substantial experience, and foresees clear profit potential over the long term. The emphasis is on reasonable rates rather than volume growth. One of CNA's primary goals has been to provide more efficient and responsive quality service to our customers. These actions include working closely with insureds to reduce claims costs through loss control and fraud prevention; providing professional services to self insured accounts and other alternative markets; implementing medical and workers' compensation cost management programs; and reinforcing business partnerships with the independent agents who represent CNA and equipping them with new or upgraded products tailored to specific customer needs. Additionally, CNA has increased the flexibility, productivity, and customer focus of its employee force through less centralized decision making and more widespread use of automation tools. CNA also continues to devote time and effort to legislative concerns in the interests of a more equitable and stable insurance marketing climate. It has enjoyed some success in enlisting support for workers' compensation reform in several states and opposing unnecessary restrictions on the insurance industry in others. CNA's property and casualty insurance subsidiaries' statutory surplus had grown from $2.7 billion five years ago to $3.9 billion in 1991. In 1992, property and casualty surplus declined to $3.1 billion, primarily due to the $1.5 billion in asbestos reserves discussed above. In 1993 property and casualty surplus rose to approximately $3.6 billion despite another $500 million increase in asbestos reserves. Statutory surplus of CNA's life insurance subsidiaries grew from $637 million at December 31, 1988 to over $1 billion at December 31, 1993. Included in the property and casualty surplus increases are capital contributions from CNA to Casualty of $475 and $120 million in 1993 and 1990, respectively. Dividends of $150, $100 and $130 million were paid to CNA by Casualty in 1993, 1992 and 1991, respectively. Life statutory surplus includes capital contributions from Casualty of $100 million in 1990. CNA's general account investment portfolio is managed to maximize after tax investment return, while minimizing credit risks, with investments concentrated in high quality securities. CNA has the capacity to hold its fixed income portfolio to maturity. However, securities may be sold as part of CNA's asset/liability strategies or to take advantage of investment opportunities generated by changing interest rates, prepayments, tax and credit considerations, or other similar factors. Accordingly, the fixed income securities are classified as available for sale. During 1993, CNA's consolidated investments increased by $2.9 billion, to $25.4 billion. This increase is primarily due to investment of operating cash flow and realized gains on sales of securities, $504 million of unrealized appreciation due to reporting debt securities at fair value, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, and $495 million in net proceeds from borrowings. Consolidated investments consist primarily of fixed income securities, which include bonds and redeemable preferred stocks. The general account portfolio consists primarily of high quality marketable debt securities, 96% of which are rated as investment grade primarily by nationally recognized rating agencies. At December 31, 1993, tax-exempt securities and short-term investments comprised approximately 19% and 28%, respectively, of the general account's total investment portfolio compared to 42% and 20%, respectively, at December 31, 1992. Historically, CNA has maintained short-term assets at a level that provided for liquidity to meet its short-term obligations, principally anticipated claim payout patterns. Throughout 1992 and 1993, the level of short-term investments has increased beyond that needed for short-term liquidity. Though expected to result in a decline in investment income in the near term, management believes that the increased concentration in short-term investments will reduce the impact that a rise in interest rates would have on its fixed income portfolio. At December 31, 1993, the major components of the short-term investment portfolio were approximately $1.2 billion of U.S. Treasury bills and $4.5 billion of high grade commercial paper. As of December 31, 1993, in accordance with SFAS No. 115, CNA's general account investments in bonds and redeemable preferred stocks were carried at a fair value of $17.6 billion. In both 1992 and 1991 these securities were carried at the lower of amortized cost or market value which amounted to $17.4 and $18.8 billion, respectively. This compares to fair values of $18.2 and $19.7 billion on those respective dates. At December 31, 1993, fixed income securities unrealized gains amounted to approximately $504 million, after realizing $741 million in capital gains from the bond portfolio during the year. This compares to $846 and $931 million of unrealized gains at December 31, 1992 and 1991, respectively. The gross unrealized gains
