==============================================================================
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, 1998
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) 521-2000
(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 19, 1999, 111,247,600 shares of Common Stock of the Registrant
were outstanding and the aggregate market value of voting stock held by
non-affiliates was approximately $6,130,368,000.
Documents Incorporated by Reference:
Portions of the Loews Corporation Notice of Annual Meeting of Stockholders
and Proxy Statement dated March 26, 1999 are incorporated by reference into
Part III. (Registrant intends to file a definitive proxy statement with the
Commission prior to April 30, 1999.)
==============================================================================
1
LOEWS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Item Page
No. PART I No.
- ---- ----
<S> <C> <C>
1 BUSINESS .......................................................... 3
CNA Financial Corporation ....................................... 3
Lorillard, Inc. ................................................. 11
Loews Hotels Holding Corporation ................................ 20
Diamond Offshore Drilling, Inc. ................................. 21
Bulova Corporation .............................................. 24
Other Interests ................................................. 24
2 PROPERTIES ........................................................ 25
3 LEGAL PROCEEDINGS ................................................. 25
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 46
EXECUTIVE OFFICERS OF THE REGISTRANT .............................. 46
PART II
5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS .......................................................... 47
6 SELECTED FINANCIAL DATA ........................................... 48
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................ 49
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 72
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 75
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................. 118
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 ... 118
</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 85% 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 52% 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 18 of the
Notes to Consolidated Financial Statements, included in Item 8.
CNA FINANCIAL CORPORATION
CNA Financial Corporation ("CNA") was incorporated in 1967 and is the parent
company of Continental Casualty Company ("CCC"), incorporated in 1897, and
Continental Assurance Company ("CAC") incorporated in 1911. On May 10, 1995,
CNA acquired The Continental Corporation ("CIC"). 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 is a holding company whose primary subsidiaries consist of
property/casualty and life insurance companies. CNA's property/casualty
insurance operations are conducted by CCC and its affiliates, and CIC and its
affiliates. Life insurance operations are conducted by CAC and its life
insurance affiliates. CNA's principal market for insurance products is the
United States. CNA accounted for 80.51%, 84.77% and 83.10% of the Company's
consolidated total revenue for the years ended December 31, 1998, 1997 and
1996, respectively.
CNA conducts its operations through the following operating segments:
Property and Casualty Operations, Group Operations, Life Operations and Other
Insurance Operations. Property and Casualty Operations are comprised of the
following operating units: Agency Market Operations, Specialty Operations,
Reinsurance Operations, Global Operations, and Risk Management. CNA's
operating segments are briefly described below:
Property and Casualty Operations
Agency Market Operations offer to businesses and individuals a wide range of
property/casualty products and services distributed through independent agency
networks. Business products include workers' compensation, commercial package,
general liability and commercial auto, and a variety of creative risk
management services. Products for individuals are primarily personal auto and
homeowners insurance.
Specialty Operations provide a broad array of professional, financial and
specialty property/casualty products and services distributed through a
network of brokers, managing general agencies, and independent agencies.
Specialty Operations provide solutions for managing the risks of architects,
engineers, lawyers, healthcare professionals, financial intermediaries and
corporate directors and officers.
CNA Re operates globally as a reinsurer and in the broker market, offering
both treaty and facultative products through major offices in London and
Chicago. CNA Re's operations include the business of CNA Reinsurance Company,
Limited, a U.K. company, and U.S. operations based in Chicago. Major products
are traditional treaty reinsurance, with developing positions in facultative
and financial reinsurance. CNA Re also participates in Lloyd's of London
through corporate syndicates.
Global Operations provide products and services to U.S.-based customers,
customers expanding overseas and foreign customers. Product distribution is
primarily through brokers and independent agents. The major product
3
lines include marine, casualty, commercial and contract surety, warranty and
specialty products, as well as commercial property and casualty.
Risk Management markets insurance products and services to large U.S.-based
companies. These customers have a minimum of $1 million or more in casualty
claims each year, and it is estimated that there are approximately 8,500
companies within this market segment.
Group Operations
Group Operations provide a broad array of group life and health insurance
products and services to employers, affinity groups and other entities that
purchase insurance as a group. Its products and services are primarily
distributed through brokers. In addition, Group Operations provide health
insurance to postal and other federal employees, retirees and their families.
Group Operations also provide managed care and self-funded medical excess
insurance, medical provider network management and administration services,
and reinsurance for life and health insurers.
Life Operations
Life Operations provide financial protection to individuals through a full
product line of term life insurance, universal life insurance, long-term care
insurance, annuities and other products. Life Operations also provide
retirement services to institutions in the form of various investment products
and administration services. Life Operations distributes its products through
various relationships and partnerships, including managing general agencies,
other independent agencies working with CNA life sales offices, a network of
brokers and dealers, and various other independent insurance consultants.
Other Insurance Operations
Other Insurance Operations include corporate borrowings of CNA and related
interest expense, certain run-off insurance operations, asbestos claims
related to Fibreboard Corporation and financial guarantee insurance contracts.
In addition, Other Insurance Operations include the operations of Agency
Management Systems, Inc., an information technology and agency software
development subsidiary, and other non-insurance operations.
The following table sets forth supplementary insurance data:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
(In millions of dollars, except ratio information)
<S> <C> <C> <C>
Trade Ratios - GAAP basis (a):
Loss ratio .......................... 80.8% 77.1% 76.4%
Expense ratio ....................... 32.8 31.3 30.9
Combined ratio (before policyholder
dividends) ......................... 113.6 108.4 107.3
Policyholder dividend ratio ......... 1.1 .5 1.6
Trade Ratios - Statutory basis (a):
Loss ratio .......................... 81.5% 77.5% 76.8%
Expense ratio ....................... 32.7 30.7 30.6
Combined ratio (before policyholder
dividends) ......................... 114.2 108.2 107.4
Policyholder dividend ratio ......... 1.0 .8 1.4
Gross Life Insurance In-Force:
Group ............................... $317,720.0 $239,843.0 $172,213.0
Life (c) ............................ 76,674.0 71,755.0 64,796.0
- ------------------------------------------------------------------------------
$394,394.0 $311,598.0 $237,009.0
==============================================================================
4
Other Data-Statutory basis (b):
Property/Casualty capital and surplus
(d) ................................ $ 7,593.0 $ 7,123.0 $ 6,349.0
Life capital and surplus ............ 1,109.0 1,223.0 1,163.0
Written to surplus ratio ............ 1.4 1.4 1.6
Capital and surplus-percent of total
liabilities ........................ 20.5% 22.4% 25.5%
Participating policyholders-percent
of gross life insurance in force ... .5% .7% .5%
- ----------------
(a) 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.
(b) Other data is determined on the statutory basis of accounting. Dividends
of $423.0, $175.0 and $545.0 million were paid to CNA by CCC in 1998, 1997 and
1996, respectively. Insurance subsidiaries have received, or will receive,
reimbursement from CNA for general management and administrative expenses,
unallocated loss adjustment expenses and investment expenses of $187.0, $217.0
and $223.0 million in 1998, 1997 and 1996, respectively. Life 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.
(c) Lapse ratios for individual life insurance, as measured by surrenders
and withdrawals as a percentage of average ordinary life insurance in force,
were 14.7%, 6.4% and 7.2% in 1998, 1997 and 1996, respectively.
(d) Surplus includes equity of property/casualty companies' ownership in
life insurance subsidiaries.
</TABLE>
The following table displays the distribution of gross written premium for
CNA's property/casualty operations:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
New York ............................... 9.5% 9.9% 9.3%
California ............................. 8.2 8.8 8.5
Texas .................................. 6.0 6.2 6.0
Pennsylvania ........................... 4.7 5.1 4.9
Florida ................................ 4.6 4.8 4.2
Illinois ............................... 4.5 4.4 5.3
New Jersey ............................. 4.4 4.3 4.1
All other states, countries or political
subdivisions (a) ...................... 48.0 48.0 46.8
Reinsurance assumed:
Voluntary ............................ 9.1 9.7 9.1
Involuntary .......................... 1.0 (1.2) 1.8
- ------------------------------------------------------------------------------
100.0% 100.0% 100.0%
==============================================================================
- ---------------
(a) No other state, country or political subdivision accounts for more than
3.0% of gross written premium.
Approximately 96% of CNA's premiums are derived from the United States.
Premiums from any individual foreign county are not significant.
</TABLE>
5
The following loss reserve development table illustrates the change over
time of reserves established for property/casualty claim and claim expenses at
the end of various calendar years for CNA's property/casualty operations. 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 the originally reported
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 property/casualty insurance subsidiaries' 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 the original reserve was
adequate or inadequate to cover the estimated costs of unsettled claims.
The loss reserve development table for property/casualty operations 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 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
(a) (a) (a) (a) (a) (a) (b) (c) (d) (e)
- -----------------------------------------------------------------------------------------------------------
(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 29,395 28,571 28,355
Ceded recoverable ..... - - 3,440 3,297 2,867 2,491 2,705 6,089 5,660 5,326 5,424
- -----------------------------------------------------------------------------------------------------------
Net reserves for
unpaid claim and
claim expenses ....... 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 23,245 22,931
Cumulative-net paid as
of:
One year later ...... 2,040 2,670 3,285 3,411 3,706 3,629 3,656 6,510 5,851 5,954 -
Two years later ..... 3,622 4,724 5,623 6,024 6,354 6,143 7,087 10,485 9,796 - -
Three years later ... 4,977 6,294 7,490 7,946 8,121 8,764 9,195 13,363 - - -
Four years later .... 6,078 7,534 8,845 9,218 10,241 10,318 10,624 - - - -
Five years later .... 6,960 8,485 9,726 10,950 11,461 22,489 - - - - -
Six years later ..... 7,682 9,108 11,207 11,951 12,308 - - - - - -
Seven years later ... 8,142 10,393 12,023 12,639 - - - - - - -
Eight years later ... 9,303 11,086 12,592 - - - - - - - -
Nine years later .... 9,924 11,563 - - - - - - - - -
Ten years later ..... 10,342 - - - - - - - - - -
Net reserves
re-estimated as of:
End of initial year . 9,552 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,735 23,245 22,931
One year later ...... 9,737 11,336 12,984 16,032 17,757 18,250 18,922 24,864 23,479 23,508 -
Two years later ..... 9,781 11,371 14,693 16,810 17,728 18,125 18,500 24,294 23,140 - -
Three years later ... 9,796 13,098 15,737 16,944 17,823 17,868 18,008 23,814 - - -
Four years later .... 11,471 14,118 15,977 17,376 17,765 17,511 17,354 - - - -
Five years later .... 12,496 14,396 16,440 17,329 17,560 17,082 - - - - -
Six years later ..... 12,742 14,811 16,430 17,293 17,285 - - - - - -
Seven years later ... 13,167 14,810 16,551 17,069 - - - - - - -
Eight years later ... 13,174 14,995 16,487 - - - - - - - -
Nine years later .... 13,396 14,973 - - - - - - - - -
Ten years later ..... 13,431 - - - - - - - - - -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (3,879) (3,706) (3,397) (2,654) (118) 1,239 1,580 1,141 595 (263) -
===========================================================================================================
Reconciliation to
gross re-estimated
reserves:
Net reserves
re-estimated ...... 13,431 14,973 16,487 17,069 17,285 17,082 17,354 23,814 23,140 23,508 -
Re-estimated ceded
recoverable ....... - - 3,339 3,173 2,714 2,287 2,480 6,420 5,940 5,646 -
- -----------------------------------------------------------------------------------------------------------
Total gross
re-estimated reserves - - 19,826 20,242 19,999 19,369 19,834 30,234 29,080 29,154 -
===========================================================================================================
Net (deficiency)
redundancy related to:
Asbestos claims ..... (3,190) (3,092) (2,958) (2,911) (1,222) (622) (587) (399) (348) (243) -
Environmental claims (1,013) (988) (981) (937) (894) (451) (279) (289) (226) (227) -
- -----------------------------------------------------------------------------------------------------------
Total asbestos and
environmental ...... (4,203) (4,080) (3,939) (3,848) (2,116)(1,073) (866) (688) (574) (470) -
Other claims ........ 324 374 542 1,194 1,998 2,312 2,446 1,829 1,169 207 -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (3,879) (3,706) (3,397) (2,654) (118) 1,239 1,580 1,141 595 (263) -
===========================================================================================================
- ----------------
(a) Reflects reserves of CNA's property and casualty insurance subsidiaries,
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)
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.
(d) Includes net and gross reserves of acquired companies of $57 and $64
million, respectively.
(e) Includes net and gross reserves of acquired companies of $122 and $223
million, respectively.
</TABLE>
See Notes 1 and 7 of the Notes to Consolidated Financial Statements,
included in Item 8, for information regarding property/casualty claim and
claim adjustment expenses including reserve development for asbestos and
environmental claims.
7
INVESTMENTS
See Note 2 of the Notes to Consolidated Financial Statements, included in
Item 8, for information regarding the investment portfolio.
At December 31, 1998 CNA had an approximately 25% ownership interest in C.W.
Investments Limited Partnership ("CWI") with a carrying value of approximately
$25 million. CNA accounted for CWI under the equity method. CWI was the sole
shareholder of Canary Wharf Group P.L.C. ("CWG").
On March 25, 1999, CWG shares were sold in an initial public offering
("IPO") at a price of 3.30 British Pounds per share and listed on the London
Stock Exchange. As a result of the IPO, CNA will receive approximately 100
million shares of CWG stock and approximately $143 million in cash. After
completion of the transaction, CNA will own approximately 15% of the
outstanding stock of CWG. CNA will account for its ownership in CWG as an
available-for-sale security with a carrying value of approximately $535
million (based upon the IPO price of 3.30 British Pounds).
Additionally the original investors, including CNA, have entered into a
lock-up agreement with the underwriters, under which they may not sell their
shares of CWG until September 30, 1999.
OTHER
Competition: All aspects of the insurance business are highly competitive.
CNA competes 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 3,400 individual companies that sell property/casualty insurance
in the United States. CNA's consolidated property/casualty subsidiaries ranked
as the third largest property/casualty insurance organization based upon 1997
statutory net written premium. There are approximately 1,600 companies selling
life insurance in the United States. CAC is ranked as the thirty-second
largest life insurance organization based on 1997 consolidated statutory
premium volume.
Dividends by Insurance Subsidiaries: The payment of dividends to CNA by its
insurance affiliates without prior approval of the affiliates' domiciliary
state insurance commissioners is limited to amounts determined by formula in
accordance with the accounting practices prescribed or permitted by each
state's insurance departments. This formula varies by state. The formula used
by the majority of states provides that 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 is
available to dividend to the parent. Some states, however, have an additional
stipulation that dividends cannot exceed the prior year's surplus. Based upon
the formulas applied by the respective domiciliary states of the operating
companies, approximately $663.0 million in dividends can be paid to CNA by its
insurance affiliates in 1999 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 powers 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. Such 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 by the state insurance regulator, 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 share of these involuntary risks is
mandatory and generally a function of its respective share of the voluntary
market by line of insurance in each state.
Reform of the nation's tort liability system is another issue facing the
insurance industry. Although federal
8
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, a number of
state courts have modified or overturned these reforms. Additionally, new
causes of action and theories of damages continue to be proposed in state
court actions or by legislatures. Continued unpredictability in the law means
that insurance underwriting and rating is difficult in commercial lines,
professional liability and some specialty coverages.
Although the federal government and its regulatory agencies do not directly
regulate the business of insurance, federal legislative and regulatory
initiatives can impact the insurance business in a variety of ways. These
initiatives include tort reform proposals; measures to limit Year 2000
liability; proposals to overhaul the Superfund hazardous waste removal and
liability statute; financial services modernization legislation, which
includes provisions to remove barriers that prevent banks from engaging in the
insurance business; and various tax proposals affecting insurance companies.
In 1998, federal legislation to provide a new and comprehensive framework
for affiliation and regulation of the banking, insurance and securities
industries was passed by the House of Representatives but not by the Senate.
Congress is expected to continue efforts to enact legislation in the financial
services area. This legislation could result in significant regulatory changes
in the financial services industry.
Environmental clean-up remains the subject of both federal and state
regulation. For the last several years Congress and the Executive branch have
failed to reach an agreement on ways to overhaul the federal Superfund
hazardous waste program. The legislative stalemate is the result of a failure
by Superfund stakeholders and Congress to reach a compromise on clean-up
standards, the repeal of retroactive liability and methodology for financing
future clean-up costs. Although Superfund reform continues to be listed as one
of Congress' legislative priorities, at this time it is unclear 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 7 of the Notes
to Consolidated Financial Statements, included in Item 8, for further
discussion.
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. The RBC requirements establish a formal state
accreditation process designed to regulate for solvency more closely, minimize
the diversity of approved statutory accounting and actuarial practices, and
increase 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, 1998, 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 16 of the Notes to Consolidated Financial
Statements, included in Item 8, for information related to CNA's reinsurance
business.
9
Properties: CNA Plaza, owned by Continental Assurance Company, serves as the
executive office for CNA and its insurance subsidiaries. An adjacent building
(located at 55 E. Jackson Blvd.), jointly owned by Continental Casualty
Company and Continental Assurance Company, is partially situated on grounds
under leases expiring in 2058. Approximately 15% of the adjacent building is
rented to non-affiliates. 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 1,091,570 Property/Casualty Insurance Offices
New York, New York
55 E. Jackson Blvd. 440,292 Principal Executive Offices of CNA
Chicago, Illinois
401 Penn Street 254,589 Property/Casualty Insurance Offices
Reading, Pennsylvania
100 CNA Drive 251,363 Life Insurance Offices
Nashville, Tennessee
1110 Ward Avenue 186,687 Property/Casualty Insurance Offices
Honolulu, Hawaii
Leased:
7361 Calhoun Place 224,725 Life Insurance Offices
Rockville, Maryland
200 S. Wacker Drive 265,727 Property/Casualty Insurance Offices
Chicago, Illinois
1111 E. Broad St. 225,470 Property/Casualty Insurance Offices
Columbus, Ohio
3501 State Highway 66 183,184 Property/Casualty Insurance Offices
Neptune, New Jersey
2405 Lucien Way 178,744 Property/Casualty Insurance Offices
Maitland, Florida
333 Glen Street 164,032 Property/Casualty Insurance Offices
Glen Falls, New York
1100 Cornwall Road 147,884 Property/Casualty Insurance Offices
Monmouth Junction, New Jersey
600 North Pearl Street 139,151 Property/Casualty Insurance Offices
Dallas, Texas
</TABLE>
10
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, True and
Maverick. Lorillard's largest selling brand is Newport, which accounted for
approximately 77% of Lorillard's sales in 1998.
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 13.51%, 12.00% and 10.95% of the Company's consolidated total
revenue for the years ended December 31, 1998, 1997 and 1996, respectively.
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.
A large number of lawsuits, including lawsuits brought by individual
plaintiffs ("Conventional Product Liability Cases"), purported class actions
("Class Actions") and lawsuits brought on behalf of states, state agencies and
union trust funds ("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, see Item 3 of this Report.
SETTLEMENT OF STATE REIMBURSEMENT LITIGATION
On November 23, 1998, Lorillard, Philip Morris Incorporated, Brown &
Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the
"Original Participating Manufacturers" and, together with Liggett Group, Inc.
and any other tobacco product manufacturer that becomes a signatory, (the
"Participating Manufacturers") entered into a Master Settlement Agreement (the
"Master Settlement Agreement") with 46 states, the District of Columbia, the
Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and
the Northern Marianas (collectively, the "Settling States") to settle the
asserted and unasserted health care cost recovery and certain other claims of
those states. The Original Participating Manufacturers had previously settled
similar claims brought by Mississippi, Florida, Texas and Minnesota.
The Master Settlement Agreement is subject to final judicial approval in
each of the Settling States. In the Company's opinion, as of March 22, 1999,
approximately 40 Settling States have achieved final judicial approval. If a
Settling State does not obtain final judicial approval by December 31, 2001,
the Master Settlement Agreement will be terminated with respect to such state.
The Master Settlement Agreement, however, will remain in effect as to each
Settling State in which final judicial approval is obtained. The Master
Settlement Agreement provides that it is not an admission, concession or
evidence of any liability or wrongdoing on the part of any party, and was
entered into by the Original Participating Manufacturers to avoid the further
expense, inconvenience, burden and uncertainty of litigation.
The Master Settlement Agreement has been filed as an Exhibit to the
Company's Report on Form 8-K dated November 23, 1998, as amended, and the
following summary of the Master Settlement Agreement is qualified by reference
thereto. See also Management's Discussion and Analysis - Results of
Operations, "Settlement of State Reimbursement Litigation" included in Item 7.
Advertising and Marketing Restrictions
The Master Settlement Agreement restricts tobacco product advertising and
marketing within the Settling States and otherwise restricts the activities of
Participating Manufacturers. Among other things, it:
(i) prohibits the targeting of youth in the advertising, promotion or
marketing of tobacco products;
(ii) bans the use of cartoon characters in all tobacco advertising and
promotion;
11
(iii) limits each Participating Manufacturer to one tobacco brand name
sponsorship during any twelve-month period, which may not include
major team sports or events in which the intended audience includes
a significant percentage of youth;
(iv) bans all outdoor advertising of tobacco products with the exception
of small signs at retail establishments that sell tobacco products;
(v) prohibits payments for tobacco product placement in various media;
(vi) bans Participating Manufacturers from offering or selling
non-tobacco apparel and other merchandise that bears a tobacco brand
name, subject to specified exceptions;
(vii) prohibits the distribution of free samples of tobacco products
except within an adult-only facility;
(viii) bans gift offers based on the purchase of tobacco products without
sufficient proof that the intended gift recipient is an adult;
(ix) prohibits each Participating Manufacturer from authorizing third
parties to advertise such manufacturer's tobacco brand names in any
manner prohibited under the Master Settlement Agreement to that
manufacturer itself;
(x) prohibits Participating Manufacturers from using as a tobacco
product brand name any nationally recognized non-tobacco brand or
trade name or the names of sports teams, entertainment groups or
individual celebrities, subject to specified exceptions;
(xi) prohibits Participating Manufacturers from selling or manufacturing
packs containing fewer than twenty cigarettes through December 31,
2001;
(xii) requires Participating Manufacturers to affirm corporate principles
to comply with the Master Settlement Agreement and to reduce
underage usage of tobacco products; and
(xiii) provides for the dissolution of the Council for Tobacco Research -
U.S.A., Inc., The Tobacco Institute, Inc. and the Center for Indoor
Air Research, Inc. and establishes rules for the regulation and
oversight of any new tobacco-related trade association.
Industry Payments
Initial Payments. The Original Participating Manufacturers have paid $2.4
billion on December 28, 1998 into an account to be held in escrow until final
approval has occurred in a sufficient number of Settling States as described
in the Master Settlement Agreement. This payment was allocated among the
Original Participating Manufacturers based on their relative market
capitalization (as stated in Exhibit K of the Master Settlement Agreement) and
will be reduced by a percentage allocated to any states that do not receive
final judicial approval of the Master Settlement Agreement. Lorillard's share
of this payment was $175.2 million. The Original Participating Manufacturers
will also pay approximately $2.5 billion on January 10, 2000; $2.5 billion on
January 10, 2001; $2.6 billion on January 10, 2002 and $2.7 billion on January
10, 2003.
Payments to Foundation. The Original Participating Manufacturers will also
make payments to fund a national foundation to be established by the National
Association of Attorneys General to conduct educational programs to counter
underage tobacco use, to educate consumers about the cause and prevention of
diseases associated with the use of tobacco products and to engage in
specified related activities other than political or lobbying activities. On
March 31, 1999 and on each March 31 for the subsequent nine years, the
Original Participating Manufacturers will pay $25.0 million to fund the
foundation. In addition, the Original Participating Manufacturers will make
further payments for the benefit of a national public education fund
established by the foundation in the amounts of $250.0 million on March 31,
1999 and $300.0 million on March 31 of 2000, 2001, 2002 and 2003. The $300.0
million payments are to be held in escrow until final judicial approval of the
Master Settlement Agreement has occurred in a sufficient number of Settling
States, as described in the Master Settlement Agreement.
12
Beginning in 2004, the Original Participating Manufacturers will pay a
$300.0 million payment each year for the benefit of the national public
education fund if the Participating Manufacturers have an aggregate share of
all domestic cigarette shipments for such year equal to or greater than
99.05%.
Payment to Enforcement Fund. On March 31, 1999, the Original Participating
Manufacturers will pay $50.0 million for the benefit of a fund to be
established by the National Association of Attorneys General to provide for
the enforcement and implementation of the Master Settlement Agreement and the
investigation and litigation of potential violations of laws with respect to
tobacco products.
Annual and Strategic Contribution Payments. On April 15, 2000 and on each
April 15 thereafter, the Original Participating Manufacturers will pay the
following amounts (subject to adjustment as described below):
2000 $4.5 billion
2001 $5.0 billion
2002-2003 $6.5 billion
2004-2007 $8.0 billion
2008-2017 $8.1 billion
2018 and each year thereafter $9.0 billion
In addition to the foregoing annual payments, the Original Participating
Manufacturers will pay strategic contribution payments of $861.0 million on
April 15, 2008 and on each April 15 thereafter through 2017.
All payments described above (other than the first initial payment) will be
allocated among the Original Participating Manufacturers based on their
relative unit volume of domestic cigarette shipments, will be reduced by a
percentage allocated to any states that do not receive final judicial approval
of the Master Settlement Agreement, and (other than the March 31, 1999
foundation payment) will be adjusted for inflation and changes in the unit
volume of domestic cigarette shipments. The annual payments will also be
reduced by a percentage allocated to those states (Mississippi, Florida, Texas
and Minnesota) that have previously settled similar claims with the leading
tobacco companies. The annual and strategic contribution payments will also be
subject to adjustment and offset as described in the Master Settlement
Agreement to compensate Participating Manufacturers in the event of a loss of
market share to tobacco manufacturers that refuse to sign the Master
Settlement Agreement, to account for the effect of any potential federal
legislation which would provide for specified compensation to the Settling
States and to account for the effect of any claims that fail to be effectively
released as contemplated under the Master Settlement Agreement.
Costs and Attorneys Fees. The Original Participating Manufacturers will
reimburse the Settling States and other specified governmental entities for
reasonable costs and expenses incurred in connection with the settled claims
and for time reasonably expended by their attorneys and paralegals in
connection with the settled actions, subject to an aggregate cap of $150.0
million. These payments will be allocated among the Original Participating
Manufacturers on the basis of relative unit volume of domestic cigarette
shipments.
The Original Participating Manufacturers will also pay the reasonable fees
of outside counsel representing the Settling States and other specified
governmental entities. The Original Participating Manufacturers will offer to
liquidate such fees and, to the extent such offers are accepted, will pay such
fees over five years, beginning in 1999, subject to an annual aggregate cap of
$250.0 million. The fees of attorneys who do not accept such offers will be
set by a panel of arbitrators and, together with the fees of attorneys
representing certain other state and class actions, will be subject to a
separate and additional nationwide annual cap of $500.0 million. Amounts owed
in a particular year that could not be paid because of the cap will be rolled
over to the next year. All such payments to outside counsel will be allocated
among the Original Participating Manufacturers on the basis of relative unit
volume of domestic cigarette shipments. On December 10, 1998, the panel of
arbitrators appointed by the Original Participating Manufacturers and outside
counsel in the States of Mississippi, Florida and Texas awarded attorneys'
fees of $1.4 billion, $3.4 billion and $3.3 billion, respectively, to
attorneys in those States. The awards by those Panels included a provision
allowing the payments to be increased annually by a factor of 3% to account
for inflation. The Original Participating Manufacturers and the outside
counsel for the States of Mississippi and Florida have agreed that the Panels
were not authorized to award the annual inflation adjustment pursuant to the
terms of the Master Settlement Agreement, and such adjustment will not be
applied. The Original Participating Manufacturers and the outside counsel for
the state of Texas have also agreed that the annual inflation adjustment
13
was not appropriately awarded by the panel, and the panel has modified its
decision accordingly.
Payment Responsibility. The payment obligations under the Master Settlement
Agreement are the several and not joint obligations of each Participating
Manufacturer and are not the responsibility of any affiliate of a
Participating Manufacturer.
Most Favored Nation Provisions
If before October 1, 2000, a Participating Manufacturer enters into any
settlement agreement of similar litigation with a non-federal, non-foreign
governmental plaintiff on terms more favorable than the overall terms of the
Master Settlement Agreement, then the Settling States will obtain treatment
with respect to such Participating Manufacturer at least as relatively
favorable as such governmental plaintiff obtained. The Master Settlement
Agreement does not require adjustment to reflect more favorable economic terms
pursuant to settlements reached after a jury is empaneled or in other
specified circumstances.
If on or after October 1, 2000, a Participating Manufacturer enters into any
future settlement agreement of similar litigation with a non-federal, non-
foreign governmental plaintiff on non-economic terms more favorable than the
non-economic terms of the Master Settlement Agreement, and such future
settlement agreement contains terms related to marketing or distributing
tobacco products or other such non-economic terms not contained in the Master
Settlement Agreement, then the Master Settlement Agreement will be revised
with respect to that Participating Manufacturer to include such terms if the
Settling States so desire.
In the event that any Settling State resolves by settlement similar claims
against any non-participating manufacturer on overall terms more favorable to
such non-participating manufacturer than those of the Master Settlement
Agreement, including terms related to marketing or distributing tobacco
products or providing a lower settlement cost per pack of cigarettes sold, the
Participating Manufacturers will obtain, with respect to such Settling State,
overall terms at least as relatively favorable.
Scope of Release
Each Settling State and its agencies, subdivisions and officials, as well as
other releasing parties as specified in the Master Settlement Agreement, will
release all Participating Manufacturers and their related parties, retailers,
and distributors, and other released parties as specified in the Master
Settlement Agreement: (i) with respect to past conduct, from any civil claims
related to the use, sale, distribution, manufacture, development, advertising,
marketing or health effects of, to the exposure to, or to research, statements
or warnings regarding, tobacco products (with the exception of certain
specified tax or license-fee related claims); and (ii) with respect to future
conduct, from monetary civil claims related to the use of or exposure to
tobacco products manufactured in the ordinary course of business, including
claims for reimbursement of health care costs allegedly associated with the
use of or exposure to tobacco products.
Brand Transfers
No Original Participating Manufacturer may sell or transfer any of its
cigarette brands, businesses or product formulas (except for use exclusively
outside the United States) to an entity that is not an Original Participating
Manufacturer unless such entity agrees to assume the obligations of an
Original Participating Manufacturer with respect to such sold or transferred
cigarette brand, business or product formula.
Tobacco Growers
The Participating Manufacturers have also, as part of the Master Settlement
Agreement, committed to work cooperatively with the tobacco grower community
to address concerns about the potential adverse economic impact on that
community and have met with the political leadership of states with grower
communities to address those economic concerns. On January 21, 1999, the
Original Participating Manufacturers reached an agreement in principle to
establish a $5.2 billion trust fund payable over 12 years to compensate the
tobacco growing communities in 11 states. Payments to the trust fund are to be
allocated among the Original Participating Manufacturers according to their
relative market share of domestic cigarette shipments, except that Philip
Morris will pay more than its market share in the first year of the agreement
but will have its payment obligations reduced
14
in years 11 and 12 to make up for the overpayment. Lorillard's payments under
the agreement will total approximately $515.0 million, including a payment of
$16.0 million in 1999. All payments will be adjusted for inflation, changes in
the unit volume of domestic cigarette shipments, and for the effect of any new
increases in state or federal excise taxes on tobacco products which benefits
the growing community.
EFFORTS TO REACH A SETTLEMENT OF TOBACCO CLAIMS THROUGH FEDERAL LEGISLATION
On June 20, 1997, Lorillard, together with other companies in the United
States tobacco industry, entered into a Memorandum of Understanding to support
the adoption of federal legislation and any necessary ancillary undertakings,
incorporating the features described in the proposed resolution attached to
the Memorandum of Understanding (together, the "Proposed Resolution"). The
Proposed Resolution would have permitted extensive regulation of the industry
by the Food and Drug Administration ("FDA") and would have imposed large
monetary obligations on the industry to be paid to the federal government and
to the states. The Proposed Resolution would have required the manufacturers
to sign private contracts, or Protocols, which embody significant restrictions
on the industry's commercial free speech and advertising. In return, the
Proposed Resolution would have resolved much of the industry's litigation and
established a rational litigation system for future lawsuits. The Proposed
Resolution, by the nature of its terms, could be implemented only by federal
legislation.
After the Proposed Resolution was announced, it became the subject of
intense review and criticism by the White House, the public health community,
and other interested parties. Over 50 bills were introduced in the 105th
Congress regarding the issues raised in the Proposed Resolution, many of which
sought more stringent regulation of tobacco products by the FDA and more
punitive monetary payments by the companies. On April 18, 1998, Lorillard,
along with the other signatory companies to the Proposed Resolution, announced
a withdrawal from the legislative process relating to enactment of a
comprehensive tobacco settlement. After much debate, Congress adjourned in
1998 without taking action on the Proposed Resolution.
On January 19, 1999, President Clinton announced in the annual State of the
Union address that the U.S. Department of Justice was preparing to sue the
nation's leading tobacco companies to recover smoking-related medical costs
incurred under the federal Medicare program, at Veterans Administration and
military base hospitals, Native American Medical programs and the Federal
Employee Health Benefits program. Recent press reports have indicated that the
Justice Department has formed a task force to study the issue, and has
requested funding to commence a suit or a series of suits, or to intervene in
existing lawsuits, against the tobacco industry. The federal government's
claim will purportedly be based on the Medical Care Recovery Act, a federal
statute which allegedly permits the federal government to recover from those
who commit a wrongful act that causes the federal government to pay health
care costs, and/or the Medicare Secondary Payer Act, which may allow the
United States to recover for injury caused to Medicare recipients. Lorillard
has no independent confirmation from anyone in the federal government that
such a suit will be filed, or where or when it may be filed. Lorillard
believes it has strong defenses to such an action and intends to vigorously
defend against any such suit or suits which may be brought against it.
BUSINESS OPERATIONS
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 Federal Comprehensive Smoking Education
Act, federal law had, since 1965,
15
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.
Furthermore, advertising of cigarettes has been prohibited on radio and
television since 1971.
From time to time, bills have been introduced in Congress (in addition to
the more than 50 bills discussed above, under "Efforts to Reach a Settlement
of Tobacco Claims Through Federal Legislation"), 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 FDA.
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 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 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 were to 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, which were to be
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,
which were to be effective August 28, 1998.
Lorillard and other cigarette manufacturers have filed a lawsuit in a United
States District Court in North Carolina challenging the FDA's assertion of
jurisdiction over cigarettes. The District Court held that the FDA has the
authority to regulate tobacco products as medical devices under the Federal
Food, Drug & Cosmetic Act, may impose restrictions regarding access to tobacco
products by persons under the age of 18, and may impose labeling
16
requirements on tobacco products' packaging. The Court, however, also held
that the FDA is not authorized to regulate the promotion or advertisement of
tobacco products. On August 14, 1998, the Fourth Circuit Court of Appeals
overturned the District Court's decision, invalidating the FDA's assertion of
authority over cigarettes and the FDA Regulations promulgated pursuant to that
asserted authority. On January 19, 1999, the government filed a petition for
certiorari to the U.S. Supreme Court, which remains pending.
Effect of Master Settlement Agreement - As noted above (see "Settlement of
State Reimbursement Litigation"), pursuant to the Master Settlement Agreement,
Lorillard and the other major tobacco product manufacturers have agreed to
various restrictions and limitations regarding the advertising, promotion and
marketing of tobacco products in the Settling States.
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. Many other scientific papers on
ETS have been published since the EPA report, with highly variable
conclusions.
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 July 1998, a
federal judge struck down EPA's scientific risk assessment in an opinion which
is currently on appeal.
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 separate enclosed rooms exhausted directly to the outside.
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, based on further research, 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, Oregon and Vermont are considering such
legislation.
Ingredient Disclosure - On August 2, 1996, the Commonwealth of Massachusetts
enacted legislation requiring each manufacturer of cigarettes and smokeless
tobacco sold in Massachusetts to submit to the Department of Public Health
("DPH") an annual report, beginning in 1997, (1) identifying for each brand
sold certain "added constituents," and (2) providing nicotine yield ratings
and other information for certain brands based on regulations promulgated by
the DPH. The legislation provides for the public release of this information,
which includes flavorings and other trade secret ingredients used in
cigarettes.
In 1996, the cigarette and smokeless tobacco manufacturers filed suit in
federal district court in Boston challenging the legislation. On December 10,
1997, the court issued a preliminary injunction, enjoining the required
submission of ingredient data to the DPH. The requirement to submit the
nicotine yield ratings and other information was not enjoined, and the
cigarette and smokeless tobacco manufacturers submitted their data to the DPH
on December 15, 1997 and again on December 1, 1998. The Commonwealth of
Massachusetts appealed the district court's preliminary injunction, which was
then upheld by the U.S. Court of Appeals for the First Circuit
17
on November 6, 1998. The case in chief remains pending before the district
court on cross motions for summary judgment.
Any impact on Lorillard from the legislation and its implementing
regulations cannot now be predicted. If the manufacturers ultimately are
required to disclose their trade secrets to the DPH and the DPH then discloses
them to the public, further litigation seeking compensation for the taking of
the manufacturers' property may ensue.
Other similar laws and regulations have been enacted or considered by other
state governments, and could have a material adverse effect on the financial
condition and results of operations of the Company if implemented without
adequate provisions to protect the manufacturers' trade secrets from being
disclosed.
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). As noted
above (see "Settlement of State Reimbursement Litigation"), pursuant to the
Master Settlement Agreement, Lorillard and the other major tobacco product
manufacturers have agreed to various restrictions and limitations regarding
the advertising, promotion and marketing of tobacco products in the Settling
States.
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 principally in
Turkey and 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 $1.720 in 1997 and $1.755 in 1998 and for burley
tobacco were $1.885 in 1997 and $1.90 in 1998. 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: During 1998, Lorillard increased the wholesale price of its
cigarettes by $31.75 per thousand in the aggregate, including an increase of
$22.50 per thousand on November 23, 1998.
Taxes: Federal excise taxes included in the price of cigarettes are $12.00
per thousand cigarettes ($0.24 per pack of 20 cigarettes). In August of 1997,
the United States Congress approved and the President signed into law an
increase in the federal excise tax on cigarettes of $7.50 per thousand
cigarettes ($0.15 per pack of 20 cigarettes). This increase is phased in at a
rate of $5.00 per thousand cigarettes in the year 2000 and an additional $2.50
per thousand cigarettes in the year 2002. Excise taxes, which are levied upon
and paid by the distributors, are also in
18
effect in the fifty states, the District of Columbia and many municipalities.
Various states have proposed, and certain states have recently passed,
increases in their state tobacco excise taxes. The state taxes generally range
from 2.5 cents to $1.00 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.
Lorillard's executive office is located in a 130,000 square-foot, four-story
office building in Greensboro, North Carolina and a modern research facility
containing approximately 82,000 square feet is also located in Greensboro.
Lorillard also leases sales offices in major cities throughout the United
States.
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
Management Science Associates (the "MSA Report"), the company used by the
industry to process shipment data, in calendar year 1998 Lorillard ranked
fourth in the industry with a 9.3% share of the market. Philip Morris and RJR
accounted for approximately 50.0% and 24.3%, respectively, of the U.S.
cigarette market.
