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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____________ to _____________
Commission File Number 1-6541
LOEWS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2646102
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
667 Madison Avenue, New York, N.Y. 10021-8087
(Address of principal executive offices) (Zip Code)
(212) 545-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x].
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
As at February 25, 1994, 61,519,700 shares of Common Stock of the Registrant
were outstanding and the aggregate market value of voting stock held by non-
affiliates was approximately $4,080,845,000.
Documents Incorporated by Reference:
Portions of the Loews Corporation Notice of Annual Meeting of Stockholders and
Proxy Statement dated March 24, 1994 are incorporated by reference into Part
III. (Registrant intends to file a definitive proxy statement with the
Commission prior to April 30, 1994.)
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LOEWS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
For the Year Ended December 31, 1993
Item Page
No. PART I No.
- ---- ----
1 BUSINESS ............................................................ 2
CNA Financial Corporation ....................................... 2
Lorillard, Inc. ................................................. 17
Loews Hotels Holding Corporation ................................ 21
Bulova Corporation .............................................. 22
Diamond Offshore Drilling, Inc. ................................. 23
Other Interests ................................................. 25
2 PROPERTIES .......................................................... 26
3 LEGAL PROCEEDINGS ................................................... 26
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................. 29
EXECUTIVE OFFICERS OF THE REGISTRANT ................................ 29
PART II
5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS ............................................................ 30
6 SELECTED FINANCIAL DATA ............................................. 30
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................. 31
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......................... 40
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................... 41
PART III
Information called for by Part III has been omitted as Registrant
intends to file with the Securities and Exchange Commission not later
than 120 days after the close of its fiscal year a definitive Proxy
Statement pursuant to Regulation 14A.
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ........................................................ 41
1
PART I
Item 1. Business.
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 83% owned subsidiary); the production and sale of
cigarettes (Lorillard, Inc., a wholly owned subsidiary); the operation of hotels
(Loews Hotels Holding Corporation, a wholly owned subsidiary); the distribution
and sale of watches and the production and sale of other timing devices (Bulova
Corporation, a 97% owned subsidiary); and the operation of oil and gas drilling
rigs (Diamond Offshore Drilling, Inc., a wholly owned subsidiary). In addition,
a wholly owned subsidiary owns approximately 20% of the outstanding common stock
of CBS Inc.
Unless the context otherwise requires, the terms "Company" and "Registrant" as
used herein mean Loews Corporation and its subsidiaries, on a consolidated
basis.
Information relating to the major business segments from which the Company's
consolidated revenues and income are derived is contained in Note 17 of the
Notes to Consolidated Financial Statements in Part II Item 8 of this Form 10-K.
CNA FINANCIAL CORPORATION
CNA Financial Corporation ("CNA") and its consolidated subsidiaries constitute
the ninth largest insurance company in the United States as measured by 1992
statutory premium volume. CNA was incorporated in 1967 as the parent company of
Continental Casualty Company ("CCC"), incorporated in 1897, and Continental
Assurance Company ("CAC") incorporated in 1911. In 1975, CAC became a wholly
owned subsidiary of CCC. CNA's property and casualty insurance operations are
conducted by CCC and its property and casualty insurance affiliates, and its
life insurance operations are conducted by CAC and its life insurance
affiliates. CNA's principal business conducted through its insurance
subsidiaries is insurance. As multiple-line insurers, the insurance companies
underwrite property, casualty, life, and accident and health coverages. Their
principal market for insurance is the United States. Foreign operations are not
significant.
The following provides information regarding CNA's property and casualty
insurance and life insurance operations.
PROPERTY AND CASUALTY INSURANCE
CNA's property and casualty operations market commercial and personal lines of
property and casualty insurance through independent agents and brokers.
CCC and its property and casualty insurance subsidiaries write primarily
commercial lines coverages. Customers include large national corporations, small
and medium-sized businesses, groups and associations, and professionals.
Coverages are written primarily through traditional insurance contracts, under
which risk is transferred to the insurer. Many commercial account policies are
written under retrospectively-rated contracts, which are experience-rated.
Premiums for such contracts may be adjusted, subject to limitations set by
contract, based on loss experience of the insureds. Other experience-rated
policies include provisions for adjustments to dividends based on loss
experience. Experience-rated contracts reduce risk to the insurer. Approximately
40% of CNA's property and casualty insurance is written on an experience-rated
basis.
CNA also provides loss control, policy administration and claim administration
services under service contracts for fees. Such services are provided primarily
in the workers' compensation market, where retention of risk through self
insurance or high deductible programs has become increasingly prevalent.
2
Commercial business includes such lines as workers' compensation, general
liability, professional and specialty, multiple peril, and accident and health
coverages. Professional and specialty coverages include liability coverage for
architects and engineers, lawyers, accountants, medical and dental
professionals; directors and officers liability; and other specialized
coverages. CNA also assumes commercial risks from other insurers. CNA's primary
lines are workers' compensation, general liability and professional and
specialty coverages, which accounted for 29%, 18% and 13%, respectively, of 1993
premiums earned, including premiums for involuntary risks. Premiums for
involuntary risks result from mandatory participation in residual markets. CNA
is required by the various states in which it does business to provide coverage
for risks that would not otherwise be considered under CNA's underwriting
standards. CNA's share of involuntary risks is generally a function of its share
of the voluntary market by line of insurance in each state.
CNA also markets personal lines of insurance, primarily automobile and
homeowners coverages sold to individuals under monoline and package policies.
The following table sets forth supplemental data for the property and casualty
business:
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
(In millions of dollars)
Commercial Premiums Earned:
Workers' compensation .............. $ 1,501.5 $ 1,669.2 $ 1,920.4
General liability .................. 1,154.5 1,176.0 1,292.6
Professional and specialty ......... 798.9 741.5 763.9
Reinsurance and other .............. 712.2 556.0 482.0
Accident and health ................ 428.3 352.6 294.2
Multiple peril ..................... 368.5 374.9 397.2
--------------------------------------
$ 4,963.9 $ 4,870.2 $ 5,150.3
======================================
Personal Premiums Earned:
Personal lines packages ............ $ 510.7 $ 447.3 $ 335.6
Monoline automobile and property
coverages ......................... 343.5 395.0 470.7
Accident and health ................ 85.6 88.6 88.8
-------------------------------------
$ 939.8 $ 930.9 $ 895.1
=====================================
Involuntary Risks Premiums Earned (a):
Workers' compensation .............. $ 292.3 $ 451.4 $ 499.5
Commercial passenger ............... 50.3 44.9 66.6
Private passenger .................. 23.2 52.5 39.2
Property and multiple peril ........ 5.5 3.7 4.6
-------------------------------------
$ 371.3 $ 552.5 $ 609.9
=====================================
Net Investment Income and Other Income:
Commercial ......................... $ 979.8 $ 1,087.3 $ 1,131.3
Personal ........................... 156.1 165.3 160.1
Involuntary risks .................. 75.7 83.6 78.5
-------------------------------------
$ 1,211.6 $ 1,336.2 $ 1,369.9
=====================================
Underwriting Income (Loss):
Commercial ......................... $(1,535.6) $(2,505.9) $ (707.1)
Personal ........................... (99.7) (152.8) (172.1)
Involuntary risks .................. (156.5) (340.9) (345.5)
-------------------------------------
$(1,791.8) $(2,999.6) $(1,224.7)
=====================================
3
Years Ended December 31,
--------------------------------------
1993 1992 1991
--------------------------------------
(In millions of dollars)
Trade Ratios (b):
Loss ratio ........................ 96.8% 116.7% 88.1%
Expense ratio ...................... 27.3% 26.2% 25.8%
Combined ratio (before policyholder
dividends) ........................ 124.1% 142.9% 113.9%
Policyholder dividend ratio ........ 2.3% 1.9% 2.4%
Trade Ratios-Statutory Basis (b):
Loss ratio ......................... 96.4% 116.3% 88.2%
Expense ratio ...................... 27.1% 25.6% 25.6%*
Combined ratio (before policyholder
dividends) ........................ 123.5% 141.9% 113.8%*
Policyholder dividend ratio ........ 3.1% 2.4% 2.7%
Other Data-Statutory Basis (c):
Statutory capital and surplus ...... $3,598.4 $3,135.8 $3,927.5
Written to surplus ratio ........... 1.7 2.0 1.7*
- ----------------
* In 1991, CNA changed its statutory method of accounting for property and
casualty written premium on indeterminate premium products (policies subject to
exposure audits). This new method defers the recognition of written premium and
acquisition expenses generally until billed. The effect of this change in 1991
was a one-time reduction in written premium and related acquisition expenses of
$864 and $78 million, respectively. In order to provide comparability, the Other
Data and Trade Ratios for 1991 shown above do not reflect the one-time impact of
this statutory accounting change.
(a) Property and casualty involuntary risks include mandatory participation in
residual markets, statutory assessments for insolvencies of other insurers and
other involuntary charges.
(b) Trade ratios reflect the results of CCC and its property and casualty
insurance subsidiaries. Trade ratios are industry measures of property and
casualty underwriting results. The loss ratio is the percentage of incurred
claims and claims adjustment expenses to premiums earned. Under generally
accepted accounting principles, the expense ratio is the percentage of
underwriting expenses, including the change in deferred acquisition costs, to
premiums earned. Under statutory accounting principles, the expense ratio is the
percentage of underwriting expenses (with no deferral of acquisition costs) to
premiums written. The combined ratio is the sum of the loss ratio and the
expense ratio. The policyholder dividend ratio is the ratio of dividends
incurred to premiums earned.
(c) Other data is determined on the basis of statutory accounting principles
and reflects capital contributions from CNA of $475 million in 1993. In
addition, dividends of $150, $100 and $130 million were paid to CNA by CCC in
1993, 1992 and 1991, respectively. Property and casualty insurance subsidiaries
have received, or will receive, reimbursement from CNA for general management
and administrative expenses, unallocated loss adjustment expenses and investment
expenses in the amounts of $167.5, $141.1 and $133.8 million in 1993, 1992, and
1991, respectively.
4
The following table displays the distribution of domestic written premium by
state:
State Years Ended December 31,
----- -------------------------
1993 1992
-------------------------
California ......................................... 12.1% 11.8%
New York ........................................... 8.4 8.0
Pennsylvania ....................................... 5.9 6.1
Texas .............................................. 6.2 5.7
Illinois ........................................... 5.1 5.1
Florida ............................................ 4.1 3.3
New Jersey ......................................... 3.3 3.1
All other states (a) ............................... 43.1 41.5
Reinsurance assumed:
Voluntary ........................................ 6.9 7.9
Involuntary ...................................... 4.9 7.5
----- -----
100.0% 100.0%
===== =====
(a) No other state accounts for more than 3.0% of direct written premium.
The growth and profitability of CNA's property and casualty insurance business
is dependent on many factors, including competitive and regulatory influences,
the efficiency and costs of operations, underwriting quality, the level of
natural disasters, and investment results.
In recent years, CNA's growth and earnings have been impacted by a prolonged
cycle of inadequate commercial lines pricing, particularly in the workers'
compensation market. CNA has intensified efforts in the political sphere on
behalf of a more predictable and equitable insurance marketing climate. CNA has
taken a leadership role in seeking workers' compensation reform in several
states. Among CNA's marketing strategies during this difficult time are to
emphasize responsible pricing over premium growth and to aggressively adapt to
changes in certain markets such as those in which self insurance has become
important. CNA has also initiated wide-scale cost management measures. CNA has
continued actions to reduce or stabilize the costs of doing business, including
costs of health care, fraud and tort liability. Programs include managed health
care programs and formation of a department devoted exclusively to fighting
fraud.
Workers' compensation has been a difficult line of business during the past
several years. Despite rapidly escalating loss costs, state regulators have been
unwilling to allow premium rate increases sufficient for insurers to earn a
profit. Unlike other insurance carriers, CNA has remained in this market in most
states. It continues to believe that workers' compensation is a critical product
to its customers, and with its proven expertise in this line, that there is a
profit potential over the long term.
During this current industry downcycle, CNA has restricted its exposure to
workers' compensation and has taken other steps to mitigate the underwriting
losses in workers' compensation. These steps include increasing conservatism of
underwriting standards, continuing migration of guaranteed cost policies to
experience-rated contracts, and as mentioned previously, aggressive cost
containment programs geared to reduce frequency and severity of claims. During
1993, 65% of workers' compensation insurance was written on an experience-rated
basis. As a result of these steps, the past year's experience has been
encouraging as accident year loss ratios have improved slightly. After factoring
in the investment income related to projected cash flows, this line of business
produced a positive economic return in the 1992 and 1993 accident years. CNA
believes that further improvement in workers' compensation results will occur as
its many efforts toward this objective continue.
The state of California is CNA's largest market, accounting for 12% of its
premium volume in 1993. Workers' compensation is the largest line of business in
California accounting for approximately 40% of premiums written in 1993. As
noted in the discussion of countrywide strategies for workers' compensation,
approximately 87% of California's workers' compensation business was written via
loss sensitive contracts.
5
Profitability trends are slightly more favorable in this state than countrywide
primarily as a result of recently enacted major workers' compensation reform
legislation which included improved benefit provisions and open premium rating.
As a result, favorable profitability trends in workers' compensation are
expected to continue. Other major lines of business in California, including
commercial multiple peril, commercial automobile and general liability, are
producing less favorable results than countrywide. CNA is aggressively seeking
adequate premium rates for these lines within the confines of the current
regulatory constraints.
Property/Casualty Claims and Claims Expense: Property/casualty claims and
claims expense reserves, except reserves for structured settlements, workers'
compensation lifetime claims and accident and health disability claims are based
on (a) case basis estimates for losses reported on direct business, adjusted in
the aggregate for ultimate loss expectations, (b) estimates of unreported losses
based upon past experience, (c) estimates of assumed insurance, (d) estimates of
future expenses to be incurred in settlement of claims and (e) estimates of
claim recoveries. Loss reserve calculations are based on quantitative techniques
which utilize historical trends to project future payments. Other factors,
including mix of business, the anticipated effects of inflation, and other
current conditions and trends, are implicit in the estimation process. The
schedule on page 3 provides information on mix of business.
Structured settlements have been negotiated for certain liability claims under
commercial automobile, personal automobile, workers' compensation, professional
liability and other liability coverages. 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 CAC. Related annuity obligations are carried in future
policy benefits reserves. Obligations for structured settlements not funded by
annuities are carried at discounted values which approximate the alternative
cost of annuity purchases. Such reserves, discounted at interest rates ranging
from 6.3% to 7.5%, totaled $749, $663 and $555 million at December 31, 1993,
1992 and 1991, respectively. Ultimate payouts under all existing contracts at
December 31, 1993 will approximate $2.2 billion.
In 1992 CNA changed its accounting for claim reserves related to workers'
compensation lifetime claims and accident and health disability claims.
Reserving practices under both statutory and generally accepted accounting
principles allow discounting of reserves for fixed and determinable claim
obligations. Reserve discounting for these types of claims is common industry
practice. These claim reserves are discounted at interest rates ranging from
3.5% to 5.5% with mortality and morbidity assumptions reflecting current
industry experience. At December 31, 1993, such discounted reserves totaled $970
million; ultimate payouts for these claims are estimated to be $1.4 billion.
Claims and claims expense reserves are based on estimates and the ultimate
liability may vary significantly from such estimates. Any adjustments that are
made to the reserves are reflected in operating income in the year such
adjustments are made.
In 1993, CNA adopted Statement of Financial Accounting Standards ("SFAS") No.
113 which requires that balances pertaining to reinsurance transactions be
reported "gross" on the balance sheet rather than as reductions of reserves for
claims and claims expenses. As a result of this change in reporting, the reserve
balances reported in the financial statements prepared in accordance with
generally accepted accounting principles and those prepared under statutory
accounting practices differ by the amount of ceded reserves of $2.9 and $2.5
billion at December 31, 1993 and 1992, respectively.
The retention limits of CNA's property/casualty business vary by type of
coverage and are based on individual risks underwritten. In general, retention
limits have been increased with the growth in underwriting capacity. There have
been no reinsurance transactions, such as portfolio reserve transfers or swaps
of reserves, that have had a material impact on net income.
6
Asbestos-related and environmental pollution claims
Reserves include estimated amounts for exposures to asbestos-related and
environmental pollution claims. Reserving for such claims involves significant
uncertainties for both CNA and the industry, characterized by complex and costly
litigation and further compounded by the tendency of the courts to broadly
reinterpret contracts beyond their original intent.
A summary of asbestos-related and environmental pollution claims and claims
expense activity follows:
Claims and Claims Expense
--------------------------------------------------
Reserves, Net of
Reinsurance Payments
December 31, Years Ended
-------------------- ---------------------------
1993 1992 1993 1992 1991
-------------------- ---------------------------
(In millions)
Asbestos-related............ $2,080 $1,683 $204 $112 $39
Environmental pollution..... 433 59 72 38 49
-----------------------------------------------
Total .................... $2,513 $1,742 $276 $150 $88
===============================================
A major portion of CNA's asbestos-related claim exposure involves litigation
with Fibreboard Corporation, as discussed in Note 16 of Notes to Consolidated
Financial Statements. Adverse reserve developments for asbestos-related claims
totaled $601, $1,689 and $48 million in 1993, 1992 and 1991, respectively.
Potential exposures also exist for claims involving environmental pollution,
including toxic waste clean-up. 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.
Reserve development for environmental pollution claims totaled $446, $48 and
$47 million in 1993, 1992 and 1991, respectively, including litigation costs of
$28, $25 and $21 million. Adverse development for 1993 primarily resulted from
the allocation of approximately $340 million of reserves for unreported claims.
The results of operations in future years may continue to be adversely affected
by environmental pollution claims and claims expenses. Management will continue
to monitor potential liabilities and make further adjustments as warranted. See
Note 16 of Notes to Consolidated Financial Statements.
Reserves for property/casualty claims and claims expense
The following table provides a reconciliation between beginning and ending
claims and claims expense reserve balances for 1993, 1992 and 1991. In 1992,
beginning and ending reserve balances were restated to retroactively reflect the
accounting change for discounting discussed previously. Not included in the
following table is premium development related to certain insurance policies
subject to retroactive premium adjustments, based on various factors including
loss experience. As a result, CNA also recorded premium and dividend related
development to prior years of $(127), $50 and $(43) million in 1993, 1992 and
1991, respectively.
7
Changes in Reserves for
Property/Casualty
Claims and Claims Expense
Years Ended December 31,
-------------------------------------
1993 1992 1991
-------------------------------------
(In millions)
Reserves at beginning of year:
Gross .............................. $20,034 $17,712 $16,530
Ceded reinsurance .................. 2,867 3,297 3,440
-----------------------------------
Net .............................. 17,167 14,415 13,090
-----------------------------------
Net incurred claims and claims expense:
Provision for insured events of
current year ...................... 5,388 5,708 5,811
Increase (decrease) in provision for
insured events of prior years ..... 590 1,617 (106)
Amortization of discounts .......... 94 104 89
-----------------------------------
Total net incurred ............... 6,072 7,429 5,794
-----------------------------------
Net payments:
Attributable to current year events 1,202 1,260 1,177
Attributable to prior year events .. 3,706 3,411 3,285
Amortization of discounts .......... 10 6 7
-----------------------------------
Total net payments ............... 4,918 4,677 4,469
-----------------------------------
Net reserves at end of year .......... $18,321 $17,167 $14,415
===================================
Gross reserves at beginning of year .. $20,034 $17,712 $16,530
-----------------------------------
Gross incurred claims and claims expense:
Provision for insured events of
current year ...................... 5,817 6,382 6,320
Increase (decrease) in provision for
insured events of prior years ..... 305 1,487 (174)
Amortization of discounts .......... 94 104 89
-----------------------------------
Total gross incurred ............. 6,216 7,973 6,235
-----------------------------------
Gross payments:
Attributable to current year events 1,278 1,348 1,245
Attributable to prior year events .. 4,150 4,297 3,801
Amortization of discounts .......... 10 6 7
-----------------------------------
Total gross payments ............. 5,438 5,651 5,053
-----------------------------------
Gross reserves at end of year ........ $20,812 $20,034 $17,712
===================================
8
The following table displays the development of financial statement claims and
claims expense reserves for 1983 through 1993. In this table, development of
reserves is included in each calendar year between the date of loss and the date
of reestimation. Therefore, the deficiencies of the original estimates of
required reserves that are reflected below are cumulative and should not be
summed. All reserve data has been restated to retroactively reflect the
accounting change for discounting discussed previously.
Schedule of Property/Casualty Loss Reserve Development
Years Ended December 31,
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
- -------------------------------------------------------------------------------------------------------------
(In millions of dollars)
Gross reserves for
unpaid claims and
claims expense .... - - - - - - - 16,530 17,712 20,034 20,812
Ceded recoverable ... - - - - - - - 3,440 3,297 2,867 2,491
---------------------------------------------------------------------------------------
Net reserves for
unpaid claims and
claims expense ..... 3,309 3,931 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321
Net Paid
(Cumulative) as of:
One year later .... 1,074 1,330 1,594 1,335 1,763 2,040 2,670 3,285 3,411 3,706 -
Two years later ... 1,624 1,936 2,932 2,383 2,961 3,622 4,724 5,623 6,024 - -
Three years later . 2,066 2,493 3,022 3,197 4,031 4,977 6,294 7,490 - - -
Four years later .. 2,469 2,963 3,642 3,963 5,007 6,078 7,534 - - - -
Five years later .. 2,759 3,407 4,175 4,736 5,801 6,960 - - - - -
Six years later ... 3,084 3,766 4,735 5,339 6,476 - - - - - -
Seven years later . 3,330 4,156 5,233 5,880 - - - - - - -
Eight years later . 3,625 4,512 5,668 - - - - - - - -
Nine years later .. 3,914 4,901 - - - - - - - - -
Ten years later ... 4,243 - - - - - - - - - -
Net Reserves
Reestimated as of:
End of initial year 3,309 3,931 4,873 6,243 8,045 9,552 11,267 13,090 14,415 17,167 18,321
One year later .... 3,367 3,985 5,047 6,642 8,086 9,737 11,336 12,984 16,032 17,757 -
Two years later ... 3,477 4,122 5,573 6,763 8,345 9,781 11,371 14,693 16,810 - -
Three years later . 3,599 4,659 5,788 6,989 8,424 9,796 13,098 15,737 - - -
Four years later .. 3,981 4,855 6,170 7,166 8,516 11,471 14,118 - - - -
Five years later .. 4,127 5,171 6,422 7,314 10,196 12,496 - - - - -
Six years later ... 4,359 5,395 6,566 9,022 11,239 - - - - - -
Seven years later . 4,534 5,486 8,317 10,070 - - - - - - -
Eight years later . 4,629 7,215 9,365 - - - - - - - -
Nine years later .. 6,351 8,270 - - - - - - - - -
Ten years later ... 7,362 - - - - - - - - - -
---------------------------------------------------------------------------------------
Total net deficiency (4,053) (4,339) (4,492) (3,827) (3,194) (2,944) (2,851) (2,647) (2,395) (590) -
=======================================================================================
Reconciliation to
Gross Reestimated
Reserves:
Net reserves
reestimated ........ - - - - - - - 15,737 16,810 17,757 -
Reestimated ceded
recoverable ........ - - - - - - - 3,221 3,060 2,582 -
---------------------------------------------------------------------------------------
Total gross
reestimated reserves - - - - - - - 18,958 19,870 20,339 -
=======================================================================================
Net Deficiency
related to:
Asbestos-related
claims ........... (2,608) (2,606) (2,640) (2,682) (2,635) (2,577) (2,476) (2,338) (2,290) (601) -
Environmental ..... (595) (601) (599) (597) (582) (577) (550) (539) (493) (446) -
Other ............. (850) (1,132) (1,253) (548) 23 210 175 230 388 457 -
---------------------------------------------------------------------------------------
Total net deficiency (4,053) (4,339) (4,492) (3,827) (3,194) (2,944) (2,851) (2,647) (2,395) (590) -
=======================================================================================
9
As the above table illustrates, most of the unfavorable reserve development is
due to asbestos claims. A discussion of CNA's litigation with Fibreboard
Corporation regarding asbestos-related bodily injury claims can be found in Note
16 of the Notes to Consolidated Financial Statements in Item 8.
In addition to the asbestos and environmental reserve developments noted on
page 8, the unfavorable reserve developments relate primarily to accident years
1986 and prior and are comprised of the following lines of business: product
liability, medical malpractice, other liability, professional liability,
reinsurance, and workers' compensation. In the early to mid-1980's, frequency
and severity trends exceeded expectations, resulting in reserve deficiencies in
1986 and prior accident years. For accident years 1987 and subsequent, frequency
and severity trends have noticeably moderated. In calendar year 1993, positive
severity experience in professional liability lines and improvement in
involuntary workers' compensation experience resulted in favorable development
in accident years 1987 through 1992.
LIFE INSURANCE
CNA's life insurance operations markets individual and group insurance
products through licensed agents, most of whom are independent contractors, who
sell life insurance for CNA and for other companies on a commission basis.
Individual insurance products include life, accident and health and annuity
products, and are sold to individuals and small businesses.
The individual life products currently being marketed consist primarily of
term, universal life and participating policies. Included in the universal life
category is a salary allotment product marketed through employers as a
supplement to employers' benefit plans. Premiums are collected from employees
through payroll deduction. The individual accident and health product currently
being marketed is long-term disability. Individual annuity products are
primarily periodic payment plans.
Group insurance products include life, accident and health and pension
products, and are sold to employers, employer associations and trusts ranging in
size from small local employers to large multinational corporations. The group
accident and health plans are primarily major medical and hospitalization. Most
of the major medical and hospitalization plans are written under experience-
rated contracts or contracts to provide claim administrative services only.
CNA's products are designed and priced using assumptions CNA management
believes to be reasonably conservative for mortality, morbidity, persistency,
expense levels and investment results. Underwriting practices that CNA
management believes are prudent are followed in selecting the risks that will be
insured. Further, actual experience related to pricing assumptions is monitored
closely so that adjustments to these assumptions may be implemented as
necessary. CNA mitigates the risk related to persistency by including surrender
charge provisions in its ordinary life and annuity policies in the first five to
ten years, thus providing for the recovery of acquisition expenses. Investment
portfolios supporting interest sensitive products, including universal life and
individual annuities, are segregated from other investments and managed so as to
minimize the liquidity and interest rate risks.
Profitability in the life insurance business has decreased over the past two
years as a result of declining investment income, reflecting lower interest
rates and a large investment in short-term investments. Further, results
continue to be impacted by intense competition and rising medical costs. CNA has
aggressively pursued expense reduction through increases in automation and other
productivity improvements. Increasing costs of health care have resulted in a
continued market shift away from traditional forms of health coverage toward
managed care products and experience-rated plans. CNA's ability to compete in
this market will be increasingly dependent on its ability to control costs
through managed care techniques, innovation, and quality customer-focused
service in order to properly position CNA in the evolving health care
environment.
The federal government's initiative to control health care costs and provide
universal access to health care was presented in 1993. The impact of potential
health care reform cannot be determined at this time. Such reform may
10
affect both CNA's individual and group accident and health business. CNA has
urged a meaningful role for the private sector in any proposed plan. The present
health care system is clearly in need of reform, and CNA has emphasized that the
competitive strengths of the insurance industry must be an integral part of a
workable solution.
The following table sets forth supplemental data for the life insurance
business:
Years Ended December 31,
-------------------------------------
1993 1992 1991
-------------------------------------
(In millions of dollars)
Individual Premiums:
Life and annuities ................. $ 312.1 $ 294.7 $ 287.9
Accident and health ................ 30.9 27.1 24.3
------------------------------------
$ 343.0 $ 321.8 $ 312.2
====================================
Group Premiums:
Life ............................... $ 107.2 $ 100.7 $ 90.8
Accident and health (a) ............ 1,983.0 1,957.5 1,887.0
Annuities .......................... 9.0 57.7 24.3
------------------------------------
$2,099.2 $2,115.9 $2,002.1
====================================
Net Investment Income and Other Income:
Individual ......................... $ 154.2 $ 163.0 $ 162.5
Group .............................. 142.8 156.6 185.4
------------------------------------
$ 297.0 $ 319.6 $ 347.9
====================================
Income Excluding Realized Capital
Gains, Before Income Tax:
Individual ........................ $ 14.5 $ 22.5 $ 13.8
Group ............................. 51.9 56.1 76.0
------------------------------------
$ 66.4 $ 78.6 $ 89.8
====================================
Gross Life Insurance in Force:
Individual (c) ..................... $ 76,835 $ 75,569 $ 71,539
Group .............................. 35,413 29,643 27,139
------------------------------------
$112,248 $105,212 $ 98,678
====================================
Other Data (b):
Statutory capital and surplus ...... $1,022.0 $1,003.0 $ 968.4
Statutory capital and surplus-
percent of total liabilities ...... 30.1% 33.4% 29.9%
Participating policyholders'-percent
of gross life insurance in force .. 1.1% 1.2% 1.6%
- --------------
(a) Group accident and health premiums include contracts involving U.S.
