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, 2000
--------------
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, 2000, 162,853,250 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 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
EXHIBIT INDEX 22
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,
2000 1999
===============================================================================================
<S> <C> <C>
REVENUES
Premiums and fees $ 3,989 $ 3,600
Net investment income 716 721
Other revenues 177 178
Realized investment gains 9 11
---------- -----------
Total revenues 4,891 4,510
---------- -----------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses 3,298 3,025
Policy acquisition expenses 69 67
Other operating expenses 1,104 1,050
---------- -----------
Total benefits, losses and expenses 4,471 4,142
---------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 420 368
---------- -----------
Income taxes (benefits):
Current 192 113
Deferred (43) 19
---------- -----------
Total taxes 149 132
---------- -----------
INCOME FROM CONTINUING OPERATIONS 271 236
INCOME FROM DISCONTINUED OPERATIONS - 43
---------- -----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 271 279
Cumulative effect of accounting change, net of taxes - (91)
---------- -----------
NET INCOME $ 271 $ 188
- -----------------------------------------------------------------==============================
BASIC EARNINGS PER SHARE
Income from continuing operations $ 1.61 $ 1.15
Income from discontinued operations - 0.21
- -----------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 1.61 1.36
Cumulative effect of accounting change, net of taxes - (0.44)
- -----------------------------------------------------------------------------------------------
Net income $ 1.61 $ 0.92
- -----------------------------------------------------------------==============================
DILUTED EARNINGS PER SHARE
Income from continuing operations $ 1.60 $ 1.14
Income from discontinued operations - 0.20
- -----------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 1.60 1.34
Cumulative effect of accounting change, net of taxes - (0.43)
- -----------------------------------------------------------------------------------------------
Net income $ 1.60 $ 0.91
- -----------------------------------------------------------------==============================
DIVIDENDS DECLARED PER SHARE $ 0.31 $ 0.30
- -----------------------------------------------------------------==============================
</TABLE>
The Notes to the 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,
2000 1999
========================================================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $23,194; $23,111) $ 23,209 $ 22,944
Equity securities, at fair value (cost, $342; $286) 644 585
Mortgage loans 9,842 9,737
Policy loans 3,020 3,079
Real estate 654 789
Other long-term investments 755 821
Short-term investments 228 950
----------- -----------
Total investments 38,352 38,905
Cash and cash equivalents 2,510 2,232
Accrued investment income 552 500
Premiums, accounts and notes receivable 2,653 2,475
Reinsurance recoverables 6,792 6,768
Deferred policy acquisition costs 947 927
Property and equipment 735 715
Deferred income taxes 1,208 1,156
Other assets 557 517
Goodwill and other intangibles 1,937 1,955
Separate account assets 40,754 39,183
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 96,997 $ 95,333
- ------------------------------------------------------------------------------=========================================
LIABILITIES
Contractholder deposit funds $ 26,470 $ 26,599
Unpaid claims and claim expenses 4,214 4,135
Future policy benefits 12,661 12,625
Unearned premiums 663 674
----------- -----------
Total insurance and contractholder liabilities 44,008 44,033
Accounts payable, accrued expenses and other liabilities 5,034 4,552
Short-term debt 21 57
Long-term debt 1,342 1,359
Separate account liabilities 40,754 39,183
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 91,159 89,184
- ------------------------------------------------------------------------------------------------------------------------
CONTINGENCIES - NOTE 8
SHAREHOLDERS' EQUITY
Common stock (par value, $0.25; shares issued, 267) 67 67
Additional paid-in capital 2,862 2,825
Net unrealized depreciation, fixed maturities $ (45) $ (36)
Net unrealized appreciation, equity securities 185 184
Net translation of foreign currencies 10 18
-------- --------
Accumulated other comprehensive income 150 166
Retained earnings 8,510 8,290
Less treasury stock, at cost (5,751) (5,199)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,838 6,149
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 96,997 $ 95,333
- ------------------------------------------------------------------------------=========================================
SHAREHOLDERS' EQUITY PER SHARE $ 35.85 $ 36.24
- ------------------------------------------------------------------------------=========================================
</TABLE>
The Notes to the 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, 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Compre- Share- Compre- Share-
hensive holders' hensive holders'
Income Equity Income Equity
=============================================================================================================================
<S> <C> <C> <C> <C>
Common stock, January 1 $ 67 $ 66
Issuance of common stock for employee benefits plans - 1
-------- ---------
Common stock, March 31 67 67
-------- ---------
Additional paid-in capital, January 1 2,825 2,719
Issuance of common stock for employee benefits plans 37 69
-------- ---------
Additional paid-in capital, March 31 2,862 2,788
-------- ---------
Accumulated other comprehensive income, January 1 166 842
Net unrealized depreciation, fixed maturities $ (9) (9) $ (255) (255)
Net unrealized appreciation, equity securities 1 1 23 23
--------- --------
Net unrealized depreciation on securities (8) (232)
Net translation of foreign currencies (8) (8) (107) (107)
--------- --------
Other comprehensive loss (16) (339)
-------- ---------
Accumulated other comprehensive income, March 31 150 503
-------- ---------
Retained earnings, January 1 8,290 6,746
Net income 271 271 188 188
Common dividends declared (51) (61)
-------- ---------
Retained earnings, March 31 8,510 6,873
-------- ---------
Treasury stock, January 1 (5,199) (2,096)
Repurchase of common stock (521) (229)
Other treasury stock transactions, net (31) (37)
-------- ---------
Treasury stock, March 31 (5,751) (2,362)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) AND SHAREHOLDERS' EQUITY $ 255 $ 5,838 $ (151) $ 7,869
- -------------------------------------------------------------------------------==============================================
</TABLE>
The Notes to the 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,
2000 1999
=======================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 271 $ 236
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Insurance liabilities 242 222
Reinsurance recoverables (45) (50)
Deferred policy acquisition costs (43) (27)
Premiums, accounts and notes receivable (155) (118)
Accounts payable, accrued expenses and other liabilities 326 176
Deferred income taxes (43) 19
Realized investment gains (9) (11)
Depreciation and goodwill amortization 56 55
Gain on sale of businesses (22) (26)
Other, net (130) (40)
---------- -----------
Net cash provided by operating activities of continuing operations 448 436
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities 791 359
Equity securities 73 23
Mortgage loans 119 51
Other (primarily short-term investments) 1,208 251
Investment maturities and repayments:
Fixed maturities 488 738
Mortgage loans 97 115
Investments purchased:
Fixed maturities (1,607) (1,353)
Equity securities (113) (27)
Mortgage loans (320) (492)
Other (primarily short-term investments) (300) (16)
Other, net (57) (68)
---------- -----------
Net cash provided by (used in) investing activities of
continuing operations 379 (419)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 1,896 1,838
Withdrawals and benefit payments from contractholder deposit funds (1,810) (2,214)
Net change in short-term debt - (6)
Repayment of long-term debt (53) -
Repurchase of common stock (514) (204)
Issuance of common stock 3 22
Common dividends paid (51) (59)
---------- -----------
Net cash used in financing activities of continuing operations (529) (623)
---------- -----------
Effect of foreign currency rate changes on cash and cash equivalents (20) (12)
Net cash from discontinued operations - 100
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 278 (518)
Cash and cash equivalents, beginning of period 2,232 1,986
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,510 $ 1,468
- ----------------------------------------------------------------------------------====================================
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds $ 5 $ 100
Interest paid $ 23 $ 24
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
4
<PAGE>
CIGNA CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CIGNA Corporation
and all significant subsidiaries, which are referred to collectively as "CIGNA."
These consolidated financial statements were prepared in conformity with
generally accepted accounting principles. Results of the property and casualty
business are reported as discontinued operations because CIGNA sold that
business in July 1999 (discussed in Note 3). Unless otherwise indicated, amounts
in these Notes exclude the effects of discontinued operations. Certain other
reclassifications have been made to prior year's amounts to conform to the 2000
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 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
Insurance-related assessments. CIGNA adopted Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," as of January 1, 1999. Issued by the American Institute of
Certified Public Accountants, this SOP guides companies in measuring and
recording liabilities for insolvency fund and other insurance-related
assessments, such as workers' compensation second injury funds, medical risk
pools and charges for operating expenses of state regulatory bodies. The
cumulative effect of adopting the SOP was a $91 million ($140 million pre-tax)
reduction of net income. Most of this effect resulted from the property and
casualty business, which has been sold and is reported as discontinued
operations.
Derivative instruments and hedging activities. 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 recognized in net income or, for derivatives that
hedge market risk related to future cash flows, in accumulated other
comprehensive income. Companies are required to implement SFAS No. 133 by the
first quarter of 2001, showing the cumulative effect of adoption in net income
and accumulated other comprehensive income. CIGNA has not determined whether it
will adopt these changes before the required implementation date or what their
effect will be.
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. The after-tax gain
on the sale was $1.2 billion. In 1999, CIGNA began reporting this business as
discontinued operations and reclassified prior period financial information
accordingly.
Summarized financial data for the discontinued operations for the three months
ended March 31, 1999 are outlined below:
- ----------------------------------------------------------------
(In millions)
- ----------------------------------------------------------------
Income Statement Data
Revenues $919
--------------
Income before income taxes $62
Income taxes 19
- ----------------------------------------------------------------
Income from discontinued
operations $43
- --------------------------------------------------==============
CIGNA had acquisitions and dispositions during the first quarters of 2000 and
1999, the effects of which were not material to the financial statements.
5
<PAGE>
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) 2000 1999
- ----------------------------------------------------------------
Fixed maturities $(14) $5
Equity securities 17 7
Real estate 6 (1)
-----------------
9 11
Less income taxes 3 4
- ----------------------------------------------------------------
Net realized investment
gains $6 $7
- -----------------------------------------------=================
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) 2000 1999
- ------------------------------------------------------------------
Proceeds from sales $864 $382
Gross gains on sales $34 $14
Gross losses on sales $(19) $(1)
- ------------------------------------------------------------------
Changes in net unrealized depreciation on investments, including discontinued
operations in 1999, for the quarter ended March 31 were as follows:
- -----------------------------------------------------------------
(In millions) 2000 1999
- -----------------------------------------------------------------
Unrealized depreciation
on investments held $(10) $(316)
Less tax benefits (4) (111)
------------------
Unrealized depreciation,
net of taxes (6) (205)
------------------
Gains realized in net income 3 41
Less taxes 1 14
------------------
Gains realized in net income,
net of taxes 2 27
- -----------------------------------------------------------------
Changes in net unrealized
depreciation $(8) $(232)
- -----------------------------------------------==================
NOTE 5 - EARNINGS PER SHARE
Basic and diluted earnings per share (EPS) for income from continuing operations
are computed as follows for the quarter ended March 31:
- ------------------------------------------------------------------
(Dollars in millions, except Effect of
per share amounts) Basic Dilution Diluted
- ------------------------------------------------------------------
2000
- ------------------------------------------------------------------
Income from continuing
operations $271 $-- $271
- -------------------------------===================================
Shares (in thousands):
Weighted average 167,941 -- 167,941
Options and restricted stock
grants 1,369 1,369
- ------------------------------------------------------------------
Total shares 167,941 1,369 169,310
- -------------------------------===================================
EPS $1.61 $(0.01) $1.60
- -------------------------------===================================
1999
- ------------------------------------------------------------------
Income from continuing
operations $236 $-- $236
- -------------------------------===================================
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
- -------------------------------===================================
EPS $1.15 $(0.01) $1.14
- -------------------------------===================================
Common shares held as Treasury shares were 104,596,338 as of March 31, 2000 and
62,715,992 as of March 31, 1999.
