UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____ to _____
Commission file number 1-8323
------
CIGNA Corporation
-----------------
(Exact name of registrant as specified in its charter)
Delaware 06-1059331
--------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Liberty Place, 1650 Market Street
Philadelphia, Pennsylvania 19192
--------------------------------
(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 March 31, 1999, 203,460,700 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 23
SIGNATURE 24
EXHIBIT INDEX 25
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
March 31,
1999 1998
=================================================================================================================================
REVENUES
<S> <C> <C>
Premiums and fees $ 4,263 $ 3,901
Net investment income 858 937
Other revenues 237 514
Realized investment gains 42 59
----------- -----------
Total revenues 5,400 5,411
----------- -----------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,516 3,333
Policy acquisition expenses 246 228
Other operating expenses 1,208 1,082
----------- -----------
Total benefits, losses and expenses 4,970 4,643
----------- -----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 430 768
----------- -----------
Income taxes (benefits):
Current 95 432
Deferred 56 (159)
----------- -----------
Total taxes 151 273
----------- -----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 279 495
Cumulative effect of accounting change for
guaranty fund and other insurance-related
assessments, net of taxes (91) 0
----------- -----------
NET INCOME $ 188 $ 495
- -------------------------------------------------------------------------------------------------================================
BASIC EARNINGS PER SHARE
Income before cumulative effect of accounting
change $ 1.36 $ 2.30
Cumulative effect of accounting change (0.44) 0
----------- -----------
NET INCOME $ 0.92 $ 2.30
- -------------------------------------------------------------------------------------------------================================
DILUTED EARNINGS PER SHARE
Income before cumulative effect of accounting
change $ 1.34 $ 2.27
Cumulative effect of accounting change (0.43) 0
----------- -----------
NET INCOME $ 0.91 $ 2.27
- -------------------------------------------------------------------------------------------------================================
DIVIDENDS DECLARED PER SHARE $ 0.30 $ 0.29
- -------------------------------------------------------------------------------------------------================================
</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
March 31, December 31,
1999 1998
=========================================================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $30,636; $30,614) $ 32,020 $ 32,634
Equity securities, at fair value (cost, $729; $746) 1,056 1,043
Mortgage loans 9,847 9,599
Policy loans 4,433 6,185
Real estate 807 733
Other long-term investments 181 205
Short-term investments 233 308
----------- -----------
Total investments 48,577 50,707
Cash and cash equivalents 2,227 3,028
Accrued investment income 768 769
Premiums, accounts and notes receivable 4,664 4,469
Reinsurance recoverables 12,803 12,925
Deferred policy acquisition costs 1,075 1,069
Property and equipment 905 938
Deferred income taxes 2,022 1,861
Other assets 1,396 1,543
Goodwill and other intangibles 2,461 2,495
Separate account assets 35,555 34,808
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 112,453 $ 114,612
- ----------------------------------------------------------------------------------======================================
LIABILITIES
Contractholder deposit funds $ 28,781 $ 30,864
Unpaid claims and claim expenses 17,848 18,017
Future policy benefits 12,290 12,510
Unearned premiums 1,933 1,990
----------- -----------
Total insurance and contractholder liabilities 60,852 63,381
Accounts payable, accrued expenses and other liabilities 6,871 6,765
Current income taxes 28 56
Short-term debt 293 272
Long-term debt 1,404 1,431
Separate account liabilities 35,136 34,430
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 104,584 106,335
- ------------------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 10
SHAREHOLDERS' EQUITY
Common stock (par value, $0.25; shares issued, 266; 265) 67 66
Additional paid-in capital 2,788 2,719
Net unrealized appreciation, fixed maturities $ 495 $ 750
Net unrealized appreciation, equity securities 229 206
Net translation of foreign currencies (221) (114)
--------- ---------
Accumulated other comprehensive income 503 842
Retained earnings 6,873 6,746
Less treasury stock, at cost (2,362) (2,096)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 7,869 8,277
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 112,453 $ 114,612
- ----------------------------------------------------------------------------------======================================
SHAREHOLDERS' EQUITY PER SHARE $ 38.68 $ 40.25
- ----------------------------------------------------------------------------------======================================
</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 March 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Compre- Share- Compre- Share-
hensive holders' hensive holders'
Income Equity Income Equity
====================================================================================================================================
<S> <C> <C> <C> <C>
Common stock, January 1 $ 66 $ 66
Issuance of common stock for employee benefits plans 1 0
----------- -----------
Common stock, March 31 67 66
----------- -----------
Additional paid-in capital, January 1 2,719 2,655
Issuance of common stock for employee benefits plans 69 40
----------- -----------
Additional paid-in capital, March 31 2,788 2,695
----------- -----------
Accumulated other comprehensive income, January 1 842 758
Net unrealized depreciation, fixed maturities $ (255) (255) $ (29) (29)
Net unrealized appreciation, equity securities 23 23 82 82
----------- ---------
Net unrealized appreciation (depreciation) on securities (232) 53
Net translation of foreign currencies (107) (107) 1 1
----------- ---------
Other comprehensive income (loss) (339) 54
----------- -----------
Accumulated other comprehensive income, March 31 503 812
----------- -----------
Retained earnings, January 1 6,746 5,696
Net income 188 188 495 495
Common dividends declared (61) (62)
----------- -----------
Retained earnings, March 31 6,873 6,129
----------- -----------
Treasury stock, January 1 (2,096) (1,243)
Repurchase of common stock (229) (111)
Other treasury stock transactions, net (37) (23)
----------- -----------
Treasury stock, March 31 (2,362) (1,377)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) AND SHAREHOLDERS' EQUITY $ (151) $ 7,869 $ 549 $ 8,325
- ---------------------------------------------------------------------===============================================================
</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>
Three Months Ended March 31,
1999 1998
==================================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Income before cumulative effect of accounting change $ 279 $ 495
Adjustments to reconcile income before cumulative effect of accounting
change to net cash provided by (used in) operating activities:
Insurance liabilities (194) 12
Reinsurance recoverables 158 167
Deferred policy acquisition costs (28) (33)
Premiums, accounts and notes receivable (208) (167)
Accounts payable, accrued expenses, other liabilities and
current income taxes 47 119
Deferred income taxes 56 (159)
Realized investment gains (42) (59)
Depreciation and goodwill amortization 82 78
Gain on sale of businesses (26) (342)
Other, net (2) (192)
------------ ------------
Net cash provided by (used in) operating activities 122 (81)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities 1,265 1,594
Equity securities 96 92
Mortgage loans 51 345
Other 335 137
Investment maturities and repayments:
Fixed maturities 1,024 940
Mortgage loans 115 232
Investments purchased:
Fixed maturities (2,388) (2,616)
Equity securities (79) (152)
Mortgage loans (492) (479)
Other (84) (792)
Sale of individual life insurance and annuity business, net proceeds 0 1,296
Other, net (80) (60)
------------ ------------
Net cash provided by (used in) investing activities (237) 537
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 1,838 1,604
Withdrawals and benefit payments from contractholder deposit funds (2,272) (1,774)
Net change in short-term debt (6) (360)
Repayment of long-term debt 0 (66)
Repurchase of common stock (204) (108)
Issuance of common stock 22 12
Common dividends paid (59) (60)
------------ ------------
Net cash used in financing activities (681) (752)
------------ ------------
Effect of foreign currency rate changes on cash and cash equivalents (5) (7)
- ----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (801) (303)
Cash and cash equivalents, beginning of period 3,028 2,625
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,227 $ 2,322
- ------------------------------------------------------------------------------------------========================================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 100 $ 204
Interest paid $ 24 $ 27
- ----------------------------------------------------------------------------------------------------------------------------------
</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 1999
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 estimating results for the full year based on
interim results of operations.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
CIGNA adopted Statement of Position (SOP) 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments" as of January 1, 1999. SOP
97-3, issued by the American Institute of Certified Public Accountants (AICPA),
provides guidance on the recognition and measurement of liabilities for guaranty
fund and other insurance-related assessments such as workers' compensation
second injury funds, medical risk pools and charges related to operating
expenses of state regulatory bodies. The cumulative effect of adopting the SOP
was a reduction of net income of $91 million ($140 million pre-tax), and is
primarily related to the property and casualty operations.
In 1999, CIGNA adopted SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1, issued by the AICPA in 1998,
specifies the 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 of this pronouncement did not have a
material effect on results of operations, liquidity or financial condition.
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 that 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 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." SOP
98-7 does not apply to long-duration life and health contracts. Implementation
is required by the first quarter of 2000, with the cumulative effect of adopting
the SOP reflected in net income in the year of adoption. CIGNA has not
determined the effect or timing of implementation of this pronouncement.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
In January 1999, CIGNA entered into an agreement to sell its domestic and
international property and casualty businesses (which comprise the Property and
Casualty segment) to ACE Limited for cash proceeds of $3.45 billion. The sale,
which is subject to U.S. and international regulatory approval and other
conditions to closing, is expected to be completed by mid-1999. Net assets of
the
5
<PAGE>
businesses to be sold were approximately $2.2 billion as of March 31, 1999. The
gain on sale will be determined, in part, by the effects on net assets through
closing of results of operations of, and dividends from, the businesses to be
sold, as well as transaction costs and other adjustments.
In April 1999, CIGNA sold a 29% interest in its Japanese life operations to
Yasuda Fire & Marine Insurance Company Ltd., reducing CIGNA's ownership interest
to 61%. Proceeds of the sale were approximately $100 million and the after-tax
gain, which CIGNA will recognize in the second quarter, is approximately $40
million.
As of January 1, 1998, CIGNA sold its individual life insurance and annuity
business for cash proceeds of $1.4 billion. The sale resulted in an after-tax
gain of approximately $770 million of which $202 million was recognized upon
closing of the sale. Since the principal agreement to sell this business is in
the form of an indemnity reinsurance arrangement, the remaining gain was
deferred and is being recognized at the rate that earnings from the business
sold would have been expected to emerge, primarily over fifteen years on a
declining basis. CIGNA recognized $15 million and $17 million of the deferred
gain in the first quarters of 1999 and 1998, respectively.
CIGNA has recently invested in certain entities in connection with the expansion
of its international operations. Most of these investments relate to the
expansion of CIGNA's health care operations in Brazil. CIGNA has incurred losses
in the Brazilian operations and expects to incur additional losses. Additional
investments may be required in order for the Brazilian operations to achieve
profitable operations. Risks are inherent in expanding operations in foreign
countries. CIGNA routinely monitors its investments supporting international
expansion for potential impairment, and management currently believes that these
investments are recoverable.
CIGNA had other acquisitions and dispositions during the three months of 1999
and 1998, the effects of which were not material to the financial statements.
NOTE 4 - INVESTMENTS
Realized Investment Gains and Losses
Realized gains and losses on investments, excluding policyholder share, were as
follows:
- ----------------------------------------------------------------------
Three Months
Ended
March 31,
(In millions) 1999 1998
- ----------------------------------------------------------------------
Fixed maturities $36 $32
Equity securities 5 4
Mortgage loans -- 12
Real estate (1) 1
Other 2 10
---------------------
42 59
Less income taxes 14 21
- ----------------------------------------------------------------------
Net realized investment
gains $28 $38
- ------------------------------------------------======================
Fixed Maturities and Equity Securities
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, were as follows:
- ----------------------------------------------------------------------
Three Months
Ended
March 31,
(In millions) 1999 1998
- ----------------------------------------------------------------------
Proceeds from sales $1,361 $1,686
Gross gains on sales 85 51
Gross losses on sales (42) (24)
- ----------------------------------------------------------------------
The components of net unrealized appreciation (depreciation) on securities
(excluding policyholder share) for the three months ended March 31 were as
follows:
- -------------------------------------------------------------------
(In millions) 1999 1998
- -------------------------------------------------------------------
Unrealized appreciation (depreciation) on
securities held, net of taxes (benefits) of
$(111) and $93, respectively. $(205) $179
Less gains realized in net income, net of
taxes of $14 and $68, respectively. 27 126
--------------------
Net unrealized appreciation (depreciation) $(232) $53
- -----------------------------------------------====================
6
<PAGE>
NOTE 5 - EARNINGS PER SHARE
Three Months Ended March 31,
- -------------------------------------------------------------------
Effect
(Dollars in millions, of
except per share amounts) Basic Dilution Diluted
- -------------------------------------------------------------------
1999
- -------------------------------------------------------------------
Net income $188 -- $188
- --------------------------------===================================
Shares (in thousands):
Weighted average 204,881 -- 204,881
Options and restricted
stock grants 2,827 2,827
- -------------------------------------------------------------------
Total shares 204,881 2,827 207,708
- --------------------------------===================================
Earnings per share $0.92 $(0.01) $0.91
- --------------------------------===================================
1998
- -------------------------------------------------------------------
Net income $495 -- $495
- --------------------------------===================================
Shares (in thousands):
Weighted average 215,637 -- 215,637
Options and restricted
stock grants 2,118 2,118
- -------------------------------------------------------------------
Total shares 215,637 2,118 217,755
- --------------------------------===================================
Earnings per share $2.30 $(0.03) $2.27
- --------------------------------===================================
Common shares held as Treasury shares were 62,715,992 and 48,803,100 as of March
31, 1999 and 1998, respectively.
NOTE 6 - INCOME TAXES
CIGNA's federal income tax returns are routinely audited by the Internal Revenue
Service (IRS), and provisions are made in the financial statements in
anticipation of the results of these audits. The IRS completed its audits for
the years 1982 through 1993, and challenged CIGNA on one issue related to years
prior to 1989. In April 1999, the U.S. Court of Appeals affirmed the Tax Court's
ruling on this issue in favor of the IRS. The decision will not have an effect
on results of operations or liquidity, as liabilities had been previously
established and paid.
In management's opinion, adequate tax liabilities have been established for all
years.
NOTE 7 - REINSURANCE RECOVERABLES
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. In connection with the
sale of CIGNA's individual life insurance and annuity business (as discussed in
Note 3), the reinsurance recoverable from Lincoln National Corporation at March
31, 1999 was $6.0 billion.
Failure of reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies
and disputes, could result in losses. Allowances for uncollectible amounts were
$706 million and $705 million as of March 31, 1999 and December 31, 1998,
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 first quarters of 1999 and 1998, premiums and fees were net of ceded
premiums of $448 million and $443 million, respectively. In addition, benefits,
losses and settlement expenses for the first quarters of 1999 and 1998 were net
of reinsurance recoveries of $255 million and $385 million, respectively. For
these quarters, ceded premiums associated with the individual life insurance and
annuity business sold were $63 million and $113 million, respectively, and
reinsurance recoveries were $22 million and $56 million.
7
<PAGE>
NOTE 8 - SEGMENT INFORMATION
Operating segments are based on CIGNA's internal reporting structure and
generally reflect differences in products; the International Life, Health and
Employee Benefits segment is based on geography. CIGNA uses operating income
(net income excluding after-tax realized investment results and, in 1999, the
cumulative effect of an accounting change) to measure the financial results of
its segments. Summarized segment financial information was as follows:
- ----------------------------------------------------------------------
Three Months
Ended
March 31,
(In millions) 1999 1998
- ----------------------------------------------------------------------
Premiums and fees and other revenues:
Employee Health Care, Life and
Disability Benefits $3,136 $2,866
Employee Retirement Benefits and
Investment Services 62 71
International Life, Health and
Employee Benefits 383 278
Property and Casualty 755 754
Other Operations 219 495
Corporate (55) (49)
- ----------------------------------------------------------------------
Total $4,500 $4,415
- ---------------------------------------------------===================
Income before cumulative effect of accounting change:
Operating income
(loss):
Employee Health Care, Life and
Disability Benefits $157 $131
Employee Retirement Benefits and
Investment Services 63 61
International Life, Health and
Employee Benefits 3 9
Property and Casualty 18 41
Other Operations 30 233
Corporate (20) (18)
-------------------
Total operating income 251 457
Realized investment gains, net of taxes 28 38
- ----------------------------------------------------------------------
Income before cumulative effect of
accounting change $279 $495
- ---------------------------------------------------===================
NOTE 9 - COST REDUCTION INITIATIVES
Property and Casualty Restructuring
In the fourth quarter of 1998, CIGNA adopted a cost reduction plan to
restructure certain of its domestic and international property and casualty
operations, which resulted in a pre-tax charge of $28 million ($18 million
after-tax). The charge consisted primarily of costs related to severance and
vacated lease space. The cash outlays associated with these initiatives will be
substantially completed by the end of 2000 with most occurring in 1999. As of
March 31, 1999, approximately $6 million of severance was paid to approximately
300 employees.
Employee Health Care, Life and Disability Benefits Restructuring
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 Health Care, Life and
Disability Benefits segment. The charge consisted primarily of costs related to
severance and vacated lease space. The cash outlays associated with these
initiatives will continue through 1999 with most having occurred in 1998. As of
March 31, 1999, approximately $11 million of severance was paid to approximately
1,300 employees.
8
<PAGE>
NOTE 10 - 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 municipal obligations and industrial revenue bonds. CIGNA
also guarantees a minimum level of benefits for certain separate account
contracts. In addition, CIGNA has entered into specialty life reinsurance
contracts that guarantee payments for specified unfavorable changes in variable
annuity account values based on underlying mutual fund investments if account
holders expire or elect to receive periodic income payments.
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 through legislative actions and
court decisions, changes in the ERISA regulations governing claim appeal
procedures imposing increased administrative burdens and costs 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.
Proposals for Superfund reform remain 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 consolidated
results of operations, liquidity or financial condition cannot be reasonably
estimated at this time.
In early 1999, the Administration proposed a federal budget that would eliminate
the deferral of taxation of certain statutory income of life insurance
companies. CIGNA has not provided taxes on $450 million of such income. If the
budget provision is enacted, CIGNA will record additional income tax expense of
$158 million to reflect this liability. The proposed federal budget also would
limit the deduction of interest expense on the general indebtedness of
corporations owning non-leveraged corporate life insurance policies covering the
lives of officers, employees or directors who are not 20 percent owners of the
corporation. If this latter provision is enacted as proposed, CIGNA does not
anticipate that it will have a material effect on its consolidated results of
operations, liquidity, or financial condition, although it could have a material
adverse effect on the results of operations of the Employee Retirement Benefits
and Investment Services segment.
In 1996, Congress passed legislation that phased out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate life
insurance products. CIGNA does not expect
9
<PAGE>
this legislation to have a material adverse effect on its consolidated results
of operations, liquidity or financial condition.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted
risk-based capital guidelines for health maintenance organizations (HMOs). CIGNA
expects its HMO subsidiaries to be adequately capitalized under these guidelines
as they become effective in various jurisdictions in 1999.
In 1998, the NAIC adopted standardized statutory accounting principles. Since
these principles have not been adopted by most of the insurance departments of
various jurisdictions in which CIGNA's insurance subsidiaries are domiciled, the
timing and 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 March 31, 1999, compared with December 31, 1998, and its results
of operations for the three months ended March 31, 1999, compared with the same
period last year. This discussion should be read in conjunction with
Management's Discussion and Analysis included in CIGNA's 1998 Annual Report to
Shareholders (pages 10 through 24), 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
In January 1999, CIGNA entered into an agreement to sell its domestic and
international property and casualty businesses (which comprise the Property and
Casualty segment) to ACE Limited for cash proceeds of $3.45 billion. The sale,
which is subject to U.S. and international regulatory approval and other
conditions to closing, is expected to be completed by mid-1999. Net assets of
the businesses to be sold were approximately $2.2 billion as of March 31, 1999.
The gain on sale will be determined, in part, by the effects on net assets
through closing of results of operations of, and dividends from, the businesses
to be sold, as well as transaction costs and other adjustments. CIGNA's
priorities for the use of capital, including proceeds from the sale are, in
order, internal growth, acquisitions, and share repurchases.
In April 1999, CIGNA sold a 29% interest in its Japanese life operations to
Yasuda Fire & Marine Insurance Company Ltd., reducing CIGNA's ownership interest
to 61%. Proceeds of the sale were approximately $100 million and the after-tax
gain, which CIGNA will recognize in the second quarter, is approximately $40
million.
As of January 1, 1998, CIGNA sold its individual life insurance and annuity
business for cash proceeds of $1.4 billion. The sale resulted in an after-tax
gain of approximately $770 million of which $202 million was recognized upon
closing of the sale. Since the principal agreement to sell this business is in
the form of an indemnity reinsurance arrangement, the remaining gain was
deferred and is being recognized at the rate that earnings from the business
sold would have been expected to emerge, primarily over fifteen years on a
declining basis. CIGNA recognized $15 million and $17 million of the deferred
gain in the first quarters of 1999 and 1998, respectively.
CIGNA has recently invested in certain entities in connection with the expansion
of its international operations and expects to pursue additional international
growth opportunities. CIGNA anticipates start-up costs and initial losses as a
result of this expansion.
Most of the recent international investments relate to the expansion of CIGNA's
health care operations in Brazil. CIGNA has incurred losses in the Brazilian
operations and expects to incur additional losses. Additional investments may be
required in order for the Brazilian operations to achieve profitable operations.
Risks are inherent in expanding operations in foreign countries. CIGNA routinely
monitors its investments supporting international expansion for potential
impairment, and management currently believes that these investments are
recoverable.
CIGNA continues to conduct strategic and financial reviews of its businesses in
order to deploy its capital most effectively. See Note 3 to the Financial
Statements for additional information on acquisitions and dispositions.
Cost Reduction Initiatives
In the fourth quarter of 1998, CIGNA adopted a cost reduction plan to
restructure certain operations which resulted in a pre-tax charge of $29 million
($19 million after-tax), including $18 million after- tax for restructuring
certain of its domestic and international operations included in the Property
and Casualty segment and $1 million after-tax for certain operations included in
the International Life, Health and Employee Benefits segment. The
11
<PAGE>
charge consisted primarily of costs related to severance and vacated lease
space. The cash outlays associated with these initiatives will be substantially
completed by the end of 2000 with most occurring in 1999. These initiatives are
expected to result in annual after-tax savings of $20 million in the Property
and Casualty segment. As noted above, CIGNA has entered into an agreement to
sell the businesses that comprise this segment.
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 Health Care, Life and
Disability Benefits segment. The charge consisted primarily of costs related to
severance and vacated lease space. The cash outlays associated with these
initiatives will continue through 1999 with most having occurred in 1998. These
initiatives are expected to result in annual after-tax expense savings of $50
million with approximately two-thirds having emerged in 1998 and the full amount
in 1999.
See Note 9 to the Financial Statements for additional information on cost
reduction initiatives.
Other Matters
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.
In early 1999, the Administration proposed a federal budget that would eliminate
the deferral of taxation of certain statutory income of life insurance
companies. As discussed in Note 10 to the Financial Statements, CIGNA has not
provided taxes on $450 million of such income. If the budget provision is
enacted, CIGNA will record additional income tax expense of $158 million to
reflect this liability. The proposed federal budget also would limit the
deduction of interest expense on the general indebtedness of corporations owning
non-leveraged corporate life insurance policies covering the lives of officers,
employees or directors who are not 20 percent owners of the corporation. If this
latter provision is enacted as proposed, CIGNA does not anticipate that it will
have a material effect on its consolidated results of operations, liquidity, or
financial condition, although it could have a material adverse effect on the
results of operations of the Employee Retirement Benefits and Investment
Services segment.
The eventual effect on CIGNA of the changing environment in which it operates
remains uncertain. For additional information, see Note 10 to the Financial
Statements.
Recent Accounting Pronouncements
CIGNA adopted Statement of Position (SOP) 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments" as of January 1, 1999. SOP
97-3 , issued by the American Institute of Certified Public Accountants (AICPA),
provides guidance on the recognition and measurement of liabilities for guaranty
fund and other insurance-related assessments such as workers' compensation
second injury funds, medical risk pools and charges related to operating
expenses of state regulatory bodies. The cumulative effect of adopting the SOP
was a reduction of net income of $91 million ($140 million pre-tax), and is
primarily related to the property and casualty operations.
In 1999, CIGNA adopted SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1, issued by the AICPA in 1998,
specifies the 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 of this pronouncement did not have a
material effect on results of operations, liquidity or financial condition.
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities."
12
<PAGE>
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
that 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 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." SOP
98-7 does not apply to long- duration life and health contracts. Implementation
is required by the first quarter of 2000, with the cumulative effect of adopting
the SOP reflected in net income in the year of adoption. CIGNA has not
determined the effect or timing of implementation of this pronouncement.
CONSOLIDATED RESULTS OF OPERATIONS
==================================================================
FINANCIAL SUMMARY Three Months Ended
March 31,
(In millions) 1999 1998
- ------------------------------------------------------------------
Premiums and fees $4,263 $3,901
Net investment income 858 937
Other revenues 237 514
Realized investment gains 42 59
---------------------
Total revenues 5,400 5,411
Benefits and expenses 4,970 4,643
---------------------
Income before taxes 430 768
Income taxes 151 273
---------------------
Income before cumulative
effect of accounting change 279 495
Less realized investment gains,
net of taxes 28 38
- -----------------------------------------------------------------
Operating income* $251 $457
- --------------------------------------------=====================
CIGNA's first quarter 1998 consolidated operating income included a $202 million
after-tax gain recognized upon closing of the sale of CIGNA's individual life
insurance and annuity business. Excluding this gain, operating income was $251
million in 1999 compared with $255 million for the same period last year, a
decrease of 2%. This decrease primarily reflects lower operating income in the
Property and Casualty and International Life, Health and Employee Benefits
segments, partially offset by improved results in CIGNA's Employee Health Care,
Life and Disability Benefits segment.
After-tax realized investment results decreased 26% in the first quarter of 1999
from the same period last year. This decrease primarily reflects lower gains on
sales of mortgage loans and real estate partnerships. For additional
information, see Note 4 to the Financial Statements.
Excluding the $202 million after-tax gain recognized on the sale of CIGNA's
individual life insurance and annuity business and the anticipated gain on the
sale of CIGNA's property and casualty operations, full year operating income for
1999 is expected to improve over 1998; however, such improvement could be
adversely affected by the factors noted in the cautionary statement on page 22.
EMPLOYEE HEALTH CARE, LIFE AND DISABILITY BENEFITS
==================================================================
FINANCIAL SUMMARY Three Months Ended
March 31,
(In millions) 1999 1998
- ------------------------------------------------------------------
Premiums and fees $2,976 $2,737
Net investment income 138 143
Other revenues 160 129
---------------------
Segment revenues 3,274 3,009
Benefits and expenses 3,030 2,801
---------------------
Income before taxes 244 208
Income taxes 87 77
---------------------
Operating income $157 $131
- --------------------------------------------=====================
Realized investment gains,
net of taxes $6 $18
- --------------------------------------------======================
Operating income for the Employee Health Care, Life and Disability Benefits
segment increased 20% for the first quarter of 1999, compared with the same
period last year. Operating income for the Indemnity and HMO operations was as
follows:
- --------
*Operating income (loss) is defined as net income (loss) excluding after-tax
realized investment results. Operating income in 1999 also excludes the
cumulative effect of adopting a new accounting pronouncement.
13
<PAGE>
==================================================================
Three Months Ended
March 31,
(In millions) 1999 1998
- ------------------------------------------------------------------
Indemnity operations $63 $69
HMO operations 94 62
- ------------------------------------------------------------------
Total $157 $131
==================================================================
Indemnity operating income decreased 9% for the first quarter of 1999 compared
with the same period last year. This decrease primarily reflects lower earnings
from the experience-rated medical business resulting from higher medical costs
and unfavorable claim experience in the group accident business. These decreases
were partially offset by improved claim experience from guaranteed cost medical
and group life businesses.
HMO earnings increased 52% for the first quarter of 1999 compared with the same
period last year. This improvement reflects rate increases for guaranteed cost
HMO business, improved results in health care services operations, membership
growth in HMO experience-rated and alternative funding business and lower
operating expenses per member.
Premiums and fees increased 9% for the first quarter of 1999 compared to the
same period last year. This increase primarily reflects HMO and medical
indemnity membership growth and rate increases.
Net investment income decreased 3% for the first quarter of 1999 compared to
1998 due to a decrease in investment yields.
As of March 31, 1999, total HMO membership was approximately 6.7 million,
representing an increase of 6% since March 31, 1998 and 3% since December 31,
1998. These increases primarily reflect membership growth in experience-rated
and alternative funding programs, partially offset by lower guaranteed cost HMO
membership. Under alternative funding programs, the customer assumes all or a
portion of the responsibility for funding claims, and CIGNA generally earns a
lower margin than under traditional programs.
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 first quarters of 1999 and 1998 were $3.5
billion and $3.2 billion, respectively. This increase primarily reflects HMO
membership growth. Premium equivalents were 54% of total adjusted premiums and
fees for the first quarters of 1999 and 1998. ASO plans accounted for
approximately 50% of total adjusted premiums and fees for the first quarters of
1999 and 1998.
EMPLOYEE RETIREMENT BENEFITS AND
INVESTMENT SERVICES
==================================================================
FINANCIAL SUMMARY Three Months Ended
March 31,
(In millions) 1999 1998
- ------------------------------------------------------------------
Premiums and fees $62 $71
Net investment income 387 410
---------------------
Segment revenues 449 481
Benefits and expenses 356 392
---------------------
Income before taxes 93 89
Income taxes 30 28
---------------------
Operating income $63 $61
- --------------------------------------------======================
Realized investment gains,
net of taxes $1 $6
- --------------------------------------------======================
Operating income for the Employee Retirement Benefits and Investment Services
segment increased 3% for the first quarter of 1999, compared with the same
period of 1998. This increase reflects higher earnings from an increased asset
base, partially offset by a shift to lower margin products (separate account
equity funds).
Premiums and fees for the first quarter of 1999 decreased 13% compared with the
same period last year, reflecting a decline in annuity sales and lower
non-leveraged corporate life insurance premiums and fees, partially offset by
higher fees from separate accounts.
Net investment income decreased 6% for the first quarter of 1999, primarily
reflecting lower investment yields and customers' continued redirection of a
portion of their investments from the general account to separate accounts.
14
<PAGE>
Assets under management are generally a key determinant of earnings for this
segment. For the quarter ended March 31, assets under management and related
activity, including amounts attributable to separate accounts, were as follows:
==================================================================
(In millions) 1999 1998
- ------------------------------------------------------------------
Balance -- January 1 $52,929 $48,231
Premiums and deposits 2,088 2,191
Investment results 924 805
Increase (decrease) in fair value of assets (16) 1,875
Customer withdrawals (1,556) (875)
Other, including participant
withdrawals and benefit payments (1,264) (1,255)
- ------------------------------------------------------------------
Balance -- March 31 $53,105 $50,972
==================================================================
Premiums and deposits decreased 5% in the three months of 1999, compared with
the same period in 1998. For the three months of 1999 and 1998, approximately
64% 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 three months of 1999, compared with the same period in 1998. This
increase reflects higher capital gains and growth in assets, partially offset by
lower investment yields. The decrease for 1999 in the fair value of assets is
primarily due to market value depreciation of fixed maturities in the general
account. The increase in customer withdrawals is primarily due to the effect of
withdrawals under defined contribution business in the first quarter of 1999.
Assets under management will continue to be affected by market value
fluctuations for fixed maturities and equity securities.
See Other Matters on page 12 for additional information regarding corporate life
insurance.
INTERNATIONAL LIFE, HEALTH AND EMPLOYEE BENEFITS
==================================================================
FINANCIAL SUMMARY Three Months Ended
March 31,
(In millions) 1999 1998
- -----------------------------------------------------------------
Premiums and fees $378 $277
Net investment income 30 27
Other revenues 5 1
----------------------
Segment revenues 413 305
Benefits and expenses 405 291
----------------------
Income before taxes 8 14
Income taxes 5 5
----------------------
Operating income $3 $9
- -------------------------------------------======================
Realized investment gains,
net of taxes $-- $--
- -------------------------------------------======================
Operating income for the International Life, Health and Employee Benefits
segment declined from the prior year. This decline is primarily attributable to
losses of $7 million after-tax from Brazilian health care operations.
CIGNA's health care operations in Brazil include a managed health care business,
which is being consolidated, and investments in another health care operation,
which are being accounted for under the equity method.
Premiums and fees increased 36% for the first quarter of 1999, compared with the
same period last year. Excluding premiums and fees from the Brazilian managed
health care operation (which was acquired in the second half of 1998) and the
effects of foreign currency changes, premiums and fees increased 23%. This
increase reflects growth in Japanese life operations and, to a lesser extent,
expansion of health care operations in other Latin American countries and higher
premiums and fees from health care business related to expatriate employees of
multinational companies.
Net investment income for the first quarter of 1999 increased 11% from the same
period last year. Excluding the effects of foreign currency changes, the
increase was 4%. This increase reflects growth in invested assets partially
offset by lower yields.
15
<PAGE>
Operating income associated with the 29% interest in CIGNA's Japanese life
operations that was sold in April 1999 was approximately $2 million in the first
quarter of 1999 and $1 million in the first quarter of 1998. Operating income
associated with this sold interest for full year 1998 was $10 million.
PROPERTY AND CASUALTY
=================================================================
FINANCIAL SUMMARY Three Months Ended
March 31,
(In millions) 1999 1998
- -----------------------------------------------------------------
Premiums and fees $676 $685
Net investment income 135 146
Other revenues 79 69
---------------------
Segment revenues 890 900
Benefits and expenses 867 841
---------------------
Income before taxes 23 59
Income taxes 5 18
---------------------
Operating income $18 $41
- --------------------------------------------=====================
Realized investment gains,
net of taxes $20 $12
- --------------------------------------------=====================
In January 1999, CIGNA entered into an agreement to sell the businesses included
in this segment. See page 11 for additional information. Operating income
decreased 56% for the first quarter of 1999, compared with the same period in
1998. Operating income for the ongoing and run-off operations was as follows:
=================================================================
Three Months Ended
March 31,
(In millions) 1999 1998
- -----------------------------------------------------------------
Ongoing operations:
International $3 $22
Domestic 15 19
----------------------
Total ongoing
operations 18 41
Run-off operations -- --
- -----------------------------------------------------------------
Total $18 $41
=================================================================
The decline in the international operations for 1999 reflects unfavorable prior
year loss development, primarily related to catastrophe losses, and lower
property and casualty earnings due to the competitive environment.
The decline in the domestic operations for 1999 primarily reflects unfavorable
prior year development related to property losses, continued competitive market
conditions and lower results from insurance-related service businesses. These
decreases were partially offset by more favorable underwriting experience in
selected lines of business.
Results for the run-off operations primarily reflect prior year development on
claim and claim adjustment expense reserves and investment activity.
Premiums and fees declined slightly in the first quarter of 1999. These declines
reflect continued price competition partially offset by the favorable effect of
foreign exchange for international operations.
Net investment income decreased 8% for the first quarter of 1999 compared with
the same period of 1998. The decline reflects lower assets and a shift in the
investment portfolio mix from fixed maturities to equity securities.
Pre-tax catastrophe losses, net of reinsurance, were $23 million in the first
quarter of 1999 compared with $9 million in the first quarter of 1998. CIGNA's
future results of operations could be volatile, depending on the frequency and
severity of future 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.
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 1998 Form 10-K.
CIGNA's property and casualty loss reserves of $14.3 billion and $14.6 billion
as of March 31, 1999 and December 31, 1998, respectively, are estimates 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
16
<PAGE>
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 property and casualty reinsurance recoverables were approximately $6.1
billion and $6.3 billion as of March 31, 1999 and December 31, 1998, net of
allowances for unrecoverable reinsurance of $706 million and $705 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 pre-tax effects on the Property and
Casualty segment's results of operations from prior year development, net of
reinsurance, for the three months ended March 31:
=================================================================
Three Months Ended
March 31,
(In millions) 1999 1998
- -----------------------------------------------------------------
By business operation:
Ongoing operations $28 $2
Run-off operations 39 46
- -----------------------------------------------------------------
Total $67 $48
=================================================================
By type of loss:
Asbestos-related $16 $18
Environmental pollution 25 7
Unrecoverable
reinsurance 3 9
Workers' compensation 9 10
Other 14 4
- -----------------------------------------------------------------
Total $67 $48
=================================================================
OTHER OPERATIONS
=================================================================
FINANCIAL SUMMARY Three Months Ended
March 31,
(In millions) 1999 1998
- -----------------------------------------------------------------
Premiums and fees $171 $131
Net investment income 161 198
Other revenues 48 364
---------------------
Segment revenues 380 693
Benefits and expenses 334 331
---------------------
Income before taxes 46 362
Income taxes 16 129
---------------------
Operating income $30 $233
- --------------------------------------------=====================
Realized investment gains,
net of taxes $-- $2
- --------------------------------------------=====================
Other Operations consist of:
o gain recognition related to the sale of the individual life insurance and
annuity business;
o corporate life insurance on which policy loans are outstanding (leveraged
corporate life insurance);
o life, accident and health reinsurance operations;
17
<PAGE>
o settlement annuity business; and
o certain new business initiatives.
Operating income for the first quarter of 1998 includes an after-tax gain of
$202 million recognized on the sale of the individual life insurance and annuity
business. On a pre-tax basis, the gain was $316 million and is reported in Other
Revenues. Excluding this amount, operating income for the first quarter 1999 was
$30 million, compared with operating income of $31 million in the first quarter
1998, reflecting comparable results for the businesses which comprise Other
Operations.
For the first quarter of 1999, premiums and fees increased 31% from the same
period of 1998. This increase primarily reflects growth in accident and
international reinsurance sales.
Net investment income decreased 19% for the first quarter of 1999 compared with
the same period of 1998. This decrease primarily reflects lower assets from
leveraged corporate life insurance, and, to a lesser extent, lower yields.
In 1996, Congress passed legislation that phased out over a three-year period
the tax deductibility of policy loan interest for most leveraged corporate life
insurance products. Revenues of $108 million and operating income of $10 million
for the first quarter of 1999 were from leveraged corporate life insurance
products that are affected by this legislation. CIGNA does not expect this
legislation to have a material adverse effect on its consolidated results of
operations, liquidity or financial condition.
The specialty life reinsurance products of this segment include contracts that
guarantee payments for specified unfavorable changes in variable annuity account
values based on underlying mutual fund investments if account holders expire or
elect to receive periodic income payments. Although these guarantees may
adversely affect CIGNA's consolidated results of operations in future periods,
they are not expected to have a material adverse effect on CIGNA's liquidity or
financial condition.
The personal accident reinsurance business of this segment includes
participation in a workers' compensation program managed by Unicover Managers,
Inc. where disputes have arisen regarding retrocessional coverage. Resolution of
these disputes is likely to take several years. CIGNA does not expect to incur
losses material to its consolidated results of operations, liquidity or
financial condition related to this program.
CORPORATE
=================================================================
FINANCIAL SUMMARY Three Months Ended
March 31,
(In millions) 1999 1998
- ------------------------------------------------------------------
Operating loss $(20) $(18)
- --------------------------------------------=====================
Realized investment gains,
net of taxes $1 $--
- --------------------------------------------=====================
Corporate is used to report amounts not allocated to segments, such as interest
expense, certain goodwill amortization and intersegment eliminations. The
increase in the operating loss in the first quarter of 1999 primarily reflects
lower net investment income due to a reduction in investment assets.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for CIGNA and its insurance subsidiaries has remained strong as
evidenced by significant amounts of short-term investments and cash and cash
equivalents in the aggregate. Generally, CIGNA has met its operating
requirements by maintaining appropriate levels of liquidity in its investment
portfolio and through utilization of overall positive cash flows.
For the first quarter of 1999, cash and cash equivalents decreased approximately
$800 million from $3.0 billion as of December 31, 1998. This decrease primarily
reflects net withdrawals from contractholder deposit funds ($434 million),
payments of dividends on and repurchases of CIGNA common stock ($263 million),
and cash used for investing activities ($237 million). These decreases were
partially offset by cash provided by operating activities ($122 million),
reflecting earnings and 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
18
<PAGE>
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 of long-term debt outstanding at March 31, 1999 and
December 31, 1998. As of March 31, 1999, CIGNA had approximately $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 March 31, 1999, CIGNA's short-term debt amounted to $293 million, an increase
of $21 million from December 31, 1998.
CIGNA has repurchased approximately 3,844,000 shares of its common stock for
$314 million during 1999, including 990,000 shares repurchased for $85 million
from April 1 through April 30, 1999. The remaining authorization of CIGNA's
Board of Directors as of April 30, 1999 was $476 million.
INVESTMENT ASSETS
==================================================================
March 31, December 31,
(In millions) 1999 1998
- ------------------------------------------------------------------
Fixed maturities $32,020 $32,634
Equity securities 1,056 1,043
Mortgage loans 9,847 9,599
Real estate 807 733
Other, primarily policy loans 4,847 6,698
- ------------------------------------------------------------------
Total investment assets $48,577 $50,707
==================================================================
Additional information regarding CIGNA's investment assets is included in Note 4
to the first quarter 1999 Financial Statements and Notes 2, 4 and 5 to the 1998
Financial Statements as well as the 1998 Form 10-K.
Investment assets as of March 31, 1999 decreased 4% from December 31, 1998. This
decrease primarily reflects a decline of approximately $1.7 billion in policy
loans due to surrenders of leveraged corporate life insurance policies.
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:
==================================================================
March 31, December 31,
1999 1998
- ------------------------------------------------------------------
Fixed maturities 30% 27%
Mortgage loans 58% 57%
Real estate 63% 63%
==================================================================
Fixed Maturities
Investments in fixed maturities (bonds) include publicly traded and private
placement debt securities; asset-backed securities, including collateralized
mortgage obligations (CMOs); and redeemable preferred stocks.
As of March 31, 1999, the fair value of fixed maturities, including policyholder
share, was greater than amortized cost by $1.4 billion, compared with $2.0
billion as of December 31, 1998. The decrease is primarily attributable to an
increase in interest rates during the first quarter of 1999.
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 $95 million of potential problem bonds, including amounts attributable
to policyholder contracts, as of March 31, 1999, compared with $69 million as of
December 31, 1998. These amounts are net of cumulative write-downs of $7 million
and $14 million, 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 March
31, 1999 and December 31, 1998, CIGNA had problem bonds, including amounts
attributable to policyholder contracts, of $118 million and $119 million, net of
related cumulative write-downs of $29 million and $19 million, respectively.
Problem bonds included $3 million related to emerging markets investments as of
March 31, 1999 and December 31, 1998. CIGNA recognizes interest income on
problem bonds only when payment is received.
19
<PAGE>
Mortgage Loans
==================================================================
March 31, December 31,
1999 1998
- ------------------------------------------------------------------
Mortgage loans (in millions) $9,847 $9,599
Property type:
Office buildings 38% 37%
Retail facilities 34 34
Apartment buildings 14 15
Industrial 7 7
Hotels 5 5
Other 2 2
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 $67 million as of March 31, 1999, and $55 million as
of December 31, 1998. There were no valuation reserves related to these amounts
in either period.
CIGNA's problem mortgage loans include delinquent and restructured mortgage
loans. Delinquent mortgage loans include those on which payment is overdue 60
days or more. Restructured mortgage loans are those whose basic financial terms
have been modified, typically to reduce the interest rate or extend the maturity
date.
CIGNA had problem mortgage loans, including amounts attributable to policyholder
contracts, of $98 million, net of valuation reserves of $6 million, as of March
31, 1999 and December 31, 1998. CIGNA recognizes interest income on problem
mortgage loans only when payment is received.
Real Estate
As of March 31, 1999 and December 31, 1998, investment real estate, net of
reserves and write-downs, included: 1) $464 million and $390 million,
respectively, of real estate held for the production of income, and 2) $343
million as of both dates of real estate held for sale, primarily properties
acquired as a result of foreclosure of mortgage loans.
Summary
The effects of write-downs, changes in valuation reserves and non-accruals
related to investment assets for the three months ended March 31, 1999 and 1998
were not material to CIGNA's policyholder contracts, results of operations,
liquidity or financial position.
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 Latin American and Asian 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.
20
<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, managing investment activities and
maintaining management information systems. 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
where the failure of those systems would result in significant costs or
disruption of operations ("mission critical systems"). As of March 31, 1999,
remediation and testing procedures had been completed for 96% of its mission
critical systems. CIGNA expects to substantially complete the remediation and
testing of its mission critical systems by the middle of 1999. 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, facility
management and other systems using embedded chips. The majority of 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 were approximately $100 million in 1998 and are expected to be
approximately $50 million in 1999. Year 2000 after-tax costs for the first
quarter of 1999 were approximately $10 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 potential 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 has made substantial progress in completing this analysis
and expects to complete it by the end of the second quarter of 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 continuity 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 prior to the
fourth quarter of 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
21
<PAGE>
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
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; 6) significant stock market declines resulting in payments contingent on
certain variable annuity account values; 7) the effect on CIGNA's international
operations and investments from further significant deterioration in Latin
American and Asian economies; and 8) proposals to change federal corporate
income taxes.
22
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index.
(b) During the quarterly period ended March 31, 1999, and
as of the filing date, CIGNA filed the following
Reports on Form 8-K:
* dated February 9, 1999, Item 5 - containing a news
release regarding its fourth quarter 1998 results.
* dated January 12, 1999, Item 5 - containing a news
release regarding an agreement to sell CIGNA's
international and domestic property & casualty
operations.
23
<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 A. Sears
---------------------
James A. Sears
Vice President and
Chief Accounting Officer
Date: May 7, 1999
24
<PAGE>
Exhibit Index
Method of
Number Description Filing
- ------ ----------- ---------
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
25
<TABLE>
<CAPTION>
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Three Months Ended
March 31,
1999 1998
===================================================================================================================================
<S> <C> <C>
Income before income taxes and cumulative effect of accounting change $ 430 $ 768
-------------- -----------------
Fixed charges included in income:
Interest expense 31 33
Interest portion of rental expense 16 20
-------------- -----------------
Total fixed charges included in income 47 53
-------------- -----------------
Income available for fixed charges $ 477 $ 821
- ---------------------------------------------------------------------------------------------======================================
RATIO OF EARNINGS TO FIXED CHARGES 10.1 15.5
- ---------------------------------------------------------------------------------------------======================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF PART I TO CIGNA'S REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 32,020
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,056
<MORTGAGE> 9,847
<REAL-ESTATE> 807
<TOTAL-INVEST> 48,577
<CASH> 2,227
<RECOVER-REINSURE> 12,803<F1>
<DEFERRED-ACQUISITION> 1,075
<TOTAL-ASSETS> 112,453
<POLICY-LOSSES> 12,290
<UNEARNED-PREMIUMS> 1,933
<POLICY-OTHER> 17,848
<POLICY-HOLDER-FUNDS> 28,781
<NOTES-PAYABLE> 1,697
0
0
<COMMON> 67
<OTHER-SE> 7,802
<TOTAL-LIABILITY-AND-EQUITY> 7,869
4,263
<INVESTMENT-INCOME> 858
<INVESTMENT-GAINS> 42
<OTHER-INCOME> 237
<BENEFITS> 3,516
<UNDERWRITING-AMORTIZATION> 246
<UNDERWRITING-OTHER> 1,208
<INCOME-PRETAX> 430
<INCOME-TAX> 151
<INCOME-CONTINUING> 279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (91)<F2>
<NET-INCOME> 188
<EPS-PRIMARY> 0.92<F3>
<EPS-DILUTED> 0.91<F4>
<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>REFLECTS THE CUMULATIVE EFFECT OF ADOPTING A NEW ACCOUNTING PRONOUNCEMENT
FOR INSURANCE-RELATED ASSESSMENTS.
<F3>AMOUNT REPRESENTS BASIC EARNINGS PER SHARE BASED ON SFAS NO. 128.
<F4>AMOUNT REPRESENTS DILUTED EARNINGS PER SHARE BASED ON SFAS NO. 128.
</FN>
</TABLE>
