In 1993 the Company changed its method of accounting for certain investments in debt and equity securities.
As previously reported, on May 10, 1995, CNA consummated the acquisition of all the outstanding shares of The Continental Corporation ("CIC") for approximately $1,100.0 million, or $20 per CIC share. As a result of the acquisition, CNA is the ninth largest U.S. insurance organization, the third largest U.S. property and casualty organization and the largest U.S. commercial lines insurance group, based on 1995 net written premiums.
In 1995, to take advantage of favorable interest rate spreads, CNA established a commercial paper program, borrowing from investors to reduce a like amount of the Bank Facility. This borrowing totaled $675.0 and $500.0 million with an average interest rate of 5.7% and 6.1% at December 31, 1996 and 1995, respectively. The commercial paper borrowings are classified as long-term debt, as the Bank Facility supports the program (at an undrawn cost of 9 basis points).
On November 15, 1996, CNA issued $250.0 million principal amount of 6 3/4% Senior notes due November 15, 2006. The net proceeds were used to pay down a portion of the Bank Facility. As a result, the borrowing capacity under the Bank Facility was reduced by $250.0 million to $1,075.0 million. As of December 31, 1996, the outstanding loans under the Bank Facility were $400.0 million. There was no unused borrowing capacity under the Bank Facility after the effects of the commercial paper program.
As a result of the settlement of the Fibreboard litigation, CNA anticipates that 1997 operating cash flows will be substantially lower, due to anticipated claim payments. The Fibreboard claim payments for 1997 will include approximately $500.0 million in payments made in late December 1996, which are reflected in the Consolidated Balance Sheet as accounts payable and accrued liabilities (see Note 19 of the Notes to Consolidated Financial Statements).
Net cash flows are primarily invested in marketable securities. Investment strategies employed by CNA's insurance subsidiaries consider the cash flow requirements of the insurance products sold, and the tax attributes of the various types of marketable securities.
Funds from operations continue to exceed operating requirements. Lorillard generated net cash flow from operations of approximately $427.7 million for the year ended December 31, 1996, compared to $315.9 million for the prior year. No material capital expenditures are anticipated during 1997.
Virtually all of Lorillard's sales are in the full price brand category. With the industry-wide list price reduction of full price brands, effective August 9, 1993, the market share of discount brands has declined and Lorillard's product line has benefited in terms of unit sales. Discount brand sales have decreased from an average of 37% of industry sales during 1993 to an average of 28% during 1996. At December 31, 1996, they represented 27.4% of industry sales. In April 1996, Lorillard increased its wholesale prices by $2.00 per thousand cigarettes, or 3.6%.
Lawsuits are being filed with increasing frequency against Lorillard and other manufacturers of tobacco products seeking damages for cancer and other health effects claimed to have resulted from the use of cigarettes or exposure to tobacco smoke. In a number of these cases the Company is named as a defendant. Pending litigation includes conventional smoking and health cases, purported class actions, governmental entities/medicaid reimbursement actions, and filter cases, most of which claim very substantial damages. These actions are described in Note 19 of the Notes to Consolidated Financial Statements.
On August 28, 1996, the Food and Drug Administration ("FDA") published regulations (the "FDA Regulations") in final form severely restricting cigarette advertising and promotion and limiting 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 become effective in stages, as follows:
(ii) Regulations regarding advertising and billboards, effective August 28, 1997. These regulations limit all cigarette advertising to a black and white, text only format in most publications and outdoor advertising such as billboards. The regulations also prohibit billboards advertising cigarettes within 1,000 feet of a school or playground, require that the established name for the product ("Cigarettes") and an intended use statement ("A Nicotine-Delivery Device For Persons 18 or Older") be included on all cigarette packaging and advertising, ban the use of cigarette brand names, logos and trademarks on premium items and prohibit 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, effective August 28, 1998.
Lorillard and other cigarette manufacturers have filed a lawsuit in the United States District Court for the Middle District of North Carolina challenging the FDA's assertion of jurisdiction over cigarettes and seeking both preliminary and permanent injunctive relief (Liggett Group has agreed to withdraw from this lawsuit). The complaint in the case, Coyne Beahm, Inc., et al. v. United States Food & Drug Administration, et al., asserts that the FDA lacks authority to regulate cigarettes and that the proposed rules violate the Federal Food, Drug and Cosmetic Act, the Federal Cigarette Labeling and Advertising Act and the United States Constitution. Lawsuits challenging the FDA Regulations also have been filed in the same court by several smokeless tobacco manufacturers, several national advertising trade associations and the National Association of Convenience Stores.
The plaintiffs have moved for summary judgment on jurisdictional, statutory and First Amendment grounds. Oral argument on the motions was heard on February 10, 1997, and a decision is pending.
It is uncertain whether Congress will pass legislation that would moot the FDA Regulations and whether the manufacturers will succeed in securing judicial relief. Accordingly, any impact on Lorillard from the FDA Regulations cannot be predicted at this time.
Funds from operations continue to exceed operating requirements. Loews Hotels is constructing a new 800 room property in Miami Beach, Florida which is scheduled to open in late 1998. Initial funding for this project has been provided by Loews Hotels (under an arrangement with the Company) and the City of Miami Beach. The balance of the funds necessary for construction will be provided by a first mortgage. In addition, Loews Hotels has entered into an agreement with the owners of the Universal City Florida resort to develop hotels at the resort. Capital expenditures in relation to the Universal City Florida hotel project are expected to be funded by a combination of equity contributions by the development partners and mortgages. Loews Hotels expects to obtain its share of the equity contribution under arrangements with the Company. Funds for other capital expenditures and working capital requirements are expected to be provided from operations. Funds for any hotel acquisitions would be expected to be provided through the Company.
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore"). Diamond Offshore is a 51% owned subsidiary of the Company.
On April 29, 1996 Diamond Offshore acquired Arethusa (Off-Shore) Limited ("Arethusa"). Holders of Arethusa stock received 17.9 million shares of common stock issued by Diamond Offshore based on a ratio of .88 shares for each share of Arethusa common stock. The Company recognized a gain of approximately $186.6 million and its interest in Diamond Offshore declined to approximately 51%.
