UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____ to _____
Commission file number 1-8323
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CIGNA Corporation
-----------------
(Exact name of registrant as specified in its charter)
Delaware 06-1059331
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Liberty Place, 1650 Market Street
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, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __x__ No ___
As of September 30, 1998, 206,482,621 shares of the issuer's Common Stock were
outstanding.
<PAGE>
CIGNA CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Income Statements 1
Consolidated Balance Sheets 2
Consolidated Statements of Comprehensive
Income and Changes in Shareholders'
Equity 3
Consolidated Statements of Cash Flows 4
Notes to Financial Statements 5
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 25
EXHIBIT INDEX 26
As used herein, "CIGNA" refers to one or more of CIGNA Corporation and its
consolidated subsidiaries.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
CIGNA CORPORATION
CONSOLIDATED INCOME STATEMENTS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums and fees $ 4,093 $ 3,925 $ 12,109 $ 10,795
Net investment income 911 1,057 2,790 3,172
Other revenues 205 175 936 498
Realized investment gains 17 25 123 81
-------- -------- -------- --------
Total revenues 5,226 5,182 15,958 14,546
-------- -------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,476 3,359 10,273 9,433
Policy acquisition expenses 252 263 719 797
Other operating expenses 1,106 1,133 3,335 3,041
-------- -------- -------- --------
Total benefits, losses and expenses 4,834 4,755 14,327 13,271
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 392 427 1,631 1,275
-------- -------- -------- --------
Income taxes (benefits):
Current 124 86 732 320
Deferred 17 62 (155) 109
-------- -------- -------- --------
Total taxes 141 148 577 429
-------- -------- -------- --------
NET INCOME $ 251 $ 279 $ 1,054 $ 846
- -----------------------------------------------==========================================================
BASIC EARNINGS PER SHARE $ 1.20 $ 1.26 $ 4.95 $ 3.83
- -----------------------------------------------==========================================================
DILUTED EARNINGS PER SHARE $ 1.19 $ 1.25 $ 4.90 $ 3.79
- -----------------------------------------------==========================================================
DIVIDENDS DECLARED PER SHARE $ 0.29 $ 0.28 $ 0.86 $ 0.83
- -----------------------------------------------==========================================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
1
<PAGE>
CIGNA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $30,936; $34,284) $ 33,339 $ 36,358
Equity securities, at fair value (cost, $662; $648) 862 854
Mortgage loans 9,556 10,859
Policy loans 6,547 7,253
Real estate 755 769
Other long-term investments 535 273
Short-term investments 318 212
--------- ---------
Total investments 51,912 56,578
Cash and cash equivalents 1,162 2,625
Accrued investment income 942 868
Premiums, accounts and notes receivable 4,963 4,265
Reinsurance recoverables 12,567 6,753
Deferred policy acquisition costs 967 1,542
Property and equipment 856 857
Deferred income taxes 1,891 1,788
Other assets 1,125 1,033
Goodwill and other intangibles 2,462 2,542
Separate account assets 30,449 29,348
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 109,296 $ 108,199
- --------------------------------------------------------------------------------------==================================
LIABILITIES
Contractholder deposit funds $ 30,877 $ 30,682
Unpaid claims and claim expenses 17,895 17,906
Future policy benefits 12,205 11,976
Unearned premiums 1,897 1,774
--------- ---------
Total insurance and contractholder liabilities 62,874 62,338
Accounts payable, accrued expenses and other liabilities 6,268 6,562
Current income taxes 114 60
Short-term debt 245 690
Long-term debt 1,440 1,465
Separate account liabilities 30,199 29,152
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 101,140 100,267
- ------------------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 9
SHAREHOLDERS' EQUITY
Common stock (par value, $.25; shares issued, 265; 264) 66 66
Additional paid-in capital 2,710 2,655
Net unrealized appreciation - fixed maturities $ 864 $ 752
Net unrealized appreciation - equity securities 127 132
Net translation of foreign currencies (149) (126)
--------- ---------
Accumulated other comprehensive income 842 758
Retained earnings 6,567 5,696
Less treasury stock, at cost (2,029) (1,243)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,156 7,932
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 109,296 $ 108,199
- --------------------------------------------------------------------------------------==================================
SHAREHOLDERS' EQUITY PER SHARE $ 39.50 $ 36.55
- --------------------------------------------------------------------------------------==================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
2
<PAGE>
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND CHANGES IN
SHAREHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Compre- Share- Compre- Share-
hensive holders' hensive holders'
Income Equity Income Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 66 $ 66
------- -------
Additional paid-in capital - June 30 2,704 2,632
Issuance of common stock for employee benefits plans 6 21
------- -------
Additional paid-in capital - September 30 2,710 2,653
------- -------
Accumulated other comprehensive income - June 30 835 496
Net unrealized appreciation - fixed maturities $ 119 119 $ 187 187
Net unrealized appreciation (depreciation) - equity securities (85) (85) 13 13
------- -------
Net unrealized appreciation on securities 34 200
Net translation of foreign currencies (27) (27) 7 7
------- -------
Other comprehensive income 7 207
------- -------
Accumulated other comprehensive income - September 30 842 703
------- -------
Retained earnings - June 30 6,376 5,299
Net income 251 251 279 279
Common dividends declared (60) (61)
------- -------
Retained earnings - September 30 6,567 5,517
------- -------
Treasury stock - June 30 (1,641) (945)
Repurchase of common stock (385) --
Other treasury stock transactions, net (3) (3)
------- -------
Treasury stock - September 30 (2,029) (948)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY $ 258 $ 8,156 $ 486 $ 7,991
- ------------------------------------------------------------------------=======================================================
Nine Months Ended September 30,
- -------------------------------------------------------------------------------------------------------------------------------
Common stock $ 66 $ 66
------- -------
Additional paid-in capital - January 1 2,655 2,594
Issuance of common stock for employee benefits plans 55 59
------- -------
Additional paid-in capital - September 30 2,710 2,653
------- -------
Accumulated other comprehensive income - January 1 758 582
Net unrealized appreciation - fixed maturities $ 112 112 $ 81 81
Net unrealized appreciation (depreciation) - equity securities (5) (5) 61 61
------- -------
Net unrealized appreciation on securities 107 142
Net translation of foreign currencies (23) (23) (21) (21)
------- -------
Other comprehensive income 84 121
------- -------
Accumulated other comprehensive income - September 30 842 703
------- -------
Retained earnings - January 1 5,696 4,855
Net income 1,054 1,054 846 846
Common dividends declared (183) (184)
------- -------
Retained earnings - September 30 6,567 5,517
------- -------
Treasury stock - January 1 (1,243) (889)
Repurchase of common stock (756) (49)
Other treasury stock transactions, net (30) (10)
------- -------
Treasury stock - September 30 (2,029) (948)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY $ 1,138 $ 8,156 $ 967 $ 7,991
- ------------------------------------------------------------------------=======================================================
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
3
<PAGE>
CIGNA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,054 $ 846
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Insurance liabilities 628 (219)
Reinsurance recoverables 98 387
Deferred policy acquisition costs (111) (102)
Premiums, accounts and notes receivable (481) (99)
Accounts payable, accrued expenses, other liabilities and
current income taxes (166) (26)
Deferred income taxes (155) 109
Realized investment gains (123) (81)
Depreciation and goodwill amortization 242 164
Gain on sale of businesses (393) --
Other, net (394) (257)
------- -------
Net cash provided by operating activities 199 722
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities 5,082 4,491
Equity securities 369 204
Mortgage loans 831 465
Other (primarily short-term investments) 1,632 3,194
Investment maturities and repayments:
Fixed maturities 3,000 2,588
Mortgage loans 416 446
Investments purchased:
Fixed maturities (7,812) (7,328)
Equity securities (363) (347)
Mortgage loans (1,292) (908)
Other (primarily short-term investments) (2,643) (2,621)
Net cash from acquisitions and dispositions 998 (1,339)
Other, net (232) (122)
------- -------
Net cash used in investing activities (14) (1,277)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 4,655 5,384
Withdrawals and benefit payments from contractholder deposit funds (4,892) (5,181)
Net change in short-term debt (372) 104
Issuance of long-term debt -- 600
Repayment of long-term debt (99) (276)
Repurchase of common stock (754) (55)
Issuance of common stock 20 18
Common dividends paid (184) (182)
------- -------
Net cash provided by (used in) financing activities (1,626) 412
------- -------
Effect of foreign currency rate changes on cash and cash equivalents (22) (19)
- -----------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,463) (162)
Cash and cash equivalents, beginning of period 2,625 1,760
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,162 $ 1,598
- ------------------------------------------------------------------------------=======================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 660 $ 333
Interest paid $ 90 $ 82
- -----------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
4
<PAGE>
CIGNA CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CIGNA Corporation
and all significant subsidiaries (CIGNA). These consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles. Certain reclassifications have been made to conform with the 1998
presentation.
The interim financial statements are unaudited but include all adjustments
(consisting of normal recurring adjustments) necessary, in the opinion of
management, for a fair statement of financial position and results of operations
for the periods reported.
The preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of
portions of the insurance business as well as competitive and other market
conditions, call for caution in drawing specific conclusions from interim
results.
On April 22, 1998, CIGNA's shareholders approved a three-for-one common stock
split, an increase in the number of common shares authorized for issuance from
200 million to 600 million and a decrease in the par value of common stock from
$1 per share to $0.25 per share. The additional shares were distributed on May
15, 1998, to shareholders of record as of May 4, 1998. The reduction in common
stock and corresponding increase in additional paid-in capital of $22 million
reflects these actions and all share data have been retroactively adjusted for
the stock split as though the split had occurred at the beginning of the periods
presented.
NOTE 2 - RECENT ACCOUNTING
PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that derivatives be
reported on the balance sheet at fair value. Changes in fair value are
recognized in net income or, for derivatives which are hedging market risk
related to future cash flows, in the accumulated other comprehensive income
section of shareholders' equity. Implementation is required by the first quarter
of 2000, with the cumulative effect of adoption reflected in net income and
accumulated other comprehensive income, as appropriate. CIGNA has not determined
the effect or timing of implementation of this pronouncement.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 will change the way segments
are reported and require additional segment disclosure, including the
presentation of CIGNA's International division as a separate segment and
realignment of the components of the Individual Financial Services segment
following the sale of its individual life and annuity businesses in 1998. CIGNA
will implement these new requirements in the fourth quarter of 1998.
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the
recognition and measurement of liabilities for guaranty fund and other
insurance-related assessments. Implementation is required by the first quarter
of 1999, with the cumulative effect of adopting the SOP reflected in net income
in the year of adoption. Although CIGNA has not determined the timing of
implementation of this pronouncement, the estimated after-tax cumulative effect
to be recognized upon implementation is expected to be approximately $75 - $100
million.
In 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 specifies the
5
<PAGE>
types of costs that must be capitalized and amortized over the software's
expected useful life and the types of costs which must be immediately recognized
as expense. Implementation is required by the first quarter of 1999. Although
CIGNA has not yet determined the timing of implementation, this pronouncement is
not expected to have a material effect on results of operations, liquidity or
financial condition.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
As of January 1, 1998, CIGNA sold its individual life insurance and annuity
businesses for cash proceeds of $1.4 billion. The sale resulted in an after-tax
gain of $773 million of which $202 million was recognized upon closing of the
sale. Since the principal agreement to sell these businesses is in the form of
an indemnity reinsurance arrangement, the remaining $571 million of the gain was
deferred and is being recognized at the rate that earnings from the businesses
sold would have been expected to emerge, primarily over fifteen years on a
declining basis. Also, as part of the transaction, CIGNA recorded a reinsurance
recoverable from the purchaser of $5.8 billion for insurance liabilities
retained and transferred invested assets of $5.4 billion along with other assets
and liabilities associated with the businesses. The sales agreement provides for
the possibility of certain adjustments; however, any future adjustments are not
expected to be material to results of operations, liquidity or financial
condition.
CIGNA acquired the outstanding common stock of Healthsource, Inc. (Healthsource)
on June 25, 1997. The cost of the acquisition was $1.7 billion, reflecting the
purchase of Healthsource common stock for $1.4 billion and the retirement of
Healthsource debt of $250 million. The acquisition was accounted for as a
purchase, and was financed through the issuance of long-term debt of $600
million and a combination of internally generated funds and short-term debt. The
results of operations of Healthsource are included in the accompanying
consolidated financial statements from the date of acquisition. Healthsource
revenues that are not included in CIGNA's results of operations were $971
million in the first half of 1997. The pro forma effect on CIGNA's net income
was not material.
Goodwill and other intangible assets associated with the Healthsource
acquisition were $1.5 billion, including $24 million recorded in the fourth
quarter of 1997 for severance of Healthsource employees, vacated Healthsource
lease space and adjustments to Healthsource net assets to conform to CIGNA's
accounting policies. As of September 30, 1998, approximately $7 million of
severance was paid to approximately 530 employees. Goodwill and other intangible
assets are being amortized on a straight-line basis over periods ranging from
eight to 40 years.
CIGNA continues to conduct strategic and financial reviews of its businesses in
order to deploy its capital most effectively. In connection with these efforts,
CIGNA has invested in various growth initiatives for recent international life
and health expansion, mainly in Brazil. In August 1998, CIGNA made additional
investments of approximately $200 million in certain Brazilian health care
companies, resulting in total investments of approximately $350 million in, and
control of, these companies. The effect on CIGNA's results of operations from
these investments has not been material. Combined revenues of these companies in
1997 were approximately $1 billion. CIGNA will complete its fair value analysis
of the net assets of these companies during the next several months. While the
effects of this analysis are not reasonably estimable at this time, they are not
expected to have a material effect on CIGNA's results of operations, liquidity
or financial condition.
Certain risks are inherent in expanding operations in foreign countries. During
the third quarter and nine months of 1998, CIGNA recognized $23 million and $31
million of after-tax losses associated with equity securities of a Brazilian
financial services company. The investments in recent international life and
health expansion, which now total approximately $400 million, are routinely
monitored for potential impairment, and management currently believes that such
investments are recoverable.
CIGNA had other acquisitions and dispositions during the nine months of 1998 and
1997, the effects of which were not material to the financial statements.
6
<PAGE>
NOTE 4 - INVESTMENTS
Realized Investment Gains and Losses
Realized gains and losses on investments, excluding policyholder share, were as
follows:
- --------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- --------------------------------------------------------------------
Fixed maturities $ 22 $ 6 $ 68 $ 35
Equity securities (24) 19 (4) 33
Mortgage loans 8 (3) 13 (17)
Real estate 8 3 15 20
Other 3 -- 31 10
--------------------------------------
17 25 123 81
Less income taxes 7 8 43 27
- ------------------------------------------------------------------
Net realized investment
gains $ 10 $ 17 $ 80 $ 54
- ---------------------------=======================================
Fixed Maturities and Equity Securities
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, were as follows:
- -------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------
Proceeds from sales $ 1,590 $ 1,417 $ 5,451 $ 4,695
Gross gains on sales 75 55 216 141
Gross losses on sales (7) (10) (66) (70)
- -------------------------------------------------------------------------
The components of unrealized appreciation on securities were as follows:
- -------------------------------------------------------------------
(In millions) 1998 1997
- -------------------------------------------------------------------
Three months ended September 30,
Unrealized appreciation on securities held,
net of taxes of $26 and $118, respectively. $ 32 $ 216
Less gains (losses) realized in net income,
net of taxes of $9 in 1997. (2) 16
------------------
Net unrealized appreciation $ 34 $ 200
- -------------------------------------------------==================
Nine months ended September 30,
Unrealized appreciation on securities held,
net of taxes of $135 and $104, respectively. $ 251 $ 186
Less gains realized in net income, net of
taxes of $78 and $24, respectively. 144 44
------------------
Net unrealized appreciation $ 107 $ 142
- -------------------------------------------------==================
NOTE 5 - INCOME TAXES
CIGNA's federal income tax returns are routinely audited by the Internal Revenue
Service (IRS), and provisions are made in the financial statements in
anticipation of the results of these audits. The IRS completed its audits for
the years 1982 through 1993, and challenged CIGNA on one issue related to years
prior to 1989. During the third quarter of 1997, the U.S. Tax Court ruled
against CIGNA on this issue. The decision did not have an effect on results of
operations, as liabilities had been previously established. In connection with
this matter, CIGNA made payments of approximately $250 million during 1997 and
$115 million in the first quarter of 1998. CIGNA has appealed the U.S. Tax Court
decision to the U.S. Court of Appeals.
In management's opinion, adequate tax liabilities have been established for all
years.
7
<PAGE>
NOTE 6 - EARNINGS PER SHARE
- -------------------------------------------------------------------------
Effect
(Dollars in millions, of
except per share amounts) Basic Dilution Diluted
- -------------------------------------------------------------------------
Three Months Ended September 30,
- -------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------
Net income $251 -- $251
- ------------------------------------=====================================
Shares (in thousands):
Weighted average 209,212 -- 209,212
Options and restricted
stock grants 2,300 2,300
- -------------------------------------------------------------------------
Total shares 209,212 2,300 211,512
- ------------------------------------=====================================
Earnings per share $1.20 $(0.01) $1.19
- ------------------------------------=====================================
1997
- -------------------------------------------------------------------------
Net income $279 -- $279
- ------------------------------------=====================================
Shares (in thousands):
Weighted average 220,897 -- 220,897
Options and restricted
stock grants 2,675 2,675
- -------------------------------------------------------------------------
Total shares 220,897 2,675 223,572
- ------------------------------------=====================================
Earnings per share $1.26 $(0.01) $1.25
- ------------------------------------=====================================
Nine Months Ended September 30,
- -------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------
Net income $1,054 -- $1,054
- ------------------------------------=====================================
Shares (in thousands):
Weighted average 212,871 -- 212,871
Options and restricted
stock grants 2,376 2,376
- -------------------------------------------------------------------------
Total shares 212,871 2,376 215,247
- ------------------------------------=====================================
Earnings per share $4.95 $(0.05) $4.90
- ------------------------------------=====================================
1997
- -------------------------------------------------------------------------
Net income $846 -- $846
- ------------------------------------=====================================
Shares (in thousands):
Weighted average 220,767 -- 220,767
Options and restricted
stock grants 2,408 2,408
- -------------------------------------------------------------------------
Total shares 220,767 2,408 223,175
- ------------------------------------=====================================
Earnings per share $3.83 $(0.04) $3.79
- ------------------------------------=====================================
Common shares held as Treasury shares were 58,498,295 and 41,524,404 as of
September 30, 1998 and 1997, respectively.
NOTE 7 - REINSURANCE
In the normal course of business, CIGNA's insurance subsidiaries enter into
agreements, primarily relating to short-duration contracts, to assume and cede
reinsurance with other insurance companies. Reinsurance is ceded primarily to
limit losses from large exposures and to permit recovery of a portion of direct
losses, although ceded reinsurance does not relieve the originating insurer of
liability. CIGNA evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities or economic characteristics of its reinsurers.
Failure of reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies
and disputes, could result in losses. Allowances for uncollectible amounts were
$710 million and $720 million as of September 30, 1998 and December 31, 1997,
respectively.
Future charges for unrecoverable reinsurance may materially affect results of
operations in future periods, however, such amounts are not expected to have a
material adverse effect on CIGNA's liquidity or financial condition.
For the third quarter and nine months of 1998, premiums and fees were net of
ceded premiums of $650 million and $1.7 billion, respectively. For the third
quarter and nine months of 1997, premiums and fees were net of ceded premiums of
$448 million and $1.5 billion, respectively. In addition, benefits, losses and
settlement expenses for the third quarter and nine months of 1998 were net of
reinsurance recoveries of $520 million and $1.4 billion, respectively. Benefits,
losses and settlement expenses for the third quarter and nine months of 1997
were net of reinsurance recoveries of $376 million and $1.1 billion,
respectively.
8
<PAGE>
NOTE 8 - COST REDUCTION INITIATIVES
In the fourth quarter of 1997, CIGNA adopted a cost reduction plan to
restructure its health care operations, which resulted in a pre-tax charge of
$32 million ($22 million after-tax) in the Employee Life and Health Benefits
segment. The charge consisted primarily of costs related to severance, real
estate and other costs for office closings. The cash outlays associated with
these initiatives will continue through 1999 with most occurring in 1998. CIGNA
has funded and will continue to fund the cash outlays through liquid assets, and
such funding has not and will not have a material adverse effect on its
liquidity. As of September 30, 1998, approximately $6 million of severance was
paid to approximately 860 employees.
NOTE 9 - CONTINGENCIES AND OTHER
MATTERS
Financial Guarantees
CIGNA, through its subsidiaries, is contingently liable for various financial
guarantees provided in the ordinary course of business. These include guarantees
for the repayment of industrial revenue bonds as well as other debt instruments
and guarantees of a minimum level of benefits for certain separate account
contracts. Although the ultimate outcome of any loss contingencies arising from
CIGNA's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on
CIGNA's liquidity or financial condition.
Regulatory and Industry Developments
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to:
o increase health care regulation;
o revise the system of funding cleanup of environmental damages;
o reinterpret insurance contracts long after the policies were written to
provide coverage unanticipated by CIGNA;
o restrict insurance pricing and the application of underwriting standards;
and
o revise federal tax laws.
Some of the more significant issues are discussed below.
Efforts at the federal and state level to increase regulation of the health care
industry could have an adverse effect on CIGNA's health care operations if they
reduce marketplace competition and innovation or result in increased medical or
administrative costs. Matters under consideration that could have an adverse
effect include mandated benefits or services that increase costs without
improving the quality of care, loss of the Employee Retirement Income Security
Act of 1974 (ERISA) preemption of state law and restrictions on the use of
prescription drug formularies. Due to the uncertainty associated with the timing
and content of any proposals ultimately adopted, the effect on CIGNA's results
of operations, liquidity or financial condition cannot be reasonably estimated
at this time.
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.
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate-owned
life insurance products. CIGNA does not
9
<PAGE>
expect this legislation to have a material effect on its consolidated results of
operations, liquidity or financial condition.
The National Association of Insurance Commissioners (NAIC) has recently adopted
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.
In 1998, the NAIC adopted standardized statutory accounting principles. Since
these principles have not yet been adopted by the insurance departments of
various jurisdictions in which CIGNA's insurance subsidiaries are domiciled, the
timing or effects of implementation have not yet been determined.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain.
Property and Casualty Unpaid Claims and
Claim Expense Reserves and Reinsurance
Recoverables
CIGNA's property and casualty loss reserves are an estimate of future payments
for reported and unreported claims for losses and related expenses with respect
to insured events that have occurred. The basic assumption underlying the many
traditional actuarial and other methods used in the estimation of property and
casualty loss reserves is that past experience is an appropriate basis for
predicting future events. However, current trends and other factors that would
modify past experience are also considered. The process of establishing loss
reserves is subject to uncertainties that are normal, recurring and inherent in
the property and casualty business.
Reserving for property and casualty claims continues to be a complex and
uncertain process, requiring the use of informed estimates and judgments.
CIGNA's estimates and judgments may be revised as additional experience and
other data become available and are reviewed, as new or improved methodologies
are developed or as current law changes. Any such revisions could result in
future changes in estimates of losses or reinsurance recoverables, and would be
reflected in CIGNA's results of operations for the period in which the estimates
are changed. While the effect of any such changes in estimates of losses or
reinsurance recoverables could be material to future results of operations,
CIGNA does not expect such changes to have a material effect on its liquidity or
financial condition.
In management's judgment, information currently available has been appropriately
considered in estimating CIGNA's loss reserves and reinsurance recoverables.
Litigation
CIGNA is continuously involved in numerous lawsuits arising, for the most part,
in the ordinary course of business, either as a liability insurer defending
third-party claims brought against its insureds or as an insurer defending
coverage claims brought against it by its policyholders or other insurers. One
such area of litigation involves policy coverage and judicial interpretation of
legal liability for asbestos-related and environmental pollution (A&E) claims.
While the outcome of all litigation involving CIGNA, including insurance-related
litigation, cannot be determined, litigation (including that related to A&E
claims) is not expected to result in losses that differ from recorded reserves
by amounts that would be material to results of operations, liquidity or
financial condition. Also, reinsurance recoveries related to claims in
litigation, net of the allowance for uncollectible reinsurance, are not expected
to result in recoveries that differ from recorded recoverables by amounts that
would be material to results of operations, liquidity or financial condition.
Property and Casualty Restructuring
Effective December 31, 1995, CIGNA restructured its domestic property and
casualty businesses into two separate operations, ongoing and run-off. Certain
competitors and policyholders of CIGNA are challenging the restructuring in
court. Although CIGNA expects the matter to be in litigation for some time, it
expects to ultimately prevail.
10
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION
The following discussion addresses the financial condition of CIGNA Corporation
(CIGNA) as of September 30, 1998, compared with December 31, 1997, and its
results of operations for the quarter and nine months ended September 30, 1998,
compared with the same periods last year. This discussion should be read in
conjunction with Management's Discussion and Analysis included in CIGNA's 1997
Annual Report to Shareholders (pages 10 through 23) and in CIGNA's report on
Form 10-Q for the second quarter of 1998, to which the reader is directed for
additional information. Due to the seasonality of certain aspects of CIGNA's
business, caution should be used in estimating results for the full year based
on interim results of operations.
Acquisitions and Dispositions
As of January 1, 1998, CIGNA sold its individual life insurance and annuity
businesses for cash proceeds of $1.4 billion. The sale resulted in an after-tax
gain of $773 million, of which $202 million was recognized upon closing of the
sale. Since the principal agreement to sell these businesses is in the form of
an indemnity reinsurance arrangement, the remaining $571 million of the gain was
deferred and is being recognized at the rate that earnings from the businesses
sold would have been expected to emerge, primarily over fifteen years on a
declining basis. CIGNA recognized approximately $17 million and $50 million of
the deferred gain in the third quarter and nine months of 1998, respectively.
The sales agreement provides for the possibility of certain adjustments;
however, any future adjustments are not expected to be material to results of
operations, liquidity or financial condition.
CIGNA acquired the outstanding common stock of Healthsource, Inc. (Healthsource)
on June 25, 1997. The cost of the acquisition was $1.7 billion, reflecting the
purchase of Healthsource common stock for $1.4 billion and the retirement of
Healthsource debt of $250 million. The acquisition was accounted for as a
purchase, and was financed through the issuance of long-term debt of $600
million and a combination of internally generated funds and short-term debt.
Goodwill and other intangible assets associated with the Healthsource
acquisition were $1.5 billion, including $24 million recorded in the fourth
quarter of 1997 for severance of Healthsource employees, vacated Healthsource
lease space and adjustments to Healthsource net assets to conform to CIGNA's
accounting policies. Annual expense savings of $35 million after-tax are
expected from the severance actions and vacated lease space, with approximately
two-thirds emerging in 1998 and the full amount in 1999. Goodwill and other
intangible assets are being amortized on a straight-line basis over periods
ranging from eight to 40 years.
In addition, in the fourth quarter of 1997, CIGNA recorded a pre-tax integration
charge of $87 million ($58 million after-tax) in connection with its review of
Healthsource operations. The charge primarily resulted from an analysis of
Healthsource HMO medical reserves, receivable balances and contractual
obligations.
CIGNA continues to conduct strategic and financial reviews of its businesses in
order to deploy its capital most effectively. In connection with these efforts,
CIGNA has invested in various growth initiatives for recent international life
and health expansion, mainly in Brazil. In August 1998, CIGNA made additional
investments of approximately $200 million in certain Brazilian health care
companies, resulting in total investments of approximately $350 million in, and
control of, these companies. The effect on CIGNA's results of operations from
these investments has not been material. Combined revenues of these companies in
1997 were approximately $1 billion. CIGNA will complete its fair value analysis
of the net assets of these companies during the next several months. While the
effects of this analysis are not reasonably estimable at this time, they are not
expected to have a material effect on CIGNA's results of operations, liquidity
or financial condition.
Certain risks are inherent in expanding operations in foreign countries. During
the third quarter and nine months of 1998, CIGNA recognized $23
11
<PAGE>
million and $31 million of after-tax losses associated with equity securities of
a Brazilian financial services company. The investments in recent international
life and health expansion, which now total approximately $400 million, are
routinely monitored for potential impairment, and management currently believes
that such investments are recoverable.
See Note 3 to the Financial Statements for additional information on
acquisitions and dispositions.
Cost Reduction Initiatives
In the fourth quarter of 1997, CIGNA adopted a cost reduction plan to
restructure its health care operations, which resulted in a pre-tax charge of
$32 million ($22 million after-tax) in the Employee Life and Health Benefits
segment. The charge consisted primarily of costs related to severance, real
estate and other costs for office closings. The cash outlays associated with
these initiatives will continue through 1999 with most occurring in 1998. CIGNA
has funded and will continue to fund the cash outlays through liquid assets, and
such funding has not and will not have a material adverse effect on its
liquidity. These initiatives are expected to result in annual after-tax expense
savings of $50 million with approximately two-thirds of the savings emerging in
1998 and the full amount in 1999. As of September 30, 1998, there were no
material changes to the costs associated with or the anticipated annual savings
related to these initiatives. As of September 30, 1998, approximately $6 million
of severance was paid to approximately 860 employees.
Other Matters
Certain European countries plan to begin implementing a common currency (euro)
in January 1999. CIGNA expects that it will have procedures and systems in place
as of January 1999 to support the implementation of the euro and that the costs
of these efforts as well as the overall effect on CIGNA's international
operations will not be material.
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment that could affect them. Some of the
changes include initiatives to:
o increase health care regulation;
o revise the system of funding cleanup of environmental damages;
o reinterpret insurance contracts long after the policies were written to
provide coverage unanticipated by CIGNA;
o restrict insurance pricing and the application of underwriting standards;
and
o revise federal tax laws.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain. For additional information, see Note 9 to the Financial
Statements.
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that derivatives be
reported on the balance sheet at fair value. Changes in fair value are
recognized in net income or, for derivatives which are hedging market risk
related to future cash flows, in the accumulated other comprehensive income
section of shareholders' equity. Implementation is required by the first quarter
of 2000, with the cumulative effect of adoption reflected in net income and
accumulated other comprehensive income, as appropriate. CIGNA has not determined
the effect or timing of implementation of this pronouncement.
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the
recognition and measurement of liabilities for guaranty fund and other
insurance-related assessments. Implementation is required by the first quarter
of 1999, with the cumulative effect of adopting the SOP reflected in net income
in the year of adoption. Although CIGNA has not determined the timing of
implementation of this pronouncement, the estimated after-tax cumulative effect
to be recognized upon implementation is expected to be approximately $75 - $100
million.
In 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 specifies the
12
<PAGE>
types of costs that must be capitalized and amortized over the software's
expected useful life and the types of costs which must be immediately recognized
as expense. Implementation is required by the first quarter of 1999. Although
CIGNA has not yet determined the timing of implementation, this pronouncement is
not expected to have a material effect on results of operations, liquidity or
financial condition.
CONSOLIDATED RESULTS OF OPERATIONS
=================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------
Premiums and fees $4,093 $3,925 $12,109 $10,795
Net investment income 911 1,057 2,790 3,172
Other revenues 205 175 936 498
Realized investment gains 17 25 123 81
----------------------------------------
Total revenues 5,226 5,182 15,958 14,546
Benefits and expenses 4,834 4,755 14,327 13,271
----------------------------------------
Income before taxes 392 427 1,631 1,275
Income taxes 141 148 577 429
----------------------------------------
Net income $251 $279 $1,054 $846
- -------------------------========================================
Realized investment
gains, net of taxes $10 $17 $80 $54
- -------------------------========================================
CIGNA's consolidated net income decreased 10% for the third quarter of 1998 and
increased 25% for the nine months of 1998 compared with the same periods last
year. The decrease for the quarter reflects lower operating income* in the
Property and Casualty segment (principally due to catastrophe losses) and in the
Individual Financial Services segment, partially offset by improved operating
income in the Employee Life and Health Benefits and Employee Retirement and
Savings Benefits segments. For the nine months, the increase in net income
primarily reflects the $202 million after-tax gain recognized on the sale of
CIGNA's individual life insurance and annuity businesses and improved results in
the Employee Life and Health Benefits and Employee Retirement and Savings
Benefits segments. This increase was partially offset by lower operating income
in the Property and Casualty segment, as discussed above, and lower operating
income in the Individual Financial Services segment (excluding the gain).
After-tax realized investment results decreased 41% in the third quarter of 1998
and increased 48% for the nine months of 1998 compared with the same periods
last year. The decrease for the quarter reflects the impairment losses on
Brazilian equity securities discussed beginning on page 11, partially offset by
increased gains on sales of fixed maturities and mortgage loans. The increase
for the nine months primarily reflects higher gains on sales of mortgage loans,
equity securities, real estate partnerships and fixed maturities partially
offset by higher impairment losses on equity securities noted above. For
additional information see Note 4 to the Financial Statements.
Full year operating income for 1998 may be slightly lower than 1997 (excluding
the $202 million gain on sale of businesses discussed above and the 1997
Healthsource integration and health care cost reduction charge of $80 million)
due primarily to higher catastrophe losses. CIGNA currently expects 1999
operating income to be somewhat higher than 1998 (excluding the $202 million
gain). Results for 1998 and 1999 could be adversely affected by the factors
noted in the cautionary statements on page 23.
EMPLOYEE LIFE AND HEALTH BENEFITS
==================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------
Premiums and fees $2,861 $2,572 $8,418 $6,792
Net investment income 152 142 436 415
Other revenues 136 116 402 340
Realized investment gains
(losses) 29 (6) 85 1
----------------------------------------
Total revenues 3,178 2,824 9,341 7,548
Benefits and expenses 2,895 2,629 8,570 6,981
----------------------------------------
Income before taxes 283 195 771 567
Income taxes 105 71 284 194
----------------------------------------
Net income $178 $124 $487 $373
- -------------------------========================================
Realized investment gains
(losses), net of taxes $19 $(4) $55 $2
- -------------------------========================================
Net income for the Employee Life and Health Benefits segment increased 44% and
31% for the third quarter and nine months of 1998, compared with the same
periods last year. Operating income for the third quarter and nine months of
1998 increased 24% and 16%, respectively, compared with the same periods last
year. Operating income
- --------
* Operating income (loss) is defined as net income (loss) excluding after-tax
realized investment results.
13
<PAGE>
for the Indemnity and HMO operations was as follows:
====================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- --------------------------------------------------------------------
Indemnity operations $77 $76 $218 $202
HMO operations 82 52 214 169
- --------------------------------------------------------------------
Total $159 $128 $432 $371
====================================================================
Indemnity operating income increased 1% and 8% for the third quarter and nine
months of 1998, respectively, compared with the same periods last year. These
increases primarily reflect improved long-term disability claim experience.
HMO results for the third quarter and nine months of 1998 include $4 million and
$11 million of after-tax charges for uncollectible receivables for a health care
specialty service business. These results also include $5 million and $6 million
of after-tax benefits principally for adjustments to reserves established in
connection with the 1997 Healthsource integration and health care cost reduction
plan. HMO results for the nine months of 1997 include net favorable after-tax
adjustments of $11 million from reserve and account reviews.
Excluding the adjustments, HMO earnings were $81 million and $219 million for
the third quarter and nine months of 1998, respectively, compared with $52
million and $158 million for the same periods last year. These improvements
reflect medical membership growth, rate increases, improved results in dental
and mental health operations and lower operating expenses per member due to
expense savings initiatives. For the nine months of 1998, the improvement
resulting from membership growth was primarily attributable to the Healthsource
acquisition in June 1997. These improvements were partially offset by increased
HMO medical costs reflecting higher pharmacy, physician and outpatient costs,
and, for the nine months of 1998, higher goodwill and other intangibles
amortization of $18 million associated with the acquisition of Healthsource.
Premiums and fees increased 11% and 24% for the third quarter and nine months of
1998, respectively, compared to the same periods last year. The increase for the
third quarter primarily reflects rate increases and membership growth. For the
nine months, the increase primarily reflects Healthsource premiums and fees, as
well as rate increases and membership growth. Growth in premiums may be
constrained by competitive pressures in both the medical indemnity and HMO
markets.
Net investment income increased 7% and 5% for the third quarter and nine months
of 1998, respectively, compared to the same periods in 1997, primarily due to
higher assets, partially offset by lower yields.
Total HMO membership increased 11% since September 30, 1997 and 10% since
December 31, 1997, primarily reflecting membership growth in CIGNA's HMO
alternative funding programs. Under alternative funding programs, the customer
assumes all or a portion of the responsibility for funding claims. CIGNA
generally earns a lower margin on these programs than under traditional HMO
plans.
Management believes that adding premium equivalents to premiums and fees
(adjusted premiums and fees) produces a more meaningful measure of business
volume. Premium equivalents for the third quarter and nine months of 1998 were
approximately $3.3 billion and $9.7 billion, respectively. These amounts
represent an increase of 8% and 24%, respectively, compared with the same
periods last year. This increase primarily reflects membership growth, and to a
lesser extent, higher medical costs. Premium equivalents may be constrained by
competitive pressures in both the medical indemnity and HMO markets. Premium
equivalents were 54% of total adjusted premiums and fees for the nine months of
1998 and 1997. Administrative Services Only (ASO) plans accounted for 49% and
50% of total adjusted premiums and fees for the nine months of 1998 and 1997,
respectively.
14
<PAGE>
EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
=======================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------
Premiums and fees $42 $40 $155 $138
Net investment income 365 393 1,140 1,192
Realized investment gains
(losses) 8 (3) 24 11
-----------------------------------------
Total revenues 415 430 1,319 1,341
Benefits and expenses 320 355 1,043 1,095
-----------------------------------------
Income before taxes 95 75 276 246
Income taxes 31 24 89 79
-----------------------------------------
Net income $64 $51 $187 $167
- ------------------------------=========================================
Realized investment gains
(losses), net of taxes $5 $(2) $16 $7
- ------------------------------=========================================
Net income for the Employee Retirement and Savings Benefits segment increased
25% and 12% for the third quarter and nine months of 1998, compared with the
same periods of 1997. Operating income for the third quarter and nine months of
1998 was $59 million and $171 million, compared with $53 million and $160
million for the same periods last year. These increases reflect higher earnings
from an increased asset base, partially offset by customers' shift from general
account fixed income investments to lower margin separate account equity funds.
Premiums and fees increased 5% and 12% for the third quarter and nine months of
1998, respectively, compared with the same periods last year, reflecting higher
fees from separate accounts and higher annuity sales for the nine months of
1998.
Net investment income decreased 7% and 4% for the third quarter and nine months
of 1998, respectively. These decreases primarily reflect lower investment yields
and customers' redirection of a portion of their investments from the general
account to separate accounts for the nine months of 1998.
Assets under management is generally a key determinant of earnings for this
segment. For the nine months ended September 30, assets under management and
related activity, including amounts attributable to separate accounts, were as
follows:
===================================================================
(In millions) 1998 1997
- -------------------------------------------------------------------
Balance -- January 1 $46,074 $40,605
Premiums and deposits 5,751 5,221
Investment results 2,128 1,847
Increase (decrease) in fair value of assets (26) 2,946
Customer withdrawals (2,900) (1,679)
Other, including participant
withdrawals and benefit payments (4,173) (3,417)
- -------------------------------------------------------------------
Balance -- September 30 $46,854 $45,523
- --------------------------------------------=======================
Premiums and deposits increased 10% in the nine months of 1998, compared with
the same period in 1997, primarily reflecting higher recurring deposits from
existing customers. For the nine months of 1998 and 1997, approximately 54% and
53%, respectively, of premiums and deposits reflect recurring deposits from
existing customers while the remaining amounts represent sales to new customers
and new plan sales to existing customers. Investment results increased 15% in
the nine months of 1998, compared with the same period in 1997. This increase
reflects higher realized capital gains and growth in assets, partially offset by
lower investment yields. The decrease for 1998 in the fair value of assets is
due to market value depreciation of equity securities in separate accounts in
the third quarter of 1998. The increase in customer withdrawals is primarily due
to the effect of one customer withdrawal in 1998. The increase in Other reflects
larger participant withdrawals and benefit payments due to a higher level of
assets under management.
Management expects that asset growth may be constrained due to the lack of
growth in the defined benefit market. In addition, assets under management will
continue to be affected by market value fluctuations for fixed maturities and
equity securities.
15
<PAGE>
INDIVIDUAL FINANCIAL SERVICES
========================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------
Premiums and fees $141 $248 $455 $731
Net investment income 166 274 502 805
Other revenues 26 17 393 46
Realized investment gains
(losses) 5 (4) 12 7
----------------------------------------
Total revenues 338 535 1,362 1,589
Benefits and expenses 272 460 856 1,357
----------------------------------------
Income before taxes 66 75 506 232
Income taxes 23 26 178 81
----------------------------------------
Net income $43 $49 $328 $151
- -------------------------------========================================
Realized investment gains
(losses), net of taxes $3 $(2) $8 $5
- -------------------------------========================================
Net income for the Individual Financial Services segment decreased 12% for the
third quarter of 1998 and increased substantially for the nine months of 1998,
compared with the same periods of 1997. Results for the nine months of 1998
include an after-tax gain of $202 million recognized on the sale of the
individual life insurance and annuity businesses. Results for the third quarter
and nine months include $17 million and $50 million after-tax, respectively,
from recognition of a portion of the deferred gain associated with the sale (as
discussed on page 11).
Excluding these amounts, operating income for the third quarter and nine months
of 1998 was $23 million and $68 million, respectively. These amounts, compared
with operating income of $25 million and $76 million for the same periods in
1997 (excluding results from the businesses sold), primarily reflect unfavorable
claim experience in the reinsurance operation, partially offset by growth in
interest-sensitive and specialty life reinsurance products.
For the third quarter and nine months of 1998, premiums and fees decreased 43%
and 38%, respectively, compared with the same periods of 1997. Excluding 1997
premiums and fees related to the businesses sold, the increase for the third
quarter and nine months of 1998 was 1% and 10%, respectively. These increases
reflect growth in reinsurance and higher renewal premiums for interest-sensitive
products.
Net investment income decreased 39% and 38% for the third quarter and nine
months of 1998, respectively, compared with the same periods of 1997. Excluding
1997 net investment income related to the businesses sold, the increase for the
third quarter and nine months of 1998 was 4% and 8%, respectively. These
increases primarily reflect growth in interest-sensitive products.
In 1996, Congress passed legislation that phases out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate-owned
life insurance (COLI) products. For the third quarter and nine months of 1998,
revenues of $131 million and $415 million and operating income of $12 million
and $33 million, respectively, were from leveraged COLI products that are
affected by this legislation. The effect of this legislation on customers'
decisions to maintain these policies after the phase-out period is unknown.
However, all or a portion of these policies could lapse.
PROPERTY AND CASUALTY
==================================================================
FINANCIAL SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- ------------------------------------------------------------------
Premiums and fees $1,049 $1,065 $3,081 $3,134
Net investment income 170 190 523 574
Other revenues 74 72 210 209
Realized investment gains
(losses) (26) 35 (4) 59
--------------------------------------
Total revenues 1,267 1,362 3,810 3,976
Benefits and expenses 1,278 1,241 3,646 3,669
--------------------------------------
Income (loss) before taxes (11) 121 164 307
Income taxes (benefits) (7) 39 50 94
--------------------------------------
Net income (loss) $(4) $82 $114 $213
- ----------------------------======================================
Realized investment gains
(losses), net of taxes $(17) $23 $(4) $38
- ----------------------------======================================
Results for the Property and Casualty segment declined substantially for the
third quarter and nine months of 1998 compared with the same periods last year.
16
<PAGE>
Operating income for the ongoing and run-off operations was as follows:
===================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- -------------------------------------------------------------------
Ongoing operations:
International $(13) $33 $46 $102
Domestic 26 26 72 72
--------------------------------------
Total ongoing
operations 13 59 118 174
Run-off operations -- -- -- 1
- -------------------------------------------------------------------
Total $13 $59 $118 $175
===================================================================
International results for the third quarter and nine months of 1998 include
catastrophe losses of $36 million after-tax related to Hurricane Georges.
Results for the nine months of 1997 include a $6 million after-tax charge for
cost reduction initiatives, principally severance. Excluding these items,
operating income was $23 million and $82 million for the third quarter and nine
months of 1998 compared with $33 million and $108 million for the same periods
last year. These declines reflect lower property and casualty earnings primarily
due to the competitive environment, and lower net investment income. Partially
offsetting these declines were improvements in the international life and health
operations (primarily in Japan).
Results for the domestic operations in the third quarter and nine months of 1998
are level compared with the same periods of 1997. These results reflect
catastrophe losses associated with Hurricane Georges of $6 million after-tax,
lower net investment income and unfavorable workers' compensation experience,
offset by favorable prior year development, improvement in results from
insurance-related service businesses and, for the nine months, improved claims
experience.
Results for the run-off operations primarily reflect prior year development on
claim and claim adjustment expense reserves and investment activity.
Premiums and fees decreased 2% for the third quarter and nine months of 1998.
These changes reflect the discontinuance of certain personal lines of business,
continued price competition and, for international, the unfavorable effect of
foreign exchange, partially offset by growth in workers' compensation and
international life and health (primarily in Japan).
Net investment income decreased 11% and 9% for the third quarter and nine months
of 1998, respectively, compared with the same periods of 1997. The declines
reflect lower average assets, the unfavorable effect of foreign exchange, a
shift in the investment portfolio mix from fixed maturities to equity securities
and lower yields.
The ongoing operations had pre-tax catastrophe losses, net of reinsurance, of
$67 million and $97 million for the third quarter and nine months of 1998,
respectively, compared with $2 million and $16 million for the same periods of
1997. Catastrophe losses in 1998 included $65 million ($55 million
international, $10 million domestic) for Hurricane Georges.
Effective July 1, 1998, CIGNA revised its reinsurance programs. CIGNA's domestic
reinsurance programs provide for approximately 60% recovery for property
catastrophe losses between $45 million and $260 million. Other reinsurance
programs are in place which could provide for the recovery of up to an
additional $300 million on certain losses, including property catastrophes,
depending on the aggregate annual level of losses incurred. CIGNA's
international catastrophe program provides approximately 95% recovery of losses
between $100 million and $400 million. CIGNA's results of operations could be
volatile, depending on the frequency and severity of catastrophes.
Certain competitors and policyholders of CIGNA are challenging in court the
restructuring of its domestic property and casualty business into two separate
operations, ongoing and run-off. Although CIGNA expects the matter to be in
litigation for some time, it expects to ultimately prevail.
17
<PAGE>
LOSS RESERVES AND REINSURANCE RECOVERABLES
CIGNA's reserving methodology and significant issues affecting the estimation of
loss reserves and reinsurance recoverables are described in its 1997 Form 10-K.
CIGNA's property and casualty loss reserves of $15.0 billion and $15.1 billion
as of September 30, 1998 and December 31, 1997, respectively, are an estimate of
future payments for reported and unreported claims for losses and related
expenses with respect to insured events that have occurred. The basic assumption
underlying the many traditional actuarial and other methods used in the
estimation of property and casualty loss reserves is that past experience is an
appropriate basis for predicting future events. However, current trends and
other factors that would modify past experience are also considered. The process
of establishing loss reserves is subject to uncertainties that are normal,
recurring and inherent in the property and casualty business.
CIGNA continually attempts to improve its loss estimation process by refining
its analysis of loss development patterns, claims payments and other
information, but there remain many reasons for adverse development of estimated
ultimate liabilities. For example, unanticipated changes in workers'
compensation and product liability laws have at times significantly affected the
ability of insurers to estimate liabilities for unpaid losses and related
expenses.
Reserving for property and casualty claims continues to be a complex and
uncertain process, requiring the use of informed estimates and judgments.
CIGNA's estimates and judgments may be revised as additional experience and
other data become available and are reviewed, as new or improved methodologies
are developed or as current law changes. Any such revisions could result in
future changes in estimates of losses or reinsurance recoverables, and would be
reflected in CIGNA's results of operations for the period in which the estimates
are changed. While the effect of any such changes in estimates of losses or
reinsurance recoverables could be material to future results of operations,
CIGNA does not expect such changes to have a material effect on its liquidity or
financial condition.
CIGNA manages its loss exposure through the use of reinsurance. While
reinsurance arrangements are designed to limit losses from large exposures and
to permit recovery of a portion of direct losses, reinsurance does not relieve
CIGNA of liability to its insureds. Accordingly, CIGNA's loss reserves represent
total gross losses, and reinsurance recoverables represent anticipated
recoveries of a portion of those losses.
CIGNA's reinsurance recoverables were approximately $6.0 billion and $6.2
billion as of September 30, 1998 and December 31, 1997, net of allowances for
unrecoverable reinsurance of $710 million and $720 million, respectively.
In management's judgment, information currently available has been appropriately
considered in estimating CIGNA's loss reserves and reinsurance recoverables.
The following table shows the adverse (favorable) pre-tax effects on the
Property and Casualty segment's results of operations from prior year
development, net of reinsurance:
====================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
- --------------------------------------------------------------------
By business operation:
Ongoing operations $(15) $8 $(10) $22
Run-off operations 44 50 137 150
- --------------------------------------------------------------------
Total $29 $58 $127 $172
====================================================================
By type of loss:
Asbestos-related $17 $20 $54 $68
Environmental
pollution 8 8 23 22
Unrecoverable
reinsurance 3 6 17 15
Workers' compensation 24 18 48 36
Other (23) 6 (15) 31
- --------------------------------------------------------------------
Total $29 $58 $127 $172
====================================================================
Other prior year development in the quarter and nine months reflected favorable
claims experience on certain commercial package, property and aviation lines of
business, somewhat offset by unfavorable development on the assumed reinsurance
line of business.
18
<PAGE>
OTHER OPERATIONS
Other Operations primarily includes unallocated investment income, expenses
(including debt service) and taxes. Also included are the results of CIGNA's
settlement annuity business and non-insurance operations engaged primarily in
investment and real estate activities and certain new business initiatives.
Other Operations had operating losses of $30 million and $67 million for the
third quarter and nine months of 1998, respectively, compared with losses of $29
million and $60 million for the same periods in 1997. The increase in operating
losses for the nine months of 1998 primarily reflects financing costs associated
with the Healthsource acquisition and increased expenses related to new business
initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for CIGNA and its insurance subsidiaries has remained strong as
evidenced by significant amounts of short-term investments and cash and cash
equivalents in the aggregate. Generally, CIGNA has met its operating
requirements by maintaining appropriate levels of liquidity in its investment
portfolio and through utilization of overall positive cash flows.
For the nine months of 1998, cash and cash equivalents decreased $1.5 billion
from $2.6 billion as of December 31, 1997. This decrease primarily reflects
repurchases of, and payments of dividends on, CIGNA common stock ($938 million),
repayment of debt ($471 million), net withdrawals from contractholder deposit
funds ($237 million), and cash used in investing activities ($14 million), which
includes investments in international growth initiatives of approximately $300
million and net investment purchases, offset by net proceeds of approximately
$1.3 billion on the sale of the individual life insurance and annuity
businesses. These decreases were partially offset by cash provided by operating
activities ($199 million), reflecting the timing of operating cash receipts and
disbursements.
CIGNA's capital resources represent funds available for long-term business
commitments. They primarily consist of retained earnings and proceeds from the
issuance of long-term debt and equity securities. CIGNA's financial strength
provides the capacity and flexibility to enable it to raise funds in the capital
markets through the issuance of such securities. CIGNA continues to be well
capitalized, with sufficient borrowing capacity to meet the anticipated needs of
its businesses.
CIGNA had $1.4 billion and $1.5 billion of long-term debt outstanding at
September 30, 1998 and December 31, 1997. As of September 30, 1998, CIGNA had $1
billion remaining under effective shelf registration statements 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.
At September 30, 1998, CIGNA's short-term debt amounted to $245 million, a
decrease of $445 million from December 31, 1997.
In April 1998, CIGNA's Board of Directors increased CIGNA's authorization to
repurchase its common stock by $750 million. Stock repurchases depend on
prevailing market conditions and alternative uses of capital. From January 1
through November 2, 1998, CIGNA repurchased 12,400,600 shares for $822 million,
including 998,700 shares repurchased for $66 million from October 1 through
November 2, 1998. The remaining authorization as of November 2, 1998 was $289
million.
INVESTMENT ASSETS
===================================================================
September 30, December 31,
(In millions) 1998 1997
- -------------------------------------------------------------------
Fixed maturities $33,339 $36,358
Equity securities 862 854
Mortgage loans 9,556 10,859
Real estate 755 769
Other, primarily policy loans 7,400 7,738
- -------------------------------------------------------------------
Total investment assets $51,912 $56,578
===================================================================
Additional information regarding CIGNA's investment assets is included in Note 4
to the third quarter 1998 Financial Statements and Notes 2, 4 and 5 to the 1997
Financial Statements as well as the 1997 Form 10-K.
Investment assets as of September 30, 1998 decreased 8% from December 31, 1997.
This decrease primarily relates to investments which were
19
<PAGE>
included in the sale of the individual life insurance and annuity businesses.
Significant amounts of CIGNA's investment assets are attributable to
experience-rated contracts with policyholders (policyholder contracts).
Approximate percentages of investments attributable to policyholder contracts
were as follows:
===================================================================
September 30, December 31,
1998 1997
- -------------------------------------------------------------------
Fixed maturities 30% 29%
Mortgage loans 57% 53%
Real estate 63% 64%
===================================================================
Fixed Maturities
Investments in fixed maturities (bonds) include publicly traded and private
placement debt securities; asset-backed securities, including collateralized
mortgage obligations (CMOs); and redeemable preferred stocks.
As of September 30, 1998, the fair value of fixed maturities, including
policyholder share, was greater than amortized cost by $2.4 billion, compared
with $2.1 billion as of December 31, 1997. The increase in unrealized
appreciation primarily reflects the decline in interest rates, partially offset
by the amount of unrealized appreciation on the bonds that were included in the
sale of the individual life insurance and annuity businesses.
Potential Problem and Problem Bonds
Potential problem bonds are fully current but judged by management to have
certain characteristics that increase the likelihood of problem classification.
CIGNA had $78 million of potential problem bonds, including amounts attributable
to policyholder contracts, as of September 30, 1998, compared with $63 million
as of December 31, 1997. These amounts are net of $7 million and $10 million of
cumulative write-downs, respectively.
CIGNA considers bonds that are delinquent or restructured as to terms, typically
interest rate and, in certain cases, maturity date, problem bonds. As of
September 30, 1998 and December 31, 1997, CIGNA had problem bonds, including
amounts attributable to policyholder contracts, of $127 million and $137
million, net of related cumulative write-downs of $26 million and $30 million,
respectively.
CIGNA recognizes interest income on problem bonds only when payment is received.
See the Summary on page 21 for the effect of non-accruals and write-downs for
bonds on policyholder contracts and on CIGNA's net income.
Mortgage Loans
====================================================================
September 30, December 31,
1998 1997
- --------------------------------------------------------------------
Mortgage loans (in millions) $9,556 $10,859
Property type:
Retail facilities 37% 40%
Office buildings 36 34
Apartment buildings 15 13
Industrial 6 5
Hotels 4 5
Other 2 3
Total 100% 100%
====================================================================
CIGNA's investment strategy requires diversification of the mortgage loan
portfolio. This strategy includes guidelines relative to property type, location
and borrower to reduce its exposure to potential losses.
Potential Problem and Problem Mortgage Loans
Potential problem mortgage loans include:
o fully current loans that are judged by management to have certain
characteristics that increase the likelihood of problem classification;
o fully current loans for which the borrower has requested restructuring; and
o loans that are 30 to 59 days delinquent with respect to interest or
principal payments.
CIGNA had potential problem mortgage loans, including amounts attributable to
policyholder contracts, of $99 million as of September 30, 1998, and $191
million as of December 31, 1997, net of related valuation reserves of $1 million
and $41 million, respectively.
CIGNA's problem mortgage loans include delinquent and restructured mortgage
loans. Delinquent mortgage loans include those on which payment is overdue
generally 60 days or more.
20
<PAGE>
Restructured mortgage loans are those whose basic financial terms have been
modified, typically to reduce the interest rate or extend the maturity date.
CIGNA had problem mortgage loans, including amounts attributable to policyholder
contracts, of $143 million and $152 million, net of valuation reserves of $9
million as of September 30, 1998 and December 31, 1997.
CIGNA recognizes interest income on problem mortgage loans only when payment is
received. See the Summary below for the effect of non-accruals and valuation
reserves for mortgage loans on policyholder contracts and on CIGNA's net income.
Real Estate
As of September 30, 1998 and December 31, 1997, investment real estate, net of
reserves and write-downs, included: 1) $394 million and $414 million,
respectively, of real estate held for the production of income, and 2) $361
million and $355 million, respectively, of real estate held for sale, primarily
properties acquired as a result of foreclosure of mortgage loans.
See the Summary below for the effect of write-downs and valuation reserves for
real estate on policyholder contracts and on CIGNA's net income.
Summary
The adverse (favorable) effects of write-downs and changes in valuation reserves
as well as of non-accruals on policyholder contracts and on CIGNA's net income
were as follows:
<TABLE>
<CAPTION>
===================================================================================================================================
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------------- ---------------------------------------------------
1998 1997 1998 1997
------------------------- ------------------------ ------------------------ -------------------------
Policy- Policy- Policy- Policy-
holder holder holder holder
(In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Write-downs and
valuation reserves:
Bonds $3 $4 $6 $12 $4 $5 $13 $20
Mortgage loans (4) -- 5 3 (7) (1) 11 8
Real estate 2 -- (2) -- 1 -- (1) 2
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1 $4 $9 $15 $(2) $4 $23 $30
===================================================================================================================================
Non-accruals:
Bonds $-- $2 $2 $3 $2 $5 $5 $8
Mortgage loans (1) (1) (1) -- (2) (1) (2) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $(1) $1 $1 $3 $-- $4 $3 $8
===================================================================================================================================
</TABLE>
CIGNA also recognized losses in connection with Brazilian equity securities as
discussed beginning on page 11. Additional losses from problem investments are
expected to occur for specific investments in the normal course of business.
Assuming no significant deterioration in economic conditions, including further
significant deterioration in Asian and Latin American economies, CIGNA does not
expect additional non-accruals, write-downs and reserves to materially affect
future results of operations, liquidity or financial condition, or to result in
a significant decline in the aggregate carrying value of its assets.
21
<PAGE>
YEAR 2000
CIGNA is highly dependent on automated systems and systems applications in
conducting its operations. These systems include information technology (IT)
systems that are used for, among other things, processing claims, billing,
collecting premiums from customers and managing investment activities. If these
systems were unable to function because of failing to be Year 2000 ready,
CIGNA's business operations would be interrupted, which could have a material
adverse effect on CIGNA's results of operations.
CIGNA's Year 2000 efforts include: 1) identifying systems requiring remediation;
2) assessing what is required to remediate those systems; 3) remediating systems
to be ready for the Year 2000 (by either modifying or replacing them); and 4)
testing systems for Year 2000 readiness, including that they properly interface
with systems of external parties such as customers and third-party
administrators. CIGNA has completed the identification and assessment phases
with respect to its IT systems that are critical to maintaining operations or
the failure of which would result in significant costs or disruption of
operations ("mission critical systems"). As of September 30, 1998, remediation
and testing procedures had been completed for 75% of its mission critical
systems. CIGNA expects to substantially complete the remediation and testing of
its mission critical systems by the end of 1998. In certain cases, CIGNA will
perform additional testing to ensure that these systems appropriately interact
with other systems.
CIGNA's systems also include non-IT systems, such as telephone and facility
management systems. The majority of non-IT systems are believed to be Year 2000
ready and the remaining non-IT systems are expected to be ready by mid-1999.
CIGNA is using both internal and external resources to meet the timetable
established for completion of its Year 2000 efforts. The after-tax costs of Year
2000 efforts are expected to be approximately $100 million in 1998 and $50
million in 1999. Year 2000 after-tax costs for the third quarter and nine months
of 1998 were $23 million and $65 million. Approximately 60% of total Year 2000
costs are attributable to existing systems resources which have been redirected
to the Year 2000 efforts. The remaining amounts represent incremental costs for
Year 2000 efforts. Although certain systems development efforts have been
deferred in order to address Year 2000 issues, CIGNA does not expect that this
deferral will have a significant adverse effect on its results of operations or
financial condition.
CIGNA has relationships with various third-party entities in the ordinary course
of business. For example, CIGNA receives data from clients; depends on others,
such as third-party administrators and banks, for services; and bears credit
risk on others, such as entities in which it invests. CIGNA has identified
third-party entities critical to its operations, and it is assessing and
attempting to mitigate its risks with respect to the failure of these entities
to be Year 2000 ready by, among other things, reviewing, where possible, their
formal Year 2000 plans and obtaining Year 2000 readiness affirmations from
certain third-party entities. The effect, if any, on CIGNA's results of
operations from the failure of these entities (including entities on which CIGNA
bears credit risk) to be Year 2000 ready is not reasonably estimable.
While CIGNA expects that its Year 2000 efforts will be successful, it has begun,
but not yet completed, a comprehensive analysis of the operational problems that
would be reasonably likely to result from the failure by CIGNA and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. CIGNA expects to complete this analysis in early 1999. CIGNA has
historically had security and backup policies and procedures for safeguarding
critical corporate data. It is supplementing these policies by developing Year
2000 contingency plans to provide for the resumption of operations in the event
of Year 2000 systems failures or the failure of third-party entities to be Year
2000 ready. These plans are expected to be completed and tested by mid-1999.
The costs of CIGNA's Year 2000 efforts and the dates on which CIGNA believes it
will complete such efforts are based on management's best estimates, which were
derived using numerous assumptions regarding future events, including the
continued availability of certain resources, third-party remediation plans, and
other factors. There can be no assurance that these estimates will prove to be
accurate, and actual results could differ materially
22
<PAGE>
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and costs
of personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, the risk
that reasonable testing will not uncover all Year 2000 problems, and similar
uncertainties. Property and casualty indemnity losses for Year 2000 claims and
litigation costs to defend or deny such claims are not reasonably estimable at
this time.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information provided in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, statements made
throughout this document are forward-looking and contain information about
financial results, economic conditions, trends and known uncertainties. CIGNA
cautions the reader that actual results could differ materially from those
expected by CIGNA, depending on the outcome of certain factors (some of which
are described with the forward-looking statements) including: 1) adverse
catastrophe experience in CIGNA's property and casualty businesses; 2) adverse
property and casualty loss development for events that CIGNA insured in prior
years; 3) an increase in medical costs in CIGNA's health care operations,
including increases in utilization and costs of medical services; 4) heightened
competition, particularly price competition, reducing product margins and
constraining growth in CIGNA's businesses; 5) significant changes in interest
rates; and 6) the effect on CIGNA's international operations and investments
from further significant deterioration in Asian and Latin American economies.
23
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) See Exhibit Index.
(b) During the quarterly period ended September 30, 1998, and as
of the filing date, CIGNA filed the following Reports on
Form 8-K:
o dated July 30, 1998, Item 5 - containing a news release
regarding its second quarter 1998 results.
o dated November 2, 1998, Item 5 - containing a news
release regarding its third quarter 1998 results.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned duly
authorized officer, on its behalf and in the capacity indicated.
CIGNA CORPORATION
By: /s/ James G. Stewart
-----------------------------
James G. Stewart
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 6, 1998
25
<PAGE>
Exhibit Index
-------------
Method of
Number Description Filing
- ------ ----------- ---------
10 CIGNA Supplemental Pension, Filed herewith
as amended and restated
August 1, 1998
12 Computation of Ratio of Filed herewith
Earnings to Fixed Charges
27 Financial Data Schedule Included only in
the EDGAR version of
the Form 10-Q
26
Exhibit 10
CIGNA SUPPLEMENTAL PENSION PLAN
(Amended and Restated effective August 1, 1998)
CIGNA Corporation, for itself and its subsidiaries and affiliates which
participate in the CIGNA Pension Plan, established the CIGNA Supplemental
Pension Plan, effective January 1, 1983, to provide eligible employees with
retirement benefits which cannot be provided by the CIGNA Pension Plan because
of certain restrictions.
This Plan is an "excess benefit plan" under ERISA section 3(36) and an
unfunded plan maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
under ERISA section 401(a)(1).
CIGNA is amending and restating the Plan in its entirety to reflect the
adoption of a new benefit accrual formula under the CIGNA Pension Plan as of
January 1, 1998 and the expansion of benefit distribution options effective
August 1, 1998.
Article I Definitions
-----------
Except as otherwise provided in this document, Plan terms with capitalized
initial letters shall have the same definitions as in the CIGNA Pension Plan.
The following definitions apply to this Plan:
1.1 "Beneficiary" means the person(s) (or trust) designated by a Participant,
or determined by the Plan Administrator, under Section 4.7.
1.2 "CIGNA" means CIGNA Corporation, a Delaware corporation, or its
successor.
1.3 "Committee" means the Corporate Benefit Plan Committee of CIGNA, or a
successor committee or person designated by CIGNA's Chief Executive
Officer.
1.4 "Company" means CIGNA Corporation and those of its subsidiaries and
affiliates which participate in the CIGNA Pension Plan.
1.5 "Deferred Compensation Plan" means the Deferred Compensation Plan of
CIGNA Corporation, any successor plan, and any similar plans or
arrangements maintained by the Company.
1.6 "Participant" means any Eligible Employee who is eligible to participate
in the Plan but only to the extent that the employee has (or might in the
event of Retirement at his earliest Early Retirement Date under the
Pension Plan have) an Accrued Benefit as defined in Section 3.1.
<PAGE>
1.7 "Plan" means the CIGNA Supplemental Pension Plan, as amended and restated
effective August 1, 1998.
1.8 "Plan A Participant" means, beginning January 1, 1998, a Participant
whose Pension Plan benefit does not accrue under the formula described in
the Part B version of the Pension Plan.
1.9 "Plan B Participant" means, beginning January 1, 1998, a Participant
whose Pension Plan benefit does accrue under the formula described in the
Part B version of the Pension Plan.
1.10 "Pension Plan" means the CIGNA Pension Plan, a defined benefit pension
plan, or its successor plan(s).
1.11 "Rabbi Trust" means a grantor trust, the assets of which will not be
subject to the claims of creditors of the Company, except in the case of
the bankruptcy or insolvency of the Company.
1.12 "Supplemental Pension Benefit" means the benefit payable to a Plan
Participant as described in Section 3.1.
1.13 "Supplemental Pre-Retirement Surviving Spouse Benefit" means the benefit
payable to Participant's surviving Spouse as described in Section 4.3.
1.14 "Survivor" means a Participant's Spouse or other person designated in
writing by the Participant under procedures established by the Plan
Administrator, to the extent the Spouse or other person remains living
after the Participant's death.
1.15 "Financial Emergency" means a Participant's severe and unforeseeable
financial hardship, resulting from a sudden and unexpected illness or
accident, casualty loss, sudden financial reversal, or similar
unforeseeable occurrence arising as a result of events beyond the
Participant's control. Cash needs arising from foreseeable events (such
as the purchase of a home or educational expenses for children) shall not
be considered to be a Financial Emergency.
Article II Eligibility
-----------
All Eligible Employees of the Company who are participants in the Pension
Plan shall be eligible to participate in this Plan. In no event shall an
employee who is not entitled to benefits under the Pension Plan be entitled to
benefits under this Plan.
2
<PAGE>
Article III Supplemental Pension Benefit
----------------------------
3.1 Accrual of Benefit
------------------
(a) A Participant shall accrue a Supplemental Pension Benefit equal to the
excess of (1) over (2) where:
(1) is the Accrued Benefit the Participant would have under the
Pension Plan if the Pension Plan did not have:
(A) a limit on retirement benefits under Code section 415;
(B) a limit on compensation under Code section 401(a)(17); and
(C) an exclusion from Eligible Earnings of compensation
deferred under the Deferred Compensation Plan; and
(2) is the Participant's actual Accrued Benefit under the Pension
Plan.
(b) For a Plan A Participant, the Supplemental Pension Benefit shall include
the actuarial lump sum present value determined using the applicable
assumptions and methods under the Pension Plan (as modified by Section
3.3) as of the date of payment, of the excess of (1) over (2) where:
(1) is the post-retirement surviving Spouse benefit which would be
payable to the Spouse under the Pension Plan if the Pension Plan
did not have the provisions listed in Section 3.1 (a)(1)(A), (B)
and (C); and
(2) is the post-retirement surviving Spouse benefit which is actually
payable under the Pension Plan.
3.2 Vesting
-------
The vesting of a Participant's Supplemental Pension Benefit shall be subject to
the Pension Plan's vesting provisions.
3.3 Calculation of Benefits
-----------------------
For all calculations of actuarial equivalence under the Plan, the applicable
actuarial factors and methods described in the Pension Plan shall be used except
that, for Plan A Participants, the Applicable Interest Rate shall be the same
rate(s) used, for the applicable time period(s), to calculate the present value
of pension benefits guaranteed by the Pension Benefit Guaranty Corporation in
case of a plan termination.
3
<PAGE>
3.4 Coordination with Other Retirement Benefits
-------------------------------------------
The Supplemental Pension Benefit shall be added to, and treated as being part
of, the benefits payable to a Participant (or a Spouse or a Beneficiary) under
the Pension Plan when applying provisions of other Company retirement plans,
arrangements or agreements which provisions reduce benefits payable under these
plans, arrangements or agreements by the amount of benefits payable under the
Pension Plan.
3.5 Duration of Accruals
--------------------
No Participant shall accrue any Supplemental Pension Benefit under this Plan
during any period in which benefit accruals under the Pension Plan have been
suspended or after benefit accruals under the Pension Plan have ceased.
Article IV Payment of Benefits
-------------------
4.1 Standard Form of Benefits
-------------------------
(a) Except as provided in Section 4.2, the Supplemental Pension Benefit under
Section 3.1 shall be paid to the Participant in the form of a single lump
sum in the January following Participant's termination of employment from
the Company or, if later, the January following the year in which the
Participant reaches age 55.
(b) The amount of the single lump sum payment shall be the actuarially
equivalent present value, determined as of the date of payment, of (1)
the Supplemental Pension Benefit described in Section 3.1(a) and (2) for
a Plan A Participant, the amount described in Section 3.1(b), with both
(1) and (2) stated in the form of a single life annuity.
4.2 Optional Payment Methods; Optional Payment Date
-----------------------------------------------
(a) A Participant may request that the Supplemental Pension Benefit be paid,
beginning on the dates described in Section 4.1(a), in one of the
following Optional Payment Methods:
(1) Single life annuity for the Participant's life;
(2) Life annuity for the Participant's life with a 50% or 100%
contingent Survivor annuity;
(3) Annual installments for five, ten or fifteen years (with any
remaining installments after Participant's death payable to
Participant's Beneficiary).
4
<PAGE>
The contingent Survivor annuity under paragraph 4.2(a)(2) shall be
payable to the Participant's Survivor only if the Participant predeceases
the Survivor and shall be paid in monthly installments beginning in the
month following the Participant's death and ending in the month the
Participant's Survivor dies.
(b) Regardless whether the Participant has requested an Optional Payment
Method under Section 4.2(a), a Participant may request that the date of
payment under Section 4.1 or the date payments begin under Section 4.2(a)
be postponed to January of any later year, but no later than the year
after the Participant reaches age 70.
(c) A Participant's request for payment of the Supplemental Pension Benefit
in an Optional Payment Method, or for a postponed payment date, shall be
made in writing to the Plan Administrator. The request must be received
by the Plan Administrator no later than the earlier of (1) 13 months
before the earliest scheduled date of payment or (2) Participant's
termination of employment date.
(d) Notwithstanding Section 4.2(c), the Plan Administrator may provide, as
soon as is reasonably practicable after August 1, 1998, to Participants
whose Supplemental Pension Benefit payments have not yet started an
opportunity to request an Optional Payment Method or a postponed payment
date, or both, or to revoke or modify a prior election. The nature and
duration of that opportunity shall be determined by the Plan
Administrator in its sole and absolute discretion.
(e) A Participant may, before his termination of employment date, make a
written request to the Plan Administrator for an Optional Payment Method,
a change to another Optional Payment Method or a change to the standard
single lump sum form of benefit under Section 4.1.
(f) The Plan Administrator shall consider any request made under Section
4.2(a), (b), (d) or (e). In determining whether the request should be
granted, the Plan Administrator shall consider:
(1) the Participant's financial needs, including any other sources of
retirement income;
(2) the needs and financial security of the Participant's dependents;
(3) the projected financial needs of the Company; and
(4) for requests under Section 4.2(e), any changed or unusual
circumstances (such as the Participant's involuntary termination
of employment).
If the Plan Administrator, in its sole and absolute discretion,
determines that the request should be granted, the request shall be
deemed to be an election by the Participant, effective as of the date the
Plan Administrator received the Participant's request, and payment of the
5
<PAGE>
Participant's Supplemental Pension Benefit shall be in the form, and at
the time, requested by the Participant.
4.3 Pre-Retirement Death Benefits - Plan A Participants
---------------------------------------------------
(a) If a Plan A Participant who dies before the Supplemental Pension Benefit
payment has been made under Section 4.1 (or before the date as of which
payments have commenced under Section 4.2) has a surviving Spouse who is
eligible for a pre-retirement surviving Spouse benefit under the Pension
Plan, then the Spouse shall be eligible for a Supplemental Pre-Retirement
Surviving Spouse Benefit under this Plan (if the amount calculated under
Section 4.3(c) is greater than zero).
(b) The Supplemental Pre-Retirement Surviving Spouse Benefit shall be paid to
the eligible Spouse as soon as practicable after the Participant's death.
The form of payment shall be:
(1) A single lump sum if the Participant had not elected an Optional
Payment Method under Section 4.2(a);
(2) Annual installments for the period selected by the Participant, if
the Participant had elected an Optional Payment Method under
Section 4.2(a)(3); or
(3) Annual installments for 15 years (with any remaining installments
payable to the Spouse's Beneficiary if the Spouse dies before all
installments are paid), if the Participant elected an Optional
Payment Method under Section 4.2(a)(1) or (2).
(c) The amount of the Supplemental Pre-Retirement Surviving Spouse Benefit
shall be equal to the actuarial present value, determined using the
applicable assumptions and methods under the Pension Plan (as modified by
Section 3.3) as of the date of payment, of the excess of (1) over (2)
where:
(1) is the pre-retirement surviving Spouse benefit which would be
payable to the Spouse under the Pension Plan if the Pension Plan
did not have the provisions listed in Section 3.1 (a)(1) (A), (B)
and (C) of this Plan; and
(2) is the pre-retirement surviving Spouse benefit which is actually
payable under the Pension Plan.
4.4 Pre-Retirement Death Benefits - Plan B Participants
---------------------------------------------------
(a) If a Plan B Participant dies before the Supplemental Pension Benefit
payment has been made under Section 4.1 (or before the date as of which
payments have commenced under Section 4.2), the Participant's
Supplemental Pension Benefit shall be paid to the Participant's
6
<PAGE>
Beneficiary as soon as practicable after the Participant's death. The
form of payment shall be:
(1) A single lump sum if the Participant had not elected an Optional
Payment Method under Section 4.2(a);
(2) Annual installments for the period selected by the Participant, if
the Participant had elected an Optional Payment Method under
Section 4.2(a)(3); or
(3) Annual installments for 15 years (with any remaining installments
payable to the Beneficiary's Beneficiary if the Beneficiary dies
before all installments are paid), if the Participant elected an
Optional Payment Method under Section 4.2(a)(1) or (2).
4.5 Lump Sum Benefits
-----------------
(a) At the sole discretion of the Plan Administrator, any benefits payable to
the Participant under Section 4.1, to Participant's Spouse under Section
4.3 or to Participant's Beneficiary under Section 4.4 which at any time
either (1) have a lump sum present value of less than $25,000 or (2)
result in monthly installments of less than $250 each may be commuted to
a single lump sum payment and paid to the Participant, Spouse, or
Beneficiary as appropriate.
(b) A Plan A Participant who is paid a Supplemental Pension Benefit in the
form of a single lump sum under Sections 4.1, 4.5 or 4.6 and who is later
rehired by any Company shall not, upon subsequent Retirement or other
termination of employment, be entitled to any additional Supplemental
Pension Benefit under this Plan based upon any Credited Service used in
the calculation of the initial Supplemental Pension Benefit payment.
Furthermore, any Credited Service that is or would be disregarded under
the preceding sentence in computing a Plan A Participant's Supplemental
Pension Benefit shall also be disregarded in computing any benefits
payable to Participant's Spouse under Sections 4.3 after Participant's
reemployment.
(c) A Plan B Participant who is paid a Supplemental Pension Benefit in the
form of a single lump sum under Sections 4.1, 4.5 or 4.6 and who is later
rehired by any Company shall not, upon subsequent Retirement or other
termination of employment, be entitled to any additional Supplemental
Pension Benefit under this Plan based upon any Benefit Credits or
Interest Credits used in the calculation of the initial Supplemental
Pension Benefit payment. Furthermore, any Credits that are or would be
disregarded under the preceding sentence in computing a Plan B
Participant's Supplemental Pension Benefit shall also be disregarded in
computing any benefits payable to Participant's Beneficiary under Section
4.4 after Participant's reemployment.
7
<PAGE>
4.6 Emergency Payment
-----------------
(a) Section 4.6 shall apply only to a Participant who has elected to postpone
the date of payment (or the date payments begin) under Section 4.2(b) and
only after the later of the date the Participant reaches age 55 or
terminates employment with the Company.
(b) Before the date of payment of a Participant's Supplemental Pension
Benefit (or the date payments are to begin under an Optional Payment
Method), a Participant may request an accelerated payment of all or part
of the Supplemental Pension Benefit to meet a Financial Emergency. The
request must be in writing to the Plan Administrator and must be
supported by evidence of a Financial Emergency. The Plan Administrator
shall have sole and absolute discretion to grant or deny the
Participant's request. If the request is granted, the accelerated payment
shall not be more than the lesser of $50,000 or the amount deemed
necessary by the Plan Administrator to meet Participant's Financial
Emergency.
(c) Any payments under this Section 4.6 shall reduce any remaining benefits
to, or related to, the Participant under this Plan.
4.7 Beneficiaries
-------------
The Plan Administrator shall provide an opportunity a Participant to designate
in writing one or more Beneficiaries to receive Plan benefits following the
Participant's death, and to change any designations. If a Participant dies
without a surviving, validly designated Beneficiary and all or part of the
Participant's Accrued Benefit remains payable, the benefit shall be paid to the
Participant's surviving Spouse or, if there is no surviving Spouse, to the
Participant's estate.
4.10 Domestic Relations Orders
-------------------------
A person shall not qualify for a benefit under this Plan solely because he is
entitled to a benefit under the Pension Plan by reason of a "qualified domestic
relations order" (as defined in ERISA section 206). Notwithstanding Section 7.3,
the Plan Administrator shall have the sole and absolute discretion to comply
with the terms of a domestic relations order if the Plan Administrator deems
compliance to be in the interests of the Participant and the Company.
4.11 Tax Withholding
---------------
Plan payments, and under certain circumstances an accrued Supplemental Pension
Benefit not yet paid, may be subject to withholding for taxes. To the extent the
Company meets any withholding obligations by paying the required withholding,
the Participant's Supplemental Pension Benefit shall be reduced by the amount of
the Company's payment.
8
<PAGE>
Article V Funding
-------
5.1 In General
----------
(a) This Plan shall be maintained as an unfunded plan which is not intended
to meet the qualification requirements of Code section 401. Plan benefits
shall be payable solely from the general assets of the Company which
employs the Participant when benefits are accrued, or a Company which has
assumed liability for paying the benefits. No separate or special fund
shall be established and no segregation of assets shall be made to assure
the payment of Plan benefits, though the Company may choose to fund Plan
benefits through a Rabbi Trust. A Participant shall have no right, title,
or interest in or to any investments which the Company may make to aid in
meeting its obligations under this Plan.
(b) Nothing contained in the Plan, and no action taken under it, shall create
or be construed to create a trust of any kind, or a fiduciary
relationship, between the Company or the Plan Administrator and a
Participant or any other person. To the extent that any person acquires a
right to receive Plan benefits, that right shall be no greater than the
right of an unsecured creditor of the Company.
Article VI Administration
--------------
6.1 Plan Administrator
------------------
(a) The Plan shall be administered by a Plan Administrator appointed by the
Committee, or its designee. The Plan Administrator shall have full power
and authority to interpret the Plan; to prescribe, amend and rescind any
rules, forms and procedures as it deems necessary or appropriate for the
proper administration of the Plan; to make any other determinations
including factual determinations and determinations as to eligibility
for, and the amount of, benefits payable under the Plan; and to take any
other actions it deems necessary or advisable in carrying out its duties
under the Plan.
(b) All decisions, interpretations and determinations by the Plan
Administrator shall be final and binding on the Company, Participants and
any other persons having or claiming an interest under this Plan.
6.2 Amendment or Termination
------------------------
Subject to Section 6.3, CIGNA, through its Board of Directors, or the People
Resources Committee of the Board of Directors (or a successor committee), may
amend or terminate this Plan at any time, in whole or in part. No amendment or
termination shall impair or adversely affect any benefits accrued under the Plan
in which the Participant was vested as of the date of that action.
9
<PAGE>
6.3 Change of Control
-----------------
For a three (3) year period beginning on the effective date of a Change of
Control and as to Participants on that date:
(a) the Plan shall not be terminated;
(b) the accrual of Supplemental Pension Benefits shall not be stopped,
suspended or otherwise adversely affected; and
(c) the rate at which Supplemental Pension Benefits accrue shall not be
reduced.
CIGNA reserves the right to amend or eliminate this paragraph 6.3 at any time
before a Change of Control.
Article VII Miscellaneous
-------------
7.1 Notices
-------
A Participant shall be responsible for providing the Plan Administrator with his
current and proper address for the mailing of notices, reports and benefit
payments. Any notice shall be deemed given if directed to a person's last known
address and mailed by regular United States mail, first-class and prepaid. If
any check mailed to that address is returned as undeliverable to the addressee,
mailing of checks will be suspended until the Participant, Beneficiary or
Survivor provides the proper address.
7.2 Missing Persons
---------------
A benefit shall be deemed forfeited if the Plan Administrator is unable to
locate the Participant, Beneficiary or Survivor to whom payment is due, after
reasonably diligent effort for a period of at least two (2) years, but the Plan
Administrator shall have the authority (but not the obligation) to reinstate the
benefit upon the later discovery of a proper payee for the benefit. Mailing of a
notice in writing, by certified or registered mail, to the last known address of
the Participant, Beneficiary or Survivor (if the address of the Beneficiary or
Survivor is known to the Plan Administrator) not less frequently than once each
year for the two-year period shall be deemed a reasonably diligent effort.
7.3 Nonalienation of Benefits
-------------------------
None of the payments, benefits or rights of any Participant, Beneficiary or
Survivor shall be subject to any claim of any creditor. To the fullest extent
permitted by law, all Plan payments, benefits and rights shall be free from
attachment, garnishment, trustee's process, or any other legal or equitable
10
<PAGE>
process available to any creditor of the Participant, Beneficiary or Survivor.
No Participant, Beneficiary or Survivor shall have the right to alienate,
anticipate, commute, pledge, encumber or assign any of the benefits or payments
which he may expect to receive under this Plan, except the right, to the extent
applicable, to designate a Beneficiary or Survivor and change a Beneficiary or
Survivor designation.
7.4 Reliance on Data
----------------
The Company, the Plan Administrator and all other persons associated with the
Plan's operation shall have the right to rely on the veracity and accuracy of
any data provided under this Plan or the Pension Plan by the Participant,
Beneficiary or Survivor, including representations as to age, health and marital
status. These representations are binding upon any party seeking to claim a
benefit through a Participant. The Company, the Plan Administrator and all other
persons associated with the Plan's operation are absolved completely from
inquiring into, and may rely upon, the accuracy or veracity of any
representation made at any time by a Participant, Beneficiary or Survivor.
7.5 No Contract of Employment
-------------------------
Neither the establishment of the Plan, nor any Plan amendment, nor the creation
of any fund, trust or account, nor the payment of any benefits shall be
construed as giving any Participant, or any other person, the right to be
employed or continue to be employed by the Company, and all Participants and
other persons shall remain subject to discharge to the same extent as if the
Plan had never been adopted.
7.6 Effect on Other Plans
---------------------
Except as provided in the Plan, no Plan benefit shall be deemed salary or other
compensation in computing benefits under any employee benefit plan or other
arrangement of the Company.
7.7 Severability of Provisions
--------------------------
If any provision of the Plan shall be held invalid or unenforceable, the
invalidity or unenforceability shall not affect any other Plan provisions, and
the Plan shall be construed and enforced as if that provision had not been
included.
7.8 Heirs, Assigns and Personal Representatives
-------------------------------------------
The Plan shall be binding upon the heirs, executors, administrators, successors
and assigns of the parties, including each Participant, Beneficiary or Survivor,
present and future.
11
<PAGE>
7.9 Payments to Minors, Etc.
------------------------
Any benefit payable to or for the benefit of a minor, an incompetent person or
other person incapable of legally accepting receipt shall be deemed paid when
paid to the person's guardian or to the party providing or reasonably appearing
to provide for the care of the person, and that payment shall fully discharge
the Company, the Plan Administrator and all other parties regarding that benefit
payment.
7.10 Headings and Captions
---------------------
The headings and captions in the Plan are provided for reference and convenience
only, shall not be considered part of the Plan, and shall not be employed in the
construction of the Plan.
7.11 Gender and Number
-----------------
Except where otherwise clearly indicated by context, the masculine and the
neuter shall include the feminine and the neuter, the singular shall include the
plural, and vice-versa.
7.12 Controlling Law
---------------
The Plan shall be construed and enforced according to the laws of the
Commonwealth of Pennsylvania, to the extent not preempted by federal law, which
shall otherwise control.
12
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Nine Months Ended
September 30,
1998 1997
- ---------------------------------------------------------------------
Income before income taxes $1,631 $1,275
------ ------
Fixed charges included in income:
Interest expense 97 96
Interest portion of rental expense 49 61
------ ------
Total fixed charges included in income 146 157
------ ------
Income available for fixed charges $1,777 $1,432
- -----------------------------------------------=====================
RATIO OF EARNINGS TO FIXED CHARGES 12.2 9.1
- -----------------------------------------------=====================
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF PART I TO CIGNA'S REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 33,339
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 862
<MORTGAGE> 9,556
<REAL-ESTATE> 755
<TOTAL-INVEST> 51,912
<CASH> 1,162
<RECOVER-REINSURE> 12,567<F1>
<DEFERRED-ACQUISITION> 967
<TOTAL-ASSETS> 109,296
<POLICY-LOSSES> 12,205
<UNEARNED-PREMIUMS> 1,897
<POLICY-OTHER> 17,895
<POLICY-HOLDER-FUNDS> 30,877
<NOTES-PAYABLE> 1,685
0
0
<COMMON> 66
<OTHER-SE> 8,090
<TOTAL-LIABILITY-AND-EQUITY> 109,296
12,109
<INVESTMENT-INCOME> 2,790
<INVESTMENT-GAINS> 123
<OTHER-INCOME> 936
<BENEFITS> 10,273
<UNDERWRITING-AMORTIZATION> 719
<UNDERWRITING-OTHER> 3,335
<INCOME-PRETAX> 1,631
<INCOME-TAX> 577
<INCOME-CONTINUING> 1,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,054
<EPS-PRIMARY> 4.95<F2>
<EPS-DILUTED> 4.90<F3>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES.
<F2>AMOUNT REPRESENTS BASIC EARNINGS PER SHARE BASED ON SFAS NO. 128.
<F3>AMOUNT REPRESENTS DILUTED EARNINGS PER SHARE BASED ON SFAS NO. 128.
</FN>
</TABLE>