The following table sets forth cigarette sales in the United States by the
industry and by Lorillard, as reported by the MSA 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>
1998 ................................. 455,212,000 42,111,000 9.3%
1997 ................................. 477,701,000 41,831,000 8.8%
1996 ................................. 483,151,000 40,405,000 8.4%
</TABLE>
- ---------------
The Bureau of Alcohol, Tobacco and Firearms reports Lorillard's share of
total taxable factory removals of all cigarettes to be approximately 9.0%,
9.0% and 8.3% for 1998, 1997 and 1996, respectively.
The MSA Report divides the cigarette market into two price segments, the
full price segment and the discount or reduced price segment. According to the
MSA Report, the reduced price segment share of market decreased from
approximately 27.0% in 1997 to 26.2% in 1998. Virtually all of Lorillard's
sales are in the full price segment where Lorillard's share amounted to
approximately 11.0% in 1998 and 1997, according to the MSA Report.
19
LOEWS HOTELS HOLDING CORPORATION
The subsidiaries of Loews Hotels Holding Corporation ("Loews Hotels"), a
wholly owned subsidiary of the Company, presently operate the following 15
hotels. Loews Hotels accounted for 1.14%, 1.10% and .98% of the Company's
consolidated total revenue for the years ended December 31, 1998, 1997 and
1996, respectively.
<TABLE>
<CAPTION>
Number of
Rooms (Year
Name and Location Opened) Owned, Leased or Managed
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Loews Annapolis 217 Owned
Annapolis, Maryland (1986(2))
Loews Coronado Bay Resort 450 Management contract expiring 2011,
San Diego, California (1991) with renewal options for 10 years (3)
Loews Giorgio 197 Owned
Denver, Colorado (1986(2))
House of Blues, a Loews Hotel 367 Management contract expiring 2005 (3)
Chicago, Illinois (1998)
Howard Johnson Hotel (1) 300 Owned
New York, New York (1962)
Loews Le Concorde 404 Land lease expiring 2069
Quebec City, Canada (1974(2))
Loews L'Enfant Plaza 372 Management contract expiring 2003 (3)
Washington, D.C. (1973)
Loews Miami Beach Hotel 800 Land lease expiring 2096
Miami Beach, Florida (1998)
Loews New York 765 Owned
New York, New York (1961)
Days Hotel (1) 366 Owned
New York, New York (1962)
The Regency, a Loews Hotel 496 Land lease expiring 2013, with
New York, New York (1963) renewal option for 47 years
Loews Santa Monica Beach 350 Management contract expiring 2018,
Santa Monica, California (1989) with renewal option for 5 years(3)
Loews Vanderbilt Plaza 342 Owned
Nashville, Tennessee (1984(2))
Loews Ventana Canyon Resort 398 Management contract expiring 2004,
Tucson, Arizona (1984) with renewal options for 10 years (3)
Loews Hotel Vogue 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 Annapolis, Giorgio, Le Concorde, Vanderbilt Plaza, and Vogue Hotels
were acquired by Loews Hotels in 1990, 1989, 1987, 1989 and 1995,
respectively.
(3) These management contracts are subject to termination rights.
</TABLE>
20
A Loews Hotels subsidiary has entered into an agreement to develop and
construct three hotels having an aggregate of approximately 2,400 rooms at
Universal Studios Escape, an approximately 840 acre world class entertainment
resort in Orlando, Florida, as part of a joint venture with Universal Studios,
Inc. and the Rank Group, Plc, owners of the resort. The hotels will be
constructed on land leased by the joint venture from the resort's owners and
operated by Loews Hotels. The first hotel, The Portofino Bay Hotel, a Loews
Hotel is scheduled to open in the Fall of 1999. In addition, a Loews Hotels
subsidiary has commenced conversion of an office building in Philadelphia, PA
into the 585 room Loews Philadelphia Hotel; which is scheduled to open in
early 2000. During 1998, Loews Hotels sold its leasehold interest in the Monte
Carlo Hotel.
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 $120.4 million at December 31, 1998 with interest
rates ranging from 6.7% to 9.0% and maturing between 1999 and 2028. In
addition, certain hotels are held under leases which are subject to formula
derived rental increases, with rentals aggregating approximately $6.3 million
for the year ended December 31, 1998.
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 its 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 the 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. Diamond Offshore accounted for
5.87%, 4.85% and 3.17% of the Company's consolidated total revenue for the
years ended December 31, 1998, 1997 and 1996, respectively.
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 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 and three fourth-generation deep
water conversions. 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: 17 in the Gulf of Mexico, four in Brazil, three
in the North Sea and three in Australia, with the remaining rigs 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. Ten 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.
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 has dynamic-positioning capabilities
and is in a Gulf of Mexico shipyard for replacement of the blow-out preventer
control system and additional upgrades that are scheduled to be completed
during the second quarter of 1999.
21
Markets: Diamond Offshore's principal markets for its offshore contract
drilling services are the Gulf of Mexico, Europe, including principally the
U.K. sector of the North Sea, South America, Africa, and Australia/Southeast
Asia. Diamond Offshore actively markets its rigs worldwide.
Diamond Offshore's contracts to provide offshore drilling services vary in
their terms and provisions. Diamond Offshore often obtains its contracts
through competitive bidding, although it is not unusual for Diamond Offshore
to be awarded drilling contracts without competitive bidding. Drilling
contracts generally provide for a basic drilling rate on a fixed dayrate basis
regardless of whether such drilling results in a productive well. Drilling
contracts may also provide for lower rates during periods when the rig is
being moved or when drilling operations are interrupted or restricted by
equipment breakdowns, adverse weather or water conditions or other conditions
beyond the control of Diamond Offshore. Under dayrate contracts, Diamond
Offshore generally pays the operating expenses of the rig, including wages and
the cost of incidental supplies. Dayrate contracts have historically accounted
for a substantial portion of Diamond Offshore's revenues. In addition, Diamond
Offshore has worked some of its rigs under dayrate contracts pursuant to which
the customer also agrees to pay Diamond Offshore an incentive bonus based upon
performance.
A dayrate drilling contract generally extends over a period of time covering
either the drilling of a single well, a group of wells (a "well-to-well
contract") or a stated term (a "term contract") and may be terminated by the
customer in the event the drilling unit is destroyed or lost or if drilling
operations are suspended for a specified period of time as a result of a
breakdown of major equipment or, in some cases, due to other events beyond the
control of either party. In addition, certain of Diamond Offshore's contracts
permit the customer to terminate the contract early by giving notice and in
some circumstances may require the payment of an early termination fee by the
customer. The contract term in many instances may be extended by the customer
exercising options for the drilling of additional wells at fixed or mutually
agreed terms, including dayrates.
During 1998, two of Diamond Offshore's term contracts were canceled by
customers. BP Exploration, a division of British Petroleum, PLC, and Diamond
Offshore agreed to terminate the drilling contract for the use of Diamond
Offshore's drillship, the Ocean Clipper, which had a term through July 2001.
Termination was associated with performance failures in the blow-out preventer
control system. In October 1998, Shell Development (Australia) Proprietary
Limited ("Shell") and Diamond Offshore agreed to an early termination and
substitution arrangement involving two semisubmersibles in Australia. The
Shell termination was not the result of performance failures of Diamond
Offshore or its equipment and an associated early termination fee was paid to
Diamond Offshore.
The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategy of the offshore drilling
contractor and its customers. In periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts that allow contractors to
profit from increasing dayrates. In contrast, during these periods customers
with reasonably definite drilling programs typically prefer longer term
contracts to maintain dayrate prices at the lowest level possible. Conversely,
in periods of decreasing demand for offshore rigs, contractors generally
prefer longer term contracts to preserve dayrates at existing levels and
ensure utilization, while the customers prefer well-to-well contracts that
allow them to obtain the benefit of lower dayrates. In general, Diamond
Offshore seeks to have a foundation of long-term contracts with a reasonable
balance of single well, well-to-well and short-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. Currently, most of Diamond
Offshore's semisubmersible rigs are committed under term contracts, however
many of these contracts expire during 1999. Contracts for Diamond Offshore's
jack-up rigs are primarily single-well or well-to-well arrangements.
Customers: Diamond Offshore provides offshore drilling services to a
customer base that includes major and independent oil and gas companies and
government-owned oil companies. Occasionally, several customers have accounted
for 10.0% or more of Diamond Offshore's annual consolidated revenues, although
the specific customers may vary from year to year. During 1998, Diamond
Offshore performed services for approximately 40 different customers with
Shell companies (including domestic and foreign affiliates) ("Shell")
accounting for 17.4% of Diamond Offshore's annual total consolidated revenues.
During 1997, Diamond Offshore performed services for approximately 50
different customers with Shell accounting for 14.3% of Diamond Offshore's
annual total consolidated revenues. During 1996, Diamond Offshore performed
services for approximately 80 different customers with Shell and British
Petroleum companies (including domestic and foreign affiliates) accounting for
13.8% and 13.5% of Diamond Offshore's annual total consolidated revenues,
respectively. With the decling overall demand for offshore drilling rigs, the
loss of a single significant customer could have a material adverse effect on
22
Diamond Offshore.
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, rig location, 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. In periods of escalated drilling activity, rig availability has,
in some cases, also become a consideration, particularly with respect to
fourth-generation and other technologically advanced units. Diamond Offshore
believes that competition for drilling contracts will continue to be intense
in 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. 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. Currently, competition for drilling contracts in
over-supplied markets such as the Gulf of Mexico has caused average dayrates
for rigs serving those markets to substantially decrease from previous levels.
In addition, rig construction and enchancement programs are ongoing by
Diamond Offshore's competitors. In current market conditions, a significant
increase in the supply of technologically advanced rigs capable of drilling in
deep water could produce an oversupply of such equipment and, in turn,
adversely affect the utilization level and average operating dayrates for
Diamond Offshore's rigs, particularly its higher specification semisubmersible
units.
Governmental Regulation: Diamond offshore's operations are subject to
numerous federal, state and local 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
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. Liability under such laws and
regulations may result from either governmental or citizen prosecution. 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.
The United States Oil Pollution Act of 1990 ("OPA '90") and similar
legislation enacted in Texas, Louisiana and other coastal states address oil
spill prevention and control and significantly expand liability exposure
across all segments of the oil and gas industry. OPA '90, such similar
legislation and related regulations impose a variety of obligations on Diamond
Offshore related to the prevention of oil spills and liability for damages
resulting from such spills. OPA '90 imposes strict and, with limited
exceptions, joint and several liability upon each responsible party for oil
removal costs and a variety of public and private damages.
Indemnification and Insurance: 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, Diamond Offshore's 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.
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. 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
23
its North Sea operations. In addition, Diamond Offshore leases various office,
warehouse and storage facilities in Louisiana, West Africa, Australia, Brazil,
Indonesia, Scotland, Sinapore and the Netherlands 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
.64%, .64% and .59% of the Company's consolidated total revenue for the years
ended December 31, 1998, 1997 and 1996, 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 also owns a 91,000 square
foot plant in Brooklyn, New York for clock service and warehouse purposes. In
addition, Bulova leases 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 34,300 persons at December 31, 1998 and considers its
employee relations to be satisfactory.
Lorillard employed approximately 3,400 persons at December 31, 1998.
Approximately 1,350 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.
Loews Hotels employed approximately 2,350 persons at December 31, 1998,
approximately 1,200 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 employed approximately 23,600 full-time equivalent
employees at December 31, 1998 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.
24
Diamond Offshore employed approximately 4,300 persons (including
international crews furnished through labor contractors) at December 31, 1998,
approximately 200 of whom are union members. Diamond Offshore has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees.
Bulova and its subsidiaries employed approximately 445 persons at December
31, 1998, approximately 150 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 7 and 17 of the Notes to
Consolidated Financial Statements included in Item 8.
NON-INSURANCE
Tobacco Litigation
- ------------------
Lawsuits continue to be filed with increasing frequency against Lorillard
and other manufacturers of tobacco products. Since January 1, 1998,
approximately 400 product liability cases have been filed and served in United
States courts against U.S. cigarette manufacturers. Lorillard has been named
as a defendant in approximately 260 of these actions. Cases also have been
filed with greater frequency against the Company. A total of approximately 900
product liability cases are pending against U.S. cigarette manufacturers; of
these, Lorillard is a defendant in approximately 520.
Tobacco litigation includes various types of claims. In these actions,
plaintiffs claim substantial compensatory, statutory and punitive damages in
amounts ranging into the billions of dollars. These claims are based on a
number of legal theories including, among other things, theories of
negligence, fraud, misrepresentation, strict liability, breach of warranty,
enterprise liability, civil conspiracy, intentional infliction of harm,
violation of consumer protection statutes, and failure to warn of the
allegedly harmful and/or addictive nature of tobacco products.
Some cases have been brought by individual plaintiffs who allege cancer and/or
other health effects claimed to have resulted from an individual's use of
cigarettes, addiction to smoking, or exposure to environmental tobacco smoke
("Conventional Product Liability Cases"). Approximately 340 such actions are
pending against Lorillard. In other cases, plaintiffs have brought claims as
class actions on behalf of large numbers of individuals for damages allegedly
caused by smoking ("Class Actions"). Approximately 60 such cases are pending
against Lorillard. In some cases, plaintiffs are governmental entities or
others, such as labor unions, private companies, Indian Tribes, or private
citizens suing on behalf of taxpayers, who seek reimbursement of health care
costs allegedly incurred as a result of smoking, as well as other alleged
damages ("Reimbursement Cases"). Approximately 100 such cases are pending,
excluding some of the actions brought by certain governmental entities that
have not been formally concluded but are subject to the November 23, 1998
"Master Settlement Agreement" discussed below. There also are claims for
contribution and/or indemnity in relation to asbestos claims filed by asbestos
manufacturers or the insurers of asbestos manufacturers ("Claims for
Contribution"). Approximately nine such actions are pending against Lorillard.
In addition to the above, claims have been brought against Lorillard seeking
damages resulting from alleged exposure to asbestos fibers which were
incorporated, for a limited period of time, ending more than forty years ago,
into filter material used in one brand of cigarettes manufactured by Lorillard
("Filter Cases"); there has not been a noticeable increase in the filing of
these suits during the past few years, and approximately 20 such actions are
pending.
On November 23, 1998, the Company and other manufacturers of tobacco
products entered into a Master Settlement Agreement ("MSA") with 46 states,
the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S.
Virgin Islands, American Samoa and the Commonwealth of the Northern Mariana
Islands (the
25
"Settling States"). The MSA provides that the Settling States shall release
and discharge all claims asserted against the Manufacturers in consideration
for the implementation of tobacco-related health measures, as well as payments
to be made by the Manufacturers. The MSA purports to settle a number of cases
listed below, including, but not limited to, the Reimbursement Cases filed on
behalf of state governmental entities. Certain suits have been filed that
contest various aspects of the MSA or seek to intervene in cases governed by
the MSA in order to achieve a different distribution of the funds allocated to
the state governments. Lorillard has been named as a defendant in several of
the cases filed to date. The Company has been named as a defendant in three of
them.
CONVENTIONAL PRODUCT LIABILITY CASES - There are approximately 675 cases filed
by individual plaintiffs against manufacturers of tobacco products pending in
the United States federal and state courts in which individuals allege they or
their decedents have been injured due to smoking cigarettes, due to exposure
to environmental tobacco smoke, or due to nicotine dependence. Lorillard is a
defendant in approximately 340 of these cases. The Company is a defendant in
11 of the cases, although seven have not been served.
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 million in compensatory damages and $600.0 million
in punitive damages.
On February 9 and 10, 1999, a jury in the Superior Court of San Francisco
County, California, returned verdicts in favor of an individual plaintiff and
awarded her $1.5 million in actual damages and $50.0 million in punitive
damages from the only defendant in the action, Philip Morris Incorporated.
Philip Morris has filed a motion for new trial and a motion for judgment
notwithstanding the verdict. In the event Philip Morris is not successful in
its attempts to reverse the trial court's final judgment in favor of the
plaintiff, we understand that Philip Morris will notice an appeal to the
California Court of Appeals. We cannot predict whether this verdict will lead
to additional litigation being brought in California or elsewhere, or whether
the Lorillard or the Company will be parties to this litigation, if any is to
be filed.
As of March 12, 1999, two trials in Conventional Product Liability Cases
were proceeding in which neither Lorillard nor the Company were parties. One
of these trials is a consolidated proceeding involving four cases before the
Circuit Court of Shelby County, Tennessee. The second trial is proceeding in
the Circuit Court of Multnomah County, Oregon. Additional trials are scheduled
during 1999, and it appears that cases will be tried with greater frequency
than in the past.
On March 18, 1998, the jury in Dunn v. RJR Nabisco Holdings Corporation, et
al. (Superior Court, Delaware County, Indiana, filed May 28, 1993) returned a
unanimous verdict in favor of the defendant cigarette manufacturers and their
parent entities, including the Company, in the trial of a suit brought by the
family of a woman who died of cancer, allegedly caused by exposure to
environmental tobacco smoke. The court denied plaintiffs' motion for new
trial. Plaintiffs did not notice an appeal.
During 1998, a jury in the Circuit Court of Duval County, Florida, returned
a verdict in favor of plaintiffs in a smoking and health case in which
Lorillard was not a party, Widdick v. Brown & Williamson Tobacco Corporation
(verdict returned June 10, 1998). The jury awarded plaintiffs $1.1 million in
actual damages and punitive damages. The First District of the Florida Court
of Appeal set aside the trial court's final judgment in favor of plaintiff and
directed the Circuit Court of Duval County, Florida to transfer the case
either to the Circuit Court of Broward County, Florida or the Circuit Court of
Palm Beach County, Florida.
The Florida Court of Appeals issued a ruling in the case of Carter v. Brown
& Williamson Tobacco Corporation, filed in the Circuit Court of Duval County,
Florida, that reversed a 1996 verdict entered in favor of plaintiffs in which
they were awarded a total of seven hundred fifty thousand dollars in actual
damages. The Court of Appeals directed that judgment be entered in favor of
Brown & Williamson Tobacco Corporation by the trial court. The Court of
Appeals denied plaintiffs' motion for reconsideration. Plaintiffs are seeking
review by the Florida Supreme Court, Lorillard was not a party to Carter v.
Brown & Williamson Tobacco Corporation.
CLASS ACTIONS - There are approximately 75 purported class actions pending
against cigarette manufacturers and other defendants, including the Company.
Two cases have not been served. Most of the suits seek class certification on
behalf of residents of the states in which the cases have been filed, although
some suits seek class certification on behalf of residents of multiple states.
All but one of the purported class actions seek class certification on behalf
of individuals who smoked cigarettes or were exposed to environmental tobacco
smoke.
26
One of the cases seek class certification on behalf of individuals who have
paid insurance premiums to Blue Cross and Blue Shield organizations.
Plaintiffs in a number of Reimbursement Cases also seek certification as class
actions (see Reimbursement Cases, below).
Theories of liability asserted in the purported class actions include a
broad range of product liability theories, including those based on consumer
protection statutes and fraud and misrepresentation. Plaintiffs seek damages
in each case that range from unspecified amounts to the billions of dollars.
Most plaintiffs seek punitive damages and some seek treble damages. Plaintiffs
in many of the cases seek medical monitoring. Plaintiffs in several of the
purported class actions are represented by a well-funded and coordinated
consortium of over 60 law firms from throughout the United States. Lorillard
is a defendant in approximately 55 of the approximately 75 cases seeking class
certification. The Company is a defendant in 24 of the purported class
actions, three of which have not been served. Many of the purported class
actions are in the pre-trial, discovery stage.
Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Dade County,
Florida, October 31, 1991). On October 10, 1997, the parties to this class
action brought on behalf of flight attendants claiming injury as a result of
exposure to environmental tobacco smoke executed a settlement agreement which
was approved by the trial court on February 3, 1998. The settlement agreement
requires Lorillard and three other cigarette manufacturers jointly to pay
$300.0 million in three annual installments to create and endow a research
institute to study diseases associated with cigarette smoke. None of these
payments are to be made until all appeals have been exhausted and judgment
becomes final. The amount to be paid by Lorillard is based upon each of the
four settling defendants' then share of the United States market for the sale
of cigarettes. Lorillard had approximately 8.8% of the cigarette market in the
United States. Based on this calculation, Lorillard is expected to pay
approximately $26.4 million of the proposed settlement amount. The plaintiff
class members are permitted to file individual suits, but these individuals
may not seek punitive damages for injuries that arose prior to January 15,
1997 which enabled them to be members of the class. The defendants that
executed the settlement agreement will pay a total of $49.0 million as fees
and expenses of the attorneys who represented plaintiffs. Certain of the
absent class members objected to the settlement agreement and appealed to the
Florida Court of Appeals, which remains pending.
Castano, et al. v. The American Tobacco Company, Inc. et al. (U.S. District
Court, Eastern District, Louisiana, March 29, 1994). This case was initiated
as a class action on behalf of nicotine dependent smokers in the United
States. During 1998, Lorillard Tobacco Company and certain other cigarette
manufacturer defendants agreed with the plaintiffs to dismiss this action
without prejudice and to toll the statute of limitations as to the named
plaintiffs' claims. Lorillard Tobacco Company paid $1.0 million to reimburse
the costs and expenses of plaintiffs' counsel. This amount will be credited
against any award of costs and expenses incurred in connection with this suit
that plaintiffs' counsel may obtain in the future as a result of the federal
legislation implementing the Proposed Resolution, or against any judgment or
settlements that such counsel may obtain in the future in similar actions.
Granier v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed September 26, 1994).
Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County,
Florida, filed May 5, 1994). Trial began during July 1998 in this case, which
is pending in a Florida state court. Plaintiffs have been granted class
certification on behalf of Florida residents and citizens, and survivors of
such individuals, who allege injury or have died from and medical conditions
caused by their addiction to cigarettes containing nicotine. The Florida
Supreme Court denied defendants' appeals from the class certification orders.
Plaintiffs seek actual damages and punitive damages estimated to be in the
billions of dollars. Plaintiffs also seek equitable relief including, but not
limited to, a fund to enable Florida smokers' medical condition to be
monitored for future health care costs, attorneys' fees, and court costs.
The case is to be tried in three phases, although the court has stated that
it may modify its trial plan order. In the first phase, which is proceeding,
plaintiffs have submitted evidence as to certain issues common to the class
and their causes of action. At the conclusion of the first phase, the jury
will not award any compensatory or punitive damages. However, the jury is
expected to decide whether there is a factual basis for awarding punitive
damages in subsequent phases.
The next two phases of the trial will proceed only if plaintiffs prevail
during the first phase. In the second phase, the jury will determine liability
and compensatory damages as to each named class representative in the case. If
27
the jury awards punitive damages to the class representatives, it will also be
asked to set a percentage, or ratio, of punitive damages to be awarded to
absent class members in the third phase.
The third and final phase of the trial will address absent class members'
claims, which include issues of specific causation and damages. This portion
of the trial will be held before a separate jury.
Norton v. RJR Nabisco Holdings Corporation, et al. (Superior Court, Madison
County, Indiana, filed May 3, 1996). The Company is a defendant in the case.
Richardson v. Philip Morris Incorporated, et al. (Circuit Court, Baltimore
City, Maryland, filed May 24, 1996). During January of 1998, the court granted
plaintiffs' motion for class certification on behalf of Maryland residents who
had, presently have, or died from diseases, medical conditions or injuries
caused by smoking cigarettes or using smokeless tobacco products; nicotine
dependent persons in Maryland who have purchased and used cigarettes and
smokeless tobacco products manufactured by the defendants; and Maryland
residents who require medical monitoring. Defendants have filed a petition for
writ of mandamus or prohibition from the class certification order with the
Maryland Court of Special Appeals.
Scott v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Louisiana, filed May 24, 1996). The Company is a defendant in the
case. Class certification has been granted on behalf of Louisiana citizens who
require medical monitoring. The class certification order was affirmed on
appeal by the Louisiana Court of Appeals, and the Louisiana Supreme Court
denied further review of the class certification order.
Small v. Lorillard Tobacco Company, Inc., et al., Hoskins v. R.J. Reynolds
Tobacco Company, et al., Frosina v. Philip Morris Incorporated, et al.,
Hoberman v. Brown & Williamson Tobacco Corporation, et al., and Zito v.
American Tobacco Company, et al. (Supreme Court, New York County, New York,
filed June 19, 1996). Small is the only one of these cases to name Lorillard
as a defendant. Small formerly was known as Mroczowski. Plaintiffs' motions
for class certification on behalf of New York residents who are nicotine
dependent was granted. On appeal, the Appellate Division of the New York
Supreme Court reversed the trial court's class certification order and
directed the trial court to enter judgment in favor of the defendants. The New
York Court of Appeals has agreed to review the Appellate Division's ruling.
Reed v. Philip Morris Incorporated, et al. (Superior Court, District of
Columbia, filed June 21, 1996). The court has denied plaintiff's motion for
class certification.
Barnes v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Pennsylvania, filed August 8, 1996). The District Court has vacated
its prior order that granted class certification on behalf of Pennsylvania
smokers who require medical monitoring. The court also granted defendants'
motion for summary judgment. The Third Circuit Court of Appeals has affirmed
the trial court's class certification ruling and the order granting the
summary judgment motion and has rejected plaintiffs' petition for rehearing.
Lyons v. The American Tobacco Company, et al. (U.S. District Court, Southern
District, Alabama, filed August 8, 1996).
Chamberlain v. The American Tobacco Company, et al. (U.S. District Court,
Northern District, Ohio, filed August 14, 1996). The Company is a defendant in
the case.
Thompson v. American Tobacco Company, Inc., et al. (U.S. District Court,
Minnesota, filed September 4, 1996). The Company is a defendant in the case.
The court has directed that this matter be ready for trial by March 1, 2000.
Perry v. The American Tobacco Company, et al. (Circuit Court, Coffee County,
Tennessee, filed September 30, 1996). Plaintiffs seek class certification on
behalf of individuals who have paid medical insurance premiums to a Blue Cross
and Blue Shield organization.
Connor v. The American Tobacco Company, et al. (Second Judicial District
Court, Bernalillo County, New Mexico, filed October 10, 1996).
Ruiz v. The American Tobacco Company, et al. (U.S. District Court, Puerto
Rico, filed October 23, 1996). The
28
court denied plaintiffs' motion for class certification.
Hansen v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Arkansas, filed November 4, 1996). The Company is a defendant in the
case. The parties have completed briefing of plaintiffs' motion for class
certification but the court has not scheduled argument on the issue.
McCune v. American Tobacco Company, et al. (Circuit Court, Kanawha County,
West Virginia, filed January 31, 1997). The Company is a defendant in the
case.
Muncy v. Philip Morris Incorporated, et al. (Circuit Court, McDowell County,
West Virginia, filed February 4, 1997). This matter formerly was known as
Woods.
Peterson v. American Tobacco Company, et al. (U.S. District Court, Hawaii,
filed February 6, 1997). The Company is a defendant in the case.
Walls v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Oklahoma, filed February 6, 1997). The court has heard argument on
plaintiffs' motion for class certification. The court has certified certain
question of Oklahoma law to the Oklahoma Supreme Court to guide it in its
class certification ruling.
Selcer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Nevada, filed March 3, 1997). The Company is a defendant in the case.
Insolia v. Philip Morris Incorporated, et al. (U.S. District Court, Western
District, Wisconsin, filed April 21, 1997). The court has denied plaintiffs'
motion for class certification. Trial in this matter is scheduled to begin on
September 13, 1999.
Geiger v. The American Tobacco Company, et al. (Supreme Court, Queens
County, New York, filed April 30, 1997). The trial court granted on an interim
basis plaintiffs' motion for class certification on behalf of New York
residents who allege lung cancer or throat cancer as a result of smoking
cigarettes. The Appellate Division of the New York Supreme Court reversed the
class certification order and directed the trial court to allow the parties to
conduct additional proceedings on the class certification motion.
Cole v. The Tobacco Institute, Inc., et al. (U.S. District Court, Eastern
District, Texas, Texarkana Division, filed May 5, 1997).
Clay v. The American Tobacco Company, Inc., et al. (U.S. District Court,
Southern District, Illinois, Benton Division, filed May 22, 1997). Trial in
this matter is scheduled to begin on an unspecified date during August 1999.
Anderson v. The American Tobacco Company, Inc., et al. (U.S. District Court,
Eastern District, Tennessee, filed May 23, 1997). The Company is a defendant
in the case.
Taylor v. The American Tobacco Company, Inc., et al. (Circuit Court, Wayne
County, Michigan, filed May 23, 1997).
Cosentino v. Philip Morris Incorporated, et al. (Superior Court, Middlesex
County, New Jersey, filed May 28, 1997). The court has denied plaintiffs'
motion for class certification and plaintiffs' motion for reconsideration.
Kirstein v. American Tobacco Company, Inc., et al. (Superior Court, Camden
County, New Jersey, filed May 28, 1997). The court has denied plaintiffs'
motion for class certification and plaintiffs' motion for reconsideration.
Tepper v. Philip Morris Incorporated, et al. (Superior Court, Bergen County,
New Jersey, filed May 28, 1997). The court has denied plaintiffs' motion for
class certification and plaintiffs' motion for reconsideration.
Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San
Diego County, California, filed June 10, 1997).
29
Lippincott v. American Tobacco Company, Inc., et al. (Superior Court, Camden
County, New Jersey, filed June 13, 1997). The court has denied plaintiffs'
motion for class certification and plaintiffs' motion for reconsideration.
Brammer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Southern District, Iowa, filed June 20, 1997). The Company is a defendant in
the case.
Daley v. American Brands, Inc., et al. (U.S. District Court, Northern
District, Illinois, filed July 7, 1997).
Piscitello v. Philip Morris, Incorporated, et al. (Superior Court, Middlesex
County, New Jersey, filed July 28, 1997). The Company is a defendant in the
case. The court has denied plaintiffs' motion for class certification and
plaintiffs' motion for reconsideration.
Bush v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, Texas, filed September 10, 1997).
Nwanze v. Philip Morris Companies Inc., et al. (U.S. District Court,
Southern District, New York, filed September 29, 1997). The Company is a
defendant in the case. The court denied plaintiffs' motion for class
certification.
Badillo v. American Tobacco Company, et al. (U.S. District Court, Nevada,
filed October 8, 1997). The Company is a defendant in the case.
Newborn v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, Western District, Tennessee, filed October 9, 1997).
Young v. The American Tobacco Company, et al. (Civil District Court, Orleans
Parish, Louisiana, filed November 12, 1997). The Company is a defendant in the
case.
Aksamit v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, South Carolina, filed November 20, 1997). The Company is a defendant in
the case.
DiEnno v. Liggett Group, Inc., et al. (U.S. District Court, Nevada, filed
December 22, 1997).
Jackson v. Philip Morris Incorporated, et al. (U.S. District Court, Central
District, Utah, filed on or about February 13, 1998). The Company is a
defendant in the case.
Parsons v. AC&S, et al. (Circuit Court, Kanawha County, West Virginia, filed
February 27, 1998). The Company is a defendant in the case.
Basik v. Lorillard Tobacco Company, et al. (U.S. District Court, Northern
District, Illinois, filed March 17, 1998).
Daniels v. Philip Morris Companies, Inc., et al. (Superior Court, San Diego
County, California, filed April 2, 1998). The Company is a defendant in the
case.
Christensen v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Nevada, filed April 3, 1998). The Company is a defendant in the case. To date,
none of the defendants have received service of process.
Avallone v. The American Tobacco Company, Inc., et al. (Superior Court,
Middlesex County, New Jersey, filed April 23, 1998). The Company is a
defendant in the case. The court has heard argument on plaintiffs' motion for
class certification.
Cleary v. Philip Morris Incorporated, et al. (Circuit Court, Cook County,
Illinois, filed June 5, 1998).
Vaughan v. Philip Morris Incorporated, et al. (U.S. District Court, Western
District, Virginia, filed June 30, 1998).
Creekmore v. Brown & Williamson Tobacco Corporation, et al. (Superior Court,
Buncombe County, North Carolina, filed July 31, 1998).
30
Smokers for Fairness v. British American Tobacco Company, et al. (Superior
Court, Los Angeles County, California, filed September 25, 1998).
Sweeney v. American Tobacco Company, et al. (U.S. District Court, Western
District, Pennsylvania, filed October 15, 1998).
Brown v. Philip Morris, Inc., et al. (U.S. District Court, Eastern District,
Pennsylvania, filed October 16, 1998).
Gatlin v. American Tobacco Company, et al. (U.S. District Court, Eastern
District, Missouri, filed December 21, 1998). The Company is a defendant in
the case.
Jones v. The American Tobacco Company, Inc., et al. (Circuit Court, Jackson
County, Missouri, filed December 22, 1998). The Company is a defendant in the
case. To date, none of the defendants have received service of process.
REIMBURSEMENT CASES - Suits brought by 46 state governments and six other
governmental entities are governed by the Master Settlement Agreement. In
addition to these, approximately 100 other suits are pending, comprised of
approximately 75 union cases, and cases brought by Indian tribes, private
companies and foreign governments filing suit in U.S. courts, in which
plaintiffs 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. Plaintiffs in a number of these actions seek
certification as class actions. Plaintiffs seek damages in each case that
range from unspecified amounts to the billions of dollars. Most plaintiffs
seek punitive damages and some seek treble damages. Plaintiffs in many of the
cases seek medical monitoring. Lorillard is named as a defendant in all such
actions except for some of those filed in U.S. courts by nations in which
Lorillard does not conduct business (The Republic of Guatemala). The Company
is named as a defendant in ten of them, although the Company was named as a
defendant in several of the cases dismissed as a result of the MSA.
Governmental Reimbursement Cases - The Master Settlement Agreement is
expected to resolve the cases filed by 46 state governments and six other
governmental entities. Since January 1, 1997, cases brought by four state
governments, Florida, Minnesota, Mississippi and Texas, were settled in
separate agreements. Lorillard was a defendant in each of the 46 cases filed
by state governments and in the six cases brought by other governmental
entities, as well as in the four cases governed by the separate settlement
agreements. Eight local governments also have filed suits against cigarette
manufacturers, although the MSA purportedly resolves those actions. In
addition to these suits, cases have been brought in U.S. courts by the nations
of Bolivia, Guatemala, Nicaragua, Panama, Thailand and Venezuela, although
none of the defendants have received service to date of the case filed by
Thailand or Venezuela. Lorillard is a defendant in some of these actions,
although it does not sell cigarettes outside the United States. The Company is
named as a defendant in the cases filed by Bolivia, Panama, Thailand and
Venezuela.
Moore v. The American Tobacco Company, et al. (Chancery Court, Jackson
County, Mississippi, filed May 23, 1994). On July 2, 1997, Lorillard and other
defendants entered into a Memorandum of Understanding with the State of
Mississippi which settled the State's claims for monetary damages. See
"Settlements of Reimbursement Cases" below.
State of Minnesota, et al. v. Philip Morris Incorporated, et al., (District
Court, Ramsey County, Minnesota, filed August 17, 1994). Blue Cross and Blue
Shield of Minnesota ("Blue Cross") also is plaintiff in the case. On May 8,
1998, the parties reached an agreement to settle the matter. See "Settlements
of Reimbursement Cases" below.
McGraw v. The American Tobacco Company, et al. (Circuit Court, Kanawha
County, West Virginia, filed September 20, 1994 by the West Virginia Attorney
General and state agencies). The Company was a defendant in the case.
Consistent with the MSA, the court has entered an order dismissing the action.
Judgment is not yet final.
The State of Florida, et al. v. The American Tobacco Company, et al.
(Circuit Court, Palm Beach County,
31
Florida, filed February 21, 1995). The trial court granted the Company's
motion to dismiss. The Florida Court of Appeal affirmed the order dismissing
the Company. On August 25, 1997, Lorillard Tobacco Company and other
defendants entered into a Memorandum of Understanding with the State of
Florida which settled the State's claims for monetary damages. See
"Settlements of Reimbursement Cases" below. The remaining claims have now been
dismissed.
Commonwealth of Massachusetts v. Philip Morris Inc., et al. (Superior Court,
Middlesex County, Massachusetts, filed December 19, 1995). Consistent with the
MSA, the court has entered an order dismissing the action. Judgment in this
matter is final.
Ieyoub v. The American Tobacco Company, et al. (U.S. District Court, Western
District, Louisiana, filed March 13, 1996 by the Louisiana Attorney General).
The Company was a defendant in the case. Consistent with the MSA, the court
has entered an order dismissing the action. Judgment is not yet final.
The State of Texas v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, Texas, filed March 28, 1996). On January 16, 1998,
Lorillard Tobacco Company and other defendants entered into a Memorandum of
Understanding with the State of Texas which settled the State's claims for
monetary damages. See "Settlements of Reimbursement Cases" below.
State of Maryland v. Philip Morris Incorporated, et al. (Circuit Court,
Baltimore City, Maryland, filed May 1, 1996). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this matter is
final.
State of Washington v. The American Tobacco Company, et al. (Superior Court,
King County, Washington, filed June 5, 1996). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this matter is
final.
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 by
various California cities and counties).
State of Connecticut v. Philip Morris Incorporated, et al. (Superior Court,
Litchfield District, Connecticut, filed July 18, 1996). Consistent with the
MSA, the court has entered an order dismissing the action. Judgment in this
matter is final.
County of Los Angeles v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, San Diego County, filed August 5, 1996). Plaintiffs voluntarily
dismissed this action on December 22, 1998.
State of Arizona v. The American Tobacco Company, et al. (Superior Court,
Maricopa County, Arizona, filed August 20, 1996). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment is not yet final.
State of Kansas v. R.J. Reynolds Tobacco Company, et al. (District Court,
Shawnee County, Kansas, filed August 20, 1996). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this matter is
final.
Kelley v. Philip Morris Incorporated, et al. (Circuit Court, Ingham County,
Michigan, filed August 21, 1996 by the Attorney General of Michigan).
Consistent with the MSA, the court has entered an order dismissing the action.
Judgment is not yet final.
State of Oklahoma, et al. v. R.J. Reynolds Tobacco Company, et al. (District
Court, Cleveland County, Oklahoma, filed August 22, 1996). The Company was a
defendant in the case. Consistent with the MSA, the court has entered an order
dismissing the action. Judgment in this matter is final.
People of the State of California v. Philip Morris Incorporated, et al.
(Superior Court, San Francisco County, California, filed September 5, 1996 by
various California counties and cities and local chapters of various medical
societies and associations).
32
State of New Jersey v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Middlesex County, New Jersey, filed September 10, 1996). Consistent
with the MSA, the court has entered an order dismissing the action. Judgment
is not yet final.
State of Utah v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Central Division, Utah, filed September 30, 1996). The Company was a defendant
in the case. Consistent with the MSA, the court has entered an order
dismissing the action. Judgment in this matter is final.
City of New York, et al. v. The Tobacco Institute, et al. (Supreme Court,
New York County, filed October 17, 1996).
People of the State of Illinois v. Philip Morris, Inc., et al. (Circuit
Court, Cook County, Illinois, filed November 12, 1996). Consistent with the
MSA, the court has entered an order dismissing the action. Judgment in this
matter is final.
State of Iowa v. R.J. Reynolds Tobacco Company, et al. (District Court,
Fifth Judicial District, Polk County, Iowa, filed November 27, 1996). The
Company was a defendant in the case. Consistent with the MSA, the court has
entered an order dismissing the action. Judgment in this matter is final.
County of Erie v. The Tobacco Institute, Inc., et al. (Supreme Court, Erie
County, New York, filed January 14, 1997).
State of New York v. The American Tobacco Company, et al. (Supreme Court,
New York County, New York, filed January 21, 1997). The Company was a
defendant in the case. Consistent with the MSA, the court has entered an order
dismissing the action. Judgment is not yet final.
State of Hawaii v. Brown & Williamson Tobacco Corporation, et al. (Circuit
Court, First Circuit, Hawaii, filed January 31, 1997). Consistent with the
MSA, the court has entered an order dismissing the action. Judgment is not yet
final.
State of Wisconsin v. Philip Morris Incorporated, et al. (Circuit Court,
Dane County, Wisconsin, filed February 5, 1997). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this matter is
final.
State of Indiana v. Philip Morris Incorporated, et al. (Superior Court,
Marion County, Indiana, filed February 19, 1997). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this matter is
final.
State of Alaska v. Philip Morris, Incorporated, et al. (Superior Court,
First Judicial District, Alaska, filed April 14, 1997). Consistent with the
MSA, the court has entered an order dismissing the action. Judgment is not yet
final.
County of Cook v. Philip Morris, Incorporated, et al. (Circuit Court, Cook
County, Illinois, filed April 18, 1997).
Commonwealth of Pennsylvania v. Philip Morris, Inc., et al. (Court of Common
Pleas, Philadelphia County, Pennsylvania, filed April 23, 1997). Consistent
with the MSA, the court has entered an order dismissing the action. Judgment
is not yet final.
State of Arkansas v. The American Tobacco Company, et al. (Sixth Division,
Chancery Court, Pulaski County, Arkansas, filed May 5, 1997). Consistent with
the MSA, the court has entered an order dismissing the action. Judgment is not
yet final.
State of Montana v. Philip Morris, Incorporated, et al. (First Judicial
Court, Lewis and Clark County, Montana, filed May 5, 1997). Consistent with
the MSA, the court has entered an order dismissing the action. Judgment in
this matter is final.
State of Ohio v. Philip Morris, Incorporated, et al. (Court of Common Pleas,
Franklin County, Ohio, filed on May 8, 1997). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this
33
matter is final.
State of Missouri v. American Tobacco Company, Inc., et al. (Circuit Court,
City of St. Louis, Missouri, filed May 12, 1997). The Company was a defendant
in the case. The court has entered an order dismissing the action. The
dismissal order reflects but is not consistent with the MSA. Judgment is not
yet final.
State of South Carolina v. Brown & Williamson Tobacco Corporation, et al.
(Court of Common Pleas, Richland County, South Carolina, filed May 12, 1997).
The Company was a defendant in the case. Consistent with the MSA, the court
has entered an order dismissing the action. Judgment is not yet final.
State of Nevada v. Philip Morris, Incorporated, et al. (Second Judicial
District, Washoe County, Nevada, filed May 21, 1997). Consistent with the MSA,
the court has entered an order dismissing the action. Judgment in this matter
is final.
University of South Alabama v. The American Tobacco Company, et al. (U.S.
District Court, Southern District, Alabama, filed May 23, 1997). The Company
is a defendant in the case. Plaintiff noticed an appeal to the U.S. Court of
Appeals for the Eleventh Circuit from the trial court's order that dismissed
the action. The Eleventh Circuit returned the case to the trial court and
ordered the case remanded to state court.
State of New Mexico v. The American Tobacco Company, et al. (First Judicial
District Court, Santa Fe County, New Mexico, filed May 27, 1997). Consistent
with the MSA, the court has entered an order dismissing the action. Judgment
in this matter is final.
City of Birmingham, Alabama, and The Greene County Racing Commission v. The
American Tobacco Company, et al. (U.S. District Court, Northern District,
Alabama, filed May 28, 1997). The Company is a defendant in the case. The
court granted defendants' motion to strike the complaint. Plaintiffs have
noticed an appeal to the United States Court of Appeals for the Eleventh
Circuit.
State of Vermont v. Philip Morris, Incorporated, et al. (Superior Court,
Chittenden County, Vermont, filed May 29, 1997). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this matter is
final.
State of New Hampshire v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Merrimack County, New Hampshire, filed June 4, 1997). Consistent with
the MSA, the court has entered an order dismissing the action. Judgment in
this matter is final.
State of Colorado v. R.J. Reynolds Tobacco Co., et al. (District Court, City
and County of Denver, Colorado, filed June 5, 1997). Consistent with the MSA,
the court has entered an order dismissing the action. Judgment in this matter
is final.
State of Idaho v. Philip Morris, Inc., et al. (District Court, Fourth
Judicial District, Ada County, Idaho, filed June 9, 1997). Consistent with the
MSA, the court has entered an order dismissing the action. Judgment in this
matter is final.
State of Oregon v. The American Tobacco Company, et al. (Circuit Court,
Multnomah County, Oregon, filed June 9, 1997). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this matter is
final.
People of the State of California v. Philip Morris, Inc., et al. (Superior
Court, Sacramento County, California, filed June 12, 1997). Consistent with
the MSA, the court has entered an order dismissing the action. Judgment is not
yet final.
State of Maine v. Philip Morris, Incorporated, et al. (Superior Court,
Kennebec County, Maine, filed June 17, 1997). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this matter is
final.
Rossello, et al. v. Brown & Williamson Tobacco Corporation, et al. (U.S.
District Court, Puerto Rico, filed June
34
17, 1997). The Company was a defendant in the case. Consistent with the MSA,
the court has entered an order dismissing the action. Judgment in this matter
is final.
State of Rhode Island v. American Tobacco Company, Inc., et al. (Superior
Court, Providence, Rhode Island, filed June 17, 1997). The Company was a
defendant in the case. Consistent with the MSA, the court has entered an order
dismissing the action. Judgment in this matter is final.
State of Georgia v. Philip Morris, Inc., et al. (Superior Court, Fulton
County, Georgia, filed August 29, 1997). Consistent with the MSA, the court
has entered an order dismissing the action. Judgment in this matter is final.
Republic of the Marshall Islands v. The American Tobacco Company, et al.
(High Court, Republic of the Marshall Islands, filed October 20, 1997). The
court granted motions to dismiss filed by Lorillard Tobacco Company,
Lorillard, Inc., and Loews Corporation.
State of South Dakota and South Dakota Department of Social Services v.
Philip Morris, Inc., et al. (Circuit Court, Sixth Judicial Circuit, Hughes
County, South Dakota filed February 23, 1998). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment is not yet final.
The Republic of Guatemala v. The Tobacco Institute, Inc., et al. (U.S.
District Court, District of Columbia, filed May 11, 1998). Neither Lorillard
nor the Company are named as defendants in the matter. Defendants have filed a
motion to transfer this and other matters filed by non-U.S. governments in
U.S. courts to the United States Panel on Multi-District Litigation.
State of Vermont v. Philip Morris, Incorporated, et al. (Superior Court,
Chittenden County, Vermont, filed July 7, 1998). Plaintiff asserted different
claims in this suit than in the one filed on May 29, 1997, that is listed
above. Consistent with the MSA, the court has entered an order dismissing the
action. Judgment in this matter is final.
State of Nebraska v. R.J. Reynolds Tobacco Company, et al. (District Court,
Lancaster County, Nebraska, filed August 21, 1998). Consistent with the MSA,
the court has entered an order dismissing the action. Judgment in this matter
is final.
Republic of Panama v. The American Tobacco Company, et al. (District Court,
Orleans Parish, Louisiana, filed October 16, 1998). The Company is a defendant
in the case. Defendants have filed a motion to transfer this and other matters
filed by non-U.S. governments in U.S. courts to the United States Panel on
Multi-District Litigation.
State of Alabama (by Attorney General Pryor) v. Philip Morris Incorporated,
et al. (Circuit Court, Montgomery County, Alabama, filed November 12, 1998).
Consistent with the MSA, the court has entered an order dismissing the action.
Judgment is not yet final.
State of Alabama (by Governor James) v. The American Tobacco Company, et al.
(Circuit Court, Montgomery County, Alabama, filed November 12, 1998). The
Company is a defendant in the case. Consistent with the MSA, the court has
entered an order dismissing the action. Judgment is not yet final.
American Samoa v. Philip Morris Incorporated, et al. (U.S. District Court,
Northern District, Illinois, filed November 20, 1998). Consistent with the
MSA, the court has entered an order dismissing the action. Judgment in this
matter is final.
The Republic of Nicaragua v. Liggett Group, Inc., et al (U.S. District
Court, Puerto Rico, filed December 10, 1998). Neither Lorillard nor the
Company are named as defendants in this matter. Defendants have filed a motion
to transfer this and other matters filed by non-U.S. governments in U.S.
courts to the United States Panel on Multi-District Litigation.
Commonwealth of Kentucky v. Philip Morris Incorporated, et al. (Circuit
Court, Franklin County, Kentucky, filed December 18, 1998). Consistent with
the MSA, the court has entered an order dismissing the action. Judgment in
this matter is final.
The United States Virgin Islands v. Philip Morris Incorporated, et al. (U.S.
District Court, United States Virgin Islands, filed December 18, 1998).
Consistent with the MSA, the court has entered an order dismissing the action.
35
Judgment is not yet final.
State of Wyoming v. Philip Morris Incorporated, et al. (First Judicial
District, Laramie County, Wyoming, filed December 18, 1998). Consistent with
the MSA, the court has entered an order dismissing the action. Judgment in
this matter is final.
State of Delaware v. Philip Morris Incorporated, et al. (Chancery Court, New
Castle County, Delaware, filed December 21, 1998). Consistent with the MSA,
the court has entered an order dismissing the action. Judgment is not yet
final.
Government of Guam v. Philip Morris Incorporated, et al. (Superior Court,
Hagatina, Guam, filed December 21, 1998). Consistent with the MSA, the court
has entered an order dismissing the action. Judgment is not yet final.
State of North Carolina v. Philip Morris Incorporated, et al. (Superior
Court, Wake County, North Carolina, filed December 21, 1998). Consistent with
the MSA, the court has entered an order dismissing the action. Judgment in
this matter is final.
State of North Dakota v. Philip Morris Incorporated, et al. (District Court,
Cass County, North Dakota, filed December 21, 1998). Consistent with the MSA,
the court has entered an order dismissing the action. Judgment is not yet
final.
State of Tennessee v. Brown & Williamson Tobacco Corporation, et al.
(Chancery Court, Davidson County, Tennessee, filed December 21, 1998).
Consistent with the MSA, the court has entered an order dismissing the action.
Judgment is not yet final.
District of Columbia v. Philip Morris Incorporated, et al. (Superior Court,
District of Columbia, filed December 23, 1998). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment in this matter is
final.
Commonwealth of the Northern Mariana Islands v. Brown & Williamson Tobacco
Corporation, et al. (Superior Court of the Commonwealth of the Northern
Mariana Islands, filed on or about December 23, 1998). Consistent with the
MSA, the court has entered an order dismissing the action. Judgment in this
matter is final.
Commonwealth of Virginia v. Brown & Williamson Tobacco Corporation, et al.
(Circuit Court, City of Richmond, Virginia, filed December 23, 1998).
Consistent with the MSA, the court has entered an order dismissing the action.
Judgment is not yet final.
The Republic of Bolivia v. Philip Morris Companies, Inc., et al. (U.S.
District Court, District of Columbia, filed on January 20, 1999). The United
States District Court for the Southern District of Texas transferred this
matter sua sponte to the United States District Court for the District of
Columbia. Defendants have filed a motion to transfer this and other matters
filed by non-U.S. governments in U.S. courts to the United States Panel on
Multi-District Litigation.
Republic of Venezuela v. Philip Morris Companies, et al. (Circuit Court,
Dade County, Florida, filed January 27, 1999). The Company is a defendant in
the case. To date, none of the defendants have received service of process.
Defendants have filed a motion to transfer this and other matters filed by
non-U.S. governments in U.S. courts to the United States Panel on Multi-
District Litigation.
The Kingdom of Thailand v. The Tobacco Institute, Inc., et al. (U.S.
District Court, Southern District, Texas, filed January 29, 1999). Neither
Lorillard nor the Company are named as defendants in this matter. To date,
none of the defendants have received service of process in this matter.
Defendants have filed a motion to transfer this and other matters filed by
non-U.S. governments in U.S. courts to the United States Panel on Multi-
District Litigation.
In addition to these reimbursement cases, some suits have been filed
contesting, in various methods, the Master Settlement Agreement. Certain other
actions have been filed in which plaintiffs seek to intervene in cases
governed by the Master Settlement Agreement in order to achieve a different
distribution of the funds allocated
36
by the MSA to the respective states. Lorillard has been named as a defendant
in several of the cases filed to date. The Company has been named as a
defendant in three of them.
The President of the United States stated in a State of the Union address on
January 19, 1999, that he had authorized the United States Justice Department
to initiate a reimbursement litigation lawsuit against United States cigarette
manufacturers. The Attorney General of the United States has subsequently
stated publicly that the Justice Department intends to pursue such litigation.
The federal litigation would not be affected by the MSA. No such federal
lawsuit has been filed to date.
Private Citizens' Reimbursement Cases - There are five suits pending in
which plaintiffs are private citizens. Four of the suits have been filed by
private citizens on behalf of taxpayers of their respective states, although
governmental entities have filed a reimbursement suit in one of the four
states. The Company is a defendant in two of the five pending private citizen
Reimbursement Cases. Lorillard is a defendant in each of the cases. Each of
these cases is in the pre-trial discovery stage.
Coyne v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Ohio, filed September 17, 1996). The Company is a defendant in the
case. The suit is on behalf of taxpayers of Ohio. The court has granted
defendants' motion to dismiss. The plaintiffs have noticed an appeal from the
court's order granting a motion to dismiss.
Beckom v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Tennessee, filed May 8, 1997). The Company is a defendant in the
case. The suit is on behalf of taxpayers of Tennessee. The court has granted
defendants' motion to dismiss. The plaintiffs have noticed an appeal from the
order that granted the motion to dismiss.
Mason v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Texas, filed December 23, 1997). The suit is on behalf of taxpayers
of the U.S. as to funds expended by the Medicaid program.
The State of North Carolina, et al. v. The American Tobacco Company, et al.
(U.S. District Court, Middle District, North Carolina, filed February 13,
1998). The suit is on behalf of taxpayers of North Carolina.
Wynn v. Philip Morris, Inc., et al. (U.S. District Court, Northern District,
Alabama, filed May 27, 1998). The suit is on behalf of taxpayers of Alabama.
Reimbursement Cases By Indian Tribes - Indian Tribes have filed nine
reimbursement suits in their tribal courts, three of which have been
dismissed. Lorillard is a defendant in each of the cases. The Company is not
named as a defendant in any of the tribal suits filed to date. Each of the
pending cases is in the pre-trial, discovery stage.
The Lower Brule Sioux Tribe v. The American Tobacco Company, et al. (Tribal
Court, Lower Brule Sioux Tribe, filed on an unknown date, first amended
complaint filed May 28, 1997).
Muscogee Creek Nation v. The American Tobacco Company, et al. (District
Court, Muscogee Creek Nation, Okmulgee District, filed June 20, 1997).
Crow Creek Sioux Tribe v. The American Tobacco Company, et al. (Tribal
Court, Crow Creek Sioux Tribe, filed September 14, 1997).
The Standing Rock Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Standing Rock Sioux Tribe, filed May 8, 1998).
The Sisseton-Wahpeton Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Sisseton-Wahpeton Sioux Tribe, filed May 12, 1998).
Pechanga Band of Luiseno Mission Indians, et al. v. Philip Morris, Inc., et
al. (Superior Court, San Diego County, California, filed October 30, 1998).
Reimbursement Cases By Labor Unions - Labor unions have filed approximately
75 reimbursement suits in
37
various states in federal or state courts. In 24 of these cases, plaintiffs
seek class certification. Lorillard is named as a defendant in each of the
suits filed to date by unions. The Company is a defendant in three of the
pending suits. Six of the approximately 75 cases are on appeal from final
judgments entered in defendants' favor by the trial courts.
On March 18, 1999, the jury in Iron Workers Local Union No. 17 Insurance
Fund, et al. v. Philip Morris, Inc., et al. (U.S. District Court, Northern
District, Ohio, Eastern Division, filed May 20, 1997) returned a verdict in
favor of the defendants, which included Lorillard, on all counts of
plaintiffs' complaint. The trial was the first against cigarette manufacturers
to be filed by union trust funds. During pre-trial proceedings, the court
granted plaintiffs' motion for class certification on behalf of funds in Ohio
established under the Taft-Hartley Act. The time for plaintiffs to file post-
trial motions or to notice an appeal has not expired.
Each of the remaining cases is in the pre-trial, discovery stage.
Stationary Engineers Local 39 Health and Welfare Trust Fund v. Philip
Morris, Inc., et al. (U.S. District Court, Northern District, California,
filed April 25, 1997).
Northwest Laborers-Employers Health and Security Trust Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, Western District,
Washington, filed May 21, 1997). The court has granted plaintiffs' motion for
class certification on behalf of "all existing jointly-administered and
collectively bargained-for health and welfare trusts in [the State of]
Washington, and/or the trustees of such entities, that have provided or paid
for health care and/or addiction treatment costs or services for employees or
other beneficiaries." The United States Court of Appeals for the Ninth Circuit
has declined to review the ruling at this time. Trial in this matter is
scheduled to begin on September 7, 1999.
Massachusetts Laborers Health and Welfare Fund v. Philip Morris Inc., et al.
(U.S. District Court, Massachusetts, filed June 2, 1997).
Central Laborers Welfare Fund, et al. v. Philip Morris, Inc., et al. (U.S.
District Court, Southern District, Illinois, filed on or about June 9, 1997).
Hawaii Health and Welfare Trust Fund for Operating Engineers v. Philip
Morris, Inc., et al. (U.S. District Court, Hawaii, filed June 13, 1997). The
court has entered an order granting defendants' motion to dismiss. Judgment in
favor of the defendants is final but the deadline for plaintiff to notice an
appeal has not expired.
Laborers Local 17 Health and Benefit Fund and The Transport Workers Union
New York City Private Bus Lines Health Benefit Trust v. Philip Morris, Inc.,
et al. (U.S. District Court, Southern District, New York, filed June 19,
1997).
Ark-La-Miss Laborers Welfare Fund v. Philip Morris, Inc., et al. (U.S.
District Court, Eastern District, Louisiana, filed June 20, 1997).
Kentucky Laborers District Council Health and Welfare Trust Fund v. Hill &
Knowlton, Inc., et al. (U.S. District Court, Western District, Kentucky,
Louisville Division, filed June 20, 1997).
Oregon Laborers -- Employers Health and Welfare Trust Fund, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Oregon, filed June 20, 1997). The
court granted defendants' motion for judgment on the pleadings, which
dismissed the case. Plaintiffs have noticed an appeal to the United States
Court of Appeals for the Ninth Circuit.
United Federation of Teachers Welfare Fund, et al. v. Philip Morris, Inc.,
et al. (U.S. District Court, Southern District, New York, filed June 25,
1997).
Laborers and Operating Engineers Utility Agreement Health and Welfare Trust
Fund for Arizona v. Philip Morris Incorporated, et al. (U.S. District Court,
Arizona, filed July 7, 1997). The court has entered an order granting in its
entirety defendants' motion to dismiss. Plaintiff has noticed an appeal to the
United States Court of Appeal for the Ninth Circuit.
West Virginia Laborers Pension Fund v. Philip Morris, Inc., et al. (U.S.
District Court, Southern District, West
38
Virginia, Huntington Division, filed July 11, 1997).
Rhode Island Laborers Health and Welfare Fund v. Philip Morris Incorporated,
et al. (U.S. District Court, Rhode Island, filed July 20, 1997).
Eastern States Health and Welfare Fund, et al. v. Philip Morris, Inc., et
al. (Supreme Court, New York County, New York, filed July 28, 1997).
Asbestos Workers Local 53 Health and Welfare Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Eastern District, Louisiana, filed August
15, 1997). This action has been consolidated with the case of Ark-La-Miss
Laborers Welfare Fund.
Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Eastern District, Pennsylvania, filed
August 21, 1997). The court granted defendants' motion to dismiss the case.
Plaintiffs have noticed an appeal to the United States Court of Appeals for
the Third Circuit.
Construction Laborers of Greater St. Louis Welfare Fund, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Eastern District, Missouri, filed
September 2, 1997).
Arkansas Carpenters Health & Welfare Fund v. Philip Morris, Inc., et al.
(U.S. District Court, Eastern District, Arkansas, filed September 4, 1997).
West Virginia--Ohio Valley Area International Brotherhood of Electrical
Workers Welfare Fund v. The American Tobacco Company, et al. (U.S. District
Court, West Virginia, filed September 11, 1997). The court has scheduled trial
in this matter to begin on March 7, 2000.
Teamsters Union No. 142, Health and Welfare Trust Fund and Sheet Metal
Workers Local Union No. 20 Welfare and Benefit Fund v. Philip Morris
Incorporated, et al. (Circuit Court, St. Joseph County, Indiana, filed
September 12, 1997).
Operating Engineers Local 12 Health and Welfare Trust v. American Tobacco
Company, et al. (Superior Court, Los Angeles County, California, filed
September 16, 1997). The court has granted defendants' motion to dismiss and
has entered judgment in favor of defendants.
Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris Inc., et al.
(Supreme Court, New York County, New York, filed September 17, 1997).
New Jersey Carpenters Health Fund, et al. v. Philip Morris, Inc., et al.
(U.S. District Court, New Jersey, filed September 25, 1997).
New Mexico and West Texas Multi-Craft Health and Welfare Trust Fund, et al.
v. Philip Morris, Inc., et al. (Second Judicial District Court, Bernalillo
County, New Mexico, filed October 10, 1997). The court has granted defendants'
motion to dismiss and has entered final judgment in favor of the defendants.
Plaintiffs have noticed an appeal to the New Mexico Court of Appeals.
Central States Joint Board v. Philip Morris, Inc., et al. (U.S. District
Court, Northern District, Illinois, filed October 20, 1997). The court has
granted defendants' motion to dismiss and has entered final judgment in favor
of the defendants. Plaintiff has noticed an appeal from the judgment to the
United States Court of Appeals for the Seventh Circuit.
International Brotherhood of Teamsters Local 734 v. Philip Morris, Inc., et
al. (U.S. District Court, Northern District, Illinois, filed October 20,
1997). The court has granted defendants' motion to dismiss and has entered
final judgment in favor of the defendants. Plaintiff has noticed an appeal
from the judgment to the United States Court of Appeals for the Seventh
Circuit.
Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, Inc., et al.
(U.S. District Court, Eastern District, Texas, Beaumont Division, filed
October 31, 1997). The court granted defendants' motion to dismiss. Plaintiff
has
39
noticed an appeal to the United States Court of Appeals for the Fifth Circuit.
United Food and Commercial Workers Unions and Employers Health and Welfare
Fund, et al. v. Philip Morris, Inc., et al. (U.S. District Court, Northern
District, Alabama, filed November 13, 1997).
B.A.C. Local 32 Insurance Trust Fund, et al. v. Philip Morris, Incorporated,
et al. (U.S. District Court, Eastern District, Michigan, filed November 14,
1997). Plaintiffs have filed a motion to voluntarily dismiss the case without
prejudice. Defendants have filed a motion to strike plaintiffs' voluntary
dismissal and have asked the court to enter a dismissal with prejudice. The
court has not ruled on the motion to date.
Screen Actors Guild-Producers Health Plan, et al. v. Philip Morris, Inc., et
al. (Superior Court, Los Angeles County, California, filed November 20, 1997).
IBEW Local 25 Health and Benefit Fund v. Philip Morris, Inc. et al. (Supreme
Court, New York County, New York, filed November 25, 1997).
IBEW Local 363 Welfare Fund v. Philip Morris, Inc., et al. (Supreme Court,
New York County, New York, filed November 25, 1997).
Local 138, 138A and 138B International Union of Operating Engineers Welfare
Fund v. Philip Morris, Inc., et al. (Supreme Court, New York County, New York,
filed November 25, 1997).
Local 840, International Brotherhood of Teamsters Health and Insurance Fund
v. Philip Morris, Inc., et al. (Supreme Court, New York County, New York,
filed November 25, 1997).
Long Island Council of Regional Carpenters Welfare Fund v. Philip Morris,
Inc., et al. (Supreme Court, New York County, New York, filed November 25,
1997).
Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris, Inc.,
et al. (Supreme Court, New York County, New York, filed December 8, 1997).
Local 1199 Home Care Industry Benefit Fund v. Philip Morris, Inc., et al.
(Supreme Court, New York County, New York, filed December 8, 1997).
Local 1199 National Benefit Fund for Health and Human Services Employees v.
Philip Morris, Inc., et al. (Supreme Court, New York County, New York, filed
December 8, 1997).
Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris,
Inc., et al. (Circuit Court, Wayne County, Michigan, filed December 30, 1997).
The court has granted defendants' motion to dismiss and had entered judgment
in favor of defendants.
Carpenters & Joiners Welfare Fund, et al. v. Philip Morris Incorporated, et
al. (U.S. District Court, Minnesota, filed December 31, 1997). The court has
directed that this matter be ready for trial by March 1, 2000.
Steamfitters Local Union No. 614 Health & Welfare Fund, et al. v. Philip
Morris, Inc., et al. (Circuit Court, Thirteenth Judicial District, Tennessee,
filed January 7, 1998).
National Asbestos Workers, et al. v. Philip Morris Incorporated, et al.
(U.S. District Court, Eastern District, New York, filed February 27, 1998).
The Company is a defendant in the case. Trial in this matter is scheduled to
begin on April 5, 2000.
40
Milwaukee Carpenters, et al. v. Philip Morris, Incorporated, et al. (Circuit
Court, Milwaukee County, Wisconsin, filed March 4, 1998). To date, none of the
defendants have received service of process.
Service Employees International Union Health & Welfare Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, District of Columbia, filed
March 19, 1998).
Milwaukee Carpenters, et al. v. Philip Morris, Incorporated, et al. (Circuit
Court, Milwaukee County, Wisconsin, filed March 30, 1998).
United Association of Plumbing and Pipefitters Industry Local 467, et al. v.
Philip Morris Incorporated, et al. (Superior Court, San Mateo County,
California, filed March 31, 1998).
Newspaper Periodical Drivers Local 921 San Francisco Newspaper Agency Health
& Welfare Fund v. Philip Morris, Inc., et al. (Superior Court, San Mateo
County, California, filed April 15, 1998).
Teamsters Benefit Trust v. Philip Morris, Inc., et al. (Superior Court,
Alameda County, California, filed April 15, 1998).
United Association Local 159 Health and Welfare Trust Fund v. Philip Morris,
Inc., et al. (Superior Court, Alameda County, California, filed April 15,
1998).
Bay Area Automotive Group Welfare Fund v. Philip Morris, Inc., et al.
(Superior Court, San Francisco County, California, filed April 16, 1998).
Bay Area Delivery Drivers Security Fund v. Philip Morris, Inc., et al.
(Superior Court, Alameda County, California, filed April 16, 1998).
Pipe Trades District Council No. 36 Health & Welfare Trust Fund v. Philip
Morris, Inc., et al. (Superior Court, Alameda County, California, filed April
16, 1998).
Sign, Pictorial and Display Industry Welfare Fund v. Philip Morris, Inc., et
al. (Superior Court, San Francisco County, California, filed April 16, 1998).
United Association Local No. 343 Health and Welfare Trust Fund v. Philip
Morris, Inc., et al. (Superior Court, Alameda County, California, filed April
16, 1998).
San Francisco Newspaper Publishers and Northern California Newspaper Guild
Health & Welfare Trust v. Philip Morris, Inc., et al. (Superior Court, San
Francisco County, California, filed April 17, 1998).
North Coast Trust Fund v. Philip Morris, Inc., et al. (Superior Court, San
Francisco County, California, filed April 24, 1998).
Northern California Bakery Drivers Security Fund v. Philip Morris, Inc., et
al. (Superior Court, Alameda County, California, filed April 24, 1998).
Northern California Plasterers Health & Welfare Trust Fund v. Philip Morris,
Inc., et al. (Superior Court, San Francisco County, California, filed May 21,
1998).
U.A. Local No. 393 Health and Welfare Trust Fund v. Philip Morris, Inc., et
al. (Superior Court, Alameda County, California, filed May 21, 1998).
Northern California General Teamsters Security Fund v. Philip Morris, Inc.,
et al. (Superior Court, Alameda County, California, filed May 22, 1998).
Utah Laborers Health & Welfare Trust Fund, et al. v. Philip Morris
Incorporated, et al. (U.S. District Court, Utah, Central Division, filed June
4, 1998). The Company is a defendant in the case.
Joint Benefit Trust v. Philip Morris, Inc., et al. (Superior Court, Alameda
County, California, filed June 15, 1998).
Northern California Pipe Trades Health and Welfare Trust v. Philip Morris,
Inc., et al. (Superior Court, Alameda County, California, filed June 18,
1998).
41
S.E.I.U. v. Philip Morris, Inc., et al. (U.S. District Court, District of
Columbia, filed June 22, 1998). To date, none of the defendants have received
service of process.
Plastering Industry Welfare Trust Fund v. Philip Morris, Inc. et al.
(Superior Court, San Francisco County, California, filed July 1, 1998).
Central Valley Painting & Decorating Health & Welfare Trust Fund v. Philip
Morris, Inc., et al. (Superior Court, San Francisco County, California, filed
July 6, 1998).
Holland, et al., Trustees of United Mine Workers v. Philip Morris
Incorporated, et al. (U.S. District Court, District of Columbia, filed July 9,
1998).
Northern California Tile Industry Health & Welfare Trust Fund v. Philip
Morris, Inc., et al. (Superior Court, San Francisco County, California, filed
July 29, 1998).
San Francisco Culinary, Bartenders and Service Employees Welfare Fund v.
Philip Morris, Inc., et al. (Superior Court, San Francisco County, California,
filed July 30, 1998).
IBEW Local 595 Health and Welfare Trust Fund v. Philip Morris, Inc., et al.
(Superior Court, Alameda County, California, filed July 30, 1998).
Shop Ironworkers Local 790 Welfare Plan v. Philip Morris, Inc., et al.
(Superior Court, Alameda County, California, filed July 31, 1998).
Contractors, Laborers, Teamsters & Engineers Health & Welfare Plan v. Philip
Morris, Inc., et al. (U.S. District Court, Nebraska, filed August 11, 1998).
The court has granted defendants' motion to dismiss the case. The deadline for
plaintiff to notice an appeal has not expired.
Central Coast Trust Fund v. Philip Morris, Inc., et al. (Superior Court, San
Francisco County, California, filed September 30, 1998).
Reimbursement Cases By Private Companies - Private companies have filed six
Reimbursement Cases to date. Lorillard is named as a defendant in each of the
cases filed by private companies. The Company is not a defendant in the cases
filed by private companies.
Group Health Plan, Inc., et al. v. Philip Morris Incorporated, et al. (U.S.
District Court, Minnesota, filed March 11, 1998). The court has directed that
this matter be ready for trial by March 1, 2000.
Great Lakes Sales & Marketing, Inc. v. The American Tobacco Company, et al.
(U.S. District Court, Western District, Pennsylvania, filed March 23, 1998).
The court has granted defendants' motion to dismiss and has entered final
judgment in defendants' favor. Plaintiff has noticed an appeal from the final
judgment. Plaintiff formerly was known as Williams and Drake Company.
Conwed Corporation, et al. v. R.J. Reynolds Tobacco Company, et al. (U.S.
District Court, Minnesota, filed April 10, 1998). The court has directed that
this matter be ready for trial by March 1, 2000.
Arkansas Blue Cross and Blue Shield, et al. v. Philip Morris, Incorporated,
et al. (U.S. District Court, Northern District, Illinois, filed April 29,
1998).
Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris,
Incorporated, et al. (U.S. District Court, Eastern District, New York, filed
April 29, 1998). This case has been set for trial on January 12, 2000.
Regence Blueshield, et al. v. Philip Morris, Incorporated, et al. (U.S.
District Court, Western District, Washington, filed April 29, 1998). The court
has granted defendants' motion to dismiss and has entered final judgment in
defendants' favor. Plaintiff has noticed an appeal from the final judgment.
CONTRIBUTION CLAIMS - In addition to the foregoing cases, nine cases are
pending in which private companies seek recovery of funds expended by them to
individuals whose asbestos disease or illness was alleged
42
to have been caused in whole or in part by smoking-related illnesses. Two of
the cases have not been served. Lorillard is named as a defendant in each
action. The Company is named as a defendant in three of the cases but has not
received service of process in one of them. Each of these cases is in the pre-
trial, discovery stage.
Raymark Industries v. R.J. Reynolds Tobacco Company, et al. (Circuit Court,
Duval County, Florida, filed September 15, 1997). The Company is a defendant
in the case but has not received service of process to date.
Fibreboard Corporation and Owens-Corning v. The American Tobacco Company, et
al. (Superior Court, Alameda County, California, filed December 11, 1997).
Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al.
(Supreme Court, New York County, New York, filed December 19, 1997). The
Company is a defendant in the case.
Falise, et al., as Trustees of the Manville Personal Injury Settlement Trust
v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, New York, filed December 31, 1997). This case has been set for trial
on November 18, 1999.
H.K. Porter Company v. B.A.T. Industries, PLC, et al. (U.S. District Court,
Eastern District, New York, filed December 31, 1997).
Raymark Industries v. R.J. Reynolds Tobacco Co., et al. (Circuit Court,
Duval County, Florida, filed December 31, 1997). To date, none of the
defendants have received service of process.
Raymark Industries v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, New York, filed January 30, 1998).
Thomas v. R.J. Reynolds Tobacco Company, et al., (Circuit Court of Jefferson
County, Mississippi, filed August 21, 1998). The complaint asserts
contribution claims on behalf of Owens Corning as well as conventional product
liability claims on behalf of an individual. The Company is a defendant in the
case. The court has scheduled this case for trial February 14, 2000.
The Seibels Bruce Group, Inc. v. R.J. Reynolds Tobacco Company, et al. (U.S.
District Court, Northern District, filed December 30, 1998).
FILTER CASES - A number of 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 more than forty years ago, into the filter material used in one
of the brands of cigarettes manufactured by Lorillard. Twenty such cases,
including one that also includes allegations that plaintiff also was injured
as a result of smoking cigarettes, are pending in federal and state courts.
Allegations of liability 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 million in compensatory damages and
$100.0 million in punitive damages. Trials have been held in eleven such
cases, including one to date in 1999. Verdicts have been returned in favor of
Lorillard Inc. or Lorillard Tobacco Company in nine of the eleven cases,
including the case tried during 1999. In one of the two remaining trials,
plaintiffs were awarded one-hundred-forty thousand dollars in actual damages
from Lorillard in a 1996 trial, although this amount was reduced to
approximately seventy thousand dollars. Appeals from this judgment have been
decided in favor of plaintiffs. In the second such action, a jury awarded
plaintiffs approximately $2.0 million in actual damages and punitive damages
following a 1995 trial. A court of appeal decided Lorillard's appeal in favor
of the plaintiffs.
In addition to the foregoing litigation, one case, Cordova v. Liggett Group,
Inc., et al. (Superior Court, San Diego County, California, filed May 12,
1992), alleged 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's counsel has advised that they believe the claims in this matter
present significant and predominating common questions of fact and law to the
case filed by the Attorney General
43
of California that purportedly is governed by the MSA. Plaintiffs have filed a
motion to voluntarily dismiss the case but the court has not issued an order
to date.
In addition, two California cities, Los Angeles and San Jose, suing on
behalf of The People of the State of California, have filed suits alleging
cigarette manufacturers, including Lorillard, have violated a California
statute, commonly known as "Proposition 65," that requires California
residents to be informed if they are exposed to substances that are alleged to
cause cancer or birth defects. Plaintiffs in both suits allege that non-
smokers have not been warned by cigarette manufacturers that exposure to
environmental tobacco smoke may cause illness. Plaintiffs in both suits
further allege defendants violated certain provisions of the California
Business and Professions Code (The People of the State of California, and
American Environmental Safety Institute v. Philip Morris Incorporated, et al.
(Superior Court, Los Angeles County, California, filed July 14, 1998) and The
People of the State of California, the City of San Jose and Paul Dowhall v.
Brown & Williamson Tobacco Corporation, et al. (Superior Court, San Francisco
County, California, filed July 28, 1998)). Trial in the latter matter has been
scheduled to begin on June 28, 1999.
SETTLEMENT OF STATE REIMBURSEMENT LITIGATION - As previously discussed,
Lorillard, and certain other United States tobacco product manufacturers,
entered into the State Settlement Agreements and an ETS smoking and health
class action brought on behalf of airline flight attendants. The State
Settlement Agreements and certain ancillary agreements are filed as exhibits
to various of the Company's reports filed with the Securities and Exchange
Commission. The discussion of these agreements and the ETS settlement in Item
1 - Business, above, is qualified by reference thereto.
DEFENSES - One of the defenses raised by Lorillard in certain cases is
preemption by the Federal Cigarette Labeling and Advertising Act (the
"Labeling Act"). In the case of Cipollone v. Liggett Group, Inc., et al., the
United States Supreme Court, in a plurality opinion issued on June 24, 1992,
held that the Labeling Act as enacted in 1965 does not preempt common law
damage claims but that the Labeling Act, as amended in 1969, does preempt
claims against tobacco companies arising after July 1, 1969, which assert that
the tobacco companies failed to adequately warn of the alleged health risks of
cigarettes, sought to undermine or neutralize the Labeling Act's mandatory
health warnings, or concealed material facts concerning the health effects of
smoking in their advertising and promotion of cigarettes. The Supreme Court
held that claims against tobacco companies based on fraudulent
misrepresentation, breach of express warranty, or conspiracy to misrepresent
material facts concerning the alleged health effects of smoking are not
preempted by the Labeling Act. The Supreme Court in so holding did not
consider whether such common law damage actions were valid under state law.
The effect of the Supreme Court's decision on pending and future cases against
Lorillard and other tobacco companies will likely be the subject of further
legal proceedings. Additional litigation involving claims such as those held
to be preempted by the Supreme Court in Cipollone could be encouraged if
legislative proposals to eliminate the federal preemption defense, pending in
Congress since 1991, are enacted. It is not possible to predict whether any
such legislation will be enacted.
Lorillard believes that it has a number of defenses to pending cases, in
addition to defenses based on preemption described above, and Lorillard will
continue to maintain a vigorous defense in all such litigation. 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 that some or all of these defenses may, in many of the
pending or anticipated cases, be found by a jury or court to bar recovery by a
plaintiff. Application of various defenses, including those based on
preemption, are likely to be the subject of further legal proceedings in the
Class Action cases and in the Reimbursement Cases.
Other Legal Proceedings: In September 1997, a purported class action was
commenced by private plaintiffs in Alabama state court alleging that the U.S.
tobacco companies and others conspired to fix cigarette prices in Alabama,
that agreements leading to price increases were reached during the
negotiations leading to the Proposed Resolution, and that prices were
increased pursuant to the alleged conspiracy in 1997 (Mosley, et al. v. Philip
Morris Companies Inc., et al.). The parties have settled this action for a
payment by defendants in an aggregate amount approximating sixty thousand
dollars to cover costs incurred by plaintiff's counsel.
Department of Justice Investigations - 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
44
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, "reflect an intense research and commercial interest in nicotine."
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.
On September 18, 1998, Lorillard was served with a grand jury subpoena for
documents in connection with an investigation being conducted by the Middle
Atlantic Office of the Antitrust Division of the United States Department of
Justice. Similar subpoenas have been served on other tobacco companies and
tobacco leaf purchasers. The investigation concerns possible violations of the
antitrust laws in connection with the purchase of tobacco leaf in the United
States. At the present time, Lorillard is unable to predict whether the
Department of Justice will ultimately determine to bring any proceedings
against Lorillard arising out of this investigation. An adverse outcome of
this investigation could result in criminal, civil or other proceedings
against Lorillard.
45
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 52 1988
Assistant Secretary
Barry Hirsch ............ Senior Vice President and 65 1971
Secretary
Herbert C. Hofmann ...... Senior Vice President 56 1979
Peter W. Keegan ......... Senior Vice President and 54 1997
Chief Financial Officer
John J. Kenny ........... Treasurer 61 1991
Guy A. Kwan ............. Controller 56 1987
John G. Malino .......... Vice President-Real Estate 59 1985
Alan Momeyer ............ Vice President-Human Resources 51 1996
Stuart B. Opotowsky ..... Vice President-Tax 64 1987
Richard E. Piluso ....... Vice President-Internal Audit 60 1990
Arthur L. Rebell ........ Senior Vice President and 57 1998
Chief Investment Officer
Andrew H. Tisch ......... Office of the President and 49 1985
Chairman of the Executive
Committee
James S. Tisch .......... Office of the President, 46 1981
President and Chief Executive
Officer
Jonathan M. Tisch ....... Office of the President 45 1987
Laurence A. Tisch ....... Co-Chairman of the Board 76 1959
Preston R. Tisch ........ Co-Chairman of the Board 72 1960
</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 and Arthur L.
Rebell, 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. Arthur L.
Rebell has been a senior vice president of Loews since June of 1998. Prior to
joining Loews, during 1997 and 1998 he was an associate professor of Mergers
and Acquisitions at New York University, a Managing Director of Highview
Capital and a Partner in Strategic Investors. Prior to that he was a Managing
Director of Schroders.
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
46
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 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter ............ $108.25 $98.13 $112.88 $88.13
Second Quarter ........... 107.00 85.31 107.00 85.50
Third Quarter ............ 91.50 78.00 114.13 94.63
Fourth Quarter ........... 106.06 82.00 115.63 99.63
</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 were paid
in each calendar quarter of 1998 and 1997.
Approximate Number of Equity Security Holders
The Company has approximately 2,900 holders of record of Common Stock.
47
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Revenues ....................... $21,208.3 $20,138.8 $20,442.4 $18,677.4 $13,515.2
Income before taxes and
minority interest ............. $ 1,077.4 $ 1,593.2 $ 2,407.8 $ 2,839.3 $ 266.1
Net operating income excluding
net investment gains/(losses)
and tobacco litigation
settlements ................... $ 798.8 $ 1,075.5 $ 1,020.3 $ 793.8 $ 522.0
Tobacco litigation
settlements ................... (346.5) (122.0)
- ------------------------------------------------------------------------------------------------
Net operating income ........... 452.3 953.5 1,020.3 793.8 522.0
Net investment gains/(losses)... 12.5 (159.9) 363.6 971.9 (254.2)
- ------------------------------------------------------------------------------------------------
Net income ..................... $ 464.8 $ 793.6 $ 1,383.9 $ 1,765.7 $ 267.8
================================================================================================
Comprehensive income (loss) .... $ 868.7 $ 1,048.9 $ 824.4 $ 2,901.5 $ (453.6)
================================================================================================
Earnings Per Share:
Net operating income excluding
net investment gains/(losses)
and tobacco litigation
settlements .................. $ 6.98 $ 9.35 $ 8.78 $ 6.73 $ 4.33
Tobacco litigation settlements . (3.03) (1.06)
- ------------------------------------------------------------------------------------------------
Net operating income ........... 3.95 8.29 8.78 6.73 4.33
Net investment gains/(losses) .. .11 (1.39) 3.13 8.25 (2.11)
- ------------------------------------------------------------------------------------------------
Net income ..................... $ 4.06 $ 6.90 $ 11.91 $ 14.98 $ 2.22
================================================================================================
Comprehensive income (loss) .... $ 7.59 $ 9.12 $ 7.10 $ 24.62 $ (3.77)
================================================================================================
Financial Position:
Total assets ................... $70,906.4 $69,983.1 $67,402.9 $65,516.9 $50,336.0
Long-term debt ................. 5,966.7 5,752.6 4,370.7 4,248.2 2,144.4
Shareholders' equity ........... 10,201.2 9,665.1 8,731.2 8,238.7 5,405.3
Cash dividends per share ....... 1.00 1.00 1.00 .63 .50
Book value per share ........... 90.61 84.04 75.92 69.92 45.84
Shares of common stock
outstanding ................... 112.6 115.0 115.0 117.8 117.9
</TABLE>
48
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
Loews Corporation (the "Company") reported 1998 net operating income,
excluding net investment gains and losses, of $452.3 million or $3.95 per
share compared to $953.5 million or $8.29 per share in 1997. Net operating
income in 1998 includes charges at the Lorillard tobacco subsidiary of $346.5
million or $3.03 per share, compared to $122.0 million or $1.06 per share in
1997, related to the settlement of tobacco litigation.
Net income for 1998 was $464.8 million or $4.06 per share compared to $793.6
million or $6.90 per share for 1997. Net income for 1998 includes net
investment gains of $12.5 million or $.11 per share compared to net investment
losses of $159.9 million or $1.39 per share in 1997.
Revenues for the year ended December 31, 1998 were $21.2 billion, compared to
$20.1 billion for 1997.
For the quarter ended December 31, 1998 the Company reported a net operating
loss, excluding net investment losses, of $172.8 million or $1.52 per share,
compared to net operating income of $228.1 million or $1.99 per share for the
1997 fourth quarter. Net operating results include charges at the Lorillard
tobacco subsidiary related to the settlement of tobacco litigation of $216.0
million or $1.90 per share in the fourth quarter of 1998, compared to $54.9
million or $.48 per share in the fourth quarter of 1997.
The net loss for the 1998 fourth quarter was $315.8 million or $2.78 per share
compared to net income of $292.9 million or $2.55 per share in 1997 including
net investment losses of $143.0 million or $1.26 per share, compared to net
investment gains of $64.8 million or $.56 per share in the fourth quarter of
1997.
Fourth quarter 1998 revenues were $5.1 billion, compared to $5.3 billion in
the fourth quarter of 1997.
At December 31 1998, the Company had a book value of $90.61 per share compared
to a book value of $84.04 per share at December 31, 1997.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
CNA Financial
Insurance operations are conducted by subsidiaries of CNA Financial
Corporation ("CNA"). CNA is an 85% owned subsidiary of the Company.
Property and Casualty
The property and casualty segment is comprised of the following operating
units of CNA: Agency Market Operations, Risk Management, Specialty Operations,
Global Operations, and Reinsurance Operations. Property and casualty
operations continue to feel the impact of the extremely competitive
environment in commercial insurance, contributing to continued poor
underwriting results. Additionally, increased catastrophe losses, significant
restructuring charges and additions to reserves for prior year losses had an
adverse impact on overall results.
1998 Compared with 1997
Earned premiums for 1998 increased $175.9 million, or approximately 2.0%, as
compared to 1997. Earned premiums increased $93.8 million for Commercial
Insurance as increases in involuntary business more than offset declines in
other lines. The increase in involuntary risks is due to reductions recorded
in 1997 related to prior years premiums. Excluding involuntary risks, premiums
decreased by approximately $35.0 million due to the continued soft market
conditions throughout the industry, particularly in workers' compensation.
Also contributing to the change in 1998 was Global Operations which increased
by $87.2 million, primarily due to the effects of recent acquisitions,
partially offset by the decision to exit unprofitable, non-core lines of
business. In addition, Personal Insurance earned premiums increased by $61.5
million due, in part, to growth in agency earned premiums, and Risk Management
and Reinsurance Operations both saw earned premium growth of approximately
$46.0 million. Offsetting these increases was a decrease in Specialty
Operations of $159.2 million due in large part to the decision to exit the
agricultural market. The impact on earned premiums due to this decision was a
decrease of $98.4 million.
49
Underwriting results, including a majority of the restructuring and other
related charges, declined in 1998 by $585.2 million. This reduction is
primarily due to net unfavorable reserve development in 1998 of $331.8 million
as compared to net favorable development of $86.3 million for 1997. The
unfavorable development in 1998 occurred primarily in asbestos and mass tort
claims. Pre-tax catastrophe losses of $309.7 million related to winter storms
and tropical storms were recorded in 1998, compared to catastrophe losses of
$91.6 million in 1997.
Restructuring and other related charges totaled approximately $190.0 million.
The charges stem from a plan, announced in the third quarter of 1998 by CNA,
to restructure operations as part of its initiatives to improve performance.
CNA intends to position each of its strategic business units as a market
leader by sharpening its focus on customers and employing new technology. The
charges recorded in 1998 related to employee terminations, lease abandonments,
writedowns of certain assets to fair value and losses related to the exiting
of businesses. Based on CNA's current estimates, it is expected that an
additional $100.0 to $150.0 million of other related charges will be incurred
over approximately the next twelve months.
1997 Compared with 1996
Earned premiums decreased $153.1 million in 1997, or approximately 2.0%, as
compared to 1996. This decrease is mainly due to reductions recorded in 1997
related to prior years involuntary risks premiums. 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. The adjustments to prior years
premiums stems from a greater willingness on the part of the voluntary market,
including CNA, to write these types of coverages. This willingness was
precipitated by improved loss experience trends in the involuntary market. In
addition, a decision to exit an Industrial Risk Insurers pool, due to historic
unprofitability, generated a decrease in earned premiums of approximately
$180.0 million. Partially offsetting these decreases was growth in Risk
Management of $204.8 million and an increase in Personal Insurance of $126.4
million due to the cancellation of a quota share agreement.
Underwriting losses for 1997 decreased $113.2 million as compared to 1996.
This decrease in losses was primarily due to lower catastrophe losses of
$223.7 million and favorable loss development of $86.3 million. Partially
offsetting these improvements was lower earned premiums, as noted above and
increases in current year loss experience.
Life
1998 Compared with 1997
Life Operations continued to experience profitability in 1998, although
results were lower than 1997 principally due to reduced investment margins
from certain investment type products sold in the Retirement Services. Current
year results also reflect lower realized capital gains and less favorable
mortality experience than in 1997.
Written premiums have continued to show strong growth over the last three
years. Premium revenues, however, decreased slightly in 1998 to $684.0 million
from $688.0 million in 1997, principally due to increased use of reinsurance
for individual term life insurance products.
Individual life insurance premiums, on a direct basis, were $754.0 million in
1998, an increase of $111.0 million from 1997 premiums of $643.0 million.
Individual life premium revenues were $321.0 million in 1998, as compared with
$373.0 million in 1997, as individual term life insurance premiums received in
the current year, for business written between mid-1994 through mid-1996, were
co-insured with a new reinsurance contract at a rate of 90% of the direct
business. The new reinsurance program complements an existing program under
which business written after mid-1996 is being co-insured at the rate of 75%
of the direct premiums.
Retirement Services premium revenues increased slightly in 1998 to $177.0
million as compared with $174.0
50
million in 1997. Total sales volume for Retirement Services, which reflects
deposits and other income which are not included in the premiums above,
declined from $1,042.0 million in 1997 to $998.0 million in 1998.
The decreased sales volume is primarily due to the discontinuation of fixed
individual annuities and the lower volume of guaranteed investment contracts
sold in institutional markets.
Long-term care premium revenues increased $37.0 million in 1998 to $137.0
million as compared with premium revenues of $100.0 million in 1997. Long-term
care written premiums increased $48.0 million in 1998 over $251.0 million in
1997.
Other revenues for 1998 increased by $10.0 million when compared to 1997,
primarily due to fees and other income resulting from significant growth in
the variable annuity separate account product.
1997 Compared with 1996
Written premium revenues increased $34.0 million in 1997 as compared with
$654.0 million in 1996, primarily due to an increase in individual term life
premiums.
Individual life insurance premiums, on a direct basis, increased $148.0
million in 1997 from 1996 premiums of $495.0 million. This trend reflects
CNA's strong market presence in this product line.
Individual life premium revenues increased from $313.0 million in 1996 to
$373.0 million in 1997, driven primarily by growth in individual term life
premiums.
Retirement Services premium revenues increased $24.0 million in 1997 from
$150.0 million in 1996. Total sales volume for Retirement Services, which
reflects deposits and other income which are not included in the premiums
above, declined from $1,410.0 million in 1996 to $1,042.0 million in 1997.
Long-term care premium revenue declined slightly in 1997 as compared with 1996
premium revenues of $110.0 million. Long-term written premiums increased by
$54.0 million in 1997 over $197.0 million in 1996.
Group
1998 Compared with 1997
In 1998, Group Operations experienced a reduction in profitability as a result
of restructuring and related charges associated with exiting certain
businesses and the continued difficult market conditions in group health
lines.
Premiums for Group Operations decreased by approximately 5.0%, or $191.0
million, in 1998 as compared to 1997. The decrease was attributable, in part,
to a $166.0 million decrease in the medical lines of coverage in Health
Benefits, resulting from the decision to exit some markets. Additionally, due
to changes in coverage terms, Federal Employees Health Benefit Plan ("FEHBP")
premiums decreased by $90.0 million. These decreases were offset, in part, by
premium growth of $65.0 million across almost all other lines of business.
Pre-tax operating income in 1998 deteriorated by $65.0 million as compared to
1997. The decrease is primarily due to restructuring and other related charges
of $39.0 million for Group Operations as discussed in Note 12 of the Notes to
Consolidated Financial Statements. This included the effect of the decision to
exit the insured comprehensive medical portion of the employer and affinity
markets. A majority of this inforce business was sold effective January 1,
1999.
In addition, increased losses of $30.0 million on accident coverages sold
within Special Benefits contributed to the operating loss. The increased
losses resulted from both adverse claim developments and unusually high claim
activity in traditional accident insurance lines.
1997 Compared with 1996
During 1997, premiums grew by $87.0 million as compared to 1996. Special
Benefits experienced growth of $85.0 million, driven by growth in disability
of $37.0 million, group term life of $27.0 million, and accident of $13.0
million. These increases resulted from strong
51
sales of employee benefit plans. Health Benefits grew by $100.0 million in
1997. An increase of $33.0 million was attributable to credit card accidental
death and dismemberment coverages and other non-medical products, and the
remainder of the growth resulted from sales and renewal increases on employer
medical plans. Partially offsetting these increases was a decrease in Group
Reinsurance premiums of approximately $80.0 million. The decrease in Group
Reinsurance assumed premiums resulted from the termination of some small group
medical quota share treaties. Additionally, premiums in the Federal Markets
group declined by $22.0 million due to a small decline in group insurance
enrollment for FEHBP.
The decline in pre-tax operating results from 1996 to 1997 was driven
primarily by deteriorating group medical claim experience, including increased
losses of approximately $40.0 million in Health Benefits (employer and
affinity health), and another $10.0 million additional losses on medical stop
loss and reinsured group medical in Provider Markets. Offsetting these
declines, Special Benefits' results increased by approximately $20.0 million
due to improved experience under both long-term care and life coverages.
Other Insurance
The Other Insurance segment contains CNA's corporate interest expense, run-off
insurance operations, asbestos claims related to Fibreboard Corporation,
financial guarantee insurance contracts and certain non-insurance operations,
principally the operations of Agency Management Systems, Inc. ("AMS"), an
information technology and agency software development company.
1998 Compared with 1997
Other Insurance segment's net loss for 1998 was $166.5 million. This is an
increase of $55.0 million over 1997's net loss of $111.5 million. Contributing
to this increase is an increase in losses at AMS due to lower revenues
attributable to reduced contract renewals as well as restructuring and other
related charges of approximately $8.0 million. Interest expense in 1998
declined to $189.7 million, compared to 1997's interest expense of $198.0
million.
1997 Compared with 1996
Other Insurance segment's net loss for 1997 was $111.5 million, an increase of
$61.2 million over 1996's net loss of $50.3 million. Pre-tax operating income
decreased by $123.4 million. This decrease is primarily due to a change in
incurred losses on the financial guarantee business of $52.0 million,
attributable to favorable loss development recorded in 1996, as well as an
increase in operating expenses of $70.0 million. This increase reflects a
change in AMS's operating expenses of approximately $56.0 million, primarily
due to acquisitions made during 1997. Partially offsetting these losses and
expenses was an increase in other revenues of $48.0 million, primarily due to
an increase in AMS's revenues from acquisitions made during 1997.
Additionally, net investment losses increased in 1997 by $7.0 million as
compared to 1996.
Lorillard
Lorillard, Inc. and subsidiaries ("Lorillard"). Lorillard, Inc. is a wholly
owned subsidiary of the Company.
Settlement of State Reimbursement Litigation
On November 23, 1998, Lorillard, Philip Morris Incorporated, Brown &
Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the
"Original Participating Manufacturers" and, together with Liggett Group, Inc.
and any other tobacco product manufacturer that becomes a signatory, the
"Participating Manufacturers") entered into a Master Settlement Agreement (the
"Master Settlement Agreement") with 46 states, the District of Columbia, the
Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and
the Northern Marianas (collectively, the "Settling States") to settle the
asserted and unasserted health care cost recovery and certain other claims of
those states. The Original Participating Manufacturers had previously settled
similar claims brought by Mississippi, Florida, Texas and Minnesota.
52
The Master Settlement Agreement is subject to final judicial approval in each
of the Settling States. If a Settling State does not obtain final judicial
approval by December 31, 2001, the Master Settlement Agreement will be
terminated with respect to such state. The Master Settlement Agreement,
however, will remain in effect as to each Settling State in which final
judicial approval is obtained. The Master Settlement Agreement provides that
it is not an admission or concession or evidence of any liability or
wrongdoing on the part of any party, and was entered into by the Original
Participating Manufacturers to avoid the further expense, inconvenience,
burden and uncertainty of litigation.
The Master Settlement Agreement mandates significant changes in the
advertising and marketing of tobacco products in the Settling States and
otherwise restricts the activities of Lorillard and other Participating
Manufacturers. It also requires the industry to pay more than $206 billion
through 2025, including (I) more than $12.7 billion in initial payments over
the first five years (including $2.4 billion paid in December); (ii) annual
payments commencing in 2000 in the initial amount of $4.5 billion and
increasing periodically to $9 billion in 2018 and thereafter in perpetuity,
and (iii) $1.7 billion over ten years for a national public education fund,
the largest portion of which is due during the first five years. The $2.4
billion payment was allocated among the Original Participating Manufacturers
based on relative market capitalization. All other payments are allocated
among the Original Participating Manufacturers based on their relative unit
volume of domestic cigarette shipments and are subject to adjustment for
inflation and volume changes and for participation by less than all the states
and for other adjustments and offsets described in the Master Settlement
Agreement.
Lorillard's share of the $2.4 billion payment amounted to $175.2 million which
was charged to expense in the fourth quarter of 1998 and paid from Lorillard's
available cash. The Company incurred an additional charge to expense in the
fourth quarter of 1998 of $150.0 million to cover Lorillard's fixed and
determinable costs associated with the Master Settlement Agreement, such as
payments due in 1999 for the benefit of the national public education fund. As
a result, the Company's fourth quarter pre-tax charge amounted to
approximately $325.2 million. The Company anticipates that Lorillard's share
of future annual industry payments related to cigarette sales would be charged
to expense as the related sales occur and may be funded through price
increases. On November 23, 1998, Lorillard increased the list price of all of
its brands by $22.50 per thousand cigarettes ($0.45 per pack of 20
cigarettes).
The Company believes that the implementation of the Master Settlement
Agreement will materially adversely affect its consolidated results of
operations and cash flows in future periods. The degree of the adverse impact
will depend, among other things, on the rates of decline in United States
cigarette sales in the full price and discount segments, Lorillard's share of
the domestic full price and discount segments, and the effect of any resulting
cost advantage of manufacturers not subject to the Master Settlement
Agreement.
The Original Participating Manufacturers will reimburse the Settling States
and other specified governmental entities for reasonable costs and expenses
incurred in connection with the settled claims and for time reasonably
expended by their attorneys and paralegals in connection with the settled
actions, subject to an aggregate cap of $150.0 million. These payments will be
allocated among the Original Participating Manufacturers on the basis of
relative unit volume of domestic cigarette shipments.
The Original Participating Manufacturers will also pay the reasonable fees of
outside counsel representing the Settling States and other specified
governmental entities. The Original Participating Manufacturers will offer to
liquidate such fees and, to the extent such offers are accepted, will pay such
fees over five years, beginning in
53
1999, subject to an annual aggregate cap of $250.0 million. The fees of
attorneys who do not accept such offers will be set by a panel of arbitrators
and, together with the fees of attorneys representing certain other state and
class actions, will be subject to a separate and additional nationwide annual
cap of $500.0 million. Amounts owed in a particular year that could not be
paid because of the cap will be rolled over to the next year. On February 1,
1999, the Original Participating Manufacturers paid $5.0 million as the first
installment on a total agreed upon liquidated fee of $233.5 million to the
outside counsel for eight states. Lorillard's share of such payment was
$455,000. In addition, the Original Participating Manufacturers will also pay
the reasonable costs and expenses of such outside counsel, subject to an
annual aggregate cap of $75.0 million. On December 31, 1998, the Original
Participating Manufacturers paid $1.7 million as reimbursement for the costs
and expenses of outside counsel in the State of Washington. Lorillard's share
of this payment was $158,500. All such payments to outside counsel will be
allocated among the Original Participating Manufacturers on the basis of
relative unit volume of domestic cigarette shipments. On December 10, 1998,
the panel of arbitrators appointed by the Original Participating Manufacturers
and outside counsel in the states of Mississippi, Florida and Texas awarded
attorneys' fees of $1.4, $3.4 and $3.3 billion, respectively, to attorneys in
those states. The awards by those panels included a provision allowing the
payments to be increased annually by a factor of 3% to account for inflation.
The Original Participating Manufacturers and the outside counsel for the
states of Mississippi and Florida have agreed that the panels were not
authorized to award the annual inflation adjustment pursuant to the terms of
the Master Settlement Agreement, and such adjustment will not be applied. The
Original Participating Manufacturers and the outside counsel for the state of
Texas have also agreed that the annual inflation adjustment was not
appropriately awarded by the panel, and the panel has modified its decision
accordingly.
The payment obligations under the Master Settlement Agreement are the several
and not joint obligations of each Participating Manufacturer.
The Participating Manufacturers have also, as part of the Master Settlement
Agreement, committed to work cooperatively with the tobacco grower community
to address concerns about the potential adverse economic impact on that
community and have met with the political leadership of states with grower
communities to address those economic concerns. On January 21, 1999, the
Original Participating Manufacturers reached an agreement in principle to
establish a $5.2 billion trust fund payable over 12 years to compensate the
tobacco growing communities in 11 states. Payments to the trust fund are to be
allocated among the Original Participating Manufacturers according to their
relative market share of domestic cigarette shipments, except that Philip
Morris will pay more than its market share in the first year of the agreement
but will have its payment obligations reduced in years 11 and 12 to make up
for the overpayment. Lorillard's payments under the agreement will total
approximately $515.0 million, including a payment of $16.0 million in 1999.
All payments will be adjusted for inflation, changes in the unit volume of
domestic cigarette shipments, and for the effect of any new increases in state
or federal excise taxes on tobacco products which benefits the growing
community.
1998 Compared with 1997
Revenues increased by $448.3 million, or 18.5%, and net income declined by
$11.3 million, or 3.1%, in 1998 as compared to 1997.
Revenues increased, as compared to 1997, by approximately $384.9 million, or
15.9%, due to higher unit prices and by approximately $31.6 million, or 1.3%,
due to an increase in unit sales volume. Net investment income also
contributed $28.8 million, or 1.2%, to the increased revenues.
Lorillard's unit sales volume increased by 1.1% as compared to 1997. Newport,
a full price brand which accounts for approximately 77% of Lorillard's unit
sales,
54
increased by 2.4% as compared to 1997. Virtually all of Lorillard's sales are
in the full price brand category. Discount brand sales have decreased from an
average of 31.4% of industry sales during 1994 to an average of 26.2% during
1998. At December 31, 1998, they represented 27.6% of industry sales.
Net income declined due primarily to the charges for tobacco litigation
settlements ($346.5 million in 1998 compared to $122.0 million in 1997)
primarily related to the Master Settlement Agreement, as discussed above, as
well as the costs related to the settlements with the states of Minnesota,
Texas, Florida and Mississippi. Higher sales promotion expenses also
negatively impacted net income in 1998 as compared to 1997. These increased
costs were partially offset by the increased revenues discussed above.
1997 Compared with 1996
Revenues increased by $177.7 million, or 7.9%, and net income declined by
$81.3 million, or 18.3%, in 1997 as compared to 1996.
Revenues increased, as compared to 1996, by approximately $70.2 million, or
3.2%, due to an increase in unit sales volume and by approximately $108.5
million, or 4.9%, due to increased unit prices.
Lorillard's unit sales volume increased by 3.4% as compared to 1996. Sales of
Newport, a full price brand which accounted for approximately 76% of
Lorillard's unit sales in 1997, increased by 7.5% as compared to 1996.
Virtually all of Lorillard's sales are in the full price brand category.
Net income declined due primarily to the settlement of certain tobacco related
litigation. As discussed in Note 17 of the Notes to Consolidated Financial
Statements, in 1997, Lorillard and other companies in the United States
tobacco industry entered into agreements to settle health care cost recovery
actions in Florida, Mississippi and Texas, and entered into an agreement to
settle a class action lawsuit in Florida. Based on the agreements, Lorillard
recorded pre-tax and after tax settlement charges of $198.8 and $122.0
million, respectively, in 1997.
Without the charges for tobacco related litigation, net income would have
increased by $40.7 million as compared to 1996 due primarily to the increased
revenues, partially offset by higher legal expenses. The rise in legal
expenses reflected 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,
1997, Lorillard was named as a defendant in approximately 384 lawsuits,
compared to 143 lawsuits in 1996.
Loews Hotels
Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews
Hotels Holding Corporation is a wholly owned subsidiary of the Company.
1998 Compared with 1997
Revenues and net income increased by $19.6 and $14.0 million, respectively, in
1998 as compared to 1997, due primarily to an approximately 7.3% increase in
average room rates. These increases include a pre-tax and after tax gain of
$14.7 and $8.4 million, respectively, from the sale of the Loews Monte Carlo
hotel. Overall occupancy rates were essentially unchanged from 1997, with rate
increases in most other properties offset by decreases in occupancy rates,
revenues and net income as a result of a lower number of rooms available due
to a major renovation program at the Regency Hotel, the chain's flagship
property.
1997 Compared with 1996
Revenues and net income increased by $21.9 and $11.9 million, respectively, in
1997 as compared to 1996, due primarily to an approximately 9.3% increase in
average room rates and a 2.2% increase in average occupancy rates. These
increases were partially offset by costs of a legal settlement in 1997.
55
Diamond Offshore
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore"). Diamond
Offshore Drilling, Inc. is a 52% owned subsidiary of the Company.
1998 Compared with 1997
Revenues and net income increased by $267.4 and $50.2 million, or 27.4% and
38.3%, respectively, in 1998 as compared to 1997.
Revenues increased due principally to higher operating dayrates for Diamond
Offshore's semisubmersible rigs ($231.5 million) and, to a lesser extent,
improved dayrates for jack-up rigs ($37.1 million). Revenues also benefited
from a net addition to the operating drilling fleet ($56.5 million) reflecting
the completion of various upgrade projects and an $11.2 million increase in
investment income as compared to 1997. These increases were partially offset
by reductions in revenues from decreased utilization due to rig downtime for
mandatory inspections and repairs performed during 1998 ($50.8 million) and
lower utilization of jack-up rigs ($15.7 million) in the shallow waters of the
Gulf of Mexico during 1998.
Net income increased due primarily to the higher revenues discussed above,
partially offset by increased depreciation expense, higher contract drilling
costs including labor and drilling supplies, and higher interest expense.
Increased depreciation expense reflects costs associated with Diamond
Offshore's continuing rig enhancement program and specific individual rig
upgrades.
1997 Compared with 1996
Revenues and net income increased by $329.4 and $78.8 million, respectively,
in 1997 as compared to 1996.
Revenues increased by $189.4 million due to higher operating dayrates, $106.6
million due to 11 rigs acquired in the acquisition of Arethusa in April 1996
and $61.4 million due to the completion of upgrade projects on four drilling
rigs in 1997 as compared to 1996. These increases were partially offset by
$34.8 million of gains recorded in 1996 from Diamond Offshore's sale 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,
partially offset by increased operating costs related to the drilling rigs
acquired from Arethusa, and higher depreciation expense resulting from capital
expenditures associated with drilling rig upgrades and modifications.
Bulova
Bulova Corporation and subsidiaries ("Bulova"). Bulova Corporation is a 97%
owned subsidiary of the Company.
1998 Compared with 1997
Revenues and net income increased by $6.1 and $0.8 million, or 4.7% and 8.2%,
respectively, in 1998 as compared to 1997.
Revenues increased, as compared to 1997, by approximately $6.1 million, or
4.7%, due to an increase in watch unit sales. Revenues also benefited from a
$0.6 million increase in interest income. These increases were partially
offset by an approximately $1.1 million decline in clock net sales in 1998 as
compared to 1997, due primarily to lower clock unit sales.
Net income increased due primarily to the higher revenues discussed above,
partially offset by a significant increase in brand support advertising
expenses.
1997 Compared with 1996
Revenues and net income increased by $8.1 and $2.9 million, or 6.7% and 42.6%,
respectively, in 1997 as compared to 1996 due primarily to higher watch unit
sales volume of 6.6% and an overall increase in watch unit prices. The
increased net income was partially offset by higher brand support advertising
in 1997.
56
Corporate
Corporate operations consist primarily of investment income, including
investment gains (losses) from the Company's investment portfolio, as well as
corporate interest expenses and other corporate overhead costs.
The components of investment gains (losses) included in Corporate operations
are as follows:
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
(Amounts in millions)
Derivative instruments (1) $ (297.3) $ (607.7) $ (153.8)
Equity securities, including short
positions (1) (251.4) (299.0) (8.9)
Short-term investments, primarily U.S.
government securities .7 (.1) 28.0
Common stock of Diamond Offshore (2) 29.1 186.6
Other 2.4 11.5 6.0
- ------------------------------------------------------------------------------
(545.6) (866.2) 57.9
Income tax benefit (expense) 191.0 303.2 (20.3)
- ------------------------------------------------------------------------------
Net (loss) income $ (354.6) $ (563.0) $ 37.6
==============================================================================
(1) Includes losses on short sales, equity index futures and options
aggregating $584.3, $936.6 and $285.7 for the years ended December 31,
1998, 1997 and 1996, respectively. The Company continues to maintain these
positions but, during 1998, has reduced its exposure in these instruments.
See "Quantitative and Qualitative Disclosures About Market Risk."
(2) See Note 14 of the Notes to Consolidated Financial Statements.
1998 Compared with 1997
Exclusive of investment gains (losses), revenues increased by $4.8 million, or
2.6%, due principally to income from a shipping joint venture, partially
offset by lower investment income. Net income declined by $15.4 million, or
64.4%, due to higher interest expenses and lower investment income, partially
offset by the shipping joint venture income.
1997 Compared with 1996
Exclusive of investment gains (losses), revenues decreased by $0.3 million, or
0.2%, due principally to a gain on an asset disposition in 1996, partially
offset by higher investment income in 1997. Net income declined by $3.5
million, or 12.8%, due to the 1996 gain on an asset disposition and higher
corporate interest expense, partially offset by increased investment income.
57
LIQUIDITY AND CAPITAL RESOURCES
CNA Financial
CNA is one of the largest commercial insurers in the United States and the
third largest property and casualty company in the country, based on 1997 net
written premiums.
CNA's property and casualty insurance subsidiaries' statutory surplus grew
from $3.4 billion in 1994 to $7.6 billion in 1998. Surplus rose in part ($1.7
billion) due to the acquisition of The Continental Corporation in 1995.
Dividends of $410.0, $175.0 and $545.0 million were paid to CNA by Continental
Casualty Company in 1998, 1997 and 1996, respectively.
Statutory surplus of CNA's life insurance subsidiaries amounted to $1.1
billion at December 31, 1998.
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, 1998, CNA's net cash used in operating
activities was $949.0 million, compared with net cash used of $193.0 million
in 1997 and net cash provided of $620.2 million in 1996. The substantially
lower operating cash flow in 1998 was primarily due to increases in insurance
and reinsurance receivables of approximately $690.0 million. CNA's negative
cash flows in 1997 were primarily due to claim payments resulting from the
settlement of the Fibreboard litigation. The impact on cash flow for these
claim payments was approximately $1.0 billion in 1997 (see Note 17 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.
In 1998, CNA issued $1.0 billion principal amount of senior notes. The
majority of the proceeds from these new issues were used to refinance existing
bank debt and mortgages. In addition, proceeds from $200.0 million principal
amount of these senior notes were used to enhance the capital of Continental
Casualty Company. Also, in December 1998, the Company purchased $200.0 million
of preferred stock from CNA, the proceeds of which were used to enhance the
capital of Continental Casualty Company.
During 1998, CNA purchased 2,734,800 shares of its outstanding Common Stock at
an aggregate cost of approximately $102.4 million. Depending on market
conditions, CNA from time to time may purchase additional shares in the open
market or otherwise.
58
The following table 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") Intercompany Pool. Also rated were CNA's
senior debt, commercial paper and preferred stock and The Continental
Corporation's ("Continental") senior debt.
<TABLE>
<CAPTION>
Debt and Stock Ratings
---------------------------------------
CNA Continental
Insurance Ratings --------------------------- -----------
------------------- Senior Commercial Preferred Senior
CCC CAC CIC 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 BBB BBB-
Duff & Phelps AA- AA - A- - BBB+ -
- ------------------------------------------------------------------------------------------------
*Applies to Continental Assurance Company only.
</TABLE>
Lorillard
Lorillard and other cigarette manufacturers continue to be confronted with an
increasing level of litigation and regulatory issues.
The volume of lawsuits 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, addiction to smoking, or
exposure to environmental tobacco smoke has increased substantially through
1997 and in 1998. See Note 17 of the Notes to Consolidated Financial
Statements. In a number of cases, the Company is named as a defendant. Tobacco
litigation includes claims brought by individual plaintiffs and claims brought
as class actions on behalf of large numbers of individuals for damages
allegedly caused by smoking; and claims brought on behalf of governmental
entities, private citizens, or other organizations seeking reimbursement of
health care costs allegedly incurred as a result of smoking. In the foregoing
actions, plaintiffs claim substantial compensatory and punitive damages in
amounts ranging into the billions of dollars. In addition, claims have been
brought against Lorillard seeking damages resulting from exposure to asbestos
fibers which had been incorporated, for a limited period of time, ending more
than forty years ago, into filter material used in one brand of cigarettes
manufactured by Lorillard.
In 1998, Lorillard, together with other tobacco product manufacturers, entered
into the Master Settlement Agreement described above. The terms of the Master
Settlement Agreement require significant payments to be made to the Settling
States beginning in 1998 and continuing in perpetuity. See "Results of
Operations" and Note 17 of the Notes to Consolidated Financial Statements for
additional information regarding this settlement.
It has also been reported that the Executive branch of
59
the government has urged the U.S. Justice Department to commence an action
against the tobacco industry seeking reimbursement of Medicare expenditures
resulting from injuries or other health effects allegedly caused by use of
tobacco products.
Efforts to Reach a Settlement of Tobacco Claims Through Federal Legislation
On June 20, 1997, Lorillard, together with other companies in the United
States tobacco industry, entered into a Memorandum of Understanding to support
the adoption of federal legislation and any necessary ancillary undertakings,
incorporating the features described in the proposed resolution attached to
the Memorandum of Understanding (together, the "Proposed Resolution"). The
Proposed Resolution would have permitted extensive regulation of the industry
by the Food and Drug Administration ("FDA") and would have imposed large
monetary obligations on the industry to be paid to the federal government and
to the states. The Proposed Resolution would have required the manufacturers
to sign private contracts, or Protocols, which embody significant restrictions
on the industry's commercial free speech and advertising. In return, the
Proposed Resolution would have resolved much of the industry's litigation and
established a rational litigation system for future lawsuits. The Proposed
Resolution, by the nature of its terms, could be implemented only by federal
legislation.
After the Proposed Resolution was announced, it became the subject of intense
review and criticism by the White House, the public health community, and
other interested parties. Over 50 bills were introduced in the 105th Congress
regarding the issues raised in the Proposed Resolution, many of which sought
more stringent regulation of tobacco products by the FDA and more punitive
monetary payments by the companies. On April 18, 1998, Lorillard, along with
the other signatory companies to the Proposed Resolution, announced a
withdrawal from the legislative process relating to enactment of a
comprehensive tobacco settlement. After much debate, Congress adjourned in
1998 without taking action on the Proposed Resolution.
FDA Regulations
In 1996, the FDA published regulations (the "FDA Regulations") which would
severely restrict cigarette advertising and promotion and limit 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
include:
(i) Regulations making 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 limiting all cigarette advertising to a black and white,
text only format in most publications and outdoor advertising such as
billboards, prohibiting billboards advertising cigarettes within 1,000
feet of a school or playground, banning the use of cigarette brand
names, logos and trademarks on premium items and prohibiting 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.
In 1997, Lorillard and other cigarette manufacturers filed a lawsuit, Coyne
Beahm, Inc., et al. v. United States Food & Drug Administration, et al., in
the United States District Court for the Middle District of North Carolina
challenging the FDA's assertion of jurisdiction over cigarettes. On August 14,
1998, the federal Fourth Circuit Court of Appeals overturned the District
Court's decision, and invalidated the FDA's assertion of authority over
cigarettes and the FDA Regulations promulgated pursuant to that asserted
authority. The FDA petitioned the appeals court for
60
rehearing with suggestions for en banc reconsideration, and on November 10,
1998 the appeals court denied that petition. On January 19, 1999, the
government filed a petition for certiorari to the U.S. Supreme Court. No
action has yet been taken by that court.
Cigarette Excise Tax
The United States federal excise tax on cigarettes is presently $12 per 1,000
cigarettes ($0.24 per pack of 20 cigarettes). An increase in the federal
excise tax on cigarettes is scheduled to be phased in at a rate of $5.00 per
1,000 cigarettes in the year 2000 and an additional $2.50 per 1,000 cigarettes
in the year 2002. Various states have proposed, and certain states have
recently passed, increases in their state tobacco excise taxes. Such actions
may adversely affect Lorillard's volume, operating revenues and operating
income.
* * * *
Lorillard generated net cash flow from operations of approximately $381.0
million for the year ended December 31, 1998, compared to $523.1 million for
the prior year. Funds from operations continue to exceed operating
requirements.
Loews Hotels
A Loews Hotels subsidiary has entered into an agreement with the owners of the
Universal Studios Escape resort in Orlando, Florida to develop three hotels at
the resort. In addition, a Loews Hotels subsidiary is developing a convention
center hotel in Philadelphia. Capital expenditures in relation to these hotel
projects are being funded by a combination of equity and mortgages.
Funds from operations continue to exceed operating requirements. Funds for
other capital expenditures and working capital requirements are expected to be
provided from operations. Loews Hotels will obtain its share of the equity
contributions for the development of hotels in Orlando and Philadelphia under
arrangements with the Company.
Diamond Offshore
Depressed product prices in the oil and gas industry have resulted in
declining dayrates and decreased utilization, primarily in the shallow waters
of the Gulf of Mexico. As a result, Diamond Offshore has cold stacked
(deactivated by performing certain procedures to retard deterioration) and
suspended marketing efforts on three of its rigs located in the Gulf of
Mexico. In addition, several of Diamond Offshore's rigs are idle in the Gulf
of Mexico. Diamond Offshore has idle rigs in other markets that have softened
as well (and has cold stacked its shallow water semisubmersible offshore West
Africa). Diamond Offshore will continue to assess the need to cold stack
additional rigs depending on market conditions. To date, Diamond Offshore has
been able to mitigate the effect of these conditions on its results of
operations with existing term contract commitments, and through the diversity
of its fleet. However, many of these contracts expire during 1999 and renewal
rates could be significantly lower than those previously obtained. These
current trends in market conditions are expected to adversely affect Diamond
Offshore's future results of operations, although the extent cannot be
accurately predicted.
Depressed conditions in the oil and gas industry have also increased the
susceptibility of term contracts, previously committed at dayrates in excess
of current market rates, to cancellation by the customer. Most drilling
contracts allow for termination if drilling operations are suspended for a
period of time as a result of a breakdown of equipment or by giving notice in
connection with payment of an early termination fee by the customer. During
1998, two of Diamond Offshore's term contracts were cancelled by customers.
The contract for use of its drillship, the Ocean Clipper, which had a four
year term through July 2001, was
61
terminated in December 1998 in connection with issues arising out of
performance failures. In October 1998, Diamond Offshore agreed to an early
termination and substitution arrangement involving two of its semisubmersibles
located offshore Australia. Diamond Offshore cannot accurately predict the
actions of its customers or the circumstances in which further contract
cancellations might occur.
Diamond Offshore continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and
harsh environment operations. During the year ended December 31, 1998, Diamond
Offshore expended $110.7 million, including capitalized interest expense, for
rig upgrades. Diamond Offshore has budgeted $173.7 million for rig upgrade
capital expenditures during 1999.
During the year ended December 31, 1998, Diamond Offshore expended $113.8
million in association with its continuing rig enhancement program to maintain
spare equipment inventory levels and meet other corporate requirements.
Diamond Offshore has budgeted $134.1 million for 1999 capital expenditures
associated with its continuing rig enhancement program, spare equipment
inventory and other corporate requirements.
Historically, the offshore contract drilling industry has been highly
competitive and cyclical, and Diamond Offshore cannot predict whether current
conditions will continue.
Diamond Offshore generated net cash flow from operations of approximately
$547.2 million for the year ended December 31, 1998, compared to $396.4
million for the prior year.
During 1998, Diamond Offshore purchased 3,518,100 shares of its outstanding
Common Stock at an aggregate cost of approximately $88.7 million. Depending on
market conditions, Diamond Offshore from time to time may purchase additional
shares in the open market or otherwise.
Bulova
Funds from operations continue to exceed operating requirements. Funds for
other capital expenditures and working capital requirements are expected to be
provided from operations. No material capital expenditures are anticipated
during 1999.
Parent Company
During 1998, the Company purchased 2,417,700 shares of its outstanding Common
Stock at an aggregate cost of approximately $218.0 million. Depending on
market conditions, the Company from time to time purchases additional shares
in the open market or otherwise.
The Company continues to pursue conservative financial strategies while
seeking opportunities for responsible growth. These include the expansion of
existing businesses, full or partial acquisitions and dispositions, and
opportunities for efficiencies and economies of scale.
62
INVESTMENTS
Investment activities of non-insurance companies include investments in fixed
income securities, equity securities including short sales, derivative
instruments and short-term investments. Equity securities which are considered
part of the Company's trading portfolio, short sales 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 which
approximated carrying value at December 31, 1998 and 1997.
The Company enters into short sales and invests in certain derivative
instruments for a number of purposes, including: (i) for asset and liability
management activities, (ii) for income enhancements for its portfolio
management strategy, and (iii) to benefit from anticipated future movements in
the underlying markets that Company management expects to occur. If such
movements do not occur or if the market moves in the opposite direction than
what management expects, significant losses may occur.
Monitoring procedures include senior management review of daily detailed
reports of existing positions and valuation fluctuations 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.
The Company does not believe that any of the derivative instruments utilized
by it are unusually complex, nor do these instruments contain imbedded
leverage features which would expose the Company to a higher degree of risk.
See "Results of Operations," "Quantitative and Qualitative Disclosures about
Market Risk" and 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.
Insurance
CNA's general account investment portfolio consists primarily of publicly
traded government bonds, asset-backed securities, mortgage-backed securities,
municipal bonds, and corporate bonds.
CNA's investment policies for both the general and separate accounts emphasize
high credit quality and diversification by industry, issuer and issue. Assets
supporting interest rate sensitive liabilities are segmented within the
general account to facilitate asset/liability duration management.
CNA believes it has the capacity to hold its fixed maturity portfolio to
maturity. However, fixed maturity 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 (rated BBB or
higher) marketable fixed maturities, 93.3% and 95.0% of which are rated as
investment grade at December 31, 1998 and 1997, respectively.
63
The following table summarizes the ratings of CNA's general account fixed
maturity bond portfolio at fair value:
<TABLE>
<CAPTION>
December 31 1998 1997
- -----------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $ 9,443.0 31.5% $13,679.0 46.4%
Other AAA rated 11,595.0 38.7 8,801.0 29.9
AA and A rated 4,884.0 16.3 3,796.0 12.9
BBB rated 2,061.0 6.8 1,695.0 5.8
Below investment grade 1,996.0 6.7 1,480.0 5.0
- -----------------------------------------------------------------------------------------------
Total $29,979.0 100.0% $29,451.0 100.0%
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes the ratings of CNA's guaranteed investment contract Separate
Account fixed maturity bond portfolio at fair value:
December 31 1998 1997
- -----------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated securities $ 167.0 5.2% $ 148.0 3.9%
Other AAA rated 1,977.0 61.2 2,401.0 62.6
AA and A rated 476.0 14.8 569.0 14.8
BBB rated 339.0 10.5 406.0 10.6
Below investment grade 269.0 8.3 310.0 8.1
- -----------------------------------------------------------------------------------------------
Total $3,228.0 100.0% $3,834.0 100.0%
===============================================================================================
</TABLE>
The ratings in the two tables above are primarily from independent rating
agencies (83.1% and 89.8% of the general account portfolio, and 76.8% and
82.1% of the guaranteed investment contract portfolio in 1998 and 1997,
respectively, were rated by major independent rating agencies).
High yield securities are bonds rated as below investment grade by bond rating
agencies 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. CNA's
concentration in high yield bonds including Separate Account business was
approximately 4.0% and 3.2% of its total assets at December 31, 1998 and 1997,
respectively.
Included in CNA's fixed maturity securities at December 31, 1998 (general and
guaranteed investment contract portfolios) are $10.3 billion of asset-backed
securities, at fair value, consisting of approximately 15.9% in U.S.
government agency issued pass-through certificates, 51.8% in collateralized
mortgage obligations ("CMO's"), 15.0% in corporate asset-backed obligations
and 17.3% in corporate mortgage-backed pass-through certificates. The majority
of CMO's held are actively traded in liquid markets and are priced by
broker-dealers.
CMO's are subject to prepayment risks that tend to vary with changes in
interest rates. During periods of
64
declining interest rates, CMO's generally prepay faster as the underlying
mortgages are prepaid and refinanced by borrowers in order to take advantage
of the lower rates. Conversely, during periods of rising interest rates,
prepayments are generally slow which may result in a decrease in yield or a
loss as a result of the slower prepayments. CNA limits the risks associated
with interest rate fluctuations and prepayments 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, 1998, the fair
value of asset-backed securities was greater than the amortized cost by
approximately $163.0 million, as compared to net unrealized gains of
approximately $114.0 million at December 31, 1997.
At December 31, 1998 and 1997, short-term investments consisted primarily of
U.S. treasury bills and commercial paper.
CNA invests in certain derivative financial instruments primarily to reduce
its exposure to market risk (principally interest rate, equity price and
foreign currency risk). CNA also uses derivatives to mitigate the risk
associated with its Separate Account indexed group annuity contract as
discussed below.
CNA considers its derivatives as being held for purposes other than trading.
Derivative securities, except for interest rate swaps associated with certain
corporate borrowings, are recorded at fair value at the reporting date, with
changes in market value reflected in investment gains and losses. The interest
rate swaps on corporate borrowings are accounted for using accrual accounting
with the related income or expense recorded as an adjustment to interest
expense; the changes in fair value are not recorded.
At December 31, 1998 CNA's general account investments in bonds and redeemable
preferred stocks were carried at their fair value of $30.1 billion, compared
to $29.5 billion at December 31, 1997. At December 31, 1998 and 1997, net
unrealized gains on fixed maturity securities amounted to approximately $562.0
and $528.0 million, respectively. The gross unrealized gains and losses for
the fixed maturity securities portfolio at December 31, 1998 were $818.0 and
$256.0 million, respectively, compared to $644.0 and $116.0 million,
respectively, at December 31, 1997.
Net unrealized gains on general account bonds at December 31, 1998 include net
unrealized losses on high yield securities of $101.0 million, compared to
unrealized losses of $2.0 million at December 31, 1997. Carrying and fair
values of high yield securities in the general account were approximately $2.0
billion at December 31, 1998, compared to $1.5 billion at December 31, 1997.
The Company's largest equity holding (held by CNA) in a single issuer is
Global Crossing, Ltd. ("Global Crossing") common stock. At December 31, 1998,
the Company owned 20,037,584 shares, or 9.8% of the outstanding common stock
of Global Crossing which was valued at $904.0 million. Net unrealized gains
associated with this security approximated $841.0 million at December 31,
1998. Without registration or an exemption from registration, sales to the
public of the Company's holdings of Global Crossing are governed by Rule 144
of the Securities Act of 1933 (the "Act") and may not commence until August
13, 1999. After August 13, 1999, the Company has the right to require Global
Crossing to register under the Act up to 25% of the Company's holdings prior
to December 31, 1999.
At December 31, 1998 and 1997, total Separate Account investments at fair
value amounted to approximately $5.1 and $5.7 billion, respectively, with
taxable fixed maturities representing approximately 80.8% and 83.3% of the
total at December 31, 1998
65
and 1997, respectively. Approximately 64.3% and 73.8% of Separate Account
investments at December 31, 1998 and 1997, respectively, are used to fund
guaranteed investments contracts for which CAC guarantees principal and a
specified return to the contract holders. The duration of fixed maturity
securities included in the guaranteed investment contract portfolio are
matched approximately with the corresponding payout pattern of the liabilities
of the guaranteed investment contracts. One Separate Account product is an
indexed group annuity contract for institutional investors which guarantees
the S&P 500 rate of return plus 25 basis points per annum. Deposits are taken
from the customer for a three year period with no payout until the end of the
period. CNA mitigates the risk associated with the contract liability by a
combination of purchasing S&P 500 futures contracts in a notional amount equal
to the original customer deposit and investing the remaining cash primarily in
high quality investments. The number of futures contracts is adjusted
regularly to approximate the liability to the contract holder.
At December 31, 1998 and 1997, fixed maturity securities in the guaranteed
investment Separate Account contract portfolio, carried at fair value,
amounted to $3.2 and $3.8 billion, respectively. Net unrealized gains on fixed
maturity securities in these Separate Accounts amounted to approximately $64.0
and $71.0 million at December 31, 1998 and 1997, respectively. The gross
unrealized gains and losses for the fixed maturity securities portfolio at
December 31, 1998 were $84.0 and $20.0 million, respectively, compared to
$87.0 and $16.0 million, respectively, at December 31, 1997.
High yield securities in the guaranteed investment Separate Account contract
portfolio, carried at fair value, amounted to $269.0 and $310.0 million at
December 31, 1998 and 1997, respectively. Net unrealized losses on high yield
securities held in such Separate Account portfolio were $9.0 and $1.0 million
at December 31, 1998 and 1997, respectively.
YEAR 2000 ISSUE
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations
and decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. The Company renovated or
replaced many of its legacy systems and upgraded its systems to accommodate
business for the Year 2000 and beyond. In addition, the Company is checking
embedded systems in computer hardware and other infrastructure such as
elevators, heating and ventilating systems, and security systems.
Based upon its current assessment, the Company estimates that the total cost
to replace and upgrade its systems to accommodate Year 2000 processing is
expected to be approximately $70.0 to $80.0 million. As of December 31, 1998,
approximately $64.0 million has been spent. However, prior to 1997, the
Company did not specifically separate technology charges for Year 2000 from
other information technology charges. In addition, while some hardware charges
are included in the budget figures, the Company's hardware costs are typically
included as part of ongoing technology updates and not specifically as part of
the Year 2000 project. All funds spent and to be spent have been or will be
financed from current operating funds.
The Company believes that it will be able to resolve the Year 2000 issue in a
timely manner. As of December 31, 1998, the Company has certified internally
over 90% of its internal applications and systems as being ready for the year
2000. In addition, certain of CNA's non-insurance affiliates are not yet Year
2000 ready, but they are expected to be ready on a timely basis. However, due
to the interdependent nature of computer systems, there may be an adverse
impact on the Company if banks, independent agents, vendors, insurance agents,
third party administrators, various governmental agencies and other business
partners fail to successfully address
66
the Year 2000 issue. In the event that they are not, it is unclear at this
time whether the impact on CNA would be material. To mitigate this impact, CNA
is communicating with these various entities to coordinate the Year 2000
conversion. CNA has already sent Year 2000 information packages to more than
12,000 independent agents to encourage them to become Year 2000 ready on a
timely basis. CNA has also sent Year 2000 information to almost 300,000
business policyholders to increase their awareness of the Year 2000 issue.
Similar information packages have been sent to health care providers, lawyers
and others with whom CNA has business relationships. Because of the
interdependent nature of the issue, the Company cannot be sure that there will
not be a disruption to its business.
The Company has also developed business resumption plans to ensure that the
Company is able to continue critical processes through other means in the
event that it becomes necessary to do so. Formal strategies have been
developed within each business unit and support organization to include
appropriate recovery processes and use of alternative vendors. More than 200
strategies have been developed to address all the recovery plans for
approximately 400 processes. These plans are being updated quarterly.
In addition, property and casualty insurance subsidiaries may have an
underwriting exposure related to the Year 2000 issue.
There can be no assurances that policyholders will not suffer losses resulting
from Year 2000 issues and seek indemnification under insurance policies
underwritten by CNA. Coverage, if any, will depend on the facts and
circumstances of the claim and the provisions of the policy. It is impossible
to estimate with any degree of accuracy the extent to which various types of
policies issued by CNA may afford coverage for loss or claims. At this time,
CNA is unable to forecast the nature and range of the losses, the availability
of coverage for the losses, or the likelihood of significant claims. As a
result, CNA is unable to determine whether the adverse impact, if any, in
connection with the foregoing circumstances would be material to it.
Accounting Standards
In December 1997, the AICPA's Accounting Standards Executive Committee issued
SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." SOP 97-3 requires that entities recognize liabilities for
insurance-related assessments when all of the following criteria have been
met: an assessment has been imposed or it is probable that an assessment will
be imposed; the event obligating an entity to pay an imposed or probable
assessment has occurred on or before the date of the financial statements; and
the amount of the assessment can be reasonably estimated. This SOP is
effective for fiscal years beginning after December 15, 1998. The effect of
this SOP will result in the Company recording an after tax charge in the first
quarter of 1999 between $120.0 and $150.0 million as a cumulative effect of a
change in accounting principle.
In March 1998, the AICPA's Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." For purposes of this SOP, internal-use software is software
acquired, internally developed or modified solely to meet the entity's
internal needs for which no substantive plan exists or is being developed to
market the software externally during the software's development or
modification. Accounting treatment for costs associated with software
developed or obtained for internal use, as defined by this SOP, is based upon
a number of factors, including the point in time during the project that costs
are incurred as well as the types of costs incurred. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998 and
will be adopted in the first quarter of 1999. The Company is currently
evaluating the effects of this SOP.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting
67
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is currently evaluating the
effects of this Statement on its accounting and reporting for derivative
securities and hedging activities.
In April 1998, the AICPA's Accounting Standards Executive Committee issued SOP
98-5, "Reporting on the Costs of Start-Up Activities." This SOP requires costs
of start-up activities and organization costs, as defined, to be expensed as
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Initial application of this SOP should be
reported as a change in accounting principle, and will, accordingly, involve a
cumulative adjustment. The Company does not expect the adoption of the SOP to
have a significant impact on its results of operations or equity.
In October 1998, the AICPA's Accounting Standards Executive Committee issued
SOP 98-7, "Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk." The guidance excludes long-duration life and health
insurance contracts from its scope. This statement is effective for financial
statements in the year 2000, with early adoption encouraged. CNA is currently
evaluating the effects of this Statement.
FORWARD-LOOKING STATEMENTS
When included in this Report, the words "believes," "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, the impact of competitive products, policies and pricing; product and
policy demand and market responses; development of claims and the effect on
loss reserves; the performance of reinsurance companies under reinsurance
contract with the Company; general economic and business conditions; changes
in financial markets (interest rate, credit, currency, commodities and
equities) or in the value of specific investments held by the Company; changes
in foreign, political, social and economic conditions; regulatory initiatives
and compliance with governmental regulations; judicial decisions and rulings
in smoking and health litigation, the impact of tobacco settlement agreements
and any future settlements of tobacco-related litigation, the impact of bills
introduced in Congress in relation to tobacco operations, changes in foreign
and domestic oil and gas exploration and production activity, rating agency
policies and practices; the results of financing efforts; the actual closing
of contemplated transactions and agreements and various other matters and
risks, 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.
68
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
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the
Equity Method)
<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------
(Amounts in millions)
Assets:
<S> <C> <C>
Current assets $ 533.9 $ 563.3
Investments in U.S. government securities and other 4,914.3 5,031.0
- ------------------------------------------------------------------------------
Total current assets and investments in securities 5,448.2 5,594.3
Investment in CNA 7,722.0 6,861.9
Investment in Diamond Offshore 905.6 772.4
Other assets 684.6 642.1
- ------------------------------------------------------------------------------
Total assets $14,760.4 $13,870.7
==============================================================================
Liabilities and Shareholders' Equity:
Current liabilities $ 1,454.5 $ 1,555.0
Securities sold under agreements to repurchase 449.7
Long-term debt, less current maturities and
unamortized discount 2,383.6 2,340.1
Other liabilities 271.4 310.5
- ------------------------------------------------------------------------------
Total liabilities 4,559.2 4,205.6
Shareholders' equity 10,201.2 9,665.1
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $14,760.4 $13,870.7
==============================================================================
</TABLE>
69
Condensed Statements of Income Information
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the
Equity Method)
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
(Amounts in millions)
Revenues:
<S> <C> <C> <C>
Manufactured products and other $3,207.6 $2,746.5 $2,552.6
Investment income 233.3 215.7 202.2
Investment (losses) gains (545.6) (866.2) 57.9
- ------------------------------------------------------------------------------
Total 2,895.3 2,096.0 2,812.7
- ------------------------------------------------------------------------------
Expenses:
Cost of manufactured products sold
and other 2,044.1 1,986.7 1,857.3
Tobacco litigation settlements 579.0 198.8
Interest 135.9 116.1 115.6
Income tax expense (benefit) 87.3 (58.1) 316.7
- ------------------------------------------------------------------------------
Total 2,846.3 2,243.5 2,289.6
- ------------------------------------------------------------------------------
Income (loss) from operations 49.0 (147.5) 523.1
Equity in income of:
CNA 234.7 810.2 808.7
Diamond Offshore 181.1 130.9 52.1
- ------------------------------------------------------------------------------
Net income $ 464.8 $ 793.6 $1,383.9
==============================================================================
</TABLE>
70
Condensed Statements of Cash Flow Information
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the
Equity Method)
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
(Amounts in millions)
Operating Activities:
<S> <C> <C> <C>
Net income $ 464.8 $ 793.6 $1,383.9
Adjustments to reconcile net income
to net cash provided by operating
activities:
Investment losses (gains) 545.6 866.2 (57.9)
Other (444.7) (1,037.3) (755.7)
Changes in assets and liabilities-net (399.9) (583.7) (453.1)
- ------------------------------------------------------------------------------
Total 165.8 38.8 117.2
- ------------------------------------------------------------------------------
Investing Activities:
Net decrease (increase) in short-term
investments, primarily U.S. government
securities 30.8 (344.3) (447.1)
Securities sold under agreements to
repurchase 449.7 (447.8) 447.8
Investment in CNA preferred stock (200.0)
Other (52.6) (66.6) (74.8)
- ------------------------------------------------------------------------------
Total 227.9 (858.7) (74.1)
- ------------------------------------------------------------------------------
Financing Activities:
Dividends paid to shareholders (114.6) (115.0) (116.2)
(Decrease) increase in long-term
debt-net (52.0) 926.0 299.5
Purchases of treasury shares (218.0) (215.7)
- ------------------------------------------------------------------------------
Total (384.6) 811.0 (32.4)
- ------------------------------------------------------------------------------
Net change in cash 9.1 (8.9) 10.7
Cash, beginning of year 11.5 20.4 9.7
- ------------------------------------------------------------------------------
Cash, end of year $ 20.6 $ 11.5 $ 20.4
==============================================================================
</TABLE>
71
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
The Company is a large diversified financial services company. As such, it has
significant amounts of financial instruments that involve market risk. The
Company's measure of market risk exposure represents an estimate of the change
in fair value of its financial instruments. Changes in the trading portfolio
would be recognized as investment gains (losses) in the income statement.
Market risk exposure is presented for each class of financial instrument held
by the Company at December 31, assuming immediate adverse market movements of
the magnitude described below. 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 risk 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.
The following tables present the Company's market risk by category (equity
markets, interest rates, foreign currency exchange rates and commodity prices)
on the basis of those entered into for trading purposes and other than trading
purposes.
Trading portfolio:
<TABLE>
<CAPTION>
Fair Value
Category of risk exposure: Asset (Liability) Market Risk
- ------------------------------------------------------------------------------
December 31 1998 1997 1998 1997
- ------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C> <C>
Equity markets (1):
Equity securities $198.1 $ 173.3 $ 49.8 $ 43.3
Options purchased 212.5 176.3 (173.1) (162.2)
Options written (39.7) (18.8) 9.2 .5
Futures-long 46.6
Futures-short (60.3) (465.3)
Short sales (657.7) (880.7) (164.4) (220.2)
Short sales of U.S. government
securities (2) (125.3) (135.6)
Commodities:
Oil (3):
Swaps (2.4) (12.2)
Energy purchase obligations (16.9) (9.8) (5.4) (6.8)
Gold (4):
Options purchased 17.5 27.9 (17.5) (27.9)
Options written (3.7) (4.2) 3.7 4.2
Other (5) 5.0 (.5) (4.8)
- ------------------------------------------------------------------------------
</TABLE>
Note: The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of (1) an
increase in equity prices of 25%, (2) a decrease in interest rates of
100 basis points, (3) a decline in oil prices of 20%, (4) an increase in
gold prices of 20% and (5) a decrease of 10%. Adverse changes on options
which differ from those presented above would not necessarily result in
a proportionate change to the estimated market risk exposure.
72
The most significant areas of market risk in the Company's trading portfolio
result from positions held in S&P futures contracts, short sales of certain
equity securities and put options purchased on the S&P 500 index. The Company
enters into these positions primarily to benefit from anticipated future
movements in the underlying markets that Company management expects to occur.
If such movements do not occur or if the market moves in the opposite
direction from what management expects, significant losses may occur. The
Company continues to maintain these positions in 1999.
Exposure to market risk is managed and monitored by senior management. Senior
management approves the overall investment strategy employed by the Company
and has responsibility to ensure that the investment positions are consistent
with that strategy and the level of risk acceptable to it. The Company may
manage risk by buying or selling instruments or entering into offsetting
positions.
Other than trading portfolio:
<TABLE>
<CAPTION>
Fair Value
Category of risk exposure: Asset (Liability) Market Risk
- ------------------------------------------------------------------------------
December 31 1998 1997 1998 1997
- ------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C> <C>
Equity market (1):
Equity securities:
General accounts (a) $ 1,970.1 $ 813.7 $ (493.0) $ (81.0)
Separate accounts 297.0 206.0 (74.0) (21.0)
Equity index futures, separate
accounts (b) (229.0) (66.0)
Interest rate (2):
Fixed maturities (a) 31,409.4 30,723.2 (1,573.9) (1,439.5)
Short-term investments (a) 7,792.1 8,754.2 (21.0) (11.0)
Interest rate swaps (20.0) (4.0) 9.0 20.0
Other derivative securities 6.0 10.0
Separate Accounts (a):
Fixed maturities 4,155.0 4,769.0 (176.0) (190.0)
Short-term investments 473.0 629.0 (1.0)
Long-term debt (5,791.9) (5,943.1)
- ------------------------------------------------------------------------------
</TABLE>
Note: The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of (1) a
decrease in equity prices of 25% and (2) an increase in interest rates
of 100 basis points.
(a) Certain securities are denominated in foreign currencies. An assumed 20%
decline in the underlying exchange rates would result in an aggregate
foreign currency exchange rate risk of $(441.0) and $(48.0) at December
31, 1998 and 1997, respectively.
(b) This market risk would be offset by decreases in liabilities to customers
under variable insurance contracts.
Equity Price Risk - The Company has exposure to equity price risk as a result
of its investment in equity securities and equity derivatives. Equity price
risk results from changes in the level or volatility of equity prices which
affect the value of equity securities or instruments which derive their value
from such securities or indexes.
73
Equity price risk was measured assuming an instantaneous 25% change in the
underlying reference price or index from its level at December 31, 1998 and
1997, with all other variables held constant.
Interest Rate Risk - The Company has exposure to interest rate risk arising
from changes in the level or volatility of interest rates. The Company
attempts to mitigate its exposure to interest rate risk by utilizing
instruments such as interest rate swaps, interest rate caps, commitments to
purchase securities, options, futures and forwards. The Company monitors its
sensitivity to interest rate risk by evaluating the change in its financial
assets and liabilities relative to fluctuations in interest rates. The
evaluation is made using an instantaneous parallel change in interest rates by
varying magnitudes on a static balance sheet to determine the effect such a
change in rates would have on the Company's market value at risk and the
resulting effect on shareholders' equity. The analysis presents the
sensitivity of the market value of the Company's financial instruments to
selected changes in market rates and prices which the Company believes are
reasonably possible over a one-year period.
The sensitivity analysis estimates the change in the market value of the
Company's interest sensitive assets and liabilities that were held on December
31, 1998 and 1997 due to instantaneous parallel changes in the year end yield
curve. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Accordingly the
analysis may not be indicative of, is not intended to provide, and does not
provide a precise forecast of the effect of changes of market interest rates
on the Company's earnings or shareholders' equity. Further, the computations
do not contemplate any actions the Company could undertake in response to
changes in interest rates.
The Company's long-term debt, including interest rate swap agreements, as of
December 31, 1998 and 1997 are denominated in U.S. Dollars. The Company's debt
has been primarily issued at fixed rates, and as such, interest expense would
not be impacted by interest rate shifts. The impact of a 100 basis point
increase in interest rates on fixed rate debt would result in a decrease in
market value of $331.0 million. A 100 basis point decrease would result in an
increase in market value of $429.4 million.
The sensitivity analysis assumes an instantaneous shift in market interest
rates increasing 100 basis points from their levels at December 31, 1998 and
1997, with all other variables held constant.
Foreign Exchange Risk - Foreign exchange rate risk arises from the possibility
that changes in foreign currency exchange rates will impact the value of
financial instruments. The Company has foreign exchange exposure when it buys
or sells foreign currencies or financial instruments denominated in a foreign
currency. This exposure is mitigated by the Company's asset/liability matching
strategy and through the use of futures for those instruments which are not
matched. The Company's foreign transactions are primarily denominated in
Canadian Dollars, British Pounds, German Marks, Chilean Pesos, Argentinean
Pesos and Japanese Yen. The sensitivity analysis also assumes an instantaneous
20% change in the foreign currency exchange rates versus the U.S. Dollar from
their levels at December 31, 1998 and 1997, with all other variables held
constant.
Commodity Price Risk - The Company has exposure to commodity price risk as a
result of its investments in oil swaps, energy purchase obligations, gold
options and other investments. Commodity price risk results from changes in
the level or volatility of commodity prices that impact instruments which
derive their value from such commodities. Commodity price risk was measured
assuming an instantaneous change of 20% for oil and gold, and 10% in the value
of other underlying commodities.
74
Item 8. Financial Statements and Supplementary Data.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Assets:
- ------------------------------------------------------------------------------
December 31 1998 1997
- ------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C>
Investments (Notes 1, 2, 3 and 4):
Fixed maturities, amortized cost of $30,850.3
and $30,201.6 $31,409.4 $30,723.2
Equity securities, cost of $1,624.7 and
$1,102.6 2,380.7 1,163.3
Other investments 1,123.0 978.4
Short-term investments 7,792.1 8,754.2
- ------------------------------------------------------------------------------
Total investments 42,705.2 41,619.1
Cash 287.4 497.8
Receivables-net (Notes 1 and 5) 14,065.9 13,754.9
Property, plant and equipment-net (Notes 1 and 6) 2,848.3 2,590.2
Deferred income taxes (Note 8) 872.6 944.3
Goodwill and other intangible assets-net (Note 1) 489.4 751.4
Other assets (Notes 1, 13 and 16) 2,012.6 1,872.1
Deferred policy acquisition costs of insurance
subsidiaries (Note 1) 2,422.2 2,141.7
Separate Account business (Notes 1 and 3) 5,202.8 5,811.6
- ------------------------------------------------------------------------------
Total assets $70,906.4 $69,983.1
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
75
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
- ------------------------------------------------------------------------------
December 31 1998 1997
- ------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C>
Insurance reserves (Notes 1 and 7):
Claim and claim adjustment expense $29,191.7 $29,557.8
Future policy benefits 5,418.3 4,829.2
Unearned premiums 5,039.4 4,699.9
Policyholders' funds 789.1 741.5
- ------------------------------------------------------------------------------
Total insurance reserves 40,438.5 39,828.4
Payable for securities purchased (Note 4) 1,160.8 1,559.2
Securities sold under agreements to repurchase
(Notes 1 and 2) 579.5 152.7
Long-term debt, less unamortized discount
(Notes 3 and 9) 5,966.7 5,752.6
Other liabilities (Notes 1, 3 and 13) 4,879.6 4,749.1
Separate Account business (Notes 1 and 3) 5,202.8 5,811.6
- ------------------------------------------------------------------------------
Total liabilities 58,227.9 57,853.6
- ------------------------------------------------------------------------------
Minority interest 2,477.3 2,464.4
- ------------------------------------------------------------------------------
Commitments and contingent liabilities
(Notes 1, 2, 4, 7, 8, 9, 10, 12, 13, 16 and 17)
Shareholders' equity (Notes 1, 2, 9 and 11):
Common stock, $1 par value:
Authorized - 400,000,000 shares
Issued and outstanding - 112,582,300 and
115,000,000 shares 112.6 115.0
Additional paid-in capital 162.3 165.8
Earnings retained in the business 9,033.5 8,895.4
Accumulated other comprehensive income 892.8 488.9
- ------------------------------------------------------------------------------
Total shareholders' equity 10,201.2 9,665.1
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $70,906.4 $69,983.1
==============================================================================
</TABLE>
76
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
(Amounts in millions, except per share data)
Revenues (Note 1):
<S> <C> <C> <C>
Insurance premiums (Note 16) $13,369.7 $13,477.6 $13,520.2
Investment income, net of expenses (Note 2) 2,408.3 2,442.0 2,477.7
Investment gains (losses) (Note 2) 149.7 (237.9) 489.9
Gains on issuance of subsidiaries' stock
(Notes 2 and 14) 124.3 186.6
Manufactured products (including excise
taxes of $495.3, $491.0 and $477.6) 2,936.6 2,514.4 2,327.5
Other 2,344.0 1,818.4 1,440.5
- ------------------------------------------------------------------------------
Total 21,208.3 20,138.8 20,442.4
- ------------------------------------------------------------------------------
Expenses (Note 1):
Insurance claims and policyholders' benefits
(Notes 7 and 16) 11,717.3 11,268.5 11,370.5
Amortization of deferred policy acquisition
costs 2,180.2 2,138.2 1,856.1
Cost of manufactured products sold 1,027.7 1,024.5 992.1
Other operating expenses 4,257.5 3,592.2 3,497.9
Tobacco litigation settlements (Note 17) 579.0 198.8
Interest 369.2 323.4 318.0
- ------------------------------------------------------------------------------
Total 20,130.9 18,545.6 18,034.6
- ------------------------------------------------------------------------------
1,077.4 1,593.2 2,407.8
- ------------------------------------------------------------------------------
Income taxes (Note 8) 354.5 495.3 791.4
Minority interest 258.1 304.3 232.5
- ------------------------------------------------------------------------------
Total 612.6 799.6 1,023.9
- ------------------------------------------------------------------------------
Net income $ 464.8 $ 793.6 $ 1,383.9
==============================================================================
Net income per share (Note 11) $ 4.06 $ 6.90 $ 11.91
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
77
<TABLE>
<CAPTION>
Consolidated Statement of Shareholders Equity
Earnings Accumulated
Additional Retained Other Common
Comprehensive Common Paid-in in the Comprehensive Stock Held
Income Stock Capital Business Income in Treasury Total
- ------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $117.8 $170.0 $7,157.8 $ 793.1 $ 8,238.7
Comprehensive income:
Net income $1,383.9 1,383.9 1,383.9
Other comprehensive
losses (Note 11) (559.5) (559.5) (559.5)
--------
Comprehensive income $ 824.4
========
Dividends paid, $1.00 per
share (116.2) (116.2)
Purchases of common stock $(215.7) (215.7)
Retirement of treasury stock (2.8) (4.2) (208.7) 215.7
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1996 115.0 165.8 8,216.8 233.6 8,731.2
Comprehensive income:
Net income $ 793.6 793.6 793.6
Other comprehensive
income (Note 11) 255.3 255.3 255.3
--------
Comprehensive income $1,048.9
========
Dividends paid, $1.00
per share (115.0) (115.0)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1997 115.0 165.8 8,895.4 488.9 9,665.1
Comprehensive income:
Net income $ 464.8 464.8 464.8
Other comprehensive
income (Note 11) 403.9 403.9 403.9
--------
Comprehensive income $ 868.7
========
Dividends paid, $1.00
per share (114.6) (114.6)
Purchases of common stock (218.0) (218.0)
Retirement of treasury stock (2.4) (3.5) (212.1) 218.0
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $112.6 $162.3 $9,033.5 $ 892.8 $10,201.2
================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
78
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
(Amounts in millions)
Operating Activities:
<S> <C> <C> <C>
Net income $464.8 $793.6 $1,383.9
Adjustments to reconcile net income to net
cash provided by operating activities:
Investment (gains) losses (149.7) 113.6 (676.5)
Provision for minority interest 258.1 304.3 232.5
Amortization of investments (217.3) (115.2) (177.6)
Depreciation and amortization 437.0 341.7 285.0
Provision for deferred income taxes 51.8 59.3 474.9
Changes in assets and liabilities-net:
Reinsurance receivables (210.3) 473.0 204.1
Other receivables (589.2) (209.7) (334.6)
Deferred policy acquisition costs (280.5) (287.5) (360.9)
Insurance reserves and claims 624.3 (133.5) (358.0)
Other liabilities 187.9 (485.5) 885.9
Trading securities (545.7) (682.4) (247.2)
Other-net (267.4) 72.1 (361.5)
- ------------------------------------------------------------------------------
(236.2) 243.8 950.0
- ------------------------------------------------------------------------------
Investing Activities:
Purchases of fixed maturities (70,141.5) (47,434.7) (41,004.7)
Proceeds from sales of fixed maturities 66,429.6 43,997.0 41,895.6
Proceeds from maturities of fixed maturities 3,564.0 2,996.9 1,796.3
Purchases of equity securities (1,072.6) (1,332.3) (971.6)
Proceeds from sales of equity securities 850.8 1,405.9 1,077.4
Purchases of property and equipment (644.0) (702.4) (545.5)
Securities sold under agreements to
repurchase 426.8 (395.5) (225.8)
Change in short-term investments 786.6 (207.4) (2,809.6)
Change in other investments 192.9 390.5 225.7
- ------------------------------------------------------------------------------
392.6 (1,282.0) (562.2)
- ------------------------------------------------------------------------------
</TABLE>
79
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
(Amounts in millions)
Financing Activities:
<S> <C> <C> <C>
Dividends paid to shareholders $ (114.6) $ (115.0) $ (116.2)
Dividends paid to minority interests (40.7) (16.0) (6.3)
Purchases of treasury shares (218.0) (215.7)
Purchases of treasury shares by subsidiaries (191.1)
Principal payments on long-term debt (861.9) (271.4) (574.2)
Issuance of long-term debt 1,073.8 1,661.0 615.9
Change in short-term debt (10.0) 2.3
Receipts credited to policyholders 6.2 6.6 11.0
Withdrawals of policyholder account
balances (20.5) (24.9) (40.6)
- ------------------------------------------------------------------------------
(366.8) 1,230.3 (323.8)
- ------------------------------------------------------------------------------
Net change in cash (210.4) 192.1 64.0
Cash, beginning of year 497.8 305.7 241.7
- ------------------------------------------------------------------------------
Cash, end of year $ 287.4 $ 497.8 $ 305.7
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in million, 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. Unless the context otherwise requires, the
term "Company" means Loews Corporation and its consolidated subsidiaries. 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.
Accounting changes - Effective December 31, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for presenting
comprehensive income and its components. The Company has presented this
information in its Consolidated Statements of Shareholders' Equity and in Note
11.
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 revises
standards for the way that public business enterprises report information
about operating segments in interim and annual financial statements and
related disclosures about products and services, geographic areas, and major
customers. The Company has presented this information in Notes 6 and 18.
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
standardizes disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in benefit obligations and fair values of plan assets that will facilitate
analysis, and eliminates certain disclosures that are no longer deemed as
useful to users of financial statements. The Company has presented this
information in Note 13.
Investments - Investments in securities, which are held principally by
insurance subsidiaries of CNA Financial Corporation ("CNA"), an 85% 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. The amortization and accretion are
included in investment income. Equity securities in 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 on an accrual basis and are included in the
income statement as an adjustment to interest expense.
Short-term investments consist primarily of U.S. government securities,
repurchase agreements and commercial paper. These investments 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 included in other comprehensive income 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.
