On January 4, 2002 the shareholders of Loews Corporation authorized and approved the creation of a new class of common stock of the Company, called Carolina Group stock and on February 6, 2002 in an initial public offering the Company issued 40.3 million shares of Carolina Group stock.
(e) any acquisitions or investments made from assets reflected in the Carolina Group.
Specialty Lines and was caused by coverages provided to health care-related entities. The level of paid and reported losses associated with coverages provided to national long-term care facilities was higher than expected. In addition, the average size of claims resulting from coverages provided to physicians and institutions providing health care-related services increased more than expected.
In 2001, CNA entered into a one-year aggregate reinsurance treaty related to the 2001 accident year covering substantially all property-casualty lines of business in the Continental Casualty Company pool (the "CCC Cover"). The loss protection provided by the CCC Cover has an aggregate limit of approximately $760.0 million of ceded losses. The CCC Cover provides continuous coverage in excess of the second section of the Aggregate Cover discussed above. Under the CCC Cover, interest charges on the funds withheld generally accrue at 8.0% per annum. The interest rate increases to 10.0% per annum if the aggregate loss ratio exceeds certain thresholds.
Net operating results also decreased due to a $141.8 million after-tax charge to strengthen prior underwriting year loss reserves for CNA Reinsurance Company Limited ("CNA Re U.K."). There was no tax benefit related to this charge due to the inability to recover further tax benefits related to the underwriting losses of CNA Re U.K. During the fourth quarter, CNA updated its impairment analysis of subsidiaries held for sale, including the United Kingdom subsidiaries of CNA Re. The updated impairment analysis indicated that the $248.0 million after-tax and minority interest realized loss recorded in the second quarter of 2001 should be reduced by $141.8 million, primarily because the net assets of CNA Re U.K. had been significantly diminished by its operating losses in the second half of 2001. In addition, CNA updated its estimate of disposal costs, including anticipated capital contributions, to reflect changes in the planned structure of the anticipated sale. The sale of the United Kingdom insurance subsidiaries will be subject to regulatory approval and all sales are expected to be completed in 2002.
Underwriting results improved $475.0 million for 2000 as compared with 1999. The combined ratio decreased 5.9 points for the Property-Casualty segment for 2000 as compared with 1999. This decrease reflects an improvement in the loss ratio of 6.0 points which is primarily attributable to significant rate increases across the entire book of business, favorable catastrophe experience, reduced prior year reserve strengthening and the increased use of reinsurance. Catastrophe losses for 2000 improved by $195.0 million for the Property-Casualty segment. In addition to the decrease in the loss ratio, there was a decrease of 0.7 points in the expense ratio to 31.5% due principally to the absence of restructuring-related charges that occurred in 1999 but did not recur in 2000. The dividend ratio increased 0.8 points relating to reduced favorable development in dividend reserves for Standard Lines in 2000 as compared to 1999.
The Other insurance segment contains CNA's corporate interest expense, certain run-off insurance operations, including Personal Insurance, losses and expenses related to the centralized adjusting and settlement of APMT claims, direct financial guarantee business underwritten by CNA's insurance affiliates, certain non-insurance operations, including eBusiness initiatives and CNA UniSource, and eliminations.
The reserve development during 2001 for environmental pollution and other mass tort reserves was due to reviews completed during the year, which indicated that paid and reported losses were higher than expectations based on prior reviews. Factors that have led to this development include a number of declaratory judgments filed this year due to an increasingly favorable legal environment for policyholders in certain courts and other unfavorable decisions regarding cleanup issues.
Net income declined for the year ended December 31, 2001, due to a charge of $121.0 million (net of taxes) to record the effect of the Engle agreement discussed in Liquidity and Capital Resources. Excluding this charge, net income would have increased by $39.3 million, or 5.2%, for the year ended December 31, 2001, as compared to 2000. This increase in net income was primarily due to the impact of wholesale price increases, partially offset by lower unit sales volume and increased sales promotional expenses, mostly in the form of coupons and other discounts provided to retailers and passed through to the consumer.
December 31, 2000 and 1999 includes pretax charges of $1,076.5 and $1,065.8 million ($642.3 and $637.3 million after-taxes), respectively, related to the settlement of tobacco litigation. Lorillard's portion of ongoing adjusted payments and legal fees is based on its share of domestic cigarette shipments in the year preceding that in which the payment is due. Accordingly, Lorillard records its portions of ongoing settlement payments as part of cost of manufactured products sold as the related sales occur. Funds required to meet the industry payment obligations have been provided by Lorillard's operating activities.
Revenues increased by $218.7 million, or 30.2%, and net income increased by $39.0 million, in 2001 as compared to 2000. Revenues and net income included a gain from the sale of a drilling rig of $13.9 and $4.7 million, respectively, for the year ended December 31, 2000.
Revenues and net income increased by $21.4 and $.9 million, or 15.4% and 6.4%, respectively, in 2000 as compared to 1999.
CNA has a commitment to purchase a $100.0 million floating rate note issued by the Californian Earthquake Authority in the event California earthquake related insurance losses exceed $4.9 billion prior to December 31, 2002.
