Loews Corporation (the "Company") reported 1999 net operating income, excluding net investment gains and losses, of $657.7 million or $6.06 per share compared to $452.3 million or $3.95 per share in 1998.
Net operating income in 1999 includes charges at the Lorillard tobacco subsidiary of $637.3 million or $5.87 per share, compared to $346.5 million or $3.03 per share in 1998, related to the settlement of tobacco litigation. Net operating income in 1999 also includes charges of $310.9 million or $2.87 per share related to loss and allocated loss adjustment insurance reserve strengthening for prior periods and $46.2 million or $.43 per share for restructuring related costs at the CNA subsidiary, compared to $142.6 million or $1.25 per share for restructuring related costs in 1998.
Net income for 1999 was $363.2 million or $3.35 per share compared to $464.8 million or $4.06 per share for the full year 1998. Net income for 1999 includes net investment losses of $136.6 million or $1.26 per share compared to net investment gains of $12.5 million or $.11 per share in 1998. Net income for 1999 also includes a charge for accounting changes of $157.9 million or $1.45 per share, primarily related to accounting for insurance-related assessments at the CNA subsidiary.
For the quarter ended December 31, 1999 the Company reported a net operating loss, excluding net investment losses, of $11.5 million or $.11 per share, compared to a loss of $172.8 million or $1.52 per share for the 1998 fourth quarter. Net operating results include charges at the Lorillard tobacco subsidiary related to the settlement of tobacco litigation of $169.4 million or $1.60 per share in the fourth quarter of 1999, compared to $216.0 million or $1.90 per share in the fourth quarter of 1998.
Fourth quarter 1999 revenues were $4.9 billion, compared to $5.0 billion in the fourth quarter of 1998.
At year end 1999, the Company had a book value of $95.50 per share compared to a book value of $90.61 per share in 1998.
Earned premiums for 1999 decreased $260.8 million or approximately 2.9%, as compared to 1998. Agency Market Operations earned premium declined $448.6 million, or 8.5%, due mainly to the transfer of CNA's personal insurance business to The Allstate Corporation effective October 1, 1999. Reinsurance agreements executed in 1999, as well as rate and underwriting actions taken to improve the core book of business, also contributed to Agency Market Operations' decreased premium. Specialty Operations premiums decreased $90.3 million due to new reinsurance agreements covering 1999 risks and due to the decision not to pursue certain markets, including the agricultural and enter-
tainment markets. Risk Management earned premium decreased $22.5 million due to the decision to take advantage of a favorable reinsurance market. Offsetting these declines were increases in CNA Re and Global Operations. CNA Re experienced $231.6 million, or 24.5%, of earned premium growth, which occurred in domestic and foreign markets in the professional and standard lines of business. Global Operations earned premium increased $69.0 million, due to the effects of 1998 acquisitions, and increased surety and warranty sales stemming from the favorable domestic economic environment.
Underwriting results declined by $201.0 million, or 14.7%, in 1999 and include approximately $558.0 million in loss and allocated loss adjustment expense reserve strengthening for prior years. Agency Market Operations underwriting results declined by $153.0 million in 1999 due primarily to greater adverse loss reserve development, which included development related primarily to automobile, workers' compensation and packaged general liability exposures. CNA Re underwriting results declined by $131.0 million, primarily due to catastrophe losses. Global Operations underwriting results improved $24.0 million due to acquisitions and a change in its mix of business that has reduced its exposure to catastrophes and large property losses. Total underwriting results were favorably impacted by $83.0 million in 1999 due to favorable legislative action in certain states which reduced CNA's liability for workers' compensation assessments.
Catastrophe losses were $54.0 million higher in 1999. Restructuring and other related charges included in underwriting results were approximately $60.0 million in 1999, down from $103.0 million in 1998. These charges stem from a plan, announced in the third quarter of 1998, to restructure operations as part of an initiative to improve performance. CNA intends to position each of its strategic business units as a market leader by sharpening its focus on customers and employing new technology. Total restructuring and related charges for the property and casualty segment were $70.0 million in 1999 and related primarily to employee terminations and parallel processing. These costs were expensed as paid because they did not qualify for accrual upon adoption of the restructuring plan.
Earned premiums for 1998 increased $175.9 million, or approximately 2.0%, as compared to 1997. Earned premiums increased $93.8 million for Commercial Insurance as increases in involuntary business more than offset declines in other lines. The increase in involuntary risks is due to reductions recorded in 1997 related to prior years premiums.
Also contributing to the change in 1998 was Global Operations which increased by $87.2 million, primarily due to the effects of recent acquisitions, partially offset by the decision to exit unprofitable, non-core lines of business. In addition, Personal Insurance earned premiums increased by $61.5 million due, in part, to growth in agency earned premiums, and Risk Management and CNA Re both saw earned premium growth of approximately $46.0 million. Offsetting these increases was a decrease in Specialty Operations of $159.2 million due in large part to the decision to exit the agricultural market. The impact on earned premiums due to this decision was a decrease of $98.4 million.
Underwriting results declined in 1998 by $585.2 million. This reduction was primarily due to net unfavorable reserve development in 1998 of $331.8 million as compared to net favorable development of $86.3 million for 1997. The unfavorable development in 1998 occurred primarily in asbestos and mass tort claims. Pre-tax catastrophe losses of $309.7 million related to winter storms and tropical storms were recorded in 1998, compared to catastrophe losses of $91.6 million in 1997.
Restructuring and other related charges for the property and casualty segment totaled approximately $190.0 million in 1998. These charges related to employee terminations, lease abandonments, writedowns of certain assets to fair value and losses related to the exiting of businesses.
Life Operations provides financial protection to individuals through a full product line of term life insurance, universal life insurance, long-term care insurance, annuities and other products. Life Operations also provides retirement service products to institutions in the form of various investment products and administration services. Life Operations has several distribution relationships and partnerships including managing general agencies, other independent agencies working with CNA life sales offices, a network of brokers and dealers and various other independent insurance consultants.
Sales volume for Retirement Services increased to $1.8 billion in 1999 from $1.0 billion in 1998, primarily related to increased sales of institutional investment products. Variable annuity sales increased 87% to $110.0 million. Retirement Services earned premiums were $216.0 million in 1999, up 22.0% from 1998 premium of $177.0 million.
Long Term Care sales volume of $343.0 million in 1999 represents a 14.7% increase over the 1998 level of $299.0 million. Long Term Care premiums increased 16.6% in 1998 and 22.2% or $61.0 million in 1999 to reach $336.0 million.
Individual life insurance premiums, on a direct basis, were $754.0 million in 1998, an increase of $111.0 million from 1997 premiums of $643.0 million.
