<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1995
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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
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(Exact name of registrant as specified in its charter)
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<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)
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Registrant's telephone number, including area code (215) 761-1000
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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
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As of October 31, 1995, 75,939,097 shares of the issuer's Common Stock
were outstanding.
<PAGE> 2
CIGNA CORPORATION
INDEX
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Page No.
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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 11
Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 36
Item 6. Exhibits and Reports on Form 8-K. 36
SIGNATURE 37
EXHIBIT INDEX 38
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<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,
1995 1994 1995 1994
==================================================================================================================
<S> <C> <C> <C> <C>
REVENUES
Premiums and fees $ 3,408 $ 3,497 $ 10,340 $ 10,307
Net investment income 1,080 980 3,192 2,940
Other revenues 134 117 391 372
Realized investment gains 20 6 226 50
-------- -------- --------- ---------
Total revenues 4,642 4,600 14,149 13,669
-------- -------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 4,266 3,250 10,687 9,685
Policy acquisition expenses 290 314 886 883
Other operating expenses 969 858 2,753 2,549
-------- -------- --------- ---------
Total benefits, losses and expenses 5,525 4,422 14,326 13,117
-------- -------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (883) 178 (177) 552
-------- -------- --------- ---------
Income taxes (benefits):
Current 65 92 176 225
Deferred (382) (37) (282) (45)
-------- -------- --------- ---------
Total income taxes (317) 55 (106) 180
-------- -------- --------- ---------
NET INCOME (LOSS) (566) 123 (71) 372
Dividends declared (56) (55) (164) (165)
Retained earnings, beginning of period 4,439 3,856 4,052 3,717
- --------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 3,817 $ 3,924 $ 3,817 $ 3,924
- ----------------------------------------------------------------------==============================================
EARNINGS PER SHARE $ (7.76) $ 1.70 $ (0.98) $ 5.14
- ----------------------------------------------------------------------==============================================
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,
1995 1994
=======================================================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost, $21,531; $18,899) $ 22,866 $ 18,521
Held to maturity, at amortized cost (fair value, $12,750; $12,276) 11,943 12,296
Equity securities, at fair value (cost, $708; $1,651) 792 1,806
Mortgage loans 10,433 9,970
Policy loans 6,309 5,355
Real estate 1,692 1,747
Other long-term investments 377 371
Short-term investments 1,140 853
--------- ---------
Total investments 55,552 50,919
Cash and cash equivalents 1,775 1,693
Accrued investment income 1,139 835
Premiums, accounts and notes receivable 4,169 3,986
Reinsurance recoverables 7,427 7,486
Deferred policy acquisition costs 1,148 1,128
Property and equipment, net 885 914
Deferred income taxes, net 2,131 2,264
Other assets 1,118 1,161
Goodwill 1,135 1,165
Separate account assets 17,270 14,551
- -----------------------------------------------------------------------------------------------------------------------
Total $ 93,749 $ 86,102
- ---------------------------------------------------------------------------------======================================
LIABILITIES
Contractholder deposit funds $ 29,488 $ 27,000
Unpaid claims and claim expenses 19,857 19,246
Future policy benefits 11,360 10,453
Unearned premiums 2,409 2,575
--------- ---------
Total insurance and contractholder liabilities 63,114 59,274
Accounts payable, accrued expenses and other liabilities 5,286 4,726
Current income taxes 138 156
Short-term debt 571 271
Long-term debt 1,068 1,389
Separate account liabilities 17,178 14,475
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 87,355 80,291
- -----------------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 7
SHAREHOLDERS' EQUITY
Common stock (shares issued, 85 and 83) 85 83
Additional paid-in capital 2,374 2,248
Net unrealized appreciation (depreciation) - fixed maturities 606 (122)
Net unrealized appreciation - equity securities 81 141
Net translation of foreign currencies 7 (27)
Retained earnings 3,817 4,052
Less treasury stock, at cost (576) (564)
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,394 5,811
- -----------------------------------------------------------------------------------------------------------------------
Total $ 93,749 $ 86,102
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SHAREHOLDERS' EQUITY PER SHARE $ 86.38 $ 80.46
- ---------------------------------------------------------------------------------======================================
</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)
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
==================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (71) $ 372
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Insurance liabilities, net of reinsurance recoverables 904 101
Premiums, accounts and notes receivable (134) 143
Accounts payable, accrued expenses, other liabilities and
current income taxes 275 (203)
Deferred income taxes, net (282) (45)
Realized investment gains (226) (50)
Gain on sale of subsidiaries and other equity interests - (26)
Other, net (123) (5)
----------- -----------
Net cash provided by operating activities 343 287
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities - available for sale 5,010 3,748
Fixed maturities - held to maturity - 12
Equity securities 1,541 472
Mortgage loans 279 484
Other (primarily short-term investments) 10,745 12,254
Investment maturities and repayments:
Fixed maturities - available for sale 770 1,438
Fixed maturities - held to maturity 1,510 2,107
Mortgage loans 345 136
Investments purchased:
Fixed maturities - available for sale (7,829) (5,437)
Fixed maturities - held to maturity (1,336) (2,260)
Equity securities (348) (450)
Mortgage loans (1,116) (592)
Other (primarily short-term investments) (11,990) (12,881)
Other, net (113) (137)
----------- -----------
Net cash used in investing activities (2,532) (1,106)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 5,597 4,392
Withdrawals from contractholder deposit funds (3,287) (3,118)
Net change in commercial paper (16) (5)
Issuance of long-term debt 88 144
Repayment of debt (3) (23)
Dividends paid (164) (165)
Other, net 17 5
----------- -----------
Net cash provided by financing activities 2,232 1,230
----------- -----------
Effect of foreign currency rate changes on cash 39 40
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Net increase in cash and cash equivalents 82 451
Cash and cash equivalents, beginning of period 1,693 1,211
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,775 $ 1,662
- ------------------------------------------------------------------------------------==============================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 198 $ 301
Interest paid $ 102 $ 93
- ------------------------------------------------------------------------------------------------------------------
</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 1995
presentation.
The interim financial statements are unaudited but include all adjustments
(consisting of normal recurring adjustments other than the adjustments
described in the notes) necessary, in the opinion of management, for a fair
statement of financial position and results of operations for the periods
reported.
The preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of
portions of the insurance business as well as competitive and other market
conditions, call for caution in drawing specific conclusions from interim
results.
NOTE 2-NEW ACCOUNTING PRONOUNCEMENTS
In 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which provides guidance on
the accounting and disclosure for impaired loans. In October 1994, the FASB
issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures," which eliminates the income recognition
requirements of SFAS No. 114. CIGNA adopted SFAS Nos. 114 and 118 in the
first quarter of 1995, which resulted in an $8 million increase in net income.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires write-down to fair value when long-lived assets to be held and used
are impaired. Long-lived assets to be disposed, including real estate held for
sale, must be carried at the lower of cost or fair value less costs to sell.
In addition, SFAS No. 121 prohibits depreciation of long-lived assets to be
disposed. SFAS No. 121 must be implemented by the first quarter of 1996 with
the cumulative effect of implementation for assets being held for disposal
reported in net income. CIGNA has not determined the timing or effect of
adoption of this standard; however, the effect on CIGNA's results of
operations, liquidity and financial condition is not expected to be material.
The Financial Accounting Standards Board is currently reviewing for issuance an
implementation guide related to SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The proposed guide contains a
provision permitting companies that currently classify fixed maturities as held
to maturity (which are carried at amortized cost) to reclassify a portion or
all of such fixed maturities to available for sale (which are carried at fair
value) in the fourth quarter of 1995. The effects, if any, of the proposed
implementation guide have not been determined.
4
<PAGE> 7
NOTE 3-INVESTMENTS
REALIZED GAINS AND LOSSES
Realized gains and losses on investments, excluding policyholder share, were as
follows:
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Realized gains (losses):
Fixed maturities $18 $7 $29 $16
Equity securities 2 1 182 18
Mortgage loans (2) 4 - (7)
Real estate 1 (8) 9 18
Other investments 1 2 6 5
----------------------------------------------------
20 6 226 50
Income taxes 7 5 53 20
- --------------------------------------------------------------------------------------------------------------
Net realized gains $13 $1 $173 $30
- ----------------------------------------------------------====================================================
</TABLE>
FIXED MATURITIES AND EQUITY SECURITIES
Sales of available-for-sale fixed maturities and equities, including
policyholder share, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proceeds from sales $2,155 $1,098 $6,551 $4,220
Gross gains on sales 53 28 326 135
Gross losses on sales (33) (26) (101) (119)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
During the third quarter and nine months of 1995, $65 million and $218 million
of fixed maturities classified as held to maturity were transferred to the
available-for-sale category, resulting in the recognition in Shareholders'
Equity of unrealized depreciation of $1 million and $11 million, net of taxes,
respectively. There were no sales of held-to-maturity fixed maturities during
the first nine months of 1995. During the nine months of 1994, $14 million of
held-to-maturity fixed maturities were sold, resulting in gross proceeds of $12
million and a realized pre-tax loss of $2 million. In addition, for the third
quarter and nine months of 1994, $31 million of fixed maturities classified as
held to maturity were transferred to the available-for-sale category, resulting
in the recognition in Shareholders' Equity of unrealized depreciation of $1
million, net of taxes. All transfers and sales for 1995 and 1994 were the
result of significant credit deterioration of the issuers of the affected
investments.
During the third quarter and nine months of 1995, Net Unrealized Appreciation -
Fixed Maturities included in Shareholders' Equity, which is net of policyholder
share and deferred income taxes, increased by $46 million and $728 million,
respectively, compared with decreases of $78 million and $898 million for the
same periods last year.
