CNA has financed the transaction (including the refinancing of $205.0 million of CIC debt) through a five-year $1,325.0 million revolving credit facility (the "Bank Facility"). The interest rate is based on the one, two, three or six month London Interbank Offered Rate ("LIBOR"), as elected, plus 16 basis points. Additionally, there is a facility fee of 9 basis points. The average interest rate was 5.7% and 6.1% at December 31, 1996 and 1995, respectively. Under the terms of the Bank Facility, CNA may prepay the debt without penalty, giving CNA flexibility to arrange longer-term financing on more favorable terms.
In 1995 CNA entered into five year interest rate swap agreements with several banks to offset the variable rate characteristics of the Bank Facility. These agreements effectively convert variable rate debt into fixed rate debt on notional amounts aggregating $1,200.0 million at December 31, 1995. In conjunction with the pay down of $250.0 million of the Bank Facility, CNA reduced its swaps for a similar notional amount. The weighted average fixed swap rate was 6.2% and 6.3% at December 31, 1996 and 1995, respectively. The effect of these interest rate swaps was to increase interest expense by $7.0 and $2.0 million for the years ended December 31, 1996 and 1995, respectively.
The weighted average interest rate (interest and facility fees) on the Bank Facility, commercial paper and the effect of the interest rate swaps, was 6.3% and 6.5% at December 31, 1996 and 1995, respectively.
The table below reflects ratings issued by A.M. Best, Standard and Poor's, Moody's and Duff & Phelps, for CNA's Continental Casualty Company ("CCC") Intercompany Pool, Continental Insurance Company ("CIC") Intercompany Pool and Continental Assurance Company ("CAC") Inter-company Pool. Also rated were the senior debt of both CNA and CIC, and CNA's preferred stock.
CNA's property and casualty insurance subsidiaries' statutory surplus grew from $3,598.4 million in 1993 to $6,348.8 million in 1996. In 1994, surplus declined to $3,367.3 million, primarily attributable to realized investment losses. In 1995, surplus rose $2,328.6 million to $5,695.9 million due to the acquisition of CIC ($1,706.7 million) and improved net income. Dividends of $545.0, $325.0, and $175.0 million were paid to CNA by CCC in 1996, 1995 and 1994, respectively.
Statutory surplus of CNA's life insurance subsidiaries grew from $1,022.0 million at December 31, 1993 to 1,163.4 million at December 31, 1996.
For the year ended December 31, 1996, CNA's operating activities generated net cash flows of $620.2 million compared to $875.0 million in 1995 and $982.2 million in 1994. CNA believes that future liquidity needs will be met primarily from operations.
(i) Regulations regarding underage youth smoking, effective February 28, 1997. These regulations make 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.
Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews Hotels is a wholly owned subsidiary of the Company.
marketed and available for contract are essentially working at full utilization and, of its 30 semisubmersibles, 25 have term commitments with renewal opportunities staggered through 2001.
In order to effectively compete in this market, Diamond Offshore is required to incur significant capital expenditures to meet customer requirements as well as fund its own rig enhancement program. Diamond Offshore expects to spend approximately $162.5 million during 1997 for rig upgrades in connection with contract requirements. In addition, it has budgeted $70.7 million for 1997 capital expenditures associated with its continuing rig enhancement program, spare equipment and other corporate requirements.
Bulova Corporation and subsidiaries ("Bulova"). Bulova is a 97% owned subsidiary of the Company.
The Company continues to seek expansion of existing businesses and significant acquisitions of new businesses.
CNA's general account investment portfolio is managed to maximize after tax investment return, while minimizing credit risks. Investments are concentrated in high quality securities to support its insurance underwriting operations.
CNA has the capacity to hold its fixed income portfolio to maturity. However, securities may be sold as part of CNA's asset/liability strategies or to take advantage of investment opportunities generated by changing interest rates, tax and credit considerations, or other similar factors. Accordingly, the fixed maturity securities are classified as available for sale.
The following table summarizes the ratings of CNA's guaranteed investment contract Separate Account fixed maturity debt portfolio:
The ratings in the two tables above are primarily from independent rating agencies (89% and 93% of the general account portfolio, and 85% and 95% of the guaranteed investment portfolio in 1996 and 1995, respectively, were rated by Standard and Poor's). In addition, CNA's investments in mortgage loans and real estate as a percentage of total assets are substantially below industry average.
and other unrated securities which, in the opinion of management, are below investment grade (below BBB). High yield securities generally involve a greater degree of risk than investment grade securities. Expected returns should, however, compensate for the added risk. The risk is also considered in the interest rate assumptions in the underlying insurance products. As of December 31, 1996, CNA's concentration in high yield bonds including Separate Accounts business was approximately 4.2% of its total assets, compared with 4.7% in 1995.
Included in CNA's fixed maturity securities at December 31, 1996 (general and guaranteed investment portfolios) are $8,642.3 million of asset-backed securities, consisting of approximately 47% in U.S. government agency issued pass-through certificates, 37% in collateralized mortgage obligations ("CMO's"), and 16% in corporate asset-backed obligations. The majority of CMO's held are U.S. government agency issues, which are actively traded in liquid markets and are priced by broker-dealers.
CNA invests from time to time in certain derivative financial instruments to increase investment returns and to reduce the impact of changes in interest rates on certain corporate borrowings. CNA considers its derivative securities as held for trading purposes, except for interest rate swaps associated with corporate borrowings, and as such, are recorded at fair value at the reporting date with changes in market value reflected in income. The interest rate swaps on corporate borrowings are accounted for as an adjustment to interest expense.
As of December 31, 1996 CNA's general account investments in bonds and redeemable preferred stocks were carried at a fair value of $27,720.6 million, compared to $30,444.7 million at December 31, 1995. At December 31, 1996, net unrealized gains on fixed maturity securities amounted to approximately $181.0 million. This compares to $1,059.3 million of net unrealized gains at December 31, 1995. The gross unrealized gains and losses for the fixed maturity securities portfolio at December 31, 1996 were $443.8 and $262.8 million, respectively, compared to $1,136.4 and $77.1 million, respectively, at December 31, 1995.
Net unrealized gains on general account bonds at December 31, 1996 include net unrealized gains on high yield securities of $41.0 million, compared to $67.0 million at December 31, 1995. High yield securities are bonds rated as below investment grade by bond rating agencies, plus private placements and other unrated securities which, in the opinion of management, are below investment grade (below BBB). Carrying and fair values of high yield securities in the general account were $2,020.3 million at December 31, 1996, compared to $1,862.0 million at December 31, 1995.
At December 31, 1996, total Separate Account business cash and investments amounted to $5,697.6 million with taxable fixed maturities representing approximately 81% of the Separate Accounts portfolio. Approximately 82% of Separate Account investments are used to fund guaranteed investments for which Continental Assurance Company guarantees principal and a specified return to the contract holders. The duration of fixed maturity securities included in the
High yield securities in the guaranteed investment portfolio are carried at fair value and amounted to $472.0 and $944.0 million at December 31, 1996 and 1995, respectively. Net unrealized losses on high yield securities held in such Separate Accounts were $6.0 million at December 31, 1996, compared to $14.0 million at December 31, 1995.
Investment activities of non-insurance companies include investments in fixed income securities, equity securities, derivative instruments and short-term investments. Equity securities which are considered part of the Company's trading portfolio, and derivative instruments are marked to market and reported as investment gains or losses in the income statement. The remaining securities are carried at fair value with a net unrealized loss of $22.4 million at December 31, 1996.
The Company invests in certain derivative instruments for income enhancement as part of its portfolio management strategy. These instruments include various swaps, forwards and futures contracts as well as both purchased and written options.
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. In addition, the amounts subject to credit risk are substantially mitigated by collateral requirements in many of these transactions.
Pre-tax investment gains (losses) amounted to $473.6, $320.6 and $(164.1) million for the years 1996, 1995 and 1994, respectively.
Net income excluding net investment gains (losses) of CNA's property and casualty insurance subsidiaries was $444.8 million for 1996, compared to $355.3 and $125.6 million in 1995 and 1994, respectively. Net investment gains for 1996 were $255.6 million, compared to $174.8 million in 1995 and net investment losses of $86.6 million for 1994.
Catastrophe losses for 1996 on a pre-tax basis were approximately $315.0 million, compared with $149.0 million in 1995 and $283.0 million in 1994. CNA's 1996 catastrophe losses were primarily weather related losses including winter storms in the East and flooding in the West. CNA's 1995 catastrophe losses related primarily to tropical storms and hail storms in Texas. CNA's 1994 catastrophe losses related primarily to the Northridge earthquake near Los Angeles and severe winter storms in the Northeast.
CNA, consistent with sound insurance reserving practices, regularly adjusts its reserve estimates in subsequent reporting periods as new facts and circumstances emerge that indicate the previous estimates need to be modified. These adjustments, referred to as "reserve development," are inevitable given the complexities of the reserving process and are recorded in the income statement in the period the need for the adjustments become apparent.
Management believes its reserves for environmental pollution and asbestos claims are appropriately established based upon known facts and current case law. However, due to the inconsistencies of court coverage decisions, the number of waste sites subject to clean-up, the standards for clean-up and liability, and other factors, the ultimate exposure to CNA for these claims may vary materially from the amounts currently recorded, resulting in a potential increase in the claim reserves recorded. In addition issues related to, among other things, specific policy provisions, multiple insurers and allocation of liability among insurers, consequences of conduct of the insured, missing policies and proof of coverage make quantification of liabilities exceptionally difficult and subject to adjustment based upon newly available data. Due to the uncertainties and factors described above, management believes it is not practicable to develop a meaningful range for any such additional reserves that may be required. See Note 10 of the Notes to Consolidated Financial Statements for further discussion of environmental pollution and asbestos reserves.
Adverse 1996 environmental pollution and asbestos reserve development of $64.7 and $50.5 million, respectively, results from CNA's ongoing monitoring of current payment and settlement patterns, current pending cases and potential future claims. Other 1996 and 1995 reserve development, which aggregated $206.2 and $377.7 million, respectively, of favorable reserve development, is principally due to favorable claim frequency (rate of claim occurrence) and severity (average cost per claim) experience in the workers' compensation line of business. These trends reflect the positive effects of changes in workers' compensation laws, more moderate increases in medical costs, and a generally strong economy in which individuals return to the workplace more quickly.
Life insurance revenues increased by $426.8 and $1,140.0 million, or 11.8% and 39.3%, as compared to 1995 and 1994, respectively. Life premium revenues increased by $340.6 and $730.6 million, or 11.3% and 27.9%, as compared to 1995 and 1994, respectively. Life insurance and annuity premiums for 1996 were up 11.3% and 26.0% from 1995 and 1994, respectively. Increases in CNA's life insurance premiums are primarily attributable to increases of approximately $230.0 million in the Federal Employees Health Benefits Program and an increase in other group medical business of approximately $75.0 million. These increases were partially offset by lower individual accident and health premiums which is attributed to CNA selling its individual disability income business in late 1995. Life investment income increased by approximately 8.3% due to a larger asset base generated from increased cash flows from premium growth. The bond segment of the life investment portfolio yielded 6.5% in 1996, compared to 7.0% in 1995.
Revenues increased by $162.4 and $301.1 million, or 7.9% and 15.7%, as compared to 1995 and 1994, respectively. Net income increased by $61.7 and $77.4 million, or 16.8% and 22.0%, as compared to 1995 and 1994, respectively.
Lorillard's unit sales volume increased by 5.1% and 11.0% as compared to 1995 and 1994, respectively. Newport, a full price brand which accounts for approximately 73% of Lorillard's unit sales, increased by 8.8% and 17.4% as compared to 1995 and 1994, respectively.
Revenues decreased by $17.4 and $16.8 million, or 8.0% and 7.7%, as compared to 1995 and 1994, respectively. Net income decreased by $9.9 and $12.6 million, as compared to 1995 and 1994, respectively.
Revenues increased by $308.7 and $344.5 million, or 90.9% and 113.4%, as compared to 1995 and 1994, respectively. Net income increased by $60.8 and $87.8 million as compared to 1995 and 1994, respectively.
Revenues increased by $116.8 million due to the 11 rigs acquired in the acquisition of Arethusa in April 1996. In addition, revenues increased $123.6 and $127.6 million as a result of higher dayrates, and $30.5 and $60.3 million from increased utilization rates as compared to 1995 and 1994, respectively. The increased dayrates and utilization rates reflect the overall improvement in the offshore drilling market as previously discussed. In addition, during 1996 Diamond Offshore recognized gains totaling $34.8 million from the sale of all of its land drilling rigs and related equipment, and three offshore drilling rigs.
expense resulting from capital expenditures associated with drilling rig upgrades and modifications.
Exclusive of BTI, revenues increased $11.9 and $21.9 million, or 10.9% and 22.1%, and net income increased by $4.4 and $6.0 million, as compared to 1995 and 1994, respectively. Revenues and net income increased due primarily to higher watch unit sales volume of 18.9% and 13.3% as compared to 1995 and 1994, respectively, and an overall increase in watch unit prices. In addition, revenues and net income in 1995 include interest income of $4.2 million and a tax expense of $3.2 million resulting from a tax audit adjustment.
Revenues decreased by $1,025.1 million and increased by $287.3 million, as compared to 1995 and 1994, respectively. Net income decreased by $680.4 million and increased by $152.1 million as compared to 1995 and 1994, respectively. Other operations consist primarily of investment income of non-insurance companies and, in 1995 and 1994, the Company's investment in CBS Inc.
In January 1997, the Securities and Exchange Commission expanded existing disclosure requirements with respect to certain derivative instruments. The new rules require enhanced descriptions in the accounting policies footnote to the financial statements and also require qualitative and quantitative disclosure outside the financial statements regarding market risk related to the derivative instruments. The rules are effective for fiscal years ending after June 15, 1997 and will not have a significant impact on the Company.
When included in this Report, the words "expects," "intends," "anticipates," "estimates," and analogous expressions are intended to identify forward-looking statements. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, general economic and business conditions, competition, changes in financial markets (credit, currency, commodities and stocks), changes in foreign, political, social and economic conditions, regulatory initiatives and compliance with governmental regulations, judicial decisions and rulings in smoking and health litigation, changes in foreign and domestic oil and gas exploration and production activity, customer preferences and various other matters, many of which are beyond the Company's control. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.
The 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. Such amortization and accretion are included in investment income. Effective January 1, 1996, equity securities added to 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.
Derivative instruments are generally held for trading purposes and, as such, are marked to market. Gains or losses are included in investment gains or losses. 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 as an adjustment to interest expense.
Securities sold under agreements to repurchase - The Company has a securities lending program where securities are loaned to third parties, primarily major brokerage firms. Borrowers of these securities must deposit 100% of the market 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). Securities sold under repurchase agreements are recorded at their contracted repurchase amounts. 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.
Structured settlements have been negotiated for claims on certain property and casualty insurance policies. Structured settlements are agreements to provide periodic payments to claimants, which are fixed and determinable as to the amount and time of payment. Certain structured settlements are funded by annuities purchased from CNA's life insurance subsidiary. Related annuity obligations are carried in future policy benefits reserves. Obligations for structured settlements not funded by annuities are carried at the present value of future benefits. At December 31, 1996 and 1995, such reserves, discounted at interest rates ranging from 6.3% to 7.5%, totaled $924.0 and $897.0, respectively (reflecting a discount of $1,556.0 and $1,555.0, respectively).
Workers' compensation lifetime claims and accident and health disability claim reserves are discounted at interest rates ranging from 3.5% to 6.0% with mortality and morbidity assumptions reflecting CNA's and current industry experience. Such discounted reserves totaled $2,165.4 and $2,240.0 (reflecting a discount of $903.0 and $893.9, respectively) at December 31, 1996 and 1995, respectively.
Restricted investments - On December 30, 1993, CNA deposited $986.8 in an escrow account, pursuant to the Fibreboard Global Settlement Agreement, as discussed
Statutory accounting practices - CNA's insurance affiliates are domiciled in various states, provinces or countries. These affiliates prepare their statutory financial statements in accordance with accounting practices "prescribed" or otherwise "permitted" by the respective state's insurance department. Prescribed statutory accounting practices are set forth in a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations and general administrative rules. CNA has no material permitted accounting practices.
Goodwill and other intangible assets - Goodwill, representing the excess of the purchase price over the fair value of the net assets of the 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, 1996 and 1995 was $243.4 and $207.1, respectively. Amortization expense amounted to $36.3, $25.6 and $9.1 for the years ended December 31, 1996, 1995 and 1994, respectively. Intangible assets are periodically reviewed to determine whether an impairment in value has occurred.
Reclassification - Certain amounts applicable to prior periods have been reclassified to conform to the classifications followed in 1996.
The carrying value of investments (other than equity securities) that have not produced income for the last twelve months is $103.4 at December 31, 1996.
The amortized cost and market value of fixed maturities at December 31, 1996 and 1995 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.
Other investments and other Separate Account assets consist of mortgage loans and notes receivable, policy loans, investments in limited partnerships and various miscellaneous assets. Valuation techniques to determine fair value consist of discounted cash flows and quoted market prices of (a) the investments, (b) comparable instruments or (c) underlying assets of the investments.
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 nonperformance to be remote. In addition, the amounts subject to credit risk are substantially mitigated by many of the Contracts' collateral requirements.
The notional values presented in the tables above include purchased options of $2,214.3 and $3,324.1 at December 31, 1996 and 1995, respectively.
CNA has entered into interest rate swap agreements to convert the variable rate of the borrowing 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. The outstanding interest rate swap agreements had a total notional principal amount of $950.0 and $1,200.0, and a fair value asset of $3.0 and liability of $28.7 at December 31, 1996 and 1995, respectively. These agreements, which terminate from May to December 2000, effectively fix the Company's interest rate exposure on $950.0 of variable rate debt.
At December 31, 1996 and 1995, gross exposure of financial guarantee insurance contracts amounted to $582.0 and $707.0, respectively. The degree of risk attached to this exposure is substantially reduced through reinsurance, collateral requirements and diversification of exposures. In addition, security interests in real estate are also obtained. Approximately 47% and 44% of the risks were ceded to reinsurers at December 31, 1996 and 1995, respectively. Total exposure, net of reinsurance, amounted to $311.0 and $395.0 at December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, collateral consisting of letters of credit and debt service reserves amounted to $28.0 and $39.0, respectively. Gross unearned premium reserves for financial guarantee contracts were $11.0 and $17.0 at December 31, 1996 and 1995, respectively. Gross claim and claim expense reserves totaled $371.0 and $463.0 at December 31, 1996 and 1995, respectively.
The pro forma consolidated condensed financial information is not necessarily indicative either of the results of operations that would have occurred had this transaction been consummated at the beginning of the periods presented or of future operations of the combined companies.
Note 10. Liability for Unpaid Claims and Claim Adjustment Expenses -
The CNA property/casualty insurance companies have potential exposures related to environmental pollution and asbestos claims.
Environmental pollution clean-up is the subject of both federal and state regulation. By some estimates, there are thousands of potential waste sites subject to clean-up. The insurance industry is involved in extensive litigation regarding coverage issues. Judicial interpretations in many cases have expanded the scope of coverage and liability beyond the original intent of the policies.
CNA and the insurance industry are disputing coverage for many such claims. Key coverage issues include whether Superfund response costs are considered damages under the policies, trigger of coverage, applicability of pollution exclusions, the potential for joint and several liability and definition of an occurrence. Similar coverage issues exist for clean-up of waste sites not covered under Superfund. 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. Despite Superfund taxing authority having expired at the end of 1995, no reforms have been enacted by Congress. No predictions can be made as to what positions the Congress or the Administration will take 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 materially reduced in favor
As of December 31, 1996 and 1995, CNA carried approximately $907.8 and $1,063.0, respectively, of claim and claim expense reserves, net of reinsurance recoverable, for reported and unreported environmental pollution claims. The reserves relate to claims for accident years 1988 and prior, which coincides with CNA's adoption of the Simplified Commercial General Liability coverage form which included an absolute pollution exclusion. Unfavorable reserve development amounted to $64.7, $226.0 and $180.6 for the years ended December 31, 1996, 1995 and 1994, respectively. Unfavorable environmental reserve development results from CNA's on-going monitoring of settlement patterns, current pending cases and potential future claims.
CNA has exposure to asbestos claims, including those attributable to CNA's litigation with Fibreboard Corporation (see Note 19). Estimation of asbestos claim reserves encounter many of the same limitations discussed above for environmental pollution claims such as inconsistency of court decisions, specific policy provisions, multiple insurers and allocation of liability among insurers, missing policies and proof of coverage. As of December 31, 1996 and 1995, CNA carried approximately $1,506.2 and $2,191.1, respectively, of claim and claim expense reserves, net of reinsurance recoverable, for reported and unreported asbestos claims. Unfavorable reserve development for the years ended December 31, 1996, 1995 and 1994 totaled $50.5, $273.7 and $36.8, respectively.
The results of operations in future years may continue to be adversely affected by environmental pollution claims and claim expenses. Management will continue to monitor potential liabilities and make further adjustments as warranted.
Gross deferred tax assets amounted to $2,826.5 and $2,449.1 and liabilities amounted to $1,688.5 and $1,243.9 for the years ended December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company had net operating loss carryforwards of $800.0 for income tax purposes that expire in years 2000 through 2010. Those carryforwards resulted from CNA's acquisition of CIC.
The Company has a past history of profitability and anticipates sufficient future taxable income to fully support recognition of its deferred tax balance at December 31, 1996, including but not limited to the reversal of existing temporary differences and the implementation of tax planning strategies, if needed.
Total income tax expense for the years ended December 31, 1996, 1995 and 1994 was different than the amounts of $842.7, $993.8 and $93.1, computed by applying the statutory U.S. federal income tax rate of 35% to income before income taxes and minority interest for each of the years.
Federal, foreign, state and local income tax payments, net of refunds, amounted to approximately $407.8, $386.5 and $194.9 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company has entered into separate tax allocation agreements with Bulova and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the "Subsidiaries"). Each agreement provides that the Company will (i) pay to the Subsidiary the amount, if any, by which the Company's consolidated federal income tax is reduced by virtue of inclusion of the Subsidiary in the Company's return, or (ii) be paid by the Subsidiary an amount, if any, equal to the federal income tax which would have been payable by the Subsidiary if it had filed a separate consolidated return. Under these agreements, CNA will pay Loews approximately $99.0 for 1996, and received from Loews approximately $78.0 and $26.0 for the years 1995 and 1994, respectively. The federal income tax to be received from Bulova amounted to approximately $3.7 for 1996 and Bulova has received approximately $0.8 and $0.1 for the years 1995 and 1994, respectively. Each agreement may be cancelled by either of the parties upon thirty days' written notice.
The Company's federal income tax returns have been examined through 1990 and settled through 1986, and the years 1991 through 1994 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.
The weighted average interest rate (interest and facility fees) on the acquisition debt, which includes the Bank Facility, commercial paper and the effect of the interest rate swaps, was 6.3% and 6.5% at December 31, 1996 and 1995, respectively.
Payment of dividends by insurance subsidiaries of CNA without prior regulatory approval is limited to certain formula-derived amounts. At December 31, 1996, approximately $3,326.0 of retained earnings was not available for dividends.
Other Postretirement Benefit Plans - The Company and its subsidiaries have several postretirement benefit plans covering eligible employees and retirees. Participants generally become eligible after reaching age 55 with required years of service. Actual requirements for coverage vary by plan. Benefits for retirees who were covered by bargaining units vary by each unit and contract. Benefits for certain retirees are in the form of a Company health care account.
Fibreboard Litigation - CNA's primary property and casualty subsidiary, Continental Casualty Company ("Casualty"), has been party to litigation with Fibreboard Corporation ("Fibreboard") involving coverage for certain asbestos-related claims and defense costs (San Francisco Superior Court, Judicial Council Coordination Proceeding 1072). As described below, Casualty, Fibreboard, another insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation), and a negotiating committee of asbestos claimant attorneys (collectively referred to as "Settling Parties") have reached a Global Settlement (the "Global Settlement") 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 does not obtain final court approval or is subsequently successfully attacked. The implementation of either the Global Settlement or the Trilateral Agreement would have the effect of settling Casualty's litigation with Fibreboard.
On July 27, 1995, the United States District Court for the Eastern District of Texas entered judgment approving the Global Settlement Agreement and the Trilateral Agreement. As expected, appeals were filed as respects both of these decisions. On July 25, 1996, a panel of the United States Fifth Circuit Court of Appeals in New Orleans affirmed the judgment approving the Global Settlement Agreement by a 2 to 1 vote and affirmed the judgment approving the Trilateral Agreement by a 3 to 0 vote. Petitions for rehearing by the panel and suggestions for rehearing by the entire Fifth Circuit Court of Appeals as respects the decision on the Global Settlement Agreement were denied. Two petitions for certiorari have been filed in the Supreme Court.
Subsequent to the announcement of the agreement in principle, Casualty, Fibreboard and Pacific Indemnity entered into the Trilateral Agreement which among other things, settles the coverage case in the event the Global Settlement approval is not ultimately upheld. In such case, Casualty and Pacific Indemnity will contribute to a settlement fund an aggregate of $2,000.0, less certain adjustments. Such fund would be devoted to the payment of Fibreboard's asbestos liabilities other than liabilities for claims settled before August 23, 1993. Casualty's share of such fund would be $1,440.0 reduced by a portion of an additional payment of $635.0 which Pacific Indemnity has agreed to pay for claims either filed or settled before August 27, 1993. As a result of the final approval of the Trilateral Agreement, Casualty has assumed responsibility for the claims that were settled before August 27, 1993. As a part of the Global Settlement and the Trilateral Agreement, Casualty is to be released by Fibreboard from any further liability under the comprehensive general liability policy written for Fibreboard by Casualty, including but not limited to liability for asbestos-related claims against Fibreboard. As indicated above, court approval of the Trilateral Agreement has become final.
Casualty and Fibreboard have entered into a supplemental agreement which governs the interim arrangements and obligations between the parties until such time as there is either final court approval or disapproval of the Global Settlement Agreement. It also governs certain obligations between the parties upon the Global Settlement being upheld on appeal including the payment of claims which are not included in the Global Settlement.
Conventional smoking and health cases - There are 321 cases filed by individual plaintiffs against manufacturers of tobacco products pending in the United States federal and state courts. Lorillard is a defendant in 84 of these cases. The Company is a defendant in five of these cases.
Class Actions - In addition to the foregoing cases, there are 23 purported class actions pending against cigarette manufacturers. Lorillard is a defendant in 22 of these cases and the Company is a defendant in 13 of these cases. Three of the cases, including two that name the Company as a defendant, have not been served. Nineteen of the purported class actions against Lorillard seek damages for alleged nicotine addiction and health effects claimed to have resulted from the use of cigarettes; one alleges health effects from exposure to tobacco smoke; one seeks compensation on behalf of individuals who have paid insurance premiums to Blue Cross and Blue Shield organizations; and one seeks disclosure of additives used in cigarettes. Theories of liability include a broad range of product liability theories, theories based upon consumer protection statutes and fraud and misrepresentation. These purported class actions are described below. Unless otherwise noted, each of these cases is in the pre-trial, discovery stage.
Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Dade County, Florida, filed October 31, 1991). The class consists of flight attendants claiming injury as a result of exposure to environmental tobacco smoke in
Castano v. The American Tobacco Company, et al. (U.S. District Court, Eastern District, Louisiana, filed March 29, 1994). The purported class consists of individuals in the United States who are allegedly nicotine-dependent and their estates and heirs. Plaintiffs are represented by a well-funded and coordinated consortium of over 60 law firms from around the United States. The Company and Lorillard are defendants in this case. Plaintiffs seek unspecified amounts in actual damages and punitive damages. The court issued an order on February 17, 1995 that granted in part plaintiffs' motion for class certification. On appeal, the United States Court of Appeals for the Fifth Circuit issued an order decertifying the class. The Court of Appeals ordered the trial court to enter an order dismissing the class action allegations in plaintiffs' complaint. A dismissal order has not been entered to date.
Lacey v. Lorillard Tobacco Company, et al. (U.S. District Court, Northern District, Alabama, filed March 15, 1994). Plaintiff alleges that the defendants, Lorillard and two other cigarette manufacturers, did not disclose to the plaintiff or other cigarette smokers in the State of Alabama the nature, type, extent and identity of additives that the defendants allegedly caused or allowed to be made a part of cigarettes or cigarette components. Plaintiff requests injunctive relief requiring defendants to list the additives that defendants have caused or allowed to be placed in cigarettes sold in Alabama. Plaintiff seeks monetary damages not to exceed forty-eight thousand five hundred dollars for any individual. The U.S. District Court has granted defendants' motion for summary judgment. Final judgment in favor of the defendants has not been entered and the time for plaintiff to notice an appeal has not begun.
Norton v. RJR Nabisco Holdings Corporation, et al. (U.S. District Court, Southern District, Indiana, filed May 3, 1996). Plaintiffs seek certification of a class comprised of all allegedly nicotine-dependent persons in the state of Indiana who have purchased and smoked cigarettes manufactured by the defendant tobacco companies since January 1, 1940; the estates, representatives and administrators of allegedly nicotine-dependent smokers; and the spouses, children and dependent relatives of allegedly nicotine-dependent smokers. The Company and Lorillard are defendants in this case. Plaintiffs seek unspecified amounts in actual damages and punitive damages; applicable damages for violation of Indiana's deceptive business practices statute; and creation of a medical monitoring fund.
Richardson v. Philip Morris Incorporated, et al. (Circuit Court, Baltimore City, Maryland, filed May 24, 1996). Plaintiffs seek certification of a class comprised of citi-
Reed v. Philip Morris Incorporated, et al. (Superior Court, District of Columbia, filed June 21, 1996). Plaintiff seeks certification of a class of residents of Washington, D.C., who allege they or their decedents are or were addicted to cigarettes. The Company and Lorillard are defendants in this case. Plaintiff seeks actual damages in an amount specified to be in excess of $0.5 for each class member; punitive damages in an amount specified to be in excess of $1.0 for each class member; an unspecified amount in treble damages; and the funding of a medical monitoring fund and of smoking cessation programs.
Mroczowski v. Lorillard, et al.; Hoskins v. R.J. Reynolds, et al,; Frosina v. Philip Morris, et al.; Stewart-Lomanitz v. Brown & Williamson, et al. and Zito v. American Tobacco, et al. (Supreme Court, New York County, New York, each filed on June 19, 1996). Plaintiffs in each of these cases seek certification of classes to be comprised of residents of the state of New York who allege they are nicotine-dependent, and the estates, representatives or administrators of the alleged nicotine-dependent smokers. Each of these cases names a cigarette manufacturer, the parent or holding company of the manufacturer, The Tobacco Institute and the Council for Tobacco Research as defendants. In Mroczowski, the only one of these cases to name Lorillard or the Company as defendants, plaintiffs seek unspecified amounts in actual damages and punitive damages.
Arch v. The American Tobacco Company, et al. (U.S. District Court, Eastern District, Pennsylvania, filed August 8, 1996). Plaintiffs seek class certification on behalf of residents of Pennsylvania who allegedly are or were nicotine-dependent, or the estates, representatives, administrators, spouses, children or relatives of the allegedly nicotine-dependent smokers. The Company and Lorillard are defendants in this case. Plaintiffs seek unspecified amounts in actual damages and punitive damages and the creation of a medical monitoring fund and of smoking cessation programs. Trial in this case is scheduled to begin on October 14, 1997.
Lyons v. The American Tobacco Company, et al. (U.S. District Court, Southern District, Alabama, filed August 8, 1996). Plaintiffs seek class certification on behalf of residents of the states of Alabama and North Carolina who allegedly are addicted to cigarette smoking and on behalf of individuals whose claims are derivative of the claims of the allegedly addicted smokers. Lorillard is a defendant in this case. Plaintiffs seek unspecified amounts in actual damages, punitive damages and a medical monitoring fund.
Chamberlain v. The American Tobacco Company, et al. (U.S. District Court, Northern District, Ohio, filed August 14, 1996). Plaintiffs seek class certification on behalf of all residents of Ohio who allege they or their decedents are or were nicotine dependent. The Company and Lorillard are defendants in this case. Plaintiffs seek unspecified amounts in actual damages and punitive damages and the creation of a medical monitoring fund.
Perry v. The American Tobacco Company, et al. (United States District Court, Eastern District, Tennessee, filed September 30, 1996). Plaintiffs seek certification of the case as a class action on behalf of individuals who have paid medical insurance premiums to a Blue Cross and Blue Shield organization. Lorillard is a defendant in this case. Plaintiffs seek recovery of the funds expended by members of the purported class for premiums paid to Blue Cross and Blue Shield entities.
Ruiz v. The American Tobacco Company, et al. (United States District Court, District of Puerto Rico, filed October 23, 1996). Plaintiffs seek certification of the case as a class action on behalf of residents of the Commonwealth of Puerto Rico who allege they or their decedents are or were nicotine dependent. Lorillard is a defendant in this case. Plaintiffs seek unspecified amounts in actual damages and punitive damages and the creation of a medical monitoring fund.
Emig v. American Tobacco Company, et al. (District Court, Eighteenth Judicial District, Sedgwick County, Kansas, filed February 6, 1997). Plaintiffs seek certification of the case as a class action on behalf of residents of Kansas who allege they or their decedents are or were nicotine dependent. The Company and Lorillard are defendants in the case. Plaintiffs seek unspecified amounts in actual damages, disgorgement of profits and the creation of a medical monitoring fund. To date, none of the defendants have received service of process.
Peterson v. American Tobacco Company, et al. (Circuit Court, First Circuit, Hawaii, filed February 6, 1997). Plaintiffs seek certification of the case as a class action on behalf of residents of Hawaii who allege they or their decedents are or were nicotine dependent. The Company and Lorillard are defendants in the case. Plaintiffs seek unspecified amounts in actual damages and punitive damages, disgorgement of profits and the creation of a medical monitoring fund. To date, none of the defendants have received service of process.
In addition to the above, neither the Company nor Lorillard are defendants in the case of Smith v. Brown & Williamson, pending in the United States District Court for the Western District of Missouri. Plaintiff seeks certification of the case as a class action on behalf
of residents of Missouri who allege they have been injured as a result of their nicotine dependence upon cigarettes manufactured by Brown & Williamson.
Commonwealth of Massachusetts v. Philip Morris Inc., et al. (Superior Court, Middlesex County, Massachusetts, filed December 19, 1995), filed by the Attorney General of Massachusetts. Lorillard is a defendant in the case.
The State of Texas v. The American Tobacco Company, et al. (U.S. District Court, Eastern District, Texas, filed March 28, 1996), filed by the Attorney General of Texas. Lorillard is a defendant in the case. Trial in this case is scheduled to begin on September 29, 1997.
State of Washington v. The American Tobacco Company, et al. (Superior Court, King County, Washington, filed June 5, 1996), filed by the Attorney General of Washington. Lorillard is a defendant in the case.
The State of Arizona, et al. v. The American Tobacco Company, et al. (Superior Court, Maricopa County, Arizona, filed August 20, 1996), filed by the Attorney General of Arizona. Lorillard is a defendant in the case.
Kelley v. Philip Morris Incorporated, et al. (Circuit Court, Ingham County, Michigan, filed August 21, 1996), filed by the Attorney General of Michigan. Lorillard is a defendant in the case.
State of New Jersey v. R.J. Reynolds Tobacco Company, et al. (Superior Court, Middlesex County, New Jersey, filed September 10, 1996), filed by the Attorney General of New Jersey. Lorillard is a defendant in the case.
State of Oklahoma, et al. v. R.J. Reynolds Tobacco Company, et al. (District Court, Cleveland County, Oklahoma, filed September 11, 1996), filed by the Attorney General of Oklahoma on behalf of the state, the Oklahoma Health Care Authority, and the Oklahoma Departments of Human Services, Veterans Affairs, and Health. The Company and Lorillard are defendants in the case.
State of Utah v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court, Central Division, Utah, filed September 30, 1996), filed by the Attorney General of Utah. The Company and Lorillard are defendants in the case.
People of the State of Illinois v. Philip Morris, Inc., et al. (Circuit Court, Cook County, Illinois, filed November 12, 1996), filed by the Attorney General of Illinois. Lorillard is a defendant in the case.
County of Erie v. The Tobacco Institute, Inc., et al. (Supreme Court, Erie County, New York, filed January 14, 1997), filed by public attorneys for Erie County, New York. Lorillard is a defendant in the case.
State of New York v. The American Tobacco Company, et al. (U.S. District Court, Southern District, New York, filed January 21, 1997), filed by public attorneys for the State of New York. Plaintiffs seek restitution, unspecified amounts in actual damages, punitive damages, and treble damages, and the funding of a clinical smoking cessation program. Lorillard is a defendant in the case.
State of Wisconsin v. Philip Morris Incorporated, et al. (Circuit Court, Dane County, Wisconsin, filed February 5, 1997), filed by the Attorney General of Wisconsin. Plaintiff seeks restitution, unspecified amounts in actual damages, punitive damages and treble damages, disgorgement of profits, and the funding of a smoking cessation program. Lorillard is a defendant in the case.
The states pursuing the foregoing efforts are doing so at the urging and with the assistance of well known members of the plaintiffs bar who have been meeting with attorneys general in other states to encourage them to file similar suits.
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, in a plurality opinion issued on June 24, 1992, held that the Labeling Act as enacted in 1965 does not preempt common law damage claims but that the Labeling Act, as amended in 1969, does preempt 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. The Supreme Court in so holding did not consider whether such common law damage actions were valid under state law. The effect of the Supreme Court's decision on pending and future cases against Lorillard and other tobacco companies will likely be the subject of further legal proceedings. Additional litigation involving claims such as those held to be preempted by the Supreme Court in Cipollone could be encouraged if legislative proposals to eliminate the federal preemption defense, pending in Congress since 1991, are enacted. It is not possible to predict whether any such legislation will be enacted.
Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending litigation. It is possible that the Company's results of operations or cash flows in a particular quarterly or annual period or its financial position could be materially affected by an ultimate unfavorable outcome of certain pending litigation. Management believes, however, that the ultimate outcome of pending litigation should not have a material adverse effect on the Company's financial position.
Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: property, casualty and life insurance (CNA Financial Corporation, an 84% owned subsidiary, "CNA"); the production and sale of cigarettes (Lorillard, Inc., a wholly owned subsidiary, "Lorillard"); the operation of hotels (Loews Hotels Holding Corporation, a wholly owned subsidiary, "Loews Hotels"); the operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc., a 51% owned subsidiary, "Diamond Offshore"); and the distribution and sale of watches and clocks (Bulova Corporation, a 97% owned subsidiary, "Bulova").
As multiple-line insurers, CNA's insurance operations underwrite property, casualty, life, and accident and health coverages. Their principal market for insurance is the United States. Foreign operations are not significant. Insurance products are marketed by CNA through independent agents and brokers.