Individual life premium revenues were $321.0 million in 1998, as compared with $373.0 million in 1997, as individual term life insurance premiums received in the current year, for business written between mid-1994 through mid-1996, were co-insured with a new reinsurance contract at a rate of 90% of the direct business. The new reinsurance program complements an existing program under which business written after mid-1996 is being coinsured at the rate of 75% of the direct premiums.
Group Operations includes five principal groups, Special Benefits, Provider Markets, Life Reinsurance, Federal Markets and Health Benefits.
Earned premiums declined in 1999 by $162.0 million, or 4.3%, from 1998. Health Benefits premiums declined $344.0 million, almost entirely due to the exit of selected medical markets in late 1998. Approximately half of the Health Benefits decline was offset by premium growth in Federal Markets of $70.0 million reflecting medical claim trends, and growth in Life Reinsurance and Special Benefits of $60.0 and $53.0 million, respectively.
Pre-tax operating loss in 1999 improved by $67.1 million compared to 1998. Health Benefits pre-tax operating income improved $81.0 million, due to the exit
Pre-tax operating loss in 1998 increased by $65.2 million as compared to 1997. The increase is primarily due to restructuring and other related charges of $39.0 million related to the decision to exit the insured comprehensive medical portion of the employer and affinity markets. The majority of the inforce business was sold effective January 1, 1999.
The Other insurance segment contains CNA's corporate interest expense, certain run-off insurance operations, asbestos claims related to Fiberboard Corporation, financial guarantee insurance contracts and certain non-insurance operations, including the operations of AMS Services, Inc. ("AMS"), an information technology and agency software development company.
The net operating loss excluding investment gains (losses) for 1999 was $169.6 million, approximately $12.4 million better than 1998. The improvement was primarily attributable to decreased losses from AMS of $17.1 million, partially offset by increased losses from run-off insurance operations. In the fourth quarter of 1999 CNA sold most of its interest in AMS. See Note 12 of the Notes to Consolidated Financial Statements.
Other insurance segment's net operating loss excluding investment gains (losses) for 1998 was $182.0 million. This is an increase of $88.3 million over 1997's net operating loss excluding investment gains (losses) of $93.7 million. Contributing to this increase is an increase in losses at AMS due to lower revenues attributable to reduced contract renewals as well as restructuring and other related charges of approximately $8.0 million. Interest expense in 1998 declined to $189.7 million, compared to 1997's interest expense of $198.0 million.
Revenues and net income increased by $1,199.4 and $300.1 million, or 41.9% and 85.3%, respectively, in 1999 as compared to 1998.
Lorillard's unit sales volume increased by 3.7% as compared to 1998. Newport, a full price brand which accounts for approximately 73% of Lorillard's unit sales, decreased by 1.8% as compared to 1998. The increase in Lorillard's unit sales volume reflects higher unit sales of its Maverick and Old Gold brands in the discount market segment, and increased sales promotion activities for these brands.
Newport's decline in unit sales volume reflects the effects of various price increases since November 1998 that followed the Master Settlement Agreement. While Newport's unit sales volume has declined, its market share has increased to 7.7% at December 31, 1999, as compared to 7.1% at December 31, 1998. Overall industry unit sales volume is down by 10.0% in 1999, as compared to 1998.
Discount brand sales have decreased from an average of 31.4% of industry sales during 1994 to an average of 25.0% during 1999. At December 31, 1999, they represented 23.1% of industry sales.
Lorillard's unit sales volume increased by 1.1% as compared to 1997. Newport, a full price brand which accounted for approximately 77% of Lorillard's unit sales, increased by 2.4% as compared to 1997.
On November 23, 1998, Lorillard, Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the "Original Participating Manufacturers" and, together with Liggett Group, Inc. and any other tobacco product manufacturer that becomes a signatory, the "Participating Manufacturers") entered into a Master Settlement Agreement (the "Master Settlement Agreement") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and the Northern Marianas (collectively, the "Settling States") to settle the asserted and unasserted health care cost recovery and certain other claims of those states. The Original Participating Manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the Master Settlement Agreement, the "State Settlement Agreements").
Loews Monte Carlo Hotel in 1998. Excluding this gain, revenues increased by $39.4 million, or 17.3%, and income before cumulative effect of changes in accounting principles decreased by $5.9 million, or 24.2%. Revenues increased due primarily to the operations of the Loews Miami Beach Hotel which opened in December 1998 and an approximately 8.4% increase in overall average room rates. These increases were partially offset by the sale of the Loews Monte Carlo Hotel in November 1998. Overall occupancy rates remained at approximately 78%, essentially unchanged from 1998.
Net income includes a charge of $7.1 million to reflect the cumulative effect of a change in accounting principles requiring current write-off of preopening expenses. Income before cumulative effect of changes in accounting principles decreased due to costs incurred with respect to preopening activities in 1999 and losses recorded from an unconsolidated joint venture which commenced operations this year. These declines were partially offset by the increased revenues discussed above.
Revenues and net income increased by $19.6 and $14.0 million, respectively, in 1998 as compared to 1997, due primarily to an approximately 7.3% increase in average room rates. These increases include a pre-tax and after tax gain of $14.7 and $8.4 million, respectively, from the sale of the Loews Monte Carlo Hotel. Overall occupancy rates were essentially unchanged from 1997, with rate increases in most other properties offset by decreases in occupancy rates, revenues and net income as a result of a lower number of rooms available due to a major renovation program at the Regency Hotel, the chain's flagship property.
These increases were partially offset by reductions in revenues from decreased utilization due to rig downtime for mandatory inspections and repairs performed during 1998 ($50.8 million) and lower utilization of jack-up rigs ($15.7 million) in the shallow waters of the Gulf of Mexico during 1998.
Net income increased due primarily to the higher revenues discussed above, partially offset by increased depreciation expense, higher contract drilling costs including labor and drilling supplies, and higher interest expense. Increased depreciation expense reflects costs associated with Diamond Offshore's continuing rig enhancement program and specific individual rig upgrades.
Revenues increased due to higher watch unit sales and increased clock unit sales and prices, partially offset by lower watch prices in 1999 as compared to 1998.
Revenues and net income increased by $6.1 and $0.8 million, or 4.7% and 8.2%, respectively, in 1998 as compared to 1997.
Revenues increased due to an increase in watch unit sales. Revenues also benefited from a $0.6 million increase in interest income. These increases were partially offset by an approximately $1.1 million decline in clock net sales in 1998 as compared to 1997, due primarily to lower clock unit sales.
(1) Includes losses on short sales, equity index futures and options aggregating $533.6, $584.3 and $936.6 for the years ended December 31, 1999, 1998 and 1997, respectively. In 1998, the Company started to reduce its exposure in certain positions. At December 31, 1999, the Company continued to maintain certain of these positions. See "Quantitative and Qualitative Disclosures About Market Risk." (2) See Note 15 of the Notes to Consolidated Financial Statements.