Government employees and their dependents amounting to approximately $1.7, $1.6
and $1.5 billion in 1993, 1992 and 1991, respectively.
(b) Other Data is determined on the basis of statutory accounting principles.
Life insurance subsidiaries have received, or will receive, reimbursement from
CNA for general management and administrative expenses and investment expenses
in the amounts of $25.6, $24.5 and $25.7 million in 1993, 1992 and 1991,
respectively. Statutory capital and surplus as a percent of total liabilities is
determined after excluding Separate Account liabilities and reclassifying the
Asset Valuation and Interest Maintenance Reserves as surplus.
(c) Lapse ratios as measured by surrenders and withdrawals as a percentage of
average ordinary life insurance in force were 9.7%, 8.6%, and 10.4% in 1993,
1992, and 1991, respectively.
11
Annuities and guaranteed investment contracts
CAC writes the majority of its annuities and guaranteed investment contracts
("GIC's") in a fixed or non-variable Separate Account, which is permitted by
Illinois Insurance statutes. This treatment affords the contractholders
additional security, in the form of CAC's general account surplus, which
supports any principal and/or guaranteed interest payment shortfalls of the
Separate Account.
CNA manages the liquidity and interest rate risks on the GIC portfolio by
matching the GIC assets and liabilities on the basis of duration and maintaining
market value surrender adjustments on the majority of the contracts.
The following table illustrates the matching of the duration of assets and
liabilities for the GIC portfolio, the investment yield, the weighted average
interest crediting rates and withdrawal characteristics.
December 31,
-----------------------------------
1993 1992 1991
-----------------------------------
Duration in years:
Assets ............................. 2.68 3.04 2.85
Liabilities ........................ 2.73 2.69 2.54
---------------------------------
Mismatch ........................ (.05) .35 .31
=================================
Weighted average investment yield .... 7.11% 8.05% 9.38%
=================================
Weighted average interest crediting
rates ............................... 7.74% 8.32% 8.84%
=================================
Withdrawal Characteristics:
With market value adjustment ....... 81% 83% 85%
Non-withdrawable ................... 13 12 11
Without market value adjustment .... 6 5 4
---------------------------------
Total ........................... 100% 100% 100%
=================================
As shown above, the investment yield at December 31, 1993 and 1992 was less
than the average crediting rate. However, this occurred because of security
sales resulting in realized capital gains. Although the sales proceeds were
invested at lower yields, the asset base was increased. At December 31, 1993 and
1992, the GIC estimated market value of assets exceeded the estimated market
value of contract liabilities and expenses.
INVESTMENTS
CNA's general account investment portfolio is managed to maximize after-tax
investment return, while minimizing credit risks with investments concentrated
in high quality securities to support its insurance underwriting operations. At
December 31, 1993, approximately 20% of CNA's general account portfolio is
invested in long-term state and municipal bonds in order to maximize after-tax
yield and provide for a more stable yield on the portfolio with a higher quality
of investment than may otherwise be available.
CNA has the capacity to hold its fixed income portfolio to maturity. However,
securities may be sold as part of CNA's asset/liability strategies or to take
advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, or other similar factors.
Accordingly, the fixed income securities are classified as available for sale.
CNA's portfolio is managed based on the following investment strategies: (i)
diversification is used to limit exposures to any one issue or issuer, and (ii)
in general, the public market is used in order to provide liquidity.
12
Historically, CNA has maintained short-term assets at a level that provided
for liquidity to meet its short-term obligations, principally anticipated claim
payout patterns. Throughout 1992 and 1993 the level of short-term investments
increased beyond that needed for short-term liquidity. This resulted in a
decline in investment income in 1993. Management believes, however, that the
increased concentration in short-term investments will reduce the impact that a
rise in interest rates would have on its fixed income portfolio.
The following summarizes CNA's distribution of general account investments:
December 31,
------------------------
1993 1992
------------------------
(In millions)
Fixed maturities (1):
Tax exempt bonds ................................ $ 5,015 $ 9,502
Taxable bonds ................................... 12,145 7,286
Redeemable preferred stocks ..................... 448 568
Equity securities:
Common stocks ................................... 508 348
Non-redeemable preferred stocks ................. 9
Mortgage loans .................................... 58 85
Policy loans ...................................... 174 179
Short-term investments ............................ 6,944 4,444
Real estate and other invested assets ............. 71 57
----------------------
Total investments at carrying value ............. $25,363 $22,478
======================
(1) Fixed maturity securities are reported at fair value in 1993.
As noted in Management's Discussion and Analysis of Financial Condition and
Results of Operations, in 1993 CNA began a program of realigning its portfolio
which resulted in realizing substantial gains. For the year ended December 31,
1993, CNA's property and casualty insurance subsidiaries sold approximately
$35.4 billion of fixed income and equity securities realizing pre-tax net gains
of $741.3 million. Of the securities sold, approximately $5.8 billion was from
the tax-exempt municipal bond portfolio. Most of the proceeds from those sales
have been invested in short-term securities, primarily U.S. Treasury bills and
high-grade commercial paper. In addition to reducing the impact that a rise in
interest rates would have on the fixed income portfolio, the increase in taxable
short-term securities and the decrease in tax-exempt investments will allow CNA
to minimize additional alternative minimum tax credit generated in 1992 and
1993.
CNA's general account fixed income portfolio has consistently been of high
quality as illustrated in the following table using the Standard & Poor's
ratings convention (see note).
December 31,
-----------------------
1993 1992
-----------------------
AAA ............................................... 77% 73%
AA ................................................ 8 10
A ................................................. 7 10
BBB ............................................... 5 3
Below BBB ......................................... 3 4
---------------------
Total ........................................ 100% 100%
=====================
13
CNA's Separate Account investment portfolio is managed to specifically support
the underlying insurance products (see the discussion of annuities and GIC's in
"Life Insurance" above). Approximately 86% or $5.6 billion of Separate Account
investments are used to fund GIC's; the remaining investments are funding
variable products. Approximately 97% of the GIC investment portfolio is
comprised of taxable fixed income securities. The quality of the GIC fixed
income portfolio using the Standard & Poor's ratings convention (see note) is as
follows:
December 31,
-----------------------
1993 1992
-----------------------
AAA ............................................... 44% 50%
AA ................................................ 6 9
A ................................................. 18 18
BBB ............................................... 13 10
Below BBB ......................................... 19 13
---------------------
Total ........................................ 100% 100%
=====================
Note: The bond ratings shown in the two tables above are primarily from
Standard & Poor's (94% of the general account portfolio and 93% of the GIC
portfolio in 1993). In the case of private placements and other unrated
securities, comparable internal ratings are developed by CNA. These ratings are
derived by management using available information on the issuer to assess the
credit risk. Reference also may be made to similar instruments of the issuer
that are rated by Standard & Poor's. In the case of unrated municipal bonds, a
AAA rating may be assigned to issues with financial guarantee insurance.
CNA actively manages its high yield bonds and maintains the level of such
investments at prudent levels, as illustrated above. In 1993, the level of high
yield investment increased $261 million to $1,068 million at year end. This
increase is a result of the relative attractiveness of the high yield investment
market in comparison to other investment opportunities during the year. Although
the level of high yield investments has increased, the components of the high
yield portfolio have shifted toward lower risk issues, with B and BB rated bonds
comprising 91% of the high yield portfolio at December 31, 1993, compared to 82%
at the end of 1992. High yield securities generally involve a greater degree of
risk than that of investment grade securities. Expected returns should, however,
compensate for the added risk. The risk is also considered in the interest rate
assumptions in the underlying insurance products. Further, CNA's investment in
real estate and mortgage loans amounted to less than one-half of one percent of
its total assets, substantially below industry averages.
Included in CNA's 1993 AAA-rated fixed income securities (general and GIC
portfolios) are $4.4 billion of asset-backed securities, consisting of
approximately 47% in collateralized mortgage obligations ("CMO's"), 47% in U.S.
Government agency pass through certificates and 6% in corporate asset-backed
obligations. The majority of CMO's held are U.S. Government agency pass-through
certificates, are actively traded in liquid markets and are priced monthly by
broker-dealers. At December 31, 1993, market value exceeded amortized cost by
approximately $87 million. CNA limits the risks associated with interest rate
fluctuations and prepayments by concentrating its CMO investments in early
planned amortization classes with wide bands and relatively short principal
repayment windows.
OTHER
Competition: All aspects of the insurance business are highly competitive.
CNA's insurance operations compete with a large number of stock and mutual
insurance companies and other entities for both producers and customers and must
continuously allocate resources to refine and improve insurance products and
services. Based on net statutory premiums written in 1992, CCC is ranked as the
sixth largest property/casualty insurance organization among approximately 3,900
companies writing property and casualty insurance in the United States, about
900 of which operate in all or most states. CAC is ranked as the seventeenth
largest consolidated life
14
insurance organization among approximately 2,000 companies selling life
insurance (including health insurance and pension products) in the United
States, based on statutory premium revenue in 1992.
Dividends by Insurance Subsidiaries: The payment of dividends to CNA by its
insurance affiliates without prior approval of the Illinois Insurance Department
("IID") is limited to formula amounts determined in accordance with the
accounting practices prescribed or permitted by the IID. The current formula
limits dividends, without approval of the insurance commissioner, to the greater
of 10% of prior year statutory surplus or prior year statutory net income
(excluding realized gains in excess of 20% of the cumulative unrealized gains
position). For 1994, approximately $360 million in dividends could be paid to
CNA by its insurance affiliates without prior approval. The National Association
of Insurance Commissioners ("NAIC") Financial Regulation Standards and
Accreditation Committee approved the Illinois dividend formula as complying with
the NAIC Model Dividend Law. All dividends must be reported to the insurance
department within five business days of declaration and ten days prior to
payment.
Regulation: The insurance industry is subject to comprehensive and detailed
regulation and supervision throughout the United States. Each state has
established supervisory agencies with broad administrative power relative to
licensing insurers and agents, approving policy forms, establishing reserve
requirements, maintaining guarantee funds, fixing minimum interest rates for
accumulation of surrender values and maximum interest rates of policy loans,
prescribing the form and content of statutory financial reports and regulating
solvency and the type and amount of investments permitted. Regulatory powers
also extend to premium rate regulation which require that rates not be
excessive, inadequate or unfairly discriminatory. In addition to regulation of
dividends by insurance subsidiaries discussed above, intercompany transfers of
assets may be subject to prior notice or approval, depending on the size of such
transfers and payments in relation to the financial position of the insurance
affiliates making the transfer.
The trend for legislation and voter initiatives continues, particularly for
personal lines products, directly impacting insurance rate development, rate
application and the ability of insurers to cancel or renew insurance policies.
Restrictions on the consideration of certain expenses, limits on services
provided by advisory organizations, and politically suppressed workers'
compensation rates in certain states continue to be of concern.
Insurers are also required by the states to provide coverage to risks which
would not otherwise be considered eligible by the insurers. Each state dictates
the types of insurance and the level of coverage which must be provided to such
involuntary risks. CNA's insurance subsidiaries share of these involuntary risks
is generally a function of its share of the voluntary market, by line of
insurance, in each state.
In recent years, insolvencies of a few large insurers previously believed to
be on solid financial ground by many rating agencies and state regulators have
led to increased scrutiny of state regulated insurer solvency requirements by
members of the U.S. Congress. Legislation has been introduced which, if passed,
would subject insurers to federal solvency regulation. In response to this
challenge the NAIC has developed new industry minimum Risk Based Capital ("RBC")
requirements, established a formal state accreditation process designed to
minimize the diversity of approved statutory accounting and actuarial practices,
and has increased the annual statutory statement disclosure requirements.
RBC requirements are effective for life insurers in 1993 and for property and
casualty insurers in 1994. The RBC formulas were designed to identify an
insurer's minimum capital requirements based upon the inherent risks (e.g.,
asset default, credit and insurance) of its operations. In addition to the
minimum capital requirements, the RBC formula and related regulations identify
various levels of capital adequacy and corresponding action that the state
insurance departments should initiate. The highest such level of capital
adequacy above which insurance departments would take no action is defined as
the Company Action Level. As of December 31, 1993, CNA's life insurance
affiliates, Continental Assurance Company and Valley Forge Life Insurance
Company, had adjusted capital amounts in excess of NAIC Company Action Levels.
The new property/casualty RBC formula was adopted in December, 1993. Absent
significant changes in the industry experience components of the formula,
15
CNA's property/casualty domestic insurers have adjusted capital amounts in
excess of NAIC Company Action Levels.
In addition to the newly established minimum capital requirements, the NAIC
still maintains the Insurance Regulatory Information System ("IRIS"), which
assists the state insurance departments in overseeing the financial condition of
both life and property/casualty insurers. These tests are in the form of ratios,
and have a range of results characterized as "usual" by the NAIC. The NAIC IRIS
user guide regarding these ratios specifically states that "Falling outside the
usual range is not considered a failing result..." and "...in some years it may
not be unusual for financially sound companies to have several ratios with
results outside the usual range." It is important, therefore, that IRIS ratio
test results be reviewed carefully in conjunction with all other financial
information.
CCC had three IRIS ratios with unusual values in 1993, four in 1992 and none
in 1991. The three ratios with unusual values in 1993 were the two year overall
operating, investment yield, and the two year reserve development ratios. The
four IRIS ratios with unusual values in 1992 were the two year overall
operating, the change in surplus, and both the one and two year reserve
development ratios. Catastrophe losses and reserve increases associated with
potential exposure to asbestos-related bodily injury cases recognized in 1992
triggered all the unusual values generated in 1992. These same events were
primarily responsible for the unusual values for the two year overall operating
and development ratios in 1993. Additionally, lower interest rates in the
capital markets in 1993, coupled with the maintenance of a large short term
investment portfolio, triggered the unusual value for the investment yield
ratio.
CAC had two IRIS ratios with unusual values in 1993, net gain to total income
and change in net written premium. CAC had one unusual value for IRIS ratios in
1992, net gain to total income, and none in 1991. CAC's reported statutory net
income was adversely affected in both 1993 and 1992 by the transfer of
significant realized capital gains to the Interest Maintenance Reserve (IMR) and
depressed investment earnings. The unusual value for the change in premium ratio
primarily relates to decreases in the Separate Account annuity products fund
deposits.
Federal measures which may significantly affect the insurance business include
proposals for directly regulating insurance company solvency as well as repeal
of the McCarran-Ferguson Act, which exempts certain aspects of insurance from
federal regulation to the extent regulated by the states. The potential for
federal health care reform has been widely publicized and debated over the past
year. Although legislative reforms could come as soon as 1994, the impact of
such reforms are as yet unknown. Among the options discussed has been a single
comprehensive health care program that would provide access for all Americans,
while attempting to reduce cost via enactment of various cost containment
measures and tort reforms. If implemented, such reforms may impact both
individual and group accident and health, workers' compensation, automobile
liability and medical malpractice lines of business currently underwritten by
CNA.
Although courts and legislatures are often asked to expand liability, there is
a growing trend among business and professional organizations to wage campaigns,
which in several instances have been successful, aimed at limiting their
liability risks. Several states have adopted and some are considering "tort
reform" measures which, among other things, limit non-economic and punitive
damages and otherwise limit damage awards in product liability and malpractice
cases.
Reinsurance: CNA's insurance subsidiaries assume and cede insurance with other
insurers and reinsurers and members of various reinsurance pools and
associations. CNA utilizes reinsurance arrangements to limit its maximum loss,
to provide greater diversification of risk and to minimize exposures on larger
risks. The reinsurance coverages are tailored to the specific risk
characteristics of each product line with CNA's retained amount varying by type
of coverage. Generally, reinsurance coverage for property risks is on an excess
of loss, per risk basis. Liability coverages are generally reinsured on a quota
share basis in excess of CNA's retained risk. In addition, CNA has catastrophe
coverage for certain types of losses over stipulated amounts arising from any
one occurrence or event.
16
The ceding of insurance does not discharge the primary liability of the
original insurer. It had been the practice of insurers to account for the
portion of the risks which have been reinsured with other companies as though
they were risks for which the original insurer is not liable. In December 1992,
the Financial Accounting Standards Board issued SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-duration and Long-duration Contracts." SFAS
No. 113 sets forth new requirements for accounting and reporting of reinsurance
contracts. The provisions of this statement are effective in 1993 and did not
have a material impact on the income or stockholders' equity of CNA as all
material reinsurance arrangements are prospective and provided for the transfer
of risk.
CNA places reinsurance with other carriers only after careful review of the
nature of the contract and a thorough assessment of the reinsurers' credit
quality and claim settlement performance. Further, for carriers that are not
authorized reinsurers in Illinois, CNA receives collateral primarily in the form
of bank letters of credit securing a large portion of the recoverables.
Reinsurance recoverables on paid and unpaid claims were $2.9, $3.2, and $3.7
billion at year end 1993, 1992 and 1991, respectively. Of the $2.9 billion
recoverable at December 31, 1993, approximately $351 million was due from
unauthorized reinsurers, approximately $155 million of which was collateralized
by letters of credit. Despite best efforts to ensure collection of reinsurance
recoverables, the long-tail nature of many of these recoverables inevitably
results in some credit risk. In estimating CNA's allowance for doubtful
accounts, reinsurance recoverables are carefully analyzed.
CNA's largest recoverable at December 31, 1993 was $484 million due from
Lloyd's of London. The recoverable from Lloyd's of London is dispersed among
thousands of individual members who have unlimited liability, many of which are
Illinois authorized reinsurers. Although Lloyd's of London has recently reported
large underwriting losses, it continues to carry substantial reserves, including
$9 billion in premium trust funds, $6 billion in member trust funds and
policyholder surplus of $381 million. Accordingly, the credit risk associated
with these recoverable balances appears to be minimal. Premiums of $58 million
were ceded to Lloyd's of London in 1993.
Properties: CNA Plaza, owned by CAC, is a 1,097,000 square foot office complex
located at 333 S. Wabash, Chicago, Illinois. The forty-five story office
building serves as the home office for CNA and its insurance subsidiaries. CNA
Plaza and the adjacent building (a 454,000 square foot building located at 55 E.
Jackson Blvd.) are partially situated on grounds under leases expiring in 2058
and 2067. Approximately 35% of the adjacent building is rented to non-
affiliates.
CNA also maintains four regional offices and forty branch offices in major
cities throughout the United States. This office space is leased except for
offices located in four CNA owned buildings.
LORILLARD, INC.
The Company's wholly owned subsidiary, Lorillard, Inc. ("Lorillard"), is
engaged, through its subsidiaries, in the production and sale of cigarettes. The
principal cigarette brand names of Lorillard are Newport, Kent and True.
Lorillard's largest selling brands are the Newport and Kent brands, which
accounted for approximately 69% and 15%, respectively, of Lorillard's sales in
1993. Substantially all of Lorillard's sales are in the United States.
Lorillard's major trademarks outside of the United States were sold in 1977.
Lorillard accounted for 13.95%, 15.96%, and 14.75% of the Company's total
revenue for the fiscal years ended December 31, 1993, 1992 and 1991,
respectively.
Smoking and Health and Related Matters: For a number of years reports of the
alleged harmful health effects of cigarette smoking have engendered significant
adverse publicity for the cigarette industry, have caused a decline in the
social acceptability of cigarette smoking and have resulted in the
implementation of numerous restrictions on the marketing, advertising and use of
cigarettes. Along with significant increases in federal and
17
state excise taxes on cigarettes, these actions have, and are likely to continue
to have, an adverse effect on cigarette sales.
The Federal Comprehensive Smoking Education Act, which became effective in
1985, requires the use on cigarette packaging and advertising of one of the
following four warning statements, on a rotating basis: (1) "SURGEON GENERAL'S
WARNING: Smoking Causes Lung Cancer, Heart Disease, Emphysema, and May
Complicate Pregnancy." (2) "SURGEON GENERAL'S WARNING: Quitting Smoking Now
Greatly Reduces Serious Risks to Your Health." (3) "SURGEON GENERAL'S WARNING:
Smoking By Pregnant Women May Result in Fetal Injury, Premature Birth, and Low
Birth Weight." (4) "SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon
Monoxide." Four shortened versions of these statements are required, on a
rotating basis, for use on billboards. This law also requires that each person
who manufactures, packages or imports cigarettes shall annually provide to the
Secretary of Health and Human Services a list of the ingredients added to
tobacco in the manufacture of cigarettes. Such list of ingredients may be
submitted in a manner which does not identify the company which uses the
ingredients or the brand of cigarettes which contains the ingredients.
Prior to the effective date of the Comprehensive Smoking Education Act,
federal law had, since 1965, required that cigarette packaging bear a warning
statement which from 1971 to 1985 was as follows: "Warning: The Surgeon General
Has Determined That Cigarette Smoking Is Dangerous To Your Health." In addition,
in 1972 Lorillard and other cigarette manufacturers had agreed, pursuant to
consent orders entered into with the Federal Trade Commission ("FTC"), to
include this health warning statement in print advertising, on billboards and on
certain categories of point-of-sale display materials relating to cigarettes. In
addition, advertising of cigarettes has been prohibited on radio and television
since 1971.
Studies with respect to the alleged health risk to nonsmokers of environmental
tobacco smoke ("ETS") have received significant publicity. In 1986, the Surgeon
General of the United States and the National Academy of Sciences reported that
ETS puts nonsmokers at an increased risk of lung cancer and respiratory illness.
In January 1993, the United States Environmental Protection Agency released a
report (the "EPA Risk Assessment") concluding that ETS is a human lung
carcinogen in adults, and causes increased respiratory tract disease and middle
ear disorders and increases the severity and frequency of asthma in children.
In recent years, many federal, state, local and municipal governments and
agencies, as well as private businesses, have adopted legislation or regulations
which prohibit or restrict, or are intended to discourage, smoking, including
legislation or regulations prohibiting or restricting smoking in various places
such as public buildings and facilities, stores and restaurants, on domestic
airline flights and in the workplace, and the sale of cigarettes in vending
machines. This trend has increased significantly since the release of the EPA
Risk Assessment. Additional laws, regulations and policies intended to prohibit,
restrict or discourage smoking are being proposed or considered by various
federal, state and local governments, agencies and private businesses with
increasing frequency.
A 1984 federal law established a Technical Study Group to conduct a study and
report to the Congress regarding the technical and commercial feasibility of
developing cigarettes that will have a minimum propensity to ignite upholstered
furniture or mattresses. The Technical Study Group concluded in 1987 that it was
technically feasible and may be commercially feasible to develop such
cigarettes. In accordance with a 1990 federal law the Consumer Product Safety
Commission issued a report in August 1993, concluding that, while it is
practicable to develop a performance standard to reduce cigarette ignition
propensity, it is unclear that such a standard will effectively address the
number of cigarette ignited fires. Several states also are considering
legislation in this area.
From time to time, bills have been introduced in Congress, among other things,
to end or limit the price supports for leaf tobacco; to prohibit all tobacco
advertising and promotion; to require new health warnings on cigarette packages
and advertising; to subject cigarettes to regulation in various ways by the U.S.
Department of Health and Human Services; to subject cigarettes generally to
regulation under the Consumer Products Safety Act; to authorize the
establishment of various anti-smoking education programs; to provide that
current federal smoking legislation should not be construed to relieve any
person of liability under common or state law; to
18
permit state and local governments to restrict the sale and distribution of
cigarettes and the placement of billboard and transit advertising of tobacco
products; to provide that cigarette advertising not be a deductible business
expense; to tax cigarettes on the basis of their "tar" and nicotine content; to
require the FTC to promulgate standards establishing maximum acceptable levels
of "tar," nicotine and "other incriminated agents" in cigarettes; to prohibit
the mailing of unsolicited samples of cigarettes; to impose an additional excise
tax on cigarettes; and to require that cigarettes be manufactured in a manner
that will cause them, under certain circumstances, to be self-extinguishing.
Additional laws, regulations and policies intended to prohibit, restrict or
discourage smoking being proposed or considered by various federal, state and
local governments and agencies could, if adopted, have a material adverse effect
on the financial condition and results of operations of the Company. The Company
does not believe there are any additional such laws, regulations or policies
likely to be adopted in the next year which would have such a material adverse
effect.
As a result of the growing concern over the asserted health effects of
smoking, in recent years the number of lawsuits against tobacco companies
seeking damages related to health effects alleged to have resulted from
cigarette smoking or exposure to cigarette smoking has increased. For additional
discussion of legal proceedings relating to Lorillard and the tobacco industry,
see Item 3 below.
Advertising and Sales Promotion: Lorillard's principal brands are advertised
and promoted extensively. Introduction of new brands, brand extensions and
packings require the expenditures of substantial sums for advertising and sales
promotion, with no assurance of consumer acceptance. The advertising media
presently used by Lorillard include magazines, newspapers, out-of-home
advertising and point-of-sale display materials. Sales promotion activities are
conducted by distribution of samples and store coupons, point-of-sale display
advertising, advertising of promotions in print media, and personal contact with
distributors, retailers and consumers.
Distribution Methods: Lorillard distributes its products through direct sales
to distributors, who in turn service retail outlets, and through chain store
organizations and vending machine operators, many of whom purchase their
requirements directly, and by direct sales to the U.S. Armed Forces. Lorillard's
tobacco products are stored in public warehouses throughout the country to
provide for rapid distribution to customers.
Lorillard has approximately 1,700 direct customers and is not dependent on any
one customer or group of customers. Lorillard does not have any backlog orders.
Tobacco and Tobacco Prices: The two main classes of tobacco grown in the
United States are flue-cured tobacco, grown mostly in Virginia, North Carolina,
South Carolina, Georgia and Florida; and burley, grown mostly in Kentucky and
Tennessee. Lorillard purchases flue-cured tobacco and burley tobacco for use in
cigarettes. Most of the tobacco of these classes used by Lorillard is purchased
by commission buyers at tobacco auctions. Lorillard also purchases various types
of Near Eastern tobacco, grown in Turkey and eight other Near Eastern countries.
In addition, Lorillard purchases substantial quantities of aged tobacco from
various sources, including cooperatives financed under the Commodity Credit
Corporation program, to supplement tobacco inventories.
Due to the varying size and quality of annual crops and other economic
factors, tobacco prices in the past have been subject to fluctuation. Among the
economic factors are federal government control of acreage and poundage in the
flue-cured producing areas and poundage control in the burley areas. These
controls together with support prices have substantially affected the market
prices of tobacco. Pursuant to authorizations contained in federal legislation
enacted in 1986, the price support levels were reduced in 1986 with the intent
of making U.S.-produced tobacco more competitive. The approximate average
auction prices per pound for flue-cured tobacco was $1.728 in 1992 and $1.687 in
1993 and for burley tobacco was $1.815 in 1992 and $1.817 in 1993. The prices
paid by Lorillard have generally been consistent with this trend. Lorillard
believes that its current leaf inventories are adequately balanced for its
present production requirements. Because the process of aging tobacco
19
normally requires approximately two years, Lorillard at all times has on hand
large quantities of leaf tobacco. See Note 1 of the Notes to Consolidated
Financial Statements, under Item 8 below, for inventory costing method.
Prices: During 1993, the wholesale price of Lorillard's king size and 100/120
millimeter cigarettes decreased by the net amount of $13.05 and $14.55 per
thousand, respectively. On January 1, 1993 the wholesale price was increased
$2.10 per thousand cigarettes in relation to the increase in the federal excise
tax. For additional information on changes in cigarette pricing see Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Taxes: Federal excise taxes included in the price of cigarettes were increased
from $10.00 to $12.00 per thousand cigarettes effective January 1, 1993. Excise
taxes, which are levied upon and paid by the distributors, are also in effect in
the fifty states, the District of Columbia and many municipalities. The state
taxes generally range from 2.5 cents to 75 cents per package of twenty
cigarettes.
