UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____ to _____
Commission file number 1-8323
CIGNA Corporation
(Exact name of registrant as specified in its charter)
Delaware 06-1059331
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Liberty Place, Philadelphia, Pa. 19192-1550
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 761-1000
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
As of September 30, 1997, 74,057,237 shares of the issuer's Common Stock were
outstanding.
<PAGE>
CIGNA CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
and Retained Earnings 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash Flows 3
Notes to Financial Statements 4
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
EXHIBIT INDEX 21
As used herein, "CIGNA" refers to one or more of CIGNA Corporation and its
consolidated subsidiaries.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
==============================================================================================================================
REVENUES
<S> <C> <C> <C> <C>
Premiums and fees $3,925 $3,444 $10,795 $10,333
Net investment income 1,057 1,069 3,172 3,263
Other revenues 175 154 498 448
Realized investment gains 25 18 81 17
-------- -------- -------- --------
Total revenues 5,182 4,685 14,546 14,061
-------- -------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,359 3,064 9,433 9,337
Policy acquisition expenses 263 283 797 877
Other operating expenses 1,133 904 3,041 2,710
-------- -------- -------- --------
Total benefits, losses and expenses 4,755 4,251 13,271 12,924
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 427 434 1,275 1,137
-------- -------- -------- --------
Income taxes:
Current 86 152 320 264
Deferred 62 1 109 123
-------- -------- -------- --------
Total taxes 148 153 429 387
-------- -------- -------- --------
NET INCOME 279 281 846 750
Common dividends declared (61) (60) (184) (182)
Retained earnings, beginning of period 5,299 4,388 4,855 4,041
- -----------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $5,517 $4,609 $5,517 $4,609
- ------------------------------------------=====================================================
EARNINGS PER SHARE $3.72 $3.69 $11.31 $9.80
- ------------------------------------------=====================================================
DIVIDENDS DECLARED PER SHARE $0.83 $0.80 $2.49 $2.40
- ------------------------------------------=====================================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
1
<PAGE>
CIGNA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1997 1996
================================================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $33,817; $33,404) $ 35,630 $ 34,933
Equity securities, at fair value (cost, $715; $573) 937 701
Mortgage loans 10,813 10,927
Policy loans 7,252 7,296
Real estate 1,023 1,102
Other long-term investments 231 255
Short-term investments 887 1,320
----------- ------------
Total investments 56,773 56,534
Cash and cash equivalents 1,470 1,287
Accrued investment income 1,088 890
Premiums, accounts and notes receivable 4,441 4,229
Reinsurance recoverables 6,938 7,287
Deferred policy acquisition costs 1,291 1,230
Property and equipment 868 802
Deferred income taxes 1,765 1,998
Other assets 959 993
Goodwill and other intangibles 2,545 1,068
Separate account assets 28,290 22,614
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 106,428 $ 98,932
- ---------------------------------------------------------------------------=====================================
LIABILITIES
Contractholder deposit funds $ 30,271 $ 29,878
Unpaid claims and claim expenses 18,434 18,841
Future policy benefits 11,896 11,784
Unearned premiums 1,852 1,940
----------- ------------
Total insurance and contractholder liabilities 62,453 62,443
Accounts payable, accrued expenses and other liabilities 5,775 5,326
Current income taxes 172 221
Short-term debt 444 289
Long-term debt 1,499 1,021
Separate account liabilities 28,094 22,424
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 98,437 91,724
- ----------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 8
SHAREHOLDERS' EQUITY
Common stock (shares issued, 88) 88 88
Additional paid-in capital 2,631 2,572
Net unrealized appreciation, fixed maturities 620 539
Net unrealized appreciation, equity securities 149 88
Net translation of foreign currencies (66) (45)
Retained earnings 5,517 4,855
Less treasury stock, at cost (948) (889)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 7,991 7,208
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 106,428 $ 98,932
- ---------------------------------------------------------------------------=====================================
SHAREHOLDERS' EQUITY PER SHARE $ 107.90 $ 97.15
- ---------------------------------------------------------------------------=====================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
2
<PAGE>
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
============================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 846 $ 750
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Insurance liabilities, net of reinsurance recoverables 168 (201)
Premiums, accounts and notes receivable (99) (39)
Accounts payable, accrued expenses, other liabilities and
current income taxes (26) (123)
Deferred income taxes 109 123
Realized investment (gains) (81) (17)
Gain on sale of businesses and other equity interests - (18)
Other, net (195) (134)
---------- ----------
Net cash provided by operating activities 722 341
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities 4,491 4,925
Equity securities 204 304
Mortgage loans 465 315
Other (primarily short-term investments) 11,029 8,871
Investment maturities and repayments:
Fixed maturities 2,588 2,891
Mortgage loans 446 542
Investments purchased:
Fixed maturities (7,328) (6,879)
Equity securities (347) (317)
Mortgage loans (908) (1,247)
Other (primarily short-term investments) (10,111) (8,627)
Net cash from acquisitions and dispositions (1,339) 66
Other, net (115) (106)
---------- ----------
Net cash provided by (used in) investing activities (925) 738
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 5,384 4,900
Withdrawals and benefit payments from contractholder deposit funds (5,181) (4,944)
Net issuance (repayment) of short-term debt 104 (11)
Issuance of long-term debt 600 -
Repurchase of common stock (55) (161)
Repayment of long-term debt including current portion (276) (158)
Common dividends paid (182) (180)
Other, net 11 11
---------- ----------
Net cash provided by (used in) financing activities 405 (543)
---------- ----------
Effect of foreign currency rate changes on cash and cash equivalents (19) (7)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 183 529
Cash and cash equivalents, beginning of period 1,287 1,559
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,470 $ 2,088
- --------------------------------------------------------------------------------------======================================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 333 $ 194
Interest paid $ 82 $ 88
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
3
<PAGE>
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 1997
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 PRONOUNCEMENT
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share (EPS)." SFAS No. 128
replaces primary EPS with basic EPS, which is computed using only weighted
average common shares outstanding without considering common stock equivalents.
Diluted EPS under SFAS No. 128 is computed similarly to fully diluted EPS. SFAS
No. 128 also requires dual presentation of basic and diluted EPS on the face of
the income statement. Adoption is required as of December 31, 1997, at which
time all prior periods must be restated. The effect on CIGNA's EPS of adopting
SFAS No. 128 is not expected to be material.
NOTE 3-ACQUISITIONS AND DISPOSITIONS
At the end of the second quarter of 1997, CIGNA acquired the outstanding common
stock of Healthsource, Inc. (Healthsource). The cost of the acquisition was $1.7
billion, reflecting the purchase of Healthsource's common stock for $1.4 billion
in June 1997 and the retirement of Healthsource debt of approximately $250
million in the third quarter of 1997. The acquisition was accounted for as a
purchase, and was financed through the issuance of long-term debt of $600
million and a combination of internally generated funds and short-term debt. The
results of operations of Healthsource are included in the accompanying
consolidated financial statements from the date of acquisition. Intangible
assets and goodwill of $1.5 billion are being amortized on a straight-line basis
over periods ranging from eight to 40 years.
In the fourth quarter of 1997, CIGNA expects to 1) complete its fair value
analysis of Healthsource's net assets; 2) finalize plans for integrating
Healthsource with CIGNA and 3) finalize plans for restructuring its health care
operations. The effect on net income from these initiatives is not reasonably
estimable at this time; however, the charge is not expected to exceed $125
million after-tax.
Healthsource's total revenues were $971 million and $1.7 billion for the six
months ended June 30, 1997 and for the full year 1996, respectively. The pro
forma effect on CIGNA's net income was not material.
In July 1997, CIGNA entered into an agreement to sell its individual life
insurance and annuity businesses, which are included in the Individual Financial
Services segment, for cash proceeds of $1.4 billion. Revenues for these
businesses were $230 million and $703 million for the third quarter and nine
months of 1997, respectively, compared with $227 million and $671 million for
the same periods last year. Net income was $24 million and $72 million for the
third quarter and nine months of 1997, respectively, compared with $21 million
and $45 million for the same periods of 1996.
4
<PAGE>
Completion of the sale, which is anticipated to occur by the end of 1997, is
subject to regulatory approvals. The agreement to sell these businesses is
generally in the form of an indemnity reinsurance arrangement, and is expected
to result in an after-tax gain on the sale of approximately $700 million. A
significant portion of the gain will be deferred and amortized over future
periods. Proceeds from the sale are expected to be used for internal growth,
acquisitions, and share repurchases, with share repurchases being the expected
use in the near term.
CIGNA had other acquisitions and dispositions during the nine months of 1997 and
1996, the effects of which were not material to the financial statements.