NOTE 6 - REINSURANCE RECOVERABLES
In the normal course of business, CIGNA's insurance subsidiaries enter into
agreements with other insurance companies to assume and cede reinsurance.
Reinsurance is ceded primarily to limit losses from large exposures and to
permit recovery of a portion of direct losses. Reinsurance does not relieve the
originating insurer of liability.
CIGNA had a reinsurance recoverable of $6.0 billion at March 31, 2000 and
December 31, 1999 from Lincoln National Corporation that arose from the sale of
CIGNA's individual life insurance and annuity business to Lincoln through an
indemnity reinsurance transaction.
Failure of reinsurers to indemnify CIGNA, whether because of reinsurer
insolvencies or contract disputes, could result in losses. However,
6
<PAGE>
management does not expect charges for unrecoverable reinsurance to have a
material effect on 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, in the following amounts:
- ------------------------------------------------------------------
Three Months
Ended
March 31,
(In millions) 2000 1999
- ------------------------------------------------------------------
Ceded premiums:
Individual life
insurance and annuity
business sold ` $105 $63
Other 84 107
- ------------------------------------------------------------------
Total $189 $170
- ------------------------------------------------==================
Reinsurance recoveries:
Individual life
insurance and annuity
business sold $42 $22
Other 98 88
- ------------------------------------------------------------------
Total $140 $110
- ------------------------------------------------==================
NOTE 7 - SEGMENT INFORMATION
Operating segments are based on CIGNA's internal reporting structure. Segments
generally reflect groups of related products, but the International Life, Health
and Employee Benefits segment is based on geography. CIGNA measures the
financial results of its segments using operating income (net income excluding
after-tax realized investment results and, in 1999, also excluding the results
of discontinued operations and the cumulative effect of adopting SOP 97-3).
Beginning January 1, 2000, CIGNA made the following segment reporting changes:
o CIGNA combined the operations of a new business initiative (the results of
which had been previously reported in Other Operations) with a business
that is reported in the Employee Health Care, Life and Disability Benefits
segment. Prior periods have been reclassified to conform to this
presentation.
o In 1999, corporate overhead expenses which would have been allocated to the
property and casualty business (had the sale of this business not occurred)
were reported in the Corporate caption. Effective January 1, 2000, this
overhead was allocated to the operating segments. If CIGNA had applied this
allocation method in the first quarter of 1999, overhead expenses of $7
million after-tax would have been charged to the operating segments (most
of which would have been allocated to the Employee Health Care, Life and
Disability Benefits segment).
Summarized segment financial information was as follows:
- ----------------------------------------------------------------
Three Months
Ended
March 31,
(In millions) 2000 1999
- ----------------------------------------------------------------
Premiums and fees and other revenues:
Employee Health Care,
Life and Disability
Benefits $3,409 $3,114
Employee Retirement
Benefits and Investment
Services 101 75
International Life, Health
and Employee Benefits 473 383
Other Operations 198 218
Corporate (15) (12)
- ----------------------------------------------------------------
Total $4,166 $3,778
- ----------------------------------------------==================
Income from continuing operations:
Operating income (loss):
Employee Health Care,
Life and Disability
Benefits $175 $153
Employee Retirement
Benefits and Investment
Services 65 63
International Life, Health
and Employee Benefits 8 3
Other Operations 28 34
Corporate (11) (24)
- ----------------------------------------------------------------
Total operating income 265 229
Realized investment
gains, net of taxes 6 7
- ----------------------------------------------------------------
Income from continuing
operations $271 $236
- ----------------------------------------------==================
7
<PAGE>
NOTE 8 - CONTINGENCIES AND OTHER MATTERS
Financial Guarantees
CIGNA, through its subsidiaries, is contingently liable for various financial
guarantees provided in the ordinary course of business. CIGNA also secures
reinsurance to recover a portion of amounts paid in connection with a financial
guarantee.
Specialty life reinsurance contracts. CIGNA has entered into specialty life
reinsurance contracts that guarantee a minimum death benefit based on
unfavorable changes in variable annuity account values. These account values are
based on underlying domestic equity and bond mutual fund investments.
Management is reviewing alternatives to manage the associated equity market and
interest rate risks for these contracts. As part of this review, CIGNA is
considering whether to modify certain reserve assumptions. The guarantees under
these contracts and changes that could result from this review could adversely
affect CIGNA's consolidated results of operations in future periods. However,
management does not expect them 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. Some of the more significant current
issues that may affect CIGNA's businesses include:
o initiatives to increase health care regulation;
o efforts to expand tort liability of health plans;
o proposed class action lawsuits targeting certain health care companies,
including CIGNA;
o initiatives to restrict insurance pricing and the application of
underwriting standards; and
o efforts to revise federal tax laws.
Health care regulation. Efforts are underway in the federal and state
legislatures and in the courts to increase regulation of the health care
industry and change its operational practices. Regulatory and operational
changes 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 without improving the quality of care.
Pending initiatives to increase health care regulation at the federal level
include "managed care reform" and "patients' bill of rights" legislation.
Separate bills passed the House of Representatives and Senate in 1999. Given
differences between the House and Senate bills and the general uncertainty of
the political process, it is not possible to determine what legislation will be
enacted, if any, or what the effect of any such legislation would be on CIGNA.
Other regulatory changes that have been under consideration and that could have
an adverse effect on CIGNA's health care operations include:
o mandated benefits or services that increase costs without improving the
quality of care;
o loss of the Employee Retirement Income Security Act of 1974 (ERISA)
preemption of state tort laws through legislative actions and court
decisions;
o changes in ERISA regulations imposing increased administrative burdens and
costs;
o restrictions on the use of prescription drug formularies;
o privacy legislation that interferes with the ability to properly use
medical information for research, coordination of medical care and disease
management; and
o proposed legislation that would exempt independent physicians from the
antitrust laws.
Federal budget proposals. The Administration's proposed budget for fiscal year
2001 would tax amounts previously accumulated in a policyholders' surplus
account. If enacted, CIGNA will record additional income tax expense of $158
million.
The proposed budget also would restrict the tax benefits for corporations owning
non-leveraged corporate life insurance policies. If enacted as proposed, CIGNA
does not anticipate that this provision will have a material effect on its
consolidated results of operations, liquidity or financial condition, but it
could have a material adverse effect on the results of operations of the
Employee Retirement Benefits and Investment Services segment.
8
<PAGE>
Tax benefits for corporate life insurance. In 1996, Congress passed legislation
implementing a three-year phase-out period for tax deductibility of policy loan
interest for most leveraged corporate life insurance products. As a result,
management expects revenues and operating income associated with these products,
which are included in Other Operations, to continue to decline. In the first
quarter of 2000, revenues of $68 million and operating income of $7 million were
from products affected by this legislation.
Risk-based capital guidelines. In 1998, the National Association of Insurance
Commissioners (NAIC) adopted risk-based capital guidelines for health
maintenance organizations (HMOs), and states in which CIGNA's HMO subsidiaries
are domiciled have begun to implement these guidelines. CIGNA expects its HMO
subsidiaries to continue to be adequately capitalized under these guidelines.
Statutory accounting principles. In 1998, the NAIC adopted standardized
statutory accounting principles. Certain states in which CIGNA's insurance
subsidiaries are domiciled have adopted these principles, effective as of
January 1, 2001. CIGNA has not determined the effect of implementing these
principles.
Class Action Lawsuits and Other Litigation
CIGNA and several health care industry competitors have had proposed class
action lawsuits filed against them by a coalition of plaintiffs' attorneys.
These lawsuits allege violations under RICO and ERISA. CIGNA is routinely
involved in lawsuits arising, for the most part, in the ordinary course of the
business of administering and insuring employee benefit programs. Although the
outcome of litigation is always uncertain, CIGNA does not believe that any
litigation currently threatened or pending involving CIGNA will result in losses
that would be material to results of operations, liquidity or financial
condition.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ------------------------------------------------------------------
INDEX
Introduction 10
Results of Continuing Operations 11
Employee Health Care, Life and Disability Benefits 12
Employee Retirement Benefits and Investment Services 13
International Life, Health and Employee Benefits 14
Other Operations 15
Corporate 16
Liquidity and Capital Resources 16
Investment Assets - Continuing Operations 17
Cautionary Statement 19
- ------------------------------------------------------------------
INTRODUCTION
The following discussion addresses the financial condition of CIGNA Corporation
as of March 31, 2000 compared with December 31, 1999 and its results of
operations for the three months ended March 31, 2000, compared with the same
period last year. This discussion should be read in conjunction with
Management's Discussion and Analysis included in CIGNA's 1999 Annual Report to
Shareholders (pages 10 through 22), 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
Sale of property and casualty business. On July 2, 1999, CIGNA sold its domestic
and international property and casualty business to ACE Limited for cash
proceeds of $3.45 billion. The after-tax gain on the sale was $1.2 billion. In
1999, CIGNA began reporting this business as discontinued operations and
reclassified prior period financial information accordingly.
CIGNA's priorities for use of capital, including proceeds from the sale, are
internal growth, acquisitions and share repurchase.
CIGNA conducts regular strategic and financial reviews of its businesses to
ensure that its capital is used 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 initiatives to increase health care regulation;
o efforts to expand tort liability of health plans;
o proposed class action lawsuits targeting certain health care companies,
including CIGNA;
o initiatives to restrict insurance pricing and the application of
underwriting standards; and
o efforts to revise federal tax laws.
Health care regulation. Efforts are underway in the federal and state
legislatures and in the courts to increase regulation of the health care
industry and change its operational practices. Regulatory and operational
changes 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 without improving the quality of care.
Pending initiatives to increase health care regulation at the federal level
include "managed care reform" and "patients' bill of rights" legislation.
Separate bills passed the House of Representatives and Senate in 1999. Given
differences between the House and Senate bills and the general uncertainty of
the political process, it is not possible to determine what legislation will be
enacted, if any, or what the effect of any such legislation would be on CIGNA.
10
<PAGE>
Other regulatory changes that have been under consideration and that could have
an adverse effect on CIGNA's health care operations include:
o mandated benefits or services that increase costs without improving the
quality of care;
o loss of the Employee Retirement Income Security Act of 1974 (ERISA)
preemption of state tort laws through legislative actions and court
decisions;
o changes in ERISA regulations imposing increased administrative burdens and
costs;
o restrictions on the use of prescription drug formularies;
o privacy legislation that interferes with the ability to properly use
medical information for research, coordination of medical care and disease
management; and
o proposed legislation that would exempt independent physicians from the
antitrust laws.
Class action lawsuits and other litigation. CIGNA and several health care
industry competitors have had proposed class action lawsuits filed against them
by a coalition of plaintiffs' attorneys. These lawsuits allege violations under
RICO and ERISA. CIGNA is routinely involved in lawsuits arising, for the most
part, in the ordinary course of the business of administering and insuring
employee benefit programs. Although the outcome of litigation is always
uncertain, CIGNA does not believe that any litigation currently threatened or
pending involving CIGNA will result in losses that would be material to results
of operations, liquidity or financial condition.
Federal budget proposals. The Administration's proposed budget for fiscal year
2001 would tax amounts previously accumulated in a policyholders' surplus
account. If enacted, CIGNA will record additional income tax expense of $158
million.
The proposed budget also would restrict the tax benefits for corporations owning
non-leveraged corporate life insurance policies. If enacted as proposed, CIGNA
does not anticipate that this provision will have a material effect on its
consolidated results of operations, liquidity or financial condition, but 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 8 to the Financial
Statements.
Accounting Pronouncements
For information on recent accounting pronouncements, see Note 2 to the Financial
Statements.
Segment Reporting Changes
For information regarding changes to segment reporting, which were effective in
the first quarter of 2000, see Note 7 to the Financial Statements.
RESULTS OF CONTINUING OPERATIONS
- ------------------------------------------------------------------
FINANCIAL SUMMARY Three Months
Ended
March 31,
(In millions) 2000 1999
- ------------------------------------------------------------------
Premiums and fees $3,989 $3,600
Net investment
income 716 721
Other revenues 177 178
Realized investment
gains 9 11
---------------------
Total revenues 4,891 4,510
Benefits and expenses 4,471 4,142
---------------------
Income before taxes 420 368
Income taxes 149 132
---------------------
Income from
continuing operations 271 236
Less realized investment
gains, net of taxes 6 7
- ------------------------------------------------------------------
Operating income $265 $229
- ---------------------------------------------=====================
Operating Income
Operating income is defined as net income excluding after-tax realized
investment results and, in 1999, also excluding the results of discontinued
operations and the cumulative effect of adopting SOP 97-3 (see Note 2 to the
Financial Statements).
The increase in operating income for the first quarter primarily reflects
improved operating results in CIGNA's Employee Health Care, Life and Disability
Benefits segment and increased investment income in Corporate (partially
attributable to the sale of the property and casualty business).
11
<PAGE>
Outlook for 2000
Management expects full year operating income to improve in 2000 over 1999
adjusted operating income of $1.06 billion (which excludes a $400 million
after-tax charge related to certain Brazilian investments, $10 million in
after-tax restructuring costs and a $43 million after-tax gain on sale of a
partial interest in the Japanese life insurance operation). However, such
improvement could be adversely affected by factors such as those noted in the
cautionary statement on page 19.
EMPLOYEE HEALTH CARE, LIFE AND DISABILITY BENEFITS
- -----------------------------------------------------------------
FINANCIAL SUMMARY Three Months
Ended
March 31,
(In millions) 2000 1999
- -----------------------------------------------------------------
Premiums and fees $3,261 $2,976
Net investment income 149 138
Other revenues 148 138
--------------------
Segment revenues 3,558 3,252
Benefits and expenses 3,286 3,014
--------------------
Income before taxes 272 238
Income taxes 97 85
--------------------
Operating income $175 $153
- ---------------------------------------------====================
Realized investment
gains, net of taxes $7 $6
- ---------------------------------------------====================
Operating Income
Operating income for the Employee Health Care, Life and Disability Benefits
segment increased 14% for the first quarter of 2000 compared with the same
period last year. Operating income for the Indemnity and HMO operations was as
follows:
- ------------------------------------------------------------------
Three Months
Ended
March 31,
(In millions) 2000 1999
- ------------------------------------------------------------------
Indemnity operations $61 $59
HMO operations 114 94
- ------------------------------------------------------------------
Total $175 $153
- ----------------------------------------------====================
Indemnity results for the first quarter of 2000 primarily reflect improved
results in experience-rated health care business, reflecting rate increases.
This improvement was offset by lower earnings on long-term disability and group
life insurance businesses due to unfavorable claim experience.
HMO results include net favorable after-tax adjustments from account and tax
reviews of $5 million in the first quarter of 2000 and $6 million in the first
quarter of 1999. The improvement in operating results for the first quarter of
2000 primarily reflects:
o higher earnings in the disability and medical cost management, behavioral
health and pharmacy service businesses;
o higher earnings in HMO alternative funding programs, reflecting membership
growth and fee increases; and
o level results in the guaranteed cost HMO business, due to rate increases
and lower operating expenses per member, offset by increased medical costs
(primarily higher outpatient and pharmacy costs).
Premiums and Fees
Premiums and fees increased 10% for the first quarter of 2000, primarily due to
HMO and medical indemnity membership growth and rate increases.
12
<PAGE>
Premium Equivalents
Management believes that business volume is best measured by premiums and fees
plus premium equivalents, called adjusted premiums and fees. Premium equivalents
generally equal paid claims under alternative funding programs, primarily
minimum premium and Administrative Services Only (ASO) programs. 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 guaranteed cost or experience-rated programs. Adjusted premiums and fees
were as follows:
- -----------------------------------------------------------------
Three Months
Ended
March 31,
(In millions) 2000 1999
- -----------------------------------------------------------------
Premiums and fees $3,261 $2,976
Premium equivalents 4,241 3,487
- -----------------------------------------------------------------
Adjusted premiums and
fees $7,502 $6,463
- --------------------------------------------=====================
The increase in premium equivalents is primarily due to membership growth in HMO
and PPO (Preferred Provider Organization) alternative funding programs and the
effect of higher paid claims under these programs.
Net Investment Income
Net investment income increased 8% for the quarter reflecting higher investment
yields and invested assets.
HMO Medical Membership
As of March 31, 2000, HMO membership totaled approximately 7.1 million,
representing increases of 6% since March 31, 1999 and 5% since December 31,
1999. These increases primarily reflect membership growth in alternative funding
programs.
EMPLOYEE RETIREMENT BENEFITS AND INVESTMENT SERVICES
- -----------------------------------------------------------------
FINANCIAL SUMMARY Three Months
Ended
March 31,
(In millions) 2000 1999
- -----------------------------------------------------------------
Premiums and fees $101 $75
Net investment income 396 387
--------------------
Segment revenues 497 462
Benefits and expenses 401 369
--------------------
Income before taxes 96 93
Income taxes 31 30
--------------------
Operating income $65 $63
- ---------------------------------------------====================
Realized investment
gains (losses), net of
taxes $(2) $1
- ---------------------------------------------====================
Operating Income
The increase in operating income of 3% for the first quarter of 2000 reflects
higher earnings from an increased asset base, partially offset by a shift of
assets to lower margin products (separate account equity funds) and increased
operating expenses.
Segment Revenues
Premiums and fees for the first quarter of 2000 increased 35% compared with the
same period last year, primarily reflecting higher annuity sales and higher fees
from increased separate account assets.
Net investment income increased 2% for the first quarter of 2000, primarily
reflecting higher investment yields.
13
<PAGE>
Assets Under Management
Assets under management are a key determinant of earnings for this segment. The
following table shows assets under management, including amounts attributable to
separate accounts, and related activity for the quarter ended March 31. Assets
under management will continue to be affected by market value fluctuations for
fixed maturities and equity securities.
- -----------------------------------------------------------------
(In millions) 2000 1999
- -----------------------------------------------------------------
Balance - January 1 $55,754 $52,929
Premiums and deposits 2,834 2,088
Investment results 1,035 924
Increase (decrease) in fair value of assets 655 (16)
Customer withdrawals (1,197) (1,556)
Other, including participant
withdrawals and benefit payments (1,681) (1,264)
- -----------------------------------------------------------------
Balance - March 31 $57,400 $53,105
- -------------------------------------------======================
Premiums and deposits. In the first quarter of 2000, approximately 55% of
premiums and deposits were from existing customers, and 45% were from sales to
new customers and new plan sales to existing customers. In the first quarter of
1999, 64% of premiums and deposits were from existing customers.
Investment results. In the first quarter of 2000, investment results increased
12% due to an increased asset base as well as higher investment yields and
realized capital gains.
Fair value of assets. The increase in the fair value of assets in the first
quarter of 2000 results primarily from higher market value appreciation of
equity securities in the separate accounts.
INTERNATIONAL LIFE, HEALTH AND EMPLOYEE BENEFITS
- ------------------------------------------------------------------
FINANCIAL SUMMARY Three Months
Ended
March 31,
(In millions) 2000 1999
- ------------------------------------------------------------------
Premiums and fees $472 $378
Net investment income 34 30
Other revenues 1 5
------------------
Segment revenues 507 413
Benefits and expenses 494 405
------------------
Income before taxes 13 8
Income taxes 5 5
------------------
Operating income $8 $3
- ------------------------------------------------==================
Realized investment
gains, net of taxes $-- $--
- ------------------------------------------------==================
Operating Income
The improvement in operating income primarily reflects the absence of losses of
approximately $7 million after-tax from a Brazilian health care operation which
CIGNA exited in 1999 and improved results in the Japanese life insurance
operation. Increased expenses on international growth initiatives and lower
health care results in Latin America partially offset these improvements.
Premiums and Fees
Premiums and fees increased 25% for the first quarter of 2000 compared with the
same period last year. Excluding the effects of foreign currency changes,
premiums and fees increased 22% for the first quarter of 2000. This increase
reflects:
o growth in the Japanese life insurance operation;
o growth in life and group benefits business in Southeast Asia; and
o higher premiums and fees for health care and other employee benefit
products for expatriate employees of multinational companies.
International Expansion
CIGNA intends to pursue international growth through acquisitions and other
investments. This strategy will result in start-up costs and initial losses.
14
<PAGE>
Brazilian Operations
CIGNA's withdrawal from the Brazilian health care operation referred to above
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
additional losses material to its consolidated results of operations, liquidity
or financial condition.
OTHER OPERATIONS
- -----------------------------------------------------------------
FINANCIAL SUMMARY Three Months
Ended
March 31,
(In millions) 2000 1999
- -----------------------------------------------------------------
Premiums and fees $155 $171
Net investment income 120 161
Other revenues 43 47
-----------------
Segment revenues 318 379
Benefits and expenses 276 327
-----------------
Income before taxes 42 52
Income taxes 14 18
-----------------
Operating income $28 $34
- ------------------------------------------------=================
Realized investment
gains, net of taxes $1 $--
- ------------------------------------------------=================
Other Operations consist of:
o the deferred gain recognized from the 1998 sale of the individual life
insurance and annuity business ($14 million after-tax in the first quarter
of 2000 and $15 million after-tax in the first quarter of 1999);
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.
Operating Income
The decrease in operating income for the first quarter 2000 primarily reflects
expenses associated with new initiatives for CIGNA's investment management
services, as well as lower income from life reinsurance and leveraged corporate
life insurance businesses.
Premiums and Fees
The 9% decrease in premiums and fees for the first quarter of 2000 is primarily
due to lower premiums from health reinsurance business.
Net Investment Income
The 25% decrease in net investment income for the first quarter of 2000
primarily reflects lower assets from leveraged corporate life insurance.
Other Matters
Tax benefits for corporate life insurance. In 1996, Congress passed legislation
implementing a three-year phase-out period for tax deductibility of policy loan
interest for most leveraged corporate life insurance products. As a result,
management expects revenues and operating income associated with these products
to continue to decline. In the first quarter of 2000, revenues of $68 million
and operating income of $7 million were from products affected by this
legislation.
Specialty life reinsurance contracts. CIGNA has entered into specialty life
reinsurance contracts that guarantee a minimum death benefit based on
unfavorable changes in variable annuity account values. These account values are
based on underlying domestic equity and bond mutual fund investments.
Management is reviewing alternatives to manage the associated equity market and
interest rate risks for these contracts. As part of this review, CIGNA is
considering whether to modify certain reserve assumptions. The guarantees under
these contracts and changes that could result from this review could adversely
affect CIGNA's consolidated results of operations in future periods. However,
management does not expect them to have a material adverse effect on CIGNA's
liquidity or financial condition.
Unicover. The reinsurance operations include a 35% share in the primary layer of
a workers' compensation reinsurance pool, which was managed by Unicover
Managers, Inc. until recently. The pool had obtained reinsurance for a
significant portion of its exposure to claims. Disputes have arisen regarding
this reinsurance (retrocessional) coverage of the pool. Two of the
retrocessionaires
15
<PAGE>
have commenced arbitration against Unicover and the pool members seeking
recission or damages. In addition, these retrocessionaires have separately
asserted that CIGNA participates in an upper layer of reinsurance for the pool,
which CIGNA denies. Resolution of these matters is likely to take some time.
Although the outcome of these matters is uncertain, CIGNA does not expect them
to result in losses material to CIGNA's consolidated results of operations,
liquidity or financial condition.
CORPORATE
- ----------------------------------------------------------------
FINANCIAL SUMMARY Three Months
Ended
March 31,
(In millions) 2000 1999
- ----------------------------------------------------------------
Operating loss $(11) $(24)
- ------------------------------------------------================
Corporate includes amounts not allocated to operating segments, such as:
o interest expense on corporate debt;
o net investment income on unallocated investments;
o intersegment eliminations; and
o certain corporate overhead expenses (see Note 7 to the Financial Statements
for information regarding a change in the allocation of these expenses).
The reduced operating loss in the first quarter of 2000 primarily reflects
higher net investment income on unallocated corporate investments (partially
attributable to the sale of the property and casualty business), as well as the
reduced allocation of certain corporate overhead expenses in the first quarter
of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity for CIGNA and its insurance subsidiaries has remained strong, as
evidenced by significant combined amounts of short-term investments and cash and
cash equivalents.
CIGNA normally meets its operating requirements by:
o maintaining appropriate levels of liquidity in its investment portfolio;
o using cash flows from operating activities (operating cash flows); and
o matching investment maturities to the duration of related insurance and
contractholder liabilities.
Operating cash flows consist of operating income adjusted to reflect the timing
of cash receipts and disbursements for premiums and fees, investment income and
benefits, losses and expenses.
Cash flows from continuing operations for the three months ended March 31 were
as follows:
- ----------------------------------------------------------------
(In millions) 2000 1999
- ----------------------------------------------------------------
Operating activities $448 $436
Investing activities $379 $(419)
Financing activities $(529) $(623)
- ----------------------------------------------==================
Cash and cash equivalents increased $278 million in 2000 and decreased $518
million in 1999. Cash flows from investing and financing activities are due to
the following:
2000:
- -----
o Cash flows from investing activities consisted of net sales of short-term
investments to fund the repurchase of CIGNA's common stock, partially
offset by net purchases of other investments.
o Cash used in financing activities consisted of payments of dividends on and
repurchase of CIGNA's common stock ($565 million) and repayment of debt
($53 million), partially offset by net deposits and interest credited to
contractholder deposit funds ($86 million).
16
<PAGE>
1999:
- ----
o Cash used in investing activities primarily reflected net investment
purchases.
o Cash used in financing activities primarily reflected the payment of
dividends on and repurchase of CIGNA's common stock ($263 million) and net
withdrawals from contractholder deposit funds ($376 million).
Capital Resources
CIGNA's capital resources (primarily retained earnings and the proceeds from the
issuance of long-term debt and equity securities) represent funds available for
long-term business commitments.
CIGNA's financial strength provides the capacity and flexibility to raise funds
in the capital markets. CIGNA continues to be well capitalized, with sufficient
borrowing capacity to meet the anticipated needs of its businesses.
CIGNA had $1.3 billion of long-term debt outstanding at March 31, 2000 and $1.4
billion at December 31, 1999. At March 31, 2000, CIGNA had $1.0 billion
remaining under effective shelf registration statements filed with the
Securities and Exchange Commission, which may be issued as debt securities,
equity securities or both. Management and the Board of Directors will consider
market conditions and internal capital requirements when deciding whether CIGNA
should issue new securities.
At March 31, 2000, CIGNA's short-term debt amounted to $21 million, a decrease
of $36 million from December 31, 1999.
Stock repurchase activity for the three months ended March 31 was as follows:
- ----------------------------------------------------------------
(In millions, except per share amounts) 2000 1999
- ----------------------------------------------------------------
Shares repurchased 7.2 2.9
Cost of shares repurchased $521 $229
Average price per share $72.36 $78.97
- ----------------------------------------------------------------
From April 1, 2000 through May 1, 2000, an additional 1.6 million shares were
repurchased for $126 million. The total remaining under CIGNA's share repurchase
authorization as of May 1, 2000 was $1.1 billion.
INVESTMENT ASSETS - CONTINUING OPERATIONS
Information regarding investment assets held by CIGNA is presented below.
Additional information regarding CIGNA's investment assets and related
accounting policies is included in Notes 2, 4 and 5 to the 1999 Financial
Statements and in CIGNA's 1999 Form 10-K.
- -------------------------------------------------------------------
March 31, December 31,
(In millions) 2000 1999
- -------------------------------------------------------------------
Fixed maturities $23,209 $22,944
Equity securities 644 585
Mortgage loans 9,842 9,737
Policy loans 3,020 3,079
Real estate 654 789
Other long-term investments 755 821
Short-term investments 228 950
- -------------------------------------------------------------------
Total investment assets $38,352 $38,905
- ----------------------------------------===========================
A significant portion of CIGNA's investment assets are attributable to
experience-rated contracts with policyholders (policyholder contracts). The
following table shows the percentage of certain categories of investment assets
that are held under policyholder contracts:
- ------------------------------------------------------------------
March 31, December 31,
2000 1999
- ------------------------------------------------------------------
Fixed maturities 38% 36%
Mortgage loans 59% 59%
Real estate 64% 65%
Other long-term investments 70% 66%
- ------------------------------------------------------------------
Fixed Maturities and Mortgage Loans
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 and Potential Problem Investments
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 are fully current, but management
17
<PAGE>
believes they have certain characteristics that increase the likelihood that
they will become "problems." CIGNA also considers mortgage loans to be potential
problems if:
o the borrower has requested restructuring; or
o principal or interest payments are past due by more than 30 but fewer than
60 days.
CIGNA recognizes interest income on problem bonds and mortgage loans only when
payment is received.
Most of the real estate held for sale were properties acquired as a result of
foreclosure of mortgage loans.
The following table presents problem and potential problem bonds and mortgage
loans as well as real estate held for sale, net of valuation reserves and
write-downs, and includes amounts attributable to policyholder contracts:
- -----------------------------------------------------------------
March 31, December 31,
(In millions) 2000 1999
- -----------------------------------------------------------------
Problem bonds, including
$14 at both dates, related to
emerging market investments $143 $151
Potential problem bonds $99 $77
Problem mortgage loans $74 $85
Potential problem mortgage loans $148 $149
Real estate held for sale $201 $312
- -----------------------------------------------------------------
Summary
CIGNA's investment asset write-downs, non-accruals and changes in valuation
reserves were not material to CIGNA's policyholder contracts, or results of
operations, liquidity or financial condition for the periods presented. CIGNA
expects additional investment losses to occur in the normal course of business.
However, assuming no significant deterioration in economic conditions, 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.
18
<PAGE>
CAUTIONARY STATEMENT 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 and oral
forward-looking statements, including statements contained in CIGNA's filings
with the Securities and Exchange Commission and in its reports to shareholders.
These statements may contain information about financial prospects, economic
conditions, trends and known uncertainties. CIGNA cautions the reader that
actual results could differ materially from those that management expects,
depending on the outcome of certain factors. In some cases, CIGNA describes
uncertainties when offering a forward-looking statement. Some factors that could
cause CIGNA's actual results to differ materially from the forward-looking
statements include:
1. increases in medical costs in CIGNA's health care operations, including
increased use and costs of medical services;
2. increased medical, administrative or other costs resulting from
legislative, regulatory and litigation challenges to CIGNA's health care
business (see page 10 for more information);
3. heightened competition, particularly price competition, which could reduce
product margins and constrain 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 (see page 15 for more information);
6. significant deterioration in economic conditions, which could have an
adverse effect on CIGNA's investments; and
7. proposals to change federal income taxes.
This list of important factors may not be complete. CIGNA will not update any
forward-looking statement that may be made by or on behalf of CIGNA prior to the
next required filing with the Securities and Exchange Commission.
19
<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, 2000, and as of the
filing date, CIGNA filed the following Reports on Form 8-K:
o dated May 1, 2000, Item 5 - containing a news release
regarding its first quarter 2000 results.
o dated February 8, 2000, Item 5 - containing a news release
regarding its fourth quarter and full year 1999 results.
20
<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 3, 2000
21
<PAGE>
Exhibit Index
-------------
Method of
Number Description Filing
- ------ ----------- ------
10 CIGNA Long-Term Filed herewith
Incentive Plan (As Amended
and Restated effective as of
January 1, 2000
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
22
EXHIBIT 10
CIGNA LONG-TERM INCENTIVE PLAN
(As Amended and Restated effective as of January 1, 2000)
ARTICLE 1
Statement of Purpose
The CIGNA Long-Term Incentive Plan (the "Plan") is intended to:
(a) Provide incentives for and reward key employees of the Company by providing
them with an opportunity to acquire an equity interest in CIGNA
Corporation, thereby increasing their personal interest in its continued
success and progress;
(b) Aid the Company in attracting and retaining key personnel of exceptional
ability;
(c) Supplement and balance the Company's salary and incentive bonus programs in
support of CIGNA Corporation's long-term strategic plans;
(d) Motivate and reward the maximization of CIGNA Corporation's long-term
financial results; and
(e) Encourage decisions and actions by senior level Company executives that are
consistent with the long-range interests of CIGNA Corporation's
shareholders.
The Plan is an amendment and restatement as of the Effective Date of the CIGNA
Long-Term Incentive Plan.
ARTICLE 2
Definitions
Except as otherwise provided in the Plan or unless the context otherwise
requires, the terms defined below shall have the following meanings under the
Plan:
2.1 "Board" -- the board of directors of CIGNA Corporation or any duly
authorized committee of that board.
2.2 "CEO" -- the Chief Executive Officer of CIGNA Corporation.
2.3 "Change of Control" --
(a) A corporation, person or group acting in concert, as described in
Exchange Act Section 14(d)(2), holds or acquires beneficial ownership
within the meaning of Rule 13d-3 promulgated under the Exchange Act of
a number of preferred or common shares of CIGNA Corporation having
voting power which is either (1) more than 50% of the voting power of
the shares which voted in the election of directors of CIGNA
<PAGE>
Corporation at the shareholders' meeting immediately preceding such
determination, or (2) more than 25% of the voting power of CIGNA
Corporation's outstanding common shares; or
(b) As a result of a merger or consolidation to which CIGNA Corporation is
a party, either (1) CIGNA Corporation is not the surviving corporation
or (2) Directors of CIGNA Corporation immediately prior to the merger
or consolidation constitute less than a majority of the board of
directors of the surviving corporation; or
(c) A change occurs in the composition of the Board at any time during any
consecutive 24-month period such that the "Continuity Directors" cease
for any reason to constitute a majority of the Board. For purposes of
the preceding sentence "Continuity Directors" shall mean those members
of the Board who either: (1) were directors at the beginning of such
consecutive 24-month period; or (2) were elected by, or on nomination
or recommendation of, at least a majority (consisting of at least nine
directors) of the Board.
2.4 "Code" -- the Internal Revenue Code of 1986, as amended.
2.5 "Committee" -- the Board's People Resources Committee or any successor
committee with responsibility for compensation. The number of Committee
members and their qualifications shall at all times be sufficient to meet
the requirements of SEC Rule 16b-3 and Code Section 162(m).
2.6 "Common Stock" -- the common stock, par value $0.25 per share, of CIGNA
Corporation.
2.7 "Company" -- CIGNA Corporation, a Delaware corporation, and/or its
Subsidiaries.
2.8 "Deferred Compensation Plan" -- a Company deferred compensation plan or
another arrangement of the Company which has been designated by the
Committee as a "Deferred Compensation Plan" for purposes of this Plan.
2.9 "Disability" -- permanent and total disability as defined in Code Section
22(e)(3).
2.10 "Early Retirement" -- a Termination of Employment, after appropriate notice
to the Company, (a) on or after age 55 and before age 65 with eligibility
for immediate annuity benefits under a qualified pension or retirement plan
of the Company, or (b) upon such terms and conditions approved by the
Committee or officers of the Company designated by the Board or the
Committee.
2
<PAGE>
2.11 "Effective Date" - January 1, 2000, subject to approval by the shareholders
of CIGNA Corporation.
2.12 "Eligible Employee" -- a salaried officer or other key employee of the
Company.
2.13 "Exchange Act" -- the Securities Exchange Act of 1934, as amended.
2.14 "Fair Market Value" -- the average of the highest and lowest quoted selling
prices as reported on the Composite Tape (or any successor method of
publishing stock prices) as of 4:00 p.m. Eastern time on the date as of
which any determination of stock value is made. If the Composite Tape (or
any successor publication) is not published on that date, the determination
will be made on the next preceding date of publication. In the absence of
reported Common Stock sales, the Committee will determine Fair Market Value
by taking into account all facts and circumstances the Committee deems
relevant.
2.15 "Incentive Stock Option" -- an Option described by Code Section 422(b).
2.16 "Nonqualified Option" -- an Option that is not an Incentive Stock Option.
2.17 "Option" -- a right granted under Article 5 to purchase one or more shares
of Common Stock.
2.18 "Option Expiration Date" -- the last date, specified in the Option grant,
on which an Option may be exercised.
2.19 "Participant" -- an Eligible Employee who has received an award under the
Plan.
2.20 "Payment" -- the compensation due a Participant, or Participant's estate,
under the Plan on account of a Unit Award.
2.21 "Payment Date" -- the date that a Qualifying Incentive Plan or a Qualifying
Supplemental Benefit Plan payment is made (or would have been made if not
deferred under Section 9.3).
2.22 "Peer Group" -- a group of companies, selected by the Committee, whose
financial performance is compared to CIGNA Corporation's under performance
goals established for Strategic Performance Units.
2.23 "Performance Period" -- the period specified by the Committee for which
Unit Awards may be made.
2.24 "Performance Points" -- the number of points assigned to a particular year
of a Performance Period under Section 10.3.
3
<PAGE>
2.25 "Plan" -- the CIGNA Long-Term Incentive Plan.
2.26 "Qualifying Incentive Plan" -- any Company bonus plan, short-term or
long-term incentive compensation plan or any other incentive compensation
arrangement, including the Company's Performance Recognition Award Program.
2.27 "Qualifying Supplemental Benefit Plan" -- any plan of the Company that pays
benefits otherwise payable under a tax qualified retirement plan but for
legal limitations.
2.28 "Restricted Period" -- the period during which Common Stock is subject to
restrictions under Section 7.2.
2.29 "Restricted Stock" -- Common Stock granted under Article 7 that remains
subject to a Restricted Period.
2.30 "Retirement" -- a Termination of Employment, after appropriate notice to
the Company, (a) on or after age 65 with eligibility for immediate annuity
benefits under a qualified pension or retirement plan of the Company, or
(b) upon such terms and conditions approved by the Committee, or officers
of the Company designated by the Board or the Committee.
2.31 "SAR" -- a stock appreciation right granted under Article 6.
2.32 "SEC" -- the Securities and Exchange Commission.
2.33 "Strategic Performance Unit" or "Unit" -- the smallest amount of incentive
opportunity available for award to a Participant for a specified
Performance Period, with a target value of $75.00 per Unit unless a
different target value is established by the Committee at the time a Unit
Award is made.
2.34 "Subsidiary" -- any corporation of which more than 50% of the total
combined voting power of all classes of stock entitled to vote, or other
equity interest, is directly or indirectly owned by CIGNA Corporation; or a
partnership, joint venture or other unincorporated entity of which more
than a 50% interest in the capital, equity or profits is directly or
indirectly owned by CIGNA Corporation; provided that such corporation,
partnership, joint venture or other unincorporated entity is included in
the Company's consolidated financial statements under generally accepted
accounting principles.
2.35 "Termination for Cause" -- a Termination of Employment initiated by the
Company on account of the conviction of an employee of a felony involving
fraud or dishonesty directed against the Company.
4
<PAGE>
2.36 "Termination of Employment" -- the termination of the Participant's active
employment relationship with the Company (unless otherwise expressly
provided by the Committee) or a transaction by which the Participant's
employing Company ceases to be a Subsidiary.
2.37 "Termination Upon a Change of Control" -- a Termination of Employment upon
or within two years after a Change of Control (a) initiated by the Company
or a successor other than a Termination for Cause or (b) initiated by a
Participant after determining in his reasonable judgment that there has
been a material reduction in his authority, duties or responsibilities, any
reduction in his compensation, or any change caused by the Company in his
office location of more than 35 miles from its location on the date of the
Change of Control.
2.38 "Unit Award" -- the assignment of a specific number of Strategic
Performance Units to an Eligible Employee for a Performance Period.
ARTICLE 3
Participation
3.1 Participation. An Eligible Employee who receives an authorized award under
the Plan shall become a Participant upon receipt of the award.
3.2 Directors. Members of the Board who are not employed by the Company are not
eligible to participate in the Plan.
ARTICLE 4
Authorized Incentive Awards
4.1 Authorized Awards. The Plan's authorized awards are: (a) Options (including
Incentive Stock Options); (b) SARs; (c) Restricted Stock; (d) dividend
equivalent rights; (e) Common Stock in lieu of cash or other awards payable
under a Qualifying Incentive Plan or Qualifying Supplemental Benefit Plan, and
(f) Strategic Performance Units.
4.2 General Powers of the Committee. Subject to the requirements of Delaware
law, the Committee may in its sole discretion select Participants and grant them
any authorized awards in amounts and combinations, and upon terms and
conditions, as it shall determine. No power or authority delegated by the
Committee to a designee under the Plan may be exercised (a) to affect the terms
and conditions of an award made to anyone subject to the requirements of Section
16(a) of the Exchange Act or (b) as to matters reserved to the Board under the
Delaware General Corporation Law.
4.3 General Powers of the CEO. Subject to the requirements of Delaware law, the
CEO may in his sole discretion select Participants and grant them any authorized
awards in amounts and combinations and upon terms and conditions as he shall
5
<PAGE>
determine, subject to the same limitations and provisions that apply under the
Plan to the Committee, and also subject to the following:
(a) The CEO may not grant any awards to or for the benefit of (1) members of
the Board or (2) anyone subject to the requirements of Exchange Act Section
16(a);
(b) The CEO must be a member of the Board when he grants any award under the
Plan and must be properly empowered by the Board to grant such award; and
(c) The total number of shares of Common Stock which may be issued pursuant to
awards granted under this Section 4.3 is limited to a maximum of 10% of the
number of shares of Common Stock authorized to be issued under the Plan.
ARTICLE 5
Stock Options
5.1 General. Subject to any Plan limitations and provisions, the Committee may
grant Options to Eligible Employees upon terms and conditions that it may
establish, including restrictions on the right to exercise Options.
5.2 Option Price. The exercise price per share of any Option shall not be less
than the Fair Market Value on the grant date. The Option price may be paid in
cash or, if the Committee so provides, in Common Stock (including Restricted
Stock). Common Stock used to pay the Option price shall be valued using the Fair
Market Value on the Option exercise date. If the Option price is paid in any
number of shares of Restricted Stock:
(a) An equal number of the shares purchased upon the Option exercise shall be
Restricted Stock;
(b) The new Restricted Stock shall be subject to restrictions identical to
those applicable to the Restricted Stock used to pay the Option price; and
(c) The restrictions shall continue in effect for the remaining part of the
Restricted Period applicable to that Restricted Stock.
5.3 Maximum Term. No Option Expiration Date shall be more than 10 years after
the Option grant date. Under Section 5.5, an Option may expire earlier than the
Option Expiration Date specified in the Option grant.
5.4 Leave of Absence. Unless otherwise expressly provided by the Committee, no
Option may be exercised during a leave of absence except to the extent
exercisable immediately before the start of the leave. Termination of Employment
during a leave of absence shall be treated under Section 5.5 the same as
Termination of Employment during a period of active employment.
6
<PAGE>
5.5 Expiration of Options.
(a) Except as provided elsewhere in Section 5.5, any outstanding Option held by
a Participant at Termination of Employment shall expire on the date of
Termination of Employment.
(b) Any outstanding Option held by a Participant at Termination Upon a Change
of Control shall:
(1) If granted on or after the Effective Date, become exercisable no later
than the date of his Termination of Employment; and
(2) Expire on the earlier of 3 months from the date of Termination of
Employment or the Option Expiration Date.
(c) Any outstanding Option granted on or after February 24, 1999 and held by a
Participant at Termination of Employment due to death, Disability, Early
Retirement or Retirement shall become or remain exercisable in accordance
with the terms and conditions established by the Committee at the time of
grant.
(d) Any outstanding Nonqualified Option granted before February 24, 1999 and
held by a Participant at Termination of Employment due to death, Disability
or Retirement shall become exercisable in accordance with conditions
imposed by the Committee, at time of grant or thereafter, and remain fully
exercisable until the Option Expiration Date.
(e) The exercise period of any outstanding Nonqualified Option granted before
February 24, 1999 and held by a Participant at Termination of Employment
due to Early Retirement may, at the sole discretion of the Committee or its
designee be extended until a date determined by the Committee or its
designee, but not later than the Option Expiration Date.
5.6 Option Replacements; Repricing. Without prior approval of CIGNA Corporation
shareholders, the Committee may not cancel a previously granted Option and grant
a replacement Option if the new Option exercise price is lower than that of the
canceled Option.
5.7 Automatic Option Grants. The Committee may provide that, to the extent a
Participant pays the Option price of an Option granted under the Plan in Common
Stock, a new Option will automatically be granted to the Participant, subject to
the following terms and conditions (and any other terms and conditions the
Committee may deem appropriate):
(a) The Option price per share of any new Option shall not be less than the
Fair Market Value on the date of the automatic grant;
7
<PAGE>
(b) The date of the automatic grant of the new Option shall be the date the
former Option is exercised; and
(c) The term of the new Option shall not extend beyond the Option Expiration
Date of the former Option.
5.8 Incentive Stock Options. The following terms and conditions shall apply to
any Options granted under the Plan that are identified as Incentive Stock
Options.
(a) Incentive Stock Options may be granted only to Eligible Employees who are
employed by CIGNA Corporation or a corporation that is either a direct
Subsidiary or an indirect Subsidiary through an unbroken chain of
corporations.
(b) No Incentive Stock Option may be granted after December 13, 2009.
(c) No Incentive Stock Option may be granted to any person who, at the time of
grant, owns (or is deemed to own under Code Section 424(d)) shares of
outstanding Common Stock possessing more than 10% of the total combined
voting power of all classes of stock of CIGNA Corporation or a Subsidiary,
unless the Option exercise price is at least 110% of the Fair Market Value
of the stock subject to the Option and the Option by its terms is not
exercisable after the expiration of five years after the Option grant date.
(d) To the extent that the aggregate Fair Market Value of stock with respect to
which the Incentive Stock Options first become exercisable by a Participant
in any calendar year exceeds $100,000 (taking into account both Common
Stock subject to the Incentive Stock Options under this Plan and stock
subject to Incentive Stock Options under all other Company plans, if any),
such Options shall be treated as Nonqualified Options. For this purpose the
Fair Market Value of the stock subject to Options shall be determined as of
the date the Options were awarded. In reducing the number of options
treated as Incentive Stock Options to meet the $100,000 limit, the most
recently granted Options shall be reduced first. To the extent a reduction
of simultaneously granted Options is necessary to meet the $100,000 limit,
the Committee may, in the manner and to the extent permitted by law,
designate which shares of Common Stock are to be treated as shares acquired
pursuant to the exercise of an Incentive Stock Option.
(e) Any grant of Incentive Stock Options shall include whatever terms and
conditions are required to meet the requirements of Code Section 422.
8
<PAGE>
ARTICLE 6
Stock Appreciation Rights
6.1 General. Subject to Article 6, and upon terms and conditions it may
establish, the Committee may grant SARs to Eligible Employees who are granted
Options under the Plan.
6.2 Rights and Options. Each SAR shall relate to a specific Option granted under
the Plan and may be granted at the same time as the related Option or later.
6.3 Nature of Rights. The SAR shall entitle an Option holder to receive upon
exercise of the SAR, without payment to the Company, a number of shares of
Common Stock determined by multiplying (a) and (b) and dividing the result by
(c):
(a) Total number of shares subject to the related Option that the Option
holder designates for SAR exercise, up to the maximum number he may
purchase under the related Option as of the SAR exercise date;
(b) Excess of (1) the Fair Market Value of a share of Common Stock on the
SAR exercise date over (2) the Fair Market Value of a share of Common
Stock on the grant date of the SAR or the related Option (as specified
by the Committee upon grant of the SAR); and
(c) Fair Market Value of a share of Common Stock on the SAR exercise date.
6.4 Cash Payments. The Committee may provide that, instead of issuing shares
upon the SAR exercise, the Company shall pay cash equal to the Fair Market
Value, on the SAR exercise date, of some or all the shares that would otherwise
be issued upon the SAR exercise.
6.5 Related Options. Shares under an Option shall be used not more than once to
calculate a number of shares or cash to be received upon exercise of a related
SAR. Upon exercise of an SAR the related Option shall be canceled to the extent
of the number of shares used in the calculation under Section 6.3(a). That
number of shares will be subtracted from the number of shares available under
the Option immediately before the SAR exercise to determine the remaining number
of shares, if any, which may be issued upon any future exercise of the related
Option or SAR.
6.6 Termination of Employment. A Participant may exercise an SAR after
Termination of Employment only to the extent and upon the conditions that
related Option may be exercised after Termination of Employment.
9
<PAGE>
ARTICLE 7
Restricted Stock Grants
7.1 General. Subject to any limitations and provisions in the Plan, the
Committee may grant Restricted Stock to Eligible Employees upon terms and
conditions it may establish. The consideration for a Restricted Stock grant may
be solely in the form of the recipient's services rendered to the Company, or it
may be any other lawful form of consideration the Committee may determine.
7.2 Restricted Period. Except as provided below, Restricted Stock shall not be
sold, transferred, assigned, pledged or otherwise disposed of by the Participant
during the Restricted Period established by the Committee. Restricted Stock may
be used to pay the exercise price of Options under Section 5.2. The Committee
may establish different Restricted Periods and different restriction terms for
shares contained in a single Restricted Stock grant.
7.3 Issuance; Voting Rights; Dividends. Restricted Stock granted to a
Participant shall be issued by the Company as of the date of the grant. During
the Restricted Period, the Participant shall be entitled to vote the shares. The
Committee may provide for the current payment of dividends on shares of
Restricted Stock to the holders of such shares. Shares issued as a result of
stock dividends, splits or reclassifications, to the extent the issued shares
relate to Restricted Stock, shall be subject to the same limitations,
restrictions and provisions that are applicable to the related Restricted Stock.
7.4 Termination of Employment.
(a) Except as provided below, Restricted Stock (and all related rights)
owned by a Participant at Termination of Employment during a Restricted
Period shall be forfeited to the Company immediately upon Termination
of Employment (unless otherwise expressly provided by the Committee).
(b) If a Participant's Termination of Employment during a Restricted Period
is due to Retirement, the Committee or its designee (in the sole
discretion of either) may provide before the Participant's Retirement
that the Restricted Period applicable to any Restricted Stock owned by
the Participant shall lapse immediately upon the Participant's
Retirement.
(c) If a Participant's Termination of Employment during a Restricted Period
is a Termination Upon a Change of Control or is due to death or
Disability, the Restricted Period applicable to any Restricted Stock
owned by the Participant shall lapse immediately on date of Termination
of Employment.
7.5 Leave of Absence. The Committee shall determine the effect of approved
leaves of absence on applicable Restricted Periods. No Restricted Period,
however, may lapse during an approved leave of absence unless expressly provided
by the Committee.
10
<PAGE>
ARTICLE 8
Dividend Equivalent Rights
8.1 General. Subject to the limitations and provisions of the Plan, the
Committee may grant dividend equivalent rights to Eligible Employees upon terms
and conditions it may establish. The consideration for stock issued pursuant to
dividend equivalent rights may be solely in the form of the recipient's services
rendered to the Company, or it may be any other lawful form of consideration as
the Committee may determine.
8.2 Rights and Options. Each right may relate to a specific Option granted
under the Plan and may be granted to the Option holder at the same time as the
Option grant or later, or each right may be independent of any Option.
8.3 Nature of Rights. The right shall entitle a holder to receive, for a period
of time to be determined by the Committee, a payment equal to the quarterly
dividend declared and paid by the Company on one share of Common Stock. If the
right relates to a specific Option, the period shall not extend beyond the
earliest of the date the Option is exercised, the date any related SAR is
exercised, or the Option Expiration Date.
8.4 Payments. The Committee shall determine at time of grant whether payment
pursuant to a right shall be immediate or deferred and whether made in cash or
Common Stock, or a combination of both. If immediate, the Company shall make
payments pursuant to each right within 90 days after the Company has paid the
quarterly dividend to holders of Common Stock. If deferred, the payments shall
accumulate (with interest computed in a manner to be determined by the
Committee) until a date or event specified by the Committee and then shall be
made within 90 days after the occurrence of the specified date or event, unless
the right is forfeited under the terms of the Plan.
8.5 Termination of Employment. Any dividend equivalent right held by a
Participant at Termination of Employment for any reason shall be forfeited to
the Company immediately upon Termination of Employment, unless otherwise
expressly provided by the Committee.
11
<PAGE>
ARTICLE 9
Common Stock in Place of Other Awards
9.1 General. The Committee may grant an Eligible Employee Common Stock
(including Restricted Stock) instead of all or a portion (determined by the
Committee) of an award otherwise payable under a Qualifying Incentive Plan or
Qualifying Supplemental Benefit Plan. The grant shall be for a number of shares
of Common Stock that have an aggregate Fair Market Value, determined as of the
Payment Date, equal to the amount of the award being replaced by the Common
Stock.
9.2 Death; Termination of Employment. Unless the Committee, in its sole
discretion, provides otherwise, a Common Stock grant approved under Section 9.1
for a Participant whose Termination of Employment occurs before the Payment Date
shall still be granted. If the reason for Termination of Employment is the
Participant's death, the grant shall be made to the Participant's spouse (or
Participant's estate if there is no surviving spouse).
9.3 Deferral of Payments. A Common Stock grant approved under Section 9.1 shall
be deferred if the Participant had elected to defer the underlying award under a
Deferred Compensation Plan, subject to the provisions of the Deferred
Compensation Plan and Section 10.7(d) of this Plan. Common Stock that would have
been issued but for deferral under this provision shall be issued under this
Plan at the end of the deferral period.
ARTICLE 10
Strategic Performance Units
10.1 Award of Units.
(a) The Committee may in its sole discretion grant Unit Awards to Eligible
Employees selected for participation for a Performance Period.
(b) The CEO or his designee may grant a Unit Award to a person who becomes an
Eligible Employee during a Performance Period as long as that Unit Award is
(1) in accordance with guidelines approved by the Committee or (2) subject
to ratification by the Committee before any resulting Unit Award Payment is
made.
(c) No Eligible Employee may receive more than 100,000 Units during any
calendar year.
10.2 Performance Goals; Financial Measures. When the Committee grants Unit
Awards for a particular Performance Period, it shall:
(a) Establish in writing the objective performance goals and the financial
measurements to be used to measure the Company's performance;
12
<PAGE>
(b) Determine the length of the Performance Period and, if the performance
goals and financial measurements require comparing the Company's financial
results to those of a Peer Group, the composition of the Peer Group;
(c) Determine the annual scoring formula or method for assigning Performance
Points to each year of the Performance Period; and
(d) Determine the payout formula for converting Performance Points for the
Performance Period into the preliminary Unit dollar value.
The financial measurements shall be one or more of the following: return on
equity, adjusted return on equity, earnings, revenue growth, expense ratios or
other expense management measures and total shareholder return.
10.3 Performance Points. A number of Performance Points will be assigned to each
year of a Performance Period under the annual scoring formula or method under
Section 10.2(c). Based upon the Committee's assessment of factors which affected
financial results, the Committee may adjust downward the number of Performance
Points for each or any year in the Performance Period, but the adjustment shall
not exceed 10% of the maximum number of available annual points. The Performance
Points for each year of a Performance Period will be added to compute the total
number of Performance Points to be used in valuing Units for the entire
Performance Period.
10.4 Value of Units. The number of Performance Points computed for the
Performance Period and the Performance Period payout formula under Section
10.2(d) will determine the preliminary dollar value of a Strategic Performance
Unit for the Performance Period. The preliminary value may be adjusted downward
by the Committee based upon the Committee's evaluation of CIGNA Corporation's
strategic accomplishments over the Performance Period. The maximum amount of the
downward adjustment per Unit shall not exceed $25.00. The final value of each
Strategic Performance Unit shall not exceed $200.00. To the extent required by
Code Section 162(m), before Payment of any Unit Award the Committee shall
certify in writing that the Unit value for a Performance Period is based on the
attainment of the pre-established, objective performance goals for the
Performance Period.
10.5 Unit Award Payment.
(a) As soon as practicable after the close of a Performance Period, the Units
shall be valued and the Company shall make Payments to Participants with
Unit Awards.
(b) A Participant's Unit Award Payment for a Performance Period shall equal the
value of one Strategic Performance Unit, determined under Section 10.4,
multiplied by the number of Units in the Participant's Unit Award.
13
<PAGE>
(d) Notwithstanding the above, the Committee in its sole discretion may reduce
the amount of any Payment to any Participant, eliminate entirely the
Payment to any Participant, or defer the Payment until a later date or
occurrence of a particular event. The Committee's authority under this
Section 10.5(c) shall expire immediately upon a Change of Control.
10.6 Eligibility for Payments.
(a) Except for Payments described in Section 10.6 (b) and (c), and except in
the event of a Termination Upon a Change of Control, a Participant shall be
eligible to receive a Unit Award Payment for a Performance Period only if
the Participant has been employed by the Company continuously from the date
of Participant's Unit Award through the date of Payment.
(b) For the purposes of this Section 10.6, a leave of absence of less than
three months' duration with the approval of the Company is not considered
to be a break in continuous employment. In the case of a leave of absence
of three months or longer:
(1) The Committee, based on the recommendation of the CEO, shall determine
whether or not the leave of absence constitutes a break in continuous
employment for purposes of a Unit Award Payment; and
(2) If a Participant is on a leave of absence on the date that the Unit
Award Payment is to be made, the Committee may require that the
Participant return to active employment with the Company at the end of
the leave of absence as a condition of receiving the Payment, and any
determination as to eligibility for a Payment may be deferred for a
reasonable period after such return.
(c) If the employment of a Participant is terminated by reason of Retirement,
death or Disability after receipt of a Unit Award but before the related
Payment is made, the Committee or its designee shall determine whether a
Payment shall be made to or on behalf of such Participant, and whether the
Payment, if made, shall be in full or prorated based on factors determined
in the sole discretion of the Committee, or its designee. Any such Payment
shall be made to the Participant or the Participant's estate.
(d) In the event of a Termination Upon a Change of Control of a Participant
after the Participant receives a Unit Award but before the related Payment
is made, a Payment in cash shall be made to the Participant within 30 days
following the Termination Upon a Change of Control. The amount of the
Payment shall equal the total number of Units contained in all Unit Awards
held by the Participant as of the date of his Termination Upon a Change of
Control multiplied by the greatest of:
14
<PAGE>
(1) The Unit target value;
(2) The highest value established by the Committee for Unit Awards for
which any Payments were made to any Participants during the
twelve-month period immediately preceding the date of Participant's
Termination Upon a Change of Control; or
(3) The average of the highest values established by the Committee for the
last two Unit Awards paid to any Participants before the Participant's
Termination Upon a Change of Control.
10.7 Form of Payment.
(a) Except as otherwise provided in Section 10.6(d), Unit Award Payments shall
be made in cash, shares of Common Stock (including Restricted Stock),
Options or a combination of any of these forms of Payment, as determined by
the Committee in its sole discretion.
(b) If a Payment is made wholly or partially in shares of Common Stock, the
Payment shall be made in a number of whole shares. That number of shares
shall have an aggregate Fair Market Value that most closely approximates,
but does not exceed, the dollar amount of the Payment if made in cash.
(c) A Participant's Payment may be deferred under the Deferred Compensation
Plan. Common Stock that would have been issued but for deferral under this
provision shall be issued under this Plan at the end of the deferral
period.
(d) In case of any deferral under Section 9.3 or 10.7(c), the rate of return
that may be credited upon the deferred compensation shall comply with
requirements under Code Section 162(m), if applicable, so as not to be
considered an impermissible increase in compensation.
10.8 Future Unit Award Not Guaranteed. A Unit Award for a Performance Period
is not intended to be, or to be construed as, a right to receive
another Unit Award in any later Performance Period. A Unit Award for
any Performance Period shall be evidenced only by the grant to the
Eligible Employee by the Committee (or CEO) of a Unit Award.
15
<PAGE>
ARTICLE 11
Shares Authorized under the Plan
11.1 Maximum Number Authorized. The number of shares of Common Stock authorized
to be issued pursuant to Options, SARs, rights, grants or other awards under
this Plan shall be 25 million. Of that number 15 million shares (after
adjustment for a 3-for-1 stock split in May 1998) were authorized by CIGNA
Corporation shareholders at the annual shareholders meeting on April 26, 1995,
and 10 million shares were authorized by CIGNA Corporation shareholders at the
annual shareholders meeting on April 26, 2000. No more than 20% of the number of
shares authorized for issuance under the Plan may be awarded or granted under
Articles 7, 8, 9 and 10 in the form of Common Stock (including Restricted
Stock).
11.2 Maximum Number Per Participant. The aggregate number of shares of Common
Stock subject to Options and SARs that may be granted during any calendar year
to any individual shall be limited to 2,500,000.
11.3 Unexercised Options, Grant Forfeitures and Options Exercised with Common
Stock. There shall be available for further awards under this Plan:
(a) Common Stock under Options granted under the Plan if the Options expire or
are canceled or surrendered;
(b) Restricted Stock granted under the Plan if the Restricted Stock is
forfeited under Section 7.4 or is otherwise surrendered to the Company
before the Restricted Period expires;
(c) Common Stock used by a Participant as full or partial payment to the
Company upon exercise of an Option granted under this Plan;
(d) Common Stock withheld by, or otherwise remitted to, the Company to satisfy
a Participant's tax withholding obligations upon the lapse of restrictions
on Restricted Stock or the exercise of Options or SARs granted under the
Plan or upon any other payment or issuance of shares under the Plan.
11.4 No Fractional Shares. No fractional shares of Common Stock shall be issued,
accepted as payment of an Option exercise price or remitted to meet
tax-withholding obligations under the Plan.
11.5 Source of Shares. Common Stock may be issued from authorized but unissued
shares or out of shares held in CIGNA Corporation's treasury, or both.
