============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6541
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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
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(Address of principal executive offices) (Zip Code)
(212) 545-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Class Outstanding at August 2, 1996
- -------------------------- -----------------------------
Common stock, $1 par value 115,040,100 shares
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Page 1
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
June 30, 1996 and December 31, 1995 ........................... 3
Consolidated Condensed Statements of Income--
Three and six months ended June 30, 1996 and 1995 ............. 4
Consolidated Condensed Statements of Cash Flows--
Six months ended June 30, 1996 and 1995 ....................... 5
Notes to Consolidated Condensed Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 24
Part II. Other Information
Item 1. Legal Proceedings ......................................... 34
Item 4. Submission of Matters to a Vote of Security Holders ....... 34
Item 6. Exhibits and Reports on Form 8-K .......................... 36
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
- --------------------------------------------------------------------------------
(Amounts in millions of dollars) June 30, December 31,
1996 1995
-----------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities, amortized cost of $28,090.3
and $29,403.5 ................................ $27,959.2 $30,467.7
Equity securities, cost of $1,045.1 and $990.9 1,213.6 1,213.6
Mortgage loans and notes receivable ........... 122.5 132.3
Policy loans .................................. 175.4 177.2
Other investments ............................. 364.9 503.1
Short-term investments ........................ 8,893.2 7,137.0
-----------------------------
Total investments .......................... 38,728.8 39,630.9
Cash ............................................ 341.2 241.7
Receivables-net ................................. 13,822.3 13,128.6
Property, plant and equipment-net ............... 2,025.6 1,437.5
Deferred income taxes ........................... 1,774.8 1,205.2
Prepaid reinsurance premiums .................... 531.2 495.4
Goodwill and other intangible assets-net ........ 504.4 481.8
Other assets .................................... 1,134.2 1,075.7
Deferred policy acquisition costs of insurance
subsidiaries ................................... 1,697.8 1,493.3
Separate Account business ....................... 5,566.5 5,868.1
-----------------------------
Total assets ............................... $66,126.8 $65,058.2
=============================
Liabilities and Shareholders' Equity:
Insurance reserves and claims ................... $41,105.0 $40,802.8
Accounts payable and accrued liabilities ........ 2,563.4 1,941.8
Payable for securities purchased ................ 1,223.6 435.3
Securities sold under repurchase agreements ..... 909.2 774.1
Long-term debt, less unamortized discount ....... 4,076.1 4,248.2
Deferred credits and participating policyholders'
equity ......................................... 968.8 1,409.9
Separate Account business ....................... 5,566.5 5,868.1
-----------------------------
Total liabilities .......................... 56,412.6 55,480.2
Minority interest ............................... 1,721.6 1,339.3
Shareholders' equity ............................ 7,992.6 8,238.7
-----------------------------
Total liabilities and shareholders' equity . $66,126.8 $65,058.2
=============================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 3
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Income
- -------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
-------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums:
Property and casualty ................. $2,478.6 $2,162.7 $ 4,986.4 $3,947.1
Life .................................. 840.8 704.6 1,625.0 1,434.5
Investment income, net of expenses ...... 606.9 544.8 1,235.7 1,005.7
Realized investment gains ............... 178.3 342.3 490.0 406.5
Manufactured products (including excise
taxes of $121.9, $118.6, $231.2 and
$220.4) ................................ 588.4 552.7 1,109.2 1,027.0
Other ................................... 351.6 212.3 642.8 401.8
-------------------------------------------------
Total ................................ 5,044.6 4,519.4 10,089.1 8,222.6
-------------------------------------------------
Expenses:
Insurance claims and policyholders'
benefits ............................... 3,144.7 2,674.2 6,162.4 5,029.9
Amortization of deferred policy
acquisition costs ...................... 439.4 421.5 967.0 782.3
Cost of manufactured products sold ...... 251.2 253.0 481.9 468.7
Selling, operating, advertising and
administrative expenses ................ 481.1 420.6 1,012.3 804.5
Interest ................................ 69.8 62.7 160.6 105.8
-------------------------------------------------
Total ................................ 4,386.2 3,832.0 8,784.2 7,191.2
-------------------------------------------------
658.4 687.4 1,304.9 1,031.4
-------------------------------------------------
Income taxes ............................ 226.4 224.8 445.1 328.5
Minority interest ....................... 53.3 42.8 112.3 68.7
-------------------------------------------------
Total ................................ 279.7 267.6 557.4 397.2
-------------------------------------------------
Net income ................................ $ 378.7 $ 419.8 $ 747.5 $ 634.2
=================================================
Net income per share ...................... $ 3.25 $ 3.56 $ 6.38 $ 5.38
=================================================
Cash dividends per share .................. $ .25 $ .13 $ .50 $ .25
=================================================
Weighted average number of shares
outstanding .............................. 116.6 117.8 117.2 117.8
=================================================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 4
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
- --------------------------------------------------------------------------------
(Amounts in millions) Six Months Ended June 30,
1996 1995
----------------------------
<S> <C> <C>
Operating Activities:
Net income .................................... $ 747.5 $ 634.2
Adjustments to reconcile net income to net
cash provided by operating activities-net .... (194.7) (192.8)
Changes in assets and liabilities-net:
Reinsurance receivable ...................... 52.7 (325.3)
Receivables ................................. (427.1) (599.2)
Prepaid reinsurance premiums ................ (35.8) 14.7
Deferred policy acquisition costs ........... (204.6) (105.0)
Insurance reserves and claims ............... 311.5 482.7
Accounts payable and accrued liabilities .... (447.3) 197.7
Investments classified as trading securities (41.6)
Other-net ................................... 243.5 566.5
---------------------------
4.1 673.5
---------------------------
Investing Activities:
Purchases of fixed maturities ................. (16,863.6) (12,486.4)
Proceeds from sales of fixed maturities ....... 17,127.6 11,859.9
Proceeds from maturities of fixed maturities .. 1,311.3 1,657.7
Change in securities sold under repurchase
agreements ................................... 135.1 (1,789.6)
Purchases of equity securities ................ (602.1) (587.2)
Proceeds from sales of equity securities ...... 779.0 999.9
Purchase of The Continental Corporation net of
cash acquired ................................ (960.4)
Change in short-term investments .............. (1,424.1) (480.2)
Purchases of property, plant and equipment .... (209.5) (84.9)
Change in other investments ................... 293.3 182.5
---------------------------
547.0 (1,688.7)
---------------------------
Financing Activities:
Dividends paid to shareholders ................ (58.7) (29.5)
Purchases of treasury shares .................. (137.6) (4.3)
Issuance of long-term debt .................... 9.1 1,332.6
Principal payments on long-term debt .......... (320.3) (27.6)
Net borrowings on revolving line of credit .... 70.0
Net decrease in short-term debt ............... (4.8) (205.0)
Receipts credited to policyholders ............ 8.6 15.7
Withdrawals of policyholder account balances .. (17.9) (17.5)
---------------------------
(451.6) 1,064.4
---------------------------
Net change in cash .............................. 99.5 49.2
Cash, beginning of period ....................... 241.7 160.6
---------------------------
Cash, end of period ............................. $ 341.2 $ 209.8
===========================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 5
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
- --------------------------------------------------------------------------------
(Dollars in millions, except per share data)
1. Reference is made to Notes to Consolidated Financial Statements in the 1995
Annual Report to Shareholders which should be read in conjunction with these
consolidated condensed financial statements.
Certain amounts applicable to prior periods have been reclassified to
conform to the classifications followed in 1996.
2. On May 10, 1995, CNA Financial Corporation, an 84% owned Subsidiary ("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
of the Notes to Consolidated Financial Statements in the 1995 Annual Report
on Form 10-K, included in Item 8). 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 Condensed Financial Statements
as of May 10, 1995.
The pro forma consolidated condensed results of operations presented below
assumes the above transaction occurred at January 1, 1995.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
--------------------------------------
<S> <C> <C>
Revenues $4,939.4 $9,710.2
=============================================================================================
Realized investment gains included in revenues $ 369.5 $ 526.5
=============================================================================================
Income before taxes and minority interest $ 647.4 $1,059.5
Income tax expense (208.0) (352.0)
Minority interest (38.6) (68.8)
---------------------------------------------------------------------------------------------
Net income $ 400.8 $ 638.7
=============================================================================================
Net income per share $ 3.40 $ 5.42
=============================================================================================
</TABLE>
The pro forma consolidated condensed financial information is not
necessarily indicative either of the results of operations that would have
occurred had the transaction been consummated at January 1, 1995 or of
future operations of the combined companies.
3. CNA assumes and cedes insurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes
reinsurance arrangements to limit its maximum loss, to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of
each product line with CNA's retained amount varying by type of coverage.
Generally, reinsurance coverage for property risks is on an excess of loss,
per risk basis. Liability coverages are generally reinsured on a quota share
basis in excess of CNA's retained risk.