and losses for the fixed income securities portfolio at December 31, 1993, were $564 and $60 million, respectively, compared to $931 and $85 million, respectively, at December 31, 1992. Net unrealized gains on general account bonds at December 31, 1993 include net unrealized gains on high yield securities of $15 million, compared to $44 million at December 31, 1992. High yield securities are bonds rated as below investment grade by bond rating agencies, plus private placements and other unrated securities which, in the opinion of management, are below investment grade. Carrying values of high yield securities in the general account were $727 million (fair value) at December 31, 1993, compared to $704 million (amortized cost) at December 31, 1992. At December 31, 1993, total separate account investments amounted to $6.5 billion with taxable debt securities representing approximately 96% of the separate accounts portfolio. Approximately 86% of separate account investments are used to fund guaranteed investment contracts ("GIC's") for which CNA's life insurance affiliate guarantees principal and a specified return to the contractholders. At December 31, 1993, all fixed income securities in the GIC portfolio were carried at fair value in accordance with SFAS No. 115 and amounted to $5.4 billion. In both 1992 and 1991, these securities were carried at the lower of amortized cost or market which amounted to $5.8 and $5.4 billion, respectively. This compares to market values of $6.0 and $5.6 billion on those respective dates. At December 31, 1993, fixed income securities unrealized gains amounted to approximately $148 million. This compares to $158 million in unrealized gains at December 31, 1992 and $203 million at December 31, 1991. The gross unrealized gains and losses for the fixed income securities portfolio at December 31, 1993, were $163 and $15 million, respectively, compared to $184 and $26 million, respectively, at December 31, 1992. At December 31, 1993 high yield securities in the GIC portfolio were carried at fair value and amounted to $1,068 million. In 1992 and 1991, these securities were carried at the lower of amortized cost or market value which amounted to $779 and $809 million, respectively. Net unrealized gains on high yield securities held in such separate accounts were $56 million at December 31, 1993, compared to $28 million at December 31, 1992 and unrealized losses of $14 million at December 31, 1991. High yield securities generally involve a greater degree of risk than that of investment grade securities. Expected returns should, however, compensate for the added risk. The risk is also considered in the interest rate assumptions in the underlying insurance products. At December 31, 1993, CNA's concentration in high yield bonds, including separate accounts, was approximately 4.3% of its total assets. In addition, CNA's exposure to the risks of the commercial mortgage loan and real estate markets is substantially less than the industry average. CNA's concentration in mortgage loans and real estate was less than 1% of its total assets. Included in CNA's fixed income securities at December 31, 1993 (general and GIC portfolios) are $4.4 billion of asset-backed securities, consisting of approximately 47% in U.S. Government agency issued pass-through certificates, 47% in collateralized mortgage obligations ("CMO's"), and 6% in corporate asset- backed obligations. The majority of CMO's held are U.S. Government agency issues, which are actively traded in liquid markets and are priced monthly by broker-dealers. At December 31, 1993, the fair value of asset-backed securities exceeded amortized cost by approximately $87 million compared to $172 million for the comparable period a year ago. CNA limits the risks associated with interest rate fluctuations and prepayment by concentrating its CMO investments in early planned amortization classes with wide bands and relatively short principal repayment windows. Over the last few years, concern has been raised regarding the quality of insurance company invested assets. At December 31, 1993, 52% of the general account's debt securities portfolio was invested in U.S. Government and affiliated securities, 25% in other AAA rated securities and 15% in AA and A rated securities. DNA's GIC fixed income portfolio is comprised of 30% U.S. Government and affiliated securities, 14% other AAA rated securities and 24% in AA and A rated securities. These ratings are primarily from nationally recognized rating agencies (94% of the general account portfolio and 93% of the GIC portfolio). The liquidity requirements of CNA are met primarily by funds generated from operations. The principal operating cash flow sources of CNA's property and casualty and life insurance subsidiaries are premiums and investment income. The primary operating cash flow uses are payments of claims, policy benefits and operating expenses. For the year ended December 31, 1993, CNA's operating activities generated net cash flows of $1.3 billion, compared to $1.0 and $1.8 billion in 1992 and 1991, respectively. The increase in cash flow, as compared
Loews Hotels Holding Corporation and subsidiaries- Funds from operations continue to exceed operating requirements. Funds for future capital expenditures and working capital requirements are expected to be provided from operations.
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore")- Oversupply of drilling rigs and low crude oil prices continue to depress conditions in the drilling industry and to adversely impact Diamond Offshore. In 1993 drilling activity in the Gulf of Mexico increased due primarily to higher natural gas prices. This improvement enabled Diamond Offshore to generate sufficient funds from operations to meet its operating requirements. Although funds for future capital expenditures and working capital requirements are expected to be provided from operations, Diamond Offshore may require additional advances from the Company due to the cyclical nature of the industry.