Exclusive of investment (losses) gains, revenues increased by $4.8 million, or 2.6%, due principally to income from a shipping joint venture, partially offset by lower investment income. Net income declined by $15.4 million, or 64.4%, due to higher interest expenses and lower investment income, partially offset by the shipping joint venture income.
The principal 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 for claims, policy benefits and operating expenses.
For the year ended December 31, 1999, CNA's net cash used in operating activities was $2,600.0 million,
The significant increase in net cash used in operating activities in 1999 is principally attributable to (i) the net transfer of $1,100.0 million in cash to Allstate in connection with the transaction involving CNA's Personal Insurance business and (ii) a payment of $1,100.0 million from escrow pursuant to the settlement between CNA, Pacific Indemnity and Fibreboard Corporation known as the Trilateral Agreement. See Notes 12 and 18 of the Notes to Consolidated Financial Statements regarding these transactions. Excluding these significant non-recurring transactions, CNA would have reported net cash used in operating activities in 1999 of approximately $400.0 million, significantly improved from 1998. Improvement in net cash used in operating activities is primarily due to lower levels of paid operating expenses, which declined by more than 30%, relative to the lower levels of net premiums collected, which declined by less than 15%. Benefits paid, adjusted for the Allstate and Fibreboard payments, were slightly higher in 1999 than 1998. Notwithstanding the improvement in 1999, the Personal Insurance transaction had an adverse impact on net cash used in operations, because the Personal Insurance business has historically contributed an inflow of operating cash. The transfer of this business on October 1, 1999 resulted in a reduction in net cash inflow of approximately $128.0 million in the fourth quarter of 1999.
CNA had substantially lower operating cash flows in 1998 and 1997, primarily due to increases in insurance receivables.
On February 15, 2000, Standard & Poor's lowered CNA's senior debt rating from A- to BBB and lowered CNA's preferred stock rating from BBB to BB+. As a result of these actions the facility fee payable on the aggregate amount of CNA's revolving credit facility (the "Facility") was increased to 12.5 basis points per annum and the interest rate on the Facility was increased to LIBOR plus 27.5 basis points. Additionally, as a result of these actions, CNA purchased and retired approximately $30.0 million of its outstanding money market preferred stock in February 2000, and announced its intention to purchase or redeem the remaining $320.0 million of its outstanding preferred shares.
On April 15, 1999, CNA retired $100.0 million of 8.25% senior notes. On August 2, 1999, CNA repaid its $157.5 million, 11% Secured Mortgage Notes, due June 30, 2013. The gain realized on the transaction was not significant.
On March 8, 2000, CNA announced that it is exploring the sale of its individual life insurance and life reinsurance businesses. CNA has engaged the services of an investment banking firm to assist with this effort. As expected, several of the major rating agencies placed their ratings of the CAC Pool under review as a result of CNA's announcement regarding the individual life and life reinsurance business. Each rating agency has slightly different terms for this special review: Standard & Poor's placed the rating on CreditWatch with developing implications; A.M. Best placed the rating under review with developing implications; Duff & Phelps placed the rating on Rating Watch - Uncertain, implying it could be upgraded or downgraded in the future.
On March 14, 2000, Moody's lowered all of CNA's ratings except for its commercial paper rating. Continental Assurance Company and Valley Forge Life Insurance Company remain under review by Moody's - direction uncertain. The outlook on all other rated entities remained at stable.
The terms of the State Settlement Agreements, described above, require significant payments to be made to the Settling States beginning in 1998 and continuing in perpetuity. See "Results of Operations" and Note 18 of the Notes to Consolidated Financial Statements for additional information regarding this settlement and litigation generally.
In September 1999, Loews Hotels opened the 750 room Portofino Bay Hotel, the first of three hotels the company is developing with its partners at Universal Orlando in Florida. Construction is continuing on the second property, the 650 room Hard Rock Hotel, scheduled to open in December 2000. A third property, the 1,000 room Royal Pacific Hotel, is scheduled to open in December 2001.
A Loews Hotels subsidiary is converting an office building in Philadelphia, into the 585 room Loews Philadelphia Hotel, which is scheduled to open this year.
jects are being funded by a combination of equity and mortgages.
Funds from operations continue to exceed operating requirements. Funds for other capital expenditures and working capital requirements are expected to be provided from operations.
The conversion of the Ocean Confidence from an accommodation vessel to a semisubmersible drilling unit capable of operating in harsh environments and ultra-deep water continues. Diamond Offshore originally estimated its net cost of conversion for this rig to be approximately $210.0 million. These estimates were developed prior to the completion of all required structural engineering. Diamond Offshore now estimates its net cost of conversion for this rig at approximately $340.0 million. Upon completion of the conversion and acceptance, the rig is scheduled to begin a five year drilling program in the Gulf of Mexico which is expected to generate approximately $320.0 million of revenues. The drilling contract contains a provision allowing the customer to cancel the contract should the unit not be delivered by July 1, 2000. Although Diamond Offshore believes the project will be completed by July 1, 2000, it is possible that delays or unforseen circumstances could push delivery beyond this date, which could allow the customer to cancel the term contract. Should Diamond Offshore be required to remarket the unit, it is likely that an initial term would be shorter than the currently contracted five-year period, and the rate would be dependent upon market conditions at such time as the Ocean Confidence might be offered for contract. In such case, future revenues generated by the rig could be less than the current contracted amount of approximately $320.0 million.
During 1999, the Company purchased 8,101,700 shares of its outstanding Common Stock at an aggregate cost of $601.6 million, and also purchased 3,001,000 shares of CNA Financial common stock at an aggregate cost of $107.0 million. During the current year to date, the Company has purchased an additional 3,347,800 shares of its outstanding Common Stock at an aggregate cost of $192.5 million. Depending on market conditions, the Company from time to time purchases shares of its, and its subsidiaries, outstanding common stock in the open market or otherwise.
Investments activities of non-insurance companies include investments in fixed income securities, equity securities including short sales, derivative instruments and short-term investments, and are carried at fair value. Equity securities, which are considered part of the Company's trading portfolio, short sales and derivative instruments are marked to market and reported as investment gains or losses in the income statement.
The Company enters into short sales and invests in certain derivative instruments for a number of purposes, including: (i) for asset and liability management activities, (ii) for income enhancements for its portfolio management strategy, and (iii) to benefit from anticipated future movements in the underlying markets that Company management expects to occur. If such movements do not occur or if the market moves in the opposite direction than what management expects, significant losses may occur.
Monitoring procedures include senior management review of daily detailed reports of existing positions and valuation fluctuations to ensure that open positions are consistent with the Company's portfolio strategy.