The markets for semisubmersible rigs which operate in deep water or harsh environments have experienced improved demand and higher dayrates during the past two years, due in part to the increasing impact of technological advances, including 3-D seismic, horizontal drilling, and subsea completion procedures. Both the Gulf of Mexico and the North Sea semisubmersible markets experienced increased utilization and significantly higher dayrates since 1995. All of Diamond Offshore's markets have experienced increased utilization and significantly higher dayrates in 1996, and customers increasingly are seeking to contract rigs for a fixed term (as opposed to contracts for the drilling of a single well or a group of wells). In 1996, average operating dayrates earned by Diamond Offshore's "fourth-generation" and other semisubmersible rigs increased 39% and 43%, respectively, from those earned during 1995. Fourth-generation semisubmersible rigs are larger than other semisubmersibles, are capable of working in deep water or harsh environments and have other advanced features. In addition, Diamond Offshore's semisubmersible rigs
Diamond Offshore generated net cash flow from operations of approximately $207.8 million for the year ended December 31, 1996, compared to $52.8 million for the prior year. It is anticipated that funds for capital expenditures and working capital requirements will be provided by cash flow from operations as well as from debt financings. Diamond Offshore has a $200.0 million revolving line of credit which expires in 2001. The unused credit available at December 31, 1996 was $137.0 million. In February 1997, Diamond Offshore sold $400.0 million principal amount of 3 3/4% convertible subordinated notes due February 15, 2007. A portion of the proceeds was used to repay the outstanding balance on its credit line.
Historically, the offshore contract drilling market has been highly competitive and cyclical, and Diamond Offshore cannot predict the extent to which current conditions will continue.
In 1995 and 1996, Bulova generated sufficient cash flow to fund its operations and expects to do so as well in 1997. Prior to 1995, Bulova had required working capital advances from the Company. While the Company has no obligation to provide working capital advances, it is anticipated that should Bulova require working capital advances, they would be provided through arrangements with the Company.
During 1996 the Company purchased 2,832,800 shares of its outstanding Common Stock at an aggregate cost of approximately $215.7 million. Depending on market conditions, the Company from time to time may purchase additional shares in the open market or otherwise. In addition, during the year the Company purchased 74,200 shares of CNA's outstanding common stock at an aggregate cost of approximately $7.2 million.
In December 1996, the Company sold $300.0 million principal amount of 6 3/4% senior notes due December 15, 2006. In addition, on January 15, 1997, the Company redeemed its $200.0 million principal amount of 8 1/4% debentures due 2007 at a price of 103.6%.
The general account portfolio consists primarily of high quality (BBB or higher) marketable fixed maturities, 93% and 94% of which are rated as investment grade at December 31, 1996 and 1995, respectively.
High yield securities are bonds rated below investment grade by bond rating agencies, plus private placements
CNA limits the risks associated with interest rate fluctuations and prepayment by concentrating its CMO investments in planned amortization classes with relatively short principal repayment windows. CNA avoids investments in complex mortgage derivatives without readily ascertainable market prices. At December 31, 1996, the amortized cost of asset-backed securities was in excess of fair value by approximately $5.0 million, as compared to fair value in excess of amortized cost of approximately $200.0 million for the comparable period a year ago.
At December 31, 1996 and 1995, short-term investments primarily consisted of U.S. treasury bills and commercial paper.
guaranteed investment portfolio are matched approximately with the corresponding payout pattern of the liabilities of the guaranteed investment contracts. At December 31, 1996, all fixed maturity securities in the guaranteed investment portfolio were carried at fair value and amounted to $3,866.7 million. At December 31, 1996, net unrealized losses on fixed maturity securities amounted to approximately $0.7 million. This compares to net unrealized gains of $62.6 million at December 31, 1995. The gross unrealized gains and losses for the fixed maturity securities portfolio at December 31, 1996 were $55.0 and $55.7 million, respectively, compared to $122.1 and $59.5 million, respectively, at December 31, 1995.
These investments subject the Company to market risk for positions where the Company does not hold an offsetting security. The Company controls this risk through monitoring procedures which include daily detailed reports of existing positions and valuation fluctuations. These reports are reviewed by members of senior management to ensure that open positions are consistent with the Company's portfolio strategy.
The Company does not believe that any of the derivative instruments utilized by it are unusually complex or volatile, nor do these instruments contain imbedded leverage features which would expose the Company to a higher degree of risk. See 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.
Revenues increased by $1,765.0 and $6,927.2 million, or 9.5% and 51.3%, in each case as compared to 1995 and 1994, respectively. Net income declined by $381.8 million and increased by $1,116.1 million as compared to 1995 and 1994, respectively.
Property and casualty operations continued to show improvement in 1996 and reflect both improved investment income and underwriting results.
Property and casualty revenues increased by $1,898.3 and $4,901.8 million, or 17.1% and 60.6%, as compared to 1995 and 1994, respectively.
Property and casualty premium revenues increased by $1,403.3 and $3,290.0 million, or 16.1% and 48.1%, as compared to 1995 and 1994, respectively. Property and casualty premiums include $2,727.4 and $1,746.8 million for 1996 and 1995, respectively, from the acquisition of CIC on May 10, 1995. Increased premium revenues reflect higher accident and health premiums due to increases in mass market premiums, higher group long-term disability premiums and increases in personal lines premium. The increase in personal lines premiums resulted from the cancellation of a quota share arrangement, under which CIC was ceding premium, and the inclusion of CIC's business for the full year of 1996. These increases were partially offset by lower involuntary risk premiums resulting from a greater willingness on the part of the voluntary market to write these types of risks, particularly workers' compensation and private passenger automotive coverage.
Property and casualty underwriting losses were $1,143.2 million in 1996, compared to $1,121.5 and $1,201.2 million in 1995 and 1994, respectively. The combined ratio was 108.9 for 1996, compared with 110.3 and 115.0 for 1995 and 1994, respectively. Underwriting results generally reflect improved loss experience from workers' compensation business, partially offset by lower results from personal lines.
Other favorable reserve development during 1994 aggregated $288.4 million which was principally attributable to positive severity experience in professional liability lines and improvement in voluntary and involuntary workers' compensation experience.
CNA's life insurance subsidiaries' net income excluding net investment gains (losses) was $94.4 million for 1996, compared to $91.3 and $68.4 million for 1995 and 1994, respectively. Profits increased primarily due to increased investment income, continued favorable mortality experience and a change in interest rate spread assumptions on interest sensitive products. Net investment gains for 1996 were $80.5 million,
compared to $71.9 million for 1995 and losses of $37.8 million for 1994.
Revenues increased, as compared to 1995, by approximately $105.0 million, or 5.1%, due to an increase in unit sales volume and by approximately $55.5 million, or 2.7%, due to increased unit prices. Compared to 1994, revenues increased by approximately $211.2 million, or 11.0%, due to increased sales volume and by approximately $86.5 million, or 4.5%, due to higher unit prices.
Net income improved due primarily to the increased revenues discussed above, partially offset by higher legal expenses and costs incurred for the relocation of Lorillard's corporate headquarters.
The increased legal expenses reflect 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, 1996, Lorillard was named as a defendant in 143 lawsuits, compared to 78 lawsuits in the prior year. Lorillard continues to vigorously defend itself against these actions.
Revenues in 1995 included gains of $14.5 and $4.0 million ($9.4 and $2.6 million after taxes) related to the transfer of the Monte Carlo casino operations and the settlement of a management contract. Revenues in 1994 included a gain of $30.2 million ($15.4 million after taxes) from the disposition of two properties leased to others.
Exclusive of these transactions, revenues increased by $1.1 and $13.4 million, or 0.5% and 7.2%, respectively, and net income increased by $2.1 and $2.8 million, or 43.8% and 68.3%, respectively, as compared to 1995 and 1994. These increases are due primarily to higher average room rates and, as compared to 1994, higher occupancy rates, partially offset by increased sales promotion expenses.
Net income increased as a result of the higher revenues discussed above and lower interest expense, partially offset by increased operating costs related to the drilling rigs acquired from Arethusa, and higher depreciation
In October 1995 Diamond Offshore sold shares of its common stock through an initial public offering, the proceeds of which were used to retire intercompany debt. Accordingly, operating results in 1996 benefited from lower interest expense as compared to the prior years.
In January 1995, Bulova sold its industrial and defense manufacturing business, Bulova Technologies, Inc. ("BTI"), and recognized a pre-tax and after tax gain of $0.6 and $0.4 million, respectively.
The components of investment gains (losses) included in other operations are as follows:
Exclusive of securities transactions, other revenues increased by $54.4 and $44.7 million, or 42.9% and 32.7%, as compared to 1995 and 1994, respectively. Revenues increased due primarily to higher investment income reflecting increased levels of invested assets, partially offset by lower earnings (accounted for under the equity method) of CBS Inc. Net loss decreased by $17.7 million and increased by $7.6 million, as compared to 1995 and 1994, respectively. Net loss declined, as compared to 1995, due primarily to the increased investment income, partially offset by higher corporate interest expense and the absence of equity income from CBS. Net loss increased, as compared to 1994, due primarily to the absence of equity income from CBS, partially offset by higher investment income.
In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." This Statement provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Generally, this Statement is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. This Statement will not have a significant impact on the Company.
In October 1996, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 96-1, "Environmental Remediation Liabilities," which, among other things, sets forth criteria for accrual of costs in relation to clean-up and remediation of environmental conditions. This Statement does not provide guidance on recognizing liabilities of insurance companies for unpaid claims, nor does it address asset impairment issues. It is effective for fiscal years beginning after December 15, 1996 and will not have a significant impact on the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (Dollars in millions, except per share data)
Mortgage loans are carried at unpaid principal balances, including unamortized premium or discount. Real estate is carried at depreciated cost. Policy loans are carried at unpaid balances. Short-term investments include U.S. government securities, commercial paper and time deposits and are carried at fair value, which approximates amortized cost.
Claim and claim expense reserves - Claim and claim expense reserves, except reserves for structured settlements, workers' compensation lifetime claims and accident and health disability claims, are based on undiscounted (a) case basis estimates for losses reported on direct business, adjusted in the aggregate for ultimate loss expectations, (b) estimates of unreported losses based upon past experience, (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.
Future policy benefits reserves - Reserves for traditional life insurance products are computed based upon the net level premium method using actuarial assumptions as to interest rates, mortality, morbidity, withdrawals and expenses. Actuarial assumptions include a margin for adverse deviation and generally vary by plan, age at issue and policy duration. Interest rates range from 3.0% to 11.0%, and mortality, morbidity and withdrawal assumptions reflect CNA and industry experience prevailing at the time of issue. Renewal expense estimates include the estimated effects of inflation and expenses beyond the premium paying period.
Involuntary risks - CNA's share of involuntary risks is mandatory and generally a function of its share of the voluntary market by line of insurance in each state. CNA records the estimated effects of its mandatory participation in residual markets on an accrual basis. CNA records assessments for insolvencies as they are paid. Accrual of such assessments is not practical, as past experience is not a reliable indicator of future activity.
Reinsurance - CNA assumes and cedes insurance with other insurers and reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk and minimize exposures on larger risks. The reinsurance coverages are tailored to the specific risk characteristics of each product line with CNA's retained amount varying by type of coverage. Generally, reinsurance coverage for property risks is on an excess of loss, per risk basis. Liability coverages are generally reinsured on a quota share basis in excess of CNA's retained risk. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability.
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 ordinary 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, which are regularly evaluated and adjusted, as appropriate.
Participating business - Participating business represented 0.5%, 0.6% and 0.9% of CNA's gross life insurance in force and 0.7%, 0.8% and 1.0% of life insurance premium income for 1996, 1995 and 1994, respectively. Participating policyholders' equity is determined by allocating 90% of related net income or loss and unrealized investment gains or losses related to such business as allowed by applicable laws, less dividends determined by CNA's Board of Directors. In the accompanying Statements of Consolidated Income, revenues and benefits and expenses include amounts related to participating policies; the net income or loss allocated to participating policyholders' equity is a component of insurance claims and policyholders' benefits.
Separate Account business - CNA's life insurance subsidiary, Continental Assurance Company ("CAC"), issues certain investment and annuity contracts. The supporting assets and liabilities of these contracts are legally segregated and reflected in the accompanying Consolidated Balance Sheets as assets and liabilities of Separate Account business. CAC guarantees principal and a specified return to the contract holders on approximately 82% of the Separate Account business. Substantially all assets of the Separate Accounts are carried at fair value.
Tobacco products - These inventories, aggregating $247.4 and $192.2 at December 31, 1996 and 1995, respectively, are stated at the lower of cost or market, using the last-in, first-out (LIFO) method.
Watches and clocks - These inventories, aggregating $37.1 and $38.9 at December 31, 1996 and 1995, respectively, are stated at the lower of cost or market, using the first-in, first-out (FIFO) method.
The principal service lives used in computing provisions for depreciation are as follows:
Impairment of long-lived assets - Long-lived assets and certain intangibles are reported at the lower of carrying amount or fair value. The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell.
The fair value of the liability for financial guarantee contracts is based on discounted cash flows utilizing interest rates currently being offered for similar contracts or spot interest rates.
The Company enters into various transactions involving off-balance-sheet financial instruments through a variety of futures, swaps, options, forwards and other contracts (the "Contracts") as part of its investing activities. These Contracts are commonly referred to as derivative instruments since their underlying values may be linked to, among other things, interest rates, exchange rates, prices of securities and financial or commodity indexes. The Company uses these Contracts for its asset and liability management activities as well as income enhancements for its portfolio management strategy. Entering into these Contracts involves not only the risk of dealing with counterparties and their ability to meet the terms of the Contracts but also the market risk associated with those positions where the Company does not hold an offsetting security. Exposure to market risk is managed in accordance with risk limits set by senior management and by buying or selling instruments or entering into offsetting positions.
The notional amounts of derivatives shown in the following table do not represent amounts exchanged in these transactions and, therefore, are not a measure of the exposure the Company has through its use of derivative instruments. In addition, notional amounts are presented gross and do not reflect the net effect of offsetting positions. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivative instruments.
The 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 $543.5 and $182.4 with fair value liabilities of $588.9 and $188.5 at December 31, 1996 and 1995, respectively.
Estimated fair values approximate carrying values and are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from independent pricing services, quoted market prices of comparable instruments or present value models.
On November 24, 1995, Westinghouse Electric Corporation completed its acquisition of CBS Inc. ("CBS") for cash consideration of $82.06 per share. The Company received proceeds of $901.7 for its CBS shares and recorded (as part of its investment gains) a pre-tax and after tax gain of $579.2 and $376.5, respectively, in the fourth quarter of 1995. Previously, the Company held approximately 18% of the outstanding common shares of CBS and accounted for it on the equity method.
The Company's equity in the earnings of CBS after giving effect to purchase value adjustments amounted to $15.7 and $45.8 before taxes and $11.3 and $30.8 after taxes for the years ended December 31, 1995 and 1994, respectively. Dividends received amounted to $4.4 and $5.2 for the respective periods.
On May 10, 1995, CNA acquired all the outstanding shares of The Continental Corporation ("CIC") for approximately $1,100.0, or $20 per CIC share. To finance the acquisition, CNA entered into a five year $1,325.0 revolving credit facility (see Note 12). CIC is an insurance holding company principally engaged through subsidiaries in the business of property and casualty insurance.
The pro forma consolidated condensed results of operations presented below assume the above transaction had occurred at the beginning of the periods presented.
CNA's property and casualty insurance claims and claims expense reserve represents 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 effects of inflation, which can be significant, are implicitly considered in the reserving process and are part of the recorded reserve balance. Reserves are not discounted except in the case of structured settlements, workers' compensation lifetime claims and accident and health disability claims (where the reserves are explicitly discounted at rates allowed by insurance regulators that range from 3.5% to 6.0%) and structured settlements (where such reserves are discounted at interest rates ranging from 6.3% to 7.5%).
The table below provides a reconciliation between beginning and ending claim and claim expense reserve balances for 1996, 1995 and 1994:
The following adverse (favorable) reserve development reflects the effects of management's ongoing evaluation of reserve levels and is comprised of the following components:
The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern the clean-up and restoration of abandoned toxic waste sites and formalize the concept of legal liability for clean-up and restoration by potentially responsible parties ("PRP's"). Superfund and the mini-Superfunds (Environmental Clean-up Laws or "ECLs") establishes a mechanism to pay for clean-up of waste sites if PRP's fail to do so, and to assign liability to PRP's. The extent of liability to be allocated to a PRP is dependent on a variety of factors. Further, the number of waste sites subject to clean-up is unknown. To date, approximately 1,300 clean-up sites have been identified by the Environmental Protection Agency on its National Priorities List. On the other hand, the Congressional Budget Office is estimating that there will be 4,500 National Priority List sites, and other estimates project as many as 30,000 sites that will require clean-up under ECLs. Very few sites have been subject to clean-up to date and the addition of new clean-up sites has substantially slowed in recent years. The extent of clean-up necessary and the assignment of liability has not been established.
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 the pattern of regulation that would result.
Due to the inherent uncertainties described above, including the inconsistency of court decisions, the number of waste sites subject to clean-up, and the standards for clean-up and liability, the ultimate exposure to CNA for environmental pollution claims cannot be meaningfully quantified.
Claim and claim expense reserves represent management's estimates of ultimate liabilities based on currently available facts and case law. However, in addition to the uncertainties previously discussed, additional issues related to, among other things, specific policy provisions, multiple insurers and allocation of liability among insurers, consequences of conduct by the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based on new data.
Other 1996 and 1995 reserve development, which aggregated $206.2 and $377.7, respectively, of favorable reserve development, was principally due to favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) experience in the workers' compensation line of business. These trends reflect the positive effects of changes in workers' compensation laws, more moderate increases in medical costs, and a generally strong economy in which individuals return to the workplace more quickly.