5
<PAGE> 8
MORTGAGE LOANS
As of September 30, 1995, CIGNA's total investment in impaired mortgage loans
was $893 million, including $482 million, before valuation reserves totaling
$84 million, and $411 million which had no valuation reserves. During the nine
months of 1995, valuation reserves for mortgage loans, including policyholder
share, decreased from $179 million as of December 31, 1994 to $84 million as of
September 30, 1995. The net decrease for the nine months reflects: (1) $54
million of reserves transferred to real estate for foreclosed mortgage loans
that were reclassified to real estate investments, (2) $44 million of
charge-offs, and (3) a $3 million net increase in valuation reserves.
For the third quarter and nine months of 1995, the average total investment in
impaired mortgage loans (average calculated using total impaired mortgage loans
before reserves) was approximately $900 million and $1.0 billion, respectively,
and interest income recorded on these loans was approximately $21 million ($16
million on a cash basis and $5 million on an accrual basis) and $58 million
($44 million on a cash basis and $14 million on an accrual basis),
respectively.
NOTE 4-EARNINGS PER SHARE
Earnings per share were based on net income (loss) divided by weighted average
common shares, including common share equivalents, where appropriate.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares 72,908 72,354 72,561 72,318
- ---------------------------------------------------------=====================================================
</TABLE>
There is no significant difference between earnings per share on a primary and
a fully diluted basis.
During the third quarter of 1995, $89 million of CIGNA's 8.2% convertible
subordinated debentures due 2010 (8.2% Debt) was converted into approximately
1.3 million shares of CIGNA common stock. Also during the third quarter, CIGNA
announced its intention to redeem (at par plus accrued interest) all 8.2% Debt
outstanding on November 2, 1995. Substantially all of the $158 million of 8.2%
Debt outstanding as of September 30, 1995 was converted into CIGNA common stock
as of the redemption date.
Assuming all of CIGNA's 8.2% Debt had been converted to CIGNA common stock (3.6
million shares) on January 1, 1995 and the related interest expense ($2 million
after-tax for the third quarter of 1995; $9 million after-tax for the nine
months of 1995) was excluded from net loss, earnings per share for the third
quarter and nine months of 1995 would have been a loss of $7.40 and $0.82,
respectively.
Common shares held as Treasury shares were 10,913,959 and 10,827,609 as of
September 30, 1995 and 1994, respectively.
6
<PAGE> 9
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. During the third quarter of 1995, one of two
outstanding issues was resolved with no effect on CIGNA's results of
operations. The remaining issue, which relates only to years prior to 1989,
could result in an assessment of approximately $195 million for those years.
CIGNA is currently contesting this issue in court. Although the outcome is
uncertain, management believes that CIGNA should prevail.
In management's opinion, adequate tax liabilities have been established for all
years.
As of September 30, 1995, CIGNA had tax basis operating loss carryforwards of
approximately $650 million.
NOTE 6-REINSURANCE
In the normal course of business, CIGNA's insurance subsidiaries enter into
agreements, primarily relating to short-duration contracts, to assume and cede
reinsurance with other insurance companies. Reinsurance is ceded primarily to
limit losses from large exposures and to permit recovery of a portion of direct
losses, although ceded reinsurance does not relieve the originating insurer of
liability. CIGNA evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities or economic characteristics of its reinsurers. Failure of
reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies or
disputes, could result in losses. Allowances for uncollectible amounts were
$672 million and $435 million as of September 30, 1995 and December 31, 1994,
respectively. During the third quarter of 1995, CIGNA increased the allowance
for uncollectible reinsurance by $210 million pre-tax ($138 million after-tax)
for asbestos and environmental losses, for assumed reinsurance business that
CIGNA previously exited and for CIGNA's domestic commercial business. While
future charges for unrecoverable reinsurance may materially affect results of
operations in future periods, such amounts are not expected to have a material
adverse effect on CIGNA's liquidity or financial condition.
For the third quarter and nine months of 1995, premiums and fees were net of
ceded premiums of $352 million and $1.3 billion, respectively. 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. In addition, benefits, losses
and settlement expenses for the third quarter and nine months of 1995 were net
of reinsurance recoveries of $408 million and $1.0 billion, respectively.
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.
NOTE 7-CONTINGENCIES AND OTHER MATTERS
FINANCIAL GUARANTEES
CIGNA, through its subsidiaries, is contingently liable for various financial
guarantees provided in the ordinary course of business. These include
guarantees for the repayment of industrial revenue bonds as well as other debt
instruments. Although the ultimate outcome of any loss contingencies arising
from CIGNA's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on
CIGNA's liquidity or financial condition.
7
<PAGE> 10
REGULATORY AND INDUSTRY DEVELOPMENTS
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to: revise the system of funding cleanup of
environmental damages; develop standards for estimating certain claim
liabilities; reinterpret insurance contracts long after the policies were
written to provide coverage unanticipated by CIGNA; restrict insurance pricing
and the application of underwriting standards; reform health care; and expand
regulation.
Legislation is currently being considered by Congress, which would limit, and
eventually substantially eliminate, the tax deductibility of policy loan
interest for corporate-owned life insurance. The outcome of such legislation
is uncertain and, although it could have a material adverse effect on results
of operations for the Individual Financial Services segment, it is not expected
to be material to CIGNA's consolidated results of operations, liquidity or
financial condition.
Superfund, originally enacted in 1980, expires this year and new legislation
has been introduced in Congress. Any changes in Superfund relating to: (1)
allocating responsibility; (2) funding cleanup costs; or (3) establishing
cleanup standards could affect the liabilities of potentially responsible
parties and insurers. Due to uncertainties associated with the timing and
content of any future Superfund legislation, the effect on CIGNA's results of
operations, liquidity or financial condition cannot be reasonably estimated at
this time.
CIGNA expects proposals for federal and state legislation seeking modest health
care insurance reform and limitations on formation and operation of efficient
health care networks. Due to uncertainties associated with the timing and
content of any health care legislation, the effect on CIGNA's future results of
operations, liquidity or financial condition cannot be reasonably estimated at
this time.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain.
8
<PAGE> 11
ASBESTOS-RELATED AND ENVIRONMENTAL POLLUTION CLAIMS
As discussed in CIGNA's 1994 Form 10-K, CIGNA historically has not been able to
estimate its ultimate liabilities for asbestos-related and environmental
pollution claims because of the significant uncertainties associated with them
that are not generally present for other types of claims. Time-tested
actuarial techniques have not been useful in attempting to estimate these
liabilities because of the lack of developed case law and adequate claim
history. However, as industry experience in dealing with these exposures has
accumulated, various industry-related parties have evaluated newly-emerging
methods for estimating asbestos-related and environmental pollution
liabilities, and these methods have attained growing credibility. In addition,
outside actuarial firms and others have developed data bases to supplement the
information that can be derived from a company's claim files.
CIGNA has evaluated these methods and expanded its data bases of
asbestos-related and environmental pollution claims. Using these recent
developments, CIGNA completed a comprehensive review of its asbestos-related
and environmental pollution exposures during the third quarter of 1995 and
increased its related reserves by $255 million ($194 million, net of
reinsurance) for asbestos-related exposures and approximately $1.2 billion
($861 million, net of reinsurance) for environmental pollution exposures.
CIGNA's reserves for asbestos-related and environmental pollution claims, as
increased in the third quarter, are a reasonable estimate of its ultimate
liability for these claims, based on currently known facts, reasonable
assumptions where the facts are not known, current law (including Superfund),
and methodologies currently available. Reserving for these claims continues to
be a complex and uncertain process, requiring the use of informed estimates and
judgments. As additional experience and other data become available and are
reviewed, or as new or improved methodologies are developed, CIGNA's estimates
and judgments may be revised. Any such revisions could result in future
changes in reserves or reinsurance recoverables for these claims, which would
be reflected in CIGNA's results of operations for the period in which the
estimates are changed. While the effect of any such changes in reserves or
reinsurance recoverables on future results of operations could be material,
CIGNA does not expect such changes to have a material effect on its liquidity
or financial condition.
LITIGATION
CIGNA is continuously involved in numerous lawsuits arising, for the most part,
in the ordinary course of business, either as a liability insurer defending
third-party claims brought against its insureds or as an insurer defending
coverage claims brought against it by its policyholders or other insurers. One
such area of litigation involves policy coverage and judicial interpretation of
legal liability for asbestos-related and environmental pollution claims.
While the outcome of all litigation involving CIGNA, including
insurance-related litigation, cannot be determined, litigation (including that
related to asbestos and environmental pollution claims) is not expected to
result in losses that differ from recorded reserves by amounts that would be
material to results of operations, liquidity or financial condition. Also,
reinsurance recoveries related to claims in litigation, net of the allowance
for uncollectible reinsurance, are not expected to result in recoveries that
differ from recorded recoverables by amounts that would be material to results
of operations, liquidity or financial condition.
9
<PAGE> 12
RESTRUCTURING INITIATIVES
During the third quarter of 1995, CIGNA implemented cost reduction plans, which
resulted in an after-tax charge totalling $55 million ($85 million pre-tax,
which is included in other operating expenses) for the domestic Property and
Casualty operations. The components of the charge on an after-tax basis were
as follows: severance - $24 million, representing costs associated with
nonvoluntary terminations of approximately 1,600 domestic employees in various
functions and locations; real estate - $16 million, primarily related to
vacated lease space; and other costs - $15 million, including $7 million of
costs associated with exiting certain business and $4 million for fixed asset
write-offs. The cash outlays associated with these initiatives began in the
third quarter of 1995 and will continue through 1998, with most of the cash
outlays occurring in 1996. During the third quarter, $2 million of severance
was paid to 250 terminated employees. CIGNA has funded, and will continue to
fund, these costs through liquid assets, and such funding will not have a
material adverse effect on its liquidity. CIGNA expects that the cost
reduction initiatives, when fully implemented, will result in annual cost
savings of approximately $55 million after-tax, primarily based on the
elimination of certain payroll costs, and to a lesser extent, lease costs.
