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, 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 September 30, 1999, 185,952,253 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 21
SIGNATURE 22
EXHIBIT INDEX 23
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,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums and fees $ 3,781 $ 3,344 $ 11,092 $ 9,914
Net investment income 762 766 2,217 2,344
Other revenues 157 150 561 785
Realized investment gains (losses) (11) 42 13 121
-------- -------- -------- --------
Total revenues 4,689 4,302 13,883 13,164
-------- -------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,142 2,879 9,280 8,655
Policy acquisition expenses 63 58 188 148
Other operating expenses 1,547 953 3,641 2,881
-------- -------- -------- --------
Total benefits, losses and expenses 4,752 3,890 13,109 11,684
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (63) 412 774 1,480
-------- -------- -------- --------
Income taxes (benefits):
Current 159 132 485 666
Deferred (90) 16 (118) (138)
-------- -------- -------- --------
Total taxes 69 148 367 528
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (132) 264 407 952
-------- -------- -------- --------
DISCONTINUED OPERATIONS
Income (loss) from operations, net of taxes -- (13) (28) 102
Gain on sale, net of taxes 1,194 -- 1,194 --
-------- -------- -------- --------
Income (loss) from discontinued operations 1,194 (13) 1,166 102
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 1,062 251 1,573 1,054
Cumulative effect of accounting change, net of taxes -- -- (91) --
-------- -------- -------- --------
NET INCOME $ 1,062 $ 251 $ 1,482 $ 1,054
- -------------------------------------------------------=====================================================
BASIC EARNINGS PER SHARE
Income (loss) from continuing operations $ (0.68) $ 1.26 $ 2.03 $ 4.47
Income (loss) from discontinued operations 6.12 (0.06) 5.81 0.48
- ------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 5.44 1.20 7.84 4.95
Cumulative effect of accounting change, net of taxes -- -- (0.45) --
- ------------------------------------------------------------------------------------------------------------
Net income $ 5.44 $ 1.20 $ 7.39 $ 4.95
- -------------------------------------------------------=====================================================
DILUTED EARNINGS PER SHARE
Income (loss) from continuing operations $ (0.68) $ 1.25 $ 2.00 $ 4.42
Income (loss) from discontinued operations 6.12 (0.06) 5.73 0.48
- ------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 5.44 1.19 7.73 4.90
Cumulative effect of accounting change, net of taxes -- -- (0.45) --
- ------------------------------------------------------------------------------------------------------------
Net income $ 5.44 $ 1.19 $ 7.28 $ 4.90
- -------------------------------------------------------=====================================================
DIVIDENDS DECLARED PER SHARE $ 0.30 $ 0.29 $ 0.90 $ 0.86
- -------------------------------------------------------=====================================================
</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,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $23,188; $22,663) $ 23,392 $ 24,270
Equity securities, at fair value (cost, $271; $249) 515 477
Mortgage loans 9,830 9,599
Policy loans 3,339 6,185
Real estate 794 733
Other long-term investments 164 170
Short-term investments 2,197 242
-------- --------
Total investments 40,231 41,676
Cash and cash equivalents 1,851 1,986
Accrued investment income 623 617
Premiums, accounts and notes receivable 2,423 2,481
Reinsurance recoverables 6,795 6,666
Deferred policy acquisition costs 850 730
Property and equipment 707 701
Deferred income taxes 1,309 1,034
Other assets 506 750
Goodwill and other intangibles 1,974 2,090
Separate account assets 35,504 34,808
Net assets of discontinued operations -- 2,351
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 92,773 $ 95,890
- -----------------------------------------------------------------------------------==================================
LIABILITIES
Contractholder deposit funds $ 27,353 $ 30,607
Unpaid claims and claim expenses 3,860 3,392
Future policy benefits 12,377 12,510
Unearned premiums 540 589
-------- --------
Total insurance and contractholder liabilities 44,130 47,098
Accounts payable, accrued expenses and other liabilities 4,756 4,358
Current income taxes 196 27
Short-term debt 68 272
Long-term debt 1,360 1,428
Separate account liabilities 35,087 34,430
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 85,597 87,613
- ---------------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 9
SHAREHOLDERS' EQUITY
Common stock (par value, $0.25; shares issued, 267; 265) 67 66
Additional paid-in capital 2,821 2,719
Net unrealized appreciation, fixed maturities $ 12 $ 750
Net unrealized appreciation, equity securities 150 206
Net translation of foreign currencies 6 (114)
-------- --------
Accumulated other comprehensive income 168 842
Retained earnings 8,049 6,746
Less treasury stock, at cost (3,929) (2,096)
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 7,176 8,277
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 92,773 $ 95,890
- -----------------------------------------------------------------------------------==================================
SHAREHOLDERS' EQUITY PER SHARE $ 38.59 $ 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 September 30, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Compre- Share- Compre- Share-
hensive holders' hensive holders'
Income Equity Income Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 67 $ 66
--------- ---------
Additional paid-in capital, July 1 2,814 2,704
Issuance of common stock for employee benefits plans 7 6
--------- ---------
Additional paid-in capital, September 30 2,821 2,710
--------- ---------
Accumulated other comprehensive income, July 1 215 835
Net unrealized appreciation (depreciation), fixed maturities $ (148) (148) $ 119 119
Net unrealized depreciation, equity securities (128) (128) (85) (85)
--------- ---------
Net unrealized appreciation (depreciation) on securities (276) 34
Net translation of foreign currencies 229 229 (27) (27)
--------- ---------
Other comprehensive income (loss) (47) 7
--------- ---------
Accumulated other comprehensive income, September 30 168 842
--------- ---------
Retained earnings, July 1 7,045 6,376
Net income 1,062 1,062 251 251
Common dividends declared (58) (60)
--------- ---------
Retained earnings, September 30 8,049 6,567
--------- ---------
Treasury stock, July 1 (2,800) (1,641)
Repurchase of common stock (1,128) (385)
Other treasury stock transactions, net (1) (3)
--------- ---------
Treasury stock, September 30 (3,929) (2,029)
- --------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY $ 1,015 $ 7,176 $ 258 $ 8,156
- ------------------------------------------------------------------==================================================
Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------------
Common stock, January 1 $ 66 $ 66
Issuance of common stock for employee benefits plans 1 --
--------- ---------
Common stock, September 30 67 66
--------- ---------
Additional paid-in capital, January 1 2,719 2,655
Issuance of common stock for employee benefits plans 102 55
--------- ---------
Additional paid-in capital, September 30 2,821 2,710
--------- ---------
Accumulated other comprehensive income, January 1 842 758
Net unrealized appreciation (depreciation), fixed maturities $ (738) (738) $ 112 112
Net unrealized depreciation, equity securities (56) (56) (5) (5)
--------- ---------
Net unrealized appreciation (depreciation) on securities (794) 107
Net translation of foreign currencies 120 120 (23) (23)
--------- ---------
Other comprehensive income (loss) (674) 84
--------- ---------
Accumulated other comprehensive income, September 30 168 842
--------- ---------
Retained earnings, January 1 6,746 5,696
Net income 1,482 1,482 1,054 1,054
Common dividends declared (179) (183)
--------- ---------
Retained earnings, September 30 8,049 6,567
--------- ---------
Treasury stock, January 1 (2,096) (1,243)
Repurchase of common stock (1,786) (756)
Other treasury stock transactions, net (47) (30)
--------- ---------
Treasury stock, September 30 (3,929) (2,029)
- --------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY $ 808 $ 7,176 $ 1,138 $ 8,156
- ------------------------------------------------------------------==================================================
</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,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 407 $ 952
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Insurance liabilities 660 696
Reinsurance recoverables (82) (69)
Deferred policy acquisition costs (101) (113)
Premiums, accounts and notes receivable (348) (207)
Accounts payable, accrued expenses, other liabilities and
current income taxes 263 (26)
Deferred income taxes (118) (138)
Realized investment gains (13) (121)
Depreciation and goodwill amortization 172 173
Gain on sale of businesses (excluding discontinued operations) (139) (393)
Charge attributable to Brazilian investments 478 --
Other, net (154) (293)
--------- ---------
Net cash provided by operating activities of continuing operations 1,025 461
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities 1,889 2,599
Equity securities 81 122
Mortgage loans 481 824
Other 1,236 993
Investment maturities and repayments:
Fixed maturities 2,090 2,406
Mortgage loans 276 416
Investments purchased:
Fixed maturities (4,353) (4,876)
Equity securities (83) (55)
Mortgage loans (1,080) (1,292)
Other (2,782) (2,028)
Proceeds on sale of businesses 3,557 998
Other, net (207) (160)
--------- ---------
Net cash provided by (used in) investing activities of continuing operations 1,105 (53)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 5,708 4,648
Withdrawals and benefit payments from contractholder deposit funds (6,103) (4,892)
Net change in short-term debt (256) (372)
Repayment of long-term debt (16) (99)
Repurchase of common stock (1,596) (754)
Issuance of common stock 39 20
Common dividends paid (180) (184)
--------- ---------
Net cash used in financing activities of continuing operations (2,404) (1,633)
--------- ---------
Effect of foreign currency rate changes on cash and cash equivalents 1 (8)
Net cash (to) from discontinued operations 138 (143)
- -------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (135) (1,376)
Cash and cash equivalents, beginning of period 1,986 1,832
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,851 $ 456
- ------------------------------------------------------------------------------------------------=========================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 346 $ 626
Interest paid $ 82 $ 81
- -------------------------------------------------------------------------------------------------------------------------
</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 period 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 CIGNA's 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 business, which CIGNA sold and
reports as discontinued 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 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 to be 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 2001, 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.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
On July 2, 1999, CIGNA sold its domestic and international property and casualty
business to ACE Limited for cash proceeds of $3.45 billion. CIGNA reports this
business as discontinued operations and has reclassified prior period financial
information. CIGNA recognized the after-tax gain on sale of approximately $1.2
billion in discontinued operations in the third quarter.
5
<PAGE>
Summarized financial data for the discontinued operations is outlined below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Statement Data
Revenues $-- $942 $1,863 $2,846
----------------------------------------------
Income (loss) before income taxes (benefits) $-- $(20) $(48) $151
Income taxes (benefits) -- (7) (20) 49
----------------------------------------------
Income (loss) from operations -- (13) (28) 102
Gain on sale, net of taxes of $1,152 1,194 -- 1,194 --
- ------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $1,194 $(13) $1,166 $102
- -------------------------------------------------===============================================
</TABLE>
- ------------------------------------------
December 31,
(In millions) 1998
- ------------------------------------------
Balance Sheet Data
Invested assets $ 9,031
Reinsurance recoverables 6,470
Other assets 6,240
--------------
Total assets 21,741
--------------
Insurance liabilities 16,494
Other liabilities 2,896
--------------
Total liabilities 19,390
- -----------------------------------------
Net assets* $ 2,351
- ---------------------------==============
The gain includes the recognition of after-tax foreign currency translation
losses of $139 million (net of tax benefits of $80 million) and net unrealized
appreciation on securities of $163 million (net of taxes of $65 million).
During the third quarter of 1999, CIGNA completed a review of its Brazilian
operations (including analyses of future estimated cash flows). These operations
consist primarily of a health care operation and a managed health care business.
As a result of the review, CIGNA decided to withdraw from the health care
operation but will continue to operate the managed health care business. This
review resulted in an aggregate after-tax charge of $400 million. The charge
includes the recognition of after-tax foreign currency translation losses of $89
million (net of a tax benefit of $48 million), and consists of the following
items:
o $305 million for the carrying value of the health care operation from which
CIGNA is withdrawing, certain loans guaranteed by CIGNA, and exit costs;
and
o $95 million for impairment of other investments, primarily goodwill.
CIGNA's withdrawal from the health care operation could be challenged. While the
outcome of any regulatory or legal actions cannot be determined, CIGNA does not
expect that such actions would result in losses material to its results of
operations, liquidity or financial condition.
In April 1999, CIGNA sold a 29% interest in its Japanese life insurance
operations to Yasuda Fire & Marine Insurance Company Ltd., reducing CIGNA's
ownership interest to 61%. Proceeds of the sale were $105 million. The after-tax
gain was $43 million and is reported in the International Life, Health and
Employee Benefits segment.
As of January 1, 1998, CIGNA sold its individual life insurance and annuity
business to Lincoln National Corporation 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 third quarters of 1999 and 1998, and $46
million and $50 million for the nine months ended September 30, 1999 and 1998,
respectively.
CIGNA had other acquisitions and dispositions during the nine months of 1999 and
1998, the effects of which were not material to the financial statements.
- --------
* Accumulated other comprehensive income associated with the discontinued
operations was $222 million as of December 31, 1998.
6
<PAGE>
NOTE 4 - INVESTMENTS
Realized Investment Gains and Losses
Realized gains and losses on investments of continuing operations, excluding
policyholder share, were as follows:
- -------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Fixed maturities $(15) $19 $(5) $39
Equity securities 2 5 15 30
Mortgage loans -- 7 -- 12
Real Estate -- 8 1 15
Other 2 3 2 25
-------------------------------------------------
(11) 42 13 121
Less income taxes
(benefits) (3) 15 5 42
- -------------------------------------------------------------------------------
Net realized investment
gains (losses) $(8) $27 $8 $79
- ------------------------------=================================================
Fixed Maturities and Equity Securities
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, for continuing operations were as follows:
- ----------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------
Proceeds from sales $610 $686 $1,970 $2,721
Gross gains on sales 11 58 54 155
Gross losses on sales (16) (1) (24) (42)
- ----------------------------------------------------------------------------
The components of net unrealized appreciation (depreciation) on securities
(including securities of discontinued operations and excluding policyholder
share) for the three and nine months ended September 30 were as follows:
- --------------------------------------------------------------------
(In millions) 1999 1998
- --------------------------------------------------------------------
Three months ended September 30,
Unrealized appreciation (depreciation) on
securities held, net of taxes (benefits) of
$(68) and $26, respectively. $(121) $32
Less gains (losses) realized in net income,
net of taxes of $60 in 1999. 155 (2)
- --------------------------------------------------------------------
Net unrealized appreciation (depreciation) $(276) $34
- ------------------------------------------------====================
Nine months ended September 30,
Unrealized appreciation (depreciation) on
securities held, net of taxes (benefits) of
$(312) and $135, respectively. $(575) $251
Less gains realized in net income, net of
taxes of $94 and $78, respectively. 219 144
- --------------------------------------------------------------------
Net unrealized appreciation (depreciation) $(794) $107
- ------------------------------------------------====================
7
<PAGE>
NOTE 5 - EARNINGS PER SHARE
Income and per share amounts reflect income (loss) from continuing operations.
- ------------------------------------------------------------------------------
Effect
(Dollars in millions, Of
except per share amounts) Basic Dilution Diluted
- ------------------------------------------------------------------------------
Three Months Ended September 30,
- ------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------
Loss $(132) -- $(132)
- ----------------------------------------======================================
Shares (in thousands):
Weighted average 195,137 -- 195,137
Options and restricted stock grants* -- --
- ------------------------------------------------------------------------------
Total shares 195,137 -- 195,137
- ----------------------------------------======================================
Loss per share $(0.68) -- $(0.68)
- ----------------------------------------======================================
1998
- ------------------------------------------------------------------------------
Income $264 -- $264
- ----------------------------------------======================================
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 $1.26 $(0.01) $1.25
- ----------------------------------------======================================
Nine Months Ended September 30,
- ------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------
Income $407 -- $407
- ----------------------------------------======================================
Shares (in thousands):
Weighted average 200,541 -- 200,541
Options and restricted stock grants 2,933 2,933
- ------------------------------------------------------------------------------
Total shares 200,541 2,933 203,474
- ----------------------------------------======================================
Earnings per share $2.03 $(0.03) $2.00
- ----------------------------------------======================================
1998
- ------------------------------------------------------------------------------
Income $952 -- $952
- ----------------------------------------======================================
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 $4.47 $(0.05) $4.42
- ----------------------------------------======================================
Common shares held as Treasury shares were 80,809,495 and 58,498,295 as of
September 30, 1999 and 1998, respectively.
NOTE 6 - REINSURANCE RECOVERABLES
In the normal course of business, CIGNA's insurance subsidiaries enter into
agreements 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.
In connection with the sale of CIGNA's individual life insurance and annuity
business, the reinsurance recoverable from Lincoln National Corporation at
September 30, 1999 was $6.1 billion.
Failure of reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies
and disputes, could result in losses. However, CIGNA does not expect charges for
unrecoverable reinsurance to have a material effect on its results of
operations, liquidity or financial condition.
In CIGNA's consolidated income statements, premiums and fees were net of ceded
premiums and benefits, losses and settlement expenses were net of reinsurance
recoveries as follows:
- -------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- -------------------------------------------------------------
Ceded premiums:
Individual life
insurance and
annuity business sold $159 $139 $323 $360
Other 118 91 347 305
- -------------------------------------------------------------
Total $277 $230 $670 $665
- --------------------------===================================
Reinsurance recoveries:
Individual life
insurance and
annuity business sold $162 $118 $261 $236
Other 130 58 284 247
- -------------------------------------------------------------
Total $292 $176 $545 $483
- --------------------------===================================
- ------------
* Because of the loss from continuing operations for the quarter, the number of
shares used to compute earnings per share does not reflect the dilution caused
by stock options and restricted stock grants of approximately 2.6 million
shares.
8
<PAGE>
NOTE 7 - SEGMENT INFORMATION
Operating segments reflect CIGNA's internal reporting structure and are based on
differences in products, except the International Life, Health and Employee
Benefits segment, which is based on geography. CIGNA uses operating income (net
income excluding after-tax realized investment results, results of discontinued
operations and, in 1999, the cumulative effect of adopting SOP 97-3) to measure
the financial results of its segments. Summarized segment financial information
was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees
and other revenues:
Employee Health Care,
Life and Disability Benefits $3,288 $3,006 $9,643 $8,845
Employee Retirement
Benefits and Investment
Services 70 54 203 198
International Life, Health
and Employee Benefits 409 300 1,274 887
Other Operations 213 164 654 848
Corporate (42) (30) (121) (79)
- ----------------------------------------------------------------------------------------
Total $3,938 $3,494 $11,653 $10,699
- -------------------------------------===================================================
Income (loss) from continuing
operations:
Operating income (loss):
Employee Health Care,
Life and Disability Benefits $182 $159 $512 $433
Employee Retirement
Benefits and Investment
Services 66 63 196 184
International Life, Health
and Employee Benefits (397) 14 (350) 30
Other Operations 33 30 100 292
Corporate (8) (29) (59) (66)
---------------------------------------------------
Total operating income (loss) (124) 237 399 873
Realized investment gains
(losses), net of taxes (8) 27 8 79
- ----------------------------------------------------------------------------------------
Income (loss) from continuing
operations $(132) $264 $407 $952
- -------------------------------------===================================================
</TABLE>
NOTE 8 - COST REDUCTION INITIATIVES
During the third quarter of 1999, CIGNA adopted a plan for cost reduction
initiatives subsequent to the sale of the property and casualty business.
Adoption of the plan resulted in a pre-tax charge of $15 million ($10 million
after-tax), primarily for severance expenses, which was recorded in Corporate
($7 million after-tax) and the International Life, Health and Employee Benefits
segment ($3 million after-tax). CIGNA expects to substantially complete
implementation of this plan by mid-2000.
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. For example, CIGNA
guarantees the repayment of industrial revenue bonds and 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.
9
<PAGE>
Regulatory and Industry Developments
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment. Some of the more significant current
issues that may affect CIGNA's businesses include:
o efforts to expand tort liability of health plans;
o proposed class action lawsuits targeting the health care industry's efforts
to deliver quality care at affordable costs;
o initiatives to increase health care regulation; and
o initiatives to restrict insurance pricing and the application of
underwriting standards.
Pending initiatives to increase health care regulation at the federal level
include "managed care reform" and "patients' bill of rights" legislation. The
bill that recently passed the House of Representatives would expand tort
liability for health plans and change the practices for defining medical
necessity. The corresponding bill that recently passed the Senate lacks similar
provisions. Given these differences between the House and Senate bills and the
general uncertainty of the political process, it is not possible to determine
what, if any, legislation will ultimately be enacted or what the effect on CIGNA
of any such legislation would be.
Several of CIGNA's health care industry competitors recently have had proposed
class action lawsuits filed against them by a coalition of plaintiffs'
attorneys. CIGNA expects that similar lawsuits could be filed against it. Given
that no such lawsuits are currently pending against CIGNA and given the
uncertainties of predicting the outcome of litigation generally, it is not
possible to determine at this time what the ultimate effect, if any, on CIGNA of
any such litigation would be.
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.
Litigation
CIGNA is continuously involved in numerous lawsuits arising, for the most part,
in the ordinary course of the business of administering and insuring employee
benefits programs. While the outcome of litigation cannot be determined, CIGNA
does not expect that litigation currently threatened or pending will result in
losses that differ from recorded reserves by amounts that would be material to
results of operations, liquidity or financial condition.
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, 1999, compared with December 31, 1998, and its
results of operations for the quarter and nine months ended September 30, 1999,
compared with the same periods 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
On July 2, 1999, CIGNA sold its domestic and international property and casualty
business to ACE Limited for cash proceeds of $3.45 billion. CIGNA reports this
business as discontinued operations and has reclassified prior period financial
information. CIGNA recognized the after-tax gain on sale of approximately $1.2
billion in discontinued operations in the third quarter. CIGNA's priorities for
use of capital, including proceeds from the sale, are internal growth,
acquisitions, and share repurchases.
In the third quarter of 1999, CIGNA recognized an after-tax charge of $400
million attributable to certain Brazilian investments. See page 15 for further
discussion.
In April 1999, CIGNA sold a 29% interest in its Japanese life insurance
operations to Yasuda Fire & Marine Insurance Company Ltd., reducing CIGNA's
ownership interest to 61%. Proceeds of the sale were $105 million. The after-tax
gain was $43 million and is reported in the International Life, Health and
Employee Benefits segment.
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 third quarters of 1999 and 1998, and $46 million and $50 million for
the nine months ended September 30, 1999 and 1998, respectively.
CIGNA will continue 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.
Other Matters
CIGNA's businesses are subject to a changing social, economic, legal,
legislative and regulatory environment. Some of the more significant current
issues that may affect CIGNA's businesses include:
o efforts to expand tort liability of health plans;
o proposed class action lawsuits targeting the health care industry's efforts
to deliver quality care at affordable costs;
o initiatives to increase health care regulation; and
o initiatives to restrict insurance pricing and the application of
underwriting standards.
Pending initiatives to increase health care regulation at the federal level
include "managed care reform" and "patients' bill of rights" legislation. The
bill that recently passed the House of Representatives would expand tort
liability for health plans and change the practices for defining medical
necessity. The corresponding bill that recently passed the Senate lacks similar
provisions. Given these differences between the House and Senate bills and the
general uncertainty of the political process, it is not possible to determine
what, if any, legislation will ultimately be enacted or what the effect on CIGNA
of any such legislation would be.
11
<PAGE>
Several of CIGNA's health care industry competitors recently have had proposed
class action lawsuits filed against them by a coalition of plaintiffs'
attorneys. CIGNA expects that similar lawsuits could be filed against it. Given
that no such lawsuits are currently pending against CIGNA and given the
uncertainties of predicting the outcome of litigation generally, it is not
possible to determine at this time what the ultimate effect, if any, on CIGNA of
any such litigation would be.
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
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 business, which CIGNA sold and
reports as discontinued operations, as discussed above.
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 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 to be 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 2001, 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.
Cost Reduction Initiatives
During the third quarter of 1999, CIGNA adopted a plan for cost reduction
initiatives subsequent to the sale of the property and casualty business.
Adoption of the plan resulted in a pre-tax charge of $15 million ($10 million
after-tax), primarily for severance expenses, which was recorded in Corporate
($7 million after-tax) and the International Life, Health and Employee Benefits
segment ($3 million after-tax). CIGNA expects to substantially complete
implementation of this plan by mid-2000.
RESULTS OF CONTINUING OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and fees $3,781 $3,344 $11,092 $9,914
Net investment income 762 766 2,217 2,344
Other revenues 157 150 561 785
Realized investment
gains (losses) (11) 42 13 121
--------------------------------------------------
Total revenues 4,689 4,302 13,883 13,164
Benefits and expenses 4,752 3,890 13,109 11,684
--------------------------------------------------
Income (loss) before taxes (63) 412 774 1,480
Income taxes 69 148 367 528
--------------------------------------------------
Income (loss) from
continuing operations (132) 264 407 952
Realized investment
(gains) losses, net
of taxes 8 (27) (8) (79)
- -----------------------------------------------------------------------------------
Operating income (loss)* $(124) $237 $399 $873
- ---------------------------------==================================================
</TABLE>
- --------
* Operating income (loss) is defined as net income (loss) excluding after-tax
realized investment results, results of discontinued operations and, in 1999,
the cumulative effect of adopting SOP 97-3.
12
<PAGE>
CIGNA's consolidated operating income (as defined in the footnote above on page
12) included certain nonrecurring items. The most significant nonrecurring items
and operating income excluding these items ("adjusted operating income") are
presented in the table below:
- -----------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- -----------------------------------------------------------------------
Operating income (loss) $(124) $237 $399 $873
Charge related to certain
Brazilian investments 400 -- 400 --
Restructuring costs 10 -- 10 --
Gain on sale of partial
interest in Japanese
life insurance operations -- -- (43) --
Gain on sale of individual
life insurance and
annuity business -- -- -- (202)
- -----------------------------------------------------------------------
Adjusted operating income $286 $237 $766 $671
- -------------------------------========================================
The increase in adjusted operating income for the third quarter and nine month
periods primarily reflects improved operating results in CIGNA's Employee Health
Care, Life and Disability Benefits segment and investment income on proceeds
from the sale of the property and casualty business.
After-tax realized investment results of the continuing operations decreased
significantly in the third quarter and nine months of 1999 versus the same
periods last year. These decreases primarily reflect lower gains on sales of
fixed maturities, real estate partnerships and equity securities. For additional
information, see Note 4 to the Financial Statements.
Excluding the nonrecurring items presented above, full year operating income
(which excludes results of discontinued operations) is expected to improve in
1999 over 1998; however, such improvement could be adversely affected by the
factors noted in the cautionary statement on page 20.
EMPLOYEE HEALTH CARE, LIFE AND DISABILITY BENEFITS
- ------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------
Premiums and fees $3,139 $2,870 $9,179 $8,443
Net investment income 141 152 428 437
Other revenues 149 136 464 402
----------------------------------------------
Segment revenues 3,429 3,158 10,071 9,282
Benefits and expenses 3,146 2,904 9,279 8,594
----------------------------------------------
Income before taxes 283 254 792 688
Income taxes 101 95 280 255
----------------------------------------------
Operating income $182 $159 $512 $433
- --------------------------==============================================
Realized investment gains
(losses), net of taxes $(6) $19 $3 $55
- --------------------------==============================================
Operating income for the Employee Health Care, Life and Disability Benefits
segment increased 14% and 18% for the third quarter and nine months of 1999
compared with the same periods last year. Operating income for the Indemnity and
HMO operations was as follows:
- ----------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- ----------------------------------------------------------
Indemnity operations $78 $77 $219 $219
HMO operations 104 82 293 214
- ----------------------------------------------------------
Total $182 $159 $512 $433
- -----------------------===================================
Indemnity results for the third quarter of 1999 primarily reflect improved
Administrative Services Only (ASO) and group life and accident businesses offset
by lower earnings on experience-rated medical and long-term disability
businesses. The results for the nine months also reflect improved guaranteed
cost medical claims experience.
HMO operating results for the third quarter and nine months of 1999 include net
favorable after-tax adjustments of $6 million and $18 million, respectively,
from account and tax reviews. HMO results for the third quarter and nine months
of 1998 include net favorable after-tax adjustments of $1 million and net
unfavorable after-tax adjustments of $5 million, respectively, from account and
tax reviews. Excluding these items,
13
<PAGE>
HMO operating results reflect improvement in health care services operations,
rate increases for guaranteed cost HMO business, and membership growth in HMO
experience-rated and alternative funding business.
Premiums and fees increased 9% for the third quarter and nine months of 1999,
primarily due to HMO and medical indemnity membership growth and rate increases.
Net investment income decreased 7% for the quarter and 2% for the nine months,
reflecting lower investment yields.
As of September 30, 1999, HMO membership totaled approximately 6.7 million,
representing increases of 4% since September 30, 1998 and 3% since December 31,
1998. These increases primarily reflect membership growth in experience-rated
and alternative funding programs, partially offset by declines in guaranteed
cost HMO membership. Under alternative funding programs, the customer assumes
all or a portion of the responsibility for funding the payment of 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 generally represent paid claims under alternative
funding programs, such as minimum premium and ASO plans. Premium equivalents for
the third quarter and nine months of 1999 were $4.0 billion and $11.4 billion,
respectively. These amounts represent increases of 22% and 18% compared with the
same periods last year. These increases primarily reflect HMO and PPO (Preferred
Provider Organization) membership growth. Premium equivalents were 55% and 53%
of total adjusted premiums and fees for the nine months of 1999 and 1998,
respectively. Premium equivalents related to ASO plans accounted for
approximately 51% and 49% of total adjusted premiums and fees for the nine
months of 1999 and 1998.
EMPLOYEE RETIREMENT BENEFITS AND INVESTMENT SERVICES
- --------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------
Premiums and fees $70 $54 $203 $198
Net investment income 409 389 1,199 1,213
------------------------------------------
Segment revenues 479 443 1,402 1,411
Benefits and expenses 382 352 1,113 1,141
------------------------------------------
Income before taxes 97 91 289 270
Income taxes 31 28 93 86
------------------------------------------
Operating income $66 $63 $196 $184
- --------------------------==========================================
Realized investment
gains (losses), net
of taxes $(1) $6 $6 $19
- --------------------------==========================================
The increases in operating income for the third quarter and nine months of 1999
are due to higher earnings from an increased asset base, partially offset by a
shift to lower margin products (separate account equity funds). Operating income
for the nine months of 1999 also includes favorable nonrecurring adjustments
totaling $3 million after-tax.
Premiums and fees for the third quarter and nine months of 1999 increased 30%
and 3%, respectively, compared with the same periods last year, primarily
reflecting higher fees from separate accounts partially offset for the nine
months by lower annuity sales.
Net investment income increased 5% and decreased 1% for the third quarter and
nine months of 1999, respectively, primarily reflecting higher investment yields
for the quarter and lower investment yields for the nine months.
14
<PAGE>
Assets under management are 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) 1999 1998
- ---------------------------------------------------------------------
Balance - January 1 $52,929 $48,231
Premiums and deposits 6,292 6,073
Investment results 2,785 2,234
Decrease in fair value of assets (898) (21)
Customer withdrawals (3,780) (2,922)
Other, including participant
withdrawals and benefit payments (4,505) (4,321)
- ---------------------------------------------------------------------
Balance - September 30 $52,823 $49,274
=====================================================================
For the nine months of 1999 and 1998, approximately 63% and 54%, 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 25% in the nine months of
1999 due to higher realized capital gains and growth in assets, partially offset
by lower investment yields. The fair value of assets decreased more in 1999 than
in 1998 primarily due to market value depreciation of fixed maturities. The
increase in customer withdrawals is primarily due to the effect of withdrawals
of 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.
INTERNATIONAL LIFE, HEALTH AND EMPLOYEE BENEFITS
- ----------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------
Premiums and fees $409 $300 $1,203 $886
Net investment income 29 27 91 83
Other revenues -- -- 71 1
------------------------------------------------
Segment revenues 438 327 1,365 970
Benefits and expenses 911 306 1,757 924
------------------------------------------------
Income (losses) before
taxes (473) 21 (392) 46
Income taxes (benefits) (76) 7 (42) 16
------------------------------------------------
Operating income (loss) $(397) $14 $(350) $30
- ----------------------------================================================
Realized investment
losses, net of taxes $-- $(2) $(1) $(2)
- ----------------------------================================================
Operating income (loss) for the International Life, Health and Employee Benefits
segment included certain nonrecurring items indicated in the table below:
- -----------------------------------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- -----------------------------------------------------------------------
Operating income (loss) $(397) $14 $(350) $30
Charge related to certain
Brazilian investments 400 -- 400 --
Restructuring costs 3 -- 3 --
Gain on sale of partial
interest in Japanese life
insurance operations -- -- (43) --
- -----------------------------------------------------------------------
Adjusted operating income $6 $14 $10 $30
- -------------------------------========================================
During the third quarter of 1999, CIGNA completed a review of its Brazilian
operations (including analyses of future estimated cash flows). These operations
consist primarily of a health care operation and a managed health care business.
As a result of the review, CIGNA decided to withdraw from the health care
operation but will continue to operate the managed health care business. This
review resulted in an aggregate after-tax charge of $400 million, consisting of
the following items:
o $305 million for the carrying value of the health care operation from which
CIGNA is withdrawing, certain loans guaranteed by CIGNA, and exit costs;
and
15
<PAGE>
o $95 million for impairment of other investments, primarily goodwill.
CIGNA's withdrawal from the health care operation could be challenged. While the
outcome of any regulatory or legal actions cannot be determined, CIGNA does not
expect that such actions would result in losses material to its results of
operations, liquidity or financial condition.
The decline for the quarter in adjusted operating income primarily reflects less
favorable claim experience in the health care business for expatriate employees
of multinational companies and unfavorable mortality experience in the group
life business, partially offset by favorable growth and product mix in the
Japanese life operations. The decline for the nine months also reflects losses
of $15 million after-tax for the Brazilian health care operation from which
CIGNA is withdrawing.
Premiums and fees increased 36% for the third quarter and nine months of 1999
compared with the same periods last year. Excluding premiums and fees from the
retained Brazilian managed health care business (which were included in results
beginning with the fourth quarter of 1998) and the effects of foreign currency
changes, premiums and fees increased 17% and 21% for the third quarter and nine
months of 1999, respectively. These increases reflect growth in Japanese life
insurance operations and, to a lesser extent, growth in life and group benefits
business in Southeast Asia, as well as higher health care premiums and fees for
expatriate employees of multinational companies.
CIGNA expects to pursue international growth through acquisitions and other
investments. CIGNA expects this growth to result in additional start-up costs
and initial losses.
OTHER OPERATIONS
- ----------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------
Premiums and fees $163 $120 $507 $387
Net investment income 140 193 447 587
Other revenues 50 44 147 461
---------------------------------------------
Segment revenues 353 357 1,101 1,435
Benefits and expenses 303 310 948 985
---------------------------------------------
Income before taxes 50 47 153 450
Income taxes 17 17 53 158
---------------------------------------------
Operating income 33 30 100 292
Gain on sale of
individual life
insurance and annuity
business -- -- -- (202)
---------------------------------------------
Adjusted operating income $33 $30 $100 $90
- -------------------------------=============================================
Realized investment
gains (losses), net of
taxes $(1) $4 $-- $7
- -------------------------------=============================================
Other Operations consist of:
o deferred 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;
o settlement annuity business; and
o certain new business initiatives.
The increase in adjusted operating income for the quarter reflects improved
health reinsurance results partially offset by lower income from leveraged
corporate life insurance business due to increased policy surrenders. The
improved results for the nine months of 1999 reflect growth in the specialty
life reinsurance business partially offset by the reductions in leveraged
corporate life insurance business.
The 36% and 31% increases in premiums and fees for the third quarter and nine
months of 1999 are primarily due to growth in the personal accident reinsurance
business partially offset by lower health reinsurance premiums.
16
<PAGE>
The 27% and 24% decreases in net investment income for the third quarter and
nine months of 1999 primarily reflect 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. As a result, revenues and operating income associated with
these products are expected to continue to decline. For the third quarter and
nine months of 1999, revenues of $84 million and $274 million, and operating
income of $8 million and $27 million were from products that are affected by
this legislation.
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 Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- -----------------------------------------------------------
Operating loss $(8) $(29) $(59) $(66)
- -------------------========================================
Corporate includes amounts not allocated to segments, such as interest expense
and intersegment eliminations. The reduced operating losses in the third quarter
and nine months of 1999 primarily reflect higher net investment income from the
proceeds of the sale of the property and casualty business, partially offset by
a restructuring charge of $7 million after-tax recorded in the third quarter of
1999 for cost reduction initiatives (primarily severance-related costs). Results
for the third quarter of 1999 and previous periods include certain corporate
overhead expenses which had been allocated to the property and casualty business
(prior to the reporting of this business as discontinued operations).
PROPERTY AND CASUALTY DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
FINANCIAL SUMMARY Three Months Nine Months
Ended Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Premiums and fees $-- $749 $1,411 $2,195
Net investment income -- 145 268 446
Other revenues -- 73 136 203
Realized investment gains
(losses) -- (25) 48 2
-----------------------------------------------
Total revenues -- 942 1,863 2,846
Benefits and expenses -- 962 1,911 2,695
-----------------------------------------------
Income (loss) before taxes -- (20) (48) 151
Income taxes (benefits) -- (7) (20) 49
-----------------------------------------------
Income (loss) from operations -- (13) (28) 102
Gain on sale, net of taxes
of $1,152 1,194 -- 1,194 --
- --------------------------------------------------------------------------------
Income (loss) from
discontinued operations $1,194 $(13) $1,166 $102
- ---------------------------------===============================================
On July 2, 1999, CIGNA sold its property and casualty business. See Acquisitions
and Dispositions on page 11 for additional information. Amounts in the table
above are excluded from CIGNA's results of continuing operations.
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 1999, cash and cash equivalents of continuing operations
decreased $135 million from $2.0 billion as of December 31, 1998. This decrease
primarily resulted from
17
<PAGE>
payments of dividends on and repurchases of CIGNA common stock ($1.8 billion)
and net withdrawals from contractholder deposit funds ($395 million). These
decreases were partially offset by cash provided by operating activities ($1.0
billion), reflecting earnings and the timing of operating cash receipts and
disbursements and cash provided by investing activities ($1.1 billion), which
includes $3.45 billion received upon completion of the sale of the property and
casualty business.
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 of long-term debt outstanding at September 30, 1999 and
December 31, 1998, respectively. As of September 30, 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 September 30, 1999, CIGNA's short-term debt amounted to $68 million, a
decrease of $204 million from December 31, 1998. The decrease reflects repayment
of commercial paper using proceeds from the sale of the property and casualty
business.
CIGNA has repurchased approximately 27,660,000 shares of its common stock for
$2.3 billion during 1999, including 7,291,900 shares repurchased for $539
million from October 1 through November 1, 1999. On September 22, 1999, CIGNA's
Board of Directors authorized an additional $2 billion of share repurchases. The
total remaining authorization as of November 1, 1999 was $1.46 billion.
INVESTMENT ASSETS - CONTINUING OPERATIONS
- -------------------------------------------------------------
September 30, December 31,
(In millions) 1999 1998
- -------------------------------------------------------------
Fixed maturities $23,392 $24,270
Equity securities 515 477
Mortgage loans 9,830 9,599
Real estate 794 733
Other, primarily policy loans 5,700 6,597
- -------------------------------------------------------------
Total investment assets $40,231 $41,676
=============================================================
Additional information regarding CIGNA's investment assets is included in Note 4
to the third 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 September 30, 1999 decreased 3% from December 31, 1998.
This decrease primarily reflects a $2.8 billion decline in policy loans due to
surrenders of leveraged corporate life insurance policies and a $1.4 billion
reduction in the fair value of fixed maturities due to increases in interest
rates, partially offset by $1.9 billion of short-term investments purchased with
proceeds of the sale of the property and casualty business.
Significant percentages of CIGNA's investment assets are attributable to
experience-rated contracts with policyholders (policyholder contracts). These
percentages were as follows:
- ---------------------------------------------------------------
September 30, December 31,
1999 1998
- ---------------------------------------------------------------
Fixed maturities 40% 39%
Mortgage loans 59% 57%
Real estate 64% 63%
===============================================================
Investments in fixed maturities (bonds) include publicly traded and private
placement debt securities, asset-backed securities and redeemable preferred
stocks. CIGNA's mortgage loans are diversified by property type, location and
borrower to reduce exposure to potential losses.
Problem bonds and mortgage loans are delinquent or have been restructured as to
terms (interest rate or maturity date).
Potential problem bonds and mortgage loans include fully current amounts with
other characteristics that increase their likelihood of
18
<PAGE>
problem classification. CIGNA also considers mortgage loans to be potential
problems if the borrower has requested restructuring or if principal or interest
payments are past due by more than 30 but fewer than 60 days.
Real estate held for sale primarily comprises properties acquired as a result of
foreclosure of mortgage loans.
The following table presents problem and potential problem bonds and mortgage
loans and real estate held for sale, net of valuation reserves and write-downs,
and includes amounts attributable to policyholder contracts:
- ------------------------------------------------------------------
September 30, December 31,
(In millions) 1999 1998
- ------------------------------------------------------------------
Problem bonds, including $14 and
$3, respectively, related to
emerging market investments $165 $108
Potential problem bonds $65 $58
Problem mortgage loans $95 $98
Potential problem mortgage loans $101 $55
Real estate held for sale $347 $343
==================================================================
CIGNA's investment asset write-downs, non-accruals and changes in valuation
reserves were not material to CIGNA's policyholder contracts, results of
operations, liquidity or financial condition for the periods presented.
Additional investment losses are expected to occur in the normal course of
business. However, assuming no significant deterioration in economic conditions
in Latin America, Asia or other geographical areas, CIGNA does not expect
additional losses 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.
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 have included: 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").
CIGNA has completed the remediation and testing of its mission critical systems.
CIGNA's systems also include non-IT systems, such as telephone, facility
management and other systems using embedded chips. These non-IT systems are
substantially Year 2000 ready.
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 (including amounts related to discontinued operations) were
approximately $100 million in 1998 and are expected to be approximately $40
million in 1999. Year 2000 after-tax costs for the third quarter and nine months
of 1999 were approximately $15 million and $35 million, respectively.
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
19
<PAGE>
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
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 historically had security and backup policies and procedures for
safeguarding critical corporate data, as well as business continuity plans. 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. CIGNA has
completed these contingency plans for the most critical functions of its major
businesses and expects them to be ready for implementation by the end 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 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.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CIGNA and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in CIGNA's filings
with the Securities and Exchange Commission and in its reports to shareholders.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, CIGNA cautions the reader that actual results
could differ materially from those contained in any forward-looking statement
made by or on behalf of CIGNA, depending on the outcome of certain factors (some
of which are described with the forward-looking statements) including: 1)
increases in medical costs in CIGNA's health care operations, including
increases in utilization and costs of medical services; 2) increased medical,
administrative or other costs resulting from legislative, regulatory and
potential litigation challenges to CIGNA's health care business (see page 11 for
more information); 3) heightened competition, particularly price competition,
reducing product margins and constraining growth in CIGNA's businesses; 4)
significant changes in interest rates; 5) significant stock market declines
resulting in payments contingent on certain variable annuity account values; 6)
the effect on CIGNA's international operations and investments of further
significant deterioration in Latin American and Asian economies; and 7)
proposals to change federal income taxes. CIGNA cautions that the foregoing list
of important factors may not be complete. CIGNA does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
CIGNA.
20
<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, 1999, and as of
the filing date, CIGNA filed the following Reports on Form 8-K:
o dated November 1, 1999, Item 5 - containing a news release
regarding its third quarter 1999 results.
o dated August 2, 1999, Item 5 - containing a news release
regarding its second quarter 1999 results.
o dated July 2, 1999, Item 2 - containing a news release
regarding the completion of the sale of its domestic and
international property and casualty businesses to ACE
Limited.
21
<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: November 5, 1999
22
<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
23
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Nine Months Ended
September 30,
1999 1998
- --------------------------------------------------------------------------------
Income from continuing operations before income taxes $ 774 $1,480
------- -------
Fixed charges included in income:
Interest expense 89 97
Interest portion of rental expense 39 49
------- -------
Total fixed charges included in income 128 146
Minority interest 16 --
------- -------
Income available for fixed charges $ 918 $1,626
- ---------------------------------------------------------=====================
RATIO OF EARNINGS TO FIXED CHARGES 7.2 11.1
- ---------------------------------------------------------=====================
<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 23,392
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 515
<MORTGAGE> 9,830
<REAL-ESTATE> 794
<TOTAL-INVEST> 40,231
<CASH> 1,851
<RECOVER-REINSURE> 6,795<F1>
<DEFERRED-ACQUISITION> 850
<TOTAL-ASSETS> 92,773
<POLICY-LOSSES> 12,377
<UNEARNED-PREMIUMS> 540
<POLICY-OTHER> 3,860
<POLICY-HOLDER-FUNDS> 27,353
<NOTES-PAYABLE> 1,428
0
0
<COMMON> 67
<OTHER-SE> 7,109
<TOTAL-LIABILITY-AND-EQUITY> 92,773
11,092
<INVESTMENT-INCOME> 2,217
<INVESTMENT-GAINS> 13
<OTHER-INCOME> 561
<BENEFITS> 9,280
<UNDERWRITING-AMORTIZATION> 188
<UNDERWRITING-OTHER> 3,641
<INCOME-PRETAX> 774
<INCOME-TAX> 367
<INCOME-CONTINUING> 407
<DISCONTINUED> 1,166<F2>
<EXTRAORDINARY> 0
<CHANGES> (91)<F3>
<NET-INCOME> 1,482
<EPS-BASIC> 7.39
<EPS-DILUTED> 7.28
<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 RELATES TO THE PROPERTY AND CASUALTY BUSINESS, WHICH WAS SOLD ON
JULY 2, 1999.
<F3>REFLECTS THE CUMULATIVE EFFECT OF ADOPTING A NEW ACCOUNTING PRONOUNCEMENT
FOR INSURANCE-RELATED ASSESSMENTS.
</FN>
</TABLE>