Properties: The properties of Lorillard are employed principally in the
processing and storage of tobacco and in the manufacture and storage of
cigarettes. Its principal properties are owned in fee. With minor exceptions,
all machinery used by Lorillard is owned by it. All properties are in good
condition. Lorillard's manufacturing plant is located on approximately 79 acres
in Greensboro, North Carolina. This 942,600 square foot plant contains modern
high speed cigarette manufacturing machinery. Lorillard also has facilities for
receiving, processing and storing leaf tobacco in Danville, Virginia, containing
approximately 1,500,000 square feet. A modern research facility containing
approximately 82,000 square feet is also located at Greensboro.
Lorillard leases a corporate office in Orangeburg, New York, an executive
office in New York City and sales offices in major cities throughout the United
States.
Competition: Substantially all of Lorillard's products are sold within the
United States in highly competitive markets where its principal competitors are
the five other major U.S. cigarette manufacturers (Philip Morris, R.J. Reynolds
("RJR"), Brown & Williamson, American Brands and Liggett Group). For the
calendar year 1993, Lorillard ranked fourth in the industry with a 7.1% share of
the market based upon the Maxwell Consumer Report, a quarterly statistical
survey of the cigarette industry. Philip Morris and RJR account for
approximately 42.2% and 30.6%, respectively, of the U.S. cigarette market,
according to the Maxwell Consumer Report.
The following table sets forth cigarette sales in the United States by the
industry and by Lorillard, as reported in the Maxwell Consumer Report. This
table indicates the relative position of Lorillard in the industry:
Lorillard to
Industry Lorillard Industry
Calendar Year (000) (000)
- --------------------------------------------------------------------------------
1993 ................................. 461,180,000 32,650,000 7.1%
1992 ................................. 506,950,000 36,540,000 7.2%
1991 ................................. 509,100,000 36,940,000 7.3%
- ---------------
The Bureau of Alcohol, Tobacco and Firearms reports Lorillard's share of total
taxable factory removals of all cigarettes to be 7.2% and 7.5% for 1992 and
1991, respectively. Data for 1993 is not currently available.
The Maxwell Consumer Report divides the cigarette market into two price
segments, the premium price segment and the discount or reduced price segment.
According to the Maxwell Consumer Report the reduced price segment increased in
1993 to approximately 37% from approximately 30% of the market. Virtually all of
Lorillard's sales are in the premium price segment where Lorillard's share
increased from 10.0% in 1992 to 10.7% in 1993, according to the Maxwell Consumer
Report.
20
LOEWS HOTELS HOLDING CORPORATION
The subsidiaries of Loews Hotels Holding Corporation ("Loews Hotels"), a
wholly owned subsidiary of the Company, presently operate the following 14
hotels:
Number of
Rooms (Year
Name and Location Type Opened) Owned,Leased or Managed
- -----------------------------------------------------------------------------------------------------------------
Loews Anatole Luxury 1,620 Management contract expiring 2000 (3)
Dallas, Texas Convention Hotel (1979)
Loews Annapolis Luxury Hotel 217 Owned
Annapolis, Maryland (1986(2))
Loews Coronado Bay Resort Luxury Hotel 450 Management contract expiring 2011,
San Diego, California (1991) with renewal options for 10 years (3)
Loews Giorgio Luxury Hotel 197 Owned
Denver, Colorado (1986(2))
Howard Johnson Hotel (1) Commercial Hotel 300 Owned
New York, New York (1962)
Loews Le Concorde Luxury Hotel 424 Land lease expiring 2069
Quebec City, Canada (1974(2))
Loews L'Enfant Plaza Luxury Hotel 372 Management contract expiring 2003 (3)
Washington, D.C. (1973)
Loews Monte Carlo Resort Hotel 622 Lease expiring 2002, with renewal
Monte Carlo, Monaco (1975) options for 20 years (4)
Loews New York First Class Hotel 765 Owned
New York, New York (1961)
Days Hotel (1) Commercial Hotel 366 Owned
New York, New York (1962)
Regency Luxury Hotel 496 Land Lease expiring 2013, with
New York, New York (1963) renewal options for 47 years.
Loews Santa Monica Beach Luxury Hotel 350 Management contract expiring 2007,
Santa Monica, California (1989) with renewal options for 10 years.
Loews Vanderbilt Plaza Luxury Hotel 342 Owned
Nashville, Tennessee (1984(2))
Loews Ventana Canyon Resort Resort Hotel 398 Management contract expiring 2004,
Tucson, Arizona (1984) with renewal options for 10 years (3)
- -------------
(1) Operated by Loews Hotels under license agreements pursuant to which Loews
Hotels pays royalty fees on sales, as defined in the agreements, for the use of
the respective trade names, trademarks and other rights.
(2) The Le Concorde, Giorgio, Vanderbilt Plaza and Annapolis Hotels were
acquired by Loews Hotels in 1987, 1989, 1989 and 1990, respectively.
(3) These management contracts are subject to termination rights.
21
(4) An arbitration proceeding is pending concerning this lease in relation to,
among other things, rent payable under the lease and a contention by the ground
lessor that the lease was not properly renewed for periods subsequent to 1990.
The Monte Carlo hotel includes a casino in which coin operated gaming devices
are operated by a joint venture in which Loews Hotels is a co-venturer. In
addition, the hotels which are operated by Loews Hotels contain shops, a variety
of restaurants and lounges, and some contain parking facilities, swimming pools,
tennis courts and access to golf courses.
The hotels owned by Loews Hotels (including those owned and leased to third
parties) are subject to mortgage indebtedness aggregating approximately
$72,653,000 at December 31, 1993 with interest rates ranging from 8.1% to 11%,
and maturing between 1996 and 1999. In addition, certain hotels are held under
leases which are subject to formula derived rental increases, with rentals
aggregating approximately $9,300,000 for the year ended December 31, 1993.
Loews Hotels has leased to a joint venture the Sheraton New York and the
Sheraton Manhattan, in New York City, for terms expiring in 2002 and 2000,
respectively. The leases, which contain purchase options on the part of lessees,
are guaranteed by American Airlines, Inc. and Sheraton Corporation and provide
for payment of fixed aggregate annual rent and a percentage rental with
provisions for maximum fixed annual and percentage rents.
Competition from other hotels, motor hotels and inns, including facilities
owned by local interests and by national and international chains, is vigorous
in all areas in which Loews Hotels operates. The demand for hotel rooms in many
areas is seasonal and dependent on general and local economic conditions. Loews
Hotels properties also compete with facilities offering similar services in
locations other than those in which the company's hotels are located.
Competition among luxury hotels is based primarily on location and service.
Competition among resort and commercial hotels is based on price as well as
location and service. However, the current oversupply of hotel rooms and the
reduced demand for hotel rooms due to weak economic conditions has intensified
the level of competition in all hotel categories, particularly with respect to
price. Because of the competitive nature of the industry, hotels must
continually make expenditures for updating, refurnishing and repairs and
maintenance, in order to prevent competitive obsolescence.
Loews Hotels accounted for 1.35%, 1.47% and 1.48% of the Company's total
revenue for the fiscal years ended December 31, 1993, 1992 and 1991,
respectively.
BULOVA CORPORATION
Bulova Corporation ("Bulova") is engaged in two lines of business. Bulova's
consumer products segment distributes and sells watches, clocks and watch parts
for consumer use. Its industrial and defense products segment manufactures and
sells electronic and mechanical time fuzes and electronic mine sensors for
national defense, as well as certain industrial products. Bulova accounted for
1.12%, 1.32%, and 1.21% of the Company's total revenue for the fiscal years
ended December 31, 1993, 1992 and 1991, respectively.
Consumer Products: Bulova distributes and sells analog and analog-digital
quartz crystal watches, jewelry and various types of clocks. All watch movements
and cases and other components and all clocks are purchased from foreign and
domestic suppliers. Watches are sold by Bulova principally in the United States
and Canada. In most other areas of the world Bulova has appointed licensees who
market watches under Bulova's trademarks in return for a royalty. The consumer
products business is seasonal, with the greatest sales coming in the third and
fourth quarters in expectation of the holiday selling season. The consumer
products business is intensely competitive. The principal methods of competition
are price, styling, aftersale service, warranty and product performance.
Defense Products: Defense sales account for approximately 84% of this
segment's sales and approximately 24% of Bulova's total sales in 1993. The
principal products of this segment are precision mechanical, electronic and
electro-mechanical timing devices. Approximately 68% of these sales were made to
the United States
22
government and approximately 16% of sales were made to foreign governments. The
Department of Defense continued to purchase mechanical fuzes during 1993,
however, Bulova understands that the Department of Defense has made the decision
to phase out mechanical time fuzes, which had been this segment's principal
product for many years. Competition for contracts to produce electronic fuzes is
expected to be intense. Accordingly, no assurance can be given as to whether
Bulova will be awarded additional contracts or as to the profitability of any
additional contracts which may be awarded to it.
To offset the decline in U.S. government defense spending, Bulova is seeking
to increase non-defense and commercial and industrial business by employing its
precision manufacturing capabilities. During 1993, non-defense industrial
products accounted for approximately 16% of this segment's sales, as compared to
4% in 1992. Industrial products included surgical instruments and printed wiring
boards.
The backlog of defense products sales amounted to $44.6 and $56.0 million as
of December 31, 1993 and 1992, respectively. Approximately 76% of the current
backlog is expected to be filled during 1994. Any backlog for commercial orders
is not believed to be significant.
The decrease in U.S. government spending has materially increased the level of
competition for defense business. The principal methods of competition are price
and product performance. Defense business represents mostly competitive fixed-
price contracts awarded by the United States government. Bulova competes with a
small number of competitors with respect to defense contracts, several of whom
have substantially greater resources and capabilities. In addition, Bulova
competes with former defense manufacturers as well as commercial companies for
its non-defense business.
Patents, Research and Development: Bulova has various United States and
foreign patents expiring between 1994 and 2006 and various pending patent
applications.
Properties: Bulova leases the primary facilities for its consumer products
segment which consist of an 80,000 square foot plant in Woodside, New York for
its principal executive and sales office, watch distribution, service and
warehouse purposes, a 71,000 square foot plant in Maspeth, New York for clock
service and warehouse purposes and a 25,000 square foot plant in Toronto, Canada
for watch and clock sales and service. Bulova's primary facility for its defense
products segment consists of its owned plant in Lancaster, Pennsylvania
aggregating 290,000 square feet. This facility is subject to mortgage
indebtedness of approximately $3,066,000 at December 31, 1993 with interest at
the prime rate, and maturing in the year 1997. Bulova also leases a 100,000
square foot warehouse located in Lancaster, Pennsylvania and 18.5 acres of land
for the storage of defense products located in West Willow, Pennsylvania.
DIAMOND OFFSHORE DRILLING, INC.
The Company's wholly owned subsidiary, Diamond Offshore Drilling Inc.
("Diamond Offshore"), is engaged, through its subsidiaries, in the business of
owning and operating drilling rigs that are used primarily in drilling of oil
and gas wells on a contract basis for companies engaged in exploration and
production of hydrocarbons. The Company entered the drilling business in 1989
through the acquisition of 10 offshore rigs. Land rigs were acquired in 1990. An
additional 40 offshore rigs were acquired in January 1992 through the
acquisition of Odeco Drilling, Inc. ("Odeco"). Diamond Offshore accounted for
2.11%, 1.59%, and 0.47% of the Company's total revenue for the fiscal years
ended December 31, 1993, 1992 and 1991, respectively.
Drilling Units and Equipment: Diamond Offshore currently owns and operates 39
mobile offshore drilling rigs (16 jackup rigs, 22 semisubmersible rigs and a
drillship), 19 land rigs and related equipment. An additional two offshore rigs,
which are inactive, are currently held for sale. Offshore rigs are mobile units
that can be relocated via either self propulsion or by the use of tugs enabling
them to be repositioned based on market demand.
Jackup rigs stand on the ocean floor with their drilling platforms "jacked up"
on support legs above the water. They are best suited for drilling in water
depths of less than 300 feet. Nine of Diamond Offshore's jackup rigs
23
are cantilevered rigs capable of over platform development drilling and workover
as well as exploratory drilling. Of Diamond Offshore's 16 jackup rigs, 14 are
located in the Gulf of Mexico and two are currently in South America.
Semisubmersible rigs are supported by large pontoons and are partially
submerged during drilling for greater stability. They are generally designed for
deep water depths of up to 6,000 feet. Diamond Offshore operates three of the
world's thirteen fourth-generation semisubmersible rigs. These rigs are equipped
with advanced drilling equipment, are capable of operations in ultra deep waters
in severe weather environments, and command high premiums from operators. Of
Diamond Offshore's 22 semisubmersible rigs, 11 are currently located in the Gulf
of Mexico, four are currently located in the North Sea, three are currently
located in Brazil, three are currently located in Australia and one is currently
located in the Black Sea.
Diamond Offshore's drillship is self-propelled and designed to drill in deep
water. Shaped like a conventional vessel, it is the most mobile of the major rig
types. Diamond Offshore's drillship is located in Indonesia.
Diamond Offshore's land rigs are all located in the United States and are also
capable of mobilizing to different drilling sites.
Drilling Contracts and Rig Utilization: Contracts for Diamond Offshore's
drilling rigs are offered worldwide for either a fixed term, which may range
from a few months to several years, or on a well-to-well basis.
The following table sets forth the size and utilization rate of Diamond
Offshore's fleet for the years ended December 31, 1993, 1992 and 1991. Data for
1991 does not include the rigs acquired from Odeco in January 1992. The
utilization rate for a period is based on the ratio of days in the period during
which the rigs were earning revenues to the total days in the period during
which the rigs were available to work.
Years Ended December 31,
-------------------------------------
1993 1992 1991
-------------------------------------
Jackups
Rigs in fleet at year-end .......... 16 19 5
Utilization during the year ........ 79.6% 57.9% 71.7%
Semisubmersibles
Rigs in fleet at year-end .......... 22 26 5
Utilization during the year ........ 71.9% 51.2% 73.3%
Land
Rigs in fleet at year-end .......... 19 19 32
Utilization during the year ........ 44.3% 22.5% 32.7%
The following table shows, for each of Diamond Offshore's four types of
drilling rigs, the number of contract months available and the number of
contract months committed for 1994. Contract months available are based on rigs
that were marketed at December 31, 1993. Contract months committed are
determined on the basis of executed contracts at December 31, 1993 and do not
include customer option periods.
-------------------------
Rig Rig
Contract Contract
Months Months
Available Committed
-------------------------
Jackups ........................................... 192 24
Semisubmersibles .................................. 264 66
Drillship ......................................... 12 4
Land .............................................. 108 3
24
Competition: The oil and gas drilling business is dependent on the drilling
requirements of petroleum producers and is competitive in all of its phases.
Diamond Offshore competes with a large number of drilling contractors and must
continually allocate resources for technological changes, repairs and
maintenance. Diamond Offshore's rigs are generally of modern design and equipped
with the latest technology. Companies in the industry compete primarily on the
basis of equipment day-rates and mobilization fees, personnel competence and
equipment suitability and availability.
Although utilization rates increased in 1993 with the rise in natural gas
prices in the Gulf of Mexico, the oversupply of drilling rigs and low crude oil
prices continue to depress conditions in the drilling industry. In view of the
worldwide oversupply of rigs and the surplus of oil, Diamond Offshore expects
that demand and compensation rates for its rigs could remain at depressed levels
in 1994 and continue to have a material adverse impact on its operations.
Operating Risks and Regulation: Diamond Offshore's operations are subject to
the usual hazards incident to the drilling of oil and gas wells, such as
blowouts, cratering and fires. Diamond Offshore's offshore operations are also
subject to perils peculiar to marine operations, such as capsizing, collision,
grounding and adverse weather and seas. Any of these hazards can seriously
damage or destroy equipment, suspend drilling operations, and, through oil
spillage, cause pollution damage to offshore or inland waters or the property of
others. Diamond Offshore currently maintains insurance covering these risks,
including expropriation, confiscation and nationalization of certain equipment
in foreign waters. There is no assurance that insurance coverage will continue
to be available at rates considered reasonable or that the insurance will be
adequate to protect against liability and loss or damage resulting from all the
consequences of a significant incident.
Diamond Offshore is subject to stringent laws relating to the equipment and
operation of vessels and drilling practices and methods. Additional governmental
legislation and regulations involving the petroleum industry could significantly
affect Diamond Offshore's operations.
Properties: Diamond Offshore owns an 18,000 square foot building and 20 acres
of land in New Iberia, Louisiana for its offshore drilling warehouse and storage
facility, a 13,000 square foot building and 5 acres of land in Dyce, Scotland
for its North Sea operations and a 15,000 square foot building and 10 acres of
land in Alice, Texas for its onshore drilling office, warehouse and storage
facility. Diamond Offshore also leases 50,000 square feet of office space for
its corporate headquarters located in Houston, Texas and various warehouse and
storage facilities in Scotland and Brazil for its offshore drilling operations.
OTHER INTERESTS
The Company owns approximately 20% of the outstanding common stock of CBS Inc.
("CBS"). Laurence A. Tisch, Chairman of the Board of Directors and Co-Chief
Executive Officer of the Company, is Chairman, President and Chief Executive
Officer of CBS. Preston R. Tisch, President and Co-Chief Executive Officer of
the Company, is also a director of CBS.
The Company also owns a 49 percent common stock interest in a joint venture
which is engaged in the business of owning and operating six large crude oil
tankers that are used primarily to transport crude oil from the Persian Gulf to
a limited number of ports in the Far East, Northern Europe and the United
States.
In addition, the Company owns a 161,000 square foot first class office
building which is leased to third parties.
25
EMPLOYEE RELATIONS
The Company, inclusive of its operating subsidiaries as described below,
employed approximately 27,100 persons at December 31, 1993 and considers its
employee relations to be satisfactory.
Lorillard employed approximately 3,800 persons at December 31, 1993.
Approximately 1,600 of these employees are represented by labor unions under
separate contracts with many local unions expiring at varying times and
severally renegotiated and renewed.
Lorillard has collective bargaining agreements covering hourly rated
production and service employees at various Lorillard plants with the Tobacco
Workers International Union, the International Brotherhood of Firemen and
Oilers, and the International Association of Machinists. Lorillard has a
retirement plan, a deferred profit sharing plan, and other benefits for its
hourly paid employees who are represented by the foregoing unions.
Loews Hotels employed approximately 2,500 persons at December 31, 1993,
approximately 1,550 of whom are union members covered under collective
bargaining agreements. Loews Hotels has experienced satisfactory labor relations
and provides comprehensive benefit plans for its hourly paid employees.
The Company maintains a retirement plan, group life, disability and health
insurance program and a savings plan for salaried employees. Lorillard and Loews
Hotels salaried employees also participate in these benefit plans.
Diamond Offshore employed approximately 2,600 persons at December 31, 1993,
approximately 300 of whom are union members. Diamond Offshore has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees.
CNA and its subsidiaries employ approximately 16,800 persons and have
experienced satisfactory labor relations. CNA and its subsidiaries have
comprehensive benefit plans for substantially all of their employees including a
retirement plan, a savings plan, a disability program, a group life program and
a group health care program.
Bulova and its subsidiaries employ approximately 1,000 persons, approximately
600 of whom are union members. Bulova and its subsidiaries have experienced
satisfactory labor relations. Bulova has comprehensive benefit plans for
substantially all employees.
Item 2. Properties.
Information relating to the properties of Registrant and its subsidiaries is
contained under Item 1.
Item 3. Legal Proceedings.
1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Note 16 of the Notes to Consolidated
Financial Statements in Item 8.
2. A number of lawsuits have been filed against Lorillard and other
manufacturers of tobacco products seeking damages for cancer and other health
effects claimed to have resulted from the use of cigarettes or from exposure to
tobacco smoke. Presently, forty-three such cases are pending in the United
States federal and state courts against manufacturers of tobacco products
generally; Lorillard is a named defendant in fourteen of these cases. Eighteen
of these cases, including four against Lorillard, have been commenced since
January 1, 1993. Plaintiffs have asserted claims based on, among other things,
theories of negligence, fraud, misrepresentation, strict liability, breach of
warranty, enterprise liability, civil conspiracy, intentional infliction of
harm, and failure to warn of the allegedly harmful and/or addictive nature of
tobacco products. Plaintiffs seek unspecified amounts in compensatory and
punitive damages in many cases, and in other cases damages are stated to amount
to as much
26
as $100,000,000 in compensatory damages and $5,000,000,000 in punitive damages.
Two of these cases are set for trial in 1994. One such case has been tried
during 1994 in which the jury returned a verdict in favor of Lorillard. That
verdict is currently on appeal.
One pending case, Broin v. Philip Morris Companies, Inc., et al. (Circuit
Court Dade County, Florida, filed October 31, 1991), is a purported class action
brought by thirty-one plaintiffs against Lorillard and other named defendants,
including other manufacturers of tobacco products, on behalf of flight
attendants claiming injury as a result of exposure to environmental tobacco
smoke in the cabins of aircraft. Plaintiffs seek an unspecified amount in
compensatory damages and $5,000,000,000 in punitive damages. The class action
allegations in the complaint were dismissed by the trial court, but this ruling
has been reversed by a Florida court of appeals and remanded to the trial court
for further consideration. Plaintiffs may now seek formal certification of a
class action.
In addition to the foregoing cases, one pending case, Cordova v. Liggett
Group, Inc., et al. (Super. Ct. San Diego County, California, filed May 12,
1992), alleges that Lorillard and other named defendants, including other
manufacturers of tobacco products, engaged in unfair and fraudulent business
practices in connection with activities relating to the Council for Tobacco
Research-USA, Inc., of which Lorillard is a sponsor, in violation of a
California state consumer protection law by misrepresenting to or concealing
from the public information concerning the health aspects of smoking. Plaintiff
seeks an injunction ordering defendants to undertake a "corrective advertising
campaign" in California to warn consumers of the health hazards associated with
smoking, to provide restitution to the public for funds "unlawfully, unfairly,
or fraudulently" obtained by defendants, and to "disgorge" all revenues and
profits acquired as a result of defendants' "unlawful, unfair and/or fraudulent
business practices." An adverse development in this case could encourage the
filing of additional actions in other states with consumer protection laws
similar to California's.
Several additional 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, almost
forty years ago, into the filter material used in one of the brands of
cigarettes manufactured by Lorillard. Presently eleven such cases are pending in
federal and state courts against Lorillard. Six such cases have been filed since
January 1, 1993. Allegations of liability against Lorillard include negligence,
strict liability, fraud, misrepresentation and breach of warranty. Plaintiffs
seek unspecified amounts in compensatory and punitive damages in many cases, and
in other cases damages are stated to amount to as much as $10,000,000 in
compensatory damages and $100,000,000 in punitive damages. Two of these cases
are currently set for trial in 1994. One such case has been tried during 1994 in
which the jury returned a defense verdict.
Another pending case, Lacey v. Lorillard Tobacco, Inc., et al. (Circuit Court,
Fayette County, Alabama, filed in March 1994), 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, additions, or additional substances that the
defendants allegedly caused or allowed to be made a part of cigarettes or
cigarette components. Plaintiff seeks certification of the case as a class
action, with the members of the class to be comprised of individuals who have
smoked or are continuing to smoke cigarettes manufactured for sale and sold in
the State of Alabama. Plaintiff requests injunctive relief requiring defendants
to list the additives, additions or additional substances that defendants have
caused or allowed to be placed onto or within cigarettes or cigarette components
manufactured for sale and sold in the State of Alabama. Plaintiff seeks monetary
damages on behalf of his individual claim and on behalf of each member of the
purported class arising out of the complaint's allegations not to exceed $48,500
for the individual claim or for any individual member of the class.
One of the defenses raised by Lorillard in certain cases is preemption by the
Federal Cigarette Labeling and Advertising Act (the "Labeling Act"). Cipollone
v. Liggett Group, Inc., et al., was tried against Lorillard and two other
tobacco companies in the Unites States District Court, District of New Jersey,
in 1988. The trial resulted in a verdict in favor of Lorillard and another
tobacco company. A verdict of $400,000 was rendered in favor of the plaintiff
against the third defendant, Liggett Group, Inc., on a breach of express
warranty claim. The United States Court of Appeals for the Third Circuit later
reversed this judgment in favor of the plaintiff and remanded the case for a new
trial. The case was appealed to the United States Supreme Court where, on June
27
24, 1992, the Court reversed in part, and affirmed in part, the Third Circuit
ruling concerning the extent to which the Labeling Act preempts certain tort
claims. The Supreme Court held in a plurality opinion 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.
The Cipollone case, however, will not be retried. On November 5, 1992, a
consent order dismissing the Cipollone case with prejudice and without costs was
entered by the District Court. 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.
In addition to the defenses based on preemption under the Supreme Court
decision referred to above, Lorillard believes that it has a number of other
valid defenses to pending cases. These defenses, where applicable, include,
among others, statutes of limitations or repose, assumption of the risk,
comparative fault, the lack of proximate causation, and the lack of any defect
in the product alleged by a plaintiff. Lorillard believes, and has been so
advised by counsel, that some or all of these defenses may, in any of the
pending or anticipated cases, be found by a jury or court to bar recovery by a
plaintiff.
In one recent smoking and health case in which Lorillard is not a defendant,
Horton v. The American Tobacco Company, et al. (Circuit Court Lafayette County,
Mississippi), a jury found in favor of plaintiffs but awarded no damages against
the defendant. The judgment in this case is under appeal by both parties. In
another smoking and health case in which Lorillard is not a defendant, Wilks v.
The American Tobacco Company, et al. (Circuit Court Washington County,
Mississippi), the trial court found that cigarettes are, as a matter of law,
"defective and unreasonably dangerous for human consumption" and held that the
defendant cigarette manufacturer would be absolutely liable for any injuries
caused by smoking. The court also struck all available state law defenses based
on decedent's conduct. However, the trial of this case resulted in a defense
verdict because the jury found that smoking was not the cause of plaintiff's
injury. Plaintiffs' motions for new trial and for judgment notwithstanding the
verdict were denied. Plaintiffs have filed a notice of appeal which is currently
pending.
Smoking and health related litigation has been brought by plaintiffs against
Lorillard and other manufacturers of tobacco products for many years. While
Lorillard intends to defend vigorously all such actions which may be brought
against it, it is not possible to predict the outcome of any of this litigation.
Based upon the foregoing, however, management believes that the outcome of all
pending litigation should not have a material adverse effect on the financial
condition or results of operations of the Company. Any adverse development in
any of the foregoing matters, whether or not Lorillard is a party, could prompt
the filing of additional cases against Lorillard.
A Grand Jury investigation is presently being conducted by the United States
Attorney's office for the Eastern District of New York regarding possible fraud
by Lorillard and other tobacco companies relating to smoking and health research
undertaken or administered by the Council for Tobacco Research-USA, Inc.
Lorillard is unable to predict the outcome of this investigation. An adverse
outcome in this investigation could result in criminal, administrative or other
proceedings against Lorillard.
Lorillard received a Civil Investigative Demand ("CID") dated January 11,
1994, from the Antitrust Division of the United States Department of Justice.
The CID, which requests the production of certain documents, was issued in the
course of an antitrust investigation to determine whether Section 1 of the
Sherman Act, 15 U.S.C. Section 1, may have been violated by joint activity to
restrain competition in the manufacture and sale of
28
cigarettes, including joint activity to limit or restrain research and
development of fire safe or self extinguishing cigarettes or product innovation.
Lorillard is presently scheduled to respond to the CID on May 9, 1994. This
investigation is in its preliminary stages and it is impossible at this time to
predict its ultimate outcome. An adverse outcome in this investigation could
result in civil or other proceedings against Lorillard.
Management believes that the outcome of these pending investigations should
not have a material adverse effect upon the financial condition or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
First
Became
Name Position and Offices Held Age Officer
- --------------------------------------------------------------------------------
Kenneth Abrams .... Vice President-Personnel 60 1975
Gary W. Garson .... Vice President and
Assistant Secretary 47 1988
Robert J. Hausman . Vice President 70 1973
Barry Hirsch ...... Senior Vice President and
Secretary 60 1971
Herbert C. Hofmann Senior Vice President 51 1979
John J. Kenny ..... Treasurer 56 1991
Guy A. Kwan ....... Controller 51 1987
John G. Malino .... Vice President-Real
Estate 54 1985
Stuart B. Opotowsky Vice President-Tax 59 1987
Richard E. Piluso . Vice President-Internal
Audit 55 1990
Roy E. Posner ..... Senior Vice President and
Chief Financial Officer 60 1973
Dennis Smith ...... Vice President-Management
Information Services 47 1990
James S. Tisch .... Executive Vice President 41 1981
Jonathan M. Tisch . Vice President 40 1987
Laurence A. Tisch . Chairman of the Board and
Co-Chief Executive
Officer 71 1959
Preston R. Tisch .. President and Co-Chief
Executive Officer 67 1960
Laurence A. Tisch and Preston R. Tisch are brothers. Andrew H. Tisch and James
S. Tisch are sons of Laurence A. Tisch and Jonathan M. Tisch is a son of Preston
R. Tisch. None of the other officers or directors of Registrant is related to
any other.