During the third quarter of 1995, CIGNA recorded an after-tax charge of $20
million ($30 million pre-tax included in other operating expenses) for cost
reduction initiatives in the Employee Life and Health Benefits segment. The
cost reduction charge primarily consisted of severance-related expenses
representing costs associated with nonvoluntary employee terminations covering
approximately 2,400 employees (approximately 45% in the indemnity operations
and 55% in the HMO operations). The cash outlays associated with the
restructuring initiatives began in the third quarter of 1995 and will continue
through 1997, with approximately 50% of such outlays occurring in 1995, 40% in
1996 and the remainder in 1997. During the third quarter, $3 million of
severance was paid to 555 terminated employees. CIGNA has funded, and will
continue to fund, these costs through liquid assets, and such funding will not
have a material adverse effect on its liquidity. The cost reduction
initiatives, when fully implemented, are expected to result in annual cost
savings of approximately $40 million after-tax primarily based on the
elimination of certain payroll costs.
During the third quarter of 1994, CIGNA decided to withdraw from the property
and casualty reinsurance business, which did not have a material effect on
CIGNA's results of operations.
10
<PAGE> 13
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, 1995, compared with December 31, 1994, and its
results of operations for the quarter and nine months ended September 30, 1995,
compared with the same periods last year. This discussion should be read in
conjunction with the Management's Discussion and Analysis section included in
CIGNA's 1994 Annual Report to Shareholders (pages 8 through 23) and in CIGNA's
reports on Form 10-Q for the first and second quarters of 1995, 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 that could affect them. Some of the
changes include initiatives to: revise the system of funding cleanup of
environmental damages; develop standards for estimating certain claim
liabilities; reinterpret insurance contracts long after the policies were
written to provide coverage unanticipated by CIGNA; restrict insurance pricing
and the application of underwriting standards; reform health care; and expand
regulation. The eventual effect on CIGNA of the changing environment in which
it operates remains uncertain. For 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 $195 million. CIGNA is
currently contesting the assessment and believes it should prevail.
CIGNA continues to conduct strategic and financial reviews of its businesses in
order to deploy its capital most effectively. Such reviews could result in
future actions; however, no determinations have been made at this time.
In the first quarter of 1995, CIGNA adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan,"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures," which resulted in an $8 million increase in
after-tax realized investment results. SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
was issued in the first quarter of 1995, and is effective for 1996 financial
statements. CIGNA has not yet determined the timing or effect of adoption of
this standard; however, the effect on CIGNA's results of operations, liquidity
and financial condition is not expected to be material. See Note 2 to the
Financial Statements for additional information.
The Financial Accounting Standards Board is currently reviewing for issuance an
implementation guide related to SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The proposed guide contains a
provision permitting companies that currently classify fixed maturities as held
to maturity (which are carried at amortized cost) to reclassify a portion or
all of such fixed maturities to available for sale (which are carried at fair
value) in the fourth quarter of 1995. The effects, if any, of the proposed
implementation guide have not been determined.
11
<PAGE> 14
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
====================================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1995 1994 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $3,408 $3,497 $10,340 $10,307
Net investment income 1,080 980 3,192 2,940
Other revenues 134 117 391 372
Realized investment gains 20 6 226 50
--------------------- --------------------
Total revenues 4,642 4,600 14,149 13,669
Benefits and expenses 5,525 4,422 14,326 13,117
--------------------- --------------------
Income (loss) before taxes (883) 178 (177) 552
Income taxes (benefits) (317) 55 (106) 180
--------------------- --------------------
Net income (loss) ($566) $123 ($71) $372
====================================================================================
Realized investment gains, net of
taxes $13 $1 $173 $30
====================================================================================
</TABLE>
CIGNA's consolidated results decreased significantly for the third quarter and
nine months of 1995 from the same periods last year. Results for the third
quarter and nine months of 1995 included a $774 million after-tax ($1.2 billion
pre-tax) charge in the Property and Casualty segment, primarily for
asbestos-related and environmental pollution exposures, as well as a $75
million after-tax ($115 million pre-tax) charge associated with cost reduction
initiatives in the Employee Life and Health Benefits and Property and Casualty
segments. Excluding these charges and after-tax realized investment gains,
income for the third quarter and nine months of 1995 was $270 million and $605
million, compared with $122 million and $342 million for the same periods last
year. These improvements primarily reflect improved results in the Property
and Casualty segment.
After-tax realized investment gains for the third quarter, compared with the
same period last year, reflect higher net gains on fixed maturities and lower
impairments on real estate investments. For the nine months of 1995, after-tax
realized investment gains increased significantly due to higher gains on sales
of equity securities resulting from a restructuring of a portion of CIGNA's
investment portfolio into fixed income securities. For additional information,
see Note 3 to the Financial Statements.
Consolidated revenues, excluding realized investment gains, for the third
quarter and nine months of 1995 increased 1% and 2% from the same periods last
year, primarily reflecting higher revenues for the Employee Life and Health
Benefits and the Individual Financial Services segments, partially offset by
lower revenues for the Property and Casualty segment.
Full year results for 1995, excluding the charges noted above, are expected to
continue to improve, compared with 1994. However, results could be adversely
affected by major catastrophes.
12
<PAGE> 15
EMPLOYEE LIFE AND HEALTH BENEFITS
<TABLE>
<CAPTION>
=====================================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1995 1994 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $1,971 $1,956 $6,069 $5,815
Net investment income 144 130 428 387
Other revenues 86 69 253 209
Realized investment gains (losses) 1 (8) 118 6
--------------------- --------------------
Total revenues 2,202 2,147 6,868 6,417
Benefits and expenses 2,029 1,952 6,228 5,829
--------------------- --------------------
Income before taxes 173 195 640 588
Income taxes 56 69 190 201
--------------------- --------------------
Net income $117 $126 $450 $387
=====================================================================================
Realized investment gains
(losses), net of taxes $1 ($6) $101 $6
=====================================================================================
</TABLE>
Net income for the Employee Life and Health Benefits segment decreased 7% for
the third quarter and increased 16% for the nine months of 1995, compared with
the same periods last year. Results for the third quarter and nine months of
1995 included an after-tax charge of $20 million related to cost reduction
initiatives discussed below. Excluding this charge and after-tax realized
investment results, income was $136 million and $369 million for the third
quarter and nine months of 1995, compared with $132 million and $381 million
for the same periods last year.
During the third quarter of 1995, CIGNA recorded an after-tax charge of $20
million ($30 million pre-tax included in other operating expenses) for cost
reduction initiatives. The cost reduction charge primarily consisted of
severance-related expenses representing costs associated with nonvoluntary
employee terminations covering approximately 2,400 employees (approximately 45%
in the indemnity operations and 55% in the HMO operations). The cash outlays
associated with the restructuring initiatives began in the third quarter of
1995 and will continue through 1997, with approximately 50% of such outlays
occurring in 1995, 40% in 1996 and the remainder in 1997. During the third
quarter, $3 million of severance was paid to 555 terminated employees. CIGNA
has funded, and will continue to fund, these costs through liquid assets, and
such funding will not have a material adverse effect on its liquidity. The
cost reduction initiatives, when fully implemented, are expected to result in
annual cost savings of approximately $40 million after-tax primarily based on
the elimination of certain payroll costs. These savings in the near term are
expected to be partially offset by increased investments in business growth and
service initiatives, particularly in the HMO operations.
Excluding the cost reduction charge and after-tax realized investment results,
earnings for the segment's indemnity operations were $87 million and $213
million for the third quarter and nine months, respectively, representing an
increase of $5 million and a decrease of $9 million, respectively, compared
with the same periods last year. The quarter and nine month results of 1995
reflect adverse claim experience resulting from higher medical costs in the
group medical operations, as well as higher claims in the group life
operations. These factors were more than offset for the quarter and partially
offset for the nine months by the improvement in earnings of $6 million
after-tax for long-term disability (LTD) business. Also, the change in
earnings for the quarter and nine months of 1995 reflects the favorable effects
of $14 million after-tax and $23 million after-tax, respectively, resulting
from the net change of reserve reviews between respective periods and a
recovery of losses on a large case.
13
<PAGE> 16
The segment's HMO operations earnings, excluding the cost reduction charge and
after-tax realized investment results, were $49 million and $156 million for
the third quarter and nine months, respectively, representing decreases of $1
million and $3 million, respectively, compared with the same periods last year.
These results reflect higher operating expenses associated with business growth
and investments in service initiatives, and lower margins resulting from higher
than expected medical care costs. These decreases were partially offset by the
effects of membership growth, as well as the favorable effects of $14 million
after-tax and $21 million after-tax for the quarter and nine months of 1995,
respectively, resulting from the net change of reserve reviews between
respective periods. Earnings for the remainder of 1995 are expected to
continue to be constrained by costs associated with business growth and service
initiatives combined with the effect of higher than expected medical care
costs.
During the third quarter, CIGNA announced the proposed sale of certain assets
of its Los Angeles staff model HMO, while retaining access to the provider
network which will continue to serve membership in this area through an
individual practice association (IPA). The sale, which is subject to
regulatory approval, is expected to be completed in 1996. The gain on
completion of the sale is not expected to be material to CIGNA's results of
operations. However, the sale agreement includes provisions that could result
in future gains depending on certain minimum membership levels.
