<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 MARCH 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ----- to -----
Commission file number 1-8323
------
CIGNA Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 06-1059331
- - ------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE LIBERTY PLACE, PHILADELPHIA, PA. 19192-1550
- - -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (215) 761-1000
--------------
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
----- ----
As of April 30, 1994, 72,286,505 shares of the issuer's Common Stock
were outstanding.
<PAGE> 2
CIGNA CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash
Flows 3
Notes to Financial Statements 4
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote
of Security Holders. 30
Item 6. Exhibits and Reports on Form 8-K. 31
SIGNATURE 32
EXHIBIT INDEX 33
</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
March 31,
1994 1993
====================================================================================
<S> <C> <C>
REVENUES
Premiums and fees $ 3,366 $ 3,261
Net investment income 992 958
Other revenues 152 124
Realized investment gains 21 31
------- -------
Total revenues 4,531 4,374
------- -------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,279 3,228
Policy acquisition expenses 286 298
Other operating expenses 796 808
------- -------
Total benefits, losses and expenses 4,361 4,334
------- -------
INCOME BEFORE INCOME TAXES 170 40
------- -------
Income taxes (benefits):
Current 54 50
Deferred 2 (56)
------- -------
Total income taxes 56 (6)
------- -------
NET INCOME 114 46
Dividends declared (55) (55)
Retained earnings, beginning of period 3,717 3,702
- - ------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 3,776 $ 3,693
- - -----------------------------------------------------------------===================
EARNINGS PER SHARE $ 1.58 $ 0.64
- - -----------------------------------------------------------------===================
DIVIDENDS DECLARED PER SHARE $ 0.76 $ 0.76
- - -----------------------------------------------------------------===================
</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
MARCH 31, DECEMBER 31,
1994 1993
===================================================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities: at amortized cost (fair value, $13,386; $13,807) $ 12,580 $ 12,375
Fixed maturities: at fair value (amortized cost, $17,371; $17,618) 18,235 19,380
Equity securities: at fair value (cost, $1,619; $1,626) 1,787 1,849
Mortgage loans 9,994 10,021
Policy loans 3,835 3,663
Real estate 1,779 1,780
Other long-term investments 357 303
Short-term investments 1,119 1,357
-------------- -------------
Total investments 49,686 50,728
Cash and cash equivalents 1,381 1,211
Accrued investment income 767 764
Premiums, accounts and notes receivable 4,246 4,065
Reinsurance recoverables 8,351 8,338
Deferred policy acquisition costs 1,095 1,085
Property and equipment, net 923 930
Deferred income taxes, net 1,961 1,703
Goodwill 1,231 1,262
Other assets 1,252 1,209
Separate account assets 13,994 13,680
- - ------------------------------------------------------------------------------------------------------------------
Total $ 84,887 $ 84,975
- - ----------------------------------------------------------------------------======================================
LIABILITIES
Future policy benefits $ 10,067 $ 9,935
Contractholder deposit funds 25,088 25,328
Unpaid claims and claim expenses 20,154 20,144
Unearned premiums 2,746 2,711
-------------- --------------
Total insurance and contractholder liabilities 58,055 58,118
Short-term debt 290 351
Accounts payable, accrued expenses and other liabilities 4,717 4,555
Current income taxes 362 468
Long-term debt 1,379 1,235
Separate account liabilities 13,988 13,673
- - ------------------------------------------------------------------------------------------------------------------
Total liabilities 78,791 78,400
- - ------------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 7
SHAREHOLDERS' EQUITY
Common stock (shares issued, 83) 83 83
Additional paid-in capital 2,245 2,222
Net unrealized appreciation - fixed maturities 472 961
Net unrealized appreciation - equity securities 158 211
Net translation of foreign currencies (73) (74)
Retained earnings 3,776 3,717
Less treasury stock, at cost (565) (545)
- - ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,096 6,575
- - ------------------------------------------------------------------------------------------------------------------
Total $ 84,887 $ 84,975
- - ----------------------------------------------------------------------------======================================
SHAREHOLDERS' EQUITY PER SHARE $ 84.32 $ 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>
THREE MONTHS ENDED MARCH 31,
1994 1993
============================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 114 $ 46
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Insurance liabilities, net of reinsurance recoverables 175 354
Premiums, accounts and notes receivable (51) (49)
Accounts payable, accrued expenses, other liabilities and
current income taxes 40 76
Deferred income taxes, net 2 (56)
Realized investment gains (21) (31)
Other, net (67) (41)
--------- ---------
Net cash provided by operating activities 192 299
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities - held to maturity - 420
Fixed maturities - available for sale 1,476 -
Mortgage loans 135 164
Equity securities 227 368
Other (primarily short-term investments) 4,795 5,298
Investment maturities and repayments:
Fixed maturities - held to maturity 834 1,041
Fixed maturities - available for sale 516 -
Mortgage loans 48 43
Investments purchased:
Fixed maturities - held to maturity (744) (1,923)
Fixed maturities - available for sale (2,204) -
Mortgage loans (186) (252)
Equity securities (209) (448)
Other (primarily short-term investments) (4,646) (5,130)
Other, net (32) (22)
--------- ---------
Net cash provided by (used in) investing activities 10 (441)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 1,370 1,583
Withdrawals from contractholder deposit funds (1,432) (1,499)
Net change in commercial paper (41) (105)
Issuance of long-term debt 144 326
Repayment of debt (20) (10)
Dividends paid (55) (55)
Other, net - 4
--------- ---------
Net cash provided by (used in) financing activities (34) 244
--------- ---------
Effect of foreign currency rate changes on cash 2 (13)
- - ----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 170 89
Cash and cash equivalents, beginning of period 1,211 1,011
- - ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,381 $ 1,100
- - -----------------------------------------------------------------------------=============================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 154 $ 29
Interest paid $ 36 $ 23
- - ----------------------------------------------------------------------------------------------------------
</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) 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
approximately $900 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. The FASB has a project underway that
could amend the income recognition provisions of SFAS No. 114. CIGNA has not
determined the timing or effect on results of operations or financial condition
of adopting SFAS No. 114.
