EXHIBIT 99
LOEWS CORPORATION
and SUBSIDIARIES
Consolidated Financial Statements as of
December 31, 1999 and 1998 and for Each of the
Three Years in the Period Ended December 31, 1999
Independent Auditors' Report
The Board of Directors and Shareholders of Loews Corporation:
We have audited the accompanying consolidated balance sheets of Loews
Corporation and its subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Loews Corporation and its
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for liabilities related to insurance-related
assessments and accounting for start-up costs in 1999.
/s/ Deloitte & Touche LLP
New York, New York
February 24, 2000
1
Consolidated Balance Sheets
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Assets:
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December 31 1999 1998
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(Amounts in millions of dollars)
Investments (Notes 1, 2, 3 and 4):
Fixed maturities, amortized cost of $28,637.7
and $30,850.3 $27,924.4 $31,409.4
Equity securities, cost of $1,870.2 and $1,624.7 4,023.5 2,380.7
Other investments 1,367.3 1,123.0
Short-term investments 7,317.8 7,792.1
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Total investments 40,633.0 42,705.2
Cash 183.9 287.4
Receivables-net (Notes 1 and 5) 13,528.7 13,087.4
Property, plant and equipment-net (Notes 1 and 6) 2,952.7 2,848.3
Deferred income taxes (Note 8) 773.9 872.6
Goodwill and other intangible assets-net (Note 1) 409.5 489.4
Other assets (Notes 1, 12, 14 and 17) 3,943.3 3,064.1
Deferred policy acquisition costs of insurance
subsidiaries (Note 1) 2,435.6 2,422.2
Separate Account business (Notes 1 and 3) 4,603.1 5,202.8
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Total assets $69,463.7 $70,979.4
==============================================================================
See Notes to Consolidated Financial Statements.
2
Consolidated Balance Sheets
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Liabilities and Shareholders' Equity:
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December 31 1999 1998
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(Amounts in millions of dollars)
Insurance reserves (Notes 1 and 7):
Claim and claim adjustment expense $27,355.9 $29,153.7
Future policy benefits 5,995.8 5,352.0
Unearned premiums 5,103.1 5,039.4
Policyholders' funds 709.9 855.4
- ------------------------------------------------------------------------------
Total insurance reserves 39,164.7 40,400.5
Payable for securities purchased (Note 4) 516.6 1,160.8
Securities sold under agreements to repurchase
(Notes 1 and 2) 1,647.3 579.5
Long-term debt, less unamortized discount
(Notes 3 and 9) 5,706.3 5,966.7
Other liabilities (Notes 1, 3 and 14) 5,497.7 4,990.6
Separate Account business (Notes 1 and 3) 4,603.1 5,202.8
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Total liabilities 57,135.7 58,300.9
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Minority interest 2,350.3 2,477.3
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Commitments and contingent liabilities
(Notes 1, 2, 4, 7, 8, 9, 10, 12, 13, 14, 17 and 18)
Shareholders' equity (Notes 1, 2, 9 and 11):
Common stock, $1 par value:
Authorized - 400,000,000 shares
Issued and outstanding - 104,480,600 and
112,582,300 shares 104.5 112.6
Additional paid-in capital 150.7 162.3
Earnings retained in the business 8,705.9 9,033.5
Accumulated other comprehensive income 1,016.6 892.8
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Total shareholders' equity 9,977.7 10,201.2
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Total liabilities and shareholders' equity $69,463.7 $70,979.4
==============================================================================
3
Consolidated Statements of Income
Year Ended December 31 1999 1998 1997
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(Amounts in millions, except per share data)
Revenues (Note 1):
Insurance premiums (Note 17) $13,276.7 $13,530.1 $13,620.0
Investment income, net of expenses
(Note 2) 2,332.5 2,408.3 2,442.0
Investment (losses) gains (Note 2) (158.2) 135.7 (252.5)
Gains on issuance of subsidiaries'
stock (Note 15) 124.3
Manufactured products (including excise
taxes of $512.6, $495.3 and $491.0) 4,125.3 2,936.6 2,514.4
Other 1,888.9 2,285.3 1,818.4
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Total 21,465.2 21,296.0 20,266.6
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Expenses (Note 1):
Insurance claims and policyholders'
benefits (Notes 7 and 17) 11,926.1 11,846.9 11,395.7
Amortization of deferred policy
acquisition costs 2,142.6 2,180.2 2,138.2
Cost of manufactured products sold
(Note 18) 2,116.4 1,027.7 1,024.5
Other operating expenses 3,981.6 4,215.6 3,592.8
Tobacco litigation settlements (Note 18) 579.0 198.8
Interest 354.3 369.2 323.4
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Total 20,521.0 20,218.6 18,673.4
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944.2 1,077.4 1,593.2
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Income taxes (Note 8) 305.5 354.5 495.3
Minority interest 117.6 258.1 304.3
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Total 423.1 612.6 799.6
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Income before cumulative effect of changes
in accounting principles 521.1 464.8 793.6
Cumulative effect of changes in accounting
principles-net (Note 1) (157.9)
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Net income $ 363.2 $ 464.8 $ 793.6
==============================================================================
Net income per share (Note 11):
Income before cumulative effect of changes
in accounting principles $ 4.80 $ 4.06 $ 6.90
Cumulative effect of changes in accounting
principles-net (1.45)
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Net income $ 3.35 $ 4.06 $ 6.90
==============================================================================
See Notes to Consolidated Financial Statements.
4
Consolidated Statement of Shareholders' Equity
Earnings Accumulated
Additional Retained Other Common
Comprehensive Common Paid-in in the Comprehensive Stock Held
Income Stock Capital Business Income in Treasury Total
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(Amounts in millions)
Balance, December 31,
1996 $115.0 $165.8 $8,216.8 $ 233.6 $8,731.2
Comprehensive income:
Net income $ 793.6 793.6 793.6
Other comprehensive
income (Note 11) 255.3 255.3 255.3
--------
Comprehensive income $1,048.9
========
Dividends paid, $1.00
per share (115.0) (115.0)
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Balance, December 31,
1997 115.0 165.8 8,895.4 488.9 9,665.1
Comprehensive income:
Net income $ 464.8 464.8 464.8
Other comprehensive
income (Note 11) 403.9 403.9 403.9
--------
Comprehensive income $ 868.7
========
Dividends paid, $1.00
per share (114.6) (114.6)
Purchases of common
stock $(218.0) (218.0)
Retirement of treasury
stock (2.4) (3.5) (212.1) 218.0
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Balance, December 31,
1998 112.6 162.3 9,033.5 892.8 10,201.2
Comprehensive income:
Net income $ 363.2 363.2 363.2
Other comprehensive
income (Note 11) 123.8 123.8 123.8
--------
Comprehensive income $ 487.0
========
Dividends paid, $1.00
per share (108.9) (108.9)
Purchases of common
stock (601.6) (601.6)
Retirement of treasury
stock (8.1) (11.6) (581.9) 601.6
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Balance, December 31,
1999 $104.5 $150.7 $8,705.9 $1,016.6 $9,977.7
================================================================================================
See Notes to Consolidated Financial Statements.
5
Consolidated Statements of Cash Flows
Year Ended December 31 1999 1998 1997
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(Amounts in millions)
Operating Activities:
Net income $ 363.2 $ 464.8 $ 793.6
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of changes in
accounting principles 157.9
Investment losses (gains) 158.2 (135.7) 128.2
Provision for minority interest 117.6 258.1 304.3
Amortization of investments (97.3) (217.3) (115.2)
Depreciation and amortization 395.3 437.0 341.7
Provision for deferred income taxes 153.5 51.8 59.3
Changes in assets and liabilities-net:
Reinsurance receivables (1,128.5) (837.5) 473.0
Other receivables 678.7 (122.9) (209.7)
Prepaid reinsurance premiums (1,145.3) (120.8) 93.5
Deferred policy acquisition costs 1.2 (280.5) (287.5)
Insurance reserves and claims (1,189.9) 586.3 (133.5)
Other liabilities 397.7 298.9 (485.5)
Trading securities (759.0) (545.7) (682.4)
Other-net 119.8 (72.7) (36.0)
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(1,776.9) (236.2) 243.8
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Investing Activities:
Purchases of fixed maturities (58,532.7) (70,141.5) (47,434.7)
Proceeds from sales of fixed maturities 57,211.8 66,429.6 43,997.0
Proceeds from maturities of fixed
maturities 2,995.5 3,564.0 2,996.9
Purchases of equity securities (1,575.4) (1,072.6) (1,332.3)
Proceeds from sales of equity securities 1,803.4 850.8 1,405.9
Purchases of property and equipment (708.2) (644.0) (702.4)
Securities sold under agreements to
repurchase 1,067.8 426.8 (395.5)
Change in short-term investments 303.4 786.6 (207.4)
Change in other investments 182.4 192.9 390.5
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2,748.0 392.6 (1,282.0)
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6
Consolidated Statements of Cash Flows
Year Ended December 31 1999 1998 1997
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(Amounts in millions)
Financing Activities:
Dividends paid to shareholders $ (108.9) $ (114.6) $ (115.0)
Dividends paid to minority interests (40.1) (40.7) (16.0)
Purchases of treasury shares (601.6) (218.0)
Purchases of treasury shares by
subsidiaries (191.1)
Principal payments on long-term debt (478.1) (861.9) (271.4)
Issuance of long-term debt 225.1 1,073.8 1,661.0
Change in short-term debt (10.0)
Receipts credited to policyholders 7.0 6.2 6.6
Withdrawals of policyholder account
balances (78.0) (20.5) (24.9)
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(1,074.6) (366.8) 1,230.3
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Net change in cash (103.5) (210.4) 192.1
Cash, beginning of year 287.4 497.8 305.7
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Cash, end of year $ 183.9 $ 287.4 $ 497.8
==============================================================================
See Notes to Consolidated Financial Statements.
7
Note 1. Summary of Significant Accounting Policies-
Principles of consolidation - The consolidated financial statements include
all significant subsidiaries and all material intercompany accounts and
transactions have been eliminated. Unless the context otherwise requires, the
term "Company" means Loews Corporation and its consolidated subsidiaries. The
equity method of accounting is used for investments in associated companies in
which the Company generally has an interest of 20% to 50%.
Accounting estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and the related notes. Actual results could differ from
those estimates.
Accounting changes - Effective January 1, 1999, the Company adopted the
AICPA's Accounting Standards Executive Committee Statement of Position ("SOP")
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," and SOP 98-5, "Reporting on the Costs of Start-Up Activities."
SOP 97-3 requires insurance companies to recognize liabilities for
insurance-related assessments when an assessment has been imposed or it is
probable that it will be imposed, when it can be reasonably estimated, and
when the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial statements. The Company
had previously accounted for these assessments as they were paid.
SOP 98-5 requires costs of start-up activities and organization costs, as
defined, to be expensed as incurred. The Company had previously deferred
recognition of these costs and amortized them over a period following the
completion of the start-up activities. The Company does not expect the
ongoing effect of adopting SOP 98-5 to have a material impact on its results
of operations.
The pro forma effect of adoption on reported results for prior periods is not
significant.
The cumulative effect of these accounting changes resulted in a charge as
follows:
Accounting by Insurance and Other Enterprises for Insurance-
Related Assessments (net of income taxes and minority interest
of $95.4 and $26.5) $150.8
Costs of Start-Up Activities (net of income taxes of $3.8) 7.1
------
$157.9
======
Investments - Investments in securities, which are held principally by
insurance subsidiaries of CNA Financial Corporation ("CNA"), an 86.5% owned
subsidiary, are carried as follows:
The Company classifies fixed maturity securities (bonds and redeemable
preferred stocks) and equity securities held by insurance subsidiaries as
available-for-sale, and are carried at fair value. Changes in fair value are
recorded as a component of accumulated other comprehensive income in
shareholders' equity, net of applicable deferred income taxes and
participating policyholders' and minority interests. The amortized cost of
fixed maturity securities is adjusted for amortization of premiums and
accretion of discounts to maturity, and amortization and accretion are
included in investment income.
Equity securities in the parent company's investment portfolio are classified
as trading securities in order to reflect the Company's investment philosophy.
These investments are carried at fair value with the net unrealized gain or
loss included in the income statement.
Derivative instruments are generally held for trading purposes and, as such,
are marked to market. Changes in fair value are included in investment gains
or losses in the income statement. Interest rate swaps which are used to
manage the Company's exposure to variable rate long-term debt are not
considered held for trading purposes. Such swaps are accounted for on an
accrual basis and are included in the income statement as an adjustment to
interest expense.
Short-term investments consist primarily of U.S. government securities,
repurchase agreements and commercial paper. These investments are carried at
fair value, which approximates amortized cost.
8
All securities transactions are recorded on the trade date. The cost of
securities sold is determined by the identified certificate method.
Investments are written down to estimated fair values, and losses are charged
to income when a decline in value is considered to be other than temporary.
Other invested assets consist primarily of investments in joint ventures,
limited partnerships, certain derivative securities and other investments. The
joint ventures and limited partnerships are carried at the Company's equity in
the investees' net assets.
Securities sold under agreements to repurchase - The Company lends securities
to unrelated parties, primarily major brokerage firms. Borrowers of these
securities must deposit collateral with the Company equal to 100% of the fair
value of these securities if the collateral is cash, or 102%, if the
collateral is securities. Cash deposits from these transactions are invested
in short-term investments (primarily U.S. government securities and commercial
paper) and a liability is recognized for the obligation to return the
collateral. The Company continues to receive the interest on loaned debt
securities, as beneficial owner, and accordingly, loaned debt securities are
included in fixed maturity securities.
Restricted investments - On December 30, 1993, CNA deposited $986.8 in an
escrow account pursuant to the Fibreboard Global Settlement Agreement. The
majority of the funds are included in short-term investments and are invested
primarily in U.S. treasury securities. The escrow account amounted to $36.0
and $1,130.0 at December 31, 1999 and 1998, respectively. During 1999, CNA
paid approximately $1,100.0 from escrow to the Fibreboard Trust, which was
established to administer claims pursuant to the Trilateral Agreement as
discussed in Note 18.
Insurance Operations - Premium revenues - Insurance premiums on property and
casualty and accident and health insurance contracts are earned ratably over
the terms of the policies after provision for estimated adjustments on
retrospectively rated policies and deductions for ceded insurance. Revenues on
universal life-type contracts are comprised of contract charges and fees,
which are recognized over the coverage period. Other life insurance premiums
and annuities are recognized as revenue when due after deductions for ceded
insurance premiums.
Claim and claim adjustment expense reserves - Claim and claim adjustment
expense reserves, except reserves for structured settlements, workers'
compensation lifetime claims and accident and health disability claims, are
not discounted and are based on (i) case basis estimates for losses reported
on direct business, adjusted in the aggregate for ultimate loss expectations,
(ii) estimates of unreported losses, (iii) estimates of losses on assumed
insurance, (iv) estimates of future expenses to be incurred in settlement of
claims, and (v) estimates of claim recoveries, exclusive of reinsurance
recoveries, which are reported as an asset. Management considers current
conditions and trends as well as past company and industry experience in
establishing these estimates. The effects of inflation, which can be
significant, are implicitly considered in the reserving process and are part
of the recorded reserve balance.
Claim and claim adjustment expense reserves represent management's estimates
of ultimate liabilities based on currently available facts and case law and
the ultimate liability may vary significantly from such estimates. CNA
regularly reviews its reserves, and any adjustments to the previously
established reserves are recognized in operating income in the period the need
for such adjustments becomes apparent. See Note 7 for a further discussion of
claim and claim adjustment expense reserves.
Structured settlements have been negotiated for claims on certain property and
casualty insurance policies. Structured settlements are agreements to provide
fixed periodic payments to claimants. Certain structured settlements are
funded by annuities purchased from CNA's life insurance subsidiary for which
the related annuity obligations are recorded in future policy benefits
reserves. Obligations for structured settlements not funded by annuities are
included in claim and claim adjustment expense reserves and carried at present
values determined using interest rates ranging from 6.0% to 7.5%. At December
31, 1999 and 1998, the discounted reserves for unfunded structured settlements
were $883.0 and $893.0, respectively (net of discounts of $1,483.0 and
$1,511.0, respectively).