All executive officers of Registrant have been engaged actively and
continuously in the business of Registrant for more than the past five years.
Officers are elected and hold office until their successors are elected and
qualified, and are subject to removal by the Board of Directors.
29
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Price Range of Common Stock
Loews Corporation's common stock is listed on the New York Stock Exchange. The
following table sets forth the reported consolidated tape high and low sales
prices in each calendar quarter of 1993 and 1992:
1993 1992
--------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter ......... $120.25 $98.13 $114.50 $105.50
Second Quarter ........ 110.88 92.75 118.63 103.50
Third Quarter ......... 98.63 86.75 126.50 110.63
Fourth Quarter ........ 98.50 90.50 125.25 109.00
Item 6. Selected Financial Data.
Years Ended December 31,
-----------------------------------------------------------------------------
1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Results of Operations:
Revenues .................. $13,686,777 $13,691,454 $13,620,264 $12,636,925 $11,436,722
Income (loss) before
cumulative effect of
changes in accounting
principles ............... 594,121 (22,097) 904,338 804,650 907,141
Per share ................. 9.27 (.33) 13.14 11.01 12.07
Net income ................ 594,121 122,614 904,338 804,650 907,141
Per share ................. 9.27 1.87 13.14 11.01 12.07
Financial Position:
Total assets (a) .......... 45,849,752 43,555,514 42,684,157 38,359,766 34,651,369
Long-term debt ............ 2,195,670 1,759,595 1,944,710 1,826,378 1,865,552
Shareholders' equity ...... 6,127,198 5,526,990 5,667,072 5,043,397 4,813,994
Cash dividends per share .. 1.00 1.00 1.00 1.00 1.00
Book value per share ...... 99.59 84.90 84.18 72.13 64.14
Shares of common stock
outstanding ............. 61,525 65,099 67,320 69,917 75,059
(a) Restated for change in accounting for reinsurance contracts in 1993.
In 1993 the Company changed its method of accounting for reinsurance contracts
and certain investments in debt and equity securities. In 1992 the Company
changed its method of accounting for postretirement benefits, income taxes and
certain workers' compensation and disability claims. See Note 1 of Notes to
Consolidated Financial Statements.
30
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources:
Insurance
Property and casualty and life insurance operations are wholly owned
subsidiaries of CNA Financial Corporation ("CNA"). CNA is an 83% owned
subsidiary of the Company-
For the year ended December 31, 1993, CNA reported a $251.7 million operating
loss net of tax (exclusive of realized gains/losses and accounting changes),
compared to $897.8 million for the prior year.
In each of the last two years, results were adversely affected by substantial
additions to reserves for asbestos-related bodily injury claims. The 1993
operating loss reflects a third quarter $500 million addition to Continental
Casualty Company's ("Casualty") claim reserves, which resulted in a $270.1
million charge, or $4.21 per share, against the Company's net income. In 1992
Casualty also increased its claim reserves with respect to asbestos-related
bodily injury cases by $1.5 billion, resulting in an after-tax charge of $822.7
million, or $12.53 per share.
These reserving actions were taken in recognition of Casualty's litigation
with Fibreboard Corporation ("Fibreboard"), a former asbestos manufacturer. In
February 1993, CNA reported that Casualty intended to discuss a global agreement
to settle third party asbestos-related bodily injury claims with Fibreboard. An
agreement in principle was reached in August 1993 and executed in December 1993
with Fibreboard, Pacific Indemnity Company (a subsidiary of Chubb Corporation)
and a negotiating committee of asbestos claimant attorneys.
CNA worked aggressively throughout the year with all involved parties to reach
this settlement. Assuming final court approval, the Fibreboard agreement removes
a major source of financial uncertainty for CNA and enables management to focus
even more attention and resources on strengthening the economic value of CNA's
businesses. No material reserve increases are anticipated to fulfill CNA's
obligations in regard to Fibreboard liabilities. See Note 16 of the Notes to
Consolidated Financial Statements for a further discussion of Fibreboard.
While CNA's 1993 and 1992 results were affected most significantly by the
Fibreboard litigation, they also reflect the impact of serious external
pressures on profitability throughout the insurance industry. Foremost among
these are the long standing cycle of inadequate pricing in property and casualty
commercial lines and low investment yields due to declining interest rates. In
addition, complex and costly litigation has been continuing, fueled by the
tendency of the courts to interpret insurance contracts beyond their stated
intent.
CNA's commercial lines remain subject to an industry downcycle that has lasted
over seven years and has seriously depressed profitability. CNA cannot predict
when the current negative cycle will turn. The current phase of the downcycle
has been characterized by a difficult pricing environment caused by strong
market competitiveness, a trend toward alternative risk mechanisms such as self-
insurance and regulatory constraints on adequate premium rates, especially in
the workers' compensation line of business.
Profitability for the life segment remains stable, although negatively
affected by intense competition, high health care costs and weak investment
yields. Increasing costs of health care have resulted in a continued market
shift away from traditional forms of health coverage toward managed care
products. The federal government's initiative to control health care costs and
provide universal access to health care was presented in 1993. The impact of
potential health care reform cannot be determined at this time. Such reform may
impact both individual and group accident and health, workers' compensation,
automobile liability and medical malpractice business of CNA. CNA has urged a
meaningful role for the private sector in any proposed plan. The present health
care system is clearly in need of reform, and CNA has emphasized that the
competitive strengths of the insurance industry must be an integral part of a
workable solution. CNA's ability to compete in this market will be increasingly
dependent on its ability to control costs through managed care techniques,
innovation, and quality customer focused service.
While CNA's strong financial position continues to represent a major
competitive advantage, CNA continues to take a number of initiatives to respond
to the many uncertainties and changes impacting the insurance environment. One
of these has been to continue to focus on the risk characteristics and premium
rates in commercial lines. CNA will continue to seek business in lines where it
his sizable market share,
31
substantial experience, and foresees clear profit potential over the long term.
The emphasis is on reasonable rates rather than volume growth.
One of CNA's primary goals has been to provide more efficient and responsive
quality service to our customers. These actions include working closely with
insureds to reduce claims costs through loss control and fraud prevention;
providing professional services to self insured accounts and other alternative
markets; implementing medical and workers' compensation cost management
programs; and reinforcing business partnerships with the independent agents who
represent CNA and equipping them with new or upgraded products tailored to
specific customer needs.
Additionally, CNA has increased the flexibility, productivity, and customer
focus of its employee force through less centralized decision making and more
widespread use of automation tools.
CNA also continues to devote time and effort to legislative concerns in the
interests of a more equitable and stable insurance marketing climate. It has
enjoyed some success in enlisting support for workers' compensation reform in
several states and opposing unnecessary restrictions on the insurance industry
in others.
CNA's property and casualty insurance subsidiaries' statutory surplus had
grown from $2.7 billion five years ago to $3.9 billion in 1991. In 1992,
property and casualty surplus declined to $3.1 billion, primarily due to the
$1.5 billion in asbestos reserves discussed above. In 1993 property and casualty
surplus rose to approximately $3.6 billion despite another $500 million increase
in asbestos reserves. Statutory surplus of CNA's life insurance subsidiaries
grew from $637 million at December 31, 1988 to over $1 billion at December 31,
1993.
Included in the property and casualty surplus increases are capital
contributions from CNA to Casualty of $475 and $120 million in 1993 and 1990,
respectively. Dividends of $150, $100 and $130 million were paid to CNA by
Casualty in 1993, 1992 and 1991, respectively.
Life statutory surplus includes capital contributions from Casualty of $100
million in 1990.
CNA's general account investment portfolio is managed to maximize after tax
investment return, while minimizing credit risks, with investments concentrated
in high quality securities. CNA has the capacity to hold its fixed income
portfolio to maturity. However, securities may be sold as part of CNA's
asset/liability strategies or to take advantage of investment opportunities
generated by changing interest rates, prepayments, tax and credit
considerations, or other similar factors. Accordingly, the fixed income
securities are classified as available for sale.
During 1993, CNA's consolidated investments increased by $2.9 billion, to
$25.4 billion. This increase is primarily due to investment of operating cash
flow and realized gains on sales of securities, $504 million of unrealized
appreciation due to reporting debt securities at fair value, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, and $495 million
in net proceeds from borrowings. Consolidated investments consist primarily of
fixed income securities, which include bonds and redeemable preferred stocks.
The general account portfolio consists primarily of high quality marketable debt
securities, 96% of which are rated as investment grade primarily by nationally
recognized rating agencies. At December 31, 1993, tax-exempt securities and
short-term investments comprised approximately 19% and 28%, respectively, of the
general account's total investment portfolio compared to 42% and 20%,
respectively, at December 31, 1992. Historically, CNA has maintained short-term
assets at a level that provided for liquidity to meet its short-term
obligations, principally anticipated claim payout patterns. Throughout 1992 and
1993, the level of short-term investments has increased beyond that needed for
short-term liquidity. Though expected to result in a decline in investment
income in the near term, management believes that the increased concentration in
short-term investments will reduce the impact that a rise in interest rates
would have on its fixed income portfolio. At December 31, 1993, the major
components of the short-term investment portfolio were approximately $1.2
billion of U.S. Treasury bills and $4.5 billion of high grade commercial paper.
As of December 31, 1993, in accordance with SFAS No. 115, CNA's general
account investments in bonds and redeemable preferred stocks were carried at a
fair value of $17.6 billion. In both 1992 and 1991 these securities were carried
at the lower of amortized cost or market value which amounted to $17.4 and $18.8
billion, respectively. This compares to fair values of $18.2 and $19.7 billion
on those respective dates. At December 31, 1993, fixed income securities
unrealized gains amounted to approximately $504 million, after realizing $741
million in capital gains from the bond portfolio during the year. This compares
to $846 and $931 million of unrealized gains at December 31, 1992 and 1991,
respectively. The gross unrealized gains
32
and losses for the fixed income securities portfolio at December 31, 1993, were
$564 and $60 million, respectively, compared to $931 and $85 million,
respectively, at December 31, 1992.
Net unrealized gains on general account bonds at December 31, 1993 include net
unrealized gains on high yield securities of $15 million, compared to $44
million at December 31, 1992. High yield securities are bonds rated as below
investment grade by bond rating agencies, plus private placements and other
unrated securities which, in the opinion of management, are below investment
grade. Carrying values of high yield securities in the general account were $727
million (fair value) at December 31, 1993, compared to $704 million (amortized
cost) at December 31, 1992.
At December 31, 1993, total separate account investments amounted to $6.5
billion with taxable debt securities representing approximately 96% of the
separate accounts portfolio. Approximately 86% of separate account investments
are used to fund guaranteed investment contracts ("GIC's") for which CNA's life
insurance affiliate guarantees principal and a specified return to the
contractholders. At December 31, 1993, all fixed income securities in the GIC
portfolio were carried at fair value in accordance with SFAS No. 115 and
amounted to $5.4 billion. In both 1992 and 1991, these securities were carried
at the lower of amortized cost or market which amounted to $5.8 and $5.4
billion, respectively. This compares to market values of $6.0 and $5.6 billion
on those respective dates. At December 31, 1993, fixed income securities
unrealized gains amounted to approximately $148 million. This compares to $158
million in unrealized gains at December 31, 1992 and $203 million at December
31, 1991. The gross unrealized gains and losses for the fixed income securities
portfolio at December 31, 1993, were $163 and $15 million, respectively,
compared to $184 and $26 million, respectively, at December 31, 1992.
At December 31, 1993 high yield securities in the GIC portfolio were carried
at fair value and amounted to $1,068 million. In 1992 and 1991, these securities
were carried at the lower of amortized cost or market value which amounted to
$779 and $809 million, respectively. Net unrealized gains on high yield
securities held in such separate accounts were $56 million at December 31, 1993,
compared to $28 million at December 31, 1992 and unrealized losses of $14
million at December 31, 1991.
High yield securities generally involve a greater degree of risk than that of
investment grade securities. Expected returns should, however, compensate for
the added risk. The risk is also considered in the interest rate assumptions in
the underlying insurance products. At December 31, 1993, CNA's concentration in
high yield bonds, including separate accounts, was approximately 4.3% of its
total assets. In addition, CNA's exposure to the risks of the commercial
mortgage loan and real estate markets is substantially less than the industry
average. CNA's concentration in mortgage loans and real estate was less than 1%
of its total assets.
Included in CNA's fixed income securities at December 31, 1993 (general and
GIC portfolios) are $4.4 billion of asset-backed securities, consisting of
approximately 47% in U.S. Government agency issued pass-through certificates,
47% in collateralized mortgage obligations ("CMO's"), and 6% in corporate asset-
backed obligations. The majority of CMO's held are U.S. Government agency
issues, which are actively traded in liquid markets and are priced monthly by
broker-dealers. At December 31, 1993, the fair value of asset-backed securities
exceeded amortized cost by approximately $87 million compared to $172 million
for the comparable period a year ago. CNA limits the risks associated with
interest rate fluctuations and prepayment by concentrating its CMO investments
in early planned amortization classes with wide bands and relatively short
principal repayment windows.
Over the last few years, concern has been raised regarding the quality of
insurance company invested assets. At December 31, 1993, 52% of the general
account's debt securities portfolio was invested in U.S. Government and
affiliated securities, 25% in other AAA rated securities and 15% in AA and A
rated securities. DNA's GIC fixed income portfolio is comprised of 30% U.S.
Government and affiliated securities, 14% other AAA rated securities and 24% in
AA and A rated securities. These ratings are primarily from nationally
recognized rating agencies (94% of the general account portfolio and 93% of the
GIC portfolio).
The liquidity requirements of CNA are met primarily by funds generated from
operations. The principal operating cash flow sources of CNA's property and
casualty and life insurance subsidiaries are premiums and investment income. The
primary operating cash flow uses are payments of claims, policy benefits and
operating expenses.
For the year ended December 31, 1993, CNA's operating activities generated net
cash flows of $1.3 billion, compared to $1.0 and $1.8 billion in 1992 and 1991,
respectively. The increase in cash flow, as compared
33
with 1992 is due primarily to federal income tax recoveries of $294 million
offset by a decrease of approximately $96 million in investment income received.
CNA believes that future liquidity needs will be met primarily from operations.
Additional sources of cash flow include sales and maturities of investments,
and financing activities. CNA's debt position in relation to total capital is
low which allowed it to take advantage of the current borrowing opportunities at
favorable rates in the capital markets. As a result, on October 25, 1993, CNA
filed a shelf registration statement with the Securities and Exchange Commission
which made $900 million of debt securities available for issuance from time to
time. In addition $100 million from a previous shelf registration remained
available for issuance. In November 1993, CNA sold $250 million principal amount
of 6.3% notes, due 2003, and $250 million principal amount of 7.3% debentures,
due 2023, at an effective rate per annum of 6.4% and 7.3%, respectively. CNA
contributed $475 million of the proceeds from this offering to the capital of
Casualty. An additional $500 million of debt securities and/or preferred stock
remains available for issuance under the shelf registration statement.
Net cash flows are invested in marketable securities. Investment strategies
employed by CNA's insurance subsidiaries consider the cash flow requirements of
the insurance products sold and the tax attributes of the various types of
marketable investments.
Cigarettes
Lorillard, Inc. and subsidiaries ("Lorillard")-
Funds from operations continue to exceed operating requirements. Lorillard
generated net cash flow from operations of approximately $538 million for the
year ended December 31, 1993, compared to $595 million for the prior year. No
material capital expenditures are anticipated during 1994.
For a number of years through 1992 leading cigarette marketers, including
Lorillard, had increased the price of their premium brands. For the period 1982
to 1992 the annual price increase for Lorillard's premium brands averaged
approximately 10%. Lorillard's cash flows from operations during this period
benefited significantly from these price increases since virtually all of
Lorillard's sales are in the premium priced segment, with Newport accounting for
more than two-thirds of Lorillard's total unit sales.
On April 2, 1993, Philip Morris USA, the largest marketer of premium priced
cigarettes in the United States, announced significant changes in pricing
policies for its premium priced brands, including a decision to reduce the
average price of its Marlboro brand through various price promotions. Philip
Morris stated that it "expects to forego further price increases on premium
brands for the foreseeable future." R.J. Reynolds Tobacco Co., the second
largest U.S. marketer of premium priced cigarettes, announced that it would take
appropriate steps to maintain its competitive position.
Philip Morris and R.J. Reynolds subsequently announced new lower pricing
policies to replace these promotions. Effective August 9, 1993 Lorillard reduced
its premium brand wholesale cigarette unit prices by approximately 25% to
maintain its competitive position. These price moves have established two price
tiers for the industry, eliminating much of the price confusion in the market
place, and substantially narrowing the price gap between premium and discount
cigarettes. These developments may tend to stabilize volume and perhaps slow the
rapid growth of discount cigarettes. While promotional spending can be reduced,
the overall impact of the new lower pricing will substantially reduce
Lorillard's revenues, income contribution and cash flow.
In November 1993, Philip Morris, R.J. Reynolds and Lorillard announced a price
increase of $2.00 per thousand cigarettes.
Forty-four lawsuits are pending in U.S. federal and state courts against
cigarette manufacturers seeking damages for cancer or other health effects
claimed to have resulted from the use of or exposure to cigarettes or other
tobacco products. Lorillard is a defendant in 14 such cases. Lorillard is also a
defendant in 10 lawsuits seeking damages for health effects claimed to have
resulted from exposure to asbestos fibers which were incorporated, for a limited
period of time almost forty years ago, into the filter material used in one
brand of cigarettes manufactured by Lorillard. Plaintiffs seek unspecified
amounts of compensatory and punitive damages in many cases, and in other cases
damages are stated to amount to as much as $100 million in compensatory damages
and as much as $5 billion in punitive damages.
34
To date, no lawsuit has resulted in damages being awarded against Lorillard.
Two cases, tried in late 1993 and January 1994, resulted in verdicts in favor of
Lorillard. However, the fact that a cigarette manufacturer prevails in a case
does not necessarily mean that a cigarette manufacturer will prevail in future
cases; likewise, a loss in any of the pending cases would not necessarily mean
that additional cases will be lost. Lorillard intends to defend vigorously all
product liability lawsuits filed against it.
Hotels
Loews Hotels Holding Corporation and subsidiaries-
Funds from operations continue to exceed operating requirements. Funds for
future capital expenditures and working capital requirements are expected to be
provided from operations.
Watches and Other Timing Devices
Bulova Corporation and subsidiaries ("Bulova"). Bulova is a 97% owned
subsidiary of the Company.
Competition and oversupply of watch products continue to adversely affect
Bulova. The defense products segment continues to be adversely impacted by the
contraction of defense spending by the United States government. Bulova may
require additional working capital advances from the Company from time to time.
While the Company has no obligation to enter into or maintain arrangements for
any further funding requirements, it is anticipated that it would be provided
through various arrangements with Bulova.
Drilling
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore")-
Oversupply of drilling rigs and low crude oil prices continue to depress
conditions in the drilling industry and to adversely impact Diamond Offshore. In
1993 drilling activity in the Gulf of Mexico increased due primarily to higher
natural gas prices. This improvement enabled Diamond Offshore to generate
sufficient funds from operations to meet its operating requirements. Although
funds for future capital expenditures and working capital requirements are
expected to be provided from operations, Diamond Offshore may require additional
advances from the Company due to the cyclical nature of the industry.
Parent Company
During 1993 the Company purchased 3,574,000 shares of its outstanding Common
Stock at an aggregate cost of approximately $336.3 million. The funds required
for such purchases were provided from working capital. Depending on market
conditions, the Company, from time to time, may purchase additional shares in
the open market or otherwise.
In February 1993 the Company redeemed, at par, its outstanding 10%
subordinated notes due 1996. In April 1993 the Company redeemed, at 105.8%, its
outstanding 9% senior sinking fund debentures due 2016. The aggregate cost of
these redemptions totaled $368 million and was provided from internally
generated funds.
In June 1993 the Company sold $300 million principal amount of 7.6% senior
notes due 2023 at an effective rate of 7.8% per annum. In October 1993 the
Company sold $400 million principal amount of 7% senior notes due 2023 (the "7%
Notes") at an effective rate of 7.2% per annum. The Company currently has an
aggregate $300 million of debt securities and/or preferred stock available for
issuance under a shelf registration statement.
In November 1993 the Company redeemed all of its currently outstanding zero
coupon convertible subordinated notes due 2004 for an aggregate redemption price
of approximately $411 million. The Company used the net proceeds received from
the sale of the 7% Notes, together with general corporate funds, to redeem these
notes.
35
Results of Operations:
Revenues declined by $4.7 million and increased by $66.5 million as compared
to 1992 and 1991, respectively. Income before accounting changes increased by
$616.2 million and decreased by $310.2 million, as compared to 1992 and 1991,
respectively.
Insurance
Property and casualty revenues increased by $211.0 million and decreased by
$319.4 million, or 2.7% and 3.8%, as compared to 1992 and 1991, respectively.
Property and casualty premium revenues decreased by $78.5 and $380.2 million,
or 1.2% and 5.7%, as compared to 1992 and 1991, respectively. The decrease from
1992 was principally attributable to increased utilization of a high deductible
program for large commercial accounts. This accounted for $235 million in
reduced premiums. Involuntary risks premiums were $182 million below the prior
year primarily due to a decline in involuntary workers' compensation premiums
recorded for the current and previous years. Small commercial accounts premiums
declined by $70 million. These declines were partially offset by growth in
professional and specialty lines and commercial reinsurance assumed premiums of
$217 million, group accident and health of $75 million and personal lines
packages premiums of $63 million. Property and casualty investment income was
down 13.4% from $1,224 million reported in 1992 and down 17.4% from 1991.
Investment income decreased primarily due to the continuing general decline in
interest rates and an increase in short-term investments (excluding investments
relating to loaned securities) from $3.0 billion at December 31, 1992 to $5.1
billion at December 31, 1993.
Life insurance revenues increased by $6.8 and $190.9 million, or 0.2% and
7.3%, as compared to 1992 and 1991, respectively. Life premium revenues for 1993
were approximately the same as 1992, and increased by approximately $122.7
million, or 5.4%, as compared to 1991.
Property and casualty underwriting losses were $1,791.8 million in 1993,
compared to $2,999.6 and $1,224.7 million in 1992 and 1991, respectively. The
combined ratio is the sum of the loss ratio and the expense ratio. The loss
ratio is the percentage of incurred claims and claims adjustment expense to
premiums earned. The expense ratio is the percentage of underwriting expenses,
including the change in deferred acquisition costs, to premiums earned. The
combined ratio was 126.4 for 1993 compared with 144.8 and 116.3 for 1992 and
1991, respectively. As previously discussed, the primary reason for the 1993 and
1992 poor operating results was the addition of $500 million in underwriting
losses related to Fibreboard in the third quarter of 1993 and $1.5 billion in
the fourth quarter of 1992.
Catastrophe losses for 1993 were approximately $74 million, compared with $270
million in 1992. CNA's 1992 catastrophe losses related primarily to Hurricane
Andrew. For the Los Angeles area earthquake and winter storms occurring in the
first quarter of 1994, CNA has recorded losses on reported claims of
approximately $65 million. Further loss development related to unreported
claims, including assumed reinsurance, is estimated at approximately $35
million.
Property and casualty pre-tax results include losses for involuntary risks of
$80.8 million in 1993. Involuntary risk charges were $257.3 and $267.0 million
in 1992 and 1991, respectively. Involuntary risks include mandatory
participation in residual markets, statutory assessments for insolvencies of
other insurers and other involuntary charges. CNA's share of involuntary risks
is generally a function of its share of the voluntary market by line of
insurance in each state. CNA records the estimated effects of its mandatory
participation in residual markets on an accrual basis. These estimates are
adjusted as premium, claim and expense activity is received from the residual
markets' administrators. CNA records assessments for insolvencies as they are
paid rather than on an accrual basis. Such an accrual process would be very
difficult, as past experience is not a reliable indicator of future activity.
Further, information currently available from all the states' life and property
and casualty guarantee funds is fairly limited and would not provide reliable
data on which to base an estimated liability. Many states allow recovery of
insolvency assessments by a direct offset to premium taxes or a separate policy
surcharge. In addition, some states assess prospectively based on current
premiums written. Thus, it would be unclear whether or not future assessments
should be accrued on a current basis as they do not necessarily represent a
liability until assessed. In any event, CNA believes that any potential
estimated necessary liability would not be material.
36
Property and casualty underwriting losses include reserve increases
(decreases) related to prior years, net of reinsurance recoverable, of $590,
$1,617 and $(106) million for the years 1993, 1992 and 1991, respectively. This
reserve development includes $601, $1,689 and $48 million for asbestos claims,
primarily representing reserve additions related to the Fibreboard litigation as
discussed above. Adverse reserve development for reported environmental
pollution claims and claims expenses totaled $107, $48 and $47 million,
respectively. In 1993, CNA allocated approximately $340 million of claim
reserves for unreported environmental pollution claims. Adverse reserve
developments for asbestos and environmental pollution claims were offset, in
part, by favorable development in other lines. For 1993, favorable trends were
represented primarily by positive severity experience in professional liability
lines and improvement in involuntary workers' compensation experience, resulting
in reserve decreases of $182 and $148 million, respectively. See Note 16 of the
Notes to Consolidated Financial Statements for further discussion of asbestos
and environmental pollution exposures.
In early 1993, CNA began a program of realigning its portfolio, which resulted
in realizing gains in its investment portfolio that increased Casualty's
statutory surplus. Casualty sold approximately $35.4 billion of fixed income and
equity securities in 1993, realizing pre-tax net gains of $741.3 million. Of the
$35.4 billion of securities sold, approximately $11.5, $13.5 and $5.8 billion
were from the U.S. Treasury, Government mortgage-backed and tax-exempt municipal
bond portfolios, respectively. The $2.1 billion increase in short-term
securities since December 31, 1992 has been invested primarily in U.S. Treasury
bills and high grade commercial paper. In addition to reducing the impact that a
rise in interest rates would have on the fixed income portfolio, the increase in
taxable short-term securities and the decrease in tax-exempt investments will
allow the Company to minimize additional alternative minimum tax credit. Since
the portfolio is extremely liquid, CNA has the flexibility to shift quickly into
higher yielding investments, as the economic environment warrants.
Cigarettes
Revenues decreased by $276.5 and $100.6 million, or 12.7% and 5.0%, as
compared to 1992 and 1991, respectively. Income before accounting changes
decreased by $183.9 and $89.5 million, or 35.1% and 20.8%, as compared to 1992
and 1991, respectively.
Revenues decreased, as compared to 1992, by approximately $106.0 million, or
4.9%, due to a reduction in unit prices as well as a decline of approximately
$235.5 million, or 10.8%, due to lower unit sales volume, partially offset by
higher federal excise taxes amounting to $65.0 million, or 3.0%. Compared to
1991, revenues declined by approximately $229.6 million, or 11.4%, due to lower
unit sales volume, partially offset by an increase of approximately $129.0
million, or 6.4%, due to price increases. The price increases over 1991 include
approximately $65.0 million, or 3.2%, from the increase of federal excise taxes
of $2.00 per thousand cigarettes on January 1, 1993.
Lorillard's sales volume has declined 10.4% and 11.4% as compared to 1992 and
1991, respectively. Unit sales volume of the U.S. cigarette industry has
declined by 9.0% and 9.4% over the same period. Lorillard's declining sales
volume reflects a continuing trend of lower consumer cigarette consumption as
well as an increase in industry discount brand sales. The discount brand
category's share of industry sales had increased from an average of 30% during
1991 to an average of 37% during 1993. As at December 31, 1993, discount brands
represented 33% of industry sales. Virtually all of Lorillard's sales are in the
premium brand category.
Newport, a premium brand which accounts for two-thirds of Lorillard's unit
sales, declined 7.8% as compared to 6.1% versus 1991. As a result of the
accelerated growth of discount brands and continued decline in consumption
during the first seven months of 1993, Newport and other Lorillard premium brand
unit sales were affected. With the industry-wide list price reduction of premium
price brands, effective August 9, 1993, the growth rate of discount brands
appears to have slowed and Lorillard's product line has benefited modestly in
terms of unit sales. These pricing changes have reduced industry profit margins.
