 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
eleven thousand dollars 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 $0.3 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 seventy seven
thousand dollars on average, with a portion of the payment contingent on final
75
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.
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 in compensatory damages and $600 in
punitive damages.
Conventional smoking and health cases have been brought by plaintiffs against
Lorillard and other manufacturers of tobacco products for many years. Two
hundred eleven such cases are pending in the United States federal and state
courts against manufacturers of tobacco products generally, up from 54 last
year; Lorillard is a named defendant in 57 of these cases, up from 17 last year.
The Company is a defendant in two of these cases. A large portion of the
increase in this category of cases is attributable to two plaintiffs' law firms
in Florida.
Five purported class actions are pending against Lorillard and other cigarette
manufacturers, and the Company is a defendant in one of these cases. Plaintiffs
in four of the purported class actions seek damages for alleged nicotine
addiction and health effects claimed to have resulted from the use of
cigarettes, and plaintiffs in one of the purported class actions allege health
effects from exposure to tobacco smoke. Theories of liability include a broad
range of product liability theories, theories based upon consumer protection
statutes and fraud and misrepresentation. These purported class actions are
described below.
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 $5,000 in punitive damages. The trial court granted
plaintiffs' motion for class certification on December 12, 1994. Defendants'
appeal of this ruling to the Florida Court of Appeal has been denied. Defendants
have asked the court to reconsider its ruling or to certify it to the Florida
Supreme Court.
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 their
estates and heirs. Plaintiffs 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
defendants' appeal is pending.
Granier v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Louisiana, filed September 26, 1994). Plaintiffs seek certification of
a
76
class 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 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.
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 their survivors, who have or who 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
$200,000, 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' appeal of this ruling to the
Florida Court of Appeal was denied, although the court has modified the class
certification order and has limited plaintiffs' class to citizens or residents
of Florida. Defendants have asked the Florida Court of Appeal to reconsider this
ruling or to certify it to the Florida Supreme Court.
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 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 that defendants
have caused or allowed to be placed in cigarettes sold in Alabama. Plaintiff
seeks monetary damages not to exceed forty-eight thousand five hundred dollars
for any individual.
In addition to the foregoing cases, five actions have been initiated in which
states or state agencies seek recovery of funds expended by the states or state
agencies, and in one case health insurers, to provide health care to individuals
with injuries or other health effects allegedly caused by use of tobacco
products or exposure to cigarette smoke. These cases are based on, among other
things, equitable claims including 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 five actions
and the Company is named as a defendant in two of them. These cases are
described below.
Moore v. The American Tobacco Company, et al. (Chancery Court, Jackson County,
Mississippi, filed May 23, 1994), filed by the Attorney General of Mississippi.
In February 1996, the Governor of Mississippi petitioned the Supreme Court of
Mississippi for a writ of mandamus, claiming the Attorney General had no
authority to bring a lawsuit against Lorillard and the other manufacturers of
tobacco products without approval by the Governor.
McGraw v. The American Tobacco Company, et al. (Circuit Court, Kanawha County,
West Virginia, filed September 20, 1994), filed by the Attorney General of West
Virginia. In this case 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. Plaintiff has filed a petition for appeal to the
West Virginia Supreme Court of Appeals.
State of Minnesota v. Philip Morris Incorporated, et al. (District Court, Ramsey
County, Minnesota, filed August 17, 1994), filed by the Attorney General of
Minnesota and Blue Cross and Blue Shield of Minnesota. 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.
Commonwealth of Massachusetts v. Philip Morris Inc., et al. (U.S. District
Court, Massachusetts, filed December 19, 1995), filed by the Attorney General of
Massachusetts.
The State of Florida, et al. v. The American Tobacco Company, et al. (Circuit
Court, Palm Beach County, Florida, filed February 22, 1995), filed by the State
of Florida, the Governor of Florida, and two state agencies. This case has been
brought under a Florida statute that
77
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.
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 this statute on which the lawsuit against
cigarette companies was based violates the constitution of the State of Florida.
Both parties have appealed the order of the Florida Court of Appeal. The Florida
Supreme Court heard argument in the appeals on November 6, 1995. The Florida
legislature has passed legislation repealing this statute, but the Governor of
the State of Florida has vetoed the repeal. Lorillard understands that several
other states, and the Congress, have considered or are considering legislation
similar to that passed in Florida.
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.
Lorillard, other cigarette manufacturers and others have commenced suits in
three states that seek declaratory judgment or injunctive relief as to the
authority of the states or state agencies to commence actions seeking recovery
of funds expended to provide health care for citizens with injuries allegedly
caused by cigarette smoking, or to retain private counsel under a contingent fee
contract to pursue such actions. The case of Philip Morris Incorporated, et al.
v. Harshbarger was filed on November 28, 1995 in the U.S. District Court of
Massachusetts. The case of Philip Morris Incorporated, et al. v. Morales, et
al., was filed on November 28, 1995 in the District Court of Travis County,
Texas. The case of Philip Morris Incorporated, et al. v. Glendening, et al. was
filed on January 22, 1996 in the Circuit Court of Talbot County, Maryland.
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, ending forty years ago, into the filter material used in one of
the brands of cigarettes manufactured by Lorillard. Fourteen such cases are
pending in federal and state courts against Lorillard. 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 in compensatory damages and $100 in punitive damages. Trials
were held in three cases of this type during 1995. In two of the cases, the
juries returned verdicts in favor of Lorillard. In the third case, the jury
returned a verdict in favor of plaintiffs. The verdict requires Lorillard to pay
an amount between $1.8 and $2.0 in actual and punitive damages. The precise
amount to be paid by Lorillard will be determined at a later date if the verdict
withstands review by appellate courts. Lorillard has noticed an appeal from the
judgment in plaintiffs' favor.
In addition to the foregoing litigation, 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."
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
78
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 ultimate unfavorable outcome of certain pending litigation.
Management believes, however, that the ultimate outcome of pending litigation
should not have a material adverse effect on the Company's financial position.
Other Litigation - The Company and its subsidiaries are also parties to other
litigation arising in the ordinary course of business. The outcome of this other
litigation will not, in the opinion of management, materially affect the
Company's results of operations or equity.
79
Note 20. Supplemental Financial Statements Schedules including CNA on the Equity
Method -
The following supplemental financial statements schedules reflect the financial
position, results of operations and cash flows of the Company with its
investment in CNA accounted for under the equity method of accounting. Because
the Company's insurance operations, conducted through CNA, are different in
nature from the Company's other business, management believes this additional
disclosure enhances a financial statement user's understanding and analysis of
the Company.