Workers' compensation lifetime claim reserves and accident and health
disability claim reserves are calculated using mortality and morbidity
assumptions based on CNA's and industry experience, and are discounted at
interest rates allowed by insurance regulators that range from 3.5% to 6.0%.
At December 31, 1999 and 1998,
9
such discounted reserves totaled $2,174.0 and $2,277.0, respectively (net of
discounts of $893.0 and $869.0, respectively).
Future policy benefits reserves - Reserves for traditional life insurance
products (whole and term life products) are computed using the net level
premium method, which incorporates actuarial assumptions as to interest rates,
mortality, morbidity, withdrawals and expenses. Actuarial assumptions
generally vary by plan, age at issue and policy duration and include a margin
for adverse deviation. Interest rates range from 3.0% to 9.0%, and mortality,
morbidity and withdrawal assumptions are based on CNA and industry experience
prevailing at the time of issue. Expense assumptions include the estimated
effects of inflation and expenses to be incurred beyond the premium paying
period. Reserves for universal life-type contracts are equal to the account
balances that accrue to the benefit of the policyholders. Interest crediting
rates ranged from 4.5% to 7.3% for the three years ended December 31, 1999.
Involuntary risks - CNA's participation in involuntary risk pools is mandatory
and generally a function of its proportionate share of the voluntary market,
by line of insurance, in each state in which it does business. Effective
January 1, 1999, in accordance with SOP 97-3, CNA records assessments for
insolvencies when an assessment is probable and will be imposed, when it can
be reasonably estimated, and when the event obligating the entity to pay an
imposed or probable assessment has occurred on or before the date of the
financial statements. CNA had previously accounted for these assessments as
they were paid.
Reinsurance - CNA assumes and cedes insurance with other insurers and
reinsurers and members of various reinsurance pools and associations. CNA
utilizes reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of
each product line and CNA's retained amount varies by type of coverage.
Generally, property risks are reinsured on an excess of loss, per risk basis.
Liability coverages are generally reinsured on a quota share basis in excess
of CNA's retained risk. CNA's life reinsurance includes coinsurance, yearly
renewable term and facultative programs.
Amounts recoverable from reinsurers are estimated in a manner consistent with
claim and claim adjustment expense reserves or future policy benefits
reserves, and reported as a receivable in the Consolidated Balance Sheets.
Deferred policy acquisition costs - Costs of acquiring property and casualty
insurance business, which vary with and are primarily related to the
production of such business, are deferred and amortized ratably over the
period the related premiums are recognized. Such costs include commissions,
premium taxes, and certain underwriting and policy issuance costs. Anticipated
investment income is considered in the determination of the recoverability of
deferred policy acquisition costs.
Life acquisition costs are capitalized and amortized based on assumptions
consistent with those used for computing future policy benefits reserves.
Acquisition costs on traditional life business are amortized over the assumed
premium paying periods. Universal life and annuity acquisition costs are
amortized in proportion to the present value of estimated gross profits over
the products' assumed durations. To the extent that unrealized gains or losses
on available-for-sale securities would result in an adjustment of deferred
policy acquisition costs, had those gains or losses actually been realized, an
adjustment to deferred policy acquisition costs is recorded to unrealized
investment gains or losses which are included in accumulated other
comprehensive income and reported as a component of shareholders' equity.
Separate Account business - CNA's life insurance subsidiary, Continental
Assurance Company ("CAC"), writes investment and annuity contracts. The
supporting assets and liabilities of certain of these contracts are legally
segregated and reported in the accompanying Consolidated Balance Sheets as
assets and liabilities of Separate Account business. CAC guarantees principal
and a specified return to the contract holders on approximately 53% and 64% of
the Separate Account business at December 31, 1999 and 1998, respectively.
Substantially all assets of the Separate Account business are carried at fair
value. Separate Account liabilities are carried at contract values.
Statutory accounting practices - CNA's insurance subsidiaries are domiciled in
various jurisdictions. These subsidiaries prepare statutory financial
statements in accordance with accounting practices prescribed or otherwise
permitted by their respective jurisdiction's insurance regulators. Prescribed
statutory accounting practices are set forth in a variety of publications of
the National Association of Insurance Commissioners, as well as state laws,
regulations and general administrative rules. CNA has no material permitted
accounting practices.
10
Statutory capital and surplus - Combined statutory capital and surplus and net
income, determined in accordance with accounting practices prescribed by the
regulations and statutes of various insurance regulators, for property and
casualty and life insurance subsidiaries, are as follows:
Statutory Capital
and Surplus Statutory Net Income (Loss)
-------------------- ---------------------------
December 31 Year Ended December 31
-------------------- ---------------------------
1999 1998 1999 1998 1997
- ---------------------------------------------------------------- ---------------------------
Property and casualty companies* $8,679.0 $7,593.0 $361.0 $161.0 $1,043.0
Life insurance companies 1,222.0 1,109.0 77.0 (57.0) 43.0
- -------------------------------------------------------------------------------------------------
*Surplus includes property and casualty companies' ownership in life insurance
subsidiaries.
Inventories-
Tobacco products - These inventories, aggregating $230.6 and $221.6 at
December 31, 1999 and 1998, respectively, are stated at the lower of cost or
market, using the last-in, first-out (LIFO) method and primarily consist of
leaf tobacco. If the average cost method of accounting had been used for
tobacco inventories instead of the LIFO method, such inventories would have
been $212.6 and $215.5 higher at December 31, 1999 and 1998, respectively.
Watches and clocks - These inventories, aggregating $36.8 and $38.9 at
December 31, 1999 and 1998, respectively, are stated at the lower of cost or
market, using the first-in, first-out (FIFO) method.
Goodwill and other intangible assets - Goodwill, representing the excess of
purchase price over fair value of the net assets of acquired entities, is
generally amortized on a straight-line basis over the period of expected
benefit of twenty years. Other intangible assets are amortized on a
straight-line basis over their estimated economic lives. Accumulated
amortization at December 31, 1999 and 1998 was $414.8 and $384.3,
respectively. Amortization expense amounted to $30.5, $101.3 and $39.6 for the
years ended December 31, 1999, 1998 and 1997, respectively. Intangible assets
are periodically reviewed to determine whether an impairment in value has
occurred.
Property, plant and equipment - Property, plant and equipment is carried at
cost less accumulated depreciation. Depreciation is computed principally by
the straight-line method over the estimated useful lives of the various
classes of properties. Leaseholds and leasehold improvements are depreciated
or amortized over the terms of the related leases (including optional renewal
periods where appropriate) or the estimated lives of improvements, if less
than the lease term.
The principal service lives used in computing provisions for depreciation are
as follows:
Years
-----
Buildings and building equipment 40
Building fixtures 10 to 20
Machinery and equipment 5 to 12
Hotel equipment 4 to 12
Offshore drilling equipment 10 to 25
Impairment of long-lived assets - The Company reviews its long-lived assets
for impairment when changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Long-lived assets and certain intangibles,
under certain circumstances, are reported at the lower of carrying amount or
fair value. Assets to be disposed of and assets not expected to provide any
future service potential to the Company are recorded at the lower of carrying
amount or fair value less cost to sell.
Supplementary cash flow information - Cash payments made for interest on long-
term debt, including capitalized interest and commitment fees, amounted to
approximately $336.9, $322.0 and $325.1 for the years ended December 31, 1999,
1998 and 1997, respectively. Cash payments made for federal, foreign, state
and local income taxes, net of refunds, amounted to approximately $205.2,
$395.1 and $565.3 for the years ended December 31, 1999, 1998 and 1997,
respectively. In 1999, CNA exchanged its interest in Canary Wharf Limited
Partnership into the common stock of Canary Wharf valued at approximately
$539.0.
Reclassification - Certain amounts applicable to prior periods have been
reclassified to conform to the classifications followed in 1999.
11
Note 2. Investments -
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Investment income consisted of:
Fixed maturity securities $1,814.8 $1,911.2 $1,905.6
Short-term investments 362.4 404.7 457.6
Other 213.5 168.4 158.6
- ------------------------------------------------------------------------------
Total investment income 2,390.7 2,484.3 2,521.8
Investment expenses (58.2) (76.0) (79.8)
- ------------------------------------------------------------------------------
Investment income-net $2,332.5 $2,408.3 $2,442.0
==============================================================================
Investment (losses) gains are as follows:
Trading securities:
Derivative instruments (a) $ (385.1) $ (285.3) $ (618.7)
Equity securities, including short
positions (a) (47.0) (251.4) (299.0)
- ------------------------------------------------------------------------------
(432.1) (536.7) (917.7)
Other than trading:
Fixed maturities (313.1) 469.3 463.4
Equity securities 356.7 38.1 102.7
Short-term investments 19.5 (21.4) 7.1
Other, including guaranteed Separate
Account business 210.8 186.4 92.0
- ------------------------------------------------------------------------------
Investment (losses) gains (158.2) 135.7 (252.5)
Gains on issuance of subsidiaries' stock 124.3
- ------------------------------------------------------------------------------
(158.2) 135.7 (128.2)
Income tax benefit (expense) 49.1 (56.2) 43.2
Minority interest (27.5) (67.0) (74.9)
- ------------------------------------------------------------------------------
Investment (losses) gains-net $ (136.6) $ 12.5 $ (159.9)
==============================================================================
(a) Includes losses on short sales, equity index futures and options
aggregating $533.6, $584.3 and $936.6 for the years ended December 31,
1999, 1998 and 1997, respectively. In 1998, the Company started to reduce
its exposure in certain positions. At December 31, 1999, the Company
continued to maintain certain of these positions.
The carrying value of investments (other than equity securities) that did not
produce income for the last twelve months is $54.0 at December 31, 1999.
Investment gains of $854.0, $1,448.4 and $837.6 and losses of $790.9, $962.4
and $264.4 were realized on securities available for sale for the years ended
December 31, 1999, 1998 and 1997, respectively. Investment gains (losses) in
1999, 1998 and 1997 also include $306.4, $159.2 and $58.6 of net unrealized
losses on equity securities in the Company's trading portfolio.
12
The amortized cost and market values of securities are as follows:
Unrealized
Amortized ------------------ Market
December 31, 1999 Cost Gains Losses Value
- ------------------------------------------------------------------------------
U.S. government and obligations of
government agencies $ 9,105.7 $ 14.3 $ 138.6 $ 8,981.4
Asset-backed 7,253.5 14.1 228.5 7,039.1
States, municipalities and political
subdivisions-tax exempt 4,514.1 16.3 134.1 4,396.3
Corporate 5,516.9 34.0 305.0 5,245.9
Other debt 2,185.0 36.0 88.9 2,132.1
Redeemable preferred stocks 62.5 71.6 4.5 129.6
- ------------------------------------------------------------------------------
Total fixed maturities available
for sale 28,637.7 186.3 899.6 27,924.4
Equity securities available for sale 1,149.9 2,634.5 174.8 3,609.6
Equity securities, trading portfolio 720.3 41.8 348.2 413.9
Short-term investments available
for sale 7,318.5 1.3 2.0 7,317.8
- ------------------------------------------------------------------------------
$37,826.4 $2,863.9 $1,424.6 $39,265.7
==============================================================================
December 31, 1998
- ------------------------------------------------------------------------------
U.S. government and obligations of
government agencies $ 8,875.3 $ 184.5 $ 20.2 $ 9,039.6
Asset-backed 8,095.8 129.8 11.7 8,213.9
States, municipalities and political
subdivisions-tax exempt 6,126.7 205.9 11.6 6,321.0
Corporate 5,105.7 135.7 144.7 5,096.7
Other debt 2,610.5 103.7 70.0 2,644.2
Redeemable preferred stocks 36.3 60.5 2.8 94.0
- ------------------------------------------------------------------------------
Total fixed maturities available
for sale 30,850.3 820.1 261.0 31,409.4
Equity securities available for sale 1,054.9 1,051.2 136.0 1,970.1
Equity securities, trading portfolio 569.8 10.8 170.0 410.6
Short-term investments available
for sale 7,793.1 .2 1.2 7,792.1
- ------------------------------------------------------------------------------
$40,268.1 $1,882.3 $ 568.2 $41,582.2
==============================================================================
The amortized cost and market value of fixed maturities at December 31, 1999
and 1998 are shown below by contractual maturity. Actual maturities may differ
from contractual maturities because securities may be called or prepaid with
or without call or prepayment penalties.
1999 1998
-----------------------------------------
Amortized Market Amortized Market
December 31 Cost Value Cost Value
- ------------------------------------------------------------------------------
Due in one year or less $ 1,560.0 $ 1,546.3 $ 3,217.3 $ 3,322.8
Due after one year through
five years 7,039.4 6,907.5 6,412.3 6,430.4
Due after five years through
ten years 7,043.7 6,560.7 5,464.0 5,434.9
Due after ten years 5,741.1 5,870.8 7,660.9 8,007.4
Asset-backed securities not due
at a single maturity date 7,253.5 7,039.1 8,095.8 8,213.9
- ------------------------------------------------------------------------------
$28,637.7 $27,924.4 $30,850.3 $31,409.4
==============================================================================
13
The Company's largest equity holding (held by CNA) in a single issuer is
Global Crossing, Ltd. ("Global Crossing") common stock. At December 31, 1999,
the Company owned 36,400,000 shares, or 4.6% of the outstanding common stock
of Global Crossing which was carried at $1,822.0. Unrealized gains associated
with this security were approximately $1,764.0 at December 31, 1999. No other
investments, other than investments in U.S. government securities, exceeded
10% of shareholders' equity.
In May 1999, Global Crossing entered into a transaction to merge Frontier
Corporation ("Frontier") into a subsidiary of Global Crossing. As part of the
Frontier merger agreement, certain shareholders of Global Crossing, including
the Company, entered into a voting agreement to limit their sales of Global
Crossing common stock to ensure that 51% of the outstanding shares of Global
Crossing would vote in favor of the merger. A large proportion of those
shareholders, including CNA, also agreed to suspend their rights under a
shareholders' agreement and a registration rights agreement until the closing
of the Frontier transaction. The voting agreement was amended on September 2,
1999 to continue the limitation on sales and to delay the exercise of those
rights described in the previous sentence until the earlier of the termination
of the Frontier transaction or six months after the closing of the Frontier
transaction.
The Frontier merger closed on September 28, 1999. Beginning on March 28, 2000,
CNA has the right to require Global Crossing to register up to 25% of CNA's
holdings under the Securities Act of 1933 (the "Act"), and beginning on August
13, 2000, to require Global Crossing to register up to an additional 25% of
CNA's holdings. CNA's holdings of Global Crossing were not acquired in a
public offering, and may not be sold to the public unless the sale is
registered or exempt from the registration requirements of the Act. Such
exemptions will include sales pursuant to Rule 144 under the Act if such sales
meet the requirements of the Rule. Subsequent to December 31, 1999, CNA
entered into option agreements intended to hedge a substantial portion of the
market risk associated with approximately half of its holdings of Global
Crossing.
At December 31, 1999 and 1998, CNA maintained statutory deposits of cash and
securities, with carrying values of $1,800.0 and $1,700.0, respectively, under
requirements of regulatory authorities.
Note 3. Fair Value of Financial Instruments -
1999 1998
--------------------------------------------
Carrying Estimated Carrying Estimated
December 31 Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------
Financial assets:
Other investments $ 1,365.0 $ 1,350.0 $ 1,118.2 $ 1,115.0
Separate Account business:
Fixed maturities securities 3,260.0 3,260.0 4,155.0 4,155.0
Equity securities 260.0 260.0 297.0 297.0
Other 493.0 493.0 216.0 216.0
Financial liabilities:
Premium deposits and annuity
contracts 1,293.0 1,240.0 1,259.0 1,205.0
Long-term debt 5,664.7 5,292.0 5,921.3 5,792.0
Financial guarantee contracts 111.0 100.0 240.0 231.0
Separate Account business:
Guaranteed investment contracts 1,516.0 1,518.0 2,423.0 2,478.0
Variable Separate Accounts 1,505.0 1,505.0 1,268.0 1,268.0
Deferred annuities 117.0 125.0 85.0 102.0
Other 571.0 571.0 600.0 600.0
- ------------------------------------------------------------------------------
14
In cases where quoted market prices are not available, fair values are
estimated using present value or other valuation techniques. These techniques
are significantly affected by management's assumptions, including the discount
rates and estimates of future cash flows. The estimates presented herein are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The amounts reported in the Consolidated Balance
Sheet for fixed maturities securities, equity securities, derivative
instruments, short-term investments and securities sold under agreements to
repurchase are at fair value. As such, these financial instruments are not
shown in the table above. See Note 4 for the fair value of derivative
instruments. Since the disclosure excludes certain financial instruments and
nonfinancial instruments such as real estate and insurance reserves, the
aggregate fair value amounts cannot be summed to determine the underlying
economic value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Fixed maturity securities and equity securities were based on quoted market
prices, where available. For securities not actively traded, fair values were
estimated using values obtained from independent pricing services or quoted
market prices of comparable instruments.
Other investments consist of mortgage loans and notes receivable, policy
loans, investments in limited partnerships and various miscellaneous assets.
Valuation techniques to determine fair value of other investments and other
Separate Account assets consisted of discounting cash flows and obtaining
quoted market prices of the investments, comparable instruments, or underlying
assets of the investments.
Premium deposits and annuity contracts were valued based on cash surrender
values and the outstanding fund balances.
The fair value of the liability for financial guarantee contracts was based on
discounted cash flows utilizing interest rates currently being offered for
similar contracts.
The fair value of guaranteed investment contracts and deferred annuities of
the Separate Accounts business was estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with similar maturities. The fair value of the liabilities for
variable Separate Account business was based on the quoted market values of
the underlying assets of each variable Separate Account. The fair value of
other Separate Account business liabilities approximates carrying value
because of their short-term nature.
Fair value of long-term debt was based on quoted market prices when available.
The fair values for other long-term debt were based on quoted market prices of
comparable instruments adjusted for differences between the quoted instruments
and the instruments being valued or are estimated using discounted cash flow
analyses, based on current incremental borrowing rates for similar types of
borrowing arrangements.
Note 4. Off-Balance-Sheet and Derivative Financial Instruments -
The Company enters into various transactions involving off-balance-sheet
financial instruments through a variety of futures, swaps, options, forwards
and other contracts (the "Contracts") as part of its investing activities.
These Contracts are commonly referred to as derivative instruments since their
underlying values may be linked to, among other things, interest rates,
exchange rates, prices of securities and financial or commodity indexes. The
Company uses these Contracts for a number of purposes, including: (i) for its
asset and liability management activities; (ii) for income enhancements for
its portfolio management strategy; and (iii) to benefit from anticipated
future movements in the underlying markets that Company management expects to
occur. If such movements do not occur or if the market moves in the opposite
direction than what management expects, significant losses may occur. These
Contracts also involve the risk of dealing with counterparties and their
ability to meet the terms of the Contracts.
Exposure to market risk is managed and monitored by senior management. Senior
management approves the overall investment strategy employed by the Company
and has responsibility to ensure that the investment positions are consistent
with that strategy and the level of risk acceptable to it. The Company may
manage risk by buying and selling instruments or entering into offsetting
positions.
15
The notional amounts of derivative instruments shown in the following tables
do not represent amounts exchanged in these transactions and, therefore, are
not a measure of the exposure the Company has through its use of derivative
instruments. In addition, notional amounts are presented gross and do not
reflect the net effect of offsetting positions. The amounts exchanged are
calculated on the basis of the notional amounts and the other terms of the
derivative instruments.
The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these Contracts with large financial
institutions and considers the risk of non-performance to be remote.
The Company's investments in derivative instruments are as follows:
Fair Value
Asset (Liability)
Contractual/ ---------------------
Notional Average for Recognized
December 31, 1999 Value Year-End the Year (Loss) Gain
- ------------------------------------------------------------------------------
Equity markets:
Options purchased $5,279.3 $188.9 $ 761.0 $(562.9)
Options written 1,097.1 (25.8) (103.9) 42.1
Index based futures-long 204.1 72.3
Index based futures-short 22.1 (16.7)
Interest rate risk:
Commitments to purchase
government and municipal
securities 127.0 (1.0) .1 (1.0)
Interest rate caps 500.0 4.0 2.8 4.0
Futures-long 151.4 (3.6)
Futures-short 560.1 15.1
Foreign currency forwards 591.0 9.0 10.8 21.0
Commodities:
Oil:
Swaps 6.4 .2 (1.1) .6
Options 33.0 (.7) (14.3) .4
Energy purchase obligations (13.8) 10.3
Gold:
Options purchased 434.5 15.6 40.9 5.5
Options written 242.9 (5.2) (14.1) 6.1
Other 94.9 2.9 (9.6) 21.7
- ------------------------------------------------------------------------------
Total $9,343.8 $187.9 $ 658.8 $(385.1)
==============================================================================
16
Fair Value
Asset (Liability)
Contractual/ ---------------------
Notional Average for Recognized
December 31, 1998 Value Year-End the Year (Loss) Gain
- ------------------------------------------------------------------------------
Equity markets:
Options purchased $3,950.4 $212.5 $1,206.6 $(289.4)
Options written 1,085.5 (39.7) (97.9) 73.1
S&P futures-long 186.2 155.2
S&P futures-short 241.3 (202.8)
Commodities:
Oil:
Swaps (7.7) (3.4)
Energy purchase obligations 44.0 (16.9) (12.4) (7.0)
Gold:
Options purchased 423.9 17.5 30.8 (2.5)
Options written 62.0 (3.7) (9.5) 4.5
Other 408.6 1.0 3.7 (13.0)
- ------------------------------------------------------------------------------
Total $6,401.9 $170.7 $1,113.6 $(285.3)
==============================================================================
December 31, 1997
- ------------------------------------------------------------------------------
Equity markets:
Options purchased $2,272.0 $176.3 $1,072.3 $(336.2)
Options written 269.7 (18.8) (134.1) 42.9
S&P futures 1,881.0 (381.2)
Commodities:
Oil:
Swaps 63.3 (2.4) (3.2) (18.8)
Energy purchase obligations 44.0 (9.8) (3.1) (10.1)
Gold:
Options purchased 488.3 27.9 27.5 44.3
Options written 84.6 (4.2) (2.0) 3.6
Other 67.5 5.0 9.6 21.4
Other 15.4
- ------------------------------------------------------------------------------
Total $5,170.4 $174.0 $967.0 $(618.7)
==============================================================================
CNA has entered into interest rate swap agreements to convert the variable
rate of its borrowings under the bank credit facility and the commercial paper
program to a fixed rate. Since these interest rate swaps are not held for
trading purposes, they are not included in the preceding tables. At December
31, 1999 and 1998, the outstanding interest rate swap agreements had a total
notional principal amount of $650.0 and $650.0, and a fair value liability of
$10.0 at December 31, 1998. Those agreements, which terminate from May 2000 to
December 2000, effectively fixed CNA's interest rate exposure on $650.0 of
variable rate debt.
CNA also uses derivatives to mitigate the risk associated with its indexed
group annuity contracts by purchasing S&P 500 futures contracts in a notional
amount equal to the portion of the customer liability related to the S&P 500
exposure. Other than derivatives held in certain Separate Accounts, CNA
generally does not hold or issue these instruments for trading purposes. The
gross notional principal or contractual amounts of these instruments in the
Separate Accounts were $1,627.0 and $1,193.0 at December 31, 1999 and 1998,
respectively.
17
The Company also enters into short sales as part of its portfolio management
strategy. Short sales are commitments to sell a financial instrument not owned
at the time of sale, usually done in anticipation of a price decline. These
sales resulted in proceeds of $201.8 and $447.4 with fair value liabilities of
$218.5 and $780.6 at December 31, 1999 and 1998, respectively. These positions
are marked to market and investment gains or losses are included in the income
statement.
Estimated fair values approximate carrying values and are based on quoted
market prices, where available. For securities not actively traded, fair
values are estimated using values obtained from independent pricing services,
quoted market prices of comparable instruments or present value models.
Through August 1, 1989, CNA's property and casualty operations wrote financial
guarantee insurance in the form of surety bonds, and also insured equity
policies. These bonds primarily represented industrial development bond
guarantees and in the case of insured equity policies, typically extended in
initial terms from ten to thirteen years. For these guarantees and policies,
CNA received an advance premium which is non-refundable and is recognized over
the exposure period and in proportion to the underlying risk insured.
At December 31, 1999 and 1998, gross exposure of financial guarantee surety
bonds and insured equity policies was $352.0 and $507.0, respectively. The
degree of risk to CNA related to this exposure is substantially reduced
through reinsurance, diversification of exposures and collateral requirements.
In addition, security interests in improved real estate are also commonly
obtained on the financial guarantee risks. Approximately 37% and 36% of the
risks were ceded to reinsurers at December 31, 1999 and 1998, respectively.
Total exposure, net of reinsurance, amounted to $222.0 and $323.0 at December
31, 1999 and 1998, respectively. At December 31, 1999 and 1998, collateral
consisting of letters of credit, cash reserves and debt service reserves
amounted to $62.0 and $38.0, respectively. Gross unearned premium reserves for
financial guarantee contracts were $11.0 and $8.0 at December 31, 1999 and
1998, respectively. Gross claim and claim adjustment expense reserves totaled
$100.0 and $232.0 at December 31, 1999 and 1998, respectively.
Note 5. Receivables-
December 31 1999 1998
- ------------------------------------------------------------------------------
Reinsurance $ 8,022.7 $ 6,894.2
Other insurance 4,482.6 5,198.4
Security sales 308.6 276.4
Accrued investment income 400.6 409.8
Other 651.0 652.4
- ------------------------------------------------------------------------------
Total 13,865.5 13,431.2
Less allowance for doubtful accounts and
cash discounts 336.8 343.8
- ------------------------------------------------------------------------------
Receivables-net $13,528.7 $13,087.4
==============================================================================
18
Note 6. Property, Plant and Equipment -
December 31 1999 1998
- ------------------------------------------------------------------------------
Land $ 116.0 $ 118.9
Buildings and building equipment 770.4 798.6
Offshore drilling rigs and equipment 2,360.1 2,017.8
Machinery and equipment 1,254.5 1,310.4
Leaseholds and leasehold improvements 125.0 122.1
- ------------------------------------------------------------------------------
Total, at cost 4,626.0 4,367.8
Less accumulated depreciation and amortization 1,673.3 1,519.5
- ------------------------------------------------------------------------------
Property, plant and equipment-net $2,952.7 $2,848.3
==============================================================================
Depreciation and amortization expense, including amortization of intangibles,
and capital expenditures, are as follows:
1999 1998 1997
- ------------------------------------------------------------------------------
Depr. & Capital Depr. & Capital Depr. & Capital
Year Ended December 31 Amort. Expend. Amort. Expend. Amort. Expend.
- ------------------------------------------------------------------------------
CNA Financial $199.5 $250.2 $261.1 $261.1 $187.4 $280.3
Lorillard 23.9 20.7 22.4 20.1 21.0 34.4
Loews Hotels 19.8 110.1 16.3 131.3 17.7 15.7
Diamond Offshore 145.3 324.1 130.3 224.5 108.3 362.6
Bulova .7 .7 .7 4.3 .8 .6
Corporate 6.1 2.4 6.2 2.7 6.5 8.8
- ------------------------------------------------------------------------------
Total $395.3 $708.2 $437.0 $644.0 $341.7 $702.4
==============================================================================
The Company sold two franchised properties in December 1999 and the Loews
Monte Carlo Hotel in November 1998, with net book values of $9.0 and $26.7,
respectively. Gains on these sales amounted to $85.1 and $14.7 ($52.0 and $8.4
after taxes) for the years ended December 31, 1999 and 1998, respectively.
19
Note 7. Claim and Claim Adjustment Expense Reserves-
CNA's property and casualty insurance claim and claim adjustment expense
reserves represent the estimated amounts necessary to settle all outstanding
claims, including claims which are incurred but not reported, as of the
reporting date. The Company's reserve projections are based primarily on
detailed analysis of the facts in each case, CNA's experience with similar
cases, and various historical development patterns. Consideration is given to
such historical patterns as field reserving trends, loss payments, pending
levels of unpaid claims and product mix, as well as court decisions, economic
conditions and public attitudes. All of these can affect the estimation of
reserves.
Establishing loss reserves is an estimation process. Many factors can
ultimately affect the final settlement of a claim and, therefore, the reserve
that is needed. Changes in the law, results of litigation, medical costs, the
cost of repair materials and labor rates can all impact ultimate claim costs.
In addition, time can be a critical part of reserving determinations since the
longer the span between the incidence of a loss and the payment or settlement
of the claim, the more variable the ultimate settlement amount can be.
Accordingly, short-tail claims, such as property damage claims, tend to be
more reasonably estimable than long-tail claims, such as general liability and
professional liability claims.
The table below provides a reconciliation between beginning and ending claim
and claim adjustment expense reserves for 1999, 1998 and 1997:
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Reserves at beginning of year:
Gross $28,317.0 $28,533.0 $29,357.0
Ceded 5,424.0 5,326.0 5,660.0
- ------------------------------------------------------------------------------
Net reserves at beginning of year 22,893.0 23,207.0 23,697.0
Net reserves transferred under retroactive
reinsurance agreements (1,024.0)
Net reserves of acquired insurance
companies at date of acquisition 122.0 57.0
- ------------------------------------------------------------------------------
Total net reserves 21,869.0 23,329.0 23,754.0
- ------------------------------------------------------------------------------
Net incurred claims and claim adjustment
expenses:
Provision for insured events of current
year 7,287.0 7,903.0 7,942.0
Increase (decrease) in provision for
insured events of prior years 1,027.0 263.0 (256.0)
Amortization of discount 139.0 143.0 143.0
- ------------------------------------------------------------------------------
Total net incurred 8,453.0 8,309.0 7,829.0
- ------------------------------------------------------------------------------
Net payments attributable to:
Current year events 2,744.0 2,791.0 2,514.0
Prior year events 7,460.0 5,954.0 5,862.0
Reinsurance recoverable against net
reserves transferred under retroactive
reinsurance agreements (240.0)
- ------------------------------------------------------------------------------
Total net payments 9,964.0 8,745.0 8,376.0
- ------------------------------------------------------------------------------
Net reserves at end of year 20,358.0 22,893.0 23,207.0
Ceded reserves at end of year 6,273.0 5,424.0 5,326.0
- ------------------------------------------------------------------------------
Gross reserves at end of year (a) $26,631.0 $28,317.0 $28,533.0
==============================================================================
(a) Excludes life claim and claim adjustment expense reserves and intercompany
eliminations of $724.9, $836.7 and $986.8 as of December 31, 1999, 1998
and 1997, respectively, included in the Consolidated Balance Sheets.
20
The change in provision for insured events of prior years, favorable (adverse)
reserve development, is comprised of the following components:
1999 1998 1997
- ------------------------------------------------------------------------------
Asbestos $ (560.0) $(243.0) $(105.0)
Environmental Pollution
and Other Mass Tort 84.0 (227.0)
Other (551.0) 207.0 361.0
- ------------------------------------------------------------------------------
Total $(1,027.0) $(263.0) $ 256.0
==============================================================================
Environmental pollution clean-up is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. Judicial interpretations in many cases
have expanded the scope of coverage and liability beyond the original intent
of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of
1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern the
clean-up and restoration of abandoned toxic waste sites and formalize the
concept of legal liability for clean-up and restoration by potentially
responsible parties ("PRPs"). Superfund and the mini-Superfunds establish
mechanisms to pay for clean-up of waste sites if PRPs fail to do so, and to
assign liability to PRPs. The extent of liability to be allocated to a PRP is
dependent on a variety of factors. Further, the number of waste sites subject
to clean-up is unknown. To date, approximately 1,300 clean-up sites have been
identified by the Environmental Protection Agency ("EPA") on its National
Priorities List ("NPL"). The addition of new clean-up sites to the NPL has
slowed in recent years. Many clean-up sites have been designated by state
authorities as well.
