SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6541
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LOEWS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2646102
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
667 MADISON AVENUE, NEW YORK, N.Y. 10021-8087
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(Address of principal executive offices) (Zip Code)
(212) 545-2000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Class Outstanding at May 2, 1994
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Common Stock, $1 par value 60,468,700 shares
1
INDEX
Part I. Financial Information Page
No.
------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
March 31, 1994 and December 31, 1993 ............ 3
Consolidated Condensed Statements of Operations--
Three months ended March 31, 1994 and 1993 ...... 4
Consolidated Condensed Statements of Cash Flows--
Three months ended March 31, 1994 and 1993 ...... 5
Notes to Consolidated Condensed Financial
Statements ...................................... 6-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 19-31
Part II. Other Information
Item 1. Legal Proceedings .......................... 32-33
Item 6. Exhibits and Reports on Form 8-K ........... 33
Exhibit 11--Statement Re Computation of Per Share
Earnings Assuming Full Dilution for the three
months ended March 31, 1993 ..................... 35
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
- - ----------------------------
Loews Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
- - ----------------------------------------------------------------------------
(Amounts in thousands) March 31, December 31,
1994 1993
-----------------------
Assets:
Investments:
Fixed maturities available for sale, amortized
cost of $20,633,967 and $17,132,086 ......... $20,633,156 $17,657,856
Equity securities available for sale, cost of
$968,992 and $1,028,733 ..................... 1,079,050 1,240,256
Mortgage loans and notes receivable .......... 117,530 121,439
Policy loans ................................. 174,167 173,606
Other investments ............................ 98,374 72,085
Short-term investments ....................... 10,650,543 8,025,201
----------------------
32,752,820 27,290,443
Cash ........................................... 96,076 155,703
Receivables--net ............................... 7,973,909 7,474,753
Inventories .................................... 235,757 241,287
Investments in associated companies ............ 495,787 490,654
Property, plant and equipment--net ............. 1,044,918 1,038,179
Deferred income taxes .......................... 1,333,096 1,074,410
Other assets ................................... 612,784 564,600
Deferred policy acquisition costs of insurance
subsidiaries .................................. 1,003,220 979,166
Separate Account business ...................... 6,114,025 6,540,557
----------------------
Total assets ................................ $51,662,392 $45,849,752
======================
Liabilities and Shareholders' Equity:
Insurance reserves and claims .................. $27,952,955 $27,439,003
Accounts payable and accrued liabilities ....... 750,328 705,034
Payable for securities purchased ............... 2,836,311 190,138
Securities sold under repurchase agreements .... 4,146,706 613,250
Accrued taxes .................................. 217,311 209,861
Long-term debt, less unamortized discount ...... 2,168,840 2,195,670
Separate Account business ...................... 6,114,025 6,540,557
Deferred credits and participating
policyholders' equity ......................... 804,224 795,767
----------------------
Total liabilities ........................... 44,990,700 38,689,280
Minority interest .............................. 965,252 1,033,274
Shareholders' equity ........................... 5,706,440 6,127,198
----------------------
Total liabilities and shareholders' equity .. $51,662,392 $45,849,752
======================
See accompanying Notes to Consolidated Condensed Financial Statements.
3
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
- - ----------------------------------------------------------------------------
(Amounts in thousands, except per share data) Three Months Ended
March 31,
1994 1993
-----------------------
Revenues:
Insurance premiums:
Property and casualty ........................ $1,624,569 $1,470,137
Life ......................................... 679,151 608,893
Investment income, net of expenses, principally
of insurance subsidiaries ..................... 363,040 361,628
Realized investment (losses) gains ............. (124,304) 463,760
Manufactured products (including excise taxes of
$101,545 and $78,729) ......................... 488,864 477,981
Other .......................................... 173,780 160,731
---------------------
Total ...................................... 3,205,100 3,543,130
---------------------
Expenses:
Insurance benefits and underwriting expenses ... 2,326,303 2,143,697
Amortization of deferred policy acquisition costs 322,784 273,840
Cost of manufactured products sold ............. 223,916 182,192
Selling, operating, advertising and
administrative expenses ....................... 364,207 382,422
Interest ....................................... 44,357 38,382
---------------------
Total ...................................... 3,281,567 3,020,533
---------------------
(76,467) 522,597
---------------------
Income taxes (benefits) ........................ (57,609) 127,300
Minority interest .............................. (12,993) 53,607
---------------------
Total ...................................... (70,602) 180,907
---------------------
Net (loss) income ................................ $ (5,865) $ 341,690
=====================
Net (loss) income per share ...................... $(.10) $5.25
================
Cash dividends per share ......................... $.25 $.25
===============
Weighted average number of shares outstanding .... 61,508 65,066
==================
See accompanying Notes to Consolidated Condensed Financial Statements.
4
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
- - ----------------------------------------------------------------------------
(Amounts in thousands) Three Months Ended
March 31,
1994 1993
-------------------------
Operating Activities:
Net (loss) income ............................. $ (5,865) $ 341,690
Adjustments to reconcile net (loss) income to
cash provided by operating activities-net .... 73,591 (403,678)
Changes in assets and liabilities-net:
Receivables ................................. (267,168) (215,088)
Inventories ................................. 5,530 (53,022)
Deferred policy acquisition costs ........... (24,055) (31,405)
Insurance reserves and claims ............... 510,860 158,387
Accounts payable and accrued liabilities .... 47,020 443,699
Accrued taxes ............................... 10,338 329,282
Other-net ................................... 5,038 (28,292)
------------------------
355,289 541,573
------------------------
Investing Activities:
Purchases of fixed maturities ................. (18,090,919) (5,888,114)
Proceeds from sales of fixed maturities ....... 14,206,257 9,431,110
Proceeds from maturities of fixed maturities .. 455,892 606,881
Securities sold under repurchase agreements ... 3,533,456 (503,547)
Purchases of equity securities ................ (190,205) (214,776)
Proceeds from sales of equity securities ...... 236,008 289,078
Change in short-term investments .............. (444,596) (4,001,858)
Purchase of property, plant and equipment ..... (42,933) (30,706)
Change in other investments ................... (37,688) 10,989
------------------------
(374,728) (300,943)
------------------------
Financing Activities:
Dividends paid to shareholders ................ (15,380) (16,275)
Purchases of treasury shares .................. (463) (7,840)
Principal payments on long-term debt .......... (27,437) (202,072)
Receipts credited to policyholders ............ 10,804 12,479
Withdrawals of policyholder account balances .. (7,712) (4,023)
------------------------
(40,188) (217,731)
------------------------
Net change in cash .............................. (59,627) 22,899
Cash, beginning of period ....................... 155,703 105,308
------------------------
Cash, end of period ............................. $ 96,076 $ 128,207
========================
See accompanying Notes to Consolidated Condensed Financial Statements.
5
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
- - ----------------------------------------------------------------------------
1. Reference is made to Notes to Consolidated Financial
Statements in the 1993 Annual Report to Shareholders which
should be read in conjunction with these consolidated
condensed financial statements.
2. The Company's inventories are comprised of the following:
March 31, December 31,
1994 1993
-------------------------
(In thousands)
Leaf tobacco ................................. $122,919 $145,259
Manufactured stock ........................... 93,242 76,946
Materials, supplies, etc. .................... 19,596 19,082
---------------------
Total .................................. $235,757 $241,287
=====================
3. 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, to provide greater diversification of risk
and to minimize exposures on larger risks. The reinsurance
coverages are tailored to the specific risk characteristics
of each product line with CNA's retained amount varying by
type of coverage. Generally, reinsurance coverage for
property risks is on an excess of loss, per risk basis.
Liability coverages are generally reinsured on a quota share
basis in excess of CNA's retained risk.
The ceding of insurance does not discharge the primary
liability of the original insurer. CNA places reinsurance
with other carriers only after careful review of the nature
of the contract and a thorough assessment of the reinsurers'
credit quality and claim settlement performance. Further, for
carriers that are not authorized reinsurers in Illinois, CNA
receives collateral primarily in the form of bank letters of
credit, securing a large portion of the recoverables. At
March 31, 1994, such collateral totaled approximately
$164,000,000. CNA's largest recoverable from a single
reinsurer, including prepaid reinsurance premiums, at March
31, 1994 was approximately $475,000,000 with Lloyd's of
London. The recoverable from Lloyd's of London is dispersed
among thousands of individual members who have unlimited
liability.
6
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
The effects of reinsurance on written premiums and earned
premiums are as follows:
Written Premium
Three Months Ended March 31,
--------------1994--------------- --------------1993---------------
Direct Ceded Assumed Net Direct Ceded Assumed Net
-------------------------------------------------------------------
(In millions of dollars)
Contracts:
Long Duration ... 120.6 5.6 26.9 141.9 97.7 4.6 32.8 125.9
Short Duration .. 2,107.5 151.8 345.1 2,300.8 1,895.8 137.9 312.9 2,070.8
------------------------------------------------------------------
Total ......... 2,228.1 157.4 372.0 2,442.7 1,993.5 142.5 345.7 2,196.7
==================================================================
Earned Premium
Three Months Ended March 31,
--------------1994--------------- --------------1993---------------
Direct Ceded Assumed Net Direct Ceded Assumed Net
-------------------------------------------------------------------
(In millions of dollars)
Contracts:
Long Duration ... 105.2 5.6 26.9 126.5 79.1 4.6 32.4 106.9
Short Duration .. 2,004.7 163.0 340.7 2,182.4 1,897.7 137.9 218.1 1,977.9
------------------------------------------------------------------
Total ......... 2,109.9 168.6 367.6 2,308.9 1,976.8 142.5 250.5 2,084.8
==================================================================
Insurance claims and policyholders' benefits are net of
reinsurance recoveries of $111.8 and $100.8 million for the
three months ended March 31, 1994 and 1993, respectively.
4. Net income per share assuming full dilution is not presented
for the three months ended March 31, 1993 since such dilution
was not material.
7
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
5. Shareholders' equity:
March 31, December 31,
1994 1993
-------------------------
(In thousands of dollars)
Preferred stock, $.10 par value,
Authorized-25,000,000 shares
Common stock, $1 par value:
Authorized-200,000,000 shares
Issued-61,524,700 shares .................... $ 61,525 $ 61,525
Additional paid-in capital ................... 212,465 210,289
Earnings retained in the business ............ 5,455,415 5,476,660
Unrealized appreciation ...................... 59,011 406,736
Pension liability adjustment ................. (28,012) (28,012)
-----------------------
Total ..................................... 5,760,404 6,127,198
Less common stock (603,400 shares) held in
treasury, at cost ........................... 53,964
-----------------------
Total ..................................... $5,706,440 $6,127,198
=======================
The $347.7 million decrease in unrealized appreciation
reflects the impact that the rise in interest rates has had
on the Company's fixed income investments.
6. Pending litigation includes claims seeking damages for cancer
and other health effects claimed to have resulted from use of
tobacco products. It is not possible to predict the outcome
of pending litigation; however, on the basis of the facts
presently known to it, management does not believe the
actions pending will have a material adverse effect upon the
financial condition or results of operations of the Company.
Should additional facts arise in the future indicating a
probable adverse determination of any such actions, such
ultimate determination might have a material adverse effect
upon the Company's financial condition.
Fibreboard Litigation-As previously reported in Note 16 of
the Notes to the Consolidated Financial Statements in the
1993 Annual Report to Shareholders, CNA's primary
property/casualty subsidiary, Continental Casualty Company
("Continental"), is party to litigation with Fibreboard
Corporation ("Fibreboard") involving coverage for certain
asbestos-related claims and defense costs (San Francisco
8
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
Superior Court, Judicial Council Coordination Proceeding
1072). As described below, Continental, Fibreboard, another
insurer ("Pacific Indemnity"), a subsidiary of the Chubb
Corporation, and a negotiating committee of asbestos claimant
attorneys have reached a Global Settlement (the "Global
Settlement") to resolve all future asbestos-related bodily
injury claims involving Fibreboard. Continental, Fibreboard
and Pacific Indemnity have also reached an agreement, which
is subject to court approval, (the "Trilateral Agreement") on
a settlement to resolve the coverage litigation in the event
the Global Settlement does not obtain final court approval.
The implementation of the Global Settlement or the Trilateral
Agreement would have the effect of settling Continental's
litigation with Fibreboard. Pending final court approval of
either the Global Settlement or the Trilateral Agreement, at
the request of Continental, Fibreboard and Pacific Indemnity,
the California Court of Appeal withheld its ruling on the
issues discrete to Continental and Pacific Indemnity in the
appeal in that litigation.
Coverage Litigation-Between 1928 and 1971, Fibreboard
manufactured insulation products containing asbestos. Since
the 1970's, thousands of claims have been filed against
Fibreboard by individuals claiming bodily injury as a result
of asbestos exposure.
Continental insured Fibreboard under a comprehensive general
liability policy between May 4, 1957 and March 15, 1959.
Fibreboard disputed the coverage positions taken by its
insurers and, in 1979, Fireman's Fund, another of
Fibreboard's insurers, brought suit with respect to coverage
for defense and indemnity costs. In January 1990, the San
Francisco Superior Court (Judicial Council Coordination
Proceeding 1072) rendered a decision against the insurers
including Continental and Pacific Indemnity. The court held
that the insurers owed a duty to defend and indemnify
Fibreboard for certain of the asbestos-related bodily injury
claims asserted against Fibreboard (in the case of
Continental, for all claims involving exposure to
Fibreboard's asbestos products if there was exposure to
asbestos at any time prior to 1959 including years prior to
1957, regardless of when the claims were asserted or injuries
manifested) and that the policies contained no aggregate
limit of liability in relation to such claims. The judgment
was appealed.
The Court of Appeal entered an opinion on November 15, 1993,
as modified on December 13, 1993, which substantially
affirmed the lower court's decisions on scope of coverage and
trigger of coverage issues, as described below. The Court of
9
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
Appeal withheld its ruling on the issues discrete to
Continental and Pacific Indemnity pending final court
approval of either the Global Settlement or the Trilateral
Agreement described below. On January 27, 1994, the
California Supreme Court granted a Petition for Review, filed
by several insurers, including Continental, of, among other
things, the trigger and scope of coverage issues. The order
granting review has no effect on the Court of Appeal's order
severing the issues unique to Continental and Pacific
Indemnity. Continental cannot predict the time frame within
which the issues before the California Supreme Court may be
resolved. If neither the Global Settlement nor the Trilateral
Agreement is approved, it is anticipated that Continental and
Pacific Indemnity will resume the appeal process.
Continental's appeal of the coverage judgment raises many
legal issues. Key issues on appeal under the policy are
trigger of coverage, scope of coverage, dual coverage
requirements and number of occurrences:
The trial court adopted a continuous trigger of coverage
theory under which all insurance policies in effect at any
time from first exposure to asbestos until the date of the
claim filing or death are triggered. The Court of Appeal
endorsed the continuous trigger theory, but modified the
ruling to provide that policies are triggered by a
claimant's first exposure to the policyholder's products,
as opposed to the first exposure to any asbestos product.
Therefore, an insurance policy is not triggered if a
claimant's first exposure to the policyholder's product
took place after the policy period. The court, however,
placed the burden on the insurer to prove the claimant was
not exposed to its policyholder's product before or during
the policy period. The trigger of coverage issue is now on
appeal to the California Supreme Court.
Continental's position is that its policy is triggered
under California law by manifestation of appreciable harm.
The bodily injury cannot be said to occur within the
meaning of the policy until actual physical symptoms and
associated functional impairment manifest themselves. Thus,
Continental's position is that if existing California law
were applied, there would be no coverage under
Continental's policy.
The scope of coverage decision imposed a form of "joint and
several" liability that makes each triggered policy liable
in whole for each covered claim, regardless of the length
of the period the policy was in effect. This decision was
affirmed by the Court of Appeal, and is now on appeal to
the California Supreme Court. Continental's position is
10
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
that liability for asbestos claims should be shared not
jointly, but severally and on a pro rata basis between the
insurers and insured. Under this theory, Continental would
only be liable for that proportion of the bodily injury
that occurred during the 22-month period its policy was in
force.
Continental maintains that both the occurrence and the
injury resulting therefrom must happen during the policy
period for the policy to be triggered. Consequently, if the
court holds that the occurrence is exposure to asbestos,
Continental's position is that coverage under the
Continental policy is restricted to those who actually
inhaled Fibreboard asbestos fibers and suffered injury from
May 4, 1957 to March 15, 1959.
Continental's policy had a $1 million per occurrence limit.
Continental contends the number of occurrences under
California law must be determined by the general cause of
the injuries, not the number of claimants, and that the
cause of the injury was the continuous sale and manufacture
of the product. Because the manufacture and sale proceeded
from two locations, Continental maintains that there were
only two occurrences and thus only $2 million of coverage
under the policy. However, the per occurrence limit was
interpreted by the trial court to mean that each claim
submitted by each individual constituted a separate
occurrence. The Court of Appeal withheld ruling on this
issue, as noted above.
Under various reinsurance agreements, Continental has
asserted a right to reimbursement for a portion of its
potential exposure to Fibreboard. The reinsurers have
disputed Continental's right to reimbursement and have taken
the position that any claim by Continental is subject to
arbitration under provisions in the reinsurance agreement. A
Federal court has ruled that the dispute must be resolved by
arbitration. There can be no assurance that Continental will
be successful in obtaining a recovery under its reinsurance
agreements.
Interim Agreement-While the state court action in regard to
the coverage issues was pending, Continental and Fibreboard
entered into an Interim Agreement in 1988 under which
Continental agreed to fund Fibreboard's defense costs and
certain settlements up to specified dollar limits through
1992. Continental funded approximately $96 million in defense
costs under the Interim Agreement.
11
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
Assignments-Beginning in 1991, Fibreboard unilaterally
reached settlements with various classes of claimants by
purporting to assign to plaintiffs potential proceeds from
its insurance policy with Continental. Continental disputed
Fibreboard's right to make such settlements and assignments,
asserted that they violated the terms of the policy and the
Interim Agreement described above and asserted that the
settlement amounts were unreasonable and excessive. In June
1992 a California trial court ruled in one case that
Fibreboard could make such settlements and assignments since,
in its view, Continental was not fully defending Fibreboard
against the claims. Continental is appealing this decision.
The trial court did rule that Continental could challenge the
reasonableness of individual settlements and assignments.
Following that ruling, Continental agreed to fund
Fibreboard's reasonable defense costs without limitation as
to amount pending resolution of Continental's appeal.
Fibreboard continued to make settlements and assignments
following such agreement, and Continental vigorously disputed
Fibreboard's right to do so.
This settlement and assignment process by Fibreboard
escalated significantly in the fourth quarter of 1992.
Through December 31, 1992, Fibreboard entered into unilateral
assignment agreements covering 31,100 claims for a total of
$400 million or an average of $12,800 per claim. Of these
claims, approximately 30,000 were settled and assigned by
Fibreboard in the month of December, 1992.
Settlement Negotiations-Based on the facts and circumstances
of the Fibreboard case prior to the fourth quarter of 1992,
including the strength of Continental's legal arguments, a
material loss to Continental was not known or believed to be
probable. Significant fourth quarter developments, including
the assignments noted above, and the continuing trend for
court decisions to expand liability of policies beyond their
original intent, led management to consider negotiation of an
all-inclusive settlement of Continental's asbestos-related
bodily injury litigation with Fibreboard.
On April 9, 1993, Continental and Fibreboard entered into an
agreement pursuant to which, among other things, the parties
agreed to use their best efforts to negotiate and finalize a
global class action settlement with asbestos-related bodily
injury and death claimants.
Through March 31, 1994, Continental, Fibreboard and plaintiff
attorneys had reached settlements with respect to
approximately 126,000 claims, subject to resolution of the
coverage issues, for a maximum settlement amount of
12
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
approximately $1 billion. If neither the Global Settlement
nor the Trilateral Agreement receive final court approval,
Continental's obligation to pay under all settlements will be
partially subject to the results of the pending appeal in the
coverage litigation. Minimum amounts payable under all such
agreements, regardless of the outcome of coverage litigation,
total approximately $675 million, of which $239 million was
paid through March 31, 1994. Continental may negotiate other
agreements with various classes of claimants including groups
who may have previously reached agreement with Fibreboard.
Continental will continue to pursue its appeals in respect of
the coverage litigation and all other litigation involving
Fibreboard if a Global Settlement or the Trilateral Agreement
cannot be implemented.
Global Settlement-On August 27, 1993, Continental, Pacific
Indemnity, Fibreboard and a negotiating committee of asbestos
claimant attorneys reached an agreement in principle for an
omnibus settlement to resolve all future asbestos-related
bodily injury claims involving Fibreboard. The Global
Settlement was executed on December 23, 1993. The agreement
calls for contribution by Continental and Pacific Indemnity
of an aggregate of $1.525 billion to a trust fund for a class
of all future asbestos claimants, defined generally as those
persons whose claims against Fibreboard were neither filed
nor settled on or before August 27, 1993. An additional $10
million is to be contributed to the fund by Fibreboard. The
Global Settlement is subject to court approval and possible
appeals. As noted below, there is limited precedent with
settlements which determine the rights of future claimants to
seek relief.
Subsequent to the announcement of the agreement in principle,
Continental, Fibreboard and Pacific entered into the
Trilateral Agreement which sets forth the parties'
obligations in the event the Global Settlement is not
approved by the court. In such case, Continental and Pacific
would contribute to a settlement fund an aggregate of $2
billion, less certain adjustments. Such fund would be devoted
to the payment of Fibreboard's asbestos liabilities other
than liabilities in respect of previously settled claims.
Continental's share of such fund would be $1.44 billion,
reduced by a portion of the additional payment of $635
million, which Pacific Indemnity has agreed to pay in respect
of unsettled present claims and previously settled claims.
Continental has agreed that if either the Global Settlement
or the Trilateral Agreement is approved, it will assume
responsibility for the claims that had been settled and paid
on or before August 27, 1993. A portion of the additional
13
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
$635 million payment by Pacific Indemnity would be applied to
the payment of such claims as well. As a part of the Global
Settlement and the Trilateral Agreement, Continental would be
released by Fibreboard from any further liability under the
comprehensive general liability policy written for Fibreboard
by Continental, including but not limited to liability for
asbestos-related claims against Fibreboard. The Trilateral
Agreement is subject to court approval and possible appeals.
Continental and Fibreboard have entered into a supplemental
agreement (the "Supplemental Agreement") which governs the
interim arrangements and obligations between the parties
until such time as the Global Settlement is either approved
or disapproved by the court and also governs certain
obligations between the parties in the event the Global
Settlement is approved, including the payment of present
claims which have been filed or settled and not included in
the Global Settlement.
In addition, Continental and Pacific Indemnity have entered
into an agreement (the "Continental-Pacific Agreement") which
sets forth the parties' agreement with respect to the means
for allocating among themselves responsibility for payments
arising out of the Fibreboard insurance policies whether or
not the Global Settlement or the Trilateral Agreement is
approved. Under the Continental-Pacific Agreement,
Continental and Pacific Indemnity have agreed to pay 64.71%
and 35.29%, respectively, of the $1.525 billion plus interest
and expenses to be used to satisfy the claims of future
claimants. If neither the Global Settlement nor the
Trilateral Agreement is approved, Continental and Pacific
Indemnity would share, in the same percentages, most but not
all liabilities and costs of either insurer including, but
not limited to, liabilities in respect of unsettled present
claims and presently settled claims. If either the Trilateral
Agreement or the Global Settlement is approved by the court,
Pacific Indemnity's share for unsettled present claims and
presently settled claims will be $635 million.
Reserves-In the fourth quarter of 1992, Continental increased
its reserve with respect to potential exposure to asbestos-
related bodily injury cases by $1.5 billion. In connection
with the agreement in principle announced on August 27, 1993,
Continental determined to add $500 million to such claim
reserve. The Fibreboard litigation represents the major
portion of Continental's asbestos-related claim exposure.
There are inherent uncertainties in establishing a reserve
for complex litigation of this type. Courts have tended to
impose joint and several liability, and because the number of
14
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
manufacturers who remain potentially liable for asbestos-
related injuries has diminished on account of bankruptcies,
as has the potential number of insurers due to operation of
policy limits, the liability of the remaining defendants is
difficult to estimate. Further, a recent trend by courts to
consolidate like cases into mass tort trials limits the
discovery ability of insurers, generally does not allow for
individual claim adjudication, restricts the identification
of appropriate allocation methods and thereby results in an
increasing likelihood for fraud and disproportionate and
potentially excessive judgments. Additionally, management
believes that recent court decisions would appear to be based
on social or other considerations irrespective of the facts
and legal issues involved.
The Global Settlement and the Trilateral Agreement are
subject to court approval. There is limited precedent with
settlements which determine the rights of future claimants to
seek relief. It is extremely difficult to assess the
magnitude of Continental's potential liability in respect of
such future claimants if the Global Settlement and the
Trilateral Agreement are not approved and upheld, keeping in
mind that Continental's potential liability is limited to
persons exposed to asbestos prior to the termination of the
policy in 1959.
Projections by experts of future trends differ widely, based
upon different assumptions with respect to a host of complex
variables. Some recently published studies, not specifically
related to Fibreboard, conclude that the number of future
asbestos-related bodily injury claims against asbestos
manufacturers could be several times the number of claims
brought to date. Such studies include claims asserted against
asbestos manufacturers for all years, including claims filed
or projected to be filed in respect of periods after 1959. As
indicated above Continental, Fibreboard and plaintiff
attorneys have reached settlements with respect to
approximately 126,000 claims, subject to the resolution of
coverage issues. Such amount does not include presently
pending or unsettled claims, claims previously dismissed or
claims settled pursuant to agreements to which Continental is
not a party.
Another aspect of the complexity in establishing a reserve
arises from the widely disparate values that have been
ascribed to claims by courts and in the context of
settlements. Under the terms of a settlement reached with
plaintiff counsel in August 1993, the expected settlement for
approximately 34,000 claims for exposure to asbestos prior to
1959 is expected to be $445 million, or an average of $13,000
15
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
per claim. Based on reports by Fibreboard, since September
1988, Fibreboard resolved approximately 40,000 claims (other
than by the assignment process noted above), approximately
45% of which involved no cost to Fibreboard other than
defense costs, with the remaining claims involving the
payment of approximately $11,000 per claim. On the other
hand, a trial court in Texas in 1990 tendered a verdict in
which Fibreboard's liability in respect of 2,300 claims was
found to be approximately $310,000 per claim including
interest and punitive damages. Fibreboard entered into a
settlement of such claims by means of an assignment of its
potential proceeds from its policy with Continental.
Continental intervened and settled these claims for
approximately $77,000 on average, with a portion of the
payment contingent on approval of the Global Settlement or
the Trilateral Agreement, and if neither is approved, subject
to resolution of the coverage appeal.
Continental believes that as a result of the proposed Global
Settlement and the Trilateral Agreement it has greatly
reduced the uncertainty of its exposure with respect to the
Fibreboard matter. However, if neither the Global Settlement
nor the Trilateral Agreement are approved and upheld, in
light of the factors discussed herein, the range of
Continental's potential liability cannot be meaningfully
estimated and there can be no assurance that the reserves
established would be sufficient to pay all amounts which
ultimately could become payable in respect of asbestos-
related bodily injury liabilities.
While it is possible that the ultimate outcome of this matter
could have a material adverse impact on the equity of CNA,
management does not believe that a further loss material to
equity is probable. Management will continue to monitor the
potential liabilities with respect to asbestos-related bodily
injury claims and will make adjustments to the claim reserves
if warranted.
Environmental Pollution-Potential exposures exist for claims
involving environmental pollution, including toxic waste
clean-up. 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.
Under federal regulation, the Comprehensive Environmental
Response Compensation and Liability Act of 1980 ("Superfund")
16
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
governs the clean-up and restoration of abandoned toxic waste
sites and formalizes the concept of legal liability for
clean-up and restoration by "Potentially Responsible Parties"
("PRP's"). Superfund establishes a mechanism to pay for
clean-up of waste sites if PRP's fail to do so, and to assign
liability to PRP's. The extent of liability to be allocated
to a PRP is dependent on a variety of factors. Further, the
number of waste sites subject to clean-up is unknown. To
date, approximately 1,300 clean-up sites have been identified
by the Environmental Protection Agency ("EPA"). On the other
hand, the Congressional Budget Office is estimating that
there will be 4,500 National Priority List sites and other
estimates run as high as 30,000 sites that will require
clean-up. Very few sites have been subject to clean-up to
date. The extent of clean-up necessary and the assignment of
liability has not been established.
CNA and the insurance industry are disputing coverage for
many such claims. Key coverage issues include whether
Superfund response costs are considered damages under the
policies, trigger of coverage, applicability of pollution
exclusions, the potential for joint and several liability and
definition of an occurrence. Similar coverage issues exist
for clean-up of waste sites not covered under Superfund. To
date, courts have been inconsistent in their rulings on these
issues.
The Superfund legislation must be reauthorized in 1994. A
number of proposals to reform Superfund have been made by
various parties. It is too early to determine the future
impact of these proposals on CNA and the insurance industry.
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 exposure to CNA for environmental pollution
claims cannot be meaningfully quantified. Prior to 1993, no
specific allocation of reserves was made for unreported
claims or for litigation expenses. CNA identified reserves
only for reported environmental pollution claims. In 1993,
CNA allocated approximately $340 million of claims and claims
expense reserves for unreported environmental pollution
claims in addition to the $94 million of reserves recorded
for reported claims. At March 31, 1994, reserves for reported
and unreported claims were $99 and $307 million,
respectively. Claims and claims expense reserves represent
management's estimates of ultimate liabilities based on
currently available facts and law. However, in addition to
the uncertainties previously discussed, additional issues
related to, among other things, specific policy provisions,
17
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Continued)
- - ----------------------------------------------------------------------------
multiple insurers and allocation of liability among insurers,
consequences of conduct by the insured, missing policies and
proof of coverage make quantification of liabilities
exceptionally difficult.
The number of claims filed for environmental pollution
coverage continues to increase. Approximately 425 claims were
reported in the first quarter of 1994 and approximately
19,600 claims have been reported to date. Pending claims
totaled approximately 10,500 and 10,600 at March 31, 1994 and
December 31, 1993, respectively. Approximately 9,100 claims
were closed through March 31, 1994, of which approximately
8,300 claims were settled without payment, except for claim
expenses of $18 million. Settlements for the remaining 800
claims totaled $95 million, plus claim expenses of $25
million. Reserve development for environmental claims totaled
$30 million in the three months ended March 31, 1993. No
reserve development for environmental claims was recognized
in 1994. The results of operations in future years may
continue to be adversely affected by environmental pollution
claims and claims expenses. Management will continue to
monitor potential liabilities and make further adjustments as
warranted.
7. In the opinion of Management, the accompanying consolidated
condensed financial statements reflect all adjustments
(consisting of only normal recurring accruals) necessary to
present fairly the financial position as of March 31, 1994
and December 31, 1993 and the results of operations and the
changes in its cash flows for the three months ended March
31, 1994 and 1993, respectively.
Results of operations for the first quarter of each of the
years is not necessarily indicative of results of operations
for that entire year.
18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
- - -----------------------------------------------------------------
Liquidity and Capital Resources:
- - --------------------------------
Insurance
- - ---------
Property and casualty and life insurance operations are wholly
owned subsidiaries of CNA Financial Corporation ("CNA"). CNA is
an 83% owned subsidiary of the Company
CNA's first quarter loss is primarily attributable to
catastrophe claims recognized by CNA's primary property and
casualty subsidiary, Continental Casualty Company ("Casualty").
The catastrophe claims, totaling approximately $100 million pre-
tax, stem from the California earthquake and severe winter storms
throughout the northeastern part of the United States. The $50.7
million of realized investment losses are principally the result
of repositioning the portfolios to longer maturities, primarily
in government bonds.
Other adverse factors affecting the industry also curtailed
CNA's first quarter earnings, particularly the longstanding cycle
of inadequate pricing in property/casualty commercial lines and
low investment yields. In addition, complex and costly litigation
has been continuing, fueled by the tendency of the courts to
interpret insurance contracts beyond their stated intent.
CNA's commercial lines remain in a downcycle that has lasted
over seven years and has seriously depressed profitability. The
downcycle continues to be characterized by a difficult pricing
environment caused by strong market competitiveness, weak
investment yields, a trend toward alternative risk mechanisms
such as self-insurance, and regulatory constraints on adequate
premium rates.
Net operating income for the life segment remains stable,
although negatively affected by intense competition and high
health care costs which have resulted in a continued market shift
away from traditional indemnity forms of health coverage toward
managed care products. The federal government's initiative to
control health care costs and provide universal access to quality
health care may impact both individual and group accident and
health, workers' compensation, automobile liability and medical
malpractice businesses of CNA. With national health care still
the subject of intense debate, CNA advocates a responsible role
for the insurance industry in any program that may be adopted.
CNA believes the public is best served by a system that relies on
the private sector's competence and competitiveness rather than
on rigid, governmental dictates. CNA's ability to compete in this
market will be increasingly dependent on its ability to control
costs through managed care techniques, innovation, and quality
19
customer focused service in order to properly position CNA in the
evolving health care environment.
CNA continues to take a number of initiatives to respond to the
many uncertainties and changes impacting the insurance
environment. One of these has been to continue to focus on the
risk characteristics and premium rates in commercial lines. CNA
will continue to seek business in lines where it has a sizable
market share, substantial experience, and foresees clear profit
potential over the long term. At the same time, however, the
emphasis is on reasonable rates rather than volume growth.
CNA also is pursuing opportunities in new marketing areas,
expanding its alternative marketing capabilities, and working
with partners in strategic alliances whose business focus
complements its own. One indication of CNA's broader marketing
approach is the recent consolidation of its reinsurance
operations under a single, cohesive management group. CNA
believes this move positions CNA more favorably for growth and
leadership in the international marketplace.
Of all CNA's priorities, preserving a strong financial
foundation remains among the highest. During the first quarter,
CNA continued to implement a number of initiatives to improve
productivity, efficiency, and competitiveness with emphasis on
adding value in serving its customers. These actions include
authorizing more decision making at lower levels to speed
response time and heighten quality service; increasing management
accountability and customer orientation through Strategic
Business Units and substantially expanding the use of personal
computer based automation tools. CNA is working closely with
policyholders to reduce claims costs through integrated processes
that enable commercial insureds to control their total loss costs
and through stepped up fraud prevention activities. Other areas
of emphasis include providing professional services to self-
insured accounts and other alternative markets; continuing
medical and workers' compensation cost management programs; and
reinforcing business partnerships with independent agents who
represent CNA and equipping them with new or upgraded products
tailored to specific customer needs.
CNA also continues to devote time and effort to legislative
concerns in the interests of a more equitable and stable
insurance marketing climate. It has enjoyed some success in
enlisting support for workers' compensation reform in several
states and opposing unnecessary restrictions on the insurance
industry in others.
During the quarter ended March 31, 1994, property and casualty
insurance subsidiaries' statutory surplus decreased 5.2% to
approximately $3.4 billion. The decrease resulted from the
aforementioned catastrophe losses and realized investment losses.
The statutory surplus of the life insurance subsidiaries remained
at $1.0 billion.
As discussed in Note 6 of the Notes to the Consolidated
Condensed Financial Statements, Casualty greatly reduced a
major source of financial uncertainty by reaching a Global
Settlement to resolve all future asbestos-related bodily injury
20
claims involving Fibreboard, a former asbestos manufacturer. The
agreement, executed in December 1993, was reached with
Fibreboard, Pacific Indemnity and a negotiating committee of
asbestos claimant attorneys. The agreement calls for Casualty and
Pacific Indemnity to contribute an aggregate of $1.525 billion to
an escrow account for a class of all future asbestos claimants.
CNA funded its obligations under the escrow account with
approximately $1.0 billion at the end of 1993. The escrow account
is included in the short-term investment portfolio. CNA believes
the agreement reached and the reserves established will be
sufficient to cover all asbestos-related Fibreboard claims. While
the Fibreboard agreement must receive court approval and meet
other conditions, settlement of this litigation substantially
reduces the uncertainty about CNA's exposure to future
asbestos-related liabilities.
CNA and the insurance industry are exposed to an unknown amount
of liability for environmental pollution, primarily related to
toxic waste site clean-up. See Note 6 of the Notes to
Consolidated Condensed Financial Statements for a further
discussion of environmental pollution exposures.
The liquidity requirements of CNA are met primarily by funds
generated from operations. The principal operating cash flow
sources of CNA's property and casualty and life insurance
subsidiaries are premiums and investment income. The primary
operating cash flow uses are payments of claims, policy benefits
and operating expenses.
For the first three months of 1994, CNA's operating activities
generated net cash flows of $164 million, compared to $420
million for the same period in 1993. The decrease in cash flows
is due primarily to a decline in tax recoveries to $12 million
for the first three months of 1994, as compared to $245 million
for the same period in 1993.
Net cash flows are invested in marketable securities.
Investment strategies employed by CNA's insurance subsidiaries
consider the cash flow requirements of the insurance products
sold and the tax attributes of the various types of marketable
investments.
21
Investments
- - -----------
A summary of CNA's general account fixed income securities
portfolio and short-term investments are as follows:
Change in
Unrealized
March 31, December 31, Gains
1994 1993 (Losses)
-----------------------------------
(In millions)
Fixed income securities:
U.S. Treasury securities and
obligations of government agencies $ 9,988 $ 6,554 $(197)
Asset-backed securities ........... 2,127 2,547 (67)
Tax exempt securities ............. 4,740 5,015 (147)
Other ............................. 3,637 3,491 (101)
--------------------------------
Total fixed income securities .... 20,492 17,607 (512)
Stocks .............................. 457 508 (20)
Other ............................... 7,684 7,248 16
--------------------------------
Total investments ................ $28,633 $25,363 (516)
====================
Participating policyholders' interest 13
Income tax benefit .................. 184
----
Net investment losses ............ $(319)
====
Short-term investments:
Security repurchase
collateral ....................... $4,270 $ 623
Escrow ............................ 984 987
Other ............................. 2,102 5,334
-------------------
Total short-term investments ..... $7,356 $6,944
===================
22
Interest rates have continued to rise throughout April
resulting in additional unrealized losses in the fixed income
investments, primarily relating to government securities.
CNA's general account investment portfolio is managed to
maximize after tax investment return, while minimizing credit
risks, with investments concentrated in high quality securities
to support its insurance underwriting operations.
CNA has the capacity to hold its fixed income portfolio to
maturity. However, securities may be sold as part of CNA's
asset/liability strategies or to take advantage of investment
opportunities generated by changing interest rates, prepayments,
tax and credit considerations, or other similar factors.
Accordingly, fixed income securities are classified as available
for sale.
During the first three months of 1994, CNA's consolidated
investments increased by $3.3 billion, to $28.6 billion. This
increase is entirely due to a $3.6 billion increase in collateral
related to securities sold under agreements to repurchase. The
general account portfolio consists primarily of high quality
marketable debt securities, approximately 97% of which are rated
as investment grade. At March 31, 1994, tax exempt securities and
short-term investments excluding collateral for securities sold
under repurchase agreements, comprised approximately 17% and 11%,
respectively, of the general account's total investment portfolio
compared to 19% and 28%, respectively, at December 31, 1993.
Historically, CNA has maintained short-term assets at a level
that provided for liquidity to meet its short-term obligations,
as well as reasonable contingencies and anticipated claim payout
patterns. At March 31, 1994, the major component of the short-
term investment portfolio was approximately $2.3 billion of U.S.
Treasury bills. Collateral for securities sold under repurchase
agreements totaled $4.3 billion and were invested in high grade
commercial paper.
As of March 31, 1994, the market value of CNA's general account
investments in bonds and redeemable preferred stocks was $20,492
million and was less than amortized cost by approximately $8
million. This compares to $504 million of unrealized gains at
December 31, 1993. The gross unrealized gains and losses for the
fixed income securities portfolio at March 31, 1994, were $334
and $342 million, respectively, compared to $564 and $60 million,
respectively, at December 31, 1993.
Net unrealized losses on general account bonds at March 31,
1994 include net unrealized losses on high yield securities of $2
million, compared to net unrealized gains of $15 million at
December 31, 1993. High yield securities are bonds rated as below
investment grade by bond rating agencies, plus private placements
and other unrated securities which, in the opinion of management,
are below investment grade. Fair values of high yield securities
in the general account were $803 million at March 31, 1994,
compared to $727 million at December 31, 1993.
At March 31, 1994, total separate account cash and investments
amounted to $6.0 billion with taxable debt securities
representing approximately 96% of the separate accounts
23
portfolio. Approximately 87% of separate account investments are
used to fund guaranteed investment contracts ("GIC's") for which
CNA's life insurance affiliate guarantees principal and a
specified return to the contractholders. The fair value of all
fixed income securities in the GIC portfolio was $5.1 billion
compared to $5.4 billion at December 31, 1993. At March 31, 1994,
market values exceeded the amortized cost by approximately $2
million. This compares to $148 million at December 31, 1993. The
gross unrealized gains and losses for the fixed income securities
portfolio at March 31, 1994, were $98 and $96 million,
respectively.
Carrying values of high yield securities in the GIC portfolio
were $1,368 million at March 31, 1994, compared to $1,068 million
at December 31, 1993. Net unrealized losses on high yield
securities held in such separate accounts were $9 million at
March 31, 1994 compared to net unrealized gains of $56 million at
December 31, 1993.
High yield securities generally involve a greater degree of
risk than that of investment grade securities. Expected returns
should, however, compensate for the added risk. The risk is also
considered in the interest rate assumptions in the underlying
insurance products. At March 31, 1994, CNA's concentration in
high yield bonds, including separate accounts, was approximately
4.8% of its total assets. In addition, CNA's investment in
mortgage loans and investment real estate are substantially below
the industry average, representing less than one quarter of one
percent of its total assets.
Included in CNA's fixed income securities at March 31, 1994
(general and GIC portfolios) are $3.7 billion of asset-backed
securities, consisting of approximately 54% in collateralized
mortgage obligations ("CMO's"), 10% in corporate asset-backed
obligations, and 36% in U.S. Government agency issued pass-
through certificates. The majority of CMO's held are U.S.
Government agency issues, which are actively traded in liquid
markets and are priced monthly by broker-dealers. At March 31,
1994, the market value of asset-backed securities was less than
amortized cost by approximately $20 million compared to
unrealized gains of $87 million at December 31, 1993. CNA limits
the risks associated with interest rate fluctuations and
prepayment by concentrating its CMO investments in early planned
amortization classes with wide bands and relatively short
principal repayment windows.
Over the last few years, much concern has been raised regarding
the quality of insurance company invested assets. At March 31,
1994, 59% of the general account's debt securities portfolio was
invested in U.S. Government securities, 20% in other AAA rated
securities and 14% in AA and A rated securities. CNA's GIC fixed
income portfolio is comprised of 23% U.S. Government securities,
15% other AAA rated securities and 22% in AA and A rated
securities. These ratings are primarily from nationally
recognized rating agencies (95% of the general account portfolio
and 93% for the GIC portfolio).
24
Cigarettes
- - ----------
Lorillard, Inc. and subsidiaries ("Lorillard")
For a number of years through 1992 leading cigarette marketers,
including Lorillard, had increased the price of their premium
brands. For the period 1982 to 1992 the annual price increase for
Lorillard's premium brands averaged approximately 10%.
Lorillard's cash flows from operations during this period
benefited significantly from these price increases since
virtually all of Lorillard's sales are in the premium priced
segment, with Newport accounting for more than two-thirds of
Lorillard's total unit sales.
Effective August 9, 1993 in response to new lower pricing
policies and promotions by its competitors Lorillard reduced its
premium brand wholesale cigarette unit prices by approximately
25% to maintain its competitive position. These price moves have
established two price tiers for the industry, eliminating much of
the price confusion in the market place, and substantially
narrowing the price gap between premium and discount cigarettes.
These developments may tend to stabilize volume and perhaps slow
the rapid growth of discount cigarettes. While promotional
spending can be reduced, the overall impact of the new lower
pricing will substantially reduce Lorillard's revenues, income
contribution and cash flow.
Corporate
- - ---------
During the three months ended March 31, 1994 the Company
purchased 603,400 shares of its outstanding Common Stock at an
aggregate cost of approximately $53.9 million. The funds required
for such purchases were provided from working capital. Depending
on market conditions, the Company, from time to time, may
purchase additional shares in the open market or otherwise.
25
Results of Operations:
- - ---------------------
Revenues declined by $338.0 million, or 9.5%, and net income
decreased by $347.6 million as compared to the prior year's first
quarter. The following table sets forth the major sources of the
Company's consolidated revenues and net (loss) income.
Three Months Ended
March 31,
----------------------
1994 1993
----------------------
(In thousands)
Revenues (a):
Property and casualty ......................... $1,883,734 $2,189,002
Life .......................................... 718,686 716,495
Cigarettes .................................... 457,627 444,118
Hotels ........................................ 39,076 42,428
Watches and other timing devices .............. 32,649 35,058
Drilling ...................................... 73,862 62,770
Investment income-net (non-insurance companies) (3,818) 46,573
Equity in income of CBS Inc. .................. 11,444 9,632
Other and eliminations-net .................... (8,160) (2,946)
---------------------
$3,205,100 $3,543,130
=====================
Net (loss) income (a):
Property and casualty ......................... $ (51,093) $ 235,900
Life .......................................... (4,992) 24,124
Cigarettes .................................... 78,371 77,040
Hotels ........................................ (3,159) (2,252)
Watches and other timing devices .............. (122) 186
Drilling ...................................... (6,462) (6,814)
Investment income-net (non-insurance companies) (2,931) 29,405
Equity in income of CBS Inc. .................. 10,242 8,978
Interest expense and other-net ................ (25,719) (24,877)
----------------------
$ (5,865) $ 341,690
======================
26
(a) Includes realized investment (losses) gains as follows:
Three Months Ended
March 31,
----------------------
1994 1993
----------------------
(In thousands)
Revenues:
Property and casualty ......................... $ (64,371) $401,141
Life .......................................... (41,120) 29,435
Investment income-net ......................... (18,813) 33,184
--------------------
$(124,304) $463,760
====================
Net (loss) income:
Property and casualty ......................... $ (34,566) $220,062
Life .......................................... (16,104) 15,238
Investment income-net ......................... (12,252) 20,828
--------------------
$ (62,922) $256,128
====================
Insurance
- - ---------
Property and casualty revenues, excluding realized investment
(losses) gains increased by $160.2 million, or 9.0%, for the
three months ended March 31, 1994, compared to the same period a
year ago.
Property and casualty premium revenues increased by $154.4
million, or 10.5%, from the prior year's comparable period. The
increase was principally attributable to increases in new excess
policies, and new business and higher renewal rates for medium
sized commercial accounts. Property and casualty investment
income was down 1.2% for the three months compared with the same
period a year ago. Investment income decreased for the three
months ended March 31, 1994 when compared to the prior year
primarily due to the change in portfolio mix resulting from a
partial shift from long-term tax exempt bonds to shorter term
taxable securities.
Life insurance revenues, excluding realized investment (losses)
gains increased by $72.7 million, or 10.6%, as compared to the
same period a year ago. Life premium revenues increased by $70.3
million, or 11.5%, for the quarter with the primary growth in
group and pension operations. Life investment income increased
27
4.7% compared to the same period a year ago primarily due to a
first quarter shift out of short-term investments.
Property and casualty underwriting losses for the three months
ended March 31, 1994 were $354.8 million, compared to $334.2
million for the same period in 1993. The first quarter 1994
combined ratio was 119.9 compared with 121.1 for the same period
in 1993.
As noted above, catastrophe losses for the three months ended
March 31, 1994 were approximately $100 million, compared with
$25.8 million for the same period in 1993.
The components of CNA's realized investment (losses) gains are
as follows:
Three Months Ended
March 31,
----------------------
1994 1993
----------------------
(In millions)
Bonds:
U.S. Government ............................... $(138.5) $ 31.1
Tax exempt .................................... 18.6 284.5
Asset-backed .................................. 12.3 51.6
Taxable ....................................... (3.4) 31.8
------------------
Total bonds ................................ (111.0) 399.0
Stocks .......................................... 12.5 35.7
Other ........................................... (7.0) (4.1)
------------------
Total realized investment (losses) gains ... $(105.5) $430.6
==================
In early 1994, CNA began to reposition its portfolios to
slightly longer maturities. As a result, both the Casualty and
Life groups shifted out of their short-term portfolios into five
and ten year government securities resulting in a decrease in
short-term investments. Short-term investments (excluding
investments relating to loaned securities) for the Casualty group
decreased from $5.1 billion at December 31, 1993 to $2.8 billion
at March 31, 1994, while the Life group's decreased from $1.2
billion at December 31, 1993 to $256.8 million at March 31, 1994.
These actions were taken in a period of rising interest rates
which resulted in both realized and unrealized losses in the
investment portfolio.
During the first quarter of 1994, Casualty sold approximately
$12 billion of fixed income and equity securities realizing pre-
tax losses of $64.4 million. Of the $12 billion of securities
sold, approximately $8 and $2 billion, respectively, were from
the U.S. Treasury and Government mortgage-backed bond portfolios.
In the first quarter of 1993, realized gains were recognized as
CNA began realigning its portfolio to reduce its concentration of
28
tax-exempt securities to more quickly utilize the alternative
minimum tax credit carryforward generated in 1992.
Cigarettes
- - ----------
Revenues and net income increased by $13.5 and $1.3 million, or
3.0% and 1.7%, respectively, as compared to the prior year first
quarter.
Lorillard cigarette unit sales for the first quarter of 1994
were 25.6% higher than the comparable quarter of 1993, however,
this was due to extremely light shipments in the 1993 quarter due
to increased unit purchases in December 1992 in anticipation of a
federal excise tax increase and a decline in sales of premium
price brands, where virtually all of Lorillard's sales are
concentrated.
Despite this sharply increased unit volume, Lorillard's total
revenue only increased $13.5 million in comparison to the prior
year's quarter. This is a result of the industry price reduction
of premium price brands, effective August 9, 1993.
For the quarter, total industry sales units increased 8.4%,
reflecting the effect of the increase in federal excise tax
described above, with the overwhelming majority of the increase
being in the premium price segment. The discount brand category's
share of industry sales decreased from 38.9% in the 1993 first
quarter as compared to 33.7% in the 1994 first quarter.
The revenue increase of $13.5 million is composed of an
increase of approximately $104.1 million, or 23.4%, due to higher
unit sales volume, partially offset by a decline of approximately
$90.6 million, or 20.4%, due to a reduction in unit prices. Net
income increased due to lower sales promotion expenses partially
offset by lower unit prices.
It is expected that lower consumer cigarette consumption will
continue to influence overall industry unit volume and the
discount category will be a significant influence in overall
sales.
The current administration's efforts to reduce the federal
deficit and to enact health care reform has led to several
proposals to increase the excise tax. The effects of any
additional federal tax increases, as well as increases by state
and local taxing authorities, or manufacturers' price increases
cannot be determined, but it is likely they would add to the
overall industry decline and the growth in the discount category.
Hotels
- - ------
Revenues decreased by $3.4 million, or 7.9%, and net loss
increased by $.9 million, or 40.3%, respectively, as compared to
the prior year first quarter.
Oversupply of hotel rooms and the highly competitive nature of
the hotel industry continue to adversely affect average room
29
rates. Although demand has increased in some areas, it has not
compensated for the lower average room rates.
Revenues declined and net loss increased due primarily to lower
average room rates at the Loews Monte Carlo Hotel reflecting the
depressed general economic conditions in southern Europe as well
as the impact of a weak Italian Lira and unfavorable foreign
currency fluctuations.
Watches and Other Timing Devices
- - --------------------------------
Revenues and net income decreased by $2.4 and $.3 million, or
6.9% and 165.6%, respectively, as compared to the prior year
first quarter.
Revenues declined due primarily to lower watch and clock unit
sales volume, partially offset by $283,000 proceeds from
favorable settlement of contract claims with the U.S. Government.
Net income declined due primarily to the lower revenues,
partially offset by lower interest expense.
Drilling
- - --------
Revenues increased by $11.1 million, or 17.7%, and net loss
decreased by $.4 million, or 5.2%, as compared to the prior
year's first quarter.
Revenues increased $14.9 million, or 23.8%, due to higher
dayrates, partially offset by a decline of $3.8 million, or 6.1%,
due to lower utilization rates.
The quarter was positively impacted by increases in dayrates
earned by the Gulf of Mexico rig fleet; both jack-up and
semisubmersible rates increased by over $5,000 per day. The
effect of this increase was partially offset by a decline in
international activity (particularly in the North Sea) and the
lost revenues and costs associated with rig relocations.
Strategic rig relocations have continued into the first quarter
of 1994. Two jack-ups completed term contracts in Venezuela and
will be available in the Gulf of Mexico following mobilizations
and planned upgrades. Additionally, two semisubmersibles
completed major mobilizations in the first quarter; one to the
Bass Strait offshore Australia, the other to Argentina. Both
semisubmersible mobilizations were undertaken against multi-well
contracts. Although all four relocations were partially funded by
contracts, total expenses and required upgrades negatively
impacted first quarter operating results by $4.7 million. In
addition, the lower net loss was partially offset by increased
interest expense.
30
Other
- - -----
Revenues and net income decreased by $53.8 and $31.9 million,
respectively, as compared to the prior year first quarter. Other
operations consist primarily of investment income of non-
insurance companies and the Company's investment in CBS Inc.
Revenues and net income decreased due primarily to pre-tax and
after-tax realized investment losses of $18.8 and $12.2 million,
respectively, for the quarter ended March 31, 1994 as compared to
pre-tax and after-tax realized investment gains of $33.2 and
$20.8 million, respectively, in the prior year. Exclusive of
securities transactions, other revenues decreased $1.8 million,
or 8.9%, due to lower results from shipping operations, partially
offset by higher earnings (accounted for under the equity method)
of CBS Inc. Net income benefited by lower interest expense of
$1.2 million, or 15.9%, due to redemption of high coupon debt and
issuance of lower coupon debt, partially offset by the lower
revenues.
Accounting Standards
- - --------------------
In May 1993, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." This Statement addresses the accounting by creditors for
impairment of certain loans. It is applicable to all creditors
and to all loans, uncollateralized as well as collateralized,
except large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, loans that are measured at
fair value or at the lower of cost or fair value, leases, and
debt securities. The Statement requires that applicable loans be
treated as impaired when it is probable that a creditor will be
unable to collect all amounts (both principal and interest)
contractually due. It requires that impaired loans be measured
based on the present value of expected future cash flows
discounted at the loan's effective interest rate. Impairment may
be measured at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. In
early 1994, the FASB began deliberating certain amendments to
this Statement and an exposure draft was issued on March 31, 1994
which would simplify the statement by allowing a creditor to use
existing methods for recognizing interest income on impaired
loans. This Statement applies to financial statements for fiscal
years beginning after December 15, 1994. This Statement will not
have a significant impact on the Company.
31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- - --------------------------
Reference is made to Note 6 to the Notes to Consolidated
Condensed Financial Statements in Part I, Item 1, Financial
Statements.
In addition to the matters disclosed in Item 3., Legal
Proceedings, of the Company's 1993 Annual Report on Form 10-K,
three purported class actions have been filed against Lorillard
and other cigarette manufacturers seeking damages for alleged
nicotine addiction and health effects claimed to have resulted
from the use of cigarettes or from exposure to tobacco smoke.
Theories of liability include a broad range of product liability
theories, consumer protection statutes and fraud and
misrepresentation claims. In one such action, Allman v. Philip
Morris, Inc. et al (U.S. District Court, Southern District,
California, filed March 30, 1994) plaintiffs seek certification
of a class consisting of all individuals in the United States who
are allegedly addicted to cigarettes and have been or will be
prescribed treatment with the nicotine transdermal system
(nicotine patch). Plaintiffs in Allman seek unspecified amounts
in actual damages and treble damages under the Racketeer
Influenced and Corrupt Organizations (RICO) Act. In the second
action, Castano v. The American Tobacco Company, et al, (U.S.
District Court, Eastern District, Louisiana, filed March 29,
1994) plaintiffs seek certification of a class consisting of all
residents of the United States who have purchased tobacco
products manufactured by the defendants and who claim to be
addicted to cigarettes, and survivors who claim their decedents
were injured by their addiction to tobacco products. A petition
for intervention (Riddle v. The American Tobacco Company, et al
filed April 11, 1994) in the Castano action seeks intervention on
behalf of a class of individuals who have never smoked tobacco
products and who have allegedly been injured by exposure to
environmental tobacco smoke. Plaintiffs and interveners also
allege that defendants manipulated the nicotine levels of their
products to cause smokers to become addicted to cigarettes.
Plaintiffs and interveners seek an unspecified amount in actual
and punitive damages, and the creation of a medical monitoring
fund to monitor the health of class members. In the third case,
Engle v. R.J. Reynolds Tobacco Co., et al, (Circuit Court, Dade
County, Florida, filed May 5, 1994) plaintiff seeks certification
of a class comprised of all citizens and residents of the United
States, and the survivors of citizens and residents of the United
States, who have had, presently have, or have died from diseases
and medical conditions allegedly caused by smoking cigarettes
containing nicotine. Plaintiffs in this case seek actual and
punitive damages in excess of $100 billion each, and the creation
of a medical fund to compensate individuals for future health
care costs.
32
Lorillard intents to defend vigorously all such actions which
may be brought against it.
Item 6. Exhibits and Reports on Form 8-K.
- - -----------------------------------------
(a) Exhibits--
(11) Statement Re Computation of Per Share Earnings
Assuming Full Dilution for the three months ended March 31, 1993.
(b) Current reports on Form 8-K--There were no reports on Form
8-K filed for the three months ended March 31, 1994.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LOEWS CORPORATION
-----------------
(Registrant)
Dated: May 16, 1994 By Roy E. Posner
-----------------------
ROY E. POSNER
Senior Vice President
and Chief Financial
Officer
(Duly authorized
officer and principal
financial officer)
34
EXHIBIT 11
Loews Corporation and Subsidiaries
Statement Re Computation of Per Share Earnings Assuming Full
Dilution
- - ----------------------------------------------------------------------------
Three Months Ended
March 31, 1993
---------------------
(In thousands, except
per share data)
Computation of Fully Diluted Net Income:
Net Income ....................................... $341,690
Reduction of interest and debt expenses related to
notes assumed converted, net of applicable
federal income taxes ............................ 3,781
-------
Fully diluted net income ......................... $345,471
=======
Computation of Fully Diluted Shares:
Weighted average shares outstanding .............. 65,066
Add shares assumed to be issued upon conversion of
notes ........................................... 2,150
------
Fully diluted shares .............................. 67,216
======
Net Income Per Share Assuming Full Dilution ........ $5.14
====
35