Page 6
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after
careful review of the nature of the contract and a thorough assessment of
the reinsurers' credit quality and claim settlement performance. Further,
for carriers that are not authorized reinsurers in its states of domiciles,
CNA receives collateral primarily in the form of bank letters of credit,
securing a large portion of the recoverables. At June 30, 1996, such
collateral totaled approximately $1,100. CNA's largest recoverable from a
single reinsurer, including prepaid reinsurance premiums, at June 30, 1996
was approximately $435 with Lloyd's of London.
The effects of reinsurance on earned premiums, are as follows:
<TABLE>
<CAPTION>
% %
Direct Assumed Ceded Net Assumed Direct Assumed Ceded Net Assumed
-----------------------------------------------------------------------------------
Six Months Ended June 30,
-----------------------------------------------------------------------------------
--------------- 1996 -------------------- ---------------------- 1995 -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life ................ $ 353.9 $ 57.2 $ 15.2 $ 395.9 14.4% $ 298.9 $ 54.9 $ 9.4 $ 344.4 15.9%
Accident and health . 1,658.4 89.4 33.2 1,714.6 5.2 1,441.2 68.2 38.2 1,471.2 4.6
Property and casualty 4,249.1 1,002.8 751.0 4,500.9 22.3 3,447.5 573.3 451.5 3,569.3 16.1
-----------------------------------------------------------------------------------
Total ............ $6,261.4 $1,149.4 $799.4 $6,611.4 17.4% $5,187.6 $696.4 $499.1 $5,384.9 12.9%
===================================================================================
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------------------------------
--------------- 1996 -------------------- ---------------------- 1995 -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life ................ $ 209.6 $ 30.3 $ 10.8 $ 229.1 13.2% $ 146.5 $ 27.6 $ 4.8 $ 169.3 16.3%
Accident and health . 827.2 44.6 4.5 867.3 5.1 732.2 30.0 22.5 739.7 4.1
Property and casualty 2,043.4 588.1 408.5 2,223.0 26.5 1,993.5 275.6 307.5 1,961.6 14.0
-----------------------------------------------------------------------------------
Total ............ $3,080.2 $ 663.0 $423.8 $3,319.4 20.0% $2,872.2 $333.2 $334.8 $2,870.6 11.6%
===================================================================================
</TABLE>
In the above table, life premium income is primarily from long duration
contracts and the property and casualty earned premium is from short
duration contracts, and accident and health earned premiums are primarily
from short duration contracts.
Insurance claims and policyholders' benefits are net of reinsurance of
$150.3, $256.5, $628.8 and $330.0 for the three and six months ended June
30, 1996 and 1995, respectively.
Page 7
4. Shareholders' equity:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------------------------
<S> <C> <C>
Preferred stock, $.10 par value,
Authorized--100,000,000 shares
Common stock, $1 par value:
Authorized--400,000,000 shares
Issued--117,832,800 shares ................. $ 117.8 $ 117.8
Additional paid-in capital ................... 170.0 170.0
Earnings retained in the business ............ 7,846.6 7,157.8
Unrealized (depreciation) appreciation ....... (4.2) 793.1
---------------------------
Total ................................. 8,130.2 8,238.7
Less common stock (1,841,100 shares) held in
treasury at cost ............................ 137.6
---------------------------
Total ................................. $7,992.6 $8,238.7
===========================
</TABLE>
5. The Company's receivables are comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------------------------
<S> <C> <C>
Reinsurance .............................. $ 7,116.4 $ 7,169.1
Other insurance .......................... 5,646.3 5,302.4
Security sales ........................... 531.3 187.7
Accrued investment income ................ 481.1 578.8
Other .................................... 339.0 193.2
---------------------------
Total ............................. 14,114.1 13,431.2
Less allowance for doubtful accounts and
cash discounts .......................... 291.8 302.6
---------------------------
Receivables-net ................... $13,822.3 $13,128.6
===========================
</TABLE>
6. On April 29, 1996 Diamond Offshore Drilling, Inc., a 70% owned subsidiary
("Diamond Offshore"), acquired Arethusa (Off-Shore) Limited ("Arethusa").
Holders of Arethusa stock received 17.9 million shares of common stock
issued by Diamond Offshore based on a ratio of .88 shares for each share of
Arethusa common stock. The Company recognized a gain of approximately $186.6
during the second quarter of 1996 and its interest in Diamond Offshore
declined to approximately 51%.
Page 8
7. 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. On July 26, 1996, a panel of the United States Fifth
Circuit Court of Appeals in New Orleans affirmed the judgment approving the
Global Settlement Agreement by a 2 to 1 vote and affirmed the judgment
approving the Trilateral Agreement by a 3 to 0 vote. Further review of the
judgment approving the Global Settlement Agreement either to the entire
Fifth Circuit Court of Appeals or the United States Supreme Court will
likely be sought. Further review of the judgment approving the Trilateral
Agreement is possible but it is uncertain whether it will be sought.
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. 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
Page 9
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. On April 30, 1996, the Court of Appeal issued its revised
opinion which essentially reaffirmed its previous decision. Casualty has
filed papers seeking review by the California Supreme Court concerning the
April 30 decision. 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.
Casualty cannot predict the time frame within which the issues before the
California courts will finally be resolved. Review of issues such as trigger
of coverage and scope of coverage is being sought notwithstanding the
pending proceedings to approve the Global and Trilateral Agreements. If
neither the Global Settlement nor the Trilateral Agreement is finally
approved, it is anticipated that Casualty and Pacific Indemnity will resume
the coverage appeal process of the issues discrete to them. Casualty's
appeal of the coverage judgment raises many legal issues. Key issues on
appeal or for which review is sought 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 1957-59 policy is not triggered under California law since, among
other reasons, there were no findings that health claimants had the actual
illness for which they later sued. Moreover, Casualty's position is that
placing the burden on the insurer is contrary to California law.
. 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. 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 ultimately 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
Page 10
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.
Casualty's principal 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.
Through June 30, 1996, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 134,200 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 $796 (without
interest), of which approximately $631 was paid through June 30, 1996.
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 neither the Global Settlement
nor the Trilateral Agreement can be implemented.
Global Settlement - 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.
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 affirmed on
appeal, however, it is likely that further review will be sought. 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,
Page 11
subject to court approval which would, among other things, settle the
coverage case in the event the Global Settlement approval is not ultimately
upheld. 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
indicated above, the Trilateral Agreement approval by the trial court has
also been affirmed on appeal and it is uncertain whether further review will
be sought.
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
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 (as
defined in the Trilateral Agreement, 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
Page 12
bankruptcies, as has the potential number of insurers due to operation of
policy limits, the liability of the remaining defendants is difficult to
estimate.
The Global Settlement and the Trilateral Agreement approved by the trial
court have so far been upheld on appeal as noted above but are subject to
further potential appeal review. There is limited precedent with settlements
which determine the rights of future claimants to seek relief, and the
outcome of any efforts to obtain further appellate review cannot be
predicted. 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 ultimately upheld, 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 June 30, 1996, Casualty, Fibreboard
and plaintiff attorneys have reached settlements with respect to
approximately 134,200 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 47,750 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 June 30,
1996. 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 four thousand
dollars on average, with a portion of the payment contingent on final
approval on appeal of the Global Settlement or the Trilateral Agreement, and
if neither is finally approved, subject to resolution of the coverage
appeal.
Casualty believes that as a result of the Global Settlement and the
Trilateral Agreement it has greatly reduced the uncertainty of its exposure
with respect to the Fibreboard matter. However, if neither the Global
Settlement, nor the Trilateral Agreement is ultimately upheld, 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.
Page 13
While it is possible that the ultimate outcome of this matter could have a
material adverse impact on the equity of the Company, management does not
believe that a further loss material to equity is probable. Management will
continue to monitor the potential liabilities with respect to asbestos-
related bodily injury claims and will make adjustments to the claim reserves
if warranted.
Environmental Pollution and Asbestos
------------------------------------
The CNA property/casualty insurance companies have potential exposures
related to environmental pollution 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 is estimating that there
will be 4,500 National Priority List sites, and other estimates project as
many as 30,000 sites that will require clean-up under ECLs. Very few sites
have been subject to clean-up to date. The extent of clean-up necessary and
the assignment of liability has not been established.
CNA and the insurance industry are disputing 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
Page 14
quantified. Claim and claim expense reserves represent management's
estimates of ultimate liabilities based on currently available facts and
case 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 adjustment based on new data. As of June 30, 1996 and December
31, 1995, CNA carried approximately $859 and $1,030, respectively, of claim
and claim expense reserves, net of reinsurance recoverable, for reported and
unreported environmental pollution claims. The decrease in carried reserves
is substantially due to claim payments. Adverse environmental reserve
development of $241 for the year ended December 31, 1995 includes $60
related to CIC and results from CNA's on-going monitoring of settlement
patterns, current pending cases and potential future claims. The foregoing
reserve information relates to 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
CNA's on-going litigation with Fibreboard Corporation (see discussion
above). 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 among insurers, missing policies and
proof of coverage. As of June 30, 1996 and December 31, 1995, CNA carried
approximately $2,101 and $2,224, respectively, of claim and claim expense
reserves, net of reinsurance recoverable, for reported and unreported
asbestos-related claims. Unfavorable reserve development for the six months
ended June 30, 1996 and year ended December 31, 1995 totaled $26 and $258,
respectively.