Many policyholders have made claims against various CNA insurance subsidiaries
for defense costs and indemnification in connection with environmental
pollution matters. These claims relate to accident years 1989 and prior, which
coincides with CNA's adoption of the Simplified Commercial General Liability
coverage that includes an absolute pollution exclusion. CNA and the insurance
industry are disputing coverage for many such claims. Key coverage issues
include whether clean-up costs are considered damages under the policies,
trigger of coverage, allocation of liability among triggered policies,
applicability of pollution exclusions and owned property exclusions, the
potential for joint and several liability and definition of an occurrence. To
date, courts have been inconsistent in their rulings on these issues.
A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress in 1999 and it is unclear as to
what positions the Congress or the Administration will take in 2000 and what
legislation, if any, will result. If there is legislation, and in some
circumstances even if there is no legislation, the federal role in
environmental clean-up may be significantly reduced in favor of state action.
Substantial changes in the federal statute or the activity of the EPA may
cause states to reconsider their environmental clean-up statutes and
regulations. There can be no meaningful prediction of regulation that would
result.
Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to clean-up, and the
standards for clean-up and liability, the ultimate liability of CNA for
environmental pollution claims may vary substantially from the amount
currently recorded.
As of December 31, 1999 and 1998, CNA carried approximately $463.0 and $787.0,
respectively, of claim and claim adjustment expense reserves, net of
reinsurance recoverable, for reported and unreported environmental pollution
and other mass tort claims. In 1999, CNA recorded $84.0 of favorable
development compared to $227.0 of adverse development in 1998. The changes
were based upon CNA's continuous review of these types of exposures, as well
as its internal study and annual analysis of environmental pollution and other
mass tort claims. The 1999 analysis indicated favorable results in the number
of new claims being reported in the other mass tort area. The 1998 analysis
indicated deterioration in claim experience related mainly to pollution
claims.
CNA's insurance subsidiaries have exposure to asbestos claims, including those
attributable to CNA's litigation with Fibreboard Corporation (see Note 18).
Estimation of asbestos claim reserves involves many of the same limitations
discussed above for environmental pollution claims such as inconsistency of
court decisions, specific policy provisions, allocation of liability among
insurers, missing policies and proof of coverage. As of December 31, 1999 and
1998, CNA carried
21
approximately $684.0 and $1,456.0, respectively, of claim and claim adjustment
expense reserves, net of reinsurance recoverable, for reported and unreported
asbestos-related claims. In 1999, CNA recorded $560.0 of adverse development
compared to $243.0 of adverse development in 1998. The reserve strengthening
in 1999 for asbestos-related claims was a result of management's continuous
review of development with respect to these exposures, as well as a review of
the results of CNA's annual analysis of these claims which was completed in
conjunction with the study of environmental pollution and other mass tort
claims. This analysis indicated continued deterioration in claim counts for
asbestos-related claims.
The results of operations in future years may continue to be adversely
affected by environmental pollution and other mass tort, and asbestos claims
and claim adjustment expenses. Management will continue to monitor these
liabilities and make further adjustments as warranted.
The following table provides additional data related to CNA's environmental
pollution, other mass tort and asbestos-related claim and claim adjustment
expense reserves:
December 31 1999 1998
- ------------------------------------------------------------------------------
Environmental Environmental
Pollution and Pollution and
Other Mass Tort Asbestos Other Mass Tort Asbestos
- ------------------------------------------------------------------------------
Gross reserves $618.0 $ 946.0 $828.0 $1,547.0
Less ceded reserves (155.0) (262.0) (41.0) (91.0)
- ------------------------------------------------------------------------------
Net reserves $463.0 $ 684.0 $787.0 $1,456.0
==============================================================================
Other lines unfavorable claim and claim adjustment expense reserve development
in 1999 of $551.0 was due to unfavorable loss development of approximately
$540.0 for standard commercial lines, approximately $60.0 for medical
malpractice, and approximately $70.0 for accident and health. These
unfavorable changes were partially offset by favorable development of
approximately $120.0 in non-medical professional liability and assumed
reinsurance on older accident years. The unfavorable development in standard
commercial lines was due to commercial automobile liability and workers'
compensation losses being higher than expected in recent accident years. In
addition, the number of claims reported for commercial multiple-peril
liability claims from older accident years has not decreased as much as
expected. The unfavorable development for medical malpractice was also due to
losses being higher than expected for recent accident years. The accident and
health unfavorable development is due to higher than expected claim reporting
on assumed personal accident coverage in recent accident years.
Other lines favorable claim and claim adjustment expense reserve development
for 1998 of $207.0 was due to favorable loss development of approximately
$100.0 in commercial lines business and approximately $105.0 of favorable loss
development in personal lines business. The favorable development in the
commercial lines business was primarily attributable to improved frequency and
severity in the commercial auto lines for older accident years, as well as
some continued improvement in workers' compensation for older years. The
favorable development in the personal lines business was attributable to
improved trends, particularly in personal auto liability.
22
Note 8. Income Taxes -
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Income taxes:
Federal:
Current $ 17.2 $195.0 $372.2
Deferred 180.0 51.8 59.3
State, city and other:
Current 134.8 115.1 65.4
Deferred (26.5) (7.4) (1.6)
- ------------------------------------------------------------------------------
Total $305.5 $354.5 $495.3
==============================================================================
Deferred tax assets (liabilities) are as follows:
December 31 1999 1998
- ------------------------------------------------------------------------------
Insurance revenues:
Property and casualty claim reserves $1,057.8 $1,183.1
Unearned premium reserves 334.7 371.7
Life reserve differences 213.4 194.7
Others 26.9 26.9
Deferred policy acquisition costs (777.9) (748.2)
Employee benefits 239.2 218.9
Property, plant and equipment (228.5) (184.5)
Investments (28.0) 80.2
Restructuring costs 9.7 55.9
Tobacco litigation settlements 253.6 70.4
Unrealized appreciation (629.0) (533.4)
Net operating loss carryforwards 137.1
Accrued assessments and guarantees (a) 72.1
Other-net 92.8 136.9
- ------------------------------------------------------------------------------
Deferred tax assets-net $ 773.9 $ 872.6
==============================================================================
(a) Effective January 1, 1999, in accordance with SOP 97-3, the Company
recorded a cumulative effect adjustment to reflect a change in accounting
principles as discussed in Note 1. This adjustment increased deferred tax
assets by $95.4. During 1999, changes in the accrual for insurance-related
assessments reduced the associated deferred tax asset by $23.3.
Gross deferred tax assets amounted to $3,195.6 and $2,953.4 and liabilities
amounted to $2,421.7 and $2,080.8 for the years ended December 31, 1999 and
1998, respectively.
23
The Company has a history of profitability and as such, management believes it
is more likely than not that the net deferred tax asset will be realized.
Total income tax expense for the years ended December 31, 1999, 1998 and 1997
was different than the amounts of $330.5, $377.1 and $557.6, computed
by applying the statutory U.S. federal income tax rate of 35% to income before
income taxes and minority interest for each of the years.
A reconciliation between the statutory federal income tax rate and the
Company's effective income tax rate as a percentage of income before income
taxes and minority interest is as follows:
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Statutory rate 35% 35% 35%
(Decrease) increase in income tax rate resulting from:
Exempt interest and dividends received deduction (9) (9) (6)
State and city income taxes and other 6 7 2
- ------------------------------------------------------------------------------
Effective income tax rate 32% 33% 31%
==============================================================================
At December 31, 1999, the Company has net operating losses for federal income
tax purposes of approximately $390.0 which expire in years 2018 through 2019.
The Company has entered into separate tax allocation agreements with Bulova
and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiary"). Each agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the
Company's return, or (ii) be paid by the Subsidiary an amount, if any, equal
to the federal income tax which would have been payable by the Subsidiary if
it had filed a separate consolidated return.
Under these agreements, CNA will receive or has received approximately $288.0
and $83.0 for 1999 and 1998, respectively, and has paid the Company
approximately $210.0 for 1997, and Bulova will pay or has paid the Company
approximately $6.3, $5.6 and $2.6 for 1999, 1998 and 1997, respectively. Each
agreement may be canceled by either of the parties upon thirty days' written
notice.
The Company's federal income tax returns have been examined and settled
through 1994 and the years 1995 through 1997 are currently under examination.
While tax liabilities for subsequent years are subject to audit and final
determination, in the opinion of management the amount accrued in the
Consolidated Balance Sheet is believed to be adequate to cover any additional
assessments which may be made by federal, state and local tax authorities and
should not have a material effect on the financial condition or results of
operations of the Company.
24
Note 9. Long-Term Debt-
Unamortized Current
December 31, 1999 Principal Discount Net Maturities
- ------------------------------------------------------------------------------
Loews Corporation $2,325.0 $ 36.4 $2,288.6
CNA 2,897.6 16.2 2,881.4 $ 3.0
Diamond Offshore 400.0 3.7 396.3
Other 140.0 140.0 1.9
- ------------------------------------------------------------------------------
Total $5,762.6 $ 56.3 $5,706.3 $ 4.9
==============================================================================
December 31 1999 1998
- ------------------------------------------------------------------------------------------------
Loews Corporation (Parent Company):
Senior:
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $300) $300.0 $300.0
8.9% debentures due 2011 (effective interest rate of 9.0%)
(authorized, $175) 175.0 175.0
7.6% notes due 2023 (effective interest rate of 7.8%)
(authorized, $300) (a) 300.0 300.0
7.0% notes due 2023 (effective interest rate of 7.2%)
(authorized, $400) (b) 400.0 400.0
Subordinated:
3.1% exchangeable subordinated notes due 2007
(effective interest rate of 3.4%)
(authorized, $1,150) (c) 1,150.0 1,150.0
CNA Financial Corporation:
Senior:
6.3% notes due 2003 (effective interest rate of 6.4%)
(authorized, $250) 250.0 250.0
7.3% notes due 2003 (effective interest rate of 7.8%)
(authorized, $150) 145.5 150.0
6.5% notes due 2005 (effective interest rate of 6.6%)
(authorized, $500) 500.0 500.0
6.8% notes due 2006 (effective interest rate of 6.8%)
(authorized, $250) 250.0 250.0
6.5% notes due 2008 (effective interest rate of 6.6%)
(authorized, $150) 150.0 150.0
6.6% notes due 2008 (effective interest rate of 6.7%)
(authorized, $200) 200.0 200.0
8.4% notes due 2012 (effective interest rate of 8.6%)
(authorized, $100) 82.2 100.0
7.0% notes due 2018 (effective interest rate of 7.1%)
(authorized, $150) 150.0 150.0
7.3% debentures due 2023 (effective interest rate of 7.3%)
(authorized, $250) 250.0 250.0
8.3% notes due 1999 100.0
Commercial Paper (weighted average yield 6.5% and 5.9%) 675.0 500.0
Bank revolving credit due 2001 (effective interest rate
of 6.7% and 5.5%) 77.0 235.0
Revolving credit facility due 2002 (effective interest
rate 6.5% and 5.6%) 100.0 113.0
Mortgage notes at 11%, due 2013 157.5
Other senior debt (effective interest rates approximate 7.9% and 8.1%) 67.9 72.3
Diamond Offshore Drilling, Inc.:
3.8% convertible subordinated notes due 2007 (effective interest
rate of 3.9%) (authorized, $400)(d) 400.0 400.0
Other senior debt, principally mortgages (effective interest
rates approximate 8.1% and 8.4%) 140.0 124.6
- ------------------------------------------------------------------------------------------------
5,762.6 6,027.4
Less unamortized discount 56.3 60.7
- ------------------------------------------------------------------------------------------------
Long-term debt, less unamortized discount $5,706.3 $5,966.7
================================================================================================
25
(a) Redeemable in whole or in part at June 1, 2003 at 103.8%, and decreasing
percentages thereafter.
(b) Redeemable in whole or in part at October 15, 2003 at 102.4%, and
decreasing percentages thereafter.
(c) The notes are exchangeable into 15.376 shares of Diamond Offshore's common
stock per one thousand dollar principal amount of notes, at a price of
$65.04 per share. Redeemable in whole or in part at September 15, 2002 at
101.6%, and decreasing percentages thereafter.
(d) The notes are convertible into 24.691 shares of Diamond Offshore's common
stock per one thousand dollar principal amount of notes, at a price of
$40.50 per share. Redeemable in whole or in part at February 22, 2001 at
102.1%, and decreasing percentages thereafter.
CNA maintains a $795.0 revolving credit facility that expires in May 2001. The
amount available is reduced by CNA's outstanding commercial paper. As of
December 31, 1999, there was $43.0 of unused borrowing capacity under the
facility. The interest rate on the bank loans was based on the London
Interbank Offered Rate ("LIBOR"), plus 16 basis points. Additionally, there
was an annual facility fee of 9 basis points on the entire facility. The
average interest rate on the bank loans under the credit facility, excluding
fees, at December 31, 1999 and 1998 was 6.7% and 5.5%, respectively.
The weighted average interest rate on commercial paper was 6.5% and 5.9% at
December 31, 1999 and 1998, respectively. Generally, commercial paper has a
weighted average maturity of 40 days.
To offset the variable rate characteristics of the facility and the interest
rate risk associated with periodically reissuing commercial paper, CNA is
party to interest rate swap agreements with several banks, which have an
aggregate notional principal amount of $650.0 at both December 31, 1999 and
1998, and terminate from May 2000 to December 2000. These agreements require
CNA to pay interest at a fixed rate, averaging 6.1% at both December 31, 1999
and 1998, in exchange for the receipt of the three month LIBOR. The effect of
the interest rate swaps was to increase interest expense by approximately
$4.0, $2.0 and $4.0 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The combined weighted average cost of borrowings, including fees for the
facility, commercial paper borrowings and interest rate swaps was 6.5% and
6.4% at December 31, 1999 and 1998, respectively.
On February 15, 2000, Standard & Poor's lowered CNA's senior debt rating from
A- to BBB and lowered CNA's preferred stock rating from BBB to BB+. As a
result of these actions the facility fee payable on the aggregate amount of
the Facility was increased to 12.5 basis points per annum and the interest
rate on the Facility was increased to LIBOR plus 27.5 basis points.
On April 15, 1999, CNA retired $100.0 of its 8.3% senior notes.
On August 2, 1999, CNA repaid its $157.5 11.0% Secured Mortgage Notes, due
June 30, 2013. The gain realized on the transaction was not significant.
The aggregate of long-term debt maturing in each of the next five years is
approximately as follows: $4.9 in 2000, $761.9 in 2001, $119.5 in 2002,
$462.4 in 2003 and $7.4 in 2004.
Payment of dividends by insurance subsidiaries of CNA without prior regulatory
approval is limited to certain formula-derived amounts. At December 31, 1999,
approximately $4,791.5 of retained earnings was not available for dividends.
Note 10. Leases -
The Company's hotels in some instances are constructed on leased land. Other
leases cover office facilities, computer and transportation equipment. Rent
expense amounted to $94.0, $151.3 and $127.2 for the years ended December 31,
1999, 1998 and 1997, respectively. The table below presents the future minimum
lease payments to be made under non-cancelable operating leases.
