-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, VbzSYqUql34JhIU9tjalo7RsQxRjY2jJd1fiBgrVnU7mTyH8PabSvOBKOQIRyzA2 TLd1JVlOycHoEUb1khvQaQ== 0000893220-94-000369.txt : 19940816 0000893220-94-000369.hdr.sgml : 19940816 ACCESSION NUMBER: 0000893220-94-000369 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIGNA CORP CENTRAL INDEX KEY: 0000701221 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94544280 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 FORM 10-Q, CIGNA CORPORATION 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1994 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 July 31, 1994, 72,242,348 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 3 Flows Notes to Financial Statements 4 Item 2. Management's Discussion and 9 Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 33 SIGNATURE 34 EXHIBIT INDEX 35
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 SIX MONTHS ENDED JUNE 30, JUNE 30, 1994 1993 1994 1993 ============================================================================================================ REVENUES Premiums and fees $ 3,444 $ 3,493 $ 6,810 $ 6,754 Net investment income 968 949 1,960 1,907 Other revenues 103 109 255 233 Realized investment gains 23 12 44 43 ---------- ------------ ------------ ----------- Total revenues 4,538 4,563 9,069 8,937 ---------- ------------ ------------ ----------- BENEFITS, LOSSES AND EXPENSES Benefits, losses and settlement expenses 3,156 3,270 6,435 6,498 Policy acquisition expenses 283 278 569 576 Other operating expenses 895 893 1,691 1,701 ---------- ------------ ------------ ----------- Total benefits, losses and expenses 4,334 4,441 8,695 8,775 ---------- ------------ ------------ ----------- INCOME BEFORE INCOME TAXES 204 122 374 162 ---------- ------------ ------------ ----------- Income taxes (benefits): Current 79 86 133 136 Deferred (10) (52) (8) (108) ---------- ------------ ------------ ----------- Total income taxes 69 34 125 28 ---------- ------------ ------------ ----------- NET INCOME 135 88 249 134 Dividends declared (55) (54) (110) (109) Retained earnings, beginning of period 3,776 3,693 3,717 3,702 - ------------------------------------------------------------------------------------------------------------ RETAINED EARNINGS, END OF PERIOD $ 3,856 $ 3,727 $ 3,856 $ 3,727 - --------------------------------------------------========================================================== EARNINGS PER SHARE $ 1.86 $ 1.22 $ 3.44 $ 1.86 - --------------------------------------------------========================================================== DIVIDENDS DECLARED PER SHARE $ 0.76 $ 0.76 $ 1.52 $ 1.52 - --------------------------------------------------==========================================================
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 June 30, December 31, 1994 1993 ================================================================================================================== ASSETS Investments: Fixed maturities: at amortized cost (fair value, $13,178; $13,807) $ 12,671 $ 12,375 Fixed maturities: at fair value (amortized cost, $17,796; $17,618) 17,907 19,380 Equity securities: at fair value (cost, $1,636; $1,626) 1,809 1,849 Mortgage loans 9,861 10,021 Policy loans 4,189 3,663 Real estate 1,797 1,780 Other long-term investments 381 303 Short-term investments 1,103 1,357 ------------ --------------- Total investments 49,718 50,728 Cash and cash equivalents 1,185 1,211 Accrued investment income 755 764 Premiums, accounts and notes receivable 3,854 4,065 Reinsurance recoverables 8,417 8,338 Deferred policy acquisition costs 1,091 1,085 Property and equipment, net 921 930 Deferred income taxes, net 2,148 1,703 Goodwill 1,207 1,262 Other assets 1,152 1,209 Separate account assets 13,874 13,680 - ------------------------------------------------------------------------------------------------------------------ Total $ 84,322 $ 84,975 - -----------------------------------------------------------------------------------=============================== LIABILITIES Future policy benefits $ 10,249 $ 9,935 Contractholder deposit funds 25,268 25,328 Unpaid claims and claim expenses 19,995 20,144 Unearned premiums 2,620 2,711 ------------ --------------- Total insurance and contractholder liabilities 58,132 58,118 Short-term debt 299 351 Accounts payable, accrued expenses and other liabilities 4,486 4,555 Current income taxes 346 468 Long-term debt 1,379 1,235 Separate account liabilities 13,830 13,673 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 78,472 78,400 - ------------------------------------------------------------------------------------------------------------------ CONTINGENCIES - NOTE 7 SHAREHOLDERS' EQUITY Common stock (shares issued, 83) 83 83 Additional paid-in capital 2,247 2,222 Net unrealized appreciation - fixed maturities 141 961 Net unrealized appreciation - equity securities 157 211 Net translation of foreign currencies (70) (74) Retained earnings 3,856 3,717 Less treasury stock, at cost (564) (545) - ------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 5,850 6,575 - ------------------------------------------------------------------------------------------------------------------ Total $ 84,322 $ 84,975 - -----------------------------------------------------------------------------------=============================== SHAREHOLDERS' EQUITY PER SHARE $ 80.98 $ 91.30 - -----------------------------------------------------------------------------------===============================
The Notes to Financial Statements are an integral part of these statements. 2 5
CIGNA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Six Months Ended June 30, 1994 1993 ========================================================================================================= CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 249 $ 134 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Insurance liabilities, net of reinsurance recoverables (86) 209 Premiums, accounts and notes receivable 232 98 Accounts payable, accrued expenses, other liabilities and current income taxes (187) (67) Deferred income taxes, net (8) (108) Realized investment gains (44) (43) Other, net 114 19 --------- ---------- Net cash provided by operating activities 270 242 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investments sold: Fixed maturities - held to maturity 12 690 Fixed maturities - available for sale 2,747 - Mortgage loans 328 424 Equity securities 376 782 Other (primarily short-term investments) 8,909 10,878 Investment maturities and repayments: Fixed maturities - held to maturity 1,488 1,851 Fixed maturities - available for sale 1,081 - Mortgage loans 120 93 Investments purchased: Fixed maturities - held to maturity (1,543) (3,473) Fixed maturities - available for sale (4,078) - Mortgage loans (391) (399) Equity securities (352) (805) Other (primarily short-term investments) (9,199) (11,308) Other, net (103) (49) --------- ---------- Net cash used in investing activities (605) (1,316) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds 2,772 4,027 Withdrawals from contractholder deposit funds (2,458) (2,975) Net change in commercial paper (32) 28 Issuance of long-term debt 144 327 Repayment of debt (20) (10) Dividends paid (110) (109) Other, net 5 4 --------- ---------- Net cash provided by financing activities 301 1,292 --------- ---------- Effect of foreign currency rate changes on cash 8 (8) - -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (26) 210 Cash and cash equivalents, beginning of period 1,211 1,011 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,185 $ 1,221 - -------------------------------------------------------------------------------========================= Supplemental Disclosure of Cash Information: Income taxes paid, net of refunds $ 246 $ 100 Interest paid $ 54 $ 43 - --------------------------------------------------------------------------------------------------------
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 1994 presentation. The interim financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The preparation of interim financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business as well as competitive and other market conditions, call for caution in drawing specific conclusions from interim results. NOTE 2-NEW ACCOUNTING PRONOUNCEMENTS In the fourth quarter of 1993, CIGNA implemented Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which was issued by the Financial Accounting Standards Board (FASB) in May 1993. SFAS No. 115 requires that debt and equity securities be classified into different categories and carried at fair value if they are not classified as held to maturity. SFAS No. 115 does not permit retroactive application of its provisions. The effect of implementing SFAS No. 115 as of December 31, 1993 resulted in an increase in investment assets of approximately $1.6 billion and an increase in shareholders' equity of $882 million resulting from the classification of certain fixed maturities previously carried at amortized cost to available for sale. The increase in shareholders' equity was net of policyholder share of $307 million and deferred income taxes of $452 million. In 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which provides guidance on valuing impaired loans, and must be implemented by the first quarter of 1995, with the cumulative effect of implementation included in net income. The FASB has a project underway that could amend the income recognition provisions of SFAS No. 114. CIGNA has not determined the timing or effect on results of operations or financial condition of adopting SFAS No. 114. 4 7 NOTE 3-INVESTMENT GAINS AND LOSSES Realized gains and losses on investments, excluding policyholder share, were as follows:
Three Months Ended Six Months Ended June 30, June 30, (in millions) 1994 1993 1994 1993 - ------------------------------------------------------------------------------------------------------------- Realized gains (losses): Fixed maturities $(7) $4 $9 $6 Mortgage loans (11) (11) (11) (29) Equity securities 13 15 17 58 Real estate 27 (9) 26 (22) Short-term investments 1 13 3 30 --------- --------- -------- ------- 23 12 44 43 Income taxes (benefits) 8 (7) 15 (6) - ------------------------------------------------------------------------------------------------------------- Net realized gains $15 $19 $29 $49 - ----------------------------------------------------------==================================================
During the second quarter and six months of 1994, proceeds from sales of available-for-sale fixed maturities and equities, including policyholder share, were $1.4 billion and $3.1 billion, respectively. The second quarter sales resulted in gross gains of $51 million and gross losses of $46 million. The six month sales resulted in gross gains of $107 million and gross losses of $93 million. In addition, there were no significant amounts of sales or transfers of fixed maturities classified as held-to-maturity during the first six months of 1994. During the second quarter and six months of 1994, Net Unrealized Appreciation - Fixed Maturities included in Shareholders' Equity, which is net of policyholder share and deferred income taxes, decreased by approximately $330 million and $820 million, respectively. NOTE 4-EARNINGS PER SHARE Earnings per share were based on net income divided by weighted average common shares, including common share equivalents, as follows:
Three Months Ended Six Months Ended June 30, June 30, (in millions) 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------- Weighted average common shares 72.398 72.040 72.299 71.965 - ---------------------------------------------------===============================================
There is no significant difference between earnings per share on a primary and a fully diluted basis. Common shares held as Treasury shares were 10,813,125 and 10,614,247 as of June 30, 1994 and 1993, respectively. 5 8 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 substantially completed audits of the years 1982 through 1988 and has proposed an adjustment which could result in an assessment of approximately $210 million for those years. CIGNA is currently contesting in court the issue (such issue does not exist for years after 1988) giving rise to such proposed adjustment and, 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 June 30, 1994, CIGNA had tax basis operating loss carryforwards of $304 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 have been established for amounts deemed uncollectible. 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 second quarter and six months of 1994, premiums and fees were net of ceded premiums of $487 million and $979 million, respectively. For the second quarter and six months of 1993, premiums and fees were net of ceded premiums of $389 million and $944 million, respectively. In addition, benefits, losses and settlement expenses for the second quarter and six months of 1994 were net of reinsurance recoveries of $508 million and $1.1 billion, respectively. Benefits, losses and settlement expenses for the second quarter and six months of 1993 were net of reinsurance recoveries of $743 million and $1.4 billion, respectively. NOTE 7-CONTINGENCIES AND OTHER MATTERS FINANCIAL GUARANTEES CIGNA 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 materially affect results of operations in future periods, they are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. 6 9 REGULATORY AND INDUSTRY DEVELOPMENTS CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment. Some of the changes include initiatives to restrict insurance pricing and the application of underwriting standards; reform health care; restrict investment practices; revise the system of funding clean-up of environmental damages; expand regulation; and reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA. Proposals on national health care reform are under consideration which could significantly change the way health care is financed and delivered in the United States. 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. Superfund, which was passed in 1980, is subject to re-authorization by Congress in 1994. Any changes in Superfund's system of allocating responsibility or funding clean-up costs could affect the liabilities of potentially responsible parties and insurers. The bill pending before Congress would create a new Environmental Insurance Resolution Fund program to resolve disputes between potentially responsible parties and their insurers regarding liability for cleanup costs for Superfund sites. This proposed program would be financed by a new excise tax on insurance premiums, the structure of which is unresolved, but which is expected to raise approximately $8 billion from the insurance industry over ten years. Due to uncertainties associated with the timing and content of any Superfund legislation, the effect on CIGNA's future results of operations, liquidity or financial condition cannot be reasonably estimated at this time. The National Association of Insurance Commissioners (NAIC) has developed model solvency-related guidelines ("risk-based capital" rules) to strengthen solvency regulation of insurance companies. At June 30, 1994, CIGNA's domestic property and casualty subsidiaries, in the aggregate, and life insurance subsidiaries were adequately capitalized under the guidelines. Additional capital resources for the domestic property and casualty operations are expected to be needed during 1994, as a result of continued property and casualty losses. CIGNA's Board of Directors has authorized up to $300 million of additional capital for these operations in 1994, $100 million of which was contributed during the second quarter. As the risk-based capital guidelines for property and casualty insurers become more stringent in future years and depending on the future results of these operations, additional capital for the property and casualty subsidiaries may be necessary. Also, the NAIC is addressing risk-based capital guidelines for health maintenance organizations (HMOs) and a proposal that would limit the types and amounts of investment assets that an insurance company can hold. CIGNA cannot currently predict what effect, if any, such guidelines will have on its future results of operations, liquidity or financial condition. 7 10 Unfavorable economic conditions have contributed to an increase in the number of insurance companies that are impaired or insolvent. This is expected to result in an increase in mandatory assessments by state guaranty funds of, or voluntary payments by, solvent insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments, which are subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states. Although future assessments and payments 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. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. ASBESTOS-RELATED, ENVIRONMENTAL POLLUTION AND OTHER LONG-TERM EXPOSURE CLAIMS Reserving for asbestos-related, environmental pollution and other long-term exposure claims is subject to significant uncertainties that are not generally present for other types of claims, as described in CIGNA's 1993 Form 10-K. Developed case law and adequate claim history do not exist for such claims. CIGNA and the insurance industry dispute coverage for the environmental pollution and some asbestos-related liabilities of their policyholders. In addition to the coverage lawsuits, CIGNA shares in the expense of defending underlying litigation against its policyholders. The outcome of the coverage litigation will assist in the determination of amounts that might be paid in the future for similar claims. The legal costs associated with these coverage lawsuits constitute a significant portion of CIGNA's losses for these claims. Reinsurance for these types of claims may become subject to similar contested coverage issues. CIGNA expects that its future results will continue to be adversely affected by losses and legal expenses for these types of claims. Because of the significant uncertainties involved and the likelihood that these uncertainties will not be resolved in the near future, CIGNA is unable to reasonably estimate the additional losses and expenses and therefore is unable to determine whether such amounts will be material to its future results of operations, 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. A number of state attorneys general and private plaintiffs filed lawsuits against a number of insurance companies and others, including CIGNA, alleging violations of federal and state antitrust laws. These cases are currently being contested in court. While the outcome of litigation involving CIGNA cannot be determined, litigation (other than that related to asbestos-related, environmental pollution and other long-term exposure claims, which is discussed below), net of reserves and giving effect to reinsurance, is not expected to have a material effect on CIGNA's future results of operations, liquidity or financial condition. CIGNA is involved in lawsuits regarding policy coverage and judicial interpretation of legal liability for asbestos-related, environmental pollution and other long-term exposure claims. The lack of developed case law, as evidenced by the coverage lawsuits, is one of the significant uncertainties that affects CIGNA's ability to estimate future losses for these types of claims. 8 11 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 June 30, 1994, compared with December 31, 1993, and its results of operations for the quarter and six months ended June 30, 1994, compared with the same periods last year. This discussion should be read in conjunction with the Management's Discussion and Analysis sections included in CIGNA's 1993 Annual Report to Shareholders (pages 14 through 29) and in CIGNA's report on Form 10-Q for the first quarter of 1994, 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 which could adversely affect them. Some of the changes include initiatives to restrict insurance pricing and the application of underwriting standards; reform health care; restrict investment practices; revise the system of funding clean-up of environmental damage; expand regulation; and reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA. 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 $210 million; CIGNA is currently contesting the issue in court and management believes that CIGNA should prevail. In July 1994, Duff & Phelps assigned an initial rating of D-1 (the second highest of 7 ratings), which it characterizes as "very high", to CIGNA's commercial paper. In August 1994, Moody's Investors Services (Moody's) downgraded the ratings of CIGNA's senior and subordinated debt to Baa1 (8th of 19 ratings) and Baa2 (9th of 19), respectively, from A2 and A3, respectively. Moody's characterizes these ratings as "medium grade". Moody's also reduced CIGNA's commercial paper rating to Prime-2 (2nd of 4), which is characterized as "strong", from Prime-1. In addition, Moody's reduced its insurance company ratings of Connecticut General Life Insurance Company to A1 (5th of 19) from Aa3 and of CIGNA's property and casualty domestic pool group to Baa1 (8th of 19) from A2. Moody's characterizes the A1 rating as "good" and the Baa1 rating as "adequate". Moody's actions are not expected to have a material effect on CIGNA's results of operations, liquidity, or financial condition. Separately, Standard & Poor's rating of CIGNA's subordinated debt is A- (7th of 22). During 1993, CIGNA announced restructuring initiatives in the Property and Casualty segment (both the domestic and international operations) and the Employee Life and Health Benefits segment. These actions were taken to reduce operating expenses by the elimination of certain payroll and lease costs in future years. During the first six months of 1994, CIGNA continued implementation of the restructuring initiatives and, as of June 30, 1994, there were no material changes to the costs associated with, or the anticipated annual savings related to, these initiatives. In 1993, CIGNA adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Investments in Certain Debt and Equity Securities," and SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." See Note 2 to the Financial Statements for a detailed discussion of recently issued accounting pronouncements and their effect on CIGNA. 9 12 CONSOLIDATED RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------- FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Premiums and fees $3,444 $3,493 $6,810 $6,754 Net investment income 968 949 1,960 1,907 Other revenues 103 109 255 233 Realized investment gains 23 12 44 43 Total revenues 4,538 4,563 9,069 8,937 Benefits and expenses 4,334 4,441 8,695 8,775 Income before taxes 204 122 374 162 Income taxes 69 34 125 28 Net income $135 $88 $249 $134 ===================================================================================================================== Realized investment gains, net of taxes $15 $19 $29 $49 =====================================================================================================================
CIGNA's 1994 consolidated net income increased 53% and 86% for the second quarter and six months of 1994 from the same periods last year. Excluding after-tax realized investment gains, income for the second quarter and six months of 1994 was $120 million and $220 million, compared with $69 million and $85 million for the same periods last year. These improvements primarily reflect significantly higher earnings in the Employee Life and Health Benefits segment as well as lower losses in the Property and Casualty segment. The six month increase also reflects a $20 million after-tax gain from the sale of the California personal automobile and homeowners insurance businesses (California business) that CIGNA retained from the 1989 sale of the Horace Mann companies. After-tax realized investment gains for the second quarter and six months of 1994 decreased, compared with the same periods last year, primarily due to lower gains on sales of equity securities and fixed maturities and a higher effective tax rate in 1994 than in 1993. Partially offsetting these factors were higher gains on sales of real estate and decreases in new loss reserves, primarily for mortgage loan and real estate investments. For additional information, see Note 3 to the Financial Statements. Consolidated revenues for the second quarter and six months of 1994 were essentially level with the same periods last year. Revenues primarily reflect higher premiums and fees as well as higher net investment income for the Employee Life and Health Benefits and Individual Financial Services segments, and lower premiums and fees for the Property and Casualty segment. Full year results for 1994 are expected to continue to improve, compared with 1993. However, such improvement could be materially affected by a continued adverse property and casualty environment, major catastrophes and significant deterioration in real estate market conditions. 10 13 EMPLOYEE LIFE AND HEALTH BENEFITS
===================================================================================================================== FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Premiums and fees $1,891 $1,860 $3,859 $3,688 Net investment income 129 114 257 247 Other revenues 71 71 140 142 Realized investment gains 6 3 14 27 Total revenues 2,097 2,048 4,270 4,104 Benefits and expenses 1,892 1,888 3,877 3,816 Income before taxes 205 160 393 288 Income taxes 69 49 132 85 Net income $136 $111 $261 $203 ===================================================================================================================== Realized investment gains, net of taxes $6 $7 $12 $28 =====================================================================================================================
