Net income for 1998 was $464.8 million or $4.06 per share compared to $793.6 million or $6.90 per share for 1997. Net income for 1998 includes net investment gains of $12.5 million or $.11 per share compared to net investment losses of $159.9 million or $1.39 per share in 1997.
For the quarter ended December 31, 1998 the Company reported a net operating loss, excluding net investment losses, of $172.8 million or $1.52 per share, compared to net operating income of $228.1 million or $1.99 per share for the 1997 fourth quarter. Net operating results include charges at the Lorillard tobacco subsidiary related to the settlement of tobacco litigation of $216.0 million or $1.90 per share in the fourth quarter of 1998, compared to $54.9 million or $.48 per share in the fourth quarter of 1997.
Earned premiums for 1998 increased $175.9 million, or approximately 2.0%, as compared to 1997. Earned premiums increased $93.8 million for Commercial Insurance as increases in involuntary business more than offset declines in other lines. The increase in involuntary risks is due to reductions recorded in 1997 related to prior years premiums. Excluding involuntary risks, premiums decreased by approximately $35.0 million due to the continued soft market conditions throughout the industry, particularly in workers' compensation. Also contributing to the change in 1998 was Global Operations which increased by $87.2 million, primarily due to the effects of recent acquisitions, partially offset by the decision to exit unprofitable, non-core lines of business. In addition, Personal Insurance earned premiums increased by $61.5 million due, in part, to growth in agency earned premiums, and Risk Management and Reinsurance Operations both saw earned premium growth of approximately $46.0 million. Offsetting these increases was a decrease in Specialty Operations of $159.2 million due in large part to the decision to exit the agricultural market. The impact on earned premiums due to this decision was a decrease of $98.4 million.
Underwriting losses for 1997 decreased $113.2 million as compared to 1996. This decrease in losses was primarily due to lower catastrophe losses of $223.7 million and favorable loss development of $86.3 million. Partially offsetting these improvements was lower earned premiums, as noted above and increases in current year loss experience.
Written premiums have continued to show strong growth over the last three years. Premium revenues, however, decreased slightly in 1998 to $684.0 million from $688.0 million in 1997, principally due to increased use of reinsurance for individual term life insurance products.
Long-term care premium revenues increased $37.0 million in 1998 to $137.0 million as compared with premium revenues of $100.0 million in 1997. Long-term care written premiums increased $48.0 million in 1998 over $251.0 million in 1997.
Other revenues for 1998 increased by $10.0 million when compared to 1997, primarily due to fees and other income resulting from significant growth in the variable annuity separate account product.
Individual life premium revenues increased from $313.0 million in 1996 to $373.0 million in 1997, driven primarily by growth in individual term life premiums.
Retirement Services premium revenues increased $24.0 million in 1997 from $150.0 million in 1996. Total sales volume for Retirement Services, which reflects deposits and other income which are not included in the premiums above, declined from $1,410.0 million in 1996 to $1,042.0 million in 1997.
Long-term care premium revenue declined slightly in 1997 as compared with 1996 premium revenues of $110.0 million. Long-term written premiums increased by $54.0 million in 1997 over $197.0 million in 1996.
Premiums for Group Operations decreased by approximately 5.0%, or $191.0 million, in 1998 as compared to 1997. The decrease was attributable, in part, to a $166.0 million decrease in the medical lines of coverage in Health Benefits, resulting from the decision to exit some markets. Additionally, due to changes in coverage terms, Federal Employees Health Benefit Plan ("FEHBP") premiums decreased by $90.0 million. These decreases were offset, in part, by premium growth of $65.0 million across almost all other lines of business.
In addition, increased losses of $30.0 million on accident coverages sold within Special Benefits contributed to the operating loss. The increased losses resulted from both adverse claim developments and unusually high claim activity in traditional accident insurance lines.
During 1997, premiums grew by $87.0 million as compared to 1996. Special Benefits experienced growth of $85.0 million, driven by growth in disability of $37.0 million, group term life of $27.0 million, and accident of $13.0 million. These increases resulted from strong
The decline in pre-tax operating results from 1996 to 1997 was driven primarily by deteriorating group medical claim experience, including increased losses of approximately $40.0 million in Health Benefits (employer and affinity health), and another $10.0 million additional losses on medical stop loss and reinsured group medical in Provider Markets. Offsetting these declines, Special Benefits' results increased by approximately $20.0 million due to improved experience under both long-term care and life coverages.
On November 23, 1998, Lorillard, Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the "Original Participating Manufacturers" and, together with Liggett Group, Inc. and any other tobacco product manufacturer that becomes a signatory, the "Participating Manufacturers") entered into a Master Settlement Agreement (the "Master Settlement Agreement") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and the Northern Marianas (collectively, the "Settling States") to settle the asserted and unasserted health care cost recovery and certain other claims of those states. The Original Participating Manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota.
Lorillard's share of the $2.4 billion payment amounted to $175.2 million which was charged to expense in the fourth quarter of 1998 and paid from Lorillard's available cash. The Company incurred an additional charge to expense in the fourth quarter of 1998 of $150.0 million to cover Lorillard's fixed and determinable costs associated with the Master Settlement Agreement, such as payments due in 1999 for the benefit of the national public education fund. As a result, the Company's fourth quarter pre-tax charge amounted to approximately $325.2 million. The Company anticipates that Lorillard's share of future annual industry payments related to cigarette sales would be charged to expense as the related sales occur and may be funded through price increases. On November 23, 1998, Lorillard increased the list price of all of its brands by $22.50 per thousand cigarettes ($0.45 per pack of 20 cigarettes).
The Company believes that the implementation of the Master Settlement Agreement will materially adversely affect its consolidated results of operations and cash flows in future periods. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the full price and discount segments, Lorillard's share of the domestic full price and discount segments, and the effect of any resulting cost advantage of manufacturers not subject to the Master Settlement Agreement.
The Original Participating Manufacturers will reimburse the Settling States and other specified governmental entities for reasonable costs and expenses incurred in connection with the settled claims and for time reasonably expended by their attorneys and paralegals in connection with the settled actions, subject to an aggregate cap of $150.0 million. These payments will be allocated among the Original Participating Manufacturers on the basis of relative unit volume of domestic cigarette shipments.
