-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IFmT8nQ8gIjxu1r+5yNgkaENmKpYJmhqHBDwzaIahITNgIBlLA97qc6ahb82maDE iyd0Cxt3LkyhCdWcY9btTw== 0000893220-95-000761.txt : 19951119 0000893220-95-000761.hdr.sgml : 19951119 ACCESSION NUMBER: 0000893220-95-000761 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIGNA CORP CENTRAL INDEX KEY: 0000701221 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061059331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08323 FILM NUMBER: 95592716 BUSINESS ADDRESS: STREET 1: ONE LIBERTY PL 1650 MARKET ST STREET 2: P O BOX 7716 CITY: PHILADELPHIA STATE: PA ZIP: 19192-1550 BUSINESS PHONE: 2157611000 10-Q 1 CIGNA CORPORATION 3RD QUARTER 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1995 ------------------ 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, PHILADELPHIA, PA. 19192-1550 - -------------------------------------- ---------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 761-1000 -------------- Not Applicable -------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ------ ------ As of October 31, 1995, 75,939,097 shares of the issuer's Common Stock were outstanding. 2 CIGNA CORPORATION INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income 1 Consolidated Balance Sheets 2 Consolidated Statements of Cash Flows 3 Notes to Financial Statements 4 Item 2. Management's Discussion and 11 Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings. 36 Item 6. Exhibits and Reports on Form 8-K. 36 SIGNATURE 37 EXHIBIT INDEX 38
3 Part I. FINANCIAL INFORMATION Item 1. Financial Statements CIGNA CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (In millions, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1995 1994 1995 1994 ================================================================================================================== REVENUES Premiums and fees $ 3,408 $ 3,497 $ 10,340 $ 10,307 Net investment income 1,080 980 3,192 2,940 Other revenues 134 117 391 372 Realized investment gains 20 6 226 50 -------- -------- --------- --------- Total revenues 4,642 4,600 14,149 13,669 -------- -------- --------- --------- BENEFITS, LOSSES AND EXPENSES Benefits, losses and settlement expenses 4,266 3,250 10,687 9,685 Policy acquisition expenses 290 314 886 883 Other operating expenses 969 858 2,753 2,549 -------- -------- --------- --------- Total benefits, losses and expenses 5,525 4,422 14,326 13,117 -------- -------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (883) 178 (177) 552 -------- -------- --------- --------- Income taxes (benefits): Current 65 92 176 225 Deferred (382) (37) (282) (45) -------- -------- --------- --------- Total income taxes (317) 55 (106) 180 -------- -------- --------- --------- NET INCOME (LOSS) (566) 123 (71) 372 Dividends declared (56) (55) (164) (165) Retained earnings, beginning of period 4,439 3,856 4,052 3,717 - -------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS, END OF PERIOD $ 3,817 $ 3,924 $ 3,817 $ 3,924 - ----------------------------------------------------------------------============================================== EARNINGS PER SHARE $ (7.76) $ 1.70 $ (0.98) $ 5.14 - ----------------------------------------------------------------------============================================== DIVIDENDS DECLARED PER SHARE $ 0.76 $ 0.76 $ 2.28 $ 2.28 - ----------------------------------------------------------------------==============================================
The Notes to Financial Statements are an integral part of these statements. 1 4 CIGNA CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except per share amounts)
AS OF AS OF SEPTEMBER 30, DECEMBER 31, 1995 1994 ======================================================================================================================= ASSETS Investments: Fixed maturities: Available for sale, at fair value (amortized cost, $21,531; $18,899) $ 22,866 $ 18,521 Held to maturity, at amortized cost (fair value, $12,750; $12,276) 11,943 12,296 Equity securities, at fair value (cost, $708; $1,651) 792 1,806 Mortgage loans 10,433 9,970 Policy loans 6,309 5,355 Real estate 1,692 1,747 Other long-term investments 377 371 Short-term investments 1,140 853 --------- --------- Total investments 55,552 50,919 Cash and cash equivalents 1,775 1,693 Accrued investment income 1,139 835 Premiums, accounts and notes receivable 4,169 3,986 Reinsurance recoverables 7,427 7,486 Deferred policy acquisition costs 1,148 1,128 Property and equipment, net 885 914 Deferred income taxes, net 2,131 2,264 Other assets 1,118 1,161 Goodwill 1,135 1,165 Separate account assets 17,270 14,551 - ----------------------------------------------------------------------------------------------------------------------- Total $ 93,749 $ 86,102 - ---------------------------------------------------------------------------------====================================== LIABILITIES Contractholder deposit funds $ 29,488 $ 27,000 Unpaid claims and claim expenses 19,857 19,246 Future policy benefits 11,360 10,453 Unearned premiums 2,409 2,575 --------- --------- Total insurance and contractholder liabilities 63,114 59,274 Accounts payable, accrued expenses and other liabilities 5,286 4,726 Current income taxes 138 156 Short-term debt 571 271 Long-term debt 1,068 1,389 Separate account liabilities 17,178 14,475 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 87,355 80,291 - ----------------------------------------------------------------------------------------------------------------------- CONTINGENCIES - NOTE 7 SHAREHOLDERS' EQUITY Common stock (shares issued, 85 and 83) 85 83 Additional paid-in capital 2,374 2,248 Net unrealized appreciation (depreciation) - fixed maturities 606 (122) Net unrealized appreciation - equity securities 81 141 Net translation of foreign currencies 7 (27) Retained earnings 3,817 4,052 Less treasury stock, at cost (576) (564) - ----------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 6,394 5,811 - ----------------------------------------------------------------------------------------------------------------------- Total $ 93,749 $ 86,102 - ---------------------------------------------------------------------------------====================================== SHAREHOLDERS' EQUITY PER SHARE $ 86.38 $ 80.46 - ---------------------------------------------------------------------------------======================================
The Notes to Financial Statements are an integral part of these statements. 2 5 CIGNA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
NINE MONTHS ENDED SEPTEMBER 30, 1995 1994 ================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (71) $ 372 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Insurance liabilities, net of reinsurance recoverables 904 101 Premiums, accounts and notes receivable (134) 143 Accounts payable, accrued expenses, other liabilities and current income taxes 275 (203) Deferred income taxes, net (282) (45) Realized investment gains (226) (50) Gain on sale of subsidiaries and other equity interests - (26) Other, net (123) (5) ----------- ----------- Net cash provided by operating activities 343 287 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investments sold: Fixed maturities - available for sale 5,010 3,748 Fixed maturities - held to maturity - 12 Equity securities 1,541 472 Mortgage loans 279 484 Other (primarily short-term investments) 10,745 12,254 Investment maturities and repayments: Fixed maturities - available for sale 770 1,438 Fixed maturities - held to maturity 1,510 2,107 Mortgage loans 345 136 Investments purchased: Fixed maturities - available for sale (7,829) (5,437) Fixed maturities - held to maturity (1,336) (2,260) Equity securities (348) (450) Mortgage loans (1,116) (592) Other (primarily short-term investments) (11,990) (12,881) Other, net (113) (137) ----------- ----------- Net cash used in investing activities (2,532) (1,106) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds 5,597 4,392 Withdrawals from contractholder deposit funds (3,287) (3,118) Net change in commercial paper (16) (5) Issuance of long-term debt 88 144 Repayment of debt (3) (23) Dividends paid (164) (165) Other, net 17 5 ----------- ----------- Net cash provided by financing activities 2,232 1,230 ----------- ----------- Effect of foreign currency rate changes on cash 39 40 - ------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 82 451 Cash and cash equivalents, beginning of period 1,693 1,211 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 1,775 $ 1,662 - ------------------------------------------------------------------------------------============================== Supplemental Disclosure of Cash Information: Income taxes paid, net of refunds $ 198 $ 301 Interest paid $ 102 $ 93 - ------------------------------------------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements. 3 6 CIGNA CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1-BASIS OF PRESENTATION The consolidated financial statements include the accounts of CIGNA Corporation and all significant subsidiaries (CIGNA). These consolidated financial statements have been prepared in conformity with generally accepted accounting principles. Certain reclassifications have been made to conform with the 1995 presentation. The interim financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments other than the adjustments described in the notes) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The preparation of interim financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business as well as competitive and other market conditions, call for caution in drawing specific conclusions from interim results. NOTE 2-NEW ACCOUNTING PRONOUNCEMENTS In 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which provides guidance on the accounting and disclosure for impaired loans. In October 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which eliminates the income recognition requirements of SFAS No. 114. CIGNA adopted SFAS Nos. 114 and 118 in the first quarter of 1995, which resulted in an $8 million increase in net income. In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires write-down to fair value when long-lived assets to be held and used are impaired. Long-lived assets to be disposed, including real estate held for sale, must be carried at the lower of cost or fair value less costs to sell. In addition, SFAS No. 121 prohibits depreciation of long-lived assets to be disposed. SFAS No. 121 must be implemented by the first quarter of 1996 with the cumulative effect of implementation for assets being held for disposal reported in net income. CIGNA has not determined the timing or effect of adoption of this standard; however, the effect on CIGNA's results of operations, liquidity and financial condition is not expected to be material. The Financial Accounting Standards Board is currently reviewing for issuance an implementation guide related to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The proposed guide contains a provision permitting companies that currently classify fixed maturities as held to maturity (which are carried at amortized cost) to reclassify a portion or all of such fixed maturities to available for sale (which are carried at fair value) in the fourth quarter of 1995. The effects, if any, of the proposed implementation guide have not been determined. 4 7 NOTE 3-INVESTMENTS REALIZED GAINS AND LOSSES Realized gains and losses on investments, excluding policyholder share, were as follows:
Three Months Ended Nine Months Ended September 30, September 30, (in millions) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------------- Realized gains (losses): Fixed maturities $18 $7 $29 $16 Equity securities 2 1 182 18 Mortgage loans (2) 4 - (7) Real estate 1 (8) 9 18 Other investments 1 2 6 5 ---------------------------------------------------- 20 6 226 50 Income taxes 7 5 53 20 - -------------------------------------------------------------------------------------------------------------- Net realized gains $13 $1 $173 $30 - ----------------------------------------------------------====================================================
FIXED MATURITIES AND EQUITY SECURITIES Sales of available-for-sale fixed maturities and equities, including policyholder share, were as follows:
Three Months Ended Nine Months Ended September 30, September 30, (in millions) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------------- Proceeds from sales $2,155 $1,098 $6,551 $4,220 Gross gains on sales 53 28 326 135 Gross losses on sales (33) (26) (101) (119) - --------------------------------------------------------------------------------------------------------------
During the third quarter and nine months of 1995, $65 million and $218 million of fixed maturities classified as held to maturity were transferred to the available-for-sale category, resulting in the recognition in Shareholders' Equity of unrealized depreciation of $1 million and $11 million, net of taxes, respectively. There were no sales of held-to-maturity fixed maturities during the first nine months of 1995. During the nine months of 1994, $14 million of held-to-maturity fixed maturities were sold, resulting in gross proceeds of $12 million and a realized pre-tax loss of $2 million. In addition, for the third quarter and nine months of 1994, $31 million of fixed maturities classified as held to maturity were transferred to the available-for-sale category, resulting in the recognition in Shareholders' Equity of unrealized depreciation of $1 million, net of taxes. All transfers and sales for 1995 and 1994 were the result of significant credit deterioration of the issuers of the affected investments. During the third quarter and nine months of 1995, Net Unrealized Appreciation - Fixed Maturities included in Shareholders' Equity, which is net of policyholder share and deferred income taxes, increased by $46 million and $728 million, respectively, compared with decreases of $78 million and $898 million for the same periods last year. 5 8 MORTGAGE LOANS As of September 30, 1995, CIGNA's total investment in impaired mortgage loans was $893 million, including $482 million, before valuation reserves totaling $84 million, and $411 million which had no valuation reserves. During the nine months of 1995, valuation reserves for mortgage loans, including policyholder share, decreased from $179 million as of December 31, 1994 to $84 million as of September 30, 1995. The net decrease for the nine months reflects: (1) $54 million of reserves transferred to real estate for foreclosed mortgage loans that were reclassified to real estate investments, (2) $44 million of charge-offs, and (3) a $3 million net increase in valuation reserves. For the third quarter and nine months of 1995, the average total investment in impaired mortgage loans (average calculated using total impaired mortgage loans before reserves) was approximately $900 million and $1.0 billion, respectively, and interest income recorded on these loans was approximately $21 million ($16 million on a cash basis and $5 million on an accrual basis) and $58 million ($44 million on a cash basis and $14 million on an accrual basis), respectively. NOTE 4-EARNINGS PER SHARE Earnings per share were based on net income (loss) divided by weighted average common shares, including common share equivalents, where appropriate.
Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------------- Weighted average common shares 72,908 72,354 72,561 72,318 - ---------------------------------------------------------=====================================================
There is no significant difference between earnings per share on a primary and a fully diluted basis. During the third quarter of 1995, $89 million of CIGNA's 8.2% convertible subordinated debentures due 2010 (8.2% Debt) was converted into approximately 1.3 million shares of CIGNA common stock. Also during the third quarter, CIGNA announced its intention to redeem (at par plus accrued interest) all 8.2% Debt outstanding on November 2, 1995. Substantially all of the $158 million of 8.2% Debt outstanding as of September 30, 1995 was converted into CIGNA common stock as of the redemption date. Assuming all of CIGNA's 8.2% Debt had been converted to CIGNA common stock (3.6 million shares) on January 1, 1995 and the related interest expense ($2 million after-tax for the third quarter of 1995; $9 million after-tax for the nine months of 1995) was excluded from net loss, earnings per share for the third quarter and nine months of 1995 would have been a loss of $7.40 and $0.82, respectively. Common shares held as Treasury shares were 10,913,959 and 10,827,609 as of September 30, 1995 and 1994, respectively. 6 9 NOTE 5-INCOME TAXES CIGNA's federal income tax returns are routinely audited by the Internal Revenue Service (IRS), and provisions are made in the financial statements in anticipation of the results of these audits. The IRS has completed audits of the years 1982 through 1990. During the third quarter of 1995, one of two outstanding issues was resolved with no effect on CIGNA's results of operations. The remaining issue, which relates only to years prior to 1989, could result in an assessment of approximately $195 million for those years. CIGNA is currently contesting this issue in court. Although the outcome is uncertain, management believes that CIGNA should prevail. In management's opinion, adequate tax liabilities have been established for all years. As of September 30, 1995, CIGNA had tax basis operating loss carryforwards of approximately $650 million. NOTE 6-REINSURANCE In the normal course of business, CIGNA's insurance subsidiaries enter into agreements, primarily relating to short-duration contracts, to assume and cede reinsurance with other insurance companies. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses, although ceded reinsurance does not relieve the originating insurer of liability. CIGNA evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of its reinsurers. Failure of reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies or disputes, could result in losses. Allowances for uncollectible amounts were $672 million and $435 million as of September 30, 1995 and December 31, 1994, respectively. During the third quarter of 1995, CIGNA increased the allowance for uncollectible reinsurance by $210 million pre-tax ($138 million after-tax) for asbestos and environmental losses, for assumed reinsurance business that CIGNA previously exited and for CIGNA's domestic commercial business. While future charges for unrecoverable reinsurance may materially affect results of operations in future periods, such amounts are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. For the third quarter and nine months of 1995, premiums and fees were net of ceded premiums of $352 million and $1.3 billion, respectively. For the third quarter and nine months of 1994, premiums and fees were net of ceded premiums of $472 million and $1.5 billion, respectively. In addition, benefits, losses and settlement expenses for the third quarter and nine months of 1995 were net of reinsurance recoveries of $408 million and $1.0 billion, respectively. Benefits, losses and settlement expenses for the third quarter and nine months of 1994 were net of reinsurance recoveries of $149 million and $1.3 billion, respectively. NOTE 7-CONTINGENCIES AND OTHER MATTERS FINANCIAL GUARANTEES CIGNA, through its subsidiaries, is contingently liable for various financial guarantees provided in the ordinary course of business. These include guarantees for the repayment of industrial revenue bonds as well as other debt instruments. Although the ultimate outcome of any loss contingencies arising from CIGNA's financial guarantees may adversely affect results of operations in future periods, they are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. 7 10 REGULATORY AND INDUSTRY DEVELOPMENTS CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: revise the system of funding cleanup of environmental damages; develop standards for estimating certain claim liabilities; reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; restrict insurance pricing and the application of underwriting standards; reform health care; and expand regulation. Legislation is currently being considered by Congress, which would limit, and eventually substantially eliminate, the tax deductibility of policy loan interest for corporate-owned life insurance. The outcome of such legislation is uncertain and, although it could have a material adverse effect on results of operations for the Individual Financial Services segment, it is not expected to be material to CIGNA's consolidated results of operations, liquidity or financial condition. Superfund, originally enacted in 1980, expires this year and new legislation has been introduced in Congress. Any changes in Superfund relating to: (1) allocating responsibility; (2) funding cleanup costs; or (3) establishing cleanup standards could affect the liabilities of potentially responsible parties and insurers. Due to uncertainties associated with the timing and content of any future Superfund legislation, the effect on CIGNA's results of operations, liquidity or financial condition cannot be reasonably estimated at this time. CIGNA expects proposals for federal and state legislation seeking modest health care insurance reform and limitations on formation and operation of efficient health care networks. Due to uncertainties associated with the timing and content of any health care legislation, the effect on CIGNA's future results of operations, liquidity or financial condition cannot be reasonably estimated at this time. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. 8 11 ASBESTOS-RELATED AND ENVIRONMENTAL POLLUTION CLAIMS As discussed in CIGNA's 1994 Form 10-K, CIGNA historically has not been able to estimate its ultimate liabilities for asbestos-related and environmental pollution claims because of the significant uncertainties associated with them that are not generally present for other types of claims. Time-tested actuarial techniques have not been useful in attempting to estimate these liabilities because of the lack of developed case law and adequate claim history. However, as industry experience in dealing with these exposures has accumulated, various industry-related parties have evaluated newly-emerging methods for estimating asbestos-related and environmental pollution liabilities, and these methods have attained growing credibility. In addition, outside actuarial firms and others have developed data bases to supplement the information that can be derived from a company's claim files. CIGNA has evaluated these methods and expanded its data bases of asbestos-related and environmental pollution claims. Using these recent developments, CIGNA completed a comprehensive review of its asbestos-related and environmental pollution exposures during the third quarter of 1995 and increased its related reserves by $255 million ($194 million, net of reinsurance) for asbestos-related exposures and approximately $1.2 billion ($861 million, net of reinsurance) for environmental pollution exposures. CIGNA's reserves for asbestos-related and environmental pollution claims, as increased in the third quarter, are a reasonable estimate of its ultimate liability for these claims, based on currently known facts, reasonable assumptions where the facts are not known, current law (including Superfund), and methodologies currently available. Reserving for these claims continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. As additional experience and other data become available and are reviewed, or as new or improved methodologies are developed, CIGNA's estimates and judgments may be revised. Any such revisions could result in future changes in reserves or reinsurance recoverables for these claims, which would be reflected in CIGNA's results of operations for the period in which the estimates are changed. While the effect of any such changes in reserves or reinsurance recoverables on future results of operations could be material, CIGNA does not expect such changes to have a material effect on its liquidity or financial condition. LITIGATION CIGNA is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of business, either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against it by its policyholders or other insurers. One such area of litigation involves policy coverage and judicial interpretation of legal liability for asbestos-related and environmental pollution claims. While the outcome of all litigation involving CIGNA, including insurance-related litigation, cannot be determined, litigation (including that related to asbestos and environmental pollution claims) is not expected to result in losses that differ from recorded reserves by amounts that would be material to results of operations, liquidity or financial condition. Also, reinsurance recoveries related to claims in litigation, net of the allowance for uncollectible reinsurance, are not expected to result in recoveries that differ from recorded recoverables by amounts that would be material to results of operations, liquidity or financial condition. 9 12 RESTRUCTURING INITIATIVES During the third quarter of 1995, CIGNA implemented cost reduction plans, which resulted in an after-tax charge totalling $55 million ($85 million pre-tax, which is included in other operating expenses) for the domestic Property and Casualty operations. The components of the charge on an after-tax basis were as follows: severance - $24 million, representing costs associated with nonvoluntary terminations of approximately 1,600 domestic employees in various functions and locations; real estate - $16 million, primarily related to vacated lease space; and other costs - $15 million, including $7 million of costs associated with exiting certain business and $4 million for fixed asset write-offs. The cash outlays associated with these initiatives began in the third quarter of 1995 and will continue through 1998, with most of the cash outlays occurring in 1996. During the third quarter, $2 million of severance was paid to 250 terminated employees. CIGNA has funded, and will continue to fund, these costs through liquid assets, and such funding will not have a material adverse effect on its liquidity. CIGNA expects that the cost reduction initiatives, when fully implemented, will result in annual cost savings of approximately $55 million after-tax, primarily based on the elimination of certain payroll costs, and to a lesser extent, lease costs. During the third quarter of 1995, CIGNA recorded an after-tax charge of $20 million ($30 million pre-tax included in other operating expenses) for cost reduction initiatives in the Employee Life and Health Benefits segment. The cost reduction charge primarily consisted of severance-related expenses representing costs associated with nonvoluntary employee terminations covering approximately 2,400 employees (approximately 45% in the indemnity operations and 55% in the HMO operations). The cash outlays associated with the restructuring initiatives began in the third quarter of 1995 and will continue through 1997, with approximately 50% of such outlays occurring in 1995, 40% in 1996 and the remainder in 1997. During the third quarter, $3 million of severance was paid to 555 terminated employees. CIGNA has funded, and will continue to fund, these costs through liquid assets, and such funding will not have a material adverse effect on its liquidity. The cost reduction initiatives, when fully implemented, are expected to result in annual cost savings of approximately $40 million after-tax primarily based on the elimination of certain payroll costs. During the third quarter of 1994, CIGNA decided to withdraw from the property and casualty reinsurance business, which did not have a material effect on CIGNA's results of operations. 