================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
------------ -------------
Commission File Number 1-6541
LOEWS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2646102
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
667 Madison Avenue, New York, N.Y. 10021-8087
(Address of principal executive offices) (Zip Code)
(212) 545-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
As at March 7, 1997, 115,000,000 shares of Common Stock of the Registrant were
outstanding and the aggregate market value of voting stock held by
non-affiliates was approximately $8,597,920,000.
Documents Incorporated by Reference:
Portions of the Loews Corporation Notice of Annual Meeting of Stockholders and
Proxy Statement dated March 27, 1997 are incorporated by reference into Part
III. (Registrant intends to file a definitive proxy statement with the
Commission prior to April 30, 1997.)
================================================================================
1
LOEWS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Item Page
No. PART I No.
- ---- ----
<S> <C> <C>
1 BUSINESS ............................................................ 3
CNA Financial Corporation ......................................... 3
Lorillard, Inc. ................................................... 13
Loews Hotels Holding Corporation .................................. 21
Diamond Offshore Drilling, Inc. ................................... 22
Bulova Corporation ................................................ 24
Other Interests ................................................... 24
2 PROPERTIES .......................................................... 25
3 LEGAL PROCEEDINGS ................................................... 25
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................. 26
EXECUTIVE OFFICERS OF THE REGISTRANT ................................ 26
PART II
5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS ............................................................ 27
6 SELECTED FINANCIAL DATA ............................................. 27
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................. 28
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......................... 44
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................... 89
PART III
Information called for by Part III has been omitted as Registrant
intends to file with the Securities and Exchange Commission not later
than 120 days after the close of its fiscal year a definitive Proxy
Statement pursuant to Regulation 14A.
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ..... 89
</TABLE>
2
PART I
Item 1. Business.
Loews Corporation is a holding company. Its subsidiaries are engaged in the
following lines of business: property, casualty and life insurance (CNA
Financial Corporation, an 84% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of hotels
(Loews Hotels Holding Corporation, a wholly owned subsidiary); the operation of
offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc., a 51% owned
subsidiary); and the distribution and sale of watches and clocks (Bulova
Corporation, a 97% owned subsidiary).
Unless the context otherwise requires, the terms "Company" and "Registrant" as
used herein mean Loews Corporation excluding its subsidiaries.
Information relating to the major business segments from which the Company's
consolidated revenues and income are derived is contained in Note 20 of the
Notes to Consolidated Financial Statements, included in Item 8.
CNA FINANCIAL CORPORATION
CNA Financial Corporation ("CNA") was incorporated in 1967 as the parent
company of Continental Casualty Company ("CCC"), incorporated in 1897, and
Continental Assurance Company ("CAC") incorporated in 1911. In 1975, CAC became
a wholly owned subsidiary of CCC. On May 10, 1995, CNA acquired all the
outstanding common stock of The Continental Corporation ("CIC") and it became a
wholly owned subsidiary of CNA. CIC, a New York corporation incorporated in
1968, is an insurance holding company. Its principal subsidiary, The Continental
Insurance Company, was organized in 1853.
CNA's property/casualty insurance operations are conducted by CCC and its
property/casualty insurance affiliates, and CIC and its property/casualty
insurance affiliates. Life insurance operations are conducted by CAC and its
life insurance affiliates. As a multiple-line insurer, CNA underwrites property,
casualty, life, and accident and health coverages as well as pension products
and annuities. CNA's principal market for insurance products is the United
States. CNA accounted for 83.08%, 78.75% and 81.27% of the Company's
consolidated total revenue for the years ended December 31, 1996, 1995 and 1994,
respectively.
The following provides information regarding CNA's property/casualty insurance
and life insurance operations.
PROPERTY/CASUALTY INSURANCE
CNA's property/casualty operations market commercial and personal lines of
property/casualty insurance through independent agents and brokers.
Commercial lines customers include large national corporations, small- and
medium-sized businesses, groups and associations, and professionals. Coverages
are written primarily through traditional insurance contracts under which risk
is transferred to the insurer. Many large commercial account policies are
written under retrospectively-rated contracts which are experience-rated.
Premiums for such contracts may be adjusted, subject to limitations set by
contract, based on loss experience of the insureds. Other experience-rated
policies include provisions for dividends based on loss experience. Experience-
rated contracts reduce but do not eliminate risk to the insurer.
Commercial business includes such lines as workers' compensation, general
liability and commercial automobile, professional and specialty, multiple peril,
and accident and health coverages as well as reinsurance. Professional and
specialty coverages include liability coverage for architects and engineers,
lawyers, accountants, medical and dental professionals; directors and officers
liability; and other specialized coverages. The major components of CNA's
commercial business are professional and specialty coverages, general liability
and commercial automobile, and workers' compensation, which accounted for 18%,
17% and 17%, respectively, of 1996 premiums earned.
3
The property/casualty group markets personal lines of insurance, primarily
automobile and homeowners coverages sold to individuals under monoline and
package policies.
CNA is required by the various states in which it does business to provide
coverage for risks that would not otherwise be considered under CNA's
underwriting standards. CNA's share of involuntary risks is mandatory and
generally a function of its share of the voluntary market by line of insurance
in each state. Premiums for involuntary risks result from mandatory
participation in residual markets. Property/casualty involuntary risks include
mandatory participation in residual markets, statutory assessments for
insolvencies of other insurers, and other charges.
CNA also provides loss control, policy administration and claim administration
services under service contracts for fees. Such services are provided primarily
in the workers' compensation market, where retention of more risk by the
employer through self-insurance or high-deductible programs has become
increasingly prevalent.
The following table sets forth supplemental data on a GAAP basis, except where
indicated, for the property/casualty business:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995(a) 1994
- --------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Commercial Premiums Earned:
Professional and specialty ......... $ 1,844.9 $ 1,557.7 $ 1,010.1
General liability and commercial
automobile ........................ 1,754.1 1,648.9 1,261.1
Workers' compensation .............. 1,542.5 1,475.8 1,426.3
Reinsurance and other .............. 1,188.9 973.9 773.5
Multiple peril ..................... 1,046.9 869.9 389.0
Accident and health ................ 919.0 699.1 557.1
- --------------------------------------------------------------------------------
$ 8,296.3 $ 7,225.3 $ 5,417.1
================================================================================
Personal Premiums Earned:
Personal lines packages ............ $ 1,063.3 $ 781.6 $ 562.6
Monoline automobile and property
coverages ......................... 366.5 325.4 314.2
Accident and health ................ 168.9 107.8 88.9
- --------------------------------------------------------------------------------
$ 1,598.7 $ 1,214.8 $ 965.7
================================================================================
Involuntary Risks Premiums Earned (b):
Workers' compensation .............. $ 135.6 $ 178.2 $ 350.0
Private passenger automobile ....... 57.9 79.7 46.4
Commercial automobile .............. 36.4 19.9 54.3
Property and multiple peril ........ 2.2 5.9 5.0
- --------------------------------------------------------------------------------
$ 232.1 $ 283.7 $ 455.7
================================================================================
Net Investment and Other Income:
Commercial ......................... $ 1,943.3 $ 1,713.1 $ 1,145.1
Personal ........................... 353.0 230.4 177.6
Involuntary risks .................. 93.4 104.3 88.1
- --------------------------------------------------------------------------------
$ 2,389.7 $ 2,047.8 $ 1,410.8
================================================================================
4
Year Ended December 31 1996 1995(a) 1994
- --------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Underwriting Loss:
Commercial ......................... $ (853.1) $ (920.8) $ (945.7)
Personal ........................... (183.8) (101.9) (185.2)
Involuntary risks .................. (106.3) (98.8) (70.3)
- --------------------------------------------------------------------------------
$(1,143.2) $(1,121.5) $(1,201.2)
================================================================================
Trade Ratios-(c):
Loss ratio ........................ 76.4% 77.9% 81.9%
Expense ratio ...................... 30.9% 29.4% 28.3%
Combined ratio (before policyholder
dividends) ........................ 107.3% 107.3% 110.2%
Policyholder dividend ratio ........ 1.6% 3.0% 4.8%
Trade Ratios-Statutory basis (c):
Loss ratio ......................... 76.8% 78.6% 82.2%
Expense ratio ...................... 31.6% 29.2% 27.8%
Combined ratio (before policyholder
dividends) ........................ 108.4% 107.8% 110.0%
Policyholder dividend ratio ........ 1.4% 2.1% 3.8%
Other Data-Statutory basis (d):
Capital and surplus ................ $6,348.8 $5,695.9 $3,367.3
Written to surplus ratio ........... 1.6 1.7 2.0
- ----------------
(a) Premiums earned, net investment income and underwriting loss includes the
results of CIC since May 10, 1995.
(b) Property/casualty involuntary risks include mandatory participation in
residual markets, statutory assessments for insolvencies of other insurers and
other involuntary charges.
(c) GAAP trade ratios for 1995 reflect the results of CCC and its
property/casualty insurance subsidiaries for the year, and include the results
of CIC and its property/casualty insurance subsidiaries since May 10, 1995.
Statutory trade ratios reflect the results of CCC, and its property/casualty
insurance subsidiaries and CIC and its property/casualty insurance subsidiaries
for the entire year of 1995. Prior year ratios have not been restated to include
CIC. Trade ratios are industry measures of property/casualty underwriting
results. The loss ratio is the percentage of incurred claim and claim adjustment
expenses to premiums earned. Under generally accepted accounting principles, the
expense ratio is the percentage of underwriting expenses, including the change
in deferred acquisition costs, to premiums earned. Under statutory accounting
principles, the expense ratio is the percentage of underwriting expenses (with
no deferral of acquisition costs) to premiums written. The combined ratio is the
sum of the loss and expense ratios. The policyholder dividend ratio is the ratio
of dividends incurred to premiums earned.
(d) Other data is determined on the statutory basis of accounting. In
addition, dividends of $545.0, $325.0 and $175.0 million were paid to CNA by CCC
in 1996, 1995 and 1994, respectively. Property/casualty insurance subsidiaries
have received, or will receive, reimbursement from CNA for general management
and administrative expenses, unallocated loss adjustment expenses and investment
expenses of $194.6, $197.0 and $169.6 million in 1996, 1995 and 1994,
respectively.
</TABLE>
5
The following table displays the distribution of gross written premium:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
New York ............................... 9.3% 10.3% 8.6%
California ............................. 8.5 9.7 11.4
Texas .................................. 6.0 6.5 6.5
Illinois ............................... 5.3 5.2 4.9
Pennsylvania ........................... 4.9 5.4 5.7
Florida ................................ 4.2 4.1 4.6
New Jersey ............................. 4.1 4.6 3.2
All other states, countries or political
subdivisions (a) ...................... 46.8 44.4 43.2
Reinsurance assumed:
Voluntary ............................ 9.1 7.8 5.9
Involuntary .......................... 1.8 2.0 6.0
- --------------------------------------------------------------------------------
100.0% 100.0% 100.0%
================================================================================
- ---------------
(a) No other state, country or political subdivision accounts for more than
3.0% of gross written premium.
</TABLE>
The loss reserve development table below illustrates the change over time of
reserves established for property/casualty claim and claim expenses at the end
of various calendar years. The first section shows the reserves as originally
reported at the end of the stated year. The second section, reading down, shows
the cumulative amounts paid as of the end of successive years with respect to
that reserve liability. The third section, reading down, shows reestimates of
the original recorded reserve as of the end of each successive year which is the
result of CNA's expanded awareness of additional facts and circumstances that
pertain to the unsettled claims. The last section compares the latest
reestimated reserve to the reserve originally established, and indicates whether
or not the original reserve was adequate or inadequate to cover the estimated
costs of unsettled claims.
The loss reserve development table is cumulative and, therefore, ending
balances should not be added since the amount at the end of each calendar year
includes activity for both the current and prior years.
6
<TABLE>
<CAPTION>
Schedule of Property/Casualty Loss Reserve Development
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
(a) (a) (a) (a) (a) (a) (a) (a) (b) (c)
- --------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves for
unpaid claim and
claim expenses ...... - - - - 16,530 17,712 20,034 20,812 21,639 31,044 29,830
Ceded recoverable ..... - - - - 3,440 3,297 2,867 2,491 2,705 6,089 6,095
- --------------------------------------------------------------------------------------------------------------
Net reserves for
unpaid claim and
claim expenses ....... 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735
Net Paid (Cumulative)
as of:
One year later ...... 1,335 1,763 2,040 2,670 3,285 3,411 3,706 3,629 3,656 6,510 -
Two years later ..... 2,383 2,961 3,622 4,724 5,623 6,024 6,354 6,143 7,087 - -
Three years later ... 3,197 4,031 4,977 6,294 7,490 7,946 8,121 8,764 - - -
Four years later .... 3,963 5,007 6,078 7,534 8,845 9,218 10,241 - - - -
Five years later .... 4,736 5,801 6,960 8,485 9,726 10,950 - - - - -
Six years later ..... 5,339 6,476 7,682 9,108 11,207 - - - - - -
Seven years later ... 5,880 7,061 8,142 10,393 - - - - - - -
Eight years later ... 6,382 7,426 9,303 - - - - - - - -
Nine years later .... 6,690 8,522 - - - - - - - - -
Ten years later ..... 7,738 - - - - - - - - - -
Net Reserves
Reestimated as of:
End of initial year . 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735
One year later ...... 6,642 8,086 9,737 11,336 12,984 16,032 17,757 18,250 18,922 24,864 -
Two years later ..... 6,763 8,345 9,781 11,371 14,693 16,810 17,728 18,125 18,500 - -
Three years later ... 6,989 8,424 9,796 13,098 15,737 16,944 17,823 17,868 - - -
Four years later .... 7,166 8,516 11,471 14,118 15,977 17,376 17,765 - - - -
Five years later .... 7,314 10,196 12,496 14,396 16,440 17,329 - - - - -
Six years later ..... 9,022 11,239 12,742 14,811 16,430 - - - - - -
Seven years later ... 10,070 11,480 13,167 14,810 - - - - - - -
Eight years later ... 10,317 11,898 13,174 - - - - - - - -
Nine years later .... 10,755 11,925 - - - - - - - - -
Ten years later ..... 10,823 - - - - - - - - - -
- --------------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (4,580) (3,880) (3,622) (3,543) (3,340) (2,914) (598) 453 434 91 -
==============================================================================================================
Reconciliation to
Gross Reestimated
Reserves:
Net reserves
reestimated .......... 6,243 8,045 9,552 11,267 16,430 17,329 17,765 17,868 18,500 24,864 -
Reestimated ceded
recoverable .......... - - - - 2,855 2,610 2,046 1,918 2,472 6,262 -
- --------------------------------------------------------------------------------------------------------------
Total gross
reestimated reserves - - - - 19,285 19,939 19,811 19,786 20,972 31,126 -
==============================================================================================================
Net (Deficiency)
Redundancy Related to:
Asbestos claims ..... (3,021) (2,973) (2,917) (2,818) (2,681) (2,634) (945) (345) (309) (51) -
Environmental claims (1,021) (1,007) (1,002) (975) (964) (918) (871) (425) (246) (65) -
- --------------------------------------------------------------------------------------------------------------
Total asbestos and
environmental ...... (4,042) (3,980) (3,919) (3,793) (3,645) (3,552) (1,816) (770) (555) (116) -
Other ............... (538) 100 297 250 305 638 1,218 1,223 989 207 -
- --------------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (4,580) (3,880) (3,622) (3,543) (3,340) (2,914) (598) 453 434 91 -
==============================================================================================================
7
- ----------------
(a) Reflects reserves of CNA, excluding CIC reserves which were acquired on May
10, 1995. Accordingly, the reserve development (net reserves recorded at the end
of the year, as initially estimated, less net reserves reestimated as of
subsequent years) relates only to the operations of CNA and does not include
CIC.
(b) Reserve development related to the 1994 reserves of CNA, excluding CIC, as
determined by the balances in this column, plus adverse reserve development of
$134 million related to the reserves of CIC, acquired on May 10, 1995, which are
not reflected in this column, were recorded by CNA in 1995 and subsequent
periods.
(c) Includes CIC gross reserves of $9,713 million and net reserves of $6,063
million acquired on May 10, 1995 and subsequent development thereon.
</TABLE>
See Notes 1 and 10 of the Notes to Consolidated Financial Statements, included
in Item 8, for information regarding property/casualty claim and claim expenses
including reserve development for asbestos and environmental claims.
LIFE INSURANCE
CNA's life insurance operations market individual and group insurance products
through licensed agents, most of whom are independent contractors, who sell life
and/or group insurance for CNA and for other companies on a commission basis.
The individual insurance products consist primarily of term, universal life,
participating policies and annuity products. Products developed in 1996 included
a portfolio of variable products and new universal life products which are
expected to be marketed in 1997. Group insurance products include life, accident
and health (consisting primarily of major medical and hospitalization) and
pension products, such as guaranteed investment contracts and annuities. In the
medical and hospitalization market, CNA underwrites the Federal Employees Health
Benefits Program ("FEHBP") which had revenues of $2.1, $1.9 and $1.8 billion in
1996, 1995 and 1994, respectively. CNA has undertaken a number of initiatives to
enhance service, manage health care utilization demand and quality, and
strengthen CNA's networks of physicians, hospitals and other providers.
CNA's products are designed and priced using assumptions CNA management
believes to be reasonably conservative for mortality, morbidity, persistency,
expense levels and investment results. Underwriting practices that CNA
management believes are prudent are followed in selecting the risks that will be
insured. Further, actual experience related to pricing assumptions is monitored
closely so that prospective adjustments to these assumptions may be implemented
as necessary. CNA mitigates the risk related to persistency by including
contractual surrender charge provisions in its ordinary life and annuity
policies in the first five to ten years, thus providing for the recovery of
acquisition expenses. The investment portfolios supporting interest sensitive
products, including universal life and individual annuities, are managed
separately to minimize surrender and interest rate risk.
Profitability in the health insurance business continues to be impacted by
intense competition and rising medical costs. CNA has aggressively pursued
expense reduction through increases in automation and other productivity
improvements. Further, increasing costs of health care have resulted in a
continued market shift away from traditional forms of health coverage toward
managed care products and experience-rated plans. CNA's ability to compete in
this market will be increasingly dependent on its ability to control costs
through managed care techniques, innovation, and quality customer-focused
service in order to properly position CNA in the evolving health care
environment.
8
The following table sets forth supplemental data for the life insurance
business:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C>
Individual Premiums:
Life and annuities .................. $ 629.1 $ 497.1 $ 369.4
Accident and health ................. 1.8 32.7 32.6
- --------------------------------------------------------------------------------
$ 630.9 $ 529.8 $ 402.0
================================================================================
Group Premiums:
Accident and health (a) ............. $2,548.0 $2,189.7 $2,111.2
Life and annuities .................. 194.9 312.9 165.0
- --------------------------------------------------------------------------------
$2,742.9 $2,502.6 $2,276.2
================================================================================
Net Investment Income and Other Income:
Individual .......................... $ 292.2 $ 247.3 $ 193.8
Group ............................... 214.2 198.1 166.4
- --------------------------------------------------------------------------------
$ 506.4 $ 445.4 $ 360.2
================================================================================
Income Excluding Realized Capital
Gains, Before Income Tax:
Individual .......................... $ 100.9 $ 65.4 $ 47.3
Group ............................... 69.8 94.9 87.1
- --------------------------------------------------------------------------------
$ 170.7 $ 160.3 $ 134.4
================================================================================
Gross Life Insurance in Force:
Individual (b) ...................... $172,213 $113,901 $ 80,560
Group ............................... 64,796 52,146 46,873
- --------------------------------------------------------------------------------
$237,009 $166,047 $127,433
================================================================================
Other Data-Statutory Basis (c):
Capital and surplus ................. $1,163.4 $1,127.6 $1,054.6
Capital and surplus-percent of total
liabilities ........................ 25.5% 28.2% 29.4%
Participating policyholders'-percent
of gross life insurance in force ... .5% .6% .9%
- --------------
(a) Group accident and health premiums include contracts involving U.S.
government employees and their dependents amounting to approximately $2.1, $1.9
and $1.8 billion in 1996, 1995 and 1994, respectively.
(b) Lapse ratios, for individual life insurance, as measured by surrenders and
withdrawals as a percentage of average ordinary life insurance in force were
7.2%, 9.4% and 9.7% in 1996, 1995 and 1994, respectively.
(c) Other Data is determined on the basis of statutory accounting practices.
Life insurance subsidiaries have received reimbursement from CNA for general
management and administrative expenses and investment expenses in the amounts of
$28.5, $21.3 and $24.7 million in 1996, 1995 and 1994, respectively. Statutory
capital and surplus as a percent of total liabilities is determined after
excluding Separate Account liabilities and reclassifying the statutorily
required Asset Valuation and Interest Maintenance Reserves as surplus.
</TABLE>
9
Guaranteed Investment Contracts
CAC writes the majority of its group pension products as guaranteed investment
contracts in a fixed Separate Account, which is permitted by Illinois insurance
statutes. CAC guarantees principal and a specified return to guaranteed
investment contract holders. This guarantee affords the contract holders
additional security, in the form of CAC's general account surplus, which
supports the principal and interest payments.
CNA manages the liquidity and interest rate risks on the guaranteed investment
contract portfolio by matching the approximate duration of fixed maturity
securities included in the investment portfolio supporting the guaranteed
investment contracts with the corresponding payout pattern of the contracts, and
assessing market value surrender charges on the majority of the contracts.
The table below shows a comparison of the duration of assets and contracts,
weighted average investment yield, weighted average interest crediting rates and
withdrawal characteristics of the guaranteed investment contract portfolio.
<TABLE>
<CAPTION>
December 31 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Duration in years:
Assets ............................. 3.12 3.12 3.23
Contracts .......................... 3.16 2.98 2.99
- --------------------------------------------------------------------------------
Difference ...................... (.04) .14 .24
================================================================================
Weighted average investment yield .... 7.44% 7.58% 7.67%
================================================================================
Weighted average interest crediting
rates ............................... 7.32% 7.45% 7.53%
================================================================================
Withdrawal Characteristics:
With market value adjustment ....... 95% 92% 79%
Non-withdrawable ................... 5 8 15
Without market value adjustment .... 6
- --------------------------------------------------------------------------------
Total ........................... 100% 100% 100%
================================================================================
</TABLE>
As shown above, the weighted average investment yields at December 31, 1996,
1995 and 1994 were more than the weighted average interest crediting rate.
INVESTMENTS
See Note 2 of the Notes to Consolidated Financial Statements, included in Item
8, for information regarding the investment portfolio.
OTHER
Competition: All aspects of the insurance business are highly competitive.
CNA's insurance operations compete with a large number of stock and mutual
insurance companies and other entities for both producers and customers and must
continuously allocate resources to refine and improve insurance products and
services. There are approximately 3,300 companies that sell property/casualty
insurance in the United States, approximately 900 of which operate in all or
most states. CNA's consolidated property/casualty subsidiaries (including CIC
for the full year of 1995) would have been ranked as the third largest
property/casualty insurance organization in 1995 based on statutory net written
premium. There are approximately 1,770 companies selling life insurance
(including accident and health insurance and pension products and annuities) in
the United States. CAC is ranked as the twenty-second largest life insurance
organization based on 1995 consolidated statutory premium volume.
10
Dividends by Insurance Subsidiaries: The payment of dividends to CNA by its
insurance affiliates without prior approval of the affiliate's domiciliary state
insurance commissioners is limited to amounts determined by formula in
accordance with the accounting practices prescribed or permitted by the states'
insurance departments. This formula varies by state. The formula for the
majority of states is the greater of 10% of prior year statutory surplus or
prior year statutory net income, less the aggregate of all dividends paid during
the twelve months prior to the date of payment. Some states, however, have an
additional stipulation that dividends cannot exceed prior year surplus. Based
upon the various state formulas, approximately $941.0 million in dividends can
be paid to CNA by its insurance affiliates in 1997 without prior approval. All
dividends must be reported to the domiciliary insurance department prior to
declaration and payment.
Regulation: The insurance industry is subject to comprehensive and detailed
regulation and supervision throughout the United States. Each state has
established supervisory agencies with broad administrative power relative to
licensing insurers and agents, approving policy forms, establishing reserve
requirements, fixing minimum interest rates for accumulation of surrender values
and maximum interest rates of policy loans, prescribing the form and content of
statutory financial reports, regulating solvency and the type and amount of
investments permitted. Regulatory powers also extend to premium rate regulations
which require that rates not be excessive, inadequate or unfairly
discriminatory. In addition to regulation of dividends by insurance subsidiaries
discussed above, intercompany transfers of assets may be subject to prior notice
or approval, depending on the size of such transfers and payments in relation to
the financial position of the insurance affiliates making the transfer.
Insurers are also required by the states to provide coverage to insureds who
would not otherwise be considered eligible by the insurers. Each state dictates
the types of insurance and the level of coverage which must be provided to such
involuntary risks. CNA's insurance subsidiaries' share of these involuntary
risks is mandatory and generally a function of its share of the voluntary market
by line of insurance in each state.
After failing to enact the massive health reform introduced in 1994, Congress
passed a health insurance reform bill in August of 1996 and the President signed
it into law (P.L. 104-191) on August 21, 1996. The new law does little for
Americans without health insurance but it will protect those who have health
insurance from losing it. The 105th Congress is expected to consider additional
incremental health care reform as it attempts to provide greater access and
affordability to Americans. Among the bills that have been introduced this year
are measures that would allow small businesses to band together to form
association health plans to buy insurance; bar the use of clauses restricting
what doctors can tell patients about treatment options; restructure the Medicare
program; subsidize health insurance for uninsured children; and limit or
prohibit underwriting on the basis of genetic information. CNA cannot predict if
any of these proposals will be enacted or the extent to which they may affect
the insurance industry.
Last year, a moderate product liability bill was vetoed and Congress was not
able to override the veto. This year, a similar product liability reform bill
was introduced in the Senate. The bill contains many of the provisions of the
vetoed bill and thus, CNA cannot predict if any reform will be adopted.
Although federal standards would create more uniform laws, tort reform
supporters still look primarily to the states for passage of reform measures.
Over the last decade, many states have passed some type of reform, but more
recently, state courts have modified or overturned approximately 38% of these
reforms. Additionally, new causes of action and theories of damages are more
frequently proposed in state courts or legislatures. Continued unpredictability
in the law means that insurance underwriting and rating is difficult in
commercial lines, professional liability, and some specialty coverages.
Environmental clean-up remains the subject of both federal and state
regulation. Last year Congress and the Clinton Administration failed to reach an
agreement on efforts to overhaul the federal Superfund hazardous waste program.
The legislative stalemate was the result of a failure by Superfund stakeholders
and Congress to reach a compromise on clean-up standards, the repeal of
retroactive liability and how to finance future clean-up costs. In the new
Congress, Superfund reform has been listed as one of the legislative priorities.
At this time CNA cannot predict if any reform will be enacted. 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
concerning clean-up of hazardous waste. Judicial interpretations in many cases
have expanded the scope of coverage and liability beyond the original intent of
the policies. See Note 10 of the Notes to Consolidated Financial Statements,
included in Item 8, for further discussion.
11
In recent years, increased scrutiny of state regulated insurer solvency
requirements by certain members of the U.S. Congress resulted in the National
Association of Insurance Commissioners developing industry minimum Risk-Based
Capital ("RBC") requirements, establishing a formal state accreditation process
designed to more closely regulate for solvency, minimize the diversity of
approved statutory accounting and actuarial practices, and increasing the annual
statutory statement disclosure requirements.
The RBC formulas are designed to identify an insurer's minimum capital
requirements based upon the inherent risks (e.g., asset default, credit and
underwriting) of its operations. In addition to the minimum capital
requirements, the RBC formula and related regulations identify various levels of
capital adequacy and corresponding actions that the state insurance departments
should initiate. The level of capital adequacy below which insurance departments
would take action is defined as the Company Action Level. As of December 31,
1996, all of CNA's property/casualty and life insurance affiliates have adjusted
capital amounts in excess of Company Action Levels.
Reinsurance: See Notes 1 and 18 of the Notes to Consolidated Financial
Statements, included in Item 8, for information related to CNA's reinsurance
business.
Properties: CNA leases office space in various cities throughout the United
States and in other countries. The following table sets forth certain
information with respect to the principal office buildings owned or leased by
CNA:
<TABLE>
<CAPTION>
Size
Location (square feet) Principal Usage
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Owned:
CNA Plaza 1,144,378 Principal Executive Offices of CNA
333 S. Wabash
Chicago, Illinois
180 Maiden Lane 507,547 Property/Casualty Insurance Offices
New York, New York
55 E. Jackson Blvd. 308,750 Principal Executive Offices of CNA
Chicago, Illinois
401 Penn Street 251,691 Property/Casualty Insurance Offices
Reading, Pennsylvania
100 CNA Drive 251,363 Life Insurance Offices
Nashville, Tennessee
1100 Ward Avenue 93,771 First Insurance Company of Hawaii Ltd.
Honolulu, Hawaii Headquarters
Leased:
1 Continental Drive 490,993 Property/Casualty Insurance Offices
Cranbury, New Jersey
7361 Calhoun Place 224,725 Life Insurance Offices
Rockville, Maryland
1111 E. Broad St. 215,470 Property/Casualty Insurance Offices
Columbus, Ohio
200 S. Wacker Drive 214,997 Property/Casualty Insurance Offices
Chicago, Illinois
12
Size
Location (square feet) Principal Usage
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
333 Glen Street 157,825 Property/Casualty Insurance Offices
Glen Falls, New York Residual Market Center
111 Congressional Blvd. 118,215 Personal Lines
Indianapolis, Indiana
1431 Opus Place 106,151 Property/Casualty, Surety Insurance
Downers Grove, Illinois Offices
2401 Pleasant Valley 102,376 Commercial Operations
York, Pennsylvania
</TABLE>
LORILLARD, INC.
The Company's wholly owned subsidiary, Lorillard, Inc. ("Lorillard"), is
engaged, through its subsidiaries, in the production and sale of cigarettes. The
principal cigarette brand names of Lorillard are Newport, Kent and True.
Lorillard's largest selling brands are the Newport and Kent brands, which
accounted for approximately 73% and 10%, respectively, of Lorillard's sales in
1996.
Substantially all of Lorillard's sales are in the United States. Lorillard's
major trademarks outside of the United States were sold in 1977. Lorillard
accounted for 10.95%, 11.00% and 14.29% of the Company's consolidated total
revenue for the years ended December 31, 1996, 1995 and 1994, respectively.
Smoking and Health and Related Matters
For a number of years reports of the asserted harmful health effects of
cigarette smoking have engendered significant adverse publicity for the
cigarette industry, have caused a decline in the social acceptability of
cigarette smoking and have resulted in the implementation of numerous
restrictions on the marketing, advertising and use of cigarettes. Along with
significant increases in federal and state excise taxes on cigarettes, these
actions have, and are likely to continue to have, an adverse effect on cigarette
sales.
Litigation: A large number of lawsuits, including lawsuits brought by
individual plaintiffs ("Conventional Smoking and Health Cases"), purported class
actions ("Class Actions") and lawsuits brought on behalf of states and state
agencies ("Reimbursement Cases") have been commenced against Lorillard and other
tobacco manufacturers seeking substantial compensatory and punitive damages for
adverse health effects claimed to have resulted from cigarette smoking or
exposure to tobacco smoke. For information with respect to such litigation
pending as of February 1997, see Note 19 of the Notes to Consolidated Financial
Statements included in Item 8 of this Report and incorporated herein by
reference.
Set forth below is information regarding additional developments respecting
litigation through March 21, 1997:
Class Actions: Lacey v. Lorillard Tobacco Company, et al. Plaintiffs did not
notice an appeal within the requisite time period, and therefore, the final
judgment in favor of the defendants is no longer subject to appeal.
The following four additional Class Actions have been filed:
Baker v. American Tobacco Company, et al., (Circuit Court, Wayne County,
Michigan, filed February 4, 1997). Plaintiff seeks certification of this case as
a class action on behalf of individuals who have quit smoking and who would
benefit from medical monitoring. Lorillard is a defendant in the case. Plaintiff
seeks the creation of a medical monitoring fund to monitor the health of the
purported class members.
Ingle v. Philip Morris Incorporated, et al. (Circuit Court, McDowell County,
West Virginia, filed February 4, 1997). Plaintiff seeks certification of the
case as a class action on behalf of residents of West Virginia who have
13
received personal injuries as a result of smoking cigarettes. Lorillard is a
defendant in this case. Plaintiff seeks unspecified amounts in actual damages
and punitive damages and the creation of a medical monitoring fund.
Walls v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Oklahoma, filed February 6, 1997; removed from District Court, Creek
County, Oklahoma). Plaintiffs seek certification of the case as a class action
on behalf of residents of Oklahoma who have purchased cigarettes manufactured by
the defendants. The Company and Lorillard are defendants in the case. Plaintiffs
seek unspecified amounts in actual damages and punitive damages, disgorgement of
profits, and the creation of a medical monitoring fund. To date, none of the
defendants have received service of process.
Selcer v. R.J. Reynolds Tobacco Company, et al. (District Court, Clark County,
Nevada, filed on or about March 3, 1997). Plaintiffs seek certification of this
case as a class action on behalf of Nevada residents who have become addicted to
cigarette smoking. Lorillard is a defendant in this case. Plaintiffs seek
unspecified amounts in actual damages and punitive damages and disgorgement of
profits. To date, none of the defendants have received service of process.
Reimbursement Cases: McGraw v. The American Tobacco Company, et al. The court
has granted defendants' motion to dismiss eleven of the fourteen counts of the
complaint and has held that the plaintiffs in the action, the West Virginia
Public Employees Insurance Agency and West Virginia Department of Health and
Human Services, lack standing to sue for personal injuries. The court has heard
argument on defendants' motion to dismiss two of the three remaining counts of
the complaint and has taken the motion under advisement.