NOTE 4-INVESTMENTS
Realized Investment Gains and Losses
Realized gains and losses on investments, excluding policyholder share, were as
follows:
- ---------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ---------------------------------------------------------------------
Realized investment
gains (losses):
Fixed maturities $6 $3 $35 $--
Equity securities 19 4 33 13
Mortgage loans (3) -- (17) (20)
Real estate 3 6 20 7
Other -- 5 10 17
--------- ----------- ---------- ---------
25 18 81 17
Less income taxes 8 7 27 8
- ---------------------------------------------------------------------
Net realized investment
gains $17 $11 $54 $9
=====================================================================
Fixed Maturities and Equity Securities
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, were as follows:
- ---------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ---------------------------------------------------------------------
Proceeds from sales $1,417 $1,544 $4,695 $5,209
Gross gains on sales 55 46 141 140
Gross losses on sales (10) (40) (70) (120)
- ---------------------------------------------------------------------
Net unrealized appreciation for investments carried at fair value is included as
a separate component of Shareholders' Equity, net of policyholder-related
amounts and deferred income taxes. The net unrealized appreciation for these
investments, primarily fixed maturities, during the third quarter and nine
months of 1997 increased by $200 million and $142 million, respectively,
compared with an increase of $2 million and a decrease of $565 million for the
same periods last year.
NOTE 5-EARNINGS PER SHARE
Earnings per share were based on net income divided by weighted average common
shares, including common share equivalents, as follows:
- ---------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------
Weighted average
common shares 75,041 76,055 74,791 76,585
- ---------------------------------------------------------------------
There is no significant difference between earnings per share on a primary and a
fully diluted basis.
Common shares held as Treasury shares were 13,841,468 and 12,390,283 as of
September 30, 1997 and 1996, respectively.
NOTE 6-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 completed its audits for
the years 1982 through 1990, and challenged CIGNA on one issue related to years
prior to 1989. During the third quarter of 1997, the U.S. Tax Court ruled
against CIGNA in connection with this issue. The decision did not have an effect
on results of operations, as adequate reserves had been previously established.
As a result of this ruling, CIGNA made payments of approximately $100 million
prior to September 30, 1997 and an additional $150 million in the fourth quarter
of 1997. CIGNA plans to appeal the U.S. Tax Court decision to the U.S. Court of
Appeals.
As of September 30, 1997, CIGNA had no tax basis operating loss carryforwards.
5
<PAGE>
NOTE 7-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 and disputes, could
result in losses. Allowances for uncollectible amounts were $719 million and
$711 million as of September 30, 1997 and December 31, 1996, 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 third quarter and nine months of 1997, premiums and fees were net of
ceded premiums of $448 million and $1.5 billion, respectively. For the third
quarter and nine months of 1996, premiums and fees were net of ceded premiums of
$619 million and $1.6 billion, respectively. In addition, benefits, losses and
settlement expenses for the third quarter and nine months of 1997 were net of
reinsurance recoveries of $376 million and $1.1 billion, respectively. Benefits,
losses and settlement expenses for the third quarter and nine months of 1996
were net of reinsurance recoveries of $410 million and $1.2 billion,
respectively.
NOTE 8-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
and guarantees of a minimum level of benefits for certain separate account
contracts. 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:
o revise the system of funding cleanup of
environmental damages;
o reinterpret insurance contracts long after the
policies were written to provide coverage
unanticipated by CIGNA;
o restrict insurance pricing and the application of
underwriting standards; and
o reform health care.
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate-owned
life insurance (COLI) products. CIGNA does not expect this legislation to have a
material effect on its 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) assigning responsibility, 2)
funding cleanup costs or 3) establishing cleanup standards could affect the
liabilities of policyholders 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.
Various federal and state proposals have been made to place limitations on the
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 (NAIC) 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.
6
<PAGE>
The NAIC is currently developing standardized statutory accounting principles,
which are scheduled to take effect in 1999. The effect on CIGNA's statutory net
income, surplus and liquidity cannot be reasonably estimated at this time.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain.
Property and Casualty Unpaid Claims and Claim
Expense Reserves and Reinsurance Recoverables
CIGNA's property and casualty loss reserves are an estimate of future payments
for reported and unreported claims for losses and related expenses with respect
to insured events that have occurred. The basic assumption underlying the many
traditional 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.
Reserving for property and casualty claims continues to be a complex and
uncertain process, requiring the use of informed estimates and judgments.
CIGNA's estimates and judgments may be revised as additional experience and
other data become available and are reviewed, as new or improved methodologies
are developed or as current law changes. Any such revisions could result in
future changes in estimates of losses or reinsurance recoverables, and would be
reflected in CIGNA's results of operations for the period in which the estimates
are changed. While the effect of any such changes in estimates of losses or
reinsurance recoverables could be material to future results of operations,
CIGNA does not expect such changes to have a material effect on its liquidity or
financial condition.
In management's judgment, 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 (A&E) claims.
While the outcome of all litigation involving CIGNA, including insurance-related
litigation, cannot be determined, litigation (including that related to A&E
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.
Property and Casualty Restructuring
Effective December 31, 1995, CIGNA restructured its domestic property and
casualty businesses into two separate operations, ongoing and run-off. Certain
competitors and policyholders of CIGNA are challenging the restructuring in
court. Although CIGNA expects the matter to be in litigation for some time, it
expects to ultimately prevail.
7
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION
The following discussion addresses the financial condition of CIGNA Corporation
(CIGNA) as of September 30, 1997, compared with December 31, 1996, and its
results of operations for the quarter and nine months ended September 30, 1997,
compared with the same periods last year. This discussion should be read in
conjunction with Management's Discussion and Analysis included in CIGNA's 1996
Annual Report to Shareholders (pages 8 through 21) and in CIGNA's report on Form
10-Q for the first and second quarters of 1997, 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.
At the end of the second quarter of 1997, CIGNA acquired the outstanding common
stock of Healthsource, Inc. (Healthsource). The cost of the acquisition was $1.7
billion, reflecting the purchase of Healthsource's common stock for $1.4 billion
in June 1997 and the retirement of Healthsource debt of approximately $250
million in the third quarter of 1997. The acquisition was accounted for as a
purchase, and was financed through the issuance of long-term debt of $600
million and a combination of internally generated funds and short-term debt. The
results of operations of Healthsource are included in the accompanying
consolidated financial statements from the date of acquisition. Intangible
assets and goodwill of $1.5 billion are being amortized on a straight-line basis
over periods ranging from eight to 40 years.
In the fourth quarter of 1997, CIGNA expects to 1) complete its fair value
analysis of Healthsource's net assets; 2) finalize plans for integrating
Healthsource with CIGNA and 3) finalize plans for restructuring its health care
operations. The effect on net income from these initiatives is not reasonably
estimable at this time; however, the charge is not expected to exceed $125
million after-tax.
Healthsource's total revenues were $971 million and $1.7 billion for the six
months ended June 30, 1997 and for the full year 1996, respectively. The pro
forma effect on CIGNA's net income was not material.
In July 1997, CIGNA entered into an agreement to sell its individual life
insurance and annuity businesses for cash proceeds of $1.4 billion. These
businesses, which are included in the Individual Financial Services segment,
reported the following results:
==============================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
--------------------------------------------------------------
Revenues $230 $227 $703 $671
Operating income * $26 $21 $70 $45
Net income $24 $21 $72 $45
==============================================================
Completion of the sale, which is anticipated to occur by the end of 1997, is
subject to regulatory approvals. The agreement to sell these businesses is
generally in the form of an indemnity reinsurance arrangement, and is expected
to result in an after-tax gain on the sale of approximately $700 million. A
significant portion of the gain will be deferred and amortized over future
periods. Proceeds from the sale are expected to be used for internal growth,
acquisitions, and share repurchases, with share repurchases being the expected
use in the near term.
CIGNA continues to conduct strategic and financial reviews of its businesses in
order to deploy its capital most effectively.
CIGNA is currently analyzing and modifying or replacing its information systems
to ensure that they are capable of processing information for the Year 2000 and
beyond. The costs of these efforts are not expected to have a material effect on
CIGNA's results of operations. In addition, CIGNA has relationships with various
third party entities in its ordinary course of business. Where practicable,
CIGNA is assessing and attempting to mitigate its risks with respect to the
failure of these entities to be Year 2000 ready. The effect, if any, on CIGNA's
results of operations from the failure of these entities to be Year 2000 ready
is not reasonably estimable. Property and casualty indemnity losses for Year
2000 claims are not expected to be material, however, litigation costs to defend
or deny such claims are not reasonably estimable at this time.
___________________________________
* Operating income (loss) is defined as net income (loss) excluding after-tax
realized investment results.
8
<PAGE>
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 completed its audits for
the years 1982 through 1990, and challenged CIGNA on one issue related to years
prior to 1989. During the third quarter of 1997, the U.S. Tax Court ruled
against CIGNA in connection with this issue. The decision did not have an effect
on results of operations, as adequate reserves had been previously established.
As a result of this ruling, CIGNA made payments of approximately $100 million
prior to September 30, 1997 and an additional $150 million in the fourth quarter
of 1997. CIGNA plans to appeal the U.S. Tax Court decision to the U.S. Court of
Appeals.
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:
o revise the system of funding cleanup of environmental damages;
o reinterpret insurance contracts long after the policies were written to
provide coverage unanticipated by CIGNA;
o restrict insurance pricing and the application of underwriting standards;
and
o reform health care.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain. For additional information, see Note 8 to the Financial
Statements.