Premiums and fees for the third quarter and nine months of 1995 increased 1%
and 4%, compared with the same periods last year. These improvements reflect
higher premiums and fees for HMOs of $83 million and $201 million, primarily
due to membership growth. Group indemnity business premiums declined $68
million for the quarter and increased $53 million for the nine months. The
decline for the quarter primarily reflects declines in medical and life
businesses due to cancellations. The nine month increase reflects higher
medical premiums due to new sales and rate increases, partially offset by
declines in the LTD line of business. Growth in premiums is expected to
continue to be constrained by competitive pressures in both the medical
indemnity and HMO markets.
Total HMO membership increased 14%, compared with September 30, 1994, and 11%
compared with December 31, 1994. Approximately 76% of membership growth for
1995 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.
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 for the third quarter and nine months of
1995 were approximately $4.3 billion and $13.3 billion, compared with $4.4
billion and $13.1 billion for the same periods last year. The decline in the
quarter primarily reflects declines in medical premium equivalents reflecting
cancellations and conversions to HMOs. The nine month increase primarily
reflects 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 54% and 56% for the nine months of 1995 and 1994,
respectively. Administrative Services Only (ASO) plans accounted for
approximately 45% of total adjusted premiums and fees for the nine months of
1995 and 1994.
Net investment income for the third quarter and nine months increased 11%,
compared with the same periods last year, primarily reflecting a change in
investment asset mix to include more fixed maturities and less equity
securities.
14
<PAGE> 17
EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
<TABLE>
<CAPTION>
====================================================================================
FINANCIAL SUMMARY Three Months Nine Months
September 30, September 30,
(In millions) 1995 1994 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and fees $40 $39 $123 $128
Net investment income 425 418 1,281 1,289
Realized investment gains -- 5 4 12
--------------- --------------------
Total revenues 465 462 1,408 1,429
Benefits and expenses 396 389 1,195 1,214
--------------- --------------------
Income before taxes 69 73 213 215
Income taxes 21 26 68 73
--------------- --------------------
Net income $48 $47 $145 $142
====================================================================================
Realized investment gains, net of taxes $ -- $3 $2 $6
====================================================================================
</TABLE>
Net income for the Employee Retirement and Savings Benefits segment increased
slightly for the third quarter and the nine months of 1995, compared with the
same periods of 1994. 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).
Excluding after-tax realized investment results and the tax adjustment, income
was $48 million and $143 million for the third quarter and nine months of 1995,
compared with $46 million and $138 million for the same periods last year.
These results primarily reflect the favorable effects on earnings from asset
growth.
Premiums and fees increased 3% for the third quarter and decreased 4% for the
nine months of 1995, compared with the same periods last year, primarily
reflecting annuity sales. Net investment income increased 2% for the third
quarter and decreased 1% for the nine months of 1995, compared with the same
period last year. The increase for the quarter reflects lower non-accruals,
which was more than offset for the nine months by the effects of lower yields.
Assets under management is generally a key determinant of earnings for this
segment. For the nine months ended September 30, assets under management and
related activity, including amounts attributable to separate accounts, were as
follows:
<TABLE>
<CAPTION>
=====================================================================================
(in millions) 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Balance -- January 1 $33,882 $34,469
Premiums and deposits 2,784 2,304
Investment results 1,970 1,791
Increase (decrease) in fair value of assets 2,114 (779)
Customer withdrawals (1,509) (1,782)
Benefit payments and other (2,044) (1,744)
- -------------------------------------------------------------------------------------
Balance -- September 30 $37,197 $34,259
=====================================================================================
</TABLE>
15
<PAGE> 18
Approximately 60% and 57% of the premiums and deposits for 1995 and 1994,
respectively, were from new customers. The higher level of premiums and
deposits in the first nine months of 1995, compared with the same period last
year, reflects increased sales. The changes in the fair value of assets for
1995 and 1994 primarily reflect market value fluctuations for both fixed
maturities and equity securities.
Management expects asset growth for the remainder of 1995 to continue to be
constrained, resulting from decisions by plan sponsors to diversify assets and
fund management. In addition, assets under management will continue to be
affected by market value fluctuations for fixed maturities and equity
securities.
16
<PAGE> 19
INDIVIDUAL FINANCIAL SERVICES
<TABLE>
<CAPTION>
====================================================================================
FINANCIAL SUMMARY Three Months Nine Months Ended
September 30, September 30,
(In millions) 1995 1994 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $216 $187 $646 $619
Net investment income 256 195 725 548
Other revenues 15 14 50 47
Realized investment gains (losses) 1 (2) (1) 7
---------------- -----------------
Total revenues 488 394 1,420 1,221
Benefits and expenses 430 346 1,248 1,067
---------------- -----------------
Income before taxes 58 48 172 154
Income taxes 21 17 60 54
---------------- -----------------
Net income $37 $31 $112 $100
====================================================================================
Realized investment gains (losses), net of taxes $1 ($2) $ -- $4
====================================================================================
</TABLE>
Net income for the Individual Financial Services segment for the third quarter
and nine months of 1995 increased 19% and 12%, compared with the same periods
last year. Excluding after-tax realized investment results, income was $36
million and $112 million for the third quarter and nine months of 1995,
compared with $33 million and $96 million for the same periods last year.
These increases reflect higher earnings from interest-sensitive products,
primarily reflecting business growth. In addition, the nine month results for
1995 reflect earnings of $4 million after-tax for additional proceeds from the
1992 sale of a substantial portion of CIGNA's mutual fund business.
Premiums and fees increased 16% and 4% for the third quarter and nine months of
1995, compared with the same periods of 1994, reflecting growth in business,
primarily of interest-sensitive products (principally corporate-owned life
insurance). The nine month increase was partially offset by lower premiums for
a product that is no longer actively marketed.
Net investment income for the third quarter and nine months of 1995 increased
31% and 32%, compared with the same periods last year, reflecting sales of
interest-sensitive and annuity products. The increase in benefits and expenses
for the third quarter and nine months reflects growth in interest-sensitive
products.
Legislation is currently being considered by Congress, which would limit, and
eventually substantially eliminate, the tax deductibility of policy loan
interest for corporate-owned life insurance. The outcome of such legislation
is uncertain and, although it could have a material adverse effect on results
of operations for the segment, it is not expected to be material to CIGNA's
consolidated results of operations, liquidity or financial condition.
17
<PAGE> 20
PROPERTY AND CASUALTY
<TABLE>
<CAPTION>
============================================================================
FINANCIAL SUMMARY Three Months Nine Months Ended
September 30, September 30,
(In millions) 1995 1994 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $1,181 $1,315 $3,502 $3,745
Net investment income 199 185 594 555
Other revenues 61 57 169 160
Realized investment gains 12 6 84 28
---------------- -----------------
Total revenues 1,453 1,563 4,349 4,488
Benefits and expenses 2,622 1,685 5,506 4,852
---------------- -----------------
Loss before taxes (1,169) (122) (1,157) (364)
Income tax benefits (413) (53) (417) (148)
---------------- -----------------
Net loss ($756) ($69) ($740) ($216)
===========================================================================
</TABLE>
Net losses for the Property and Casualty segment increased significantly,
compared with the same periods last year, primarily reflecting charges
associated with reserve strengthening for asbestos-related and environmental
pollution (A&E) claims ($686 million after-tax) and uncollectible reinsurance
for non-A&E exposures ($88 million after-tax), and charges for cost reduction
initiatives ($55 million after-tax). The Property and Casualty segment's
after-tax results for the periods presented above included the following (in
millions):
<TABLE>
<S> <C> <C> <C> <C>
Underlying operations $83 $56 $223 $86
Realized investment gains 7 3 54 17
Prior year development:
Asbestos and environmental (686) (42) (787) (118)
Unrecoverable reinsurance (88) (4) (105) (14)
Other (12) (74) (32) (91)
Catastrophe losses (5) (7) (38) (95)
Cost reduction charges (55) (9) (55) (9)
Federal tax adjustments - 8 - 8
----------------- --------------
Net loss ($756) ($69) ($740) ($216)
================= ==============
</TABLE>
The improvement in "Underlying operations" for the third quarter and nine
months of 1995, compared with the same periods last year, was primarily driven
by lower current accident year underwriting losses due to improved claim
experience and rate increases on certain lines of business, and higher net
investment income primarily for the international operations. Although its
results are improving, CIGNA's domestic business continues to reflect the
highly competitive pricing environment.
Premiums and fees for the third quarter and the nine months of 1995 decreased
10% and 6% from the same periods last year. These declines primarily reflect
reduced premiums of $147 million for the quarter and $334 million for the nine
months in CIGNA's domestic commercial business due to continued competition,
the application of stricter underwriting standards and, to a lesser extent,
conversions of workers' compensation business from standard risk transfer to
high-deductible policies, and the ratings downgrade by Best in 1994. In
addition, the declines reflect a decrease in premiums and fees from the
reinsurance business of $67 million and $155 million for the quarter and nine
months, respectively, due to CIGNA's withdrawal from this business late in
1994. These declines were partially offset by growth in international lines of
business of $99 million and $284
18
<PAGE> 21
million for the quarter and nine months, respectively. Premiums and fees are
expected to continue to be depressed through 1995 for the reasons noted above;
however, CIGNA does not expect the premium decline to have a material effect on
its future results of operations, liquidity or financial condition.
Net investment income for the third quarter and the nine months of 1995
increased 8% and 7%, compared with the same periods last year, primarily
reflecting growth in international lines of business and higher investment
yields, partially offset by negative cash flows in the domestic property and
casualty operations.