Property and casualty revenues increased by $211.0 million and decreased by $319.4 million, or 2.7% and 3.8%, as compared to 1992 and 1991, respectively. Property and casualty premium revenues decreased by $78.5 and $380.2 million, or 1.2% and 5.7%, as compared to 1992 and 1991, respectively. The decrease from 1992 was principally attributable to increased utilization of a high deductible program for large commercial accounts. This accounted for $235 million in reduced premiums. Involuntary risks premiums were $182 million below the prior year primarily due to a decline in involuntary workers' compensation premiums recorded for the current and previous years. Small commercial accounts premiums declined by $70 million. These declines were partially offset by growth in professional and specialty lines and commercial reinsurance assumed premiums of $217 million, group accident and health of $75 million and personal lines packages premiums of $63 million. Property and casualty investment income was down 13.4% from $1,224 million reported in 1992 and down 17.4% from 1991. Investment income decreased primarily due to the continuing general decline in interest rates and an increase in short-term investments (excluding investments relating to loaned securities) from $3.0 billion at December 31, 1992 to $5.1 billion at December 31, 1993. Life insurance revenues increased by $6.8 and $190.9 million, or 0.2% and 7.3%, as compared to 1992 and 1991, respectively. Life premium revenues for 1993 were approximately the same as 1992, and increased by approximately $122.7 million, or 5.4%, as compared to 1991. Property and casualty underwriting losses were $1,791.8 million in 1993, compared to $2,999.6 and $1,224.7 million in 1992 and 1991, respectively. The combined ratio is the sum of the loss ratio and the expense ratio. The loss ratio is the percentage of incurred claims and claims adjustment expense to premiums earned. The expense ratio is the percentage of underwriting expenses, including the change in deferred acquisition costs, to premiums earned. The combined ratio was 126.4 for 1993 compared with 144.8 and 116.3 for 1992 and 1991, respectively. As previously discussed, the primary reason for the 1993 and 1992 poor operating results was the addition of $500 million in underwriting losses related to Fibreboard in the third quarter of 1993 and $1.5 billion in the fourth quarter of 1992. Catastrophe losses for 1993 were approximately $74 million, compared with $270 million in 1992. CNA's 1992 catastrophe losses related primarily to Hurricane Andrew. For the Los Angeles area earthquake and winter storms occurring in the first quarter of 1994, CNA has recorded losses on reported claims of approximately $65 million. Further loss development related to unreported claims, including assumed reinsurance, is estimated at approximately $35 million. Property and casualty pre-tax results include losses for involuntary risks of $80.8 million in 1993. Involuntary risk charges were $257.3 and $267.0 million in 1992 and 1991, respectively. Involuntary risks include mandatory participation in residual markets, statutory assessments for insolvencies of other insurers and other involuntary charges. CNA's share of involuntary risks is 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. These estimates are adjusted as premium, claim and expense activity is received from the residual markets' administrators. CNA records assessments for insolvencies as they are paid rather than on an accrual basis. Such an accrual process would be very difficult, as past experience is not a reliable indicator of future activity. Further, information currently available from all the states' life and property and casualty guarantee funds is fairly limited and would not provide reliable data on which to base an estimated liability. Many states allow recovery of insolvency assessments by a direct offset to premium taxes or a separate policy surcharge. In addition, some states assess prospectively based on current premiums written. Thus, it would be unclear whether or not future assessments should be accrued on a current basis as they do not necessarily represent a liability until assessed. In any event, CNA believes that any potential estimated necessary liability would not be material.
Property and casualty underwriting losses include reserve increases (decreases) related to prior years, net of reinsurance recoverable, of $590, $1,617 and $(106) million for the years 1993, 1992 and 1991, respectively. This reserve development includes $601, $1,689 and $48 million for asbestos claims, primarily representing reserve additions related to the Fibreboard litigation as discussed above. Adverse reserve development for reported environmental pollution claims and claims expenses totaled $107, $48 and $47 million, respectively. In 1993, CNA allocated approximately $340 million of claim reserves for unreported environmental pollution claims. Adverse reserve developments for asbestos and environmental pollution claims were offset, in part, by favorable development in other lines. For 1993, favorable trends were represented primarily by positive severity experience in professional liability lines and improvement in involuntary workers' compensation experience, resulting in reserve decreases of $182 and $148 million, respectively. See Note 16 of the Notes to Consolidated Financial Statements for further discussion of asbestos and environmental pollution exposures. In early 1993, CNA began a program of realigning its portfolio, which resulted in realizing gains in its investment portfolio that increased Casualty's statutory surplus. Casualty sold approximately $35.4 billion of fixed income and equity securities in 1993, realizing pre-tax net gains of $741.3 million. Of the $35.4 billion of securities sold, approximately $11.5, $13.5 and $5.8 billion were from the U.S. Treasury, Government mortgage-backed and tax-exempt municipal bond portfolios, respectively. The $2.1 billion increase in short-term securities since December 31, 1992 has been invested primarily in U.S. Treasury bills and high grade commercial paper. In addition to reducing the impact that a rise in interest rates would have on the fixed income portfolio, the increase in taxable short-term securities and the decrease in tax-exempt investments will allow the Company to minimize additional alternative minimum tax credit. Since the portfolio is extremely liquid, CNA has the flexibility to shift quickly into higher yielding investments, as the economic environment warrants.
Revenues decreased by $276.5 and $100.6 million, or 12.7% and 5.0%, as compared to 1992 and 1991, respectively. Income before accounting changes decreased by $183.9 and $89.5 million, or 35.1% and 20.8%, as compared to 1992 and 1991, respectively. Revenues decreased, as compared to 1992, by approximately $106.0 million, or 4.9%, due to a reduction in unit prices as well as a decline of approximately $235.5 million, or 10.8%, due to lower unit sales volume, partially offset by higher federal excise taxes amounting to $65.0 million, or 3.0%. Compared to 1991, revenues declined by approximately $229.6 million, or 11.4%, due to lower unit sales volume, partially offset by an increase of approximately $129.0 million, or 6.4%, due to price increases. The price increases over 1991 include approximately $65.0 million, or 3.2%, from the increase of federal excise taxes of $2.00 per thousand cigarettes on January 1, 1993. Lorillard's sales volume has declined 10.4% and 11.4% as compared to 1992 and 1991, respectively. Unit sales volume of the U.S. cigarette industry has declined by 9.0% and 9.4% over the same period. Lorillard's declining sales volume reflects a continuing trend of lower consumer cigarette consumption as well as an increase in industry discount brand sales. The discount brand category's share of industry sales had increased from an average of 30% during 1991 to an average of 37% during 1993. As at December 31, 1993, discount brands represented 33% of industry sales. Virtually all of Lorillard's sales are in the premium brand category. Newport, a premium brand which accounts for two-thirds of Lorillard's unit sales, declined 7.8% as compared to 6.1% versus 1991. As a result of the accelerated growth of discount brands and continued decline in consumption during the first seven months of 1993, Newport and other Lorillard premium brand unit sales were affected. With the industry-wide list price reduction of premium price brands, effective August 9, 1993, the growth rate of discount brands appears to have slowed and Lorillard's product line has benefited modestly in terms of unit sales. These pricing changes have reduced industry profit margins. Although Newport declined in unit sales, this decrease was less than the overall industry decline, and resulted in a share of total industry sales of 4.91% versus 4.85% in 1992, an increase of .06%. On an overall basis, Lorillard's premium brands compared favorably with the industry's rate of decline for this segment, a loss of 17.7% for the industry versus 11.2% for Lorillard.
U.S. federal excise taxes on cigarettes increased $2.00 per thousand effective January 1, 1993. The current administration's efforts to reduce the federal deficit and to enact health care reform has led to further proposals to increase the excise tax. The effects of any additional federal tax increases, as well as increases by state and local taxing authorities, or manufacturers' price increases cannot be determined, but it is likely they would add to the overall industry decline and the growth in the discount category.
operations in the North Sea. Diamond Offshore believes that it may be necessary to mobilize its older rigs to new markets during the next year. It is likely that the costs of these relocations will not be fully reimbursed by customers. Diamond Offshore anticipates its three newest units will not require major modifications and may continue to operate in this market.
Results from operations also benefited from the parent company to retire intercompany debt. Revenues increased in 1993 as compared to 1991, due primarily to the acquisition of 40 offshore drilling rigs in January 1992. Net loss increased due primarily to the corresponding increase in intercompany interest and higher depreciation expenses related to the additional rigs.
Investments-Investments in securities, which are held principally by insurance subsidiaries of CNA, are carried as follows: The Company believes it has the ability to hold all fixed income investments until maturity. However, securities may be sold to take advantage of investment opportunities generated by changing interest rates, prepayments, tax and credit considerations, as part of the Company's asset/liability strategy, or for other similar factors. As a result, the Company considers its fixed maturity securities (bonds and redeemable preferred stocks) and equity securities as available for sale and they are carried at fair value. In prior years, fixed maturity securities were also considered as available for sale, but were carried at the lower of aggregate amortized cost or fair value; in accordance with guidance promulgated by the Securities and Exchange Commission. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Mortgage loans are carried at unpaid principal balances, adjusted for amortization of premium or discount. Policy loans are carried at unpaid balances. Short-term investments are carried at amortized cost, which approximates market value. The cost of securities sold is determined by the identified certificate method. The unrealized gain or loss on investments which are revalued to current market values is net of applicable deferred income taxes and participating policyholders' and minority interests and is reflected as part of shareholders' equity in unrealized appreciation. Investments are written down to estimated realizable values and losses are charged to income when a decline in value is considered to be other than temporary.
Claims and claims expense reserves are based on estimates and the ultimate liability may vary significantly from such estimates. Any adjustments that are made to the reserves are reflected in operating income in the year such adjustments are made. Future policy benefits reserves-Reserves for traditional life insurance products are computed based upon net level premium methods using actuarial assumptions as to interest rates, mortality, morbidity, withdrawals and expenses. Actuarial assumptions include a margin for adverse deviations and generally vary by plan, age at issue and policy duration. Interest rates range from 3% to 10.5%, 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. 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, to provide greater diversification of risk and to minimize exposures on larger risks. The reinsurance coverages are tailored to the specific risk characteristics of each product line with CNA's retained amount varying by type of coverage. Generally, reinsurance coverage for property risks is on 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 associated with the reinsured policy. Deferred policy acquisition costs-Costs of acquiring insurance business, which vary with and are primarily related to the production of such business, are deferred. Such costs include commissions, premium taxes, and certain underwriting and policy issuance costs. Property/casualty acquisition costs are amortized ratably over the period the related premiums are recognized. 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 investment 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. To the extent that unrealized gains or losses on available for sale securities would result in an adjustment of deferred policy acquisition costs had those gains or losses actually been realized, the related unamortized deferred policy acquisition costs are recorded as an adjustment of the unrealized gains or losses included in shareholders' equity. Restricted investments-On December 30, 1993, CNA deposited $986,800,000 in an escrow account, pursuant to the Fibreboard Global Settlement Agreement, as discussed in Note 16. The funds are included in short-term investments and are invested in U.S. treasury securities. The escrow account is the prefunding mechanism to the trust fund for future claimants. Participating business-Participating business represented 1.1%, 1.2% and 1.6% of CNA's gross life insurance in force and 1.1%, 1.2% and 1.4% of life insurance premium income for 1993, 1992 and 1991, respectively. Participating policyholders' equity is determined by allocating 90% of related net income or loss and unrealized investment gains or losses to such business, 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 assets and liabilities of which 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 contractholders of approximately 86% of the Separate Account business. Substantially all assets of the Separate Accounts are carried at fair value. Separate Account liabilities are carried at the higher of contract value or the fair value of the underlying assets. Investment income and gains and losses for the Separate Account accrue to the contractholders and are therefore not included in the Statements of Consolidated Income or Cash Flows except for funding which may be required under the guarantees. Revenues to CNA from the Separate Account business consist principally of administration fees.
Inventories-Tobacco products-These inventories, aggregating $174,377,000 and $186,986,000 at December 31, 1993 and 1992, respectively, are stated at the lower of cost or market, using the last-in, first-out (LIFO) method. Watches and other timing devices-These inventories, aggregating $52,109,000 and $59,322,000 at December 31, 1993 and 1992, respectively, are stated at the lower of cost or market, using the first-in, first-out (FIFO) method.
Reclassification-Certain amounts applicable to prior periods have been reclassified to conform to the classifications followed in 1993.
Securities sold under agreements to repurchase represent the amounts of securities which will be reacquired subsequently by certain insurance and non- insurance subsidiaries as specified in the agreements. Proceeds from these transactions have been invested in short-term investments (principally commercial paper and government securities) with maturities which correspond to the repurchase dates. The carrying value of investments (other than equity securities) that have not produced income for the last twelve months is $134,188,000 at December 31, 1993. Investment gains of $1,005,538,000 and losses of $120,916,000 were realized on securities available for sale for the year ended December 31, 1993. Total investment gains of $459,000,000 and $614,307,000 and losses of $155,378,000 and $172,449,000 were realized on sales of fixed maturities for the years ended December 31, 1992 and 1991, respectively.
The amortized cost and market value of fixed maturities at December 31, 1993 and 1992 are shown below by contractual maturity. Actual maturities differ from contractual maturities because securities may be called or prepaid with or without call or prepayment penalties.
Premium deposit and annuity contracts are valued based on cash surrender values and the outstanding fund balances. Guaranteed investment contracts and deferred annuities of the separate accounts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. The fair value of the liabilities for variable separate accounts are based on the quoted market values of the underlying assets of each variable separate account. The fair value of other separate account liabilities approximates carrying value. Fair value of long-term debt traded on securities exchanges is based on quoted market prices. The fair values for other long-term debt are based on quoted market prices of comparable instruments adjusted for differences between the quoted instruments and the instruments being valued or are estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.
The Company enters into various transactions involving off-balance-sheet financial instruments through a variety of futures, swaps, options, forward and other contracts (the "contracts") as part of its investing activities. 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 unmatched positions. Notional or contractual amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. In addition, the amounts subject to credit loss are substantially mitigated by collateral requirements of the contracts. These contracts are marked to market and gains or losses are included in realized investment gains or losses. The Company's investments in off-balance-sheet financial instruments are as follows:
Equity in earnings (losses) of associated companies, included in other revenues, amounted to $53,395,000, $26,743,000 and $(13,802,000) for the years ended December 31, 1993, 1992 and 1991, respectively. CBS Inc.-The Company held approximately 20% of the outstanding common shares of CBS Inc. ("CBS") at December 31, 1993 and accounts for CBS on the equity method. In 1992, CBS adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," SFAS No. 109, "Accounting for Income Taxes" and SFAS No. 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1992. The cumulative effect of these accounting changes resulted in recognition by Loews of a charge of $17.4 million, or $.27 per share, in relation to its investment in CBS. The Company's equity in the earnings (losses) of CBS after giving effect to purchase value adjustments amounted to $58,990,000, $27,012,000 and $(24,533,000) before taxes and $52,641,000, $24,717,000 and $(22,904,000) after taxes for the years ended December 31, 1993, 1992 and 1991, respectively. Dividends received amounted to $3,787,000, $3,029,000 and $3,029,000 for the respective periods. In May 1993, $389.6 million of CBS 5% convertible debentures were converted for 1,947,975 shares of common stock. The difference between the amount of debt converted and the average cost of the treasury shares issued, net of unamortized issue costs related to this debt, was credited to additional paid-in capital. As a result, the Company's ownership in CBS decreased from approximately 23% to 20% and the Company's additional paid-in capital increased by $58,942,000. In February 1991, CBS completed a cash tender offer at an amount exceeding its net book value per share for repurchase of its common stock aggregating approximately $2 billion or 44% of its common shares. The Company tendered its shares and received cash amounting to $537,234,000, comprised of $414,568,000 realization of previously undistributed earnings and $122,666,000 representing a return of the Company's investment. As a result of the tender, the Company's ownership in CBS decreased from approximately 25% to 23% and the Company's additional paid-in capital increased by $37,880,000.
If the average cost method of accounting had been used for tobacco inventories instead of the LIFO method, such inventories would have been $211,227,000 and $211,198,000 higher at December 31, 1993 and 1992, respectively.
Gross deferred tax assets amounted to $1,895,689,000 and $1,595,083,000 and liabilities amounted to $821,279,000 and $485,551,000, for the years ended December 31, 1993 and 1992, respectively. No valuation allowance for deferred tax assets is necessary due to the Company's election to designate its 1988 through 1991 tax payments as Special Estimated Tax Payments as permitted under the Technical and Miscellaneous Revenue Act of 1988, which should assure realization of a substantial portion of deferred tax assets arising from the discounting of property/casualty loss reserves and the Company's past history of profitability and anticipated continued profitability.
Deferred Federal income taxes (benefits) have been provided for the tax effects of items reported in different periods for financial and income tax reporting purposes. The sources of these differences for the year ended December 31, 1991, in thousands of dollars, were as follows:
Total income tax expense (benefit) for the years ended December 31, 1993, 1992 and 1991 was different than the amounts of $241,275,000, $(176,278,000) and $418,591,000, computed by applying the statutory U.S. federal income tax rate of 35%, 34% and 34%, respectively to income (loss) before income taxes and minority interest for each of the years. The reasons for variances from the statutory rate are as follows:
The Company has entered into separate tax allocation agreements with Bulova and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the "Subsidiaries"). 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 (it) be paid by the Subsidiary an amount, if any, equal to the federal income tax which would have been payable by the Subsidiary if it had filed a separate consolidated return. Under these agreements, the federal income tax benefit (expense) to CNA amounted to approximately $17,000,000, $350,000,000 and $(82,000,000) for the years ended December 31, 1993, 1992 and 1991, respectively, and the federal income tax benefit (expense) to Bulova amounted to approximately $2,500,000, $(3,300,000) and $1,900,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Each agreement may be cancelled by either of the parties upon thirty days' written notice. The Company's federal income tax returns have been examined through 1988 and settled through 1983, and the years 1989 and 1990 are currently under examination. While tax liabilities for subsequent years are subject to audit and final determination, in the opinion of management the amount accrued in the consolidated balance sheet is believed to be adequate to cover any additional assessments which may be made by federal, state and local tax authorities and should not have a material effect on the financial condition of the Company. The Revenue Reconciliation Act of 1990 (the "1990 Act") requires property/casualty insurance companies to accrue estimated salvage and subrogation recoverable for tax purposes as of January 1, 1990. Under a transition provision of the 1990 Act, for companies that had anticipated salvage and subrogation in determining loss reserves, 87% of such accrual as of January 1, 1990 was forgiven. This special deduction is to be taken ratably over four taxable years beginning in 1990. CNA recognized a tax benefit of approximately $17,000,000, $17,000,000 and $33,000,000 for the years ended December 31, 1993, 1992 and 1991, respectively. The 1991 amount recognizes tax benefit for the 1990 year. The Omnibus Budget Reconciliation Act of 1993, enacted in August 1993, among other things, increased the corporate tax rate from 34% to 35 % effective January 1, 1993. In accordance with SFAS No. 109 deferred tax assets have been adjusted for the effect of the change in tax rates in the period enacted. As a result, the Company has recorded a tax benefit in 1993 of approximately $31,636,000 to increase its deferred tax asset.
In January 1992 Diamond Offshore Drilling, Inc., a wholly owned subsidiary, acquired all of the outstanding common stock of Odeco Drilling, Inc. ("Odeco") at a purchase price of $372,242,000 in cash. Odeco owned and operated 40 offshore drilling rigs that were used in drilling oil and gas wells. The acquisition has been accounted for by the purchase method and the results of operations are included in the Company's financial statements as of January 1, 1992. Had this acquisition occurred on January 1, 1991, consolidated results of operations for the year ended December 31, 1991 would not have been materially different.
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. Pension cost includes the following components:
At December 31, 1993, the Company's adjustment required to recognize its minimum pension liability exceeded its unrecognized prior service cost and net transition obligation by $43,095,000. This excess is recorded as a reduction to shareholders' equity of $28,012,000, net of tax benefits of $15,083,000, in accordance with SFAS No. 87, "Employers' Accounting for Pensions." The rates used in the actuarial assumptions were:
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. Other Postretirement Benefit Plans-The Company and its subsidiaries have several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by bargaining units vary by each unit and contract. Benefits for certain retirees are in the form of a company health care account which can have a maximum of $4,500 per year, with an equal amount for a spouse in the same age grouping. Benefits for retirees reaching age 65 are generally integrated with Medicare. Benefits for certain retirees are in the form of a company health care account which can have a maximum value of $1,500 per year, with an equal amount for a spouse in the same age grouping. Other retirees, based on plan provisions, must use Medicare as their primary coverage, with the Company reimbursing a portion of the unpaid amount; or are reimbursed for the Medicare Part B premium or have no company coverage. The benefits provided by the Company are basically health, and for certain retirees, life insurance type benefits. The Company does not fund any of these benefit plans and accrues postretirement benefits during the active service of those employees who would become eligible for such benefits when they retire. The rates used in the actuarial assumptions were:
Prior to 1992 the Company recognized the expense as amounts were paid. Such costs amounted to approximately S10,441,000 for 1991. For measurement purposes, a trend rate of 14.5% to 15% pre-65 and 11.5% post- 65, for covered costs was used. These trend rates are expected to decrease gradually to 6% and 7% 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 $28,685,000 and the net periodic postretirement benefit cost by approximately $3,900,000.
Coverage Litigation--Between 1928 and 1971, Fibreboard manufactured insulation products containing asbestos. Since the 1970's, thousands of claims have been filed against Fibreboard by individuals claiming bodily injury as a result of asbestos exposure. Continental insured Fibreboard under a comprehensive general liability policy between May 4, 1957 and March 15, 1959. Fibreboard disputed the coverage positions taken by its insurers and, in 1979, Fireman's Fund, another of Fibreboard's insurers, brought suit with respect to coverage for defense and indemnity costs. In January 1990, the San Francisco Superior Court (Judicial Council Coordination Proceeding 1072) rendered a decision against the insurers including Continental and Pacific Indemnity. The court held that the insurers owed a duty to defend and indemnify Fibreboard for certain of the asbestos- related bodily injury claims asserted against Fibreboard (in the case of Continental, for all claims involving exposure to Fibreboard's asbestos products if there was exposure to asbestos at any time prior to 1959 including years prior to 1957, regardless of when the claims were asserted or injuries manifested) and that the policies contained no aggregate limit of liability in relation to such claims. The judgment was appealed. The Court of Appeal entered an opinion on November 15, 1993, as modified on December 13, 1993, which substantially affirmed the lower court's decisions on scope of coverage and trigger of coverage issues, as described below. The Court of Appeal withheld its ruling on the issues discrete to Continental and Pacific Indemnity pending final court approval of either the Global Settlement or the Trilateral Agreement described below. On January 27, 1994, the California Supreme Court granted a Petition for Review, filed by several insurers, including Continental, of, among other things, the trigger and scope of coverage issues. The order granting review has no effect on the Court of Appeal's order severing the issues unique to Continental and Pacific Indemnity. Continental cannot predict the time frame within which the issues before the California Supreme Court may be resolved. If neither the Global Settlement nor the Trilateral Agreement is approved, it is anticipated that Continental and Pacific Indemnity will resume the appeal process. Continental's appeal of the coverage judgment raises many legal issues. Key issues on appeal under the policy are trigger of coverage, scope of coverage, dual coverage requirements and number of occurrences: .The trial court adopted a continuous trigger of coverage theory under which all insurance policies in effect at any time from first exposure to asbestos until the date of the claim filing or death are triggered. The Court of Appeal endorsed the continuous trigger theory, but modified the ruling to provide that policies are triggered by a claimant's first exposure to the policyholder's products, as opposed to the first exposure to any asbestos product. Therefore, an insurance policy is not triggered if a claimant's first
