<PAGE> 1
CONFORMED COPY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____ to _____
Commission file number 1-8323
------
CIGNA Corporation
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1059331
------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE LIBERTY PLACE, PHILADELPHIA, PA. 19192-1550
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 761-1000
--------------
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
----- ----
As of September 30, 1996, 75,180,739 shares of the issuer's Common
Stock were outstanding.
<PAGE> 2
CIGNA CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
and Retained Earnings 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash
Flows 3
Notes to Financial Statements 4
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 20
SIGNATURE 21
EXHIBIT INDEX 22
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
==================================================================================================
<S> <C> <C> <C> <C>
REVENUES
Premiums and fees $ 3,444 $ 3,408 $ 10,333 $ 10,340
Net investment income 1,069 1,080 3,263 3,192
Other revenues 154 134 448 391
Realized investment gains 18 20 17 226
-------- --------- --------- ---------
Total revenues 4,685 4,642 14,061 14,149
-------- --------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,064 4,266 9,337 10,687
Policy acquisition expenses 283 290 877 886
Other operating expenses 904 969 2,710 2,753
-------- --------- --------- ---------
Total benefits, losses and expenses 4,251 5,525 12,924 14,326
-------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 434 (883) 1,137 (177)
-------- --------- --------- ---------
Income tax (benefits):
Current 152 65 264 176
Deferred 1 (382) 123 (282)
-------- --------- --------- ---------
Total income taxes 153 (317) 387 (106)
-------- --------- --------- ---------
NET INCOME (LOSS) 281 (566) 750 (71)
Dividends declared (60) (56) (182) (164)
Retained earnings, beginning of period 4,388 4,439 4,041 4,052
- --------------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 4,609 $ 3,817 $ 4,609 $ 3,817
- --------------------------------------------------================================================
EARNINGS (LOSS) PER SHARE $ 3.69 $ (7.76) $ 9.80 $ (0.98)
- --------------------------------------------------================================================
DIVIDENDS DECLARED PER SHARE $ 0.80 $ 0.76 $ 2.40 $ 2.28
- --------------------------------------------------================================================
</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,
1996 1995
========================================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost,
$32,626; $33,275) $ 33,888 $ 36,241
Equity securities, at fair value (cost, $598; $565) 712 661
Mortgage loans 11,278 11,010
Policy loans 7,299 7,107
Real estate 1,275 1,283
Other long-term investments 234 295
Short-term investments 697 1,113
--------- ---------
Total investments 55,383 57,710
Cash and cash equivalents 2,088 1,559
Accrued investment income 1,103 908
Premiums, accounts and notes receivable 4,398 4,268
Reinsurance recoverables 7,352 7,120
Deferred policy acquisition costs 1,211 1,109
Property and equipment, net 798 864
Deferred income taxes, net 2,043 1,866
Other assets 1,066 1,149
Goodwill 1,078 1,118
Separate account assets 20,827 18,232
- -----------------------------------------------------------------------------------------------------
Total $ 97,347 $ 95,903
- ----------------------------------------------------------------------------=========================
LIABILITIES
Contractholder deposit funds $ 29,692 $ 30,055
Unpaid claims and claim expenses 19,159 19,303
Future policy benefits 11,777 12,007
Unearned premiums 2,065 2,176
--------- ---------
Total insurance and contractholder liabilities 62,693 63,541
Accounts payable, accrued expenses and other liabilities 5,364 5,408
Current income taxes 252 187
Short-term debt 268 414
Long-term debt 1,037 1,066
Separate account liabilities 20,725 18,130
- -----------------------------------------------------------------------------------------------------
Total liabilities 90,339 88,746
- -----------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 7
SHAREHOLDERS' EQUITY
Common stock (shares issued, 88; 87) 88 87
Additional paid-in capital 2,557 2,536
Net unrealized appreciation - fixed maturities 456 1,025
Net unrealized appreciation - equity securities 77 73
Net translation of foreign currencies (31) (27)
Retained earnings 4,609 4,041
Less treasury stock, at cost (748) (578)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 7,008 7,157
- -----------------------------------------------------------------------------------------------------
Total $ 97,347 $ 95,903
- ----------------------------------------------------------------------------=========================
SHAREHOLDERS' EQUITY PER SHARE $ 93.22 $ 93.76
- ----------------------------------------------------------------------------=========================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
2
<PAGE> 5
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
===============================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss) $ 750 $ (71)
Adjustments to reconcile net income(loss) to net cash
provided by (used in) operating activities:
Insurance liabilities, net of reinsurance recoverables (201) 904
Premiums, accounts and notes receivable (39) (134)
Accounts payable, accrued expenses, other liabilities and
current income taxes (123) 275
Deferred income taxes, net 123 (282)
Realized investment gains (17) (226)
Gain on sale of subsidiaries and other equity interests (18) --
Other, net (134) (123)
----------- ----------
Net cash provided by operating activities 341 343
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities - available-for-sale 4,925 5,010
Equity securities 304 1,541
Mortgage loans 315 279
Other (primarily short-term investments) 8,871 10,745
Investment maturities and repayments:
Fixed maturities - available-for-sale 2,891 770
Fixed maturities - held-to-maturity -- 1,510
Mortgage loans 542 345
Investments purchased:
Fixed maturities - available-for-sale (6,879) (7,829)
Fixed maturities - held-to-maturity -- (1,336)
Equity securities (317) (348)
Mortgage loans (1,247) (1,116)
Other (primarily short-term investments) (8,627) (11,990)
Proceeds from sale of subsidiaries and other equity interests 66 --
Other, net (106) (113)
----------- ----------
Net cash provided by (used in) investing activities 738 (2,532)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 4,900 5,597
Withdrawals from contractholder deposit funds (4,944) (3,287)
Net change in commercial paper (11) (16)
Issuance of long-term debt -- 88
Repurchases of common stock (161) --
Repayment of debt (158) (3)
Issuance of common stock 11 17
Dividends paid (180) (164)
----------- ----------
Net cash provided by (used in) financing activities (543) 2,232
----------- ----------
Effect of foreign currency rate changes on cash (7) 39
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 529 82
Cash and cash equivalents, beginning of period 1,559 1,693
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,088 $ 1,775
- ---------------------------------------------------------------------------------==============================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 194 $ 198
Interest paid $ 88 $ 102
- ---------------------------------------------------------------------------------------------------------------
</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 1996
presentation.
The interim financial statements are unaudited but include all adjustments
(consisting of normal recurring adjustments, except for the adjustments noted
in the third quarter 1996 Management's Discussion and Analysis and described in
the notes) necessary, in the opinion of management, for a fair statement of
financial position and results of operations for the periods reported.
The preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of
portions of the insurance business as well as competitive and other market
conditions, call for caution in drawing specific conclusions from interim
results.
NOTE 2-NEW ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No.
121 requires write-down to fair value when long-lived assets to be held and
used are impaired. Long-lived assets to be disposed, including real estate
held for sale, must be carried at the lower of cost or fair value less costs to
sell. Depreciation of assets to be disposed of is prohibited. In the first
quarter of 1996, CIGNA implemented SFAS No. 121. The effect of adoption of
this standard was not material to CIGNA's results of operations, liquidity or
financial condition.
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," effective for 1996. This statement provides guidance on the
prospective accounting and reporting for the cost of stock-based compensation.
The cost related to stock options is permitted to be recorded or disclosed, and
such cost must be measured at the grant date based upon estimated fair values
using option pricing models. CIGNA will disclose the effect of stock-based
compensation in its 1996 annual financial statements.
In 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," which provides guidance on the accounting and disclosure for
impaired loans. In 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," which
eliminates the income recognition requirements of SFAS No. 114. CIGNA adopted
SFAS Nos. 114 and 118 in the first quarter of 1995. The effect of adoption of
these standards was not material to CIGNA's results of operations, liquidity or
financial condition.
NOTE 3-INVESTMENTS
REALIZED GAINS AND LOSSES
Realized gains and losses on investments, excluding policyholder share, were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Realized gains (losses):
Fixed maturities $3 $18 $-- $29
Equity securities 4 2 13 182
Mortgage loans -- (2) (20) --
Real estate 6 1 7 9
Other investments 5 1 17 6
---------------------------------------
18 20 17 226
Income taxes 7 7 8 53
- ------------------------------------------------------------------
Net realized gains $11 $13 $9 $173
- ---------------------------=======================================
</TABLE>
4
<PAGE> 7
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) 1996 1995 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Proceeds from sales $1,543 $2,155 $5,209 $6,551
Gross gains on sales 46 53 140 326
Gross losses on sales (40) (33) (120) (101)
- --------------------------------------------------------------
</TABLE>
During the third quarter and nine months of 1996, Net Unrealized Appreciation -
Fixed Maturities included in Shareholders' Equity, which is net of
policyholder-related amounts and deferred income taxes, increased by $12
million and decreased by $569 million, respectively, compared with increases of
$46 million and $728 million for the same periods last year.
NOTE 4-EARNINGS PER SHARE
Earnings per share were based on net income (loss) divided by weighted average
common shares, including common share equivalents, as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 1996 1995 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average
common shares 76,055 72,908 76,585 72,561
- --------------------------------------------------------------
</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 of
1995, CIGNA announced its intention to redeem (at par value plus accrued
interest) all 8.2% Debt outstanding on November 2, 1995. Substantially all of
the $158 million of 8.2% Debt outstanding as of September 30, 1995 was
converted into CIGNA common stock as of the redemption date.
Assuming all of CIGNA's 8.2% Debt had been converted to CIGNA common stock (3.6
million shares) on January 1, 1995 and the related interest expense ($2 million
after-tax for the third quarter of 1995; $9 million after-tax for the nine
months of 1995) was excluded from net loss, the loss per share for the third
quarter and nine months of 1995 would have been $7.40 and $0.82, respectively.
Common shares held as Treasury shares were 12,390,283 and 10,913,959 as of
September 30, 1996 and 1995, respectively.
NOTE 5-INCOME TAXES
CIGNA's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS), and provisions are made in the financial statements in
anticipation of the results of these audits. The IRS has completed audits of
the years 1982 through 1990. One outstanding issue, which relates only to
years prior to 1989, could result in an assessment of approximately $215
million. CIGNA is contesting this issue in court. Although the outcome is
uncertain, management believes that CIGNA should prevail.
In management's opinion, adequate tax liabilities have been established for all
years.
As of September 30, 1996, CIGNA had tax basis operating loss carryforwards of
approximately $250 million.
NOTE 6-REINSURANCE
In the normal course of business, CIGNA's insurance subsidiaries enter into
agreements, primarily relating to short-duration contracts, to assume and cede
reinsurance with other insurance companies. Reinsurance is ceded primarily to
limit losses from large exposures and to permit recovery of a portion of direct
losses, although ceded reinsurance does not relieve the originating insurer of
liability. CIGNA evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities or economic characteristics of its reinsurers. Failure of
reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies or
disputes, could result in losses. Allowances for uncollectible amounts were
$718 million and $700 million as of September 30, 1996 and December 31, 1995,
respectively. During the third quarter of 1995, CIGNA increased the allowance
for uncollectible reinsurance by $210 million pre-tax
5
<PAGE> 8
($138 million after-tax) primarily for asbestos and environmental losses and
for assumed reinsurance business that CIGNA previously exited. While future
charges for unrecoverable reinsurance may materially affect results of
operations in future periods, such amounts are not expected to have a material
adverse effect on CIGNA's liquidity or financial condition.
For the third quarter and nine months of 1996, premiums and fees were net of
ceded premiums of $619 million and $1.6 billion, respectively. For the third
quarter and nine months of 1995, premiums and fees were net of ceded premiums
of $493 million and $1.6 billion, respectively. In addition, benefits, losses
and settlement expenses for the third quarter and nine months of 1996 were net
of reinsurance recoveries of $410 million and $1.2 billion, respectively.
Benefits, losses and settlement expenses for the third quarter and nine months
of 1995 were net of reinsurance recoveries of $572 million and $1.4 billion,
respectively.
NOTE 7-CONTINGENCIES AND OTHER MATTERS
FINANCIAL GUARANTEES
CIGNA, through its subsidiaries, is contingently liable for various financial
guarantees provided in the ordinary course of business. These include
guarantees for the repayment of industrial revenue bonds as well as other debt
instruments. Although the ultimate outcome of any loss contingencies arising
from CIGNA's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on
CIGNA's liquidity or financial condition.
REGULATORY AND INDUSTRY DEVELOPMENTS
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to:
- revise the system of funding cleanup of environmental damages;
- reform the federal tax system;
- reinterpret insurance contracts long after the policies were written to
provide coverage unanticipated by CIGNA;
- restrict insurance pricing and the application of underwriting
standards;
- reform health care; and
- expand regulation.
In August 1996, Congress passed legislation that phases out over a three year
period the tax deductibility of policy loan interest for most leveraged COLI
products. The effect of the legislation on the Individual Financial Services
segment is uncertain, but is not expected to be material over the next several
years. However, over the longer term, a substantial portion of revenues and
earnings from leveraged COLI are expected to be eliminated, which could have a
material adverse effect on results of operations for the segment. The effect
of this legislation is not expected to be material to CIGNA's consolidated
results of operations, liquidity or financial condition.
Proposed legislation for Superfund reform remains under consideration by
Congress. Any changes in Superfund relating to 1) allocating responsibility,
2) funding cleanup costs, or 3) establishing cleanup standards could affect the
liabilities of potentially responsible parties and insurers. Due to
uncertainties associated with the timing and content of any future Superfund
legislation, the effect on CIGNA's results of operations, liquidity or
financial condition cannot be reasonably estimated at this time.
CIGNA expects proposals for federal and state legislation seeking some health
care insurance reforms and limitations on formation and operation of efficient
health care networks. Due to uncertainties associated with the timing and
content of any health care legislation, the effect on CIGNA's future results of
operations, liquidity or financial condition cannot be reasonably estimated at
this time.
6
<PAGE> 9
The National Association of Insurance Commissioners is currently addressing
risk-based capital guidelines for health maintenance organizations (HMOs).
CIGNA does not expect such guidelines to have a material adverse effect on its
future results of operations, liquidity or financial condition.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain.
PROPERTY AND CASUALTY UNPAID CLAIMS AND CLAIM EXPENSE RESERVES AND REINSURANCE
RECOVERABLES
CIGNA's property and casualty loss reserves are an estimate of future payments
for reported and unreported claims for losses and related expenses with respect
to insured events that have occurred. The basic assumption underlying the many
standard actuarial and other methods used in the estimation of property and
casualty loss reserves is that past experience is an appropriate basis for
predicting future events. However, current trends and other factors that would
modify past experience are also considered. The process of establishing loss
reserves is subject to uncertainties that are normal, recurring and inherent in
the property and casualty business.
CIGNA continually attempts to improve its loss estimation process by refining
its process of analyzing loss development patterns, claims payments and other
information, but there remain many reasons for adverse development of estimated
ultimate liabilities. For example, unanticipated changes in workers'
compensation laws have at times significantly affected the ability of insurers
to estimate liabilities for unpaid losses and related expenses.
CIGNA completed a comprehensive review of its asbestos-related and
environmental pollution exposures during the third quarter of 1995 and
increased its related reserves by $255 million ($194 million, net of
reinsurance) for asbestos-related exposures and approximately $1.2 billion
($861 million, net of reinsurance) for environmental pollution exposures.
Reserving for all property and casualty claims and related reinsurance
recoverables continues to be a complex and uncertain process, requiring the use
of informed estimates and judgments. CIGNA's estimates and judgments may be
revised as additional experience and other data become available and are
reviewed, as new or improved methodologies are developed or as current law
changes. Any such revisions could result in future changes in estimates of
losses or reinsurance recoverables, and would be reflected in CIGNA's results
of operations for the period in which the estimates are changed. While the
effect of any such changes in estimates of losses or reinsurance recoverables
could be material to future results of operations, CIGNA does not expect such
changes to have a material effect on its liquidity or financial condition.
In management's judgement, information currently available has been
appropriately considered in estimating CIGNA's loss reserves and reinsurance
recoverables.
LITIGATION
CIGNA is continuously involved in numerous lawsuits arising, for the most part,
in the ordinary course of business, either as a liability insurer defending
third-party claims brought against its insureds or as an insurer defending
coverage claims brought against it by its policyholders or other insurers. One
such area of litigation involves policy coverage and judicial interpretation of
legal liability for asbestos-related and environmental pollution claims.
While the outcome of all litigation involving CIGNA, including
insurance-related litigation, cannot be determined, litigation (including that
related to asbestos and environmental pollution claims) is not expected to
result in losses that differ from recorded reserves by amounts that would be
material to results of operations, liquidity or financial condition. Also,
reinsurance recoveries related to claims in litigation, net of the allowance
for uncollectible reinsurance, are not expected to result in recoveries that
differ from recorded recoverables by amounts that would be material to results
of operations, liquidity or financial condition.
OTHER POSTRETIREMENT BENEFITS PLANS
In July 1996, CIGNA's Board of Directors approved an amendment to CIGNA's
post-retirement medical benefit plan effective as of January 1, 1997. The plan
amendment as well as a change in actuarial assumptions in connection with
amending the plan is expected to reduce the accumulated benefit obligation by
approximately $150 million. Beginning in the third quarter of 1996, this
reduction is being amortized into income over the average remaining service
period of 17 years. The effect of this plan amendment and change in actuarial
7
<PAGE> 10
assumptions is not material to CIGNA's results of operations, liquidity or
financial condition.
COST REDUCTION INITIATIVES
During the third quarter of 1995, CIGNA implemented cost reduction initiatives
in the Domestic Property and Casualty operations and the Employee Life and
Health Benefits segment, which resulted in charges of $85 million ($55 million
after-tax) and $30 million ($20 million after-tax), respectively. The cost
reduction initiatives, when fully implemented, are estimated to result in
annual after-tax savings of approximately $55 million and $40 million,
respectively, primarily based on the elimination of certain payroll and
payroll-related costs and, to a lesser extent, lease costs. The savings in the
near term for the Employee Life and Health Benefits segment are expected to be
partially offset by increased investments in business growth and service
initiatives. As of September 30, 1996, there were no material changes to the
costs associated with, or the anticipated annual savings related to, these
initiatives. Through September 30, 1996, approximately $46 million of
severance was paid to approximately 3,000 terminated employees of the Property
and Casualty and Employee Life and Health Benefits segments.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion addresses the financial condition of CIGNA Corporation
(CIGNA) as of September 30, 1996, compared with December 31, 1995, and its
results of operations for the quarter and nine months ended September 30, 1996,
compared with the same periods last year. This discussion should be read in
conjunction with Management's Discussion and Analysis included in CIGNA's 1995
Annual Report to Shareholders (pages 8 through 23) and in CIGNA's reports on
Form 10-Q for the first and second quarters of 1996. Due to the seasonality of
certain aspects of CIGNA's business, caution should be used in estimating
results for the full year based on interim results of operations.
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to:
- revise the system of funding cleanup of environmental damages;
- reform the federal tax system;
- reinterpret insurance contracts long after the policies were written to
provide coverage unanticipated by CIGNA;
- restrict insurance pricing and the application of underwriting
standards;
- reform health care; and
- expand regulation.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain. For additional information, see Note 7 to the Financial
Statements. Also, see Note 5 regarding a proposed IRS assessment of
approximately $215 million. CIGNA is currently contesting the assessment and
believes it should prevail.
During 1995, CIGNA implemented cost reduction initiatives in the Domestic
Property and Casualty operations and the Employee Life and Health Benefits
segment. As of September 30, 1996, there were no material changes to the costs
associated with, or the anticipated annual savings related to, these
initiatives. For additional information, see Note 7 to the Financial
Statements.
In October 1996, Moody's Investors Service (Moody's) raised the insurance
financial strength rating of Connecticut General Life Insurance Company,
CIGNA's principal life insurance subsidiary, to Aa3 ("Excellent," 4th of 19)
from A1 ("Good," 5th of 19). Moody's also raised the rating on CIGNA's senior
debt to A3 ("Upper-medium-grade," 7th of 19) from Baa1 ("Medium-grade," 8th of
19).
In the first quarter of 1996, CIGNA adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The effect of implementing SFAS
No. 121 on CIGNA's results of operations, liquidity and financial condition was
not material. For additional information, see Note 2 to the Financial
Statements.
9
<PAGE> 12
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $3,444 $3,408 $10,333 $10,340
Net investment income 1,069 1,080 3,263 3,192
Other revenues 154 134 448 391
Realized investment gains 18 20 17 226
-----------------------------------------------------------------------------
Total revenues 4,685 4,642 14,061 14,149
Benefits and expenses 4,251 5,525 12,924 14,326
-----------------------------------------------------------------------------
Income (loss) before taxes 434 (883) 1,137 (177)
Income taxes (benefits) 153 (317) 387 (106)
-----------------------------------------------------------------------------
Net income (loss) $281 ($566) $750 ($71)
- ---------------------------------------------=============================================================================
Realized investment gains,
net of taxes $11 $13 $9 $173
- ---------------------------------------------=============================================================================
</TABLE>
CIGNA's 1996 consolidated net income increased significantly for the third
quarter and nine months, compared with the same periods last year. Results for
the third quarter and nine months of 1995 included a $774 million after-tax
($1.2 billion pre-tax) charge in the Property and Casualty segment, primarily
for asbestos-related and environmental pollution exposures, as well as a $75
million after-tax ($115 million pre-tax) charge associated with cost reduction
initiatives in the Property and Casualty and Employee Life and Health Benefits
segments.