Net income for the Employee Life and Health Benefits segment increased 23% for the second quarter and 29% for the six months of 1994, compared with the same periods of 1993. Excluding after-tax realized investment gains, income was $130 million and $249 million for the second quarter and six months of 1994, compared with $104 million and $175 million for the same periods last year. The increase for the quarter reflects improvements of $18 million and $8 million in the HMO and indemnity operations, respectively. The six month increase reflects improvements of $41 million and $33 million in the HMO and indemnity operations, respectively. The improvement in HMO operations for the quarter and six months reflects approximately $10 million and $20 million, respectively, attributable to membership growth with the balance primarily due to favorable medical cost experience. The improvements in indemnity operations were attributable to favorable claim experience, reflecting lower medical care cost inflation, and more favorable morbidity and mortality in the group life and accident lines of business. Premiums and fees for the second quarter and six months increased 2% and 5%, compared with the same periods last year. For the quarter and six months, premiums and fees for HMOs increased $10 million and $47 million, primarily reflecting rate increases. Premiums and fees for the indemnity business increased $21 million for the second quarter resulting from life insurance business ($61 million) primarily due to new sales, partially offset by a decline in other indemnity lines ($40 million), primarily due to cancellations in medical business. Premiums and fees for the indemnity business increased $124 million for the six months primarily in the life ($87 million) and dental ($33 million) insurance businesses primarily due to new sales. Total HMO membership increased 21%, compared with June 30, 1993, and 16%, compared with December 31, 1993. Substantially all the HMO membership growth 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. As reflected above, growth in the medical indemnity business has been constrained by cancellations and increasing penetration into the indemnity market by prepaid health care providers, including conversions to CIGNA's HMOs. 11 14 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 were $4.2 billion and $8.7 billion for the second quarter and six months of 1994, compared with $4.4 billion and $8.7 billion for the same periods last year. The decline for the quarter primarily reflects cancellations in medical indemnity business. Premium equivalents, as a percentage of total adjusted premiums and fees, were 55% and 58% for the six months of 1994 and 1993, respectively. Administrative Services Only (ASO) plans accounted for 45% and 44% of total adjusted premiums and fees for the six months of 1994 and 1993, respectively. 12 15 EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
===================================================================================================================== FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Premiums and fees $46 $62 $89 $111 Net investment income 421 451 871 918 Realized investment gains (losses) 10 (11) 7 (24) Total revenues 477 502 967 1,005 Benefits and expenses 403 450 825 900 Income before taxes 74 52 142 105 Income taxes 25 16 47 33 Net income $49 $36 $95 $72 ===================================================================================================================== Realized investment gains (losses), net of taxes $5 ($8) $3 ($16) =====================================================================================================================
Net income for the Employee Retirement and Savings Benefits segment increased 36% and 32% for the second quarter and six months of 1994, compared with the same periods of 1993. Excluding after-tax realized investment results, income was $44 million and $92 million for the second quarter and six months of 1994, compared with $44 million and $88 million for the same periods last year. The six month increase primarily reflects improved interest margins on defined contribution business ($6 million) and higher earnings from an increased asset base ($2 million), partially offset by higher expenses ($4 million), primarily for systems upgrades. For the second quarter, the favorable effects of improved interest margins and an increased asset base were offset by higher expenses of $3 million. Premiums and fees decreased 26% and 20% for the second quarter and six months of 1994, compared with the same periods last year, primarily reflecting lower annuity premiums. Net investment income declined 7% and 5% for the second quarter and six months of 1994, compared with the same periods last year, primarily from lower yields on invested assets. Assets under management is generally a key determinant of earnings for this segment. For the six months ended June 30, assets under management and related activity, including amounts attributable to separate accounts, were as follows:
===================================================================================================================== (in millions) 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Balance as of January 1 $34,469 $32,736 Premiums and deposits 1,359 1,427 Investment results 1,283 1,379 Reduction in fair value of assets (1,024) (59) Customer withdrawals (1,341) (1,724) Benefit payments and other (1,395) (916) - --------------------------------------------------------------------------------------------------------------------- Balance as of June 30 $33,351 $32,843 =====================================================================================================================
13 16 Assets under management as of June 30, 1994 decreased by $1.1 billion to $33.4 billion from the balance as of January 1, 1994, reflecting a reduction of $1 billion in the fair value of assets, primarily fixed maturities, resulting from an increase in interest rates. Approximately 53% and 45% of the premiums and deposits for 1994 and 1993, respectively, were from new customers. The decline in investment results for assets under management for the six months ended June 30, 1994, compared with the same period last year, primarily reflects significantly lower realized gains from the sales of separate account investment assets. The decline in withdrawals for the six months of 1994, compared with the same period last year, reflects approximately $600 million of payments made in 1993 to two large customers under contracts that were terminated prior to 1993. Asset growth for 1994 could be constrained by withdrawals and lower deposits resulting from decisions by plan sponsors to diversify assets and fund management. In addition, further increases in interest rates may adversely affect assets under management. 14 17 INDIVIDUAL FINANCIAL SERVICES
===================================================================================================================== FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Premiums and fees $249 $245 $432 $400 Net investment income 184 150 353 272 Other revenues 17 15 33 29 Realized investment gains (losses) 7 (14) 9 (21) Total revenues 457 396 827 680 Benefits and expenses 393 370 721 621 Income before taxes 64 26 106 59 Income taxes 23 8 37 19 Net income $41 $18 $69 $40 ===================================================================================================================== Realized investment gains (losses), net of taxes $4 ($8) $6 ($13) =====================================================================================================================
Net income for the Individual Financial Services segment for the second quarter and six months increased 128% and 73%, respectively, compared with the same periods last year. Excluding after-tax realized investment results, income was $37 million and $63 million for the second quarter and six months of 1994, compared with $26 million and $53 million for the same periods last year. These increases reflect higher earnings from interest-sensitive products of $5 million for the quarter and $8 million for the six months, primarily reflecting improved interest margins and business growth. In addition, the increases reflect favorable mortality of $6 million for the quarter and $2 million for the six months. Premiums and fees for the second quarter and six months of 1994 increased 2% and 8% from the same periods of 1993. Net investment income for the second quarter and six months of 1994 increased 23% and 30%, compared with the same periods last year. These increases, as well as the increase in benefits and expenses, reflect growth in business, primarily of interest-sensitive products (principally corporate-owned life insurance). 15 18 PROPERTY AND CASUALTY
===================================================================================================================== FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Premiums and fees $1,258 $1,318 $2,430 $2,540 Net investment income 176 179 370 368 Other revenues 46 52 103 115 Realized investment gains -- 42 22 72 Total revenues 1,480 1,591 2,925 3,095 Benefits and expenses 1,590 1,675 3,167 3,320 Loss before taxes (110) (84) (242) (225) Income tax benefits (43) (39) (95) (101) Net loss ($67) ($45) ($147) ($124) ===================================================================================================================== Realized investment gains, net of taxes $-- $34 $14 $58 =====================================================================================================================
Property and Casualty segment losses, excluding after-tax realized investment results, were $67 million and $161 million in the second quarter and six months of 1994, compared with losses of $79 million and $182 million for the same periods last year. The decrease in losses primarily reflects lower underwriting losses. Underwriting losses were $233 million and $550 million in the second quarter and six months of 1994, compared with $276 million and $618 million for the same periods last year. Excluding asbestos and environmental losses (see table on page 18), underwriting losses for the second quarter and six months of 1994 were $183 million and $433 million, respectively, compared with $239 million and $508 million for the same periods last year. The decline in underwriting losses for the second quarter primarily reflects lower losses for the international business ($31 million); lower self-insurance costs ($42 million) and lower catastrophe losses, partially offset by reserve strengthening in several lines. For the six months, lower underwriting losses primarily resulted from lower losses for the international business ($55 million); a reduction in operating expenses ($19 million); and lower self-insurance costs ($54 million); partially offset by higher catastrophe losses and reserve strengthening in several lines. Although underwriting losses declined, they continue to reflect unfavorable underwriting experience for CIGNA's domestic business, as well as the adverse effects of the highly competitive pricing environment. Catastrophe losses included in underwriting results were $5 million, net of reinsurance, (before reinsurance, or "gross", $6 million) for the second quarter of 1994, compared with $15 million (gross, $89 million) for the same period last year. Through six months, catastrophe losses were $135 million (gross, $141 million) in 1994, compared with $98 million (gross, $252 million) for the same period last year. Catastrophe losses for the six months of 1994 include $91 million (gross, $94 million) for the Los Angeles earthquake and $33 million (gross, $35 million) for the severe winter weather. Catastrophe losses for the six months of 1993 included $42 million (gross, $173 million) and $36 million (gross, $37 million) for the World Trade Center bombing and the East Coast blizzard, respectively. 16 19 Premiums and fees for the second quarter and six months of 1994 decreased 5% and 4% from the same periods of 1993. These declines primarily reflect reduced premiums of $73 million for the quarter and $136 million for the six months in CIGNA's domestic commercial business due to price competition, particularly in the commercial packages and casualty lines. Price competition also resulted in reduced premiums for workers' compensation coverage ($51 million for the quarter; $91 million for the six months). The decreases in premiums and fees were partially offset by growth in international lines of business ($75 million for the quarter; $141 million for the six months). Domestic premiums and fees are expected to continue to decrease through 1994 as a result of the above factors. Net investment income for the second quarter and six months of 1994 was essentially level with the same periods last year primarily reflecting growth in investment assets of the international life operation and a change in investment asset mix, offset by lower yields. RESERVES CIGNA's reserving methodology and significant issues affecting the estimation of loss reserves are described in its 1993 Form 10-K. In summary, property and casualty reserves are an estimate of future amounts needed to pay claims and related expenses for insured events that have occurred, including events that have not been reported to CIGNA. The basic assumption underlying the many standard 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 also are 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 revises its estimate of the liability for insured events of prior years as new data become available. CIGNA continually attempts to improve its loss estimation process by refining its ability to analyze 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. In management's judgment, based on known facts and current law, reserves are appropriate. However, future changes in estimates of CIGNA's liability for insured events may adversely affect results in future periods. 17 20 The following table shows the adverse pre-tax effects on CIGNA's results of operations from insured events of prior years (prior year development) for the second quarter and six months ended June 30:
==================================================================================================================================== Three Months Ended Six Months Ended June 30, June 30, (In millions) 1994 1993 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Asbestos-related $11 12% $18 24% $14 9% $58 37% Environmental pollution 39 43 19 26 103 65 52 33 Unrecoverable reinsurance 7 8 7 9 15 9 16 10 Other 33 37 30 41 26 17 32 20 - ------------------------------------------------------------------------------------------------------------------------------------ Total $90 100% $74 100% $158 100% $158 100% ====================================================================================================================================
CIGNA continues to receive asbestos-related, environmental pollution and other long-term exposure claims asserting a right to recovery under insurance policies issued by CIGNA. Standard actuarial methods cannot be used in the estimation of liabilities for asbestos-related, environmental pollution and certain other long-term exposure claims because developed case law and adequate history do not exist for such claims. In addition, CIGNA and the insurance industry are litigating issues that will ultimately determine, in many cases, whether insurance coverage exists. Determination that coverage exists would result in the emergence of additional liabilities. CIGNA has been a major writer of commercial insurance policies, which are subject to these types of claims. The majority of CIGNA's losses and legal expenses for asbestos-related, environmental pollution and other long-term exposure claims arise from its domestic property and casualty operations. As of June 30, 1994 and December 31, 1993, approximately 1,200 policyholders had outstanding asbestos-related claims with the domestic operations. CIGNA continues to litigate certain asbestos-related coverage issues, with 43 lawsuits involving 35 policyholders pending as of June 30, 1994, compared with 39 lawsuits involving 27 policyholders as of December 31, 1993. It is not possible to determine CIGNA's potential liability for asbestos-related claims based on the number of policyholders with claims outstanding. Additional information, which is not available, would be needed for such determination, including the extent of coverage, the policyholder's liability for claims tendered to it, the injuries allegedly sustained by the policyholder's claimants and the number of claims pending against a policyholder. The domestic operations had approximately 14,500 environmental pollution files outstanding at June 30, 1994 and 13,300 at December 31, 1993. A file represents each policyholder involved at a site, regardless of the number or type of claims asserted against the policyholder or the number or type of insurance policies (primary or excess) under which coverage is asserted. CIGNA disputes coverage for essentially all environmental pollution claims, and is involved in 505 coverage lawsuits as of June 30, 1994, compared with 493 as of December 31, 1993. Accordingly, and because of the many unresolved legal and factual issues related to environmental pollution cases, liabilities for these types of claims cannot be estimated from the number of environmental pollution files outstanding. 18 21 Superfund, which was passed in 1980, is subject to re-authorization by Congress in 1994. Any changes in Superfund's system of allocating responsibility or funding clean-up costs could affect the liabilities of potentially responsible parties and insurers. The bill pending before Congress would create a new Environmental Insurance Resolution Fund program to resolve disputes between potentially responsible parties and their insurers regarding liability for cleanup costs for Superfund sites. This proposed program would be financed by a new excise tax on insurance premiums, the structure of which is unresolved, but which is expected to raise approximately $8 billion from the insurance industry over ten years. Due to uncertainties associated with the timing and content of any Superfund legislation, the effect on CIGNA's future results of operations, liquidity or financial condition cannot be reasonably estimated at this time. The American Academy of Actuaries has initiated a project to develop standards for estimating currently unquantifiable liabilities. The project may cover unreported claims for asbestos-related, environmental pollution and certain other long-term exposures. Since this project is in its early stages, its outcome and effect, if any, on CIGNA are not determinable at this time. For the reasons discussed in Note 16 to the 1993 Financial Statements and in the 1993 Form 10-K, CIGNA expects that its future results will continue to be adversely affected by losses and legal expenses for asbestos-related, environmental pollution and other long-term exposure claims. Because of the significant uncertainties involved and the likelihood that these uncertainties, with the exception of Superfund re-authorization, will not be resolved in the near future, CIGNA is unable to reasonably estimate the additional losses and expenses for these types of claims and, therefore, is unable to determine whether such amounts will be material to its future results of operations, liquidity or financial condition. 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. Allowances have been established for amounts deemed uncollectible. 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. Other prior year development in 1994 was primarily attributable to other long-term exposures, workers' compensation and reinsurance. In 1993, other prior year development was primarily attributable to commercial packages, reinsurance and workers' compensation. 19 22 OTHER OPERATIONS Other Operations primarily includes unallocated investment income, expenses 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 also included the California business until it was sold in the first quarter of 1994, resulting in an after-tax gain of approximately $20 million. Net losses for Other Operations were $24 million and $29 million for the second quarter and six months of 1994, compared with losses of $32 million and $57 million for the same periods last year. After-tax realized investment losses for the six months of 1994 were $6 million, compared with losses of $8 million last year. There were no net after-tax realized investment results in the second quarter of 1994, compared with losses of $6 million in 1993. Excluding after-tax realized investment results, the decreased loss for the second quarter primarily reflects lower operating expenses, including lower net interest expense. In addition, the reduced loss for the six months reflects the gain on the sale of the California business. 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 1994, cash and cash equivalents decreased $26 million from $1.2 billion as of December 31, 1993. This decrease primarily reflects cash used for investing activities ($605 million), primarily net investment purchases ($502 million); payments of dividends on CIGNA common stock ($110 million); and debt repayments ($52 million). The decrease in cash flows was partially offset by the issuance of long-term debt ($144 million); deposits and interest credited, net of withdrawals, to contractholder deposit funds ($314 million); and cash flows from operating activities ($270 million), primarily resulting from earnings and the timing of cash receipts and cash disbursements. Cash flow from operating activities was constrained by negative cash flow from property and casualty business of approximately $120 million resulting from operating losses. 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 business. CIGNA had $1.38 billion of long-term debt outstanding at June 30, 1994, compared with $1.24 billion at December 31, 1993. This increase primarily reflects issuance in January 1994 of $100 million of unsecured 6 3/8% Notes due in 2006. The proceeds from this issue were used for general corporate purposes. As of June 30, 1994, CIGNA had approximately $850 million remaining under shelf registration statements that may be issued as debt and equity securities, depending upon market conditions and CIGNA's capital requirements. At June 30, 1994, CIGNA's short-term debt, primarily commercial paper, amounted to $299 million, a decrease of $52 million from December 31, 1993. 20 23 Additional capital resources for the domestic property and casualty operations are expected to be needed during 1994, as a result of continued losses. CIGNA's Board of Directors has authorized up to $300 million of additional capital for these operations in 1994. Pursuant to this authorization, CIGNA contributed $100 million of capital in the second quarter. CIGNA is currently assessing the strategic direction of its property and casualty reinsurance operations. No determination has been made regarding any future actions. A determination is expected to be made later in 1994. CIGNA has sufficient internal resources to meet the expected capital needs of these operations. 21 24 INVESTMENT ASSETS
==================================================================================================================================== June 30, December 31, (In millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Fixed maturities: at amortized cost $12,671 $12,375 Fixed maturities: at fair value 17,907 19,380 Equity securities 1,809 1,849 Mortgage loans 9,861 10,021 Real estate 1,797 1,780 Other 5,673 5,323 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment assets $49,718 $50,728 ====================================================================================================================================
Additional information regarding CIGNA's investment assets is included in Note 3 to the second quarter 1994 Financial Statements and Notes 1, 3 and 4 to the 1993 Financial Statements as well as the 1993 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:
==================================================================================================================================== June 30, December 31, 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Fixed maturities 33% 33% Mortgage loans 58% 59% Real estate 57% 56% ====================================================================================================================================
22 25 FIXED MATURITIES Investments in fixed maturities (bonds) include publicly traded and private placement debt securities; mortgage-backed securities, including collateralized mortgage obligations (CMOs); and redeemable preferred stocks. As of December 31, 1993, CIGNA adopted SFAS No. 115; accordingly, fixed maturities classified as held to maturity are carried at amortized cost, net of impairments, and those classified as available for sale are carried at fair value, with unrealized appreciation or depreciation included in shareholders' equity. As of June 30, 1994, fixed maturities classified as available for sale had an aggregate fair value in excess of amortized cost of approximately $111 million, compared with approximately $1.76 billion as of December 31, 1993. The decline in unrealized appreciation primarily reflects the upward movement in interest rates since December 31, 1993. QUALITY RATINGS Quality ratings for bonds were as follows (shown as a percentage of bonds):
==================================================================================================================================== June 30, December 31, 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Investment grade 93% 94% Below investment grade: Available for sale 1 1 Held to maturity 6 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 35% of below investment grade securities relate to policyholder contracts. 23 26 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:
==================================================================================================================================== June 30, December 31, (In millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Delinquent bonds $178 $131 Less cumulative write-downs 62 52 ------- ------- 116 79 ------- ------- Restructured bonds 256 383 Less cumulative write-downs 46 55 ------- ------- 210 328 - ------------------------------------------------------------------------------------------------------------------------------------ Problem bonds $326 $407 ====================================================================================================================================
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, and related cumulative write-downs and valuation reserves were as follows:
==================================================================================================================================== June 30, December 31, (In millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Potential problem bonds $181 $225 Less cumulative write-downs and valuation reserves 13 11 - ------------------------------------------------------------------------------------------------------------------------------------ Potential problem bonds $168 $214 ====================================================================================================================================
* Bonds in these categories are primarily classified as held to maturity. 24 27 CUMULATIVE WRITE-DOWNS AND VALUATION RESERVES FOR BONDS The activity in cumulative write-downs and valuation reserves for bonds during the six months ended June 30 was as follows:
==================================================================================================================================== 1994 1993 -------------------------------------- ---------------------------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Total Contracts CIGNA Total - ------------------------------------------------------------------------------------------------------------------------------------ Beginning balance - January 1 $54 $69 $123 $89 $81 $170 Additions to cumulative write-downs 12 11 23 7 20 27 Net decrease in valuation reserves (2) (1) (3) (4) (4) (8) Charge-offs upon sales, repayments and other (9) (9) (18) (6) (1) (7) Transfers to equity securities - - - (22) (21) (43) - ------------------------------------------------------------------------------------------------------------------------------------ Ending balance - June 30 $55 $70 $125 $64 $75 $139 ====================================================================================================================================
Included in the total ending balances above as of June 30, 1994 and 1993 were $4 million for bonds no longer classified as problem or potential problem bonds. As of December 31, 1993, such reserves were $5 million. The adverse after-tax effect of write-downs and net change in valuation reserves on CIGNA's net income for the quarter and six months ended June 30, 1994 was $6 million and $7 million, respectively, compared with $5 million and $11 million for the same periods of 1993. During 1993 and the first six months of 1994, bonds with a carrying value of $102 million and $23 million, respectively, were restructured into equity securities. As of June 30, 1994, CIGNA had cumulative write-downs for equity securities of $68 million (including $27 million attributable to policyholder contracts), compared with $78 million (including $39 million attributable to policyholder contracts) as of December 31, 1993. 25 28 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 net income is shown in the following table:
======================================================================================== Three Months Ended June 30, -------------------------------------------------------- 1994 1993 ------------------------ --------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Contracts CIGNA - ---------------------------------------------------------------------------------------- Net investment income under original contract terms $6 $10 $14 $16 Less net investment income received 3 3 8 11 ------------------------ --------------------- Forgone investment income 3 7 6 5 Tax effect - (3) - (2) - ---------------------------------------------------------------------------------------- Net effect of non- accruals $3 $4 $6 $3 ======================================================================================== Forgone investment income by type: Delinquent bonds $2 $4 $1 $1 Restructured bonds 1 3 5 4 ------------------------ --------------------- Forgone investment income 3 7 6 5 Tax effect - (3) - (2) - ---------------------------------------------------------------------------------------- Net effect of non- accruals $3 $4 $6 $3 ========================================================================================
======================================================================================== Six Months Ended June 30, ------------------------------------------------------- 1994 1993 -------------------- ---------------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Contracts CIGNA - ---------------------------------------------------------------------------------------- Net investment income under original contract terms $12 $21 $26 $27 Less net investment income received 6 8 15 18 -------------------- ----------------------------- Forgone investment income 6 13 11 9 Tax effect - (5) - (3) - ---------------------------------------------------------------------------------------- Net effect of non- accruals $6 $8 $11 $6 ======================================================================================== Forgone investment income by type: Delinquent bonds $3 $7 $2 $3 Restructured bonds 3 6 9 6 -------------------- ----------------------------- Forgone investment income 6 13 11 9 Tax effect - (5) - (3) - ---------------------------------------------------------------------------------------- Net effect of non- accruals $6 $8 $11 $6 ========================================================================================
26 29 MORTGAGE LOANS
=============================================================================================================================== June 30, December 31, 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Mortgage loans (in millions) $9,861 $10,021 By type: Office buildings 39% 40% Retail facilities 38 37 Hotels 7 7 Apartment buildings 10 10 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, borrower and loan size to reduce its exposure to potential losses. Continued adverse conditions in real estate markets and more stringent lending practices by financial institutions have affected scheduled maturities of mortgage loans. During the first six months of 1994, $674 million of mortgage loans was scheduled to mature, of which $33 million was paid in full, $182 million was extended at existing loan rates for a weighted average of 14 months and $373 million was refinanced at current market rates. Mortgage loan extensions and refinancings are loans in good standing. The remainder of the scheduled maturities was problem mortgage loans or foreclosure properties, including $43 million that were restructured and $32 million that were foreclosed or were in the process of foreclosure. 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. 27 30 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. As of June 30, 1994, restructured mortgage loans with a carrying value of approximately $379 million had their original maturity dates extended, with an average extension of four years. Restructured mortgage loans generated annualized cash returns averaging approximately 7% as of June 30, 1994. Problem mortgage loans, including amounts attributable to policyholder contracts, and related valuation reserves were as follows:
====================================================================================================================== June 30, December 31, (In millions) 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- Delinquent mortgage loans $154 $162 Less valuation reserves 36 32 ----------- -------- 118 130 ----------- -------- Restructured mortgage loans 862 839 Less valuation reserves 100 105 ----------- -------- 762 734 - ---------------------------------------------------------------------------------------------------------------------- Problem mortgage loans $880 $864 ======================================================================================================================
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 June 30, 1994, approximately 87% of 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:
=============================================================================================================================== June 30, December 31, (In millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Potential problem mortgage loans before reserves $557 $627 Less reserves 74 79 - ------------------------------------------------------------------------------------------------------------------------------- Potential problem mortgage loans $483 $548 ===============================================================================================================================
28 31 VALUATION RESERVES FOR MORTGAGE LOANS The activity in valuation reserves for mortgage loans during the six months ended June 30 was as follows:
============================================================================================================================== 1994 1993 ------------------------------------- -------------------------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Total Contracts CIGNA Total - ------------------------------------------------------------------------------------------------------------------------------ Beginning balance - January 1 $105 $111 $216 $106 $78 $184 Net increase in valuation reserves 15 9 24 17 30 47 Charge-offs upon sales, repayments and other (1) (2) (3) (7) (6) (13) Transfers to real estate (10) (17) (27) (23) (14) (37) - ------------------------------------------------------------------------------------------------------------------------------ Ending balance - June 30 $109 $101 $210 $93 $88 $181 ==============================================================================================================================
The adverse after-tax effect of the net increase in valuation reserves on CIGNA's net income was $4 million and $6 million for the second quarter and six months of 1994, compared with $7 million and $20 million for the same periods of 1993. Valuation reserves for mortgage loans include reserves for loans which are in-substance foreclosures (classified as problem mortgage loans), and such loans are carried at the fair value of the underlying property. As of June 30, 1994, December 31, 1993 and June 30, 1993, the carrying value of such loans was $95 million, $17 million and $84 million, respectively, net of valuation reserves of $32 million, $17 million and $35 million, respectively. 29 32 EFFECT OF NON-ACCRUALS FOR MORTGAGE LOANS Interest income is recognized on problem mortgage loans only when payment is received. The adverse effect of non-accruals for mortgage loans (in total and by type) on policyholder contracts and on CIGNA's net income is shown in the following table:
================================================================================================ Three Months Ended June 30, ---------------------------------------------------------------- 1994 1993 -------------------------- ------------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Contracts CIGNA - ------------------------------------------------------------------------------------------------ Net investment income under original contract terms $20 $12 $25 $14 Less net investment income received 12 8 15 8 -------------------------- ------------------------- Forgone investment income 8 4 10 6 Tax effect - (1) - (3) - ------------------------------------------------------------------------------------------------ Net effect of non- accruals $8 $3 $10 $3 ================================================================================================ Forgone investment income by type: Delinquent mortgage loans $3 $3 $4 $2 Restructured mortgage loans 5 1 6 4 -------------------------- ------------------------- Forgone investment income 8 4 10 6 Tax effect - (1) - (3) - ------------------------------------------------------------------------------------------------ Net effect of non- accruals $8 $3 $10 $3 ================================================================================================
===================================================================================================== Six Months Ended June 30, -------------------------------------------------------------- 1994 1993 --------------------------- ----------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Contracts CIGNA - ----------------------------------------------------------------------------------------------------- Net investment income under original contract terms $41 $24 $51 $29 Less net investment income received 26 15 32 16 --------------------------- ----------------------- Forgone investment income 15 9 19 13 Tax effect - (3) - (5) - ----------------------------------------------------------------------------------------------------- Net effect of non- accruals $15 $6 $19 $8 ===================================================================================================== Forgone investment income by type: Delinquent mortgage loans $7 $6 $9 $5 Restructured mortgage loans 8 3 10 8 --------------------------- ----------------------- Forgone investment income 15 9 19 13 Tax effect - (3) - (5) - ----------------------------------------------------------------------------------------------------- Net effect of non- accruals $15 $6 $19 $8 =====================================================================================================
30 33 REAL ESTATE Investment real estate includes real estate held for the production of income and 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:
====================================================================================================================== June 30, December 31, (In millions) 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- Foreclosure properties $1,338 $1,289 Less cumulative write-downs 318 301 Less valuation reserves 62 59 --------- --------- 958 929 --------- --------- Real estate held for the production of income 878 890 Less valuation reserves 39 39 --------- --------- 839 851 - ---------------------------------------------------------------------------------------------------------------------- Investment real estate $1,797 $1,780 ======================================================================================================================
RESERVES FOR REAL ESTATE The activity in cumulative write-downs and valuation reserves for real estate during the six months ended June 30 was as follows:
============================================================================================================================== 1994 1993 -------------------------------------- -------------------------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Total Contracts CIGNA Total - ------------------------------------------------------------------------------------------------------------------------------ Beginning balance - January 1 $239 $160 $399 $184 $108 $292 Additions to cumulative write-downs 8 2 10 12 21 33 Net increase in valuation reserves 5 4 9 13 3 16 Charge-offs upon sales and other (21) (5) (26) (8) 8 - Transfers from mortgage loans 10 17 27 23 14 37 - ------------------------------------------------------------------------------------------------------------------------------ Ending balance - June 30 $241 $178 $419 $224 $154 $378 ==============================================================================================================================
The adverse after-tax effect of write-downs and the net increase in valuation reserves on CIGNA's net income for the quarter and six months ended June 30, 1994 was $3 million and $4 million, respectively, compared with $6 million and $15 million for the same periods of 1993. 31 34 SUMMARY The adverse 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 net income were as follows:
================================================================================================ Three Months Ended June 30, ---------------------------------------------------------------- 1994 1993 -------------------------- ------------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Contracts CIGNA - ------------------------------------------------------------------------------------------------ Write-downs and reserves: Bonds $8 $6 $2 $5 Mortgage loans 7 4 9 7 Real estate 9 3 17 6 - ------------------------------------------------------------------------------------------------ Total $24 $13 $28 $18 ================================================================================================ Non-accruals: Bonds $3 $4 $6 $3 Mortgage loans 8 3 10 3 - ------------------------------------------------------------------------------------------------ Total $11 $7 $16 $6 ================================================================================================
====================================================================================================== Six Months Ended June 30, -------------------------------------------------------------- 1994 1993 -------------------------- ----------------------- Policy- Policy- holder holder (In millions) Contracts CIGNA Contracts CIGNA - ------------------------------------------------------------------------------------------------------ Write-downs and reserves: Bonds $10 $7 $3 $11 Mortgage loans 15 6 17 20 Real estate 13 4 25 15 - ------------------------------------------------------------------------------------------------------ Total $38 $17 $45 $46 ====================================================================================================== Non-accruals: Bonds $6 $8 $11 $6 Mortgage loans 15 6 19 8 - ------------------------------------------------------------------------------------------------------ Total $21 $14 $30 $14 ======================================================================================================
The effect of adverse economic conditions on certain industry segments and adverse real estate market conditions is expected to continue, resulting in additional problem investments and foreclosures. Investments in California and in office buildings are particularly vulnerable to deterioration. Although additional non-accruals, write-downs and reserves may materially affect future results of operations, the amounts and timing cannot be reasonably estimated. CIGNA currently does not expect such non-accruals, write-downs and reserves to result in a significant decline in the aggregate carrying value of its assets or a material adverse effect on its liquidity or financial condition. 32 35 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) See Exhibit Index. (b) CIGNA filed a Report on Form 8-K dated August 1, 1994 containing a press release regarding its second quarter 1994 results. -33- 36 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: August 15, 1994 -34- 37 Exhibit Index
Method of Number Description Filing - ------ ----------- ---------- 10.1 CIGNA Supplemental Pension Filed herewith. Plan, as amended and restated effective July 28, 1993 10.2 CIGNA Corporation Filed herewith. Severance Benefits Plan, as amended and restated July 27, 1994 11 Computation of Earnings Filed herewith. Per Share 12 Computation of Ratio of Filed herewith. Earnings to Fixed Charges
-35- EX-10.1 2 CIGNA SUPPLEMENTAL PENSION PLAN 1 EXHIBIT 10.1 CIGNA SUPPLEMENTAL PENSION PLAN (Amended and Restated effective July 28, 1993) WHEREAS, CIGNA Corporation, on its own behalf and on behalf of those of its subsidiaries and affiliates which participate in the CIGNA Pension Plan, established the CIGNA Supplemental Pension Plan (the "Plan"), effective January 1, 1983, to provide to eligible employees retirement benefits which would otherwise be provided by the CIGNA Pension Plan but for certain restrictions on the benefits payable under the CIGNA Pension Plan; WHEREAS, This Plan is intended to be an "excess benefit plan" under section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, within the meaning of section 401(a)(1) of ERISA; and WHEREAS, CIGNA has amended this Plan from time to time and wishes to amend it further; NOW, THEREFORE, CIGNA amends and restates the Plan in its entirety. ARTICLE I DEFINITIONS Except as otherwise provided in this document, terms indicated by capitalized initial letters whenever they appear in the plan shall have the same definitions in this Plan as in the CIGNA Pension Plan. Otherwise, the following definitions apply to this Plan: 1.1 "CIGNA" shall mean CIGNA Corporation, a Delaware corporation, or its successor. 1.2 "Committee" shall mean the Corporate Benefit Plan Committee of CIGNA, or a successor committee or person designated by CIGNA's Chief Executive Officer. 1.3 "Company" shall mean CIGNA Corporation and those of its subsidiaries and affiliates which participate in the CIGNA Pension Plan. 1.4 "Deferred Compensation Plan" shall mean the Deferred Compensation Plan of CIGNA Corporation, any successor plan, and any similar plans or arrangements maintained by the Company. 2 1.5 "Participant" shall mean any Eligible Employee who is eligible to participate in the Plan but only to the extent that the employee has, or might in the event of Retirement at his earliest Early Retirement Date under the Pension Plan have, an Accrued Benefit as defined in Section 3.01 of the Plan. 1.6 "Pension Plan" shall mean the CIGNA Pension Plan, a defined benefit pension plan, or its successor plan(s). 1.7 "Rabbi Trust" shall mean a grantor trust, the assets of which will not be subject to the claims of creditors of the Company, except in the case of the bankruptcy or insolvency of the Company. 1.8 "Supplemental Pension Benefit" shall mean the benefit payable to a Plan Participant as described in Article III. 1.9 "Supplemental Post-Retirement Surviving Spouse Benefit" shall mean the benefit payable to Participant's surviving Spouse as described in Section 4.3 of the Plan. 1.10 "Supplemental Post-Retirement Survivor Benefit" shall mean the benefit payable to Participant's contingent survivor as described in Section 4.4 of the Plan. 1.11 "Supplemental Pre-Retirement Surviving Spouse Benefit" shall mean the benefit payable to Participant's surviving Spouse as described in Section 4.5 of the Plan. ARTICLE II ELIGIBILITY All Eligible Employees of the Company who are participants in the Pension Plan shall be eligible to participate in this Plan. In no event shall an employee who is not entitled to benefits under the Pension Plan be entitled to benefits under this Plan. ARTICLE III SUPPLEMENTAL PENSION BENEFIT 3.1 Accrual of Benefit A Participant shall accrue under this Plan a Supplemental Pension Benefit which shall equal the excess of (a) over (b) where: (a) is the Accrued Benefit the Participant would have under the Pension Plan if the Pension Plan were administered without regard to: 2 3 (1) the limitations imposed on retirement benefits pursuant to section 415 of the Code; (2) the limitation on compensation imposed pursuant to section 401(a)(17) of the Code; and (3) the exclusion of compensation deferred under the Deferred Compensation Plan from the definition of Eligible Earnings; and (b) is the Participant's actual Accrued Benefit under the Pension Plan. 3.2 Vesting The vesting of a Participant's Supplemental Pension Benefit shall be subject to the same provisions applicable to the vesting of retirement benefits under the Pension Plan. 3.3 Calculation of Benefits The Supplemental Pension Benefit shall be expressed in the form of a single life annuity payable for the life of the Participant, commencing at the Participant's Normal Retirement Date. Such benefit shall be adjusted using the actuarial factors described in the Pension Plan to reflect the time and form of payment provided to the Participant. 3.4 Coordination with Other Retirement Benefits The Supplemental Pension Benefit shall be added to, and treated as being part of, the benefits payable to a Participant (or a Spouse or a Beneficiary) under the Pension Plan for the purposes of applying those provisions of other Company retirement plans, arrangements or agreements which provisions reduce benefits payable under such plans, arrangements or agreements by the amount of benefits payable under the Pension Plan. 3.5 Duration of Accruals No Participant shall accrue any Supplemental Pension Benefit under this Plan during any period in which benefit accruals under the Pension Plan have been suspended or after benefit accruals under the Pension Plan have ceased. 3 4 ARTICLE IV PAYMENT OF BENEFITS 4.1 Standard Form of Benefits (a) The Supplemental Pension Benefit under Article III of the Plan shall be paid to the Participant in the form of a single lump sum, unless the Committee approves an optional form of payment under Section 4.2 of the Plan. The amount of the single lump sum payment shall be the actuarial present value, determined using the applicable assumptions and methods under the Pension Plan as of the date of payment, of (1) the Supplemental Pension Benefit and (2) the Supplemental Post-Retirement Surviving Spouse Benefit described in Section 4.3 of the Plan, with both (1) and (2) stated in the form of a single life annuity. (b) The single lump sum payment shall be made in the January following Participant's termination of employment from the Company or, if later, the January following the year in which the Participant reaches age fifty-five (55). 4.2 Optional Form of Benefit (a) Notwithstanding the provisions of Section 4.1, a Participant may request to receive the Supplemental Pension Benefit in the same form in which his Pension Plan benefits are distributed. (b) A Participant's request for payment of the Supplemental Pension Benefit in this optional form shall be made in writing to the Plan Administrator. The request must be received by the Plan Administrator no later than thirteen (13) months before the date of payment. The Committee may, in its sole and absolute discretion, waive the thirteen (13) month requirement set forth above for Participants whose termination of employment occurs before January 1, 1995. (c) The Plan Administrator shall forward any request made under paragraph 4.2(b) to the Committee, which shall consider any such request. In determining whether the request should be granted, the Committee shall consider the Participant's financial needs, including any other sources of retirement income, and the needs and financial security of the Participant's dependents. If the Committee, in its sole and absolute discretion, determines that the request should be granted, payment of the Participant's Supplemental Pension Benefit shall be in the optional form. 4 5 4.3 Post-Retirement Surviving Spouse Benefits (a) If a Participant whose Supplemental Pension Benefit is paid in the optional form under Section 4.2 of the Plan dies after such payments have commenced and has a surviving Spouse who is eligible for a surviving Spouse benefit under Article V of the Pension Plan, then such Spouse shall also be eligible for a Supplemental Post-Retirement Surviving Spouse Benefit under this Plan. (b) The Supplemental Post-Retirement Surviving Spouse Benefit shall be paid to the eligible Spouse in the form of a single lump sum payment as soon as practicable after the Participant's death. (c) The amount of the Supplemental Surviving Spouse Benefit shall be equal to the lump sum present value, determined using the applicable assumptions and methods under the Pension Plan as of the date of payment, of the excess of (1) over (2) where: (1) is the post-retirement surviving Spouse benefit which would be payable to the Spouse under the Pension Plan if such benefit were computed without regard to the items listed in Section 3.1 (a)(1), (2) and (3) of this Plan; and (2) is the post-retirement surviving Spouse benefit which is actually payable under the Pension Plan. (d) No Supplemental Post-Retirement Surviving Spouse Benefit is available under this Plan if the Participant's Supplemental Pension Benefit is paid in the standard, single lump sum form under Section 4.1. 4.4 Other Post-Retirement Survivor Benefits (a) If a Participant, whose Supplemental Pension Benefit is paid in the optional form under Section 4.2 of the Plan that includes a contingent survivor annuity for someone other than the Participant's surviving Spouse, dies after payments in the optional form have commenced, then the survivor under the contingent annuity option shall be eligible for a Supplemental Post-Retirement Survivor Benefit under this Plan. (b) The Supplemental Post-Retirement Survivor Benefit shall be paid to the eligible survivor in the form of a single lump sum payment as soon as practicable after the Participant's death. 5 6 (c) The amount of the Supplemental Post-Retirement Survivor Benefit shall be equal to the lump sum present value, determined using the applicable assumptions and methods under the Pension Plan as of the date of payment, of the excess of (1) over (2) where: (1) is the post-retirement contingent survivor benefit which would be payable to the survivor under the Pension Plan if such benefit were computed without regard to the items listed in Section 3.1 (a)(1), (2) and (3) of this Plan; and (2) is the post-retirement contingent survivor benefit which is actually payable under the Pension Plan. (d) No Supplemental Post-Retirement Survivor Benefit is available under this Plan if the Participant's Supplemental Pension Benefit is paid in the standard, single lump sum form under Section 4.1. 4.5 Pre-Retirement Surviving Spouse Benefits (a) If a Participant who dies before the Supplemental Pension Benefit payment has been made under Section 4.1 (or before the date as of which payments have commenced under Section 4.2) has a surviving Spouse who is eligible for a pre-retirement surviving Spouse benefit under Article V of the Pension Plan, then such Spouse shall be eligible for a Supplemental Pre-Retirement Surviving Spouse Benefit under this Plan. (b) The Supplemental Pre-Retirement Surviving Spouse Benefit shall be paid to the eligible spouse in the form of a single lump sum payable as soon as practicable after the Participant's death. (c) The amount of the Supplemental Pre-Retirement Surviving Spouse Benefit shall be equal to the actuarial present value, determined using the applicable assumptions and methods under the Pension Plan as of the date of payment, of the excess of (1) over (2) where: (1) is the pre-retirement surviving Spouse benefit which would be payable to the Spouse under the Pension Plan if such benefit were computed without regard to the items listed in Section 3.1 (a)(1), (2) and (3) of this Plan; and (2) is the pre-retirement surviving Spouse benefit which is actually payable under the Pension Plan. 6 7 4.6 Lump Sum Benefits (a) At the sole discretion of the Plan Administrator, any benefits payable pursuant to this Article V which at any time either (1) have a lump sum present value of less than twenty-five thousand dollars ($25,000) or (2) result in monthly installments of less than two hundred fifty dollars ($250) each may be commuted to a single lump sum payment and paid to the Participant, Spouse, or Beneficiary as appropriate. (b) A Participant who is paid a Supplemental Pension Benefit in the form of a single lump sum under Section 4.1 or this Section 4.6 and who is later rehired by any Company shall not, upon subsequent Retirement or other termination of employment, be entitled to any additional Supplemental Pension Benefit under this Plan based upon any Credited Service used in the calculation of the initial Supplemental Pension Benefit payment. Furthermore, any Credited Service that is or would be disregarded under the preceding sentence in computing a Participant's Supplemental Pension Benefit shall also be disregarded in computing any survivor benefits payable under Sections 4.3, 4.4 or 4.5 of this Plan after Participant's reemployment. 4.7 Domestic Relations Orders An individual shall not qualify for a benefit under this Plan solely because such individual is entitled to a benefit under the Pension Plan by reason of a "qualified domestic relations order" (as defined in Section 206 of ERISA). Benefits under this Plan that would have been payable hereunder to such individual but for the preceding sentence shall be paid to those individuals who would have received benefits under the Pension Plan, if no such qualified domestic relations order was then in effect. ARTICLE V FUNDING 5.1 In General (a) This Plan shall be maintained as an unfunded plan which is not intended to meet the qualification requirements of section 401 of the Code. All benefits from this Plan shall be payable solely from the general assets of the Company. No separate or special fund shall be established and no segregation of assets shall be made to assure the payment of benefits from this Plan. A Participant shall have no right, title, or interest in or 7 8 to any investments which the Company may make to aid in meeting its obligations under this Plan. (b) Nothing contained in this document, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company or the Plan Administrator and a Participant or any other person. To the extent that any person acquires a right to receive payments from the Company pursuant to this Plan, such right shall be no greater than the right of an unsecured creditor of the Company. (c) Notwithstanding the above, the benefits payable under this plan may be funded through a Rabbi Trust. ARTICLE VI ADMINISTRATION 6.1 Plan Administrator (a) The Plan shall be administered by a Plan Administrator appointed by the Committee, or its designee. The Plan Administrator shall have full power and authority to interpret the Plan, to prescribe, amend and rescind any rules, forms and procedures as it deems necessary or appropriate for the proper administration of the Plan, to make any other determinations including determinations as to eligibility for, and the amount of, benefits payable under the Plan, and to take such other actions as it deems necessary or advisable in carrying out its duties under the Plan. (b) All decisions, interpretations and determinations by the Plan Administrator shall be final and binding on the Company, Participants and any other persons having or claiming an interest under this Plan. 6.2 Amendment or Termination Subject to Section 6.3 of the Plan, CIGNA, through its Board of Directors, or the People Resources Committee of the Board of Directors (or a successor committee), may amend or terminate this Plan at any time, in whole or in part, if it deems such amendment or termination necessary or desirable. No amendment or termination shall impair or adversely affect any benefits accrued under the Plan in which the Participant was vested as of the date of such action. 8 9 6.3 Change of Control For a three (3) year period beginning on the effective date of a Change of Control and with respect to Plan Participants on that date: (a) the Plan shall not be terminated; (b) the accrual of Supplemental Pension Benefits by Participants shall not be stopped, suspended or otherwise adversely affected; (c) and the rate at which Supplemental Pension Benefits accrue for Participants shall not be reduced. CIGNA reserves the right to amend or eliminate this paragraph 6.3 at any time prior to a Change of Control. ARTICLE VII MISCELLANEOUS 7.1 Notices Each Participant shall be responsible for furnishing the Plan Administrator with the current and proper address for the mailing of notices, reports and benefit payments. Any notice required or permitted to be given shall be deemed given if directed to the person to whom addressed at such address and mailed by regular United States mail, first-class and prepaid. If any check mailed to such address is returned as undeliverable to the addressee, mailing of checks will be suspended until the Participant or beneficiary furnishes the proper address. 7.2 Lost Distributees A benefit shall be deemed forfeited if the Plan Administrator is unable to locate the Participant or beneficiary to whom payment is due, after diligent effort for a period of at least two (2) years, provided, however, that the Plan Administrator shall have the authority (but not the obligation) to reinstate such benefit upon the later discovery of a proper payee for such benefit. Mailing of a notice in writing, by certified or registered mail, to the last known address of the Participant and to the beneficiaries of such Participant (if the addresses of such beneficiaries are known to the Plan Administrator) not less frequently than once each year for the two-year period shall be considered a diligent effort for this purpose. 9 10 7.3 Nonalienation of Benefits None of the payments, benefits or rights of any Participant or beneficiary shall be subject to any claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Participant or beneficiary. No Participant or beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he may expect to receive, contingently or otherwise, under this Plan, except the right, to the extent applicable, to designate a beneficiary or beneficiaries to receive any benefits payable upon the Participant's death, and to change such beneficiary designations from time to time by taking such action under the Pension Plan. 7.4 Reliance on Data The Company, the Plan Administrator and all other persons associated with the Plan's operation shall have the right to rely on the veracity and accuracy of any data provided pursuant to, or in respect of, this Plan or the Pension Plan by the Participant or by any beneficiary, including representations as to age, health and marital status. Such representations are binding upon any party seeking to claim a benefit through a Participant. The Company, the Plan Administrator and all other persons associated with the Plan's operation are absolved completely from inquiring into the accuracy or veracity of any such representation made at any time by a Participant or beneficiary. 7.5 No Contract of Employment Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Participant, or any person whomsoever, the right to be retained in the service of the Company, and all Participants and other persons shall remain subject to discharge to the same extent as if the Plan had never been adopted. 7.6 Effect on Other Plans Any benefit payable under the Plan shall not be deemed salary or other compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Company for the benefit of its employees. 10 11 7.7 Severability of Provisions If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included. 7.8 Heirs, Assigns and Personal Representatives The Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant and beneficiary, present and future. 7.9 Payments to Minors, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Company, the Plan Administrator and all other parties with respect thereto. 7.10 Headings and Captions The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 7.11 Gender and Number Except where otherwise clearly indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice-versa. 7.12 Controlling Law The Plan shall be construed and enforced according to the laws of the Commonwealth of Pennsylvania, to the extent not preempted by federal law, which shall otherwise control. 11 12 IN WITNESS WHEREOF, CIGNA Corporation has caused this Amended and Restated Plan to be executed by the undersigned officers on the 28th day of July, 1994, to be effective as of July 28, 1993. [Corporate Seal] Attest: CIGNA CORPORATION /s/Carol J. Ward /s/Donald M. Levinson - ---------------- --------------------- Carol J. Ward Donald M. Levinson Corporate Secretary Executive Vice President 12 EX-10.2 3 CIGNA CORPORATION SEVERANCE BENEFITS PLAN 1 EXHIBIT 10.2 CIGNA CORPORATION SEVERANCE BENEFITS PLAN FOR MEMBERS OF THE EXECUTIVE GROUP (As Amended and Restated July 27, 1994) Article 1 -- Definitions. The following are defined terms wherever they appear in this Plan. 1.1 "CIGNA" means CIGNA Corporation, a Delaware corporation, and includes its subsidiaries, successors and predecessors. 1.2 "Cause" means conviction of the Participant for a felony involving fraud or dishonesty directed against CIGNA. 1.3 "Change of Control" means: (a) A corporation, person or group acting in concert as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), holds or acquires beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act of a number of preferred or common shares of CIGNA Corporation having voting power which is either (1) more than 50% of the voting power of the shares which voted in the election of Directors of CIGNA Corporation at the shareholders' meeting immediately preceding such determination, or (2) more than 25% of the voting power of CIGNA Corporation's outstanding common shares; or (b) As a result of a merger or consolidation to which CIGNA Corporation is a party, either (1) CIGNA Corporation is not the surviving corporation or (2) Directors of CIGNA Corporation immediately prior to the merger or consolidation constitute less than a majority of the Board of Directors of the surviving corporation; or (c) A change occurs in the composition of the Board of CIGNA Corporation at any time during any consecutive 24 month period such that the "Continuity Directors" cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence "Continuity Directors" shall mean those members of the Board who either: (1) were directors at the beginning of such consecutive 24 month period; or (2) were elected by, or on nomination or recommendation of, at least a majority (consisting of at least nine directors) of the Board. 1.4 "Participant" means an employee of CIGNA who meets the eligibility requirements set forth in Article 2. - 1 - 2 1.5 "Plan" means the CIGNA Corporation Severance Benefits Plan for Members of the Executive Group as it may be amended from time to time. 1.6 "Severance Period" means the fifty-two (52) week period immediately following a Participant's Termination of Employment Date. 1.7 "Subsidiary" means any corporation or unincorporated entity of which more than 50% of the voting power in the election of directors, or 50% of any ownership interest, is at the time directly or indirectly owned, held or controlled by CIGNA Corporation. 1.8 "Terminated Participant" means a Participant who suffers a Termination upon a Change of Control. 1.9 "Termination of Employment Date" means the date on which the Participant's actual employment relationship with CIGNA ends. 1.10 "Termination upon a Change of Control" means the termination of a Participant's employment with CIGNA upon or within two (2) years following a Change of Control (i) initiated by CIGNA or a successor other than a Termination for Cause or (ii) initiated by an Employee after determining in his reasonable judgment that there has been a reduction in his authority, duties, responsibilities or title, any reduction in his compensation, or any changes caused by CIGNA in his office location of more than thirty-five (35) miles from its location on the date of the Change of Control. Article 2 -- Eligibility 2.1 Subject to the limits in Section 2.3, any person employed by CIGNA in a position at a Salary Grade Level of 60 or higher (or an equivalent position) on the date immediately preceding his or her Termination of Employment Date shall be eligible for benefits under this Plan. 2.2 Subject to the limits in Section 2.3, any person employed by CIGNA in a position described in Section 2.1 on the date of a Change of Control shall, in the event of a Termination upon a Change of Control, remain eligible for benefits under this Plan and not under the CIGNA Severance Pay Plan. 2.3 An employee who is party to an individual agreement with CIGNA which provides severance benefits and who qualifies for severance benfits under both the agreement and this Plan shall receive the greater of those severance benefits provided under the agreement or those provided under this Plan, but not both. - 2 - 3 Article 3 -- Benefits. 3.1 Incorporation of CIGNA Severance Pay Plan Provisions The provisions of the CIGNA Severance Pay Plan, with the exception of the exclusions from eligibility of persons in positions above salary Grade 59 (or their equivalent), as such plan may be amended from time to time, are incorporated by reference herein and made part of this Plan, except as set forth in this Article 3. 3.2 Termination Upon a Change of Control The provisions of the CIGNA Severance Pay Plan incorporated above in Section 3.1 into this Plan, shall apply to a Participant whose employment with CIGNA ends on account of a Termination upon a Change of Control except as follows: (a) Instead of Basic Severance Pay under Schedule II, a Terminated Participant shall receive Basic Severance Pay equal to his or her base salary rate, stated in weekly terms, multiplied by four (4) weeks for each completed year of service attained by the Participant on his or her Termination of Employment Date except that the minimum number of weeks shall be fifty-two (52) and the maximum number of weeks shall be one hundred four (104). Such Basic Severance Pay shall be payable in equal bi-weekly installments unless the Participant elects a lump sum payment. (b) Supplemental Severance Pay for a Terminated Participant with a Termination of Employment Date from May 1 to December 31 shall be computed as under the CIGNA Severance Pay Plan with the following changes. Instead of averaging bonuses or making pro-rata adjustments, the lump sum amount shall equal the higher of the bonus actually received by the Terminated Participant for the calendar year preceding his Termination of Employment Date or the amount of the annual incentive bonus guideline, established by the Board for determining appropriate levels of incentive compensation payments under the CIGNA Key Management Incentive Bonus Plan, which guideline was applicable to the Terminated Participant immediately preceding the Change of Control. (c) During the first six months of the Severance Period, CIGNA will provide a Terminated Participant with outplacement counseling, office space and secretarial services. - 3 - 4 (d) A Terminated Participant may elect to have CIGNA provide executive financial planning and tax preparation services for the calendar year in which his or her Termination of Employment Date occurs in accordance with such programs then in effect. Article 4 -- Administration of the Plan. 4.1 This Plan may be amended, modified or terminated in the sole and absolute discretion of CIGNA at any time, except after a Change of Control. For the two-year period following a Change of Control, no amendment, modification or termination which would adversely affect any Participant in any manner may be made. 4.2 Effective Date. This Plan, as amended and restated, shall be effective July 27, 1994. IN WITNESS WHEREOF, CIGNA Corporation has caused this Plan to be executed by the undersigned officer this 28th day of July, 1994, to be effective as of the date set forth herein. (Corporate Seal) Attest: CIGNA CORPORATION /s/Carol J. Ward /s/Donald M. Levinson - ---------------- --------------------- Carol J. Ward Donald M. Levinson Corporate Secretary Executive Vice President - 4 - EX-11 4 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 Six Months Ended June 30, June 30, 1994 1993 1994 1993 ============================================================================================================================= PRIMARY EARNINGS PER SHARE NET INCOME AVAILABLE TO COMMON SHARES $ 135 $ 88 $ 249 $ 134 - ---------------------------------------------------========================================================================= WEIGHTED AVERAGE SHARES: Common shares 72,286,013 71,959,794 72,196,784 71,877,160 Common share equivalents applicable to stock options 111,754 79,944 102,271 87,401 - ---------------------------------------------------------------------------------------------------------------------------- Total 72,397,767 72,039,738 72,299,055 71,964,561 - ---------------------------------------------------========================================================================= PRIMARY EARNINGS PER SHARE $ 1.86 $ 1.22 $ 3.44 $ 1.86 - ---------------------------------------------------========================================================================= FULLY DILUTED EARNINGS PER SHARE NET INCOME AVAILABLE TO COMMON SHARES: Net income $ 135 $ 88 $ 249 $ 134 Adjusted for: Interest expense (net of tax) on convertible debentures 4 4 7 * - ----------------------------------------------------------------------------------------------------------------------------- Net income available to common shares $ 139 $ 92 $ 256 $ 134 - ---------------------------------------------------========================================================================= WEIGHTED AVERAGE SHARES: Common shares 72,286,013 71,959,794 72,196,784 71,877,160 Common share equivalents applicable to stock options 178,301 83,603 135,544 89,469 Assumed conversion of convertible debentures 3,626,102 3,626,395 3,626,102 * - ----------------------------------------------------------------------------------------------------------------------------- Total 76,090,416 75,669,792 75,958,430 71,966,629 - ---------------------------------------------------========================================================================= FULLY DILUTED EARNINGS PER SHARE $ 1.83 $ 1.22 $ 3.37 $ 1.86 - ---------------------------------------------------=========================================================================
* The effect of incremental shares was anti-dilutive. Net income available to common shares reflects the payment of interest expense on debentures. EX-12 5 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1
CIGNA CORPORATION EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions) Six Months Ended June 30, 1994 1993 ========================================================================================= Income before income taxes $ 374 $ 162 -------- ------- Fixed charges included in income: Interest expense 61 60 Interest portion of rental expense 52 52 -------- ------- Total fixed charges included in income 113 112 -------- ------- Income available for fixed charges $ 487 $ 274 - --------------------------------------------------------------=========================== RATIO OF EARNINGS TO FIXED CHARGES 4.3 2.4 - --------------------------------------------------------------===========================
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