<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 JUNE 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 July 31, 1996, 75,973,510 shares of the issuer's Common
Stock were outstanding.
<PAGE> 2
CIGNA CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 1
and Retained Earnings
Consolidated Balance Sheets 2
Consolidated Statements of Cash 3
Flows
Notes to Financial Statements 4
Item 2. Management's Discussion and 9
Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 24
SIGNATURE 25
EXHIBIT INDEX 26
<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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
===============================================================================================================================
<S> <C> <C> <C> <C>
REVENUES
Premiums and fees $ 3,499 $ 3,514 $ 6,889 $ 6,932
Net investment income 1,111 1,085 2,194 2,112
Other revenues 152 130 294 257
Realized investment gains (losses) (31) 24 (1) 206
---------- ----------- ----------- -----------
Total revenues 4,731 4,753 9,376 9,507
---------- ----------- ----------- -----------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,129 3,224 6,273 6,421
Policy acquisition expenses 322 290 594 596
Other operating expenses 935 935 1,806 1,784
---------- ----------- ----------- -----------
Total benefits, losses and expenses 4,386 4,449 8,673 8,801
---------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 345 304 703 706
---------- ----------- ----------- -----------
Income taxes:
Current 36 75 112 111
Deferred 78 24 122 100
---------- ----------- ----------- -----------
Total income taxes 114 99 234 211
---------- ----------- ----------- -----------
NET INCOME 231 205 469 495
Dividends declared (62) (55) (122) (108)
Retained earnings, beginning of period 4,219 4,289 4,041 4,052
- -------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 4,388 $ 4,439 $ 4,388 $ 4,439
- -----------------------------------------------------==========================================================================
EARNINGS PER SHARE INFORMATION:
Primary $ 3.00 $ 2.82 $ 6.10 $ 6.82
Fully Diluted $ 3.00 $ 2.74 $ 6.10 $ 6.59
- -----------------------------------------------------==========================================================================
DIVIDENDS DECLARED PER SHARE $ 0.80 $ 0.76 $ 1.60 $ 1.52
- -----------------------------------------------------==========================================================================
</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
JUNE 30, DECEMBER 31,
1996 1995
===================================================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available-for-sale, at fair value (amortized cost, $32,629; $33,275) $ 33,918 $ 36,241
Equity securities, at fair value (cost, $597; $565) 715 661
Mortgage loans 11,245 11,010
Policy loans 7,243 7,107
Real estate 1,262 1,283
Other long-term investments 246 295
Short-term investments 852 1,113
----------- -----------
Total investments 55,481 57,710
Cash and cash equivalents 1,434 1,559
Accrued investment income 1,021 908
Premiums, accounts and notes receivable 4,254 4,268
Reinsurance recoverables 7,130 7,120
Deferred policy acquisition costs 1,161 1,109
Property and equipment, net 814 864
Deferred income taxes, net 2,058 1,866
Other assets 1,037 1,149
Goodwill 1,097 1,118
Separate account assets 20,412 18,232
- -------------------------------------------------------------------------------------------------------------------
Total $ 95,899 $ 95,903
- ----------------------------------------------------------------------------=======================================
LIABILITIES
Contractholder deposit funds $ 29,292 $ 30,055
Unpaid claims and claim expenses 19,004 19,303
Future policy benefits 11,750 12,007
Unearned premiums 2,059 2,176
----------- -----------
Total insurance and contractholder liabilities 62,105 63,541
Accounts payable, accrued expenses and other liabilities 4,983 5,408
Current income taxes 174 187
Short-term debt 406 414
Long-term debt 1,037 1,066
Separate account liabilities 20,309 18,130
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 89,014 88,746
- -------------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 7
SHAREHOLDERS' EQUITY
Common stock (shares issued, 88; 87) 88 87
Additional paid-in capital 2,554 2,536
Net unrealized appreciation - fixed maturities 444 1,025
Net unrealized appreciation - equity securities 87 73
Net translation of foreign currencies (47) (27)
Retained earnings 4,388 4,041
Less treasury stock, at cost (629) (578)
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,885 7,157
- -------------------------------------------------------------------------------------------------------------------
Total $ 95,899 $ 95,903
- ---------------------------------------------------------------------------========================================
SHAREHOLDERS' EQUITY PER SHARE $ 90.40 $ 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>
SIX MONTHS ENDED JUNE 30,
1996 1995
===============================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 469 $ 495
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Insurance liabilities, net of reinsurance recoverables (140) (113)
Premiums, accounts and notes receivable (109) (106)
Accounts payable, accrued expenses, other liabilities and
current income taxes (343) 210
Deferred income taxes, net 122 100
Realized investment (gains) losses 1 (206)
Gain on sale of subsidiaries and other equity interests (18) --
Other, net (40) (78)
-------------- --------------
Net cash provided by (used in) operating activities (58) 302
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities - available for sale 3,447 2,980
Equity securities 218 1,417
Mortgage loans 265 197
Other (primarily short-term investments) 6,449 6,081
Investment maturities and repayments:
Fixed maturities - available for sale 1,992 576
Fixed maturities - held to maturity -- 1,066
Mortgage loans 357 169
Investments purchased:
Fixed maturities - available for sale (4,528) (5,480)
Fixed maturities - held to maturity -- (728)
Equity securities (238) (258)
Mortgage loans (906) (708)
Other (primarily short-term investments) (6,463) (6,992)
Proceeds from sale of subsidiaries and other equity interests 66 --
Other, net (61) (75)
-------------- --------------
Net cash provided by (used in) investing activities 598 (1,755)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 3,108 4,145
Withdrawals from contractholder deposit funds (3,570) (2,680)
Net change in commercial paper (24) (29)
Issuance of long-term debt -- 88
Repurchases of common stock (41) --
Repayment of debt (8) (3)
Issuance of common stock 7 5
Dividends paid (122) (108)
-------------- --------------
Net cash provided by (used in) financing activities (650) 1,418
-------------- --------------
Effect of foreign currency rate changes on cash (15) 49
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (125) 14
Cash and cash equivalents, beginning of period 1,559 1,693
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,434 $ 1,707
- ---------------------------------------------------------------------------------==============================================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 125 $ 31
Interest paid $ 55 $ 60
- -------------------------------------------------------------------------------------------------------------------------------
</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 second quarter 1996 Management's Discussion and Analysis) 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 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.
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.
4
<PAGE> 7
NOTE 3-INVESTMENTS
REALIZED GAINS AND LOSSES
Realized gains and losses on investments, excluding policyholder share, were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Realized gains (losses):
Fixed maturities ($14) $4 ($3) $11
Equity securities 1 27 9 180
Mortgage loans (18) (7) (20) 2
Real estate (4) (4) 1 8
Other investments 4 4 12 5
-----------------------------------------------------------------
(31) 24 (1) 206
Income taxes (benefits) (10) 8 1 46
- ----------------------------------------------------------------------------------------------------------------------
Net realized gains (losses) ($21) $16 ($2) $160
- -----------------------------------------------------=================================================================
</TABLE>
FIXED MATURITIES AND EQUITY SECURITIES
During the second quarter and six months of 1996, proceeds from sales of
available-for-sale fixed maturities and equities, including policyholder share,
were $1.6 billion and $3.7 billion, respectively, compared with $1.9 billion and
$4.4 billion for the same periods last year. The second quarter 1996 sales
resulted in gross gains and gross losses of $14 million and $35 million,
respectively, compared with gains of $93 million and losses of $49 million for
the same period last year. Sales for the six months of 1996 resulted in gross
gains of $94 million and gross losses of $80 million, compared with gains of
$273 million and losses of $68 million for the same period last year.