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
March 31,
(in millions) 1994 1993
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Realized gains (losses):
Fixed maturities $16 $2
Mortgage loans - (18)
Equity securities 4 43
Real estate (1) (13)
Short-term investments 2 17
------- -------
21 31
Income taxes 7 1
- - ------------------------------------------------------------------------------------------------------------
Net realized gains $14 $30
- - ----------------------------------------------------------------------------------------=====================
</TABLE>
During the first quarter of 1994, proceeds from sales of available-for-sale
fixed maturities and equities, including policyholder share, were $1.7 billion.
Such sales resulted in gross gains of $56 million and gross losses of $47
million. In addition, there were no sales of held-to-maturity fixed maturities
during the first quarter of 1994.
During the first quarter of 1994, Net Unrealized Appreciation - Fixed
Maturities included in Shareholders' Equity, which is net of policyholder share
and deferred income taxes, decreased by approximately $490 million.
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
March 31,
(in millions) 1994 1993
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average common shares 72.199 71.888
- - ----------------------------------------------------------------------------------------====================
</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 10,702,522 and 10,610,457 as of
March 31, 1994 and 1993, respectively.
5
<PAGE> 8
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 substantially
completed audits of the years 1982 through 1988 and has proposed an adjustment
which could result in an assessment of approximately $205 million for those
years. CIGNA is currently contesting in court the issue giving rise to such
proposed adjustment and, although the outcome is uncertain, management believes
that CIGNA should prevail.
In management's opinion, adequate tax liabilities have been established for all
years.
As of March 31, 1994, CIGNA had tax basis operating loss carryforwards of $304
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. Failure of reinsurers to indemnify CIGNA, as a result of reinsurer
insolvencies or disputes, could result in losses. Consequently, allowances are
established for amounts deemed uncollectible. 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.
For the first quarter of 1994 and 1993, premiums and fees were net of ceded
premiums of $492 million and $555 million, respectively. In addition,
benefits, losses and settlement expenses for the first quarter of 1994 and 1993
were net of reinsurance recoveries of $603 million and $680 million,
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 adversely affect results of operations in future periods, they
are not expected to have a material adverse effect on CIGNA's 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. Current proposals on national health care
reform could significantly change the way health care is financed and delivered
in the United States. CIGNA is not able to predict the effect on its business
of any legislative or other changes resulting from health care reform.
6
<PAGE> 9
Superfund, which was passed in 1980, is subject to re-authorization by Congress
in 1994; any changes in Superfund's system of allocating responsibility or
funding clean-up costs could affect the liability of policyholders and
insurers. The proposals being considered by Congress to reform Superfund are
in the early stages of development; therefore, CIGNA is not able to determine
what effect, if any, such enacted reform would have on its future results.
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 March 31, 1994, CIGNA's domestic
property and casualty subsidiaries, in the aggregate, and life insurance
subsidiaries were adequately capitalized under the guidelines. Additional
capital resources for the property and casualty operations are expected to be
needed during 1994, as a result of continued property and casualty losses.
CIGNA's Board of Directors has authorized up to $300 million of additional
capital for these operations in 1994. As the risk-based capital guidelines for
property and casualty become more stringent in 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
operations.
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 adversely affect results of operations in future periods, such
amounts are not expected to have a material adverse effect on CIGNA's 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.
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.
7
<PAGE> 10
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.
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. These cases are currently
being contested in court.
While the outcome of litigation involving CIGNA cannot be determined,
litigation (other than that related to asbestos-related, environmental
pollution and other long-term exposure claims, which is discussed below), net
of reserves and giving effect to reinsurance, is not expected to have a
material effect on CIGNA.
