<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1994
------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
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Commission file number 1-8323
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 761-1000
----------------
Not Applicable
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(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 October 31, 1994, 72,236,930 shares of the issuer's Common Stock
were outstanding.
<PAGE> 2
CIGNA CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash 3
Flows
Notes to Financial Statements 4
Item 2. Management's Discussion and 10
Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 35
Item 6. Exhibits and Reports on Form 8-K. 35
SIGNATURE 36
EXHIBIT INDEX 37
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1994 1993
=================================================================================================
<S> <C> <C> <C> <C>
REVENUES
Premiums and fees $ 3,497 $ 3,298 $ 10,307 $ 10,052
Net investment income 980 971 2,940 2,878
Other revenues 117 146 372 379
Realized investment gains 6 110 50 153
--------- --------- --------- ---------
Total revenues 4,600 4,525 13,669 13,462
--------- --------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,250 3,487 9,685 9,985
Policy acquisition expenses 314 323 883 899
Other operating expenses 858 976 2,549 2,677
--------- --------- --------- ---------
Total benefits, losses and expenses 4,422 4,786 13,117 13,561
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 178 (261) 552 (99)
--------- --------- --------- ---------
Income taxes (benefits):
Current 92 58 225 194
Deferred (37) (225) (45) (333)
--------- --------- --------- ---------
Total income taxes 55 (167) 180 (139)
--------- --------- --------- ---------
NET INCOME (LOSS) 123 (94) 372 40
Dividends declared (55) (55) (165) (164)
Retained earnings, beginning of period 3,856 3,727 3,717 3,702
- -------------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 3,924 $ 3,578 $ 3,924 $ 3,578
- -------------------------------------------======================================================
EARNINGS PER SHARE $ 1.70 $ (1.31) $ 5.14 $ 0.55
- -------------------------------------------======================================================
DIVIDENDS DECLARED PER SHARE $ 0.76 $ 0.76 $ 2.28 $ 2.28
- -------------------------------------------======================================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
1
<PAGE> 4
CIGNA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1994 1993
=======================================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities: at amortized cost (fair value, $12,996; $13,807) $ 12,740 $ 12,375
Fixed maturities: at fair value (amortized cost, $18,045; $17,618) 17,982 19,380
Equity securities: at fair value (cost, $1,668; $1,626) 1,897 1,849
Mortgage loans 9,868 10,021
Policy loans 4,404 3,663
Real estate 1,731 1,780
Other long-term investments 409 303
Short-term investments 1,023 1,357
-------- --------
Total investments 50,054 50,728
Cash and cash equivalents 1,662 1,211
Accrued investment income 889 764
Premiums, accounts and notes receivable 3,999 4,065
Reinsurance recoverables 8,083 8,338
Deferred policy acquisition costs 1,103 1,085
Property and equipment, net 913 930
Deferred income taxes, net 2,204 1,703
Goodwill 1,188 1,262
Other assets 1,217 1,209
Separate account assets 14,692 13,680
- -------------------------------------------------------------------------------------------------------
Total $ 86,004 $ 84,975
- ----------------------------------------------------------------------------===========================
LIABILITIES
Future policy benefits $ 10,376 $ 9,935
Contractholder deposit funds 25,838 25,328
Unpaid claims and claim expenses 19,877 20,144
Unearned premiums 2,634 2,711
-------- --------
Total insurance and contractholder liabilities 58,725 58,118
Short-term debt 324 351
Accounts payable, accrued expenses and other liabilities 4,647 4,555
Current income taxes 391 468
Long-term debt 1,378 1,235
Separate account liabilities 14,639 13,673
- -------------------------------------------------------------------------------------------------------
Total liabilities 80,104 78,400
- -------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 7
SHAREHOLDERS' EQUITY
Common stock (shares issued, 83) 83 83
Additional paid-in capital 2,247 2,222
Net unrealized appreciation - fixed maturities 63 961
Net unrealized appreciation - equity securities 195 211
Net translation of foreign currencies (48) (74)
Retained earnings 3,924 3,717
Less treasury stock, at cost (564) (545)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,900 6,575
- -------------------------------------------------------------------------------------------------------
Total $ 86,004 $ 84,975
- ----------------------------------------------------------------------------===========================
SHAREHOLDERS' EQUITY PER SHARE $ 81.68 $ 91.30
- ----------------------------------------------------------------------------===========================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
2
<PAGE> 5
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1994 1993
=======================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 372 $ 40
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Insurance liabilities, net of reinsurance recoverables 101 643
Premiums, accounts and notes receivable 143 63
Accounts payable, accrued expenses, other liabilities and
current income taxes (203) 180
Deferred income taxes, net (45) (333)
Realized investment gains (50) (153)
Gain on sale of subsidiaries and other equity interests (26) (29)
Other, net (5) 1
-------- --------
Net cash provided by operating activities 287 412
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities - held to maturity 12 825
Fixed maturities - available for sale 3,748 -
Mortgage loans 484 772
Equity securities 472 1,400
Other (primarily short-term investments) 12,254 15,248
Investment maturities and repayments:
Fixed maturities - held to maturity 2,107 3,623
Fixed maturities - available for sale 1,438 -
Mortgage loans 136 154
Investments purchased:
Fixed maturities - held to maturity (2,260) (5,699)
Fixed maturities - available for sale (5,437) -
Mortgage loans (592) (666)
Equity securities (450) (1,051)
Other (primarily short-term investments) (12,528) (16,260)
Other, net (137) (81)
-------- --------
Net cash used in investing activities (753) (1,735)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 4,039 5,241
Withdrawals from contractholder deposit funds (3,118) (3,995)
Net change in commercial paper (5) 49
Issuance of long-term debt 144 327
Repayment of debt (23) (67)
Dividends paid (165) (164)
Other, net 5 6
-------- --------
Net cash provided by financing activities 877 1,397
-------- --------
Effect of foreign currency rate changes on cash 40 (16)
- -------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 451 58
Cash and cash equivalents, beginning of period 1,211 1,011
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,662 $ 1,069
- ----------------------------------------------------------------------------===========================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 301 $ 109
Interest paid $ 93 $ 86
- -------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
3
<PAGE> 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 1994
presentation.
The interim financial statements are unaudited but include all adjustments
(consisting of normal recurring adjustments other than the adjustments
described throughout 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 the fourth quarter of 1993, CIGNA implemented Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which was issued by the Financial Accounting
Standards Board (FASB) in May 1993. SFAS No. 115 requires that debt and equity
securities be classified into different categories and carried at fair value if
they are not classified as held to maturity. SFAS No. 115 does not permit
retroactive application of its provisions. The effect of implementing SFAS No.
115 as of December 31, 1993 resulted in an increase in investment assets of
approximately $1.6 billion and an increase in shareholders' equity of $882
million resulting from the classification of certain fixed maturities
previously carried at amortized cost to available for sale. The increase in
shareholders' equity was net of policyholder share of $307 million and deferred
income taxes of $452 million.
In 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," which provides guidance on valuing impaired loans, and must be
implemented by the first quarter of 1995, with the cumulative effect of
implementation included in net income. In October 1994, the FASB issued SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures," which amends the income recognition provision of SFAS No.
114. CIGNA has not determined the timing for its adoption of SFAS Nos. 114 and
118; however, the effect on its results of operations and financial condition
upon adoption is not expected to be material.
4
<PAGE> 7
NOTE 3-INVESTMENT GAINS AND LOSSES
Realized gains and losses on investments, excluding policyholder share, were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Realized gains (losses):
Fixed maturities $7 $12 $16 $18
Mortgage loans 4 (3) (7) (32)
Equity securities 1 91 18 149
Real estate (8) (13) 18 (35)
Other investments 2 23 5 53
-------- --------- --------- ---------
6 110 50 153
Income taxes 5 37 20 31
- ---------------------------------------------------------------------------------------------------------------
Net realized gains $1 $73 $30 $122
- -------------------------------------------------------========================================================
</TABLE>
During the third quarter and nine months of 1994, proceeds from sales of
available-for-sale fixed maturities and equities, including policyholder share,
were $1.1 billion and $4.2 billion, respectively. The third quarter sales
resulted in gross gains of $28 million and gross losses of $26 million. The
nine month sales resulted in gross gains of $135 million and gross losses of
$119 million.
During the second quarter of 1994, $14 million of fixed maturities classified
as held to maturity were sold, resulting in gross proceeds of $12 million and a
realized pre-tax loss of $2 million. In addition, during the third quarter of
1994, $31 million of fixed maturities classified as held to maturity were
transferred to the available for sale category, resulting in the recognition of
unrealized depreciation, including policyholder share, of $2 million as of
September 30, 1994. The sales of fixed maturities classified as held to
maturity and the transfer of such securities to the available for sale category
were the result of significant credit deterioration of the issuers of the
affected investments.