Condensed Balance Sheet Information
Loews Corporation and Subsidiaries (Including CNA on the Equity Method)
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current assets $ 530.8 $ 716.1
Investments in U.S. government securities 3,412.5 3,401.5
Investments in securities 319.0 707.7
- -------------------------------------------------------------------------------------------------
Total current assets and investments in securities 4,262.3 4,825.3
Investment in CNA 5,519.4 3,675.8
Other investments, primarily CBS Inc. in 1994 74.8 324.7
Property, plant and equipment and other assets 1,053.6 930.4
- -------------------------------------------------------------------------------------------------
Total assets $10,910.1 $9,756.2
=================================================================================================
Liabilities and Shareholders' Equity:
Current liabilities $ 888.1 $ 704.6
Securities sold under agreements to repurchase 2,092.9
Long-term debt, less current maturities and unamortized discount 1,228.0 1,229.8
Other liabilities 555.3 323.6
- -------------------------------------------------------------------------------------------------
Total liabilities 2,671.4 4,350.9
Shareholders' equity 8,238.7 5,405.3
- -------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,910.1 $9,756.2
=================================================================================================
</TABLE>
80
Condensed Statements of Income Information
Loews Corporation and Subsidiaries (Including CNA on the Equity Method)
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Manufactured products and other $2,732.9 $2,619.7 $2,592.9
Investment income including realized investment gains
(losses) 1,251.1 (85.4) 105.1
- -------------------------------------------------------------------------------------------------
Total 3,984.0 2,534.3 2,698.0
- -------------------------------------------------------------------------------------------------
Expenses:
Cost of manufactured products sold and other 2,093.1 2,023.9 1,975.7
Interest 100.6 105.6 124.4
Income taxes 659.8 161.5 220.6
- -------------------------------------------------------------------------------------------------
Total 2,853.5 2,291.0 2,320.7
- -------------------------------------------------------------------------------------------------
Income from operations 1,130.5 243.3 377.3
Equity in income of CNA 635.2 24.5 216.8
- -------------------------------------------------------------------------------------------------
Net income $1,765.7 $ 267.8 $ 594.1
=================================================================================================
</TABLE>
81
Condensed Statements of Cash Flow Information
Loews Corporation and Subsidiaries (Including CNA on the Equity Method)
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 1,765.7 $ 267.8 $ 594.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized investment (gains) losses (1,116.2) 201.3 (46.2)
Other (458.8) 115.6 (194.5)
Changes in assets and liabilities-net 237.1 (62.7) 39.2
- -------------------------------------------------------------------------------------------------
Total 427.8 522.0 392.6
- -------------------------------------------------------------------------------------------------
Investing Activities:
Net decrease (increase) in securities 624.0 61.1 (0.6)
Net decrease (increase) in U.S. government securities 57.3 (2,515.2) (339.6)
Securities sold under agreements to repurchase (2,092.9) 2,092.9 (100.1)
Proceeds from sale of CBS stock 901.7
Proceeds from Diamond Offshore initial public offering 338.4
Other (164.0) 163.0 516.1
- -------------------------------------------------------------------------------------------------
Total (335.5) (198.2) 75.8
- -------------------------------------------------------------------------------------------------
Financing Activities:
Dividends paid to shareholders (73.8) (60.2) (64.3)
Purchases of treasury shares (6.0) (225.1) (336.3)
Decrease in long-term debt-net (5.5) (51.6) (62.9)
- -------------------------------------------------------------------------------------------------
Total (85.3) (336.9) (463.5)
- -------------------------------------------------------------------------------------------------
Net change in cash 7.0 (13.1) 4.9
Cash, beginning of year 13.0 26.1 21.2
- -------------------------------------------------------------------------------------------------
Cash, end of year $ 20.0 $ 13.0 $ 26.1
=================================================================================================
</TABLE>
82
Note 21. Business Segments -
Loews Corporation is a holding company. Its subsidiaries are engaged in the
following lines of business: property, casualty and life insurance (CNA
Financial Corporation, an 84% owned subsidiary, "CNA"); the production and sale
of cigarettes (Lorillard, Inc., a wholly owned subsidiary, "Lorillard"); the
operation of hotels (Loews Hotels Holding Corporation, a wholly owned
subsidiary, "Loews Hotels"); the operation of oil and gas drilling rigs (Diamond
Offshore Drilling, Inc., a 70% owned subsidiary, "Diamond Offshore"); and the
distribution and sale of watches and clocks (Bulova Corporation, a 97% owned
subsidiary, "Bulova").
As multiple-line insurers, CNA's insurance operations underwrite property,
casualty, life, and accident and health coverages. Their principal market for
insurance is the United States. Foreign operations are not significant.
Insurance products are marketed by CNA through independent agents and brokers.
Lorillard's principal products are marketed under the brand names of Newport,
Kent and True with substantially all of its sales in the United States.
Loews Hotels properties consist of 14 hotels, 11 of which are in the United
States, two are in Canada and one is located in Monte Carlo.
Diamond Offshore's business primarily consists of 37 offshore drilling rigs that
are used on a contract basis by companies engaged in exploration and production
of hydrocarbons. Offshore rigs are mobile units that can be relocated based on
market demand. Currently 65% of these rigs operate in the Gulf of Mexico, 11%
operate in the North Sea and the remaining 24% are located in various foreign
markets.
Bulova distributes and sells watches and clocks under the brand names of Bulova,
Caravelle and Accutron with substantially all of its sales in the United States
and Canada. All watches and clocks are purchased from foreign suppliers.
The following table sets forth the major sources of the Company's consolidated
revenues, income and assets.
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (a):
Property and casualty insurance $11,092.1 $ 8,088.6 $ 8,159.8
Life insurance (b) 3,617.0 2,903.8 2,823.3
Cigarettes 2,054.3 1,915.6 1,908.9
Hotels (c) 218.0 217.4 185.3
Drilling 339.5 303.7 288.3
Watches and clocks 109.5 151.5 153.5
Investment income-net (d) 1,259.3 (90.1) 120.0
Equity in income of CBS Inc. 15.7 45.8 59.0
Other and eliminations-net (28.0) (21.1) (11.3)
- -------------------------------------------------------------------------------------------------
Total $18,677.4 $13,515.2 $13,686.8
=================================================================================================
83
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income contribution (a)(e):
Property and casualty insurance $ 953.6 $ (107.7) $ (33.1)
Life insurance 330.8 93.2 177.4
Cigarettes 635.4 584.0 592.4
Hotels (c) 32.3 48.9 14.2
Drilling 13.9 (14.2) 4.8
Watches and clocks 8.2 4.1 6.3
Investment income-net (d) 1,255.0 (93.5) 116.0
Equity in income of CBS Inc. 15.7 45.8 59.0
Other (14.0) (15.7) (17.2)
- -------------------------------------------------------------------------------------------------
Total $ 3,230.9 $ 544.9 $ 919.8
=================================================================================================
Net income (a):
Property and casualty insurance $ 530.1 $ 39.0 $ 145.8
Life insurance 163.2 30.6 94.3
Cigarettes 363.3 347.9 340.7
Hotels (c) 14.2 17.0 (1.8)
Drilling (8.9) (36.0) (16.6)
Watches and clocks 2.5 0.8 2.4
Investment income-net (d) 812.1 (61.0) 71.5
Equity in income of CBS Inc. 11.3 30.8 52.6
Interest expense and other-net (f) (122.1) (101.3) (94.8)
- -------------------------------------------------------------------------------------------------
Total $ 1,765.7 $ 267.8 $ 594.1
=================================================================================================
Identifiable assets:
Property and casualty insurance $46,649.6 $31,915.9 $29,630.3
Life insurance 13,101.4 12,350.3 12,225.7
Cigarettes 620.9 542.2 547.1
Hotels 214.2 182.8 199.3
Drilling 618.1 527.4 550.6
Watches and clocks 134.1 164.8 158.6
Investment income 3,813.2 4,234.1 1,966.7
Investment in CBS Inc. 294.3 473.5
Corporate 19.8 63.5 42.0
Other and eliminations (113.1) 60.7 56.0
- -------------------------------------------------------------------------------------------------
Total $65,058.2 $50,336.0 $45,849.8
=================================================================================================
84
(a) Realized investment gains (losses) included in Revenues, Income contribution and Net income
are as follows:
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Property and casualty insurance $ 320.6 $(164.1) $674.5
Life insurance 139.2 (81.0) 125.8
Investment income-net 1,120.2 (201.9) 62.5
- -------------------------------------------------------------------------------------------------
Total $1,580.0 $(447.0) $862.8
=================================================================================================
Income contribution:
Property and casualty insurance $ 320.6 $(164.1) $674.5
Life insurance 131.4 (70.1) 112.7
Investment income-net 1,120.2 (201.9) 62.5
- -------------------------------------------------------------------------------------------------
Total $1,572.2 $(436.1) $849.7
=================================================================================================
Net income:
Property and casualty insurance $ 174.8 $ (86.6) $362.9
Life insurance 71.9 (37.8) 60.3
Investment income-net 726.5 (131.3) 38.7
- -------------------------------------------------------------------------------------------------
Total $ 973.2 $(255.7) $461.9
=================================================================================================
(b) Includes $1,900, $1,800 and $1,700 under contracts covering U.S. government employees and
their dependents for the respective periods.
(c) Includes pre-tax and after tax gain on sale of two hotels leased to others amounting to $30.2
and $15.4, respectively, for the year ended December 31, 1994.
(d) Consists of investment income of non-insurance operations. Investment income of insurance
operations is included in the Revenues, Income contribution and Net income of the related
insurance operations.
(e) Consists of income before minority interest and allocation for financial reporting purposes
of interest expense, corporate expense and income taxes.
(f) Includes interest expense, net of tax benefits, of $104.4, $87.1 and $83.1 for the respective
periods.
</TABLE>
Note 22. Subsequent Event -
On February 9, 1996 Diamond Offshore and Arethusa (Off-Shore) Limited
("Arethusa"), executed a definitive agreement to merge the two companies. The
agreement provides that holders of Arethusa stock will receive 17.9 million
shares of common stock to be issued by Diamond Offshore based on a ratio of
.88 shares for each share of Arethusa common stock. The merger is subject to
requisite shareholder approval and is anticipated to close in the spring of
1996. Upon consummation of the merger, the Company would recognize a gain of
approximately $187 and its interest in Diamond Offshore would decline to
approximately 52%.
85
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Information called for by Part III has been omitted as Registrant intends to
file with the Securities and Exchange Commission not later than 120 days after
the close of its fiscal year a definitive Proxy Statement pursuant to regulation
14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements:
The financial statements appear above under Item 8. The following additional
financial data should be read in conjunction with those financial statements.
Schedules not included with these additional financial data have been omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or notes to consolidated financial statements.