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 table provides additional data related to CNA's
environmental pollution and asbestos-related claims reserves.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------------------------------------------
Environmental Asbestos Environmental Asbestos
----------------------------------------------------
<S> <C> <C> <C> <C>
Gross reserves:
Reported claims ................... $ 372 $1,880 $ 337 $1,963
Unreported claims ................. 621 307 839 358
----------------------------------------------------
993 2,187 1,176 2,321
Less reinsurance recoverable ........ (134) (86) (146) (97)
----------------------------------------------------
Net reserves ...................... $ 859 $2,101 $1,030 $2,224
====================================================
</TABLE>
The results of operations in future years may continue to be adversely
affected by environmental pollution and asbestos claim and claim expenses.
Management will continue to monitor potential liabilities and make further
adjustments as warranted.
Page 15
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 individual
plaintiffs or on behalf of purported classes against Lorillard and other
manufacturers of tobacco products for many years. Two hundred fifty-nine
such cases are pending in the United States federal and state courts against
manufacturers of tobacco products generally; Lorillard is a named defendant
in 68 of these cases. The Company is a defendant in three of these cases
(including one pending case in which the Company has not received service of
process).
On August 9, 1996 the jury in Carter v. Brown & Williamson Tobacco
Corporation (District Court, Duval County, Florida), returned a verdict in
favor of the plaintiffs and awarded them $0.8 in actual damages. The Company
understands that Brown & Williamson Tobacco Corporation, the only defendant
in the case, intends to notice an appeal.
Class Actions - Fifteen purported class actions are pending against
cigarette manufacturers. Lorillard is a defendant in 11 of these cases and
the Company is a defendant in seven of these cases. Plaintiffs in 14 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 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' motion to reconsider the ruling or to certify it to the Florida
Supreme Court has been denied. Defendants' attempts to appeal to the Florida
Supreme Court have been denied.
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. On appeal, the
United States Court of Appeals for the Fifth Circuit issued an order
Page 16
decertifying the class. The Court of Appeals ordered the trial court to
enter an order dismissing the class action allegations in plaintiffs'
complaint. A dismissal order has not been entered to date.
Granier v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed September 26, 1994). Plaintiffs seek
certification of a class 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'
motion to reconsider this ruling has been denied. Defendants have appealed
the orders to the Florida Supreme Court. A ruling has not been issued to
date.
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. The court
advised the parties on August 13, 1996, that it will grant defendants'
motion for summary judgment based on preemption. An order has not been
entered to date.
Norton v. RJR Nabisco Holdings Corporation, et al. (U.S. District Court,
Southern District, Indiana, filed May 3, 1996). Plaintiffs seek
certification of a class comprised of all allegedly nicotine-dependent
persons in the state of Indiana who have purchased and smoked cigarettes
manufactured by the defendant tobacco companies since January 1, 1940; the
estates, representatives and administrators of allegedly nicotine-dependent
smokers; and the spouses, children and dependent relatives of allegedly
nicotine-dependent smokers. Plaintiffs seek unspecified amounts in actual
damages and punitive damages; applicable damages for violation of Indiana's
deceptive business practices statute; and creation of a medical monitoring
fund.
Richardson v. Philip Morris Incorporated, et al. (U.S. District Court,
Maryland, filed May 24, 1996). Plaintiffs seek certification of a class
comprised of citizens or residents of Maryland who allege they or their
decedents who have or died from diseases or medical conditions caused by
addiction to smoking cigarettes or using other tobacco products containing
nicotine. Plaintiffs seek unspecified amounts in actual damages and punitive
Page 17
damages and the creation of a medical monitoring fund, smoking cessation
programs, and a corrective public education campaign.
Scott v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Louisiana, filed May 24, 1996). Plaintiffs seek certification of a
class of residents of Louisiana and the estates, representatives,
administrators, spouses, children or significant others of Louisiana
residents who allegedly are or were nicotine-dependent. Plaintiffs seek an
unspecified amount of actual damages and the creation of a medical
monitoring fund.
Reed v. Philip Morris Incorporated, et al. (Superior Court, District of
Columbia, filed June 21, 1996). Plaintiff seeks certification of a class of
residents of Washington, D.C., who allege they or their decedents are or
were addicted to cigarettes. Plaintiff seeks actual damages in an amount
specified to be in excess of $0.5 for each class member; punitive damages in
an amount specified to be in excess of $1.0 for each class member; an
unspecified amount in treble damages; and the funding of a medical
monitoring fund and of smoking cessation programs.
Mroczowski v. Lorillard, et al.; Hoskins v. R.J. Reynolds, et al,; Frosina
v. Philip Morris, et al.; Stewart-Lomanitz v. Brown & Williamson, et al. and
Zito v. American Tobacco, et al. (Supreme Court, New York County, New York,
each filed on June 19, 1996). Plaintiffs in each of these cases seek
certification of classes to be comprised of residents of the state of New
York who allege they are nicotine-dependent, and the estates,
representatives or administrators of the alleged nicotine-dependent smokers.
Each of these cases names a cigarette manufacturer, the parent or holding
company of the manufacturer, The Tobacco Institute and the Council for
Tobacco Research as defendants. In Mroczowski, the only one of these cases
to name Lorillard or the Company as defendants, plaintiffs seek unspecified
amounts in actual damages and punitive damages.
Arch v. The American Tobacco Company, et al. (Court of Common Pleas,
Philadelphia County, Mississippi, filed August 8, 1996). Plaintiffs seek
class certification on behalf of residents of Pennsylvania who allegedly are
or were nicotine-dependent, or the estates, representatives, administrators,
spouses, children or relatives of the allegedly nicotine-dependent smokers.
Plaintiffs seek unspecified amounts in actual damages and punitive damages
and the creation of a medical monitoring fund and of smoking cessation
programs. Lorillard and the Company are named as defendants in the complaint
but neither have received service of process.
Reimbursement Cases-In addition to the foregoing cases, twelve actions have
been initiated in which governmental entities seek recovery of funds
expended by them, 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
eleven actions and may be named in the twelfth. The Company is named as a
defendant in five of them and may be named in a sixth. 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.
Page 18
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.
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 denied in part 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. (Superior Court,
Middlesex County, Massachusetts, filed December 19, 1995), filed by the
Attorney General of Massachusetts. The action recently was remanded from
U.S. District Court, Massachusetts.
Ieyoub v. The American Tobacco Company, et al. (District Court, Calcasieu
Parish, Louisiana, filed March 13, 1996), filed by the Attorney General of
Louisiana. The action recently was remanded from U.S. District Court,
Western District, Louisiana.
The State of Texas v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, Texas, filed March 28, 1996), filed by the Attorney
General of Texas.
State of Maryland v. Philip Morris Incorporated, et al. (Circuit Court,
Baltimore City, Maryland, filed May 1, 1996), filed by the Attorney General
of Maryland. The case recently was remanded from U.S. District Court,
Maryland.
State of Washington v. The American Tobacco Company, et al. (Superior Court,
King County, Washington, filed June 5, 1996), filed by the Attorney General
of the state of Washington.
City and County of San Francisco, et al. v. Philip Morris Incorporated, et
al. (U.S. District Court, Northern District, California, filed June 6,
1996), filed by the City and County of San Francisco on behalf of the
citizens of the state of California.
State of Connecticut v. Philip Morris Incorporated, et al. (Superior Court,
Stamford/Norwalk District, Connecticut, filed July 18, 1996), filed by the
Attorney General of Connecticut.
The Company understands that the County of Los Angeles filed suit during
August of 1996. Neither the Company nor Lorillard has received service of
process in this matter. It is not known whether the complaint in the action
names the Company or Lorillard as defendants.
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 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
Page 19
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 appealed the ruling
to the Florida Court of Appeal. The appeal subsequently was transferred to
the Florida Supreme Court. On June 27, 1996, the Florida Supreme Court
affirmed in part and reversed in part the trial court's judgment. A
plurality of the court held that the 1994 amendments are constitutional on
their face, but that cigarette manufacturers are not precluded from
asserting an action in the future challenging the application of the
amendments. The court further directed that the state must identify the
individual Medicaid recipients for whom it is seeking recovery; that the
cigarette manufacturers will be permitted to assert certain defenses to
claims that appear to be time-barred; that the state will be prohibited from
combining theories of market-share liability and joint and several liability
(although the state may assert either claim individually); and that recovery
of payments made prior to July 1, 1994, the effective date of the
amendments, may be sought only under traditional methods such as
subrogation, assignment or lien. 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.
In addition to the above, a private citizen has filed suit in the Circuit
Court of Wayne County, Michigan, that seeks a writ of mandamus compelling
the Governor of the State of Michigan to direct the Attorney General of the
State of Michigan to file a reimbursement suit against the cigarette
manufacturers and their holding companies named as defendants in the
complaint, including the Company and Lorillard (Bleakley, et al. v. Engler,
et al., filed March 21, 1996). In the alternative, the complaint seeks
certification as a class action with the named plaintiffs representing a
class defined as the taxpayers of the State of Michigan. Neither the Company
nor Lorillard have received service of process of this suit. Defendants have
removed the case to U.S. District Court for the District of Michigan.