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.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion addresses the financial condition of CIGNA Corporation
(CIGNA) as of March 31, 1994, compared with December 31, 1993, and its results
of operations for the three months ended March 31, 1994, compared with the same
period last year. This discussion should be read in conjunction with the
Management's Discussion and Analysis section included in CIGNA's 1993 Annual
Report to Shareholders (pages 14 through 29), 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 a proposed IRS assessment
of approximately $205 million; CIGNA is currently contesting the issue in court
and management believes that CIGNA should prevail.
Moody's Investor Services is reviewing the debt ratings of CIGNA Corporation
and the claims-paying ratings of its insurance companies. The outcome of this
review is not expected to have a material adverse effect on CIGNA's financial
condition.
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. During the first quarter of 1994, CIGNA continued
implementation of the restructuring initiatives and, as of March 31, 1994,
there were no material changes to the costs associated with, or the anticipated
annual savings related to, these initiatives.
In 1993, CIGNA adopted Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for 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.
9
<PAGE> 12
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
=====================================================================================================================
FINANCIAL SUMMARY Three Months
Ended March 31,
(In millions) 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and fees $3,366 $3,261
Net investment income 992 958
Other revenues 152 124
Realized investment gains 21 31
Total revenues 4,531 4,374
Benefits and expenses 4,361 4,334
Income before taxes 170 40
Income taxes (benefits) 56 (6)
Net income $114 $46
=====================================================================================================================
Realized investment gains, net of taxes $14 $30
=====================================================================================================================
</TABLE>
CIGNA's first quarter 1994 consolidated net income increased significantly from
the same period last year. Excluding after-tax realized investment gains,
earnings were $100 million, compared with $16 million for 1993. This
improvement reflects significantly higher earnings in the Employee Life and
Health Benefits segment as well as a $20 million after-tax gain from the sale
of the California personal automobile and homeowners insurance businesses that
CIGNA retained from the 1989 sale of the Horace Mann companies.
After-tax realized investment gains decreased 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 was a decrease in new
loss reserves, primarily for mortgage loan and real estate investments. For
additional information, see Note 3 to the Financial Statements.
Consolidated revenues increased 4% from the same period last year, primarily
reflecting higher premiums and fees for the Employee Life and Health Benefits
and Individual Financial Services segments, partially offset by lower premiums
and fees for the Property and Casualty segment.
Full year results for 1994 are expected to improve, compared with 1993.
However, such improvement could be materially affected by a continued adverse
property and casualty environment, major catastrophes and significant
deterioration in real estate market conditions.
10
<PAGE> 13
EMPLOYEE LIFE AND HEALTH BENEFITS
<TABLE>
<CAPTION>
=====================================================================================================================
FINANCIAL SUMMARY Three Months
Ended March 31,
(In millions) 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and fees $1,968 $1,828
Net investment income 128 133
Other revenues 69 71
Realized investment gains 8 24
Total revenues 2,173 2,056
Benefits and expenses 1,985 1,928
Income before taxes 188 128
Income taxes 63 36
Net income $125 $92
=====================================================================================================================
Realized investment gains, net of taxes $6 $21
=====================================================================================================================
</TABLE>
Net income for the Employee Life and Health Benefits segment increased 36% for
the first quarter of 1994, compared with the same period last year. Excluding
after-tax realized investment gains, income for the first quarter of 1994 was
$119 million, compared with $71 million for the same period last year. This
increase reflects improvements of $23 million and $25 million in the segment's
HMO and group indemnity operations, respectively. The HMO improvement reflects
approximately $10 million attributable to membership growth, with the balance
attributable to rate increases and cost control initiatives. The improvement
in the group indemnity business is primarily due to favorable claim experience,
reflecting lower medical care cost inflation. While full year 1994 results are
expected to improve over 1993, earnings growth is not expected to continue at
the same level as first quarter.
Premiums and fees for the first quarter of 1994 increased 8% from the same
period last year. This improvement reflects (1) increased premiums and fees
for HMOs of approximately $35 million, primarily reflecting rate increases and
increases in membership; and (2) an increase of approximately $105 million in
group indemnity businesses (medical, $45 million; dental, $35 million; and
life, $25 million), primarily due to new sales and rate increases. Total HMO
membership increased 22%, compared with March 31, 1993, and 14%, compared with
December 31, 1993. 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. Growth in the medical indemnity business has been
constrained by cancellations and increasing penetration into the indemnity
market by prepaid health care providers, including conversions to CIGNA's HMOs.
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 for the first quarter of
1994, compared with $4.3 billion for the same period last year. Premium
equivalents, as a percentage of total adjusted premiums and fees, were 56% and
58% for the first quarters of 1994 and 1993, respectively. Administrative
Services Only (ASO) plans accounted for 46% and 44% of total adjusted premiums
and fees for the first quarters of 1994 and 1993, respectively.
11
<PAGE> 14
EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
<TABLE>
<CAPTION>
=====================================================================================================================
FINANCIAL SUMMARY Three Months
Ended March 31,
(In millions) 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and fees $43 $49
Net investment income 450 467
Realized investment losses (3) (13)
Total revenues 490 503
Benefits and expenses 422 450
Income before taxes 68 53
Income taxes 22 17
Net income $46 $36
=====================================================================================================================
Realized investment losses, net of taxes ($2) ($8)
=====================================================================================================================
</TABLE>
Net income for the Employee Retirement and Savings Benefits segment increased
28% for the first quarter of 1994, compared with the same period of 1993.
Excluding after-tax realized investment results, income for the first quarter
of 1994 was $48 million, compared with $44 million for the same period last
year. This increase primarily reflects higher earnings from an increased asset
base and, to a lesser extent, improved margins on defined contribution
business.
Premiums and fees for the first quarter of 1994 decreased 12% from the same
period last year, primarily reflecting lower annuity premiums. Net investment
income declined 4% for the first quarter of 1994, compared with the same period
last year, reflecting lower yields on invested assets.
Assets under management is generally a key determinant of earnings for this
segment. For the quarter ended March 31, 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 at January 1 $34,469 $32,736
Premiums and deposits 722 726
Investment results 578 750
Reduction in fair value of assets (524) (68)
Customer withdrawals (864) (1,251)
Benefit payments and other (442) (549)
- - --------------------------------------------------------------------------------------------------------------------------------
Balance at March 31 $33,939 $32,344
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
Approximately 54% and 26% 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 first quarter of 1994, compared with the same
period last year, primarily reflects significantly lower realized gains from
the sales of separate account investment assets. The decline in withdrawals
for the first quarter 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.
Assets under management as of March 31, 1994 decreased from $34.5 billion as of
December 31, 1993, primarily reflecting a reduction in the fair value of
assets. Assets under management at March 31, 1994 reflect approximately $225
million of unrealized appreciation in fair value of assets resulting from the
implementation of SFAS No. 115, compared with $521 million as of December 31,
1993. Asset growth for 1994 could be constrained by withdrawals and lower
deposits resulting from decisions by plan sponsors to diversify assets and fund
management.
13
<PAGE> 16
INDIVIDUAL FINANCIAL SERVICES
<TABLE>
<CAPTION>
=====================================================================================================================
FINANCIAL SUMMARY Three Months
Ended March 31,
(In millions) 1994 1993
=====================================================================================================================
<S> <C> <C>
Premiums and fees $183 $155
Net investment income 169 122
Other revenues 16 14
Realized investment gains (losses) 2 (7)
Total revenues 370 284
Benefits and expenses 328 251
Income before taxes 42 33
Income taxes 14 11
Net income $28 $22
=====================================================================================================================
Realized investment gains (losses), net of taxes $2 ($5)
=====================================================================================================================
</TABLE>
Net income for the Individual Financial Services segment increased 27% for the
first quarter of 1994, compared with the same period of 1993. Excluding
after-tax realized investment results, income was $26 million for the first
quarter 1994 and $27 million for the same period last year. The slight
decrease in earnings reflects lower reinsurance earnings due to unfavorable
claim experience, and less favorable mortality, partially offset by $4 million
from higher sales of interest-sensitive business (particularly corporate-owned
life insurance).
Premiums and fees for the first quarter of 1994 increased 18% from the same
period of 1993. Net investment income for the first quarter of 1994 increased
39% from the same period of 1993. These increases, as well as the 31% increase
in benefits and expenses, reflect increased sales, primarily of
interest-sensitive business.
14
<PAGE> 17
PROPERTY AND CASUALTY
<TABLE>
<CAPTION>
=====================================================================================================================
FINANCIAL SUMMARY Three Months
Ended March 31,
(In millions) 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and fees $1,172 $1,222
Net investment income 194 189
Other revenues 57 63
Realized investment gains 22 30
Total revenues 1,445 1,504
Benefits and expenses 1,577 1,645
Loss before taxes (132) (141)
Income tax benefits (52) (62)
Net loss ($80) ($79)
=====================================================================================================================
Realized investment gains, net of taxes $14 $24
=====================================================================================================================
</TABLE>
Excluding after-tax realized investment results, Property and Casualty segment
losses were $94 million in the first quarter of 1994, compared with losses of
$103 million for the same period last year. The decrease in losses primarily
reflects lower underwriting losses.
Underwriting losses were $317 million in the first quarter of 1994, compared
with $342 million for the same period last year. Excluding asbestos and
environmental losses of $67 million and $73 million for 1994 and 1993,
respectively, underwriting losses declined 7%. This decrease is primarily due
to lower losses for the international business ($24 million); favorable loss
development on the domestic commercial property line ($25 million); and a
reduction in operating expenses ($12 million), primarily associated with
restructuring initiatives implemented in 1993. These factors were partially
offset by higher losses from catastrophes. In addition, underwriting losses
continue to reflect the adverse effects of the highly competitive pricing
environment.
Included in underwriting results for the first quarter of 1994 were catastrophe
losses, net of reinsurance, of $130 million (before reinsurance, or "gross",
$135 million), compared with $83 million net (gross, $163 million) in the same
period of last year. Catastrophe losses for the first quarter of 1994 included
$97 million (gross, $100 million) for the Los Angeles earthquake and $35
million (gross, $36 million) for the severe winter weather. Catastrophe losses
for the first quarter of 1993 included $43 million (gross, $122 million) and
$31 million (gross, $31 million) for the World Trade Center bombing and the
East Coast blizzard, respectively.
Premiums and fees in the first quarter of 1994 decreased 4%, compared with the
same period last year. This decline primarily reflects reduced writings due to
price competition in CIGNA's domestic commercial business ($63 million),
particularly in the commercial packages, casualty and property lines. This
decline also reflects reduced premiums for workers' compensation coverage that
involves risk transfer and writing workers' compensation policies with higher
customer risk retention ($40 million). The decrease in premiums and fees was
partially offset by growth in the international life and property and casualty
lines of business ($66 million). Domestic premiums and fees are expected to
continue to decrease through 1994 as a result of the above factors.
15
<PAGE> 18
In recent years, CIGNA has withdrawn substantially from the domestic voluntary
personal automobile and the London property and casualty assumed reinsurance
markets. CIGNA routinely re-evaluates the regulatory and reserving environment
associated with these automobile and London reinsurance lines of business, and
future changes in related reserves could occur.
Net investment income increased 3% in the first quarter of 1994, compared with
the same period last year. The increase primarily reflects growth in investment
assets of the international life operation and a change in investment asset
mix.
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.
The following table shows the adverse (favorable) pre-tax effects on CIGNA's
results of operations from insured events of prior years (prior year
development) for the three months ended March 31:
<TABLE>
<CAPTION>
====================================================================================================================
(Dollars in millions) 1994 % 1993 %
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos-related $3 4 $40 48
Environmental pollution 64 94 33 39
Unrecoverable reinsurance 8 12 9 11
- - --------------------------------------------------------------------------------------------------------------------
75 110 82 98
Other (7) (10) 2 2
- - --------------------------------------------------------------------------------------------------------------------
Total $68 100 $84 100
====================================================================================================================
</TABLE>
16
<PAGE> 19
CIGNA continues to receive asbestos, environmental pollution and other
long-term exposure claims asserting a right to recovery under insurance
policies issued by CIGNA.
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 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 March 31, 1994 and December
31, 1993, approximately 1,200 policyholders had outstanding asbestos-related
claims with the domestic operations. CIGNA continues to litigate certain
asbestos-related coverage issues, with 41 lawsuits involving 27 policyholders
pending as of March 31, 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 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 13,900 environmental pollution files
outstanding at March 31, 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 489 coverage lawsuits as of March 31, 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.
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
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 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. Additional charges for unrecoverable reinsurance are likely to
affect future results adversely, although the amounts and timing cannot be
reasonably estimated.
Other prior year development in 1994 was primarily attributable to favorable
reserve development on the domestic property line of business, partially offset
by losses, primarily for long-term exposure claims.
17
<PAGE> 20
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 that CIGNA retained
from the 1989 sale of the Horace Mann companies until these businesses were
sold on January 15, 1994. The sale resulted in an after-tax gain of
approximately $20 million in the first quarter of 1994.
Net losses for Other Operations were $5 million for the first quarter of 1994,
compared with $25 million for the same period of 1993. After-tax realized
investment losses in the first quarter of 1994 were $6 million, compared with
$2 million for the first quarter of 1993. Excluding after-tax realized
investment results, income was $1 million in the first quarter of 1994,
compared with a loss of $23 million for the same period last year. This
improvement reflects the gain on the sale of the California businesses.
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.
For the first quarter of 1994, cash and cash equivalents increased $170 million
from $1.2 billion as of December 31, 1993. This increase primarily reflects
issuance of long-term debt; net investment sales; and cash flows from operating
activities, primarily resulting from earnings and the timing of cash receipts
and cash disbursements. These factors were partially offset by withdrawals,
net of deposits and interest credited, to contractholder deposit funds and
payments of dividends on CIGNA common stock.
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 borrowing capacity to meet the anticipated
needs of its business.
CIGNA had $1.38 billion of long-term debt outstanding at March 31, 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 March 31, 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 March 31, 1994, CIGNA's short-term debt, primarily commercial paper,
amounted to $290 million, a decrease of $61 million from December 31, 1993.
Additional capital resources for the property and casualty operations are
expected to be needed during 1994, as a result of continued property and
casualty losses. CIGNA's Board of Directors has authorized up to $300 million
of additional capital for these operations in 1994. CIGNA has sufficient
internal resources to meet this need.
18
<PAGE> 21
INVESTMENT ASSETS
<TABLE>
<CAPTION>
====================================================================================================================================
March 31, December 31,
(In millions) 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities: at amortized cost $12,580 $12,375
Fixed maturities: at fair value 18,235 19,380
Equity securities 1,787 1,849
Mortgage loans 9,994 10,021
Real estate 1,779 1,780
Other 5,311 5,323
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investment assets $49,686 $50,728
====================================================================================================================================
</TABLE>
Additional information regarding CIGNA's investment assets is included in Note
3 to the first 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>
====================================================================================================================================
March 31, December 31,
1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities 34% 33%
Mortgage loans 59% 59%
Real estate 58% 56%
====================================================================================================================================
</TABLE>
19
<PAGE> 22
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 March 31, 1994, fixed maturities classified as available for sale had an
aggregate fair value in excess of amortized cost of approximately $865 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>
====================================================================================================================================
March 31, December 31,
1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment grade 93% 94%
Below investment grade:
Available for sale 1 1
Held to maturity 6 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 36% of below investment grade securities relate to
policyholder contracts. As a result of the higher yields and the inherent risk
associated with below investment grade securities, gains or losses could
significantly affect future earnings, although such effects are not expected to
be material to CIGNA's financial condition.
20
<PAGE> 23
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>
====================================================================================================================================
March 31, December 31,
(In millions) 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Delinquent bonds $138 $131
Less cumulative write-downs 55 52
--------- ---------
83 79
--------- ---------
Restructured bonds 324 383
Less cumulative write-downs 55 55
--------- ---------
269 328
- - ------------------------------------------------------------------------------------------------------------------------------------
Problem bonds $352 $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 and valuation reserves were as
follows:
<TABLE>
<CAPTION>
====================================================================================================================================
March 31, December 31,
(In millions) 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Potential problem bonds $187 $225
Less cumulative write-downs and
valuation reserves 9 11
- - ------------------------------------------------------------------------------------------------------------------------------------
Potential problem bonds $178 $214
====================================================================================================================================
</TABLE>
* Bonds in these categories are primarily classified as held to maturity.
21
<PAGE> 24
CUMULATIVE WRITE-DOWNS AND VALUATION RESERVES FOR BONDS
The activity in cumulative write-downs and valuation reserves for bonds during
the three months ended March 31 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 4 2 6 - 8 8
Net increase (decrease) in
valuation reserves (2) - (2) 1 1 2
Charge-offs upon sales,
repayments and other (2) (1) (3) (5) 8 3
- - ----------------------------------------------------------------------------------------------------------------------------------
Ending balance - March 31 $54 $70 $124 $85 $98 $183
==================================================================================================================================
</TABLE>
Included in the total ending balances above as of March 31, 1994 and 1993 were
$5 million and $3 million, respectively, for bonds no longer classified as
problem or potential problem bonds. As of December 31, 1993, such reserves
were $5 million.
The after-tax adverse effect of write-downs and net increase in valuation
reserves on CIGNA's net income for the three months ended March 31, 1994 and
1993 were $1 million and $6 million, respectively.
During 1993 and the first quarter of 1994, bonds with a carrying value of $102
million and $23 million, respectively, were restructured into equity
securities. As of March 31, 1994, CIGNA had cumulative write-downs for equity
securities of $83 million (including $40 million attributable to policyholder
contracts), compared with $78 million (including $39 million attributable to
policyholder contracts) as of December 31, 1993.
22
<PAGE> 25
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 for the three months ended
March 31 is shown in the following table:
<TABLE>
<CAPTION>
=====================================================================================================================
1994 1993
--------------------------- ------------------------------
Policyholder Policyholder
(In millions) Contracts CIGNA Contracts CIGNA
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income under
original contract terms $6 $11 $12 $11
Less net investment income received 3 5 7 7
--------------------------- ---------------------------
Forgone investment income 3 6 5 4
Tax effect - (2) - (1)
- - --------------------------------------------------------------------------------------------------------------------
Net effect of non-accruals $3 $4 $5 $3
====================================================================================================================
Forgone investment income by
type:
Delinquent bonds $1 $3 $1 $2
Restructured bonds 2 3 4 2
--------------------------- ---------------------------
Forgone investment income 3 6 5 4
Tax effect - (2) - (1)
- - --------------------------------------------------------------------------------------------------------------------
Net effect of non-accruals $3 $4 $5 $3
====================================================================================================================
</TABLE>
23
<PAGE> 26
MORTGAGE LOANS
<TABLE>
<CAPTION>
====================================================================================================================================
March 31, December 31,
1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans (in millions) $9,994 $10,021
By type:
Office buildings 39% 40%
Retail facilities 38 37
Hotels 7 7
Apartment buildings 10 10
Other 6 6
Total 100% 100%
===================================================================================================================================
</TABLE>
CIGNA's investment strategy calls for diversification of the mortgage loan
portfolio. CIGNA follows guidelines relative to property type, location,
borrower and loan size to reduce its exposure to potential losses.
Continued adverse conditions in real estate markets and more stringent lending
practices by financial institutions have affected scheduled maturities of
mortgage loans. During the first three months of 1994, $528 million of
mortgage loans was scheduled to mature, of which $8 million was paid in full,
$127 million was extended at existing loan rates for a weighted average of 18
months and $315 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 $32 million that were restructured and $34 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 results of operations, liquidity or capital
resources.
24
<PAGE> 27
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. As
of March 31, 1994, restructured mortgage loans with a carrying value of
approximately $287 million had their original maturity date extended, with an
average extension of four years. Restructured mortgage loans generated
annualized cash returns averaging approximately 6% as of March 31, 1994.
Problem mortgage loans, including amounts attributable to policyholder
contracts, and related valuation reserves were as follows:
<TABLE>
<CAPTION>
======================================================================================================================
March 31, December 31,
(In millions) 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Delinquent mortgage loans $186 $162
Less valuation reserves 38 32
--------- ---------
148 130
--------- ---------
Restructured mortgage loans 858 839
Less valuation reserves 105 105
--------- ---------
753 734
- - ----------------------------------------------------------------------------------------------------------------------
Problem mortgage loans $901 $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 March 31,
1994, approximately 91% 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>
====================================================================================================================================
March 31, December 31,
(In millions) 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Potential problem mortgage loans before reserves $558 $627
Less reserves 77 79
- - ------------------------------------------------------------------------------------------------------------------------------------
Potential problem mortgage loans $481 $548
====================================================================================================================================
</TABLE>
25
<PAGE> 28
VALUATION RESERVES FOR MORTGAGE LOANS
The activity in valuation reserves for mortgage loans during the three months
ended March 31 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 8 2 10 8 20 28
Charge-offs upon sales,
repayments and other (1) (1) (2) (9) 5 (4)
Transfers to real estate - (4) (4) (13) (10) (23)
- - ----------------------------------------------------------------------------------------------------------------------------------
Ending balance - March 31 $112 $108 $220 $92 $93 $185
==================================================================================================================================
</TABLE>
The after-tax adverse effect of the net increase in valuation reserves on
CIGNA's net income was $2 million and $13 million for the first quarters of
1994 and 1993, respectively.
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 March
31, 1994, December 31, 1993 and March 31, 1993, the carrying value of such
loans was $24 million, $17 million and $64 million, respectively, net of
valuation reserves of $13 million, $17 million and $30 million, respectively.
26
<PAGE> 29
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 for the three
months ended March 31 is shown in the following table:
<TABLE>
<CAPTION>
======================================================================================================================
1994 1993
----------------------------- -----------------------------
Policyholder Policyholder
(In millions) Contracts CIGNA Contracts CIGNA
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income under
original contract terms $21 $12 $26 $15
Less net investment income received 14 7 17 8
----------------------------- -----------------------------
Forgone investment income 7 5 9 7
Tax effect - (2) - (2)
- - ----------------------------------------------------------------------------------------------------------------------
Net effect of non-accruals $7 $3 $9 $5
======================================================================================================================
Forgone investment income by
type:
Delinquent mortgage loans $4 $3 $5 $3
Restructured mortgage loans 3 2 4 4
----------------------------- -----------------------------
Forgone investment income 7 5 9 7
Tax effect - (2) - (2)
- - ---------------------------------------------------------------------------------------------------------------------
Net effect of non-accruals $7 $3 $9 $5
=====================================================================================================================
</TABLE>
27
<PAGE> 30
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>
======================================================================================================================
March 31, December 31,
(In millions) 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreclosure properties $1,283 $1,289
Less cumulative write-downs 297 301
Less valuation reserves 61 59
--------- ---------
925 929
--------- ---------
Real estate held for the production of income 893 890
Less valuation reserves 39 39
--------- ---------
854 851
- - ----------------------------------------------------------------------------------------------------------------------
Investment real estate $1,779 $1,780
======================================================================================================================
</TABLE>
RESERVES FOR REAL ESTATE
The activity in cumulative write-downs and valuation reserves for real estate
during the three months ended March 31 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 3 - 3 3 13 16
Net increase in valuation
reserves 1 2 3 5 1 6
Charge-offs upon sales and
other (9) (3) (12) (10) 12 2
Transfers from mortgage loans - 4 4 13 10 23
- - ----------------------------------------------------------------------------------------------------------------------------------
Ending balance - March 31 $234 $163 $397 $195 $144 $339
==================================================================================================================================
</TABLE>
The after-tax adverse effect of write-downs and the net increase in valuation
reserves on CIGNA's net income for the three months ended March 31, 1994 and
1993 was $1 million and $9 million, respectively.
28
<PAGE> 31
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 for the three months ended March 31 were as follows:
<TABLE>
<CAPTION>
======================================================================================================================
1994 1993
----------------------------- -----------------------------
Policyholder Policyholder
(In millions) Contracts CIGNA Contracts CIGNA
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Write-downs and reserves:
Bonds $2 $1 $1 $6
Mortgage loans 8 2 8 13
Real estate 4 1 8 9
- - --------------------------------------------------------------------------------------------------------------------
Total $14 $4 $17 $28
====================================================================================================================
Non-accruals:
Bonds $3 $4 $5 $3
Mortgage loans 7 3 9 5
- - --------------------------------------------------------------------------------------------------------------------
Total $10 $7 $14 $8
====================================================================================================================
</TABLE>
The effect of adverse economic conditions on certain industry segments and
adverse real estate market conditions is expected to continue, resulting in
additional problem investments and foreclosures. Investments in California and
in office buildings are particularly vulnerable to deterioration. Although
additional non-accruals, write-downs and reserves will adversely affect future
results, the amounts and timing cannot be reasonably estimated. CIGNA
currently does not expect such non-accruals, write-downs and reserves to result
in a significant decline in the aggregate carrying value of its assets or a
material adverse effect on its financial condition.
29
<PAGE> 32
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of CIGNA Corporation was
held on April 27, 1994. At the meeting, 62,752,170 shares of
Common Stock were represented and entitled to vote; 72,064,338
shares of Common Stock were outstanding and entitled to vote.
CIGNA shareholders elected six nominees to the Board of
Directors and ratified the appointment of Price Waterhouse as
independent accountants for 1994 by the votes shown in the
table below. There were no broker non-votes.
<TABLE>
<CAPTION>
Votes
Votes For Withheld
--------- --------
<S> <C> <C>
Election of nominees to
Board of Directors for
terms expiring in April
1996:
Bernard M. Fox 62,072,792 679,378
Marilyn W. Lewis 62,500,103 252,067
Election of nominees to
Board of Directors for
terms expiring in April
1997:
Alfred C. DeCrane, Jr 62,515,684 236,486
Frank S. Jones 62,505,202 246,968
Paul F. Oreffice 62,510,373 241,797
Wilson H. Taylor 62,513,124 239,046
</TABLE>
---------------------------------
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C> <C>
Ratification of Price
Waterhouse as
independent accountants 62,580,256 72,134 99,780
</TABLE>
-30-
<PAGE> 33
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) Since January 1, 1994, CIGNA has filed the following
Reports on Form 8-K:
o dated May 2, 1994 containing a news release
regarding its first quarter results;
o dated February 14, 1994 containing a news
release regarding its year-end 1993 results; and
o dated January 17, 1994 regarding CIGNA's
anticipated exposure as a result of the
earthquake that occurred in California on
January 17, 1994.
-31-
<PAGE> 34
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: May 13, 1994
-32-
<PAGE> 35
Exhibit Index
<TABLE>
<CAPTION>
Method of
Number Description Filing
- - ------ ----------- ----------
<S> <C> <C>
11 Computation of Earnings Filed herewith.
Per Share
12 Computation of Ratio of Filed herewith.
Earnings to Fixed Charges
</TABLE>
-33-
<PAGE> 1
CIGNA CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1994 1993
=======================================================================================================
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
NET INCOME AVAILABLE TO
COMMON SHARES $ 114 $ 46
- - --------------------------------------------------------------------------=============================
WEIGHTED AVERAGE SHARES:
Common shares 72,106,563 71,793,607
Common share equivalents applicable
to stock options 92,787 94,857
- - -------------------------------------------------------------------------------------------------------
Total 72,199,350 71,888,464
- - --------------------------------------------------------------------------=============================
PRIMARY EARNINGS PER SHARE $ 1.58 $ 0.64
- - --------------------------------------------------------------------------=============================
FULLY DILUTED EARNINGS PER SHARE
NET INCOME AVAILABLE TO
COMMON SHARES:
Net income $ 114 $ 46
Adjusted for:
Interest expense (net of tax) on
convertible debentures 3 *
- - -------------------------------------------------------------------------------------------------------
Net income available to common shares $ 117 $ 46
- - --------------------------------------------------------------------------=============================
WEIGHTED AVERAGE SHARES:
Common shares 72,106,563 71,793,607
Common share equivalents applicable
to stock options 92,787 95,334
Assumed conversion of convertible debentures 3,626,395 *
- - -------------------------------------------------------------------------------------------------------
Total 75,825,745 71,888,941
- - --------------------------------------------------------------------------=============================
FULLY DILUTED EARNINGS PER SHARE $ 1.54 $ 0.64
- - --------------------------------------------------------------------------=============================
</TABLE>
* The effect of incremental shares was anti-dilutive. Net income 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>
THREE MONTHS ENDED
MARCH 31,
1994 1993
======================================================================
<S> <C> <C>
Income before income taxes $ 170 $ 40
------ ------
Fixed charges included in income:
Interest expense 30 29
Interest portion of rental expense 25 26
------ ------
Total fixed charges included in income 55 55
------ ------
Income available for fixed charges $ 225 $ 95
- - -----------------------------------------------------=================
RATIO OF EARNINGS TO FIXED CHARGES 4.1 1.7
- - -----------------------------------------------------=================
</TABLE>