<TABLE>
<CAPTION>
Page
2. Financial Statement Schedules: Number
------
<S> <C>
Independent Auditors' Report ......................................... L-1
Loews Corporation and Subsidiaries:
Schedule I-Condensed financial information of Registrant for the
years ended December 31, 1995, 1994 and 1993 ...................... L-2
Schedule II-Valuation and qualifying accounts for the years ended
December 31, 1995, 1994 and 1993 .................................. L-6
Schedule V-Supplemental information concerning property/casualty
insurance operations for the years ended December 31, 1995, 1994
and 1993 .......................................................... L-7
3. Exhibits:
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession
Merger Agreement, dated as of December 6, 1994, by and among
CNA Financial Corporation, Chicago Acquisition Corp. and The
Continental Corporation is incorporated herein by reference to
Exhibit 2 to CNA Financial Corporation's (Commission File Number
1-5823) Report on Form 8-K filed December 9, 1994 ............... 2.01
(3) Articles of Incorporation and By-Laws
Restated Certificate of Incorporation of the Registrant,
incorporated herein by reference to Exhibit 3 to Registrant's
Report on Form 10-Q for the quarter ended September 30, 1987 .... 3.01
By-Laws of the Registrant as amended to date, incorporated herein
by reference to Exhibit 3.02 to Registrant's Report on Form 10-K
for the year ended December 31, 1994 ............................ 3.02
86
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
The Registrant hereby agrees to furnish to the Commission upon
request copies of instruments with respect to long-term debt,
pursuant to Item 601(b)(4)(iii) of Regulation S-K.
(10) Material Contracts
Employment Agreement between Registrant and Laurence A. Tisch
dated March 1, 1971 as amended through October 18, 1994 is
incorporated herein by reference to Exhibit 10.01 to Registrant's
Reports on Form 10-K for the years ended December 31, 1981,
1983, 1984, 1985, 1986, 1988, 1989, 1992 and 1994 and an
amendment dated February 20, 1996 is filed herewith ............... 10.01*
Employment Agreement dated as of March 1, 1988 between Registrant
and Preston R. Tisch as amended through October 18, 1994 is
incorporated herein by reference to Exhibit 10.05 to Registrant's
Report on Form 10-K for the years ended December 31, 1987,
1989 and 1992 and to Exhibit 10.02 to Registrant's Report on Form
10-K for the year ended December 31, 1994 and an amendment dated
February 20, 1996 is filed herewith ............................... 10.02*
Continuing Service Agreement between a subsidiary of Registrant
and Edward J. Noha, dated February 27, 1991 incorporated herein
by reference to Exhibit 10.04 to Registrant's Report on Form 10-K
for the year ended December 31, 1990 .............................. 10.03
Loews Corporation Benefits Equalization Plan ...................... 10.04*
Loews Corporation Deferred Compensation Plan ...................... 10.05*
Agreement between Fibreboard Corporation and Continental Casualty
Company, dated April 9, 1993 is incorporated herein by reference
to Exhibit A to Registrant's Report on Form 8-K filed April 12,
1993 .............................................................. 10.06
Settlement Agreement entered into on October 12, 1993 by and
among Fibreboard Corporation, Continental Casualty Company, CNA
Casualty Company of California, Columbia Casualty Company and
Pacific Indemnity Company is incorporated herein by reference to
Exhibit 99.1 to Registrant's Report on Form 10-Q for the quarter
ended September 30, 1993 .......................................... 10.07
Continental-Pacific Agreement entered into on October 12, 1993
between Continental Casualty Company and Pacific Indemnity
Company is incorporated herein by reference to Exhibit 99.2 to
Registrant's Report on Form 10-Q for the quarter ended September
30, 1993 .......................................................... 10.08
87
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
Global Settlement Agreement among Fibreboard Corporation,
Continental Casualty Company, CNA Casualty Company of California,
Columbia Casualty Company, Pacific Indemnity Company and the
Settlement Class dated December 23, 1993 is incorporated herein
by reference to Exhibit 10.09 to Registrant's Report on Form 10-K
for the year ended December 31, 1993 .............................. 10.09
Glossary of Terms in Global Settlement Agreement, Trust
Agreement, Trust Distribution Process and Defendant Class
Settlement Agreement dated December 23, 1993 is incorporated
herein by reference to Exhibit 10.10 to Registrant's Report on
Form 10-K for the year ended December 31, 1993 .................... 10.10
Fibreboard Asbestos Corporation Trust Agreement dated December
23, 1993 is incorporated herein by reference to Exhibit 10.11 to
Registrant's Report on Form 10-K for the year ended December 31,
1993 .............................................................. 10.11
Trust Distribution Process - Annex A to the Trust Agreement dated
December 23, 1993 is incorporated herein by reference to Exhibit
10.12 to Registrant's Report on Form 10-K for the year ended
December 31, 1993 ................................................. 10.12
Defendant Class Settlement Agreement dated December 23, 1993 is
incorporated herein by reference to Exhibit 10.13 to Registrant's
Report on Form 10-K for the year ended December 31, 1993 .......... 10.13
Escrow Agreement among Continental Casualty Company, Pacific
Indemnity Company and the First National Bank of Chicago dated
December 23, 1993 is incorporated herein by reference to Exhibit
10.14 to Registrant's Report on Form 10-K for the year ended
December 31, 1993 ................................................. 10.14
(21) Subsidiaries of the Registrant
List of subsidiaries of Registrant ................................ 21.01*
(23) Consents of Experts and Counsel
Consent of Deloitte & Touche LLP .................................. 23.01*
(27) Financial Data Schedule ........................................... 27.01*
(28) Information from Reports furnished to State Insurance Regulatory
Authorities
Reconciliation of Property/Casualty Reserves as shown on Schedule
P to Reserves for Unpaid Claim and Claim Expenses as shown in the
Form 10-K for the year ended December 31, 1995 .................... 28.01*
88
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
Schedule P of Annual Statements to state regulatory authorities
by property/casualty insurance subsidiaries for the year ended
December 31, 1995 is incorporated herein by reference to Exhibit
28.2 to CNA Financial Corporation's (Commission File Number
1-5823) Report on Form 10-K for the year ended December 31, 1995 .. 28.02
</TABLE>
* Filed herewith
(b) Reports on Form 8-K:
There were no reports filed for the three months ended December 31, 1995.
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LOEWS CORPORATION
Dated: March 28, 1996 By /s/ Roy E. Posner
---------------------------------
(Roy E. Posner, Senior Vice
President and Chief Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 28, 1996 By /s/ Laurence A. Tisch
---------------------------------
(Laurence A. Tisch, Co-Chairman
of the Board and Principal
Executive Officer)
Dated: March 28, 1996 By /s/ Roy E. Posner
---------------------------------
(Roy E. Posner, Senior Vice
President and Chief Financial
Officer)
Dated: March 28, 1996 By /s/ Guy A. Kwan
---------------------------------
(Guy A. Kwan, Controller)
Dated: March 28, 1996 By /s/ Charles B. Benenson
---------------------------------
(Charles B. Benenson, Director)
Dated: March 28, 1996 By /s/ John Brademas
---------------------------------
(John Brademas, Director)
Dated: March 28, 1996 By /s/ Dennis H. Chookaszian
---------------------------------
(Dennis H. Chookaszian, Director)
90
By
---------------------------------
(Bernard Myerson, Director)
Dated: March 28, 1996 By /s/ Edward J. Noha
---------------------------------
(Edward J. Noha, Director)
By
---------------------------------
(Gloria R. Scott, Director)
Dated: March 28, 1996 By /s/ Andrew H. Tisch
---------------------------------
(Andrew H. Tisch, Director)
Dated: March 28, 1996 By /s/ James S. Tisch
---------------------------------
(James S. Tisch, Director)
Dated: March 28, 1996 By /s/ Jonathan M. Tisch
---------------------------------
(Jonathan M. Tisch, Director)
Dated: March 28, 1996 By /s/ Preston R. Tisch
---------------------------------
(Preston R. Tisch, Director)
91
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Shareholders of Loews Corporation:
We have audited the accompanying consolidated balance sheets of Loews
Corporation and its subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. Our audits
also included the financial statement schedules listed in the Index at Item
14(a)2. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Loews Corporation and its
subsidiaries at December 31, 1995 and 1994 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities in 1993.
