-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LSBbZkeqIdPbUe7JLgxUv3jOZT/GXSa8rGiv086Z3wZOaFai+hRM7YA2vqiacgiH f+Wi4svVpKwYvRXLmg70Hg== 0000893220-96-001803.txt : 19961107 0000893220-96-001803.hdr.sgml : 19961107 ACCESSION NUMBER: 0000893220-96-001803 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961106 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIGNA CORP CENTRAL INDEX KEY: 0000701221 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061059331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08323 FILM NUMBER: 96654985 BUSINESS ADDRESS: STREET 1: ONE LIBERTY PL 1650 MARKET ST STREET 2: P O BOX 7716 CITY: PHILADELPHIA STATE: PA ZIP: 19192-1550 BUSINESS PHONE: 2157611000 10-Q 1 CIGNA CORPORATION FORM 10-Q QUARTER ENDED 9/30/96 1 CONFORMED COPY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1996 ------------------ 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 1-8323 ------ CIGNA Corporation ------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 06-1059331 ------------------------------- ------------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) ONE LIBERTY PLACE, PHILADELPHIA, PA. 19192-1550 -------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 761-1000 -------------- Not Applicable ------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 of September 30, 1996, 75,180,739 shares of the issuer's Common Stock were outstanding. 2 CIGNA CORPORATION INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income and Retained Earnings 1 Consolidated Balance Sheets 2 Consolidated Statements of Cash Flows 3 Notes to Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 20 SIGNATURE 21 EXHIBIT INDEX 22
3 Part I. FINANCIAL INFORMATION Item 1. Financial Statements CIGNA CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (In millions, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 ================================================================================================== REVENUES Premiums and fees $ 3,444 $ 3,408 $ 10,333 $ 10,340 Net investment income 1,069 1,080 3,263 3,192 Other revenues 154 134 448 391 Realized investment gains 18 20 17 226 -------- --------- --------- --------- Total revenues 4,685 4,642 14,061 14,149 -------- --------- --------- --------- BENEFITS, LOSSES AND EXPENSES Benefits, losses and settlement expenses 3,064 4,266 9,337 10,687 Policy acquisition expenses 283 290 877 886 Other operating expenses 904 969 2,710 2,753 -------- --------- --------- --------- Total benefits, losses and expenses 4,251 5,525 12,924 14,326 -------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES 434 (883) 1,137 (177) -------- --------- --------- --------- Income tax (benefits): Current 152 65 264 176 Deferred 1 (382) 123 (282) -------- --------- --------- --------- Total income taxes 153 (317) 387 (106) -------- --------- --------- --------- NET INCOME (LOSS) 281 (566) 750 (71) Dividends declared (60) (56) (182) (164) Retained earnings, beginning of period 4,388 4,439 4,041 4,052 - -------------------------------------------------------------------------------------------------- RETAINED EARNINGS, END OF PERIOD $ 4,609 $ 3,817 $ 4,609 $ 3,817 - --------------------------------------------------================================================ EARNINGS (LOSS) PER SHARE $ 3.69 $ (7.76) $ 9.80 $ (0.98) - --------------------------------------------------================================================ DIVIDENDS DECLARED PER SHARE $ 0.80 $ 0.76 $ 2.40 $ 2.28 - --------------------------------------------------================================================
The Notes to Financial Statements are an integral part of these statements. 1 4 CIGNA CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except per share amounts)
AS OF AS OF SEPTEMBER 30, DECEMBER 31, 1996 1995 ======================================================================================================== ASSETS Investments: Fixed maturities: Available-for-sale, at fair value (amortized cost, $32,626; $33,275) $ 33,888 $ 36,241 Equity securities, at fair value (cost, $598; $565) 712 661 Mortgage loans 11,278 11,010 Policy loans 7,299 7,107 Real estate 1,275 1,283 Other long-term investments 234 295 Short-term investments 697 1,113 --------- --------- Total investments 55,383 57,710 Cash and cash equivalents 2,088 1,559 Accrued investment income 1,103 908 Premiums, accounts and notes receivable 4,398 4,268 Reinsurance recoverables 7,352 7,120 Deferred policy acquisition costs 1,211 1,109 Property and equipment, net 798 864 Deferred income taxes, net 2,043 1,866 Other assets 1,066 1,149 Goodwill 1,078 1,118 Separate account assets 20,827 18,232 - ----------------------------------------------------------------------------------------------------- Total $ 97,347 $ 95,903 - ----------------------------------------------------------------------------========================= LIABILITIES Contractholder deposit funds $ 29,692 $ 30,055 Unpaid claims and claim expenses 19,159 19,303 Future policy benefits 11,777 12,007 Unearned premiums 2,065 2,176 --------- --------- Total insurance and contractholder liabilities 62,693 63,541 Accounts payable, accrued expenses and other liabilities 5,364 5,408 Current income taxes 252 187 Short-term debt 268 414 Long-term debt 1,037 1,066 Separate account liabilities 20,725 18,130 - ----------------------------------------------------------------------------------------------------- Total liabilities 90,339 88,746 - ----------------------------------------------------------------------------------------------------- CONTINGENCIES - NOTE 7 SHAREHOLDERS' EQUITY Common stock (shares issued, 88; 87) 88 87 Additional paid-in capital 2,557 2,536 Net unrealized appreciation - fixed maturities 456 1,025 Net unrealized appreciation - equity securities 77 73 Net translation of foreign currencies (31) (27) Retained earnings 4,609 4,041 Less treasury stock, at cost (748) (578) - ----------------------------------------------------------------------------------------------------- Total shareholders' equity 7,008 7,157 - ----------------------------------------------------------------------------------------------------- Total $ 97,347 $ 95,903 - ----------------------------------------------------------------------------========================= SHAREHOLDERS' EQUITY PER SHARE $ 93.22 $ 93.76 - ----------------------------------------------------------------------------=========================
The Notes to Financial Statements are an integral part of these statements. 2 5 CIGNA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 =============================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income(loss) $ 750 $ (71) Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities: Insurance liabilities, net of reinsurance recoverables (201) 904 Premiums, accounts and notes receivable (39) (134) Accounts payable, accrued expenses, other liabilities and current income taxes (123) 275 Deferred income taxes, net 123 (282) Realized investment gains (17) (226) Gain on sale of subsidiaries and other equity interests (18) -- Other, net (134) (123) ----------- ---------- Net cash provided by operating activities 341 343 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investments sold: Fixed maturities - available-for-sale 4,925 5,010 Equity securities 304 1,541 Mortgage loans 315 279 Other (primarily short-term investments) 8,871 10,745 Investment maturities and repayments: Fixed maturities - available-for-sale 2,891 770 Fixed maturities - held-to-maturity -- 1,510 Mortgage loans 542 345 Investments purchased: Fixed maturities - available-for-sale (6,879) (7,829) Fixed maturities - held-to-maturity -- (1,336) Equity securities (317) (348) Mortgage loans (1,247) (1,116) Other (primarily short-term investments) (8,627) (11,990) Proceeds from sale of subsidiaries and other equity interests 66 -- Other, net (106) (113) ----------- ---------- Net cash provided by (used in) investing activities 738 (2,532) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds 4,900 5,597 Withdrawals from contractholder deposit funds (4,944) (3,287) Net change in commercial paper (11) (16) Issuance of long-term debt -- 88 Repurchases of common stock (161) -- Repayment of debt (158) (3) Issuance of common stock 11 17 Dividends paid (180) (164) ----------- ---------- Net cash provided by (used in) financing activities (543) 2,232 ----------- ---------- Effect of foreign currency rate changes on cash (7) 39 - --------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 529 82 Cash and cash equivalents, beginning of period 1,559 1,693 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 2,088 $ 1,775 - ---------------------------------------------------------------------------------============================== Supplemental Disclosure of Cash Information: Income taxes paid, net of refunds $ 194 $ 198 Interest paid $ 88 $ 102 - ---------------------------------------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements. 