Excluding the above charges and after-tax realized investment gains, earnings
for the third quarters of both years were $270 million, and for the nine months
of 1996 were $741 million, compared with $605 million for the same period last
year. Level earnings for the third quarter compared with 1995, reflect
improvements in the Individual Financial Services and Employee Retirement and
Savings Benefits segments, offset by lower earnings in the remaining business
segments. Growth in earnings for the nine months of 1996 primarily reflects
improved results in the Property and Casualty segment.
After-tax realized investment results were significantly lower for the nine
months of 1996, compared to the same period last year, primarily because of
gains from the 1995 restructuring of a portion of the Employee Life and Health
Benefits and Property and Casualty segments' equity investment portfolios into
fixed income securities. For additional information, see Note 3 to the
Financial Statements.
Full year earnings for 1996 are expected to improve over 1995, excluding the
effects of realized investment results and the 1995 third quarter charges
previously discussed. However, such improvement could be adversely affected by
the factors noted in the cautionary statements on page 19.
EMPLOYEE LIFE AND HEALTH BENEFITS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $2,036 $1,971 $6,188 $6,069
Net investment income 136 144 423 428
Other revenues 99 86 301 253
Realized investment gains (losses) 4 1 (5) 118
--------------------------------------------------------------------------
Total revenues 2,275 2,202 6,907 6,868
Benefits and expenses 2,071 2,029 6,362 6,228
--------------------------------------------------------------------------
Income before taxes 204 173 545 640
Income taxes 74 56 188 190
--------------------------------------------------------------------------
Net income $130 $117 $357 $450
- -----------------------------------------------==========================================================================
Realized investment gains
(losses), net of taxes $3 $1 ($3) $101
- -----------------------------------------------==========================================================================
</TABLE>
Net income for the Employee Life and Health Benefits segment increased 11% for
the third quarter and decreased 21% for the nine months of 1996. Results for
the third quarter and nine months of 1995 included an after-tax charge of $20
million related to cost reduction initiatives. Excluding that charge and
after-tax realized investment results, Employee Life and Health Benefits
segment income for the third quarter and nine months of 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Indemnity operations $73 $87 $198 $213
HMO operations 54 49 162 156
- -------------------------------------------------------------------------------------------------------------------------
Total $127 $136 $360 $369
=========================================================================================================================
</TABLE>
The declines in the indemnity operations reflect unfavorable claim experience
including the unfavorable after-tax effects from reserve reviews ($7 million
for the third quarter and $13 million for the nine months of 1996) and, to a
lesser extent for the quarter, higher operating expenses. Partially offsetting
these declines were improved investment margins, higher earnings from medical
rate increases and, for the nine months, higher fees for Administrative
Services Only (ASO) business.
10
<PAGE> 13
HMO earnings for the third quarter of 1996 and 1995 include $7 million and $13
million, respectively, due to the favorable after-tax effect of reserve
reviews. Excluding the reserve reviews, earnings increased by $11 million.
This increase reflects membership growth and improved per member medical costs,
partially offset by competitive pressures on rates and higher operating
expenses associated with business growth and customer service initiatives.
HMO earnings for the nine months of 1996 include a favorable after-tax reserve
adjustment of $12 million and an after-tax gain of $8 million from sales of
subsidiaries. Earnings for the nine months of 1995 include $33 million
after-tax due to the favorable effect of reserve reviews. Excluding these
items, 1996 results increased by $19 million, reflecting the same factors noted
above for the quarter.
CIGNA expects fourth quarter earnings for this segment to be lower than the
fourth quarter of 1995. Indemnity results are expected to be lower due to
large cumulative medical rate increases in the fourth quarter of 1995, whereas,
for 1996, such rate increases were obtained throughout the year. Also, a
declining premium base, which reflects competitive pressures and conversions to
HMOs, is expected to adversely affect future indemnity earnings. CIGNA expects
HMO results for the fourth quarter of 1996 to be about the same as the third
quarter of 1996.
Premiums and fees increased 3% and 2% for the third quarter and nine months of
1996, respectively. These improvements reflect membership growth in HMOs,
partially offset by lower medical indemnity premiums resulting from the effect
of favorable claim experience on premiums for experience-rated business and, to
a lesser extent, cancellations and conversions to HMOs. Growth in premiums is
expected to continue to be constrained by competitive pressures in both the
medical indemnity and HMO markets.
Total HMO membership increased 11% since September 30, 1995 and 10% since
December 31, 1995. These increases primarily reflect membership growth in HMO
alternative funding programs. Under these programs, the customer assumes all
or a portion of the responsibility for funding claims and CIGNA generally earns
a lower margin than under traditional HMO plans.
Management believes that adding premium equivalents to premiums and fees
(adjusted premiums and fees) produces a more meaningful measure of business
volume. Premium equivalents for the third quarters of 1996 and 1995 were
approximately $2.4 billion, and for the nine months of 1996 were $7.2 billion,
compared with $7.3 billion for the same period last year. Premium equivalents
were about level year over year reflecting declines in medical premium
equivalents due to cancellations and conversions to HMOs, partially offset by
growth in HMO alternative funding programs. Growth in premium equivalents is
expected to continue to be constrained by competitive pressures in both the
medical indemnity and HMO markets. Premium equivalents were 54% of total
adjusted premiums and fees for the nine months of 1996 and 1995. ASO plans
accounted for 45% of total adjusted premiums and fees for the nine months of
1996 and 1995.
EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $55 $40 $143 $123
Net investment income 419 425 1,278 1,281
Realized investment gains 9 -- 19 4
----------------------------------------------------------------------------
Total revenues 483 465 1,440 1,408
Benefits and expenses 398 396 1,204 1,195
----------------------------------------------------------------------------
Income before taxes 85 69 236 213
Income taxes 28 21 78 68
----------------------------------------------------------------------------
Net income $57 $48 $158 $145
- ---------------------------------------------============================================================================
Realized investment gains,
net of taxes $5 $-- $11 $2
- ---------------------------------------------============================================================================
</TABLE>
Net income for the Employee Retirement and Savings Benefits segment increased
19% and 9% for the third quarter and nine months of 1996, respectively.
Results for the nine months of 1996 include an after-tax charge of $8 million
for expected state guaranty fund assessments. Excluding this charge and
after-tax realized investment gains, income was $52 million and $147 million
for the third quarter and nine months of 1996, compared with $48 million and
$143 million for the same periods last year. These improvements primarily
reflect higher earnings from an increased asset base.
Premiums and fees increased 38% and 16% for the third quarter and nine months
of 1996, reflecting higher annuity sales and higher fees from separate
accounts.
11
<PAGE> 14
Net investment income decreased slightly for the quarter and nine months of
1996, reflecting customers' redirection of a portion of their investments from
the general account to separate accounts, partially offset by higher investment
yields.