The Original Participating Manufacturers will also pay the reasonable fees of outside counsel representing the Settling States and other specified governmental entities. The Original Participating Manufacturers will offer to liquidate such fees and, to the extent such offers are accepted, will pay such fees over five years, beginning in
1999, subject to an annual aggregate cap of $250.0 million. The fees of attorneys who do not accept such offers will be set by a panel of arbitrators and, together with the fees of attorneys representing certain other state and class actions, will be subject to a separate and additional nationwide annual cap of $500.0 million. Amounts owed in a particular year that could not be paid because of the cap will be rolled over to the next year. On February 1, 1999, the Original Participating Manufacturers paid $5.0 million as the first installment on a total agreed upon liquidated fee of $233.5 million to the outside counsel for eight states. Lorillard's share of such payment was $455,000. In addition, the Original Participating Manufacturers will also pay the reasonable costs and expenses of such outside counsel, subject to an annual aggregate cap of $75.0 million. On December 31, 1998, the Original Participating Manufacturers paid $1.7 million as reimbursement for the costs and expenses of outside counsel in the State of Washington. Lorillard's share of this payment was $158,500. All such payments to outside counsel will be allocated among the Original Participating Manufacturers on the basis of relative unit volume of domestic cigarette shipments. On December 10, 1998, the panel of arbitrators appointed by the Original Participating Manufacturers and outside counsel in the states of Mississippi, Florida and Texas awarded attorneys' fees of $1.4, $3.4 and $3.3 billion, respectively, to attorneys in those states. The awards by those panels included a provision allowing the payments to be increased annually by a factor of 3% to account for inflation. The Original Participating Manufacturers and the outside counsel for the states of Mississippi and Florida have agreed that the panels were not authorized to award the annual inflation adjustment pursuant to the terms of the Master Settlement Agreement, and such adjustment will not be applied. The Original Participating Manufacturers and the outside counsel for the state of Texas have also agreed that the annual inflation adjustment was not appropriately awarded by the panel, and the panel has modified its decision accordingly.
The payment obligations under the Master Settlement Agreement are the several and not joint obligations of each Participating Manufacturer.
Revenues increased by $177.7 million, or 7.9%, and net income declined by $81.3 million, or 18.3%, in 1997 as compared to 1996.
Lorillard's unit sales volume increased by 3.4% as compared to 1996. Sales of Newport, a full price brand which accounted for approximately 76% of Lorillard's unit sales in 1997, increased by 7.5% as compared to 1996. Virtually all of Lorillard's sales are in the full price brand category.
Without the charges for tobacco related litigation, net income would have increased by $40.7 million as compared to 1996 due primarily to the increased revenues, partially offset by higher legal expenses. The rise in legal expenses reflected the increasing number of cases seeking damages against Lorillard for cancer and other health effects claimed to have resulted from an individual's use of cigarettes or exposure to tobacco smoke. At December 31, 1997, Lorillard was named as a defendant in approximately 384 lawsuits, compared to 143 lawsuits in 1996.
Revenues increased by $189.4 million due to higher operating dayrates, $106.6 million due to 11 rigs acquired in the acquisition of Arethusa in April 1996 and $61.4 million due to the completion of upgrade projects on four drilling rigs in 1997 as compared to 1996. These increases were partially offset by $34.8 million of gains recorded in 1996 from Diamond Offshore's sale of its land drilling rigs and related equipment, and three offshore drilling rigs.
Revenues increased, as compared to 1997, by approximately $6.1 million, or 4.7%, due to an increase in watch unit sales. Revenues also benefited from a $0.6 million increase in interest income. These increases were partially offset by an approximately $1.1 million decline in clock net sales in 1998 as compared to 1997, due primarily to lower clock unit sales.
Revenues and net income increased by $8.1 and $2.9 million, or 6.7% and 42.6%, respectively, in 1997 as compared to 1996 due primarily to higher watch unit sales volume of 6.6% and an overall increase in watch unit prices. The increased net income was partially offset by higher brand support advertising in 1997.
Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------ (Amounts in millions)
Derivative instruments (1) $ (297.3) $ (607.7) $ (153.8) Equity securities, including short positions (1) (251.4) (299.0) (8.9) Short-term investments, primarily U.S. government securities .7 (.1) 28.0 Common stock of Diamond Offshore (2) 29.1 186.6 Other 2.4 11.5 6.0 - ------------------------------------------------------------------------------ (545.6) (866.2) 57.9 Income tax benefit (expense) 191.0 303.2 (20.3) - ------------------------------------------------------------------------------ Net (loss) income $ (354.6) $ (563.0) $ 37.6 ==============================================================================
Exclusive of investment gains (losses), revenues increased by $4.8 million, or 2.6%, due principally to income from a shipping joint venture, partially offset by lower investment income. Net income declined by $15.4 million, or 64.4%, due to higher interest expenses and lower investment income, partially offset by the shipping joint venture income.
CNA's property and casualty insurance subsidiaries' statutory surplus grew from $3.4 billion in 1994 to $7.6 billion in 1998. Surplus rose in part ($1.7 billion) due to the acquisition of The Continental Corporation in 1995. Dividends of $410.0, $175.0 and $545.0 million were paid to CNA by Continental Casualty Company in 1998, 1997 and 1996, respectively.
The principal cash flow sources of CNA's property and casualty and life insurance subsidiaries are premiums, investment income and sales and maturities of investments. The primary operating cash flow uses are payments for claims, policy benefits and operating expenses.
The following table reflects ratings issued by A.M. Best, Standard and Poor's, Moody's and Duff & Phelps for CNA's Continental Casualty Company ("CCC") Intercompany Pool, Continental Insurance Company ("CIC") Intercompany Pool and Continental Assurance Company ("CAC") Intercompany Pool. Also rated were CNA's senior debt, commercial paper and preferred stock and The Continental Corporation's ("Continental") senior debt.
the government has urged the U.S. Justice Department to commence an action against the tobacco industry seeking reimbursement of Medicare expenditures resulting from injuries or other health effects allegedly caused by use of tobacco products.