10 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion addresses the financial condition of CIGNA Corporation (CIGNA) as of September 30, 1995, compared with December 31, 1994, and its results of operations for the quarter and nine months ended September 30, 1995, compared with the same periods last year. This discussion should be read in conjunction with the Management's Discussion and Analysis section included in CIGNA's 1994 Annual Report to Shareholders (pages 8 through 23) and in CIGNA's reports on Form 10-Q for the first and second quarters of 1995, 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. CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: revise the system of funding cleanup of environmental damages; develop standards for estimating certain claim liabilities; reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; restrict insurance pricing and the application of underwriting standards; reform health care; and expand regulation. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. For more detailed information on these and other contingencies, see Note 7 to the Financial Statements. Also, see Note 5 regarding a proposed IRS assessment of approximately $195 million. CIGNA is currently contesting the assessment and believes it should prevail. CIGNA continues to conduct strategic and financial reviews of its businesses in order to deploy its capital most effectively. Such reviews could result in future actions; however, no determinations have been made at this time. In the first quarter of 1995, CIGNA adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures," which resulted in an $8 million increase in after-tax realized investment results. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was issued in the first quarter of 1995, and is effective for 1996 financial statements. CIGNA has not yet determined the timing or effect of adoption of this standard; however, the effect on CIGNA's results of operations, liquidity and financial condition is not expected to be material. See Note 2 to the Financial Statements for additional information. The Financial Accounting Standards Board is currently reviewing for issuance an implementation guide related to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The proposed guide contains a provision permitting companies that currently classify fixed maturities as held to maturity (which are carried at amortized cost) to reclassify a portion or all of such fixed maturities to available for sale (which are carried at fair value) in the fourth quarter of 1995. The effects, if any, of the proposed implementation guide have not been determined. 11 14 CONSOLIDATED RESULTS OF OPERATIONS
==================================================================================== FINANCIAL SUMMARY Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------ Premiums and fees $3,408 $3,497 $10,340 $10,307 Net investment income 1,080 980 3,192 2,940 Other revenues 134 117 391 372 Realized investment gains 20 6 226 50 --------------------- -------------------- Total revenues 4,642 4,600 14,149 13,669 Benefits and expenses 5,525 4,422 14,326 13,117 --------------------- -------------------- Income (loss) before taxes (883) 178 (177) 552 Income taxes (benefits) (317) 55 (106) 180 --------------------- -------------------- Net income (loss) ($566) $123 ($71) $372 ==================================================================================== Realized investment gains, net of taxes $13 $1 $173 $30 ====================================================================================
CIGNA's consolidated results decreased significantly for the third quarter and nine months of 1995 from the same periods last year. Results for the third quarter and nine months of 1995 included a $774 million after-tax ($1.2 billion pre-tax) charge in the Property and Casualty segment, primarily for asbestos-related and environmental pollution exposures, as well as a $75 million after-tax ($115 million pre-tax) charge associated with cost reduction initiatives in the Employee Life and Health Benefits and Property and Casualty segments. Excluding these charges and after-tax realized investment gains, income for the third quarter and nine months of 1995 was $270 million and $605 million, compared with $122 million and $342 million for the same periods last year. These improvements primarily reflect improved results in the Property and Casualty segment. After-tax realized investment gains for the third quarter, compared with the same period last year, reflect higher net gains on fixed maturities and lower impairments on real estate investments. For the nine months of 1995, after-tax realized investment gains increased significantly due to higher gains on sales of equity securities resulting from a restructuring of a portion of CIGNA's investment portfolio into fixed income securities. For additional information, see Note 3 to the Financial Statements. Consolidated revenues, excluding realized investment gains, for the third quarter and nine months of 1995 increased 1% and 2% from the same periods last year, primarily reflecting higher revenues for the Employee Life and Health Benefits and the Individual Financial Services segments, partially offset by lower revenues for the Property and Casualty segment. Full year results for 1995, excluding the charges noted above, are expected to continue to improve, compared with 1994. However, results could be adversely affected by major catastrophes. 12 15 EMPLOYEE LIFE AND HEALTH BENEFITS
===================================================================================== FINANCIAL SUMMARY Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------- Premiums and fees $1,971 $1,956 $6,069 $5,815 Net investment income 144 130 428 387 Other revenues 86 69 253 209 Realized investment gains (losses) 1 (8) 118 6 --------------------- -------------------- Total revenues 2,202 2,147 6,868 6,417 Benefits and expenses 2,029 1,952 6,228 5,829 --------------------- -------------------- Income before taxes 173 195 640 588 Income taxes 56 69 190 201 --------------------- -------------------- Net income $117 $126 $450 $387 ===================================================================================== Realized investment gains (losses), net of taxes $1 ($6) $101 $6 =====================================================================================
Net income for the Employee Life and Health Benefits segment decreased 7% for the third quarter and increased 16% for the nine months of 1995, compared with the same periods last year. Results for the third quarter and nine months of 1995 included an after-tax charge of $20 million related to cost reduction initiatives discussed below. Excluding this charge and after-tax realized investment results, income was $136 million and $369 million for the third quarter and nine months of 1995, compared with $132 million and $381 million for the same periods last year. During the third quarter of 1995, CIGNA recorded an after-tax charge of $20 million ($30 million pre-tax included in other operating expenses) for cost reduction initiatives. The cost reduction charge primarily consisted of severance-related expenses representing costs associated with nonvoluntary employee terminations covering approximately 2,400 employees (approximately 45% in the indemnity operations and 55% in the HMO operations). The cash outlays associated with the restructuring initiatives began in the third quarter of 1995 and will continue through 1997, with approximately 50% of such outlays occurring in 1995, 40% in 1996 and the remainder in 1997. During the third quarter, $3 million of severance was paid to 555 terminated employees. CIGNA has funded, and will continue to fund, these costs through liquid assets, and such funding will not have a material adverse effect on its liquidity. The cost reduction initiatives, when fully implemented, are expected to result in annual cost savings of approximately $40 million after-tax primarily based on the elimination of certain payroll costs. These savings in the near term are expected to be partially offset by increased investments in business growth and service initiatives, particularly in the HMO operations. Excluding the cost reduction charge and after-tax realized investment results, earnings for the segment's indemnity operations were $87 million and $213 million for the third quarter and nine months, respectively, representing an increase of $5 million and a decrease of $9 million, respectively, compared with the same periods last year. The quarter and nine month results of 1995 reflect adverse claim experience resulting from higher medical costs in the group medical operations, as well as higher claims in the group life operations. These factors were more than offset for the quarter and partially offset for the nine months by the improvement in earnings of $6 million after-tax for long-term disability (LTD) business. Also, the change in earnings for the quarter and nine months of 1995 reflects the favorable effects of $14 million after-tax and $23 million after-tax, respectively, resulting from the net change of reserve reviews between respective periods and a recovery of losses on a large case. 13 16 The segment's HMO operations earnings, excluding the cost reduction charge and after-tax realized investment results, were $49 million and $156 million for the third quarter and nine months, respectively, representing decreases of $1 million and $3 million, respectively, compared with the same periods last year. These results reflect higher operating expenses associated with business growth and investments in service initiatives, and lower margins resulting from higher than expected medical care costs. These decreases were partially offset by the effects of membership growth, as well as the favorable effects of $14 million after-tax and $21 million after-tax for the quarter and nine months of 1995, respectively, resulting from the net change of reserve reviews between respective periods. Earnings for the remainder of 1995 are expected to continue to be constrained by costs associated with business growth and service initiatives combined with the effect of higher than expected medical care costs. During the third quarter, CIGNA announced the proposed sale of certain assets of its Los Angeles staff model HMO, while retaining access to the provider network which will continue to serve membership in this area through an individual practice association (IPA). The sale, which is subject to regulatory approval, is expected to be completed in 1996. The gain on completion of the sale is not expected to be material to CIGNA's results of operations. However, the sale agreement includes provisions that could result in future gains depending on certain minimum membership levels. Premiums and fees for the third quarter and nine months of 1995 increased 1% and 4%, compared with the same periods last year. These improvements reflect higher premiums and fees for HMOs of $83 million and $201 million, primarily due to membership growth. Group indemnity business premiums declined $68 million for the quarter and increased $53 million for the nine months. The decline for the quarter primarily reflects declines in medical and life businesses due to cancellations. The nine month increase reflects higher medical premiums due to new sales and rate increases, partially offset by declines in the LTD line of business. Growth in premiums is expected to continue to be constrained by competitive pressures in both the medical indemnity and HMO markets. Total HMO membership increased 14%, compared with September 30, 1994, and 11% compared with December 31, 1994. Approximately 76% of membership growth for 1995 has been in HMO alternative funding programs under which the customer assumes all or a portion of the responsibility for funding claims. Such programs generally have lower margins than traditional HMO plans. Management believes that adding premium equivalents to premiums and fees (adjusted premiums and fees) produces a more meaningful measure of business volume. Adjusted premiums and fees for the third quarter and nine months of 1995 were approximately $4.3 billion and $13.3 billion, compared with $4.4 billion and $13.1 billion for the same periods last year. The decline in the quarter primarily reflects declines in medical premium equivalents reflecting cancellations and conversions to HMOs. The nine month increase primarily reflects growth in HMO alternative funding programs, partially offset by declines in medical premium equivalents reflecting cancellations and conversions to HMOs. Premium equivalents, as a percentage of total adjusted premiums and fees, were 54% and 56% for the nine months of 1995 and 1994, respectively. Administrative Services Only (ASO) plans accounted for approximately 45% of total adjusted premiums and fees for the nine months of 1995 and 1994. Net investment income for the third quarter and nine months increased 11%, compared with the same periods last year, primarily reflecting a change in investment asset mix to include more fixed maturities and less equity securities. 14 17 EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