CNA's ability to pay dividends and other credit obligations is significantly dependent on receipt of dividends from its subsidiaries. The payment of dividends to CNA by its insurance subsidiaries without prior approval of the insurance department of each subsidiary's domiciliary jurisdiction is limited by formula. Dividends in excess of these amounts are subject to prior approval of the respective state insurance departments.
On July 14, 2000, the jury in Engle v. R.J. Reynolds Tobacco Co., et al. awarded a total of $145.0 billion in punitive damages against all defendants, including $16.3 billion against Lorillard. The judgment also provides that the jury's awards bear interest at the rate of 10% per year. Lorillard remains of the view that the Engle case should not have been certified as a class action. That certification is inconsistent with the majority of federal and state court decisions which have held that mass smoking and health claims are inappropriate for class treatment. Lorillard has challenged class certification, as well as other numerous legal errors that it believes occurred during the trial. The Company and Lorillard believe that an appeal of these issues on the merits should prevail.
For the year ended December 31, 2001, net cash provided for operating activities was $15.9 million as compared with net cash used of $15.9 million in 2000. Bulova's cash and cash equivalents, and investments amounted to $18.9 million at December 31, 2001, compared to $16.9 million in 2000. The increase in net cash flow is primarily the result of a decrease in inventory purchases and a higher collection of accounts receivables as compared to the prior year, partially offset by a change in the timing of accounts payable and accrued expenses. Funds for capital expenditures and working capital requirements are expected to be provided from operations and existing cash balances. No material capital expenditures are anticipated during 2002.
Net realized investment gains increased $135.2 million in 2001 as compared with 2000. This increase was due primarily to gains (after-tax and minority interest) from the sale of Global Crossing Ltd. common stock ("Global Crossing") and its related hedge of $566.0 million in 2001 as compared with $274.0 million in 2000, as well as gains of $47.9 million resulting from the sale of a New York real estate property and gains from the sale of fixed maturity security investments. The gains from Global Crossing reported in 2001 are from recognition of hedge arrangements that were entered into in March of 2000. This improvement was partially offset by estimated losses recorded for the planned dispositions of certain operations, principally CNA Re's U.K. subsidiaries described in more detail below as well as decreases in gains from the sale of Canary Wharf Group plc common stock ("Canary Wharf") of $30.0 million (after-tax and minority interest) in 2001 as compared with $251.0 million in 2000.
A primary objective in the management of the fixed maturity portfolio is to maximize total return relative to underlying liabilities and respective liquidity needs. In achieving this goal, assets may be sold to take advantage of market conditions or other investment opportunities or credit and tax considerations. This activity will produce realized gains and losses.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 essentially applies one accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. Adoption of this Statement is required for fiscal years beginning after December 15, 2001. Adoption of these provisions will not have a material impact on the financial position or results of operations of the Company.
Reinsurance - Amounts recoverable from reinsurers are estimated in a manner consistent with claim and claim adjustment expense reserves or future policy benefits reserves and are reported as a receivable in the Consolidated Balance Sheets. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, management's experience and current economic conditions.
In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. These techniques are significantly affected by management's assumptions, including discount rates and estimates of future cash flows. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The amounts reported in the Consolidated Balance Sheet for fixed maturities securities, equity securities, derivative instruments, short-term investments and securities sold under agreements to repurchase are at fair value. As such, these financial instruments are not shown in the table above. See Note 4 for the value of derivative instruments. Since the disclosure excludes certain financial instruments and nonfinancial instruments such as real estate and insurance reserves, the aggregate fair value amounts cannot be summed to determine the underlying economic value of the Company.
During 2001, CNA discontinued its commercial paper program and repaid all loans outstanding under the program. The weighted average interest rate on commercial paper was 7.2% at December 31, 2000. The funds used to retire the outstanding commercial paper debt were obtained through the draw down of the full amount available under CNA's $500.0 revolving credit facility. The facility is composed of two parts: a $250.0 component with a 364-day expiration date (with an option enabling CNA to convert borrowings into a one- year term loan) and a $250.0 component with a three-year expiration date.
In addition to the facility fees, CNA pays interest on any outstanding debt/borrowings under the facility based on a rate determined using the long- term debt ratings of CNA. The interest rate is equal to the London Interbank Offering Rate ("LIBOR") plus 60 basis points for the 364-day component and LIBOR plus 57.5 basis points for the three-year component. Further, if CNA has outstanding loans greater than 50% of the amounts available under the facility, CNA also will pay a utilization fee of 12.5 basis points on such loans. At December 31, 2001, the weighted average interest rate on the borrowings under the facility, including facility and utilization fees, was 3.1%.