State of Florida, et al. v. The American Tobacco Company, et al. The United
States Supreme Court has denied the petition for writ of certiorari in the
declaratory judgment action filed by certain companies and trade associations.
Moore v. The American Tobacco Company et al. The Mississippi Supreme Court has
dismissed the petitions filed by the defendants in the case and separately by
the Governor of Mississippi.
City and County of San Francisco, et al. v. Philip Morris Incorporated, et al.
The court has granted, with leave to amend, defendants' motion to dismiss the
complaint.
The following additional Reimbursement Case has been filed:
State of Indiana v. Philip Morris Incorporated, et al. (Superior Court, Marion
County, Indiana, filed February 19, 1997), filed by the State of Indiana.
Lorillard is a defendant in the case.
In addition, there have been the following developments in the suits commenced
by Lorillard and other cigarette manufacturers seeking declaratory judgment or
injunctive relief in relation to the Reimbursement Cases:
Philip Morris Incorporated, et al. v. Graham, et al. The court has granted
defendants' motion to dismiss three of the five counts of the complaint and
plaintiffs have voluntarily dismissed the remaining counts. The court has
entered judgment in favor of the defendants. Plaintiffs do not intend to notice
an appeal from the judgment.
Philip Morris Incorporated, et al. v. Verniero, et al. The court has
consolidated this action with the case of State of New Jersey v. R.J. Reynolds
Tobacco Company, et al.
Reported Liggett Settlement: On March 20, 1997, Liggett Group, Inc. and its
parent company, Brooke Group, Ltd., Inc. ("Liggett"), and the Attorneys General
for twenty-two states, announced that they have reached agreement (the
"Settlement Agreement") to settle the reimbursement suits pending in those
states. The proposed settlements reportedly will require Liggett: to pay 25% of
its pre-tax profits, plus as much as $25.0 million, to the twenty-two states
annually for the next twenty-five years; to acknowledge that cigarette smoking
is addictive (Liggett will supplement the warning notices it places on its
cigarette packages to reflect that acknowledgment); to acknowledge that
cigarette smoking causes disease; to acknowledge that cigarette companies have
targeted marketing programs towards minors; and to cooperate in suits against
the other cigarette manufacturers by releasing Liggett documents to the
Attorneys General and to allow its employees to testify in these matters. The
Settlement Agreement also purports to be on behalf of "all persons who, prior to
or during the term of [the
14
Settlement Agreement], have smoked cigarettes or have used other tobacco
products and have suffered or claim to have suffered injury as a consequence
thereof."
On March 20, 1997, Lorillard and three other cigarette manufacturers filed
suit in the Superior Court of Forsyth County, North Carolina against Liggett.
The court entered a temporary restraining order on March 20, 1997 that prohibits
Liggett and certain persons related to it or acting in concert with it from
misusing or disclosing any privileged or confidential information relating to
plaintiffs, or involving matters in which plaintiffs and Liggett share a common
interest and resulting from communications between counsel for plaintiffs and
Liggett. The court further directed Liggett to appear before the court to
identify for an in camera inspection all documents Liggett has disclosed; to
show cause why Liggett and certain related persons should not be enjoined from
disclosing the privileged or confidential information pending trial in this
action; and to disclose to the court under seal the identity of the individuals
to whom Liggett has disclosed the confidential and privileged information to
date.
On March 21, 1997, the court in the case of Butler v. Philip Morris, Inc., et
al., ordered Liggett, among other things, to submit documents in its possession
that are subject to claims of a joint defense or common interest privilege or
other protection from discovery, for an in camera review and determination by
the court as to the validity of such claims. The court also ordered Liggett to
serve all counsel a copy of the descriptive logs of the submitted documents.
Butler is a Conventional Smoking and Health Case pending in a state court in
Mississippi alleging injury to an individual from exposure to environmental
tobacco smoke. The Company and Lorillard are defendants in the case. Trial in
this case is scheduled to begin on August 18, 1997.
On March 20, 1997, the case of Fletcher, et al. v. Liggett was filed in the
Circuit Court of Mobile County, Alabama. The plaintiffs seek certification of
the case as a class action on behalf of all residents of the United States. The
complaint seeks certification of two subclasses; a personal injury subclass and
a recoupment subclass. The personal injury subclass purports to be comprised of
individual smokers; the estates, representatives, spouses or heirs of the
individual smokers; and individuals who allege injury from exposure to
environmental tobacco smoke. The recoupment subclass purports to be comprised of
individuals who have incurred economic loss as a result of payments for the
treatments of diseases or medical conditions allegedly caused by cigarette
smoking or exposure to environmental tobacco smoke. Neither the Company nor
Lorillard is a defendant in Fletcher. The claims in Fletcher purportedly are
covered by the Settlement Agreement. The court has conditionally certified the
case as a class action and has provisionally accepted the Settlement Agreement.
The court has scheduled a full hearing for July 11, 1997 to determine whether
the Settlement Agreement is fair to the plaintiffs in this action.
Lorillard continues to believe that there are a number of valid defenses to
smoking and health litigation pending against it, and Lorillard will continue to
vigorously defend against all such claims. Recent press reports have discussed
proposals to establish a comprehensive legislative solution to smoking and
health claims against the tobacco industry. The Company believes that any such
legislation would involve significant, and perhaps insurmountable, difficulties
in reconciling the views of many competing interests. However, the Company will
explore and is prepared to discuss all reasonable measures to resolve these
matters. The Company would not contemplate making further comment as to the
existence or progress of any such discussions.
Other Legal Proceedings: In addition to the litigation referred to above,
Lorillard has been notified of several governmental investigations pending
against Lorillard and other tobacco manufacturers, which are described below.
Department of Justice Investigation - Early in 1994, the Energy and Commerce
Subcommittee on Health and the Environment of the U.S. House of Representatives
(the "Subcommittee") launched an oversight investigation into tobacco products,
including possible regulation of nicotine-containing cigarettes as drugs. During
the course of such investigation, the Subcommittee held hearings at which
executives of each of the major tobacco manufacturers testified. Following the
November 1994 elections, the incoming Chairman of the Energy and Commerce
Committee indicated that this investigation by the Subcommittee would not
continue, and on December 20, 1994, the outgoing majority staff of the
Subcommittee issued two final reports. One of these reports questioned the
scientific practices of what it characterized as the tobacco industry's "long-
running campaign" related to ETS, but reached no final conclusions. The second
report asserted that documents obtained from American Tobacco Company, a
competitor of Lorillard's, "reflect an intense research and commercial interest
in nicotine."
15
The U.S. Department of Justice is investigating allegations of perjury in
connection with the testimony provided by tobacco industry executives, including
Lorillard executives, to the Subcommittee in April 1994. Lorillard has not
received any request for documents or testimony. It is impossible at this time
to predict the outcome of this investigation.
In 1996 Lorillard responded to a grand jury subpoena for documents in
connection with a grand jury investigation commenced in 1992 by the United
States Attorney's Office for the Eastern District of New York regarding possible
fraud by Lorillard and other tobacco companies relating to smoking and health
research undertaken or administered by the Council for Tobacco Research - USA,
Inc. There have been no requests for any testimony by any Lorillard personnel.
At the present time, Lorillard is unable to predict whether the United States
Attorney's Office will ultimately determine to bring any proceeding against
Lorillard. An adverse outcome of this investigation could result in criminal,
administrative or other proceedings against Lorillard.
In March 1996, the Company and Lorillard each received a grand jury subpoena
duces tecum from the United States Attorney's Office for the Southern District
of New York seeking documents, advertisements or related materials distributed
by the Company and Lorillard to members of the general public relating to, among
other things, the health effects of cigarettes, nicotine or tobacco products,
the addictiveness of such products, and Congressional hearings relating to
cigarettes or the tobacco industry. The Company and Lorillard responded to the
subpoena. The Company and Lorillard were informed in the latter part of 1996
that responsibility for this investigation has been transferred from the United
States Attorney's Office for the Southern District of New York to the United
States Department of Justice in Washington, D.C. It is impossible at this time
to predict the ultimate outcome of this investigation.
Legislation and Regulation: Federal Legislation - The Federal Comprehensive
Smoking Education Act, which became effective in 1985, requires the use on
cigarette packaging and advertising of one of the following four warning
statements, on a rotating basis: (1) "SURGEON GENERAL'S WARNING: Smoking Causes
Lung Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy." (2)
"SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks
to Your Health." (3) "SURGEON GENERAL'S WARNING: Smoking By Pregnant Women May
Result in Fetal Injury, Premature Birth, and Low Birth Weight." (4) "SURGEON
GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide." Four shortened
versions of these statements are required, on a rotating basis, for use on
billboards. This law also requires that each person who manufactures, packages
or imports cigarettes shall annually provide to the Secretary of Health and
Human Services a list of the ingredients added to tobacco in the manufacture of
cigarettes. Such list of ingredients may be submitted in a manner which does not
identify the company which uses the ingredients or the brand of cigarettes which
contain the ingredients.
Prior to the effective date of the Comprehensive Smoking Education Act,
federal law had, since 1965, required that cigarette packaging bear a warning
statement which from 1970 to 1985 was as follows: "Warning: The Surgeon General
Has Determined That Cigarette Smoking Is Dangerous to Your Health." In addition,
in 1972 Lorillard and other cigarette manufacturers had agreed, pursuant to
consent orders entered into with the Federal Trade Commission ("FTC"), to
include this health warning statement in print advertising, on billboards and on
certain categories of point-of-sale display materials relating to cigarettes. In
addition, advertising of cigarettes has been prohibited on radio and television
since 1971.
From time to time, bills have been introduced in Congress, among other things,
to end or limit the price supports for leaf tobacco; to prohibit all tobacco
advertising and promotion; to require new health warnings on cigarette packages
and advertising; to subject cigarettes generally to regulation under the
Consumer Products Safety Act or the Food, Drug and Cosmetics Act; to authorize
the establishment of various anti-smoking education programs; to provide that
current federal law should not be construed to relieve any person of liability
under common or state law; to permit state and local governments to restrict the
sale and distribution of cigarettes and the placement of billboard and transit
advertising of tobacco products; to provide that cigarette advertising not be
deductible as a business expense; to prohibit the mailing of unsolicited samples
of cigarettes and otherwise to restrict the sale or distribution of cigarettes;
to impose an additional excise tax on cigarettes; to require that cigarettes be
manufactured in a manner that will cause them, under certain circumstances, to
be self-extinguishing; and to subject cigarettes to regulation in various ways
by the U.S. Department of Health and Human Services, including regulation by the
Food and Drug Administration.
16
In 1995, Congress passed legislation prohibiting the sale of cigarettes by
vending machines on certain federal property, and the General Services
Administration has published implementing regulations. In January 1996, the
Substance Abuse and Mental Health Services Administration("SAMHSA") issued final
regulations implementing a 1992 law (Section 1926 of the Public Health Service
Act), which requires the states to enforce their minimum sales-age laws as a
condition of receiving federal substance abuse block grants.
Food and Drug Administration Regulation of Tobacco Products - On August 28,
1996, the Food and Drug Administration ("FDA") published regulations (the "FDA
Regulations") in final form severely restricting cigarette advertising and
promotion and limiting the manner in which tobacco products can be sold. In
enacting the FDA Regulations, the FDA determined that nicotine is a drug and
that cigarettes are a nicotine delivery system and, accordingly, subject to FDA
regulatory authority as medical devices. The FDA premised its regulations on the
need to reduce smoking by underage youth and young adults. The FDA Regulations
become effective in stages, as follows:
(i) Regulations regarding minimum sales age, effective February 28, 1997.
These regulations make unlawful the sale of cigarettes to anyone under age 18.
These regulations also require proof of age to be demanded from any person under
age 27 who attempts to purchase cigarettes.
(ii) Regulations regarding advertising and billboards, vending machines, self-
service displays, sampling premiums, and package labels, effective August 28,
1997. These regulations limit all cigarette advertising to black and white, text
only format in most publications and outdoor advertising such as billboards. The
regulations also prohibit billboards advertising cigarettes within 1,000 feet of
a school or playground, require that the established name for the product
("Cigarettes") and an intended use statement ("Nicotine - Delivery Device For
Persons 18 or Older") be included on all cigarette packages and advertising, ban
vending machine sales, product sampling, and the use of cigarette brand names,
logos and trademarks on premium items, and prohibit the furnishing of any
premium item in consideration for the purchase of cigarettes or the redemption
of proofs-of-purchase coupons.
(iii) Regulations prohibiting use of cigarette brand names to sponsor sporting
and cultural events and requiring cigarette manufacturers to comply with certain
stringent FDA regulations (known as "good manufacturing practices") governing
the manufacture and distribution of medical devices, effective August 28, 1998.
The FDA has announced that it will "contract" with states to jointly enforce
the FDA Regulations. State regulations narrower in scope and not inconsistent
with the FDA Regulations may be exempt from the pre-emptive effect of the
federal rules and be enforced concurrently.
Lorillard and other cigarette manufacturers have filed a lawsuit in the United
States District Court for the Middle District of North Carolina challenging the
FDA's assertion of jurisdiction over cigarettes and seeking both preliminary and
permanent injunctive relief (Liggett Group has agreed to withdraw from this
lawsuit). The complaint in the case, Coyne Beahm, Inc., et al. v. United States
Food & Drug Administration, et al., asserts that the FDA lacks authority to
regulate cigarettes and that the proposed rules violate the Federal Food, Drug
and Cosmetic Act, the Federal Cigarette Labeling and Advertising Act and the
United States Constitution. Lawsuits challenging the FDA's rule making also have
been filed in the same court by several smokeless tobacco manufacturers, several
national advertising trade associations and the National Association of
Convenience Stores.
The plaintiffs have moved for summary judgment on jurisdictional, statutory
and First Amendment grounds. Oral argument on the motions was heard on February
10, 1997, and a decision is pending.
It is uncertain whether Congress will pass legislation that would moot the FDA
Regulations and whether the manufacturers will succeed in securing judicial
relief. Accordingly, any impact on Lorillard from the FDA Regulations cannot be
predicted at this time.
Environmental Tobacco Smoke - Studies with respect to the alleged health risk
to nonsmokers of environmental tobacco smoke ("ETS") have received significant
publicity. In 1986, the Surgeon General of the United States and the National
Academy of Sciences reported that ETS puts nonsmokers at an increased risk of
lung cancer and respiratory illness. In January 1993, the United States
Environmental Protection Agency released a report (the "EPA Risk Assessment")
concluding that ETS is a human lung carcinogen in adults, causes increased
respiratory tract disease, middle ear disorders and increases the severity and
frequency of asthma in children.
17
In recent years, many federal, state, local and municipal governments and
agencies, as well as private businesses, have adopted legislation or regulations
which prohibit or restrict, or are intended to discourage, smoking, including
legislation or regulations prohibiting or restricting smoking in various places
such as public buildings and facilities, stores and restaurants, on domestic
airline flights and in the workplace, and the sale of cigarettes in vending
machines. This trend has increased significantly since the release of the EPA
Risk Assessment. Additional laws, regulations and policies intended to prohibit,
restrict or discourage smoking are being proposed or considered by various
federal, state and local governments, agencies and private businesses with
increasing frequency.
In 1994, the Occupational Safety and Health Administration published a
proposed rule on air quality in indoor workplaces. The proposed rule would
require employers in the United States to prohibit smoking indoors or to
restrict smoking to a separate room with outside exhaust and negative air
pressure. A period of public comment on the proposed rules has ended. Hearings
on the proposed rules were conducted in late 1994 and early 1995. It is
impossible at this time to predict whether or in what form the proposed rules
will be adopted.
Fire Safe Cigarettes - A 1984 federal law established a Technical Study Group
to conduct a study and report to the Congress regarding the technical and
commercial feasibility of developing cigarettes that will have a minimum
propensity to ignite upholstered furniture or mattresses. The Technical Study
Group concluded in 1987 that it was technically feasible and may be commercially
feasible to develop such cigarettes. In accordance with a 1990 federal law the
Consumer Product Safety Commission issued a report in August 1993, concluding
that, while it is practicable to develop a performance standard to reduce
cigarette ignition propensity, it is unclear that such a standard will
effectively address the number of cigarette ignited fires. Several states also
have considered legislation authorizing or directing the establishment of
cigarette fire-safety standards from time to time. Currently, New York and
Oregon are considering such legislation.
Ingredient Disclosure - On August 2, 1996, the Governor of Massachusetts
signed legislation (the "ingredient disclosure legislation") requiring each
manufacturer of cigarettes and smokeless tobacco sold in the commonwealth to
submit to the Department of Public Health ("DPH"), beginning in 1997, an annual
report (1) identifying, for each brand, certain "added constituents," and (2)
providing, for each brand, nicotine-yield ratings based on standards to be
developed by the DPH. The legislation provides for the public release of this
information, which includes flavorings and other trade-secret ingredients used
in cigarettes.
The cigarette and smokeless tobacco manufacturers have filed suit in federal
district court in Boston challenging the ingredient disclosure legislation;
Philip Morris Incorporated v. Harshbarger, Civil Action No. 96-11599-GAO (D.
Mass.) and United States Tobacco Company v. Harshbarger, Civil Action No. 96-
11619-GAO (D. Mass.). Their complaints assert that the legislation conflicts
with, and is pre-empted by, federal law and is otherwise unconstitutional. On
February 7, 1997 the Court ruled that the ingredient disclosure legislation was
not pre-empted by federal law. The manufacturers have appealed the trial court's
preemption ruling, and they continue to pursue their other claims in the
district court.
In November 1996, the DPH published proposed regulations implementing the
ingredient disclosure legislation. Public hearings on the proposed regulations
were held on January 30 and 31, 1997 and written comments were submitted on
February 21, 1997.
Any impact on Lorillard from the ingredient disclosure legislation and any
implementing regulations cannot be predicted at this time. It is uncertain
whether the manufacturers will succeed in their legal challenges to the
legislation; if they ultimately are required to disclose their trade secrets to
the DPH and the DPH releases this information, further litigation seeking
compensation for the taking of the manufacturers' property may ensue. It is also
uncertain whether proposed regulations will be modified before they are
promulgated in final form, and whether the manufacturers will challenge them as
so promulgated.
Other similar laws, regulations and policies are being proposed or considered
by various federal, state and local governments and agencies and could, if
adopted, have a material adverse effect on the financial condition and results
of operations of the Company.
18
Business Operations
Advertising and Sales Promotion: Lorillard's principal brands are advertised
and promoted extensively. Introduction of new brands, brand extensions and
packings require the expenditures of substantial sums for advertising and sales
promotion, with no assurance of consumer acceptance. The advertising media
presently used by Lorillard include magazines, newspapers, out-of-home
advertising, direct mail and point-of-sale display materials. Sales promotion
activities are conducted by distribution of samples and store coupons,
point-of-sale display advertising, advertising of promotions in print media, and
personal contact with distributors, retailers and consumers. All of these
activities would be severely affected by the new FDA Regulations (see "Food and
Drug Administration Regulation of Tobacco Products," above).
Distribution Methods: Lorillard distributes its products through direct sales
to distributors, who in turn service retail outlets, and through chain store
organizations and vending machine operators, many of whom purchase their
requirements directly, and by direct sales to the U.S. Armed Forces. Lorillard's
tobacco products are stored in public warehouses throughout the country to
provide for rapid distribution to customers.
Lorillard has approximately 1,500 direct customers and is not dependent on any
one customer or group of customers. Lorillard does not have any backlog orders.
Tobacco and Tobacco Prices: The two main classes of tobacco grown in the
United States are flue-cured tobacco, grown mostly in Virginia, North Carolina,
South Carolina, Georgia and Florida; and burley, grown mostly in Kentucky and
Tennessee. Lorillard purchases flue-cured tobacco and burley tobacco for use in
cigarettes. Most of the tobacco of these classes used by Lorillard is purchased
by commission buyers at tobacco auctions. Lorillard also purchases various types
of Near Eastern tobacco, grown in Turkey and eight other Near Eastern countries.
In addition, Lorillard purchases substantial quantities of aged tobacco from
various sources, including cooperatives financed under the Commodity Credit
Corporation program, to supplement tobacco inventories.
Due to the varying size and quality of annual crops and other economic
factors, tobacco prices in the past have been subject to fluctuation. Among the
economic factors are federal government control of acreage and poundage in the
flue-cured producing areas and poundage control in the burley areas. These
controls together with support prices have substantially affected the market
prices of tobacco. The approximate average auction prices per pound for
flue-cured tobacco were $1.794 in 1995 and $1.837 in 1996 and for burley tobacco
were $1.854 in 1995 and $1.920 in 1996. The prices paid by Lorillard have
generally been consistent with this trend. Lorillard believes that its current
leaf inventories are adequately balanced for its present production
requirements. Because the process of aging tobacco normally requires
approximately two years, Lorillard at all times has on hand large quantities of
leaf tobacco. See Note 1 of the Notes to Consolidated Financial Statements,
included in Item 8, for inventory costing method.
Prices: In March 1997 and April 1996 Lorillard increased the wholesale price
of its king size and 100/120 millimeter cigarettes by $2.50 and $2.00 per
thousand in the aggregate, respectively.
Taxes: Federal excise taxes included in the price of cigarettes are $12.00 per
thousand cigarettes. Excise taxes, which are levied upon and paid by the
distributors, are also in effect in the fifty states, the District of Columbia
and many municipalities. The state taxes generally range from 2.5 cents to 82.5
cents per package of twenty cigarettes.
Properties: The properties of Lorillard are employed principally in the
processing and storage of tobacco and in the manufacture and storage of
cigarettes. Its principal properties are owned in fee. With minor exceptions,
all machinery used by Lorillard is owned by it. All properties are in good
condition. Lorillard's manufacturing plant is located on approximately 79 acres
in Greensboro, North Carolina. This 942,600 square foot plant contains modern
high speed cigarette manufacturing machinery. A warehouse was added in early
1995 with shipping and receiving areas totaling 54,800 square feet. Lorillard
also has facilities for receiving and storing leaf tobacco in Danville,
Virginia, containing approximately 1,500,000 square feet. A modern research
facility containing approximately 82,000 square feet is also located at
Greensboro.
Lorillard leases a corporate office in Orangeburg, New York, an executive
office in New York City and sales offices in major cities throughout the United
States. In May 1997 Lorillard will relocate its New York executive
19
office to a 130,000 square-foot, four-story office building in Greensboro, North
Carolina. This move allows Lorillard to consolidate its operations in
Greensboro, the site of its manufacturing facility.
Competition: Substantially all of Lorillard's products are sold within the
United States in highly competitive markets where its principal competitors are
the four other major U.S. cigarette manufacturers (Philip Morris, R.J. Reynolds
("RJR"), Brown & Williamson and Liggett Group). According to the Maxwell
Consumer Report, a quarterly statistical survey of the cigarette industry, in
calendar year 1996 Lorillard ranked fourth in the industry with an 8.4% share of
the market. Philip Morris and RJR accounted for approximately 47.8% and 24.6%,
respectively, of the U.S. cigarette market, according to the Maxwell Consumer
Report.
The following table sets forth cigarette sales in the United States by the
industry and by Lorillard, as reported in the Maxwell Consumer Report. This
table indicates the relative position of Lorillard in the industry:
<TABLE>
<CAPTION>
Industry Lorillard Lorillard
Calendar Year (000) (000) to Industry
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 ................................. 483,300,000 40,400,000 8.4%
1995 ................................. 481,100,000 38,580,000 8.0%
1994 ................................. 489,600,000 36,610,000 7.5%
</TABLE>
- ---------------
The Bureau of Alcohol, Tobacco and Firearms reports Lorillard's share of total
taxable factory removals of all cigarettes to be 7.9% and 7.5% for 1995 and
1994, respectively. Data for 1996 is not currently available.
The Maxwell Consumer Report divides the cigarette market into two price
segments, the premium price segment and the discount or reduced price segment.
According to the Maxwell Consumer Report the reduced price segment decreased in
1996 to approximately 28.5% from approximately 30.0% of the market in 1995.
Virtually all of Lorillard's sales are in the premium price segment where
Lorillard's share increased from 10.9% in 1995 to 11.0% in 1996, according to
the Maxwell Consumer Report.
20
LOEWS HOTELS HOLDING CORPORATION
The subsidiaries of Loews Hotels Holding Corporation ("Loews Hotels"), a
wholly owned subsidiary of the Company, presently operate the following 14
hotels. Loews Hotels accounted for .98%, 1.17% and 1.61% of the Company's
consolidated total revenue for the years ended December 31, 1996, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
Number of
Rooms (Year
Name and Location Type Opened) Owned, Leased or Managed
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loews Annapolis Luxury Hotel 217 Owned
Annapolis, Maryland (1986(2))
Loews Coronado Bay Resort Luxury Hotel 450 Management contract expiring 2011,
San Diego, California (1991) with renewal options for 10 years (3)
Loews Giorgio Luxury Hotel 197 Owned
Denver, Colorado (1986(2))
Howard Johnson Hotel (1) Commercial Hotel 300 Owned
New York, New York (1962)
Loews Le Concorde Luxury Hotel 424 Land lease expiring 2069
Quebec City, Canada (1974(2))
Loews L'Enfant Plaza Luxury Hotel 372 Management contract expiring 2003 (3)
Washington, D.C. (1973)
Loews Monte Carlo Resort Hotel 622 Lease expiring 2002, with renewal
Monte Carlo, Monaco (1975) options for 20 years
Loews New York First Class Hotel 765 Owned
New York, New York (1961)
Days Hotel (1) Commercial Hotel 366 Owned
New York, New York (1962)
Regency Luxury Hotel 496 Land Lease expiring 2013, with
New York, New York (1963) renewal options for 47 years
Loews Santa Monica Beach Luxury Hotel 350 Management contract expiring 2007,
Santa Monica, California (1989) with renewal options for 10 years
Loews Vanderbilt Plaza Luxury Hotel 342 Owned
Nashville, Tennessee (1984(2))
Loews Ventana Canyon Resort Resort Hotel 398 Management contract expiring 2004,
Tucson, Arizona (1984) with renewal options for 10 years (3)
Loews Vogue Luxury Hotel 154 Owned
Montreal, Canada (1990(2))
- -------------
(1) Operated by Loews Hotels under license agreements pursuant to which Loews
Hotels pays royalty fees on sales, as defined in the agreements, for the
use of the respective trade names, trademarks and other rights.
(2) The Le Concorde, Giorgio, Vanderbilt Plaza, Annapolis and Vogue Hotels
were acquired by Loews Hotels in 1987, 1989, 1989, 1990 and 1995,
respectively.
(3) These management contracts are subject to termination rights.
</TABLE>
21
A Loews Hotels subsidiary is presently constructing an 800 room convention
center hotel in Miami Beach, Florida. The hotel is being constructed on land
leased from the Miami Beach Redevelopment Agency under a 100 year ground lease.
The hotel is expected to open in late 1998. In addition, a Loews Hotels
subsidiary has entered into an agreement to develop hotels at Universal City
Florida, an 840 acre world class entertainment resort, as part of a joint
venture with Universal, Inc. and the Rank Organisation, owners of the resort.
The hotels which are operated by Loews Hotels contain shops, a variety of
restaurants and lounges, and some contain parking facilities, swimming pools,
tennis courts and access to golf courses.
The hotels owned by Loews Hotels are subject to mortgage indebtedness
aggregating approximately $42.2 million at December 31, 1996 with interest rates
ranging from 9% to 11%, and maturing between 1998 and 1999. In addition, certain
hotels are held under leases which are subject to formula derived rental
increases, with rentals aggregating approximately $7.3 million for the year
ended December 31, 1996.
Competition from other hotels, motor hotels and inns, including facilities
owned by local interests and by national and international chains, is vigorous
in all areas in which Loews Hotels operates. The demand for hotel rooms in many
areas is seasonal and dependent on general and local economic conditions. Loews
Hotels properties also compete with facilities offering similar services in
locations other than those in which the company's hotels are located.
Competition among luxury hotels is based primarily on location and service.
Competition among resort and commercial hotels is based on price as well as
location and service. Because of the competitive nature of the industry, hotels
must continually make expenditures for updating, refurnishing and repairs and
maintenance, in order to prevent competitive obsolescence.
DIAMOND OFFSHORE DRILLING, INC.
Diamond Offshore Drilling Inc. ("Diamond Offshore"), is engaged, through its
subsidiaries, in the business of owning and operating drilling rigs that are
used primarily in drilling of offshore oil and gas wells on a contract basis for
companies engaged in exploration and production of hydrocarbons. Diamond
Offshore operates 46 offshore rigs. On December 31, 1996, Diamond Offshore
exited the land drilling business with the sale of its land rigs and associated
equipment for approximately $26 million. Diamond Offshore accounted for 3.17%,
1.82% and 2.25% of the Company's consolidated total revenue for the years ended
December 31, 1996, 1995 and 1994, respectively.
On April 29, 1996 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
million and its interest in Diamond Offshore declined to approximately 51%.
Arethusa owned and/or operated a fleet of thirteen mobile offshore drilling rigs
and provided drilling services worldwide to international and government-
controlled oil and gas companies. The fleet consisted of eight semisubmersible
rigs and five jackup rigs.
Drilling Units and Equipment: Diamond Offshore currently owns and operates 46
mobile offshore drilling rigs (30 semisubmersible rigs, 15 jackup rigs and one
drillship) and related equipment. Offshore rigs are mobile units that can be
relocated via either self propulsion or by the use of tugs enabling them to be
repositioned based on market demand.
Semisubmersible rigs are supported by large pontoons and are partially
submerged during drilling for greater stability. They are generally designed for
deep water depths of up to 5,000 feet. Diamond Offshore owns and operates three
fourth-generation semisubmersible rigs. These rigs are equipped with advanced
drilling equipment, are capable of operations in deep water or harsh
environments, and command high premiums from operators. Diamond Offshore's 30
semisubmersible rigs are currently located as follows: 16 in the Gulf of Mexico,
four in the North Sea, four in Brazil and the remaining rigs are located in
various foreign markets.
Jackup rigs stand on the ocean floor with their drilling platforms "jacked up"
on support legs above the water. They are used extensively for drilling in water
depths from 20 feet to 350 feet. Twelve of Diamond Offshore's jackup rigs are
cantilevered rigs capable of over platform development drilling and workover as
well as exploratory drilling. Of Diamond Offshore's 15 jackup rigs, 12 are
currently located in the Gulf of Mexico.
22
Diamond Offshore's drillship is self-propelled and designed to drill in deep
water. Shaped like a conventional vessel, it is the most mobile of the major rig
types. Diamond Offshore's drillship is currently being upgraded to operate in
the deep water market of the Gulf of Mexico and is scheduled to be completed in
mid-1997.
Drilling Contracts and Rig Utilization: Contracts for Diamond Offshore's
drilling rigs are offered worldwide for either a fixed term, which may range
from a few months to several years, or on a well-to-well basis. In general,
Diamond Offshore seeks to have a reasonable balance of single well, well-to-well
and term contracts to minimize the downside impact of a decline in the market
while still participating in the benefit of increasing dayrates in a rising
market. Although most of Diamond Offshore's semisubmersible rigs are committed
on a term basis, its jackup rigs are primarily committed for short-term single
well or well-to-well arrangements.
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past two years, due
in part to the increasing impact of technological advances that have broadened
opportunities for offshore exploration and development. Both the Gulf of Mexico
and the North Sea semisubmersible markets experienced increased utilization and
significantly higher dayrates since 1995. All of Diamond Offshore's markets
experienced increased utilization and higher dayrates in 1996, and customers
increasingly are seeking to contract rigs for a fixed term (as opposed to
contracts for the drilling of a single well or a group of wells). Diamond
Offshore's semisubmersible rigs marketed and available for contract are
essentially working at full utilization and, of its 30 semisubmersibles, 25 have
term commitments with renewal opportunities staggered through 2001.
The market for jackup rigs in the Gulf of Mexico, which weakened during 1994,
began to stabilize during 1995 and strengthened significantly in 1996. Diamond
Offshore's marketed jackup rigs in the Gulf of Mexico are currently experiencing
full utilization, although contracts generally remain on a short-term or well-
to-well basis, which is typical for the prevailing market conditions. Diamond
Offshore cannot predict whether and, if so, to what extent these recently
improved conditions will continue.
Competition: The contract drilling industry is highly competitive. Customers
often award contracts on a competitive bid basis, and although a customer
selecting a rig may consider, among other things, a contractor's safety record,
crew quality and quality of service and equipment, the historical oversupply of
rigs has created an intensely competitive market in which price is the primary
factor in determining the selection of a drilling contractor. However, due to
the recent escalation of drilling activity, rig availability has, in some cases,
also become a consideration. Diamond Offshore believes that competition for
drilling contracts will continue to be intense for the foreseeable future.
Contractors are also able to adjust localized supply and demand imbalances by
moving rigs from areas of low utilization and dayrates to areas of greater
activity and relatively higher dayrates. In addition, there are inactive non-
marketed rigs or rigs being operated in non-drilling activities that could be
reactivated to meet an increase in demand for drilling rigs in any given market.
Such movements or reactivations or a decrease in drilling activity in any major
market could depress dayrates and could adversely affect utilization of Diamond
Offshore's rigs.
Operating Risks and Regulation: Diamond Offshore's operations are subject to
hazards inherent in the drilling of oil and gas wells such as blowouts,
reservoir damage, loss of production, loss of well control, cratering or fires,
the occurrence of which could result in the suspension of drilling operations,
injury to or death of rig and other personnel and damage to or destruction of
Diamond Offshore's, its customer's or a third party's property or equipment.