Pre-tax catastrophe losses, net of reinsurance, ("catastrophe losses") were $8
million and $11 million for the third quarter of 1995 and 1994, respectively.
Through nine months, catastrophe losses were $59 million in 1995, compared with
$146 million for the same period last year. Catastrophe losses for the nine
months of 1995 include $31 million for Texas hail storms. Catastrophe losses
for the nine months of 1994 include $86 million for the Los Angeles earthquake
and $34 million for the severe winter weather. The effects of reinsurance on
catastrophe losses in the third quarter and nine months of 1995 and 1994 were
not material.
During the third quarter of 1995, CIGNA implemented cost reduction plans, which
resulted in an after-tax charge totalling $55 million ($85 million pre-tax,
which is included in other operating expenses) for the domestic Property and
Casualty operations. The components of the charge on an after-tax basis were
as follows: severance - $24 million, representing costs associated with
nonvoluntary terminations of approximately 1,600 domestic employees in various
functions and locations; real estate - $16 million, primarily related to
vacated lease space; and other costs - $15 million, including $7 million of
costs associated with exiting certain business and $4 million for fixed asset
write-offs. The cash outlays associated with these initiatives began in the
third quarter of 1995 and will continue through 1998, with most of the cash
outlays occurring in 1996. During the third quarter, $2 million of severance
was paid to 250 terminated employees. CIGNA has funded, and will continue to
fund, these costs through liquid assets, and such funding will not have a
material adverse effect on its liquidity. CIGNA expects that the cost
reduction initiatives, when fully implemented, will result in annual cost
savings of approximately $55 million after-tax, primarily based on the
elimination of certain payroll costs and, to a lesser extent, lease costs.
LOSS RESERVES AND REINSURANCE RECOVERABLES
CIGNA's reserving methodology (for other than asbestos-related and
environmental pollution exposures, which is discussed below) and significant
issues affecting the estimation of loss reserves are described in its 1994 Form
10-K.
In summary, CIGNA's loss reserves of $17.6 billion and $16.8 billion as of
September 30, 1995 and December 31, 1994, respectively, are an estimate of
future payments for reported and unreported claims for losses and related
expenses with respect to insured events that have occurred. The basic
assumption underlying the many time-tested actuarial and other methods used in
the estimation of property and casualty loss reserves is that past experience
is an appropriate basis for predicting future events. However, current trends
and other factors that would modify past experience are also considered.
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 changes its estimate of the liability for insured events
of prior years as new data become available. The effects of these changes, net
of reinsurance, are charged or credited to income for the periods in which they
are determined.
CIGNA continually attempts to improve its loss estimation process by refining
its process of analyzing loss development patterns, claims payments and other
information, but there remain many reasons for adverse development of estimated
ultimate liabilities. For example, 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.
19
<PAGE> 22
The following table shows the adverse (favorable) pre-tax effects on CIGNA's
results of operations from prior year development, net of reinsurance, for the
third quarter and nine months ended September 30:
<TABLE>
<CAPTION>
====================================================================================================================================
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------------------------------------------------
(Dollars in millions) 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asbestos-related $194 16% $16 9% $255 18% $30 9%
Environmental pollution 861 71 48 26 955 67 151 44
Reinsurance exposures 22 2 52 28 23 2 59 17
Unrecoverable reinsurance 135 11 6 3 161 11 21 6
Workers' compensation 27 2 14 8 67 5 24 7
Other (30) (2) 49 26 (40) (3) 58 17
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,209 100% $185 100% $1,421 100% $343 100%
====================================================================================================================================
</TABLE>
CIGNA's reserves for asbestos-related and environmental pollution exposures
were $765 million ($456 million, net of reinsurance) and $1.8 billion ($1.3
billion, net of reinsurance), respectively, as of September 30, 1995, compared
with $594 million ($281 million, net of reinsurance) and $707 million ($542
million, net of reinsurance) as of December 31, 1994. Asbestos-related and
environmental pollution reserves at September 30, 1994 were $632 million ($276
million, net of reinsurance) and $681 million ($522 million, net of
reinsurance), respectively.
These reserves as of September 30, 1995 include the effects of charges recorded
in the third quarter of 1995 as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
Asbestos Environmental Total
-------------------------------------------------------------
(In millions) Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Bulk reserve for reported claims $84 $55 $559 $373 $643 $428
Bulk reserve for incurred but not reported 171 114 619 438 790 552
claims
Unrecoverable reinsurance -- 25 -- 50 -- 75
- ------------------------------------------------------------------------------------------------------------------------------------
Total $255 $194 $1,178 $861 $1,433 $1,055
====================================================================================================================================
</TABLE>
As discussed in CIGNA's 1994 Form 10-K, CIGNA historically has not been able to
estimate its ultimate liabilities for asbestos-related and environmental
pollution claims because of the significant uncertainties associated with them
that are not generally present for other types of claims. Time-tested
actuarial techniques have not been useful in attempting to estimate these
liabilities because of the lack of developed case law and adequate claim
history. However, as industry experience in dealing with these exposures has
accumulated, various industry-related parties have evaluated newly-emerging
methods for estimating asbestos-related and environmental pollution
liabilities, and these methods have attained growing credibility. In addition,
outside actuarial firms and others have developed data bases to supplement the
information that can be derived from a company's claim files.
CIGNA has evaluated these methods and expanded its data bases of
asbestos-related and environmental pollution claims. Using these recent
developments, CIGNA completed a comprehensive review of its asbestos-related
and environmental pollution exposures during the third quarter of 1995 and
increased its related net reserves by approximately $1.1 billion. CIGNA's
methodology, which was reviewed by an outside actuarial firm, consisted of a
detailed analysis of its reported claims, using a stratified sampling approach.
Reported claims representing approximately 50% of CIGNA's estimated
asbestos-related exposure and approximately 75% of its estimated environmental
pollution exposure were analyzed individually, with the results of the claim
reviews extrapolated
20
<PAGE> 23
to the remainder of the reported claim population.
Each claim review involved analyzing various characteristics of the applicable
policies, including their related attachment points, limits of liability,
terms, conditions and exclusions. For environmental pollution claims, the
reviews also evaluated damages per site using CIGNA's claim files and
information from a site data base obtained from external and internal sources.
The possible effects of Superfund reform were not considered. The claim
reviews considered specific coverage defenses and the allocation and spreading
of losses across policy periods and among other insurers and the policyholder.
The previous history of payments and the type of business conducted by the
policyholder were also considered. Based on this work, additional reserves for
reported claims were established, as shown in the above table.
In addition, CIGNA also estimated reserves for incurred but not reported (IBNR)
claims (also shown in the above table) by using the recent developments
described above. For environmental pollution claims, the IBNR reserve was
based on estimates of future development for sites yet to be identified, of
additional claims related to currently-identified sites and of third party
liability. For asbestos-related claims, the IBNR reserve was based on
estimates of additional claims against known policyholders as well as claims
against policyholders that have not yet asserted claims against CIGNA.
In addition to CIGNA's own reserve review, a state insurance department
retained an outside actuarial consulting firm to review CIGNA's reserves in
conjunction with a quadrennial NAIC zone examination of certain of CIGNA's
property and casualty subsidiaries. That firm applied its methods, including
its proprietary model, a loss development approach and a market share approach
for estimating possible outcomes of asbestos-related and environmental
pollution liabilities. The results of the firm's work, which was statistically
based, corroborated, in the aggregate, the results of CIGNA's work, which was
largely based on the judgment of experienced claims professionals in reviewing
claim files, as described above. This corroboration between two different
approaches to estimating CIGNA's asbestos-related and environmental pollution
liabilities provided confidence in the results and supported CIGNA's decision
to increase its reserves.
Reserves for environmental pollution claims and related incurred expense and
payment activity include internal costs to manage such claims and disputes with
policyholders over insurance coverage issues as well as external
litigation-related costs for such disputes. Payments associated with disputed
coverage issues will decline in the future, and eventually end, as the disputes
or related issues are resolved. To present CIGNA's environmental pollution
reserves and related activity that more directly relates to indemnity costs and
costs to defend policyholders against environmental pollution claims for the
nine months ended September 30, the following table excludes internal costs and
external litigation-related costs for insurance coverage disputes.
<TABLE>
<CAPTION>
===================================================================================
1995 1994
------------- ------------
(In millions) Gross Net Gross Net
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning reserves $558 $397 $444 $285
Plus incurred claims and claim adjustment
expenses 1,181 854 146 97
Less payments for claims and claim
adjustment expenses (130) (103) (58) (5)
- -----------------------------------------------------------------------------------
Ending reserves $1,609 $1,148 $532 $377
===================================================================================
</TABLE>
Since the mid-1980's, when CIGNA established a separate unit to handle its
asbestos-related and environmental pollution claims, it has followed an
aggressive resolution strategy for these claims. When appropriate, CIGNA has
settled claims with its policyholders, often obtaining full policy releases.
While CIGNA believes that its ultimate asbestos-related and environmental
pollution exposure has been reduced by this strategy, it has also resulted in
accelerating the recognition of incurred and paid claims and claim adjustment
expenses. A significant portion of the payments shown in the above table for
1995 are due to substantial settlements made pursuant to CIGNA's aggressive
resolution strategy. Paid environmental pollution claims are expected to
continue to be significant for the foreseeable future, but will vary depending
on the level of settlement activity. There will be less variability in the
future in the level of incurred claims and claim adjustment expenses because of
the increase in reserves
21
<PAGE> 24
in the third quarter of 1995.