On October 1, 1999, certain subsidiaries of CNA completed a transaction with The Allstate Corporation ("Allstate"), whereby CNA's Personal Insurance lines of business and related employees were transferred to Allstate. Approximately $1,100.0 of cash and $1,100.0 of additional assets (primarily premium receivables and deferred acquisition costs) were transferred to Allstate, and Allstate assumed $2,200.0 of claim and claim adjustment expense reserves and unearned premium reserves. Additionally, CNA received $140.0 in cash which consisted of (i) $120.0 in ceding commission for the reinsurance of the CNA personal insurance business by Allstate, and (ii) $20.0 for an option exercisable during 2002 to purchase 100% of the common stock of five CNA insurance subsidiaries at a price equal to the GAAP carrying value as of the exercise date. Also, CNA invested $75.0 in a 10-year equity-linked note issued by Allstate.
The 2001 Plan charges incurred by CNA Re were $6.0. Costs related to employee termination and benefit costs for planned reductions in the workforce of 33 positions, gross and net, amounted to $2.0, all of which related to severance and outplacement costs. Through December 31, 2001 no employees in CNA Re were released due to the 2001 Plan. The remaining $4.0 of charges incurred by CNA Re related to lease termination costs.
In 1999, CNA recorded pretax curtailment and other related charges of approximately $8.0 related to the transfer of personal lines insurance business to Allstate as discussed in Note 12. This transaction resulted in a reduction of the pension and postretirement benefit obligations of $44.0 and $2.0, respectively.
The fair value of granted options was estimated at the grant date using the Black-Scholes option pricing model. The weighted average fair value per share of options granted during 2001 and 2000 was $16.90 and $10.73, respectively. The following weighted average assumptions were used for the years ended December 31, 2001 and 2000: risk free interest rate of 5.3% and 6.7%; expected dividend yield of 1.1% and 1.6%; expected option life of 5 years; and expected stock price volatility of 35.2% and 33.4%, respectively.
The impact of the Aggregate Cover for the year ended December 31, 2001 was as follows:
In 2001, CNA entered into a one-year aggregate reinsurance treaty related to the 2001 accident year covering substantially all property-casualty lines of business in the Continental Casualty Company Pool (the "CCC Cover"). The loss protection provided by the CCC Cover has an aggregate limit of approximately $760.0 of ceded losses. The CCC Cover provides continuous coverage in excess of the second section of the Aggregate Cover discussed above. Under the CCC Cover, interest charges on the funds withheld generally accrue at 8.0% per annum. The interest rate increases to 10.0% per annum if the aggregate loss ratio exceeds certain thresholds.
On October 5, 2001, a jury returned a verdict in favor of the defendants in Tompkin v. The American Tobacco Company, et al., a conventional product liability case in the United States District Court for the Northern District of Ohio. Lorillard was a defendant in the case. The court has denied plaintiff's motion for new trial and entered final judgment in favor of the defendants. Plaintiff has noticed an appeal from the judgment to the U.S. Court of Appeals for the Sixth Circuit.
The second part of Phase Two of the trial began on May 22, 2000 and was heard by the same jury that heard the trial's prior phases and considered evidence as to the punitive damages to be awarded to the class. On July 14, 2000, the jury awarded approximately $145,000.0 in punitive damages against all defendants, including $16,250.0 against Lorillard.
Other Class Action Cases - On November 14, 2001, a jury in the Circuit Court of Ohio County, West Virginia returned a verdict in favor of the defendants, including Lorillard, in the case of Blankenship v. American Tobacco Company, et al. (Circuit Court, Ohio County, West Virginia, filed January 31, 1997). The court has denied plaintiffs' motion for new trial. The time for plaintiffs to appeal has not expired. During 2000, the court granted plaintiffs' motion for class certification.
FILTER CASES - A number of cases have been filed against Lorillard seeking damages for cancer and other health effects claimed to have resulted from exposure to asbestos fibers which were incorporated, for a limited period of time, ending more than 40 years ago, into the filter material used in one of the brands of cigarettes manufactured by Lorillard. Approximately 30 filter cases are pending in federal and state courts against Lorillard. In certain of these cases, the manufacturer and supplier of the filter material, Hollingsworth & Vose Company, also is a defendant. In addition, two matters are pending against Hollingsworth & Vose Company in which Lorillard is not a party. Lorillard has agreed to indemnify Hollingsworth & Vose Company with respect to these matters, including the two cases in which Lorillard is not named as a defendant. The Company is not a defendant in any of the pending filter cases. Allegations of liability include negligence, strict liability, fraud, misrepresentation and breach of warranty. Plaintiffs in most of these cases seek unspecified amounts in compensatory and punitive damages.
Cigarette Advertising Suit - On June 28, 2001, the U.S. Supreme Court voided in large part a Massachusetts law that placed restrictions on cigarette advertising and promotional practices. The Court held that the Federal Cigarette Labeling and Advertising Act preempts many of Massachusetts' regulations governing outdoor and point-of-sale cigarette advertising. The Court also ruled that Massachusetts' outdoor and point-of-sale advertising regulations relating to smokeless tobacco and cigars violate the First Amendment and are unconstitutional. However, the Court held that the prohibition of self-service promotional displays relating to cigarettes, cigars and smokeless tobacco products is constitutional. Such regulations include those designed to prevent the sale of cigarettes to minors or to regulate conduct as it relates to the sale or use of cigarettes.