exposure to the policyholder's product took place after the policy period. The court, however, placed the burden on the insurer to prove the claimant was not exposed to its policyholder's product before or during the policy period. The trigger of coverage issue is now on appeal to the California Supreme Court. Continental's position is that its policy is triggered under California law by manifestation of appreciable harm. The bodily injury cannot be said to occur within the meaning of the policy until actual physical symptoms and associated functional impairment manifest themselves. Thus, Continental's position is that if existing California law were applied, there would be no coverage under Continental's policy. .The scope of coverage decision imposed a form of "joint and several" liability that makes each triggered policy liable in whole for each covered claim, regardless of the length of the period the policy was in effect. This decision was affirmed by the Court of Appeal, and is now on appeal to the California Supreme Court. Continental's position is that liability for asbestos claims should be shared not jointly, but severally and on a pro data basis between the insurers and insured. Under this theory, Continental would only be liable for that proportion of the bodily injury that occurred during the 22-month period its policy was in force. .Continental maintains that both the occurrence and the injury resulting therefrom must happen during the policy period for the policy to be triggered. Consequently, if the court holds that the occurrence is exposure to asbestos, Continental's position is that coverage under the Continental policy is restricted to those who actually inhaled Fibreboard asbestos fibers and suffered injury from May 4, 1957 to March 15, 1959. .Continental's policy had a $1 million per occurrence limit. Continental contends the number of occurrences under California law must be determined by the general cause of the injuries, not the number of claimants, and that the cause of the injury was the continuous sale and manufacture of the product. Because the manufacture and sale proceeded from two locations, Continental maintains that there were only two occurrences and thus only $2 million of coverage under the policy. However, the per occurrence limit was interpreted by the trial court to mean that each claim submitted by each individual constituted a separate occurrence. The Court of Appeal withheld ruling on this issue, as noted above. Under various reinsurance agreements, Continental has asserted a right to reimbursement for a portion of its potential exposure to Fibreboard. The reinsurers have disputed Continental's right to reimbursement and have taken the position that any claim by Continental is subject to arbitration under provisions in the reinsurance agreement. A Federal court has ruled that the dispute must be resolved by arbitration. There can be no assurance that Continental will be successful in obtaining a recovery under its reinsurance agreements.
Assignments--Beginning in 1991, Fibreboard unilaterally reached settlements with various classes of claimants by purporting to assign to plaintiffs potential proceeds from its insurance policy with Continental disputed Fibreboard's right to make such settlements and assignments, asserted that they violated the terms of the policy and the Interim Agreement described above and asserted that the settlement amounts were unreasonable and excessive. In June 1992 a California trial court ruled in one case that Fibreboard could make such settlements and assignments since, in its view, Continental was not fully defending Fibreboard against the claims. Continental is appealing this decision. The trial court did rule that Continental could challenge the reasonableness of individual settlements and assignments. Following that ruling, Continental agreed to fund Fibreboard's reasonable defense costs without limitation as to amount pending resolution of Continental's appeal. Fibreboard continued to make settlements and assignments following such agreement, and Continental vigorously disputed Fibreboard's right to do so. This settlement and assignment process by Fibreboard escalated significantly in the fourth quarter of 1992. Through December 31, 1992, Fibreboard entered into unilateral assignment agreements covering 31,100 claims for a total of $400 million or an average of $12,800 per claim. Of these claims, approximately 30,000 were settled and assigned by Fibreboard in the month of December, 1992.
The Company's subsidiaries are engaged primarily in insurance (property, casualty and life), the production and sale of cigarettes, the operation of hotels and oil and gas drilling rigs, the distribution of watches and the production and sale of other timing devices. The following table sets forth the major sources of the Company's consolidated revenues, income and assets.
(a) Realized investment gains (losses) included in Revenues, income contribution and Net income are as follows:
(e) Includes interest expense, net of tax benefits, of $83,127, $71,499 and $91,306 for the respective periods.