Private citizens have filed suit in the Circuit Court of Montgomery County,
Alabama seeking class certification on behalf of the taxpayers of Alabama.
Plaintiffs seek recovery of funds expended by the state in providing health
care to individuals allegedly injured by cigarette smoking (Crozier v. The
American Tobacco Company, et al., filed August 8, 1996). Plaintiffs seek
unspecified amounts in actual damages and punitive damages. Plaintiffs are
represented by private counsel. Lorillard and the Company are named as
defendants in the action but neither have been served to date.
Lorillard, other cigarette manufacturers and others have commenced suits in
five 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. This action has been abated by
the trial court pending resolution of State of Texas v. The American Tobacco
Page 20
Company, et al. 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. The court has entered an order denying plaintiffs'
motion for summary judgment and granting defendants' motion for summary
judgment. The case of Philip Morris Incorporated, et al. v. Blumenthal was
filed on June 28, 1996 in U.S. District Court for the District of
Connecticut. The case of Philip Morris Incorporated, et al. v. Graham, et
al. was filed on July 15, 1996 in the District Court of Salt Lake County,
Utah.
Filter Cases-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. Twelve such cases are pending in federal and state courts against
Lorillard. Lorillard has been advised that it may be named as a defendant in
another case. 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. Trials have been held in
three cases of this type during 1996. 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 the amount of one hundred forty thousand dollars. Lorillard has filed a
motion asking the trial court to enter judgment in its favor notwithstanding
the verdict. The trial court has not ruled on this motion to date. The time
for Lorillard to notice an appeal from the judgment in plaintiff's favor has
not yet expired.
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."
Another case, Ellis v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Orange County, California, filed July 24, 1996), alleges that the
defendants denied and concealed that the nicotine contained within their
tobacco products is addictive, and that the defendants controlled and
manipulated the nicotine content of their cigarettes in order to create and
sustain addiction. Plaintiff seeks declarations that defendants violated
provisions of the California Business and Professions Code; injunctions
prohibiting the defendants from engaging in conduct that violates the
Page 21
California Business and Professions Code; orders requiring the defendants to
fund a public education campaign, smoking cessation programs and corrective
advertising campaigns; and orders requiring defendants to disgorge profits
and to pay restitution to the general public of California. Lorillard has
been named as a defendant in the complaint but has not received service of
process to date.
One of the defenses raised by Lorillard in certain cases is preemption by
the Federal Cigarette Labeling and Advertising Act (the "Labeling Act"). In
the case of Cipollone v. Liggett Group, Inc., et al., the United States
Supreme Court, in a plurality opinion issued on June 24, 1992, held that the
Labeling Act as enacted in 1965 does not preempt common law damage claims
but that the Labeling Act, as amended in 1969, does preempt claims against
tobacco companies arising after July 1, 1969, which assert that the tobacco
companies failed to adequately warn of the alleged health risks of
cigarettes, sought to undermine or neutralize the Labeling Act's mandatory
health warnings, or concealed material facts concerning the health effects
of smoking in their advertising and promotion of cigarettes. The Supreme
Court held that claims against tobacco companies based on fraudulent
misrepresentation, breach of express warranty, or conspiracy to misrepresent
material facts concerning the alleged health effects of smoking are not
preempted by the Labeling Act. The Supreme Court in so holding did not
consider whether such common law damage actions were valid under state law.
The effect of the Supreme Court's decision on pending and future cases
against Lorillard and other tobacco companies will likely be the subject of
further legal proceedings. Additional litigation involving claims such as
those held to be preempted by the Supreme Court in Cipollone could be
encouraged if legislative proposals to eliminate the federal preemption
defense, pending in Congress since 1991, are enacted. It is not possible to
predict whether any such legislation will be enacted.
In addition to the defenses based on preemption under the Supreme Court
decision referred to above, Lorillard believes that it has a number of other
valid defenses to pending cases. These defenses, where applicable, include,
among others, statutes of limitations or repose, assumption of the risk,
comparative fault, the lack of proximate causation, and the lack of any
defect in the product alleged by a plaintiff. Lorillard believes, and has
been so advised by counsel, that some or all of these defenses may, in any
of the pending or anticipated cases, be found by a jury or court to bar
recovery by a plaintiff. Application of valid defenses, including those of
preemption, are likely to be the subject of further legal proceedings in the
class action cases and in the actions brought by states or state agencies.
Smoking and health related litigation has been brought by plaintiffs against
Lorillard and other manufacturers of tobacco products for many years. While
Lorillard intends to defend vigorously all such actions which may be brought
against it, it is not possible to predict the outcome of any of this
litigation. Litigation is subject to many uncertainties, and it is possible
that some of these actions could be decided unfavorably. An unfavorable
outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending litigation. It
is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an 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.
Page 22
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.
8. In the opinion of Management, the accompanying consolidated condensed
financial statements reflect all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
June 30, 1996 and December 31, 1995 and the results of operations for the
three and six months and changes in cash flows for the six months ended June
30, 1996 and 1995, respectively.
Results of operations for the second quarter and first six months of each of
the years is not necessarily indicative of results of operations for that
entire year.
Page 23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
-----------------------------------------------------------------------
Liquidity and Capital Resources:
- -------------------------------
Insurance
- ---------
Property and casualty and life insurance operations are wholly owned
subsidiaries of CNA Financial Corporation ("CNA"). CNA is an 84% owned
subsidiary of the Company--
As previously reported, on May 10, 1995 CNA acquired The Continental
Corporation ("CIC") for approximately $1.1 billion or $20 per CIC share. This
acquisition makes CNA the sixth largest U.S. insurance organization, the third
largest U.S. property-casualty organization and the largest U.S. commercial
lines insurance group, based on 1994 premium volume.
CNA has financed the transaction (including the refinancing of $205 million of
CIC debt) through a five-year $1.3 billion revolving credit facility with 16
banks. The interest rate is based on the 1,2,3 or 6 month London Interbank
Offered Rate ("LIBOR") plus 25 basis points. Additionally, there is a facility
fee of 10 basis points annually. The average interest rate was 5.7% at June 30,
1996. Under the terms of the facility, CNA may prepay the debt without penalty,
giving CNA flexibility to arrange longer-term financing on more favorable terms.
In 1995, to take advantage of favorable interest rate spreads, CNA established
a Commercial Paper Program, borrowing $500 million from investors to reduce a
like amount of bank financing. In the first half of 1996, CNA increased
commercial paper borrowings by $150 million replacing a like amount of bank
financing. The weighted average yield on commercial paper at June 30, 1996 was
5.6%. The commercial paper borrowings are classified as long-term debt as $650
million of the committed Bank Facility will support the commercial paper
program.
On July 22, 1996, CNA increased its commercial paper borrowings by $25 million
replacing a like amount of bank financing. As of August 1, 1996, the outstanding
loans under the revolving credit facility were $650 million. There was no unused
borrowing capacity under the facility after the effects of the commercial paper
program.
CNA entered into interest rate swap agreements with several banks which
terminate from May to December 2000. The effect of these interest rate swaps was
to increase interest expense by $2.2 and $3.8 million for the quarter and six
months ended June 30, 1996.
The weighted average interest rate on the acquisition debt, which includes the
revolving credit facility, commercial paper, and the effect of the interest rate
swaps, was 6.4% on June 30, 1996.
On March 1, 1996, CNA repaid $250 million of 8 5/8% senior notes, which had
matured.
For the first six months of 1996, statutory surplus of the property and
casualty insurance subsidiaries decreased 2.5% to approximately $5.8 billion.
The decrease resulted primarily from the payment of dividends. The statutory
surplus of the life insurance subsidiaries remained at $1.1 billion.
Page 24
CNA and the insurance industry are exposed to an unknown amount of liability
for environmental pollution, primarily related to toxic waste site clean-up.
See Note 7 of the Notes to Consolidated Condensed Financial Statements for a
further discussion of environmental pollution exposures.
The principal cash flow sources of CNA's property and casualty and life
insurance subsidiaries are premiums and investment income. The primary operating
cash flow uses are payments for claims, policy benefits and operating expenses.
For the first six months of 1996, CNA's operating activities used cash flows
of approximately $113 million, compared to positive cash flows of $625 million
in 1995. The decrease is primarily the result of negative cash flows generated
by underwriting activities, higher payment for federal income taxes and
increased interest payments. Net cash flows are generally invested in marketable
securities. Investment strategies employed by CNA's insurance subsidiaries
consider the cash flow requirements of the insurance products sold and the tax
attributes of the various types of marketable investments.
CNA and the insurance industry are exposed to an unknown amount of liability
for environmental pollution, primarily related to toxic waste site clean-up. See
Note 7 of the Notes to Consolidated Condensed Financial Statements for further
discussion of environmental pollution exposures.
Cigarettes
- ----------
Lorillard, Inc. and subsidiaries ("Lorillard")--
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 June 30, 1996, they represented 29.2% of industry sales.
A number of lawsuits have been filed against Lorillard and other manufacturers
of tobacco products seeking damages for cancer and other health effects claimed
to have resulted from the use of cigarettes or exposure to tobacco smoke. See
Note 7 of the Notes to Consolidated Condensed Financial Statements. In several
of these cases the Company is named as a defendant. Pending litigation includes
conventional smoking and health cases, purported class actions, governmental
entities/medicaid reimbursement actions, and filter cases, most of which claim
very substantial damages.
On August 9, 1996 the jury in Carter v. Brown & Williamson Tobacco Corporation
(District Court, Duval County, Florida), returned a verdict in favor of the
plaintiffs and awarded them $0.8 in actual damages. The Company understands that
Brown & Williamson Tobacco Corporation, the only defendant in the case, intends
to notice an appeal.
Corporate
- ---------
During the six months ended June 30, 1996 the Company purchased 1,841,100
shares of its outstanding Common Stock at an aggregate cost of approximately
$137.6 million. The funds required for such purchases were provided from working
capital. Depending on market conditions, the Company, from time to time, may
purchase shares in the open market or otherwise.
Page 25
Investments:
- -----------
Insurance
- ---------
A summary of CNA's general account fixed maturity securities portfolio and
short-term investments are as follows:
<TABLE>
<CAPTION>
Change in
June 30, December 31, Unrealized
1996 1995 Gains
------------------------------------
(In millions)
<S> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and
obligations of government agencies .. $ 9,991 $13,542 $ (599)
Asset-backed securities .............. 6,024 6,086 (227)
Tax exempt securities ................ 4,313 3,603 (118)
Taxable .............................. 7,610 7,214 (250)
--------------------------------
Total fixed income securities ... 27,938 30,445 (1,194)
Stocks ................................. 985 918 (3)
Short-term and other investments........ 6,169 4,482
Derivative security investments ........ 3 41
--------------------------------
Total ........................... $35,095 $35,886 $(1,197)
================================
Short-term investments:
Security repurchase collateral ....... $ 909 $ 776
Escrow ............................... 1,063 1,045
Others ............................... 3,556 1,904
Other investments ...................... 641 757
---------------------
Total short-term and other
investments .................... $ 6,169 $ 4,482
=====================
</TABLE>
CNA's general account investment portfolio is managed to maximize after tax
investment return, while minimizing credit risks, with investments concentrated
in high quality securities to support its insurance underwriting operations.
CNA has the capacity to hold its fixed 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, fixed maturity securities are classified as available for sale.
CNA holds a small amount of derivative financial instruments for purposes of
enhancing income and total return. The derivative securities are marked-to-
market with valuation changes reported as realized investment gains and losses.
CNA's investment in, and risk in relation to, derivative securities is not
significant.
The general account portfolio consists primarily of high quality marketable
debt securities, approximately 92% of which are rated as investment grade. At
Page 26
June 30, 1996 tax exempt securities and short-term investments excluding
collateral for securities sold under repurchase agreements, comprised
approximately 12% and 13%, respectively, of the general account's total
investment portfolio compared to 10% and 8%, respectively, at December 31, 1995.
Historically, CNA has maintained short-term assets at a level that provided for
liquidity to meet its short-term obligations, as well as reasonable
contingencies and anticipated claim payout patterns. At June 30, 1996, the major
components of the short-term investment portfolio consist primarily of high
grade commercial paper and U.S. Treasury bills. Collateral for securities sold
under repurchase agreements increased $127 million to $903 million.
As of June 30, 1996, the market value of CNA's general account investments in
fixed maturities was $27.9 billion and was less than amortized cost by
approximately $134 million. This compares to $1,059 million of net unrealized
investment gains at December 31, 1995. The gross unrealized investment gains and
losses for the fixed maturity securities portfolio at June 30, 1996, were $357
and $491 million, respectively, compared to $1,136 and $77 million,
respectively, at December 31, 1995. The change in unrealized investment gains on
the fixed maturity portfolio of $1,194 for the six months ended June 30, 1996 is
attributable, in large part, to increases in interest rates which have an
adverse effect on bond prices.
Net unrealized investment losses on general account bonds at June 30, 1996
include net unrealized investment losses on high yield securities of $24
million, compared to net unrealized investment gains of $67 million at December
31, 1995. High yield securities are bonds rated as below investment grade by
bond rating agencies, plus private placements and other unrated securities
which, in the opinion of management, are below investment grade. Fair values of
high yield securities in the general account were $2.3 billion at June 30, 1996,
compared to $1.9 billion at December 31, 1995.
CNA's general account also maintains an equity securities portfolio, the fair
value of which was $985 million compared to cost of $806 million reflecting
unrealized gains of $179 million at June 30, 1996. The fair value of the equity
securities portfolio in the general account was $918 million compared to a cost
of $736 million, reflecting unrealized gains of approximately $182 million at
December 31, 1995.
At June 30, 1996, total Separate Account cash and investments amounted to $5.6
billion with taxable fixed maturity securities representing approximately 85% of
the Separate Accounts' portfolio. Approximately 82% of Separate Account
investments are used to fund guaranteed investments for which CNA's life
insurance affiliate 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. The fair
value of all fixed maturity securities in the guaranteed investment portfolio
was $4.0 billion compared to $4.8 billion at December 31, 1995. At June 30,
1996, amortized cost was greater than fair value by approximately $23 million.
This compares to a gain of $53 million at December 31, 1995. The gross
unrealized investment gains and losses for the fixed maturity securities
portfolio at June 30, 1996 were $67 and $90 million, respectively.
Carrying values of high yield securities in the guaranteed investment
portfolio were $688 and $944 million, respectively, at June 30, 1996 and
December 31, 1995. Net unrealized investment losses on high yield securities
held in such Separate Accounts were $28 million at June 30, 1996, compared to
$14 million at December 31, 1995.
High yield securities generally involve a greater degree of risk than that of
investment grade securities. Expected returns should, however, compensate for
Page 27
the added risk. The risk is also considered in the interest rate assumptions in
the underlying insurance products. At June 30, 1996, CNA's concentration in high
yield bonds, including Separate Accounts, was approximately 5% of its total
assets. In addition, CNA's investment in mortgage loans and investment real
estate are substantially below the industry average, representing less than one
quarter of one percent of its total assets.
Included in CNA's fixed maturity securities at June 30, 1996 (general and
guaranteed investment portfolios) are $8.2 billion of asset-backed securities,
consisting of approximately 32% in collateralized mortgage obligations
("CMO's"), 9% in corporate asset-backed obligations, and 59% in U.S. government
agency issued pass-through certificates. The majority of CMO's held are U.S.
government agency issues, which are actively traded in liquid markets and are
priced monthly by broker-dealers. At June 30, 1996, the fair value of asset-
backed securities was more than amortized cost by approximately $74 million
compared to unrealized investment gains of $200 million at December 31, 1995.
CNA limits the risks associated with interest rate fluctuations and prepayment
by concentrating its CMO investments in early planned amortization classes with
relatively short principal repayment windows.
Over the last few years, much concern has been raised regarding the quality of
insurance company invested assets. At June 30, 1996, 54% of the general
account's fixed maturity securities portfolio was invested in U.S. government
securities, 19% in other AAA rated securities and 14% in AA and A rated
securities. CNA's guaranteed investment fixed maturity securities portfolio is
comprised of 34% U.S. government securities, 18% in other AAA rated securities
and 18% in AA and A rated securities. These ratings are primarily from
nationally recognized rating agencies.
Other
- -----
Investment activities of non-insurance companies include investments in fixed
maturities securities, equity securities, derivative instruments and short-term
investments. Derivative instruments are marked-to-market with valuation changes
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. Effective January 1, 1996, equity securities
added to the parent company's investment portfolio are classified as trading
securities in order to reflect the Company's investment philosophy. These
investments are carried at fair value with the net unrealized gain or loss
included in the 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.
Page 28
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. See "Results of Operations -- Other". See Note 4 of the Notes to
Consolidated Financial Statements in the 1995 Annual Report on Form 10-K,
included in Item 8 for additional information with respect to derivative
instruments.