Other favorable reserve development during 1994 aggregated $288.4 which was principally attributable to positive severity experience in professional liability lines and improvement in voluntary and involuntary workers' compensation experience.
CNA, consistent with sound reserving practices, regularly adjusts its reserve estimates in subsequent reporting periods as new facts and circumstances emerge that indicate the previous estimates need to be modified. Beginning the latter part of 1995 and through 1996 to date, CNA has been actively settling many of its larger environmental pollution and asbestos-related claim exposures. This strategy has resulted in a large volume of claim payments during 1996 and corresponding reductions in reserves. In addition, Fibreboard claim payments escalated in 1996 as some scheduled payments came due. Management does not believe that these recent activities have changed facts or circumstances evident at December 31, 1995, therefore, no material modifications to previous reserve estimates have been made in 1996.
The following tables provides additional data related to CNA's environmental pollution and asbestos-related claims activity. CIC claims activity for 1995 is included for the period May 10, 1995 through December 31, 1995.
To finance the acquisition of CIC, CNA entered into a five-year $1,325.0 revolving credit facility (the "Bank Facility"). In 1996, CNA renegotiated the facility extending the maturity to May 2001. The interest rate is based on the one, two, three or six month London Interbank Offered Rate ("LIBOR"), as elected, plus 16 basis points. Additionally, there is a facility fee of 9 basis points. Under the terms of the facility, CNA may prepay the debt without penalty.
In 1995, CNA entered into interest rate swap agreements with a notional principal amount of $1,200.0, which terminate from May to December 2000. These agreements effectively convert variable rate debt into fixed rate debt and provide that CNA pay interest at a fixed rate, averaging 6.2% at December 31, 1996, in exchange for the receipt of interest at the three month LIBOR rate. Concurrent with the pay down of $250.0 on the Bank Facility, CNA terminated interest rate swaps with a total notional amount of $250.0. As a result, the borrowing capacity under the Bank Facility was reduced to $1,075.0. The effect of these interest rate swaps was to increase interest expense by approximately $7.0 and $2.0 for the years ended December 31, 1996 and 1995, respectively.
In 1995, to take advantage of favorable interest rate spreads, CNA established a commercial paper program borrowing from investors to reduce a like amount of the Bank Facility. These borrowings are classified as long-term debt, as the Bank Facility supports the commercial paper program. At December 31, 1996, there was no unused borrowing capacity under the Bank Facility after the effects of the commercial paper program.
The aggregate of long-term debt maturing in each of the next five years is approximately as follows: $294.4 in 1997, $274.1 in 1998, $134.5 in 1999, $8.4 in 2000 and $1,088.5 in 2001. The Company paid interest expenses of approximately $315.3, $276.0 and $168.9 for the years ended December 31, 1996, 1995 and 1994, respectively.
Pension Plans - The Company and its subsidiaries have several non-contributory defined benefit plans for eligible employees. The benefits for certain plans which cover salaried employees and certain union employees are based on formulas which include among others, years of service and average pay. The benefits for one plan which covers union workers under various union contracts and certain salaried employees are based on years of service multiplied by a stated amount.
The following table sets forth the funded status of the Company's pension plans:
The Company's funding policy is to make contributions in accordance with applicable governmental regulatory requirements. The assets of the plans are invested primarily in interest-bearing obligations and for one plan with an insurance subsidiary of the Company, in its Separate Account business. In 1995, the Company made contributions totaling approximately $186.0 to fund completely certain plans which had been underfunded.
For measurement purposes, a trend rate for covered costs of 12.0% to 12.5% pre-65 and 9.5% post-65, was used. These trend rates are expected to decrease gradually to 5.0% and 7.0% at rates from 0.5% to 1.0% per annum. An increase of one percentage point in assumed health care cost trend rates would increase the accumulated postretirement benefit obligation by approximately $36.7 and the net periodic postretirement benefit cost by approximately $6.0.
Savings Plans - The Company and its subsidiaries have several contributory savings plans which allow employees to make regular contributions based upon a percentage of their salary. The Company's contributions to these plans amounted to $28.6, $25.9 and $21.2 for the years ended December 31, 1996, 1995 and 1994, respectively.
On April 29, 1996, Diamond Offshore Drilling, Inc., a 70% owned subsidiary ("Diamond Offshore"), acquired Arethusa (Off-Shore) Limited ("Arethusa"). Diamond Offshore issued 17.9 million shares of its common stock and assumed Arethusa stock options as consideration for the purchase price of approximately $550.7. Arethusa owned a fleet of 11 mobile offshore drilling rigs and operated two additional mobile offshore rigs pursuant to bareboat charters. The acquisition of Arethusa has been accounted for as a purchase, and Arethusa's operations are included in the Consolidated Financial Statements as of April 29, 1996. Pro forma operating results for the years ended December 31, 1996 and 1995, assuming the transaction had occurred at the beginning of the respective periods, would not be materially different from those reported in the Consolidated Financial Statements. The Company recognized a gain of approximately $186.6 ($121.3 after provision for deferred income taxes) and its interest in Diamond Offshore declined to approximately 51%.
Earnings per share are based on the weighted average number of shares outstanding during each year (116,161,000, 117,835,000 and 120,383,000 for the years ended December 31, 1996, 1995 and 1994, respectively).
Written premiums were $13,891.0, $12,952.0 and $9,581.0 at December 31, 1996, 1995 and 1994, 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 its states of domiciles, CNA receives collateral, primarily in the form of bank letters of credit, securing a large portion of the recoverables. Such collateral totaled approximately $800.9 and $1,100.0 at December 31, 1996 and 1995, respectively. CNA's largest recoverable from a single reinsurer, including prepaid reinsurance premiums, is with Lloyd's of London and approximates $440.0 and $435.0 at December 31, 1996 and 1995, respectively.
Insurance claims and policyholders' benefits are net of reinsurance recoveries of $1,220.0, $934.8 and $827.9 for the years ended December 31, 1996, 1995 and 1994, respectively.
