==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
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)
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--------- ---------
Class Outstanding at November 5, 1999
- -------------------------- -------------------------------
Common stock, $1 par value 106,050,300 shares
==============================================================================
Page 1
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
September 30, 1999 and December 31, 1998 .................... 3
Consolidated Condensed Statements of Income--
Three and nine months ended September 30, 1999 and 1998 ..... 4
Consolidated Condensed Statements of Cash Flows--
Nine months ended September 30, 1999 and 1998 ............... 5
Notes to Consolidated Condensed Financial Statements .......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 24
Item 3. Quantitative and Qualitative Disclosures about Market
Risk ........................................................... 40
Part II. Other Information
Item 1. Legal Proceedings ....................................... 44
Item 6. Exhibits and Reports on Form 8-K ........................ 56
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
- ------------------------------------------------------------------------------
(Amounts in millions of dollars) September 30, December 31,
1999 1998
-------------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities, amortized cost of
$28,582.0 and $30,850.3 ................... $28,078.0 $31,409.4
Equity securities, cost of $1,939.2 and
$1,624.7 .................................. 3,279.6 2,380.7
Other investments .......................... 1,342.1 1,123.0
Short-term investments ..................... 11,827.1 7,792.1
------------------------------
Total investments ....................... 44,526.8 42,705.2
Cash ......................................... 362.9 287.4
Receivables-net .............................. 13,147.5 12,953.4
Property, plant and equipment-net ............ 3,084.5 2,848.3
Deferred income taxes ........................ 1,102.4 872.6
Goodwill and other intangible assets-net ..... 457.5 489.4
Other assets ................................. 2,706.9 3,125.1
Deferred policy acquisition costs of insurance
subsidiaries ................................ 2,650.1 2,422.2
Separate Account business .................... 4,572.5 5,202.8
------------------------------
Total assets ............................ $72,611.1 $70,906.4
==============================
Liabilities and Shareholders' Equity:
Insurance reserves and claims ................ $40,532.9 $40,438.5
Payable for securities purchased ............. 1,249.5 1,160.8
Securities sold under repurchase agreements .. 2,872.3 579.5
Long-term debt, less unamortized discount .... 5,699.3 5,966.7
Other liabilities ............................ 5,349.6 4,879.6
Separate Account business .................... 4,572.5 5,202.8
------------------------------
Total liabilities ....................... 60,276.1 58,227.9
Minority interest ............................ 2,429.5 2,477.3
Shareholders' equity ......................... 9,905.5 10,201.2
------------------------------
Total liabilities and shareholders'
equity ................................. $72,611.1 $70,906.4
==============================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 3
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Income
- ------------------------------------------------------------------------------------------------
(In millions, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums ..................... $3,327.6 $3,361.9 $10,270.5 $10,281.4
Investment income, net of expenses ..... 589.6 585.4 1,727.8 1,837.9
Investment gains (losses) .............. (2.3) 660.6 136.7 328.7
Manufactured products (including excise
taxes of $137.5, $134.8, $388.6 and
$371.5) ............................... 1,106.4 805.2 3,067.0 2,126.2
Other .................................. 409.2 579.2 1,404.0 1,681.3
--------------------------------------------------
Total ............................... 5,430.5 5,992.3 16,606.0 16,255.5
--------------------------------------------------
Expenses:
Insurance claims and policyholders'
benefits .............................. 2,752.8 2,807.0 8,609.7 8,681.1
Amortization of deferred policy
acquisition costs ..................... 483.3 465.9 1,591.4 1,560.7
Cost of manufactured products sold ..... 279.7 272.6 805.8 769.2
Other operating expenses ............... 1,057.9 1,262.0 3,229.1 3,188.7
Tobacco litigation settlements ......... 297.9 30.8 782.4 218.3
Interest ............................... 91.1 89.3 286.7 282.3
--------------------------------------------------
Total ............................... 4,962.7 4,927.6 15,305.1 14,700.3
--------------------------------------------------
467.8 1,064.7 1,300.9 1,555.2
--------------------------------------------------
Income tax expense ..................... 165.2 384.9 424.9 532.0
Minority interest ...................... 31.3 62.7 147.1 242.6
--------------------------------------------------
Total ............................... 196.5 447.6 572.0 774.6
--------------------------------------------------
Income before cumulative effect of changes
in accounting principles ................ 271.3 617.1 728.9 780.6
Cumulative effect of changes in accounting
principles-net .......................... (157.9)
--------------------------------------------------
Net income ............................... $ 271.3 $ 617.1 $ 571.0 $ 780.6
==================================================
Net income per share:
Income before cumulative effect of
changes in accounting principles ....... $ 2.52 $ 5.38 $ 6.65 $ 6.79
Cumulative effect of changes in
accounting principles-net .............. (1.44)
--------------------------------------------------
Net income ............................... $ 2.52 $ 5.38 $ 5.21 $ 6.79
==================================================
Cash dividends per share ................. $ .25 $ .25 $ .75 $ .75
==================================================
Weighted average number of shares
outstanding ............................. 107.6 114.7 109.5 114.9
==================================================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 4
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
- ------------------------------------------------------------------------------
(Amounts in millions) Nine Months Ended September 30,
1999 1998
-------------------------------
<S> <C> <C>
Operating Activities:
Net income .................................. $ 571.0 $ 780.6
Adjustments to reconcile net income
to net cash used by operating activities-net 221.3 191.9
Cumulative effect of changes in accounting
principles ................................. 157.9
Changes in assets and liabilities-net:
Reinsurance receivable .................... 126.5 (178.3)
Other receivables ......................... 141.2 (693.1)
Deferred policy acquisition costs ......... (228.0) (217.3)
Insurance reserves and claims ............. 98.2 665.5
Other liabilities ......................... 263.5 135.1
Trading securities ........................ (656.1) (673.4)
Other-net ................................. 170.7 (165.7)
---------------------------
866.2 (154.7)
---------------------------
Investing Activities:
Purchases of fixed maturities ............... (45,708.9) (50,541.0)
Proceeds from sales of fixed maturities ..... 45,461.0 49,698.1
Proceeds from maturities of fixed maturities 2,305.3 2,655.3
Change in securities sold under repurchase
agreements ................................. 2,292.8 (94.8)
Purchases of equity securities .............. (735.3) (793.0)
Proceeds from sales of equity securities .... 879.8 511.7
Change in short-term investments ............ (3,962.2) (560.7)
Purchases of property, plant and equipment .. (491.9) (345.2)
Purchases of subsidiary common stock ........ (67.9)
Change in other investments ................. 49.0 (246.2)
---------------------------
21.7 284.2
---------------------------
Financing Activities:
Dividends paid to shareholders .............. (82.3) (86.2)
Dividends paid to minority interest ......... (30.3) (30.7)
Purchases of treasury shares ................ (435.4) (110.1)
Purchases of treasury shares by subsidiaries (153.6)
Issuances of long-term debt ................. 206.1 1,011.7
Principal payments on long-term debt ........ (474.4) (1,065.9)
Other ....................................... 3.9 (11.5)
---------------------------
(812.4) (446.3)
---------------------------
Net change in cash ............................ 75.5 (316.8)
Cash, beginning of period ..................... 287.4 497.8
---------------------------
Cash, end of period ........................... $ 362.9 $ 181.0
===========================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 5
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
- ------------------------------------------------------------------------------
(Dollars in millions, except per share data)
1. General:
Reference is made to the Notes to Consolidated Financial Statements in
the 1998 Annual Report to Shareholders which should be read in conjunction
with these consolidated condensed financial statements.
Accounting Changes
Effective January 1, 1999, the Company adopted, the AICPA's Accounting
Standards Executive Committee SOP 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" and SOP 98-5, "Reporting on
the Costs of Start-Up Activities." SOP 97-3 requires insurance companies to
recognize liabilities for insurance-related assessments when an assessment
has been imposed or it is probable that it will be imposed, when it can be
reasonably estimated, and when the event obligating an entity to pay an
imposed or probable assessment has occurred on or before the date of the
financial statements. The Company had previously accounted for these
assessments as they were paid.
SOP 98-5 requires costs of start-up activities and organization costs, as
defined, to be expensed as incurred. The Company had previously deferred
recognition of these costs and amortized them over a period following the
completion of the start-up activities. The Company does not expect the on-
going effect of adopting SOP 98-5 to have a material impact on its results
of operations.
The cumulative effect of these accounting changes resulted in a charge as
follows:
<TABLE>
<CAPTION>
<S> <C>
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments (net of income taxes and minority interest of $95.4
and $26.5) .................................................................. $150.8
Costs of Start-Up Activities (net of income taxes of $3.8) ..................... 7.1
------
$157.9
======
</TABLE>
Comprehensive (loss) income
Comprehensive (loss) income includes all changes to shareholders' equity,
including net income (loss), except those resulting from investments by
shareholders and distributions to shareholders. For the three and nine
months ended September 30, 1999 and 1998, comprehensive (loss) income
totaled $(285.4), $846.9, $226.0 and $1,042.3, respectively. Comprehensive
(loss) income includes net income, unrealized appreciation (depreciation)
and foreign currency translation gains or losses.
Net income per share
Companies with complex capital structures are required to present basic
and diluted earnings per share. Basic earnings per share excludes dilution
and is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
Page 6
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. The Company does not have any dilutive instruments related to its
common shares. Accordingly, basic and diluted earnings per share are the
same.
Reclassifications
Certain amounts applicable to prior periods have been reclassified to
conform to the classifications followed in 1999.
2. Reinsurance:
The effects of reinsurance on earned premiums are shown in the following
table.
<TABLE>
<CAPTION>
Direct Assumed Ceded Net
-------------------------------------------
Nine Months Ended September 30, 1999
-------------------------------------------
<S> <C> <C> <C> <C>
Property and casualty ...................... $ 6,731.0 $1,237.0 $ 999.0 $ 6,969.0
Accident and health ........................ 2,801.0 117.0 253.0 2,665.0
Life ....................................... 799.0 139.0 302.0 636.0
-------------------------------------------
Total ................................... $10,331.0 $1,493.0 $1,554.0 $10,270.0
===========================================
<CAPTION>
Nine Months Ended September 30, 1998
-------------------------------------------
<S> <C> <C> <C> <C>
Property and casualty ...................... $6,295.0 $1,114.0 $481.0 $ 6,928.0
Accident and health ........................ 2,742.0 147.0 202.0 2,687.0
Life ....................................... 742.0 112.0 188.0 666.0
-------------------------------------------
Total ................................... $9,779.0 $1,373.0 $871.0 $10,281.0
===========================================
</TABLE>
In the table above, life premiums are principally from long duration
contracts, property and casualty premiums are from short duration contracts
and approximately 75% of accident and health premiums are from short
duration contracts.
Page 7
3. Receivables:
The Company's receivables are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------
<S> <C> <C>
Reinsurance ................................. $ 6,238.9 $ 6,415.8
Other insurance ............................. 5,724.7 5,542.8
Security sales .............................. 730.9 276.4
Accrued investment income ................... 402.2 409.8
Other ....................................... 402.4 652.4
---------------------------
Total ................................ 13,499.1 13,297.2
Less allowance for doubtful accounts and
cash discounts ............................. 351.6 343.8
---------------------------
Receivables-net ...................... $13,147.5 $12,953.4
===========================
</TABLE>
4. Shareholders' equity:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------
<S> <C> <C>
Preferred stock, $.10 par value,
Authorized--100,000,000 shares
Common stock, $1 par value:
Authorized--400,000,000 shares
Issued--112,582,300 shares ................ $ 112.6 $ 112.6
Additional paid-in capital .................. 162.3 162.3
Earnings retained in the business ........... 9,522.2 9,033.5
Accumulated other comprehensive income ...... 547.8 892.8
---------------------------
Total ................................ 10,344.9 10,201.2
Less common stock (5,646,400 shares) held in
treasury, at cost .......................... 439.4
---------------------------
Total shareholders' equity .................. $ 9,905.5 $10,201.2
===========================
</TABLE>
5. Restructuring and Other Related Charges:
As part of CNA's restructuring plan that was initiated in August 1998,
restructuring related charges of $70.0 were recorded in the nine months
ended September 30, 1999. These charges did not qualify for accrual under
generally accepted accounting principles at the end of the third quarter of
1998 and, therefore, have been expensed as incurred. The charges included
the following:
In the first nine months of 1999, restructuring related charges for CNA's
property and casualty Agency Market Operations totaled approximately $48.0.
The charges included employee severance and outplacement costs of $17.0
Page 8
related to the planned net reduction in the workforce. The Agency Market
Operations charges also included consulting costs of $9.0 and parallel
processing charges of $10.0. Other charges, including relocation and
facility charges, totaled approximately $12.0.
In the first nine months of 1999, restructuring related charges for CNA's
property and casualty Risk Management business totaled approximately $8.0.
The charges included parallel processing costs of approximately $3.0,
employee severance and outplacement costs of approximately $2.0 and other
charges, including consulting and facility charges, totaling approximately
$5.0. Additionally, Risk Management reduced its estimate for lease
termination costs by $2.0 during the nine months ended September 30, 1999.
In the first nine months of 1999, restructuring related charges for Group
Operations totaled approximately $5.0. These charges related to employee
severance and other charges.
For the other segments of CNA, restructuring related charges totaled
approximately $9.0 for the first nine months of 1999. These charges were
primarily for employee termination related costs.
The following table sets forth the major categories of restructuring
accrual and changes therein during 1999.
<TABLE>
<CAPTION>
Employee
Termination Lease Business
and Related Termination Exit
Benefit Costs Costs Costs Total
--------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued costs at December 31, 1998 . $ 37.0 $ 42.0 $ 32.0 $ 111.0
Payments charged against liability (27.0) (7.0) (12.0) (46.0)
Reduction in estimated costs . . . (2.0) (2.0)
-------------------------------------------------------
Accrued costs at September 30,
1999. . . . . . . . . . . . . . . $ 10.0 $ 33.0 $ 20.0 $ 63.0
=======================================================
</TABLE>
6. Subsequent Event:
On October 1, 1999, CNA completed a previously announced transaction with
The Allstate Corporation ("Allstate"), involving CNA's personal lines
insurance business. Approximately $1,200.0 was transferred to Allstate for
the policy liabilities assumed. Additionally, CNA received $140.0 in cash
which consisted of (i) $120.0 in commissions for the reinsurance of the CNA
personal insurance business by Allstate and (ii) $20.0 for an option
exercisable during 2002 to purchase common stock of five CNA subsidiaries.
CNA will continue to have an ongoing interest in the profitability of
CNA's personal lines insurance business and the related successor business
through a $75.0 equity linked note. In addition, CNA has licensed the "CNA
Personal Insurance" trademark and personal insurance distribution system to
Allstate for use in Allstate's personal insurance agency business for a
period of five years. CNA will receive a royalty fee based on the business
volume of personal insurance policies sold through the CNA agents for a
period of six years.
Page 9
7. 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 86% 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.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies in Note 1 of the Notes to
Consolidated Financial Statements in the Annual Report on Form 10-K for the
year ended December 31, 1998. 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 and
income by business segment:
<TABLE> <CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
1999 1998 1999 1998
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues (a):
CNA Financial:
Property and casualty .................... $2,679.3 $2,732.5 $ 8,675.0 $ 8,591.2
Life ..................................... 389.0 351.7 1,091.5 1,234.0
Group .................................... 908.2 973.4 2,811.9 2,881.3
Other Insurance .......................... (59.3) 111.9 116.7 283.4
----------------------------------------------
Total CNA Financial ....................... 3,917.2 4,169.5 12,695.1 12,989.9
Lorillard .................................. 1,088.6 788.8 3,018.5 2,074.1
Loews Hotels ............................... 63.1 57.8 191.7 171.2
Diamond Offshore ........................... 216.1 326.6 676.6 950.5
Bulova ..................................... 38.6 35.4 99.6 96.2
Corporate .................................. 106.9 614.2 (75.5) (26.4)
----------------------------------------------
Total ..................................... $5,430.5 $5,992.3 $16,606.0 $16,255.5
==============================================
Income before taxes, minority interest and
cumulative effect of changes in accounting
principles:
CNA Financial:
Property and casualty .................... $ 45.7 $ 39.3 $ 533.1 $ 542.4
Life ..................................... 36.0 33.7 111.1 229.2
Group .................................... 32.7 (56.6) 69.2 (33.4)
Other Insurance .......................... (82.2) (31.6) (248.7) (125.6)
----------------------------------------------
Total CNA Financial ....................... 32.2 (15.2) 464.7 612.6
Lorillard .................................. 305.7 325.6 790.3 593.2
Loews Hotels ............................... 1.5 10.0 12.9 30.0
Diamond Offshore ........................... 58.2 167.2 219.8 464.3
Bulova ..................................... 6.1 5.6 14.2 13.6
Corporate .................................. 64.1 571.5 (201.0) (158.5)
----------------------------------------------
Total ..................................... $ 467.8 $1,064.7 $ 1,300.9 $ 1,555.2
==============================================
Page 10
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
1999 1998 1999 1998
----------------------------------------------
<S> <C> <C> <C> <C>
Net income (a):
CNA Financial:
Property and casualty .................... $ 30.6 $ 22.0 $ 323.0 $ 323.2
Life ..................................... 20.3 17.9 62.2 126.4
Group .................................... 18.6 (29.9) 41.1 (15.0)
Other Insurance .......................... (45.7) (22.7) (125.3) (75.7)
----------------------------------------------
Total CNA Financial ....................... 23.8 (12.7) 301.0 358.9
Lorillard .................................. 182.9 195.5 472.6 356.2
Loews Hotels ............................... 1.2 6.5 8.5 18.0
Diamond Offshore ........................... 18.8 54.0 70.4 144.0
Bulova ..................................... 3.3 3.2 7.8 7.3
Corporate .................................. 41.3 370.6 (131.4) (103.8)
----------------------------------------------
271.3 617.1 728.9 780.6
Cumulative effect of changes in accounting
principles ................................ (157.9)
----------------------------------------------
Total ..................................... $ 271.3 $ 617.1 $ 571.0 $ 780.6
==============================================
</TABLE>
(a) Investment gains (losses) included in Revenues and Net income are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
1999 1998 1999 1998
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
CNA Financial:
Property and casualty ...................... $ (61.1) $ 65.7 $ 293.2 $ 334.0
Life ....................................... (19.4) 5.7 (47.5) 110.0
Group ...................................... (3.4) 4.4 7.4 29.4
Other Insurance ............................ 2.7 18.3 55.0 29.0
----------------------------------------------
Total CNA Financial ......................... (81.2) 94.1 308.1 502.4
Corporate .................................... 78.9 566.5 (171.4) (173.7)
----------------------------------------------
Total ....................................... $ (2.3) $ 660.6 $ 136.7 $ 328.7
==============================================
Net income:
CNA Financial:
Property and casualty ...................... $ (34.0) $ 32.0 $ 162.7 $ 178.0
Life ....................................... (10.8) 2.7 (26.4) 58.7
Group ...................................... (1.9) 2.2 4.1 15.8
Other Insurance ............................ 1.8 10.4 30.7 15.9
----------------------------------------------
Total CNA Financial ......................... (44.9) 47.3 171.1 268.4
Corporate .................................... 51.3 368.2 (111.4) (112.9)
----------------------------------------------
Total ....................................... $ 6.4 $ 415.5 $ 59.7 $ 155.5
==============================================
Page 11
</TABLE>
8. 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, in 1993, Casualty,
Fibreboard, another insurer (Pacific Indemnity, a subsidiary of the Chubb
Corporation), and a negotiating committee of asbestos claimant attorneys
(collectively referred to as "Settling Parties") reached an agreement (the
"Global Settlement Agreement") to resolve all future asbestos-related
bodily injury claims involving Fibreboard. The Global Settlement Agreement
by its terms required court approval.
Casualty, Fibreboard and Pacific Indemnity also reached an agreement (the
"Trilateral Agreement"), on a settlement to resolve the coverage litigation
in the event the Global Settlement Agreement did 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 both of these decisions. On July 25, 1996, a panel of the United
States Fifth Circuit Court of Appeals in New Orleans affirmed the judgment
approving the Global Settlement Agreement by a 2 to 1 vote and affirmed the
judgment approving the Trilateral Agreement by a 3 to 0 vote. Petitions for
rehearing by the panel and suggestions for rehearing by the entire Fifth
Circuit Court of Appeals as respects the decision on the Global Settlement
Agreement were denied. No further appeal was filed with respect to the
Trilateral Agreement; therefore, court approval of the Trilateral Agreement
has become final.
On June 23, 1999, the Supreme Court reversed the Fifth Circuit decision
approving the Global Settlement Agreement by a 7 to 2 vote. On September
22, 1999, the District Court entered judgement disapproving the Global
Settlement Agreement. If no appeals are filed from that judgement, it is
expected to become final as of November 22, 1999.
Upon final disapproval of the Global Settlement Agreement, the Trilateral
Agreement becomes fully effective.
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 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 was disapproved. The
Trilateral Agreement calls for payment by Casualty and Pacific Indemnity of
an aggregate $2,000.0, of which Casualty's portion is approximately
$1,460.0, to Fibreboard to resolve all claims by Fibreboard and all future
and certain present asbestos claims arising under the policies issued to
Fibreboard by Casualty.
Page 12
Under 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 September 30, 1999, Casualty, Fibreboard and plaintiff attorneys
had reached settlements with respect to approximately 133,000 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. Of these settlements,
Casualty, has paid approximately $1,720.0 (including interest of
approximately $185.0) through September 30, 1999. Casualty has recovered
approximately $700.0 of these payments from Pacific Indemnity. In addition,
approximately $300.0 of these settlements will be deducted from the
aggregate $2,000.0 payable to Fibreboard.
Final court approval of the Trilateral Agreement and its implementation
has substantially resolved Casualty's 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.
Other Litigation
----------------
CNA and its subsidiaries are also parties to other litigation arising in
the ordinary course of business. The outcome of such other litigation will
not in the opinion of management, materially affect the results of
operations or equity of the Company.
Environmental Pollution and Other Mass Tort and Asbestos
--------------------------------------------------------
The CNA property and casualty insurance companies have potential
exposures related to environmental pollution and other mass tort and
asbestos claims.
Environmental pollution clean-up is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. Judicial interpretations in many
cases have expanded the scope of coverage and liability beyond the original
intent of the policies.
The Comprehensive Environmental Response Compensation and Liability Act
of 1980 ("Superfund") and comparable state statutes ("mini-Superfund")
govern the clean-up and restoration of abandoned toxic waste sites and
formalize the concept of legal liability for clean-up and restoration by
potentially responsible parties ("PRP's"). Superfund and the
mini-Superfunds 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.
Page 13
Many policyholders have made claims against various CNA insurance
subsidiaries for defense costs and indemnification in connection with
environmental pollution matters. These claims relate to 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 have been enacted by Congress in 1999 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 significantly reduced in favor of state
action. Substantial changes in the federal statute or the activity of the
EPA may cause states to reconsider their environmental clean-up statutes
and regulations. There can be no meaningful prediction of the pattern of
regulation that would result.
Due to the inherent uncertainties described above, including the
inconsistency of court decisions, the number of waste sites subject to
clean-up, and the standards for clean-up and liability, the ultimate
liability of CNA for environmental pollution claims may vary substantially
from the amount currently recorded.
As of September 30, 1999 and December 31, 1998, CNA carried approximately
$585.0 and $787.0, respectively, of claim and claim expense reserves, net
of reinsurance recoverables, for reported and unreported environmental
pollution and other mass tort claims.
CNA's property/casualty insurance subsidiaries have exposure to asbestos
claims, including those attributable to CNA's litigation with Fibreboard
Corporation. 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
September 30, 1999 and December 31, 1998, CNA carried approximately
$1,503.0 and $1,456.0, respectively, of claim and claim expense reserves,
net of reinsurance recoverables, for reported and unreported
asbestos-related claims including those related to Fibreboard.
Unfavorable asbestos claim reserve development for the nine months ended
September 30, 1999 and 1998 totaled $215.0 and $205.0, respectively.
Environmental pollution and other mass tort reserves experienced favorable
development of $49.0 during the nine months ended September 30, 1999 and
unfavorable development of $58.0 during the nine months ended September 30,
1998.
Page 14
The following table provides additional data related to CNA's
environmental pollution, other mass tort and asbestos-related claims
activity.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------------------------------------
Environmental Environmental
Pollution Pollution
and Other Mass and Other Mass
Tort Asbestos Tort Asbestos
------------------------------------------------------
<S> <C> <C> <C> <C>
Reported Claims:
Gross reserves ................... $306.0 $1,564.0 $ 291.0 $1,305.0
Less reinsurance recoverable ..... (61.0) (316.0) (41.0) (91.0)
------------------------------------------------------
Net reported claims .............. 245.0 1,248.0 250.0 1,214.0
Net unreported claims .............. 340.0 255.0 537.0 242.0
------------------------------------------------------
Net reserves ....................... $585.0 $1,503.0 $ 787.0 $1,456.0
======================================================
</TABLE>
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.
NON-INSURANCE
Tobacco Litigation -- Since 1995, lawsuits have been filed with increasing
frequency against Lorillard and other manufacturers of tobacco products.
Since January 1, 1998, approximately 525 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 320
of these actions. Cases also have been filed with greater frequency against
the Company. A total of approximately 725 product liability cases are
pending against U.S. cigarette manufacturers; of these, Lorillard is a
defendant in approximately 335.
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.
Tobacco litigation includes various types of claims. 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 210 such actions
are pending against Lorillard. In other cases, plaintiffs have brought
claims as purported class actions on behalf of large numbers of individuals
for damages allegedly caused by smoking ("Class Actions"). Approximately 40
such cases are pending against Lorillard. In addition, cases have been
brought by governmental entities and 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").
Reimbursement cases include a case commenced in September 1999 by the
Page 15
federal government. Approximately 75 Reimbursement Cases are pending
against Lorillard and, in some instances, the Company, 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 eight such actions are pending against
Lorillard. Lorillard is named as a defendant in a ninth action but has not
received service of process.
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. The Company is not a defendant
in any of the actions.
SETTLEMENT OF GOVERNMENTAL REIMBURSEMENT CASES AND A CLASS ACTION CASE -
On November 23, 1998, Lorillard 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 "Settling States"). The MSA provides, among other things, that
the Settling States shall release and discharge all of their health care
cost recovery claims against the manufacturers in consideration for the
implementation of tobacco-related health measures, settle a number of
cases, 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. 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 MSA is subject to final judicial approval in each of the Settling
States. In the Company's opinion, approximately 44 of the Settling States
have achieved final judicial approval. Some suits have been filed
contesting various aspects of the MSA. Certain other actions have been
filed in which plaintiffs seek to intervene in cases governed by the MSA in
order to achieve a different distribution of the funds allocated by the MSA
to the respective states. If a Settling State does not obtain final
judicial approval by December 31, 2001, the MSA will be terminated with
respect to such state. The MSA, however, will remain in effect as to each
Settling State in which final judicial approval is obtained. The MSA
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 to
avoid the further expense, inconvenience, burden and uncertainty of
litigation.
Lorillard, and certain other United States tobacco product manufacturers,
have also entered into an agreement that settled an ETS smoking and health
class action brought on behalf of airline flight attendants.
Lorillard recorded pre-tax charges of $297.9, $30.8, $782.4 and $218.3
for the three and nine months ended September 30, 1999 and 1998,
respectively, related to the settlement of tobacco litigation. The Company
believes that the MSA will materially adversely affect its cash flows and
operating income in future years. The degree of the adverse impact will
Page 16
depend, among other things, on the rates of decline in United States
cigarette sales in the full price and discount cigarette segments.
CONVENTIONAL PRODUCT LIABILITY CASES - There are approximately 600 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 210 of these cases.
The Company is a defendant in eight of the cases, although it has not
received service of process in three of them.
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 in excess of $100.0
in punitive damages.
Several cases have been tried against cigarette manufacturers during 1998
and 1999. Lorillard was a defendant in two of the cases while the Company
was a defendant in one of the two cases in which Lorillard was a party.
Juries returned verdicts in favor of the defendants in both of these
matters. Appeals are not pending in either of these cases. Other
manufacturers were defendants in six other trials that involve nine cases
(four separate cases were tried in one consolidated trial). The juries
returned verdicts in favor of the defendants in the cases that comprised
the consolidated trial and in two other matters. However, juries returned
verdicts in favor of the plaintiffs in the three remaining trials. One of
these three verdicts has been reversed on appeal. In the two other cases,
the trial courts have reduced the amounts awarded by the juries. Appeals
are pending in both of these matters. It appears that cases will be tried
with greater frequency than in the past and several cases are scheduled for
trial against Lorillard during 2000. Cases against other tobacco companies
are scheduled for trial during 2000. Trial dates are subject to change.