Results of Operations:
- ----------------------
Revenues increased by $525.2 and $1,866.5 million, or 11.6% and 22.7%, and net
income decreased by $41.1 million, or 9.8%, and increased by $113.3 million, or
17.9%, respectively, for the quarter and six months ended June 30, 1996 as
compared to the prior year. The following table sets forth the major sources of
the Company's consolidated revenues and net income.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenues (a):
Property and casualty insurance ....... $3,126.3 $2,773.7 $ 6,447.0 $4,971.7
Life insurance ........................ 985.4 890.2 1,980.6 1,744.5
Cigarettes ............................ 567.2 532.6 1,065.0 984.8
Hotels ................................ 54.3 62.3 95.7 103.5
Drilling .............................. 150.3 72.9 257.8 148.1
Watches and clocks .................... 24.0 25.5 49.5 50.0
Investment income-net (non-insurance
companies) ........................... 148.6 165.3 206.4 223.6
Other and eliminations-net ............ (11.5) (3.1) (12.9) (3.6)
----------------------------------------------------
$5,044.6 $4,519.4 $10,089.1 $8,222.6
====================================================
Net income (a):
Property and casualty insurance ....... $ 151.5 $ 173.0 $ 381.7 $ 279.9
Life insurance ........................ 29.0 62.0 94.9 93.9
Cigarettes ............................ 111.4 103.5 183.6 175.3
Hotels ................................ 4.5 7.1 1.7 4.4
Drilling .............................. 12.0 (5.1) 20.5 (13.0)
Watches and clocks .................... .6 .7 1.3 1.2
Investment income-net (non-insurance
companies) ........................... 96.5 120.1 132.9 157.6
Corporate interest expense ............ (15.4) (15.4) (34.8) (30.8)
Unallocated corporate expense and
other-net ............................ (11.4) (26.1) (34.3) (34.3)
----------------------------------------------------
$ 378.7 $ 419.8 $ 747.5 $ 634.2
====================================================
Page 29
(a) Includes realized investment gains as follows:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance ....... $ 63.2 $117.9 $279.8 $134.7
Life insurance ........................ 14.4 87.1 102.0 105.2
Investment income-net ................. 100.7 137.3 108.2 166.6
----------------------------------------------------
$178.3 $342.3 $490.0 $406.5
====================================================
Net income:
Property and casualty insurance ....... $ 38.5 $ 64.6 $151.7 $ 72.2
Life insurance ........................ 6.8 44.1 47.9 53.8
Investment income-net ................. 66.0 89.1 70.8 108.0
----------------------------------------------------
$111.3 $197.8 $270.4 $234.0
====================================================
</TABLE>
Insurance
- ---------
Property and casualty revenues, excluding realized investment gains, increased
by $407.3 and $1,330.2 million, or 15.3% and 27.5%, respectively for the quarter
and six months ended June 30, 1996, as compared to the same periods a year ago.
Property and casualty premium revenues increased by $315.9 and $1,039.3
million, or 14.6% and 26.3%, respectively, for the quarter and six months ended
June 30, 1996, from the prior year's comparable period. The increase in earned
premium is primarily the inclusion of CIC business for the full six months
offset by a decline in workers' compensation premiums. Net investment income
increased by $35.0 and $173.3 million, or 8.3% and 22.6%, for the quarter and
six months compared with the same periods in the prior year primarily due to the
inclusion of the CIC investment portfolio of $235.7 million for six months ended
June 30, 1996. The bond segment of the investment portfolio yielded 6.7% in the
first half of 1996 and 1995.
Life insurance revenues, excluding realized investment gains, increased by
$167.9 and $239.3 million, or 20.9% and 14.6%, as compared to the same periods a
year ago. Life premium revenues increased by $136.2 and $190.5 million, or 19.3%
and 13.3%, for the quarter and six months ended June 30, 1996 with the primary
growth in the individual life business which markets term, universal life and
annuities. Life net investment income increased by $10.0 and $19.3 million, or
11.2% and 10.9%, for the quarter and six months ended June 30, 1996, compared to
the same period a year ago due to a larger asset base generated from increased
cash flows from premium growth. The bond segment of the life investment
portfolio yielded 6.8% in the first half of 1996 compared with 6.9% for the same
period a year ago.
Property and casualty underwriting losses for the quarter and six months ended
June 30, 1996 were $243.0 and $534.0 million, compared to $266.2 and $464.0
million for the same period in 1995. Operating results reflect reduced
underwriting expenses as a percentage of premium, as well as continued favorable
loss trends in workers' compensation business, partially offset by higher
weather related catastrophe costs. Pre-tax catastrophe losses for the quarter
and six months ended June 30, 1996 were $114.5 and $208.0 million, compared with
Page 30
$55 and $78 million in 1995. The second quarter catastrophe loss of $114.5
million includes approximately $33 million of adverse development on first
quarter catastrophe losses.
The components of CNA's realized investment gains are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Bonds:
U.S. Government ....................... $(21.9) $ 88.0 $112.4 $ 97.9
Tax exempt ............................ (10.5) 1.2 9.5 17.9
Asset-backed .......................... 3.9 24.0 21.3 33.9
Taxable ............................... 17.0 20.1 44.8 (4.7)
----------------------------------------------------
Total bonds ........................ (11.5) 133.3 188.0 145.0
Stocks .................................. 74.3 34.1 129.2 51.7
Derivative instruments .................. 2.9 1.2 12.0 (7.2)
Separate Accounts and other ............. 6.9 37.2 48.6 52.1
----------------------------------------------------
Total realized investment gains .... $ 72.6 $205.8 $377.8 $ 241.6
====================================================
</TABLE>
Cigarettes
- ----------
Revenues increased by $34.6 and $80.2 million, or 6.5% and 8.1%, and net
income increased by $7.9 and $8.3 million, or 7.6% and 4.7%, respectively, for
the quarter and six months ended June 30, 1996 as compared to the corresponding
periods of the prior year.
The increase in revenues is primarily composed of an increase of approximately
$15.6 and $49.5 million, or 2.9% and 5.0%, due to higher unit sales volume and
an increase of approximately $17.7 and $28.8 million, or 3.3% and 2.9%,
reflecting higher average unit prices for the quarter and six months ended June
30, 1996 as compared to the prior year. Net income increased as a result of the
improved revenues, partially offset by higher sales promotion.
Hotels
- ------
Revenues decreased by $8.0 and $7.8 million, or 12.8% and 7.5%, and net income
decreased by $2.6 and $2.7 million, or 36.6% and 61.4%, for the quarter and six
months ended June 30, 1996, as compared to the prior year.
Revenues and net income decreased in the quarter and six months ended June 30,
1996, as compared to the prior year, due primarily to a $3.9 million payment
received in 1995 related to termination of a management contract. In addition,
revenues and net income for the quarter and six months ended June 30, 1996 were
negatively impacted by lower average room rates and the absence of casino
revenues at the Loews Monte Carlo Hotel, partially offset by higher average room
rates at Loews Hotels' domestic properties.
Drilling
- --------
Revenues increased by $77.4 and $109.7 million and net income increased by
$17.1 and $33.5 million, respectively, for the quarter and six months ended June
Page 31
30, 1996, as compared to the prior year.
Revenues for the quarter and six months ended June 30, 1996 increased by $29.4
and $51.4 million, or 40.3% and 34.7%, due primarily to higher dayrates
recognized by semisubmersible rigs located in the North Sea and the Gulf of
Mexico. The second quarter of 1996 also includes approximately $24.2 million of
revenues due to the merger of Arethusa. Revenues from jack-up operations
increased by $12.7 and $15.9 million, or 17.4% and 10.7%, due to additional rigs
acquired in the merger and improvements in dayrates in the Gulf of Mexico.
Revenues from turnkey operations increased $4.5 and $15.0 million, or 6.2% and
10.1%, reflecting the completion of projects of greater magnitude during the
quarter and six months ended June 30, 1996 as compared to the prior year.
Net income for the quarter and six months ended June 30, 1996 increased due
primarily to higher revenues discussed above and decreased interest expense,
partially offset by increased provision for minority interest as a result of the
dilutive effect of Diamond Offshore's initial public offering in October 1995
and its subsequent acquisition of Arethusa in April 1996.
Watches and Clocks
- ------------------
Revenues decreased by $1.5 and $.5 million, or 5.8% and 1.0%, and net income
decreased by $.1 million, or 14.3%, and increased by $.1 million, or 8.3%,
respectively, for the quarter and six months ended June 30, 1996 as compared to
the prior year.
Revenues decreased for the quarter and six months ended June 30, 1996 due
primarily to interest income of $4.2 million recorded in the second quarter of
1995 related to a prior year tax audit adjustment, partially offset by higher
watch unit sales and prices.
Net income in the second quarter of 1995 includes a benefit of $1.0 million
related to the prior year tax audit adjustment. Exclusive of this adjustment,
net income increased for the quarter and six months ended June 30, 1996, as
compared to the prior year, as a result of the increased watch unit sales and
prices, and a favorable change in Bulova's product sales mix.
Other
- -----
Revenues decreased by $25.1 and $26.5 million, or 15.5% and 12.0%, and net
income decreased by $8.9 and $28.7 million, or 11.3% and 31.0%, respectively,
for the quarter and six months ended June 30, 1996 as compared to the prior
year. Other operations consist primarily of investment income of non-insurance
companies and, in 1995, the Company's investment in CBS Inc.
Page 32
The components of realized investment gains (losses) included in Investment
income-net are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenues:
Derivative instruments (1) ............ $(67.9) $(10.1) $(102.9) $ (5.7)
Short-term investments ................ 6.1 6.5 7.7 38.6
Arethusa acquisition (2) .............. 186.6 186.6
Sale of Champion International common
stock ................................ 145.4 20.3 145.4
Other ................................. (24.1) (4.5) (3.5) (11.7)
-----------------------------------
100.7 137.3 108.2 166.6
Income tax expense ...................... (35.2) (48.1) (37.8) (58.4)
Minority interest ....................... .5 (.1) .4 (.2)
-----------------------------------
Net income ......................... $ 66.0 $ 89.1 $ 70.8 $108.0
===================================
</TABLE>
(1) Consists primarily of losses incurred on common stock index futures.
(2) See Note 6 of the Notes to Consolidated Condensed Financial Statements.
Exclusive of securities transactions, revenues increased $11.5 and $31.9
million, or 46.2% and 59.7%, respectively, for the quarter and six months ended
June 30, 1996 due primarily to increased investment income reflecting increased
levels of invested assets, partially offset by the absence of intercompany
interest income of $8.8 and $17.3, and equity income from CBS of $7.2 and $9.0.
Net income increased by $14.2 and $8.5 million for the quarter and six months
ended June 30, 1996 due to increased investment income, partially offset by
increased interest expense and losses from CNA non-insurance operations.
Accounting Standards
- --------------------
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." This Statement
establishes accounting standards based on consistent application of a financial-
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognized the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. The statement also provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This Statement is effective for transfers and serving of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. This Statement will not have a
significant impact on the Company.
Page 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Note 7 of the Notes to Consolidated
Condensed Financial Statements in Part I.
2. Lorillard is involved in various lawsuits involving tobacco products
seeking damages for cancer and other health effects claimed to have resulted
from the use of cigarettes or from exposure to tobacco smoke. Information
involving such lawsuits is incorporated by reference to Note 7 of the Notes to
Consolidated Condensed Financial Statements in Part I.
In addition, on May 8, 1996, Lorillard received a grand jury subpoena duces
tecum from the United States Attorney's Office for the Eastern District of New
York. This subpoena relates to an investigation commenced in 1992 by that office
regarding possible fraud by Lorillard and other tobacco companies relating to
research undertaken or administered by the Council for Tobacco Research - USA,
Inc., as reported in Item 1 of the Company's annual report on Form 10-K for the
year ended December 31, 1995. It is impossible at this time to predict the
ultimate outcome of this investigation. An adverse outcome of this investigation
could result in criminal, administrative or other proceedings against Lorillard.
Item 4. Submissions of Matters to a Vote of Security Holders.
----------------------------------------------------
Set forth below is information relating to the 1996 Annual Meeting of
Shareholders of the Registrant:
The annual meeting was called to order at 11:00 A.M., May 14, 1996.
Represented at the meeting, in person or by proxy, were 107,693,408 shares,
approximately 91.4% of the issued and outstanding shares entitled to vote.
The following business was transacted:
Election of Directors
- --------------------------------------------------------------------------------
Over 98% of the votes cast for directors were voted for the election of the
following directors. The number of votes for and withheld with respect to each
director was as follows:
Votes For Votes Withheld
--------- --------------
Charles B. Benenson 106,077,848 1,615,560
John Brademas 106,087,679 1,605,729
Dennis H. Chookaszian 105,727,143 1,966,265
Bernard Myerson 105,688,733 2,004,675
Edward J. Noha 105,672,690 2,020,718
Gloria R. Scott 105,974,711 1,718,697
Andrew H. Tisch 105,656,555 2,036,853
James S. Tisch 105,699,744 1,993,664
Jonathan M. Tisch 105,683,594 2,009,814
Laurence A. Tisch 105,674,529 2,018,879
Preston R. Tisch 105,690,521 2,002,887
Page 34
Approval of Incentive Compensation Plan for Executive Officers
- --------------------------------------------------------------------------------
Approved-- 102,951,682 shares, approximately 96.2% of the shares voting,
voted to approve the Incentive Compensation Plan. 3,569,417 shares,
approximately 3.3% of the shares voting, voted against; and 455,922 shares,
approximately .5% of the shares voting, abstained. In addition, there were
716,387 shares as to which brokers indicated that they did not have authority to
vote ("broker non-votes").
Approval of Amendment to Certificate of Incorporation to Increase the Authorized
Common Stock to 400,000,000 Shares
- --------------------------------------------------------------------------------
Approved-- 93,436,894 shares, approximately 86.8% of the shares voting, voted
to approve the amendment to increase the authorized common stock; 13,925,149
shares, approximately 12.9% of the shares voting, voted against; and 331,365
shares, approximately .3% of the shares voting, abstained. There were no broker
non-votes.
Approval of Amendment to Certificate of Incorporation to Increase the Authorized
Preferred Stock to 100,000,000 Shares
- --------------------------------------------------------------------------------
Approved-- 62,750,030 shares, approximately 62.4% of the shares voting, voted
to approve the amendment to increase the authorized preferred stock; 37,472,736
shares, approximately 37.2% of the shares voting, voted against; and 382,220
shares, approximately .4% of the shares voting, abstained. There were 7,088,422
broker non-votes.
Ratification of the appointment of Independent Certified Public Accountants
- --------------------------------------------------------------------------------
Approved-- 105,760,954 shares, approximately 98.2% of the shares voting,
voted to ratify the appointment of Deloitte & Touche, LLP as independent
certified public accountants for the Company; 1,669,287 shares; approximately
1.6% of the shares voting, voted against, and 263,167 shares, approximately .2%
of the shares voting, abstained. There were no broker non-votes.
Shareholder proposal relating to Cumulative Voting
- --------------------------------------------------------------------------------
Rejected-- 72,185,827 shares, approximately 71.8% of the shares voting, voted
against this shareholder proposal; 27,456,710 shares, approximately 27.3% of the
shares voting, were cast for; and 962,448 shares, approximately .9% of the
shares voting, abstained. In addition, there were 7,088,423 broker non-votes.
Shareholder proposal relating to Director Stock Ownership
- --------------------------------------------------------------------------------
Rejected-- 93,887,949 shares, approximately 93.3% of the shares voting, voted
against this shareholder proposal; 3,292,394 shares, approximately 3.3% of the
shares voting, were cast for; and 3,424,642 shares, approximately 3.4% of the
shares voting, abstained. In addition, there were 7,088,423 broker non-votes.
Shareholder proposal relating to Smoking by Youth
- --------------------------------------------------------------------------------
Rejected-- 92,203,947 shares, approximately 91.7% of the shares voting, voted
against this shareholder proposal; 3,543,054 shares, approximately 3.5% of the
shares voting, were cast for; and 4,858,385 shares, approximately 4.8% of the
shares voting, abstained. In addition, there were 7,088,022 broker non-votes.
Page 35
Shareholder proposal relating to Nicotine in Tobacco Products
- --------------------------------------------------------------------------------
Rejected-- 93,033,492 shares, approximately 92.5% of the shares voting, voted
against this shareholder proposal; 2,756,743 shares, approximately 2.7% of the
shares voting, were cast for; and 4,814,750 shares, approximately 4.8% of the
shares voting, abstained. In addition, there were 7,088,423 broker non-votes.
Shareholder proposal relating to Use of Licensed Brands on Cigarettes and Toys
- --------------------------------------------------------------------------------
Rejected-- 92,738,229 shares, approximately 92.2% of the shares voting, voted
against this shareholder proposal; 3,596,984 shares, approximately 3.6% of the
shares voting, were cast for; and 4,269,773 shares, approximately 4.2% of the
shares voting, abstained. In addition, there were 7,088,422 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits--
(3) Restated Certificate of Incorporation, as amended May 16, 1996.
(27) Financial Data Schedule for the six months ended June 30, 1996.
(b) Current reports on Form 8-K--There were no reports on Form 8-K filed for
the six months ended June 30, 1996.
Page 36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOEWS CORPORATION
-----------------
(Registrant)
Dated: August 14, 1996 By /s/ Roy E. Posner
-------------------------
ROY E. POSNER
Senior Vice President and
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
Page 37
Exhibit 3
RESTATED CERTIFICATE OF INCORPORATION
OF
LOEWS CORPORATION
It is hereby certified that:
1. (a) The present name of the corporation (hereinafter called the
"Corporation") is Loews Corporation.
(b) The name under which the Corporation was originally
incorporated is Loew's Corporation; and the date of filing the original
certificate of incorporation of the Corporation with the Secretary of State of
the State of Delaware is November 12, 1969.
2. The provisions of the certificate of incorporation of the
Corporation as heretofore amended and/or supplemented, are hereby restated and
integrated into the single instrument which is hereinafter set forth, and which
is entitled Restated Certificate of Incorporation of Loews Corporation, without
further amendment and without any discrepancy between the provisions of the
Certificate of Incorporation as heretofore amended and supplemented and the
provisions of the said single instrument hereinafter set forth.
3. The Board of Directors of the Corporation has duly adopted this
Restated Certificate of Incorporation pursuant to the provisions of Section 245
of the General Corporation Law of the State of Delaware in the form hereinafter
set forth:
1
RESTATED CERTIFICATE OF INCORPORATION
OF
LOEWS CORPORATION
FIRST: Name. The name of the corporation (the "Corporation") is:
----
LOEWS CORPORATION
SECOND: Registered Office and Agent. The registered office of the
---------------------------
Corporation is 229 South State Street, City of Dover, County of Kent, State of
Delaware. The name of its registered agent at such address is UNITED STATES
CORPORATION COMPANY.
THIRD: The nature of the business or purposes of the Corporation
are as follows:
(1) to buy, manufacture, sell and otherwise deal in tobacco and
tobacco products in any and all forms.
(2) to carry on the business of theatre proprietors, managers and
directors, and in particular, to provide for the production,
presentation and performance of motion pictures, operas, stage
plays, musical comedies, sporting events, radio and television
programs of all types and description, and other forms of amusement
including amusement parks, carnivals and circuses, and in connection
therewith, to own, operate, control, buy, rent, sell, lease,
sublease, mortgage, or otherwise acquire or dispose of theatres and
other places of entertainment and any and all rights and privileges
therein, and real property for the purpose of erecting and operating
theatres and other
2
places of entertainment, and to own, control, buy, sell, rent,
lease, sublease, mortgage or otherwise acquire or dispose of all
forms of personal property necessary or incidental to the operation
and control of theatres and other places of entertainment.
(3) to purchase and otherwise acquire, own, build, lease (either
as lessor or lessee), erect, construct, alter, repair, improve,
furnish, equip, hold, occupy, maintain, manage, operate, sell, or
dispose of hotels, motels, apartment hotels, inns, taverns, lodging
houses, hostelries, boardinghouses, apartment houses, restaurants,
cafes, bars, cafeterias, garages, and the furniture, furnishings,
fixtures and equipment thereof; to engage in and carry on the
business of hotel keepers, innkeepers, apartment housekeepers,
hostelers, restauranteurs, cafe keepers, cafeteria keepers,
garagemen, and also the business of tobacconists, confectioners,
dealers in provisions, barbers, hairdressers, manicurists,
druggists, florists, stationers, news agents and news, magazine and
book dealers; to buy, sell, rent and let for hire automobiles and
other means of transportation; the buying and selling of wines,
liquors and all other beverages of alcoholic and nonalcoholic
contents; to provide and conduct apartments, accommodations, eating
places, newspaper rooms, reading and writing rooms, rest rooms,
dressing rooms, baths, swimming pools, telephone and other
conveniences for the use of the public, and to do every act and
thing necessary, convenient or desirable for the furnishing of
guests, lodgers, tenants, travelers, and all others who may be
received by the corporation, with food, drink, lodging,
entertainment and such other services as are commonly rendered as a
part of or in connection with, or as incidental to, any of the
businesses hereinbefore mentioned; to procure all necessary permits
or licenses from municipal or other authorities for the erection and
operation of any of the foregoing businesses and to maintain all
conveniences necessary thereto, including, but without limitation,
elevators, heating, lighting and air conditioning and other
refrigerating
3
apparatus; and to give or grant to others the right, privilege or
license to engage in any kind of business on premises owned, leased
or managed by it.
(4) to manufacture, process, purchase, sell and generally to
trade and deal in and with goods, wares and merchandise of every
kind, nature and description, and to engage and participate in any
mercantile, industrial or trading business of any kind or character
whatsoever.
(5) to purchase, acquire, own, hold, use, lease (either as lessor
or lessee), grant, sell, exchange, sub-divide, mortgage, convey in
trust, manage, improve, construct, operate and generally deal in any
and all real estate, improved and unimproved, stores, office
buildings, dwelling houses, apartment houses, hotels, theatres,
manufacturing plants and other buildings, and any and all other
property of every kind or description, real, personal and mixed, and
wheresoever situated, either in California, other states of the
United States, the District of Columbia, territories and colonies of
the United States, or foreign countries.
(6) to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of
the State of Delaware.
FOURTH: The total number of shares of all classes of stock which
the Corporation shall have authority to issue is 225,000,000 shares, consisting
of 200,000,000 shares of Common Stock of the par value of $1.00 per share and
25,000,000 shares of Preferred Stock of the par value of $.10 per share.
The Board of Directors is hereby authorized to issue the Preferred
Stock, from time to time, in one or
4
more series, on such terms and conditions as it may deem advisable and to fix by
resolution the designation of each series and the powers, preferences, and
relative, participating, optional or other special rights of the shares of each
series, and the qualifications, limitations or restrictions thereof, to the full
extent now or hereafter permitted by law. The authority of the Board of
Directors with respect to each such series shall include, but not be limited to,
determination of the following:
(a) the designation and number of shares comprising such series;
(b) the dividends, if any, which shall be payable on the shares
of such series and any preferences and other terms and conditions
applicable thereto;
(c) any rights and preferences of the holders of the shares of
such series upon the liquidation, dissolution, or winding up of the
affairs of, or upon any distribution of the assets of, the
Corporation;
(d) the full, limited or special voting rights, if any, of the
shares of such series, in addition to voting rights provided by law,
and the terms and conditions applicable thereto;
(e) any provision with respect to the conversion of the shares of
such series into, or the exchange of such shares for, shares of any
other class or classes, or of any other series of any class, of the
capital stock of the Corporation and/or any other property or cash,
and the terms and conditions applicable to any such conversion or
exchange;
5
(f) any provision with respect to the redemption, purchase, or
retirement of such shares and the terms and conditions applicable
thereto;
(g) any provision with respect to the issuance of additional
shares of such series or of any other class or series on a parity
with or superior to the shares of such series; and
(h) any other relative, participating, optional or special
powers, preferences, or rights of, and any other qualifications,
limitations, or restrictions with respect to, the shares of such
series as the Board of Directors may deem advisable.
FIFTH: Any director or any officer of the Corporation elected or
appointed by the stockholders of the Corporation or by the Board of Directors
may be removed at any time in such manner as shall be provided in the By-laws of
the Corporation.
SIXTH: In furtherance of and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized:
To make, alter or repeal the By-laws of the Corporation.
By resolution passed by a majority of the whole Board, to designate
one or more committees, each committee to consist of two or more
directors of the Corporation, which, to the extent provided in the
resolution or in the By-laws of the Corporation, shall have and may
exercise the powers of the Board of Directors in the management of
the business and affairs of the Corporation and may authorize the
seal of the Corporation to be affixed to all papers which may
require it. Such committee or committees shall have such name or
names as may be stated in the By-laws of the Corporation or as may
be determined from time to time by resolution adopted by the Board
of Directors.
6
SEVENTH: The principal office of the Corporation shall be located at
such place, whether within or without the State of Delaware, as may be provided
in the By-laws.
EIGHTH: Unless contrary to statute, the books of the Corporation may
be kept outside of the State of Delaware at such place or places as may from
time to time be designated by the Board of Directors or in the By-laws of the
Corporation.
NINTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
TENTH: No director shall be personally liable to the Corporation or
its stockholders for monetary damages for any breach of fiduciary duty by such
director as a director, except (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the Delaware General Corporation Law, or
(iv) for any transaction from which the director derived an improper personal
benefit.
Any repeal or modification of this Article Tenth shall not increase
the personal liability of any
7
director for any occurrence taking place prior to such repeal or modification,
or otherwise adversely affect any right or benefit of a director existing at the
time of such repeal or modification.
The provisions of this Article Tenth shall not be deemed to limit or
preclude indemnification of a director by the Corporation for any liability
which has not been limited by the provisions of this Article Tenth.
Signed and attested to on October 20, 1987.
/s/ Barry Hirsch
----------------------------------
Barry Hirsch
Sr. Vice President
Attest:
/s/ Gary W. Garson
- ----------------------------------
Gary W. Garson
Asst. Secretary
8
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
LOEWS CORPORATION
It is hereby certified that:
1. The name of the Corporation (hereinafter called the "Corporation")
is Loews Corporation.
2. The certificate of incorporation of the Corporation is hereby
amended by striking out the first sentence of Article FOURTH thereof and by
substituting in lieu of said sentence the following new sentence:
"FOURTH: The total number of shares of all classes of
stock which the Corporation shall have authority to
issue is 500,000,000 shares, consisting of 400,000,000
shares of Common Stock of the par value of $1.00 per
share and 100,000,000 shares of Preferred Stock of the
par value of $.10 per share."
3. The amendment of the Certificate of Incorporation herein certified
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Signed and attested to on May 16, 1996.
ATTEST:
/s/ Gary W. Garson /s/ Barry Hirsch
- --------------------- ----------------------
Gary W. Garson Barry Hirsch
Assistant Secretary Senior Vice President
Loews Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 341,200
<SECURITIES> 38,066,000
<RECEIVABLES> 14,114,100
<ALLOWANCES> 291,800
<INVENTORY> 244,100
<CURRENT-ASSETS> 0
<PP&E> 3,004,000
<DEPRECIATION> 978,400
<TOTAL-ASSETS> 66,126,800
<CURRENT-LIABILITIES> 0
<BONDS> 4,076,100
<COMMON> 117,800
0
0
<OTHER-SE> 7,874,800
<TOTAL-LIABILITY-AND-EQUITY> 66,126,800
<SALES> 1,109,200
<TOTAL-REVENUES> 10,089,100
<CGS> 481,900
<TOTAL-COSTS> 7,611,300
<OTHER-EXPENSES> 1,012,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160,600
<INCOME-PRETAX> 1,304,900
<INCOME-TAX> 445,100
<INCOME-CONTINUING> 747,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 747,500
<EPS-PRIMARY> 6.38
<EPS-DILUTED> 0
</TABLE>