Superfund, originally enacted in 1980, expires this year and new legislation
has been introduced in Congress. Any changes in Superfund relating to: (1)
allocating responsibility; (2) funding cleanup costs; or (3) establishing
cleanup standards could affect the liabilities of potentially responsible
parties and insurers. Due to uncertainties associated with the timing and
content of any future Superfund legislation, the effect on CIGNA's results of
operations, liquidity or financial condition cannot be reasonably estimated at
this time.
CIGNA's reserves for asbestos-related and environmental pollution claims, as
increased in the third quarter, are a reasonable estimate of its ultimate
liability for these claims, based on currently known facts, reasonable
assumptions where the facts are not known, current law (including Superfund),
and methodologies currently available. Reserving for these claims continues to
be a complex and uncertain process, requiring the use of informed estimates and
judgments. As additional experience and other data become available and are
reviewed, or as new or improved methodologies are developed, CIGNA's estimates
and judgments may be revised. Any such revisions could result in future
changes in reserves or reinsurance recoverables for these claims, which would
be reflected in CIGNA's results of operations for the period in which the
estimates are changed. While the effect of any such changes in reserves or
reinsurance recoverables on future results of operations could be material,
CIGNA does not expect such changes to have a material effect on its liquidity
or financial condition.
Losses for reinsurance exposures for 1995 primarily reflect $15 million for
London reinsurance exposures. For 1994, losses for reinsurance exposures
primarily reflect a $40 million charge resulting from a third quarter review of
reserves for certain reinsurance lines of business (principally closed books of
business) other than London reinsurance exposures.
The increase in workers' compensation loss development in 1995, compared with
1994, primarily reflects unfavorable claim experience for experience-rated
coverages.
Other prior year development in 1995 was primarily attributable to favorable
reserve development on commercial packages and commercial fire lines of
business, partially offset by unfavorable development on other long-term
exposures. For the comparable period in 1994, other prior year development was
primarily attributable to the general and excess liability line of business and
other long-term exposures, partially offset by favorable reserve development on
the commercial fire line of business.
CIGNA's reinsurance recoverables were approximately $7.0 billion and $7.1
billion as of September 30, 1995 and December 31, 1994, net of allowances of
$672 million and $435 million, respectively.
CIGNA expects to continue to have significant recoveries from its reinsurance
arrangements, including recoveries of asbestos-related and environmental
pollution losses. 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 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. During the third quarter of
1995, CIGNA increased the allowance for uncollectible reinsurance by $210
million pre-tax, including $75 million, which is reported as asbestos-related
and environmental pollution prior year development in the table on page 10.
The remainder of the increase ($135 million) relates to CIGNA's assumed
reinsurance business that it previously exited and domestic commercial
business. 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.
22
<PAGE> 25
In management's judgement, information currently available has been
appropriately considered in estimating CIGNA's loss reserves and reinsurance
recoverables.
During the third quarter, CIGNA announced its plan to reorganize its domestic
property and casualty subsidiaries into two separate operations. One operation
will manage ongoing business and the other will manage run-off policies and
related claims, including those for asbestos-related and environmental
pollution exposures. The plan is designed to create business structures that
enhance management's focus on its specialist strategy and to position the
ongoing business for future profitable growth, while at the same time providing
dedicated, specialized resources to manage each operation separately and
effectively. In addition, by placing the exposures associated with the run-off
businesses in a legal entity separate from the ongoing operation, CIGNA expects
to improve the claims paying rating for its ongoing operation. As part of its
overall reorganization plan, which is subject to regulatory approval, CIGNA has
committed to contribute $375 million of additional capital by December 31, 1995
to the run-off companies; such capital will be provided through internal
sources. Regulatory approval is expected by year-end.
In early 1995, A.M. Best Company, Inc. ("Best") assigned the rating of A-,
which was under review with "developing implications," to CIGNA's new domestic
property and casualty pool group and downgraded the INA Domestic Pool Group to
a B+ rating, which was under review with "negative implications". In October
1995 Best affirmed those ratings and removed the "under review" status of the
ratings based on its review of the domestic property and casualty operations,
including CIGNA's actions to strengthen its reserves for asbestos-related and
environmental pollution exposures and to reorganize its businesses into two
distinct operations. Best has indicated that it will review and issue ratings
on CIGNA's reorganized operations after the reorganization receives final
approval by the state insurance departments and that the ongoing operations are
expected to be rated A-.
23
<PAGE> 26
OTHER OPERATIONS
Other Operations primarily includes unallocated investment income, expenses
(principally debt service) and taxes. Also included in Other Operations are
the results of CIGNA's settlement annuity business and non-insurance operations
engaged primarily in investment and real estate activities.
Other Operations had losses of $12 million and $38 million for the third
quarter and nine months of 1995, compared with losses of $12 million and $41
million for the same periods last year. After-tax realized investment results
for the third quarter and nine months of 1995 were gains of $4 million and $16
million, respectively. After-tax realized investment results for the third
quarter and nine months of 1994 were gains of $3 million and losses of $3
million, respectively. Excluding after-tax realized investment results and a
$20 million after-tax gain from the first quarter 1994 sale of a business,
losses were $16 million and $15 million for the third quarters of 1995 and
1994; losses for the nine months of 1995 and 1994 were $54 million and $58
million. The declines in losses reflect overall lower expenses.
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 1995, cash and cash equivalents increased slightly from $1.7 billion as
of December 31, 1994 to $1.8 billion as of September 30, 1995. This increase
primarily reflects deposits and interest credited, net of withdrawals, to
contractholder deposit funds ($2.3 billion); proceeds from the issuance of
long-term debt ($88 million); and cash flows from operating activities ($343
million), primarily resulting from the timing of cash receipts and cash
disbursements. The increase in cash flows was partially offset by cash used
for investing activities ($2.5 billion), primarily net investment purchases
($2.4 billion); and payments of dividends on CIGNA common stock ($164 million).
Cash flow from operating activities was constrained by negative cash flow of
approximately $300 million from the property and casualty business, reflecting
claim payments related to insurance reserves established in prior periods.
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 businesses.
CIGNA had $1.07 billion of long-term debt outstanding at September 30, 1995,
compared with $1.39 billion at December 31, 1994. The decrease in long-term
debt primarily reflects (1) the reclassification of $150 million of CIGNA's 8%
Notes due September 1996 to short-term, and (2) conversions of $89 million of
CIGNA's 8.2% Convertible Debentures due in 2010 into 1.3 million shares of
CIGNA common stock. In addition, as a result of CIGNA's redemption (at par
plus accrued interest) of all unconverted 8.2% Convertible Debentures on
November 2, 1995, the remaining portion of such debt ($158 million) was
reclassified to short-term debt as of September 30, 1995. Substantially all of
this debt was converted into common stock as of the redemption date. The
decline in long-term debt was partially offset by the issuance of $25 million
of 7.17% Notes due in 2002, $25 million of 8.16% Notes due in 2000 and $36
million of medium-term notes. The proceeds from these issuances were used for
general corporate purposes. As of September 30, 1995, CIGNA had $800 million
remaining under a shelf registration statement that may be issued as debt,
equity securities or both, depending upon market conditions and CIGNA's capital
requirements.
24
<PAGE> 27
At September 30, 1995, CIGNA's short-term debt, primarily current maturities of
long-term debt and commercial paper, amounted to $571 million, an increase of
$300 million from December 31, 1994, primarily reflecting the reclassification
of currently maturing debt to short-term debt discussed above.
CIGNA contributed approximately $250 million of capital during 1994 to the
domestic property and casualty operations, as a result of continued losses. As
previously discussed in the Property and Casualty section, during the third
quarter CIGNA announced its plan to reorganize its domestic property and
casualty subsidiaries into two separate operations. CIGNA has committed to
contribute $375 million, contingent upon approval of the reorganization; such
funds will be provided through internal sources.
Standard & Poor's upgraded the outlook for CIGNA's corporate debt ratings from
negative to stable and Duff & Phelps announced that it expects to reaffirm
CIGNA's corporate debt and commercial paper ratings if the domestic property
and casualty reorganization plan is approved.
25
<PAGE> 28
INVESTMENT ASSETS
<TABLE>
<CAPTION>
======================================================================================
September 30, December 31,
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities: at fair value $22,866 $18,521
Fixed maturities: at amortized cost 11,943 12,296
Equity securities 792 1,806
Mortgage loans 10,433 9,970
Real estate 1,692 1,747
Other 7,826 6,579
- --------------------------------------------------------------------------------------
Total investment assets $55,552 $50,919
======================================================================================
</TABLE>
Additional information regarding CIGNA's investment assets is included in Note
3 to the third quarter 1995 Financial Statements and Notes 1, 3 , 4 and 18 to
the 1994 Financial Statements as well as the 1994 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,
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities 31% 32%
Mortgage loans 56% 57%
Real estate 59% 55%
======================================================================================
</TABLE>
26
<PAGE> 29
FIXED MATURITIES
Investments in fixed maturities (bonds) include publicly traded and private
placement debt securities; asset-backed securities, including collateralized
mortgage obligations (CMOs); and redeemable preferred stocks. As of September
30, 1995, fixed maturities classified as available for sale, including
policyholder share, had an aggregate fair value that was greater (less) than
amortized cost by approximately $1.3 billion, compared with approximately
($378) million as of December 31, 1994. The increase in unrealized
appreciation primarily reflects the downward movement in interest rates since
December 31, 1994.
QUALITY RATINGS
Quality ratings for bonds were as follows (shown as a percentage of bonds):
<TABLE>
<CAPTION>
======================================================================================
September 30, December 31,
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
Investment grade 95% 94%
Below investment grade:
Available for sale 2 1
Held to maturity 3 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 29% of below investment grade securities relate to
policyholder contracts.
