Loews Corporation (the "Company") reported 1998 net operating income, excluding net investment gains and losses, of $452.3 million or $3.95 per share compared to $953.5 million or $8.29 per share in 1997. Net operating income in 1998 includes charges at the Lorillard tobacco subsidiary of $346.5 million or $3.03 per share, compared to $122.0 million or $1.06 per share in 1997, related to the settlement of tobacco litigation.
Revenues for the year ended December 31, 1998 were $21.2 billion, compared to $20.1 billion for 1997.
The net loss for the 1998 fourth quarter was $315.8 million or $2.78 per share compared to net income of $292.9 million or $2.55 per share in 1997 including net investment losses of $143.0 million or $1.26 per share, compared to net investment gains of $64.8 million or $.56 per share in the fourth quarter of 1997.
Fourth quarter 1998 revenues were $5.1 billion, compared to $5.3 billion in the fourth quarter of 1997.
At December 31 1998, the Company had a book value of $90.61 per share compared to a book value of $84.04 per share at December 31, 1997.
Insurance operations are conducted by subsidiaries of CNA Financial Corporation ("CNA"). CNA is an 85% owned subsidiary of the Company.
The property and casualty segment is comprised of the following operating units of CNA: Agency Market Operations, Risk Management, Specialty Operations, Global Operations, and Reinsurance Operations. Property and casualty operations continue to feel the impact of the extremely competitive environment in commercial insurance, contributing to continued poor underwriting results. Additionally, increased catastrophe losses, significant restructuring charges and additions to reserves for prior year losses had an adverse impact on overall results.
Underwriting results, including a majority of the restructuring and other related charges, declined in 1998 by $585.2 million. This reduction is 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 totaled approximately $190.0 million. The charges stem from a plan, announced in the third quarter of 1998 by CNA, to restructure operations as part of its initiatives 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. The charges recorded in 1998 related to employee terminations, lease abandonments, writedowns of certain assets to fair value and losses related to the exiting of businesses. Based on CNA's current estimates, it is expected that an additional $100.0 to $150.0 million of other related charges will be incurred over approximately the next twelve months.
Earned premiums decreased $153.1 million in 1997, or approximately 2.0%, as compared to 1996. This decrease is mainly due to reductions recorded in 1997 related to prior years involuntary risks premiums. CNA's share of involuntary risks is mandatory and generally a function of its share of the voluntary market by line of insurance in each state. The adjustments to prior years premiums stems from a greater willingness on the part of the voluntary market, including CNA, to write these types of coverages. This willingness was precipitated by improved loss experience trends in the involuntary market. In addition, a decision to exit an Industrial Risk Insurers pool, due to historic unprofitability, generated a decrease in earned premiums of approximately $180.0 million. Partially offsetting these decreases was growth in Risk Management of $204.8 million and an increase in Personal Insurance of $126.4 million due to the cancellation of a quota share agreement.
Life Operations continued to experience profitability in 1998, although results were lower than 1997 principally due to reduced investment margins from certain investment type products sold in the Retirement Services. Current year results also reflect lower realized capital gains and less favorable mortality experience than in 1997.
Retirement Services premium revenues increased slightly in 1998 to $177.0 million as compared with $174.0
million in 1997. Total sales volume for Retirement Services, which reflects deposits and other income which are not included in the premiums above, declined from $1,042.0 million in 1997 to $998.0 million in 1998.
Written premium revenues increased $34.0 million in 1997 as compared with $654.0 million in 1996, primarily due to an increase in individual term life premiums.
Individual life insurance premiums, on a direct basis, increased $148.0 million in 1997 from 1996 premiums of $495.0 million. This trend reflects CNA's strong market presence in this product line.
sales of employee benefit plans. Health Benefits grew by $100.0 million in 1997. An increase of $33.0 million was attributable to credit card accidental death and dismemberment coverages and other non-medical products, and the remainder of the growth resulted from sales and renewal increases on employer medical plans. Partially offsetting these increases was a decrease in Group Reinsurance premiums of approximately $80.0 million. The decrease in Group Reinsurance assumed premiums resulted from the termination of some small group medical quota share treaties. Additionally, premiums in the Federal Markets group declined by $22.0 million due to a small decline in group insurance enrollment for FEHBP.
Other Insurance segment's net loss for 1998 was $166.5 million. This is an increase of $55.0 million over 1997's net loss of $111.5 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.
Other Insurance segment's net loss for 1997 was $111.5 million, an increase of $61.2 million over 1996's net loss of $50.3 million. Pre-tax operating income decreased by $123.4 million. This decrease is primarily due to a change in incurred losses on the financial guarantee business of $52.0 million, attributable to favorable loss development recorded in 1996, as well as an increase in operating expenses of $70.0 million. This increase reflects a change in AMS's operating expenses of approximately $56.0 million, primarily due to acquisitions made during 1997. Partially offsetting these losses and expenses was an increase in other revenues of $48.0 million, primarily due to an increase in AMS's revenues from acquisitions made during 1997. Additionally, net investment losses increased in 1997 by $7.0 million as compared to 1996.
The Master Settlement Agreement is subject to final judicial approval in each of the Settling States. If a Settling State does not obtain final judicial approval by December 31, 2001, the Master Settlement Agreement will be terminated with respect to such state. The Master Settlement Agreement, however, will remain in effect as to each Settling State in which final judicial approval is obtained. The Master Settlement Agreement provides that it is not an admission or concession or evidence of any liability or wrongdoing on the part of any party, and was entered into by the Original Participating Manufacturers to avoid the further expense, inconvenience, burden and uncertainty of litigation.
The Master Settlement Agreement mandates significant changes in the advertising and marketing of tobacco products in the Settling States and otherwise restricts the activities of Lorillard and other Participating Manufacturers. It also requires the industry to pay more than $206 billion through 2025, including (I) more than $12.7 billion in initial payments over the first five years (including $2.4 billion paid in December); (ii) annual payments commencing in 2000 in the initial amount of $4.5 billion and increasing periodically to $9 billion in 2018 and thereafter in perpetuity, and (iii) $1.7 billion over ten years for a national public education fund, the largest portion of which is due during the first five years. The $2.4 billion payment was allocated among the Original Participating Manufacturers based on relative market capitalization. All other payments are allocated among the Original Participating Manufacturers based on their relative unit volume of domestic cigarette shipments and are subject to adjustment for inflation and volume changes and for participation by less than all the states and for other adjustments and offsets described in the Master Settlement Agreement.
The Participating Manufacturers have also, as part of the Master Settlement Agreement, committed to work cooperatively with the tobacco grower community to address concerns about the potential adverse economic impact on that community and have met with the political leadership of states with grower communities to address those economic concerns. On January 21, 1999, the Original Participating Manufacturers reached an agreement in principle to establish a $5.2 billion trust fund payable over 12 years to compensate the tobacco growing communities in 11 states. Payments to the trust fund are to be allocated among the Original Participating Manufacturers according to their relative market share of domestic cigarette shipments, except that Philip Morris will pay more than its market share in the first year of the agreement but will have its payment obligations reduced in years 11 and 12 to make up for the overpayment. Lorillard's payments under the agreement will total approximately $515.0 million, including a payment of $16.0 million in 1999. All payments will be adjusted for inflation, changes in the unit volume of domestic cigarette shipments, and for the effect of any new increases in state or federal excise taxes on tobacco products which benefits the growing community.
Revenues increased by $448.3 million, or 18.5%, and net income declined by $11.3 million, or 3.1%, in 1998 as compared to 1997.
Lorillard's unit sales volume increased by 1.1% as compared to 1997. Newport, a full price brand which accounts for approximately 77% of Lorillard's unit sales,
increased by 2.4% as compared to 1997. Virtually all of Lorillard's sales are in the full price brand category. Discount brand sales have decreased from an average of 31.4% of industry sales during 1994 to an average of 26.2% during 1998. At December 31, 1998, they represented 27.6% of industry sales.
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.
Revenues and net income increased by $21.9 and $11.9 million, respectively, in 1997 as compared to 1996, due primarily to an approximately 9.3% increase in average room rates and a 2.2% increase in average occupancy rates. These increases were partially offset by costs of a legal settlement in 1997.
Revenues increased due principally to higher operating dayrates for Diamond Offshore's semisubmersible rigs ($231.5 million) and, to a lesser extent, improved dayrates for jack-up rigs ($37.1 million). Revenues also benefited from a net addition to the operating drilling fleet ($56.5 million) reflecting the completion of various upgrade projects and an $11.2 million increase in investment income as compared to 1997. 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.
Revenues and net income increased by $329.4 and $78.8 million, respectively, in 1997 as compared to 1996.
Net income increased as a result of the higher revenues discussed above, partially offset by increased operating costs related to the drilling rigs acquired from Arethusa, and higher depreciation expense resulting from capital expenditures associated with drilling rig upgrades and modifications.
Net income increased due primarily to the higher revenues discussed above, partially offset by a significant increase in brand support advertising expenses.
Corporate operations consist primarily of investment income, including investment gains (losses) from the Company's investment portfolio, as well as corporate interest expenses and other corporate overhead costs.
(1) Includes losses on short sales, equity index futures and options aggregating $584.3, $936.6 and $285.7 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company continues to maintain these positions but, during 1998, has reduced its exposure in these instruments. See "Quantitative and Qualitative Disclosures About Market Risk." (2) See Note 14 of the Notes to Consolidated Financial Statements.
Exclusive of investment gains (losses), revenues decreased by $0.3 million, or 0.2%, due principally to a gain on an asset disposition in 1996, partially offset by higher investment income in 1997. Net income declined by $3.5 million, or 12.8%, due to the 1996 gain on an asset disposition and higher corporate interest expense, partially offset by increased investment income.
CNA is one of the largest commercial insurers in the United States and the third largest property and casualty company in the country, based on 1997 net written premiums.
Statutory surplus of CNA's life insurance subsidiaries amounted to $1.1 billion at December 31, 1998.
For the year ended December 31, 1998, CNA's net cash used in operating activities was $949.0 million, compared with net cash used of $193.0 million in 1997 and net cash provided of $620.2 million in 1996. The substantially lower operating cash flow in 1998 was primarily due to increases in insurance and reinsurance receivables of approximately $690.0 million. CNA's negative cash flows in 1997 were primarily due to claim payments resulting from the settlement of the Fibreboard litigation. The impact on cash flow for these claim payments was approximately $1.0 billion in 1997 (see Note 17 of the Notes to Consolidated Financial Statements).
In 1998, CNA issued $1.0 billion principal amount of senior notes. The majority of the proceeds from these new issues were used to refinance existing bank debt and mortgages. In addition, proceeds from $200.0 million principal amount of these senior notes were used to enhance the capital of Continental Casualty Company. Also, in December 1998, the Company purchased $200.0 million of preferred stock from CNA, the proceeds of which were used to enhance the capital of Continental Casualty Company.
During 1998, CNA purchased 2,734,800 shares of its outstanding Common Stock at an aggregate cost of approximately $102.4 million. Depending on market conditions, CNA from time to time may purchase additional shares in the open market or otherwise.
Lorillard and other cigarette manufacturers continue to be confronted with an increasing level of litigation and regulatory issues.
The volume of lawsuits against Lorillard and other manufacturers of tobacco products seeking damages for cancer and other health effects claimed to have resulted from an individual's use of cigarettes, addiction to smoking, or exposure to environmental tobacco smoke has increased substantially through 1997 and in 1998. See Note 17 of the Notes to Consolidated Financial Statements. In a number of cases, the Company is named as a defendant. Tobacco litigation includes claims brought by individual plaintiffs and claims brought as class actions on behalf of large numbers of individuals for damages allegedly caused by smoking; and claims brought on behalf of governmental entities, private citizens, or other organizations seeking reimbursement of health care costs allegedly incurred as a result of smoking. In the foregoing actions, plaintiffs claim substantial compensatory and punitive damages in amounts ranging into the billions of dollars. In addition, claims have been brought against Lorillard seeking damages resulting from exposure to asbestos fibers which had been 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.
In 1998, Lorillard, together with other tobacco product manufacturers, entered into the Master Settlement Agreement described above. The terms of the Master Settlement Agreement require significant payments to be made to the Settling States beginning in 1998 and continuing in perpetuity. See "Results of Operations" and Note 17 of the Notes to Consolidated Financial Statements for additional information regarding this settlement.
Efforts to Reach a Settlement of Tobacco Claims Through Federal Legislation
(i) Regulations making unlawful the sale by retail merchants of cigarettes to anyone under age 18. These regulations also require retail merchants to request proof of age for any person under age 27 who attempts to purchase cigarettes.
In 1997, Lorillard and other cigarette manufacturers filed a lawsuit, Coyne Beahm, Inc., et al. v. United States Food & Drug Administration, et al., in the United States District Court for the Middle District of North Carolina challenging the FDA's assertion of jurisdiction over cigarettes. On August 14, 1998, the federal Fourth Circuit Court of Appeals overturned the District Court's decision, and invalidated the FDA's assertion of authority over cigarettes and the FDA Regulations promulgated pursuant to that asserted authority. The FDA petitioned the appeals court for
Lorillard generated net cash flow from operations of approximately $381.0 million for the year ended December 31, 1998, compared to $523.1 million for the prior year. Funds from operations continue to exceed operating requirements.
Depressed product prices in the oil and gas industry have resulted in declining dayrates and decreased utilization, primarily in the shallow waters of the Gulf of Mexico. As a result, Diamond Offshore has cold stacked (deactivated by performing certain procedures to retard deterioration) and suspended marketing efforts on three of its rigs located in the Gulf of Mexico. In addition, several of Diamond Offshore's rigs are idle in the Gulf of Mexico. Diamond Offshore has idle rigs in other markets that have softened as well (and has cold stacked its shallow water semisubmersible offshore West Africa). Diamond Offshore will continue to assess the need to cold stack additional rigs depending on market conditions. To date, Diamond Offshore has been able to mitigate the effect of these conditions on its results of operations with existing term contract commitments, and through the diversity of its fleet. However, many of these contracts expire during 1999 and renewal rates could be significantly lower than those previously obtained. These current trends in market conditions are expected to adversely affect Diamond Offshore's future results of operations, although the extent cannot be accurately predicted.
Diamond Offshore continues to enhance its fleet to meet customer demand for diverse drilling capabilities, including those required for deep water and harsh environment operations. During the year ended December 31, 1998, Diamond Offshore expended $110.7 million, including capitalized interest expense, for rig upgrades. Diamond Offshore has budgeted $173.7 million for rig upgrade capital expenditures during 1999.
The general account portfolio consists primarily of high quality (rated BBB or higher) marketable fixed maturities, 93.3% and 95.0% of which are rated as investment grade at December 31, 1998 and 1997, respectively.
The ratings in the two tables above are primarily from independent rating agencies (83.1% and 89.8% of the general account portfolio, and 76.8% and 82.1% of the guaranteed investment contract portfolio in 1998 and 1997, respectively, were rated by major independent rating agencies).
Included in CNA's fixed maturity securities at December 31, 1998 (general and guaranteed investment contract portfolios) are $10.3 billion of asset-backed securities, at fair value, consisting of approximately 15.9% in U.S. government agency issued pass-through certificates, 51.8% in collateralized mortgage obligations ("CMO's"), 15.0% in corporate asset-backed obligations and 17.3% in corporate mortgage-backed pass-through certificates. The majority of CMO's held are actively traded in liquid markets and are priced by broker-dealers.
declining interest rates, CMO's generally prepay faster as the underlying mortgages are prepaid and refinanced by borrowers in order to take advantage of the lower rates. Conversely, during periods of rising interest rates, prepayments are generally slow which may result in a decrease in yield or a loss as a result of the slower prepayments. CNA limits the risks associated with interest rate fluctuations and prepayments by concentrating its CMO investments in planned amortization classes with relatively short principal repayment windows. CNA avoids investments in complex mortgage derivatives without readily ascertainable market prices. At December 31, 1998, the fair value of asset-backed securities was greater than the amortized cost by approximately $163.0 million, as compared to net unrealized gains of approximately $114.0 million at December 31, 1997.
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 also uses derivatives to mitigate the risk associated with its Separate Account indexed group annuity contract as discussed below.
CNA considers its derivatives as being 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; the changes in fair value are not recorded.
Net unrealized gains on general account bonds at December 31, 1998 include net unrealized losses on high yield securities of $101.0 million, compared to unrealized losses of $2.0 million at December 31, 1997. Carrying and fair values of high yield securities in the general account were approximately $2.0 billion at December 31, 1998, compared to $1.5 billion at December 31, 1997.
At December 31, 1998 and 1997, total Separate Account investments at fair value amounted to approximately $5.1 and $5.7 billion, respectively, with taxable fixed maturities representing approximately 80.8% and 83.3% of the total at December 31, 1998
and 1997, respectively. Approximately 64.3% and 73.8% of Separate Account investments at December 31, 1998 and 1997, respectively, are used to fund guaranteed investments 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 are matched approximately with the corresponding payout pattern of the liabilities of the guaranteed investment contracts. One Separate Account product is an indexed group annuity contract for institutional investors which guarantees the S&P 500 rate of return plus 25 basis points per annum. Deposits are taken from the customer for a three year period with no payout until the end of the period. CNA mitigates the risk associated with the contract liability by a combination of purchasing S&P 500 futures contracts in a notional amount equal to the original customer deposit and investing the remaining cash primarily in high quality investments. The number of futures contracts is adjusted regularly to approximate the liability to the contract holder.
The Company believes that it will be able to resolve the Year 2000 issue in a timely manner. As of December 31, 1998, the Company has certified internally over 90% of its internal applications and systems as being ready for the year 2000. In addition, certain of CNA's non-insurance affiliates are not yet Year 2000 ready, but they are expected to be ready on a timely basis. However, due to the interdependent nature of computer systems, there may be an adverse impact on the Company if banks, independent agents, vendors, insurance agents, third party administrators, various governmental agencies and other business partners fail to successfully address
the Year 2000 issue. In the event that they are not, it is unclear at this time whether the impact on CNA would be material. To mitigate this impact, CNA is communicating with these various entities to coordinate the Year 2000 conversion. CNA has already sent Year 2000 information packages to more than 12,000 independent agents to encourage them to become Year 2000 ready on a timely basis. CNA has also sent Year 2000 information to almost 300,000 business policyholders to increase their awareness of the Year 2000 issue. Similar information packages have been sent to health care providers, lawyers and others with whom CNA has business relationships. Because of the interdependent nature of the issue, the Company cannot be sure that there will not be a disruption to its business.
The Company has also developed business resumption plans to ensure that the Company is able to continue critical processes through other means in the event that it becomes necessary to do so. Formal strategies have been developed within each business unit and support organization to include appropriate recovery processes and use of alternative vendors. More than 200 strategies have been developed to address all the recovery plans for approximately 400 processes. These plans are being updated quarterly.
In addition, property and casualty insurance subsidiaries may have an underwriting exposure related to the Year 2000 issue.
In March 1998, the AICPA's Accounting Standards Executive Committee issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." For purposes of this SOP, internal-use software is software acquired, internally developed or modified solely to meet the entity's internal needs for which no substantive plan exists or is being developed to market the software externally during the software's development or modification. Accounting treatment for costs associated with software developed or obtained for internal use, as defined by this SOP, is based upon a number of factors, including the point in time during the project that costs are incurred as well as the types of costs incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998 and will be adopted in the first quarter of 1999. The Company is currently evaluating the effects of this SOP.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is currently evaluating the effects of this Statement on its accounting and reporting for derivative securities and hedging activities.
In April 1998, the AICPA's Accounting Standards Executive Committee issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." This SOP requires costs of start-up activities and organization costs, as defined, to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. Initial application of this SOP should be reported as a change in accounting principle, and will, accordingly, involve a cumulative adjustment. The Company does not expect the adoption of the SOP to have a significant impact on its results of operations or equity.
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 revises standards for the way that public business enterprises report information about operating segments in interim and annual financial statements and related disclosures about products and services, geographic areas, and major customers. The Company has presented this information in Notes 6 and 18.
Investments - Investments in securities, which are held principally by insurance subsidiaries of CNA Financial Corporation ("CNA"), an 85% owned subsidiary, are carried as follows:
The Company classifies fixed maturity securities (bonds and redeemable preferred stocks) and equity securities held by insurance subsidiaries as available for sale and they are carried at fair value. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization and accretion are included in investment income. Equity securities in the parent company's investment portfolio are classified as trading securities in order to reflect the Company's investment philosophy. These investments are carried at fair value with the net unrealized gain or loss included in the income statement.
Short-term investments consist primarily of U.S. government securities, repurchase agreements and commercial paper. These investments are carried at fair value, which approximates amortized cost.
All securities transactions are recorded on the trade date. The cost of securities sold is determined by the identified certificate method. Unrealized appreciation included in other comprehensive income in shareholders' equity reflects the unrealized gain or loss on investments which are available for sale and carried at fair value, net of applicable deferred income taxes and participating policyholders' and minority interests. 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.
Other invested assets consist primarily of investments in joint ventures, limited partnerships, certain derivative securities and other investments not classified elsewhere. The joint ventures and limited partnerships are carried at equity value.
Borrowers of these securities must deposit 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). The Company continues to receive the interest on loaned debt securities, as beneficial owner, and accordingly, loaned debt securities are included within 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.
Future policy benefits reserves - Reserves for traditional life insurance products (whole and term life products) are computed based upon the net level premium method using actuarial assumptions as to interest rates, mortality, morbidity, withdrawals and expenses. Actuarial assumptions include a margin for adverse deviation and generally vary by plan, age at issue and policy duration. Interest rates range from 3.0% to 9.0%, and mortality, morbidity and withdrawal assumptions reflect CNA and industry experience prevailing at the time of issue. Expense assumptions include the estimated effects of inflation and expenses 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 4.3% to 7.3% for the three years ended December 31, 1998.
Involuntary risks - CNA's share of involuntary risks is mandatory and generally a function of its share of the voluntary market by line of insurance in each state. CNA records the estimated effects of its mandatory participation on an accrual basis. CNA currently records assessments for insolvencies as they are paid. In 1999, CNA will account for these assessments in compliance with Statement of Position ("SOP") 97-3. SOP 97-3 requires that insurance companies recognize liabilities for insurance-related assessments when an assessment is probable and will be imposed, when it can be reasonably estimated, and when the event obligating the entity to pay an imposed or probable assessment, has occurred on or before the date of the financial statements. In the first quarter of 1999, the Company will record the initial impact of the application of this SOP as a cumulative effect of a change in accounting principle and report an after tax charge between $120.0 and $150.0.
Reinsurance - CNA assumes and cedes insurance with other insurers and reinsurers and members of various reinsurance pools and associations. CNA utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk and minimize exposures on larger risks. The reinsurance coverages are tailored to the specific risk characteristics of each product line with CNA's retained amount varying by type of coverage. Generally, reinsurance coverage for property risks is on an excess of loss, per risk basis. Liability coverages are generally reinsured on a quota share basis in excess of CNA's retained risk. CNA's life reinsurance includes coinsurance, yearly renewable term and facultative programs. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim or policy reserve liability and shown as a recoverable in the Consolidated Balance Sheets.
Participating business - Participating business represented 0.5%, 0.7% and 0.5% of CNA's gross life insurance in force and 0.7%, 0.7% and 0.7% of life insurance premium income for 1998, 1997 and 1996, respectively. Participating policyholders' equity is determined by allocating 90% of related net income or loss and unrealized investment gains or losses related to such business as allowed by applicable laws, less dividends determined by CNA's Board of Directors. Revenues 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"), write certain investment and annuity contracts. The supporting assets and liabilities of these contracts are legally segregated and reflected in the accompanying Consolidated Balance Sheets as assets and liabilities of Separate Account business. CAC guarantees principal and a specified return to the contract holders on approximately 64% and 74% of the Separate Account business at December 31, 1998 and 1997, respectively. Substantially all assets of the Separate Account business are carried at fair value. Separate Account liabilities are carried at contract values.
Watches and clocks - These inventories, aggregating $38.9 and $35.7 at December 31, 1998 and 1997, 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 1998.
(a) Includes losses on short sales, equity index futures and options aggregating $584.3, $936.6 and $285.7 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company continues to maintain these positions.
The carrying value of investments (other than equity securities) that have not produced income for the last twelve months is $23.0 at December 31, 1998.
The amortized cost and market value of fixed maturities at December 31, 1998 and 1997 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be called or prepaid with or without call or prepayment penalties.
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 Accounts 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.
Fair value of long-term debt was based on quoted market prices when available. The fair values for other long-term debt were 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, forwards and other contracts (the "Contracts") as part of its investing activities. These Contracts are commonly referred to as derivative instruments since their underlying values may be linked to, among other things, interest rates, exchange rates, prices of securities and financial or commodity indexes. The Company uses these Contracts for a number of purposes, including: (i) for its 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. These Contracts also involve the risk of dealing with counterparties and their ability to meet the terms of the Contracts.
CNA has entered into interest rate swap agreements to convert the variable rate of its borrowings under the bank credit facility and the commercial paper program to a fixed rate. Since these interest rate swaps are not held for trading purposes, they are not included in the preceding tables. At December 31, 1998 and 1997, the outstanding interest rate swap agreements had a total notional principal amount of $650.0 and $950.0, and a fair value liability of $10.0 and $4.0, respectively. Those agreements, which terminate from May 2000 to December 2000, effectively fixed CNA's interest rate exposure on $650.0 and $950.0 of variable rate debt, respectively.
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. 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 totaled $979.0 and $711.0 at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, gross exposure of financial guarantee insurance contracts amounted to $507.0 and $553.0, respectively. The degree of risk attached to this exposure is substantially reduced through reinsurance, diversification of exposures and collateral requirements. In addition, security interests in the real estate are also obtained. Approximately 36% and 39% of the risks were ceded to reinsurers at December 31, 1998 and 1997, respectively. Total exposure, net of reinsurance, amounted to $323.0 and $337.0 at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, collateral consisting of letters of credit and debt service reserves amounted to $38.0 and $23.0, respectively. Gross unearned premium reserves for financial guarantee contracts were $7.0 and $5.0 at December 31, 1998 and 1997, respectively. Gross claim and claim expense reserves totaled $232.0 and $377.0 at December 31, 1998 and 1997, respectively.
Note 7. Liability for Unpaid Claims and Claim Adjustment Expenses -
The Comprehensive Environmental Response Compensation and Liability Act of 1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern the clean-up and restoration of abandoned toxic waste sites and formalize the concept of legal liability for clean-up and restoration by potentially responsible parties ("PRP's"). Superfund and the mini-Superfunds establish mechanisms to pay for clean-up of waste sites if PRP's fail to do so, and to assign liability to PRP's. The extent of liability to be allocated to a PRP is dependent on a variety of factors. Further, the number of waste sites subject to clean-up is unknown. To date, approximately 1,300 clean-up sites have been identified by the Environmental Protection Agency ("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.
As of December 31, 1998 and 1997, CNA carried approximately $787.0 and $773.0, respectively, of claim and claim expense reserves, net of reinsurance recoverables, for reported and unreported environmental pollution and other mass tort claims. In 1998, CNA recorded $227.0 of adverse development compared to no development in 1997. The additional strengthening in 1998 was 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. This analysis indicated deterioration in claim experience related to pollution claims, as well as some emerging mass tort exposures.
Other lines favorable loss and loss adjustment expense reserve development for 1997 of $361.0 was attributable to approximately $540.0 in workers' compensation involuntary risks and approximately $200.0 in personal lines business, partially offset by unfavorable loss and loss adjustment expense development of $379.0 in other commercial lines. The 1997 favorable loss development was offset in part by unfavorable premium development of approximately $340.0 in involuntary risk business and $170.0 favorable premium development in commercial lines.
The following tables provide additional data related to CNA's environmental pollution, other mass tort and asbestos-related claims activity.
Total income tax expense for the years ended December 31, 1998, 1997 and 1996 was different than the amounts of $377.1, $557.6 and $842.7, computed by applying the statutory U.S. federal income tax rate of 35% to income before income taxes and minority interest for each of the years.
The Company's federal income tax returns have been examined through 1994 and settled through 1990 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.
CNA maintains a revolving credit facility that expires in May 2001. The amount available is reduced by CNA's outstanding commercial paper. As of December 31, 1998, there was $60.0 of unused borrowing capacity under the facility. The interest rate on the bank loans is based on the London Interbank Offered Rate ("LIBOR"), plus 16 basis points. Additionally, there is a facility fee of 9 basis points per annum. The average interest rate on the bank loans under the credit facility at December 31, 1998 and 1997, respectively, was 5.5% and 6.2%.
To offset the variable rate characteristics of the facility, CNA entered into interest rate swap agreements with several banks having a total notional principal amount at December 31, 1998 and 1997 of $650.0 and $950.0, respectively, which terminate from May 2000 to December 2000. These agreements provide that CNA pay interest at a fixed rate, averaging 6.1% and 6.2% at December 31, 1998 and 1997, respectively, in exchange for the receipt of interest at the three month LIBOR rate. The effect of these interest rate swaps was to increase interest expense by approximately $2.0 and $4.0 for the years ended December 31, 1998 and 1997, respectively.
On April 15, 1998, CNA issued $500.0 principal amount of 6.5% senior notes due April 15, 2005. The net proceeds were used to prepay a portion of the secured mortgage notes, pay down a portion of the existing bank debt outstanding under CNA's revolving credit facility, provide refinancing of senior notes and provide funds for acquisitions.
The Company's hotels in some instances are constructed on leased land or are leased. Other leases cover office facilities, computer and transportation equipment. Rent expense amounted to $151.3, $127.2 and $128.6 for the years ended December 31, 1998, 1997 and 1996, respectively. It is expected, in the normal course of business, that leases which expire will be renewed or replaced by leases on other properties; therefore, it is believed that future minimum annual rental commitments will not be less than the amount of rental expense incurred in 1998. At December 31, 1998 future aggregate minimum rental payments approximated $597.4.
Through December 31, 1998, approximately 364 Agency Market Operations employees, the majority of whom were loss adjusters and office support staff, had been released at a cost of $8.0.
The 1998 restructuring and other related charges for CNA's property and casualty Risk Management business totaled approximately $88.0. The charges included lease termination costs associated with the consolidation of claim offices in 36 market territories that totaled approximately $8.0. In addition, employee severance and outplacement costs relating to the net reduction in workforce of approximately 200 employees were approximately $10.0 and the writedown of fixed and intangible assets totaled approximately $64.0. Parallel processing and other charges totaled approximately $6.0.
The charges related to fixed and intangible assets were primarily due to a writedown of an intangible asset (goodwill) related to a business that had been acquired several years earlier. As part of CNA's periodic reviews of asset recoverability and as a result of several adverse events, CNA concluded, based on its discounted cash flow analysis completed in the third quarter of 1998, that a $59.0 write-off 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 1998 restructuring and other related charges for Group Operations totaled approximately $39.0. The charges included approximately $29.0 of costs related to CNA's decision to exit the Employer Health and Affinity lines of business. These costs represent CNA's estimate of losses in connection with fulfilling the remaining obligations under contracts related to these lines. Earned premiums for these lines of businesses approximated $400.0 in 1998. The 1998 charges also included employee severance and outplacement costs of approximately $7.0 related to the planned net reduction in workforce of approximately 400 employees. Lease termination costs and other charges totaled $3.0.
Through December 31, 1998, approximately 56 Group Operations employees had been released at a cost of $1.0. The majority of the employees were claims and sales support staff.
For CNA's other segments, restructuring and other related charges totaled approximately $23.0 for 1998. Charges related primarily to the closing of leased
The following table sets forth the major categories of restructuring and other related charges that were initially accrued and recorded upon the finalization and approval of the Plan and the activity in the accrual for such costs during 1998:
Pension Plans - The Company has several non-contributory defined benefit plans for eligible employees. The benefits for certain plans which cover salaried employees and certain union employees are based on formulas which include among others, years of service and average pay. The benefits for one plan which covers union workers under various union contracts and certain salaried employees are based on years of service multiplied by a stated amount.
The 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 CNA, in its Separate Account business.
As a result of CNA's restructuring activities discussed in Note 12, CNA recorded curtailment charges of approximately $19.0 related to its pension and postretirement plans. Additionally these curtailments resulted in the reduction of the pension and postretirement benefit obligations of $88.0 and $34.0, respectively.
For measurement purposes, a trend rate for covered costs of 7.8% to 8.0% pre- 65 and 7.0% post-65, was used. These trend rates are expected to decrease gradually 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, 1998 by $26.8 (or $23.7) and the aggregate net periodic postretirement cost for 1998 by $4.3 (or $3.7).
Savings Plans - The Company and its subsidiaries have several contributory savings plans which allow employees to make regular contributions based upon a percentage of their salary. The Company makes matching contributions up to specified percentages of employees' contributions. The Company's contributions to these plans amounted to $34.4, $29.1 and $28.6 for the years ended December 31, 1998, 1997 and 1996, respectively.
On April 29, 1996, Diamond Offshore, then a 70% owned subsidiary, acquired Arethusa (Off-Shore) Limited ("Arethusa"). Diamond Offshore issued 35.8 million shares of its common stock and assumed Arethusa stock options as consideration for the purchase price of approximately $550.7. Arethusa owned a fleet of 11 mobile offshore drilling rigs and operated two additional mobile offshore rigs pursuant to bareboat charters. The acquisition of Arethusa has been accounted for as a purchase, and Arethusa's operations are included in the Consolidated Financial Statements as of April 29, 1996. Pro forma operating results for the year ended December 31, 1996, assuming the transaction had occurred at the beginning of that year, would not be materially different from those reported in the Consolidated Financial Statements. The Company recognized a gain of approximately $186.6 ($121.3 after provision for deferred income taxes) and its interest in Diamond Offshore declined to approximately 51%.
neys (collectively referred to as "Settling Parties") have reached a Global Settlement Agreement to resolve all future asbestos-related bodily injury claims involving Fibreboard, which is subject to court approval.
Casualty, Fibreboard and Pacific Indemnity have also reached an agreement (the "Trilateral Agreement"), on a settlement to resolve the coverage litigation in the event the Global Settlement Agreement does not obtain final court approval.
Under either the Global Settlement Agreement or the Trilateral Agreement, Casualty is also obligated to pay prior settlements of present asbestos claims. As a result of the final approval of the Trilateral Agreement, such obligation has become final. Through December 31, 1998, Casualty, Fibreboard and plaintiff attorneys had reached settlements with respect to approximately 134,000 claims, for an estimated settlement amount of approximately $1,630.0 plus any applicable interest. Final court approval of the Trilateral Agreement obligated Casualty to pay under these settlements. Approximately $1,690.0 (including interest of $185.0) was paid through December 31, 1998. Such payments have been partially recovered from Pacific Indemnity. Casualty may negotiate other agreements for unsettled claims.
Tobacco Litigation - Several of CNA's primary property/casualty subsidiaries have been named as defendants as part of a "direct action" lawsuit, Richard P. Ieyoub v. The American Tobacco Company, et al., filed by the Attorney General for the state of Louisiana, in state court, Calcasieu Parish, Louisiana. In that suit, filed against certain tobacco manufacturers and distributors (the "Tobacco Defendants") and over 100 insurance companies, the state of Louisiana seeks to recover medical expenses allegedly incurred by the state as a result of tobacco-related illnesses.
The original suit was filed on March 13, 1996, against the Tobacco Defendants only. The insurance companies were added to the suit in March 1997 under a "direct action" statute in Louisiana. Under the direct action statute, the Louisiana Attorney General is pursuing liability claims against the Tobacco Defendants and their insurers in the same suit, even though none of the Tobacco Defendants has made a claim for insurance coverage.
In June of 1997, the above case was removed to the United States District Court for the Western District of Louisiana. The district court's decision denying a motion to remand the case to the state court is currently on appeal to the United States Fifth Circuit Court of Appeals. During the pending appeal, all proceedings in state court and in the federal district court are stayed.
However, in other states, third parties have challenged the November 1998 settlement agreement, and the Medicaid reimbursement lawsuits in those states may not be resolved for some time. In addition, the November 1998 settlement does not preclude the cigarette manufacturers, or other entities named as defendants in the various Medicaid reimbursement lawsuits, from seeking coverage under the insurance policies issued to those defendants. Because of the uncertainties inherent in assessing the risk of liability at this juncture, management is unable to make a meaningful estimate of the amount or range of any loss that could result from an unfavorable outcome of the pending litigation. However, management believes that the ultimate outcome of the pending litigation should not materially affect the results of operations or equity of CNA.
Tobacco Litigation - Lawsuits continue to be filed with increasing frequency against Lorillard and other manufacturers of tobacco products. Since January 1, 1998, approximately 400 product liability cases have been filed and served in United States courts against U.S. cigarette manufacturers. Lorillard has been named as a defendant in approximately 260 of these actions. Cases also have been filed with greater frequency against the Company. A total of approximately 900 product liability cases are pending against U.S. cigarette manufacturers; of these, Lorillard is a defendant in approximately 520.
Tobacco litigation includes various types of claims. In these actions, plaintiffs claim substantial compensatory, statutory and punitive damages in amounts ranging into the billions of dollars. These claims are based on a number of legal theories including, among other things, theories of negligence, fraud, misrepresentation, strict liability, breach of warranty, enterprise liability, civil conspiracy, intentional infliction of harm, violation of consumer protection statutes, and failure to warn of the allegedly harmful and/or addictive nature of tobacco products.
The Master Settlement Agreement is subject to final judicial approval in each of the Settling States. In the Company's opinion, approximately 35 of the Settling States have achieved final judicial approval. Some suits have been filed contesting various aspects of the Master Settlement Agreement. Certain other actions have been filed in which plaintiffs seek to intervene in cases governed by the Master Settlement Agreement in order to achieve a different distribution of the funds allocated by the Master Settlement Agreement to the respective states. If a Settling State does not obtain final judicial approval by December 31, 2001, the Master Settlement Agreement will be terminated with respect to such state. The Master Settlement Agreement, however, will remain in effect as to each Settling State in which final judicial approval is obtained. The Master Settlement Agreement provides that it is not an admission or concession or evidence of any liability or wrongdoing on the part of any party, and was entered into by the Original Participating Manufacturers to avoid the further expense, inconvenience, burden and uncertainty of litigation.
The Original Participating Manufacturers have also, as part of the Master Settlement Agreement, committed to work cooperatively with the tobacco grower community to address concerns about the potential adverse economic impact on that community. On January 21, 1999, the Original Participating Manufacturers reached an agreement in principle to establish a $5,150.0 trust fund payable over 12 years to compensate the tobacco growing communities in 11 states. Payments to the trust fund are to be allocated among the Original Participating Manufacturers according to their relative market share of domestic cigarette shipments, except that Philip Morris will pay more than its market share in the first year of the agreement but will have its payment obligations reduced in years 11 and 12 to make up for the overpayment. Lorillard's payments under the agreement will total approximately $515.0, including a payment of $16.0 in 1999. All payments will be adjusted for inflation, changes in the unit volume of domestic cigarette shipments, and for the effect of any new increases in state or federal excise taxes on tobacco products which benefits the growing community.
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. As of January 22, 1999, manufacturers representing almost all domestic shipments in 1998 had agreed to become subject to the terms of the Master Settlement Agreement.
On February 9 and 10, 1999, a jury in the Superior Court of San Francisco County, California, returned verdicts in favor of an individual plaintiff and awarded $1.5 in actual damages and $50.0 in punitive damages against the only defendant in the action, Philip Morris Incorporated. The Company understands that Philip Morris Incorporated will seek a reduction of the amounts awarded to plaintiff and will notice an appeal from the final judgment entered by the trial court reflecting the verdict. The Company cannot predict whether this verdict will lead to additional litigation being brought in California or elsewhere, or whether Lorillard or the Company will be part of this litigation, if any is to be filed.
During 1998, a jury returned a verdict in favor of the plaintiff and against Brown & Williamson Tobacco Corporation in a smoking and health trial in which Lorillard was not a party, Widdick v. Brown & Williamson Tobacco Corporation (verdict returned June 10, 1998) (Circuit Court, Duval County, Florida). The jury awarded plaintiff a total of $0.6 in actual damages and $0.5 in punitive damages. The court entered final judgment in favor of plaintiff that was consistent with the jury's verdict. The First District of the Florida Court of Appeal has directed the Circuit Court of
The third and final phase of the trial will address absent class members' claims, which include issues of specific causation and damages. This portion of the trial will be held before a separate jury.
On October 10, 1997, the parties to Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Dade County, Florida, October 31, 1991), a class action brought on behalf of flight attendants claiming injury as a result of exposure to environmental tobacco smoke, executed a settlement agreement which was approved by the court on February 3, 1998. The order approving the settlement has been appealed. The settlement agreement requires Lorillard and three other cigarette manufacturers jointly to pay $300.0 in three annual installments to create and endow a research institute to study diseases associated with cigarette smoke and to pay plaintiffs' attorney fees aggregating $49.0. Lorillard's share is approximately $30.7 of the proposed settlement amount. The plaintiff class members are permitted to file individual suits, but these individuals may not seek punitive damages for injuries that arose prior to January 15, 1997.
use of tobacco products or exposure to cigarette smoke. These cases are based on, among other things, equitable claims, including indemnity, restitution, unjust enrichment and public nuisance, and claims based on antitrust laws and state consumer protection acts. Plaintiffs seek damages in each case that range from unspecified amounts to the billions of dollars. Most plaintiffs seek punitive damages and some seek treble damages. Plaintiffs in many of the cases seek medical monitoring. Lorillard is named as a defendant in most such actions. The Company is named as a defendant in 12 of them.
State or Local Governmental Reimbursement Cases - The Master Settlement Agreement will resolve the cases filed by 46 state governments and six other governmental entities. Since January 1, 1997, cases brought by four state governments, Florida, Minnesota, Mississippi and Texas, were settled in separate agreements. Lorillard was a defendant in each of the 46 cases filed by state governments and in the six cases brought by other governmental entities, as well as in the four cases governed by the separate settlement agreements. Eight local governments also have filed suit against cigarette manufacturers, although the Master Settlement Agreement purportedly resolves those actions. In addition to these suits, cases have been brought in U.S. courts by the nations of Bolivia, Guatemala, Nicaragua, Panama, Thailand and Venezuela. Lorillard is a defendant in some of these actions, although it does not sell cigarettes outside the United States. The Company is named as a defendant in the cases filed by Bolivia, Panama, Thailand and Venezuela.
Private Citizens Reimbursement Cases - There are six suits pending in which plaintiffs are private citizens. Four of the suits have been filed by private citizens on behalf of taxpayers of their respective states, although governmental entities have filed reimbursement suits in two of the four states. The Company is a defendant in two of the six pending private citizen reimbursement cases. Lorillard is a defendant in each of the cases. Four of the cases are in the pre-trial, discovery stage. Two of the matters are on appeal from final judgments entered by the trial courts in favor of the defendants.
DEFENSES - One of the defenses raised by Lorillard in certain cases is preemption by the Federal Cigarette Labeling and Advertising Act (the "Labeling Act"). In the case of Cipollone v. Liggett Group, Inc., et al., the United States Supreme Court held that the Labeling Act, as amended in 1969, preempts claims against tobacco companies arising after July 1, 1969, which assert that the tobacco companies failed to adequately warn of the alleged health risks of cigarettes, sought to undermine or neutralize the Labeling Act's mandatory health warnings, or concealed material facts concerning the health effects of smoking in their advertising and promotion of cigarettes. The Supreme Court held that claims against tobacco companies based on fraudulent misrepresentation, breach of express warranty, or conspiracy to misrepresent material facts concerning the alleged health effects of smoking are not preempted by the Labeling Act.
CNA's insurance products include property and casualty coverages; life, accident and health insurance; and pension products and annuities. CNA's services include risk management, information services, health care management and claims administration. CNA's products and services are marketed through agents, brokers, general agents and direct sales.
Lorillard's principal products are marketed under the brand names of Newport, Kent, True and Maverick with substantially all of its sales in the United States.
Diamond Offshore's business primarily consists of operating 46 offshore drilling rigs that are chartered on a contract basis for fixed terms by companies engaged in exploration and production of hydrocarbons. Offshore rigs are mobile units that can be relocated based on market demand. Currently 65% of these rigs operate in the Gulf of Mexico, 7% operate in the North Sea and the remaining 28% are located in various foreign markets.