The credit exposure associated with these instruments is generally limited to the positive market value of the instruments and will vary based on changes in market prices. The Company enters into these transactions with large financial institutions and considers the risk of nonperformance to be remote.
CNA's investment policies for both the general and Separate Accounts emphasize high credit quality and diversification by industry, issuer and issue. Assets supporting interest rate sensitive liabilities are segmented within the general account to facilitate asset/liability duration management.
A primry objective in the management of the fixed maturity portfolio is to maximize total return relative to underlying liabilities and appropriate market benchmarks. In achieving this goal, assets may be sold to take advantage of market conditions, other investment opportunities, and credit and tax considerations. This activity will produce realized gains and losses depending on then current interest rates.
In the above tables, approximately 95.4% and 91.5% of the general account bond portfolio, and 96.9% and 95.7% of the guaranteed investment contract bond portfolio were U.S. government agencies or were rated by Standard & Poor's or Moody Investors Service at December 31, 1999 and 1998, respectively. The remaining bonds were rated by other rating agencies, outside brokers or CNA's management.
Total Separate Accounts investments at fair value were approximately $4.5 and $5.1 billion at December 31, 1999 and 1998, respectively, with taxable fixed maturities representing approximately 72.4% and 80.8% of the totals, respectively. Approximately 52.8% and 64.3% of Separate Accounts investments at December 31, 1999 and 1998, respectively, are used to fund guaranteed investment contracts for which CAC guarantees principal and a specified return to the contract holders. The duration of fixed maturity securities included in the guaranteed investment contract portfolio is matched approximately with the corresponding payout pattern of the liabilities of the guaranteed investment contracts.
CNA invests in certain derivative financial instruments primarily to reduce its exposure to market risk (principally interest rate, equity price and foreign currency risk). CNA considers the derivatives in its general accounts to be held for purposes other than trading. Derivative securities, except for interest rate swaps associated with certain corporate borrowings, are recorded at fair value at the reporting date, with changes in market value reflected in investment gains and losses. The interest rate swaps on corporate borrowings are accounted for using accrual accounting with the related income or expense recorded as an adjustment to interest expense; adjustments to fair value are not recognized. Certain derivatives in the Separate Accounts are held for trading purposes. These derivatives relate to an indexed group annuity contract for institutional investors, which guarantees the S&P 500 Composite
The Company's largest equity holding (held by CNA) in a single issue is Global Crossing, Ltd. ("Global Crossing") common stock. At December 31, 1999, the Company owned 36.4 million shares, or 4.6%, of Global Crossing's outstanding common stock which was carried at $1,822.0 million. Unrealized gains associated with this security were approximately $1,764.0 million at December 31, 1999.
CNA also has a significant equity investment in Canary Wharf Group plc. The carrying value of this investment was $622.0 million with an unrealized gain of $621.0 million as of December 31, 1999.
The tobacco industry continues to be subject to health concerns relating to the use of tobacco products and exposure to environmental tobacco smoke, legislation, including actual and potential excise tax increases, increasing marketing and regulatory restrictions, governmental regulation, privately imposed smoking restrictions, governmental and grand jury investigations, litigation, including risks associated with adverse jury and judicial determinations, courts reaching conclusions at variance with the general understandings of applicable law, bonding requirements and the absence of adequate appellate remedies to get timely relief from any of the foregoing, and the effects of price increases related to concluded tobacco litigation settlements and excise tax increases on consumption rates. Developments in any of these areas, which are more fully described elsewhere in this Report could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.
Accounting changes - Effective January 1, 1999, the Company adopted the AICPA's Accounting Standards Executive Committee Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," and SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 97-3 requires insurance companies to recognize liabilities for insurance-related assessments when an assessment has been imposed or it is probable that it will be imposed, when it can be reasonably estimated, and when the event obligating an entity to pay an imposed or probable assessment has occurred on or before the date of the financial statements. The Company had previously accounted for these assessments as they were paid.
SOP 98-5 requires costs of start-up activities and organization costs, as defined, to be expensed as incurred. The Company had previously deferred recognition of these costs and amortized them over a period following the completion of the start-up activities. The Company does not expect the ongoing effect of adopting SOP 98-5 to have a material impact on its results of operations.
The pro forma effect of adoption on reported results for prior periods is not significant.
The cumulative effect of these accounting changes resulted in a charge as follows:
Derivative instruments are generally held for trading purposes and, as such, are marked to market. Changes in fair value are included in investment gains or losses in the income statement. Interest rate swaps which are used to manage the Company's exposure to variable rate long-term debt are not considered held for trading purposes. Such swaps are accounted for on an accrual basis and are included in the income statement as an adjustment to interest expense.
All securities transactions are recorded on the trade date. The cost of securities sold is determined by the identified certificate method. Investments are written down to estimated fair values, and losses are charged to income when a decline in value is considered to be other than temporary.
Securities sold under agreements to repurchase - The Company lends securities to unrelated parties, primarily major brokerage firms. Borrowers of these securities must deposit collateral with the Company equal to 100% of the fair value of these securities if the collateral is cash, or 102%, if the collateral is securities. Cash deposits from these transactions are invested in short-term investments (primarily U.S. government securities and commercial paper) and a liability is recognized for the obligation to return the collateral. The Company continues to receive the interest on loaned debt securities, as beneficial owner, and accordingly, loaned debt securities are included in fixed maturity securities.
Insurance Operations - Premium revenues - Insurance premiums on property and casualty and accident and health insurance contracts are earned ratably over the terms of the policies after provision for estimated adjustments on retrospectively rated policies and deductions for ceded insurance. Revenues on universal life-type contracts are comprised of contract charges and fees, which are recognized over the coverage period. Other life insurance premiums and annuities are recognized as revenue when due after deductions for ceded insurance premiums.
Claim and claim adjustment expense reserves represent management's estimates of ultimate liabilities based on currently available facts and case law and the ultimate liability may vary significantly from such estimates. CNA regularly reviews its reserves, and any adjustments to the previously established reserves are recognized in operating income in the period the need for such adjustments becomes apparent. See Note 7 for a further discussion of claim and claim adjustment expense reserves.
such discounted reserves totaled $2,174.0 and $2,277.0, respectively (net of discounts of $893.0 and $869.0, respectively).
Future policy benefits reserves - Reserves for traditional life insurance products (whole and term life products) are computed using the net level premium method, which incorporates actuarial assumptions as to interest rates, mortality, morbidity, withdrawals and expenses. Actuarial assumptions generally vary by plan, age at issue and policy duration and include a margin for adverse deviation. Interest rates range from 3.0% to 9.0%, and mortality, morbidity and withdrawal assumptions are based on CNA and industry experience prevailing at the time of issue. Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the premium paying period. Reserves for universal life-type contracts are equal to the account balances that accrue to the benefit of the policyholders. Interest crediting rates ranged from 4.5% to 7.3% for the three years ended December 31, 1999.
Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves, and reported as a receivable in the Consolidated Balance Sheets.
Statutory capital and surplus - Combined statutory capital and surplus and net income, determined in accordance with accounting practices prescribed by the regulations and statutes of various insurance regulators, for property and casualty and life insurance subsidiaries, are as follows:
Watches and clocks - These inventories, aggregating $36.8 and $38.9 at December 31, 1999 and 1998, respectively, are stated at the lower of cost or market, using the first-in, first-out (FIFO) method.
Goodwill and other intangible assets - Goodwill, representing the excess of purchase price over fair value of the net assets of acquired entities, is generally amortized on a straight-line basis over the period of expected benefit of twenty years. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. Accumulated amortization at December 31, 1999 and 1998 was $414.8 and $384.3, respectively. Amortization expense amounted to $30.5, $101.3 and $39.6 for the years ended December 31, 1999, 1998 and 1997, respectively. Intangible assets are periodically reviewed to determine whether an impairment in value has occurred.
The carrying value of investments (other than equity securities) that did not produce income for the last twelve months is $54.0 at December 31, 1999.
The Company's largest equity holding (held by CNA) in a single issuer is Global Crossing, Ltd. ("Global Crossing") common stock. At December 31, 1999, the Company owned 36,400,000 shares, or 4.6% of the outstanding common stock of Global Crossing which was carried at $1,822.0. Unrealized gains associated with this security were approximately $1,764.0 at December 31, 1999. No other investments, other than investments in U.S. government securities, exceeded 10% of shareholders' equity.
The Frontier merger closed on September 28, 1999. Beginning on March 28, 2000, CNA has the right to require Global Crossing to register up to 25% of CNA's holdings under the Securities Act of 1933 (the "Act"), and beginning on August 13, 2000, to require Global Crossing to register up to an additional 25% of CNA's holdings. CNA's holdings of Global Crossing were not acquired in a public offering, and may not be sold to the public unless the sale is registered or exempt from the registration requirements of the Act. Such exemptions will include sales pursuant to Rule 144 under the Act if such sales meet the requirements of the Rule. Subsequent to December 31, 1999, CNA entered into option agreements intended to hedge a substantial portion of the market risk associated with approximately half of its holdings of Global Crossing.
The fair value of the liability for financial guarantee contracts was based on discounted cash flows utilizing interest rates currently being offered for similar contracts.
The fair value of guaranteed investment contracts and deferred annuities of the Separate Accounts business was estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with similar maturities. The fair value of the liabilities for variable Separate Account business was based on the quoted market values of the underlying assets of each variable Separate Account. The fair value of other Separate Account business liabilities approximates carrying value because of their short-term nature.
The notional amounts of derivative instruments shown in the following tables do not represent amounts exchanged in these transactions and, therefore, are not a measure of the exposure the Company has through its use of derivative instruments. In addition, notional amounts are presented gross and do not reflect the net effect of offsetting positions. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivative instruments.
The credit exposure associated with these instruments is generally limited to the positive market value of the instruments and will vary based on changes in market prices. The Company enters into these Contracts with large financial institutions and considers the risk of non-performance to be remote.
CNA also uses derivatives to mitigate the risk associated with its indexed group annuity contracts by purchasing S&P 500 futures contracts in a notional amount equal to the portion of the customer liability related to the S&P 500 exposure. Other than derivatives held in certain Separate Accounts, CNA generally does not hold or issue these instruments for trading purposes. The gross notional principal or contractual amounts of these instruments in the Separate Accounts were $1,627.0 and $1,193.0 at December 31, 1999 and 1998, respectively.
Through August 1, 1989, CNA's property and casualty operations wrote financial guarantee insurance in the form of surety bonds, and also insured equity policies. These bonds primarily represented industrial development bond guarantees and in the case of insured equity policies, typically extended in initial terms from ten to thirteen years. For these guarantees and policies, CNA received an advance premium which is non-refundable and is recognized over the exposure period and in proportion to the underlying risk insured.
The change in provision for insured events of prior years, favorable (adverse) reserve development, 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 ("PRPs"). Superfund and the mini-Superfunds establish mechanisms to pay for clean-up of waste sites if PRPs fail to do so, and to assign liability to PRPs. The extent of liability to be allocated to a PRP is dependent on a variety of factors. Further, the number of waste sites subject to clean-up is unknown. To date, approximately 1,300 clean-up sites have been identified by the Environmental Protection Agency ("EPA") on its National Priorities List ("NPL"). The addition of new clean-up sites to the NPL has slowed in recent years. Many clean-up sites have been designated by state authorities as well.
Many policyholders have made claims against various CNA insurance subsidiaries for defense costs and indemnification in connection with environmental pollution matters. These claims relate to accident years 1989 and prior, which coincides with CNA's adoption of the Simplified Commercial General Liability coverage that includes an absolute pollution exclusion. CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether clean-up costs are considered damages under the policies, trigger of coverage, allocation of liability among triggered policies, applicability of pollution exclusions and owned property exclusions, the potential for joint and several liability and definition of an occurrence. To date, courts have been inconsistent in their rulings on these issues.
A number of proposals to reform Superfund have been made by various parties. However, no reforms were enacted by Congress in 1999 and it is unclear as to what positions the Congress or the Administration will take in 2000 and what legislation, if any, will result. If there is legislation, and in some circumstances even if there is no legislation, the federal role in environmental clean-up may be significantly reduced in favor of state action. Substantial changes in the federal statute or the activity of the EPA may cause states to reconsider their environmental clean-up statutes and regulations. There can be no meaningful prediction 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 liability of CNA for environmental pollution claims may vary substantially from the amount currently recorded.
As of December 31, 1999 and 1998, CNA carried approximately $463.0 and $787.0, respectively, of claim and claim adjustment expense reserves, net of reinsurance recoverable, for reported and unreported environmental pollution and other mass tort claims. In 1999, CNA recorded $84.0 of favorable development compared to $227.0 of adverse development in 1998. The changes were based upon CNA's continuous review of these types of exposures, as well as its internal study and annual analysis of environmental pollution and other mass tort claims. The 1999 analysis indicated favorable results in the number of new claims being reported in the other mass tort area. The 1998 analysis indicated deterioration in claim experience related mainly to pollution claims.
Gross deferred tax assets amounted to $3,195.6 and $2,953.4 and liabilities amounted to $2,421.7 and $2,080.8 for the years ended December 31, 1999 and 1998, respectively.
At December 31, 1999, the Company has net operating losses for federal income tax purposes of approximately $390.0 which expire in years 2018 through 2019.