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) 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Delinquent bonds $174 $156
Less cumulative write-downs 77 54
------- --------
97 102
------- --------
Restructured bonds 276 270
Less cumulative write-downs 59 65
------- --------
217 205
- -------------------------------------------------------------------------------------
Problem bonds $314 $307
=====================================================================================
</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, were $119 million as of September 30, 1995, compared with $141
million as of December 31, 1994. There were no cumulative write-downs for
potential problem bonds as of September 30, 1995 and December 31, 1994.
27
<PAGE> 30
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>
=======================================================================================
1995 1994
------------------------------ ------------------------------
Policy- Policy-
holder holder
(In millions) Contracts CIGNA Total Contracts CIGNA Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance -
January 1 $50 $73 $123 $54 $69 $123
Additions to
cumulative
write-downs 18 28 46 16 14 30
Charge-offs upon
sales,
repayments and
other (15) (11) (26) (11) (13) (24)
Transfers to equity
securities (1) (2) (3) (4) (2) (6)
- --------------------------------------------------------------------------------------
Ending balance -
September 30 $52 $88 $140 $55 $68 $123
=======================================================================================
</TABLE>
Included in the total ending balances above as of September 30, 1995 and 1994
as well as the balance at December 31, 1994 were $4 million for bonds no longer
classified as problem or potential problem bonds.
The adverse after-tax effect of write-downs on CIGNA's results for the quarter
and nine months ended September 30, 1995 was $12 million and $18 million,
respectively, compared with $2 million and $9 million for the same periods of
1994.
During the nine months of 1995 and 1994, bonds with a carrying value of $3
million and $27 million, respectively, were restructured into equity
securities. As of September 30, 1995 and 1994, CIGNA had cumulative
write-downs for equity securities of $60 million (including $16 million
attributable to policyholder contracts), compared with $75 million (including
$30 million attributable to policyholder contracts). As of December 31, 1994,
cumulative write-downs were $57 million (including $14 million attributable to
policyholder contracts).
28
<PAGE> 31
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 results is shown in the following table:
<TABLE>
<CAPTION>
==============================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------- ------------------------------------------
1995 1994 1995 1994
------------------ ----------------- ------------------ -------------------
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 $5 $10 $7 $10 $16 $31 $19 $31
Less net
investment
income received 1 3 2 3 6 11 8 11
------------------ ----------------- ------------------ -------------------
Forgone
investment
income 4 7 5 7 10 20 11 20
Tax effect -- (2) -- (2) -- (7) -- (7)
- --------------------------------------------------------------------------------------------------------------
Net effect of
non-accruals $4 $5 $5 $5 $10 $13 $11 $13
==============================================================================================================
Forgone
investment
income by type:
Delinquent
bonds $2 $5 $2 $5 $5 $13 $5 $12
Restructured
bonds 2 2 3 2 5 7 6 8
------------------ ----------------- ------------------ -------------------
Forgone
investment
income 4 7 5 7 10 20 11 20
Tax effect -- (2) -- (2) -- (7) -- (7)
- --------------------------------------------------------------------------------------------------------------
Net effect of
non-accruals $4 $5 $5 $5 $10 $13 $11 $13
==============================================================================================================
</TABLE>
29
<PAGE> 32
MORTGAGE LOANS
<TABLE>
<CAPTION>
======================================================================================
September 30, December 31,
1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans (in millions) $10,433 $9,970
By property type:
Office buildings 36% 37%
Retail facilities 42 39
Apartment buildings 10 11
Hotels 6 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 and borrower to reduce its exposure to potential losses.
Adverse conditions in real estate markets and more stringent lending practices
by financial institutions have affected scheduled maturities of mortgage loans.
During the nine months of 1995, $606 million of mortgage loans was scheduled to
mature, of which $165 million was paid in full, $114 million was extended at
existing loan rates for a weighted average of seven months and $246 million was
refinanced at current market rates. Mortgage loan extensions and refinancings
are loans in good standing. A significant portion of the remaining scheduled
maturities was problem mortgage loans ($43 million -- foreclosed; $17 million
- -- restructured; and $12 million -- delinquent). 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.
30
<PAGE> 33
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, 1995, restructured mortgage loans
with a carrying value of approximately $350 million had their original maturity
dates extended, with an average extension of approximately four years.
Restructured mortgage loans generated annualized cash returns averaging
approximately 7 1/2% as of September 30, 1995. During the nine months of 1995,
approximately $70 million of restructured mortgage loans were reclassified to
loans in good standing since they were performing under the terms of the
restructured loan agreement and, at the time of restructure, such terms were
generally equivalent to terms that CIGNA was willing to accept for a comparable
new loan.
Problem mortgage loans, including amounts attributable to policyholder
contracts, and related valuation reserves were as follows:
<TABLE>
<CAPTION>
=============================================================================
September 30, December 31,
(In millions) 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Delinquent mortgage loans $100 $249
Less valuation reserves 16 58
----- -------
84 191
----- -------
Restructured mortgage loans 546 671
Less valuation reserves 43 66
----- -------
503 605
- -----------------------------------------------------------------------------
Problem mortgage loans $587 $796
=============================================================================
</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,
1995, all 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) 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
Potential problem mortgage loans before reserves $247 $405
Less valuation reserves 25 55
- --------------------------------------------------------------------------------------
Potential problem mortgage loans $222 $350
======================================================================================
</TABLE>
As discussed in Note 2 to the Financial Statements, CIGNA adopted SFAS Nos. 114
and 118. CIGNA's problem and potential problem mortgage loans are considered
impaired under this guidance. Implementation of these standards as of January
1, 1995 resulted in a decline of $29 million in valuation reserves for
potential problem mortgage loans, $16 million attributable to policyholder
contracts and $13 million attributable to CIGNA.
31
<PAGE> 34
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>
=====================================================================================
1995 1994
--------------------------- ---------------------------
Policy- Policy-
holder holder
(In millions) Contracts CIGNA Total Contracts CIGNA Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance -
January 1 $95 $84 $179 $105 $111 $216
Net increase
(decrease) in
valuation reserves 4 (1) 3 24 12 36
Charge-offs upon
repayments and other (18) (26) (44) (18) (15) (33)
Transfers to real
estate (22) (32) (54) (10) (19) (29)
- -------------------------------------------------------------------------------------
Ending balance -
September 30 $59 $25 $84 $101 $89 $190
=====================================================================================
</TABLE>
The after-tax effect of the net increase (decrease) in valuation reserves on
CIGNA's results was a charge (benefit) of $2 million and ($1) million for the
third quarter and nine months of 1995, compared with $2 million and $8 million
for the same periods of 1994.
32
<PAGE> 35
EFFECT OF NON-ACCRUALS FOR MORTGAGE LOANS
Interest income is recognized on problem mortgage loans only when payment is
received. The adverse (favorable) effect of non-accruals for mortgage loans
(in total and by type) on policyholder contracts and on CIGNA's results is
shown in the following table:
<TABLE>
<CAPTION>
===============================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------- -------------------------------------------
1995 1994 1995 1994
----------------- ------------------ ------------------- --------------------
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 $11 $6 $18 $11 $37 $22 $59 $35
Less net
investment
income received 12 5 14 6 33 21 40 21
----------------- ------------------ ------------------- --------------------
Forgone
investment
income (1) 1 4 5 4 1 19 14
Tax effect -- -- -- (2) -- -- -- (5)
- ---------------------------------------------------------------------------------------------------------------
Net effect of
non-accruals ($1) $1 $4 $3 $4 $1 $19 $9
===============================================================================================================
Forgone
investment
income by type:
Delinquent
mortgage
loans $1 $1 $3 $3 $4 $ -- $10 $9
Restructured
mortgage
loans (2) -- 1 2 -- 1 9 5
----------------- ------------------ ------------------- --------------------
Forgone
investment
income (1) 1 4 5 4 1 19 14
Tax effect -- -- -- (2) -- -- -- (5)
- ---------------------------------------------------------------------------------------------------------------
Net effect of
non-accruals ($1) $1 $4 $3 $4 $1 $19 $9
===============================================================================================================
</TABLE>
33
<PAGE> 36
REAL ESTATE
Investment real estate includes real estate held for the production of income
and real estate held for sale, primarily 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) 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Real estate held for sale (primarily foreclosure $1,297 $1,228
properties)
Less cumulative write-downs 325 281
Less valuation reserves 59 55
------- ------
913 892
------- ------
Real estate held for the production of income 829 904
Less valuation reserves 50 49
------- ------
779 855
- -------------------------------------------------------------------------------------
Investment real estate $1,692 $1,747
=====================================================================================
</TABLE>
REAL ESTATE WRITE-DOWNS AND RESERVES
The activity in cumulative write-downs and valuation reserves for real estate
during the nine months ended September 30 was as follows:
<TABLE>
<CAPTION>
====================================================================================
1995 1994
------------------------- --------------------------
Policy- Policy-
holder holder
(In millions) Contracts CIGNA Total Contracts CIGNA Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance -
January 1 $212 $173 $385 $239 $160 $399
Additions to
cumulative
write-downs 7 4 11 9 6 15
Net increase in
valuation
reserves 7 4 11 3 4 7
Charge-offs upon
sales and
other (18) (9) (27) (51) (17) (68)
Transfers from
mortgage loans 22 32 54 10 19 29
- ------------------------------------------------------------------------------------
Ending balance -
September 30 $230 $204 $434 $210 $172 $382
====================================================================================
</TABLE>
There was no adverse after-tax effect from write-downs and valuation reserves
on CIGNA's results for the quarter ended September 30, 1995, compared with $3
million for the same period last year. The adverse after-tax effect from
write-downs and the net increase in valuation reserves on CIGNA's results for
the nine months ended September 30, 1995 was $5 million, compared with $7
million for the nine months of 1994.
