Why did Loews restate its prior financial statements and report ineffective internal control?

The restatement corrects CNA's accounting for discontinued operations acquired in its 1995 merger with The Continental Corporation, where net assets were overstated and periodic results were misstated. Cash flow statements for 2004 and 2003 were also restated to fix classification errors. Management identified two material weaknesses at CNA as of December 31, 2005, and Deloitte & Touche issued an adverse opinion on internal control over financial reporting.

What are the main financial risks from Lorillard's tobacco litigation?

The filing discloses approximately 3,675 tobacco-related lawsuits against Lorillard, a $16.3 billion punitive damages judgment in the Engle case that is under Florida Supreme Court review, and the $591.0 million Scott judgment plus about $395.0 million of judicial interest that is on appeal. The filing states that an adverse outcome could significantly exceed Lorillard's assets, and that Lorillard's State Settlement Agreement payments will materially adversely affect future cash flows and operating income.

How did CNA's results change in 2005?

CNA recorded $991.0 million of net loss reserve development in 2005, including $433.0 million from commutations of significant finite reinsurance contracts. Catastrophe losses included Hurricanes Katrina, Rita and Wilma. CNA's 2005 net income attributable to Loews was $239.8 million in the supplemental equity-method presentation for the parent-only view, and its combined ratio on a GAAP basis was 120.9% in 2005 compared with 106.3% in 2004.

What is the Carolina Group tracking stock and how does it differ from Loews common stock?

Carolina Group stock tracks the economic performance of the Carolina Group, which consists mainly of Loews' 100% ownership of Lorillard, along with an $1.6 billion notional intergroup debt owed to the Loews Group and any tobacco-related liabilities. As of December 31, 2005, Carolina Group stock represents a 45.03% economic interest in that group. Carolina Group shares carry one-tenth of a vote each, so holders of Loews common stock controlled approximately 96.0% of combined voting power as of February 17, 2006.

How did Loews' debt and cash position change in 2005?

Total debt fell to $5,206.8 million at December 31, 2005 from $6,990.3 million. In 2005 Loews redeemed $400.0 million of 7.0% senior notes due 2023 and $1,150.0 million of 3.1% exchangeable subordinated notes due 2007, and issued $300.0 million of 6.0% senior notes due 2035 and $100.0 million of 5.3% senior notes due 2016. Corporate cash and investments, net of receivables and payables, totaled $2.9 billion at year-end 2005, up from $2.5 billion at year-end 2004.

L 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 10, 2006. Cited figures are marked; the original filing is the authoritative source.

Loews Corporation's 2005 annual report, filed on Form 10-K for the fiscal year ended December 31, 2005, describes a holding company with six operating lines: commercial property and casualty insurance through CNA Financial (91%^a owned), cigarette production through Lorillard (wholly owned), natural gas pipelines through Boardwalk Pipeline Partners (85% owned), offshore drilling through Diamond Offshore (54% owned), hotels through Loews Hotels, and watches and clocks through Bulova.

Consolidated revenues were $16,017.8 million^b in 2005 versus $15,236.9 million in 2004, and net income was $1,211.6 million versus $1,215.8 million. Net income attributable to Loews common stock was $960.3 million, or $5.16 per diluted share, compared with $5.56 in 2004, and Carolina Group stock earned $251.3 million, or $3.62 per share. The filing is dominated by material weaknesses and restatements.

Management concluded that internal control over financial reporting was ineffective as of December 31, 2005, because of weaknesses at CNA relating to discontinued operations acquired in its 1995 merger with The Continental Corporation and to the classification of cash flows. Loews restated 2001 through 2004 and interim periods through September 30, 2005, and the auditor, Deloitte & Touche LLP, issued an adverse opinion on internal control. CNA recorded $991.0 million^c of loss reserve development in 2005, including $433.0 million tied to commutations of finite reinsurance contracts, and catastrophe losses from Hurricanes Katrina, Rita and Wilma.

Investors should weigh these items alongside the disclosed litigation exposure at Lorillard, including an Engle judgment of $16.3 billion^d that is under appeal and a Scott judgment of $591.0 million plus judicial interest. Lorillard's State Settlement Agreement payments are expected to be $875.0 million to $925.0 million in 2006, and the filing says these obligations will materially adversely affect future cash flows and operating income. Loews' book value per Loews common share rose to $70.93 from $65.56, and the company reported total debt of $5,206.8 million at year-end 2005, down from $6,990.3 million.

02—Key points

Key Highlights

Consolidated revenues of $16,017.8 million in 2005, up from $15,236.9 million in 2004, driven by the Gulf South acquisition, improved Diamond Offshore results and the 2004 CNA individual life sale loss.
Net income attributable to Loews common stock of $960.3 million, or $5.16 per diluted share, versus $1,031.3 million, or $5.56 per share, in 2004; Carolina Group stock net income was $251.3 million, or $3.62 per share.
Management concluded internal control over financial reporting was ineffective at December 31, 2005 due to two material weaknesses at CNA; Loews restated 2001 to 2004 financial statements, and Deloitte & Touche issued an adverse opinion on internal control.
CNA recorded $991.0 million of loss reserve development in 2005, including $433.0 million related to commutations of finite reinsurance contracts, and catastrophe losses from Hurricanes Katrina, Rita and Wilma.
Lorillard faces a $16.3 billion Engle punitive damages judgment under appeal and a $591.0 million Scott judgment plus about $395.0 million of judicial interest as of February 15, 2006; State Settlement Agreement payments for 2006 are estimated at $875.0 million to $925.0 million.
Total debt declined to $5,206.8 million at December 31, 2005 from $6,990.3 million, following redemptions of the 7.0% senior notes due 2023 and the 3.1% exchangeable subordinated notes due 2007.
Book value per share of Loews common stock increased to $70.93 from $65.56 at year-end 2004.

03—Questions

Frequently Asked Questions

Why did Loews restate its prior financial statements and report ineffective internal control?
The restatement corrects CNA's accounting for discontinued operations acquired in its 1995 merger with The Continental Corporation, where net assets were overstated and periodic results were misstated. Cash flow statements for 2004 and 2003 were also restated to fix classification errors. Management identified two material weaknesses at CNA as of December 31, 2005, and Deloitte & Touche issued an adverse opinion on internal control over financial reporting.
What are the main financial risks from Lorillard's tobacco litigation?
The filing discloses approximately 3,675 tobacco-related lawsuits against Lorillard, a $16.3 billion punitive damages judgment in the Engle case that is under Florida Supreme Court review, and the $591.0 million Scott judgment plus about $395.0 million of judicial interest that is on appeal. The filing states that an adverse outcome could significantly exceed Lorillard's assets, and that Lorillard's State Settlement Agreement payments will materially adversely affect future cash flows and operating income.
How did CNA's results change in 2005?
CNA recorded $991.0 million of net loss reserve development in 2005, including $433.0 million from commutations of significant finite reinsurance contracts. Catastrophe losses included Hurricanes Katrina, Rita and Wilma. CNA's 2005 net income attributable to Loews was $239.8 million in the supplemental equity-method presentation for the parent-only view, and its combined ratio on a GAAP basis was 120.9% in 2005 compared with 106.3% in 2004.
What is the Carolina Group tracking stock and how does it differ from Loews common stock?
Carolina Group stock tracks the economic performance of the Carolina Group, which consists mainly of Loews' 100% ownership of Lorillard, along with an $1.6 billion notional intergroup debt owed to the Loews Group and any tobacco-related liabilities. As of December 31, 2005, Carolina Group stock represents a 45.03% economic interest in that group. Carolina Group shares carry one-tenth of a vote each, so holders of Loews common stock controlled approximately 96.0% of combined voting power as of February 17, 2006.
How did Loews' debt and cash position change in 2005?
Total debt fell to $5,206.8 million at December 31, 2005 from $6,990.3 million. In 2005 Loews redeemed $400.0 million of 7.0% senior notes due 2023 and $1,150.0 million of 3.1% exchangeable subordinated notes due 2007, and issued $300.0 million of 6.0% senior notes due 2035 and $100.0 million of 5.3% senior notes due 2016. Corporate cash and investments, net of receivables and payables, totaled $2.9 billion at year-end 2005, up from $2.5 billion at year-end 2004.

04—Continue

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