CONSOLIDATED RESULTS OF OPERATIONS
================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ----------------------------------------------------------------
Premiums and fees $3,925 $3,444 $10,795 $10,333
Net investment income 1,057 1,069 3,172 3,263
Other revenues 175 154 498 448
Realized investment
gains 25 18 81 17
----------------------------------------
Total revenues 5,182 4,685 14,546 14,061
Benefits and expenses 4,755 4,251 13,271 12,924
----------------------------------------
Income before taxes 427 434 1,275 1,137
Income taxes 148 153 429 387
----------------------------------------
Net income $279 $281 $846 $750
- ------------------------========================================
Realized investment
gains, net of taxes $17 $11 $54 $9
- ------------------------========================================
CIGNA's 1997 consolidated net income decreased 1% for the third quarter and
increased 13% for the nine months, compared with the same periods last year.
Operating income for the third quarter and nine months of 1997 was $262 million
and $792 million, respectively, compared with $270 million and $741 million,
respectively, for the same periods last year. The decrease in operating income
for the third quarter reflects increased losses in Other Operations, which
include the financing costs associated with the Healthsource acquisition.
Improvements in all of the business segments partially offset these increased
losses. For the nine months, operating income increased 7%, reflecting
improvement in all of the business segments, partially offset by increased
losses in Other Operations.
After-tax realized investment results improved for the third quarter and nine
months of 1997 from the same periods last year. Results for the third quarter
primarily reflect higher gains on sales of equity securities and fixed
maturities, partially offset by higher impairment losses on fixed maturities and
mortgage loans. Results for the nine months reflect higher gains on sales of
fixed maturities, equity securities and real estate as well as lower mortgage
loan impairment losses. For additional information, see Note 4 to the Financial
Statements.
Full year operating income for 1997 is expected to improve over 1996. However,
such improvement could be adversely affected by the factors noted in the
cautionary statement on page 18.
9
<PAGE>
EMPLOYEE LIFE AND HEALTH BENEFITS
================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ----------------------------------------------------------------
Premiums and fees $2,572 $2,036 $6,792 $6,188
Net investment income 142 136 415 423
Other revenues 116 99 340 301
Realized investment
gains (losses) (6) 4 1 (5)
----------------------------------------
Total revenues 2,824 2,275 7,548 6,907
Benefits and expenses 2,629 2,071 6,981 6,362
----------------------------------------
Income before taxes 195 204 567 545
Income taxes 71 74 194 188
----------------------------------------
Net income $124 $130 $373 $357
- ------------------------========================================
Realized investment
gains (losses), net of
taxes ($4) $3 $2 ($3)
- ------------------------========================================
Net income for the Employee Life and Health Benefits segment decreased 5% for
the third quarter and increased 4% for the nine months of 1997, compared with
the same periods last year.
Operating income for the Indemnity and HMO operations was as follows:
================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ----------------------------------------------------------------
Indemnity operations $76 $73 $202 $198
HMO operations 52 54 169 162
- ----------------------------------------------------------------
Total $128 $127 $371 $360
================================================================
Indemnity operating income increased 4% and 2% for the third quarter and nine
months of 1997, respectively, compared with the same periods last year. Third
quarter 1996 results reflect the unfavorable after-tax effects of $7 million
from reserve reviews. Excluding this item, operating income for 1997 declined
5%. This decline reflects unfavorable long-term disability claim experience,
partially offset by improved results from guaranteed cost medical business and
earnings from Healthsource operations. Results for the nine months of 1997 and
1996 include unfavorable after-tax adjustments of $3 million and $9 million,
respectively, from reserve reviews. Excluding these items, earnings were $205
million and $207 million for the nine months ended September 30, 1997 and 1996,
respectively. This decrease reflects higher operating expenses primarily due to
customer service initiatives, and lower investment income resulting from lower
average assets and yields, partially offset by improved claim experience.
HMO results for the third quarter of 1996 include favorable after-tax
adjustments of $7 million from reserve reviews. Results for the nine months of
1997 and 1996 include favorable after-tax adjustments of $13 million and $12
million, respectively, from reserve reviews and the nine months of 1996 also
include a first quarter after-tax gain of $8 million from the sale of
subsidiaries. Excluding these items, HMO earnings were $52 million and $156
million for the third quarter and nine months of 1997, respectively, compared
with $47 million and $142 million, respectively, for the same periods last year.
These higher earnings are due to improved results in the dental operations,
primarily reflecting rate increases, cost controls, and membership growth.
Results in 1997 for the medical HMOs were about level with the same periods last
year, reflecting rate increases and membership growth, offset by higher HMO
medical costs, higher operating expenses associated with growth and customer
service initiatives, and Healthsource losses after goodwill.
Premiums and fees increased 26% and 10% for the third quarter and nine months of
1997, respectively, compared to the same periods last year, primarily reflecting
the addition of Healthsource. Growth in premiums is expected to continue to be
constrained by competitive pressures in both the medical indemnity and HMO
markets.
Net investment income increased 4% for the third quarter of 1997 compared to
1996 primarily due to the addition of assets related to Healthsource, partially
offset by lower yields. The 2% decrease for the nine months of 1997 compared to
1996 is primarily a result of lower yields, partially offset by the addition of
assets related to Healthsource.
Total HMO membership increased 36% since September 30, 1996 and 35% since
December 31, 1996. Healthsource accounts for 78% and 79%, of these increases,
respectively. The remaining increases primarily reflect membership growth in
CIGNA's HMO alternative funding programs. Under alternative funding programs,
the customer assumes all or a portion of the responsibility for funding claims.
CIGNA generally earns a lower margin on these programs than under traditional
HMO plans.
Management believes that adding premium equivalents to premiums and fees
(adjusted premiums and fees) produces a more meaningful measure of business
volume. Premium equivalents for the third quarter and nine months of 1997 were
10
<PAGE>
approximately $3.0 billion and $7.8 billion, respectively. These amounts
represent an increase of 29% and 9%, respectively, compared with the same
periods last year primarily reflecting Healthsource. Excluding Healthsource,
premium equivalents for alternative funding programs were about level with 1996,
reflecting growth in HMOs offset by cancellations and conversions of medical
indemnity business to HMOs. Premium equivalents are expected to continue to be
constrained by competitive pressures in both the medical indemnity and HMO
markets.
Premium equivalents were 54% of total adjusted premiums and fees for the nine
months of 1997 and 1996. Administrative Services Only (ASO) plans accounted for
50% and 48% of total adjusted premiums and fees for the nine months of 1997 and
1996, respectively.
EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ----------------------------------------------------------------
Premiums and fees $40 $55 $138 $143
Net investment income 393 419 1,192 1,278
Realized investment
gains (losses) (3) 9 11 19
----------------------------------------
Total revenues 430 483 1,341 1,440
Benefits and expenses 355 398 1,095 1,204
----------------------------------------
Income before taxes 75 85 246 236
Income taxes 24 28 79 78
----------------------------------------
Net income $51 $57 $167 $158
- ------------------------========================================
Realized investment
gains (losses), net of
taxes ($2) $5 $7 $11
- ------------------------========================================
Net income for the Employee Retirement and Savings Benefits segment decreased
11% and increased 6% for the third quarter and nine months of 1997,
respectively, compared with the same periods of 1996. Results for the nine
months of 1996 include an after-tax charge of $8 million for state guaranty fund
assessments. Excluding the above charge, operating income was $53 million and
$160 million for the third quarter and nine months of 1997, respectively,
compared with $52 million and $155 million, respectively, for the same periods
last year. These increases reflect higher earnings from an increased asset base,
partially offset by a shift to lower margin products (separate account equity
funds) and higher operating expenses related to growth initiatives.
Premiums and fees decreased 27% and 3% for the third quarter and nine months of
1997, respectively, reflecting lower annuity sales, partially offset by higher
fees from separate accounts.
Net investment income decreased 6% and 7% for the third quarter and nine months
of 1997, respectively, compared with the same periods last year. These decreases
primarily reflect lower investment yields and customers' continued redirection
of a portion of their investments from the general account to separate accounts.
Assets under management is generally a key determinant of earnings for this
segment. For the nine months ended September 30, assets under management and
related activity, including amounts attributable to separate accounts, were as
follows:
================================================================
(In millions) 1997 1996
- ----------------------------------------------------------------
Balance -- January 1 $40,587 $38,183
Premiums and deposits 5,207 4,478
Investment results 1,846 1,977
Increase (decrease) in fair value of 2,946 (421)
assets
Customer withdrawals (1,679) (1,596)
Other, including participant
withdrawals and benefit payments (3,494) (3,542)
- ----------------------------------------------------------------
Balance -- September 30 $45,413 $39,079
================================================================
Premiums and deposits increased 16% in the nine months of 1997, compared with
the same period in 1996. Of this increase, approximately 57% reflects higher
recurring deposits from existing customers while the remaining increase
represents sales to new customers. Sales to new customers and new plan sales to
existing customers were approximately 47% of premiums and deposits for the nine
months of 1997 and 1996. The decrease in investment results reflects lower
capital gains in 1997 compared with 1996 and lower investment yields. The
increase for 1997 in the fair value of assets is due to market value
appreciation of equity securities in separate accounts and, to a lesser extent,
market value appreciation in fixed maturities in the general account.
Management expects asset growth to continue to be constrained due to the lack of
growth in the defined benefit market. In addition, assets under management will
continue to be affected by market value fluctuations for fixed maturities and
equity securities.
11
<PAGE>
INDIVIDUAL FINANCIAL SERVICES
================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ----------------------------------------------------------------
Premiums and fees $248 $233 $731 $678
Net investment income 274 257 805 780
Other revenues 17 20 46 58
Realized investment
gains (losses) (4) -- 7 --
----------------------------------------
Total revenues 535 510 1,589 1,516
Benefits and expenses 460 438 1,357 1,330
----------------------------------------
Income before taxes 75 72 232 186
Income taxes 26 25 81 65
----------------------------------------
Net income $49 $47 $151 $121
- ------------------------========================================
Realized investment
gains (losses), net of
taxes ($2) $-- $5 $--
- ------------------------========================================
Net income for the Individual Financial Services segment increased 4% and 25%
for the third quarter and nine months of 1997, respectively, compared with the
same periods last year. Results for the third quarter and nine months include an
after-tax benefit of $4 million for both periods in 1997 and for 1996 after-tax
benefits of $5 million and $2 million, respectively, from reserve and account
reviews. Excluding these items, operating income was $47 million and $142
million for the third quarter and nine months of 1997, respectively, compared
with $42 million and $119 million, respectively, for the same periods last year.
These increases primarily reflect favorable mortality and business growth, which
for the nine months were partially offset by lower earnings from leveraged
corporate-owned life insurance (COLI).
For the third quarter and nine months of 1997, premiums and fees increased 6%
and 8%, respectively, compared with the same periods of 1996. These increases
primarily reflect growth in reinsurance and interest sensitive products. This
growth was partially offset by lower COLI renewal premiums.
Net investment income increased 7% and 3% for the third quarter and nine months
of 1997, respectively. These increases primarily reflect asset growth in the
non-leveraged corporate-owned life insurance and annuity businesses.
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged COLI products.
Revenues of $432 million and operating income of $31 million for the nine months
of 1997 were from leveraged COLI products that are affected by this legislation.
CIGNA does not expect this legislation to have a material effect on its
consolidated results of operations, liquidity or financial condition.
A significant portion of this segment's businesses are expected to be sold by
the end of 1997. See page 8 for further discussion.
PROPERTY AND CASUALTY
================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ----------------------------------------------------------------
Premiums and fees $1,065 $1,120 $3,134 $3,324
Net investment income 190 201 574 606
Other revenues 72 63 209 176
Realized investment
gains 35 2 59 2
----------------------------------------
Total revenues 1,362 1,386 3,976 4,108
Benefits and expenses 1,241 1,301 3,669 3,880
----------------------------------------
Income before taxes 121 85 307 228
Income taxes 39 26 94 68
----------------------------------------
Net income $82 $59 $213 $160
- ------------------------========================================
Realized investment
gains, net of taxes $23 $1 $38 $1
- ------------------------========================================
Net income for the Property and Casualty segment increased 39% and 33% for the
third quarter and nine months of 1997, respectively, compared with the same
periods last year.
Operating income increased 2% and 10% for the third quarter and nine months of
1997, respectively, compared with the same periods in 1996. Operating income for
the ongoing and run-off operations was as follows:
================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ----------------------------------------------------------------
Ongoing operations:
International $33 $37 $102 $102
Domestic 26 20 72 52
-----------------------------------------
Total ongoing 59 57 174 154
operations
Run-off operations -- 1 1 5
- ----------------------------------------------------------------
Total $59 $58 $175 $159
================================================================
International results for the nine months of 1997 include a $6 million after-tax
charge for cost reduction initiatives, primarily severance. For the third
quarter and nine months of 1996, International results include $4 million for
favorable prior year
12
<PAGE>
development and, for the quarter, $3 million for improved claim experience.
Excluding these items, operating income for the third quarter and nine months of
1997 was $33 million and $108 million, respectively, compared with $30 million
and $98 million, respectively, for the same periods last year. These increases
are primarily attributable to improved international life insurance results.
Improvement in Domestic operations' results for the third quarter and nine
months primarily reflects lower catastrophes, partially offset by lower premiums
and fees in 1997. Results for International and Domestic operations continue to
reflect a highly competitive pricing environment.
Premiums and fees declined 5% and 6% in the third quarter and nine months of
1997, respectively, compared with the same periods last year. These declines
primarily reflect strict underwriting standards, continued competition
(particularly in domestic casualty, large risk property and commercial package
lines of business), and an unfavorable effect from foreign currency translation
(approximately $25 million and $95 million, respectively). Strong growth in the
international accident and health line of business partially offset these
declines.
Domestic operations had pre-tax catastrophe losses of $2 million and $16
million, net of reinsurance, for the third quarter and nine months of 1997,
respectively, compared with $27 million and $58 million, respectively, for the
same periods of 1996. Catastrophe losses for the third quarter and nine months
of 1996 include $20 million for Hurricane Fran. Catastrophe losses for the nine
months of 1996 include $21 million for East Coast winter storms. The effects of
reinsurance on catastrophe losses for the periods presented were not material.
International operations had no catastrophe losses in the third quarter and nine
months of 1997 and 1996.
Certain competitors and policyholders of CIGNA are challenging in court the
restructuring of its domestic property and casualty business into two separate
operations, ongoing and run-off. Although CIGNA expects the matter to be in
litigation for some time, it expects to ultimately prevail.
LOSS RESERVES AND REINSURANCE
RECOVERABLES
CIGNA's reserving methodology and significant issues affecting the estimation of
loss reserves and reinsurance recoverables are described in its 1996 Form 10-K.
CIGNA's property and casualty loss reserves of $16.0 billion and $16.5 billion
as of September 30, 1997 and December 31, 1996, 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 traditional 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 refines its loss estimation process by improving the analysis
of 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 and product
liability laws have at times significantly affected the ability of insurers to
estimate liabilities for unpaid losses and related expenses.
Reserving for property and casualty claims continues to be a complex and
uncertain process, requiring the use of informed estimates and judgments.
CIGNA's estimates and judgments may be revised as additional experience and
other data become available and are reviewed, as new or improved methodologies
are developed or as current law changes. Any such revisions could result in
future changes in estimates of losses or reinsurance recoverables, and would be
reflected in CIGNA's results of operations for the period in which the estimates
are changed. While the effect of any such changes in estimates of losses or
reinsurance recoverables could be material to future results of operations,
CIGNA does not expect such changes to have a material effect on its liquidity or
financial condition.
CIGNA manages its loss exposure through the use of reinsurance. While
reinsurance arrangements are designed to limit losses from large exposures and
to
13
<PAGE>
permit recovery of a portion of direct losses, reinsurance does not relieve
CIGNA of liability to its insureds. Accordingly, CIGNA's loss reserves represent
total gross losses, and reinsurance recoverables represent anticipated
recoveries of a portion of those losses.
CIGNA's reinsurance recoverables were approximately $6.4 billion and $6.8
billion as of September 30, 1997 and December 31, 1996, respectively, net of
allowances for unrecoverable reinsurance of $719 million and $711 million,
respectively.
In management's judgment, information currently available has been appropriately
considered in estimating CIGNA's loss reserves and reinsurance recoverables.
The following table shows the adverse (favorable) pre-tax effects on the
Property and Casualty segment's results of operations from prior year
development, net of reinsurance, for the quarter and nine months ended September
30:
================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
- ----------------------------------------------------------------
By business operation:
Ongoing operations $8 ($2) $22 $15
Run-off operations 50 38 150 110
================================================================
Total $58 $36 $172 $125
================================================================
By type of loss:
Asbestos-related $20 $13 $68 $27
Environmental
pollution 8 5 22 31
Unrecoverable
reinsurance 6 2 15 20
Workers' compensation 18 17 36 36
Other 6 (1) 31 11
================================================================
Total $58 $36 $172 $125
================================================================
Other prior year development for the third quarter and nine months of 1997 was
primarily attributable to assumed reinsurance and long-term exposures.
OTHER OPERATIONS
Other Operations includes unallocated investment income, expenses (including
debt service and new business initiatives), and taxes. Also included are the
results of CIGNA's settlement annuity business and non-insurance operations
engaged primarily in investment and real estate activities.
Other Operations had net losses of $27 million and $58 million for the third
quarter and nine months of 1997, respectively, compared with net losses of $12
million and $46 million, respectively, for the same periods in 1996. Net losses
included after-tax realized investment gains of $2 million for the third quarter
and nine months of 1997 and the third quarter of 1996. There were no realized
investment gains or losses for the nine months of 1996. The increase in losses
primarily reflects financing costs associated with the Healthsource acquisition
and expenses related to new business initiatives.
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 nine months of 1997, cash and cash equivalents increased $183 million
from $1.3 billion as of December 31, 1996. The increase primarily reflects cash
provided by operating activities ($722 million), due to earnings and the timing
of operating cash receipts and disbursements; proceeds on the issuance of
long-term debt ($600 million) and net proceeds on short-term debt ($104
million). These increases were partially offset by cash used in investing
activities ($925 million, which includes the $1.3 billion acquisition of
Healthsource partially offset by net investment sales); repayment of
Healthsource debt (approximately $250 million) and payments of dividends on and
repurchases of CIGNA common stock ($237 million). For additional information
regarding the funding of the Healthsource acquisition, see page 8.
CIGNA's capital resources represent funds available for long-term business
commitments. They primarily consist of retained earnings and proceeds from the
issuance of long-term debt and equity securities. CIGNA's financial strength
provides the capacity and flexibility to enable it to raise funds in the capital
markets through the issuance of such securities. CIGNA continues to be well
capitalized, with sufficient borrowing capacity to meet the anticipated needs of
its businesses.
CIGNA had $1.5 billion of long-term debt outstanding at September 30, 1997,
compared with $1.02 billion at December 31, 1996. This increase
14
<PAGE>
primarily reflects issuance in May 1997 of $300 million of 7.4% unsecured Notes
due in 2007 and $300 million of 7.875% unsecured Debentures due in 2027. The
proceeds from these issues were used to finance the acquisition of Healthsource.
As of September 30, 1997, CIGNA had $200 million remaining under a shelf
registration statement that may be issued as debt or equity securities, or both,
depending upon market conditions and CIGNA's capital requirements.
At September 30, 1997, CIGNA's short-term debt amounted to $444 million, an
increase of $155 million from December 31, 1996. The increase primarily reflects
higher borrowings to fund working capital needs arising as a result of the
redemption of the Healthsource debt in the third quarter of 1997.
In October 1997, Standard and Poor's raised its ratings on CIGNA's senior debt
to A from A-, and on CIGNA's commercial paper to A-1 from A-2.
In October 1997, CIGNA's Board of Directors increased CIGNA's authorization to
repurchase its common stock by $500 million. Stock repurchases will depend on
prevailing market conditions and alternative uses of capital. During 1997, CIGNA
has repurchased 927,000 shares for $149 million, including 587,000 shares
repurchased for $100 million from October 1 through November 5, 1997. The
remaining authorization as of November 5, 1997 is $552 million.
INVESTMENT ASSETS
================================================================
September 30, December 31,
(In millions) 1997 1996
- ----------------------------------------------------------------
Fixed maturities $35,630 $34,933
Equity securities 937 701
Mortgage loans 10,813 10,927
Real estate 1,023 1,102
Other, primarily policy loans 8,370 8,871
- ----------------------------------------------------------------
Total investment assets $56,773 $56,534
================================================================
Additional information regarding CIGNA's investment assets is included in Note 4
to the third quarter 1997 Financial Statements and Notes 2, 4 and 5 to the 1996
Financial Statements as well as the 1996 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:
================================================================
September 30, December 31,
1997 1996
- ----------------------------------------------------------------
Fixed maturities 29% 28%
Mortgage loans 55% 56%
Real estate 62% 58%
================================================================
Fixed Maturities
Investments in fixed maturities (bonds) include publicly traded and private
placement debt securities; asset-backed securities, including collateralized
mortgage obligations (CMOs); and redeemable preferred stocks.
As of September 30, 1997 and December 31, 1996, the fair value of fixed
maturities, including policyholder share, was greater than amortized cost by
$1.8 billion and $1.5 billion, respectively. The increase in unrealized
appreciation primarily reflects the downward movement in interest rates since
December 31, 1996.
Potential Problem Bonds
Potential problem bonds are fully current but judged by management to have
certain characteristics that increase the likelihood of problem classification.
CIGNA had $58 million of potential problem bonds, including amounts attributable
to policyholder contracts, as of September 30, 1997, compared with $107 million
as of December 31, 1996. These amounts are net of $5 million of cumulative
write-downs.
Problem Bonds
CIGNA considers bonds that are delinquent or restructured as to terms, typically
interest rate and, in certain cases, maturity date, problem bonds. As of
September 30, 1997 and December 31, 1996, CIGNA had problem bonds, including
amounts attributable to policyholder contracts, of $177 million and $160
million, net of related cumulative write-downs of $98 million and $125 million,
respectively.
15
<PAGE>
Cumulative Write-Downs for Bonds
CIGNA had cumulative write-downs for bonds as of September 30, 1997 and 1996 of
$104 million and $168 million, respectively, including $30 million and $60
million attributable to policyholder contracts. Also, cumulative write-downs as
of September 30, 1997 and 1996 included $1 million for bonds no longer
classified as problem or potential problem bonds.
During the nine months of 1997 and 1996, CIGNA established write-downs of $43
million and $44 million, respectively, for problem and potential problem bonds.
These amounts included $13 million and $14 million, attributable to policyholder
contracts, for the nine months of 1997 and 1996, respectively. See the Summary
on page 18 for the effect of write-downs on policyholder contracts and on
CIGNA's net income.
Effect of Non-Accruals for Bonds
CIGNA recognizes interest income on problem bonds only when payment is received.
See the Summary on page 18 for the effect of non-accruals for bonds on
policyholder contracts and on CIGNA's net income.
Mortgage Loans
================================================================
September 30, December 31,
1997 1996
- ----------------------------------------------------------------
Mortgage loans (in millions) $10,813 $10,927
Property type:
Retail facilities 42% 43%
Office buildings 33 34
Apartment buildings 12 12
Hotels 6 6
Other 7 5
Total 100% 100%
================================================================
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.
During the nine months of 1997, $706 million of mortgage loans were scheduled to
mature, of which $312 million were paid in full, $132 million were extended at
existing loan rates for a weighted average of nine months and $102 million were
refinanced at current market rates. Mortgage loan extensions and refinancings
are loans in good standing. The remaining scheduled maturities of $160 million
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:
o fully current loans that are judged by management to have certain
characteristics that increase the likelihood of problem classification;
o fully current loans for which the borrower has requested restructuring; and
o loans that are 30 to 59 days delinquent with respect to interest or
principal payments.
CIGNA had potential problem mortgage loans, including amounts attributable to
policyholder contracts, of $281 million as of September 30, 1997, and $384
million as of December 31, 1996, net of related valuation reserves of $36
million and $30 million, 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 September 30, 1997, restructured mortgage loans
with a carrying value of $174 million had their original maturity date extended,
with a weighted average extension of approximately five years. Restructured
mortgage loans generated annualized cash returns averaging approximately 10% as
of September 30, 1997.
CIGNA had problem mortgage loans, including amounts attributable to policyholder
contracts, of $199 million and $363 million, net of valuation reserves of $12
million and $71 million, as of September 30, 1997 and December 31, 1996,
respectively.
Valuation Reserves for Mortgage Loans
CIGNA had valuation reserves for mortgage loans at September 30, 1997 and 1996
of $48 million and $95 million, respectively, including $29 million and $62
million attributable to policyholder contracts.
16
<PAGE>
During the nine months of 1997 and 1996, CIGNA established valuation reserves of
$23 million and $53 million, respectively, for problem and potential problem
mortgage loans. These amounts included $11 million and $30 million,
respectively, attributable to policyholder contracts.
See the Summary on page 18 for the effect of valuation reserves on policyholder
contracts and on CIGNA's net income.
Effect of Non-Accruals for Mortgage Loans
CIGNA recognizes interest income on problem mortgage loans only when payment is
received. See the Summary on page 18 for the effect of non-accruals for mortgage
loans on policyholder contracts and on CIGNA's net income.
Real Estate
As of September 30, 1997 and December 31, 1996, investment real estate, net of
reserves and write-downs, included: 1) $466 million and $495 million,
respectively, of real estate held for the production of income and 2) $557
million and $607 million, respectively, of real estate held for sale, primarily
properties acquired as a result of foreclosure of mortgage loans.
Real Estate Write-downs and Valuation
Reserves
CIGNA had cumulative write-downs and valuation reserves for real estate as of
September 30, 1997 and 1996 of $294 million and $391 million, respectively,
including $159 million and $197 million attributable to policyholder contracts.
See the Summary on page 18 for the effect of write-downs and valuation reserves
on policyholder contracts and on CIGNA's net income.
17
<PAGE>
Summary
The adverse (favorable) effects of write-downs and changes in valuation reserves
as well as of non-accruals on policyholder contracts and on CIGNA's net income
were as follows:
<TABLE>
<CAPTION>
============================================================================================================================
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------- -------------------------------------------------
1997 1996 1997 1996
----------------------- ----------------------- ------------------------ -----------------------
Policyholder Policyholder Policyholder Policyholder
(In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Write-downs and
valuation
reserves:
Bonds $6 $12 $6 $8 $13 $20 $14 $19
Mortgage loans 5 3 1 1 11 8 30 14
Real estate (2) -- 1 -- (1) 2 -- 1
- ----------------------------------------------------------------------------------------------------------------------------
Total $9 $15 $8 $9 $23 $30 $44 $34
============================================================================================================================
Non-accruals:
Bonds $2 $3 $3 $4 $5 $8 $8 $12
Mortgage loans (1) -- 2 -- (2) -- 5 1
- ----------------------------------------------------------------------------------------------------------------------------
Total $1 $3 $5 $4 $3 $8 $13 $13
============================================================================================================================
</TABLE>
Additional losses from problem investments are expected to occur for specific
investments in the normal course of business. 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 STATEMENT
Except for historical information provided in this Management's Discussion and
Analysis, statements made throughout this document are forward-looking and
contain information about financial results, economic conditions, trends and
known uncertainties. CIGNA cautions the reader that actual results could differ
materially from those expected by CIGNA, depending on the outcome of certain
factors (some of which are described with the forward-looking statements)
including: 1) adverse catastrophe experience in CIGNA's property and casualty
businesses; 2) adverse property and casualty loss development for events that
CIGNA insured in prior years; 3) an increase in medical costs in CIGNA's health
care operations, including increases in utilization and costs of medical
services; 4) heightened competition, particularly price competition, reducing
product margins and constraining growth in CIGNA's businesses; 5) significant
changes in interest rates; 6) charges in CIGNA's health care operations
associated with restructuring activities and the Healthsource acquisition; and
7) completion of the sale of its individual life insurance and annuity
businesses.
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) During the quarterly period ended September 30, 1997,
and as of the filing date, CIGNA filed the following
Reports on Form 8-K:
o dated July 30, 1997, Item 5 - containing a
news release regarding its second quarter
1997 results.
o dated August 4, 1997, Item 5 - containing a
news release regarding the adoption of the
Shareholder Rights Agreement.
o dated October 1, 1997, Item 5 - containing a
news release regarding its preliminary third
quarter 1997 earnings estimates.
o dated October 30, 1997, Item 5 - containing
a news release regarding its third quarter
1997 earnings results.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the undersigned duly
authorized officer, on its behalf and in the capacity indicated.
CIGNA CORPORATION
By /s/ Gary A. Swords
Gary A. Swords
Vice President and
Chief Accounting Officer
Date: November 7, 1997
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Exhibit Index
Method of
Number Description Filing
3 Restated Certificate of Incorporation Filed herewith.
of the Registrant as last amended
August 4, 1997
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.
21
EXHIBIT 3
RESTATED CERTIFICATE OF INCORPORATION
OF
CIGNA CORPORATION
*****
This Restated Certificate of Incorporation of CIGNA Corporation was
duly approved by the Board of Directors of the Corporation and only restates and
integrates but does not further amend the provisions of the Corporation's
Certificate of Incorporation as theretofore amended or supplemented; and there
is no discrepancy between these amended and supplemented provisions and the
provisions of the Restated Certificate of Incorporation set forth below except
as permitted by Section 245 of the General Corporation Law. The Corporation was
incorporated under the name North American General Corporation. The original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on November 3, 1981.
First: The name of the Corporation is CIGNA Corporation.
Second: The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street in the City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
Third: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
Fourth: The total number of shares of all classes of capital stock
which the Corporation shall have the authority to issue is 225,000,000 shares
divided into two classes as follows: 200,000,000 shares of Common Stock (the
"Common Stock") of the par value of $1 per share and 25,000,000 shares of
Preferred Stock (the "Preferred Stock") of the par value of $1 per share.
A. PREFERRED STOCK
The Board of Directors is expressly authorized to provide for
the issue of all or any shares of the Preferred Stock, in one or more series,
and to fix for each such series such voting powers, full or limited, or no
voting powers, and such designations, preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions adopted by the Board of Directors providing for the issue of such
series and as may be permitted by the General Corporation Law of the State of
Delaware, including, without limitation, the authority to provide that any such
series may be (i) subject to redemption at such time or times and at such price
or prices; (ii) entitled to receive dividends (which may be cumulative or
non-cumulative) at such rates, on such conditions, and at such times, and
payable in preference to, or in such relation to, the dividends payable on any
other class or classes or any other series; (iii) entitled to such rights upon
the dissolution of, or upon any distribution of the assets of, the Corporation;
or (iv) convertible into, or exchangeable for, shares of any other class or
classes of stock, or of any other series of the same or any other class or
classes of stock, of the Corporation at such price or prices or at such rates of
exchange and with such
<PAGE>
adjustments; all as may be stated in such resolution or resolutions.
1. Junior Participating Preferred Stock, Series D.
Section 1. Designation and Amount. There shall be a series of the
Preferred Stock of the Corporation which shall be designated as the "Junior
Participating Preferred Stock, Series D," $1.00 par value, and the number of
shares constituting such series shall be 6,000,000. Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided, that
no decrease shall reduce the number of shares of Junior Participating Preferred
Stock, Series D, to a number less than that of the shares then outstanding plus
the number of shares issuable upon exercise of outstanding rights, options or
warrants or upon conversion of outstanding securities issued by the Corporation.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Junior Participating Preferred Stock, Series D, with respect to dividends,
the holders of shares of Junior Participating Preferred Stock, Series D, in
preference to the holders of shares of Common Stock, par value $1.00 per share
(the "Common Stock"), of the Corporation and any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for that purpose, quarterly dividends payable in cash on
the 10th day of January, April, July and October in each year (or, in each case,
if not a date on which the Corporation is open for business, the next date on
which the Corporation is so open) (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Junior Participating Preferred Stock, Series D, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $10.00, or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate per
share amount of all cash dividends, and 100 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock, since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Junior Participating Preferred
Stock, Series D. In the event the Corporation shall at any time after August 4,
1997 (the "Effective Date") (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount to which holders of shares of Junior Participating
Preferred Stock, Series D, were entitled immediately prior to such event under
clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
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(B) The Corporation shall declare a dividend or distribution on the
Junior Participating Preferred Stock, Series D, as provided in paragraph (A)
above immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $10.00 per share on
the Junior Participating Preferred Stock, Series D, shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Junior Participating Preferred Stock, Series D, from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Junior
Participating Preferred Stock, Series D, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares of
Junior Participating Preferred Stock, Series D, entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date in either of which
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Junior Participating Preferred Stock,
Series D, in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Junior Participating Preferred Stock, Series D, entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Junior Participating
Preferred Stock, Series D shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Junior Participating Preferred Stock, Series D, shall entitle the
holder thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any time
after the Effective Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the number of votes per share to which holders of shares of
Junior Participating Preferred Stock, Series D, were entitled immediately prior
to such event shall be adjusted by multiplying such number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Junior Participating Preferred Stock, Series D, and the holders of
shares of Common Stock shall vote together as one class on all matters submitted
to a vote of
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<PAGE>
stockholders of the Corporation.
(C) (i) If at any time dividends on any Junior Participating
Preferred Stock, Series D, shall be in arrears in an amount equal to six (6)
quarterly dividends thereon ,the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which shall extend
until such time when all accrued and unpaid dividends for all previous quarterly
dividend periods and for the current quarterly dividend period on all shares of
Junior Participating Preferred Stock, Series D, then outstanding shall have been
declared and paid or set apart for payment. During each default period, all
holders of Preferred Stock (including holders of the Junior Participating
Preferred Stock, Series D) with dividends in arrears in an amount equal to six
(6) quarterly dividends thereon, voting as a class, irrespective of series,
shall have the right to elect two (2) directors.
(ii) During any default period, such voting right of the
holders of Junior Participating Preferred Stock, Series D, may be exercised
initially at a special meeting called pursuant to subparagraph (iii) of this
Section 3(C) or at any annual meeting of stockholders, and thereafter at annual
meetings of stockholders, provided that neither such voting right nor the right
of the holders of any other series of Preferred Stock, if any, to increase, in
certain cases, the authorized number of directors shall be exercised unless the
holders of ten percent (10%) in number of shares of Preferred Stock outstanding
shall be present in person or by proxy. The absence of a quorum of the holders
of Common Stock shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of Preferred Stock
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
directors, or if such right is exercised at an annual meeting, to elect two (2)
directors. If the number which may be so elected at any special meeting does not
amount to the required number, the holders of the Preferred Stock shall have the
right to make such increase in the number of directors as shall be necessary to
permit the election by them of the required number. After the holders of the
Preferred Stock shall have exercised their right to elect directors in any
default period and during the continuance of such period, the number of
directors shall not be increased or decreased except by vote of the holders of
Preferred Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Junior Participating
Preferred Stock, Series D.
(iii) Unless the holders of Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series, may request, the
calling of a special meeting of the holders of Preferred Stock, which meeting
shall thereupon be called by the Chairman, President, a Vice-President or the
Corporate Secretary of the Corporation. Notice of such meeting and of any annual
meeting at which holders of Preferred Stock are entitled to vote pursuant to
this paragraph (C)(iii) shall be given to each holder of record of Preferred
Stock by mailing a copy of such notice to him at his last address as the same
appears on the books of the Corporation. Such meeting shall be called for a
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<PAGE>
time not earlier than 10 days and not later than 60 days after such order or
request or in default of the calling of such meeting within 60 days after such
order or request, such meeting may be called on similar notice by any
stockholder or stockholders owning in the aggregate not less than ten percent
(10%) of the total number of shares of Preferred Stock outstanding.
Notwithstanding the provisions of this paragraph (C)(iii), no such special
meeting shall be called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and
other classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of directors until the holders of Preferred
Stock shall have exercised their right to elect two (2) directors voting as a
class, after the exercise of which right (x) the directors so elected by the
holders of Preferred Stock shall continue in office until their successors shall
have been elected by such holders or until the expiration of the default period,
and (y) any vacancy in the Board of Directors may (except as provided in
paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the
remaining directors theretofore elected by the holders of the class of stock
which elected the director whose office shall have become vacant. References in
this paragraph (C) to directors elected by the holders of a particular class of
stock shall include directors elected by such directors to fill vacancies as
provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x)
the right of the holders of Preferred Stock, as a class to elect directors shall
cease, (y) the term of any directors elected by the holders of Preferred Stock,
as a class shall terminate, and (z) the number of directors shall be such number
as may be provided for in, or pursuant to, the Restated Certificate of
Incorporation or Bylaws irrespective of any increase made pursuant to the
provisions of paragraph (C) (ii) of this Section 3 (such number being subject,
however to change thereafter in any manner provided by law or in the Restated
Certificate of Incorporation or Bylaws). Any vacancies in the Board of Directors
effected by the provisions of clauses (y) and (z) in the preceding sentence may
be filled by a majority of the remaining directors, even though less than a
quorum.
(D) Except as set forth herein, holders of Junior Participating
Preferred Stock, Series D, shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Junior Participating Preferred Stock, Series D, as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Junior Participating
Preferred Stock, Series D, outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of
5
<PAGE>
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Junior Participating Preferred Stock,
Series D;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up), with the
Junior Participating Preferred Stock, Series D, except dividends paid
ratably on the Junior Participating Preferred Stock, Series D, and all
such parity stock on which dividends are payable or in arrears in
proportion to the total amounts of which the holders of all such shares
are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Junior Participating Preferred Stock, Series D, provided that the
Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Junior Participating
Preferred Stock, Series D; or
(iv) purchase or otherwise acquire for consideration
any shares of Junior Participating Preferred Stock, Series D, or any
shares of stock ranking on a parity with the Junior Participating
Preferred Stock, Series D, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series of classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Junior Participating
Preferred Stock, Series D, purchased or otherwise acquired by the Corporation in
any manner whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part of
a new series of Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions and restrictions on issuance
set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Junior Participating Preferred Stock, Series D, unless, prior
thereto, the holders of shares of Junior Participating Preferred Stock, Series
D, shall have received $100 per share plus an
6
<PAGE>
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment (the "Series D Liquidation
Preference"). Following the payment of the full amount of the Series D
Liquidation Preference, no additional distributions shall be made to the holders
of shares of Junior Participating Preferred Stock, Series D, unless, prior
thereto, the holders of shares of Common Stock shall have received an amount per
share (the "Common Adjustment") equal to the quotient obtained by dividing (i)
the Series D Liquidation Preference by (ii) 100 (as appropriately adjusted as
set forth in subparagraph C below to reflect such events as stock splits, stock
dividends and recapitalizations with respect to the Common Stock) (such number
in clause (ii), the "Adjustment Number"). Following the payment of the full
amount of the Series D Liquidation Preference and the Common Adjustment in
respect of all outstanding shares of Junior Participating Preferred Stock,
Series D, and holders of shares of Common Stock shall receive their ratable and
proportionate share of the remaining assets to be distributed in the ratio of
the Adjustment Number to 1 with respect to such Preferred Stock and Common
Stock, on a per share basis, respectively.
(B) In the event there are not sufficient assets available to permit
payment in full of the Series D Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any, which rank on a
parity with the Junior Participating Preferred Stock, Series D, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event
there are not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
(C) In the event the Corporation shall at any time after the execution
of the Rights Agreement (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Junior Participating Preferred Stock, Series D, shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 100 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Effective
Date (i) declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the preceding sentence with respect to the
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exchange or change of shares of Junior Participating Preferred Stock, Series D,
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
are outstanding immediately prior to such event.
Section 8. Redemption. The shares of Junior Participating Preferred
Stock, Series D, shall not be redeemable.
Section 9. Ranking. The Junior Participating Preferred Stock, Series D,
shall rank junior to all other series of the Corporation's Preferred Stock as to
the payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 10. Amendment. The Restated Certificate of Incorporation of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Junior
Participating Preferred Stock, Series D, so as to affect them adversely without
the affirmative vote of at least two-thirds (66 2/3%) of the outstanding shares
of Junior Participating Preferred Stock, Series D, voting separately as a class.
Section 11. Fractional Shares. Junior Participating Preferred Stock,
Series D, may be issued in fractions of a share, which are one one-hundredths or
integral multiples of one one-hundredths of a share, which shall entitle the
holder, in proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have the benefit
of all other rights of holders of Junior Participating Preferred Stock, Series
D.
B. COMMON STOCK
1. Voting Rights. Except as provided by law or this
Certificate of Incorporation, each holder of Common Stock shall have one vote in
respect of each share of stock held by him of record on the books of the
Corporation for the election of directors and on all matters submitted to a vote
of stockholders of the Corporation.
2. Dividends. Subject to the preferential rights of the
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of capital stock.
3. Dissolution, Liquidation or Winding Up. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of Preferred Stock, holders of Common Stock shall be
entitled to receive all of the remaining assets of the Corporation of whatever
kind available for distribution to stockholders ratably in proportion to the
number of shares of Common Stock held by them respectively. The Board of
Directors may distribute in kind to the holders of Common Stock such remaining
assets of the Corporation or may sell, transfer or otherwise dispose of all or
any part of such remaining assets to any other corporation,
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trust or other entity and receive payment therefor in cash, stock or obligations
of such other corporation, trust or entity, or any combination thereof, and may
sell all or any part of the consideration so received and distribute any balance
thereof in kind to holders of Common Stock. Neither the merger or consolidation
of the Corporation into or with any other corporation, nor the merger of any
other corporation into it, nor any purchase or redemption of shares of stock of
the Corporation of any class, shall be deemed to be a dissolution, liquidation
or winding up of the Corporation for the purpose of this paragraph.
Fifth: The By-Laws of the Corporation may be adopted, amended or
repealed (a) by action of the holders of at least eighty percent (80%) of the
voting power of all outstanding Voting Stock (as defined in Article Tenth) of
the Corporation entitled to vote generally at any annual or special meeting of
stockholders or (b) by action of the Board of Directors at a regular or special
meeting thereof. Any By-Laws made by the Board of Directors may be amended or
repealed by action of the stockholders by the vote required by (a) above at any
annual or special meeting of stockholders.
Sixth: Elections of directors need not be by written ballot unless the
by-laws of the Corporation shall otherwise provide.
Seventh: Notwithstanding any provision of the General Corporation Law
of the State of Delaware, no action may be taken by stockholders without a
meeting, without prior notice and without a vote, unless a consent in writing
setting forth the action so taken shall be signed by the holders of all the
outstanding stock who would be entitled to vote thereon.
Eighth: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all of the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
Ninth: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted
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subject to this reservation.
Tenth: 1. Higher Vote for Certain Business Combinations. In addition to
any affirmative vote of holders of a class or series of capital stock of the
Corporation required by law or this Certificate, a Business Combination (as
hereinafter defined) with or upon a proposal by a Related Person (as hereinafter
defined) shall require the affirmative vote of the holders of at least eighty
percent (80%) of the voting power of all outstanding Voting Stock (as
hereinafter defined) of the Corporation, voting together as a single class. Such
affirmative votes shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or the Board.
2. When Higher Vote Is Not Required. The provisions of this
Article shall not be applicable to a particular Business Combination, and such
Business Combination shall require only such affirmative vote as is required by
law and any other provision of this Certificate or the By-Laws of the
Corporation, if all of the conditions specified in any one of the following
Paragraphs (A), (B) or (C) are met:
(A) Approval by Directors. The Business Combination has
been approved by a vote of a majority of all the Continuing Directors (as
hereinafter defined); or
(B) Combination with Subsidiary. The Business Combination
is solely between the Corporation and a subsidiary of the Corporation and such
Business Combination does not have the direct or indirect effect set forth in
Paragraph 3(B)(v) of this Article Tenth; or
(C) Price and Procedural Conditions. The proposed Business
Combination will be consummated within three years after the date the Related
Person became a Related Person (the "Determination Date") and all of the
following conditions have been met:
(i) The aggregate amount of (x) cash and (y) fair
market value (as of the date of the consummation of the Business Combination) of
consideration other than cash, to be received per share of Common or Preferred
Stock of the Corporation in such Business Combination by holders thereof shall
be at least equal to the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the Related
Person for any shares of such class or series of stock acquired by it; provided,
that if either (a) the highest preferential amount per share of a series of
Preferred Stock to which the holders thereof would be entitled in the event of
any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of the Corporation (regardless of whether the Business Combination to be
consummated constitutes such an event) or (b) the highest reported sales price
per share for any shares of such series of Preferred Stock on any national
securities exchange on which such series is traded and if not traded on any such
exchange, the highest reported closing bid quotation per share with respect to
shares of such series on the National Association of Securities Dealers, Inc.
Automated Quotation System or on any system then in use, at any time after the
Related Person became a holder of any shares of Common Stock, is greater than
such aggregate amount, holders of such series of Preferred Stock shall receive
an amount for each such share at least equal to the greater of
10
<PAGE>
(a) or (b).
(ii) The consideration to be received by holders of a
particular class or series of outstanding Common or Preferred Stock shall be in
cash or in the same form as the Related Person has previously paid for shares of
such class or series of stock. If the Related Person has paid for shares of any
class or series of stock with varying forms of consideration, the form of
consideration given for such class or series of stock in the Business
Combination shall be either cash or the form used to acquire the largest number
of shares of such class or series of stock previously acquired by it.
(iii) No Extraordinary Event (as hereinafter defined)
occurs after the Determination Date and prior to the consummation of the
Business Combination.
(iv) A proxy or information statement describing the
proposed Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) is mailed to public stockholders of the Corporation at least 30
days prior to the consummation of such Business Combination (whether or not such
proxy or information statement is required pursuant to such Act or subsequent
provisions).
3. Certain Definitions. For purposes of this Article Tenth:
(A) A "person" shall mean any individual, firm,
corporation or other entity, or a group of "persons" acting or agreeing to act
together in the manner set forth in Rule 13d-5 under the Securities Exchange Act
of 1934, as in effect on April 24, 1985.
(B) The term "Business Combination" shall mean any of the
following transactions, when entered into by the Corporation or a subsidiary of
the Corporation with, or upon a proposal by, a Related Person:
(i) the merger or consolidation of the Corporation or
any subsidiary of the Corporation; or
(ii) the sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one or a series of transactions) of any assets
of the Corporation or any subsidiary of the Corporation having an aggregate fair
market value of $100 million or more; or
(iii) the issuance or transfer by the Corporation or
any subsidiary of the Corporation (in one or a series of transactions) of
securities of the Corporation or any subsidiary having an aggregate fair market
value of $50 million or more; or
(iv) the adoption of a plan or proposal for the
liquidation or dissolution of the Corporation; or
11
<PAGE>
(v) the reclassification of securities (including a
reverse stock split), recapitalization, consolidation or any other transaction
(whether or not involving a Related Person) which has the direct or indirect
effect of increasing the voting power, whether or not then exercisable, of a
Related Person in any class or series of capital stock of the Corporation or any
subsidiary of the Corporation; or
(vi) any agreement, contract or other arrangement
providing directly or indirectly for any of the foregoing.
(C) The term "Related Person" shall mean any person (other
than the Corporation, a subsidiary of the Corporation or any profit sharing,
employee stock ownership or other employee benefit plan of the Corporation or of
a subsidiary of the Corporation or any trustee of or fiduciary with respect to
any such plan acting in such capacity) that is the direct or indirect beneficial
owner (as defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act
of 1934, as in effect on April 24, 1985) of more than ten percent (10%) of the
outstanding Voting Stock of the Corporation, and any Affiliate or Associate of
any such person.
(D) The term "Continuing Director" shall mean any member
of the Board of Directors who is not affiliated with a Related Person and who
was a member of the Board of Directors immediately prior to the time that the
Related Person became a Related Person, and any successor to a Continuing
Director who is not affiliated with the Related Person and is recommended to
succeed a Continuing Director by a majority of Continuing Directors who are then
members of the Board of Directors.
(E) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act
of 1934, as in effect on April 24, 1985.
(F) The term "Extraordinary Event" shall mean, as to any
Business Combination and Related Person, any of the following events that is not
approved by a majority of all Continuing Directors:
(i) any failure to declare and pay at the regular date
therefor any full quarterly dividend (whether or not cumulative) on outstanding
Preferred Stock; or
(ii) any reduction in the annual rate of dividends
paid on the Common Stock (except as necessary to reflect any subdivision of the
Common Stock); or
(iii) any failure to increase the annual rate of
dividends paid on the Common Stock as necessary to reflect any reclassification
(including any reverse stock split), recapitalization, reorganization or any
similar transaction that has the effect of reducing the number of outstanding
shares of the Common Stock; or
(iv) he receipt by the Related Person, after the
Determination Date, of a direct or indirect benefit (except proportionately as a
stockholder) from any loans, advances, guarantees, pledges or other financial
assistance or any tax credits or
12
<PAGE>
other tax advantages provided by the Corporation or any subsidiary of the
Corporation, whether in anticipation of or in connection with the Business
Combination or otherwise.
(G) A majority of all Continuing Directors shall have the
power to make all determinations with respect to this Article Tenth, including,
without limitation, the transactions that are Business Combinations, the persons
who are Related Persons, the time at which a Related Person became a Related
Person, and the fair market value of any assets, securities or other property,
and any such determinations of such directors shall be conclusive and binding.
(H) The term "Voting Stock" shall mean all outstanding
shares of the Common or Preferred Stock of the Corporation entitled to vote
generally and each reference to a proportion of Voting Stock shall refer to
shares having such proportion of the number of shares entitled to be cast.
4. No Effect on Fiduciary Obligations of Related Persons. Nothing
contained in this Article Tenth shall be construed to relieve any Related Person
from any fiduciary obligation imposed by law.
5. Amendment, Repeal, etc. The affirmative vote of the holders of
at least eighty percent (80%) of the voting power of all outstanding Voting
Stock of the Corporation, voting together as a single class, shall be required
in order to amend, repeal or adopt any provision inconsistent with this Article
Tenth.
Eleventh: To the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended, no
director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Any repeal or modification of the preceding sentence shall not adversely affect
any right or protection of a director existing at the time of such repeal or
modification.
13
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this instrument to be signed
in its name by its Chairman of the Board and Chief Executive Officer and
attested to by its Corporate Secretary this 4th day of August, 1997.
/s/ Wilson H. Taylor
Wilson H. Taylor
Chairman of the Board and
Chief Executive Officer
Attest:
/s/ Carol J. Ward
Carol J. Ward
Corporate Secretary
<TABLE>
<CAPTION>
CIGNA CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(Dollars in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
===================================================================================================================================
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Primary Earnings Per Share
- ----------------------------------------------------------
NET INCOME AVAILABLE TO
COMMON SHARES $ 279 $ 281 $ 846 $ 750
- ------------------------------------------------------=============================================================================
WEIGHTED AVERAGE SHARES:
Common shares 73,957,348 75,705,848 73,974,661 76,154,099
Common share equivalents applicable
to stock options 1,084,117 349,199 815,956 430,934
- -----------------------------------------------------------------------------------------------------------------------------------
Total 75,041,465 76,055,047 74,790,617 76,585,033
- ------------------------------------------------------=============================================================================
PRIMARY EARNINGS PER SHARE $ 3.72 $ 3.69 $ 11.31 $ 9.80
- ------------------------------------------------------=============================================================================
- ----------------------------------------------------------
Fully Diluted Earnings Per Share
- ----------------------------------------------------------
NET INCOME AVAILABLE TO
COMMON SHARES $ 279 $ 281 $ 846 $ 750
- ------------------------------------------------------=============================================================================
WEIGHTED AVERAGE SHARES:
Common shares 73,957,348 75,705,848 73,974,661 76,154,099
Common share equivalents applicable
to stock options 1,084,117 379,876 833,131 462,101
- -----------------------------------------------------------------------------------------------------------------------------------
Total 75,041,465 76,085,724 74,807,792 76,616,200
- ------------------------------------------------------=============================================================================
FULLY DILUTED EARNINGS PER SHARE $ 3.72 $ 3.69 $ 11.31 $ 9.79
- ------------------------------------------------------=============================================================================
</TABLE>
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Nine Months Ended
September 30,
1997 1996
============================================================
Income before income taxes $1,275 $1,137
------ ------
Fixed charges included in income:
Interest expense 96 80
Interest portion of rental expense 61 66
------ ------
Total fixed charges included in income 157 146
------ ------
Income available for fixed charges $1,432 $1,283
- --------------------------------------======================
RATIO OF EARNINGS TO FIXED CHARGES 9.1 8.8
- --------------------------------------======================
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF PART I TO CIGNA'S REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 35,630
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 937
<MORTGAGE> 10,813
<REAL-ESTATE> 1,023
<TOTAL-INVEST> 56,773
<CASH> 1,470
<RECOVER-REINSURE> 6,938<F1>
<DEFERRED-ACQUISITION> 1,291
<TOTAL-ASSETS> 106,428
<POLICY-LOSSES> 11,896
<UNEARNED-PREMIUMS> 1,852
<POLICY-OTHER> 18,434
<POLICY-HOLDER-FUNDS> 30,271
<NOTES-PAYABLE> 1,943
0
0
<COMMON> 88
<OTHER-SE> 7,903
<TOTAL-LIABILITY-AND-EQUITY> 106,428
10,795
<INVESTMENT-INCOME> 3,172
<INVESTMENT-GAINS> 81
<OTHER-INCOME> 498
<BENEFITS> 9,433
<UNDERWRITING-AMORTIZATION> 797
<UNDERWRITING-OTHER> 3,041
<INCOME-PRETAX> 1,275
<INCOME-TAX> 429
<INCOME-CONTINUING> 846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 846
<EPS-PRIMARY> 11.31
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES.
</FN>
</TABLE>