Deloitte & Touche LLP
New York, New York
February 14, 1996
L-1
SCHEDULE I
Condensed Financial Information of Registrant
LOEWS CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31
--------------------------
1995 1994
--------------------------
(In millions)
<S> <C> <C>
Current assets, principally investment in U.S.
government securities ............................ $3,226.3 $3,059.6
Investments in securities ......................... 310.9 707.7
Investments in capital stocks of subsidiaries, at
equity ........................................... 6,368.3 4,888.5
Advances to subsidiaries .......................... 329.4
Other assets ...................................... 9.5 24.8
------------------------
Total assets ................................. $9,915.0 $9,010.0
========================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Accounts payable and accrued liabilities .......... $ 407.9 $ 280.8
Securities sold under agreements to repurchase .... 2,092.9
Long-term debt, less current maturities (b) ....... 1,170.2 1,169.8
Deferred income tax ............................... 98.2 61.2
------------------------
Total liabilities ............................ 1,676.3 3,604.7
Shareholders' equity (a) .......................... 8,238.7 5,405.3
------------------------
Total liabilities and shareholders' equity ... $9,915.0 $9,010.0
========================
</TABLE>
L-2
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1995 1994 1993
-------------------------------------
(In millions)
<S> <C> <C> <C>
Revenues:
Equity in income of subsidiaries (d) . $1,442.4 $ 369.3 $585.0
Realized investment gains (losses) ... 535.9 (199.0) 46.2
Interest and other ................... 102.5 122.5 75.3
-------------------------------------
Total ............................. 2,080.8 292.8 706.5
-------------------------------------
Expenses:
Administrative ....................... 12.6 7.6 6.2
Interest ............................. 97.8 95.5 114.4
-------------------------------------
Total ............................. 110.4 103.1 120.6
-------------------------------------
1,970.4 189.7 585.9
-------------------------------------
Income tax expense (benefit) (c):
Federal .............................. 205.2 (79.2) (13.9)
State ................................ (.5) 1.1 5.7
-------------------------------------
Total ............................. 204.7 (78.1) (8.2)
-------------------------------------
Net income ............................. $1,765.7 $ 267.8 $594.1
=====================================
</TABLE>
L-3
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1995 1994 1993
---------------------------------------
(In millions)
<S> <C> <C> <C>
Operating Activities:
Net income ........................... $ 1,765.7 $ 267.8 $ 594.1
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed earnings of affiliates (327.6) (104.0) (79.3)
Realized investment (gains) losses . (535.9) 199.0 (46.2)
Changes in assets and liabilities-net:
Receivables ........................ 174.3 (117.1) (71.8)
Accounts payable and accrued
liabilities ....................... (37.8) 117.3 38.0
Federal income taxes ............... 226.8 (54.7) 204.4
Other-net .......................... 86.3 1.2 (14.7)
--------------------------------------
1,351.8 309.5 624.5
--------------------------------------
Investing Activities:
Purchases of securities .............. (395.4) (424.6) (263.5)
Proceeds from sales of securities .... 1,031.1 476.1 262.9
Investments in and advances to
subsidiaries-net .................... 557.5 (42.8) (399.9)
Net decrease (increase) in U.S.
government securities ............... 413.8 (2,060.9) (201.1)
Securities sold under agreements to
repurchase .......................... (2,092.9) 2,092.9 (100.1)
Change in other investments .......... (2.2) (24.2) 39.1
--------------------------------------
(488.1) 16.5 (662.6)
--------------------------------------
Financing Activities:
Dividends paid to shareholders ....... (73.8) (60.2) (64.3)
Purchases of treasury shares ......... (6.0) (225.1) (336.3)
Principal payments on long-term debt . (15.7) (739.9)
Issuance of long-term debt ........... 681.3
--------------------------------------
(79.8) (301.0) (459.2)
--------------------------------------
Net change in cash and cash equivalents 783.9 25.0 (497.3)
Cash and cash equivalents, beginning
of year ............................... 36.1 11.1 508.4
--------------------------------------
Cash and cash equivalents, end of year . $ 820.0 $ 36.1 $ 11.1
======================================
</TABLE>
L-4
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
- --------------
Notes:
(a) In addition to its common stock, the Company has authorized 25,000,000
shares of preferred stock, $.10 par value.
(b) Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31
--------------------------
1995 1994
--------------------------
<S> <C> <C>
8.5% notes due 1998 (effective interest rate
of 8.6%) (authorized, $125) ................ $ 117.8 $ 117.8
8.3% debentures due 2007 (effective interest
rate of 8.4%) (authorized, $200) (1) ....... 200.0 200.0
8.9% debentures due 2011 (effective interest
rate of 9.0%) (authorized, $175) ........... 175.0 175.0
7.6% notes due 2023 (effective interest rate
of 7.8%) (authorized, $300) (2) ............ 300.0 300.0
7% notes due 2023 (effective interest rate of
7.2%) (authorized, $400) (3) ............... 400.0 400.0
-------------------------
1,192.8 1,192.8
Less unamortized discount ................... 22.6 23.1
-------------------------
$1,170.2 $1,169.7
=========================
(1) Redeemable in whole or in part at January 15, 1997 at 104%, and
decreasing percentages thereafter.
(2) Redeemable in whole or in part at June 1, 2003 at 104%, and decreasing
percentages thereafter.
(3) Redeemable in whole or in part at October 15, 2003 at 102%, and
decreasing percentages thereafter.
</TABLE>
The aggregate of long-term debt maturing in the year ending December 31, 1998
is approximately $117.8.
(c) The Company is included in a consolidated federal income tax return with
certain of its subsidiaries and, accordingly, participates in the allocation of
certain components of the consolidated provision for federal income taxes. Such
taxes are generally allocated on a separate return bases.
The Company has entered into separate tax allocation agreements with Bulova
and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiaries"). Each agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the Company's
return, or (ii) be paid by the Subsidiary an amount, if any, equal to the
federal income tax which would have been payable by the Subsidiary if it had
filed a separate consolidated return. Under these agreements, the federal income
tax (expense) benefit to CNA amounted to approximately $(35.0), $84.0 and $17.0
for the years ended December 31, 1995, 1994 and 1993, respectively, and the
federal income tax benefit to Bulova amounted to approximately $0.8, $0.1 and
$2.5 for the years ended December 31, 1995, 1994 and 1993, respectively. Each
agreement may be canceled by either of the parties upon thirty days' written
notice. See Note 11 of the Notes to Consolidated Financial Statements of Loews
Corporation and subsidiaries.
(d) Cash dividends paid to the Company by affiliates amounted to $1,085.7,
$265.3 and $505.7 for the years ended December 31, 1995, 1994 and 1993,
respectively.
L-5
SCHEDULE II
LOEWS CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- --------------------------------------------------------------------------------
(In millions)
For the Year Ended December 31, 1995
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 2.0 $ 78.0 $78.0(1) $ 2.0
Allowance for
doubtful accounts 138.0 41.0 $143.5(2) 21.5 301.0
------------------------------------------------------
Total .......... $ 140.0 $119.0 $143.5 $99.5 $303.0
======================================================
<CAPTION>
For the Year Ended December 31, 1994
<S> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 2.5 $ 71.9 $ 72.4(1) $ 2.0
Allowance for
doubtful accounts 127.2 20.7 9.9 138.0
------------------------------------------------------
Total .......... $ 129.7 $ 92.6 $ 82.3 $140.0
======================================================
<CAPTION>
For the Year Ended December 31, 1993
<S> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 5.3 $ 69.7 $ 72.5(1) $ 2.5
Allowance for
doubtful accounts 126.0 11.1 9.9 127.2
------------------------------------------------------
Total .......... $ 131.3 $ 80.8 $ 82.4 $129.7
======================================================
- -----------
Notes: (1) Discounts allowed.
(2) Includes CIC allowance at acquisition.
</TABLE>
L-6
SCHEDULE V
LOEWS CORPORATION AND SUBSIDIARIES
Supplemental Information Concerning Property/Casualty Insurance Operations
<TABLE>
<CAPTION>
Consolidated Property/Casualty Entities
----------------------------------------
Year Ended December 31
----------------------------------------
1995 1994 1993
----------------------------------------
(In millions)
<S> <C> <C> <C>
Deferred policy acquisition costs .... $ 968.7 $ 592.3 $ 562.0
Reserves for unpaid claim and claim
expenses ............................ 31,044.3 21,638.6 20,812.0
Discount, if any, deducted above
(based on interest rates ranging from
3.5% to 7.5%) ....................... 2,426.9 1,951.3 1,886.5
Unearned premiums .................... 4,549.4 2,690.7 2,556.0
Earned premiums ...................... 8,723.8 6,838.5 6,275.0
Net investment income ................ 1,699.8 1,240.4 1,059.8
Claim and claim expenses related to
current year ........................ 6,787.3 5,610.8 5,387.9
Claim and claim expenses related to
prior years ......................... 121.8 (71.2) 590.0
Amortization of deferred policy
acquisition costs ................... 1,782.9 1,328.8 1,172.4
Paid claim and claim expenses ........ 7,057.5 5,026.6 4,917.9
Premiums written ..................... 9,126.1 6,964.7 6,382.3
L-7
</TABLE>
LOEWS
CORPORATION
667 Madison Avenue, New York, N.Y. 10021-8087 (212) 545-2000
February 20, 1996
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation (the
"Company"), dated March 1, 1971, as amended by agreements dated February 27,
1974, March 1, 1976, May 10, 1977, July 17, 1979, June 16, 1981, May 10, 1983,
May 10, 1984, October 15, 1985, February 24, 1987, October 14, 1988, March 1,
1990, October 22, 1992 and October 18, 1994 (the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended as
follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 1998 upon all the terms, conditionstions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$1,750,000 per annum for the period January 1, 1996 through May 31, 1996. For
the period June 1, 1996 through December 31, 1996, your Basic Salary shall be in
the amount of $975,000, less amounts theretofore paid as Basic Salary for the
calendar year 1996. For the calendar years 1997 and 1998 Basic Salary shall be
paid to you at the rate of $975,000 per annum. Basic Salary shall be payable in
accordance with the Company's customary payroll practices for executives as in
effect from time to time, and shall be subject to such increases as the Board of
Directors of the Company, in its sole discretion, may from time to time
determine. Such Basic Salary shall be exclusive of fees received by you as a
director and as a member of Committees of the Boards of Directors of other
corporations, including subsidiaries, affiliates and investees of the Company.
3. In addition to receipt of Basic Salary under the Employment Agreement,
in the event the Company's shareholders approve the Incentive Compensation Plan
for Executive Officers of the Company (the "Compensation Plan"), you shall
participate in and shall receive incentive compensation under the Compensation
Plan as awarded by the Incentive Compensation Committee of the Board of
Directors of the Company.
Mr. Laurence A. Tisch
February 20, 1996
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of pensionable
earnings in determining your Supplemental Benefits under the Employment
Agreement. In no event, however, shall such Supplemental Benefits duplicate
benefits under the Company's Benefit Equalization Plan as amended from time to
time.
5. The Company shall pay to you annually an amount equal to any
difference between your available "flexdollars" amount under the Company's
Beneflex employee benefit program and a greater flexdollars amount calculated on
a basis which includes incentive based compensation awarded in relation to an
applicable year under the Compensation Plan, after taking into account your
annual "Beneflex" elections. For purposes of such calculations, incentive based
compensation may be assumed to be payable in the amount of your "Cap" for the
applicable year under the Compensation Plan, subject to appropriate adjustment
in relation to incentive compensation actually awarded under the Compensation
Plan. Other employee benefits, such as life insurance, provided by the Company
will be based on your Basic Salary.
Except as herein modified or amended, the Employment Agreement shall remain
in full force and effect.
If the foregoing is in accordance with your understanding, would you please
sign the enclosed duplicate copy of this Letter Agreement at the place indicated
below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/Barry Hirsch
------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/Laurence A. Tisch
- -------------------------
Laurence A. Tisch
LOEWS
CORPORATION
667 Madison Avenue, New York, N.Y. 10021-8087 (212) 545-2000
February 20, 1996
Mr. Preston R. Tisch
5 Timber Trail
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation (the
"Company"), dated March 1, 1988, as amended by agreements dated March 1, 1990,
October 22, 1992 and October 18, 1994 (the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended as
follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 1998 upon all the terms, conditionstions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$1,750,000 per annum for the period January 1, 1996 through May 31, 1996. For
the period June 1, 1996 through December 31, 1996, your Basic Salary shall be in
the amount of $975,000, less amounts theretofore paid as Basic Salary for the
calendar year 1996. For the calendar years 1997 and 1998 Basic Salary shall be
paid to you at the rate of $975,000 per annum. Basic Salary shall be payable in
accordance with the Company's customary payroll practices for executives as in
effect from time to time, and shall be subject to such increases as the Board of
Directors of the Company, in its sole discretion, may from time to time
determine. Such Basic Salary shall be exclusive of fees received by you as a
director and as a member of Committees of the Boards of Directors of other
corporations, including subsidiaries, affiliates and investees of the Company.
3. In addition to receipt of Basic Salary under the Employment Agreement,
in the event the Company's shareholders approve the Incentive Compensation Plan
for Executive Officers of the Company (the "Compensation Plan"), you shall
participate in and shall receive incentive compensation under the Compensation
Plan as awarded by the Incentive Compensation Committee of the Board of
Directors of the Company.
Mr. Preston R. Tisch
February 20, 1996
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of pensionable
earnings in determining your Supplemental Benefits under the Employment
Agreement. In no event, however, shall such Supplemental Benefits duplicate
benefits under the Company's Benefit Equalization Plan as amended from time to
time.
5. The Company shall pay to you annually an amount equal to any
difference between your available "flexdollars" amount under the Company's
Beneflex employee benefit program and a greater flexdollars amount calculated on
a basis which includes incentive based compensation awarded in relation to an
applicable year under the Compensation Plan, after taking into account your
annual "Beneflex" elections. For purposes of such calculations, incentive based
compensation may be assumed to be payable in the amount of your "Cap" for the
applicable year under the Compensation Plan, subject to appropriate adjustment
in relation to incentive compensation actually awarded under the Compensation
Plan. Other employee benefits, such as life insurance, provided by the Company
will be based on your Basic Salary.
Except as herein modified or amended, the Employment Agreement shall remain
in full force and effect.
If the foregoing is in accordance with your understanding, would you please
sign the enclosed duplicate copy of this Letter Agreement at the place indicated
below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/Barry Hirsch
------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/Preston R. Tisch
- -------------------------
Preston R. Tisch
LOEWS CORPORATION
BENEFIT EQUALIZATION PLAN
As amended through October 17, 1995
FOREWORD
Effective as of January 1, 1987, Loews Corporation, Marcus Loew Booking Agency
and Lorillard, Inc. have adopted the Loews Corporation Benefit Equalization Plan
(the "Plan") for the benefit of certain of their executives. It is intended
that the "excess benefits" provided under the Plan be an "excess benefits plan"
as that term is defined in Section 3(36) of the Employee Retirement Income
Security Act of 1974, and that the "supplemental benefits", "pension supplement
benefits", "savings supplement benefits", and/or "deferred compensation
benefits" provided under the Plan be a deferred compensation plan for "a select
group of management or highly compensated employees" as that term is used in the
Employee Retirement Income Security Act of 1974.
The purpose of the Plan is to:
(1) provide retired participants and their surviving spouses, contingent
annuitants and beneficiaries under the Retirement Plan for Employees of
Loews Corporation ("Retirement Plan") with the amount of company-provided
benefits that would have been provided under the Retirement Plan but for
(i) the limitations on benefits imposed under Section 415 of the Internal
Revenue Code,
(ii) the limitation on compensation for purposes of the Retirement Plan
imposed by Section 401(a)(17) of such Code, and/or
(iii) the fact that the participant elected to defer compensation that
otherwise would be payable currently by reason of an election to
defer such compensation under the Loews Corporation Deferred
Compensation Plan,
(2) provide certain participants in the Loews Corporation Employees Savings
Plan ("Savings Plan") with the "pension supplement benefits" (as defined in
Section 1.7 of this Plan) that would have been credited to their accounts
under the Savings Plan were it not for the limitation on compensation for
purposes of the Savings Plan imposed by Section 401(a)(17) of the Internal
Revenue Code and/or the fact that such participants may have elected to
defer compensation that would otherwise have been payable currently in
accordance with the Loews Corporation Deferred Compensation Plan, and
(3) provide certain participants in the Loews Corporation Employees Savings
Plan ("Savings Plan") with the "savings supplement benefits" (as defined in
Section 1.11 of this Plan) that would have been credited to their accounts
under the Savings Plan were it not for the fact that such participants may
have elected to defer compensation that would otherwise have been payable
currently in accordance with the Loews Corporation Deferred Compensation
Plan.
In addition, additional and/or modified benefits under this Plan may be
provided to an employee in accordance with the terms of an Agreement
between such employee and the Company. If and to the extent the provisions
of any such Agreement are inconsistent with any Plan provision, such
2
provisions of such Agreement (i) shall be deemed to modify the terms of the
Plan with respect to the employee to whom the Agreement applies, and (ii)
shall in all events control and govern, notwithstanding any Plan provision
to the contrary.
Except to the extent otherwise indicated, and to the extent otherwise
inappropriate, the Retirement Plan and the provisions thereof and the
Savings Plan and the provisions thereof are hereby incorporated by
reference.
SECTION ONE
-----------
Definitions
-----------
1.1 Except to the extent otherwise indicated herein, and to the extent
otherwise inappropriate in the context, the definitions contained in
Article 1 of the Retirement Plan are applicable under the Plan.
1.2 "Agreement" means a written agreement between an executive of the
Company and the Company which modifies the provisions of the Plan
insofar as such provisions relate to such executive.
1.3 "Board of Directors" means the Board of Directors of Loews
Corporation.
1.4 "Company" means Loews Corporation or any successor by merger,
purchase or otherwise, with respect to its employees; Marcus Loew
Booking Agency with respect to its employees; Lorillard, Inc. with
respect to its employees; or any other company participating in the
Plan as provided in Section 4.3 with respect to its employees.
1.5 "Deferred Compensation Benefit" means, except as is otherwise
provided in an Agreement, the excess, if any, of (i) the retirement
allowance which would have been payable to or with respect to a
participant under the Retirement Plan had he not elected to defer
compensation that would have other wise been payable to him currently
in accordance with the provisions of the Loews Corporation Deferred
Compensation Plan over (ii) the retirement allowance payable to or
with respect to the participant under the Retirement Plan.
1.6 "Excess Benefit" means, except as is otherwise provided in an
Agreement, the excess, if any, of (i) the retirement allowance which
would have been payable to or with respect to a participant under the
Retirement Plan had the limitations on benefits imposed by Section
4.08 of the Retirement Plan not been applicable over (ii) the
retirement allowance payable to or with respect to the participant
under the Retirement Plan.
1.7 "Pension Supplement Benefit" means, except as is otherwise provided
in an Agreement, in the case of an individual who is a participant in
the Savings Plan and whose employment with the Company commenced
prior to January 1, 1982, the sum of:
(i) the following percentage of such person's compensation for each
year based on his age as of the first day of each such year to the
extent such compensation (a) exceeds the
3
limitation on compensation imposed by Section 401(a)(17) of the
Code, or (b) is not currently received by reason of an election to
defer compensation in accordance with the Loews Corporation
Deferred Compensation Plan:
Age at Beginning of Year Percentage of Compensation
------------------------ --------------------------
Under age 28 0%
28 .04%
29 .07%
30 .09%
31 .12%
32 .14%
33 .17%
34 .20%
35 .22%
36 .25%
37 .28%
38 .31%
39 .34%
40 .37%
41 .40%
42 .44%
43 .47%
44 .51%
45 .54%
46 .58%
47 .61%
48 .65%
49 .69%
50 .73%
51 .77%
52 .81%
53 .85%
54 .89%
55 .94%
56 .98%
57 1.03%
58 1.08%
59 1.12%
60 1.17%
61 1.21%
62 1.25%
63 and older 1.30%
plus
4
(ii) interest on such amount equal to the aggregate investment
experience that would have been credited with respect to such
amount if it had been credited to the participant's account in the
Money Market/ Government Securities Fund [now known as the Short
Term Government Securities Fund] of the Savings Plan were it not
for (a) the limitation on the amount of compensation recognized
under the Savings Plan by reason of Section 401(a)(17) of the
Code, or (b) the fact that such compensation is not payable
currently due to a deferral election in accordance with the Loews
Corporation Deferred Compensation Plan.
1.8 "Plan" means the Loews Corporation Benefit Equalization Plan as set
forth herein and as from time to time in effect.
1.9 "Retirement Plan" means the Retirement Plan for Employees of Loews
Corporation.
1.10 "Savings Plan" means the Loews Corporation Employees Savings Plan.
1.11 "Savings Supplement Benefit" means, except as is otherwise provided
in an Agreement, in the case of an individual who is a participant in
the Savings Plan, the sum of:
(i) 1% of that portion of the first $100,000 of such person's
compensation for each year to the extent such compensation is not
currently received by reason of an election to defer compensation
in accordance with the Loews Corporation Deferred Compensation
Plan; plus
(ii) interest on such amount equal to the aggregate investment
experience that would have been credited with respect to such
amount if it had been credited to the participant's account in the
Money Market/Government Securities Fund of the Savings Plan were
it not for the fact that such compensation is not payable
currently due to a deferral election in accordance with the Loews
Corporation Deferred Compensation Plan.
1.12 "Supplemental Benefit" means, except as is otherwise provided in an
Agreement, the excess, if any, of (i) the retirement allowance that
would have been payable to or with respect to a participant under the
Retirement Plan had the amount of the participant's total annual
compensation paid by the Company and the amount deferred under the
Loews Corporation Deferred Compensation Plan been included in the
term "Compensation" under the Retirement Plan over (ii) the sum of
(a) the retirement allowance payable to or with respect to the
participant under the Retirement Plan, (b) any Excess Benefit payable
under this Plan, and (c) any Deferred Compensation Benefit payable
under this Plan.
SECTION TWO
-----------
Participation
-------------
Except as is otherwise provided in an Agreement, participation in the Plan
shall be limited to
(1) those participants in the Retirement Plan and their surviving
spouses, contingent annuitants and beneficiaries who, as a result of
5
(i) the limitations on benefits that may be paid or accrued under
the Retirement Plan by reason of Section 415 of the Internal
Revenue Code,
(ii) the limitation on compensation which may be taken into account
under the Retirement Plan by reason of Section 401(a)(17) of
such Code, and/or
(iii) the deferral of the receipt of compensation that would have
otherwise have been payable currently pursuant to an election
to defer such compensation in accordance with the Loews
Corporation Deferred Compensation Plan, receive or will receive
a lesser amount of retirement income under the Retirement Plan
than otherwise would be paid or payable in the absence of such
limitations and/or such election to defer,
(2) those participants in the Savings Plan whose employment with the
Company commenced prior to January 1, 1982 (and the surviving spouses
and other beneficiaries of such individuals) who, as a result of the
limitation on compensation which may be taken into account under the
Savings Plan by reason of Section 401(a)(17) of the Internal Revenue
Code and/or the fact that such participants may have elected to defer
compensation that would otherwise have been payable currently in
accordance with the Loews Corporation Deferred Compensation Plan,
receive or will receive a lesser amount of benefits in accordance
with Section 3.1(b) of the Savings Plan (or any successor to such
section) than otherwise would be receivable, and
(3) those participants in the Savings Plan who, as a result of their
deferral of compensation that would otherwise be recognized under
such Savings Plan pursuant to an election to defer in accordance with
the Loews Corporation Deferred Compensation Plan, receive or will
receive a lesser allocation in accordance with Section 3.1(a) of the
Savings Plan (or any successor to such section) than otherwise would
be allocated.
SECTION THREE
-------------
Benefits
-------------
3.1 Excess Benefits
---------------
The aggregate amount of Excess Benefit payable to or with respect to
a participant shall be paid directly to such participant, or to his
surviving spouse, contingent annuitant or beneficiary, as applicable,
from the general assets of the Company in accordance with Section
3.6.
3.2 Supplemental Benefits
---------------------
The aggregate amount of Supplemental Benefit payable to or with
respect to a participant shall be paid directly to such participant,
or to his surviving spouse, contingent annuitant or beneficiary, as
applicable, from the general assets of the Company in accordance with
Section 3.6.
6
3.3 Deferred Compensation Benefits
------------------------------
The aggregate amount of Deferred Compensation Benefit payable to or
with respect to a participant shall be paid directly to such
participant, or to his surviving spouse, contingent annuitant or
beneficiary, as applicable, from the general assets of the Company in
accordance with Section 3.6.
3.4 Pension Supplement Benefits
---------------------------
The aggregate amount of Pension Supplement Benefits payable to or
with respect to a participant shall be paid directly to such
participant, or to his surviving spouse or beneficiary, as
applicable, from the general assets of the Company in accordance with
Section 3.6.
3.5 Savings Supplement Benefits
---------------------------
The aggregate amount of Savings Supplement Benefits payable to or
with respect to a participant shall be paid directly to such
participant, or to his surviving spouse or beneficiary, as
applicable, from the general assets of the Company in accordance with
Section 3.6.
3.6 General Provisions
------------------
(a) The Company shall make no provision for the funding of any Excess
Benefits, Supplemental Benefits, Deferred Compensation Benefits,
Pension Supplement Benefits, or Savings Supplement Benefits
payable hereunder.
(b) In the event that the Company shall decide to establish an advance
accrual reserve on its books against the future expense of Excess
Benefit payments, Supplemental Benefit payments, Deferred
Compensation Benefit payments, Pension Supplement Benefit
payments, or Savings Supplement Benefit payments, such reserve
shall not under any circumstances be deemed to be an asset of this
Plan but, at all times, shall remain a part of the general assets
of the Company, subject to claims of the Company's creditors.
(c) A person entitled to an Excess Benefit, Supplemental Benefit,
Deferred Compensation Benefit, Pension Supplement Benefit, or
Savings Supplement Benefit shall have a claim upon the Company
only to the extent of the monthly payments thereof, if any, due up
to and including the then current month and shall not have a claim
against the Company for any subsequent monthly payment unless and
until such payment shall become due and payable.
(d) Except as is otherwise provided in an Agreement and in the case of
an active participant over age 70-1/2 who is receiving required
payments, the Excess Benefit, Supplemental Benefit, and Deferred
Compensation Benefit with respect to a participant shall be paid
to the participant, his surviving spouse, contingent annuitant or
beneficiary in the same form and at the same time as the
retirement allowance to or with respect to the participant under
the Retirement Plan. An active participant over age 70-1/2 will
not receive
7
payments under this Plan until his or her termination of
employment. Except as is otherwise provided in an Agreement, the
Pension Supplement Benefit and Savings Supplement Benefit with
respect to a participant shall be paid to the participant, his
surviving spouse, or beneficiary in a cash lump sum payment to be
made as soon as is practicable following the date of the
participant's termination of employment.
(e) Except as is otherwise provided in an Agreement, to the extent
that any supplemental retirement benefits (other than Pension
Supplement Benefits and Savings Supplement Benefits) are payable
to a participant under an employment or other agreement between
the participant and the Company (other than the Loews Corporation
Deferred Compensation Plan), the amount of such payments shall be
deducted from Excess Benefit, Supplemental Benefit, and/or
Deferred Compensation Benefit payable hereunder.
(f) Except as is otherwise provided in an Agreement, in the event that
the Retirement Plan shall be terminated in accordance with Section
8.01 thereof, Excess Benefits, Supplemental Benefits, and Deferred
Compensation Benefits shall continue to be paid directly by the
Company but only to the same extent and for the same duration as
that part of the payee's benefit from the Trust fund of the
Retirement Plan, which is directly related to such Excess Benefit,
Supplemental Benefit, or Deferred Compensation Benefit is
continued to be provided by the assets of the Trust fund of the
Retirement Plan; but such continued payment of Excess Benefit,
Supplemental Benefit, or Deferred Compensation Benefit shall still
be subject to the conditions specified in subsections (a), (b),
(c), (d) and (e) above. Except as is otherwise provided in an
Agreement, in the event that the Savings Plan shall be terminated,
Pension Supplement Benefits and Savings Supplement Benefits shall
be paid at such time and in such manner as related accounts under
the Savings Plan are paid.
(g) Notwithstanding subparagraph (d), if an active participant so
elects, the participant may receive the Present Value (as
hereinafter defined) of the Excess Benefit, Supplemental Benefit
and Deferred Compensation Benefit paid in a lump sum upon
termination of employment. Such election shall not be effective if
termination of employment occurs less than one full calendar year
after the election is made, except if termination occurs by reason
of death or disability. "Present Value" as used in this subsection
(g) shall mean the amount determined under Internal Revenue Code
Section 417(e)(3); reduced however by an election penalty of 5%.
3.7 Minimum Benefits
----------------
Effective with respect to participants who terminate employment for
any reason after December 31, 1993, there shall be certain minimum
benefits payable, as follows:
(a) The minimum Excess Benefit, as defined in Section 1.6, payable at age
65 or later retirement, shall be 75% (90% for active Loews
participants age 65 or older at December 31, 1993) of the Excess
Benefit determined as if the participant had terminated
8
employment on December 31, 1993 and elected to receive this benefit
at age 65 (age at December 31, 1993, if older), but recognizing the
1994 limitation under Section 4.08 of the Retirement Plan.
(b) The minimum Pension Supplement Benefit, as defined in Section 1.7,
shall be the December 31, 1993 account balance.
(c) The minimum Savings Supplement Benefit, as defined in Section 1.11,
shall be the December 31, 1993 account balance.
(d) The minimum Supplemental Benefit, as defined in Section 1.12, payable
at age 65 or later retirement, shall be 75% (90% for active Loews
participants age 65 or older at December 31, 1993) of the
Supplemental Benefit determined as if the participant had terminated
employment on December 31, 1993 and elected to receive this benefit
at age 65 (age at December 31, 1993, if older), but recognizing the
1994 limitation under Section 4.08 of the Retirement Plan for
purposes of computing the Excess Benefit.
SECTION FOUR
------------
Administration
--------------
4.1 Plan Administrator
------------------
Loews Corporation shall be the "administrator" of the Plan within the
meaning of ERISA.
4.2 Retirement Committee
--------------------
Subject to the provisions of Section 4.1, the Retirement Committee of
the Retirement Plan shall be vested with the general administration
of the Plan. The Retirement Committee shall have the exclusive right
to interpret the Plan. The decisions, actions and records of the
Retirement Committee shall be conclusive and binding upon the Company
and all persons having or claiming to have any right or interest in
or under the Plan.
4.3 Participation by Subsidiary
---------------------------
If any company is now or hereafter becomes a subsidiary or affiliated
company of the Company and becomes a participating company under the
Retirement Plan or the Savings Plan, the Board of Directors may
authorize such subsidiary or affiliated company to participate in
this Plan upon appropriate action by such company necessary to adopt
the Plan.
9
SECTION FIVE
------------
Amendment and Termination
-------------------------
5.1 Amendment of the Plan
---------------------
Subject to the provisions of Section 5.3, the Plan may be wholly or
partially amended or otherwise modified at any time by the Board of
Directors.
5.2 Termination of the Plan
-----------------------
Subject to the provisions of Section 5.3, the Plan may be terminated
at any time by the Board of Directors.
5.3 No Impairment of benefits
-------------------------
Notwithstanding the provisions of Sections 5.1 and 5.2, no amendment
to or termination of the Plan shall impair any rights to benefits
which have accrued hereunder.
10
LOEWS CORPORATION
Deferred Compensation Plan
As Amended through 10/17/1995
1. Purpose
The purpose of the Loews Corporation Deferred Compensation Plan (the
"Plan") is to provide select management employees of Loews Corporation (the
"Corporation", and certain of its Subsidiaries and Affiliates (hereinafter,
with the Corporation, collectively referred to as the "Company") an
opportunity, in accordance with the terms and conditions set forth herein,
to defer, on a non-qualified basis, compensation that otherwise would be
payable currently.
2. Administration
The Plan shall be administered by a committee (the "Deferred Compensation
Committee", hereinafter referred to as the "Committee") consisting of at
least three members appointed by the Board of Directors of the Corporation
(the "Board"). The Committee shall have sole and complete authority to
interpret the terms and provisions of the Plan and to adopt, alter and
repeal such administrative rules, regulations and practices governing the
operation of the Plan as it shall from time to time deem advisable. The
Committee may appoint a person or persons to administer the Plan on a
day-to-day basis.
3. Eligibility
The Committee shall have the sole and absolute discretion to select those
employees who shall participate in the Plan ("Participants") and shall
determine the extent to which Participants can defer base salary or any
other form of compensation. A Participant shall continue to participate in
the Plan until the Committee determines otherwise.
4. Election to Defer
(a) Participant may elect to defer receipt of a portion of his/her base
salary and/or any other form of compensation, as (and to the extent)
permitted by the Committee in accordance with rules and procedures to
be established from time to time by the Committee. Amounts deferred
under this Paragraph 4(a) shall be referred to as the "Deferred
Amounts". Election forms for Participants to defer compensation shall
be provided by the Committee, and all such elections shall be made in
writing on such forms. Once made, an election cannot be revoked.
(b) The election by a Participant to defer base salary must be made prior
to the beginning of the period of service for which such base salary is
payable. The election to defer any other form of compensation must be
made in accordance with rules established by the Committee. A
Participant must make separate elections with respect to each calendar
year of participation in the Plan.
5. Establishment of Deferred Compensation Account
At the time of the Participant's initial election to defer pursuant to
Paragraph 4, the Company shall establish a memorandum account (a "Deferred
Compensation Account") for each participant on its books. The Deferred
Amount (as determined under the Participant's election form) shall be
credited to the Participant's Deferred Compensation Account as of the day
that the compensation would otherwise have been paid to the Participant.
6. Additions to Deferred Amounts
Amounts equivalent to interest ("interest") shall be credited to a
Participant's Deferred Compensation Account at the end of each calendar
year based on the average balance (including Deferred Amounts and prior
interest credits) in the Participant's Account for such year. Interest for
any calendar year shall be computed at such rate (which may be a floating
rate) as shall be determined by the Committee, subject to a minimum rate
equal to the average Federal Funds Rate for such year minus twenty-five
basis points. A Deferred Compensation Account that is paid out prior to
the last day of a calendar year shall be credited with interest for a
partial year ending with the date of payout based on the average balance in
the Participant's Account for such partial year. The foregoing
notwithstanding, a Deferred Compensation Account that is paid out because
of a Participant's termination from employment pursuant to Paragraph
7(c)(iii) below, shall receive no interest credit for the year in which
such termination and/or payout occurs.
7. Payment of Deferred Amounts
For purposes of this Paragraph 7, continuous employment of the Participant
with the Company and any corporation or other entity that is the successor,
either directly or indirectly, to all or substantially all of the assets
and/or business of the Company shall be deemed continuous employment with
the Company.
(a) Subject to the provisions of subparagraphs (c) and (d) below, unless
otherwise elected by the Participant in his/her election form in
accordance with rules established by the Committee, the period of
deferral shall be until termination of the Participant's employment
with the Company.
(b) The Participant may elect, in his/her election to defer, that his/her
Deferred Compensation Account be paid either (i) in a lump sum or (ii)
in such number of annual installments, not to exceed fifteen, as the
Participant shall elect under rules established by the Committee. In
the absence of an election by the Participant, the Committee shall
determine the manner of payment.
(c) (i) In the event of the Participant's death, payment of the balance
in the Participant's Deferred Compensation Account shall be made
as elected by the Participant in the election to defer, to the
Participant's designated beneficiary, or if none, to the
Participant's estate;
(ii) In the event of the Participant's termination from employment
from the Company for disability or retirement, payment of the
balance in the Participant's Deferred Compensation Account shall
be made as elected by the Participant in the election to defer;
and
(iii) In the event of the Participant's termination from employment
with the Company for any reason other than death, or disability
or retirement, payment of the balance in the Participant's
Deferred Compensation Account shall be made in a lump sum, as
soon as practicable after the date of termination; the election
of the Participant to the contrary in his/her election to defer
notwithstanding.
(d) Anything contained in this Paragraph 7 to the contrary notwithstanding,
in the event a Participant incurs a severe financial hardship or a
Participant becomes disabled, the Committee, in its sole and absolute
discretion and upon written application of such Participant, may direct
immediate payment of all or a portion of the then current value of such
Participant's Deferred Compensation Account; provided that, in the case
of a hardship, such payment shall in no event exceed the amount
necessary to alleviate such financial hardship.
(e) A participant may make a new election at any time, provided that such
election will not be effective until one full calendar year elapses,
and further provided the participant may not make a deferral election
regarding that year's compensation.
8. Transferability of Interests
Except for the right of a Participant to designate a beneficiary as
hereinabove provided, a Participant's, or beneficiary's, rights and
interests may not be anticipated, alienated, assigned, pledged, transferred
or otherwise encumbered.
9. Amendment, Suspension and Termination
The Corporation, in its sole and absolute discretion, at any time may
amend, suspend or terminate the Plan or any portion thereof in any manner
and to any extent. No such amendment, suspension or termination shall
alter or impair the rights of a Participant with respect to then Deferred
Amounts.
10. Definitions
(a) The term "Subsidiary" shall mean any corporation 50 percent or more of
the voting stock of which shall at the time be owned directly or
indirectly by the Corporation.
(b) The term "Affiliate" means any corporation or other entity which is not
a Subsidiary but as to which the Corporation or a Subsidiary possesses
a direct or indirect ownership interest.
11. Unfunded Obligation
No assets of the Company have been set aside to provide for the payment of
the Deferred Amounts. Assets of the Company are subject to the claims of
the Company's general creditors. The Plan is intended to be, and shall be
operated and administered so as to be, a plan which is unfunded and which
is maintained primarily for the purpose of providing deferred compensation
for a select group of management or highly compensated employees. The
Company shall make no provision for the funding or insuring of Deferred
Amounts that would cause the Plan to be (i) a "funded" plan for purposes of
section 404(a)(5) of the Internal Revenue Code of 1986 or Title I of the
Employee Retirement Income Security Act of 1974, as amended, or (ii) other
than an "unfunded and unsecured promise to pay money or property in the
future" under Treasury Regulations sections 1.83-3(e). A Participant and
his/her beneficiary shall be treated as a general, unsecured creditor of
the Company at all times under this Plan, except as otherwise provided
under applicable state law.
12. No Right to Employment or other Benefits
This Plan shall not constitute a contract of employment between the Company
and the Participant, and nothing contained herein shall be construed as
conferring upon any Participant the right to continue in the employ of the
Company.
Any compensation deferred and any benefits paid under this Plan shall be
disregarded in computing benefits under any employee benefit plan of the
Company, except to the extent expressly provided for in such employee
benefit plans; and, further provided that any benefit, which would have
been payable to Participants under the "Retirement Plan for Employees of
Loews Corporation" had compensation deferred under this Plan been included
in Compensation (for Retirement Plan purposes) in the calendar year to
which the deferred compensation is attributable, shall be paid under the
"Benefit Equalization Plan".
13. Effective Date
The Plan shall be effective immediately upon approval by the Board of
Directors of the Corporation.
14. Governing Law
The Plan shall be governed by the laws of the State of New York without
reference to the principles of conflict of laws.
Exhibit 21.01
LOEWS CORPORATION
Subsidiaries of the Registrant
December 31, 1995
<TABLE>
<CAPTION>
Organized Under
Name of Subsidiary Laws of Business Names
------------------ --------------- ----------------
<S> <C> <C>
CNA Financial Corporation ............. Delaware )
Continental Casualty Company ......... Illinois )
Continental Assurance Company ....... Illinois )
National Fire Insurance Company of )
Hartford ........................... Connecticut )
American Casualty Company of )
Reading, Pennsylvania .............. Pennsylvania ) CNA Insurance
CNA Management Company Limited ...... Great Britain )
The Continental Corporation .......... New York )
The Buckeye Union Insurance Company . Ohio )
Firemen's Insurance Company of )
Newark, New Jersey ................. New Jersey )
The Continental Insurance Company ... New Hampshire )
Lorillard, Inc. ....................... New York )
Lorillard Tobacco Company ............ Delaware ) Lorillard
Diamond Offshore Drilling, Inc. ....... Delaware Diamond Offshore
L.T. Holding Corp. .................... Delaware L.T. Holding
</TABLE>
The names of certain subsidiaries which, if considered as a single subsidiary,
would not constitute a "significant subsidiary" as defined in Regulation S-X,
have been omitted.
EXHIBIT 23.01
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
60342 of Loews Corporation on Form S-3 of our report dated February 14, 1996,
appearing in this Annual Report on Form 10-K of Loews Corporation for the year
ended December 31, 1995.
Deloitte & Touche LLP
New York, New York
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 241,700
<SECURITIES> 38,818,300
<RECEIVABLES> 13,431,200
<ALLOWANCES> 302,600
<INVENTORY> 247,400
<CURRENT-ASSETS> 0
<PP&E> 2,293,500
<DEPRECIATION> 856,000
<TOTAL-ASSETS> 65,058,200
<CURRENT-LIABILITIES> 0
<BONDS> 4,248,200
<COMMON> 117,800
0
0
<OTHER-SE> 8,120,900
<TOTAL-LIABILITY-AND-EQUITY> 65,058,200
<SALES> 2,152,200
<TOTAL-REVENUES> 18,677,400
<CGS> 964,100
<TOTAL-COSTS> 13,700,700
<OTHER-EXPENSES> 1,854,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282,500
<INCOME-PRETAX> 2,839,300
<INCOME-TAX> 945,300
<INCOME-CONTINUING> 1,765,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,765,700
<EPS-PRIMARY> 14.98
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 28.01
LOEWS CORPORATION AND SUBSIDIARIES
Reconciliation of Property/Casualty Reserves as shown on Schedule P
to Reserves for Unpaid Claim and Claim Expenses
December 31, 1995
A reconciliation of property/casualty reserves as shown on Schedule P to
reserves for unpaid claim and claim expenses, as shown in the Annual Report on
Form 10-K follows. Schedule P is from CNA's property/casualty insurance
subsidiaries 1995 annual statutory statements provided to state insurance
regulatory authorities. Statutory claim and claim expense reserves are presented
net of ceded reinsurance. Under generally accepted accounting principles such
reserves are recorded "gross" of reinsurance with corresponding ceded
reinsurance recoverables recorded as assets.
<TABLE>
<CAPTION>
Property/Casualty Reserve Reconciliation
Statutory Basis to Generally Accepted Accounting Principles
- --------------------------------------------------------------------------------
(In millions)
<S> <C>
Total claim and claim expenses per Schedule P (net of
reinsurance) ................................................... $ 24,047
Non-domestic affiliates ......................................... 908
Ceded claim and claim expenses .................................. 6,089
-----------
Reserve for claim and claim expenses-generally accepted
accounting principles ..................................... $ 31,044
===========
</TABLE>