Although Newport declined in unit sales, this decrease was less than the
overall industry decline, and resulted in a share of total industry sales of
4.91% versus 4.85% in 1992, an increase of .06%. On an overall basis,
Lorillard's premium brands compared favorably with the industry's rate of
decline for this segment, a loss of 17.7% for the industry versus 11.2% for
Lorillard.
37
It is expected that lower consumer cigarette consumption will continue to
influence overall industry unit volume and the discount category will be a
significant influence in overall sales.
U.S. federal excise taxes on cigarettes increased $2.00 per thousand effective
January 1, 1993. The current administration's efforts to reduce the federal
deficit and to enact health care reform has led to further proposals to increase
the excise tax. The effects of any additional federal tax increases, as well as
increases by state and local taxing authorities, or manufacturers' price
increases cannot be determined, but it is likely they would add to the overall
industry decline and the growth in the discount category.
Hotels
Revenues decreased by $16.2 and $15.7 million, or 8.0% and 7.8%, as compared
to 1992 and 1991, respectively. Results from operations before accounting
changes declined $3.7 and $6.6 million, as compared to 1992 and 1991,
respectively.
Oversupply of hotel rooms and the highly competitive nature of the hotel
industry continue to adversely affect average room rates. Although demand has
increased in some areas, it has not compensated for the lower average room
rates.
Revenues declined due primarily to lower occupancy rates at the Loews Monte
Carlo Hotel resulting from the depressed general economic conditions in southern
Europe as well as the impact of a weak Italian Lira and resulting absence of
Italian tourist business on the Riviera. In addition, average room rates
declined at North American properties, partially offset by increased occupancy
rates. Results from operations before accounting changes declined due primarily
to the lower revenues. The prior year included a charge of $3.7 million relating
to renegotiation of a hotel land lease.
Watches and Other Timing Devices
Revenues decreased by $27.8 and $10.8 million, or 15.4% and 6.5%, as compared
to 1992 and 1991, respectively. Results from operations before accounting
changes decreased by $2.0 and increased by $0.5 million, as compared to 1992 and
1991, respectively.
Revenues and results from operations declined due primarily to lower
industrial and defense sales volume related to a $19.5 million payment by the
U.S. government in 1992 in relation to a favorable settlement of defense
contract claims. This benefit was partially offset by a charge of approximately
$2.4 million for the write-off of parts inventory and equipment related to these
contracts, as well as a continuing decline of defense business. Watch and clock
unit sales volume also declined in 1993, partially offset by a gain on sale of
an inactive defense manufacturing facility and accrual of environmental costs in
1992. Results from operations increased, as compared to 1991, due to the gain
from asset dispositions and lower interest expense, partially offset by lower
results from Bulova's consumer products division.
Drilling
Revenues increased by $70.5 and $223.7 million, as compared to 1992 and 1991,
respectively. Net loss decreased by $34.6 million and increased by $5.4 million,
as compared to 1992 and 1991, respectively.
Revenues increased and net loss declined, as compared to 1992, due to Gulf of
Mexico jackup rigs achieving nearly 98% utilization due to higher natural gas
prices and deployment to Mexico of jackup rigs under long term contracts. This
caused revenues and operating income to increase by approximately $38 million as
compared to 1992.
Since this recovery, a number of jackup rigs have been mobilized to the Gulf
of Mexico from foreign locations. To date, the market has been able to absorb
this increase in supply but Diamond Offshore faces a risk that rates and
utilization can decline if the number of rigs available exceeds demand. This
risk is magnified since most Gulf of Mexico employment is short term, on a well
to well basis.
Higher rig utilization and day rates in the Gulf of Mexico were partially
offset by adverse market conditions in the North Sea due primarily to changes in
the United Kingdom Petroleum Revenue Tax. In addition, regulatory changes will
require substantial capital expenditures for older rigs in order to obtain
licensing for
38
operations in the North Sea. Diamond Offshore believes that it may be necessary
to mobilize its older rigs to new markets during the next year. It is likely
that the costs of these relocations will not be fully reimbursed by customers.
Diamond Offshore anticipates its three newest units will not require major
modifications and may continue to operate in this market.
Results from operations also benefited from the parent company to retire
intercompany debt.
Revenues increased in 1993 as compared to 1991, due primarily to the
acquisition of 40 offshore drilling rigs in January 1992. Net loss increased due
primarily to the corresponding increase in intercompany interest and higher
depreciation expenses related to the additional rigs.
Other
Revenues increased by $27.5 and $98.4 million, as compared to 1992 and 1991,
respectively. Results from operations decreased by $6.9 million and increased by
$77.7 million, as compared to 1992 and 1991, respectively. Other operations
consist primarily of investment income of non-insurance companies and the
Company's investment in CBS Inc.
Revenues increased due primarily to higher earnings (accounted for under the
equity method) of CBS Inc. and higher realized investment gains, partially
offset by lower investment income. Results from operations before accounting
changes declined, as compared to 1992, due to increased interest expense
relating to the write off of unamortized discount for the early retirement of
debt, partially offset by the increased revenues. Results from operations
increased, as compared to 1991, due to the increased revenues, and lower
interest expense.
Accounting Developments:
In November 1992, the Financial Accounting Standards Board ("FASB") issued
SFAS No.112, "Employers' Accounting for Postemployment Benefits." This Statement
establishes accounting standards for employers who provide benefits to former or
inactive employees after employment but before retirement (postemployment
benefits). Postemployment benefits include salary continuation, supplemental
unemployment benefits, severance benefits, disability-related benefits, job
training and counseling and continuation of benefits such as health care
benefits and life insurance coverage. This Statement applies to financial
statements for fiscal years beginning after December 15, 1993. This Statement
will not have a significant impact on the Company.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This Statement addresses the accounting by creditors for
impairment of certain loans. It is applicable to all creditors and to all loans,
uncollateralized as well as collateralized, except large groups of smaller-
balance homogeneous loans that are collectively evaluated for impairment, loans
that are measured at fair value or at the lower of cost or fair value, leases,
and debt securities. The Statement requires that applicable loans be treated as
impaired when it is probable that a creditor will be unable to collect all
amounts (both principal and interest) contractually due. It requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate. Impairment may be
measured at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. In early 1994, the FASB began
deliberating certain amendments to this Statement. This Statement applies to
financial statements for fiscal years beginning after December 15, 1994. This
Statement will not have a significant impact on the Company.
39
Item 8. Financial Statements and Supplementary Data.
Loews Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------
(Amounts in thousands of dollars) 1993 1992
- ------------------------------------------------------------------------------------------------------
(Restated)
Assets:
Investments (Notes 1, 2, 3 and 4):
Fixed maturities available for sale, amortized cost of
$17,132,086 and market value of $18,295,953, respectively ...... $17,657,856 $17,414,480
Equity securities available for sale, cost of $1,028,733 and
market value of $902,455, respectively ......................... 1,240,256 859,879
Mortgage loans and notes receivable ............................. 121,439 152,328
Policy loans .................................................... 173,606 177,811
Other investments ............................................... 72,085 59,524
Short-term investments .......................................... 8,025,201 5,712,212
-------------------------------
Total investments ............................................ 27,290,443 24,376,234
Cash .............................................................. 155,703 105,308
Receivables (Note 1):
Reinsurance ..................................................... 2,951,644 3,249,849
Other insurance ................................................. 3,657,048 3,995,103
Less allowance for doubtful accounts ............................ (117,324) (110,420)
Security sales .................................................. 467,329 137,054
Federal income taxes (Note 8) ................................... 96,623 301,009
Other, less allowance for doubtful accounts and cash discounts of
$12,418 and $20,860 ............................................ 419,413 516,790
Inventories (Notes 1 and 6) ....................................... 241,287 260,019
Investment in associated companies (Note 5) ....................... 490,654 422,941
Property, plant and equipment-net (Notes 1 and 7) ................. 1,038,179 1,002,251
Deferred income taxes (Note 8) .................................... 1,074,410 1,109,532
Other assets (Notes 13 and 14) .................................... 564,600 467,498
Deferred policy acquisition costs of insurance subsidiaries (Note 1) 979,166 887,004
Separate Account business (Notes 1 and 3) ......................... 6,540,557 6,835,342
-------------------------------
Total assets ................................................. $45,849,752 $43,555,514
===============================
See Notes to Consolidated Financial Statements.
40
December 31,
--------------------------------
1993 1992
- ------------------------------------------------------------------------------------------------------
(Restated)
Liabilities and Shareholders' Equity:
Insurance reserves (Note 1):
Claims and claims expense ....................................... $21,670,202 $20,733,438
Future policy benefits .......................................... 2,735,691 2,486,279
Unearned insurance premiums ..................................... 2,556,015 2,422,149
Policyholders' funds ............................................ 477,095 538,373
-------------------------------
Total insurance reserves ..................................... 27,439,003 26,180,239
Accounts payable and accrued liabilities .......................... 705,034 598,726
Payable for securities purchased .................................. 190,138 113,960
Securities sold under repurchase agreements (Note 2) .............. 613,250 610,987
Accrued taxes (Note 8) ............................................ 290,861 205,520
Long-term debt, less unamortized discount (Notes 3 and 9) ......... 2,195,670 1,759,595
Deferred credits and other liabilities (Note 13) .................. 635,667 612,826
Separate Account business (Notes 1 and 3) ......................... 6,540,557 6,835,342
Participating policyholders' equity (Note 1) ...................... 160,100 177,568
-------------------------------
Total liabilities ............................................ 38,689,280 37,094,763
-------------------------------
Minority interest ................................................. 1,033,274 933,761
-------------------------------
Commitments and contingent liabilities
(Notes 1, 2, 4, 8, 9, 13, 14, 15 and 16)
Shareholders' equity (Notes 1, 2, 5, 9, 11 and 13):
Common stock, $1 par value:
Authorized-200,000,000 shares
Issued and outstanding-61,524,700 and 65,098,700 shares ....... 61,525 65,099
Additional paid-in capital ...................................... 210,289 163,076
Earnings retained in the business ............................... 5,476,660 5,266,983
Unrealized appreciation ......................................... 406,736 31,832
Pension liability adjustment .................................... (28,012)
-------------------------------
Total shareholders' equity ................................... 6,127,198 5,526,990
-------------------------------
Total liabilities and shareholders' equity ................... $45,849,752 $43,555,514
===============================
41
Loews Corporation and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
Years Ended December 31,
---------------------------------------------------
(Amounts in thousands, except per share data) 1993 1992 1991
- -----------------------------------------------------------------------------------------------------
Revenues (Note 1):
Insurance premiums:
Property and casualty (net of insurance
premiums ceded of $508,098, $487,381
and $481,709) ............................ $ 6,273,654 $ 6,352,166 $ 6,653,846
Life (net of insurance premiums ceded of
$40,053, $41,884 and $25,869) ............ 2,392,027 2,392,690 2,269,320
Investment income, net of expenses (Note 2) . 1,377,754 1,584,321 1,736,806
Realized investment gains (Note 2) .......... 862,797 407,247 412,155
Manufactured products (including excise taxes
of $379,361, $355,816 and $358,993) ........ 2,055,084 2,363,431 2,167,410
Other (Note 5) .............................. 725,461 591,599 380,727
---------------------------------------------------
Total .................................... 13,686,777 13,691,454 13,620,264
---------------------------------------------------
Expenses (Note 1):
Insurance benefits and underwriting expenses
(net of reinsurance ceded of $177,550,
$570,208 and $473,161) ..................... 9,271,536 10,697,227 9,076,444
Amortization of deferred policy acquisition
costs ...................................... 1,193,421 1,067,689 1,112,857
Cost of manufactured products sold (Note 6) . 864,115 878,465 886,340
Selling, operating, advertising and
administrative expenses..................... 1,506,049 1,417,696 1,169,915
Interest .................................... 162,298 148,843 163,559
---------------------------------------------------
Total .................................... 12,997,419 14,209,920 12,389,115
---------------------------------------------------
689,358 (518,466) 1,231,149
---------------------------------------------------
Income taxes (benefits) (Note 8) ............ 46,567 (388,691) 217,458
Minority interest ........................... 48,670 (107,678) 109,353
---------------------------------------------------
Total .................................... 95,237 (496,369) 326,811
---------------------------------------------------
Income (loss) before cumulative effect of
changes in accounting principles ............. 594,121 (22,097) 904,338
Cumulative effect of changes in accounting
principles-net (Note 1) ...................... 144,711
---------------------------------------------------
Net income .................................... $ 594,121 $ 122,614 $ 904,338
===================================================
Earnings Per Share (Note 11):
Income (loss) before cumulative effect of
changes in accounting principles ........... $9.27 $ (.33) $13.14
Cumulative effect of changes in accounting
principles-net ............................. 2.20
---------------------------------------------------
Net income ............................... $9.27 $1.87 $13.14
===================================================
See Notes to Consolidated Financial Statements.
42
Loews Corporation and Subsidiaries
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Additional Earnings Unrealized Pension Common
Common Paid-In Retained in Appreciation Liability Stock Held
(Amounts in thousands) Stock Capital the Business (Depreciation) Adjustment in Treasury
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1990 .......... $69,917 $130,301 $4,860,494 $(17,315)
Net income ........................ 904,338
Dividends paid, $1 per share ...... (68,923)
Purchases of common stock ........ $ 264,182
Retirement of common stock held
in treasury ..................... (2,359) (5,685) (231,873) (239,917)
Net unrealized appreciation ...... 14,896
Equity in certain transactions of
subsidiary companies (Note 5) ... 37,546
-------------------------------------------------------------------------
Balance, December 31, 1991 ......... 67,558 162,162 5,464,036 (2,419) 24,265
Net income ....................... 122,614
Dividends paid, $1 per share ..... (65,810)
Purchases of common stock ........ 238,223
Retirement of common stock held in
treasury ........................ (2,459) (6,172) (253,857) (262,488)
Net unrealized appreciation....... 34,251
Equity in certain transactions of
subsidiary companies ............ 7,086
-------------------------------------------------------------------------
Balance, December 31, 1992 ......... 65,099 163,076 5,266,983 31,832
Net income ....................... 594,121
Dividends paid, $1 per share ..... (64,289)
Purchases of common stock ........ 336,297
Retirement of common stock held in
treasury ........................ (3,574) (12,568) (320,155) (336,297)
Accounting change (Note 1) ....... 367,928
Net unrealized appreciation ...... 6,976
Pension liability adjustment
(Note 13) ....................... $(28,012)
Equity in certain transactions of
subsidiary companies (Note 5) ... 59,781
-------------------------------------------------------------------------
Balance, December 31, 1993 ......... $61,525 $210,289 $5,476,660 $406,736 $(28,012)
=========================================================================
See Notes to Consolidated Financial Statements.
43
Loews Corporation and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended December 31,
----------------------------------------------------
(Amounts in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
------------(Restated)----------
Operating Activities:
Net income .................................. $ 594,121 $ 122,614 $ 904,338
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of changes in
accounting principles .................... (144,711)
Undistributed (earnings) losses from
unconsolidated affiliates ................ (50,045) (26,170) 22,589
Distribution of CBS equity earnings ....... 3,787 3,029 417,597
Provision for minority interest ........... 48,670 (107,678) 109,353
Amortization of investments ............... (95,262) (127,416) (144,697)
Depreciation and amortization ............. 135,101 138,370 99,701
Realized investment gains ................. (862,797) (407,247) (412,155)
Provision for deferred income taxes ....... (181,601) (382,691) (220,207)
Changes in assets and liabilities-net:
Reinsurance receivables ................... 298,185 457,892 213,036
Other receivables ......................... 349,971 (327,966) 250,208
Deferred policy acquisition costs ......... (92,162) (34,065) (27,263)
Insurance reserves and claims ............. 1,229,486 2,496,282 1,419,342
Accounts payable and accrued liabilities .. 403,027 (28,336) 102,754
Other-net ................................. (119,803) 26,704 (52,871)
----------------------------------------------------
1,660,678 1,658,611 2,681,725
----------------------------------------------------
Investing Activities:
Purchases of fixed maturities ............... (42,893,379) (32,343,428) (38,115,486)
Proceeds from sales of fixed maturities ..... 41,339,798 32,854,377 32,039,457
Proceeds from maturities of fixed maturities 2,349,370 1,414,987 2,751,185
Purchases of equity securities .............. (957,846) (574,478) (419,347)
Proceeds from sales of equity securities .... 874,460 435,147 654,403
Return of investment from CBS tender offer... 12,666
Purchases of property and equipment ......... (159,480) (123,658) (90,216)
Proceeds from sales of property and equipment 20,276 17,184 22,411
Securities sold under repurchase agreements . 2,263 (789,248) 1,381,439
Change in short-term investments ............ (2,259,348) (1,841,219) (293,957)
Change in other investments ................. 8,146 151,821 (110,336)
Purchase of business-net of cash acquired ... (372,242)
-----------------------------------------------------
(1,675,740) (1,170,757) (2,057,781)
-----------------------------------------------------
Financing Activities:
Dividends paid to shareholders .............. (64,289) (65,810) (68,923)
Purchases of treasury shares ................ (336,297) (238,223) (264,182)
Principal payments on long-term debt ........ (745,163) (210,662) (303,717)
Issuance of long-term debt .................. 1,181,910 1,517 397,461
Net decrease in short-term debt ............. (399,429)
Receipts credited to policyholders .......... 47,481 47,293 45,204
Withdrawals of policyholder account balances (18,185) (18,476) (11,581)
----------------------------------------------------
65,457 (484,361) (605,167)
-----------------------------------------------------
Net change in cash ............................ 50,395 3,493 18,777
Cash, beginning of year ....................... 105,308 101,815 83,038
----------------------------------------------------
Cash, end of year ............................. $ 155,703 $ 105,308 $ 101,815
====================================================
See Notes to Consolidated Financial Statements.
44
Loews Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies-
Principles of Consolidation-The consolidated financial statements include all
significant subsidiaries and all material intercompany accounts and transactions
have been eliminated. The equity method of accounting is used for investments in
associated companies in which the Company has an interest of 20% to 50%.
Accounting Changes-Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 113, "Accounting and Reporting for
Reinsurance of Short-duration and Long-duration Contracts." This Statement
establishes the conditions required for a contract to be accounted for as
reinsurance, prescribes accounting and reporting standards for those contracts,
and requires that balances pertaining to reinsurance transactions be reported
"gross" on the balance sheet rather than reductions of reserves for claims and
claims expense, policy benefits of unearned premiums. At December 31, 1993,
reinsurance recoverables on insurance claim and policy benefits reserves of
$2,500,000,000 and ceded unearned premiums of $167,000,000 are reported as
assets. Prior years' amounts have been restated. As a result, assets and
liabilities at December 31, 1992 were each increased by $3,100,000,000.
The provisions of SFAS No. 113 that pertain to risk transfer and recognition
of revenues and costs did not impact the Company's income or shareholders'
equity as all material reinsurance arrangements are prospective and provided for
the transfer of risk.
Effective December 31, 1993, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This Statement requires that
investments in debt and equity securities classified as available: for sale be
carried at fair value. Previously, fixed income securities classified as
available for sale were carried at the lower of aggregate amortized cost or fair
value. Unrealized gains and losses are reflected as a separate component of
shareholders' equity, net of deferred income taxes, participating policyholders'
and minority interests. The effect of adopting this Statement was to increase
shareholders' equity by $367,928,000 (net of $293,973,000 in deferred income
taxes, participating policyholders' and minority interests). The adoption of
this Statement did not impact net income. In accordance with the Statement,
prior period financial statements have not been restated. Separate Account
assets invested in debt securities have also been classified as available for
sale and are now carried at fair value. As a result, Separate Account
investments were increased by $189,000,000 with a corresponding increase to
Separate Account liabilities.
In 1992 the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and SFAS No. 109, "Accounting for
Income Taxes." CBS Inc. has also adopted SFAS Nos. 106 and 109 as well as SFAS
No. 112, "Employers' Accounting for Postemployment Benefits" which requires
accrual of benefits to be provided to former or inactive employees after
employment, but before retirement. In addition, CNA Financial Corporation
("CNA") changed its method of accounting from reporting ultimate reserves for
fixed and determinable claims reserves related to workers' compensation lifetime
claims and accident and health disability claims to discounting such reserves
consistent with accounting practices on other similar fixed and determinable
claims. The cumulative effect as of January 1, 1992 of adopting these accounting
changes is as follows:
In thousands Per Share
------------ ---------
Postretirement benefits other than pensions (net
of income tax benefit of $102,005) ............... $(201,131) $(3.06)
Accounting for income taxes ....................... 128,991 1.96
Discounting for certain workers' compensation and
disability claims (net of income tax expense
of $135,200) ..................................... 218,132 3.32
Postemployment benefits of CBS Inc. (net of income
tax benefit of $94) .............................. (1,281) (.02)
--------- ------
$ 144,711 $ 2.20
========= ======
45
Investments-Investments in securities, which are held principally by insurance
subsidiaries of CNA, are carried as follows:
The Company believes it has the ability to hold all fixed income investments
until maturity. However, securities may be sold to take advantage of investment
opportunities generated by changing interest rates, prepayments, tax and credit
considerations, as part of the Company's asset/liability strategy, or for other
similar factors. As a result, the Company considers its fixed maturity
securities (bonds and redeemable preferred stocks) and equity securities as
available for sale and they are carried at fair value. In prior years, fixed
maturity securities were also considered as available for sale, but were carried
at the lower of aggregate amortized cost or fair value; in accordance with
guidance promulgated by the Securities and Exchange Commission. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in investment income.
Mortgage loans are carried at unpaid principal balances, adjusted for
amortization of premium or discount. Policy loans are carried at unpaid
balances. Short-term investments are carried at amortized cost, which
approximates market value.
The cost of securities sold is determined by the identified certificate
method. The unrealized gain or loss on investments which are revalued to current
market values is net of applicable deferred income taxes and participating
policyholders' and minority interests and is reflected as part of shareholders'
equity in unrealized appreciation. Investments are written down to estimated
realizable values and losses are charged to income when a decline in value is
considered to be other than temporary.
Insurance Operations-Premium revenue-Insurance premiums on property/casualty
and health insurance contracts (included in life premiums) 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 when assessed against the policyholders'
account balances. Other life insurance premiums are recognized as revenue when
due after deductions for ceded insurance.
Claims and claims expense reserves-Claims and claims expense reserves, except
reserves for structured settlements, workers' compensation lifetime claims and
accident and health disability claims, are based on (a) case basis estimates for
losses reported on direct business, adjusted in the aggregate for ultimate loss
expectations, (b) estimates of unreported losses based upon past experience, (c)
estimates of assumed insurance, (d) estimates of future expenses to be incurred
in settlement of claims, and (e) estimates of claim recoveries. In establishing
these estimates, consideration is given to current conditions and trends as well
as past company and industry experience.
Structured settlements have been negotiated for claims on certain
property/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
discounted values which approximate the alternative cost of annuity purchases.
Such reserves, discounted at interest rates ranging from 6.3 % to 7.5 %, totaled
$748,900,000 and $662,600,000 at December 31, 1993 and 1992, respectively.
Workers' compensation lifetime claims and accident and health disability claim
reserves are discounted at interest rates ranging from 3.5% to 5.5% with
mortality and morbidity assumptions reflecting current industry experience. Such
discounted reserves totaled $969,800,000 and $911,100,000 at December 31, 1993
and 1992 respectively.
Amounts assuming the changes in accounting for discounting certain workers'
compensation and disability claims were applied retroactively to the year ended
December 31, 1991, in thousands of dollars except per share data, are as
follows:
Pro forma consolidated net income ............................... $941,730
Per share ..................................................... 13.69
Net income per share as previously reported ................... 13.14
46
Claims and claims expense reserves are based on estimates and the ultimate
liability may vary significantly from such estimates. Any adjustments that are
made to the reserves are reflected in operating income in the year such
adjustments are made.
Future policy benefits reserves-Reserves for traditional life insurance
products are computed based upon net level premium methods using actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions include a margin for adverse deviations and
generally vary by plan, age at issue and policy duration. Interest rates range
from 3% to 10.5%, and mortality, morbidity and withdrawal assumptions reflect
CNA and industry experience prevailing at the time of issue. Renewal expense
estimates include the estimated effects of inflation and expenses beyond the
premium paying period.
Reinsurance-CNA assumes and cedes insurance with other insurers and reinsurers
and members of various reinsurance pools and associations. CNA utilizes
reinsurance arrangements to limit its maximum loss, to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of each
product line with CNA's retained amount varying by type of coverage. Generally,
reinsurance coverage for property risks is on excess of loss, per risk basis.
Liability coverages are generally reinsured on a quota share basis in excess of
CNA's retained risk. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured policy.
Deferred policy acquisition costs-Costs of acquiring insurance business, which
vary with and are primarily related to the production of such business, are
deferred. Such costs include commissions, premium taxes, and certain
underwriting and policy issuance costs. Property/casualty acquisition costs are
amortized ratably over the period the related premiums are recognized.
Anticipated investment income is considered in the determination of the
recoverability of deferred policy acquisition costs. Life acquisition costs are
capitalized and amortized based on assumptions consistent with those used for
computing policy benefit reserves. Acquisition costs on ordinary life business
are amortized over the assumed premium paying periods. Universal life and
investment annuity acquisition costs are amortized in proportion to the present
value of estimated gross profits over the products' assumed durations, which are
regularly evaluated and adjusted, as appropriate. To the extent that unrealized
gains or losses on available for sale securities would result in an adjustment
of deferred policy acquisition costs had those gains or losses actually been
realized, the related unamortized deferred policy acquisition costs are recorded
as an adjustment of the unrealized gains or losses included in shareholders'
equity.
Restricted investments-On December 30, 1993, CNA deposited $986,800,000 in an
escrow account, pursuant to the Fibreboard Global Settlement Agreement, as
discussed in Note 16. The funds are included in short-term investments and are
invested in U.S. treasury securities. The escrow account is the prefunding
mechanism to the trust fund for future claimants.
Participating business-Participating business represented 1.1%, 1.2% and 1.6%
of CNA's gross life insurance in force and 1.1%, 1.2% and 1.4% of life insurance
premium income for 1993, 1992 and 1991, respectively. Participating
policyholders' equity is determined by allocating 90% of related net income or
loss and unrealized investment gains or losses to such business, less dividends
determined by CNA's Board of Directors. In the accompanying Statements of
Consolidated Income, revenues and benefits and expenses include amounts related
to participating policies; the net income or loss allocated to participating
policyholders' equity is a component of insurance claims and policyholders'
benefits.
Separate Account business-CNA's life insurance subsidiary, Continental
Assurance Company ("CAC"), issues certain investment and annuity contracts, the
assets and liabilities of which are legally segregated and reflected in the
accompanying Consolidated Balance Sheets as assets and liabilities of Separate
Account business. CAC guarantees principal and a specified return to the
contractholders of approximately 86% of the Separate Account business.
Substantially all assets of the Separate Accounts are carried at fair value.
Separate Account liabilities are carried at the higher of contract value or the
fair value of the underlying assets. Investment income and gains and losses for
the Separate Account accrue to the contractholders and are therefore not
included in the Statements of Consolidated Income or Cash Flows except for
funding which may be required under the guarantees. Revenues to CNA from the
Separate Account business consist principally of administration fees.
47
Statutory capital and surplus-Statutory capital and surplus and net income
(loss), determined in accordance with accounting practice prescribed or
permitted by the Illinois Insurance Department, for property/casualty and life
insurance subsidiaries are as follows:
Statutory Capital
and Surplus Statutory Net Income (Loss)
---------------------- ----------------------------------
December 31, Years Ended December 31,
---------------------- ----------------------------------
1993 1992 1993 1992 1991
----------------------------------------------------------
(In thousands)
Property/casualty .... $3,598,415 $3,135,847 $120,710 $(1,043,050) $716,950
Life ............... 1,021,970 1,002,985 99 11,831 113,288
Inventories-Tobacco products-These inventories, aggregating $174,377,000 and
$186,986,000 at December 31, 1993 and 1992, respectively, are stated at the
lower of cost or market, using the last-in, first-out (LIFO) method.
Watches and other timing devices-These inventories, aggregating $52,109,000
and $59,322,000 at December 31, 1993 and 1992, respectively, are stated at the
lower of cost or market, using the first-in, first-out (FIFO) method.
Property, Plant and Equipment-Property, plant and equipment is carried at cost
less accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the various classes of
properties. Leaseholds and leasehold improvements are depreciated or amortized
over the terms of the related leases (including optional renewal periods where
appropriate) or the estimated lives of improvements, if less than the lease
term.