CLASS ACTIONS - There are approximately 60 purported class actions
pending against cigarette manufacturers and other defendants, including the
Company. 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 additional 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 of the cases 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. Lorillard is a defendant in approximately 40 of the
approximately 60 cases seeking class certification. The Company is a
defendant in 18 of the purported class actions, two of which have not been
served. Many of the purported class actions are in the pre-trial, discovery
stage.
Trial began during July 1998 in the case of Engle v. R.J. Reynolds
Tobacco Co., et al. (Circuit Court, Dade County, Florida, filed May 5,
Page 17
1994). The plaintiff class seeks compensatory and punitive damages, each in
excess of one hundred billion dollars, as well as attorneys' fees and court
costs. The class consists of all Florida residents and citizens, and their
survivors, who have suffered, presently suffer or have died from diseases
and medical conditions caused by their addiction to cigarettes that contain
nicotine.
On July 7, 1999, the jury returned a verdict against defendants at the
conclusion of Phase One of the three phase trial. The Phase One verdict
concerned certain issues determined by the trial court to be "common" to
the causes of action of the plaintiff class. Among other things, the jury
found that smoking cigarettes causes twenty diseases or medical conditions,
that cigarettes are addictive or dependence producing, defective and
unreasonably dangerous, that defendants made materially false statements
with the intention of misleading smokers, that defendants concealed or
omitted material information concerning the health effects and/or the
addictive nature of smoking cigarettes and agreed to misrepresent and
conceal the health effects and/or the addictive nature of smoking
cigarettes, and that defendants were negligent and engaged in extreme and
outrageous conduct or acted with reckless disregard with the intent to
inflict emotional distress. The jury also found that defendants' conduct
"rose to a level that would permit a potential award or entitlement to
punitive damages." On July 29, 1999, the trial judge denied defendants'
motions to set aside the Phase One verdict, to grant a new trial and to
decertify the class.
Liability and damages in relation to any individual class member were not
decided in Phase One. Phase Two of the trial plan began on November 1,
1999, with two of the named plaintiffs seeking to have their claims
adjudicated in a consolidated trial before the same jury which returned the
verdict in Phase One. Under the trial plan, the jury in this part of Phase
Two will determine issues of specific causation, reliance, affirmative
defenses, and other individual-specific issues related to the claims of the
two named plaintiffs and their entitlement to damages, if any. This part of
Phase Two may not be concluded until early 2000. It is not known when the
trials of the other seven class representatives will be conducted.
Phase Three of the trial plan would address other class members' claims,
including issues of specific causation, reliance, affirmative defenses and
other individual-specific issues regarding entitlement to damages, in
individual trials before separate juries.
By order dated July 30, 1999 and supplemented on August 2, 1999
(together, the "order"), the trial judge amended the trial plan in respect
to the manner of determining punitive damages, if any. The order provides
that the jury in the second stage of Phase Two will determine punitive
damages, if any, on a lump-sum dollar amount basis for the entire qualified
class, after the determination of liability and compensatory damages.
Defendants sought review of the July 30, 1999 and August 2, 1999 orders
by filing a motion to enforce the mandate with the Florida Third District
Court of Appeal. The motion asked the Third District Court of Appeal to
enforce its January 1996 mandate that directed that "the issue of damages,"
among "other issues," could not be determined on a class-wide basis and
must be resolved individually "as to each class member." On September 3,
1999, the Third District Court of Appeal ruled that the trial judge's
orders violated the mandate, expressly instructing that "the issue of
damages, both compensatory and punitive, must be tried on an individual
basis." However, on September 17, 1999, the Third District Court of Appeal
vacated its September 3rd order on its own motion. The Third District Court
of Appeal heard oral argument on October 20, 1999 and shortly thereafter
Page 18
issued an order that reversed its September 3rd order and denied
defendants' motion to enforce the mandate, stating only that the issues
could be raised in a subsequent appeal.
On October 29, 1999, defendants filed a petition for writ of prohibition
and mandamus or, in the alternative, request for an extraordinary writ with
the Florida Supreme Court. The petition seeks an order that punitive
damages would have to be determined on an individual and not a class-wide
basis. On November 3rd, the Florida Supreme Court ordered Plaintiffs to
file a response by November 29th and Defendants to file a reply by December
6th. It is not known when the Florida Supreme Court will rule, but the
Court's order would stay any punitive damages proceeding in the trial court
until the Supreme Court rules.
If review by the Florida Supreme Court is not successful, it is unclear
how the order will be implemented. The August 2nd, order provides that the
lump-sum punitive damage amount, if any, will be allocated equally to each
class member and acknowledges that the actual size of the class will not be
known until the last case has withstood appeal, i.e., the punitive damage
amount, if any, determined for the entire qualified class, would be divided
equally among those plaintiffs who are ultimately successful. The order
does not address whether defendants would be required to pay the punitive
damage award, if any, prior to a determination of claims of all class
members, a process that could take years to conclude. Lorillard does not
believe that an adverse class-wide punitive damage award in Phase Two would
permit entry of a judgment at that time that would require the posting of a
bond to stay its execution pending appeal or that any party would be
entitled to execute on such a judgment in the absence of a bond. However,
in a worst case scenario, it is possible that a judgment for punitive
damages could be entered in an amount not capable of being bonded,
resulting in an execution of the judgment before it could be set aside on
appeal. Lorillard believes that such a result would be unconstitutional and
would also violate Florida laws. Lorillard will take all appropriate steps
to seek to prevent this worst case scenario from occurring and believes
these efforts should be successful.
On August 2, 1999, Lorillard and other defendants filed a motion to
disqualify the trial judge after press reports stating that the judge is a
former smoker. The motion asserted among other things that the trial judge
was required to disqualify himself because he has a serious medical
condition of a type that the plaintiffs claim and the jury has now found is
caused by smoking, making him financially interested in the result of the
case and, under plaintiffs' theory of the case, a potential member of the
plaintiff class. On August 4, 1999, the trial judge denied the
disqualification motion; Lorillard believes that the denial was in error
and defendants sought a writ of prohibition from the Florida Third District
Court of Appeal.
The Third District Court of Appeal denied defendants' request for relief,
without opinion. On August 27, 1999, defendants filed with the Third
District Court of Appeal a motion for rehearing, rehearing en banc and/or
certification to the Florida Supreme Court. Defendants have advised the
Third District Court of Appeal that one of plaintiffs' expert witnesses had
testified that former smokers with medical conditions of the type
experienced by Judge Kaye would be class members. On October 25th, the
Third District Court of Appeal ordered plaintiffs to respond to the motion
to supplement the record. It is not known when the Third District Court of
Appeal will rule on defendants' motions.
Lorillard remains of the view that the Engle case should not have been
certified as a class action. That certification is inconsistent with the
Page 19
overwhelming majority of federal and state court decisions which have held
that mass smoking and health claims are inappropriate for class treatment.
Lorillard intends to challenge the class certification, as well as other
numerous reversible errors that it believes occurred during the Phase One
trial, at the earliest time that an appeal of these issues is permissible
under Florida law. In any event, Lorillard would be entitled to appeal
these issues following any judgment in favor of an individual named or
absent class member plaintiff.
REIMBURSEMENT CASES - Suits brought by 46 state governments and six other
governmental entities are governed by the MSA. In addition to these,
approximately 60 other suits are pending, comprised of a suit brought by
the United States federal government, approximately 40 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 they
allegedly expended to provide health care to individuals with injuries or
other health effects allegedly caused by use of tobacco products or
exposure to cigarette smoke. 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 non-U.S.
national governments (The Republic of Guatemala and Republic of Nicaragua).
In addition, the Company, Lorillard Tobacco Company and Lorillard, Inc.
were dismissed from the suits brought by the Republic of the Marshall
Islands and the Republic of Panama. Both cases remain pending against other
cigarette manufacturers. The Company is named as a defendant in 12 of the
pending reimbursement cases. The Company also was named as a defendant in
several of the cases dismissed as a result of the MSA.
Governmental Reimbursement Cases - The MSA is expected to resolve the
cases filed by 46 state governments and six other governmental entities.
Since January 1, 1997, cases brought by four other 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. Suits by seven local governments are pending against cigarette
manufacturers, although the MSA purportedly resolves those actions. In
addition to these suits, cases have been brought in U.S. courts by Bolivia,
Guatemala, Nicaragua, Panama, the State of Goias, Brazil, the State of Rio
de Janeiro, Brazil, Thailand and Venezuela. Thailand has voluntarily
dismissed its case. To date, none of the defendants have received service
of process of the case filed by the State of Goias, Brazil. Cases also have
been filed in Israel, the Marshall Islands and British Columbia. 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, the State of Goias, the State of Rio de
Janeiro and Venezuela. In 1977 Lorillard sold its major trademarks outside
of the United States and the international sales business in cigarettes
associated with those brands. Performance by Lorillard of obligations under
the 1977 agreement was guaranteed by the Company. Lorillard and the Company
have received notice from Brown & Williamson Tobacco Corporation, which
claims to be a successor to the purchaser, that indemnity will be sought
under certain indemnification provisions of the 1977 agreement with respect
to suits brought by various of the foregoing foreign jurisdictions,
concerning periods prior to June 1977 and during portions of 1978.
Page 20
The federal government of the United States filed a reimbursement suit on
September 22, 1999 in federal court in the District of Columbia against
Lorillard, other U.S. cigarette manufacturers, some parent companies and
two trade associations. Plaintiff asserts claims under the Medical Care
Recovery Act, the Medicare Secondary Payer provisions of the Social
Security Act, and the Racketeer Influenced and Corrupt Organizations Act.
The government alleges in the complaint that it has incurred costs of more
than $20,000.0 annually in providing health care costs under certain
federal programs, including Medicare, military and veterans' benefits
programs, and the Federal Employee Health Benefits Program. The federal
government seeks to recover an unspecified amount of health care costs, and
various types of declaratory relief, including disgorgement, injunctive
relief and declaratory relief that defendants are liable for the
government's future costs of providing health care resulting from the
defendants' alleged wrongful conduct.
In addition to the reimbursement cases, some suits have been filed
contesting, by various methods, the MSA. Certain other actions have been
filed in which plaintiffs seek to intervene in cases governed by the MSA in
order to achieve a different distribution of the funds allocated by the MSA
to the respective states. Lorillard was named as a defendant in several of
the cases filed to date. The Company was named as a defendant in one of the
cases but has been voluntarily dismissed from the action.
Private Citizen 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 subsequently filed reimbursement cases in
each state. The Company is a defendant in two of the pending private
citizen reimbursement cases. Lorillard is a defendant in each of the cases.
One of the five cases is on appeal from a final judgment entered by the
trial court in favor of the defendants. In a second case, a federal court
of appeal affirmed the federal trial court's final judgment in favor of the
defendants but remanded the matter to a state trial court for additional
proceedings. The three remaining suits are in the pre-trial, discovery
stage.
Reimbursement Cases By Indian Tribes - Indian Tribes have filed eleven
reimbursement suits against cigarette manufacturers. Three of the eleven
cases have been dismissed. Some of the cases have been filed by the tribes
in their tribal courts. 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.
Reimbursement Cases By Private Companies - Private companies have filed
six suits against cigarette manufacturers, although two of them have been
dismissed. Lorillard has been a defendant in each of the cases. The Company
is not named as a defendant in any of the cases filed to date by private
companies.
Reimbursement Cases By Labor Unions - Approximately 40 reimbursement
cases filed by labor unions are pending in various states in federal or
state courts. In 21 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 named as a defendant in four of the cases. Fourteen
of the approximately 40 cases are on appeal from final judgments entered in
defendants' favor by the trial courts. Plaintiffs sought class
certification on behalf of other unions in ten of the cases on appeal. One
such case has been tried during 1999, and Lorillard was a defendant in that
action. The jury in that matter, Ironworkers Local Union No. 17 Insurance
Fund, et al. v. Philip Morris, Inc., et al., returned a verdict in favor of
Page 21
the defendants on March 18, 1999. Plaintiffs have voluntarily dismissed the
appeal they noticed following the verdict.
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, although it has not received service of
process of one of them. The Company is named as a defendant in five of the
cases, two of which have not been served.
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.
Approximately 20 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 $50.0 in compensatory
damages and $100.0 in punitive damages. Trials have been held in twelve
such cases, including two in 1999. Juries have returned verdicts in favor
of Lorillard in nine of the twelve trials. Three verdicts have been
returned in plaintiffs' favor, including one of the two cases tried to date
during 1999. In the 1999 trial, plaintiffs were awarded $2.2 in actual
damages. Lorillard has noticed an appeal from this verdict.
OTHER TOBACCO-RELATED LITIGATION - In addition to the foregoing
litigation, 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)). Two other cases
that make similar allegations against manufacturers of other types of
tobacco products have been filed. The four "Proposition 65" suits have been
transferred to a coordinated proceeding involving certain other cases
against cigarette manufacturers that is pending in the Superior Court of
San Diego County, California. The four "Proposition 65" cases are set for
trial on February 25, 2000.
DEFENSES - Lorillard believes that it has a number of defenses to pending
cases, and Lorillard will continue to maintain a vigorous defense in all
such litigation. These defenses, where applicable, include, among others,
preemption, 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 are likely to be the subject of further legal proceedings
in the litigation.
Page 22
* * * *
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 and the MSA 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.
9. In the opinion of Management, the accompanying consolidated condensed
financial statements reflect all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of September 30, 1999 and December 31, 1998 and the results of operations
for the three and nine months and changes in cash flows for the nine months
ended September 30, 1999 and 1998, respectively.
Results of operations for the third quarter and the first nine months of
each of the years is not necessarily indicative of results of operations
for that entire year.
Page 23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
---------------------------------------------------------------------
OVERVIEW
Loews Corporation (the "Company") reported net operating income, excluding
net investment gains and losses, for the third quarter ended September 30,
1999 of $264.9 million or $2.46 per share, compared to $201.6 million or $1.76
per share in 1998.
Net operating income for the third quarter ended September 30, 1999 and
1998, included charges at the Lorillard Tobacco subsidiary of $178.2 and $18.4
million (after-taxes), respectively, related to the settlement of tobacco
litigation, and charges at the CNA Financial Corporation subsidiary of $8.8
and $127.9 million (after taxes and minority interest), respectively, for
restructuring and other related items.
Net income for the 1999 third quarter amounted to $271.3 million or $2.52
per share, compared to $617.1 million or $5.38 per share for the 1998 third
quarter. Net income in the 1999 third quarter includes net investment gains of
$6.4 million, compared to $415.5 million in the third quarter of 1998.
Revenues in the third quarter amounted to $5.4 billion compared to $6.0
billion in the comparable 1998 quarter. Revenues in the third quarter,
excluding investment gains and losses, were $5.4 billion compared to $5.3
billion in 1998.
Net operating income for the nine months ended September 30, 1999, excluding
net investment gains and losses and accounting changes, was $669.2 million or
$6.11 per share versus $625.1 million or $5.44 per share in the first nine
months of 1998. Net operating income for the nine months ended September 30,
1999 and 1998, included charges at the Lorillard Tobacco subsidiary of $467.9
and $130.5 million (after taxes), respectively, related to the settlement of
tobacco litigation and charges at the CNA Financial Corporation subsidiary of
$39.0 and $127.9 million (after taxes and minority interest), respectively,
for restructuring and other related items.
Net income for the nine month period in 1999 was $571.0 million or $5.21 per
share, compared to $780.6 million or $6.79 per share in 1998, reflecting net
investment gains of $59.7 million in the first nine months of 1999 compared to
$155.5 million in 1998.
Revenues for the first nine months of 1999 were $16.6 billion, compared to
$16.3 billion in 1998. Revenues for the first nine months of 1999, excluding
investment gains and losses, amounted to $16.5 billion compared to $15.9
billion in 1998.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
CNA Financial
Insurance operations are conducted by subsidiaries of CNA Financial
Corporation ("CNA"). CNA is an 86% 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.
Page 24
Net written premiums for the property/casualty segment increased $81.0
million for the first nine months of 1999 as compared with the same period in
1998. The increase in net written premiums was comprised primarily of an
increase in CNA Re of $252.0 million and an increase of $100.0 million in
Global Operations. These increases were partially offset by decreases in net
written premiums in Risk Management of $137.0 million, Agency Market
Operations of $68.0 million and Specialty Operations of $66.0 million.
The increase in CNA Re net written premiums is primarily attributable to
expansion of business with existing clients and the continued development of
new product lines, and growth in global facultative operations and the
Canadian branch.
The increase in Global Operations premiums was due to (i) an increase in
international premiums of $74.0 million, of which $45.0 million related to the
June 30, 1998, acquisition of Maritime Insurance Co., Ltd, and $17.0 million
of which resulted from business growth in the United Kingdom and continental
Europe, (ii) an increase in surety premiums of $21.0 million, primarily due to
generally favorable economic conditions for public construction nationwide,
and (iii) an increase in premiums in the warranty unit of $19.0 million,
mainly attributable to robust sales of new automobiles. These increases were
partially offset by adverse premium development in voluntary pools and
associations.
The decline in Agency Market Operations net written premiums was mainly due
to aggressive re-underwriting and expansion of reinsurance to take advantage
of a favorable reinsurance market. The decrease in Risk Management was
primarily due to CNA's decision to take advantage of a favorable reinsurance
market and cede a larger portion of its direct premiums, as well as the
redesign of existing risk management programs.
Net written premiums increased $305.0 million to $2,317.0 million for the
third quarter of 1999 as compared with the same period for 1998. The increase
was mainly attributable to a $247.0 million increase in CNA Re, a $66.0
million increase in Global Operations and a $43.0 million increase in Agency
Market Operations. These decreases were offset in part by a $39.0 million
decrease in Risk Management. The increases in CNA Re and Global Operations and
the decrease in Risk Management are due primarily to the reasons previously
mentioned. The increase in net written premiums in Agency Market Operations in
the third quarter of 1999 compared to the same period in 1998 is due to growth
in the personal insurance segment of that unit which was driven by new agency
appointments and a new auto tiering program, which allows for the acceptance
of a broader range of customers for which to write business.
Underwriting losses increased by $33.0 million for the nine months ended
September 30, 1999 as compared with the same period in 1998. The combined
ratio increased .3 points to 111.4% for the nine months ended September 30,
1999 from 111.1% for the same period in 1998. This increase is due to a slight
increase in the loss ratio of .6 points to 78.4% for the nine months ended
September 30, 1999 from 77.8% for the same period in 1998 principally due to
adverse development and greater catastrophes, partially offset by the benefits
of new reinsurance treaties. Offsetting the increase in the loss ratio is a
decrease in the expense ratio of .3 points to 33.0% from 33.3%.
Restructuring-related charges of $220.0 million incurred in the third quarter
of 1998 versus $70.0 million in the first nine months of 1999 were the primary
reason for the decrease in the expense ratio.
Underwriting results improved $46.0 million for the quarter ended September
30, 1999 as compared with the same quarter in 1998. The combined ratio
decreased 2.1 points to 110.1% for the three months ended September 30, 1999
from 112.2% for the same period in 1998. This decline is due to a 2.0 point
Page 25
decrease in the expense ratio to 34.0% for the third quarter of 1999 from
36.0% for the same period in 1998. Restructuring-related charges of $220.0
million incurred in the third quarter of 1998 versus $16.0 million in 1999
were the primary reason for the decrease in the expense ratio.
On October 1, 1999, CNA completed a previously announced transaction with
The Allstate Corporation ("Allstate"), involving CNA's personal lines
insurance business. Approximately $1.2 billion was transferred to Allstate for
the policy liabilities assumed. Additionally, CNA received $140.0 million in
cash which consisted of (i) $120.0 million in commissions for the reinsurance
of the CNA personal insurance business by Allstate and (ii) $20.0 million for
an option exercisable during 2002 to purchase common stock of five CNA
subsidiaries.
CNA will continue to have an ongoing interest in the profitability of CNA's
personal lines insurance business and the related successor business through a
$75.0 million equity linked note. In addition, CNA has licensed the "CNA
Personal Insurance" trademark and personal insurance distribution system to
Allstate for use in Allstate's personal insurance agency business for a period
of five years. CNA will receive a royalty fee based on the business volume of
personal insurance policies sold through the CNA agents and on some related
business for a period of six years. The Company believes there will be no
material effect on its operating income in 1999 and 2000 as a result of this
transaction.
Life
- ----
Life Operations continued to have strong sales, particularly in retirement-
related products as well as an increasing base of direct premiums for life and
long term care. Sales volume is a cash based measure of business sales, which
includes premium and annuity considerations, investment deposits, and other
sales activity not reported as premiums. Sales volume increased from $1,660.0
million for the first nine months of 1998 to $2,195.0 million for the first
nine months of 1999. Third quarter 1999 sales volume was $800.0 million
compared to $531.0 million in 1998.
Life Operations' premiums decreased $34.0 million for the first nine months
of 1999 as compared with the same period in 1998. The decline was primarily
the result of ceding business under a reinsurance treaty that was completed in
late 1998. Premiums for the third quarter of 1999 increased $19.0 million as
compared with the same period in 1998.
Net operating income for the first nine months of 1999 was higher than net
operating income for the same period in 1998 due to a combination of lower
operating expenses and improved investment results in institutional pension
products. Net operating income for the third quarter of 1999 decreased $18.0
million as compared with the same period in 1998.
Group
- -----
Group Operations' premiums for the three and nine months ended September 30,
1999 decreased $60.0 and $51.0 million, respectively, as compared with the
same periods in 1998. These decreases are due primarily to CNA's exit from the
Employer Health and Affinity lines of business resulting in the loss of $87.0
and $264.0 million in premiums in the three and nine months ended September
30, 1999, respectively, as compared with the same periods in 1998. The loss of
Page 26
this business has been substantially offset by growth in all other units
within this segment.
Net operating income increased by $80.0 million in the first nine months of
1999, as compared with the same period in 1998. This improvement is
attributable partially to a $48.0 million decrease in current year losses as a
result of Group Operations' decision to exit certain lines of business, as
mentioned above. In addition, results improved by $30.0 million due to
improved loss experience on life and disability business.
Net operating income for the third quarter of 1999 was $24.0 million as
compared with a net operating loss of $38.0 million for the same period in
1998. This change was again driven by a $47.0 million decrease in current year
losses as a result of Group Operations' decision to exit certain lines of
business and improvement in life and disability business of $14.0 million.
Other Insurance
- ---------------
The Other Insurance segment contains CNA's corporate interest expense,
certain 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.
Pre-tax operating losses, excluding realized investment gains, for the Other
Insurance segment for the first nine months of 1999 increased by $151.0
million as compared with the same period in 1998. The increase was principally
attributable to unfavorable loss reserve development in run-off insurance
lines (including Fibreboard), and a settlement of a computer services
contract. Pre-tax operating losses, excluding realized investment gains, for
the quarter ended September 30, 1999 increased approximately $36.0 million as
compared with the same period in 1998 for the same reason.
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
"MSA") 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. See Item 1-Business-
Lorillard, Inc.-Settlement of State Reimbursement Litigation-in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 for a more
detailed discussion.
The MSA 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 MSA will be terminated with respect to such state. The
MSA, however, will remain in effect as to each Settling State in which final
Page 27
judicial approval is obtained. The MSA 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 MSA 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 1998); (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 MSA.
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 MSA, 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 in 1998 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). On August
30, 1999, Lorillard increased the list price of all of its brands by $9.00 per
thousand cigarettes ($0.18 per pack of 20 cigarettes).
The Company believes that the implementation of the MSA 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 MSA.
FDA REGULATIONS -
The FDA has promulgated regulations asserting jurisdiction over cigarettes
as "drugs" or "medical devices" under the provisions of the Food, Drug and
Cosmetic Act. These regulations include severe restrictions on the
distribution, marketing and advertising of cigarettes, and would require the
industry to comply with a wide range of labeling, reporting, record keeping,
manufacturing and other requirements. The FDA's exercise of jurisdiction, if
not reversed by judicial or legislative action, could lead to more expansive
FDA-imposed restrictions on cigarette operations than those set forth in the
regulations, and could materially adversely affect the business, volume,
results of operations, cash flows and financial position of Lorillard and the
Company. In August 1998, the Fourth Circuit Court of Appeals ruled that the
FDA does not have the authority to regulate tobacco products, and declared the
FDA's regulations invalid. In April 1999, the U.S. Supreme Court agreed to
review the Fourth Circuit's decision. Oral argument will be heard before the
Page 28
U.S. Supreme Court on December 1, 1999. The ultimate outcome of this
litigation cannot be predicted.
Operating Results
Revenues increased by $299.8 and $944.4 million, or 38.0% and 45.5%,
respectively, and net income decreased by $12.6 million, or 6.4%, and
increased $116.4 million, or 32.7%, for the quarter and nine months ended
September 30, 1999, respectively, as compared to the corresponding periods of
the prior year.
The increase in revenues is primarily composed of an increase of
approximately $273.6 and $802.8 million, or 35.5% and 39.5%, due to higher
average unit prices and an increase of approximately $24.0 and $133.8 million,
or 3.1% and 6.6%, reflecting higher unit sales volume for the quarter and nine
months ended September 30, 1999, respectively, as compared to the
corresponding periods of the prior year.
Net income for the quarter and nine months ended September 30, 1999 and 1998
includes pre-tax charges of $297.9, $30.8, $782.4 and $218.3 million ($178.2,
$18.4, $467.9 and $130.5 million after taxes), respectively, related to the
settlement of tobacco litigation. Excluding these charges, net income would
have increased by $147.2 and $453.8 million, or 68.8% and 93.2%, as a result
of the improved revenues, partially offset by higher sales promotion expenses.
Lorillard's unit sales volume increased by 2.6% and 5.2%, while Newport's
unit sales volume decreased by 2.5% and 2.5%, for the quarter and nine months
ended September 30, 1999, respectively, as compared to the corresponding
periods of the prior year. The increase in Lorillard's unit sales volume
reflects higher unit sales of its Maverick and Old Gold brands in the discount
market segment, and increased sales promotion activities for these brands.
Newport's decline in unit sales volume reflects the effect of the November
1998 cigarette price increase of $0.45 per pack that followed the MSA. While
Newport's unit sales volume has declined, its market share has increased to
7.5% at September 30, 1999, as compared to 7.1% at December 31, 1998. Overall
industry unit sales volume is down by 10.7% year to date. Newport, a full
price brand, accounted for 72.2% of Lorillard's unit sales. 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 September 30, 1999, they represented 25.6%
of industry sales.
Loews Hotels
- ------------
Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews
Hotels Holding Corporation is a wholly owned subsidiary of the Company.
Revenues increased by $5.3 and $20.5 million, or 9.2% and 12.0%,
respectively, and income before cumulative effect of changes in accounting
principles decreased by $5.3 and $9.5 million, or 81.5% and 52.8%,
respectively, for the quarter and nine months ended September 30, 1999, as
compared to the corresponding periods of the prior year.
Revenues increased primarily due to the operations of the Loews Miami Beach
Hotel which opened in December 1998 and higher overall average room rates.
These increases were partially offset by the sale of the Loews Monte Carlo
Hotel in November 1998 and lower overall occupancy rates.
Page 29
Net income includes a charge of $7.1 million to reflect the cumulative
effect of a change in accounting principles with respect to preopening
expenses. Excluding this charge, net income decreased due to higher
advertising and sales promotion expense and preopening costs incurred,
partially offset by the higher revenues discussed above.
Diamond Offshore
- ----------------
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore").
Diamond Offshore Drilling, Inc. is a 52% owned subsidiary of the Company.
Revenues decreased by $110.5 and $273.9 million, or 33.8% and 28.8%,
respectively, and net income declined by $35.2 and $73.6 million, or 65.2% and
51.1%, respectively, for the quarter and nine months ended September 30, 1999,
as compared to the corresponding periods of the prior year.
Revenues from semisubmersible rigs decreased by $83.8 and $170.7 million, or
25.7% and 18.0%, due primarily to lower utilization rates ($54.9 and $135.3
million) and a decline in dayrates ($28.3 and $28.3 million) for the quarter
and nine months ended September 30, 1999, respectively, as compared to the
corresponding periods of the prior year. Revenues from jackup rigs decreased
by $37.8 and $117.1 million, or 11.6% and 12.3%, due to a decline in dayrates
($30.1 and $57.3 million) and decreased utilization rates ($7.7 and $58.0
million), primarily in the Gulf of Mexico.
Net income for the quarter and nine months ended September 30, 1999
decreased due primarily to the lower overall utilization rates and dayrates
discussed above.
Bulova
- ------
Bulova Corporation and subsidiaries ("Bulova"). Bulova Corporation is a 97%
owned subsidiary of the Company.
Revenues increased by $3.2 and $3.4 million, or 9.0% and 3.5%, respectively,
and net income increased by $.1 and $.5 million, or 3.1% and 6.8%,
respectively, for the quarter and nine months ended September 30, 1999, as
compared to the corresponding periods of the prior year. Increased revenues
reflect higher unit sales volume, partially offset by lower average unit sales
prices and reduced investment income. Net income increased due to a higher
gross margin reflecting an improved product sales mix, partially offset by
higher advertising expenses.
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.
Page 30
The components of investment gains (losses) included in Corporate operations
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------
1999 1998 1999 1998
------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenues:
Derivative instruments (1) .......... $ 56.0 $ 487.6 $(180.3) $ (12.6)
Fixed maturities .................... 25.3 (6.1) 14.0
Equity securities, including short
positions (1) ...................... 22.2 54.5 8.1 (174.8)
Short-term investments, primarily
U.S. government securities ......... .7 (.9) 6.9 (.3)
-----------------------------------
78.9 566.5 (171.4) (173.7)
Income tax (expense) benefit .......... (27.6) (198.3) 60.0 60.8
-----------------------------------
Net income (loss) ................ $ 51.3 $ 368.2 $(111.4) $(112.9)
===================================
</TABLE>
(1) Includes gains (losses) on short sales, equity index futures and options
aggregating $39.3, $491.8, $(264.9) and $(221.6) for the quarter and
nine months ended September 30, 1999 and 1998, respectively. The Company
continues to maintain these positions and, since September 30, 1999, has
experienced losses from these positions. See Item 3, "Qualitative and
Qualitative Disclosures About Market Risk."
Exclusive of securities transactions, revenues decreased $19.7 and $51.4
million, and net income decreased $12.4 and $29.1 million, for the quarter and
nine months ended September 30, 1999, respectively, as compared to the
corresponding periods of the prior year, due primarily to lower investment
income. The decline for the quarter ended September 30, 1999 was also impacted
by lower results from a 49% common stock interest in a shipping joint venture.
Liquidity and Capital Resources:
- -------------------------------
CNA Financial
- -------------
The statutory surplus of the property and casualty insurance subsidiaries
was approximately $7.9 billion at September 30, 1999 and $7.6 billion at
December 31, 1998. Statutory surplus increased by net income for the nine
months ended September 30, 1999 of $284.0 million and an increase in net
unrealized investment gains for that period of $676.0 million, principally
attributable to increases in the market value of Global Crossing Ltd. These
increases were partially offset by $470.0 million in dividends to the parent
company. The statutory surplus of the life insurance subsidiaries was
approximately $1.3 billion at September 30, 1999, compared 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 and investment income. The primary
Page 31
operating cash flow uses are payments for claims, policy benefits and
operating expenses.
For the nine months ended September 30, 1999, CNA's operating cash flows
were a negative $149.0 million, compared to negative cash flows of $730.0
million in 1998.
Net cash flows from operations 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 investments.
On August 2, 1999, CNA repaid its 11.0% Secured Mortgage Notes, due June 30,
2013. The gain realized on the transaction was not significant.
CNA and the insurance industry are exposed to liability for environmental
pollution, primarily related to toxic waste site clean-up. See Note 8 of the
Notes to Consolidated Condensed Financial Statements for further discussion of
environmental pollution exposures.
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 since 1997. See Note 8
of the Notes to Consolidated Condensed 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 MSA described above. The terms of the MSA require significant
payments to be made to the Settling States beginning in 1998 and continuing in
perpetuity. See "Results of Operations," above, and Note 17 of the Notes to
Consolidated Financial Statements to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 for additional information regarding this
settlement.
During 1999, the U.S. federal government initiated 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.
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
Page 32
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.
Loews Hotels
- ------------
A Loews Hotels subsidiary is developing a convention center hotel in
Philadelphia. Capital expenditures in relation to this hotel project is 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
- ----------------
Recent product prices have improved considerably as compared to late 1997
and throughout 1998. If sustained long-term, this improvement suggests the
offshore drilling industry could see a gradual improvement in utilization and
dayrates. But in the near-term, however, customers are taking a very cautious
approach to exploration and development until product prices display some
level of stability at a sustainable level. Continued improvements in market
conditions depend upon, among other factors, Diamond Offshore's customer's
belief that the improved product prices currently in effect are sustainable.
Currently, Diamond Offshore has eight rigs removed from service and several of
its other rigs remain idle in various markets. Diamond Offshore will
continually assess the need to cold stack additional rigs or reactivate
equipment depending on market conditions. Diamond Offshore believes that, with
its fleet size and composition, it is well positioned to take advantage of
opportunities when market conditions improve.
The 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 be terminated or renegotiated by the customer.
Cancellation or renegotiation of these contracts could have an adverse effect
on Diamond Offshore's results of operations.
The conversion of the Ocean Confidence from an accommodation vessel to a
semisubmersible drilling unit capable of operating in harsh environments and
ultra-deep water continues. Diamond Offshore previously estimated the cost of
conversion for this rig to be approximately $210.0 million. These estimates
were developed prior to the completed structural engineering. Diamond Offshore
now estimates the cost of conversion for this rig at approximately $285.0
million. Upon completion of the conversion and rig acceptance, the rig is
scheduled to begin a five year drilling program in the Gulf of Mexico which is
expected to generate approximately $320.0 million of revenues. The drilling
contract contains a provision allowing the customer to cancel the contract
should the unit not be delivered by July 1, 2000, but such date may be
adjusted in certain circumstances. Diamond Offshore believes that the project
will be completed timely and within the revised budget, although, as with any
major rig conversion, the possibility of unforeseen delays and costs overruns
exists.
Increased rig construction and enhancement programs are also ongoing by
Diamond Offshore's competitors. This increase in the supply of technologically
advanced rigs capable of drilling in deep water has produced a marginal
Page 33
oversupply of such equipment in the current market and, in turn, adversely
affected the utilization level and average operating dayrates available for
Diamond Offshore's rigs, particularly its higher specification semisubmersible
units.
Results of operations for 1999 have been adversely affected by the loss of
revenues and associated costs incurred during required regulatory inspections
of its drilling rigs. Five of these inspections were completed during the nine
months ended September 30, 1999. Also, in late September 1999, Diamond
Offshore began the regulatory inspection of the Ocean Guardian, which was
previously scheduled for the first quarter of 2000, to utilize idle time
between contracts. While no further inspections are scheduled for the
remainder of 1999, Diamond Offshore may perform additional inspections or
undertake modifications to take advantage of rig downtime. Diamond Offshore
intends to focus on returning these rigs to operation as soon as reasonably
possible, in order to minimize downtime and associated loss of revenues, but
the extent of such downtime cannot be accurately predicted.
Historically, the offshore contract drilling market has been highly
competitive and cyclical, and Diamond Offshore cannot predict the extent to
which current conditions may or may not continue.
Bulova
- ------
Funds from operations continue to exceed operating requirements. Bulova's
cash and cash equivalents, and investments amounted to $34.2 million at
September 30, 1999, as compared to $25.7 million at December 31, 1998. Funds
for other capital expenditures and working capital requirements are expected
to be provided from operations.
Parent Company
- --------------
During the quarter and nine months ended September 30, 1999, the Company
purchased 1,431,000 and 5,646,400 shares of its outstanding Common Stock at an
aggregate cost of approximately $109.1 and $439.4 million, respectively, and
purchased 783,700 and 1,856,000 shares of CNA Financial common stock at an
aggregate cost of approximately $28.5 and $67.9 million, respectively.
Depending on market conditions, the Company from time to time purchases
additional shares in the open market or otherwise.
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 September 30, 1999 and December 31, 1998.
The Company enters into short sales and invests in certain derivative
instruments 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.
Page 34
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" and "Quantitative and Qualitative Disclosures
about Market Risk" for additional information with respect to derivative
instruments, including recognized gains and losses on these instruments. See
also Note 4 of the Notes to Consolidated Financial Statements in the 1998
Annual Report on Form 10-K.
Insurance
- ---------
A summary of CNA's general account investments, at carrying value, are as
follows:
<TABLE> <CAPTION>
Change in
Unrealized
September 30, December 31, Gains
1999 1998 (Losses)
------------------------------------
(In millions)
<S> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and
obligations of government agencies . $ 8,768.0 $ 7,734.0 $ (233.0)
Asset-backed securities ............. 7,216.0 8,214.0 (218.0)
Tax exempt securities ............... 4,445.0 6,321.0 (333.0)
Taxable ............................. 6,919.0 7,804.0 (273.0)
-----------------------------------
Total fixed income securities .. 27,348.0 30,073.0 (1,057.0)
Equity securities ..................... 2,597.0 1,970.0 466.0
Short-term and other investments....... 8,886.0 5,134.0 119.0
-----------------------------------
Total .......................... $38,831.0 $37,177.0 $ (472.0)
===================================
Short-term and other investments:
Commercial paper .................... $ 5,193.0 $ 2,406.0
Money market funds .................. 1,643.0 536.0
U.S. Treasury securities ............ 58.0 506.0
Others .............................. 677.0 589.0
Other investments ..................... 1,315.0 1,097.0
-----------------------
Total short-term and other
investments ................... $ 8,886.0 $ 5,134.0
=======================
</TABLE>
CNA's general account investment portfolio consists primarily of publicly
traded government bonds, asset-backed securities, mortgage-backed securities,
Page 35
municipal bonds, corporate bonds and equity securities. 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.
The general account portfolio consists primarily of high quality (BBB or
higher) marketable fixed maturity securities, approximately 94.3% of which are
rated as investment grade. At September 30, 1999, tax exempt securities and
short-term investments excluding collateral for securities sold under
repurchase agreements, comprised approximately 11.4% and 12.6%, respectively,
of the general account's total investment portfolio compared to 17.0% and
10.5%, respectively, at December 31, 1998. Historically, CNA has maintained
short-term assets at a level that provided for liquidity to meet its short-
term obligations, as well as reasonable contingencies and anticipated claim
payout patterns. Short-term investments at September 30, 1999 are
substantially higher than historical levels in anticipation of the cash
transfer related to the Allstate transaction and Fibreboard-related claim
payments.
As of September 30, 1999, the market value of CNA's general account
investments in fixed maturities was $27.4 billion with net unrealized
investment losses of approximately $495.0 million. This compares to a market
value of $30.1 billion and approximately $562.0 million of net unrealized
investment gains at December 31, 1998. The gross unrealized investment gains
and losses for the fixed maturity securities portfolio at September 30, 1999
were $195.0 and $690.0 million, respectively, compared to $818.0 and $256.0
million, respectively, at December 31, 1998.
Net unrealized investment losses on general account fixed maturities at
September 30, 1999 include net unrealized investment losses on high yield
securities of $126.0 million, compared to net unrealized investment losses of
$101.0 million on such securities at December 31, 1998. High yield securities
are bonds rated as below investment grade by bond rating agencies, plus
private placements and other unrated securities which, in the opinion of
management, are below investment grade (below BBB). CNA's investment in high
yield securities in the general account decreased $455.0 million to
approximately $1.5 billion at September 30, 1999, as compared to December 31,
1998.
The Company's largest equity holding (held by CNA) in a single issuer is
Global Crossing, Ltd. ("Global Crossing") common stock. As of September 30,
1999, the Company owned 36.4 million shares, or 8.4% of the outstanding common
stock, which was carried at $966.0 million. Unrealized gains associated with
this security approximated $908.0 million at September 30, 1999.
In May 1999, Global Crossing entered into a transaction to merge Frontier
Corporation ("Frontier") into a subsidiary of Global Crossing. As part of the
Frontier merger agreement, certain shareholders of Global Crossing, including
the Company, entered into a voting agreement to limit their sales of Global
Crossing common stock to ensure that 51% of the outstanding shares of Global
Crossing would vote in favor of the merger. A large proportion of those
shareholders, including the Company, also agreed to suspend their rights under
a shareholders' agreement and a registration rights agreement until the
closing of the Frontier transaction. The voting rights agreement was amended
on September 2, 1999 to delay the exercise of those rights described in the
previous sentence until the earlier of the termination of the Frontier
transaction or six months after the closing of the Frontier transaction. The
Frontier transaction closed on September 28, 1999. The Company has the right
beginning on March 28, 2000 to require Global Crossing to register under the
Securities Act of 1933 (the "Act") up to 25% of the Company's holdings and
Page 36
beginning on August 13, 2000 to require Global Crossing to register up to an
additional 25% of the Company's holdings. The Company's holdings of Global
Crossing were not acquired in a public offering, and may not be sold to the
public unless the sale is registered or exempt from the registration
requirements of the Act. Such exemptions would include sales pursuant to Rule
144 under the Act if such sales meet the requirements of the Rule.
At September 30, 1999, total Separate Account cash, investments and other
assets amounted to approximately $4.6 billion with taxable fixed maturity
securities representing approximately 77.3% of the Separate Accounts'
portfolios. Approximately 57.0% of Separate Account investments are used to
fund guaranteed investment contracts for which CNA's life insurance affiliate
guarantees principal and a specified rate of return to the contract holders.
The duration of fixed maturity securities included in the guaranteed
investment contract portfolio is generally matched with the corresponding
payout pattern of the liabilities of the guaranteed investment contracts. The
fair value of all fixed maturity securities in the guaranteed investment
contract portfolio was $2.5 billion at September 30, 1999 and $3.2 billion at
December 31, 1998.
At September 30, 1999, net unrealized losses on the guaranteed investment
contract fixed maturity securities portfolio were approximately $32.0 million
compared with net unrealized gains of approximately $64.0 million at December
31, 1998. The gross unrealized investment gains and losses for the guaranteed
investment contract fixed maturity securities portfolio at September 30, 1999
were $20.0 and $52.0 million, respectively, as compared to unrealized
investment gains of $84.0 million and unrealized investment losses of $20.0
million, respectively, at December 31, 1998.
High yield securities generally involve a greater degree of risk than that
of investment grade securities. Expected returns should, however, compensate
for the added risk. The risk is also considered in the interest rate
assumptions in the underlying insurance products. Carrying values of high
yield securities in the guaranteed investment contract portfolio were $100.0
and $269.0 million at September 30, 1999 and December 31, 1998, respectively.
Net unrealized investment losses on high yield securities held in such
Separate Accounts were $12.0 million at September 30, 1999, compared to $11.0
million at December 31, 1998. As of September 30, 1999, CNA's concentration in
high yield bonds, including Separate Accounts, was approximately 2.9% of its
total assets, compared to 4.0% at December 31, 1998.
Included in CNA's fixed maturity securities at September 30, 1999 (general
and guaranteed investment contract portfolios) are $9.0 billion of asset-
backed securities, consisting of approximately 57.3% in collateralized
mortgage obligations ("CMO's"), 19.4% in corporate asset-backed obligations,
9.5% in corporate mortgage backed security pass-through obligations, and 13.8%
in U.S. government agency issued pass-through certificates. The majority of
CMO's held are corporate mortgaged backed securities, which are actively
traded in liquid markets and are priced by broker-dealers. At September 30,
1999, the net unrealized loss related to asset-backed securities was
approximately $134.0 million compared with a net unrealized gain of
approximately $163.0 million at December 31, 1998. CNA limits the risks
associated with interest rate fluctuations and prepayments by concentrating
its CMO investments in early planned amortization classes with relatively
short principal repayment windows.