==================================================================================== FINANCIAL SUMMARY Three Months Nine Months September 30, September 30, (In millions) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------ Premiums and fees $40 $39 $123 $128 Net investment income 425 418 1,281 1,289 Realized investment gains -- 5 4 12 --------------- -------------------- Total revenues 465 462 1,408 1,429 Benefits and expenses 396 389 1,195 1,214 --------------- -------------------- Income before taxes 69 73 213 215 Income taxes 21 26 68 73 --------------- -------------------- Net income $48 $47 $145 $142 ==================================================================================== Realized investment gains, net of taxes $ -- $3 $2 $6 ====================================================================================
Net income for the Employee Retirement and Savings Benefits segment increased slightly for the third quarter and the nine months of 1995, compared with the same periods of 1994. Included in the third quarter and nine month results for 1994 was an unfavorable tax adjustment resulting from IRS audits of $3 million (including a $1 million charge related to realized investment results). Excluding after-tax realized investment results and the tax adjustment, income was $48 million and $143 million for the third quarter and nine months of 1995, compared with $46 million and $138 million for the same periods last year. These results primarily reflect the favorable effects on earnings from asset growth. Premiums and fees increased 3% for the third quarter and decreased 4% for the nine months of 1995, compared with the same periods last year, primarily reflecting annuity sales. Net investment income increased 2% for the third quarter and decreased 1% for the nine months of 1995, compared with the same period last year. The increase for the quarter reflects lower non-accruals, which was more than offset for the nine months by the effects of lower yields. Assets under management is generally a key determinant of earnings for this segment. For the nine months ended September 30, assets under management and related activity, including amounts attributable to separate accounts, were as follows:
===================================================================================== (in millions) 1995 1994 - ------------------------------------------------------------------------------------- Balance -- January 1 $33,882 $34,469 Premiums and deposits 2,784 2,304 Investment results 1,970 1,791 Increase (decrease) in fair value of assets 2,114 (779) Customer withdrawals (1,509) (1,782) Benefit payments and other (2,044) (1,744) - ------------------------------------------------------------------------------------- Balance -- September 30 $37,197 $34,259 =====================================================================================
15 18 Approximately 60% and 57% of the premiums and deposits for 1995 and 1994, respectively, were from new customers. The higher level of premiums and deposits in the first nine months of 1995, compared with the same period last year, reflects increased sales. The changes in the fair value of assets for 1995 and 1994 primarily reflect market value fluctuations for both fixed maturities and equity securities. Management expects asset growth for the remainder of 1995 to continue to be constrained, resulting from decisions by plan sponsors to diversify assets and fund management. In addition, assets under management will continue to be affected by market value fluctuations for fixed maturities and equity securities. 16 19 INDIVIDUAL FINANCIAL SERVICES
==================================================================================== FINANCIAL SUMMARY Three Months Nine Months Ended September 30, September 30, (In millions) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------ Premiums and fees $216 $187 $646 $619 Net investment income 256 195 725 548 Other revenues 15 14 50 47 Realized investment gains (losses) 1 (2) (1) 7 ---------------- ----------------- Total revenues 488 394 1,420 1,221 Benefits and expenses 430 346 1,248 1,067 ---------------- ----------------- Income before taxes 58 48 172 154 Income taxes 21 17 60 54 ---------------- ----------------- Net income $37 $31 $112 $100 ==================================================================================== Realized investment gains (losses), net of taxes $1 ($2) $ -- $4 ====================================================================================
Net income for the Individual Financial Services segment for the third quarter and nine months of 1995 increased 19% and 12%, compared with the same periods last year. Excluding after-tax realized investment results, income was $36 million and $112 million for the third quarter and nine months of 1995, compared with $33 million and $96 million for the same periods last year. These increases reflect higher earnings from interest-sensitive products, primarily reflecting business growth. In addition, the nine month results for 1995 reflect earnings of $4 million after-tax for additional proceeds from the 1992 sale of a substantial portion of CIGNA's mutual fund business. Premiums and fees increased 16% and 4% for the third quarter and nine months of 1995, compared with the same periods of 1994, reflecting growth in business, primarily of interest-sensitive products (principally corporate-owned life insurance). The nine month increase was partially offset by lower premiums for a product that is no longer actively marketed. Net investment income for the third quarter and nine months of 1995 increased 31% and 32%, compared with the same periods last year, reflecting sales of interest-sensitive and annuity products. The increase in benefits and expenses for the third quarter and nine months reflects growth in interest-sensitive products. Legislation is currently being considered by Congress, which would limit, and eventually substantially eliminate, the tax deductibility of policy loan interest for corporate-owned life insurance. The outcome of such legislation is uncertain and, although it could have a material adverse effect on results of operations for the segment, it is not expected to be material to CIGNA's consolidated results of operations, liquidity or financial condition. 17 20 PROPERTY AND CASUALTY
============================================================================ FINANCIAL SUMMARY Three Months Nine Months Ended September 30, September 30, (In millions) 1995 1994 1995 1994 - ---------------------------------------------------------------------------- Premiums and fees $1,181 $1,315 $3,502 $3,745 Net investment income 199 185 594 555 Other revenues 61 57 169 160 Realized investment gains 12 6 84 28 ---------------- ----------------- Total revenues 1,453 1,563 4,349 4,488 Benefits and expenses 2,622 1,685 5,506 4,852 ---------------- ----------------- Loss before taxes (1,169) (122) (1,157) (364) Income tax benefits (413) (53) (417) (148) ---------------- ----------------- Net loss ($756) ($69) ($740) ($216) ===========================================================================
Net losses for the Property and Casualty segment increased significantly, compared with the same periods last year, primarily reflecting charges associated with reserve strengthening for asbestos-related and environmental pollution (A&E) claims ($686 million after-tax) and uncollectible reinsurance for non-A&E exposures ($88 million after-tax), and charges for cost reduction initiatives ($55 million after-tax). The Property and Casualty segment's after-tax results for the periods presented above included the following (in millions): Underlying operations $83 $56 $223 $86 Realized investment gains 7 3 54 17 Prior year development: Asbestos and environmental (686) (42) (787) (118) Unrecoverable reinsurance (88) (4) (105) (14) Other (12) (74) (32) (91) Catastrophe losses (5) (7) (38) (95) Cost reduction charges (55) (9) (55) (9) Federal tax adjustments - 8 - 8 ----------------- -------------- Net loss ($756) ($69) ($740) ($216) ================= ==============
The improvement in "Underlying operations" for the third quarter and nine months of 1995, compared with the same periods last year, was primarily driven by lower current accident year underwriting losses due to improved claim experience and rate increases on certain lines of business, and higher net investment income primarily for the international operations. Although its results are improving, CIGNA's domestic business continues to reflect the highly competitive pricing environment. Premiums and fees for the third quarter and the nine months of 1995 decreased 10% and 6% from the same periods last year. These declines primarily reflect reduced premiums of $147 million for the quarter and $334 million for the nine months in CIGNA's domestic commercial business due to continued competition, the application of stricter underwriting standards and, to a lesser extent, conversions of workers' compensation business from standard risk transfer to high-deductible policies, and the ratings downgrade by Best in 1994. In addition, the declines reflect a decrease in premiums and fees from the reinsurance business of $67 million and $155 million for the quarter and nine months, respectively, due to CIGNA's withdrawal from this business late in 1994. These declines were partially offset by growth in international lines of business of $99 million and $284 18 21 million for the quarter and nine months, respectively. Premiums and fees are expected to continue to be depressed through 1995 for the reasons noted above; however, CIGNA does not expect the premium decline to have a material effect on its future results of operations, liquidity or financial condition. Net investment income for the third quarter and the nine months of 1995 increased 8% and 7%, compared with the same periods last year, primarily reflecting growth in international lines of business and higher investment yields, partially offset by negative cash flows in the domestic property and casualty operations. Pre-tax catastrophe losses, net of reinsurance, ("catastrophe losses") were $8 million and $11 million for the third quarter of 1995 and 1994, respectively. Through nine months, catastrophe losses were $59 million in 1995, compared with $146 million for the same period last year. Catastrophe losses for the nine months of 1995 include $31 million for Texas hail storms. Catastrophe losses for the nine months of 1994 include $86 million for the Los Angeles earthquake and $34 million for the severe winter weather. The effects of reinsurance on catastrophe losses in the third quarter and nine months of 1995 and 1994 were not material. During the third quarter of 1995, CIGNA implemented cost reduction plans, which resulted in an after-tax charge totalling $55 million ($85 million pre-tax, which is included in other operating expenses) for the domestic Property and Casualty operations. The components of the charge on an after-tax basis were as follows: severance - $24 million, representing costs associated with nonvoluntary terminations of approximately 1,600 domestic employees in various functions and locations; real estate - $16 million, primarily related to vacated lease space; and other costs - $15 million, including $7 million of costs associated with exiting certain business and $4 million for fixed asset write-offs. The cash outlays associated with these initiatives began in the third quarter of 1995 and will continue through 1998, with most of the cash outlays occurring in 1996. During the third quarter, $2 million of severance was paid to 250 terminated employees. CIGNA has funded, and will continue to fund, these costs through liquid assets, and such funding will not have a material adverse effect on its liquidity. CIGNA expects that the cost reduction initiatives, when fully implemented, will result in annual cost savings of approximately $55 million after-tax, primarily based on the elimination of certain payroll costs and, to a lesser extent, lease costs. LOSS RESERVES AND REINSURANCE RECOVERABLES CIGNA's reserving methodology (for other than asbestos-related and environmental pollution exposures, which is discussed below) and significant issues affecting the estimation of loss reserves are described in its 1994 Form 10-K. In summary, CIGNA's loss reserves of $17.6 billion and $16.8 billion as of September 30, 1995 and December 31, 1994, respectively, are an estimate of future payments for reported and unreported claims for losses and related expenses with respect to insured events that have occurred. The basic assumption underlying the many time-tested actuarial and other methods used in the estimation of property and casualty loss reserves is that past experience is an appropriate basis for predicting future events. However, current trends and other factors that would modify past experience are also considered. Estimating property and casualty reserves is a complex process that relies heavily on judgment and is subject to uncertainties that are normal, recurring and inherent. CIGNA changes its estimate of the liability for insured events of prior years as new data become available. The effects of these changes, net of reinsurance, are charged or credited to income for the periods in which they are determined. CIGNA continually attempts to improve its loss estimation process by refining its process of analyzing loss development patterns, claims payments and other information, but there remain many reasons for adverse development of estimated ultimate liabilities. For example, the uncertainties inherent in estimating losses have grown in the last decade because of changes in social and legal trends that expand the liability of insureds, establish new liabilities and reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA. Such changes from past experience significantly affect the ability of insurers to estimate liabilities for unpaid losses and related expenses. 19 22 The following table shows the adverse (favorable) pre-tax effects on CIGNA's results of operations from prior year development, net of reinsurance, for the third quarter and nine months ended September 30:
==================================================================================================================================== Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------ (Dollars in millions) 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Asbestos-related $194 16% $16 9% $255 18% $30 9% Environmental pollution 861 71 48 26 955 67 151 44 Reinsurance exposures 22 2 52 28 23 2 59 17 Unrecoverable reinsurance 135 11 6 3 161 11 21 6 Workers' compensation 27 2 14 8 67 5 24 7 Other (30) (2) 49 26 (40) (3) 58 17 - ------------------------------------------------------------------------------------------------------------------------------------ Total $1,209 100% $185 100% $1,421 100% $343 100% ====================================================================================================================================
CIGNA's reserves for asbestos-related and environmental pollution exposures were $765 million ($456 million, net of reinsurance) and $1.8 billion ($1.3 billion, net of reinsurance), respectively, as of September 30, 1995, compared with $594 million ($281 million, net of reinsurance) and $707 million ($542 million, net of reinsurance) as of December 31, 1994. Asbestos-related and environmental pollution reserves at September 30, 1994 were $632 million ($276 million, net of reinsurance) and $681 million ($522 million, net of reinsurance), respectively. These reserves as of September 30, 1995 include the effects of charges recorded in the third quarter of 1995 as follows:
==================================================================================================================================== Asbestos Environmental Total ------------------------------------------------------------- (In millions) Gross Net Gross Net Gross Net - ------------------------------------------------------------------------------------------------------------------------------------ Bulk reserve for reported claims $84 $55 $559 $373 $643 $428 Bulk reserve for incurred but not reported 171 114 619 438 790 552 claims Unrecoverable reinsurance -- 25 -- 50 -- 75 - ------------------------------------------------------------------------------------------------------------------------------------ Total $255 $194 $1,178 $861 $1,433 $1,055 ====================================================================================================================================
As discussed in CIGNA's 1994 Form 10-K, CIGNA historically has not been able to estimate its ultimate liabilities for asbestos-related and environmental pollution claims because of the significant uncertainties associated with them that are not generally present for other types of claims. Time-tested actuarial techniques have not been useful in attempting to estimate these liabilities because of the lack of developed case law and adequate claim history. However, as industry experience in dealing with these exposures has accumulated, various industry-related parties have evaluated newly-emerging methods for estimating asbestos-related and environmental pollution liabilities, and these methods have attained growing credibility. In addition, outside actuarial firms and others have developed data bases to supplement the information that can be derived from a company's claim files. CIGNA has evaluated these methods and expanded its data bases of asbestos-related and environmental pollution claims. Using these recent developments, CIGNA completed a comprehensive review of its asbestos-related and environmental pollution exposures during the third quarter of 1995 and increased its related net reserves by approximately $1.1 billion. CIGNA's methodology, which was reviewed by an outside actuarial firm, consisted of a detailed analysis of its reported claims, using a stratified sampling approach. Reported claims representing approximately 50% of CIGNA's estimated asbestos-related exposure and approximately 75% of its estimated environmental pollution exposure were analyzed individually, with the results of the claim reviews extrapolated 20 23 to the remainder of the reported claim population. Each claim review involved analyzing various characteristics of the applicable policies, including their related attachment points, limits of liability, terms, conditions and exclusions. For environmental pollution claims, the reviews also evaluated damages per site using CIGNA's claim files and information from a site data base obtained from external and internal sources. The possible effects of Superfund reform were not considered. The claim reviews considered specific coverage defenses and the allocation and spreading of losses across policy periods and among other insurers and the policyholder. The previous history of payments and the type of business conducted by the policyholder were also considered. Based on this work, additional reserves for reported claims were established, as shown in the above table. In addition, CIGNA also estimated reserves for incurred but not reported (IBNR) claims (also shown in the above table) by using the recent developments described above. For environmental pollution claims, the IBNR reserve was based on estimates of future development for sites yet to be identified, of additional claims related to currently-identified sites and of third party liability. For asbestos-related claims, the IBNR reserve was based on estimates of additional claims against known policyholders as well as claims against policyholders that have not yet asserted claims against CIGNA. In addition to CIGNA's own reserve review, a state insurance department retained an outside actuarial consulting firm to review CIGNA's reserves in conjunction with a quadrennial NAIC zone examination of certain of CIGNA's property and casualty subsidiaries. That firm applied its methods, including its proprietary model, a loss development approach and a market share approach for estimating possible outcomes of asbestos-related and environmental pollution liabilities. The results of the firm's work, which was statistically based, corroborated, in the aggregate, the results of CIGNA's work, which was largely based on the judgment of experienced claims professionals in reviewing claim files, as described above. This corroboration between two different approaches to estimating CIGNA's asbestos-related and environmental pollution liabilities provided confidence in the results and supported CIGNA's decision to increase its reserves. Reserves for environmental pollution claims and related incurred expense and payment activity include internal costs to manage such claims and disputes with policyholders over insurance coverage issues as well as external litigation-related costs for such disputes. Payments associated with disputed coverage issues will decline in the future, and eventually end, as the disputes or related issues are resolved. To present CIGNA's environmental pollution reserves and related activity that more directly relates to indemnity costs and costs to defend policyholders against environmental pollution claims for the nine months ended September 30, the following table excludes internal costs and external litigation-related costs for insurance coverage disputes.
=================================================================================== 1995 1994 ------------- ------------ (In millions) Gross Net Gross Net - ----------------------------------------------------------------------------------- Beginning reserves $558 $397 $444 $285 Plus incurred claims and claim adjustment expenses 1,181 854 146 97 Less payments for claims and claim adjustment expenses (130) (103) (58) (5) - ----------------------------------------------------------------------------------- Ending reserves $1,609 $1,148 $532 $377 ===================================================================================
Since the mid-1980's, when CIGNA established a separate unit to handle its asbestos-related and environmental pollution claims, it has followed an aggressive resolution strategy for these claims. When appropriate, CIGNA has settled claims with its policyholders, often obtaining full policy releases. While CIGNA believes that its ultimate asbestos-related and environmental pollution exposure has been reduced by this strategy, it has also resulted in accelerating the recognition of incurred and paid claims and claim adjustment expenses. A significant portion of the payments shown in the above table for 1995 are due to substantial settlements made pursuant to CIGNA's aggressive resolution strategy. Paid environmental pollution claims are expected to continue to be significant for the foreseeable future, but will vary depending on the level of settlement activity. There will be less variability in the future in the level of incurred claims and claim adjustment expenses because of the increase in reserves 21 24 in the third quarter of 1995. Superfund, originally enacted in 1980, expires this year and new legislation has been introduced in Congress. Any changes in Superfund relating to: (1) allocating responsibility; (2) funding cleanup costs; or (3) establishing cleanup standards could affect the liabilities of potentially responsible parties and insurers. Due to uncertainties associated with the timing and content of any future Superfund legislation, the effect on CIGNA's results of operations, liquidity or financial condition cannot be reasonably estimated at this time. CIGNA's reserves for asbestos-related and environmental pollution claims, as increased in the third quarter, are a reasonable estimate of its ultimate liability for these claims, based on currently known facts, reasonable assumptions where the facts are not known, current law (including Superfund), and methodologies currently available. Reserving for these claims continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. As additional experience and other data become available and are reviewed, or as new or improved methodologies are developed, CIGNA's estimates and judgments may be revised. Any such revisions could result in future changes in reserves or reinsurance recoverables for these claims, which would be reflected in CIGNA's results of operations for the period in which the estimates are changed. While the effect of any such changes in reserves or reinsurance recoverables on future results of operations could be material, CIGNA does not expect such changes to have a material effect on its liquidity or financial condition. Losses for reinsurance exposures for 1995 primarily reflect $15 million for London reinsurance exposures. For 1994, losses for reinsurance exposures primarily reflect a $40 million charge resulting from a third quarter review of reserves for certain reinsurance lines of business (principally closed books of business) other than London reinsurance exposures. The increase in workers' compensation loss development in 1995, compared with 1994, primarily reflects unfavorable claim experience for experience-rated coverages. Other prior year development in 1995 was primarily attributable to favorable reserve development on commercial packages and commercial fire lines of business, partially offset by unfavorable development on other long-term exposures. For the comparable period in 1994, other prior year development was primarily attributable to the general and excess liability line of business and other long-term exposures, partially offset by favorable reserve development on the commercial fire line of business. CIGNA's reinsurance recoverables were approximately $7.0 billion and $7.1 billion as of September 30, 1995 and December 31, 1994, net of allowances of $672 million and $435 million, respectively. CIGNA expects to continue to have significant recoveries from its reinsurance arrangements, including recoveries of asbestos-related and environmental pollution losses. However, the extent of recoveries in the aggregate, including for asbestos-related and environmental pollution losses, will depend on future gross loss experience and the particular reinsurance arrangements to which future losses relate. Losses for unrecoverable reinsurance are principally due to the failure of reinsurers to indemnify CIGNA, primarily because of reinsurer insolvencies and disputes under reinsurance contracts. Reinsurance disputes have increased in recent years, particularly on larger and more complex claims such as those related to professional liability, asbestos and London reinsurance market exposures. Reinsurance disputes may increase in the future, and are likely to include disputes related to environmental pollution. Allowances have been established for amounts deemed uncollectible. During the third quarter of 1995, CIGNA increased the allowance for uncollectible reinsurance by $210 million pre-tax, including $75 million, which is reported as asbestos-related and environmental pollution prior year development in the table on page 10. The remainder of the increase ($135 million) relates to CIGNA's assumed reinsurance business that it previously exited and domestic commercial business. While future charges for unrecoverable reinsurance may materially affect results of operations in future periods, such amounts are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. 22 25 In management's judgement, information currently available has been appropriately considered in estimating CIGNA's loss reserves and reinsurance recoverables. During the third quarter, CIGNA announced its plan to reorganize its domestic property and casualty subsidiaries into two separate operations. One operation will manage ongoing business and the other will manage run-off policies and related claims, including those for asbestos-related and environmental pollution exposures. The plan is designed to create business structures that enhance management's focus on its specialist strategy and to position the ongoing business for future profitable growth, while at the same time providing dedicated, specialized resources to manage each operation separately and effectively. In addition, by placing the exposures associated with the run-off businesses in a legal entity separate from the ongoing operation, CIGNA expects to improve the claims paying rating for its ongoing operation. As part of its overall reorganization plan, which is subject to regulatory approval, CIGNA has committed to contribute $375 million of additional capital by December 31, 1995 to the run-off companies; such capital will be provided through internal sources. Regulatory approval is expected by year-end. In early 1995, A.M. Best Company, Inc. ("Best") assigned the rating of A-, which was under review with "developing implications," to CIGNA's new domestic property and casualty pool group and downgraded the INA Domestic Pool Group to a B+ rating, which was under review with "negative implications". In October 1995 Best affirmed those ratings and removed the "under review" status of the ratings based on its review of the domestic property and casualty operations, including CIGNA's actions to strengthen its reserves for asbestos-related and environmental pollution exposures and to reorganize its businesses into two distinct operations. Best has indicated that it will review and issue ratings on CIGNA's reorganized operations after the reorganization receives final approval by the state insurance departments and that the ongoing operations are expected to be rated A-. 23 26 OTHER OPERATIONS Other Operations primarily includes unallocated investment income, expenses (principally debt service) and taxes. Also included in Other Operations are the results of CIGNA's settlement annuity business and non-insurance operations engaged primarily in investment and real estate activities. Other Operations had losses of $12 million and $38 million for the third quarter and nine months of 1995, compared with losses of $12 million and $41 million for the same periods last year. After-tax realized investment results for the third quarter and nine months of 1995 were gains of $4 million and $16 million, respectively. After-tax realized investment results for the third quarter and nine months of 1994 were gains of $3 million and losses of $3 million, respectively. Excluding after-tax realized investment results and a $20 million after-tax gain from the first quarter 1994 sale of a business, losses were $16 million and $15 million for the third quarters of 1995 and 1994; losses for the nine months of 1995 and 1994 were $54 million and $58 million. The declines in losses reflect overall lower expenses. LIQUIDITY AND CAPITAL RESOURCES Liquidity for CIGNA and its insurance subsidiaries has remained strong as evidenced by significant amounts of short-term investments and cash and cash equivalents in the aggregate. Generally, CIGNA has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio and through utilization of overall positive cash flows. During 1995, cash and cash equivalents increased slightly from $1.7 billion as of December 31, 1994 to $1.8 billion as of September 30, 1995. This increase primarily reflects deposits and interest credited, net of withdrawals, to contractholder deposit funds ($2.3 billion); proceeds from the issuance of long-term debt ($88 million); and cash flows from operating activities ($343 million), primarily resulting from the timing of cash receipts and cash disbursements. The increase in cash flows was partially offset by cash used for investing activities ($2.5 billion), primarily net investment purchases ($2.4 billion); and payments of dividends on CIGNA common stock ($164 million). Cash flow from operating activities was constrained by negative cash flow of approximately $300 million from the property and casualty business, reflecting claim payments related to insurance reserves established in prior periods. CIGNA's capital resources represent funds available for long-term business commitments and primarily consist of retained earnings and proceeds from the issuance of long-term debt and equity securities. CIGNA's financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of such securities. CIGNA continues to be well capitalized, with sufficient borrowing capacity to meet the anticipated needs of its businesses. CIGNA had $1.07 billion of long-term debt outstanding at September 30, 1995, compared with $1.39 billion at December 31, 1994. The decrease in long-term debt primarily reflects (1) the reclassification of $150 million of CIGNA's 8% Notes due September 1996 to short-term, and (2) conversions of $89 million of CIGNA's 8.2% Convertible Debentures due in 2010 into 1.3 million shares of CIGNA common stock. In addition, as a result of CIGNA's redemption (at par plus accrued interest) of all unconverted 8.2% Convertible Debentures on November 2, 1995, the remaining portion of such debt ($158 million) was reclassified to short-term debt as of September 30, 1995. Substantially all of this debt was converted into common stock as of the redemption date. The decline in long-term debt was partially offset by the issuance of $25 million of 7.17% Notes due in 2002, $25 million of 8.16% Notes due in 2000 and $36 million of medium-term notes. The proceeds from these issuances were used for general corporate purposes. As of September 30, 1995, CIGNA had $800 million remaining under a shelf registration statement that may be issued as debt, equity securities or both, depending upon market conditions and CIGNA's capital requirements. 24 27 At September 30, 1995, CIGNA's short-term debt, primarily current maturities of long-term debt and commercial paper, amounted to $571 million, an increase of $300 million from December 31, 1994, primarily reflecting the reclassification of currently maturing debt to short-term debt discussed above. CIGNA contributed approximately $250 million of capital during 1994 to the domestic property and casualty operations, as a result of continued losses. As previously discussed in the Property and Casualty section, during the third quarter CIGNA announced its plan to reorganize its domestic property and casualty subsidiaries into two separate operations. CIGNA has committed to contribute $375 million, contingent upon approval of the reorganization; such funds will be provided through internal sources. Standard & Poor's upgraded the outlook for CIGNA's corporate debt ratings from negative to stable and Duff & Phelps announced that it expects to reaffirm CIGNA's corporate debt and commercial paper ratings if the domestic property and casualty reorganization plan is approved. 25 28 INVESTMENT ASSETS
====================================================================================== September 30, December 31, (In millions) 1995 1994 - -------------------------------------------------------------------------------------- Fixed maturities: at fair value $22,866 $18,521 Fixed maturities: at amortized cost 11,943 12,296 Equity securities 792 1,806 Mortgage loans 10,433 9,970 Real estate 1,692 1,747 Other 7,826 6,579 - -------------------------------------------------------------------------------------- Total investment assets $55,552 $50,919 ======================================================================================
Additional information regarding CIGNA's investment assets is included in Note 3 to the third quarter 1995 Financial Statements and Notes 1, 3 , 4 and 18 to the 1994 Financial Statements as well as the 1994 Form 10-K. Significant amounts of CIGNA's investment assets are attributable to experience-rated contracts with policyholders (policyholder contracts). Approximate percentages of investments attributable to policyholder contracts were as follows:
====================================================================================== September 30, December 31, (In millions) 1995 1994 - -------------------------------------------------------------------------------------- Fixed maturities 31% 32% Mortgage loans 56% 57% Real estate 59% 55% ======================================================================================
26 29 FIXED MATURITIES Investments in fixed maturities (bonds) include publicly traded and private placement debt securities; asset-backed securities, including collateralized mortgage obligations (CMOs); and redeemable preferred stocks. As of September 30, 1995, fixed maturities classified as available for sale, including policyholder share, had an aggregate fair value that was greater (less) than amortized cost by approximately $1.3 billion, compared with approximately ($378) million as of December 31, 1994. The increase in unrealized appreciation primarily reflects the downward movement in interest rates since December 31, 1994. QUALITY RATINGS Quality ratings for bonds were as follows (shown as a percentage of bonds):
====================================================================================== September 30, December 31, (In millions) 1995 1994 - -------------------------------------------------------------------------------------- Investment grade 95% 94% Below investment grade: Available for sale 2 1 Held to maturity 3 5 - -------------------------------------------------------------------------------------- Total 100% 100% ======================================================================================
The quality ratings of CIGNA's below investment grade bonds (BA and below, or equivalent) are concentrated toward the higher end of the non-investment grade spectrum. Approximately 29% of below investment grade securities relate to policyholder contracts. PROBLEM BONDS Bonds that are delinquent or restructured as to terms, typically interest rate and, in certain cases, maturity date, are considered problem bonds. Problem bonds, including amounts attributable to policyholder contracts, and related cumulative write-downs were as follows:
===================================================================================== September 30, December 31, (In millions) 1995 1994 - ------------------------------------------------------------------------------------- Delinquent bonds $174 $156 Less cumulative write-downs 77 54 ------- -------- 97 102 ------- -------- Restructured bonds 276 270 Less cumulative write-downs 59 65 ------- -------- 217 205 - ------------------------------------------------------------------------------------- Problem bonds $314 $307 =====================================================================================
POTENTIAL PROBLEM BONDS Potential problem bonds are fully current but judged by management to have certain characteristics that increase the likelihood of problem classification. Potential problem bonds, including amounts attributable to policyholder contracts, were $119 million as of September 30, 1995, compared with $141 million as of December 31, 1994. There were no cumulative write-downs for potential problem bonds as of September 30, 1995 and December 31, 1994. 27 30 CUMULATIVE WRITE-DOWNS FOR BONDS The activity in cumulative write-downs for bonds during the nine months ended September 30 was as follows:
======================================================================================= 1995 1994 ------------------------------ ------------------------------ Policy- Policy- holder holder (In millions) Contracts CIGNA Total Contracts CIGNA Total - ---------------------------------------------------------------------------------------- Beginning balance - January 1 $50 $73 $123 $54 $69 $123 Additions to cumulative write-downs 18 28 46 16 14 30 Charge-offs upon sales, repayments and other (15) (11) (26) (11) (13) (24) Transfers to equity securities (1) (2) (3) (4) (2) (6) - -------------------------------------------------------------------------------------- Ending balance - September 30 $52 $88 $140 $55 $68 $123 =======================================================================================
Included in the total ending balances above as of September 30, 1995 and 1994 as well as the balance at December 31, 1994 were $4 million for bonds no longer classified as problem or potential problem bonds. The adverse after-tax effect of write-downs on CIGNA's results for the quarter and nine months ended September 30, 1995 was $12 million and $18 million, respectively, compared with $2 million and $9 million for the same periods of 1994. During the nine months of 1995 and 1994, bonds with a carrying value of $3 million and $27 million, respectively, were restructured into equity securities. As of September 30, 1995 and 1994, CIGNA had cumulative write-downs for equity securities of $60 million (including $16 million attributable to policyholder contracts), compared with $75 million (including $30 million attributable to policyholder contracts). As of December 31, 1994, cumulative write-downs were $57 million (including $14 million attributable to policyholder contracts). 28 31 EFFECT OF NON-ACCRUALS FOR BONDS Interest income is recognized on problem bonds only when payment is received. The adverse effect of non-accruals for bonds (in total and by type) on policyholder contracts and on CIGNA's results is shown in the following table:
============================================================================================================== Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------- ------------------------------------------ 1995 1994 1995 1994 ------------------ ----------------- ------------------ ------------------- Policy- Policy- Policy- Policy- holder holder holder holder (In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA - -------------------------------------------------------------------------------------------------------------- Net investment income under original contract terms $5 $10 $7 $10 $16 $31 $19 $31 Less net investment income received 1 3 2 3 6 11 8 11 ------------------ ----------------- ------------------ ------------------- Forgone investment income 4 7 5 7 10 20 11 20 Tax effect -- (2) -- (2) -- (7) -- (7) - -------------------------------------------------------------------------------------------------------------- Net effect of non-accruals $4 $5 $5 $5 $10 $13 $11 $13 ============================================================================================================== Forgone investment income by type: Delinquent bonds $2 $5 $2 $5 $5 $13 $5 $12 Restructured bonds 2 2 3 2 5 7 6 8 ------------------ ----------------- ------------------ ------------------- Forgone investment income 4 7 5 7 10 20 11 20 Tax effect -- (2) -- (2) -- (7) -- (7) - -------------------------------------------------------------------------------------------------------------- Net effect of non-accruals $4 $5 $5 $5 $10 $13 $11 $13 ==============================================================================================================
29 32 MORTGAGE LOANS
====================================================================================== September 30, December 31, 1995 1994 - -------------------------------------------------------------------------------------- Mortgage loans (in millions) $10,433 $9,970 By property type: Office buildings 36% 37% Retail facilities 42 39 Apartment buildings 10 11 Hotels 6 7 Other 6 6 Total 100% 100% ======================================================================================
CIGNA's investment strategy requires diversification of the mortgage loan portfolio. This strategy includes guidelines relative to property type, location and borrower to reduce its exposure to potential losses. Adverse conditions in real estate markets and more stringent lending practices by financial institutions have affected scheduled maturities of mortgage loans. During the nine months of 1995, $606 million of mortgage loans was scheduled to mature, of which $165 million was paid in full, $114 million was extended at existing loan rates for a weighted average of seven months and $246 million was refinanced at current market rates. Mortgage loan extensions and refinancings are loans in good standing. A significant portion of the remaining scheduled maturities was problem mortgage loans ($43 million -- foreclosed; $17 million - -- restructured; and $12 million -- delinquent). The effect of not receiving timely cash payments on maturing mortgage loans is not expected to have a material adverse effect on CIGNA's future results of operations, liquidity or financial condition. 30 33 PROBLEM MORTGAGE LOANS CIGNA's problem mortgage loans include delinquent and restructured mortgage loans. Delinquent mortgage loans include those on which payment is overdue, generally 60 days or more. Restructured mortgage loans are those whose basic financial terms have been modified, typically to reduce the interest rate or extend the maturity. As of September 30, 1995, restructured mortgage loans with a carrying value of approximately $350 million had their original maturity dates extended, with an average extension of approximately four years. Restructured mortgage loans generated annualized cash returns averaging approximately 7 1/2% as of September 30, 1995. During the nine months of 1995, approximately $70 million of restructured mortgage loans were reclassified to loans in good standing since they were performing under the terms of the restructured loan agreement and, at the time of restructure, such terms were generally equivalent to terms that CIGNA was willing to accept for a comparable new loan. Problem mortgage loans, including amounts attributable to policyholder contracts, and related valuation reserves were as follows:
============================================================================= September 30, December 31, (In millions) 1995 1994 - ----------------------------------------------------------------------------- Delinquent mortgage loans $100 $249 Less valuation reserves 16 58 ----- ------- 84 191 ----- ------- Restructured mortgage loans 546 671 Less valuation reserves 43 66 ----- ------- 503 605 - ----------------------------------------------------------------------------- Problem mortgage loans $587 $796 =============================================================================
POTENTIAL PROBLEM MORTGAGE LOANS Potential problem mortgage loans include: 1) fully current loans that are judged by management to have certain characteristics that increase the likelihood of problem classification, 2) fully current loans for which the borrower has requested restructuring and 3) loans that are 30 to 59 days delinquent with respect to interest or principal payments. As of September 30, 1995, all potential problem mortgage loans were fully current under their original terms. Potential problem mortgage loans, including amounts attributable to policyholder contracts, and related valuation reserves were as follows:
====================================================================================== September 30, December 31, (In millions) 1995 1994 - -------------------------------------------------------------------------------------- Potential problem mortgage loans before reserves $247 $405 Less valuation reserves 25 55 - -------------------------------------------------------------------------------------- Potential problem mortgage loans $222 $350 ======================================================================================
As discussed in Note 2 to the Financial Statements, CIGNA adopted SFAS Nos. 114 and 118. CIGNA's problem and potential problem mortgage loans are considered impaired under this guidance. Implementation of these standards as of January 1, 1995 resulted in a decline of $29 million in valuation reserves for potential problem mortgage loans, $16 million attributable to policyholder contracts and $13 million attributable to CIGNA. 31 34 VALUATION RESERVES FOR MORTGAGE LOANS The activity in valuation reserves for mortgage loans during the nine months ended September 30 was as follows:
===================================================================================== 1995 1994 --------------------------- --------------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Total Contracts CIGNA Total - ------------------------------------------------------------------------------------- Beginning balance - January 1 $95 $84 $179 $105 $111 $216 Net increase (decrease) in valuation reserves 4 (1) 3 24 12 36 Charge-offs upon repayments and other (18) (26) (44) (18) (15) (33) Transfers to real estate (22) (32) (54) (10) (19) (29) - ------------------------------------------------------------------------------------- Ending balance - September 30 $59 $25 $84 $101 $89 $190 =====================================================================================
The after-tax effect of the net increase (decrease) in valuation reserves on CIGNA's results was a charge (benefit) of $2 million and ($1) million for the third quarter and nine months of 1995, compared with $2 million and $8 million for the same periods of 1994. 32 35 EFFECT OF NON-ACCRUALS FOR MORTGAGE LOANS Interest income is recognized on problem mortgage loans only when payment is received. The adverse (favorable) effect of non-accruals for mortgage loans (in total and by type) on policyholder contracts and on CIGNA's results is shown in the following table:
=============================================================================================================== Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------- ------------------------------------------- 1995 1994 1995 1994 ----------------- ------------------ ------------------- -------------------- Policy- Policy- Policy- Policy- holder holder holder holder (In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA - --------------------------------------------------------------------------------------------------------------- Net investment income under original contract terms $11 $6 $18 $11 $37 $22 $59 $35 Less net investment income received 12 5 14 6 33 21 40 21 ----------------- ------------------ ------------------- -------------------- Forgone investment income (1) 1 4 5 4 1 19 14 Tax effect -- -- -- (2) -- -- -- (5) - --------------------------------------------------------------------------------------------------------------- Net effect of non-accruals ($1) $1 $4 $3 $4 $1 $19 $9 =============================================================================================================== Forgone investment income by type: Delinquent mortgage loans $1 $1 $3 $3 $4 $ -- $10 $9 Restructured mortgage loans (2) -- 1 2 -- 1 9 5 ----------------- ------------------ ------------------- -------------------- Forgone investment income (1) 1 4 5 4 1 19 14 Tax effect -- -- -- (2) -- -- -- (5) - --------------------------------------------------------------------------------------------------------------- Net effect of non-accruals ($1) $1 $4 $3 $4 $1 $19 $9 ===============================================================================================================
33 36 REAL ESTATE Investment real estate includes real estate held for the production of income and real estate held for sale, primarily properties acquired as a result of foreclosure of mortgage loans (foreclosure properties). Investment real estate, including amounts attributable to policyholder contracts, and related cumulative write-downs and valuation reserves were as follows:
===================================================================================== September 30, December 31, (In millions) 1995 1994 - ------------------------------------------------------------------------------------- Real estate held for sale (primarily foreclosure $1,297 $1,228 properties) Less cumulative write-downs 325 281 Less valuation reserves 59 55 ------- ------ 913 892 ------- ------ Real estate held for the production of income 829 904 Less valuation reserves 50 49 ------- ------ 779 855 - ------------------------------------------------------------------------------------- Investment real estate $1,692 $1,747 =====================================================================================
REAL ESTATE WRITE-DOWNS AND RESERVES The activity in cumulative write-downs and valuation reserves for real estate during the nine months ended September 30 was as follows:
==================================================================================== 1995 1994 ------------------------- -------------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Total Contracts CIGNA Total - ------------------------------------------------------------------------------------ Beginning balance - January 1 $212 $173 $385 $239 $160 $399 Additions to cumulative write-downs 7 4 11 9 6 15 Net increase in valuation reserves 7 4 11 3 4 7 Charge-offs upon sales and other (18) (9) (27) (51) (17) (68) Transfers from mortgage loans 22 32 54 10 19 29 - ------------------------------------------------------------------------------------ Ending balance - September 30 $230 $204 $434 $210 $172 $382 ====================================================================================
There was no adverse after-tax effect from write-downs and valuation reserves on CIGNA's results for the quarter ended September 30, 1995, compared with $3 million for the same period last year. The adverse after-tax effect from write-downs and the net increase in valuation reserves on CIGNA's results for the nine months ended September 30, 1995 was $5 million, compared with $7 million for the nine months of 1994. 34 37 SUMMARY The adverse (favorable) effects of non-accruals as well as write-downs and changes in valuation reserves ("write-downs and reserves") on policyholder contracts and on CIGNA's results were as follows:
==================================================================================================== Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ --------------------------------------- 1995 1994 1995 1994 --------------- -------------- --------------- ----------------- Policy- Policy- Policy- Policy- holder holder holder holder (In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA - ----------------------------------------------------------------------------------------------------- Write-downs and reserves: Bonds $9 $12 $6 $2 $18 $18 $16 $9 Mortgage loans 4 2 9 2 4 (1) 24 8 Real estate 3 -- (1) 3 14 5 12 7 - ----------------------------------------------------------------------------------------------------- Total $16 $14 $14 $7 $36 $22 $52 $24 ==================================================================================================== Non-accruals: Bonds $4 $5 $5 $5 $10 $13 $11 $13 Mortgage loans (1) 1 4 3 4 1 19 9 - ----------------------------------------------------------------------------------------------------- Total $3 $6 $9 $8 $14 $14 $30 $22 ====================================================================================================
Economic conditions, including real estate market conditions, have improved. However, additional losses from problem investments are expected to occur for specific investments in the normal course of business, particularly due to continuing weak conditions in certain office building markets. CIGNA does not expect additional non-accruals, write-downs and reserves to materially affect future results of operations, liquidity or financial condition, or to result in a significant decline in the aggregate carrying value of its assets. 35 38 Part II. OTHER INFORMATION Item 1. Legal Proceedings. CIGNA is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of business, either as a liability insurer defending third-party claims brought against its insureds or an insurer defending coverage claims brought against it by its policyholders or other insurers. One such area of litigation involves policy coverage and judicial interpretation of legal liability for asbestos-related and environmental pollution claims. While the outcome of all litigation involving CIGNA, including insurance-related litigation, cannot be determined, litigation (including that related to asbestos and environmental pollution claims) is not expected to result in losses that differ from recorded reserves by amounts that would be material to results of operations, liquidity or financial condition. Also, reinsurance recoveries related to claims in litigation, net of allowance for uncollectible reinsurance, are not expected to result in recoveries that differ from recorded recoverables by amounts that would be material to results of operations, liquidity or financial condition. Item 6. Exhibits and Reports on Form 8-K. (a) See Exhibit Index. (b) CIGNA filed the following Reports on Form 8-K: - dated October 31, 1995 containing a news release regarding its third quarter results; and - dated October 2, 1995 regarding plans to strengthen net reserves for asbestos-related and environmental pollution claims and other exposures by $1.2 billion and restructure the domestic property and casualty operations. -36- 39 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/ Gary A. Swords ------------------------ Gary A. Swords Vice President and Chief Accounting Officer Date: November 14, 1995 -37- 40 Exhibit Index
Method of Number Description Filing - ------ ----------- ---------- 10.1 Description of July 26, 1995 Filed herewith. Amendment to CIGNA Supplemental Pension Plan 10.2 Description of July 26, 1995 Filed herewith. Amendment to the CIGNA Corporation Severance Benefits Plan for Members of the Executive Group 10.3 Description of Stock Compensation Filed herewith. Plan for Non-Employee Directors of CIGNA Corporation, as amended and restated, effective July 1, 1995 11 Computation of Earnings Filed herewith. Per Share 12 Computation of Ratio of Filed herewith. Earnings to Fixed Charges 27 Financial Data Schedule Filed herewith.
-38- EX-10.1 2 DESC AMEND CIGNA SUPP PENSION PLAN 1 Exhibit 10.1 DESCRIPTION OF JULY 26, 1995 AMENDMENT TO CIGNA SUPPLEMENTAL PENSION PLAN The adoption of an amendment to the CIGNA Pension Plan shall have no effect on the interest rate assumptions used in the calculation of lump sum distributions of accrued benefits under the CIGNA Supplemental Pension Plan, and the "applicable interest rate" used under the CIGNA Supplemental Pension Plan shall continue to be the "Applicable Interest Rate" as currently defined in Section 1.8 of the CIGNA Pension Plan. EX-10.2 3 DESC AMEND SEV BENEFIT PLAN EXECUTIVE GROUP 1 Exhibit 10.2 DESCRIPTION OF JULY 26, 1995 AMENDMENT TO THE CIGNA CORPORATION SEVERANCE BENEFITS PLAN FOR MEMBERS OF THE EXECUTIVE GROUP The CIGNA Corporation Severance Benefits Plan for Members of the Executive Group (As Amended and Restated July 27, 1994) (the "Severance Plan") has been amended, effective July 26, 1995, regarding benefits available in the event of a Termination upon a Change of Control. If payments to the Participant under the Severance Plan and any other plans or programs maintained by the Corporation or its subsidiaries would create for such Participant an excise tax liability under Section 4999 of the Internal Revenue Code of 1986 (the "Code") for "excess parachute payments" as defined in Section 280G of the Code, then the Severance Plan shall pay an additional benefit ("Additional Payment") to the Participant sufficient to offset any excise tax and other adverse tax consequences due to any mandatory deferral of Participant's compensation followed by a Change of Control of the Corporation. EX-10.3 4 DESC STOCK COMPENSATION PLAN N/E DIRECTORS 1 Exhibit 10.3 Description of Stock Compensation Plan for Non-Employee Directors of CIGNA Corporation (as amended and restated, effective July 1, 1995) The Stock Compensation Plan for Non-Employee Directors of CIGNA Corporation, as amended (the "Plan"), provides certain stock compensation arrangements to members of CIGNA Corporation's Board of Directors (the "Board") who are not in the employ of the company. The Plan provides that at least $12,000 of the annual retainer paid to Directors for their services as Directors (and as members of committees of the Board) must be taken either in shares of CIGNA Corporation Common Stock or deferred pursuant to the terms of the Deferred Compensation Plan for Directors of CIGNA Corporation. If payment is made in shares of Common Stock, the shares are issued in four equal installments within 30 days of the end of each calendar quarter. The number of shares in each payment is determined by the closing price at which the Common Stock trades on the last trade date for Common Stock in the quarter for which payment is being made. The above provisions relating to amount, price and timing of Common Stock payments may not be amended more than once every six months (except where an amendment is necessary to comply with certain federal laws). In addition, the Plan provides that Directors may, with respect to any other fees paid to them for services as Directors, defer receipt of all or any portion thereof or elect to receive all or any portion thereof in either cash or an equivalent amount of Common Stock (provided that no fractional shares may be issued). EX-11 5 COMPUTATION OF EARNINGS PER SHARE 1 CIGNA CORPORATION EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (Dollars in millions, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1995 1994 1995 1994 ============================================================================================================================== PRIMARY EARNINGS PER SHARE - --------------------------- NET INCOME (LOSS) AVAILABLE TO COMMON SHARES $ (566) $ 123 $ (71) $ 372 - -------------------------------------------------------==============================------=================================== WEIGHTED AVERAGE SHARES: Common shares 72,908,117 72,241,829 72,561,464 72,211,964 Common share equivalents applicable to stock options * 112,170 * 105,570 - ------------------------------------------------------------------------------------------------------------------------------ Total 72,908,117 72,353,999 72,561,464 72,317,534 - -------------------------------------------------------==============================------=================================== PRIMARY EARNINGS PER SHARE $ (7.76) $ 1.70 $ (0.98) $ 5.14 - -------------------------------------------------------==============================------=================================== FULLY DILUTED EARNINGS PER SHARE - -------------------------------- NET INCOME (LOSS) AVAILABLE TO COMMON SHARES: Net income (loss) $ (566) $ 123 $ (71) $ 372 Adjusted for: Interest expense (net of tax) on convertible debentures * 3 * 10 - ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) available to common shares $ (566) $ 126 $ (71) $ 382 - -------------------------------------------------------==============================------=================================== WEIGHTED AVERAGE SHARES: Common shares 72,908,117 72,241,829 72,561,464 72,211,964 Common share equivalents applicable to stock options * 112,170 * 127,753 Assumed conversion of convertible debentures * 3,626,102 * 3,626,102 - ------------------------------------------------------------------------------------------------------------------------------ Total 72,908,117 75,980,101 72,561,464 75,965,819 - ------------------------------------------------------===============================-----==================================== FULLY DILUTED EARNINGS PER SHARE $ (7.76) $ 1.66 $ (0.98) $ 5.03 - ------------------------------------------------------===============================-----====================================
* Anti-dilutive; therefore effects have been excluded. EX-12 6 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 CIGNA CORPORATION EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Nine Months Ended September 30, 1995 1994 ================================================================================================================================ Income (loss) before income taxes $ (177) $ 552 --------- ------- Fixed charges included in income (loss): Interest expense 94 91 Interest portion of rental expense 72 77 --------- ------- Total fixed charges included in income (loss) 166 168 --------- ------- Income (loss) available for fixed charges $ (11) $ 720 - ----------------------------------------------------------------------------------------------------============================ RATIO OF EARNINGS TO FIXED CHARGES - (A) 4.3 - ----------------------------------------------------------------------------------------------------============================
(A) As a result of a pre-tax loss, the loss available for fixed charges of $11 million is insufficient to cover total fixed charges of $166 million. EX-27 7 FINANCIAL DATA SCHEDULE
7 EXHIBIT 27 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF PART 1 TO CIGNA'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 22,866 11,943 12,750 792 10,433 1,692 55,552 1,775 7,427 1,148 93,749 11,360 2,409 19,857 29,488 1,639 85 0 0 6,309 93,749 10,340 3,192 226 391 10,687 886 2,753 (177) (106) (71) 0 0 0 (71) (0.98) 0 0 0 0 0 0 0 0 AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES
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