During the second quarter and six months of 1996, Net Unrealized Appreciation -
Fixed Maturities included in Shareholders' Equity, which is net of
policyholder-related amounts and deferred income taxes, decreased by $118
million and $581 million, respectively, compared with increases of $469 million
and $682 million for the same periods last year.
NOTE 4-EARNINGS PER SHARE
Earnings per share were based on net income divided by weighted average common
shares, including common share equivalents, as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares - primary 76,821 72,616 76,854 72,529
Weighted average common shares - fully diluted 76,884 76,326 76,885 76,223
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of computing fully diluted earnings per share for 1995, CIGNA's
8.2% Convertible Subordinated Debentures, which were converted in late 1995, are
considered to have been converted to CIGNA common stock (3.6 million shares as
of June 30, 1995) and the related interest expense, $4
5
<PAGE> 8
million after-tax for the quarter and $7 million after-tax for the six months,
has been excluded from net income.
Common shares held as Treasury shares were 11,344,351 and 10,912,750 as of June
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 $210 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 June 30, 1996, CIGNA had tax basis operating loss carryforwards of
approximately $500 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 $708 million and
$700 million as of June 30, 1996 and December 31, 1995, respectively. 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 second quarter and six months of 1996, premiums and fees were net of
ceded premiums of $350 million and $794 million, respectively. For the second
quarter and six months of 1995, premiums and fees were net of ceded premiums of
$542 million and $937 million, respectively. In addition, benefits, losses and
settlement expenses for the second quarter and six months of 1996 were net of
reinsurance recoveries of $317 million and $585 million, respectively. Benefits,
losses and settlement expenses for the second quarter and six months of 1995
were net of reinsurance recoveries of $349 million and $629 million,
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.
6
<PAGE> 9
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.
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
In summary, 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.
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. As additional experience and other data
become available and are reviewed, as new or improved methodologies are
developed or as current law changes, CIGNA's estimates and judgments may be
revised. Any such
7
<PAGE> 10
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 and, beginning in the third quarter of 1996, this
reduction will be amortized into income over the average remaining service
period of 17 years. CIGNA does not expect the effect of this plan amendment and
change in actuarial assumptions to be material to its 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 June 30,
1996, there were no material changes to the costs associated with, or the
anticipated annual savings related to, these initiatives. Through June 30, 1996,
approximately $40 million of severance was paid to approximately 2,700
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 June 30, 1996, compared with December 31, 1995, and its results of
operations for the quarter and six months ended June 30, 1996, 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 1995 Annual
Report to Shareholders (pages 8 through 23) and in CIGNA's report on Form 10-Q
for the first quarter of 1996, 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; 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 $210 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 June 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.
CIGNA continues to conduct strategic and financial reviews of its businesses to
deploy its capital most effectively. Such reviews could result in future
actions, including strategic acquisitions and divestitures; however, no
determinations have been made at this time.
In June 1996, Standard & Poor's (S&P) assigned its BBB ("Adequate", 9th of 18)
claims-paying ability rating to both the ongoing and run-off domestic property
and casualty operations. This rating is within the "secure" range of S&P's
claims-paying ability ratings. In July 1996, Duff & Phelps Credit Rating Co.
assigned initial claims-paying ability ratings of A- ("High", 7th of 18) to the
ongoing domestic property and casualty operations and BBB- ("Adequate", 10th of
18) to the run-off operations. Also in June, S&P raised its rating for CIGNA
Corporation's senior debt to A- ("Strong", 7th of 22), and Fitch Investors
Service, Inc assigned a rating of F-1 ("Very Strong", 2nd of 6) to CIGNA's
commercial paper.
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>
===================================================================================================================================
Three Months Ended Six Months Ended
FINANCIAL SUMMARY June 30, June 30,
(In millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $3,499 $3,514 $6,889 $6,932
Net investment income 1,111 1,085 2,194 2,112
Other revenues 152 130 294 257
Realized investment gains (losses) (31) 24 (1) 206
---------------------------------- ---------------------------------
Total revenues 4,731 4,753 9,376 9,507
Benefits and expenses 4,386 4,449 8,673 8,801
---------------------------------- ---------------------------------
Income before taxes 345 304 703 706
Income tax expense 114 99 234 211
---------------------------------- ---------------------------------
Net income $231 $205 $469 $495
===================================================================================================================================
Realized investment gains (losses), net of taxes ($21) $16 ($2) $160
===================================================================================================================================
</TABLE>
CIGNA's 1996 consolidated net income increased 13% for the second quarter and
decreased 5% for the six months, compared with the same periods last year.
Excluding after-tax realized investment results, earnings for the second quarter
and six months of 1996 were $252 million and $471 million, respectively,
compared with $189 million and $335 million for the same periods last year.
Growth in earnings for the quarter and six months of 1996 primarily reflects
improved results in the Property and Casualty segment.
After-tax realized investment results were lower for the second quarter and six
months of 1996, compared to the same periods 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, as well as higher mortgage loan impairments in 1996.
For additional information, see Note 3 to the Financial Statements.
Full year earnings for 1996 are expected to improve, compared with 1995,
excluding the effects of realized investment results and the 1995 third quarter
charges for asbestos-related and environmental pollution exposures,
unrecoverable reinsurance and cost reduction initiatives. However, such
improvement could be adversely affected by the factors noted in the cautionary
statements on page 23.
10
<PAGE> 13
EMPLOYEE LIFE AND HEALTH BENEFITS
<TABLE>
<CAPTION>
===================================================================================================================================
Three Months Ended Six Months Ended
FINANCIAL SUMMARY June 30, June 30,
(In millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $2,075 $2,033 $4,152 $4,098
Net investment income 143 148 287 284
Other revenues 99 84 202 167
Realized investment gains (losses) (7) 29 (9) 117
-------------------------------------- ---------------------------------
Total revenues 2,310 2,294 4,632 4,666
Benefits and expenses 2,139 2,073 4,291 4,199
-------------------------------------- ---------------------------------
Income before taxes 171 221 341 467
Income tax expense 54 73 114 134
-------------------------------------- ---------------------------------
Net income $117 $148 $227 $333
===================================================================================================================================
Realized investment gains (losses), net of taxes ($4) $19 ($6) $100
===================================================================================================================================
</TABLE>
Net income for the Employee Life and Health Benefits segment decreased 21% for
the second quarter and 32% for the six months of 1996, compared with the same
periods last year. Excluding after-tax realized investment results, income was
$121 million and $233 million for the second quarter and six months of 1996,
compared with $129 million and $233 million for the same periods last year.
The segment's indemnity operations had after-tax earnings, excluding realized
investment results, of $69 million and $125 million for the second quarter and
six months of 1996, compared with $79 million and $126 million for the same
periods in 1995. These declines reflect lower earnings primarily in the
long-term disability (LTD) and group life lines of business due to unfavorable
claim experience, and a $6 million after-tax charge in the long-term care line
of business resulting from a review of account balances. Partially offsetting
these declines were increased earnings primarily reflecting higher fees for
Administrative Services Only (ASO) business, improved investment margins on
certain experience-rated business and, to a lesser extent, higher earnings from
medical rate increases. Results for the second half of 1996, compared with the
same period last year, are expected to be lower due to the timing of medical
rate increases and less favorable LTD experience.
The segment's HMO operations had after-tax earnings, excluding realized
investment results, of $52 million and $108 million for the second quarter and
six months of 1996, compared with $50 million and $107 million for the same
periods in 1995. Second quarter and six months of 1996 and 1995 include
favorable after-tax adjustments of $5 million and $6 million, respectively, from
certain reserve reviews. Results for the six months of 1996 also included a
first quarter after-tax gain of $8 million from the sales of subsidiaries.
Excluding the above, the improvement in results for the second quarter of 1996
reflects the favorable effects of membership growth and improved medical cost
experience, partially offset by competitive pressures on rates. The decline in
earnings for the six months of 1996 reflects competitive pressures on rates and
higher operating expenses associated with business growth and customer service
initiatives, which were partially offset by the favorable effects of membership
growth and the improvement in medical cost experience. Results for the full year
of 1996 are expected to be about level with 1995.
11
<PAGE> 14
Premiums and fees increased 2% and 1% for the second quarter and six 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 12%, compared with June 30, 1995 and increased
10%, compared with 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 second quarter and six months of 1996 were
approximately $2.4 billion and $4.8 billion, compared with $2.4 billion and $4.9
billion for the same periods 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. Premium equivalents, as a percentage of total
adjusted premiums and fees, were 54% and 55% for the six months of 1996 and
1995, respectively. ASO plans accounted for 46% and 45% of total adjusted
premiums and fees for the six months of 1996 and 1995, respectively.
EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
<TABLE>
<CAPTION>
===================================================================================================================================
Three Months Ended Six Months Ended
FINANCIAL SUMMARY June 30, June 30,
(In millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $50 $41 $88 $83
Net investment income 431 432 859 856
Realized investment gains (losses) (6) 1 10 4
-------------------------------------- ---------------------------------
Total revenues 475 474 957 943
Benefits and expenses 415 405 806 799
-------------------------------------- ---------------------------------
Income before taxes 60 69 151 144
Income tax expense 20 23 50 47
-------------------------------------- ---------------------------------
Net income $40 $46 $101 $97
===================================================================================================================================
Realized investment gains (losses), net of taxes ($4) $-- $6 $2
===================================================================================================================================
</TABLE>
Net income for the Employee Retirement and Savings Benefits segment decreased
13% and increased 4% for the second quarter and six months of 1996, compared
with the same periods of 1995. Results for the second quarter and six 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 results,
income was $52 million and $103 million for the second quarter and six months of
1996, compared with $46 million and $95 million for the same periods last year.
These improvements primarily reflect higher earnings from an increased asset
base.
Revenues, excluding realized investment results, increased 1% year over year,
reflecting higher investment yields, offset by customers' redirection of
investments to separate accounts.
12
<PAGE> 15
Assets under management is generally a key determinant of earnings for this
segment. For the six months ended June 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 3,068 2,804
Investment results 1,360 1,329
Increase (decrease) in fair value of assets (422) 1,555
Customer withdrawals (1,236) (1,107)
Benefit payments and other (2,529) (2,276)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance -- June 30 $38,424 $36,187
===================================================================================================================================
</TABLE>
Premiums and deposits increased 9% in the six months of 1996, compared with the
same period in 1995, reflecting higher sales. Approximately 52% and 43% of the
premiums and deposits for the six months of 1996 and 1995, respectively, were
from new customers. The increase in investment results for the six months of
1996, compared with 1995, reflects separate account asset growth. The decrease
for 1996 in the fair value of assets is due to market value depreciation for
fixed maturities. The growth in benefit payments and other, compared with the
prior year, primarily reflects higher scheduled maturities on guaranteed
investment contracts.
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>
===================================================================================================================================
Three Months Ended Six Months Ended
FINANCIAL SUMMARY June 30, June 30,
(In millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $209 $221 $445 $430
Net investment income 271 243 523 469
Other revenues 21 23 38 35
Realized investment losses (2) (5) -- (2)
--------------------------------------- ---------------------------------
Total revenues 499 482 1,006 932
Benefits and expenses 437 419 892 818
--------------------------------------- ---------------------------------
Income before taxes 62 63 114 114
Income tax expense 22 21 40 39
--------------------------------------- ---------------------------------
Net income $40 $42 $74 $75
===================================================================================================================================
Realized investment losses, net of taxes ($2) ($3) $-- ($1)
===================================================================================================================================
</TABLE>
Net income for the Individual Financial Services segment decreased 5% and 1% for
the second quarter and six months of 1996, respectively, compared with the same
periods last year. Results for the second quarter and six months of 1996 include
a net after-tax charge of $3 million resulting from account reviews. This net
charge comprises an unfavorable adjustment to deferred policy acquisition costs
of $23 million ($15 million after-tax), a favorable policy loan investment
income adjustment of $15 million ($10 million after-tax) and a favorable
reinsurance loss reserve adjustment of $3 million ($2 million after-tax).
Results for 1995 include a $4 million after-tax benefit from additional proceeds
from
13
<PAGE> 16
the 1992 sale of a substantial portion of CIGNA's mutual fund business.
Excluding the above items and after-tax realized investment losses, income was
$45 million and $77 million for the second quarter and six months of 1996,
compared with $41 million and $72 million for the same periods last year. These
increases primarily reflect higher earnings from interest-sensitive products,
including leveraged corporate-owned life insurance (COLI), partially offset for
the six months by unfavorable mortality experience.
For the second quarter and six months of 1996, premiums and fees decreased 5%
and increased 3%, respectively, compared with the same periods last year. The
decrease for the quarter reflects lower leveraged COLI renewal premiums. The
increase for the six months primarily reflects higher sales of reinsurance and
interest-sensitive products, which were constrained by lower leveraged COLI
renewal premiums.
Net investment income, excluding the adjustment to policy loan investment income
noted above, increased 5% and 8% from the same periods last year. These
increases primarily reflect higher investment income from leveraged COLI policy
loans and annuity business.
Benefits and expenses, excluding the adjustment to deferred policy acquisition
costs and reinsurance loss reserves noted above, decreased 1% in the second
quarter and increased 7% for the six months of 1996, compared with the same
periods last year. The decrease for the quarter reflects lower expenses for
leveraged COLI, while the increase for the six months reflects business growth.
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.
14
<PAGE> 17
PROPERTY AND CASUALTY
<TABLE>
<CAPTION>
===================================================================================================================================
Three Months Ended Six Months Ended
FINANCIAL SUMMARY June 30, June 30,
(In millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $1,165 $1,219 $2,204 $2,321
Net investment income 208 206 405 395
Other revenues 60 49 113 108
Realized investment gains (losses) (13) 4 -- 72
------------------------------------ ---------------------------------
Total revenues 1,420 1,478 2,722 2,896
Benefits and expenses 1,345 1,498 2,579 2,884
------------------------------------ ---------------------------------
Income (loss) before taxes 75 (20) 143 12
Income tax expense (benefit) 24 (10) 42 (4)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $51 ($10) $101 $16
===================================================================================================================================
Realized investment gains (losses), net of taxes ($8) $2 $-- $47
===================================================================================================================================
</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 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. Consolidated Property and Casualty segment amounts were not affected
by the restructuring.
Net income increased significantly for the second quarter and six months of
1996, compared with the same periods last year. Included in net income for the
ongoing operations in the second quarter and six months of 1996 were after-tax
realized investment losses of $1 million and gains of $11 million, respectively,
compared with gains of $49 million for the six months of 1995. There were no net
after-tax realized investment gains or losses for the ongoing operations in the
second quarter of 1995. For the run-off operations, after-tax realized
investment losses were $7 million and $11 million for the second quarter and six
months of 1996, respectively, compared with gains of $2 million and losses of $2
million for the same periods in 1995.
15
<PAGE> 18
Excluding after-tax realized investment results, Property and Casualty segment
income (loss) for the second quarter and six months of 1996 and 1995, was as
follows:
<TABLE>
<CAPTION>
===================================================================================================================================
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------- -------------------------------------
(In millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ongoing operations:
Domestic $20 ($2) $32 ($16)
International 36 30 65 48
--------------------------------------- -------------------------------------
Total ongoing operations 56 28 97 32
Run-off operations 3 (40) 4 (63)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $59 ($12) $101 ($31)
===================================================================================================================================
</TABLE>
The improvement in the domestic operations for the second quarter of 1996,
compared with the same period last year, primarily reflects favorable claim
experience, including lower catastrophe losses, and, for the second quarter and
six months, lower expenses resulting from the 1995 cost reduction initiative.
Improvement in the international operations for the second quarter and six
months of 1996, compared with the same periods last year, primarily reflects
favorable claim experience. Results for the domestic and international
operations reflect a highly competitive pricing environment. The improvement in
results for the run-off operations primarily reflects lower asbestos-related and
environmental pollution losses.
Premiums and fees for the Property and Casualty segment decreased 4% and 5% in
the second quarter and six months of 1996, compared with the same periods last
year. These declines primarily reflect the application of strict underwriting
standards, continued competition (particularly in workers' compensation,
commercial package and certain international lines of business), and, for the
second quarter, an unfavorable effect from foreign currency translation of
approximately $50 million for the international business. The quarter and six
month declines also reflect lower premiums of $4 million and $54 million,
respectively, 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.
Current year catastrophes in the domestic operations were $8 million and $31
million, net of reinsurance, for the second quarter and six months of 1996.
Catastrophe losses for the six months of 1996 include $18 million for winter
storms. There were no catastrophe losses for the international operations in the
second quarter and six months of 1996. Catastrophe losses for the second quarter
and six months of 1995 were $27 million and $41 million, including losses of $27
million and $34 million for the domestic operations. The effects of reinsurance
on catastrophe losses for the second quarter and six months of 1996 and 1995
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 $16.7 billion and
$17.0 billion as of June 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.
16
<PAGE> 19
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 June 30, 1996 and December 31, 1995, CIGNA's reinsurance recoverables were
approximately $6.7 billion, net of allowances for uncollectible amounts of $708
million and $700 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 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. As additional experience and other data
become available and are reviewed, as new or improved methodologies are
developed or as current law changes, CIGNA's estimates and judgments may be
revised. 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 judgment, information currently available has been appropriately
considered in estimating CIGNA's loss reserves and reinsurance recoverables.
The following table shows the adverse pre-tax effects on the Property and
Casualty segment's results of operations from prior year development, net of
reinsurance, for the second quarter and six months ended June 30:
<TABLE>
<CAPTION>
===================================================================================================================================
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
(In millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos-related $10 $40 $14 $61
Environmental pollution 9 46 26 94
Workers' Compensation 7 29 19 40
Other 27 4 30 17
- -----------------------------------------------------------------------------------------------------------------------------------
Total $53 $119 $89 $212
===================================================================================================================================
</TABLE>
During the third quarter of 1995, CIGNA significantly increased its
asbestos-related and environmental pollution (A&E) reserves (see CIGNA's 1995
Form 10-K for additional information) and, as a result, charges for A&E losses
in 1996 are expected to be substantially lower than in prior years. The prior
year development for A&E losses for the second quarter and six months of 1996
reflect revisions to previous estimates based upon recent experience. As
additional loss experience develops, A&E losses for the remainder of 1996 are
reasonably possible.
Other prior year development for the six months of 1996 and 1995 was primarily
attributable to
17
<PAGE> 20
unfavorable development on long-term exposure claims, reinsurance exposures and
unrecoverable reinsurance, partially offset by favorable development on
commercial package and commercial fire lines of business.
Total prior year development for the run-off operations was $36 million and $72
million in the second quarter and six months of 1996, respectively, compared
with $100 million and $187 million for the same periods of 1995. Total prior
year development for the ongoing operations was $17 million in the second
quarter and six months of 1996, compared with $19 million and $25 million for
the same periods of 1995.
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 for the second quarter of 1996 and 1995 of $17
million and $21 million, respectively, which included after-tax realized
investment losses of $3 million and $2 million, respectively. Net losses for the
six months of 1996 and 1995 were $34 million and $26 million, respectively,
which included after-tax realized investment losses of $2 million and gains of
$12 million, respectively. Excluding after-tax realized investment results,
losses were $14 million and $19 million for the second quarters of 1996 and
1995, and $32 million and $38 million for the six months of 1996 and 1995. These
decreases in losses primarily reflect lower net interest expense and higher
investment management fees.
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 six months of 1996, cash and cash equivalents decreased $125
million from $1.6 billion as of December 31, 1995. This decrease primarily
reflects withdrawals from contractholder deposit funds, net of deposits and
interest credited, ($462 million); payments of dividends on and repurchases of
CIGNA common stock ($163 million); and cash used for operating activities ($58
million), reflecting the timing of cash receipts and cash disbursements and
earnings. The decrease in cash flows was partially offset by cash provided by
investing activities ($598 million), primarily net investment sales and
maturities ($593 million).
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 $1.04 billion of long-term debt outstanding at June 30, 1996, compared
with $1.07 billion at December 31, 1995. As of June 30, 1996, CIGNA had
approximately $800 million remaining under shelf registration statements that
may be issued as debt or equity securities, or both, depending upon market
conditions and CIGNA's capital requirements.
At June 30, 1996, CIGNA's short-term debt, primarily commercial paper, amounted
to $406 million, a decrease of $8 million from December 31, 1995.
18
<PAGE> 21
In connection with the domestic property and casualty restructuring, CIGNA
contributed additional capital of $250 million and $125 million to these
property and casualty 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 $66
million, or 592,000 shares, of common stock were purchased as of July 31, 1996.
Shares have been, and are expected to continue to be, purchased with internal
funds.
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. CIGNA does
not expect the effect of this plan amendment as well as a change in actuarial
assumptions in connection with amending the plan to be material to its results
of operations, liquidity or financial condition. For additional information, see
Note 7 to the Financial Statements.
19
<PAGE> 22
INVESTMENT ASSETS
<TABLE>
<CAPTION>
================================================================================================================================
June 30, December 31,
(In millions) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities $33,918 $36,241
Equity securities 715 661
Mortgage loans 11,245 11,010
Real estate 1,262 1,283
Other, primarily policy loans 8,341 8,515
- --------------------------------------------------------------------------------------------------------------------------------
Total investment assets $55,481 $57,710
================================================================================================================================
</TABLE>
Additional information regarding CIGNA's investment assets is included in Note 3
to the second 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>
================================================================================================================================
June 30, December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities 28% 30%
Mortgage loans 56% 58%
Real estate 57% 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.
As of June 30, 1996, fixed maturities had an aggregate fair value, including
policyholder share, that was greater than amortized cost by $1.3 billion,
compared with 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 $142 million as of June 30, 1996, compared with $137 million as
of December 31, 1995. There were no cumulative write-downs for potential problem
bonds as of June 30, 1996 and December 31, 1995.
PROBLEM BONDS
Bonds that are delinquent or restructured as to terms, typically interest rate
and, in certain cases, maturity date, are considered problem bonds. As of June
30, 1996 and December 31, 1995, problem bonds, including amounts attributable to
policyholder contracts, were $189 million and $196 million, net of related
cumulative write-downs of $154 million and $140 million, respectively.
20
<PAGE> 23
CUMULATIVE WRITE-DOWNS FOR BONDS
Cumulative write-downs for bonds as of June 30, 1996 and 1995 were $156 million
and $131 million, including $55 million and $52 million attributable to
policyholder contracts, respectively. Also, cumulative write-downs as of June
30, 1996 and 1995 included $2 million and $4 million, respectively, for bonds no
longer classified as problem or potential problem bonds.
During the six months of 1996 and 1995, write-downs of $25 million and $18
million, respectively, were established for problem bonds, including $8 million
and $9 million, respectively, attributable to policyholder contracts. See the
Summary on page 23 for the adverse after-tax effect of write-downs on
policyholder contracts and on CIGNA's net income.
EFFECT OF NON-ACCRUALS FOR BONDS
Interest income is recognized on problem bonds only when payment is received.
See the Summary on page 23 for the adverse effect of non-accruals for bonds on
policyholder contracts and on CIGNA's net income.
MORTGAGE LOANS
<TABLE>
<CAPTION>
==============================================================================================================================
June 30, December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans (in millions) $11,245 $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 six months of 1996, $695 million of mortgage loans was scheduled to
mature, of which $246 million was paid in full, $123 million was extended at
existing loan rates for a weighted average of six months and $269 million was
refinanced at current market rates. Mortgage loan extensions and refinancings
are loans in good standing. The remaining scheduled maturities of $57 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: 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. Potential problem mortgage loans,
including amounts attributable to policyholder contracts, were $348 million as
of June 30, 1996, compared with $211 million as of December 31, 1995, net of
related valuation reserves of $35 million and $29 million,
21
<PAGE> 24
respectively.
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 June 30, 1996, restructured mortgage loans with
a carrying value of approximately $300 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% as
of June 30, 1996.
During the six months of 1996, approximately $55 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 the terms
were generally equivalent to terms that CIGNA was willing to accept for a
comparable new loan at the time of restructure.
As of June 30, 1996 and December 31, 1995, problem mortgage loans, including
amounts attributable to policyholder contracts, were $514 million and $575
million, net of valuation reserves of $86 million and $59 million, respectively.
VALUATION RESERVES FOR MORTGAGE LOANS
Valuation reserves for mortgage loans at June 30, 1996 and 1995 were $121
million and $100 million, respectively, including $78 million and $68 million
attributable to policyholder contracts. The increase (decrease) in valuation
reserves established for problem and potential problem mortgage loans during the
six months of 1996 and 1995 were $49 million and $(4) million, respectively.
Such amounts included $29 million attributable to policyholder contracts for
1996 and no amount attributable to policyholder contracts in 1995. The net
decrease in valuation reserves established in the six 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 23 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
Interest income is recognized on problem mortgage loans only when payment is
received. See the Summary on page 23 for the effect of non-accruals for mortgage
loans on policyholder contracts and on CIGNA's net income.
REAL ESTATE
As of June 30, 1996 and December 31, 1995, investment real estate, net of
reserves and write-downs, included: 1) real estate held for the production of
income of $507 million and $563 million, respectively, and 2) real estate held
for sale, primarily properties acquired as a result of foreclosure of mortgage
loans, of $755 million and $720 million, respectively.
REAL ESTATE WRITE-DOWNS AND RESERVES
Cumulative write-downs and valuation reserves for real estate at June 30, 1996
and 1995 were $394 million and $433 million, respectively, including $200
million and $229 million attributable to policyholder contracts. See the Summary
on page 23 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.
22
<PAGE> 25
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 June 30, Six Months Ended June 30,
------------------------------------------------------- ----------------------------------------------------
1996 1995 1996 1995
------------------------ ---------------------- ------------------------- --------------------
Policy- Policy- Policy- Policy-
(In millions) holder CIGNA holder CIGNA holder CIGNA holder CIGNA
Contracts Contracts Contracts Contracts
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Write-downs
and valuation
reserves:
Bonds $5 $6 $6 $4 $8 $11 $9 $6
Mortgage loans 17 9 5 2 29 13 -- (3)
Real estate -- -- 4 2 (1) 1 11 5
- -----------------------------------------------------------------------------------------------------------------------------------
Total $22 $15 $15 $8 $36 $25 $20 $8
===================================================================================================================================
Non-accruals:
Bonds $2 $5 $3 $5 $5 $8 $6 $8
Mortgage loans 3 1 1 (1) 3 1 5 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $5 $6 $4 $4 $8 $9 $11 $8
===================================================================================================================================
</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 in CIGNA's businesses; and 5) significant changes in interest
rates.
23
<PAGE> 26
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) During the quarterly period ended June 30, 1996, and
as of the filing date, CIGNA filed the following
Reports on Form 8-K:
- dated July 30, 1996, Item 5--containing a
news release regarding its second quarter
1996 results.
- dated April 30, 1996, Item 5--containing a
news release regarding its first quarter
1996 results.
-24-
<PAGE> 27
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: August 9, 1996
-25-
<PAGE> 28
Exhibit Index
<TABLE>
<CAPTION>
Method of
Number Description Filing
- ------ ----------- ----------
<C> <C>
10.1 Amendment No. 1 to the Filed herewith.
CIGNA Long-Term Incentive
Plan effective as of
August 15, 1996
10.2 Amendment No. 3 to the Filed herewith.
CIGNA Corporation Stock Plan
effective as of August 15, 1996
10.3 Amendment No. 3 to the Filed herewith.
CIGNA Corporation Executive
Stock Incentive Plan (as
Amended and Restated as of
March 23, 1988) effective
as of August 15, 1996
10.4 Deferred Compensation Plan Filed herewith.
for Directors of CIGNA Corporation
as Amended and Restated as of
August 15, 1996
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>
-26-
<PAGE> 1
EXHIBIT 10.1
Amendment No. 1
to the
CIGNA LONG-TERM INCENTIVE PLAN
1. Section 11.3 of Article 11 of the Plan is amended in its entirety, to
read as follows:
11.3 UNEXERCISED OPTIONS, GRANT FORFEITURES AND OPTIONS EXERCISED WITH
COMMON STOCK.
(a) All Common Stock (1) under options granted under this
Plan which expire or are canceled or surrendered or
(2) which is forfeited pursuant to Section 7.4, shall
be available for further awards under this Plan upon
such expiration, cancellation, surrender and
forfeiture; and
(b) Any Common Stock which is used by a Participant as
full or partial payment to the Company for the
purchase of Common Stock acquired upon exercise of a
stock option granted under this Plan, and any shares
withheld by the Company to satisfy a Participant's
tax withholding obligations, shall be available for
further awards under this Plan.
2. Section 15.6 of Article 15 is amended in its entirety to read as
follows:
15.6 WITHHOLDING TAXES. Upon the exercise of any option or stock
appreciation right, the vesting of any Restricted Stock, or
payment of any award described in Section 4.1(d), (e) or (f),
or upon the exercise of an Incentive Stock Option prior to the
satisfaction of the holding period requirements of Code
Section 422, the Company shall have the right at its option
to:
(a) require the Participant (or personal representative
or beneficiary) to remit an amount sufficient to
satisfy federal, state and local withholding taxes;
or
(b) deduct, from any amount payable, the amount of any
taxes the Company may be required to withhold with
respect to such transaction.
The Committee may require, or permit, the Participant to remit
such amount in whole or in part in Common Stock. If the
Committee permits a Participant to elect to remit such amount
in Common Stock, any such election shall be made on or prior
to the date the withholding obligation arises and be subject
to the disapproval of the Committee. The Committee may
establish such additional conditions as it deems appropriate.
If the Participant remits such amount in Common Stock, the
number of shares of Common Stock delivered to or on behalf of
a Participant shall be reduced by the number of shares so
remitted. Common Stock so remitted shall be valued using the
Fair Market Value of Common Stock as of the date the
withholding obligation arises.
<PAGE> 2
3. Article 15 of the Plan is amended by deleting Section 15.13.
<PAGE> 1
EXHIBIT 10.2
Amendment No. 3
to the
CIGNA CORPORATION STOCK PLAN
1. Section 4.3 of Article IV of the Plan is hereby amended in its entirety, to
read as follows:
4.3 UNEXERCISED OPTIONS, GRANT FORFEITURES AND OPTIONS EXERCISED WITH
COMMON STOCK.
(a) All Common Stock (1) under options granted under this Plan
which expire or are canceled or surrendered or (2) which is
forfeited pursuant to Section 3.5, shall be available for
further awards under this Plan upon such expiration,
cancellation, surrender or forfeiture; and
(b) Any Common Stock which is used by a Participant as full or
partial payment to the Company for the purchase of Common
Stock acquired upon exercise of a stock option granted under
this Plan, and any shares withheld by the Company to satisfy a
Participant's tax withholding obligations, shall be available
for further awards under this Plan.
2. Section 8.6 of Article VIII is amended in its entirety to read as follows:
8.6 WITHHOLDING TAXES. Whenever Common Stock is to be issued or
delivered in satisfaction of options or other awards granted
hereunder, the Company shall have the right to require the
Participant to remit an amount sufficient to satisfy federal,
state and local withholding taxes prior to delivery of any
certificate for such shares. The Committee may require, or
permit, the Participant to remit such amount in whole or in
part in Common Stock. If the Committee permits a Participant
to elect to remit such amount in Common Stock, any such
election shall be made on or prior to the date the withholding
obligation arises and be subject to the disapproval of the
Committee. The Committee may establish such additional
conditions as it deems appropriate. If the Participant remits
such amount in Common Stock, the number of shares of Common
Stock delivered to or on behalf of a Participant shall be
reduced by the number of shares so remitted. Common Stock so
remitted shall be valued using the Fair Market Value of Common
Stock as of the date the withholding obligation arises.
<PAGE> 1
EXHIBIT 10.3
Amendment No. 3
to the
CIGNA CORPORATION
EXECUTIVE STOCK INCENTIVE PLAN
Section 8.6 of Article VIII of the Plan is hereby amended in its
entirety, effective as of August 15, 1996, to read as follows:
8.6 WITHHOLDING TAXES. Whenever Common Stock is to be issued or
delivered in satisfaction of options or other awards granted
hereunder, the Company shall have the right to require the
Participant to remit an amount sufficient to satisfy federal,
state and local withholding taxes prior to delivery of any
certificate for such shares. The Committee may require, or
permit, the Participant to remit such amount in whole or in
part in Common Stock. If the Committee permits a Participant
to elect to remit such amount in Common Stock, any such
election shall be made on or prior to the date the withholding
obligation arises and be subject to the disapproval of the
Committee. The Committee may establish such additional
conditions as it deems appropriate. If the Participant remits
such amount in Common Stock, the number of shares of Common
Stock delivered to or on behalf of a Participant shall be
reduced by the number of shares so remitted. Common Stock so
remitted shall be valued using the Fair Market Value of Common
Stock as of the date the withholding obligation arises.
<PAGE> 1
EXHIBIT 10.4
DEFERRED COMPENSATION PLAN FOR DIRECTORS OF CIGNA CORPORATION
(Amended and Restated Effective August 15, 1996)
ARTICLE I. DEFINITIONS
The following are defined terms wherever they appear in the Plan.
1.1 "Administrator" shall mean the person, or committee, appointed by
the Chief Executive Officer of CIGNA Corporation, and charged with
responsibility for administration of the Plan.
1.2 "Committee" shall mean the Committee on Directors of the Board of
Directors of CIGNA Corporation, or the successor to such committee.
1.3 "Board of Directors" or "Board" shall mean the Board of Directors
of CIGNA Corporation.
1.4 "Change of Control" shall mean that:
(a) A corporation, person or group acting in concert as
described in Section 14(d)(2) of the Securities Exchange Act of 1934 as amended
("Exchange Act"), holds or acquires beneficial ownership, within the meaning of
Rule 13d-3 promulgated under the Exchange Act, of a number of preferred or
common shares of CIGNA Corporation having voting power which is either: (1) more
than 50 percent of the voting power of the shares which voted in the election of
directors of CIGNA Corporation at the shareholders' meeting immediately
preceding such determination; or, (2) more than 25 percent of the voting power
of common shares outstanding of CIGNA Corporation; or,
(b) As a result of a merger or consolidation to which CIGNA
Corporation is a party, either: (1) CIGNA Corporation is not the surviving
corporation; or, (2) Directors of CIGNA Corporation immediately prior to the
merger or consolidation constitute less than a majority of the Board of
Directors of the surviving corporation; or,
(c) A change occurs in the composition of the Board at any
time during any consecutive 24-month period such that the "Continuity Directors"
cease for any reason to constitute a majority of the Board. For purposes of the
preceding sentence, "Continuity Directors" shall mean those members of the Board
who either: (1) were directors at the beginning of such consecutive 24-month
period, or, (2) were elected by, or upon nomination or recommendation of, at
least a majority (consisting of at least nine directors) of the Board.
1.5 "CIGNA Common Stock" or "Common Stock" or "Stock" shall mean the
common stock of CIGNA Corporation, par value of one dollar ($1.00) per share.
1.6 "Deferral Election" shall mean the instrument executed by a
Participant which specifies amounts and items of compensation to be deferred.
<PAGE> 2
1.7 "Deferred Compensation Account" or "Account" shall mean the
separate account established under the Plan for each Participant, as described
in Section 3.1.
l.8 "Participant" shall mean each individual who as a director of CIGNA
Corporation elects to participate in the Plan in accordance with the terms and
conditions of the Plan.
1.9 "Payment Election" shall mean the instrument executed by a
Participant which specifies the method of payment of compensation deferred.
1.10 "Plan" shall mean the Deferred Compensation Plan for Directors of
CIGNA Corporation, as it may be amended or restated from time to time by the
Board of Directors.
1.11 "Restatement Date" shall mean January 1, 1996, the effective date
of the Plan, as amended and restated.
1.12 "Termination of Service" shall mean termination of services as a
director of CIGNA Corporation.
1.12 "Valuation Date" shall mean the close of business on the last
business day of each month.
ARTICLE II. PARTICIPATION
2.1 Eligibility to Participate in the Plan.
The individuals who are eligible to participate in the Plan are those
persons who serve as directors of CIGNA Corporation.
2.2 Participation in the Plan.
(a) A Participant may elect to defer receipt of all or a
portion of those items of compensation for services as a director as are
specified by the Administrator.
(b) The election to defer is made by delivering a properly
executed Deferral Election to the Administrator. The Deferral Election shall
specify the item or items of compensation to be deferred, and the amount of such
compensation to be deferred. The election for payment of compensation deferred
is made by delivering a properly executed Payment Election to the Administrator.
The Payment Election shall specify the method by which such deferred
compensation is to be paid, and the date or dates for payment of such deferred
compensation.
(c) An election to defer compensation must be filed by the
Participant prior to the commencement of a calendar year during which such
compensation will be paid.
-2-
<PAGE> 3
(d) Notwithstanding Section 2.2(c), an election to defer
compensation made by an individual who subsequently begins active service as a
director of CIGNA Corporation, is filed prior to the date upon which such active
service begins, shall be effective according to Section 2.2(e)(2), below.
(e) An election to defer compensation is effective: (1) for
the year beginning after the election, and for subsequent years, unless modified
or revoked; or, (2) if Section 2.2(d) applies, for the remainder of the first
year of active service, as of the first day of active service, and for
subsequent years, unless modified or revoked.
2.3 Elections Pertaining to Payments.
In executing a Payment Election, the Participant shall elect among the
methods of payment as are specified by the Committee.
(a) If a method of payment provides for periodic
payments, the payments shall be made at least annually, over a period
not to exceed 15 (fifteen) years.
(b) If the payments are to commence after Termination
of Service, no payments may be made before the first day of January
following the calendar year during which the Participant terminates
service.
(c) The balance of a Participant's Account shall be
paid, in all events, no later than January of the fifteenth year
following Termination of Service.
(d) If there is not in effect as of Participant's
Termination of Service a valid Payment Election, the Participant's
Account shall be paid annually over a period of 15 (fifteen) years.
2.4 Modification of Elections Pertaining to Payments.
With respect to payment of deferred compensation following Termination
of Service, a Participant may request modification of his existing Payment
Election, for payment under another method among those specified by the
Committee. Any request for modification of such Payment Election shall be made
before the Participant terminates service. The Committee shall consider any such
modification request. In determining whether the request should be allowed, the
Committee shall consider the Participant's financial needs, including any
changed circumstances, as well as the projected financial needs of CIGNA
Corporation. If the Committee determines that the request should be allowed, the
requested modifications shall be made. The Participant shall effect the
modifications through execution of a new Payment Election, which shall
constitute the only Payment Election which is outstanding and effective.
Notwithstanding the foregoing, a Participant may not request modification of a
fixed date elected for payment of deferred compensation invested in hypothetical
Common Stock.
-3-
<PAGE> 4
2.5 Reduction or Termination of Future Deferral.
(a) A Participant may elect to reduce or to revoke his
deferral of compensation, but such election shall have effect only
prospectively. A Participant shall effect an election to reduce his deferral of
compensation by execution of a new Deferral Election, which shall constitute the
only Deferral Election which is outstanding and effective. A Participant shall
effect an election to revoke his deferral of compensation by informing the
Administrator in writing. Only one election to reduce and one election to revoke
may be made under this Section 2.5 by each Participant in a calendar year.
(b) An election to reduce or to revoke deferral of
compensation shall become effective in the second calendar month following
receipt of such election by the Administrator.
ARTICLE III. COMPENSATION DEFERRED
3.1 Deferred Compensation Account.
A Deferred Compensation Account shall be established for each director
when the director becomes a Participant. Compensation deferred by a Participant
under the Plan shall be credited to the Account on the date such compensation
would have been paid to the Participant. Hypothetical income on deferred
compensation shall be credited to the Account as provided in Section 3.3, below.
3.2 Balance of Deferred Compensation Account.
The balance of each Participant's Deferred Compensation Account shall
include compensation deferred by the Participant, plus income and gains credited
with respect to hypothetical investment. Losses from hypothetical investment
shall reduce the Participant's Account balance. The balance of each
Participant's Account shall be determined as of each Valuation Date.
3.3 Hypothetical Investment.
(a) Compensation deferred under the Plan which would have been
paid in cash shall be assumed to be invested, without charge, in one or more
hypothetical investment vehicles as are specified from time to time by the
Committee. With respect to such hypothetical investment:
(1) Cash compensation deferred shall be deemed to
earn income under the hypothetical investment vehicle. The Administrator shall
credit such income to the Participant's Account, pursuant to Section 3.4 below.
(2) The Committee, in its sole discretion, may
provide that cash compensation deferred after the Restatement date is deemed
invested in a different hypothetical investment vehicle or vehicles than the
investment vehicle in which cash compensation deferred before the Restatement
Date is deemed invested.
-4-
<PAGE> 5
(3) The Committee, in its sole discretion, may
provide Plan Participants with options for one or more additional hypothetical
investment vehicles for investment of cash compensation deferred under the Plan,
with respect to which:
(A) a Participant may modify his election
of hypothetical investment, through a written request to the Administrator;
provided that,
(B) only one such modification shall be
allowed during any calendar quarter.
(C) any such modification shall be
effective in the second calendar month following receipt of the request by the
Plan Administrator.
(D) such modifications will be in accordance
with rules and procedures adopted by the Plan Administrator.
(b) Compensation deferred under the Plan as an alternative to
receipt of Common Stock shall be assumed to be invested, hypothetically and
without charge, in whole shares of hypothetical Common Stock. Amounts equal to
cash dividends which would have been paid on shares of Common Stock shall be
deemed paid on whole shares of hypothetical Common Stock and credited and
hypothetically invested pursuant to Section 3.3(a), above. Shares of
hypothetical Common Stock shall be subject to adjustment in order to reflect
Common Stock dividends, splits, and reclassification. Notwithstanding any other
provision of the Plan, deferred compensation invested in hypothetical Common
Stock must remain so invested (1) for a period of not less than six months, or
(2) until death, disability, Termination of Service, or (3) until approval of
the Board or Committee. Deferred compensation invested in hypothetical Common
Stock must remain deemed invested in hypothetical Common Stock, and no other
investment vehicle available hereunder may be substituted therefor.
(c) In the event of a Change of Control, the Committee shall
provide Participants with the option for investment in at least one hypothetical
investment vehicle, the annual income earned on which must be not less than 50
basis points over the Ten-Year Constant Treasury Maturity Yield as reported by
the Federal Reserve Board, based upon the November averages for the preceding
year.
3.4 Time of Hypothetical Investment.
(a) The balance of each Participant's Deferred Compensation
Account shall be deemed hypothetically invested on each Valuation Date, and
income shall accrue on such balance upon such date, from the previous Valuation
Date.
(b) Compensation which would have been paid in cash shall be
deemed invested on the Valuation Date next following such hypothetical
investment or credit.
(c) Compensation hypothetically invested in Common Stock shall
be deemed invested in whole shares of Common Stock as of the date such
compensation otherwise would have been payable to the Participant. The number of
whole shares of Common Stock in which
-5-
<PAGE> 6
compensation is deemed hypothetically invested shall be determined with respect
to the last trade date in the month in which such compensation otherwise would
have been payable, by reference to the last quoted transaction in such month as
reported on the Composite tape (or successor means of publishing stock prices),
provided, that in absence of such information, the Stock value shall be
determined by the Committee.
3.5 Statement of Account.
The Administrator shall provide each Participant a statement of his
Deferred Compensation Account at least annually.
ARTICLE IV. PAYMENT OF DEFERRED COMPENSATION
4.1 Payment of Deferred Compensation.
(a) The Administrator shall pay amounts from the Participant's
Account, according to the Participant's Payment Election.
(b) Compensation deferred under the Plan shall be paid to the
Participant in cash pursuant to Section 4.1(a).
4.2 Financial Necessity Payment.
Notwithstanding any other provision of the Plan, if the Board or
Committee, after consideration of a Participant's application, determines that
the Participant has a financial necessity beyond the Participant's control, and
of such a substantial nature that immediate payment of compensation deferred
under the Plan is warranted, the Board or Committee in its sole and absolute
discretion may direct that all or a portion of the balance of the Participant's
Deferred Compensation Account be paid to the Participant in cash. The amount of
any such distribution shall be limited to the amount deemed necessary by the
Board or Committee to alleviate or remedy the hardship. The payment shall be
made in a manner and at the time specified by the Board or Committee. A
Participant receiving a Financial Necessity Payment is deemed to have revoked
his election for deferral of compensation under the Plan, as of the time of the
Financial Necessity Payment. Any subsequent deferral of compensation under the
Plan shall require that the Participant execute a new Deferral Election, subject
to terms of Section 2.2(e)(1) hereof.
4.3 Certain Accelerated Payments.
(a) If a Participant terminates service under circumstances
which are such that the Committee deems it in the best interest of the
Participant and of CIGNA Corporation that payment of the Participant's Deferred
Compensation Account be accelerated, then the Committee, upon its own motion and
in its sole discretion, may direct that the Participant's Account balance be
paid to him immediately.
-6-
<PAGE> 7
(b) If, as a result of substantial and unforeseen changes
affecting (1) the business of CIGNA Corporation, (2) the personal or
professional circumstances of a Participant, or (3) operation or administration
of the Plan, the Board or Committee determines that the interests of the
Participant and of CIGNA Corporation are best served through accelerated payment
of the Participant's Deferred Compensation Account, the Board or Committee on
its own motion and in its sole discretion may direct that the Participant's
account balance be paid to him immediately.
(c) A Participant who is not entitled to payment of his
Deferred Compensation Account under any other provision of Article IV may make a
written request to the Board or Committee for an accelerated payment of his
entire Deferred Compensation Account balance. If the Board or Committee receives
such a request, it shall make a final valuation of the unrestricted portion of
the Participant's Deferred Compensation Account and pay ninety per cent (90%) of
the Deferred Compensation Account balance to the Participant. The Participant
shall forfeit the remaining ten per cent (10%) of his Deferred Compensation
Account balance to the Corporation. Payments under this Section 4.3(c) apply
only to that portion of a Participant's Account, including hypothetical
investment results, attributable to compensation deferred after 1995.
4.4 Payments of a Deceased Participant's Account
(a) If a Participant dies before his entire Account
has been paid to him, the Administrator shall pay the Account balance in a
single lump sum payment to the person(s) or trust(s) designated in writing by
the Participant as his beneficiary(ies) under the Plan. The Administrator is
authorized to establish rules and procedures for designations of beneficiaries
and shall have the sole discretion to make determinations regarding the
existence and identity of beneficiaries and the validity of beneficiary
designations.
(b) Notwithstanding Section 4.4(a), the Administrator
shall pay the Account balance, as soon as administratively feasible, in a single
lump sum payment to the Participant's estate if:
(1) The Participant dies without having a
valid beneficiary designation in effect;
(2) The Participant's designated beneficiary
has predeceased him;
(3) The Participant's designated beneficiary
cannot be found after what the Administrator determines, in his sole discretion,
has been a reasonably diligent search; or
(4) The Administrator determines, in his
sole discretion, that a payment in such form is in the best interest of the
Corporation.
-7-
<PAGE> 8
ARTICLE V. GENERAL PROVISIONS
5.1 Committee Membership.
A Participant who is also a member of the Committee shall take no part
in any decision pertaining to a request by such Participant under Sections 2.4,
4.1(c), 4.2, and 4.3 hereof.
5.2 Participant's Rights Unsecured.
The right of any Participant to receive payments under the provisions
of the Plan represents an unsecured claim against the general assets of CIGNA
Corporation, or against the general assets of any successor company which
assumes the liabilities of CIGNA Corporation.
5.3 Assignability.
No right to receive payments hereunder shall be transferable or
assignable by a Participant. Any attempted assignment or alienation of payments
hereunder shall be void and of no force or effect.
5.4 Administration.
Except as otherwise provided herein, the Plan shall be administered by
the Administrator who shall have the authority to adopt rules and regulations
for carrying out the Plan, and who shall interpret, construe and implement the
provisions of the Plan.
5.5 Amendment.
The Plan may be amended, restated, modified, or terminated by the Board
of Directors. No amendment, restatement, modification, or termination shall
reduce the balance of a Participant's Deferred Compensation Account as of the
Valuation Date immediately preceding such action.
5.6 Correction of Errors and Inconsistencies.
The Committee upon its own motion, or at the request of the
Administrator or of a Participant, shall have authority to effect consistency
among deferral elections, payment elections, or hypothetical investment with
respect to amounts deferred by a Participant under the Plan, so as to avoid or
to rectify difficulties in Plan administration. In no event shall such action by
the Committee reduce the dollar value of a Participant's Account balance
existing on the Valuation Date immediately preceding such action, nor shall the
Committee take action inconsistent with Section 3.3(b) hereof. The Committee may
take such action with respect to a Participant's Account, regardless of whether
such Participant may continue as a director of CIGNA Corporation, or whether he
may have terminated service. Without limiting the generality of the foregoing,
the Committee may take such action upon the request of the Administrator, in
order to avoid deferral, or payment or other distribution of fractional shares
of Stock.
-8-
<PAGE> 9
5.8 Construction.
The masculine gender where appearing in the Plan shall be deemed to
include the feminine gender. The singular shall be deemed to include the plural;
and the plural the singular.
-9-
<PAGE> 1
CIGNA CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
===================================================================================================================================
PRIMARY EARNINGS PER SHARE
<S> <C> <C> <C> <C>
NET INCOME AVAILABLE TO
COMMON SHARES $ 231 $ 205 $ 469 $ 495
- ----------------------------------------------------------=========================================================================
WEIGHTED AVERAGE SHARES:
Common shares 76,382,263 72,459,254 76,381,939 72,385,231
Common share equivalents applicable
to stock options 439,160 156,283 471,801 143,414
- -----------------------------------------------------------------------------------------------------------------------------------
Total 76,821,423 72,615,537 76,853,740 72,528,645
- ----------------------------------------------------------=========================================================================
PRIMARY EARNINGS PER SHARE $ 3.00 $ 2.82 $ 6.10 $ 6.82
- ----------------------------------------------------------=========================================================================
FULLY DILUTED EARNINGS PER SHARE
NET INCOME AVAILABLE TO
COMMON SHARES:
Net income $ 231 $ 205 $ 469 $ 495
Adjusted for:
Interest expense (net of tax) on
convertible debentures - 4 - 7
- -----------------------------------------------------------------------------------------------------------------------------------
Net income available to common shares $ 231 $ 209 $ 469 $ 502
- ----------------------------------------------------------=========================================================================
WEIGHTED AVERAGE SHARES:
Common shares 76,382,263 72,459,254 76,381,939 72,385,231
Common share equivalents applicable
to stock options 501,985 240,331 503,214 211,660
Assumed conversion of convertible debentures - 3,625,956 - 3,625,956
- -----------------------------------------------------------------------------------------------------------------------------------
Total 76,884,248 76,325,541 76,885,153 76,222,847
- ----------------------------------------------------------=========================================================================
FULLY DILUTED EARNINGS PER SHARE $ 3.00 $ 2.74 $ 6.10 $ 6.59
- ----------------------------------------------------------=========================================================================
</TABLE>
<PAGE> 1
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
==============================================================================================================================
<S> <C> <C>
Income before income taxes $703 $706
---- ----
Fixed charges included in income:
Interest expense 55 63
Interest portion of rental expense 44 46
---- ----
Total fixed charges included in income 99 109
---- ----
Income available for fixed charges $802 $815
- --------------------------------------------------------------------------------------------------=========================
RATIO OF EARNINGS TO FIXED CHARGES 8.1 7.5
- --------------------------------------------------------------------------------------------------=========================
</TABLE>
<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 JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 33,918
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 715
<MORTGAGE> 11,245
<REAL-ESTATE> 1,262
<TOTAL-INVEST> 55,481
<CASH> 1,434
<RECOVER-REINSURE> 7,130<F1>
<DEFERRED-ACQUISITION> 1,161
<TOTAL-ASSETS> 95,899
<POLICY-LOSSES> 11,750
<UNEARNED-PREMIUMS> 2,059
<POLICY-OTHER> 19,004
<POLICY-HOLDER-FUNDS> 29,292
<NOTES-PAYABLE> 1,443
0
0
<COMMON> 88
<OTHER-SE> 6,797
<TOTAL-LIABILITY-AND-EQUITY> 95,899
6,889
<INVESTMENT-INCOME> 2,194
<INVESTMENT-GAINS> (1)
<OTHER-INCOME> 294
<BENEFITS> 6,273
<UNDERWRITING-AMORTIZATION> 594
<UNDERWRITING-OTHER> 1,806
<INCOME-PRETAX> 703
<INCOME-TAX> 234
<INCOME-CONTINUING> 469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469
<EPS-PRIMARY> 6.10
<EPS-DILUTED> 6.10
<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>