Assets under management is generally a key determinant of earnings for this
segment. For the nine months ended September 30, assets under management and
related activity, including amounts attributable to separate accounts, were as
follows:
<TABLE>
<CAPTION>
(In millions) 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Balance -- January 1 $38,183 $33,882
Premiums and deposits 4,478 3,957
Investment results 1,977 1,969
Increase (decrease) in fair value of assets (421) 2,114
Customer withdrawals (1,596) (1,509)
Benefit payments and other (3,590) (3,216)
- ---------------------------------------------------------------------
Balance -- September 30 $39,031 $37,197
=====================================================================
</TABLE>
Premiums and deposits increased 13% reflecting higher sales. Approximately 47%
and 42% of the premiums and deposits for 1996 and 1995, respectively, were from
new customers. The decrease for 1996 in the fair value of assets is due to
market value depreciation for fixed maturities.
Management expects asset growth to continue to be constrained, resulting from
decisions by plan sponsors to diversify assets and fund management. In
addition, assets under management will continue to be affected by market value
fluctuations for fixed maturities and equity securities.
INDIVIDUAL FINANCIAL SERVICES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $233 $216 $678 $646
Net investment income 257 256 780 725
Other revenues 20 15 58 50
Realized investment gains (losses) -- 1 -- (1)
---------------------------------------------------------------------------
Total revenues 510 488 1,516 1,420
Benefits and expenses 438 430 1,330 1,248
---------------------------------------------------------------------------
Income before taxes 72 58 186 172
Income taxes 25 21 65 60
---------------------------------------------------------------------------
Net income $47 $37 $121 $112
- ----------------------------------------------===========================================================================
Realized investment gains
(losses), net of taxes $-- $1 $-- $--
- ----------------------------------------------===========================================================================
</TABLE>
Net income for the Individual Financial Services segment increased 27% and 8%
for the third quarter and nine months of 1996, respectively. The increase for
the quarter reflects higher earnings from interest-sensitive products,
including leveraged corporate-owned life insurance (COLI), and an after-tax
benefit of $5 million for a favorable reinsurance loss reserve adjustment. The
nine month increase primarily reflects higher earnings from interest-sensitive
products, including leveraged COLI.
For the third quarter and nine months of 1996, premiums and fees increased 8%
and 5%, respectively. These increases primarily reflect higher sales of
reinsurance and interest-sensitive products, partially offset by lower
leveraged COLI renewal premiums.
Net investment income increased slightly for the quarter reflecting growth in
business, partially offset by lower yields. The increase of 8% for the nine
months reflects growth from leveraged COLI policy loans and annuity business.
In August 1996, Congress passed legislation that phases out over a three year
period the tax deductibility of policy loan interest for most leveraged COLI
products. The effect of the legislation on this segment is uncertain, but is
not expected to be material over the next several years. However, over the
longer term, a substantial portion of revenues and earnings from leveraged COLI
are expected to be eliminated, which could have a material adverse effect on
results of operations for the segment. The effect of this legislation is not
expected to be material to CIGNA's consolidated results of operations,
liquidity or financial condition.
12
<PAGE> 15
PROPERTY AND CASUALTY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $1,120 $1,181 $3,324 $3,502
Net investment income 201 199 606 594
Other revenues 63 61 176 169
Realized investment gains 2 12 2 84
---------------------------------------------------------------------------
Total revenues 1,386 1,453 4,108 4,349
Benefits and expenses 1,301 2,622 3,880 5,506
---------------------------------------------------------------------------
Income (loss) before taxes 85 (1,169) 228 (1,157)
Income taxes (benefits) 26 (413) 68 (417)
---------------------------------------------------------------------------
Net income (loss) $59 ($756) $160 ($740)
- ----------------------------------------------===========================================================================
Realized investment gains,
net of taxes $1 $7 $1 $54
- ----------------------------------------------===========================================================================
</TABLE>
Effective December 31, 1995, CIGNA restructured its domestic property and
casualty businesses into two separate operations, ongoing and run-off. The
ongoing operations are actively engaged in selling insurance products and
related services. The run-off operations, which do not actively sell insurance
products, manage run-off policies and related claims, including those for
asbestos-related and environmental pollution exposures. Insurance products
that were actively sold in 1995 by subsidiaries that are now in run-off
continue to be sold by the ongoing operations. Results for the run-off
operations primarily reflect current year losses associated with unearned
premiums as of December 31, 1995, prior year development on claim and claim
adjustment expense reserves and investment activity. The restructuring is
being contested in the courts by certain competitors and policyholders;
however, management believes that its restructuring will not be affected.
Financial data for the domestic and run-off operations for 1995 are prepared on
a pro forma basis as though the restructuring occurred at the beginning of
1995. The pro forma amounts are not necessarily indicative of the amounts that
would have been reported had the restructuring actually occurred as of January
1, 1995. Amounts for the international operations and for the consolidated
Property and Casualty segment were not affected by the restructuring.
Net income for the ongoing operations in the third quarter and nine months of
1996 included after-tax realized investment gains of $2 million and $13
million, respectively, compared with gains of $10 million and $59 million for
the same periods of 1995. For the run-off operations, after-tax realized
investment losses were $1 million and $12 million for the third quarter and
nine months of 1996, respectively, compared with losses of $3 million and $5
million for the same periods in 1995.
Results for the third quarter and nine months of 1995 reflect charges
associated with reserve strengthening for asbestos-related and environmental
pollution (A&E) claims ($686 million after-tax) and uncollectible reinsurance
for non-A&E exposures ($88 million after-tax), and charges for cost reduction
initiatives ($55 million after-tax).
Excluding the 1995 charges and after-tax realized investment gains, Property
and Casualty segment income (loss) for the third quarter and nine months of
1996 and 1995 was as follows:
<TABLE>
<CAPTION>
======================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ongoing operations:
Domestic $20 $11 $52 ($5)
International 37 36 102 84
--------------------------------------------------------------------------
Total ongoing
operations 57 47 154 79
Run-off operations 1 19 5 (44)
- ----------------------------------------------------------------------------------------------------------------------
Total $58 $66 $159 $35
======================================================================================================================
</TABLE>
The improvement in the domestic operations reflects lower expenses primarily
resulting from the 1995 cost reduction initiative, higher investment income due
to higher yields, and improved claim experience, partially offset by lower
premiums and fees as discussed further on page 14. Improvement in the
international operations primarily reflects favorable claim experience.
Results for the domestic and international operations reflect a highly
competitive pricing environment. The decline in results for the run-off
operations for the third quarter of 1996 primarily reflects higher A&E losses
and higher expenses. The improvement in results for the run-off operations for
the nine months of 1996 primarily reflects lower A&E losses.
Premiums and fees declined 5% in both the third quarter and nine months of
1996. The decline primarily reflects the application of strict underwriting
standards, continued competition (particularly in workers' compensation,
commercial package and certain international lines of business), and an
unfavorable effect from foreign currency translation (approximately $70 million
and $130
13
<PAGE> 16
million for the international business for the quarter and nine months,
respectively). The nine month decline also reflects lower premiums of
approximately $75 million for reinsurance and personal automobile products that
are no longer being actively sold. These declines were partially offset by
growth in the domestic property, casualty, and marine and aviation lines of
business, as well as the international accident and health line of business.
