==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO 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)
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its Annual Report on Form 10-K for the year
ended December 31, 1999 as set forth in the pages attached hereto.
Part I: Item 1. Business.
(To correct Schedule of Property/Casualty Loss Reserve
Development on Page 11)
==============================================================================
1
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.
2
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
3
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
4
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
5
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.
6
(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.
7
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.
8
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.
9
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.
10
<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 ...... - - - - 20,812 21,639 31,044 29,357 28,533 28,317 26,631
Ceded recoverable ..... - - - - 2,491 2,705 6,089 5,660 5,326 5,424 5,489
- -----------------------------------------------------------------------------------------------------------
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 21,142
- ------------------------------------------------------------------------------------------------------------
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 7,321 -
Two years later ..... 4,724 5,623 6,024 6,354 6,143 7,087 10,485 9,796 11,394 - -
Three years later ... 6,294 7,490 7,946 8,121 8,764 9,195 13,363 13,602 - - -
Four years later .... 7,534 8,845 9,218 10,241 10,318 10,624 16,271 - - - -
Five years later .... 8,485 9,726 10,950 11,461 11,378 12,577 - - - - -
Six years later ..... 9,108 11,207 11,951 12,308 13,100 - - - - - -
Seven years later ... 10,393 12,023 12,639 13,974 - - - - - - -
Eight years later ... 11,086 12,592 14,271 - - - - - - - -
Nine years later .... 11,563 14,159 - - - - - - - - -
Ten years later ..... 13,035 - - - - - - - - - -
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 21,142
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 23,717 - -
Three years later ... 13,098 15,737 16,944 17,823 17,868 18,008 23,814 23,270 - - -
Four years later .... 14,118 15,977 17,376 17,765 17,511 17,354 24,092 - - - -
Five years later .... 14,396 16,440 17,329 17,560 17,082 17,506 - - - - -
Six years later ..... 14,811 16,430 17,293 17,285 17,176 - - - - - -
Seven years later ... 14,810 16,551 17,069 17,398 - - - - - - -
Eight years later ... 14,995 16,487 17,189 - - - - - - - -
Nine years later .... 14,973 16,592 - - - - - - - - -
Ten years later ..... 15,091 - - - - - - - - - -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (3,824) (3,502) (2,774) (231) 1,145 1,428 863 427 (510) (1,027) -
===========================================================================================================
Reconciliation to
gross re-estimated
reserves:
Net reserves
re-estimated ...... 15,091 16,592 17,189 17,398 17,176 17,506 24,092 23,270 23,717 23,920 -
Re-estimated ceded
recoverable ....... - - - - 1,547 1,858 6,020 5,285 4,547 4,472 -
- -----------------------------------------------------------------------------------------------------------
Total gross
re-estimated reserves 15,091 16,592 17,189 17,398 18,723 19,364 30,112 28,555 28,264 28,392 -
===========================================================================================================
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 ........ 650 835 1,476 2,288 2,623 2,703 1,871 1,473 434 (551) -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (3,824) (3,502) (2,774) (231) 1,145 1,428 863 427 (510) (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.
(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.
11
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.
12
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>
13
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;
14
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
15
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.
16
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>
17
- ---------------
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>
18
- -------------
(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.
19
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
20
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
21
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.
22
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.
23
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: April 18, 2000 By /s/ Peter W. Keegan
-------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)
24