Damage to the environment could also result from Diamond Offshore's operations,
particularly through oil spillage or uncontrolled fires. In addition, offshore
drilling operations are subject to perils peculiar to marine operations,
including capsizing, grounding, collision and loss or damage from severe
weather. Diamond Offshore has insurance coverage and contractual indemnification
for certain risks, but there can be no assurance that such coverage or
indemnification will adequately cover Diamond Offshore's loss or liability in
many circumstances, or that Diamond Offshore will continue to carry such
insurance or receive such indemnification. Except with respect to certain
semisubmersible rigs, Diamond Offshore does not maintain business interruption
insurance and may elect to discontinue existing coverage at any time.
Diamond Offshore's operations are subject to numerous federal, state and local
environmental laws and regulations that relate directly or indirectly to its
operations, including certain regulations controlling the discharge of materials
into the environment, requiring removal and clean-up under certain
circumstances, or otherwise relating to the protection of the environment. For
example, Diamond Offshore may be liable for damages and costs
23
incurred in connection with oil spills for which it is held responsible. Laws
and regulations protecting the environment have become increasingly stringent in
recent years and may in certain circumstances impose "strict liability"
rendering a company liable for environmental damage without regard to negligence
or fault on the part of such company. Such laws and regulations may expose
Diamond Offshore to liability for the conduct of or conditions caused by others,
or for acts of Diamond Offshore that were in compliance with all applicable laws
at the time such acts were performed. The application of these requirements or
the adoption of new requirements could have a material adverse effect on Diamond
Offshore.
Properties: Diamond Offshore owns an eight-story office building located in
Houston, Texas containing approximately 182,000 net rentable square feet, which
is used for its corporate headquarters. A portion of the building is currently
occupied by other tenants under leases which expire through 2005. Diamond
Offshore also owns an 18,000 square foot building and 20 acres of land in New
Iberia, Louisiana for its offshore drilling warehouse and storage facility, and
a 13,000 square foot building and five acres of land in Aberdeen, Scotland for
its North Sea operations. In addition, Diamond Offshore leases additional
office, warehouse and storage facilities and lots in Louisiana, Scotland,
Australia, Brazil and various other foreign locations to support its offshore
drilling operations.
BULOVA CORPORATION
Bulova Corporation ("Bulova") is engaged in the distribution and sale of
watches, clocks and timepiece parts for consumer use. Bulova accounted for .59%,
.59% and 1.12% of the Company's consolidated total revenue for the years ended
December 31, 1996, 1995 and 1994, respectively.
Bulova's principal watch brands are Bulova, Caravelle, Accutron and
Sportstime. Clocks are principally sold under the Bulova brand name. All watches
and clocks are purchased from foreign suppliers. Bulova's principal markets are
the United States and Canada. In most other areas of the world Bulova has
appointed licensees who market watches under Bulova's trademarks in return for a
royalty. The business is seasonal, with the greatest sales coming in the third
and fourth quarters in expectation of the holiday selling season. The business
is intensely competitive. The principal methods of competition are price,
styling, product availability, aftersale service, warranty and product
performance.
Properties: Bulova owns an 80,000 square foot plant in Woodside, New York
which is used for its principal executive and sales office, watch distribution,
service and warehouse purposes, and leases a 71,000 square foot plant in
Maspeth, New York for clock service and warehouse purposes and a 25,000 square
foot plant in Toronto, Canada for watch and clock sales and service.
OTHER INTERESTS
A subsidiary of the Company owns a 49% common stock interest in a joint
venture which is engaged in the business of owning and operating six large crude
oil tankers that are used primarily to transport crude oil from the Persian Gulf
to a limited number of ports in the Far East, Northern Europe and the United
States.
EMPLOYEE RELATIONS
The Company, inclusive of its operating subsidiaries as described below,
employed approximately 35,300 persons at December 31, 1996 and considers its
employee relations to be satisfactory.
Lorillard employed approximately 3,600 persons at December 31, 1996.
Approximately 1,400 of these employees are represented by labor unions under
separate contracts with many local unions expiring at varying times and
severally renegotiated and renewed.
Lorillard has collective bargaining agreements covering hourly rated
production and service employees at various Lorillard plants with the Tobacco
Workers International Union, the International Brotherhood of Firemen and
Oilers, and the International Association of Machinists. Lorillard has
experienced satisfactory labor relations and provides a retirement plan, a
deferred profit sharing plan, and other benefits for its hourly paid employees
who are represented by the foregoing unions. In addition, Lorillard provides to
its salaried employees a retirement plan, group life, disability and health
insurance program and a savings plan.
24
Loews Hotels employed approximately 2,800 persons at December 31, 1996,
approximately 1,800 of whom are union members covered under collective
bargaining agreements. Loews Hotels has experienced satisfactory labor relations
and provides comprehensive benefit plans for its hourly paid employees.
The Company maintains a retirement plan, group life, disability and health
insurance program and a savings plan for salaried employees. Loews Hotels
salaried employees also participate in these benefit plans.
CNA and its subsidiaries employ approximately 24,300 full-time equivalent
persons and has experienced satisfactory labor relations. CNA has never had work
stoppages due to labor disputes. CNA and its subsidiaries have comprehensive
benefit plans for substantially all of their employees, including retirement
plans, savings plans, disability programs, group life programs and group health
care programs.
Diamond Offshore employed approximately 3,770 persons at December 31, 1996,
approximately 160 of whom are union members. Diamond Offshore has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees.
Bulova and its subsidiaries employ approximately 440 persons, approximately
135 of whom are union members. Bulova and its subsidiaries have experienced
satisfactory labor relations. Bulova has comprehensive benefit plans for
substantially all employees.
Item 2. Properties.
Information relating to the properties of Registrant and its subsidiaries is
contained under Item 1.
Item 3. Legal Proceedings.
1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Notes 10 and 19 of the Notes to
Consolidated Financial Statements included in Item 8.
2. Lorillard is involved in various lawsuits involving tobacco products
seeking damages for cancer and other health effects claimed to have resulted
from the use of cigarettes or from exposure to tobacco smoke. Information
regarding such lawsuits is incorporated by reference to Note 19 of the Notes to
Consolidated Financial Statements included in Item 8. Additional information
regarding legal proceedings involving Lorillard is contained in the section
entitled Lorillard, Inc., in Item 1, which is incorporated herein by reference.
25
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
First
Became
Name Position and Offices Held Age Officer
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gary W. Garson .......... Vice President and 50 1988
Assistant Secretary
Barry Hirsch ............ Senior Vice President and 63 1971
Secretary
Herbert C. Hofmann ...... Senior Vice President 54 1979
Peter W. Keegan ......... Senior Vice President and 52 1997
Chief Financial Officer
John J. Kenny ........... Treasurer 59 1991
Guy A. Kwan ............. Controller 54 1987
John G. Malino .......... Vice President-Real Estate 57 1985
Alan Momeyer ............ Vice President-Human Resources 49 1996
Stuart B. Opotowsky ..... Vice President-Tax 62 1987
Richard E. Piluso ....... Vice President-Internal Audit 58 1990
Andrew H. Tisch ......... Chairman of the Management 47 1985
Committee
James S. Tisch .......... President and Chief Operating 44 1981
Officer
Jonathan M. Tisch ....... Vice President 43 1987
Laurence A. Tisch ....... Co-Chairman of the Board and 74 1959
Co-Chief Executive Officer
Preston R. Tisch ........ Co-Chairman of the Board and 70 1960
Co-Chief Executive Officer
</TABLE>
Laurence A. Tisch and Preston R. Tisch are brothers. Andrew H. Tisch and James
S. Tisch are sons of Laurence A. Tisch and Jonathan M. Tisch is a son of Preston
R. Tisch. None of the other officers or directors of Registrant is related to
any other.
All executive officers of Registrant, except Peter W. Keegan, have been
engaged actively and continuously in the business of Registrant for more than
the past five years. Peter W. Keegan was Senior Vice President of Finance at CBS
Inc. prior to joining Loews Corporation.
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
26
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Price Range of Common Stock
Loews Corporation's common stock is listed on the New York Stock Exchange. The
following table sets forth the reported consolidated tape high and low sales
prices in each calendar quarter of 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter ............ $88.25 $74.25 $49.88 $43.31
Second Quarter ........... 83.50 72.50 61.00 49.38
Third Quarter ............ 83.88 73.63 73.50 57.88
Fourth Quarter ........... 95.88 77.13 79.88 69.56
</TABLE>
Dividend Information
The Company has paid quarterly cash dividends on its common stock in each year
since 1967. Regular dividends of $.25 per share of common stock outstanding were
paid in each calendar quarter of 1996 and in the fourth quarter 1995. In each of
the first three quarters of 1995 the Company paid dividends of $.12 1/2 per
share.
Approximate Number of Equity Security Holders
The Company has approximately 3,500 holders of record of Common Stock.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Revenues .................. $20,442.4 $18,677.4 $13,515.2 $13,686.8 $13,691.5
Income (loss) before
cumulative effect of
accounting changes ....... 1,383.9 1,765.7 267.8 594.1 (22.1)
Per share ................. 11.91 14.98 2.22 4.63 (.17)
Net income ................ 1,383.9 1,765.7 267.8 594.1 122.6
Per share ................. 11.91 14.98 2.22 4.63 .93
Financial Position:
Total assets .............. 67,683.0 65,516.9 50,336.0 45,849.8 43,555.5
Long-term debt ............ 4,370.7 4,248.2 2,144.4 2,195.7 1,759.6
Shareholders' equity ...... 8,731.2 8,238.7 5,405.3 6,127.2 5,527.0
Cash dividends per share .. 1.00 .63 .50 .50 .50
Book value per share ...... 75.92 69.92 45.84 49.79 42.45
Shares of common stock
outstanding .............. 115.0 117.8 117.9 123.0 130.2
</TABLE>
In 1993 the Company changed its method of accounting for certain investments
in debt and equity securities.
27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Insurance
Property and casualty and life insurance operations are wholly owned
subsidiaries of CNA Financial Corporation ("CNA"). CNA is an 84% owned
subsidiary of the Company.
As previously reported, on May 10, 1995, CNA consummated the acquisition of all
the outstanding shares of The Continental Corporation ("CIC") for approximately
$1,100.0 million, or $20 per CIC share. As a result of the acquisition, CNA is
the ninth largest U.S. insurance organization, the third largest U.S. property
and casualty organization and the largest U.S. commercial lines insurance group,
based on 1995 net written premiums.
CNA has financed the transaction (including the refinancing of $205.0 million of
CIC debt) through a five-year $1,325.0 million revolving credit facility (the
"Bank Facility"). The interest rate is based on the one, two, three or six month
London Interbank Offered Rate ("LIBOR"), as elected, plus 16 basis points.
Additionally, there is a facility fee of 9 basis points. The average interest
rate was 5.7% and 6.1% at December 31, 1996 and 1995, respectively. Under the
terms of the Bank Facility, CNA may prepay the debt without penalty, giving CNA
flexibility to arrange longer-term financing on more favorable terms.
In 1995 CNA entered into five year interest rate swap agreements with several
banks to offset the variable rate characteristics of the Bank Facility. These
agreements effectively convert variable rate debt into fixed rate debt on
notional amounts aggregating $1,200.0 million at December 31, 1995. In
conjunction with the pay down of $250.0 million of the Bank Facility, CNA
reduced its swaps for a similar notional amount. The weighted average fixed swap
rate was 6.2% and 6.3% at December 31, 1996 and 1995, respectively. The effect
of these interest rate swaps was to increase interest expense by $7.0 and $2.0
million for the years ended December 31, 1996 and 1995, respectively.
In 1995, to take advantage of favorable interest rate spreads, CNA established a
commercial paper program, borrowing from investors to reduce a like amount of
the Bank Facility. This borrowing totaled $675.0 and $500.0 million with an
average interest rate of 5.7% and 6.1% at December 31, 1996 and 1995,
respectively. The commercial paper borrowings are classified as long-term debt,
as the Bank Facility supports the program (at an undrawn cost of 9 basis
points).
The weighted average interest rate (interest and facility fees) on the Bank
Facility, commercial paper and the effect of the interest rate swaps, was 6.3%
and 6.5% at December 31, 1996 and 1995, respectively.
On November 15, 1996, CNA issued $250.0 million principal amount of 6 3/4%
Senior notes due November 15, 2006. The net proceeds were used to pay down a
portion of the Bank Facility. As a result, the borrowing capacity under the Bank
Facility was reduced by $250.0 million to $1,075.0 million. As of December 31,
1996, the outstanding loans under the Bank Facility were $400.0 million. There
was no unused borrowing capacity under the Bank Facility after the effects of
the commercial paper program.
The table below reflects ratings issued by A.M. Best, Standard and Poor's,
Moody's and Duff & Phelps, for CNA's Continental Casualty Company ("CCC")
Intercompany Pool, Continental Insurance Company ("CIC") Intercompany Pool and
Continental Assurance Company ("CAC") Inter-company Pool. Also rated were the
senior debt of both CNA and CIC, and CNA's preferred stock.
28
<TABLE>
<CAPTION>
Insurance Ratings Debt and Stock Ratings
------------------- ---------------------------------------
CNA CIC CNA CIC
------------ --- ----------------------------- -------
Senior Commercial Preferred Senior
CCC CAC Debt Paper Stock Debt
- -------------------------------------------------------------------------------------------------
Financial Strength
--------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A.M. Best A A A- - - - -
Moody's A1 A1* A2 A3 P2 a3 Baa1
Claims Paying Ability
---------------------
Standard & Poor's A+ AA A- A- A2 A- BBB-
Duff & Phelps AA- AA - A- - A- -
- -------------------------------------------------------------------------------------------------
*Applies to Continental Assurance Company only.
</TABLE>
CNA's property and casualty insurance subsidiaries' statutory surplus grew from
$3,598.4 million in 1993 to $6,348.8 million in 1996. In 1994, surplus declined
to $3,367.3 million, primarily attributable to realized investment losses. In
1995, surplus rose $2,328.6 million to $5,695.9 million due to the acquisition
of CIC ($1,706.7 million) and improved net income. Dividends of $545.0, $325.0,
and $175.0 million were paid to CNA by CCC in 1996, 1995 and 1994, respectively.
Statutory surplus of CNA's life insurance subsidiaries grew from $1,022.0
million at December 31, 1993 to 1,163.4 million at December 31, 1996.
The liquidity requirements of CNA, excluding the acquisition of CIC, have been
met primarily by funds generated from operations. The principal cash flow
sources of CNA's property and casualty and life insurance subsidiaries are
premiums, investment income and sales and maturities of investments. The primary
operating cash flow uses are payments for claims, policy benefits and operating
expenses.
For the year ended December 31, 1996, CNA's operating activities generated net
cash flows of $620.2 million compared to $875.0 million in 1995 and $982.2
million in 1994. CNA believes that future liquidity needs will be met primarily
from operations.
As a result of the settlement of the Fibreboard litigation, CNA anticipates that
1997 operating cash flows will be substantially lower, due to anticipated claim
payments. The Fibreboard claim payments for 1997 will include approximately
$500.0 million in payments made in late December 1996, which are reflected in
the Consolidated Balance Sheet as accounts payable and accrued liabilities (see
Note 19 of the Notes to Consolidated Financial Statements).
Net cash flows are primarily invested in marketable securities. Investment
strategies employed by CNA's insurance subsidiaries consider the cash flow
requirements of the insurance products sold, and the tax attributes of the
various types of marketable securities.
Cigarettes
Lorillard, Inc. and subsidiaries ("Lorillard"). Lorillard is a wholly owned
subsidiary of the Company.
Funds from operations continue to exceed operating requirements. Lorillard
generated net cash flow from operations of approximately $427.7 million for the
year ended December 31, 1996, compared to $315.9 million for the prior year. No
material capital expenditures are anticipated during 1997.
29
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 28% during
1996. At December 31, 1996, they represented 27.4% of industry sales. In April
1996, Lorillard increased its wholesale prices by $2.00 per thousand cigarettes,
or 3.6%.
Lawsuits are being filed with increasing frequency against Lorillard and other
manufacturers of tobacco products seeking damages for cancer and other health
effects claimed to have resulted from the use of cigarettes or exposure to
tobacco smoke. In a number of these cases the Company is named as a defendant.
Pending litigation includes conventional smoking and health cases, purported
class actions, governmental entities/medicaid reimbursement actions, and filter
cases, most of which claim very substantial damages. These actions are described
in Note 19 of the Notes to Consolidated Financial Statements.
On August 28, 1996, the Food and Drug Administration ("FDA") published
regulations (the "FDA Regulations") in final form severely restricting cigarette
advertising and promotion and limiting the manner in which tobacco products can
be sold. The FDA premised its regulations on the need to reduce smoking by
underage youth and young adults. The FDA Regulations become effective in stages,
as follows:
(i) Regulations regarding underage youth smoking, effective February 28,
1997. These regulations make unlawful the sale by retail merchants of
cigarettes to anyone under age 18. These regulations also require retail
merchants to request proof of age for any person under age 27 who
attempts to purchase cigarettes.
(ii) Regulations regarding advertising and billboards, effective August 28,
1997. These regulations limit all cigarette advertising to a black and
white, text only format in most publications and outdoor advertising
such as billboards. The regulations also prohibit billboards advertising
cigarettes within 1,000 feet of a school or playground, require that the
established name for the product ("Cigarettes") and an intended use
statement ("A Nicotine-Delivery Device For Persons 18 or Older") be
included on all cigarette packaging and advertising, ban the use of
cigarette brand names, logos and trademarks on premium items and
prohibit the furnishing of any premium item in consideration for the
purchase of cigarettes or the redemption of proofs-of-purchase coupons.
(iii) Regulations prohibiting the use of cigarette brand names to sponsor
sporting and cultural events, effective August 28, 1998.
The FDA has announced that it will contract with states to jointly enforce the
FDA Regulations. State regulations narrower in scope and not inconsistent with
the FDA Regulations may be exempt from the pre-emptive effect of the federal
rules and be enforced concurrently.
Lorillard and other cigarette manufacturers have filed a lawsuit in the United
States District Court for the Middle District of North Carolina challenging the
FDA's assertion of jurisdiction over cigarettes and seeking both preliminary and
permanent injunctive relief (Liggett Group has agreed to withdraw from this
lawsuit). The complaint in the case, Coyne Beahm, Inc., et al. v. United States
Food & Drug Administration, et al., asserts that the FDA lacks authority to
regulate cigarettes and that the proposed rules violate the Federal Food, Drug
and Cosmetic Act, the Federal Cigarette Labeling and Advertising Act and the
United States Constitution. Lawsuits challenging the FDA Regulations also have
been filed in the same court by several smokeless tobacco manufacturers, several
national advertising trade associations and the National Association of
Convenience Stores.
30
The plaintiffs have moved for summary judgment on jurisdictional, statutory and
First Amendment grounds. Oral argument on the motions was heard on February 10,
1997, and a decision is pending.
It is uncertain whether Congress will pass legislation that would moot the FDA
Regulations and whether the manufacturers will succeed in securing judicial
relief. Accordingly, any impact on Lorillard from the FDA Regulations cannot be
predicted at this time.
Hotels
Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews Hotels
is a wholly owned subsidiary of the Company.
Funds from operations continue to exceed operating requirements. Loews Hotels is
constructing a new 800 room property in Miami Beach, Florida which is scheduled
to open in late 1998. Initial funding for this project has been provided by
Loews Hotels (under an arrangement with the Company) and the City of Miami
Beach. The balance of the funds necessary for construction will be provided by a
first mortgage. In addition, Loews Hotels has entered into an agreement with the
owners of the Universal City Florida resort to develop hotels at the resort.
Capital expenditures in relation to the Universal City Florida hotel project are
expected to be funded by a combination of equity contributions by the
development partners and mortgages. Loews Hotels expects to obtain its share of
the equity contribution under arrangements with the Company. Funds for other
capital expenditures and working capital requirements are expected to be
provided from operations. Funds for any hotel acquisitions would be expected to
be provided through the Company.
Drilling
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore"). Diamond
Offshore is a 51% owned subsidiary of the Company.
On April 29, 1996 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
million and its interest in Diamond Offshore declined to approximately 51%.
The markets for semisubmersible rigs which operate in deep water or harsh
environments have experienced improved demand and higher dayrates during the
past two years, due in part to the increasing impact of technological advances,
including 3-D seismic, horizontal drilling, and subsea completion procedures.
Both the Gulf of Mexico and the North Sea semisubmersible markets experienced
increased utilization and significantly higher dayrates since 1995. All of
Diamond Offshore's markets have experienced increased utilization and
significantly higher dayrates in 1996, and customers increasingly are seeking to
contract rigs for a fixed term (as opposed to contracts for the drilling of a
single well or a group of wells). In 1996, average operating dayrates earned by
Diamond Offshore's "fourth-generation" and other semisubmersible rigs increased
39% and 43%, respectively, from those earned during 1995. Fourth-generation
semisubmersible rigs are larger than other semisubmersibles, are capable of
working in deep water or harsh environments and have other advanced features. In
addition, Diamond Offshore's semisubmersible rigs
31
marketed and available for contract are essentially working at full utilization
and, of its 30 semisubmersibles, 25 have term commitments with renewal
opportunities staggered through 2001.
In order to effectively compete in this market, Diamond Offshore is required to
incur significant capital expenditures to meet customer requirements as well as
fund its own rig enhancement program. Diamond Offshore expects to spend
approximately $162.5 million during 1997 for rig upgrades in connection with
contract requirements. In addition, it has budgeted $70.7 million for 1997
capital expenditures associated with its continuing rig enhancement program,
spare equipment and other corporate requirements.
Diamond Offshore generated net cash flow from operations of approximately $207.8
million for the year ended December 31, 1996, compared to $52.8 million for the
prior year. It is anticipated that funds for capital expenditures and working
capital requirements will be provided by cash flow from operations as well as
from debt financings. Diamond Offshore has a $200.0 million revolving line of
credit which expires in 2001. The unused credit available at December 31, 1996
was $137.0 million. In February 1997, Diamond Offshore sold $400.0 million
principal amount of 3 3/4% convertible subordinated notes due February 15, 2007.
A portion of the proceeds was used to repay the outstanding balance on its
credit line.
Historically, the offshore contract drilling market has been highly competitive
and cyclical, and Diamond Offshore cannot predict the extent to which current
conditions will continue.
Watches and Clocks
Bulova Corporation and subsidiaries ("Bulova"). Bulova is a 97% owned subsidiary
of the Company.
In 1995 and 1996, Bulova generated sufficient cash flow to fund its operations
and expects to do so as well in 1997. Prior to 1995, Bulova had required working
capital advances from the Company. While the Company has no obligation to
provide working capital advances, it is anticipated that should Bulova require
working capital advances, they would be provided through arrangements with the
Company.
Parent Company
During 1996 the Company purchased 2,832,800 shares of its outstanding Common
Stock at an aggregate cost of approximately $215.7 million. Depending on market
conditions, the Company from time to time may purchase additional shares in the
open market or otherwise. In addition, during the year the Company purchased
74,200 shares of CNA's outstanding common stock at an aggregate cost of
approximately $7.2 million.
In December 1996, the Company sold $300.0 million principal amount of 6 3/4%
senior notes due December 15, 2006. In addition, on January 15, 1997, the
Company redeemed its $200.0 million principal amount of 8 1/4% debentures due
2007 at a price of 103.6%.
The Company continues to seek expansion of existing businesses and significant
acquisitions of new businesses.
32
INVESTMENTS
Insurance
CNA's general account investment portfolio is managed to maximize after tax
investment return, while minimizing credit risks. Investments are concentrated
in high quality securities to support its insurance underwriting operations.
CNA has the capacity to hold its fixed income portfolio to maturity. However,
securities may be sold as part of CNA's asset/liability strategies or to take
advantage of investment opportunities generated by changing interest rates, tax
and credit considerations, or other similar factors. Accordingly, the fixed
maturity securities are classified as available for sale.
The general account portfolio consists primarily of high quality (BBB or higher)
marketable fixed maturities, 93% and 94% of which are rated as investment grade
at December 31, 1996 and 1995, respectively.
The following table summarizes the ratings of CNA's general account fixed
maturity debt portfolio:
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $ 11,626.0 42% $ 18,905.0 62%
Other AAA rated 9,184.0 33 4,625.0 15
AA and A rated 3,657.0 13 3,511.0 12
BBB rated 1,168.0 5 1,425.0 5
Below investment grade 2,020.0 7 1,862.0 6
- -------------------------------------------------------------------------------------------------
Total $ 27,655.0 100% $30,328.0 100%
=================================================================================================
</TABLE>
The following table summarizes the ratings of CNA's guaranteed investment
contract Separate Account fixed maturity debt portfolio:
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $ 192.0 5% $ 1,743.0 36%
Other AAA rated 2,245.0 58 828.0 17
AA and A rated 662.0 17 914.0 19
BBB rated 292.0 8 361.0 8
Below investment grade 472.0 12 944.0 20
- -------------------------------------------------------------------------------------------------
Total $ 3,863.0 100% $ 4,790.0 100%
=================================================================================================
</TABLE>
The ratings in the two tables above are primarily from independent rating
agencies (89% and 93% of the general account portfolio, and 85% and 95% of the
guaranteed investment portfolio in 1996 and 1995, respectively, were rated by
Standard and Poor's). In addition, CNA's investments in mortgage loans and real
estate as a percentage of total assets are substantially below industry average.
High yield securities are bonds rated below investment grade by bond rating
agencies, plus private placements
33
and other unrated securities which, in the opinion of management, are below
investment grade (below BBB). High yield securities generally involve a greater
degree of risk than investment grade securities. Expected returns should,
however, compensate for the added risk. The risk is also considered in the
interest rate assumptions in the underlying insurance products. As of December
31, 1996, CNA's concentration in high yield bonds including Separate Accounts
business was approximately 4.2% of its total assets, compared with 4.7% in 1995.
Included in CNA's fixed maturity securities at December 31, 1996 (general and
guaranteed investment portfolios) are $8,642.3 million of asset-backed
securities, consisting of approximately 47% in U.S. government agency issued
pass-through certificates, 37% in collateralized mortgage obligations ("CMO's"),
and 16% in corporate asset-backed obligations. The majority of CMO's held are
U.S. government agency issues, which are actively traded in liquid markets and
are priced by broker-dealers.
CNA limits the risks associated with interest rate fluctuations and prepayment
by concentrating its CMO investments in planned amortization classes with
relatively short principal repayment windows. CNA avoids investments in complex
mortgage derivatives without readily ascertainable market prices. At December
31, 1996, the amortized cost of asset-backed securities was in excess of fair
value by approximately $5.0 million, as compared to fair value in excess of
amortized cost of approximately $200.0 million for the comparable period a year
ago.
At December 31, 1996 and 1995, short-term investments primarily consisted of
U.S. treasury bills and commercial paper.
CNA invests from time to time in certain derivative financial instruments to
increase investment returns and to reduce the impact of changes in interest
rates on certain corporate borrowings. CNA considers its derivative securities
as held for trading purposes, except for interest rate swaps associated with
corporate borrowings, and as such, are recorded at fair value at the reporting
date with changes in market value reflected in income. The interest rate swaps
on corporate borrowings are accounted for as an adjustment to interest expense.
As of December 31, 1996 CNA's general account investments in bonds and
redeemable preferred stocks were carried at a fair value of $27,720.6 million,
compared to $30,444.7 million at December 31, 1995. At December 31, 1996, net
unrealized gains on fixed maturity securities amounted to approximately $181.0
million. This compares to $1,059.3 million of net unrealized gains at December
31, 1995. The gross unrealized gains and losses for the fixed maturity
securities portfolio at December 31, 1996 were $443.8 and $262.8 million,
respectively, compared to $1,136.4 and $77.1 million, respectively, at December
31, 1995.
Net unrealized gains on general account bonds at December 31, 1996 include net
unrealized gains on high yield securities of $41.0 million, compared to $67.0
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 (below BBB). Carrying and fair values of high yield securities in the
general account were $2,020.3 million at December 31, 1996, compared to $1,862.0
million at December 31, 1995.
At December 31, 1996, total Separate Account business cash and investments
amounted to $5,697.6 million with taxable fixed maturities representing
approximately 81% of the Separate Accounts portfolio. Approximately 82% of
Separate Account investments are used to fund guaranteed investments for which
Continental Assurance Company guarantees principal and a specified return to the
contract holders. The duration of fixed maturity securities included in the
34
guaranteed investment portfolio are matched approximately with the corresponding
payout pattern of the liabilities of the guaranteed investment contracts. At
December 31, 1996, all fixed maturity securities in the guaranteed investment
portfolio were carried at fair value and amounted to $3,866.7 million. At
December 31, 1996, net unrealized losses on fixed maturity securities amounted
to approximately $0.7 million. This compares to net unrealized gains of $62.6
million at December 31, 1995. The gross unrealized gains and losses for the
fixed maturity securities portfolio at December 31, 1996 were $55.0 and $55.7
million, respectively, compared to $122.1 and $59.5 million, respectively, at
December 31, 1995.
High yield securities in the guaranteed investment portfolio are carried at fair
value and amounted to $472.0 and $944.0 million at December 31, 1996 and 1995,
respectively. Net unrealized losses on high yield securities held in such
Separate Accounts were $6.0 million at December 31, 1996, compared to $14.0
million at December 31, 1995.
Other
Investment activities of non-insurance companies include investments in fixed
income securities, equity securities, derivative instruments and short-term
investments. Equity securities which are considered part of the Company's
trading portfolio, and derivative instruments are marked to market and reported
as investment gains or losses in the income statement. The remaining securities
are carried at fair value with a net unrealized loss of $22.4 million at
December 31, 1996.
The Company invests in certain derivative instruments for income enhancement as
part of its portfolio management strategy. These instruments include various
swaps, forwards and futures contracts as well as both purchased and written
options.
These investments subject the Company to market risk for positions where the
Company does not hold an offsetting security. The Company controls this risk
through monitoring procedures which include daily detailed reports of existing
positions and valuation fluctuations. These reports are reviewed by members of
senior management to ensure that open positions are consistent with the
Company's portfolio strategy.
The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these transactions with large financial
institutions and considers the risk of nonperformance to be remote. In addition,
the amounts subject to credit risk are substantially mitigated by collateral
requirements in many of these transactions.
The Company does not believe that any of the derivative instruments utilized by
it are unusually complex or volatile, nor do these instruments contain imbedded
leverage features which would expose the Company to a higher degree of risk. See
Note 4 of the Notes to Consolidated Financial Statements for additional
information with respect to derivative instruments, including recognized gains
and losses on these instruments.
35
RESULTS OF OPERATIONS
Revenues increased by $1,765.0 and $6,927.2 million, or 9.5% and 51.3%, in each
case as compared to 1995 and 1994, respectively. Net income declined by $381.8
million and increased by $1,116.1 million as compared to 1995 and 1994,
respectively.
Insurance
Property and casualty operations continued to show improvement in 1996 and
reflect both improved investment income and underwriting results.
Property and casualty revenues increased by $1,898.3 and $4,901.8 million, or
17.1% and 60.6%, as compared to 1995 and 1994, respectively.
Property and casualty premium revenues increased by $1,403.3 and $3,290.0
million, or 16.1% and 48.1%, as compared to 1995 and 1994, respectively.
Property and casualty premiums include $2,727.4 and $1,746.8 million for 1996
and 1995, respectively, from the acquisition of CIC on May 10, 1995. Increased
premium revenues reflect higher accident and health premiums due to increases in
mass market premiums, higher group long-term disability premiums and increases
in personal lines premium. The increase in personal lines premiums resulted from
the cancellation of a quota share arrangement, under which CIC was ceding
premium, and the inclusion of CIC's business for the full year of 1996. These
increases were partially offset by lower involuntary risk premiums resulting
from a greater willingness on the part of the voluntary market to write these
types of risks, particularly workers' compensation and private passenger
automotive coverage.
Property and casualty investment income increased by $181.5 and $640.9 million,
or 10.7% and 51.7%, as compared to 1995 and 1994, respectively. Investment
income increased primarily due to the inclusion of the CIC portfolio for the
full year of 1996, partially offset by slightly lower yields on the bond segment
of the investment portfolio as compared to 1995. The bond segment of the
investment portfolio yielded 6.8% in 1996 compared with 6.9% in 1995.
Pre-tax investment gains (losses) amounted to $473.6, $320.6 and $(164.1)
million for the years 1996, 1995 and 1994, respectively.
Net income excluding net investment gains (losses) of CNA's property and
casualty insurance subsidiaries was $444.8 million for 1996, compared to $355.3
and $125.6 million in 1995 and 1994, respectively. Net investment gains for 1996
were $255.6 million, compared to $174.8 million in 1995 and net investment
losses of $86.6 million for 1994.
Property and casualty underwriting losses were $1,143.2 million in 1996,
compared to $1,121.5 and $1,201.2 million in 1995 and 1994, respectively. The
combined ratio was 108.9 for 1996, compared with 110.3 and 115.0 for 1995 and
1994, respectively. Underwriting results generally reflect improved loss
experience from workers' compensation business, partially offset by lower
results from personal lines.
Catastrophe losses for 1996 on a pre-tax basis were approximately $315.0
million, compared with $149.0 million in 1995 and $283.0 million in 1994. CNA's
1996 catastrophe losses were primarily weather related losses including winter
storms in the East and flooding in the West. CNA's 1995 catastrophe losses
related primarily to tropical storms and hail storms in Texas. CNA's 1994
catastrophe losses related primarily to the Northridge earthquake near Los
Angeles and severe winter storms in the Northeast.
CNA, consistent with sound insurance reserving practices, regularly adjusts its
reserve estimates in subsequent reporting periods as new facts and circumstances
emerge that indicate the previous estimates need to be modified. These
adjustments, referred to as "reserve development," are inevitable given the
complexities of the reserving process and are recorded in the income statement
in the period the need for the adjustments become apparent.
36
The following adverse (favorable) reserve development reflects the effects of
management's ongoing evaluation of reserve levels and is comprised of the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------
(Amount in millions)
<S> <C> <C> <C>
Environmental Pollution $ 64.7 $ 226.0 $ 180.6
Asbestos 50.5 273.7 36.8
Other (206.2) (377.7) (288.4)
- -------------------------------------------------------------------------------------------------
Total $ (91.0) $ 122.0 $ (71.0)
=================================================================================================
</TABLE>
Management believes its reserves for environmental pollution and asbestos claims
are appropriately established based upon known facts and current case law.
However, due to the inconsistencies of court coverage decisions, the number of
waste sites subject to clean-up, the standards for clean-up and liability, and
other factors, the ultimate exposure to CNA for these claims may vary materially
from the amounts currently recorded, resulting in a potential increase in the
claim reserves recorded. In addition issues related to, among other things,
specific policy provisions, multiple insurers and allocation of liability among
insurers, consequences of conduct of the insured, missing policies and proof of
coverage make quantification of liabilities exceptionally difficult and subject
to adjustment based upon newly available data. Due to the uncertainties and
factors described above, management believes it is not practicable to develop a
meaningful range for any such additional reserves that may be required. See Note
10 of the Notes to Consolidated Financial Statements for further discussion of
environmental pollution and asbestos reserves.
Adverse 1996 environmental pollution and asbestos reserve development of $64.7
and $50.5 million, respectively, results from CNA's ongoing monitoring of
current payment and settlement patterns, current pending cases and potential
future claims. Other 1996 and 1995 reserve development, which aggregated $206.2
and $377.7 million, respectively, of favorable reserve development, is
principally due to favorable claim frequency (rate of claim occurrence) and
severity (average cost per claim) experience in the workers' compensation line
of business. These trends reflect the positive effects of changes in workers'
compensation laws, more moderate increases in medical costs, and a generally
strong economy in which individuals return to the workplace more quickly.
Other favorable reserve development during 1994 aggregated $288.4 million which
was principally attributable to positive severity experience in professional
liability lines and improvement in voluntary and involuntary workers'
compensation experience.
Life insurance revenues increased by $426.8 and $1,140.0 million, or 11.8% and
39.3%, as compared to 1995 and 1994, respectively. Life premium revenues
increased by $340.6 and $730.6 million, or 11.3% and 27.9%, as compared to 1995
and 1994, respectively. Life insurance and annuity premiums for 1996 were up
11.3% and 26.0% from 1995 and 1994, respectively. Increases in CNA's life
insurance premiums are primarily attributable to increases of approximately
$230.0 million in the Federal Employees Health Benefits Program and an increase
in other group medical business of approximately $75.0 million. These increases
were partially offset by lower individual accident and health premiums which is
attributed to CNA selling its individual disability income business in late
1995. Life investment income increased by approximately 8.3% due to a larger
asset base generated from increased cash flows from premium growth. The bond
segment of the life investment portfolio yielded 6.5% in 1996, compared to
7.0% in 1995.
CNA's life insurance subsidiaries' net income excluding net investment gains
(losses) was $94.4 million for 1996, compared to $91.3 and $68.4 million for
1995 and 1994, respectively. Profits increased primarily due to increased
investment income, continued favorable mortality experience and a change in
interest rate spread assumptions on interest sensitive products. Net investment
gains for 1996 were $80.5 million,
37
compared to $71.9 million for 1995 and losses of $37.8 million for 1994.
Cigarettes
Revenues increased by $162.4 and $301.1 million, or 7.9% and 15.7%, as compared
to 1995 and 1994, respectively. Net income increased by $61.7 and $77.4 million,
or 16.8% and 22.0%, as compared to 1995 and 1994, respectively.
Revenues increased, as compared to 1995, by approximately $105.0 million, or
5.1%, due to an increase in unit sales volume and by approximately $55.5
million, or 2.7%, due to increased unit prices. Compared to 1994, revenues
increased by approximately $211.2 million, or 11.0%, due to increased sales
volume and by approximately $86.5 million, or 4.5%, due to higher unit prices.
Lorillard's unit sales volume increased by 5.1% and 11.0% as compared to 1995
and 1994, respectively. Newport, a full price brand which accounts for
approximately 73% of Lorillard's unit sales, increased by 8.8% and 17.4% as
compared to 1995 and 1994, respectively.
Net income improved due primarily to the increased revenues discussed above,
partially offset by higher legal expenses and costs incurred for the relocation
of Lorillard's corporate headquarters.
The increased legal expenses reflect the increasing number of cases seeking
damages against Lorillard for cancer and other health effects claimed to have
resulted from an individual's use of cigarettes or exposure to tobacco smoke. At
December 31, 1996, Lorillard was named as a defendant in 143 lawsuits, compared
to 78 lawsuits in the prior year. Lorillard continues to vigorously defend
itself against these actions.
Hotels
Revenues decreased by $17.4 and $16.8 million, or 8.0% and 7.7%, as compared to
1995 and 1994, respectively. Net income decreased by $9.9 and $12.6 million, as
compared to 1995 and 1994, respectively.
Revenues in 1995 included gains of $14.5 and $4.0 million ($9.4 and $2.6 million
after taxes) related to the transfer of the Monte Carlo casino operations and
the settlement of a management contract. Revenues in 1994 included a gain of
$30.2 million ($15.4 million after taxes) from the disposition of two properties
leased to others.
Exclusive of these transactions, revenues increased by $1.1 and $13.4 million,
or 0.5% and 7.2%, respectively, and net income increased by $2.1 and $2.8
million, or 43.8% and 68.3%, respectively, as compared to 1995 and 1994. These
increases are due primarily to higher average room rates and, as compared to
1994, higher occupancy rates, partially offset by increased sales promotion
expenses.
Drilling
Revenues increased by $308.7 and $344.5 million, or 90.9% and 113.4%, as
compared to 1995 and 1994, respectively. Net income increased by $60.8 and $87.8
million as compared to 1995 and 1994, respectively.
Revenues increased by $116.8 million due to the 11 rigs acquired in the
acquisition of Arethusa in April 1996. In addition, revenues increased $123.6
and $127.6 million as a result of higher dayrates, and $30.5 and $60.3 million
from increased utilization rates as compared to 1995 and 1994, respectively. The
increased dayrates and utilization rates reflect the overall improvement in the
offshore drilling market as previously discussed. In addition, during 1996
Diamond Offshore recognized gains totaling $34.8 million from the sale of all of
its land drilling rigs and related equipment, and three offshore drilling rigs.
Net income increased as a result of the higher revenues discussed above and
lower interest expense, partially offset by increased operating costs related to
the drilling rigs acquired from Arethusa, and higher depreciation
38
expense resulting from capital expenditures associated with drilling rig
upgrades and modifications.
In October 1995 Diamond Offshore sold shares of its common stock through an
initial public offering, the proceeds of which were used to retire intercompany
debt. Accordingly, operating results in 1996 benefited from lower interest
expense as compared to the prior years.
Watches and Clocks
Revenues increased by $11.3 million, or 10.3%, and decreased by $30.7 million,
or 20.3%, as compared to 1995 and 1994, respectively. Net income increased by
$4.0 and $5.7 million, as compared to 1995 and 1994, respectively.
In January 1995, Bulova sold its industrial and defense manufacturing business,
Bulova Technologies, Inc. ("BTI"), and recognized a pre-tax and after tax gain
of $0.6 and $0.4 million, respectively.
Exclusive of BTI, revenues increased $11.9 and $21.9 million, or 10.9% and
22.1%, and net income increased by $4.4 and $6.0 million, as compared to 1995
and 1994, respectively. Revenues and net income increased due primarily to
higher watch unit sales volume of 18.9% and 13.3% as compared to 1995 and 1994,
respectively, and an overall increase in watch unit prices. In addition,
revenues and net income in 1995 include interest income of $4.2 million and a
tax expense of $3.2 million resulting from a tax audit adjustment.
Other
Revenues decreased by $1,025.1 million and increased by $287.3 million, as
compared to 1995 and 1994, respectively. Net income decreased by $680.4 million
and increased by $152.1 million as compared to 1995 and 1994, respectively.
Other operations consist primarily of investment income of non-insurance
companies and, in 1995 and 1994, the Company's investment in CBS Inc.
The components of investment gains (losses) included in other operations are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C>
Derivative instruments (1) $ (153.8) $ (40.1) $ (17.6)
Short-term investments, primarily U.S. government securities 29.4 38.1 (159.9)
Diamond Offshore common stock (2) 186.6 192.9
Common stock of CBS Inc. 579.2
Common stock of Champion International Corporation 20.3 372.9
Other (41.8) (22.8) (24.4)
- -------------------------------------------------------------------------------------------------
40.7 1,120.2 (201.9)
Income tax (expense) benefit (14.2) (393.5) 70.6
Minority interest 1.9 (.2)
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 28.4 $ 726.5 $ (131.3)
=================================================================================================
(1) Includes losses on equity index futures and options aggregating $234.0. The Company
continued to experience significant losses from its open contracts on these equity index
positions in 1997.
(2) See Note 15 of the Notes to Consolidated Financial Statements.
</TABLE>
39
Exclusive of securities transactions, other revenues increased by $54.4 and
$44.7 million, or 42.9% and 32.7%, as compared to 1995 and 1994, respectively.
Revenues increased due primarily to higher investment income reflecting
increased levels of invested assets, partially offset by lower earnings
(accounted for under the equity method) of CBS Inc. Net loss decreased by $17.7
million and increased by $7.6 million, as compared to 1995 and 1994,
respectively. Net loss declined, as compared to 1995, due primarily to the
increased investment income, partially offset by higher corporate interest
expense and the absence of equity income from CBS. Net loss increased, as
compared to 1994, due primarily to the absence of equity income from CBS,
partially offset by higher investment income.
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 provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. Generally, this Statement is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. This Statement will not have a significant impact on the Company.
In October 1996, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
which, among other things, sets forth criteria for accrual of costs in relation
to clean-up and remediation of environmental conditions. This Statement does not
provide guidance on recognizing liabilities of insurance companies for unpaid
claims, nor does it address asset impairment issues. It is effective for fiscal
years beginning after December 15, 1996 and will not have a significant impact
on the Company.
In January 1997, the Securities and Exchange Commission expanded existing
disclosure requirements with respect to certain derivative instruments. The new
rules require enhanced descriptions in the accounting policies footnote to the
financial statements and also require qualitative and quantitative disclosure
outside the financial statements regarding market risk related to the derivative
instruments. The rules are effective for fiscal years ending after June 15, 1997
and will not have a significant impact on the Company.
FORWARD-LOOKING STATEMENTS
When included in this Report, the words "expects," "intends," "anticipates,"
"estimates," and analogous expressions are intended to identify forward-looking
statements. Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, among others, general economic
and business conditions, competition, changes in financial markets (credit,
currency, commodities and stocks), changes in foreign, political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, judicial decisions and rulings in smoking and health litigation,
changes in foreign and domestic oil and gas exploration and production activity,
customer preferences and various other matters, many of which are beyond the
Company's control. These forward-looking statements speak only as of the date of
this Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any
statement is based.
40
SUPPLEMENTAL FINANCIAL INFORMATION
The following supplemental condensed financial information reflects the
financial position, results of operations and cash flows of Loews Corporation
with its investments in CNA and Diamond Offshore accounted for on an equity
basis rather than as consolidated subsidiaries. It does not purport to present
the financial position, results of operations and cash flows of the Company in
accordance with generally accepted accounting principles because it does not
comply with SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries."
Management believes, however, that this disaggregated financial data enhances an
understanding of the consolidated financial statements by providing users with a
format that management uses in assessing the Company.
Condensed Balance Sheet Information
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the Equity Method)
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C>
Assets:
Current assets $ 546.7 $ 430.7
Investments in U.S. government securities and other 4,486.3 3,726.5
- -------------------------------------------------------------------------------------------------
Total current assets and investments in securities 5,033.0 4,157.2
Investment in CNA 5,802.3 5,519.4
Investment in Diamond Offshore 584.7 345.8
Other assets 640.5 615.5
- -------------------------------------------------------------------------------------------------
Total assets $12,060.5 $10,637.9
=================================================================================================
Liabilities and Shareholders' Equity:
Current liabilities $ 1,204.0 $ 872.0
Securities sold under agreements to repurchase 447.8
Long-term debt, less current maturities and unamortized discount 1,315.4 1,225.5
Other liabilities 362.1 301.7
- -------------------------------------------------------------------------------------------------
Total liabilities 3,329.3 2,399.2
Shareholders' equity 8,731.2 8,238.7
- -------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $12,060.5 $10,637.9
=================================================================================================
</TABLE>
41
Condensed Statements of Income Information
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the Equity Method)
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C>
Revenues:
Manufactured products and other $2,552.6 $2,393.1 $2,314.1
Investment income including investment gains (losses) 260.1 1,251.3 (83.6)
- -------------------------------------------------------------------------------------------------
Total 2,812.7 3,644.4 2,230.5
- -------------------------------------------------------------------------------------------------
Expenses:
Cost of manufactured products sold and other 1,857.3 1,765.0 1,705.3
Interest 115.6 100.5 105.5
Income taxes 316.7 657.2 161.0
- -------------------------------------------------------------------------------------------------
Total 2,289.6 2,522.7 1,971.8
- -------------------------------------------------------------------------------------------------
Income from operations 523.1 1,121.7 258.7
Equity in income (loss) of:
CNA 808.7 635.2 24.5
Diamond Offshore 52.1 8.8 (15.4)
- -------------------------------------------------------------------------------------------------
Net income $1,383.9 $1,765.7 $ 267.8
=================================================================================================
</TABLE>
42
Condensed Statements of Cash Flow Information
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the Equity Method)
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C>
Operating Activities:
Net income $1,383.9 $ 1,765.7 $ 267.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Investment (gains) losses (59.3) (1,116.2) 201.3
Other (755.7) (495.3) 101.2
Changes in assets and liabilities-net (451.7) 223.0 (92.7)
- -------------------------------------------------------------------------------------------------
Total 117.2 377.2 477.6
=================================================================================================
Investing Activities:
Net (increase) decrease in short-term investments, primarily U.S.
government securities (447.1) 77.4 (2,475.8)
Securities sold under agreements to repurchase 447.8 (2,092.9) 2,092.9
Net decrease in securities 624.0 61.1
Proceeds from sale of CBS stock 901.7
Investments in and advances to subsidiaries-net 331.2 (10.0)
Other (74.8) (133.8) 184.0
- -------------------------------------------------------------------------------------------------
Total (74.1) (292.4) (147.8)
- -------------------------------------------------------------------------------------------------
Financing Activities:
Dividends paid to shareholders (116.2) (73.8) (60.2)
Purchases of treasury shares (215.7) (6.0) (225.1)
Increase (decrease) in long-term debt-net 299.5 (5.5) (51.6)
- -------------------------------------------------------------------------------------------------
Total (32.4) (85.3) (336.9)
- -------------------------------------------------------------------------------------------------
Net change in cash 10.7 (.5) (7.1)
Cash, beginning of year 9.7 10.2 17.3
- -------------------------------------------------------------------------------------------------
Cash, end of year $ 20.4 $ 9.7 $ 10.2
=================================================================================================
</TABLE>
43
Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Assets:
- -------------------------------------------------------------------------------------------------
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C>
Investments (Notes 1, 2, 3 and 4):
Fixed maturities, amortized cost of $29,319.3 and $29,403.5 $29,478.3 $30,467.7
Equity securities, cost of $981.8 and $990.9 1,136.3 1,213.6
Other investments 997.9 812.6
Short-term investments 8,304.9 7,137.0
- -------------------------------------------------------------------------------------------------
Total investments 39,917.4 39,630.9
Cash 305.7 241.7
Receivables-net (Notes 1 and 7) 13,862.1 13,660.1
Property, plant and equipment-net (Notes 1 and 9) 2,225.1 1,437.5
Deferred income taxes (Note 11) 1,138.0 1,205.2
Goodwill and other intangible assets-net (Note 1) 562.4 481.8
Other assets (Notes 1, 8, 14 and 18) 1,697.2 1,498.3
Deferred policy acquisition costs of insurance subsidiaries (Note 1) 1,854.2 1,493.3
Separate Account business (Notes 1 and 3) 6,120.9 5,868.1
- -------------------------------------------------------------------------------------------------
Total assets $67,683.0 $65,516.9
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
44
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
- -------------------------------------------------------------------------------------------------
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C>
Insurance reserves (Notes 1 and 10):
Claim and claim expense $30,829.5 $32,032.4
Future policy benefits 4,181.3 3,515.9
Unearned insurance premiums 4,658.7 4,549.5
Policyholders' funds 745.6 705.0
- -------------------------------------------------------------------------------------------------
Total insurance reserves 40,415.1 40,802.8
Accounts payable and accrued liabilities 3,110.9 2,217.8
Payable for securities purchased 966.4 435.3
Securities sold under agreements to repurchase (Notes 1 and 2) 548.3 774.1
Long-term debt, less unamortized discount (Notes 3 and 12) 4,370.7 4,248.2
Deferred credits and other liabilities (Notes 1 and 14) 1,538.6 1,592.6
Separate Account business (Notes 1 and 3) 6,120.9 5,868.1
- -------------------------------------------------------------------------------------------------
Total liabilities 57,070.9 55,938.9
- -------------------------------------------------------------------------------------------------
Minority interest 1,880.9 1,339.3
- -------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
(Notes 1, 2, 4, 10, 11, 12, 13, 14, 18 and 19)
Shareholders' equity (Notes 1, 2, 12 and 16):
Common stock, $1 par value:
Authorized - 400,000,000 shares
Issued and outstanding - 115,000,000 and 117,832,800 shares 115.0 117.8
Additional paid-in capital 165.8 170.0
Earnings retained in the business 8,216.8 7,157.8
Unrealized appreciation 233.6 793.1
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 8,731.2 8,238.7
- -------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $67,683.0 $65,516.9
=================================================================================================
</TABLE>
45
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED INCOME
- -------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data)
Revenues (Note 1):
<S> <C> <C> <C>
Insurance premiums (Note 18):
Property and casualty $10,127.1 $ 8,723.8 $ 6,837.1
Life 3,347.1 3,006.5 2,616.5
Investment income, net of expenses (Note 2) 2,476.3 2,211.5 1,671.3
Investment gains (losses) (Notes 2 and 5) 491.3 1,387.1 (447.0)
Manufactured products (including excise taxes of
$477.6, $455.0 and $431.7) 2,327.5 2,152.2 2,061.4
Gain on issuance of subsidiary's stock (Note 15) 186.6 192.9
Other 1,486.5 1,003.4 775.9
- -------------------------------------------------------------------------------------------------
Total 20,442.4 18,677.4 13,515.2
- -------------------------------------------------------------------------------------------------
Expenses (Note 1):
Insurance claims and policyholders' benefits
(Notes 10 and 18) 11,370.5 9,951.7 8,448.7
Amortization of deferred policy acquisition costs 2,192.1 1,843.5 1,373.1
Cost of manufactured products sold 992.1 964.1 929.4
Selling, operating, advertising and administrative
expenses 3,161.9 2,796.3 2,323.3
Interest 318.0 282.5 174.6
- -------------------------------------------------------------------------------------------------
Total 18,034.6 15,838.1 13,249.1
- -------------------------------------------------------------------------------------------------
2,407.8 2,839.3 266.1
- -------------------------------------------------------------------------------------------------
Income taxes (benefits) (Note 11) 791.4 945.3 (9.0)
Minority interest 232.5 128.3 7.3
- -------------------------------------------------------------------------------------------------
Total 1,023.9 1,073.6 (1.7)
- -------------------------------------------------------------------------------------------------
Net income $ 1,383.9 $ 1,765.7 $ 267.8
=================================================================================================
Net income per share (Note 16) $ 11.91 $ 14.98 $ 2.22
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
46
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------
Earnings Common
Additional Retained Pension Stock
Common Paid-in in the Unrealized Liability Held in
Stock Capital Business Appreciation Adjustment Treasury
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 61.5 $210.3 $5,476.7 $ 406.7 $(28.0)
Net income 267.8
Dividends paid, $.50 per share (60.2)
Purchases of common stock $ 226.8
Retirement of treasury stock (2.5) (9.9) (214.4) (226.8)
Net unrealized depreciation (729.4)
Pension liability adjustment
(Note 14) 8.0
Equity in certain transactions
of subsidiary companies 18.7
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1994 59.0 219.1 5,469.9 (322.7) (20.0)
Net income 1,765.7
Two-for-one stock split 59.0 (59.0)
Dividends paid, $.63 per share (73.8)
Purchases of common stock 4.3
Retirement of treasury stock (.2) (.1) (4.0) (4.3)
Net unrealized appreciation 1,115.8
Pension liability adjustment
(Note 14) 20.0
Equity in certain transactions of
subsidiary companies 10.0
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1995 117.8 170.0 7,157.8 793.1
Net income 1,383.9
Dividends paid, $1.00 per share (116.2)
Purchases of common stock 215.7
Retirement of treasury stock (2.8) (4.2) (208.7) (215.7)
Net unrealized depreciation (559.5)
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $115.0 $165.8 $8,216.8 $ 233.6
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
47
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED CASH FLOWS
- -------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
Operating Activities:
<S> <C> <C> <C>
Net income $ 1,383.9 $ 1,765.7 $ 267.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Investment (gains) losses (677.9) (1,580.0) 447.0
Provision for minority interest 232.5 128.3 7.3
Amortization of investments (177.6) (141.4) (120.0)
Depreciation and amortization 285.0 225.8 160.7
Provision for deferred income taxes 474.9 302.3 (112.1)
Undistributed earnings from unconsolidated
companies (14.4) (30.1)
Distribution of CBS equity earnings 4.4 91.6
Changes in assets and liabilities-net:
Reinsurance receivables 204.1 (41.4) (236.0)
Other receivables (334.6) (164.5) (369.6)
Deferred policy acquisition costs (360.9) (162.6) (45.4)
Insurance reserves and claims (358.0) 431.0 1,484.4
Accounts payable and accrued liabilities 1,012.3 290.3 78.8
Investments classified as trading securities (247.2)
Other-net (492.8) 252.4 (125.1)
- -------------------------------------------------------------------------------------------------
943.7 1,295.9 1,499.3
- -------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of fixed maturities (41,004.7) (29,275.3) (34,282.1)
Proceeds from sales of fixed maturities 41,895.6 24,093.6 25,398.7
Proceeds from maturities of fixed maturities 1,796.3 2,855.2 4,506.3
Purchases of equity securities (971.6) (1,479.3) (1,195.1)
Proceeds from sales of equity securities 1,077.4 2,317.9 1,034.1
Purchase of The Continental Corporation-net of
cash acquired (960.4)
Proceeds from sale of CBS stock 901.7
Proceeds from Diamond Offshore initial public
offering 338.4
Return of investment from CBS tender offer 184.0
Purchases of property and equipment (545.5) (257.9) (209.1)
Proceeds from sales of property and equipment 54.4 16.5 97.7
Securities sold under agreements to repurchase (225.8) (3,797.4) 3,958.3
Change in short-term investments (2,809.6) 2,998.8 (594.9)
Change in other investments 171.3 (1.5) (63.4)
- -------------------------------------------------------------------------------------------------
(562.2) (2,249.7) (1,165.5)
- -------------------------------------------------------------------------------------------------
</TABLE>
48
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED CASH FLOWS
- -------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
(Amounts in millions)
Financing Activities:
<S> <C> <C> <C>
Dividends paid to shareholders (116.2) (73.8) (60.2)
Purchases of treasury shares (215.7) (6.0) (225.1)
Principal payments on long-term debt (574.2) (8.8) (54.5)
Issuance of long-term debt 615.9 1,337.0 .5
Change in short-term debt 2.3 (201.9)
Receipts credited to policyholders 11.0 22.6 32.8
Withdrawals of policyholder account balances (40.6) (34.2) (22.4)
- -------------------------------------------------------------------------------------------------
(317.5) 1,034.9 (328.9)
- -------------------------------------------------------------------------------------------------
Net change in cash 64.0 81.1 4.9
Cash, beginning of year 241.7 160.6 155.7
- -------------------------------------------------------------------------------------------------
Cash, end of year $ 305.7 $ 241.7 $ 160.6
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Note 1. Summary of Significant Accounting Policies-
Principles of consolidation - The consolidated financial statements include all
significant subsidiaries and all material intercompany accounts and transactions
have been eliminated. The equity method of accounting is used for investments in
associated companies in which the Company generally has an interest of 20% to
50%.
Accounting estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and the related notes. Actual results could differ from
those estimates.
Investments - Investments in securities, which are held principally by insurance
subsidiaries of CNA Financial Corporation ("CNA"), an 84% owned subsidiary, are
carried as follows:
The Company classifies fixed maturity securities (bonds and redeemable preferred
stocks) and equity securities held by insurance subsidiaries as available for
sale and they are carried at fair value. The amortized cost of fixed maturity
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretion are included in investment income.
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.
Derivative instruments are generally held for trading purposes and, as such, are
marked to market. Gains or losses are included in investment gains or losses.
Interest rate swaps which are used to manage the Company's exposure to variable
rate long-term debt are not considered held for trading purposes. Such swaps are
accounted for as an adjustment to interest expense.
Mortgage loans are carried at unpaid principal balances, including unamortized
premium or discount. Real estate is carried at depreciated cost. Policy loans
are carried at unpaid balances. Short-term investments include U.S. government
securities, commercial paper and time deposits and are carried at fair value,
which approximates amortized cost.
All securities transactions are recorded on the trade date. The cost of
securities sold is determined by the identified certificate method. Unrealized
appreciation in shareholders' equity reflects the unrealized gain or loss on
investments which are available for sale and carried at fair value, net of
applicable deferred income taxes and participating policyholders' and minority
interests. Investments are written down to estimated fair values and losses are
charged to income when a decline in value is considered to be other than
temporary.
Securities sold under agreements to repurchase - The Company has a securities
lending program where securities are loaned to third parties, primarily major
brokerage firms. Borrowers of these securities must deposit 100% of the market
value of these securities if the collateral is cash, or 102% if the collateral
is securities. Cash deposits from these transactions are invested in short-term
investments (primarily U.S. government securities and commercial paper).
Securities sold under repurchase agreements are recorded at their contracted
repurchase amounts. The Company continues to receive the interest on loaned debt
securities, as beneficial owner, and accordingly, loaned debt securities are
included within fixed maturity securities.
Insurance Operations - Premium revenue - Insurance premiums on property and
casualty and health insurance contracts (included in life premiums) are earned
ratably over the terms of the policies after provision for estimated adjustments
on retrospectively rated policies and deductions for ceded insurance. Revenues
on universal life type contracts comprise contract charges and fees which are
recognized over the coverage period. Other life insurance premiums are
recognized as revenue when due after deductions for ceded insurance.
Claim and claim expense reserves - Claim and claim expense reserves, except
reserves for structured settlements, workers' compensation lifetime claims and
accident and health disability claims, are based on undiscounted (a) case basis
estimates for losses reported on direct business, adjusted in the aggregate for
ultimate loss expectations, (b) estimates of unreported losses based upon past
experience, (c) estimates of
50
losses on assumed insurance, and (d) estimates of future expenses to be incurred
in settlement of claims. In establishing these estimates, consideration is given
to current conditions and trends as well as past company and industry
experience.
Claim and claim expense reserves are based on estimates and the ultimate
liability may vary significantly from such estimates. CNA regularly reviews its
reserves, and any adjustments that are made to the reserves are reflected in
operating income in the period the need for such adjustments become apparent.
See Note 10 for a further discussion of claim and claim expense reserves.
Structured settlements have been negotiated for claims on certain property and
casualty insurance policies. Structured settlements are agreements to provide
periodic payments to claimants, which are fixed and determinable as to the
amount and time of payment. Certain structured settlements are funded by
annuities purchased from CNA's life insurance subsidiary. Related annuity
obligations are carried in future policy benefits reserves. Obligations for
structured settlements not funded by annuities are carried at the present value
of future benefits. At December 31, 1996 and 1995, such reserves, discounted at
interest rates ranging from 6.3% to 7.5%, totaled $924.0 and $897.0,
respectively (reflecting a discount of $1,556.0 and $1,555.0, respectively).
Workers' compensation lifetime claims and accident and health disability claim
reserves are discounted at interest rates ranging from 3.5% to 6.0% with
mortality and morbidity assumptions reflecting CNA's and current industry
experience. Such discounted reserves totaled $2,165.4 and $2,240.0 (reflecting a
discount of $903.0 and $893.9, respectively) at December 31, 1996 and 1995,
respectively.
Future policy benefits reserves - Reserves for traditional life insurance
products are computed based upon the net level premium method using actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions include a margin for adverse deviation and
generally vary by plan, age at issue and policy duration. Interest rates range
from 3.0% to 11.0%, and mortality, morbidity and withdrawal assumptions reflect
CNA and industry experience prevailing at the time of issue. Renewal expense
estimates include the estimated effects of inflation and expenses beyond the
premium paying period.
Involuntary risks - CNA's share of involuntary risks is mandatory and generally
a function of its share of the voluntary market by line of insurance in each
state. CNA records the estimated effects of its mandatory participation in
residual markets on an accrual basis. CNA records assessments for insolvencies
as they are paid. Accrual of such assessments is not practical, as past
experience is not a reliable indicator of future activity.
Reinsurance - CNA assumes and cedes insurance with other insurers and reinsurers
and members of various reinsurance pools and associations. CNA utilizes
reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and minimize exposures on larger risks. The reinsurance
coverages are tailored to the specific risk characteristics of each product line
with CNA's retained amount varying by type of 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. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability.
Deferred policy acquisition costs - Costs of acquiring property and casualty
insurance business, which vary with and are primarily related to the production
of such business, are deferred and amortized ratably over the period the related
premiums are recognized. Such costs include commissions, premium taxes, and
certain underwriting and policy issuance costs. Anticipated investment income is
considered in the determination of the recoverability of deferred policy
acquisition costs. Life acquisition costs are capitalized and amortized based on
assumptions consistent with those used for computing policy benefit reserves.
Acquisition costs on ordinary life business are amortized over the assumed
premium paying periods. Universal life and annuity acquisition costs are
amortized in proportion to the present value of estimated gross profits over the
products' assumed durations, which are regularly evaluated and adjusted, as
appropriate.
Restricted investments - On December 30, 1993, CNA deposited $986.8 in an escrow
account, pursuant to the Fibreboard Global Settlement Agreement, as discussed
51
in Note 19. The funds are included in short-term investments and are invested in
U.S. treasury securities. The escrow account amounted to $1,071.2 and $1,044.6
at December 31, 1996 and 1995, respectively.
Participating business - Participating business represented 0.5%, 0.6% and 0.9%
of CNA's gross life insurance in force and 0.7%, 0.8% and 1.0% of life insurance
premium income for 1996, 1995 and 1994, respectively. Participating
policyholders' equity is determined by allocating 90% of related net income or
loss and unrealized investment gains or losses related to such business as
allowed by applicable laws, less dividends determined by CNA's Board of
Directors. In the accompanying Statements of Consolidated Income, revenues and
benefits and expenses include amounts related to participating policies; the net
income or loss allocated to participating policyholders' equity is a component
of insurance claims and policyholders' benefits.
Separate Account business - CNA's life insurance subsidiary, Continental
Assurance Company ("CAC"), issues certain investment and annuity contracts. The
supporting assets and liabilities of these contracts are legally segregated and
reflected in the accompanying Consolidated Balance Sheets as assets and
liabilities of Separate Account business. CAC guarantees principal and a
specified return to the contract holders on approximately 82% of the Separate
Account business. Substantially all assets of the Separate Accounts are carried
at fair value.
Statutory capital and surplus - Statutory capital and surplus and net income,
determined in accordance with accounting practices prescribed by the regulations
and statutes of various insurance departments, for property and casualty and
life insurance subsidiaries, are as follows:
<TABLE>
<CAPTION>
Statutory Capital
and Surplus Statutory Net Income
--------------------- -----------------------------
December 31 Year Ended December 31
--------------------- -----------------------------
1996 1995* 1996 1995* 1994**
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and casualty $6,348.8 $5,695.9 $1,208.0 $1,208.3 $67.3
Life 1,163.4 1,127.6 57.6 30.2 65.1
- -------------------------------------------------------------------------------------------------
* Includes results of The Continental Corporation for the full year.
** Excludes results for The Continental Corporation.
</TABLE>
Statutory accounting practices - CNA's insurance affiliates are domiciled in
various states, provinces or countries. These affiliates prepare their statutory
financial statements in accordance with accounting practices "prescribed" or
otherwise "permitted" by the respective state's insurance department. Prescribed
statutory accounting practices are set forth in a variety of publications of the
National Association of Insurance Commissioners, as well as state laws,
regulations and general administrative rules. CNA has no material permitted
accounting practices.
52
Inventories-
Tobacco products - These inventories, aggregating $247.4 and $192.2 at December
31, 1996 and 1995, respectively, are stated at the lower of cost or market,
using the last-in, first-out (LIFO) method.
Watches and clocks - These inventories, aggregating $37.1 and $38.9 at December
31, 1996 and 1995, respectively, are stated at the lower of cost or market,
using the first-in, first-out (FIFO) method.
Goodwill and other intangible assets - Goodwill, representing the excess of the
purchase price over the fair value of the net assets of the acquired entities,
is generally amortized on a straight-line basis over the period of expected
benefit of twenty years. Other intangible assets are amortized on a
straight-line basis over their estimated economic lives. Accumulated
amortization at December 31, 1996 and 1995 was $243.4 and $207.1, respectively.
Amortization expense amounted to $36.3, $25.6 and $9.1 for the years ended
December 31, 1996, 1995 and 1994, respectively. Intangible assets are
periodically reviewed to determine whether an impairment in value has occurred.
Property, plant and equipment - Property, plant and equipment is carried at cost
less accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the various classes of
properties. Leaseholds and leasehold improvements are depreciated or amortized
over the terms of the related leases (including optional renewal periods where
appropriate) or the estimated lives of improvements, if less than the lease
term.
The principal service lives used in computing provisions for depreciation are as
follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and building equipment 40
Building fixtures 10 to 20
Machinery and equipment 5 to 12
Hotel equipment 4 to 12
Drilling equipment 10 to 25
</TABLE>
Impairment of long-lived assets - Long-lived assets and certain intangibles are
reported at the lower of carrying amount or fair value. The Company reviews its
long-lived assets for impairment when changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Assets to be disposed of and
assets not expected to provide any future service potential to the Company are
recorded at the lower of carrying amount or fair value less cost to sell.
Reclassification - Certain amounts applicable to prior periods have been
reclassified to conform to the classifications followed in 1996.
53
<TABLE>
<CAPTION>
Note 2. Investments -
Investment income consisted of:
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
Taxable $1,820.9 $1,512.1 $1,019.1
Tax exempt 273.4 264.3 333.8
Redeemable preferred stocks 2.0 3.9 13.5
Equity securities 45.3 55.5 28.2
Security repurchase transactions 89.2 215.5 271.2
Short term investments 290.2 302.3 174.1
Other 78.5 76.8 42.5
- -------------------------------------------------------------------------------------------------
Total investment income 2,599.5 2,430.4 1,882.4
Investment expenses 43.2 46.1 24.0
Security repurchase transactions 80.0 172.8 187.1
- -------------------------------------------------------------------------------------------------
Investment income-net $2,476.3 $2,211.5 $1,671.3
=================================================================================================
Investment gains (losses) are as follows:
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
Fixed maturities $ 324.6 $ 222.4 $ (314.8)
Equity securities 209.7 1,075.5 41.6
Derivative instruments (a) (137.6) (31.4) (14.6)
Short-term investments 10.3 47.5 (164.7)
Other 84.3 73.1 5.5
- -------------------------------------------------------------------------------------------------
491.3 1,387.1 (447.0)
Gain on issuance of subsidiary's stock 186.6 192.9
- -------------------------------------------------------------------------------------------------
677.9 1,580.0 (447.0)
Income tax (expense) benefit (238.0) (552.3) 155.3
Allocated to participating policyholders (14.3) (7.8) 10.9
Minority interest (61.1) (46.7) 25.1
- -------------------------------------------------------------------------------------------------
Realized investment gains (losses)-net $ 364.5 $ 973.2 $ (255.7)
=================================================================================================
(a) Includes losses on equity index futures and options aggregating $234.0 for the year ended
December 31, 1996. The Company continued to experience significant losses from its open
contracts on these equity index positions in 1997.
</TABLE>
54
The carrying value of investments (other than equity securities) that have not
produced income for the last twelve months is $103.4 at December 31, 1996.
Investment gains of $696.8, $1,135.2 and $322.4 and losses of $149.2, $369.0 and
$760.3 were realized on securities available for sale for the years ended
December 31, 1996, 1995 and 1994, respectively. Investment gains in 1996 also
include $2.7 of net unrealized losses on equity securities in the Company's
trading portfolio.
The amortized cost and market values of securities are as follows:
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------- Market
December 31, 1996 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and obligations of
government agencies $11,619.5 $ 72.4 $114.1 $11,577.8
Asset-backed 6,297.9 53.3 58.9 6,292.3
States, municipalities and political
subdivisions-tax exempt 4,859.6 120.9 29.3 4,951.2
Corporate 4,745.1 122.1 64.1 4,803.1
Other debt 1,748.0 59.5 19.2 1,788.3
Redeemable preferred stocks 49.2 16.7 .3 65.6
- -------------------------------------------------------------------------------------------------
Total fixed maturities available for sale 29,319.3 444.9 285.9 29,478.3
Equity securities available for sale 701.9 254.3 97.1 859.1
Equity securities, trading portfolio 279.9 24.9 27.6 277.2
Short-term investments available for sale 8,305.1 .4 .6 8,304.9
- -------------------------------------------------------------------------------------------------
$38,606.2 $ 724.5 $411.2 $38,919.5
=================================================================================================
December 31, 1995
- -------------------------------------------------------------------------------------------------
U.S. government and obligations of
government agencies $13,064.0 $ 479.5 $ 1.3 $13,542.2
Asset-backed 5,939.7 160.3 13.8 6,086.2
States, municipalities and political
subdivisions-tax exempt 3,452.8 163.7 13.4 3,603.1
Corporate 4,540.4 215.2 39.9 4,715.7
Other debt 2,306.3 105.4 7.5 2,404.2
Redeemable preferred stocks 100.3 17.2 1.2 116.3
- -------------------------------------------------------------------------------------------------
Total fixed maturities available for sale 29,403.5 1,141.3 77.1 30,467.7
Equity securities available for sale 990.9 247.3 24.6 1,213.6
Short-term investments available for sale 7,117.0 20.0 7,137.0
- -------------------------------------------------------------------------------------------------
$37,511.4 $1,408.6 $101.7 $38,818.3
=================================================================================================
</TABLE>
55
The amortized cost and market value of fixed maturities at December 31, 1996 and
1995 are shown below by contractual maturity. Actual maturities may differ from
contractual maturities because securities may be called or prepaid with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
1996 1995
------------------------ -----------------------
Amortized Market Amortized Market
December 31 Cost Value Cost Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,494.1 $ 2,506.4 $ 849.8 $ 853.0
Due after one year through five years 10,145.7 10,041.8 11,916.2 12,124.0
Due after five years through ten years 4,811.5 4,829.7 4,542.5 4,767.2
Due after ten years 5,570.1 5,808.1 6,155.3 6,637.3
Asset-backed securities not due at a
single maturity date 6,297.9 6,292.3 5,939.7 6,086.2
- -------------------------------------------------------------------------------------------------
$29,319.3 $29,478.3 $29,403.5 $30,467.7
=================================================================================================
</TABLE>
Note 3. Fair Value of Financial Instruments -
<TABLE>
<CAPTION>
1996 1995
------------------------- ----------------------
Carrying Estimated Carrying Estimated
December 31 Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Other investments $ 987.0 $ 977.2 $ 809.4 $ 838.9
Separate Account business:
Fixed maturities 4,608.3 4,608.3 5,499.3 5,499.3
Equity securities 169.2 169.2 242.7 242.7
Short-term investments 906.1 906.1 84.5 84.5
Other 437.4 437.4 41.6 48.7
Financial liabilities:
Premium deposits and annuity contracts 1,064.5 1,017.6 825.5 776.8
Long-term debt 4,313.9 4,322.8 4,189.9 4,305.5
Financial guarantee liabilities 382.0 378.3 479.6 472.8
Separate Account business:
Guaranteed investment contracts 3,989.5 4,011.5 4,315.8 4,455.5
Deferred annuities 73.0 84.1 74.1 108.2
Variable Separate Accounts 568.6 568.6 228.0 228.0
Other 895.6 895.6 585.8 585.8
- -------------------------------------------------------------------------------------------------
</TABLE>
56
In cases where quoted market prices are not available, fair values may be based
on estimates using present value or other valuation techniques. These techniques
are significantly affected by the assumptions used, including the discount rates
and estimates of future cash flows. Accordingly, the estimates presented herein
are subjective in nature and are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The amounts reported in
the balance sheet for fixed maturities securities, equity securities, derivative
instruments, short-term investments and securities sold under agreements to
repurchase are at fair value. As such, these financial instruments are not shown
in the table above. See Note 4 for the fair value of derivative instruments.
Since the disclosure excludes certain financial instruments and all nonfinancial
instruments such as real estate and insurance reserves, the aggregate fair value
amounts cannot be summed to determine the underlying economic value of the
Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Fixed maturity securities, equity securities and separate account securities are
based on quoted market prices, where available. For securities not actively
traded, fair values are estimated using values obtained from independent pricing
services or quoted market prices of comparable instruments adjusted for
differences between the quoted instruments and the instruments being valued.
Other investments and other Separate Account assets consist of mortgage loans
and notes receivable, policy loans, investments in limited partnerships and
various miscellaneous assets. Valuation techniques to determine fair value
consist of discounted cash flows and quoted market prices of (a) the
investments, (b) comparable instruments or (c) underlying assets of the
investments.
Premium deposits and annuity contracts are valued based on cash surrender values
and the outstanding fund balances.
The fair value of the liability for financial guarantee contracts is based on
discounted cash flows utilizing interest rates currently being offered for
similar contracts or spot interest rates.
The fair value of guaranteed investment contracts and deferred annuities of the
Separate Accounts business are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with similar maturities. The fair value of the liabilities for
variable Separate Accounts business are based on the quoted market values of the
underlying assets of each variable Separate Account. The fair value of other
Separate Account business liabilities approximates carrying value.
Fair value of long-term debt is based on quoted market prices when available.
The fair values for other long-term debt are based on quoted market prices of
comparable instruments adjusted for differences between the quoted instruments
and the instruments being valued or are estimated using discounted cash flow
analyses, based on current incremental borrowing rates for similar types of
borrowing arrangements.
57
Note 4. Off-Balance-Sheet and Derivative Financial Instruments -
The Company enters into various transactions involving off-balance-sheet
financial instruments through a variety of futures, swaps, options, forwards and
other contracts (the "Contracts") as part of its investing activities. These
Contracts are commonly referred to as derivative instruments since their
underlying values may be linked to, among other things, interest rates, exchange
rates, prices of securities and financial or commodity indexes. The Company uses
these Contracts for its asset and liability management activities as well
as income enhancements for its portfolio management strategy. Entering into
these Contracts involves not only the risk of dealing with counterparties and
their ability to meet the terms of the Contracts but also the market risk
associated with those positions where the Company does not hold an offsetting
security. Exposure to market risk is managed in accordance with risk limits set
by senior management and by buying or selling instruments or entering into
offsetting positions.
The notional amounts of derivatives shown in the following table do not
represent amounts exchanged in these transactions and, therefore, are not a
measure of the exposure the Company has through its use of derivative
instruments. In addition, notional amounts are presented gross and do not
reflect the net effect of offsetting positions. The amounts exchanged are
calculated on the basis of the notional amounts and the other terms of the
derivative instruments.
The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these Contracts with large financial
institutions and considers the risk of nonperformance to be remote. In addition,
the amounts subject to credit risk are substantially mitigated by many of the
Contracts' collateral requirements.
The Company's investments in derivative instruments are as follows:
<TABLE>
<CAPTION>
Fair Value
Asset (Liability)
Contractual/ -------------------- Estimated
Notional Average for Potential Recognized
December 31, 1996 Value Year-End the Year Exposure Gain (Loss)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate swaps $ 85.0 $ (.4) $ 2.3 $ (16.0)(3) $ 29.0
Commitments to purchase government
and municipal securities 406.5 (.9) (1.0) (40.6)(3)
Options on equities and equity index 3,219.2 81.6 40.6 (52.6)(1) (85.7)
Options on treasury securities 218.6 1.3 .6 3.3
Financial futures and forwards:
Foreign currency 599.0 (2.0) (1.7) (14.7)(3) (3.5)
Equity index and other 1,466.9 (286.2)(1) (138.2)
Commodity:
Swaps 194.5 11.1 (14.3) (31.6)(1) 48.5
Options 216.5 2.1 2.0 (1.2)(3) (3.5)
Futures and forwards 78.5 (1.4) (.5) (7.7)(3) (4.6)
Purchase obligations 79.1 2.3 (7.0) (16.3)(1) 17.1
- ---------------------------------------------------------------------- -----------
Total $6,563.8 $ 93.7 $ 21.0 $ (137.6)
=================================================================================================
</TABLE>
58
<TABLE>
<CAPTION>
Fair Value
Asset (Liability)
Contractual/ -------------------- Estimated
Notional Average for Potential Recognized
December 31, 1995 Value Year-End the Year Exposure Gain (Loss)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate swaps $ 93.0 $ 10.0 $ 1.1 $ 9.1
Options on equities and equity index 3,455.1 39.2 19.4 $ (5.6)(1) (59.3)
Options on foreign currency 434.7 37.8 10.4 72.5
Options on treasury securities 1,111.6 (12.1) (3.4) (176.5)(2) (1.8)
Financial futures and forwards:
Foreign currency 508.6 (.5) .3 (20.8)(3) (3.9)
Equity index and other 717.1 (140.7)(1) (44.0)
Commodity:
Swaps 262.1 (31.4) (33.2) (46.1)(1) (2.8)
Options 596.5 2.5 3.0 (2.9)
Futures 7.9 (1.6)(1)
Purchase obligations 88.0 (14.4) (19.6) (14.7)(1) 1.7
- ---------------------------------------------------------------------- -----------
Total $7,274.6 $ 31.1 $(22.0) $(31.4)
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate swaps $ 75.0 $ .5 $ (1.3) $ (7.6)(3) $ (8.9)
Options on equities and equity index 712.0 (1.3) (.6) (8.2)(3) 32.5
Options on foreign currency 75.0 .1 1.4 (3.0)
Financial futures and forwards:
Foreign currency 586.8 (.5) (14.2) (5.6)(3) (3.8)
Equity index and other 78.9 .1 .1 (7.9)(3) (25.3)
Commodity:
Swaps 295.6 (29.0) (27.0) (53.3)(1) (5.8)
Options 208.5 .2 5.5 1.4
Futures and forwards 9.1 .2 (.5)(4) 4.6
Purchase obligations 88.0 (16.2) (13.5) (14.4)(1) (6.3)
- ---------------------------------------------------------------------- -----------
Total $2,128.9 $(46.1) $(49.4) $(14.6)
=================================================================================================
Note: The calculation of estimated potential exposure is based on assumed adverse changes in the
underlying reference price or index of (1) 20%, (2) 15%, (3) 10% or (4) 5%. Adverse
changes on options which differ from those presented above would not necessarily result in
a proportionate change to the estimated potential exposure.
</TABLE>
59
The notional values presented in the tables above include purchased options of
$2,214.3 and $3,324.1 at December 31, 1996 and 1995, respectively.
The Company's measure of exposure represents an estimate of net losses that
would be recognized on each class of derivative instrument held by the Company
at December 31, assuming immediate adverse market movements of the magnitude
described above. The Company believes that the various rates of adverse market
movements represent a measure of exposure to loss under hypothetically assumed
adverse conditions. The estimated market exposure represents the hypothetical
loss to future earnings and does not represent the maximum possible loss nor any
expected actual loss, even under adverse conditions, because actual adverse
fluctuations would likely differ. In addition, since the Company's investment
portfolio is subject to change based on its portfolio management strategy as
well as in response to changes in the market, these estimates are not
necessarily indicative of the actual results which may occur.
CNA has entered into interest rate swap agreements to convert the variable rate
of the borrowing under the bank credit facility and the commercial paper program
to a fixed rate. Since these interest rate swaps are not held for trading
purposes, they are not included in the preceding tables. The outstanding
interest rate swap agreements had a total notional principal amount of $950.0
and $1,200.0, and a fair value asset of $3.0 and liability of $28.7 at December
31, 1996 and 1995, respectively. These agreements, which terminate from May to
December 2000, effectively fix the Company's interest rate exposure on $950.0 of
variable rate debt.
The Company also enters into short sales as part of its portfolio management
strategy. Short sales are commitments to sell a financial instrument not owned
at the time of sale, usually done in anticipation of a price decline. These
sales resulted in proceeds of $543.5 and $182.4 with fair value liabilities of
$588.9 and $188.5 at December 31, 1996 and 1995, respectively.
Estimated fair values approximate carrying values and are based on quoted market
prices, where available. For securities not actively traded, fair values are
estimated using values obtained from independent pricing services, quoted market
prices of comparable instruments or present value models.
Through August 1, 1989, CNA's property and casualty operations wrote financial
guarantee insurance contracts. These contracts primarily represent industrial
development bond guarantees and equity guarantees typically extending from ten
to thirteen years. For these guarantees, CNA received an advance premium which
is recognized over the exposure period and in proportion to the underlying
exposure insured.
At December 31, 1996 and 1995, gross exposure of financial guarantee insurance
contracts amounted to $582.0 and $707.0, respectively. The degree of risk
attached to this exposure is substantially reduced through reinsurance,
collateral requirements and diversification of exposures. In addition, security
interests in real estate are also obtained. Approximately 47% and 44% of the
risks were ceded to reinsurers at December 31, 1996 and 1995, respectively.
Total exposure, net of reinsurance, amounted to $311.0 and $395.0 at December
31, 1996 and 1995, respectively. At December 31, 1996 and 1995, collateral
consisting of letters of credit and debt service reserves amounted to $28.0 and
$39.0, respectively. Gross unearned premium reserves for financial guarantee
contracts were $11.0 and $17.0 at December 31, 1996 and 1995, respectively.
Gross claim and claim expense reserves totaled $371.0 and $463.0 at December 31,
1996 and 1995, respectively.
Note 5. Investment in CBS Inc. -
On November 24, 1995, Westinghouse Electric Corporation completed its
acquisition of CBS Inc. ("CBS") for cash consideration of $82.06 per share. The
Company received proceeds of $901.7 for its CBS shares and recorded (as part of
its investment gains) a pre-tax and after tax gain of $579.2 and $376.5,
respectively, in the fourth quarter of 1995. Previously, the Company held
approximately 18% of the outstanding common shares of CBS and accounted for it
on the equity method.
The Company's equity in the earnings of CBS after giving effect to purchase
value adjustments amounted to $15.7 and $45.8 before taxes and $11.3 and $30.8
after taxes for the years ended December 31, 1995 and 1994, respectively.
Dividends received amounted to $4.4 and $5.2 for the respective periods.
60
Note 6. Purchase of Business -
On May 10, 1995, CNA acquired all the outstanding shares of The Continental
Corporation ("CIC") for approximately $1,100.0, or $20 per CIC share. To finance
the acquisition, CNA entered into a five year $1,325.0 revolving credit facility
(see Note 12). CIC is an insurance holding company principally engaged through
subsidiaries in the business of property and casualty insurance.
The acquisition of CIC has been accounted for as a purchase, and CIC's
operations are included in the Consolidated Financial Statements as of May 10,
1995.
The pro forma consolidated condensed results of operations presented below
assume the above transaction had occurred at the beginning of the periods
presented.
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $20,132.5 $18,622.2
=================================================================================================
Investment gains (losses) included in revenue $ 1,699.0 $ (371.0)
=================================================================================================
Income (loss) before taxes and minority interest $ 2,881.4 $ (830.9)
Income tax (expense) benefit (975.8) 400.8
Minority interest (130.2) 104.9
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 1,775.4 $ (325.2)
=================================================================================================
Per share $ 15.07 $ (2.70)
=================================================================================================
</TABLE>
The pro forma consolidated condensed financial information is not necessarily
indicative either of the results of operations that would have occurred had this
transaction been consummated at the beginning of the periods presented or of
future operations of the combined companies.
Note 7. Receivables
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Reinsurance $ 6,965.0 $ 7,169.1
Other insurance 5,942.5 5,833.9
Security sales 299.7 187.7
Accrued investment income 534.3 578.8
Other 412.0 193.2
- -------------------------------------------------------------------------------------------------
Total 14,153.5 13,962.7
Less allowance for doubtful accounts and cash discounts 291.4 302.6
- -------------------------------------------------------------------------------------------------
Receivables-net $13,862.1 $13,660.1
=================================================================================================
</TABLE>
61
Note 8. Inventories -
Inventories, included in other assets, are as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Leaf tobacco $ 210.8 $160.7
Manufactured stock 69.4 64.9
Materials, supplies, etc. 35.7 21.8
- -------------------------------------------------------------------------------------------------
Total $ 315.9 $247.4
=================================================================================================
</TABLE>
If the average cost method of accounting had been used for tobacco inventories
instead of the LIFO method, such inventories would have been $205.9 and $203.3
higher at December 31, 1996 and 1995, respectively.
Note 9. Property, Plant and Equipment -
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 120.3 $ 123.1
Buildings and building equipment 673.7 564.5
Machinery and equipment 2,388.5 1,573.3
Leaseholds and leasehold improvements 69.1 32.6
- -------------------------------------------------------------------------------------------------
Total, at cost 3,251.6 2,293.5
Less accumulated depreciation and amortization 1,026.5 856.0
- -------------------------------------------------------------------------------------------------
Property, plant and equipment-net $ 2,225.1 $1,437.5
=================================================================================================
</TABLE>
Depreciation and amortization expense, including amortization of intangibles,
and capital expenditures, by business segment, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- ---------------
Depr. & Capital Depr. & Capital Depr. & Capital
Year Ended December 31 Amort. Expend. Amort. Expend. Amort. Expend.
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property and casualty insurance $141.2 $180.2 $101.8 $ 99.7 $ 49.6 $ 99.3
Life insurance 22.5 25.1 18.9 26.5 16.7 10.2
Cigarettes 21.5 35.3 28.4 43.1 22.5 31.2
Hotels 18.7 16.7 18.5 21.1 17.5 19.9
Drilling 75.8 267.2 52.9 66.7 49.9 46.2
Watches and clocks .8 .1 .6 .1 1.8 1.2
- -------------------------------------------------------------------------------------------------
Total business segments 280.5 524.6 221.1 257.2 158.0 208.0
Corporate 4.5 20.9 4.7 .7 2.7 1.1
- -------------------------------------------------------------------------------------------------
Total $285.0 $545.5 $225.8 $257.9 $160.7 $209.1
=================================================================================================
</TABLE>
62
Note 10. Liability for Unpaid Claims and Claim Adjustment Expenses -
CNA's property and casualty insurance claims and claims expense reserve
represents the estimated amounts necessary to settle all outstanding claims,
including claims which are incurred but not reported, as of the reporting date.
The Company's reserve projections are based primarily on detailed analysis of
the facts in each case, CNA's experience with similar cases, and various
historical development patterns. Consideration is given to such historical
patterns as field reserving trends, loss payments, pending levels of unpaid
claims and product mix, as well as court decisions, economic conditions and
public attitudes. All of these can affect the estimation of reserves. The
effects of inflation, which can be significant, are implicitly considered in the
reserving process and are part of the recorded reserve balance. Reserves are not
discounted except in the case of structured settlements, workers' compensation
lifetime claims and accident and health disability claims (where the reserves
are explicitly discounted at rates allowed by insurance regulators that range
from 3.5% to 6.0%) and structured settlements (where such reserves are
discounted at interest rates ranging from 6.3% to 7.5%).
Estimating loss reserves is a difficult process as there are many factors that
can ultimately affect the final settlement of a claim and, therefore, the
reserve that is needed. Changes in the law, results of litigation, medical
costs, the cost of repair materials and labor rates can all impact ultimate
claim costs. In addition, time can be a critical part of reserving
determinations since the longer the span between the incidence of a loss and the
payment or settlement of the claim, the more variable the ultimate settlement
amount can be. Accordingly, short-tail claims, such as property damage claims,
tend to be more reasonably predictable than long-tail claims, such as general
liability and professional liability claims.
The table below provides a reconciliation between beginning and ending claim and
claim expense reserve balances for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves at beginning of year:
Gross $31,044.0 $21,639.0 $20,812.0
Ceded reinsurance 6,089.0 2,705.0 2,491.0
- -------------------------------------------------------------------------------------------------
Net reserves at beginning of year 24,955.0 18,934.0 18,321.0
CIC reserves at acquisition-net 6,063.0
- -------------------------------------------------------------------------------------------------
Net 24,955.0 24,997.0 18,321.0
- -------------------------------------------------------------------------------------------------
Net incurred claim and claim expenses:
Provision for insured events of current year 7,922.0 6,787.0 5,611.0
Increase (decrease) in provision for insured
events of prior years (91.0) 122.0 (71.0)
Amortization of discounts 149.0 106.0 100.0
- -------------------------------------------------------------------------------------------------
Total net incurred 7,980.0 7,015.0 5,640.0
- -------------------------------------------------------------------------------------------------
</TABLE>
63
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net payments attributable to:
Current year events $ 2,676.0 $ 2,000.0 $ 1,388.0
Prior year events 6,524.0 5,057.0 3,639.0
- -------------------------------------------------------------------------------------------------
Total net payments 9,200.0 7,057.0 5,027.0
- -------------------------------------------------------------------------------------------------
Net reserves at end of year 23,735.0 24,955.0 18,934.0
Ceded reinsurance at end of year 6,095.0 6,089.0 2,705.0
- -------------------------------------------------------------------------------------------------
Gross reserves at end of year (a) $29,830.0 $31,044.0 $21,639.0
=================================================================================================
(a) Excludes life claim and claim expense reserves and intercompany eliminations of $1,000.0,
$988.0 and $926.0 as of December 31, 1996, 1995 and 1994, respectively, included in the
Consolidated Balance Sheets.
</TABLE>
The following adverse (favorable) reserve development reflects the effects of
management's ongoing evaluation of reserve levels and is comprised of the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Environmental Pollution $ 64.7 $ 226.0 $ 180.6
Asbestos 50.5 273.7 36.8
Other (206.2) (377.7) (288.4)
- -------------------------------------------------------------------------------------------------
Total $ (91.0) $ 122.0 $ (71.0)
=================================================================================================
</TABLE>
The CNA property/casualty insurance companies have potential exposures related
to environmental pollution and asbestos 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 and the addition of new clean-up sites has substantially slowed in
recent years. 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 having expired at the end of 1995, no reforms
have been enacted by Congress. 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
64
of state action. Substantial changes in the federal statute or the activity of
the EPA may cause states to reconsider their environmental clean-up statutes and
regulations. There can be no meaningful prediction of the pattern of regulation
that would result.
Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to clean-up, and the
standards for clean-up and liability, the ultimate exposure to CNA for
environmental pollution claims cannot be meaningfully quantified.
Claim and claim expense reserves represent management's estimates of ultimate
liabilities based on currently available facts and 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 December 31, 1996 and 1995, CNA carried approximately $907.8 and $1,063.0,
respectively, of claim and claim expense reserves, net of reinsurance
recoverable, for reported and unreported environmental pollution claims. The
reserves relate 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. Unfavorable reserve development
amounted to $64.7, $226.0 and $180.6 for the years ended December 31, 1996, 1995
and 1994, respectively. Unfavorable environmental reserve development results
from CNA's on-going monitoring of settlement patterns, current pending cases and
potential future claims.
CNA has exposure to asbestos claims, including those attributable to CNA's
litigation with Fibreboard Corporation (see Note 19). Estimation of asbestos
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 December 31, 1996 and
1995, CNA carried approximately $1,506.2 and $2,191.1, respectively, of claim
and claim expense reserves, net of reinsurance recoverable, for reported and
unreported asbestos claims. Unfavorable reserve development for the years ended
December 31, 1996, 1995 and 1994 totaled $50.5, $273.7 and $36.8, respectively.
Other 1996 and 1995 reserve development, which aggregated $206.2 and $377.7,
respectively, of favorable reserve development, was principally due to favorable
claim frequency (rate of claim occurrence) and severity (average cost per claim)
experience in the workers' compensation line of business. These trends reflect
the positive effects of changes in workers' compensation laws, more moderate
increases in medical costs, and a generally strong economy in which individuals
return to the workplace more quickly.
Other favorable reserve development during 1994 aggregated $288.4 which was
principally attributable to positive severity experience in professional
liability lines and improvement in voluntary and involuntary workers'
compensation experience.
The results of operations in future years may continue to be adversely affected
by environmental pollution claims and claim expenses. Management will continue
to monitor potential liabilities and make further adjustments as warranted.
CNA, consistent with sound reserving practices, regularly adjusts its reserve
estimates in subsequent reporting periods as new facts and circumstances emerge
that indicate the previous estimates need to be modified. Beginning the latter
part of 1995 and through 1996 to date, CNA has been actively settling many of
its larger environmental pollution and asbestos-related claim exposures. This
strategy has resulted in a large volume of claim payments during 1996 and
corresponding reductions in reserves. In addition, Fibreboard claim payments
escalated in 1996 as some scheduled payments came due. Management does not
believe that these recent activities have changed facts or circumstances evident
at December 31, 1995, therefore, no material modifications to previous reserve
estimates have been made in 1996.
65
The following tables provides additional data related to CNA's environmental
pollution and asbestos-related claims activity. CIC claims activity for 1995 is
included for the period May 10, 1995 through December 31, 1995.
<TABLE>
<CAPTION>
Reserve Summary
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
Environmental Environmental
Pollution Asbestos Pollution Asbestos
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross reserves:
Reported claims $ 288.9 $1,551.4 $ 288.4 $1,947.1
Unreported claims 714.0 94.0 895.0 369.0
- -------------------------------------------------------------------------------------------------
1,002.9 1,645.4 1,183.4 2,316.1
Less reinsurance recoverable (95.1) (139.2) (120.4) (125.0)
- -------------------------------------------------------------------------------------------------
Net reserves $ 907.8 $1,506.2 $1,063.0 $2,191.1
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The following tables summarize activity for environmental pollution and asbestos.
Changes in Environmental Pollution Reserves
Year Ended December 31 1996 1995* 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net reserves at beginning of year $1,063.0 $ 948.8 $ 432.6
Reserve strengthening 64.7 226.0 180.6
Less:
Gross payments (304.2) (183.4) (131.8)
Reinsurance recoveries 84.3 71.6 24.3
- -------------------------------------------------------------------------------------------------
Net reserves at end of year $ 907.8 $1,063.0 $ 505.7
=================================================================================================
*Includes CIC net reserves of $443.1 at May 10, 1995.
</TABLE>
<TABLE>
<CAPTION>
Changes in Asbestos Reserves
Year Ended December 31 1996 1995* 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net reserves at beginning of year $2,191.1 $2,109.1 $2,080.0
Reserve strengthening 50.5 273.7 36.8
Less:
Gross payments (787.7) (267.8) (245.9)
Reinsurance recoveries 52.3 76.1 67.8
- -------------------------------------------------------------------------------------------------
Net reserves at end of year $1,506.2 $2,191.1 $1,938.7
=================================================================================================
*Includes CIC net reserves of $170.4 at May 10, 1995.
</TABLE>
66
Note 11. Income Taxes -
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes (benefits):
Federal:
Current $276.4 $595.8 $ 82.2
Deferred 474.9 302.3 (112.1)
State, city and other, principally current 40.1 47.2 20.9
- -------------------------------------------------------------------------------------------------
Total $791.4 $945.3 $ (9.0)
=================================================================================================
</TABLE>
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31 1996 1995(a) 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Insurance reserves:
Property and casualty claim reserve discounting $1,145.2 $1,328.0 $1,027.4 $ 990.2
Unearned premium reserves 268.0 251.0 137.4 125.5
Life reserve differences 141.1 153.4 115.9 144.1
Others 31.4 22.8 10.3 (12.1)
Deferred policy acquisition costs (570.1) (457.2) (312.6) (310.2)
Employee benefits 219.0 202.9 157.1 144.6
Property, plant and equipment (145.5) (56.5) (133.2) (132.8)
Investments (71.2) 74.8 111.7 143.3
Alternative minimum tax credit 239.6 165.2
Net operating loss carry forward 279.9 298.0
Other-net 318.3 273.8 60.7 44.4
Valuation allowance (250.0) (250.0)
- -------------------------------------------------------------------------------------------------
1,366.1 1,841.0 1,414.3 1,302.2
Unrealized (appreciation) depreciation (133.2) (579.9) 282.4 (257.8)
Other-net (94.9) (55.9) (17.5) 30.0
- -------------------------------------------------------------------------------------------------
Deferred tax assets-net $1,138.0 $1,205.2 $1,679.2 $1,074.4
=================================================================================================
(a) CIC deferred tax assets at May 10, 1995, amounted to $729.0.
</TABLE>
Gross deferred tax assets amounted to $2,826.5 and $2,449.1 and liabilities
amounted to $1,688.5 and $1,243.9 for the years ended December 31, 1996 and
1995, respectively.
At December 31, 1996, the Company had net operating loss carryforwards of $800.0
for income tax purposes that expire in years 2000 through 2010. Those
carryforwards resulted from CNA's acquisition of CIC.
67
The Company has a past history of profitability and anticipates sufficient
future taxable income to fully support recognition of its deferred tax balance
at December 31, 1996, including but not limited to the reversal of existing
temporary differences and the implementation of tax planning strategies, if
needed.
A valuation allowance is maintained due to the uncertainty regarding the
realization of deferred tax assets related to the acquisition of CIC.
Accordingly, any subsequent adjustment of the valuation allowance will be
reflected as an adjustment to intangible assets.
Total income tax expense for the years ended December 31, 1996, 1995 and 1994
was different than the amounts of $842.7, $993.8 and $93.1, computed by applying
the statutory U.S. federal income tax rate of 35% to income before income taxes
and minority interest for each of the years.
A reconciliation between the statutory federal income tax rate and the Company's
effective income tax rate as a percentage of income before income taxes and
minority interest is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
(Decrease) increase in income tax rate resulting from:
Exempt interest and dividends received deduction (3) (3) (42)
State and city income taxes 1 1 4
- -------------------------------------------------------------------------------------------------
Effective income tax rate 33% 33% (3)%
=================================================================================================
</TABLE>
Federal, foreign, state and local income tax payments, net of refunds, amounted
to approximately $407.8, $386.5 and $194.9 for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company has entered into separate tax allocation agreements with Bulova and
CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiaries"). Each agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the Company's
return, or (ii) be paid by the Subsidiary an amount, if any, equal to the
federal income tax which would have been payable by the Subsidiary if it had
filed a separate consolidated return. Under these agreements, CNA will pay Loews
approximately $99.0 for 1996, and received from Loews approximately $78.0 and
$26.0 for the years 1995 and 1994, respectively. The federal income tax to be
received from Bulova amounted to approximately $3.7 for 1996 and Bulova has
received approximately $0.8 and $0.1 for the years 1995 and 1994, respectively.
Each agreement may be cancelled by either of the parties upon thirty days'
written notice.
The Company's federal income tax returns have been examined through 1990 and
settled through 1986, and the years 1991 through 1994 are currently under
examination. While tax liabilities for subsequent years are subject to audit and
final determination, in the opinion of management the amount accrued in the
consolidated balance sheet is believed to be adequate to cover any additional
assessments which may be made by federal, state and local tax authorities and
should not have a material effect on the financial condition or results of
operations of the Company.
68
Note 12. Long-Term Debt
<TABLE>
<CAPTION>
Unamortized Current
December 31, 1996 Principal Discount Net Maturities
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loews Corporation $1,492.8 $21.2 $1,471.6 $200.0
CNA 2,776.0 11.1 2,764.9 4.0
Diamond Offshore(a) 73.0 73.0 73.0
Other 61.2 61.2 17.4
- -------------------------------------------------------------------------------------------------
Total $4,403.0 $32.3 $4,370.7 $294.4
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Loews Corporation (Parent Company):
8.5% notes due 1998 (effective interest rate of 8.6%)
(authorized, $125) (b) $ 117.8 $ 117.8
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $300) 300.0
8.3% debentures due 2007 (effective interest rate of 8.4%)
(authorized, $200) (c) 200.0 200.0
8.9% debentures due 2011 (effective interest rate of 9.0%)
(authorized, $175) 175.0 175.0
7.6% notes due 2023 (effective interest rate of 7.8%)
(authorized, $300) (d) 300.0 300.0
7.0% notes due 2023 (effective interest rate of 7.2%)
(authorized, $400) (e) 400.0 400.0
CNA Financial Corporation:
8.9% notes due 1998 (effective interest rate of 9.2%)
(authorized, $150) 150.0 150.0
8.3% notes due 1999 (effective interest rate of 7.3%)
(authorized, $100) 100.0 100.0
6.3% notes due 2003 (effective interest rate of 6.4%)
(authorized, $250) 250.0 250.0
7.3% notes due 2003 (effective interest rate of 7.8%)
(authorized, $150) 150.0 150.0
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $250) 250.0
8.4% notes due 2012 (effective interest rate of 8.6%)
(authorized, $100) 100.0 100.0
7.3% debentures due 2023 (effective interest rate of 7.3%)
(authorized, $250) 250.0 250.0
8.6% notes due 1996 250.0
Commercial Paper (weighted average yield 5.7% and 6.1%) 675.0 500.0
Bank revolving credit due 2001 (effective interest rate of 5.7% and 6.1%) 400.0 825.0
Mortgage notes at 11%, due 2013 386.6 386.6
Other senior debt (effective interest rates approximate 8.4%) 64.4 65.7
Diamond Offshore Drilling, Inc. bank revolving credit due 2001 (effective
interest rate of 8.5%) 63.0
Other senior debt, principally mortgages (effective interest rates approximate
9.4%) 71.2 60.2
- -------------------------------------------------------------------------------------------------
4,403.0 4,280.3
Less unamortized discount 32.3 32.1
- -------------------------------------------------------------------------------------------------
Long-term debt, less unamortized discount $4,370.7 $4,248.2
=================================================================================================
(a) On February 4, 1997, Diamond Offshore sold $400.0 principal amount of 3 3/4% convertible
subordinated notes due February 15, 2007 (the "Notes"). The Notes are convertible into shares
of Diamond Offshore's common stock at a price of $81 per share.
(b) Net of $7.2 held by the Company.
(c) Redeemed on January 15, 1997.
(d) Redeemable in whole or in part at June 1, 2003 at 103.8%, and decreasing percentages
thereafter.
(e) Redeemable in whole or in part at October 15, 2003 at 102.4%, and decreasing percentages
thereafter.
</TABLE>
69
To finance the acquisition of CIC, CNA entered into a five-year $1,325.0
revolving credit facility (the "Bank Facility"). In 1996, CNA renegotiated the
facility extending the maturity to May 2001. The interest rate is based on the
one, two, three or six month London Interbank Offered Rate ("LIBOR"), as
elected, plus 16 basis points. Additionally, there is a facility fee of 9 basis
points. Under the terms of the facility, CNA may prepay the debt without
penalty.
In 1995, CNA entered into interest rate swap agreements with a notional
principal amount of $1,200.0, which terminate from May to December 2000. These
agreements effectively convert variable rate debt into fixed rate debt and
provide that CNA pay interest at a fixed rate, averaging 6.2% at December 31,
1996, in exchange for the receipt of interest at the three month LIBOR rate.
Concurrent with the pay down of $250.0 on the Bank Facility, CNA terminated
interest rate swaps with a total notional amount of $250.0. As a result, the
borrowing capacity under the Bank Facility was reduced to $1,075.0. The effect
of these interest rate swaps was to increase interest expense by approximately
$7.0 and $2.0 for the years ended December 31, 1996 and 1995, respectively.
In 1995, to take advantage of favorable interest rate spreads, CNA established a
commercial paper program borrowing from investors to reduce a like amount of the
Bank Facility. These borrowings are classified as long-term debt, as the Bank
Facility supports the commercial paper program. At December 31, 1996, there was
no unused borrowing capacity under the Bank Facility after the effects of the
commercial paper program.
The weighted average interest rate (interest and facility fees) on the
acquisition debt, which includes the Bank Facility, commercial paper and the
effect of the interest rate swaps, was 6.3% and 6.5% at December 31, 1996 and
1995, respectively.
The aggregate of long-term debt maturing in each of the next five years is
approximately as follows: $294.4 in 1997, $274.1 in 1998, $134.5 in 1999, $8.4
in 2000 and $1,088.5 in 2001. The Company paid interest expenses of
approximately $315.3, $276.0 and $168.9 for the years ended December 31, 1996,
1995 and 1994, respectively.
Payment of dividends by insurance subsidiaries of CNA without prior regulatory
approval is limited to certain formula-derived amounts. At December 31, 1996,
approximately $3,326.0 of retained earnings was not available for dividends.
Note 13. Leases -
The Company's hotels in some instances are constructed on leased land or are
leased. Other leases cover office facilities, computer and transportation
equipment. Rent expense amounted to $128.6, $118.9 and $78.1 for the years ended
December 31, 1996, 1995 and 1994, respectively. It is expected, in the normal
course of business, that leases which expire will be renewed or replaced by
leases on other properties; therefore, it is believed that future minimum annual
rental commitments will not be less than the amount of rental expense incurred
in 1996. At December 31, 1996 future aggregate minimum rental payments
approximated $668.6.
70
Note 14. Benefit Plans -
Pension Plans - The Company and its subsidiaries have several non-contributory
defined benefit plans for eligible employees. The benefits for certain plans
which cover salaried employees and certain union employees are based on formulas
which include among others, years of service and average pay. The benefits for
one plan which covers union workers under various union contracts and certain
salaried employees are based on years of service multiplied by a stated amount.
Pension cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned $ 69.3 $ 54.6 $ 43.4
Interest cost 155.7 129.0 86.3
Return on plan assets-actual (88.9) (240.2) 16.6
Net amortization and deferrals (20.5) 149.8 (65.5)
- -------------------------------------------------------------------------------------------------
Net pension cost $ 115.6 $ 93.2 $ 80.8
=================================================================================================
</TABLE>
The following table sets forth the funded status of the Company's pension plans:
<TABLE>
<CAPTION>
1996 1995
----------------------- ------------------------
Overfunded Underfunded Overfunded Underfunded
December 31 Plans Plans Plans Plans
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation $ 858.5 $ 947.7 $ 852.9 $ 930.0
=================================================================================================
Accumulated vested benefit obligation $ 799.7 $ 890.9 $ 798.5 $ 893.5
=================================================================================================
Projected benefit obligation $1,081.4 $1,139.2 $1,121.4 $1,121.5
Plan assets at fair value 1,035.7 770.2 969.9 737.2
- -------------------------------------------------------------------------------------------------
Projected benefit obligation over plan assets 45.7 369.0 151.5 384.3
Unrecognized prior service cost (39.3) (78.9) (62.1) (87.9)
Unrecognized net obligation, January 1 (15.0) (.8) (15.4) (1.0)
Unrecognized net loss (169.3) (37.0) (226.9) (64.2)
- -------------------------------------------------------------------------------------------------
Net pension (asset) liability recognized in
the balance sheet $ (177.9) $ 252.3 $ (152.9) $ 231.2
=================================================================================================
</TABLE>
71
The rates used in the actuarial assumptions were:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7.0% to 7.3% 8.5% to 8.8%
Rate of compensation increase 2.8% to 5.8% 2.8% to 5.5% 4.0% to 6.3%
Expected long-term rate of return on assets 7.0% to 7.8% 7.5% to 8.8% 7.5% to 8.8%
- -------------------------------------------------------------------------------------------------
</TABLE>
The Company's funding policy is to make contributions in accordance with
applicable governmental regulatory requirements. The assets of the plans are
invested primarily in interest-bearing obligations and for one plan with an
insurance subsidiary of the Company, in its Separate Account business. In 1995,
the Company made contributions totaling approximately $186.0 to fund completely
certain plans which had been underfunded.
Other Postretirement Benefit Plans - The Company and its subsidiaries have
several postretirement benefit plans covering eligible employees and retirees.
Participants generally become eligible after reaching age 55 with required years
of service. Actual requirements for coverage vary by plan. Benefits for retirees
who were covered by bargaining units vary by each unit and contract. Benefits
for certain retirees are in the form of a Company health care account.
Benefits for retirees reaching age 65 are generally integrated with Medicare.
Other retirees, based on plan provisions, must use Medicare as their primary
coverage, with the Company reimbursing a portion of the unpaid amount; or are
reimbursed for the Medicare Part B premium or have no Company coverage. The
benefits provided by the Company are basically health and, for certain retirees,
life insurance type benefits.
The Company does not fund any of these benefit plans and accrues postretirement
benefits during the active service of those employees who would become eligible
for such benefits when they retire.
The rates used in the actuarial assumptions were:
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net periodic postretirement benefit cost 7.0% to 7.3% 8.5% to 8.8%
Accumulated postretirement benefit liability 7.5% 7.0% to 7.3%
- -------------------------------------------------------------------------------------------------
</TABLE>
72
The following table sets forth the postretirement benefit plans' status:
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $269.2 $288.4
Fully eligible active plan participants 109.8 86.4
Other active plan participants 146.0 130.1
- -------------------------------------------------------------------------------------------------
525.0 504.9
Unrecognized prior service cost (3.7) (9.8)
Unrecognized net gain 62.9 60.7
- -------------------------------------------------------------------------------------------------
Accrued postretirement benefit liability $584.2 $555.8
=================================================================================================
</TABLE>
Postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service costs $ 16.9 $ 10.3 $ 13.7
Interest costs 35.8 28.5 24.8
- -------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 52.7 $ 38.8 $ 38.5
=================================================================================================
</TABLE>
For measurement purposes, a trend rate for covered costs of 12.0% to 12.5%
pre-65 and 9.5% post-65, was used. These trend rates are expected to decrease
gradually to 5.0% and 7.0% at rates from 0.5% to 1.0% per annum. An increase of
one percentage point in assumed health care cost trend rates would increase the
accumulated postretirement benefit obligation by approximately $36.7 and the net
periodic postretirement benefit cost by approximately $6.0.
Savings Plans - The Company and its subsidiaries have several contributory
savings plans which allow employees to make regular contributions based upon a
percentage of their salary. The Company's contributions to these plans amounted
to $28.6, $25.9 and $21.2 for the years ended December 31, 1996, 1995 and 1994,
respectively.
73
Note 15. Gain on Issuance of Subsidiary's Stock -
On April 29, 1996, Diamond Offshore Drilling, Inc., a 70% owned subsidiary
("Diamond Offshore"), acquired Arethusa (Off-Shore) Limited ("Arethusa").
Diamond Offshore issued 17.9 million shares of its common stock and assumed
Arethusa stock options as consideration for the purchase price of approximately
$550.7. Arethusa owned a fleet of 11 mobile offshore drilling rigs and operated
two additional mobile offshore rigs pursuant to bareboat charters. The
acquisition of Arethusa has been accounted for as a purchase, and Arethusa's
operations are included in the Consolidated Financial Statements as of April 29,
1996. Pro forma operating results for the years ended December 31, 1996
and 1995, assuming the transaction had occurred at the beginning of the
respective periods, would not be materially different from those reported in the
Consolidated Financial Statements. The Company recognized a gain of
approximately $186.6 ($121.3 after provision for deferred income taxes) and its
interest in Diamond Offshore declined to approximately 51%.
In October 1995 the Company's then wholly owned subsidiary, Diamond Offshore,
sold 14.9 million shares of its common stock through an initial public offering
at $24 per share. Diamond Offshore used the net proceeds of approximately $338.4
to fund the repayment of its intercompany debt as well as a dividend to the
Company. As a result of the offering, the Company's ownership interest in
Diamond Offshore declined to approximately 70% and the Company recorded a gain
of approximately $192.9 ($125.4 after provision for deferred income taxes).
Note 16. Capital Stock and Earnings Per Share -
In addition to its common stock, the Company has authorized 100,000,000 shares
of preferred stock, $.10 par value.
Earnings per share are based on the weighted average number of shares
outstanding during each year (116,161,000, 117,835,000 and 120,383,000 for the
years ended December 31, 1996, 1995 and 1994, respectively).
Note 17. Quarterly Financial Data (Unaudited) -
<TABLE>
<CAPTION>
1996 Quarters Ended Dec. 31 Sept. 30 June 30 (1) March 31
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $5,137.0 $5,216.3 $5,044.6 $5,044.5
Net income 247.8 388.6 378.7 368.8
Per share 2.15 3.37 3.25 3.13
1995 Quarters Ended Dec. 31 (2) Sept. 30 June 30 March 31
- -------------------------------------------------------------------------------------------------
Total revenues $5,495.3 $4,959.6 $4,519.3 $3,703.2
Net income 745.1 386.4 419.7 214.5
Per share 6.32 3.28 3.56 1.82
- -------------------------------------------------------------------------------------------------
(1) Revenues and net income include investment gains of $186.6 and $121.3, respectively, from the
Diamond Offshore acquisition of Arethusa.
(2) Revenues and net income include investment gains of $772.1 and $501.9, respectively, from the
sale of shares of CBS and Diamond Offshore.
</TABLE>
74
Note 18. Reinsurance -
<TABLE>
<CAPTION>
The effects of reinsurance on earned premiums are as follows:
%
Direct Assumed Ceded Net Assumed
- -------------------------------------------------------------------------------------------------
Year Ended December 31, 1996:
<S> <C> <C> <C> <C> <C>
Life $ 736.0 $ 121.0 $ 55.0 $ 802.0 15.1%
Accident and health 3,570.0 187.0 176.0 3,581.0 5.2
Property and casualty 8,957.0 1,558.0 1,424.0 9,091.0 17.1
- -------------------------------------------------------------------------------------------------
Total $13,263.0 $1,866.0 $1,655.0 $13,474.0 13.8%
=================================================================================================
Year Ended December 31, 1995:
Life $ 701.0 $ 109.0 $ 21.0 $ 789.0 13.8%
Accident and health 3,012.0 125.0 106.0 3,031.0 4.1
Property and casualty 7,868.0 1,335.0 1,293.0 7,910.0 16.9
- -------------------------------------------------------------------------------------------------
Total $11,581.0 $1,569.0 $1,420.0 $11,730.0 13.4%
=================================================================================================
Year Ended December 31, 1994:
Life $ 408.0 $ 107.0 $ 23.0 $ 492.0 21.7%
Accident and health 2,678.0 158.0 45.0 2,791.0 5.7
Property and casualty 5,601.0 1,251.0 661.0 6,191.0 20.2
- -------------------------------------------------------------------------------------------------
Total $ 8,687.0 $1,516.0 $ 729.0 $ 9,474.0 16.0%
=================================================================================================
</TABLE>
Written premiums were $13,891.0, $12,952.0 and $9,581.0 at December 31, 1996,
1995 and 1994, respectively. The ceding of insurance does not discharge the
primary liability of the original insurer. CNA places reinsurance with other
carriers only after careful review of the nature of the contract and a thorough
assessment of the reinsurers' credit quality and claim settlement performance.
Further, for carriers that are not authorized reinsurers in its states of
domiciles, CNA receives collateral, primarily in the form of bank letters of
credit, securing a large portion of the recoverables. Such collateral totaled
approximately $800.9 and $1,100.0 at December 31, 1996 and 1995, respectively.
CNA's largest recoverable from a single reinsurer, including prepaid reinsurance
premiums, is with Lloyd's of London and approximates $440.0 and $435.0 at
December 31, 1996 and 1995, respectively.
Insurance claims and policyholders' benefits are net of reinsurance recoveries
of $1,220.0, $934.8 and $827.9 for the years ended December 31, 1996, 1995 and
1994, respectively.
75
Note 19. Legal Proceedings and Contingent Liabilities -
Fibreboard Litigation - CNA's primary property and casualty subsidiary,
Continental Casualty Company ("Casualty"), has been 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"), 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 either 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 25, 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. Petitions for rehearing by the panel and suggestions
for rehearing by the entire Fifth Circuit Court of Appeals as respects the
decision on the Global Settlement Agreement were denied. Two petitions for
certiorari have been filed in the Supreme Court.
No further appeal was filed with respect to the Trilateral Agreement; therefore
court approval of the Trilateral Agreement has become final.
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, the Settling Parties 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 $1,525.0 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
$10.0 is to be contributed to the fund by Fibreboard. As indicated above,
although the Global Settlement approval has so far been affirmed on appeal,
further review is being sought. There is limited precedent for settlements which
determine the rights of future claimants to seek relief.
Subsequent to the announcement of the agreement in principle, Casualty,
Fibreboard and Pacific Indemnity entered into the Trilateral Agreement which
among other things, settles the coverage case in the event the Global Settlement
approval is not ultimately upheld. In such case, Casualty and Pacific Indemnity
will contribute to a settlement fund an aggregate of $2,000.0, 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 $1,440.0 reduced by a portion of an
additional payment of $635.0 which Pacific Indemnity has agreed to pay for
claims either filed or settled before August 27, 1993. As a result of the final
approval of the Trilateral Agreement, Casualty has assumed responsibility for
the claims that were settled before August 27, 1993. As a part of the Global
Settlement and the Trilateral Agreement, Casualty is to 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,
court approval of the Trilateral Agreement has become final.
Casualty and Fibreboard have entered into a supplemental agreement which governs
the interim arrangements and obligations between the parties until such time as
there is either final court approval or disapproval of the Global Settlement
Agreement. It also governs certain obligations between the parties upon the
Global Settlement being upheld on appeal including the payment of claims which
are not included in the Global Settlement.
76
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. Under the Casualty-Pacific
Agreement, Casualty and Pacific Indemnity have agreed to pay 64.71% and 35.29%,
respectively, of the $1,525.0 to be used to satisfy the claims of future
claimants, plus certain expenses. The $1,525.0 has already been deposited into
an escrow for such purpose. As a result of final approval of the Trilateral
Agreement, Pacific Indemnity's share for unsettled present claims and presently
settled claims will be $635.0.
Through December 31, 1996, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 135,200 claims, for an
estimated settlement amount of approximately $1,600.0 plus any applicable
interest. Final court approval of the Trilateral Agreement obligates Casualty to
pay under these settlements. Approximately $1,310.0 was paid through December
31, 1996, including approximately $500.0 paid in the fourth quarter of 1996 as a
result of the Trilateral Agreement becoming final. As described above, such
payments are partially recoverable from Pacific Indemnity. Casualty may
negotiate other agreements with various classes of claimants including groups
who may have previously reached agreement with Fibreboard.
Casualty believes that final court approval of the Trilateral Agreement and its
implementation has eliminated any further material exposure with respect to the
Fibreboard matter, and subsequent reserve adjustments, if any, will not
materially affect the equity of the Company.
Tobacco Litigation - Lawsuits are being filed with increasing frequency 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.
Conventional smoking and health cases - There are 321 cases filed by individual
plaintiffs against manufacturers of tobacco products pending in the United
States federal and state courts. Lorillard is a defendant in 84 of these cases.
The Company is a defendant in five of these cases.
Plaintiffs in these cases seek unspecified amounts in compensatory and punitive
damages in many cases, and in other cases damages are stated to amount to as
much as $100.0 in compensatory damages and $600.0 in punitive damages.
On August 23, 1996 the jury in Rogers v. R.J. Reynolds Tobacco Company, et al.
(District Court, Marion County, Indiana), returned a verdict in favor of the
defendants. Neither Lorillard nor the Company was a party in Rogers. Plaintiff
has noticed an appeal.
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. Brown & Williamson Tobacco
Corporation, the only defendant in the case, has noticed an appeal.
Class Actions - In addition to the foregoing cases, there are 23 purported class
actions pending against cigarette manufacturers. Lorillard is a defendant in 22
of these cases and the Company is a defendant in 13 of these cases. Three of the
cases, including two that name the Company as a defendant, have not been served.
Nineteen of the purported class actions against Lorillard seek damages for
alleged nicotine addiction and health effects claimed to have resulted from the
use of cigarettes; one alleges health effects from exposure to tobacco smoke;
one seeks compensation on behalf of individuals who have paid insurance premiums
to Blue Cross and Blue Shield organizations; and one seeks disclosure of
additives used in cigarettes. 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.
Unless otherwise noted, each of these cases is in the pre-trial, discovery
stage.
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
77
the cabins of aircraft. Lorillard is a defendant in this case. Plaintiffs seek
an unspecified amount in compensatory damages and $5,000.0 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. Trial in this matter is scheduled to
begin on June 2, 1997.
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. The Company and
Lorillard are defendants in this case. 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
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.
Lorillard is a defendant in this case. 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.
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. Lorillard is a defendant in this case. Plaintiffs seek actual and
punitive damages in excess of $200,000.0, 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. The Florida Supreme Court has denied defendants'
petition to invoke the discretionary jurisdiction of the court to review the
class certification rulings. Trial in this matter is scheduled to begin on
September 8, 1997.
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 U.S. District Court has granted defendants' motion for
summary judgment. Final judgment in favor of the defendants has not been entered
and the time for plaintiff to notice an appeal has not begun.
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. The
Company and Lorillard are defendants in this case. 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. (Circuit Court, Baltimore City,
Maryland, filed May 24, 1996). Plaintiffs seek certification of a class
comprised of citi-
78
zens or residents of Maryland who allege they or their decedents have, or have
died from, diseases or medical conditions caused by addiction to smoking
cigarettes or using other tobacco products containing nicotine. Lorillard is a
defendant in this case. The Company was named as a defendant but plaintiffs
voluntarily dismissed it. Plaintiffs seek unspecified amounts in actual damages
and punitive 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. (District Court, Orleans Parish,
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. The Company and Lorillard are defendants in this
case. 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. The Company and Lorillard are defendants in this case.
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. (U.S. District Court, Eastern
District, Pennsylvania, 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. The Company
and Lorillard are defendants in this case. Plaintiffs seek unspecified amounts
in actual damages and punitive damages and the creation of a medical monitoring
fund and of smoking cessation programs. Trial in this case is scheduled to begin
on October 14, 1997.
Harris v. The American Tobacco Company, et al. (U.S. District Court, Middle
District, Pennsylvania, filed March 1, 1996; service not effected on any
defendants until October 1996). Plaintiffs, who are incarcerated in federal
correctional facility, are appearing pro se and in forma pauperis and sought
certification of the case as a class action on behalf of all residents of the
United States who allege they or their decedents are or were nicotine dependent.
The Company and Lorillard are defendants in this case. The court entered an
order on its own motion that dismissed the class action allegations. Plaintiffs
seek unspecified amounts in actual damages, punitive damages and the creation of
a medical monitoring fund. The court has entered an order granting a motion to
dismiss filed by several of the defendants named in the complaint, including the
Company and Lorillard, but final judgment has not been entered in their favor
and the time for plaintiffs to notice an appeal has not begun.
Lyons v. The American Tobacco Company, et al. (U.S. District Court, Southern
District, Alabama, filed August 8, 1996). Plaintiffs seek class certification on
behalf of residents of the states of Alabama and North Carolina who allegedly
are addicted to cigarette smoking and on behalf of individuals whose claims are
derivative of the claims of the allegedly addicted smokers. Lorillard is a
defendant in this case. Plaintiffs seek unspecified amounts in actual damages,
punitive damages and a medical monitoring fund.
79
Chamberlain v. The American Tobacco Company, et al. (U.S. District Court,
Northern District, Ohio, filed August 14, 1996). Plaintiffs seek class
certification on behalf of all residents of Ohio who allege they or their
decedents are or were nicotine dependent. The Company and Lorillard are
defendants in this case. Plaintiffs seek unspecified amounts in actual damages
and punitive damages and the creation of a medical monitoring fund.
Masepohl v. American Tobacco Company, Inc., et al. (U.S. District Court,
Minnesota, filed September 4, 1996). Plaintiff seeks class certification on
behalf of all residents of Minnesota who allege they or their decedents are or
were nicotine dependent. The Company and Lorillard are defendants in this case.
Plaintiff seeks an unspecified amount in actual damages and the creation of a
medical monitoring fund.
Perry v. The American Tobacco Company, et al. (United States District Court,
Eastern District, Tennessee, filed September 30, 1996). Plaintiffs seek
certification of the case as a class action on behalf of individuals who have
paid medical insurance premiums to a Blue Cross and Blue Shield organization.
Lorillard is a defendant in this case. Plaintiffs seek recovery of the funds
expended by members of the purported class for premiums paid to Blue Cross and
Blue Shield entities.
Connor v. The American Tobacco Company, et al. (Second Judicial District Court,
Bernalillo County, New Mexico, filed October 10, 1996). Plaintiffs seek
certification of the case as a class action on behalf of New Mexico residents
who allege they or their decedents are or were nicotine dependent. The Company
and Lorillard are defendants in this case. Plaintiffs seek unspecified amounts
in actual damages and punitive damages, and the creation and implementation of a
medical monitoring fund.
Ruiz v. The American Tobacco Company, et al. (United States District Court,
District of Puerto Rico, filed October 23, 1996). Plaintiffs seek certification
of the case as a class action on behalf of residents of the Commonwealth of
Puerto Rico who allege they or their decedents are or were nicotine dependent.
Lorillard is a defendant in this case. Plaintiffs seek unspecified amounts in
actual damages and punitive damages and the creation of a medical monitoring
fund.
McGinty v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Arkansas, filed November 4, 1996). Plaintiffs seek class certification
on behalf of all residents of Arkansas who allege they or their decedents are or
were nicotine dependent. The Company and Lorillard are defendants in this case.
Plaintiffs seek restitution and refunds of the sums paid by class members to
purchase cigarettes; disgorgement of the profits from the sale of cigarettes; a
medical monitoring fund; an unspecified amount in actual damages; and an
unspecified amount in punitive damages.
McCune v. American Tobacco Company, et al. (Circuit Court, Kanawha County, West
Virginia, filed January 31, 1997). Plaintiff seeks certification of the case as
a class action on behalf of residents of West Virginia who allege they or their
decedents are or were nicotine dependent. Lorillard is a defendant in the case.
Plaintiff seeks unspecified amounts in actual damages and punitive damages and
the creation of a medical monitoring fund. To date, none of the defendants have
received service of process.
Emig v. American Tobacco Company, et al. (District Court, Eighteenth Judicial
District, Sedgwick County, Kansas, filed February 6, 1997). Plaintiffs seek
certification of the case as a class action on behalf of residents of Kansas who
allege they or their decedents are or were nicotine dependent. The Company and
Lorillard are defendants in the case. Plaintiffs seek unspecified amounts in
actual damages, disgorgement of profits and the creation of a medical monitoring
fund. To date, none of the defendants have received service of process.
Peterson v. American Tobacco Company, et al. (Circuit Court, First Circuit,
Hawaii, filed February 6, 1997). Plaintiffs seek certification of the case as a
class action on behalf of residents of Hawaii who allege they or their decedents
are or were nicotine dependent. The Company and Lorillard are defendants in the
case. Plaintiffs seek unspecified amounts in actual damages and punitive
damages, disgorgement of profits and the creation of a medical monitoring fund.
To date, none of the defendants have received service of process.
In addition to the above, neither the Company nor Lorillard are defendants in
the case of Smith v. Brown & Williamson, pending in the United States District
Court for the Western District of Missouri. Plaintiff seeks certification of the
case as a class action on behalf
80
of residents of Missouri who allege they have been injured as a result of their
nicotine dependence upon cigarettes manufactured by Brown & Williamson.
Reimbursement Cases - In addition to the foregoing cases, there are 26 actions
(one of which is unserved) pending in which governmental entities and in one
case health insurers, seek recovery of funds expended by them, 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 all 26 such
actions. The Company is named as a defendant in five of them (one of which is
unserved). In addition to the suits filed by governmental entities, private
citizens represented by private counsel have filed three suits in relation to
reimbursement of funds expended by respective states in providing health care to
individuals with injuries or other health effects allegedly caused by use of
tobacco products or exposure to tobacco smoke. One of the three cases has not
been served. The Company and Lorillard are named as defendants in each of the
three cases, including the one that has not been served. These cases are
described below. Unless otherwise noted, each of these cases is in the
pre-trial, discovery stage.
Moore v. The American Tobacco Company, et al. (Chancery Court, Jackson County,
Mississippi, filed May 23, 1994), filed by the Attorney General of Mississippi.
Lorillard is a defendant in the case. The Company was named as a defendant but
plaintiff voluntarily dismissed it. Trial in this case is scheduled to begin on
June 2, 1997.
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. The Company and Lorillard are defendants in this case. Plaintiffs
filed a third amended complaint that contained claims on behalf of the State of
West Virginia Department of Health and Human Resources.
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. Lorillard is a defendant
in the case. The Minnesota Supreme Court has issued an order ruling that
plaintiff Blue Cross & Blue Shield of Minnesota ("Blue Cross") does not have
standing to pursue tort claims against the defendants. The Minnesota Supreme
Court order permits Blue Cross to proceed with its claims that defendants
violated antitrust and consumer protection statutes. The Minnesota Supreme
Court's order permits Blue Cross to pursue its equitable claims for injunctive
relief but bars Blue Cross from pursuing money damages for the equitable claims.
Trial in this matter is scheduled to begin on January 19, 1998.
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. Lorillard is a defendant in the case.
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 Company and Lorillard are defendants in the case.
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. Lorillard is a defendant in the case. Trial in this case is scheduled to
begin on September 29, 1997.
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. Lorillard is a defendant in the case. The Company was named as a
defendant but plaintiff voluntarily dismissed it.
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
Washington. Lorillard is a defendant in the case.
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. Lorillard is a defendant in the case.
State of Connecticut v. Philip Morris Incorporated, et al. (Superior Court,
Litchfield District, Connecticut, filed
81
July 18, 1996), filed by the Attorney General of Connecticut. Lorillard is a
defendant in the case.
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 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. 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. The plaintiffs in the declaratory judgment action
have filed a petition for writ of certiorari with the United States Supreme
Court. The United States Supreme Court has not ruled as to whether it will
accept jurisdiction of the petition. Lorillard understands that several other
states, and the Congress, have considered or are considering legislation similar
to that passed in Florida. The court granted the Company's motion to dismiss on
September 16, 1996. Plaintiffs noticed an appeal to the Florida Court of Appeals
from the September 16, 1996 order. Plaintiffs filed a third amended complaint on
November 1, 1996 that added certain statutory counts, including one under a
Florida statute that permits plaintiffs to seek treble damages and a claim for
punitive damages. The third amended complaint reasserted claims against the
Company. The court granted the Company's motion to dismiss the third amended
complaint on December 6, 1996. Plaintiffs have amended their notice of appeal to
reflect the December 6, 1996 order. Trial in this case is scheduled to begin
August 4, 1997.
The County of Los Angeles, et al. v. R.J. Reynolds Tobacco Company, et al.
(Superior Court, San Diego County, California, filed August 5, 1996), filed by
public attorneys for the County of Los Angeles. Lorillard is a defendant in the
case.
The State of Arizona, et al. v. The American Tobacco Company, et al. (Superior
Court, Maricopa County, Arizona, filed August 20, 1996), filed by the Attorney
General of Arizona. Lorillard is a defendant in the case.
The State of Kansas v. R.J. Reynolds Tobacco Company, et al. (District Court,
Shawnee County, Kansas, filed August 20, 1996), filed by the Attorney General of
Kansas. Lorillard is a defendant in the case.
Kelley v. Philip Morris Incorporated, et al. (Circuit Court, Ingham County,
Michigan, filed August 21, 1996), filed by the Attorney General of Michigan.
Lorillard is a defendant in the case.
People of the State of California v. Philip Morris Incorporated, et al.
(Superior Court, San Francisco County, California, filed September 5, 1996),
filed by 12 California counties, the cities of San Francisco and San Jose, the
California Division of the American Cancer Society, the California chapter of
the American Heart Association, the California Medical Association, and the
California District of the American Academy of Pediatrics. Lorillard is a
defendant in the case.
State of New Jersey v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Middlesex County, New Jersey, filed September 10, 1996), filed by the Attorney
General of New Jersey. Lorillard is a defendant in the case.
State of Oklahoma, et al. v. R.J. Reynolds Tobacco Company, et al. (District
Court, Cleveland County, Oklahoma, filed September 11, 1996), filed by the
Attorney General of Oklahoma on behalf of the state, the Oklahoma Health Care
Authority, and the Oklahoma Departments of Human Services, Veterans Affairs, and
Health. The Company and Lorillard are defendants in the case.
State of Utah v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Central Division, Utah, filed September 30, 1996), filed by the Attorney General
of Utah. The Company and Lorillard are defendants in the case.
City of New York, et al. v. The Tobacco Institute, et al. (U.S. District Court,
Southern District, New York, filed October 17, 1996), filed by the Corporation
Counsel of the City of New York on behalf of the city and the
82
New York City Health and Hospitals Corporation. Lorillard is a defendant in the
case.
People of the State of Illinois v. Philip Morris, Inc., et al. (Circuit Court,
Cook County, Illinois, filed November 12, 1996), filed by the Attorney General
of Illinois. Lorillard is a defendant in the case.
State of Iowa v. R.J. Reynolds Tobacco Company, et al. (District Court, Fifth
Judicial District, Polk County, Iowa, filed November 27, 1996), filed by the
Attorney General of Iowa. The Company and Lorillard are defendants in the case.
County of Erie v. The Tobacco Institute, Inc., et al. (Supreme Court, Erie
County, New York, filed January 14, 1997), filed by public attorneys for Erie
County, New York. Lorillard is a defendant in the case.
State of New York v. The American Tobacco Company, et al. (U.S. District Court,
Southern District, New York, filed January 21, 1997), filed by public attorneys
for the State of New York. Plaintiffs seek restitution, unspecified amounts in
actual damages, punitive damages, and treble damages, and the funding of a
clinical smoking cessation program. Lorillard is a defendant in the case.
State of Hawaii v. Brown & Williamson Tobacco Corporation, et al. (Circuit
Court, First Circuit, Hawaii, filed January 31, 1997), filed by the Attorney
General of Hawaii. Plaintiff seeks restitution, unspecified amounts in actual
damages, punitive damages and treble damages, disgorgement of profits, and the
funding of smoking cessation campaign. Lorillard is a defendant in the case.
State of Wisconsin v. Philip Morris Incorporated, et al. (Circuit Court, Dane
County, Wisconsin, filed February 5, 1997), filed by the Attorney General of
Wisconsin. Plaintiff seeks restitution, unspecified amounts in actual damages,
punitive damages and treble damages, disgorgement of profits, and the funding of
a smoking cessation program. Lorillard is a defendant in the case.
The states pursuing the foregoing efforts are doing so at the urging and with
the assistance of well known members of the plaintiffs bar who have been meeting
with attorneys general in other states to encourage them to file similar suits.
Bleakley, et al. v. Engler, et al. (U.S. District Court, Eastern District,
Michigan, filed March 21, 1996), filed by private citizens. Plaintiffs seek a
writ of mandamus compelling the Governor of the State of Michigan to direct its
Attorney General to file a reimbursement suit against the cigarette
manufacturers and their holding companies named as defendants in the case. 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. The Company and Lorillard are named as defendants in the case. Neither
the Company nor Lorillard have received service of process of this
suit.
Crozier v. The American Tobacco Company, et al. (U.S. District Court, Middle
District, Alabama, filed August 8, 1996), filed by private citizens who seek
class certification on behalf of the taxpayers of Alabama. Plaintiffs seek
recovery of funds expended by the State of Alabama in providing health care to
individuals allegedly injured by cigarette smoking. The Company and Lorillard
are defendants in the case. Plaintiffs seek unspecified amounts in actual
damages and punitive damages.
Coyne v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Ohio, filed September 17, 1996), filed by private citizens who seek
class certification on behalf of the taxpayers of Ohio. Plaintiffs seek recovery
of funds expended by the State of Ohio in providing health care through its
Medicaid, State Teachers Retirement System and the State Public Employment
Retirement System programs to individuals allegedly injured by cigarette
smoking. The Company and Lorillard are defendants in the case. Plaintiffs seek
unspecified amounts in restitution and punitive damages, disgorgement of
profits, and the funding of smoking cessation and corrective public education
campaigns.
Lorillard, other cigarette manufacturers and others have commenced suits in
eight 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
83
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 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
tobacco companies have noticed an appeal to the Maryland Court of Appeals. 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. On December 23,
1996, the court granted a motion to dismiss filed by the defendant Attorney
General. The plaintiff tobacco companies have filed a notice of appeal from the
dismissal order to the United States Court of Appeals for the First Circuit. 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. The case of Philip
Morris Incorporated, et al. v. Verniero, et al., was filed on August 20, 1996,
in the Superior Court of Mercer County, New Jersey. The case subsequently was
transferred to the Superior Court of Middlesex County, New Jersey. The case of
Philip Morris Incorporated, et al. v. Bronster, was filed on August 28, 1996, in
the United States District Court for the District of Hawaii. The case of Philip
Morris Incorporated, et al. v. Botelho was filed on January 8, 1997, in the
United States District Court for the District of Alaska.
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. 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 $10.0 in compensatory damages and $100.0 in punitive damages.
Trials were 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 noticed an
appeal to the California Court of Appeals. Trials were held in three cases of
this type during 1995. In two of the cases, the juries returned verdicts in
favor of Lorillard. In the third case, the jury returned a verdict in favor of
plaintiffs. The verdict requires Lorillard to pay an amount between $1.8 and
$2.0 in actual and punitive damages. The precise amount to be paid by Lorillard
will be determined at a later date if the verdict withstands review by appellate
courts. Lorillard has noticed an appeal from the judgment in plaintiffs' favor.
In addition to the foregoing litigation, one pending case, Cordova v. Liggett
Group, Inc., et al. (Superior Court, San Diego County, California, filed May 12,
1992), alleges that Lorillard and other named defendants, including other
manufacturers of tobacco products, engaged in unfair and fraudulent business
practices in connection with activities relating to the Council for Tobacco
Research-USA, Inc., of which Lorillard is a sponsor, in violation of a
California state consumer protection law by misrepresenting to or concealing
from the public information concerning the health aspects of smoking. Plaintiff
seeks an injunction ordering defendants to undertake a "corrective advertising
campaign" in California to warn consumers of the health hazards associated with
smoking, to provide restitution to the public for funds "unlawfully, unfairly,
or fraudulently" obtained by defendants, and to "disgorge" all revenues and
profits acquired as a result of defendants' "unlawful, unfair and/or fraudulent
business practices."
One of the defenses raised by Lorillard in certain cases is preemption by the
Federal Cigarette Labeling and Advertising Act (the "Labeling Act"). In the case
of Cipollone v. Liggett Group, Inc., et al., the United States 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,
84
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
reimbursement cases.
Smoking and health related litigation has been brought by plaintiffs against
Lorillard and other manufacturers of tobacco products for many years. While
Lorillard intends to defend vigorously all such actions which may be brought
against it, it is not possible to predict the outcome of any of this litigation.
Litigation is subject to many uncertainties, and it is possible that some of
these actions could be decided unfavorably. An unfavorable outcome of a pending
smoking and health case could encourage the commencement of additional similar
litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending litigation. It is
possible that the Company's results of operations or cash flows in a particular
quarterly or annual period or its financial position could be materially
affected by an ultimate unfavorable outcome of certain pending litigation.
Management believes, however, that the ultimate outcome of pending litigation
should not have a material adverse effect on the Company's financial position.
Other Litigation - The Company and its subsidiaries are also parties to other
litigation arising in the ordinary course of business. The outcome of this other
litigation will not, in the opinion of management, materially affect the
Company's results of operations or equity.
85
Note 20. Business Segments -
Loews Corporation is a holding company. Its subsidiaries are engaged in the
following lines of business: property, casualty and life insurance (CNA
Financial Corporation, an 84% owned subsidiary, "CNA"); the production and sale
of cigarettes (Lorillard, Inc., a wholly owned subsidiary, "Lorillard"); the
operation of hotels (Loews Hotels Holding Corporation, a wholly owned
subsidiary, "Loews Hotels"); the operation of offshore oil and gas drilling rigs
(Diamond Offshore Drilling, Inc., a 51% owned subsidiary, "Diamond Offshore");
and the distribution and sale of watches and clocks (Bulova Corporation, a 97%
owned subsidiary, "Bulova").
As multiple-line insurers, CNA's insurance operations underwrite property,
casualty, life, and accident and health coverages. Their principal market for
insurance is the United States. Foreign operations are not significant.
Insurance products are marketed by CNA through independent agents and brokers.
Lorillard's principal products are marketed under the brand names of Newport,
Kent and True with substantially all of its sales in the United States.
Loews Hotels properties consist of 14 hotels, 11 of which are in the United
States, two are in Canada and one is located in Monte Carlo.
Diamond Offshore's business primarily consists of operating 46 offshore drilling
rigs that are chartered on a contract basis for fixed terms by companies engaged
in exploration and production of hydrocarbons. Offshore rigs are mobile units
that can be relocated based on market demand. Currently 65% of these rigs
operate in the Gulf of Mexico, 9% operate in the North Sea and the remaining 26%
are located in various foreign markets.
Bulova distributes and sells watches and clocks under the brand names of Bulova,
Caravelle and Accutron with substantially all of its sales in the United States
and Canada. All watches and clocks are purchased from foreign suppliers.
<TABLE>
<CAPTION>
The following table sets forth the major sources of the Company's consolidated revenues, income
and assets.
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (a):
Property and casualty insurance $12,990.4 $11,092.1 $ 8,088.6
Life insurance (b) 4,043.8 3,617.0 2,903.8
Cigarettes 2,216.7 2,054.3 1,915.6
Hotels (c) 200.6 218.0 217.4
Drilling 648.2 339.5 303.7
Watches and clocks 120.8 109.5 151.5
Investment income-net (d) 237.6 1,259.3 (90.1)
Other and eliminations-net (15.7) (12.3) 24.7
- -------------------------------------------------------------------------------------------------
Total $20,442.4 $18,677.4 $13,515.2
=================================================================================================
</TABLE>
86
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income contribution (a)(e):
Property and casualty insurance $ 1,287.1 $ 953.6 $ (107.7)
Life insurance 327.7 330.8 93.2
Cigarettes 721.6 635.4 584.0
Hotels (c) 22.0 32.3 48.9
Drilling 215.1 13.9 (14.2)
Watches and clocks 12.4 8.2 4.1
Investment income-net (d) 230.8 1,255.0 (93.5)
Other 5.2 1.7 30.1
- -------------------------------------------------------------------------------------------------
Total $ 2,821.9 $ 3,230.9 $ 544.9
=================================================================================================
Net income (a):
Property and casualty insurance $ 700.4 $ 530.1 $ 39.0
Life insurance 174.9 163.2 30.6
Cigarettes 429.9 368.2 352.5
Hotels (c) 6.9 16.8 19.5
Drilling 52.1 (8.7) (35.7)
Watches and clocks 6.8 2.8 1.1
Investment income-net (d) 152.2 813.3 (59.9)
Corporate interest expense (72.2) (64.5) (62.8)
Corporate expense and other-net (67.1) (55.5) (16.5)
- -------------------------------------------------------------------------------------------------
Total $ 1,383.9 $ 1,765.7 $ 267.8
=================================================================================================
Identifiable assets:
Property and casualty insurance $46,999.7 $47,108.3 $31,915.9
Life insurance 14,040.5 13,101.4 12,350.3
Cigarettes 690.8 620.9 542.2
Hotels 231.2 214.2 182.8
Drilling 1,574.5 618.1 527.4
Watches and clocks 148.6 134.1 164.8
Investment income 4,617.5 3,813.2 4,234.1
Corporate 31.0 19.8 63.5
Other and eliminations-net (650.8) (113.1) 355.0
- -------------------------------------------------------------------------------------------------
Total $67,683.0 $65,516.9 $50,336.0
=================================================================================================
</TABLE>
87
<TABLE>
<CAPTION>
(a) Investment gains (losses) included in Revenues, Income contribution and Net income are as
follows:
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Property and casualty insurance $473.6 $ 320.6 $(164.1)
Life insurance 163.6 139.2 (81.0)
Investment income-net 40.7 1,120.2 (201.9)
- -------------------------------------------------------------------------------------------------
Total $677.9 $1,580.0 $(447.0)
=================================================================================================
Income contribution:
Property and casualty insurance $473.6 $ 320.6 $(164.1)
Life insurance 149.3 131.4 (70.1)
Investment income-net 40.7 1,120.2 (201.9)
- -------------------------------------------------------------------------------------------------
Total $663.6 $1,572.2 $(436.1)
=================================================================================================
Net income:
Property and casualty insurance $255.6 $ 174.8 $ (86.6)
Life insurance 80.5 71.9 (37.8)
Investment income-net 28.4 726.5 (131.3)
- -------------------------------------------------------------------------------------------------
Total $364.5 $ 973.2 $(255.7)
=================================================================================================
(b) Includes $2,100.0, $1,900.0 and $1,800.0 under contracts covering U.S. government employees
and their dependents for the respective periods.
(c) Includes pre-tax and after tax gain on sale of two hotels leased to others amounting to $30.2
and $15.4, respectively, for the year ended December 31, 1994.
(d) Consists of investment income of non-insurance operations. Investment income of insurance
operations is included in the Revenues, Income contribution and Net income of the related
insurance operations.
(e) Consists of income before minority interest and allocation for financial reporting purposes
of interest expense, corporate expense and income taxes.
</TABLE>
88
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Information called for by Part III has been omitted as Registrant intends to
file with the Securities and Exchange Commission not later than 120 days after
the close of its fiscal year a definitive Proxy Statement pursuant to regulation
14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements:
The financial statements appear above under Item 8. The following additional
financial data should be read in conjunction with those financial statements.
Schedules not included with these additional financial data have been omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or notes to consolidated financial statements.
<TABLE>
<CAPTION>
Page
2. Financial Statement Schedules: Number
------
<S> <C>
Independent Auditors' Report ......................................... L-1
Loews Corporation and Subsidiaries:
Schedule I-Condensed financial information of Registrant for the
years ended December 31, 1996, 1995 and 1994 ...................... L-2
Schedule II-Valuation and qualifying accounts for the years ended
December 31, 1996, 1995 and 1994 .................................. L-6
Schedule V-Supplemental information concerning property/casualty
insurance operations for the years ended December 31, 1996, 1995
and 1994 .......................................................... L-7
3. Exhibits:
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession
Merger Agreement, dated as of December 6, 1994, by and among
CNA Financial Corporation, Chicago Acquisition Corp. and The
Continental Corporation is incorporated herein by reference to
Exhibit 2 to CNA Financial Corporation's (Commission File Number
1-5823) Report on Form 8-K filed December 9, 1994 ............... 2.01
(3) Articles of Incorporation and By-Laws
Restated Certificate of Incorporation of the Registrant,
incorporated herein by reference to Exhibit 3 to Registrant's
Report on Form 10-Q for the quarter ended June 30, 1996 ......... 3.01
By-Laws of the Registrant as amended to date, incorporated herein
by reference to Exhibit 3.01 to Registrant's Report on Form 10-Q
for the quarter ended September 30, 1996 ........................ 3.02
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
The Registrant hereby agrees to furnish to the Commission upon
request copies of instruments with respect to long-term debt,
pursuant to Item 601(b)(4)(iii) of Regulation S-K.
89
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
(10) Material Contracts
Employment Agreement between Registrant and Laurence A. Tisch
dated March 1, 1971 as amended through February 20, 1996 is
incorporated herein by reference to Exhibit 10.01 to Registrant's
Reports on Form 10-K for the years ended December 31, 1981,
1983, 1984, 1985, 1986, 1988, 1989, 1992, 1994 and 1995 ......... 10.01
Employment Agreement dated as of March 1, 1988 between Registrant
and Preston R. Tisch as amended through February 20, 1996 is
incorporated herein by reference to Exhibit 10.05 to Registrant's
Report on Form 10-K for the years ended December 31, 1987,
1989 and 1992 and to Exhibit 10.02 to Registrant's Report on Form
10-K for the year ended December 31, 1994 and 1995 .............. 10.02
Continuing Service Agreement between a subsidiary of Registrant
and Edward J. Noha, dated February 27, 1991 incorporated herein
by reference to Exhibit 10.04 to Registrant's Report on Form 10-K
for the year ended December 31, 1990 ............................ 10.03
Loews Corporation Benefits Equalization Plan as amended and
restated as of December 31, 1996 ................................ 10.04*
Loews Corporation Deferred Compensation Plan as amended and
restated as of December 31, 1995 ................................ 10.05*
Agreement between Fibreboard Corporation and Continental Casualty
Company, dated April 9, 1993 is incorporated herein by reference
to Exhibit A to Registrant's Report on Form 8-K filed April 12,
1993 ............................................................ 10.06
Settlement Agreement entered into on October 12, 1993 by and
among Fibreboard Corporation, Continental Casualty Company, CNA
Casualty Company of California, Columbia Casualty Company and
Pacific Indemnity Company is incorporated herein by reference to
Exhibit 99.1 to Registrant's Report on Form 10-Q for the quarter
ended September 30, 1993 ........................................ 10.07
Continental-Pacific Agreement entered into on October 12, 1993
between Continental Casualty Company and Pacific Indemnity
Company is incorporated herein by reference to Exhibit 99.2 to
Registrant's Report on Form 10-Q for the quarter ended September
30, 1993 ........................................................ 10.08
Global Settlement Agreement among Fibreboard Corporation,
Continental Casualty Company, CNA Casualty Company of California,
Columbia Casualty Company, Pacific Indemnity Company and the
Settlement Class dated December 23, 1993 is incorporated herein
by reference to Exhibit 10.09 to Registrant's Report on Form 10-K
for the year ended December 31, 1993 ............................ 10.09
Glossary of Terms in Global Settlement Agreement, Trust
Agreement, Trust Distribution Process and Defendant Class
Settlement Agreement dated December 23, 1993 is incorporated
herein by reference to Exhibit 10.10 to Registrant's Report on
Form 10-K for the year ended December 31, 1993 .................. 10.10
Fibreboard Asbestos Corporation Trust Agreement dated December
23, 1993 is incorporated herein by reference to Exhibit 10.11 to
Registrant's Report on Form 10-K for the year ended December 31,
1993 ............................................................ 10.11
Trust Distribution Process - Annex A to the Trust Agreement dated
December 23, 1993 is incorporated herein by reference to Exhibit
10.12 to Registrant's Report on Form 10-K for the year ended
December 31, 1993 ............................................... 10.12
Defendant Class Settlement Agreement dated December 23, 1993 is
incorporated herein by reference to Exhibit 10.13 to Registrant's
Report on Form 10-K for the year ended December 31, 1993 ........ 10.13
90
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
Escrow Agreement among Continental Casualty Company, Pacific
Indemnity Company and the First National Bank of Chicago dated
December 23, 1993 is incorporated herein by reference to Exhibit
10.14 to Registrant's Report on Form 10-K for the year ended
December 31, 1993 ............................................... 10.14
Incentive Compensation Plan ..................................... 10.15*
(21) Subsidiaries of the Registrant
List of subsidiaries of Registrant .............................. 21.01*
(23) Consents of Experts and Counsel
Consent of Deloitte & Touche LLP ................................ 23.01*
(27) Financial Data Schedule ......................................... 27.01*
</TABLE>
* Filed herewith
(b) Reports on Form 8-K:
In a report on Form 8-K dated December 11, 1996, the Company (i) stated that
it sold $300 million principal amount of 6.75% senior notes due December 15,
2006 pursuant to an underwriting agreement executed on December 4, 1996, and
(ii) announced its intention to call for redemption, on or about January 15,
1997, the entire principal amount of its then currently outstanding 8.25%
debentures due 2007 at the redemption price of 103.60% of the principal amount
thereof.
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LOEWS CORPORATION
Dated: March 26, 1997 By /s/ Peter W. Keegan
---------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 26, 1997 By /s/ Laurence A. Tisch
---------------------------------
(Laurence A. Tisch, Co-Chairman
of the Board and Principal
Executive Officer)
Dated: March 26, 1997 By /s/ Peter W. Keegan
---------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)
Dated: March 26, 1997 By /s/ Guy A. Kwan
---------------------------------
(Guy A. Kwan, Controller)
Dated: March 26, 1997 By /s/ Charles B. Benenson
---------------------------------
(Charles B. Benenson, Director)
Dated: March 26, 1997 By /s/ John Brademas
---------------------------------
(John Brademas, Director)
Dated: March 26, 1997 By /s/ Dennis H. Chookaszian
---------------------------------
(Dennis H. Chookaszian, Director)
92
Dated: March 26, 1997 By /s/ Bernard Myerson
---------------------------------
(Bernard Myerson, Director)
Dated: March 26, 1997 By /s/ Edward J. Noha
---------------------------------
(Edward J. Noha, Director)
Dated: March 26, 1997 By /s/ Gloria R. Scott
---------------------------------
(Gloria R. Scott, Director)
Dated: March 26, 1997 By /s/ Andrew H. Tisch
---------------------------------
(Andrew H. Tisch, Director)
Dated: March 26, 1997 By /s/ James S. Tisch
---------------------------------
(James S. Tisch, Director)
Dated: March 26, 1997 By /s/ Jonathan M. Tisch
---------------------------------
(Jonathan M. Tisch, Director)
Dated: March 26, 1997 By /s/ Preston R. Tisch
---------------------------------
(Preston R. Tisch, Director)
93
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Shareholders of Loews Corporation:
We have audited the accompanying consolidated balance sheets of Loews
Corporation and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedules listed in the Index at Item
14(a)2. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Loews Corporation and its
subsidiaries at December 31, 1996 and 1995 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
February 12, 1997
L-1
SCHEDULE I
Condensed Financial Information of Registrant
LOEWS CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Current assets, principally investment in U.S.
government securities ............................. $ 4,140.8 $3,226.3
Investments in securities .......................... 283.4 310.9
Investments in capital stocks of subsidiaries, at
equity ............................................ 6,908.1 6,368.3
Other assets ....................................... 73.2 9.5
- --------------------------------------------------------------------------------
Total assets .................................. $11,405.5 $9,915.0
================================================================================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Accounts payable and accrued liabilities ........... $ 618.4 $ 407.9
Current maturities of long-term debt ............... 200.0
Securities sold under agreements to repurchase ..... 447.8
Long-term debt, less current maturities (a) ........ 1,271.6 1,170.2
Deferred income tax ................................ 136.5 98.2
- --------------------------------------------------------------------------------
Total liabilities ............................. 2,674.3 1,676.3
Shareholders' equity ............................... 8,731.2 8,238.7
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity .... $11,405.5 $9,915.0
================================================================================
</TABLE>
L-2
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Revenues:
Equity in income of subsidiaries (c) . $1,324.0 $1,442.4 $ 369.3
Investment gains (losses) ............ 57.9 535.9 (199.0)
Interest and other ................... 177.9 102.5 122.5
- --------------------------------------------------------------------------------
Total ............................. 1,559.8 2,080.8 292.8
- --------------------------------------------------------------------------------
Expenses:
Administrative ....................... 38.1 12.6 7.6
Interest ............................. 109.9 97.8 95.5
- --------------------------------------------------------------------------------
Total ............................. 148.0 110.4 103.1
- --------------------------------------------------------------------------------
1,411.8 1,970.4 189.7
Income tax expense (benefit) (b) ....... 27.9 204.7 (78.1)
- --------------------------------------------------------------------------------
Net income ............................. $1,383.9 $1,765.7 $ 267.8
================================================================================
</TABLE>
L-3
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Operating Activities:
Net income ............................ $ 1,383.9 $ 1,765.7 $ 267.8
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed earnings of affiliates (879.9) (327.6) (104.0)
Investment (gains) losses ........... (57.9) (535.9) 199.0
Changes in assets and liabilities-net:
Receivables ......................... (107.5) 174.3 (117.1)
Accounts payable and accrued
liabilities ........................ 19.7 (37.8) 117.3
Federal income taxes ................ (75.4) 226.8 (54.7)
Investments classified as trading
securities ......................... (247.2)
Other-net ........................... 70.7 86.3 1.2
- --------------------------------------------------------------------------------
106.4 1,351.8 309.5
- --------------------------------------------------------------------------------
Investing Activities:
Purchases of securities ............... (395.4) (424.6)
Proceeds from sales of securities ..... 1,031.1 476.1
Investments in and advances to
subsidiaries-net ..................... (30.8) 557.5 (42.8)
Net increase in short-term investments,
primarily U.S. government securities . (482.5) (393.6) (2,055.9)
Securities sold under agreements to
repurchase ........................... 447.8 (2,092.9) 2,092.9
Change in other investments ........... (1.0) (2.2) (24.2)
- --------------------------------------------------------------------------------
(66.5) (1,295.5) 21.5
- --------------------------------------------------------------------------------
Financing Activities:
Dividends paid to shareholders ........ (116.2) (73.8) (60.2)
Purchases of treasury shares .......... (215.7) (6.0) (225.1)
Principal payments on long-term debt .. (15.7)
Issuance of long-term debt ............ 298.2
- --------------------------------------------------------------------------------
(33.7) (79.8) (301.0)
- --------------------------------------------------------------------------------
Net change in cash ...................... 6.2 (23.5) 30.0
Cash, beginning of year ................. 1.6 25.1 (4.9)
- --------------------------------------------------------------------------------
Cash, end of year ....................... $ 7.8 $ 1.6 $ 25.1
================================================================================
</TABLE>
L-4
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
- --------------
Notes:
(a) Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
8.5% notes due 1998 (effective interest rate
of 8.6%) (authorized, $125) ................ $ 117.8 $ 117.8
6.8% notes due 2006 (effective interest rate
of 6.8%) (authorized, $300) ................ 300.0
8.3% debentures due 2007 (effective interest
rate of 8.4%) (authorized, $200) (1) ....... 200.0 200.0
8.9% debentures due 2011 (effective interest
rate of 9.0%) (authorized, $175) ........... 175.0 175.0
7.6% notes due 2023 (effective interest rate
of 7.8%) (authorized, $300) (2) ............ 300.0 300.0
7% notes due 2023 (effective interest rate of
7.2%) (authorized, $400) (3) ............... 400.0 400.0
- --------------------------------------------------------------------------------
1,492.8 1,192.8
Less unamortized discount ................... 21.2 22.6
current maturities ..................... 200.0
- --------------------------------------------------------------------------------
$1,271.6 $1,170.2
================================================================================
(1) Redeemed on January 15, 1997.
(2) Redeemable in whole or in part at June 1, 2003 at 104%, and decreasing
percentages thereafter.
(3) Redeemable in whole or in part at October 15, 2003 at 102%, and
decreasing percentages thereafter.
</TABLE>
The aggregate of long-term debt maturing in the next five years is $200.0 and
$117.8 for the years ending December 31, 1997 and 1998, respectively.
(b) The Company is included in a consolidated federal income tax return with
certain of its subsidiaries and, accordingly, participates in the allocation of
certain components of the consolidated provision for federal income taxes. Such
taxes are generally allocated on a separate return bases.
The Company has entered into separate tax allocation agreements with Bulova
and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiaries"). Each agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the Company's
return, or (ii) be paid by the Subsidiary an amount, if any, equal to the
federal income tax which would have been payable by the Subsidiary if it had
filed a separate consolidated return. Under these agreements, CNA will pay Loews
approximately $99.0 for 1996, and received from Loews approximately $78.0 and
$26.0 for the years 1995 and 1994, respectively. The federal income tax to be
received from Bulova amounted to approximately $3.7 for 1996 and Bulova has
received approximately $0.8 and $0.1 for the years 1995 and 1994, respectively.
Each agreement may be canceled by either of the parties upon thirty days'
written notice. See Note 11 of the Notes to Consolidated Financial Statements of
Loews Corporation and subsidiaries included in Item 8.
(c) Cash dividends paid to the Company by affiliates amounted to $445.4,
$1,085.7 and $265.3 for the years ended December 31, 1996, 1995 and 1994,
respectively.
L-5
SCHEDULE II
LOEWS CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- --------------------------------------------------------------------------------
(In millions)
<CAPTION>
For the Year Ended December 31, 1996
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 2.0 $ 84.0 $ 84.6(1) $ 1.4
Allowance for
doubtful accounts 301.0 36.4 47.4 290.0
------------------------------------------------------
Total .......... $ 303.0 $120.4 $132.0 $291.4
======================================================
<CAPTION>
For the Year Ended December 31, 1995
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 2.0 $ 78.0 $ 78.0(1) $ 2.0
Allowance for
doubtful accounts 138.0 41.0 $143.5(2) 21.5 301.0
------------------------------------------------------
Total .......... $ 140.0 $119.0 $143.5 $ 99.5 $303.0
======================================================
<CAPTION>
For the Year Ended December 31, 1994
<S> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 2.5 $ 71.9 $ 72.4(1) $ 2.0
Allowance for
doubtful accounts 127.2 20.7 9.9 138.0
------------------------------------------------------
Total .......... $ 129.7 $ 92.6 $ 82.3 $140.0
======================================================
- -----------
Notes: (1) Discounts allowed.
(2) Includes CIC allowance at acquisition.
</TABLE>
L-6
SCHEDULE V
LOEWS CORPORATION AND SUBSIDIARIES
Supplemental Information Concerning Property/Casualty Insurance Operations
<TABLE>
<CAPTION>
Consolidated Property/Casualty Entities
- --------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Deferred policy acquisition costs .... $ 1,084 $ 969 $ 592
Reserves for unpaid claim and claim
expenses ............................ 29,830 31,044 21,639
Discount, if any, deducted above
(based on interest rates ranging from
3.5% to 7.5%) ....................... 2,459 2,449 1,951
Unearned premiums .................... 4,659 4,549 2,691
Earned premiums ...................... 10,127 8,724 6,839
Net investment income ................ 1,881 1,700 1,240
Claim and claim expenses related to
current year ........................ 7,922 6,787 5,611
Claim and claim expenses related to
prior years ......................... (91) 122 (71)
Amortization of deferred policy
acquisition costs ................... 2,179 1,783 1,329
Paid claim and claim expenses ........ 9,201 7,058 5,027
Premiums written ..................... 10,611 9,126 6,965
L-7
</TABLE>
LOEWS CORPORATION
BENEFIT EQUALIZATION PLAN
amended and restated as of December 31, 1996
December 5, 1996
FOREWORD
Effective as of January 1, 1987, Loews Corporation, Marcus Loew Booking Agency
and Lorillard, Inc. have adopted the Loews Corporation Benefit Equalization Plan
(the "Plan") for the benefit of certain of their executives. The Plan has been
amended and restated, as hereinafter set forth, effective as of January 1, 1989.
It is intended that the "excess benefits" provided under the Plan be an "excess
benefits plan" as that term is defined in Section 3(36) of the Employee
Retirement Income Security Act of 1974, and that the "supplemental benefits",
"pension supplement benefits", "savings supplement benefits", and/or "deferred
compensation benefits" provided under the Plan be a deferred compensation plan
for "a select group of management or highly compensated employees" as that term
is used in the Employee Retirement Income Security Act of 1974.
The purpose of the Plan is to:
(1) provide retired participants and their surviving spouses, contingent
annuitants and beneficiaries under the Retirement Plan for Employees of
Loews Corporation ("Retirement Plan") with the amount of company-provided
benefits that would have been provided under the Retirement Plan but for
(i) the limitations on benefits imposed under Section 415 of the
Internal Revenue Code,
(ii) the limitation on compensation for purposes of the Retirement Plan
imposed by Section 401(a)(17) of such Code, and/or
(iii) the fact that the participant elected to defer compensation that
otherwise would be payable currently by reason of an election to
defer such compensation under the Loews Corporation Deferred
Compensation Plan,
(2) provide certain participants in the Loews Corporation Employees Savings
Plan ("Savings Plan") with the "pension supplement benefits" (as defined
in Section 1.7 of this Plan) that would have been credited to their
accounts under the Savings Plan were it not for the limitation on
compensation for purposes of the Savings Plan imposed by Section
401(a)(17) of the Internal Revenue Code and/or the fact that such
participants may have elected to defer compensation that would otherwise
have been payable currently in accordance with the Loews Corporation
Deferred Compensation Plan, and
(3) provide certain participants in the Loews Corporation Employees Savings
Plan ("Savings Plan") with the "savings supplement benefits" (as defined
in Section 1.11 of this Plan) that would have been credited to their
accounts under the Savings Plan were it not for the fact that such
participants may have elected to defer compensation that would otherwise
have been payable currently in accordance with the Loews Corporation
Deferred Compensation Plan.
i
In addition, additional and/or modified benefits under this Plan may be
provided to an employee in accordance with the terms of an Agreement
between such employee and the Company. If and to the extent the provisions
of any such Agreement are inconsistent with any Plan provision, such
provisions of such Agreement (i) shall be deemed to modify the terms of
the Plan with respect to the employee to whom the Agreement applies, and
(ii) shall in all events control and govern, notwithstanding any Plan
provision to the contrary.
Effective as of January 1, 1997, Lorillard, Inc., and its successor
employer Lorillard Tobacco Company, will no longer be employers included
in the definition of Company. The liabilities under the Plan with respect
to amounts accrued by Lorillard, Inc. and Lorillard Tobacco Company
employees while employed by Lorillard, Inc. and Lorillard Tobacco Company
under the Plan prior to January 1, 1997 shall be transferred to the
Lorillard Tobacco Company Benefit Equalization Plan as of January 1, 1997.
Except to the extent otherwise indicated, and to the extent otherwise
inappropriate, the Retirement Plan and the provisions thereof and the
Savings Plan and the provisions thereof are hereby incorporated by
reference.
ii
SECTION ONE
-----------
Definitions
-----------
1.1 Except to the extent otherwise indicated herein, and to the extent
otherwise inappropriate in the context, the definitions contained
in Article 1 of the Retirement Plan are applicable under the Plan.
1.2 "Agreement" means a written agreement between an executive of the
Company and the Company which modifies the provisions of the Plan
insofar as such provisions relate to such executive.
1.3 "Board of Directors" means the Board of Directors of Loews
Corporation.
1.4 "Company" means Loews Corporation or any successor by merger,
purchase or otherwise, with respect to its employees; Marcus Loew
Booking Agency with respect to its employees; Lorillard, Inc. and
Lorillard Tobacco Company (prior to January 1, 1997) with respect
to their employees; or any other company participating in the Plan
as provided in Section 4.3 with respect to its employees.
1.5 "Death Benefit" means, except as is otherwise provided in an
Agreement, the excess, if any, of (i) the amount of lump sum death
benefit which would have been payable with respect to a participant
under the Retirement Plan had he not elected to defer compensation
that would have otherwise been payable to him currently in
accordance with the provisions of the Loews Corporation Deferred
Compensation Plan and had the limitations of Section 401(a)(17) of
the Code not applied over (ii) the amount of lump sum death benefit
payable with respect to the participant under the Retirement Plan.
1.6 "Deferred Compensation Benefit" means, except as is otherwise
provided in an Agreement, the excess, if any, of (i) the retirement
allowance which would have been payable to or with respect to a
participant under the Retirement Plan had he not elected to defer
compensation that would have otherwise been payable to him
currently in accordance with the provisions of the Loews
Corporation Deferred Compensation Plan over (ii) the retirement
allowance payable to or with respect to the participant under the
Retirement Plan.
1.7 "Excess Benefit" means, except as is otherwise provided in an
Agreement, the excess, if any, of (i) the retirement allowance
which would have been payable to or with respect to a participant
under the Retirement Plan had the limitations on benefits imposed
by Section 4.08 of the Retirement Plan not been applicable over
(ii) the retirement allowance payable to or with respect to the
participant under the Retirement Plan.
1.8 "Pension Supplement Benefit" means, except as is otherwise provided
in an Agreement, in the case of an individual who is a participant
in the Savings Plan and whose employment with the Company commenced
prior to January 1, 1982, the sum of:
1
(i) the following percentage of such person's compensation for each
year based on his age as of the first day of each such year to the
extent such compensation (a) exceeds the limitation on compensation
imposed by Section 401(a)(17) of the Code, or (b) is not currently
received by reason of an election to defer compensation in
accordance with the Loews Corporation Deferred Compensation Plan:
Age at Beginning of Year Percentage of Compensation
------------------------ --------------------------
Under age 28 0%
28 .04%
29 .07%
30 .09%
31 .12%
32 .14%
33 .17%
34 .20%
35 .22%
36 .25%
37 .28%
38 .31%
39 .34%
40 .37%
41 .40%
42 .44%
43 .47%
44 .51%
45 .54%
46 .58%
47 .61%
48 .65%
49 .69%
50 .73%
51 .77%
52 .81%
53 .85%
54 .89%
55 .94%
56 .98%
2
Age at Beginning of Year Percentage of Compensation
------------------------ --------------------------
57 1.03%
58 1.08%
59 1.12%
60 1.17%
61 1.21%
62 1.25%
63 and older 1.30%
plus
(ii) interest on such amount equal to the aggregate investment
experience that would have been credited with respect to such
amount if it had been credited to the participant's account in the
Short Term Government Securities Fund of the Savings Plan were it
not for (a) the limitation on the amount of compensation recognized
under the Savings Plan by reason of Section 401(a)(17) of the Code,
or (b) the fact that such compensation is not payable currently due
to a deferral election in accordance with the Loews Corporation
Deferred Compensation Plan.
1.9 "Plan" means the Loews Corporation Benefit Equalization Plan as set
forth herein and as from time to time in effect.
1.10 "Retirement Plan" means the Retirement Plan for Employees of Loews
Corporation.
1.11 "Savings Plan" means the Loews Corporation Employees Savings Plan.
1.12 "Savings Supplement Benefit" means, except as is otherwise provided
in an Agreement, in the case of an individual who is a participant
in the Savings Plan, the sum of:
(i) 1% of that portion of the first $100,000 of such person's
compensation for each year to the extent such compensation is not
currently received by reason of an election to defer compensation
in accordance with the Loews Corporation Deferred Compensation
Plan; plus
(ii) interest on such amount equal to the aggregate investment
experience that would have been credited with respect to such
amount if it had been credited to the participant's account in the
Short Term Government Securities Fund of the Savings Plan were it
not for the fact that such compensation is not payable currently
due to a deferral election in accordance with the Loews Corporation
Deferred Compensation Plan.
3
1.13 "Supplemental Benefit" means, except as is otherwise provided in an
Agreement, the excess, if any, of (i) the retirement allowance that
would have been payable to or with respect to a participant under
the Retirement Plan had the amount of the participant's total
annual compensation paid by the Company and the amount deferred
under the Loews Corporation Deferred Compensation Plan been
included in the term "Compensation" under the Retirement Plan over
(ii) the sum of (a) the retirement allowance payable to or with
respect to the participant under the Retirement Plan, (b) any
Excess Benefit payable under this Plan, and (c) any Deferred
Compensation Benefit payable under this Plan.
4
SECTION TWO
-----------
Participation and Transfers
---------------------------
2.1 Participation
-------------
Except as is otherwise provided in an Agreement, participation in
the Plan shall be limited to
(1) those participants in the Retirement Plan and their surviving
spouses, contingent annuitants and beneficiaries who, as a
result of
(i) the limitations on benefits that may be paid or accrued
under the Retirement Plan by reason of Section 415 of the
Internal Revenue Code,
(ii) the limitation on compensation which may be taken into
account under the Retirement Plan by reason of Section
401(a)(17) of such Code, and/or
(iii) the deferral of the receipt of compensation that would
have otherwise have been payable currently pursuant to an
election to defer such compensation in accordance with
the Loews Corporation Deferred Compensation Plan,
receive or will receive a lesser amount of retirement income
under the Retirement Plan than otherwise would be paid or
payable in the absence of such limitations and/or such election
to defer,
(2) those participants in the Savings Plan whose employment with the
Company commenced prior to January 1, 1982 (and the surviving
spouses and other beneficiaries of such individuals) who, as a
result of the limitation on compensation which may be taken into
account under the Savings Plan by reason of Section 401(a)(17)
of the Internal Revenue Code and/or the fact that such
participants may have elected to defer compensation that would
otherwise have been payable currently in accordance with the
Loews Corporation Deferred Compensation Plan, receive or will
receive a lesser amount of benefits in accordance with Section
3.1(b) of the Savings Plan (or any successor to such section)
than otherwise would be receivable, and
(3) those participants in the Savings Plan who, as a result of their
deferral of compensation that would otherwise be recognized
under such Savings Plan pursuant to an election to defer in
accordance with the Loews Corporation Deferred Compensation
Plan, receive or will receive a lesser allocation in accordance
with Section 3.1(a) of the Savings Plan (or any successor to
such section) than otherwise would be allocated.
5
2.2 Transfers
---------
(a) If a participant in this Plan transfers employment to an
employer which is an Affiliated Company (as defined in the
Retirement Plan) and which is not a Company participating in
this Plan, such participant shall cease accruing benefits in
this Plan as of the date of such transfer of employment.
Benefits earned prior to such transfer shall be payable upon
termination of employment with all employers who are Affiliated
Companies. Such transferees shall be considered as active
participants until such subsequent termination of employment
with all employers who are Affiliated Companies.
(b) If a participant transfers into this Plan from an Affiliated
Company (as defined in the Retirement Plan) which is not a
Company participating in this Plan and which has been designated
by the Board of Directors for transfer of credited service, such
participant's benefits shall be calculated based on total
credited service, offset by amounts payable from any non-
qualified plan of the Affiliated Company.
6
SECTION THREE
-------------
Benefits
-------------
3.1 Excess Benefits
---------------
The aggregate amount of Excess Benefit payable to or with respect to
a participant shall be paid directly to such participant, or to his
surviving spouse, contingent annuitant or beneficiary, as applicable,
from the general assets of the Company in accordance with Section
3.6.
3.2 Supplemental Benefits
---------------------
The aggregate amount of Supplemental Benefit payable to or with
respect to a participant shall be paid directly to such participant,
or to his surviving spouse, contingent annuitant or beneficiary, as
applicable, from the general assets of the Company in accordance with
Section 3.6.
3.3 Deferred Compensation Benefits
------------------------------
The aggregate amount of Deferred Compensation Benefit payable to or
with respect to a participant shall be paid directly to such
participant, or to his surviving spouse, contingent annuitant or
beneficiary, as applicable, from the general assets of the Company in
accordance with Section 3.6.
3.4 Pension Supplement and Death Benefits
-------------------------------------
The aggregate amount of Pension Supplement Benefits and/or Death
Benefits payable to or with respect to a participant shall be paid
directly to such participant, or to his surviving spouse or
beneficiary, as applicable, from the general assets of the Company in
accordance with Section 3.6.
3.5 Savings Supplement Benefits
---------------------------
The aggregate amount of Savings Supplement Benefits payable to or
with respect to a participant shall be paid directly to such
participant, or to his surviving spouse or beneficiary, as
applicable, from the general assets of the Company in accordance with
Section 3.6.
3.6 General Provisions
------------------
(a) The Company shall make no provision for the funding of any Excess
Benefits, Supplemental Benefits, Deferred Compensation Benefits,
Pension Supplement Benefits, Death Benefits or Savings Supplement
Benefits payable hereunder.
7
(b) In the event that the Company shall decide to establish an advance
accrual reserve on its books against the future expense of Excess
Benefit payments, Supplemental Benefit payments, Deferred
Compensation Benefit payments, Pension Supplement Benefit payments,
Death Benefit payments or Savings Supplement Benefit payments, such
reserve shall not under any circumstances be deemed to be an asset of
this Plan but, at all times, shall remain a part of the general
assets of the Company, subject to claims of the Company's creditors.
(c) A person entitled to an Excess Benefit, Supplemental Benefit,
Deferred Compensation Benefit, Pension Supplement Benefit, Death
Benefit or Savings Supplement Benefit shall have a claim upon the
Company only to the extent of the monthly payments thereof, if any,
due up to and including the then current month and shall not have a
claim against the Company for any subsequent monthly payment unless
and until such payment shall become due and payable.
(d) Except as is otherwise provided in an Agreement and in the case of an
active participant over age 70-1/2 who is receiving required payments
under the Retirement Plan, the Excess Benefit, Supplemental Benefit,
Death Benefit and Deferred Compensation Benefit with respect to a
participant shall be paid to the participant, his surviving spouse,
contingent annuitant or beneficiary in the same form and at the same
time as the retirement allowance to or with respect to the
participant under the Retirement Plan. An active participant over age
70-1/2 will not receive any payments under this Plan until his or her
termination of employment.
Except as is otherwise provided in an Agreement and in the case of an
active participant over age 70-1/2 who is receiving required payments
under the Savings Plan, the Pension Supplement Benefit and Savings
Supplement Benefit with respect to a participant shall be paid to the
participant, his surviving spouse, or beneficiary in the same form
and at the same time as the comparable benefits are payable to or
with respect to the participant under the Savings Plan. An active
participant over age 70-1/2 will not receive any payments under this
Plan until his or her termination of employment.
(e) Except as is otherwise provided in an Agreement, to the extent that
any supplemental retirement benefits (other than Pension Supplement
Benefits and Savings Supplement Benefits) are payable to a
participant under an employment or other agreement between the
participant and the Company (other than the Loews Corporation
Deferred Compensation Plan), the amount of such payments shall be
deducted from Excess Benefit, Supplemental Benefit, Death Benefit
and/or Deferred Compensation Benefit payable hereunder.
(f) Except as is otherwise provided in an Agreement, in the event that
the Retirement Plan shall be terminated in accordance with Section
8.01 thereof, Excess Benefits, Supplemental Benefits, and Deferred
Compensation Benefits shall continue to be paid directly by the
Company but only to the same extent and for the same duration as that
part of the payee's benefit from the Trust fund of the Retirement
Plan, which is
8
directly related to such Excess Benefit, Supplemental Benefit, or
Deferred Compensation Benefit is continued to be provided by the
assets of the Trust fund of the Retirement Plan; but such continued
payment of Excess Benefit, Supplemental Benefit, or Deferred
Compensation Benefit shall still be subject to the conditions
specified in subsections (a), (b), (c), (d) and (e) above. Except as
is otherwise provided in an Agreement, in the event that the Savings
Plan shall be terminated, Pension Supplement Benefits and Savings
Supplement Benefits shall be paid at such time and in such manner as
related accounts under the Savings Plan are paid.
(g) Notwithstanding subparagraph (d), if an active participant so elects,
the participant may receive the present value (as hereinafter
defined) of the Excess Benefit, Supplemental Benefit and Deferred
Compensation Benefit paid in a lump sum upon termination of
employment.
(i) Such election shall not be effective if termination of
employment occurs before the end of the first full calendar
year after the election is made, except if termination occurs
by reason of death.
(ii) Present value shall mean the amount determined under Internal
Revenue Code Section 417(e)(3); reduced however by an election
penalty of 5%.
(iii) For employees terminating at or after age 60, or after age 55
with 30 years of service, the benefit calculation shall be made
based on the immediate benefit. For employees terminating at or
after age 55 but before age 60, with more than 10 but less than
30 years of service, the benefit calculation shall be made
based on the benefit assumed to commence at age 60. For all
other terminating employees the benefit calculation shall be
made based on the benefit assumed to commence at age 65.
(iv) If a participant becomes disabled, as defined in the Retirement
Plan, termination of employment shall be deemed to occur upon
cessation of benefit accruals under the Retirement Plan.
If a participant elects the lump sum form of payment under this
Section 3.6(g), the lump sum shall not reflect the value of any
Death Benefit payable under the Plan, and any Death Benefit
payable under the Plan shall be paid in accordance with the
terms of the Plan as if the participant had not elected such
lump sum form of payment.
9
SECTION FOUR
------------
Administration
--------------
4.1 Plan Administrator
------------------
Loews Corporation shall be the "administrator" of the Plan within the
meaning of ERISA.
4.2 Retirement Committee
--------------------
Subject to the provisions of Section 4.1, the Retirement Committee of
the Retirement Plan shall be vested with the general administration
of the Plan. The Retirement Committee shall have the exclusive right
to interpret the Plan. The decisions, actions and records of the
Retirement Committee shall be conclusive and binding upon the Company
and all persons having or claiming to have any right or interest in
or under the Plan.
4.3 Participation by Subsidiary
---------------------------
If any company is now or hereafter becomes a subsidiary or affiliated
company of the Company and becomes a participating company under the
Retirement Plan or the Savings Plan, the Board of Directors may
authorize such subsidiary or affiliated company to participate in
this Plan upon appropriate action by such company necessary to adopt
the Plan.
10
SECTION FIVE
------------
Amendment and Termination
-------------------------
5.1 Amendment of the Plan
---------------------
Subject to the provisions of Section 5.3, the Plan may be wholly or
partially amended or otherwise modified at any time by the Board of
Directors.
5.2 Termination of the Plan
-----------------------
Subject to the provisions of Section 5.3, the Plan may be terminated
at any time by the Board of Directors.
5.3 No Impairment of benefits
-------------------------
Notwithstanding the provisions of Sections 5.1 and 5.2, no amendment
to or termination of the Plan shall impair any rights to benefits
which have accrued hereunder.
11
LOEWS CORPORATION
Deferred Compensation Plan
amended and restated as of December 31, 1995
November 8, 1996
<PAGE>
1. Purpose
-------
The purpose of the Loews Corporation Deferred Compensation Plan (the
"Plan") is to provide select management employees of Loews Corporation (the
"Corporation") and certain of its Subsidiaries and Affiliates (hereinafter,
with the Corporation, collectively referred to as the "Company") an
opportunity, in accordance with the terms and conditions set forth herein,
to defer, on a non-qualified basis, compensation that would otherwise be
payable currently.
2. Administration
--------------
The Plan shall be administered by a committee (the "Deferred Compensation
Committee", hereinafter referred to as the "Committee") consisting of at
least three members appointed by the Board of Directors of the Corporation
(the "Board"). The Committee shall have the sole and complete authority to
interpret the terms and provisions of the Plan and to adopt, alter and
repeal such administrative rules, regulations and practices governing the
operation of the Plan as it shall from time to time deem advisable. The
Committee may appoint a person or persons to administer the Plan on a
day-to-day basis.
3. Eligibility
-----------
The Committee shall have the sole and absolute discretion to select those
employees who shall participate in the Plan ("Participants") and shall
determine the extent to which Participants can defer base salary or any
other form of compensation. A Participant shall continue to participate in
the Plan until the Committee determines otherwise.
4. Election to Defer
-----------------
(a) A Participant may elect to defer receipt of a portion of his/her base
salary and/or any other form of compensation, as (and to the extent)
permitted by the Committee in accordance with rules and procedures to
be established from time to time by the Committee. Amounts deferred
under this Paragraph 4(a) shall be referred to as the "Deferred
Amounts". Election forms for Participants to defer compensation shall
be provided by the Committee, and all such elections shall be made in
writing on such forms. Once made, an election cannot be revoked.
(b) The election by a Participant to defer compensation shall be made
before the beginning of the calendar year in which such compensation is
paid. A Participant must make separate elections with respect to each
calendar year of participation in the Plan.
5. Establishment of Deferred Compensation Account
----------------------------------------------
At the time of the Participant's initial election to defer pursuant to
Paragraph 4, the Company shall establish a memorandum account (a "Deferred
Compensation Account") for each Participant on its books. The Deferred
Amount (as determined under the Participant's
1
election form) shall be credited to the Participant's Deferred Compensation
Account as of the day that the compensation would otherwise have been paid
to the Participant.
6. Additions to Deferred Amounts
-----------------------------
Amounts equivalent to interest ("Interest") shall be credited to a
Participant's Deferred Compensation Account at the end of each calendar
year based on the average balance (including Deferred Amounts and prior
interest credits) in the Participant's Account for such year. Interest for
any calendar year shall be computed at such rate (which may be a floating
rate) as shall be determined by the Committee, subject to a minimum rate
equal to the average Federal Funds Rate for such year minus twenty-five
basis points. A Deferred Compensation Account that is paid out prior to
the last day of a calendar year shall be credited with interest for a
partial year ending with the date of payout based on the average balance in
the Participant's Account for such partial year. The foregoing
notwithstanding, a Deferred Compensation Account that is paid out because
of a Participant's termination from employment pursuant to Paragraph
7(c)(iii) below, shall receive no Interest credit for the year in which
such termination and/or payout occurs.
7. Payment of Deferred Amounts
---------------------------
For purposes of this Paragraph 7, continuous employment of the Participant
with the Company and any corporation or other entity that is the successor,
either directly or indirectly, to all or substantially all of the assets
and business of the Company shall be deemed continuous employment with the
Company.
(a) Subject to the provisions of subparagraphs (b) and (c) below, unless
otherwise elected by the Participant in his/her election form in
accordance with rules established by the Committee, the period of
deferral shall be until termination of the Participant's employment
with the Company.
(b) The Participant shall elect, in his/her election to defer, that his/her
Deferred Compensation Account be paid either (i) in a lump sum or (ii)
in such number of annual installments (each as nearly equal as
possible), not to exceed fifteen, as the Participant shall elect under
rules established by the Committee. In the absence of an election by
the Participant, the Committee shall determine the manner of payment.
(c) (i) In the event of the Participant's death, payment of the balance
in the Participant's Deferred Compensation Account shall be made
as elected by the Participant in the election to defer, to the
Participant's designated beneficiary, or if none, to the
Participant's estate;
(ii) In the event of the Participant's termination from employment
from the Company for disability or retirement, payment of the
balance in the Participant's Deferred Compensation Account shall
be made as elected by the Participant in the election to defer;
and
2
(iii) In the event of the Participant's termination from employment
from the Company for any reason other than death, or disability
or retirement, payment of the balance in the Participant's
Deferred Compensation Account shall be made in a lump sum, as
soon as practicable after the date of termination; the election
of the Participant to the contrary in his/her election to defer
notwithstanding.
(d) Anything contained in this Paragraph 7 to the contrary notwithstanding,
in the event a Participant incurs a severe financial hardship or a
Participant becomes disabled, the Committee, in its sole and absolute
discretion and upon written application of such Participant, may direct
immediate payment of all or a portion of the then current value of such
Participant's Deferred Compensation Account; provided that, in the case
of a hardship, such payment shall in no event exceed the amount
necessary to alleviate such financial hardship.
(e) A Participant may make a new election at any time, provided that such
election will not be effective if termination of employment occurs
before the end of the first full calendar year commencing after the
election is made, except if termination occurs by reason of death; and
further provided the Participant may not make a deferral election under
Paragraph 4 regarding the intervening year's compensation.
8. Transferability of Interests
----------------------------
Except for the right of a Participant to designate a beneficiary as
hereinabove provided, a Participant, or beneficiary's, rights and interests
may not be anticipated, alienated, assigned, pledged, transferred or
otherwise encumbered.
9. Amendment, Suspension and Termination
-------------------------------------
The Corporation, in its sole and absolute discretion, at any time may
amend, suspend or terminate the Plan or any portion thereof in any manner
and to any extent. No such amendment, suspension or termination shall
alter or impair the rights of a Participant with respect to then Deferred
Amounts.
10. Definitions
-----------
(a) The term "Subsidiary" shall mean any corporation 50 percent or more of
the voting stock of which shall at the time be owned directly or
indirectly by the Corporation.
(b) The term "Affiliate" means any corporation or other entity which is not
a Subsidiary but as to which the Corporation or a Subsidiary possesses
a direct or indirect ownership interest.
3
11. Unfunded Obligation
-------------------
No assets of the Company have been set aside to provide for the payment of
the Deferred Amounts. Assets of the Company are subject to the claims of
the Company's general creditors. The Plan is intended to be, and shall be
operated and administered to be, a plan which is unfunded and which is
maintained primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees. The Company
shall make no provision for the funding or insuring of Deferred Amounts
that would cause the Plan to be (i) a "funded" plan for purposes of section
404(a)(5) of the Internal Revenue Code of 1986 or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or (ii) other than an
"unfunded and unsecured promise to pay money or property in the future"
under Treasury Regulations sections 1.83-3(e). A Participant and his/her
beneficiary shall be treated as a general unsecured creditor of the Company
at all times under this Plan, except as otherwise provided under applicable
state law.
12. No Right to Employment or other Benefits
----------------------------------------
This Plan shall not constitute a contract of employment between the Company
and the Participant, and nothing contained herein shall be construed as
conferring upon any Participant the right to continue in the employ of the
Company.
Any compensation deferred and any benefits paid under this Plan shall be
disregarded in computing benefits under any employee benefit plan of the
Company, except to the extent expressly provided for in such employee
benefit plans; and, further provided that any benefit, which would have
been payable to Participants under the "Retirement Plan for Employees of
Loews Corporation" had compensation deferred under this Plan been included
in Compensation (for Retirement Plan purposes) in the calendar year to
which the deferred compensation is attributable, shall be paid under the
"Benefit Equalization Plan".
13. Effective Date
--------------
The Plan shall be effective immediately upon approval by the Board of
Directors.
14. Governing Law
-------------
The Plan shall be governed by the laws of the State of New York without
reference to the principles of conflict of laws.
4
Exhibit 10.15
THE LOEWS CORPORATION
INCENTIVE COMPENSATION PLAN FOR EXECUTIVE OFFICERS
1. PURPOSE OF THE PLAN
The purpose of The Loews Corporation Incentive Compensation Plan for
Executive Officers (the "Plan") is to provide a means of rewarding certain
executive officers of Loews Corporation (the "Corporation") who have contributed
to the profitability of the Corporation in a manner which permits such
compensation to be deductible by the Corporation for federal income tax
purposes.
2. ADMINISTRATION OF THE PLAN
The administration of this Plan shall be vested in the Incentive Compensation
Committee of the Board of Directors of the Corporation, or such other committee
of the Board of Directors which shall succeed to the functions and
responsibilities of such committee in relation to this Plan (the "Committee"),
which shall make all determinations necessary under this Plan. All members of
the Committee shall qualify as "outside directors" (as the term is defined in
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
and the regulations thereunder as currently proposed or as may from time to time
be in effect (the "Regulations")). No member of the Committee shall be entitled
to participate in this Plan.
3. PARTICIPATION IN THE PLAN
Executive officers of the Corporation shall be eligible to participate in
this Plan. Within the period specified in the Regulations within which a
performance goal is required to be established to qualify as a pre-established
performance goal (the "Designation Period"), the Committee may designate one or
more such executive officers of the Corporation (each, a "Participant") who
shall participate in this Plan for the Performance Period or the Multiple Award
Period (as those terms are defined in Section 6 below).
4. PERFORMANCE GOALS
Prior to the end of the Designation Period for a Performance Period, the
Committee shall designate in writing a percentage of the consolidated after-tax
net income of the Corporation and its subsidiaries excluding realized investment
gains and losses ("Net Income") for such Performance Period. In the event of a
Multiple Award Period, prior to the end of the Designation Period for the first
Performance Period in the Multiple Award Period the Committee shall designate a
percentage of Net Income for each of the subsequent Performance Periods in the
Multiple Award Period. The percentage for a subsequent Performance Period may be
increased at any time prior to the end of the Designation Period for such
Performance Period.
5. AWARDS TO PARTICIPANTS
Prior to the end of the Designation Period for a Performance Period, the
Committee shall allocate in writing, on behalf of each Participant, a percentage
of Net Income on which such Participant's award will be based. In the event of a
Multiple Award Period, prior to the end of the first Designation Period for all
included Performance Periods the Committee shall allocate in writing, on behalf
of each Participant, a percentage of Net Income for each of the Performance
Periods in the Multiple Award Period, or, in the alternative an aggregate
formula for the later Performance Periods in the Multiple Award
Period based on the total of assigned percentages of Net Income for the then
current and the prior Performance Periods included in the Multiple Award Period.
The Committee may in its discretion make an award for a Performance Period to a
Participant who has received an award for a Multiple Award Period which includes
such Performance Period, provided that this is done in writing prior to the end
of the Designation Period for such Performance Period. In no event shall the sum
of the percentages allocated to Participants exceed the percentage determined in
Section 4 for any Performance Period. The Committee shall set a maximum amount
payable (the "Cap") for each Participant, which shall not exceed $3,000,000 per
year.
6. PERFORMANCE PERIOD
The Performance Period as to which awards may be made under this Plan shall
be the twelve-month period commencing January 1 of a calendar year and ending on
December 31 of such calendar year. The Committee may designate Participants for
future Performance Period awards, not to exceed three such periods (a "Multiple
Award Period").
7. PAYMENT OF BONUS AWARDS UNDER THE PLAN
(a) Following the completion of each Performance Period, the Committee shall
certify in writing (i) the amount, if any, of Net Income for such Performance
Period and (ii) the bonus awards payable to the Participants.
(b) Except as provided in Section 8 of this Plan, each Participant shall
receive payment, subject to all required tax withholdings, of his or her bonus
award as soon as practicable following the determination of the amount of such
award.
8. DEFERRAL OF PAYMENT OF AWARDS
At the discretion of the Committee, any Participant, subject to such terms
and conditions as the Committee may determine, may elect to defer payment of all
or part of any award which such Participant might earn with respect to a
Performance Period (together with interest thereon from the date as of which the
award would have been paid but for such Participant's election to defer payment
at the rate, if any, fixed by the Committee) by complying with such procedures
as the Committee may from time to time prescribe.
9. SEPARATION FROM THE CORPORATION AND ITS SUBSIDIARIES
(a) Participants who cease to be employed by the Corporation or its
subsidiaries prior to the end of the Performance Period, other than due to
retirement under any retirement plan maintained by the Corporation or any of its
subsidiaries under which such Participant is covered, death or disability (as
defined in any disability plan of the Corporation or any of its subsidiaries
applicable to the Participant), shall not be eligible to receive a bonus award
for the Performance Period in which such termination of employment occurs;
provided, however, that the Committee may, in its sole discretion, when it finds
that a waiver may be in the best interest of the Corporation, waive in whole or
in part any or all of the provisions of this Section 9(a).
(b) Participants who cease to be employed by the Corporation or its
subsidiaries prior to the end of a Performance Period due to retirement under
any retirement plan maintained by the Corporation or any of its subsidiaries
under which such Participant is covered, death or disability (as defined in any
disability plan of the Corporation or any of its subsidiaries applicable to the
Participant) shall receive a bonus award which is prorated to the date of
cessation of employment.
A-2
(c) Any Participant may designate in writing the beneficiary of the unpaid
amount of a bonus award (including the amount of any bonus award which was
previously deferred) in case of death and if no designation has been made, or if
any such designation shall become ineffective, any such unpaid amount will be
paid to the Participant's estate. Such designation shall be effective upon
receipt thereof by the Corporation. Any such designation may be revoked in
writing by a Participant at any time without the consent of any such
beneficiary.
10. AMENDMENTS
The Committee may amend this Plan at any time, provided that such changes may
be made consistent with the provisions of Section 162(m) of the Code and the
Regulations without adversely affecting the ability of the Corporation to deduct
the compensation which may be paid pursuant to this Plan for federal income tax
purposes and, provided, further, that if Section 162(m) of the Code or the
Regulations would require stockholder approval of such an amendment in order for
payments under this Plan to be deductible then no such amendment shall be
effective without such approval.
11. TERMINATION
The Board of Directors of the Corporation may terminate this Plan at any
time. No termination of this Plan shall adversely affect the right of any person
to receive any award for a Performance Period or Periods for which such person
had been designated under Section 3 of this Plan, or amounts previously awarded
to such person but deferred in accordance with Section 8 of this Plan plus any
interest thereon.
12. MISCELLANEOUS
(a) Nothing contained in this Plan shall be construed as giving any executive
officer of the Corporation the right to participate in this Plan or to continued
employment or any interest in any asset of the Corporation or any of its
subsidiaries, nor to prevent the Corporation or any of its subsidiaries or
affiliates from taking any action which it deems to be appropriate or in its
best interests, whether or not such action would have an adverse effect on this
Plan or the amounts payable hereunder.
(b) This Plan shall be unfunded and the Corporation shall not be required to
establish any segregation of assets to assure payment of any awards made
hereunder.
(c) A Participant may not sell, transfer or assign any right or interest in
this Plan except as provided in Section 9(c) hereof and any attempted sale,
transfer or assignment shall be null and void.
(d) This Plan shall be governed by and construed in accordance with the laws
of the State of New York and the applicable provisions of the Code and the
Regulations.
13. EFFECTIVE DATE
This Plan shall be effective as of January 1, 1996, subject to the subsequent
approval hereof by the Corporation's stockholders at the 1996 Annual Meeting of
Shareholders and, if so approved, shall remain in effect until terminated in
accordance with Section 11 hereof.
A-3
Exhibit 21.01
LOEWS CORPORATION
Subsidiaries of the Registrant
December 31, 1996
<TABLE>
<CAPTION>
Organized Under
Name of Subsidiary Laws of Business Names
------------------ --------------- ----------------
<S> <C> <C>
CNA Financial Corporation ............. Delaware )
Continental Casualty Company ......... Illinois )
Continental Assurance Company ....... Illinois )
National Fire Insurance Company of )
Hartford ........................... Connecticut )
American Casualty Company of )
Reading, Pennsylvania .............. Pennsylvania ) CNA Insurance
CNA Management Company Limited ...... Great Britain )
The Continental Corporation .......... New York )
The Buckeye Union Insurance Company . Ohio )
Firemen's Insurance Company of )
Newark, New Jersey ................. New Jersey )
The Continental Insurance Company ... New Hampshire )
Lorillard, Inc. ....................... New York )
Lorillard Tobacco Company ............ Delaware ) Lorillard
Vegan Development Corp. .............. Nevada )
Diamond Offshore Drilling, Inc. ....... Delaware Diamond Offshore
</TABLE>
The names of certain subsidiaries which, if considered as a single subsidiary,
would not constitute a "significant subsidiary" as defined in Regulation S-X,
have been omitted.
EXHIBIT 23.01
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-22113 of Loews Corporation on Form S-3 of our report dated February 12,
1997, appearing in this Annual Report on Form 10-K of Loews Corporation for the
year ended December 31, 1996.
Deloitte & Touche LLP
New York, New York
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 305,700
<SECURITIES> 38,919,500
<RECEIVABLES> 14,153,500
<ALLOWANCES> 291,400
<INVENTORY> 315,900
<CURRENT-ASSETS> 0
<PP&E> 3,251,600
<DEPRECIATION> 1,026,500
<TOTAL-ASSETS> 67,683,000
<CURRENT-LIABILITIES> 0
<BONDS> 4,370,700
<COMMON> 115,000
0
0
<OTHER-SE> 8,616,200
<TOTAL-LIABILITY-AND-EQUITY> 67,683,000
<SALES> 2,327,500
<TOTAL-REVENUES> 20,442,400
<CGS> 992,100
<TOTAL-COSTS> 14,554,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 318,000
<INCOME-PRETAX> 2,407,800
<INCOME-TAX> 791,400
<INCOME-CONTINUING> 1,383,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,383,900
<EPS-PRIMARY> 11.91
<EPS-DILUTED> 0
</TABLE>
