<PAGE> 1
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) MARCH 5, 1997
CIGNA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-8323 06-1059331
-------- ------ ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
ONE LIBERTY PLACE, 1650 MARKET STREET, P.O. BOX 7716
PHILADELPHIA, PENNSYLVANIA 19192-1550
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(215) 761-1000
--------------
NOT APPLICABLE
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
In connection with CIGNA Corporation's ("CIGNA") anticipated filing of
a Schedule 14D-1 under the Securities Exchange Act of 1934, CIGNA is filing the
following audited financial statements with this Form 8-K so that they may be
incorporated by reference therein: consolidated statements of income and
retained earnings for the years ended December 31, 1996, 1995 and 1994;
consolidated balance sheets as of December 31, 1996 and 1995; and consolidated
statements of cash flows for the years ended December 31, 1996, 1995 and 1994.
The audited financial statements, notes to the financial statements and the
report of independent accountants are attached as Exhibit 99 and are hereby
incorporated by reference.
Item 7. Financial Statements and Exhibits.
(c) The exhibits accompanying this report are listed in the Index
to Exhibits below.
<PAGE> 3
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
CIGNA CORPORATION
Date: March 5, 1997 By: /s/ Gary A. Swords
-------------------------------
Gary A. Swords
Vice President and
Chief Accounting Officer
<PAGE> 4
Index to Exhibits
<TABLE>
<CAPTION>
Number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
23 Consent of Independent Accountants Filed herewith
27 Financial Data Schedule Filed herewith
(included only in
the electronically
filed document)
99 Financial Statements and Notes: Filed herewith
Consolidated Statements of Income and Retained Earnings for
the years ended December 31, 1996, 1995 and 1994
Consolidated Balance Sheets as of
December 31, 1996 and 1995
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994
Notes to Financial Statements
Report of Independent Accountants
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANT
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 33-65396) and Form S-8 (No. 2-76445, No. 2-76444,
No. 33-44371, No. 33-51791, No. 33-60053 and 333-22391) of CIGNA Corporation,
of our report dated February 11, 1997, included in the Current Report on Form
8-K of CIGNA Corporation dated March 5, 1997.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
March 5, 1997
<PAGE> 1
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
- --------------------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and fees $13,916 $13,914 $13,912
Net investment income 4,333 4,296 3,946
Other revenues 610 512 492
Realized investment gains 91 233 42
---------------------------------------------------
Total revenues 18,950 18,955 18,392
---------------------------------------------------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 12,473 13,855 12,926
Policy acquisition expenses 1,138 1,181 1,166
Other operating expenses 3,738 3,668 3,495
---------------------------------------------------
Total benefits, losses and expenses 17,349 18,704 17,587
---------------------------------------------------
INCOME BEFORE INCOME TAXES 1,601 251 805
---------------------------------------------------
Income taxes (benefits):
Current 419 258 224
Deferred 126 (218) 27
---------------------------------------------------
Total taxes 545 40 251
---------------------------------------------------
NET INCOME 1,056 211 554
Common dividends declared (242) (222) (219)
Retained earnings, beginning of year 4,041 4,052 3,717
---------------------------------------------------
RETAINED EARNINGS, END OF YEAR $ 4,855 $ 4,041 $ 4,052
- ---------------------------------------------------------=========================================
EARNINGS PER SHARE $ 13.85 $ 2.86 $ 7.66
- ---------------------------------------------------------=========================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
1
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
- --------------------------------------------------------------------------------------------------------
As of December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $33,404; $33,275) $34,933 $36,241
Equity securities, at fair value (cost, $573; $565) 701 661
Mortgage loans 10,927 11,010
Policy loans 7,296 7,107
Real estate 1,102 1,283
Other long-term investments 255 295
Short-term investments 1,320 1,113
---------------------------------
Total investments 56,534 57,710
Cash and cash equivalents 1,287 1,559
Accrued investment income 890 908
Premiums, accounts and notes receivable 4,229 4,268
Reinsurance recoverables 7,287 7,120
Deferred policy acquisition costs 1,230 1,109
Property and equipment 802 864
Deferred income taxes 1,998 1,866
Other assets 993 1,149
Goodwill 1,068 1,118
Separate account assets 22,614 18,232
- --------------------------------------------------------------------------------------------------------
Total assets $98,932 $95,903
- ---------------------------------------------------------------------------------=======================
LIABILITIES
Contractholder deposit funds $29,878 $30,055
Unpaid claims and claim expenses 18,841 19,303
Future policy benefits 11,784 12,007
Unearned premiums 1,940 2,176
---------------------------------
Total insurance and contractholder liabilities 62,443 63,541
Accounts payable, accrued expenses and other liabilities 5,326 5,408
Current income taxes 221 187
Short-term debt 289 414
Long-term debt 1,021 1,066
Separate account liabilities 22,424 18,130
- --------------------------------------------------------------------------------------------------------
Total liabilities 91,724 88,746
- --------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 19
SHAREHOLDERS' EQUITY
Common stock (shares issued, 88; 87) 88 87
Additional paid-in capital 2,572 2,536
Net unrealized appreciation, fixed maturities 539 1,025
Net unrealized appreciation, equity securities 88 73
Net translation of foreign currencies (45) (27)
Retained earnings 4,855 4,041
Less treasury stock, at cost (889) (578)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 7,208 7,157
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $98,932 $95,903
- ---------------------------------------------------------------------------------=======================
SHAREHOLDERS' EQUITY PER SHARE $ 97.15 $ 93.76
- ---------------------------------------------------------------------------------=======================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
- ---------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,056 $ 211 $ 554
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Insurance liabilities (351) 550 (853)
Reinsurance recoverables (140) 362 862
Premiums, accounts and notes receivable 23 (184) (10)
Accounts payable, accrued expenses, other liabilities
and current income taxes 23 589 (119)
Deferred income taxes 126 (218) 27
Realized investment gains (91) (233) (42)
Other, net 54 27 56
------------------------------------------------
Net cash provided by operating activities 700 1,104 475
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities -- available-for-sale 6,076 6,492 4,868
Fixed maturities -- held-to-maturity -- -- 12
Equity securities 368 1,668 681
Mortgage loans 676 430 601
Other (primarily short-term investments) 11,555 16,969 16,076
Investment maturities and repayments:
Fixed maturities -- available-for-sale 3,867 1,144 1,946
Fixed maturities -- held-to-maturity -- 2,177 2,624
Mortgage loans 672 389 194
Investments purchased:
Fixed maturities -- available-for-sale (9,842) (9,906) (7,809)
Fixed maturities -- held-to-maturity -- (1,790) (2,477)
Equity securities (348) (348) (606)
Mortgage loans (1,375) (1,829) (953)
Other (primarily short-term investments) (11,862) (18,957) (17,109)
Other, net (144) (152) (140)
------------------------------------------------
Net cash used in investing activities (357) (3,713) (2,092)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 7,261 8,472 7,459
Withdrawals and benefit payments from contractholder deposit funds (7,168) (5,859) (5,252)
Net change in commercial paper (6) (13) (38)
Issuance of long-term debt -- 88 158
Repayment of debt (158) (9) (46)
Repurchase of common stock (292) -- --
Issuance of common stock 12 21 5
Common dividends paid (242) (222) (219)
------------------------------------------------
Net cash provided by (used in) financing activities (593) 2,478 2,067
------------------------------------------------
Effect of foreign currency rate changes on cash and cash equivalents (22) (3) 32
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (272) (134) 482
Cash and cash equivalents, beginning of year 1,559 1,693 1,211
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,287 $ 1,559 $ 1,693
- ----------------------------------------------------------------------------------=========================================
SUPPLEMENTAL DISCLOSURE OF CASH INFORMATION:
Income taxes paid, net of refunds $ 360 $ 233 $ 531
Interest paid $ 106 $ 123 $ 117
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
3
<PAGE> 4
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
CIGNA Corporation's subsidiaries provide group life and health insurance,
managed care products and related services, individual life and health insurance
and annuity products, retirement and investment products and services, and
property and casualty insurance throughout the United States and in many
locations worldwide.
NOTE 2 -- SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
A) 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, and reflect management's estimates and
assumptions, such as those regarding medical costs and interest rates, that
affect the recorded amounts. Significant estimates used in determining insurance
and contractholder liabilities and related reinsurance recoverables, and
valuation allowances for investment assets and deferred tax assets are discussed
throughout the Notes to Financial Statements.
Certain reclassifications have been made to prior years' amounts to conform
with the 1996 presentation.
B) RECENT ACCOUNTING PRONOUNCEMENTS: In 1996, CIGNA implemented Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires write-down to fair value when long-lived assets to be held and used are
impaired. Long-lived assets to be disposed of, including real estate held for
sale, must be carried at the lower of cost or fair value less costs to sell.
Depreciation of assets to be disposed of is prohibited. The effect of
implementing SFAS No. 121 was not material to CIGNA.
In 1996, CIGNA implemented SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement provides guidance on the accounting and reporting
for the cost of stock-based compensation. The cost related to stock options is
permitted to be recorded or disclosed, and such cost must be measured at the
grant date based upon estimated fair values using an option pricing model. CIGNA
implemented SFAS No. 123 by disclosing the pro forma effect on net income of
stock options. See Note 11 for further information.
In 1993, CIGNA implemented SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," which required that debt and equity securities
be classified into different categories and carried at fair value if they are
not classified as held-to-maturity. During the fourth quarter of 1995, the
Financial Accounting Standards Board (FASB) issued a guide to implementation of
SFAS No. 115, which permitted a one-time opportunity to reclassify securities
subject to SFAS No. 115. Consequently, CIGNA reclassified all held-to-maturity
securities to available-for-sale as of December 31, 1995. The non-cash
reclassification of these securities, which had an aggregate amortized cost of
$11.8 billion and fair value of $12.8 billion, resulted in an increase of
approximately $300 million, net of policyholder-related amounts and deferred
income taxes, in net unrealized appreciation included in Shareholders' Equity as
of December 31, 1995.
In 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which provides guidance on the accounting and disclosure
for impaired loans. In 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -Income Recognition and Disclosures," which
eliminates the income recognition requirements of SFAS No. 114. CIGNA adopted
SFAS Nos. 114 and 118 in the first quarter of 1995, which resulted in an $8
million increase in net income.
C) FINANCIAL INSTRUMENTS: In the normal course of business, CIGNA enters
into transactions involving various types of financial instruments, including
investments such as fixed maturities and equity securities, debt, and
off-balance-sheet financial instruments such as investment and loan commitments
and financial guarantees. These instruments are subject to risk of loss due to
interest rate and market fluctuations and most have credit risk. CIGNA evaluates
and monitors each financial instrument individually and, where appropriate, uses
certain derivative instruments or obtains collateral or other forms of security
to minimize risk of loss.
Financial instruments that are subject to fair value disclosure requirements
(insurance contracts, real estate, goodwill and taxes are excluded) are carried
in the financial statements at amounts that approximate fair value, except for
Mortgage Loans, Contractholder Deposit Funds (non-insurance products) and
Long-term Debt. For these financial instruments, the fair value was not
materially different from the carrying amount as of December 31, 1996 and 1995.
Fair values of off-balance-sheet financial instruments as of December 31, 1996
and 1995 were not material.
Fair values for financial instruments are estimates that, in many cases, may
differ significantly from the amounts that could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments with comparable terms and credit
quality. The fair value of liabilities for contractholder deposit funds was
estimated using the amount payable on demand and, for those not payable on
demand, discounted cash flow analyses.
4
<PAGE> 5
D) INVESTMENTS: Investments in fixed maturities, which are classified as
available-for-sale, include bonds; asset-backed securities, including
collateralized mortgage obligations (CMOs); and redeemable preferred stocks.
Fixed maturities are carried at fair value, with unrealized appreciation or
depreciation included in Shareholders' Equity. Fixed maturities are considered
impaired and written down to fair value when a decline in value is considered to
be other than temporary.
Mortgage loans are carried principally at unpaid principal balances, net of
valuation reserves. Mortgage loans are considered impaired when it is probable
that CIGNA will not collect all amounts according to the contractual terms of
the loan agreement. If impaired, a valuation reserve is utilized to record any
change in the fair value of the underlying collateral below the carrying value
of the mortgage loan.
Fixed maturities and mortgage loans that are delinquent or restructured to
modify basic financial terms, typically to reduce the interest rate and, in
certain cases, extend the term, are placed on non-accrual status. Net investment
income on such investments is recognized only when payment is received.
Real estate investments are either held for the production of income or held
for sale. Real estate investments held for the production of income are carried
at depreciated cost less any write-downs to fair value. Depreciation is
generally calculated using the straight-line method based on the estimated
useful lives of these assets.
Real estate investments held for sale are generally those which are acquired
through the foreclosure of mortgage loans. CIGNA's policy is to rehabilitate,
re-lease and sell foreclosed properties, which generally takes two to four
years. At the time of foreclosure, properties are valued at fair value less
estimated costs to sell and reclassified from mortgage loans to real estate held
for sale. Subsequent to foreclosure, these investments are carried at the lower
of cost or current fair value less estimated costs to sell. Adjustments to the
carrying value as a result of changes in fair value subsequent to foreclosure
are recorded as valuation reserves, and reported in realized investment gains
and losses. CIGNA considers several methods in determining fair value for real
estate, with emphasis placed on the use of discounted cash flow analyses and, in
some cases, the use of third-party appraisals. Effective with the implementation
of SFAS No. 121, real estate held for sale is no longer depreciated.
Equity securities, which include common and non-redeemable preferred stocks,
are carried at fair value, with unrealized appreciation or depreciation included
in Shareholders' Equity. Short-term investments are carried at fair value, which
approximates cost. Equity securities and short-term investments are classified
as available-for-sale.
Policy loans generally are carried at unpaid principal balances.
Realized investment gains and losses result from sales, investment asset
write-downs and changes in valuation reserves. Realized investment gains and
losses do not include amounts attributable to experience-rated pension
policyholders' contracts and participating life policies (policyholder share).
Realized investment gains and losses are based upon specific identification of
the investment assets.
Unrealized investment gains and losses for investments carried at fair
value, are included in Shareholders' Equity net of policyholder-related amounts
and deferred income taxes.
See Note 4(F) for a discussion of CIGNA's accounting policies for derivative
financial instruments.
E) CASH AND CASH EQUIVALENTS: Short-term investments with a maturity of
three months or less at the time of purchase are reported as cash equivalents.
F) REINSURANCE RECOVERABLES: Reinsurance recoverables are estimates of
amounts to be received from reinsurers. Allowances are established for amounts
estimated to be uncollectible.
G) DEFERRED POLICY ACQUISITION COSTS: Acquisition costs consist of
commissions, premium taxes and other costs, which vary with, and are primarily
related to, the production of revenues. Acquisition costs for:
- - property and casualty products are deferred and amortized over the terms of
the insurance policies;
- - universal life products and contractholder deposit funds are deferred and
amortized in proportion to total estimated gross profits over the expected
lives of the contracts;
- - annuity and other individual life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods; and
- - other products are expensed as incurred.
Deferred policy acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income. If such costs are
estimated to be unrecoverable, they are expensed. If such costs are estimated to
be unrecoverable as a result of treating unrealized investment gains and losses
as though they had been realized, a deferred acquisition cost valuation
allowance may be established or adjusted, with a comparable offset in net
unrealized appreciation (depreciation).
H) PROPERTY AND EQUIPMENT: Property and equipment are carried at cost less
accumulated depreciation. When applicable, cost includes interest and real
estate taxes incurred during construction and other construction-related costs.
Depreciation is calculated principally on the straight-line method based on the
estimated useful lives of the assets. Accumulated depreciation was $1.1 billion
at December 31, 1996 and 1995.
5
<PAGE> 6
I) OTHER ASSETS: Other Assets consists of various insurance-related assets,
principally ceded unearned premiums and reinsurance deposits.
J) GOODWILL: Goodwill represents the excess of the cost of businesses
acquired over the fair value of their net assets. Goodwill is amortized on
systematic bases over periods, not exceeding 40 years, that correspond with the
benefits estimated to be derived from the acquisitions. CIGNA evaluates the
carrying amount of goodwill by analyzing historical and estimated future income
and undiscounted estimated cash flows of the related businesses. Goodwill is
written down when impaired. Amortization periods are revised if it is estimated
that the remaining period of benefit of the goodwill has changed. Accumulated
amortization was $959 million and $909 million at December 31, 1996 and 1995,
respectively.
K) SEPARATE ACCOUNTS: Separate account assets and liabilities are carried at
market value and represent policyholder funds maintained in accounts having
specific investment objectives. The investment income, gains and losses of these
accounts generally accrue to the policyholders and, therefore, are not included
in CIGNA's revenues and expenses.
L) CONTRACTHOLDER DEPOSIT FUNDS: Liabilities for Contractholder Deposit
Funds consist of deposits received from customers and investment earnings on
their fund balances, less administrative charges and, for universal life fund
balances, mortality charges.
M) UNPAID CLAIMS AND CLAIM EXPENSES: Liabilities for unpaid claims and claim
expenses are estimates of payments to be made on reported claims and incurred
but not reported claims on property and casualty, health and dental coverages.
Estimated amounts of salvage and subrogation are deducted from the liability for
unpaid claims.
N) FUTURE POLICY BENEFITS: Future policy benefits are liabilities for life,
health and annuity products. Such liabilities are established in amounts
adequate to meet the estimated future obligations of policies in force. These
liabilities are computed using premium assumptions for group annuity policies
and the net level premium method for individual life policies, and are based
upon estimates as to future investment yield, mortality and withdrawals that
include provisions for adverse deviation. Future policy benefits for individual
life insurance and annuity policies are computed using interest rates ranging
from approximately 2% to 11%, generally graded down from 1 to 20 years.
Mortality, morbidity and withdrawal assumptions are based on either CIGNA's own
experience or various actuarial tables.
O) UNEARNED PREMIUMS: Premiums for property and casualty and group life,
accident and health insurance are reported as earned on a pro-rata basis over
the contract period. The unexpired portion of these premiums is recorded as
Unearned Premiums.
P) OTHER LIABILITIES: Other Liabilities consists principally of
postretirement and postemployment benefits and various insurance-related
liabilities, including amounts related to reinsurance contracts, the present
value of obligations related to a closed book of reinsurance business acquired
in 1984, and guaranty fund assessments that can be reasonably estimated.
Q) TRANSLATION OF FOREIGN CURRENCIES: Foreign operations primarily utilize
the local currencies as their functional currencies, and assets and liabilities
are translated at the rates of exchange as of the balance sheet date. The
translation gain or loss on such functional currencies, net of applicable taxes,
is generally reflected in Shareholders' Equity. Revenues and expenses are
translated at average rates of exchange prevailing during the year.
R) PREMIUMS AND FEES, REVENUES AND RELATED EXPENSES: Premiums for property
and casualty insurance, group life, accident and health insurance, and prepaid
health and dental coverages are recognized as revenue on a pro-rata basis over
their contract periods. Benefits, losses and settlement expenses are recognized
when incurred.
Premiums for individual life insurance as well as individual and group
annuity products, excluding universal life and investment-related products, are
recognized as revenue when due. Benefits, losses and settlement expenses are
matched with premiums.
Revenues for universal life products consist of net investment income and
mortality, administration and surrender fees assessed against the fund balances
during the period. Net investment income represents investment income on assets
supporting universal life products and is recognized as earned. Fees for
mortality are recognized ratably over the policy year. Administration fees are
recognized as services are provided, and surrender charges are recognized as
earned. Benefit expenses for universal life products consist of benefit claims
in excess of fund balances, which are recognized when claims are filed, and
interest credited in accordance with contract provisions.
Revenues for investment-related products consist of net investment income
and contract fees assessed against the fund balances during the period. Net
investment income represents investment income on assets supporting
investment-related products and is recognized as earned. Contract fees are based
upon related administrative expenses and are assessed ratably over the contract
year. Benefit expenses for investment-related products primarily consist of
interest credited in accordance with contract provisions.
S) PARTICIPATING BUSINESS: Certain life insurance policies contain dividend
payment provisions that enable the policyholder to participate in a portion of
the earnings of the life insurance subsidiaries of CIGNA. The participating
insurance in force accounted for approximately 6% of total life insurance in
force at December 31, 1996 and 1995, compared with 5% at December 31, 1994.
6
<PAGE> 7
T) INCOME TAXES: CIGNA and its domestic subsidiaries file a consolidated
United States federal income tax return; foreign subsidiaries file tax returns
in accordance with applicable foreign regulations. Included in tax returns for
domestic subsidiaries are the taxable income and credits for taxes paid for
certain foreign subsidiaries. Entities included within the consolidated group
are segregated into either a life insurance or non-life insurance company
subgroup. The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life company taxable income.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes. See
Note 9 for additional information.
NOTE 3 -- ACQUISITIONS AND DISPOSITIONS
CIGNA had various acquisitions and dispositions during 1996, 1995 and 1994,
the effects of which were not material to the financial statements.
In February 1997, CIGNA announced its intent to acquire the outstanding
shares of Healthsource, Inc. (Healthsource) for $1.65 billion, including the
payment of approximately $250 million of outstanding Healthsource long-term
debt. Healthsource's principal businesses are managed care and group indemnity
insurance. The transaction, which is subject to regulatory approval, is expected
to be completed in 1997. Healthsource had revenues of $1.7 billion and a net
loss of $4 million for 1996. Healthsource's shareholders' equity was
approximately $400 million as of December 31, 1996.
NOTE 4 -- INVESTMENTS
A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of
$131 million and $144 million, including policyholder share, as of December 31,
1996 and 1995, respectively.
The amortized cost and fair value by contractual maturity periods for fixed
maturities, including policyholder share, as of December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Amortized Fair
(In millions) Cost Value
- --------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,577 $ 1,635
Due after one year through five years 9,558 9,890
Due after five years through ten years 8,306 8,660
Due after ten years 5,650 6,238
Asset-backed securities 8,313 8,510
- --------------------------------------------------------------
Total $33,404 $34,933
- -------------------------------------------===================
</TABLE>
Actual maturities could differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Also, CIGNA may extend maturities in some cases.
Gross unrealized appreciation (depreciation) for fixed maturities, including
policyholder share, by type of issuer was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
December 31, 1996
- ----------------------------------------------------------------
Unrealized Unrealized
Amortized Apprec- Deprec- Fair
(In millions) Cost iation iation Value
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal government
bonds $ 1,104 $ 181 $ (10) $ 1,275
State and local
government bonds 1,608 176 (8) 1,776
Foreign government
bonds 2,272 177 (33) 2,416
Corporate securities 20,107 1,044 (195) 20,956
Asset-backed securities 8,313 285 (88) 8,510
- ----------------------------------------------------------------
Total $33,404 $1,863 $(334) $34,933
- --------------------------======================================
December 31, 1995
- ----------------------------------------------------------------
Federal government
bonds $ 1,307 $ 344 $ (1) $ 1,650
State and local
government bonds 1,594 226 (4) 1,816
Foreign government
bonds 2,354 161 (7) 2,508
Corporate securities 20,207 1,905 (99) 22,013
Asset-backed securities 7,813 500 (59) 8,254
- ----------------------------------------------------------------
Total $33,275 $3,136 $(170) $36,241
- --------------------------======================================
</TABLE>
Asset-backed securities include investments in CMOs as of December 31, 1996
of $3.4 billion carried at fair value (amortized cost, $3.4 billion), compared
with $3.3 billion carried at fair value (amortized cost, $3.2 billion) as of
December 31, 1995. Certain of these securities are backed by Aaa/AAA-rated
government agencies. All other CMO securities have high quality ratings through
use of credit enhancements provided by subordinated securities or mortgage
insurance from Aaa/AAA-rated insurance companies. CMO holdings are concentrated
in securities with limited prepayment, extension and default risk, such as
planned amortization class bonds. CIGNA's investments in interest-only and
principal-only CMOs, which are subject to interest rate risk due to accelerated
prepayments, represented approximately 1% of total CMO investments at December
31, 1996 and 1995.
7
<PAGE> 8
At December 31, 1996, contractual fixed maturity investment commitments were
$104 million. The majority of investment commitments are for the purchase of
investment grade fixed maturities, bearing interest at a fixed market rate, and
require no collateral. These commitments are diversified by issuer and maturity
date, and it is estimated that approximately 75% will be disbursed in 1997.
B) MORTGAGE LOANS AND REAL ESTATE: CIGNA's mortgage loans and real estate
investments are diversified by property type and location and, for mortgage
loans, by borrower. Mortgage loans are collateralized by the related property
and generally approximate 75% of the property's value at the time the original
loan is made.
At December 31, the carrying values of mortgage loans and real estate
investments, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(In millions) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Mortgage loans $10,927 $11,010
---------------------
Real estate:
Held for sale 607 720
Held for the production of income 495 563
---------------------
Total real estate 1,102 1,283
- --------------------------------------------------------------
Total $12,029 $12,293
- ---------------------------------------------=================
</TABLE>
At December 31, mortgage loans and real estate investments comprised the
following property types and geographic regions:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(In millions) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
PROPERTY TYPE:
Retail facilities $ 4,822 $ 4,696
Office buildings 4,498 4,804
Apartment buildings 1,420 1,392
Hotels 684 731
Other 605 670
- --------------------------------------------------------------
Total $12,029 $12,293
- ------------------------------------------====================
GEOGRAPHIC REGION:
Central $ 3,762 $ 3,815
Pacific 2,705 2,772
Middle Atlantic 2,025 2,063
South Atlantic 1,688 1,813
New England 1,213 1,252
Other 636 578
- --------------------------------------------------------------
Total $12,029 $12,293
- ------------------------------------------====================
</TABLE>
MORTGAGE LOANS
At December 31, 1996, scheduled mortgage loan maturities were as follows:
1997 -- $898 million; 1998 -- $725 million; 1999 -- $1.4 billion; 2000 -- $1.6
billion; 2001 -- $1.3 billion; and $5 billion thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations, with or without prepayment penalties; the maturity date may
be extended; and loans may be refinanced. During 1996 and 1995, CIGNA refinanced
at current market rates approximately $520 million and $400 million,
respectively, of its mortgage loans relating to borrowers that were unable to
obtain alternative financing.
At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $425 million, all
of which were at a fixed market rate of interest. These commitments expire
within three months, and are diversified by property type and geographic region.
At December 31, 1996, CIGNA's impaired mortgage loans were $848 million,
including $462 million before valuation reserves totaling $101 million, and $386
million, which had no valuation reserves. At December 31, 1995, CIGNA's impaired
mortgage loans were $874 million, including $474 million before valuation
reserves totaling $88 million, and $400 million, which had no valuation
reserves.
During the year ended December 31, changes in reserves for impaired mortgage
loans, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(In millions) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Reserve balance -- January 1 $ 88 $179
Transfers to foreclosed real estate (30) (54)
Charge-offs upon sales (20) (50)
Net increase in valuation reserves 63 13
- --------------------------------------------------------------
Reserve balance -- December 31 $101 $ 88
- --------------------------------------------------------------
--------------------
</TABLE>
During 1996 and 1995, impaired mortgage loans, before valuation reserves,
averaged approximately $885 million and $1 billion, respectively, and interest
income recorded and cash received on these loans was approximately $75 million
in each year.
8
<PAGE> 9
REAL ESTATE
During 1996, 1995 and 1994, non-cash investing activities included real
estate acquired through foreclosure of mortgage loans, which totaled $114
million, $146 million and $169 million, respectively.
Valuation reserves and cumulative write-downs related to real estate,
including policyholder share, were $344 million and $381 million as of December
31, 1996 and 1995, respectively.
Net income for 1996 included $15 million and $1 million for net investment
income and write-downs upon foreclosures, respectively, for real estate held for
sale.
C) SHORT-TERM INVESTMENTS AND CASH EQUIVALENTS: At December 31, 1996 and
1995, short-term investments and cash equivalents, in the aggregate, primarily
included debt securities, principally corporate securities of $1.4 billion.
D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized
appreciation (depreciation) for investments carried at fair value as of December
31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(In millions) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Unrealized appreciation:
Fixed maturities $1,863 $3,136
Equity securities 198 151
-------------------------
2,061 3,287
-------------------------
Unrealized depreciation:
Fixed maturities (334) (170)
Equity securities (70) (55)
-------------------------
(404) (225)
-------------------------
1,657 3,062
Less policyholder-related amounts 723 1,408
-------------------------
Shareholder net unrealized
appreciation 934 1,654
Less deferred income taxes 307 556
- --------------------------------------------------------------
Net unrealized appreciation $ 627 $1,098
- -------------------------------------=========================
</TABLE>
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 (depreciation) for these investments, primarily fixed maturities,
during 1996, 1995 and 1994 was ($471) million, $1.1 billion and ($1.2) billion,
respectively.
During 1995 and 1994, certain fixed maturities were carried at amortized
cost in the financial statements. The change in net unrealized appreciation
(depreciation) for such investments was $20 million and ($1.5) billion in 1995
and 1994, respectively.
E) NON-INCOME PRODUCING INVESTMENTS: At December 31, the carrying values of
investments, including policyholder share, that were non-income producing during
the preceding 12 months were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(In millions) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Fixed maturities $ 82 $102
Mortgage loans 14 17
Real estate 173 288
Other long-term investments 12 8
- --------------------------------------------------------------
Total $281 $415
- -------------------------------------=========================
</TABLE>
F) DERIVATIVE FINANCIAL INSTRUMENTS: CIGNA's investment strategy is to
manage the characteristics of investment assets, such as liquidity, currency,
yield and duration, to reflect the underlying characteristics of the related
insurance and contractholder liabilities, which vary among CIGNA's principal
product lines. In connection with this investment strategy, CIGNA's use of
derivative instruments, including interest rate and currency swaps, purchased
options and futures contracts, is limited to hedging applications to minimize
market risk.
Hedge accounting treatment requires a probability of high correlation
between the changes in the market value or cash flows of the derivatives and the
hedged assets or liabilities. Under hedge accounting, the changes in market
value or cash flows of the derivatives and the hedged assets or liabilities are
recognized in net income in the same period. If CIGNA's use of derivatives does
not qualify for hedge accounting treatment, the derivative is recorded at fair
value and changes in its fair value are recognized in net income without
considering changes in the hedged asset or liability.
CIGNA routinely monitors, by individual counterparty, exposure to credit
risk associated with swap and option contracts and diversifies the portfolio
among approved dealers of high credit quality. Futures contracts are
exchange-traded and, therefore, credit risk is limited since the exchange
assumes the obligations. CIGNA manages legal risks by following industry
standardized documentation procedures and by monitoring legal developments.
9
<PAGE> 10
Underlying contract, notional or principal amounts associated with
derivatives at December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(In millions) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Interest rate swaps $408 $601
Currency swaps $304 $371
Purchased options $632 $ 84
Futures $ 45 $ 22
- --------------------------------------------------------------
</TABLE>
Under interest rate swaps, CIGNA agrees with other parties to periodically
exchange the difference between variable rate and fixed rate asset cash flows to
provide stable returns for related liabilities. CIGNA uses currency swaps
(primarily Canadian dollars, pounds sterling and Swiss francs) to match the
currency of investments to that of the associated liabilities. Under currency
swaps, the parties exchange principal and interest amounts in two relevant
currencies using agreed-upon exchange amounts.
The net interest cash flows from interest rate and currency swaps are
recognized currently as an adjustment to net investment income, and the fair
value of these swaps is reported as an adjustment to the related investments.
Using purchased options to reduce the effect of changes in interest rates or
equity indexes on liabilities, CIGNA pays an up-front fee to receive cash flows
from third parties when interest rates or equity indexes vary from specified
levels. Purchased options that qualify for hedge accounting are recorded
consistent with the related liabilities, at amortized cost plus adjustments
based on current equity indexes, and income is reported as an adjustment to
benefit expense. Purchased options are reported in other assets, and fees paid
are amortized to benefit expense over their contractual periods. Purchased
options with underlying notional amounts of $112 million at December 31, 1996
that are designated as hedges, but do not qualify for hedge accounting, are
reported in other long-term investments at fair value with changes in fair value
recognized as realized investment gains and losses.
Interest rate futures are used to temporarily hedge against the changes in
market values of bonds and mortgage loans to be purchased or sold. Under futures
contracts, changes in the contract values are settled in cash daily with the
exchange on which the instrument is traded. These changes in contract values are
deferred and recorded as adjustments to the carrying value of the related bond
or mortgage loan. Deferred gains and losses are amortized into net investment
income over the life of the investments purchased or are recognized in full as
realized investment gains and losses if investments are sold. Gains and losses
on futures contracts deferred in anticipation of investment purchases were
immaterial at December 31, 1996 and 1995.
The effects of interest rate and currency swaps, purchased options and
futures on the components of net income for 1996, 1995 and 1994 were not
material.
As of December 31, 1996 and 1995, CIGNA's variable interest rate investments
consisted of approximately $1.5 billion and $1.4 billion of fixed maturities,
respectively. As of December 31, 1996 and 1995, CIGNA's fixed interest rate
investments consisted of $33.4 billion and $34.8 billion, respectively, of fixed
maturities, and $10.9 billion and $11 billion, respectively, of mortgage loans.
G) OTHER: As of December 31, 1996 and 1995, CIGNA had no concentration of
investments in a single investee exceeding 10% of Shareholders' Equity.
NOTE 5 -- INVESTMENT INCOME AND GAINS AND LOSSES
A) NET INVESTMENT INCOME: The components of net investment income, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(In millions) 1996 1995 1994
- -------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $2,613 $2,571 $2,465
Equity securities 20 47 67
Mortgage loans 982 932 892
Policy loans 561 511 371
Real estate 223 317 327
Other long-term
investments 65 77 73
Short-term investments 110 199 128
--------------------------
4,574 4,654 4,323
Less investment expenses 241 358 377
- -------------------------------------------------------
Net investment income $4,333 $4,296 $3,946
- -----------------------------==========================
</TABLE>
Net investment income attributable to policyholder contracts, which is
included in CIGNA's revenues and is primarily offset by amounts included in
Benefits, Losses and Settlement Expenses, was approximately $1.8 billion for
both 1996 and 1995, compared with $1.5 billion for 1994. Net investment income
for separate accounts, which is not reflected in CIGNA's revenues, was $1.1
billion, $885 million and $699 million for 1996, 1995 and 1994, respectively.
As of December 31, 1996, fixed maturities and mortgage loans on non-accrual
status, including policyholder share, were $166 million and $370 million,
including restructured investments of $144 million and $312 million,
respectively. As of December 31, 1995, fixed maturities and mortgage loans on
non-accrual status, including policyholder share, were $196 million and $575
million, including restructured investments of $139 million and $494 million,
respectively. If interest on these investments had been recognized in accordance
with their original terms, net income would have been increased by $15 million,
$14 million and $27 million in 1996, 1995 and 1994, respectively.
10
<PAGE> 11
B) REALIZED INVESTMENT GAINS AND LOSSES: Realized gains and losses on
investments, excluding policyholder share, for the year ended December 31 were
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(In millions) 1996 1995 1994
- -------------------------------------------------------------
Realized investment gains (losses):
<S> <C> <C> <C>
Fixed maturities $ 37 $ 26 $ (6)
Equity securities 24 187 38
Mortgage loans (23) (3) (1)
Real estate 29 19 10
Other 24 4 1
-----------------------
91 233 42
Less income taxes 37 55 14
- -------------------------------------------------------------
Net realized investment gains $ 54 $178 $ 28
- --------------------------------------=======================
</TABLE>
Realized investment gains and losses include impairments in the value of
investments, net of recoveries, of $51 million, $46 million and $50 million in
1996, 1995 and 1994, respectively.
Realized investment gains (losses) for separate accounts, which are not
reflected in CIGNA's revenues, were $305 million, $412 million and ($51) million
for 1996, 1995 and 1994, respectively. Realized investment gains (losses)
attributable to policyholder contracts, which also are not reflected in CIGNA's
revenues, were $82 million, ($7) million and $5 million for 1996, 1995 and 1994,
respectively.
Sales of available-for-sale fixed maturities and equity securities,
including policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------
(In millions) 1996 1995 1994
- -----------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $6,444 $8,160 $5,549
Gross gains on sales $239 $426 $232
Gross losses on sales ($158) ($205) ($222)
- -----------------------------------------------------
</TABLE>
Prior to the SFAS No. 115 reclassification described in Note 2(B), $218
million of fixed maturities classified as held-to-maturity, including
policyholder share, were transferred to the available-for-sale category in 1995
with no material effect on Shareholders' Equity.
NOTE 6 - DEBT
Short-term and long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(In millions) 1996 1995
- -------------------------------------------------------------------
SHORT-TERM
<S> <C> <C>
Commercial paper $ 247 $ 253
Current maturities of long-term debt 42 161
- -------------------------------------------------------------------
Total short-term debt $ 289 $ 414
- ------------------------------------------=========================
LONG-TERM
Unsecured Debt:
8.16% Notes due 2000 $ 25 $ 25
8 3/4% Notes due 2001 100 100
7.17% Notes due 2002 25 25
7.4% Notes due 2003 100 100
6 3/8% Notes due 2006 100 100
8 1/4% Notes due 2007 100 100
7.65% Notes due 2023 100 100
8.3% Notes due 2023 100 100
Medium-term Notes 203 242
Secured Debt (principally by real estate) 168 174
- -------------------------------------------------------------------
Total long-term debt $1,021 $1,066
- ------------------------------------------=========================
</TABLE>
CIGNA issues commercial paper primarily to manage imbalances between
operating cash flows and existing commitments, to meet working capital needs
and to take advantage of current investment opportunities. Commercial paper
borrowing arrangements are supported by various lines of credit. As of December
31, 1996 and 1995, the weighted average interest rate on commercial paper was
5.6% and 5.9%, respectively.
Medium-term notes have original maturity dates ranging from approximately
five to ten years and interest rates ranging from 5 3/4% to 9 3/4%. As of
December 31, 1996 and 1995, the weighted average interest rate on medium-term
notes was 8.5%.
During 1995, CIGNA's 8.2% Convertible Subordinated Debentures due in 2010
were converted through non-cash transactions into approximately 3.6 million
shares of CIGNA common stock.
In 1995, CIGNA issued $25 million of unsecured 8.16% Notes due in 2000, $25
million of unsecured 7.17% Notes due in 2002 and $36 million in medium-term
notes. The proceeds from these issues were used for general corporate purposes.
As of December 31, 1996, CIGNA had available approximately $660 million in
committed and uncommitted lines of credit provided by U.S. and foreign banks.
These lines of credit generally have terms ranging from one to three years and
are paid for by using a combination of fees and bank balances. Interest that
CIGNA would be charged for usage of these lines of credit is based upon
negotiated arrangements.
11
<PAGE> 12
As of December 31, 1996, CIGNA had approximately $800 million remaining
under an effective shelf registration statement filed with the Securities and
Exchange Commission that may be issued as debt securities, equity securities or
both, depending upon market conditions and CIGNA's capital requirements.
Maturities of long-term debt for each of the next five years are as follows:
1997 -- $42 million; 1998 -- $85 million; 1999 -- $60 million; 2000 -- $56
million; and 2001 -- $148 million.
Interest expense was $102 million, $120 million and $121 million in 1996,
1995 and 1994, respectively.
NOTE 7 -- COMMON AND PREFERRED STOCK
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(Shares in thousands) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Common: Par value $1
200,000 shares authorized
Outstanding -- January 1 76,332 72,225 72,015
Issued for stock option
and other benefit plans 294 504 210
Issued upon conversion
of 8.2% Convertible
Subordinated Debentures -- 3,603 --
Repurchase of common stock (2,428) -- --
---------------------------
Outstanding -- December 31 74,198 76,332 72,225
Treasury shares 13,432 11,014 10,844
- -------------------------------------------------------------
Issued -- December 31 87,630 87,346 83,069
- ----------------------------------===========================
</TABLE>
Stock issued under stock option and other benefit plans resulted in
increases in Additional Paid-in Capital of $36 million, $41 million and $26
million in 1996, 1995 and 1994, respectively. Such stock issuances also
resulted in net increases in Treasury Stock of $12 million, $14 million and $19
million in 1996, 1995 and 1994, respectively. During 1996, Treasury Stock
increased by approximately $300 million as a result of repurchase of common
stock. In 1995, conversion of CIGNA's 8.2% Convertible Subordinated Debentures
resulted in an increase in Common Stock and Additional Paid-in Capital of $4
million and $247 million, respectively.
Under CIGNA's shareholder rights plan, Preferred Stock Purchase Rights
(Rights) attach to all outstanding shares of CIGNA common stock. The Rights
trade with the stock until the Rights become exercisable. They are exercisable
only if a party acquires, or announces a tender offer to acquire, 20% or more of
the outstanding common stock. Each Right entitles the shareholder to buy for a
$200 exercise price 1/100 of a share of Junior Participating Preferred Stock
Series D, having dividend and voting rights approximately equal to one share of
common stock. Under certain circumstances, including the acquisition of 20% or
more of the outstanding common stock by an acquirer, all Rights holders except
the acquirer may purchase shares of common stock worth twice the exercise price.
If CIGNA is acquired in a merger after the acquisition of 20% of outstanding
common stock, Rights holders may purchase the acquirer's shares at a similar
discount. CIGNA may redeem the Rights for five cents each at any time before an
acquirer acquires 20% of its outstanding common stock, and thereafter under
certain circumstances.
CIGNA has authorized a total of 25 million shares of $1 par value preferred
stock. No shares of preferred stock were outstanding at December 31, 1996, 1995
and 1994.
NOTE 8 -- SHAREHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
The insurance departments of various jurisdictions in which CIGNA's insurance
subsidiaries are domiciled recognize as net income and surplus (shareholders'
equity) those amounts determined in conformity with statutory accounting
practices prescribed or permitted by the departments, which differ in certain
respects from generally accepted accounting principles. As permitted by a state
insurance department, certain of CIGNA's insurance subsidiaries discount certain
asbestos-related and environmental pollution liabilities, which increased
statutory surplus by approximately $240 million and $260 million as of December
31, 1996 and 1995, respectively.
As part of its overall restructuring of the domestic property and casualty
operations, CIGNA contributed $375 million of additional capital to certain
property and casualty insurance companies in 1996. See Note 16 for additional
information on the restructuring.
As a result of property and casualty losses, CIGNA contributed $250 million
of capital in 1994 to enhance the capital base of the domestic property and
casualty operations.
The amounts of statutory net income (loss) for the year ended, and surplus
as of, December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(In millions) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
LIFE INSURANCE COMPANIES:
Net income $ 680 $ 471 $ 514
Surplus $2,683 $2,672 $2,564
PROPERTY AND CASUALTY
INSURANCE COMPANIES:
Net income (loss) $ 164 $ (201) $ 51
Surplus $1,655 $1,589 $1,565
- -------------------------------------------------------------
</TABLE>
12
<PAGE> 13
CIGNA's insurance subsidiaries are subject to various regulatory
restrictions that limit the amount of annual dividends or other distributions,
such as loans or cash advances, available to shareholders without prior
approval of the insurance regulatory authorities. The maximum dividend
distribution that may be made by CIGNA's insurance subsidiaries during 1997
without prior approval is approximately $1.2 billion. The amount of restricted
net assets as of December 31, 1996 was approximately $6.4 billion.
NOTE 9 -- INCOME TAXES
CIGNA's net deferred tax asset of $2 billion and $1.9 billion as of December
31, 1996 and 1995, respectively, reflects management's belief that CIGNA's
taxable income in future years will be sufficient to realize the net deferred
tax asset based on CIGNA's earnings history and its future expectations. In
determining the adequacy of future taxable income, management considered the
future reversal of its existing taxable temporary differences and available tax
planning strategies that could be implemented, if necessary.
CIGNA's deferred tax asset is net of valuation allowances of $47 million and
$48 million as of December 31, 1996 and 1995, respectively. The valuation
allowance reflects management's assessment, based on available information,
that it is more likely than not that a portion of the deferred tax asset for
certain foreign operations will not be realized. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of the
amount of the deferred tax asset that is realizable. During 1996, 1995 and
1994, the valuation allowance was increased (decreased) by ($1) million, $1
million and ($6) million, respectively, to reflect management's assessment of
changes related to certain foreign operations.
As of December 31, 1996 and 1995, the net deferred tax asset included a
benefit of $53 million and $287 million, respectively, resulting from tax basis
net operating loss carryforwards of $150 million and $819 million, respectively.
Subject to statutory limitations, these carryforwards are available to offset
future taxable income through the year 2010.
In accordance with the Life Insurance Company Income Tax Act of 1959, a
portion of CIGNA's life insurance companies' statutory income was not subject
to current income taxation but was accumulated in an account designated
Policyholders' Surplus Account. Under the Tax Reform Act of 1984, no further
additions may be made to the Policyholders' Surplus Account for tax years
ending after December 31, 1983. The balance in the account of approximately
$450 million at December 31, 1996 would result in a tax liability of $158
million only if distributed to shareholders or if the account balance exceeded
a prescribed maximum. No income taxes have been provided on this amount
because, in management's opinion, the likelihood that these conditions will be
met is remote.
CIGNA's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS), and provisions are made in the financial statements in
anticipation of the results of these audits. The IRS has completed audits of
the years 1982 through 1990. One issue, which relates only to years prior to
1989, remains outstanding, and it could result in an assessment of
approximately $220 million. CIGNA is contesting this issue in court. Although
the outcome is uncertain, management believes that CIGNA should prevail.
In management's opinion, adequate tax liabilities have been established for
all years.
<PAGE> 14
The tax effect of temporary differences which give rise to deferred income
tax assets and liabilities as of December 31 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(In millions) 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Loss reserve discounting $ 779 $ 741
Other insurance and contractholder
liabilities 607 718
Employee and retiree benefit plans 450 433
Investments, net 284 211
Operating loss carryforwards 53 287
Bad debt expense 122 123
Other 254 195
-----------------
Deferred tax assets before valuation
allowance 2,549 2,708
Valuation allowance for deferred tax
assets (47) (48)
-----------------
Deferred tax assets, net of valuation
allowance 2,502 2,660
-----------------
DEFERRED TAX LIABILITIES:
Unrealized appreciation on investments 307 556
Depreciation 112 129
Policy acquisition expenses 36 52
Other 49 57
-----------------
Total deferred tax liabilities 504 794
- ---------------------------------------------------------------
Net deferred income tax asset $1,998 $1,866
- ----------------------------------------------=================
</TABLE>
The components of income taxes for the year ended December 31 were as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------
(In millions) 1996 1995 1994
- ----------------------------------------------------
<S> <C> <C> <C>
CURRENT TAXES:
U.S. income $339 $ 185 $182
Foreign income 80 73 42
----------------------------
419 258 224
----------------------------
DEFERRED TAXES
(BENEFITS):
U.S. income 108 (212) 22
Foreign income 18 (6) 5
----------------------------
126 (218) 27
- ----------------------------------------------------
Total income taxes $545 $ 40 $251
- ------------------------============================
</TABLE>
13
<PAGE> 15
Total income taxes for the year ended December 31 were less than the amount
computed using the nominal federal income tax rate of 35% for the following
reasons:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(In millions) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at nominal rate $560 $88 $282
Tax exempt interest income (31) (34) (37)
Realized investment gains 1 (24) (5)
Dividends received deduction (7) (8) (10)
Amortization of goodwill 17 16 30
Interest on provisions 7 10 10
Resolved federal tax audit issues -- (7) (7)
Other (2) (1) (12)
- ------------------------------------------------------------------------------------
Total income taxes $545 $40 $251
- ------------------------------------------------====================================
</TABLE>
NOTE 10 -- PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PLANS
A) PENSION PLANS: CIGNA and certain of its subsidiaries provide retirement
benefits to eligible employees and agents. These benefits are provided through a
plan covering most domestic employees (the Plan) and by several separate pension
plans for various subsidiaries, agents and foreign employees.
The Plan is a non-contributory, defined benefit, trusteed plan available to
eligible domestic employees. Benefits are based on employees' years of service
and compensation during the highest three or, if service commenced after
December 31, 1988, five consecutive years of employment, offset by a portion of
the Social Security benefit for which they are eligible. CIGNA funds at least
the minimum amount required by the Employee Retirement Income Security Act of
1974.
The following table summarizes the status as of December 31 of pension plans
for which assets exceeded accumulated benefit obligations:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(In millions) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $1,826 $1,877
-------------------
Accumulated benefit obligation $1,867 $1,913
-------------------
Pension liability included in Other Liabilities:
Projected benefit obligation $2,244 $2,318
Less plan assets at fair value 2,288 2,071
-------------------
Plan assets (greater) less than projected
benefit obligation (44) 247
Unrecognized net gain (loss) from past
experience 72 (225)
Unrecognized prior service cost (27) (28)
Unamortized SFAS 87 transition asset 48 58
- -----------------------------------------------------------------------
Pension liability $ 49 $ 52
- ----------------------------------------------------===================
</TABLE>
At December 31, 1996 and 1995, plans under which accumulated benefits
exceeded assets had projected benefit obligations of $296 million and $246
million, respectively, and related assets at fair value of $49 million and $37
million for 1996 and 1995, respectively. The accumulated benefit obligation as
of December 31, 1996 and 1995 related to these plans was $211 million and $187
million, respectively. The pension liability included in Other Liabilities
related to these plans was $172 million and $157 million, respectively.
Components of net pension cost for all plans for the year ended December 31
were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(In millions) 1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits
earned during the year $ 100 $ 83 $ 104
Interest accrued on projected
benefit obligation 174 163 151
Actual return on assets (269) (392) (26)
Net amortization and deferral 106 231 (121)
- ----------------------------------------------------------
Net pension cost $ 111 $ 85 $ 108
- ---------------------------------=========================
</TABLE>
Determination of the projected benefit obligation was based on an estimated
discount rate of 7.5% and 7.1% for 1996 and 1995, respectively, and an
estimated long-term rate of compensation increase of 4.7% for both 1996 and
1995. The estimated long-term rate of return on assets was 9% for both 1996 and
1995. Substantially all Plan assets are invested in either the separate
accounts of Connecticut General Life Insurance Company (CGLIC), which is a
CIGNA subsidiary, or immediate participation guaranteed investment contracts
issued by CGLIC. Plan assets also include 97,500 and 297,500 shares of CIGNA
common stock at December 31, 1996 and 1995, respectively, with a market value
of $13 million and $31 million at December 31, 1996 and 1995, respectively.
B) OTHER POSTRETIREMENT BENEFITS PLANS: In addition to providing pension
benefits, CIGNA and certain of its subsidiaries provide certain health care and
life insurance benefits to retired employees, spouses and other eligible
dependents through various plans. A substantial portion of CIGNA's employees
may become eligible for these benefits upon retirement. CIGNA's contributions
for health care benefits depend upon a retiree's date of retirement, age, years
of service and cost-sharing features, such as deductibles and coinsurance.
Under the terms of the benefit plans, benefit provisions and cost-sharing
features can be adjusted. In general, retiree health care benefits are not
funded and are paid as covered expenses are incurred. Retiree life insurance
benefits are paid from plan assets or as covered expenses are incurred.
14
<PAGE> 16
In 1996, CIGNA amended its health care plan for certain current and future
retirees effective January 1, 1997, whereby health benefits will be provided
primarily through CIGNA's managed care networks in exchange for a fixed
reimbursement amount per retiree from Medicare. The effect of the plan
amendment was to reduce the accumulated benefit obligation by $110 million. The
reduction of the liability is being amortized into income over the average
remaining employee service period, approximately 17 years.
An employer's postretirement benefit liability is primarily measured by
determining the present value of the projected future costs of health benefits
based on an estimate of health care cost trend rates.
The following table summarizes the underfunded plans' benefit obligations
reconciled with the amount included in Other Liabilities as of December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(In millions) 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Retirees $379 $446
Other fully eligible plan participants 11 27
Other active plan participants 72 170
------------
Total accumulated benefit obligations 462 643
Less plan assets at fair value 54 54
------------
Plan assets less than accumulated
benefit obligations 408 589
Unrecognized net gain from past experience 234 158
Unrecognized prior service cost 254 156
- ---------------------------------------------------------------
Other postretirement benefit liability $896 $903
- ---------------------------------------------------============
</TABLE>
At December 31, 1996 and 1995, plan assets of $54 million represented
partial funding for retiree life insurance plans with accumulated benefit
obligations of $129 million and $131 million, respectively, and such plan
assets were invested in the general account assets of CGLIC, with an estimated
long-term rate of return of 7% for both 1996 and 1995.
Components of net other postretirement benefit cost for the year ended
December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(In millions) 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned
during the year $ 10 $ 14 $ 23
Interest accrued on benefit
obligation 38 44 49
Actual return on assets (1) (9) 2
Net amortization and deferral (26) (13) (16)
- -------------------------------------------------------------
Net other postretirement
benefit cost $ 21 $ 36 $ 58
- -------------------------------------========================
</TABLE>
Determination of the accumulated other postretirement benefit obligations
for 1996 and 1995 was based on an estimated discount rate of 7.5% and 7.2%,
respectively, and an estimated long-term rate of compensation increase of 4.5%
for both 1996 and 1995. The estimated rate of future increases in per capita
cost of health care benefits (the health care cost trend rate) was 10.0%
decreasing ratably to 5.5% over five years, which reflects CIGNA's current
claim experience and management's estimate that future rates of growth will
decline. Increasing the health care cost trend rate by one percentage point for
each future year would increase accumulated other postretirement benefit
obligations by $40 million and the annual service and interest cost by $4
million, before taxes.
C) OTHER POSTEMPLOYMENT BENEFITS: CIGNA and certain of its subsidiaries
provide certain salary continuation (severance and disability), health care and
life insurance benefits to inactive and former employees, spouses and other
eligible dependents through various employee benefit plans.
Although severance benefits accumulate with additional service, CIGNA
recognizes severance expense when severance is probable and the costs can be
reasonably estimated. Postemployment benefits other than severance generally do
not vest or accumulate; therefore, the estimated cost of benefits are accrued
when determined to be probable and estimable, generally upon disability or
termination. See Note 16 for additional information regarding severance
benefits accrued as part of cost reduction plans.
D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation
plans in which employee contributions on a pre-tax basis (401(k)) are
supplemented by CIGNA matching contributions. Contributions are invested, at
the election of the employee, in one or more of the following investments:
CIGNA common stock fund, several non-CIGNA stock and bond portfolios, and a
fixed-income fund. CIGNA's expense for such plans totaled $39 million, $37
million and $34 million for 1996, 1995 and 1994, respectively.
NOTE 11 -- EMPLOYEE INCENTIVE PLANS
The People Resources Committee of the Board of Directors can award to key
employees stock options, stock appreciation rights (SARs) only in tandem with
stock options, restricted stock, dividend equivalent rights or common stock in
lieu of cash payable under other incentive plans. As of December 31, 1996, 1995
and 1994, stock available for award aggregated 5,095,415 shares, 6,007,504
shares and 1,746,135 shares, respectively. The increase in 1995 was due to the
adoption of a new plan. In 1997, CIGNA registered an additional one million
shares of stock to be available for award under these plans.
15
<PAGE> 17
Grants of restricted stock are awarded annually, with vesting periods
ranging from three to five years. Although recipients are entitled to receive
dividends and vote restricted stock during the vesting period, termination of
employment prior to vesting results in forfeiture of the stock. Grants of
restricted shares of CIGNA common stock during 1996, 1995 and 1994 totaled
143,278 shares, 321,494 shares and 331,757 shares, respectively, at a weighted
average fair value per share of $118.41, $74.37 and $63.03, respectively.
Restricted stock grants of 653,739 shares for 1,274 employees were outstanding
at December 31, 1996. Compensation cost related to restricted stock grants was
not material to CIGNA's results of operations, liquidity or financial
condition.
Options to purchase CIGNA common stock are awarded at market price on the
date of grant and expire no later than 10 years after that date. Certain
outstanding options have a replacement option feature providing that when the
underlying option is exercised by tendering stock a new option is granted
covering shares equal to the number tendered. These options are exercisable at
the market price on the date of the new grant and expire on the expiration date
of the original option. SARs permit the holders to receive in cash or stock the
excess of the current market price of the underlying stock over the option
price. Either the stock option or the SAR, but not both, may be exercised.
Options and SARs may be subject to vesting periods. For options with SARs,
changes in the market price of the stock, to the extent it exceeds the option
price, are reflected as an expense.
The following table summarizes the status of, and changes in, common stock
options outstanding for the year ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- January 1 1,608,889 $ 71.15 1,611,949 $65.60 745,614 $57.57
Granted 871,320 121.15 536,823 79.05 1,095,200 69.66
Exercised (803,134) 71.33 (509,533) 61.87 (116,943) 52.46
Expired or canceled ( 49,109) 89.73 ( 30,350) 71.85 (111,922) 65.88
--------- --------- ---------
Outstanding -- December 31 1,627,966 97.26 1,608,889 71.15 1,611,949 65.60
- ----------------------------------==============================================================================================
Options exercisable at year-end 664,784 $ 75.62 683,376 $64.80 486,917 $57.70
- ----------------------------------==============================================================================================
</TABLE>
The following table summarizes the range of exercise prices for outstanding
common stock options at December 31, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Range Of Exercise
Prices
- ---------------------------------------------------------------
<S> <C> <C>
$48.00 TO $102.25 TO
$ 80.25 $ 141.00
- ---------------------------------------------------------------
Options outstanding 730,407 897,559
Weighted average remaining
contractual life 7.1 years 8.5 years
Weighted average exercise price $ 68.99 $ 120.37
Options exercisable 537,907 126,877
Weighted average exercise price $ 66.78 $ 113.11
- ---------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted during 1996 and 1995 was
$29.98 and $18.16, respectively. Fair value of each option grant in 1996 and
1995 was estimated using the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Dividend yield 3.5% 4.6%
Expected volatility 26.2% 25.5%
Risk-free interest rate 5.9% 7.1%
Expected option life 6 years 6 years
- -----------------------------------------------------------
</TABLE>
CIGNA's net income would have been reduced by $10 million and $2 million in
1996 and 1995, respectively, and earnings per share would have been reduced by
$0.13 and $0.03 had CIGNA recorded compensation expense for stock options based
on their fair value at the grant date.
