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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X].
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
-------- --------
As at March 17, 2000, 99,388,700 shares of Common Stock of the Registrant
were outstanding and the aggregate market value of voting stock held by
non-affiliates was approximately $3,129,067,000.
Documents Incorporated by Reference:
Portions of the Loews Corporation Notice of Annual Meeting of Stockholders
and Proxy Statement dated March 28, 2000 are incorporated by reference into
Part III. (Registrant intends to file a definitive proxy statement with the
Commission prior to April 29, 2000.)
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1
LOEWS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Item Page
No. PART I No.
- ---- ----
<S> <C> <C>
1 BUSINESS .......................................................... 3
CNA Financial Corporation ....................................... 3
Lorillard, Inc. ................................................. 15
Loews Hotels Holding Corporation ................................ 19
Diamond Offshore Drilling, Inc. ................................. 20
Bulova Corporation .............................................. 23
Other Interests ................................................. 23
2 PROPERTIES ........................................................ 24
3 LEGAL PROCEEDINGS ................................................. 24
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 41
EXECUTIVE OFFICERS OF THE REGISTRANT .............................. 41
PART II
5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS .......................................................... 42
6 SELECTED FINANCIAL DATA ........................................... 43
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................ 44
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 65
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 69
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................. 115
PART III
Information called for by Part III has been omitted as Registrant
intends to file with the Securities and Exchange Commission not later
than 120 days after the close of its fiscal year a definitive Proxy
Statement pursuant to Regulation 14A.
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ... 115
</TABLE>
2
PART I
Item 1. Business.
Loews Corporation is a holding company. Its subsidiaries are engaged in the
following lines of business: property, casualty and life insurance (CNA
Financial Corporation, an 87% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of
hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary); the
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc., a 52% owned subsidiary); and the distribution and sale of watches and
clocks (Bulova Corporation, a 97% owned subsidiary).
Unless the context otherwise requires, the terms "Company" and "Registrant"
as used herein mean Loews Corporation excluding its subsidiaries.
Information relating to the major business segments from which the Company's
consolidated revenues and income are derived is contained in Note 19 of the
Notes to Consolidated Financial Statements, included in Item 8.
CNA FINANCIAL CORPORATION
CNA Financial Corporation ("CNA") was incorporated in 1967 and is an
insurance holding company whose primary subsidiaries consist of
property/casualty and life insurance companies. Collectively, CNA and its
subsidiaries are referred to as CNA. CNA's property/casualty insurance
operations are conducted by Continental Casualty Company ("CCC"), incorporated
in 1897, and its affiliates, and The Continental Insurance Company ("CIC"),
organized in 1853, and its affiliates. Life insurance operations are conducted
by Continental Assurance Company ("CAC"), incorporated in 1911, and its life
insurance affiliates. CIC became an affiliate of CNA in 1995 as a result of
the acquisition of The Continental Corporation ("Continental"). The principal
business of Continental is the ownership of a group of property and casualty
insurance companies. CNA serves businesses and individuals with a broad range
of insurance and other risk management products and services. Insurance
products include property and casualty coverages; life, accident and health
insurance; and pension products and annuities. CNA services include risk
management, information services, healthcare management and claims
administration. CNA products are marketed through agents, brokers, managing
general agents and direct sales. CNA's principal market is the United States.
CNA accounted for 76.42%, 80.59% and 84.87% of the Company's consolidated
total revenue for the years ended December 31, 1999, 1998 and 1997,
respectively.
CNA conducts its operations through the following operating segments:
Property and Casualty Operations, Life Operations, Group Operations and Other
insurance operations. Property and Casualty Operations are comprised of the
following operating units: Agency Market Operations, Specialty Operations, CNA
Re, Global Operations, and Risk Management. A more detailed description of
each segment follows.
Property and Casualty Operations
Agency Market Operations
Agency Market Operations builds on CNA's long and successful relationship
with the independent agency distribution system to market a broad range of
property/casualty insurance products and services to both businesses and
individuals. Business products include workers' compensation, commercial
packages, general liability and commercial auto, as well as a variety of
creative risk management services. Products for individuals were primarily
personal auto and homeowners insurance. In addition, in 1997, Agency Market
Operations launched a professional employer organization, CNA UniSource, which
provides various employer-related services.
Agency Market Operations is comprised of the following four groups.
Commercial Insurance: Commercial Insurance ("CI") provides traditional
property/casualty insurance products such as workers' compensation, general
and product liability, property, commercial auto and umbrella coverage to
businesses with less than $1 million in annual premiums. The majority of CI
customers are small and medium-sized businesses. CI is among the market
leaders in applying industry segmentation techniques to design products and
services tailored to the needs of its targeted customer groups.
3
During 1998, CI completed an extensive review of its business and developed
a new, more effective operating model, that management believes will position
CI as a world class competitor for the new century. The basis for this model
was to move decision-making authority and resources closer to CI's customers.
CI's focus during 1999 was the transition to this operating model. The model
includes branches, located throughout the U.S., that provide customer support
in the areas of underwriting, loss control, sales and claims, and a
centralized processing center in Maitland, Florida that houses premium
processing and accounting for all branches, and includes a call center for
increased customer service. Eight claim service centers, located throughout
the U.S., provide customers and claimants with improved service through more
specialized claim handling and easier claim reporting.
The efficiencies resulting from these changes are expected to decrease
expenses in underwriting and claims through the implementation of new
technology, process redesign and centralization. In addition, CI recognizes
that an even lower cost platform is necessary to be successful in the small
commercial marketplace. During 2000, CI will be consolidating its underwriting
for small commercial products with the existing centralized processing.
Management expects that this centralization, along with the implementation of
new technology, tools and processes, will allow CI to improve underwriting and
further lower the cost model related to its small commercial business.
Personal Insurance: On October 1, 1999, certain CNA subsidiaries completed a
previously announced transaction with The Allstate Corporation ("Allstate")
involving the transfer of substantially all of CNA's personal lines insurance
business. See Note 12 of the Notes to Consolidated Financial Statements
included in Item 8 of this Report.
Personal Insurance sold primarily personal auto and homeowners coverages and
also offered excess liability, separate scheduled property, boat-owners and
other recreational vehicle insurance. These coverages were primarily sold in a
package product.
CNA E&S: CNA E&S ("E&S") provides specialized insurance and other financial
products for a wide array of commercial customers. Risks covered by E&S are
generally viewed as high risk and less predictable in exposure than those
covered by the more traditional insurers. By combining superior insurance and
financial expertise with a detailed understanding of customer operations and
future direction, E&S is able to create and implement innovative business
solutions that are valued by the customer. In addition, E&S actively seeks
business partners who can supplement CNA resources and enhance value for the
customer.
CNA UniSource: CNA UniSource offers outsourcing services and other financial
products that relieve businesses of many administrative tasks, allowing them
more time to focus on their core objectives. CNA UniSource provides human
resources ("HR") information technology, payroll and benefits processing and
Professional Employer Organization ("PEO") services. CNA UniSource is also
engaged in delivering Internet-based HR and payroll administrative services
and is a leader in the implementation of HR information outsourcing for
large-scale businesses. When it functions as a PEO, CNA UniSource establishes
a co-employment relationship with its clients and contractually assumes
substantial employer administrative responsibilities such as regulatory
compliance and benefits administration. At December 31, 1999, CNA UniSource
had 768 clients with over 30,000 co-employees and conducts business in 45
states and the District of Columbia via 30 geographically dispersed service
offices and a state-of-the-art customer service call center. The number of
co-employees grew 150 percent compared with 1998. The primary sales force is
comprised of independent insurance agencies. Management expects significant
growth in the number of clients and co-employees over the next several years.
Specialty Operations
Specialty Operations provides a broad array of professional, financial and
specialty property/casualty products and services through a network of
brokers, managing general agencies and independent agencies. Specialty
Operations provides creative solutions for managing the risks of its clients,
including architects, engineers, lawyers, healthcare professionals, financial
intermediaries and corporate directors and officers.
Specialty Operations is composed of three principal groups.
CNA Pro: CNA Pro is one of the largest providers of non-medical professional
liability insurance and risk
4
management services in the U.S. CNA Pro's customers include architects and
engineers, lawyers, accountants and real estate agents and brokers, along with
a broad range of large and small corporate clients and not-for-profit
organizations. CNA Pro's products include errors and omissions, directors and
officers, and employment practices liability coverages and a broad range of
fidelity products. Products are distributed on a national basis through a
variety of channels including brokers, agents and managing general agents.
CNA HealthPro: CNA HealthPro offers a comprehensive set of specialized
insurance products and clinical risk management consulting services designed
to assist healthcare providers in managing the quality-of-care risks
associated with the delivery of healthcare. Key customer segments include
individual, small group and large corporate purchasers of malpractice
insurance. Caronia Corporation, acquired during 1997, provides third-party
claims administration for medical professional liability insureds.
CNA Guaranty and Credit: CNA Guaranty and Credit provides credit insurance
on short-term trade receivables for domestic and international clients and
credit enhancement products that focus on asset backed transactions. Credit
insurance is primarily distributed through captive agents with additional
distribution through brokers and financial institutions. Credit enhancement
products are distributed through specialty brokers and directly to customers.
Other Operations: Other operations consisted principally of Hedge Financial
Products, which focused on securitization of insurance risk and the embedding
of financial protections within traditional insurance programs, and
agricultural and entertainment insurance business. During 1999 and 1998 CNA
decided to exit Hedge Financial Products, and argiculture and entertainment
insurance businesses, respectively.
CNA Re
CNA Re operates globally as a reinsurer in the broker market, offering both
treaty and facultative products through major offices in London and Chicago.
CNA Re's operations include the business of CNA Reinsurance Company Limited
("CNA Re U.K."), a U.K. company, and U.S. operations based in Chicago. While
CNA Re's primary product is traditional treaty reinsurance, it is also
developing positions in facultative and financial reinsurance. CNA Re also
participates in Lloyd's of London through CNA Corporate Capital Ltd., which
provides capital to Lloyd's Syndicate 1229.
CNA Re U.K. writes in both the London market and other European markets
through its headquarters in London and offices in Amsterdam, Milan, Singapore
and Zurich. As one of the largest reinsurers in this market, CNA Re U.K. has
ratings of A (Strong) from Standard & Poor's, A (Excellent) from A.M. Best and
A3 (Good) from Moody's. CNA Re U.K. writes U.S. and international treaty and
professional liability business, including medical malpractice, errors and
omissions, and directors and officers coverages.
The U.S. operations of CNA Re provide products to the North American
markets. Treaty products include working layer property, working layer
casualty, property catastrophe, workers' compensation, products liability,
general liability, professional liability, specialty and excess and surplus
lines. In addition, financial reinsurance products are offered as well as
property and casualty facultative reinsurance.
Global Operations
Global Operations provides products and services to U.S.-based customers,
customers expanding overseas and foreign customers. Product distribution is
primarily through brokers and independent agents. The major product lines
include marine, commercial and contract surety, warranty and specialty
products, as well as commercial property and casualty.
Global Operations is composed of five principal groups.
Marine: On July 1, 1998, CNA completed the acquisition of Maritime Insurance
Co., Ltd. ("Maritime Ltd."), based in the U.K., and its Canadian subsidiary,
Eastern Marine Underwriters ("EMU"), strengthening CNA's position as a global
marine insurer. In 1999, CNA launched the marketing brand, CNA Maritime, which
unites three industry leaders to serve global ocean marine needs. Marine
Office of America Corp. ("MOAC"), a leading provider of ocean marine insurance
in the U.S., offers hull, cargo, primary and excess marine liability, offshore
energy, marine claims and recovery products and services. Business is sold
through national brokers, regional
5
marine specialty brokers and independent agencies, which work closely with
MOAC's ten branch offices located throughout the U.S. Maritime Ltd. is a
leading marine cargo and related marine insurance specialist with markets
extending across Europe and throughout the world. EMU serves the Canadian
market. As foreign subsidiaries, Maritime Ltd. and EMU are included in the
results of, and are managed by, the International business unit. Growth is
expected to result from leveraging the relationships with CNA's domestic
producers, implementing e-commerce, and providing customers with services and
products throughout the world.
Surety: On October 1, 1997, Global Operations completed the merger of CNA's
surety operations with Capsure Holdings Corp.'s subsidiaries, Western Surety
Company and Universal Surety of America to form CNA Surety Corporation ("CNA
Surety"). CNA owns approximately 62% of CNA Surety.
CNA Surety, which is traded on the New York Stock Exchange (SUR), is the
largest publicly traded provider of surety bonds, with approximately 9% of
that market. Among its U.S. competitors, CNA Surety has the most extensive
distribution system and one of the most diverse surety product lines, offering
small, medium and large contract and commercial surety bonds. CNA Surety
provides surety and fidelity bonds in all 50 states through a combined network
of approximately 37,000 independent agencies. Growth is expected to come from
CNA Surety's broad product and distribution resources and international
expansion.
On March 20, 2000, CCC proposed to CNA Surety that CCC make a cash tender
offer at $13.00 per share for all shares of CNA Surety common stock not
already owned by CCC and its affiliates. CCC and its affiliates owned
approximately 62 percent of the outstanding shares of CNA Surety common stock
on March 20, 2000. CCC intends to condition the tender offer upon receiving
enough shares so that its ownership reaches at least 90 percent. If this
ownership threshold is achieved, CCC would then acquire the remaining
outstanding shares of CNA Surety common stock not tendered to CCC through a
statutory "short-form" merger process. Stockholders who do not tender their
shares to CCC during the tender offer would also receive $13.00 per share in
cash for their stock in the short-form merger.
Warranty: CNA's warranty operation ("Warranty") is the fourth largest
warranty underwriter in the U.S., providing extended service contracts,
warranties and related insurance products that protect the consumer or
business from the financial burden associated with the breakdown,
under-performance or maintenance of a product. Warranty's key market segments
consist of vehicle, retail, home, commercial and original equipment
manufacturer. Each market segment distributes its product via a sales force
employed or contracted through a program administrator.
CNA National Warranty Corporation sells vehicle warranty services in the
U.S. and Canada. In July 1998, Warranty expanded into the home warranty
segment with the acquisition of a 90% interest in Home Security of America,
Inc., one of the largest home warranty administrators in the U.S. Also, in
January 1998 CNA acquired a joint venture interest in Specialty Underwriters,
a provider of innovative equipment maintenance management services to
companies worldwide. As these entities are not licensed insurance companies,
they purchase coverages from various CNA affiliates to back the warranty
products they sell. Warranty expects growth from cross marketing efforts with
other CNA businesses, increasing product distribution via the CNA independent
agency force and introducing several warranty products in the international
marketplace.
International: International is responsible for coordinating and managing
the direct business of the foreign property/casualty operations of CNA. This
business identifies and capitalizes on strategic indigenous opportunities
outside the U.S. by continuing to build its own capabilities and by initiating
acquisitions, strategic alliances and start-up operations that allow for
expansion into targeted markets. In addition, International provides
U.S.-based customers that are expanding their operations overseas with a
single source for their commercial insurance needs. To this end, International
has placed underwriters within CI branches.
International currently oversees operations in Europe, Latin America, Canada
and Asia. In Europe, CNA formed CNA Insurance Company (Europe) Limited ("CIE")
in 1996, which is based in London. CIE has since opened offices in France,
Germany and the Netherlands and has purchased a managing general agent in
Denmark. Through its network of offices, International intends to build on the
successes of several CNA specialty products (including travel and accident,
warranty and financial lines insurance) and introduce those products across
Europe. International also includes the results of U.K. based Maritime Ltd.
In Latin America, the Company acquired a 70% interest in Omega A.R.T. in
1997, a workers' compensation
6
company domiciled in Argentina. Omega ranks as the fourth largest workers'
compensation company in Argentina based on premium volume.
CNA Canada, formed in 1998, sells a broad array of property/casualty and
specialty insurance products through brokers and managing general agents. The
results of EMU are also included in International.
The short to mid-term growth opportunities for International are in the more
mature foreign insurance markets, such as Europe and Canada, and in specialty
insurance products. In the longer term, emphasis will be on the emerging
insurance markets in Latin America and Asia.
First Insurance Company Of Hawaii: First Insurance Company of Hawaii, Ltd.
("FICOH") is the oldest domestic insurer in the state of Hawaii, dating back
to 1911. FICOH is also the largest commercial insurance company and the second
largest property/casualty insurance company in the state. FICOH offers
commercial and personal lines solely in the state of Hawaii. Distributed
through independent agencies, the business mix has historically been
approximately 65% commercial and 35% personal lines. On November 1, 1999,
Tokio Marine & Fire Insurance Co. Ltd. ("Tokio") and CNA executed an agreement
to increase Tokio's ownership share from 40% to 50%, resulting in equal
ownership by CNA and Tokio. Additionally, on November 1, 1999, Tokio merged
their Hawaii-based operations into FICOH. CNA retains control over FICOH's
daily operations. CNA views this transaction as a positive step in the ongoing
strategic relationship between CNA and Tokio.
CNA's partnership with Tokio is expected to generate growth opportunities
and facilitate international expansion. Additionally, CNA foresees growth
opportunities through collaborative partnerships between FICOH and other CNA
businesses.
Risk Management
Risk Management ("RM") markets and sells insurance products and services to
large U.S.-based companies. These customers have a minimum of $1 million or
more in casualty claims each year. It is estimated that there are
approximately 8,500 targeted companies within this market segment. RM is one
of 11 significant competitors and has a very strong reputation and presence,
particularly as a writer of casualty insurance lines.
RM includes two groups.
Risk Transfer: Risk Transfer writes property/casualty lines of insurance.
The casualty insurance business focuses on workers' compensation, commercial
auto liability, general liability through traditional and innovative financial
risk products, and excess coverage needs. The excess products provide
umbrella, excess workers' compensation and high excess coverages.
Over the last two years, domestic and global property capabilities have been
increased, providing primary, inland marine and excess property facilities.
Global property includes a strategic alliance with Protection Mutual to
address the needs of the highly protected risk customer. Global property also
includes Northrock Insurance Company Limited, a wholly owned subsidiary in
Bermuda, offering property excess of loss insurance coverages.
RSKCo: Formed in 1998, RSKCo provides total risk management services
(integrated and single component) related to claims, loss control, cost
management and information services to the commercial insurance marketplace.
RSKCo's capabilities include:
(a) Claim Services: Services that allow customers to select from a single
source the desired level of service-from an integrated claims package to any
component service.
(b) Loss Control: Pre-loss prevention services include industrial hygiene,
laboratory, ergonomics, field consulting and training, property, environmental
and transportation loss control. Driver training is provided through Smith
System Driver Improvement Institute, Inc., a wholly owned subsidiary.
(c) Cost Management: Post-loss cost control services through case
management, medical bill review, preferred provider organizations and other
unique partnerships to reduce lost work days through rapid response, quality
care and effective coordination.
7
(d) Information Services: These services include data access, reporting
tools, information and benchmarking analysis, consulting and custom reporting
services.
Group Operations
Group Operations provides a broad array of group life and health insurance
products and services to employers, affinity groups and other entities that
purchase insurance as a group. Its products and services are primarily
distributed through brokers. In addition, Group Operations provides health
insurance to federal employees, retirees and their families; managed care and
self-funded medical excess insurance; medical provider network management and
administration services; and reinsurance for life and health insurers.
Group Operations includes five principal groups.
Special Benefits: Special Benefits provides group term life insurance, short
and long term disability, statutory disability, long term care and accident
products. Products are marketed through a nationwide operation of 31 sales
offices, third party administrators, managing general agents and insurance
consultants.
Provider Markets: Provider Markets is comprised of two major businesses. CNA
Health Partners provides comprehensive managed care services to employers
offering self-funded medical plans and to healthcare provider networks,
including provider organizations that manage capitated risks. Services offered
include network development and management, medical management, medical claims
administration, consulting services and management services. Group Reinsurance
writes assumed reinsurance on health, life and other related products written
on a group basis, as well as excess risk coverages related to health care.
Life Reinsurance: Life Reinsurance reinsures individual life and health
products marketed by unaffiliated life insurance companies throughout North
America. Sales are through an internal sales force.
Federal Markets: Federal Markets is the second largest provider of health
insurance benefits to federal employees, and operates through the Mail
Handlers Benefit Plan under the Federal Employees Health Benefit Plan. In
addition to insuring approximately one million members, Federal Markets is
responsible for all claim management activities under the plan, such as large
case management, hospital and provider bill negotiations, fraud detection
activities and vendor contracts.
Health Benefits: Health Benefits markets direct mail specialty products such
as accidental death and dismemberment, term life and dental insurance to bank
customers and federal employees.
Life Operations
Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long term care
insurance, annuities and other products. Life Operations also provides
retirement services products to institutions in the form of various investment
products and administration services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers and various other independent insurance consultants.
On March 8, 2000, CNA announced that, consistent with its strategy to
sharpen its focus on insurance products and services for businesses, it is
exploring the sale of its individual life insurance and life reinsurance
businesses and has engaged an investment banking firm to assist with the
potential sale of the life operations.
Life Operations is composed of four principal groups.
Individual Life: Individual Life offers primarily level premium term life
insurance, universal life insurance and related products. New sales of term
life have placed CNA as first or close to first in the market in each of the
last three years.
Retirement Services: Retirement Services markets annuities and investment
products and services to both retail and institutional customers.
8
Long Term Care: Long Term Care products provide reimbursement for covered
nursing home and home health care expenses incurred due to physical or mental
disability.
Other Operations: Other Life Operations businesses include viatical
settlements and developing operations in certain international markets.
Restructuring And Other Related Charges
On August 5, 1998, CNA announced estimates of the financial implications of
its initiatives to achieve world-class performance. "World-class performance,"
as defined by CNA, refers to its intention to position each strategic business
units as a market leader by sharpening its focus on customers and employing
new technology to work smarter and faster. In the third quarter of 1998, CNA
finalized and approved a plan to restructure its operations. The restructuring
plan focused on a gross reduction in the then-current workforce of
approximately 4,500 employees resulting in a net reduction of approximately
2,400 employees, the consolidation of certain processing centers, the closing
of various facilities, and the exiting of certain businesses. The details of
the restructuring and other related charges recognized in 1998 and 1999 are
discussed in Note 13 to the Notes to Consolidated Financial Statements
included in Item 8 of this Report. The initial expectation from management was
that CNA's initiatives would result in a reduction of approximately 2 points
in expense ratio due to savings of approximately $300 to $350 million on an
annualized basis.
As of December 31, 1999, CNA had completed essentially all aspects of its
restructuring plan. Management estimates CNA has achieved annualized run-rate
expense savings of $381 million. "Annualized run-rate expense savings," as
defined by CNA, refers to the difference between the normalized current
expense ratio and a base-line expense ratio applied to a base-line measure of
revenue, generally written premiums. Approximately $70 million of the
annualized run-rate savings relate to the Personal Insurance business
transferred to Allstate. See Note 12 of the Notes to Consolidated Financial
Statements included in Item 8 of this Report for a discussion of the Personal
Insurance transaction. The normalization of the current expense ratio involves
adjusting the expense ratio, exclusive of restructuring and other related
charges, for other expenses that are not expected to recur or persist in the
restructured operating platform. Because many of the expenses to which these
adjustments relate are included in the results of operations determined in
accordance with generally accepted accounting principles, the annualized
run-rate expense savings cannot be interpreted as the difference in expenses
incurred in 1999 compared to 1998. Management expects that the effects of the
restructured operating platform will be reflected in the 2000 results.
Other
Other insurance operations include corporate borrowings of CNA and related
interest expense, certain run-off insurance operations, asbestos claims
related to Fibreboard Corporation and financial guarantee insurance contracts.
9
Supplementary Insurance Data
The following table sets forth supplementary insurance data:
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
(In millions of dollars, except ratio information)
<S> <C> <C> <C>
Trade Ratios - GAAP basis (a):
Loss ratio .......................... 87.1% 81.8% 77.1%
Expense ratio ....................... 32.4 33.6 31.3
Combined ratio (before policyholder
dividends) ......................... 119.5 115.4 108.4
Policyholder dividend ratio ......... .3 1.1 .5
Trade Ratios - Statutory basis (a):
Loss ratio .......................... 87.1% 81.5% 77.5%
Expense ratio ....................... 33.8 32.8 30.7
Combined ratio (before policyholder
dividends) ......................... 120.9 114.3 108.2
Policyholder dividend ratio ......... .3 1.0 .8
Gross Life Insurance In-Force:
Group ............................... $394,743.0 $317,720.0 $239,843.0
Life (c) ............................ 75,247.0 76,674.0 71,755.0
- ------------------------------------------------------------------------------
$469,990.0 $394,394.0 $311,598.0
==============================================================================
Other Data-Statutory basis (b):
Property/casualty capital and surplus
(d) ................................ $ 8,679.0 $ 7,623.0 $ 7,123.0
Life capital and surplus ............ 1,222.0 1,109.0 1,223.0
Written premium to surplus ratio .... 1.1 1.4 1.4
Capital and surplus-percent of total
liabilities ........................ 21.9% 20.5% 22.4%
Participating policyholders-percent
of gross life insurance in force ... .5% .5% .7%
</TABLE>
- ----------------
(a) Trade ratios reflect the results of CNA's property/casualty insurance
subsidiaries. Trade ratios are industry measures of property/casualty
underwriting results. The loss ratio is the percentage of incurred claim and
claim adjustment expenses to premiums earned. The expense ratio, using amounts
determined in accordance with generally accepted accounting principles, is the
percentage of underwriting expenses, including the amortization of deferred
acquisition costs, to premiums earned. The expense ratio, using amounts
determined in accordance with statutory accounting practices, is the
percentage of underwriting expenses (with no deferral of acquisition costs) to
premiums written. The combined ratio is the sum of the loss and expense
ratios. The policyholder dividend ratio is the ratio of dividends incurred to
premiums earned.
(b) Other data is determined in accordance with statutory accounting
practices. Dividends of $570.0, $410.0 and $175.0 million were paid to CNA by
CCC in 1999, 1998 and 1997, respectively. Insurance subsidiaries have
received, or will receive, reimbursement from CNA for general management and
administrative expenses, unallocated loss adjustment expenses and investment
expenses of $203.0, $189.0 and $217.0 million in 1999, 1998 and 1997,
respectively. Life statutory capital and surplus as a percent of total
liabilities is determined after excluding Separate Account liabilities and
reclassifying the statutorily required Asset Valuation and Interest
Maintenance Reserves as surplus.
(c) Lapse ratios for individual life insurance, as measured by surrenders
and withdrawals as a percentage of average ordinary life insurance in force,
were 10.9%, 14.7% and 6.4% in 1999, 1998 and 1997, respectively.
(d) Surplus includes equity of property/casualty companies' ownership in
life insurance subsidiaries.
10
The following table displays the distribution of gross written premiums for
CNA's property/casualty operations:
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
New York ............................... 8.2% 9.5% 9.9%
California ............................. 7.1 8.2 8.8
Texas .................................. 5.7 6.0 6.2
Florida ................................ 4.6 4.6 4.8
Pennsylvania ........................... 4.3 4.7 5.1
New Jersey ............................. 3.8 4.4 4.3
Illinois ............................... 3.8 4.5 4.4
All other states, countries or political
subdivisions (a) ...................... 46.5 48.0 48.0
Reinsurance assumed .................... 16.0 10.1 8.5
- ------------------------------------------------------------------------------
100.0% 100.0% 100.0%
==============================================================================
</TABLE>
- ---------------
(a) No other state, country or political subdivision accounts for more than
3.0% of gross written premium.
Approximately 97% of CNA's premiums are derived from the United States.
Premiums from any individual foreign county are not significant.
Property/Casualty Claim and Claim Adjustment Expenses
The following loss reserve development table illustrates the change over
time of reserves established for property/casualty claims and claim adjustment
expenses at the end of the preceding eleven calendar years for CNA's
property/casualty operations. The first section shows the reserves as
originally reported at the end of the stated year. The second section, reading
down, shows the cumulative amounts paid as of the end of successive years with
respect to the originally reported reserve liability. The third section,
reading down, shows re-estimates of the originally recorded reserve as of the
end of each successive year which is the result of CNA's property/casualty
insurance subsidiaries' expanded awareness of additional facts and
circumstances that pertain to the unsettled claims. The last section compares
the latest re-estimated reserve to the reserve originally established, and
indicates whether the original reserve was adequate or inadequate to cover the
estimated costs of unsettled claims.
The loss reserve development table for property/casualty operations is
cumulative and, therefore, ending balances should not be added since the
amount at the end of each calendar year includes activity for both the current
and prior years.
11
<TABLE>
<CAPTION>
Schedule of Property/Casualty Loss Reserve Development
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
(a) (a) (a) (a) (a) (a) (b) (c) (d) (e)
- -----------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves for
unpaid claim and
claim expenses ...... - 16,530 17,712 20,034 20,812 21,639 31,044 29,357 28,533 28,317 26,631
Ceded recoverable ..... - 3,440 3,297 2,867 2,491 2,705 6,089 5,660 5,326 5,424 6,273
- -----------------------------------------------------------------------------------------------------------
Net reserves for
unpaid claim and
claim expenses ....... 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,697 23,207 22,893 20,358
Cumulative-net paid as
of:
One year later ...... 2,670 3,285 3,411 3,706 3,629 3,656 6,510 5,851 5,954 7,460 -
Two years later ..... 4,724 5,623 6,024 6,354 6,143 7,087 10,485 9,796 11,102 - -
Three years later ... 6,294 7,490 7,946 8,121 8,764 9,195 13,363 13,627 - - -
Four years later .... 7,534 8,845 9,218 10,241 10,318 10,624 16,407 - - - -
Five years later .... 8,485 9,726 10,950 11,461 12,489 12,666 - - - - -
Six years later ..... 9,108 11,207 11,951 12,308 14,249 - - - - - -
Seven years later ... 10,393 12,023 12,639 13,947 - - - - - - -
Eight years later ... 11,086 12,592 14,166 - - - - - - - -
Nine years later .... 11,563 14,019 - - - - - - - - -
Ten years later ..... 12,897 - - - - - - - - - -
Net reserves
re-estimated as of:
End of initial year . 11,267 13,090 14,415 17,167 18,321 18,934 24,955 23,697 23,207 22,893 20,358
One year later ...... 11,336 12,984 16,032 17,757 18,250 18,922 24,864 23,479 23,508 23,920 -
Two years later ..... 11,371 14,693 16,810 17,728 18,125 18,500 24,294 23,140 23,702 - -
Three years later ... 13,098 15,737 16,944 17,823 17,868 18,008 23,814 23,666 - - -
Four years later .... 14,118 15,977 17,376 17,765 17,511 17,354 24,679 - - - -
Five years later .... 14,396 16,440 17,329 17,560 17,082 19,558 - - - - -
Six years later ..... 14,811 16,430 17,293 17,285 20,066 - - - - - -
Seven years later ... 14,810 16,551 17,069 18,974 - - - - - - -
Eight years later ... 14,995 16,487 18,553 - - - - - - - -
Nine years later .... 14,973 17,792 - - - - - - - - -
Ten years later ..... 16,155 - - - - - - - - - -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (4,888) (4,702) (4,138) (1,807)(1,745) (624) 276 31 (495) (1,027) -
===========================================================================================================
Reconciliation to
gross re-estimated
reserves:
Net reserves
re-estimated ...... 16,155 17,792 18,553 18,974 20,066 19,558 24,679 23,666 23,702 23,920 -
Re-estimated ceded
recoverable ....... - 405 667 926 1,095 1,366 7,484 8,334 8,634 9,021 -
- -----------------------------------------------------------------------------------------------------------
Total gross
re-estimated reserves 16,155 18,197 19,220 19,900 21,161 20,924 32,163 32,000 32,336 32,941 -
===========================================================================================================
Net (deficiency)
redundancy related to:
Asbestos claims ..... (3,496) (3,365) (3,321) (1,633)(1,033) (999) (811) (910) (806) (560) -
Environmental claims (978) (972) (929) (886) (445) (276) (197) (136) (138) 84 -
- -----------------------------------------------------------------------------------------------------------
Total asbestos and
environmental ...... (4,474) (4,337) (4,250) (2,519)(1,478)(1,275) (1,008)(1,046) (944) (476) -
Other claims ........ (414) (365) 112 712 (267) 651 1,284 1,077 449 (551) -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (4,888) (4,702) (4,138) (1,807)(1,745) (624) 276 31 (495) (1,027) -
===========================================================================================================
</TABLE>
- ----------------
(a) Reflects reserves of CNA's property and casualty insurance subsidiaries,
excluding CIC reserves which were acquired on May 10, 1995. Accordingly, the
reserve development (net reserves recorded at the end of the year, as
initially estimated, less net reserves re-estimated as of subsequent years)
does not include CIC. In 1995, CNA recorded adverse reserve development of
$134 million related to the reserves of CIC, acquired on May 10, 1995.
(b) Includes CIC gross reserves of $9,713 million and net reserves of $6,063
million acquired on May 10, 1995 and subsequent development thereon.
(c) Includes net and gross reserves of acquired companies of $57 and $64
million, respectively.
(d) Includes net and gross reserves of acquired companies of $122 and $223
million, respectively.
(e) Ceded recoverable includes reserves transferred under retroactive
reinsurance agreements of $784 million, as of December 31, 1999.
See Notes 1 and 7 of the Notes to Consolidated Financial Statements,
included in Item 8, for information regarding property/casualty claim and
claim adjustment expenses including reserve development for asbestos and
environmental claims.
12
INVESTMENTS
See Note 2 of the Notes to Consolidated Financial Statements, included in
Item 8, for information regarding the investment portfolio.
Additional information as to the Company's investments is set forth in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations.
OTHER
Competition: Due to market pressures, the insurance environment remains
intensely competitive. CNA competes with a large number of stock and mutual
insurance companies and other entities for both producers and customers and
must continuously allocate resources to refine and improve its insurance
products and services. There are approximately 3,400 individual companies that
sell property/casualty insurance in the United States. CNA's consolidated
property/casualty subsidiaries ranked as the fifth largest property/casualty
insurance organization based upon 1998 statutory net written premium. There
are approximately 1,500 companies selling life insurance in the United States.
CAC is ranked as the thirty-fifth largest life insurance organization based on
1998 consolidated statutory premium volume.
Dividends by Insurance Subsidiaries: The payment of dividends to CNA by its
insurance subsidiaries without prior approval of the affiliates' domiciliary
state insurance commissioners is limited by formula. This formula varies by
state. The formula used by the majority of states provides that the greater of
10% of prior year statutory surplus or prior year statutory net income, less
the aggregate of all dividends paid during the twelve months prior to the date
of payment is available to be paid as a dividend to the parent company. Some
states, however, have an additional stipulation that dividends cannot exceed
the prior year's surplus. Based upon the formulae applied by the respective
domiciliary states of CNA's insurance subsidiaries, approximately $887.0
million in dividends can be paid to CNA by those subsidiaries in 2000 without
prior approval. However, all dividends must be reported to the domiciliary
insurance department prior to declaration and payment.
Regulation: The insurance industry is subject to comprehensive and detailed
regulation and supervision throughout the United States. Each state has
established supervisory agencies with broad administrative powers relative to
licensing insurers and agents, approving policy forms, establishing reserve
requirements, fixing minimum interest rates for accumulation of surrender
values and maximum interest rates of policy loans, prescribing the form and
content of statutory financial reports, and regulating solvency and the type
and amount of investments permitted. Such regulatory powers also extend to
premium rate regulations which require that rates not be excessive, inadequate
or unfairly discriminatory. In addition to regulation of dividends by
insurance subsidiaries discussed above, intercompany transfers of assets may
be subject to prior notice or approval by the state insurance regulator,
depending on the size of such transfers and payments in relation to the
financial position of the insurance affiliates making the transfer.
Insurers are also required by the states to provide coverage to insureds who
would not otherwise be considered eligible by the insurers. Each state
dictates the types of insurance and the level of coverage which must be
provided to such involuntary risks. CNA's share of these involuntary risks is
mandatory and generally a function of its respective share of the voluntary
market by line of insurance in each state.
Reform of the U.S. tort liability system is another issue facing the
insurance industry. Although federal standards would create more uniform laws,
tort reform supporters still look primarily to the states for passage of
reform measures. Over the last decade, many states have passed some type of
reform, but more recently, a number of state courts have modified or
overturned these reforms. Additionally, new causes of action and theories of
damages continue to be proposed in state court actions or by legislatures.
Continued unpredictability in the law means that insurance underwriting and
rating is expected to be difficult in commercial lines, professional liability
and some specialty coverages.
Although the federal government and its regulatory agencies do not directly
regulate the business of insurance, federal legislative and regulatory
initiatives can impact the insurance business in a variety of ways. These
initiatives and legislation include tort reform proposals; proposals to
overhaul the Superfund hazardous waste removal and liability statute;
financial services modernization legislation, which includes provisions to
remove barriers that prevent banks from engaging in the insurance business;
and various tax proposals affecting insurance companies.
13
In the mid 1990's the National Association of Insurance Commissioners
("NAIC") adopted risk based capital ("RBC") requirements for both life
insurance companies and property/casualty insurance companies. The
requirements are to be utilized by state insurance departments as a minimum
capital requirement identifying companies that merit further regulatory
action. The formulae were not developed to differentiate adequately
capitalized companies that operate with capital levels higher than the RBC
requirements. Therefore, it is inappropriate and inadvisable to use the
formulae to rate or rank insurers. At December 31, 1999 and 1998, all of CNA's
life and property and casualty companies had adjusted capital in excess of
amounts requiring any regulatory action.
Reinsurance: See Notes 1 and 17 of the Notes to Consolidated Financial
Statements, included in Item 8, for information related to CNA's reinsurance
activities.
Properties: CNA Plaza, owned by Continental Assurance Company, serves as the
executive office for CNA and its insurance subsidiaries. An adjacent building
(located at 55 E. Jackson Blvd.), jointly owned by Continental Casualty
Company and Continental Assurance Company, is partially situated on grounds
under leases expiring in 2058. Approximately 25% of the adjacent building is
rented to non-affiliates. CNA leases office space in various cities throughout
the United States and in other countries. The following table sets forth
certain information with respect to the principal office buildings owned or
leased by CNA:
<TABLE>
<CAPTION>
Size
Location (square feet) Principal Usage
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Owned:
CNA Plaza 1,144,378 Principal Executive Offices of CNA
333 S. Wabash
Chicago, Illinois
180 Maiden Lane 1,115,100 Property/Casualty Insurance Offices
New York, New York
55 E. Jackson Blvd. 440,292 Principal Executive Offices of CNA
Chicago, Illinois
401 Penn Street 254,589 Leased to tenants
Reading, Pennsylvania
100 CNA Drive 251,363 Life Insurance Offices
Nashville, Tennessee
1110 Ward Avenue 186,687 Property/Casualty Insurance Offices
Honolulu, Hawaii
Leased:
200 S. Wacker Drive 265,727 Property/Casualty Insurance Offices
Chicago, Illinois
1111 E. Broad St. 225,470 Property/Casualty Insurance Offices
Columbus, Ohio
40 Wall Street 199,238 Property/Casualty Insurance Offices
New York, New York
3501 State Highway 66 183,184 Property/Casualty Insurance Offices
Neptune, New Jersey
2405 Lucien Way 178,744 Property/Casualty Insurance Offices
Maitland, Florida
333 Glen Street 164,032 Property/Casualty Insurance Offices
Glens Falls, New York
1100 Cornwall Road 147,884 Property/Casualty Insurance Offices
Monmouth Junction, New Jersey
600 North Pearl Street 139,151 Property/Casualty Insurance Offices
Dallas, Texas
</TABLE>
14
LORILLARD, INC.
The Company's wholly owned subsidiary, Lorillard, Inc. ("Lorillard"), is
engaged, through its subsidiaries, in the production and sale of cigarettes.
The principal cigarette brand names of Lorillard are Newport, Kent, True,
Maverick and Old Gold. Lorillard's largest selling brand is Newport, which
accounted for approximately 73% of Lorillard's sales in 1999.
Substantially all of Lorillard's sales are in the United States. Lorillard's
major trademarks outside of the United States were sold in 1977. Lorillard
accounted for 18.94%, 13.45% and 11.93% of the Company's consolidated total
revenue for the years ended December 31, 1999, 1998 and 1997, respectively.
For a number of years Lorillard and other cigarette manufacturers have been
faced with a number of factors which adversely affect Lorillard's business,
including: litigation against tobacco manufacturers by private plaintiffs,
some of which have resulted in substantial jury verdicts, as well as
litigation by governmental entities; enacted and proposed legislation and
regulation intended to discourage and restrict smoking; a decline in the
social acceptability of smoking; cigarette price increases related to the cost
of certain litigation settlements; and increased pressure from anti-tobacco
groups.
See Item 3 of this Report for information with respect to litigation against
Lorillard including litigation seeking substantial compensatory and punitive
damages for adverse health effects claimed to have resulted from the use of
cigarettes and smokeless tobacco, and from exposure to tobacco smoke, and
claims brought by cigarette wholesalers and others alleging violations of
antitrust laws.
On November 23, 1998, Lorillard and other manufacturers of tobacco products
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 Commonwealth of the Northern Mariana Islands
(collectively, the "Settling States") to settle the asserted and unasserted
health care cost recovery and certain other claims of those states. Lorillard
and the other major U.S. tobacco manufacturers had previously settled similar
claims brought by the four other states (together with the MSA, the "State
Settlement Agreements"). The State Settlement Agreements and certain ancillary
agreements are included as exhibits to this Report (Exhibits 10.08 through
10.23) and are incorporated by reference thereto. See also Management's
Discussion and Analysis - Results of Operations, "Settlement of State
Reimbursement Litigation" included in Item 7.
Legislation and Regulation: Federal Legislation - The Federal Comprehensive
Smoking Education Act, which became effective in 1985, requires the use on
cigarette packaging and advertising of one of the following four warning
statements, on a rotating basis: (1) "SURGEON GENERAL'S WARNING: Smoking
Causes Lung Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy."
(2) "SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious
Risks to Your Health." (3) "SURGEON GENERAL'S WARNING: Smoking By Pregnant
Women May Result in Fetal Injury, Premature Birth, and Low Birth Weight." (4)
"SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide." Four
shortened versions of these statements are required, on a rotating basis, for
use on billboards. This law also requires that each person who manufactures,
packages or imports cigarettes shall annually provide to the Secretary of
Health and Human Services a list of the ingredients added to tobacco in the
manufacture of cigarettes. Such list of ingredients may be submitted in a
manner which does not identify the company which uses the ingredients or the
brand of cigarettes which contain the ingredients.
Prior to the effective date of the Federal Comprehensive Smoking Education
Act, federal law had, since 1965, required that cigarette packaging bear a
warning statement which from 1970 to 1985 was as follows: "Warning: The
Surgeon General Has Determined That Cigarette Smoking Is Dangerous To Your
Health." In addition, in 1972 Lorillard and other cigarette manufacturers had
agreed, pursuant to consent orders entered into with the Federal Trade
Commission ("FTC"), to include this health warning statement in print
advertising, on billboards and on certain categories of point-of-sale display
materials relating to cigarettes. Furthermore, advertising of cigarettes has
been prohibited on radio and television since 1971.
From time to time, bills have been introduced in Congress, among other
things, to end or limit the price supports for leaf tobacco; to prohibit all
tobacco advertising and promotion; to require new health warnings on cigarette
packages and advertising; to subject cigarettes generally to regulation under
the Consumer Products Safety Act or the Food, Drug and Cosmetics Act; to
authorize the establishment of various anti-smoking education programs;
15
to provide that current federal law should not be construed to relieve any
person of liability under common or state law; to permit state and local
governments to restrict the sale and distribution of cigarettes and the
placement of billboard and transit advertising of tobacco products; to provide
that cigarette advertising not be deductible as a business expense; to
prohibit the mailing of unsolicited samples of cigarettes and otherwise to
restrict the sale or distribution of cigarettes; to impose an additional
excise tax on cigarettes; to require that cigarettes be manufactured in a
manner that will cause them, under certain circumstances, to be
self-extinguishing; and to subject cigarettes to regulation in various ways by
the U.S. Department of Health and Human Services, including regulation by the
FDA.
In 1995, Congress passed legislation prohibiting the sale of cigarettes by
vending machines on certain federal property, and the General Services
Administration has published implementing regulations. In January 1996, the
Substance Abuse and Mental Health Services Administration issued final
regulations implementing a 1992 law (Section 1926 of the Public Health Service
Act), which requires the states to enforce their minimum sales-age laws as a
condition of receiving federal substance abuse block grants.
Food and Drug Administration Regulation of Tobacco Products - In 1996, the
FDA published regulations (the "FDA Regulations") which would have severely
restricted cigarette advertising and promotion and limited the manner in which
tobacco products could be sold. In enacting the FDA Regulations, the FDA
determined that nicotine is a drug and that cigarettes are a nicotine delivery
system and, accordingly, subject to FDA regulatory authority as medical
devices. The FDA premised its regulations on the need to reduce smoking by
underage youth and young adults. The FDA Regulations included the following:
(i) Regulations regarding minimum sales age. These regulations would have
made unlawful the sale of cigarettes to anyone under age 18. These
regulations would have also required proof of age to be demanded from
any person under age 27 who attempts to purchase cigarettes.
(ii) Regulations regarding advertising and billboards, vending machines,
self-service displays, sampling premiums, and package labels. These
regulations would have limited all cigarette advertising to black and
white, text only format in most publications and outdoor advertising
such as billboards. The regulations also would have prohibited
billboards advertising cigarettes within 1,000 feet of a school or
playground, require that the established name for the product
("Cigarettes") and an intended use statement ("Nicotine - Delivery
Device For Persons 18 or Older") be included on all cigarette packages
and advertising, banned vending machine sales, product sampling, and the
use of cigarette brand names, logos and trademarks on premium items, and
prohibited the furnishing of any premium item in consideration for the
purchase of cigarettes or the redemption of proofs-of-purchase coupons.
(iii) Regulations which would have prohibited use of cigarette brand names to
sponsor sporting and cultural events and require cigarette manufacturers
to comply with certain stringent FDA regulations (known as "good
manufacturing practices") governing the manufacture and distribution of
medical devices.
Lorillard and other cigarette manufacturers filed a lawsuit in the U.S.
District Court in North Carolina challenging the FDA's assertion of
jurisdiction over cigarettes. Lower court rulings in this litigation were
appealed to the U.S. Supreme Court which, on March 21, 2000, held that
Congress did not give the FDA authority to regulate tobacco products under the
Federal Food, Drug and Cosmetic Act and, accordingly, the FDA's assertion of
jurisdiction over tobacco products was impermissible under that Act. Since the
Supreme Court decision, various proposals have been made for federal and state
legislation to regulate cigarette manufacturers. The ultimate outcome of these
proposals cannot be predicted.
Environmental Tobacco Smoke - Studies with respect to the alleged health
risk to nonsmokers of environmental tobacco smoke ("ETS") have received
significant publicity. In 1986, the Surgeon General of the United States and
the National Academy of Sciences reported that ETS puts nonsmokers at an
increased risk of lung cancer and respiratory illness. In January 1993, the
United States Environmental Protection Agency released a report (the "EPA Risk
Assessment") concluding that ETS is a human lung carcinogen in adults, causes
increased respiratory tract disease, middle ear disorders and increases the
severity and frequency of asthma in children. Many other scientific papers on
ETS have been published since the EPA report, with highly variable
conclusions.
In recent years, many federal, state, local and municipal governments and
agencies, as well as private businesses, have adopted legislation or
regulations which prohibit or restrict, or are intended to discourage,
smoking, including
16
legislation or regulations prohibiting or restricting smoking in various
places such as public buildings and facilities, stores and restaurants, on
domestic airline flights and in the workplace, and the sale of cigarettes in
vending machines. This trend has increased significantly since the release of
the EPA Risk Assessment. Additional laws, regulations and policies intended to
prohibit, restrict or discourage smoking are being proposed or considered by
various federal, state and local governments, agencies and private businesses
with increasing frequency. In July 1998, a federal judge struck down EPA's
scientific risk assessment in an opinion which is currently on appeal.
Ingredient Disclosure - On August 2, 1996, the Commonwealth of Massachusetts
enacted legislation requiring each manufacturer of cigarettes and smokeless
tobacco sold in Massachusetts to submit to the Department of Public Health
("DPH") an annual report, beginning in 1997, (1) identifying for each brand
sold certain "added constituents," and (2) providing nicotine yield ratings
and other information for certain brands based on regulations promulgated by
the DPH. The legislation provides for the public release of this information,
which includes flavorings and other trade secret ingredients used in
cigarettes.
In 1996, the cigarette and smokeless tobacco manufacturers filed suit in
federal district court in Boston challenging the legislation. On December 10,
1997, the court issued a preliminary injunction, enjoining the required
submission of ingredient data to the DPH. The requirement to submit the
nicotine yield ratings and other information was not enjoined, and the
cigarette and smokeless tobacco manufacturers submitted their data to the DPH
on December 15, 1997 and again on December 1, 1998. The Commonwealth of
Massachusetts appealed the district court's preliminary injunction, which was
then upheld by the U.S. Court of Appeals for the First Circuit on November 6,
1998. The case in chief remains pending before the district court on cross
motions for summary judgment.
Any impact on Lorillard from the legislation and its implementing
regulations cannot now be predicted. If the manufacturers ultimately are
required to disclose their trade secrets to the DPH and the DPH then discloses
them to the public, further litigation seeking compensation for the taking of
the manufacturers' property may ensue.
Other similar laws and regulations have been enacted or considered by other
state governments, and could have a material adverse effect on the financial
condition and results of operations of the Company if implemented without
adequate provisions to protect the manufacturers' trade secrets from being
disclosed.
Advertising and Sales Promotion: Lorillard's principal brands are advertised
and promoted extensively. Advertising and promotion activities by Lorillard
and other major tobacco manufacturers have been severely restricted by the MSA
and would have been further restricted by the regulations proposed by the FDA,
discussed above. Pursuant to the MSA, Lorillard and the other major tobacco
product manufacturers have agreed to various restrictions and limitations
regarding the advertising, promotion and marketing of tobacco products in the
Settling States. Among other things, the MSA prohibits the targeting of youth
in the advertising, promotion or marketing of tobacco products; bans the use
of cartoon characters in all tobacco advertising and promotion; limits each
tobacco manufacturer to one tobacco brand name sponsorship during any
twelve-month period, which may not include major team sports or events in
which the intended audience includes a significant percentage of youth; bans
all outdoor advertising of tobacco products with the exception of small signs
at retail establishments that sell tobacco products; bans tobacco
manufacturers from offering or selling non-tobacco apparel and other
merchandise that bears a tobacco brand name, subject to specified exceptions;
and prohibits the distribution of free samples of tobacco products except
within an adult-only facility.
Introduction of new brands, brand extensions and packings require the
expenditures of substantial sums for advertising and sales promotion, with no
assurance of consumer acceptance. The advertising media presently used by
Lorillard include magazines, newspapers, direct mail and point-of-sale display
materials. Sales promotion activities are conducted by distribution of samples
and store coupons, point-of-sale display advertising, advertising of
promotions in print media, and personal contact with distributors, retailers
and consumers.
Distribution Methods: Lorillard distributes its products through direct
sales to distributors, who in turn service retail outlets, and through chain
store organizations and vending machine operators, many of whom purchase their
requirements directly, and by direct sales to the U.S. Armed Forces.
Lorillard's tobacco products are stored in public warehouses throughout the
country to provide for rapid distribution to customers.
Lorillard has approximately 1,500 direct customers and is not dependent on
any one customer or group of customers. Lorillard does not have any backlog
orders.
17
Tobacco and Tobacco Prices: The two main classes of tobacco grown in the
United States are flue-cured tobacco, grown in Virginia, North Carolina, South
Carolina, Georgia and Florida; and burley, grown primarily in Kentucky and
Tennessee. Lorillard purchases flue-cured tobacco and burley tobacco for use
in cigarettes. Most of the tobacco from these classes used by Lorillard is
purchased by commission buyers at tobacco auctions. Lorillard also purchases
various types of aromatic tobacco, grown principally in Turkey and other Near
Eastern countries. In addition, Lorillard purchases substantial quantities of
aged tobacco from various sources, including cooperatives financed by the
Commodity Credit Corporation program, to supplement tobacco inventories.
Due to the varying size and quality of annual crops and other economic
factors, tobacco prices have varied in the past. Those economic factors
include federal government control of acreage and poundage in the flue-cured
producing areas and poundage control for burley production. The price supports
that accompany these production controls have substantially affected the
market prices of tobacco. The approximate average auction prices per pound for
flue-cured tobacco were $1.755 in 1998 and $1.736 in 1999. Burley prices per
pound were approximately $1.903 in 1998 and $1.903 in 1999. The prices paid by
Lorillard have generally been consistent with this trend. Lorillard believes
that its current leaf inventories are adequately balanced for its present
production requirements. Because the process of aging tobacco normally
requires approximately two years, Lorillard at all times has large quantities
of leaf tobacco. See Note 1 of the Notes to Consolidated Financial Statements,
included in Item 8, for inventory costing method.
Prices: On August 30, 1999 and January 17, 2000, Lorillard increased the
wholesale price of its cigarettes by $9.00 and $6.50 per thousand cigarettes
($0.18 and $0.13 per pack of 20 cigarettes), respectively.
Taxes: Federal excise taxes included in the price of cigarettes are $17.00
per thousand cigarettes ($0.34 per pack of 20 cigarettes). The federal excise
tax on cigarettes is scheduled to increase by $2.50 per thousand cigarettes in
the year 2002. Excise taxes, which are levied upon and paid by the
distributors, are also in effect in the fifty states, the District of Columbia
and many municipalities. Various states have proposed, and certain states have
recently passed, increases in their state tobacco excise taxes. The state
taxes generally range from 2.5 cents to $1.11 per package of twenty
cigarettes.
Properties: The properties of Lorillard are employed principally in the
processing and storage of tobacco and in the manufacture and storage of
cigarettes. Its principal properties are owned in fee. With minor exceptions,
all machinery used by Lorillard is owned by it. All properties are in good
condition. Lorillard's manufacturing plant is located on approximately 79
acres in Greensboro, North Carolina. This 942,600 square foot plant contains
modern high speed cigarette manufacturing machinery. A warehouse was added in
early 1995 with shipping and receiving areas totaling 54,800 square feet.
Lorillard also has facilities for receiving and storing leaf tobacco in
Danville, Virginia, containing approximately 1,500,000 square feet.
Lorillard's executive office is located in a 130,000 square-foot, four-story
office building in Greensboro, North Carolina and a modern research facility
containing approximately 82,000 square feet is also located in Greensboro.
Lorillard also leases sales offices in major cities throughout the United
States.
Competition: Substantially all of Lorillard's products are sold within the
United States in highly competitive markets where its principal competitors
are the four other major U.S. cigarette manufacturers (Philip Morris, R.J.
Reynolds ("RJR"), Brown & Williamson and Liggett Group). According to
Management Science Associates, the company used by the industry to process
shipment data, in calendar year 1999 Lorillard ranked fourth in the industry
with a 10.7% share of the market. Philip Morris and RJR accounted for
approximately 50.8% and 23.6%, respectively, of the U.S. cigarette market.
The following table sets forth cigarette sales in the United States by the
industry and by Lorillard, as reported by Management Science Associates. This
table indicates the relative position of Lorillard in the industry:
<TABLE>
<CAPTION>
Industry Lorillard Lorillard
Calendar Year (000) (000) to Industry
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 ............................... 409,496,000 43,608,000 10.7%
1998 ............................... 455,212,000 42,111,000 9.3%
1997 ............................... 477,701,000 41,831,000 8.8%
</TABLE>
18
- ---------------
The Management Science Associates Report (the "Report") divides the
cigarette market into two price segments, the full price segment and the
discount or reduced price segment. According to the Report, the reduced price
segment share of market decreased from approximately 26.2% in 1998 to 25.0% in
1999. Virtually all of Lorillard's sales are in the full price segment where
Lorillard's share amounted to approximately 11.6% in 1999 and 11.0% in 1998,
according to the Report.
LOEWS HOTELS HOLDING CORPORATION
The subsidiaries of Loews Hotels Holding Corporation ("Loews Hotels"), a
wholly owned subsidiary of the Company, presently operate the following 14
hotels. Loews Hotels accounted for 1.64%, 1.14% and 1.10% of the Company's
consolidated total revenue for the years ended December 31, 1999, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
Number of
Rooms (Year
Name and Location Opened) Owned, Leased or Managed
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Loews Annapolis 217 Owned
Annapolis, Maryland (1986(1))
Loews Coronado Bay Resort 450 Owned
San Diego, California (1991(1))
Loews Giorgio 197 Owned
Denver, Colorado (1986(1))
House of Blues, a Loews Hotel 367 Management contract expiring 2005 (2)
Chicago, Illinois (1998)
Loews Le Concorde 404 Land lease expiring 2069
Quebec City, Canada (1974(1))
Loews L'Enfant Plaza 372 Management contract expiring 2003 (2)
Washington, D.C. (1973)
Loews Miami Beach Hotel 800 Land lease expiring 2096
Miami Beach, Florida (1998)
Loews New York 765 Owned
New York, New York (1961)
The Portofino Bay Hotel, 750 Management contract (3)
at Universal Orlando, a Loews Hotel (1999)
Orlando, Florida
The Regency, a Loews Hotel 496 Land lease expiring 2013, with
New York, New York (1963) renewal option for 47 years
Loews Santa Monica Beach 350 Management contract expiring 2018,
Santa Monica, California (1989) with renewal option for 5 years(2)
Loews Vanderbilt Plaza 342 Owned
Nashville, Tennessee (1984(1))
Loews Ventana Canyon Resort 398 Management contract expiring 2004,
Tucson, Arizona (1984) with renewal options for 10 years(2)
Loews Hotel Vogue 154 Owned
Montreal, Canada (1990(1))
</TABLE>
19
- -------------
(1) The Annapolis, Giorgio, Le Concorde, Vanderbilt Plaza, Vogue and Coronado
Bay Hotels were acquired by Loews Hotels in 1990, 1989, 1987, 1989, 1995
and 2000, respectively.
(2) These management contracts are subject to termination rights.
(3) A Loews Hotels subsidiary is a 50% owner of the property through a joint
venture, discussed below.
Recent Developments: In spring 2000, the 583 room Loews Philadelphia Hotel
is scheduled to open, following its conversion from the landmark PSFS
building. In January 2000, Loews Hotels purchased the Coronado Bay Resort
hotel located in San Diego, California and the Days and Howard Johnson hotels
located in New York City were sold in December 1999. Loews Hotels has entered
into a letter of intent to form a joint venture to develop and operate a new
432 room hotel in Boston's theater district.
Hotels at Universal Orlando: A Loews Hotels subsidiary has a 50% interest in
a joint venture with the owners of the Universal Orlando theme park in
Orlando, Florida to develop and construct three hotels having an aggregate of
approximately 2,400 rooms. The hotels will be constructed on land leased by
the joint venture from the resort's owners and will be operated by Loews
Hotels pursuant to a management contract. The first hotel, the Portofino Bay
Hotel, opened in the fall of 1999. Construction has commenced on the second
hotel, the Hard Rock Hotel, a 650 room hotel which is scheduled to open in
December 2000. The third hotel, the 1,000 room Royal Pacific is scheduled to
open in 2001.
The hotels which are operated by Loews Hotels contain shops, a variety of
restaurants and lounges, and some contain parking facilities, swimming pools,
tennis courts and access to golf courses.
The hotels owned by Loews Hotels are subject to mortgage indebtedness
aggregating approximately $135.9 million at December 31, 1999 with interest
rates ranging from 6.6% to 8.7% and maturing between 2000 and 2018. In
addition, certain hotels are held under leases which are subject to formula
derived rental increases, with rentals aggregating approximately $3.4 million
for the year ended December 31, 1999.
Competition from other hotels, motor hotels and inns, including facilities
owned by local interests and by national and international chains, is vigorous
in all areas in which Loews Hotels operates. The demand for hotel rooms in
many areas is seasonal and dependent on general and local economic conditions.
Loews Hotels properties also compete with facilities offering similar services
in locations other than those in which its hotels are located. Competition
among luxury hotels is based primarily on location and service. Competition
among resort and commercial hotels is based on price as well as location and
service. Because of the competitive nature of the industry, hotels must
continually make expenditures for updating, refurnishing and repairs and
maintenance, in order to prevent competitive obsolescence.
DIAMOND OFFSHORE DRILLING, INC.
Diamond Offshore Drilling Inc. ("Diamond Offshore"), is engaged, through its
subsidiaries, in the business of owning and operating drilling rigs that are
used primarily in the drilling of offshore oil and gas wells on a contract
basis for companies engaged in exploration and production of hydrocarbons.
Diamond Offshore operates 45 offshore rigs. Diamond Offshore accounted for
3.95%, 5.85% and 4.82% of the Company's consolidated total revenue for the
years ended December 31, 1999, 1998 and 1997, respectively.
Drilling Units and Equipment: Diamond Offshore currently owns and operates
45 mobile offshore drilling rigs (30 semisubmersible rigs, 14 jackup rigs and
one drillship) and related equipment. Offshore rigs are mobile units that can
be relocated via either self propulsion or the use of tugs enabling them to be
repositioned based on market demand.
Semisubmersible rigs are supported by large pontoons and are partially
submerged during drilling for greater stability. They are generally designed
for deep water depths of up to 5,000 feet. Diamond Offshore owns and operates
three fourth-generation semisubmersible rigs and four fourth-generation deep
water conversions. These rigs are equipped with advanced drilling equipment,
are capable of operations in deep water or harsh environments, and command
high premiums from operators. Diamond Offshore's 30 semisubmersible rigs are
currently located as follows: 16 in the Gulf of Mexico, four in Brazil, three
in the North Sea and two in Australia, with the remaining rigs located in
various foreign markets.
20
Jackup rigs stand on the ocean floor with their drilling platforms "jacked
up" on support legs above the water. They are used extensively for drilling in
water depths from 20 feet to 350 feet. Nine of Diamond Offshore's jackup rigs
are cantilevered rigs capable of over platform development drilling and
workover as well as exploratory drilling. Of Diamond Offshore's 14 jackup
rigs, 12 are currently located in the Gulf of Mexico.
Diamond Offshore's drillship is self-propelled and designed to drill in deep
water. Shaped like a conventional vessel, it is the most mobile of the major
rig types. Diamond Offshore's drillship has dynamic-positioning capabilities
and during 1999 replacement of the blow-out preventer control system and
additional upgrades were completed. The drillship then mobilized to offshore
Brazil in late December 1999 and is currently operating under a three year
contract.
Markets: Diamond Offshore's principal markets for its offshore contract
drilling services are the Gulf of Mexico, Europe, including principally the
U.K. sector of the North Sea, South America, Africa, and Australia/Southeast
Asia. Diamond Offshore actively markets its rigs worldwide.
Diamond Offshore contracts to provide offshore drilling services vary in
their terms and provisions. Diamond Offshore often obtains its contracts
through competitive bidding, although it is not unusual for Diamond Offshore
to be awarded drilling contracts without competitive bidding. Drilling
contracts generally provide for a basic drilling rate on a fixed dayrate basis
regardless of whether such drilling results in a productive well. Drilling
contracts may also provide for lower rates during periods when the rig is
being moved or when drilling operations are interrupted or restricted by
equipment breakdowns, adverse weather or water conditions or other conditions
beyond the control of Diamond Offshore. Under dayrate contracts, Diamond
Offshore generally pays the operating expenses of the rig, including wages and
the cost of incidental supplies. Dayrate contracts have historically accounted
for a substantial portion of Diamond Offshore's revenues. In addition, Diamond
Offshore has worked some of its rigs under dayrate contracts pursuant to which
the customer also agrees to pay Diamond Offshore an incentive bonus based upon
performance.
A dayrate drilling contract generally extends over a period of time covering
either the drilling of a single well, a group of wells (a "well-to-well
contract") or a stated term (a "term contract") and may be terminated by the
customer in the event the drilling unit is destroyed or lost or if drilling
operations are suspended for a specified period of time as a result of a
breakdown of major equipment or, in some cases, due to other events beyond the
control of either party. In addition, certain of Diamond Offshore's contracts
permit the customer to terminate the contract early by giving notice and in
some circumstances may require the payment of an early termination fee by the
customer. The contract term in many instances may be extended by the customer
exercising options for the drilling of additional wells at fixed or mutually
agreed terms, including dayrates.
In January 2000, Diamond Offshore announced that it had been awarded a
letter of intent for its fourth-generation semisubmersible, the Ocean
Alliance, for a three-year term commitment with Petrobras in Brazil. The rig,
currently working in West Africa, is scheduled to begin mobilization for the
program in the third quarter of 2000, depending on the duration of its current
commitments. The contract, which will commence in direct continuation of
current obligations, is expected to generate revenues of approximately $131.0
million, with provisions for additional revenue if the rig is utilized in
waters deeper than the primary contract obligation of 1,200 meters.
Additionally, the commitment allows Diamond Offshore certain rights for
participation in possible increases in the drilling market during the third
year of the agreement.
In August 1999, a customer terminated a contract for use of one of Diamond
Offshore's drilling rigs located offshore Australia. The termination was not
the result of performance failures by Diamond Offshore or its equipment.
Diamond Offshore believes the contract requires the customer to pay
approximately $16.5 million in remaining revenue through the end of the
contract period, which was previously scheduled to end in early January 2000.
However, the customer believes that there is no further obligations under the
contract and has refused to pay the $16.5 million early termination fee.
Diamond Offshore filed suit in Australia in August 1999 requesting
reconstruction of the contract and a declaratory judgment requiring the
customer to pay such early termination fee.
The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategies of the offshore
drilling contractor and its customers. In periods of rising demand for
offshore rigs, contractors typically prefer well-to-well contracts that allow
contractors to profit from increasing dayrates. In contrast, during these
periods customers with reasonably definite drilling programs typically prefer
longer term contracts to maintain dayrate prices at the lowest level possible.
Conversely, in periods of decreasing
21
demand for offshore rigs, contractors generally prefer longer term contracts
to preserve dayrates at existing levels and ensure utilization, while the
customers prefer well-to-well contracts that allow them to obtain the benefit
of lower dayrates. In general, Diamond Offshore seeks to have a foundation of
long-term contracts with a reasonable balance of single well, well-to-well and
short-term contracts to minimize the downside impact of a decline in the
market while still participating in the benefit of increasing dayrates in a
rising market.
Disposition of Assets: In January 2000, Diamond Offshore sold its jack-up
drilling rig, the Ocean Scotian, for $32.0 million in cash resulting in an
after-tax gain of $9.0 million. The rig had been cold stacked offshore
Netherlands prior to the sale. Certain other assets, including drilling rigs,
have been sold in previous years. These assets have generally been inactive or
did not fit the overall strategic direction of Diamond Offshore. Although
Diamond Offshore does not, as of the date hereof, have any commitment with
respect to a material disposition of assets, it could enter into such an
agreement in the future.
Customers: Diamond Offshore provides offshore drilling services to a
customer base that includes major and independent oil and gas companies and
government-owned oil companies. Occasionally, several customers have accounted
for 10.0% or more of Diamond Offshore's annual consolidated revenues, although
the specific customers may vary from year to year. During 1999, Diamond
Offshore performed services for approximately 40 different customers with
Petrobras and Shell companies (including domestic and foreign affiliates)
("Shell") accounting for 15.5% and 14.5% of Diamond Offshore's annual total
consolidated revenues, respectively. During 1998, Diamond Offshore performed
services for approximately 40 different customers with Shell accounting for
17.4% of Diamond Offshore's annual total consolidated revenues. During 1997,
Diamond Offshore performed services for approximately 50 different customers
with Shell accounting for 14.3% of Diamond Offshore's annual total
consolidated revenues. During periods of low demand for offshore drilling
rigs, the loss of a single significant customer could have a material adverse
effect on Diamond Offshore's result of operations.
Competition: The contract drilling industry is highly competitive. Customers
often award contracts on a competitive bid basis, and although a customer
selecting a rig may consider, among other things, a contractor's safety
record, crew quality, rig location, and quality of service and equipment, the
historical oversupply of rigs has created an intensely competitive market in
which price is the primary factor in determining the selection of a drilling
contractor. In periods of escalated drilling activity, rig availability has,
in some cases, also become a consideration, particularly with respect to
technologically advanced units. Diamond Offshore believes that competition for
drilling contracts will continue to be intense in the foreseeable future.
Contractors are also able to adjust localized supply and demand imbalances by
moving rigs from areas of low utilization and dayrates to areas of greater
activity and relatively higher dayrates. Such movements, reactivations or a
decrease in drilling activity in any major market could depress dayrates and
could adversely affect utilization of Diamond Offshore's rigs.
In addition, rig construction and enhancement programs by offshore drilling
contractors, which began in late 1997 and 1998, have resulted in an increase
in the supply of technologically advanced rigs capable of drilling in deep
water. This marginal oversupply of such equipment has, in turn, adversely
affected the utilization level and average operating dayrates available for
Diamond Offshore's rigs, particularly its higher specification semisubmersible
units.
Governmental Regulation: Diamond offshore's operations are subject to
numerous federal, state and local laws and regulations that relate directly or
indirectly to its operations, including certain regulations controlling the
discharge of materials into the environment, requiring removal and clean-up
under certain circumstances, or otherwise relating to the protection of the
environment. For example, Diamond Offshore may be liable for damages and costs
incurred in connection with oil spills for which it is held responsible. Laws
and regulations protecting the environment have become increasingly stringent
in recent years and may in certain circumstances impose "strict liability"
rendering a company liable for environmental damage without regard to
negligence or fault on the part of such company. Liability under such laws and
regulations may result from either governmental or citizen prosecution. Such
laws and regulations may expose Diamond Offshore to liability for the conduct
of or conditions caused by others, or for acts of Diamond Offshore that were
in compliance with all applicable laws at the time such acts were performed.
The application of these requirements or the adoption of new requirements
could have a material adverse effect on Diamond Offshore.
The United States Oil Pollution Act of 1990 ("OPA '90") and similar
legislation enacted in Texas, Louisiana and other coastal states addresses oil
spill prevention and control and significantly expands liability exposure
across all segments of the oil and gas industry. OPA '90, such similar
legislation and related regulations impose a variety
22
of obligations on Diamond Offshore related to the prevention of oil spills and
liability for damages resulting from such spills. OPA '90 imposes strict and,
with limited exceptions, joint and several liability upon each responsible
party for oil removal costs and a variety of public and private damages.
Indemnification and Insurance: Diamond Offshore's operations are subject to
hazards inherent in the drilling of oil and gas wells such as blowouts,
reservoir damage, loss of production, loss of well control, cratering or
fires, the occurrence of which could result in the suspension of drilling
operations, injury to or death of rig and other personnel and damage to or
destruction of Diamond Offshore's, Diamond Offshore's customer's or a third
party's property or equipment. Damage to the environment could also result
from Diamond Offshore's operations, particularly through oil spillage or
uncontrolled fires. In addition, offshore drilling operations are subject to
perils peculiar to marine operations, including capsizing, grounding,
collision and loss or damage from severe weather. Diamond Offshore has
insurance coverage and contractual indemnification for certain risks, but
there can be no assurance that such coverage or indemnification will
adequately cover Diamond Offshore's loss or liability in many circumstances or
that Diamond Offshore will continue to carry such insurance or receive such
indemnification.
Properties: Diamond Offshore owns an eight-story office building located in
Houston, Texas containing approximately 182,000 net rentable square feet,
which is used for its corporate headquarters. Diamond Offshore also owns an
18,000 square foot building and 20 acres of land in New Iberia, Louisiana for
its offshore drilling warehouse and storage facility, and a 13,000 square foot
building and five acres of land in Aberdeen, Scotland for its North Sea
operations. In addition, Diamond Offshore leases various office, warehouse and
storage facilities in Louisiana, West Africa, Australia, Brazil, Indonesia,
Scotland, Singapore and Trinidad to support its offshore drilling operations.
BULOVA CORPORATION
Bulova Corporation ("Bulova") is engaged in the distribution and sale of
watches, clocks and timepiece parts for consumer use. Bulova accounted for
.65%, .63% and .64% of the Company's consolidated total revenue for the years
ended December 31, 1999, 1998 and 1997, respectively.
Bulova's principal watch brands are Bulova, Caravelle, Accutron and
Sportstime. Clocks are principally sold under the Bulova brand name. All
watches and clocks are purchased from foreign suppliers. Bulova's principal
markets are the United States and Canada. In most other areas of the world
Bulova has appointed licensees who market watches under Bulova's trademarks in
return for a royalty. The business is seasonal, with the greatest sales coming
in the third and fourth quarters in expectation of the holiday selling season.
The business is intensely competitive. The principal methods of competition
are price, styling, product availability, aftersale service, warranty and
product performance.
Properties: Bulova owns an 80,000 square foot plant in Woodside, New York
which is used for its principal executive and sales office, watch
distribution, service and warehouse purposes, and also owns a 91,000 square
foot plant in Brooklyn, New York for clock service and warehouse purposes. In
addition, Bulova leases a 25,000 square foot plant in Toronto, Canada for
watch and clock sales and service.
OTHER INTERESTS
A subsidiary of the Company, Majestic Shipping Corporation ("Majestic"),
owns a 49% common stock interest in Hellespont Shipping Corporation
("Hellespont"). Hellespont is engaged in the business of owning and operating
six large crude oil tankers that are used primarily to transport crude oil
from the Persian Gulf to a limited number of ports in the Far East, Northern
Europe and the United States.
For information with respect to agreements entered into by Majestic and
Hellespont for the newbuilding of up to eight ships, see Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.
EMPLOYEE RELATIONS
The Company, inclusive of its operating subsidiaries as described below,
employed approximately 30,900 persons at December 31, 1999 and considers its
employee relations to be satisfactory.
23
Lorillard employed approximately 3,300 persons at December 31, 1999.
Approximately 1,300 of these employees are represented by labor unions under
separate contracts with many local unions expiring at varying times and
severally renegotiated and renewed.
Lorillard has collective bargaining agreements covering hourly rated
production and service employees at various Lorillard plants with the Tobacco
Workers International Union, the International Brotherhood of Firemen and
Oilers, and the International Association of Machinists. Lorillard has
experienced satisfactory labor relations and provides a retirement plan, a
deferred profit sharing plan, and other benefits for its hourly paid employees
who are represented by the foregoing unions. In addition, Lorillard provides
to its salaried employees a retirement plan, group life, disability and health
insurance program and a savings plan.
Loews Hotels employed approximately 2,700 persons at December 31, 1999,
approximately 1,100 of whom are union members covered under collective
bargaining agreements. Loews Hotels has experienced satisfactory labor
relations and provides comprehensive benefit plans for its hourly paid
employees.
The Company maintains a retirement plan, group life, disability and health
insurance program and a savings plan for salaried employees. Loews Hotels
salaried employees also participate in these benefit plans.
CNA employed approximately 19,600 full-time equivalent employees at December
31, 1999 and has experienced satisfactory labor relations. CNA has never had
work stoppages due to labor disputes. CNA and its subsidiaries have
comprehensive benefit plans for substantially all of their employees,
including retirement plans, savings plans, disability programs, group life
programs and group health care programs.
Diamond Offshore employed approximately 4,600 persons at December 31, 1999
(including international crews furnished through labor contractors),
approximately 34 of whom are union members. Diamond Offshore has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees.
Bulova and its subsidiaries employed approximately 450 persons at December
31, 1999, approximately 150 of whom are union members. Bulova and its
subsidiaries have experienced satisfactory labor relations. Bulova has
comprehensive benefit plans for substantially all employees.
Item 2. Properties.
Information relating to the properties of Registrant and its subsidiaries is
contained under Item 1.
Item 3. Legal Proceedings.
1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Notes 7 and 18 of the Notes to
Consolidated Financial Statements included in Item 8.
NON-INSURANCE
Tobacco Litigation
- ------------------
Lawsuits continue to be filed with increasing frequency against Lorillard
and other manufacturers of tobacco products. As of March 1, 2000,
approximately 1,100 product liability cases have been filed and served in
United States courts against U.S. cigarette manufacturers since January 1,
1998. Lorillard has been named as a defendant in approximately 840 of these
actions. Cases also have been filed with greater frequency against the
Company. A total of approximately 1,225 product liability cases are pending
against U.S. cigarette manufacturers, including approximately 500 cases filed
by flight attendants alleging injury from exposure to environmental tobacco
smoke in the aircraft cabin. Of these 1,225 cases, Lorillard is a defendant in
approximately 825, including each of the flight attendant cases filed and
served to date and the Company is named as a defendant in 38 cases, 11 of
which have not been served.
Tobacco litigation includes various types of claims. In these actions,
plaintiffs claim substantial compensatory, statutory and punitive damages, as
well as equitable and injunctive relief, 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,
24
fraud, misrepresentation, strict liability, breach of warranty, enterprise
liability, civil conspiracy, intentional infliction of harm, violation of
consumer protection statutes, violation of anti-trust statutes, and failure to
warn of the allegedly harmful and/or addictive nature of tobacco products.
Some cases have been brought by individual plaintiffs who allege cancer
and/or other health effects claimed to have resulted from an individual's use
of cigarettes and smokeless tobacco products, addiction to smoking, or
exposure to environmental tobacco smoke ("Conventional Product Liability
Cases"). Approximately 715 such actions are pending against Lorillard. In
other cases, plaintiffs have brought claims as class actions on behalf of
large numbers of individuals for damages allegedly caused by smoking ("Class
Actions"). Approximately 40 such cases are pending against Lorillard. In some
cases, plaintiffs are governmental entities or entities such as labor unions,
private companies, Indian Tribes, or private citizens suing on behalf of
taxpayers. Plaintiffs in these cases seek reimbursement of health care costs
allegedly incurred as a result of smoking, as well as other alleged damages
("Reimbursement Cases"). Approximately 55 such cases are pending, excluding
some of the actions brought by certain governmental entities that have not
been formally concluded but are subject to the MSA discussed below. The U.S.
federal government and the governments of several foreign nations also have
filed suit in U.S. courts but these cases are not governed by the MSA. 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, and a ninth case has been served on some of the
defendants but not Lorillard.
In addition to the above, claims have been brought against Lorillard seeking
damages resulting from alleged exposure to asbestos fibers which were
incorporated, for a limited period of time, ending more than forty years ago,
into filter material used in one brand of cigarettes manufactured by Lorillard
("Filter Cases"); there has not been a noticeable increase in the filing of
these suits during the past few years, and approximately 25 such actions are
pending.
CONVENTIONAL PRODUCT LIABILITY CASES - There are approximately 1,120 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.
Approximately 500 of the cases have been filed by flight attendants
purportedly injured by their exposure to environmental tobacco smoke in the
aircraft cabin. Lorillard is a defendant in approximately 715 of these cases.
The Company is a defendant in eight of the cases filed by individuals,
although five of them have not been served. The Company is not named as a
defendant in any of the flight attendant cases served to date.
Plaintiffs in most of these cases seek unspecified amounts in compensatory
and punitive damages.
On March 20, 2000, the jury in Whiteley v. Raybestos-Manhattan, Inc., et al.
(Superior Court, City and County of San Francisco, filed April 30, 1999)
returned a verdict in plaintiffs' favor in an individual smoking and health
lawsuit brought against Philip Morris and R.J. Reynolds (Lorillard was not a
defendant). The jury awarded plaintiffs $1.7 million in actual damages and
$20.0 million in punitive damages.
During 1998 and 1999, a total of eight trials were held involving eleven
cases filed by individual plaintiffs. One trial has been held to date in 2000,
raising to nine the number of trials held since 1998. The Company was a
defendant in one of the cases. Lorillard was a defendant in two of the cases,
including the one that was tried against the Company. Juries returned verdicts
in favor of the defendants in the cases tried against Lorillard and the
Company.
On June 2, 1999, the jury in Butler v. Philip Morris, Inc., et al. (Circuit
Court, Second Judicial District of Jones County, Mississippi, filed May 12,
1994) returned a verdict in favor of the defendants, which included Lorillard,
in the trial of a suit brought by the family of a man who died of cancer,
allegedly caused by exposure to environmental tobacco smoke. Plaintiffs
voluntarily withdrew their post-trial motions and did not notice an appeal.
On March 18, 1998, the jury in Dunn v. RJR Nabisco Holdings Corporation, et
al. (Superior Court, Delaware County, Indiana, filed May 28, 1993) returned a
unanimous verdict in favor of the defendant cigarette manufacturers and their
parent entities, including the Company, in the trial of a suit brought by the
family of a woman who died of cancer, allegedly caused by exposure to
environmental tobacco smoke. The court denied plaintiffs' motion for new
trial. Plaintiffs did not notice an appeal.
25
Neither the Company nor Lorillard were defendants in the ten remaining
cases. Verdicts were returned in favor of the defendants in six of the ten
matters, but juries found in plaintiffs' favor in the remaining four cases. In
three of these verdicts, juries awarded plaintiffs a total of $132.8 million
in actual damages and punitive damages. One of the verdicts in favor of
plaintiffs has been vacated on appeal. In two of the remaining cases, the
courts have reduced the verdicts to a total of $59.4 million. Appeals are
pending in both of these actions. The fourth verdict was returned in the
Whiteley case discussed above. Neither Lorillard nor the Company are
defendants in this action.
CLASS ACTIONS - There are approximately 60 purported class actions pending
against cigarette manufacturers and other defendants, including the Company.
One of the cases has not been served. Most of the suits seek class
certification on behalf of residents of the states in which the cases have
been filed, although some suits seek class certification on behalf of
residents of multiple states. All but one of the purported class actions seek
class certification on behalf of individuals who smoked cigarettes or were
exposed to environmental tobacco smoke. One of the cases seek class
certification on behalf of individuals who have paid insurance premiums to
Blue Cross and Blue Shield organizations. Plaintiffs in some of Reimbursement
Cases also seek certification as class actions (see Reimbursement Cases,
below).
Theories of liability asserted in the purported class actions include a
broad range of product liability theories, including those based on consumer
protection statutes and fraud and misrepresentation. Plaintiffs seek damages
in each case that range from unspecified amounts to the billions of dollars.
Most plaintiffs seek punitive damages and some seek treble damages. Plaintiffs
in many of the cases seek medical monitoring. Plaintiffs in several of the
purported class actions are represented by a well-funded and coordinated
consortium of over 60 law firms from throughout the United States. Lorillard
is a defendant in approximately 40 of the approximately 60 cases seeking class
certification. The Company is a defendant in twelve of the purported class
actions. The Company is a defendant in another case in which none of the
defendants have received service of process to date. Many of the purported
class actions are in the pre-trial, discovery stage.
Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Dade County,
Florida, October 31, 1991). On October 10, 1997, the parties to this class
action brought on behalf of flight attendants claiming injury as a result of
exposure to environmental tobacco smoke executed a settlement agreement which
was approved by the trial court on February 3, 1998. The settlement agreement
requires Lorillard and three other cigarette manufacturers jointly to pay
$300.0 million in three annual installments to create and endow a research
institute to study diseases associated with cigarette smoke. The plaintiff
class members are permitted to file individual suits, but these individuals
may not seek punitive damages for injuries that arose prior to January 15,
1997 which enabled them to be members of the class. As of March 1, 2000,
approximately 500 such cases had been filed and served on cigarette
manufacturers, including Lorillard.
Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County,
Florida, filed May 5, 1994). Trial began during July 1998 in this case, which
is pending in a Florida state court. The trial court has granted class
certification on behalf of Florida residents and citizens, and survivors of
such individuals, who allegedly have been injured 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 conditions to be
monitored for future health care costs, and attorneys' fees and court costs.
The case is being tried in three phases. The first phase involved
consideration of certain issues "common" to the members of the class and their
asserted causes of action.
On July 7, 1999, the jury returned a verdict against defendants at the
conclusion of the first phase. The jury found, among other things, that
cigarette smoking is addictive and causes lung cancer and a variety of other
diseases, that the defendants concealed information about the health risks of
smoking, and that defendants' conduct "rose to a level that would permit a
potential award or entitlement to punitive damages." The verdict permitted the
trial to proceed to a second phase. The jury was not asked to award damages in
the Phase One verdict.
Phase Two of the trial began on November 1, 1999 and is proceeding before
the same jury which returned the verdict in Phase One. In the first part of
Phase Two, the jury will determine issues of specific causation, reliance,
affirmative defenses and other individual-specific issues related to the
claims of three named plaintiffs and their entitlement to damages, if any.
26
If the jury returns a verdict in favor of any of the three named plaintiffs
and awards compensatory damages, then the trial would proceed to the second
part of Phase Two, which would involve a determination of punitive damages. 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. The order provides that the jury will determine
punitive damages, if any, on a lump-sum dollar amount basis for the entire
qualified class. The Third District of the Florida Court of Appeal rejected
defendants' appeals from these rulings, and the Florida Supreme Court declined
to review the orders at this time.
It is unclear how the order will be implemented. The August 2, 1999 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 law.
Lorillard will take all appropriate steps to seek to prevent this worst case
scenario from occurring and believes these efforts should be successful.
Pursuant to the trial plan, Phase Three would address potentially hundreds
of thousands of 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.
Lorillard remains of the view that the Engle case should not have been
certified as a class action. That certification is inconsistent with the
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 appropriate
under Florida law. Lorillard believes that an appeal of these issues on the
merits should prevail.
Norton v. RJR Nabisco Holdings Corporation, et al. (Superior Court, Madison
County, Indiana, filed May 3, 1996). The Company is a defendant in the case.
Richardson v. Philip Morris Incorporated, et al. (Circuit Court, Baltimore
City, Maryland, filed May 24, 1996). During January of 1998, the court granted
plaintiffs' motion for class certification on behalf of Maryland residents who
had, presently have, or died from diseases, medical conditions or injuries
caused by smoking cigarettes or using smokeless tobacco products; nicotine
dependent persons in Maryland who have purchased and used cigarettes and
smokeless tobacco products manufactured by the defendants; and Maryland
residents who require medical monitoring. Defendants have filed a petition for
writ of mandamus or prohibition from the class certification order with the
Maryland Court of Special Appeals.
Scott v. The American Tobacco Company, et al. (District Court, Orleans
Parish, Louisiana, filed May 24, 1996). The Company is a defendant in the
case. Class certification has been granted on behalf of Louisiana citizens who
require medical monitoring. The class certification order was affirmed on
appeal by the Louisiana Court of Appeals, and the Louisiana Supreme Court
denied further review of the class certification order.
The court has entered an order scheduling the case for trial. The trial plan
entered by the court directs that trial is to be held in three stages. The
first phase of trial to begin on January 15, 2001. The second phase will begin
fourteen days after the conclusion of the first phase of trial, and the third
phase is to begin fourteen days after the end of the second phase. The same
jury is to hear each of the three phases. In the first phase, the trial will
address fault and causation issues "common" to the class. According to the
court, these issues include, but are not limited to, whether the class
representatives smoked; whether nicotine caused the representatives to smoke;
whether cigarettes are defective "in relation to nicotine and addiction as a
matter of Louisiana law;" and whether the representatives' alleged addiction
"caused conditions or effects that justify medical monitoring or other
class-wide remedies or damages ..." The second phase of trial is to "determine
any items of damage common to the class and
27
the basis for the assessment of those damages ..." The third phase is to
"assess the common damages determined in the Phase II trial ..." According to
the trial plan, a final judgment will not be entered until the third phase is
concluded. Following the end of the third phase of trial, the court will
schedule additional trials "to determine and assess individual damages not
common to the class."
Lyons v. The American Tobacco Company, et al. (U.S. District Court, Southern
District, Alabama, filed August 8, 1996).
Perry v. The American Tobacco Company, et al. (Circuit Court, Coffee County,
Tennessee, filed September 30, 1996). Plaintiffs seek class certification on
behalf of individuals who have paid medical insurance premiums to a Blue Cross
and Blue Shield organization.
Connor v. The American Tobacco Company, et al. (Second Judicial District
Court, Bernalillo County, New Mexico, filed October 10, 1996).
Blankenship v. American Tobacco Company, et al. (Circuit Court, Kanawha
County, West Virginia, filed January 31, 1997). The Company is a defendant in
the case. Trial is scheduled to begin on October 2, 2000. This matter formerly
was know as McCune.
Muncy v. Philip Morris Incorporated, et al. (Circuit Court, McDowell County,
West Virginia, filed February 4, 1997). This matter formerly was known as
Woods.
Peterson v. American Tobacco Company, et al. (Circuit Court, First Circuit,
Hawaii, filed February 6, 1997).
Walls v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Oklahoma, filed February 6, 1997). The court has heard argument on
plaintiffs' motion for class certification. The court has certified certain
questions of Oklahoma law to the Oklahoma Supreme Court to guide it in its
class certification ruling.
Selcer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Nevada, filed March 3, 1997). The Company is a defendant in the case. The
court has certified certain questions of Nevada law to the Nevada Supreme
Court to guide it in its class certification ruling.
Geiger v. The American Tobacco Company, et al. (Supreme Court, Queens
County, New York, filed April 30, 1997). During 1997, the trial court granted
on an interim basis plaintiffs' motion for class certification on behalf of
New York residents who allege lung cancer or throat cancer as a result of
smoking cigarettes. The Appellate Division of the New York Supreme Court
reversed the class certification order and directed the trial court to allow
the parties to conduct additional proceedings on the class certification
motion. During 1999, the trial court denied plaintiffs' renewed motion for
class certification. Plaintiffs have been permitted to appeal the decision to
the Appellate Division of the New York Supreme Court.
Cole v. The Tobacco Institute, Inc., et al. (U.S. District Court, Eastern
District, Texas, Texarkana Division, filed May 5, 1997).
Anderson v. The American Tobacco Company, Inc., et al. (U.S. District Court,
Eastern District, Tennessee, filed May 23, 1997). The Company is a defendant
in the case.
Taylor v. The American Tobacco Company, Inc., et al. (Circuit Court, Wayne
County, Michigan, filed May 23, 1997). During January 2000, the court denied
plaintiffs' motion for class certification.
Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San
Diego County, California, filed June 10, 1997).
Brammer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Southern District, Iowa, filed June 20, 1997).
Denberg v. American Brands, Inc., et al. (U.S. District Court, Northern
District, Illinois, filed July 7, 1997). This matter formerly was known as
Daley.
28
Bush v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, Texas, filed September 10, 1997).
Nwanze v. Philip Morris Companies Inc., et al. (U.S. District Court,
Southern District, New York, filed September 29, 1997). The Company is a
defendant in the case. The court denied plaintiffs' motion for class
certification.
Badillo v. American Tobacco Company, et al. (U.S. District Court, Nevada,
filed October 8, 1997). The Company is a defendant in the case. The court has
certified certain questions of Nevada law to the Nevada Supreme Court to guide
it in its class certification ruling.
Young v. The American Tobacco Company, et al. (Civil District Court, Orleans
Parish, Louisiana, filed November 12, 1997). The Company is a defendant in the
case.
Aksamit v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, South Carolina, filed November 20, 1997).
DiEnno v. Liggett Group, Inc., et al. (U.S. District Court, Nevada, filed
December 22, 1997). The court has certified certain questions of Nevada law to
the Nevada Supreme Court to guide it in its class certification ruling.
Jackson v. Philip Morris Incorporated, et al. (U.S. District Court, Central
District, Utah, filed on or about February 13, 1998). The Company is a
defendant in the case.
Parsons v. AC&S, et al. (Circuit Court, Kanawha County, West Virginia, filed
February 27, 1998).
Basik v. Lorillard Tobacco Company, et al. (U.S. District Court, Northern
District, Illinois, filed March 17, 1998).
Daniels v. Philip Morris Companies, Inc., et al. (Superior Court, San Diego
County, California, filed April 2, 1998).
Christensen v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Nevada, filed April 3, 1998). The Company is a defendant in the case. To date,
none of the defendants have received service of process. The court has
certified certain questions of Nevada law to the Nevada Supreme Court to guide
it in its class certification ruling.
Avallone v. The American Tobacco Company, Inc., et al. (Superior Court,
Middlesex County, New Jersey, filed April 23, 1998). The Company is a
defendant in the case. The court has denied plaintiffs' motion for class
certification and denied their motion for reconsideration of the decision.
Plaintiffs have sought leave to appeal the rulings.
Cleary v. Philip Morris Incorporated, et al. (Circuit Court, Cook County,
Illinois, filed June 5, 1998).
Creekmore v. Brown & Williamson Tobacco Corporation, et al. (Superior Court,
Buncombe County, North Carolina, filed July 31, 1998).
Sweeney v. American Tobacco Company, et al. (Court of Common Pleas,
Allegheny County, Pennsylvania, filed October 15, 1998). The Company is a
defendant in the case.
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. Plaintiffs have noticed an appeal to the U.S. Court of
Appeals for the Third Circuit.
Gatlin v. American Tobacco Company, et al. (U.S. District Court, Eastern
District, Missouri, filed December 21, 1998). The Company was a defendant in
the case. During February 2000, plaintiffs voluntarily dismissed the case.
Jones v. The American Tobacco Company, Inc., et al. (Circuit Court, Jackson
County, Missouri, filed December 22, 1998). The Company is a defendant in the
case.
29
Tobacco Consumers Group No. 3 v. R.J. Reynolds Tobacco Company, et al. (U.S.
District Court, Massachusetts, filed March 22, 1999).
Simon v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, New York, filed April 9, 1999). This matter formerly was known as
Sturgeon.
Julian v. Philip Morris Companies Inc., et al. (Circuit Court, Montgomery
County, Alabama, filed April 14, 1999).
REIMBURSEMENT CASES - On November 23, 1998, Lorillard and other
manufacturers of tobacco products 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
Commonwealth of the Northern Mariana Islands (collectively, the "Settling
States") to settle the asserted and unasserted health care cost recovery and
certain other claims of those states. Lorillard and the other major U.S.
tobacco manufacturers had previously settled similar claims brought by the
four other states (together with the MSA, the "State Settlement Agreements").
The State Settlement Agreements and certain ancillary agreements are included
as exhibits to this Report (Exhibits 10.08 through 10.23) and are incorporated
by reference thereto.
The MSA is subject to final judicial approval in each of the Settling
States. In the Company's opinion, final judicial approval has been achieved in
each of the Settling States, and a condition known as "State-Specific
Finality" has been achieved in 47 of the 52 Settling States. Settlement funds
may not be released to a Settling State until State-Specific Finality has been
achieved. State-Specific Finality has not been achieved in the five remaining
Settling States for various reasons, including that suits have been filed
contesting various aspects of the MSA. In addition, certain other actions have
been filed in which plaintiffs seek to achieve a different distribution of the
funds allocated by the MSA to the respective states. Lorillard has been a
defendant in some but not all of the suits filed by these plaintiffs. If a
Settling State does not achieve State-Specific Finality by December 31, 2001,
the MSA will be terminated with respect to such state, unless otherwise agreed
to by each of Lorillard and the other participating manufacturers and the
Settling State. The MSA, however, will remain in effect as to each Settling
State in which State-Specific Finality 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 Lorillard and the other
participating manufacturers to avoid the further expense, inconvenience,
burden and uncertainty of litigation.
Suits brought by 46 state governments and six other governmental entities
are governed by the MSA. In addition to these, approximately 50 other suits
are pending, comprised of cases brought by the U.S. federal government,
unions, Indian tribes, private companies and foreign governments filing suit
in U.S. courts, in which plaintiffs seek recovery of funds expended by them to
provide health care to individuals with injuries or other health effects
allegedly caused by use of tobacco products or exposure to cigarette smoke.
These cases are based on, among other things, equitable claims, including
injunctive relief, 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 foreign governments. The Company is
named as a defendant in ten of the pending reimbursement cases.
U.S. State and Local Governmental Reimbursement Cases - The MSA has resolved
or is expected to resolve the cases filed by 46 state governments and six
other governmental entities. Since January 1, 1997, cases brought by four
state governments, Florida, Minnesota, Mississippi and Texas, were settled in
separate agreements. Lorillard was a defendant in each of the 46 cases filed
by state governments and in the six cases brought by other governmental
entities, as well as in the four cases governed by the separate settlement
agreements. Five suits filed by local governments also are pending against
cigarette manufacturers, although the MSA purportedly resolves those actions.
Several other cases filed by local governments have been dismissed. The
remaining pending cases follows.
State of Arizona v. The American Tobacco Company, et al. (Superior Court,
Maricopa County, Arizona, filed August 20, 1996). Consistent with the MSA, the
court has entered an order dismissing the action. Judgment is not yet final.
30
City of New York, et al. v. The Tobacco Institute, et al. (Supreme Court,
New York County, filed October 17, 1996).
County of Cook v. Philip Morris, Incorporated, et al. (Circuit Court, Cook
County, Illinois, filed April 18, 1997).
State of Arkansas v. The American Tobacco Company, et al. (Sixth Division,
Chancery Court, Pulaski County, Arkansas, filed May 5, 1997). Consistent with
the MSA, the court has entered an order dismissing the action. Judgment is not
yet final.
State of Missouri v. American Tobacco Company, Inc., et al. (Circuit Court,
City of St. Louis, Missouri, filed May 12, 1997). The Company was a defendant
in the case. The court has entered an order dismissing the action. The
dismissal order reflects but is not consistent with the MSA. Judgment is not
yet final.
Republic of the Marshall Islands v. The American Tobacco Company, et al.
(High Court, Republic of the Marshall Islands, filed October 20, 1997). The
court granted motions to dismiss filed by Lorillard Tobacco Company,
Lorillard, Inc., and Loews Corporation. Trial in this matter is scheduled to
begin during January 2001.
State of Alabama (by Attorney General Pryor) v. Philip Morris Incorporated,
et al. (Circuit Court, Montgomery County, Alabama, filed November 12, 1998).
Consistent with the MSA, the court has entered an order dismissing the action.
Judgment is not yet final.
State of Alabama (by Governor James) v. The American Tobacco Company, et al.
(Circuit Court, Montgomery County, Alabama, filed November 12, 1998). The
Company was a defendant in the case. Consistent with the MSA, the court has
entered an order dismissing the action. Judgment is not yet final.
City of St. Louis, et al. v. American Tobacco Company, Inc., et al. (Circuit
Court, City of St. Louis, Missouri, filed November 25, 1998). The Company is a
defendant in the case.
St. Louis County, Missouri v. American Tobacco Company, Inc., et al.
(Circuit Court, City of St. Louis, Missouri, filed December 3, 1998). The
Company is a defendant in the case but has not received service of process to
date.
State of North Carolina v. Philip Morris Incorporated, et al. (Superior
Court, Wake County, North Carolina, filed December 21, 1998). Consistent with
the MSA, the court has entered an order dismissing the action. Judgment in
this matter is final.
State of Tennessee v. Brown & Williamson Tobacco Corporation, et al.
(Chancery Court, Davidson County, Tennessee, filed December 21, 1998).
Consistent with the MSA, the court has entered an order dismissing the action.
Judgment is not yet final.
County of Wayne v. Philip Morris Incorporated, et al. (U.S. District Court,
Eastern District, Michigan, filed December 6, 1999).
Reimbursement Cases filed by Foreign Governments in U.S. Courts - Cases have
been brought in U.S. courts by the nations of Bolivia, Ecuador, Guatemala,
Nicaragua, Panama, Thailand, Ukraine and Venezuela, as well as by the
Brazilian States of Goias, Rio de Janeiro and Sao Paolo and the Canadian
Province of Ontario. The Company and Lorillard are each named as defendants in
the cases filed by Bolivia, Ukraine and Venezuela, by the three Brazilian
states and by Ontario, Canada. None of the defendants have received service of
the suits filed by Ecuador or Ontario. The Company has not received service of
process of the case filed by Venezuela or of the case filed by the State of
Sao Paolo, Brazil. The suit filed by Thailand has been voluntarily dismissed
by the plaintiffs. 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.
The Republic of Guatemala v. The Tobacco Institute, Inc., et al. (U.S.
District Court, District of Columbia, filed May 11, 1998). Neither Lorillard
nor the Company are named as defendants in the matter. Defendants' motion to
31
transfer this matter to the United States Panel on Multi-District Litigation
has been granted. The court granted defendants' motion to dismiss the case.
Plaintiff has noticed an appeal from the ruling to the U.S. Court of Appeals
for the District of Columbia.
Republic of Panama v. The American Tobacco Company, et al. (District Court,
Orleans Parish, Louisiana, filed October 16, 1998). Plaintiff dismissed the
Company and Lorillard from the case.
The Republic of Nicaragua v. Liggett Group, Inc., et al. (U.S. District
Court, Puerto Rico, filed December 10, 1998). Neither Lorillard nor the
Company are named as defendants in this matter. Defendants' motion to transfer
this matter to the United States Panel on Multi-District Litigation has been
granted.
The Republic of Bolivia v. Philip Morris Companies, Inc., et al. (U.S.
District Court, District of Columbia, filed on January 20, 1999). The U.S.
District Court for the Southern District of Texas transferred this matter sua
sponte to the U.S. District Court for the District of Columbia. The Company is
a defendant in the case. Defendants' motion to transfer this matter to the
United States Panel on Multi-District Litigation has been granted.
Republic of Venezuela v. Philip Morris Companies, et al. (U.S. District
Court, District of Columbia, filed January 27, 1999). The Company is a
defendant in the case but has not received service of process to date.
Defendants' motion to transfer this matter to the United States Panel on
Multi-District Litigation has been granted.
State of Rio de Janeiro of The Federative Republic of Brazil v. Philip
Morris Companies, Inc., et al. (District Court, Angelina County, Texas, filed
July 12, 1999). The Company is a defendant in the case.
The State of Goias, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, District of Columbia, filed October 19, 1999). The Company is
a defendant in the case but has not received service of process to date.
Defendants' motion to transfer this matter to the United States Panel on
Multi-District Litigation has been granted.
Ukraine v. American Brands, Inc., et al. (U.S. District Court, District of
Columbia, filed November 19, 1999). The Company is a defendant in the case.
Defendants' motion to transfer this matter to the United States Panel on
Multi-District Litigation has been granted.
The Republic of Ecuador v. Philip Morris Companies, Inc., et al. (Circuit
Court, Eleventh Judicial Circuit, Dade County, Florida, filed January 21,
2000). To date, none of the defendants has received service of process.
The State of Sao Paolo of The Federated Republic of Brazil v. The American
Tobacco Company, et al. (District Court, Orleans Parish, Louisiana, filed
February 9, 2000). The Company is a defendant in the case but has not received
service of process to date.
Her Majesty the Queen in Right of Ontario and The Minister of Health and
Long Term Care v. Imperial Tobacco Limited, et al. (U.S. District Court,
Southern District, New York, filed March 1, 2000). The Company is a defendant
in the case. To date, none of the defendants has received service of process.
U.S. Federal Government Case - The federal government of the United States
filed a reimbursement suit, The United States of America v. Philip Morris
Incorporated, et al. (U.S. District Court, District of Columbia, filed
September 22, 1999) 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 $20.0 billion 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.
Post-MSA Cases - In addition to these reimbursement cases, some suits have
been filed contesting, in 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 has been named as a defendant in several
of the cases filed to date. The Company has been dismissed from the three
cases in which it was named as a defendant.
32
Private Citizens' Reimbursement Cases - There are four suits pending in
which plaintiffs are private citizens. In three of the cases, plaintiffs are
private citizens who have filed suit on behalf of taxpayers of their
respective states, although governmental entities filed reimbursement cases in
each of the states. The Company is a defendant in two of the pending private
citizen Reimbursement Cases. Lorillard is a defendant in each of the cases.
Three of these cases are in the pre-trial discovery stage. One of the matters
is on appeal from a final judgment entered by the trial court in favor of the
defendants.
Coyne v. The American Tobacco Company, et al. (Court of Common Pleas,
Cuyahoga County, Ohio, filed September 17, 1996). The Company is a defendant
in the case. The suit is on behalf of taxpayers of Ohio. The U.S. District
Court for the Northern District of Ohio granted defendants' motion to dismiss
the case. On appeal, the U.S. Court of Appeals for the Sixth Circuit remanded
the case to the Court of Common Pleas of Cuyahoga County, Ohio for additional
proceedings.
Beckom v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Tennessee, filed May 8, 1997). The Company is a defendant in the
case. The suit is on behalf of taxpayers of Tennessee. The court has granted
defendants' motion to dismiss. The plaintiffs have noticed an appeal from the
order that granted the motion to dismiss to the U.S. Court of Appeals for the
Sixth Circuit.
Mason v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Texas, filed December 23, 1997). The suit is on behalf of taxpayers
of the U.S. as to funds expended by the Medicaid program.
The State of North Carolina, et al. v. The American Tobacco Company, et al.
(U.S. District Court, Middle District, North Carolina, filed February 13,
1998). The suit is on behalf of taxpayers of North Carolina.
Reimbursement Cases By Indian Tribes - Indian Tribes have filed eleven
reimbursement suits. Most of these cases have been filed in tribal courts.
Four of the eleven cases have been dismissed. Lorillard is a defendant in each
of the cases. The Company has not been named as a defendant in any of the
tribal suits filed to date. Each of the pending cases is in the pre-trial,
discovery stage.
The Lower Brule Sioux Tribe v. The American Tobacco Company, et al. (Tribal
Court, Lower Brule Sioux Tribe, filed on an unknown date, first amended
complaint filed May 28, 1997).
Crow Creek Sioux Tribe v. The American Tobacco Company, et al. (Tribal
Court, Crow Creek Sioux Tribe, filed September 14, 1997).
The Standing Rock Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Standing Rock Sioux Tribe, filed May 8, 1998).
The Sisseton-Wahpeton Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Sisseton-Wahpeton Sioux Tribe, filed May 12, 1998).
U Tu Utu Gwaitu Paiute Tribe, et al. v. Philip Morris, Inc., et al.
(Superior Court, San Diego County, California, filed October 30, 1998). This
matter formerly was known as Pechanga Band of Luiseno Mission Indians, et al.
Acoma Pueblo, et al. v. The American Tobacco Company, et al. (U.S. District
Court, New Mexico, filed June 16, 1999).
Navajo Nation v. Philip Morris Incorporated, et al. (District Court, Navajo
Nation, filed August 12, 1999).
Reimbursement Cases By Labor Unions - Approximately 30 reimbursement suits
are pending in various federal or state courts in which the plaintiffs are
labor unions, their trustees or their trust funds. Lorillard is named as a
defendant in each of the suits filed to date by unions. The Company is a
defendant in three of the pending suits. Ten of the cases were dismissed
during March of 2000 and the time for plaintiffs to notice appeals from the
rulings have not expired. Six of the approximately 30 cases are on appeal from
final judgments entered in defendants' favor by the trial courts. The Second,
Third, Fifth, Seventh and Ninth Circuit Courts of Appeal have affirmed various
rulings entered by trial courts that dismissed several of the labor union
actions, and the U.S. Supreme Court has
33
denied petitions for writ of certiorari that sought review of some of these
decisions.
On March 18, 1999, the jury in Iron Workers Local Union No. 17 Insurance
Fund, et al. v. Philip Morris, Inc., et al. (U.S. District Court, Northern
District, Ohio, Eastern Division, filed May 20, 1997) returned a verdict in
favor of the defendants, which included Lorillard, on all counts of
plaintiffs' complaint. The trial was the first against cigarette manufacturers
to be filed by union trust funds. During pre-trial proceedings, the court
granted plaintiffs' motion for class certification on behalf of funds in Ohio
established under the Taft-Hartley Act. Plaintiffs voluntarily dismissed the
appeal they noticed following the verdict.
Unless otherwise noted, each of the pending cases is in the pre-trial,
discovery stage.
Stationary Engineers Local 39 Health and Welfare Trust Fund v. Philip
Morris, Inc., et al. (U.S. District Court, Northern District, California,
filed April 25, 1997). Plaintiffs voluntarily dismissed the case without
prejudice during August 1999. Plaintiffs noticed an appeal to the U.S. Court
of Appeals for the Ninth Circuit, contending that the court's interlocutory
rulings that dismissed certain of their claims had limited their case. During
March 2000, plaintiffs voluntarily dismissed the appeal, concluding the case.
Northwest Laborers-Employers Health and Security Trust Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, Western District,
Washington, filed May 21, 1997). The court granted plaintiffs' motion for
class certification on behalf of "all existing jointly-administered and
collectively bargained-for health and welfare trusts in [the State of]
Washington, and/or the trustees of such entities, that have provided or paid
for health care and/or addiction treatment costs or services for employees or
other beneficiaries." During July 1999, the court granted defendants' motion
for summary judgment. Plaintiffs noticed an appeal to the U.S. Court of
Appeals for the Ninth Circuit, but voluntarily dismissed the case and their
appeal during February 2000.
Massachusetts Laborers Health and Welfare Fund v. Philip Morris Inc., et al.
(U.S. District Court, Massachusetts, filed June 2, 1997).
Central Laborers Welfare Fund, et al. v. Philip Morris, Inc., et al.
(Circuit Court, Madison County, Illinois, filed on or about June 9, 1997).
Hawaii Health and Welfare Trust Fund for Operating Engineers v. Philip
Morris, Inc., et al. (U.S. District Court, Hawaii, filed June 13, 1997). The
court has entered an order granting defendants' motion to dismiss the case.
Plaintiffs noticed an appeal from the ruling to the U.S. Court of Appeals for
the Ninth Circuit. During March 2000, plaintiffs voluntarily dismissed the
appeal, concluding the case.
Laborers Local 17 Health and Benefit Fund and The Transport Workers Union
New York City Private Bus Lines Health Benefit Trust v. Philip Morris, Inc.,
et al. (U.S. District Court, Southern District, New York, filed June 19,
1997). The trial court, due to a ruling by the U.S. Court of Appeals for the
Second Circuit, entered an order that granted defendants' motion to dismiss
the complaint. The U.S. Supreme Court declined to review plaintiffs' petition
for writ of certiorari during January 2000.
Ark-La-Miss Laborers Welfare Fund v. Philip Morris, Inc., et al. (U.S.
District Court, Eastern District, Louisiana, filed June 20, 1997). During
February 2000, plaintiffs voluntarily dismissed the case.
Oregon Laborers -- Employers Health and Welfare Trust Fund, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Oregon, filed June 20, 1997). The
court granted defendants' motion for judgment on the pleadings, which
dismissed the case. On appeal, the U.S. Court of Appeals for the Ninth Circuit
affirmed the trial court's final judgment in favor of the defendants. The U.S.
Supreme Court declined to review plaintiffs' petition for writ of certiorari
in a ruling entered during January 2000.
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). The trial court, due to a ruling by the U.S. Court of Appeals for the
Second Circuit, entered an order that granted defendants' motion to dismiss
the complaint. The U.S. Supreme Court declined to review plaintiffs' petition
for writ of certiorari during January 2000.
Laborers and Operating Engineers Utility Agreement Health and Welfare Trust
Fund for Arizona v. Philip Morris Incorporated, et al. (U.S. District Court,
Arizona, filed July 7, 1997). The court has entered an order
34
granting in its entirety defendants' motion to dismiss. Plaintiff noticed an
appeal to the United States Court of Appeals for the Ninth Circuit. During
March 2000, plaintiff voluntarily dismissed the appeal, concluding the case.
Rhode Island Laborers Health and Welfare Fund v. Philip Morris Incorporated,
et al. (U.S. District Court, Rhode Island, filed July 20, 1997).
Eastern States Health and Welfare Fund, et al. v. Philip Morris, Inc., et
al. (Supreme Court, New York County, New York, filed July 28, 1997). During
March 2000, the court granted defendants' motion to dismiss the complaint. The
time for plaintiffs to notice an appeal has not expired.
Asbestos Workers Local 53 Health and Welfare Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Eastern District, Louisiana, filed August
15, 1997). This action was consolidated with the case of Ark-La-Miss Laborers
Welfare Fund. During February 2000, plaintiffs voluntarily dismissed the case.
Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Eastern District, Pennsylvania, filed
August 21, 1997). The court granted defendants' motion to dismiss the case. On
appeal, the U.S. Court of Appeals for the Ninth Circuit affirmed the trial
court's final judgment in favor of the defendants. The U.S. Supreme Court
declined to review plaintiffs' petition for writ of certiorari in a ruling
entered during January 2000.
Construction Laborers of Greater St. Louis Welfare Fund, et al. v. Philip
Morris, Inc., et al. (Circuit Court, City of St. Louis, Missouri, filed
September 2, 1997). The Company was a defendant in the case. During January
2000, plaintiffs voluntarily dismissed the case.
Teamsters Union No. 142, Health and Welfare Trust Fund and Sheet Metal
Workers Local Union No. 20 Welfare and Benefit Fund v. Philip Morris
Incorporated, et al. (Circuit Court, St. Joseph County, Indiana, filed
September 12, 1997). Plaintiffs voluntarily dismissed the case during February
2000.
Operating Engineers Local 12 Health and Welfare Trust, et al. v. American
Tobacco Company, et al. (Superior Court, Los Angeles County, California, filed
September 16, 1997). The case has been transferred to a Coordinated Proceeding
before the Superior Court of San Diego County, California. Trial in this
matter is scheduled to begin during January 2001.
Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris Inc., et al.
(Supreme Court, New York County, New York, filed September 17, 1997). During
March 2000, the court granted defendants' motion to dismiss the complaint. The
time for plaintiffs to notice an appeal has not expired.
New Mexico and West Texas Multi-Craft Health and Welfare Trust Fund, et al.
v. Philip Morris, Inc., et al. (Second Judicial District Court, Bernalillo
County, New Mexico, filed October 10, 1997). The court granted defendants'
motion to dismiss the complaint and has entered final judgment in favor of the
defendants. Plaintiffs have noticed an appeal to the New Mexico Court of
Appeals.
Central States Joint Board v. Philip Morris, Inc., et al. (U.S. District
Court, Northern District, Illinois, filed October 20, 1997). The court granted
defendants' motion to dismiss the complaint and entered final judgment in
favor of the defendants. On appeal, the United States Court of Appeals for the
Seventh Circuit affirmed the judgment during November 1999. Plaintiff did not
seek further appellate review of the ruling.
International Brotherhood of Teamsters Local 734 v. Philip Morris, Inc., et
al. (U.S. District Court, Northern District, Illinois, filed October 20,
1997). The court granted defendants' motion to dismiss the complaint and
entered final judgment in favor of the defendants. On appeal, the United
States Court of Appeals for the Seventh Circuit affirmed the judgment during
November 1999. Plaintiff did not seek further appellate review of the ruling.
Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, Inc., et al.
(U.S. District Court, Eastern District, Texas, Beaumont Division, filed
October 31, 1997). The court granted defendants' motion to dismiss. Plaintiff
has noticed an appeal to the United States Court of Appeals for the Fifth
Circuit. The Court of Appeals affirmed the final judgment entered in favor of
the defendants. The deadline for plaintiffs to seek additional appellate
review of the decision has not expired.
United Food and Commercial Workers Unions and Employers Health and Welfare
Fund, et al. v. Philip Morris,
35
Inc., et al. (U.S. District Court, Northern District, Alabama, filed November
13, 1997). During August 1999, the court granted defendants' motion to dismiss
the case. Plaintiffs have noticed an appeal to the United States Court of
Appeals for the Eleventh Circuit.
IBEW Local 25 Health and Benefit Fund v. Philip Morris, Inc. et al. (Supreme
Court, New York County, New York, filed November 25, 1997). During March 2000,
the court granted defendants' motion to dismiss the complaint. The time for
plaintiffs to notice an appeal has not expired.
IBEW Local 363 Welfare Fund v. Philip Morris, Inc., et al. (Supreme Court,
New York County, New York, filed November 25, 1997). During March 2000, the
court granted defendants' motion to dismiss the complaint. The time for
plaintiffs to notice an appeal has not expired.
Local 138, 138A and 138B International Union of Operating Engineers Welfare
Fund v. Philip Morris, Inc., et al. (Supreme Court, New York County, New York,
filed November 25, 1997). During March 2000, the court granted defendants'
motion to dismiss the complaint. The time for plaintiffs to notice an appeal
has not expired.
Local 840, International Brotherhood of Teamsters Health and Insurance Fund
v. Philip Morris, Inc., et al. (Supreme Court, New York County, New York,
filed November 25, 1997). During March 2000, the court granted defendants'
motion to dismiss the complaint. The time for plaintiffs to notice an appeal
has not expired.
Long Island Council of Regional Carpenters Welfare Fund v. Philip Morris,
Inc., et al. (Supreme Court, New York County, New York, filed November 25,
1997). During March 2000, the court granted defendants' motion to dismiss the
complaint. The time for plaintiffs to notice an appeal has not expired.
Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris, Inc.,
et al. (Supreme Court, New York County, New York, filed December 8, 1997).
During March 2000, the court granted defendants' motion to dismiss the
complaint. The time for plaintiffs to notice an appeal has not expired.
Local 1199 Home Care Industry Benefit Fund v. Philip Morris, Inc., et al.
(Supreme Court, New York County, New York, filed December 8, 1997). During
March 2000, the court granted defendants' motion to dismiss the complaint. The
time for plaintiffs to notice an appeal has not expired.
Local 1199 National Benefit Fund for Health and Human Services Employees v.
Philip Morris, Inc., et al. (Supreme Court, New York County, New York, filed
December 8, 1997). During March 2000, the court granted defendants' motion to
dismiss the complaint. The time for plaintiffs to notice an appeal has not
expired.
Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris,
Inc., et al. (Circuit Court, Wayne County, Michigan, filed December 30, 1997).
The court granted defendants' motion to dismiss the complaint and entered
judgment in favor of defendants. Plaintiffs have noticed an appeal to the
Michigan Court of Appeals.
Carpenters & Joiners Welfare Fund, 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 entered final judgment
in their favor during April 1999. Plaintiffs have noticed an appeal to the
U.S. Court of Appeals for the Eighth Circuit.
Steamfitters Local Union No. 614 Health & Welfare Fund, et al. v. Philip
Morris, Inc., et al. (Circuit Court, Thirteenth Judicial District, Tennessee,
filed January 7, 1998). An interlocutory appeal is pending before the
Tennessee Court of Appeals from the trial court's order granting in part and
denying in part defendants' motion to dismiss the case.
National Asbestos Workers, et al. v. Philip Morris Incorporated, et al.
(U.S. District Court, Eastern District, New York, filed February 27, 1998).
The Company is a defendant in the case. Trial in this matter is scheduled to
begin following the conclusion of the trial in the case of Blue Cross and Blue
Shield of New Jersey, discussed below.
Service Employees International Union Health & Welfare Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, District of Columbia, filed
March 19, 1998). Defendants have been permitted to notice an interlocutory
appeal to the U.S. Court of Appeals for the District of Columbia from the
trial court's order denying defendants' motion to dismiss.
36
Milwaukee Carpenters, et al. v. Philip Morris, Incorporated, et al. (U.S.
District Court, Eastern District, Wisconsin, filed March 30, 1998). The court
entered a stipulation of dismissal of the case during January 2000.
Utah Laborers Health & Welfare Trust Fund, et al. v. Philip Morris
Incorporated, et al. (U.S. District Court, Utah, Central Division, filed June
4, 1998). The Company is a defendant in the case. Defendants have been
permitted to notice an interlocutory appeal to the U.S. Court of Appeals for
the Tenth Circuit from the trial court's denial of their motion to dismiss the
complaint.
S.E.I.U. v. Philip Morris, Inc., et al. (U.S. District Court, District of
Columbia, filed June 22, 1998). To date, none of the defendants have received
service of process. Defendants have been permitted to notice an interlocutory
appeal to the United States Court of Appeals for the District of Columbia from
the trial court's order denying defendants' motion to dismiss.
Holland, et al., Trustees of United Mine Workers v. Philip Morris
Incorporated, et al. (U.S. District Court, District of Columbia, filed July 9,
1998). Defendants have been permitted to notice an interlocutory appeal to the
United States Court of Appeals for the District of Columbia from the trial
court's order denying defendants' motion to dismiss.
Bergeron, et al. v. Philip Morris Incorporated, et al. (U.S. District Court,
Eastern District, New York, filed September 29, 1999). The Company is a
defendant in the case. 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). Defendants have
been permitted to notice an interlocutory appeal to the United States Court of
Appeals for the District of Columbia from the trial court's order denying
defendants' motion to dismiss.
Reimbursement Cases By Private Companies - Private companies have filed six
Reimbursement Cases to date. Two of the six cases have been terminated. Three
of the six suits filed to date have been brought by various Blue Cross and/or
Blue Shield entities, two of the cases have been filed by self-insured
employers that directly provide health care benefits to employees and their
families, while the sixth case is brought by a health maintenance
organization. The cases brought by the two self-insured employers have been
terminated. In addition, the plaintiffs in two of the Blue Cross cases have
noticed appeals from orders by their trial courts that dismissed the suits.
Lorillard is named as a defendant in each of the cases filed by private
companies. The Company has not been named as a defendant in any of the cases
filed by private companies.
Group Health Plan, Inc., et al. v. Philip Morris Incorporated, et al. (U.S.
District Court, Minnesota, filed March 11, 1998).
Health Care Services Corporation, et al. v. Philip Morris, Incorporated, et
al. (U.S. District Court, Northern District, Illinois, filed April 29, 1998).
Consistent with an interlocutory ruling by the United States Court of Appeals
for the Seventh Circuit, the court entered an order dismissing the case and
entered final judgment in favor of the defendants. Plaintiffs have noticed an
appeal from the final judgment to the United States Court of Appeals for the
Seventh Circuit. This matter formerly was known as Arkansas Blue Cross and
Blue Shield, et al.
Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris,
Incorporated, et al. (U.S. District Court, Eastern District, New York, filed
April 29, 1998). This case has been set for trial on June 26, 2000.
Regence Blueshield, et al. v. Philip Morris, Incorporated, et al. (U.S.
District Court, Western District, Washington, filed April 29, 1998). The court
granted defendants' motion to dismiss the case and entered final judgment in
defendants' favor. Plaintiff has noticed an appeal from the final judgment to
the United States Court of Appeals for the Ninth Circuit.
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. One of the cases has not
been served. Lorillard is named as a defendant in each action. The Company is
named as a defendant in four of the cases but has not received service of
process in two of them. Trial is scheduled in four of the cases. Each of these
cases is in the pre-trial, discovery stage.
37
Raymark Industries v. R.J. Reynolds Tobacco Company, et al. (Circuit Court,
Duval County, Florida, filed September 15, 1997). The Company is a defendant
in the case but has not received service of process to date.
Fibreboard Corporation and Owens-Corning v. The American Tobacco Company, et
al. (Superior Court, Alameda County, California, filed December 11, 1997).
Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al.
(Supreme Court, New York County, New York, filed December 19, 1997). The
Company is a defendant in the case.
H.K. Porter Company v. B.A.T. Industries, PLC, et al. (U.S. District Court,
Eastern District, New York, filed December 31, 1997). Trial in this matter is
scheduled to begin on September 11, 2000.
Raymark Industries v. R.J. Reynolds Tobacco Co., et al. (Circuit Court,
Duval County, Florida, filed December 31, 1997). To date, none of the
defendants have received service of process.
Raymark Industries v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, New York, filed January 30, 1998). Trial in this
matter is scheduled to begin on October 2, 2000.
Thomas v. R.J. Reynolds Tobacco Company, et al., (Circuit Court of Jefferson
County, Mississippi, filed August 21, 1998). The complaint asserts
contribution claims on behalf of Owens Corning as well as conventional product
liability claims on behalf of an individual. The Company is a defendant in the
case. The court has scheduled the asbestos contribution portion of this case
for trial on an unspecified date during February 2001.
UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation,
et al. (Supreme Court, New York County, New York, filed March 12, 1999). The
Company is a defendant in the case but has not received service of process.
Falise, et al., as Trustees of the Manville Personal Injury Settlement Trust
v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, New York, filed November 12, 1999). This case has been set for trial
on April 19, 2000.
CALIFORNIA PROPOSITION 65 CASES - 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. Two other cases
that make similar allegations against manufacturers of other types of tobacco
products have been filed. The four 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 court has entered an order dismissing the "Proposition 65"
claims but certain other causes of action remain pending. Plaintiffs have
sought to appeal the dismissal of the "Proposition 65" claims. The four cases
are set for trial on June 2, 2000.
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).
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).
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 25 such
cases, including one that also includes allegations that plaintiff also was
injured as a result of smoking cigarettes, are pending in federal and state
courts. Allegations of liability include negligence, strict liability, fraud,
misrepresentation and breach of warranty. Plaintiffs in most of these cases
seek unspecified amounts in compensatory and punitive damages. Trials have
been held in thirteen such cases. Two such trials were held in 1999, and one
trial has been held to date during 2000. Verdicts have been returned in favor
38
of Lorillard Inc. or Lorillard Tobacco Company in ten of the thirteen cases,
including in the one case tried to date during 2000. Three verdicts have been
returned in plaintiffs' favor, including in one of the cases tried during
1999. In the 1999 trial, plaintiffs were awarded $2.2 million in actual
damages. Lorillard has noticed an appeal from this verdict.
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, the lack of any defect in
the product alleged by a plaintiff, and defenses based upon the MSA. 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.
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.
OTHER LEGAL PROCEEDINGS - Antitrust Cases: Lorillard has been named as a
defendant in approximately 20 purported class actions filed in the states of
Arizona, California, Florida, Maine, Michigan, Minnesota, Mississippi, New
Mexico, New York, North Dakota, South Dakota, Tennessee and West Virginia, and
the District of Columbia, alleging that the defendants conspired to fix
cigarette prices. Plaintiffs in many of these suits are represented by a
consortium of attorneys from throughout the nation. Plaintiffs allege
violations of state antitrust laws, which permit indirect purchasers, such as
retailers and consumers, to sue under price fixing or consumer fraud statutes.
Plaintiffs seek treble damages in many of the cases. Approximately 18 states
permit such suits. It is undetermined at this time whether actions in all such
states' courts will be filed or whether Lorillard and/or the Company will be
named in all such suits.
Brownstein v. Philip Morris Companies, Inc., et al. (Circuit Court, Broward
County, Florida, filed February 8, 2000). The Company is a defendant in the
case but has not received service of process to date.
Del Serrone v. Philip Morris Companies, Inc., et al. (Circuit Court, Wayne
County, Michigan, filed February 8, 2000). The Company is a defendant in the
case.
Greer v. R.J. Reynolds Tobacco Company, et al. (Superior Court, San
Francisco County, California, filed February 9, 2000). The Company is a
defendant in the case.
Lennon v. Philip Morris Companies, Inc., et al. (Supreme Court, New York
County, New York, filed February 9, 2000). The Company is a defendant in the
case.
Munoz v. Philip Morris Companies, Inc., et al. (Superior Court, San
Francisco County, California, filed February 9, 2000). The Company is a
defendant in the case.
Romero v. Philip Morris Companies, Inc., et al. (First Judicial District
Court, Rio Arriba County, New Mexico, filed February 9, 2000). The Company is
a defendant in the case.
Withers v. Philip Morris Companies, Inc., et al. (Circuit Court, Jefferson
County, Tennessee, filed February 9, 2000). The Company is a defendant in the
case.
Barnes v. Philip Morris Companies, Inc., et al. (Superior Court, District of
Columbia, filed February 10, 2000). The Company is a defendant in the case.
Gray v. Philip Morris Companies, Inc., et al. (Superior Court, Pima County,
Arizona, filed February 11, 2000). The Company is a defendant in the case.
39
Ludke v. Philip Morris Companies, Inc., et al. (District Court, Hennepin
County, Minnesota, filed February 14, 2000). The Company is a defendant in the
case.
Morse v. R.J. Reynolds Tobacco Company, et al. (Superior Court, Alameda
County, California, filed February 14, 2000). The Company is a defendant in
the case but has not received service of process to date.
Quickel v. Philip Morris Companies, Inc., et al. (Circuit Court, Brooke
County, West Virginia, filed February 14, 2000). The Company is a defendant in
the case.
Faherty v. Philip Morris Companies, Inc., et al. (Superior Court, Cumberland
County, Maine, filed February 16, 2000). The Company is a defendant in the
case.
Rowlen v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Southern District, Mississippi, filed February 16, 2000). The Company is a
defendant in the case.
Shafer v. Philip Morris Companies, Inc., et al. (District Court, South
Central Judicial District, Morton County, North Dakota, filed February 16,
2000). The Company is a defendant in the case.
Cusanis v. Phillip Morris Companies, Inc., et al. (Circuit Court, Milwaukee
County, Wisconsin, filed February 17, 2000). The Company is a defendant in the
case.
Sullivan v. R.J. Reynolds Tobacco Company, et al. (Superior Court, Alameda
County, California, filed February 17, 2000). The Company is a defendant in
the case but has not received service of process to date.
Teitler v. R.J. Reynolds Tobacco Company, et al. (Superior Court, Alameda
County, California, filed February 17, 2000). The Company is a defendant in
the case but has not received service of process to date.
Uhlan v. R.J. Reynolds Tobacco Company, et al. (Superior Court, Alameda
County, California, filed February 17, 2000). The Company is a defendant in
the case but has not received service of process to date.
Vetter v. Philip Morris Companies, Inc., et al. (Circuit Court, Sixth
Judicial Circuit, Hughes County, South Dakota, filed February 22, 2000). The
Company is a defendant in the case.
Peirona v. Philip Morris Companies, Inc., et al. (Superior Court, San
Francisco County, California, filed February 28, 2000). The Company is a
defendant in the case.
Sand v. Philip Morris Companies, Inc., et al. (Superior Court, Los Angeles
County, California, filed February 28, 2000). The Company is a defendant in
the case but has not received service of process to date.
Sylvester v. Philip Morris Companies, Inc., et al. (Supreme Court, New York
County, New York, filed March 8, 2000). The Company is a defendant in the
case.
Wholesalers and Direct Purchasers Suits - Tobacco wholesalers or other
direct purchasers of cigarettes have filed three suits alleging the defendants
conspired to fix cigarette prices.
Buffalo Tobacco Products, et al. v. Philip Morris Companies Inc., et al.
(U.S. District Court, District of Columbia, filed February 8, 2000. The
Company is a defendant in the case.
Rog-Glo Ltd. v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Southern District, New York, filed February 8, 2000). The Company is a
defendant in the case.
Williamson Oil Company Inc. v. Philip Morris Companies, et al. (U.S.
District Court, Northern District, Georgia, filed February 28, 2000). The
Company is a defendant in the case.
Amsterdam Tobacco Corp. V. Philip Morris Companies, Inc., et al. (U.S.
District Court, District of Columbia, filed March 6, 2000). The Company is a
defendant in the case.
Tobacco Growers Suit - DeLoach v. Philip Morris Companies Inc., et al. (U.S.
District Court, District of
40
Columbia, filed February 16, 2000). The Company and Lorillard were named as
defendants in a lawsuit alleging antitrust violations, conspiracy and fraud.
The other major domestic tobacco companies, their parent companies and the
Attorneys General of states that entered into the Master Settlement Agreement
with the domestic tobacco companies in 1998, are also named as defendants or
co-conspirators. Plaintiffs seek certification of a class including all
tobacco growers and quota holders (the licenses that a farmer must either own
or rent to sell the crop), who sold tobacco under the federal tobacco leaf
price support program since 1985. The approximately 4,000 named plaintiffs
represent approximately 3% of all potentially eligible class members, and
their claims relate to the conduct of the companies in the purchase of tobacco
under the federal program and in conduct relating to the negotiation of the
MSA and efforts to defeat federal tobacco legislation. The suit seeks $23.0
million in actual damages, trebled under the antitrust laws to $69.0 million,
and injunctive relief.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
First
Became
Name Position and Offices Held Age Officer
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Gary W. Garson .......... Vice President and 53 1988
Assistant Secretary
Barry Hirsch ............ Senior Vice President and 66 1971
Secretary
Herbert C. Hofmann ...... Senior Vice President 57 1979
Peter W. Keegan ......... Senior Vice President and 55 1997
Chief Financial Officer
John J. Kenny ........... Treasurer 62 1991
Guy A. Kwan ............. Controller 57 1987
Alan Momeyer ............ Vice President-Human Resources 52 1996
Stuart B. Opotowsky ..... Vice President-Tax 65 1987
Richard E. Piluso ....... Vice President-Internal Audit 61 1990
Arthur L. Rebell ........ Senior Vice President and 58 1998
Chief Investment Officer
Andrew H. Tisch ......... Office of the President and 50 1985
Chairman of the Executive
Committee
James S. Tisch .......... Office of the President, 47 1981
President and Chief Executive
Officer
Jonathan M. Tisch ....... Office of the President 46 1987
Laurence A. Tisch ....... Co-Chairman of the Board 77 1959
Preston R. Tisch ........ Co-Chairman of the Board 73 1960
</TABLE>
Laurence A. Tisch and Preston R. Tisch are brothers. Andrew H. Tisch and
James S. Tisch are sons of Laurence A. Tisch and Jonathan M. Tisch is a son of
Preston R. Tisch. None of the other officers or directors of Registrant is
related to any other.
All executive officers of Registrant, except Peter W. Keegan and Arthur L.
Rebell, have been engaged actively and continuously in the business of
Registrant for more than the past five years. Peter W. Keegan was Senior Vice
President of Finance at CBS Inc. prior to joining Loews Corporation. Arthur L.
Rebell has been a senior vice president of Loews since June of 1998. Prior to
joining Loews, during 1997 and 1998 he was an associate professor of Mergers
and Acquisitions at New York University, a Managing Director of Highview
Capital and a Partner in Strategic Investors. Prior to that he was a Managing
Director of Schroders.
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
41
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Price Range of Common Stock
Loews Corporation's common stock is listed on the New York Stock Exchange.
The following table sets forth the reported consolidated tape high and low
sales prices in each calendar quarter of 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter ............ $104.50 $74.63 $108.25 $98.13
Second Quarter ........... 84.19 69.00 107.00 85.31
Third Quarter ............ 82.44 68.56 91.50 78.00
Fourth Quarter ........... 73.88 58.50 106.06 82.00
</TABLE>
Dividend Information
The Company has paid quarterly cash dividends on its common stock in each
year since 1967. Regular dividends of $.25 per share of common stock were paid
in each calendar quarter of 1999 and 1998.
Approximate Number of Equity Security Holders
The Company has approximately 2,500 holders of record of Common Stock.
42
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Revenues ....................... $21,465.2 $21,296.0 $20,266.6 $20,472.0 $18,707.8
Income before taxes and
minority interest and cumulative
effect of changes in accounting
principles-net ................ $ 944.2 $ 1,077.4 $ 1,593.2 $ 2,407.8 $ 2,839.3
Net operating income excluding
net investment (losses)/gains
and tobacco litigation
settlements ................... $ 1,295.0 $ 798.8 $ 1,075.5 $ 1,020.3 $ 793.8
Tobacco litigation
settlements ................... (637.3) (346.5) (122.0)
- ------------------------------------------------------------------------------------------------
Net operating income ........... 657.7 452.3 953.5 1,020.3 793.8
Net investment (losses)/gains .. (136.6) 12.5 (159.9) 363.6 971.9
Cumulative effect of changes
in accounting principles-net .. (157.9)
- ------------------------------------------------------------------------------------------------
Net income ..................... $ 363.2 $ 464.8 $ 793.6 $ 1,383.9 $ 1,765.7
================================================================================================
Comprehensive income ........... $ 487.0 $ 868.7 $ 1,048.9 $ 824.4 $ 2,901.5
================================================================================================
Earnings Per Share:
Net operating income excluding
net investment (losses)/gains
and tobacco litigation
settlements .................. $ 11.93 $ 6.98 $ 9.35 $ 8.78 $ 6.73
Tobacco litigation settlements . (5.87) (3.03) (1.06)
- ------------------------------------------------------------------------------------------------
Net operating income ........... 6.06 3.95 8.29 8.78 6.73
Net investment (losses)/gains .. (1.26) .11 (1.39) 3.13 8.25
Cumulative effect of changes
in accounting principles-net .. (1.45)
- ------------------------------------------------------------------------------------------------
Net income ..................... $ 3.35 $ 4.06 $ 6.90 $ 11.91 $ 14.98
================================================================================================
Comprehensive income ........... $ 4.49 $ 7.59 $ 9.12 $ 7.10 $ 24.62
================================================================================================
Financial Position:
Total assets ................... $69,463.7 $70,979.4 $69,983.1 $67,402.9 $65,516.9
Long-term debt ................. 5,706.3 5,966.7 5,752.6 4,370.7 4,248.2
Shareholders' equity ........... 9,977.7 10,201.2 9,665.1 8,731.2 8,238.7
Cash dividends per share ....... 1.00 1.00 1.00 1.00 .63
Book value per share ........... 95.50 90.61 84.04 75.92 69.92
Shares of common stock
outstanding ................... 104.5 112.6 115.0 115.0 117.8
</TABLE>
43
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
Loews Corporation (the "Company") reported 1999 net operating income,
excluding net investment gains and losses, of $657.7 million or $6.06 per
share compared to $452.3 million or $3.95 per share in 1998.
Net operating income in 1999 includes charges at the Lorillard tobacco
subsidiary of $637.3 million or $5.87 per share, compared to $346.5 million or
$3.03 per share in 1998, related to the settlement of tobacco litigation. Net
operating income in 1999 also includes charges of $310.9 million or $2.87 per
share related to loss and allocated loss adjustment insurance reserve
strengthening for prior periods and $46.2 million or $.43 per share for
restructuring related costs at the CNA subsidiary, compared to $142.6 million
or $1.25 per share for restructuring related costs in 1998.
Net income for 1999 was $363.2 million or $3.35 per share compared to $464.8
million or $4.06 per share for the full year 1998. Net income for 1999
includes net investment losses of $136.6 million or $1.26 per share compared
to net investment gains of $12.5 million or $.11 per share in 1998. Net income
for 1999 also includes a charge for accounting changes of $157.9 million or
$1.45 per share, primarily related to accounting for insurance-related
assessments at the CNA subsidiary.
Revenues for the full year 1999 were $21.5 billion, compared to $21.3 billion
for the full year 1998.
For the quarter ended December 31, 1999 the Company reported a net operating
loss, excluding net investment losses, of $11.5 million or $.11 per share,
compared to a loss of $172.8 million or $1.52 per share for the 1998 fourth
quarter. Net operating results include charges at the Lorillard tobacco
subsidiary related to the settlement of tobacco litigation of $169.4 million
or $1.60 per share in the fourth quarter of 1999, compared to $216.0 million
or $1.90 per share in the fourth quarter of 1998.
The net loss for the 1999 fourth quarter was $207.8 million or $1.97 per share
compared to a loss of $315.8 million or $2.78 per share in 1998 and includes
net investment losses of $196.3 million or $1.86 per share, compared to net
investment losses of $143.0 million or $1.26 per share in the fourth quarter
of 1998.
Fourth quarter 1999 revenues were $4.9 billion, compared to $5.0 billion in
the fourth quarter of 1998.
At year end 1999, the Company had a book value of $95.50 per share compared to
a book value of $90.61 per share in 1998.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
CNA Financial
Insurance operations are conducted by subsidiaries of CNA Financial
Corporation ("CNA"). CNA is an 86.5% 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 CNA Re. Property and casualty operations continue to
feel the impact of the extremely competitive environment in commercial
insurance. Additionally, increased catastrophe losses and additions to
reserves for prior year losses had an adverse impact on overall results.
1999 Compared with 1998
Earned premiums for 1999 decreased $260.8 million or approximately 2.9%, as
compared to 1998. Agency Market Operations earned premium declined $448.6
million, or 8.5%, due mainly to the transfer of CNA's personal insurance
business to The Allstate Corporation effective October 1, 1999. Reinsurance
agreements executed in 1999, as well as rate and underwriting actions taken to
improve the core book of business, also contributed to Agency Market
Operations' decreased premium. Specialty Operations premiums decreased $90.3
million due to new reinsurance agreements covering 1999 risks and due to the
decision not to pursue certain markets, including the agricultural and enter-
44
tainment markets. Risk Management earned premium decreased $22.5 million due
to the decision to take advantage of a favorable reinsurance market.
Offsetting these declines were increases in CNA Re and Global Operations. CNA
Re experienced $231.6 million, or 24.5%, of earned premium growth, which
occurred in domestic and foreign markets in the professional and standard
lines of business. Global Operations earned premium increased $69.0 million,
due to the effects of 1998 acquisitions, and increased surety and warranty
sales stemming from the favorable domestic economic environment.
Underwriting results declined by $201.0 million, or 14.7%, in 1999 and include
approximately $558.0 million in loss and allocated loss adjustment expense
reserve strengthening for prior years. Agency Market Operations underwriting
results declined by $153.0 million in 1999 due primarily to greater adverse
loss reserve development, which included development related primarily to
automobile, workers' compensation and packaged general liability exposures.
CNA Re underwriting results declined by $131.0 million, primarily due to
catastrophe losses. Global Operations underwriting results improved $24.0
million due to acquisitions and a change in its mix of business that has
reduced its exposure to catastrophes and large property losses. Total
underwriting results were favorably impacted by $83.0 million in 1999 due to
favorable legislative action in certain states which reduced CNA's liability
for workers' compensation assessments.
Catastrophe losses were $54.0 million higher in 1999. Restructuring and other
related charges included in underwriting results were approximately $60.0
million in 1999, down from $103.0 million in 1998. These charges stem from a
plan, announced in the third quarter of 1998, to restructure operations as
part of an initiative to improve performance. CNA intends to position each of
its strategic business units as a market leader by sharpening its focus on
customers and employing new technology. Total restructuring and related
charges for the property and casualty segment were $70.0 million in 1999 and
related primarily to employee terminations and parallel processing. These
costs were expensed as paid because they did not qualify for accrual upon
adoption of the restructuring plan.
1998 Compared with 1997
Earned premiums for 1998 increased $175.9 million, or approximately 2.0%, as
compared to 1997. Earned premiums increased $93.8 million for Commercial
Insurance as increases in involuntary business more than offset declines in
other lines. The increase in involuntary risks is due to reductions recorded
in 1997 related to prior years premiums.
Also contributing to the change in 1998 was Global Operations which increased
by $87.2 million, primarily due to the effects of recent acquisitions,
partially offset by the decision to exit unprofitable, non-core lines of
business. In addition, Personal Insurance earned premiums increased by $61.5
million due, in part, to growth in agency earned premiums, and Risk Management
and CNA Re both saw earned premium growth of approximately $46.0 million.
Offsetting these increases was a decrease in Specialty Operations of $159.2
million due in large part to the decision to exit the agricultural market. The
impact on earned premiums due to this decision was a decrease of $98.4
million.
Underwriting results declined in 1998 by $585.2 million. This reduction was
primarily due to net unfavorable reserve development in 1998 of $331.8 million
as compared to net favorable development of $86.3 million for 1997. The
unfavorable development in 1998 occurred primarily in asbestos and mass tort
claims. Pre-tax catastrophe losses of $309.7 million related to winter storms
and tropical storms were recorded in 1998, compared to catastrophe losses of
$91.6 million in 1997.
Restructuring and other related charges for the property and casualty segment
totaled approximately $190.0 million in 1998. These charges related to
employee terminations, lease abandonments, writedowns of certain assets to
fair value and losses related to the exiting of businesses.
45
Life
Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long-term care
insurance, annuities and other products. Life Operations also provides
retirement service products to institutions in the form of various investment
products and administration services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers and various other independent insurance consultants.
Life Operations is composed of four principal groups, Individual Life,
Retirement Services, Long Term Care and Other Operations.
1999 Compared with 1998
Life Operations experienced strong growth in revenues and profitability in
1999. Premium growth was primarily due to strong sales in retirement-related
and long term care products, as well as an increasing base of direct premiums
for life products. Net operating income growth was achieved primarily in
Retirement Services, Individual Life and in the viatical settlements business.
Sales volume increased to $3.2 billion in 1999, up 47.4% from 1998,
principally due to increased sales of Retirement Services Products. Sales
volume is a cash-based measure which includes premium and annuity
considerations, investment deposits and other sales activity that are not
reported as premiums under generally accepted accounting principles. The 1999
increase represents strong sales in Retirement Services and a growing base of
premiums for Life and Long Term Care. Despite an increased use of reinsurance,
net premium revenues have also shown strong growth, increasing 13.7% in 1999
and 3.3% in 1998.
Individual Life sales volume of $873.0 million represents a 14.7% increase
over $761.0 million in 1998. Individual Life earned premiums were $306.0
million in 1999, down 4.7% from $321.0 million in 1998. The primary reason for
this decrease was a reinsurance treaty that was completed in late 1998 that
lowered CNA's life insurance retention levels.
Sales volume for Retirement Services increased to $1.8 billion in 1999 from
$1.0 billion in 1998, primarily related to increased sales of institutional
investment products. Variable annuity sales increased 87% to $110.0 million.
Retirement Services earned premiums were $216.0 million in 1999, up 22.0% from
1998 premium of $177.0 million.
Long Term Care sales volume of $343.0 million in 1999 represents a 14.7%
increase over the 1998 level of $299.0 million. Long Term Care premiums
increased 16.6% in 1998 and 22.2% or $61.0 million in 1999 to reach $336.0
million.
International sales climbed to $78.0 million in 1999, for a second consecutive
year of growth, fueled primarily by retirement annuity sales in Chile.
Viaticus sales volume has also continued year to year growth, amounting to
$105.0 million in 1999. Viatical sales volume is measured as amounts paid to
insured, along with other related costs, in return for assignment of their
life insurance policies.
Life Operations continues to show strong performance in the individual life
market, where net operating income increased $7.0 million in 1999 to $83.0
million, due to expense savings and improved mortality experience. Also,
effective use of reinsurance has reduced Life Operations exposure to
volatility in its results. Net operating income for Retirement Services for
1999 of $37.0 million increased $16.0 million, or 76.2%, from 1998. This was
primarily due to favorable investment performance in the portfolio supporting
Retirement Services' Index 500 product, and improved sales and economies of
scale in the trust and banking services operation. Net operating income from
the viatical settlements business improved by $12.0 million due primarily to
expense reductions and the recent entry into the profitable high net worth
market.
46
1998 Compared with 1997
Life Operations continued to experience profitability in 1998, although
results were lower than 1997 principally due to reduced investment margins
from certain investment type products sold in the Retirement Services. Results
in 1998 also reflect lower realized capital gains and less favorable mortality
experience than in 1997.
Premium revenues increased in 1998 to $823.0 million from $797.0 million in
1997, representing growth of 3.3%.
Individual life insurance premiums, on a direct basis, were $754.0 million in
1998, an increase of $111.0 million from 1997 premiums of $643.0 million.
Individual life premium revenues were $321.0 million in 1998, as compared with
$373.0 million in 1997, as individual term life insurance premiums received in
the current year, for business written between mid-1994 through mid-1996, were
co-insured with a new reinsurance contract at a rate of 90% of the direct
business. The new reinsurance program complements an existing program under
which business written after mid-1996 is being coinsured at the rate of 75% of
the direct premiums.
Retirement Services premium revenues increased slightly in 1998 to $177.0
million as compared with $174.0 million in 1997. Total sales volume for
Retirement Services, which reflects deposits and other income which are not
included in the premiums above, declined from $1,035.0 million in 1997 to
$986.0 million in 1998.
The decreased sales volume is primarily due to the discontinuation of fixed
individual annuities and the lower volume of guaranteed investment contracts
sold in institutional markets.
Long-term care premium revenues increased $40.0 million in 1998 to $276.0
million as compared with premium revenues of $236.0 million in 1997. Long-term
care written premiums increased $48.0 million in 1998 over $251.0 million in
1997.
Other revenues for 1998 increased by $10.0 million when compared to 1997,
primarily due to fees and other income resulting from significant growth in
the variable annuity separate account product.
Group
Group Operations provides a broad array of group life and health insurance
products and services to employers, affinity groups and other entities that
purchase insurance as a group. Its products and services are primarily
distributed through brokers. In addition, Group Operations provides health
insurance to federal employees, retirees and their families; managed care and
self-funded medical excess insurance; medical provider network management and
administration services; and reinsurance for life and health insurers.
Group Operations includes five principal groups, Special Benefits, Provider
Markets, Life Reinsurance, Federal Markets and Health Benefits.
1999 Compared with 1998
Group Operations experienced $36.1 million of improved net operating results
excluding investment gains (losses) in 1999 over 1998. Key components of the
improvements include better underwriting results in Special Benefits' life and
disability product lines, the exit of selected medical markets, and lower
restructuring and other related charges, partially offset by adverse losses
and reserve development in the personal accident business.
Earned premiums declined in 1999 by $162.0 million, or 4.3%, from 1998. Health
Benefits premiums declined $344.0 million, almost entirely due to the exit of
selected medical markets in late 1998. Approximately half of the Health
Benefits decline was offset by premium growth in Federal Markets of $70.0
million reflecting medical claim trends, and growth in Life Reinsurance and
Special Benefits of $60.0 and $53.0 million, respectively.
Pre-tax operating loss in 1999 improved by $67.1 million compared to 1998.
Health Benefits pre-tax operating income improved $81.0 million, due to the
exit
47
from the employer health and affinity lines of business in 1998 and due to the
restructuring and other related charges recorded in 1998. Offsetting these
improvements was a decline in Special Benefits pre-tax operating income of
$19.0 million due to adverse losses and reserve development in personal
accident business, partially offset by improved underwriting results on life
and disability products.
1998 Compared with 1997
In 1998, Group Operations experienced a reduction in profitability as a result
of restructuring and related charges associated with exiting certain
businesses and the continued difficult market conditions in group health
lines.
Premiums for Group Operations decreased by approximately 5.2%, or $203.0
million, in 1998 as compared to 1997. The decrease was attributable, in part,
to a $166.0 million decrease in the medical lines of coverage in Health
Benefits, resulting from the decision to exit some markets. Additionally, due
to changes in coverage terms, Federal Employees Health Benefit Plan premiums
decreased by $90.0 million. These decreases were offset, in part, by premium
growth of $65.0 million across almost all other lines of business.
Pre-tax operating loss in 1998 increased by $65.2 million as compared to 1997.
The increase is primarily due to restructuring and other related charges of
$39.0 million related to the decision to exit the insured comprehensive
medical portion of the employer and affinity markets. The majority of the
inforce business was sold effective January 1, 1999.
Earned premiums for these lines of business was approximately $400.0 million
in 1998. In addition, Special Benefits 1998 accident coverages experienced
$30.0 million in increased losses, both from adverse claim developments and
unusually high claim activity, in the traditional accident insurance line.
Other
The Other insurance segment contains CNA's corporate interest expense, certain
run-off insurance operations, asbestos claims related to Fiberboard
Corporation, financial guarantee insurance contracts and certain non-insurance
operations, including the operations of AMS Services, Inc. ("AMS"), an
information technology and agency software development company.
1999 Compared with 1998
The net operating loss excluding investment gains (losses) for 1999 was $169.6
million, approximately $12.4 million better than 1998. The improvement was
primarily attributable to decreased losses from AMS of $17.1 million,
partially offset by increased losses from run-off insurance operations. In the
fourth quarter of 1999 CNA sold most of its interest in AMS. See Note 12 of
the Notes to Consolidated Financial Statements.
1998 Compared with 1997
Other insurance segment's net operating loss excluding investment gains
(losses) for 1998 was $182.0 million. This is an increase of $88.3 million
over 1997's net operating loss excluding investment gains (losses) of $93.7
million. Contributing to this increase is an increase in losses at AMS due to
lower revenues attributable to reduced contract renewals as well as
restructuring and other related charges of approximately $8.0 million.
Interest expense in 1998 declined to $189.7 million, compared to 1997's
interest expense of $198.0 million.
Lorillard
Lorillard, Inc. and subsidiaries ("Lorillard"). Lorillard, Inc. is a wholly
owned subsidiary of the Company.
Operating Results
1999 Compared with 1998
Revenues and net income increased by $1,199.4 and $300.1 million, or 41.9% and
85.3%, respectively, in 1999 as compared to 1998.
48
Revenues increased, as compared to 1998, by approximately $1,045.9 million, or
36.5%, due to higher unit prices and by approximately $137.9 million, or 4.8%,
due to an increase in unit sales volume. Net investment income also
contributed $14.8 million to the increased revenues.
On November 23, 1998, August 30, 1999 and January 17, 2000, Lorillard
increased the list price of all of its brands by $22.50, $9.00 and $6.50 per
thousand cigarettes ($0.45, $0.18 and $0.13 per pack of 20 cigarettes),
respectively.
Net income increased due primarily to the increased revenues discussed above,
partially offset by the charges for tobacco litigation settlements ($637.3
million in 1999 compared to $346.5 million in 1998) and higher sales promotion
expenses.
Lorillard's unit sales volume increased by 3.7% as compared to 1998. Newport,
a full price brand which accounts for approximately 73% of Lorillard's unit
sales, decreased by 1.8% as compared to 1998. 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 effects of various price
increases since November 1998 that followed the Master Settlement Agreement.
While Newport's unit sales volume has declined, its market share has increased
to 7.7% at December 31, 1999, as compared to 7.1% at December 31, 1998.
Overall industry unit sales volume is down by 10.0% in 1999, as compared to
1998.
Discount brand sales have decreased from an average of 31.4% of industry sales
during 1994 to an average of 25.0% during 1999. At December 31, 1999, they
represented 23.1% of industry sales.
1998 Compared with 1997
Revenues increased by $448.3 million, or 18.5%, and net income declined by
$11.3 million, or 3.1%, in 1998 as compared to 1997.
Revenues increased, as compared to 1997, by approximately $384.9 million, or
15.9%, due to higher unit prices and by approximately $31.6 million, or 1.3%,
due to an increase in unit sales volume. Net investment income also
contributed $28.8 million, or 1.2%, to the increased revenues.
Lorillard's unit sales volume increased by 1.1% as compared to 1997. Newport,
a full price brand which accounted for approximately 77% of Lorillard's unit
sales, increased by 2.4% as compared to 1997.
Net income declined due primarily to the charges for tobacco litigation
settlements ($346.5 million in 1998 compared to $122.0 million in 1997)
primarily related to the Master Settlement Agreement, as discussed below, as
well as the costs related to the settlements with the states of Minnesota,
Texas, Florida and Mississippi. Higher sales promotion expenses also
negatively impacted net income in 1998 as compared to 1997. These increased
costs were partially offset by the increased revenues discussed above.
Settlement of State Reimbursement Litigation
On November 23, 1998, Lorillard, Philip Morris Incorporated, Brown &
Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the
"Original Participating Manufacturers" and, together with Liggett Group, Inc.
and any other tobacco product manufacturer that becomes a signatory, the
"Participating Manufacturers") entered into a Master Settlement Agreement (the
"Master Settlement Agreement") with 46 states, the District of Columbia, the
Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and
the Northern Marianas (collectively, the "Settling States") to settle the
asserted and unasserted health care cost recovery and certain other claims of
those states. The Original Participating Manufacturers had previously settled
similar claims brought by Mississippi, Florida, Texas and Minnesota (together
with the Master Settlement Agreement, the "State Settlement Agreements").
49
The State Settlement Agreements mandate significant changes in the advertising
and marketing of tobacco products in the Settling States and otherwise
restrict the activities of Lorillard and other Participating Manufacturers.
They also require the industry to make substantial annual payments in the
following amounts, subject to adjustment for several factors, including
inflation, market share and industry volume: 2000, $9.2 billion; 2001, $9.9
billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4
billion; and thereafter, $9.4 billion. In addition, the domestic tobacco
industry is required to pay settling plaintiffs' attorneys' fees, subject to
an annual cap of $500.0 million, as well as additional amounts, as follows:
2000, $416.0 million; and 2001 through 2003, $250.0 million. These payment
obligations are the several and not joint obligations of each settling
defendant.
Lorillard recorded pre-tax charges of $1,065.8, $579.0 and $198.8 million for
the years ended December 31, 1999, 1998 and 1997, respectively, to accrue its
obligations under the tobacco settlements. The amount recorded for the year
ended December 31, 1998 represented Lorillard's share of all fixed and
determinable portions of its obligations under the tobacco settlements. For
periods subsequent to December 31, 1998, Lorillard's portion of ongoing
adjusted payments and legal fees is based on its share of domestic cigarette
shipments in the year preceding that in which the payment is due. Accordingly,
Lorillard records its portions of ongoing settlement payments as part of cost
of manufactured products sold as the related sales occur. Funds required to
meet the industry payment obligations have been provided by Lorillard's
operating activities.
The Company believes that the implementation of the State Settlement
Agreements will materially adversely affect its consolidated results of
operations and cash flows in future periods. The degree of the adverse impact
will depend, among other things, on the rates of decline in United States
cigarette sales in the full price and discount segments, Lorillard's share of
the domestic full price and discount segments, and the effect of any resulting
cost advantage of manufacturers not subject to the Master Settlement
Agreement.
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. This ruling has been appealed to the United States
Supreme Court which heard oral arguments on December 1, 1999. If the Supreme
Court should uphold the Fourth Circuit's ruling, it is likely that legislation
will be introduced in Congress regarding the FDA's jurisdiction over
cigarettes. The ultimate outcome of the foregoing cannot be predicted.
[See Item 1, Business - Lorillard, Inc. - "Food and Drug Administration
Regulation of Tobacco Products" for subsequent information concerning the
Supreme Court ruling issued March 21, 2000.]
Loews Hotels
Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews
Hotels Holding Corporation is a wholly owned subsidiary of the Company.
1999 Compared with 1998
Revenues and income before cumulative effect of changes in accounting
principles increased by $109.8 and $37.7 million, respectively, in 1999 as
compared to 1998, and includes a gain of $85.1 and $14.7 million ($52.0 and
$8.4 million after taxes) from the sale of two franchised properties in 1999
and the sale of the
50
Loews Monte Carlo Hotel in 1998. Excluding this gain, revenues increased by
$39.4 million, or 17.3%, and income before cumulative effect of changes in
accounting principles decreased by $5.9 million, or 24.2%. Revenues increased
due primarily to the operations of the Loews Miami Beach Hotel which opened in
December 1998 and an approximately 8.4% increase in overall average room
rates. These increases were partially offset by the sale of the Loews Monte
Carlo Hotel in November 1998. Overall occupancy rates remained at
approximately 78%, essentially unchanged from 1998.
Net income includes a charge of $7.1 million to reflect the cumulative effect
of a change in accounting principles requiring current write-off of preopening
expenses. Income before cumulative effect of changes in accounting principles
decreased due to costs incurred with respect to preopening activities in 1999
and losses recorded from an unconsolidated joint venture which commenced
operations this year. These declines were partially offset by the increased
revenues discussed above.
1998 Compared with 1997
Revenues and net income increased by $19.6 and $14.0 million, respectively, in
1998 as compared to 1997, due primarily to an approximately 7.3% increase in
average room rates. These increases include a pre-tax and after tax gain of
$14.7 and $8.4 million, respectively, from the sale of the Loews Monte Carlo
Hotel. Overall occupancy rates were essentially unchanged from 1997, with rate
increases in most other properties offset by decreases in occupancy rates,
revenues and net income as a result of a lower number of rooms available due
to a major renovation program at the Regency Hotel, the chain's flagship
property.
Diamond Offshore
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore"). Diamond
Offshore Drilling, Inc. is a 52% owned subsidiary of the Company.
1999 Compared with 1998
Revenues and net income decreased by $398.0 and $108.4 million, or 32.0% and
59.9%, respectively, in 1999 as compared to 1998.
Revenues decreased due principally to lower utilization of semisubmersible
rigs ($163.6 million) and jack-up rigs ($52.9 million) during 1999, rig
downtime for mandatory inspections and repairs performed ($72.1 million), and
reduced operating dayrates for Diamond Offshore's semisubmersible rigs ($84.7
million) and jack-up rigs ($81.8 million). These declines were partially
offset by a net addition to the operating drilling fleet ($43.3 million)
reflecting the completion of various upgrade and repair projects.
Diamond Offshore's results of operations have been adversely affected by the
loss of revenues and associated costs incurred during required regulatory
inspections of its drilling rigs. Six of these inspections were performed in
1999 and two are scheduled for completion in 2000. Diamond Offshore may elect
to perform additional inspections or undertake modifications to take advantage
of rig downtime. Diamond Offshore intends to focus on returning these rigs to
operations as soon as reasonably possible, in order to minimize inspection
downtime and associated loss of revenues, but the extent of such downtime
cannot be accurately predicted.
Net income declined due primarily to the lower revenues discussed above and
increased depreciation expense, partially offset by lower contract drilling
costs related to the decline in utilization.
1998 Compared with 1997
Revenues and net income increased by $267.4 and $50.2 million, or 27.4% and
38.3%, respectively, in 1998 as compared to 1997.
Revenues increased due principally to higher operating dayrates for Diamond
Offshore's semisubmersible rigs ($231.5 million) and, to a lesser extent,
improved dayrates for jack-up rigs ($37.1 million). Revenues also benefited
from a net addition to the operating drilling fleet ($56.5 million) reflecting
the completion of various upgrade projects and an $11.2 million increase in
investment income as compared to 1997.
51
These increases were partially offset by reductions in revenues from decreased
utilization due to rig downtime for mandatory inspections and repairs
performed during 1998 ($50.8 million) and lower utilization of jack-up rigs
($15.7 million) in the shallow waters of the Gulf of Mexico during 1998.
Net income increased due primarily to the higher revenues discussed above,
partially offset by increased depreciation expense, higher contract drilling
costs including labor and drilling supplies, and higher interest expense.
Increased depreciation expense reflects costs associated with Diamond
Offshore's continuing rig enhancement program and specific individual rig
upgrades.
Bulova
Bulova Corporation and subsidiaries ("Bulova"). Bulova Corporation is a 97%
owned subsidiary of the Company.
1999 Compared with 1998
Revenues and net income increased by $3.7 and $3.6 million, or 2.7% and 34.3%,
respectively, in 1999 as compared to 1998.
Revenues increased due to higher watch unit sales and increased clock unit
sales and prices, partially offset by lower watch prices in 1999 as compared
to 1998.
Watch prices declined due primarily to a change in style sales mix.
Net income increased due primarily to the higher revenues discussed above and
reduced income taxes, partially offset by increased administrative expenses.
1998 Compared with 1997
Revenues and net income increased by $6.1 and $0.8 million, or 4.7% and 8.2%,
respectively, in 1998 as compared to 1997.
Revenues increased due to an increase in watch unit sales. Revenues also
benefited from a $0.6 million increase in interest income. These increases
were partially offset by an approximately $1.1 million decline in clock net
sales in 1998 as compared to 1997, due primarily to lower clock unit sales.
Net income increased due primarily to the higher revenues discussed above,
partially offset by a significant increase in brand support advertising
expenses.
52
Corporate
Corporate operations consist primarily of investment income, including
investment (losses) gains from the Company's investment portfolio, as well as
corporate interest expenses and other corporate overhead costs.
The components of investment (losses) gains included in Corporate operations
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C>
Derivative instruments (1) $(424.1) $(297.3) $(607.7)
Equity securities, including short
positions (1) (47.0) (251.4) (299.0)
Short-term investments, primarily U.S.
government securities 10.1 .7 (.1)
Common stock of Diamond Offshore (2) 29.1
Other (1.6) 2.4 11.5
- -----------------------------------------------------------------------------
(462.6) (545.6) (866.2)
Income tax benefit 161.9 191.0 303.2
- -----------------------------------------------------------------------------
Net loss $(300.7) $(354.6) $(563.0)
=============================================================================
</TABLE>
(1) Includes losses on short sales, equity index futures and options
aggregating $533.6, $584.3 and $936.6 for the years ended December 31,
1999, 1998 and 1997, respectively. In 1998, the Company started to reduce
its exposure in certain positions. At December 31, 1999, the Company
continued to maintain certain of these positions. See "Quantitative and
Qualitative Disclosures About Market Risk."
(2) See Note 15 of the Notes to Consolidated Financial Statements.
1999 Compared with 1998
Exclusive of investment (losses) gains, revenues and net income declined by
$69.7 and $39.1 million, respectively, due to significantly lower investment
income reflecting a lower base of invested assets, and lower results from a
shipping joint venture. The decline in net income was partially offset by
lower interest expenses.
1998 Compared with 1997
Exclusive of investment (losses) gains, revenues increased by $4.8 million, or
2.6%, due principally to income from a shipping joint venture, partially
offset by lower investment income. Net income declined by $15.4 million, or
64.4%, due to higher interest expenses and lower investment income, partially
offset by the shipping joint venture income.
LIQUIDITY AND CAPITAL RESOURCES
CNA Financial
CNA's property and casualty insurance subsidiaries' statutory surplus grew
from $7.1 billion in 1997 to $8.7 billion in 1999. Dividends of $570.0, $410.0
and $175.0 million were paid to CNA by Continental Casualty Company in 1999,
1998 and 1997, respectively.
Statutory surplus of CNA's life insurance subsidiaries amounted to $1.2
billion at December 31, 1999.
The principal cash flow sources of CNA's property and casualty and life
insurance subsidiaries are premiums and investment income. The primary
operating cash flow uses are payments for claims, policy benefits and
operating expenses.
For the year ended December 31, 1999, CNA's net cash used in operating
activities was $2,600.0 million,
53
compared with net cash used of $949.0 million and $193.0 million in 1998 and
1997, respectively.
The significant increase in net cash used in operating activities in 1999 is
principally attributable to (i) the net transfer of $1,100.0 million in cash
to Allstate in connection with the transaction involving CNA's Personal
Insurance business and (ii) a payment of $1,100.0 million from escrow pursuant
to the settlement between CNA, Pacific Indemnity and Fibreboard Corporation
known as the Trilateral Agreement. See Notes 12 and 18 of the Notes to
Consolidated Financial Statements regarding these transactions. Excluding
these significant non-recurring transactions, CNA would have reported net cash
used in operating activities in 1999 of approximately $400.0 million,
significantly improved from 1998. Improvement in net cash used in operating
activities is primarily due to lower levels of paid operating expenses, which
declined by more than 30%, relative to the lower levels of net premiums
collected, which declined by less than 15%. Benefits paid, adjusted for the
Allstate and Fibreboard payments, were slightly higher in 1999 than 1998.
Notwithstanding the improvement in 1999, the Personal Insurance transaction
had an adverse impact on net cash used in operations, because the Personal
Insurance business has historically contributed an inflow of operating cash.
The transfer of this business on October 1, 1999 resulted in a reduction in
net cash inflow of approximately $128.0 million in the fourth quarter of 1999.
CNA had substantially lower operating cash flows in 1998 and 1997, primarily
due to increases in insurance receivables.
CNA is separated into three intercompany reinsurance pools: the Continental
Casualty Company Pool ("CCC Pool"), The Continental Insurance Company Pool
("CIC Pool"), and the Continental Assurance Company Pool ("CAC Pool"). The CCC
Pool, CIC Pool and CAC Pool, are comprised of 9, 15 and 2 legal insurance
entities, respectively, domiciled in a total of 13 states and doing business
in the 50 U.S. states and territories, and in Canada (the "Pool Companies").
To the extent a Pool Company's currently due claim liabilities may exceed its
readily available liquid assets, CNA may be called upon to contribute capital
to that company. Furthermore, such capital would likely be obtained in the
form of a dividend from another Pool Company, possibly in a different pool,
which may or may not require the approval of insurance regulators in the
jurisdiction of the dividend-paying company. Accordingly, management must
continuously monitor the capital allocation among the pools and the liquidity
and capital resources of the individual Pool Companies.
The National Association of Insurance Commissioners has completed the process
of codifying Statutory Accounting Practices ("Codification") to promote
standardization of methods, and is encouraging each state to adopt
Codification as soon as possible, with a proposed implementation date of
January 1, 2001. Related statutory accounting changes are not expected to
significantly impact CNA's statutory capital requirements.
On February 15, 2000, Standard & Poor's lowered CNA's senior debt rating from
A- to BBB and lowered CNA's preferred stock rating from BBB to BB+. As a
result of these actions the facility fee payable on the aggregate amount of
CNA's revolving credit facility (the "Facility") was increased to 12.5 basis
points per annum and the interest rate on the Facility was increased to LIBOR
plus 27.5 basis points. Additionally, as a result of these actions, CNA
purchased and retired approximately $30.0 million of its outstanding money
market preferred stock in February 2000, and announced its intention to
purchase or redeem the remaining $320.0 million of its outstanding preferred
shares.
On April 15, 1999, CNA retired $100.0 million of 8.25% senior notes. On August
2, 1999, CNA repaid its $157.5 million, 11% Secured Mortgage Notes, due June
30, 2013. The gain realized on the transaction was not significant.
As previously mentioned, on February 15, 2000, Standard & Poor's lowered its
rating on CNA's senior debt and preferred stock. At the same time, they
lowered the rating of the CCC Pool and affirmed all other ratings.
Additionally, Standard & Poor's changed the outlook for all rated entities
from negative to stable.
54
On February 24, 2000, A.M. Best affirmed all ratings but assigned a negative
outlook. Also on February 24, 2000, Duff & Phelps reaffirmed all ratings but
moved the outlook on the CCC Pool rating to negative from stable. The CAC Pool
outlook remained at stable.
On March 8, 2000, CNA announced that it is exploring the sale of its
individual life insurance and life reinsurance businesses. CNA has engaged the
services of an investment banking firm to assist with this effort. As
expected, several of the major rating agencies placed their ratings of the CAC
Pool under review as a result of CNA's announcement regarding the individual
life and life reinsurance business. Each rating agency has slightly different
terms for this special review: Standard & Poor's placed the rating on
CreditWatch with developing implications; A.M. Best placed the rating under
review with developing implications; Duff & Phelps placed the rating on Rating
Watch - Uncertain, implying it could be upgraded or downgraded in the future.
When an insurance company experiences a significant event which might be
pertinent to its financial strength rating or claims-paying ability rating,
the major ratings agencies generally place that company's rating under special
review. Such events may include merger, sale, recapitalization, regulatory
action, or other significant event.
On March 14, 2000, Moody's lowered all of CNA's ratings except for its
commercial paper rating. Continental Assurance Company and Valley Forge Life
Insurance Company remain under review by Moody's - direction uncertain. The
outlook on all other rated entities remained at stable.
Lorillard
Lorillard and other cigarette manufacturers continue to be confronted with an
increasing level of litigation and regulatory issues. Approximately 1,225
product liability cases are pending against U.S. cigarette manufacturers.
Lorillard is a defendant in approximately 825 of these cases and the Company
is a defendant in approximately 41 of these cases. Plaintiffs claim
substantial compensatory and punitive damages in amounts ranging into the
billions of dollars.
The terms of the State Settlement Agreements, described above, require
significant payments to be made to the Settling States beginning in 1998 and
continuing in perpetuity. See "Results of Operations" and Note 18 of the Notes
to Consolidated Financial Statements for additional information regarding this
settlement and litigation generally.
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 $17 per 1,000
cigarettes ($.34 per pack of 20 cigarettes). The federal excise tax on
cigarettes is scheduled to increase by $2.50 per 1,000 cigarettes in the year
2002. Various states have proposed, and certain states have recently passed,
increases in their state tobacco excise taxes. Such actions may adversely
affect Lorillard's volume, operating revenues and operating income.
* * * *
Lorillard generated net cash flow from operations of approximately $1,024.9
million for the year ended December 31, 1999, compared to $379.8 million for
the prior year. Funds from operations continue to exceed operating
requirements.
Loews Hotels
In September 1999, Loews Hotels opened the 750 room Portofino Bay Hotel, the
first of three hotels the company is developing with its partners at Universal
Orlando in Florida. Construction is continuing on the second property, the 650
room Hard Rock Hotel, scheduled to open in December 2000. A third property,
the 1,000 room Royal Pacific Hotel, is scheduled to open in December 2001.
A Loews Hotels subsidiary is converting an office building in Philadelphia,
into the 585 room Loews Philadelphia Hotel, which is scheduled to open this
year.
Capital expenditures in relation to these hotel pro-
55
jects are being funded by a combination of equity and mortgages.
In January 2000, Loews Hotels purchased the Loews Coronado Bay Hotel, a 440
room property in San Diego, California that Loews Hotels has managed since its
opening in 1991.
Funds from operations continue to exceed operating requirements. Funds for
other capital expenditures and working capital requirements are expected to be
provided from operations.
Diamond Offshore
During 1999 operators took a cautious approach on spending for exploration and
development due to fluctuating product price levels. In response, Diamond
Offshore removed as many as eight rigs from service during all or part of 1999
and several of its other rigs were idle in various markets. In addition, rig
construction and enhancement programs by offshore drilling contractors, which
were started in late 1997 and 1998, resulted in a marginal over supply of
technologically advanced rigs capable of drilling in deep water. Such
conditions adversely affected the utilization level and average operating
dayrates available for Diamond Offshore's rigs, particularly its higher
specification semisubmersible units. The previously depressed conditions in
the oil and gas industry also increased the susceptibility of term contracts
committed at dayrates in excess of the current market rates to be terminated
or renegotiated by the customer. Although Diamond Offshore did not experience
termination of significant contracts or substantial renegotiations, several
term contracts were terminated during 1999 within the offshore contract
drilling industry for various reasons.
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.
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 originally estimated its net cost
of conversion for this rig to be approximately $210.0 million. These estimates
were developed prior to the completion of all required structural engineering.
Diamond Offshore now estimates its net cost of conversion for this rig at
approximately $340.0 million. Upon completion of the conversion and
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. Although
Diamond Offshore believes the project will be completed by July 1, 2000, it is
possible that delays or unforseen circumstances could push delivery beyond
this date, which could allow the customer to cancel the term contract. Should
Diamond Offshore be required to remarket the unit, it is likely that an
initial term would be shorter than the currently contracted five-year period,
and the rate would be dependent upon market conditions at such time as the
Ocean Confidence might be offered for contract. In such case, future revenues
generated by the rig could be less than the current contracted amount of
approximately $320.0 million.
During the year ended December 31, 1999, Diamond Offshore expended $208.8
million, including capitalized interest expense, for rig upgrades primarily
related to the Ocean Confidence. Diamond Offshore has budgeted $87.2 million
for rig upgrade capital expenditures during 2000.
During the year ended December 31, 1999, Diamond Offshore expended $115.3
million in association with its continuing rig enhancement program and to meet
other corporate requirements. Diamond Offshore has budgeted $70.8 million for
these capital expenditures in the year 2000.
Diamond Offshore generated net cash flow from operations of approximately
$398.1 million for the year ended December 31, 1999, compared to $547.2
million for the prior year.
During the current year to date, Diamond Offshore has purchased 308,800 shares
of its outstanding Common Stock at an aggregate cost of $8.5 million. In the
first quarter of 2000, four of Diamond Offshore's semisubmersible rigs will
complete drilling contracts
56
that were negotiated during stronger market conditions. Barring a near-term
market recovery, new contracts for these rigs may be negotiated at lower
dayrates. If general weakness in the demand for drilling rigs persists, it is
likely that revenues, income from operations and cash flows will be negatively
impacted.
Bulova
Funds from operations continue to exceed operating requirements. Funds for
capital expenditures and working capital requirements are expected to be
provided from operations. No material capital expenditures are anticipated
during 2000.
Majestic Shipping
In December 1999, Majestic Shipping Corporation ("Majestic"), a wholly owned
subsidiary of the Company, entered into an agreement with a Korean shipyard
for the new building of two 442,500 deadweight ton, ultra-large crude carrying
ships ("ULCCs"). Majestic also has options for new building of two additional
ULCCs. Hellespont Shipping Corporation ("Hellespont"), a 49% owned subsidiary
of Majestic, also entered into an agreement with another Korean shipyard for
the new building of four 303,000 deadweight ton, very-large crude carrying
ships ("VLCCs"). In connection with Hellespont's contracts for new building of
four VLCCs, a subsidiary of the Company entered into time charter agreements
for five year periods commencing upon the delivery of each VLCC. The Company
has guaranteed performance by its subsidiary under the time charter
agreements. Should Majestic exercise its options, the total cost of the eight
ships is estimated to amount to approximately $700.0 million.
Parent Company
During 1999, the Company purchased 8,101,700 shares of its outstanding Common
Stock at an aggregate cost of $601.6 million, and also purchased 3,001,000
shares of CNA Financial common stock at an aggregate cost of $107.0 million.
During the current year to date, the Company has purchased an additional
3,347,800 shares of its outstanding Common Stock at an aggregate cost of
$192.5 million. Depending on market conditions, the Company from time to time
purchases shares of its, and its subsidiaries, outstanding common stock in the
open market or otherwise.
The Company continues to pursue conservative financial strategies while
seeking opportunities for responsible growth. These include the expansion of
existing businesses, full or partial acquisitions and dispositions, and
opportunities for efficiencies and economies of scale.
INVESTMENTS
Investments activities of non-insurance companies include investments in fixed
income securities, equity securities including short sales, derivative
instruments and short-term investments, and are carried at fair value. 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 Company enters into short sales and invests in certain derivative
instruments for a number of purposes, including: (i) for asset and liability
management activities, (ii) for income enhancements for its portfolio
management strategy, and (iii) to benefit from anticipated future movements in
the underlying markets that Company management expects to occur. If such
movements do not occur or if the market moves in the opposite direction than
what management expects, significant losses may occur.
Monitoring procedures include senior management review of daily detailed
reports of existing positions and valuation fluctuations to ensure that open
positions are consistent with the Company's portfolio strategy.
The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these transactions with large financial
institutions and considers the risk of nonperformance to be remote.
57
The Company does not believe that any of the derivative instruments utilized
by it are unusually complex, nor do these instruments contain imbedded
leverage features which would expose the Company to a higher degree of risk.
See "Results of Operations," "Quantitative and Qualitative Disclosures about
Market Risk" and Note 4 of the Notes to Consolidated Financial Statements for
additional information with respect to derivative instruments, including
recognized gains and losses on these instruments.
Insurance
CNA's general and Separate Accounts investment portfolios consist primarily of
publicly traded government bonds, asset-backed securities, mortgage-backed
securities, municipal bonds, and corporate bonds.
CNA's investment policies for both the general and Separate Accounts emphasize
high credit quality and diversification by industry, issuer and issue. Assets
supporting interest rate sensitive liabilities are segmented within the
general account to facilitate asset/liability duration management.
A primry objective in the management of the fixed maturity portfolio is to
maximize total return relative to underlying liabilities and appropriate
market benchmarks. In achieving this goal, assets may be sold to take
advantage of market conditions, other investment opportunities, and credit and
tax considerations. This activity will produce realized gains and losses
depending on then current interest rates.
The general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 94.2% and 93.3% of which are rated as investment grade at
December 31, 1999 and 1998, respectively.
The following table summarizes the ratings of CNA's general account fixed
maturity bond portfolio at fair value:
<TABLE>
<CAPTION>
December 31 1999 1998
- -----------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated
securities $ 8,781.0 32.4% $ 9,443.0 31.5%
Other AAA rated 9,692.0 35.7 11,595.0 38.7
AA and A rated 4,465.0 16.5 4,884.0 16.3
BBB rated 2,598.0 9.6 2,061.0 6.8
Below investment grade 1,582.0 5.8 1,996.0 6.7
- -----------------------------------------------------------------------------
Total $27,118.0 100.0% $29,979.0 100.0%
=============================================================================
</TABLE>
The following table summarizes the ratings of the guaranteed investment
contract portion of CNA's Separate Accounts bond portfolio at fair value:
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C> <C> <C>
U.S. government and affiliated
securities $ 52.0 2.2% $ 167.0 5.2%
Other AAA rated 1,514.0 64.7 1,977.0 61.2
AA and A rated 356.0 15.2 476.0 14.8
BBB rated 335.0 14.3 339.0 10.5
Below investment grade 85.0 3.6 269.0 8.3
- -----------------------------------------------------------------------------
Total $2,342.0 100.0% $3,228.0 100.0%
=============================================================================
</TABLE>
58
In the above tables, approximately 95.4% and 91.5% of the general account bond
portfolio, and 96.9% and 95.7% of the guaranteed investment contract bond
portfolio were U.S. government agencies or were rated by Standard & Poor's or
Moody Investors Service at December 31, 1999 and 1998, respectively. The
remaining bonds were rated by other rating agencies, outside brokers or CNA's
management.
High yield securities are bonds rated as below investment grade (below BBB) by
bond rating agencies and other unrated securities which, in the opinion of
management, are below investment grade. High yield securities generally
involve a greater degree of risk than investment grade securities. However,
expected returns should compensate for the added risk. This risk is also
considered in the interest rate assumptions in the underlying insurance
products. CNA's concentration in high yield bonds, including guaranteed
Separate Account business, was 4.7% and 6.1% of its total investments as of
December 31, 1999 and 1998, respectively.
Included in CNA's fixed maturity securities at December 31, 1999 (general and
guaranteed investment contract portfolios) are $8.6 billion of asset-backed
securities, at fair value, consisting of approximately 12.8% in U.S.
government agency issued pass-through certificates, 56.7% in collateralized
mortgage obligations ("CMOs"), 20.5% in corporate asset-backed obligations and
10.0% in corporate mortgage-backed pass-through certificates. The majority of
CMOs held are actively traded in liquid markets and are priced by
broker-dealers.
CMOs are subject to prepayment risks that tend to vary with changes in
interest rates. During periods of declining interest rates, CMOs generally
prepay faster as the underlying mortgages are prepaid and refinanced by
borrowers in order to take advantage of the lower rates. Conversely, during
periods of rising interest rates, prepayments generally slow, which may result
in a decrease in yield or a loss as a result of the slower prepayments. CNA
limits the risks associated with interest rate fluctuations and prepayments by
concentrating its CMO investments in planned amortization classes with
relatively short principal repayment windows. CNA avoids investments in
complex mortgage derivatives without readily ascertainable market prices. At
December 31, 1999, the fair value of asset-backed securities was approximately
$249.0 million lower than the amortized cost, compared with net unrealized
gains of approximately $163.0 million at December 31, 1998.
At December 31, 1999 and 1998, short-term investments consisted primarily of
commercial paper and money market funds.
Total Separate Accounts investments at fair value were approximately $4.5 and
$5.1 billion at December 31, 1999 and 1998, respectively, with taxable fixed
maturities representing approximately 72.4% and 80.8% of the totals,
respectively. Approximately 52.8% and 64.3% of Separate Accounts investments
at December 31, 1999 and 1998, respectively, are used to fund guaranteed
investment contracts for which CAC guarantees principal and a specified return
to the contract holders. The duration of fixed maturity securities included in
the guaranteed investment contract portfolio is matched approximately with the
corresponding payout pattern of the liabilities of the guaranteed investment
contracts.
CNA invests in certain derivative financial instruments primarily to reduce
its exposure to market risk (principally interest rate, equity price and
foreign currency risk). CNA considers the derivatives in its general accounts
to be held for purposes other than trading. Derivative securities, except for
interest rate swaps associated with certain corporate borrowings, are recorded
at fair value at the reporting date, with changes in market value reflected in
investment gains and losses. The interest rate swaps on corporate borrowings
are accounted for using accrual accounting with the related income or expense
recorded as an adjustment to interest expense; adjustments to fair value are
not recognized. Certain derivatives in the Separate Accounts are held for
trading purposes. These derivatives relate to an indexed group annuity
contract for institutional investors, which guarantees the S&P 500 Composite
59
Stock Price Index ("S&P 500") rate of return, plus 25 basis points. Deposits
are received from the customer and held for a three year period with no payout
until the end of the period. CNA mitigates the risk associated with the
contract liability by a combination of purchasing S&P 500 futures contracts in
a notional amount equal initially to the original customer deposit and
investing the remaining cash primarily in high quality investments. The number
of futures contracts is adjusted regularly to approximate the liability to the
contract holder. Changes in fair value of Separate Accounts derivatives held
for trading purposes are reported as a component of net investment income.
The Company's largest equity holding (held by CNA) in a single issue is Global
Crossing, Ltd. ("Global Crossing") common stock. At December 31, 1999, the
Company owned 36.4 million shares, or 4.6%, of Global Crossing's outstanding
common stock which was carried at $1,822.0 million. Unrealized gains
associated with this security were approximately $1,764.0 million at December
31, 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's,
including CNA, 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 CNA, also agreed to suspend their rights under a
shareholders' agreement and a registration rights agreement until the closing
of the Frontier transaction. The voting agreement was amended on September 2,
1999 to continue the limitation on sales and 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 merger closed on September 28, 1999. Beginning on
March 28, 2000, CNA has the right to require Global Crossing to register up to
25% of CNA's holdings under the Securities Act of 1933 (the "Act"), and
beginning on August 13, 2000, to require Global Crossing to register up to an
additional 25% of CNA's holdings. CNA'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 will include sales pursuant to Rule 144 under the Act if such
sales meet the requirements of the Rule. Subsequent to December 31, 1999, CNA
entered into option agreements intended to hedge a substantial portion of the
market risk associated with approximately half of its holdings of Global
Crossing.
CNA also has a significant equity investment in Canary Wharf Group plc. The
carrying value of this investment was $622.0 million with an unrealized gain
of $621.0 million as of December 31, 1999.
YEAR 2000 ISSUE
The Company estimates that the total amount spent on Year 2000 readiness
matters approximated $79.2 million during the last three years. 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 above amount, the Company's hardware costs
typically are included as part of ongoing technology updates and not
specifically as part of the Year 2000 project. All funds spent have been
financed from current operating funds.
The Company believes that it has successfully resolved the Year 2000 issue
without any material impact on its results of operations, cash flows or
equity.
Property and casualty insurance companies may have an underwriting exposure
related to the Year 2000 issue. Coverage, if any, will depend on the facts and
circumstances of the claim and the provisions of the policy. CNA has received
notice of a limited number of Year 2000-related policy claims. The Company
does not
60
believe that the adverse impact, if any, in connection with claims related to
the Year 2000 will be material to its results of operations, cash flows or
equity.
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
derivative instruments as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (i) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (iii) 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 fiscal years beginning after June
15, 2000. The Company is currently evaluating the effects of this Statement on
its accounting and reporting of 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 does
not expect the adoption of this Statement to have a significant impact on its
results of operations or equity.
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; the effect of potential liability concerning third party corrective
actions on Year 2000 compliance; general economic and business conditions;
changes in financial markets (interest rate, credit, currency, commodities and
equities) or in the value of specific investments; changes in foreign,
political, social and economic conditions; regulatory initiatives and
compliance with governmental regulations; changes in foreign and domestic oil
and gas exploration and production activity, and expenditures related to rig
conversion and upgrade; 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.
The tobacco industry continues to be subject to health concerns relating to
the use of tobacco products and exposure to environmental tobacco smoke,
legislation, including actual and potential excise tax increases, increasing
marketing and regulatory restrictions, governmental regulation, privately
imposed smoking restrictions, governmental and grand jury investigations,
litigation, including risks associated with adverse jury and judicial
determinations, courts reaching conclusions at variance with the general
understandings of applicable law, bonding requirements and the absence of
adequate appellate remedies to get timely relief from any of the foregoing,
and the effects of price increases related to concluded tobacco litigation
settlements and excise tax increases on consumption rates. Developments in any
of these areas, which are more fully described elsewhere in this Report could
cause the Company's results to differ materially from results that have been
or may be projected by or on behalf of the Company. 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.
61
SUPPLEMENTAL FINANCIAL INFORMATION
The following supplemental condensed financial information reflects the
financial position, results of operations and cash flows of Loews Corporation
with its investments in CNA and Diamond Offshore accounted for on an equity
basis rather than as consolidated subsidiaries. It does not purport to present
the financial position, results of operations and cash flows of the Company in
accordance with generally accepted accounting principles because it does not
comply with SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries."
Management believes, however, that this disaggregated financial data enhances
an understanding of the consolidated financial statements by providing users
with a format that management uses in assessing the Company.
Condensed Balance Sheet Information
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the
Equity Method)
<TABLE>
<CAPTION>
December 31 1999 1998
- -----------------------------------------------------------------------------
(Amounts in millions)
Assets:
<S> <C> <C>
Current assets $ 872.7 $ 785.2
Investments in U.S. government securities and other 4,447.2 4,914.3
- -----------------------------------------------------------------------------
Total current assets and investments in securities 5,319.9 5,699.5
Investment in CNA 7,612.0 7,722.0
Investment in Diamond Offshore 963.7 905.6
Other assets 850.6 761.4
- -----------------------------------------------------------------------------
Total assets $14,746.2 $15,088.5
=============================================================================
Liabilities and Shareholders' Equity:
Current liabilities $ 1,418.3 $ 1,454.6
Securities sold under agreements to repurchase 347.8 449.7
Long-term debt, less current maturities and
unamortized discount 2,426.7 2,383.6
Other liabilities 575.7 599.4
- -----------------------------------------------------------------------------
Total liabilities 4,768.5 4,887.3
Shareholders' equity 9,977.7 10,201.2
- -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $14,746.2 $15,088.5
=============================================================================
</TABLE>
62
Condensed Statements of Income Information
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the
Equity Method)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------
(Amounts in millions)
Revenues:
<S> <C> <C> <C>
Manufactured products and other $4,485.9 $3,207.6 $2,746.5
Investment income 198.1 233.3 215.7
Investment losses (461.7) (545.6) (866.2)
- -----------------------------------------------------------------------------
Total 4,222.3 2,895.3 2,096.0
- -----------------------------------------------------------------------------
Expenses:
Cost of manufactured products sold
and other 3,374.0 2,044.1 1,986.7
Tobacco litigation settlements 579.0 198.8
Interest 143.4 135.9 116.1
Income tax expense (benefit) 299.7 87.3 (58.1)
- -----------------------------------------------------------------------------
Total 3,817.1 2,846.3 2,243.5
- -----------------------------------------------------------------------------
Income (loss) from operations 405.2 49.0 (147.5)
Equity in income of:
CNA 43.2 234.7 810.2
Diamond Offshore 72.7 181.1 130.9
- -----------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 521.1 464.8 793.6
Cumulative effect of changes in
accounting principles-net (157.9)
- -----------------------------------------------------------------------------
Net income $ 363.2 $ 464.8 $ 793.6
=============================================================================
</TABLE>
63
Condensed Statements of Cash Flow Information
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the
Equity Method)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------
(Amounts in millions)
Operating Activities:
<S> <C> <C> <C>
Net income $ 363.2 $ 464.8 $ 793.6
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in
accounting principles 157.9
Investment losses 461.7 545.6 866.2
Other (99.2) (444.7) (1,037.3)
Changes in assets and liabilities-net (376.3) (399.9) (583.7)
- -----------------------------------------------------------------------------
Total 507.3 165.8 38.8
- -----------------------------------------------------------------------------
Investing Activities:
Net decrease (increase) in short-term
investments, primarily U.S. government
securities 242.9 30.8 (344.3)
Securities sold under agreements to
repurchase (101.9) 449.7 (447.8)
Purchases of CNA common stock (107.0) (4.2) (4.9)
Redemption (purchase) of CNA preferred
stock 200.0 (200.0)
Other (62.0) (48.4) (61.7)
- -----------------------------------------------------------------------------
Total 172.0 227.9 (858.7)
- -----------------------------------------------------------------------------
Financing Activities:
Dividends paid to shareholders (108.9) (114.6) (115.0)
Increase (decrease) in long-term debt-net 20.5 (52.0) 926.0
Purchases of treasury shares (601.6) (218.0)
- -----------------------------------------------------------------------------
Total (690.0) (384.6) 811.0
- -----------------------------------------------------------------------------
Net change in cash (10.7) 9.1 (8.9)
Cash, beginning of year 20.6 11.5 20.4
- -----------------------------------------------------------------------------
Cash, end of year $ 9.9 $ 20.6 $ 11.5
=============================================================================
</TABLE>
64
Item 7A. 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 December 31, assuming immediate adverse market movements of
the magnitude described below. The Company believes that the various rates of
adverse market movements represent a measure of exposure to loss under
hypothetically assumed adverse conditions. The estimated market risk exposure
represents the hypothetical loss to future earnings and does not represent the
maximum possible loss nor any expected actual loss, even under adverse
conditions, because actual adverse fluctuations would likely differ. In
addition, since the Company's investment portfolio is subject to change based
on its portfolio management strategy as well as in response to changes in the
market, these estimates are not necessarily indicative of the actual results
which may occur.
The 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. In 1998,
the Company started to reduce its exposure in certain positions. At December
31, 1999, the Company continued to maintain certain of these positions.
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.
65
The following tables present the Company's market risk by category (equity
markets, interest rates, foreign currency exchange rates and commodity prices)
on the basis of those entered into for trading purposes and other than trading
purposes.
Trading portfolio:
<TABLE>
<CAPTION>
Fair Value Asset
Category of risk exposure: (Liability) Market Risk
- ------------------------------------------------------------------------------
December 31 1999 1998 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C> <C>
Equity markets (1):
Equity securities $ 225.0 $ 198.1 $ 57.0 $ 50.0
Options purchased 188.9 212.5 (154.0) (173.0)
Options written (25.8) (39.7) 10.0 9.0
Index based futures-long 51.0 47.0
Index based futures-short (6.0) (60.0)
Short sales (218.5) (657.7) (55.0) (164.0)
Separate Accounts - Equity securities 19.0 (5.0)
Separate Accounts - Equity index
futures (a) (261.0) (229.0)
Interest rate (2):
Short sales of U.S. government
securities (122.9) (18.0)
Futures-long 18.0
Futures-short (48.2)
Separate Accounts - Fixed maturity
securities 333.0 (12.0)
Commodities:
Oil (3):
Swaps .2 (1.0)
Options (.7) (2.0)
Energy purchase obligations (16.9) (5.0)
Gold (4):
Options purchased 15.6 17.5 (14.0) (18.0)
Options written (5.2) (3.7) 5.0 4.0
- ------------------------------------------------------------------------------
</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% and (4) an increase
in gold prices of 20%. Adverse changes on options which differ from
those presented above would not necessarily result in a proportionate
change to the estimated market risk exposure.
(a) This market risk would be offset by decreases in liabilities to customers
under variable insurance contracts.
66
Other than trading portfolio:
<TABLE>
<CAPTION>
Fair Value Asset
Category of risk exposure: (Liability) Market Risk
- ------------------------------------------------------------------------------
December 31 1999 1998 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C> <C>
Equity markets (1):
Equity securities:
General accounts (a) $ 3,609.6 $ 1,970.1 $ (902.0) $ (493.0)
Separate accounts 240.0 297.0 (60.0) (74.0)
Interest rate (2):
Fixed maturities (a) 27,924.4 31,409.4 (1,286.0) (1,574.0)
Short-term investments (a) 7,317.8 7,792.1 (2.0) (21.0)
Interest rate swaps (20.0) 9.0
Other derivative securities 16.0 6.0 16.0 10.0
Separate Accounts (a):
Fixed maturities 2,927.0 4,155.0 (115.0) (176.0)
Short-term investments 59.0 473.0
Long-term debt (5,292.0) (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% and (2) an increase in interest rates
of 100 basis points.
(a) Certain securities are denominated in foreign currencies. An assumed 20%
decline in the underlying exchange rates would result in an aggregate
foreign currency exchange rate risk of $(673.0) and $(441.0) at December
31, 1999 and 1998, respectively.
Equity Price Risk - The Company has exposure to equity price risk as a result
of its investment in equity securities and equity derivatives. Equity price
risk results from changes in the level or volatility of equity prices which
affect the value of equity securities or instruments which derive their value
from such securities or indexes. Equity price risk was measured assuming an
instantaneous 25% change in the underlying reference price or index from its
level at December 31, 1999 and 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
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 by varying
magnitudes on a static balance sheet to determine the effect such a change in
rates would have on the recorded market value of the Company's investments 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.
67
The sensitivity analysis estimates the change in the market value of the
Company's interest sensitive assets and liabilities that were held on December
31, 1999 and 1998 due to instantaneous parallel shifts in the year end yield
curve of 100 basis points, with all other variables held constant. The
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Accordingly the analysis may not
be indicative of, is not intended to provide, and does not provide a precise
forecast of the effect of changes of market interest rates on the Company's
earnings or shareholders' equity. Further, the computations do not contemplate
any actions the Company could undertake in response to changes in interest
rates.
The Company's long-term debt, including interest rate swap agreements, as of
December 31, 1999 and 1998 is 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 $301.7 and $331.0 million, respectively. A 100 basis point
decrease would result in an increase in market value of $335.9 and $429.4
million, respectively.
The sensitivity analysis assumes an instantaneous shift in market interest
rates increasing 100 basis points from their levels at December 31, 1999 and
1998, with all other variables held constant.
Foreign Exchange Rate 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 rate exposure
when it buys or sells foreign currencies or financial instruments denominated
in a foreign currency. This exposure is mitigated by the Company's
asset/liability matching strategy and through the use of futures for those
instruments which are not matched. The Company's foreign transactions are
primarily denominated in Canadian Dollars, British Pounds, German Marks,
Chilean Pesos, Argentinean Pesos and Japanese Yen. The sensitivity analysis
also assumes an instantaneous 20% change in the foreign currency exchange
rates versus the U.S. Dollar from their levels at December 31, 1999 and 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 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.
68
Item 8. Financial Statements and Supplementary Data.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Assets:
- ------------------------------------------------------------------------------
December 31 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions of dollars)
Investments (Notes 1, 2, 3 and 4):
<S> <C> <C>
Fixed maturities, amortized cost of $28,637.7
and $30,850.3 $27,924.4 $31,409.4
Equity securities, cost of $1,870.2 and $1,624.7 4,023.5 2,380.7
Other investments 1,367.3 1,123.0
Short-term investments 7,317.8 7,792.1
- ------------------------------------------------------------------------------
Total investments 40,633.0 42,705.2
Cash 183.9 287.4
Receivables-net (Notes 1 and 5) 13,528.7 13,087.4
Property, plant and equipment-net (Notes 1 and 6) 2,952.7 2,848.3
Deferred income taxes (Note 8) 773.9 872.6
Goodwill and other intangible assets-net (Note 1) 409.5 489.4
Other assets (Notes 1, 12, 14 and 17) 3,943.3 3,064.1
Deferred policy acquisition costs of insurance
subsidiaries (Note 1) 2,435.6 2,422.2
Separate Account business (Notes 1 and 3) 4,603.1 5,202.8
- ------------------------------------------------------------------------------
Total assets $69,463.7 $70,979.4
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
69
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
- ------------------------------------------------------------------------------
December 31 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions of dollars)
<S> <C> <C>
Insurance reserves (Notes 1 and 7):
Claim and claim adjustment expense $27,355.9 $29,153.7
Future policy benefits 5,995.8 5,352.0
Unearned premiums 5,103.1 5,039.4
Policyholders' funds 709.9 855.4
- ------------------------------------------------------------------------------
Total insurance reserves 39,164.7 40,400.5
Payable for securities purchased (Note 4) 516.6 1,160.8
Securities sold under agreements to repurchase
(Notes 1 and 2) 1,647.3 579.5
Long-term debt, less unamortized discount
(Notes 3 and 9) 5,706.3 5,966.7
Other liabilities (Notes 1, 3 and 14) 5,497.7 4,990.6
Separate Account business (Notes 1 and 3) 4,603.1 5,202.8
- ------------------------------------------------------------------------------
Total liabilities 57,135.7 58,300.9
- ------------------------------------------------------------------------------
Minority interest 2,350.3 2,477.3
- ------------------------------------------------------------------------------
Commitments and contingent liabilities
(Notes 1, 2, 4, 7, 8, 9, 10, 12, 13, 14, 17 and 18)
Shareholders' equity (Notes 1, 2, 9 and 11):
Common stock, $1 par value:
Authorized - 400,000,000 shares
Issued and outstanding - 104,480,600 and
112,582,300 shares 104.5 112.6
Additional paid-in capital 150.7 162.3
Earnings retained in the business 8,705.9 9,033.5
Accumulated other comprehensive income 1,016.6 892.8
- ------------------------------------------------------------------------------
Total shareholders' equity 9,977.7 10,201.2
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $69,463.7 $70,979.4
==============================================================================
</TABLE>
70
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
(Amounts in millions, except per share data)
Revenues (Note 1):
<S> <C> <C> <C>
Insurance premiums (Note 17) $13,276.7 $13,530.1 $13,620.0
Investment income, net of expenses
(Note 2) 2,332.5 2,408.3 2,442.0
Investment (losses) gains (Note 2) (158.2) 135.7 (252.5)
Gains on issuance of subsidiaries'
stock (Note 15) 124.3
Manufactured products (including excise
taxes of $512.6, $495.3 and $491.0) 4,125.3 2,936.6 2,514.4
Other 1,888.9 2,285.3 1,818.4
- ------------------------------------------------------------------------------
Total 21,465.2 21,296.0 20,266.6
- ------------------------------------------------------------------------------
Expenses (Note 1):
Insurance claims and policyholders'
benefits (Notes 7 and 17) 11,926.1 11,846.9 11,395.7
Amortization of deferred policy
acquisition costs 2,142.6 2,180.2 2,138.2
Cost of manufactured products sold
(Note 18) 2,116.4 1,027.7 1,024.5
Other operating expenses 3,981.6 4,215.6 3,592.8
Tobacco litigation settlements (Note 18) 579.0 198.8
Interest 354.3 369.2 323.4
- ------------------------------------------------------------------------------
Total 20,521.0 20,218.6 18,673.4
- ------------------------------------------------------------------------------
944.2 1,077.4 1,593.2
- ------------------------------------------------------------------------------
Income taxes (Note 8) 305.5 354.5 495.3
Minority interest 117.6 258.1 304.3
- ------------------------------------------------------------------------------
Total 423.1 612.6 799.6
- ------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 521.1 464.8 793.6
Cumulative effect of changes in accounting
principles-net (Note 1) (157.9)
- ------------------------------------------------------------------------------
Net income $ 363.2 $ 464.8 $ 793.6
==============================================================================
Net income per share (Note 11):
Income before cumulative effect of changes
in accounting principles $ 4.80 $ 4.06 $ 6.90
Cumulative effect of changes in accounting
principles-net (1.45)
- ------------------------------------------------------------------------------
Net income $ 3.35 $ 4.06 $ 6.90
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
71
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Earnings Accumulated
Additional Retained Other Common
Comprehensive Common Paid-in in the Comprehensive Stock Held
Income Stock Capital Business Income in Treasury Total
- ------------------------------------------------------------------------------------------------
(Amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996 $115.0 $165.8 $8,216.8 $ 233.6 $8,731.2
Comprehensive income:
Net income $ 793.6 793.6 793.6
Other comprehensive
income (Note 11) 255.3 255.3 255.3
--------
Comprehensive income $1,048.9
========
Dividends paid, $1.00
per share (115.0) (115.0)
- ------------------------------------------------------------------------------------------------
Balance, December 31,
1997 115.0 165.8 8,895.4 488.9 9,665.1
Comprehensive income:
Net income $ 464.8 464.8 464.8
Other comprehensive
income (Note 11) 403.9 403.9 403.9
--------
Comprehensive income $ 868.7
========
Dividends paid, $1.00
per share (114.6) (114.6)
Purchases of common
stock $(218.0) (218.0)
Retirement of treasury
stock (2.4) (3.5) (212.1) 218.0
- ------------------------------------------------------------------------------------------------
Balance, December 31,
1998 112.6 162.3 9,033.5 892.8 10,201.2
Comprehensive income:
Net income $ 363.2 363.2 363.2
Other comprehensive
income (Note 11) 123.8 123.8 123.8
--------
Comprehensive income $ 487.0
========
Dividends paid, $1.00
per share (108.9) (108.9)
Purchases of common
stock (601.6) (601.6)
Retirement of treasury
stock (8.1) (11.6) (581.9) 601.6
- ------------------------------------------------------------------------------------------------
Balance, December 31,
1999 $104.5 $150.7 $8,705.9 $1,016.6 $9,977.7
================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
72
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
(Amounts in millions)
Operating Activities:
<S> <C> <C> <C>
Net income $ 363.2 $ 464.8 $ 793.6
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of changes in
accounting principles 157.9
Investment losses (gains) 158.2 (135.7) 128.2
Provision for minority interest 117.6 258.1 304.3
Amortization of investments (97.3) (217.3) (115.2)
Depreciation and amortization 395.3 437.0 341.7
Provision for deferred income taxes 153.5 51.8 59.3
Changes in assets and liabilities-net:
Reinsurance receivables (1,128.5) (837.5) 473.0
Other receivables 678.7 (122.9) (209.7)
Prepaid reinsurance premiums (1,145.3) (120.8) 93.5
Deferred policy acquisition costs 1.2 (280.5) (287.5)
Insurance reserves and claims (1,189.9) 586.3 (133.5)
Other liabilities 397.7 298.9 (485.5)
Trading securities (759.0) (545.7) (682.4)
Other-net 119.8 (72.7) (36.0)
- ------------------------------------------------------------------------------
(1,776.9) (236.2) 243.8
- ------------------------------------------------------------------------------
Investing Activities:
Purchases of fixed maturities (58,532.7) (70,141.5) (47,434.7)
Proceeds from sales of fixed maturities 57,211.8 66,429.6 43,997.0
Proceeds from maturities of fixed
maturities 2,995.5 3,564.0 2,996.9
Purchases of equity securities (1,575.4) (1,072.6) (1,332.3)
Proceeds from sales of equity securities 1,803.4 850.8 1,405.9
Purchases of property and equipment (708.2) (644.0) (702.4)
Securities sold under agreements to
repurchase 1,067.8 426.8 (395.5)
Change in short-term investments 303.4 786.6 (207.4)
Change in other investments 182.4 192.9 390.5
- ------------------------------------------------------------------------------
2,748.0 392.6 (1,282.0)
- ------------------------------------------------------------------------------
73
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
(Amounts in millions)
Financing Activities:
<S> <C> <C> <C>
Dividends paid to shareholders $ (108.9) $ (114.6) $ (115.0)
Dividends paid to minority interests (40.1) (40.7) (16.0)
Purchases of treasury shares (601.6) (218.0)
Purchases of treasury shares by
subsidiaries (191.1)
Principal payments on long-term debt (478.1) (861.9) (271.4)
Issuance of long-term debt 225.1 1,073.8 1,661.0
Change in short-term debt (10.0)
Receipts credited to policyholders 7.0 6.2 6.6
Withdrawals of policyholder account
balances (78.0) (20.5) (24.9)
- ------------------------------------------------------------------------------
(1,074.6) (366.8) 1,230.3
- ------------------------------------------------------------------------------
Net change in cash (103.5) (210.4) 192.1
Cash, beginning of year 287.4 497.8 305.7
- ------------------------------------------------------------------------------
Cash, end of year $ 183.9 $ 287.4 $ 497.8
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
74
Note 1. Summary of Significant Accounting Policies-
Principles of consolidation - The consolidated financial statements include
all significant subsidiaries and all material intercompany accounts and
transactions have been eliminated. Unless the context otherwise requires, the
term "Company" means Loews Corporation and its consolidated subsidiaries. The
equity method of accounting is used for investments in associated companies in
which the Company generally has an interest of 20% to 50%.
Accounting estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and the related notes. Actual results could differ from
those estimates.
Accounting changes - Effective January 1, 1999, the Company adopted the
AICPA's Accounting Standards Executive Committee Statement of Position ("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
ongoing effect of adopting SOP 98-5 to have a material impact on its results
of operations.
The pro forma effect of adoption on reported results for prior periods is not
significant.
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>
Investments - Investments in securities, which are held principally by
insurance subsidiaries of CNA Financial Corporation ("CNA"), an 86.5% owned
subsidiary, are carried as follows:
The Company classifies fixed maturity securities (bonds and redeemable
preferred stocks) and equity securities held by insurance subsidiaries as
available-for-sale, and are carried at fair value. Changes in fair value are
recorded as a component of accumulated other comprehensive income in
shareholders' equity, net of applicable deferred income taxes and
participating policyholders' and minority interests. The amortized cost of
fixed maturity securities is adjusted for amortization of premiums and
accretion of discounts to maturity, and amortization and accretion are
included in investment income.
Equity securities in the parent company's investment portfolio are classified
as trading securities in order to reflect the Company's investment philosophy.
These investments are carried at fair value with the net unrealized gain or
loss included in the income statement.
Derivative instruments are generally held for trading purposes and, as such,
are marked to market. Changes in fair value are included in investment gains
or losses in the income statement. Interest rate swaps which are used to
manage the Company's exposure to variable rate long-term debt are not
considered held for trading purposes. Such swaps are accounted for on an
accrual basis and are included in the income statement as an adjustment to
interest expense.
Short-term investments consist primarily of U.S. government securities,
repurchase agreements and commercial paper. These investments are carried at
fair value, which approximates amortized cost.
75
All securities transactions are recorded on the trade date. The cost of
securities sold is determined by the identified certificate method.
Investments are written down to estimated fair values, and losses are charged
to income when a decline in value is considered to be other than temporary.
Other invested assets consist primarily of investments in joint ventures,
limited partnerships, certain derivative securities and other investments. The
joint ventures and limited partnerships are carried at the Company's equity in
the investees' net assets.
Securities sold under agreements to repurchase - The Company lends securities
to unrelated parties, primarily major brokerage firms. Borrowers of these
securities must deposit collateral with the Company equal to 100% of the fair
value of these securities if the collateral is cash, or 102%, if the
collateral is securities. Cash deposits from these transactions are invested
in short-term investments (primarily U.S. government securities and commercial
paper) and a liability is recognized for the obligation to return the
collateral. The Company continues to receive the interest on loaned debt
securities, as beneficial owner, and accordingly, loaned debt securities are
included in fixed maturity securities.
Restricted investments - On December 30, 1993, CNA deposited $986.8 in an
escrow account pursuant to the Fibreboard Global Settlement Agreement. The
majority of the funds are included in short-term investments and are invested
primarily in U.S. treasury securities. The escrow account amounted to $36.0
and $1,130.0 at December 31, 1999 and 1998, respectively. During 1999, CNA
paid approximately $1,100.0 from escrow to the Fibreboard Trust, which was
established to administer claims pursuant to the Trilateral Agreement as
discussed in Note 18.
Insurance Operations - Premium revenues - Insurance premiums on property and
casualty and accident and health insurance contracts are earned ratably over
the terms of the policies after provision for estimated adjustments on
retrospectively rated policies and deductions for ceded insurance. Revenues on
universal life-type contracts are comprised of contract charges and fees,
which are recognized over the coverage period. Other life insurance premiums
and annuities are recognized as revenue when due after deductions for ceded
insurance premiums.
Claim and claim adjustment expense reserves - Claim and claim adjustment
expense reserves, except reserves for structured settlements, workers'
compensation lifetime claims and accident and health disability claims, are
not discounted and are based on (i) case basis estimates for losses reported
on direct business, adjusted in the aggregate for ultimate loss expectations,
(ii) estimates of unreported losses, (iii) estimates of losses on assumed
insurance, (iv) estimates of future expenses to be incurred in settlement of
claims, and (v) estimates of claim recoveries, exclusive of reinsurance
recoveries, which are reported as an asset. Management considers current
conditions and trends as well as past company and industry experience in
establishing these estimates. The effects of inflation, which can be
significant, are implicitly considered in the reserving process and are part
of the recorded reserve balance.
Claim and claim adjustment expense reserves represent management's estimates
of ultimate liabilities based on currently available facts and case law and
the ultimate liability may vary significantly from such estimates. CNA
regularly reviews its reserves, and any adjustments to the previously
established reserves are recognized in operating income in the period the need
for such adjustments becomes apparent. See Note 7 for a further discussion of
claim and claim adjustment expense reserves.
Structured settlements have been negotiated for claims on certain property and
casualty insurance policies. Structured settlements are agreements to provide
fixed periodic payments to claimants. Certain structured settlements are
funded by annuities purchased from CNA's life insurance subsidiary for which
the related annuity obligations are recorded in future policy benefits
reserves. Obligations for structured settlements not funded by annuities are
included in claim and claim adjustment expense reserves and carried at present
values determined using interest rates ranging from 6.0% to 7.5%. At December
31, 1999 and 1998, the discounted reserves for unfunded structured settlements
were $883.0 and $893.0, respectively (net of discounts of $1,483.0 and
$1,511.0, respectively).
Workers' compensation lifetime claim reserves and accident and health
disability claim reserves are calculated using mortality and morbidity
assumptions based on CNA's and industry experience, and are discounted at
interest rates allowed by insurance regulators that range from 3.5% to 6.0%.
At December 31, 1999 and 1998,
76
such discounted reserves totaled $2,174.0 and $2,277.0, respectively (net of
discounts of $893.0 and $869.0, respectively).
Future policy benefits reserves - Reserves for traditional life insurance
products (whole and term life products) are computed using the net level
premium method, which incorporates actuarial assumptions as to interest rates,
mortality, morbidity, withdrawals and expenses. Actuarial assumptions
generally vary by plan, age at issue and policy duration and include a margin
for adverse deviation. Interest rates range from 3.0% to 9.0%, and mortality,
morbidity and withdrawal assumptions are based on CNA and industry experience
prevailing at the time of issue. Expense assumptions include the estimated
effects of inflation and expenses to be incurred beyond the premium paying
period. Reserves for universal life-type contracts are equal to the account
balances that accrue to the benefit of the policyholders. Interest crediting
rates ranged from 4.5% to 7.3% for the three years ended December 31, 1999.
Involuntary risks - CNA's participation in involuntary risk pools is mandatory
and generally a function of its proportionate share of the voluntary market,
by line of insurance, in each state in which it does business. Effective
January 1, 1999, in accordance with SOP 97-3, CNA records assessments for
insolvencies when an assessment is probable and will be imposed, when it can
be reasonably estimated, and when the event obligating the entity to pay an
imposed or probable assessment has occurred on or before the date of the
financial statements. CNA had previously accounted for these assessments as
they were paid.
Reinsurance - CNA assumes and cedes insurance with other insurers and
reinsurers and members of various reinsurance pools and associations. CNA
utilizes reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of
each product line and CNA's retained amount varies by type of coverage.
Generally, property risks are reinsured on an excess of loss, per risk basis.
Liability coverages are generally reinsured on a quota share basis in excess
of CNA's retained risk. CNA's life reinsurance includes coinsurance, yearly
renewable term and facultative programs.
Amounts recoverable from reinsurers are estimated in a manner consistent with
claim and claim adjustment expense reserves or future policy benefits
reserves, and reported as a receivable in the Consolidated Balance Sheets.
Deferred policy acquisition costs - Costs of acquiring property and casualty
insurance business, which vary with and are primarily related to the
production of such business, are deferred and amortized ratably over the
period the related premiums are recognized. Such costs include commissions,
premium taxes, and certain underwriting and policy issuance costs. Anticipated
investment income is considered in the determination of the recoverability of
deferred policy acquisition costs.
Life acquisition costs are capitalized and amortized based on assumptions
consistent with those used for computing future policy benefits reserves.
Acquisition costs on traditional life business are amortized over the assumed
premium paying periods. Universal life and annuity acquisition costs are
amortized in proportion to the present value of estimated gross profits over
the products' assumed durations. To the extent that unrealized gains or losses
on available-for-sale securities would result in an adjustment of deferred
policy acquisition costs, had those gains or losses actually been realized, an
adjustment to deferred policy acquisition costs is recorded to unrealized
investment gains or losses which are included in accumulated other
comprehensive income and reported as a component of shareholders' equity.
Separate Account business - CNA's life insurance subsidiary, Continental
Assurance Company ("CAC"), writes investment and annuity contracts. The
supporting assets and liabilities of certain of these contracts are legally
segregated and reported in the accompanying Consolidated Balance Sheets as
assets and liabilities of Separate Account business. CAC guarantees principal
and a specified return to the contract holders on approximately 53% and 64% of
the Separate Account business at December 31, 1999 and 1998, respectively.
Substantially all assets of the Separate Account business are carried at fair
value. Separate Account liabilities are carried at contract values.
Statutory accounting practices - CNA's insurance subsidiaries are domiciled in
various jurisdictions. These subsidiaries prepare statutory financial
statements in accordance with accounting practices prescribed or otherwise
permitted by their respective jurisdiction's insurance regulators. Prescribed
statutory accounting practices are set forth in a variety of publications of
the National Association of Insurance Commissioners, as well as state laws,
regulations and general administrative rules. CNA has no material permitted
accounting practices.
77
Statutory capital and surplus - Combined statutory capital and surplus and net
income, determined in accordance with accounting practices prescribed by the
regulations and statutes of various insurance regulators, for property and
casualty and life insurance subsidiaries, are as follows:
<TABLE>
<CAPTION>
Statutory Capital
and Surplus Statutory Net Income (Loss)
-------------------- ---------------------------
December 31 Year Ended December 31
-------------------- ---------------------------
1999 1998 1999 1998 1997
- ---------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Property and casualty companies* $8,679.0 $7,593.0 $361.0 $161.0 $1,043.0
Life insurance companies 1,222.0 1,109.0 77.0 (57.0) 43.0
- ------------------------------------------------------------------------------
</TABLE>
*Surplus includes property and casualty companies' ownership in life insurance
subsidiaries.
Inventories-
Tobacco products - These inventories, aggregating $230.6 and $221.6 at
December 31, 1999 and 1998, respectively, are stated at the lower of cost or
market, using the last-in, first-out (LIFO) method and primarily consist of
leaf tobacco. If the average cost method of accounting had been used for
tobacco inventories instead of the LIFO method, such inventories would have
been $212.6 and $215.5 higher at December 31, 1999 and 1998, respectively.
Watches and clocks - These inventories, aggregating $36.8 and $38.9 at
December 31, 1999 and 1998, respectively, are stated at the lower of cost or
market, using the first-in, first-out (FIFO) method.
Goodwill and other intangible assets - Goodwill, representing the excess of
purchase price over fair value of the net assets of acquired entities, is
generally amortized on a straight-line basis over the period of expected
benefit of twenty years. Other intangible assets are amortized on a
straight-line basis over their estimated economic lives. Accumulated
amortization at December 31, 1999 and 1998 was $414.8 and $384.3,
respectively. Amortization expense amounted to $30.5, $101.3 and $39.6 for the
years ended December 31, 1999, 1998 and 1997, respectively. Intangible assets
are periodically reviewed to determine whether an impairment in value has
occurred.
Property, plant and equipment - Property, plant and equipment is carried at
cost less accumulated depreciation. Depreciation is computed principally by
the straight-line method over the estimated useful lives of the various
classes of properties. Leaseholds and leasehold improvements are depreciated
or amortized over the terms of the related leases (including optional renewal
periods where appropriate) or the estimated lives of improvements, if less
than the lease term.
The principal service lives used in computing provisions for depreciation are
as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and building equipment 40
Building fixtures 10 to 20
Machinery and equipment 5 to 12
Hotel equipment 4 to 12
Offshore drilling equipment 10 to 25
</TABLE>
Impairment of long-lived assets - The Company reviews its long-lived assets
for impairment when changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Long-lived assets and certain intangibles,
under certain circumstances, are reported at the lower of carrying amount or
fair value. Assets to be disposed of and assets not expected to provide any
future service potential to the Company are recorded at the lower of carrying
amount or fair value less cost to sell.
Supplementary cash flow information - Cash payments made for interest on
long-term debt, including capitalized interest and commitment fees, amounted
to approximately $336.9, $322.0 and $325.1 for the years ended December 31,
1999, 1998 and 1997, respectively. Cash payments made for federal, foreign,
state and local income taxes, net of refunds, amounted to approximately
$205.2, $395.1 and $565.3 for the years ended December 31, 1999, 1998 and
1997, respectively. In 1999, CNA exchanged its interest in Canary Wharf
Limited Partnership into the common stock of Canary Wharf valued at
approximately $539.0.
Reclassification - Certain amounts applicable to prior periods have been
reclassified to conform to the classifications followed in 1999.
78
Note 2. Investments -
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Investment income consisted of:
<S> <C> <C> <C>
Fixed maturity securities $1,814.8 $1,911.2 $1,905.6
Short-term investments 362.4 404.7 457.6
Other 213.5 168.4 158.6
- ------------------------------------------------------------------------------
Total investment income 2,390.7 2,484.3 2,521.8
Investment expenses (58.2) (76.0) (79.8)
- ------------------------------------------------------------------------------
Investment income-net $2,332.5 $2,408.3 $2,442.0
==============================================================================
Investment (losses) gains are as follows:
Trading securities:
Derivative instruments (a) $ (385.1) $ (285.3) $ (618.7)
Equity securities, including short
positions (a) (47.0) (251.4) (299.0)
- ------------------------------------------------------------------------------
(432.1) (536.7) (917.7)
Other than trading:
Fixed maturities (313.1) 469.3 463.4
Equity securities 356.7 38.1 102.7
Short-term investments 19.5 (21.4) 7.1
Other, including guaranteed Separate
Account business 210.8 186.4 92.0
- ------------------------------------------------------------------------------
Investment (losses) gains (158.2) 135.7 (252.5)
Gains on issuance of subsidiaries' stock 124.3
- ------------------------------------------------------------------------------
(158.2) 135.7 (128.2)
Income tax benefit (expense) 49.1 (56.2) 43.2
Minority interest (27.5) (67.0) (74.9)
- ------------------------------------------------------------------------------
Investment (losses) gains-net $ (136.6) $ 12.5 $ (159.9)
==============================================================================
</TABLE>
(a) Includes losses on short sales, equity index futures and options
aggregating $533.6, $584.3 and $936.6 for the years ended December 31,
1999, 1998 and 1997, respectively. In 1998, the Company started to reduce
its exposure in certain positions. At December 31, 1999, the Company
continued to maintain certain of these positions.
The carrying value of investments (other than equity securities) that did not
produce income for the last twelve months is $54.0 at December 31, 1999.
Investment gains of $854.0, $1,448.4 and $837.6 and losses of $790.9, $962.4
and $264.4 were realized on securities available for sale for the years ended
December 31, 1999, 1998 and 1997, respectively. Investment gains (losses) in
1999, 1998 and 1997 also include $306.4, $159.2 and $58.6 of net unrealized
losses on equity securities in the Company's trading portfolio.
79
The amortized cost and market values of securities are as follows:
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------ Market
December 31, 1999 Cost Gains Losses Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and obligations of
government agencies $ 9,105.7 $ 14.3 $ 138.6 $ 8,981.4
Asset-backed 7,253.5 14.1 228.5 7,039.1
States, municipalities and political
subdivisions-tax exempt 4,514.1 16.3 134.1 4,396.3
Corporate 5,516.9 34.0 305.0 5,245.9
Other debt 2,185.0 36.0 88.9 2,132.1
Redeemable preferred stocks 62.5 71.6 4.5 129.6
- ------------------------------------------------------------------------------
Total fixed maturities available
for sale 28,637.7 186.3 899.6 27,924.4
Equity securities available for sale 1,149.9 2,634.5 174.8 3,609.6
Equity securities, trading portfolio 720.3 41.8 348.2 413.9
Short-term investments available
for sale 7,318.5 1.3 2.0 7,317.8
- ------------------------------------------------------------------------------
$37,826.4 $2,863.9 $1,424.6 $39,265.7
==============================================================================
December 31, 1998
- ------------------------------------------------------------------------------
U.S. government and obligations of
government agencies $ 8,875.3 $ 184.5 $ 20.2 $ 9,039.6
Asset-backed 8,095.8 129.8 11.7 8,213.9
States, municipalities and political
subdivisions-tax exempt 6,126.7 205.9 11.6 6,321.0
Corporate 5,105.7 135.7 144.7 5,096.7
Other debt 2,610.5 103.7 70.0 2,644.2
Redeemable preferred stocks 36.3 60.5 2.8 94.0
- ------------------------------------------------------------------------------
Total fixed maturities available
for sale 30,850.3 820.1 261.0 31,409.4
Equity securities available for sale 1,054.9 1,051.2 136.0 1,970.1
Equity securities, trading portfolio 569.8 10.8 170.0 410.6
Short-term investments available
for sale 7,793.1 .2 1.2 7,792.1
- ------------------------------------------------------------------------------
$40,268.1 $1,882.3 $ 568.2 $41,582.2
==============================================================================
</TABLE>
The amortized cost and market value of fixed maturities at December 31, 1999
and 1998 are shown below by contractual maturity. Actual maturities may differ
from contractual maturities because securities may be called or prepaid with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------
Amortized Market Amortized Market
December 31 Cost Value Cost Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,560.0 $ 1,546.3 $ 3,217.3 $ 3,322.8
Due after one year through
five years 7,039.4 6,907.5 6,412.3 6,430.4
Due after five years through
ten years 7,043.7 6,560.7 5,464.0 5,434.9
Due after ten years 5,741.1 5,870.8 7,660.9 8,007.4
Asset-backed securities not due
at a single maturity date 7,253.5 7,039.1 8,095.8 8,213.9
- ------------------------------------------------------------------------------
$28,637.7 $27,924.4 $30,850.3 $31,409.4
==============================================================================
</TABLE>
80
The Company's largest equity holding (held by CNA) in a single issuer is
Global Crossing, Ltd. ("Global Crossing") common stock. At December 31, 1999,
the Company owned 36,400,000 shares, or 4.6% of the outstanding common stock
of Global Crossing which was carried at $1,822.0. Unrealized gains associated
with this security were approximately $1,764.0 at December 31, 1999. No other
investments, other than investments in U.S. government securities, exceeded
10% of shareholders' equity.
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 CNA, also agreed to suspend their rights under a
shareholders' agreement and a registration rights agreement until the closing
of the Frontier transaction. The voting agreement was amended on September 2,
1999 to continue the limitation on sales and 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 merger closed on September 28, 1999. Beginning on March 28, 2000,
CNA has the right to require Global Crossing to register up to 25% of CNA's
holdings under the Securities Act of 1933 (the "Act"), and beginning on August
13, 2000, to require Global Crossing to register up to an additional 25% of
CNA's holdings. CNA'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 will include sales pursuant to Rule 144 under the Act if such sales
meet the requirements of the Rule. Subsequent to December 31, 1999, CNA
entered into option agreements intended to hedge a substantial portion of the
market risk associated with approximately half of its holdings of Global
Crossing.
At December 31, 1999 and 1998, CNA maintained statutory deposits of cash and
securities, with carrying values of $1,800.0 and $1,700.0, respectively, under
requirements of regulatory authorities.
Note 3. Fair Value of Financial Instruments -
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------
Carrying Estimated Carrying Estimated
December 31 Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Other investments $ 1,365.0 $ 1,350.0 $ 1,118.2 $ 1,115.0
Separate Account business:
Fixed maturities securities 3,260.0 3,260.0 4,155.0 4,155.0
Equity securities 260.0 260.0 297.0 297.0
Other 493.0 493.0 216.0 216.0
Financial liabilities:
Premium deposits and annuity
contracts 1,293.0 1,240.0 1,259.0 1,205.0
Long-term debt 5,664.7 5,292.0 5,921.3 5,792.0
Financial guarantee contracts 111.0 100.0 240.0 231.0
Separate Account business:
Guaranteed investment contracts 1,516.0 1,518.0 2,423.0 2,478.0
Variable Separate Accounts 1,505.0 1,505.0 1,268.0 1,268.0
Deferred annuities 117.0 125.0 85.0 102.0
Other 571.0 571.0 600.0 600.0
- ------------------------------------------------------------------------------
</TABLE>
81
In cases where quoted market prices are not available, fair values are
estimated using present value or other valuation techniques. These techniques
are significantly affected by management's assumptions, including the discount
rates and estimates of future cash flows. The estimates presented herein are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The amounts reported in the Consolidated Balance
Sheet for fixed maturities securities, equity securities, derivative
instruments, short-term investments and securities sold under agreements to
repurchase are at fair value. As such, these financial instruments are not
shown in the table above. See Note 4 for the fair value of derivative
instruments. Since the disclosure excludes certain financial instruments and
nonfinancial instruments such as real estate and insurance reserves, the
aggregate fair value amounts cannot be summed to determine the underlying
economic value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Fixed maturity securities and equity securities were based on quoted market
prices, where available. For securities not actively traded, fair values were
estimated using values obtained from independent pricing services or quoted
market prices of comparable instruments.
Other investments consist of mortgage loans and notes receivable, policy
loans, investments in limited partnerships and various miscellaneous assets.
Valuation techniques to determine fair value of other investments and other
Separate Account assets consisted of discounting cash flows and obtaining
quoted market prices of the investments, comparable instruments, or underlying
assets of the investments.
Premium deposits and annuity contracts were valued based on cash surrender
values and the outstanding fund balances.
The fair value of the liability for financial guarantee contracts was based on
discounted cash flows utilizing interest rates currently being offered for
similar contracts.
The fair value of guaranteed investment contracts and deferred annuities of
the Separate Accounts business was estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with similar maturities. The fair value of the liabilities for
variable Separate Account business was based on the quoted market values of
the underlying assets of each variable Separate Account. The fair value of
other Separate Account business liabilities approximates carrying value
because of their short-term nature.
Fair value of long-term debt was based on quoted market prices when available.
The fair values for other long-term debt were based on quoted market prices of
comparable instruments adjusted for differences between the quoted instruments
and the instruments being valued or are estimated using discounted cash flow
analyses, based on current incremental borrowing rates for similar types of
borrowing arrangements.
Note 4. Off-Balance-Sheet and Derivative Financial Instruments -
The Company enters into various transactions involving off-balance-sheet
financial instruments through a variety of futures, swaps, options, forwards
and other contracts (the "Contracts") as part of its investing activities.
These Contracts are commonly referred to as derivative instruments since their
underlying values may be linked to, among other things, interest rates,
exchange rates, prices of securities and financial or commodity indexes. The
Company uses these Contracts for a number of purposes, including: (i) for its
asset and liability management activities; (ii) for income enhancements for
its portfolio management strategy; and (iii) to benefit from anticipated
future movements in the underlying markets that Company management expects to
occur. If such movements do not occur or if the market moves in the opposite
direction than what management expects, significant losses may occur. These
Contracts also involve the risk of dealing with counterparties and their
ability to meet the terms of the Contracts.
Exposure to market risk is managed and monitored by senior management. Senior
management approves the overall investment strategy employed by the Company
and has responsibility to ensure that the investment positions are consistent
with that strategy and the level of risk acceptable to it. The Company may
manage risk by buying and selling instruments or entering into offsetting
positions.
82
The notional amounts of derivative instruments shown in the following tables
do not represent amounts exchanged in these transactions and, therefore, are
not a measure of the exposure the Company has through its use of derivative
instruments. In addition, notional amounts are presented gross and do not
reflect the net effect of offsetting positions. The amounts exchanged are
calculated on the basis of the notional amounts and the other terms of the
derivative instruments.
The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these Contracts with large financial
institutions and considers the risk of non-performance to be remote.
The Company's investments in derivative instruments are as follows:
<TABLE>
<CAPTION>
Fair Value
Asset (Liability)
Contractual/ ---------------------
Notional Average for Recognized
December 31, 1999 Value Year-End the Year (Loss) Gain
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity markets:
Options purchased $5,279.3 $188.9 $ 761.0 $(562.9)
Options written 1,097.1 (25.8) (103.9) 42.1
Index based futures-long 204.1 72.3
Index based futures-short 22.1 (16.7)
Interest rate risk:
Commitments to purchase
government and municipal
securities 127.0 (1.0) .1 (1.0)
Interest rate caps 500.0 4.0 2.8 4.0
Futures-long 151.4 (3.6)
Futures-short 560.1 15.1
Foreign currency forwards 591.0 9.0 10.8 21.0
Commodities:
Oil:
Swaps 6.4 .2 (1.1) .6
Options 33.0 (.7) (14.3) .4
Energy purchase obligations (13.8) 10.3
Gold:
Options purchased 434.5 15.6 40.9 5.5
Options written 242.9 (5.2) (14.1) 6.1
Other 94.9 2.9 (9.6) 21.7
- ------------------------------------------------------------------------------
Total $9,343.8 $187.9 $ 658.8 $(385.1)
==============================================================================
</TABLE>
83
<TABLE>
<CAPTION>
Fair Value
Asset (Liability)
Contractual/ ---------------------
Notional Average for Recognized
December 31, 1998 Value Year-End the Year (Loss) Gain
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity markets:
Options purchased $3,950.4 $212.5 $1,206.6 $(289.4)
Options written 1,085.5 (39.7) (97.9) 73.1
S&P futures-long 186.2 155.2
S&P futures-short 241.3 (202.8)
Commodities:
Oil:
Swaps (7.7) (3.4)
Energy purchase obligations 44.0 (16.9) (12.4) (7.0)
Gold:
Options purchased 423.9 17.5 30.8 (2.5)
Options written 62.0 (3.7) (9.5) 4.5
Other 408.6 1.0 3.7 (13.0)
- ------------------------------------------------------------------------------
Total $6,401.9 $170.7 $1,113.6 $(285.3)
==============================================================================
December 31, 1997
- ------------------------------------------------------------------------------
Equity markets:
Options purchased $2,272.0 $176.3 $1,072.3 $(336.2)
Options written 269.7 (18.8) (134.1) 42.9
S&P futures 1,881.0 (381.2)
Commodities:
Oil:
Swaps 63.3 (2.4) (3.2) (18.8)
Energy purchase obligations 44.0 (9.8) (3.1) (10.1)
Gold:
Options purchased 488.3 27.9 27.5 44.3
Options written 84.6 (4.2) (2.0) 3.6
Other 67.5 5.0 9.6 21.4
Other 15.4
- ------------------------------------------------------------------------------
Total $5,170.4 $174.0 $967.0 $(618.7)
==============================================================================
</TABLE>
CNA has entered into interest rate swap agreements to convert the variable
rate of its borrowings under the bank credit facility and the commercial paper
program to a fixed rate. Since these interest rate swaps are not held for
trading purposes, they are not included in the preceding tables. At December
31, 1999 and 1998, the outstanding interest rate swap agreements had a total
notional principal amount of $650.0 and $650.0, and a fair value liability of
$10.0 at December 31, 1998. Those agreements, which terminate from May 2000 to
December 2000, effectively fixed CNA's interest rate exposure on $650.0 of
variable rate debt.
CNA also uses derivatives to mitigate the risk associated with its indexed
group annuity contracts by purchasing S&P 500 futures contracts in a notional
amount equal to the portion of the customer liability related to the S&P 500
exposure. Other than derivatives held in certain Separate Accounts, CNA
generally does not hold or issue these instruments for trading purposes. The
gross notional principal or contractual amounts of these instruments in the
Separate Accounts were $1,627.0 and $1,193.0 at December 31, 1999 and 1998,
respectively.
84
The Company also enters into short sales as part of its portfolio management
strategy. Short sales are commitments to sell a financial instrument not owned
at the time of sale, usually done in anticipation of a price decline. These
sales resulted in proceeds of $201.8 and $447.4 with fair value liabilities of
$218.5 and $780.6 at December 31, 1999 and 1998, respectively. These positions
are marked to market and investment gains or losses are included in the income
statement.
Estimated fair values approximate carrying values and are based on quoted
market prices, where available. For securities not actively traded, fair
values are estimated using values obtained from independent pricing services,
quoted market prices of comparable instruments or present value models.
Through August 1, 1989, CNA's property and casualty operations wrote financial
guarantee insurance in the form of surety bonds, and also insured equity
policies. These bonds primarily represented industrial development bond
guarantees and in the case of insured equity policies, typically extended in
initial terms from ten to thirteen years. For these guarantees and policies,
CNA received an advance premium which is non-refundable and is recognized over
the exposure period and in proportion to the underlying risk insured.
At December 31, 1999 and 1998, gross exposure of financial guarantee surety
bonds and insured equity policies was $352.0 and $507.0, respectively. The
degree of risk to CNA related to this exposure is substantially reduced
through reinsurance, diversification of exposures and collateral requirements.
In addition, security interests in improved real estate are also commonly
obtained on the financial guarantee risks. Approximately 37% and 36% of the
risks were ceded to reinsurers at December 31, 1999 and 1998, respectively.
Total exposure, net of reinsurance, amounted to $222.0 and $323.0 at December
31, 1999 and 1998, respectively. At December 31, 1999 and 1998, collateral
consisting of letters of credit, cash reserves and debt service reserves
amounted to $62.0 and $38.0, respectively. Gross unearned premium reserves for
financial guarantee contracts were $11.0 and $8.0 at December 31, 1999 and
1998, respectively. Gross claim and claim adjustment expense reserves totaled
$100.0 and $232.0 at December 31, 1999 and 1998, respectively.
Note 5. Receivables-
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Reinsurance $ 8,022.7 $ 6,894.2
Other insurance 4,482.6 5,198.4
Security sales 308.6 276.4
Accrued investment income 400.6 409.8
Other 651.0 652.4
- ------------------------------------------------------------------------------
Total 13,865.5 13,431.2
Less allowance for doubtful accounts and
cash discounts 336.8 343.8
- ------------------------------------------------------------------------------
Receivables-net $13,528.7 $13,087.4
==============================================================================
</TABLE>
85
Note 6. Property, Plant and Equipment -
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 116.0 $ 118.9
Buildings and building equipment 770.4 798.6
Offshore drilling rigs and equipment 2,360.1 2,017.8
Machinery and equipment 1,254.5 1,310.4
Leaseholds and leasehold improvements 125.0 122.1
- ------------------------------------------------------------------------------
Total, at cost 4,626.0 4,367.8
Less accumulated depreciation and amortization 1,673.3 1,519.5
- ------------------------------------------------------------------------------
Property, plant and equipment-net $2,952.7 $2,848.3
==============================================================================
</TABLE>
Depreciation and amortization expense, including amortization of intangibles,
and capital expenditures, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
Depr. & Capital Depr. & Capital Depr. & Capital
Year Ended December 31 Amort. Expend. Amort. Expend. Amort. Expend.
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CNA Financial $199.5 $250.2 $261.1 $261.1 $187.4 $280.3
Lorillard 23.9 20.7 22.4 20.1 21.0 34.4
Loews Hotels 19.8 110.1 16.3 131.3 17.7 15.7
Diamond Offshore 145.3 324.1 130.3 224.5 108.3 362.6
Bulova .7 .7 .7 4.3 .8 .6
Corporate 6.1 2.4 6.2 2.7 6.5 8.8
- ------------------------------------------------------------------------------
Total $395.3 $708.2 $437.0 $644.0 $341.7 $702.4
==============================================================================
</TABLE>
The Company sold two franchised properties in December 1999 and the Loews
Monte Carlo Hotel in November 1998, with net book values of $9.0 and $26.7,
respectively. Gains on these sales amounted to $85.1 and $14.7 ($52.0 and $8.4
after taxes) for the years ended December 31, 1999 and 1998, respectively.
86
Note 7. Claim and Claim Adjustment Expense Reserves-
CNA's property and casualty insurance claim and claim adjustment expense
reserves represent the estimated amounts necessary to settle all outstanding
claims, including claims which are incurred but not reported, as of the
reporting date. The Company's reserve projections are based primarily on
detailed analysis of the facts in each case, CNA's experience with similar
cases, and various historical development patterns. Consideration is given to
such historical patterns as field reserving trends, loss payments, pending
levels of unpaid claims and product mix, as well as court decisions, economic
conditions and public attitudes. All of these can affect the estimation of
reserves.
Establishing loss reserves is an estimation process. Many factors can
ultimately affect the final settlement of a claim and, therefore, the reserve
that is needed. Changes in the law, results of litigation, medical costs, the
cost of repair materials and labor rates can all impact ultimate claim costs.
In addition, time can be a critical part of reserving determinations since the
longer the span between the incidence of a loss and the payment or settlement
of the claim, the more variable the ultimate settlement amount can be.
Accordingly, short-tail claims, such as property damage claims, tend to be
more reasonably estimable than long-tail claims, such as general liability and
professional liability claims.
The table below provides a reconciliation between beginning and ending claim
and claim adjustment expense reserves for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves at beginning of year:
Gross $28,317.0 $28,533.0 $29,357.0
Ceded 5,424.0 5,326.0 5,660.0
- ------------------------------------------------------------------------------
Net reserves at beginning of year 22,893.0 23,207.0 23,697.0
Net reserves transferred under retroactive
reinsurance agreements (1,024.0)
Net reserves of acquired insurance
companies at date of acquisition 122.0 57.0
- ------------------------------------------------------------------------------
Total net reserves 21,869.0 23,329.0 23,754.0
- ------------------------------------------------------------------------------
Net incurred claims and claim adjustment
expenses:
Provision for insured events of current
year 7,287.0 7,903.0 7,942.0
Increase (decrease) in provision for
insured events of prior years 1,027.0 263.0 (256.0)
Amortization of discount 139.0 143.0 143.0
- ------------------------------------------------------------------------------
Total net incurred 8,453.0 8,309.0 7,829.0
- ------------------------------------------------------------------------------
Net payments attributable to:
Current year events 2,744.0 2,791.0 2,514.0
Prior year events 7,460.0 5,954.0 5,862.0
Reinsurance recoverable against net
reserves transferred under retroactive
reinsurance agreements (240.0)
- ------------------------------------------------------------------------------
Total net payments 9,964.0 8,745.0 8,376.0
- ------------------------------------------------------------------------------
Net reserves at end of year 20,358.0 22,893.0 23,207.0
Ceded reserves at end of year 6,273.0 5,424.0 5,326.0
- ------------------------------------------------------------------------------
Gross reserves at end of year (a) $26,631.0 $28,317.0 $28,533.0
==============================================================================
</TABLE>
(a) Excludes life claim and claim adjustment expense reserves and intercompany
eliminations of $724.9, $836.7 and $986.8 as of December 31, 1999, 1998
and 1997, respectively, included in the Consolidated Balance Sheets.
87
The change in provision for insured events of prior years, favorable (adverse)
reserve development, is comprised of the following components:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Asbestos $ (560.0) $(243.0) $(105.0)
Environmental Pollution
and Other Mass Tort 84.0 (227.0)
Other (551.0) 207.0 361.0
- ------------------------------------------------------------------------------
Total $(1,027.0) $(263.0) $ 256.0
==============================================================================
</TABLE>
Environmental pollution clean-up is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. Judicial interpretations in many cases
have expanded the scope of coverage and liability beyond the original intent
of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of
1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern the
clean-up and restoration of abandoned toxic waste sites and formalize the
concept of legal liability for clean-up and restoration by potentially
responsible parties ("PRPs"). Superfund and the mini-Superfunds establish
mechanisms to pay for clean-up of waste sites if PRPs fail to do so, and to
assign liability to PRPs. The extent of liability to be allocated to a PRP is
dependent on a variety of factors. Further, the number of waste sites subject
to clean-up is unknown. To date, approximately 1,300 clean-up sites have been
identified by the Environmental Protection Agency ("EPA") on its National
Priorities List ("NPL"). The addition of new clean-up sites to the NPL has
slowed in recent years. Many clean-up sites have been designated by state
authorities as well.
Many policyholders have made claims against various CNA insurance subsidiaries
for defense costs and indemnification in connection with environmental
pollution matters. These claims relate to accident years 1989 and prior, which
coincides with CNA's adoption of the Simplified Commercial General Liability
coverage that includes an absolute pollution exclusion. CNA and the insurance
industry are disputing coverage for many such claims. Key coverage issues
include whether clean-up costs are considered damages under the policies,
trigger of coverage, allocation of liability among triggered policies,
applicability of pollution exclusions and owned property exclusions, the
potential for joint and several liability and definition of an occurrence. To
date, courts have been inconsistent in their rulings on these issues.
A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress in 1999 and it is unclear as to
what positions the Congress or the Administration will take in 2000 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 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 December 31, 1999 and 1998, CNA carried approximately $463.0 and $787.0,
respectively, of claim and claim adjustment expense reserves, net of
reinsurance recoverable, for reported and unreported environmental pollution
and other mass tort claims. In 1999, CNA recorded $84.0 of favorable
development compared to $227.0 of adverse development in 1998. The changes
were based upon CNA's continuous review of these types of exposures, as well
as its internal study and annual analysis of environmental pollution and other
mass tort claims. The 1999 analysis indicated favorable results in the number
of new claims being reported in the other mass tort area. The 1998 analysis
indicated deterioration in claim experience related mainly to pollution
claims.
CNA's insurance subsidiaries have exposure to asbestos claims, including those
attributable to CNA's litigation with Fibreboard Corporation (see Note 18).
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.
88
As of December 31, 1999 and 1998, CNA carried approximately $684.0 and
$1,456.0, respectively, of claim and claim adjustment expense reserves, net of
reinsurance recoverable, for reported and unreported asbestos-related claims.
In 1999, CNA recorded $560.0 of adverse development compared to $243.0 of
adverse development in 1998. The reserve strengthening in 1999 for
asbestos-related claims was a result of management's continuous review of
development with respect to these exposures, as well as a review of the
results of CNA's annual analysis of these claims which was completed in
conjunction with the study of environmental pollution and other mass tort
claims. This analysis indicated continued deterioration in claim counts for
asbestos-related claims.
The results of operations in future years may continue to be adversely
affected by environmental pollution and other mass tort, and asbestos claims
and claim adjustment expenses. Management will continue to monitor these
liabilities and make further adjustments as warranted.
The following table provides additional data related to CNA's environmental
pollution, other mass tort and asbestos-related claim and claim adjustment
expense reserves:
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------
Environmental Environmental
Pollution and Pollution and
Other Mass Tort Asbestos Other Mass Tort Asbestos
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross reserves $618.0 $ 946.0 $828.0 $1,547.0
Less ceded reserves (155.0) (262.0) (41.0) (91.0)
- ------------------------------------------------------------------------------
Net reserves $463.0 $ 684.0 $787.0 $1,456.0
==============================================================================
</TABLE>
Other lines unfavorable claim and claim adjustment expense reserve development
in 1999 of $551.0 was due to unfavorable loss development of approximately
$540.0 for standard commercial lines, approximately $60.0 for medical
malpractice, and approximately $70.0 for accident and health. These
unfavorable changes were partially offset by favorable development of
approximately $120.0 in non-medical professional liability and assumed
reinsurance on older accident years. The unfavorable development in standard
commercial lines was due to commercial automobile liability and workers'
compensation losses being higher than expected in recent accident years. In
addition, the number of claims reported for commercial multiple-peril
liability claims from older accident years has not decreased as much as
expected. The unfavorable development for medical malpractice was also due to
losses being higher than expected for recent accident years. The accident and
health unfavorable development is due to higher than expected claim reporting
on assumed personal accident coverage in recent accident years.
Other lines favorable claim and claim adjustment expense reserve development
for 1998 of $207.0 was due to favorable loss development of approximately
$100.0 in commercial lines business and approximately $105.0 of favorable loss
development in personal lines business. The favorable development in the
commercial lines business was primarily attributable to improved frequency and
severity in the commercial auto lines for older accident years, as well as
some continued improvement in workers' compensation for older years. The
favorable development in the personal lines business was attributable to
improved trends, particularly in personal auto liability.
89
Note 8. Income Taxes -
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes:
Federal:
Current $ 17.2 $195.0 $372.2
Deferred 180.0 51.8 59.3
State, city and other:
Current 134.8 115.1 65.4
Deferred (26.5) (7.4) (1.6)
- ------------------------------------------------------------------------------
Total $305.5 $354.5 $495.3
==============================================================================
</TABLE>
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Insurance revenues:
Property and casualty claim reserves $1,057.8 $1,183.1
Unearned premium reserves 334.7 371.7
Life reserve differences 213.4 194.7
Others 26.9 26.9
Deferred policy acquisition costs (777.9) (748.2)
Employee benefits 239.2 218.9
Property, plant and equipment (228.5) (184.5)
Investments (28.0) 80.2
Restructuring costs 9.7 55.9
Tobacco litigation settlements 253.6 70.4
Unrealized appreciation (629.0) (533.4)
Net operating loss carryforwards 137.1
Accrued assessments and guarantees (a) 72.1
Other-net 92.8 136.9
- ------------------------------------------------------------------------------
Deferred tax assets-net $ 773.9 $ 872.6
==============================================================================
</TABLE>
(a) Effective January 1, 1999, in accordance with SOP 97-3, the Company
recorded a cumulative effect adjustment to reflect a change in accounting
principles as discussed in Note 1. This adjustment increased deferred tax
assets by $95.4. During 1999, changes in the accrual for insurance-related
assessments reduced the associated deferred tax asset by $23.3.
Gross deferred tax assets amounted to $3,195.6 and $2,953.4 and liabilities
amounted to $2,421.7 and $2,080.8 for the years ended December 31, 1999 and
1998, respectively.
90
The Company has a history of profitability and as such, management believes it
is more likely than not that the net deferred tax asset will be realized.
Total income tax expense for the years ended December 31, 1999, 1998 and 1997
was different than the amounts of $330.5, $377.1 and $557.6, computed
by applying the statutory U.S. federal income tax rate of 35% to income before
income taxes and minority interest for each of the years.
A reconciliation between the statutory federal income tax rate and the
Company's effective income tax rate as a percentage of income before income
taxes and minority interest is as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
(Decrease) increase in income tax rate resulting from:
Exempt interest and dividends received deduction (9) (9) (6)
State and city income taxes and other 6 7 2
- ------------------------------------------------------------------------------
Effective income tax rate 32% 33% 31%
==============================================================================
</TABLE>
At December 31, 1999, the Company has net operating losses for federal income
tax purposes of approximately $390.0 which expire in years 2018 through 2019.
The Company has entered into separate tax allocation agreements with Bulova
and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiary"). Each agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the
Company's return, or (ii) be paid by the Subsidiary an amount, if any, equal
to the federal income tax which would have been payable by the Subsidiary if
it had filed a separate consolidated return.
Under these agreements, CNA will receive or has received approximately $288.0
and $83.0 for 1999 and 1998, respectively, and has paid the Company
approximately $210.0 for 1997, and Bulova will pay or has paid the Company
approximately $6.3, $5.6 and $2.6 for 1999, 1998 and 1997, respectively. Each
agreement may be canceled by either of the parties upon thirty days' written
notice.
The Company's federal income tax returns have been examined and settled
through 1994 and the years 1995 through 1997 are currently under examination.
While tax liabilities for subsequent years are subject to audit and final
determination, in the opinion of management the amount accrued in the
Consolidated Balance Sheet is believed to be adequate to cover any additional
assessments which may be made by federal, state and local tax authorities and
should not have a material effect on the financial condition or results of
operations of the Company.
91
Note 9. Long-Term Debt-
<TABLE>
<CAPTION>
Unamortized Current
December 31, 1999 Principal Discount Net Maturities
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loews Corporation $2,325.0 $ 36.4 $2,288.6
CNA 2,897.6 16.2 2,881.4 $ 3.0
Diamond Offshore 400.0 3.7 396.3
Other 140.0 140.0 1.9
- ------------------------------------------------------------------------------
Total $5,762.6 $ 56.3 $5,706.3 $ 4.9
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Loews Corporation (Parent Company):
Senior:
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $300) $300.0 $300.0
8.9% debentures due 2011 (effective interest rate of 9.0%)
(authorized, $175) 175.0 175.0
7.6% notes due 2023 (effective interest rate of 7.8%)
(authorized, $300) (a) 300.0 300.0
7.0% notes due 2023 (effective interest rate of 7.2%)
(authorized, $400) (b) 400.0 400.0
Subordinated:
3.1% exchangeable subordinated notes due 2007
(effective interest rate of 3.4%)
(authorized, $1,150) (c) 1,150.0 1,150.0
CNA Financial Corporation:
Senior:
6.3% notes due 2003 (effective interest rate of 6.4%)
(authorized, $250) 250.0 250.0
7.3% notes due 2003 (effective interest rate of 7.8%)
(authorized, $150) 145.5 150.0
6.5% notes due 2005 (effective interest rate of 6.6%)
(authorized, $500) 500.0 500.0
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $250) 250.0 250.0
6.5% notes due 2008 (effective interest rate of 6.6%)
(authorized, $150) 150.0 150.0
6.6% notes due 2008 (effective interest rate of 6.7%)
(authorized, $200) 200.0 200.0
8.4% notes due 2012 (effective interest rate of 8.6%)
(authorized, $100) 82.2 100.0
7.0% notes due 2018 (effective interest rate of 7.1%)
(authorized, $150) 150.0 150.0
7.3% debentures due 2023 (effective interest rate of 7.3%)
(authorized, $250) 250.0 250.0
8.3% notes due 1999 100.0
Commercial Paper (weighted average yield 6.5% and 5.9%) 675.0 500.0
Bank revolving credit due 2001 (effective interest rate
of 6.7% and 5.5%) 77.0 235.0
Revolving credit facility due 2002 (effective interest
rate 6.5% and 5.6%) 100.0 113.0
Mortgage notes at 11%, due 2013 157.5
Other senior debt (effective interest rates approximate 7.9% and 8.1%) 67.9 72.3
Diamond Offshore Drilling, Inc.:
3.8% convertible subordinated notes due 2007 (effective interest
rate of 3.9%) (authorized, $400)(d) 400.0 400.0
Other senior debt, principally mortgages (effective interest
rates approximate 8.1% and 8.4%) 140.0 124.6
- ------------------------------------------------------------------------------------------------
5,762.6 6,027.4
Less unamortized discount 56.3 60.7
- ------------------------------------------------------------------------------------------------
Long-term debt, less unamortized discount $5,706.3 $5,966.7
================================================================================================
</TABLE>
92
(a) Redeemable in whole or in part at June 1, 2003 at 103.8%, and decreasing
percentages thereafter.
(b) Redeemable in whole or in part at October 15, 2003 at 102.4%, and
decreasing percentages thereafter.
(c) The notes are exchangeable into 15.376 shares of Diamond Offshore's common
stock per one thousand dollar principal amount of notes, at a price of
$65.04 per share. Redeemable in whole or in part at September 15, 2002 at
101.6%, and decreasing percentages thereafter.
(d) The notes are convertible into 24.691 shares of Diamond Offshore's common
stock per one thousand dollar principal amount of notes, at a price of
$40.50 per share. Redeemable in whole or in part at February 22, 2001 at
102.1%, and decreasing percentages thereafter.
CNA maintains a $795.0 revolving credit facility that expires in May 2001. The
amount available is reduced by CNA's outstanding commercial paper. As of
December 31, 1999, there was $43.0 of unused borrowing capacity under the
facility. The interest rate on the bank loans was based on the London
Interbank Offered Rate ("LIBOR"), plus 16 basis points. Additionally, there
was an annual facility fee of 9 basis points on the entire facility. The
average interest rate on the bank loans under the credit facility, excluding
fees, at December 31, 1999 and 1998 was 6.7% and 5.5%, respectively.
The weighted average interest rate on commercial paper was 6.5% and 5.9% at
December 31, 1999 and 1998, respectively. Generally, commercial paper has a
weighted average maturity of 40 days.
To offset the variable rate characteristics of the facility and the interest
rate risk associated with periodically reissuing commercial paper, CNA is
party to interest rate swap agreements with several banks, which have an
aggregate notional principal amount of $650.0 at both December 31, 1999 and
1998, and terminate from May 2000 to December 2000. These agreements require
CNA to pay interest at a fixed rate, averaging 6.1% at both December 31, 1999
and 1998, in exchange for the receipt of the three month LIBOR. The effect of
the interest rate swaps was to increase interest expense by approximately
$4.0, $2.0 and $4.0 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The combined weighted average cost of borrowings, including fees for the
facility, commercial paper borrowings and interest rate swaps was 6.5% and
6.4% at December 31, 1999 and 1998, respectively.
On February 15, 2000, Standard & Poor's lowered CNA's senior debt rating from
A- to BBB and lowered CNA's preferred stock rating from BBB to BB+. As a
result of these actions the facility fee payable on the aggregate amount of
the Facility was increased to 12.5 basis points per annum and the interest
rate on the Facility was increased to LIBOR plus 27.5 basis points.
On April 15, 1999, CNA retired $100.0 of its 8.3% senior notes.
On August 2, 1999, CNA repaid its $157.5 11.0% Secured Mortgage Notes, due
June 30, 2013. The gain realized on the transaction was not significant.
The aggregate of long-term debt maturing in each of the next five years is
approximately as follows: $4.9 in 2000, $761.9 in 2001, $119.5 in 2002,
$462.4 in 2003 and $7.4 in 2004.
Payment of dividends by insurance subsidiaries of CNA without prior regulatory
approval is limited to certain formula-derived amounts. At December 31, 1999,
approximately $4,791.5 of retained earnings was not available for dividends.
Note 10. Leases -
The Company's hotels in some instances are constructed on leased land. Other
leases cover office facilities, computer and transportation equipment. Rent
expense amounted to $94.0, $151.3 and $127.2 for the years ended December 31,
1999, 1998 and 1997, respectively. The table below presents the future minimum
lease payments to be made under non-cancelable operating leases.
<TABLE>
<CAPTION>
Year Ended December 31
- ------------------------------------------------------------------------------
<S> <C>
2000 $165.0
2001 106.9
2002 93.8
2003 72.5
2004 49.8
Thereafter 185.5
- ------------------------------------------------------------------------------
Total $673.5
==============================================================================
</TABLE>
93
Note 11. Shareholders' Equity and Earnings Per Share -
In addition to its common stock, the Company has authorized 100,000,000 shares
of preferred stock, $.10 par value. Earnings per share are based on the
weighted average number of shares outstanding during each year (108,533,368,
114,539,080 and 115,000,000 for the years ended December 31, 1999, 1998 and
1997, respectively).
The components of accumulated other comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
Unrealized Accumulated
Gains Minimum Other
(Losses) On Foreign Pension Comprehensive
Investments Currency Liability Income (Loss)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 202.8 $ 30.8 $ 233.6
Unrealized holding gains, net of tax
of $174.9 343.6 343.6
Adjustment for items included in net
income, net of tax of $67.2 (102.7) (102.7)
Foreign currency translation adjustment,
net of tax of $4.1 14.4 14.4
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1997 443.7 45.2 488.9
Unrealized holding gains, net of tax of
$323.0 509.8 509.8
Foreign currency translation adjustment,
net of tax of $.6 6.0 6.0
Adjustment for items included in net income,
net of tax of $77.9 and $4.5 (114.7) 8.4 (106.3)
Minimum pension liability adjustment, net
of tax of $3.1 $ (5.6) (5.6)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1998 838.8 59.6 (5.6) 892.8
Unrealized holding gains, net of tax
of $250.8 381.1 381.1
Adjustment for items included in net income,
net of tax of $138.8 (224.2) (224.2)
Foreign currency translation adjustment,
net of tax of $.1 (35.1) (35.1)
Minimum pension liability adjustment, net
of tax of $1.1 2.0 2.0
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 995.7 $ 24.5 $ (3.6) $ 1,016.6
================================================================================================
</TABLE>
94
Note 12. Significant Transactions -
Personal Insurance Transaction
On October 1, 1999, certain subsidiaries of CNA completed a transaction with
The Allstate Corporation ("Allstate"), whereby CNA's personal lines insurance
business and related employees were transferred to Allstate. Approximately
$1,100.0 of cash and $1,100.0 of additional assets (primarily premium
receivables and deferred policy acquisition costs) were transferred to
Allstate, and Allstate assumed $2,200.0 of claim and claim adjustment expense
reserves. Additionally, CNA received $140.0 in cash which consisted of (i)
$120.0 in ceding commission for the reinsurance of the CNA personal insurance
business by Allstate, and (ii) $20.0 for an option exercisable during 2002 to
purchase 100% of the common stock of five CNA insurance subsidiaries at a
price equal to carrying value in accordance with generally accepted accounting
principles as of the exercise date. Also, CNA invested $75.0 in a ten year
equity-linked note issued by Allstate.
CNA will continue to write new and renewal personal insurance policies and to
reinsure this business with Allstate companies, until such time as Allstate
exercises its option to buy the five CNA subsidiaries. Prior to 2002, the
Company will concentrate the direct writing of personal lines insurance
business into the five optioned companies, such that most, if not all,
business related to this transaction will be written by those companies by the
date Allstate exercises its option. CNA continues to have primary liability on
policies reinsured by Allstate.
CNA will continue to have an ongoing interest in the profitability of CNA's
personal lines insurance business and the related successor business through
an agreement licensing the "CNA Personal Insurance" trademark and a portion of
CNA's Agency Market Operations distribution system to Allstate for use in
Allstate's personal insurance agency business for a period of five years.
Under this agreement, 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. In addition, the $75.0 equity-linked note will be redeemed on
September 30, 2009 (subject to earlier redemption on stated contingencies) for
an amount equal to the face amount plus or minus an amount not exceeding
$10.0, depending on the underwriting profitability of the CNA personal
insurance business.
CNA also shares in any reserve development related to claim and claim
adjustment expense reserves transferred to Allstate at the transaction date.
Under the reserve development sharing agreement, 80% of any favorable or
adverse reserve development up to $40.0 and 90% of any favorable or adverse
reserve development in excess of $40.0 inure to CNA. CNA's obligation with
respect to unallocated loss adjustment expense reserves was settled at the
transaction date, and is therefore not subject to the reserve sharing
arrangement.
The retroactive portion of the reinsurance transaction, consisting primarily
of the transfer of claim and claim adjustment expense reserves approximating
$1,000.0, was not recognized as reinsurance, because criteria for risk
transfer was not met for this portion of the transaction. The related
consideration paid was recorded as a deposit and is included in reinsurance
receivables in the Consolidated Balance Sheets. The prospective portion of the
transaction, which as of the transaction date consisted primarily of the
cession of $1,100.0 of unearned premium reserves, has been recorded as
reinsurance. The related consideration paid was recorded as prepaid
reinsurance premiums. Premiums ceded after the transaction date will follow
this same treatment. The $20.0 received from Allstate for the option to
purchase the five CNA subsidiaries was deferred and will not be recognized
until Allstate exercises its option, at which time it will be recorded in
realized gains and losses.
CNA recognized an after tax realized loss of approximately $39.0 related to
the transaction, consisting primarily of the accrual of lease obligations and
the write-down of assets that related specifically to the Personal Insurance
lines of business. The ceding commission related to the prospective portion of
the transaction will be recognized in proportion to the recognition of the
unearned premium reserve to which it relates. $51.0 of the ceding commission
was earned in 1999. Royalty fees earned in 1999 were approximately $7.0.
95
The Personal Insurance lines transferred to Allstate contributed net earned
premiums of $1,354.0, $1,622.0 and $1,607.0 and pre-tax operating income of
$89.0, $97.0 and $237.0 for the nine months ended September 30, 1999 and the
years ended December 31, 1998 and 1997, respectively.
Sale of AMS Services, Inc.
On November 30, 1999, CNA sold the majority of its interest in AMS Services,
Inc. ("AMS"), a software development company serving the insurance agency
market. Prior to the sale, CNA owned 89% of AMS and consolidated AMS in its
financial statements. As a result of the sale, CNA owns 9% of AMS and
therefore AMS is no longer consolidated. CNA recognized an after tax gain of
$21.0 on the sale. Total assets of AMS as of the sale date were approximately
$135.0. CNA's share of AMS' operating results were $206.0, $264.0 and $216.0
of operating revenue and $8.0, $28.0 and $10.0 of operating losses, for the
eleven months ended November 30, 1999 and the years ended December 31, 1998
and 1997, respectively.
Note 13. Restructuring and Other Related Charges -
CNA finalized and approved a restructuring plan (the "Plan") in August 1998.
In connection with the Plan, CNA incurred various expenses that were recorded
in the third and fourth quarters of 1998 and throughout 1999. These
restructuring and other related charges primarily related to the following
activities: planned reductions in the workforce; the consolidation of certain
processing centers; the exiting of certain businesses and facilities; the
termination of lease obligations; and the writeoff of certain assets related
to these activities. The Plan contemplates a gross reduction in workforce of
4,500 employees, resulting in a planned net reduction of approximately 2,400
employees. As of December 31, 1999, CNA had completed essentially all aspects
of the Plan.
CNA accrued $220.0 of these restructuring and other related charges in the
third quarter of 1998 (the "Initial Accrual"). Other charges such as parallel
processing costs, relocation costs, and retention bonuses, did not qualify
for accrual under generally accepted accounting principles and have been
charged to expense as incurred ("Period Costs"). CNA incurred Period Costs of
$83.0 and $26.0 during 1999 and the fourth quarter of 1998, respectively.
CNA incurred restructuring and other related charges of $246.0 in 1998 that
were comprised of the Initial Accrual and fourth quarter Period Costs, and
which included the following: (i) costs and benefits related to planned
employee terminations of $98.0, of which $53.0 related to severance and
outplacement costs, $24.0 related to other employee transition related costs
and $21.0 related to benefit plan curtailment costs; (ii) writedown of
certain assets to their fair value of $74.0, of which $59.0 related to a
writedown of an intangible asset, and $15.0 of abandoned leasehold
improvements and other related fixed assets associated with leases that were
terminated as part of the restructuring plan; (iii) lease termination costs of
$42.0; and (iv) losses incurred on the exiting of certain businesses of $32.0.
The 1998 restructuring and other related charges incurred by Agency Market
Operations were approximately $96.0. These charges included employee severance
and outplacement costs of $43.0 related to the planned net reduction in the
workforce of approximately 1,200 employees. Lease termination costs of
approximately $29.0 were incurred in connection with the consolidation of four
regional offices into two zone offices and a reduction of the number of claim
processing offices from 24 to 8. The Agency Market Operations charges also
included benefit plan curtailment costs of $12.0, parallel processing charges
of $7.0 and $5.0 of fixed asset writedowns. Through December 31, 1998,
approximately 364 Agency Market Operations employees, the majority of whom
were loss adjusters and office support staff.
The 1999 Period Costs incurred by Agency Market Operations were approximately
$60.0. These charges included employee related expenses (outplacement,
retention bonuses and relocation costs) of $23.0, parallel processing costs
of $16.0 and consulting expenses of $10.0. Other charges, including technology
and facility charges, were approximately $15.0. Additionally, Agency Market
Operations reduced its estimate for lease termination costs by $4.0 during
1999. During 1999, approximately 1,000 Agency Market Operations employees, the
majority of whom were office support staff, were released.
The 1998 restructuring and other related charges incurred by Risk Management
were approximately
96
$88.0. These charges included lease termination costs associated with the
consolidation of claim offices in 36 market territories of approximately
$8.0. In addition, employee severance and outplacement costs relating to the
planned net reduction in workforce of approximately 200 employees were
approximately $10.0 and the writedown of fixed and intangible assets was
approximately $64.0. Parallel processing and other charges were approximately
$6.0. Through December 31, 1998, approximately 152 Risk Management employees
had been released, the majority of whom were claims adjusters and office
support staff.
The charges related to fixed and intangible assets were primarily due to a
writedown of an intangible asset (goodwill) related to Alexsis, Inc., a
wholly owned subsidiary acquired by CNA in 1995 that provided claims
administration services for unrelated parties. As part of CNA's periodic
reviews of asset recoverability and as a result of several adverse events, CNA
concluded, based on an undiscounted cash flow analysis completed in the third
quarter of 1998, that an impairment existed, and based on a discounted cash
flow analysis, that a $59.0 writeoff was necessary. The adverse events
contributing to this conclusion included operating losses from the business,
the loss of several significant customers whose business volume with this
operation constituted a large portion of the revenue base, and substantial
changes in the overall market demand for the services offered by this
operation which, in turn, had negative effects on the prospects for achieving
the profitability levels necessary to recover the intangible asset.
The 1999 Period Costs incurred by Risk Management were approximately $10.0.
These charges included employee related expenses of $3.0 and parallel
processing charges of $3.0. Other charges, including consulting and facility
charges, were approximately $7.0. Additionally, Risk Management reduced its
estimate for lease termination costs by $2.0 and its estimate of employee
severance costs by $1.0 during 1999. During 1999, approximately 136 Risk
Management employees were released, the majority of whom were claims adjusters
and office support staff.
The 1998 restructuring and other related charges incurred by Group Operations
were approximately $39.0. These charges included approximately $29.0 of costs
related to CNA's decision to exit the Employer Health and Affinity lines of
business. These costs represent CNA's estimate of losses in connection with
fulfilling the remaining obligations under contracts. Earned premiums for
these lines of business were approximately $400.0 in 1998. The 1998 charges
also included employee severance and outplacement costs of approximately $7.0
related to the planned net reduction in workforce of approximately 400
employees. Charges for lease termination costs and fixed asset writedowns were
$3.0. Through December 31, 1998, approximately 56 Group Operations employees
had been released. The majority of the released employees were claims
adjusters and sales support staff.
The 1999 Period Costs incurred by Group Operations were approximately $5.0.
These charges include $7.0 of employee severance and related charges.
Additionally, Group Operations reduced its estimate for business exit costs
by $2.0 during 1999. During 1999, approximately 300 Group Operations employees
were released, the majority of whom were claims adjusters and sales support
staff.
For the other segments of CNA, restructuring and other related charges were
approximately $23.0 in 1998. Charges, related primarily to the closing of
leased facilities, were $3.0 and employee severance and outplacement costs
related to planned net reductions of 600 employees in the current workforce
and benefit costs associated with those reductions were $13.0. In addition,
there were charges of $4.0 related to the writedown of certain assets and
$3.0 related to the exiting of certain businesses. Through December 31,
1998, approximately 270 employees of these other segments, most of whom were
underwriters and office support staff, had been released.
For the other segments of CNA, Period Costs were approximately $8.0 for 1999.
These charges were primarily for employee termination related costs. Through
December 31, 1999, approximately 600 employees of these other segments, most
of whom were underwriters and office support staff, had been released.
97
The following table sets forth the major categories of the Initial Accrual and
the activity in the accrual during 1998 and 1999:
<TABLE>
<CAPTION>
Employee
Termination Lease
and Related Writedown Termination Business
Benefit Costs of Assets Costs Exit Costs Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial Accrual $ 72.0 $ 74.0 $42.0 $ 32.0 $220.0
Payments charged against liability (14.0) (14.0)
Costs that did not require cash (21.0) (74.0) (95.0)
- ------------------------------------------------------------------------------------------------
Accrued costs at December 31, 1998 37.0 42.0 32.0 111.0
Payments charged against liability (32.0) (9.0) (15.0) (56.0)
Reduction in estimated costs (1.0) (6.0) (2.0) (9.0)
- ------------------------------------------------------------------------------------------------
Accrued costs at December 31, 1999 $ 4.0 $27.0 $ 15.0 $ 46.0
================================================================================================
</TABLE>
Note 14. Benefit Plans -
Pension Plans - The Company has several non-contributory defined benefit plans
for eligible employees. The benefits for certain plans which cover salaried
employees and certain union employees are based on formulas which include,
among others, years of service and average pay. The benefits for one plan
which covers union workers under various union contracts and certain salaried
employees are based on years of service multiplied by a stated amount.
Effective January 1, 1998, one of the Company's retirement plans was converted
to a cash balance plan. A cash balance plan is a form of non-contributory,
defined benefit pension plan in which the value of each participant's benefit
is expressed as a nominal cash balance account established in the name of such
participant. The cash balance in each account is increased annually based on a
specified percentage of annual earnings (based on the participant's age) and a
specified interest rate (which is established annually for all participants).
The Company's funding policy is to make contributions in accordance with
applicable government regulatory requirements. The assets of the plans are
invested primarily in interest-bearing obligations and for one plan with an
insurance subsidiary of CNA, in its Separate Account business.
Other Postretirement Benefit Plans - The Company has several postretirement
benefit plans covering eligible employees and retirees. Participants generally
become eligible after reaching age 55 with required years of service. Actual
requirements for coverage vary by plan. Benefits for retirees who were covered
by bargaining units vary by each unit and contract. Benefits for certain
retirees are in the form of a Company health care account.
Benefits for retirees reaching age 65 are generally integrated with Medicare.
Other retirees, based on plan provisions, must use Medicare as their primary
coverage, with the Company reimbursing a portion of the unpaid amount; or are
reimbursed for the Medicare Part B premium or have no Company coverage. The
benefits provided by the Company are basically health and, for certain
retirees, life insurance type benefits.
The Company does not fund any of these benefit plans and accrues
postretirement benefits during the active service of those employees who would
become eligible for such benefits when they retire.
In 1999, CNA recorded curtailment and other related charges of approximately
$8.0 related to the transfer of personal lines insurance business to Allstate
as discussed in Note 12. This transaction resulted in a reduction of the
pension and postretirement benefit obligations of $44.0 and $2.0,
respectively.
In 1999, CNA amended certain plans to change, among other things, early
retirement eligibility and the level of employer contributions. These actions
resulted in a
98
reduction in pension and postretirement benefit obligations of approximately
$10.0 and $48.0, respectively.
In 1998, CNA amended the Continental postretirement plan changing the benefits
available to Continental retirees to be equivalent to the benefits available
to CNA retirees. As a result of this amendment, CNA's postretirement benefit
obligation was reduced by $99.0.
In 1998, CNA recorded curtailment charges of approximately $19.0 related to
its restructuring activities as discussed in Note 13. These curtailments
resulted in the reduction of the pension and postretirement benefit
obligations of $88.0 and $34.0, respectively.
The weighted average rates used in the actuarial assumptions were:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
--------------------------------------- ---------------------------------
Year Ended December 31 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.8% to 8.0% 6.8% 7.0% to 7.3% 7.8% to 8.0% 6.8% 7.0% to 7.3%
Expected return
on plan assets 6.8% to 8.0% 7.0% 7.5%
Rate of compensation
increase 5.5% to 5.7% 5.5% to 5.7% 5.5% to 5.7%
- ------------------------------------------------------------------------------------------------
</TABLE>
Net periodic benefit cost components:
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
---------------------- -----------------------
Year Ended December 31 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits earned $ 79.6 $ 72.6 $ 67.3 $ 14.8 $ 14.7 $14.5
Interest cost 180.9 175.7 167.4 31.4 37.7 37.7
Expected return on plan assets (145.3) (141.9) (142.0)
Amortization of unrecognized
net asset 5.6 3.6 .6
Amortization of unrecognized
net loss (gain) 11.9 7.4 8.5 (3.4) (5.9) (4.4)
Amortization of unrecognized
prior service cost 9.9 14.2 13.5 (14.3) (5.0) .7
Curtailment loss 8.0 17.0 2.0
- ------------------------------------------------------------------------------
Net periodic benefit cost $ 150.6 $ 148.6 $ 115.3 $ 28.5 $ 43.5 $48.5
==============================================================================
</TABLE>
For measurement purposes, a trend rate for covered costs from 8.0% to 9.0%
pre-65 and 8.3% post-65, was used. These trend rates are expected to decrease
gradually to an ultimate rate from 6.0% to 4.8% at rates from 0.5% to 0.3% per
annum. The health care cost trend rate assumption has a significant effect on
the amount of the benefit obligation and periodic cost reported. An increase
(or decrease) in the assumed health care cost trend rate of 1% would increase
(or decrease) the postretirement benefit obligation as of December 31, 1999 by
$21.9 (or $20.2) and the total of service and interest cost components of net
periodic postretirement benefit cost for 1999 by $3.0 (or $2.9).
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with an accumulated benefit obligation
in excess of plan assets were $1,940.2, $1,617.8 and $1,539.0, respectively,
at December 31, 1999 and $2,323.3, $1,983.7 and $1,746.1, respectively, at
December 31, 1998.
99
Savings Plans - The Company and its subsidiaries have several contributory
savings plans which allow employees to make regular contributions based upon a
percentage of their salary. Matching contributions are made up to specified
percentages of employees' contributions. The contributions by the Company and
its subsidiaries to these plans amounted to $33.6, $34.4 and $29.1 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The following provides a reconciliation of benefit obligations:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
-------------------- ---------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at
January 1 $2,677.4 $2,512.8 $ 465.8 $ 521.9
Service cost 79.6 72.6 14.8 14.7
Interest cost 180.9 175.7 31.4 37.7
Plan participants' contribution 7.4 8.6
Amendments (.4) .5 (48.0) (102.7)
Actuarial (gain) loss (214.2) 142.1 (11.9) 64.2
Benefits paid from plan assets (146.3) (138.3) (45.6) (44.6)
Curtailment (44.0) (88.0) (2.0) (34.0)
- ------------------------------------------------------------------------------
Benefit obligation at
December 31 2,533.0 2,677.4 411.9 465.8
- ------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at January 1 2,107.8 1,966.1
Actual return on plan assets (27.3) 161.9
Company contributions 170.7 118.1 38.2 36.0
Plan participants' contribution 7.4 8.6
Benefits paid from plan assets (146.3) (138.3) (45.6) (44.6)
- ------------------------------------------------------------------------------
Fair value of plan assets at
December 31 2,104.9 2,107.8
- ------------------------------------------------------------------------------
Benefit obligation over plan
assets (428.1) (569.6) (411.9) (465.8)
Unrecognized net actuarial
loss 257.7 360.6 (48.8) (38.2)
Unrecognized prior service
cost (benefit) 67.4 82.7 (141.2) (107.5)
Unrecognized net obligation 6.2 11.8
- ------------------------------------------------------------------------------
Accrued benefit cost $ (96.8) $ (114.5) $(601.9) $(611.5)
==============================================================================
Amounts recognized in the
Consolidated Balance
Sheets consist of:
Prepaid benefit cost $ 85.7 $ 94.5
Accrued benefit liability (188.3) (218.0) $(601.9) $(611.5)
Intangible asset .2 .3
Accumulated other
comprehensive income 5.6 8.7
- ------------------------------------------------------------------------------
Net amount recognized $ (96.8) $ (114.5) $(601.9) $(611.5)
==============================================================================
</TABLE>
100
Note 15. Gains on Issuance of Subsidiaries' Stock -
In September 1997, a subsidiary of CNA merged with Capsure Holdings Corp. to
form a new company, CNA Surety Corporation. CNA owns approximately 61% of the
outstanding shares on a fully diluted basis. As a result of this transaction,
the Company recognized a gain of $95.2 ($52.2 after provision for deferred
taxes and minority interest) from issuance of its subsidiary's common stock.
In April 1997, Diamond Offshore Drilling, Inc., ("Diamond Offshore") completed
a public offering of 2.5 million shares of its common stock for net proceeds
of approximately $82.3. Diamond Offshore used these funds to acquire the
Polyconfidence, a semisubmersible accommodation vessel for approximately
$81.0. As a result of the public offering, the Company's ownership interest in
Diamond Offshore declined to 50.3% and the Company recorded a pre-tax gain of
approximately $29.1 ($18.9 after provision for deferred taxes).
Note 16. Quarterly Financial Data (Unaudited) -
<TABLE>
<CAPTION>
1999 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $4,859.2 $5,430.5 $5,670.6 $5,504.9
(Loss) income before cumulative
effect of changes in accounting
principles (207.8) 271.3 254.3 203.3
Per share (1.97) 2.52 2.33 1.82
Net (loss) income (207.8) 271.3 254.3 45.4
Per share (1.97) 2.52 2.33 .41
1998 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------
Total revenues $5,040.0 $5,992.7 $5,441.8 $4,821.5
Net (loss) income (315.8) 617.1 247.2 (83.7)
Per share (2.78) 5.38 2.15 (.73)
- ------------------------------------------------------------------------------
</TABLE>
Note 17. Reinsurance -
<TABLE>
<CAPTION>
The effects of reinsurance on earned premiums are as follows:
Direct Assumed Ceded Net
- ------------------------------------------------------------------------------
Year Ended December 31, 1999
<S> <C> <C> <C> <C>
Property and casualty $ 9,158.0 $ 1,816.0 $ 2,199.0 $ 8,775.0
Accident and health 3,725.0 198.0 397.0 3,526.0
Life 1,174.0 222.0 420.0 976.0
- ------------------------------------------------------------------------------
Total $14,057.0 $ 2,236.0 $ 3,016.0 $13,277.0
==============================================================================
</TABLE>
101
<TABLE>
<CAPTION>
Direct Assumed Ceded Net
- ------------------------------------------------------------------------------
Year Ended December 31, 1998
<S> <C> <C> <C> <C>
Property and casualty $ 8,327.0 $ 1,549.0 $ 897.0 $ 8,979.0
Accident and health 3,739.0 176.0 256.0 3,659.0
Life 1,014.0 159.0 281.0 892.0
- ------------------------------------------------------------------------------
Total $13,080.0 $ 1,884.0 $ 1,434.0 $13,530.0
==============================================================================
Year Ended December 31, 1997
Property and casualty $ 8,528.0 $ 1,101.0 $ 612.0 $ 9,017.0
Accident and health 3,719.0 259.0 280.0 3,698.0
Life 908.0 128.0 131.0 905.0
- ------------------------------------------------------------------------------
Total $13,155.0 $1,488.0 $1,023.0 $13,620.0
==============================================================================
</TABLE>
Written premiums were $12,290.0, $13,823.0 and $13,620.0 at December 31, 1999,
1998 and 1997, respectively. The ceding of insurance does not discharge the
primary liability of CNA. CNA places reinsurance with carriers only after
careful review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claims settlement practices. Further, CNA
generally requires collateral, primarily in the form of bank letters of
credit, from carriers that are not authorized reinsurers in CNA's states of
domicile. Such collateral was approximately $1,191.0 and $774.0 at December
31, 1999 and 1998, respectively. CNA's largest recoverables from reinsurers,
including prepaid reinsurance premiums, were approximately $788.0 and $510.0
at December 31, 1999, and were with Allstate and Lloyds of London,
respectively.
Insurance claims and policyholders' benefits are net of reinsurance recoveries
of $3,272.0, $994.0 and $1,309.0 for the years ended December 31, 1999, 1998
and 1997, respectively.
In the above tables, life premiums are primarily from long duration contracts,
property and casualty premiums, and accident and health premiums are primarily
from short duration contracts.
Note 18. Legal Proceedings and Contingent Liabilities -
INSURANCE RELATED
Fibreboard Corporation Litigation - An agreement between Continental Casualty
Company ("Casualty"), Pacific Indemnity and Fibreboard Corporation
("Fibreboard") (the "Trilateral Agreement") has obtained final court approval
and its implementation has substantially resolved Casualty's exposure with
respect to asbestos claims involving Fibreboard. 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 (i) all claims by Fibreboard and (ii) all filed but unsettled asbestos
claims as of August 23, 1993, and all future asbestos claims against
Fibreboard. Casualty has paid all amounts required under this obligation of
the Trilateral Agreement. Casualty is also obligated to pay asbestos claims
settled as of August 23, 1993.
Through December 31, 1999, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 133,000 claims, for an esti-
102
mated settlement amount of approximately $1,630.0 plus any applicable
interest. Approximately $1,720.0 (including interest of approximately $184.0)
was paid by Casualty through December 31, 1999. Such payments have been
partially recovered from Pacific Indemnity.
While there does exist the possibility of further adverse developments with
respect to Fibreboard claims, management does not anticipate subsequent
reserve adjustments, if any, to materially affect the equity of the Company.
Management will continue to monitor the potential liabilities with respect to
Fibreboard asbestos claims and will make adjustments to claim reserves if
warranted.
TOBACCO LITIGATION - Three insurance subsidiaries of CNA are defendants in a
lawsuit arising out of policies allegedly issued to Liggett Group, Inc.
("Liggett"). Although it did not issue policies to Liggett, CNA also has been
named as a defendant in this lawsuit which was filed by Liggett and Brooke
Group Holding Inc. in Delaware Superior Court, New Castle County on January
26, 2000. The lawsuit, which involves numerous insurers, concern coverage
issues relating to hundreds of tobacco-related claims asserted against Liggett
over the past twenty years. However, Liggett only began submitting claims for
coverage under the policies in January 2000. All of the policies issued by
subsidiaries of CNA that have been located to date contain exclusions for
tobacco-related claims. Based on facts and circumstances currently known,
management believes that the ultimate outcome of the pending litigations
should not materially affect the financial condition of CNA.
IGI CONTINGENCY - In 1997, CNA Reinsurance Company Limited ("CNA Re Ltd.")
entered into an arrangement with IOA Global, Ltd. ("IOA"), an independent
managing general agent based in Philadelphia, Pennsylvania, to develop and
manage a book of accident and health coverages. Pursuant to this arrangement,
IGI Underwriting Agencies, Ltd. ("IGI"), a personal accident reinsurance
managing general underwriter, was appointed to underwrite and market the book
under the supervision of IOA. Over the past three years, IGI bound CNA Re Ltd.
on a number of reinsurance arrangements with respect to personal accident
insurance worldwide (the "IGI Program"). Under various arrangements CNA Re
Ltd. both assumed risks as a reinsurer and also ceded a substantial portion of
those risks to other companies, including other CNA insurance subsidiaries and
ultimately a group of reinsurers participating in a reinsurance pool known as
the Associated Accident and Health Reinsurance Underwriters ("AAHRU")
Facility. CNA's Group Health business unit participated as a pool member in
the AAHRU Facility in varying percentages over the past three years.
CNA has undertaken a review of the IGI Program and, among other things, has
determined that approximately $20.0 of premium was assumed by CNA Re Ltd. with
respect to United States workers' compensation "carve out" insurance. CNA is
aware that a number of reinsurers with respect to such "carve out" insurance
have disavowed their obligations under various legal theories. If one or more
such companies are successful in avoiding or reducing their liabilities, then
it is likely that CNA's liability will also be reduced. Moreover, based on
information known at this time, CNA reasonably believes it has strong grounds
for avoiding altogether a substantial portion of its carve out exposure
through legal action.
As noted, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program. Although CNA believes it has valid and
enforceable reinsurance contracts with the AAHRU Facility and other reinsurers
with respect to United States workers' compensation carve out business, it is
unable to predict to what extent such reinsurers would dispute their
liabilities to CNA. Legal actions could result, and the resolution of any such
actions could take years.
CNA has a reserve of $50.0 as of December 31, 1999 with respect to the United
States workers' compensation carve out exposure it incurred through the IGI
Program. These reserves were established net of estimated recoveries from
retrocessionaires and the estimate of ultimate losses is subject to
considerable uncertainty. As a result of these uncertainties, the results of
operations in future years may be adversely affected by potentially
significant reserve additions. Management does not believe that any such
future reserve additions will be material to equity.
103
TOBACCO RELATED
Lawsuits continue to be filed with increasing frequency against Lorillard and
other manufacturers of tobacco products. Approximately 1,225 product liability
cases are pending against U.S. cigarette manufacturers, including
approximately 500 cases filed by flight attendants alleging injury from
exposure to environmental tobacco smoke in the aircraft cabin. Of these 1,225
cases, Lorillard is a defendant in approximately 825, including each of the
flight attendant cases filed and served to date.
Tobacco litigation includes various types of claims. In these actions,
plaintiffs claim substantial compensatory, statutory and punitive damages, as
well as equitable and injunctive relief, 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,
violation of anti-trust statutes, and failure to warn of the allegedly harmful
and/or addictive nature of tobacco products.
Some cases have been brought by individual plaintiffs who allege cancer and/or
other health effects claimed to have resulted from an individual's use of
cigarettes, addiction to smoking, or exposure to environmental tobacco smoke
("Conventional Product Liability Cases"). Approximately 715 such actions are
pending against Lorillard. In other cases, plaintiffs have brought claims as
class actions on behalf of large numbers of individuals for damages allegedly
caused by smoking ("Class Actions"). Approximately 40 such cases are pending
against Lorillard. In some cases, plaintiffs are governmental entities or
entities such as labor unions, private companies, Indian Tribes, or private
citizens suing on behalf of taxpayers. Plaintiffs in these cases seek
reimbursement of health care costs allegedly incurred as a result of smoking,
as well as other alleged damages ("Reimbursement Cases"). Approximately 55
such cases are pending, including suits brought by the U.S. federal government
and the governments of several foreign nations. 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, and a ninth case has been served on some of the defendants but not
Lorillard.
In addition to the above, claims have been brought against Lorillard seeking
damages resulting from alleged exposure to asbestos fibers which were
incorporated, for a limited period of time, ending more than forty years ago,
into filter material used in one brand of cigarettes manufactured by Lorillard
("Filter Cases"); approximately 25 such actions are pending.
SETTLEMENT OF STATE REIMBURSEMENT LITIGATION
On November 23, 1998, Lorillard, Philip Morris Incorporated, Brown &
Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the
"Original Participating Manufacturers") entered into a Master Settlement
Agreement (the "Master Settlement Agreement") with 46 states, the District of
Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands,
American Samoa and the Northern Marianas (collectively, the "Settling States")
to settle the asserted and unasserted health care cost recovery and certain
other claims of those states. The Original Participating Manufacturers had
previously settled similar claims brought by Mississippi, Florida, Texas, and
Minnesota (together with the Master Settlement Agreement, the "State
Settlement Agreements").
The Master Settlement Agreement is subject to final judicial approval in each
of the Settling States. In the Company's opinion, final judicial approval has
been achieved in each of the Settling States, and a condition known as
"State-Specific Finality" has been achieved in 47 of the 52 Settling States.
The Master Settlement Agreement provides that it is not an admission or
concession or evidence of any liability or wrongdoing on the part of any
party, and was entered into by the Original Participating Manufacturers to
avoid the further expense, inconvenience, burden and uncertainty of
litigation.
Lorillard recorded pre-tax charges of $1,065.8, $579.0 and $198.8 for the
years ended December 31, 1999, 1998 and 1997, respectively, to account for its
obligations under the State Settlement Agreements. The 1998 and 1997 charges
represent Lorillard's share of all fixed and determinable portions of its
obligations under the tobacco settlements. For periods subsequent to December
31, 1998, Lorillard's portion of ongoing adjusted payments and legal fees is
based on its share of
104
domestic cigarette shipments in the year preceding that in which the payment
is due. Accordingly, Lorillard records its portions of ongoing settlement
payments as part of cost of manufactured products sold as the related sales
occur.
The State Settlement Agreements require that the domestic tobacco industry
make annual payments in the following amounts, subject to adjustment for
several factors, including inflation, market share and industry volume: 2000,
$9,200.0; 2001, $9,900.0; 2002, $11,300.0; 2003, $10,900.0; 2004 through 2007,
$8,400.0; and thereafter, $9,400.0. In addition, the domestic tobacco industry
is required to pay settling plaintiffs' attorneys' fees, subject to an annual
cap of $500.0, as well as additional amounts as follows: 2000, $416.0; and
2001 through 2003, $250.0. These payment obligations are the several and not
joint obligations of each settling defendant.
The State Settlement Agreements also include provisions relating to
significant advertising and marketing restrictions, public disclosure of
certain industry documents, limitations on challenges to tobacco control and
underage use laws, and other provisions.
The Original Participating Manufacturers have also, as part of the Master
Settlement Agreement, committed to work cooperatively with the tobacco grower
community to address concerns about the potential adverse economic impact on
that community. On January 21, 1999, the Original Participating Manufacturers
reached an agreement in principle to establish a $5,150.0 trust fund payable
over 12 years to compensate the tobacco growing communities in 11 states.
Payments to the trust fund are to be allocated among the Original
Participating Manufacturers according to their relative market share of
domestic cigarette shipments, except that Philip Morris will pay more than its
market share in the first year of the agreement but will have its payment
obligations reduced in years 11 and 12 to make up for the overpayment.
Lorillard's payments under the agreement will total approximately $515.0. All
payments will be adjusted for inflation, changes in the unit volume of
domestic cigarette shipments, and for the effect of any new increases in state
or federal excise taxes on tobacco products which benefits the growing
community.
The Company believes that the State Settlement Agreements will materially
adversely affect its cash flows and operating income in future years. The
degree of the adverse impact will depend, among other things, on the rates of
decline in United States cigarette sales in the full price and discount
segments, Lorillard's share of the domestic full price and discount cigarette
segments, and the effect of any resulting cost advantage of manufacturers not
subject to the State Settlement Agreements. Almost all domestic manufacturers
have agreed to become subject to the terms of the Master Settlement Agreement.
CONVENTIONAL PRODUCT LIABILITY CASES- There are approximately 1,120 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.
Approximately 500 of the cases have been filed by flight attendants
purportedly injured by their exposure to environmental tobacco smoke in the
aircraft cabin. Lorillard is a defendant in approximately 715 of these cases,
including each of the approximately 500 flight attendant cases. The Company is
a defendant in eight of the cases filed by individuals, although five of them
have not been served. The Company is not named as a defendant in any of the
flight attendant cases served to date.
Plaintiffs in most of these cases seek unspecified amounts in compensatory and
punitive damages.
During 1998 and 1999, a total of eight trials were held involving eleven cases
filed by individual plaintiffs. Lorillard and the Company were defendants in
one of the cases and Lorillard was a defendant in a second case. Juries
returned verdicts in favor of the defendants in the cases tried against
Lorillard and the Company. In the nine remaining cases, verdicts were returned
in favor of the defendants in six of the matters. Juries found in plaintiffs'
favor in the remaining three cases. In these three verdicts, juries awarded
plaintiffs a total of $132.8 in actual damages and punitive damages. One of
the three verdicts in favor of plaintiffs has been vacated on appeal. In the
two remaining cases, the courts have reduced the verdicts to a total of $59.4.
Appeals are pending in both of these actions. Trial is currently underway in
one case brought by individuals. Neither the Company nor Lorillard is a
defendant in that matter.
CLASS ACTIONS - There are 60 purported class actions pending against cigarette
manufacturers and
105
other defendants. Lorillard is a defendant in 40 of the 60 cases seeking class
certification. The Company is a defendant in 12 of the purported class actions
in which Lorillard is a defendant. Many of the purported class actions are in
the pre-trial, discovery stage. Most of the suits seek class certification on
behalf of residents of the states in which the cases have been filed, although
some suits seek class certification on behalf of residents of multiple states.
All but one of the purported class actions seek class certification on behalf
of individuals who smoked cigarettes or were exposed to environmental tobacco
smoke. One case seeks class certification on behalf of individuals who have
paid insurance premiums to Blue Cross and Blue Shield organizations.
Theories of liability asserted in the purported class actions include a broad
range of product liability theories, including those based on consumer
protection statutes and fraud and misrepresentation. Plaintiffs seek damages
in each case that range from unspecified amounts to the billions of dollars.
Most plaintiffs seek punitive damages and some seek treble damages. Plaintiffs
in many of the cases seek medical monitoring. Plaintiffs in several of the
purported class actions are represented by a well-funded and coordinated
consortium of over 60 law firms from throughout the United States.
Trial began during July 1998 in the case of Engle v. R.J. Reynolds Tobacco
Co., et al. (Circuit Court, Dade County, Florida, filed May 5, 1994). The
trial court has granted class certification on behalf of Florida residents and
citizens, and survivors of such individuals, who suffered injury or have died
from medical conditions allegedly caused by their addiction to cigarettes
containing nicotine. Plaintiffs seek actual damages and punitive damages
estimated to be in the billions of dollars. Plaintiffs also seek equitable
relief including, but not limited to, a fund to enable Florida smokers'
medical condition to be monitored for future health care costs, attorneys'
fees and court costs.
The case is being tried in three phases. The first phase involved
consideration of certain issues "common" to the members of the class and their
asserted causes of action.
On July 7, 1999, the jury returned a verdict against defendants at the
conclusion of the first phase. The jury found, among other things, that
cigarette smoking is addictive and causes lung cancer and a variety of other
diseases, that the defendants concealed information about the health risks of
smoking, and that defendants' conduct "rose to a level that would permit a
potential award or entitlement to punitive damages." The verdict permitted the
trial to proceed to a second phase. The jury was not asked to award damages in
the Phase One verdict.
Phase Two of the trial began on November 1, 1999 and is proceeding before the
same jury which returned the verdict in Phase One. In the first part of Phase
Two, the jury will determine issues of specific causation, reliance,
affirmative defenses, and other individual-specific issues related to the
claims of three named plaintiffs and their entitlement to damages, if any.
If the jury returns a verdict in favor of any of the three named plaintiffs
and awards compensatory damages, then the trial would proceed to the second
part of Phase Two, which would involve a determination of punitive damages. 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. The order provides that the jury will determine
punitive damages, if any, on a lump-sum dollar amount basis for the entire
qualified class. The Third District of the Florida Court of Appeal rejected
defendants' appeals from these rulings, and the Florida Supreme Court declined
to review the orders at this time.
It is unclear how the order will be implemented. The August 2, 1999 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
106
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 law.
Lorillard intends to take all appropriate steps to seek to prevent this worst
case scenario from occurring and believes these efforts should be successful.
Pursuant to the trial plan, Phase Three would address potentially hundreds of
thousands of 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.
Lorillard remains of the view that the Engle case should not have been
certified as a class action. That certification is inconsistent with the
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 trial to date,
at the earliest time that an appeal of these issues is appropriate under
Florida law. Lorillard believes that an appeal of these issues on the merits
should prevail.
On October 10, 1997, the parties to Broin v. Philip Morris Companies, Inc., et
al. (Circuit Court, Dade County, Florida, October 31, 1991), a class action
brought on behalf of flight attendants claiming injury as a result of exposure
to environmental tobacco smoke, executed a settlement agreement which was
approved by the court on February 3, 1998. Pursuant to the settlement
agreement, among other things, Lorillard has agreed to pay approximately $30.0
to create and endow a research institute to study diseases associated with
cigarette smoke. In addition, the settlement agreement permits the plaintiff
class members to file individual suits, but they may not seek punitive damages
for injuries that arose prior to January 15, 1997. To date, approximately 500
such suits have been filed and served on U.S. cigarette manufacturers,
including Lorillard.
REIMBURSEMENT CASES - Suits brought by 46 state governments and six other
governmental entities have been resolved or are expected to be resolved by the
Master Settlement Agreement. In addition to these, approximately 55 other
suits are pending, comprised of cases brought by the U.S. federal government,
unions, Indian tribes, private companies and foreign governments filing suit
in U.S. courts, in which plaintiffs seek recovery of funds expended by them to
provide health care to individuals with injuries or other health effects
allegedly caused by use of tobacco products or exposure to cigarette smoke.
These cases are based on, among other things, equitable claims, including
injunctive relief, indemnity, restitution, unjust enrichment and public
nuisance, and claims based on antitrust laws and state consumer protection
acts. Plaintiffs seek damages in each case that range from unspecified amounts
to the billions of dollars. Most plaintiffs seek punitive damages and some
seek treble damages. Plaintiffs in many of the cases seek medical monitoring.
Lorillard is named as a defendant in most such actions. The Company is named
as a defendant in 13 of them, although two of the cases have not been served.
U.S. Federal Government Action - 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 (but not the Company) 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. On December 27,
1999, defendants filed a motion to dismiss all claims.
State or Local Governmental Reimbursement Cases - The Master Settlement
Agreement has resolved or is expected to resolve the cases filed by 46 state
governments and six other governmental entities. Since January 1, 1997, cases
brought by four state governments, Florida, Minnesota, Mississippi and Texas,
were settled in separate agreements. Lorillard was a defendant in each of the
46 cases filed by state governments and in the six cases brought by other
governmental
107
entities, as well as in the four cases governed by the separate settlement
agreements. Seven local governments also have filed suit against cigarette
manufacturers, although the Master Settlement Agreement purportedly resolves
those actions.
Private Citizens Reimbursement Cases - There are four suits pending in which
plaintiffs are private citizens. In three of the cases, plaintiffs are private
citizens who have filed suit on behalf of taxpayers of their respective
states, although governmental entities filed reimbursement suits in the
states. The Company is a defendant in two of the pending private citizen
reimbursement cases. Lorillard is a defendant in each of the cases. Three of
the cases are in the pre-trial, discovery stage. One of the matters is on
appeal from a final judgment entered by the trial court in favor of the
defendants.
Reimbursement Cases filed by Foreign Governments in U.S. Courts - Cases have
been brought in U.S. courts by the nations of Bolivia, Ecuador, Guatemala,
Nicaragua, Panama, Thailand, Venezuela and Ukraine, as well as by the
Brazilian States of Goias, Rio de Janeiro and Sao Paolo. Lorillard is a
defendant in the cases filed by Bolivia, Ecuador, Ukraine, Venezuela and the
three Brazilian states. The Company is a defendant in the cases filed by
Bolivia, Ukraine and Venezuela, as well as those filed by the three Brazilian
states, although the Company has not received service of process of the cases
filed by the State of Sao Paolo, Brazil, or Venezuela. None of the defendants
have received service of process to date of the case filed by Ecuador. The
suit filed by Thailand has been voluntarily dismissed by the plaintiffs. 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.
Reimbursement Cases by Indian Tribes - Indian Tribes have filed eleven
reimbursement suits. Most of these cases have been filed in tribal courts.
Four of the eleven cases have been dismissed. Lorillard is a defendant in each
of the cases. The Company is not named as a defendant in any of the tribal
suits filed to date. Each of the pending cases is in the pre-trial, discovery
stage.
Reimbursement Cases Filed By Private Companies - Private companies have filed
six reimbursement suits against cigarette manufacturers, two of such cases,
brought by self insured employers, have been terminated. Three of the six
suits filed to date have been brought by various Blue Cross and/or Blue Shield
entities, while another case was brought by a health maintenance organization.
The plaintiffs in two of the cases filed by Blue Cross entities have noticed
appeals from orders by their trial courts that dismissed the cases. Lorillard
has been named as a defendant in each of the six cases filed to date by
private companies. The Company has not been named as a defendant in any of the
actions filed to date by private companies. Two of the cases are in the
pre-trial, discovery stage, and both are scheduled for trial during 2000.
Reimbursement Cases by Labor Unions - Approximately 30 reimbursement suits are
pending in various federal or state courts in which the plaintiffs are labor
unions, their trustees or their trust funds. Lorillard is a defendant in each
of these suits. The Company is named as a defendant in three of them. Nine of
the approximately 30 cases are on appeal from final judgments entered in
defendants' favor by the trial courts. The Second, Third, Fifth, Seventh and
Ninth Circuit Courts of Appeal have affirmed various rulings entered by trial
courts that dismissed several of the labor union actions, and the U.S. Supreme
Court has denied petitions for writ of certiorari that sought review of some
of these decisions. Each of the remaining cases is in the pre-trial, discovery
stage. Trial is scheduled to be held during 2000 in one of the cases.
On March 18, 1999, the jury in Iron Workers Local Union No. 17 Insurance Fund,
et al. v. Philip Morris, Inc., et al. (U.S. District Court, Northern District,
Ohio, Eastern Division, filed May 20, 1997) returned a verdict in favor of the
defendants, which included Lorillard, on all counts of plaintiffs' complaint.
The trial was the first against cigarette manufacturers in a case filed by
union trust funds. During pre-trial proceedings, the court granted plaintiffs'
motion for class certification on behalf of funds in Ohio established under
the Taft-Hartley Act. Plaintiffs have voluntarily dismissed
108
the appeal they noticed following the verdict.
In addition to the reimbursement cases, some suits have been filed contesting
the Master Settlement Agreement. Certain other actions have been filed in
which plaintiffs seek to intervene in cases governed by the Master Settlement
Agreement in order to achieve a different distribution of the funds allocated
by the Master Settlement Agreement to the respective states.
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 four of the cases,
although it has not received service of process of one of the actions. Each of
these cases is in the pre-trial, discovery stage. Trial is scheduled to be
held during 2000 in three of the cases.
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 25 such
cases are pending in federal and state courts. Allegations of liability
include negligence, strict liability, fraud, misrepresentation and breach of
warranty. Plaintiffs in most of these cases seek unspecified amounts in
compensatory and punitive damages. Trials have been held in 13 such cases. Two
such trials were held in 1999 and one trial was held in 2000. Juries have
returned verdicts in favor of Lorillard in 10 of the 13 trials. Three verdicts
have been returned in plaintiffs' favor, including in one of the cases tried
during 1999. In the 1999 trial, plaintiffs were awarded $2.2 in actual
damages. Lorillard has noticed an appeal from this verdict.
CALIFORNIA BUSINESS AND PROFESSIONS CODE CASES - 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," by failing to warn California residents of the health risks of
environmental tobacco smoke. Plaintiffs in both suits further allege
defendants violated certain provisions of the California Business and
Professions Code. Two other cases that make similar allegations against
manufacturers of other types of tobacco products have been filed. The four
suits have been transferred to a coordinated proceeding in the Superior Court
of San Diego County, California. The court has entered an order dismissing the
"Proposition 65" claims but certain causes of action remain pending. The four
cases are set for trial on June 2, 2000.
OTHER TOBACCO-RELATED LITIGATION
Antitrust Cases
Wholesalers and Direct Purchasers Suits - Lorillard and other domestic and
international cigarette manufacturers and their parent companies, including
the Company, have been named as defendants in four separate federal court
actions brought by tobacco product wholesalers for violations of U.S.
antitrust laws and international law. The complaints allege that defendants
conspired to fix the price of cigarettes to wholesalers since 1988 in
violation of the Sherman Act. The action seeks certification of a class
including all domestic and international wholesalers similarly affected by
such alleged conduct, and seeks damages, injunctive relief and attorneys'
fees.
Twenty-five suits in various state courts have also been filed alleging
violations of state antitrust laws which permit indirect purchasers, such as
retailers and consumers, to sue under price fixing or consumer fraud statutes.
Approximately 18 states permit such suits.
Tobacco Growers Case - A purported class action on behalf of tobacco growers
and quota holders has been filed against the major U.S. cigarette
manufacturers, their parent companies (including the Company) and other
affiliated entities in which the plaintiffs allege the defendants conspired
through the Master Settlement Agreement and other related activities to
displace the tobacco quota and price support system that is administered by
the federal government; that the defendants misled plaintiffs into supporting
their legislative and settlement positions; and that the defendants violated
their fiduciary obligation to represent plaintiffs' interests.
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, pre-
109
emption, statutes of limitations or repose, assumption of the risk,
comparative fault, the lack of proximate causation, the lack of any defect in
the product alleged by a plaintiff, defenses based upon the Master Settlement
Agreement and defenses available under general antitrust law. 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.
* * * *
While Lorillard intends to defend vigorously all smoking and health related
litigation which may be brought against it, it is not possible to predict the
outcome of any of this litigation. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably.
Many of the recent developments in relation to smoking and health discussed
above have received wide-spread media attention including the release of
industry documents. These developments may reflect adversely on the tobacco
industry and could have adverse effects on the ability of Lorillard and other
cigarette manufacturers to prevail in smoking and health litigation.
Except for the impact of the State Settlement Agreements as described above,
management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending litigation. It
is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an unfavorable outcome of certain pending litigation.
OTHER LITIGATION - The Company and its subsidiaries are also parties to other
litigation arising in the ordinary course of business. The outcome of this
other litigation will not, in the opinion of management, materially affect the
Company's results of operations or equity.
MAJESTIC SHIPPING
In December 1999, Majestic Shipping Corporation ("Majestic"), a wholly owned
subsidiary of the Company, entered into an agreement with a Korean shipyard
for the newbuilding of two 442,500 deadweight ton, ultra-large crude carrying
ships ("ULCCs"). Majestic also has options for newbuilding of two additional
ULCCs. Hellespont Shipping Corporation ("Hellespont"), a 49% owned subsidiary
of Majestic, also entered into an agreement with another Korean shipyard for
the newbuilding of four 303,000 deadweight ton, very-large crude carrying
ships ("VLCCs"). In connection with Hellespont's contracts for newbuilding of
four VLCCs, a subsidiary of the Company entered into time charter agreements
for five year periods commencing upon the delivery of each VLCC. The Company
has guaranteed performance by its subsidiary under the time charter
agreements. Should Majestic exercise its options, the total cost of the eight
ships is estimated to amount to approximately $700.0.
110
Note 19. 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 86.5% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of
hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary); the
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc., a 52% owned subsidiary); and the distribution and sale of watches and
clocks (Bulova Corporation, a 97% owned subsidiary). Each operating entity is
responsible for the operation of its specialized business and is headed by a
chief executive officer having the duties and authority commensurate with that
position.
CNA's insurance products include property and casualty coverages; life,
accident and health insurance; and pension products and annuities. CNA's
services include risk management, information services, health care
management, claims administration and employee leasing/payroll processing.
CNA's products and services are marketed through agents, brokers, managing
general agents and direct sales.
Lorillard's principal products are marketed under the brand names of Newport,
Kent, True, Maverick and Old Gold with substantially all of its sales in the
United States.
Loews Hotels owns and/or operates 14 hotels, 12 of which are in the United
States and two are in Canada. There are also three properties in the United
States under development with opening dates scheduled from 2000 to 2002.
Diamond Offshore's business primarily consists of operating 45 offshore
drilling rigs that are chartered on a contract basis for fixed terms by
companies engaged in exploration and production of hydrocarbons. Offshore rigs
are mobile units that can be relocated based on market demand. As of December
31, 1999, 29 of these rigs were located in the Gulf of Mexico, 5 were located
in Brazil and the remaining 11 were located in various foreign markets.
Bulova distributes and sells watches and clocks under the brand names of
Bulova, Caravelle and Accutron with substantially all of its sales in the
United States and Canada. All watches and clocks are purchased from foreign
suppliers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. In addition, CNA does not maintain
a distinct investment portfolio for each of its insurance segments, and
accordingly, allocation of assets to each segment is not performed. Therefore,
investment income and investment gains (losses) are allocated based on each
segment's carried insurance reserves, as adjusted.
111
The following tables set forth the Company's consolidated revenues, income and
assets by business segment:
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Revenues (a):
<S> <C> <C> <C>
CNA Financial:
Property and casualty $10,945.7 $11,320.7 $11,172.7
Life 1,577.8 1,593.6 1,593.8
Group (b) 3,747.3 3,935.2 4,113.0
Other 132.1 312.4 319.8
- ------------------------------------------------------------------------------
Total CNA Financial 16,402.9 17,161.9 17,199.3
Lorillard 4,064.5 2,865.1 2,416.8
Loews Hotels (c) 351.9 242.1 222.5
Diamond Offshore 846.9 1,244.9 977.5
Bulova 138.7 135.0 128.9
Corporate (339.7) (353.0) (678.4)
- ------------------------------------------------------------------------------
Total $21,465.2 $21,296.0 $20,266.6
==============================================================================
Income before taxes and minority interest and cumulative effect of changes in
accounting principles (a) (e):
CNA Financial:
Property and casualty $ 69.0 $ 399.7 $ 1,198.7
Life 178.0 293.9 377.8
Group (10.1) (37.9) 25.0
Other (236.2) (305.2) (233.1)
- ------------------------------------------------------------------------------
Total CNA Financial .7 350.5 1,368.4
Lorillard (d) 1,079.6 593.5 574.7
Loews Hotels (c) 112.5 54.5 32.2
Diamond Offshore 238.0 590.2 430.1
Bulova 20.8 18.6 15.3
Corporate (507.4) (529.9) (827.5)
- ------------------------------------------------------------------------------
Total $ 944.2 $ 1,077.4 $ 1,593.2
==============================================================================
112
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Net income (a) (e):
<S> <C> <C> <C>
CNA Financial:
Property and casualty $ 73.1 $ 257.7 $ 693.0
Life 97.4 158.5 206.3
Group (1.5) (16.2) 16.7
Other (125.8) (165.3) (105.8)
- ------------------------------------------------------------------------------
Total CNA Financial 43.2 234.7 810.2
Lorillard (d) 651.9 351.8 363.1
Loews Hotels (c) 70.5 32.8 18.8
Diamond Offshore 72.7 181.1 130.9
Bulova 14.1 10.5 9.7
Corporate (331.3) (346.1) (539.1)
- ------------------------------------------------------------------------------
521.1 464.8 793.6
Cumulative effect of changes in accounting
principles (157.9)
- ------------------------------------------------------------------------------
Total $ 363.2 $ 464.8 $ 793.6
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Investments Receivables Total Assets
-----------------------------------------------------------------
December 31 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CNA Financial $35,559.5 $37,177.3 $13,132.8 $12,661.3 $61,244.8 $62,432.0
Lorillard 1,301.0 558.5 54.9 41.8 2,208.7 1,296.1
Loews Hotels 202.9 72.2 23.7 33.0 604.0 395.8
Diamond Offshore 620.6 587.3 143.6 233.7 2,699.7 2,609.7
Bulova 31.0 22.0 63.4 56.2 178.8 164.4
Corporate and eliminations 2,918.0 4,287.9 110.3 61.4 2,527.7 4,081.4
- ------------------------------------------------------------------------------------------------
Total $40,633.0 $42,705.2 $13,528.7 $13,087.4 $69,463.7 $70,979.4
================================================================================================
</TABLE>
113
(a) Investment gains (losses) included in Revenues, Pre-tax income and Net
income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Revenues and pre-tax income:
<S> <C> <C> <C>
CNA Financial:
Property and casualty $ 257.2 $ 474.7 $ 524.7
Life (37.9) 130.9 190.8
Group 6.0 45.3 43.0
Other 89.3 30.4 (20.5)
- ------------------------------------------------------------------------------
Total CNA Financial 314.6 681.3 738.0
Corporate and other (472.8) (545.6) (866.2)
- ------------------------------------------------------------------------------
$(158.2) $ 135.7 $(128.2)
==============================================================================
Net income:
CNA Financial:
Property and casualty $ 143.3 $ 256.2 $ 287.6
Life (26.3) 69.5 104.2
Group 3.3 24.7 23.4
Other 43.8 16.7 (12.1)
- ------------------------------------------------------------------------------
Total CNA Financial 164.1 367.1 403.1
Corporate and other (300.7) (354.6) (563.0)
- ------------------------------------------------------------------------------
$(136.6) $ 12.5 $(159.9)
==============================================================================
</TABLE>
(b) Includes $2,100.0, $2,000.0 and $2,100.0 under contracts covering U.S.
government employees and their dependents for the respective periods.
(c) Includes gains from the sale of hotel properties of $85.1 and $14.7 ($52.0
and $8.4 after taxes) for the years ended December 31, 1999 and 1998,
respectively.
(d) Includes pre-tax charges related to the settlements of tobacco litigation
of $1,065.8, $579.0 and $198.8 ($637.3, $346.5 and $122.0 after taxes) for
the years ended December 31, 1999, 1998 and 1997, respectively.
(e) Income taxes and interest expenses are as follows:
<TABLE>
<CAPTION>
Income Interest Income Interest Income Interest
Taxes Expense Taxes Expense Taxes Expense
---------------------------------------------------
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CNA Financial:
Property and casualty $ (44.3) $ 13.4 $ 70.1 $ 15.0 $ 341.7
Life 64.1 3.3 106.8 14.3 133.2
Group (8.3) .2 (18.8) 5.2
Other (95.5) 184.8 (111.1) 189.7 (88.0) $198.0
- ------------------------------------------------------------------------------
Total CNA Financial (84.0) 201.7 47.0 219.0 392.1 198.0
Lorillard 427.7 14.9 241.7 1.4 211.6 .9
Loews Hotels 42.0 2.2 21.7 3.3 13.4 3.6
Diamond Offshore 89.8 9.2 220.2 14.5 161.3 10.3
Bulova 6.1 7.7 .1 5.3 .1
Corporate (176.1) 126.3 (183.8) 130.9 (288.4) 110.5
- ------------------------------------------------------------------------------
Total $ 305.5 $354.3 $ 354.5 $369.2 $ 495.3 $323.4
==============================================================================
</TABLE>
114
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Information called for by Part III has been omitted as Registrant intends to
file with the Securities and Exchange Commission not later than 120 days after
the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements:
The financial statements appear above under Item 8. The following additional
financial data should be read in conjunction with those financial statements.
Schedules not included with these additional financial data have been omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or notes to consolidated financial
statements.
<TABLE>
<CAPTION>
Page
2. Financial Statement Schedules: Number
------
<S> <C>
Independent Auditors' Report ......................................... L-1
Loews Corporation and Subsidiaries:
Schedule I-Condensed financial information of Registrant for the
years ended December 31, 1999, 1998 and 1997 ...................... L-2
Schedule II-Valuation and qualifying accounts for the years ended
December 31, 1999, 1998 and 1997 .................................. L-6
Schedule V-Supplemental information concerning property/casualty
insurance operations for the years ended December 31, 1999, 1998
and 1997 .......................................................... L-7
3. Exhibits:
Exhibit
Description Number
----------- -------
(3) Articles of Incorporation and By-Laws
Restated Certificate of Incorporation of the Registrant,
incorporated herein by reference to Exhibit 3 to Registrant's
Report on Form 10-Q for the quarter ended June 30, 1996 ....... 3.01
By-Laws of the Registrant as amended to date, incorporated
herein by reference to Exhibit 3.1 to Registrant's Report on
Form 10-Q for the quarter ended September 30, 1998 ............. 3.02
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
The Registrant hereby agrees to furnish to the Commission upon
request copies of instruments with respect to long-term debt,
pursuant to Item 601(b)(4)(iii) of Regulation S-K.
(10) Material Contracts
Employment Agreement between Registrant and Laurence A. Tisch
dated March 1, 1971 as amended through February 20, 1996 is
incorporated herein by reference to Exhibit 10.01 to
Registrant's Reports on Form 10-K for the years ended December
31, 1981, 1983, 1984, 1985, 1986, 1988, 1989, 1992, 1994, 1995
and 1998 ....................................................... 10.01
115
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
Employment Agreement dated as of March 1, 1988 between
Registrant and Preston R. Tisch as amended through February 20,
1996 is incorporated herein by reference to Exhibit 10.05 to
Registrant's Report on Form 10-K for the years ended December
31, 1987, 1989 and 1992 and to Exhibit 10.02 to Registrant's
Report on Form 10-K for the year ended December 31, 1994, 1995
and 1998 ....................................................... 10.02
Continuing Service Agreement between a subsidiary of Registrant
and Edward J. Noha, dated February 27, 1991 incorporated herein
by reference to Exhibit 10.04 to Registrant's Report on Form
10-K for the year ended December 31, 1990 ...................... 10.03
Loews Corporation Deferred Compensation Plan as amended and
restated as of December 31, 1995 is incorporated herein by
reference to Exhibit 10.05 to Registrant's Report on Form 10-K
for the year ended December 31, 1996 ........................... 10.04
Agreement between Fibreboard Corporation and Continental
Casualty Company, dated April 9, 1993 is incorporated herein by
reference to Exhibit A to Registrant's Report on Form 8-K filed
April 12, 1993 ................................................. 10.05
Settlement Agreement entered into on October 12, 1993 by and
among Fibreboard Corporation, Continental Casualty Company, CNA
Casualty Company of California, Columbia Casualty Company and
Pacific Indemnity Company is incorporated herein by reference to
Exhibit 99.1 to Registrant's Report on Form 10-Q for the quarter
ended September 30, 1993 ....................................... 10.06
Incentive Compensation Plan incorporated herein by reference to
Exhibit 10.15 to Registrant's Report on Form 10-K for the year
ended December 31, 1996 ........................................ 10.07
Comprehensive Settlement Agreement and Release with the State of
Florida to settle and resolve with finality all present and
future economic claims by the State and its subdivisions
relating to the use of or exposure to tobacco products,
incorporated herein by reference to Exhibit 10 to
Registrant's Report on Form 8-K filed September 5, 1997 ........ 10.08
Comprehensive Settlement Agreement and Release with the State
of Texas to settle and resolve with finality all present and
future economic claims by the State and its subdivisions
relating to the use of or exposure to tobacco products,
incorporated herein by reference to Exhibit 10 to Registrant's
Report on Form 8-K filed February 3, 1998 ...................... 10.09
State of Minnesota Settlement Agreement and Stipulation for
Entry of Consent Judgment to settle and resolve with finality
all claims of the State of Minnesota relating to the subject
matter of this action which have been or could have been
asserted by the State, incorporated herein by reference
to Exhibit 10.1 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.10
State of Minnesota Consent Judgment relating to the settlement
of tobacco litigation, incorporated herein by reference to
Exhibit 10.2 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.11
State of Minnesota Settlement Agreement and Release relating
to the settlement of tobacco litigation, incorporated herein
by reference to Exhibit 10.3 to Registrant's Report on Form
10-Q for the quarter ended March 31, 1998 ...................... 10.12
Agreement to Pay State of Minnesota Attorneys' Fees and Costs
relating to the settlement of tobacco litigation, incorporated
herein by reference to Exhibit 10.4 to Registrant's Report on
Form 10-Q for the quarter ended March 31, 1998 ................. 10.13
116
<CAPTION>
Exhibit
Description Number
----------- -------
<S> <C>
Agreement to Pay Blue Cross and Blue Shield of Minnesota
Attorneys' Fees and Costs relating to the settlement of
tobacco litigation, incorporated herein by reference to
Exhibit 10.5 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.14
State of Minnesota State Escrow Agreement relating to the
settlement of tobacco litigation, incorporated herein by
reference to Exhibit 10.6 to Registrant's Report on Form 10-Q
for the quarter ended March 31, 1998 ........................... 10.15
Stipulation of Amendment to Settlement Agreement and For Entry
of Agreed Order, dated July 2, 1998, regarding the settlement
of the State of Mississippi health care cost recovery action,
incorporated herein by reference to Exhibit 10.1 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.16
Mississippi Fee Payment Agreement, dated July 2, 1998,
regarding the payment of attorneys' fees, incorporated herein
by reference to Exhibit 10.2 to Registrant's Report on Form
10-Q for the quarter ended June 30, 1998 ....................... 10.17
Mississippi MFN Escrow Agreement, dated July 2, 1998,
incorporated herein by reference to Exhibit 10.3 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.18
Stipulation of Amendment to Settlement Agreement and For Entry
of Consent Decree, dated July 24, 1998, regarding the
settlement of the Texas health care cost recovery action,
incorporated herein by reference to Exhibit 10.4 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.19
Texas Fee Payment Agreement, dated July 24, 1998, regarding
the payment of attorneys' fees, incorporated herein by
reference to Exhibit 10.5 to Registrant's Report on Form 10-Q
for the quarter ended June 30, 1998 ............................ 10.20
Stipulation of Amendment to Settlement Agreement and For Entry
of Consent Decree, dated September 11, 1998, regarding the
settlement of the Florida health care cost recovery action,
incorporated herein by reference to Exhibit 10.1 to Registrant's
Report on Form 10-Q for the quarter ended September 30, 1998 ... 10.21
Florida Fee Payment Agreement, dated September 11, 1998,
regarding the payment of attorneys' fees, incorporated herein
by reference to Exhibit 10.2 to Registrant's Report on Form
10-Q for the quarter ended September 30, 1998 .................. 10.22
Master Settlement Agreement with 46 states, the District of
Columbia, the Commonwealth of Puerto Rico, Guam, the U.S.
Virgin Islands, American Samoa and the Northern Marianas to
settle the asserted and unasserted health care cost recovery
and certain other claims of those states, incorporated herein
by reference to Exhibit 10 to Registrant's Report on Form 8-K
filed November 25, 1998 ........................................ 10.23
Employment Agreement dated as of January 1, 1999 between
Registrant and Andrew H. Tisch is incorporated herein by
reference to Exhibit 10.31 to Registrant's Report on Form 10-K
for the year ended December 31, 1998 ........................... 10.24
Employment Agreement dated as of January 1, 1999 between
Registrant and James S. Tisch is incorporated herein by
reference to Exhibit 10.32 to Registrant's Report on Form 10-K
for the year ended December 31, 1998 ........................... 10.25
Employment Agreement dated as of January 1, 1999 between
Registrant and Jonathan M. Tisch is incorporated herein by
reference to Exhibit 10.33 to Registrant's Report on Form 10-K
for the year ended December 31, 1998 ........................... 10.26
117
Exhibit
Description Number
----------- -------
Continuing Services Agreement between a subsidiary of Registrant
and Dennis H. Chookaszian, dated February 9, 1999 incorporated
herein by reference to Exhibit 10.2 to CNA Financial
Corporation's (Commission File Number 1-5823) Report on Form
10-K for the year ended December 31, 1998 ...................... 10.27
Supplemental Retirement Agreement dated September 21, 1999
between Registrant and Arthur Rebell ........................... 10.28*
Loews Corporation 2000 Stock Option Plan is incorporated by
reference to Exhibit A to Registrant's Definitive Proxy
Statement filed on March 29, 2000 .............................. 10.29
(21) Subsidiaries of the Registrant
List of subsidiaries of Registrant ............................. 21.01*
(27) Financial Data Schedule ........................................ 27.01*
</TABLE>
* Filed herewith
(b) Reports on Form 8-K -- The Company filed a report on Form 8-K on October
19, 1999 stating that CNA Financial Corporation, an 86% owned subsidiary,
completed a previously announced transaction with The Allstate Corporation
involving CNA's personal lines insurance business.
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LOEWS CORPORATION
Dated: March 29, 2000 By /s/ Peter W. Keegan
-------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 29, 2000 By /s/ James S. Tisch
-------------------------------
(James S. Tisch, President
and Chief Executive Officer)
Dated: March 29, 2000 By /s/ Peter W. Keegan
-------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)
Dated: March 29, 2000 By /s/ Guy A. Kwan
-------------------------------
(Guy A. Kwan, Controller)
Dated: March 29, 2000 By /s/ Charles B. Benenson
-------------------------------
(Charles B. Benenson, Director)
Dated: March 29, 2000 By /s/ John Brademas
-------------------------------
(John Brademas, Director)
Dated: March 29, 2000 By /s/ Dennis H. Chookaszian
-------------------------------
(Dennis H. Chookaszian,
Director)
Dated: March 29, 2000 By /s/ Paul Fribourg
-------------------------------
(Paul Fribourg, Director)
119
By
-------------------------------
(Bernard Myerson, Director)
Dated: March 29, 2000 By /s/ Edward J. Noha
-------------------------------
(Edward J. Noha, Director)
Dated: March 29, 2000 By /s/ Gloria R. Scott
-------------------------------
(Gloria R. Scott, Director)
Dated: March 29, 2000 By /s/ Andrew H. Tisch
-------------------------------
(Andrew H. Tisch, Director)
Dated: March 29, 2000 By /s/ Jonathan M. Tisch
-------------------------------
(Jonathan M. Tisch, Director)
Dated: March 29, 2000 By /s/ Laurence A. Tisch
-------------------------------
(Laurence A. Tisch, Director)
Dated: March 29, 2000 By /s/ Preston R. Tisch
-------------------------------
(Preston R. Tisch, Director)
120
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Shareholders of Loews Corporation:
We have audited the accompanying consolidated balance sheets of Loews
Corporation and its subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedules listed in the Index at Item
14(a)2. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedules based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Loews Corporation and its
subsidiaries at December 31, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for liabilities related to insurance-related
assessments and accounting for start-up costs in 1999.
Deloitte & Touche LLP
New York, New York
February 24, 2000
L-1
SCHEDULE I
Condensed Financial Information of Registrant
LOEWS CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Current assets, principally investment in U.S.
government securities ............................. $ 2,879.5 $ 4,207.5
Investments in securities .......................... 407.6 411.3
Investments in capital stocks of subsidiaries, at
equity ............................................ 9,763.6 9,362.0
Other assets ....................................... 70.1 54.0
- ------------------------------------------------------------------------------
Total assets .................................. $13,120.8 $14,034.8
==============================================================================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Accounts payable and accrued liabilities ........... $ 299.6 $ 892.0
Securities sold under agreements to repurchase ..... 347.8 449.7
Long-term debt, less current maturities (a) ........ 2,288.6 2,286.3
Deferred income tax and other ...................... 207.1 205.6
- ------------------------------------------------------------------------------
Total liabilities ............................. 3,143.1 3,833.6
Shareholders' equity ............................... 9,977.7 10,201.2
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity .... $13,120.8 $14,034.8
==============================================================================
</TABLE>
L-2
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Revenues:
Equity in income of subsidiaries (b) . $ 867.2 $ 824.5 $1,329.9
Investment losses .................... (462.6) (545.5) (866.2)
Interest and other ................... 126.3 179.8 199.2
- ------------------------------------------------------------------------------
Total ............................. 530.9 458.8 662.9
- ------------------------------------------------------------------------------
Expenses:
Administrative ....................... 40.4 43.7 34.9
Interest ............................. 125.9 129.6 109.4
- ------------------------------------------------------------------------------
Total ............................. 166.3 173.3 144.3
- ------------------------------------------------------------------------------
364.6 285.5 518.6
Income tax benefit (c) ................. 156.5 179.3 275.0
- ------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles ...... 521.1
Cumulative effect of changes in
accounting principles-net ............. (157.9)
- ------------------------------------------------------------------------------
Net income ............................. $ 363.2 $ 464.8 $ 793.6
==============================================================================
</TABLE>
L-3
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Operating Activities:
Net income ............................ $ 363.2 $ 464.8 $ 793.6
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Cumulative effect of changes in
accounting principles .............. 157.9
Undistributed earnings of affiliates. (498.8) (276.8) (1,225.9)
Investment losses ................... 462.6 545.5 866.2
Provision for deferred income taxes . 119.0 (11.5) (78.3)
Changes in assets and liabilities-net:
Receivables ......................... (17.7) 3.6 (7.0)
Accounts payable and accrued
liabilities ........................ 6.0 2.2 (12.2)
Federal income taxes ................ (46.1) (198.3) 37.7
Trading securities .................. (759.0) (522.4) (682.4)
Other-net ........................... 5.0 .1 5.9
- ------------------------------------------------------------------------------
(207.9) 7.2 (302.4)
- ------------------------------------------------------------------------------
Investing Activities:
Investments in and advances to
subsidiaries ......................... (293.6) (292.3) (138.1)
Reduction of investments and advances
to subsidiaries ...................... 208.5 311.5 33.4
Net decrease in short-term investments,
primarily U.S. government securities . 1,057.6 6.7 53.7
Securities sold under agreements to
repurchase ........................... (101.9) 449.7 (447.8)
Change in other investments ........... 15.2 (2.5) (7.8)
- ------------------------------------------------------------------------------
885.8 473.1 (506.6)
- ------------------------------------------------------------------------------
Financing Activities:
Dividends paid to shareholders ........ (108.9) (114.6) (115.0)
Purchases of treasury shares .......... (601.6) (218.0)
Principal payments on long-term debt .. (117.8) (200.0)
Issuance of long-term debt ............ 1,129.3
- ------------------------------------------------------------------------------
(710.5) (450.4) 814.3
- ------------------------------------------------------------------------------
Net change in cash ...................... (32.6) 29.9 5.3
Cash, beginning of year ................. 43.0 13.1 7.8
- ------------------------------------------------------------------------------
Cash, end of year ....................... $ 10.4 $ 43.0 $ 13.1
==============================================================================
</TABLE>
L-4
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
- --------------
Notes:
(a) Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
6.8% notes due 2006 (effective interest rate
of 6.8%) (authorized, $300) ................ $ 300.0 $ 300.0
3.1% exchangeable subordinated notes due 2007
(effective interest rate of 3.4%)
(authorized $1,150) (1) .................... 1,150.0 1,150.0
8.9% debentures due 2011 (effective interest
rate of 9.0%) (authorized, $175) ........... 175.0 175.0
7.6% notes due 2023 (effective interest rate
of 7.8%) (authorized, $300) (2) ............ 300.0 300.0
7% notes due 2023 (effective interest rate of
7.2%) (authorized, $400) (3) ............... 400.0 400.0
- ------------------------------------------------------------------------------
2,325.0 2,325.0
Less unamortized discount ................... 36.4 38.7
- ------------------------------------------------------------------------------
$2,288.6 $2,286.3
==============================================================================
(1) Redeemable in whole or in part at September 15, 2002 at 101.6%, and
decreasing percentages thereafter. The notes are exchangeable into
15.376 shares of Diamond Offshore's common stock per $1,000
principal amount of notes, at a price of $65.04 per share.
(2) Redeemable in whole or in part at June 1, 2003 at 103.8%, and
decreasing percentages thereafter.
(3) Redeemable in whole or in part at October 15, 2003 at 102.4%, and
decreasing percentages thereafter.
</TABLE>
(b) Cash dividends paid to the Company by affiliates amounted to $368.4,
$547.1 and $113.2 for the years ended December 31, 1999, 1998 and 1997,
respectively.
(c) The Company is included in a consolidated federal income tax return with
certain of its subsidiaries and, accordingly, participates in the allocation
of certain components of the consolidated provision for federal income taxes.
Such taxes are generally allocated on a separate return bases.
The Company has entered into separate tax allocation agreements with Bulova
and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiaries"). Each agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the
Company's return, or (ii) be paid by the Subsidiary an amount, if any, equal
to the federal income tax which would have been payable by the Subsidiary if
it had filed a separate consolidated return. Under these agreements, CNA will
receive approximately $288.0 and $83.0 for 1999 and 1998 and has paid Loews
approximately $210.0 for 1997, respectively, and Bulova will pay or has paid
Loews approximately $6.3, $5.6 and $2.6 for 1999, 1998 and 1997, respectively.
Each agreement may be canceled by either of the parties upon thirty days'
written notice. See Note 8 of the Notes to Consolidated Financial Statements
of Loews Corporation and subsidiaries included in Item 8.
L-5
SCHEDULE II
LOEWS CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------------------------------------------------------
(In millions)
<CAPTION>
For the Year Ended December 31, 1999
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 1.6 $156.8 $155.7(1) $ 2.7
Allowance for
doubtful accounts 342.2 13.2 21.3 334.1
------------------------------------------------------
Total .......... $ 343.8 $170.0 $177.0 $336.8
======================================================
<CAPTION>
For the Year Ended December 31, 1998
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 1.4 $109.8 $109.6(1) $ 1.6
Allowance for
doubtful accounts 316.6 35.6 10.0 342.2
------------------------------------------------------
Total .......... $ 318.0 $145.4 $119.6 $343.8
======================================================
<CAPTION>
For the Year Ended December 31, 1997
<S> <C> <C> <C> <C>
Deducted from assets:
Allowance for
discounts ......... $ 1.4 $ 93.0 $ 93.0(1) $ 1.4
Allowance for
doubtful accounts 290.0 30.6 4.0 316.6
------------------------------------------------------
Total .......... $ 291.4 $123.6 $ 97.0 $318.0
======================================================
- --------------
Notes: (1) Discounts allowed.
</TABLE>
L-6
SCHEDULE V
LOEWS CORPORATION AND SUBSIDIARIES
Supplemental Information Concerning Property/Casualty Insurance Operations
<TABLE>
<CAPTION>
Consolidated Property/Casualty Entities
- ------------------------------------------------------------------------------
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Deferred policy acquisition costs .... $ 1,126 $ 1,279 $ 1,162
Reserves for unpaid claim and claim
adjustment expenses ................. 26,631 28,317 28,533
Discount deducted from claim and
claim adjustment expenses reserves
above (based on interest rates
ranging from 3.5% to 7.5%) .......... 2,376 2,380 2,409
Unearned premiums .................... 5,103 5,039 4,700
Earned premiums ...................... 9,901 10,079 9,927
Net investment income ................ 1,648 1,731 1,790
Incurred claim and claim adjustment
expenses related to current year .... 7,287 7,903 7,942
Incurred claim and claim adjustment
expenses related to prior years ..... 1,027 263 (256)
Amortization of deferred policy
acquisition costs ................... 2,004 2,042 2,017
Paid claim and claim expenses ........ 9,964 8,745 8,376
Net premiums written ................. 8,987 10,569 10,186
L-7
</TABLE>
Exhibit 10.28
SUPPLEMENTAL RETIREMENT AGREEMENT
---------------------------------
AGREEMENT made on September 21, 1999 between LOEWS CORPORATION (the
--
"Company") and Arthur Rebell the "Executive").
WITNESSETH:
WHEREAS, the Executive is currently serving as an executive employee of the
Company, and the Company and the Executive desire that the Executive's
retirement benefits be supplemented on the terms and conditions set forth
herein.
NOW, THEREFORE, the parties agree as follows:
1. In connection with his employment by the Company, the Executive shall be
entitled to the following, in addition to his compensation and benefits:
(a) An account (the "Account") shall be established for the Executive
(which shall not be funded) which shall be credited each year
commencing in 1999. The Executive shall become eligible and vested
in the Account as of January 1, 1999. The Account shall be credited
on the last day of each calendar year with the Pay-Based Credit
which would have been credited under Section 3.2 of the Loews
Corporation Cash Balance Plan (the "Plan") if the definition of
Compensation under Section 1.9 of the Plan had not included the
second sentence thereof.
(b) The Account shall be credited with an initial balance in the amount
of $500,000 on June 30, 1999.
(c) The amount credited under paragraph (1)(b) above will be deemed to
be Compensation under paragraph 1 and eligible for a Pay-Based
Credit for calendar year 1999.
(d) The Account shall be credited on the last day of each calendar year
with the Interest Credit which would have been credited under
Section 3.3 of the Plan. It is intended that the Account shall
receive one half year's Interest Credit on the last day of calendar
year 1999 for the initial balance of $500,000 for the calendar year
1999.
(e) The Account shall be accumulated until the Executive's termination
of employment. At such time, the amount in the Account shall be
converted into an actuarially equivalent annuity, payable at the
Executive's election in the form of a single life annuity, a joint
and survivor annuity, or a 10 year certain annuity, payable
monthly. For purposes of this Agreement, the term "actuarial
equivalent" shall have the meaning ascribed to it in Section 1.3 of
the Plan.
2. In lieu of the benefits due under the preceding paragraphs, the
Executive may request (at least one year prior to retirement) to receive the
accumulated balance in the Account as a lump sum upon retirement, provided
that such request is approved by the Chief Executive Officer of the Company.
3. If the Executive should die before payments have commenced under the
preceding paragraphs, and in lieu of the benefits due under the preceding
paragraphs, the accumulated balance in the Account shall be paid as soon as
practicable after the Executive's death to his wife, Adele, if living, and if
not, then to the Arabel Foundation, Inc., a New York Corporation. The
Executive may revoke such beneficiary designation and designate a new
beneficiary or beneficiaries by giving written notice as provided in
2
Paragraph 5 below. Such alternative beneficiary designation must be received
prior to the Executive's death.
4. The amount of any payments under the preceding paragraphs shall be
reduced by that portion of any benefits payable under the Plan and under the
Loews Corporation Benefit Equalization Plan which are attributable to the same
compensation. Thus, for example, if the Executive becomes vested under the
Plan, Pay-Based Credits to the Account (and Interest Credits thereon) under
paragraph (1)(a) of this Agreement based on the amount of duplicated
compensation would be deemed eliminated.
5. All notices, requests, designations and other communications provided
for by this Agreement shall be in writing and shall be personally delivered or
mailed by registered or certified mail to the address of the party to whom
intended as specified below or notice sent in accordance with this Paragraph.
If to the Company, at:
667 Madison Avenue
New York, N.Y. 10021
Attention: Corporate Secretary
If to the Executive, at:
372 Canterbury Lane
Wyckoff, N.J. 07481
Any such writings shall be effective upon receipt.
6. This Agreement sets forth the entire understanding between the parties
with respect to the subject matter hereof and supersedes all prior
understandings and agreements. No change, termination or waiver of any of the
provisions hereof shall be binding unless in writing and signed by the party
against whom the same is sought to be
3
enforced. The Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be duly
executed as of the day and year first above written.
LOEWS CORPORATION
By: /s/ James S. Tisch
---------------------
Accepted and Agreed to:
/s/ Arthur L. Rebell
- --------------------------
The Executive
4
Exhibit 21.01
LOEWS CORPORATION
Subsidiaries of the Registrant
December 31, 1999
<TABLE>
<CAPTION>
Organized Under
Name of Subsidiary Laws of Business Names
------------------ --------------- ----------------
<S> <C> <C>
CNA Financial Corporation ............. Delaware )
Continental Casualty Company ......... Illinois )
Continental Assurance Company ....... Illinois )
National Fire Insurance Company of )
Hartford ........................... Connecticut )
American Casualty Company of )
Reading, Pennsylvania .............. Pennsylvania ) CNA Insurance
CNA Surety Corporation .............. Delaware )
The Continental Corporation .......... New York )
The Buckeye Union Insurance Company . Ohio )
Firemen's Insurance Company of )
Newark, New Jersey ................. New Jersey )
The Continental Insurance Company ... New Hampshire )
Continental Insurance Company of )
New Jersey ......................... New Jersey )
Lorillard, Inc. ....................... Delaware ) Lorillard
Lorillard Tobacco Company ............ Delaware )
Diamond Offshore Drilling, Inc. ....... Delaware Diamond Offshore
</TABLE>
The names of certain subsidiaries which, if considered as a single
subsidiary, would not constitute a "significant subsidiary" as defined in
Regulation S-X, have been omitted.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 183,900
<SECURITIES> 39,265,700
<RECEIVABLES> 13,865,500
<ALLOWANCES> 336,800
<INVENTORY> 307,900
<CURRENT-ASSETS> 0
<PP&E> 4,626,000
<DEPRECIATION> 1,673,300
<TOTAL-ASSETS> 69,463,700
<CURRENT-LIABILITIES> 0
<BONDS> 5,706,300
0
0
<COMMON> 104,500
<OTHER-SE> 9,873,200
<TOTAL-LIABILITY-AND-EQUITY> 69,463,700
<SALES> 4,125,300
<TOTAL-REVENUES> 21,465,200
<CGS> 2,116,400
<TOTAL-COSTS> 16,185,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 354,300
<INCOME-PRETAX> 944,200
<INCOME-TAX> 305,500
<INCOME-CONTINUING> 521,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (157,900)
<NET-INCOME> 363,200
<EPS-BASIC> 3.35
<EPS-DILUTED> 3.35
</TABLE>