The principal service lives used in computing provisions for depreciation are
as follows:
Years
--------
Buildings and building equipment ................................. 40
Building fixtures ................................................ 10 to 20
Machinery and equipment .......................................... 5 to 12
Hotel equipment .................................................. 4 to 12
Drilling equipment ............................................... 10 to 25
Research and Development Costs-Research and development costs are charged to
expense as incurred and amounted to $11,866,000, $11,521,000 and $11,476,000 for
the years ended December 31, 1993, 1992 and 1991, respectively.
Reclassification-Certain amounts applicable to prior periods have been
reclassified to conform to the classifications followed in 1993.
48
2. Investments-
Investment income consisted of:
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
(In thousands)
Investment income:
Fixed maturities:
Bonds:
Tax exempt .................... $ 504,896 $ 728,031 $ 638,110
Taxable ....................... 539,695 622,967 811,016
Redeemable preferred stocks ..... 21,231 11,207 13,734
Equity securities ................. 16,441 19,068 19,392
Mortgage loans .................... 15,410 13,001 15,799
Policy loans ...................... 10,413 10,587 10,520
Security repurchase transactions .. 6,249 18,627 44,373
Short-term investments ............ 281,401 177,923 217,676
Other ............................. 12,138 22,586 25,848
---------------------------------------
Total investment income ........ 1,407,874 1,623,997 1,796,468
Investment expenses ................. 30,120 39,676 59,662
---------------------------------------
Investment income-net .......... $1,377,754 $1,584,321 $1,736,806
=======================================
Realized investment gains (losses) are as follows:
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
(In thousands)
Fixed maturities .................... $ 765,848 $ 303,622 $ 441,858
Equity securities ................... 118,774 45,339 3,762
Guaranteed separate accounts ........ 35,496 (39,675)
Other ............................... (21,825) 22,790 6,210
---------------------------------------
862,797 407,247 412,155
Income taxes ........................ (300,002) (132,980) (140,607)
Allocated to participating
policyholders ...................... (13,142) (12,140) (20,055)
Minority interest ................... (87,752) (39,785) (48,411)
---------------------------------------
Realized investment gains-net .. $ 461,901 $ 222,342 $ 203,082
=======================================
Securities sold under agreements to repurchase represent the amounts of
securities which will be reacquired subsequently by certain insurance and non-
insurance subsidiaries as specified in the agreements. Proceeds from these
transactions have been invested in short-term investments (principally
commercial paper and government securities) with maturities which correspond to
the repurchase dates.
The carrying value of investments (other than equity securities) that have not
produced income for the last twelve months is $134,188,000 at December 31, 1993.
Investment gains of $1,005,538,000 and losses of $120,916,000 were realized on
securities available for sale for the year ended December 31, 1993. Total
investment gains of $459,000,000 and $614,307,000 and losses of $155,378,000 and
$172,449,000 were realized on sales of fixed maturities for the years ended
December 31, 1992 and 1991, respectively.
49
The amortized cost and market values of securities available for sale are as
follows:
Unrealized
Amortized ------------------------------ Market
Cost Gains Losses Value
-------------------------------------------------------------
(In thousands)
December 31, 1993
-----------------
United States government and obligations of
government agencies .......................... $ 6,482,814 $ 80,070 $ 8,405 $ 6,554,479
Asset-backed .................................. 2,514,596 42,073 9,373 2,547,296
States, municipalities and political
subdivisions-tax exempt ...................... 4,725,384 316,717 27,260 5,014,841
Corporate ..................................... 1,800,548 64,042 12,768 1,851,822
Other debt .................................... 1,163,454 80,033 2,053 1,241,434
Redeemable preferred stocks ................... 445,290 3,493 799 447,984
-------------------------------------------------------------
Total fixed maturities ................... 17,132,086 586,428 60,658 17,657,856
Equity securities ............................. 1,028,733 229,806 18,283 1,240,256
-------------------------------------------------------------
$18,160,819 $ 816,234 $ 78,941 $18,898,112
=============================================================
December 31, 1992
-----------------
United States government and obligations of
government agencies .......................... $ 2,878,835 $ 28,639 $ 7,427 $ 2,900,047
Asset-backed .................................. 2,132,976 94,942 14,055 2,213,863
States, municipalities and political
subdivisions-tax exempt ...................... 9,501,741 712,962 52,276 10,162,427
Corporate ..................................... 1,161,965 75,185 10,765 1,226,385
Other debt .................................... 1,171,407 52,748 2,295 1,221,860
Redeemable preferred stocks ................... 567,556 4,427 612 571,371
-------------------------------------------------------------
Total fixed maturities ................... 17,414,480 968,903 87,430 18,295,953
Equity securities ............................. 813,779 106,911 18,235 902,455
-------------------------------------------------------------
$18,228,259 $1,075,814 $105,665 $19,198,408
=============================================================
The amortized cost and market value of fixed maturities at December 31, 1993
and 1992 are shown below by contractual maturity. Actual maturities differ from
contractual maturities because securities may be called or prepaid with or
without call or prepayment penalties.
December 31,
--------------------------------------------------------
1993 1992
--------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------------------------------------------------------
(In thousands)
Due in one year or less ...................... $ 687,704 $ 702,683 $ 819,504 $ 831,731
Due after one year through five years ........ 7,500,849 7,597,198 4,810,388 4,953,451
Due after five years through ten years ....... 1,466,050 1,520,597 2,248,911 2,362,085
Due after ten years .......................... 4,962,887 5,290,082 7,402,701 7,934,823
Asset-backed securities not due at a single
maturity date ............................... 2,514,596 2,547,296 2,132,976 2,213,863
--------------------------------------------------------
$17,132,086 $17,657,856 $17,414,480 $18,295,953
========================================================
50
3. Fair Value of Financial Instruments-
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values may be based on
estimates using present value or other valuation techniques. These techniques
are significantly affected by the assumptions used, including the discount rates
and estimates of future cash flows. Accordingly, the estimates presented herein
are subjective in nature and are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. SFAS No. 107 excludes
certain financial instruments and all nonfinancial instruments such as real
estate and insurance reserves from fair value disclosure. Thus, the aggregate
fair value amounts cannot be summed to determine the underlying economic value
of the Company.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
December 31,
--------------------------------------------------------
1993 1992
--------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------
(In thousands)
Financial Assets:
Investments:
Fixed maturities available for sale ...... $17,657,856 $17,657,856 $17,414,480 $18,295,953
Equity securities available for sale ..... 1,240,256 1,240,256 859,879 902,455
Mortgage loans and notes receivable ...... 74,816 77,914 103,018 104,937
Policy loans ............................. 173,606 163,566 177,811 167,894
Other investments ........................ 67,891 70,664 54,294 54,901
Separate Account assets:
Fixed maturities available for sale ........ 6,234,964 6,234,964 6,507,127 6,693,943
Equity securities available for sale ....... 145,663 145,663 112,511 112,594
Other ...................................... 159,930 168,570 215,704 215,727
Financial Liabilities:
Premium deposits and annuity contracts ..... 544,669 534,948 519,758 511,027
Long-term debt ............................. 2,182,210 2,284,651 1,742,799 1,826,894
Separate Account liabilities:
Guaranteed investment contracts .......... 4,875,440 5,178,817 5,531,806 5,782,639
Deferred annuities........................ 66,458 81,433 64,284 78,600
Variable separate accounts................ 222,780 222,780 148,970 148,970
Other..................................... 887,440 887,440 685,390 685,390
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
The carrying amounts reported in the balance sheet for short-term investments
and securities sold under repurchase agreements approximates fair value, because
of the short maturity of those investments. As such, these financial instruments
are not shown in the table above.
Fixed maturity securities, equity securities and separate account securities
are based on quoted market prices, where available. For securities not actively
traded, fair values are estimated using values obtained from independent pricing
services or quoted market prices of comparable instruments adjusted for
differences between the quoted instruments and the instruments being valued.
Fair value for mortgage loans and notes receivable and policy loans are
estimated using discounted cash flow analyses, at interest rates currently being
offered for similar loans to borrowers with comparable credit ratings. Loans
with similar characteristics are aggregated for purposes of the calculations.
Other investments and other Separate Account assets consist of investments in
limited partnerships, short term securities 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 and
(c) underlying assets of the investments. The fair value of certain assets
contained above approximates their carrying value.
51
Premium deposit and annuity contracts are valued based on cash surrender
values and the outstanding fund balances.
Guaranteed investment contracts and deferred annuities of the separate
accounts are estimated using discounted cash flow calculations, based on
interest rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
The fair value of the liabilities for variable separate accounts are based on
the quoted market values of the underlying assets of each variable separate
account. The fair value of other separate account liabilities approximates
carrying value.
Fair value of long-term debt traded on securities exchanges is based on quoted
market prices. The fair values for other long-term debt are based on quoted
market prices of comparable instruments adjusted for differences between the
quoted instruments and the instruments being valued or are estimated using
discounted cash flow analyses, based on current incremental borrowing rates for
similar types of borrowing arrangements.
4. Off-Balance-Sheet Financial Instruments-
The Company enters into various transactions involving off-balance-sheet
financial instruments through a variety of futures, swaps, options, forward and
other contracts (the "contracts") as part of its investing activities. Entering
into these contracts involves not only the risk of dealing with counterparties
and their ability to meet the terms of the contracts but also the market risk
associated with unmatched positions. Notional or contractual amounts are often
used to express the volume of these transactions, but the amounts potentially
subject to credit risk are much smaller. In addition, the amounts subject to
credit loss are substantially mitigated by collateral requirements of the
contracts. These contracts are marked to market and gains or losses are included
in realized investment gains or losses.
The Company's investments in off-balance-sheet financial instruments are as
follows:
December 31,
-----------------------------------------------------------
1993 1992
-----------------------------------------------------------
Contractual/ Estimated Contractual/ Estimated
Notional Fair Value Notional Fair Value
-----------------------------------------------------------
(In thousands)
Interest rate swaps ........................... $ 75,000 $ (8,005) $ 325,000 $(3,435)
Commitments to purchase government and
municipal securities ......................... 211,000 137 299,500 3,071
Options written on:
Intermediate term United States Treasury
securities ................................. 1,000,000 6,239
Equities and equity index ................... 133,712 (6,572) 89,974 268
Financial futures ............................. 803,313 2,557 444,451 (2,568)
Commodity:
Swaps ....................................... 344,870 (32,277) 272,890 (5,081)
Futures ..................................... 19,921 980 17,737 (446)
Forward ..................................... 96,453 4,188
Purchase obligations ........................ 87,990 (9,870) 87,990
Other ......................................... 4,688 14 10,818 (2,685)
The estimated fair values approximate carrying values and are generally
equivalent to the gains or losses on these financial instruments. Fair values
are based on quoted market prices, where available. For securities not actively
traded, fair values are estimated using values obtained from independent pricing
services, quoted market prices of comparable instruments or present value
models.
Through August 1, 1989, CNA's property/casualty operations wrote financial
guarantee insurance contracts. These contracts primarily represent industrial
development bond guarantees and equity guarantees typically extending from ten
to thirteen years. For these guarantees CNA received an advance premium which is
recognized over the exposure period and in proportion to the underlying exposure
insured.
52
At December 31, 1993 and 1992, gross exposure of financial guarantee insurance
amounted to $792,000,000 and $1,000,000,000, respectively. The degree of risk
attached to this exposure is substantially reduced through reinsurance,
collateral requirements and diversification of exposures. At December 31, 1993
and 1992, collateral consisting of letters of credit and debt service reserves
amounted to $48,000,000 and $60,000,000, respectively. In addition, security
interests in real estate are also obtained. Approximately 38% of the risks were
ceded to reinsurers at December 31, 1993 and 1992. Total exposure, net of
reinsurance, amounted to $492,000,000 and $603,000,000 at December 31, 1993 and
1992, respectively. Gross unearned premium reserves for financial guarantee
contracts were $33,000,000 and $51,000,000 at December 31, 1993 and 1992,
respectively. Gross claims and claims expense reserves totaled $320,000,000 and
$197,000,000 at December 31, 1993 and 1992, respectively. The fair values of the
liability for financial guarantee contracts were $350,000,000 and $235,000,000
at December 31, 1993 and 1992, respectively. Fair values are based on discounted
cash flows utilizing interest rates currently being offered for similar
contracts and spot interest rates.
5. Investments in Associated Companies-
Investments in associated companies consisted of:
December 31,
-------------------------
1993 1992
-------------------------
(In thousands)
CBS Inc. (market value $873,975 and $569,423)... $473,483 $358,500
Other........................................... 17,171 64,441
------------------------
$490,654 $422,941
========================
Equity in earnings (losses) of associated companies, included in other
revenues, amounted to $53,395,000, $26,743,000 and $(13,802,000) for the years
ended December 31, 1993, 1992 and 1991, respectively.
CBS Inc.-The Company held approximately 20% of the outstanding common shares
of CBS Inc. ("CBS") at December 31, 1993 and accounts for CBS on the equity
method.
In 1992, CBS adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," SFAS No. 109, "Accounting for Income Taxes" and
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," effective
January 1, 1992. The cumulative effect of these accounting changes resulted in
recognition by Loews of a charge of $17.4 million, or $.27 per share, in
relation to its investment in CBS.
The Company's equity in the earnings (losses) of CBS after giving effect to
purchase value adjustments amounted to $58,990,000, $27,012,000 and
$(24,533,000) before taxes and $52,641,000, $24,717,000 and $(22,904,000) after
taxes for the years ended December 31, 1993, 1992 and 1991, respectively.
Dividends received amounted to $3,787,000, $3,029,000 and $3,029,000 for the
respective periods.
In May 1993, $389.6 million of CBS 5% convertible debentures were converted
for 1,947,975 shares of common stock. The difference between the amount of debt
converted and the average cost of the treasury shares issued, net of unamortized
issue costs related to this debt, was credited to additional paid-in capital. As
a result, the Company's ownership in CBS decreased from approximately 23% to 20%
and the Company's additional paid-in capital increased by $58,942,000.
In February 1991, CBS completed a cash tender offer at an amount exceeding its
net book value per share for repurchase of its common stock aggregating
approximately $2 billion or 44% of its common shares. The Company tendered its
shares and received cash amounting to $537,234,000, comprised of $414,568,000
realization of previously undistributed earnings and $122,666,000 representing a
return of the Company's investment. As a result of the tender, the Company's
ownership in CBS decreased from approximately 25% to 23% and the Company's
additional paid-in capital increased by $37,880,000.
53
Summarized financial information for CBS is as follows:
December 31,
--------------------------
1993 1992
--------------------------
(In thousands)
Current assets ................................... $1,677,500 $1,480,500
Non-current assets ............................... 1,741,200 1,694,500
--------------------------
Total assets ................................ 3,418,700 3,175,000
--------------------------
Current liabilities .............................. 1,038,900 1,117,300
Long-term debt ................................... 590,300 870,000
Other liabilities ................................ 651,500 740,900
--------------------------
Total liabilities ........................... 2,280,700 2,728,200
--------------------------
Shareholders' equity ............................. $1,138,000 $ 446,800
==========================
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
(In thousands)
Net sales .......................... $3,510,100 $3,503,000 $3,035,000
======================================
Cost of sales ...................... $2,688,800 $2,906,500 $2,938,000
======================================
Income (loss) before discontinued
operations and cumulative effect of
changes in accounting principles .. $ 326,200 $ 162,500 $ (98,700)
======================================
Net income (loss) .................. $ 326,200 $ 81,000 $ (85,800)
======================================
6. Inventories-
December 31,
--------------------------
1993 1992
--------------------------
(In thousands)
Leaf tobacco ..................................... $145,259 $162,093
Manufactured stock ............................... 76,946 77,537
Materials, supplies, etc. ........................ 19,082 20,389
-----------------------
Total ....................................... $241,287 $260,019
=======================
If the average cost method of accounting had been used for tobacco inventories
instead of the LIFO method, such inventories would have been $211,227,000 and
$211,198,000 higher at December 31, 1993 and 1992, respectively.
7. Property, Plant and Equipment-
December 31,
--------------------------
1993 1992
--------------------------
(In thousands)
Land ............................................. $ 33,482 $ 35,187
Buildings and building equipment ................. 395,748 387,250
Machinery and equipment .......................... 1,189,062 1,096,244
Leaseholds and leasehold improvements ............ 32,008 30,355
-------------------------
Total, at cost............................... 1,650,300 1,549,036
Less accumulated depreciation and amortization ... 612,121 546,785
-------------------------
Property, plant and equipment-net ........... $1,038,179 $1,002,251
=========================
54
Depreciation and amortization expense and capital expenditures, by business
segment, are as follows:
Years Ended December 31,
------------------------------------------------------------------------
1993 1992 1991
------------------------------------------------------------------------
Depr. & Capital Depr. & Capital Depr. & Capital
Amort. Expend. Amort. Expend. Amort. Expend.
------------------------------------------------------------------------
(In thousands)
Property and casualty insurance .... $ 24,431 $ 84,100 $ 8,030 $ 18,315 $ 8,820 $ 4,191
Life insurance ..................... 21,931 5,372 32,644 13,604 29,960 27,534
Cigarettes ......................... 21,973 26,996 18,314 23,205 22,938 26,397
Hotels ............................. 15,940 18,110 15,479 11,550 14,004 10,842
Watches and other timing devices ... 2,248 1,310 5,608 3,617 3,681 780
Drilling ........................... 43,938 70,276 52,550 471,067 14,545 14,431
-----------------------------------------------------------------------
Total business segments ....... 130,461 206,164 132,625 541,358 93,948 84,175
Corporate .......................... 4,640 1,343 5,745 3,472 5,753 6,041
-----------------------------------------------------------------------
Total ......................... $135,101 $207,507 $138,370 $544,830 $99,701 $90,216
=======================================================================
8. Income Taxes-
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
(In thousands)
Income taxes (benefits):
Operations:
Federal:
Current ......................... $ 175,705 $ (67,809) $ 388,158
Deferred ........................ (181,601) (382,691) (220,207)
State, city and other, principally
current .......................... 52,463 61,809 49,507
--------------------------------------
46,567 (388,691) 217,458
Cumulative effect of changes in
accounting principles .............. 118,209
--------------------------------------
Total ............................ $ 46,567 $(270,482) $ 217,458
======================================
Deferred tax assets (liabilities) are as follows:
December 31,
---------------------------- January 1,
1993 1992 1992
---------------------------------------
(In thousands)
Insurance reserves:
Property/casualty claim reserve
discounting ....................... $ 990,206 $ 861,323 $ 714,320
Unearned premium reserves .......... 125,560 147,874 134,239
Life reserve differences ........... 144,078 140,120 108,535
Others ............................. (12,126) 4,747 15,111
Deferred policy acquisition costs..... (310,228) (280,902) (282,073)
Employee benefits..................... 144,566 128,127 117,292
Property, plant and equipment......... (132,750) (148,541) (154,714)
Investments........................... 143,342 61,280 46,455
Alternative minimum tax credit........ 165,200 151,000
Other-net............................. 44,371 55,590 38,762
--------------------------------------
1,302,219 1,120,618 737,927
Unrealized (appreciation) depreciation (257,764) (15,601) 186
Other-net............................. 29,955 4,515 387
--------------------------------------
Deferred tax assets-net.......... $1,074,410 $1,109,532 $ 738,500
======================================
55
Gross deferred tax assets amounted to $1,895,689,000 and $1,595,083,000 and
liabilities amounted to $821,279,000 and $485,551,000, for the years ended
December 31, 1993 and 1992, respectively.
No valuation allowance for deferred tax assets is necessary due to the
Company's election to designate its 1988 through 1991 tax payments as Special
Estimated Tax Payments as permitted under the Technical and Miscellaneous
Revenue Act of 1988, which should assure realization of a substantial portion of
deferred tax assets arising from the discounting of property/casualty loss
reserves and the Company's past history of profitability and anticipated
continued profitability.
Deferred Federal income taxes (benefits) have been provided for the tax
effects of items reported in different periods for financial and income tax
reporting purposes. The sources of these differences for the year ended December
31, 1991, in thousands of dollars, were as follows:
Insurance reserves ............................................... $(149,076)
Utilization of alternative minimum tax credit .................... 41,000
Deferred income .................................................. (50,393)
Investment write-downs ........................................... (57,865)
Deferred policy acquisition costs ................................ (7,183)
Provisions deductible in different years ......................... 14,307
Other ............................................................ (10,997)
---------
Total ....................................................... $(220,207)
=========
Total income tax expense (benefit) for the years ended December 31, 1993, 1992
and 1991 was different than the amounts of $241,275,000, $(176,278,000) and
$418,591,000, computed by applying the statutory U.S. federal income tax rate of
35%, 34% and 34%, respectively to income (loss) before income taxes and minority
interest for each of the years. The reasons for variances from the statutory
rate are as follows:
Percent of Pre-tax Income
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
Statutory rate ...................... 35 % (34)% 34 %
(Decrease) increase in income tax
rate resulting from:
Tax rate change .................... (5)
Exempt interest and dividends
received deduction ................ (28) (44) (16)
Special deduction-salvage and
subrogation ....................... (2) (3) (2)
Fresh start adjustments ............ (3)
State and city income taxes ........ 7 8 3
Other .............................. (2) 2
--------------------------------
Effective income tax rate........... 7 % (75)% 18 %
================================
Federal, foreign, state and local income tax payments, net of refunds,
amounted to approximately $10,263,000, $355,853,000 and $346,856,000 for the
years ended December 31, 1993, 1992 and 1991, respectively.
The Tax Reform Act of 1986 enacted a new separate parallel tax system referred
to as the Alternative Minimum Tax ("AMT") system. AMT is based on a flat rate
applied to a broader tax base. It is calculated separately from the regular
federal income tax and the higher of the two taxes is paid. The excess of the
AMT over regular tax is a tax credit, which can be carried forward indefinitely
to reduce regular tax liabilities of future years. As a result of a carryback of
1992 tax losses, the Company received a tax refund of approximately $32,000,000.
At December 31, 1993 the AMT credit totaled approximately $165,200,000.
56
The Company has entered into separate tax allocation agreements with Bulova
and CNA, majority-owned subsidiaries in which its ownership exceeds 80% (the
"Subsidiaries"). Each agreement provides that the Company will (i) pay to the
Subsidiary the amount, if any, by which the Company's consolidated federal
income tax is reduced by virtue of inclusion of the Subsidiary in the Company's
return, or (it) be paid by the Subsidiary an amount, if any, equal to the
federal income tax which would have been payable by the Subsidiary if it had
filed a separate consolidated return. Under these agreements, the federal income
tax benefit (expense) to CNA amounted to approximately $17,000,000, $350,000,000
and $(82,000,000) for the years ended December 31, 1993, 1992 and 1991,
respectively, and the federal income tax benefit (expense) to Bulova amounted to
approximately $2,500,000, $(3,300,000) and $1,900,000 for the years ended
December 31, 1993, 1992 and 1991, respectively. Each agreement may be cancelled
by either of the parties upon thirty days' written notice.
The Company's federal income tax returns have been examined through 1988 and
settled through 1983, and the years 1989 and 1990 are currently under
examination. While tax liabilities for subsequent years are subject to audit and
final determination, in the opinion of management the amount accrued in the
consolidated balance sheet is believed to be adequate to cover any additional
assessments which may be made by federal, state and local tax authorities and
should not have a material effect on the financial condition of the Company.
The Revenue Reconciliation Act of 1990 (the "1990 Act") requires
property/casualty insurance companies to accrue estimated salvage and
subrogation recoverable for tax purposes as of January 1, 1990. Under a
transition provision of the 1990 Act, for companies that had anticipated salvage
and subrogation in determining loss reserves, 87% of such accrual as of January
1, 1990 was forgiven. This special deduction is to be taken ratably over four
taxable years beginning in 1990. CNA recognized a tax benefit of approximately
$17,000,000, $17,000,000 and $33,000,000 for the years ended December 31, 1993,
1992 and 1991, respectively. The 1991 amount recognizes tax benefit for the 1990
year.
The Omnibus Budget Reconciliation Act of 1993, enacted in August 1993, among
other things, increased the corporate tax rate from 34% to 35 % effective
January 1, 1993. In accordance with SFAS No. 109 deferred tax assets have been
adjusted for the effect of the change in tax rates in the period enacted. As a
result, the Company has recorded a tax benefit in 1993 of approximately
$31,636,000 to increase its deferred tax asset.
57
9. Long-Term Debt-
December 31, 1993
------------------------------------------------------------
Senior Unamortized Current
Debt Discount Net Maturities
------------------------------------------------------------
(In thousands)
By company:
Loews Corporation ............................ $1,208,573 $23,529 $1,185,044 $1,252
CNA .......................................... 920,777 7,498 913,279 1,699
Bulova ....................................... 4,282 4,282 943
Other ........................................ 93,065 93,065 4,647
--------------------------------------------------------
Total ................................... $2,226,697 $31,027 $2,195,670 $8,541
========================================================
Long-term debt, net of notes and debentures held by the Company (a), consists
of:
December 31,
-------------------------
1993 1992
-------------------------
(In thousands)
Senior debt:
Loews Corporation (Parent Company):
8.5% notes due 1998 (effective interest rate of
8.6%) (authorized, $125,000) .................. $ 117,832 $ 117,832
8.3% debentures due 2007 (effective interest
rate of 8.4%) (authorized, $200,000) (b) ...... 200,000 200,000
8.9% debentures due 2011 (effective interest
rate of 9.0%) (authorized, $175,000) .......... 175,000 175,000
9% senior sinking fund debentures due 2016 ..... 158,700
7.6% notes due 2023 (effective interest rate of
7.8%) (authorized, $300,000) (c) .............. 300,000
7% notes due 2023 (effective interest rate of
7.2%) (authorized, $400,000) (d) .............. 400,000
Note payable (effective interest rate of 10%) .. 15,741 16,879
CNA Financial Corporation:
8.6% notes due 1996 (effective interest rate of
8.8%) (authorized, $250,000) .................. 250,000 250,000
8.9% notes due 1998 (effective interest rate of
9.2%) (authorized, $150,000) .................. 150,000 150,000
6.3% notes due 2003 (effective interest rate of
6.4%) (authorized, $250,000) .................. 250,000
7.3% debentures due 2023 (effective interest
rate of 7.3%) (authorized, $250,000) .......... 250,000
Other senior debt (effective interest rates
approximate 4.6%) ............................. 20,777 16,096
Other senior debt, principally mortgages
(effective interest rates approximate 8.9%) .... 97,347 103,476
-------------------------
2,226,697 1,187,983
Less unamortized discount ......................... 31,027 11,042
-------------------------
Senior debt-net .............................. 2,195,670 1,176,941
-------------------------
Subordinated debt:
Loews Corporation (Parent Company):
10% subordinated notes due 1996 ................ 200,000
Zero coupon convertible subordinated notes
due 2004, net of discount of $393,293 ......... 390,138
-------------------------
590,138
Less unamortized discount ......................... 7,484
-------------------------
Subordinated debt-net ....................... 582,654
-------------------------
Long-term debt, less unamortized discount ... $2,195,670 $1,759,595
=========================
58
(a) Amounts of notes and debentures held by the Company are:
December 31,
-------------------------
1993 1992
-------------------------
8.5%, due 1998 .................................... $7,168 $ 7,168
Zero coupon, due 2004, net of discount of $146,372 145,197
9%, due 2016 ...................................... 41,300
(b) Redeemable in whole or in part at January 15, 1997 at 104%, and decreasing
percentages thereafter.
(c) Redeemable in whole or in part at June 1, 2003 at 104%, and decreasing
percentages thereafter.
(d) Redeemable in whole or in part at October 15, 2003 at 102%, and decreasing
percentages thereafter.
The aggregate of long-term debt maturing in each of the next five years is
approximately as follows: $8,541,000 in 1994, $6,815,000 in 1995, $282,499,000
in 1996, $21,512,000 in 1997 and $273,283,000 in 1998.
The Company paid interest expenses of approximately $219,099,000, $127,689,000
and $146,659,000 for the years ended December 31, 1993, 1992 and 1991,
respectively.
Payment of dividends by insurance subsidiaries of CNA without prior regulatory
agency approval is limited to certain formula-derived amounts. At December 31,
1993, $2,089,629,000 of retained earnings of subsidiaries was not available for
dividends to the Company.
10. Purchase of Business-
In January 1992 Diamond Offshore Drilling, Inc., a wholly owned subsidiary,
acquired all of the outstanding common stock of Odeco Drilling, Inc. ("Odeco")
at a purchase price of $372,242,000 in cash. Odeco owned and operated 40
offshore drilling rigs that were used in drilling oil and gas wells. The
acquisition has been accounted for by the purchase method and the results of
operations are included in the Company's financial statements as of January 1,
1992. Had this acquisition occurred on January 1, 1991, consolidated results of
operations for the year ended December 31, 1991 would not have been materially
different.
11. Capital Stock and Earnings Per Share-
In addition to its common stock, the Company has authorized 25,000,000 shares
of preferred stock, $.10 par value.
Earnings per share, assuming no dilution, are based on the weighted average
number of shares outstanding during each year (64,108,000, 65,659,000 and
68,807,000 for the years ended December 31, 1993, 1992 and 1991, respectively).
Fully diluted earnings per share assumes conversion of the zero coupon
convertible subordinated notes and elimination of the related interest charges,
net of taxes. Fully diluted earnings per share are not presented for the years
ended December 31, 1992 and 1991 since such dilution is not material.
59
12. Quarterly Financial Data (Unaudited)-
1993 Quarters Ended 1992 Quarters Ended
-------------------------------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
-------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Total revenues ........ $3,351,634 $3,416,934 $3,375,079 $3,543,130 $3,433,430 $3,419,039 $3,442,358 $3,396,627
Income (loss) before
cumulative effect of
changes in accounting
principles ........... 138,403 (89,615) 203,643 341,690 (620,691) 122,326 266,179 210,089
Per share ........... 2.20 (1.40) 3.16 5.25 (9.53) 1.88 4.06 3.14
Net income (loss) ..... 138,403 (89,615) 203,643 341,690 (620,691) 122,326 266,179 354,800
Per share ........... 2.20 (1.40) 3.16 5.25 (9.53) 1.88 4.06 5.30
13. Retirement Plans-
Pension Plans-The Company and its subsidiaries have several non-contributory
defined benefit plans for eligible employees. The benefits for certain plans
which cover salaried employees and certain union employees are based on formulas
which include among others, years of service and average pay. The benefits for
one plan which covers union workers under various union contracts and certain
salaried employees are based on years of service multiplied by a stated amount.
Pension cost includes the following components:
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
(In thousands)
Service cost-benefits earned ........ $ 37,141 $ 34,292 $ 29,672
Interest cost ....................... 81,811 76,814 69,715
Return on plan assets-actual ........ (54,079) (55,446) (95,262)
Net amortization and deferrals ...... (7,163) (598) 49,722
-------------------------------------
Net pension cost .................. $ 57,710 $ 55,062 $ 53,847
=====================================
The following table sets forth the pension plans' funded status:
December 31,
------------------------------------------------------------
1993 1992
------------------------------------------------------------
Overfunded Underfunded Overfunded Underfunded
Plans Plans Plans Plans
------------------------------------------------------------
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation ............. $ 450,751 $512,907 $ 534,041 $261,216
=======================================================
Accumulated vested benefit obligation ...... $ 409,399 $473,030 $ 473,042 $244,372
=======================================================
Projected benefit obligation ................. $ 619,001 $565,127 $ 733,121 $264,512
Plan assets at fair value .................... 483,774 361,285 616,655 158,865
-------------------------------------------------------
Projected benefit obligation over plan assets 135,227 203,842 116,466 105,647
Unrecognized prior service cost .............. (16,273) (17,587) (22,628) (18,785)
Unrecognized net asset (obligation), January 1 22,330 (39,756) 22,437 (40,387)
Unrecognized net loss ........................ (159,594) (96,156) (103,651) (23,610)
Adjustment required to recognize minimum
liability ................................... 102,343 83,713
-------------------------------------------------------
Net pension (asset) liability recognized in
the balance sheet ......................... $ (18,310) $152,686 $ 12,624 $106,578
=======================================================
60
At December 31, 1993, the Company's adjustment required to recognize its
minimum pension liability exceeded its unrecognized prior service cost and net
transition obligation by $43,095,000. This excess is recorded as a reduction to
shareholders' equity of $28,012,000, net of tax benefits of $15,083,000, in
accordance with SFAS No. 87, "Employers' Accounting for Pensions."
The rates used in the actuarial assumptions were:
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
Discount rate ...................... 7.3% to 7.5% 8.3% to 8.5% 8.5% to 9.0%
Rate of compensation increase....... 4.5% to 5.8% 5.3% to 5.5% 5.8% to 6.3%
Expected long-term rate of return on
assets ............................ 7.5% to 8.5% 9.0% 9.3% to 9.5%
The Company's funding policy is to make contributions in accordance with
applicable governmental regulatory requirements. The assets of the plans are
invested primarily in interest-bearing obligations and for one plan with an
insurance subsidiary of the Company, in its Separate Account business.
Other Postretirement Benefit Plans-The Company and its subsidiaries have
several postretirement benefit plans covering eligible employees and retirees.
Participants generally become eligible after reaching age 55 with required years
of service. Actual requirements for coverage vary by plan. Benefits for retirees
who were covered by bargaining units vary by each unit and contract. Benefits
for certain retirees are in the form of a company health care account which can
have a maximum of $4,500 per year, with an equal amount for a spouse in the same
age grouping.
Benefits for retirees reaching age 65 are generally integrated with Medicare.
Benefits for certain retirees are in the form of a company health care account
which can have a maximum value of $1,500 per year, with an equal amount for a
spouse in the same age grouping. Other retirees, based on plan provisions, must
use Medicare as their primary coverage, with the Company reimbursing a portion
of the unpaid amount; or are reimbursed for the Medicare Part B premium or have
no company coverage. The benefits provided by the Company are basically health,
and for certain retirees, life insurance type benefits.
The Company does not fund any of these benefit plans and accrues
postretirement benefits during the active service of those employees who would
become eligible for such benefits when they retire.
The rates used in the actuarial assumptions were:
December 31
-------------------------
1993 1992
-------------------------
Net periodic postretirement benefit cost .......... 8.3% to 8.5% 8.5% to 9.0%
Accumulated postretirement benefit liability ...... 7.3% to 7.5% 8.3% to 8.5%
61
The following table sets forth the postretirement plans' status:
December 31,
--------------------------
1993 1992
--------------------------
(In thousands)
Accumulated postretirement benefit obligation:
Retirees ........................................ $134,502 $136,493
Fully eligible active plan participants ......... 57,376 61,369
Other active plan participants .................. 128,992 125,170
-----------------------
320,870 323,032
Unrecognized prior service cost ................. 736
Unrecognized net gain (loss) .................... 21,869 (11,216)
-----------------------
Accrued postretirement benefit liability ........ $343,475 $311,816
=======================
Years Ended December 31,
--------------------------
1993 1992
--------------------------
(In thousands)
Postretirement benefit cost includes the following
components:
Service costs ................................... $ 10,892 $ 10,807
Interest costs .................................. 25,238 24,919
-----------------------
Net periodic postretirement benefit cost ........ $ 36,130 $ 35,726
=======================
Prior to 1992 the Company recognized the expense as amounts were paid. Such
costs amounted to approximately S10,441,000 for 1991.
For measurement purposes, a trend rate of 14.5% to 15% pre-65 and 11.5% post-
65, for covered costs was used. These trend rates are expected to decrease
gradually to 6% and 7% at rates from 0.5% to 1.0% per annum. An increase of one
percentage point in assumed health care cost trend rates would increase the
accumulated postretirement benefit obligation by approximately $28,685,000 and
the net periodic postretirement benefit cost by approximately $3,900,000.
14. Reinsurance-
CNA assumes and cedes insurance with other insurers and reinsurers and members
of various reinsurance pools and associations. CNA utilizes reinsurance
arrangements to limit its maximum loss, to provide greater diversification of
risk and to minimize exposures on larger risks. The reinsurance coverages are
tailored to the specific risk characteristics of each product line with CNA's
retained amount varying by type of coverage. Generally, reinsurance coverage for
property risks is on excess of loss, per risk basis. Liability coverages are
generally reinsured on a quota share basis in excess of CNA's retained risk. In
addition, CNA has catastrophe coverage for certain types of losses over
stipulated amounts arising from any one occurrence or event.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after careful
review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance. Further, for
carriers that are not authorized reinsurers in Illinois, CNA receives collateral
primarily in the form of bank letters of credit, securing a large portion of the
recoverables. At December 31, 1993, such collateral totaled approximately
$155,000,000. CNA's largest recoverable, including prepaid reinsurance premiums,
at December 31, 1993 was approximately $484,000,000 with Lloyd's of London. The
recoverable from Lloyd's of London is dispersed among thousands of individual
reinsurers and other names who have unlimited liability.
62
The effects of reinsurance on written premiums and earned premiums are as
follows:
Written Premiums
-----------------------------------------------------------
Direct Ceded Assumed Net
-----------------------------------------------------------
(In thousands)
Year Ended December 31, 1993
Long Duration Contracts ...................... $ 422,700 $ 23,000 $ 141,600 $ 541,300
Short Duration Contract ...................... 7,654,900 540,100 1,168,400 8,283,200
-------------------------------------------------------
Total ................................... $8,077,600 $563,100 $1,310,000 $8,824,500
=======================================================
Year Ended December 31, 1992
Long Duration Contracts ...................... $ 413,800 $ 23,200 $ 146,500 $ 537,100
Short Duration Contracts ..................... 7,325,800 506,500 1,367,500 8,186,800
-------------------------------------------------------
Total ................................... $7,739,600 $529,700 $1,514,000 $8,723,900
=======================================================
Year Ended December 31, 1991
Long Duration Contracts ...................... $ 366,000 $ 19,700 $ 161,700 $ 508,000
Short Duration Contracts ..................... 7,623,500 491,800 1,294,700 8,426,400
-------------------------------------------------------
Total ................................... $7,989,500 $511,500 $1,456,400 $8,934,400
=======================================================
Earned Premiums
------------------------------------------------------------
Year Ended December 31, 1993
Long Duration Contracts ...................... $ 350,100 $ 23,000 $ 140,900 $ 468,000
Short Duration Contracts ..................... 7,603,200 525,100 1,142,700 8,220,800
--------------------------------------------------------
Total ................................... $7,953,300 $548,100 $1,283,600 $8,688,800
========================================================
Year Ended December 31, 1992
Long Duration Contracts ...................... $ 376,400 $ 23,200 $ 146,500 $ 499,700
Short Duration Contracts ..................... 7,570,500 506,100 1,203,900 8,268,300
--------------------------------------------------------
Total ................................... $7,946,900 $529,300 $1,350,400 $8,768,000
========================================================
Year Ended December 31, 1991
Long Duration Contracts ...................... $ 324,100 $ 19,700 $ 161,700 $ 466,100
Short Duration Contracts ..................... 7,741,700 487,900 1,226,500 8,480,300
--------------------------------------------------------
Total ................................... $8,065,800 $507,600 $1,388,200 $8,946,400
========================================================
15. Leases-
The Company's hotels in some instances are constructed on leased land or are
leased. Other leases cover central office facilities, computer equipment and
operating service offices. Rent expense amounted to $84,946,000, $85,400,000 and
$84,429,000 for the years ended December 31, 1993, 1992 and 1991, 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 1993. At December 31, 1993 future aggregate
minimum rental payments approximated $282,805,000.
63
16. Legal Proceedings and Contingent Liabilities-
Pending litigation includes claims seeking damages for cancer and other health
effects claimed to have resulted from use of tobacco products. It is not
possible to predict the outcome of pending litigation; however, on the basis of
the facts presently known to it, management does not believe the actions pending
will have a material adverse effect upon the financial condition or results of
operations of the Company. Should additional facts arise in the future
indicating a probable adverse determination of any such actions, such ultimate
determination might have a material adverse effect upon the Company's financial
condition.
Fibreboard Litigation--CNA's primary property/casualty subsidiary, Continental
Casualty Company ("Continental"), is 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, Continental, Fibreboard,
another insurer ("Pacific Indemnity"), a subsidiary of the Chubb Corporation,
and a negotiating committee of asbestos claimant attorneys have reached a Global
Settlement (the "Global Settlement") to resolve all future asbestos-related
bodily injury claims involving Fibreboard. Continental, Fibreboard and Pacific
Indemnity have also reached an agreement, which is subject to court approval,
(the "Trilateral Agreement") on a settlement to resolve the coverage litigation
in the event the Global Settlement does not obtain final court approval. The
implementation of the Global Settlement or the Trilateral Agreement would have
the effect of settling Continental's litigation with Fibreboard. Pending final
court approval of either the Global Settlement or the Trilateral Agreement, at
the request of Continental, Fibreboard and Pacific Indemnity, the California
Court of Appeal withheld its ruling on the issues discrete to Continental and
Pacific Indemnity in the appeal in that litigation.
Coverage Litigation--Between 1928 and 1971, Fibreboard manufactured insulation
products containing asbestos. Since the 1970's, thousands of claims have been
filed against Fibreboard by individuals claiming bodily injury as a result of
asbestos exposure.
Continental insured Fibreboard under a comprehensive general liability policy
between May 4, 1957 and March 15, 1959. Fibreboard disputed the coverage
positions taken by its insurers and, in 1979, Fireman's Fund, another of
Fibreboard's insurers, brought suit with respect to coverage for defense and
indemnity costs. In January 1990, the San Francisco Superior Court (Judicial
Council Coordination Proceeding 1072) rendered a decision against the insurers
including Continental and Pacific Indemnity. The court held that the insurers
owed a duty to defend and indemnify Fibreboard for certain of the asbestos-
related bodily injury claims asserted against Fibreboard (in the case of
Continental, for all claims involving exposure to Fibreboard's asbestos products
if there was exposure to asbestos at any time prior to 1959 including years
prior to 1957, regardless of when the claims were asserted or injuries
manifested) and that the policies contained no aggregate limit of liability in
relation to such claims. The judgment was appealed.
The Court of Appeal entered an opinion on November 15, 1993, as modified on
December 13, 1993, which substantially affirmed the lower court's decisions on
scope of coverage and trigger of coverage issues, as described below. The Court
of Appeal withheld its ruling on the issues discrete to Continental and Pacific
Indemnity pending final court approval of either the Global Settlement or the
Trilateral Agreement described below. On January 27, 1994, the California
Supreme Court granted a Petition for Review, filed by several insurers,
including Continental, of, among other things, the trigger and scope of coverage
issues. The order granting review has no effect on the Court of Appeal's order
severing the issues unique to Continental and Pacific Indemnity. Continental
cannot predict the time frame within which the issues before the California
Supreme Court may be resolved. If neither the Global Settlement nor the
Trilateral Agreement is approved, it is anticipated that Continental and Pacific
Indemnity will resume the appeal process.
Continental's appeal of the coverage judgment raises many legal issues. Key
issues on appeal under the policy are trigger of coverage, scope of coverage,
dual coverage requirements and number of occurrences:
.The trial court adopted a continuous trigger of coverage theory under which
all insurance policies in effect at any time from first exposure to asbestos
until the date of the claim filing or death are triggered. The Court of
Appeal endorsed the continuous trigger theory, but modified the ruling to
provide that policies are triggered by a claimant's first exposure to the
policyholder's products, as opposed to the first exposure to any asbestos
product. Therefore, an insurance policy is not triggered if a claimant's
first
64
exposure to the policyholder's product took place after the policy period.
The court, however, placed the burden on the insurer to prove the claimant
was not exposed to its policyholder's product before or during the policy
period. The trigger of coverage issue is now on appeal to the California
Supreme Court. Continental's position is that its policy is triggered under
California law by manifestation of appreciable harm. The bodily injury cannot
be said to occur within the meaning of the policy until actual physical
symptoms and associated functional
impairment manifest themselves. Thus, Continental's position is that if
existing California law were applied, there would be no coverage under
Continental's policy.
.The scope of coverage decision imposed a form of "joint and several"
liability that makes each triggered policy liable in whole for each covered
claim, regardless of the length of the period the policy was in effect. This
decision was affirmed by the Court of Appeal, and is now on appeal to the
California Supreme Court. Continental's position is that liability for
asbestos claims should be shared not jointly, but severally and on a pro data
basis between the insurers and insured. Under this theory, Continental would
only be liable for that proportion of the bodily injury that occurred during
the 22-month period its policy was in force.
.Continental maintains that both the occurrence and the injury resulting
therefrom must happen during the policy period for the policy to be
triggered. Consequently, if the court holds that the occurrence is exposure
to asbestos, Continental's position is that coverage under the Continental
policy is restricted to those who actually inhaled Fibreboard asbestos fibers
and suffered injury from May 4, 1957 to March 15, 1959.
.Continental's policy had a $1 million per occurrence limit. Continental
contends the number of occurrences under California law must be determined by
the general cause of the injuries, not the number of claimants, and that the
cause of the injury was the continuous sale and manufacture of the product.
Because the manufacture and sale proceeded from two locations, Continental
maintains that there were only two occurrences and thus only $2 million of
coverage under the policy. However, the per occurrence limit was interpreted
by the trial court to mean that each claim submitted by each individual
constituted a separate occurrence. The Court of Appeal withheld ruling on
this issue, as noted above.
Under various reinsurance agreements, Continental has asserted a right to
reimbursement for a portion of its potential exposure to Fibreboard. The
reinsurers have disputed Continental's right to reimbursement and have taken the
position that any claim by Continental is subject to arbitration under
provisions in the reinsurance agreement. A Federal court has ruled that the
dispute must be resolved by arbitration. There can be no assurance that
Continental will be successful in obtaining a recovery under its reinsurance
agreements.
Interim Agreement--While the state court action in regard to the coverage
issues was pending, Continental and Fibreboard entered into an Interim Agreement
in 1988 under which Continental agreed to fund Fibreboard's defense costs and
certain settlements up to specified dollar limits through 1992. Continental
funded approximately $96 million in defense costs under the Interim Agreement.
Assignments--Beginning in 1991, Fibreboard unilaterally reached settlements
with various classes of claimants by purporting to assign to plaintiffs
potential proceeds from its insurance policy with Continental disputed
Fibreboard's right to make such settlements and assignments, asserted that they
violated the terms of the policy and the Interim Agreement described above and
asserted that the settlement amounts were unreasonable and excessive. In June
1992 a California trial court ruled in one case that Fibreboard could make such
settlements and assignments since, in its view, Continental was not fully
defending Fibreboard against the claims. Continental is appealing this decision.
The trial court did rule that Continental could challenge the reasonableness of
individual settlements and assignments. Following that ruling, Continental
agreed to fund Fibreboard's reasonable defense costs without limitation as to
amount pending resolution of Continental's appeal. Fibreboard continued to make
settlements and assignments following such agreement, and Continental vigorously
disputed Fibreboard's right to do so.
This settlement and assignment process by Fibreboard escalated significantly
in the fourth quarter of 1992. Through December 31, 1992, Fibreboard entered
into unilateral assignment agreements covering 31,100 claims for a total of $400
million or an average of $12,800 per claim. Of these claims, approximately
30,000 were settled and assigned by Fibreboard in the month of December, 1992.
65
Settlement Negotiations--Based on the facts and circumstances of the
Fibreboard case prior to the fourth quarter of 1992, including the strength of
Continental's legal arguments, a material loss to Continental was not known or
believed to be probable. Significant fourth quarter developments, including the
assignments noted above, and the continuing trend for court decisions to expand
liability of policies beyond their original intent, led management to consider
negotiation of an all-inclusive settlement of Continental's asbestos-related
bodily injury litigation with Fibreboard.
On April 9, 1993, Continental and Fibreboard entered into an agreement
pursuant to which, among other things, the parties agreed to use their best
efforts to negotiate and finalize a global class action settlement with
asbestos-related bodily injury and death claimants.
Through December 31, 1993, Continental, Fibreboard and plaintiff attorneys had
reached settlements with respect to approximately 95,000 claims, subject to
resolution of the coverage issues, for a maximum settlement amount of
approximately $1.2 billion. If neither the Global Settlement nor the Trilateral
Agreement receive final court approval, Continental's obligation to pay under
all settlements will be partially subject to the results of the pending appeal
in the coverage litigation. Minimum amounts payable under all such agreements,
regardless of the outcome of coverage litigation, total approximately $560
million, of which $193 million was paid through December 31, 1993. Continental
may negotiate other agreements with various classes of claimants including
groups who may have previously reached agreement with Fibreboard.
Continental will continue to pursue its appeals in respect of the coverage
litigation and all other litigation involving Fibreboard if a Global Settlement
or the Trilateral Agreement cannot be implemented.
Global Settlement--On August 27, 1993, Continental, Pacific Indemnity,
Fibreboard and a negotiating committee of asbestos claimant attorneys reached an
agreement in principle for an omnibus settlement to resolve all future asbestos-
related bodily injury claims involving Fibreboard. The Global Settlement was
executed on December 23, 1993. The agreement calls for contribution by
Continental and Pacific Indemnity of an aggregate of $1.525 billion to a trust
fund for a class of all future asbestos claimants, defined generally as those
persons whose claims against Fibreboard were neither filed nor settled on or
before August 27, 1993. An additional $10 million is to be contributed to the
fund by Fibreboard. The Global Settlement is subject to court approval and
possible appeals. As noted below, there is limited precedent with settlements
which determine the rights of future claimants to seek relief.
Subsequent to the announcement of the agreement in principle, Continental,
Fibreboard and Pacific entered into the Trilateral Agreement which sets forth
the parties' obligations in the event the Global Settlement is not approved by
the court. In such case, Continental and Pacific would contribute to a
settlement fund an aggregate of $2 billion, less certain adjustments. Such fund
would be devoted to the payment of Fibreboard's asbestos liabilities other than
liabilities in respect of previously settled claims. Continental's share of such
fund would be $1.46 billion, reduced by a portion of the additional payment of
$635 million, which Pacific Indemnity has agreed to pay in respect of unsettled
present claims and previously settled claims. Continental has agreed that if
either the Global Settlement or the Trilateral Agreement is approved, it will
assume responsibility for the claims that had been settled and paid on or before
August 27, 1993. A portion of the additional $635 million payment by Pacific
Indemnity would be applied to the payment of such claims as well. As a part of
the Global Settlement and the Trilateral Agreement, Continental would be
released by Fibreboard from any further liability under the comprehensive
general liability policy written for Fibreboard by Continental, including but
not limited to liability for asbestos-related claims against Fibreboard. The
Trilateral Agreement is subject to court approval and possible appeals.
Continental and Fibreboard have entered into a supplemental agreement (the
"Supplemental Agreement") which governs the interim arrangements and obligations
between the parties until such time as the Global Settlement is either approved
or disapproved by the court and also governs certain obligations between the
parties in the event the Global Settlement is approved, including the payment of
present claims which have been filed or settled and not included in the Global
Settlement.
In addition, Continental and Pacific Indemnity have entered into an agreement
(the "Continental Pacific Agreement") which sets forth the parties' agreement
with respect to the means for allocating among themselves responsibility for
payments arising out of the Fibreboard insurance policies whether or not the
Global Settlement or the Trilateral Agreement is approved. Under the
Continental-Pacific Agreement, Continental and Pacific Indemnity have agreed to
pay 64.71% and 35.29%, respectively, of the $1.525 billion plus interest and
expenses to be used to satisfy the claims of future claimants. If neither the
Global
66
Settlement nor the Trilateral Agreement is approved, Continental and Pacific
Indemnity would share, in the same percentages, most but not all liabilities and
costs of either insurer including, but not limited to, liabilities in respect of
unsettled present claims and presently settled claims. If either the Trilateral
Agreement or the Global Settlement is approved by the court, Pacific Indemnity's
share for unsettled present claims and presently settled claims will be $635
million.
Reserves--In the fourth quarter of 1992, Continental increased its reserve
with respect to potential exposure to asbestos-related bodily injury cases by
$1.5 billion. In connection with the agreement in principle announced on August
27, 1993, Continental determined to add $500 million to such claim reserve. The
Fibreboard litigation represents the major portion of Continental's asbestos-
related claim exposure.
There are inherent uncertainties in establishing a reserve for complex
litigation of this type. Courts have tended to impose joint and several
liability, and because the number of manufacturers who remain potentially liable
for asbestos-related injuries has diminished on account of bankruptcies, as has
the potential number of insurers due to operation of policy limits, the
liability of the remaining defendants is difficult to estimate. Further, a
recent trend by courts to consolidate like cases into mass tort trials limits
the discovery ability of insurers, generally does not allow for individual claim
adjudication, restricts the identification of appropriate allocation methods and
thereby results in an increasing likelihood for fraud and disproportionate and
potentially excessive judgments. Additionally, management believes that recent
court decisions would appear to be based on social of other considerations
irrespective of the facts and legal issues involved.
The Global Settlement and the Trilateral Agreement are subject to court
approval. There is limited precedent with settlements which determine the rights
of future claimants to seek relief. It is extremely difficult to assess the
magnitude of Continental's potential liability in respect of such future
claimants if the Global Settlement and the Trilateral Agreement are not approved
and upheld, keeping in mind that Continental's potential liability is limited to
persons exposed to asbestos prior to the termination of the policy in 1959.
Projections by experts of future trends differ widely, based upon different
assumptions with respect to a host of complex variables. Some recently published
studies, not specifically related to Fibreboard, conclude that the number of
future asbestos-related bodily injury claims against asbestos manufacturers
could be several times the number of claims brought to date. Such studies
include claims asserted against asbestos manufacturers for all years, including
claims filed or projected to be filed in respect of periods after 1959. As
indicated above Continental, Fibreboard and plaintiff attorneys have reached
settlements with respect to approximately 95,000 claims, subject to the
resolution of coverage issues. Such amount does not include presently pending or
unsettled claims, previously dismissed or claims settled pursuant to agreements
to which Continental is not a party.
Another aspect of the complexity in establishing a reserve arises from the
widely disparate values that have been ascribed to claims by courts and in the
context of settlements. Under the terms of a settlement reached with plaintiff
counsel in August 1993, the expected settlement for approximately 34,000 claims
for exposure to asbestos prior to 1959 is expected to be $445 million, or an
average of $13,000 per claim. Based on reports by Fibreboard, since September
1988, Fibreboard resolved approximately 40,000 claims (other than by the
assignment process noted above), approximately 45% of which involved no cost to
Fibreboard other than defense costs, with the remaining claims involving the
payment of approximately $11,000 per claim. On the other hand, a trial court in
Texas in 1990 rendered a verdict in which Fibreboard's liability in respect of
2,300 claims was found to be approximately $310,000 per claim including interest
and punitive damages. Fibreboard entered into a settlement of such claims by
means of an assignment of its potential proceeds from its policy with
Continental. Continental intervened and settled these claims in 1992 for
approximately $77,000 on average, subject to resolution of the coverage appeal.
Continental believes that as a result of the proposed Global Settlement and
the Trilateral Agreement it has greatly reduced the uncertainty of its exposure
with respect to the Fibreboard matter. However, if neither the Global Settlement
nor the Trilateral Agreement are approved and upheld, in light of the factors
discussed herein, the range of Continental's potential liability cannot be
meaningfully estimated and there can be no assurance that the reserves
established would be sufficient to pay all amounts which ultimately could become
payable in respect of asbestos-related bodily injury liabilities.
While it is possible that the ultimate outcome of this matter could have a
material adverse impact on the equity of CNA, management does not believe that a
further loss material to equity is probable. Management will continue to monitor
the potential liabilities with respect to asbestos-related bodily injury claims
and will make adjustments to the claim reserves if warranted.
67
Environmental Pollution-Potential exposures exist for claims involving
environmental pollution, including toxic waste clean-up. 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.
Under federal regulation, the Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("Superfund") governs the clean-up and
restoration of abandoned toxic waste sites and formalizes the concept of legal
liability for clean-up and restoration by "Potentially Responsible Parties"
("PRP's"). Superfund establishes a mechanism 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 the other hand, the Congressional Budget Office is
estimating that there will be 4,500 National Priority List sites and other
estimates run as high as 30,000 sites that will require clean-up. Very few sites
have been subject to clean-up to date. The extent of clean-up necessary and the
assignment of liability has not been established.
CNA and the insurance industry are disputing coverage for many such claims.
Key coverage issues include whether Superfund response cost 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.
The Superfund legislation must be reauthorized in 1994. A number of proposals
to reform Superfund have been made by various parties including the EPA, the
Treasury Department, congressional delegates and the Keystone Commission, a
broad based national coalition which includes community, industry and insurance
representatives. It is too early to determine the future impact of these
proposals on CNA and the insurance industry.
Due to the inherent uncertainties described above, including the inconsistency
of court decisions, the number of waste sites subject to clean-up, and the
standards for clean-up and liability, the exposure to CNA for environmental
pollution claims cannot be meaningfully quantified. Prior to 1993, no specific
allocation of reserves was made for unreported claims or for litigation
expenses. CNA identified reserves only for reported environmental pollution
claims. In 1993, CNA allocated approximately $340 million of claims and claims
expense reserves for unreported environmental pollution claims in addition to
the $94 million of reserves recorded for reported claims. Claims and claims
expense reserves represent management's estimates of ultimate liabilities based
on currently available facts and law. However, in addition to the uncertainties
previously discussed, additional issues related to, among other things, specific
policy provisions, multiple insurers and allocation of liability among insurers,
consequences of conduct by the insured, missing policies and proof of coverage
make quantification of liabilities exceptionally difficult.
The number of claims filed for environmental pollution coverage continues to
increase. Approximately 2,700 claims were reported in 1993 and approximately
19,200 claims have been reported to date. Pending claims total approximately
10,600, 10,800, and 9,300 at December 31, 1993, 1992 and 1991, respectively.
Approximately 8,600 claims were closed through December 31, 1993, of which
approximately 7,800 claims were settled without payment, except for claim
expenses of $18 million. Settlements for the remaining 800 claims totaled $76
million, plus claim expenses of $21 million. Reserve development for
environmental claims totaled $446, $48, and $47 million in 1993, 1992 and 1991,
respectively, including litigation costs of $28, $25 and $21 million. As noted
above, adverse development for 1993 primarily resulted from the allocation of
$339 million of reserves for unreported claims. The results of operations in
future years may continue to be adversely affected by environmental pollution
claims and claims expenses. Management will continue to monitor potential
liabilities and make further adjustments as warranted.
68
17. Business Segment Data-
The Company's subsidiaries are engaged primarily in insurance (property,
casualty and life), the production and sale of cigarettes, the operation of
hotels and oil and gas drilling rigs, the distribution of watches and the
production and sale of other timing devices. The following table sets forth the
major sources of the Company's consolidated revenues, income and assets.
Years Ended December 31,
--------------------------------------------------------
1993 1992 1991
--------------------------------------------------------
(In thousands)
Revenues (a):
Property and casualty insurance ........... $ 8,159,851 $ 7,948,867 $ 8,479,267
Life insurance (b) ........................ 2,823,314 2,816,471 2,632,368
Cigarettes ................................ 1,908,903 2,185,448 2,009,545
Hotels .................................... 185,268 201,436 200,924
Watches and other timing devices .......... 153,543 181,388 164,301
Drilling .................................. 288,251 217,713 64,571
Investment income-net (c) ................. 120,000 117,189 69,463
Equity in income of CBS Inc. .............. 58,990 27,012 (24,533)
Other and eliminations-net ................ (11,343) (4,070) 24,358
---------------------------------------------------
$13,686,777 $13,691,454 $13,620,264
===================================================
Income contribution (a) (d):
Property and casualty insurance ........... $ (33,136) $(1,495,498) $ 529,391
Life insurance ............................ 177,392 159,600 75,037
Cigarettes ................................ 592,368 914,973 771,636
Hotels .................................... 14,216 19,127 25,400
Watches and other timing devices .......... 6,274 12,470 7,299
Drilling .................................. 4,866 (48,911) (14,838)
Investment income-net (c) ................. 116,062 116,076 69,463
Equity in income of CBS Inc. .............. 58,990 27,012 (24,533)
Other ..................................... (17,207) (7,279) 19,115
---------------------------------------------------
$ 919,825 $ (302,430) $ 1,457,970
===================================================
Net income (a):
Property and casualty insurance ........... $ 145,757 $ (623,243) $ 490,394
Life insurance ............................ 94,288 85,227 36,619
Cigarettes ................................ 340,689 524,546 430,219
Hotels .................................... (1,785) 1,911 4,809
Watches and other timing devices .......... 2,413 4,366 1,880
Drilling .................................. (16,576) (51,174) (11,221)
Investment income-net (c) ................. 71,476 75,858 45,324
Equity in income of CBS Inc. .............. 52,641 24,717 (22,904)
Interest expense and other-net (e) ........ (94,782) (64,305) (70,782)
Cumulative effect of changes in accounting
principles-net ........................... 144,711
---------------------------------------------------
$ 594,121 $ 122,614 $ 904,338
===================================================
69
December 31,
--------------------------------------------------------
1993 1992 1991
--------------------------------------------------------
(In thousands)
Identifiable assets:
Property and casualty insurance ........... $29,630,328 $27,247,756 $26,867,628
Life insurance ............................ 12,225,641 12,355,269 12,137,393
Cigarettes ................................ 547,063 623,936 616,920
Hotels .................................... 199,288 205,900 207,870
Watches and other timing devices .......... 158,609 166,482 155,520
Drilling .................................. 550,622 538,792 107,719
Investment income ......................... 1,966,655 1,917,614 2,098,439
Investment in CBS Inc. .................... 473,483 358,500 345,842
Other ..................................... 56,046 96,013 114,099
Corporate ................................. 42,017 45,252 32,727
---------------------------------------------------
$45,849,752 $43,555,514 $42,684,157
===================================================
(a) Realized investment gains (losses) included in Revenues, income contribution
and Net income are as follows:
Years Ended December 31,
----------------------------------------
1993 1992 1991
----------------------------------------
Revenues:
Property and casualty insurance ... $674,452 $262,658 $456,541
Life insurance .................... 125,813 95,433 7,434
Investment income-net ............. 62,532 49,156 (51,820)
-------------------------------------
$862,797 $407,247 $412,155
=====================================
Income contribution:
Property and casualty insurance ... $674,452 $262,658 $456,541
Life insurance .................... 112,671 83,293 (12,622)
Investment income-net ............. 62,532 49,156 (51,820)
-------------------------------------
$849,655 $395,107 $392,099
=====================================
Net income:
Property and casualty insurance ... $362,917 $146,466 $248,490
Life insurance .................... 60,256 44,592 (11,085)
Investment income-net ............. 38,728 31,284 (34,323)
-------------------------------------
$461,901 $222,342 $203,082
=====================================
(b) Includes $1,700,000, $1,600,000 and $1,500,000 under contracts covering U.S.
government employees and their dependents for the respective periods.
(c) Consists of investment income of non-insurance operations. Investment
income of insurance operations is included in the Revenues, Income contribution
and Net income of the related insurance operations.
(d) Consists of income before minority interest, cumulative effect of changes in
accounting principles and allocation
for financial reporting purposes of interest expense, corporate expense and
income taxes.
(e) Includes interest expense, net of tax benefits, of $83,127, $71,499 and
$91,306 for the respective periods.
70
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Information called for by Part III has been omitted as Registrant intends to
file with the Securities and Exchange Commission not later than 120 days after
the close of its fiscal year a definitive Proxy Statement pursuant to regulation
14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements:
The financial statements appear above under Item 8. The following additional
financial data should be read in conjunction with those financial statements.
Schedules not included with these additional financial data have been omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or notes to consolidated financial statements.
Page
2. Financial Statement Schedules: Number
-------
Independent Auditors' Report ........................................ L-1
Loews Corporation and Subsidiaries:
Schedule I-Summary of investments-other than investments in related
parties at December 31, 1993 ...................................... L-2
Schedule III-Condensed financial information of Registrant for the
years ended December 31, 1993, 1992 and 1991 ...................... L-3
Schedule VIII-Valuation and qualifying accounts for the years ended
December 31, 1993, 1992 and 1991 .................................. L-8
Schedule IX-Short-term borrowings for the years ended December 31,
1993, 1992 and 1991 ............................................... L-9
Schedule XIV-Supplemental information concerning property/casualty
insurance operations for the years ended December 31, 1993, 1992
and 1991 .......................................................... L-10
3. Exhibits:
Exhibit
Description Number
------------ --------
(3) Articles of Incorporation and By-Laws
Restated Certificate of Incorporation of the Registrant,
incorporated herein by reference to Exhibit 3 to Registrant's
Report on Form 10-Q for the quarter ended September 30, 1987 .... 3.01
By-Laws of the Registrant as amended to date, incorporated
herein by reference to Exhibit 4.6 to Registrant's Registration
Statement No. 33-31432 .......................................... 3.02
71
Exhibit
Description Number
------------ --------
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
The Registrant hereby agrees to furnish to the Commission upon
request copies of instruments with respect to long-term debt,
pursuant to Item 601(b)(4)(iii) of Regulation S-K.
(10) Material Contracts
Employment Agreement between Registrant and Laurence A. Tisch
dated March 1, 1971 as amended through October 22, 1992 is
incorporated herein by reference to Exhibit 10.01 to Registrant's
Reports on Form 10-K for the years ended December 31, 1981,
December 31, 1983, December 31, 1984, December 31, 1985,
December 31, 1986, December 31, 1988, December 31, 1989 and
December 31, 1992 ............................................... 10.01
Employment Agreement dated as of March 1, 1988 between Registrant
and Preston R. Tisch as amended through October 22, 1992 is
incorporated herein by reference to Exhibit 10.05 to Registrant's
Report on Form 10-K for the years ended December 31, 1987,
December 31, 1989 and December 31, 1992 .......................... 10.02
Continuing Service Agreement between a subsidiary of Registrant
and Edward J. Noha, dated February 27, 1991 incorporated herein
by reference to Exhibit 10.04 to Registrant's Report on Form 10-K
for the year ended December 31, 1990 ............................ 10.03
Loews Corporation Benefits Equalization Plan dated
January 10, 1994, amended and restated as of December 31, 1993 .. 10.04*
Loews Corporation Deferred Compensation Plan is incorporated
herein by reference to Exhibit 10.07 to Registrant's Report on
Form 10-K for the year ended December 31, 1988 .................. 10.05
Agreement between Fibreboard Corporation and Continental Casualty
Company, dated April 9, 1993 is incorporated herein by reference
to Exhibit A to Registrant's Report on Form 8-K filed April 12,
1993 ............................................................ 10.06
Settlement Agreement entered into on October 12, 1993 by and
among Fibreboard Corporation, Continental Casualty Company, CNA
Casualty Company of California, Columbia Casualty Company and
Pacific Indemnity Company together the "Parties" is incorporated
herein by reference to Exhibit 99.1 to Registrant's Report on
Form 10-Q for the quarter ended September 30, 1993 .............. 10.07
Continental-Pacific Agreement entered into on October 12, 1993
between Continental Casualty Company and Pacific Indemnity
Company is incorporated herein by reference to Exhibit 99.2 to
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1993 .............................................. 10.08
Global Settlement Agreement among Fibreboard Corporation,
Continental Casualty Company, CNA Casualty Company of California,
Columbia Casualty Company, Pacific Indemnity Company and the
Settlement Class dated December 23, 1993 ........................ 10.09*
72
Exhibit
Description Number
------------ --------
Glossary of Terms in Global Settlement Agreement, Trust
Agreement, Trust Distribution Process and Defendant Class
Settlement Agreement as of December 23, 1993 .................... 10.10*
Fibreboard Asbestos Corporation Trust Agreement dated
December 23, 1993 ............................................... 10.11*
Trust Distribution Process - Annex A to the Trust Agreement as of
December 23, 1993 ............................................... 10.12*
Defendant Class Settlement Agreement dated December 23, 1993 .... 10.13*
Escrow Agreement among Continental Casualty Company, Pacific
Indemnity Company and the First National Bank of Chicago dated
December 23, 1993 ............................................... 10.14*
(11) Statement Re Computation of Per Share Earnings
Computation of earnings per common share assuming full dilution
for the years ended December 31, 1992 and 1991 .................. 11.01*
(21) Subsidiaries of the Registrant
List of subsidiaries of Registrant .............................. 21.01*
(23) Consents of Experts and Counsel
Consent of Deloitte & Touche .................................... 23.01*
(28) Information from Reports furnished to State Insurance Regulatory
Authorities
Reconciliation of Property/Casualty Reserves as shown on
Schedule P to Reserves for Unpaid Claims and Claims Expense as
shown in the Form 10-K for the year ended December 31, 1993 ..... 28.01*
Schedule P of Annual Statements to state regulatory authorities
by property/casualty insurance subsidiaries for the year ended
December 31, 1993 ............................................... 28.02*
* Filed herewith
(b) Reports on Form 8-K:
During the three months ended December 31, 1993, Registrant filed a Current
Report on Form 8-K, dated October 20, 1993, reporting under Item 5, Other
Events, with respect to the issuance by the Company of $400,000,000 aggregate
principal amount of the Company's 7% Senior Notes due October 15, 2023 (the
"Notes") and the call for redemption on November 19, 1993, of the entire
principal amount of the Company's outstanding Liquid Yield Option Notes due 2004
(the "LYONS") for an aggregate redemption price of approximately $411 million.
The Company used the net proceeds received from the sale of the Notes, together
with general corporate funds, to redeem the LYONS.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LOEWS CORPORATION
Dated: March 24, 1994 By Roy E. Posner
--------------------------------
(Roy E. Posner, Senior Vice
President and Chief Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 24, 1994 By Laurence A. Tisch
--------------------------------
(Laurence A. Tisch, Chairman of
the Board and Principal
Executive Officer)
Dated: March 24, 1994 By Roy E. Posner
--------------------------------
(Roy E. Posner, Senior Vice
President and Chief Financial
Officer)
Dated: March 24, 1994 By Guy A. Kwan
--------------------------------
(Guy A. Kwan, Controller)
Dated: March 24, 1994 By Charles B. Benenson
--------------------------------
(Charles B. Benenson, Director)
Dated: March 24, 1994 By John Brademas
--------------------------------
(John Brademas, Director)
By
--------------------------------
(Bernard Myerson, Director)
Dated: March 24, 1994 By Edward J. Noha
--------------------------------
(Edward J. Noha, Director)
Dated: March 24, 1994 By Lester Pollack
--------------------------------
(Lester Pollack, Director)
74
By
--------------------------------
(Gloria R. Scott, Director)
Dated: March 24, 1994 By Andrew H. Tisch
--------------------------------
(Andrew H. Tisch, Director)
Dated: March 24, 1994 By James S. Tisch
--------------------------------
(James S. Tisch, Director)
Dated: March 24, 1994 By Jonathan M. Tisch
--------------------------------
(Jonathan M. Tisch, Director)
Dated: March 24, 1994 By Preston R. Tisch
--------------------------------
(Preston R. Tisch, Director)
75
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Shareholders of Loews Corporation:
We have audited the accompanying consolidated balance sheets of Loews
Corporation and its subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1993. Our audits
also included the financial statement schedules listed in the Index at Item
14(a)2. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Loews Corporation and its
subsidiaries at December 31, 1993 and 1992 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for reinsurance and certain investments in
debt and equity securities in 1993 and its methods of accounting for
postretirement benefits, income taxes and certain workers' compensation and
disability claims in 1992.
Deloitte & Touche
New York, New York
February 16, 1994
L-1
SCHEDULE I
LOEWS CORPORATION AND SUBSIDIARIES
Summary of Investments - Other than Investments in Related Parties at
December 31, 1993
Quoted
Market Carrying
Cost Value Value
---------------------------------------
(In thousands)
Fixed maturities available for sale:
Bonds and notes:
United States government and
government agencies and authorities $ 8,551,503 $ 8,688,293 $ 8,688,293
States, municipalities and political
subdivisions-tax exempt ........... 4,724,041 5,014,841 5,014,841
Foreign governments ................ 420,948 423,356 423,356
Public utilities ................... 235,366 256,502 256,502
Convertibles and bonds with warrants
attached .......................... 188,583 193,943 193,943
All other corporate ................ 2,489,849 2,632,937 2,632,937
Redeemable preferred stocks ......... 445,291 447,984 447,984
---------------------------------------
Total fixed maturities available
for sale ....................... 17,055,581 $17,657,856 17,657,856
--------------===========--------------
Equity securities available for sale:
Common stocks:
Public utilities .................. 21,634 $21,810 21,810
Banks, trusts and insurance
companies ........................ 57,784 56,695 56,695
Industrial, miscellaneous and all
other ............................ 949,196 1,161,751 1,161,751
---------------------------------------
Total equity securities ......... 1,028,614 $ 1,240,256 1,240,256
---------------===========-------------
Mortgage loans and notes receivable .. 128,934 125,402
----------- -----------
Loans to life insurance policyholders 174,006 173,606
----------- -----------
Other long-term investments .......... 69,375 68,121
----------- -----------
Short-term investments ............... 8,025,201 8,025,201
----------- -----------
Total investments ............... $26,481,711 $27,290,442
=========== ===========
L-2
SCHEDULE III
Condensed Financial Information of Registrant
LOEWS CORPORATION
BALANCE SHEETS
ASSETS
December 31,
--------------------------
1993 1992
--------------------------
(In thousands)
(Restated)
Current assets:
Cash and cash equivalents ....................... $ 11,140 $ 508,468
Investment in U.S. government securities ........ 762,639 561,844
Income tax receivable (c) ....................... 96,623 301,009
Receivables ..................................... 82,504 11,159
Deferred income taxes ........................... 3,264
-------------------------
Total current assets ......................... 956,170 1,382,480
Investments in securities ......................... 782,228 572,681
-------------------------
Total current assets and investments ......... 1,738,398 1,955,161
Investments in capital stocks of subsidiaries, at
equity ........................................... 5,356,871 4,968,120
Advances to subsidiaries .......................... 415,114
Other assets ...................................... 20,954 22,211
-------------------------
Total assets ................................. $7,531,337 $6,945,492
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........ $ 159,805 $ 47,625
Accrued taxes ................................... 8,121 14,089
Securities sold under repurchase agreements ..... 100,125
Current maturities of long-term debt (b) ........ 1,252 201,138
-------------------------
Total current liabilities .................... 169,178 362,917
Long-term debt, less current maturities (b) ....... 1,183,792 1,042,020
Deferred income tax ............................... 51,169 2,260
Advances from subsidiaries ........................ 11,245
-------------------------
Total liabilities ............................ 1,404,139 1,418,502
-------------------------
Shareholders' equity (a):
Common stock, $1 par value
Authorized-200,000,000 shares
Issued and outstanding-61,524,700 and
65,098,700 shares ............................ 61,525 65,099
Additional paid-in capital ...................... 210,289 163,076
Earnings retained in the business ............... 5,476,660 5,266,983
Unrealized appreciation ......................... 406,736 31,832
Pension liability adjustment .................... (28,012)
-------------------------
Total shareholders' equity ................... 6,127,198 5,526,990
-------------------------
Total liabilities and shareholders' equity ... $7,531,337 $6,945,492
=========================
L-3
SCHEDULE III
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------------
1993 1992 1991
--------------------------------------
(In thousands)
-(Restated)-
Revenues:
Equity in income (loss) of
subsidiaries (d) .................. $585,039 $(63,448) $ 942,203
Realized investment gains .......... 46,184 39,377 14,602
Interest and other ................. 46,103 95,009 94,510
-------------------------------------
Total ........................... 677,326 70,938 1,051,315
-------------------------------------
Expenses:
Administrative ..................... 5,119 6,990 6,139
Interest ........................... 86,239 101,129 106,795
-------------------------------------
Total ........................... 91,358 108,119 112,934
-------------------------------------
585,968 (37,181) 938,381
-------------------------------------
(Benefit) provision for income taxes
(c):
Federal ............................ (13,853) (16,464) 22,987
State .............................. 5,700 1,380 11,056
-------------------------------------
Total ........................... (8,153) (15,084) 34,043
-------------------------------------
Income (loss) before cumulative effect
of changes in accounting principles . 594,121 (22,097) 904,338
Cumulative effect of changes in
accounting principles-net ........... 144,711
-------------------------------------
Net income ........................... $594,121 $122,614 $ 904,338
=====================================
L-4
SCHEDULE III
(Continued)
Condensed Financial Information of Registrant
LOEWS CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------
1993 1992 1991
----------------------------------------
(In thousands)
-(Restated)-
Operating Activities:
Net income ......................... $ 594,121 $ 122,614 $ 904,338
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of changes in
accounting principles ........... (144,711)
Undistributed (earnings) losses
of affiliates ................... (52,819) 626,733 (273,829)
Realized investment gains ........ (46,184) (39,377) (14,602)
Changes in assets and liabilities-net:
Receivables ...................... (71,829) 3,624 33,224
Accounts payable and accrued
liabilities ..................... 38,015 3,744 (19,601)
Federal income taxes ............. 204,386 (382,949) 14,663
Other-net ........................ (14,743) 46,799 (1,175)
--------------------------------------
650,947 236,477 643,018
--------------------------------------
Investing Activities:
Purchases of securities ............ (263,476) (142,292) (237,839)
Proceeds from sales of securities .. 262,918 124,032 159,673
Investments in and advances to
subsidiaries-net .................. (426,359) (82,441) 373,054
Net (increase) decrease in U.S.
government securities ............. (201,086) 440,345 (251,274)
Securities sold under agreements to
repurchase ........................ (100,125) 100,125
Change in other investments ........ 39,082 98,444 (98,443)
--------------------------------------
(689,046) 538,213 (54,829)
--------------------------------------
Financing Activities:
Dividends paid to shareholders ..... (64,289) (65,810) (68,923)
Purchases of treasury shares ....... (336,297) (238,223) (264,182)
Principal payments on long-term debt (739,893) (17,207) (294,975)
Issuance of long-term debt ......... 681,250
--------------------------------------
(459,229) (321,240) (628,080)
--------------------------------------
Net change in cash and cash equivalents (497,328) 453,450 (39,891)
Cash and cash equivalents, beginning
of year ............................. 508,468 55,018 94,909
--------------------------------------
Cash and cash equivalents, end of year $ 11,140 $ 508,468 $ 55,018
======================================
L-5
SCHEDULE III
(Continued)
Condensed Financial Information of Registrant
- --------------
Notes:
(a) In addition to its common stock, the Company has authorized 25,000,000
shares of preferred stock, $.10 par value.
(b) Long-term debt consisted of:
December 31,
--------------------------
1993 1992
--------------------------
(In thousands)
8.5% notes due 1998 (effective interest rate of
8.6%) (authorized, $125,000) .................. $ 117,832 $ 117,832
8.3% debentures due 2007 (effective interest
rate of 8.4%) (authorized, $200,000) (1) ...... 200,000 200,000
8.9% debentures due 2011 (effective interest
rate of 9.0%) (authorized, $175,000) .......... 175,000 175,000
9% senior sinking fund debentures due 2016
(effective interest rate of 9.2%)(authorized,
$200,000) ..................................... 158,700
7.6% notes due 2023 (effective interest rate of
7.8%) (authorized, $300,000) (2) .............. 300,000
7% notes due 2023 (effective interest rate of
7.2%) (authorized, $400,000) (3) .............. 400,000
Notes payable due 2002 (effective interest rate
of 10.0%) ..................................... 15,741 16,879
10% subordinated notes due 1996 ................ 200,000
Zero coupon convertible subordinated notes due
2004, net of discount of $393,293 ............. 390,138
-------------------------
1,208,573 1,258,549
Less: unamortized discount ..................... 23,529 15,391
current maturities ....................... 1,252 201,138
-------------------------
$1,183,792 $1,042,020
=========================
(1) Redeemable in whole or in part at January 15, 1997 at 104%, and decreasing
percentages thereafter.
(2) Redeemable in whole or in part at June 1, 2003 at 104%, and decreasing
percentages thereafter.
(3) Redeemable in whole or in part at October 15, 2003 at 102%, and decreasing
percentages thereafter.
The aggregate of long-term debt maturing in each of the next five years is
approximately as follows: $1,252,000; $1,380,000; $1,527,000; $1,680,000 and
$119,685,000.
L-6
(c) The Company is included in a consolidated federal income tax return with
certain of its subsidiaries and, accordingly, participates in the allocation of
certain components of the consolidated provision for federal income taxes. Such
taxes are generally allocated on a separate return bases.
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, the federal income
tax benefit (expense) to CNA amounted to approximately $17,000,000, $350,000,000
and $(82,000,000) for the years ended December 31, 1993, 1992 and 1991,
respectively, and the federal income tax benefit (expense) to Bulova amounted to
approximately $2,500,000, $(3,300,000) and $1,900,000 for the years ended
December 31, 1993, 1992 and 1991, respectively. Each agreement may be cancelled
by either of the parties upon thirty days' written notice. See Note 8 to the
Notes to Consolidated Financial Statements of Loews Corporation and
subsidiaries.
(d) Cash dividends paid to the Company by affiliates amounted to $505,739,000,
$553,592,000 and $654,741,000 for the years ended December 31, 1993, 1992 and
1991, respectively.
L-7
SCHEDULE VIII
LOEWS CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------
Balance at Charge to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- --------------------------------------------------------------------------------
(In thousands)
For the Year Ended December 31, 1993
Deducted from assets:
Allowance for
discounts ........ $ 5,277 $ 69,754 $72,494(1) $ 2,537
Allowance for
doubtful accounts 126,003 11,137 9,935 127,205
----------------------------------------------------------
Total ......... $131,280 $ 80,891 $82,429 $129,742(2)
==========================================================
For the Year Ended December 31, 1992
Deducted from assets:
Allowance for
discounts ........ $ 5,124 $ 75,546 $75,393(1) $ 5,277
Allowance for
doubtful accounts 112,880 33,179 20,056 126,003
----------------------------------------------------------
Total ......... $118,004 $108,725 $95,449 $131,280(2)
==========================================================
For the Year Ended December 31, 1991
Deducted from assets:
Allowance for
discounts ........ $ 5,089 $ 71,374 $71,339(1) $ 5,124
Allowance for
doubtful accounts 89,629 39,104 15,853 112,880
----------------------------------------------------------
Total ......... $ 94,718 $110,478 $87,192 $118,004(2)
==========================================================
- -----------
Notes:
(1) Discounts allowed.
(2) Shown in the following captions in the accompanying consolidated
balance sheets:
1993 1992 1991
------------------------------------
Receivables:
Insurance ..................... $117,324 $110,420 $100,382
Other ......................... 12,418 20,860 17,622
------------------------------------
Total ...................... $129,742 $131,280 $118,004
====================================
L-8
SCHEDULE IX
LOEWS CORPORATION AND SUBSIDIARIES
Short-Term Borrowings
Weighted
Maximum Average average
Category of Weighted amount amount interest
aggregate Balance average outstanding outstanding rate
short-term at end of interest during the during the during the
borrowings period rate period period (a) period (b)
- --------------------------------------------------------------------------------
(In thousands of dollars)
Year Ended December 31, 1993
Banks $2,000 4.00% $ 2,000 $ 2,000 4.43%
Year Ended December 31, 1992
Banks $2,000 5.13% $ 2,101 $ 2,040 5.52%
Year Ended December 31, 1991
Banks (c) $2,011 6.02% $288,577 $107,399 6.61%
- ----------
Notes: (a) Average amounts outstanding during the period are calculated by an
average of end of month balances.
(b) Weighted average interest rate during the period is calculated by
dividing short-term interest expense by the average amount outstanding for the
period.
(c) CNA entered into master note agreements and loan participation
certificates ("LPC") with several banks and a money market fund that provided
short-term borrowing facilities. Master notes represent borrowings on a demand
basis arranged generally with trust departments of certain banks. LPC's are bank
loans that are immediately sold to other institutions; they are similar in
nature to commercial paper.
L-9
SCHEDULE XIV
LOEWS CORPORATION AND SUBSIDIARIES
Supplemental Information Concerning Property/Casualty Insurance Operations
Consolidated Property/Casualty Entities
----------------------------------------
Years Ended December 31,
----------------------------------------
1993 1992 1991
----------------------------------------
(In thousands)
--------(Restated)--------
Deferred policy acquisition costs .... $ 562,029 $ 507,487 $ 494,010
Reserves for unpaid claims and claims
expense ............................. 20,811,955 20,033,647 18,200,170
Discount, if any, deducted above
(based on interest rates ranging from
3.5% to 7.5%) ....................... 1,886,532 1,787,348 1,126,024
Unearned premiums .................... 2,556,015 2,425,105 2,507,955
Earned premiums ...................... 6,275,018 6,353,574 6,655,318
Net investment income ................ 1,059,796 1,224,120 1,282,736
Claims and claims expense related to
current year ........................ 5,387,947 5,708,216 5,833,016
Claims and claims expense related to
prior years ......................... 589,959 1,617,433 (12,255)
Amortization of deferred policy
acquisition costs ................... 1,172,362 1,032,556 1,056,753
Paid claims and claims expense ....... 4,916,888 4,676,600 4,468,924
Premiums written ..................... 6,382,326 6,286,197 6,620,099
L-10