16
<PAGE> 18
NOTE 12 -- EARNINGS PER SHARE
Earnings per share were based on net income divided by weighted average
common shares, including common share equivalents, of 76.2 million, 73.7
million and 72.3 million for 1996, 1995 and 1994, respectively.
There was no significant difference between earnings per share on a primary
and a fully diluted basis.
As discussed in Note 6, during 1995 CIGNA's 8.2% Convertible Subordinated
Debentures were converted into approximately 3.6 million shares of CIGNA common
stock. If these conversions had taken place on January 1, 1995 and the related
interest expense ($10 million after-tax) were excluded from net income for the
year, earnings per share for 1995 would have been $2.89.
NOTE 13 -- 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. As of December 31,
1996 and 1995, approximately 7% and 8%, respectively, of reinsurance
recoverables were due from certain syndicates affiliated with Lloyd's of
London.
Failure of reinsurers to indemnify CIGNA, as a result of reinsurer
insolvencies and disputes, could result in losses. Allowances for uncollectible
amounts were $711 million and $700 million as of December 31, 1996 and 1995,
respectively. During 1995, CIGNA increased the allowance for uncollectible
reinsurance by $210 million pre-tax ($138 million after-tax) for
asbestos-related and environmental pollution losses, assumed reinsurance and
other commercial exposures. 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.
The effects of reinsurance on net earned premiums and fees for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(In millions) 1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
SHORT-DURATION CONTRACTS
Premiums and fees:
Direct $12,346 $12,144 $12,281
Assumed 1,534 1,881 2,039
Ceded (1,931) (2,115) (2,236)
- ------------------------------------------------------------
Net earned premiums and fees $11,949 $11,910 $12,084
- --------------------------------============================
LONG-DURATION CONTRACTS
Premiums and fees:
Direct $ 1,959 $ 1,979 $ 1,781
Assumed 199 162 148
Ceded (191) (137) (101)
- ------------------------------------------------------------
Net earned premiums and fees $ 1,967 $ 2,004 $ 1,828
- --------------------------------============================
</TABLE>
The effects of reinsurance on written premiums and fees for short-duration
contracts were not materially different from the amounts shown in the above
table. Benefits, losses and settlement expenses for 1996, 1995 and 1994 were
net of reinsurance recoveries of $1.6 billion, $1.5 billion and $1.2 billion,
respectively.
NOTE 14 -- PROPERTY AND CASUALTY UNPAID CLAIMS AND CLAIM EXPENSE RESERVES AND
REINSURANCE RECOVERABLES
As described in Note 2(M), CIGNA establishes loss reserves, which are
estimates of future payments of reported and unreported claims for losses and
related expenses, with respect to insured events that have occurred.
17
<PAGE> 19
Activity in the reserve for unpaid claims and claim adjustment expenses for
the year ended December 31 was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(In millions) 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Gross reserve -- January 1 $17,023 $16,825 $17,764
Less reinsurance recoverable 5,864 6,190 7,104
-----------------------------
Net reserve -- January 1 11,159 10,635 10,660
-----------------------------
Plus incurred claims and claim
adjustment expenses:
Provision for insured events of
the current year 2,348 2,386 3,093
Increase in provision for insured
events of prior years 177 1,498 538
-----------------------------
Total incurred claims and claim
adjustment expenses 2,525 3,884 3,631
-----------------------------
Less payments for claims and
claim adjustment expenses
attributable to:
Insured events of the current year 823 971 1,020
Insured events of prior years 2,214 2,389 2,636
-----------------------------
Total payments for claims and
claim adjustment expenses 3,037 3,360 3,656
-----------------------------
Net reserve -- December 31 10,647 11,159 10,635
Plus reinsurance recoverable 5,835 5,864 6,190
- ----------------------------------------------------------------------
Gross reserve -- December 31 $16,482 $17,023 $16,825
- -----------------------------------------=============================
</TABLE>
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 implemented a new methodology for estimating asbestos-related and
environmental pollution (A&E) reserves in the third quarter of 1995. CIGNA
evaluated newly emerging methods for estimating A&E liabilities and expanded its
claims data bases. Using those recent developments, CIGNA completed a
comprehensive review of its A&E exposures and increased asbestos-related
reserves by $255 million ($194 million, net of reinsurance) and environmental
pollution reserves by $1.2 billion ($861 million, net of reinsurance). CIGNA's
reserves for A&E claims are a reasonable estimate of its liability for these
claims, based on currently known facts, reasonable assumptions where the facts
are not known, current law and methodologies currently available.
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.
Charges to income for increases in the Property and Casualty segment's
liability for insured events of prior years (prior year development) for A&E
losses and charges for unrecoverable reinsurance in the aggregate were $117
million, $1.4 billion and $304 million for 1996, 1995 and 1994, respectively.
Prior year development for 1995 reflects the A&E charge noted above, as well as
$135 million for unrecoverable reinsurance related to CIGNA's assumed
reinsurance and other commercial exposures.
CIGNA's reserves for A&E exposures as of December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
1996 1995
----------------------------------------
(In millions) Gross Net Gross Net
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asbestos $ 771 $ 483 $ 749 $ 457
Environmental $1,492 $1,161 $1,665 $1,268
- -------------------------------------------------------------------
</TABLE>
Prior year development, other than for A&E claims and charges for
unrecoverable reinsurance, was $60 million, $109 million and $234 million for
1996, 1995 and 1994, respectively.
18
<PAGE> 20
NOTE 15 -- LEASES AND RENTALS
Rental expenses for operating leases, principally with respect to
buildings, amounted to $214 million, $238 million and $246 million in 1996,
1995 and 1994, respectively.
As of December 31, 1996, future net minimum rental payments under
non-cancelable operating leases were approximately $697 million, payable as
follows: 1997 -- $140 million; 1998 -- $118 million; 1999 -- $96 million; 2000
- -- $71 million; 2001 -- $56 million; and $216 million thereafter.
NOTE 16 -- RESTRUCTURING AND COST REDUCTION INITIATIVES
Effective December 31, 1995, CIGNA restructured its domestic property and
casualty businesses into two separate operations, ongoing and run-off. The
ongoing operations are actively engaged in selling insurance products and
related services. The run-off operations, which do not actively sell insurance
products, manage run-off policies and related claims, including those for A&E
exposures. Insurance products that were actively sold in 1995 by subsidiaries
that are now in run-off continue to be sold by the ongoing operations. Results
for the run-off operations primarily reflect current year losses associated
with unearned premiums as of December 31, 1995, prior year development on claim
and claim adjustment expense reserves, and investment activity. The
restructuring is being contested in the courts by certain competitors and
policyholders; however, CIGNA expects to ultimately prevail.
As part of its overall restructuring plan, CIGNA contributed $375 million
of additional capital to the run-off operations. This contribution, which is
reflected in the run-off operations' statutory surplus as of December 31, 1995,
was funded in 1996 through internal sources. Also, the ongoing operations will
contribute an additional $50 million to the run-off operations by December 31,
2001. In addition, the ongoing operations assumed $125 million of liabilities,
primarily related to employee benefits of the run-off operations, and will
reinsure up to $800 million of claims of the run-off operations in the unlikely
event that the statutory capital and surplus of the run-off operations falls
below $25 million.
During 1995, CIGNA began cost reduction initiatives, which resulted in an
$85 million pre-tax charge, included in Other Operating Expenses, for the
Domestic Property and Casualty operations. The components of the charge were as
follows: severance, $37 million, representing costs associated with
nonvoluntary terminations of approximately 1,600 domestic employees in various
functions and locations; real estate, $25 million, primarily related to vacated
lease space; and other costs, $23 million, including $10 million of costs
associated with exiting certain business and $6 million for fixed asset
write-offs. The cash outlays associated with these initiatives began in the
third quarter of 1995 and will continue through 1998, with most of the
remaining cash outlays expected to occur in 1997. As of December 31, 1996, $30
million of severance was paid to 1,230 terminated employees. CIGNA has funded,
and will continue to fund, these costs through liquid assets, and such funding
has not and will not have a material adverse effect on its liquidity.
During 1995, CIGNA recorded a $30 million pre-tax charge, included in Other
Operating Expenses, for cost reduction initiatives in the Employee Life and
Health Benefits segment. The charge consisted primarily of severance-related
expenses representing costs associated with nonvoluntary employee terminations
covering approximately 2,400 employees (approximately 45% in the indemnity
operations and 55% in the HMO operations). The cash outlays associated with the
restructuring initiatives began in the third quarter of 1995 and will continue
through 1997, with $16 million paid in 1996. As of December 31, 1996, $21
million of severance was paid to 1,960 terminated employees. CIGNA has funded,
and will continue to fund, these costs through liquid assets, and such funding
has not and will not have a material adverse effect on its liquidity.
19
<PAGE> 21
NOTE 17 -- SEGMENT INFORMATION
CIGNA operates principally in four segments: Property and Casualty,
Employee Life and Health Benefits, Employee Retirement and Savings Benefits,
and Individual Financial Services. Other Operations primarily includes
unallocated investment income, expenses (principally debt service) and taxes.
Also included in Other Operations are the results of CIGNA's settlement annuity
business and non-insurance operations engaged primarily in investment and real
estate activities.
CIGNA's Property and Casualty operations routinely insure various forms of
property, including large property risks. A major catastrophe could have a
material adverse effect on CIGNA's results of operations. However, because
CIGNA, through its risk assessment and accumulation processes, monitors
writings to avoid significant concentrations, it is not likely that such
adverse effect would be material to the Company's liquidity or financial
condition.
CIGNA's operations are not materially dependent on one or a few customers,
brokers or agents.
As discussed in more detail in Note 16, CIGNA's domestic property and
casualty operations were restructured into ongoing and run-off operations
effective December 31, 1995. Amounts shown for the Property and Casualty
segment's ongoing and run-off operations for 1995 are reported on a pro forma
basis as though the restructuring was in place at the beginning of 1995. These
pro forma results are not necessarily indicative of the results that would have
been reported had the restructuring actually occurred as of January 1, 1995.
Information for the Property and Casualty segment on a pro forma basis is not
available for 1994. Consolidated Property and Casualty segment amounts,
including International, did not change as a result of the restructuring.
Summarized financial information with respect to the business segments for
the year ended and as of December 31 was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(In millions) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Property and Casualty:
International $ 2,859 $ 3,005 $ 2,644
Domestic - ongoing 2,147 2,259
- pre-restructuring 3,386
---------------------
Ongoing operations 5,006 5,264
Run-off operations 478 471
----------------------------------
Total Property and Casualty 5,484 5,735 6,030
Employee Life and Health Benefits 9,318 9,167 8,650
Employee Retirement
and Savings Benefits 2,950 1,983 1,935
Individual Financial Services 2,074 1,920 1,637
Other Operations 124 150 140
- ---------------------------------------------------------------------
Total $ 18,950 $ 18,955 $ 18,392
- -----------------------------------==================================
INCOME (LOSS) BEFORE
INCOME TAXES
Property and Casualty:
International $ 248 $ 203 $ 94
Domestic - ongoing 111 (35)
- pre-restructuring (511)
---------------------
Ongoing operations 359 168
Run-off operations (13) (1,228)
----------------------------------
Total Property and Casualty 346 (1,060) (417)
Employee Life and Health Benefits 764 860 829
Employee Retirement
and Savings Benefits 329 284 287
Individual Financial Services 259 231 210
Other Operations (97) (64) (104)
- ---------------------------------------------------------------------
Total $ 1,601 $ 251 $ 805
- -----------------------------------==================================
IDENTIFIABLE ASSETS
Property and Casualty:
International $ 7,611 $ 7,603 $ 6,785
Domestic - ongoing 10,553 9,843
- pre-restructuring 18,850
---------------------
Ongoing operations 18,164 17,446
Run-off operations 8,043 8,872
----------------------------------
Total Property and Casualty 26,207 26,318 25,635
Employee Life and Health Benefits 11,590 12,206 11,331
Employee Retirement
and Savings Benefits 40,399 37,736 33,939
Individual Financial Services 17,581 15,913 12,195
Other Operations 3,155 3,730 3,002
- ---------------------------------------------------------------------
Total $ 98,932 $ 95,903 $ 86,102
- -----------------------------------==================================
</TABLE>
20
<PAGE> 22
NOTE 18 -- FOREIGN OPERATIONS
CIGNA provides international property and casualty and life and health
insurance coverages on a direct and reinsured basis, primarily in Europe, the
Pacific region, Canada and Latin America.
For the year ended December 31, 1996 and 1994, the change in Net
Translation of Foreign Currencies reflects increases (decreases) of ($18)
million (including a tax benefit of $11 million) and $47 million (including a
tax benefit of $16 million), respectively. There was no change in Net
Translation of Foreign Currencies for the year ended December 31, 1995.
Summary financial data of CIGNA's foreign operations for the year ended and
as of December 31 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(In millions) 1996 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
Revenues $3,125 $3,240 $2,991
Income before income taxes $ 265 $ 82 $ 32
Identifiable assets $9,852 $9,589 $8,742
- ---------------------------------------------------------------
</TABLE>
CIGNA's income before income taxes included aggregate foreign exchange
transaction losses of $1 million in both 1996 and 1995, compared with $5
million in 1994.
NOTE 19 -- CONTINGENCIES
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. The contractual amounts of financial guarantees reflect CIGNA's
maximum exposure to credit loss in the event of nonperformance. To limit
CIGNA's exposure in the event of default of any guaranteed obligation, various
programs are in place to ascertain the creditworthiness of guaranteed parties
and to monitor this status on a periodic basis. Risk is further reduced
primarily through reinsurance.
The industrial revenue bonds guaranteed directly by CIGNA have remaining
maturities of up to 19 years. The guarantees provide for payment of debt service
only as it becomes due; consequently, an event of default would not cause an
acceleration of scheduled principal and interest payments. The principal amount
of the bonds guaranteed by CIGNA at December 31, 1996 and 1995 was $234 million
and $266 million, respectively. Revenues in connection with industrial revenue
bond guarantees are derived principally from equity participations in the
related projects and are included in Net Investment Income as earned. During
1994, losses for industrial revenue bonds were $1 million. There were no such
losses in 1996 and 1995.
In addition, CIGNA is liable for municipal guarantee business of $1.0
billion and $1.3 billion at December 31, 1996 and 1995, respectively, which
have maturities of up to 38 years. Such amounts are fully reinsured through a
subsidiary of MBIA Inc., a corporation that guarantees the scheduled payment of
principal and interest for many types of municipal obligations, including
general obligation and special revenue bonds. The nature of this guarantee
business is similar to the reinsurance transactions described in Note 13.
Municipal guarantees provide for payment of debt service only as it becomes
due; consequently, an event of default would not cause an acceleration of
scheduled principal and interest payments. As of December 31, 1996 and 1995,
loss reserves and unearned premiums under these programs were not material.
CIGNA also guarantees a minimum level of benefits for certain separate
account contracts and, in the event that separate account assets are
insufficient to fund minimum policy benefits, CIGNA is obligated to fund the
difference. As of December 31, 1996 and 1995, the amount of minimum benefit
guarantees for separate account contracts was $4.9 billion and $4.7 billion,
respectively. Reserves in addition to the separate account liabilities are
established when CIGNA believes a payment will be required under one of these
guarantees. No such reserves were required as of December 31, 1996 and 1995.
Guarantee fees are part of the overall management fee charged to separate
accounts and are recognized in income as earned.
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.
21
<PAGE> 23
REGULATORY AND INDUSTRY DEVELOPMENTS
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to:
- - revise the system of funding cleanup of environmental damages;
- - change certain federal corporate tax laws;
- - reinterpret insurance contracts long after the policies were written to
provide coverage unanticipated by CIGNA;
- - restrict insurance pricing and the application of underwriting standards;
- - reform health care; and
- - expand regulation.
Some of the more significant issues are discussed below.
In August 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. For 1996, 31% of
revenues and 29% of income for the Individual Financial Services segment were
from leveraged COLI products that are affected by this legislation. The effect
of the legislation on this segment's income is not expected to be material
through 1998. Beginning in 1999, the effect of the legislation is uncertain;
however, it could have a material adverse effect on the segment's income. 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.
CIGNA expects proposals for federal and state legislation seeking to place
limitations on formation and operation of efficient health care networks. Due
to uncertainties associated with the timing and content of any health care
legislation, the effect on CIGNA's future results of operations, liquidity or
financial condition cannot be reasonably estimated at this time.
The National Association of Insurance Commissioners (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.
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.
In recent years, the number of insurance companies that are impaired or
insolvent has increased. This is expected to result in an increase in mandatory
assessments by state guaranty funds of, or voluntary payments by, solvent
insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. CIGNA's insurance subsidiaries recorded pre-tax charges of $56
million, $43 million and $39 million for 1996, 1995 and 1994, respectively, for
guaranty fund assessments that can be reasonably estimated before giving effect
to future premium tax recoveries. Although future assessments and payments may
adversely 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.
The eventual effect on CIGNA of the changing environment in which it
operates remains uncertain.
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 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.
22
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
[LOGO]
Price Waterhouse LLP
TO THE BOARD OF DIRECTORS
AND SHAREHOLDERS OF CIGNA CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of CIGNA
Corporation and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years ended December
31, 1996, 1995 and 1994 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
February 11, 1997
23
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in Exhibit 99 to this current report on Form 8-K
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 34,933
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 701
<MORTGAGE> 10,927
<REAL-ESTATE> 1,102
<TOTAL-INVEST> 56,534
<CASH> 1,287
<RECOVER-REINSURE> 7,287<F1>
<DEFERRED-ACQUISITION> 1,230
<TOTAL-ASSETS> 98,932
<POLICY-LOSSES> 11,784
<UNEARNED-PREMIUMS> 1,940
<POLICY-OTHER> 18,841
<POLICY-HOLDER-FUNDS> 29,878
<NOTES-PAYABLE> 1,310
0
0
<COMMON> 88
<OTHER-SE> 7,120
<TOTAL-LIABILITY-AND-EQUITY> 98,932
13,916
<INVESTMENT-INCOME> 4,333
<INVESTMENT-GAINS> 91
<OTHER-INCOME> 610
<BENEFITS> 12,473
<UNDERWRITING-AMORTIZATION> 1,138
<UNDERWRITING-OTHER> 3,738
<INCOME-PRETAX> 1,601
<INCOME-TAX> 545
<INCOME-CONTINUING> 1,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,056
<EPS-PRIMARY> 13.85
<EPS-DILUTED> 0
<RESERVE-OPEN> 11,159<F2>
<PROVISION-CURRENT> 2,348
<PROVISION-PRIOR> 177
<PAYMENTS-CURRENT> 823
<PAYMENTS-PRIOR> 2,214
<RESERVE-CLOSE> 10,647<F2>
<CUMULATIVE-DEFICIENCY> 177
<FN>
<F1>Amount includes recoverables on paid and unpaid losses.
<F2>Amount is net of reinsurance recoverables.
</FN>
</TABLE>