At September 30, 1999, 36.1% of the general account's fixed maturity
securities portfolio was invested in U.S. government securities, 35.0% in
other AAA rated securities and 14.7% in AA and A rated securities. CNA's
guaranteed investment fixed maturity securities portfolio is comprised of 2.8%
U.S. government securities, 67.3% in other AAA rated securities and 14.6% in
Page 37
AA and A rated securities. These ratings are primarily from Standard and
Poor's Corporation.
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 $82.0 million. As of September 30, 1999, the
Company has spent approximately $65.0 million on Year 2000 readiness matters.
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 September 30, 1999, all of its internal application
systems had been certified by the Company as being ready for the Year 2000.
For an internal system to be certified Year 2000 ready by the Company, it had
to be tested and accepted as capable of receiving, processing and providing
dates and date-related data from, into and between the years 1999 and 2000,
and beyond, including leap year calculations. Replacement of hardware and
associated systems software is now in all material respects complete,
providing Year 2000 readiness for the Company's infrastructure components.
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 the Year 2000 issue. CNA has
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 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. To
mitigate this impact, the Company is communicating with these various entities
to coordinate Year 2000 conversion. In addition, the Company has engaged in
interface and Y2K readiness testing with many of its banking relationships. No
major problems have been identified. The Company continues to communicate with
its bank relationships to conduct appropriate testing.
As business conditions change, CNA may respond by revising previous Year
2000 strategies or solutions affecting specific systems. In limited cases, a
system that was to have been replaced, may instead be renovated to become Year
2000 ready prior to January 1, 2000. The Company believes that these changes
will not have a material impact on its results of operations or equity.
Page 38
In addition, CNA's non-insurance affiliates are expected to be ready on a
timely basis. In the event that they are not, CNA does not believe the impact
would be material to its results of operations or equity. To mitigate this
impact, CNA is communicating with these non-insurance affiliates to coordinate
Year 2000 conversion.
The Company also has 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 reviewed and updated
quarterly. The Company is also developing a year-end rollover plan to ensure
its ability to continue critical processes.
In addition, property and casualty insurance companies 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
underwriting companies. Coverage, if any, will depend on the facts and
circumstances of the claim and the provisions of the policy. The range of
potential insurance exposure created by the Year 2000 problem is sufficiently
broad that 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. Although the Company has received notices of Year 2000 related
claims, it is unable to forecast the nature and range of the losses, the
availability of coverage for the losses, or the likely frequency or severity
of future claims. As a result, CNA is unable to determine whether the adverse
impact, if any, in connection with the foregoing circumstances would be
material on the results of operations or equity of CNA.
Accounting Standards
- --------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting 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, 2000. The Company is currently evaluating the
effects of this Statement on its accounting and reporting for derivative
securities and hedging activities.
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. The Company is
currently evaluating the effects of this Statement.
Page 39
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
contracts 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, the effect on
the Company with regards to third party corrective actions on Year 2000
compliance; changes in 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.
Item 3. Quantitative and Qualitative Disclosures 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 September 30, 1999 and December 31, 1998, 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.
Page 40
Trading portfolio:
<TABLE>
<CAPTION>
Fair Value
Category of risk exposure: Asset (Liability) Market Risk
- ------------------------------------------------------------------------------
September 30, December 31, September 30, December 31,
1999 1998 1999 1998
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Equity markets (1):
Equity securities $ 234.4 $ 198.1 $ 59.0 $ 50.0
Options purchased 448.2 212.5 (390.0) (173.0)
Options written (24.1) (39.7) 9.0 9.0
Futures-long 134.0 47.0
Futures-short (2.0) (60.0)
Short sales (312.7) (657.7) (78.0) (164.0)
Interest rate (2):
Short sales of U.S.
government securities (126.0) (123.0) (12.0) (18.0)
Options written on U.S.
government securities (2.3) (7.0)
Futures-long 14.0
Futures-short (116.0)
Commodities (3):
Energy purchase
obligations (16.9) (5.0)
Gold (4):
Options purchased 21.1 17.5 (21.0) (18.0)
Options written (11.8) (3.7) 12.0 4.0
Other (5) (6.7) (13.0) (1.0)
- ------------------------------------------------------------------------------
</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.
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.
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.
Page 41
Other than trading portfolio:
<TABLE>
<CAPTION>
Fair Value
Category of risk exposure: Asset (Liability) Market Risk
- ------------------------------------------------------------------------------
September 30, December 31, September 30, December 31,
1999 1998 1999 1998
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Equity market (1):
Equity securities (a):
CNA Financial general
accounts $ 2,597.0 $ 1,970.1 $ (649.0) $ (493.0)
CNA Financial separate
accounts 243.0 297.0 (61.0) (74.0)
Equity index futures,
separate accounts (b) (229.0) (229.0)
Interest rate (2):
Fixed maturities (a) 28,078.0 31,409.4 (1,432.0) (1,574.0)
Short-term investments (a) 11,827.1 7,792.1 (4.0) (21.0)
Interest rate swaps (20.0) 9.0
Other derivative securities 9.0 6.0 4.0 10.0
Separate Accounts (a):
Fixed maturities 3,428.6 4,155.0 (137.0) (176.0)
Short-term investments 343.2 473.0
Long-term debt (5,475.2) (5,791.9)
- ------------------------------------------------------------------------------
</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%, (2) an increase in interest rates of
100 basis points and (3) a decline of 20% in foreign currency exchange
rates.
(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 $(429.5) and $(441.0) at September 30, 1999 and
December 31, 1998, 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
that affect the value of equity securities or instruments that derive their
value from such securities or indexes.
Equity price risk was measured assuming an instantaneous 25% change in the
underlying reference price or index from its level at September 30, 1999 and
December 31, 1998, 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
Page 42
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 change in interest rates of varying
magnitude 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
September 30, 1999 and December 31, 1998 due to instantaneous parallel changes
in the yield curve at the end of the period. 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 debt, including certain related interest rate swap agreements,
as of September 30, 1999 and December 31, 1998 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 $310.5 and $331.0 million at
September 30, 1999 and December 31, 1998, respectively. A 100 basis point
decrease would result in an increase in market value of $350.4 and $429.4
million at September 30, 1999 and December 31, 1998, respectively.
The sensitivity analysis assumes an instantaneous shift in market rates
increasing 100 basis points from their levels at September 30, 1999 and
December 31, 1998, 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 September 30, 1999 and December 31, 1998, 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 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.
Page 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Note 8 of the Notes to Consolidated
Condensed Financial Statements in Part I.
2. As noted in Item 3 Legal Proceedings of the Company's Report on Form 10-K
for the year ended December 31, 1998, Lorillard is defendant in various
lawsuits seeking damages for cancer and health effects claimed to have
resulted from the use of cigarettes or from exposure to tobacco smoke.
Information involving such lawsuits is incorporated by reference to such Item
3 Legal Proceedings. Material developments in relation to the foregoing are
described below.
CONVENTIONAL PRODUCT LIABILITY CASES -
On February 9 and 10, 1999, a jury in the Superior Court of San Francisco
County, California, returned a verdict in favor of the plaintiff in the case
of Henley v. Philip Morris Incorporated. The jury awarded plaintiff $1.5 in
actual damages and $50.0 in punitive damages. The court subsequently reduced
the punitive damages award to $25.0. Philip Morris has noticed an appeal to
the California Court of Appeals. Neither the Company nor Lorillard were
defendants in the case.
On March 30, 1999, a jury in the Circuit Court of Multnomah County, Oregon,
returned a verdict in favor of the plaintiff in the case of Williams v. Philip
Morris Incorporated and awarded her $.8 million in actual damages and $79.5
million in punitive damages. The court has reduced the punitive damages award
to $32.0 million. Plaintiff and Philip Morris have separately noticed appeals
to the Oregon Court of Appeals. Neither the Company nor Lorillard were
defendants in the case.
On May 10, 1999, a jury returned a verdict in favor of Philip Morris, R.J.
Reynolds and Brown & Williamson in a consolidated trial involving four cases
before the Circuit Court of Shelby County, Tennessee (Karney v. Philip Morris
Incorporated; McDaniel v. Brown & Williamson, et al.; Newcomb v. Brown &
Williamson, et al.; and Settle v. Brown & Williamson, et al.). Plaintiffs did
not notice appeal in any of the four cases. Neither the Company nor Lorillard
were defendants in these matters.
On May 13, 1999, a jury in the United States District Court for the Western
District of Missouri returned a verdict in favor of the defendant in the case
of Steele v. Brown & Williamson Tobacco Corporation. Plaintiffs did not notice
an appeal. Neither the Company nor Lorillard were defendants in the case.
On June 3, 1999, a jury in the case of Butler v. Philip Morris, Inc., et
al., tried in the Circuit Court of Jones County, Mississippi, returned a
verdict in favor of the defendants, including Lorillard. Plaintiffs withdrew
their post-trial motion for judgment notwithstanding the verdict or for new
trial and they did not notice an appeal. The Company was named as a defendant
in the complaint, but the court issued an order on the eve of trial that
granted the Company's motion to dismiss the complaint. Plaintiffs alleged
their decedent died as a result of exposure to environmental tobacco smoke.
On July 9, 1999, a jury in the District Court of East Baton Rouge Parish,
Louisiana, returned a verdict in favor of the defendants in the case of Gilboy
v. American Tobacco Company, et al. Plaintiffs withdrew their motion for new
Page 44
trial and did not notice an appeal. Neither the Company nor Lorillard were
defendants in the case.
CLASS ACTIONS -
Trial began during July 1998 in the case of Engle v. R.J. Reynolds Tobacco
Co., et al. (Circuit Court, Dade County, Florida, filed May 5, 1994). Prior to
trial, plaintiffs were granted class certification on behalf of Florida
residents and citizens, and survivors of such individuals, who allege injury
or have died from 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. Defendants are the major U.S. cigarette manufacturers,
including Lorillard, the parent company of one of the manufacturers, The
Tobacco Institute and the Council for Tobacco Research. The Company is not a
defendant in the case. See Note 8 of the Notes to Consolidated Condensed
Financial Statements, included in Part I, for a discussion of the Phase One
verdict and certain other recent developments in this case.
In the case of Avallone, et al. v. The American Tobacco Company, et al.
(Superior Court, Middlesex County, New Jersey, filed April 23, 1998), the
court has taken under advisement plaintiffs' motion for reconsideration of the
order denying plaintiffs' motion for class certification on behalf of New
Jersey casino workers occupationally exposed to environmental tobacco smoke.
The Company is a defendant in this matter.
In the cases of Badillo v. American Tobacco Company, et al. (filed October
8, 1997), Christensen v. Philip Morris Companies, Inc., et al. (filed April 3,
1998), Dienno v. Liggett Group, Inc., et al. (filed December 22, 1997), and
Selcer v. R.J. Reynolds Tobacco Company, et al. (filed March 3, 1997) (each
case pending in U.S. District Court, Nevada), the court has certified to the
Nevada Supreme Court questions of Nevada law in order to assist it in ruling
on the class certification issues raised by the parties in the briefing on
plaintiffs' motions for class certification. The Company is a defendant in
Badillo and Christensen. To date, none of the defendants have received service
of process in Christensen.
In the case of Barnes v. R.J. Reynolds Tobacco Company, et al. (U.S.
District Court, Eastern District, Pennsylvania), the United States Supreme
Court declined to accept plaintiffs' petition for writ of certiorari, which
concluded activity in the case. Plaintiffs had asked the Supreme Court to
review rulings by the U.S. Court of Appeals for the Third Circuit that
affirmed the trial court's order dismissing the case and decertifying the
class it previously had ordered.
In the case of Broin v. Philip Morris Companies, Inc., et al. (Circuit
Court, Dade County, Florida, filed October 31, 1991), a class action brought
on behalf of flight attendants claiming injury as a result of exposure to
environmental tobacco smoke, certain individuals who objected to the
settlement agreement approved by the court on February 3, 1998 have withdrawn
their appeals to the Florida Supreme Court. The objectors' appeals were the
only remaining challenges to the 1998 settlement order.
In the case of Brown v. Philip Morris, Inc., et al. (U.S. District Court,
Eastern District, Pennsylvania, filed October 16, 1998), the court granted
defendants' motion to dismiss the complaint and entered final judgment in
their favor. Plaintiffs have noticed an appeal to the U.S. Court of Appeals
for the Third Circuit.
Page 45
In the case of Castano, et al. v. The American Tobacco Company, et al. (U.S.
District Court, Eastern District, Louisiana, filed March 29, 1994), the court
entered an order that administratively terminated the case.
In the case of Chamberlain v. The American Tobacco Company, et al. (U.S.
District Court, Northern District, Ohio, filed August 14, 1996), the court has
denied plaintiffs' motion for class certification. The Company is a defendant
in the case. Due to the denial of the class certification motion, the case is
no longer proceeding as a class action and plaintiffs are pursuing their
individual claims.
In the case of Clay, et al. v. The American Tobacco Company, Inc., et al.
(U.S. District Court, Southern District, Illinois, Benton Division, filed May
22, 1997), the court entered a stipulation that voluntarily dismissed the
case.
In the cases of Cosentino v. Philip Morris Incorporated, et al. (filed May
28, 1997), Kirstein v. American Tobacco Company, Inc., et al. (filed May 28,
1997), Lippincott v. American Tobacco Company, Inc., et al. (filed June 13,
1997), Piscitello v. Philip Morris, Incorporated, et al. (filed July 28, 1997)
and Tepper v. Philip Morris Incorporated, et al. (filed May 28, 1997) (each
case pending in the Superior Court of Middlesex County, New Jersey), the New
Jersey Supreme Court declined to review the rulings by the trial court that
denied plaintiffs' motions for class certification. The class action cases
have been dismissed, although the plaintiffs in some of the actions are
proceeding with their individual claims in individual cases.
In the case of Geiger, et al. v. The American Tobacco Company, et al.
(Supreme Court, Queens County, New York), the plaintiffs have asked the
Appellate Division of the New York Supreme Court to review the trial court's
decision that denied their motion for class certification.
In the case of Granier, et al. v. The American Tobacco Company, et al. (U.S.
District Court, Eastern District, Louisiana, filed September 26, 1994), the
court entered an order that administratively terminated the case.
In the case of Hansen, et al. v. The American Tobacco Company, et al. (U.S.
District Court, Eastern District, Arkansas), the United States Court of
Appeals for the Eighth Circuit declined plaintiffs' interlocutory request that
it review the trial court's decision denying plaintiffs' motion for class
certification. The Company is a defendant in this matter.
In the case of Newborn v. Brown & Williamson Tobacco Corporation, et al.
(U.S. District Court, Western District, Tennessee, filed October 9, 1997), the
court entered an order dismissing the action due to plaintiffs' failure to
prosecute.
In the case of Reed v. Philip Morris, Inc., et al. (Superior Court, District
of Columbia), the court denied plaintiffs' renewed motion for class
certification. The court previously denied plaintiffs' original class
certification motion.
In the cases of 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), the New York Court of Appeals affirmed the ruling by the
Appellate Division that the cases be dismissed. Small is the only one of these
cases to name Lorillard as a defendant.
Page 46
In the case of Smokers for Fairness v. British American Tobacco Company, et
al. (Superior Court, Los Angeles County, California, filed September 25,
1998), plaintiffs have voluntarily dismissed the case without prejudice.
In the case of Taylor v. The American Tobacco Company, et al. (Circuit
Court, Wayne County, Michigan, filed May 23, 1997), the court has heard
argument on plaintiffs' motion for class certification and has taken it under
advisement.
In the case of Thompson v. American Tobacco Company, et al. (U.S. District
Court, Minnesota, filed September 4, 1996), the court has heard argument on
plaintiffs' motion for class certification and has taken it under advisement.
The Company is a defendant in this matter. Trial in this matter is scheduled
to begin on June 1, 2000.
In the case of Vaughan v. Philip Morris Incorporated, et al. (U.S. District
Court, Western District, Virginia, filed June 30, 1998), plaintiffs have
voluntarily dismissed the matter.
Since the effective date of the Loews Corporation Form 10-K dated December
31, 1998, Lorillard has received service of the following cases:
Jones v. The American Tobacco Company, Inc., et al. (Circuit Court, Jackson
County, Missouri, filed December 22, 1998). The Company is named as a
defendant in this matter.
Tobacco Consumers Group No. 3 v. R.J. Reynolds Tobacco Company, et al. (U.S.
District Court, Massachusetts, filed March 22, 1999).
Sturgeon v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, New York, filed April 9, 1999). Plaintiffs have filed an amended
complaint that drops the claims on behalf of plaintiff Sturgeon. Hereinafter,
the case will be known as Simon v. Philip Morris Incorporated, et al.
Julian v. Philip Morris Companies Inc., et al. (Circuit Court, Montgomery
County, Alabama, filed April 14, 1999).
REIMBURSEMENT CASES -
Governmental Reimbursement Cases:
Judgment has become final, pursuant to the MSA, in the cases brought by the
settling states that are listed below:
State of Alaska v. Philip Morris, Incorporated, et al. (Superior Court,
First Judicial District, Alaska, filed April 14, 1997).
State of Delaware v. Philip Morris Incorporated, et al. (Chancery Court, New
Castle County, Delaware, filed December 21, 1998).
Government of Guam v. Philip Morris Incorporated, et al. (Superior Court,
Hagatina, Guam, filed December 21, 1998).
State of Hawaii v. Brown & Williamson Tobacco Corporation, et al. (Circuit
Court, First Circuit Hawaii, filed January 31, 1997).
Ieyoub v. The American Tobacco Company, et al. (U.S. District Court, Western
District, Louisiana, filed March 13, 1996).
Kelley v. Philip Morris Incorporated, et al. (Circuit Court, Ingham County,
Michigan, filed August 21, 1996).
Page 47
McGraw v. The American Tobacco Company, et al. (Circuit Court, Kanawha
County, West Virginia, filed September 20, 1994).
State of North Dakota v. Philip Morris Incorporated, et al. (District Court,
Cass County, North Dakota, filed December 21, 1998).
State of South Carolina v. Brown & Williamson Tobacco Corporation, et al.
(Court of Common Pleas, Richland County, South Carolina, filed May 12, 1997).
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).
The United States Virgin Islands v. Philip Morris Incorporated, et al. (U.S.
District Court, United States Virgin Islands, filed December 18, 1998).
People of the State of California v. Philip Morris, Inc., et al. (Superior
Court, Sacramento County, California, filed June 12, 1997.
State of New York v. The American Tobacco Company, et al. (Supreme Court,
New York County, New York, filed January 27, 1997).
In the case of People of the State of California v. Philip Morris
Incorporated, et al. (Superior Court, San Francisco County, California, filed
September 5, 1996), plaintiffs have voluntarily dismissed the action. The case
was brought by various California counties and cities and local chapters of
various medical societies and associations.
In the case of The Republic of Bolivia v. Philip Morris Companies, Inc., et
al. (U.S. District Court, District of Columbia, filed January 20, 1999), the
United States Panel on Multi-District Litigation granted a motion filed by
certain of the cigarette manufacturing defendants to transfer to the Panel
this and other matters filed by non-U.S. governments that are pending in U.S.
federal courts. The Company is a defendant in this matter.
In the case of The Republic of Guatemala v. The Tobacco Institute, Inc., et
al. (U.S. District Court, District of Columbia, filed May 11, 1998), the
United States Panel on Multi-District Litigation granted a motion filed by
certain of the cigarette manufacturing defendants to transfer to the Panel
this and other matters filed by non-U.S. governments that are pending in U.S.
federal courts. Neither the Company nor Lorillard are defendants in this
matter.
In the case of The Republic of Nicaragua v. Liggett Group, Inc., et al.
(U.S. District Court, District of Columbia, filed December 10, 1998), the
United States Panel on Multi-District Litigation granted a motion filed by
certain of the cigarette manufacturing defendants to transfer to the Panel
this and other matters filed by non-U.S. governments that are pending in U.S.
federal courts. Neither Lorillard nor the Company are defendants in this
matter.
In the case of The Republic of Panama v. The American Tobacco Company, et
al. (Circuit Court, Orleans Parish, Louisiana, filed October 16, 1998),
plaintiff has voluntarily dismissed Lorillard and the Company from this
matter. The case remains pending against other cigarette manufacturers and
their parent companies.
In the case of City of Birmingham, Alabama, et al. v. The American Tobacco
Company, et al. (U.S. District Court, Northern District, Alabama, filed May
28, 1997), plaintiffs have voluntarily dismissed their appeal to the U.S.
Court of Appeals for the Eleventh Circuit, thereby concluding the case.
Page 48
In the case of The Kingdom of Thailand v. The Tobacco Institute, Inc., et
al. (U.S. District Court, Southern District, Texas, filed January 29, 1999),
plaintiff voluntarily dismissed the case immediately after the United States
Panel on Multi-District Litigation granted certain cigarette manufacturing
defendants' motion to transfer this and other matters filed by non-U.S.
governments in U.S. courts to the Panel. Neither the Company nor Lorillard
were defendants in this case.
In the case of Republic of Venezuela v. Philip Morris Companies, et al.
(U.S. District Court, District of Columbia, filed January 27, 1999), the
United States Panel on Multi-District Litigation granted a motion filed by
certain of the cigarette manufacturing defendants to transfer to the Panel
this and other matters filed by non-U.S. governments that are pending in U.S.
federal courts. The Company is a defendant in this matter.
The following additional Governmental Reimbursement Cases have been filed:
The State of Rio de Janeiro of the Federated Republic of Brazil v. Philip
Morris Companies, Inc., et al. (District Court, Angelina County, Texas, filed
July 12, 1999). The Company is named as a defendant in the case.
The case of Kupat Holim Clalit v. Philip Morris, Inc., et al. (Jerusalem
District Court, filed September 28, 1998). Lorillard and the Company are named
as defendants.
The United States of America v. Philip Morris Incorporated, et al. (U.S.
District Court, District of Columbia, filed September 22, 1999). The Philip
Morris defendants have filed a motion to consolidate this action with the
United States Panel on Multi-District Litigation.
The State of Goias, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed October 19, 1999). The
Company is a defendant in the case. To date, none of the defendants have
received service of process.
Reimbursement Cases filed by Private Citizens:
In the case of Coyne v. The American Tobacco Company, et al. (Court of
Common Pleas, Cuyahoga County, Ohio, filed September 17, 1996), the matter has
been remanded to the Court of Common Pleas of Cuyahoga County, Ohio for
additional proceedings. The Company is a defendant in the case.
In the case of Wynn v. Philip Morris, Inc., et al. (Circuit Court, Jefferson
County, Alabama, filed May 27, 1998), the court has granted defendants' motion
to dismiss the complaint and has entered final judgment in their favor.
Plaintiff has asked the court to reconsider its decision.
Reimbursement Cases filed by Indian Tribes:
In the case of Pechanga Band of Luiseno Mission Indians, et al. v. Philip
Morris, Inc., et al. (Superior Court, San Diego County, California, filed
October 30, 1998), plaintiffs have filed an amended complaint that dismisses
claims on behalf of the first named plaintiff in the suit. The case now will
be known as U Tu Utu Gwaitu Paiute Tribe, et al. v. Philip Morris, Inc., et
al.
Page 49
The following additional reimbursement cases by Indian tribes have been
filed:
Yukon-Kuskokwim Health Corporation v. Philip Morris, Incorporated, et al.
(Superior Court, Fourth Judicial District Alaska, filed April 5, 1999).
Plaintiff has voluntarily dismissed the case.
Acoma Pueblo, et al. v. The American Tobacco Company, et al. (District
Court, Santa Fe County, New Mexico, filed June 16, 1999). Plaintiffs are 34
Indian Tribes.
Navajo Nation v. Philip Morris Incorporated, et al. (District Court, Navajo
Nation, filed August 12, 1999).
Reimbursement Cases filed by Private Companies:
In the case of Conwed Corporation, et al. v. R.J. Reynolds Tobacco Company,
et al. (U.S. District Court, Minnesota), the court granted defendants' motion
to dismiss the complaint and entered final judgment in their favor. Plaintiffs
did not notice an appeal.
In the case of Group Health Plan, Inc., et al. v. Philip Morris
Incorporated, et al. (U.S. District Court, Minnesota, filed March 11, 1998),
the court has scheduled the case for trial on December 1, 2000.
In the case of Great Lakes Sales & Marketing, Inc. v. The American Tobacco
Company, et al. (U.S. District Court, Western District, Pennsylvania, filed
March 23, 1998), the United States Court of Appeals for the Third Circuit
dismissed plaintiff's appeal due to its failure to comply with the court's
scheduling order. Plaintiff, which formerly was known as Williams & Drake
Company, had appealed from the trial court's final judgment in defendants'
favor, which reflected an order that granted defendants' motion to dismiss the
complaint.
In the case of 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), the court has continued the trial date from
January 10, 2000, to April 10, 2000.
Reimbursement Cases filed by Labor Unions:
In the case of Arkansas Carpenters Health & Welfare Fund v. Philip Morris,
Inc., et al. (U.S. District Court, Eastern District, Arkansas, filed September
4, 1997), the court has entered an order granting defendants' motion to
dismiss the complaint. The court also entered final judgment in favor of the
defendants. Plaintiff has noticed an appeal from the final judgment to the
U.S. Court of Appeals for the Eighth Circuit.
In the case of B.A.C. Local 32 Insurance Trust Fund, et al. v. Philip
Morris, Incorporated, et al. (U.S. District Court, Michigan, filed November
14, 1997), defendants withdrew their objection to plaintiffs' request to
voluntarily dismiss the case without prejudice. Defendants had asked the court
to dismiss the matter with prejudice. The matter now is concluded.
In the case of Bay Area Automotive Group Welfare Fund v. Philip Morris,
Inc., et al. (Superior Court, San Francisco County, California, filed April
16, 1998; transferred to a Coordinated Proceeding before the Superior Court of
San Diego County, California), plaintiff has dismissed the case and will
become an absent class member in the case of Operating Engineers Local 12
Health and Welfare Trust v. American Tobacco Company, et al.
Page 50
In the case of Bay Area Delivery Drivers Security Fund v. Philip Morris,
Inc., et al. (Superior Court, Alameda County, California, filed April 16,
1998; transferred to a Coordinated Proceeding before the Superior Court of San
Diego County, California), plaintiff has dismissed the case and will become an
absent class member in the case of Operating Engineers Local 12 Health and
Welfare Trust v. American Tobacco Company, et al.
In the case of Carpenters and Joiners, et al. v. Philip Morris Incorporated,
et al. (U.S. District Court, Minnesota, filed December 31, 1997), the court
granted defendants' motion to dismiss the complaint and plaintiffs have
noticed an appeal to the United States Court of Appeals for the Eighth
Circuit.
In the case of Central Coast Trust Fund v. Philip Morris, Inc., et al.
(Superior Court, San Francisco County, California, filed September 30, 1998;
transferred to a Coordinated Proceeding before the Superior Court of San Diego
County, California), plaintiff has dismissed the case and will become an
absent class member in the case of Operating Engineers Local 12 Health and
Welfare Trust v. American Tobacco Company, et al.
In the cases of Central States Joint Board v. Philip Morris Incorporated, et
al. and International Brotherhood of Teamsters Local 734 v. Philip Morris
Incorporated, et al. (U.S. District Court, Northern District, Illinois, filed
October 20, 1997), the cases have been consolidated for appeal. The parties
have completed briefing of plaintiffs' appeals and oral argument has been
scheduled.
In the case of Central Valley Painting & Decorating Health & Welfare Trust
Fund v. Philip Morris, Inc., et al. (Superior Court, San Francisco County,
California, filed July 6, 1998; transferred to a Coordinated Proceeding before
the Superior Court of San Diego County, California), plaintiff has dismissed
the case and will become an absent class member in the case of Operating
Engineers Local 12 Health and Welfare Trust v. American Tobacco Company, et
al.
In the case of Contractors, Laborers, Teamsters & Engineers Health & Welfare
Plan v. Philip Morris, Inc., et al. (U.S. District Court, Nebraska, filed
August 11, 1998), the court granted defendants' motion to dismiss the
complaint and entered final judgment in their favor. Plaintiff did not notice
an appeal.
In the case of 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 trial court granted defendants' motion to dismiss the complaint and
entered final judgment in their favor. Plaintiff has noticed an appeal to the
United States Court of Appeals for the Ninth Circuit.
In the case of I.B.E.W. Local 595 Health & Welfare Trust Fund v. Philip
Morris, Inc., et al. (Superior Court, Alameda County, California, filed July
30, 1998; transferred to a Coordinated Proceeding before the Superior Court of
San Diego County, California), plaintiff has dismissed the case and will
become an absent class member in the case of Operating Engineers Local 12
Health and Welfare Trust v. American Tobacco Company, et al.
In the case of International Union of Operating Engineers Local 132 v.
Philip Morris Incorporated, et al. (U.S. District Court, Southern District,
West Virginia, filed July 11, 1997), plaintiff has voluntarily dismissed the
case with prejudice.
In the case of Ironworkers Local Union No. 17 Insurance Fund, et al. v.
Philip Morris Incorporated et al. (U.S. District Court, Northern District,
Page 51
Ohio, Eastern Division, filed May 20, 1997), plaintiffs have voluntarily
dismissed their appeal to the United States Court of Appeals for the Sixth
Circuit from the trial court's final judgment in defendants' favor. On March
18, 1999, the jury returned a verdict in favor of the defendants.
In the case of Joint Benefit Trust v. Philip Morris, Inc., et al. (Superior
Court, Alameda County, California, filed June 15, 1998; transferred to a
Coordinated Proceeding before the Superior Court of San Diego County,
California), plaintiff has dismissed the case and will become an absent class
member in the case of Operating Engineers Local 12 Health and Welfare Trust v.
American Tobacco Company, et al.
In the case of Kentucky Laborers District Council Health and Welfare Trust
Fund v. Hill & Knowlton, Inc., et al. (U.S. District Court, Kentucky, filed
June 20, 1997), plaintiff has voluntarily dismissed the case.
In the cases of Laborers Local 17 Health and Benefit Fund, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Southern District, New York, filed
June 19, 1997) and 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), plaintiffs have filed a petition for writ of certiorari
with the United States Supreme Court. The petition asks the Court to review
the ruling by the U.S. Court of Appeals for the Second Circuit that reversed
the trial court's orders that denied defendants' motions to dismiss the
complaint. The Second Circuit ruling also directed the trial court to enter
orders dismissing both actions.
In the case of National Asbestos Workers, et al. v. Philip Morris
Incorporated, et al. (U.S. District Court, Eastern District, New York, filed
February 27, 1998), the court has continued the trial date to June 5, 2000.
The Company is a defendant in the case.
In the case of New Jersey Carpenters, et al. v. Philip Morris Incorporated,
et al. (U.S. District Court, New Jersey, filed September 25, 1997), the court
entered an order sua sponte that dismissed the case based on a ruling by the
U.S. Court of Appeals for the Third Circuit in the case of Steamfitters Local
Union No. 420 Welfare Fund, et al. v. Philip Morris, Inc., et al.
In the case of 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 March 31, 1998;
transferred to a Coordinated Proceeding before the Superior Court of San Diego
County, California), plaintiff has dismissed the case and will become an
absent class member in the case of Operating Engineers Local 12 Health and
Welfare Trust v. American Tobacco Company, et al.
In the case of North Coast Trust Fund v. Philip Morris, Inc., et al.
(Superior Court, San Francisco County, California, filed April 24, 1998;
transferred to a Coordinated Proceeding before the Superior Court of San Diego
County, California), plaintiffs have dismissed their case in order to assert
claims as a purported class member in the case of Operating Engineers Local 12
Health and Welfare Trust v. American Tobacco Company, et al.
In the case of Northern California Bakery Drivers Security Fund v. Philip
Morris, Inc., et al. (Superior Court, Alameda County, California, filed April
24, 1998; transferred to a Coordinated Proceeding before the Superior Court of
San Diego County, California), plaintiff has dismissed the case and will
become an absent class member in the case of Operating Engineers Local 12
Health and Welfare Trust v. American Tobacco Company, et al.
Page 52
In the case of Northern California General Teamsters Security Fund v. Philip
Morris, Inc., et al. (Superior Court, Alameda County, California, filed May
22, 1998; transferred to a Coordinated Proceeding before the Superior Court of
San Diego County, California), plaintiff has dismissed the case and will
become an absent class member in the case of Operating Engineers Local 12
Health and Welfare Trust v. American Tobacco Company, et al.
In the case of Northern California Pipe Trades Health and Welfare Trust v.
Philip Morris, Inc., et al. (Superior Court, Alameda County, California, filed
June 18, 1998; transferred to a Coordinated Proceeding before the Superior
Court of San Diego County, California), plaintiff has dismissed the case and
will become an absent class member in the case of Operating Engineers Local 12
Health and Welfare Trust v. American Tobacco Company, et al.
In the case of Northern California Plasterers Health & Welfare Trust Fund v.
Philip Morris, Inc., et al. (Superior Court, San Francisco County, California,
filed May 21, 1998; transferred to a Coordinated Proceeding before the
Superior Court of San Diego County, California), plaintiff has dismissed the
case and will become an absent class member in the case of Operating Engineers
Local 12 Health and Welfare Trust v. American Tobacco Company, et al.
In the case of Northern California Tile Industry Health & Welfare Trust Fund
v. Philip Morris, Inc., et al. (Superior Court, San Francisco County,
California, filed July 29, 1998; transferred to a Coordinated Proceeding
before the Superior Court of San Diego County, California), plaintiff has
dismissed the case and will become an absent class member in the case of
Operating Engineers Local 12 Health and Welfare Trust v. American Tobacco
Company, et al.
In the case of 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), plaintiffs have noticed an appeal to the
United States Court of Appeals for the Ninth Circuit from the trial court's
order that granted defendants' motion for summary judgment. Plaintiffs have
asked the Ninth Circuit Court of Appeals to certify two questions of
Washington law to the Washington Supreme Court.
In the case of Operating Engineers Local 12 Health and Welfare Trust v.
American Tobacco Company, et al. (Superior Court, Los Angeles County,
California, filed September 16, 1997; transferred to a Coordinated Proceeding
before the Superior Court of San Diego County, California), the court has
indicated that it will continue the trial date to an unspecified date during
September 2000.
In the case of 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 trial court has granted defendants' motion to dismiss
and has entered final judgment in their favor. Plaintiffs have noticed an
appeal to the Michigan Court of Appeals.
In the case of 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), plaintiffs have asked the United States Supreme Court to review the
trial court's order that dismissed the case and the ruling by the Ninth
Circuit Court of Appeals that affirmed the dismissal.
In the case of 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; transferred to a Coordinated Proceeding
before the Superior Court of San Diego County, California), plaintiff has
dismissed the case and will become an absent class member in the case of
Page 53
Operating Engineers Local 12 Health and Welfare Trust v. American Tobacco
Company, et al.
In the case of Plastering Industry Welfare Trust Fund v. Philip Morris,
Inc., et al. (Superior Court, San Francisco County, California, filed July 1,
1998; transferred to a Coordinated Proceeding before the Superior Court of San
Diego County, California), plaintiff has dismissed the case and will become an
absent class member in the case of Operating Engineers Local 12 Health and
Welfare Trust v. American Tobacco Company, et al.
In the case of San Francisco Culinary, Bartenders & Service Employees
Welfare Fund v. Philip Morris, Inc., et al. (Superior Court, San Francisco
County, California, filed July 30, 1998; transferred to a Coordinated
Proceeding before the Superior Court of San Diego County, California),
plaintiff has dismissed the case and will become an absent class member in the
case of Operating Engineers Local 12 Health and Welfare Trust v. American
Tobacco Company, et al.
In the case of 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;
transferred to a Coordinated Proceeding before the Superior Court of San Diego
County, California), plaintiff has dismissed the case and will become an
absent class member in the case of Operating Engineers Local 12 Health and
Welfare Trust v. American Tobacco Company, et al.
In the case of Shop Ironworkers Local 790 Welfare Plan v. Philip Morris,
Inc., et al. (Superior Court, Alameda County, California, filed July 31, 1998;
transferred to a Coordinated Proceeding before the Superior Court of San Diego
County, California), plaintiff has dismissed the case and will become an
absent class member in the case of Operating Engineers Local 12 Health and
Welfare Trust v. American Tobacco Company, et al.
In the case of Sign, Pictorial and Display Industry Welfare Fund v. Philip
Morris, Inc., et al. (Superior Court, San Francisco County, California, filed
April 16, 1998; transferred to a Coordinated Proceeding before the Superior
Court of San Diego County, California), plaintiff has dismissed the case and
will become an absent class member in the case of Operating Engineers Local 12
Health and Welfare Trust v. American Tobacco Company, et al.
In the case of 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), the court granted plaintiff's motion to
dismiss the case. Plaintiff has noticed an appeal to the United States Court
of Appeals for the Ninth Circuit from the dismissal and from several of the
court's interlocutory rulings.
In the case of 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), plaintiffs have filed a petition for
writ of certiorari with the United States Supreme Court that seeks review of
the trial court's order that granted defendants' motion to dismiss the
complaint and of the ruling by the Third Circuit Court of Appeals that
affirmed the trial court's order.
In the case of Teamsters Benefit Trust v. Philip Morris, Inc., et al.
(Superior Court, Alameda County, California, filed April 15, 1998; transferred
to a Coordinated Proceeding before the Superior Court of San Diego County,
California), plaintiff has dismissed the case and will become an absent class
member in the case of Operating Engineers Local 12 Health and Welfare Trust v.
American Tobacco Company, et al.
Page 54
In the case of United Association Local 159 Health and Welfare Trust Fund v.
Philip Morris, Inc., et al. (Superior Court, Alameda County, California, filed
April 15, 1998; transferred to a Coordinated Proceeding before the Superior
Court of San Diego County, California), plaintiff has dismissed the case and
will become an absent class member in the case of Operating Engineers Local 12
Health and Welfare Trust v. American Tobacco Company, et al.
In the case of Texas Carpenters Health Benefit Fund, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Eastern District, Texas, filed
October 31, 1997), the U.S. Court of Appeals for the Fifth Circuit has heard
argument in plaintiffs' appeal and has taken it under advisement.
In the case of 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; transferred to a Coordinated Proceeding
before the Superior Court of San Diego County, California), plaintiff has
dismissed the case and will become an absent class member in the case of
Operating Engineers Local 12 Health and Welfare Trust v. American Tobacco
Company, et al.
In the case of 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; transferred to a Coordinated Proceeding before the Superior Court of
San Diego County, California), plaintiffs have dismissed their case in order
to assert claims as a purported class member in the case of Operating
Engineers Local 12 Health and Welfare Trust v. American Tobacco Company, et
al.
In the case of 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; assigned to a Coordinated Proceeding
before the Superior Court of San Diego County, California), plaintiffs have
dismissed their case in order to assert claims as a purported class member in
the case of Operating Engineers Local 12 Health and Welfare Trust v. American
Tobacco Company, et al.
In the case of United Food and Commercial Workers Union, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Northern District, Alabama, filed
November 13, 1997), the court granted defendants' motion to dismiss the
complaint and entered final judgment in defendants' favor. Plaintiff has
noticed an appeal from the final judgment to the U.S. Court of Appeals for the
Eleventh Circuit.
In the case of 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), plaintiff has
voluntarily dismissed the case.
The following additional reimbursement cases have been filed by labor unions:
Bergeron, et al. v. Philip Morris Incorporated, et al. (U.S. District Court,
Eastern District, New York, filed September 29, 1999). Plaintiffs are the
trustees of the Massachusetts State Carpenters Health Benefits Fund.
Sheet Metal Workers Trust Fund, et al. v. Philip Morris, Inc., et al. (U.S.
District Court, District of Columbia, filed August 31, 1999). To date,
Lorillard has not received service of process.
Page 55
CONTRIBUTION CLAIMS -
In the case of Falise, et al. v. The American Tobacco Company, et al. (U.S.
District Court, Eastern District, New York), the court has granted defendants'
motion to dismiss the complaint. Trial in the dismissed action had been
scheduled to begin on February 1, 2000. To date, a new case has not been
filed.
In the case of H.K. Porter Company v. B.A.T Industries, PLC, et al. (U.S.
District Court, Eastern District, New York, filed June 19, 1998), the court
has scheduled the case for trial on September 11, 2000.
In the case of Raymark Industries v. The American Tobacco Company, et al.
(U.S. District Court, Eastern District, New York, filed January 30, 1998), the
court has scheduled the case for trial on October 12, 2000.
In the case of The Seibels Bruce Group v. R.J. Reynolds Tobacco Company, et
al. (U.S. District Court, Northern District, California, filed December 30,
1998), the court granted defendants' motion to dismiss the complaint and has
entered final judgment in their favor. Plaintiff did not notice an appeal from
the ruling.
FILTER CASES -
In the case of Lacy v. Lorillard, Inc., et al. (Superior Court, Norfolk
County, Massachusetts, filed September 1, 1994), the jury returned a verdict
in favor of Lorillard and Hollingsworth & Vose. Plaintiff did not notice an
appeal.
In the case of Connor v. ACandS, Inc. et al. (Circuit Court, Baltimore City,
Maryland, filed July 29, 1997), Lorillard and Hollingsworth & Vose have
noticed an appeal to the Maryland Court of Appeals from the jury's verdict in
favor of the plaintiffs. The jury awarded plaintiffs $.2 in actual damages and
$2.0 in non-economic damages.
OTHER TOBACCO CASES -
In the case of Cordova v. Liggett Group, Inc., et al. (Superior Court, San
Diego County, California, filed May 12, 1992), plaintiff has voluntarily
dismissed the matter.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits--
(27.1) Financial Data Schedule for the nine months ended September 30,
1999.
(b) Current reports on Form 8-K--There were no reports on Form 8-K filed for
three months ended September 30, 1999.
Page 56
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LOEWS CORPORATION
-----------------
(Registrant)
Dated: November 15, 1999 By /s/ Peter W. Keegan
-------------------------
PETER W. KEEGAN
Senior Vice President and
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
Page 57
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 362,900
<SECURITIES> 43,184,700
<RECEIVABLES> 13,499,100
<ALLOWANCES> 351,600
<INVENTORY> 268,900
<CURRENT-ASSETS> 0
<PP&E> 4,855,200
<DEPRECIATION> 1,770,700
<TOTAL-ASSETS> 72,611,100
<CURRENT-LIABILITIES> 0
<BONDS> 5,699,300
0
0
<COMMON> 112,600
<OTHER-SE> 9,792,900
<TOTAL-LIABILITY-AND-EQUITY> 72,611,100
<SALES> 3,067,000
<TOTAL-REVENUES> 16,606,000
<CGS> 805,800
<TOTAL-COSTS> 11,006,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286,700
<INCOME-PRETAX> 1,300,900
<INCOME-TAX> 424,900
<INCOME-CONTINUING> 728,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (157,900)
<NET-INCOME> 571,000
<EPS-BASIC> 5.21
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