On June 20, 1997, Lorillard, together with other companies in the United States tobacco industry, entered into a Memorandum of Understanding to support the adoption of federal legislation and any necessary ancillary undertakings, incorporating the features described in the proposed resolution attached to the Memorandum of Understanding (together, the "Proposed Resolution"). The Proposed Resolution would have permitted extensive regulation of the industry by the Food and Drug Administration ("FDA") and would have imposed large monetary obligations on the industry to be paid to the federal government and to the states. The Proposed Resolution would have required the manufacturers to sign private contracts, or Protocols, which embody significant restrictions on the industry's commercial free speech and advertising. In return, the Proposed Resolution would have resolved much of the industry's litigation and established a rational litigation system for future lawsuits. The Proposed Resolution, by the nature of its terms, could be implemented only by federal legislation.
After the Proposed Resolution was announced, it became the subject of intense review and criticism by the White House, the public health community, and other interested parties. Over 50 bills were introduced in the 105th Congress regarding the issues raised in the Proposed Resolution, many of which sought more stringent regulation of tobacco products by the FDA and more punitive monetary payments by the companies. On April 18, 1998, Lorillard, along with the other signatory companies to the Proposed Resolution, announced a withdrawal from the legislative process relating to enactment of a comprehensive tobacco settlement. After much debate, Congress adjourned in 1998 without taking action on the Proposed Resolution.
In 1996, the FDA published regulations (the "FDA Regulations") which would severely restrict cigarette advertising and promotion and limit the manner in which tobacco products can be sold. The FDA premised its regulations on the need to reduce smoking by underage youth and young adults. The FDA Regulations include:
(ii) Regulations limiting all cigarette advertising to a black and white, text only format in most publications and outdoor advertising such as billboards, prohibiting billboards advertising cigarettes within 1,000 feet of a school or playground, banning the use of cigarette brand names, logos and trademarks on premium items and prohibiting the furnishing of any premium item in consideration for the purchase of cigarettes or the redemption of proofs-of-purchase coupons.
(iii) Regulations prohibiting the use of cigarette brand names to sponsor sporting and cultural events.
rehearing with suggestions for en banc reconsideration, and on November 10, 1998 the appeals court denied that petition. On January 19, 1999, the government filed a petition for certiorari to the U.S. Supreme Court. No action has yet been taken by that court.
Funds from operations continue to exceed operating requirements. Funds for other capital expenditures and working capital requirements are expected to be provided from operations. Loews Hotels will obtain its share of the equity contributions for the development of hotels in Orlando and Philadelphia under arrangements with the Company.
Depressed conditions in the oil and gas industry have also increased the susceptibility of term contracts, previously committed at dayrates in excess of current market rates, to cancellation by the customer. Most drilling contracts allow for termination if drilling operations are suspended for a period of time as a result of a breakdown of equipment or by giving notice in connection with payment of an early termination fee by the customer. During 1998, two of Diamond Offshore's term contracts were cancelled by customers. The contract for use of its drillship, the Ocean Clipper, which had a four year term through July 2001, was
terminated in December 1998 in connection with issues arising out of performance failures. In October 1998, Diamond Offshore agreed to an early termination and substitution arrangement involving two of its semisubmersibles located offshore Australia. Diamond Offshore cannot accurately predict the actions of its customers or the circumstances in which further contract cancellations might occur.
During the year ended December 31, 1998, Diamond Offshore expended $113.8 million in association with its continuing rig enhancement program to maintain spare equipment inventory levels and meet other corporate requirements. Diamond Offshore has budgeted $134.1 million for 1999 capital expenditures associated with its continuing rig enhancement program, spare equipment inventory and other corporate requirements.
During 1998, Diamond Offshore purchased 3,518,100 shares of its outstanding Common Stock at an aggregate cost of approximately $88.7 million. Depending on market conditions, Diamond Offshore from time to time may purchase additional shares in the open market or otherwise.
Funds from operations continue to exceed operating requirements. Funds for other capital expenditures and working capital requirements are expected to be provided from operations. No material capital expenditures are anticipated during 1999.
During 1998, the Company purchased 2,417,700 shares of its outstanding Common Stock at an aggregate cost of approximately $218.0 million. Depending on market conditions, the Company from time to time purchases additional shares in the open market or otherwise.
Investment activities of non-insurance companies include investments in fixed income securities, equity securities including short sales, derivative instruments and short-term investments. 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 remaining securities are carried at fair value which approximated carrying value at December 31, 1998 and 1997.
CNA's general account investment portfolio consists primarily of publicly traded government bonds, asset-backed securities, mortgage-backed securities, municipal bonds, and corporate bonds.
High yield securities are bonds rated as below investment grade by bond rating agencies and other unrated securities which, in the opinion of management, are below investment grade (below BBB). High yield securities generally involve a greater degree of risk than investment grade securities. Expected returns should, however, compensate for the added risk. The risk is also considered in the interest rate assumptions in the underlying insurance products. CNA's concentration in high yield bonds including Separate Account business was approximately 4.0% and 3.2% of its total assets at December 31, 1998 and 1997, respectively.
CMO's are subject to prepayment risks that tend to vary with changes in interest rates. During periods of
At December 31, 1998 CNA's general account investments in bonds and redeemable preferred stocks were carried at their fair value of $30.1 billion, compared to $29.5 billion at December 31, 1997. At December 31, 1998 and 1997, net unrealized gains on fixed maturity securities amounted to approximately $562.0 and $528.0 million, respectively. The gross unrealized gains and losses for the fixed maturity securities portfolio at December 31, 1998 were $818.0 and $256.0 million, respectively, compared to $644.0 and $116.0 million, respectively, at December 31, 1997.
The Company's largest equity holding (held by CNA) in a single issuer is Global Crossing, Ltd. ("Global Crossing") common stock. At December 31, 1998, the Company owned 20,037,584 shares, or 9.8% of the outstanding common stock of Global Crossing which was valued at $904.0 million. Net unrealized gains associated with this security approximated $841.0 million at December 31, 1998. Without registration or an exemption from registration, sales to the public of the Company's holdings of Global Crossing are governed by Rule 144 of the Securities Act of 1933 (the "Act") and may not commence until August 13, 1999. After August 13, 1999, the Company has the right to require Global Crossing to register under the Act up to 25% of the Company's holdings prior to December 31, 1999.
At December 31, 1998 and 1997, fixed maturity securities in the guaranteed investment Separate Account contract portfolio, carried at fair value, amounted to $3.2 and $3.8 billion, respectively. Net unrealized gains on fixed maturity securities in these Separate Accounts amounted to approximately $64.0 and $71.0 million at December 31, 1998 and 1997, respectively. The gross unrealized gains and losses for the fixed maturity securities portfolio at December 31, 1998 were $84.0 and $20.0 million, respectively, compared to $87.0 and $16.0 million, respectively, at December 31, 1997.
High yield securities in the guaranteed investment Separate Account contract portfolio, carried at fair value, amounted to $269.0 and $310.0 million at December 31, 1998 and 1997, respectively. Net unrealized losses on high yield securities held in such Separate Account portfolio were $9.0 and $1.0 million at December 31, 1998 and 1997, respectively.
The widespread use of computer programs, both in the United States and internationally, that rely on two digit date fields to perform computations and decision making functions may cause computer systems to malfunction when processing information involving dates beginning in 1999. Such malfunctions could lead to business delays and disruptions. The Company renovated or replaced many of its legacy systems and upgraded its systems to accommodate business for the Year 2000 and beyond. In addition, the Company is checking embedded systems in computer hardware and other infrastructure such as elevators, heating and ventilating systems, and security systems.
Based upon its current assessment, the Company estimates that the total cost to replace and upgrade its systems to accommodate Year 2000 processing is expected to be approximately $70.0 to $80.0 million. As of December 31, 1998, approximately $64.0 million has been spent. However, prior to 1997, the Company did not specifically separate technology charges for Year 2000 from other information technology charges. In addition, while some hardware charges are included in the budget figures, the Company's hardware costs are typically included as part of ongoing technology updates and not specifically as part of the Year 2000 project. All funds spent and to be spent have been or will be financed from current operating funds.
There can be no assurances that policyholders will not suffer losses resulting from Year 2000 issues and seek indemnification under insurance policies underwritten by CNA. Coverage, if any, will depend on the facts and circumstances of the claim and the provisions of the policy. It is impossible to estimate with any degree of accuracy the extent to which various types of policies issued by CNA may afford coverage for loss or claims. At this time, CNA is unable to forecast the nature and range of the losses, the availability of coverage for the losses, or the likelihood of significant claims. As a result, CNA is unable to determine whether the adverse impact, if any, in connection with the foregoing circumstances would be material to it.
In December 1997, the AICPA's Accounting Standards Executive Committee issued SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." SOP 97-3 requires that entities recognize liabilities for insurance-related assessments when all of the following criteria have been met: an assessment has been imposed or it is probable that an assessment will be imposed; the event obligating an entity to pay an imposed or probable assessment has occurred on or before the date of the financial statements; and the amount of the assessment can be reasonably estimated. This SOP is effective for fiscal years beginning after December 15, 1998. The effect of this SOP will result in the Company recording an after tax charge in the first quarter of 1999 between $120.0 and $150.0 million as a cumulative effect of a change in accounting principle.
In October 1998, the AICPA's Accounting Standards Executive Committee issued SOP 98-7, "Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." The guidance excludes long-duration life and health insurance contracts from its scope. This statement is effective for financial statements in the year 2000, with early adoption encouraged. CNA is currently evaluating the effects of this Statement.
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 contract with the Company; general economic and business conditions; changes in financial markets (interest rate, credit, currency, commodities and equities) or in the value of specific investments held by the Company; changes in foreign, political, social and economic conditions; regulatory initiatives and compliance with governmental regulations; judicial decisions and rulings in smoking and health litigation, the impact of tobacco settlement agreements and any future settlements of tobacco-related litigation, the impact of bills introduced in Congress in relation to tobacco operations, changes in foreign and domestic oil and gas exploration and production activity, rating agency policies and practices; the results of financing efforts; the actual closing of contemplated transactions and agreements and various other matters and risks, many of which are beyond the Company's control. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in million, except per share data)
Accounting changes - Effective December 31, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for presenting comprehensive income and its components. The Company has presented this information in its Consolidated Statements of Shareholders' Equity and in Note 11.
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in benefit obligations and fair values of plan assets that will facilitate analysis, and eliminates certain disclosures that are no longer deemed as useful to users of financial statements. The Company has presented this information in Note 13.
Securities lending activities - The Company has a securities lending program where securities are loaned to third parties, primarily major brokerage firms.
Claim and claim adjustment expense reserves - Claim and claim expense reserves, except reserves for structured settlements, workers' compensation lifetime claims and accident and health disability claims, are not discounted and are based on (a) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations, (b) estimates of unreported losses, (c) estimates of losses on assumed insurance, and (d) estimates of future expenses to be incurred in settlement of claims. In establishing these estimates, consideration is given to current conditions and trends as well as past company and industry experience. The effects of inflation, which can be significant, are implicitly considered in the reserving process and are part of the recorded reserve balance.
Claim and claim adjustment expense reserves represent management's estimates of ultimate liabilities based on currently available facts and case law and the ultimate liability may vary significantly from such estimates. CNA regularly reviews its reserves, and any adjustments to the previously established reserves are reflected in operating income in the period the need for such adjustments becomes apparent. See Note 7 for a further discussion of claim and claim expense reserves.
Structured settlements have been negotiated for claims on certain property and casualty insurance policies. Structured settlements are agreements to provide periodic payments to claimants, which are fixed and determinable as to the amount and time of payment. Certain structured settlements are funded by annuities purchased from CNA's life insurance subsidiary. Related annuity obligations are recorded in future policy benefits reserves. Obligations for structured settlements not funded by annuities are included in claim and claim expense reserves and carried at the present values determined using interest rates ranging from 6.0% to 7.5%. At December 31, 1998 and 1997, the discounted reserves for unfunded structured settlements were $893.0 and $913.0, respectively (reflecting a discount of $1,511.0 and $1,527.0, respectively). Workers' compensation lifetime claim reserves and accident and health disability claim reserves are discounted at interest rates allowed by insurance regulators that range from 3.5% to 6.0% with mortality and morbidity assumptions reflecting CNA's and current industry experience. At December 31, 1998 and 1997, such discounted reserves totaled $2,277.0 and $2,196.0, respectively (reflecting a discount of $869.0 and $882.0, respectively).
Deferred policy acquisition costs - Costs of acquiring property and casualty insurance business, which vary with and are primarily related to the production of such business, are deferred and amortized ratably over the period the related premiums are recognized. Such costs include commissions, premium taxes, and certain underwriting and policy issuance costs. Anticipated investment income is considered in the determination of the recoverability of deferred policy acquisition costs. Life acquisition costs are capitalized and amortized based on assumptions consistent with those used for computing policy benefit reserves. Acquisition costs on traditional life business are amortized over the assumed premium paying periods. Universal life and annuity acquisition costs are amortized in proportion to the present value of estimated gross profits over the products' assumed durations. To the extent that unrealized gains or losses on available for sale securities would result in an adjustment of deferred policy acquisition costs had those gains or losses actually been realized, the related unamortized deferred policy acquisition costs are recorded as an adjustment of the unrealized gains or losses included in shareholders' equity.
Tobacco products - These inventories, aggregating $221.6 and $227.9 at December 31, 1998 and 1997, 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 $215.5 and $208.6 higher at December 31, 1998 and 1997, respectively.
Investment gains of $1,448.4, $837.6 and $716.0 and losses of $962.4, $264.4 and $165.1 were realized on securities available for sale for the years ended December 31, 1998, 1997 and 1996, respectively. Investment gains (losses) in 1998, 1997 and 1996 also include $159.2, $58.6 and $2.7 of net unrealized losses on equity securities in the Company's trading portfolio.
The amortized cost and market values of securities are as follows:
The Company's largest equity holding (held by CNA) in a single issuer is Global Crossing, Ltd. ("Global Crossing") common stock. At December 31, 1998, the Company owned 20,037,584 shares, or 9.8% of the outstanding common stock of Global Crossing which was valued at $904.0. Net unrealized gains associated with this security approximated $841.0 at December 31, 1998. Without registration or an exemption from registration, sales to the public of the Company's holdings of Global Crossing are governed by Rule 144 of the Securities Act of 1933 (the "Act") and may not commence until August 13, 1999. After August 13, 1999, the Company has the right to require Global Crossing to register under the Act up to 25% of the Company's holdings prior to December 31, 1999.
At December 31, 1998 and 1997, CNA maintained statutory deposits of cash and securities, with carrying values of $1,700.0 and $2,100.0, respectively, under requirements of regulatory authorities.
In cases where quoted market prices are not available, fair values may be based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. Accordingly, the estimates presented herein are subjective in nature and are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The amounts reported in the consolidated balance sheet for fixed maturities securities, equity securities, derivative instruments, short-term investments and securities sold under agreements to repurchase are at fair value. As such, these financial instruments are not shown in the table above. See Note 4 for the fair value of derivative instruments. Since the disclosure excludes certain financial instruments and nonfinancial instruments such as real estate and insurance reserves, the aggregate fair value amounts cannot be summed to determine the underlying economic value of the Company.
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 discounted cash flows and quoted market prices of the investments, comparable instruments, or underlying assets of the investments.
CNA's property and casualty insurance claims and claim adjustment expense reserves represent the estimated amounts necessary to settle all outstanding claims, including claims which are incurred but not reported, as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, CNA's experience with similar cases, and various historical development patterns. Consideration is given to such historical patterns as field reserving trends, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes. All of these can affect the estimation of reserves.
The table below provides a reconciliation between beginning and ending claim and claim adjustment expense reserve balances for 1998, 1997 and 1996:
Many policyholders have made claims against various CNA insurance subsidiaries for defense costs and indemnification in connection with environmental pollution matters. These reserves relate to claims for accident years 1989 and prior, which coincides with CNA's adoption of the Simplified Commercial General Liability coverage form which included an absolute pollution exclusion. CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether clean-up costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues.
A number of proposals to reform Superfund have been made by various parties. However, no reforms were enacted by Congress in 1998 and it is unclear as to what positions the Congress or the Administration will take and what legislation, if any, will result. If there is legislation, and in some circumstances even if there is no legislation, the federal role in environmental clean-up may be materially reduced in favor of state action. Substantial changes in the federal statute or the activity of the EPA may cause states to reconsider their environmental clean-up statutes and regulations. There can be no meaningful prediction of regulation that would result.
CNA's insurance subsidiaries have exposure to asbestos claims, including those attributable to CNA's litigation with Fibreboard Corporation (see Note 17). Estimation of asbestos claim reserves involves many of the same limitations discussed above for environmental pollution claims such as inconsistency of court decisions, specific policy provisions, allocation of liability among insurers, missing policies and proof of coverage. As of December 31, 1998 and 1997, CNA carried approximately $1,456.0 and $1,400.0, respectively, of claim and claim expense reserves, net of reinsurance recoverable, for reported and unreported asbestos-related claims. In 1998, CNA recorded $243.0 of adverse development
compared to $105.0 of adverse development in 1997. As with CNA's exposure to environmental pollution and other mass tort exposures, the additional reserve strengthening in 1998 for asbestos related claims was a result of management's continuous review of development with respect to these exposures, as well as a review of the results of CNA's annual analysis of these claims which was completed in conjunction with the study of environmental pollution and other mass tort claims. This analysis indicated deterioration in claims experience and claim counts for asbestos related claims.
The other favorable development during 1996 of $206.2 was principally due to favorable claim experience in the workers' compensation line of business.
Gross deferred tax assets amounted to $2,953.4 and $2,891.8 and liabilities amounted to $2,080.8 and $1,947.5 for the years ended December 31, 1998 and 1997, respectively.
The 1998 amounts reflect an increase in certain components of net deferred tax assets as a result of the finalization of an Internal Revenue Service examination. The increase resulted in a corresponding reduction of intangible assets.
Federal, foreign, state and local income tax payments, net of refunds, amounted to approximately $395.1, $565.3 and $407.8 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company has entered into separate tax allocation agreements with Bulova and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the "Subsidiary"). Each agreement provides that the Company will (i) pay to the Subsidiary the amount, if any, by which the Company's consolidated federal income tax is reduced by virtue of inclusion of the Subsidiary in the Company's return, or (ii) be paid by the Subsidiary an amount, if any, equal to the federal income tax which would have been payable by the Subsidiary if it had filed a separate consolidated return. Under these agreements, CNA will receive approximately $83.0 for 1998 and has paid the Company approximately $210.0 and $99.0 for 1997 and 1996, respectively, and Bulova will pay or has paid the Company approximately $5.6, $2.6 and $5.3 for 1998, 1997 and 1996, respectively. Each agreement may be cancelled by either of the parties upon thirty days' written notice.
The commercial paper borrowings are classified as long-term as the program is fully supported by the committed credit facility. The average interest rate on commercial paper was 5.9% and 6.1% at December 31, 1998 and 1997, respectively.
The weighted average interest rate (interest and facility fees) on the combined revolving credit facility, commercial paper borrowings and interest rate swaps was 6.4% at December 31, 1998 and 1997.
On December 14, 1998, CNA issued $200.0 principal amount of 6.6% senior notes due December 15, 2008. The net proceeds were used to enhance the capital of Continental Casualty Company.
The aggregate of long-term debt maturing in each of the next five years is approximately as follows: $130.1 in 1999, $3.2 in 2000, $743.6 in 2001, $128.7 in 2002 and $402.9 in 2003. The Company paid interest expenses of approximately $322.0, $325.1 and $315.3 for the years ended December 31, 1998, 1997 and 1996, respectively.
Earnings per share are based on the weighted average number of shares outstanding during each year (114,539,080, 115,000,000 and 116,161,000 for the years ended December 31, 1998, 1997 and 1996, respectively).
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. These restructuring and other related charges primarily related to the following activities: planned reductions in the workforce; the consolidation of certain processing centers; the exiting of certain businesses and facilities; the termination of related lease obligations; and the write-off of certain assets related to these activities. The Plan contemplates a gross reduction in workforce of 4,500 employees, resulting in a planned net reduction of approximately 2,400 employees. According to the Plan, the various activities and workforce reductions should be completed by the end of 1999.
The restructuring and other related charges were comprised of the following costs and expenses: (a) costs and benefits related to planned employee terminations of $98.0, of which $53.0 related to severance and outplacement costs and $24.0 related to other employee transition related costs and $21.0 related to benefit curtailment losses; (b) 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; (c) lease termination costs of $42.0 and (d) losses incurred on the exiting of certain businesses of $32.0.
CNA recorded $220.0 of these restructuring and other related charges in the third quarter of 1998. Other charges such as parallel processing costs, relocation costs, and retention bonuses, did not qualify for accrual at the end of the third quarter under generally accepted accounting principles and are being expensed as incurred. In the fourth quarter of 1998, $26.0 of these charges were recorded.
The 1998 restructuring and other related charges for CNA's property and casualty Agency Market Operations totaled approximately $96.0. The charges included employee severance and outplacement costs of $34.0 related to the planned net reduction in the workforce of approximately 1,200 employees. Approximately $29.0 of lease termination costs were also 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 costs of $12.0, parallel processing charges of $7.0, and $5.0 of other fixed asset writedowns. Other charges, including travel, relocation and other transition related activity, which were expensed as incurred, totaled approximately $9.0.
Through December 31, 1998, approximately 152 Risk Management employees had been released at a cost of $2.0. The majority of the employees were adjusters and office support staff.
Through December 31, 1998, approximately 270 employees of these other segments, most of whom were underwriters and office support staff, had been released at a cost of $3.0.
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 $2,323.3, $1,983.7 and $1,746.1, respectively, at December 31, 1998 and $2,170.6, $1,747.6 and $1,609.6, respectively, at December 31, 1997.
In April 1997, Diamond Offshore Drilling Inc., ("Diamond Offshore") completed a public offering of 2.5 million shares of its common stock for net proceeds of approximately $82.3. Diamond Offshore used these funds to acquire the Polyconfidence, a semisubmersible accommodation vessel for approximately $81.0. As a result of the public offering, the Company's ownership interest in Diamond Offshore declined to 50.3% and the Company recorded a pre-tax gain of approximately $29.1 ($18.9 after provision for deferred taxes).
Written premiums were $13,823.0, $13,620.0 and $13,938.0 at December 31, 1998, 1997 and 1996, respectively. The ceding of insurance does not discharge the primary liability of the original insurer. CNA places reinsurance with other carriers only after careful review of the nature of the contract and a thorough assessment of the reinsurers' credit quality and claim settlement performance. Further, for carriers that are not authorized reinsurers in CNA's states of domicile, CNA receives collateral, primarily in the form of bank letters of credit. Such collateral totaled approximately $774.0 and $857.0 at December 31, 1998 and 1997, respectively. CNA's largest recoverable from a single reinsurer, including prepaid reinsurance premiums, is with Lloyds of London and approximated $416.0 and $451.0 at December 31, 1998 and 1997, respectively.
Insurance claims and policyholders' benefits expense is net of reinsurance recoveries of $994.0, $1,309.0 and $1,220.0 for the years ended December 31, 1998, 1997 and 1996, respectively.
In the above table, life premiums are primarily from long duration contracts, property and casualty premiums are from short duration contracts, and accident and health premiums are primarily from short duration contracts.
Fibreboard Litigation - CNA's primary property and casualty subsidiary, Continental Casualty Company ("Casualty"), has been party to litigation with Fibreboard Corporation ("Fibreboard") involving coverage for certain asbestos-related claims and defense costs (San Francisco Superior Court, Judicial Council Coordination Proceeding 1072). As described below, Casualty, Fibreboard, another insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation), and a negotiating committee of asbestos claimant attor-
On July 27, 1995, the United States District Court for the Eastern District of Texas entered judgment approving the Global Settlement Agreement and the Trilateral Agreement. As expected, appeals were filed as respects to both of these decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of Appeals in New Orleans affirmed the judgment approving the Global Settlement Agreement by a 2 to 1 vote and affirmed the judgment approving the Trilateral Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and Suggestions for Rehearing by the entire Fifth Circuit Court of Appeals as respects to the decision on the Global Settlement Agreement were denied. Two petitions for certiorari were filed in the Supreme Court as respects the Global Settlement Agreement. On June 27, 1997, the Supreme Court granted these petitions, vacated the Fifth Circuit's judgment as respects to the Global Settlement Agreement, and remanded the matter to the Fifth Circuit for reconsideration in light of the Supreme Court's decision in Amchem Products Co. v. Windsor.
Settlement Agreements - On April 9, 1993, Casualty and Fibreboard entered into an agreement pursuant to which, among other things, the parties agreed to use their best efforts to negotiate and finalize a global class action settlement with asbestos-related bodily injury and death claimants.
On August 27, 1993, the Settling Parties reached an agreement in principle for an omnibus settlement to resolve all future asbestos-related bodily injury claims involving Fibreboard. The Global Settlement Agreement was executed on December 23, 1993. The agreement calls for contribution by Casualty and Pacific Indemnity of an aggregate of $1,525.0 to a trust fund for a class of all future asbestos claimants, defined generally as those persons whose claims against Fibreboard were neither filed nor settled before August 27, 1993. (As used in this note, "present" claims generally refers to asbestos claims filed against Fibreboard, on or before August 27, 1993.) An additional $10.0 is to be contributed to the fund by Fibreboard. As indicated above, the Global Settlement Agreement has been approved by the Fifth Circuit a second time, but the Supreme Court granted a petition for certiorari and is currently reviewing the Fifth Circuit decision.
On October 12, 1993, Casualty, Pacific Indemnity and Fibreboard entered into the Trilateral Agreement to settle the coverage litigation to operate in the event that the Global Settlement Agreement is disapproved. The Trilateral Agreement calls for payment to Fibreboard by Casualty and Pacific Indemnity of an aggregate $2,000.0, of which Casualty's portion is approximately $1,460.0, to resolve all claims by Fibreboard and all future and certain present asbestos claims arising under the policy issued to Fibreboard by Casualty.
Final court approval of the Trilateral Agreement and its implementation has substantially resolved Casualty's
exposure with respect to asbestos claims involving Fibreboard. While there does exist the possibility of further adverse developments with respect to Fibreboard claims, management does not anticipate subsequent reserve adjustments, if any, to materially affect the equity of the Company. Management will continue to monitor the potential liabilities with respect to Fibreboard asbestos claims and will make adjustments to claim reserves if warranted.
On November 23 1998, the cigarette manufacturers and the attorneys general for 46 states (including Louisiana) and six other governmental entities reached an agreement regarding the resolution of their Medicaid reimbursement claims. The cigarette manufacturers have agreed to make annual payments in perpetuity, including a total of $206,000.0 through 2025. In exchange, the states have agreed to release their claims against the cigarette manufacturers and have further agreed to release any claims that they may have against cigarette distributors, retailers, component part manufacturers and their insurers. None of these latter entities are parties to the settlement agreement. The Attorney General of Louisiana and the defendants in the Ieyoub litigation are implementing procedures to secure dismissal of the Ieyoub litigation and resolution of the Attorney General's claims. Thus, the litigation may be dismissed with prejudice in the near future.
Some cases have been brought by individual plaintiffs who allege cancer and/or other health effects claimed
to have resulted from an individual's use of cigarettes, addiction to smoking, or exposure to environmental tobacco smoke ("Conventional Product Liability Cases"). Approximately 340 such actions are pending against Lorillard. In other cases, plaintiffs have brought claims as class actions on behalf of large numbers of individuals for damages allegedly cause by smoking ("Class Actions"). Approximately 60 such cases are pending against Lorillard. In some cases, plaintiffs are governmental entities or others, such as labor unions, private companies, Indian Tribes, or private citizens suing on behalf of taxpayers, who seek reimbursement of health care costs allegedly incurred as a result of smoking, as well as other alleged damages ("Reimbursement Cases"). Approximately 100 such cases are pending, excluding some of the actions brought by certain governmental entities that have not been formally concluded but are subject to the November 23, 1998 "Master Settlement Agreement" discussed below. There also are claims for contribution and/or indemnity in relation to asbestos claims filed by asbestos manufacturers or the insurers of asbestos manufacturers ("Claims for Contribution"). Approximately nine such actions are pending against Lorillard.
In addition to the above, claims have been brought against Lorillard seeking damages resulting from alleged exposure to asbestos fibers which were incorporated, for a limited period of time, ending more than forty years ago, into filter material used in one brand of cigarettes manufactured by Lorillard ("Filter Cases"); there has not been a noticeable increase in the filing of these suits during the past few years, and approximately 20 such actions are pending.
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") and an environmental tobacco smoke smoking and health class action brought on behalf of airline flight attendants.
Lorillard recorded pre-tax charges of $579.0 and $198.8 for the years ended December 31, 1998 and 1997, respectively, to accrue its share of all fixed and determinable portions of its obligations under the tobacco settlements. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments in the following amounts, subject to adjustment for several factors, including inflation, market share and industry volume: 1999, $4,100.0 (of which $2,400.0 related to the Master Settlement Agreement has already been paid); 2000, $9,100.0; 2001, $9,900.0; 2002, $11,300.0; 2003, $10,900.0; 2004 through 2007, $8,400.0; and thereafter, $9,400.0. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500.0, as well as additional amounts as follows: 1999, $450.0; 2000, $416.0; and 2001 through 2003, $250.0. These payment obligations are the several and not joint obligations of each settling defendant. Lorillard's portion of the future adjusted payments and legal fees, which is not currently estimable, will be based on its share of domestic cigarette shipments in the year preceding that in which the payment is made. Lorillard's
The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to tobacco control and underage use laws and other provisions.
On March 18, 1998, a jury in the case of Dunn v. RJR Nabisco Holdings Corporation, et al. (Superior Court, Delaware County, Indiana), returned a verdict in favor of defendants, which included the Company and Lorillard Tobacco Company. The court entered a final judgment in favor of the defendants that was consistent with the jury's verdict. Plaintiffs did not notice an appeal from the final judgment.
Duval County to vacate its final judgment and to transfer the case either to the Circuit Court of Broward County, Florida, or the Circuit Court of Palm Beach County, Florida, or a new trial.
CLASS ACTIONS - There are 80 purported class actions pending against cigarette manufacturers and other defendants, including the Company. Lorillard is a defendant in 60 of the 80 cases seeking class certification. The Company is a defendant in 24 of the purported class actions. Many of the purported class actions are in the pre-trial, discovery stage. Most of the suits seek class certification on behalf of residents of the states in which the cases have been filed, although some suits seek class certification on behalf of residents of multiple states. All but one of the purported class actions seek class certification on behalf of individuals who smoked cigarettes or were exposed to environmental tobacco smoke. One case seeks class certification on behalf of individuals who have paid insurance premiums to Blue Cross and Blue Shield organizations.
Trial began during July 1998 in the case of Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida, May 5, 1994). Plaintiffs have been granted class certification on behalf of Florida residents and citizens, and survivors of such individuals, who allege injury or have died from and medical conditions caused by their addiction to cigarettes containing nicotine. Plaintiffs seek actual damages and punitive damages estimated to be in the billions of dollars. Plaintiffs also seek equitable relief including, but not limited to, a fund to enable Florida smokers' medical condition to be monitored for future health care costs, attorneys' fees, and court costs.
REIMBURSEMENT CASES - Suits brought by 46 states governments and six other governmental entities are expected to be resolved by the Master Settlement Agreement. In addition to these, approximately 100 other suits are pending, comprised of approximately 75 union cases, and cases brought by Indian tribes, private companies and foreign governments filing suit in U.S. courts, in which plaintiffs seek recovery of funds expended by them to provide health care to individuals with injuries or other health effects allegedly caused by
The President of the United States stated in a State of the Union address on January 19, 1999, that he had authorized the United States Justice Department to initiate a reimbursement litigation lawsuit against United States cigarette manufacturers. The Attorney General of the United States has subsequently stated publicly that the Justice Department intends to pursue such litigation. Such federal litigation would not be affected by the Master Settlement Agreement. No such federal lawsuit has been filed to date.
Reimbursement Cases by Indian Tribes - Indian Tribes have filed nine reimbursement suits in their tribal courts, three of which have been dismissed. Lorillard is a defendant in each of the cases. The Company is not named as a defendant in any of the five tribal suits filed to date. Each of the pending cases is in the pre-trial, discovery stage.
Reimbursement Cases Filed By Private Companies - Private companies have filed six suits against cigarette manufacturers. Three of the suits were brought by various Blue Cross and/or Blue Shield entities, two of the cases have been filed by self-insured employers that directly provide health care benefits to employees and their families, while the sixth case is brought by a health maintenance organization. Lorillard is a defendant in each of the six cases. The Company is not named as a defendant in any of the actions filed to date by private companies. Four of the six cases are in the pre-trial, discovery stage. Courts have granted defendants' motions dismissing the remaining two cases, and plaintiffs in both actions have noticed appeals.
Reimbursement Cases by Labor Unions - Labor unions have filed approximately 75 reimbursement suits in various states in federal or state courts. Lorillard is named as a defendant in each of the suits filed to date by unions. The Company is named as a defendant in three of the cases. Five of the approximately 75 cases are on appeal from final judgments entered in defendants' favor by the trial courts. Each of the remaining cases is in the pre-trial, discovery stage.
Trial is underway in Ironworkers Local Union No. 17 Insurance Fund, et al. v. Philip Morris Incorporated et al., an action pending in federal court in Ohio, in which plaintiffs are the trust funds of various Ohio unions. Prior to trial, the court granted plaintiffs' motion for class certification on behalf of approximately 100 such trust funds. Plaintiffs seek actual damages and punitive damages estimated to be in the billions of dollars.
The Company is named as a defendant in four of the cases. Each of these cases is 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 time, ending more than forty years ago, into the filter material used in one of the brands of cigarettes manufactured by Lorillard. Twenty such cases are pending in federal and state courts. Allegations of liability include negligence, strict liability, fraud, misrepresentation and breach of warranty. Plaintiffs seek unspecified amounts in compensatory and punitive damages in many cases, and in other cases damages are stated to amount to as much as $10.0 in compensatory damages and $100.0 in punitive damages. Trials have been held in 11 such cases, including one to date in 1999. Verdicts have been returned in favor of Lorillard in nine of the 11 cases. In one of the two remaining trials, plaintiffs were awarded $0.14 in actual damages from Lorillard in a 1996 trial, although this amount was reduced to approximately seventy thousand dollars. In the second such action, a jury awarded plaintiffs approximately $2.0 in actual damages and punitive damages following a 1995 trial. Courts of appeal decided Lorillard's appeals in favor of the plaintiffs.
While Lorillard intends to defend vigorously all smoking and health related litigation which may be brought against it, it is not possible to predict the outcome of any of this litigation. Litigation is subject to many uncertainties, and it is possible that some of these actions could be decided unfavorably.
Except for the impact of the State Settlement Agreements as described above, management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending litigation. It is possible that the Company's results of operations or cash flows in a particular quarterly or annual period or its financial position could be materially affected by an unfavorable outcome of certain pending litigation.
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 85% owned subsidiary); the production and sale of cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc., a 52% owned subsidiary); and the distribution and sale of watches and clocks (Bulova Corporation, a 97% owned subsidiary). Each operating entity is responsible for the operation of its specialized business and is headed by a chief executive officer having the duties and authority commensurate with that position.
Loews Hotels owns and/or operates 15 hotels, 13 of which are in the United States and two in Canada.
(a) Investment gains (losses) included in Revenues, Income before taxes and minority interest and Net income are as follows:
(b) Includes $2,000.0, $2,100.0 and $2,100.0 under contracts covering U.S. government employees and their dependents for the respective periods. (c) Includes pre-tax charges related to the settlements of tobacco litigation of $579.0 and $198.8 ($346.5 and $122.0 after taxes) for the years ended December 31, 1998 and 1997, respectively. (d) Income taxes and interest expenses are as follows: