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.
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.
Fourth quarter 2000 revenues were $5.6 billion, compared to $4.9 billion in the fourth quarter of 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.
Insurance operations are conducted by subsidiaries of CNA Financial Corporation ("CNA"). CNA is an 87% owned subsidiary of the Company.
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.
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 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.
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 Operations includes four principal groups, Group Benefits, Provider Markets, Life Reinsurance, and Federal Markets.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
Revenues increased due to higher watch unit sales and increased clock unit sales and prices, partially offset by
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.
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.
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.
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.
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.
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.
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.
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
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
Reclassification - Certain amounts applicable to prior periods have been reclassified to conform to the classifications followed in 2000.
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.
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 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.
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.
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.
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.
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 1999 of $551.0 was due to unfavorable loss development of approximately $540.0 for
standard commercial lines, approximately $60.0 for medical malpractice, and approximately $70.0 for accident and health. These unfavorable changes were partially offset by favorable development of approximately $120.0 in non- medical professional liability and assumed reinsurance on older accident years. The unfavorable development in standard commercial lines was due to commercial automobile liability and workers' compensation losses being higher than expected in recent accident years. In addition, the number of claims reported for commercial multiple-peril liability claims from older accident years 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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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).
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").
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.
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.
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
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.
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.
Several additional Claims for Contribution cases have been filed but not served on any of the defendants to date.
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.
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.
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.
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,
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.
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 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.
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.
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.
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.
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 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
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
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.
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
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.
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.
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.