Consolidated revenues of $5.0 billion increased 7% over the third quarter of 1999. Consolidated revenues for the nine months of 2000 were $14.9 billion, up 7%, compared with $13.9 billion for the same period last year, excluding the results of discontinued operations⁴. The increases were primarily due to business growth in the Employee Health Care, Life and Disability Benefits segment.

The company repurchased 4.4 million shares of its common stock for $432 million during the third quarter and 0.6 million shares for $64 million in October 2000. Repurchases through October resulted in a 10% decrease in shares outstanding since December 31, 1999. Total available repurchase authority is approximately $740 million at November 2, 2000.

Assets at September 30, 2000 increased to $96.7 billion from $95.3 billion at December 31, 1999.

This segment includes CIGNA's HMO and Indemnity operations. HMO includes medical and dental managed care and specialty health care operations. Indemnity includes medical and dental indemnity, disability, and group life insurance operations.

Operating income for the segment increased by 17% in the quarter, compared with pro forma⁵ operating income for the same period last year.

For the nine months of 2000, operating income was $556 million, compared with $499 million (pro forma of $480 million) for the same period last year.

HMO operating income increased 15% over pro forma HMO operating income for the same quarter of 1999. This increase was largely attributable to membership growth and rate increases in the medical managed care business, as well as higher earnings in the specialty health care operations.

The HMO results included net favorable adjustments of $11 million for the nine months of 2000. This compares with favorable adjustments of $6 million and $18 million, respectively, for the third quarter and nine months of 1999.

Indemnity operating income increased 17% over pro forma Indemnity operating income for the third quarter of 1999. The results reflect higher earnings from health care products funded through alternative funding arrangements (Administrative Services Only (ASO)) and retrospectively experience-rated business, partially offset by lower earnings on long-term disability business, primarily due to unfavorable pricing and claims experience.

The after-tax operating margin⁶ for the segment was 5.4%, compared with 5.3% for the third quarter of 1999.

The 12% increase in premiums and premium equivalents⁷ for the combined HMO and Indemnity operations was driven primarily by membership growth, rate increases and the effect of higher medical costs under alternative funding programs.

Total medical membership increased by nearly one million lives, compared with the same period last year, about evenly split between HMO and Indemnity coverages.

At September 30, 2000, approximately 20% of CIGNA's 14.3 million medical lives were covered by guaranteed cost managed care and indemnity arrangements (primarily Commercial HMO, Medicare, and Medicaid) where CIGNA assumes the risk for medical cost inflation.

The Commercial HMO medical risk loss ratio improved over the same period last year and the second quarter of 2000.

Average net premium yields (i.e., rate increases net of reductions in benefits) for the Commercial HMO business modestly outpaced medical cost inflation in the quarter.

The rate of commercial medical cost inflation is approximately 8%, unchanged from the second quarter of 2000. Outpatient and pharmacy (utilization and unit cost increases) continue to be the primary factors that are driving medical cost inflation.

The expense ratio for HMO increased, compared with the third quarter of 1999 and the second quarter of 2000, due primarily to technology and eCommerce initiatives.

This segment, which operates in the defined contribution, defined benefit and corporate life insurance markets, had operating income of $63 million in the third quarter of 2000, compared with $66 million for the same period last year. The results in the quarter reflect increased operating expenses and a shift of assets to lower margin products (separate account equity funds), partially offset by higher earnings from an increased asset base. For the nine months of 2000 and 1999, operating income was $192 million and $196 million, respectively.

Assets under management at September 30, 2000 were $57.0 billion, an increase of 8% compared with $52.8 billion as of September 30, 1999, and an increase of 2% compared with $55.8 billion as of December 31, 1999.

The ratio of annualized underlying segment operating income to average assets under management was approximately 44 basis points for the quarter, compared with 47 basis points for full year 1999.

This segment, which includes CIGNA's life insurance and employee benefits businesses operating in select international markets, had operating income of $15 million in the third quarter of 2000, compared with $6 million for the same period last year (excluding 1999 charges of $400 million after-tax for Brazilian investments³ and $3 million after-tax for restructuring activities). The segment's operating income for the nine months of 2000 was $33 million, compared with $10 million for the nine months of 1999, excluding the charges noted above and an after-tax gain of $43 million associated with the sale of a partial interest in CIGNA's Japanese life insurance business.

The improvement in operating income for the third quarter primarily reflects increased earnings in the Japanese life insurance business. The nine month results also reflect the absence of approximately $15 million in losses from a Brazilian health care operation that CIGNA exited in the third quarter of 1999.

Premiums and fees of $515 million increased 26% in the quarter, compared with $409 million in the third quarter of 1999, primarily reflecting growth in the Japanese life insurance operation, growth in life and group benefits business in other Asian operations and higher premiums and fees for products related to expatriate employees of multinational companies.

Other Operations includes gain recognition related to the 1998 sale of the individual life insurance and annuity business and the 2000 sale of a portion of the reinsurance business. It also includes the results of the leveraged corporate life insurance operation, the reinsurance business (consisting of the sold reinsurance operations prior to the date of sale and the retained business that was placed in run-off) and the settlement annuity business.

Other Operations reported operating income of $19 million in the third quarter of 2000, compared with $37 million for the same period last year. The decrease in the quarter primarily reflects the absence of earnings from the reinsurance business. For the nine months ended September 30, 2000, Other Operations reported operating income of $78 million³, compared with $113 million reported for the nine months ended September 30, 1999.

Corporate includes unallocated investment income and parent company expenses, primarily debt service. For 1999, Corporate also includes certain overhead expenses previously allocated to the sold property and casualty businesses that have been allocated to the remaining business segments since the beginning of 2000.

Corporate had a loss of $16 million in the third quarter of 2000, compared with a loss of $1 million for the same period last year, excluding a $7 million after-tax restructuring charge. The increased loss in the quarter primarily reflects lower net investment income on unallocated corporate investments resulting from share repurchases following the sale of the property and casualty business. The operating loss for the nine months of 2000 was $34 million, compared with a loss of $52 million for the same period last year, excluding the restructuring charge.

Consolidated net income⁸ for the quarter was $278 million, or $1.74 per share, compared with $1.1 billion, or $5.44 per share, for the same period last year. For the nine months of 2000, consolidated net income was $710 million, or $4.33 per share, compared with $1.5 billion, or $7.28 per share, for the same period last year.

Operating income (loss) is defined as net income (loss) excluding after-tax realized investment results and the cumulative effect of an accounting change in 1999.

All earnings per share amounts are on a diluted basis.

Consolidated operating income for the nine months of 2000 excludes after-tax charges of $127 million associated with the run-off reinsurance business principally for reserve strengthening. Consolidated operating income for the third quarter and nine months of 1999 excludes an after-tax gain of $1.2 billion for the sale of the property and casualty (P&C) business to ACE Limited (reported in discontinued operations), a $400 million after-tax charge attributable to certain Brazilian

investments, and $10 million of after-tax restructuring charges for cost reduction initiatives subsequent to the sale of P&C.

On July 2, 1999, CIGNA sold its domestic and international Property and Casualty business to ACE Limited. In 1999, CIGNA began reporting this business as discontinued operations.

Pro forma 1999 operating income for the Employee Health Care, Life and Disability Benefits segment includes certain overhead expenses that were reported in the Corporate segment until 2000, when these expenses were allocated to the operating segments. Pro forma HMO results include expenses of $4 million after-tax and $10 million after-tax for the third quarter and nine months of 1999, respectively. Pro forma Indemnity results include expenses of $3 million after-tax and $9 million after-tax for the third quarter and nine months of 1999, respectively.

Operating margin is defined as operating income divided by GAAP revenue, excluding realized investment gains.

Due to CIGNA's business mix, which has a large concentration of retrospectively experience-rated and ASO business with self-insured customers, rather than fully insured business, management believes that business volume is best measured by premiums and fees plus premium equivalents. Premium equivalents generally equal paid claims under alternative funding programs, where CIGNA's customers assume all or a portion of the responsibility for funding claims. CIGNA would have recorded the amount of these paid claims as additional premiums if these programs had been written as guaranteed cost (full risk) business.

Consolidated net income includes the charges and gains, noted above, recognized during 2000 and 1999, and the $91 million after-tax charge in 1999 for the cumulative effect of adopting a new accounting standard, primarily related to the sold property and casualty business.

CIGNA made certain segment reclassifications, effective January 1, 2000. See Exhibit 1 for additional information.

In 1999, corporate overhead which would have been allocated to the P&C segment had the sale to ACE Limited not occurred was reported in Corporate (other operating expenses). Effective January 1, 2000, this overhead was allocated to the operating segments. Prior period amounts have not been restated to reflect this change but are illustrated above on a pro forma basis.

Because of the overall loss from continuing operations for the third quarter of 1999, the number of shares used to compute operating income per share as adjusted does not reflect the dilution caused by stock options and restricted stock grants of approximately 2.6 million shares. If they were included in the computation of per share amounts, operating income per share as adjusted would have been $1.45 per share for the quarter.