Other invested assets consist primarily of investments in joint ventures,
limited partnerships, certain derivative securities and other investments not
classified elsewhere. The joint ventures and limited partnerships are carried
at equity value.
Securities lending activities - The Company has a securities lending program
where securities are loaned to third parties, primarily major brokerage firms.
81
Borrowers of these securities must deposit 100% of the fair 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). 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.
Restricted investments - On December 30, 1993, CNA deposited $986.8 in an
escrow account, pursuant to the Fibreboard Global Settlement Agreement, as
discussed in Note 17. The majority of the funds are included in short-term
investments and are invested primarily in U.S. treasury securities. The escrow
account amounted to $1,130.0 and $1,098.0 at December 31, 1998 and 1997,
respectively.
Insurance Operations - Premium revenues - Insurance premiums on property and
casualty and accident and health insurance contracts 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 are comprised of contract charges and fees which
are recognized over the coverage period. Other life insurance premiums and
annuities are recognized as revenue when due after deductions for ceded
insurance premiums.
Claim and claim adjustment expense reserves - Claim and claim expense
reserves, except reserves for structured settlements, workers' compensation
lifetime claims and accident and health disability claims, are not discounted
and are based on (a) case basis estimates for losses reported on direct
business, adjusted in the aggregate for ultimate loss expectations, (b)
estimates of unreported losses, (c) estimates of losses on assumed insurance,
and (d) estimates of future expenses to be incurred in settlement of claims.
In establishing these estimates, consideration is given to current conditions
and trends as well as past company and industry experience. The effects of
inflation, which can be significant, are implicitly considered in the
reserving process and are part of the recorded reserve balance.
Claim and claim adjustment expense reserves represent management's estimates
of ultimate liabilities based on currently available facts and case law and
the ultimate liability may vary significantly from such estimates. CNA
regularly reviews its reserves, and any adjustments to the previously
established reserves are reflected in operating income in the period the need
for such adjustments becomes apparent. See Note 7 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 recorded in future policy benefits reserves. Obligations for
structured settlements not funded by annuities are included in claim and claim
expense reserves and carried at the present values determined using interest
rates ranging from 6.0% to 7.5%. At December 31, 1998 and 1997, the discounted
reserves for unfunded structured settlements were $893.0 and $913.0,
respectively (reflecting a discount of $1,511.0 and $1,527.0, respectively).
Workers' compensation lifetime claim reserves and accident and health
disability claim reserves are discounted at interest rates allowed by
insurance regulators that range from 3.5% to 6.0% with mortality and morbidity
assumptions reflecting CNA's and current industry experience. At December 31,
1998 and 1997, such discounted reserves totaled $2,277.0 and $2,196.0,
respectively (reflecting a discount of $869.0 and $882.0, respectively).
Future policy benefits reserves - Reserves for traditional life insurance
products (whole and term life 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 9.0%, and mortality, morbidity and
withdrawal assumptions reflect CNA and industry experience prevailing at the
time of issue. Expense assumptions include the estimated effects of inflation
and expenses beyond the premium paying period. Reserves for universal
life-type contracts are equal to the account balances that accrue to the
benefit of the policyholders. Interest crediting rates ranged from 4.3% to
7.3% for the three years ended December 31, 1998.
82
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 on an accrual basis. CNA currently records assessments for
insolvencies as they are paid. In 1999, CNA will account for these assessments
in compliance with Statement of Position ("SOP") 97-3. SOP 97-3 requires that
insurance companies recognize liabilities for insurance-related assessments
when an assessment is probable and will be imposed, when it can be reasonably
estimated, and when the event obligating the entity to pay an imposed or
probable assessment, has occurred on or before the date of the financial
statements. In the first quarter of 1999, the Company will record the initial
impact of the application of this SOP as a cumulative effect of a change in
accounting principle and report an after tax charge between $120.0 and $150.0.
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. CNA's life reinsurance includes
coinsurance, yearly renewable term and facultative programs. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
claim or policy reserve liability and shown as a recoverable in the
Consolidated Balance Sheets.
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 traditional 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. To the extent
that unrealized gains or losses on available for sale securities would result
in an adjustment of deferred policy acquisition costs had those gains or
losses actually been realized, the related unamortized deferred policy
acquisition costs are recorded as an adjustment of the unrealized gains or
losses included in shareholders' equity.
Participating business - Participating business represented 0.5%, 0.7% and
0.5% of CNA's gross life insurance in force and 0.7%, 0.7% and 0.7% of life
insurance premium income for 1998, 1997 and 1996, 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. Revenues 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"), write 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 64% and 74% of the
Separate Account business at December 31, 1998 and 1997, respectively.
Substantially all assets of the Separate Account business are carried at fair
value. Separate Account liabilities are carried at contract values.
Statutory accounting practices - CNA's insurance subsidiaries are domiciled in
various jurisdictions. These subsidiaries prepare statutory financial
statements in accordance with accounting practices prescribed or otherwise
permitted by their respective jurisdiction's insurance regulator. 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.
83
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 regulators, for property and
casualty and life insurance subsidiaries, are as follows:
<TABLE>
<CAPTION>
Statutory Capital
and Surplus Statutory Net Income (Loss)
-------------------- -----------------------------
December 31 Year Ended December 31
-------------------- -----------------------------
1998 1997 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and casualty companies* $7,593.0 $7,123.0 $161.0 $1,043.0 $1,208.0
Life insurance companies 1,109.0 1,224.0 (57.0) 43.0 57.6
- ------------------------------------------------------------------------------------------------
*Surplus includes equity of property and casualty companies ownership in life insurance
subsidiaries.
</TABLE>
Inventories -
Tobacco products - These inventories, aggregating $221.6 and $227.9 at
December 31, 1998 and 1997, respectively, are stated at the lower of cost or
market, using the last-in, first-out (LIFO) method and primarily consist of
leaf tobacco. If the average cost method of accounting had been used for
tobacco inventories instead of the LIFO method, such inventories would have
been $215.5 and $208.6 higher at December 31, 1998 and 1997, respectively.
Watches and clocks - These inventories, aggregating $38.9 and $35.7 at
December 31, 1998 and 1997, 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, 1998 and 1997 was $384.3 and $283.0,
respectively. Amortization expense amounted to $101.3, $39.6 and $36.3 for the
years ended December 31, 1998, 1997 and 1996, 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
Offshore drilling equipment 10 to 25
</TABLE>
Impairment of long-lived assets - 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. Long-lived assets and certain intangibles,
under certain circumstances, are reported at the lower of carrying amount or
fair value. 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 1998.
84
Note 2. Investments -
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
Investment income consisted of:
<S> <C> <C> <C>
Fixed maturities:
Taxable $1,568.8 $1,616.4 $1,820.9
Tax exempt 342.4 289.2 273.4
Equity securities 34.7 37.6 46.4
Security repurchase transactions - net 15.0 20.1 9.2
Short-term investments 404.7 457.6 290.5
Other 118.7 100.9 80.5
- ------------------------------------------------------------------------------
Total investment income 2,484.3 2,521.8 2,520.9
Investment expenses (76.0) (79.8) (43.2)
- ------------------------------------------------------------------------------
Investment income-net $2,408.3 $2,442.0 $2,477.7
==============================================================================
Investment gains (losses) are as follows:
Trading securities:
Derivative instruments (a) $ (285.3) $ (618.7) $ (137.6)
Equity securities, including short
positions (a) (251.4) (299.0) (7.7)
- ------------------------------------------------------------------------------
(536.7) (917.7) (145.3)
Other than trading:
Fixed maturities 469.3 463.4 324.6
Equity securities 38.1 102.7 216.3
Short-term investments (21.4) 7.1 10.0
Other, including guaranteed Separate
Account business 200.4 106.6 84.3
- ------------------------------------------------------------------------------
Investment gains (losses) 149.7 (237.9) 489.9
Gains on issuance of subsidiaries' stock 124.3 186.6
- ------------------------------------------------------------------------------
149.7 (113.6) 676.5
Income tax (expense) benefit (56.2) 43.2 (237.6)
Allocated to participating policyholders (14.0) (14.6) (14.2)
Minority interest (67.0) (74.9) (61.1)
- ------------------------------------------------------------------------------
Investment gains (losses) -net $ 12.5 $ (159.9) $ 363.6
==============================================================================
</TABLE>
(a) Includes losses on short sales, equity index futures and options
aggregating $584.3, $936.6 and $285.7 for the years ended December 31,
1998, 1997 and 1996, respectively. The Company continues to maintain these
positions.
The carrying value of investments (other than equity securities) that have not
produced income for the last twelve months is $23.0 at December 31, 1998.
Investment gains of $1,448.4, $837.6 and $716.0 and losses of $962.4, $264.4
and $165.1 were realized on securities available for sale for the years ended
December 31, 1998, 1997 and 1996, respectively. Investment gains (losses) in
1998, 1997 and 1996 also include $159.2, $58.6 and $2.7 of net unrealized
losses on equity securities in the Company's trading portfolio.
85
The amortized cost and market values of securities are as follows:
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------ Market
December 31, 1998 Cost Gains Losses Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and obligations of
government agencies $ 8,875.3 $ 184.5 $ 20.2 $ 9,039.6
Asset-backed 8,095.8 129.8 11.7 8,213.9
States, municipalities and
political subdivisions-tax exempt 6,126.7 205.9 11.6 6,321.0
Corporate 5,105.7 135.7 144.7 5,096.7
Other debt 2,610.5 103.7 70.0 2,644.2
Redeemable preferred stocks 36.3 60.5 2.8 94.0
- ------------------------------------------------------------------------------
Total fixed maturities available
for sale 30,850.3 820.1 261.0 31,409.4
Equity securities available for
sale 1,054.9 1,051.2 136.0 1,970.1
Equity securities, trading
portfolio 569.8 10.8 170.0 410.6
Short-term investments available
for sale 7,793.1 .2 1.2 7,792.1
- ------------------------------------------------------------------------------
$40,268.1 $1,882.3 $568.2 $41,582.2
==============================================================================
December 31, 1997
U.S. government and obligations
of government agencies $14,034.9 $ 119.4 $ 25.3 $14,129.0
Asset-backed 4,716.1 97.8 9.6 4,804.3
States, municipalities and
political subdivisions-tax exempt 4,534.3 194.0 3.8 4,724.5
Corporate 5,282.7 142.2 53.1 5,371.8
Other debt 1,566.9 60.8 31.1 1,596.6
Redeemable preferred stocks 66.7 30.3 97.0
- ------------------------------------------------------------------------------
Total fixed maturities available
for sale 30,201.6 644.5 122.9 30,723.2
Equity securities available
for sale 694.4 190.1 70.8 813.7
Equity securities, trading
portfolio 408.2 4.1 62.7 349.6
Short-term investments available
for sale 8,754.5 .1 .4 8,754.2
- ------------------------------------------------------------------------------
$40,058.7 $838.8 $256.8 $40,640.7
==============================================================================
</TABLE>
The Company's largest equity holding (held by CNA) in a single issuer is
Global Crossing, Ltd. ("Global Crossing") common stock. At December 31, 1998,
the Company owned 20,037,584 shares, or 9.8% of the outstanding common stock
of Global Crossing which was valued at $904.0. Net unrealized gains associated
with this security approximated $841.0 at December 31, 1998. Without
registration or an exemption from registration, sales to the public of the
Company's holdings of Global Crossing are governed by Rule 144 of the
Securities Act of 1933 (the "Act") and may not commence until August 13, 1999.
After August 13, 1999, the Company has the right to require Global Crossing to
register under the Act up to 25% of the Company's holdings prior to December
31, 1999.
At December 31, 1998 and 1997, CNA maintained statutory deposits of cash and
securities, with carrying values of $1,700.0 and $2,100.0, respectively, under
requirements of regulatory authorities.
86
The amortized cost and market value of fixed maturities at December 31, 1998
and 1997 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>
1998 1997
-------------------- ---------------------
Amortized Market Amortized Market
December 31 Cost Value Cost Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,217.3 $ 3,322.8 $ 2,059.0 $ 2,076.7
Due after one year through five
years 6,412.3 6,430.4 12,675.9 12,674.0
Due after five years through ten
years 5,464.0 5,434.9 3,324.4 3,374.9
Due after ten years 7,660.9 8,007.4 7,426.2 7,793.3
Asset-backed securities not due
at a single maturity date 8,095.8 8,213.9 4,716.1 4,804.3
- ------------------------------------------------------------------------------
$30,850.3 $31,409.4 $30,201.6 $30,723.2
==============================================================================
</TABLE>
Note 3. Fair Value of Financial Instruments -
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
Carrying Estimated Carrying Estimated
December 31 Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Other investments $1,118.2 $1,115.2 $ 973.9 $ 967.9
Separate Account business:
Fixed maturities 4,155.0 4,155.0 4,769.0 4,769.0
Equity securities 297.0 297.0 206.0 206.0
Other 216.0 216.0 117.0 117.0
Financial liabilities:
Premium deposits and annuity
contracts 1,259.0 1,205.0 1,194.0 1,145.0
Long-term debt 5,921.3 5,791.9 5,697.2 5,943.1
Financial guarantee liabilities 240.0 231.0 382.0 373.0
Separate Account business:
Guaranteed investment contracts 2,423.0 2,478.0 3,414.0 3,448.0
Variable Separate Accounts 1,268.0 1,268.0 997.0 997.0
Deferred annuities 85.0 102.0 73.0 90.0
Other 600.0 600.0 614.0 614.0
- ------------------------------------------------------------------------------
</TABLE>
87
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 consolidated 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 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 and equity securities were based on quoted market
prices, where available. For securities not actively traded, fair values were
estimated using values obtained from independent pricing services or quoted
market prices of comparable instruments.
Other investments consist of mortgage loans and notes receivable, policy
loans, investments in limited partnerships and various miscellaneous assets.
Valuation techniques to determine fair value of other investments and other
Separate Account assets consisted of discounted cash flows and quoted market
prices of the investments, comparable instruments, or underlying assets of the
investments.
Premium deposits and annuity contracts were valued based on cash surrender
values and the outstanding fund balances.
The fair value of the liability for financial guarantee contracts was based on
discounted cash flows utilizing interest rates currently being offered for
similar contracts.
The fair value of guaranteed investment contracts and deferred annuities of
the Separate Accounts business was 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 was 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 was based on quoted market prices when available.
The fair values for other long-term debt were 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.
88
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 a number of purposes, including: (i) for its
asset and liability management activities; (ii) for income enhancements for
its portfolio management strategy; and (iii) to benefit from anticipated
future movements in the underlying markets that Company management expects to
occur. If such movements do not occur or if the market moves in the opposite
direction than what management expects, significant losses may occur. These
Contracts also involve the risk of dealing with counterparties and their
ability to meet the terms of the Contracts.
Exposure to market risk is managed and monitored by senior management. Senior
management approves the overall investment strategy employed by the Company
and has responsibility to ensure that the investment positions are consistent
with that strategy and the level of risk acceptable to it. The Company may
manage risk by buying and selling instruments or entering into offsetting
positions.
The notional amounts of derivative instruments shown in the following tables
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.
The Company's investments in derivative instruments are as follows:
<TABLE>
<CAPTION>
Fair Value Asset
(Liability)
Contractual/ ----------------------
Notional Average for Recognized
December 31, 1998 Value Year-End the Year (Loss) Gain
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity markets:
Options purchased $3,950.4 $212.5 $1,206.6 $(289.4)
Options written 1,085.5 (39.7) (97.9) 73.1
S&P futures-long 186.2 155.2
S&P futures-short 241.3 (202.8)
Commodities:
Oil:
Swaps (7.7) (3.4)
Energy purchase obligations 44.0 (16.9) (12.4) (7.0)
Gold:
Options purchased 423.9 17.5 30.8 (2.5)
Options written 62.0 (3.7) (9.5) 4.5
Other 408.6 1.0 3.7 (13.0)
- ------------------------------------------------------------------------------
Total $6,401.9 $170.7 $1,113.6 $(285.3)
==============================================================================
</TABLE>
89
<TABLE>
<CAPTION>
Fair Value Asset
(Liability)
-------------------
Contractual/ Average
Notional for Recognized
December 31, 1997 Value Year-End the Year (Loss) Gain
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity markets:
Options purchased $2,272.0 $176.3 $1,072.3 $(336.2)
Options written 269.7 (18.8) (134.1) 42.9
S&P futures 1,881.0 (381.2)
Commodities:
Oil:
Swaps 63.3 (2.4) (3.2) (18.8)
Energy purchase obligations 44.0 (9.8) (3.1) (10.1)
Gold:
Options purchased 488.3 27.9 27.5 44.3
Options written 84.6 (4.2) (2.0) 3.6
Other 67.5 5.0 9.6 21.4
Other 15.4
- ------------------------------------------------------------------------------
Total $5,170.4 $174.0 $ 967.0 $(618.7)
==============================================================================
December 31, 1996
- ------------------------------------------------------------------------------
Equity markets:
Options purchased $1,995.7 $100.7 $ 66.1 $(149.1)
Options written 1,223.5 (19.1) (25.5) 63.4
Futures 1,466.9 (138.2)
Interest rate risk:
Treasury bill calls 218.6 1.3 .6 3.3
Interest rate swaps 85.0 (.4) 2.3 29.0
Commitments to purchase
government and municipal
securities 406.5 (.9) (1.0)
Foreign exchange futures and
forwards 599.0 (2.0) (1.7) (3.5)
Commodities:
Oil:
Swaps 104.0 6.3 (13.5) 52.2
Energy purchase obligations 79.1 2.3 (7.0) 17.1
Gold options purchased 209.0 2.1 2.2 (2.1)
Other 176.5 3.4 (1.5) (9.7)
- ------------------------------------------------------------------------------
Total $6,563.8 $ 93.7 $ 21.0 $(137.6)
==============================================================================
</TABLE>
90
CNA has entered into interest rate swap agreements to convert the variable
rate of its borrowings under the bank credit facility and the commercial paper
program to a fixed rate. Since these interest rate swaps are not held for
trading purposes, they are not included in the preceding tables. At December
31, 1998 and 1997, the outstanding interest rate swap agreements had a total
notional principal amount of $650.0 and $950.0, and a fair value liability of
$10.0 and $4.0, respectively. Those agreements, which terminate from May 2000
to December 2000, effectively fixed CNA's interest rate exposure on $650.0 and
$950.0 of variable rate debt, respectively.
CNA also uses derivatives to mitigate the risk associated with its indexed
group annuity contracts by purchasing S&P 500 futures contracts in a notional
amount equal to the portion of the customer liability related to the S&P 500
exposure. CNA generally does not hold or issue these instruments for trading
purposes. The gross notional principal or contractual amounts of these
instruments in the Separate Accounts totaled $979.0 and $711.0 at December 31,
1998 and 1997, respectively.
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 $1,069.2 and $602.3 with fair value
liabilities of $783.0 and $880.7 at December 31, 1998 and 1997, respectively.
These positions are marked to market and investment gains or losses are
included in the income statement.
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, 1998 and 1997, gross exposure of financial guarantee insurance
contracts amounted to $507.0 and $553.0, respectively. The degree of risk
attached to this exposure is substantially reduced through reinsurance,
diversification of exposures and collateral requirements. In addition,
security interests in the real estate are also obtained. Approximately 36% and
39% of the risks were ceded to reinsurers at December 31, 1998 and 1997,
respectively. Total exposure, net of reinsurance, amounted to $323.0 and
$337.0 at December 31, 1998 and 1997, respectively. At December 31, 1998 and
1997, collateral consisting of letters of credit and debt service reserves
amounted to $38.0 and $23.0, respectively. Gross unearned premium reserves for
financial guarantee contracts were $7.0 and $5.0 at December 31, 1998 and
1997, respectively. Gross claim and claim expense reserves totaled $232.0 and
$377.0 at December 31, 1998 and 1997, respectively.
91
Note 5. Receivables -
<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Reinsurance $ 6,267.3 $ 6,057.0
Other insurance 6,803.8 6,431.9
Security sales 276.4 755.8
Accrued investment income 409.8 422.8
Other 652.4 405.4
- ------------------------------------------------------------------------------
Total 14,409.7 14,072.9
Less allowance for doubtful accounts and
cash discounts 343.8 318.0
- ------------------------------------------------------------------------------
Receivables-net $14,065.9 $13,754.9
==============================================================================
</TABLE>
Note 6. Property, Plant and Equipment -
<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 118.9 $ 123.4
Buildings and building equipment 798.6 753.8
Offshore drilling rigs and equipment 2,017.8 1,781.1
Machinery and equipment 1,310.4 1,130.6
Leaseholds and leasehold improvements 122.1 67.7
- ------------------------------------------------------------------------------
Total, at cost 4,367.8 3,856.6
Less accumulated depreciation and amortization 1,519.5 1,266.4
- ------------------------------------------------------------------------------
Property, plant and equipment-net $ 2,848.3 $ 2,590.2
==============================================================================
</TABLE>
Depreciation and amortization expense, including amortization of intangibles,
and capital expenditures, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------- -----------------
Depr. & Capital Depr. & Capital Depr. & Capital
Year Ended December 31 Amort. Expend. Amort. Expend. Amort. Expend.
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CNA Financial $261.1 $261.1 $187.4 $280.3 $163.7 $205.3
Lorillard 22.4 20.1 21.0 34.4 21.5 35.3
Loews Hotels 16.3 131.3 17.7 15.7 18.7 16.7
Diamond Offshore 130.3 224.5 108.3 362.6 75.8 267.2
Bulova .7 4.3 .8 .6 .8 .1
Corporate 6.2 2.7 6.5 8.8 4.5 20.9
- ------------------------------------------------------------------------------------------------
Total $437.0 $644.0 $341.7 $702.4 $285.0 $545.5
================================================================================================
</TABLE>
92
Note 7. Liability for Unpaid Claims and Claim Adjustment Expenses -
CNA's property and casualty insurance claims and claim adjustment expense
reserves represent 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.
Establishing loss reserves is an estimation process. Many factors 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 estimable 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 adjustment expense reserve balances for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves at beginning of year:
Gross $28,571.0 $29,395.0 $31,044.0
Ceded 5,326.0 5,660.0 6,089.0
- ------------------------------------------------------------------------------
Net reserves at beginning of year 23,245.0 23,735.0 24,955.0
Net reserves of acquired insurance
companies at date of acquisition 122.0 57.0
- ------------------------------------------------------------------------------
Total net reserves 23,367.0 23,792.0 24,955.0
- ------------------------------------------------------------------------------
Net incurred claim and claim expenses:
Provision for insured events of current
year 7,903.0 7,942.0 7,922.0
Increase (decrease) in provision for
insured events of prior years 263.0 (256.0) (91.0)
Amortization of discount 143.0 143.0 149.0
- ------------------------------------------------------------------------------
Total net incurred 8,309.0 7,829.0 7,980.0
- ------------------------------------------------------------------------------
Net payments attributable to:
Current year events 2,791.0 2,514.0 2,676.0
Prior year events 5,954.0 5,862.0 6,524.0
- ------------------------------------------------------------------------------
Total net payments 8,745.0 8,376.0 9,200.0
- ------------------------------------------------------------------------------
Net reserves at end of year 22,931.0 23,245.0 23,735.0
Ceded at end of year 5,424.0 5,326.0 5,660.0
- ------------------------------------------------------------------------------
Gross reserves at end of year (a) $28,355.0 $28,571.0 $29,395.0
==============================================================================
</TABLE>
(a) Excludes life claim and claim expense reserves and intercompany
eliminations of $836.7, $986.8 and $999.5 as of December 31, 1998, 1997
and 1996, respectively, included in the Consolidated Balance Sheets.
93
The change in provision for insured events of prior years, favorable (adverse)
reserve development, is comprised of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Asbestos $(243.0) $(105.0) $(50.5)
Environmental Pollution and Other Mass Tort (227.0) (64.7)
Other 207.0 361.0 206.2
- ------------------------------------------------------------------------------
Total $(263.0) $ 256.0 $ 91.0
==============================================================================
</TABLE>
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 establish
mechanisms 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 ("EPA") on its National
Priorities List ("NPL"). The addition of new clean-up sites to the NPL has
slowed in recent years. Many clean-up sites have been designated by state
authorities as well.
Many policyholders have made claims against various CNA insurance subsidiaries
for defense costs and indemnification in connection with environmental
pollution matters. These reserves relate to claims for accident years 1989 and
prior, which coincides with CNA's adoption of the Simplified Commercial
General Liability coverage form which included an absolute pollution
exclusion. CNA and the insurance industry are disputing coverage for many such
claims. Key coverage issues include whether clean-up costs are considered
damages under the policies, trigger of coverage, allocation of liability among
triggered policies, applicability of pollution exclusions and owned property
exclusions, the potential for joint and several liability and definition of an
occurrence. To date, courts have been inconsistent in their rulings on these
issues.
A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress in 1998 and it is unclear as to
what positions the Congress or the Administration will take and what
legislation, if any, will result. If there is legislation, and in some
circumstances even if there is no legislation, the federal role in
environmental clean-up may be materially reduced in favor of state action.
Substantial changes in the federal statute or the activity of the EPA may
cause states to reconsider their environmental clean-up statutes and
regulations. There can be no meaningful prediction of 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, CNA's ultimate liability for
environmental pollution claims may vary substantially from the amount
currently recorded.
As of December 31, 1998 and 1997, CNA carried approximately $787.0 and $773.0,
respectively, of claim and claim expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and other
mass tort claims. In 1998, CNA recorded $227.0 of adverse development compared
to no development in 1997. The additional strengthening in 1998 was based upon
CNA's continuous review of these types of exposures, as well as its internal
study and annual analysis of environmental pollution and other mass tort
claims. This analysis indicated deterioration in claim experience related to
pollution claims, as well as some emerging mass tort exposures.
CNA's insurance subsidiaries have exposure to asbestos claims, including those
attributable to CNA's litigation with Fibreboard Corporation (see Note 17).
Estimation of asbestos claim reserves involves many of the same limitations
discussed above for environmental pollution claims such as inconsistency of
court decisions, specific policy provisions, allocation of liability among
insurers, missing policies and proof of coverage. As of December 31, 1998 and
1997, CNA carried approximately $1,456.0 and $1,400.0, respectively, of claim
and claim expense reserves, net of reinsurance recoverable, for reported and
unreported asbestos-related claims. In 1998, CNA recorded $243.0 of adverse
development
94
compared to $105.0 of adverse development in 1997. As with CNA's exposure to
environmental pollution and other mass tort exposures, the additional reserve
strengthening in 1998 for asbestos related claims was a result of management's
continuous review of development with respect to these exposures, as well as a
review of the results of CNA's annual analysis of these claims which was
completed in conjunction with the study of environmental pollution and other
mass tort claims. This analysis indicated deterioration in claims experience
and claim counts for asbestos related claims.
The results of operations in future years may continue to be adversely
affected by environmental pollution and asbestos claims and claim expenses.
Management will continue to monitor these liabilities and make further
adjustments as warranted.
Other lines favorable loss and loss adjustment expense reserve development for
1998 of $207.0 was due to favorable loss development of approximately $100.0
in commercial lines business and approximately $105.0 of favorable loss
development in personal lines business. The favorable development in the
commercial lines business was primarily attributable to improved frequency and
severity in the commercial auto lines, as well as some continued improvement
in workers' compensation. The favorable development in the personal lines
business was attributable to improved trends, particularly in personal auto
liability.
Other lines favorable loss and loss adjustment expense reserve development for
1997 of $361.0 was attributable to approximately $540.0 in workers'
compensation involuntary risks and approximately $200.0 in personal lines
business, partially offset by unfavorable loss and loss adjustment expense
development of $379.0 in other commercial lines. The 1997 favorable loss
development was offset in part by unfavorable premium development of
approximately $340.0 in involuntary risk business and $170.0 favorable premium
development in commercial lines.
The other favorable development during 1996 of $206.2 was principally due to
favorable claim experience in the workers' compensation line of business.
The following tables provide additional data related to CNA's environmental
pollution, other mass tort and asbestos-related claims activity.
<TABLE>
<CAPTION>
Reserve Summary
December 31 1998 1997
- ------------------------------------------------------------------------------
Environmental Environmental
Pollution and Pollution and
Other Mass Other Mass
Tort Asbestos Tort Asbestos
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reported Claims:
Gross reserves $291.0 $1,305.0 $279.0 $1,198.0
Less reinsurance recoverable (41.0) (91.0) (36.0) (117.0)
- ------------------------------------------------------------------------------
Net reported claims 250.0 1,214.0 243.0 1,081.0
Net unreported claims 537.0 242.0 530.0 319.0
- ------------------------------------------------------------------------------
Net reserves $ 787.0 $1,456.0 $ 773.0 $1,400.0
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Changes in Environmental Pollution and Other Mass Tort Reserves
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net reserves at beginning of year $ 773.0 $ 907.8 $1,063.0
Reserve strengthening 227.0 64.7
Less:
Gross payments (274.0) (258.0) (304.2)
Reinsurance recoveries 61.0 123.2 84.3
- ------------------------------------------------------------------------------
Net reserves at end of year $ 787.0 $ 773.0 $ 907.8
==============================================================================
</TABLE>
95
Changes in Asbestos Reserves
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net reserves at beginning of year $1,400.0 $1,506.2 $2,191.1
Reserve strengthening 243.0 105.0 50.5
Less:
Gross payments (239.0) (268.2) (787.7)
Reinsurance recoveries 52.0 57.0 52.3
- ------------------------------------------------------------------------------
Net reserves at end of year $1,456.0 $1,400.0 $1,506.2
==============================================================================
</TABLE>
Note 8. Income Taxes -
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes:
Federal:
Current $195.0 $372.2 $276.4
Deferred 51.8 59.3 474.9
State, city and other, principally current 107.7 63.8 40.1
- ------------------------------------------------------------------------------
Total $354.5 $495.3 $791.4
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Deferred tax assets (liabilities) are as follows:
December 31 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Insurance revenues:
Property and casualty claim reserves $1,183.1 $1,101.3
Unearned premium reserves 371.7 283.2
Life reserve differences 194.7 156.4
Others 26.9 22.2
Deferred policy acquisition costs (748.2) (666.7)
Employee benefits 218.9 219.6
Property, plant and equipment (184.5) (109.8)
Investments 80.2 49.0
Restructuring costs 55.9
Tobacco litigation settlements 70.4
Unrealized appreciation (533.4) (290.7)
Other-net 136.9 179.8
- ------------------------------------------------------------------------------
Deferred tax assets-net $ 872.6 $ 944.3
==============================================================================
</TABLE>
96
Gross deferred tax assets amounted to $2,953.4 and $2,891.8 and liabilities
amounted to $2,080.8 and $1,947.5 for the years ended December 31, 1998 and
1997, respectively.
The 1998 amounts reflect an increase in certain components of net deferred tax
assets as a result of the finalization of an Internal Revenue Service
examination. The increase resulted in a corresponding reduction of intangible
assets.
The Company has a history of profitability and as such, management believes it
is more likely than not that the net deferred tax asset will be realized.
Total income tax expense for the years ended December 31, 1998, 1997 and 1996
was different than the amounts of $377.1, $557.6 and $842.7, 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 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
(Decrease) increase in income tax rate
resulting from:
Exempt interest and dividends received
deduction (9) (6) (3)
State, city and other income taxes 7 2 1
- ------------------------------------------------------------------------------
Effective income tax rate 33% 31% 33%
==============================================================================
</TABLE>
Federal, foreign, state and local income tax payments, net of refunds,
amounted to approximately $395.1, $565.3 and $407.8 for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company has entered into separate tax allocation agreements with Bulova
and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiary"). 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
receive approximately $83.0 for 1998 and has paid the Company approximately
$210.0 and $99.0 for 1997 and 1996, respectively, and Bulova will pay or has
paid the Company approximately $5.6, $2.6 and $5.3 for 1998, 1997 and 1996,
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 1994 and
settled through 1990 and the years 1995 through 1997 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.
97
Note 9. Long-Term Debt -
<TABLE>
<CAPTION>
Unamortized Current
December 31, 1998 Principal Discount Net Maturities
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loews Corporation $2,325.0 $38.7 $2,286.3
CNA 3,177.8 17.8 3,160.0 $102.8
Diamond Offshore 400.0 4.2 395.8
Other 124.6 124.6 27.3
- ------------------------------------------------------------------------------
Total $6,027.4 $60.7 $5,966.7 $130.1
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Loews Corporation (Parent Company):
Senior:
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $300) $ 300.0 $ 300.0
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) (a) 300.0 300.0
7.0% notes due 2023 (effective interest rate of 7.2%)
(authorized, $400) (b) 400.0 400.0
8.5% notes due 1998 117.8
Subordinated:
3.1% exchangeable subordinated notes due 2007 (effective
interest rate of 3.4%) (authorized, $1,150) (c) 1,150.0 1,150.0
CNA Financial Corporation:
Senior:
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
6.5% notes due 2005 (effective interest rate of 6.6%)
(authorized, $500) 500.0
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $250) 250.0 250.0
6.5% notes due 2008 (effective interest rate of 6.6%)
(authorized, $150) 150.0
6.6% notes due 2008 (effective interest rate of 6.7%)
(authorized, $200) 200.0
8.4% notes due 2012 (effective interest rate of 8.6%)
(authorized, $100) 100.0 100.0
7.0% notes due 2018 (effective interest rate of 7.1%)
(authorized, $150) 150.0
8.9% notes due 1998 150.0
Subordinated:
7.3% debentures due 2023 (effective interest rate of 7.3%)
(authorized, $250) 250.0 250.0
Commercial Paper (weighted average yield 5.9% and 6.1%) 500.0 675.0
Bank revolving credit due 2001 (effective interest rate of
5.5% and 6.2%) 235.0 400.0
Mortgage notes at 11%, due 2013 157.5 389.2
Revolving credit facility due 2002 (effective interest
rate 6.2%) 113.0 118.0
Other senior debt (effective interest rates approximate 8.1%
and 8.2%) 72.3 75.2
Diamond Offshore Drilling, Inc.:
3.8% convertible subordinated notes due 2007 (effective
interest rate of 3.9%) (authorized, $400)(d) 400.0 400.0
Other senior debt, principally mortgages (effective interest
rates approximate 8.4% and 9.4%) 124.6 58.5
- ------------------------------------------------------------------------------------------------
6,027.4 5,808.7
Less unamortized discount 60.7 56.1
- ------------------------------------------------------------------------------------------------
Long-term debt, less unamortized discount $5,966.7 $5,752.6
================================================================================================
</TABLE>
98
(a) Redeemable in whole or in part at June 1, 2003 at 103.8%, and decreasing
percentages thereafter.
(b) Redeemable in whole or in part at October 15, 2003 at 102.4%, and
decreasing percentages thereafter.
(c) The notes are exchangeable into 15.376 shares of Diamond Offshore's common
stock per one thousand dollar principal amount of notes, at a price of
$65.04 per share. Redeemable in whole or in part at September 15, 2002 at
101.6%, and decreasing percentages thereafter.
(d) The notes are convertible into 24.691 shares of Diamond Offshore's common
stock per one thousand dollar principal amount of notes, at a price of
$40.50 per share. Redeemable in whole or in part at February 22, 2001 at
102.1%, and decreasing percentages thereafter.
CNA maintains a revolving credit facility that expires in May 2001. The amount
available is reduced by CNA's outstanding commercial paper. As of December 31,
1998, there was $60.0 of unused borrowing capacity under the facility. The
interest rate on the bank loans is based on the London Interbank Offered Rate
("LIBOR"), plus 16 basis points. Additionally, there is a facility fee of 9
basis points per annum. The average interest rate on the bank loans under the
credit facility at December 31, 1998 and 1997, respectively, was 5.5% and
6.2%.
The commercial paper borrowings are classified as long-term as the program is
fully supported by the committed credit facility. The average interest rate on
commercial paper was 5.9% and 6.1% at December 31, 1998 and 1997,
respectively.
To offset the variable rate characteristics of the facility, CNA entered into
interest rate swap agreements with several banks having a total notional
principal amount at December 31, 1998 and 1997 of $650.0 and $950.0,
respectively, which terminate from May 2000 to December 2000. These agreements
provide that CNA pay interest at a fixed rate, averaging 6.1% and 6.2% at
December 31, 1998 and 1997, respectively, in exchange for the receipt of
interest at the three month LIBOR rate. The effect of these interest rate
swaps was to increase interest expense by approximately $2.0 and $4.0 for the
years ended December 31, 1998 and 1997, respectively.
The weighted average interest rate (interest and facility fees) on the
combined revolving credit facility, commercial paper borrowings and interest
rate swaps was 6.4% at December 31, 1998 and 1997.
On January 8, 1998, CNA issued $150.0 principal amount of 6.5% senior notes,
due January 15, 2008, and $150.0 principal amount of 7.0% senior notes, due
January 15, 2018. The net proceeds were used to repay a portion of CNA's
revolving credit facility.
On April 15, 1998, CNA issued $500.0 principal amount of 6.5% senior notes due
April 15, 2005. The net proceeds were used to prepay a portion of the secured
mortgage notes, pay down a portion of the existing bank debt outstanding under
CNA's revolving credit facility, provide refinancing of senior notes and
provide funds for acquisitions.
On December 14, 1998, CNA issued $200.0 principal amount of 6.6% senior notes
due December 15, 2008. The net proceeds were used to enhance the capital of
Continental Casualty Company.
The aggregate of long-term debt maturing in each of the next five years is
approximately as follows: $130.1 in 1999, $3.2 in 2000, $743.6 in 2001, $128.7
in 2002 and $402.9 in 2003. The Company paid interest expenses of
approximately $322.0, $325.1 and $315.3 for the years ended December 31, 1998,
1997 and 1996, respectively.
Payment of dividends by insurance subsidiaries of CNA without prior regulatory
approval is limited to certain formula-derived amounts. At December 31, 1998,
approximately $5,103.1 of retained earnings was not available for dividends.
Note 10. 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 $151.3, $127.2 and $128.6 for the years
ended December 31, 1998, 1997 and 1996, 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 1998. At December 31, 1998 future aggregate minimum rental
payments approximated $597.4.
99
Note 11. Shareholders' Equity 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 (114,539,080, 115,000,000 and 116,161,000 for the
years ended December 31, 1998, 1997 and 1996, respectively).
The components of accumulated other comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
Accumulated
Unrealized Other
Gains Minimum Comprehensive
(Losses) On Foreign Pension Income
Investments Currency Liability Income (Loss)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 772.3 $ 20.8 $ 793.1
Unrealized holding losses, net
of tax of $138.8 (219.0) (219.0)
Adjustment for items included in
net income, net of tax of $233.0 (350.5) (350.5)
Foreign currency translation
adjustment, net of tax of $.2 10.0 10.0
- ------------------------------------------------------------------------------
Balance, December 31, 1996 202.8 30.8 233.6
Unrealized holding gains, net
of tax of $174.9 343.6 343.6
Adjustment for items included in
net income, net of tax of $67.2 (102.7) (102.7)
Foreign currency translation
adjustment, net of tax of $4.1 14.4 14.4
- ------------------------------------------------------------------------------
Balance, December 31, 1997 443.7 45.2 488.9
Unrealized holding gains, net
of tax of $323.0 509.8 509.8
Foreign currency translation
adjustment, net of tax of $.6 6.0 6.0
Adjustment for items included in
net income, net of tax of $77.9
and $4.5 (114.7) 8.4 (106.3)
Minimum pension liability adjustment,
net of tax of $3.1 $(5.6) (5.6)
- ------------------------------------------------------------------------------
Balance, December 31, 1998 $ 838.8 $59.6 $(5.6) $ 892.8
==============================================================================
</TABLE>
Note 12. Restructuring and Other Related Charges -
CNA finalized and approved a restructuring plan (the "Plan") in August 1998.
In connection with the Plan, CNA incurred various expenses that were recorded
in the third and fourth quarters of 1998. These restructuring and other
related charges primarily related to the following activities: planned
reductions in the workforce; the consolidation of certain processing centers;
the exiting of certain businesses and facilities; the termination of related
lease obligations; and the write-off of certain assets related to these
activities. The Plan contemplates a gross reduction in workforce of 4,500
employees, resulting in a planned net reduction of approximately 2,400
employees. According to the Plan, the various activities and workforce
reductions should be completed by the end of 1999.
100
The restructuring and other related charges were comprised of the following
costs and expenses: (a) costs and benefits related to planned employee
terminations of $98.0, of which $53.0 related to severance and outplacement
costs and $24.0 related to other employee transition related costs and $21.0
related to benefit curtailment losses; (b) writedown of certain assets to
their fair value of $74.0, of which $59.0 related to a writedown of an
intangible asset, and $15.0 of abandoned leasehold improvements and other
related fixed assets associated with leases that were terminated as part of
the restructuring plan; (c) lease termination costs of $42.0 and (d) losses
incurred on the exiting of certain businesses of $32.0.
CNA recorded $220.0 of these restructuring and other related charges in the
third quarter of 1998. Other charges such as parallel processing costs,
relocation costs, and retention bonuses, did not qualify for accrual at the
end of the third quarter under generally accepted accounting principles and
are being expensed as incurred. In the fourth quarter of 1998, $26.0 of these
charges were recorded.
The 1998 restructuring and other related charges for CNA's property and
casualty Agency Market Operations totaled approximately $96.0. The charges
included employee severance and outplacement costs of $34.0 related to the
planned net reduction in the workforce of approximately 1,200 employees.
Approximately $29.0 of lease termination costs were also incurred in
connection with the consolidation of four regional offices into two zone
offices and a reduction of the number of claim processing offices from 24 to
8. The Agency Market Operations charges also included benefit plan costs of
$12.0, parallel processing charges of $7.0, and $5.0 of other fixed asset
writedowns. Other charges, including travel, relocation and other transition
related activity, which were expensed as incurred, totaled approximately $9.0.
Through December 31, 1998, approximately 364 Agency Market Operations
employees, the majority of whom were loss adjusters and office support staff,
had been released at a cost of $8.0.
The 1998 restructuring and other related charges for CNA's property and
casualty Risk Management business totaled approximately $88.0. The charges
included lease termination costs associated with the consolidation of claim
offices in 36 market territories that totaled approximately $8.0. In addition,
employee severance and outplacement costs relating to the net reduction in
workforce of approximately 200 employees were approximately $10.0 and the
writedown of fixed and intangible assets totaled approximately $64.0. Parallel
processing and other charges totaled approximately $6.0.
The charges related to fixed and intangible assets were primarily due to a
writedown of an intangible asset (goodwill) related to a business that had
been acquired several years earlier. As part of CNA's periodic reviews of
asset recoverability and as a result of several adverse events, CNA concluded,
based on its discounted cash flow analysis completed in the third quarter of
1998, that a $59.0 write-off was necessary. The adverse events contributing to
this conclusion included operating losses from the business, the loss of
several significant customers whose business volume with this operation
constituted a large portion of the revenue base, and substantial changes in
the overall market demand for the services offered by this operation which, in
turn, had negative effects on the prospects for achieving the profitability
levels necessary to recover the intangible asset.
Through December 31, 1998, approximately 152 Risk Management employees had
been released at a cost of $2.0. The majority of the employees were adjusters
and office support staff.
The 1998 restructuring and other related charges for Group Operations totaled
approximately $39.0. The charges included approximately $29.0 of costs related
to CNA's decision to exit the Employer Health and Affinity lines of business.
These costs represent CNA's estimate of losses in connection with fulfilling
the remaining obligations under contracts related to these lines. Earned
premiums for these lines of businesses approximated $400.0 in 1998. The 1998
charges also included employee severance and outplacement costs of
approximately $7.0 related to the planned net reduction in workforce of
approximately 400 employees. Lease termination costs and other charges totaled
$3.0.
Through December 31, 1998, approximately 56 Group Operations employees had
been released at a cost of $1.0. The majority of the employees were claims and
sales support staff.
For CNA's other segments, restructuring and other related charges totaled
approximately $23.0 for 1998. Charges related primarily to the closing of
leased
101
facilities were $3.0 and employee severance and outplacement costs related to
planned net reductions of 600 employees in the current workforce and benefit
costs associated with those reductions were $13.0. In addition, there were
charges of $4.0 related to the writedown of certain assets and $3.0 related to
the exiting of certain businesses.
Through December 31, 1998, approximately 270 employees of these other
segments, most of whom were underwriters and office support staff, had been
released at a cost of $3.0.
The following table sets forth the major categories of restructuring and other
related charges that were initially accrued and recorded upon the finalization
and approval of the Plan and the activity in the accrual for such costs during
1998:
<TABLE>
<CAPTION>
Employee
Termination Lease
and Related Writedown Termination Business
Benefit Costs of Assets Costs Exit Costs Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial charge recorded in third
quarter of 1998 $ 72.0 $ 74.0 $42.0 $32.0 $220.0
Less payments charged against
liability (14.0) (14.0)
Less costs that do not use cash (21.0) (74.0) (95.0)
- ------------------------------------------------------------------------------------------------
Accrued costs at December 31, 1998 $ 37.0 $42.0 $32.0 $111.0
================================================================================================
</TABLE>
Note 13. Benefit Plans -
Pension Plans - The Company has 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.
Effective January 1, 1998, one of the Company's retirement plans was converted
to a cash balance plan. A cash balance plan is a form of non-contributory,
defined benefit pension plan in which the value of each participant's benefit
is expressed as a nominal cash balance account established in the name of such
participant. The cash balance in each account is increased annually based on a
specified percentage of annual earnings (based on the participant's age) and a
specified interest rate (which is established annually for all participants).
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 CNA, in its Separate Account business.
Other Postretirement Benefit Plans - The Company has 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.
102
In 1998, CNA amended the Continental postretirement plan changing the benefits
available to Continental retirees to be equivalent to the benefits available
to CNA retirees. As a result of this amendment, CNA's postretirement benefit
obligation was reduced by $99.0.
As a result of CNA's restructuring activities discussed in Note 12, CNA
recorded curtailment charges of approximately $19.0 related to its pension and
postretirement plans. Additionally these curtailments resulted in the
reduction of the pension and postretirement benefit obligations of $88.0 and
$34.0, respectively.
The weighted average rates used in the actuarial assumptions were:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
---------------------------------------- -----------------------------
Year Ended December 31 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.8% 7.0% to 7.3% 7.5% 6.8% 7.0% to 7.3% 7.5%
Expected return on
plan assets 7.0% 7.5% 7.0% to 8.5%
Rate of compensation
increase 5.5% to 5.7% 5.5% to 5.7% 5.7% to 5.8%
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net periodic benefit cost components:
Pension Benefits Other Postretirement Benefits
------------------------------------ -----------------------------
Year Ended December 31 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits
earned $ 72.6 $ 67.3 $ 69.0 $14.7 $14.5 $17.0
Interest cost 175.7 167.4 155.7 37.7 37.7 37.1
Expected return on plan
assets (141.9) (142.0) (131.8)
Amortization of
unrecognized net asset 3.6 .6 1.1
Amortization of
unrecognized net loss
(gain) 7.4 8.5 9.1 (5.9) (4.4) (2.7)
Amortization of
unrecognized prior
service cost 14.2 13.5 13.0 (5.0) .7 .9
Curtailment loss 17.0 2.0
- ------------------------------------------------------------------------------------------------
Net periodic benefit
cost $148.6 $ 115.3 $ 116.1 $43.5 $48.5 $52.3
================================================================================================
</TABLE>
For measurement purposes, a trend rate for covered costs of 7.8% to 8.0% pre-
65 and 7.0% post-65, was used. These trend rates are expected to decrease
gradually to 4.8% at rates from 0.5% to 0.3% per annum. The health care cost
trend rate assumption has a significant effect on the amount of the benefit
obligation and periodic cost reported. An increase (or decrease) in the
assumed health care cost trend rate of 1% would increase (or decrease) the
postretirement benefit obligation as of December 31, 1998 by $26.8 (or $23.7)
and the aggregate net periodic postretirement cost for 1998 by $4.3 (or $3.7).
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with an accumulated benefit obligation
in excess of plan assets were $2,323.3, $1,983.7 and $1,746.1, respectively,
at December 31, 1998 and $2,170.6, $1,747.6 and $1,609.6, respectively, at
December 31, 1997.
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 makes matching contributions up to
specified percentages of employees' contributions. The Company's contributions
to these plans amounted to $34.4, $29.1 and $28.6 for the years ended December
31, 1998, 1997 and 1996, respectively.
103
The following provides a reconciliation of benefit obligations:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------- -----------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1 $2,512.8 $2,230.2 $ 521.9 $ 494.7
Service cost 72.6 67.3 14.7 14.5
Interest cost 175.7 167.4 37.7 37.7
Plan participants' contribution 8.6 5.6
Amendments .5 8.9 (102.7) (10.7)
Actuarial loss 142.1 162.4 64.2 11.4
Benefits paid from plan assets (138.3) (123.4) (44.6) (31.3)
Curtailment (88.0) (34.0)
- ------------------------------------------------------------------------------
Benefit obligation at December 31 2,677.4 2,512.8 465.8 521.9
- ------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 1,966.1 1,816.6
Actual return on plan assets 161.9 166.9
Company contributions 118.1 106.0 36.0 26.7
Plan participants' contribution 8.6 5.6
Benefits paid from plan assets (138.3) (123.4) (44.6) (32.3)
- ------------------------------------------------------------------------------
Fair value of plan assets at
December 31 2,107.8 1,966.1
- ------------------------------------------------------------------------------
Benefit obligation over plan assets (569.6) (546.7) (465.8) (521.9)
Unrecognized net actuarial loss 360.6 331.9 (38.2) (77.9)
Unrecognized prior service cost
(benefit) 82.7 113.7 (107.5) (7.7)
Unrecognized net obligation (asset) 11.8 15.3
- ------------------------------------------------------------------------------
Accrued benefit cost $ (114.5) $ (85.8) $(611.5) $(607.5)
==============================================================================
Amounts recognized in the statement
of financial position consist of:
Prepaid benefit cost $ 94.5 $ 109.2
Accrued benefit liability (218.0) (196.6) $(611.5) $(607.5)
Intangible asset .3 1.6
Accumulated other comprehensive income 8.7
- ------------------------------------------------------------------------------
Net amount recognized $ (114.5) $ (85.8) $(611.5) $(607.5)
==============================================================================
</TABLE>
104
Note 14. Gains on Issuance of Subsidiaries' Stock -
In September 1997, a subsidiary of CNA merged with Capsure Holdings Corp. to
form a new company, CNA Surety Corporation. CNA owns approximately 61% of the
outstanding shares on a fully diluted basis. As a result of this transaction,
the Company recognized a gain of $95.2 ($52.2 after provision for deferred
taxes and minority interest) from issuance of its subsidiary's common stock.
In April 1997, Diamond Offshore Drilling Inc., ("Diamond Offshore") completed
a public offering of 2.5 million shares of its common stock for net proceeds
of approximately $82.3. Diamond Offshore used these funds to acquire the
Polyconfidence, a semisubmersible accommodation vessel for approximately
$81.0. As a result of the public offering, the Company's ownership interest in
Diamond Offshore declined to 50.3% and the Company recorded a pre-tax gain of
approximately $29.1 ($18.9 after provision for deferred taxes).
On April 29, 1996, Diamond Offshore, then a 70% owned subsidiary, acquired
Arethusa (Off-Shore) Limited ("Arethusa"). Diamond Offshore issued 35.8
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 year ended December 31, 1996, assuming the
transaction had occurred at the beginning of that year, 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%.
Note 15. Quarterly Financial Data (Unaudited) -
<TABLE>
<CAPTION>
1998 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $5,056.5 $5,951.9 $5,404.8 $4,795.1
Net (loss) income (315.8) 617.1 247.2 (83.7)
Per share (2.78) 5.38 2.15 (.73)
1997 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------
Total revenues $5,339.2 $5,111.4 $4,749.1 $4,939.1
Net income 292.9 197.6 63.8 239.3
Per share 2.55 1.72 .55 2.08
- ------------------------------------------------------------------------------
</TABLE>
105
Note 16. Reinsurance -
The effects of reinsurance on earned premiums are as follows:
<TABLE>
<CAPTION>
%
Direct Assumed Ceded Net Assumed
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Property and casualty $ 8,327.0 $1,549.0 $ 897.0 $ 8,979.0 17.3%
Accident and health 3,579.0 181.0 261.0 3,499.0 5.2
Life 1,014.0 159.0 281.0 892.0 17.8
- ------------------------------------------------------------------------------
Total $12,920.0 $1,889.0 $1,439.0 $13,370.0 14.1%
==============================================================================
Year Ended December 31, 1997:
Property and casualty $ 8,528.0 $1,101.0 $ 612.0 $ 9,017.0 12.2%
Accident and health 3,599.0 111.0 154.0 3,556.0 3.1
Life 908.0 128.0 131.0 905.0 14.1
- ------------------------------------------------------------------------------
Total $13,035.0 $1,340.0 $ 897.0 $13,478.0 9.9%
==============================================================================
Year Ended December 31, 1996:
Property and casualty $ 9,003.0 $1,123.0 $ 989.0 $ 9,137.0 12.3%
Accident and health 3,570.0 187.0 176.0 3,581.0 5.2
Life 736.0 121.0 55.0 802.0 15.1
- ------------------------------------------------------------------------------
Total $13,309.0 $1,431.0 $1,220.0 $13,520.0 10.6%
==============================================================================
</TABLE>
Written premiums were $13,823.0, $13,620.0 and $13,938.0 at December 31, 1998,
1997 and 1996, 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 CNA's
states of domicile, CNA receives collateral, primarily in the form of bank
letters of credit. Such collateral totaled approximately $774.0 and $857.0 at
December 31, 1998 and 1997, respectively. CNA's largest recoverable from a
single reinsurer, including prepaid reinsurance premiums, is with Lloyds of
London and approximated $416.0 and $451.0 at December 31, 1998 and 1997,
respectively.
Insurance claims and policyholders' benefits expense is net of reinsurance
recoveries of $994.0, $1,309.0 and $1,220.0 for the years ended December 31,
1998, 1997 and 1996, respectively.
In the above table, life premiums are primarily from long duration contracts,
property and casualty premiums are from short duration contracts, and accident
and health premiums are primarily from short duration contracts.
Note 17. Legal Proceedings and Contingent Liabilities -
INSURANCE RELATED
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 attor-
106
neys (collectively referred to as "Settling Parties") have reached a Global
Settlement Agreement 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 Agreement does not obtain final court
approval.
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 to 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 to the decision on the Global Settlement Agreement were denied. Two
petitions for certiorari were filed in the Supreme Court as respects the
Global Settlement Agreement. On June 27, 1997, the Supreme Court granted these
petitions, vacated the Fifth Circuit's judgment as respects to the Global
Settlement Agreement, and remanded the matter to the Fifth Circuit for
reconsideration in light of the Supreme Court's decision in Amchem Products
Co. v. Windsor.
On January 27, 1998, a panel of the United States Fifth Circuit Court of
Appeals again approved the Global Settlement Agreement by a 2 to 1 vote. Two
sets of objectors filed petitions for certiorari, which were docketed on April
16 and 17, 1998, by the United States Supreme Court. On June 22, 1998, the
Supreme Court granted the petition for certiorari filed by one set of
Objectors. The Supreme Court heard oral arguments on December 8, 1998. No
opinion has yet been released.
No further appeal was filed with respect to the Trilateral Agreement;
therefore, court approval of the Trilateral Agreement has become final.
Settlement Agreements - On April 9, 1993, Casualty and Fibreboard entered into
an agreement pursuant to which, among other things, the parties agreed to use
their best efforts to negotiate and finalize a global class action settlement
with asbestos-related bodily injury and death claimants.
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. (As
used in this note, "present" claims generally refers to asbestos claims filed
against Fibreboard, on or before August 27, 1993.) An additional $10.0 is to
be contributed to the fund by Fibreboard. As indicated above, the Global
Settlement Agreement has been approved by the Fifth Circuit a second time, but
the Supreme Court granted a petition for certiorari and is currently reviewing
the Fifth Circuit decision.
On October 12, 1993, Casualty, Pacific Indemnity and Fibreboard entered into
the Trilateral Agreement to settle the coverage litigation to operate in the
event that the Global Settlement Agreement is disapproved. The Trilateral
Agreement calls for payment to Fibreboard by Casualty and Pacific Indemnity of
an aggregate $2,000.0, of which Casualty's portion is approximately $1,460.0,
to resolve all claims by Fibreboard and all future and certain present
asbestos claims arising under the policy issued to Fibreboard by Casualty.
Under either the Global Settlement Agreement or the Trilateral Agreement,
Casualty is also obligated to pay prior settlements of present asbestos
claims. As a result of the final approval of the Trilateral Agreement, such
obligation has become final. Through December 31, 1998, Casualty, Fibreboard
and plaintiff attorneys had reached settlements with respect to approximately
134,000 claims, for an estimated settlement amount of approximately $1,630.0
plus any applicable interest. Final court approval of the Trilateral Agreement
obligated Casualty to pay under these settlements. Approximately $1,690.0
(including interest of $185.0) was paid through December 31, 1998. Such
payments have been partially recovered from Pacific Indemnity. Casualty may
negotiate other agreements for unsettled claims.
Final court approval of the Trilateral Agreement and its implementation has
substantially resolved Casualty's
107
exposure with respect to asbestos claims involving Fibreboard. While there
does exist the possibility of further adverse developments with respect to
Fibreboard claims, management does not anticipate subsequent reserve
adjustments, if any, to materially affect the equity of the Company.
Management will continue to monitor the potential liabilities with respect to
Fibreboard asbestos claims and will make adjustments to claim reserves if
warranted.
Tobacco Litigation - Several of CNA's primary property/casualty subsidiaries
have been named as defendants as part of a "direct action" lawsuit, Richard P.
Ieyoub v. The American Tobacco Company, et al., filed by the Attorney General
for the state of Louisiana, in state court, Calcasieu Parish, Louisiana. In
that suit, filed against certain tobacco manufacturers and distributors (the
"Tobacco Defendants") and over 100 insurance companies, the state of Louisiana
seeks to recover medical expenses allegedly incurred by the state as a result
of tobacco-related illnesses.
The original suit was filed on March 13, 1996, against the Tobacco Defendants
only. The insurance companies were added to the suit in March 1997 under a
"direct action" statute in Louisiana. Under the direct action statute, the
Louisiana Attorney General is pursuing liability claims against the Tobacco
Defendants and their insurers in the same suit, even though none of the
Tobacco Defendants has made a claim for insurance coverage.
In June of 1997, the above case was removed to the United States District
Court for the Western District of Louisiana. The district court's decision
denying a motion to remand the case to the state court is currently on appeal
to the United States Fifth Circuit Court of Appeals. During the pending
appeal, all proceedings in state court and in the federal district court are
stayed.
On November 23 1998, the cigarette manufacturers and the attorneys general for
46 states (including Louisiana) and six other governmental entities reached an
agreement regarding the resolution of their Medicaid reimbursement claims. The
cigarette manufacturers have agreed to make annual payments in perpetuity,
including a total of $206,000.0 through 2025. In exchange, the states have
agreed to release their claims against the cigarette manufacturers and have
further agreed to release any claims that they may have against cigarette
distributors, retailers, component part manufacturers and their insurers. None
of these latter entities are parties to the settlement agreement. The Attorney
General of Louisiana and the defendants in the Ieyoub litigation are
implementing procedures to secure dismissal of the Ieyoub litigation and
resolution of the Attorney General's claims. Thus, the litigation may be
dismissed with prejudice in the near future.
However, in other states, third parties have challenged the November 1998
settlement agreement, and the Medicaid reimbursement lawsuits in those states
may not be resolved for some time. In addition, the November 1998 settlement
does not preclude the cigarette manufacturers, or other entities named as
defendants in the various Medicaid reimbursement lawsuits, from seeking
coverage under the insurance policies issued to those defendants. Because of
the uncertainties inherent in assessing the risk of liability at this
juncture, management is unable to make a meaningful estimate of the amount or
range of any loss that could result from an unfavorable outcome of the pending
litigation. However, management believes that the ultimate outcome of the
pending litigation should not materially affect the results of operations or
equity of CNA.
NON-INSURANCE
Tobacco Litigation - Lawsuits continue to be filed with increasing frequency
against Lorillard and other manufacturers of tobacco products. Since January
1, 1998, approximately 400 product liability cases have been filed and served
in United States courts against U.S. cigarette manufacturers. Lorillard has
been named as a defendant in approximately 260 of these actions. Cases also
have been filed with greater frequency against the Company. A total of
approximately 900 product liability cases are pending against U.S. cigarette
manufacturers; of these, Lorillard is a defendant in approximately 520.
Tobacco litigation includes various types of claims. In these actions,
plaintiffs claim substantial compensatory, statutory and punitive damages in
amounts ranging into the billions of dollars. These claims are based on a
number of legal theories including, among other things, theories of
negligence, fraud, misrepresentation, strict liability, breach of warranty,
enterprise liability, civil conspiracy, intentional infliction of harm,
violation of consumer protection statutes, and failure to warn of the
allegedly harmful and/or addictive nature of tobacco products.
Some cases have been brought by individual plaintiffs who allege cancer and/or
other health effects claimed
108
to have resulted from an individual's use of cigarettes, addiction to smoking,
or exposure to environmental tobacco smoke ("Conventional Product Liability
Cases"). Approximately 340 such actions are pending against Lorillard. In
other cases, plaintiffs have brought claims as class actions on behalf of
large numbers of individuals for damages allegedly cause by smoking ("Class
Actions"). Approximately 60 such cases are pending against Lorillard. In some
cases, plaintiffs are governmental entities or others, such as labor unions,
private companies, Indian Tribes, or private citizens suing on behalf of
taxpayers, who seek reimbursement of health care costs allegedly incurred as a
result of smoking, as well as other alleged damages ("Reimbursement Cases").
Approximately 100 such cases are pending, excluding some of the actions
brought by certain governmental entities that have not been formally concluded
but are subject to the November 23, 1998 "Master Settlement Agreement"
discussed below. There also are claims for contribution and/or indemnity in
relation to asbestos claims filed by asbestos manufacturers or the insurers of
asbestos manufacturers ("Claims for Contribution"). Approximately nine such
actions are pending against Lorillard.
In addition to the above, claims have been brought against Lorillard seeking
damages resulting from alleged exposure to asbestos fibers which were
incorporated, for a limited period of time, ending more than forty years ago,
into filter material used in one brand of cigarettes manufactured by Lorillard
("Filter Cases"); there has not been a noticeable increase in the filing of
these suits during the past few years, and approximately 20 such actions are
pending.
SETTLEMENT OF STATE REIMBURSEMENT LITIGATION
On November 23, 1998, Lorillard, Philip Morris Incorporated, Brown &
Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the
"Original Participating Manufacturers") entered into a Master Settlement
Agreement (the "Master Settlement Agreement") with 46 states, the District of
Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands,
American Samoa and the Northern Marianas (collectively, the "Settling States")
to settle the asserted and unasserted health care cost recovery and certain
other claims of those states. The Original Participating Manufacturers had
previously settled similar claims brought by Mississippi, Florida, Texas, and
Minnesota (together with the Master Settlement Agreement, the "State
Settlement Agreements") and an environmental tobacco smoke smoking and health
class action brought on behalf of airline flight attendants.
The Master Settlement Agreement is subject to final judicial approval in each
of the Settling States. In the Company's opinion, approximately 35 of the
Settling States have achieved final judicial approval. Some suits have been
filed contesting various aspects of the Master Settlement Agreement. Certain
other actions have been filed in which plaintiffs seek to intervene in cases
governed by the Master Settlement Agreement in order to achieve a different
distribution of the funds allocated by the Master Settlement Agreement to the
respective states. If a Settling State does not obtain final judicial approval
by December 31, 2001, the Master Settlement Agreement will be terminated with
respect to such state. The Master Settlement Agreement, however, will remain
in effect as to each Settling State in which final judicial approval is
obtained. The Master Settlement Agreement provides that it is not an admission
or concession or evidence of any liability or wrongdoing on the part of any
party, and was entered into by the Original Participating Manufacturers to
avoid the further expense, inconvenience, burden and uncertainty of
litigation.
Lorillard recorded pre-tax charges of $579.0 and $198.8 for the years ended
December 31, 1998 and 1997, respectively, to accrue its share of all fixed and
determinable portions of its obligations under the tobacco settlements. The
State Settlement Agreements require that the domestic tobacco industry make
substantial annual payments in the following amounts, subject to adjustment
for several factors, including inflation, market share and industry volume:
1999, $4,100.0 (of which $2,400.0 related to the Master Settlement Agreement
has already been paid); 2000, $9,100.0; 2001, $9,900.0; 2002, $11,300.0; 2003,
$10,900.0; 2004 through 2007, $8,400.0; and thereafter, $9,400.0. In addition,
the domestic tobacco industry is required to pay settling plaintiffs'
attorneys' fees, subject to an annual cap of $500.0, as well as additional
amounts as follows: 1999, $450.0; 2000, $416.0; and 2001 through 2003, $250.0.
These payment obligations are the several and not joint obligations of each
settling defendant. Lorillard's portion of the future adjusted payments and
legal fees, which is not currently estimable, will be based on its share of
domestic cigarette shipments in the year preceding that in which the payment
is made. Lorillard's
109
share in 1998 was approximately 9.3%.
The State Settlement Agreements also include provisions relating to
advertising and marketing restrictions, public disclosure of certain industry
documents, limitations on challenges to tobacco control and underage use laws
and other provisions.
The Original Participating Manufacturers have also, as part of the Master
Settlement Agreement, committed to work cooperatively with the tobacco grower
community to address concerns about the potential adverse economic impact on
that community. On January 21, 1999, the Original Participating Manufacturers
reached an agreement in principle to establish a $5,150.0 trust fund payable
over 12 years to compensate the tobacco growing communities in 11 states.
Payments to the trust fund are to be allocated among the Original
Participating Manufacturers according to their relative market share of
domestic cigarette shipments, except that Philip Morris will pay more than its
market share in the first year of the agreement but will have its payment
obligations reduced in years 11 and 12 to make up for the overpayment.
Lorillard's payments under the agreement will total approximately $515.0,
including a payment of $16.0 in 1999. All payments will be adjusted for
inflation, changes in the unit volume of domestic cigarette shipments, and for
the effect of any new increases in state or federal excise taxes on tobacco
products which benefits the growing community.
The Company believes that the State Settlement Agreements will materially
adversely affect its cash flows and operating income in future years. The
degree of the adverse impact will depend, among other things, on the rates of
decline in United States cigarette sales in the full price and discount
segments, Lorillard's share of the domestic full price and discount cigarette
segments, and the effect of any resulting cost advantage of manufacturers not
subject to the State Settlement Agreements. As of January 22, 1999,
manufacturers representing almost all domestic shipments in 1998 had agreed to
become subject to the terms of the Master Settlement Agreement.
CONVENTIONAL PRODUCT LIABILITY CASES -
There are approximately 675 cases filed by individual plaintiffs against
manufacturers of tobacco products pending in the United States federal and
state courts in which individuals allege they or their decedents have been
injured due to smoking cigarettes, due to exposure to environmental tobacco
smoke, or due to nicotine dependence. Lorillard is a defendant in
approximately 340 of these cases. The Company is a defendant in 99 of these
cases, although nine of them have not been served. Eighty-seven of the cases
are pending in West Virginia and 83 of the 87 cases were filed in two groups
of 18 and 65 cases each.
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 February 9 and 10, 1999, a jury in the Superior Court of San Francisco
County, California, returned verdicts in favor of an individual plaintiff and
awarded $1.5 in actual damages and $50.0 in punitive damages against the only
defendant in the action, Philip Morris Incorporated. The Company understands
that Philip Morris Incorporated will seek a reduction of the amounts awarded
to plaintiff and will notice an appeal from the final judgment entered by the
trial court reflecting the verdict. The Company cannot predict whether this
verdict will lead to additional litigation being brought in California or
elsewhere, or whether Lorillard or the Company will be part of this
litigation, if any is to be filed.
On March 18, 1998, a jury in the case of Dunn v. RJR Nabisco Holdings
Corporation, et al. (Superior Court, Delaware County, Indiana), returned a
verdict in favor of defendants, which included the Company and Lorillard
Tobacco Company. The court entered a final judgment in favor of the defendants
that was consistent with the jury's verdict. Plaintiffs did not notice an
appeal from the final judgment.
During 1998, a jury returned a verdict in favor of the plaintiff and against
Brown & Williamson Tobacco Corporation in a smoking and health trial in which
Lorillard was not a party, Widdick v. Brown & Williamson Tobacco Corporation
(verdict returned June 10, 1998) (Circuit Court, Duval County, Florida). The
jury awarded plaintiff a total of $0.6 in actual damages and $0.5 in punitive
damages. The court entered final judgment in favor of plaintiff that was
consistent with the jury's verdict. The First District of the Florida Court of
Appeal has directed the Circuit Court of
110
Duval County to vacate its final judgment and to transfer the case either to
the Circuit Court of Broward County, Florida, or the Circuit Court of Palm
Beach County, Florida, or a new trial.
CLASS ACTIONS - There are 80 purported class actions pending against cigarette
manufacturers and other defendants, including the Company. Lorillard is a
defendant in 60 of the 80 cases seeking class certification. The Company is a
defendant in 24 of the purported class actions. Many of the purported class
actions are in the pre-trial, discovery stage. Most of the suits seek class
certification on behalf of residents of the states in which the cases have
been filed, although some suits seek class certification on behalf of
residents of multiple states. All but one of the purported class actions seek
class certification on behalf of individuals who smoked cigarettes or were
exposed to environmental tobacco smoke. One case seeks class certification on
behalf of individuals who have paid insurance premiums to Blue Cross and Blue
Shield organizations.
Theories of liability asserted in the purported class actions include a broad
range of product liability theories, including those based on consumer
protection statutes and fraud and misrepresentation. Plaintiffs seek damages
in each case that range from unspecified amounts to the billions of dollars.
Most plaintiffs seek punitive damages and some seek treble damages. Plaintiffs
in many of the cases seek medical monitoring. Plaintiffs in several of the
purported class actions are represented by a well-funded and coordinated
consortium of over 60 law firms from throughout the United States.
Trial began during July 1998 in the case of Engle v. R.J. Reynolds Tobacco
Co., et al. (Circuit Court, Dade County, Florida, May 5, 1994). Plaintiffs
have been granted class certification on behalf of Florida residents and
citizens, and survivors of such individuals, who allege injury or have died
from and medical conditions caused by their addiction to cigarettes containing
nicotine. Plaintiffs seek actual damages and punitive damages estimated to be
in the billions of dollars. Plaintiffs also seek equitable relief including,
but not limited to, a fund to enable Florida smokers' medical condition to be
monitored for future health care costs, attorneys' fees, and court costs.
The case is to be tried in three phases, although the court has stated that it
may modify its trial plan order. In the first phase, which is proceeding,
plaintiffs have submitted evidence as to certain issues common to the class
and their causes of action. At the conclusion of the first phase, the jury
will not award any compensatory or punitive damages. However, the jury is
expected to decide whether there is a factual basis for awarding punitive
damages in subsequent phases.
The next two phases of the trial will proceed only if plaintiffs prevail
during the first phase. In the second phase, the jury will determine liability
and compensatory damages as to each named class representative in the case. If
the jury awards punitive damages to the class representatives, it will also be
asked to set a percentage, or ratio, of punitive damages to be awarded to
absent class members in the third phase.
The third and final phase of the trial will address absent class members'
claims, which include issues of specific causation and damages. This portion
of the trial will be held before a separate jury.
On October 10, 1997, the parties to Broin v. Philip Morris Companies, Inc., et
al. (Circuit Court, Dade County, Florida, October 31, 1991), a class action
brought on behalf of flight attendants claiming injury as a result of exposure
to environmental tobacco smoke, executed a settlement agreement which was
approved by the court on February 3, 1998. The order approving the settlement
has been appealed. The settlement agreement requires Lorillard and three other
cigarette manufacturers jointly to pay $300.0 in three annual installments to
create and endow a research institute to study diseases associated with
cigarette smoke and to pay plaintiffs' attorney fees aggregating $49.0.
Lorillard's share is approximately $30.7 of the proposed settlement amount.
The plaintiff class members are permitted to file individual suits, but these
individuals may not seek punitive damages for injuries that arose prior to
January 15, 1997.
REIMBURSEMENT CASES - Suits brought by 46 states governments and six other
governmental entities are expected to be resolved by the Master Settlement
Agreement. In addition to these, approximately 100 other suits are pending,
comprised of approximately 75 union cases, and cases brought by Indian tribes,
private companies and foreign governments filing suit in U.S. courts, in which
plaintiffs seek recovery of funds expended by them to provide health care to
individuals with injuries or other health effects allegedly caused by
111
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. Plaintiffs seek damages in each case that
range from unspecified amounts to the billions of dollars. Most plaintiffs
seek punitive damages and some seek treble damages. Plaintiffs in many of the
cases seek medical monitoring. Lorillard is named as a defendant in most such
actions. The Company is named as a defendant in 12 of them.
The President of the United States stated in a State of the Union address on
January 19, 1999, that he had authorized the United States Justice Department
to initiate a reimbursement litigation lawsuit against United States cigarette
manufacturers. The Attorney General of the United States has subsequently
stated publicly that the Justice Department intends to pursue such litigation.
Such federal litigation would not be affected by the Master Settlement
Agreement. No such federal lawsuit has been filed to date.
State or Local Governmental Reimbursement Cases - The Master Settlement
Agreement will resolve the cases filed by 46 state governments and six other
governmental entities. Since January 1, 1997, cases brought by four state
governments, Florida, Minnesota, Mississippi and Texas, were settled in
separate agreements. Lorillard was a defendant in each of the 46 cases filed
by state governments and in the six cases brought by other governmental
entities, as well as in the four cases governed by the separate settlement
agreements. Eight local governments also have filed suit against cigarette
manufacturers, although the Master Settlement Agreement purportedly resolves
those actions. In addition to these suits, cases have been brought in U.S.
courts by the nations of Bolivia, Guatemala, Nicaragua, Panama, Thailand and
Venezuela. Lorillard is a defendant in some of these actions, although it does
not sell cigarettes outside the United States. The Company is named as a
defendant in the cases filed by Bolivia, Panama, Thailand and Venezuela.
Private Citizens Reimbursement Cases - There are six suits pending in which
plaintiffs are private citizens. Four of the suits have been filed by private
citizens on behalf of taxpayers of their respective states, although
governmental entities have filed reimbursement suits in two of the four
states. The Company is a defendant in two of the six pending private citizen
reimbursement cases. Lorillard is a defendant in each of the cases. Four of
the cases are in the pre-trial, discovery stage. Two of the matters are on
appeal from final judgments entered by the trial courts in favor of the
defendants.
Reimbursement Cases by Indian Tribes - Indian Tribes have filed nine
reimbursement suits in their tribal courts, three of which have been
dismissed. Lorillard is a defendant in each of the cases. The Company is not
named as a defendant in any of the five tribal suits filed to date. Each of
the pending cases is in the pre-trial, discovery stage.
Reimbursement Cases Filed By Private Companies - Private companies have filed
six suits against cigarette manufacturers. Three of the suits were brought by
various Blue Cross and/or Blue Shield entities, two of the cases have been
filed by self-insured employers that directly provide health care benefits to
employees and their families, while the sixth case is brought by a health
maintenance organization. Lorillard is a defendant in each of the six cases.
The Company is not named as a defendant in any of the actions filed to date by
private companies. Four of the six cases are in the pre-trial, discovery
stage. Courts have granted defendants' motions dismissing the remaining two
cases, and plaintiffs in both actions have noticed appeals.
Reimbursement Cases by Labor Unions - Labor unions have filed approximately 75
reimbursement suits in various states in federal or state courts. Lorillard is
named as a defendant in each of the suits filed to date by unions. The Company
is named as a defendant in three of the cases. Five of the approximately 75
cases are on appeal from final judgments entered in defendants' favor by the
trial courts. Each of the remaining cases is in the pre-trial, discovery
stage.
Trial is underway in Ironworkers Local Union No. 17 Insurance Fund, et al. v.
Philip Morris Incorporated et al., an action pending in federal court in Ohio,
in which plaintiffs are the trust funds of various Ohio unions. Prior to
trial, the court granted plaintiffs' motion for class certification on behalf
of approximately 100 such trust funds. Plaintiffs seek actual damages and
punitive damages estimated to be in the billions of dollars.
CONTRIBUTION CLAIMS - In addition to the foregoing cases, nine cases are
pending in which private companies seek recovery of funds expended by them to
individuals whose asbestos disease or illness was alleged to have been caused
in whole or in part by smoking-related illnesses. Lorillard is named as a
defendant in each action.
112
The Company is named as a defendant in four of the cases. Each of these cases
is in the pre-trial, discovery stage.
FILTER CASES - A number of 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 more than forty years ago, into the filter material used in one
of the brands of cigarettes manufactured by Lorillard. Twenty such cases are
pending in federal and state courts. Allegations of liability 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 have been
held in 11 such cases, including one to date in 1999. Verdicts have been
returned in favor of Lorillard in nine of the 11 cases. In one of the two
remaining trials, plaintiffs were awarded $0.14 in actual damages from
Lorillard in a 1996 trial, although this amount was reduced to approximately
seventy thousand dollars. In the second such action, a jury awarded plaintiffs
approximately $2.0 in actual damages and punitive damages following a 1995
trial. Courts of appeal decided Lorillard's appeals in favor of the
plaintiffs.
DEFENSES - 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 held that the Labeling Act, as amended in 1969,
preempts claims against tobacco companies arising after July 1, 1969, which
assert that the tobacco companies failed to adequately warn of the alleged
health risks of cigarettes, sought to undermine or neutralize the Labeling
Act's mandatory health warnings, or concealed material facts concerning the
health effects of smoking in their advertising and promotion of cigarettes.
The Supreme Court held that claims against tobacco companies based on
fraudulent misrepresentation, breach of express warranty, or conspiracy to
misrepresent material facts concerning the alleged health effects of smoking
are not preempted by the Labeling Act.
Lorillard believes that it has a number of defenses to pending cases, in
addition to defenses based on preemption described above, and Lorillard will
continue to maintain a vigorous defense in all such litigation. 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 that some or all of these defenses may, in many of the
pending or anticipated cases, be found by a jury or court to bar recovery by a
plaintiff. Application of various defenses, including those based on
preemption, are likely to be the subject of further legal proceedings in the
litigation.
* * * *
While Lorillard intends to defend vigorously all smoking and health related
litigation 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.