Under these agreements, CNA will receive or has received approximately $288.0 and $83.0 for 1999 and 1998, respectively, and has paid the Company approximately $210.0 for 1997, and Bulova will pay or has paid the Company approximately $6.3, $5.6 and $2.6 for 1999, 1998 and 1997, respectively. Each agreement may be canceled by either of the parties upon thirty days' written notice.
The Company's federal income tax returns have been examined and settled through 1994 and the years 1995 through 1997 are currently under examination. While tax liabilities for subsequent years are subject to audit and final determination, in the opinion of management the amount accrued in the Consolidated Balance Sheet is believed to be adequate to cover any additional assessments which may be made by federal, state and local tax authorities and should not have a material effect on the financial condition or results of operations of the Company.
(a) Redeemable in whole or in part at June 1, 2003 at 103.8%, and decreasing percentages thereafter. (b) Redeemable in whole or in part at October 15, 2003 at 102.4%, and decreasing percentages thereafter. (c) The notes are exchangeable into 15.376 shares of Diamond Offshore's common stock per one thousand dollar principal amount of notes, at a price of $65.04 per share. Redeemable in whole or in part at September 15, 2002 at 101.6%, and decreasing percentages thereafter. (d) The notes are convertible into 24.691 shares of Diamond Offshore's common stock per one thousand dollar principal amount of notes, at a price of $40.50 per share. Redeemable in whole or in part at February 22, 2001 at 102.1%, and decreasing percentages thereafter.
CNA maintains a $795.0 revolving credit facility that expires in May 2001. The amount available is reduced by CNA's outstanding commercial paper. As of December 31, 1999, there was $43.0 of unused borrowing capacity under the facility. The interest rate on the bank loans was based on the London Interbank Offered Rate ("LIBOR"), plus 16 basis points. Additionally, there was an annual facility fee of 9 basis points on the entire facility. The average interest rate on the bank loans under the credit facility, excluding fees, at December 31, 1999 and 1998 was 6.7% and 5.5%, respectively.
On April 15, 1999, CNA retired $100.0 of its 8.3% senior notes.
Payment of dividends by insurance subsidiaries of CNA without prior regulatory approval is limited to certain formula-derived amounts. At December 31, 1999, approximately $4,791.5 of retained earnings was not available for dividends.
CNA will continue to write new and renewal personal insurance policies and to reinsure this business with Allstate companies, until such time as Allstate exercises its option to buy the five CNA subsidiaries. Prior to 2002, the Company will concentrate the direct writing of personal lines insurance business into the five optioned companies, such that most, if not all, business related to this transaction will be written by those companies by the date Allstate exercises its option. CNA continues to have primary liability on policies reinsured by Allstate.
CNA recognized an after tax realized loss of approximately $39.0 related to the transaction, consisting primarily of the accrual of lease obligations and the write-down of assets that related specifically to the Personal Insurance lines of business. The ceding commission related to the prospective portion of the transaction will be recognized in proportion to the recognition of the unearned premium reserve to which it relates. $51.0 of the ceding commission was earned in 1999. Royalty fees earned in 1999 were approximately $7.0.
On November 30, 1999, CNA sold the majority of its interest in AMS Services, Inc. ("AMS"), a software development company serving the insurance agency market. Prior to the sale, CNA owned 89% of AMS and consolidated AMS in its financial statements. As a result of the sale, CNA owns 9% of AMS and therefore AMS is no longer consolidated. CNA recognized an after tax gain of $21.0 on the sale. Total assets of AMS as of the sale date were approximately $135.0. CNA's share of AMS' operating results were $206.0, $264.0 and $216.0 of operating revenue and $8.0, $28.0 and $10.0 of operating losses, for the eleven months ended November 30, 1999 and the years ended December 31, 1998 and 1997, respectively.
The 1998 restructuring and other related charges incurred by Risk Management were approximately
$88.0. These charges included lease termination costs associated with the consolidation of claim offices in 36 market territories of approximately $8.0. In addition, employee severance and outplacement costs relating to the planned net reduction in workforce of approximately 200 employees were approximately $10.0 and the writedown of fixed and intangible assets was approximately $64.0. Parallel processing and other charges were approximately $6.0. Through December 31, 1998, approximately 152 Risk Management employees had been released, the majority of whom were claims adjusters and office support staff.
The charges related to fixed and intangible assets were primarily due to a writedown of an intangible asset (goodwill) related to Alexsis, Inc., a wholly owned subsidiary acquired by CNA in 1995 that provided claims administration services for unrelated parties. As part of CNA's periodic reviews of asset recoverability and as a result of several adverse events, CNA concluded, based on an undiscounted cash flow analysis completed in the third quarter of 1998, that an impairment existed, and based on a discounted cash flow analysis, that a $59.0 writeoff was necessary. The adverse events contributing to this conclusion included operating losses from the business, the loss of several significant customers whose business volume with this operation constituted a large portion of the revenue base, and substantial changes in the overall market demand for the services offered by this operation which, in turn, had negative effects on the prospects for achieving the profitability levels necessary to recover the intangible asset.
The 1999 Period Costs incurred by Risk Management were approximately $10.0. These charges included employee related expenses of $3.0 and parallel processing charges of $3.0. Other charges, including consulting and facility charges, were approximately $7.0. Additionally, Risk Management reduced its estimate for lease termination costs by $2.0 and its estimate of employee severance costs by $1.0 during 1999. During 1999, approximately 136 Risk Management employees were released, the majority of whom were claims adjusters and office support staff.
For the other segments of CNA, restructuring and other related charges were approximately $23.0 in 1998. Charges, related primarily to the closing of leased facilities, were $3.0 and employee severance and outplacement costs related to planned net reductions of 600 employees in the current workforce and benefit costs associated with those reductions were $13.0. In addition, there were charges of $4.0 related to the writedown of certain assets and $3.0 related to the exiting of certain businesses. Through December 31, 1998, approximately 270 employees of these other segments, most of whom were underwriters and office support staff, had been released. For the other segments of CNA, Period Costs were approximately $8.0 for 1999. These charges were primarily for employee termination related costs. Through December 31, 1999, approximately 600 employees of these other segments, most of whom were underwriters and office support staff, had been released.
The following table sets forth the major categories of the Initial Accrual and the activity in the accrual during 1998 and 1999:
reduction in pension and postretirement benefit obligations of approximately $10.0 and $48.0, respectively.
In 1998, CNA amended the Continental postretirement plan changing the benefits available to Continental retirees to be equivalent to the benefits available to CNA retirees. As a result of this amendment, CNA's postretirement benefit obligation was reduced by $99.0.
For measurement purposes, a trend rate for covered costs from 8.0% to 9.0% pre-65 and 8.3% post-65, was used. These trend rates are expected to decrease gradually to an ultimate rate from 6.0% to 4.8% at rates from 0.5% to 0.3% per annum. The health care cost trend rate assumption has a significant effect on the amount of the benefit obligation and periodic cost reported. An increase (or decrease) in the assumed health care cost trend rate of 1% would increase (or decrease) the postretirement benefit obligation as of December 31, 1999 by $21.9 (or $20.2) and the total of service and interest cost components of net periodic postretirement benefit cost for 1999 by $3.0 (or $2.9).
Savings Plans - The Company and its subsidiaries have several contributory savings plans which allow employees to make regular contributions based upon a percentage of their salary. Matching contributions are made up to specified percentages of employees' contributions. The contributions by the Company and its subsidiaries to these plans amounted to $33.6, $34.4 and $29.1 for the years ended December 31, 1999, 1998 and 1997, respectively.
In September 1997, a subsidiary of CNA merged with Capsure Holdings Corp. to form a new company, CNA Surety Corporation. CNA owns approximately 61% of the outstanding shares on a fully diluted basis. As a result of this transaction, the Company recognized a gain of $95.2 ($52.2 after provision for deferred taxes and minority interest) from issuance of its subsidiary's common stock.
Insurance claims and policyholders' benefits are net of reinsurance recoveries of $3,272.0, $994.0 and $1,309.0 for the years ended December 31, 1999, 1998 and 1997, respectively.
In the above tables, life premiums are primarily from long duration contracts, property and casualty premiums, and accident and health premiums are primarily from short duration contracts.
mated settlement amount of approximately $1,630.0 plus any applicable interest. Approximately $1,720.0 (including interest of approximately $184.0) was paid by Casualty through December 31, 1999. Such payments have been partially recovered from Pacific Indemnity.
IGI CONTINGENCY - In 1997, CNA Reinsurance Company Limited ("CNA Re Ltd.") entered into an arrangement with IOA Global, Ltd. ("IOA"), an independent managing general agent based in Philadelphia, Pennsylvania, to develop and manage a book of accident and health coverages. Pursuant to this arrangement, IGI Underwriting Agencies, Ltd. ("IGI"), a personal accident reinsurance managing general underwriter, was appointed to underwrite and market the book under the supervision of IOA. Over the past three years, IGI bound CNA Re Ltd. on a number of reinsurance arrangements with respect to personal accident insurance worldwide (the "IGI Program"). Under various arrangements CNA Re Ltd. both assumed risks as a reinsurer and also ceded a substantial portion of those risks to other companies, including other CNA insurance subsidiaries and ultimately a group of reinsurers participating in a reinsurance pool known as the Associated Accident and Health Reinsurance Underwriters ("AAHRU") Facility. CNA's Group Health business unit participated as a pool member in the AAHRU Facility in varying percentages over the past three years.
Some cases have been brought by individual plaintiffs who allege cancer and/or other health effects claimed to have resulted from an individual's use of cigarettes, addiction to smoking, or exposure to environmental tobacco smoke ("Conventional Product Liability Cases"). Approximately 715 such actions are pending against Lorillard. In other cases, plaintiffs have brought claims as class actions on behalf of large numbers of individuals for damages allegedly caused by smoking ("Class Actions"). Approximately 40 such cases are pending against Lorillard. In some cases, plaintiffs are governmental entities or entities such as labor unions, private companies, Indian Tribes, or private citizens suing on behalf of taxpayers. Plaintiffs in these cases seek reimbursement of health care costs allegedly incurred as a result of smoking, as well as other alleged damages ("Reimbursement Cases"). Approximately 55 such cases are pending, including suits brought by the U.S. federal government and the governments of several foreign nations. There also are claims for contribution and/or indemnity in relation to asbestos claims filed by asbestos manufacturers or the insurers of asbestos manufacturers ("Claims for Contribution"). Approximately eight such actions are pending against Lorillard, and a ninth case has been served on some of the defendants but not Lorillard.
In addition to the above, claims have been brought against Lorillard seeking damages resulting from alleged exposure to asbestos fibers which were incorporated, for a limited period of time, ending more than forty years ago, into filter material used in one brand of cigarettes manufactured by Lorillard ("Filter Cases"); approximately 25 such actions are pending.
Lorillard recorded pre-tax charges of $1,065.8, $579.0 and $198.8 for the years ended December 31, 1999, 1998 and 1997, respectively, to account for its obligations under the State Settlement Agreements. The 1998 and 1997 charges represent Lorillard's share of all fixed and determinable portions of its obligations under the tobacco settlements. For periods subsequent to December 31, 1998, Lorillard's portion of ongoing adjusted payments and legal fees is based on its share of
domestic cigarette shipments in the year preceding that in which the payment is due. Accordingly, Lorillard records its portions of ongoing settlement payments as part of cost of manufactured products sold as the related sales occur.
The State Settlement Agreements require that the domestic tobacco industry make annual payments in the following amounts, subject to adjustment for several factors, including inflation, market share and industry volume: 2000, $9,200.0; 2001, $9,900.0; 2002, $11,300.0; 2003, $10,900.0; 2004 through 2007, $8,400.0; and thereafter, $9,400.0. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500.0, as well as additional amounts as follows: 2000, $416.0; and 2001 through 2003, $250.0. These payment obligations are the several and not joint obligations of each settling defendant.
The Company believes that the State Settlement Agreements will materially adversely affect its cash flows and operating income in future years. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the full price and discount segments, Lorillard's share of the domestic full price and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the State Settlement Agreements. Almost all domestic manufacturers have agreed to become subject to the terms of the Master Settlement Agreement.
CONVENTIONAL PRODUCT LIABILITY CASES- There are approximately 1,120 cases filed by individual plaintiffs against manufacturers of tobacco products pending in the United States federal and state courts in which individuals allege they or their decedents have been injured due to smoking cigarettes, due to exposure to environmental tobacco smoke, or due to nicotine dependence. Approximately 500 of the cases have been filed by flight attendants purportedly injured by their exposure to environmental tobacco smoke in the aircraft cabin. Lorillard is a defendant in approximately 715 of these cases, including each of the approximately 500 flight attendant cases. The Company is a defendant in eight of the cases filed by individuals, although five of them have not been served. The Company is not named as a defendant in any of the flight attendant cases served to date.
Plaintiffs in most of these cases seek unspecified amounts in compensatory and punitive damages.
During 1998 and 1999, a total of eight trials were held involving eleven cases filed by individual plaintiffs. Lorillard and the Company were defendants in one of the cases and Lorillard was a defendant in a second case. Juries returned verdicts in favor of the defendants in the cases tried against Lorillard and the Company. In the nine remaining cases, verdicts were returned in favor of the defendants in six of the matters. Juries found in plaintiffs' favor in the remaining three cases. In these three verdicts, juries awarded plaintiffs a total of $132.8 in actual damages and punitive damages. One of the three verdicts in favor of plaintiffs has been vacated on appeal. In the two remaining cases, the courts have reduced the verdicts to a total of $59.4. Appeals are pending in both of these actions. Trial is currently underway in one case brought by individuals. Neither the Company nor Lorillard is a defendant in that matter.
other defendants. Lorillard is a defendant in 40 of the 60 cases seeking class certification. The Company is a defendant in 12 of the purported class actions in which Lorillard is a defendant. Many of the purported class actions are in the pre-trial, discovery stage. Most of the suits seek class certification on behalf of residents of the states in which the cases have been filed, although some suits seek class certification on behalf of residents of multiple states. All but one of the purported class actions seek class certification on behalf of individuals who smoked cigarettes or were exposed to environmental tobacco smoke. One case seeks class certification on behalf of individuals who have paid insurance premiums to Blue Cross and Blue Shield organizations.
Trial began during July 1998 in the case of Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida, filed May 5, 1994). The trial court has granted class certification on behalf of Florida residents and citizens, and survivors of such individuals, who suffered injury or have died from medical conditions allegedly caused by their addiction to cigarettes containing nicotine. Plaintiffs seek actual damages and punitive damages estimated to be in the billions of dollars. Plaintiffs also seek equitable relief including, but not limited to, a fund to enable Florida smokers' medical condition to be monitored for future health care costs, attorneys' fees and court costs.
Phase Two of the trial began on November 1, 1999 and is proceeding before the same jury which returned the verdict in Phase One. In the first part of Phase Two, the jury will determine issues of specific causation, reliance, affirmative defenses, and other individual-specific issues related to the claims of three named plaintiffs and their entitlement to damages, if any.
It is unclear how the order will be implemented. The August 2, 1999 order provides that the lump-sum punitive damage amount, if any, will be allocated equally to each class member and acknowledges that the actual size of the class will not be known until the last case has withstood appeal, i.e., the punitive damage amount, if any, determined for the entire qualified class, would be divided equally among those plaintiffs who are ultimately successful. The order does not address whether defendants would be required to pay the punitive damage award, if any, prior to a determination of claims of all class members, a process that could take years to conclude. Lorillard does not believe that an adverse class-wide punitive damage award in Phase Two would permit entry of a judgment at that time that would require the posting of a bond to stay its execution pending appeal or that any party would be entitled to execute on such a judgment in the absence of a bond. However, in a worst case scenario, it is possible that a judgment for punitive damages could be entered
Lorillard remains of the view that the Engle case should not have been certified as a class action. That certification is inconsistent with the overwhelming majority of federal and state court decisions which have held that mass smoking and health claims are inappropriate for class treatment. Lorillard intends to challenge the class certification, as well as other numerous reversible errors that it believes occurred during the trial to date, at the earliest time that an appeal of these issues is appropriate under Florida law. Lorillard believes that an appeal of these issues on the merits should prevail.
Reimbursement Cases by Indian Tribes - Indian Tribes have filed eleven reimbursement suits. Most of these cases have been filed in tribal courts. Four of the eleven cases have been dismissed. Lorillard is a defendant in each of the cases. The Company is not named as a defendant in any of the tribal suits filed to date. Each of the pending cases is in the pre-trial, discovery stage.
Reimbursement Cases Filed By Private Companies - Private companies have filed six reimbursement suits against cigarette manufacturers, two of such cases, brought by self insured employers, have been terminated. Three of the six suits filed to date have been brought by various Blue Cross and/or Blue Shield entities, while another case was brought by a health maintenance organization. The plaintiffs in two of the cases filed by Blue Cross entities have noticed appeals from orders by their trial courts that dismissed the cases. Lorillard has been named as a defendant in each of the six cases filed to date by private companies. The Company has not been named as a defendant in any of the actions filed to date by private companies. Two of the cases are in the pre-trial, discovery stage, and both are scheduled for trial during 2000.
Reimbursement Cases by Labor Unions - Approximately 30 reimbursement suits are pending in various federal or state courts in which the plaintiffs are labor unions, their trustees or their trust funds. Lorillard is a defendant in each of these suits. The Company is named as a defendant in three of them. Nine of the approximately 30 cases are on appeal from final judgments entered in defendants' favor by the trial courts. The Second, Third, Fifth, Seventh and Ninth Circuit Courts of Appeal have affirmed various rulings entered by trial courts that dismissed several of the labor union actions, and the U.S. Supreme Court has denied petitions for writ of certiorari that sought review of some of these decisions. Each of the remaining cases is in the pre-trial, discovery stage. Trial is scheduled to be held during 2000 in one of the cases.
Wholesalers and Direct Purchasers Suits - Lorillard and other domestic and international cigarette manufacturers and their parent companies, including the Company, have been named as defendants in four separate federal court actions brought by tobacco product wholesalers for violations of U.S. antitrust laws and international law. The complaints allege that defendants conspired to fix the price of cigarettes to wholesalers since 1988 in violation of the Sherman Act. The action seeks certification of a class including all domestic and international wholesalers similarly affected by such alleged conduct, and seeks damages, injunctive relief and attorneys' fees. Twenty-five suits in various state courts have also been filed alleging violations of state antitrust laws which permit indirect purchasers, such as retailers and consumers, to sue under price fixing or consumer fraud statutes. Approximately 18 states permit such suits.
DEFENSES - Lorillard believes that it has a number of defenses to pending cases and Lorillard will continue to maintain a vigorous defense in all such litigation. These defenses, where applicable, include, among others, pre-
Loews Hotels owns and/or operates 14 hotels, 12 of which are in the United States and two are in Canada. There are also three properties in the United States under development with opening dates scheduled from 2000 to 2002.
Diamond Offshore's business primarily consists of operating 45 offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. As of December 31, 1999, 29 of these rigs were located in the Gulf of Mexico, 5 were located in Brazil and the remaining 11 were located in various foreign markets.
(a) Investment gains (losses) included in Revenues, Pre-tax income and Net income are as follows:
(b) Includes $2,100.0, $2,000.0 and $2,100.0 under contracts covering U.S. government employees and their dependents for the respective periods. (c) Includes gains from the sale of hotel properties of $85.1 and $14.7 ($52.0 and $8.4 after taxes) for the years ended December 31, 1999 and 1998, respectively. (d) Includes pre-tax charges related to the settlements of tobacco litigation of $1,065.8, $579.0 and $198.8 ($637.3, $346.5 and $122.0 after taxes) for the years ended December 31, 1999, 1998 and 1997, respectively. (e) Income taxes and interest expenses are as follows: