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Exhibit 21.01
LOEWS CORPORATION
Subsidiaries of the Registrant
December 31, 2000
Organized Under
Name of Subsidiary Laws of Business Names
------------------ --------------- ----------------
CNA Financial Corporation ............. Delaware )
Continental Casualty Company ......... Illinois )
Continental Assurance Company ....... Illinois )
National Fire Insurance Company of )
Hartford ........................... Connecticut )
American Casualty Company of )
Reading, Pennsylvania .............. Pennsylvania ) CNA Insurance
CNA Surety Corporation .............. Delaware )
The Continental Corporation .......... New York )
The Buckeye Union Insurance Company . Ohio )
Firemen's Insurance Company of )
Newark, New Jersey ................. New Jersey )
The Continental Insurance Company ... New Hampshire )
Continental Insurance Company of )
New Jersey ......................... New Jersey )
Lorillard, Inc. ....................... Delaware ) Lorillard
Lorillard Tobacco Company ............ Delaware )
Diamond Offshore Drilling, Inc. ....... Delaware Diamond Offshore
The names of certain subsidiaries which, if considered as a single
subsidiary, would not constitute a "significant subsidiary" as defined in
Regulation S-X, have been omitted.
Exhibit 23.01
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-33616 of Loews Corporation, on Form S-8 of our report dated February 15,
2001 (February 20, 2001 as to the stock split described in Note 1), appearing
in this Annual Report on Form 10-K of Loews Corporation for the year ended
December 31, 2000.
DELOITTE & TOUCHE LLP
New York, New York
March 16, 2001
Exhibit 10.01
January 1, 2001
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1971, as amended by agreements dated February
27, 1974, March 1, 1976, May 10, 1977, July 17,1979, June 16,1981, May 10,
1983, May 10, 1984, October 15,1985, February 24, 1987, October 14, 1988,
March 1, 1990, October 22, 1992 and October 18, 1994, February 20, 1996 and
November 3, 1998 (the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 2002 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$800,000 per annum for the extension period January 1, 2001 through December
31, 2002. Basic Salary shall be payable in accordance with the Company's
customary payroll practices for executives as in effect from time to time, and
shall be subject to such increases as the Board of Directors of the Company,
in its sole discretion, may from time to time determine. Such Basic Salary
shall be exclusive of fees received by you as a director and as a member of
Committees of the Boards of Directors of other corporations, including
subsidiaries, affiliates and investees of the Company.
3. In addition to receipt of Basic Salary under the Employment
Agreement, you shall participate in and shall receive incentive compensation
under the Incentive Compensation Plan for Executive Officers of the Company
(the "Compensation Plan") as awarded by the Incentive Compensation Committee
of the Board of Directors of the Company.
Mr. Laurence A. Tisch
January 1, 2001
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of
pensionable earnings in determining your Supplemental Benefits under the
Employment Agreement. In no event, however, shall such Supplemental Benefits
duplicate benefits under the Company's Benefit Equalization Plan as amended
from time to time.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
----------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
November 3, 1998
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1971, as amended by agreements dated February
27, 1974, March 1, 1976, May 10, 1977, July 17, 1979, June 16, 1981, May 10,
1983, May 10, 1984, October 15, 1985, February 24, 1987, October 14, 1988,
March 1, 1990, October 22, 1992 and October 18, 1994 and February 20, 1996
(the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 2000 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$975,000 per annum for the extension period January 1, 1998 through December
31, 2000. Your Basic Salary for the balance of 1998 will remain at the
rate of $975,000 per annum. Basic Salary shall be payable in accordance with
the Company's customary payroll practices for executives as in effect from
time to time, and shall be subject to such increases as the Board of Directors
of the Company, in its sole discretion, may from time to time determine. Such
Basic Salary shall be exclusive of fees received by you as a director and as a
member of Committees of the Boards of Directors of other corporations,
including subsidiaries, affiliates and investees of the Company.
3. In addition to receipt of Basic Salary under the Employment
Agreement, you shall participate in and shall receive incentive compensation
under the Incentive Compensation Plan for Executive Officers of the Company
(the "Compensation Plan") as awarded by the Incentive Compensation Committee
of the Board of Directors of the Company.
Mr. Laurence A. Tisch
November 3, 1998
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of
pensionable earnings in determining your Supplemental Benefits under the
Employment Agreement. In no event, however, shall such Supplemental Benefits
duplicate benefits under the Company's Benefit Equalization Plan as amended
from time to time.
5. The Company shall pay to you annually an amount equal to any
difference between your available "flexdollars" amount under the Company's
Beneflex employee benefit program and a greater flexdollars amount calculated
on a basis which includes incentive based compensation awarded in relation to
an applicable year under the Compensation Plan, after taking into account your
annual "Beneflex" elections. For purposes of such calculations, incentive
based compensation may be assumed to be payable in the amount of your "Cap"
for the applicable year under the Compensation Plan, subject to appropriate
adjustment in relation to incentive compensation actually awarded under the
Compensation Plan. Other employee benefits, such as life insurance, provided
by the Company will be based on your Basic Salary.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
February 20, 1996
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1971, as amended by agreements dated February
27, 1974, March 1, 1976, May l0, 1977, July l7, 1979, June l6, 1981, May l0,
1983, May l0, 1984, October l5, 1985, February 24, 1987, October 14, 1988,
March 1, 1990, October 22, 1992 and October 18, 1994 (the "Employment
Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 1998 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$1,750,000 per annum for the period January 1, 1996 through May 31, 1996. For
the period June 1, 1996 through December 31, 1996, your Basic Salary shall be
in the amount of $975,000, less amounts theretofore paid as Basic Salary for
the calendar year 1996. For the calendar years 1997 and 1998 Basic Salary
shall be paid to you at the rate of $975,000 per annum. Basic Salary shall be
payable in accordance with the Company's customary payroll practices for
executives as in effect from time to time, and shall be subject to such
increases as the Board of Directors of the Company, in its sole discretion,
may from time to time determine. Such Basic Salary shall be exclusive of fees
received by you as a director and as a member of Committees of the Boards of
Directors of other corporations, including subsidiaries, affiliates and
investees of the Company.
3. In addition to receipt of Basic Salary under the Employment
Agreement, in the event the Company's shareholders approve the Incentive
Compensation Plan for Executive Officers of the Company (the "Compensation
Plan"), you shall participate in and shall receive incentive compensation
under the Compensation Plan as awarded by the Incentive Compensation Committee
of the Board of Directors of the Company.
Mr. Laurence A. Tisch
February 20, 1996
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of
pensionable earnings in determining your Supplemental Benefits under the
Employment Agreement. In no event, however, shall such Supplemental Benefits
duplicate benefits under the Company's Benefit Equalization Plan as amended
from time to time.
5. The Company shall pay to you annually an amount equal to any
difference between your available "flexdollars" amount under the Company's
Beneflex employee benefit program and a greater flexdollars amount calculated
on a basis which includes incentive based compensation awarded in relation to
an applicable year under the Compensation Plan, after taking into account your
annual "Beneflex" elections. For purposes of such calculations, incentive
based compensation may be assumed to be payable in the amount of your "Cap"
for the applicable year under the Compensation Plan, subject to appropriate
adjustment in relation to incentive compensation actually awarded under the
Compensation Plan. Other employee benefits, such as life insurance, provided
by the Company will be based on your Basic Salary.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence a. Tisch
- -----------------------
Laurence A. Tisch
October 18, 1994
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1971, as amended by agreements dated February
27, 1974, March 1, 1976, May 10, 1977, July 17, 1979, June 16, 1981, May 10,
1983, May 10, 1984, October 15, 1985, February 24, 1987, October 14, 1988,
March 1, 1990 and October 22, 1992 (the "Employment Agreement").
This will confirm our agreement that the Employment Agreement
is amended as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
October 31, 1996 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement, effective November 1,
1994, of $1,750,000 per annum, subject to such increases as the Board of
Directors of the Company, in its sole discretion, may from time to time
determine. Such Basic Salary shall be exclusive of fees received by you as a
director and as a member of Committees of the Boards of Directors of other
corporations, including subsidiaries, affiliates and investees of the Company.
3. Effective November 1, 1994, and for so long as you are devoting a
principal amount of your time to CBS Inc. ("CBS"), the Basic Salary shall be
reduced to the rate of $750,000 per annum.
Mr. Laurence A. Tisch
October 18, 1994
Page 2
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
October 22, 1992
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1971, as amended by agreements dated February
27, 1974, March 1, 1976, May 10, 1977, July 17, 1979, June 16, 1981, May 10,
1983, May 10, 1984, October 15, 1985, February 24, 1987, October 14, 1988 and
March 1, 1990 (the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
October 31, 1994 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement, effective November 1,
1992, of $1,500,000 per annum, subject to such increases as the Board of
Directors of the Company, in its sole discretion, may from time to time
determine. Such Basic Salary shall be exclusive of fees received by you as a
director and as a member of Committees of the Boards of Directors of other
corporations, including subsidiaries, affiliates and investees of the Company.
3. Effective November 1, 1992, and for so long as you are devoting a
principal amount of your time to CBS Inc. ("CBS"), the Basic Salary shall be
reduced to the rate of $550,000 per annum.
Mr. Laurence A. Tisch
October 22, 1992
Page 2
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
March 1, 1990
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1971, as amended by agreements dated February
27, 1974, March 1, 1976, May 10, 1977, July 17, 1979, June 16, 1981, May 10,
1983, May 10, 1984, October 15, 1985, February 24, 1987 and October 14, 1988
(the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
October 31, 1992 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement, effective March 1,
1990, of $1,250,000 per annum, subject to such increases as the Board of
Directors of the company, in its sole discretion, may from time to time
determine. Such Basic Salary shall be exclusive of fees received by you as a
director and as a member of Committees of the Boards of Directors of other
corporations, including subsidiaries, affiliates and investees of the Company.
3. Effective March 1, 1990, and for so long as you are devoting a
principal amount of your time to CBS Inc. ("CBS"), the Basic Salary shall be
reduced to the rate of $300,000 per annum.
Mr. Laurence A. Tisch
March 1, 1990
Page 2
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
BARRY HIRSCH
Senior Vice President
Secretary & General Counsel
October 14, 1988
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews
Corporation (the "Company"), dated March 1, 1971, as amended by agreements
dated February 27, 1974, March 1, 1976, May 10, 1977, July 17, 1979, June 16,
1981, May 10, 1983, May 10, 1984, October 15, 1985 and February 24, 1987 (the
"Employment Agreement").
This will confirm our agreement that the Employment Agreement is
amended as follows:
1. The period of your employment under and pursuant to the
Employment Agreement is hereby extended for an additional period through and
including October 31, 1990 upon all the terms, conditions and provisions of
the Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement, effective October 15,
1988, of $950,000 per annum, subject to such increases as the Board of
Directors of the Company, in its sole discretion, may from time to time
determine. Such Basic Salary shall be exclusive of fees received by you as a
director and as a member of Committees of the Boards of Directors of other
corporations, including subsidiaries, affiliates and investees of the Company.
3. For so long as you are devoting a principal amount of your time
to CBS Inc. ("CBS"), the Basic Salary shall be reduced to the rate of $200,000
per annum.
Mr. Laurence A. Tisch
October 14, 1988
Page 2
4. In addition to the provisions of paragraph 2 of the February 24,
1987 amendment to the Employment Agreement, in determining your Supplemental
Benefits, you will be deemed to be a "full-time employee" (as such term is
defined in the Retirement Plan for Employees of Loews Corporation) of the
Company for any period of time during the term of this Employment Agreement
during which you may be devoting a principal amount of your time to CBS.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
BARRY HIRSCH
Vice President
Secretary & General Counsel
February 24, 1987
Mr. Laurence A. Tisch
Island Drive
North Manurising Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement (the "Employment
Agreement") with Loews Corporation (the "Company"), dated March 1, 1971, as
amended by agreements dated February 27, 1974, March 1, 1976, May 10, 1977,
July 17, 1979, June 16, 1981, May 10, 1983, May 10, 1984 and October 15, 1985.
You are presently serving, with the Company's consent, as a
director, President and Chief Executive Officer of CBS Inc. ("CBS").
This will confirm our agreement that the Employment Agreement is
amended as follows:
1. For so long as you are devoting a principal amount of your time
to CBS, your basic salary of $750,000 per annum (the "Basic Salary") under the
Employment Agreement will be reduced, effective as of February 16, 1987, to
the rate of $200,000 per annum (the "Modified Salary").
2. Notwithstanding the foregoing, (a) in determining your
Supplemental Benefits (as defined in the Employment Agreement), for purposes
of clause (i) of paragraph 3 of the July 17, 1979 amendment to the Employment
Agreement, the reduction in salary will not be considered in determining the
retirement benefits which you would be entitled to receive under the Plan (as
defined in the Employment Agreement) and (b) any Supplemental Benefits payable
to you will be reduced by any retirement benefits actually paid to you under
retirement plans of CBS Inc.
3. The Company agrees to pay to you, annually, the amount by which
your available "flexdollars" amount Under the Company's Beneflex employee
benefit program is
Mr. Laurence A. Tisch
February 24, 1987
Page 2
reduced as a result of the foregoing reduction in salary, after taking into
Account your annual "Beneflex" elections. Other employee benefits, such as
life insurance, provided by the Company will be based on your Modified Salary
so long as the Modified Salary remains in effect.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
BARRY HIRSCH
Vice President
Secretary & General Counsel
October 15, 1985
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement (the "Employment
Agreement") with Loews Corporation (the "Company"), dated March 1, 1971, as
amended, by agreements dated February 27, 1974, March 1, 1976, May 10, 1977,
July 17, 1979, June 16, 1981, May 10, 1983 and May 10, 1984.
This will confirm our agreement that the Employment Agreement is
amended as follows:
1. The period of your employment under and pursuant to the
Employment Agreement is hereby extended for an additional period through and
including October 14, 1988 upon all the terms, conditions and provisions of
the Employment Agreement as hereby amended.
2. You shall be paid a basic salary for your services under and
pursuant to the Employment Agreement, effective October 15, 1985, of $750,000
per annum, subject to such increases as the Board of Directors of the Company,
in its sole discretion may from time to time determine. Such basic salary
shall be exclusive of fees received by you as a director and as a member of
committees of the Boards of Directors of CNA Financial Corporation and its
subsidiaries.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy
Mr. Laurence A. Tisch
October 15, 1985
Page 2
of this Letter Agreement at the place indicated below and return the same to
us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
May 10, 1984
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your employment agreement (the "Theatres
Employment Agreement"), with Loew's Theatres, Inc., a New York corporation
("Theatres"), dated May 1, 1960, as amended and supplemented by agreements
dated April 17, 1963, April 1, 1965, February 28, 1968 and May 29, 1968.
Reference is also made to your employment agreement (the "Loews Employment
Agreement") with Loews Corporation, a Delaware corporation ("Loews"), dated
March 1, 1971, as amended and supplemented by agreements dated February 22,
1974, March 1, 1976, May 10, 1977, July 17, 1979, June 16, 1981, and May 10,
1983. Under the Loews Employment Agreement, Loews, among other things, assumed
the obligation of Theatres to make certain payments to you (the "Deferred
Payments") under paragraph 5 of the Theatres Employment Agreement commencing
with the termination of your active employment.
This will confirm our agreement as follows:
1) Upon the execution of this letter agreement, Loews shall pay to
you the sum of $281,500, less applicable withholding taxes, in full and
complete settlement of any obligation of Loews or Theatres to make Deferred
Payments.
2) In consideration of the foregoing, you hereby agree that:
(a) for a period of ten years and forty-three weeks commencing
with the termination of your active employment with Loews you will render such
services of an advisory nature as the Board of Directors of Loews shall
request and your health will permit (such services to be rendered at such
times and places as shall be mutually convenient and after reasonable notice
to you) and you will not be employed by or engaged in any business which is in
Mr. Laurence A. Tisch
May 10, 1984
Page 2
direct or substantial competition with the business of Loews at any time
during such period; and
(b) the period of your employment under and pursuant to the
Loews Employment Agreement is hereby extended for an additional period through
and including February 28, 1987 upon the terms, conditions and provisions of
the Loews Employment Agreement.
Except as herein modified or amended, the Loews Employment Agreement
shall remain in full force and effect.
Our check in the sum of $281,500, less applicable withholding taxes,
referred to above, is enclosed with this letter.
If the foregoing is in accordance with your understanding, please
sign the enclosed duplicate copy of this letter acknowledging receipt of our
check and your agreement to the terms and provisions of this letter and return
the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By /s/ Barry Hirsch
-------------------------
Barry Hirsch
Vice President
RECEIPT ACKNOWLEDGED
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
May 10, 1983
Mr. Laurence.A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your employment agreement (the "Employment
Agreement") with Loews Corporation (the "Company") dated March 1, 1971, as
amended by agreements dated February 27, 1974, March 1, 1976, May 10, 1977,
July 17, 1979 and June 16, 1981.
In connection therewith, this will confirm our agreement that the
Employment Agreement is amended as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
February 28, 1986, upon all the terms, conditions and provisions of the
Employment Agreement as hereby amended.
2. You shall be paid a basic salary for your services under and pursuant
to the Employment Agreement, effective May 30, 1983, of $634,400 per annum,
subject to such increases as the Board of Directors of the Company in its sole
discretion may from time to time determine. Such basic salary shall be
exclusive of fees received by you as a director and as a member of committees
of the Boards of Directors of CNA Financial Corporation and its subsidiaries.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
Mr. Laurence A. Tisch
May 10, 1983
Page 2
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this letter agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
June 16, 1981
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your employment agreement (the "Employment
Agreement") with Loews Corporation (the "Company") dated March 1, 1971, as
amended by agreements dated February 27, 1974, March 1, 1976, May 10, 1977 and
July 17, 1979.
In connection therewith, this will confirm our agreement that the
Employment Agreement Is amended as follows:
1. The period of your employment under and pursuant to the
Employment Agreement is hereby extended for an additional period through and
including February 28, 1984, upon all the terms, conditions and provisions of
the Employment Agreement as hereby amended.
2. You shall be paid a basic salary for your services under and
pursuant to the Employment Agreement, effective June 15, 1981, of $520,000 per
annum, subject to such increases as the Board of Directors of the Company in
its sole discretion may from time to time determine. Such basic salary shall
be exclusive of fees received by you as a director and as a member of
committees of the Boards of Directors of CNA Financial Corporation and its
subsidiaries.
Mr. Laurence A. Tisch
June 16, 1981
Page 2
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this letter agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Vice President
ACCEPTED AND AGREED TO:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
July 17, 1979
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your employment agreement (the "Employment Agreement")
with Loews Corporation (the "Company" dated May 10, 1977, which incorporates
provisions of the employment agreement with you dated March 1, 1971, as
amended by agreements dated February 27, 1974 and March 1, 1976.
In connection therewith this will confirm our agreement that the Employment
Agreement is amended as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
February 28, 1982, upon all the terms, conditions and provisions of the
Employment Agreement as hereby amended.
2. You shall be paid a basic salary for your services under and pursuant
to the Employment Agreement, effective June 4, 1979, of $4l6,000 per annum,
subject to such increases as the Board, of Directors of the Company in its
sole discretion may from time to time determine. Such basic salary shall be
exclusive of fees received by you as a director and as a member of committees
of the Boards of Directors of CNA Financial Corporation and its subsidiaries.
3. The Company hereby agrees to pay to you or your spouse and/or other
beneficiary (the Recipient") designated under the Retirement Plan for
Employees
Mr. Laurence A. Tisch - 2 - July 17, 1979
of Loews Corporation (the "Plan") supplemental retirement benefits
("Supplemental Benefits") in an amount equal to the amount, if any, by which
(i) retirement benefits which the Recipient would be entitled to receive under
the Plan, without giving effect to Section 4.08 of the Plan and the Erisa
Limit defined below, would exceed (ii) retirement benefits actually paid to
the Recipient under the Plan as limited by Section 4.08 of the Plan and the
Erisa Limit. The Supplemental Benefits shall be paid by the Company from its
general funds and not from any funds or assets held under the Plan and the
Company shall not be obligated to deposit or set aside any funds for the
payment thereof. The Supplemental Benefits shall be paid by the Company at the
same times and on the same terms (as nearly as may be practicable) as the
Recipient is entitled to receive retirement benefits from the Plan, except to
the extent withholding for taxes may be applicable. As used herein, the term
"Erisa Limit" shall mean the maximum annual retirement benefit allowed under
Section 415, as adjusted from time to time pursuant to Section 415(d), of the
Internal Revenue Code of 1954 as amended to the date hereof.
Except as herein modified or amended, the Employment Agreement shall remain in
full force and effect.
If the foregoing is in accordance with your understanding, would you please
sign the enclosed duplicate copy of this letter agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Accepted and Agreed to:
/s/ Laurence A. Tisch
- ------------------------
May 10, 1977
Mr. Laurence A. Tisch
Island Drive
North Manursing island
Rye, New York
Dear Mr. Tisch:
You have previously entered into an employment agreement with Loews
Corporation (the "Company") dated March 1, 1971, as amended by agreements
dated February 27, 1974 and March l, 1976 (the agreements dated March 1, 1971
February 27, 1974 and March 1. 1976 being hereinafter referred to as the
"Employment Agreement").
In connection therewith, this will confirm our agreement as follows:
1. The Company does hereby engage and agree to employ your services, in
an executive capacity, for a period of three years from March 1, 1977 to
February 29, 1980; and, you accept such employment and agree that you will
perform the duties which you now perform as well as such other duties as may
be required of you from time to time by the Board of Directors of the Company
in keeping with the character of the duties you now perform.
2. Your employment hereunder shall be on the same terms and conditions
as those of the Employment Agreement, except that you shall be paid a basic
salary for your services, effective March 1, 1977, of $327,600 per annum,
subject to such increases as the Board of Directors of the Company in its sole
discretion may from time to time determine. Such basic salary reflects the
discontinuance effective March 1, 1977 of the non-accountable expense
allowance previously received by you at the rate of $300 per week.
Mr. Laurence A. Tisch 2 May 10, 1977
3. Such basic salary shall be exclusive of fees received by you as a
director and as a member of committees of the Boards of Directors of CNA
Financial Corporation and it's subsidiaries.
4. It is understood that you may continue to devote a reasonable portion
of your time and attention to the supervision of your own investments, to
charitable and civic activities and to memberships on the Boards of Directors
or Trustees of other non-competitive companies or organizations, to the extent
the foregoing does not (a) require a significant portion of your time or (b)
interfere or conflict in any way with the performance of your services
hereunder.
If the foregoing is in accordance with your understanding, would you please
sign the enclosed duplicate copy of this letter agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Lester Pollack
-------------------------
Executive Vice President
Accepted and Agreed to:
/s/ Laurence A. Tisch
- -----------------------
Laurence A. Tisch
March 1, 1976
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York
Dear Mr. Tisch:
You have previously entered into an employment agreement with Loews
Corporation (the "Company") dated March 1 1971 as amended and extended by
agreement dated February 27, 1974 (the agreements dated March 1, 1971 and
February 27, 1974 are hereinafter referred to as the "Employment Agreement").
Pursuant to the terms of the agreement dated February 27, 1974, the Board of
Directors of the Company has determined, and you are agreeable, that the basic
compensation for your services under the Employment Agreement, for the period
March 1, 1976 through and including February 28, 1977, be increased to the
rate of $260,000.00 per annum.
In addition to such basic compensation, you shall continue to receive an
expense allowance at the rate of $300.00 a week and you shall not be required
to account to the Company, by voucher, or otherwise, for the expenditure of
such allowance.
Except as amended herein, the Employment Agreement is ratified and confirmed
in all respects, and continued in full force and effect for the remainder of
the term of the Employment Agreement.
If the foregoing is in accordance with our understanding, please sign the
enclosed duplicate copy of this letter
Mr. Laurence A. Tisch 2 March 1, 1976
agreement at the place indicated below and return same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Lester Pollack
-------------------------
Accepted and Agreed:
/s/ Laurence A. Tisch
- ---------------------
Laurence A. Tisch
February 27, 1974
Mr. Laurence A. Tisch
Island Drive
North Manursing Island
Rye, New York
Dear Mr. Tisch:
This will confirm the understanding between US that, as of the date set forth
above, the employment agreement between you and Loews Corporation (the
"Company") dated March 1, 1971 (the "Employment Agreement") is hereby extended
for an additional period commencing February 28, 1974 through and including
February 28, 1977.
The foregoing extension shall be upon the same terms and conditions contained
in the Employment Agreement and at the same remuneration provided thereunder,
except that the compensation for your services for the period commencing March
1, 1976 through and including February 28, 1977 shall be subject to review by
the Board of Directors of the Company and, if the Board of Directors in its
sole discretion (you and Preston R. Tisch not participating) shall so
determine, to such revision for such period as you and the Company may agree
upon.
During such additional period you may continue to devote a reasonable portion
of your time and attention to the supervision of your own investments, to
charitable and civic activities, and to membership on the Board of Directors
or Trustees of other non-competitive companies or organizations, to the extent
the foregoing does not (a) require a significant portion of your time or (b)
interfere or conflict in any way with the performance of your services under
the Employment Agreement.
If the foregoing is in accordance with your understanding, would you please
sign the enclosed duplicate copy of this
Mr. Laurence A. Tisch 2 February , 1974
letter agreement at the place indicated below and return the same to us for
our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Lester Pollack
-------------------------
Lester Pollack
Senior Vice President
Accepted and Agreed:
/s/ Laurence A. Tisch
- ---------------------
Laurence A. Tisch
AGREEMENT MADE as of the first day of March, 1971 between LOEWS
CORPORATION ("the Company") and LAURENCE A. TISCH ("Tisch").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Tisch is Chairman of the Board and Chief Executive Officer
of the Company and of Loew's Theatres, Inc. ("Loew's"), its wholly-owned
subsidiary; and
WHEREAS, it is desirable that the Company be assured of Tisch's
continued services for the period and upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the covenants
and agreements hereinafter set forth, the parties agree as follows:
1. The Company does hereby engage and employ Tisch's services, in
an executive capacity, for at least the major portion of his time, for a
period of three (3) years from March 1, 1971 to February 28, 1974.
2. Tisch accepts such employment and agrees that he will perform
the duties which he now performs as well as such other duties as may be
required of him from time to time by the Board of Directors in keeping with
the character of the duties he now performs. His office will be in New York
City.
-2-
3. Tisch hereby agrees that during the term hereof he will not
render services for any person, firm or corporation other than the Company or
its subsidiary and affiliated corporations; provided, however, that Tisch may
serve as a director or officer of any one or more of the corporations listed
on Exhibit A hereto, and may render services in such capacities if such
services do not, in the aggregate, (a) require a significant portion of
Tisch's time or (b) interfere or conflict in any way with the performance of
Tisch's services under this agreement.
4. As compensation for all of his services hereunder, the Company
will pay Tisch, during the term of his employment, a salary at the rate of Two
Hundred-Eight Thousand ($208,000) Dollars per annum, payable in accordance
with the Company's customary payroll practices.
5. Nothing contained in this agreement or elsewhere shall be deemed
to affect Tisch's rights to deferred compensation accrued under the Employment
Agreement dated as of May 2, 1960, as amended, between Tisch and Loew's ("the
earlier agreement"), it being further understood and agreed that (a) the
Company hereby assumes the obligations now imposed on Loew's under paragraph 5
of the earlier agreement and promises and covenants to make all presently
accrued payments and to perform all conditions of said paragraph 5 of the
earlier agreement by Loew's to be kept and performed expressly adopting for
itself the provisions of said paragraph 5 with
-3-
respect to all deferred compensation rights presently accrued, and (b) Tisch
acknowledges that he will not be entitled to deferred compensation for any
services rendered or performed after February 28, 1971.
IN WITNESS WHEREOF, the parties hereto have caused these presents to
be duly executed as of the day and year first above written.
LOEWS CORPORATION
(Corporate Seal) By: /s/ Herbert A. Hofmann
-------------------------
Herbert A. Hofmann
Senior Vice President
/s/ Laurence A. Tisch
-------------------------
Laurence A. Tisch
Exhibit 10.02
January 1, 2001
Preston R. Tisch
5 Timber Trail
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1988, as amended by agreements dated March 1,
1990, October 22, 1992, October 18, 1994, February 20, 1996 and November 3,
1998 (the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 2002 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$800,000 per annum for the extension period January 1, 2001 through December
31, 2002. Basic Salary shall be payable in accordance with the Company's
customary payroll practices for executives as in effect from time to time, and
shall be subject to such increases as the Board of Directors of the Company,
in its sole discretion, may from time to time determine. Such Basic Salary
shall be exclusive of fees received by you as a director and as a member of
Committees of the Boards of Directors of other corporations, including
subsidiaries, affiliates and investees of the Company.
3. In addition to receipt of Basic Salary under the Employment
Agreement, you shall participate in and shall receive incentive compensation
under the Compensation Plan for Executive Officers of the Company (the
"Compensation Plan") as awarded by the Incentive Compensation Committee of the
Board of Directors of the Company.
Mr. Preston R. Tisch
January 1, 2001
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of
pensionable earnings in determining your Supplemental Benefits under the
Employment Agreement. In no event, however, shall such Supplemental Benefits
duplicate benefits under the Company's Benefit Equalization Plan as amended
from time to time.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
---------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Preston R. Tisch
- -----------------------
Preston R. Tisch
November 3, 1998
Preston R. Tisch
5 Tirnber Trail
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1988, as amended by agreements dated March 1,
1990, October 22, 1992, October 18, 1994 and February 20, 1996 (the
"Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 2000 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$975,000 per annum for the extension period January 1, 1998 through December
31, 2000. Your Basic Salary for the balance of 1998 will remain at the rate of
$975,000 per annum. Basic Salary shall be payable in accordance with the
Company's customary payroll practices for executives as in effect from time to
time, and shall be subject to such increases as the Board of Directors of the
Company, in its sole discretion, may from time to time determine. Such Basic
Salary shall be exclusive of fees received by you as a director and as a
member of Committees of the Boards of Directors of other corporations,
including subsidiaries, affiliates and investees of the Company.
3. In addition to receipt of Basic Salary under the Employment
Agreement, you shall participate in and shall receive incentive compensation
under the Compensation Plan for Executive Officers of the Company (the
"Compensation Plan") as awarded by the Incentive Compensation Committee of the
Board of Directors of the Company.
Mr. Preston R. Tisch
November 3, 1998
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of
pensionable earnings in determining your Supplemental Benefits under the
Employment Agreement. In no event, however, shall such Supplemental Benefits
duplicate benefits under the Company's Benefit Equalization Plan as amended
from time to time.
5. The Company shall pay to you annually an amount equal to any
difference between your available "flexdollars" amount under the Company's
Beneflex employee benefit program and a greater flexdollars amount calculated
on a basis which includes incentive based compensation awarded in relation to
an applicable year under the Compensation Plan, after taking into account your
annual "Beneflex" elections. For purposes of such calculations, incentive
based compensation may be assumed to be payable in the amount of your "Cap"
for the applicable year under the Compensation Plan, subject to appropriate
adjustment in relation to incentive compensation actually awarded under the
Compensation Plan. Other employee benefits, such as life insurance, provided
by the Company will be based on your Basic Salary.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Preston R. Tisch
- -----------------------
Preston R. Tisch
February 20, 1996
Mr. Preston R. Tisch
5 Timber Trail
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1988, as amended by agreements dated March 1,
1990, October 22, 1992 and October 18, 1994 (the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
December 31, 1998 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement at the rate of
$1,750,000 per annum for the period January 1, 1996 through May 31, 1996. For
the period June 1, 1996 through December 31, 1996, your Basic Salary shall be
in the amount of $975,000, less amounts theretofore paid as Basic Salary for
the calendar year 1996. For the calendar years 1997 and 1998 Basic Salary
shall be paid to you at the rate of $975,000 per annum. Basic Salary shall be
payable in accordance with the Company's customary payroll practices for
executives as in effect from time to time, and shall be subject to such
increases as the Board of Directors of the Company, in its sole discretion,
may from time to time determine. Such Basic Salary shall be exclusive of fees
received by you as a director and as a member of Committees of the Boards of
Directors of other corporations, including subsidiaries, affiliates and
investees of the Company.
3. In addition to receipt of Basic Salary under the Employment
Agreement, in the event the Company's shareholders approve the Incentive
Compensation Plan for Executive Officers of the Company (the "Compensation
Plan"), you shall participate in and shall receive incentive compensation
under the Compensation Plan as awarded by the Incentive Compensation Committee
of the Board of Directors of the Company.
Mr. Preston R. Tisch
February 20, 1996
Page 2
4. Incentive based compensation awarded in relation to applicable years
under the Compensation Plan shall be included in the computation of
pensionable earnings in determining your Supplemental Benefits under the
Employment Agreement. In no event, however, shall such Supplemental Benefits
duplicate benefits under the Company's Benefit Equalization Plan as amended
from time to time.
5. The Company shall pay to you annually an amount equal to any
difference between your available "flexdollars" amount under the Company's
Beneflex employee benefit program and a greater flexdollars amount calculated
on a basis which includes incentive based compensation awarded in relation to
an applicable year under the Compensation Plan, after taking into account your
annual "Beneflex" elections. For purposes of such calculations, incentive
based compensation may be assumed to be payable in the amount of your "Cap"
for the applicable year under the Compensation Plan, subject to appropriate
adjustment in relation to incentive compensation actually awarded under the
Compensation Plan. Other employee benefits, such as life insurance, provided
by the Company will be based on your Basic Salary.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Preston R. Tisch
- -----------------------
Preston R. Tisch
October 18, 1994
Mr. Preston R. Tisch
5 Timber Trail
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1988, as amended by agreements dated March 1,
1990 and October 22, 1992 (the "Employment Agreement") .
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
October 31, 1996 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement, effective November 1,
1994, of $1,750,000 per annum, subject to such increases as the Board of
Directors of the Company, in its sole discretion, may from time to time
determine. Such Basic-Salary shall be exclusive of fees received by you as a
director and as a member of committees of the Boards of Directors of other
corporations, including subsidiaries, affiliates and investees of the Company.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
Mr. Preston R. Tisch
October 18, 1994
Page 2
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Preston R. Tisch
- -----------------------
Preston R. Tisch
October 22, 1992
Mr. Preston R. Tisch
5 Timber Trail
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company") , dated March 1, 1988, as amended by agreement dated March 1,
1990 (the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
October 31, 1994 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement, effective November 1,
1992, of $1,500,000 per annum, subject to such increases as the Board of
Directors of the Company, in its sole discretion, may from time to time
determine. Such Basic Salary shall be exclusive of fees received by you as a
director and as a member of Committees of the Boards of Directors of other
corporations, including subsidiaries, affiliates and investees of the Company.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
Mr. Preston R. Tisch
October 22, 1992
Page 2
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Preston R. Tisch
- -----------------------
Preston R. Tisch
March 1, 1990
Mr. Preston R. Tisch
5 Timber Trail
Rye, New York 10580
Dear Mr. Tisch:
Reference is made to your Employment Agreement with Loews Corporation
(the "Company"), dated March 1, 1988 (the "Employment Agreement").
This will confirm our agreement that the Employment Agreement is amended
as follows:
1. The period of your employment under and pursuant to the Employment
Agreement is hereby extended for an additional period through and including
October 31, 1992 upon all the terms, conditions and provisions of the
Employment Agreement, as hereby amended.
2. You shall be paid a basic salary (the "Basic Salary") for your
services under and pursuant to the Employment Agreement, effective March 1,
1990, of $1,250,000 per annum, subject to such increases as the Board of
Directors of the Company, in its sole discretion, may from time to time
determine. Such Basic Salary shall be exclusive of fees received by you as a
director and as a member of Committees of the Boards of Directors of other
corporations, including subsidiaries, affiliates and investees of the Company.
Except as herein modified or amended, the Employment Agreement shall
remain in full force and effect.
Mr. Preston R. Tisch
March 1, 1990
Page 2
If the foregoing is in accordance with your understanding, would you
please sign the enclosed duplicate copy of this Letter Agreement at the place
indicated below and return the same to us for our records.
Very truly yours,
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Barry Hirsch
Senior Vice President
ACCEPTED AND AGREED TO:
/s/ Preston R. Tisch
- -----------------------
Preston R. Tisch
AGREEMENT made as of the first day of March, 1988 between LOEWS
CORPORATION (the "Company") and PRESTON R. TISCH ("Tisch").
W I T N E S S E T H:
WHEREAS, Tisch had served as President of the Company until his
retirement to become Postmaster General of the United States on August 15,
1986; and
WHEREAS, Tisch has resigned as Postmaster General of the United
States effective March 1, 1988 and it is desirable that he return to the
employ of the Company, and that the Company be assured of his continued
services upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the covenants
and agreements hereinafter set forth, the parties agree as follows:
1. The Company does hereby engage and employ Tisch's services, in
an executive capacity, for at least a major portion of his time, for a period
of two (2) years and eight (8) months from March 1, 1988 to October 31, 1990.
2. Tisch accepts such employment and agrees that he will perform
the duties which he heretofore performed as President and Chief Operating
Officer of the Company as well as such other duties as may be required of him
from time
to time by the Board of Directors in keeping with the character of his prior
duties. His office will be in New York City.
3. Tisch hereby agrees that during the term hereof he will not
render services for any person, firm or corporation other than the Company or
its subsidiary and affiliated corporations; provided, however, that Tisch may
continue to devote a reasonable portion of his time and attention to
supervision of his own investments, to charitable and civic activities and to
membership on the Board of Directors or Trustees of other non-competitive
companies or organizations, but only to the extent that the foregoing does
not, in the aggregate, (a) require a significant portion of Tisch's time or.
(b) interfere or conflict in any way with the performance of Tisch's services
under this Agreement.
4. As compensation for all of his services here-under, the Company
will pay Tisch, during the term of his employment, a salary at the rate of
Nine Hundred Fifty Thousand ($950,000) Dollars per annum, payable in
accordance with the Company's customary payroll practices, subject to such
increases as the Board of Directors of the Company in its sole discretion may
from time to time determine. Such
- 2 -
basic salary shall be exclusive of fees received by Tisch as a director and as
a member of committees of the, Boards of Directors of CNA Financial
Corporation and its subsidiaries.
5. The Company hereby agrees to pay to Tisch or his spouse and/or
other beneficiary (the "Recipient") designated under the Retirement Plan for
Employees of Loews Corporation (the "Plan") supplemental retirement benefits
("Supplemental Benefits") in an amount equal to the amount, if any, by which
(i) retirement benefits which the Recipient would be entitled to receive under
the Plan, without giving effect to provisions of the Plan. ("Plan Limits") now
or hereafter in effect which limit benefits in accordance with the Erisa Limit
defined below, would exceed (ii) retirement benefits actually paid to the
Recipient under the Plan as limited by the-Plan Limits and the Erisa Limit.
The Supplemental Benefits shall be paid by the Company from its general funds
and not from any funds or assets held under the Plan and the Company shall not
be obligated to deposit or set aside any funds for the payment thereof. The
Supplemental Benefits shall be paid by the Company at the same times and on
the same terms (as nearly as may be practicable) as the Recipient is entitled
to receive retirement benefits from the Plan, except to the extent with-
holding for taxes may be applicable. As used herein, the term "Erisa Limit"
shall mean the maximum annual retirement benefit allowed under Section
401(a)(17) and Section 415, as adjusted from time to time pursuant to Section
401(a)(17) and
- 3 -
Section 415(d), of the Internal Revenue Code of 1954 as amended to the date
hereof.
6. For a period of six years commencing with the termination of
Tisch's active employment with the Company, Tisch will render such services of
an advisory nature as the Board of Directors of the Company shall request and
Tisch's health will permit (such services to be rendered at such times and
places as shall be mutually convenient and after reasonable notice to Tisch)
and Tisch will not be employed by or engaged in any business which is in
direct or substantial competition with the business of the Company at any time
during such period.
7. This Agreement sets forth the entire understanding between the
parties with respect to the subject matter hereof and supersedes all prior
understandings and agreements. No change, termination or waiver of any of the
provisions hereof shall be binding unless in writing and signed by the party
against whom the same is sought to be enforced.
IN WITNESS WHEREOF, the parties hereto have caused these presents to
be duly executed as of the day and year first above written.
LOEWS CORPORATION
By: /s/ Barry Hirsch
-------------------------
Accepted and Agreed to:
/s/ Preston R. Tisch
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Preston R. Tisch
- 4-
Exhibit 3.02
AS AMENDED THROUGH
February 20, 2001
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LOEWS CORPORATION
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By-Laws
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2
BY-LAWS
OF
LOEWS CORPORATION
(A Delaware Corporation)
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-----------------------------------
ARTICLE 1
Definitions
As used in these By-laws, unless the context otherwise requires, the
term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as amended
from time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from
time to time.
1.6 "Corporation" means Loews Corporation.
1.7 "Directors" means directors of the Corporation.
1.8 "General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended from time to time.
1.9 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.10 "Chairman of the Board" means the Chairman of the Board of Directors
of the Corporation.
1.11 "President" means the President of the Corporation.
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1.12 "Secretary" means the Secretary of the Corporation.
1.13 "Stockholders" means stockholders of the Corporation.
1.14 "Treasurer" means the Treasurer of the Corporation.
1.15 "Vice President" means a Vice President of the Corporation.
ARTICLE 2
STOCKHOLDERS
2.1 Place of Meetings. Every meeting of the stockholders shall be held at
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the office of the Corporation or at such other place within or without the
State of Delaware as shall be specified or fixed in the notice of such meeting
or in the waiver of notice thereof.
2.2 Annual Meeting. A meeting of stockholders shall be held annually for
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the election of directors and the transaction of other business at such hour
as may be designated in the notice of meeting, on the second Tuesday in May in
each year (or, if such date falls on a legal holiday, on the first business
day thereafter which is not a Saturday, Sunday or legal holiday), or on such
other date not later than six months after the end of the fiscal year of the
Corporation, as may be fixed by the Board.
2.3 Special Meetings. A special meeting of stockholders, unless otherwise
----------------
prescribed by statute, may be called at any time by the Board or by the
Chairman of the Board and Chief Executive Officer, the President or by the
Secretary and shall be called by the Chairman of the Board and Chief Executive
Officer, the President or by the Secretary on the written request of holders
of a majority or more of the shares of capital stock of the Corporation
entitled to vote in an election of directors, which written request shall
state the purpose or purposes of such meeting. At any special meeting of
stockholders only such business may be transacted which is related to the
purpose or purposes of such meeting set forth in the notice thereof given
pursuant to Section 2.5 of the By-laws or in any waiver of notice thereof
given pursuant to Section 2.4 of the By-laws.
2.4 Fixing Record Date. For the purpose of determining the stockholders
------------------
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or for the purpose of determining stockholders entitled to
receive payment of any dividend or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board may fix, in
advance, a date as the record date
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for any such determination of stockholders. Such date shall not be more than
sixty nor less than ten days before the date of such meeting, nor more than
sixty days prior to any other action. If no such record date is fixed:
2.4.1 The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice
is waived, at the close of business on the day next preceding the day on
which the meeting is held;
2.4.2 The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior
action by the Board is necessary, shall be the day on which the first
written consent is expressed;
2.4.3 The record date for determining stockholders for any purpose other
than specified in Sections 2.4.1 and 2.4.2 shall be at the close of
business on the day on which the Board adopts the resolution relating
thereto.
When a determination of stockholders entitled to notice of or to vote at any
meeting of stockholders has been made as provided in this Section 2.4 such
determination shall apply to any adjournment thereof, unless the Board fixes a
new record date for the adjourned meeting.
2.5 Notice of Meetings of Stockholders. Except as otherwise provided in
----------------------------------
Sections 2.3 and 2.4 of the By-laws, whenever under the General Corporation
Law or the Certificate of Incorporation or the By-laws, stockholders are
required or permitted to take any action at a meeting, written notice shall be
given stating the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. A
copy of the notice of any meeting shall be given, personally or by mail not
less than ten nor more than fifty days before the date of the meeting, to each
stockholder entitled to notice of or to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
with postage prepaid, directed to the stockholder at his address as it appears
on the records of the Corporation. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the Corporation that the
notice required by this section has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. When a meeting is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which
the adjournment is taken, and at the adjourned meeting any business may be
transacted that might have been transacted at the meeting as originally
called. If, however, the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
2.6 List of Stockholders. The Secretary shall prepare and make, or cause
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to be prepared and made, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the
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address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
2.7 Quorum of Stockholders; Adjournment. The holders of a majority of the
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shares of stock entitled to vote at any meeting of stockholders, present in
person or represented by proxy, shall constitute a quorum for the transaction
of any business at such meeting. When a quorum is once present to organize a
meeting of stockholders, it is not broken by the subsequent withdrawal of any
stockholders. The holders of a majority of the shares of stock present in
person or represented by proxy at any meeting of stockholders, including an
adjourned meeting, whether or not a quorum is present, may adjourn such
meeting to another time and place.
2.8 Voting; Proxies. Unless otherwise provided in the Certificate of
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Incorporation every stockholder of record shall be entitled at every meeting
of stockholders to one vote for each share of capital stock standing in his
name on the record of stockholders determined in accordance with Section 2.4
of the By-laws. If the Certificate of Incorporation provides for more or less
than one vote for any share, on any matter, every, reference in the By-laws or
the General Corporation Law to a majority or other proportion of stock shall
refer to such majority or other proportion of the votes of such stock. The
provisions of Sections 212 and 217 of the General Corporation Law shall apply
in determining whether any shares of capital stock may be voted and the
persons, if any, entitled to vote such shares; but the Corporation shall be
protected in treating the persons in whose names shares of capital stock stand
on the record of stockholders as owners thereof for all purposes. At any
meeting of stockholders, a quorum being present, all matters, except as
otherwise provided by law or by the Certificate of Incorporation or by the By-
laws, shall be decided by a majority of the votes cast at such meeting by the
holders of shares present in person or represented by proxy and entitled to
vote thereon. All elections of directors shall be by written ballot unless
otherwise provided in the Certificate of Incorporation. In voting on any other
question on which a vote by ballot is required by law or is demanded by any
stockholder entitled to vote, the voting shall be by ballot. Each ballot shall
be signed by the stockholder voting or by his proxy, and shall state the
number of shares voted. On all other questions, the voting may be viva voce.
Every stockholder entitled to vote at a meeting of stockholders or to express
consent or dissent without a meeting may authorize another person or persons
to act for him by proxy. The validity and enforceability of any proxy shall be
determined in accordance with Section 212 of the General Corporation Law.
2.9 Selection and Duties of Inspectors at Meetings of Stockholders. The
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Board, in advance of any meeting of stockholders, may appoint one or more
inspectors to act at the meeting or any adjournment thereof. If inspectors are
not so appointed, the person presiding at such meeting may, and on the request
of any stockholder entitled to vote thereat shall, appoint
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one or more inspectors. In case any person appointed fails to appear or act,
the vacancy may be filled by appointment made by the Board in advance of the
meeting or at the meeting by the person presiding thereat. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspector or
inspectors shall determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the person
presiding at the meeting or any stockholder entitled to vote thereat, the
inspector or inspectors shall make a report in writing of any challenge,
question or matter determined by him or them and execute a certificate of any
fact found by him or them. Any report or certificate made by the inspector or
inspectors shall be prima facie evidence of the facts stated and of the vote
as certified by him or them.
2.10 Organization. At every meeting of stockholders, the Chairman of the
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Board and Chief Executive Officer, or in his absence the President, or in the
absence of both of them the Senior Vice President, or in the absence of all of
them the Executive Vice President or in the absence of all of them the most
senior Vice President (based on term of service as Vice President) present,
shall act as chairman of the meeting. The Secretary, or in his absence one of
the Assistant Secretaries, shall act as secretary of the meeting. In case none
of the officers above designated to act as chairman or secretary of the
meeting, respectively, shall be present a chairman or a secretary of the
meeting, as the case may be, shall be chosen by a majority of the votes cast
at such meeting by the holders of shares of capital stock present in person or
represented by proxy and entitled to vote at the meeting.
2.11 Order of Business. The order of business at all meetings of
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stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present
may be changed by a majority of the votes cast at such meeting by the holders
of shares of capital stock present in person or represented by proxy and
entitled to vote at the meeting.
ARTICLE 3
Directors
3.1 General Powers. Except as otherwise provided in the Certificate of
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Incorporation, the business and affairs of the Corporation shall be managed by
the Board. The Board may adopt such rules and regulations, not inconsistent
with the Certificate of Incorporation or the By-laws or applicable laws, as it
may deem proper for the conduct of its meetings and the management of the
Corporation. In addition to the powers expressly conferred by the By-laws, the
Board may
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exercise all powers and perform all acts which are not required, by the By-
laws or the Certificate of Incorporation or by law, to be exercised and
performed by the stockholders.
3.2 Number; Qualification; Term of Office. The Board shall consist of one
--------------------------------------
or more members. The number of directors shall be fixed initially by the Board
and may thereafter be changed from time to time by action of the stockholders
or of the Board. Directors need not be stockholders. Each director shall hold
office until his successor is elected and qualified or until his earlier
death, resignation or removal.
3.3 Election. Directors shall except as otherwise required by law or by
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the Certificate of Incorporation, be elected by a plurality of the votes cast
at a meeting of stockholders by the holders of shares entitled to vote in the
election.
3.4 Newly Created Directorships and Vacancies. Unless otherwise provided
------------------------------------------
in the Certificate of Incorporation, newly created directorships resulting
from an increase in the number of directors and vacancies occurring in the
Board for any reason, including the removal of directors without cause, may be
filled by vote of a majority of the directors then in office, although less
than a quorum, at any meeting of the Board or may be elected by a plurality of
the votes cast by the holders of shares of capital stock entitled to vote in
the election at a special meeting of stockholders called for that purpose. A
director elected to fill a vacancy shall be elected to hold office until his
successor is elected and qualified, or until his earlier death, resignation or
removal.
3.5 Resignations. Any director may resign at any time by written notice
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to the Corporation. Such resignation shall take effect at the time therein
specified, and, unless otherwise specified, the acceptance of such resignation
shall not be necessary to make it effective.
3.6 Removal of Directors. Any or all of the directors may be removed (i)
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for cause, by vote of the stockholders or by action of the Board, and (ii)
without cause, by vote of the stockholders.
3.7 Remuneration. Unless otherwise expressly provided by resolution
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adopted by the Board, none of the directors or of the members of any committee
of the Corporation contemplated by these By-laws or otherwise provided for by
resolution of the Board shall as such receive any stated remuneration for his
services; but the Board may at any time or from time to time by resolution
provide that remuneration shall be paid to, or on behalf of, any director of
the Corporation or to any member of any such committee who shall not be in the
employ of the Corporation or of any of its subsidiary companies, either as his
annual remuneration as such director or member or as remuneration for his
attendance at each meeting of the Board or of such committee. The Board may
also likewise provide that the Corporation shall reimburse each such director
or member of such committee for any expenses paid by him on account of his
attendance at any such meeting. Nothing in this Section contained shall be
8
construed to preclude any director from serving the Corporation in any other
capacity and receiving remuneration therefor.
3.8 Place and Time of Meetings of the Board. Meetings of the Board,
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regular or special, may be held at any place within or without the State of
Delaware. The times and places for holding meetings of the Board may be fixed
from time to time by resolution of the Board or (unless contrary to resolution
of the Board) in the notice of the meeting.
3.9 Annual Meetings. On the day when and at the place where the annual
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meeting of stockholders for the election of directors is held, and as soon as
practicable thereafter, the Board may hold its annual meeting, without notice
of such meeting, for the purposes of organization the election of officers and
the transaction of other business. The annual meeting of the Board may be held
at any other time and place specified in a notice given as provided in Section
3.11 of the By-laws for special meetings of the Board or in a waiver of notice
thereof.
3.10 Regular Meetings. Regular meetings of the Board may be held at such
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times and places as may be fixed from time to time by the Board. Unless
otherwise required by the Board, regular meetings of the Board may be held
without notice. If any day fixed for a regular meeting of the Board shall be a
Saturday or Sunday or a legal holiday at the place where such meeting is to be
held, then such meeting shall be held at the same hour at the same place on
the first business day thereafter which is not a Saturday, Sunday or legal
holiday.
3.11 Special Meetings. Special meetings of the Board shall be held
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whenever called by the Chairman of the Board, the President, or the Secretary
or by any two or more directors. Notice of each special meeting of the Board
shall, if mailed, be addressed to each director at the address designated by
him for that purpose or, if none is designated, at his last known address at
least two days before the date on which the meeting is to be held; or such
notice shall be sent to each director at such address by telegraph, cable or
wireless, or be delivered to him personally, not later than the day before the
date on which such meeting is to be held. Every such notice shall state the
time and place of the meeting but need not state the purposes of the meeting,
except to the extent required by law. If mailed, each notice shall be deemed
given when deposited, with postage thereon prepaid, in a post office or
official depository under the exclusive care and custody of the United States
Post Office Department. Such mailing shall be by first-class mail.
3.12 Adjourned Meetings. A majority of the directors present at any
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meeting of the Board, including an adjourned meeting, whether or not a quorum
is present may adjourn such meeting to another time and place. Notice of any
adjourned meeting of the Board need not be given to any director whether or
not present at the time of the adjournment. Any business may be transacted at
any adjourned meeting that might have been transacted at the meeting as
originally called.
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3.13 Waiver of Notice. Whenever notice is required to be given to any
----------------
director or member of a committee of directors under any provision of the
General Corporation Law or of the Certificate of Incorporation or By-laws, a
written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of
such meeting, except when the person attends a meeting for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special
meeting of the directors, or members of a committee of directors, need be
specified in any written waiver of notice.
3.14 Organization. At each meeting of the Board, the Chairman of the
------------
Board, or in the absence of the Chairman of the Board, the President of the
Corporation, or in the absence of all of them a chairman chosen by the
majority of the directors present, shall preside. The Secretary shall act as
secretary at each meeting of the Board. In case the Secretary shall be absent
from any meeting of the Board, an Assistant Secretary shall perform the duties
of secretary at such meeting; and in the absence from any such meeting of the
Secretary and Assistant Secretaries, the person presiding at the meeting may
appoint any person to act as secretary of the meeting.
3.15 Quorum of Directors. A majority of the directors then in office
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shall constitute a quorum for the transaction of business or of any specified
item of business at any meeting of the Board.
3.16 Action by the Board. All corporate action taken by the Board or any
-------------------
committee thereof shall be taken at a meeting of the Board, or of such
committee, as the case may be, except that any action required or permitted to
be taken at any meeting of the Board, or of any committee thereof, may be
taken without a meeting if all members of the Board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the Board or committee. Members of the Board, or
any committee designated by the Board, may participate in a meeting of the
Board, or of such committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each others and participation in a
meeting pursuant to this Section 3.16 shall constitute presence in person at
such meeting. Except as otherwise provided by the Certificate of
Incorporation or by law, the vote of a majority of the directors present
(including those who participate by means of conference telephone or similar
communications equipment) at the time of the vote, if a quorum is present at
such time, shall be the act of the Board.
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ARTICLE 4
COMMITTEES OF THE BOARD
4.1 Executive Committee; Number, Appointment, Term of Office, etc. (a)
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The Board, by resolution adopted by a majority of the whole Board, may
designate an Executive Committee consisting of the Chairman of the Board and
Chief Executive Officer and such other directors as it may designate. Each
member of the Executive Committee shall continue to be a member thereof only
so long as he remains a director and at the pleasure of a majority of the
whole Board. Any vacancies on the Executive Committee may be filled by the
majority of the whole Board.
(b) The Executive Committee, between meetings of the Board, shall have
and may exercise the powers of the Board in the management of the property,
business and affairs of the Corporation and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Without limiting
the foregoing, the Executive Committee shall have the express power and
authority to declare a dividend, to authorize the issuance of stock, and to
adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of the State of Delaware.
(c) Regular meetings of the Executive Committee, of which no notice shall
be necessary, shall be held on such days and at such places, within or without
the State of Delaware, as shall be fixed by resolution adopted by a majority
of the Executive Committee. Special meetings of the Executive Committee shall
be held whenever called by the Chairman of the Board, if Chief Executive
Officer, the President, the Chairman of the Executive Committee and shall be
called by the Secretary of the Corporation on the request of a majority of the
Executive Committee. Notice of each special meeting of the Executive Committee
shall be given to each member thereof by depositing such notice in the United
States mail, in a postage prepaid envelope, directed to him at his residence
or usual place of business at least two days before the day on which such
meeting is to be held or shall be sent addressed to him at such place by
telegraph, cable, wireless or other form of recorded communication or be
delivered personally or by telephone a reasonable time in advance of the time
at which such meeting is to be held. Notice of any such meeting need not,
however, be given to any member of the Executive Committee if he shall be
present at such meeting. Any meeting of the Executive Committee shall be a
legal meeting without any notice thereof having been given if all the members
of the Executive Committee shall be present thereat. Such notice shall specify
the time and place of the meeting, but except as otherwise expressly provided
by law, the purposes thereof need not be stated in such notice. Subject to the
provisions of these By-laws, the Executive Committee may fix its own rules of
procedure, and it shall keep a record of its proceedings and report them to
the Board at the next regular or special meeting thereof after such
proceedings shall have been taken. All such proceedings shall be subject to
revision or alteration by the Board; provided, however, that third parties
shall not be prejudiced by any such revision or alteration.
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(d) Except as otherwise provided by law, a majority of the Executive
Committee then in office shall constitute a quorum for the transaction of
business, and the act of a majority of those present at a meeting thereof
shall be the act of the Executive Committee. In the absence of a quorum, a
majority of the members of the Executive Committee present thereat may adjourn
such meeting from time to time until a quorum shall be present thereat. Notice
of any adjourned meeting need not be given. The Executive Committee shall act
only as a committee, and the individual members shall have no power as such.
(e) Any member of the Executive Committee may resign therefrom at any
time by giving written notice of his resignation to the Chairman of the Board,
the President or the Secretary. Any such resignation shall take effect at the
time specified therein or, if the time when it shall become effective shall
not be specified therein, it shall take effect immediately upon its receipt;
and, except as specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
(f) In addition to the foregoing, in the absence or disqualification of a
member of the Executive Committee, the members present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
4.2 Other Committees of the Board. The Board, by resolution adopted by a
-----------------------------
majority of the whole Board, may designate one or more other committees, which
shall in each case consist of such number of directors, but not less than two,
and shall have and may exercise such powers for such periods, as the Board may
determine in the resolution designating such committee. A majority of the
members of any such committee may fix its rules of procedure, determine its
action, fix the time and place, whether within or without the State of
Delaware, of its meetings and specify what notice thereof, if any, shall be
given, unless the Board shall by resolution adopted by a majority of the whole
Board otherwise provide. Each member of any such committee shall continue to
be a member thereof only so long as he remains a director and at the pleasure
of a majority of the whole Board. Any vacancies on any such committee may be
filled by a majority of the whole Board.
4.3 Other Committees. Nothing hereinbefore contained in this Article 4
----------------
shall be deemed to preclude the designation by the Chairman of the Board, if
Chief Executive Officer, or the President, of committees, other than
committees of the Board, which may include officers and employees who are not
directors.
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ARTICLE 5
OFFICERS
5.1 Officers. The Board shall elect a Chairman of the Board, a President
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and Chief Executive Officer, a Chairman of the Executive Committee, a
Secretary and a Treasurer, and as many Assistant Secretaries and Assistant
Treasurers as the Board may deem necessary, and may elect or appoint one or
more Vice Presidents and such other officers as it may determine. The Board
may designate one or more Vice Presidents as Senior Vice President or
Executive Vice President, and may use descriptive words or phrases to
designate the standing, seniority or area of special competence of the Vice
Presidents elected or appointed by it. Each officer shall hold his office
until his successor is elected and qualified or until his earlier death,
resignation or removal in the manner provided in Section 5.2 of the By-laws.
Any two or more offices may be held by the same person. The Board may require
any officer to give a bond or other security for the faithful performance of
his duties, in such amount and with such sureties as the Board may determine.
All officers as between themselves and the Corporation shall have such
authority and perform such duties in the management of the Corporation as may
be provided in the By-laws or as the Board may from time to time determine.
5.2 Removal of Officers. Any officer elected or appointed by the Board
--------------------
may be removed by the Board with or without cause. The removal of an officer
without cause shall be without prejudice to his contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights.
5.3 Resignations. Any officer may resign at any time in writing by
------------
notifying the Board, the Chairman of the Board, the President or the
Secretary. Such resignation shall take effect at the date of receipt of such
notice or at such later time as is therein specified, and, unless otherwise
specified, the acceptance of such resignation shall not be necessary to make
it effective. The resignation of an officer shall be without prejudice to the
contract rights of the Corporation, if any.
5.4 Vacancies. A vacancy in any office because of death, resignation,
---------
removal, disqualification or any other cause shall be filled for the unexpired
portion of the term in the manner prescribed in the By-laws for the regular
election or appointment to such office.
5.5 Compensation. Salaries or other compensation of the officers may be
------------
fixed from time to time by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that he is also
a director.
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5.6 Chairman of the Board. The Chairman of the Board of the Corporation
---------------------
shall have general supervision over the business of the Corporation, subject,
however, to the control of the Board and of any duly authorized committee of
directors. The Chairman of the Board shall, if present, preside at all
meetings of the stockholders and at all meetings of the Board. He may, with
the Secretary or the Treasurer or an Assistant Secretary or an Assistant
Treasurer, sign certificates for shares of capital stock of the Corporation.
He may sign and execute in the name of the Corporation deeds, mortgages,
bonds, contracts and other instruments, except in cases where the signing and
execution thereof shall be expressly delegated by the Board or by the By-laws
to some other officer or agent of the Corporation, or shall be required by law
otherwise to be signed or executed and, in general, he shall perform all
duties incident to the office of Chairman of the Board and such other duties
as from time to time may be assigned to him by the Board. The Board may
designate two persons to serve as Co-Chairman of the Board of the Corporation
in which case each reference in these By-Laws to the "Chairman of the Board"
shall mean the "Co-Chairmen of the Board". Where both individuals holding such
office are present, the individual with greater seniority shall exercise the
powers of the office, unless otherwise directed by the Board.
5.7 President and Chief Executive Officer. The President shall be the
-------------------------------------
Chief Executive Officer of the Corporation and as such shall have the general
powers and duties of supervision and management usually vested in the office
of President and Chief Executive Officer. The President may also, with the
Secretary or the Treasurer or an Assistant Secretary or an Assistant
Treasurer, sign certificates for shares of capital stock of the Corporation;
may sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts or other instruments authorized by the Board, except in cases where
the signing and execution thereof shall be expressly delegated by the Board or
by the By-laws to some other officer or agent of the Corporation, or shall be
required by law otherwise to be signed or executed; and shall perform such
other duties as from time to time may be assigned to him by the Board.
5.8 Chairman of the Executive Committee. The Chairman of the Executive
-----------------------------------
Committee shall have the powers and duties incident to that office and shall
have other powers and duties as may be prescribed from time to time by the
Board of Directors. He shall be a member of the Executive Committee and shall
preside at all meetings of the Executive Committee. In the event of the
absence or disability of the President, he shall perform the duties of the
President, unless the Board of Directors shall have designated another person
to perform such duties.
5.9 Vice Presidents. Each Vice President shall have such powers and shall
---------------
perform such duties as shall be assigned to such person by the President or
the Board of Directors. Any Vice President may also, with the Secretary or
the Treasurer or an Assistant Secretary or an Assistant Treasurer, sign
certificates for shares of capital stock of the Corporation; may sign and
execute in the name of the Corporation deeds, mortgages, bonds, contracts or
other instruments authorized by the Board, except in cases where the signing
and execution thereof be expressly delegated by the Board or by the
14
By-laws to some other officer or agent of the Corporation, or shall be
required by law otherwise to be signed or executed.
5.10 Secretary. The Secretary, if present, shall act as secretary of all
---------
meetings of the stockholders and of the Board, and shall keep the minutes
thereof in the proper book or books to be provided for that purpose; he shall
see that all notices required to be given by the Corporation are duly given
and served; he may, with the Chairman of the Board, the President or a Vice
President, sign certificates for shares of capital stock of the Corporation;
he shall be custodian of the seal of the Corporation and may seal with the
seal of the Corporation, or a facsimile thereof, all certificates for shares
of capital stock, of the Corporation and all documents the execution of which
on behalf of the Corporation under its corporate seal is authorized in
accordance with the provisions of the By-laws; he shall have charge of the
stock ledger and also of the other books, records and papers of the
Corporation relating to its organization and management as a Corporation, and
shall see that the reports, statements and other documents required by law are
properly kept and filed; and shall, in general, perform all the duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to him by the Board or by the President.
5.11 Treasurer. The Treasurer shall have charge and custody of, and be
---------
responsible for, all funds, securities and notes of the Corporation; receive
and give receipts for moneys due and payable to the Corporation from any
sources whatsoever; deposit all such moneys in the name of the Corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with these By-laws; against proper vouchers, cause such funds to be
disbursed by checks or drafts on the authorized depositaries of the
Corporation signed in such manner as shall be determined in accordance with
any provisions of the By-laws, and be responsible for the accuracy of the
amounts of all moneys so disbursed; regularly enter or cause to be entered in
books to be kept by him or under his direction full and adequate amount of all
moneys received or paid by him for the amount of the Corporation; have the
right to require, from time to time reports or statements giving such
information as he may desire with respect to any and all financial
transactions of the Corporation from the officers or agents transacting the
same; render to the President or the Board, whenever the President or the
Board, respectively, require him so to do, an account of the financial
condition of the Corporation and of all his transactions as Treasurer; exhibit
at all reasonable times his books of account and other records to any of the
directors upon application at the office of the Corporation where such books
and records are kept; and in general, perform all the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
to him by the Board, or by the President; and he may sign, with the Chairman
of the Board, the President or a Vice President, certificates for shares of
capital stock of the Corporation.
5.12 Assistant Secretaries and Assistant Treasurers. Assistant
----------------------------------------------
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer, respectively, or by the
Board, or the President. Assistant
15
Secretaries and Assistant Treasurers may, with the Chairman of the Board, the
President or a Vice President, sign certificates for shares of capital stock
of the Corporation.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
6.1 Execution of Contracts. The Board may authorize any officer, employee
----------------------
or agent, in the name and on behalf of the Corporation, to enter into any
contracts or execute and satisfy any instrument, and any such authority may be
general or confined to specific instances, or otherwise limited.
6.2 Loans. The Chairman of the Board and Chief Executive Officer, the
-----
President or any other officer, employee or agent authorized by the By-laws or
by the Board may effect loans and advances at any time for the Corporation
from any bank, trust company or other institutions or from any firm,
corporation or individual and for such loan and advances may make, execute and
deliver promissory notes, bonds or other certificates or evidences of
indebtedness of the Corporation, and when authorized so to do may pledge and
hypothecate or transfer any securities or other property of the Corporation as
security for any such loans or advances. Such authority conferred by the Board
may be general or confined to specific instances or otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
-------------------
payment of money out of the funds of the Corporation and all notes or other
evidences of indebtedness of the Corporation shall be signed on behalf of the
Corporation in such manner as shall from time to time be determined by
resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed shall
--------
be deposited from time to time to the order of the Corporation in such banks,
trust companies or other depositories as the Board may select or as may be
selected by an officer, employee or agent of the Corporation to whom such
power may from time to time be delegated by the Board.
ARTICLE 7
STOCKS AND DIVIDENDS
7.1 Certificates Representing Shares. The shares of capital stock of the
--------------------------------
Corporation shall be represented by certificates in such form (consistent with
the provisions of Section 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by the Chairman of
the Board (or a Co-Chairman of the Board), the President or a Vice President
and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the Corporation or a
facsimile thereof. The signatures of the officers upon a certificate
16
may be facsimiles, if the certificate is countersigned by a transfer agent or
registrar other than the Corporation itself or its employee. In case any
officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon any certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, such
certificate may, unless otherwise ordered by the Board, be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent or registrar at the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
------------------
Corporation shall be made only on the books of the Corporation by the holder
thereof or by his duly authorized attorney appointed by a power of attorney
duly executed and filed with the Secretary or a transfer agent of the
Corporation, and on surrender of the certificate or certificates representing
such shares of capital stock properly endorsed for transfer and upon payment
of all necessary transfer taxes. Every certificate exchanged, returned or
surrendered to the Corporation shall be marked "Canceled," with the date of
cancellation, by the Secretary or an Assistant Secretary or the transfer agent
of the Corporation. A person in whose name shares of capital stock shall stand
on the books of the Corporation shall be deemed the owner thereof to receive
dividends, to vote as such owner and for all other purposes as respects the
Corporation. No transfer of shares of capital stock shall be valid as against
the Corporation, its stockholders and creditors for any purpose, except to
render the transferee liable for the debts of the Corporation to the extent
provided by law, until such transfer shall have been entered on the books of
the Corporation by an entry showing from and to whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to time
----------------------------
maintain one or more transfer offices or agents and registry offices or agents
at such place or places as may be determined from time to time by the Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of any
--------------------------------------------------
shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as, a condition to the issue of
any such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his legal representatives, to make proof
satisfactory to the Board of such loss, destruction, theft or mutilation and
to advertise such fact in such manner as the Board may require, and to give
the Corporation and its transfer agents and registrars, or such of them as the
Board may require, a bond in such form, in such sum and with such surety or
sureties as the Board may direct, to indemnify the Corporation and its
transfer agents and registrars against any claim that may be made against any
of them on account of the continued existence of any such certificate so
alleged to have been lost, destroyed, stolen or mutilated and against any
expense in connection with such claim.
7.5 Regulations. The Board may make such rules and regulations as it may
-----------
deem expedient, not inconsistent with the By-laws or with the Certificate of
Incorporation,
17
concerning the issue, transfer and registration of certificates representing
shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on the
--------------------------------
transfer or registration of transfer of capital stock of the Corporation, if
permitted by Section 202 of the General Corporation Law and noted
conspicuously on the certificate representing such capital stock, may be
enforced against the holder of the restricted capital stock or any successor
or transferee of the holder including an executor, administrator, trustee,
guardian or other fiduciary entrusted with like responsibility for the person
or estate of the holder. Unless noted conspicuously on the certificate
representing such capital stock, a restriction, even though permitted by
Section 202 of the General Corporation Law, shall be ineffective except
against a person with actual knowledge of the restriction. A restriction on
the transfer or registration of transfer of capital stock of the Corporation
may be imposed either by the Certificate of Incorporation or by an agreement
among any number of stockholders or among such stockholders and the
Corporation. No restriction so imposed shall be binding with respect to
capital stock issued prior to the adoption of the restriction unless the
holders of such capital stock are parties to an agreement or voted in favor of
the restriction.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the Certificate
-----------------------
of Incorporation and of law, the Board:
7.7.1 May declare and pay dividends or make other distributions on the
outstanding shares of capital stock in such amounts and at such time or
times as, in its discretion, the condition of the affairs of the
Corporation shall render advisable;
7.7.2 May use and apply, in its discretion, any of the surplus of the
Corporation in purchasing or acquiring any shares of capital stock of the
Corporation, or purchase warrants therefor, in accordance with law, or
any of its bonds, debentures, notes, scrip or other securities or
evidences of indebtedness;
7.7.3 May set aside from time to time out of such surplus or net profits
such sum or sums as, in its discretion, it may think proper, as a reserve
fund to meet contingencies, or for equalizing dividends or for the
purpose of maintaining or increasing the property or business of the
Corporation, or for any purpose it may think conducive to the best
interest of the Corporation.
ARTICLE 8
INDEMNIFICATION
8.1 Indemnification of Officers and Directors. The Corporation shall
-----------------------------------------
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative
18
or investigative, by reason of the fact that he is or was a director or an
officer of the Corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding to the
fullest extent and in the manner set forth in and permitted by the General
Corporation Law, and any other applicable law, as from time to time in effect.
Such right of indemnification shall not be deemed exclusive of any other
rights to which such director or officer may be entitled apart from the
foregoing provisions. The foregoing provisions of this Section 8.1 shall be
deemed to be a contract between the Corporation and each director and officer
who serves in such capacity at any time while this Article 8 and the relevant
provisions, of the General Corporation law and other applicable law, if any,
are in effect, and any repeal or modification thereof shall not affect any
rights or obligations then existing, with respect to any state of facts then
or theretofore existing, or any action, suit or proceeding theretofore, or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
8.2 Indemnification of Other Persons. The Corporation may indemnify any
--------------------------------
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was an employee or agent of the Corporation, or is or was, serving at the
request of the Corporation, as a director, officer, employee or agent of
another Corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding to the extent and in the manner set forth in
and permitted by the General Corporation Law, and any other applicable law, as
from time to time in effect. Such right of indemnification shall not be deemed
exclusive of any other rights to which any such person may be entitled apart
from the foregoing provisions.
ARTICLE 9
BOOKS AND RECORDS
9.1 Books and Records. The Corporation shall keep correct and complete
------------------
books and records of account and shall keep minutes of the proceedings of the
stockholders, the Board and any committee of the Board. The Corporation shall
keep at the office designated in the Certificate of Incorporation or at the
office of the transfer agent or registrar of the Corporation in Delaware, a
record containing the names and addresses of all stockholders, the number and
class of shares held by each and the dates when they respectively became the
owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation in the
---------------
regular course of its business, including its stock ledger, books of account,
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs or any other information storage device
provided that the records so kept can be converted into clearly legible
written form within a reasonable time. The
19
Corporation shall so convert any records so kept upon the request of any
person entitled to inspect the same.
9.3 Inspection of Books and Records. Except as otherwise provided by law,
-------------------------------
the Board shall determine from time to time whether, and, if allowed, when and
under what conditions and regulations, the accounts, books, minutes and other
records of the Corporation, or any of them, shall be open to the inspection of
the stockholders.
ARTICLE 10
SEAL
The Board may adopt a corporate seal which shall be in the form of a
circle and shall bear the full name of the Corporation, the year of its
incorporation and the word "Delaware".
ARTICLE 11
FISCAL YEAR
The fiscal year of the Corporation shall begin on the 1st day of January
and shall terminate on the 31st day of December in each year, or such other
period as may be fixed by resolution of the Board.
ARTICLE 12
VOTING OF SHARES HELD
Unless otherwise provided by resolution of the Board, the Chairman of the
Board and Chief Executive Officer, or the President, or any Vice President,
may, from time to time, appoint one or more attorneys or agents of the
Corporation, in the name and on behalf of the Corporation, to cast the votes
which the Corporation may be entitled to cast as a stockholder or otherwise in
any other corporation, any of whose shares or securities may be held by the
Corporation, at meetings of the holders of stock or other securities of such
other corporation, or to consent, in writing to any action by any such other
corporation, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause
to be executed on behalf of the Corporation and under its corporate seal, or
otherwise, such written proxies, consents, waivers or other instruments as he
may deem necessary or proper in the premises; or the Chairman of the Board and
Chief Executive Officer, or the President, or any Vice President may himself
attend any meeting of the holders of the stock or other securities of any such
other corporation and thereat vote or exercise any or all other
20
powers of the Corporation as the holder of such stock or other securities of
such other corporation.
ARTICLE 13
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
Pursuant to the provisions of Section 203 (a) (2) of the General
Corporation Law, the Corporation, by action of the Board, expressly elects not
to be governed by Section 203 of the General Corporation Law, dealing with
business combinations with interested stockholders. Notwithstanding anything
to the contrary in these By-laws, the provisions of this Article 13 may not be
further amended by the Board, except as may be specifically authorized by the
General Corporation Law.
ARTICLE 14
AMENDMENTS
The By-laws may be altered, amended, supplemented or repealed, or new By-
laws may be adopted, by vote of the holders of the shares entitled to vote in
the election of directors. The By-laws may be altered, amended, supplemented
or repealed, or new By-laws may be adopted, by the Board, provided that the
vote of a majority of the entire Board shall be required to change the number
of authorized directors. Any By-laws adopted, altered, amended, or
supplemented by the Board may be altered, amended, supplemented or repealed by
the stockholders entitled to vote thereon.
ARTICLE 15
OFFICES
The Corporation may have an office or offices at such place or places,
within or without the State of Delaware, as the Board of Directors may from
time to time designate or the business of the Corporation require.
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
------------ -------------
Commission File Number 1-6541
LOEWS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2646102
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
667 Madison Avenue, New York, N.Y. 10021-8087
(Address of principal executive offices) (Zip Code)
(212) 521-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
3 1/8% Exchangeable Subordinated Notes Due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As at March 9, 2001, 98,619,050 shares of Common Stock of the Registrant
were outstanding and the aggregate market value of voting stock held by non-
affiliates was approximately $8,461,277,000.
Documents Incorporated by Reference:
Portions of the Loews Corporation Notice of Annual Meeting of Stockholders
and Proxy Statement dated March 27, 2001 are incorporated by reference into
Part III. (Registrant intends to file a definitive proxy statement with the
Commission prior to April 30, 2001).
==============================================================================
1
LOEWS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 2000
Item Page
No. PART I No.
- ---- ----
1 BUSINESS .......................................................... 3
CNA Financial Corporation ....................................... 3
Lorillard, Inc. ................................................. 12
Loews Hotels Holding Corporation ................................ 16
Diamond Offshore Drilling, Inc. ................................. 17
Bulova Corporation .............................................. 19
Other Interests ................................................. 19
2 PROPERTIES ........................................................ 20
3 LEGAL PROCEEDINGS ................................................. 20
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 38
EXECUTIVE OFFICERS OF THE REGISTRANT .............................. 38
PART II
5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS .......................................................... 39
6 SELECTED FINANCIAL DATA ........................................... 40
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................ 41
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 61
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 65
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................. 117
PART III
Information called for by Part III has been omitted as Registrant
intends to file with the Securities and Exchange Commission not later
than 120 days after the close of its fiscal year a definitive Proxy
Statement pursuant to Regulation 14A.
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ... 117
2
PART I
Item 1. Business.
Loews Corporation is a holding company. Its subsidiaries are engaged in the
following lines of business: property, casualty and life insurance (CNA
Financial Corporation, an 87% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of
hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary); the
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc., a 53% owned subsidiary); and the distribution and sale of watches and
clocks (Bulova Corporation, a 97% owned subsidiary).
Unless the context otherwise requires, the terms "Company" and "Registrant"
as used herein mean Loews Corporation excluding its subsidiaries.
Information relating to the major business segments from which the Company's
consolidated revenues and income are derived is contained in Note 18 of the
Notes to Consolidated Financial Statements, included in Item 8.
CNA FINANCIAL CORPORATION
CNA Financial Corporation ("CNA") was incorporated in 1967 and is an
insurance holding company whose primary subsidiaries consist of property-
casualty and life insurance companies. Collectively, CNA and its subsidiaries
are referred to as CNA. CNA's property-casualty insurance operations are
conducted by Continental Casualty Company ("CCC"), incorporated in 1897, and
its affiliates, and The Continental Insurance Company ("CIC"), organized in
1853, and its affiliates. Life insurance operations are conducted by
Continental Assurance Company ("CAC"), incorporated in 1911, and its life
insurance affiliates. CIC became an affiliate of CNA in 1995 as a result of
the acquisition of The Continental Corporation ("Continental"). The principal
business of Continental is the ownership of a group of property and casualty
insurance companies. CNA serves a wide variety of customers, including small,
medium and large businesses; associations; professionals; and groups and
individuals with a broad range of insurance and risk management products and
services. Insurance products include property and casualty coverages; life,
accident and health insurance; and retirement products and annuities. CNA
services include risk management, information services, health care
management, claims administration and employee leasing/payroll processing. CNA
products are marketed through agents, brokers, managing general agents and
direct sales. CNA's principal market is the United States with a continued
focus on expanding globally to serve those with growing worldwide interests,
as well as adding value in international market niches. CNA accounted for
73.18%, 76.42% and 80.59% of the Company's consolidated total revenue for the
years ended December 31, 2000, 1999 and 1998, respectively.
CNA conducts its operations through seven operating segments: Agency Market
Operations, Specialty Operations, CNA Re, Global Operations, Risk Management,
Group Operations and Life Operations. These operating segments reflect the way
CNA distributes its products to the marketplace, manages operations and makes
business decisions. A more detailed description of each segment follows.
Property and Casualty Operations
Agency Market Operations
Agency Market Operations builds on CNA's long and successful relationship
with the independent agency distribution system to market a broad range of
property-casualty insurance products and services to small and middle market
businesses. Business products include workers' compensation, commercial
packages, general liability, umbrella and commercial auto, as well as a
variety of creative risk management services. In addition, Agency Market
Operations includes a professional employer organization, CNA UniSource, which
provides various employer-related services. Personal Insurance included
personal auto and homeowners coverage and also offered personal umbrella,
separate scheduled property, boat-owners and other recreational vehicle
insurance. These operations were transferred to The Allstate Corporation
("Allstate") effective October 1, 1999. See Note 12 of the Notes to
Consolidated Financial Statements for discussion of the Personal Insurance
transaction.
Agency Market Operations is principally comprised of the following three
groups.
Commercial Insurance: Commercial Insurance ("CI") provides standard
property-casualty insurance products such as workers' compensation, general
and product liability, property, commercial auto and umbrella coverage to a
wide range of businesses. The majority of CI customers are small and middle-
market businesses, with less than $1.0 million in annual insurance premiums.
Most insurance programs are provided on a guaranteed cost basis, although
customized loss sensitive programs are also available for larger middle-market
customers.
3
CNA E&S: CNA E&S ("E&S") provides specialized insurance and other financial
products for selected commercial risks on both an individual customer or
program basis. Risks insured by E&S are generally viewed as higher risk and
less predictable in exposure than those covered by standard insurance markets.
CNA UniSource: CNA UniSource is a business solutions provider offering
outsourcing services and products that relieve businesses of many
administrative tasks, allowing them more time to focus on their core business.
CNA UniSource provides human resources ("HR") information technology, payroll
processing and professional employer organization services. CNA UniSource is
also engaged in delivering Internet-based HR and payroll administrative
services and implementing HR information outsourcing for large-scale
businesses.
Specialty Operations
Specialty Operations provides a broad array of professional, financial and
specialty property-casualty products and services through a network of
brokers, managing general agencies and independent agencies. Specialty
Operations provides creative solutions for managing the risks of its clients,
including architects, engineers, lawyers, health care professionals, financial
intermediaries and corporate directors and officers.
Specialty Operations is composed of three principal groups.
CNA Pro: CNA Pro is one of the largest providers of non-medical professional
liability insurance and risk management services in the United States. CNA
Pro's products include errors and omissions, directors and officers, and
employment practices liability coverages and a broad range of fidelity
products. Products are distributed on a national basis through a variety of
channels including brokers, agents and managing general underwriters. CNA
Pro's customers include architects and engineers, lawyers, accountants and
real estate agents and brokers, along with a broad range of large and small
corporate clients and not-for-profit organizations.
CNA HealthPro: CNA HealthPro offers a comprehensive set of specialized
insurance products and clinical risk management consulting services designed
to assist health care providers in managing the quality-of-care risks
associated with the delivery of health care. Key customer segments include
individual, small group and large corporate purchasers of malpractice
insurance. Caronia Corporation, an operating company of CNA HealthPro,
provides third-party claims administration for medical professional liability
insureds.
CNA Guaranty and Credit: CNA Guaranty and Credit provides credit insurance
on short-term trade receivables for domestic and international clients,
reinsurance to insurers who provide financial guarantees to issuers of asset-
backed securities, money market funds and investment grade corporate debt
securities and credit enhancement products that focus on asset-backed
transactions. These products are distributed through brokers, captive agents,
financial institutions and directly to customers. In addition, CNA Guaranty
and Credit includes RVI Guaranty Co. Ltd. ("RVI"), a 50% owned, but not
controlled, affiliate. RVI is the largest monoline residual value insurer in
the world offering coverages to protect the insured against a decrease in the
market value of a properly maintained asset at the termination of a lease.
CNA Re
CNA Re operates globally as a reinsurer in the broker market, offering both
treaty and facultative products. CNA Re's operations include the business of
CNA Reinsurance Company Limited ("CNA Re U.K."), a United Kingdom reinsurance
company, and United States operations based in Chicago. While CNA Re's primary
product is traditional treaty reinsurance, it also offers facultative and
financial reinsurance. CNA Re also participates in Lloyd's of London through
CNA Corporate Capital Ltd., which provides capital to Lloyd's Syndicate 1229.
CNA Re U.K. writes in both the London market and other European markets
through its headquarters in London and offices in Amsterdam, Milan, Singapore
and Zurich. As one of the largest reinsurers in this market, CNA Re U.K. has
ratings of A (Strong) from Standard & Poor's ("S&P"), A (Excellent) from A.M.
Best and A3 (Good) from Moody's. CNA Re U.K. writes United States and
international treaty and professional liability business, including medical
malpractice, errors and omissions, and directors and officers' coverages.
The United States operations of CNA Re provide products to the North
American markets. Treaty products include working layer property, working
layer casualty, property catastrophe, workers' compensation, products
liability, general liability, professional liability, specialty and excess and
surplus lines. In addition, financial reinsurance products are offered as well
as property and casualty facultative reinsurance.
4
Global Operations
Global Operations provides products and services to United States-based
customers expanding overseas and foreign customers. The major product lines
include marine, commercial and contract surety, warranty and specialty
products, as well as commercial property and casualty coverages.
Global Operations is composed of five principal groups.
Marine: Marine completed the acquisition of Maritime Insurance Co., Ltd.
("Maritime Ltd."), based in the United Kingdom, and its Canadian subsidiary,
Eastern Marine Underwriters ("EMU") on July 1, 1998, strengthening CNA's
position as a global marine insurer. In 1999, CNA launched the marketing
brand, CNA Maritime, which unites three industry leaders, MOAC, Maritime Ltd.
and EMU, to serve global ocean marine needs. MOAC, a leading provider of ocean
marine insurance in the United States, offers hull, cargo, primary and excess
marine liability, marine claims and recovery products and services. Business
is sold through national brokers, regional marine specialty brokers and
independent agencies, which work closely with MOAC's nine branch offices
located throughout the United States. Maritime Ltd., is a leading marine cargo
and related marine insurance specialist with markets extending across Europe
and throughout the world. As foreign subsidiaries, Maritime, Ltd. and EMU are
included in the results of, and are managed by, CNA Global.
Surety: Surety consists primarily of CNA Surety Corporation (CNA Surety),
which is traded on the New York Stock Exchange ("SUR") and is the largest
publicly traded provider of surety bonds, with approximately 8% of that
market. Among its United States competitors, CNA Surety has one of the most
extensive distribution systems and one of the most diverse surety product
lines, offering small, medium and large contract and commercial surety bonds.
CNA Surety provides surety and fidelity bonds in all 50 states through a
combined network of approximately 37,000 independent agencies. Growth is
expected to come from CNA Surety's broad product and distribution resources
and international expansion. CNA owns approximately 64% of CNA Surety.
Warranty: Warranty is one of the largest warranty underwriters in the United
States, providing extended service contracts, warranties and related insurance
products that protect the consumer or business from the financial burden
associated with the breakdown, under-performance or maintenance of a product.
Warranty's key market segments consist of vehicle, retail, home, commercial
and original equipment manufacturers. Each market segment distributes its
product via a sales force employed or contracted through a program
administrator.
CNA National Warranty Corporation ("CNA Warranty") sells vehicle warranty
services in the United States and Canada. In July 1998, CNA Warranty expanded
into the home warranty segment with the acquisition of a 90% interest in Home
Security of America, Inc., one of the largest home warranty administrators in
the United States. Also, in January 1998, the company acquired a joint venture
interest in Specialty Underwriters, a provider of innovative equipment
maintenance management services to companies worldwide. These entities are
service administrators whose products are backed by insurance coverages
provided by CNA's insurance affiliates.
CNA Global: CNA Global is responsible for coordinating and managing the
direct business of the foreign property-casualty operations of CNA. This
business identifies and capitalizes on strategic indigenous opportunities
outside the United States by continuing to build its own capabilities and by
initiating acquisitions, strategic alliances and start-up operations that
allow for expansion into targeted markets. In addition, CNA Global provides
United States-based customers expanding their operations overseas with a
single source for their commercial insurance needs. To this end, CNA Global
has placed underwriters within commercial insurance branches.
CNA Global currently oversees operations in Europe, Latin America, Canada
and Asia. CNA Insurance Company (Europe) Limited ("CIE") is based in London,
with offices in France, Germany, the Netherlands and Denmark. In Europe, CNA
Global's operations include the results of U.K.-based Maritime Ltd. and CIE.
On July 1, 2001, a planned merger of CIE into Maritime Ltd. is expected to be
completed. Through its network of offices, CNA Global built on the successes
of several CNA specialty products (including travel and accident, warranty and
financial lines insurance) and introduced those products across Europe in
2000. During 2000, the company had a majority and controlling interest in
Omega A.R.T. ("Omega"), a workers' compensation company domiciled in
Argentina. Omega ranks as the fifth largest workers' compensation company in
Argentina based on premium volume.
First Insurance Company of Hawaii: First Insurance Company of Hawaii
("FICOH") is the oldest and largest domestic property-casualty insurer in
Hawaii and offers commercial and personal lines solely in that state.
Distributed through 30 independent agencies, the business mix has historically
been approximately 70% commercial and 30% personal lines. On November 1, 1999,
Tokio Marine & Fire Insurance Co. Ltd. ("Tokio") and CNA executed an agreement
to increase Tokio's ownership share from 40% to 50%, resulting in equal
ownership by CNA and Tokio. Concurrently, Tokio merged their Hawaii-based
operations into FICOH. As CNA retains control over FICOH, its operations are
consolidated with CNA's operations.
5
Risk Management
Risk Management serves the property-casualty needs of large domestic
commercial businesses, offering customized strategies to address the
management of business risks. Also, Risk Management, primarily through RSKCo,
provides total risk management services relating to claims, loss control, cost
management and information services to the commercial insurance marketplace.
Risk Management is composed of two groups.
Risk Transfer: Risk Transfer writes casualty and property lines of
insurance. The casualty business focuses on workers' compensation, commercial
auto liability, and general liability through traditional and innovative
advanced financial risk products. Excess products provide umbrella, excess
workers' compensation and high excess coverages.
Over the last three years, domestic and global property insurance
capabilities have been increased, providing primary, quota share and excess of
loss property facilities. Capabilities include providing property, inland
marine, global and boiler and machinery coverages to large accounts and
businesses.
RSKCo: RSKCo was formed in 1998 and provides total risk management services
(integrated and single component) related to claims, loss control, cost
management and information services to the commercial insurance marketplace.
RSKCo's capabilities include:
Claim Services, which provides services that allow customers to select from
a single source the desired level of service ranging from an integrated claims
package to any component service.
Loss Control, which provides pre-loss prevention services that include
industrial hygiene, laboratory, ergonomics, field consulting and training,
property, environmental and transportation loss control. Driver training is
provided through Smith System Driver Improvement Institute, Inc., a wholly
owned subsidiary.
Cost Management, which provides post-loss cost control services through case
management, medical bill review, preferred provider organizations and other
unique partnerships to reduce lost work days through rapid response, quality
care and effective coordination.
Information Services, which provides services including data access,
reporting tools, information and benchmarking analysis, consulting and custom
reporting services.
Group Operations
Group Operations provides a broad array of group life and health insurance
products and services to employers, affinity groups and other entities that
purchase insurance as a group. Group Operations also provides health insurance
to federal employees, retirees and their families ("Federal Markets"); managed
care and self-funded medical excess insurance; medical provider network
management and administration services; and reinsurance for life and health
insurers.
Group Operations is composed of four principal groups.
Group Benefits: Group Benefits provides group term life insurance, short and
long-term disability, statutory disability, long-term care and accident
products. Products are marketed through a nationwide operation of 31 sales
offices, third party administrators, managing general agents and insurance
consultants.
Provider Markets: Provider Markets is composed of two major businesses. CNA
Health Partners provides comprehensive managed care services to employers
offering self-funded medical plans. Services offered include network
development and management, medical management, medical claims administration,
consulting services and management services. Group reinsurance assumes
reinsurance on health, life and other related products written on a group
basis, as well as excess risk coverages related to health care.
Life Reinsurance: Life Reinsurance reinsures individual life and health
products marketed by unaffiliated life insurance companies throughout North
America. Sales are generated through an internal sales force. On December 31,
2000, CNA sold its Life Reinsurance business. See Note 12 of the Notes to
Consolidated Financial Statements, included in Item 8, for discussion of the
Life Reinsurance transaction.
Federal Markets: Federal Markets is the second largest provider of health
insurance benefits to federal employees, insuring approximately one million
members under the Mail Handlers Benefit Plan offered through the Federal
Employees Health Benefit Plan, and also underwrites conversion policies and
supplemental coverages for members. Federal Markets is responsible for all
claim management activities under the plan, such as large case management,
hospital and provider bill negotiations, fraud detection activities and vendor
contracts.
6
Life Operations
Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long term care
insurance, annuities and other products. Life Operations also provides
retirement services products to institutions in the form of various investment
products and administration services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers and various other independent insurance consultants.
Life Operations is composed of four principal groups.
Individual Life: Individual Life primarily offers level premium term life
insurance, universal life insurance and related products. New sales of term
life have consistently placed CNA among the top five producers in the market
in each of the past three years.
Retirement Services: Retirement Services markets annuities and investment
products and services to both retail and institutional customers. In the
institutional market, CNA has benefited from strong sales and earnings of its
Index 500 product, which is a guaranteed investment contract that is indexed
to the performance of the Standard & Poor's 500 ("S&P 500") index.
Long Term Care: Long Term Care products provide reimbursement for covered
nursing home and home health care expenses incurred due to physical or mental
disability. New sales of Long Term Care have placed CNA among the top
producers in the individual marketplace in each of the past three years.
Other: Other operations businesses include developing operations in certain
international markets and life settlements.
Other
The Other insurance segment contains CNA's corporate interest expense,
certain run-off insurance operations, asbestos claims related to Fibreboard
Corporation, financial guarantee insurance contracts, and certain non-
insurance operations, including eBusiness initiatives.
Supplementary Insurance Data
The following table sets forth supplementary insurance data:
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
(In millions of dollars, except ratio information)
Trade Ratios - GAAP basis (a):
Loss ratio .......................... 81.2% 87.1% 81.8%
Expense ratio ....................... 30.3 32.4 33.6
Combined ratio (before policyholder
dividends) ......................... 111.5 119.5 115.4
Policyholder dividend ratio ......... .9 .3 1.1
Trade Ratios - Statutory basis (a):
Loss ratio .......................... 80.4% 87.3% 81.5%
Expense ratio ....................... 33.2 33.5 32.8
Combined ratio (before policyholder
dividends) ......................... 113.6 120.8 114.3
Policyholder dividend ratio ......... 1.2 .3 1.0
Gross Life Insurance In-Force:
Life (b) ............................ $462,799.0 $394,743.0 $317,720.0
Group ............................... 71,982.0 75,247.0 76,674.0
- ------------------------------------------------------------------------------
$534,781.0 $469,990.0 $394,394.0
==============================================================================
Other Data - Statutory basis (c):
Property-casualty capital and
surplus* ........................... $ 8,387.0 $ 8,679.0 $ 7,623.0
Life capital and surplus ............ 1,274.0 1,222.0 1,109.0
Property-casualty written premium to
surplus ratio ...................... 1.0 1.0 1.4
Life capital and surplus-percent of
total liabilities .................. 24.5% 21.9% 20.5%
Participating policyholders-percent
of gross life insurance in force ... .4% .5% .5%
* Surplus includes equity of property-casualty companies' ownership in life
insurance subsidiaries.
7
- ----------------
(a) Trade ratios reflect the results of CNA's property-casualty insurance
subsidiaries. Trade ratios are industry measures of property-casualty
underwriting results. The loss ratio is the percentage of incurred claim and
claim adjustment expenses to premiums earned. The primary difference in this
ratio between statutory accounting practices ("SAP") and accounting principles
generally accepted in the United States of America ("GAAP") is related
primarily to the treatment of active life reserves ("ALR"). For GAAP, ALR are
classified as loss reserves whereas for SAP, ALR are classified as unearned
premium reserves. The expense ratio, using amounts determined in accordance
with GAAP, is the percentage of underwriting expenses, including the
amortization of deferred acquisition costs, to premiums earned. The expense
ratio, using amounts determined in accordance with SAP, is the percentage of
underwriting expenses (with no deferral of acquisition costs) to premiums
written. The combined ratio (before policyholder dividends) is the sum of the
loss and expense ratios. The policyholder dividend ratio using amounts
determined in accordance with GAAP, is the ratio of dividends incurred to
premiums earned. The policyholder dividend ratio, using amounts determined in
accordance with SAP, is the ratio of dividends paid to premiums earned.
(b) Lapse ratios for individual life insurance, as measured by surrenders
and withdrawals as a percentage of average ordinary life insurance in-force,
were 12.7%, 10.9% and 14.7% in 2000, 1999 and 1998, respectively.
(c) Other data is determined in accordance with SAP. Life statutory capital
and surplus as a percent of total liabilities is determined after excluding
Separate Account liabilities and reclassifying the statutorily required Asset
Valuation Reserve to surplus.
The following table displays the distribution of gross written premiums for
CNA's operations:
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
New York ............................... 7.3% 7.4% 8.3%
California ............................. 6.0 7.1 8.0
Texas .................................. 4.7 5.4 5.6
Florida ................................ 4.8 4.6 4.5
Pennsylvania ........................... 3.8 4.1 4.4
New Jersey ............................. 3.4 3.5 4.0
Illinois ............................... 9.2 8.6 9.2
Maryland ............................... 5.6 4.5 2.1
United Kingdom ......................... 5.3 5.8 3.5
All other states, countries or political
subdivisions (a) ...................... 49.9 49.0 50.4
- ------------------------------------------------------------------------------
100.0% 100.0% 100.0%
==============================================================================
- ---------------
(a) No other individual state, country or political subdivision accounts for
more than 3.0% of gross written premium.
Approximately 8.2%, 7.6% and 5.0% of CNA's gross written premiums are
derived from outside of the United States for the years ended December 31,
2000, 1999 and 1998. The increase in foreign premiums is indicative of CNA's
continued expansion overseas, which reflects greater awareness and working
knowledge of international business to seize the opportunities of
international economic growth. Premiums from any individual foreign country
besides those stated in the table above are not significant.
Property-Casualty Claim and Claim Adjustment Expenses
The following loss reserve development table illustrates the change over
time of reserves established for property-casualty claims and claim adjustment
expenses at the end of the preceding eleven calendar years for CNA's property-
casualty operations. The first section shows the reserves as originally
reported at the end of the stated year. The second section, reading down,
shows the cumulative amounts paid as of the end of successive years with
respect to the originally reported reserve liability. The third section,
reading down, shows re-estimates of the originally recorded reserve as of the
end of each successive year which is the result of CNA's property-casualty
insurance subsidiaries' expanded awareness of additional facts and
circumstances that pertain to the unsettled claims. The last section compares
the latest re-estimated reserve to the reserve originally established, and
indicates whether the original reserve was adequate or inadequate to cover the
estimated costs of unsettled claims. This table is cumulative and, therefore,
ending balances should not be added since the amount at the end of each
calendar year includes activity for both the current and prior years.
8
Schedule of Property-Casualty Loss Reserve Development
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
(a) (a) (a) (a) (a) (b) (c) (d) (e) (f)
- -----------------------------------------------------------------------------------------------------------
(In millions of dollars)
Originally reported
gross reserves for
unpaid claim and
claim expenses ...... 20,812 21,639 31,044 29,357 28,533 28,317 26,631 26,408
Originally reported
ceded recoverable ..... 2,491 2,705 6,089 5,660 5,326 5,424 6,273 7,568
- -----------------------------------------------------------------------------------------------------------
Originally reported net
reserves for
unpaid claim and
claim expenses ....... 13,090 14,415 17,167 18,321 18,934 24,955 23,697 23,207 22,893 20,358 18,840
Cumulative-net paid as
of:
One year later ...... 3,285 3,411 3,706 3,629 3,656 6,510 5,851 5,954 7,321 6,546 -
Two years later ..... 5,623 6,024 6,354 6,143 7,087 10,485 9,796 11,394 12,241 - -
Three years later ... 7,490 7,946 8,121 8,764 9,195 13,363 13,602 14,423 - - -
Four years later .... 8,845 9,218 10,241 10,318 10,624 16,271 15,793 - - - -
Five years later .... 9,726 10,950 11,461 11,378 12,577 17,947 - - - - -
Six years later ..... 11,207 11,951 12,308 13,100 13,472 - - - - - -
Seven years later ... 12,023 12,639 13,974 13,848 - - - - - - -
Eight years later ... 12,592 14,271 14,640 - - - - - - - -
Nine years later .... 14,159 14,873 - - - - - - - - -
Ten years later ..... 14,693 - - - - - - - - - -
Net reserves
re-estimated as of:
End of initial year . 13,090 14,415 17,167 18,321 18,934 24,955 23,697 23,207 22,893 20,358 18,840
One year later ...... 12,984 16,032 17,757 18,250 18,922 24,864 23,441 23,470 23,920 20,785 -
Two years later ..... 14,693 16,810 17,728 18,125 18,500 24,294 23,102 23,717 23,774 - -
Three years later ... 15,737 16,944 17,823 17,868 18,008 23,814 23,270 23,414 - - -
Four years later .... 15,977 17,376 17,765 17,511 17,354 24,092 22,977 - - - -
Five years later .... 16,440 17,329 17,560 17,082 17,506 23,854 - - - - -
Six years later ..... 16,430 17,293 17,285 17,176 17,248 - - - - - -
Seven years later ... 16,551 17,069 17,398 17,017 - - - - - - -
Eight years later ... 16,487 17,189 17,354 - - - - - - - -
Nine years later .... 16,592 17,174 - - - - - - - - -
Ten years later ..... 16,586 - - - - - - - - - -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (3,496) (2,759) (187) 1,304 1,686 1,101 720 (207) (881) (427) -
===========================================================================================================
Reconciliation to
gross re-estimated
reserves:
Net reserves
re-estimated ...... 16,586 17,174 17,354 17,017 17,248 23,854 22,977 23,414 23,774 20,785 -
Re-estimated ceded
recoverable ....... 1,640 1,956 5,835 5,151 4,481 4,614 6,530 -
- -----------------------------------------------------------------------------------------------------------
Total gross
re-estimated reserves 16,586 17,174 17,354 18,657 19,204 29,689 28,128 27,895 28,388 27,315 -
===========================================================================================================
Net (deficiency)
redundancy related to:
Asbestos claims ..... (3,421) (3,378) (1,690)(1,091)(1,057) (893) (992) (888) (644) (65) -
Environmental claims (977) (936) (894) (452) (283) (201) (142) (154) 70 (17) -
- -----------------------------------------------------------------------------------------------------------
Total asbestos and
environmental ...... (4,398) (4,314) (2,584)(1,543)(1,340) (1,094)(1,134)(1,042) (574) (82) -
Other claims ........ 902 1,555 2,397 2,847 3,026 2,195 1,854 835 (307) (345) -
- -----------------------------------------------------------------------------------------------------------
Total net (deficiency)
redundancy ........... (3,496) (2,759) (187) 1,304 1,686 1,101 720 (207) (881) (427) -
===========================================================================================================
- ----------------
(a) Reflects reserves of CNA's property and casualty insurance subsidiaries,
excluding Continental reserves which were acquired on May 10, 1995.
Accordingly, the reserve development (net reserves recorded at the end of the
year, as initially estimated, less net reserves re-estimated as of subsequent
years) does not include Continental.
(b) Includes Continental gross reserves of $9,713 million and net reserves of
$6,063 million acquired on May 10, 1995 and subsequent development thereon.
(c) Includes net and gross reserves of acquired companies of $57 and $64
million, respectively.
(d) Includes net and gross reserves of acquired companies of $122 and $223
million, respectively.
(e) Ceded recoverable includes reserves transferred under retroactive
reinsurance agreements of $784 million, as of December 31, 1999.
(f) Includes net and gross reserves of acquired companies of $9 and $13
million, respectively. Ceded recoverable includes reserves transferred under
retroactive reinsurance agreements of $414 million as of December 31, 2000.
See Notes 1 and 7 of the Notes to Consolidated Financial Statements,
included in Item 8, for information regarding property-casualty claim and
claim adjustment expenses including reserve development for asbestos and
environmental claims.
9
INVESTMENTS
See Note 2 of the Notes to Consolidated Financial Statements, included in
Item 8, for information regarding the investment portfolio.
Additional information as to the Company's investments is set forth in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations.
OTHER
Competition: Due to market pressures, the insurance and reinsurance
environment remains intensely competitive. Excess underwriting capacity
continues to depress prices in the reinsurance market; however the commercial
property-casualty market is beginning to experience significant rate
increases. CNA competes with a large number of stock and mutual insurance and
reinsurance companies and other entities for both producers and customers and
must continuously allocate resources to refine and improve its insurance and
reinsurance products and services.
There are approximately 3,320 individual companies that sell property-
casualty insurance in the United States. CNA's consolidated property-casualty
subsidiaries ranked as the eighth largest property-casualty insurance
organization in the United States based upon 1999 statutory net written
premiums. CNA's reinsurance operations ranked as the 19th largest reinsurance
organization in the world, based upon 1999 gross written premiums.
There are approximately 1,470 companies selling life insurance in the United
States. CAC is ranked as the 36th largest life insurance organization based on
1999 consolidated statutory premium volume.
Dividends by Insurance Subsidiaries: The payment of dividends to CNA by its
subsidiaries without prior approval of the affiliates' domiciliary state
insurance commissioners is limited by formula. This formula varies by state.
The formula used by the majority of states provides that the greater of 10% of
prior year statutory surplus or prior year statutory net income, less the
aggregate of all dividends paid during the 12 months prior to the date of
payment is available to be paid as a dividend to the parent company. In
addition, by agreement with the New Hampshire Insurance Department, as well as
certain other state insurance departments, dividend paying capacity for the
Continental Insurance Company Pool is restricted to internal and external debt
service requirements through September 2003 up to a maximum of $85 million
annually, without the prior approval of the New Hampshire Insurance
Department. As of December 31, 2000, approximately $881 million of dividend
payments would not be subject to insurance department pre-approval. However,
all dividends must be reported to the domiciliary insurance department prior
to declaration and payment.
Regulation: The insurance industry is subject to comprehensive and detailed
regulation and supervision throughout the United States. Each state has
established supervisory agencies with broad administrative powers relative to
licensing insurers and agents, approving policy forms, establishing reserve
requirements, fixing minimum interest rates for accumulation of surrender
values and maximum interest rates of policy loans, prescribing the form and
content of statutory financial reports and regulating solvency and the type
and amount of investments permitted. Such regulatory powers also extend to
premium rate regulations, which require that rates not be excessive,
inadequate or unfairly discriminatory. In addition to regulation of dividends
by insurance subsidiaries discussed above, intercompany transfers of assets
may be subject to prior notice or approval by the state insurance regulator,
depending on the size of such transfers and payments in relation to the
financial position of the insurance affiliates making the transfer.
Insurers are also required by the states to provide coverage to insureds who
would not otherwise be considered eligible by the insurers. Each state
dictates the types of insurance and the level of coverage that must be
provided to such involuntary risks. CNA's share of these involuntary risks is
mandatory and generally a function of its respective share of the voluntary
market by line of insurance in each state.
Reform of the U.S. tort liability system is another issue facing the
insurance industry. Over the last decade, many states have passed some type of
reform, but more recently, a number of state courts have modified or
overturned these reforms. Additionally, new causes of action and theories of
damages continue to be proposed in state court actions or by legislatures.
Continued unpredictability in the law means that insurance underwriting and
rating is expected to be difficult in commercial lines, professional liability
and some specialty coverages.
Although the federal government and its regulatory agencies do not directly
regulate the business of insurance, federal legislative and regulatory
initiatives can impact the insurance business in a variety of ways. These
initiatives and legislation include tort reform proposals; proposals to
overhaul the Superfund hazardous waste removal and liability statute;
additional financial services modernization legislation, which could include
provisions to have an alternate federal system of regulation for insurance
companies; and various tax proposals affecting insurance companies.
The National Association of Insurance Commissioners ("NAIC") has adopted
risk based capital ("RBC") requirements for both life insurance companies and
property-casualty insurance companies. The requirements are to be utilized by
state insurance departments as a minimum capital requirement identifying
companies that merit further regulatory action. The formulas were not
developed to differentiate adequately capitalized companies that operate with
capital levels higher than the RBC requirements. Therefore, it is
inappropriate and inadvisable to use the formula to rate or rank insurers. At
December 31, 2000 and 1999, all of CNA's life and property and casualty
companies had adjusted capital in excess of amounts requiring any regulatory
action.
10
Subsidiaries with insurance operations outside the United States are also
subject to regulation in the countries in which they operate.
Reinsurance: See Notes 1 and 15 of the Notes to Consolidated Financial
Statements, included in Item 8, for information related to CNA's reinsurance
activities.
Properties: CNA Plaza, owned by Continental Assurance Company, serves as the
executive office for CNA and its insurance subsidiaries. An adjacent building
(located at 55 E. Jackson Blvd.), jointly owned by Continental Casualty
Company and Continental Assurance Company, is partially situated on grounds
under leases expiring in 2058. Approximately 40% of the adjacent building is
rented to non-affiliates. CNA leases office space in various cities throughout
the United States and in other countries. The following table sets forth
certain information with respect to the principal office buildings owned or
leased by CNA:
Size
Location (square feet) Principal Usage
- ------------------------------------------------------------------------------------------------
Owned:
CNA Plaza 1,144,378 Principal Executive Offices of CNA
333 S. Wabash
Chicago, Illinois
55 E. Jackson Blvd. 440,292 Principal Executive Offices of CNA
Chicago, Illinois
401 Penn Street 254,589 Leased to tenants
Reading, Pennsylvania
100 CNA Drive 251,363 Life Insurance Offices
Nashville, Tennessee
1110 Ward Avenue 186,687 Property-Casualty Insurance Offices
Honolulu, Hawaii
Leased:
1111 E. Broad St. 225,470 Property-Casualty Insurance Offices
Columbus, Ohio
40 Wall Street 199,238 Property-Casualty Insurance Offices
New York, New York
2405 Lucien Way 178,744 Property-Casualty Insurance Offices
Maitland, Florida
3500 Lacey Road 168,793 Property-Casualty Insurance Offices
Downers Grove, Illinois
333 Glen Street 164,032 Property-Casualty Insurance Offices
Glens Falls, New York
1100 Cornwall Road 147,884 Property-Casualty Insurance Offices
Monmouth Junction, New Jersey
600 North Pearl Street 139,151 Property-Casualty Insurance Offices
Dallas, Texas
11
LORILLARD, INC.
The Company's wholly owned subsidiary, Lorillard, Inc. ("Lorillard"), is
engaged, through its subsidiaries, in the production and sale of cigarettes.
The principal cigarette brand names of Lorillard are Newport, Kent, True,
Maverick and Old Gold. Lorillard's largest selling brand is Newport, which
accounted for approximately 80% of Lorillard's sales in 2000.
Substantially all of Lorillard's sales are in the United States. Lorillard's
major trademarks outside of the United States were sold in 1977. Lorillard
accounted for 20.35%, 18.94% and 13.45% of the Company's consolidated total
revenue for the years ended December 31, 2000, 1999 and 1998, respectively.
For a number of years Lorillard and other cigarette manufacturers have been
faced with a number of factors which adversely affect Lorillard's business,
including: litigation against tobacco manufacturers by private plaintiffs,
some of which have resulted in substantial jury verdicts, as well as
litigation by governmental entities; enacted and proposed legislation and
regulation intended to discourage and restrict smoking; a decline in the
social acceptability of smoking; cigarette price increases related to the cost
of certain litigation settlements; and increased pressure from anti-tobacco
groups.
See Item 3 of this Report for information with respect to litigation against
Lorillard including litigation seeking substantial compensatory and punitive
damages for adverse health effects claimed to have resulted from the use of
cigarettes and smokeless tobacco, and from exposure to tobacco smoke, and
claims brought by cigarette wholesalers and others alleging violations of
antitrust laws.
On November 23, 1998, Lorillard and other manufacturers of tobacco products
entered into a Master Settlement Agreement (the "MSA") with 46 states, the
District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin
Islands, American Samoa and the Commonwealth of the Northern Mariana Islands
(collectively, the "Settling States") to settle the asserted and unasserted
health care cost recovery and certain other claims of those states. Lorillard
and the other major U.S. tobacco manufacturers had previously settled similar
claims brought by the four other states (together with the MSA, the "State
Settlement Agreements"). The State Settlement Agreements and certain ancillary
agreements are included as exhibits to this Report (Exhibits 10.06 through
10.21) and are incorporated by reference thereto. See also Management's
Discussion and Analysis - Results of Operations, included in Item 7.
Legislation and Regulation: Federal Legislation - The Federal Comprehensive
Smoking Education Act, which became effective in 1985, requires the use on
cigarette packaging and advertising of one of the following four warning
statements, on a rotating basis: (1) "SURGEON GENERAL'S WARNING: Smoking
Causes Lung Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy."
(2) "SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious
Risks to Your Health." (3) "SURGEON GENERAL'S WARNING: Smoking By Pregnant
Women May Result in Fetal Injury, Premature Birth, and Low Birth Weight." (4)
"SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide." This
law also requires that each person who manufactures, packages or imports
cigarettes shall annually provide to the Secretary of Health and Human
Services a list of the ingredients added to tobacco in the manufacture of
cigarettes. Such list of ingredients may be submitted in a manner which does
not identify the company which uses the ingredients or the brand of cigarettes
which contain the ingredients.
Prior to the effective date of the Federal Comprehensive Smoking Education
Act, federal law had, since 1965, required that cigarette packaging bear a
warning statement which from 1970 to 1985 was as follows: "Warning: The
Surgeon General Has Determined That Cigarette Smoking Is Dangerous To Your
Health." In addition, in 1972 Lorillard and other cigarette manufacturers had
agreed, pursuant to consent orders entered into with the Federal Trade
Commission ("FTC"), to include this health warning statement in print
advertising, on billboards and on certain categories of point-of-sale display
materials relating to cigarettes. Furthermore, advertising of cigarettes has
been prohibited on radio and television since 1971.
From time to time, bills have been introduced in Congress, among other
things, to end or limit the price supports for leaf tobacco; to prohibit all
tobacco advertising and promotion; to require new health warnings on cigarette
packages and advertising; to subject cigarettes generally to regulation under
the Consumer Products Safety Act or the Food, Drug and Cosmetics Act; to
authorize the establishment of various anti-smoking education programs; to
provide that current federal law should not be construed to relieve any person
of liability under common or state law; to permit state and local governments
to restrict the sale and distribution of cigarettes; concerning the placement
of advertising of tobacco products; to provide that cigarette advertising not
be deductible as a business expense; to prohibit the mailing of unsolicited
samples of cigarettes and otherwise to restrict the sale or distribution of
cigarettes; to impose an additional excise tax on cigarettes; to require that
cigarettes be manufactured in a manner that will cause them, under certain
circumstances, to be self-extinguishing; and to subject cigarettes to
regulation in various ways by the U.S. Department of Health and Human
12
Services, including regulation by the FDA.
In 1995, Congress passed legislation prohibiting the sale of cigarettes by
vending machines on certain federal property, and the General Services
Administration has published implementing regulations. In January 1996, the
Substance Abuse and Mental Health Services Administration issued final
regulations implementing a 1992 law (Section 1926 of the Public Health Service
Act), which requires the states to enforce their minimum sales age laws as a
condition of receiving federal substance abuse block grants.
Food and Drug Administration Regulation of Tobacco Products - In 1996, the
FDA published regulations (the "FDA Regulations") which would have severely
restricted cigarette advertising and promotion and limited the manner in which
tobacco products could be sold. In enacting the FDA Regulations, the FDA
determined that nicotine is a drug and that cigarettes are a nicotine delivery
system and, accordingly, subject to FDA regulatory authority as medical
devices. The FDA premised its regulations on the need to reduce smoking by
underage youth and young adults. The FDA Regulations included the following:
(i) Regulations regarding minimum sales age. These regulations would have
made unlawful the sale of cigarettes to anyone underage 18. These regulations
would have also required proof of age to be demanded from any person underage
27 who attempts to purchase cigarettes.
(ii) Regulations regarding advertising and billboards, vending machines,
self-service displays, sampling premiums, and package labels. These
regulations would have limited all cigarette advertising to black and white,
text only format in most publications and outdoor advertising such as
billboards. The regulations also would have prohibited billboards advertising
cigarettes within 1,000 feet of a school or playground, require that the
established name for the product ("Cigarettes") and an intended use statement
("Nicotine - Delivery Device For Persons 18 or Older") be included on all
cigarette packages and advertising, banned vending machine sales, product
sampling, and the use of cigarette brand names, logos and trademarks on
premium items, and prohibited the furnishing of any premium item in
consideration for the purchase of cigarettes or the redemption of proofs-of-
purchase coupons.
(iii) Regulations which would have prohibited use of cigarette brand names to
sponsor sporting and cultural events and require cigarette manufacturers to
comply with certain stringent FDA regulations (known as "good manufacturing
practices") governing the manufacture and distribution of medical devices.
Lorillard and other cigarette manufacturers filed a lawsuit in the U.S.
District Court in North Carolina challenging the FDA's assertion of
jurisdiction over cigarettes. Lower court rulings in this litigation were
appealed to the U.S. Supreme Court which, on March 21, 2000, held that
Congress did not give the FDA authority to regulate tobacco products under the
Federal Food, Drug and Cosmetic Act and, accordingly, the FDA's assertion of
jurisdiction over tobacco products was impermissible under that Act. Since the
Supreme Court decision, various proposals have been made for federal and state
legislation to regulate cigarette manufacturers.
Recently a Presidential commission appointed by former President Clinton
issued a preliminary report recommending that the FDA be given authority by
Congress to regulate the manufacture, sale, distribution and labeling of
tobacco products to protect public health. In addition, Congressional
advocates of FDA regulation have introduced such legislation for consideration
by the 107th Congress. The ultimate outcome of these proposals cannot be
predicted.
Environmental Tobacco Smoke - Studies with respect to the alleged health
risk to nonsmokers of environmental tobacco smoke ("ETS") have received
significant publicity. In 1986, the Surgeon General of the United States and
the National Academy of Sciences reported that ETS puts nonsmokers at an
increased risk of lung cancer and respiratory illness. In January 1993, the
United States Environmental Protection Agency released a report (the "EPA Risk
Assessment") concluding that ETS is a human lung carcinogen in adults, causes
increased respiratory tract disease, middle ear disorders and increases the
severity and frequency of asthma in children. Many other scientific papers on
ETS have been published since the EPA report, with highly variable
conclusions.
In recent years, many federal, state, local and municipal governments and
agencies, as well as private businesses, have adopted legislation or
regulations which prohibit or restrict, or are intended to discourage,
smoking, including legislation or regulations prohibiting or restricting
smoking in various places such as public buildings and facilities, stores and
restaurants, on domestic airline flights and in the workplace, and the sale of
cigarettes in vending machines. This trend has increased significantly since
the release of the EPA Risk Assessment. Additional laws, regulations and
policies intended to prohibit, restrict or discourage smoking are being
proposed or considered by various federal, state and local governments,
agencies and private businesses with increasing frequency. In July 1998, a
federal judge struck down EPA's scientific risk assessment in an opinion which
is currently on appeal.
Ingredient Disclosure - On August 2, 1996, the Commonwealth of Massachusetts
enacted legislation requiring each manufacturer of cigarettes and smokeless
tobacco sold in Massachusetts to submit to the Department of Public Health
13
("DPH") an annual report, beginning in 1997, (1) identifying for each brand
sold certain "added constituents," and (2) providing nicotine yield ratings
and other information for certain brands based on regulations promulgated by
the DPH. The legislation provides for the public release of this information,
which includes flavorings and other trade secret ingredients used in
cigarettes.
In 1996, the cigarette and smokeless tobacco manufacturers filed suit in
federal district court in Boston challenging the legislation. On December 10,
1997, the court issued a preliminary injunction, enjoining the required
submission of ingredient data to the DPH. The requirement to submit the
nicotine yield ratings and other information was not enjoined, and the
cigarette and smokeless tobacco manufacturers submitted their data to the DPH
on December 15, 1997 and again on December 1, 1998. The Commonwealth of
Massachusetts appealed the district court's preliminary injunction, which was
then upheld by the U.S. Court of Appeals for the First Circuit on November 6,
1998. The case in chief remains pending before the district court on cross
motions for summary judgment.
Any impact on Lorillard from the legislation and its implementing
regulations cannot now be predicted. If the manufacturers ultimately are
required to disclose their trade secrets to the DPH and the DPH then discloses
them to the public, further litigation seeking compensation for the taking of
the manufacturers' property may ensue.
Other similar laws and regulations have been enacted or considered by other
state governments, and could have a material adverse effect on the financial
condition and results of operations of the Company if implemented without
adequate provisions to protect the manufacturers' trade secrets from being
disclosed.
Advertising and Sales Promotion: Lorillard's principal brands are advertised
and promoted extensively. Advertising and promotion activities by Lorillard
and other major tobacco manufacturers have been severely restricted by the MSA
and would have been further restricted by the regulations proposed by the FDA,
discussed above. Pursuant to the MSA, Lorillard and the other major tobacco
product manufacturers have agreed to various restrictions and limitations
regarding the advertising, promotion and marketing of tobacco products in the
Settling States. Among other things, the MSA prohibits the targeting of youth
in the advertising, promotion or marketing of tobacco products; bans the use
of cartoon characters in all tobacco advertising and promotion; limits each
tobacco manufacturer to one tobacco brand name sponsorship during any twelve-
month period, which may not include major team sports or events in which the
intended audience includes a significant percentage of youth; bans all outdoor
advertising of tobacco products with the exception of small signs at retail
establishments that sell tobacco products; bans tobacco manufacturers from
offering or selling non-tobacco apparel and other merchandise that bears a
tobacco brand name, subject to specified exceptions; and prohibits the
distribution of free samples of tobacco products except within an adult-only
facility.
Certain states, cities and counties have enacted legislation or regulations
further restricting tobacco advertising in various forms. In 1999, the
Attorney General of Massachusetts issued regulations severely restricting the
placement of outdoor and point of sale advertising in retail stores and
banning the self-service display of tobacco products. Lorillard and other
tobacco companies challenged the regulations in the Federal District Court for
the District of Massachusetts as a violation of their First Amendment right to
commercial free speech and as preempted by federal laws regulating tobacco
advertising. In early 2000, the District Court upheld the regulations, and the
First Circuit Court of Appeals affirmed such ruling later that year. The
companies have appealed to the U. S. Supreme Court and the case has been
accepted for decision by the high Court in 2001.
Prior challenges to similar laws or regulations by the tobacco industry in
five other federal appeals courts have resulted in four such courts upholding
similar advertising restrictions.
Introduction of new brands, brand extensions and packings require the
expenditures of substantial sums for advertising and sales promotion, with no
assurance of consumer acceptance. The advertising media presently used by
Lorillard includes magazines, newspapers, direct mail and point-of-sale
display materials. Sales promotion activities are conducted by distribution of
store coupons, point-of-sale display advertising, advertising of promotions in
print media, and personal contact with distributors, retailers and consumers.
Distribution Methods: Lorillard distributes its products through direct
sales to distributors, who in turn service retail outlets, and through chain
store organizations and vending machine operators, many of whom purchase their
requirements directly, and by direct sales to the U.S. Armed Forces.
Lorillard's tobacco products are stored in public warehouses throughout the
country to provide for rapid distribution to customers.
Lorillard has approximately 1,500 direct customers and is not dependent on
any one customer or group of customers. Lorillard does not have any backlog
orders.
Tobacco and Tobacco Prices: The two main classes of tobacco grown in the
United States are flue-cured tobacco, grown in Virginia, North Carolina, South
Carolina, Georgia and Florida; and burley, grown primarily in Kentucky and
14
Tennessee. Lorillard purchases flue-cured tobacco and burley tobacco for use
in cigarettes. Most of the tobacco from these classes used by Lorillard is
purchased by commission buyers at tobacco auctions. Lorillard also purchases
various types of aromatic tobacco, grown principally in Turkey and other Near
Eastern countries. In addition, Lorillard purchases substantial quantities of
aged tobacco from various sources, including cooperatives financed by the
Commodity Credit Corporation program, to supplement tobacco inventories.
Due to the varying size and quality of annual crops and other economic
factors, tobacco prices have varied in the past. Those economic factors
include federal government control of acreage and poundage in the flue-cured
producing areas and poundage control for burley production. The price supports
that accompany these production controls have substantially affected the
market prices of tobacco. Another factor that could temporarily impact the
market prices is the transition from auction markets to direct farmer
contracting. The approximate average prices per pound for flue-cured tobacco
were $1.736 in 1999 and $1.790 in 2000. Burley prices per pound were
approximately $1.898 in 1999 and $1.965 in 2000. The prices paid by Lorillard
have generally been consistent with this trend. Lorillard believes that its
current leaf inventories are adequately balanced for its present production
requirements. Because the process of aging tobacco normally requires
approximately two years, Lorillard at all times has large quantities of leaf
tobacco available. See Note 1 of the Notes to Consolidated Financial
Statements, included in Item 8, for inventory costing method.
Prices: During 2000, Lorillard increased the wholesale price of its
cigarettes by an aggregate of $16.50 per thousand cigarettes ($0.33 per pack
of 20 cigarettes).
Taxes: Federal excise taxes included in the price of cigarettes are $17.00
per thousand cigarettes ($0.34 per pack of 20 cigarettes). The federal excise
tax on cigarettes is scheduled to increase by $2.50 per thousand cigarettes in
2002. Excise taxes, which are levied upon and paid by the distributors, are
also in effect in the fifty states, the District of Columbia and many
municipalities. Various states have proposed, and certain states have recently
passed, increases in their state tobacco excise taxes. The state taxes
generally range from 2.5 cents to $1.11 per package of twenty cigarettes.
Properties: The properties of Lorillard are employed principally in the
processing and storage of tobacco and in the manufacture and storage of
cigarettes. Its principal properties are owned in fee. With minor exceptions,
all machinery used by Lorillard is owned by it. All properties are in good
condition. Lorillard's manufacturing plant is located on approximately 79
acres in Greensboro, North Carolina. This 942,600 square-foot plant contains
modern high speed cigarette manufacturing machinery. The Greensboro facility
also includes a warehouse with shipping and receiving areas totaling 54,800
square feet. Lorillard also has facilities for receiving and storing leaf
tobacco in Danville, Virginia, containing approximately 1,500,000 square feet.
Lorillard's executive office is located in a 130,000 square-foot, four-story
office building in Greensboro, North Carolina and a modern research facility
containing approximately 82,000 square feet is also located in Greensboro.
Lorillard also leases sales offices in major cities throughout the United
States.
Competition: Substantially all of Lorillard's products are sold within the
United States in highly competitive markets where its principal competitors
are the four other major U.S. cigarette manufacturers (Philip Morris, R.J.
Reynolds ("RJR"), Brown & Williamson and Liggett Group). According to
Management Science Associates, the company used by the industry to process
shipment data, in calendar year 2000 Lorillard ranked fourth in the industry
with a 10.0% share of the market. Philip Morris and RJR accounted for
approximately 52.4% and 23.8%, respectively, of the U.S. cigarette market
excluding the small manufacturers discussed below.
Since the MSA and partially as a result of increases to the price of
cigarettes, small manufacturers of low price cigarettes have gained
substantial market share. Collectively these manufacturers now account for
approximately 3.6% of the domestic market for cigarettes, as reported by
Management Science Associates.
The following table sets forth cigarette sales in the United States by the
industry and by Lorillard, as reported by Management Science Associates. This
table indicates the relative position of Lorillard in the industry:
Industry Lorillard Lorillard
Calendar Year (000) (000) to Industry
- -----------------------------------------------------------------------------
2000 ............................... 404,301,000 40,402,000 10.0%
1999 ............................... 409,496,000 43,608,000 10.7%
1998 ............................... 455,212,000 42,111,000 9.3%
- ----------------
The Management Science Associates Report (the "Report") divides the
cigarette market into two price segments, the full price segment and the
discount or reduced price segment. According to the Report, the reduced price
segment share of market decreased from approximately 25.0% in 1999 to 23.9% in
2000. Virtually all of Lorillard's sales are in the full price segment where
Lorillard's share amounted to approximately 11.5% in 2000 and 11.6% in 1999,
according to the Report.
15
LOEWS HOTELS HOLDING CORPORATION
The subsidiaries of Loews Hotels Holding Corporation ("Loews Hotels"), a
wholly owned subsidiary of the Company, presently operate the following 17
hotels. Loews Hotels accounted for 1.59%, 1.64% and 1.14% of the Company's
consolidated total revenue for the years ended December 31, 2000, 1999 and
1998, respectively.
Number of
Name and Location Rooms Owned, Leased or Managed
- ------------------------------------------------------------------------------------------------
Loews Annapolis 220 Owned
Annapolis, Maryland
Loews Coronado Bay Resort 440 Land lease expiring 2034
San Diego, California
Loews Giorgio 185 Owned
Denver, Colorado
Hard Rock Hotel, 650 Management contract (2)
at Universal Orlando
Orlando, Florida
House of Blues, a Loews Hotel 370 Management contract expiring 2005 (1)
Chicago, Illinois
The Jefferson, a Loews Hotel 100 Management contract expiring 2010 (1)
Washington, D.C.
Loews Le Concorde 400 Land lease expiring 2069
Quebec City, Canada
Loews L'Enfant Plaza 370 Management contract expiring 2003 (1)
Washington, D.C.
Loews Miami Beach Hotel 790 Land lease expiring 2096
Miami Beach, Florida
The Metropolitan Hotel 720 Owned
New York, New York
Loews Philadelphia Hotel 585 Owned
Philadelphia, Pennsylvania
The Portofino Bay Hotel, 750 Management contract (2)
at Universal Orlando, a Loews Hotel
Orlando, Florida
The Regency, a Loews Hotel 350 Land lease expiring 2013, with
New York, New York renewal option for 47 years
Loews Santa Monica Beach 340 Management contract expiring 2018,
Santa Monica, California with renewal option for 5 years (1)
Loews Vanderbilt Plaza 340 Owned
Nashville, Tennessee
Loews Ventana Canyon Resort 400 Management contract expiring 2004,
Tucson, Arizona with renewal options for 10 years (1)
Loews Hotel Vogue 140 Owned
Montreal, Canada
- --------------
(1) These management contracts are subject to termination rights.
(2) A Loews Hotels subsidiary is a 50% owner of the property through a joint
venture, discussed below.
16
In addition to the properties listed above, Loews Hotels has entered into a
letter of intent to form a joint venture to develop and operate a new 432 room
hotel in Boston's theater district.
Hotels at Universal Orlando: Loews Hotels has a 50% interest in a joint
venture with Universal Studios and the Rank Group to develop and construct
three hotels having an aggregate of approximately 2,400 rooms at the Universal
Orlando theme park in Florida. The hotels will be constructed on land leased
by the joint venture from the resort's owners and will be operated by Loews
Hotels pursuant to a management contract. The first hotel, the Portofino Bay
Hotel, opened in the fall of 1999. The second hotel, the Hard Rock Hotel, a
650 room hotel opened in January 2001. The third hotel, the 1,000 room Royal
Pacific is scheduled to open in 2002.
The hotels which are operated by Loews Hotels contain shops, a variety of
restaurants and lounges, and some contain parking facilities, swimming pools,
tennis courts and access to golf courses.
The hotels owned by Loews Hotels are subject to mortgage indebtedness
aggregating approximately $162.1 million at December 31, 2000 with interest
rates ranging from 7.2% to 9.1% and maturing between 2001 and 2018. In
addition, certain hotels are held under leases which are subject to formula
derived rental increases, with rentals aggregating approximately $7.8 million
for the year ended December 31, 2000.
Competition from other hotels, motor hotels and inns, including facilities
owned by local interests and by national and international chains, is vigorous
in all areas in which Loews Hotels operates. The demand for hotel rooms in
many areas is seasonal and dependent on general and local economic conditions.
Loews Hotels properties also compete with facilities offering similar services
in locations other than those in which its hotels are located. Competition
among luxury hotels is based primarily on location and service. Competition
among resort and commercial hotels is based on price as well as location and
service. Because of the competitive nature of the industry, hotels must
continually make expenditures for updating, refurnishing and repairs and
maintenance, in order to prevent competitive obsolescence.
DIAMOND OFFSHORE DRILLING, INC.
Diamond Offshore Drilling Inc. ("Diamond Offshore"), is engaged, through its
subsidiaries, in the business of owning and operating drilling rigs that are
used primarily in the drilling of offshore oil and gas wells on a contract
basis for companies engaged in exploration and production of hydrocarbons.
Diamond Offshore operates 45 offshore rigs. Diamond Offshore accounted for
3.39%, 3.95% and 5.85% of the Company's consolidated total revenue for the
years ended December 31, 2000, 1999 and 1998, respectively.
Drilling Units and Equipment: Diamond Offshore currently owns and operates
45 mobile offshore drilling rigs (30 semisubmersible rigs, 14 jackup rigs and
one drillship) and related equipment. Offshore rigs are mobile units that can
be relocated via either self propulsion or the use of tugs enabling them to be
repositioned based on market demand.
Semisubmersible rigs are supported by large pontoons and are partially
submerged during drilling for greater stability. They are generally designed
for deep water depths of up to 5,000 feet. Semisubmersibles are typically
anchored in position and remain stable for drilling in the semi-submerged
floating position due in part to their wave transparency characteristics at
the water line. Semisubmersibles can also be held in position through the use
of a computer controlled thruster (dynamic-positioning) system to maintain the
rig's position over a drillsite. Diamond Offshore has four such
semisubmersible rigs. These semisubmersibles are larger than many other
semisubmersibles, are capable of working in deep water or harsh environments,
and have other advanced features. Diamond Offshore's 30 semisubmersible rigs
are currently located as follows: 17 in the Gulf of Mexico, five in Brazil,
three in the North Sea and two in Australia, with the remaining rigs located
in various foreign markets.
Jackup rigs stand on the ocean floor with their drilling platforms "jacked
up" on support legs above the water. They are used extensively for drilling in
water depths from 20 feet to 350 feet. Nine of Diamond Offshore's jackup rigs
are cantilevered rigs capable of over platform development drilling and
workover as well as exploratory drilling. Of Diamond Offshore's 14 jackup
rigs, 12 are currently located in the Gulf of Mexico.
Diamond Offshore's drillship is self-propelled and designed to drill in deep
water. Shaped like a conventional vessel, it is the most mobile of the major
rig types. Diamond Offshore's drillship has dynamic-positioning capabilities
and is currently operating in Brazil.
Markets: Diamond Offshore's principal markets for its offshore contract
drilling services are the Gulf of Mexico, Europe, including principally the
U.K. sector of the North Sea, South America, Africa, and Australia/Southeast
Asia. Diamond Offshore actively markets its rigs worldwide.
Diamond Offshore contracts to provide offshore drilling services vary in
their terms and provisions. Diamond
17
Offshore often obtains its contracts through competitive bidding, although it
is not unusual for Diamond Offshore to be awarded drilling contracts without
competitive bidding. Drilling contracts generally provide for a basic drilling
rate on a fixed dayrate basis regardless of whether such drilling results in a
productive well. Drilling contracts may also provide for lower rates during
periods when the rig is being moved or when drilling operations are
interrupted or restricted by equipment breakdowns, adverse weather or water
conditions or other conditions beyond the control of Diamond Offshore. Under
dayrate contracts, Diamond Offshore generally pays the operating expenses of
the rig, including wages and the cost of incidental supplies. Dayrate
contracts have historically accounted for a substantial portion of Diamond
Offshore's revenues. In addition, Diamond Offshore has worked some of its rigs
under dayrate contracts pursuant to which the customer also agrees to pay
Diamond Offshore an incentive bonus based upon performance.
A dayrate drilling contract generally extends over a period of time covering
either the drilling of a single well, a group of wells (a "well-to-well
contract") or a stated term (a "term contract") and may be terminated by the
customer in the event the drilling unit is destroyed or lost or if drilling
operations are suspended for a specified period of time as a result of a
breakdown of equipment or, in some cases, due to other events beyond the
control of either party. In addition, certain of Diamond Offshore's contracts
permit the customer to terminate the contract early by giving notice and in
some circumstances may require the payment of an early termination fee by the
customer. The contract term in many instances may be extended by the customer
exercising options for the drilling of additional wells at fixed or mutually
agreed terms, including dayrates.
The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategies of the offshore
drilling contractor and its customers. In periods of rising demand for
offshore rigs, contractors typically prefer well-to-well contracts that allow
contractors to profit from increasing dayrates. In contrast, during these
periods customers with reasonably definite drilling programs typically prefer
longer term contracts to maintain dayrate prices at a consistent level.
Conversely, in periods of decreasing demand for offshore rigs, contractors
generally prefer longer term contracts to preserve dayrates at existing levels
and ensure utilization, while customers prefer well-to-well contracts that
allow them to obtain the benefit of lower dayrates. In general, Diamond
Offshore seeks to have a foundation of long-term contracts with a reasonable
balance of single well, well-to-well and short-term contracts to minimize the
downside impact of a decline in the market while still participating in the
benefit of increasing dayrates in a rising market.
Customers: Diamond Offshore provides offshore drilling services to a
customer base that includes major and independent oil and gas companies and
government-owned oil companies. Several customers have accounted for 10.0% or
more of Diamond Offshore's annual consolidated revenues, although the specific
customers may vary from year to year. During 2000, Diamond Offshore performed
services for approximately 50 different customers with Petrobraspetroleo
Brasileiro SA ("Petrobras") and BP accounting for 25.4% and 20.0% of Diamond
Offshore's annual total consolidated revenues, respectively. During 1999,
Diamond Offshore performed services for approximately 45 different customers
with Petrobras and Shell companies (including domestic and foreign affiliates)
("Shell") accounting for 15.5% and 14.5% of Diamond Offshore's annual total
consolidated revenues, respectively. During 1998, Diamond Offshore performed
services for approximately 40 different customers with Shell accounting for
17.4% of Diamond Offshore's annual total consolidated revenues. During periods
of low demand for offshore drilling rigs, the loss of a single significant
customer could have a material adverse effect on Diamond Offshore's results of
operations.
Competition: The contract drilling industry is highly competitive. Customers
often award contracts on a competitive bid basis, and although a customer
selecting a rig may consider, among other things, a contractor's safety
record, crew quality, rig location, and quality of service and equipment, the
historical oversupply of rigs has created an intensely competitive market in
which price is the primary factor in determining the selection of a drilling
contractor. In periods of escalated drilling activity, rig availability has,
in some cases, also become a consideration, particularly with respect to
technologically advanced units. Diamond Offshore believes that competition for
drilling contracts will continue to be intense in the foreseeable future.
Contractors are also able to adjust localized supply and demand imbalances by
moving rigs from areas of low utilization and dayrates to areas of greater
activity and relatively higher dayrates. Such movements, reactivations or a
decrease in drilling activity in any major market could depress dayrates and
could adversely affect utilization of Diamond Offshore's rigs.
Governmental Regulation: Diamond Offshore's operations are subject to
numerous federal, state and local laws and regulations that relate directly or
indirectly to its operations, including certain regulations controlling the
discharge of materials into the environment, requiring removal and clean-up
under certain circumstances, or otherwise relating to the protection of the
environment. For example, Diamond Offshore may be liable for damages and costs
incurred in connection with oil spills for which it is held responsible. Laws
and regulations protecting the environment have become increasingly stringent
in recent years and may in certain circumstances impose "strict liability"
rendering a company liable for environmental damage without regard to
negligence or fault on the part of such company. Liability under such laws and
regulations may result from either governmental or citizen prosecution. Such
laws and regulations may expose Diamond Offshore to liability for the conduct
of or conditions caused by others, or for acts of Diamond Offshore that
18
were in compliance with all applicable laws at the time such acts were
performed. The application of these requirements or the adoption of new
requirements could have a material adverse effect on Diamond Offshore.
The United States Oil Pollution Act of 1990 ("OPA '90") and similar
legislation enacted in Texas, Louisiana and other coastal states addresses oil
spill prevention and control and significantly expands liability exposure
across all segments of the oil and gas industry. OPA '90, such similar
legislation and related regulations impose a variety of obligations on Diamond
Offshore related to the prevention of oil spills and liability for damages
resulting from such spills. OPA '90 imposes strict and, with limited
exceptions, joint and several liability upon each responsible party for oil
removal costs and a variety of public and private damages.
Indemnification and Insurance: Diamond Offshore's operations are subject to
hazards inherent in the drilling of oil and gas wells such as blowouts,
reservoir damage, loss of production, loss of well control, cratering or
fires, the occurrence of which could result in the suspension of drilling
operations, injury to or death of rig and other personnel and damage to or
destruction of Diamond Offshore's, Diamond Offshore's customers' or a third
party's property or equipment. Damage to the environment could also result
from Diamond Offshore's operations, particularly through oil spillage or
uncontrolled fires. In addition, offshore drilling operations are subject to
perils peculiar to marine operations, including capsizing, grounding,
collision and loss or damage from severe weather. Diamond Offshore has
insurance coverage and contractual indemnification for certain risks, but
there can be no assurance that such coverage or indemnification will
adequately cover Diamond Offshore's loss or liability in many circumstances or
that Diamond Offshore will continue to carry such insurance or receive such
indemnification.
Properties: Diamond Offshore owns an eight-story office building located in
Houston, Texas containing approximately 182,000 net rentable square feet,
which is used for its corporate headquarters. Diamond Offshore also owns an
18,000 square foot building and 20 acres of land in New Iberia, Louisiana for
its offshore drilling warehouse and storage facility, and a 13,000 square foot
building and five acres of land in Aberdeen, Scotland for its North Sea
operations. In addition, Diamond Offshore leases various office, warehouse and
storage facilities in Louisiana, West Africa, Australia, Brazil, Indonesia,
Scotland, Singapore and Trinidad to support its offshore drilling operations.
BULOVA CORPORATION
Bulova Corporation ("Bulova") is engaged in the distribution and sale of
watches, clocks and timepiece parts for consumer use. Bulova accounted for
.75%, .65% and .63% of the Company's consolidated total revenue for the years
ended December 31, 2000, 1999 and 1998, respectively.
Bulova's principal watch brands are Bulova, Caravelle, Accutron and
Sportstime. Clocks are principally sold under the Bulova brand name. All
watches and clocks are purchased from foreign suppliers. Bulova's principal
markets are the United States, Canada and Mexico. In most other areas of the
world Bulova has appointed licensees who market watches under Bulova's
trademarks in return for a royalty. The business is seasonal, with the
greatest sales coming in the third and fourth quarters in expectation of the
holiday selling season. The business is intensely competitive. The principal
methods of competition are price, styling, product availability, aftersale
service, warranty and product performance.
Properties: Bulova owns an 80,000 square foot plant in Woodside, New York
which is used for its principal executive and sales office, watch
distribution, service and warehouse purposes, and also owns a 91,000 square
foot plant in Brooklyn, New York for clock service and warehouse purposes. In
addition, Bulova leases a 25,000 square foot plant in Toronto, Canada for
watch and clock sales and service and leases approximately 5,400 square feet
of office space in Mexico, Federal District.
OTHER INTERESTS
A subsidiary of the Company, Majestic Shipping Corporation ("Majestic"),
owns a 49% common stock interest in Hellespont Shipping Corporation
("Hellespont"). Hellespont is engaged in the business of owning and operating
six large crude oil tankers that are used primarily to transport crude oil
from the Persian Gulf to a limited number of ports in the Far East, Northern
Europe and the United States.
For information with respect to agreements entered into by Majestic and
Hellespont for the newbuilding of up to eight ships, see Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.
19
EMPLOYEE RELATIONS
The Company, inclusive of its operating subsidiaries as described below,
employed approximately 29,700 persons at December 31, 2000 and considers its
employee relations to be satisfactory.
Lorillard employed approximately 3,300 persons at December 31, 2000.
Approximately 1,230 of these employees are represented by labor unions under
separate contracts with many local unions expiring at varying times and
severally renegotiated and renewed.
Lorillard has collective bargaining agreements covering hourly rated
production and service employees at various Lorillard plants with the Tobacco
Workers International Union, the International Brotherhood of Firemen and
Oilers, and the International Association of Machinists. Lorillard has
experienced satisfactory labor relations and provides a retirement plan, a
deferred profit sharing plan, and other benefits for its hourly paid employees
who are represented by the foregoing unions. In addition, Lorillard provides
to its salaried employees a retirement plan, group life, disability and health
insurance program and a savings plan.
Loews Hotels employed approximately 2,540 persons at December 31, 2000,
approximately 1,000 of whom are union members covered under collective
bargaining agreements. Loews Hotels has experienced satisfactory labor
relations and provides comprehensive benefit plans for its hourly paid
employees.
The Company maintains a retirement plan, group life, disability and health
insurance program and a savings plan for salaried employees. Loews Hotels
salaried employees also participate in these benefit plans.
CNA employed approximately 19,100 full-time equivalent employees at December
31, 2000 and has experienced satisfactory labor relations. CNA has never had
work stoppages due to labor disputes. CNA and its subsidiaries have
comprehensive benefit plans for substantially all of their employees,
including retirement plans, savings plans, disability programs, group life
programs and group health care programs.
Diamond Offshore employed approximately 4,000 persons at December 31, 2000
(including international crews furnished through labor contractors),
approximately 100 of whom are union members. Diamond Offshore has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees.
Bulova and its subsidiaries employed approximately 500 persons at December
31, 2000, approximately 150 of whom are union members. Bulova and its
subsidiaries have experienced satisfactory labor relations. Bulova has
comprehensive benefit plans for substantially all employees.
Item 2. Properties.
Information relating to the properties of Registrant and its subsidiaries is
contained under Item 1.
Item 3. Legal Proceedings.
1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Notes 7 and 17 of the Notes to
Consolidated Financial Statements included in Item 8.
NON-INSURANCE
Tobacco Litigation
- ------------------
Lawsuits continue to be filed with increasing frequency against Lorillard
and other manufacturers of tobacco products. Approximately 4,900 product
liability cases are pending against cigarette manufacturers in the United
States. Of these, approximately 1,225 cases are pending in a West Virginia
court. Another group of approximately 3,050 cases are brought by flight
attendants alleging injury from exposure to environmental tobacco smoke in the
cabins of aircraft. Lorillard is a defendant in all of the flight attendant
suits served to date and is a defendant in most of the cases pending in West
Virginia.
Excluding the flight attendant and West Virginia suits, approximately 575
product liability cases are pending against U.S. cigarette manufacturers. Of
these 575 cases, Lorillard is a defendant in approximately 260. The Company is
a defendant in approximately 50 actions, although it has not received service
of process of 17 of them.
Tobacco litigation includes various types of claims. In these actions,
plaintiffs claim substantial compensatory,
20
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 and smokeless tobacco products, addiction to smoking, or
exposure to environmental tobacco smoke ("Conventional Product Liability
Cases"). Approximately 4,375 such actions are pending against Lorillard,
including most of the cases filed in West Virginia and each of the pending
flight attendant cases. In other cases, plaintiffs have brought claims as
purported class actions on behalf of large numbers of individuals for damages
allegedly caused by smoking ("Class Actions"). Approximately 35 such cases are
pending against Lorillard. In other cases, plaintiffs are governmental
entities or entities such as labor unions, private companies, hospitals or
hospital districts, 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 50 such cases are pending, including
suits brought by the U.S. federal government and the governments of several
foreign nations or states of foreign nations. In addition, there 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 nine such actions are pending against Lorillard,
and a tenth case has been served on some of the defendants but not Lorillard.
Several additional cases have been filed but not served on any of the
defendants to date.
In addition to the above, claims have been brought against Lorillard seeking
damages resulting from alleged exposure to asbestos fibers which were
incorporated, for a limited period of time, ending more than forty years ago,
into filter material used in one brand of cigarettes manufactured by Lorillard
("Filter Cases"); there has not been a noticeable increase in the filing of
these suits during the past few years, and approximately 20 such actions are
pending.
CONVENTIONAL PRODUCT LIABILITY CASES - There are approximately 4,750 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, due to use of smokeless
tobacco products, or due to nicotine dependence. Approximately 1,225 of these
are individual cases pending in West Virginia. Approximately 3,050 of these
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 4,375 of these cases, including most of the cases
pending in West Virginia, as well as all of the pending flight attendant
cases. The Company is a defendant in thirteen of the cases filed by
individuals, although nine of them have not been served on the Company. The
Company is not named as a defendant in any of the flight attendant cases or in
any of the conventional cases pending in West Virginia.
Plaintiffs in most of these cases seek unspecified amounts in compensatory
and punitive damages. Plaintiffs in the flight attendant cases may not seek
punitive damages as to injuries that arose prior to January 15, 1997.
Plaintiffs in most of the West Virginia suits seek unspecified amounts of
actual damages and punitive damages.
Since January 1, 1999, a total of 13 trials have been held involving 16
cases filed by individual plaintiffs. Lorillard was a defendant in three of
the cases. The Company was not a defendant in any of the cases tried to date
since January 1, 1999. Juries returned verdicts in favor of the defendants in
the three cases tried against Lorillard. In the 13 remaining cases, verdicts
were returned in favor of the defendants in nine of the matters. Juries found
in plaintiffs' favor in the remaining four cases. In these four verdicts,
juries awarded plaintiffs a total of $153.2 million in actual damages and
punitive damages. One of the four verdicts was vacated when the trial court
granted defendant's motion for new trial. Plaintiff in that action was awarded
$.2 million in actual damages. In two of the four cases, the courts have
reduced the verdicts to $26.5 million (from $51.5 million) and $32.8 million
(from $80.3 million), respectively. In the fourth case, the jury awarded $21.2
million. Appeals are pending in these four actions.
To date during 2001, juries have returned verdicts in favor of the defendants
in three cases. Lorillard was a defendant in one of the matters.
On January 16, 2001, the jury in the case of Apostolou v. Philip Morris
Incorporated, et al. (Supreme Court, Kings County, New York, filed April 17,
1997) returned a verdict in favor of the defendants, which included Lorillard.
The deadline for plaintiffs to file a post-trial motion or to notice an appeal
has not expired.
On June 27, 2000, the jury in the case of Anderson v. The American Tobacco
Company, et al. (Supreme Court, Kings County, New York, filed October 22,
1997) returned a verdict in favor of the defendants, which included Lorillard.
The court denied plaintiffs' motion for new trial and entered final judgment
in favor of the defendants. Plaintiff has noticed an
21
appeal from the judgment to the Appellate Division of the New York Supreme
Court.
On June 2, 1999, the jury in Butler v. Philip Morris, Inc., et al. (Circuit
Court, Second Judicial District of Jones County, Mississippi, filed May 12,
1994) returned a verdict in favor of the defendants, which included Lorillard,
in the trial of a suit brought by the family of a man who died of cancer,
allegedly caused by exposure to environmental tobacco smoke. Plaintiffs
voluntarily withdrew their post-trial motions and did not notice an appeal.
During 2001, another cigarette manufacturer, Brown & Williamson Tobacco
Corporation, paid $1.1 million in damages and interest to a former smoker and
his spouse for injuries they allegedly incurred as a result of smoking. Carter
v. Brown & Williamson Tobacco Corporation (Circuit Court, Duval County,
Florida, filed February 10, 1995). During 1996, a jury awarded plaintiffs a
total of $.8 million in actual damages at trial. Plaintiffs did not seek
punitive damages. During 1998, the Florida Court of Appeal reversed the trial
court's final judgment, holding that plaintiffs' claims were barred by the
statute of limitations. The Florida Supreme Court, however, reinstated the
jury's damages award during 2000 and denied Brown & Williamson's motion for
rehearing during 2001. Brown & Williamson has been quoted in press reports as
stating that it will file a petition for writ of certiorari with the U.S.
Supreme Court that seeks review of the Florida Supreme Court's decision.
Several additional cases are scheduled for trial during 2001 against U.S.
cigarette manufacturers and manufacturers of smokeless tobacco products.
Lorillard is a defendant in some of these actions. These scheduled trials
include a consolidated trial that is to begin during June 2001 in the cases
brought by approximately 1,225 West Virginia smokers or users of smokeless
tobacco products. These cases are presently scheduled to be tried pursuant to
a multi-part trial plan. In addition, the first trial of one of the flight
attendant cases is scheduled to begin during March 2001. Several additional
flight attendant cases are scheduled for trial during 2001.
The California Supreme Court has agreed to review decisions by the
California Court of Appeals as to whether amendments to a California statute
bars claims against cigarette manufacturers if the claims accrued between 1988
and 1998. Several cases against cigarette manufacturers, including Lorillard,
have been dismissed based on application of the statute in question.
CLASS ACTIONS - There are approximately 55 purported class actions pending
against cigarette manufacturers and other defendants, including the Company.
Most of the suits seek class certification on behalf of residents of the
states in which the cases have been filed, although some suits seek class
certification on behalf of residents of 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. Plaintiffs in some of
Reimbursement Cases also seek certification as class actions (see
Reimbursement Cases, below).
Various courts have ruled on motions for class certification in smoking and
health-related cases. In twelve state court cases, which were pending in five
states and the District of Columbia, courts have denied plaintiffs' class
certification motions. In another twelve cases, cigarette manufacturers have
defeated motions for class certification before either federal trial courts or
courts of appeal from cases pending in eleven states and the Commonwealth of
Puerto Rico. The denial of class certification in a New York federal court
case, however, was due to the court's interest in preserving judicial
resources for a potentially broader class certification ruling in In re Simon
(II) Litigation, discussed below. Plaintiffs in some of these cases sought
class certification on behalf of individuals who smoked cigarettes, while
plaintiffs in other matters sought certification on behalf of individuals
allegedly injured by their exposure to environmental tobacco smoke. In five
cases in which Lorillard is a defendant, plaintiffs' motions for class
certification have been granted and appeals either have been rejected at the
interlocutory stage, appeals have not yet been considered, or the plaintiffs'
claims were resolved through a settlement agreement. These five cases, each of
which is discussed below, are Broin (which was the matter concluded by the
settlement agreement), Engle, Scott, Blankenship and Daniels.
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 approximately 60 law firms from throughout the United States.
Lorillard is a defendant in approximately 35 of the approximately 55 cases
seeking class certification. The Company is a defendant in eight of the
purported class actions. Lorillard also is a defendant in each of these eight
actions. Two cases naming both the Company and Lorillard as defendants have
not been served on any of the parties. Many of the purported class actions are
in the pre-trial, discovery stage.
Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Dade County,
Florida, October 31, 1991). On October 10, 1997, the parties to this class
action brought on behalf of flight attendants claiming injury as a result of
exposure to environmental tobacco smoke executed a settlement agreement which
was approved by the trial court on February 3, 1998. Pursuant to the
settlement agreement, among other things, Lorillard and three other cigarette
manufacturers agreed jointly to pay $300.0 million in three annual
installments 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
22
individual suits, but these individuals may not seek punitive damages for
injuries that arose prior to January 15, 1997. As of March 1, 2001,
approximately 3,050 such cases were pending against Lorillard and three other
cigarette manufacturers before the Circuit Court of Dade County, Florida. The
time for virtually all class members to file suits pursuant to the settlement
agreement has expired.
During October 2000, the Circuit Court of Dade County, Florida entered an
order that may be construed to hold that the flight attendants are not
required to prove the substantive liability elements of their claims for
negligence, strict liability and breach of implied warranty in order to
recover damages. The court further ruled that the trials of these suits are to
address whether the plaintiffs' alleged injuries were caused by their exposure
to environmental tobacco smoke and, if so, the amount of damages to be
awarded. It is not clear how the trial judges will apply this order.
Defendants have noticed an appeal from the October 2000 order to the Third
District of the Florida Court of Appeal. The first trial of one of the flight
attendant cases is scheduled to begin during March 2001. Several additional
flight attendant cases are scheduled for trial during 2001.
Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County,
Florida, filed May 5, 1994). The trial court, as amended by the Florida Court
of Appeal, granted class certification on behalf of Florida residents and
citizens, and survivors of such individuals, who allegedly have been injured
or have died from medical conditions caused by their addiction to cigarettes
containing nicotine.
The case is being tried in three phases. The first phase began during July
1998 and involved consideration of certain issues claimed to be "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.
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 provided 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 as premature defendants' appeals from these rulings, and the Florida
Supreme Court declined to review the orders at this time.
The first portion of Phase Two of the trial began on November 1, 1999 before
the same jury that returned the verdict in Phase One. In the first part of
Phase Two, the jury determined 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.
On April 7, 2000, the jury found in favor of the three plaintiffs and
awarded them a total of $12.5 million in economic damages, pain and suffering
damages and damages for loss of consortium. After awarding damages to one of
the three plaintiffs, the jury appeared to find that his claims were barred by
the statute of limitations. The purported final judgment entered by the trial
court on November 6, 2000 reflected the damages award, and held only a portion
of this plaintiff's claims were barred by the statute of limitations.
The second part of Phase Two of the trial began on May 22, 2000 and was
heard by the same jury that heard the trial's prior phases and considered
evidence as to the punitive damages to be awarded to the class. On July 14,
2000, the jury awarded a total of $145.0 billion in punitive damages against
all defendants, including $16.3 billion against Lorillard.
Following the July 2000 verdict, a motion for intervention was filed on
behalf of a purported class of third party payers who purportedly paid for
medical care received by some of the class members. Based upon the
intervention motion, defendants removed the case to the United States District
Court for the Southern District of Florida. The federal court granted the
separate motions of the plaintiffs and the interveners to remand the case to
state court. The United States Court of Appeals for the Eleventh Circuit
dismissed defendants' appeal of the remand ruling.
On November 6, 2000, the Circuit Court of Dade County, Florida, purported to
enter a final judgment in favor of the plaintiffs that reflects the juries'
three verdicts in favor of the plaintiffs. The court's purported final
judgment also denied various of defendants' post-trial motions, which included
a motion for new trial and a motion seeking reduction of the punitive damages
award. Lorillard has noticed an appeal from the purported final judgment to
the Third District of the Florida Court of Appeal and has posted its appellate
bond in the amount of $104.0 million pursuant to recent Florida legislation
limiting the amount of an appellate bond required to be posted in order to
stay execution of a judgment for punitive damages in a certified class action.
Although this legislation is intended to apply to the Engle case, Lorillard
cannot predict the outcome of any challenges to the possible application or
constitutionality of this legislation. In the event this legislation is
challenged and
23
found to be invalid, Lorillard could be required to post a bond in an amount
not capable of being bonded, resulting in 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 scenario from occurring and
believes these efforts should be successful.
Now that the jury has awarded punitive damages and a purported final
judgment has been entered, it is unclear how the August 2, 1999 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, which is Phase Three
of the trial plan, a process that could take years to conclude. The purported
final judgment entered by the court on November 6, 2000 directs that the
amounts awarded by the jury are to be paid immediately. 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 has challenged the class certification, as well as other numerous
legal errors that it believes occurred during the trial. The Company and
Lorillard believes that an appeal of these issues on the merits should
prevail.
Norton v. RJR Nabisco Holdings Corporation, et al. (Superior Court, Madison
County, Indiana, filed May 3, 1996). The Company is a defendant in the case.
Richardson v. Philip Morris Incorporated, et al. (Circuit Court, Baltimore
City, Maryland, filed May 24, 1996). During January of 1998, the court granted
plaintiffs' motion for class certification on behalf of Maryland residents who
had, presently have, or died from diseases, medical conditions or injuries
caused by smoking cigarettes or using smokeless tobacco products; nicotine
dependent persons in Maryland who have purchased and used cigarettes and
smokeless tobacco products manufactured by the defendants; and Maryland
residents who require medical monitoring. Defendants filed a petition for writ
of mandamus or prohibition from the class certification order with the
Maryland Court of Special Appeals. During 2000, the Court of Special Appeals
reversed the class certification order.
Scott v. The American Tobacco Company, et al. (District Court, Orleans
Parish, Louisiana, filed May 24, 1996). The trial court has certified a class
for purposes of medical monitoring and smoking cessation claims comprised of
residents of the State of Louisiana who desire to participate in medical
monitoring or smoking cessation programs and who began smoking prior to
September 1, 1988, or who allege that defendants undermined compliance with
the warnings on cigarette packages. The class certification order was affirmed
on appeal by the Louisiana Court of Appeals, and the Louisiana Supreme Court
denied further review of the class certification order.
The court has entered an order scheduling the case for trial. The trial plan
entered by the court directs that trial is to be held in three stages. The
first phase of trial is to begin on June 18, 2001. The second phase will begin
fourteen days after the conclusion of the first phase of trial, and the third
phase is to begin fourteen days after the end of the second phase. The same
jury is to hear each of the three phases. In the first phase, the trial will
address fault and causation issues "common" to the class. According to the
court, these issues include, but are not limited to, whether the class
representatives smoked; whether nicotine caused the representatives to smoke;
whether cigarettes are defective "in relation to nicotine and addiction as a
matter of Louisiana law;" and whether the representatives' alleged addiction
"caused conditions or effects that justify medical monitoring or other class-
wide remedies or damages ..." The second phase of trial is to "determine any
items of damage common to the class and the basis for the assessment of those
damages ..." The third phase is to "assess the common damages determined in
the Phase II trial ..." According to the trial plan, a final judgment will not
be entered until the third phase is concluded. Following the end of the third
phase of trial, the court will schedule additional trials "to determine and
assess individual damages not common to the class."
Perry v. The American Tobacco Company, et al. U.S. District Court, Eastern
District, Tennessee, filed September 30, 1996). Plaintiffs seek class
certification on behalf of Tennessee residents who have paid medical insurance
premiums to a Blue Cross and Blue Shield organization.
Connor v. The American Tobacco Company, et al. (Second Judicial District
Court, Bernalillo County, New Mexico, filed October 10, 1996).
Blankenship v. American Tobacco Company, et al. (Circuit Court, County, West
Virginia, filed January 31, 1997).
24
This matter was transferred from the Circuit Court of Kanawha County, West
Virginia to a coordinated proceeding pending before the Circuit Court of Ohio
County, West Virginia. During 2000, the court granted plaintiffs' motion for
class certification on behalf of present or former West Virginia smokers who
desire to participate in a medical monitoring plan. The court ruled that class
members must have been cigarette smokers as of January 31, 1995 and have had a
minimum of a five pack-year smoking history. The West Virginia Supreme Court
declined to review defendants' writ from the class certification ruling. Trial
of this matter began during January 2001. The court subsequently declared a
mistrial due to plaintiffs' attempt to present evidence on nicotine
dependence. The court is considering whether to permit plaintiffs to present
evidence on nicotine dependence during re-trial of the suit. Defendants have
opposed the litigation of these issues and have sought decertification of the
class. The court has taken plaintiffs' request to try nicotine dependence and
defendants' decertification motion under consideration. The court has not
scheduled re-trial. The case is expected to be tried pursuant to a multi-part
trial plan and the first phase is expected to address issues "common" to the
class members' claims, including matters relating to the design of cigarettes.
The court has not specified the issues to be addressed in the trial's
subsequent phases.
Muncy v. Philip Morris Incorporated, et al. (Circuit Court, Ohio County,
West Virginia, filed February 4, 1997). This matter was transferred from the
Circuit Court of McDowell County, West Virginia to a coordinated proceeding
pending before the Circuit Court of Ohio County, West Virginia.
Canter v. American Tobacco Company, et al. (Circuit Court, First Circuit,
Hawaii, filed February 6, 1997). This matter formerly was known as Peterson.
Selcer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Nevada, filed March 3, 1997). The Company is a defendant in the case. During
2001, the Nevada Supreme Court issued an opinion addressing questions
certified to it by the trial court from this and three other Nevada cases in
order to assist it in ruling on plaintiffs' motions for class certification.
The Supreme Court held that Nevada law did not recognize a cause of action for
medical monitoring. To date, the trial court has not entered an order
reflecting the Supreme Court's holdings. The three additional Nevada cases
affected by the Nevada Supreme Court's ruling, Badillo, Dienno and
Christensen, are referenced below.
Geiger v. The American Tobacco Company, et al. (Supreme Court, Queens
County, New York, filed April 30, 1997). During 1999, the trial court denied
plaintiffs' motion for class certification. During 2000, the Appellate
Division of the New York Supreme Court affirmed the ruling. During 2001, the
New York Court of Appeals dismissed plaintiffs' attempts to seek review of the
class certification rulings.
Cole v. The Tobacco Institute, Inc., et al. (U.S. District Court, Eastern
District, Texas, Texarkana Division, filed May 5, 1997). During 2000, the
court dismissed the suit and entered final judgment in favor of the
defendants. Plaintiffs have noticed an appeal from the judgment to the U.S.
Court of Appeals for the Fifth Circuit.
Anderson v. The American Tobacco Company, Inc., et al. (U.S. District Court,
Eastern District, Tennessee, filed May 23, 1997). The Company is a defendant
in the case.
Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San
Diego County, California, filed June 10, 1997). During 2000, the court denied
plaintiffs' motion for class certification. The court has permitted plaintiffs
to file another motion for class certification.
Mahoney v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Southern District, Iowa, filed June 20, 1997). This matter formerly was know
as Brammer. It also was known as Fitz.
Guillory v. American Brands, Inc., et al. (U.S. District Court, Northern
District, Illinois, filed July 7, 1997). This matter formerly was known as
Denberg. The parties have completed briefing of plaintiffs' motion for class
certification. It is not known if the court will hear argument of the motion
before issuing its decision.
Nwanze v. Philip Morris Companies Inc., et al. (U.S. District Court,
Southern District, New York, filed September 29, 1997). The Company is a
defendant in the case. The court denied plaintiffs' motion for class
certification. During 2000, the court granted defendants' motion to dismiss
the complaint and entered final judgment in their favor. Plaintiffs noticed an
appeal from the judgment to the U.S. Court of Appeals for the Second Circuit.
Briefing of the appeal has been completed and plaintiffs have asked the court
to resolve it without benefit of argument.
Badillo v. American Tobacco Company, et al. (U.S. District Court, Nevada,
filed October 8, 1997). The Company is a defendant in the case. During 2001,
the Nevada Supreme Court issued a ruling to guide the court in determining
plaintiffs' motion for class certification. See Selcer above.
Young v. The American Tobacco Company, et al. (Civil District Court, Orleans
Parish, Louisiana, filed November 12,
25
1997). The Company is a defendant in the case.
Aksamit v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, South Carolina, filed November 20, 1997). During 2000, the court denied
plaintiffs' motion for class certification. Plaintiffs are evaluating their
appellate options from this ruling.
DiEnno v. Liggett Group, Inc., et al. (U.S. District Court, Nevada, filed
December 22, 1997). During 2001, the Nevada Supreme Court issued a ruling to
guide the court in determining plaintiffs' motion for class certification. See
Selcer above.
Jackson v. Philip Morris Incorporated, et al. (U.S. District Court, Central
District, Utah, filed on or about February 13, 1998).
Parsons v. AC&S, et al. (Circuit Court, Ohio County, West Virginia, filed
February 27, 1998). This matter was transferred from the Circuit Court of
Kanawha County, West Virginia to a coordinated proceeding pending before the
Circuit Court of Ohio County, West Virginia.
Basik v. Lorillard Tobacco Company, et al. (U.S. District Court, Northern
District, Illinois, filed March 17, 1998). During 2001, the court dismissed
the action due to plaintiffs' failure to prosecute.
Daniels v. Philip Morris Companies, Inc., et al. (Superior Court, San Diego
County, California, filed April 2, 1998). During 2000, the court granted
plaintiffs' motion for class certification on behalf of California residents
who, while minors, smoked at least one cigarette between April 1994 and
December 31, 1999. The California Court of Appeals has denied defendants'
petition for writ or prohibition from the class certification ruling. Trial of
this matter is scheduled to begin during March 2002.
Christensen v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Nevada, filed April 3, 1998). The Company is a defendant in the case. To date,
none of the defendants have received service of process. During 2001, the
Nevada Supreme Court issued a ruling to guide the court in determining
plaintiffs' motion for class certification. See Selcer above.
Avallone v. The American Tobacco Company, Inc., et al. (Superior Court,
Middlesex County, New Jersey, filed April 23, 1998). The Company is a
defendant in the case. The court has denied plaintiffs' motion for class
certification and denied their motion for reconsideration of the decision.
During 2000, the Appellate Division of the New Jersey Superior Court and the
New Jersey Supreme Court both declined to review the class certification
rulings.
Cleary v. Philip Morris Incorporated, et al. (Circuit Court, Cook County,
Illinois, filed June 5, 1998).
Creekmore v. Brown & Williamson Tobacco Corporation, et al. (Superior Court,
Buncombe County, North Carolina, filed July 31, 1998).
Brown v. Philip Morris, Inc., et al. (U.S. District Court, Eastern District,
Pennsylvania, filed October 16, 1998). The court granted defendants' motion to
dismiss the complaint. Plaintiffs have noticed an appeal to the U.S. Court of
Appeals for the Third Circuit.
Cypret v. The American Tobacco Company, Inc., et al. (Circuit Court, Jackson
County, Missouri, filed December 22, 1998). The Company is a defendant in the
case. This matter formerly was known as Jones.
Simon v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, New York, filed April 9, 1999). During 2000, the court denied
plaintiffs' motion for class certification but the court stated that it would
"entertain a prompt motion for certification in Simon II." The court further
stated that "Simon II should be triable without appreciable delay should it be
certified." To date, a trial date has not been set in this matter.
Julian v. Philip Morris Companies Inc., et al. (Circuit Court, Montgomery
County, Alabama, filed April 14, 1999).
Decie v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, New York, filed April 21, 2000).
Arnitz v. Philip Morris Incorporated, et al. (Circuit Court, Hillsborough
County, Florida, filed June 6, 2000; amended complaint filed in order to pursue
class action claims, June 30, 2000).
Lewis v. Philip Morris, Incorporated, et al. (U.S. District Court,
Massachusetts, filed July 11, 2000).
26
National Tobacco Consumers Group Number 2 v. R.J. Reynolds Tobacco Company,
et al. (U.S. District Court, Massachusetts, filed July 18, 2000).
Ebert v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, New York, filed August 9, 2000). The Company is named as a defendant
in this matter. To date, none of the defendants have received service of
process.
Vandermeulen v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Michigan, filed September 18, 2000).
REIMBURSEMENT CASES - 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 "MSA") with 46 states, the District of Columbia, the
Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and
the Commonwealth of the Northern Mariana Islands (collectively, the "Settling
States") to settle the asserted and unasserted health care cost recovery and
certain other claims of those states. 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"). Lorillard and the other major U.S. tobacco
manufacturers had previously settled similar claims brought by the four other
states (together with the MSA, the "State Settlement Agreements"). The State
Settlement Agreements and certain ancillary agreements are included as
exhibits to this Report (Exhibits 10.06 through 10.21) and are incorporated by
reference thereto. Fifty-one of the 52 Settling States have achieved a
condition known as "State Specific Finality," which allows the MSA funds to be
released to that State.
The MSA provides that it is not an admission or concession or evidence of
any liability or wrongdoing on the part of any party, and was entered into by
Lorillard and the other participating manufacturers to avoid the further
expense, inconvenience, burden and uncertainty of litigation.
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 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 payments under the State Settlement Agreements. Almost all domestic
manufacturers have agreed to become subject to the terms of the Master
Settlement Agreement.
Suits brought by the Settling States are governed by the MSA. In addition to
these, approximately 50 other suits are pending, comprised of cases brought by
the U.S. federal government, county governments, city governments, unions,
Indian tribes, hospitals or hospital districts, private companies and foreign
governments filing suit in U.S. courts, in which plaintiffs seek recovery of
funds allegedly expended by them to provide health care to individuals with
injuries or other health effects allegedly caused by use of tobacco products
or exposure to cigarette smoke. These cases are based on, among other things,
equitable claims, including injunctive relief, indemnity, restitution, unjust
enrichment and public nuisance, and claims based on antitrust laws and state
consumer protection acts. Plaintiffs in a number of these actions seek
certification as class actions. Plaintiffs seek damages in each case that
range from unspecified amounts to the billions of dollars. Most plaintiffs
seek punitive damages and some seek treble damages. Plaintiffs in many of the
cases seek medical monitoring. Lorillard is named as a defendant in all such
actions except for some of those filed in U.S. courts by foreign governments.
The Company is named as a defendant in 18 of the pending reimbursement cases,
although three of these matters have not been served.
U.S. State and Local Governmental Reimbursement Cases - The MSA has resolved
all but one of the cases filed by 46 state governments and six other
governmental entities. The final case may be resolved during 2001. Since
January 1, 1997, cases brought by four state governments, Florida, Minnesota,
Mississippi and Texas, were settled in separate agreements. Lorillard was a
defendant in each of the 46 cases filed by state governments and in the six
cases brought by other governmental entities, as well as in the four cases
governed by the separate settlement agreements. Four suits filed by local
governments also are pending against cigarette manufacturers, although the MSA
purportedly resolves those actions. Several other cases filed by local
governments have been dismissed. The remaining pending cases follows.
County of Cook v. Philip Morris, Incorporated, et al. (Circuit Court, Cook
County, Illinois, filed April 18, 1997).
State of Missouri v. American Tobacco Company, Inc., et al. (Circuit Court,
City of St. Louis, Missouri, filed May 12, 1997). The Company was a defendant
in the case. The court has entered an order dismissing the action. The
dismissal order reflects but is not consistent with the MSA. During 2000, the
Missouri Supreme Court rejected the attempts by
27
various entities or individuals to intervene in the suit. The court also ruled
that the MSA does not impair or impede the City of St. Louis and certain
Missouri hospital districts from pursuing their reimbursement claims. Judgment
is not yet final. The MSA provides that if a Settling State does not achieve
State-Specific Finality by December 31, 2001, the MSA will be terminated with
respect to such state, unless otherwise agreed to by each of Lorillard and the
other participating manufacturers and the Settling State.
Republic of the Marshall Islands v. The American Tobacco Company, et al.
(High Court, Republic of the Marshall Islands, filed October 20, 1997). The
court granted motions to dismiss filed by Lorillard Tobacco Company,
Lorillard, Inc., and Loews Corporation. Trial in this matter is scheduled to
begin during September 2001.
City of St. Louis, et al. v. American Tobacco Company, Inc., et al. (Circuit
Court, City of St. Louis, Missouri, filed November 25, 1998). The Company is a
defendant in the case.
St. Louis County, Missouri v. American Tobacco Company, Inc., et al.
(Circuit Court, City of St. Louis, Missouri, filed December 3, 1998). The
Company is a defendant in the case but has not received service of process to
date.
County of Wayne v. Philip Morris Incorporated, et al. (U.S. District Court,
Eastern District, Michigan, filed December 6, 1999).
Reimbursement Cases filed by Foreign Governments in U.S. Courts - Cases have
been brought in U.S. courts by the nations of Bolivia, Ecuador, Guatemala,
Honduras, Krygyz, Nicaragua, Panama, the Russian Federation, Tajikistan,
Thailand, Ukraine and Venezuela, as well as by the Brazilian States of
Espirito Santo, Goias, Mato Grosso do Sul, Piaui, Rio de Janeiro, Sao Paolo
and Tocantins, and the Canadian Province of Ontario. The Company and Lorillard
are both named as defendants in the cases filed by Bolivia, Ecuador, Honduras,
Kyrgyz, the Russian Federation, Tajikistan, Ukraine and Venezuela, the seven
Brazilian states and the Province of Ontario, Canada. The Company has not
received service of process of the case filed by Honduras, Venezuela or of the
case filed by the State of Sao Paolo, Brazil. The suit filed by Thailand has
been voluntarily dismissed by the plaintiffs. In 1977, Lorillard sold its
major trademarks outside of the United States and the international sales
business in cigarettes associated with those brands. Performance by Lorillard
of obligations under the 1977 agreement was guaranteed by the Company.
Lorillard and the Company have received notice from Brown & Williamson Tobacco
Corporation, which claims to be a successor to the purchaser, that indemnity
will be sought under certain indemnification provisions of the 1977 agreement
with respect to suits brought by various of the foregoing foreign
jurisdictions, concerning periods prior to June 1977 and during portions of
1978.
The Republic of Guatemala v. The Tobacco Institute, Inc., et al. (U.S.
District Court, District of Columbia, filed May 11, 1998). Neither Lorillard
nor the Company are named as defendants in the matter. Defendants' motion to
transfer this matter to the United States Panel on Multi-District Litigation
was granted. The court granted defendants' motion to dismiss the case.
Plaintiff has noticed an appeal from the ruling to the U.S. Court of Appeals
for the District of Columbia.
Republic of Panama v. The American Tobacco Company, et al. (District Court,
Orleans Parish, Louisiana, filed October 16, 1998). Plaintiff dismissed the
Company and Lorillard from the case.
The Republic of Nicaragua v. Liggett Group, Inc., et al. (U.S. District
Court, District of Columbia, filed December 10, 1998). Neither Lorillard nor
the Company are named as defendants in this matter. Defendants' motion to
transfer this matter to the United States Panel on Multi-District Litigation
was granted. The court granted defendants' motion to dismiss the case.
Plaintiff has noticed an appeal from the ruling to the U.S. Court of Appeals
for the District of Columbia.
The Republic of Bolivia v. Philip Morris Companies, Inc., et al. (U.S.
District Court, District of Columbia, filed on January 20, 1999). The U.S.
District Court for the Southern District of Texas transferred this matter sua
sponte to the U.S. District Court for the District of Columbia. The Company is
a defendant in the case. Defendants' motion to transfer this matter to the
United States Panel on Multi-District Litigation has been granted.
Republic of Venezuela v. Philip Morris Companies, et al. (Circuit Court,
Dade County, Florida, filed January 27, 1999). The Company is a defendant in
the case but has not received service of process to date.
State of Rio de Janeiro of The Federative Republic of Brazil v. Philip
Morris Companies, Inc., et al. (District Court, Angelina County, Texas, filed
July 12, 1999). The Company is a defendant in the case.
The State of Goias, Brazil v. Philip Morris Companies, Inc., et al. (Circuit
Court, Dade County, Florida, filed October 19, 1999). The Company is a
defendant in the case.
28
Ukraine v. American Brands, Inc., et al. (U.S. District Court, District of
Columbia, filed November 19, 1999). The Company is a defendant in the case.
The case was transferred to the United States Panel on Multi-District
Litigation. The court granted defendants' motion to dismiss the complaint and
entered final judgment in their favor. Plaintiff has noticed an appeal to the
U.S. Court of Appeals for the District of Columbia.
The Republic of Ecuador v. Philip Morris Companies, Inc., et al. (Circuit
Court, Eleventh Judicial Circuit, Dade County, Florida, filed January 21,
2000). The Company is a defendant in the case.
The State of Sao Paolo of The Federated Republic of Brazil v. The American
Tobacco Company, et al. (District Court, Orleans Parish, Louisiana, filed
February 9, 2000). The Company is a defendant in the case.
Her Majesty the Queen in Right of Ontario and The Minister of Health and
Long Term Care v. Imperial Tobacco Limited, et al. (U.S. District Court,
District of Columbia, filed March 1, 2000). The Company is a defendant in the
case. The court has granted defendants' motion to dismiss the complaint and
entered final judgment in their favor. Plaintiff has noticed an appeal from
the final judgment to the U.S. Court of Appeals for the District of Columbia.
Espirito Santo, Brazil, et al. v. The Brooke Group Ltd., Inc., et al.
(Circuit Court, Dade County, Florida, filed March 20, 2000). The Company is a
defendant in the case.
The State of Mato Grosso do Sul, Brazil v. Philip Morris Companies, Inc., et
al. (U.S. District Court, District of Columbia, filed July 19, 2000). The
Company is a defendant in the case. The case has been transferred to the
Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.
The Russian Federation v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed August 25, 2000). The
Company is a defendant in the case. The case has been transferred to the
Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.
The Republic of Honduras v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed September 29, 2000). The
Company is a defendant in the case, although it has not received service of
process to date. Defendants have conditionally transferred the case to the
Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.
The State of Tocantins, Brazil v. The Brooke Group, Ltd. Inc., et al. (U.S.
District Court, Southern District, Florida, filed October 1, 2000). The Company
is a defendant in the case. Defendants have conditionally transferred the case
to the Multi-District Litigation Panel pending in the U.S. District Court for
the District of Columbia.
The State of Piaui, Brazil v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, Florida, filed December 13, 2000). The
Company is a defendant in the case. Defendants have conditionally transferred
the case to the Multi-District Litigation Panel pending in the U.S. District
Court for the District of Columbia.
The Kyrgyz Republic v. The Brooke Group Ltd. Inc., et al. (U.S. District
Court, Southern District, Florida, filed January 22, 2001). The Company is a
defendant in the case. Defendants have conditionally transferred the case to
the Multi-District Litigation Panel pending in the U.S. District Court for the
District of Columbia.
The Republic of Tajikistan v. The Brooke Group Ltd. Inc., et al., (U.S.
District Court, Southern District, Florida, filed January 22, 2001). The
Company is a defendant in the case. Defendants have conditionally transferred
the case to the Multi-District Litigation Panel pending in the U.S. District
Court for the District of Columbia.
U.S. Federal Government Case - The federal government of the United States
filed a reimbursement suit, The United States of America v. Philip Morris
Incorporated, et al. (U.S. District Court, District of Columbia, filed
September 22, 1999) against Lorillard, other U.S. cigarette manufacturers,
some parent companies and two trade associations. The Company is not a
defendant in this action. Plaintiff asserts claims under the Medical Care
Recovery Act, the Medicare Secondary Payer provisions of the Social Security
Act, and the Racketeer Influenced and Corrupt Organizations Act. The
government alleges in the complaint that it has incurred costs of more than
$20.0 billion annually in providing health care costs under certain federal
programs, including Medicare, military and veterans' benefits programs, and
the Federal Employee Health Benefits Program. The federal government seeks to
recover an unspecified amount of health care costs, and various types of
declaratory relief, including disgorgement, injunctive relief and declaratory
relief that defendants are liable for the government's future costs of
providing health care resulting from the defendants' alleged wrongful conduct.
During September 2000, the U.S. District Court for the District of Columbia
granted in part and denied in part defendants' motion to dismiss the
complaint. The court dismissed plaintiff's claims asserted under the Medical
Care Recovery Act as well as those under Medicare as Secondary Payer Act. The
court denied the motion as to plaintiff's
29
claims under the Racketeering Influenced and Corrupt Organizations Act.
Plaintiff is seeking modification of the trial court's order as it relates to
the dismissal of the Medical Care Recovery Act claim. Plaintiff also has filed
an amended complaint in which it attempts to re-plead the claims dismissed by
the September 2000 order with greater specificity. In addition, the Cherokee
Nation Tribe has filed a motion for intervention and a proposed complaint in
intervention on behalf of a purported nationwide class of Indian tribes. The
court has not ruled on the motions.
Post-MSA Cases - In addition to these reimbursement cases, some suits have
been filed contesting, in various methods, the MSA. Certain other actions have
been filed in which plaintiffs seek to intervene in cases governed by the MSA
in order to achieve a different distribution of the funds allocated by the MSA
to the respective states. Lorillard has been named as a defendant in several
of the cases filed to date. The Company is not named as a defendant in any of
the pending cases.
Private Citizens' Reimbursement Cases - There are three suits pending in
which plaintiffs are private citizens. In two of the cases, plaintiffs are
private citizens who have filed suit on behalf of taxpayers of their
respective states, although both of the respective states brought a
reimbursement suit and State-Specific Finality has been achieved. The Company
is a defendant in two of the pending Private Citizen Reimbursement Cases.
Lorillard is a defendant in each of the cases. Each of these cases is in the
pre-trial discovery stage.
Coyne v. The American Tobacco Company, et al. (Court of Common Pleas,
Cuyahoga County, Ohio, filed September 17, 1996). The Company was a defendant
in the case. The suit was on behalf of taxpayers of Ohio. The U.S. District
Court for the Northern District of Ohio granted defendants' motion to dismiss
the case. On appeal, the U.S. Court of Appeals for the Sixth Circuit remanded
the case to the Court of Common Pleas of Cuyahoga County, Ohio for additional
proceedings. During 2000, the court granted defendants' motion to dismiss the
suit and entered final judgment in their favor. Plaintiffs noticed an appeal
from the final judgment to the Ohio Court of Appeals, but the court entered
the parties' stipulation of dismissal of the appeal during 2001.
Beckom v. The American Tobacco Company, et al. Chancery Court, Monroe
County, Tennessee, filed May 8, 1997). The Company is a defendant in the case.
The suit is on behalf of taxpayers of Tennessee. The U.S. District Court for
the Eastern District of Tennessee granted defendants' motion to dismiss the
case. On Appeal, the U.S. Court of Appeals for the Sixth Circuit remanded the
case to the Chancery Court of Monroe County, Tennessee for additional
proceedings.
Mason v. The American Tobacco Company, et al. (filed in U.S. District Court,
Northern District, Texas; transferred to U.S. District Court, Eastern
District, New York, filed December 23, 1997). The suit is on behalf of
taxpayers of the U.S. as to funds expended by the Medicaid program. During
2000, the U.S. District Court for the Western District of Texas, where the
case was initiated, granted plaintiffs' motion to transfer the case to the
U.S. District Court for the Eastern District of New York. Defendants' motion
to transfer the case to the U.S. District Court for the District of Columbia
has been denied.
Temple v. The State of Tennessee, et al. (U.S. District Court, Middle
District, Tennessee, filed as individual smoking and health case on February
7, 2000; amended complaint filed in order to expand plaintiffs' claims,
September 11, 2000). Plaintiffs contend that defendant the State of Tennessee
has no standing to recover the funds paid to it as compensation for the monies
it has paid through its TennCare program for individuals allegedly injured by
a smoking-related disease. Plaintiffs further seek a declaration that the
Master Settlement Agreement is unconstitutional. Plaintiffs' amended complaint
also includes claims for class certification on behalf of Tennessee smokers.
The Company was named as a defendant in the amended complaint but has not
received service of process to date.
Reimbursement Cases By Indian Tribes - Indian Tribes are the plaintiffs in
six pending reimbursement suits. Most of these cases have been filed in tribal
courts. Lorillard is a defendant in each of the cases. The Company has not
been named as a defendant in any of the tribal suits filed to date. Each of
the pending cases is in the pre-trial, discovery stage.
Crow Creek Sioux Tribe v. The American Tobacco Company, et al. (Tribal
Court, Crow Creek Sioux Tribe, filed September 14, 1997).
The Standing Rock Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Standing Rock Sioux Tribe, filed May 8, 1998).
The Sisseton-Wahpeton Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Sisseton-Wahpeton Sioux Tribe, filed May 12, 1998).
Acoma Pueblo, et al. v. The American Tobacco Company, et al. (U.S. District
Court, New Mexico, filed June 16, 1999).
Navajo Nation v. Philip Morris Incorporated, et al. (District Court, Navajo
Nation, filed August 12, 1999).
The Alabama Coushatta Tribe of Texas v. American Tobacco Company, et al.
(U.S. District Court, Eastern District, Texas, filed August 30, 2000).
30
Reimbursement Cases By Labor Unions - Approximately 20 reimbursement suits
are pending in various federal or state courts in which the plaintiffs are
labor unions, their trustees or their trust funds. Lorillard is named as a
defendant in each of these suits. The Company is a defendant in two of the
pending suits. Thirteen of the approximately 20 cases are on appeal from final
judgments entered in defendants' favor by the trial courts. Ten of the
thirteen cases on appeal are from a single ruling in favor of the defendants
by a single New York state court. The remaining three cases on appeal are from
rulings in defendants' favor by state courts in California, Michigan and the
District of Columbia. Approximately 60 union cases have been dismissed in
recent years. Some of these cases were dismissed voluntarily, while others
were dismissed as a result of defendants' dispositive motions. Appeals were
sought from some of these dismissal rulings and defendants have prevailed in
each of these appeals to date. The Second, Third, Fifth, Seventh, Eighth,
Ninth and Eleventh Circuit Courts of Appeal have found in favor of the
defendants in each of the appeals from dismissal orders entered by the federal
trial courts that were submitted to them, and the U.S. Supreme Court has
denied petitions for writ of certiorari that sought review of some of these
decisions. Several cases pending in state courts also have been dismissed.
On March 18, 1999, the jury in Iron Workers Local Union No. 17 Insurance
Fund, et al. v. Philip Morris, Inc., et al. (U.S. District Court, Northern
District, Ohio, Eastern Division, filed May 20, 1997) returned a verdict in
favor of the defendants, which included Lorillard, on all counts of
plaintiffs' complaint. The trial was the first against cigarette manufacturers
to be filed by union trust funds. During pre-trial proceedings, the court
granted plaintiffs' motion for class certification on behalf of funds in Ohio
established under the Taft-Hartley Act. Plaintiffs voluntarily dismissed the
appeal they noticed following the verdict.
Unless otherwise noted, each of the pending cases before the trial courts is
in the pre-trial, discovery stage.
Central Laborers Welfare Fund, et al. v. Philip Morris, Inc., et al.
(Circuit Court, Madison County, Illinois, filed on or about June 9, 1997).
Oberle (Trustees of the Connecticut Pipe Trades Health Fund), et al. v.
Philip Morris, Inc., et al. (U.S. District Court, Connecticut, filed July 1,
1997). The court granted the parties' joint stipulation to dismiss the case
without prejudice during September 1998. During 2000, plaintiffs filed a
motion to reinstate the suit. Defendants have filed an opposition to the
motion to reinstate. The court has not issued a ruling to date on the motion
to reinstate the suit.
Ten separate cases, all of which were filed in the Supreme Court of New York
County, New York between July and December 1997, are pending. During March
2000, the court granted defendants' motions to dismiss the complaints in each
of the ten cases and entered final judgments in their favor. Plaintiffs in
these ten cases have noticed appeals from the judgments to the Appellate
Division of the New York Supreme Court.
Operating Engineers Local 12 Health and Welfare Trust, et al. v. American
Tobacco Company, et al. (Superior Court, Los Angeles County, California, filed
September 16, 1997). During 2000, plaintiffs voluntarily dismissed the case
with prejudice. Plaintiffs subsequently noticed an appeal to the California
Court of Appeals. In their notice of appeal, plaintiffs stated they
voluntarily dismissed their case due to the limitations the trial court's pre-
trial rulings had placed on their claims.
Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris,
Inc., et al. (Circuit Court, Wayne County, Michigan, filed December 30, 1997).
The court granted defendants' motion to dismiss the complaint and entered
judgment in favor of defendants. Plaintiffs have noticed an appeal to the
Michigan Court of Appeals.
Steamfitters Local Union No. 614 Health & Welfare Fund, et al. v. Philip
Morris, Inc., et al. (Circuit Court, Thirteenth Judicial District, Tennessee,
filed January 7, 1998). During 2000, the Tennessee Court of Appeals directed
the trial court to enter an order granting defendants' motion to dismiss
plaintiffs' complaint. The trial court entered a dismissal order during 2001.
National Asbestos Workers, et al. v. Philip Morris Incorporated, et al.
(U.S. District Court, Eastern District, New York, filed February 27, 1998).
The Company is a defendant in the case. Trial in this matter is scheduled to
begin during September 2001.
Service Employees International Union Health & Welfare Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, District of Columbia, filed
March 19, 1998). Defendants have been permitted to notice an interlocutory
appeal to the U.S. Court of Appeals for the District of Columbia from the
trial court's order denying defendants' motion to dismiss.
S.E.I.U. v. Philip Morris, Inc., et al. (U.S. District Court, District of
Columbia, filed June 22, 1998). To date, none of the defendants have received
service of process. Defendants have been permitted to notice an interlocutory
appeal to the United States Court of Appeals for the District of Columbia from
the trial court's order denying defendants' motion to dismiss.
31
Holland, et al., Trustees of United Mine Workers v. Philip Morris
Incorporated, et al. (U.S. District Court, District of Columbia, filed July 9,
1998). Defendants have been permitted to notice an interlocutory appeal to the
United States Court of Appeals for the District of Columbia from the trial
court's order denying defendants' motion to dismiss.
Bergeron, et al. v. Philip Morris Incorporated, et al. (U.S. District Court,
Eastern District, New York, filed September 29, 1999). The Company is a
defendant in the case. Plaintiffs are the trustees of the Massachusetts State
Carpenters Health Benefits Fund.
Sheet Metal Workers Trust Fund, et al. v. Philip Morris, Inc., et al. (U.S.
District Court, District of Columbia, filed August 31, 1999). Defendants have
been permitted to notice an interlocutory appeal to the United States Court of
Appeals for the District of Columbia from the trial court's order denying
defendants' motion to dismiss.
Obra Social de Empleados de la Marina Mercante, et al. v. The American
Tobacco Company, et al. (Superior Court, District of Columbia, filed March 8,
2000). During January 2001, the court granted defendants' motion to dismiss
the complaint and entered final judgment in their favor. Plaintiffs have
noticed an appeal to the Court of Appeals for the District of Columbia.
Reimbursement Cases By Private Companies and Health Plans - Four cases are
pending against cigarette manufacturers in which the plaintiffs are private
companies, including not-for-profit insurance companies. Lorillard is a
defendant in each of the pending cases. The Company has not been named as a
defendant in any of the pending private company cases. Trial is scheduled to
begin during March 2001 in one of the suits. One of the two remaining cases
was filed in New York by eight German insurance companies. In addition, two
suits filed by hospitals or hospital districts are pending. One of the cases
is brought on behalf of approximately 175 hospitals operating in the state of
New York. Lorillard is named as a defendant in both of the pending cases filed
by hospitals or hospital districts. The Company is not named as a defendant in
either of the pending hospital or hospital district cases.
Group Health Plan, Inc., et al. v. Philip Morris Incorporated, et al. (U.S.
District Court, Minnesota, filed March 11, 1998).
Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris,
Incorporated, et al. (U.S. District Court, Eastern District, New York, filed
April 29, 1998). During 2000, the court severed the claims of one of the plan
plaintiffs, Empire Blue Cross and Blue Shield, from those of the other
claimants. Trial as to the claims asserted by Empire Blue Cross and Blue
Shield is scheduled to begin on March 19, 2001.
Regence Blueshield, et al. v. Philip Morris, Incorporated, et al. (U.S.
District Court, Western District, Washington, filed April 29, 1998). The court
granted defendants' motion to dismiss the case and entered final judgment in
defendants' favor. During 2001, the United States Court of Appeals for the
Ninth Circuit affirmed the dismissal of the case. The time for plaintiffs to
seek additional appellate review of the ruling has not expired.
A.O. Fox Memorial Hospital, et al. v. The American Tobacco Company, et al.
(Supreme Court, Nassau County, New York, filed March 30, 2000). Plaintiffs are
approximately 175 New York hospitals.
County of McHenry, Randolph Hospital District, et al. v. Philip Morris,
Inc., et al. (Circuit Court, Cook County, Illinois, filed July 13, 2000).
Betriebskrankenkasse aktiv, et al. v. Philip Morris, Inc., et al. (U.S.
District Court, Eastern District, New York, filed September 8, 2000).
Plaintiffs are eight private, not-for-profit German health insurance
providers.
Eastern District of New York Litigation - On April 18, 2000, a federal judge
in the Eastern District of New York issued an order that consolidates, for
settlement purposes only, ten pending cases involving Lorillard as well as
other industry defendants. These cases include three contribution cases
(Falise v. The American Tobacco Company, et al., H.K. Porter Company, Inc. v.
The American Tobacco Company, Inc., et al. and Raymark Industries, Inc. v. The
American Tobacco Company, Inc., et al.), two union cases (Bergeron, et al. v.
Philip Morris, Inc., et al. and The National Asbestos Workers Medical Fund, et
al. v. Philip Morris Incorporated, et al.), one private company case (Blue
Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris,
Incorporated, et al.), two smoking and health class actions that have been
served on defendants (Decie v. The American Tobacco Company, Inc., et al. and
Simon v. Philip Morris Incorporated, et al.), one smoking and health class
action in which none of the defendants have received service of process (Ebert
v. Philip Morris, Incorporated, et al.) and one case that contains elements of
both a smoking and health class action and a private citizen reimbursement
case (Mason v. The American Tobacco Company, Inc., et al.). The judge's order
directed the parties to select a mediator or special master in order to
facilitate settlement discussions and also invited the federal government to
join in the settlement discussions. On July 31, 2000, the federal judge orally
proposed the formation of a national punitive damages class action for the
purposes of settlement. Pursuant to the judge's
32
proposal, Lorillard entered into discussions with a committee of counsel
representing a broad-based group of plaintiffs in an effort to arrive at a
comprehensive settlement of all exemplary and punitive damage claims,
including claims involved in the Engle class action in Florida described
above. The parties have been unable to reach an understanding and the
negotiations have been suspended.
The federal judge directed that a combined suit be filed encompassing all of
the claims pending before him that name cigarette manufacturers as defendants,
the case of In re Simon (II) Litigation (U.S. District Court, Eastern
District, New York, filed September 6, 2000). The Company is a defendant in
this proceeding. The court has directed a briefing schedule in order to
resolve plaintiffs' class action claims, and argument of this motion is
scheduled to be heard by the court during March 2001. In a separate November
2000 ruling, the court stated that it would "entertain a prompt motion for
certification in Simon II." The court further stated that "Simon II should be
triable without appreciable delay should it be certified." To date, a trial
date has not been set in this matter.
To date during 2001, a trial was held in one of the contribution cases
pending before the Eastern District of New York, Falise. However, as noted
below a mistrial was declared due to the inability of the jury to reach a
verdict. The court has not scheduled re-trial of this matter. Trial is
scheduled to begin during March 2001 in the private company case, Blue Cross
and Blue Shield of New Jersey. Several Blue Cross and Blue Shield plans are
plaintiffs in this action, but the trial scheduled to begin during March 2001
will address only one of them, Empire Blue Cross and Blue Shield.
CONTRIBUTION CLAIMS - In addition to the foregoing cases, ten 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. In addition to the above,
eight cases are pending in which none of the defendants, including Lorillard
and the Company, have received service of process. Lorillard is named as a
defendant in each action, although it has not received service of process of
one of them. The Company is named as a defendant in five of the cases but has
not received service of process in one of them. During January of 2001, a
mistrial was declared during jury deliberations in the case of Falise, et al.
v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, New York), which was filed by the Trustees of the Johns Manville
Trust. To date, retrial of this case has not been scheduled. Two other cases
are set for trial during 2001. The remaining cases are in the pre-trial,
discovery stage.
Raymark Industries v. R.J. Reynolds Tobacco Company, et al. (Circuit Court,
Duval County, Florida, filed September 15, 1997). The Company is a defendant
in the case but has not received service of process to date.
Fibreboard Corporation and Owens-Corning v. The American Tobacco Company, et
al. (Superior Court, Alameda County, California, filed December 11, 1997). The
court has scheduled a trial readiness date of July 20, 2001.
Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al.
(Supreme Court, New York County, New York, filed December 19, 1997). The
Company is a defendant in the case.
H.K. Porter Company v. B.A.T Industries, PLC, et al. (U.S. District Court,
Eastern District, New York, filed December 31, 1997).
Raymark Industries v. R.J. Reynolds Tobacco Co., et al. (Circuit Court,
Duval County, Florida, filed December 31, 1997). To date, none of the
defendants have received service of process.
Raymark Industries v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, New York, filed January 30, 1998).
Thomas v. R.J. Reynolds Tobacco Company, et al., (Circuit Court of Jefferson
County, Mississippi, filed August 21, 1998). The complaint asserts
contribution claims on behalf of Owens Corning as well as conventional product
liability claims on behalf of an individual. The Company is a defendant in the
case. The court has scheduled the asbestos contribution portion of this case
for trial on June 18, 2001.
UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation,
et al. (Supreme Court, New York County, New York, filed March 12, 1999). The
Company is a defendant in the case but has not received service of process.
Falise, et al., as Trustees of the Manville Personal Injury Settlement Trust
v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, New York, filed November 12, 1999). Trial in this matter began
during November 2000. During January 2001, the court declared a mistrial due
to the jury's inability to reach a verdict. The court has not scheduled re-
trial.
33
A.P. Green Industries, Inc., et al. v. RJR Nabisco, Inc., et al. (Circuit
Court, Jefferson County, Mississippi, filed December 18, 2000). The Company is
named as a defendant in the case but has not received service of process. To
date, none of the defendants have received service of the complaint.
A.P. Green Services, Inc., et al. v. RJR Nabisco, Inc., et al. (Circuit
Court, Jefferson County, Mississippi, filed December 18, 2000). The Company is
named as a defendant in the case but has not received service of process. To
date, none of the defendants have received service of the complaint.
Asbestos Claims Management Corporation, et al. v. RJR Nabisco, Inc., et al.
(Circuit Court, Jefferson County, Mississippi, filed December 18, 2000). The
Company is named as a defendant in the case but has not received service of
process. To date, none of the defendants have received service of the
complaint.
Combustion Engineering, Inc., et al. v. RJR Nabisco, Inc., et al. (Circuit
Court, Jefferson County, Mississippi, filed December 18, 2000). The Company is
named as a defendant in the case but has not received service of process. To
date, none of the defendants have received service of the complaint.
Kaiser Aluminum & Chemical Corporation, et al. v. RJR Nabisco, Inc., et al.
(Circuit Court, Jefferson County, Mississippi, filed December 18, 2000). The
Company is named as a defendant in the case.
T&N, Ltd., et al. v. RJR Nabisco, Inc., et al. (Circuit Court, Jefferson
County, Mississippi, filed December 18, 2000). The Company is named as a
defendant in the case but has not received service of process. To date, none
of the defendants have received service of the complaint.
Uniroyal Holdings, Inc., et al. v. RJR Nabisco, Inc., et al. (Circuit Court,
Jefferson County, Mississippi, filed December 18, 2000). The Company is named
as a defendant in the case but has not received service of process. To date,
none of the defendants have received service of the complaint.
FILTER CASES - A number of cases have been filed against Lorillard seeking
damages for cancer and other health effects claimed to have resulted from
exposure to asbestos fibers which were incorporated, for a limited period of
time, ending more than forty years ago, into the filter material used in one
of the brands of cigarettes manufactured by Lorillard. Approximately 20 such
cases are pending in federal and state courts. The Company is named as a
defendant in one of the pending actions. 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 fifteen such cases. Five such
trials have been held since 1999. Juries have returned verdicts in favor of
Lorillard in 11 of the 15 trials. Four verdicts have been returned in
plaintiffs' favor, including in one of the two cases tried during 1999 and in
one of the three cases tried during 2000. In the 1999 trial in which a jury
found in favor of the plaintiffs, plaintiffs were awarded $2.2 million in
actual damages. In the one trial in 2000 in which the jury found in
plaintiffs' favor, the jury awarded plaintiffs $1.1 million in actual damages
and the case was settled prior to a determination of punitive damages.
DEFENSES - While Lorillard intends to defend vigorously all 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. An unfavorable
verdict has been returned and judgment has been entered against Lorillard in
the Engle case, described above, and it is possible that additional cases
could be decided unfavorably to Lorillard.
In addition, adverse developments in relation to smoking and health,
including the release in 1998 of industry documents, have received widespread
media attention. These developments may reflect adversely on the tobacco
industry and, together with possible adverse outcomes in pending cases, could
have adverse effects on the ability of Lorillard and other cigarette
manufacturers to prevail in smoking and health litigation and could prompt the
filing of additional litigation.
Lorillard believes that it has valid defenses to the cases pending against
it as well as valid bases for appeal of the adverse verdict against it and
Lorillard will continue to maintain a vigorous defense in all such litigation.
Lorillard may enter into discussions in an attempt to settle particular cases
if it believes it is appropriate to do so.
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 adversely affected by an unfavorable outcome of certain pending
litigation.
34
OTHER TOBACCO-RELATED LITIGATION
Antitrust cases
The following indirect purchaser antitrust cases have been served:
The case of Smith v. Philip Morris Companies, Inc., et al. (District Court,
Seward County, Kansas, filed February 7, 2000). The Company has been dismissed
as a defendant in the case. The case continues as to Lorillard. The court
denied defendants' motion to dismiss. Class certification proceedings and pre-
trial discovery are ongoing.
The case of Nierman v. Philip Morris Companies, Inc., et al. (Supreme Court,
New York County, New York, filed March 6, 2000). The court has entered a
stipulation that dismissed the Company from the case without prejudice. The
case continues as to Lorillard.
The case of Sylvester v. Philip Morris Companies, Inc., et al. (Supreme
Court, New York County, New York, filed March 8, 2000). The court has entered
a stipulation that dismissed the Company from the case without prejudice. The
case continues as to Lorillard.
The case of Taylor v. Philip Morris Companies, et al. (Superior Court,
Cumberland County, Maine, filed March 24, 2000). The court has approved the
parties' stipulation dismissing the Company from the case without prejudice.
The case continues as to Lorillard.
The case of Belch v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed April 11, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.
The case of Belmonte v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Alameda County, California, filed April 11, 2000). The Company was
named as a defendant in the case but is no longer a party to the suit. The
case continues as to Lorillard. The case has been assigned to a coordinated
proceeding in the Superior Court of Alameda County, California.
The case of Shafer v. Philip Morris Companies, Inc., et al. (District Court,
South Central Judicial District, Morton County, North Dakota, filed April 18,
2000). The Company was a defendant in the case. The court has entered an order
approving plaintiff's motion voluntarily dismissing the Company without
prejudice from the case. The court has entered final judgment in favor of the
Company reflecting the dismissal order. The case continues as to Lorillard.
The case of Swanson v. Philip Morris Companies, Inc., et al. (Circuit Court,
Hughes County, South Dakota, filed April 18, 2000). The court has approved the
parties' stipulation dismissing the Company from the case without prejudice.
The case continues as to Lorillard.
The case of Kissel v. Philip Morris Companies, Inc., et al. (Circuit Court,
Brooke County, West Virginia, filed May 2, 2000). The court has approved the
parties' stipulation dismissing the Company from the case without prejudice.
The case continues as to Lorillard.
The case of Cusatis v. Philip Morris Companies, Inc., et al. (Circuit Court,
Milwaukee County, Wisconsin, filed May 5, 2000). The court has entered an
order granting plaintiff's motion to voluntarily dismiss the Company from the
case without prejudice. The case continues as to Lorillard.
The case of Barnes v. Philip Morris Companies, Inc., et al. (Superior Court,
District of Columbia, filed May 11, 2000). The court has entered an order
granting plaintiff's motion to voluntarily dismiss the Company from the case
without prejudice. The case continues as to Lorillard.
35
The case of Aguayo v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed May 15, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.
The case of Campe v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed May 15, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.
The case of Phillips v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Alameda County, California, filed May 15, 2000). The Company was named
as a defendant in the case but is no longer a party to the suit. The case
continues as to Lorillard. The case has been assigned to a coordinated
proceeding in the Superior Court of Alameda County, California.
The case of Anderson v. Philip Morris Companies, Inc., et al. (U.S. District
Court, Minnesota, filed May 17, 2000). The Company is a defendant in the case.
The case has been transferred to a Multi-District Litigation Proceeding
pending in the U.S. District Court for the Northern District of Georgia. The
plaintiffs have moved to voluntarily dismiss the case as to all defendants,
including the Company and Lorillard, and that motion was granted by the court
on November 17, 2000.
The case of Lau v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed May 25, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.
The case of Unruh v. R.J. Reynolds Tobacco Company, et al. (Second Judicial
District Court, Washoe County, Nevada, filed June 9, 2000). The Company is not
named as a defendant in this matter. The case continues as to Lorillard.
The case of Baker v. R.J. Reynolds Tobacco Company, et al. (Superior Court,
Alameda County, California, filed June 15, 2000). The Company was named as a
defendant in the case but is no longer a party to the suit. The case continues
as to Lorillard. The case has been assigned to a coordinated proceeding in the
Superior Court of Alameda County, California.
The case of In re Cigarette Antitrust Cases, (Judicial Counsel Coordination
Proceeding 4114, Superior Court of Alameda County, California). Approximately
twenty indirect purchaser suits under California state law were filed in state
courts in various California counties. The Company and Lorillard were named as
defendants in each of the cases. The actions were subsequently transferred for
coordination to the Superior Court for Alameda County, California. Plaintiffs
have filed a single amended class action complaint with each of the plaintiffs
who brought the original complaints named as plaintiffs. The amended complaint
names Lorillard as a defendant but did not name the Company, which plaintiffs
had dismissed from each of the underlying suits. The case continues as to
Lorillard.
In the case of Barnes v. Philip Morris Companies, Inc., et al. (Superior
Court, District of Columbia, filed February 10, 2000), the court granted
plaintiff's motion to voluntarily dismiss the case without prejudice. The case
continues as to Lorillard.
In the case of Brownstein v. Philip Morris Companies, Inc., et al. (Circuit
Court, Broward County, Florida, filed February 8, 2000), the court has entered
a stipulation dismissing the Company from the case without prejudice. The case
continues as to Lorillard.
In the case of Del Serrone v. Philip Morris Companies, Inc., et al. (Circuit
Court, Wayne County, Michigan, filed February 8, 2000), the court has entered
a stipulation dismissing the Company from the case without prejudice. The case
continues as to Lorillard.
In the case of Gray v. Philip Morris Companies, Inc., et al. (Superior
Court, Pima County, Arizona, filed February 11, 2000), the court has entered
the parties' stipulation dismissing the Company from the case without
prejudice. The case continues as to Lorillard.
In the case of Lennon v. Philip Morris Companies, Inc., et al. (Supreme
Court, New York County, New York, filed February 9, 2000), the court has
entered the parties' stipulation dismissing the Company from the case without
prejudice. The case continues as to Lorillard.
36
In the case of Ludke v. Philip Morris Companies, Inc., et al. (District
Court, Hennepin County, Minnesota, filed February 14, 2000), the court has
entered the parties' stipulation dismissing the Company from the case without
prejudice. The case continues as to Lorillard. The court granted defendants'
motion to dismiss claims under Minnesota's consumer fraud statute and
deceptive trade practices statute. The claim under Minnesota's state antitrust
statute remains. Class certification proceedings and pre-trial discovery are
ongoing.
In the case of Romero v. Philip Morris Companies, Inc., et al. (U.S.
District Court, New Mexico, filed February 9, 2000), the court has entered the
parties' stipulation dismissing the Company from the case without prejudice.
The case continues as to Lorillard. The court dismissed the claim under New
Mexico's deceptive trade practices statute. The claim under New Mexico's state
antitrust statute remains.
In the case of Rowlen v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Southern District, filed February 16, 2000), plaintiffs have
voluntarily dismissed the case against all defendants without prejudice. The
Company and Lorillard were defendants in the case.
In the case of Withers v. Philip Morris Companies, Inc., et al. (Circuit
Court, Jefferson County, Tennessee, filed February 9, 2000), the court has
entered a stipulation dismissing the Company from the case without prejudice.
The case continues as to Lorillard.
Wholesalers and Other Direct Purchasers Suits -
The following suits filed by wholesalers and other direct purchasers of
cigarettes have been served:
The case of Amsterdam Tobacco Company, et al. v. Philip Morris Companies,
Inc., et al. (U.S. District Court, District of Columbia, filed March 6, 2000).
The case has been transferred to a Multi-District Litigation Proceeding
pending in the U.S. District Court for the Northern District of Georgia. The
court has entered the parties' stipulation dismissing the Company from the
case without prejudice. The case continues as to Lorillard.
The case of I. Goldschlack Company v. Philip Morris Companies, Inc., et al.
(U.S. District Court, Eastern District, Pennsylvania, filed March 9, 2000).
The case has been transferred to a Multi-District Litigation Proceeding
pending in the U.S. District Court for the Northern District of Georgia. The
court has entered the parties' stipulation dismissing the Company from the
case without prejudice. The case continues as to Lorillard.
The case of Suwanee Swifty Stores, Inc., et al. v. Philip Morris Companies,
Inc., et al. (U.S. District Court, Northern District, Georgia, filed March 14,
2000). The case has been transferred to a Multi-District Litigation Proceeding
pending in the U.S. District Court for the Northern District of Georgia. The
court has entered the parties' stipulation dismissing the Company from the
case without prejudice. The case continues as to Lorillard.
The case of Holiday Markets, Inc., et al. v. Philip Morris Companies, Inc.,
et al. (U.S. District Court, Northern District, Georgia, filed March 17,
2000). The case has been transferred to a Multi-District Litigation Proceeding
pending in the U.S. District Court for the Northern District of Georgia. The
court has entered the parties' stipulation dismissing the Company from the
case without prejudice. The case continues as to Lorillard.
The case of Marcus Distributors v. Philip Morris Companies, Inc., et al.
(U.S. District Court, Southern District, Illinois, filed April 25, 2000). The
court has approved the plaintiffs' motion to voluntarily dismiss the case
without prejudice.
The case of Hartz Foods v. Philip Morris Companies, Inc., et al. (U.S.
District Court, District of Columbia, filed May 10, 2000). The Company was
initially named a defendant, but Plaintiff did not serve the Company. The case
has been transferred to a Multi-District Litigation Proceeding pending in the
U.S. District Court for the Northern District of Georgia. The case continues
as to Lorillard.
In the case of Buffalo Tobacco Products, et al. v. Philip Morris Companies,
Inc., et al. (U.S. District Court, District of Columbia, filed February 8,
2000), the court entered an order granting the parties' stipulation dismissing
the Company without prejudice. The case has been transferred to a Multi-
District Litigation Proceeding pending in the U.S. District Court for the
Northern District of Georgia. The case continues as to Lorillard.
In the case of Rog-Glo Ltd. v. R.J. Reynolds Tobacco Company, et al. (U.S.
District Court, Southern District, New York, filed February 8, 2000),
plaintiff voluntarily dismissed the case without prejudice.
37
In the case of Williamson Oil Company Inc. v. Philip Morris Companies, Inc.,
et al. (U.S. District Court, Northern District, Georgia, filed February 28,
2000), the court has entered the parties' stipulation dismissing the Company
from the case without prejudice. The case has been transferred to a Multi-
District Litigation Proceeding pending in the U.S. District Court for the
Northern District of Georgia. The case continues as to Lorillard.
The Company and Lorillard were named as defendants in nine direct purchaser
suits alleging price-fixing in connection with the sale of cigarettes and
purporting to represent a class of indirect purchasers. The court has granted
the motion of one of the plaintiffs to voluntary dismiss its complaint. The
remaining direct purchaser actions were transferred by the Judicial Panel on
Multi-District Litigation to the U.S. District Court for the Northern District
of Georgia. Plaintiffs subsequently filed a single amended complaint that
consolidated the claims of the plaintiffs in the transferred cases into a
single class action. The amended complaint names Lorillard but not the Company
as a defendant, and the Company has been voluntarily dismissed from the
action. The case continues as to Lorillard. The court certified a four-year
class of direct purchasers and pre-trial discovery is on-going.
Tobacco Growers Suit -
DeLoach v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Middle District of North Carolina, filed February 16, 2000). Lorillard is
named as a defendant in a lawsuit that, after several amendments, alleges only
antitrust violations. The other major domestic tobacco companies are also
presently named as defendants, and the plaintiffs have now added the major
leaf buyers as defendants. This case was originally filed in U.S. District
Court, District of Columbia, and transferred to a North Carolina federal court
upon motion by the defendants. Plaintiffs seek certification of a class
including all tobacco growers and quota holders (the licenses that a farmer
must either own or rent to sell the crop), who sold tobacco or held quota
under the federal tobacco leaf price support program since February 1996. The
plaintiffs' claims relate to the conduct of the companies in the purchase of
tobacco through the auction system under the federal program. The suit seeks
an unspecified amount of actual damages, trebled under the antitrust laws, and
injunctive relief.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
First
Became
Name Position and Offices Held Age Officer
- ------------------------------------------------------------------------------
Jason Boxer ............. Vice President-Real Estate 30 2001
Gary W. Garson .......... Vice President and 54 1988
Assistant Secretary
Barry Hirsch ............ Senior Vice President and 67 1971
Secretary
Herbert C. Hofmann ...... Senior Vice President 58 1979
Peter W. Keegan ......... Senior Vice President and 56 1997
Chief Financial Officer
John J. Kenny ........... Treasurer 63 1991
Guy A. Kwan ............. Controller 58 1987
Alan Momeyer ............ Vice President-Human Resources 53 1996
Stuart B. Opotowsky ..... Vice President-Tax 66 1987
Richard E. Piluso ....... Vice President-Internal Audit 62 1990
Arthur L. Rebell ........ Senior Vice President and 59 1998
Chief Investment Officer
Andrew H. Tisch ......... Office of the President and 51 1985
Chairman of the Executive
Committee
James S. Tisch .......... Office of the President, 48 1981
President and Chief Executive
Officer
Jonathan M. Tisch ....... Office of the President 47 1987
Laurence A. Tisch ....... Co-Chairman of the Board 78 1959
Preston R. Tisch ........ Co-Chairman of the Board 74 1960
Laurence A. Tisch and Preston R. Tisch are brothers. Andrew H. Tisch and
James S. Tisch are sons of Laurence A. Tisch and Jonathan M. Tisch is a son of
Preston R. Tisch. None of the other officers or directors of Registrant is
related to any other.
All executive officers of Registrant, except Jason Boxer, Peter W. Keegan
and Arthur L. Rebell, have been engaged actively and continuously in the
business of Registrant for more than the past five years. Prior to being named
Vice President - Real Estate in February 2001, Jason Boxer served in various
capacities within the Registrant's real estate department since 1998. Prior
thereto, he had been an associate attorney with the law firm of Battle Fowler,
LLP since 1995. Peter W. Keegan was Senior Vice President of Finance at CBS
Inc. prior to joining Loews Corporation. Arthur L. Rebell has been a senior
vice president of Loews since June of 1998. Prior to joining Loews, during
1997 and 1998 he was an associate professor of Mergers and Acquisitions at New
York University, a Managing Director of Highview Capital and a Partner in
Strategic Investors. Prior to that he was a Managing Director of Schroders.
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
38
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Price Range of Common Stock*
Loews Corporation's common stock is listed on the New York Stock Exchange.
The following table sets forth the reported consolidated tape high and low
sales prices in each calendar quarter of 2000 and 1999:
2000 1999
------------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------
First Quarter ............ $61.13 $38.25 $104.50 $74.63
Second Quarter ........... 68.13 49.25 84.19 69.00
Third Quarter ............ 88.75 59.63 82.44 68.56
Fourth Quarter ........... 104.94 74.50 73.88 58.50
Dividend Information*
The Company has paid quarterly cash dividends on its common stock in each
year since 1967. Regular dividends of $.25 per share of common stock were paid
in each calendar quarter of 2000 and 1999.
Approximate Number of Equity Security Holders
The Company has approximately 2,300 holders of record of Common Stock.
*All per share amounts have not been adjusted to give retroactive effect to
the two-for-one stock split effective March 21, 2001.
39
Item 6. Selected Financial Data.
Year Ended December 31 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data)
Results of Operations:
Revenues ....................... $21,337.8 $21,465.2 $21,296.0 $20,266.6 $20,472.0
Income before taxes and
minority interest and cumulative
effect of changes in accounting
principles-net ................ $ 3,205.9 $ 944.2 $ 1,077.4 $ 1,593.2 $ 2,407.8
Net operating income excluding
net investment gains/(losses)
and tobacco litigation
settlements ................... $ 1,776.5 $ 1,295.0 $ 798.8 $ 1,075.5 $ 1,020.3
Tobacco litigation settlements . (642.3) (637.3) (346.5) (122.0)
- ------------------------------------------------------------------------------------------------
Net operating income ........... 1,134.2 657.7 452.3 953.5 1,020.3
Net investment gains/(losses)... 742.5 (136.6) 12.5 (159.9) 363.6
Cumulative effect of changes
in accounting principles-net .. (157.9)
- ------------------------------------------------------------------------------------------------
Net income ..................... $ 1,876.7 $ 363.2 $ 464.8 $ 793.6 $ 1,383.9
================================================================================================
Comprehensive income ........... $ 1,616.8 $ 487.0 $ 868.7 $ 1,048.9 $ 824.4
================================================================================================
Earnings Per Share:
Net operating income excluding
net investment gains/(losses)
and tobacco litigation
settlements .................. $ 17.87 $ 11.93 $ 6.98 $ 9.35 $ 8.78
Tobacco litigation settlements . (6.46) (5.87) (3.03) (1.06)
- ------------------------------------------------------------------------------------------------
Net operating income ........... 11.41 6.06 3.95 8.29 8.78
Net investment gains/(losses) .. 7.47 (1.26) .11 (1.39) 3.13
Cumulative effect of changes
in accounting principles-net .. (1.45)
- ------------------------------------------------------------------------------------------------
Net income ..................... $ 18.88 $ 3.35 $ 4.06 $ 6.90 $ 11.91
================================================================================================
Comprehensive income ........... $ 16.27 $ 4.49 $ 7.59 $ 9.12 $ 7.10
================================================================================================
Pro forma net income to reflect
two-for-one stock split........ $ 9.44 $ 1.67 $ 2.03 $ 3.45 $ 5.96
================================================================================================
Financial Position:
Total assets ................... $70,877.1 $69,463.7 $70,979.4 $69,983.1 $67,402.9
Long-term debt ................. 6,040.0 5,706.3 5,966.7 5,752.6 4,370.7
Shareholders' equity ........... 11,191.1 9,977.7 10,201.2 9,665.1 8,731.2
Cash dividends per share ....... 1.00 1.00 1.00 1.00 1.00
Book value per share ........... 113.48 95.50 90.61 84.04 75.92
Shares of common stock
outstanding ................... 98.6 104.5 112.6 115.0 115.0
40
Item 7. Management's Discussion and Analysis of Financial Condition and
Results Of Operations.
OVERVIEW
Loews Corporation reported net income for 2000 of $1,876.7 million or $18.88
per share, compared to $363.2 million or $3.35 per share in 1999.
Net income includes investment gains of $742.5 million in 2000, compared to
losses of $136.6 million in 1999. Net investment gains in 2000 resulted
principally from the sale of common stock of Global Crossing Ltd. ("Global
Crossing") and Canary Wharf Group, plc. ("Canary Wharf") by the CNA
subsidiary, and reduced losses from the parent company investment portfolio.
Net income for 1999 also reflected a charge of $157.9 million or $1.45 per
share, due primarily to the adoption of a change in accounting principles at
the CNA subsidiary.
Net operating income, which excludes net investment gains and losses (and in
1999, accounting changes) was $1,134.2 million or $11.41 per share for 2000,
compared to $657.7 million or $6.06 per share in 1999.
Revenues for 2000 were $21.3 billion, compared to $21.5 billion for 1999.
Revenues declined primarily due to the transfer of CNA's personal insurance
business to Allstate in October 1999.
For the quarter ended December 31, 2000 the Company reported net income of
$502.9 million or $5.10 per share, compared to a net loss of $207.8 million or
$1.97 per share in 1999.
Net income in the fourth quarter includes investment gains of $192.2 million,
compared to losses of $196.3 million in 1999. Net investment gains in 2000
resulted principally from sale of common stock of Canary Wharf by the CNA
subsidiary, and significantly improved results from the parent company
investment portfolio.
Net operating income which excludes net investment gains and losses, was
$310.7 million or $3.15 per share for the quarter ended December 31, 2000,
compared to a net operating loss of $11.5 million or $.11 per share in 1999.
Fourth quarter 2000 revenues were $5.6 billion, compared to $4.9 billion in
the fourth quarter of 1999.
At year end 2000, Loews Corporation had a book value of $113.48 per share
compared to $95.50 per share in 1999.
On February 20, 2001, the Board of Directors declared a two-for-one stock
split, by way of a stock dividend, effective March 21, 2001. All share and per
share data has not been restated to retroactively reflect the stock split.
Unless the context otherwise requires, the term "Company" means Loews
Corporation and its consolidated subsidiaries.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
CNA Financial
Insurance operations are conducted by subsidiaries of CNA Financial
Corporation ("CNA"). CNA is an 87% owned subsidiary of the Company.
Property and Casualty
The property and casualty segment is comprised of the following operating
units of CNA: Agency Market Operations, Risk Management, Specialty Operations,
Global Operations and CNA Re.
2000 Compared with 1999
Net earned premiums for the property-casualty segment decreased $1,842.0
million, or 21.0%, to $6,945.0 million in 2000 as compared with 1999. This
decline in net earned premiums was comprised primarily of decreases in Agency
Market Operations of $1,468.0 million, Specialty Operations of $202.0 million,
Risk Management of $164.0 million and CNA Re of $87.0 million. These decreases
were partially offset by an increase in net earned premiums for Global
Operations of $79.0 million.
The decrease in net earned premiums of Agency Market Operations was primarily
attributable to the transfer of the personal insurance line of business
("Personal Insurance") to The Allstate Corporation ("Allstate") on October 1,
1999. Net earned premiums for 1999 included $1,354.0 million of premiums
related to CNA Personal Insurance. Aside from the effects of Personal
Insurance, commercial insurance premiums declined slightly due to continued
efforts to re-underwrite business and obtain adequate rates for exposure
underwritten.
41
The net earned premiums decline for Specialty Operations was related
principally to (i) decisions to renew only those accounts which meet current
underwriting guidelines supporting the ongoing commitment to underwriting
discipline, (ii) a $46.0 million decline related to the exiting of certain
lines of business, (iii) an increase in the retrospective return premium
relating to favorable loss experience in the retrospectively rated architects'
and engineers' business, and (iv) a $30.0 million decline due to the increased
use of reinsurance for the medical professional liability lines of CNA
HealthPro.
Net earned premiums for Risk Management decreased as a result of a continued
focus on re-underwriting the book of business, as well as the increased
utilization of reinsurance. CNA Re also experienced a decrease in net earned
premiums that reflects decisions not to renew contracts that management
believed did not meet profitability targets, partially offset by modest rate
increases. The increase in net earned premiums for Global Operations was
driven by growth in the commercial casualty and property lines in the European
operations, as well as growth in the commercial warranty and surety lines.
Underwriting results improved $852.0 million for 2000 as compared with 1999.
The combined ratio decreased for the property-casualty segment to 110.3% for
2000 as compared with 117.9% for 1999. This decrease reflects an improvement
in the loss ratio to 78.5% in 2000 as compared with 86.2% in 1999 which is
primarily attributable to significant rate increases across the entire book of
business, favorable catastrophe experience, reduced prior year reserve
strengthening and the increased use of reinsurance. After-tax and minority
interest catastrophe losses for 2000 improved by $164.0 million, including
$54.0 million related to Personal Insurance. In addition to the decrease in
the loss ratio was a decrease in the expense ratio to 30.6% in 2000 as
compared with 31.4% in 1999 due principally to the absence of restructuring-
related charges in 1999. The dividend ratio increased to 1.2% relating to
favorable development in dividend reserves in Agency Market Operations in 1999
as compared to 2000.
Net operating income improved $391.0 million for 2000 as compared with 1999.
This improvement was primarily driven by the improved underwriting results
discussed above, partially offset by decreased investment income and increased
expenses, including increased interest expense related to the cost of
reinsurance. In addition, net operating income in both 2000 and 1999 benefited
from a change in estimate for certain insurance-related assessments resulting
from regulatory changes in the basis on which certain of these assessments are
calculated. The after-tax and minority interest impact of this change was
$52.0 million in 2000 and $44.0 million in 1999.
1999 Compared with 1998
Net earned premiums for the property-casualty segment for 1999 decreased
$260.0 million or approximately 2.9% as compared to 1998. Agency Market
Operations' earned premium declined $448.0 million, or 8.5%, due mainly to the
transfer of Personal Insurance to Allstate effective October 1, 1999.
Reinsurance agreements executed in 1999, as well as rate and underwriting
actions taken to improve the core book of business, also contributed to Agency
Market Operations' decreased premium. Specialty Operations' premiums decreased
$91.0 million due to new reinsurance agreements covering 1999 risks and due to
the decision not to pursue certain markets, including the agricultural and
entertainment markets. Risk Management's earned premium decreased $22.0
million due to the decision to take advantage of a favorable reinsurance
market. Offsetting these declines were increases in CNA Re and Global
Operations. CNA Re experienced $232.0 million, or 24.5%, of earned premium
growth, which occurred in domestic and foreign markets in the professional and
standard lines of business. Global Operations' earned premium increased $69.0
million, due to the effects of 1998 acquisitions, and increased surety and
warranty sales stemming from the favorable domestic economic environment.
Underwriting results declined by $201.0 million, or 15.0%, in 1999 and include
approximately $558.0 million in loss and allocated loss adjustment expense
reserve strengthening for prior years. Agency Market
42
Operations' underwriting results declined by $153.0 million in 1999 due
primarily to greater adverse loss reserve development, which included
development related primarily to automobile, workers' compensation and
packaged general liability exposures. CNA Re underwriting results declined by
$131.0 million, primarily due to catastrophe losses. Global Operations'
underwriting results improved $24.0 million due to acquisitions and a change
in its mix of business that has reduced its exposure to catastrophes and large
property losses. Total underwriting results were favorably impacted by $83.0
million in 1999 due to favorable legislative action in certain states which
reduced CNA's liability for workers' compensation assessments.
Catastrophe losses were $54.0 million higher in 1999. Restructuring and other
related charges included in underwriting results were approximately $60.0
million in 1999, down from $103.0 million in 1998. Total restructuring and
related charges for the property and casualty segment were $70.0 million in
1999 and related primarily to employee terminations and parallel processing.
These costs were expensed as paid because they did not qualify for accrual
upon adoption of the restructuring plan.
Group
Group Operations provides a broad array of group life and health insurance
products and services to employers, affinity groups and other entities that
purchase insurance as a group. In addition, Group Operations provides health
insurance to federal employees, retirees and their families ("Federal
Markets"); managed care and self-funded medical excess insurance; medical
provider network management and administration services; and reinsurance for
life and health insurers.
Group Operations includes four principal groups, Group Benefits, Provider
Markets, Life Reinsurance, and Federal Markets.
2000 Compared with 1999
Net earned premiums for Group Operations in 2000 increased $104.0 million, or
2.9%, to $3,675.0 million as compared with 1999. This increase was a result of
a $41.0 million increase in Group Benefits, primarily related to the group
life line of business; a $35.0 million increase in Life Reinsurance; an $18.0
million increase in Provider Markets, primarily related to the group
reinsurance line of business and a $10.0 million increase in Federal Markets.
The increase in Group Benefits and Life Reinsurance relate to new business
production.
Net operating income increased $36.3 million in 2000 as compared with 1999.
This increase relates to a $20.9 million improvement in Federal Markets due to
the 1999 exit of unprofitable medical lines, a $29.6 million improvement in
Provider Markets, and a $3.5 million improvement in Life Reinsurance. These
improvements were partially offset by a $15.7 million decline in Group
Benefits due to favorable 1999 loss experience in the group life line of
business. The improvement associated with Provider Markets relates to adverse
experience and loss development for the personal accident business recorded in
1999, which exceeded $7.0 million of exit costs incurred from the Management
Services Organization business and $13.0 million of adverse development on the
medical stop loss business in 2000.
On December 31, 2000, CNA sold its Life Reinsurance business. Life Reinsurance
contributed $229.0 and $194.0 million of net earned premiums and $18.0 and
$15.0 million of net operating income for 2000 and 1999, respectively.
1999 Compared with 1998
Net earned premiums declined in 1999 by $162.0 million, or 4.3%, to $3,571.0
million as compared with 1998. Federal Markets' net earned premiums declined
$274.0 million, almost entirely due to the exit of selected medical markets in
late 1998. This decline was partially offset by growth in Life Reinsurance and
Group Benefits of $60.0 and $53.0 million, respectively.
Net operating results in 1999 improved by $36.1 million as compared with 1998.
Key components of the improvement include better underwriting results in
43
Group Benefits' life and disability product lines, the exit of the employer
health and affinity lines of business, and lower restructuring and other
related charges, partially offset by adverse losses and reserve development in
the personal accident business.
Life
Life Operations provides financial protection to individuals through a full
product line of term life insurance, universal life insurance, long term care
insurance, annuities and other products. Life Operations also provides
retirement services products to institutions in the form of various investment
products and administration services. Life Operations has several distribution
relationships and partnerships including managing general agencies, other
independent agencies working with CNA life sales offices, a network of brokers
and dealers and various other independent insurance consultants.
Life Operations is composed of four principal groups, Individual Life,
Retirement Services, Long Term Care and Other Operations.
2000 Compared with 1999
Sales volume for Life Operations declined $478.0 million, or 13.0%, to
$3,191.0 million in 2000 as compared with 1999. The decline in sales volume
reflects a reduction in Retirement Services' products sold to institutions.
These products tend to be "large case" institutional markets' sales, which can
be sporadic, opportunistic and sensitive to independent agency ratings.
Despite the overall decline, Life Operations' competitively priced product
portfolio enabled most of its businesses to experience growth in 2000.
Individual Life and Long Term Care products had an increasing base of direct
premiums, and variable investment contracts experienced growth of $270.0
million to reach an annual sales level of $380.0 million in 2000. Net earned
premiums declined $60.0 million, or 6.4%, to $876.0 million in 2000 as
compared with 1999. This decline was mainly attributable to sales declines in
structured settlements and single premium group annuities due to a competitive
pricing environment. These declines were partially offset by a growing in-
force block of Long Term Care and annuity products.
Net operating income increased $23.2 million in 2000 as compared with 1999.
The increase was principally attributable to increased earnings in the Index
500 product, the continued growth of Individual Life insurance in-force and
favorable investment results in Individual Life and Retirement Services
businesses.
1999 Compared with 1998
Sales volume increased $915.0 million, or 33.2%, to $3,669.0 million in 1999
as compared with 1998. The 1999 increase represents increased sales of $717.0
million in Retirement Services and a growing base of premiums for Individual
Life and Long Term Care. The significant growth in Retirement Services was
largely attributable to strong sales in institutional investment products and
variable annuities. Net earned premiums increased $113.0 million, or 13.7%, to
$936.0 million in 1999 as compared with 1998. This increase was mainly
attributable to increases in Long Term Care of $61.0 million and Retirement
Services of $39.0 million.
Net operating income increased to $123.7 million in 1999 as compared with
$89.0 million in 1998. The 1999 improvement in net operating income was due
primarily to favorable investment performance in the portfolio supporting
Retirement Services' Index 500 product, improved mortality experience in the
individual life market, and expense reductions across virtually all of the
other principal groups.
Other
The Other insurance segment contains CNA's corporate interest expense, certain
run-off insurance operations, asbestos claims related to Fibreboard
Corporation, financial guarantee insurance contracts and certain non-insurance
operations, including eBusiness initiatives.
2000 Compared with 1999
Net operating loss increased to $178.5 million for 2000 as compared with a
loss of $169.6 million in 1999 primarily as a result of expenses in 2000 for
CNA's eBusiness initiatives.
44
1999 Compared with 1998
The net operating loss for 1999 was $169.6 million, approximately $12.4
million less than 1998. The improvement was primarily attributable to
decreased interest expense and decreased losses of $17.1 million from AMS
Services, Inc. ("AMS"), an information technology and agency software
development company sold in the fourth quarter of 1999 (see Note 12 of the
Notes to Consolidated Financial Statements), partially offset by increased
losses from run-off insurance operations.
Lorillard
Lorillard, Inc. and subsidiaries ("Lorillard"). Lorillard, Inc. is a wholly
owned subsidiary of the Company.
2000 Compared with 1999
Revenues and net income increased by $277.9 and $102.0 million, or 6.8% and
15.6%, respectively, in 2000 as compared to 1999.
Revenues increased as compared to 1999, by approximately $550.2 million, or
13.5%, due to higher average unit prices, including $200.1 million from the
increase in federal excise tax, partially offset by a decrease of
approximately $307.8 million, or 7.6%, reflecting lower unit sales volume in
2000. Net investment income contributed $35.9 million to the increased
revenues.
During 2000, Lorillard increased the wholesale price of its cigarettes by an
aggregate of $16.50 per thousand cigarettes ($0.33 per pack of 20 cigarettes).
Federal excise taxes included in the price of cigarettes are $17.00 per
thousand cigarettes ($0.34 per pack of 20 cigarettes). The federal excise tax
on cigarettes is scheduled to increase by $2.50 per thousand cigarettes in
2002. All of the states also levy excise taxes on cigarettes. Various states
have proposed, and certain states have recently passed, increases in their
state tobacco excise taxes. Such actions may adversely affect Lorillard's
volume, operating revenues and operating income.
Net income increased due primarily to the increased revenues discussed above,
partially offset by the charges for tobacco litigation settlements and higher
legal expenses. Net income for the years ended December 31, 2000 and 1999
includes pre-tax charges of $1,076.5 and $1,065.8 million ($642.3 and $637.3
million after taxes), respectively, related to the settlement of tobacco
litigation. Lorillard's portion of ongoing adjusted payments and legal fees is
based on its share of domestic cigarette shipments in the year preceding that
in which the payment is due. Accordingly, Lorillard records its portions of
ongoing settlement payments as part of cost of manufactured products sold as
the related sales occur. Funds required to meet the industry payment
obligations have been provided by Lorillard's operating activities.
The Company believes that the implementation of the State Settlement
Agreements will materially adversely affect its consolidated results of
operations and cash flows in future periods. The degree of the adverse impact
will depend, among other things, on the rates of decline in United States
cigarette sales in the full price and discount segments, Lorillard's share of
the domestic full price and discount segments, and the effect of any resulting
cost advantage of manufacturers not subject to payments under the Master
Settlement Agreement.
Lorillard's unit sales volume decreased by 7.2% as compared to 1999. Newport,
a full price brand, which accounted for approximately 80% of Lorillard's unit
sales in 2000, increased by 1.5% as compared to 1999. Newport's increase in
unit sales volume reflects increased promotional activities to the extent
practicable in light of existing limitations due to competitive conditions.
The decrease in Lorillard's overall unit sales volume reflects lower unit
sales of its Maverick and Old Gold brands in the discount market segment.
Discount brand sales have remained relatively constant at 26.3%, 26.4% and
26.2% as a percentage of industry sales for 2000, 1999 and 1998, respectively.
Newport's market share remained at 7.7% in 2000, as compared to 1999. Overall
industry unit sales volume is up by .2% in 2000, as compared to 1999.
45
1999 Compared with 1998
Revenues and net income increased by $1,199.4 and $300.1 million, or 41.9% and
85.3%, respectively, in 1999 as compared to 1998.
Revenues increased, as compared to 1998, by approximately $1,045.9 million, or
36.5%, due to higher unit prices and by approximately $137.9 million, or 4.8%,
due to an increase in unit sales volume. Net investment income also
contributed $14.8 million to the increased revenues.
Net income increased due primarily to the increased revenues discussed above,
partially offset by higher charges for tobacco litigation settlements ($637.3
million in 1999 compared to $346.5 million in 1998) and higher sales promotion
expenses.
Lorillard's unit sales volume increased by 4.0% as compared to 1998. Newport,
a full price brand which accounted for approximately 73% of Lorillard's unit
sales in 1999, decreased by 1.8% as compared to 1998. The increase in
Lorillard's unit sales volume reflects higher unit sales of its Maverick and
Old Gold brands in the discount market segment, and increased sales promotion
activities, relative to the state of the competitive marketplace in early
1999, for these brands.
Newport's decline in unit sales volume reflects the effects of various price
increases since November 1998 that followed the Master Settlement Agreement
(see Note 17 of the Notes to Consolidated Financial Statements). While
Newport's unit sales volume has declined, its market share has increased to
7.7% at December 31, 1999, as compared to 7.1% at December 31, 1998. Overall
industry unit sales volume is down by 10.0% in 1999, as compared to 1998.
Loews Hotels
Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews
Hotels Holding Corporation is a wholly owned subsidiary of the Company.
2000 Compared with 1999
Revenues and income before cumulative effect of changes in accounting
principles decreased by $13.4 and $43.7 million, or 3.8% and 62.0%,
respectively, in 2000 as compared to 1999. Included in 1999 is a gain of $85.1
million ($52.0 million after taxes) from the sale of two franchised
properties. Excluding this gain, revenues and income before cumulative effect
of changes in accounting principles increased by $71.7 and $8.3 million,
respectively.
Revenues and income before cumulative effect of changes in accounting
principles increased due primarily to increased overall average room rates and
the addition of two luxury properties to the Loews Hotels portfolio,
offsetting the 1999 sale of the two franchised properties. Overall occupancy
rates remained at approximately 78%, essentially unchanged from 1999. Income
also benefited from improved operating results from an unconsolidated joint
venture whose operations commenced in 1999.
1999 Compared with 1998
Revenues and income before cumulative effect of changes in accounting
principles increased by $109.8 and $37.7 million, respectively, in 1999 as
compared to 1998, and includes a gain of $85.1 and $14.7 million ($52.0 and
$8.4 million after taxes) from the sale of two franchised properties in 1999
and the sale of the Loews Monte Carlo Hotel in 1998. Excluding this gain,
revenues increased by $39.4 million, or 17.3%, and income before cumulative
effect of changes in accounting principles decreased by $5.9 million, or
24.2%. Revenues increased due primarily to the operations of the Loews Miami
Beach Hotel which opened in December 1998 and an approximately 8.4% increase
in overall average room rates. These increases were partially offset by the
sale of the Loews Monte Carlo Hotel in November 1998. Overall occupancy rates
remained at approximately 78%, essentially unchanged from 1998.
Net income includes a charge of $7.1 million to reflect the cumulative effect
of a change in accounting principles requiring current write-off of preopening
expenses. Income before cumulative effect of changes in accounting principles
decreased due to costs incurred with respect to preopening activities in 1999
and losses recorded from an unconsolidated joint venture which commenced
operations that year. These declines were partially offset by the increased
revenues discussed above.
46
Diamond Offshore
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore"). Diamond
Offshore Drilling, Inc. is a 53% owned subsidiary of the Company.
2000 Compared with 1999
Revenues and net income decreased by $123.3 and $40.7 million, or 14.6% and
56.0%, respectively, in 2000 as compared to 1999.
Revenues decreased due principally to lower operating dayrates ($143.9
million) and reduced utilization ($50.6 million) for Diamond Offshore's
semisubmersible rigs, partially offset by increased utilization ($35.1
million) and higher dayrates ($26.4 million) for jack-up rigs during 2000, as
compared to 1999. Revenues also declined by $17.1 million due to the sale of a
jack-up rig and $6.0 million due to the mobilization of rigs to new markets
during 2000. These declines were partially offset by increased investment
income ($14.5 million) and a gain from the sale of a drilling rig of $13.9
million ($4.7 million after taxes and minority interest) in 2000.
Net income declined due primarily to the lower revenues discussed above and
the fact that contract drilling costs remained relatively unchanged. Operating
expenses generally are not affected by changes in dayrates, nor are they
significantly affected by fluctuations in utilization. For instance, if a rig
is to be idle for a short period of time, Diamond Offshore realizes few
decreases in operating expenses since the rig is typically maintained in a
prepared state with a full crew. In addition, when a rig is idle, Diamond
Offshore is responsible for certain operating expenses such as rig fuel and
supply boat costs, which are typically charged to the operator under drilling
contracts. However, if the rig is to be idle for an extended period of time,
Diamond Offshore may reduce the size of a rig's crew and take steps to "cold
stack" the rig, which lowers expenses and partially offsets the impact on
operating income.
1999 Compared with 1998
Revenues and net income decreased by $398.0 and $108.4 million, or 32.0% and
59.9%, respectively, in 1999 as compared to 1998.
Revenues decreased due principally to lower utilization of semisubmersible
rigs ($163.6 million) and jack-up rigs ($52.9 million) during 1999, rig
downtime for mandatory inspections and repairs performed ($72.1 million), and
reduced operating dayrates for Diamond Offshore's semisubmersible rigs ($84.7
million) and jack-up rigs ($81.8 million). These declines were partially
offset by a net addition to the operating drilling fleet ($43.3 million)
reflecting the completion of various upgrade and repair projects.
Net income declined due primarily to the lower revenues discussed above and
increased depreciation expense, partially offset by lower contract drilling
costs.
Bulova
Bulova Corporation and subsidiaries ("Bulova"). Bulova Corporation is a 97%
owned subsidiary of the Company.
2000 Compared with 1999
Revenues and net income increased by $21.4 and $.9 million, or 15.4% and 6.4%,
respectively, in 2000 as compared to 1999.
Revenues increased due to an increase in royalty income of $5.5 million from
the settlement of a contract dispute, and higher watch unit sales volume.
These increases were partially offset by lower watch prices and lower clock
unit sales in 2000, as compared to 1999. Watch prices declined due primarily
to a change in sales mix.
Net income increased due primarily to the higher revenues discussed above,
partially offset by increased brand support and advertising expenses, and a
lower effective income tax rate in 1999 due to a valuation allowance
adjustment related to prior years.
1999 Compared with 1998
Revenues and net income increased by $3.7 and $3.6 million, or 2.7% and 34.3%,
respectively, in 1999 as compared to 1998.
Revenues increased due to higher watch unit sales and increased clock unit
sales and prices, partially offset by
47
lower watch prices in 1999 as compared to 1998. Watch prices declined due
primarily to a change in sales mix.
Net income increased due primarily to the higher revenues discussed above and
reduced income taxes, partially offset by increased administrative expenses.
Corporate
Corporate operations consist primarily of investment income, including
investment (losses) gains from the Company's investment portfolio, as well as
equity earnings from a shipping joint venture, corporate interest expenses and
other corporate administrative costs.
The components of investment (losses) gains included in Corporate operations
are as follows:
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------------------------
(Amounts in millions)
Derivative instruments (1) $(146.5) $(424.1) $(297.3)
Equity securities, including short positions (1) 125.1 (47.0) (251.4)
Short-term investments, primarily U.S. government securities (2.5) 10.1 .7
Other 17.3 (1.6) 2.4
- ------------------------------------------------------------------------------------------------
(6.6) (462.6) (545.6)
Income tax benefit 2.3 161.9 191.0
- ------------------------------------------------------------------------------------------------
Net loss $ (4.3) $(300.7) $(354.6)
================================================================================================
(1) Includes losses on short sales, equity index futures and options
aggregating $14.5, $533.6 and $584.3 for the years ended December 31, 2000,
1999 and 1998, respectively. The Company has maintained short positions in the
form of futures or options-most recently as put options-since 1996.
Substantially all of the index short positions were closed during the second
quarter of 2000. See "Quantitative and Qualitative Disclosures About Market
Risk."
2000 Compared with 1999
Exclusive of investment (losses) gains, revenues increased by $42.7 million
and net loss decreased by $15.9 million, or 34.7% and 52.0%, respectively, due
to higher investment income reflecting an increased base of invested assets,
and improved results from a shipping joint venture, partially offset by
increased administrative and interest expenses.
1999 Compared with 1998
Exclusive of investment (losses) gains, revenues and net income declined by
$69.7 and $39.1 million, respectively, due to significantly lower investment
income reflecting a lower base of invested assets, and lower results from a
shipping joint venture. The decline in net income was partially offset by
lower interest expenses.
48
LIQUIDITY AND CAPITAL RESOURCES
CNA Financial
The principal operating cash flow sources of CNA's property-casualty and life
insurance subsidiaries are premiums and investment income. The primary
operating cash flow uses are payments for claims, policy benefits and
operating expenses.
For the year ended December 31, 2000, net cash used for operating activities
was $1,373.0 million as compared with net cash used of $2,934.0 and $806.0
million in 1999 and 1998, respectively. The improvement in 2000 relates
primarily to significant payments in 1999 for (i) $1.1 billion in cash to
Allstate in connection with the transaction involving CNA's Personal Insurance
business and (ii) $1.1 billion of claim payments from escrow pursuant to the
Fibreboard settlement. See Note 12 of the Notes to Consolidated Financial
Statements for discussion of the Personal Insurance transaction. Excluding
these significant, non-recurring transactions from 1999, CNA's 2000 cash
outflow from operations declined by approximately $600.0 million to an outflow
of approximately $1.4 billion. The operating cash flows forgone in 2000 due to
the transfer of Personal Insurance in 1999 was approximately $250.0 million.
The remainder of the decline related primarily to increased payments of claims
and decreased receipts of premiums.
For the year ended December 31, 2000, net cash inflows from investment
activities were $1,870.0 million as compared with $3,428.0 million for the
same period in 1999. Cash flows from investing activities were particularly
high in 1999 due to sales of investments to fund the outflows related to the
Personal Insurance transaction and Fibreboard claim payments.
For the year ended December 31, 2000, net cash used for financing activities
was $487.0 million as compared with $558.0 million for the same period in
1999. During 2000 cash flows for financing activities included the repurchase
of preferred and common stock, the retirement or repurchase of senior debt
securities and mortgages, and the repayment of bank loans.
On February 15, 2000, Standard & Poor's lowered CNA's senior debt rating from
A- to BBB and lowered CNA's preferred stock rating from BBB to BB+. As a
result of these actions, the facility fee payable on the aggregate amount of
CNA's $795.0 million revolving credit facility ("Facility") was increased to
12.5 basis points per annum from 9.0 basis points per annum and the interest
rate was increased to London Interbank Offered Rate ("LIBOR") plus 27.5 basis
points from LIBOR plus 16.0 basis points. Subsequently, CNA repurchased and
retired the outstanding money market preferred stock ($150.0 million) in early
2000.
CNA has selected a financial institution to lead the syndication process for
its new credit facility to replace its current $750.0 million revolving credit
facility that terminates in May 2001.
During 2000, CNA purchased a portion of its notes when opportunities arose.
CNA may purchase additional securities in the future. These repurchases
included approximately $38.0 million of senior notes.
CNA is separated into three intercompany reinsurance pools: the Continental
Casualty Company Pool ("CCC Pool"), the Continental Insurance Company Pool
("CIC Pool") and the Continental Assurance Company Pool ("CAC Pool"). The CCC
Pool, CIC Pool and CAC Pool are comprised of 9, 15 and 2 legal insurance
entities, respectively, domiciled in a total of 13 states and doing business
in 50 states and Canada (the "Pool Companies"). To the extent a Pool Company's
currently due claim liabilities may exceed its readily available liquid
assets, CNA may be called upon to contribute capital to that company.
Furthermore, such capital would likely be obtained in the form of a dividend
from another Pool Company, possibly in a different pool, which may or may not
require the approval of insurance regulators in the jurisdiction of the
dividend-paying company. Accordingly, management must continuously monitor the
capital allocation among the pools and the liquidity and capital resources of
the individual Pool Companies.
49
The table below presents ratings issued by A.M. Best, Fitch, Moody's and
Standard & Poor's for the CCC Pool, the CIC Pool and the CAC Pool. Also
rated were CNA's senior debt and commercial paper and The Continental
Corporation's ("Continental") senior debt.
Pool CCC CAC CIC
- ------------------------------------------------------------------------------------------------
Financial strength rating
A.M. Best A A A-
Fitch AA- AA
Moody's A2 A2* A3
Standard & Poor's A AA- A-
* Continental Assurance Company and Valley Forge Life Insurance Company are rated separately by
Moody's and both have an A2 rating.
CNA CNA Continental
Senior Commercial Senior
Debt Paper Debt
- ------------------------------------------------------------------------------------------------
Fitch A-
Moody's Baa1 P2 Baa2
Standard & Poor's BBB A2 BBB-
Lorillard
Lorillard and other cigarette manufacturers continue to be confronted with an
increasing level of litigation and regulatory issues. Lawsuits continue to be
filed with increasing frequency against Lorillard and other manufacturers of
tobacco products. Approximately 4,900 product liability cases are pending
against cigarette manufacturers in the United States. Of these, approximately
1,225 cases are pending in a West Virginia court, and approximately 3,050
cases are brought by flight attendants alleging injury from exposure to
environmental tobacco smoke in the cabins of aircraft. Lorillard is a
defendant in all of the flight attendant suits served to date and is a
defendant in most of the cases pending in West Virginia.
On July 14, 2000, the jury in Engle v. R.J. Reynolds Tobacco Co., et al.
awarded a total of $145.0 billion in punitive damages against all defendants,
including $16.3 billion against Lorillard. 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 has challenged class
certification, as well as other numerous legal errors that it believes
occurred during the trial. The Company and Lorillard believe that an appeal of
these issues on the merits should prevail.
Lorillard has noticed an appeal from the purported final judgment to the Third
District of the Florida Court of Appeal and has posted its appellate bond in
the amount of $104.0 million pursuant to recent Florida legislation limiting
the amount of an appellate bond required to be posted in order to stay
execution of a judgment for punitive damages in a certified class action.
Although this legislation is intended to apply to the Engle case, Lorillard
cannot predict the outcome of any challenges to the possible application or
constitutionality of this legislation. In the event this legislation is
challenged and found to be invalid, Lorillard could be required to post a bond
in an amount not capable of being bonded, resulting in 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 prevent this scenario from
occurring and believes these efforts should be successful.
50
The terms of the State Settlement Agreements require significant payments to
be made to the Settling States which began in 1998 and continue in perpetuity.
See Note 17 of the Notes to Consolidated Financial Statements for additional
information regarding this settlement and other litigation matters.
Lorillard generated net cash flow from operations of approximately $550.4
million for the year ended December 31, 2000, compared to $1,024.9 million for
the prior year. Funds from operations continue to exceed operating
requirements.
Loews Hotels
In 2000, Loews Hotels acquired the Coronado Bay Resort and opened the Loews
Philadelphia Hotel. In 2001, Loews Hotels, with its partners, opened a second
hotel at Universal Orlando in Florida and is developing a third hotel with its
partners which is scheduled to open in 2002. Capital expenditures in relation
to these hotel projects are being funded by a combination of equity from Loews
Hotels and its partners, and mortgages.
Funds from operations continue to exceed operating requirements. Funds for
other capital expenditures and working capital requirements are expected to be
provided from existing cash balances and operations.
Diamond Offshore
During 2000, oil and gas prices remained significantly above historical
averages. However, market recovery for various classes of equipment within the
offshore drilling industry was inconsistent. Diamond Offshore believes that
current expectations are for higher than average product prices to persist as
world energy demand is increasing and short-term oil supplies are below
historical averages. The growth in the offshore drilling industry, anticipated
because of these favorable market fundamentals, is dependent on confidence by
Diamond Offshore's customers that current levels of oil and gas prices will be
sustained.
Utilization and dayrates for Diamond Offshore's domestic jack-up market
improved significantly in 2000 as independent producers acted quickly to take
advantage of the high natural gas prices which prevailed throughout the year.
Although the improvement in the jack-up market leveled off during the fourth
quarter of 2000, it remains strong. Diamond Offshore's outlook for this market
is for continued strength, especially if the recovery of the international
jack-up market creates a tight supply of jack-ups in the Gulf of Mexico.
During 2000, there was increased interest for Diamond Offshore's deepwater
high specification rig fleet with both utilization and dayrates increasing.
Diamond Offshore believes that prospects are good for further improvement in
this market, as most recent dayrates are greater than rates under current
contracts. Most of the existing contracts are for short-term, well-to-well
work and Diamond Offshore anticipates upward pressure on rates as these
existing contracts are renewed or replaced.
For Diamond Offshore's other semisubmersible rig fleet, the market began to
experience growth in the latter half of 2000 with both dayrates and
utilization increasing. Currently, all of the domestic marketed rigs in this
class are working or have commitments. If the backlog for these rigs continues
to increase, Diamond Offshore expects further increases in dayrates.
Diamond Offshore believes that the international markets are also
strengthening for all classes of equipment. Dayrates are increasing and that
trend is expected to continue into the second half of the year. All three of
Diamond Offshore's rigs located in the North Sea have recently committed for
work at dayrates that are well above their previously contracted dayrates.
Five of Diamond Offshore's six rigs operating in Brazil are committed under
long-term contracts ranging from 18 months to approximately three years.
At December 31, 2000, cash and marketable securities totaled $862.1 million,
up from $641.4 million at December 31, 1999. In June 2000, Diamond Offshore
issued zero coupon convertible debentures maturing June 2020 with a face value
of $805.0 million and received net proceeds of approximately $392.6 million.
The debentures were issued at a discount providing a yield to maturity of
51
3.5%, and are convertible into 8.6075 shares of Diamond Offshore common stock
per $1,000 debenture. On March 7, 2001 Diamond Offshore called for redemption
its 3.75% convertible subordinated notes due 2007 at a redemption price of
102.1%. Approximately $400.0 million of these notes are outstanding. These
notes are convertible into Diamond Offshore common stock at a conversion price
of $40.50 per share until the day prior to the April 6, 2001 redemption date.
During 2000, Diamond Offshore purchased 2.7 million shares of its common stock
at an aggregate cost of $93.0 million. Depending on market conditions, Diamond
Offshore may, from time to time, purchase shares of its common stock in the
open market.
During the year ended December 31, 2000, Diamond Offshore expended $250.9
million, including capitalized interest expense, for rig upgrades, primarily
for the conversion of the Ocean Confidence. Also included in this amount is
approximately $16.0 million expended for variable deckload and water depth
capability upgrades on the Ocean Epoch. Diamond Offshore expects to spend
approximately $144.8 million for rig upgrade capital expenditures during 2001
which are primarily costs associated with the deepwater upgrade of the Ocean
Baroness. Included in this amount is approximately $20.0 million for
accommodations and stability enhancement upgrade on the Ocean Nomad.
The conversion of the Ocean Confidence from an accommodation vessel to a
semisubmersible drilling unit was completed and the rig was accepted by the
customer on January 5, 2001 at which time it began a five-year drilling
program in the Gulf of Mexico. The net cost of conversion for this rig was
approximately $450.0 million. Future revenues to be generated by the Ocean
Confidence under its five-year contract are estimated to be $311.5 million
including the effect of an $8.1 million reduction that resulted from the late
delivery of the rig. Additional revenue reductions could occur during the
first two wells under the drilling contract based on the nature of any
downtime.
The significant upgrade of Diamond Offshore's semisubmersible, the Ocean
Baroness, to high specification capabilities will be an enhanced version of
Diamond Offshore's Victory-class upgrades. The initial estimated cost for the
deepwater upgrade of the Ocean Baroness is approximately $180.0 million and is
anticipated to take approximately 18 months, with an expected delivery date of
February 2002. During the year ended December 31, 2000, Diamond Offshore
expended $21.9 million for the deepwater upgrade of the Ocean Baroness.
During the year ended December 31, 2000, Diamond Offshore expended $73.0
million for its continuing rig enhancement program and other corporate
requirements. Diamond Offshore has budgeted $106.0 million for 2001 capital
expenditures associated with these items.
Cash required to meet Diamond Offshore's capital commitments is determined by
evaluating rig upgrades to meet specific customer requirements and by
evaluating Diamond Offshore's continuing rig enhancement program, including
water depth and drilling capability upgrades. It is management's opinion that
operating cash flows and Diamond Offshore's cash reserves will be sufficient
to meet these capital commitments; however, periodic assessments will be made
based on industry conditions. In addition, Diamond Offshore may, from time to
time, issue debt or equity securities, or a combination thereof, to finance
capital expenditures, the acquisition of assets and businesses, or for general
corporate purposes. Diamond Offshore's ability to effect any such issuance
will be dependent on its results of operations, its current financial and
market conditions, and other factors beyond its control.
Bulova
For the year ended December 31, 2000, net cash used for operating activities
was $15.9 million as compared with net cash inflows of $8.6 million in 1999.
Bulova's cash and cash equivalents, and investments amounted to $16.9 million
at December 31, 2000, compared to $34.1 million in 1999. The decrease is
primarily the result of an increase in inventory purchases to meet Bulova's
spring 2001 sales forecast. Funds for capital expenditures and working
52
capital requirements are expected to be provided from operations and existing
cash balances. No material capital expenditures are anticipated during 2001.
Majestic Shipping
Subsidiaries of Majestic Shipping Corporation ("Majestic"), a wholly owned
subsidiary of the Company, entered into agreements with a Korean shipyard for
the new building of four 442,500 deadweight ton, ultra-large crude carrying
ships ("ULCCs"). Hellespont Shipping Corporation ("Hellespont"), a 49% owned
subsidiary of Majestic, also entered into agreements with another Korean
shipyard for the new building of four 303,000 deadweight ton, very large crude
carrying ships ("VLCCs"). In connection with the contracts for the new
building of four VLCCs, a subsidiary of the Company entered into time charter
agreements for five year periods commencing upon the delivery of each VLCC.
The Company has guaranteed performance by its subsidiary under the time
charter agreements. The total cost of the eight ships is estimated to amount
to approximately $660.0 million. The financing for the ULCCs and VLCCs will be
provided through equity contributions by the Company and Hellespont,
respectively, and bank debt guaranteed by Majestic and Hellespont,
respectively. The Company has agreed to provide credit support for Majestic's
and Hellespont's bank debt by making available to the borrowers limited
operating cash flow credit facilities.
Parent Company
During 2000, the Company purchased 5,866,600 shares of its outstanding Common
Stock at an aggregate cost of $305.7 million. Depending on market conditions,
the Company from time to time purchases shares of its, and its subsidiaries',
outstanding common stock in the open market or otherwise.
The Company continues to pursue conservative financial strategies while
seeking opportunities for responsible growth. These include the expansion of
existing businesses, full or partial acquisitions and dispositions, and
opportunities for efficiencies and economies of scale.
INVESTMENTS
Investment activities of non-insurance companies include investments in fixed
income securities, equity securities including short sales, derivative
instruments and short-term investments, and are carried at fair value. Equity
securities, which are considered part of the Company's trading portfolio,
short sales and derivative instruments are marked to market and reported as
investment gains or losses in the income statement.
The Company enters into short sales and invests in certain derivative
instruments for a number of purposes, including: (i) asset and liability
management activities, (ii) income enhancements for its portfolio management
strategy, and (iii) to benefit from anticipated future movements in the
underlying markets. If such movements do not occur as anticipated, then
significant losses may occur.
Monitoring procedures include senior management review of daily detailed
reports of existing positions and valuation fluctuations to ensure that open
positions are consistent with the Company's portfolio strategy.
The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these transactions with large financial
institutions and considers the risk of nonperformance to be remote.
The Company does not believe that any of the derivative instruments utilized
by it are unusually complex, nor do these instruments contain imbedded
leverage features which would expose the Company to a higher degree of risk.
See "Results of Operations," "Quantitative and Qualitative Disclosures about
Market Risk" and Note 4 of the Notes to Consolidated Financial Statements for
additional information with respect to derivative instruments, including
recognized gains and losses on these instruments.
53
Insurance
CNA's general and Separate Accounts investment portfolios consist primarily of
publicly traded government bonds, asset-backed securities, mortgage-backed
securities, municipal bonds, and corporate bonds.
CNA's investment policies for both the general and Separate Accounts
portfolios emphasize high credit quality and diversification by industry,
issuer and issue. Assets supporting interest rate sensitive liabilities are
segmented within the general account to facilitate asset/liability duration
management.
The general account portfolio consists primarily of high quality (rated BBB or
higher) bonds, 93.0% and 94.2% of which are rated as investment-grade at
December 31, 2000 and 1999, respectively.
The following table summarizes the ratings of CNA's general account fixed
maturity bond portfolio at fair value:
December 31 2000 1999
- ------------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
U.S. government and affiliated agency securities $ 8,689.0 32.7% $ 8,781.0 32.4%
Other AAA rated 7,120.0 26.8 9,692.0 35.7
AA and A rated 5,954.0 22.4 4,465.0 16.5
BBB rated 3,066.0 11.5 2,598.0 9.6
Below investment-grade 1,769.0 6.6 1,582.0 5.8
- ------------------------------------------------------------------------------------------------
Total $26,598.0 100.0% $27,118.0 100.0%
================================================================================================
The following table summarizes the bond ratings of the investments supporting
CNA's Separate Accounts products which guarantee principal and a specified
rate of interest:
December 31 2000 1999
- ------------------------------------------------------------------------------------------------
(Amounts in millions of dollars)
U.S. government and affiliated agency securities $ 224.0 9.8% $ 59.0 2.1%
Other AAA rated 1,248.0 54.5 1,795.0 62.2
AA and A rated 374.0 16.3 548.0 19.0
BBB rated 397.0 17.3 375.0 13.0
Below investment-grade 49.0 2.1 107.0 3.7
- ------------------------------------------------------------------------------------------------
Total $ 2,292.0 100.0% $ 2,884.0 100.0%
================================================================================================
At December 31, 2000 and 1999, approximately 98.0% and 95.4% of the general
account bond portfolio, and 99.0% and 96.9% of the guaranteed investment
contract bond portfolio, respectively, were U.S. government agency securities
or were rated by Standard & Poor's or Moody's Investors Service. The remaining
bonds were rated by other rating agencies, outside brokers or CNA's
management.
High yield securities are bonds rated as below investment-grade (below BBB) by
bond rating agencies and other unrated securities that, in the opinion of
management, are below investment grade. High yield securities generally
involve a greater degree of risk than investment-grade securities. However,
expected returns should compensate for the added risk. This risk is also
considered in the interest rate assumptions in the underlying insurance
products.
54
CNA's concentration in high yield bonds was approximately 6.6% and 5.8% of the
general account portfolio and 2.1% and 3.7% of the guaranteed investment
contract portion of CNA's Separate Accounts bond portfolio as of December 31,
2000 and 1999, respectively.
Included in CNA's general account fixed maturity securities at December 31,
2000 are $7,623.0 million of asset-backed securities, at fair value,
consisting of approximately 46.0% in U.S. government agency issued pass-
through certificates, 34.0% in collateralized mortgage obligations ("CMOs"),
16.0% in corporate asset-backed obligations and 4.0% in corporate mortgage-
backed pass-through certificates. The majority of CMOs held are actively
traded in liquid markets and are priced by broker-dealers.
At December 31, 2000 and 1999, short-term investments consisted primarily of
commercial paper and money market funds.
Total Separate Accounts investments at fair value were approximately $4.1 and
$4.5 billion at December 31, 2000 and 1999, respectively, with taxable fixed
maturities representing approximately 65.2% and 72.4% of the totals,
respectively. Approximately 57.0% and 63.0% of Separate Accounts investments
at December 31, 2000 and 1999, respectively, are used to fund guaranteed
investment contracts for which Continental Assurance Company and Valley Forge
Life Insurance Company guarantee principal and a specified return to the
contract holders (guaranteed investment contracts). The duration of fixed
maturity securities included in the guaranteed investment contract portfolio
is matched approximately with the corresponding payout pattern of the
liabilities of the guaranteed investment contracts.
CNA invests in certain derivative financial instruments primarily to reduce
its exposure to market risk (principally interest rate, equity price and
foreign currency risk). CNA considers the derivatives in its general account
to be held for purposes other than trading. Derivative securities are recorded
at fair value at the reporting date.
Certain derivatives in Separate Accounts are held for trading purposes. CNA
uses these derivatives to mitigate market risk by purchasing Standard and
Poor's 500 index futures contracts in a notional amount equal to the contract
liability relating to Life Operations' Index 500 guaranteed investment
contract product.
CNA's largest equity holding in a single issuer is Global Crossing common
stock. See Note 2 of the Notes to Consolidated Financial Statements for a
discussion of CNA's ownership in Global Crossing.
CNA's second largest equity holding is Canary Wharf. During 2000, CNA
experienced a net decrease in unrealized gains of $334.0 million on its
position in Canary Wharf, which was valued at $291.0 million on December 31,
2000. The majority of this decline was due to the sale of 60.1 million shares,
resulting in a pre-tax realized gain of $444.0 million.
55
ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." This statement
addresses a limited number of issues causing implementation difficulties for
entities applying SFAS No. 133. SFAS No. 133, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivative instruments as either assets or liabilities in the balance sheet
and measure those instruments at fair value. A derivative may be specifically
designated as a hedge of the exposures to changes in the fair value, cash
flows or foreign currencies. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation.
The Company is required to adopt SFAS No. 133 effective January 1, 2001. The
transition adjustment resulting from adoption must be reported in net income
or other comprehensive income, as appropriate, as the cumulative effect of a
change in accounting principle. The Company estimates that the initial
adoption of SFAS No. 133 will not have a material impact on the Company's
shareholders' equity; however, adoption will result in an estimated decrease
to 2001 earnings of $54.0 million, net of taxes and minority interest. Of this
estimated transition amount, approximately $50.0 million, net of taxes and
minority interest, relates to investments and investment-related derivatives
(related primarily to CNA's hedged position in Global Crossing common stock,
see Note 2 of the Notes to Consolidated Financial Statements). Because the
Company already carries its investment-related derivatives at fair value
through other comprehensive income, there is an equal and offsetting favorable
adjustment of $50.0 million to shareholders' equity. The remainder of the
estimated transition adjustment is attributable to collateralized debt
obligation products that are derivatives under SFAS No. 133.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases,
SAB No. 101A and No. 101B, was effective for registrants no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999.
Adoption of this bulletin, which occurred on October 1, 2000, did not have a
significant impact on the results of operations or equity of the Company.
In 2001, the Company is required to implement the provisions of the FASB's
Emerging Issues Task Force Issue No. 00-14, "Accounting for Certain Sales
Incentives." This Issue addresses the recognition, measurement, and income
statement classification for sales incentives offered voluntarily by a vendor
without charge to customers that can be used in, or that are exercisable by a
customer as a result of, a single exchange transaction. Implementation of the
recognition and measurement criteria will not have a material impact to the
Company's results of operations or equity. Implementation of this Issue will
result in reclassifying certain promotional expenses from Other Operating
Expenses to become a reduction of Revenues from Manufactured Products.
Effective January 1, 2001, the Company is required to adopt statutory basis
accounting changes related to the National Association of Insurance
Commissioners codification of Statutory Accounting Practices. The Company
estimates that the adoption of Codification, as modified, will increase
statutory capital and surplus as of January 1, 2001 by approximately $77.0
million, which primarily relates to deferred tax assets offset by insurance-
related assessments and pension liabilities.
56
FORWARD-LOOKING STATEMENTS
When included in this Report, the words "believes," "expects," "intends,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a
variety of risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, among
others, the impact of competitive products, policies and pricing; product and
policy demand and market responses; development of claims and the effect on
loss reserves; the performance of reinsurance companies under reinsurance
contracts; general economic and business conditions; changes in financial
markets (interest rate, credit, currency, commodities and equities) or in the
value of specific investments; changes in foreign, political, social and
economic conditions; regulatory initiatives and compliance with governmental
regulations; changes in foreign and domestic oil and gas exploration and
production activity, and expenditures related to rig conversion and upgrade;
changes in rating agency policies and practices, the results of financing
efforts; and agreements and various other matters and risks, many of which are
beyond the Company's control.
The tobacco industry continues to be subject to health concerns relating to
the use of tobacco products and exposure to environmental tobacco smoke,
legislation, including actual and potential excise tax increases, increasing
marketing and regulatory restrictions, governmental regulation, privately
imposed smoking restrictions, litigation, including risks associated with
adverse jury and judicial determinations, courts reaching conclusions at
variance with the general understandings of applicable law, bonding
requirements and the absence of adequate appellate remedies to get timely
relief from any of the foregoing, and the effects of price increases related
to concluded tobacco litigation settlements and excise tax increases on
consumption rates. Developments in any of these areas, which are more fully
described elsewhere in this Report could cause the Company's results to differ
materially from results that have been or may be projected by or on behalf of
the Company. These forward-looking statements speak only as of the date of
this Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectations with
regard thereto or any change in events, conditions or circumstances on which
any statement is based.
57
SUPPLEMENTAL FINANCIAL INFORMATION
The following supplemental condensed financial information reflects the
financial position, results of operations and cash flows of Loews Corporation
with its investments in CNA and Diamond Offshore accounted for on an equity
basis rather than as consolidated subsidiaries. It does not purport to present
the financial position, results of operations and cash flows of the Company in
accordance with generally accepted accounting principles because it does not
comply with SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries."
Management believes, however, that this disaggregated financial data enhances
an understanding of the consolidated financial statements by providing users
with a format that management uses in assessing the Company.
Condensed Balance Sheet Information
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the
Equity Method)
December 31 2000 1999
- ------------------------------------------------------------------------------
(Amounts in millions)
Assets:
Current assets $ 579.7 $ 872.7
Investments in U.S. government securities and other 4,417.1 4,447.2
- ------------------------------------------------------------------------------
Total current assets and investments in securities 4,996.8 5,319.9
Investment in CNA 8,407.1 7,612.0
Investment in Diamond Offshore 975.8 963.7
Other assets 1,119.4 850.6
- ------------------------------------------------------------------------------
Total assets $15,499.1 $14,746.2
==============================================================================
Liabilities and Shareholders' Equity:
Current liabilities $ 1,543.3 $ 1,418.3
Securities sold under agreements to repurchase 347.8
Long-term debt, less current maturities and
unamortized discount 2,450.8 2,426.7
Other liabilities 313.9 575.7
- ------------------------------------------------------------------------------
Total liabilities 4,308.0 4,768.5
Shareholders' equity 11,191.1 9,977.7
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $15,499.1 $14,746.2
==============================================================================
58
Condensed Statements of Income Information
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the
Equity Method)
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions)
Revenues:
Manufactured products and other $4,751.5 $4,485.9 $3,207.6
Investment income 258.5 198.1 233.3
Investment losses (7.4) (461.7) (545.6)
- ------------------------------------------------------------------------------
Total 5,002.6 4,222.3 2,895.3
==============================================================================
Expenses:
Cost of manufactured products sold
and other 3,593.5 3,374.0 2,044.1
Tobacco litigation settlements 579.0
Interest 140.3 143.4 135.9
Income tax expense 492.1 299.7 87.3
- ------------------------------------------------------------------------------
Total 4,225.9 3,817.1 2,846.3
- ------------------------------------------------------------------------------
Income from operations 776.7 405.2 49.0
Equity in income of:
CNA 1,068.0 43.2 234.7
Diamond Offshore 32.0 72.7 181.1
- ------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 1,876.7 521.1 464.8
Cumulative effect of changes in
accounting principles-net (157.9)
- ------------------------------------------------------------------------------
Net income $1,876.7 $ 363.2 $ 464.8
==============================================================================
59
Condensed Statements of Cash Flow Information
Loews Corporation and Subsidiaries (Including CNA and Diamond Offshore on the
Equity Method)
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions)
Operating Activities:
Net income $ 1,876.7 $ 363.2 $ 464.8
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed earnings of CNA and
Diamond Offshore (1,064.9) (75.4) (380.7)
Cumulative effect of change in
accounting principles 157.9
Investment losses 7.4 461.7 545.6
Other 12.5 (23.8) (28.9)
Changes in assets and liabilities-net (88.0) (376.3) (399.9)
- ------------------------------------------------------------------------------
Total 743.7 507.3 200.9
- ------------------------------------------------------------------------------
Investing Activities:
Net decrease in short-term investments,
primarily U.S. government securities 193.2 242.9 30.8
Securities sold under agreements
to repurchase (347.8) (101.9) 449.7
Purchases of CNA common stock (107.0) (4.2)
Redemption (purchase) of CNA preferred
stock 200.0 (200.0)
Other (198.1) (62.0) (83.5)
- ------------------------------------------------------------------------------
Total (352.7) 172.0 192.8
- ------------------------------------------------------------------------------
Financing Activities:
Dividends paid to shareholders (99.7) (108.9) (114.6)
Increase (decrease) in long-term debt-net 26.1 20.5 (52.0)
Purchases of treasury shares (305.7) (601.6) (218.0)
- ------------------------------------------------------------------------------
Total (379.3) (690.0) (384.6)
- ------------------------------------------------------------------------------
Net change in cash 11.7 (10.7) 9.1
Cash, beginning of year 9.9 20.6 11.5
- ------------------------------------------------------------------------------
Cash, end of year $ 21.6 $ 9.9 $ 20.6
==============================================================================
60
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is a large diversified financial services company. As such, it and
its subsidiaries have significant amounts of financial instruments that involve
market risk. The Company's measure of market risk exposure represents an
estimate of the change in fair value of its financial instruments. Changes in
the trading portfolio would be recognized as investment gains (losses) in the
income statement. Market risk exposure is presented for each class of financial
instrument held by the Company at December 31, assuming immediate adverse market
movements of the magnitude described below. The Company believes that the
various rates of adverse market movements represent a measure of exposure to
loss under hypothetically assumed adverse conditions. The estimated market risk
exposure represents the hypothetical loss to future earnings and does not
represent the maximum possible loss nor any expected actual loss, even under
adverse conditions, because actual adverse fluctuations would likely differ. In
addition, since the Company's investment portfolio is subject to change based
on its portfolio management strategy as well as in response to changes in the
market, these estimates are not necessarily indicative of the actual results
which may occur.
Historically the most significant areas of market risk in the Company's trading
portfolio result from positions held in S&P futures contracts, short sales of
certain equity securities and put options purchased on the S&P 500 index. The
Company entered into these positions primarily to benefit from anticipated
future movements in the underlying markets that Company management expected to
occur. If such movements do not occur or if the market moves in the opposite
direction from what management expects, significant losses may occur. The
Company has maintained short positions, in the form of futures or options -
most recently as put options - since 1996. Substantially all of these index
short positions were closed during the second quarter of 2000.
Exposure to market risk is managed and monitored by senior management. Senior
management approves the overall investment strategy employed by the Company and
has responsibility to ensure that the investment positions are consistent with
that strategy and the level of risk acceptable to it. The Company may manage
risk by buying or selling instruments or entering into offsetting positions.
61
The following tables present the Company's market risk by category (equity
markets, interest rates, foreign currency exchange rates and commodity prices)
on the basis of those entered into for trading purposes and other than
trading purposes.
Trading portfolio:
Category of risk exposure: Fair Value Asset (Liability) Market Risk
- ------------------------------------------------------------------------------------------------
December 31 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------
(Amounts in millions)
Equity markets (1):
Equity securities $ 248.2 $ 225.0 $(62.0) $ 57.0
Options - purchased 22.7 188.9 4.0 (154.0)
- written (17.5) (25.8) (3.0) 10.0
Index futures - long 51.0
- short 1.0 (6.0)
Short sales (201.1) (218.5) 50.0 (55.0)
Separate Accounts - Equity securities (a) 2.7 19.2 (1.0) 5.0
- Other invested assets 404.3 318.9 (7.0) 6.0
Interest rate (2):
Futures - long 17.0 18.0
- short (52.0) (48.0)
Separate Accounts - Fixed maturity
securities 410.1 333.3 19.0 13.0
Commodities:
Oil (3):
Swaps .2 (1.0)
Options (.7) (2.0)
Gold (4):
Options - purchased 11.8 15.6 (12.0) (14.0)
- written (5.2) 5.0
- ------------------------------------------------------------------------------------------------
Note: The calculation of estimated market risk exposure is based on assumed
adverse changes in
the underlying reference price or index of (1) a decrease in equity prices
of 25% from
December 31, 2000, and an increase in equity prices of 25% from December
31, 1999, (2) a
decrease in interest rates of 100 basis points, (3) a decline in oil prices
of 20% and (4)
an increase in gold prices of 20%. Adverse changes on options which differ
from those
presented above would not necessarily result in a proportionate change to
the estimated
market risk exposure.
(a) In addition, the Separate Accounts carry positions in equity index futures. A decrease in
equity prices of 25% would result in market risk amounting to $(245.0) and $(261.0) at
December 31, 2000 and 1999, respectively. This market risk would be offset by decreases in
liabilities to customers under variable insurance contracts.
62
Other than trading portfolio:
Category of risk exposure: Fair Value Asset (Liability) Market Risk
- ------------------------------------------------------------------------------------------------
December 31 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------
(Amounts in millions)
Equity markets (1):
Equity securities:
General accounts (a) $ 2,411.6 $ 3,609.6 $ (456.0) $ (902.0)
Separate accounts 212.4 241.1 (53.0) (60.0)
Other invested assets 1,333.0 1,331.0 (112.0) (111.0)
Separate Accounts - Other Invested Assets 443.4 175.8 (111.0) (44.0)
Interest rate (2):
Fixed maturities (a) 27,244.3 27,924.4 (1,458.0) (1,286.0)
Short-term investments (a) 9,100.3 7,317.8 (4.0) (2.0)
Other derivative securities 2.1 16.3 1.0 16.0
Separate Accounts (a):
Fixed maturities 2,292.5 2,926.9 (118.0) (115.0)
Short-term investments 150.4 59.2
Long-term debt (5,747.0) (5,292.0)
- ------------------------------------------------------------------------------------------------
Note: The calculation of estimated market risk exposure is based on assumed adverse changes in
the underlying reference price or index of (1) a decrease in equity prices of 25% and (2)
an increase in interest rates of 100 basis points.
(a) Certain securities are denominated in foreign currencies. An assumed 20% decline in the
underlying exchange rates would result in an aggregate foreign currency exchange rate
risk of $(581.0) and $(437.0) at December 31, 2000 and 1999, respectively.
Equity Price Risk - The Company has exposure to equity price risk as a result of
its investment in equity securities and equity derivatives. Equity price risk
results from changes in the level or volatility of equity prices which affect
the value of equity securities or instruments that derive their value from such
securities or indexes. Equity price risk was measured assuming an instantaneous
25% change in the underlying reference price or index from its level at December
31, 2000 and 1999, with all other variables held constant.
Interest Rate Risk - The Company has exposure to interest rate risk arising from
changes in the level or volatility of interest rates. The Company attempts to
mitigate its exposure to interest rate risk by utilizing instruments such as
interest rate swaps, interest rate caps, commitments to purchase securities,
options, futures and forwards. The Company monitors its sensitivity to interest
rate risk by evaluating the change in the value of its financial assets and
liabilities due to fluctuations in interest rates. The evaluation is performed
by applying an instantaneous change in interest rates by varying magnitudes on a
static balance sheet to determine the effect such a change in rates would have
on the recorded market value of the Company's investments and the resulting
effect on shareholders' equity. The analysis presents the sensitivity of the
market value of the Company's financial instruments to selected changes in
market rates and prices which the Company believes are reasonably possible over
a one-year period.
The sensitivity analysis estimates the change in the market value of the
Company's interest sensitive assets and liabilities that were held on December
31, 2000 and 1999 due to instantaneous parallel shifts in the yield curve of 100
basis points, with all other variables held constant.
63
The interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Accordingly the analysis may not be
indicative of, is not intended to provide, and does not provide a precise
forecast of the effect of changes of market interest rates on the Company's
earnings or shareholders' equity. Further, the computations do not contemplate
any actions the Company could undertake in response to changes in interest
rates.
The Company's long-term debt, including interest rate swap agreements, as of
December 31, 2000 and 1999 is denominated in U.S. Dollars. The Company's debt
has been primarily issued at fixed rates, and as such, interest expense would
not be impacted by interest rate shifts. The impact of a 100 basis point
increase in interest rates on fixed rate debt would result in a decrease in
market value of $352.0 and $301.7 million, respectively. A 100 basis point
decrease would result in an increase in market value of $398.8 and $335.9
million, respectively.
The sensitivity analysis assumes an instantaneous shift in market interest rates
changing by 100 basis points from their levels at December 31, 2000 and 1999,
with all other variables held constant.
Foreign Exchange Rate Risk - Foreign exchange rate risk arises from the
possibility that changes in foreign currency exchange rates will impact the
value of financial instruments. The Company has foreign exchange rate exposure
when it buys or sells foreign currencies or financial instruments denominated
in a foreign currency. This exposure is mitigated by the Company's
asset/liability matching strategy and through the use of futures for those
instruments which are not matched. The Company's foreign transactions are
primarily denominated in Canadian Dollars, British Pounds and the European
Monetary Unit. The sensitivity analysis also assumes an instantaneous 20%
change in the foreign currency exchange rates versus the U.S. Dollar from their
levels at December 31, 2000 and 1999, with all other variables held constant.
Commodity Price Risk - The Company has exposure to commodity price risk as a
result of its investments in oil swaps and options, and gold options. Commodity
price risk results from changes in the level or volatility of commodity prices
that impact instruments which derive their value from such commodities.
Commodity price risk was measured assuming an instantaneous change of 20% from
their levels at December 31, 2000 and 1999.
64
Item 8. Financial Statements and Supplementary Data.
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
Assets:
- ------------------------------------------------------------------------------
December 31 2000 1999
- ------------------------------------------------------------------------------
(Dollar amounts in millions)
Investments (Notes 1, 2, 3 and 4):
Fixed maturities, amortized cost of
$27,167.5 and $28,637.7 $27,244.3 $27,924.4
Equity securities, cost of $1,462.5
and $1,870.2 2,682.5 4,023.5
Other investments 1,368.5 1,367.3
Short-term investments 9,100.3 7,317.8
- ------------------------------------------------------------------------------
Total investments 40,395.6 40,633.0
Cash 195.2 183.9
Receivables-net (Notes 1 and 5) 15,301.6 13,540.9
Property, plant and equipment-net
(Notes 1 and 6) 3,206.3 2,952.7
Deferred income taxes (Note 8) 404.0 773.9
Goodwill and other intangible assets-net
(Note 1) 378.7 409.5
Other assets (Notes 1, 12, 14 and 15) 4,291.3 3,931.1
Deferred acquisition costs of insurance
subsidiaries (Note 1) 2,417.8 2,435.6
Separate Account business (Notes 1 and 3) 4,286.6 4,603.1
- ------------------------------------------------------------------------------
Total assets $70,877.1 $69,463.7
==============================================================================
See Notes to Consolidated Financial Statements.
65
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
- ------------------------------------------------------------------------------
December 31 2000 1999
- ------------------------------------------------------------------------------
(Dollar amounts in millions)
Insurance reserves (Notes 1 and 7):
Claim and claim adjustment expense $26,962.7 $27,355.9
Future policy benefits 6,669.5 6,102.0
Unearned premiums 4,820.6 5,103.1
Policyholders' funds 601.5 709.9
- ------------------------------------------------------------------------------
Total insurance reserves 39,054.3 39,270.9
Payable for securities purchased (Note 4) 971.4 516.6
Securities sold under agreements to repurchase
(Notes 1 and 2) 1,308.4 1,647.3
Long-term debt, less unamortized discounts
(Notes 3 and 9) 6,040.0 5,706.3
Other liabilities (Notes 1, 3 and 14) 5,817.4 5,391.5
Separate Account business (Notes 1 and 3) 4,286.6 4,603.1
- ------------------------------------------------------------------------------
Total liabilities 57,478.1 57,135.7
- ------------------------------------------------------------------------------
Minority interest 2,207.9 2,350.3
- ------------------------------------------------------------------------------
Commitments and contingent liabilities
(Notes 1, 2, 4, 7, 8, 9, 11, 12, 13,
14, 15 and 17)
Shareholders' equity (Notes 1, 2, 9 and 10):
Common stock, $1 par value:
Authorized - 400,000,000 shares
Issued and outstanding - 98,614,000
and 104,480,600 shares 98.6 104.5
Additional paid-in capital 144.2 150.7
Earnings retained in the business 10,191.6 8,705.9
Accumulated other comprehensive income 756.7 1,016.6
- ------------------------------------------------------------------------------
Total shareholders' equity 11,191.1 9,977.7
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $70,877.1 $69,463.7
==============================================================================
66
Consolidated Statements of Income
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions, except per share data)
Revenues (Note 1):
Insurance premiums (Note 15) $11,471.7 $13,276.7 $13,530.1
Investment income, net of expenses
(Note 2) 2,387.9 2,332.5 2,408.3
Investment gains (losses) (Note 2) 1,313.9 (158.2) 135.7
Manufactured products (including
excise taxes of $667.9, $512.6
and $495.3) 4,383.6 4,125.3 2,936.6
Other 1,780.7 1,888.9 2,285.3
- ------------------------------------------------------------------------------
Total 21,337.8 21,465.2 21,296.0
- ------------------------------------------------------------------------------
Expenses (Note 1):
Insurance claims and policyholders'
benefits (Notes 7 and 15) 9,831.1 11,890.3 11,700.9
Amortization of deferred policy
acquisition costs 1,879.8 2,142.6 2,180.2
Cost of manufactured products sold
(Note 17) 2,251.1 2,116.4 1,027.7
Other operating expenses 3,813.0 4,017.4 4,361.6
Tobacco litigation settlements (Note 17) 579.0
Interest 356.9 354.3 369.2
- ------------------------------------------------------------------------------
Total 18,131.9 20,521.0 20,218.6
- ------------------------------------------------------------------------------
3,205.9 944.2 1,077.4
- ------------------------------------------------------------------------------
Income taxes (Note 8) 1,106.9 305.5 354.5
Minority interest 222.3 117.6 258.1
- ------------------------------------------------------------------------------
Total 1,329.2 423.1 612.6
- ------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 1,876.7 521.1 464.8
Cumulative effect of changes in
accounting principles-net (Note 1) (157.9)
- ------------------------------------------------------------------------------
Net income $ 1,876.7 $ 363.2 $ 464.8
==============================================================================
Net income per share (Note 10):
Income before cumulative effect of
changes in accounting principles $ 18.88 $ 4.80 $ 4.06
Cumulative effect of changes in
accounting principles-net (1.45)
- ------------------------------------------------------------------------------
Net income $ 18.88 $ 3.35 $ 4.06
==============================================================================
Pro forma net income to reflect
two-for-one stock split $ 9.44 $ 1.67 $ 2.03
==============================================================================
See Notes to Consolidated Financial Statements.
67
Consolidated Statements Of Shareholders' Equity
Earnings Accumulated Common
Additional Retained Other Stock
Comprehensive Common Paid-in in the Comprehensive Held in
Income Stock Capital Business Income Treasury Total
- ------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data)
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 10) 403.9 403.9 403.9
---------
Comprehensive income $ 868.7
=========
Dividends paid,
$1.00 per share (114.6) (114.6)
Purchases of common
stock $(218.0) (218.0)
Retirement of
treasury stock (2.4) (3.5) (212.1) 218.0
- ------------------------------------------------------------------------------------------------
Balance, December
31, 1998 112.6 162.3 9,033.5 892.8 10,201.2
Comprehensive income:
Net income $ 363.2 363.2 363.2
Other comprehensive
income (Note 10) 123.8 123.8 123.8
---------
Comprehensive income $ 487.0
=========
Dividends paid,
$1.00 per share (108.9) (108.9)
Purchases of common
stock (601.6) (601.6)
Retirement of
treasury stock (8.1) (11.6) (581.9) 601.6
- ------------------------------------------------------------------------------------------------
Balance, December
31, 1999 104.5 150.7 8,705.9 1,016.6 9,977.7
Comprehensive income:
Net income $ 1,876.7 1,876.7 1,876.7
Other comprehensive
losses (Note 10) (259.9) (259.9) (259.9)
---------
Comprehensive income $ 1,616.8
=========
Equity in certain
transactions of
subsidiary
companies 2.0 2.0
Dividends paid,
$1.00 per share (99.7) (99.7)
Purchases of
common stock (305.7) (305.7)
Retirement of
treasury stock (5.9) (8.5) (291.3) 305.7
- ------------------------------------------------------------------------------------------------
Balance, December
31, 2000 $ 98.6 $144.2 $10,191.6 $ 756.7 $11,191.1
================================================================================================
See Notes to Consolidated Financial Statements.
68
Consolidated Statements Of Cash Flows
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions)
Operating Activities:
Net income $ 1,876.7 $ 363.2 $ 464.8
Adjustments to reconcile net income
to net cash used by operating
activities:
Cumulative effect of changes in
accounting principles 157.9
Investment (gains) losses (1,313.9) 158.2 (135.7)
Provision for minority interest 222.3 117.6 258.1
Amortization of investments (370.5) (301.2) (217.3)
Depreciation and amortization 356.6 395.3 437.0
Provision for deferred income taxes 532.7 153.5 44.4
Changes in assets and liabilities-net:
Reinsurance receivables (1,729.2) 615.9 (523.5)
Other receivables 74.1 (602.8) (122.9)
Prepaid reinsurance premiums 10.7 (152.1) (434.8)
Deferred policy acquisition costs (132.2) (220.8) (280.5)
Insurance reserves and claims (127.6) (1,192.9) 586.3
Other liabilities 447.2 634.7 298.9
Trading securities (157.5) (759.0) (545.7)
Transfer of business-reinsurance (41.3) (1,149.2)
Other-net (114.8) (286.7) 77.6
- ------------------------------------------------------------------------------
(466.7) (2,068.4) (93.3)
- ------------------------------------------------------------------------------
Investing Activities:
Purchases of fixed maturities (60,838.3) (58,532.7) (70,141.5)
Proceeds from sales of fixed maturities 58,345.0 57,211.8 66,429.6
Proceeds from maturities of fixed
maturities 4,222.3 2,995.5 3,564.0
Purchases of equity securities (1,858.0) (1,575.4) (1,072.6)
Proceeds from sales of equity securities 2,941.6 1,803.4 850.8
Purchases of property and equipment (667.2) (708.2) (644.0)
Securities sold under agreements to
repurchase (338.9) 1,067.8 426.8
Change in short-term investments (1,125.2) 507.3 786.6
Change in other investments 336.2 270.0 50.0
- ------------------------------------------------------------------------------
1,017.5 3,039.5 249.7
- ------------------------------------------------------------------------------
69
Consolidated Statements Of Cash Flows
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
(Amounts in millions)
Financing Activities:
Dividends paid to shareholders $ (99.7) $ (108.9) $ (114.6)
Dividends paid to minority interests (33.5) (40.1) (40.7)
Purchases of treasury shares (305.7) (601.6) (218.0)
Purchases of treasury shares by
subsidiaries (127.9) (191.1)
Redemption of preferred stock by
subsidiary (150.0)
Principal payments on long-term debt (166.6) (478.1) (861.9)
Issuance of long-term debt 476.9 225.1 1,073.8
Receipts credited to policyholders 4.8 7.0 6.2
Withdrawals of policyholder
account balances (137.8) (78.0) (20.5)
- ------------------------------------------------------------------------------
(539.5) (1,074.6) (366.8)
- ------------------------------------------------------------------------------
Net change in cash 11.3 (103.5) (210.4)
Cash, beginning of year 183.9 287.4 497.8
- ------------------------------------------------------------------------------
Cash, end of year $ 195.2 $ 183.9 $ 287.4
==============================================================================
See Notes to Consolidated Financial Statements.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
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 - In the first quarter of 2000, the Company adopted the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 98-7, "Deposit Accounting: Accounting for Insurance and
Reinsurance Contracts That Do Not Transfer Insurance Risk." Adoption of SOP
98-7 did not have a material impact on the financial position or results of
operations of the Company.
Effective January 1, 1999, the Company adopted 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 is probable, 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.
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 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
======
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. This bulletin, through its subsequent revised releases,
SAB No. 101A and No. 101B, was effective for registrants no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999.
Adoption of this bulletin, which occurred on October 1, 2000, did not have a
significant impact on the results of operations or equity of the Company.
Common stock split - On February 20, 2001, the Board of Directors declared a
two-for-one stock split, by way of a stock dividend, effective March 21, 2001.
All share and per share data has not been restated to retroactively reflect
the stock split.
Investments - Investments in securities, which are held principally by
insurance subsidiaries of CNA Financial Corporation ("CNA"), an 87% owned
subsidiary, are carried as follows:
The Company classifies fixed maturity securities (bonds and redeemable
preferred stocks) and its 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 interest. The amortized cost of
fixed maturity securities is adjusted for amortization of premiums and
accretion of discounts to maturity, and amortization and accretion are
71
included in investment income. Investments are written down to estimated fair
values and losses are recognized in income when a decline in value is
determined to be other than temporary.
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. Derivatives used to hedge the fair value of
assets or liabilities are classified with the related hedged item in the
consolidated balance sheets. 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.
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% of the fair value
of the securities, 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 fair value of collateral held and
included in short-term investments was $885.0 and $1,300.0 at December 31,
2000 and 1999, respectively. 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.
Insurance Operations - Premium revenues - Insurance premiums on property and
casualty, and accident and health insurance contracts are earned ratably over
the duration of the policies after provision for estimated adjustments on
retrospectively rated policies and deductions for ceded insurance. The reserve
for unearned premium on these contracts represents the portion of premiums
written relating to the unexpired terms of coverage. Revenues on interest
sensitive contracts are comprised of contract charges and fees, which are
recognized over the coverage period. Premiums for other life insurance
products 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
reinsurance, (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. 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.
72
Structured settlements have been negotiated for claims on certain property and
casualty insurance claims. 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, 2000 and 1999, the discounted reserves for unfunded structured settlements
were $884.0 and $883.0, respectively (net of discounts of $1,473.0 and
$1,483.0, 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 6.5%.
At December 31, 2000 and 1999, such discounted reserves totaled $2,205.0 and
$2,174.0, respectively (net of discounts of $940.0 and $893.0, respectively).
Future policy benefits reserves - Reserves for traditional life insurance
products (whole and term life products) and long-term care 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 interest sensitive
contracts are equal to the account balances that accrue to the benefit of the
policyholders. Interest crediting rates ranged from 4.3% to 6.9% for the three
years ended December 31, 2000.
Insurance-related assessments - 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
liabilities for insurance-related assessments when an assessment is probable,
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. Insurance-related assessment liabilities are not
discounted or recorded net of premium taxes. These liabilities are included as
part of other liabilities in the Consolidated Balance Sheets.
Reinsurance - 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. Reinsurance contracts that do not meet the criteria for risk transfer
are recorded in accordance with SOP No. 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
The related deposit assets are recorded as reinsurance receivables in the
Consolidated Balance Sheets.
Deferred acquisition costs - Costs that vary with and are related primarily to
the acquisition of property and casualty insurance business, are deferred and
amortized ratably over the period the related premiums are earned. 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 acquisition costs.
Life insurance business acquisition costs are deferred and amortized based on
assumptions consistent with those used for computing future policy benefits
reserves. Deferred acquisition costs on traditional life business are
amortized over the assumed premium paying periods. The amortization of
deferred acquisition costs for universal life and annuity contracts is matched
to the recognition of gross profits on these contracts. To the extent that
unrealized gains or losses on available-for-sale securities would result in an
adjustment of deferred acquisition costs, had those gains or losses actually
been realized, an adjustment is recorded to deferred acquisition costs and 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 subsidiaries, Continental
Assurance Company ("CAC") and
73
Valley Forge Life Insurance Company ("VFL"), write 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 and VFL
guarantee principal and a specified return to the contract holders on
approximately 57% and 63% of the Separate Account business at December 31,
2000 and 1999, 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 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 ("NAIC"), as well as state
laws, regulations and general administrative rules. CNA's insurance
subsidiaries follow one significant permitted accounting practice related to
discounting of certain non-tabular workers' compensation claims. The effect of
this permitted practice was to increase statutory surplus by approximately
$71.0, $95.0 and $118.0 at December 31, 2000, 1999 and 1998, respectively.
This practice was followed by an acquired company, and CNA received permission
to eliminate the effect of the permitted practice after a 10 year period.
Statutory capital and surplus - Combined statutory capital and surplus and net
income (loss), determined in accordance with accounting practices prescribed
or permitted by the regulations and statutes of various insurance regulators,
for property and casualty and life insurance subsidiaries, are as follows:
Statutory Capital Statutory Net
and Surplus Income (Loss)
--------------------------------------------
December 31 Year Ended December 31
--------------------------------------------
2000 1999 2000 1999 1998
- ------------------------------------------------------------------------------
Property and casualty companies* $8,387.0 $8,679.0 $1,118.0 $361.0 $161.0
Life insurance companies 1,274.0 1,222.0 (47.0) 77.0 (57.0)
- ------------------------------------------------------------------------------
*Surplus includes property and casualty companies' ownership in life insurance
subsidiaries.
Effective January 1, 2001, CNA is required to adopt statutory basis accounting
changes related to the NAIC codification of statutory accounting principles.
CNA estimates that the adoption of this codification, as modified, will
increase statutory capital and surplus as of January 1, 2001 by approximately
$77.0, which primarily relates to deferred tax assets offset by insurance-
related assessments and pension liabilities.
At December 31, 2000 and 1999, CNA maintained statutory deposits of cash and
securities, with carrying values of $1,900.0 and $1,800.0, respectively, under
requirements of regulatory authorities.
Tobacco product inventories - These inventories, aggregating $269.3 and $230.6
at December 31, 2000 and 1999, 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 $205.7 and $212.6 higher at December 31, 2000 and 1999, respectively.
Watch and clock inventories - These inventories, aggregating $56.1 and $36.8
at December 31, 2000 and 1999, 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 ranging from 15 to 30 years. Other intangible assets are amortized on
a straight-line basis over their estimated economic lives. Accumulated
amortization at December 31, 2000 and 1999 was $442.0 and $414.8,
respectively. Amortization expense amounted to $27.2, $30.5 and $101.3 for the
years ended December 31, 2000, 1999 and 1998, respectively.
74
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 $361.3, $336.9 and $322.0 for the years ended December 31, 2000,
1999 and 1998, respectively. Cash payments made for federal, foreign, state
and local income taxes, net of refunds, amounted to approximately $227.9,
$205.2 and $395.1 for the years ended December 31, 2000, 1999 and 1998,
respectively. In 1999, CNA exchanged its interest in Canary Wharf Limited
Partnership into the common stock of Canary Wharf Group, plc. valued at
approximately $539.0.
Accounting pronouncements - In June 2000, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." This statement addresses a limited number of issues causing
implementation difficulties for entities applying SFAS No. 133. SFAS No. 133,
as amended and interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and hedging activities. SFAS No. 133 requires that an entity
recognize all derivative instruments as either assets or liabilities in the
balance sheet and measure those instruments at fair value. A derivative may be
specifically designated as a hedge of the exposures to changes in the fair
value, cash flows or foreign currencies. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and
the resulting designation.
The Company is required to adopt SFAS No. 133 effective January 1, 2001. The
transition adjustment resulting from adoption must be reported in net income
or other comprehensive income, as appropriate, as the cumulative effect of a
change in accounting principle. Adoption of SFAS No. 133 will not have a
material impact on the Company's shareholders' equity. It is estimated that
the initial adoption as of January 1, 2001, will result in a decrease to 2001
earnings of $54.0, net of taxes and minority interest. Of this estimated
transition amount, approximately $50.0, net of taxes and minority interest,
relates to investments and investment-related derivatives (related primarily
to CNA's hedged position in Global Crossing Ltd. ("Global Crossing") common
stock). Because the Company already carries its investment-related derivatives
at fair value through other comprehensive income, there is an equal and
offsetting favorable adjustment of $50.0, to shareholders' equity. The
remainder of the estimated transition adjustment is attributable to
collateralized debt obligation products that are derivatives under SFAS No.
133.
In 2001, the Company is required to implement the provisions of the FASB's
Emerging Issues Task Force Issue No. 00-14, "Accounting for Certain Sales
Incentives." This Issue addresses the recognition, measurement, and income
statement classification for sales incentives offered voluntarily by a vendor
without charge to customers that can be used in, or that are exercisable by a
customer as a result of, a single exchange transaction. Implementation of the
recognition and measurement cri-
75
teria will not have a material impact to the Company's results of operations
or equity. Implementation of this Issue will result in reclassifying certain
promotional expenses from Other Operating Expenses to become a reduction of
Revenues from Manufactured Products.
Reclassification - Certain amounts applicable to prior periods have been
reclassified to conform to the classifications followed in 2000.
Note 2. Investments -
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
Investment income consisted of:
Fixed maturity securities $1,798.0 $1,814.8 $1,911.2
Short-term investments 420.2 362.4 404.7
Other 219.9 213.5 168.4
- ------------------------------------------------------------------------------
Total investment income 2,438.1 2,390.7 2,484.3
Investment expenses (50.2) (58.2) (76.0)
- ------------------------------------------------------------------------------
Investment income-net $2,387.9 $2,332.5 $2,408.3
==============================================================================
Investment gains (losses) are as follows:
Trading securities:
Derivative instruments (a) $ (135.9) $ (385.1) $ (285.3)
Equity securities, including
short positions (a) 131.2 (47.0) (251.4)
- ------------------------------------------------------------------------------
(4.7) (432.1) (536.7)
Other than trading:
Fixed maturities (113.0) (313.1) 469.3
Equity securities 1,109.9 356.7 38.1
Short-term investments (2.4) 19.5 (21.4)
Other, including guaranteed
Separate Account business 324.1 210.8 186.4
- ------------------------------------------------------------------------------
Investment gains (losses) 1,313.9 (158.2) 135.7
Income tax (expense) benefit (458.5) 49.1 (56.2)
Minority interest (112.9) (27.5) (67.0)
- ------------------------------------------------------------------------------
Investment gains (losses)-net $ 742.5 $ (136.6) $ 12.5
==============================================================================
(a) Includes losses on short sales, equity index futures and options
aggregating $14.5, $533.6 and $584.3 for the years ended December 31, 2000,
1999 and 1998, respectively. The Company has maintained short positions, in
the form of futures or options - most recently as put options - since 1996.
Substantially all of the index short positions were closed during the second
quarter of 2000.
The carrying value of investments (other than equity securities) that did not
produce income for the last twelve months is $35.5 at December 31, 2000.
Investment gains of $1,826.3, $854.0 and $1,448.4 and losses of $831.8, $790.9
and $962.4 were realized on securities available for sale for the years ended
December 31, 2000, 1999 and 1998, respectively. Investment gains (losses) in
2000, 1999 and 1998 also include $16.5, $306.4 and $159.2 of net unrealized
losses on equity securities in the Company's trading portfolio.
76
The amortized cost and market values of securities are as follows:
Unrealized
Amortized -------------------- Market
December 31, 2000 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------
U.S. government and obligations of
government agencies $ 5,666.1 $ 202.9 $ 2.9 $ 5,866.1
Asset-backed 7,548.5 99.8 25.2 7,623.1
States, municipalities and political
subdivisions-tax exempt 3,279.3 79.2 9.1 3,349.4
Corporate 7,262.4 149.2 344.0 7,067.6
Other debt 3,357.2 62.5 135.3 3,284.4
Redeemable preferred stocks 54.0 .2 .5 53.7
- ------------------------------------------------------------------------------------------------
Total fixed maturities available for sale 27,167.5 593.8 517.0 27,244.3
Equity securities available for sale 1,175.1 1,400.1 163.6 2,411.6
Equity securities, trading portfolio 287.4 58.3 74.8 270.9
Short-term investments available for sale 9,100.7 .6 1.0 9,100.3
- ------------------------------------------------------------------------------------------------
$37,730.7 $2,052.8 $ 756.4 $39,027.1
================================================================================================
December 31, 1999
- ------------------------------------------------------------------------------------------------
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
================================================================================================
The amortized cost and market value of fixed maturities at December 31, 2000 and 1999 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.
2000 1999
-------------------------------------------------
Amortized Market Amortized Market
December 31, 2000 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------
Due in one year or less $ 1,217.4 $ 1,209.4 $ 1,560.0 $ 1,546.3
Due after one year through five years 5,049.8 5,015.4 7,039.4 6,907.5
Due after five years through ten years 7,241.0 7,138.7 7,043.7 6,560.7
Due after ten years 6,110.8 6,257.7 5,741.1 5,870.8
Asset-backed securities not due at a
single maturity date 7,548.5 7,623.1 7,253.5 7,039.1
- ------------------------------------------------------------------------------------------------
$27,167.5 $27,244.3 $28,637.7 $27,924.4
================================================================================================
77
As of December 31, 2000, CNA owned 19.3 million shares of Global Crossing
common stock valued at $277.0, representing approximately 2.2% of Global
Crossing's outstanding common stock. During the first quarter of 2000, CNA
entered into option agreements intended to hedge market risk associated with
approximately 19.3 million shares of Global Crossing common stock. These
option agreements were structured as a collar in which CNA purchased put
options and sold call options on Global Crossing common stock. As of December
31, 2000, the average exercise prices were $51.70 and $64.93 on the put
options and call options, respectively, subject to adjustments on the call
options under certain limited circumstances. The options expire in the first
half of 2002 and are only exercisable on their expiration dates. CNA has
designated the collar as a hedge of its investment in Global Crossing common
stock. Accordingly, the fair value of the collar is presented in equity
securities available-for-sale in the accompanying Consolidated Balance Sheets,
consistent with the hedged item. Additionally, as of December 31, 2000, CNA
holds collateral, included in short-term investments, with a fair value of
$462.0. The unrealized gain on CNA's position in Global Crossing common stock,
including the fair market value of the related hedge, was $902.0 and $1,764.0
as of December 31, 2000 and 1999, respectively.
Changes in CNA's investment in Global Crossing, on a pre-tax basis, were as
follows:
Year ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------------------------
(Decrease) increase in unrealized gain on common stock $(1,525.0) $924.0 $828.0
Increase in unrealized gain on options collar 663.0
- ------------------------------------------------------------------------------------------------
Net (decrease) increase in unrealized gain on position
in Global Crossing common stock $ (862.0) $924.0 $828.0
================================================================================================
Realized gains on sales of Global Crossing common stock $ 485.0 $222.0 $ 63.0
================================================================================================
CNA's holdings of Global Crossing were not acquired in a public offering. The
shares may not be sold to the public unless the sale is registered or exempt
from the registration requirements of the Securities Act of 1933 (the "Act")
including sales pursuant to Rule 144. CNA has the right to require Global
Crossing to register, under the Act, all of its current holdings.
78
Note 3. Fair Value of Financial Instruments -
2000 1999
- ------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
December 31 Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------
Financial assets:
Other investments $1,363.0 $1,351.0 $1,365.0 $1,350.0
Separate Account business:
Fixed maturities securities 2,703.0 2,703.0 3,260.0 3,260.0
Equity securities 215.0 215.0 260.0 260.0
Other 849.0 849.0 493.0 493.0
Financial liabilities:
Premium deposits and annuity
contracts 1,486.0 1,419.0 1,293.0 1,240.0
Long-term debt 6,000.0 5,747.0 5,664.7 5,292.0
Financial guarantee contracts 150.0 128.0 124.0 112.0
Separate Account business:
Guaranteed investment
contracts 882.0 880.0 1,516.0 1,518.0
Variable Separate Accounts 1,387.0 1,387.0 1,505.0 1,505.0
Deferred annuities 114.0 115.0 117.0 125.0
Other 623.0 623.0 571.0 571.0
- ------------------------------------------------------------------------------
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 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 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.
79
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 were
estimated 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 were 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 value for other long-term debt was based on quoted market prices of
comparable instruments adjusted for differences between the quoted instruments
and the instruments being valued or is 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) asset
and liability management activities; (ii) income enhancements for its
portfolio management strategy; and (iii) to benefit from anticipated future
movements in the underlying markets. If such movements do not occur as
anticipated, then 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.
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.
80
The Company's investments in derivative instruments are as follows:
Fair Value Asset
(Liability)
--------------------
Contractual/ Average Recognized
Notional for (Loss)
December 31, 2000 Value Year-End the Year Gain
- ------------------------------------------------------------------------------------------------
Equity markets:
Options
Purchased-Global Crossing $1,000.0 $664.0 $400.9
-other 173.0 23.7 379.2 $(166.3)
Written-Global Crossing 1,256.0 (1.0) (37.6)
-other 269.6 (17.5) (63.5) 39.8
Index futures-long (2.7)
-short 2.3 .8
Interest rate risk:
Commitments to purchase government
and municipal securities 2.1 5.0
Interest rate caps 500.0 1.0 2.2 (3.0)
Futures-long 229.0 7.9
-short 806.2 (25.8)
Foreign currency forwards 13.0 12.9 44.3
Commodities:
Oil:
Swaps (9.9) (2.1)
Options 1.2 2.8
Gold:
Options-purchased 232.5 11.8 18.6 2.4
-written (5.6) (5.2)
Other 8.6 (7.8) 13.9
- ------------------------------------------------------------------------------------------------
Total $4,490.2 $682.0 $692.7 $ (88.2)
================================================================================================
81
Fair Value Asset
(Liability)
--------------------
Contractual/ Average Recognized
Notional for (Loss)
December 31, 1999 Value Year-End the Year Gain
- ------------------------------------------------------------------------------------------------
Equity markets:
Options-purchased $5,279.3 $188.9 $ 761.0 $(562.9)
-written 1,097.1 (25.8) (103.9) 42.1
Index futures-long 204.1 72.3
-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)
-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
-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)
================================================================================================
December 31, 1998
- ------------------------------------------------------------------------------------------------
Equity markets:
Options-purchased $3,950.4 $212.5 $1,206.6 $(289.4)
-written 1,085.5 (39.7) (97.9) 73.1
Index futures-long 186.2 155.2
-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)
-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)
================================================================================================
82
CNA had entered into interest rate swap agreements to convert the variable
rate of its borrowings under a bank credit facility and its 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. CNA was party
to interest rate swap agreements with several banks with an aggregate notional
principal amount of $650.0 at December 31, 1999. Those agreements, which
terminated December 14, 2000, effectively fixed CNA's interest cost on $650.0
of variable rate debt for 1998, 1999 and most of 2000.
CNA also uses derivatives to mitigate the risk associated with its indexed
group annuity contracts (a separate account product) by purchasing Standard &
Poor's 500 ("S&P 500") index futures contracts in a notional amount equal to
the contract holder liability, which is calculated using the S&P 500 rate of
return. The gross notional principal or contractual amounts of these
instruments in the Separate Accounts were $1,411.0 and $1,627.0 at December
31, 2000 and 1999, respectively.
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 $224.7 and $201.8 with fair value liabilities of
$201.1 and $218.5 at December 31, 2000 and 1999, 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 value
is estimated using values obtained from independent pricing services, quoted
market prices of comparable instruments or present value models.
CNA's property and casualty operations write financial guarantee insurance
contracts, which guarantee corporate credit and asset-backed securities.
Premiums are received throughout the exposure period and are recognized as
revenue in proportion to the underlying risk insured. In addition, 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 represented primarily industrial development bond
guarantees and, in the case of insured equity policies, typically extended in
initial terms from 10 to 13 years. For these guarantees and policies, CNA
received an advance premium which is recognized over the exposure period in
proportion to the underlying risk insured.
At December 31, 2000 and 1999, gross exposure on financial guarantee surety
bonds and insured equity policies was $249.0 and $352.0, 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 39% and 37% of the
risks were ceded to reinsurers at December 31, 2000 and 1999, respectively.
Total exposure, net of reinsurance, amounted to $151.0 and $222.0 at December
31, 2000 and 1999, respectively. At December 31, 2000 and 1999, collateral
consisting of letters of credit, cash reserves and debt service reserves
amounted to $7.0 and $43.0, respectively.
Gross unearned premium reserves for financial guarantee contracts were $23.0
and $11.0 at December 31, 2000 and 1999, respectively. Gross claim and claim
adjustment expense reserves totaled $127.0 and $113.0 at December 31, 2000 and
1999, respectively.
83
Note 5. Receivables -
December 31 2000 1999
- ------------------------------------------------------------------------------
Reinsurance $ 9,397.3 $ 7,402.6
Other insurance 5,026.3 5,114.8
Security sales 470.5 308.6
Accrued investment income 424.3 400.6
Other 331.9 651.1
- ------------------------------------------------------------------------------
Total 15,650.3 13,877.7
Less allowance for doubtful accounts and
cash discounts 348.7 336.8
- ------------------------------------------------------------------------------
Receivables-net $15,301.6 $13,540.9
==============================================================================
Note 6. Property, Plant and Equipment -
December 31 2000 1999
- ------------------------------------------------------------------------------
Land $ 128.8 $ 116.0
Buildings and building equipment 831.5 770.4
Offshore drilling rigs and equipment 2,682.9 2,360.1
Machinery and equipment 1,381.3 1,254.5
Leaseholds and leasehold improvements 123.2 125.0
- ------------------------------------------------------------------------------
Total, at cost 5,147.7 4,626.0
Less accumulated depreciation and amortization 1,941.4 1,673.3
- ------------------------------------------------------------------------------
Property, plant and equipment-net $ 3,206.3 $ 2,952.7
==============================================================================
Depreciation and amortization expense, including amortization of intangibles,
and capital expenditures, are as follows:
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Depr. & Capital Depr. & Capital Depr. & Capital
Amort. Expend. Amort. Expend. Amort. Expend.
- ------------------------------------------------------------------------------------------------
CNA Financial $151.0 $151.8 $199.5 $250.2 $261.1 $261.1
Lorillard 25.0 30.1 23.9 20.7 22.4 20.1
Loews Hotels 24.8 129.1 19.8 110.1 16.3 131.3
Diamond Offshore 148.8 323.9 145.3 324.1 130.3 224.5
Bulova .9 1.1 .7 .7 .7 4.3
Corporate 6.1 31.2 6.1 2.4 6.2 2.7
- ------------------------------------------------------------------------------------------------
Total $356.6 $667.2 $395.3 $708.2 $437.0 $644.0
================================================================================================
In January 2000, the Company sold a jack-up drilling rig for $32.0 resulting
in a gain of $13.9 ($4.7 after tax and minority interest).
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.
84
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 that 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 factors 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 affect 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 2000, 1999 and 1998:
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
Reserves at beginning of year:
Gross $26,631.0 $28,317.0 $28,533.0
Ceded 6,273.0 5,424.0 5,326.0
- ------------------------------------------------------------------------------
Net reserves at beginning of year 20,358.0 22,893.0 23,207.0
- ------------------------------------------------------------------------------
Net reserves transferred under
retroactive reinsurance agreements (1,024.0)
Net reserves of acquired insurance
companies at date of acquisition 122.0
- ------------------------------------------------------------------------------
Total net adjustments (1,024.0) 122.0
- ------------------------------------------------------------------------------
Net incurred claims and claim
adjustment expenses:
Provision for insured events of
current year 6,331.0 7,287.0 7,903.0
Increase in provision for insured
events of prior years 427.0 1,027.0 263.0
Amortization of discount 158.0 139.0 143.0
- ------------------------------------------------------------------------------
Total net incurred 6,916.0 8,453.0 8,309.0
- ------------------------------------------------------------------------------
Net payments attributable to:
Current year events 1,888.0 2,744.0 2,791.0
Prior year events 6,916.0 7,460.0 5,954.0
Reinsurance recoverable against
net reserves transferred under
retroactive reinsurance agreements
(see Note 12) (370.0) (240.0)
- ------------------------------------------------------------------------------
Total net payments 8,434.0 9,964.0 8,745.0
- ------------------------------------------------------------------------------
Net reserves at end of year 18,840.0 20,358.0 22,893.0
Ceded reserves at end of year 7,568.0 6,273.0 5,424.0
- ------------------------------------------------------------------------------
Gross reserves at end of year (a) $26,408.0 $26,631.0 $28,317.0
==============================================================================
(a) Excludes life claim and claim adjustment expense reserves of $554.7,
$724.9 and $836.7 as of December 31, 2000, 1999 and 1998, respectively,
included in the Consolidated Balance Sheets.
85
The increase (decrease) in provision for insured events of prior years
(reserve development), is comprised of the following components:
2000 1999 1998
- ------------------------------------------------------------------------------
Environmental Pollution and Other Mass Tort $ 17.0 $ (84.0) $ 227.0
Asbestos 65.0 560.0 243.0
Other 345.0 551.0 (207.0)
- ------------------------------------------------------------------------------
Total $427.0 $1,027.0 $ 263.0
==============================================================================
CNA's property and casualty insurance companies have potential exposures
related to environmental pollution and other mass tort and asbestos claims.
Environmental pollution cleanup is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to cleanup. 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
cleanup and restoration of toxic waste sites and formalize the concept of
legal liability for cleanup and restoration by Potentially Responsible Parties
("PRPs"). Superfund and the mini-Superfunds establish mechanisms to pay for
cleanup 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 cleanup is unknown. To
date, approximately 1,500 cleanup sites have been identified by the
Environmental Protection Agency ("EPA") on its National Priorities List
("NPL"). The addition of new cleanup sites to the NPL has slowed in recent
years. State authorities have designated many cleanup sites 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 form, which includes an absolute pollution exclusion. CNA and the
insurance industry are disputing coverage for many such claims. Key coverage
issues include whether cleanup costs are considered damages under the
policies, trigger of coverage, allocation of liability among triggered
polices, applicability of pollution exclusions and owned property exclusions,
the potential for joint and several liability and the 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 during 2000 and it is unclear
what positions the Congress or the administration will take and what
legislation, if any, will result in the future. If there is legislation, and
in some circumstances even if there is no legislation, the federal role in
environmental cleanup 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 cleanup statutes and
regulations. There can be no meaningful prediction of the pattern of
regulation that would result.
Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to cleanup, and the
standards for cleanup and liability, the ultimate liability of CNA for
environmental pollution claims may vary substantially from the amount
currently recorded.
86
The following table provides data related to CNA's environmental pollution,
other mass tort and asbestos claim and claim adjustment expense reserves:
December 31 2000 1999
- ------------------------------------------------------------------------------
Environmental Environmental
Pollution and Pollution and
Other Mass Other Mass
Tort Asbestos Tort Asbestos
- ------------------------------------------------------------------------------
Gross reserves $ 493.0 $ 848.0 $ 618.0 $ 946.0
Less ceded reserves (146.0) (245.0) (155.0) (262.0)
- ------------------------------------------------------------------------------
Net reserves $ 347.0 $ 603.0 $ 463.0 $ 684.0
==============================================================================
As of December 31, 2000, 1999 and 1998, CNA carried $347.0, $463.0 and $787.0,
respectively, of claim and claim expense reserves, net of reinsurance
recoverables, for reported and unreported environmental pollution and other
mass tort claims. In 2000, CNA recorded $17.0 of adverse development compared
with $84.0 of favorable development in 1999 and $227.0 of adverse development
in 1998. These changes were based upon CNA's continuous review of these types
of exposures, as well as its internal studies and annual analysis of
environmental pollution and other mass tort claims. The analysis of activity
in calendar year 2000 indicated a slight deterioration in pollution claims.
The analysis completed in 1999 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 property-casualty insurance subsidiaries also have exposure to asbestos
claims. Estimation of asbestos claim and claim adjustment expense 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, 2000, 1999 and 1998, CNA carried approximately $603.0,
$684.0 and $1,456.0, respectively, of claim and claim adjustment expense
reserves, net of reinsurance recoverables, for reported and unreported
asbestos claims. In 2000, CNA recorded $65.0 of adverse development compared
with $560.0 and $243.0 in 1999 and 1998, respectively. The reserve
strengthening in 2000 for asbestos 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 and asbestos claims similar to the results noted in both 1999 and 1998.
The factors that have led to the deterioration in claim counts include
intensive advertising campaigns by lawyers for asbestos claimants and the
addition of new defendants, such as distributors of asbestos containing
products.
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.
Unfavorable claim and claim adjustment expense reserve development for other
lines in 2000 was due to unfavorable loss experience in standard commercial
lines, assumed reinsurance and accident and health lines. These unfavorable
changes were partially offset by favorable development in non-medical
professional liability and other casualty lines. The unfavorable development
in standard commercial lines can be attributed to adverse claim experience for
recent accident years in the commercial auto liability, commercial multi-peril
and workers' compensation lines of business. The unfavorable development in
the assumed reinsurance and accident and health lines also resulted from
adverse claims experience.
Unfavorable claim and claim adjustment expense reserve development for other
lines in 1999 of $551.0 was due to unfavorable loss development of
approximately $540.0 for
87
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 did not decrease 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 was 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 the commercial lines business and approximately $105.0 of favorable
loss development in personal lines business. The favorable development in the
commercial lines of 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 auto lines of business was attributable
to improved trends, particularly in personal auto liability.
CNA's insurance subsidiaries also have exposure to construction defect losses,
principally in its general liability and commercial multiple peril lines. This
exposure relates to claims involving property damage alleging loss of use,
damage, destruction or deterioration of land, buildings and other structures
involving new construction or major rehabilitation of real property. Many of
these claims involve multiple defects and multiple defendants. The majority of
losses have been concentrated in a limited number of states, including
California. CNA has taken several underwriting actions to mitigate this
exposure in the future. Estimation of construction defect losses is subject to
a high level of uncertainty due to the long period of time between the
accident date and the reporting of the claim, emerging case law, changing
regulatory rules and the allocation of damages to the multiple defendants. Due
to the inherent uncertainties noted above, the ultimate liability for
construction defect claims may vary substantially from the amount currently
recorded.
88
Note 8. Income Taxes -
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
Income taxes:
Federal:
Current $ 489.5 $ 17.2 $195.0
Deferred 536.1 180.0 51.8
State, city and other:
Current 84.7 134.8 115.1
Deferred (3.4) (26.5) (7.4)
- ------------------------------------------------------------------------------
Total $1,106.9 $305.5 $354.5
==============================================================================
Deferred tax assets (liabilities) are as follows:
December 31 2000 1999
- ------------------------------------------------------------------------------
Insurance reserves:
Property and casualty claim reserves $ 864.1 $1,081.8
Unearned premium reserves 294.2 334.7
Life reserve differences 187.4 213.4
Others 20.9 26.9
Deferred acquisition costs (762.9) (777.9)
Postretirement benefits other than pensions 197.4 239.2
Property, plant and equipment (243.7) (228.5)
Investments (89.2) (18.3)
Foreign affiliates related 110.0 44.7
Tobacco litigation settlements 286.0 253.6
Unrealized appreciation (472.6) (629.0)
Net operating loss carryforwards 137.1
Accrued assessments and guarantees 43.1 72.1
Receivables 82.5 80.5
Other-net (113.2) (56.4)
- ------------------------------------------------------------------------------
Deferred tax assets-net $ 404.0 $ 773.9
==============================================================================
Gross deferred tax assets amounted to $2,484.7 and $2,869.1 and liabilities
amounted to $2,080.7 and $2,095.2 for the years ended December 31, 2000 and
1999, respectively.
The Company has a history of profitability and as such, management believes it
is more likely than not that the net deferred tax assets will be realized.
Total income tax expense for the years ended December 31, 2000, 1999 and 1998
was different than the amounts of $1,122.1, $330.5 and $377.1, 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.
89
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 2000 1999 1998
- ------------------------------------------------------------------------------
Statutory rate 35% 35% 35%
(Decrease) increase in income tax rate
resulting from:
Exempt interest and dividends received deduction (2) (9) (9)
State and city income taxes and other 2 6 7
- ------------------------------------------------------------------------------
Effective income tax rate 35% 32% 33%
==============================================================================
The Company has entered into separate tax allocation agreements with 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 that
would have been payable by the Subsidiary if it had filed a separate
consolidated return.
Under these agreements, CNA will pay approximately $64.0 for 2000. In 1999 and
1998 CNA received $288.0 and $83.0, 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.
90
Note 9. Long-Term Debt -
Unamortized Current
December 31, 2000 Principal Discount Net Maturities
- ------------------------------------------------------------------------------
Loews Corporation $2,325.0 $34.0 $2,291.0
CNA 2,742.1 13.5 2,728.6 $ 638.4
Diamond Offshore 866.3 12.1 854.2 409.7
Other 166.2 166.2 6.4
- ------------------------------------------------------------------------------
Total $6,099.6 $59.6 $6,040.0 $1,054.5
==============================================================================
December 31 2000 1999
- ------------------------------------------------------------------------------------------------
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) 134.0 145.5
6.5% notes due 2005 (effective interest rate of 6.6%)
(authorized, $500) 492.8 500.0
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) 69.6 82.2
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) 243.0 250.0
Commercial Paper (weighted average yield 7.2% and 6.5%) 627.1 675.0
Bank revolving credit due 2001 (effective interest rate of 6.7%) 77.0
Revolving credit facility due 2002 (effective interest rate 7.0% and
6.5%) 100.0 100.0
Other senior debt (effective interest rates approximate 7.9% and 7.9%) 75.6 67.9
Diamond Offshore Drilling, Inc.:
3.8% convertible subordinated notes due 2007 (effective interest
rate of 3.9%) (authorized, $400) (d) 400.0 400.0
Zero coupon convertible debentures due 2020, net of discount
of $394.8 (effective interest rate of 3.6%) (e) 410.2
Other subordinated debt due 2005 (effective interest rate of 7.1%) 56.1
Other senior debt, principally mortgages (effective interest rates
approximate 8.5% and 8.1%) 166.2 140.0
- ------------------------------------------------------------------------------------------------
6,099.6 5,762.6
Less unamortized discount 59.6 56.3
- ------------------------------------------------------------------------------------------------
Long-term debt, less unamortized discount $6,040.0 $5,706.3
================================================================================================
91
(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. On March 7, 2001,
Diamond Offshore announced it will redeem all of the notes on April 6, 2001, at a price of
102.1%.
(e) The debentures are convertible into Diamond Offshore's common stock at the rate of 8.6075
shares per one thousand dollars principal amount, subject to adjustment. Each debenture will
be purchased by Diamond Offshore at the option of the holder on the fifth, tenth and
fifteenth anniversaries of issuance at the accreted value through the date of repurchase.
Diamond Offshore, at its option, may elect to pay the purchase price in cash or shares of
common stock, or in certain combinations thereof. The debentures are redeemable at the
option of Diamond Offshore at any time after June 6, 2005, at prices which reflect a yield
of 3.5% to the holder. The debentures are senior unsecured obligations of Diamond Offshore.
On June 6, 2000, Diamond Offshore issued zero coupon convertible debentures in
the principal amount at maturity of $805.0, due June 6, 2020, and received net
proceeds of approximately $392.6. These debentures were issued at a price of
49.96% of the principal amount for a yield of 3.5% per annum to maturity.
CNA has a $750.0 revolving credit facility that expires in May 2001. The
amount available is reduced by CNA's outstanding commercial paper borrowing.
As of December 31, 2000, there was $122.9 of unused borrowing capacity under
the facility. The interest rate on the bank loans is based on the London
Interbank Offered Rate ("LIBOR"), plus 27.5 basis points. Additionally, there
is an annual facility fee of 12.5 basis points on the entire facility. There
were no borrowings under the facility at December 31, 2000. The average
interest rate on the borrowings under the credit facility, excluding fees, at
December 31, 1999 was 6.7%.
The weighted average interest rate on commercial paper was 7.2%, 6.5% and 5.9%
at December 31, 2000, 1999 and 1998, respectively. At December 31, 2000,
commercial paper had a weighted average maturity of 22 days.
To offset the variable rate characteristics of the facility and the interest
rate risk associated with periodically reissuing commercial paper, CNA was
party to interest rate swap agreements with several banks. The last of these
agreements expired on December 14, 2000. These agreements required CNA to pay
interest at a fixed rate, in exchange for the receipt of the three month
LIBOR. The effect of the interest rate swap agreements decreased interest
expense by approximately $2.0 for the year ended December 31, 2000 and
increased interest expense by approximately $4.0 and $2.0 for the years ended
December 31, 1999 and 1998, respectively.
The combined weighted average cost of facility borrowings and commercial paper
borrowings, including facility fees, and interest rate swaps, was 7.4%, 6.5%
and 6.4% at December 31, 2000, 1999 and 1998, respectively.
CNA repurchased and retired all of its outstanding $150.0 of money market
preferred stock in early 2000. In addition, during 2000, CNA repurchased
approximately $38.0 of its senior notes.
The aggregate of long-term debt maturing in each of the next five years is
approximately as follows: $1,054.5 in 2001, $130.7 in 2002, $401.2 in 2003,
$78.6 in 2004 and $553.8 in 2005.
Payment of dividends by insurance subsidiaries of CNA without prior regulatory
approval is limited to certain formula-derived amounts. At December 31, 2000,
approximately $5,900.0 of retained earnings was not available for dividends
without insurance department pre-approval.
92
Note 10. 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.
Companies with complex capital structures are required to present basic and
diluted earnings per share. Basic earnings per share excludes dilution and is
computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Earnings per
common share-assuming dilution, is the same as basic earnings per share
because the impact of securities that could potentially dilute basic earnings
per common share is insignificant.
Earnings per share are based on the weighted average number of shares
outstanding during each year (99,366,411, 108,533,368 and 114,539,080 for the
years ended December 31, 2000, 1999 and 1998, respectively).
The components of accumulated other comprehensive income (loss) are as
follows:
Accumulated
Other
Unrealized Minimum Comprehensive
Gains (Losses) Foreign Pension Income
on Investments Currency Liability (Loss)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 443.7 $ 45.2 $ 488.9
Unrealized holding gains, net of tax of $323.0 509.8 509.8
Adjustment for items included in net income,
net of tax of $77.9 and $4.5 (114.7) 8.4 (106.3)
Foreign currency translation adjustment, net
of tax of $.6 6.0 6.0
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
Unrealized holding gains, net of tax of $149.4 271.4 271.4
Adjustment for items included in net income,
net of tax of $312.9 (506.8) (506.8)
Foreign currency translation adjustment, net
of tax of $.9 (24.2) (24.2)
Minimum pension liability adjustment, net of
tax of $.2 (.3) (.3)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 760.3 $ .3 $(3.9) $ 756.7
================================================================================================
93
Note 11. 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 $93.7, $94.0 and $151.3 for the years ended December 31,
2000, 1999 and 1998, respectively. The table below presents the future minimum
lease payments to be made under non-cancelable operating leases along with
lease and sublease minimum receipts to be received on owned and leased
properties.
Future Minimum Future Minimum
Year Ended December 31 Lease Payments Lease Receipts
- ------------------------------------------------------------------------------
2001 $134.7 $ 54.0
2002 121.5 54.2
2003 96.4 50.0
2004 75.1 46.1
2005 65.0 43.6
Thereafter 280.4 253.2
- ------------------------------------------------------------------------------
Total $773.1 $501.1
==============================================================================
Note 12. Significant Transactions -
Individual Life Reinsurance Transaction
Effective December 31, 2000, CNA completed a transaction with Munich American
Reassurance Company ("MARC"), whereby MARC acquired CNA's individual life
reinsurance business ("CNA Life Re") via an indemnity reinsurance agreement.
CNA will continue to accept and retrocede business on existing CNA Life Re
contracts until such time that CNA and MARC are able to execute novations of
each of CNA Life Re's assumed and retroceded reinsurance contracts.
MARC assumed approximately $294.0 of liabilities (primarily future policy
benefits and claim reserves) and approximately $209.0 in assets (primarily
uncollected premium and deferred policy acquisition costs). The net gain from
the reinsurance transaction, which is subject to certain post-closing
adjustments, has been recorded as deferred revenue, and will be recognized in
income over the next 12 to 18 months as CNA Life Re's assumed contracts are
novated to MARC.
The CNA Life Re business contributed net earned premiums of $229.0, $194.0 and
$134.0, and pre-tax operating income of $33.0, $28.0 and $12.0 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Personal Insurance Transaction
On October 1, 1999, certain subsidiaries of CNA completed a transaction with
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 and unearned premium
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 GAAP carrying value as of the exercise date. Also, CNA invested
$75.0 in a 10 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, CNA 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 has the
opportunity to exercise its option. CNA continues to have primary liability on
policies reinsured by Allstate.
94
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 from
the transaction date. 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, subject to
adjustment in 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 inures 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 cession of claim and claim adjustment expense reserves approximating
$1,000.0, was not recognized as reinsurance because the criteria for risk
transfer were 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 or the option expires.
CNA recognized an after-tax realized loss of approximately $39.0 in 1999
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 $120.0 ceding commission related to
the prospective portion of the transaction has been recognized in proportion
to the recognition of the unearned premium reserve to which it relates. Ceding
commission earned was $69.0 and $51.0 in 2000 and 1999, respectively. Royalty
fees earned in 2000 and 1999 were approximately $27.0 and $7.0, respectively.
The Personal Insurance lines transferred to Allstate contributed net earned
premiums of $1,354.0 and $1,622.0 and pre-tax operating income of $89.0 and
$97.0 for the years ended December 31, 1999 and 1998, 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 date of sale were
approximately $135.0. CNA's share of AMS' operating results were $206.0 and
$264.0 of operating revenue and $8.0 and $28.0 of operating losses for the
eleven months ended November 30, 1999 and the year ended December 31, 1998,
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 related primarily to the following
activities: planned reductions in the workforce; the consolidation of certain
processing centers; the exiting of certain businesses and office facilities;
the termination of lease obligations; and the write-off of certain assets
related to these activities. The Plan contemplated 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.
95
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, had been released.
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 cost 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 $88.0. These charges included lease termination costs of
approximately $8.0 associated with the consolidation of claim offices in 36
market territories. 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 claim
adjusters and office support staff.
The charges related to fixed and intangible assets were due primarily 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. Based on a discounted cash flow
analysis, a $59.0 write-off 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
96
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 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.
No restructuring-related charges related to the Plan were incurred during
2000; however, payments were made during 2000 related to amounts accrued under
the Plan as of December 31, 1999.
The following table sets forth the major categories of the restructuring
accrual and changes therein during the years ended December 31, 2000, 1999 and
1998.
Employee
Termination
and
Related Lease
Benefit Writedown Termination Business
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
Payments charged against liability (4.0) (20.0) (15.0) (39.0)
- ------------------------------------------------------------------------------------------------
Accrued costs at December 31, 2000 $ 7.0 $ 7.0
================================================================================================
97
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.
Benefits for another plan are determined 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) applied to
accrued balances.
The Company's funding policy is to make contributions in accordance with
applicable governmental 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 2000, CNA recorded pre-tax curtailment charges of approximately $13.0
related to employee's elections regarding participation in a defined benefit
pension plan. This change resulted in a reduction of the pension benefit
obligation of $37.0.
In 1999, CNA recorded pre-tax 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 reduction in pension and postretirement benefit obligations of
approximately $10.0 and $48.0, respectively.
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.
98
The weighted average rates used in the actuarial assumptions were:
Pension Benefits Other Postretirement Benefits
--------------------------------------- -----------------------------
Year Ended December 31 2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Discount rate 7.5% 7.8% to 8.0% 6.8% 7.5% 7.8% to 8.0% 6.8%
Expected return
on plan assets 7.8% to 8.0% 6.8% to 8.0% 7.0%
Rate of compensation
increase 5.5% to 5.8% 5.5% to 5.7% 5.5% to 5.7%
- ------------------------------------------------------------------------------------------------
Net periodic benefit cost components:
Other Postretirement
Pension Benefits Benefits
---------------------------- ------------------------
Year Ended December 31 2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Service cost $ 45.1 $ 79.6 $ 72.6 $ 10.1 $ 14.8 $14.7
Interest cost 187.4 180.9 175.7 33.0 31.4 37.7
Expected return on plan assets (172.2) (145.3) (141.9)
Amortization of unrecognized net asset 5.6 5.6 3.6
Amortization of unrecognized net loss
(gain) 2.5 11.9 7.4 (4.4) (3.4) (5.9)
Amortization of unrecognized prior
service cost 7.7 9.9 14.2 (17.6) (14.3) (5.0)
Curtailment loss 12.9 8.0 17.0 2.0
- ------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 89.0 $ 150.6 $ 148.6 $ 21.1 $ 28.5 $43.5
================================================================================================
For measurement purposes, a trend rate for covered costs from 4.0% to 9.0%
pre-65 and 11.0% post-65, was used. These trend rates are expected to decrease
gradually to an ultimate rate of 4.0% to 5.5% at a rate of .5% 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, 2000 by
$21.8 (or $19.9) and the total of service and interest cost components of net
periodic postretirement benefit cost for 2000 by $2.1 (or $1.9).
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 $2,019.4, $1,788.4 and $1,779.4, respectively,
at December 31, 2000 and $1,940.2, $1,687.9 and $1,539.0, respectively, at
December 31, 1999.
99
The following provides a reconciliation of benefit obligations:
Pension Benefits Other Postretirement
Benefits
------------------------ --------------------
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1 $2,533.0 $2,677.4 $ 411.9 $ 465.8
Service cost 45.1 79.6 10.1 14.8
Interest cost 187.4 180.9 33.0 31.4
Plan participants' contribution 8.0 7.4
Amendments 4.6 (.4) (2.8) (48.0)
Actuarial (gain) loss 108.2 (214.2) 38.6 (11.9)
Benefits paid from plan assets (173.1) (146.3) (40.2) (45.6)
Curtailment (37.0) (44.0) (2.0)
- ------------------------------------------------------------------------------------------------
Benefit obligation at December 31 2,668.2 2,533.0 458.6 411.9
- ------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 2,104.9 2,107.8
Actual return on plan assets 310.4 (27.3)
Company contributions 238.9 170.7 32.2 38.2
Plan participants' contribution 8.0 7.4
Benefits paid from plan assets (173.1) (146.3) (40.2) (45.6)
- ------------------------------------------------------------------------------------------------
Fair value of plan assets at December 31 2,481.1 2,104.9
- ------------------------------------------------------------------------------------------------
Benefit obligation over plan assets (187.1) (428.1) (458.6) (411.9)
Unrecognized net actuarial loss 188.6 257.7 (5.5) (48.8)
Unrecognized prior service cost (benefit) 50.7 67.4 (126.3) (141.2)
Unrecognized net obligation .4 6.2
- ------------------------------------------------------------------------------------------------
Accrued benefit cost $ 52.6 $ (96.8) $(590.4) $(601.9)
================================================================================================
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost $ 147.0 $ 85.7
Accrued benefit liability (100.6) (188.3) $(590.4) $(601.9)
Intangible asset .2 .2
Accumulated other comprehensive income 6.0 5.6
- ------------------------------------------------------------------------------------------------
Net amount recognized $ 52.6 $ (96.8) $(590.4) $(601.9)
================================================================================================
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 salaries. Matching contributions are made up to specified
percentages of employees' contributions. The contributions by the Company and
its subsidiaries to these plans amounted to $49.5, $39.6 and $34.4 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Stock Option Plans - In 2000, shareholders approved the Loews Corporation 2000
Stock Option Plan (the "Plan").
100
The aggregate number of shares of Common Stock for which options may be
granted under the Plan is 1,000,000; and the maximum number of shares of
Common Stock with respect to which options may be granted to any individual in
any calendar year is 200,000. The exercise price per share may not be less
than the fair market value of the Common Stock on the date of grant. Pursuant
to the Plan, options were granted for a total of 132,000 shares of Common
Stock at an exercise price of $60.28 per share, the fair market value on the
date of grant. These options vest ratably over a four-year period and expire
in ten years. The Company has elected to follow Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options and awards.
A summary of the status of the Company's stock option plan as of December 31,
2000, and changes during the year then ending, follows:
Options Available Weighted Average
for Grant Options Exercise Price
- ------------------------------------------------------------------------------------------------
Balance at January 18, 2000 1,000,000
Granted (132,000) 132,000 $60.28
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2000 868,000 132,000 $60.28
================================================================================================
The weighted average remaining contractual life of options granted was 9.0
years and the exercise price on those options was $60.28. No options were
exercisable at December 31, 2000.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company
to disclose pro forma information regarding option grants made to its
employees. SFAS No. 123 specifies certain valuation techniques that produce
estimated compensation charges for purposes of valuing stock option grants.
These amounts have not been included in the Company's Consolidated Statements
of Income, because APB No. 25 specifies that no compensation charge arises
when the price of the employees' stock options equal the market value of the
underlying stock at the grant date. Several of the Company's subsidiaries also
maintain their own stock option plans. The pro forma effect of applying SFAS
No. 123 includes the Company's share of expense related to the subsidiaries'
plans as well. The Company's pro forma net income for the year ended December
31, 2000, was $1,875.2 or $18.88 per share.
The fair value of granted options was estimated at the grant date using the
Black-Scholes option pricing model. The weighted average fair value of options
granted during 2000 was $21.46. The following weighted average assumptions
were used for the year ended December 31, 2000: risk free interest rate of
6.7%; expected dividend yield of 1.6%; expected option life of 5 years; and
expected stock price volatility of 33.4%.
Note 15. Reinsurance -
CNA assumes and cedes reinsurance 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, minimize exposures on larger risks, and to exit
certain lines of business. 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.
101
The effects of reinsurance on earned premiums are as follows:
Direct Assumed Ceded Net
- ------------------------------------------------------------------------------------------------
Year Ended December 31, 2000
Property and casualty $ 8,389.0 $1,955.0 $3,421.0 $ 6,923.0
Accident and health 3,642.0 484.0 487.0 3,639.0
Life 1,227.0 220.0 537.0 910.0
- ------------------------------------------------------------------------------------------------
Total $13,258.0 $2,659.0 $4,445.0 $11,472.0
================================================================================================
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
================================================================================================
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
================================================================================================
Written premiums were $11,244.0, $12,215.0 and $13,728.0 at December 31, 2000,
1999 and 1998, respectively. The ceding of insurance does not discharge the
primary liability of CNA. Therefore, a credit exposure exits with respect to
property, liability and life reinsurance ceded to the extent that any
reinsurer is unable to meet the obligations assumed under reinsurance
agreements. CNA holds substantial collateral in the form of funds and bank
letters of credit. 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. Such collateral
was approximately $1,566.0 and $1,306.0 at December 31, 2000 and 1999,
respectively. CNA's largest recoverables from reinsurers, including prepaid
reinsurance premiums, were approximately $1,176.0, $776.0 and $402.0 at
December 31, 2000, from The Allstate Corporation ("Allstate"), American
Reinsurance Company and National Indemnity Insurance Company, respectively.
Insurance claims and policyholders' benefits are net of reinsurance recoveries
of $4,863.0, $3,224.0 and $994.0 for the years ended December 31, 2000, 1999
and 1998, respectively.
In the above tables, life premiums are from primarily long duration contracts,
property and casualty premiums, and accident and health premiums are from
primarily short duration contracts.
102
Note 16. Quarterly Financial Data (Unaudited) -
2000 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------------------------
Total revenues $5,555.7 $5,776.4 $5,331.9 $4,673.8
Net income 502.9 679.6 510.6 183.6
Per share 5.10 6.89 5.17 1.81
1999 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------------------------
Total revenues $4,859.2 $5,513.8 $5,611.9 $5,480.3
(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
- ------------------------------------------------------------------------------------------------
Note 17. Legal Proceedings and Contingent Liabilities -
INSURANCE RELATED
Tobacco Litigation - Four insurance subsidiaries of CNA are defendants in a
lawsuit arising out of policies allegedly issued to Liggett Group, Inc.
("Liggett"). The lawsuit was filed by Liggett and its current parent, Brooke
Group Holding Inc., in the Delaware Superior Court, New Castle County on
January 26, 2000. The lawsuit, which involves numerous insurers, concerns
coverage issues relating to a number of tobacco-related claims (currently over
1,100 pending) asserted against Liggett over the past twenty years. However,
Liggett only began submitting claims for coverage under the policies in
January 2000. CNA believes its coverage defenses are strong. Based on facts
and circumstances currently known, management believes that the ultimate
outcome of the pending litigation should not materially affect the financial
condition or results of operations of the Company.
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. Between April 1, 1997 and December 1, 1999, IGI underwrote
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 to a group of reinsurers participating in a reinsurance pool known
as the Associated Accident and Health Reinsurance Underwriters ("AAHRU")
Facility. CNA's Group Operations business unit participated as a pool member
in the AAHRU Facility in varying percentages between 1997 and 1999.
CNA has undertaken a review of the IGI Program and, among other things, has
determined that a small portion of the premium assumed under the IGI Program
related to United States workers' compensation "carve-out" business. CNA is
aware that a number of reinsurers with workers' compensation carve-out
insurance exposure 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
103
will also be reduced. Moreover, based on information known at this time, CNA
reasonably believes it has strong grounds for avoiding a substantial portion
of its United States workers' compensation carve-out exposure through legal
action.
As noted, CNA arranged substantial reinsurance protection to manage its
exposures under the IGI Program. CNA believes it has valid and enforceable
reinsurance contracts with the AAHRU Facility and other reinsurers with
respect to the IGI Program, including the United States workers' compensation
carve-out business. It is likely that certain reinsurers will dispute their
liabilities to CNA; however, CNA is unable to predict the extent of such
potential disputes at this time. Legal actions could result, and the
resolution of any such actions could take years.
Based on CNA's review of the entire IGI Program, CNA has established reserves
for its estimated exposure under the program and an estimate for recoverables
from retrocessionaires.
CNA is pursuing a number of loss mitigation strategies. Although the results
of these various actions to date support the recorded reserves, 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
the equity of the Company.
TOBACCO RELATED
Lawsuits continue to be filed with increasing frequency against Lorillard and
other manufacturers of tobacco products. Approximately 4,900 product liability
cases are pending against cigarette manufacturers in the United States. Of
these, approximately 1,225 cases are pending in a West Virginia court and
approximately 3,050 cases are brought by flight attendants alleging injury
from exposure to environmental tobacco smoke in the cabins of aircraft.
Lorillard is a defendant in all of the flight attendant suits served to date
and is a defendant in most of the cases pending in West Virginia.
Excluding the flight attendant and West Virginia suits, approximately 575
product liability cases are pending against U.S. cigarette manufacturers. Of
these 575 cases, Lorillard is a defendant in approximately 260. The Company is
a defendant in approximately 50 actions, although it has not received service
of process of 17 of them.
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 antitrust statutes, and failure to warn of the allegedly harmful
and/or addictive nature of tobacco products.
Some cases have been brought by individual plaintiffs who allege cancer and/or
other health effects claimed to have resulted from an individual's use of
cigarettes and/or smokeless tobacco products, addiction to smoking, or
exposure to environmental tobacco smoke ("Conventional Product Liability
Cases"). Approximately 4,375 such actions are pending against Lorillard,
including most of the cases filed in West Virginia and each of the pending
flight attendant cases. In other cases, plaintiffs have brought claims as
purported class actions on behalf of large numbers of individuals for damages
allegedly caused by smoking ("Class Actions"). Approximately 35 such cases are
pending against Lorillard. In other 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 50 such cases are pending, including suits brought by the U.S.
federal government and the governments of several foreign nations or states of
foreign nations. In addition, there 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 nine such actions are pending against Lorillard, and a tenth
case has been served on some of the defendants but not Lorillard.
104
Several additional Claims for Contribution cases have been filed but not
served on any of the defendants to date.
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 20 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 State Settlement Agreements provide 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 $1,076.5, $1,065.8 and $579.0 for the
years ended December 31, 2000, 1999 and 1998, respectively, to account for its
obligations under the State Settlement Agreements. The 1998 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 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: 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 of $250.0 per annum for 2001 through
2003. 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
105
any resulting cost advantage of manufacturers not subject to payments under
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 4,750 cases
pending against manufacturers of tobacco products in 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, due to use of smokeless tobacco products, or due to nicotine
dependence. Approximately 1,225 of these are individual cases pending in West
Virginia. Approximately 3,050 of these 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 4,375
of these cases, including most of the cases pending in West Virginia, as well
as all of the pending flight attendant cases. The Company is a defendant in 13
of the cases filed by individuals, although nine of them have not been served
on the Company. The Company is not a defendant in any of the flight attendant
suits or in any of the conventional cases pending in West Virginia.
Plaintiffs in most of these cases seek unspecified amounts in compensatory and
punitive damages. Plaintiffs in the flight attendant cases may not seek
punitive damages as to injuries that arose prior to January 15, 1997.
Plaintiffs in most of the West Virginia suits seek unspecified amounts of
actual damages and punitive damages.
Since January 1, 1999, a total of twelve trials have been held involving
fifteen cases filed by individual plaintiffs. Lorillard was a defendant in
three of the cases. The Company was not a defendant in any of the cases tried
to date since January 1, 1999. Juries returned verdicts in favor of the
defendants in the three cases tried against Lorillard. In the twelve remaining
cases, verdicts were returned in favor of the defendants in eight of the
matters. Juries found in plaintiffs' favor in the remaining four cases. In
these four verdicts, juries awarded plaintiffs a total of $153.2 in actual
damages and punitive damages. One of the four verdicts was vacated when the
trial court granted defendant's motion for new trial. Plaintiff in that action
had been awarded $.2 in actual damages. In two of the four cases, the courts
have reduced the verdicts to $26.5 (from $51.5) and $32.8 (from $80.3),
respectively. In the fourth case, the jury awarded $21.2. Appeals are pending
in each of these actions. To date during 2001, juries have returned verdicts
in favor of the defendants in two cases. The time for plaintiffs to seek
review of these verdicts has not expired. Lorillard is a defendant in one of
the two cases tried to date during 2001. Trial is proceeding in another matter
in which neither the Company nor Lorillard are parties. Several additional
cases are scheduled for trial against Lorillard during 2001, including a
consolidated trial scheduled to begin during June 2001, in the cases brought
by the approximately 1,225 West Virginia smokers or users of smokeless tobacco
products. These cases are presently scheduled to be tried pursuant to a multi-
part trial plan.
In addition to the above, the Florida Supreme Court has reinstated the
judgment entered by the trial court in the case of Carter v. Brown &
Williamson Tobacco Corporation. In a 1996 trial, the jury found in favor of
the plaintiffs and awarded them a total of $.8 in actual damages. Plaintiffs
did not seek punitive damages. In a 1998 decision, the Florida Court of Appeal
reversed the judgment, holding that plaintiffs' claims were barred by the
statute of limitations. Plaintiffs subsequently asked the Florida Supreme
Court to review the issue. Lorillard was not a defendant in this matter.
The California Supreme Court has agreed to review decisions by the California
Court of Appeals as to whether amendments to a California statute bars claims
against cigarette manufacturers if the claims accrued between 1988 and 1998.
Several cases against cigarette manufacturers, including Lorillard, have been
dismissed based on application of the statute in question.
CLASS ACTIONS - There are approximately 55 purported class actions pending
against cigarette manufacturers and other defendants. Lorillard is a defendant
in approximately 35 of the 55 cases seeking class certification. The Company
is a defendant in eight of the purported class actions, in all of which
Lorillard is also a defendant. Two cases naming both the Company and Lorillard
as defendants have not been served on any of the parties. 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,
106
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.
Various courts have ruled on motions for class certification in smoking and
health related cases. In 12 state court cases, which were pending in five
states and the District of Columbia, courts have denied plaintiffs' class
certification motions. In another 12 cases, cigarette manufacturers have
defeated motions for class certification before either federal trial courts or
courts of appeal from cases pending in 11 states and the Commonwealth of
Puerto Rico. The denial of class certification in a New York federal court
case, however, was due to the court's interest in preserving judicial
resources for a potentially broader class certification ruling in In re Simon
(II) Litigation, discussed below. In five cases in which Lorillard is a
defendant, plaintiffs' motions for class certification have been granted and
appeals either have been rejected at the interlocutory stage, appeals have not
yet been considered, or the plaintiffs' claims were resolved through a
settlement agreement. These five cases, each of which is discussed below, are
Broin (which was the matter concluded by the settlement agreement), Engle,
Scott, Blankenship and Daniels.
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 approximately 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, as amended by the Florida Court of Appeal, 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.
The case is being tried in three phases. The first phase involved
consideration of certain issues claimed to be "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.
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 provided 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 as
premature defendants' appeals from these rulings, and the Florida Supreme
Court declined to review the orders at this time.
The first portion of Phase Two of the trial began on November 1, 1999 before
the same jury that returned the verdict in Phase One. In the first part of
Phase Two, the jury determined 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.
On April 7, 2000, the jury found in favor of the three plaintiffs and awarded
them a total of $12.5 in economic damages, pain and suffering damages and
damages for loss of consortium. After awarding damages to one of the three
plaintiffs, the jury appeared to find that his claims were barred by the
statute of limitations. The purported final judgment entered by the trial
court on November 6, 2000 reflected the damages award, and held only a portion
of this plaintiff's claims were barred by the statute of limitations.
107
The second part of Phase Two of the trial began on May 22, 2000 and was heard
by the same jury that heard the trial's prior phases. The second part of the
trial's Phase Two considered evidence as to the punitive damages to be awarded
to the class. On July 14, 2000, the jury awarded a total of $145,000.0 in
punitive damages against all defendants, including $16,250.0 against
Lorillard.
On November 6, 2000, the Circuit Court of Dade County, Florida, entered a
purported final judgment in favor of the plaintiffs that reflects the jury's
three verdicts in favor of the plaintiffs. The court's purported final
judgment also denied various of defendants' post-trial motions, which included
a motion for new trial and a motion seeking reduction of the punitive damages
award. Lorillard has noticed an appeal from the purported final judgment to
the Third District of the Florida Court of Appeal and has posted its appellate
bond in the amount of $104.0 pursuant to recent Florida legislation limiting
the amount of an appellate bond required to be posted in order to stay
execution of a judgment for punitive damages in a certified class action.
Although this legislation is intended to apply to the Engle case, Lorillard
cannot predict the outcome of any challenges to the possible application or
constitutionality of this legislation. In the event this legislation is
challenged and found to be invalid, Lorillard could be required to post a bond
in an amount not capable of being bonded, resulting in 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 prevent this scenario from
occurring and believes these efforts should be successful.
Now that the jury has awarded punitive damages and a purported final judgment
has been entered, it is unclear how the August 2, 1999 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, which is Phase Three
of the trial plan, a process that could take years to conclude. The purported
final judgment entered by the court on November 6, 2000 directs that the
amounts awarded by the jury are to be paid immediately. 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 has challenged class certification, as well as other numerous legal
errors that it believes occurred during the trial. The Company and Lorillard
believe that an appeal of these issues on the merits should prevail.
Trial began during January 2001 in the case of Blankenship v. R.J. Reynolds
Tobacco Company, et al. (Circuit Court, Ohio County, West Virginia) but a
mistrial was declared while plaintiffs were presenting their evidence. A date
for retrial has not been set. Shortly before trial began the court granted
class certification on behalf of West Virginia residents who desire to
participate in a medical monitoring plan. The West Virginia Supreme Court
declined to review defendants' writ from the class certification ruling.
Lorillard is a defendant in the action. The case is to be tried under a multi-
part trial plan.
Trial is scheduled to begin during June 2001 in the case of Scott v. The
American Tobacco Company, et al. (District Court, Orleans Parish, Louisiana).
The trial court has certified a class for purposes of medical monitoring and
smoking cessation claims comprised of residents of the State of Louisiana who
desire to participate in medical monitoring or smoking cessation programs and
who began smoking prior to September 1, 1988, or who allege that defendants
undermined compliance with the warnings on cigarette packages. The case is
scheduled to be tried under a three-part trial plan. Lorillard is a defendant
in the suit.
During December 2000, the Superior Court of San Diego County, California
issued an order in the case of Daniels v. Philip Morris, Incorporated, et al.
that granted plaintiffs'
108
motion for class certification on behalf of California residents who, while
minors, smoked at least one cigarette between April 1994 and December 31,
1999. Defendants have filed a petition for writ or prohibition from the class
certification ruling. Trial in this matter is scheduled to begin during March
2002. Lorillard is a defendant in this action.
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 and three other U.S. cigarette
manufacturers paid approximately $300.0 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 3,175 such suits have been filed and
served on U.S. cigarette manufacturers, including Lorillard. Approximately
3,050 of these cases are pending. The time for class members to file suits
pursuant to the settlement agreement has expired.
During October 2000, the Circuit Court of Dade County, Florida, entered an
order that may be construed to hold that the flight attendants are not
required to prove the substantive liability elements of their claims for
negligence, strict liability and breach of implied warranty in order to
recover damages. The court further ruled that the trial of these suits are to
address whether the plaintiffs' alleged injuries were caused by their exposure
to environmental tobacco smoke and, if so, the amount of damages to be
awarded. It is not clear how the trial judges will apply this order.
Defendants have noticed an appeal from the October 2000 order to the Third
District of the Florida Court of Appeal. Several of the cases are scheduled
for trial during 2001, although Lorillard believes it is unlikely that any
trials will be held until defendants' appeal of the October 2000 order is
resolved.
REIMBURSEMENT CASES - In addition to the cases settled by the State Settlement
Agreements described above, approximately 50 other suits are pending,
comprised of cases brought by the U.S. federal government, unions, Indian
tribes, private companies and health plans, and foreign governments filing
suit in U.S. courts, in which plaintiffs seek recovery of funds allegedly
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 18 of them, although three of the cases
have not been served on the Company.
U.S. Federal Government Action - The federal government of the United States
filed a reimbursement suit on September 22, 1999 in the United States District
Court for 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 of profits, 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.
During September 2000, the court granted in part and denied in part
defendants' motion to dismiss the complaint. The court dismissed plaintiff's
claims asserted under the Medical Care Recovery Act as well as those under
Medicare as Secondary Payer Act. The court denied the motion as to plaintiff's
claims under the Racketeering Influenced and Corrupt
109
Organizations Act. Plaintiff is seeking modification of the trial court's
order as it relates to the dismissal of the Medical Care Recovery Act claim.
In an amended complaint filed during February 2001, plaintiff attempted to
plead with greater specificity the claims dismissed by the court in the
September 2000 ruling.
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,
Honduras, Krygyz, Nicaragua, Panama, the Russian Federation, Tajikistan,
Thailand, Ukraine and Venezuela, as well as by the Brazilian States of
Espirito Santo, Goias, Mato Grosso do Sul, Piaui, Rio de Janeiro, Sao Paolo
and Tocatins, and the Canadian province of Ontario. Lorillard is a defendant
in the cases filed by Bolivia, Ecuador, Honduras, Kyrgyz, the Russian
Federation, Tajikistan, Ukraine, Venezuela, the seven Brazilian states and the
Province of Ontario. The Company is a defendant in the cases filed by Bolivia,
Ecuador, Honduras, Kyrgyz, the Russian Federation, Tajikistan, Ukraine and
Venezuela, as well as those filed by the seven Brazilian states and the
Province of Ontario. The Company has not received service of process of the
cases filed by Honduras, Venezuela or the State of Sao Paolo, Brazil. The suit
filed by Thailand has been voluntarily dismissed by the plaintiffs. In 1977,
Lorillard sold its major trademarks outside of the United States and the
international sales business in cigarettes associated with those brands.
Performance by Lorillard of obligations under the 1977 agreement was
guaranteed by the Company. Lorillard and the Company have received notice from
Brown & Williamson Tobacco Corporation, which claims to be a successor to the
purchaser, that indemnity will be sought under certain indemnification
provisions of the 1977 agreement with respect to suits brought by various of
the foregoing foreign jurisdictions, and in certain cases brought in foreign
countries by individuals concerning periods prior to June 1977 and during
portions of 1978.
Reimbursement Cases by Indian Tribes - Indian Tribes are the plaintiffs in six
pending reimbursement suits. Most of these cases have been filed in tribal
courts. Lorillard is a defendant in each of the cases. The Company is not
named as a defendant in any of the pending tribal cases. Each of the pending
cases is in the pre-trial, discovery stage.
Reimbursement Cases Filed by Private Companies and Health Plans - Four cases
are pending against cigarette manufacturers in which the plaintiffs are
private companies, including not-for-profit insurance companies. Lorillard is
a defendant in each of the pending cases. In one of the cases, an appeal is
pending from the final judgment entered in favor of the defendants by the
trial court. Trial is scheduled to begin during March 2001 in one of the
suits, the case of Blue Cross and Blue Shield of New Jersey, which is pending
in the U.S. District Court for the Eastern District of New York. One of the
two remaining cases was filed in New York by eight German insurance companies.
In addition to these private company cases, two suits filed by hospitals or
hospital districts are pending. One of the cases is brought on behalf of
approximately 175 hospitals operating in the state of New York. Lorillard is
named as a defendant in both of the pending cases filed by hospitals or
hospital districts.
Reimbursement Cases by Labor Unions - Approximately 20 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 two of them. Twelve of
the approximately 20 cases are on appeal from final judgments entered in
defendants' favor by the trial courts. Ten of the twelve cases on appeal are
from a single ruling in favor of the defendants by a single New York state
court. The remaining two cases on appeal are from rulings in defendants' favor
by state courts in California and Michigan. Approximately 60 union cases have
been dismissed in recent years. Some of these cases were dismissed
voluntarily, while others were dismissed as a result of defendants'
dispositive motions. Appeals were sought from some of these dismissal rulings
and defendants have prevailed in each of these appeals to date. The Second,
Third, Fifth, Seventh, Eighth, Ninth and Eleventh Circuit Courts of Appeal
have found in favor of the defendants in each of the appeals from dismissal
orders entered by the federal trial courts that were submitted to them, and
the U.S. Supreme Court has denied petitions for writ of certiorari that sought
review of some of these decisions. Several cases pending in state courts also
have been dismissed. Each of the cases pending before a trial court is in the
pre-trial, discovery stage.
Eastern District of New York Litigation - On April 18, 2000, a federal judge
in the Eastern District of New York
110
issued an order that consolidates, for settlement purposes only, ten pending
cases involving Lorillard as well as other industry defendants. These cases
include three contribution cases (Falise v. The American Tobacco Company, et
al., H.K. Porter Company, Inc. v. The American Tobacco Company, Inc., et al.
and Raymark Industries, Inc. v. The American Tobacco Company, Inc., et al.),
two union cases (Bergeron, et al. v. Philip Morris, Inc., et al. and The
National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated,
et al.), one private company case (Blue Cross and Blue Shield of New Jersey,
Inc., et al. v. Philip Morris, Incorporated, et al.), two smoking and health
class actions that have been served on defendants (Decie v. The American
Tobacco Company, Inc., et al. and Simon v. Philip Morris Incorporated, et
al.), one smoking and health class action in which none of the defendants have
received service of process (Ebert v. Philip Morris, Incorporated, et al.) and
one case that contains elements of both a smoking and health class action and
a private citizen reimbursement case (Mason v. The American Tobacco Company,
Inc., et al.). The judge's order directed the parties to select a mediator or
special master in order to facilitate settlement discussions and also invited
the federal government to join in the settlement discussions. On July 31,
2000, the federal judge orally proposed the formation of a national punitive
damages class action for the purposes of settlement. Pursuant to the judge's
proposal, Lorillard entered into discussions with a committee of counsel
representing a broad-based group of plaintiffs in an effort to arrive at a
comprehensive settlement of all exemplary and punitive damage claims,
including claims involved in the Engle class action in Florida described
above. The parties have been unable to reach an understanding and the
negotiations have been suspended.
The federal judge directed that a combined suit be filed encompassing all of
the claims pending before him that name cigarette manufacturers as defendants,
the case of In re Simon (II) Litigation (U.S. District Court, Eastern
District, New York, filed September 6, 2000). The Company is a defendant in
this proceeding. The court has directed a briefing schedule in order to
resolve plaintiffs' class action claims, and argument of this motion is
scheduled to be heard by the court during March 2001. In a separate November
2000 ruling, the court stated that it would "entertain a prompt motion for
certification in Simon II." The court further stated that "Simon II should be
triable without appreciable delay should it be certified." To date, a trial
date has not been set in this matter.
To date during 2001, a trial was held in one of the contribution cases,
Falise. However, as noted below a mistrial was declared due to the inability
of the jury to reach a verdict. The court has not scheduled re-trial of this
matter. Trial is scheduled to begin during March 2001 in the private company
case, Blue Cross and Blue Shield of New Jersey. Several Blue Cross and Blue
Shield plans are plaintiffs in this action, but the trial scheduled to begin
during March 2001 will address only one of them, Empire Blue Cross and Blue
Shield.
CONTRIBUTION CLAIMS - In addition to the foregoing cases, ten cases are
pending in which private companies seek recovery of funds expended by them to
individuals whose asbestos disease or illness was alleged to have been caused
in whole or in part by smoking-related illnesses. Lorillard is named as a
defendant in each action, although it has not received service of process of
one of them. The Company is named as a defendant in five of the cases,
although it has not received service of process of one of the actions. An
additional eight cases have been filed in which none of the named defendants,
including Lorillard and the Company, have received service of process to date.
During January of 2001, a mistrial was declared during jury deliberations in
the case of Falise, et al. v. The American Tobacco Company, et al. (U.S.
District Court, Eastern District, New York), which was filed by the Trustees
of the Johns Manville Trust. To date, retrial of this case has not been
scheduled. Trial is scheduled in two cases during 2001. Trial in the case of
Owens Corning v. R.J. Reynolds Tobacco Company, et al., pending in the Circuit
Court of Jefferson County, Mississippi, is scheduled to begin during June
2001. Trial in the case of Fibreboard Corporation and Owens Corning v. R.J.
Reynolds Tobacco Company, et al., pending in the Superior Court of Alameda
County, California, is scheduled to begin during July 2001. The remaining
cases are in the pre-trial, discovery stage.
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
111
time, ending more than forty years ago, into the filter material used in one
of the brands of cigarettes manufactured by Lorillard. Approximately 20 such
cases are pending in federal and state courts against Lorillard. The Company
is named as a defendant in one of the pending actions. 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 15 such cases.
Five such trials have been held since 1999. Juries have returned verdicts in
favor of Lorillard in 11 of the 15 trials. Four verdicts have been returned in
plaintiffs' favor, including one of the two cases tried during 1999 and one of
the three cases tried during 2000. In the 1999 trial in which a jury found in
favor of the plaintiffs, plaintiffs were awarded $2.2 in actual damages. In
the one trial in 2000 in which the jury found in plaintiffs' favor, the jury
awarded plaintiffs $1.1 in actual damages and the case was settled prior to a
determination of punitive damages.
TOBACCO-RELATED Antitrust Cases - Wholesalers and Direct Purchasers Suits -
Lorillard and other domestic and international cigarette manufacturers and
their parent companies, including the Company, were named as defendants in
nine 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. These actions seek certification of a
class including all domestic and international wholesalers similarly affected
by such alleged conduct, and damages, injunctive relief and attorneys' fees.
These actions were consolidated for pre-trial purposes in the United States
District Court for the Northern District of Georgia. The Company has been
voluntarily dismissed without prejudice from all direct purchaser cases.
Approximately 30 suits are pending in various state courts 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. Lorillard is a defendant in each of
these indirect purchaser cases. The Company was also named as a defendant in
most of these indirect purchaser cases but has been voluntarily dismissed
without prejudice from all of them.
Tobacco Growers Suit - DeLoach v. Philip Morris Companies, Inc., et al. (U.S.
District Court, Middle District of North Carolina, filed February 16, 2000).
Lorillard is named as a defendant in a lawsuit that, after several amendments,
alleges only antitrust violations. The other major domestic tobacco companies
are also presently named as defendants, and the plaintiffs have now added the
major leaf buyers as defendants. This case was originally filed in U.S.
District Court, District of Columbia, and transferred to a North Carolina
federal court upon motion by the defendants. Plaintiffs seek certification of
a class including all tobacco growers and quota holders (the licenses that a
farmer must either own or rent to sell the crop), who sold tobacco or held
quota under the federal tobacco leaf price support program since February
1996. The plaintiffs' claims relate to the conduct of the companies in the
purchase of tobacco through the auction system under the federal program. The
suit seeks an unspecified amount of actual damages, trebled under the
antitrust laws, and injunctive relief.
* * * *
While Lorillard intends to defend vigorously all 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. An unfavorable
verdict has been returned and judgment has been entered against Lorillard in
the Engle case, described above, and it is possible that additional cases
could be decided unfavorably to Lorillard.
In addition, adverse developments in relation to smoking and health, including
the release in 1998 of industry documents, have received widespread media
attention. These developments may reflect adversely on the tobacco industry
and, together with possible adverse outcomes in pending cases, could have
adverse effects on the ability of Lorillard and other cigarette manufacturers
to prevail in smoking and health litigation and could prompt the filing of
additional litigation.
Lorillard believes that it has valid defenses to the cases pending against it
as well as valid bases for appeal of the adverse verdict against it and
Lorillard will continue to maintain a vigorous defense in all such litigation.
Lorillard
112
may enter into discussions in an attempt to settle particular cases if it
believes it is appropriate to do so.
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 adversely 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.
Note 18. 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 87% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of
hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary); the
operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling,
Inc., a 53% 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 retirement 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 17 hotels, 15 of which are in the United
States and two are in Canada. There is also a property in the United States
under development with an opening date scheduled in 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, 2000, 29 of these rigs were located in the Gulf of Mexico, 6 were located
in Brazil and the remaining 10 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.
113
The following tables set forth the Company's consolidated revenues, income and
assets by business segment:
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
Revenues (a):
CNA Financial:
Property and casualty $10,078.0 $10,945.7 $11,320.7
Life 1,701.0 1,577.8 1,593.6
Group (b) 3,949.4 3,747.3 3,935.2
Other (114.2) 132.1 312.4
- ------------------------------------------------------------------------------
Total CNA Financial 15,614.2 16,402.9 17,161.9
Lorillard 4,342.4 4,064.5 2,865.1
Loews Hotels (c) 338.5 351.9 242.1
Diamond Offshore (d) 723.6 846.9 1,244.9
Bulova (e) 160.1 138.7 135.0
Corporate 159.0 (339.7) (353.0)
- ------------------------------------------------------------------------------
Total $21,337.8 $21,465.2 $21,296.0
==============================================================================
Income before taxes and minority interest and cumulative effect of changes in
accounting principles (a)(g):
CNA Financial:
Property and casualty $ 1,733.9 $ 69.0 $ 399.7
Life 285.8 178.0 293.9
Group 134.2 (10.1) (37.9)
Other (325.0) (236.2) (305.2)
- ------------------------------------------------------------------------------
Total CNA Financial 1,828.9 .7 350.5
Lorillard (f) 1,223.9 1,079.6 593.5
Loews Hotels (c) 47.6 112.5 54.5
Diamond Offshore (d) 107.7 238.0 590.2
Bulova (e) 27.1 20.8 18.6
Corporate (29.3) (507.4) (529.9)
- ------------------------------------------------------------------------------
Total $ 3,205.9 $ 944.2 $ 1,077.4
==============================================================================
114
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
Net income (a)(g):
CNA Financial:
Property and casualty $1,000.8 $ 73.1 $ 257.7
Life 166.0 97.4 158.5
Group 78.8 (1.5) (16.2)
Other (177.6) (125.8) (165.3)
- ------------------------------------------------------------------------------
Total CNA Financial 1,068.0 43.2 234.7
Lorillard (f) 753.9 651.9 351.8
Loews Hotels (c) 26.8 70.5 32.8
Diamond Offshore (d) 32.0 72.7 181.1
Bulova (e) 15.0 14.1 10.5
Corporate (19.0) (331.3) (346.1)
- ------------------------------------------------------------------------------
1,876.7 521.1 464.8
Cumulative effect of changes in
accounting principles (157.9)
- ------------------------------------------------------------------------------
Total $1,876.7 $ 363.2 $ 464.8
==============================================================================
Investments Receivables Total Assets
----------------------------------------------------------------------
December 31 2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------
CNA Financial $35,122.3 $35,559.5 $14,945.1 $13,145.0 $62,037.2 $61,244.8
Lorillard 1,640.9 1,301.0 68.4 54.9 2,671.8 2,208.7
Loews Hotels 96.5 202.9 42.2 23.7 639.1 604.0
Diamond Offshore 851.8 620.6 153.5 143.6 3,122.5 2,699.7
Bulova 12.5 31.0 70.7 63.4 186.7 178.8
Corporate and
eliminations 2,671.6 2,918.0 21.7 110.3 2,219.8 2,527.7
- ------------------------------------------------------------------------------------------------
Total $40,395.6 $40,633.0 $15,301.6 $13,540.9 $70,877.1 $69,463.7
================================================================================================
(a) Investment gains (losses) included in Revenues, Pre-tax income and Net
income are as follows:
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
Revenues and pre-tax income:
CNA Financial:
Property and casualty $1,204.4 $ 257.2 $ 474.7
Life 31.7 (37.9) 130.9
Group 83.7 6.0 45.3
Other 1.5 89.3 30.4
- ------------------------------------------------------------------------------
Total CNA Financial 1,321.3 314.6 681.3
Corporate and other (7.4) (472.8) (545.6)
- ------------------------------------------------------------------------------
$1,313.9 $(158.2) $ 135.7
==============================================================================
115
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
Net income:
CNA Financial:
Property and casualty $680.0 $ 143.3 $ 256.2
Life 19.1 (26.3) 69.5
Group 47.3 3.3 24.7
Other .9 43.8 16.7
- ------------------------------------------------------------------------------
Total CNA Financial 747.3 164.1 367.1
Corporate and other (4.8) (300.7) (354.6)
- ------------------------------------------------------------------------------
$742.5 $(136.6) $ 12.5
==============================================================================
(b) Includes $2,100.0, $2,100.0 and $2,000.0 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 a gain from the sale of a drilling rig of $13.9 ($4.7 after taxes and minority
interest) for the year ended December 31, 2000.
(e) Includes a gain of $5.5 from settlement of a contract dispute ($3.0 after taxes and minority
interest) for the year ended December 31, 2000.
(f) Includes pre-tax charges related to the settlements of tobacco litigation of $1,076.5,
$1,065.8 and $579.0 ($642.3, $637.3 and $346.5 after taxes) for the years ended December 31,
2000, 1999 and 1998, respectively.
(g) Income taxes and interest expenses are as follows:
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------------------------
Income Interest Income Interest Income Interest
Taxes Expense Taxes Expense Taxes Expense
- ------------------------------------------------------------------------------------------------
CNA Financial:
Property and casualty $ 557.8 $ 17.2 $ (44.3) $ 13.4 $ 70.1 $ 15.0
Life 94.6 .1 64.1 3.3 106.8 14.3
Group 43.6 .3 (8.3) .2 (18.8)
Other (122.2) 188.7 (95.5) 184.8 (111.1) 189.7
- ------------------------------------------------------------------------------------------------
Total CNA Financial 573.8 206.3 (84.0) 201.7 47.0 219.0
Lorillard 469.8 1.5 427.7 14.9 241.7 1.4
Loews Hotels 20.8 11.2 42.0 2.2 21.7 3.3
Diamond Offshore 41.0 10.3 89.8 9.2 220.2 14.5
Bulova 11.6 6.1 7.7 .1
Corporate (10.1) 127.6 (176.1) 126.3 (183.8) 130.9
- ------------------------------------------------------------------------------------------------
Total $1,106.9 $356.9 $ 305.5 $354.3 $ 354.5 $369.2
================================================================================================
116
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Information called for by Part III has been omitted as Registrant intends to
file with the Securities and Exchange Commission not later than 120 days after
the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements:
The financial statements appear above under Item 8. The following additional
financial data should be read in conjunction with those financial statements.
Schedules not included with these additional financial data have been omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or notes to consolidated financial
statements.
Page
2. Financial Statement Schedules: Number
------
Independent Auditors' Report ......................................... L-1
Loews Corporation and Subsidiaries:
Schedule I-Condensed financial information of Registrant for the
years ended December 31, 2000, 1999 and 1998 ...................... L-2
Schedule II-Valuation and qualifying accounts for the years ended
December 31, 2000, 1999 and 1998 .................................. L-6
Schedule V-Supplemental information concerning property-casualty
insurance operations for the years ended December 31, 2000, 1999
and 1998 .......................................................... L-7
3. Exhibits:
Exhibit
Description Number
----------- -------
(3) Articles of Incorporation and By-Laws
Restated Certificate of Incorporation of the Registrant,
incorporated herein by reference to Exhibit 3 to Registrant's
Report on Form 10-Q for the quarter ended June 30, 1996 ....... 3.01
By-Laws of the Registrant as amended through February 20, 2001
are filed herewith ............................................. 3.02*
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
The Registrant hereby agrees to furnish to the Commission upon
request copies of instruments with respect to long-term debt,
pursuant to Item 601(b)(4)(iii) of Regulation S-K.
(10) Material Contracts
Employment Agreement between Registrant and Laurence A. Tisch
dated March 1, 1971 as amended through January 1, 2001, is
filed herewith ................................................. 10.01*
Employment Agreement between Registrant and Preston R. Tisch
dated as of March 1, 1988 as amended through January 1, 2001,
is filed herewith .............................................. 10.02*
Continuing Service Agreement between a subsidiary of Registrant
and Edward J. Noha, dated February 27, 1991 is incorporated
herein by reference to Exhibit 10.04 to Registrant's Report on
Form 10-K for the year ended December 31, 1990 ................. 10.03
117
Exhibit
Description Number
----------- -------
Loews Corporation Deferred Compensation Plan as amended and
restated as of December 31, 1995 is incorporated herein by
reference to Exhibit 10.05 to Registrant's Report on Form 10-K
for the year ended December 31, 1996 ........................... 10.04
Incentive Compensation Plan incorporated herein by reference to
Exhibit 10.15 to Registrant's Report on Form 10-K for the year
ended December 31, 1996 ........................................ 10.05
Comprehensive Settlement Agreement and Release with the State of
Florida to settle and resolve with finality all present and
future economic claims by the State and its subdivisions
relating to the use of or exposure to tobacco products,
incorporated herein by reference to Exhibit 10 to
Registrant's Report on Form 8-K filed September 5, 1997 ........ 10.06
Comprehensive Settlement Agreement and Release with the State
of Texas to settle and resolve with finality all present and
future economic claims by the State and its subdivisions
relating to the use of or exposure to tobacco products,
incorporated herein by reference to Exhibit 10 to Registrant's
Report on Form 8-K filed February 3, 1998 ...................... 10.07
State of Minnesota Settlement Agreement and Stipulation for
Entry of Consent Judgment to settle and resolve with finality
all claims of the State of Minnesota relating to the subject
matter of this action which have been or could have been
asserted by the State, incorporated herein by reference
to Exhibit 10.1 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.08
State of Minnesota Consent Judgment relating to the settlement
of tobacco litigation, incorporated herein by reference to
Exhibit 10.2 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.09
State of Minnesota Settlement Agreement and Release relating
to the settlement of tobacco litigation, incorporated herein
by reference to Exhibit 10.3 to Registrant's Report on Form
10-Q for the quarter ended March 31, 1998 ...................... 10.10
Agreement to Pay State of Minnesota Attorneys' Fees and Costs
relating to the settlement of tobacco litigation, incorporated
herein by reference to Exhibit 10.4 to Registrant's Report on
Form 10-Q for the quarter ended March 31, 1998 ................. 10.11
Agreement to Pay Blue Cross and Blue Shield of Minnesota
Attorneys' Fees and Costs relating to the settlement of
tobacco litigation, incorporated herein by reference to
Exhibit 10.5 to Registrant's Report on Form 10-Q for the
quarter ended March 31, 1998 ................................... 10.12
State of Minnesota State Escrow Agreement relating to the
settlement of tobacco litigation, incorporated herein by
reference to Exhibit 10.6 to Registrant's Report on Form 10-Q
for the quarter ended March 31, 1998 ........................... 10.13
Stipulation of Amendment to Settlement Agreement and For Entry
of Agreed Order, dated July 2, 1998, regarding the settlement
of the State of Mississippi health care cost recovery action,
incorporated herein by reference to Exhibit 10.1 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.14
Mississippi Fee Payment Agreement, dated July 2, 1998,
regarding the payment of attorneys' fees, incorporated herein
by reference to Exhibit 10.2 to Registrant's Report on Form
10-Q for the quarter ended June 30, 1998 ....................... 10.15
Mississippi MFN Escrow Agreement, dated July 2, 1998,
incorporated herein by reference to Exhibit 10.3 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.16
Stipulation of Amendment to Settlement Agreement and For Entry
of Consent Decree, dated July 24, 1998, regarding the
settlement of the Texas health care cost recovery action,
incorporated herein by reference to Exhibit 10.4 to
Registrant's Report on Form 10-Q for the quarter ended June
30, 1998 ....................................................... 10.17
Texas Fee Payment Agreement, dated July 24, 1998, regarding
the payment of attorneys' fees, incorporated herein by
reference to Exhibit 10.5 to Registrant's Report on Form 10-Q
for the quarter ended June 30, 1998 ............................ 10.18
Stipulation of Amendment to Settlement Agreement and For Entry
of Consent Decree, dated September 11, 1998, regarding the
settlement of the Florida health care cost recovery action,
incorporated herein by reference to Exhibit 10.1 to Registrant's
Report on Form 10-Q for the quarter ended September 30, 1998 ... 10.19
118
Exhibit
Description Number
----------- -------
Florida Fee Payment Agreement, dated September 11, 1998,
regarding the payment of attorneys' fees, incorporated herein
by reference to Exhibit 10.2 to Registrant's Report on Form
10-Q for the quarter ended September 30, 1998 .................. 10.20
Master Settlement Agreement with 46 states, the District of
Columbia, the Commonwealth of Puerto Rico, Guam, the U.S.
Virgin Islands, American Samoa and the Northern Marianas to
settle the asserted and unasserted health care cost recovery
and certain other claims of those states, incorporated herein
by reference to Exhibit 10 to Registrant's Report on Form 8-K
filed November 25, 1998 ........................................ 10.21
Employment Agreement dated as of January 1, 1999 between
Registrant and Andrew H. Tisch is incorporated herein by
reference to Exhibit 10.31 to Registrant's Report on Form 10-K
for the year ended December 31, 1998 ........................... 10.22
Employment Agreement dated as of January 1, 1999 between
Registrant and James S. Tisch is incorporated herein by
reference to Exhibit 10.32 to Registrant's Report on Form 10-K
for the year ended December 31, 1998 ........................... 10.23
Employment Agreement dated as of January 1, 1999 between
Registrant and Jonathan M. Tisch is incorporated herein by
reference to Exhibit 10.33 to Registrant's Report on Form 10-K
for the year ended December 31, 1998 ........................... 10.24
Continuing Services Agreement between a subsidiary of Registrant
and Dennis H. Chookaszian, dated February 9, 1999 incorporated
herein by reference to Exhibit 10.2 to CNA Financial
Corporation's (Commission File Number 1-5823) Report on Form
10-K for the year ended December 31, 1998 ...................... 10.25
Supplemental Retirement Agreement dated September 21, 1999
between Registrant and Arthur Rebell is incorporated herein
by reference to Exhibit 10.28 to Registrant's Report on Form
10-K for the year ended December 31, 1999....................... 10.26
Loews Corporation 2000 Stock Option Plan is incorporated by
reference to Exhibit A to Registrant's Definitive Proxy
Statement filed on March 29, 2000 .............................. 10.27
Supplemental Retirement Agreement dated March 24, 2000 between
Registrant and Peter W. Keegan is incorporated herein by
reference to Exhibit 10.1 to Registrant's Report on Form 10-Q
for the quarter ended March 31, 2000............................ 10.28
First Amendment to Supplemental Retirement Agreement dated
March 24, 2000 between Registrant and Arthur L. Rebell is
incorporated herein by reference to Exhibit 10.2 to
Registrant's Report on Form 10-Q for the quarter ended
March 31, 2000.......... ....................................... 10.29
(21) Subsidiaries of the Registrant
List of subsidiaries of Registrant ............................. 21.01*
119
Exhibit
Description Number
----------- -------
(23) Consents of Experts and Counsel
Consent of Deloitte & Touche LLP ............................... 23.01*
* Filed herewith
(b) Reports on Form 8-K - The Company filed a report on Form 8-K on October
6, 2000, stating that CNA Financial Corporation, an 87% owned subsidiary, sold
its life reinsurance business to Munich American Reassurance Company.
120
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LOEWS CORPORATION
Dated: March 16, 2001 By /s/ Peter W. Keegan
-------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 16, 2001 By /s/ James S. Tisch
-------------------------------
(James S. Tisch, President
and Chief Executive Officer)
Dated: March 16, 2001 By /s/ Peter W. Keegan
-------------------------------
(Peter W. Keegan, Senior Vice
President and Chief Financial
Officer)
Dated: March 16, 2001 By /s/ Guy A. Kwan
-------------------------------
(Guy A. Kwan, Controller)
Dated: March 16, 2001 By /s/ Charles B. Benenson
-------------------------------
(Charles B. Benenson, Director)
Dated: March 16, 2001 By /s/ John Brademas
-------------------------------
(John Brademas, Director)
Dated: March 16, 2001 By /s/ Dennis H. Chookaszian
-------------------------------
(Dennis H. Chookaszian,
Director)
Dated: March 16, 2001 By /s/ Paul Fribourg
-------------------------------
(Paul Fribourg, Director)
121
By
-------------------------------
(Bernard Myerson, Director)
Dated: March 16, 2001 By /s/ Edward J. Noha
-------------------------------
(Edward J. Noha, Director)
Dated: March 16, 2001 By /s/ Michael F. Price
------------------------------
(Michael F. Price, Director)
Dated: March 16, 2001 By /s/ Gloria R. Scott
-------------------------------
(Gloria R. Scott, Director)
Dated: March 16, 2001 By /s/ Andrew H. Tisch
-------------------------------
(Andrew H. Tisch, Director)
Dated: March 16, 2001 By /s/ Jonathan M. Tisch
-------------------------------
(Jonathan M. Tisch, Director)
Dated: March 16, 2001 By /s/ Laurence A. Tisch
-------------------------------
(Laurence A. Tisch, Director)
Dated: March 16, 2001 By /s/ Preston R. Tisch
-------------------------------
(Preston R. Tisch, Director)
Dated: March 16, 2001 By /s/ Fred Wilpon
-------------------------------
(Fred Wilpon, Director)
122
INDEPENDENT AUDITORS' REPORT
To 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, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. Our audits
also included the financial statement schedules listed in the Index at Item
14(a)2. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Loews Corporation and its
subsidiaries at December 31, 2000 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for liabilities related to insurance-related
assessments and accounting for start-up costs in 1999.
Deloitte & Touche LLP
New York, New York
February 15, 2001
(February 20, 2001 as to the
stock split described in Note 1)
L-1
SCHEDULE I
Condensed Financial Information of Registrant
LOEWS CORPORATION
BALANCE SHEETS
ASSETS
December 31 2000 1999
- ------------------------------------------------------------------------------
(In millions)
Current assets, principally investment in U.S.
government securities ............................. $ 2,430.2 $ 2,879.5
Investments in securities .......................... 280.7 407.6
Investments in capital stocks of subsidiaries, at
equity ............................................ 11,095.4 9,763.6
Other assets ....................................... 273.8 70.1
- ------------------------------------------------------------------------------
Total assets .................................. $14,080.1 $13,120.8
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities ........... $ 376.7 $ 299.6
Securities sold under agreements to repurchase ..... 347.8
Long-term debt, less current maturities (a) ........ 2,291.0 2,288.6
Deferred income tax and other ...................... 221.3 207.1
- ------------------------------------------------------------------------------
Total liabilities ............................. 2,889.0 3,143.1
Shareholders' equity ............................... 11,191.1 9,977.7
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity .... $14,080.1 $13,120.8
==============================================================================
L-2
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF INCOME
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
(In millions)
Revenues:
Equity in income of subsidiaries (b) . $1,905.9 $ 867.2 $ 824.5
Investment losses .................... (6.6) (462.6) (545.5)
Interest and other ................... 149.8 126.3 179.8
- ------------------------------------------------------------------------------
Total ............................. 2,049.1 530.9 458.8
- ------------------------------------------------------------------------------
Expenses:
Administrative ....................... 53.7 40.4 43.7
Interest ............................. 128.2 125.9 129.6
- ------------------------------------------------------------------------------
Total ............................. 181.9 166.3 173.3
- ------------------------------------------------------------------------------
1,867.2 364.6 285.5
Income tax benefit (c) ................. 9.5 156.5 179.3
- ------------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles ...... 1,876.7 521.1 464.8
Cumulative effect of changes in
accounting principles-net ............. (157.9)
- ------------------------------------------------------------------------------
Net income ............................. $1,876.7 $ 363.2 $ 464.8
==============================================================================
L-3
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
(In millions)
Operating Activities:
Net income ............................ $1,876.7 $ 363.2 $ 464.8
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Cumulative effect of changes in
accounting principles .............. 157.9
Undistributed earnings of affiliates. (1,556.2) (498.8) (276.8)
Investment (gains) losses ........... 6.6 462.6 545.5
Provision for deferred income taxes . 12.5 119.0 (11.5)
Changes in assets and liabilities-net:
Receivables ......................... 37.3 (17.7) 3.6
Accounts payable and accrued
liabilities ........................ (3.5) 6.0 2.2
Federal income taxes ................ 411.3 (46.1) (198.3)
Trading securities .................. (157.4) (759.0) (522.4)
Other-net ........................... (5.2) 5.0 .1
- ------------------------------------------------------------------------------
622.1 (207.9) 7.2
- ------------------------------------------------------------------------------
Investing Activities:
Investments in and advances to
subsidiaries ......................... (281.5) (293.6) (292.3)
Reduction of investments and advances
to subsidiaries ...................... 41.4 208.5 311.5
Net decrease in short-term investments,
primarily U.S. government securities . 353.3 1,057.6 6.7
Securities sold under agreements to
repurchase ........................... (347.8) (101.9) 449.7
Change in other investments ........... 17.7 15.2 (2.5)
- ------------------------------------------------------------------------------
(216.9) 885.8 473.1
- ------------------------------------------------------------------------------
Financing Activities:
Dividends paid to shareholders ........ (99.7) (108.9) (114.6)
Purchases of treasury shares .......... (305.7) (601.6) (218.0)
Principal payments on long-term debt .. (117.8)
- ------------------------------------------------------------------------------
(405.4) (710.5) (450.4)
- ------------------------------------------------------------------------------
Net change in cash ...................... (.2) (32.6) 29.9
Cash, beginning of year ................. 10.4 43.0 13.1
- ------------------------------------------------------------------------------
Cash, end of year ....................... $ 10.2 $ 10.4 $ 43.0
==============================================================================
L-4
SCHEDULE I
(Continued)
Condensed Financial Information of Registrant
- --------------
Notes:
(a) Long-term debt consisted of:
December 31 2000 1999
- ------------------------------------------------------------------------------
6.8% notes due 2006 (effective interest rate
of 6.8%) (authorized, $300) ................ $ 300.0 $ 300.0
3.1% exchangeable subordinated notes due 2007
(effective interest rate of 3.4%)
(authorized $1,150) (1) .................... 1,150.0 1,150.0
8.9% debentures due 2011 (effective interest
rate of 9.0%) (authorized, $175) ........... 175.0 175.0
7.6% notes due 2023 (effective interest rate
of 7.8%) (authorized, $300) (2) ............ 300.0 300.0
7% notes due 2023 (effective interest rate of
7.2%) (authorized, $400) (3) ............... 400.0 400.0
- ------------------------------------------------------------------------------
2,325.0 2,325.0
Less unamortized discount ................... 34.0 36.4
- ------------------------------------------------------------------------------
$ 2,291.0 $2,288.6
==============================================================================
(1) Redeemable in whole or in part at September 15, 2002, at 101.6%, and
decreasing percentages thereafter. The notes are exchangeable into
15.376 shares of Diamond Offshore's common stock per $1,000
principal amount of notes, at a price of $65.04 per share.
(2) Redeemable in whole or in part at June 1, 2003 at 103.8%, and
decreasing percentages thereafter.
(3) Redeemable in whole or in part at October 15, 2003 at 102.4%, and
decreasing percentages thereafter.
(b) Cash dividends paid to the Company by affiliates amounted to $356.7,
$368.4 and $547.1 for the years ended December 31, 2000, 1999 and 1998,
respectively.
(c) The Company is included in a consolidated federal income tax return with
certain of its subsidiaries and, accordingly, participates in the allocation
of certain components of the consolidated provision for federal income taxes.
Such taxes are generally allocated on a separate return bases.
The Company has entered into separate tax allocation agreements with
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
pay approximately $64.0 for 2000. In 1999 and 1998, CNA received $288.0 and
$83.0, respectively. Each agreement may be canceled by either of the parties
upon thirty days' written notice. See Note 8 of the Notes to Consolidated
Financial Statements of Loews Corporation and subsidiaries included in Item 8.
L-5
SCHEDULE II
LOEWS CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------------------------------------------------------
(In millions)
For the Year Ended December 31, 2000
Deducted from assets:
Allowance for
discounts ......... $ 2.7 $165.4 $165.4(1) $ 2.7
Allowance for
doubtful accounts 334.1 19.4 7.9 345.7
------------------------------------------------------
Total .......... $ 336.8 $184.9 $173.3 $348.4
======================================================
For the Year Ended December 31, 1999
Deducted from assets:
Allowance for
discounts ......... $ 1.6 $156.8 $155.7(1) $ 2.7
Allowance for
doubtful accounts 342.2 13.2 21.3 334.1
------------------------------------------------------
Total .......... $ 343.8 $170.0 $177.0 $336.8
======================================================
For the Year Ended December 31, 1998
Deducted from assets:
Allowance for
discounts ......... $ 1.4 $109.8 $109.6(1) $ 1.6
Allowance for
doubtful accounts 316.6 35.6 10.0 342.2
------------------------------------------------------
Total .......... $ 318.0 $145.4 $119.6 $343.8
======================================================
- --------------
Notes: (1) Discounts allowed.
L-6
SCHEDULE V
LOEWS CORPORATION AND SUBSIDIARIES
Supplemental Information Concerning Property-Casualty Insurance Operations
Consolidated Property-Casualty Entities
- ------------------------------------------------------------------------------
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------
(In millions)
Deferred policy acquisition costs .... $ 1,121 $ 1,126
Reserves for unpaid claim and claim
adjustment expenses ................. 26,408 26,631
Discount deducted from claim and
claim adjustment expenses reserves
above (based on interest rates
ranging from 3.5% to 7.5%) .......... 2,413 2,376
Unearned premiums .................... 4,821 5,103
Net earned premiums .................. 8,893 10,010 $10,281
Net investment income ................ 1,540 1,632 1,741
Incurred claim and claim adjustment
expenses related to current year .... 6,331 7,287 7,903
Incurred claim and claim adjustment
expenses related to prior years ..... 427 1,027 263
Amortization of deferred policy
acquisition costs ................... 1,729 2,005 2,042
Paid claim and claim expenses ........ 8,434 9,964 8,745
Net premiums written ................. 8,686 8,987 10,569
L-7
152