16
<PAGE>
ARTICLE 12
Antidilution Provisions
Except as expressly provided under the Plan, the following provisions shall
apply to all shares of Common Stock (including Restricted Stock) authorized for
issuance and all Options granted under the Plan:
12.1 Stock Dividends, Splits, Etc. In the event of a stock dividend, stock
split, or other subdivision or combination of the Common Stock:
(a) The number of authorized shares of Common Stock, and any numerical share
limits, under the Plan will be adjusted proportionately; and
(b) There will be a proportionate adjustment in the number of shares of Common
Stock subject to unexercised stock Options and related SARs, and in the per
share Option exercise price (but without adjustment to the aggregate Option
exercise price) and in the number of shares of Restricted Stock
outstanding.
12.2 Merger, Exchange or Reorganization. If the outstanding shares of Common
Stock are changed or converted into, exchanged or exchangeable for, a different
number or kind of shares or other securities of CIGNA Corporation or of another
corporation, by reason of a reorganization, merger, consolidation,
reclassification or combination (an "Event"), appropriate adjustment shall be
made by the Committee in the number of shares and kind of Restricted Stock and
Common Stock for which Options, SARs and other rights may be or may have been
awarded under this Plan, so that the proportionate interests of Participants
shall be maintained as before the Event. However, in case of any contemplated
Event which may constitute a Change of Control, the Committee, with the approval
of a majority of the members of the Board who are not then Participants, may
modify any and all outstanding Restricted Stock, Options, SARs and other rights
(except those deferred under Section 9.3), so as to accelerate, as a consequence
of or in connection with the Event, the vesting of a Participant's right to
exercise any such Options or SARs or the lapsing of the Restricted Periods for
shares of Restricted Stock or the accelerated payment of any deferred dividend
equivalent rights.
ARTICLE 13
Administration of Plan
13.1 General Administration. The Plan shall be administered by the Committee,
subject to any requirements for review and approval by the Board that the Board
may establish.
13.2 Administrative Rules. The Committee shall have full power and authority to
adopt, amend and rescind administrative guidelines, rules and regulations
relating to this Plan, to interpret the Plan and to rule on any questions
relating to any of its provisions, terms and conditions.
17
<PAGE>
13.3 Committee Members Not Eligible. No member of the Committee shall be
eligible to participate in this Plan.
13.4 Decisions Binding. All decisions of the Committee concerning this Plan
shall be binding on CIGNA Corporation and its Subsidiaries and their respective
boards of directors, and on all Eligible Employees, Participants and other
persons claiming rights under the Plan.
ARTICLE 14
Amendments
All amendments to this Plan shall be in writing and shall be effective when
approved by the Board. A Plan amendment shall not be effective without the prior
approval of CIGNA Corporation shareholders if necessary under Internal Revenue
Service or SEC regulations, or the rules of the New York Stock Exchange or any
applicable law. The Board may make any changes required to conform the Plan and
Option agreements or grants with applicable Code provisions and regulations
relating to Incentive Stock Options. Unless otherwise expressly provided by an
amendment or the Board, no amendment to this Plan shall apply to grants of
Options, SARs, other rights or Restricted Stock made before the effective date
of the amendment. To the extent any provision of this Plan (as amended and
restated as of January 1, 2000) amends any provision of the Plan as in effect
before the Effective Date, however, unless otherwise expressly provided the
amendments shall apply to grants made before the Effective Date. Otherwise, a
Participant's rights under any Plan grants or awards, including any rights under
paragraph 10.6(d), and a transferee's rights relating to any transferred
derivative securities, may not be abridged by any amendment, modification or
termination of the Plan without his individual consent.
ARTICLE 15
Other Provisions
15.1 Effective Date. The Plan as amended and restated is effective as of January
1, 2000, subject to approval by the shareholders of CIGNA Corporation.
15.2 Duration of the Plan. The Plan shall remain in effect until all Options and
rights granted under the Plan have been satisfied by the issuance of Common
Stock or terminated under the terms of this Plan, all Restricted Periods
applicable to Restricted Stock granted under the Plan have lapsed, and all
Performance Periods related to Unit Awards granted under the Plan have expired,
and all related Unit Award Payments have been made.
18
<PAGE>
15.3 Early Termination. Notwithstanding Section 15.2, the Board may terminate
this Plan at any time; but no such action by the Board shall adversely affect
the rights of Participants which exist under this Plan immediately before its
termination.
15.4 General Restriction. No Common Stock issued pursuant to this Plan shall be
sold or distributed by a Participant until all appropriate listing, registration
and qualification requirements and consents and approvals have been obtained,
free of any condition unacceptable to the Board. In no event shall the value,
amount or form of consideration for any award under the Plan be less than the
value or amount, or in other than the form, required by applicable Delaware law.
15.5 Awards Not Assignable.
(a) No derivative security (as defined in rules promulgated under Exchange Act
Section 16), including any right to receive Common Stock (such as Options,
SARs or similar rights) or any right to payment under the Plan, shall be
assignable or transferable by a Participant except by will or by the laws
of descent and distribution. Any other attempted assignment or alienation
shall be void and of no force or effect. Any right to receive Common Stock
or any other derivative security (including Options, SARs or similar
rights) shall be exercisable during a Participant's lifetime only by the
Participant or by the Participant's guardian or legal representative.
(b) Notwithstanding Section 15.5(a), the Committee shall have the authority, in
its discretion, to grant (or to sanction by way of amendment of an existing
grant) derivative securities (other than Incentive Stock Options) which may
be transferred without consideration by the Participant during his lifetime
to any member of his immediate family, to a trust established for the
exclusive benefit of one or more members of his immediate family, to a
partnership of which the only partners are members of his immediate family,
or to such other person as the Committee shall permit. In the case of a
grant, the written documentation containing the terms and conditions of
such derivative security shall state that it is transferable, and in the
case of an amendment to an existing grant, such amendment shall be in
writing. A derivative security transferred as contemplated in this Section
15.5(b) may not be subsequently transferred by the transferee except by
will or the laws of descent and distribution and shall continue to be
governed by and subject to the terms and limitations of the Plan and the
relevant grant. The Committee, in its sole discretion at the time the
transfer is approved, may alter the terms and limitations of the relevant
grant and establish such additional terms and conditions as it shall deem
appropriate. As used in this subparagraph, "immediate family" shall mean,
as to any person, a spouse, any child, stepchild or grandchild, and shall
include relationships arising from legal adoption.
15.6 Withholding Taxes. Upon the exercise of any Option or SAR, the vesting of
any Restricted Stock, or payment of any award described in Section 4.1(d), (e)
19
<PAGE>
or (f), or upon the exercise of an Incentive Stock Option prior to the
satisfaction of the holding period requirements of Code Section 422, the Company
shall have the right at its option to:
(a) require the Participant (or personal representative or beneficiary) to
remit an amount sufficient to satisfy applicable federal, state and local
withholding taxes; or
(b) deduct from any amount payable the amount of any taxes the Company may be
required to withhold because of the transaction.
The Committee may require or permit the Participant to remit all or part of the
required withholding amount in Common Stock (other than Restricted Stock). The
remitted Common Stock may be shares deliverable to the Participant because of
the transaction giving rise to the withholding obligation (in which case the
number of shares of Common Stock delivered to a Participant shall be reduced by
the number of shares so remitted) or shares the Participant has owned without
restriction for at least six months as of the date the withholding obligation
arises. If the Committee permits a Participant to elect to remit Common Stock,
the election shall be made on or before the date the withholding obligation
arises and be subject to the disapproval of the Committee. The Committee may
establish any additional conditions it deems appropriate. The value of any
remitted Common Stock shall be its Fair Market Value as of the date the
withholding obligation arises.
15.7 Book Entry; Certificates. A book entry shall be made in the electronic
share ownership records maintained by the Company or the Company's transfer
agent as evidence of the issuance of Common Stock to a Participant (or
beneficiary) upon a Restricted Stock grant, the exercise of an Option or any
other grant or payment of Common Stock under the Plan. The Company or its
transfer agent shall deliver to any Participant (or beneficiary), upon his
request and subject to his compliance with applicable administrative procedures
the Company or its transfer agent may establish, a certificate for any of the
shares evidenced by book entry. A certificate for Restricted Stock, however,
will not be delivered until the applicable Restricted Period has expired.
15.8 Participant's Rights Unsecured. The right of any Participant to receive
future payments under the provisions of the Plan shall be an unsecured claim
against the general assets of the Company.
15.10 Termination of Employment. The Company retains the right to terminate the
employment of any employee at any time for any reason or no reason, and an award
or grant under the Plan to an Eligible Employee is not, and shall not be
construed in any manner to be, a waiver of that right.
15.11 Successors. Any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
or assets of CIGNA Corporation, shall assume the liabilities of CIGNA
20
<PAGE>
Corporation under this Plan and perform any duties and responsibilities in the
same manner and to the same extent that CIGNA Corporation would be required to
perform if no such succession had taken place.
15.12 Construction. The terms used in this Plan shall include the feminine as
well as the masculine gender and the plural as well as the singular, as the
context in which they are used requires.
21
<TABLE>
<CAPTION>
CIGNA CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Three Months Ended
March 31,
2000 1999
=====================================================================================================
<S> <C> <C>
Income from continuing operations before income taxes $ 420 $ 368
------------ ---------------
Fixed charges included in income:
Interest expense 27 31
Interest portion of rental expense 10 16
------------ ---------------
Total fixed charges included in income 37 47
Minority interest 9 -
------------ ---------------
Income available for fixed charges $ 466 $ 415
- ------------------------------------------------------------------===================================
RATIO OF EARNINGS TO FIXED CHARGES 12.6 8.8
- ------------------------------------------------------------------===================================
</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, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 23,209
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 644
<MORTGAGE> 9,842
<REAL-ESTATE> 654
<TOTAL-INVEST> 38,352
<CASH> 2,510
<RECOVER-REINSURE> 6,792<F1>
<DEFERRED-ACQUISITION> 947
<TOTAL-ASSETS> 96,997
<POLICY-LOSSES> 12,661
<UNEARNED-PREMIUMS> 663
<POLICY-OTHER> 4,214
<POLICY-HOLDER-FUNDS> 26,470
<NOTES-PAYABLE> 1,363
0
0
<COMMON> 67
<OTHER-SE> 5,771
<TOTAL-LIABILITY-AND-EQUITY> 96,997
3,989
<INVESTMENT-INCOME> 716
<INVESTMENT-GAINS> 9
<OTHER-INCOME> 177
<BENEFITS> 3,298
<UNDERWRITING-AMORTIZATION> 69
<UNDERWRITING-OTHER> 1,104
<INCOME-PRETAX> 420
<INCOME-TAX> 149
<INCOME-CONTINUING> 271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 271
<EPS-BASIC> 1.61
<EPS-DILUTED> 1.60
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES.
</FN>
</TABLE>