3 6 CIGNA CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1-BASIS OF PRESENTATION The consolidated financial statements include the accounts of CIGNA Corporation and all significant subsidiaries (CIGNA). These consolidated financial statements have been prepared in conformity with generally accepted accounting principles. Certain reclassifications have been made to conform with the 1996 presentation. The interim financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments, except for the adjustments noted in the third quarter 1996 Management's Discussion and Analysis and described in the notes) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The preparation of interim financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business as well as competitive and other market conditions, call for caution in drawing specific conclusions from interim results. NOTE 2-NEW ACCOUNTING PRONOUNCEMENTS In 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires write-down to fair value when long-lived assets to be held and used are impaired. Long-lived assets to be disposed, including real estate held for sale, must be carried at the lower of cost or fair value less costs to sell. Depreciation of assets to be disposed of is prohibited. In the first quarter of 1996, CIGNA implemented SFAS No. 121. The effect of adoption of this standard was not material to CIGNA's results of operations, liquidity or financial condition. In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," effective for 1996. This statement provides guidance on the prospective accounting and reporting for the cost of stock-based compensation. The cost related to stock options is permitted to be recorded or disclosed, and such cost must be measured at the grant date based upon estimated fair values using option pricing models. CIGNA will disclose the effect of stock-based compensation in its 1996 annual financial statements. In 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which provides guidance on the accounting and disclosure for impaired loans. In 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which eliminates the income recognition requirements of SFAS No. 114. CIGNA adopted SFAS Nos. 114 and 118 in the first quarter of 1995. The effect of adoption of these standards was not material to CIGNA's results of operations, liquidity or financial condition. NOTE 3-INVESTMENTS REALIZED GAINS AND LOSSES Realized gains and losses on investments, excluding policyholder share, were as follows:
Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - ------------------------------------------------------------------ Realized gains (losses): Fixed maturities $3 $18 $-- $29 Equity securities 4 2 13 182 Mortgage loans -- (2) (20) -- Real estate 6 1 7 9 Other investments 5 1 17 6 --------------------------------------- 18 20 17 226 Income taxes 7 7 8 53 - ------------------------------------------------------------------ Net realized gains $11 $13 $9 $173 - ---------------------------=======================================
4 7 FIXED MATURITIES AND EQUITY SECURITIES Sales of available-for-sale fixed maturities and equities, including policyholder share, were as follows:
Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - -------------------------------------------------------------- Proceeds from sales $1,543 $2,155 $5,209 $6,551 Gross gains on sales 46 53 140 326 Gross losses on sales (40) (33) (120) (101) - --------------------------------------------------------------
During the third quarter and nine months of 1996, Net Unrealized Appreciation - Fixed Maturities included in Shareholders' Equity, which is net of policyholder-related amounts and deferred income taxes, increased by $12 million and decreased by $569 million, respectively, compared with increases of $46 million and $728 million for the same periods last year. NOTE 4-EARNINGS PER SHARE Earnings per share were based on net income (loss) divided by weighted average common shares, including common share equivalents, as follows:
Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 1996 1995 1996 1995 - -------------------------------------------------------------- Weighted average common shares 76,055 72,908 76,585 72,561 - --------------------------------------------------------------
There is no significant difference between earnings per share on a primary and a fully diluted basis. During the third quarter of 1995, $89 million of CIGNA's 8.2% convertible subordinated debentures due 2010 (8.2% Debt) was converted into approximately 1.3 million shares of CIGNA common stock. Also during the third quarter of 1995, CIGNA announced its intention to redeem (at par value plus accrued interest) all 8.2% Debt outstanding on November 2, 1995. Substantially all of the $158 million of 8.2% Debt outstanding as of September 30, 1995 was converted into CIGNA common stock as of the redemption date. Assuming all of CIGNA's 8.2% Debt had been converted to CIGNA common stock (3.6 million shares) on January 1, 1995 and the related interest expense ($2 million after-tax for the third quarter of 1995; $9 million after-tax for the nine months of 1995) was excluded from net loss, the loss per share for the third quarter and nine months of 1995 would have been $7.40 and $0.82, respectively. Common shares held as Treasury shares were 12,390,283 and 10,913,959 as of September 30, 1996 and 1995, respectively. NOTE 5-INCOME TAXES CIGNA's federal income tax returns are routinely audited by the Internal Revenue Service (IRS), and provisions are made in the financial statements in anticipation of the results of these audits. The IRS has completed audits of the years 1982 through 1990. One outstanding issue, which relates only to years prior to 1989, could result in an assessment of approximately $215 million. CIGNA is contesting this issue in court. Although the outcome is uncertain, management believes that CIGNA should prevail. In management's opinion, adequate tax liabilities have been established for all years. As of September 30, 1996, CIGNA had tax basis operating loss carryforwards of approximately $250 million. NOTE 6-REINSURANCE In the normal course of business, CIGNA's insurance subsidiaries enter into agreements, primarily relating to short-duration contracts, to assume and cede reinsurance with other insurance companies. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses, although ceded reinsurance does not relieve the originating insurer of liability. CIGNA evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of its reinsurers. Failure of reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies or disputes, could result in losses. Allowances for uncollectible amounts were $718 million and $700 million as of September 30, 1996 and December 31, 1995, respectively. During the third quarter of 1995, CIGNA increased the allowance for uncollectible reinsurance by $210 million pre-tax 5 8 ($138 million after-tax) primarily for asbestos and environmental losses and for assumed reinsurance business that CIGNA previously exited. While future charges for unrecoverable reinsurance may materially affect results of operations in future periods, such amounts are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. For the third quarter and nine months of 1996, premiums and fees were net of ceded premiums of $619 million and $1.6 billion, respectively. For the third quarter and nine months of 1995, premiums and fees were net of ceded premiums of $493 million and $1.6 billion, respectively. In addition, benefits, losses and settlement expenses for the third quarter and nine months of 1996 were net of reinsurance recoveries of $410 million and $1.2 billion, respectively. Benefits, losses and settlement expenses for the third quarter and nine months of 1995 were net of reinsurance recoveries of $572 million and $1.4 billion, respectively. NOTE 7-CONTINGENCIES AND OTHER MATTERS FINANCIAL GUARANTEES CIGNA, through its subsidiaries, is contingently liable for various financial guarantees provided in the ordinary course of business. These include guarantees for the repayment of industrial revenue bonds as well as other debt instruments. Although the ultimate outcome of any loss contingencies arising from CIGNA's financial guarantees may adversely affect results of operations in future periods, they are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. REGULATORY AND INDUSTRY DEVELOPMENTS CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: - revise the system of funding cleanup of environmental damages; - reform the federal tax system; - reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; - restrict insurance pricing and the application of underwriting standards; - reform health care; and - expand regulation. In August 1996, Congress passed legislation that phases out over a three year period the tax deductibility of policy loan interest for most leveraged COLI products. The effect of the legislation on the Individual Financial Services segment is uncertain, but is not expected to be material over the next several years. However, over the longer term, a substantial portion of revenues and earnings from leveraged COLI are expected to be eliminated, which could have a material adverse effect on results of operations for the segment. The effect of this legislation is not expected to be material to CIGNA's consolidated results of operations, liquidity or financial condition. Proposed legislation for Superfund reform remains under consideration by Congress. Any changes in Superfund relating to 1) allocating responsibility, 2) funding cleanup costs, or 3) establishing cleanup standards could affect the liabilities of potentially responsible parties and insurers. Due to uncertainties associated with the timing and content of any future Superfund legislation, the effect on CIGNA's results of operations, liquidity or financial condition cannot be reasonably estimated at this time. CIGNA expects proposals for federal and state legislation seeking some health care insurance reforms and limitations on formation and operation of efficient health care networks. Due to uncertainties associated with the timing and content of any health care legislation, the effect on CIGNA's future results of operations, liquidity or financial condition cannot be reasonably estimated at this time. 6 9 The National Association of Insurance Commissioners is currently addressing risk-based capital guidelines for health maintenance organizations (HMOs). CIGNA does not expect such guidelines to have a material adverse effect on its future results of operations, liquidity or financial condition. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. PROPERTY AND CASUALTY UNPAID CLAIMS AND CLAIM EXPENSE RESERVES AND REINSURANCE RECOVERABLES CIGNA's property and casualty loss reserves are an estimate of future payments for reported and unreported claims for losses and related expenses with respect to insured events that have occurred. The basic assumption underlying the many standard actuarial and other methods used in the estimation of property and casualty loss reserves is that past experience is an appropriate basis for predicting future events. However, current trends and other factors that would modify past experience are also considered. The process of establishing loss reserves is subject to uncertainties that are normal, recurring and inherent in the property and casualty business. CIGNA continually attempts to improve its loss estimation process by refining its process of analyzing loss development patterns, claims payments and other information, but there remain many reasons for adverse development of estimated ultimate liabilities. For example, unanticipated changes in workers' compensation laws have at times significantly affected the ability of insurers to estimate liabilities for unpaid losses and related expenses. CIGNA completed a comprehensive review of its asbestos-related and environmental pollution exposures during the third quarter of 1995 and increased its related reserves by $255 million ($194 million, net of reinsurance) for asbestos-related exposures and approximately $1.2 billion ($861 million, net of reinsurance) for environmental pollution exposures. Reserving for all property and casualty claims and related reinsurance recoverables continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. CIGNA's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current law changes. Any such revisions could result in future changes in estimates of losses or reinsurance recoverables, and would be reflected in CIGNA's results of operations for the period in which the estimates are changed. While the effect of any such changes in estimates of losses or reinsurance recoverables could be material to future results of operations, CIGNA does not expect such changes to have a material effect on its liquidity or financial condition. In management's judgement, information currently available has been appropriately considered in estimating CIGNA's loss reserves and reinsurance recoverables. LITIGATION CIGNA is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of business, either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against it by its policyholders or other insurers. One such area of litigation involves policy coverage and judicial interpretation of legal liability for asbestos-related and environmental pollution claims. While the outcome of all litigation involving CIGNA, including insurance-related litigation, cannot be determined, litigation (including that related to asbestos and environmental pollution claims) is not expected to result in losses that differ from recorded reserves by amounts that would be material to results of operations, liquidity or financial condition. Also, reinsurance recoveries related to claims in litigation, net of the allowance for uncollectible reinsurance, are not expected to result in recoveries that differ from recorded recoverables by amounts that would be material to results of operations, liquidity or financial condition. OTHER POSTRETIREMENT BENEFITS PLANS In July 1996, CIGNA's Board of Directors approved an amendment to CIGNA's post-retirement medical benefit plan effective as of January 1, 1997. The plan amendment as well as a change in actuarial assumptions in connection with amending the plan is expected to reduce the accumulated benefit obligation by approximately $150 million. Beginning in the third quarter of 1996, this reduction is being amortized into income over the average remaining service period of 17 years. The effect of this plan amendment and change in actuarial 7 10 assumptions is not material to CIGNA's results of operations, liquidity or financial condition. COST REDUCTION INITIATIVES During the third quarter of 1995, CIGNA implemented cost reduction initiatives in the Domestic Property and Casualty operations and the Employee Life and Health Benefits segment, which resulted in charges of $85 million ($55 million after-tax) and $30 million ($20 million after-tax), respectively. The cost reduction initiatives, when fully implemented, are estimated to result in annual after-tax savings of approximately $55 million and $40 million, respectively, primarily based on the elimination of certain payroll and payroll-related costs and, to a lesser extent, lease costs. The savings in the near term for the Employee Life and Health Benefits segment are expected to be partially offset by increased investments in business growth and service initiatives. As of September 30, 1996, there were no material changes to the costs associated with, or the anticipated annual savings related to, these initiatives. Through September 30, 1996, approximately $46 million of severance was paid to approximately 3,000 terminated employees of the Property and Casualty and Employee Life and Health Benefits segments. 8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion addresses the financial condition of CIGNA Corporation (CIGNA) as of September 30, 1996, compared with December 31, 1995, and its results of operations for the quarter and nine months ended September 30, 1996, compared with the same periods last year. This discussion should be read in conjunction with Management's Discussion and Analysis included in CIGNA's 1995 Annual Report to Shareholders (pages 8 through 23) and in CIGNA's reports on Form 10-Q for the first and second quarters of 1996. Due to the seasonality of certain aspects of CIGNA's business, caution should be used in estimating results for the full year based on interim results of operations. CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: - revise the system of funding cleanup of environmental damages; - reform the federal tax system; - reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; - restrict insurance pricing and the application of underwriting standards; - reform health care; and - expand regulation. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. For additional information, see Note 7 to the Financial Statements. Also, see Note 5 regarding a proposed IRS assessment of approximately $215 million. CIGNA is currently contesting the assessment and believes it should prevail. During 1995, CIGNA implemented cost reduction initiatives in the Domestic Property and Casualty operations and the Employee Life and Health Benefits segment. As of September 30, 1996, there were no material changes to the costs associated with, or the anticipated annual savings related to, these initiatives. For additional information, see Note 7 to the Financial Statements. In October 1996, Moody's Investors Service (Moody's) raised the insurance financial strength rating of Connecticut General Life Insurance Company, CIGNA's principal life insurance subsidiary, to Aa3 ("Excellent," 4th of 19) from A1 ("Good," 5th of 19). Moody's also raised the rating on CIGNA's senior debt to A3 ("Upper-medium-grade," 7th of 19) from Baa1 ("Medium-grade," 8th of 19). In the first quarter of 1996, CIGNA adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The effect of implementing SFAS No. 121 on CIGNA's results of operations, liquidity and financial condition was not material. For additional information, see Note 2 to the Financial Statements. 9 12 CONSOLIDATED RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------- FINANCIAL SUMMARY Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- Premiums and fees $3,444 $3,408 $10,333 $10,340 Net investment income 1,069 1,080 3,263 3,192 Other revenues 154 134 448 391 Realized investment gains 18 20 17 226 ----------------------------------------------------------------------------- Total revenues 4,685 4,642 14,061 14,149 Benefits and expenses 4,251 5,525 12,924 14,326 ----------------------------------------------------------------------------- Income (loss) before taxes 434 (883) 1,137 (177) Income taxes (benefits) 153 (317) 387 (106) ----------------------------------------------------------------------------- Net income (loss) $281 ($566) $750 ($71) - ---------------------------------------------============================================================================= Realized investment gains, net of taxes $11 $13 $9 $173 - ---------------------------------------------=============================================================================