During the third quarter and nine months of 1994, Net Unrealized Appreciation -
Fixed Maturities included in Shareholders' Equity, which is net of policyholder
share and deferred income taxes, decreased by approximately $80 million and
$900 million, respectively.
As of September 30, 1994 and December 31, 1993, all futures contracts, which
totalled $88 million and $129 million, respectively, were accounted for as
hedges. As of December 31, 1992, $293 million of futures contracts were
accounted for as hedges while $231 million of futures contracts relating to
policyholder contracts did not receive hedge accounting treatment because they
were used as a general portfolio hedge rather than to hedge specific
transactions. At December 31, 1992, futures contracts were outstanding to
hedge a large contractholder withdrawal which was completed in 1993.
Outstanding futures contracts were further reduced during 1994 and 1993 because
of greater anticipated availability of permanent fixed maturity and mortgage
loan investments.
5
<PAGE> 8
NOTE 4-EARNINGS PER SHARE
Earnings per share were based on net income divided by weighted average common
shares, including common share equivalents, as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares 72.354 72.056 72.318 71.995
- -----------------------------------------------=======================================================
</TABLE>
There is no significant difference between earnings per share on a primary and
a fully diluted basis.
Common shares held as Treasury shares were 10,827,609 and 10,614,689 as of
September 30, 1994 and 1993, 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 and has proposed two adjustments. One adjustment,
relating only to years prior to 1989, could result in an assessment of
approximately $215 million for those years. The other adjustment, which
relates to years 1989 and 1990, and would be applicable for years thereafter,
could result in an assessment of approximately $140 million. CIGNA is
contesting the first issue in court and appealing the second issue with the
IRS. Although the outcomes of both issues are uncertain, management believes
that CIGNA should prevail.
In management's opinion, adequate tax liabilities have been established for all
years.
As a result of the Omnibus Budget Reconciliation Act of 1993 (OBRA), the
federal corporate income tax rate increased by one percent to 35% retroactive
to January 1, 1993. Deferred tax benefits for the third quarter of 1993
included $48 million related to an increase in CIGNA's net deferred tax asset
as of January 1, 1993 due to the effect of the tax rate increase.
As of September 30, 1994, CIGNA had tax basis operating loss carryforwards of
$311 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 amounts deemed uncollectible
were $430 million and $405 million as of September 30, 1994 and December 31,
1993, respectively. While future charges for unrecoverable reinsurance may
materially affect results of
6
<PAGE> 9
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 1994, premiums and fees were net of
ceded premiums of $472 million and $1.5 billion, respectively. For the third
quarter and nine months of 1993, premiums and fees were net of ceded premiums
of $487 million and $1.4 billion, respectively. In addition, benefits, losses
and settlement expenses for the third quarter and nine months of 1994 were net
of reinsurance recoveries of $149 million and $1.3 billion, respectively.
Benefits, losses and settlement expenses for the third quarter and nine months
of 1993 were net of reinsurance recoveries of $788 million and $2.2 billion,
respectively.
NOTE 7-CONTINGENCIES AND OTHER MATTERS
FINANCIAL GUARANTEES
CIGNA 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 materially 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. Some of the changes include
initiatives to restrict insurance pricing and the application of underwriting
standards; reform health care; restrict investment practices; revise the system
of funding clean-up of environmental damages; expand regulation; and
reinterpret insurance contracts long after the policies were written to provide
coverage unanticipated by CIGNA.
Proposals on national health care reform have been under consideration which
could significantly change the way health care is financed and delivered in the
United States. Congress recessed in 1994 without completing action on health
care reform. New legislation is expected to be introduced in Congress in 1995.
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.
Superfund, originally enacted in 1980, was under review by Congress in 1994.
Congress recessed in 1994 without completing action on Superfund legislation.
New legislation is expected to be introduced in Congress in 1995, in part
because the existing Superfund legislation expires in 1995. Any changes in
Superfund's system of allocating responsibility or funding clean-up costs 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.
The National Association of Insurance Commissioners (NAIC) has developed model
solvency-related guidelines ("risk-based capital" rules) to strengthen solvency
regulation of insurance companies. At September 30, 1994, CIGNA's domestic
property and casualty subsidiaries, in the aggregate, and life insurance
subsidiaries were adequately capitalized under the guidelines. During 1994,
CIGNA contributed approximately $250 million of capital ($150 million during
the third quarter) to the domestic property and casualty operations as a result
of continued losses. As the risk-based capital guidelines for property and
casualty insurers become more stringent in
7
<PAGE> 10
future years and depending on the future results of these operations,
additional capital for the property and casualty subsidiaries may be necessary.
Also, the NAIC is addressing risk-based capital guidelines for health
maintenance organizations (HMOs) and a proposal that would limit the types and
amounts of investment assets that an insurance company can hold. CIGNA cannot
currently predict what effect, if any, such guidelines will have on its future
results of operations, liquidity or financial condition.
Unfavorable economic conditions have contributed to an increase in the number
of insurance companies that are impaired or insolvent. This is expected to
result in an increase in mandatory assessments by state guaranty funds of, or
voluntary payments by, solvent insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments,
which are subject to statutory limits, can be partially recovered through a
reduction in future premium taxes in some states. Although future assessments
and payments 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.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain.
ASBESTOS-RELATED, ENVIRONMENTAL POLLUTION AND OTHER LONG-TERM EXPOSURE CLAIMS
Reserving for asbestos-related, environmental pollution and other long-term
exposure claims is subject to significant uncertainties that are not generally
present for other types of claims, as described in CIGNA's 1993 Form 10-K.
Developed case law and adequate claim history do not exist for such claims.
CIGNA and the insurance industry dispute coverage for the environmental
pollution and some asbestos-related liabilities of their policyholders. In
addition to the coverage lawsuits, CIGNA shares in the expense of defending
underlying litigation against its policyholders. The outcome of the coverage
litigation will assist in the determination of amounts that might be paid in
the future for similar claims. The legal costs associated with these coverage
lawsuits constitute a significant portion of CIGNA's losses for these claims.
Reinsurance for these types of claims may become subject to similar contested
coverage issues.
In 1993, CIGNA re-evaluated its reported asbestos-related, environmental
pollution and other long-term exposure claims to determine if future legal
expenses could be reasonably estimated and reserves established. Based on this
review, CIGNA recorded a charge of $375 million, net of reinsurance, ($244
million after-tax) in the third quarter of 1993 for future legal and associated
expenses for reported claims.
CIGNA expects that its future results will continue to be adversely affected by
losses and legal expenses for these types of claims. Because of the
significant uncertainties involved and the likelihood that these uncertainties
will not be resolved in the near future, CIGNA is unable to reasonably estimate
the additional losses and expenses and therefore is unable to determine whether
such amounts will be material to its future results of operations, liquidity or
financial condition.
8
<PAGE> 11
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.
In 1988, a number of state attorneys general and private plaintiffs filed
lawsuits against a number of insurance companies and others, including CIGNA,
alleging violations of federal and state antitrust laws. Subject to final
approval by the court, an agreement in principle to settle these cases has been
reached. CIGNA's portion of the settlement is not expected to be material to
its results of operations.
While the outcome of all litigation involving CIGNA, including
insurance-related litigation, cannot be determined, litigation (other than that
related to asbestos, environmental pollution and other long-term exposure
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 recoveries by
amounts that would be material to results of operations, liquidity or financial
condition.
CIGNA is involved in lawsuits regarding policy coverage and judicial
interpretation of legal liability for asbestos-related, environmental pollution
and other long-term exposure claims. The lack of developed case law, as
evidenced by the coverage lawsuits, is one of the significant uncertainties
that affects CIGNA's ability to estimate future losses for these types of
claims.
RESTRUCTURING INITIATIVES
During the third quarter of 1994, CIGNA decided to substantially withdraw from
the property and casualty reinsurance business. Withdrawing from this business
is not expected to have a material effect on CIGNA's results of operations.
During the third quarter of 1993, CIGNA announced restructuring initiatives in
the Property and Casualty segment (both the domestic and international
operations) and the Employee Life and Health Benefits segment. These actions
were taken in an effort to reduce operating expenses. Results for the third
quarter and nine months of 1993 reflect an after-tax charge of $107 million
($165 million pre-tax) for the estimated costs of these restructuring actions.
9
<PAGE> 12
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, 1994, compared with December 31, 1993, and its
results of operations for the quarter and nine months ended September 30, 1994,
compared with the same periods last year. This discussion should be read in
conjunction with the Management's Discussion and Analysis sections included in
CIGNA's 1993 Annual Report to Shareholders (pages 14 through 29) and in CIGNA's
reports on Form 10-Q for the first and second quarters of 1994, to which the
reader is directed for additional information. 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 which could adversely affect them.
Some of the changes include initiatives to restrict insurance pricing and the
application of underwriting standards; reform health care; restrict investment
practices; revise the system of funding clean-up of environmental damage;
expand regulation; and reinterpret insurance contracts long after the policies
were written to provide coverage unanticipated by CIGNA. The eventual effect
on CIGNA of the changing environment in which it operates remains uncertain.
For more detailed information on these and other contingencies, see Note 7 to
the Financial Statements. Also, see Note 5 regarding proposed IRS assessments
of approximately $350 million. CIGNA is currently contesting the assessments
and believes it should prevail.
Based on a recent strategic assessment, CIGNA decided in the third quarter of
1994 to substantially withdraw from the property and casualty reinsurance
business. For 1993, the portion of the business affected by the withdrawal had
international and domestic revenues of approximately $500 million and results
of operations not material to CIGNA. In connection with the withdrawal, CIGNA
entered into agreements to sell renewal opportunities for a significant portion
of its international reinsurance business. CIGNA will discontinue writing most
other property and casualty reinsurance coverages. These actions are not
expected to have a material effect on CIGNA's results of operations.
During 1993, CIGNA announced restructuring initiatives in the Property and
Casualty segment (both the domestic and international operations) and the
Employee Life and Health Benefits segment. These actions were taken to reduce
operating expenses by the elimination of certain payroll and lease costs in
future years. During the nine months of 1994, CIGNA continued implementation
of the restructuring initiatives and, as of September 30, 1994, there were no
material changes to the costs associated with, or the anticipated annual
savings related to, these initiatives.
CIGNA expects to continue to conduct ongoing strategic and financial reviews of
its businesses in an effort to deploy its capital most effectively. Such
reviews could result in future actions; however, no determinations have been
made at this time.
In 1993, CIGNA adopted Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Investments in Certain Debt and Equity Securities," and
SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts." See Note 2 to the Financial Statements for a
detailed discussion of recently issued accounting pronouncements and their
effect on CIGNA.
10
<PAGE> 13
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
======================================================================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $3,497 $3,298 $10,307 $10,052
Net investment income 980 971 2,940 2,878
Other revenues 117 146 372 379
Realized investment gains 6 110 50 153
Total revenues 4,600 4,525 13,669 13,462
Benefits and expenses 4,422 4,786 13,117 13,561
Income (loss) before taxes 178 (261) 552 (99)
Income taxes (benefits) 55 (167) 180 (139)
Net income (loss) $123 ($94) $372 $40
======================================================================================================================
Realized investment gains, net of taxes $1 $73 $30 $122
======================================================================================================================
</TABLE>
CIGNA's consolidated net income increased significantly for the third quarter
and nine months of 1994 from the same periods last year. Excluding after-tax
realized investment gains, income for the third quarter and nine months of 1994
was $122 million and $342 million, compared with losses of $167 million and $82
million for the same periods of 1993. These increases primarily reflect lower
losses in the Property and Casualty segment as the 1993 amounts included a $244
million after-tax charge for legal and associated expenses for reported claims
related to asbestos, environmental pollution and other long-term exposures and
$97 million in after-tax restructuring charges. In addition, CIGNA's results
for 1993 reflected a benefit of $48 million resulting from the effect on
CIGNA's net deferred tax asset of an increase in the federal income tax rate.
After-tax realized investment gains for the third quarter and nine months of
1994 decreased, compared with the same periods last year, primarily due to
lower gains on sales of equity securities and fixed maturities and a higher
effective tax rate in 1994 than in 1993. Partially offsetting these factors
were decreases in new loss reserves, primarily for mortgage loan and real
estate investments and, for the nine months, higher gains on sales of real
estate. For additional information, see Note 3 to the Financial Statements.
Consolidated revenues for the third quarter and nine months of 1994 increased
slightly from the same periods last year. Revenues primarily reflect higher
premiums and fees for the Employee Life and Health Benefits segment as well as
higher net investment income for the Individual Financial Services segment.
These increases were partially offset by lower Property and Casualty revenues.
Full year results for 1994 are expected to improve significantly, compared with
1993. However, such improvement could be materially affected by a continued
adverse property and casualty environment and major catastrophes.
11
<PAGE> 14
EMPLOYEE LIFE AND HEALTH BENEFITS
<TABLE>
<CAPTION>
======================================================================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $1,956 $1,780 $5,815 $5,468
Net investment income 130 133 387 380
Other revenues 69 74 209 216
Realized investment gains (losses) (8) 26 6 53
Total revenues 2,147 2,013 6,417 6,117
Benefits and expenses 1,952 1,797 5,829 5,613
Income before taxes 195 216 588 504
Income taxes 69 64 201 149
Net income $126 $152 $387 $355
======================================================================================================================
Realized investment gains (losses), net of taxes ($6) $19 $6 $47
=======================================================================================================================
</TABLE>
Net income for the Employee Life and Health Benefits segment decreased 17% for
the third quarter and increased 9% for the nine months of 1994, compared with
the same periods of 1993. Results for the third quarter and nine months of
1993 included favorable tax adjustments of $7 million (including a $2 million
charge related to realized investment results) and restructuring charges of $10
million after-tax.
Excluding these items and after-tax realized investment results, income was
$132 million and $381 million for the third quarter and nine months of 1994,
compared with $134 million and $309 million for the same periods last year.
The decrease for the quarter reflects a decline in the indemnity operations of
$6 million, partially offset by improvement of $4 million in the HMO
operations. The nine month increase reflects improvements of $27 million and
$45 million in the indemnity and HMO operations, respectively. The improvement
in HMO operations for the quarter primarily reflects membership growth. The
improvement for the nine months reflects approximately $32 million attributable
to membership growth with the balance primarily due to favorable medical cost
experience. The nine month increase in indemnity operations was attributable
to favorable claim experience, reflecting lower medical care cost inflation,
and more favorable mortality and morbidity in the group life and accident lines
of business. The decrease in indemnity operations for the quarter also
reflects after-tax losses of $16 million related to several large cases.
Premiums and fees for the third quarter and nine months increased 10% and 6%,
compared with the same periods last year. For the quarter and nine months,
premiums and fees for HMOs increased $10 million and $57 million, primarily
reflecting rate increases. Premiums and fees for the indemnity business
increased $166 million and $290 million for the quarter and nine months. These
increases were driven by higher life insurance premiums of $72 million and $159
million and medical premiums of $98 million and $102 million, respectively,
primarily reflecting new sales and rate increases. Overall, future growth in
medical indemnity business is expected to be constrained by cancellations and
increasing penetration into the indemnity market by prepaid health care
providers, including conversions to CIGNA's HMOs.
Total HMO membership increased 24% compared with September 30, 1993, and 20%
compared with December 31, 1993. Substantially all the HMO membership growth
has been in HMO alternative funding programs under which the customer assumes
all or a portion of the responsibility for funding claims. Such programs
generally have lower margins than traditional HMO plans.
12
<PAGE> 15
Management believes that adding premium equivalents to premiums and fees
(adjusted premiums and fees) produces a more meaningful measure of business
volume. Adjusted premiums and fees were $4.4 billion and $13.1 billion for the
third quarter and nine months of 1994, compared with $4.3 billion and $13.1
billion for the same periods last year. The increase for the quarter primarily
reflects the above-mentioned growth in life and medical premiums, as well as
membership growth in HMO alternative funding programs, partially offset by
declines in medical premium equivalents reflecting cancellations and
conversions to HMOs. Premium equivalents, as a percentage of total adjusted
premiums and fees, were 56% and 58% for the nine months of 1994 and 1993,
respectively. Administrative Services Only (ASO) plans accounted for 44% of
total adjusted premiums and fees for both the nine months of 1994 and 1993.
13
<PAGE> 16
EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
<TABLE>
<CAPTION>
=====================================================================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $39 $44 $128 $155
Net investment income 418 448 1,289 1,366
Realized investment gains (losses) 5 (4) 12 (28)
Total revenues 462 488 1,429 1,493
Benefits and expenses 389 428 1,214 1,328
Income before taxes 73 60 215 165
Income taxes 26 16 73 49
Net income $47 $44 $142 $116
=====================================================================================================================
Realized investment gains (losses), net of taxes $3 ($6) $6 ($22)
=====================================================================================================================
</TABLE>
Net income for the Employee Retirement and Savings Benefits segment increased
7% and 22% for the third quarter and nine months of 1994, compared with the
same periods of 1993. Included in the third quarter and nine month results for
1994 was an unfavorable tax adjustment resulting from IRS audits of $3 million
(including a $1 million charge related to realized investment results),
compared with a favorable tax adjustment of $3 million (including a $3 million
charge related to realized investment results) for the comparable periods last
year.
Excluding after-tax realized investment results and the tax adjustments, income
was $46 million and $138 million for the third quarter and nine months of 1994,
compared with $44 million and $132 million for the same periods last year. The
third quarter and nine month increases primarily reflect improved interest
margins on defined contribution business.
Premiums and fees decreased 11% and 17% for the third quarter and nine months
of 1994, compared with the same periods last year, primarily reflecting lower
annuity premiums. Net investment income declined 7% and 6% for the third
quarter and nine months of 1994, compared with the same periods last year,
primarily from lower yields on invested assets.
14
<PAGE> 17
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:
<TABLE>
<CAPTION>
=================================================================================================
(in millions) 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance as of January 1 $34,469 $32,736
Premiums and deposits 2,566 2,333
Investment results 1,791 2,217
Increase (reduction) in fair value of assets (779) 36
Customer withdrawals (1,782) (2,255)
Benefit payments and other (2,006) (1,492)
- -------------------------------------------------------------------------------------------------
Balance as of September 30 $34,259 $33,575
=================================================================================================
</TABLE>
Approximately 51% and 44% of the premiums and deposits for 1994 and 1993,
respectively, were from new customers. The decline in investment results for
assets under management for the nine months ended September 30, 1994, compared
with the same period last year, primarily reflects significantly lower realized
gains from the sales of separate account investment assets. The reduction of
approximately $800 million in the fair value of assets during the nine months
of 1994 primarily relates to fixed maturities, resulting from an increase in
interest rates. The decline in withdrawals for the nine months of 1994,
compared with the same period last year, reflects approximately $600 million of
payments made in 1993 to two large customers under contracts that were
terminated prior to 1993. The increase in benefit payments and other is
primarily due to the payment of benefits for several large contracts that
matured in 1994.
Asset growth could be constrained by withdrawals and lower deposits resulting
from decisions by plan sponsors to diversify assets and fund management as well
as approximately $500 million of benefit payments to be made on several large
contracts that will mature in 1995. In addition, assets under management would
be adversely affected by any future increase in interest rates.
15
<PAGE> 18
INDIVIDUAL FINANCIAL SERVICES
<TABLE>
<CAPTION>
=======================================================================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1994 1993 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $187 $198 $619 $598
Net investment income 195 155 548 427
Other revenues 14 16 47 45
Realized investment gains (losses) (2) 5 7 (16)
Total revenues 394 374 1,221 1,054
Benefits and expenses 346 323 1,067 944
Income before taxes 48 51 154 110
Income taxes 17 12 54 31
Net income $31 $39 $100 $79
=======================================================================================================================
Realized investment gains (losses), net of taxes ($2) $2 $4 ($11)
=======================================================================================================================
</TABLE>
Net income for the Individual Financial Services segment decreased 21% for the
third quarter and increased 27% for the nine months of 1994, compared with the
same periods last year. Results for the third quarter and nine months of 1993
include favorable tax adjustments of $7 million (including a $1 million charge
related to realized investment results).
Excluding after-tax realized investment results and the tax adjustments, income
was $33 million and $96 million for the third quarter and nine months of 1994,
compared with $29 million and $82 million for the same periods last year.
These increases primarily reflect higher earnings from interest-sensitive
products of $5 million for the quarter and $13 million for the nine months,
primarily reflecting improved interest margins and business growth.
Premiums and fees decreased 6% for the third quarter and increased 4% for the
nine months of 1994, compared with the same periods of 1993. The third quarter
decrease is due to the inclusion of premiums in the third quarter of 1993 for a
terminated reinsurance arrangement. The nine month increase primarily reflects
higher premiums from corporate-owned life insurance (COLI). Net investment
income for the third quarter and nine months of 1994 increased 26% and 28%,
compared with the same periods last year. These increases in net investment
income, as well as the increase in benefits and expenses, reflect growth in
business, primarily of interest-sensitive products (principally COLI).
16
<PAGE> 19
PROPERTY AND CASUALTY
<TABLE>
<CAPTION>
======================================================================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $1,315 $1,269 $3,745 $3,809
Net investment income 185 186 555 554
Other revenues 57 82 160 197
Realized investment gains 6 77 28 149
Total revenues 1,563 1,614 4,488 4,709
Benefits and expenses 1,685 2,185 4,852 5,505
Loss before taxes (122) (571) (364) (796)
Income tax benefits (53) (251) (148) (352)
Net loss ($69) ($320) ($216) ($444)
======================================================================================================================
Realized investment gains, net of taxes $3 $54 $17 $112
======================================================================================================================
</TABLE>
The following after-tax (charges)/benefits are included in the net loss for the
Property and Casualty segment for the periods presented above.
<TABLE>
<S> <C> <C> <C> <C>
Realized investment gains $3 $54 $17 $112
Prior year development (120) (307) (223) (410)
Catastrophe losses (7) (23) (95) (87)
Restructuring charges (9) (97) (9) (97)
Reserve increase for self-
insurance programs - - - (40)
Gain from the sale of
insurance subsidiaries - 20 - 20
Tax benefit from federal
income tax rate change
on deferred tax asset - 24 - 24
Federal tax audit adjustments 8 3 8 3
Underlying operations 56 6 86 31
--------------------- --------------------
Net loss ($69) ($320) ($216) ($444)
===================== ====================
</TABLE>
Pre-tax catastrophe losses were $11 million for the third quarter of 1994,
compared with $36 million for the same period last year. There were no
reinsurance recoveries for catastrophe losses for the third quarter of 1994 and
1993. Through nine months, catastrophe losses were $146 million, net of
reinsurance, (before reinsurance, or "gross", $153 million) in 1994, compared
with $134 million (gross, $288 million) for the same period last year.
Catastrophe losses for the nine months of 1994 include $86 million (gross, $89
million) for the Los Angeles earthquake and $34 million (gross, $35 million)
for the severe winter weather. Catastrophe losses for the nine months of 1993
included $42 million (gross, $173 million) and $36 million (gross, $38 million)
for the World Trade Center bombing and the East Coast blizzard, respectively.
The restructuring charge in the third quarter and nine months of 1994 primarily
represents severance and lease costs associated with CIGNA's decision to
substantially withdraw from the property and casualty reinsurance business.
Results for the third quarter and nine months of 1993 included an after-tax
charge of $97 million for restructuring initiatives in the domestic and
international operations. For additional information on this and other 1993
items see Management's Discussion and Analysis in CIGNA's 1993 Report on Form
10-K.
17
<PAGE> 20
The improvement in "Underlying operations" for the third quarter and nine
months of 1994, compared with the same periods last year, as shown in the above
table, primarily reflects improvement in current accident year losses for the
international business. This improvement was primarily driven by favorable
claim experience and rate increases. Although results are beginning to show
improvement, CIGNA's domestic business continues to reflect the highly
competitive pricing environment.
Premiums and fees increased 4% for the third quarter and decreased 2% for the
nine months of 1994 from the same periods of 1993. The increase for the
quarter primarily reflects growth in international lines of business ($68
million), partially offset by lower premiums of $18 million in CIGNA's
reinsurance business. The decline in premiums and fees for nine months
primarily reflects a decrease in premiums of $218 million for CIGNA's domestic
commercial business, particularly commercial packages and casualty, due to
price competition, strengthened underwriting standards and agency force
realignment, and a decrease in reinsurance premiums of $43 million. These
declines were partially offset by growth in international lines of business
($209 million). Premiums and fees are expected to continue to be depressed
through 1994 as a result of price competition in the domestic commercial lines
of business.
RESERVES
CIGNA's reserving methodology and significant issues affecting the estimation
of loss reserves are described in its 1993 Form 10-K.
In summary, property and casualty reserves are an estimate of future amounts
needed to pay claims and related expenses for insured events that have
occurred, including events that have not been reported to CIGNA. 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 also are considered.
Estimating property and casualty reserves is a complex process that relies
heavily on judgment and is subject to uncertainties that are normal, recurring
and inherent. CIGNA revises its estimate of the liability for insured events
of prior years as new data become available.
CIGNA continually attempts to improve its loss estimation process by refining
its ability to analyze loss development patterns, claims payments and other
information, but there remain many reasons for adverse development of estimated
ultimate liabilities. For example, the uncertainties inherent in estimating
losses have grown in the last decade because of changes in social and legal
trends that expand the liability of insureds, establish new liabilities and
reinterpret insurance contracts long after the policies were written to provide
coverage unanticipated by CIGNA. Such changes from past experience
significantly affect the ability of insurers to estimate liabilities for unpaid
losses and related expenses.
In management's judgment, based on known facts and current law, reserves are
appropriate. However, future changes in estimates of CIGNA's liability for
insured events may adversely affect results in future periods.
18
<PAGE> 21
The following table shows the adverse pre-tax effects on CIGNA's results of
operations from prior year development for the third quarter and nine months
ended September 30:
<TABLE>
<CAPTION>
==================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asbestos-related $16 9% $93 20% $30 9% $151 24%
Environmental pollution 48 26 293 62 151 44 345 55
Other long-term exposure 5 3 40 8 19 6 48 8
Reinsurance exposures 52 28 25 5 59 17 50 8
Unrecoverable reinsurance 6 3 (2) - 21 6 14 2
Other 58 31 24 5 63 18 23 3
- ------------------------------------------------------------------------------------------------------------------
Total $185 100% $473 100% $343 100% $631 100%
==================================================================================================================
</TABLE>
CIGNA continues to receive asbestos-related, environmental pollution and other
long-term exposure claims asserting a right to recovery under insurance
policies issued by CIGNA. In 1993, CIGNA re-evaluated its reported
asbestos-related, environmental pollution and other long-term exposure claims
to determine if future legal expenses could be reasonably estimated and
reserves established. Based on this review, CIGNA recorded a charge of $375
million, net of reinsurance, ($244 million after-tax) in the third quarter of
1993 for future legal and associated expenses for reported claims.
The majority of CIGNA's losses and legal expenses for asbestos-related,
environmental pollution and other long-term exposure claims arise from its
domestic property and casualty operations. As of September 30, 1994,
approximately 1,150 policyholders had outstanding asbestos-related claims with
the domestic operations compared with 1,200 at December 31, 1993. CIGNA
continues to litigate certain asbestos-related coverage issues, with 45
lawsuits involving 36 policyholders pending as of September 30, 1994, compared
with 39 lawsuits involving 27 policyholders as of December 31, 1993. It is
not possible to determine CIGNA's potential liability for asbestos-related
claims based on the number of policyholders with claims outstanding.
Additional information, which is not available, would be needed for such
determination, including the extent of coverage, the policyholder's liability
for claims tendered to it, the injuries allegedly sustained by the
policyholder's claimants and the number of claims pending against a
policyholder.
The domestic operations had approximately 14,850 environmental pollution files
outstanding at September 30, 1994 and 13,300 at December 31, 1993. A file
represents each policyholder involved at a site, regardless of the number or
type of claims asserted against the policyholder or the number or type of
insurance policies (primary or excess) under which coverage is asserted. CIGNA
disputes coverage for essentially all environmental pollution claims, and is
involved in 518 coverage lawsuits as of September 30, 1994, compared with 493
as of December 31, 1993. Accordingly, and because of the many unresolved legal
and factual issues related to environmental pollution cases, liabilities for
these types of claims cannot be estimated from the number of environmental
pollution files outstanding.
Superfund, originally enacted in 1980, was under review by Congress in 1994.
Congress recessed in 1994 without completing action on Superfund legislation.
New legislation is expected to be introduced in Congress in 1995, in part
because the existing Superfund legislation expires in 1995. Any changes in
Superfund's system of allocating responsibility or funding clean-up costs 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.
19
<PAGE> 22
Standard actuarial methods cannot be used in the estimation of liabilities for
asbestos-related, environmental pollution and certain other long-term exposure
claims because developed case law and adequate history do not exist for such
claims. In addition, CIGNA and the insurance industry are litigating issues
that will ultimately determine, in many cases, whether insurance coverage
exists. Determination that coverage exists would result in the emergence of
additional liabilities. CIGNA has been a major writer of commercial insurance
policies, which are subject to these types of claims.
The American Academy of Actuaries has initiated a project to develop standards
for estimating currently unquantifiable liabilities. The project may cover
unreported claims for asbestos-related, environmental pollution and certain
other long-term exposures. In addition, industry-related parties are making
efforts to create a model to allocate pollution liabilities based on a market
share analysis rather than by an actuarial projection of ultimate liabilities.
Since these initiatives are in the early stages, their outcome and effect, if
any, on CIGNA are not determinable at this time.
For the reasons discussed in Note 16 to the 1993 Financial Statements and in
the 1993 Form 10-K, CIGNA expects that its future results will continue to be
adversely affected by losses and legal expenses for asbestos-related,
environmental pollution and other long-term exposure claims. Because of the
significant uncertainties involved and the likelihood that these uncertainties,
with the exception of Superfund re- authorization, will not be resolved in the
near future, CIGNA is unable to reasonably estimate the additional losses and
expenses for these types of claims and, therefore, is unable to determine
whether such amounts will be material to its future results of operations,
liquidity or financial condition.
Losses for reinsurance exposures for 1994 primarily reflect a $40 million
charge resulting from a third quarter review of reserves for certain
reinsurance lines of business (principally previously closed books of business)
other than London reinsurance exposures. For 1993, losses for reinsurance
exposures primarily related to reserve strengthening for London reinsurance
exposures.
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 professional liability, 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. 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.
Other prior year development for the nine months of 1994 was primarily
attributable to workers' compensation and general and excess liability lines of
business. For the comparable period in 1993, other prior year development was
primarily attributable to workers' compensation business and commercial
packages.
20
<PAGE> 23
THE FOLLOWING IS INFORMATION REGARDING CIGNA'S LOSS RESERVES AND REINSURANCE
RECOVERABLES AS OF DECEMBER 31, 1993 AND 1992. SIMILAR INFORMATION WILL BE
INCLUDED IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS SECTION OF CIGNA'S FUTURE
REPORTS ON FORM 10-K. CERTAIN OF THE INFORMATION IS NOT AVAILABLE ON A
QUARTERLY BASIS.
CIGNA's 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. CIGNA manages its loss exposure through the use of
reinsurance. While reinsurance arrangements are designed to limit losses from
large exposures and to permit recovery of a portion of direct losses,
reinsurance does not relieve CIGNA of liability to its insureds. Accordingly,
CIGNA's loss reserves represent total gross losses, and reinsurance
recoverables represent anticipated recoveries of a portion of these losses.
The following table shows CIGNA's gross losses for incurred claims and claim
adjustment expenses ("gross"), amounts ceded to reinsurers ("reinsurance") and
net losses for incurred claims and claim adjustment expenses ("net") for the
years ended December 31, 1993 and 1992. The table also categorizes those
amounts as they relate to insured events of the current year and of prior years
("prior year development").
<TABLE>
<CAPTION>
==================================================================================================================================
1993 1992
========================================== ========================================
(In millions) Gross Reinsurance Net Gross Reinsurance Net
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Year $5,491 ($2,027) $3,464 $6,897 ($2,449) $4,448
------------------------------------------------------------------------------------------
Prior year development:
Asbestos-related 303 (132) 171 142 (73) 69
Environmental pollution 482 (88) 394 197 (70) 127
Other long-term exposure 155 (79) 76 34 (18) 16
Servicing carrier workers'
compensation 205 (205) -- -- -- --
Unrecoverable reinsurance -- 28 28 -- 89 89
London reinsurance 55 (24) 31 474 (246) 228
Other 172 (83) 89 380 (253) 127
- ----------------------------------------------------------------------------------------------------------------------------------
Total prior year development 1,372 (583) 789 1,227 (571) 656
- ----------------------------------------------------------------------------------------------------------------------------------
Total Incurred Claims and Claim
Adjustment Expenses $6,863 ($2,610) $4,253 $8,124 ($3,020) $5,104
==================================================================================================================================
</TABLE>
Property and Casualty Loss Reserves
CIGNA's reserves for unpaid claims and claim expenses were approximately $17.7
billion and $17.5 billion as of December 31, 1993 and 1992, respectively.
CIGNA's loss reserves reflect the effects of gross property and casualty losses
for incurred claims and claim adjustment expenses, net of related payments.
Gross and net losses for insured events of the current year declined
significantly in 1993, compared with 1992, reflecting improvements in the
quality of underwriting and reduced premium volume in certain lines of business
(as addressed more fully on page 19 of the 1993 MD&A), as well as lower
catastrophe losses. CIGNA expects that strengthened underwriting will result
in continued reductions in losses for insured events of current years, relative
to premiums.
A significant amount of prior year development on both a gross and net basis in
recent years has been for losses related to asbestos, environmental pollution
and other long-term exposure claims. In 1993, such losses were higher than in
the past because of the establishment in that year of gross reserves of
21
<PAGE> 24
$489 million ($375 million, net) for future legal and associated expenses for
such claims.
Servicing carrier workers' compensation business is coverage the Company writes
on a direct basis for the National Workers' Compensation Pool. Because the
Company cedes premiums and losses from this business to the Pool, this business
does not result in net losses to CIGNA. The 1993 amounts resulted from a
reserve review by the Company.
Losses for London reinsurance in 1992 resulted from a review of CIGNA's London
property and casualty reinsurance exposures related to large catastrophes
occurring in recent years. The losses in 1993 resulted from an update of that
review.
Gross and net losses for other prior year development included losses for
commercial packages, reinsurance and workers' compensation lines of business in
1993 and 1992.
CIGNA expects adverse prior year development to continue in future years,
primarily for losses and related loss adjustment expenses for asbestos-related
and environmental pollution claims. For the reasons noted on pages 19 to 23 of
the Business Section of its 1993 Form 10-K, CIGNA is unable to reasonably
estimate the additional losses and expenses that will be incurred for
asbestos-related and environmental pollution claims and, therefore, is unable
to determine whether such amounts will be material to its future results of
operations, liquidity or financial condition.
Property and Casualty Reinsurance Recoverables
CIGNA's reinsurance recoverables were approximately $8 billion as of December
31, 1993 and 1992, net of allowances for unrecoverable reinsurance of
approximately $405 million and $381 million, respectively.
CIGNA recognized significant recoveries in 1993 and 1992 from reinsurance
arrangements on both current year business and prior year development, as shown
in the above table. Reinsurance recoveries for the current year decreased
approximately 17% in 1993, compared with 1992, as a result of a comparable
decrease in gross losses. The increase in reinsurance recoveries for
asbestos-related, environmental pollution and other long-term exposure claims
in 1993, compared with 1992, was attributable to corresponding increases in
gross losses for such claims.
CIGNA expects to continue to have significant recoveries from its reinsurance
arrangements, including for asbestos-related and environmental pollution
losses. CIGNA expects its reinsurance arrangements to continue to provide
recoveries for future asbestos-related and environmental pollution losses in
approximately the same proportion to gross losses as in the past. However, the
extent of recoveries in the aggregate, including for asbestos-related and
environmental pollution losses, will depend on future gross loss experience and
the particular reinsurance arrangements to which future losses relate.
Losses for unrecoverable reinsurance noted in the above table are principally
due to the failure of reinsurers to indemnify CIGNA, primarily because of
reinsurer insolvencies and disputes under reinsurance contracts. Losses for
unrecoverable reinsurance for 1992 included $62 million for London reinsurance
exposures.
Reinsurance disputes have increased in recent years, particularly on larger and
more complex claims such as those related to professional liability, asbestos
and London reinsurance exposures. Allowances have been established for
amounts deemed uncollectible. 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.
Approximately 10% of CIGNA's reinsurance recoverables relate to paid claims.
The timing and collectibility of such recoverables have not had, and are not
expected to have, a material adverse effect on its liquidity.
22
<PAGE> 25
OTHER OPERATIONS
Other Operations primarily includes unallocated investment income, expenses 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 also included the California
personal automobile and homeowners insurance businesses (California business)
that CIGNA sold in the first quarter of 1994, resulting in an after-tax gain of
approximately $20 million.
Net losses for Other Operations were $12 million and $41 million for the third
quarter and nine months of 1994, compared with losses of $9 million and $66
million for the same periods last year. After-tax realized investment results
for the third quarter and nine months of 1994 were gains of $3 million and
losses of $3 million. After-tax realized investment results for the third
quarter and nine months of 1993 were gains of $4 million and losses of $4
million. Excluding after-tax realized investment results, the increased loss
for the third quarter primarily reflects the absence of earnings from the
California business. The decreased losses for the nine months reflect the gain
on the sale of the California business and lower operating expenses, including
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 1994, cash and cash equivalents increased $451 million from $1.2 billion
as of December 31, 1993. This increase primarily reflects the issuance of
long-term debt ($144 million); deposits and interest credited, net of
withdrawals, to contractholder deposit funds ($921 million); and cash flows
from operating activities ($287 million), primarily resulting from earnings and
the timing of cash receipts and cash disbursements. The increase in cash flows
was partially offset by cash used for investing activities ($753 million),
primarily net investment purchases ($616 million); payments of dividends on
CIGNA common stock ($165 million); and debt repayments ($28 million). Cash
flow from operating activities was constrained by negative cash flow from
property and casualty business of approximately $150 million resulting from
operating losses.
CIGNA's capital resources represent funds available for long-term business
commitments and 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 capacity to meet the anticipated needs of its
business.
CIGNA had $1.38 billion of long-term debt outstanding at September 30, 1994,
compared with $1.24 billion at December 31, 1993. This increase primarily
reflects issuance in January 1994 of $100 million of unsecured 6 3/8% Notes due
in 2006. The proceeds from this issue were used for general corporate
purposes. As of September 30, 1994, CIGNA had approximately $850 million
remaining under shelf registration statements that may be issued as debt and
equity securities, depending upon market conditions and CIGNA's capital
requirements.
At September 30, 1994, CIGNA's short-term debt, primarily commercial paper,
amounted to $324 million, a decrease of $27 million from December 31, 1993.
CIGNA contributed approximately $250 million of capital during 1994 ($150
million in the third quarter) to the domestic property and casualty operation
as a result of its continued losses.
23
<PAGE> 26
INVESTMENT ASSETS
<TABLE>
<CAPTION>
========================================================================================================
September 30, December 31,
(In millions) 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities: at amortized cost $12,740 $12,375
Fixed maturities: at fair value 17,982 19,380
Equity securities 1,897 1,849
Mortgage loans 9,868 10,021
Real estate 1,731 1,780
Other 5,836 5,323
- --------------------------------------------------------------------------------------------------------
Total investment assets $50,054 $50,728
========================================================================================================
</TABLE>
Additional information regarding CIGNA's investment assets is included in Note
3 to the third quarter 1994 Financial Statements and Notes 1, 3 and 4 to the
1993 Financial Statements as well as the 1993 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:
<TABLE>
<CAPTION>
========================================================================================================
September 30, December 31,
1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities 33% 33%
Mortgage loans 58% 59%
Real estate 56% 56%
========================================================================================================
</TABLE>
24
<PAGE> 27
FIXED MATURITIES
Investments in fixed maturities (bonds) include publicly traded and private
placement debt securities; mortgage-backed securities, including collateralized
mortgage obligations (CMOs); and redeemable preferred stocks. As of December
31, 1993, CIGNA adopted SFAS No. 115; accordingly, fixed maturities classified
as held to maturity are carried at amortized cost, net of impairments, and
those classified as available for sale are carried at fair value, with
unrealized appreciation or depreciation included in shareholders' equity.
As of September 30, 1994, fixed maturities classified as available for sale had
an aggregate fair value, including policyholder share, that was greater (less)
than amortized cost by approximately ($63) million, compared with approximately
$1.76 billion as of December 31, 1993. The decline in unrealized appreciation
primarily reflects the upward movement in interest rates since December 31,
1993.
QUALITY RATINGS
Quality ratings for bonds were as follows (shown as a percentage of bonds):
<TABLE>
<CAPTION>
========================================================================================================
September 30, December 31,
1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment grade 94% 94%
Below investment grade:
Available for sale 1 1
Held to maturity 5 5
- --------------------------------------------------------------------------------------------------------
Total 100% 100%
========================================================================================================
</TABLE>
The quality ratings of CIGNA's below investment grade bonds (BA and below, or
equivalent) are concentrated toward the higher end of the non- investment grade
spectrum. Approximately 35% of below investment grade securities relate to
policyholder contracts.
25
<PAGE> 28
PROBLEM BONDS *
Bonds that are delinquent or restructured as to terms, typically interest rate
and, in certain cases, maturity date, are considered problem bonds. Problem
bonds, including amounts attributable to policyholder contracts, and related
cumulative write-downs were as follows:
<TABLE>
<CAPTION>
============================================================================================
September 30, December 31,
(In millions) 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Delinquent bonds $179 $131
Less cumulative write-downs 66 52
------- -------
113 79
------- -------
Restructured bonds 239 383
Less cumulative write-downs 39 55
------- -------
200 328
- --------------------------------------------------------------------------------------------
Problem bonds $313 $407
============================================================================================
</TABLE>
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, and related cumulative write-downs were as follows:
<TABLE>
<CAPTION>
============================================================================================
September 30, December 31,
(In millions) 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Potential problem bonds $168 $225
Less cumulative write-downs 14 11
- --------------------------------------------------------------------------------------------
Potential problem bonds $154 $214
============================================================================================
</TABLE>
* Bonds in these categories are primarily classified as held to maturity.
26
<PAGE> 29
CUMULATIVE WRITE-DOWNS FOR BONDS
The activity in cumulative write-downs for bonds during the nine months ended
September 30 was as follows:
<TABLE>
<CAPTION>
=================================================================================================================================
1994 1993
=========================================== ========================================
Policy- Policy-
holder holder
(In millions) Contracts CIGNA Total Contracts CIGNA Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance - January 1 $54 $69 $123 $89 $81 $170
Additions to cumulative
write-downs 16 14 30 10 22 32
Charge-offs upon sales,
repayments and other (11) (13) (24) (8) (2) (10)
Transfers to equity securities (4) (2) (6) (22) (21) (43)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance - September 30 $55 $68 $123 $69 $80 $149
=================================================================================================================================
</TABLE>
Included in the total ending balances above as of September 30, 1994 and 1993
were $4 million and $7 million, respectively, for bonds no longer classified as
problem or potential problem bonds. As of December 31, 1993, such cumulative
write-downs were $5 million.
The adverse after-tax effect of write-downs on CIGNA's net income for the
quarter and nine months ended September 30, 1994 was $2 million and $9 million,
respectively, compared with $3 million and $14 million for the same periods of
1993.
During the nine months of 1994 and the full year 1993, bonds with a carrying
value of $27 million and $102 million, respectively, were restructured into
equity securities. As of September 30, 1994, CIGNA had cumulative write-downs
for equity securities of $75 million (including $30 million attributable to
policyholder contracts), compared with $78 million (including $39 million
attributable to policyholder contracts) as of December 31, 1993.
27
<PAGE> 30
EFFECT OF NON-ACCRUALS FOR BONDS
Interest income is recognized on problem bonds only when payment is received.
The adverse effect of non-accruals for bonds (in total and by type) on
policyholder contracts and on CIGNA's net income is shown in the following
table:
<TABLE>
<CAPTION>
=======================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------- ------------------------------------------------
1994 1993 1994 1993
-------------------- ---------------------- ---------------------- -----------------------
Policy- Policy- Policy- Policy-
holder holder holder holder
(In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net investment
income under
original contract
terms $7 $10 $7 $11 $19 $31 $33 $38
Less net investment
income received 2 3 - 4 8 11 15 22
-------------------- ---------------------- ---------------------- -------------------
Forgone investment
income 5 7 7 7 11 20 18 16
Tax effect - (2) - (3) - (7) - (6)
- -----------------------------------------------------------------------------------------------------------------------
Net effect of
non-accruals $5 $5 $7 $4 $11 $13 $18 $10
=======================================================================================================================
Forgone investment
income by type:
Delinquent bonds $2 $5 $7 $5 $5 $12 $9 $8
Restructured bonds 3 2 - 2 6 8 9 8
-------------------- ---------------------- ---------------------- -------------------
Forgone investment
income 5 7 7 7 11 20 18 16
Tax effect - (2) - (3) - (7) - (6)
- -----------------------------------------------------------------------------------------------------------------------
Net effect of
non-accruals $5 $5 $7 $4 $11 $13 $18 $10
=======================================================================================================================
</TABLE>
28
<PAGE> 31
MORTGAGE LOANS
<TABLE>
<CAPTION>
======================================================================================
September 30, December 31,
1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans (in millions) $9,868 $10,021
By type:
Office buildings 38% 40%
Retail facilities 38 37
Apartment Buildings 11 10
Hotels 7 7
Other 6 6
Total 100% 100%
======================================================================================
</TABLE>
CIGNA's investment strategy requires diversification of the mortgage loan
portfolio. This strategy includes guidelines relative to property type,
location, borrower and loan size 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 1994, $816 million of mortgage loans was scheduled to
mature, of which $108 million was paid in full, $200 million was extended at
existing loan rates for a weighted average of 12 months and $379 million was
refinanced at current market rates. Mortgage loan extensions and refinancings
are loans in good standing. The remainder of the scheduled maturities was
problem mortgage loans or foreclosure properties, including $39 million that
were restructured and $32 million that were foreclosed or were in the process
of foreclosure. 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.
29
<PAGE> 32
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. As of September 30, 1994, restructured mortgage loans
with a carrying value of approximately $418 million had their original maturity
dates extended, with an average extension of five years. Restructured mortgage
loans generated annualized cash returns averaging approximately 7% as of
September 30, 1994.
Problem mortgage loans, including amounts attributable to policyholder
contracts, and related valuation reserves were as follows:
<TABLE>
<CAPTION>
=======================================================================================
September 30, December 31,
(In millions) 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Delinquent mortgage loans $196 $162
Less valuation reserves 38 32
---- ----
158 130
---- ----
Restructured mortgage loans 793 839
Less valuation reserves 74 105
---- ----
719 734
- ---------------------------------------------------------------------------------------
Problem mortgage loans $877 $864
=======================================================================================
</TABLE>
POTENTIAL PROBLEM MORTGAGE LOANS
Potential problem mortgage loans include: 1) fully current loans that are
judged by management to have certain characteristics that increase the
likelihood of problem classification, 2) fully current loans for which the
borrower has requested restructuring and 3) loans that are 30 to 59 days
delinquent with respect to interest or principal payments. As of September 30,
1994, approximately 93% of potential problem mortgage loans were fully current
under their original terms. Potential problem mortgage loans, including
amounts attributable to policyholder contracts, and related valuation reserves
were as follows:
<TABLE>
<CAPTION>
=======================================================================================
September 30, December 31,
(In millions) 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Potential problem mortgage loans before reserves $574 $627
Less reserves 78 79
- ---------------------------------------------------------------------------------------
Potential problem mortgage loans $496 $548
=======================================================================================
</TABLE>
30
<PAGE> 33
VALUATION RESERVES FOR MORTGAGE LOANS
The activity in valuation reserves for mortgage loans during the nine months
ended September 30 was as follows:
<TABLE>
<CAPTION>
===============================================================================================================================
1994 1993
========================================= =========================================
Policy- Policy-
holder holder
(In millions) Contracts CIGNA Total Contracts CIGNA Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance - January 1 $105 $111 $216 $106 $78 $184
Net increase in valuation
reserves 24 12 36 20 35 55
Charge-offs upon sales,
repayments and other (18) (15) (33) (7) (6) (13)
Transfers to real estate (10) (19) (29) (32) (17) (49)
- -------------------------------------------------------------------------------------------------------------------------------
Ending balance - September 30 $101 $89 $190 $87 $90 $177
===============================================================================================================================
</TABLE>
The adverse after-tax effect of the net increase in valuation reserves on
CIGNA's net income was $2 million and $8 million for the third quarter and nine
months of 1994, compared with $3 million and $23 million for the same periods
of 1993.
Valuation reserves for mortgage loans include reserves for loans which are
in-substance foreclosures (classified as problem mortgage loans), and such
loans are carried at the fair value of the underlying property. As of
September 30, 1994, December 31, 1993 and September 30, 1993, the carrying
value of such loans was $101 million, $17 million and $94 million,
respectively, net of valuation reserves of $34 million, $17 million and $25
million, respectively.
31
<PAGE> 34
EFFECT OF NON-ACCRUALS FOR MORTGAGE LOANS
Interest income is recognized on problem mortgage loans only when payment is
received. The adverse effect of non-accruals for mortgage loans (in total and
by type) on policyholder contracts and on CIGNA's net income is shown in the
following table:
<TABLE>
<CAPTION>
==============================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------- -------------------------------------------------
1994 1993 1994 1993
--------------------- -------------------- --------------------- --------------------
Policy- Policy- Policy- Policy-
holder holder holder holder
(In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net investment
income under
original
contract terms $18 $11 $22 $11 $59 $35 $73 $40
Less net
investment
income received 14 6 16 6 40 21 48 22
----------------------- ----------------------- ------------------------ -------------------
Forgone
investment
income 4 5 6 5 19 14 25 18
Tax effect - (2) - (1) - (5) - (6)
- ------------------------------------------------------------------------------------------------------------------------------
Net effect of
non-accruals $4 $3 $6 $4 $19 $9 $25 $12
==============================================================================================================================
Forgone
investment
income by type:
Delinquent
mortgage loans $3 $3 $2 $2 $10 $9 $11 $7
Restructured
mortgage loans 1 2 4 3 9 5 14 11
----------------------- ----------------------- ------------------------ -------------------
Forgone
investment
income 4 5 6 5 19 14 25 18
Tax effect - (2) - (1) - (5) - (6)
- ------------------------------------------------------------------------------------------------------------------------------
Net effect of
non-accruals $4 $3 $6 $4 $19 $9 $25 $12
==============================================================================================================================
</TABLE>
32
<PAGE> 35
REAL ESTATE
Investment real estate includes real estate held for the production of income
and properties acquired as a result of foreclosure of mortgage loans
(foreclosure properties).
Investment real estate, including amounts attributable to policyholder
contracts, and related cumulative write-downs and valuation reserves were as
follows:
<TABLE>
<CAPTION>
============================================================================================
September 30, December 31,
(In millions) 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Foreclosure properties $1,217 $1,289
Less cumulative write-downs 292 301
Less valuation reserves 53 59
--------- ---------
872 929
--------- ---------
Real estate held for the production of income 896 890
Less valuation reserves 37 39
--------- ---------
859 851
- --------------------------------------------------------------------------------------------
Investment real estate $1,731 $1,780
============================================================================================
</TABLE>
RESERVES FOR REAL ESTATE
The activity in cumulative write-downs and valuation reserves for real estate
during the nine months ended September 30 was as follows:
<TABLE>
<CAPTION>
===============================================================================================================================
1994 1993
========================================= =========================================
Policy- Policy-
holder holder
(In millions) Contracts CIGNA Total Contracts CIGNA Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance - January 1 $239 $160 $399 $184 $108 $292
Additions to cumulative
write-downs 9 6 15 23 30 53
Net increase in valuation
reserves 3 4 7 15 5 20
Charge-offs upon sales and
other (51) (17) (68) (9) 2 (7)
Transfers from mortgage loans 10 19 29 32 17 49
- -------------------------------------------------------------------------------------------------------------------------------
Ending balance - September 30 $210 $172 $382 $245 $162 $407
===============================================================================================================================
</TABLE>
The adverse after-tax effect of write-downs and the net increase in valuation
reserves on CIGNA's net income for the quarter and nine months ended September
30, 1994 was $3 million and $7 million, respectively, compared with $8 million
and $23 million for the same periods of 1993.
33
<PAGE> 36
SUMMARY
The adverse effects of non-accruals as well as write-downs and changes in
valuation reserves ("write-downs and reserves") on policyholder contracts and
on CIGNA's net income were as follows:
<TABLE>
<CAPTION>
============================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------ -------------------------------------------------
1994 1993 1994 1993
--------------------- -------------------- -------------------- ----------------------
Policy- Policy- Policy- Policy-
holder holder holder holder
(In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Write-downs
and reserves:
Bonds $6 $2 $7 $3 $16 $9 $10 $14
Mortgage
loans 9 2 3 3 24 8 20 23
Real estate (1) 3 13 8 12 7 38 23
- ----------------------------------------------------------------------------------------------------------------------------
Total $14 $7 $23 $14 $52 $24 $68 $60
============================================================================================================================
Non-accruals:
Bonds $5 $5 $7 $4 $11 $13 $18 $10
Mortgage
loans 4 3 6 4 19 9 25 12
- ----------------------------------------------------------------------------------------------------------------------------
Total $9 $8 $13 $8 $30 $22 $43 $22
============================================================================================================================
</TABLE>
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. CIGNA currently
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.
34
<PAGE> 37
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
During 1988, a number of state attorneys general and private
plaintiffs filed lawsuits against a number of insurance
companies and others, including CIGNA, alleging violations of
federal and state antitrust laws. One of the lawsuits, filed
in Texas, was settled in March 1991 for an insignificant
amount. All of the remaining lawsuits were dismissed by the
trial court in 1989. The United States Court of Appeals
reversed the trial court and the United States Supreme Court
reversed in part and modified in part the ruling of the Court
of Appeals and remanded the cases to the Court of Appeals for
further proceedings in accordance with its opinion. The
Supreme Court ruled that the insurance companies did not
forfeit their McCarran-Ferguson protection when they acted
with reinsurers to produce acceptable policy terms and defined
the boycott exception to the McCarran-Ferguson exemption in a
manner favorable to the insurance industry. The cases were
remanded by the Court of Appeals to the trial court for
further proceedings. Subject to final approval by the trial
court, an agreement in principle to settle these cases has
been reached. CIGNA's portion of the settlement is not
expected to be material to it.
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) CIGNA filed a Report on Form 8-K dated October 31,
1994 containing a press release regarding its third
quarter 1994 results.
-35-
<PAGE> 38
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 14, 1994
-36-
<PAGE> 39
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 Filed herewith.
-37-
<PAGE> 1
CIGNA CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
NET INCOME (LOSS) AVAILABLE TO
COMMON SHARES $ 123 $ (94) $ 372 $ 40
- --------------------------------------------------------=========================================================================
WEIGHTED AVERAGE SHARES:
Common shares 72,241,829 71,973,782 72,211,964 71,909,721
Common share equivalents applicable
to stock options 112,170 82,235 105,570 85,679
- ---------------------------------------------------------------------------------------------------------------------------------
Total 72,353,999 72,056,017 72,317,534 71,995,400
- --------------------------------------------------------=========================================================================
PRIMARY EARNINGS PER SHARE $ 1.70 $ (1.31) $ 5.14 $ 0.55
- --------------------------------------------------------=========================================================================
FULLY DILUTED EARNINGS PER SHARE
NET INCOME (LOSS) AVAILABLE TO
COMMON SHARES:
Net income (loss) $ 123 $ (94) $ 372 $ 40
Adjusted for:
Interest expense (net of tax) on
convertible debentures 3 * 10 *
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shares $ 126 $ (94) $ 382 $ 40
- --------------------------------------------------------=========================================================================
WEIGHTED AVERAGE SHARES:
Common shares 72,241,829 71,973,782 72,211,964 71,909,721
Common share equivalents applicable
to stock options 112,170 111,967 127,753 96,968
Assumed conversion of convertible debentures 3,626,102 * 3,626,102 *
- ---------------------------------------------------------------------------------------------------------------------------------
Total 75,980,101 72,085,749 75,965,819 72,006,689
- --------------------------------------------------------=========================================================================
FULLY DILUTED
EARNINGS PER SHARE $ 1.66 $ (1.31) $ 5.03 $ 0.55
- --------------------------------------------------------=========================================================================
</TABLE>
* The effect of incremental shares was anti-dilutive. Net income (loss)
available to common shares reflects the payment of interest expense on
debentures.
<PAGE> 1
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1994 1993
============================================================================================================
<S> <C> <C>
Income (loss) before income taxes $ 552 $ (99)
--------- ----------
Fixed charges included in income (loss):
Interest expense 91 92
Interest portion of rental expense 77 78
--------- ----------
Total fixed charges included in income (loss) 168 170
--------- ----------
Income available for fixed charges $ 720 $ 71
- -------------------------------------------------------------------------------=============================
RATIO OF EARNINGS TO FIXED CHARGES 4.3 (A)
- -------------------------------------------------------------------------------=============================
</TABLE>
(A) As a result of a pre-tax loss, income available for fixed charges was $71
million, compared with $170 million in total fixed charges.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The 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, 1994, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 17,982
<DEBT-CARRYING-VALUE> 12,740
<DEBT-MARKET-VALUE> 12,996
<EQUITIES> 1,897
<MORTGAGE> 9,868
<REAL-ESTATE> 1,731
<TOTAL-INVEST> 50,054
<CASH> 1,662
<RECOVER-REINSURE> 8,083<F1>
<DEFERRED-ACQUISITION> 1,103
<TOTAL-ASSETS> 86,004
<POLICY-LOSSES> 10,376
<UNEARNED-PREMIUMS> 2,634
<POLICY-OTHER> 19,877
<POLICY-HOLDER-FUNDS> 25,838
<NOTES-PAYABLE> 1,702
<COMMON> 83
0
0
<OTHER-SE> 5,817
<TOTAL-LIABILITY-AND-EQUITY> 86,004
10,307
<INVESTMENT-INCOME> 2,940
<INVESTMENT-GAINS> 50
<OTHER-INCOME> 372
<BENEFITS> 9,685
<UNDERWRITING-AMORTIZATION> 883
<UNDERWRITING-OTHER> 2,549
<INCOME-PRETAX> 552
<INCOME-TAX> 180
<INCOME-CONTINUING> 372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 372
<EPS-PRIMARY> 5.14
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>(1) Amount includes recoverables on paid and unpaid losses
</FN>
</TABLE>