No further appeal was filed with respect to the Trilateral Agreement; therefore court approval of the Trilateral Agreement has become final.
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. An additional $10.0 is to be contributed to the fund by Fibreboard. As indicated above, although the Global Settlement approval has so far been affirmed on appeal, further review is being sought. There is limited precedent for settlements which determine the rights of future claimants to seek relief.
In addition, Casualty and Pacific Indemnity have entered into an agreement (the "Casualty-Pacific Agreement") which sets forth the parties' agreement with respect to the means for allocating among themselves responsibility for payments arising out of the Fibreboard insurance policies. Under the Casualty-Pacific Agreement, Casualty and Pacific Indemnity have agreed to pay 64.71% and 35.29%, respectively, of the $1,525.0 to be used to satisfy the claims of future claimants, plus certain expenses. The $1,525.0 has already been deposited into an escrow for such purpose. As a result of final approval of the Trilateral Agreement, Pacific Indemnity's share for unsettled present claims and presently settled claims will be $635.0.
Through December 31, 1996, Casualty, Fibreboard and plaintiff attorneys had reached settlements with respect to approximately 135,200 claims, for an estimated settlement amount of approximately $1,600.0 plus any applicable interest. Final court approval of the Trilateral Agreement obligates Casualty to pay under these settlements. Approximately $1,310.0 was paid through December 31, 1996, including approximately $500.0 paid in the fourth quarter of 1996 as a result of the Trilateral Agreement becoming final. As described above, such payments are partially recoverable from Pacific Indemnity. Casualty may negotiate other agreements with various classes of claimants including groups who may have previously reached agreement with Fibreboard.
Casualty believes that final court approval of the Trilateral Agreement and its implementation has eliminated any further material exposure with respect to the Fibreboard matter, and subsequent reserve adjustments, if any, will not materially affect the equity of the Company.
On August 23, 1996 the jury in Rogers v. R.J. Reynolds Tobacco Company, et al. (District Court, Marion County, Indiana), returned a verdict in favor of the defendants. Neither Lorillard nor the Company was a party in Rogers. Plaintiff has noticed an appeal.
On August 9, 1996 the jury in Carter v. Brown & Williamson Tobacco Corporation (District Court, Duval County, Florida), returned a verdict in favor of the plaintiffs and awarded them $0.8 in actual damages. Brown & Williamson Tobacco Corporation, the only defendant in the case, has noticed an appeal.
the cabins of aircraft. Lorillard is a defendant in this case. Plaintiffs seek an unspecified amount in compensatory damages and $5,000.0 in punitive damages. The trial court granted plaintiffs' motion for class certification on December 12, 1994. Defendants' appeal of this ruling to the Florida Court of Appeal has been denied. Defendants' motion to reconsider the ruling or to certify it to the Florida Supreme Court has been denied. Defendants' attempts to appeal to the Florida Supreme Court have been denied. Trial in this matter is scheduled to begin on June 2, 1997.
Granier v. The American Tobacco Company, et al. (U.S. District Court, Eastern District, Louisiana, filed September 26, 1994). Plaintiffs seek certification of a class comprised of all residents of the United States who are addicted to nicotine, and of survivors who claim their decedents were addicted to nicotine. Lorillard is a defendant in this case. Plaintiffs seek unspecified actual damages and punitive damages and the creation of a medical monitoring fund to monitor the health of individuals allegedly injured by their addiction to nicotine.
Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida, filed May 5, 1994). The purported class consists of citizens and residents of the United States, and their survivors who have, or who have died from, diseases and medical conditions allegedly caused by smoking cigarettes containing nicotine. Lorillard is a defendant in this case. Plaintiffs seek actual and punitive damages in excess of $200,000.0, and the creation of a medical fund to compensate individuals for future health care costs. Plaintiffs' motion for class certification was granted by the court on October 31, 1994. Defendants' appeal of this ruling to the Florida Court of Appeal was denied, although the court has modified the class certification order and has limited plaintiffs' class to citizens or residents of Florida. Defendants' motion to reconsider this ruling has been denied. The Florida Supreme Court has denied defendants' petition to invoke the discretionary jurisdiction of the court to review the class certification rulings. Trial in this matter is scheduled to begin on September 8, 1997.
zens or residents of Maryland who allege they or their decedents have, or have died from, diseases or medical conditions caused by addiction to smoking cigarettes or using other tobacco products containing nicotine. Lorillard is a defendant in this case. The Company was named as a defendant but plaintiffs voluntarily dismissed it. Plaintiffs seek unspecified amounts in actual damages and punitive damages and the creation of a medical monitoring fund, smoking cessation programs, and a corrective public education campaign.
Scott v. The American Tobacco Company, et al. (District Court, Orleans Parish, Louisiana, filed May 24, 1996). Plaintiffs seek certification of a class of residents of Louisiana and the estates, representatives, administrators, spouses, children or significant others of Louisiana residents who allegedly are or were nicotine-dependent. The Company and Lorillard are defendants in this case. Plaintiffs seek an unspecified amount of actual damages and the creation of a medical monitoring fund.
Harris v. The American Tobacco Company, et al. (U.S. District Court, Middle District, Pennsylvania, filed March 1, 1996; service not effected on any defendants until October 1996). Plaintiffs, who are incarcerated in federal correctional facility, are appearing pro se and in forma pauperis and sought certification of the case as a class action on behalf of all residents of the United States who allege they or their decedents are or were nicotine dependent. The Company and Lorillard are defendants in this case. The court entered an order on its own motion that dismissed the class action allegations. Plaintiffs seek unspecified amounts in actual damages, punitive damages and the creation of a medical monitoring fund. The court has entered an order granting a motion to dismiss filed by several of the defendants named in the complaint, including the Company and Lorillard, but final judgment has not been entered in their favor and the time for plaintiffs to notice an appeal has not begun.
Masepohl v. American Tobacco Company, Inc., et al. (U.S. District Court, Minnesota, filed September 4, 1996). Plaintiff seeks class certification on behalf of all residents of Minnesota who allege they or their decedents are or were nicotine dependent. The Company and Lorillard are defendants in this case. Plaintiff seeks an unspecified amount in actual damages and the creation of a medical monitoring fund.
Connor v. The American Tobacco Company, et al. (Second Judicial District Court, Bernalillo County, New Mexico, filed October 10, 1996). Plaintiffs seek certification of the case as a class action on behalf of New Mexico residents who allege they or their decedents are or were nicotine dependent. The Company and Lorillard are defendants in this case. Plaintiffs seek unspecified amounts in actual damages and punitive damages, and the creation and implementation of a medical monitoring fund.
McGinty v. The American Tobacco Company, et al. (U.S. District Court, Eastern District, Arkansas, filed November 4, 1996). Plaintiffs seek class certification on behalf of all residents of Arkansas who allege they or their decedents are or were nicotine dependent. The Company and Lorillard are defendants in this case. Plaintiffs seek restitution and refunds of the sums paid by class members to purchase cigarettes; disgorgement of the profits from the sale of cigarettes; a medical monitoring fund; an unspecified amount in actual damages; and an unspecified amount in punitive damages.
McCune v. American Tobacco Company, et al. (Circuit Court, Kanawha County, West Virginia, filed January 31, 1997). Plaintiff seeks certification of the case as a class action on behalf of residents of West Virginia who allege they or their decedents are or were nicotine dependent. Lorillard is a defendant in the case. Plaintiff seeks unspecified amounts in actual damages and punitive damages and the creation of a medical monitoring fund. To date, none of the defendants have received service of process.
Reimbursement Cases - In addition to the foregoing cases, there are 26 actions (one of which is unserved) pending in which governmental entities and in one case health insurers, seek recovery of funds expended by them, to provide health care to individuals with injuries or other health effects allegedly caused by use of tobacco products or exposure to cigarette smoke. These cases are based on, among other things, equitable claims including indemnity, restitution, unjust enrichment and public nuisance, and claims based on antitrust laws and state consumer protection acts. Lorillard is named as a defendant in all 26 such actions. The Company is named as a defendant in five of them (one of which is unserved). In addition to the suits filed by governmental entities, private citizens represented by private counsel have filed three suits in relation to reimbursement of funds expended by respective states in providing health care to individuals with injuries or other health effects allegedly caused by use of tobacco products or exposure to tobacco smoke. One of the three cases has not been served. The Company and Lorillard are named as defendants in each of the three cases, including the one that has not been served. These cases are described below. Unless otherwise noted, each of these cases is in the pre-trial, discovery stage.
Moore v. The American Tobacco Company, et al. (Chancery Court, Jackson County, Mississippi, filed May 23, 1994), filed by the Attorney General of Mississippi. Lorillard is a defendant in the case. The Company was named as a defendant but plaintiff voluntarily dismissed it. Trial in this case is scheduled to begin on June 2, 1997.
McGraw v. The American Tobacco Company, et al. (Circuit Court, Kanawha County, West Virginia, filed September 20, 1994), filed by the Attorney General of West Virginia. The Company and Lorillard are defendants in this case. Plaintiffs filed a third amended complaint that contained claims on behalf of the State of West Virginia Department of Health and Human Resources.
State of Minnesota v. Philip Morris Incorporated, et al. (District Court, Ramsey County, Minnesota, filed August 17, 1994), filed by the Attorney General of Minnesota and Blue Cross and Blue Shield of Minnesota. Lorillard is a defendant in the case. The Minnesota Supreme Court has issued an order ruling that plaintiff Blue Cross & Blue Shield of Minnesota ("Blue Cross") does not have standing to pursue tort claims against the defendants. The Minnesota Supreme Court order permits Blue Cross to proceed with its claims that defendants violated antitrust and consumer protection statutes. The Minnesota Supreme Court's order permits Blue Cross to pursue its equitable claims for injunctive relief but bars Blue Cross from pursuing money damages for the equitable claims. Trial in this matter is scheduled to begin on January 19, 1998.
Ieyoub v. The American Tobacco Company, et al. (District Court, Calcasieu Parish, Louisiana, filed March 13, 1996), filed by the Attorney General of Louisiana. The Company and Lorillard are defendants in the case.
State of Maryland v. Philip Morris Incorporated, et al. (Circuit Court, Baltimore City, Maryland, filed May 1, 1996), filed by the Attorney General of Maryland. Lorillard is a defendant in the case. The Company was named as a defendant but plaintiff voluntarily dismissed it.
City and County of San Francisco, et al. v. Philip Morris Incorporated, et al. (U.S. District Court, Northern District, California, filed June 6, 1996), filed by the City and County of San Francisco on behalf of the citizens of the state of California. Lorillard is a defendant in the case.
State of Connecticut v. Philip Morris Incorporated, et al. (Superior Court, Litchfield District, Connecticut, filed
July 18, 1996), filed by the Attorney General of Connecticut. Lorillard is a defendant in the case.
The State of Florida, et al. v. The American Tobacco Company, et al. (Circuit Court, Palm Beach County, Florida, filed February 22, 1995), filed by the State of Florida, the Governor of Florida, and two state agencies. This case has been brought under a Florida statute that permits the state to sue a manufacturer to recover Medicaid costs incurred by the state that are claimed to result from the use of the manufacturer's product. The statute permits causation and damages to be proven by statistical analysis, abrogates all affirmative defenses, adopts a "market share" liability theory, applies joint and several liability and eliminates the statute of repose. An action for declaratory judgment has been commenced in Florida state court by companies and trade associations in several potentially affected industries challenging this statute. In June 1995, a ruling was issued by a Florida state court that granted in part this motion for declaratory judgment. Both parties appealed the ruling to the Florida Court of Appeal. The appeal subsequently was transferred to the Florida Supreme Court. On June 27, 1996, the Florida Supreme Court affirmed in part and reversed in part the trial court's judgment. The plaintiffs in the declaratory judgment action have filed a petition for writ of certiorari with the United States Supreme Court. The United States Supreme Court has not ruled as to whether it will accept jurisdiction of the petition. Lorillard understands that several other states, and the Congress, have considered or are considering legislation similar to that passed in Florida. The court granted the Company's motion to dismiss on September 16, 1996. Plaintiffs noticed an appeal to the Florida Court of Appeals from the September 16, 1996 order. Plaintiffs filed a third amended complaint on November 1, 1996 that added certain statutory counts, including one under a Florida statute that permits plaintiffs to seek treble damages and a claim for punitive damages. The third amended complaint reasserted claims against the Company. The court granted the Company's motion to dismiss the third amended complaint on December 6, 1996. Plaintiffs have amended their notice of appeal to reflect the December 6, 1996 order. Trial in this case is scheduled to begin August 4, 1997.