CIGNA's 1996 consolidated net income increased significantly for the third quarter and nine months, compared with the same periods last year. Results for the third quarter and nine months of 1995 included a $774 million after-tax ($1.2 billion pre-tax) charge in the Property and Casualty segment, primarily for asbestos-related and environmental pollution exposures, as well as a $75 million after-tax ($115 million pre-tax) charge associated with cost reduction initiatives in the Property and Casualty and Employee Life and Health Benefits segments. Excluding the above charges and after-tax realized investment gains, earnings for the third quarters of both years were $270 million, and for the nine months of 1996 were $741 million, compared with $605 million for the same period last year. Level earnings for the third quarter compared with 1995, reflect improvements in the Individual Financial Services and Employee Retirement and Savings Benefits segments, offset by lower earnings in the remaining business segments. Growth in earnings for the nine months of 1996 primarily reflects improved results in the Property and Casualty segment. After-tax realized investment results were significantly lower for the nine months of 1996, compared to the same period last year, primarily because of gains from the 1995 restructuring of a portion of the Employee Life and Health Benefits and Property and Casualty segments' equity investment portfolios into fixed income securities. For additional information, see Note 3 to the Financial Statements. Full year earnings for 1996 are expected to improve over 1995, excluding the effects of realized investment results and the 1995 third quarter charges previously discussed. However, such improvement could be adversely affected by the factors noted in the cautionary statements on page 19. EMPLOYEE LIFE AND HEALTH BENEFITS
- ------------------------------------------------------------------------------------------------------------------------- FINANCIAL SUMMARY Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Premiums and fees $2,036 $1,971 $6,188 $6,069 Net investment income 136 144 423 428 Other revenues 99 86 301 253 Realized investment gains (losses) 4 1 (5) 118 -------------------------------------------------------------------------- Total revenues 2,275 2,202 6,907 6,868 Benefits and expenses 2,071 2,029 6,362 6,228 -------------------------------------------------------------------------- Income before taxes 204 173 545 640 Income taxes 74 56 188 190 -------------------------------------------------------------------------- Net income $130 $117 $357 $450 - -----------------------------------------------========================================================================== Realized investment gains (losses), net of taxes $3 $1 ($3) $101 - -----------------------------------------------==========================================================================
Net income for the Employee Life and Health Benefits segment increased 11% for the third quarter and decreased 21% for the nine months of 1996. Results for the third quarter and nine months of 1995 included an after-tax charge of $20 million related to cost reduction initiatives. Excluding that charge and after-tax realized investment results, Employee Life and Health Benefits segment income for the third quarter and nine months of 1996 and 1995 was as follows:
- ------------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Indemnity operations $73 $87 $198 $213 HMO operations 54 49 162 156 - ------------------------------------------------------------------------------------------------------------------------- Total $127 $136 $360 $369 =========================================================================================================================
The declines in the indemnity operations reflect unfavorable claim experience including the unfavorable after-tax effects from reserve reviews ($7 million for the third quarter and $13 million for the nine months of 1996) and, to a lesser extent for the quarter, higher operating expenses. Partially offsetting these declines were improved investment margins, higher earnings from medical rate increases and, for the nine months, higher fees for Administrative Services Only (ASO) business. 10 13 HMO earnings for the third quarter of 1996 and 1995 include $7 million and $13 million, respectively, due to the favorable after-tax effect of reserve reviews. Excluding the reserve reviews, earnings increased by $11 million. This increase reflects membership growth and improved per member medical costs, partially offset by competitive pressures on rates and higher operating expenses associated with business growth and customer service initiatives. HMO earnings for the nine months of 1996 include a favorable after-tax reserve adjustment of $12 million and an after-tax gain of $8 million from sales of subsidiaries. Earnings for the nine months of 1995 include $33 million after-tax due to the favorable effect of reserve reviews. Excluding these items, 1996 results increased by $19 million, reflecting the same factors noted above for the quarter. CIGNA expects fourth quarter earnings for this segment to be lower than the fourth quarter of 1995. Indemnity results are expected to be lower due to large cumulative medical rate increases in the fourth quarter of 1995, whereas, for 1996, such rate increases were obtained throughout the year. Also, a declining premium base, which reflects competitive pressures and conversions to HMOs, is expected to adversely affect future indemnity earnings. CIGNA expects HMO results for the fourth quarter of 1996 to be about the same as the third quarter of 1996. Premiums and fees increased 3% and 2% for the third quarter and nine months of 1996, respectively. These improvements reflect membership growth in HMOs, partially offset by lower medical indemnity premiums resulting from the effect of favorable claim experience on premiums for experience-rated business and, to a lesser extent, cancellations and conversions to HMOs. Growth in premiums is expected to continue to be constrained by competitive pressures in both the medical indemnity and HMO markets. Total HMO membership increased 11% since September 30, 1995 and 10% since December 31, 1995. These increases primarily reflect membership growth in HMO alternative funding programs. Under these programs, the customer assumes all or a portion of the responsibility for funding claims and CIGNA generally earns a lower margin than under traditional HMO plans. Management believes that adding premium equivalents to premiums and fees (adjusted premiums and fees) produces a more meaningful measure of business volume. Premium equivalents for the third quarters of 1996 and 1995 were approximately $2.4 billion, and for the nine months of 1996 were $7.2 billion, compared with $7.3 billion for the same period last year. Premium equivalents were about level year over year reflecting declines in medical premium equivalents due to cancellations and conversions to HMOs, partially offset by growth in HMO alternative funding programs. Growth in premium equivalents is expected to continue to be constrained by competitive pressures in both the medical indemnity and HMO markets. Premium equivalents were 54% of total adjusted premiums and fees for the nine months of 1996 and 1995. ASO plans accounted for 45% of total adjusted premiums and fees for the nine months of 1996 and 1995. EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
- ------------------------------------------------------------------------------------------------------------------------- FINANCIAL SUMMARY Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Premiums and fees $55 $40 $143 $123 Net investment income 419 425 1,278 1,281 Realized investment gains 9 -- 19 4 ---------------------------------------------------------------------------- Total revenues 483 465 1,440 1,408 Benefits and expenses 398 396 1,204 1,195 ---------------------------------------------------------------------------- Income before taxes 85 69 236 213 Income taxes 28 21 78 68 ---------------------------------------------------------------------------- Net income $57 $48 $158 $145 - ---------------------------------------------============================================================================ Realized investment gains, net of taxes $5 $-- $11 $2 - ---------------------------------------------============================================================================
Net income for the Employee Retirement and Savings Benefits segment increased 19% and 9% for the third quarter and nine months of 1996, respectively. Results for the nine months of 1996 include an after-tax charge of $8 million for expected state guaranty fund assessments. Excluding this charge and after-tax realized investment gains, income was $52 million and $147 million for the third quarter and nine months of 1996, compared with $48 million and $143 million for the same periods last year. These improvements primarily reflect higher earnings from an increased asset base. Premiums and fees increased 38% and 16% for the third quarter and nine months of 1996, reflecting higher annuity sales and higher fees from separate accounts. 11 14 Net investment income decreased slightly for the quarter and nine months of 1996, reflecting customers' redirection of a portion of their investments from the general account to separate accounts, partially offset by higher investment yields. Assets under management is generally a key determinant of earnings for this segment. For the nine months ended September 30, assets under management and related activity, including amounts attributable to separate accounts, were as follows:
(In millions) 1996 1995 - --------------------------------------------------------------------- Balance -- January 1 $38,183 $33,882 Premiums and deposits 4,478 3,957 Investment results 1,977 1,969 Increase (decrease) in fair value of assets (421) 2,114 Customer withdrawals (1,596) (1,509) Benefit payments and other (3,590) (3,216) - --------------------------------------------------------------------- Balance -- September 30 $39,031 $37,197 =====================================================================
Premiums and deposits increased 13% reflecting higher sales. Approximately 47% and 42% of the premiums and deposits for 1996 and 1995, respectively, were from new customers. The decrease for 1996 in the fair value of assets is due to market value depreciation for fixed maturities. Management expects asset growth to continue to be constrained, resulting from decisions by plan sponsors to diversify assets and fund management. In addition, assets under management will continue to be affected by market value fluctuations for fixed maturities and equity securities. INDIVIDUAL FINANCIAL SERVICES
- ------------------------------------------------------------------------------------------------------------------------- FINANCIAL SUMMARY Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Premiums and fees $233 $216 $678 $646 Net investment income 257 256 780 725 Other revenues 20 15 58 50 Realized investment gains (losses) -- 1 -- (1) --------------------------------------------------------------------------- Total revenues 510 488 1,516 1,420 Benefits and expenses 438 430 1,330 1,248 --------------------------------------------------------------------------- Income before taxes 72 58 186 172 Income taxes 25 21 65 60 --------------------------------------------------------------------------- Net income $47 $37 $121 $112 - ----------------------------------------------=========================================================================== Realized investment gains (losses), net of taxes $-- $1 $-- $-- - ----------------------------------------------===========================================================================
Net income for the Individual Financial Services segment increased 27% and 8% for the third quarter and nine months of 1996, respectively. The increase for the quarter reflects higher earnings from interest-sensitive products, including leveraged corporate-owned life insurance (COLI), and an after-tax benefit of $5 million for a favorable reinsurance loss reserve adjustment. The nine month increase primarily reflects higher earnings from interest-sensitive products, including leveraged COLI. For the third quarter and nine months of 1996, premiums and fees increased 8% and 5%, respectively. These increases primarily reflect higher sales of reinsurance and interest-sensitive products, partially offset by lower leveraged COLI renewal premiums. Net investment income increased slightly for the quarter reflecting growth in business, partially offset by lower yields. The increase of 8% for the nine months reflects growth from leveraged COLI policy loans and annuity business. In August 1996, Congress passed legislation that phases out over a three year period the tax deductibility of policy loan interest for most leveraged COLI products. The effect of the legislation on this segment is uncertain, but is not expected to be material over the next several years. However, over the longer term, a substantial portion of revenues and earnings from leveraged COLI are expected to be eliminated, which could have a material adverse effect on results of operations for the segment. The effect of this legislation is not expected to be material to CIGNA's consolidated results of operations, liquidity or financial condition. 12 15 PROPERTY AND CASUALTY
- ------------------------------------------------------------------------------------------------------------------------- FINANCIAL SUMMARY Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Premiums and fees $1,120 $1,181 $3,324 $3,502 Net investment income 201 199 606 594 Other revenues 63 61 176 169 Realized investment gains 2 12 2 84 --------------------------------------------------------------------------- Total revenues 1,386 1,453 4,108 4,349 Benefits and expenses 1,301 2,622 3,880 5,506 --------------------------------------------------------------------------- Income (loss) before taxes 85 (1,169) 228 (1,157) Income taxes (benefits) 26 (413) 68 (417) --------------------------------------------------------------------------- Net income (loss) $59 ($756) $160 ($740) - ----------------------------------------------=========================================================================== Realized investment gains, net of taxes $1 $7 $1 $54 - ----------------------------------------------===========================================================================
Effective December 31, 1995, CIGNA restructured its domestic property and casualty businesses into two separate operations, ongoing and run-off. The ongoing operations are actively engaged in selling insurance products and related services. The run-off operations, which do not actively sell insurance products, manage run-off policies and related claims, including those for asbestos-related and environmental pollution exposures. Insurance products that were actively sold in 1995 by subsidiaries that are now in run-off continue to be sold by the ongoing operations. Results for the run-off operations primarily reflect current year losses associated with unearned premiums as of December 31, 1995, prior year development on claim and claim adjustment expense reserves and investment activity. The restructuring is being contested in the courts by certain competitors and policyholders; however, management believes that its restructuring will not be affected. Financial data for the domestic and run-off operations for 1995 are prepared on a pro forma basis as though the restructuring occurred at the beginning of 1995. The pro forma amounts are not necessarily indicative of the amounts that would have been reported had the restructuring actually occurred as of January 1, 1995. Amounts for the international operations and for the consolidated Property and Casualty segment were not affected by the restructuring. Net income for the ongoing operations in the third quarter and nine months of 1996 included after-tax realized investment gains of $2 million and $13 million, respectively, compared with gains of $10 million and $59 million for the same periods of 1995. For the run-off operations, after-tax realized investment losses were $1 million and $12 million for the third quarter and nine months of 1996, respectively, compared with losses of $3 million and $5 million for the same periods in 1995. Results for the third quarter and nine months of 1995 reflect charges associated with reserve strengthening for asbestos-related and environmental pollution (A&E) claims ($686 million after-tax) and uncollectible reinsurance for non-A&E exposures ($88 million after-tax), and charges for cost reduction initiatives ($55 million after-tax). Excluding the 1995 charges and after-tax realized investment gains, Property and Casualty segment income (loss) for the third quarter and nine months of 1996 and 1995 was as follows:
====================================================================================================================== Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Ongoing operations: Domestic $20 $11 $52 ($5) International 37 36 102 84 -------------------------------------------------------------------------- Total ongoing operations 57 47 154 79 Run-off operations 1 19 5 (44) - ---------------------------------------------------------------------------------------------------------------------- Total $58 $66 $159 $35 ======================================================================================================================
The improvement in the domestic operations reflects lower expenses primarily resulting from the 1995 cost reduction initiative, higher investment income due to higher yields, and improved claim experience, partially offset by lower premiums and fees as discussed further on page 14. Improvement in the international operations primarily reflects favorable claim experience. Results for the domestic and international operations reflect a highly competitive pricing environment. The decline in results for the run-off operations for the third quarter of 1996 primarily reflects higher A&E losses and higher expenses. The improvement in results for the run-off operations for the nine months of 1996 primarily reflects lower A&E losses. Premiums and fees declined 5% in both the third quarter and nine months of 1996. The decline primarily reflects the application of strict underwriting standards, continued competition (particularly in workers' compensation, commercial package and certain international lines of business), and an unfavorable effect from foreign currency translation (approximately $70 million and $130 13 16 million for the international business for the quarter and nine months, respectively). The nine month decline also reflects lower premiums of approximately $75 million for reinsurance and personal automobile products that are no longer being actively sold. These declines were partially offset by growth in the domestic property, casualty, and marine and aviation lines of business, as well as the international accident and health line of business. The domestic operations had catastrophe losses of $27 million and $58 million, net of reinsurance, for the third quarter and nine months of 1996, including $20 million for Hurricane Fran. In addition, catastrophe losses for the nine months of 1996 include $21 million for winter storms. There were no catastrophe losses for the international operations in the third quarter and nine months of 1996. Catastrophe losses for the third quarter and nine months of 1995 were $4 million and $45 million, including losses of $5 million and $39 million for the domestic operations. Catastrophe losses for the nine months of 1995 included $31 million for Texas hail storms. The effects of reinsurance on catastrophe losses for the periods presented were not material. LOSS RESERVES AND REINSURANCE RECOVERABLES CIGNA's reserving methodology and significant issues affecting the estimation of loss reserves are described in its Form 10-K. In summary, CIGNA's property and casualty loss reserves of $16.8 billion and $17.0 billion as of September 30, 1996 and December 31, 1995, respectively, are an estimate of future payments for reported and unreported claims for losses and related expenses with respect to insured events that have occurred. The basic assumption underlying the many standard actuarial and other methods used in the estimation of property and casualty loss reserves is that past experience is an appropriate basis for predicting future events. However, current trends and other factors that would modify past experience are also considered. The process of establishing loss reserves is subject to uncertainties that are normal, recurring and inherent in the property and casualty business. CIGNA continually attempts to improve its loss estimation process by refining its process of analyzing loss development patterns, claims payments and other information, but there remain many reasons for adverse development of estimated ultimate liabilities. For example, unanticipated changes in workers' compensation laws have at times significantly affected the ability of insurers to estimate liabilities for unpaid losses and related expenses. As of September 30, 1996 and December 31, 1995, CIGNA's reinsurance recoverables were approximately $6.8 billion and $6.7 billion, net of allowances for uncollectible amounts of $718 million and $700 million, respectively. During the third quarter of 1995, CIGNA increased the allowance for uncollectible reinsurance by $210 million pre-tax, including $75 million that is reported as asbestos-related and environmental pollution prior year development in the table on page 15. CIGNA expects to continue to have significant recoveries from its reinsurance arrangements, including recoveries of A&E losses. However, the extent of recoveries in the aggregate will depend on future gross loss experience and the particular reinsurance arrangements to which future losses relate. Losses for unrecoverable reinsurance are principally due to the failure of reinsurers to indemnify CIGNA, primarily because of reinsurer insolvencies and disputes under reinsurance contracts. Reinsurance disputes have increased in recent years, particularly on larger and more complex claims such as those related to asbestos and London reinsurance market exposures. Reinsurance disputes may increase in the future and are likely to include disputes related to environmental pollution. Allowances have been established for amounts deemed uncollectible. Reserving for all property and casualty claims and related reinsurance recoverables continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. CIGNA's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current law changes. Any such revisions could result in future changes in estimates of losses or reinsurance recoverables, and would be reflected in CIGNA's results of operations for the period in which the estimates are changed. While the effect of any such changes in estimates of losses or reinsurance recoverables could be material to 14 17 future results of operations, CIGNA does not expect such changes to have a material effect on its liquidity or financial condition. In management's judgment, information currently available has been appropriately considered in estimating CIGNA's loss reserves and reinsurance recoverables. The following table shows the adverse (favorable) pre-tax effects on the Property and Casualty segment's results of operations from prior year development, net of reinsurance, for the third quarter and nine months ended September 30:
===================================================================================================================== Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------------------------------- By business operation: Ongoing operations $(2) $7 $15 $32 Run-off operations 38 1,202 110 1,389 - --------------------------------------------------------------------------------------------------------------------- Total $36 $1,209 $125 $1,421 ===================================================================================================================== By type of loss: Asbestos-related $13 $194 $27 $255 Environmental pollution 5 861 31 955 Unrecoverable reinsurance 2 135 20 161 Workers' Compensation 17 27 36 67 Other (1) (8) 11 (17) - --------------------------------------------------------------------------------------------------------------------- Total $36 $1,209 $125 $1,421 =====================================================================================================================
CIGNA completed a comprehensive review of its A&E exposures during the third quarter of 1995 and increased its related reserves by $255 million ($194 million, net of reinsurance) for asbestos-related exposures and approximately $1.2 billion ($861 million, net of reinsurance) for environmental pollution exposures. As a result, charges for A&E losses in 1996 have been and are expected to be substantially lower than in prior years. Other prior year development for the nine months of 1996 and 1995 was primarily attributable to favorable development on commercial package and commercial fire lines of business, as well as unfavorable development on long-term exposure claims and reinsurance exposures. OTHER OPERATIONS Other Operations primarily includes unallocated investment income, expenses (principally debt service) and taxes. Also included in Other Operations are the results of CIGNA's settlement annuity business and non-insurance operations engaged primarily in investment and real estate activities. Other Operations had net losses of $12 million for the third quarter of 1996 and 1995. Net losses for the nine months of 1996 and 1995 were $46 million and $38 million, respectively. Excluding after-tax realized investment results, losses were $14 million and $46 million for the third quarter and nine months of 1996, compared with $16 million and $54 million for the same periods last year. The decreases in losses primarily reflect lower net interest expense. LIQUIDITY AND CAPITAL RESOURCES Liquidity for CIGNA and its insurance subsidiaries has remained strong as evidenced by significant amounts of short-term investments and cash and cash equivalents in the aggregate. Generally, CIGNA has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio and through utilization of overall positive cash flows. During the first nine months of 1996, cash and cash equivalents increased $529 million from $1.6 billion as of December 31, 1995. This increase primarily reflects cash provided by investing activities ($738 million), primarily due to net investment sales and maturities, and cash provided by operating activities ($341 million), reflecting the timing of cash receipts and cash disbursements and earnings. The increase in cash flows was partially offset by payments of dividends on and repurchases of CIGNA common stock ($341 million) and repayment of debt ($158 million). CIGNA's capital resources represent funds available for long-term business commitments. They primarily consist of retained earnings and proceeds from the issuance of long-term debt and equity securities. CIGNA's financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of such securities. CIGNA continues to be well capitalized, with sufficient borrowing capacity to meet the anticipated needs of its businesses. CIGNA continues to conduct strategic and financial reviews of its businesses to deploy its capital resources most effectively. 15 18 CIGNA had $1.04 billion of long-term debt outstanding at September 30, 1996, compared with $1.07 billion at December 31, 1995. As of September 30, 1996, CIGNA had approximately $800 million remaining under a shelf registration statement that may be issued as debt or equity securities, or both, depending upon market conditions and CIGNA's capital requirements. At September 30, 1996, CIGNA's short-term debt, primarily commercial paper, amounted to $268 million, a decrease of $146 million from December 31, 1995. This decrease reflects the repayment of notes which matured on September 1, 1996. In connection with the domestic property and casualty restructuring, CIGNA contributed additional capital of $250 million and $125 million to these operations in the first quarter of 1996 and 1995, respectively. These contributions were funded through internal sources. In April 1996, CIGNA's Board of Directors authorized the purchase of up to $500 million of its common stock, depending on prevailing market conditions and alternative uses of capital. Under this authorization, approximately $175 million, or 1.5 million shares, of common stock were purchased as of October 31, 1996. Shares were, and are expected to be, purchased with internal funds. INVESTMENT ASSETS
================================================================================================== September 30, December 31, (In millions) 1996 1995 - -------------------------------------------------------------------------------------------------- Fixed maturities $33,888 $36,241 Equity securities 712 661 Mortgage loans 11,278 11,010 Real estate 1,275 1,283 Other, primarily policy loans 8,230 8,515 - -------------------------------------------------------------------------------------------------- Total investment assets $55,383 $57,710 ==================================================================================================
Additional information regarding CIGNA's investment assets is included in Note 3 to the third quarter 1996 Financial Statements and Notes 2, 4, 5 and 20 to the 1995 Financial Statements as well as the 1995 Form 10-K. Significant amounts of CIGNA's investment assets are attributable to experience-rated contracts with policyholders (policyholder contracts). Approximate percentages of investments attributable to policyholder contracts were as follows:
=============================================================================================== September 30, December 31, 1996 1995 - ----------------------------------------------------------------------------------------------- Fixed maturities 28% 30% Mortgage loans 56% 58% Real estate 56% 57% ===============================================================================================
FIXED MATURITIES Investments in fixed maturities (bonds) include publicly traded and private placement debt securities; asset-backed securities, including collateralized mortgage obligations (CMOs); and redeemable preferred stocks. Fixed maturities had an aggregate fair value, including policyholder share, that was greater than amortized cost by approximately $1.3 billion, as of September 30, 1996, and by approximately $3.0 billion as of December 31, 1995. The decrease in unrealized appreciation primarily reflects the upward movement in interest rates since December 31, 1995. POTENTIAL PROBLEM BONDS Potential problem bonds are fully current but judged by management to have certain characteristics that increase the likelihood of problem classification. Potential problem bonds, including amounts attributable to policyholder contracts, were $70 million as of September 30, 1996, compared with $137 million as of December 31, 1995. There were no cumulative write-downs for potential problem bonds as of those dates. 16 19 PROBLEM BONDS CIGNA considers bonds that are delinquent or restructured as to terms, typically interest rate and, in certain cases, maturity date, problem bonds. As of September 30, 1996 and December 31, 1995, problem bonds, including amounts attributable to policyholder contracts, were $202 million and $196 million, net of related cumulative write-downs of $167 million and $140 million, respectively. CUMULATIVE WRITE-DOWNS FOR BONDS Cumulative write-downs for bonds as of September 30, 1996 and 1995 were $168 million and $140 million, including $60 million and $52 million attributable to policyholder contracts, respectively. Also, cumulative write-downs as of September 30, 1996 and 1995 included $1 million and $4 million, respectively, for bonds no longer classified as problem or potential problem bonds. During the nine months of 1996 and 1995, CIGNA established write-downs of $44 million and $46 million, respectively, for problem bonds. These amounts included $14 million and $18 million, respectively, attributable to policyholder contracts. See the Summary on page 19 for the adverse after-tax effect of write-downs on policyholder contracts and on CIGNA's net income. EFFECT OF NON-ACCRUALS FOR BONDS CIGNA recognizes interest income on problem bonds only when payment is received. See the Summary on page 19 for the adverse effect of non-accruals for bonds on policyholder contracts and on CIGNA's net income. MORTGAGE LOANS
====================================================================================================== September 30, December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------ Mortgage loans (in millions) $11,278 $11,010 By property type: Retail facilities 42% 42% Office buildings 34 35 Apartment buildings 12 12 Hotels 7 6 Other 5 5 Total 100% 100% ======================================================================================================
CIGNA's investment strategy requires diversification of the mortgage loan portfolio. This strategy includes guidelines relative to property type, location and borrower to reduce its exposure to potential losses. Adverse conditions in real estate markets and more stringent lending practices by financial institutions have affected scheduled maturities of mortgage loans. During the nine months of 1996, $824 million of mortgage loans was scheduled to mature, of which $378 million was paid in full, $82 million was extended at existing loan rates for a weighted average of six months and $340 million was refinanced at current market rates. Mortgage loan extensions and refinancings are loans in good standing. The remaining scheduled maturities of $24 million were problem and potential problem mortgage loans. The effect of not receiving timely cash payments on maturing mortgage loans is not expected to have a material adverse effect on CIGNA's future results of operations, liquidity or financial condition. POTENTIAL PROBLEM MORTGAGE LOANS Potential problem mortgage loans include: - - fully current loans that are judged by management to have certain characteristics that increase the likelihood of problem classification, - - fully current loans for which the borrower has requested restructuring, and - - loans that are 30 to 59 days delinquent with respect to interest or principal payments. Potential problem mortgage loans, including amounts attributable to policyholder contracts, were $346 million as of September 30, 1996, compared with $211 million as of December 31, 1995, net of related valuation reserves of $24 million and $29 million, respectively. 17 20 PROBLEM MORTGAGE LOANS CIGNA's problem mortgage loans include delinquent and restructured mortgage loans. Delinquent mortgage loans include those on which payment is overdue generally 60 days or more. Restructured mortgage loans are those whose basic financial terms have been modified, typically to reduce the interest rate or extend the maturity date. As of September 30, 1996, restructured mortgage loans with a carrying value of $268 million had their original maturity date extended, with an average extension of approximately five years. Restructured mortgage loans generated annualized cash returns averaging approximately 8 1/2% as of September 30, 1996. During the nine months of 1996, CIGNA reclassified approximately $55 million of restructured mortgage loans to loans in good standing because they were performing under the terms of the restructured loan agreement, and those terms were generally equivalent to terms that CIGNA was willing to accept for a comparable new loan at the time of restructure. As of September 30, 1996 and December 31, 1995, problem mortgage loans, including amounts attributable to policyholder contracts, were $420 million and $575 million, net of valuation reserves of $71 million and $59 million, respectively. VALUATION RESERVES FOR MORTGAGE LOANS Valuation reserves for mortgage loans at September 30, 1996 and 1995 were $95 million and $84 million, respectively, including $62 million and $59 million attributable to policyholder contracts. During the nine months of 1996 and 1995, CIGNA established valuation reserves for problem and potential problem mortgage loans of $53 million and $3 million, respectively. These amounts included $30 million and $4 million attributable to policyholder contracts. The net increase in valuation reserves established in the nine months of 1995 reflects the implementation of SFAS Nos. 114 and 118, which resulted in a decrease in reserves of $29 million, including $16 million attributable to policyholders. See the Summary on page 19 for the net after-tax effect of valuation reserves on policyholder contracts and on CIGNA's net income. EFFECT OF NON-ACCRUALS FOR MORTGAGE LOANS CIGNA recognizes interest income on problem mortgage loans only when payment is received. See the Summary on page 19 for the effect of non-accruals for mortgage loans on policyholder contracts and on CIGNA's net income. REAL ESTATE As of September 30, 1996 and December 31, 1995, investment real estate, net of reserves and write-downs, included: 1) $506 million and $563 million, respectively, of real estate held for the production of income, and 2) $769 million and $720 million, respectively, of real estate held for sale, primarily properties acquired as a result of foreclosure of mortgage loans. REAL ESTATE WRITE-DOWNS AND RESERVES Cumulative write-downs and valuation reserves for real estate at September 30, 1996 and 1995 were $391 million and $434 million, respectively, including $197 million and $230 million attributable to policyholder contracts. See the Summary on page 19 for the adverse after-tax effect of write-downs and the net increase in valuation reserves on policyholder contracts and on CIGNA's net income. 18 21 SUMMARY The adverse (favorable) effects of write-downs and changes in valuation reserves as well as of non-accruals on policyholder contracts and on CIGNA's net income were as follows:
- ----------------------------------------------------------------------------------------------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, ----------------------------------------------------- ------------------------------------------------- 1996 1995 1996 1995 ---------------------------- ----------------------- ---------------------- ------------------------- Policy- Policy- Policy- Policy- holder holder holder holder (In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA - ----------------------------------------------------------------------------------------------------------------------------- Write-downs and valuation reserves: Bonds $6 $8 $9 $12 $14 $19 $18 $18 Mortgage loans 1 1 4 2 30 14 4 (1) Real estate 1 -- 3 -- -- 1 14 5 - ----------------------------------------------------------------------------------------------------------------------------- Total $8 $9 $16 $14 $44 $34 $36 $22 ============================================================================================================================= Non-accruals: Bonds $3 $4 $4 $5 $8 $12 $10 $13 Mortgage loans 2 -- (1) 1 5 1 4 1 - ----------------------------------------------------------------------------------------------------------------------------- Total $5 $4 $3 $6 $13 $13 $14 $14 =============================================================================================================================
Economic conditions, including real estate market conditions, have improved. However, additional losses from problem investments are expected to occur for specific investments in the normal course of business, particularly due to continuing weak conditions in certain office building markets. Assuming no significant deterioration in economic conditions, CIGNA does not expect additional non-accruals, write-downs and reserves to materially affect future results of operations, liquidity or financial condition, or to result in a significant decline in the aggregate carrying value of its assets. CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for historical information provided in this Management's Discussion and Analysis, statements made throughout this document are forward-looking and contain information about financial results, economic conditions, trends and known uncertainties. CIGNA cautions the reader that actual results could differ materially from those expected by CIGNA, depending on the outcome of certain factors (some of which are described with the forward-looking statements) including: 1) adverse catastrophe experience in CIGNA's property and casualty businesses; 2) adverse property and casualty loss development for events that CIGNA insured in prior years; 3) an increase in medical costs in CIGNA's health care operations, including increases in utilization and costs of medical services; 4) heightened competition, particularly price competition, reducing product margins and constraining growth in CIGNA's businesses; and 5) significant changes in interest rates. 19 22 Item 6. Exhibits and Reports on Form 8-K. (a) See Exhibit Index. (b) During the quarterly period ended September 30, 1996, and as of the filing date, CIGNA filed the following Reports on Form 8-K: - dated October 30, 1996, Item 5--containing a news release regarding its third quarter 1996 results. - dated July 30, 1996, Item 5--containing a news release regarding its second quarter 1996 results. -20- 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned duly authorized officer, on its behalf and in the capacity indicated. CIGNA CORPORATION By /s/ Gary A. Swords ------------------------ Gary A. Swords Vice President and Chief Accounting Officer Date: November 6, 1996 -21- 24 Exhibit Index
Method of Number Description Filing - ------ ----------- ---------- 11 Computation of Earnings Filed herewith. Per Share 12 Computation of Ratio of Filed herewith. Earnings to Fixed Charges 27 Financial Data Schedule Included only in the EDGAR version of the Form 10-Q.
-22- EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 CIGNA CORPORATION EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (Dollars in millions, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 ==================================================================================================================================== - -------------------------------------------------- PRIMARY EARNINGS PER SHARE - -------------------------------------------------- NET INCOME (LOSS) AVAILABLE TO COMMON SHARES $ 281 $ (566) $ 750 $ (71) - ---------------------------------------------------------=========================================================================== WEIGHTED AVERAGE SHARES: Common shares 75,705,848 72,908,117 76,154,099 72,561,464 Common share equivalents applicable to stock options 349,199 * 430,934 * - ------------------------------------------------------------------------------------------------------------------------------------ Total 76,055,047 72,908,117 76,585,033 72,561,464 - ---------------------------------------------------------=========================================================================== PRIMARY EARNINGS PER SHARE $ 3.69 $ (7.76) $ 9.80 $ (0.98) - ---------------------------------------------------------=========================================================================== - -------------------------------------------------- FULLY DILUTED EARNINGS PER SHARE - -------------------------------------------------- NET INCOME (LOSS) AVAILABLE TO COMMON SHARES: Net income $ 281 $ (566) $ 750 $ (71) Adjusted for: Interest expense (net of tax) on convertible debentures - * - * - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) available to common shares $ 281 $ (566) $ 750 $ (71) - ---------------------------------------------------------=========================================================================== WEIGHTED AVERAGE SHARES: Common shares 75,705,848 72,908,117 76,154,099 72,561,464 Common share equivalents applicable to stock options 379,876 * 462,101 * Assumed conversion of convertible debentures - * - * - ------------------------------------------------------------------------------------------------------------------------------------ Total 76,085,724 72,908,117 76,616,200 72,561,464 - ---------------------------------------------------------=========================================================================== FULLY DILUTED EARNINGS PER SHARE $ 3.69 $ (7.76) $ 9.79 $ (0.98) - ---------------------------------------------------------===========================================================================
* Anti-dilutive; therefore effects have been excluded. EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 CIGNA CORPORATION EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 ===================================================================================================================== Income (loss) before income taxes $ 1,137 $ (177) ------------- ------------- Fixed charges included in income (loss): Interest expense 80 94 Interest portion of rental expense 66 72 ------------- ------------- Total fixed charges included in income (loss) 146 166 ------------- ------------- Income (loss) available for fixed charges $ 1,283 $ (11) - ---------------------------------------------------------------------------------------============================== RATIO OF EARNINGS TO FIXED CHARGES 8.8 -(A) - ---------------------------------------------------------------------------------------==============================
(A) As a result of a pre-tax loss, the loss available for fixed charges of $11 million is insufficient to cover total fixed charges of $166 million. EX-27 4 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF PART I TO CIGNA'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 33,888 0 0 712 11,278 1,275 55,383 2,088 7,352 1,211 97,347 11,777 2,065 19,159 29,692 1,305 0 0 88 6,920 97,347 10,333 3,263 17 448 9,337 877 2,710 1,137 387 750 0 0 0 750 9.80 0 0 0 0 0 0 0 0 Amount includes recoverables on paid and unpaid losses.
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