The domestic operations had catastrophe losses of $27 million and $58 million,
net of reinsurance, for the third quarter and nine months of 1996, including
$20 million for Hurricane Fran. In addition, catastrophe losses for the nine
months of 1996 include $21 million for winter storms. There were no
catastrophe losses for the international operations in the third quarter and
nine months of 1996. Catastrophe losses for the third quarter and nine months
of 1995 were $4 million and $45 million, including losses of $5 million and $39
million for the domestic operations. Catastrophe losses for the nine months of
1995 included $31 million for Texas hail storms. The effects of reinsurance on
catastrophe losses for the periods presented were not material.
LOSS RESERVES AND REINSURANCE RECOVERABLES
CIGNA's reserving methodology and significant issues affecting the estimation
of loss reserves are described in its Form 10-K.
In summary, CIGNA's property and casualty loss reserves of $16.8 billion and
$17.0 billion as of September 30, 1996 and December 31, 1995, respectively, are
an estimate of future payments for reported and unreported claims for losses
and related expenses with respect to insured events that have occurred. The
basic assumption underlying the many standard actuarial and other methods used
in the estimation of property and casualty loss reserves is that past
experience is an appropriate basis for predicting future events. However,
current trends and other factors that would modify past experience are also
considered. The process of establishing loss reserves is subject to
uncertainties that are normal, recurring and inherent in the property and
casualty business.
CIGNA continually attempts to improve its loss estimation process by refining
its process of analyzing loss development patterns, claims payments and other
information, but there remain many reasons for adverse development of estimated
ultimate liabilities. For example, unanticipated changes in workers'
compensation laws have at times significantly affected the ability of insurers
to estimate liabilities for unpaid losses and related expenses.
As of September 30, 1996 and December 31, 1995, CIGNA's reinsurance
recoverables were approximately $6.8 billion and $6.7 billion, net of
allowances for uncollectible amounts of $718 million and $700 million,
respectively. During the third quarter of 1995, CIGNA increased the allowance
for uncollectible reinsurance by $210 million pre-tax, including $75 million
that is reported as asbestos-related and environmental pollution prior year
development in the table on page 15. CIGNA expects to continue to have
significant recoveries from its reinsurance arrangements, including recoveries
of A&E losses. However, the extent of recoveries in the aggregate will depend
on future gross loss experience and the particular reinsurance arrangements to
which future losses relate.
Losses for unrecoverable reinsurance are principally due to the failure of
reinsurers to indemnify CIGNA, primarily because of reinsurer insolvencies and
disputes under reinsurance contracts. Reinsurance disputes have increased in
recent years, particularly on larger and more complex claims such as those
related to asbestos and London reinsurance market exposures. Reinsurance
disputes may increase in the future and are likely to include disputes related
to environmental pollution. Allowances have been established for amounts
deemed uncollectible.
Reserving for all property and casualty claims and related reinsurance
recoverables continues to be a complex and uncertain process, requiring the use
of informed estimates and judgments. CIGNA's estimates and judgments may be
revised as additional experience and other data become available and are
reviewed, as new or improved methodologies are developed or as current law
changes. Any such revisions could result in future changes in estimates of
losses or reinsurance recoverables, and would be reflected in CIGNA's results
of operations for the period in which the estimates are changed. While the
effect of any such changes in estimates of losses or reinsurance recoverables
could be material to
14
<PAGE> 17
future results of operations, CIGNA does not expect such changes to have a
material effect on its liquidity or financial condition.
In management's judgment, information currently available has been
appropriately considered in estimating CIGNA's loss reserves and reinsurance
recoverables.
The following table shows the adverse (favorable) pre-tax effects on the
Property and Casualty segment's results of operations from prior year
development, net of reinsurance, for the third quarter and nine months ended
September 30:
<TABLE>
<CAPTION>
=====================================================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
By business operation:
Ongoing operations $(2) $7 $15 $32
Run-off operations 38 1,202 110 1,389
- ---------------------------------------------------------------------------------------------------------------------
Total $36 $1,209 $125 $1,421
=====================================================================================================================
By type of loss:
Asbestos-related $13 $194 $27 $255
Environmental pollution 5 861 31 955
Unrecoverable
reinsurance 2 135 20 161
Workers' Compensation 17 27 36 67
Other (1) (8) 11 (17)
- ---------------------------------------------------------------------------------------------------------------------
Total $36 $1,209 $125 $1,421
=====================================================================================================================
</TABLE>
CIGNA completed a comprehensive review of its A&E exposures during the third
quarter of 1995 and increased its related reserves by $255 million ($194
million, net of reinsurance) for asbestos-related exposures and approximately
$1.2 billion ($861 million, net of reinsurance) for environmental pollution
exposures. As a result, charges for A&E losses in 1996 have been and are
expected to be substantially lower than in prior years.
Other prior year development for the nine months of 1996 and 1995 was primarily
attributable to favorable development on commercial package and commercial fire
lines of business, as well as unfavorable development on long-term exposure
claims and reinsurance exposures.
OTHER OPERATIONS
Other Operations primarily includes unallocated investment income, expenses
(principally debt service) and taxes. Also included in Other Operations are
the results of CIGNA's settlement annuity business and non-insurance operations
engaged primarily in investment and real estate activities.
Other Operations had net losses of $12 million for the third quarter of 1996
and 1995. Net losses for the nine months of 1996 and 1995 were $46 million and
$38 million, respectively. Excluding after-tax realized investment results,
losses were $14 million and $46 million for the third quarter and nine months
of 1996, compared with $16 million and $54 million for the same periods last
year. The decreases in losses primarily reflect lower net interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for CIGNA and its insurance subsidiaries has remained strong as
evidenced by significant amounts of short-term investments and cash and cash
equivalents in the aggregate. Generally, CIGNA has met its operating
requirements by maintaining appropriate levels of liquidity in its investment
portfolio and through utilization of overall positive cash flows.
During the first nine months of 1996, cash and cash equivalents increased $529
million from $1.6 billion as of December 31, 1995. This increase primarily
reflects cash provided by investing activities ($738 million), primarily due to
net investment sales and maturities, and cash provided by operating activities
($341 million), reflecting the timing of cash receipts and cash disbursements
and earnings. The increase in cash flows was partially offset by payments of
dividends on and repurchases of CIGNA common stock ($341 million) and repayment
of debt ($158 million).
CIGNA's capital resources represent funds available for long-term business
commitments. They primarily consist of retained earnings and proceeds from the
issuance of long-term debt and equity securities. CIGNA's financial strength
provides the capacity and flexibility to enable it to raise funds in the
capital markets through the issuance of such securities. CIGNA continues to be
well capitalized, with sufficient borrowing capacity to meet the anticipated
needs of its businesses. CIGNA continues to conduct strategic and financial
reviews of its businesses to deploy its capital resources most effectively.
15
<PAGE> 18
CIGNA had $1.04 billion of long-term debt outstanding at September 30, 1996,
compared with $1.07 billion at December 31, 1995. As of September 30, 1996,
CIGNA had approximately $800 million remaining under a shelf registration
statement that may be issued as debt or equity securities, or both, depending
upon market conditions and CIGNA's capital requirements.
At September 30, 1996, CIGNA's short-term debt, primarily commercial paper,
amounted to $268 million, a decrease of $146 million from December 31, 1995.
This decrease reflects the repayment of notes which matured on September 1,
1996.
In connection with the domestic property and casualty restructuring, CIGNA
contributed additional capital of $250 million and $125 million to these
operations in the first quarter of 1996 and 1995, respectively. These
contributions were funded through internal sources.
In April 1996, CIGNA's Board of Directors authorized the purchase of up to $500
million of its common stock, depending on prevailing market conditions and
alternative uses of capital. Under this authorization, approximately $175
million, or 1.5 million shares, of common stock were purchased as of October
31, 1996. Shares were, and are expected to be, purchased with internal funds.
INVESTMENT ASSETS
<TABLE>
<CAPTION>
==================================================================================================
September 30, December 31,
(In millions) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities $33,888 $36,241
Equity securities 712 661
Mortgage loans 11,278 11,010
Real estate 1,275 1,283
Other, primarily policy loans 8,230 8,515
- --------------------------------------------------------------------------------------------------
Total investment assets $55,383 $57,710
==================================================================================================
</TABLE>
Additional information regarding CIGNA's investment assets is included in Note
3 to the third quarter 1996 Financial Statements and Notes 2, 4, 5 and 20 to
the 1995 Financial Statements as well as the 1995 Form 10-K.
Significant amounts of CIGNA's investment assets are attributable to
experience-rated contracts with policyholders (policyholder contracts).
Approximate percentages of investments attributable to policyholder contracts
were as follows:
<TABLE>
<CAPTION>
===============================================================================================
September 30, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities 28% 30%
Mortgage loans 56% 58%
Real estate 56% 57%
===============================================================================================
</TABLE>
FIXED MATURITIES
Investments in fixed maturities (bonds) include publicly traded and private
placement debt securities; asset-backed securities, including collateralized
mortgage obligations (CMOs); and redeemable preferred stocks.
Fixed maturities had an aggregate fair value, including policyholder share,
that was greater than amortized cost by approximately $1.3 billion, as of
September 30, 1996, and by approximately $3.0 billion as of December 31, 1995.
The decrease in unrealized appreciation primarily reflects the upward movement
in interest rates since December 31, 1995.
POTENTIAL PROBLEM BONDS
Potential problem bonds are fully current but judged by management to have
certain characteristics that increase the likelihood of problem classification.
Potential problem bonds, including amounts attributable to policyholder
contracts, were $70 million as of September 30, 1996, compared with $137
million as of December 31, 1995. There were no cumulative write-downs for
potential problem bonds as of those dates.
16
<PAGE> 19
PROBLEM BONDS
CIGNA considers bonds that are delinquent or restructured as to terms,
typically interest rate and, in certain cases, maturity date, problem bonds.
As of September 30, 1996 and December 31, 1995, problem bonds, including
amounts attributable to policyholder contracts, were $202 million and $196
million, net of related cumulative write-downs of $167 million and $140
million, respectively.
CUMULATIVE WRITE-DOWNS FOR BONDS
Cumulative write-downs for bonds as of September 30, 1996 and 1995 were $168
million and $140 million, including $60 million and $52 million attributable to
policyholder contracts, respectively. Also, cumulative write-downs as of
September 30, 1996 and 1995 included $1 million and $4 million, respectively,
for bonds no longer classified as problem or potential problem bonds.
During the nine months of 1996 and 1995, CIGNA established write-downs of $44
million and $46 million, respectively, for problem bonds. These amounts
included $14 million and $18 million, respectively, attributable to
policyholder contracts. See the Summary on page 19 for the adverse after-tax
effect of write-downs on policyholder contracts and on CIGNA's net income.
EFFECT OF NON-ACCRUALS FOR BONDS
CIGNA recognizes interest income on problem bonds only when payment is
received. See the Summary on page 19 for the adverse effect of non-accruals
for bonds on policyholder contracts and on CIGNA's net income.
MORTGAGE LOANS
<TABLE>
<CAPTION>
======================================================================================================
September 30, December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans (in millions) $11,278 $11,010
By property type:
Retail facilities 42% 42%
Office buildings 34 35
Apartment buildings 12 12
Hotels 7 6
Other 5 5
Total 100% 100%
======================================================================================================
</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 1996, $824 million of mortgage loans was scheduled to
mature, of which $378 million was paid in full, $82 million was extended at
existing loan rates for a weighted average of six months and $340 million was
refinanced at current market rates. Mortgage loan extensions and refinancings
are loans in good standing. The remaining scheduled maturities of $24 million
were problem and potential problem mortgage loans. The effect of not receiving
timely cash payments on maturing mortgage loans is not expected to have a
material adverse effect on CIGNA's future results of operations, liquidity or
financial condition.
POTENTIAL PROBLEM MORTGAGE LOANS
Potential problem mortgage loans include:
- - fully current loans that are judged by management to have certain
characteristics that increase the likelihood of problem
classification,
- - fully current loans for which the borrower has requested
restructuring, and
- - loans that are 30 to 59 days delinquent with respect to interest or
principal payments.
Potential problem mortgage loans, including amounts attributable to
policyholder contracts, were $346 million as of September 30, 1996, compared
with $211 million as of December 31, 1995, net of related valuation reserves of
$24 million and $29 million, respectively.
17
<PAGE> 20
PROBLEM MORTGAGE LOANS
CIGNA's problem mortgage loans include delinquent and restructured mortgage
loans. Delinquent mortgage loans include those on which payment is overdue
generally 60 days or more. Restructured mortgage loans are those whose basic
financial terms have been modified, typically to reduce the interest rate or
extend the maturity date. As of September 30, 1996, restructured mortgage
loans with a carrying value of $268 million had their original maturity date
extended, with an average extension of approximately five years. Restructured
mortgage loans generated annualized cash returns averaging approximately 8 1/2%
as of September 30, 1996.
During the nine months of 1996, CIGNA reclassified approximately $55 million of
restructured mortgage loans to loans in good standing because they were
performing under the terms of the restructured loan agreement, and those terms
were generally equivalent to terms that CIGNA was willing to accept for a
comparable new loan at the time of restructure.
As of September 30, 1996 and December 31, 1995, problem mortgage loans,
including amounts attributable to policyholder contracts, were $420 million and
$575 million, net of valuation reserves of $71 million and $59 million,
respectively.
VALUATION RESERVES FOR MORTGAGE LOANS
Valuation reserves for mortgage loans at September 30, 1996 and 1995 were $95
million and $84 million, respectively, including $62 million and $59 million
attributable to policyholder contracts. During the nine months of 1996 and
1995, CIGNA established valuation reserves for problem and potential problem
mortgage loans of $53 million and $3 million, respectively. These amounts
included $30 million and $4 million attributable to policyholder contracts.
The net increase in valuation reserves established in the nine months of 1995
reflects the implementation of SFAS Nos. 114 and 118, which resulted in a
decrease in reserves of $29 million, including $16 million attributable to
policyholders. See the Summary on page 19 for the net after-tax effect of
valuation reserves on policyholder contracts and on CIGNA's net income.
EFFECT OF NON-ACCRUALS FOR MORTGAGE LOANS
CIGNA recognizes interest income on problem mortgage loans only when payment is
received. See the Summary on page 19 for the effect of non-accruals for
mortgage loans on policyholder contracts and on CIGNA's net income.
REAL ESTATE
As of September 30, 1996 and December 31, 1995, investment real estate, net of
reserves and write-downs, included: 1) $506 million and $563 million,
respectively, of real estate held for the production of income, and 2) $769
million and $720 million, respectively, of real estate held for sale, primarily
properties acquired as a result of foreclosure of mortgage loans.
REAL ESTATE WRITE-DOWNS AND RESERVES
Cumulative write-downs and valuation reserves for real estate at September 30,
1996 and 1995 were $391 million and $434 million, respectively, including $197
million and $230 million attributable to policyholder contracts. See the
Summary on page 19 for the adverse after-tax effect of write-downs and the net
increase in valuation reserves on policyholder contracts and on CIGNA's net
income.
18
<PAGE> 21
SUMMARY
The adverse (favorable) effects of write-downs and changes in valuation
reserves as well as of non-accruals on policyholder contracts and on CIGNA's
net income were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------------- -------------------------------------------------
1996 1995 1996 1995
---------------------------- ----------------------- ---------------------- -------------------------
Policy- Policy- Policy- Policy-
holder holder holder holder
(In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Write-downs and
valuation
reserves:
Bonds $6 $8 $9 $12 $14 $19 $18 $18
Mortgage loans 1 1 4 2 30 14 4 (1)
Real estate 1 -- 3 -- -- 1 14 5
- -----------------------------------------------------------------------------------------------------------------------------
Total $8 $9 $16 $14 $44 $34 $36 $22
=============================================================================================================================
Non-accruals:
Bonds $3 $4 $4 $5 $8 $12 $10 $13
Mortgage loans 2 -- (1) 1 5 1 4 1
- -----------------------------------------------------------------------------------------------------------------------------
Total $5 $4 $3 $6 $13 $13 $14 $14
=============================================================================================================================
</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.
Assuming no significant deterioration in economic conditions, CIGNA does not
expect additional non-accruals, write-downs and reserves to materially affect
future results of operations, liquidity or financial condition, or to result in
a significant decline in the aggregate carrying value of its assets.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information provided in this Management's Discussion and
Analysis, statements made throughout this document are forward-looking and
contain information about financial results, economic conditions, trends and
known uncertainties. CIGNA cautions the reader that actual results could
differ materially from those expected by CIGNA, depending on the outcome of
certain factors (some of which are described with the forward-looking
statements) including: 1) adverse catastrophe experience in CIGNA's property
and casualty businesses; 2) adverse property and casualty loss development for
events that CIGNA insured in prior years; 3) an increase in medical costs in
CIGNA's health care operations, including increases in utilization and costs of
medical services; 4) heightened competition, particularly price competition,
reducing product margins and constraining growth in CIGNA's businesses; and 5)
significant changes in interest rates.
19
<PAGE> 22
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) During the quarterly period ended September 30, 1996, and as
of the filing date, CIGNA filed the following Reports on Form
8-K:
- dated October 30, 1996, Item 5--containing a news
release regarding its third quarter 1996 results.
- dated July 30, 1996, Item 5--containing a news
release regarding its second quarter 1996 results.
-20-
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the undersigned duly
authorized officer, on its behalf and in the capacity indicated.
CIGNA CORPORATION
By /s/ Gary A. Swords
------------------------
Gary A. Swords
Vice President and
Chief Accounting Officer
Date: November 6, 1996
-21-
<PAGE> 24
Exhibit Index
<TABLE>
<CAPTION>
Method of
Number Description Filing
- ------ ----------- ----------
<S> <C> <C>
11 Computation of Earnings Filed herewith.
Per Share
12 Computation of Ratio of Filed herewith.
Earnings to Fixed Charges
27 Financial Data Schedule Included only in
the EDGAR version
of the Form 10-Q.
</TABLE>
-22-
<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,
1996 1995 1996 1995
====================================================================================================================================
<S> <C> <C> <C> <C>
- --------------------------------------------------
PRIMARY EARNINGS PER SHARE
- --------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHARES $ 281 $ (566) $ 750 $ (71)
- ---------------------------------------------------------===========================================================================
WEIGHTED AVERAGE SHARES:
Common shares 75,705,848 72,908,117 76,154,099 72,561,464
Common share equivalents applicable
to stock options 349,199 * 430,934 *
- ------------------------------------------------------------------------------------------------------------------------------------
Total 76,055,047 72,908,117 76,585,033 72,561,464
- ---------------------------------------------------------===========================================================================
PRIMARY EARNINGS PER SHARE $ 3.69 $ (7.76) $ 9.80 $ (0.98)
- ---------------------------------------------------------===========================================================================
- --------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE
- --------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHARES:
Net income $ 281 $ (566) $ 750 $ (71)
Adjusted for:
Interest expense (net of tax) on
convertible debentures - * - *
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shares $ 281 $ (566) $ 750 $ (71)
- ---------------------------------------------------------===========================================================================
WEIGHTED AVERAGE SHARES:
Common shares 75,705,848 72,908,117 76,154,099 72,561,464
Common share equivalents applicable
to stock options 379,876 * 462,101 *
Assumed conversion of convertible debentures - * - *
- ------------------------------------------------------------------------------------------------------------------------------------
Total 76,085,724 72,908,117 76,616,200 72,561,464
- ---------------------------------------------------------===========================================================================
FULLY DILUTED EARNINGS PER SHARE $ 3.69 $ (7.76) $ 9.79 $ (0.98)
- ---------------------------------------------------------===========================================================================
</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,
1996 1995
=====================================================================================================================
<S> <C> <C>
Income (loss) before income taxes $ 1,137 $ (177)
------------- -------------
Fixed charges included in income (loss):
Interest expense 80 94
Interest portion of rental expense 66 72
------------- -------------
Total fixed charges included in income (loss) 146 166
------------- -------------
Income (loss) available for fixed charges $ 1,283 $ (11)
- ---------------------------------------------------------------------------------------==============================
RATIO OF EARNINGS TO FIXED CHARGES 8.8 -(A)
- ---------------------------------------------------------------------------------------==============================
</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>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF PART I TO CIGNA'S REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 33,888
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 712
<MORTGAGE> 11,278
<REAL-ESTATE> 1,275
<TOTAL-INVEST> 55,383
<CASH> 2,088
<RECOVER-REINSURE> 7,352<F1>
<DEFERRED-ACQUISITION> 1,211
<TOTAL-ASSETS> 97,347
<POLICY-LOSSES> 11,777
<UNEARNED-PREMIUMS> 2,065
<POLICY-OTHER> 19,159
<POLICY-HOLDER-FUNDS> 29,692
<NOTES-PAYABLE> 1,305
0
0
<COMMON> 88
<OTHER-SE> 6,920
<TOTAL-LIABILITY-AND-EQUITY> 97,347
10,333
<INVESTMENT-INCOME> 3,263
<INVESTMENT-GAINS> 17
<OTHER-INCOME> 448
<BENEFITS> 9,337
<UNDERWRITING-AMORTIZATION> 877
<UNDERWRITING-OTHER> 2,710
<INCOME-PRETAX> 1,137
<INCOME-TAX> 387
<INCOME-CONTINUING> 750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 750
<EPS-PRIMARY> 9.80
<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>