The County of Los Angeles, et al. v. R.J. Reynolds Tobacco Company, et al. (Superior Court, San Diego County, California, filed August 5, 1996), filed by public attorneys for the County of Los Angeles. Lorillard is a defendant in the case.
The State of Kansas v. R.J. Reynolds Tobacco Company, et al. (District Court, Shawnee County, Kansas, filed August 20, 1996), filed by the Attorney General of Kansas. Lorillard is a defendant in the case.
People of the State of California v. Philip Morris Incorporated, et al. (Superior Court, San Francisco County, California, filed September 5, 1996), filed by 12 California counties, the cities of San Francisco and San Jose, the California Division of the American Cancer Society, the California chapter of the American Heart Association, the California Medical Association, and the California District of the American Academy of Pediatrics. Lorillard is a defendant in the case.
City of New York, et al. v. The Tobacco Institute, et al. (U.S. District Court, Southern District, New York, filed October 17, 1996), filed by the Corporation Counsel of the City of New York on behalf of the city and the
State of Iowa v. R.J. Reynolds Tobacco Company, et al. (District Court, Fifth Judicial District, Polk County, Iowa, filed November 27, 1996), filed by the Attorney General of Iowa. The Company and Lorillard are defendants in the case.
Bleakley, et al. v. Engler, et al. (U.S. District Court, Eastern District, Michigan, filed March 21, 1996), filed by private citizens. Plaintiffs seek a writ of mandamus compelling the Governor of the State of Michigan to direct its Attorney General to file a reimbursement suit against the cigarette manufacturers and their holding companies named as defendants in the case. In the alternative, the complaint seeks certification as a class action with the named plaintiffs representing a class defined as the taxpayers of the State of Michigan. The Company and Lorillard are named as defendants in the case. Neither the Company nor Lorillard have received service of process of this suit.
Crozier v. The American Tobacco Company, et al. (U.S. District Court, Middle District, Alabama, filed August 8, 1996), filed by private citizens who seek class certification on behalf of the taxpayers of Alabama. Plaintiffs seek recovery of funds expended by the State of Alabama in providing health care to individuals allegedly injured by cigarette smoking. The Company and Lorillard are defendants in the case. Plaintiffs seek unspecified amounts in actual damages and punitive damages.
Coyne v. The American Tobacco Company, et al. (U.S. District Court, Northern District, Ohio, filed September 17, 1996), filed by private citizens who seek class certification on behalf of the taxpayers of Ohio. Plaintiffs seek recovery of funds expended by the State of Ohio in providing health care through its Medicaid, State Teachers Retirement System and the State Public Employment Retirement System programs to individuals allegedly injured by cigarette smoking. The Company and Lorillard are defendants in the case. Plaintiffs seek unspecified amounts in restitution and punitive damages, disgorgement of profits, and the funding of smoking cessation and corrective public education campaigns.
Lorillard, other cigarette manufacturers and others have commenced suits in eight states that seek declaratory judgment or injunctive relief as to the authority of the states or state agencies to commence actions seeking recovery of funds expended to provide health care for citizens with injuries allegedly caused by cigarette smoking, or to retain private counsel under a contingent fee contract to pursue such actions. The case of Philip Morris Incorporated, et al. v. Harshbarger was
Filter Cases - In addition to the foregoing cases, several 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 forty years ago, into the filter material used in one of the brands of cigarettes manufactured by Lorillard. Twelve such cases are pending in federal and state courts against Lorillard. Allegations of liability against Lorillard 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 were held in three cases of this type during 1996. In two of the cases, the juries returned verdicts in favor of Lorillard. In the third case, the jury returned a verdict in favor of plaintiffs. The verdict requires Lorillard to pay the amount of one hundred forty thousand dollars. Lorillard has noticed an appeal to the California Court of Appeals. Trials were held in three cases of this type during 1995. In two of the cases, the juries returned verdicts in favor of Lorillard. In the third case, the jury returned a verdict in favor of plaintiffs. The verdict requires Lorillard to pay an amount between $1.8 and $2.0 in actual and punitive damages. The precise amount to be paid by Lorillard will be determined at a later date if the verdict withstands review by appellate courts. Lorillard has noticed an appeal from the judgment in plaintiffs' favor.
In addition to the defenses based on preemption under the Supreme Court decision referred to above, Lorillard believes that it has a number of other valid defenses to pending cases. These defenses, where applicable, include, among others, statutes of limitations or repose, assumption of the risk, comparative fault, the lack of proximate causation, and the lack of any defect in the product alleged by a plaintiff. Lorillard believes, and has been so advised by counsel, that some or all of these defenses may, in any of the pending or anticipated cases, be found by a jury or court to bar recovery by a plaintiff. Application of valid defenses, including those of preemption, are likely to be the subject of further legal proceedings in the class action cases and in the reimbursement cases.
Smoking and health related litigation has been brought by plaintiffs against Lorillard and other manufacturers of tobacco products for many years. While Lorillard intends to defend vigorously all such actions 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. An unfavorable outcome of a pending smoking and health case could encourage the commencement of additional similar litigation.
Loews Hotels properties consist of 14 hotels, 11 of which are in the United States, two are in Canada and one is located in Monte Carlo.
Diamond Offshore's business primarily consists of operating 46 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. Currently 65% of these rigs operate in the Gulf of Mexico, 9% operate in the North Sea and the remaining 26% are located in various foreign markets.