Year Ended December 31
- ------------------------------------------------------------------------------
2000 $165.0
2001 106.9
2002 93.8
2003 72.5
2004 49.8
Thereafter 185.5
- ------------------------------------------------------------------------------
Total $673.5
==============================================================================
26
Note 11. Shareholders' Equity and Earnings Per Share -
In addition to its common stock, the Company has authorized 100,000,000 shares
of preferred stock, $.10 par value. Earnings per share are based on the
weighted average number of shares outstanding during each year (108,533,368,
114,539,080 and 115,000,000 for the years ended December 31, 1999, 1998 and
1997, respectively).
The components of accumulated other comprehensive income (loss) are as
follows:
Unrealized Accumulated
Gains Minimum Other
(Losses) On Foreign Pension Comprehensive
Investments Currency Liability Income (Loss)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 202.8 $ 30.8 $ 233.6
Unrealized holding gains, net of tax
of $174.9 343.6 343.6
Adjustment for items included in net
income, net of tax of $67.2 (102.7) (102.7)
Foreign currency translation adjustment,
net of tax of $4.1 14.4 14.4
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1997 443.7 45.2 488.9
Unrealized holding gains, net of tax of
$323.0 509.8 509.8
Foreign currency translation adjustment,
net of tax of $.6 6.0 6.0
Adjustment for items included in net income,
net of tax of $77.9 and $4.5 (114.7) 8.4 (106.3)
Minimum pension liability adjustment, net
of tax of $3.1 $ (5.6) (5.6)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1998 838.8 59.6 (5.6) 892.8
Unrealized holding gains, net of tax
of $250.8 381.1 381.1
Adjustment for items included in net income,
net of tax of $138.8 (224.2) (224.2)
Foreign currency translation adjustment,
net of tax of $.1 (35.1) (35.1)
Minimum pension liability adjustment, net
of tax of $1.1 2.0 2.0
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 995.7 $ 24.5 $ (3.6) $ 1,016.6
================================================================================================
27
Note 12. Significant Transactions -
Personal Insurance Transaction
On October 1, 1999, certain subsidiaries of CNA completed a transaction with
The Allstate Corporation ("Allstate"), whereby CNA's personal lines insurance
business and related employees were transferred to Allstate. Approximately
$1,100.0 of cash and $1,100.0 of additional assets (primarily premium
receivables and deferred policy acquisition costs) were transferred to
Allstate, and Allstate assumed $2,200.0 of claim and claim adjustment expense
reserves. Additionally, CNA received $140.0 in cash which consisted of (i)
$120.0 in ceding commission for the reinsurance of the CNA personal insurance
business by Allstate, and (ii) $20.0 for an option exercisable during 2002 to
purchase 100% of the common stock of five CNA insurance subsidiaries at a
price equal to carrying value in accordance with generally accepted accounting
principles as of the exercise date. Also, CNA invested $75.0 in a ten year
equity-linked note issued by Allstate.
CNA will continue to write new and renewal personal insurance policies and to
reinsure this business with Allstate companies, until such time as Allstate
exercises its option to buy the five CNA subsidiaries. Prior to 2002, the
Company will concentrate the direct writing of personal lines insurance
business into the five optioned companies, such that most, if not all,
business related to this transaction will be written by those companies by the
date Allstate exercises its option. CNA continues to have primary liability on
policies reinsured by Allstate.
CNA will continue to have an ongoing interest in the profitability of CNA's
personal lines insurance business and the related successor business through
an agreement licensing the "CNA Personal Insurance" trademark and a portion of
CNA's Agency Market Operations distribution system to Allstate for use in
Allstate's personal insurance agency business for a period of five years.
Under this agreement, CNA will receive a royalty fee based on the business
volume of personal insurance policies sold through the CNA agents for a period
of six years. In addition, the $75.0 equity-linked note will be redeemed on
September 30, 2009 (subject to earlier redemption on stated contingencies) for
an amount equal to the face amount plus or minus an amount not exceeding
$10.0, depending on the underwriting profitability of the CNA personal
insurance business.
CNA also shares in any reserve development related to claim and claim
adjustment expense reserves transferred to Allstate at the transaction date.
Under the reserve development sharing agreement, 80% of any favorable or
adverse reserve development up to $40.0 and 90% of any favorable or adverse
reserve development in excess of $40.0 inure to CNA. CNA's obligation with
respect to unallocated loss adjustment expense reserves was settled at the
transaction date, and is therefore not subject to the reserve sharing
arrangement.
The retroactive portion of the reinsurance transaction, consisting primarily
of the transfer of claim and claim adjustment expense reserves approximating
$1,000.0, was not recognized as reinsurance, because criteria for risk
transfer was not met for this portion of the transaction. The related
consideration paid was recorded as a deposit and is included in reinsurance
receivables in the Consolidated Balance Sheets. The prospective portion of the
transaction, which as of the transaction date consisted primarily of the
cession of $1,100.0 of unearned premium reserves, has been recorded as
reinsurance. The related consideration paid was recorded as prepaid
reinsurance premiums. Premiums ceded after the transaction date will follow
this same treatment. The $20.0 received from Allstate for the option to
purchase the five CNA subsidiaries was deferred and will not be recognized
until Allstate exercises its option, at which time it will be recorded in
realized gains and losses.
CNA recognized an after tax realized loss of approximately $39.0 related to
the transaction, consisting primarily of the accrual of lease obligations and
the write-down of assets that related specifically to the Personal Insurance
lines of business. The ceding commission related to the prospective portion of
the transaction will be recognized in proportion to the recognition of the
unearned premium reserve to which it relates. $51.0 of the ceding commission
was earned in 1999. Royalty fees earned in 1999 were approximately $7.0.
28
The Personal Insurance lines transferred to Allstate contributed net earned
premiums of $1,354.0, $1,622.0 and $1,607.0 and pre-tax operating income of
$89.0, $97.0 and $237.0 for the nine months ended September 30, 1999 and the
years ended December 31, 1998 and 1997, respectively.
Sale of AMS Services, Inc.
On November 30, 1999, CNA sold the majority of its interest in AMS Services,
Inc. ("AMS"), a software development company serving the insurance agency
market. Prior to the sale, CNA owned 89% of AMS and consolidated AMS in its
financial statements. As a result of the sale, CNA owns 9% of AMS and
therefore AMS is no longer consolidated. CNA recognized an after tax gain of
$21.0 on the sale. Total assets of AMS as of the sale date were approximately
$135.0. CNA's share of AMS' operating results were $206.0, $264.0 and $216.0
of operating revenue and $8.0, $28.0 and $10.0 of operating losses, for the
eleven months ended November 30, 1999 and the years ended December 31, 1998
and 1997, respectively.
Note 13. Restructuring and Other Related Charges -
CNA finalized and approved a restructuring plan (the "Plan") in August 1998.
In connection with the Plan, CNA incurred various expenses that were recorded
in the third and fourth quarters of 1998 and throughout 1999. These
restructuring and other related charges primarily related to the following
activities: planned reductions in the workforce; the consolidation of certain
processing centers; the exiting of certain businesses and facilities; the
termination of lease obligations; and the writeoff of certain assets related
to these activities. The Plan contemplates a gross reduction in workforce of
4,500 employees, resulting in a planned net reduction of approximately 2,400
employees. As of December 31, 1999, CNA had completed essentially all aspects
of the Plan.
CNA accrued $220.0 of these restructuring and other related charges in the
third quarter of 1998 (the "Initial Accrual"). Other charges such as parallel
processing costs, relocation costs, and retention bonuses, did not qualify
for accrual under generally accepted accounting principles and have been
charged to expense as incurred ("Period Costs"). CNA incurred Period Costs of
$83.0 and $26.0 during 1999 and the fourth quarter of 1998, respectively.
CNA incurred restructuring and other related charges of $246.0 in 1998 that
were comprised of the Initial Accrual and fourth quarter Period Costs, and
which included the following: (i) costs and benefits related to planned
employee terminations of $98.0, of which $53.0 related to severance and
outplacement costs, $24.0 related to other employee transition related costs
and $21.0 related to benefit plan curtailment costs; (ii) writedown of
certain assets to their fair value of $74.0, of which $59.0 related to a
writedown of an intangible asset, and $15.0 of abandoned leasehold
improvements and other related fixed assets associated with leases that were
terminated as part of the restructuring plan; (iii) lease termination costs of
$42.0; and (iv) losses incurred on the exiting of certain businesses of $32.0.
The 1998 restructuring and other related charges incurred by Agency Market
Operations were approximately $96.0. These charges included employee severance
and outplacement costs of $43.0 related to the planned net reduction in the
workforce of approximately 1,200 employees. Lease termination costs of
approximately $29.0 were incurred in connection with the consolidation of four
regional offices into two zone offices and a reduction of the number of claim
processing offices from 24 to 8. The Agency Market Operations charges also
included benefit plan curtailment costs of $12.0, parallel processing charges
of $7.0 and $5.0 of fixed asset writedowns. Through December 31, 1998,
approximately 364 Agency Market Operations employees, the majority of whom
were loss adjusters and office support staff.
The 1999 Period Costs incurred by Agency Market Operations were approximately
$60.0. These charges included employee related expenses (outplacement,
retention bonuses and relocation costs) of $23.0, parallel processing costs
of $16.0 and consulting expenses of $10.0. Other charges, including technology
and facility charges, were approximately $15.0. Additionally, Agency Market
Operations reduced its estimate for lease termination costs by $4.0 during
1999. During 1999, approximately 1,000 Agency Market Operations employees, the
majority of whom were office support staff, were released.
The 1998 restructuring and other related charges incurred by Risk Management
were approximately
29
$88.0. These charges included lease termination costs associated with the
consolidation of claim offices in 36 market territories of approximately
$8.0. In addition, employee severance and outplacement costs relating to the
planned net reduction in workforce of approximately 200 employees were
approximately $10.0 and the writedown of fixed and intangible assets was
approximately $64.0. Parallel processing and other charges were approximately
$6.0. Through December 31, 1998, approximately 152 Risk Management employees
had been released, the majority of whom were claims adjusters and office
support staff.
The charges related to fixed and intangible assets were primarily due to a
writedown of an intangible asset (goodwill) related to Alexsis, Inc., a
wholly owned subsidiary acquired by CNA in 1995 that provided claims
administration services for unrelated parties. As part of CNA's periodic
reviews of asset recoverability and as a result of several adverse events, CNA
concluded, based on an undiscounted cash flow analysis completed in the third
quarter of 1998, that an impairment existed, and based on a discounted cash
flow analysis, that a $59.0 writeoff was necessary. The adverse events
contributing to this conclusion included operating losses from the business,
the loss of several significant customers whose business volume with this
operation constituted a large portion of the revenue base, and substantial
changes in the overall market demand for the services offered by this
operation which, in turn, had negative effects on the prospects for achieving
the profitability levels necessary to recover the intangible asset.
The 1999 Period Costs incurred by Risk Management were approximately $10.0.
These charges included employee related expenses of $3.0 and parallel
processing charges of $3.0. Other charges, including consulting and facility
charges, were approximately $7.0. Additionally, Risk Management reduced its
estimate for lease termination costs by $2.0 and its estimate of employee
severance costs by $1.0 during 1999. During 1999, approximately 136 Risk
Management employees were released, the majority of whom were claims adjusters
and office support staff.
The 1998 restructuring and other related charges incurred by Group Operations
were approximately $39.0. These charges included approximately $29.0 of costs
related to CNA's decision to exit the Employer Health and Affinity lines of
business. These costs represent CNA's estimate of losses in connection with
fulfilling the remaining obligations under contracts. Earned premiums for
these lines of business were approximately $400.0 in 1998. The 1998 charges
also included employee severance and outplacement costs of approximately $7.0
related to the planned net reduction in workforce of approximately 400
employees. Charges for lease termination costs and fixed asset writedowns were
$3.0. Through December 31, 1998, approximately 56 Group Operations employees
had been released. The majority of the released employees were claims
adjusters and sales support staff.
The 1999 Period Costs incurred by Group Operations were approximately $5.0.
These charges include $7.0 of employee severance and related charges.
Additionally, Group Operations reduced its estimate for business exit costs
by $2.0 during 1999. During 1999, approximately 300 Group Operations employees
were released, the majority of whom were claims adjusters and sales support
staff.
For the other segments of CNA, restructuring and other related charges were
approximately $23.0 in 1998. Charges, related primarily to the closing of
leased facilities, were $3.0 and employee severance and outplacement costs
related to planned net reductions of 600 employees in the current workforce
and benefit costs associated with those reductions were $13.0. In addition,
there were charges of $4.0 related to the writedown of certain assets and
$3.0 related to the exiting of certain businesses. Through December 31,
1998, approximately 270 employees of these other segments, most of whom were
underwriters and office support staff, had been released.
For the other segments of CNA, Period Costs were approximately $8.0 for 1999.
These charges were primarily for employee termination related costs. Through
December 31, 1999, approximately 600 employees of these other segments, most
of whom were underwriters and office support staff, had been released.
30
The following table sets forth the major categories of the Initial Accrual and
the activity in the accrual during 1998 and 1999:
Employee
Termination Lease
and Related Writedown Termination Business
Benefit Costs of Assets Costs Exit Costs Total
- ------------------------------------------------------------------------------------------------
Initial Accrual $ 72.0 $ 74.0 $42.0 $ 32.0 $220.0
Payments charged against liability (14.0) (14.0)
Costs that did not require cash (21.0) (74.0) (95.0)
- ------------------------------------------------------------------------------------------------
Accrued costs at December 31, 1998 37.0 42.0 32.0 111.0
Payments charged against liability (32.0) (9.0) (15.0) (56.0)
Reduction in estimated costs (1.0) (6.0) (2.0) (9.0)
- ------------------------------------------------------------------------------------------------
Accrued costs at December 31, 1999 $ 4.0 $27.0 $ 15.0 $ 46.0
================================================================================================
Note 14. Benefit Plans -
Pension Plans - The Company has several non-contributory defined benefit plans
for eligible employees. The benefits for certain plans which cover salaried
employees and certain union employees are based on formulas which include,
among others, years of service and average pay. The benefits for one plan
which covers union workers under various union contracts and certain salaried
employees are based on years of service multiplied by a stated amount.
Effective January 1, 1998, one of the Company's retirement plans was converted
to a cash balance plan. A cash balance plan is a form of non-contributory,
defined benefit pension plan in which the value of each participant's benefit
is expressed as a nominal cash balance account established in the name of such
participant. The cash balance in each account is increased annually based on a
specified percentage of annual earnings (based on the participant's age) and a
specified interest rate (which is established annually for all participants).
The Company's funding policy is to make contributions in accordance with
applicable government regulatory requirements. The assets of the plans are
invested primarily in interest-bearing obligations and for one plan with an
insurance subsidiary of CNA, in its Separate Account business.
Other Postretirement Benefit Plans - The Company has several postretirement
benefit plans covering eligible employees and retirees. Participants generally
become eligible after reaching age 55 with required years of service. Actual
requirements for coverage vary by plan. Benefits for retirees who were covered
by bargaining units vary by each unit and contract. Benefits for certain
retirees are in the form of a Company health care account.
Benefits for retirees reaching age 65 are generally integrated with Medicare.
Other retirees, based on plan provisions, must use Medicare as their primary
coverage, with the Company reimbursing a portion of the unpaid amount; or are
reimbursed for the Medicare Part B premium or have no Company coverage. The
benefits provided by the Company are basically health and, for certain
retirees, life insurance type benefits.
The Company does not fund any of these benefit plans and accrues
postretirement benefits during the active service of those employees who would
become eligible for such benefits when they retire.
In 1999, CNA recorded curtailment and other related charges of approximately
$8.0 related to the transfer of personal lines insurance business to Allstate
as discussed in Note 12. This transaction resulted in a reduction of the
pension and postretirement benefit obligations of $44.0 and $2.0,
respectively.
In 1999, CNA amended certain plans to change, among other things, early
retirement eligibility and the level of employer contributions. These actions
resulted in a
31
reduction in pension and postretirement benefit obligations of approximately
$10.0 and $48.0, respectively.
In 1998, CNA amended the Continental postretirement plan changing the benefits
available to Continental retirees to be equivalent to the benefits available
to CNA retirees. As a result of this amendment, CNA's postretirement benefit
obligation was reduced by $99.0.
In 1998, CNA recorded curtailment charges of approximately $19.0 related to
its restructuring activities as discussed in Note 13. These curtailments
resulted in the reduction of the pension and postretirement benefit
obligations of $88.0 and $34.0, respectively.
The weighted average rates used in the actuarial assumptions were:
Pension Benefits Other Postretirement Benefits
--------------------------------------- ---------------------------------
Year Ended December 31 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------
Discount rate 7.8% to 8.0% 6.8% 7.0% to 7.3% 7.8% to 8.0% 6.8% 7.0% to 7.3%
Expected return
on plan assets 6.8% to 8.0% 7.0% 7.5%
Rate of compensation
increase 5.5% to 5.7% 5.5% to 5.7% 5.5% to 5.7%
- ------------------------------------------------------------------------------------------------
Net periodic benefit cost components:
Other
Pension Benefits Postretirement Benefits
---------------------- -----------------------
Year Ended December 31 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------
Service cost-benefits earned $ 79.6 $ 72.6 $ 67.3 $ 14.8 $ 14.7 $14.5
Interest cost 180.9 175.7 167.4 31.4 37.7 37.7
Expected return on plan assets (145.3) (141.9) (142.0)
Amortization of unrecognized
net asset 5.6 3.6 .6
Amortization of unrecognized
net loss (gain) 11.9 7.4 8.5 (3.4) (5.9) (4.4)
Amortization of unrecognized
prior service cost 9.9 14.2 13.5 (14.3) (5.0) .7
Curtailment loss 8.0 17.0 2.0
- ------------------------------------------------------------------------------
Net periodic benefit cost $ 150.6 $ 148.6 $ 115.3 $ 28.5 $ 43.5 $48.5
==============================================================================
For measurement purposes, a trend rate for covered costs from 8.0% to 9.0%
pre-65 and 8.3% post-65, was used. These trend rates are expected to decrease
gradually to an ultimate rate from 6.0% to 4.8% at rates from 0.5% to 0.3% per
annum. The health care cost trend rate assumption has a significant effect on
the amount of the benefit obligation and periodic cost reported. An increase
(or decrease) in the assumed health care cost trend rate of 1% would increase
(or decrease) the postretirement benefit obligation as of December 31, 1999 by
$21.9 (or $20.2) and the total of service and interest cost components of net
periodic postretirement benefit cost for 1999 by $3.0 (or $2.9).
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with an accumulated benefit obligation
in excess of plan assets were $1,940.2, $1,617.8 and $1,539.0, respectively,
at December 31, 1999 and $2,323.3, $1,983.7 and $1,746.1, respectively, at
December 31, 1998.
32
Savings Plans - The Company and its subsidiaries have several contributory
savings plans which allow employees to make regular contributions based upon a
percentage of their salary. Matching contributions are made up to specified
percentages of employees' contributions. The contributions by the Company and
its subsidiaries to these plans amounted to $33.6, $34.4 and $29.1 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The following provides a reconciliation of benefit obligations:
Other Postretirement
Pension Benefits Benefits
-------------------- ---------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at
January 1 $2,677.4 $2,512.8 $ 465.8 $ 521.9
Service cost 79.6 72.6 14.8 14.7
Interest cost 180.9 175.7 31.4 37.7
Plan participants' contribution 7.4 8.6
Amendments (.4) .5 (48.0) (102.7)
Actuarial (gain) loss (214.2) 142.1 (11.9) 64.2
Benefits paid from plan assets (146.3) (138.3) (45.6) (44.6)
Curtailment (44.0) (88.0) (2.0) (34.0)
- ------------------------------------------------------------------------------
Benefit obligation at
December 31 2,533.0 2,677.4 411.9 465.8
- ------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at January 1 2,107.8 1,966.1
Actual return on plan assets (27.3) 161.9
Company contributions 170.7 118.1 38.2 36.0
Plan participants' contribution 7.4 8.6
Benefits paid from plan assets (146.3) (138.3) (45.6) (44.6)
- ------------------------------------------------------------------------------
Fair value of plan assets at
December 31 2,104.9 2,107.8
- ------------------------------------------------------------------------------
Benefit obligation over plan
assets (428.1) (569.6) (411.9) (465.8)
Unrecognized net actuarial
loss 257.7 360.6 (48.8) (38.2)
Unrecognized prior service
cost (benefit) 67.4 82.7 (141.2) (107.5)
Unrecognized net obligation 6.2 11.8
- ------------------------------------------------------------------------------
Accrued benefit cost $ (96.8) $ (114.5) $(601.9) $(611.5)
==============================================================================
Amounts recognized in the
Consolidated Balance
Sheets consist of:
Prepaid benefit cost $ 85.7 $ 94.5
Accrued benefit liability (188.3) (218.0) $(601.9) $(611.5)
Intangible asset .2 .3
Accumulated other
comprehensive income 5.6 8.7
- ------------------------------------------------------------------------------
Net amount recognized $ (96.8) $ (114.5) $(601.9) $(611.5)
==============================================================================
33
Note 15. Gains on Issuance of Subsidiaries' Stock -
In September 1997, a subsidiary of CNA merged with Capsure Holdings Corp. to
form a new company, CNA Surety Corporation. CNA owns approximately 61% of the
outstanding shares on a fully diluted basis. As a result of this transaction,
the Company recognized a gain of $95.2 ($52.2 after provision for deferred
taxes and minority interest) from issuance of its subsidiary's common stock.
In April 1997, Diamond Offshore Drilling, Inc., ("Diamond Offshore") completed
a public offering of 2.5 million shares of its common stock for net proceeds
of approximately $82.3. Diamond Offshore used these funds to acquire the
Polyconfidence, a semisubmersible accommodation vessel for approximately
$81.0. As a result of the public offering, the Company's ownership interest in
Diamond Offshore declined to 50.3% and the Company recorded a pre-tax gain of
approximately $29.1 ($18.9 after provision for deferred taxes).
Note 16. Quarterly Financial Data (Unaudited) -
1999 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------
Total revenues $4,859.2 $5,430.5 $5,670.6 $5,504.9
(Loss) income before cumulative
effect of changes in accounting
principles (207.8) 271.3 254.3 203.3
Per share (1.97) 2.52 2.33 1.82
Net (loss) income (207.8) 271.3 254.3 45.4
Per share (1.97) 2.52 2.33 .41
1998 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------
Total revenues $5,040.0 $5,992.7 $5,441.8 $4,821.5
Net (loss) income (315.8) 617.1 247.2 (83.7)
Per share (2.78) 5.38 2.15 (.73)
- ------------------------------------------------------------------------------
Note 17. Reinsurance -
The effects of reinsurance on earned premiums are as follows:
Direct Assumed Ceded Net
- ------------------------------------------------------------------------------
Year Ended December 31, 1999
Property and casualty $ 9,158.0 $ 1,816.0 $ 2,199.0 $ 8,775.0
Accident and health 3,725.0 198.0 397.0 3,526.0
Life 1,174.0 222.0 420.0 976.0
- ------------------------------------------------------------------------------
Total $14,057.0 $ 2,236.0 $ 3,016.0 $13,277.0
==============================================================================
34
Direct Assumed Ceded Net
- ------------------------------------------------------------------------------
Year Ended December 31, 1998
Property and casualty $ 8,327.0 $ 1,549.0 $ 897.0 $ 8,979.0
Accident and health 3,739.0 176.0 256.0 3,659.0
Life 1,014.0 159.0 281.0 892.0
- ------------------------------------------------------------------------------
Total $13,080.0 $ 1,884.0 $ 1,434.0 $13,530.0
==============================================================================
Year Ended December 31, 1997
Property and casualty $ 8,528.0 $ 1,101.0 $ 612.0 $ 9,017.0
Accident and health 3,719.0 259.0 280.0 3,698.0
Life 908.0 128.0 131.0 905.0
- ------------------------------------------------------------------------------
Total $13,155.0 $1,488.0 $1,023.0 $13,620.0
==============================================================================
Written premiums were $12,290.0, $13,823.0 and $13,620.0 at December 31, 1999,
1998 and 1997, respectively. The ceding of insurance does not discharge the
primary liability of CNA. CNA places reinsurance with carriers only after
careful review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claims settlement practices. Further, CNA
generally requires collateral, primarily in the form of bank letters of
credit, from carriers that are not authorized reinsurers in CNA's states of
domicile. Such collateral was approximately $1,191.0 and $774.0 at December
31, 1999 and 1998, respectively. CNA's largest recoverables from reinsurers,
including prepaid reinsurance premiums, were approximately $788.0 and $510.0
at December 31, 1999, and were with Allstate and Lloyds of London,
respectively.
Insurance claims and policyholders' benefits are net of reinsurance recoveries
of $3,272.0, $994.0 and $1,309.0 for the years ended December 31, 1999, 1998
and 1997, respectively.
In the above tables, life premiums are primarily from long duration contracts,
property and casualty premiums, and accident and health premiums are primarily
from short duration contracts.
Note 18. Legal Proceedings and Contingent Liabilities -
INSURANCE RELATED
Fibreboard Corporation Litigation - An agreement between Continental Casualty
Company ("Casualty"), Pacific Indemnity and Fibreboard Corporation
("Fibreboard") (the "Trilateral Agreement") has obtained final court approval
and its implementation has substantially resolved Casualty's exposure with
respect to asbestos claims involving Fibreboard. The Trilateral Agreement
calls for payment by Casualty and Pacific Indemnity of an aggregate $2,000.0,
of which Casualty's portion is approximately $1,460.0, to Fibreboard to
resolve (i) all claims by Fibreboard and (ii) all filed but unsettled asbestos
claims as of August 23, 1993, and all future asbestos claims against
Fibreboard. Casualty has paid all amounts required under this obligation of
the Trilateral Agreement. Casualty is also obligated to pay asbestos claims
settled as of August 23, 1993.
Through December 31, 1999, Casualty, Fibreboard and plaintiff attorneys had
reached settlements with
35
respect to approximately 133,000 claims, for an estimated settlement amount of
approximately $1,630.0 plus any applicable interest. Approximately $1,720.0
(including interest of approximately $184.0) was paid by Casualty through
December 31, 1999. Such payments have been partially recovered from Pacific
Indemnity.
While there does exist the possibility of further adverse developments with
respect to Fibreboard claims, management does not anticipate subsequent
reserve adjustments, if any, to materially affect the equity of the Company.
Management will continue to monitor the potential liabilities with respect to
Fibreboard asbestos claims and will make adjustments to claim reserves if
warranted.
TOBACCO LITIGATION - Three insurance subsidiaries of CNA are defendants in a
lawsuit arising out of policies allegedly issued to Liggett Group, Inc.
("Liggett"). Although it did not issue policies to Liggett, CNA also has been
named as a defendant in this lawsuit which was filed by Liggett and Brooke
Group Holding Inc. in Delaware Superior Court, New Castle County on January
26, 2000. The lawsuit, which involves numerous insurers, concern coverage
issues relating to hundreds of tobacco-related claims asserted against Liggett
over the past twenty years. However, Liggett only began submitting claims for
coverage under the policies in January 2000. All of the policies issued by
subsidiaries of CNA that have been located to date contain exclusions for
tobacco-related claims. Based on facts and circumstances currently known,
management believes that the ultimate outcome of the pending litigations
should not materially affect the financial condition of CNA.
IGI CONTINGENCY - In 1997, CNA Reinsurance Company Limited ("CNA Re Ltd.")
entered into an arrangement with IOA Global, Ltd. ("IOA"), an independent
managing general agent based in Philadelphia, Pennsylvania, to develop and
manage a book of accident and health coverages. Pursuant to this arrangement,
IGI Underwriting Agencies, Ltd. ("IGI"), a personal accident reinsurance
managing general underwriter, was appointed to underwrite and market the book
under the supervision of IOA. Over the past three years, IGI bound CNA Re Ltd.
on a number of reinsurance arrangements with respect to personal accident
insurance worldwide (the "IGI Program"). Under various arrangements CNA Re
Ltd. both assumed risks as a reinsurer and also ceded a substantial portion of
those risks to other companies, including other CNA insurance subsidiaries and
ultimately a group of reinsurers participating in a reinsurance pool known as
the Associated Accident and Health Reinsurance Underwriters ("AAHRU")
Facility. CNA's Group Health business unit participated as a pool member in
the AAHRU Facility in varying percentages over the past three years.
CNA has undertaken a review of the IGI Program and, among other things, has
determined that approximately $20.0 of premium was assumed by CNA Re Ltd. with
respect to United States workers' compensation "carve out" insurance. CNA is
aware that a number of reinsurers with respect to such "carve out" insurance
have disavowed their obligations under various legal theories. If one or more
such companies are successful in avoiding or reducing their liabilities, then
it is likely that CNA's liability will also be reduced. Moreover, based on
information known at this time, CNA reasonably believes it has strong grounds
for avoiding altogether a substantial portion of its carve out exposure
through legal action.
As noted, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program. Although CNA believes it has valid and
enforceable reinsurance contracts with the AAHRU Facility and other reinsurers
with respect to United States workers' compensation carve out business, it is
unable to predict to what extent such reinsurers would dispute their
liabilities to CNA. Legal actions could result, and the resolution of any such
actions could take years.
CNA has a reserve of $50.0 as of December 31, 1999 with respect to the United
States workers' compensation carve out exposure it incurred through the IGI
Program. These reserves were established net of estimated recoveries from
retrocessionaires and the estimate of ultimate losses is subject to
considerable uncertainty. As a result of these uncertainties, the results of
operations in future years may be adversely affected by potentially
significant reserve additions. Management does not believe that any such
future reserve additions will be material to equity.
36
TOBACCO RELATED
Lawsuits continue to be filed with increasing frequency against Lorillard and
other manufacturers of tobacco products. Approximately 1,225 product liability
cases are pending against U.S. cigarette manufacturers, including
approximately 500 cases filed by flight attendants alleging injury from
exposure to environmental tobacco smoke in the aircraft cabin. Of these 1,225
cases, Lorillard is a defendant in approximately 825, including each of the
flight attendant cases filed and served to date.
Tobacco litigation includes various types of claims. In these actions,
plaintiffs claim substantial compensatory, statutory and punitive damages, as
well as equitable and injunctive relief, in amounts ranging into the billions
of dollars. These claims are based on a number of legal theories including,
among other things, theories of negligence, fraud, misrepresentation, strict
liability, breach of warranty, enterprise liability, civil conspiracy,
intentional infliction of harm, violation of consumer protection statutes,
violation of anti-trust statutes, and failure to warn of the allegedly harmful
and/or addictive nature of tobacco products.
Some cases have been brought by individual plaintiffs who allege cancer and/or
other health effects claimed to have resulted from an individual's use of
cigarettes, addiction to smoking, or exposure to environmental tobacco smoke
("Conventional Product Liability Cases"). Approximately 715 such actions are
pending against Lorillard. In other cases, plaintiffs have brought claims as
class actions on behalf of large numbers of individuals for damages allegedly
caused by smoking ("Class Actions"). Approximately 40 such cases are pending
against Lorillard. In some cases, plaintiffs are governmental entities or
entities such as labor unions, private companies, Indian Tribes, or private
citizens suing on behalf of taxpayers. Plaintiffs in these cases seek
reimbursement of health care costs allegedly incurred as a result of smoking,
as well as other alleged damages ("Reimbursement Cases"). Approximately 55
such cases are pending, including suits brought by the U.S. federal government
and the governments of several foreign nations. There also are claims for
contribution and/or indemnity in relation to asbestos claims filed by asbestos
manufacturers or the insurers of asbestos manufacturers ("Claims for
Contribution"). Approximately eight such actions are pending against
Lorillard, and a ninth case has been served on some of the defendants but not
Lorillard.
In addition to the above, claims have been brought against Lorillard seeking
damages resulting from alleged exposure to asbestos fibers which were
incorporated, for a limited period of time, ending more than forty years ago,
into filter material used in one brand of cigarettes manufactured by Lorillard
("Filter Cases"); approximately 25 such actions are pending.
SETTLEMENT OF STATE REIMBURSEMENT LITIGATION
On November 23, 1998, Lorillard, Philip Morris Incorporated, Brown &
Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the
"Original Participating Manufacturers") entered into a Master Settlement
Agreement (the "Master Settlement Agreement") with 46 states, the District of
Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands,
American Samoa and the Northern Marianas (collectively, the "Settling States")
to settle the asserted and unasserted health care cost recovery and certain
other claims of those states. The Original Participating Manufacturers had
previously settled similar claims brought by Mississippi, Florida, Texas, and
Minnesota (together with the Master Settlement Agreement, the "State
Settlement Agreements").
The Master Settlement Agreement is subject to final judicial approval in each
of the Settling States. In the Company's opinion, final judicial approval has
been achieved in each of the Settling States, and a condition known as "State-
Specific Finality" has been achieved in 47 of the 52 Settling States. The
Master Settlement Agreement provides that it is not an admission or concession
or evidence of any liability or wrongdoing on the part of any party, and was
entered into by the Original Participating Manufacturers to avoid the further
expense, inconvenience, burden and uncertainty of litigation.
Lorillard recorded pre-tax charges of $1,065.8, $579.0 and $198.8 for the
years ended December 31, 1999, 1998 and 1997, respectively, to account for its
obligations under the State Settlement Agreements. The 1998 and 1997 charges
represent Lorillard's share of all fixed and determinable portions of its
obligations under the tobacco settlements. For periods subsequent to December
31, 1998, Lorillard's portion of ongoing adjusted payments and legal fees is
based on its share of
37
domestic cigarette shipments in the year preceding that in which the payment
is due. Accordingly, Lorillard records its portions of ongoing settlement
payments as part of cost of manufactured products sold as the related sales
occur.
The State Settlement Agreements require that the domestic tobacco industry
make annual payments in the following amounts, subject to adjustment for
several factors, including inflation, market share and industry volume: 2000,
$9,200.0; 2001, $9,900.0; 2002, $11,300.0; 2003, $10,900.0; 2004 through 2007,
$8,400.0; and thereafter, $9,400.0. In addition, the domestic tobacco industry
is required to pay settling plaintiffs' attorneys' fees, subject to an annual
cap of $500.0, as well as additional amounts as follows: 2000, $416.0; and
2001 through 2003, $250.0. These payment obligations are the several and not
joint obligations of each settling defendant.
The State Settlement Agreements also include provisions relating to
significant advertising and marketing restrictions, public disclosure of
certain industry documents, limitations on challenges to tobacco control and
underage use laws, and other provisions.
The Original Participating Manufacturers have also, as part of the Master
Settlement Agreement, committed to work cooperatively with the tobacco grower
community to address concerns about the potential adverse economic impact on
that community. On January 21, 1999, the Original Participating Manufacturers
reached an agreement in principle to establish a $5,150.0 trust fund payable
over 12 years to compensate the tobacco growing communities in 11 states.
Payments to the trust fund are to be allocated among the Original
Participating Manufacturers according to their relative market share of
domestic cigarette shipments, except that Philip Morris will pay more than its
market share in the first year of the agreement but will have its payment
obligations reduced in years 11 and 12 to make up for the overpayment.
Lorillard's payments under the agreement will total approximately $515.0. All
payments will be adjusted for inflation, changes in the unit volume of
domestic cigarette shipments, and for the effect of any new increases in state
or federal excise taxes on tobacco products which benefits the growing
community.
The Company believes that the State Settlement Agreements will materially
adversely affect its cash flows and operating income in future years. The
degree of the adverse impact will depend, among other things, on the rates of
decline in United States cigarette sales in the full price and discount
segments, Lorillard's share of the domestic full price and discount cigarette
segments, and the effect of any resulting cost advantage of manufacturers not
subject to the State Settlement Agreements. Almost all domestic manufacturers
have agreed to become subject to the terms of the Master Settlement Agreement.
CONVENTIONAL PRODUCT LIABILITY CASES- There are approximately 1,120 cases
filed by individual plaintiffs against manufacturers of tobacco products
pending in the United States federal and state courts in which individuals
allege they or their decedents have been injured due to smoking cigarettes,
due to exposure to environmental tobacco smoke, or due to nicotine dependence.
Approximately 500 of the cases have been filed by flight attendants
purportedly injured by their exposure to environmental tobacco smoke in the
aircraft cabin. Lorillard is a defendant in approximately 715 of these cases,
including each of the approximately 500 flight attendant cases. The Company is
a defendant in eight of the cases filed by individuals, although five of them
have not been served. The Company is not named as a defendant in any of the
flight attendant cases served to date.
Plaintiffs in most of these cases seek unspecified amounts in compensatory and
punitive damages.
During 1998 and 1999, a total of eight trials were held involving eleven cases
filed by individual plaintiffs. Lorillard and the Company were defendants in
one of the cases and Lorillard was a defendant in a second case. Juries
returned verdicts in favor of the defendants in the cases tried against
Lorillard and the Company. In the nine remaining cases, verdicts were returned
in favor of the defendants in six of the matters. Juries found in plaintiffs'
favor in the remaining three cases. In these three verdicts, juries awarded
plaintiffs a total of $132.8 in actual damages and punitive damages. One of
the three verdicts in favor of plaintiffs has been vacated on appeal. In the
two remaining cases, the courts have reduced the verdicts to a total of $59.4.
Appeals are pending in both of these actions. Trial is currently underway in
one case brought by individuals. Neither the Company nor Lorillard is a
defendant in that matter.
CLASS ACTIONS - There are 60 purported class actions pending against cigarette
manufacturers and
38
other defendants. Lorillard is a defendant in 40 of the 60 cases seeking class
certification. The Company is a defendant in 12 of the purported class actions
in which Lorillard is a defendant. Many of the purported class actions are in
the pre-trial, discovery stage. Most of the suits seek class certification on
behalf of residents of the states in which the cases have been filed, although
some suits seek class certification on behalf of residents of multiple states.
All but one of the purported class actions seek class certification on behalf
of individuals who smoked cigarettes or were exposed to environmental tobacco
smoke. One case seeks class certification on behalf of individuals who have
paid insurance premiums to Blue Cross and Blue Shield organizations.
Theories of liability asserted in the purported class actions include a broad
range of product liability theories, including those based on consumer
protection statutes and fraud and misrepresentation. Plaintiffs seek damages
in each case that range from unspecified amounts to the billions of dollars.
Most plaintiffs seek punitive damages and some seek treble damages. Plaintiffs
in many of the cases seek medical monitoring. Plaintiffs in several of the
purported class actions are represented by a well-funded and coordinated
consortium of over 60 law firms from throughout the United States.
Trial began during July 1998 in the case of Engle v. R.J. Reynolds Tobacco
Co., et al. (Circuit Court, Dade County, Florida, filed May 5, 1994). The
trial court has granted class certification on behalf of Florida residents and
citizens, and survivors of such individuals, who suffered injury or have died
from medical conditions allegedly caused by their addiction to cigarettes
containing nicotine. Plaintiffs seek actual damages and punitive damages
estimated to be in the billions of dollars. Plaintiffs also seek equitable
relief including, but not limited to, a fund to enable Florida smokers'
medical condition to be monitored for future health care costs, attorneys'
fees and court costs.
The case is being tried in three phases. The first phase involved
consideration of certain issues "common" to the members of the class and their
asserted causes of action.
On July 7, 1999, the jury returned a verdict against defendants at the
conclusion of the first phase. The jury found, among other things, that
cigarette smoking is addictive and causes lung cancer and a variety of other
diseases, that the defendants concealed information about the health risks of
smoking, and that defendants' conduct "rose to a level that would permit a
potential award or entitlement to punitive damages." The verdict permitted the
trial to proceed to a second phase. The jury was not asked to award damages in
the Phase One verdict.
Phase Two of the trial began on November 1, 1999 and is proceeding before the
same jury which returned the verdict in Phase One. In the first part of Phase
Two, the jury will determine issues of specific causation, reliance,
affirmative defenses, and other individual-specific issues related to the
claims of three named plaintiffs and their entitlement to damages, if any.
If the jury returns a verdict in favor of any of the three named plaintiffs
and awards compensatory damages, then the trial would proceed to the second
part of Phase Two, which would involve a determination of punitive damages. By
order dated July 30, 1999 and supplemented on August 2, 1999 (together, the
"order"), the trial judge amended the trial plan in respect to the manner of
determining punitive damages. The order provides that the jury will determine
punitive damages, if any, on a lump-sum dollar amount basis for the entire
qualified class. The Third District of the Florida Court of Appeal rejected
defendants' appeals from these rulings, and the Florida Supreme Court declined
to review the orders at this time.
It is unclear how the order will be implemented. The August 2, 1999 order
provides that the lump-sum punitive damage amount, if any, will be allocated
equally to each class member and acknowledges that the actual size of the
class will not be known until the last case has withstood appeal, i.e., the
punitive damage amount, if any, determined for the entire qualified class,
would be divided equally among those plaintiffs who are ultimately successful.
The order does not address whether defendants would be required to pay the
punitive damage award, if any, prior to a determination of claims of all class
members, a process that could take years to conclude. Lorillard does not
believe that an adverse class-wide punitive damage award in Phase Two would
permit entry of a judgment at that time that would require the posting of a
bond to stay its execution pending appeal or that any party would be entitled
to execute on such a judgment in the absence of a bond. However, in a worst
case scenario, it is possible that a judgment for punitive damages could be
entered
39
in an amount not capable of being bonded, resulting in an execution of the
judgment before it could be set aside on appeal. Lorillard believes that such
a result would be unconstitutional and would also violate Florida law.
Lorillard intends to take all appropriate steps to seek to prevent this worst
case scenario from occurring and believes these efforts should be successful.
Pursuant to the trial plan, Phase Three would address potentially hundreds of
thousands of other class members' claims, including issues of specific
causation, reliance, affirmative defenses and other individual-specific issues
regarding entitlement to damages, in individual trials before separate juries.
Lorillard remains of the view that the Engle case should not have been
certified as a class action. That certification is inconsistent with the
overwhelming majority of federal and state court decisions which have held
that mass smoking and health claims are inappropriate for class treatment.
Lorillard intends to challenge the class certification, as well as other
numerous reversible errors that it believes occurred during the trial to date,
at the earliest time that an appeal of these issues is appropriate under
Florida law. Lorillard believes that an appeal of these issues on the merits
should prevail.
On October 10, 1997, the parties to Broin v. Philip Morris Companies, Inc., et
al. (Circuit Court, Dade County, Florida, October 31, 1991), a class action
brought on behalf of flight attendants claiming injury as a result of exposure
to environmental tobacco smoke, executed a settlement agreement which was
approved by the court on February 3, 1998. Pursuant to the settlement
agreement, among other things, Lorillard has agreed to pay approximately $30.0
to create and endow a research institute to study diseases associated with
cigarette smoke. In addition, the settlement agreement permits the plaintiff
class members to file individual suits, but they may not seek punitive damages
for injuries that arose prior to January 15, 1997. To date, approximately 500
such suits have been filed and served on U.S. cigarette manufacturers,
including Lorillard.
REIMBURSEMENT CASES - Suits brought by 46 state governments and six other
governmental entities have been resolved or are expected to be resolved by the
Master Settlement Agreement. In addition to these, approximately 55 other
suits are pending, comprised of cases brought by the U.S. federal government,
unions, Indian tribes, private companies and foreign governments filing suit
in U.S. courts, in which plaintiffs seek recovery of funds expended by them to
provide health care to individuals with injuries or other health effects
allegedly caused by use of tobacco products or exposure to cigarette smoke.
These cases are based on, among other things, equitable claims, including
injunctive relief, indemnity, restitution, unjust enrichment and public
nuisance, and claims based on antitrust laws and state consumer protection
acts. Plaintiffs seek damages in each case that range from unspecified amounts
to the billions of dollars. Most plaintiffs seek punitive damages and some
seek treble damages. Plaintiffs in many of the cases seek medical monitoring.
Lorillard is named as a defendant in most such actions. The Company is named
as a defendant in 13 of them, although two of the cases have not been served.
U.S. Federal Government Action - The federal government of the United States
filed a reimbursement suit on September 22, 1999 in federal court in the
District of Columbia against Lorillard, other U.S. cigarette manufacturers,
some parent companies (but not the Company) and two trade associations.
Plaintiff asserts claims under the Medical Care Recovery Act, the Medicare
Secondary Payer provisions of the Social Security Act, and the Racketeer
Influenced and Corrupt Organizations Act. The government alleges in the
complaint that it has incurred costs of more than $20,000.0 annually in
providing health care costs under certain federal programs, including
Medicare, military and veterans' benefits programs, and the Federal Employee
Health Benefits Program. The federal government seeks to recover an
unspecified amount of health care costs, and various types of declaratory
relief, including disgorgement, injunctive relief and declaratory relief that
defendants are liable for the government's future costs of providing health
care resulting from the defendants' alleged wrongful conduct. On December 27,
1999, defendants filed a motion to dismiss all claims.
State or Local Governmental Reimbursement Cases - The Master Settlement
Agreement has resolved or is expected to resolve the cases filed by 46 state
governments and six other governmental entities. Since January 1, 1997, cases
brought by four state governments, Florida, Minnesota, Mississippi and Texas,
were settled in separate agreements. Lorillard was a defendant in each of the
46 cases filed by state governments and in the six cases brought by other
governmental
40
entities, as well as in the four cases governed by the separate settlement
agreements. Seven local governments also have filed suit against cigarette
manufacturers, although the Master Settlement Agreement purportedly resolves
those actions.
Private Citizens Reimbursement Cases - There are four suits pending in which
plaintiffs are private citizens. In three of the cases, plaintiffs are private
citizens who have filed suit on behalf of taxpayers of their respective
states, although governmental entities filed reimbursement suits in the
states. The Company is a defendant in two of the pending private citizen
reimbursement cases. Lorillard is a defendant in each of the cases. Three of
the cases are in the pre-trial, discovery stage. One of the matters is on
appeal from a final judgment entered by the trial court in favor of the
defendants.
Reimbursement Cases filed by Foreign Governments in U.S. Courts - Cases have
been brought in U.S. courts by the nations of Bolivia, Ecuador, Guatemala,
Nicaragua, Panama, Thailand, Venezuela and Ukraine, as well as by the
Brazilian States of Goias, Rio de Janeiro and Sao Paolo. Lorillard is a
defendant in the cases filed by Bolivia, Ecuador, Ukraine, Venezuela and the
three Brazilian states. The Company is a defendant in the cases filed by
Bolivia, Ukraine and Venezuela, as well as those filed by the three Brazilian
states, although the Company has not received service of process of the cases
filed by the State of Sao Paolo, Brazil, or Venezuela. None of the defendants
have received service of process to date of the case filed by Ecuador. The
suit filed by Thailand has been voluntarily dismissed by the plaintiffs. In
1977, Lorillard sold its major trademarks outside of the United States and the
international sales business in cigarettes associated with those brands.
Performance by Lorillard of obligations under the 1977 agreement was
guaranteed by the Company. Lorillard and the Company have received notice from
Brown & Williamson Tobacco Corporation, which claims to be a successor to the
purchaser, that indemnity will be sought under certain indemnification
provisions of the 1977 agreement with respect to suits brought by various of
the foregoing foreign jurisdictions, concerning periods prior to June 1977 and
during portions of 1978.
Reimbursement Cases by Indian Tribes - Indian Tribes have filed eleven
reimbursement suits. Most of these cases have been filed in tribal courts.
Four of the eleven cases have been dismissed. Lorillard is a defendant in each
of the cases. The Company is not named as a defendant in any of the tribal
suits filed to date. Each of the pending cases is in the pre-trial, discovery
stage.
Reimbursement Cases Filed By Private Companies - Private companies have filed
six reimbursement suits against cigarette manufacturers, two of such cases,
brought by self insured employers, have been terminated. Three of the six
suits filed to date have been brought by various Blue Cross and/or Blue Shield
entities, while another case was brought by a health maintenance organization.
The plaintiffs in two of the cases filed by Blue Cross entities have noticed
appeals from orders by their trial courts that dismissed the cases. Lorillard
has been named as a defendant in each of the six cases filed to date by
private companies. The Company has not been named as a defendant in any of the
actions filed to date by private companies. Two of the cases are in the pre-
trial, discovery stage, and both are scheduled for trial during 2000.
Reimbursement Cases by Labor Unions - Approximately 30 reimbursement suits are
pending in various federal or state courts in which the plaintiffs are labor
unions, their trustees or their trust funds. Lorillard is a defendant in each
of these suits. The Company is named as a defendant in three of them. Nine of
the approximately 30 cases are on appeal from final judgments entered in
defendants' favor by the trial courts. The Second, Third, Fifth, Seventh and
Ninth Circuit Courts of Appeal have affirmed various rulings entered by trial
courts that dismissed several of the labor union actions, and the U.S. Supreme
Court has denied petitions for writ of certiorari that sought review of some
of these decisions. Each of the remaining cases is in the pre-trial, discovery
stage. Trial is scheduled to be held during 2000 in one of the cases.
On March 18, 1999, the jury in Iron Workers Local Union No. 17 Insurance Fund,
et al. v. Philip Morris, Inc., et al. (U.S. District Court, Northern District,
Ohio, Eastern Division, filed May 20, 1997) returned a verdict in favor of the
defendants, which included Lorillard, on all counts of plaintiffs' complaint.
The trial was the first against cigarette manufacturers in a case filed by
union trust funds. During pre-trial proceedings, the court granted plaintiffs'
motion for class certification on behalf of funds in Ohio established under
the Taft-Hartley Act. Plaintiffs have voluntarily dismissed
41
the appeal they noticed following the verdict.
In addition to the reimbursement cases, some suits have been filed contesting
the Master Settlement Agreement. Certain other actions have been filed in
which plaintiffs seek to intervene in cases governed by the Master Settlement
Agreement in order to achieve a different distribution of the funds allocated
by the Master Settlement Agreement to the respective states.
CONTRIBUTION CLAIMS - In addition to the foregoing cases, nine cases are
pending in which private companies seek recovery of funds expended by them to
individuals whose asbestos disease or illness was alleged to have been caused
in whole or in part by smoking-related illnesses. Lorillard is named as a
defendant in each action, although it has not received service of process of
one of them. The Company is named as a defendant in four of the cases,
although it has not received service of process of one of the actions. Each of
these cases is in the pre-trial, discovery stage. Trial is scheduled to be
held during 2000 in three of the cases.
FILTER CASES - A number of cases have been filed against Lorillard seeking
damages for cancer and other health effects claimed to have resulted from
exposure to asbestos fibers which were incorporated, for a limited period of
time, ending more than forty years ago, into the filter material used in one
of the brands of cigarettes manufactured by Lorillard. Approximately 25 such
cases are pending in federal and state courts. Allegations of liability
include negligence, strict liability, fraud, misrepresentation and breach of
warranty. Plaintiffs in most of these cases seek unspecified amounts in
compensatory and punitive damages. Trials have been held in 13 such cases. Two
such trials were held in 1999 and one trial was held in 2000. Juries have
returned verdicts in favor of Lorillard in 10 of the 13 trials. Three verdicts
have been returned in plaintiffs' favor, including in one of the cases tried
during 1999. In the 1999 trial, plaintiffs were awarded $2.2 in actual
damages. Lorillard has noticed an appeal from this verdict.
CALIFORNIA BUSINESS AND PROFESSIONS CODE CASES - Two California cities, Los
Angeles and San Jose, suing on behalf of the People of the State of
California, have filed suits alleging cigarette manufacturers, including
Lorillard, have violated a California statute, commonly known as "Proposition
65," by failing to warn California residents of the health risks of
environmental tobacco smoke. Plaintiffs in both suits further allege
defendants violated certain provisions of the California Business and
Professions Code. Two other cases that make similar allegations against
manufacturers of other types of tobacco products have been filed. The four
suits have been transferred to a coordinated proceeding in the Superior Court
of San Diego County, California. The court has entered an order dismissing the
"Proposition 65" claims but certain causes of action remain pending. The four
cases are set for trial on June 2, 2000.
OTHER TOBACCO-RELATED LITIGATION
Antitrust Cases
Wholesalers and Direct Purchasers Suits - Lorillard and other domestic and
international cigarette manufacturers and their parent companies, including
the Company, have been named as defendants in four separate federal court
actions brought by tobacco product wholesalers for violations of U.S.
antitrust laws and international law. The complaints allege that defendants
conspired to fix the price of cigarettes to wholesalers since 1988 in
violation of the Sherman Act. The action seeks certification of a class
including all domestic and international wholesalers similarly affected by
such alleged conduct, and seeks damages, injunctive relief and attorneys'
fees.
Twenty-five suits in various state courts have also been filed alleging
violations of state antitrust laws which permit indirect purchasers, such as
retailers and consumers, to sue under price fixing or consumer fraud statutes.
Approximately 18 states permit such suits.
Tobacco Growers Case - A purported class action on behalf of tobacco growers
and quota holders has been filed against the major U.S. cigarette
manufacturers, their parent companies (including the Company) and other
affiliated entities in which the plaintiffs allege the defendants conspired
through the Master Settlement Agreement and other related activities to
displace the tobacco quota and price support system that is administered by
the federal government; that the defendants misled plaintiffs into supporting
their legislative and settlement positions; and that the defendants violated
their fiduciary obligation to represent plaintiffs' interests.
DEFENSES - Lorillard believes that it has a number of defenses to pending
cases and Lorillard will continue to maintain a vigorous defense in all such
litigation. These defenses, where applicable, include, among others, pre-
42
emption, statutes of limitations or repose, assumption of the risk,
comparative fault, the lack of proximate causation, the lack of any defect in
the product alleged by a plaintiff, defenses based upon the Master Settlement
Agreement and defenses available under general antitrust law. Lorillard
believes that some or all of these defenses may, in many of the pending or
anticipated cases, be found by a jury or court to bar recovery by a plaintiff.
Application of various defenses are likely to be the subject of further legal
proceedings in the litigation.
* * * *
While Lorillard intends to defend vigorously all smoking and health related
litigation which may be brought against it, it is not possible to predict the
outcome of any of this litigation. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably.
Many of the recent developments in relation to smoking and health discussed
above have received wide-spread media attention including the release of
industry documents. These developments may reflect adversely on the tobacco
industry and could have adverse effects on the ability of Lorillard and other
cigarette manufacturers to prevail in smoking and health litigation.
Except for the impact of the State Settlement Agreements as described above,
management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending litigation. It
is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an unfavorable outcome of certain pending litigation.
OTHER LITIGATION - The Company and its subsidiaries are also parties to other
litigation arising in the ordinary course of business. The outcome of this
other litigation will not, in the opinion of management, materially affect the
Company's results of operations or equity.
MAJESTIC SHIPPING
In December 1999, Majestic Shipping Corporation ("Majestic"), a wholly owned
subsidiary of the Company, entered into an agreement with a Korean shipyard
for the newbuilding of two 442,500 deadweight ton, ultra-large crude carrying
ships ("ULCCs"). Majestic also has options for newbuilding of two additional
ULCCs. Hellespont Shipping Corporation ("Hellespont"), a 49% owned subsidiary
of Majestic, also entered into an agreement with another Korean shipyard for
the newbuilding of four 303,000 deadweight ton, very-large crude carrying
ships ("VLCCs"). In connection with Hellespont's contracts for newbuilding of
four VLCCs, a subsidiary of the Company entered into time charter agreements
for five year periods commencing upon the delivery of each VLCC. The Company
has guaranteed performance by its subsidiary under the time charter
agreements. Should Majestic exercise its options, the total cost of the eight
ships is estimated to amount to approximately $700.0.
43
Note 19. Business Segments -
Loews Corporation is a holding company. Its subsidiaries are engaged in the
following lines of business: property, casualty and life insurance (CNA
Financial Corporation, an 86.5% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of
hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary); the
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc., a 52% owned subsidiary); and the distribution and sale of watches and
clocks (Bulova Corporation, a 97% owned subsidiary). Each operating entity is
responsible for the operation of its specialized business and is headed by a
chief executive officer having the duties and authority commensurate with that
position.
CNA's insurance products include property and casualty coverages; life,
accident and health insurance; and pension products and annuities. CNA's
services include risk management, information services, health care
management, claims administration and employee leasing/payroll processing.
CNA's products and services are marketed through agents, brokers, managing
general agents and direct sales.
Lorillard's principal products are marketed under the brand names of Newport,
Kent, True, Maverick and Old Gold with substantially all of its sales in the
United States.
Loews Hotels owns and/or operates 14 hotels, 12 of which are in the United
States and two are in Canada. There are also three properties in the United
States under development with opening dates scheduled from 2000 to 2002.
Diamond Offshore's business primarily consists of operating 45 offshore
drilling rigs that are chartered on a contract basis for fixed terms by
companies engaged in exploration and production of hydrocarbons. Offshore rigs
are mobile units that can be relocated based on market demand. As of December
31, 1999, 29 of these rigs were located in the Gulf of Mexico, 5 were located
in Brazil and the remaining 11 were located in various foreign markets.
Bulova distributes and sells watches and clocks under the brand names of
Bulova, Caravelle and Accutron with substantially all of its sales in the
United States and Canada. All watches and clocks are purchased from foreign
suppliers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. In addition, CNA does not maintain
a distinct investment portfolio for each of its insurance segments, and
accordingly, allocation of assets to each segment is not performed. Therefore,
investment income and investment gains (losses) are allocated based on each
segment's carried insurance reserves, as adjusted.
44
The following tables set forth the Company's consolidated revenues, income and
assets by business segment:
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Revenues (a):
CNA Financial:
Property and casualty $10,945.7 $11,320.7 $11,172.7
Life 1,577.8 1,593.6 1,593.8
Group (b) 3,747.3 3,935.2 4,113.0
Other 132.1 312.4 319.8
- ------------------------------------------------------------------------------
Total CNA Financial 16,402.9 17,161.9 17,199.3
Lorillard 4,064.5 2,865.1 2,416.8
Loews Hotels (c) 351.9 242.1 222.5
Diamond Offshore 846.9 1,244.9 977.5
Bulova 138.7 135.0 128.9
Corporate (339.7) (353.0) (678.4)
- ------------------------------------------------------------------------------
Total $21,465.2 $21,296.0 $20,266.6
==============================================================================
Income before taxes and minority interest and cumulative effect of changes in
accounting principles (a) (e):
CNA Financial:
Property and casualty $ 69.0 $ 399.7 $ 1,198.7
Life 178.0 293.9 377.8
Group (10.1) (37.9) 25.0
Other (236.2) (305.2) (233.1)
- ------------------------------------------------------------------------------
Total CNA Financial .7 350.5 1,368.4
Lorillard (d) 1,079.6 593.5 574.7
Loews Hotels (c) 112.5 54.5 32.2
Diamond Offshore 238.0 590.2 430.1
Bulova 20.8 18.6 15.3
Corporate (507.4) (529.9) (827.5)
- ------------------------------------------------------------------------------
Total $ 944.2 $ 1,077.4 $ 1,593.2
==============================================================================
45
Net income (a) (e):
CNA Financial:
Property and casualty $ 73.1 $ 257.7 $ 693.0
Life 97.4 158.5 206.3
Group (1.5) (16.2) 16.7
Other (125.8) (165.3) (105.8)
- ------------------------------------------------------------------------------
Total CNA Financial 43.2 234.7 810.2
Lorillard (d) 651.9 351.8 363.1
Loews Hotels (c) 70.5 32.8 18.8
Diamond Offshore 72.7 181.1 130.9
Bulova 14.1 10.5 9.7
Corporate (331.3) (346.1) (539.1)
- ------------------------------------------------------------------------------
521.1 464.8 793.6
Cumulative effect of changes in accounting
principles (157.9)
- ------------------------------------------------------------------------------
Total $ 363.2 $ 464.8 $ 793.6
==============================================================================
Investments Receivables Total Assets
-----------------------------------------------------------------
December 31 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
CNA Financial $35,559.5 $37,177.3 $13,132.8 $12,661.3 $61,244.8 $62,432.0
Lorillard 1,301.0 558.5 54.9 41.8 2,208.7 1,296.1
Loews Hotels 202.9 72.2 23.7 33.0 604.0 395.8
Diamond Offshore 620.6 587.3 143.6 233.7 2,699.7 2,609.7
Bulova 31.0 22.0 63.4 56.2 178.8 164.4
Corporate and eliminations 2,918.0 4,287.9 110.3 61.4 2,527.7 4,081.4
- ------------------------------------------------------------------------------------------------
Total $40,633.0 $42,705.2 $13,528.7 $13,087.4 $69,463.7 $70,979.4
================================================================================================
46
(a) Investment gains (losses) included in Revenues, Pre-tax income and Net
income are as follows:
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
Revenues and pre-tax income:
CNA Financial:
Property and casualty $ 257.2 $ 474.7 $ 524.7
Life (37.9) 130.9 190.8
Group 6.0 45.3 43.0
Other 89.3 30.4 (20.5)
- ------------------------------------------------------------------------------
Total CNA Financial 314.6 681.3 738.0
Corporate and other (472.8) (545.6) (866.2)
- ------------------------------------------------------------------------------
$(158.2) $ 135.7 $(128.2)
==============================================================================
Net income:
CNA Financial:
Property and casualty $ 143.3 $ 256.2 $ 287.6
Life (26.3) 69.5 104.2
Group 3.3 24.7 23.4
Other 43.8 16.7 (12.1)
- ------------------------------------------------------------------------------
Total CNA Financial 164.1 367.1 403.1
Corporate and other (300.7) (354.6) (563.0)
- ------------------------------------------------------------------------------
$(136.6) $ 12.5 $(159.9)
==============================================================================
(b) Includes $2,100.0, $2,000.0 and $2,100.0 under contracts covering U.S.
government employees and their dependents for the respective periods.
(c) Includes gains from the sale of hotel properties of $85.1 and $14.7 ($52.0
and $8.4 after taxes) for the years ended December 31, 1999 and 1998,
respectively.
(d) Includes pre-tax charges related to the settlements of tobacco litigation
of $1,065.8, $579.0 and $198.8 ($637.3, $346.5 and $122.0 after taxes) for
the years ended December 31, 1999, 1998 and 1997, respectively.
(e) Income taxes and interest expenses are as follows:
Income Interest Income Interest Income Interest
Taxes Expense Taxes Expense Taxes Expense
---------------------------------------------------
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
CNA Financial:
Property and casualty $ (44.3) $ 13.4 $ 70.1 $ 15.0 $ 341.7
Life 64.1 3.3 106.8 14.3 133.2
Group (8.3) .2 (18.8) 5.2
Other (95.5) 184.8 (111.1) 189.7 (88.0) $198.0
- ------------------------------------------------------------------------------
Total CNA Financial (84.0) 201.7 47.0 219.0 392.1 198.0
Lorillard 427.7 14.9 241.7 1.4 211.6 .9
Loews Hotels 42.0 2.2 21.7 3.3 13.4 3.6
Diamond Offshore 89.8 9.2 220.2 14.5 161.3 10.3
Bulova 6.1 7.7 .1 5.3 .1
Corporate (176.1) 126.3 (183.8) 130.9 (288.4) 110.5
- ------------------------------------------------------------------------------
Total $ 305.5 $354.3 $ 354.5 $369.2 $ 495.3 $323.4
==============================================================================
47