34
<PAGE> 37
SUMMARY
The adverse (favorable) 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 results were as follows:
<TABLE>
<CAPTION>
====================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ---------------------------------------
1995 1994 1995 1994
--------------- -------------- --------------- -----------------
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 $9 $12 $6 $2 $18 $18 $16 $9
Mortgage loans 4 2 9 2 4 (1) 24 8
Real estate 3 -- (1) 3 14 5 12 7
- -----------------------------------------------------------------------------------------------------
Total $16 $14 $14 $7 $36 $22 $52 $24
====================================================================================================
Non-accruals:
Bonds $4 $5 $5 $5 $10 $13 $11 $13
Mortgage loans (1) 1 4 3 4 1 19 9
- -----------------------------------------------------------------------------------------------------
Total $3 $6 $9 $8 $14 $14 $30 $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 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.
35
<PAGE> 38
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
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
an insurer defending coverage claims brought against it by its
policyholders or other insurers. One such area of litigation
involves policy coverage and judicial interpretation of legal
liability for asbestos-related and environmental pollution claims.
While the outcome of all litigation involving CIGNA, including
insurance-related litigation, cannot be determined, litigation
(including that related to asbestos and environmental pollution
claims) is not expected to result in losses that differ from recorded
reserves by amounts that would be material to results of operations,
liquidity or financial condition. Also, reinsurance recoveries
related to claims in litigation, net of allowance for uncollectible
reinsurance, are not expected to result in recoveries that differ
from recorded recoverables by amounts that would be material to
results of operations, liquidity or financial condition.
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) CIGNA filed the following Reports on Form 8-K:
- dated October 31, 1995 containing a news release regarding
its third quarter results; and
- dated October 2, 1995 regarding plans to strengthen net
reserves for asbestos-related and environmental pollution
claims and other exposures by $1.2 billion and restructure
the domestic property and casualty operations.
-36-
<PAGE> 39
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, 1995
-37-
<PAGE> 40
Exhibit Index
<TABLE>
<CAPTION>
Method of
Number Description Filing
- ------ ----------- ----------
<S> <C> <C>
10.1 Description of July 26, 1995 Filed herewith.
Amendment to CIGNA
Supplemental Pension Plan
10.2 Description of July 26, 1995 Filed herewith.
Amendment to the CIGNA Corporation
Severance Benefits Plan for
Members of the Executive Group
10.3 Description of Stock Compensation Filed herewith.
Plan for Non-Employee Directors
of CIGNA Corporation, as amended
and restated, effective
July 1, 1995
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.
</TABLE>
-38-
<PAGE> 1
Exhibit 10.1
DESCRIPTION OF JULY 26, 1995 AMENDMENT TO CIGNA SUPPLEMENTAL PENSION PLAN
The adoption of an amendment to the CIGNA Pension Plan shall have no
effect on the interest rate assumptions used in the calculation of lump sum
distributions of accrued benefits under the CIGNA Supplemental Pension Plan,
and the "applicable interest rate" used under the CIGNA Supplemental Pension
Plan shall continue to be the "Applicable Interest Rate" as currently defined
in Section 1.8 of the CIGNA Pension Plan.
<PAGE> 1
Exhibit 10.2
DESCRIPTION OF JULY 26, 1995 AMENDMENT TO THE CIGNA CORPORATION
SEVERANCE BENEFITS PLAN FOR MEMBERS OF THE EXECUTIVE GROUP
The CIGNA Corporation Severance Benefits Plan for Members of the
Executive Group (As Amended and Restated July 27, 1994) (the "Severance Plan")
has been amended, effective July 26, 1995, regarding benefits available in the
event of a Termination upon a Change of Control. If payments to the
Participant under the Severance Plan and any other plans or programs maintained
by the Corporation or its subsidiaries would create for such Participant an
excise tax liability under Section 4999 of the Internal Revenue Code of 1986
(the "Code") for "excess parachute payments" as defined in Section 280G of the
Code, then the Severance Plan shall pay an additional benefit ("Additional
Payment") to the Participant sufficient to offset any excise tax and other
adverse tax consequences due to any mandatory deferral of Participant's
compensation followed by a Change of Control of the Corporation.
<PAGE> 1
Exhibit 10.3
Description of
Stock Compensation Plan
for Non-Employee Directors
of CIGNA Corporation
(as amended and restated, effective July 1, 1995)
The Stock Compensation Plan for Non-Employee Directors of CIGNA
Corporation, as amended (the "Plan"), provides certain stock compensation
arrangements to members of CIGNA Corporation's Board of Directors (the "Board")
who are not in the employ of the company.
The Plan provides that at least $12,000 of the annual retainer paid to
Directors for their services as Directors (and as members of committees of the
Board) must be taken either in shares of CIGNA Corporation Common Stock or
deferred pursuant to the terms of the Deferred Compensation Plan for Directors
of CIGNA Corporation. If payment is made in shares of Common Stock, the shares
are issued in four equal installments within 30 days of the end of each
calendar quarter. The number of shares in each payment is determined by the
closing price at which the Common Stock trades on the last trade date for
Common Stock in the quarter for which payment is being made. The above
provisions relating to amount, price and timing of Common Stock payments may
not be amended more than once every six months (except where an amendment is
necessary to comply with certain federal laws).
In addition, the Plan provides that Directors may, with respect to any
other fees paid to them for services as Directors, defer receipt of all or any
portion thereof or elect to receive all or any portion thereof in either cash
or an equivalent amount of Common Stock (provided that no fractional shares may
be issued).
<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,
1995 1994 1995 1994
==============================================================================================================================
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
- ---------------------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHARES $ (566) $ 123 $ (71) $ 372
- -------------------------------------------------------==============================------===================================
WEIGHTED AVERAGE SHARES:
Common shares 72,908,117 72,241,829 72,561,464 72,211,964
Common share equivalents applicable
to stock options * 112,170 * 105,570
- ------------------------------------------------------------------------------------------------------------------------------
Total 72,908,117 72,353,999 72,561,464 72,317,534
- -------------------------------------------------------==============================------===================================
PRIMARY EARNINGS PER SHARE $ (7.76) $ 1.70 $ (0.98) $ 5.14
- -------------------------------------------------------==============================------===================================
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHARES:
Net income (loss) $ (566) $ 123 $ (71) $ 372
Adjusted for:
Interest expense (net of tax) on
convertible debentures * 3 * 10
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shares $ (566) $ 126 $ (71) $ 382
- -------------------------------------------------------==============================------===================================
WEIGHTED AVERAGE SHARES:
Common shares 72,908,117 72,241,829 72,561,464 72,211,964
Common share equivalents applicable
to stock options * 112,170 * 127,753
Assumed conversion of convertible debentures * 3,626,102 * 3,626,102
- ------------------------------------------------------------------------------------------------------------------------------
Total 72,908,117 75,980,101 72,561,464 75,965,819
- ------------------------------------------------------===============================-----====================================
FULLY DILUTED EARNINGS PER SHARE $ (7.76) $ 1.66 $ (0.98) $ 5.03
- ------------------------------------------------------===============================-----====================================
</TABLE>
* Anti-dilutive; therefore effects have been excluded.
<PAGE> 1
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
================================================================================================================================
<S> <C> <C>
Income (loss) before income taxes $ (177) $ 552
--------- -------
Fixed charges included in income (loss):
Interest expense 94 91
Interest portion of rental expense 72 77
--------- -------
Total fixed charges included in income (loss) 166 168
--------- -------
Income (loss) available for fixed charges $ (11) $ 720
- ----------------------------------------------------------------------------------------------------============================
RATIO OF EARNINGS TO FIXED CHARGES - (A) 4.3
- ----------------------------------------------------------------------------------------------------============================
</TABLE>
(A) As a result of a pre-tax loss, the loss available for fixed charges of
$11 million is insufficient to cover total fixed charges of $166
million.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
EXHIBIT 27
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS INCLUDED IN ITEM 1 OF PART 1 TO CIGNA'S REPORT ON FORM 10-Q FOR THE
PERIOD ENDED SEPTEMBER 30, 1995 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-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 22,866
<DEBT-CARRYING-VALUE> 11,943
<DEBT-MARKET-VALUE> 12,750
<EQUITIES> 792
<MORTGAGE> 10,433
<REAL-ESTATE> 1,692
<TOTAL-INVEST> 55,552
<CASH> 1,775
<RECOVER-REINSURE> 7,427<F1>
<DEFERRED-ACQUISITION> 1,148
<TOTAL-ASSETS> 93,749
<POLICY-LOSSES> 11,360
<UNEARNED-PREMIUMS> 2,409
<POLICY-OTHER> 19,857
<POLICY-HOLDER-FUNDS> 29,488
<NOTES-PAYABLE> 1,639
<COMMON> 85
0
0
<OTHER-SE> 6,309
<TOTAL-LIABILITY-AND-EQUITY> 93,749
10,340
<INVESTMENT-INCOME> 3,192
<INVESTMENT-GAINS> 226
<OTHER-INCOME> 391
<BENEFITS> 10,687
<UNDERWRITING-AMORTIZATION> 886
<UNDERWRITING-OTHER> 2,753
<INCOME-PRETAX> (177)
<INCOME-TAX> (106)
<INCOME-CONTINUING> (71)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71)
<EPS-PRIMARY> (0.98)
<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>AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES
</FN>
</TABLE>
