<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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 April 30, 1996, 76,511,754 shares of the issuer's Common Stock
were outstanding.
<PAGE> 2
CIGNA CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 1
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 4. Submission of Matters to a Vote 22
of Security Holders.
Item 6. Exhibits and Reports on Form 8-K. 23
SIGNATURE 24
EXHIBIT INDEX 25
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED
EARNINGS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
==============================================================================================
<S> <C> <C>
REVENUES
Premiums and fees $ 3,390 $ 3,418
Net investment income 1,083 1,027
Other revenues 142 127
Realized investment gains 30 182
---------- ---------
Total revenues 4,645 4,754
---------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,144 3,197
Policy acquisition expenses 272 306
Other operating expenses 871 849
---------- ---------
Total benefits, losses and expenses 4,287 4,352
---------- ---------
INCOME BEFORE INCOME TAXES 358 402
---------- ---------
Income taxes:
Current 76 36
Deferred 44 76
---------- ---------
Total income taxes 120 112
---------- ---------
NET INCOME 238 290
Dividends declared (60) (53)
Retained earnings, beginning of period 4,041 4,052
- ---------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 4,219 $ 4,289
- ------------------------------------------------------------------===========================
EARNINGS PER SHARE INFORMATION:
Primary $ 3.10 $ 4.00
Fully Diluted $ 3.10 $ 3.85
- ------------------------------------------------------------------===========================
DIVIDENDS DECLARED PER SHARE $ 0.80 $ 0.76
- ------------------------------------------------------------------===========================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
1
<PAGE> 4
CIGNA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1996 1995
===============================================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value (amortized $ 34,761 $ 36,241
cost, $33,121; $33,275)
Equity securities, at fair value (cost, $597; $565) 689 661
Mortgage loans 11,285 11,010
Policy loans 7,123 7,107
Real estate 1,276 1,283
Other long-term investments 267 295
Short-term investments 699 1,113
---------- ---------
Total investments 56,100 57,710
Cash and cash equivalents 1,269 1,559
Accrued investment income 953 908
Premiums, accounts and notes receivable 4,229 4,268
Reinsurance recoverables 7,176 7,120
Deferred policy acquisition costs 1,123 1,109
Property and equipment, net 831 864
Deferred income taxes, net 2,078 1,866
Other assets 1,110 1,149
Goodwill 1,107 1,118
Separate account assets 19,441 18,232
- ---------------------------------------------------------------------------------------------------------------
Total $ 95,417 $ 95,903
- ---------------------------------------------------------------------------====================================
LIABILITIES
Contractholder deposit funds $ 29,373 $ 30,055
Unpaid claims and claim expenses 19,156 19,303
Future policy benefits 11,688 12,007
Unearned premiums 2,187 2,176
---------- ---------
Total insurance and contractholder liabilities 62,404 63,541
Accounts payable, accrued expenses and other liabilities 5,086 5,408
Current income taxes 253 187
Short-term debt 435 414
Long-term debt 1,037 1,066
Separate account liabilities 19,339 18,130
---------------------------------------------------------------------------------------------------------------
Total liabilities 88,554 88,746
- ---------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 7
SHAREHOLDERS' EQUITY
Common stock (shares issued, 87) 87 87
Additional paid-in capital 2,549 2,536
Net unrealized appreciation - fixed maturities 562 1,025
Net unrealized appreciation - equity securities 71 73
Net translation of foreign currencies (41) (27)
Retained earnings 4,219 4,041
Less treasury stock, at cost (584) (578)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,863 7,157
- ---------------------------------------------------------------------------------------------------------------
Total $ 95,417 $ 95,903
- ---------------------------------------------------------------------------====================================
SHAREHOLDERS' EQUITY PER SHARE $ 89.74 $ 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>
Three Months Ended March 31,
1996 1995
================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 238 $ 290
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Insurance liabilities, net of reinsurance recoverables (74) 130
Premiums, accounts and notes receivable (50) (129)
Accounts payable, accrued expenses, other liabilities and
current income taxes (163) 46
Deferred income taxes, net 44 76
Realized investment gains (30) (182)
Gain on sale of subsidiaries and other equity interests (18) -
Other, net (26) (141)
------------ -----------
Net cash provided by (used in) operating activities (79) 90
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities - available for sale 2,023 1,531
Equity securities 109 975
Mortgage loans 104 102
Other (primarily short-term investments) 3,924 3,261
Investment maturities and repayments:
Fixed maturities - available for sale 897 251
Fixed maturities - held to maturity - 589
Mortgage loans 169 57
Investments purchased:
Fixed maturities - available for sale (2,551) (3,130)
Fixed maturities - held to maturity - (323)
Equity securities (135) (63)
Mortgage loans (569) (190)
Other (primarily short-term investments) (3,667) (3,489)
Proceeds from sale of subsidiaries and other equity interests 65 -
Other, net (30) (31)
------------ -----------
Net cash provided by (used in) investing activities 339 (460)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 1,587 2,424
Withdrawals from contractholder deposit funds (2,077) (1,455)
Net change in commercial paper 4 (46)
Issuance of long-term debt - 47
Repayment of debt (7) -
Issuance of common stock 7 3
Dividends paid (60) (53)
------------ -----------
Net cash provided by (used in) financing activities (546) 920
------------ -----------
Effect of foreign currency rate changes on cash (4) -
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (290) 550
Cash and cash equivalents, beginning of period 1,559 1,693
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,269 $ 2,243
- ----------------------------------------------------------------------------------==============================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 9 $ 26
Interest paid $ 34 $ 42
- ----------------------------------------------------------------------------------------------------------------
</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) 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
March 31,
(in millions) 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Realized gains (losses):
Fixed maturities $11 $7
Equity securities 8 153
Mortgage loans (2) 9
Real estate 5 12
Other investments 8 1
-------------------
30 182
Income taxes 11 38
- --------------------------------------------------------------------------------------------------------------
Net realized gains $19 $144
- -------------------------------------------------------------------------------------------===================
</TABLE>
FIXED MATURITIES AND EQUITY SECURITIES
During the first quarter of 1996 and 1995, proceeds from sales of
available-for-sale fixed maturities and equities, including policyholder share,
were $2.1 billion and $2.5 billion, respectively. The 1996 sales resulted in
gross gains of $80 million and gross losses of $45 million. The 1995 sales
resulted in gross gains of $180 million and gross losses of $19 million.
During the first quarter of 1996 and 1995, Net Unrealized Appreciation - Fixed
Maturities included in Shareholders' Equity, which is net of
policyholder-related amounts and deferred income taxes, decreased by $463
million and increased by $213 million, respectively.
NOTE 4-EARNINGS PER SHARE
Earnings per share were based on net income divided by weighted average common
shares, including common share equivalents, as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average common shares - primary 76,886 72,441
Weighted average common shares - fully diluted 76,886 76,119
- ----------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of computing fully diluted earnings per share, 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 March 31, 1995) and the related interest expense, $3 million after-tax, has
been excluded from net income for the three months ended March 31, 1995.
Common shares held as Treasury shares were 10,975,479 and 10,912,241 as of
March 31, 1996 and 1995, respectively.
5
<PAGE> 8
NOTE 5-INCOME TAXES
CIGNA's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS), and provisions are made in the financial statements in
anticipation of the results of these audits. The IRS has 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 $205
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 March 31, 1996, CIGNA had tax basis operating loss carryforwards of $650
million.
NOTE 6-REINSURANCE
In the normal course of business, CIGNA's insurance subsidiaries enter into
agreements, primarily relating to short-duration contracts, to assume and cede
reinsurance with other insurance companies. Reinsurance is ceded primarily to
limit losses from large exposures and to permit recovery of a portion of direct
losses, although ceded reinsurance does not relieve the originating insurer of
liability. CIGNA evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities or economic characteristics of its reinsurers. Failure of
reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies or
disputes, could result in losses. Allowances for uncollectible amounts were
$698 million and $700 million as of March 31, 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 first quarter of 1996 and 1995, premiums and fees were net of ceded
premiums of $444 million and $395 million, respectively. In addition,
benefits, losses and settlement expenses for the first quarter of 1996 and 1995
were net of reinsurance recoveries of $268 million and $280 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.
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.
Legislation is being considered by Congress that is likely to limit, and
eventually substantially eliminate, the tax deductibility of policy loan
interest for leveraged corporate-owned life insurance. Although the outcome of
such legislation is uncertain, the effect of the proposal currently under
consideration on the
6
<PAGE> 9
Individual Financial Services segment is not expected to be material over the
next several years. However, over the longer term, substantially all revenues
and earnings from leveraged corporate-owned life insurance 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 from past experience
significantly affect 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 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.
7
<PAGE> 10
LITIGATION
CIGNA is continuously involved in numerous lawsuits arising, for the most part,
in the ordinary course of business, either as a liability insurer defending
third-party claims brought against its insureds or as an insurer defending
coverage claims brought against it by its policyholders or other insurers. 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.
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 March 31, 1996, there were no material changes to the costs
associated with, or the anticipated annual savings related to, these
initiatives. Through March 31, 1996, $31 million of severance was paid to
approximately 2,200 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 March 31, 1996, compared with December 31, 1995, and its results
of operations for the three months ended March 31, 1996, compared with the same
period last year. This discussion should be read in conjunction with the
Management's Discussion and Analysis section included in CIGNA's 1995 Annual
Report to Shareholders (pages 8 through 23), 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 $205 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 March 31, 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 in
order 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 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 $8
million, or 72,000 shares, of common stock were purchased as of May 9, 1996.
Shares have been, and are expected to continue to be, purchased with internal
funds.
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
FINANCIAL SUMMARY March 31,
(In millions) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and fees $3,390 $3,418
Net investment income 1,083 1,027
Other revenues 142 127
Realized investment gains 30 182
-------------------------
Total revenues 4,645 4,754
Benefits and expenses 4,287 4,352
-------------------------
Income before taxes 358 402
Income tax expense 120 112
-------------------------
Net income $238 $290
=======================================================================================================================
Realized investment gains, net of taxes $19 $144
=======================================================================================================================
</TABLE>
CIGNA's first quarter 1996 consolidated net income decreased 18% from the same
period last year. Excluding after-tax realized investment gains, earnings for
the first quarter of 1996 were $219 million compared with $146 million for the
same period last year, an increase of 50%. This increase primarily reflects
improved results in the Property and Casualty segment.
After-tax realized investment gains decreased significantly in 1996, compared
with 1995, due primarily to lower gains on sales of equity securities
reflecting the 1995 restructuring of a portion of the Employee Life and Health
Benefits and Property and Casualty segments' equity investment portfolios into
fixed income securities. For additional information, see Note 3 to the
Financial Statements.
Full year earnings for 1996 are expected to improve, 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 21.
10
<PAGE> 13
EMPLOYEE LIFE AND HEALTH BENEFITS
<TABLE>
<CAPTION>
======================================================================================================================
Three Months Ended
FINANCIAL SUMMARY March 31,
(In millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and fees $2,077 $2,065
Net investment income 144 136
Other revenues 103 83
Realized investment gains (losses) (2) 88
--------------------------
Total revenues 2,322 2,372
Benefits and expenses 2,152 2,126
--------------------------
Income before taxes 170 246
Income tax expense 60 61
--------------------------
Net income $110 $185
======================================================================================================================
Realized investment gains (losses), net of taxes $(2) $81
======================================================================================================================
</TABLE>
Net income for the Employee Life and Health Benefits segment decreased 41% for
the first quarter of 1996, compared with the same period last year. Excluding
after-tax realized investment results, income for the first quarter of 1996 was
$112 million, compared with $104 million for the same period last year, an
increase of 8%.
The segment's indemnity operations had after-tax earnings, excluding realized
investment results, of $56 million in 1996, compared with $47 million for 1995.
This increase reflects higher fees for Administrative Services Only (ASO)
business and improved investment income resulting from the 1995 portfolio
restructuring.
The segment's HMO operations had after-tax earnings, excluding realized
investment results, of $56 million for 1996 compared with $57 million for 1995.
Results for 1996 include an after-tax gain of $8 million from the sale of
subsidiaries, while 1995 includes a comparable amount resulting from the
favorable effects of reserve reviews. Excluding these items, 1996 results
reflect: 1) lower earnings on traditional HMO plans resulting from competitive
pressures on rates and 2) higher operating expenses associated with business
growth and customer service initiatives. These factors were partially offset
by the favorable effect of membership growth.
Premiums and fees for the first quarter of 1996 increased 1% from the same
period last year. This improvement reflects higher premiums and fees of $58
million for HMOs due to membership growth, partially offset by lower medical
indemnity premiums resulting from the effect of favorable claim experience on
premiums for experience-rated business. Growth in premiums is expected to
continue to be constrained by competitive pressures in both the medical
indemnity and HMO markets.
Total HMO membership increased 12% and 9%, compared with March 31, 1995 and
December 31, 1995, respectively. 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 both the first quarter of 1996 and 1995 were
approximately $2.5 billion. Premium equivalents were level year over year
reflecting growth in HMO alternative funding programs, offset by declines in
medical premium equivalents due to cancellations and conversions to HMOs.
Premium equivalents, as a percentage of total adjusted premiums and fees, were
54% and 55% for the first quarters of 1996 and 1995, respectively. ASO
11
<PAGE> 14
plans accounted for 46% and 45% of total adjusted premiums and fees for the
first quarters of 1996 and 1995, respectively.
EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
<TABLE>
<CAPTION>
======================================================================================================================
Three Months Ended
FINANCIAL SUMMARY March 31,
(In millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and fees $38 $42
Net investment income 428 424
Realized investment gains 16 3
--------------------------
Total revenues 482 469
Benefits and expenses 391 394
--------------------------
Income before taxes 91 75
Income tax expense 30 24
--------------------------
Net income $61 $51
======================================================================================================================
Realized investment gains, net of taxes $10 $2
======================================================================================================================
</TABLE>
Net income for the Employee Retirement and Savings Benefits segment increased
20% for the first quarter of 1996, compared with the same period of 1995.
Excluding after-tax realized investment results, income for the first quarter
of 1996 was $51 million, compared with $49 million for the same period last
year. This increase primarily reflects higher earnings from an increased asset
base.
Revenues, excluding realized investment results, were level year over year,
reflecting higher investment yields, offset by customers' redirection of
investments to separate accounts and lower annuity sales.
Assets under management is generally a key determinant of earnings for this
segment. For the quarter ended March 31, assets under management and related
activity, including amounts attributable to separate accounts, were as follows:
<TABLE>
<CAPTION>
(In millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance -- January 1 $38,183 $33,882
Premiums and deposits 1,799 1,599
Investment results 666 586
Increase (decrease) in fair value of assets (448) 515
Customer withdrawals (576) (608)
Benefit payments and other (1,486) (1,010)
- ----------------------------------------------------------------------------------------------------------------------
Balance -- March 31 $38,138 $34,964
======================================================================================================================
</TABLE>
Premiums and deposits increased 13% in the first quarter of 1996, compared with
the same period in 1995, reflecting higher sales. Approximately 56% and 46% of
the premiums and deposits for 1996 and 1995, respectively, were from new
customers. The increase in investment results for 1996, compared with 1995,
primarily 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
12
<PAGE> 15
to be affected by market value fluctuations for fixed maturities and equity
securities.
INDIVIDUAL FINANCIAL SERVICES
<TABLE>
<CAPTION>
======================================================================================================================
Three Months Ended
FINANCIAL SUMMARY March 31,
(In millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and fees $236 $209
Net investment income 252 226
Other revenues 17 12
Realized investment gains 2 3
--------------------------
Total revenues 507 450
Benefits and expenses 455 399
--------------------------
Income before taxes 52 51
Income tax expense 18 18
--------------------------
Net income $34 $33
======================================================================================================================
Realized investment gains, net of taxes $2 $2
======================================================================================================================
</TABLE>
Earnings for the Individual Financial Services segment for the first quarter of
1996 reflect higher earnings from interest-sensitive products, including
leveraged corporate-owned life insurance, partially offset by unfavorable
mortality experience.
For the first quarter of 1996, premiums and fees increased 13% and net
investment income increased 12% from the same period of 1995. The increase in
premiums and fees reflects sales of new and existing reinsurance products, and
growth in interest-sensitive business, while the increase in investment income
reflects growth in interest-sensitive business, primarily leveraged
corporate-owned life insurance, and annuity business. Benefits and expenses
increased 14% for 1996 reflecting business growth, as noted above, combined
with unfavorable mortality.
Legislation is being considered by Congress that is likely to limit, and
eventually substantially eliminate, the tax deductibility of policy loan
interest for leveraged corporate-owned life insurance. Although the outcome of
such legislation is uncertain, the effect of the proposal currently under
consideration on the Individual Financial Services segment is not expected to
be material over the next several years. However, over the longer term,
substantially all revenues and earnings from leveraged corporate-owned life
insurance 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.
13
<PAGE> 16
PROPERTY AND CASUALTY
<TABLE>
<CAPTION>
======================================================================================================================
Three Months Ended
FINANCIAL SUMMARY March 31,
(In millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Premiums and fees $1,039 $1,102
Net investment income 197 189
Other revenues 53 59
Realized investment gains 13 68
--------------------------
Total revenues 1,302 1,418
Benefits and expenses 1,234 1,386
--------------------------
Income before taxes 68 32
Income tax expense 18 6
- ----------------------------------------------------------------------------------------------------------------------
Net income $50 $26
======================================================================================================================
Realized investment gains, net of taxes $8 $45
======================================================================================================================
</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 are no longer actively selling
insurance products and 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 reflect 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 CIGNA
should prevail.
Property and Casualty segment income (loss) for the first quarter of 1996 and
1995, excluding after-tax realized investment gains of $12 million and $49
million, respectively, for the ongoing operations and losses of $4 million for
the run-off operations in each of the first quarters of 1996 and 1995, were as
follows:
<TABLE>
<CAPTION>
======================================================================================================================
(In millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ongoing operations:
Domestic $12 $(14)
International 29 18
--------------------------
Total ongoing operations 41 4
Run-off operations 1 (23)
- ----------------------------------------------------------------------------------------------------------------------
Total $42 $(19)
======================================================================================================================
</TABLE>
Results for the domestic and run-off operations for 1995, included in the above
table, are prepared on a pro forma basis as though the restructuring occurred
at the beginning of 1995. The pro forma results are not necessarily indicative
of the results that would have been reported had the restructuring actually
occurred as of January 1, 1995. The international operations and the total
Property and Casualty segment results were not affected by the restructuring.
The improvement in the domestic operations primarily reflects lower expenses
resulting from the 1995 cost reduction initiative and increased investment
income, partially offset by higher catastrophe losses. Although its results
are improving, CIGNA's domestic operations continue to reflect the highly
competitive pricing environment. Results for the international operations
improved, primarily reflecting favorable claim experience, including an absence
of catastrophe losses. The improvement in results for
14
<PAGE> 17
the run-off operations primarily reflects lower asbestos-related and
environmental pollution losses.
Premiums and fees for the Property and Casualty segment decreased 6% in the
first quarter of 1996, compared with the same period last year. This decline
reflects a decrease of $43 million for CIGNA's domestic business due to
continued competition and the application of stricter underwriting standards,
as well as a decrease of $35 million in the run-off operations primarily due to
lower reinsurance premiums. Premiums and fees are expected to continue to be
constrained by competition in 1996.
Net investment income for the Property and Casualty segment increased 4% in the
first quarter of 1996, primarily resulting from the 1995 portfolio
restructuring and, to a lesser extent, business growth and higher investment
yields on investments supporting international businesses.
Current year catastrophes resulted in pre-tax losses, net of reinsurance,
("catastrophe losses") for the domestic operations of $23 million, including
$17 million for winter storms, for the first quarter of 1996. There were no
catastrophe losses for the international operations in the first quarter of
1996. Catastrophe losses for the first quarter of 1995 were $7 million for
each of the domestic and international operations. The effects of reinsurance
on catastrophe losses for the first quarter 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 $16.8 billion and
$17.0 billion as of March 31, 1996 and December 31, 1995, respectively, are an
estimate of future payments for reported and unreported claims for losses and
related expenses with respect to insured events that have occurred. The basic
assumption underlying the many standard actuarial and other methods used in the
estimation of property and casualty loss reserves is that past experience is an
appropriate basis for predicting future events. However, current trends and
other factors that would modify past experience are also considered. The
process of establishing loss reserves is subject to uncertainties that are
normal, recurring and inherent in the property and casualty business.
CIGNA continually attempts to improve its loss estimation process by refining
its process of analyzing loss development patterns, claims payments and other
information, but there remain many reasons for adverse development of estimated
ultimate liabilities. For example, unanticipated changes from past experience
significantly affect the ability of insurers to estimate liabilities for unpaid
losses and related expenses.
CIGNA's reinsurance recoverables were approximately $6.7 billion, net of
allowances for uncollectible amounts of approximately $700 million, as of March
31, 1996 and December 31, 1995. 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 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
15
<PAGE> 18
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.
Total prior year development for the first quarter of 1996 was attributable to
the run-off operations. Total prior year development for the same period of
1995 was $87 million for the run-off operations and $6 million for the ongoing
operations.
The following table shows the adverse pre-tax effects on CIGNA's results of
operations from prior year development, net of reinsurance, for the three
months ended March 31:
<TABLE>
<CAPTION>
======================================================================================================================
(In millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Asbestos-related $4 $21
Environmental pollution 17 48
Workers' Compensation 12 11
Other 3 13
- ----------------------------------------------------------------------------------------------------------------------
Total $36 $93
======================================================================================================================
</TABLE>
During the third quarter of 1995, CIGNA significantly increased its
asbestos-related and environmental pollution reserves (see CIGNA's 1995 Form
10-K for additional information) and, as a result, charges for asbestos-related
and environmental pollution losses in 1996, as well as future years, are
expected to be substantially lower than in prior years. Other prior year
development in 1996 and 1995 was primarily attributable to unfavorable
development on long-term exposure claims, reinsurance exposures and
unrecoverable reinsurance, partially offset by favorable development on
commercial packages and commercial fire lines of business.
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 a net loss of $17 million for the first quarter of 1996
compared with $5 million for the first quarter of 1995. Excluding after-tax
realized investment gains of $1 million for the first quarter of 1996 and $14
million for the first quarter of 1995, losses were $18 million and $19 million
for the first quarter of 1996 and 1995, respectively. The decrease in losses
reflects lower net interest expense.
16
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for CIGNA and its insurance subsidiaries has remained strong as
evidenced by significant amounts of short-term investments and cash and cash
equivalents in the aggregate. Generally, CIGNA has met its operating
requirements by maintaining appropriate levels of liquidity in its investment
portfolio and through utilization of overall positive cash flows.
For the first quarter of 1996, cash and cash equivalents decreased $290 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, ($490 million); payments of dividends on CIGNA common stock ($60
million); and cash used for operating activities ($79 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 ($339
million), primarily net investment sales and maturities ($304 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 March 31, 1996,
compared with $1.07 billion at December 31, 1995. As of March 31, 1996, CIGNA
had approximately $800 million remaining under shelf registration statements
that may be issued as debt, equity securities or both, depending upon market
conditions and CIGNA's capital requirements.
At March 31, 1996, CIGNA's short-term debt, primarily commercial paper,
amounted to $435 million, an increase of $21 million from December 31, 1995.
In connection with the domestic property and casualty restructuring, CIGNA
contributed additional capital of $250 million and $125 million to the property
and casualty segment in 1996 and 1995, respectively. These contributions were
funded through internal sources.
17
<PAGE> 20
INVESTMENT ASSETS
<TABLE>
<CAPTION>
======================================================================================================================
March 31, December 31,
(In millions) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities $34,761 $36,241
Equity securities 689 661
Mortgage loans 11,285 11,010
Real estate 1,276 1,283
Other, primarily policy loans 8,089 8,515
- ----------------------------------------------------------------------------------------------------------------------
Total investment assets $56,100 $57,710
======================================================================================================================
</TABLE>
Additional information regarding CIGNA's investment assets is included in Note
3 to the first 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>
======================================================================================================================
March 31, December 31,
1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities 28% 30%
Mortgage loans 57% 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 March 31, 1996, fixed maturities had an aggregate fair value, including
policyholder share, that was greater than amortized cost by $1.6 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 $111 million as of March 31, 1996, compared with $137 million
as of December 31, 1995. There were no cumulative write-downs for potential
problem bonds as of March 31, 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
March 31, 1996 and December 31, 1995, problem bonds, including amounts
attributable to policyholder contracts, were $208 million and $196 million, net
of related cumulative write-downs of $145 million and $140 million,
respectively.
18
<PAGE> 21
CUMULATIVE WRITE-DOWNS FOR BONDS
Cumulative write-downs for bonds as of March 31, 1996 and 1995 were $148
million and $127 million, including $55 million and $51 million attributable to
policyholder contracts, respectively. Also, cumulative write-downs as of March
31, 1996 and 1995 included $3 million and $4 million, respectively, for bonds
no longer classified as problem or potential problem bonds.
During the first quarter of 1996 and 1995, write-downs of $11 million and $6
million, respectively, were established for problem bonds, including $3 million
in each period attributable to policyholder contracts. See the Summary on page
21 for the adverse after-tax effect of write-downs 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 21 for the adverse effect of non-accruals for bonds on
policyholder contracts and on CIGNA's net income.
MORTGAGE LOANS
<TABLE>
<CAPTION>
======================================================================================================================
March 31, December 31,
1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans (in millions) $11,285 $11,010
By property type:
Retail facilities 41% 42%
Office buildings 36 35
Apartment buildings 12 12
Hotels 6 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 first three months of 1996, $363 million of mortgage loans was
scheduled to mature, of which $65 million was paid in full, $168 million was
extended at existing loan rates for a weighted average of nine months and $127
million was refinanced at current market rates. Mortgage loan extensions and
refinancings are loans in good standing. The remaining scheduled maturities
were 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
$286 million as of March 31, 1996, compared with $211 million as of December
31, 1995, net of related valuation reserves of $22 million and $29 million,
respectively.
19
<PAGE> 22
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 March 31, 1996, restructured mortgage loans
with a carrying value of approximately $270 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 March 31, 1996.
During the first quarter 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 March 31, 1996 and December 31, 1995, problem mortgage loans, including
amounts attributable to policyholder contracts, were $484 million and $575
million, net of valuation reserves of $69 million and $59 million,
respectively.
VALUATION RESERVES FOR MORTGAGE LOANS
Valuation reserves for mortgage loans at March 31, 1996 and 1995 were $91
million and $112 million, respectively, including $62 million and $77 million
attributable to policyholder contracts. The increase (decrease) in valuation
reserves established for problem and potential problem mortgage loans during
the first quarter of 1996 and 1995 were $18 million and $(13) million,
respectively. Such amounts included $12 million and $(5) million attributable
to policyholder contracts for 1996 and 1995, respectively. The net decrease in
valuation reserves established in the first quarter 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 21 for the net after-tax effect of valuation reserves
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 21 for the effect of non-accruals for
mortgage loans on policyholder contracts and on CIGNA's net income.
REAL ESTATE
As of March 31, 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 $546 million and $563 million, respectively, and 2) real estate held
for sale, primarily properties acquired as a result of foreclosure of mortgage
loans, of $730 million and $720 million, respectively.
REAL ESTATE WRITE-DOWNS AND RESERVES
Cumulative write-downs and valuation reserves for real estate at March 31, 1996
and 1995 were $425 million and $429 million, respectively, including $216
million and $224 million attributable to policyholder contracts. See the
Summary on page 21 for the adverse after-tax effect of write-downs and the net
increase in valuation reserves on CIGNA's net income.
20
<PAGE> 23
SUMMARY
The adverse (favorable) effects of write-downs and changes in valuation
reserves ("write-downs and reserves") as well as of non-accruals on
policyholder contracts and on CIGNA's net income for the three months ended
March 31 were as follows:
<TABLE>
<CAPTION>
==========================================================================================================================
1996 1995
--------------------------------- ------------------------------------
Policyholder Policyholder
(In millions) Contracts CIGNA Contracts CIGNA
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Write-downs and reserves:
Bonds $3 $5 $3 $2
Mortgage loans 12 4 (5) (5)
Real estate (1) 1 7 3
- --------------------------------------------------------------------------------------------------------------------------
Total $14 $10 $5 $--
==========================================================================================================================
Non-accruals:
Bonds $3 $3 $3 $3
Mortgage loans -- -- 4 1
- --------------------------------------------------------------------------------------------------------------------------
Total $3 $3 $7 $4
==========================================================================================================================
</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.
21
<PAGE> 24
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of CIGNA Corporation was
held on April 24, 1996. At the meeting, 65,515,706 shares of
Common Stock were represented and entitled to vote, and
76,458,246 shares of Common Stock were outstanding and
entitled to vote. CIGNA shareholders elected nominees to the
Board of Directors and ratified the appointment of Price
Waterhouse LLP as independent accountants for 1996
<TABLE>
<CAPTION>
Votes
Votes For Withheld
--------- --------
<S> <C> <C>
Election of nominees to
Board of Directors for
terms expiring in April
1999:
James F. English, Jr. 64,927,945 587,761
Bernard M. Fox 64,938,670 577,036
Marilyn W. Lewis 64,939,390 576,316
Carol Cox Wait 64,918,097 597,609
-------------------------------
</TABLE>
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C> <C>
Ratification of Price
Waterhouse LLP as
Independent Accountants 65,392,122 50,631 72,953
-------------------------------
</TABLE>
-22-
<PAGE> 25
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) During the quarterly period ended March 31, 1996,
CIGNA filed the following Reports on Form 8-K:
- dated March 5, 1996, Item 5--regarding the
"safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995; and
- dated February 13, 1996, Item 5--containing
a news release regarding its year-end 1995
results.
-23-
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the undersigned duly
authorized officer, on its behalf and in the capacity indicated.
CIGNA CORPORATION
By /s/ Gary A. Swords
----------------------
Gary A. Swords
Vice President and
Chief Accounting Officer
Date: May 13, 1996
-24-
<PAGE> 27
Exhibit Index
<TABLE>
<CAPTION>
Method of
Number Description Filing
- ------ ----------- ----------
<S> <C> <C>
11 Computation of Earnings Filed herewith.
Per Share
12 Computation of Ratio of Filed herewith.
Earnings to Fixed Charges
27 Financial Data Schedule Filed herewith.
</TABLE>
-25-
<PAGE> 1
CIGNA CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
===============================================================================================================
<S> <C> <C>
- ---------------------------------------
Primary Earnings Per Share
- ---------------------------------------
NET INCOME AVAILABLE TO
COMMON SHARES $ 238 $ 290
- -------------------------------------------------------------------------======================================
WEIGHTED AVERAGE SHARES:
Common shares 76,381,612 72,310,385
Common share equivalents applicable
to stock options 504,442 130,545
- ---------------------------------------------------------------------------------------------------------------
Total 76,886,054 72,440,930
- -------------------------------------------------------------------------======================================
PRIMARY EARNINGS PER SHARE $ 3.10 $ 4.00
- -------------------------------------------------------------------------======================================
- ---------------------------------------
Fully Diluted Earnings Per Share
- ---------------------------------------
NET INCOME AVAILABLE TO
COMMON SHARES:
Net income $ 238 $ 290
Adjusted for:
Interest expense (net of tax) on
convertible debentures - 3
- ---------------------------------------------------------------------------------------------------------------
Net income available to common shares $ 238 $ 293
- -------------------------------------------------------------------------======================================
WEIGHTED AVERAGE SHARES:
Common shares 76,381,612 72,310,385
Common share equivalents applicable
to stock options 504,442 182,989
Assumed conversion of convertible debentures - 3,625,956
- ---------------------------------------------------------------------------------------------------------------
Total 76,886,054 76,119,330
- -------------------------------------------------------------------------======================================
FULLY DILUTED EARNINGS PER SHARE $ 3.10 $ 3.85
- -------------------------------------------------------------------------======================================
</TABLE>
<PAGE> 1
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
===============================================================================
<S> <C> <C>
Income before income taxes $ 358 $ 402
------- -------
Fixed charges included in income:
Interest expense 28 32
Interest portion of rental expense 21 23
------- -------
Total fixed charges included in income 49 55
------- -------
Income available for fixed charges $ 407 $ 457
- -----------------------------------------------------==========================
RATIO OF EARNINGS TO FIXED CHARGES 8.3 8.3
- -----------------------------------------------------==========================
</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 MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 34,761
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 689
<MORTGAGE> 11,285
<REAL-ESTATE> 1,276
<TOTAL-INVEST> 56,100
<CASH> 1,269
<RECOVER-REINSURE> 7,176<F1>
<DEFERRED-ACQUISITION> 1,123
<TOTAL-ASSETS> 95,417
<POLICY-LOSSES> 11,688
<UNEARNED-PREMIUMS> 2,187
<POLICY-OTHER> 19,156
<POLICY-HOLDER-FUNDS> 29,373
<NOTES-PAYABLE> 1,472
0
0
<COMMON> 87
<OTHER-SE> 6,776
<TOTAL-LIABILITY-AND-EQUITY> 95,417
3,390
<INVESTMENT-INCOME> 1,083
<INVESTMENT-GAINS> 30
<OTHER-INCOME> 142
<BENEFITS> 3,144
<UNDERWRITING-AMORTIZATION> 272
<UNDERWRITING-OTHER> 871
<INCOME-PRETAX> 358
<INCOME-TAX> 120
<INCOME-CONTINUING> 238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238
<EPS-PRIMARY> 3.10
<EPS-DILUTED> 3.10
<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>