Many of the recent developments in relation to smoking and health discussed
above have received wide-spread media attention including the release of
industry documents. These developments may reflect adversely on the tobacco
industry and could have adverse effects on the ability of Lorillard and other
cigarette manufacturers to prevail in smoking and health litigation.
Except for the impact of the State Settlement Agreements as described above,
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 unfavorable outcome of certain pending litigation.
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.
113
Note 18. 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 85% 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 52% owned subsidiary); and the distribution and sale of watches and
clocks (Bulova Corporation, a 97% owned subsidiary). Each operating entity is
responsible for the operation of its specialized business and is headed by a
chief executive officer having the duties and authority commensurate with that
position.
CNA's insurance products include property and casualty coverages; life,
accident and health insurance; and pension products and annuities. CNA's
services include risk management, information services, health care management
and claims administration. CNA's products and services are marketed through
agents, brokers, general agents and direct sales.
Lorillard's principal products are marketed under the brand names of Newport,
Kent, True and Maverick with substantially all of its sales in the United
States.
Loews Hotels owns and/or operates 15 hotels, 13 of which are in the United
States and two in Canada.
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, 7% operate in the North Sea and
the remaining 28% are located in various foreign markets.
Bulova distributes and sells watches and clocks under the brand names of
Bulova, Caravelle and Accutron with substantially all of its sales in the
United States and Canada. All watches and clocks are purchased from foreign
suppliers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. In addition, CNA does not maintain
a distinct investment portfolio for each of its insurance segments, and
accordingly, allocation of assets to each segment is not performed. Therefore,
investment income and investment gains (losses) are allocated based on each
segment's carried insurance reserves, as adjusted.
The following tables set forth the Company's consolidated revenues, income and
assets by business segment:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (a):
CNA Financial:
Property and casualty $11,379.7 $11,168.7 $11,260.2
Life 1,468.1 1,499.4 1,418.5
Group (b) 3,914.1 4,080.0 3,974.2
Other Insurance 312.3 323.4 334.9
- ------------------------------------------------------------------------------
Total CNA Financial 17,074.2 17,071.5 16,987.8
Lorillard 2,865.1 2,416.8 2,239.1
Loews Hotels 242.1 222.5 200.6
Diamond Offshore 1,244.9 977.5 648.1
Bulova 135.0 128.9 120.8
Corporate (353.0) (678.4) 246.0
- ------------------------------------------------------------------------------
Total $21,208.3 $20,138.8 $20,442.4
==============================================================================
</TABLE>
114
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
Income before taxes and minority interest (a)(d):
<S> <C> <C> <C>
CNA Financial:
Property and casualty $ 399.4 $1,180.2 $1,017.6
Life 294.3 377.8 376.3
Group (37.2) 25.0 52.2
Other Insurance (306.0) (214.6) (91.2)
- ------------------------------------------------------------------------------
Total CNA Financial 350.5 1,368.4 1,354.9
Lorillard (c) 593.5 574.7 716.4
Loews Hotels 54.5 32.2 13.4
Diamond Offshore 590.2 430.1 212.7
Bulova 18.6 15.3 11.7
Corporate (529.9) (827.5) 98.7
- ------------------------------------------------------------------------------
Total $1,077.4 $1,593.2 $2,407.8
==============================================================================
Net income (a)(d):
CNA Financial
Property and casualty $ 258.1 $ 698.2 $ 620.7
Life 158.8 206.6 206.3
Group (15.7) 16.9 32.0
Other Insurance (166.5) (111.5) (50.3)
- ------------------------------------------------------------------------------
Total CNA Financial 234.7 810.2 808.7
Lorillard (c) 351.8 363.1 444.4
Loews Hotels 32.8 18.8 6.9
Diamond Offshore 181.1 130.9 52.1
Bulova 10.5 9.7 6.8
Corporate (346.1) (539.1) 65.0
- ------------------------------------------------------------------------------
Total $ 464.8 $ 793.6 $1,383.9
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Investments Receivables Total Assets
-------------------- -------------------- --------------------
December 31 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CNA Financial $37,177.3 $36,203.1 $13,639.8 $13,336.6 $62,359.0 $61,675.0
Lorillard 558.5 627.5 41.8 25.4 1,296.1 1,312.1
Loews Hotels 72.2 13.0 33.0 35.7 395.8 216.5
Diamond Offshore 587.3 363.1 233.7 205.6 2,609.7 2,298.6
Bulova 22.0 27.6 56.2 51.4 164.4 155.5
Corporate and eliminations 4,287.9 4,384.8 61.4 100.2 4,081.4 4,325.4
- ------------------------------------------------------------------------------------------------
Total $42,705.2 $41,619.1 $14,065.9 $13,754.9 $70,906.4 $69,983.1
================================================================================================
</TABLE>
115
(a) Investment gains (losses) included in Revenues, Income before taxes and
minority interest and Net income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
CNA Financial
Property and casualty $ 474.5 $ 524.7 $386.2
Life 144.9 205.4 173.5
Group 45.5 43.0 32.2
Other Insurance 30.4 (20.5) 26.7
- ------------------------------------------------------------------------------
Total CNA Financial 695.3 752.6 618.6
Corporate (545.6) (866.2) 57.9
- ------------------------------------------------------------------------------
$ 149.7 $(113.6) $676.5
==============================================================================
Income before taxes and minority interest:
CNA Financial
Property and casualty $ 474.5 $ 524.7 $386.2
Life 130.9 190.8 159.3
Group 45.5 43.0 32.2
Other Insurance 30.4 (20.5) 26.7
- ------------------------------------------------------------------------------
Total CNA Financial 681.3 738.0 604.4
Corporate (545.6) (866.2) 57.9
- ------------------------------------------------------------------------------
$ 135.7 $(128.2) $662.3
==============================================================================
Net income:
CNA Financial
Property and casualty $ 256.2 $ 286.6 $208.4
Life 69.5 104.2 85.9
Group 24.7 23.5 17.3
Other Insurance 16.7 (11.2) 14.4
- ------------------------------------------------------------------------------
Total CNA Financial 367.1 403.1 326.0
Corporate (354.6) (563.0) 37.6
- ------------------------------------------------------------------------------
$ 12.5 $(159.9) $363.6
==============================================================================
</TABLE>
116
(b) Includes $2,000.0, $2,100.0 and $2,100.0 under contracts covering U.S.
government employees and their dependents for the respective periods.
(c) Includes pre-tax charges related to the settlements of tobacco litigation
of $579.0 and $198.8 ($346.5 and $122.0 after taxes) for the years ended
December 31, 1998 and 1997, respectively.
(d) Income taxes and interest expenses are as follows:
<TABLE>
<CAPTION>
Income Interest Income Interest Income Interest
Taxes Expense Taxes Expense Taxes Expense
------------------- ------------------ ------------------
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CNA Financial
Property and casualty $ 69.3 $ 15.0 $ 342.9 $272.8
Life 106.8 14.3 133.2 131.2
Group (18.6) 5.2 14.6
Other Insurance (110.5) 189.7 (89.2) $198.0 (38.4) $200.4
- ------------------------------------------------------------------------------------------------
Total CNA Financial 47.0 219.0 392.1 198.0 380.2 200.4
Lorillard 241.7 1.4 211.6 .9 272.0 .4
Loews Hotels 21.7 3.3 13.4 3.6 6.5 3.7
Diamond Offshore 220.2 14.5 161.3 10.3 94.4 2.4
Bulova 7.7 .1 5.3 .1 4.7
Corporate (183.8) 130.9 (288.4) 110.5 33.6 111.1
- ------------------------------------------------------------------------------------------------
Total $ 354.5 $369.2 $ 495.3 $323.4 $791.4 $318.0
================================================================================================
</TABLE>
117
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, 1998, 1997 and 1996 ...................... L-2
Schedule II-Valuation and qualifying accounts for the years ended
December 31, 1998, 1997 and 1996 .................................. L-6
Schedule V-Supplemental information concerning property/casualty
insurance operations for the years ended December 31, 1998, 1997
and 1996 .......................................................... L-7
3. Exhibits:
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 3.1 to Registrant's Report on
Form 10-Q for the quarter ended September 30, 1998 ............. 3.02
118
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
The Registrant hereby agrees to furnish to the Commission upon
request copies of instruments with respect to long-term debt,
pursuant to Item 601(b)(4)(iii) of Regulation S-K.
(10) Material Contracts
Employment Agreement between Registrant and Laurence A. Tisch
dated March 1, 1971 as amended through 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 and an amendment dated November 3, 1998 is filed herewith . 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 and an amendment dated November 3, 1998 is filed herewith . 10.02*
Continuing Service Agreement between a subsidiary of Registrant
and Edward J. Noha, dated February 27, 1991 incorporated herein
by reference to Exhibit 10.04 to Registrant's Report on Form
10-K for the year ended December 31, 1990 ...................... 10.03
Loews Corporation Deferred Compensation Plan as amended and
restated as of December 31, 1995 is incorporated herein by
reference to Exhibit 10.05 to Registrant's Report on Form 10-K
for the year ended December 31, 1996 ........................... 10.04
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 ................................................. 10.05
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 ....................................... 10.06
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 ....................................................... 10.07
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 ................. 10.08
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 ................. 10.09
119
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
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 ........................................................... 10.10
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 ........................................ 10.11
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 ....................................................... 10.12
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 .............................................. 10.13
Incentive Compensation Plan incorporated herein by reference to
Exhibit 10.15 to Registrant's Report on Form 10-K for the year
ended December 31, 1996 ........................................ 10.14
Comprehensive Settlement Agreement and Release with the State of
Florida to settle and resolve with finality all present and
future economic claims by the State and its subdivisions
relating to the use of or exposure to tobacco products,
incorporated herein by reference to Exhibit 10 to
Registrant's Report on Form 8-K filed September 5, 1997 ........ 10.15
Comprehensive Settlement Agreement and Release with the State
of Texas to settle and resolve with finality all present and
future economic claims by the State and its subdivisions
relating to the use of or exposure to tobacco products,
incorporated herein by reference to Exhibit 10 to Registrant's
Report on Form 8-K filed February 3, 1998 ...................... 10.16
State of Minnesota Settlement Agreement and Stipulation for
Entry of Consent Judgment to settle and resolve with finality
all claims of the State of Minnesota relating to the subject
matter of this action which have been or could have been
asserted by the State, incorporated herein by reference
to Exhibit 10.1 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.17
State of Minnesota Consent Judgment relating to the settlement
of tobacco litigation, incorporated herein by reference to
Exhibit 10.2 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.18
State of Minnesota Settlement Agreement and Release relating
to the settlement of tobacco litigation, incorporated herein
by reference to Exhibit 10.3 to Registrant's Report on Form
10-Q for the quarter ended March 31, 1998 ...................... 10.19
Agreement to Pay State of Minnesota Attorneys' Fees and Costs
relating to the settlement of tobacco litigation, incorporated
herein by reference to Exhibit 10.4 to Registrant's Report on
Form 10-Q for the quarter ended March 31, 1998 ................. 10.20
Agreement to Pay Blue Cross and Blue Shield of Minnesota
Attorneys' Fees and Costs relating to the settlement of
tobacco litigation, incorporated herein by reference to
Exhibit 10.5 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.21
120
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
State of Minnesota State Escrow Agreement relating to the
settlement of tobacco litigation, incorporated herein by
reference to Exhibit 10.6 to Registrant's Report on Form 10-Q
for the quarter ended March 31, 1998 ........................... 10.22
Stipulation of Amendment to Settlement Agreement and For Entry
of Agreed Order, dated July 2, 1998, regarding the settlement
of the State of Mississippi health care cost recovery action,
incorporated herein by reference to Exhibit 10.1 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.23
Mississippi Fee Payment Agreement, dated July 2, 1998,
regarding the payment of attorneys' fees, incorporated herein
by reference to Exhibit 10.2 to Registrant's Report on Form
10-Q for the quarter ended June 30, 1998 ....................... 10.24
Mississippi MFN Escrow Agreement, dated July 2, 1998,
incorporated herein by reference to Exhibit 10.3 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.25
Stipulation of Amendment to Settlement Agreement and For Entry
of Consent Decree, dated July 24, 1998, regarding the
settlement of the Texas health care cost recovery action,
incorporated herein by reference to Exhibit 10.4 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.26
Texas Fee Payment Agreement, dated July 24, 1998, regarding
the payment of attorneys' fees, incorporated herein by
reference to Exhibit 10.5 to Registrant's Report on Form 10-Q
for the quarter ended June 30, 1998 ............................ 10.27
Stipulation of Amendment to Settlement Agreement and For Entry
of Consent Decree, dated September 11, 1998, regarding the
settlement of the Florida health care cost recovery action,
incorporated herein by reference to Exhibit 10.1 to Registrant's
Report on Form 10-Q for the quarter ended September 30, 1998 ... 10.28
Florida Fee Payment Agreement, dated September 11, 1998,
regarding the payment of attorneys' fees, incorporated herein
by reference to Exhibit 10.2 to Registrant's Report on Form
10-Q for the quarter ended September 30, 1998 .................. 10.29
Master Settlement Agreement with 46 states, the District of
Columbia, the Commonwealth of Puerto Rico, Guam, the U.S.
Virgin Islands, American Samoa and the Northern Marianas to
settle the asserted and unasserted health care cost recovery
and certain other claims of those states, incorporated herein
by reference to Exhibit 10 to Registrant's Report on Form 8-K
filed November 25, 1998 ........................................ 10.30
Employment Agreement dated as of January 1, 1999 between
Registrant and Andrew H. Tisch ................................. 10.31*
Employment Agreement dated as of January 1, 1999 between
Registrant and James S. Tisch .................................. 10.32*
Employment Agreement dated as of January 1, 1999 between
Registrant and Jonathan M. Tisch ............................... 10.33*
Continuing Services Agreement between a subsidiary of Registrant
and Dennis H. Chookaszian, dated February 9, 1999 incorporated
herein by reference to Exhibit 10.2 to CNA Financial
Corporation's (Commission File Number 1-5823) Report on Form
10-K for the year ended December 31, 1998 ...................... 10.34
(21) Subsidiaries of the Registrant
List of subsidiaries of Registrant ............................. 21.01*
121
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
(27) Financial Data Schedule ........................................ 27.01*
</TABLE>
* Filed herewith
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on November 25, 1998, as amended on
December 29, 1998, stating that together with other companies in the United
States tobacco industry, the Company's Subsidiary, Lorillard Tobacco Company,
entered into a Master Settlement Agreement with 46 states, the District of
Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands,
American Samoa and the Northern Marianas to settle the asserted and unasserted
health care cost recovery and certain other claims of those states.
122
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 31, 1999 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 31, 1999 By /s/ Laurence A. Tisch
-------------------------------
(Laurence A. Tisch, Co-
Chairman of the Board)
Dated: March 31, 1999 By /s/ Peter W. Keegan
-------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)
Dated: March 31, 1999 By /s/ Guy A. Kwan
-------------------------------
(Guy A. Kwan, Controller)
Dated: March 31, 1999 By /s/ Charles B. Benenson
-------------------------------
(Charles B. Benenson, Director)
Dated: March 31, 1999 By /s/ John Brademas
-------------------------------
(John Brademas, Director)
Dated: March 31, 1999 By /s/ Dennis H. Chookaszian
-------------------------------
(Dennis H. Chookaszian,
Director)
Dated: March 31, 1999 By /s/ Paul Fribourg
-------------------------------
(Paul Fribourg, Director)
123
Dated: March 31, 1999 By /s/ Bernard Myerson
-------------------------------
(Bernard Myerson, Director)
Dated: March 31, 1999 By /s/ Edward J. Noha
-------------------------------
(Edward J. Noha, Director)
Dated: March 31, 1999 By /s/ Gloria R. Scott
-------------------------------
(Gloria R. Scott, Director)
Dated: March 31, 1999 By /s/ Andrew H. Tisch
-------------------------------
(Andrew H. Tisch, Director)
Dated: March 31, 1999 By /s/ James S. Tisch
-------------------------------
(James S. Tisch, Chief
Executive Officer and
Director)
Dated: March 31, 1999 By /s/ Jonathan M. Tisch
-------------------------------
(Jonathan M. Tisch,
Director)
Dated: March 31, 1999 By /s/ Preston R. Tisch
-------------------------------
(Preston R. Tisch, Director)
124
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 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 10, 1999
L-1
SCHEDULE I
Condensed Financial Information of Registrant
LOEWS CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Current assets, principally investment in U.S.
government securities ............................. $ 4,207.5 $ 4,251.6
Investments in securities .......................... 411.3 351.7
Investments in capital stocks of subsidiaries, at
equity ............................................ 9,362.0 8,441.1
Other assets ....................................... 54.0 161.0
- ------------------------------------------------------------------------------
Total assets .................................. $14,034.8 $13,205.4
==============================================================================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Accounts payable and accrued liabilities ........... $ 892.0 $ 1,071.5
Current maturities of long-term debt ............... 117.8
Securities sold under agreements to repurchase ..... 449.7
Long-term debt, less current maturities (a) ........ 2,286.3 2,284.0
Deferred income tax and other ...................... 205.6 67.0
- ------------------------------------------------------------------------------
Total liabilities ............................. 3,833.6 3,540.3
Shareholders' equity ............................... 10,201.2 9,665.1
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity .... $14,034.8 $13,205.4
==============================================================================
</TABLE>
L-2
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Revenues:
Equity in income of subsidiaries (b) . $ 824.5 $1,329.9 $1,324.0
Investment (losses) gains ............ (545.5) (866.2) 57.9
Interest and other ................... 179.8 199.2 177.9
- ------------------------------------------------------------------------------
Total ............................. 458.8 662.9 1,559.8
- ------------------------------------------------------------------------------
Expenses:
Administrative ....................... 43.7 34.9 38.1
Interest ............................. 129.6 109.4 109.9
- ------------------------------------------------------------------------------
Total ............................. 173.3 144.3 148.0
- ------------------------------------------------------------------------------
285.5 518.6 1,411.8
Income tax benefit (expense) (c) ....... 179.3 275.0 (27.9)
- ------------------------------------------------------------------------------
Net income ............................. $ 464.8 $ 793.6 $1,383.9
==============================================================================
</TABLE>
L-3
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Operating Activities:
Net income ............................ $ 464.8 $ 793.6 $ 1,383.9
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Undistributed earnings of affiliates. (276.8) (1,225.9) (879.9)
Investment losses (gains) ........... 545.5 866.2 (57.9)
Changes in assets and liabilities-net:
Receivables ......................... 3.6 (7.0) (107.5)
Accounts payable and accrued
liabilities ........................ 2.2 (12.2) 19.7
Federal income taxes ................ (198.3) 37.7 (75.4)
Trading securities .................. (522.4) (682.4) (247.2)
Other-net ........................... (11.4) (72.4) 70.7
- ------------------------------------------------------------------------------
7.2 (302.4) 106.4
- ------------------------------------------------------------------------------
Investing Activities:
Investments in and advances to
subsidiaries ......................... (292.3) (138.1) (142.0)
Reduction of investments and advances
to subsidiaries ...................... 311.5 33.4 111.2
Net decrease (increase) in short-term
investments, primarily U.S.
government securities ................ 6.7 53.7 (482.5)
Securities sold under agreements to
repurchase ........................... 449.7 (447.8) 447.8
Change in other investments ........... (2.5) (7.8) (1.0)
- ------------------------------------------------------------------------------
473.1 (506.6) (66.5)
- ------------------------------------------------------------------------------
Financing Activities:
Dividends paid to shareholders ........ (114.6) (115.0) (116.2)
Purchases of treasury shares .......... (218.0) (215.7)
Principal payments on long-term debt .. (117.8) (200.0)
Issuance of long-term debt ............ 1,129.3 298.2
- ------------------------------------------------------------------------------
(450.4) 814.3 (33.7)
- ------------------------------------------------------------------------------
Net change in cash ...................... 29.9 5.3 6.2
Cash, beginning of year ................. 13.1 7.8 1.6
- ------------------------------------------------------------------------------
Cash, end of year ....................... $ 43.0 $ 13.1 $ 7.8
==============================================================================
</TABLE>
L-4
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
- --------------
Notes:
(a) Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
6.8% notes due 2006 (effective interest rate
of 6.8%) (authorized, $300) ................ $ 300.0 $ 300.0
3.1% exchangeable subordinated notes due 2007
(effective interest rate of 3.4%)
(authorized $1,150) (1) .................... 1,150.0 1,150.0
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
8.5% notes due 1998 ......................... 117.8
- ------------------------------------------------------------------------------
2,325.0 2,442.8
Less unamortized discount ................... 38.7 41.0
current maturities ..................... 117.8
- ------------------------------------------------------------------------------
$2,286.3 $2,284.0
==============================================================================
(1) Redeemable in whole or in part at September 15, 2002 at 101.6%, and
decreasing percentages thereafter. The notes are exchangeable into
15.376 shares of Diamond Offshore's common stock per $1,000
principal amount of notes, at a price of $65.04 per share.
(2) Redeemable in whole or in part at June 1, 2003 at 103.8%, and
decreasing percentages thereafter.
(3) Redeemable in whole or in part at October 15, 2003 at 102.4%, and
decreasing percentages thereafter.
</TABLE>
(b) Cash dividends paid to the Company by affiliates amounted to $547.1,
$113.2 and $445.4 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(c) The Company is included in a consolidated federal income tax return with
certain of its subsidiaries and, accordingly, participates in the allocation
of certain components of the consolidated provision for federal income taxes.
Such taxes are generally allocated on a separate return bases.
The Company has entered into separate tax allocation agreements with Bulova
and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiaries"). Each agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the
Company's return, or (ii) be paid by the Subsidiary an amount, if any, equal
to the federal income tax which would have been payable by the Subsidiary if
it had filed a separate consolidated return. Under these agreements, CNA will
receive approximately $83.0 for 1998 and has paid Loews approximately $210.0
and $99.0 for 1997 and 1996, respectively, and Bulova will pay or has paid
Loews approximately $5.6, $2.6 and $5.3 for 1998, 1997 and 1996, respectively.
Each agreement may be canceled by either of the parties upon thirty days'
written notice. See Note 8 of the Notes to Consolidated Financial Statements
of Loews Corporation and subsidiaries included in Item 8.
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, 1998
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 1.4 $109.8 $109.6(1) $ 1.6
Allowance for
doubtful accounts 316.6 35.6 10.0 342.2
------------------------------------------------------
Total .......... $ 318.0 $145.4 $119.6 $343.8
======================================================
<CAPTION>
For the Year Ended December 31, 1997
<S> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 1.4 $ 93.0 $ 93.0(1) $ 1.4
Allowance for
doubtful accounts 290.0 30.6 4.0 316.6
------------------------------------------------------
Total .......... $ 291.4 $123.6 $ 97.0 $318.0
======================================================
<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
======================================================
- -----------
Notes: (1) Discounts allowed.
</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 1998 1997 1996
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Deferred policy acquisition costs .... $ 1,279 $ 1,162 $ 1,084
Reserves for unpaid claim and claim
adjustment expenses ................. 28,355 28,571 29,395
Discount deducted from claim and
claim adjustment expenses reserves
above (based on interest rates
ranging from 3.5% to 7.5%) .......... 2,380 2,409 2,459
Unearned premiums .................... 5,039 4,700 4,659
Earned premiums ...................... 10,079 9,927 10,127
Net investment income ................ 1,731 1,790 1,881
Incurred claim and claim adjustment
expenses related to current year .... 7,903 7,942 7,922
Incurred claim and claim adjustment
expenses related to prior years ..... 263 (256) (91)
Amortization of deferred policy
acquisition costs ................... 2,042 2,017 1,843
Paid claim and claim expenses ........ 8,745 8,376 9,200
Net premiums written ................. 10,569 10,186 10,611
L-7
</TABLE>
Exhibit 21.01
LOEWS CORPORATION
Subsidiaries of the Registrant
December 31, 1998
<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 )
CNA Surety Corporation .............. Delaware )
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. ....................... Delaware ) Lorillard
Lorillard Tobacco Company ............ Delaware )
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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 287,400
<SECURITIES> 41,582,200
<RECEIVABLES> 14,409,700
<ALLOWANCES> 343,800
<INVENTORY> 297,400
<CURRENT-ASSETS> 0
<PP&E> 4,367,800
<DEPRECIATION> 1,519,500
<TOTAL-ASSETS> 70,906,400
<CURRENT-LIABILITIES> 0
<BONDS> 5,966,700
0
0
<COMMON> 112,600
<OTHER-SE> 10,088,600
<TOTAL-LIABILITY-AND-EQUITY> 70,906,400
<SALES> 2,936,600
<TOTAL-REVENUES> 21,208,300
<CGS> 1,027,700
<TOTAL-COSTS> 14,925,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 369,200
<INCOME-PRETAX> 1,077,400
<INCOME-TAX> 354,500
<INCOME-CONTINUING> 464,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 464,800
<EPS-PRIMARY> 4.06
<EPS-DILUTED> 4.06
</TABLE>
Exhibit 10.01
November 3, 1998
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1971, as amended by agreements dated February
27, 1974, March 1, 1976, May 10, 1977, July 17, 1979, June 16, 1981, May 10,
1983, May 10, 1984, October 15, 1985, February 24, 1987, October 14, 1988,
March 1, 1990, October 22, 1992 and October 18, 1994 and February 20, 1996
(the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 2000 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$975,000 per annum for the extension period January 1, 1998 through December
31, 2000. Your Basic Salary for the balance of 1998 will remain at the rate of
$975,000 per annum. Basic Salary shall be payable in accordance with the
Company's customary payroll practices for executives as in effect from time to
time, and shall be subject to such increases as the Board of Directors of the
Company, in its sole discretion, may from time to time determine. Such Basic
Salary shall be exclusive of fees received by you as a director and as a
member of Committees of the Boards of Directors of other corporations,
including subsidiaries, affiliates and investees of the Company.
3. In addition to receipt of Basic Salary under the Employment
Agreement, you shall participate in and shall receive incentive compensation
under the Incentive Compensation Plan for Executive Officers of the Company
(the "Compensation Plan") as awarded by the Incentive Compensation Committee
of the Board of Directors of the Company.
Mr. Laurence A. Tisch
November 3, 1998
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of
pensionable earnings in determining your Supplemental Benefits under the
Employment Agreement. In no event, however, shall such Supplemental Benefits
duplicate benefits under the Company's Benefit Equalization Plan as amended
from time to time.
5. The Company shall pay to you annually an amount equal to any
difference between your available "flexdollars" amount under the Company's
Beneflex employee benefit program and a greater flexdollars amount calculated
on a basis which includes incentive based compensation awarded in relation to
an applicable year under the Compensation Plan, after taking into account your
annual "Beneflex" elections. For purposes of such calculations, incentive
based compensation may be assumed to be payable in the amount of your "Cap"
for the applicable year under the Compensation Plan, subject to appropriate
adjustment in relation to incentive compensation actually awarded under the
Compensation Plan. Other employee benefits, such as life insurance, provided
by the Company will be based on your Basic Salary.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: Barry Hirsch
----------------------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
Laurence A. Tisch
- -----------------------
Laurence A. Tisch
Exhibit 10.02
November 3, 1998
Mr. Preston R. Tisch
5 Timber Trail
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1988, as amended by agreements dated March 1,
1990, October 22, 1992, October 18, 1994 and February 20, 1996 (the
"Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 2000 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$975,000 per annum for the extension period January 1, 1998 through December
31, 2000. Your Basic Salary for the balance of 1998 will remain at the rate of
$975,000 per annum. Basic Salary shall be payable in accordance with the
Company's customary payroll practices for executives as in effect from time to
time, and shall be subject to such increases as the Board of Directors of the
Company, in its sole discretion, may from time to time determine. Such Basic
Salary shall be exclusive of fees received by you as a director and as a
member of Committees of the Boards of Directors of other corporations,
including subsidiaries, affiliates and investees of the Company.
3. In addition to receipt of Basic Salary under the Employment
Agreement, you shall participate in and shall receive incentive compensation
under the Compensation Plan for Executive Officers of the Company (the
"Compensation Plan") as awarded by the Incentive Compensation Committee of the
Board of Directors of the Company.
Mr. Preston R. Tisch
November 3, 1998
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of
pensionable earnings in determining your Supplemental Benefits under the
Employment Agreement. In no event, however, shall such Supplemental Benefits
duplicate benefits under the Company's Benefit Equalization Plan as amended
from time to time.
5. The Company shall pay to you annually an amount equal to any
difference between your available "flexdollars" amount under the Company's
Beneflex employee benefit program and a greater flexdollars amount calculated
on a basis which includes incentive based compensation awarded in relation to
an applicable year under the Compensation Plan, after taking into account your
annual "Beneflex" elections. For purposes of such calculations, incentive
based compensation may be assumed to be payable in the amount of your "Cap"
for the applicable year under the Compensation Plan, subject to appropriate
adjustment in relation to incentive compensation actually awarded under the
Compensation Plan. Other employee benefits, such as life insurance, provided
by the Company will be based on your Basic Salary.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: Barry Hirsch
----------------------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
Preston R. Tisch
- -----------------------
Preston R. Tisch
Exhibit 10.31
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of the first day of JANUARY, 1999 between LOEWS
CORPORATION (the "Company") and ANDREW H. TISCH (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is currently serving as an executive employee of
the Company and the Company and the Executive desire that such employment be
continued on the terms and condition set forth herein.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements hereinafter set forth, the parties agree as follows:
1. Term of Employment. The Company does hereby engage and employ the
------------------
Executive and the Executive hereby accepts such Employment in an executive
capacity, for a term of three (3) years from January 1, 1999 to December 31,
2001 (the "Term").
2. Duties. The Executive accepts such employment and agrees that the
------
Executive shall be employed as a senior executive officer of the Company and
as such shall perform the duties which he heretofore performed as a senior
executive officer of the Company and such other duties, as may be required of
him from time to time by the Board of Directors in keeping with his position
as a senior executive officer of the Company. His office will be in New York
City.
3. Other Activities. The Executive hereby agrees that during the Term he
----------------
will not render services for any person, firm or corporation other than the
Company and its subsidiary and affiliated corporations; provided, however,
that the Executive may continue to devote a reasonable portion of his time and
attention to supervision of his own investments, to charitable and civic
activities and to membership on the Board of Directors or Trustees of other
non- competitive companies or organizations, but only to the extent that the
foregoing does not, in the aggregate, (a) require a significant portion of the
Executive's time or (b) interfere or conflict with the performance of the
Executive's services under this Agreement.
4. Compensation. As basic compensation ("Basic Compensation") for all of
------------
his services to the Company and its subsidiaries hereunder, the Company will
pay or cause to be paid to the Executive, during the term of his employment, a
salary at the rate of Nine Hundred Seventy Five Thousand ($975,000) Dollars
per annum, payable in accordance with the
Company's customary payroll practices, subject to such increases as the Board
of Directors of the Company in its sole discretion may from time to time
determine. In addition to Basic Compensation, the Executive shall participate
in the Incentive Compensation Plan for Executive Officers of the Company and
shall be eligible to receive incentive compensation under such plan as may be
awarded in accordance with the terms of such plan. The foregoing compensation
shall be exclusive of compensation and fees, if any, to which the Executive
may be entitled as an officer or director of a subsidiary of the Company.
5. Benefits. The Executive shall be entitled to participate in all
--------
employee benefit plans from time to time provided by the Company during the
Term which are generally available to the executive employees of the Company
and as to which the Executive shall be eligible in accordance with the terms
of such plans.
6. Confidential Information. The Executive shall keep confidential and
------------------------
shall not at any time reveal to anyone outside of the Company any
confidential or proprietary information, know-how or trade secrets (except as
may be required in the furtherance of the Company's business or objectives)
pertaining to the business of the Company or any of its subsidiaries or
affiliates. This obligation shall survive the termination of this Agreement
and the employment of the Executive by the Company and its breach or
threatened breach may be enjoined in any court of competent jurisdiction.
7. Miscellaneous. This Agreement sets forth the entire understanding
-------------
between the parties with respect to the subject matter hereof and supersedes
all prior understandings and agreements. No change, termination or waiver of
any of the provisions hereof shall be binding unless in writing and signed by
the party against whom the same is sought to be enforced. The headings of the
Agreement are for convenience of reference only and do not limit or otherwise
affect the meaning hereof. The Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
duly executed as of the day and year first above written.
LOEWS CORPORATION
By: Barry Hirsch
------------------------------------
Barry Hirsch
Senior Vice President
Accepted and Agreed to:
Andrew H. Tisch
- --------------------------------
Andrew H. Tisch
-2-
Exhibit 10.32
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of the first day of JANUARY, 1999 between LOEWS
CORPORATION (the "Company") and JAMES S. TISCH (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is currently serving as an executive employee of
the Company and the Company and the Executive desire that such employment be
continued on the terms and condition set forth herein.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements hereinafter set forth, the parties agree as follows:
1. Term of Employment. The Company does hereby engage and employ the
------------------
Executive and the Executive hereby accepts such Employment in an executive
capacity, for a term of three (3) years from January 1, 1999 to December 31,
2001 (the "Term").
2. Duties. The Executive accepts such employment and agrees that the
------
Executive shall be employed as a senior executive officer of the Company and
as such shall perform the duties which he heretofore performed as a senior
executive officer of the Company and such other duties, as may be required of
him from time to time by the Board of Directors in keeping with his position
as a senior executive officer of the Company. His office will be in New York
City.
3. Other Activities. The Executive hereby agrees that during the Term he
----------------
will not render services for any person, firm or corporation other than the
Company and its subsidiary and affiliated corporations; provided, however,
that the Executive may continue to devote a reasonable portion of his time and
attention to supervision of his own investments, to charitable and civic
activities and to membership on the Board of Directors or Trustees of other
non- competitive companies or organizations, but only to the extent that the
foregoing does not, in the aggregate, (a) require a significant portion of the
Executive's time or (b) interfere or conflict with the performance of the
Executive's services under this Agreement.
4. Compensation. As basic compensation ("Basic Compensation") for all of
------------
his services to the Company and its subsidiaries hereunder, the Company will
pay or cause to be paid to the Executive, during the term of his employment, a
salary at the rate of Nine Hundred Seventy Five Thousand ($975,000) Dollars
per annum, payable in accordance with the
Company's customary payroll practices, subject to such increases as the Board
of Directors of the Company in its sole discretion may from time to time
determine. In addition to Basic Compensation, the Executive shall participate
in the Incentive Compensation Plan for Executive Officers of the Company and
shall be eligible to receive incentive compensation under such plan as may be
awarded in accordance with the terms of such plan. The foregoing compensation
shall be exclusive of compensation and fees, if any, to which the Executive
may be entitled as an officer or director of a subsidiary of the Company.
5. Benefits. The Executive shall be entitled to participate in all
--------
employee benefit plans from time to time provided by the Company during the
Term which are generally available to the executive employees of the Company
and as to which the Executive shall be eligible in accordance with the terms
of such plans.
6. Confidential Information. The Executive shall keep confidential and
------------------------
shall not at any time reveal to anyone outside of the Company any confidential
or proprietary information, know-how or trade secrets (except as may be
required in the furtherance of the Company's business or objectives)
pertaining to the business of the Company or any of its subsidiaries or
affiliates. This obligation shall survive the termination of this Agreement
and the employment of the Executive by the Company and its breach or
threatened breach may be enjoined in any court of competent jurisdiction.
7. Miscellaneous. This Agreement sets forth the entire understanding
-------------
between the parties with respect to the subject matter hereof and supersedes
all prior understandings and agreements. No change, termination or waiver of
any of the provisions hereof shall be binding unless in writing and signed by
the party against whom the same is sought to be enforced. The headings of the
Agreement are for convenience of reference only and do not limit or otherwise
affect the meaning hereof. The Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
duly executed as of the day and year first above written.
LOEWS CORPORATION
By: Barry Hirsch
------------------------------------
Barry Hirsch
Senior Vice President
Accepted and Agreed to:
James S. Tisch
- --------------------------------
James S. Tisch
-2-
Exhibit 10.33
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of the first day of JANUARY, 1999 between LOEWS
CORPORATION (the "Company") and JONATHAN M. TISCH (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is currently serving as an executive employee of
the Company and the Company and the Executive desire that such employment be
continued on the terms and condition set forth herein.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements hereinafter set forth, the parties agree as follows:
1. Term of Employment. The Company does hereby engage and employ the
------------------
Executive and the Executive hereby accepts such Employment in an executive
capacity, for a term of three (3) years from January 1, 1999 to December 31,
2001 (the "Term").
2. Duties. The Executive accepts such employment and agrees that the
------
Executive shall be employed as a senior executive officer of the Company and
as such shall perform the duties which he heretofore performed as a senior
executive officer of the Company and such other duties, as may be required of
him from time to time by the Board of Directors in keeping with his position
as a senior executive officer of the Company. His office will be in New York
City.
3. Other Activities. The Executive hereby agrees that during the Term he
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will not render services for any person, firm or corporation other than the
Company and its subsidiary and affiliated corporations; provided, however,
that the Executive may continue to devote a reasonable portion of his time and
attention to supervision of his own investments, to charitable and civic
activities and to membership on the Board of Directors or Trustees of other
non- competitive companies or organizations, but only to the extent that the
foregoing does not, in the aggregate, (a) require a significant portion of the
Executive's time or (b) interfere or conflict with the performance of the
Executive's services under this Agreement.
4. Compensation. As basic compensation ("Basic Compensation") for all of
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his services to the Company and its subsidiaries hereunder, the Company will
pay or cause to be paid to the Executive, during the term of his employment, a
salary at the rate of Nine Hundred Seventy Five Thousand ($975,000) Dollars
per annum, payable in accordance with the
Company's customary payroll practices, subject to such increases as the Board
of Directors of the Company in its sole discretion may from time to time
determine. In addition to Basic Compensation, the Executive shall participate
in the Incentive Compensation Plan for Executive Officers of the Company and
shall be eligible to receive incentive compensation under such plan as may be
awarded in accordance with the terms of such plan. The foregoing compensation
hall be exclusive of compensation and fees, if any, to which the Executive may
be entitled as an officer or director of a subsidiary of the Company.
5. Benefits. The Executive shall be entitled to participate in all
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employee benefit plans from time to time provided by the Company during the
Term which are generally available to the executive employees of the Company
and as to which the Executive shall be eligible in accordance with the terms
of such plans.
6. Confidential Information. The Executive shall keep confidential and
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shall not at any time reveal to anyone outside of the Company any confidential
or proprietary information, know-how or trade secrets (except as may be
required in the furtherance of the Company's business or objectives)
pertaining to the business of the Company or any of its subsidiaries or
affiliates. This obligation shall survive the termination of this Agreement
and the employment of the Executive by the Company and its breach or
threatened breach may be enjoined in any court of competent jurisdiction.
7. Miscellaneous. This Agreement sets forth the entire understanding
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between the parties with respect to the subject matter hereof and supersedes
all prior understandings and agreements. No change, termination or waiver of
any of the provisions hereof shall be binding unless in writing and signed by
the party against whom the same is sought to be enforced. The headings of the
Agreement are for convenience of reference only and do not limit or otherwise
affect the meaning hereof. The Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
duly executed as of the day and year first above written.
LOEWS CORPORATION
By: Barry Hirsch
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Barry Hirsch
Senior Vice President
Accepted and Agreed to:
Jonathan M. Tisch
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Jonathan M. Tisch
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