-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LZomQUOYYN1S+nWKD7rZ+echlon2elYPcSqb/vEObNvANj9t9i6C4Ja/s3ZrXkEU EZ7YZ5TU0ko0oEBkxcHpSw== 0000893220-96-001312.txt : 19960812 0000893220-96-001312.hdr.sgml : 19960812 ACCESSION NUMBER: 0000893220-96-001312 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIGNA CORP CENTRAL INDEX KEY: 0000701221 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061059331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08323 FILM NUMBER: 96607075 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 CONFORMED COPY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1996 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, 1996, 75,973,510 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 and Retained Earnings 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. 24 SIGNATURE 25 EXHIBIT INDEX 26 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, 1996 1995 1996 1995 =============================================================================================================================== REVENUES Premiums and fees $ 3,499 $ 3,514 $ 6,889 $ 6,932 Net investment income 1,111 1,085 2,194 2,112 Other revenues 152 130 294 257 Realized investment gains (losses) (31) 24 (1) 206 ---------- ----------- ----------- ----------- Total revenues 4,731 4,753 9,376 9,507 ---------- ----------- ----------- ----------- BENEFITS, LOSSES AND EXPENSES Benefits, losses and settlement expenses 3,129 3,224 6,273 6,421 Policy acquisition expenses 322 290 594 596 Other operating expenses 935 935 1,806 1,784 ---------- ----------- ----------- ----------- Total benefits, losses and expenses 4,386 4,449 8,673 8,801 ---------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 345 304 703 706 ---------- ----------- ----------- ----------- Income taxes: Current 36 75 112 111 Deferred 78 24 122 100 ---------- ----------- ----------- ----------- Total income taxes 114 99 234 211 ---------- ----------- ----------- ----------- NET INCOME 231 205 469 495 Dividends declared (62) (55) (122) (108) Retained earnings, beginning of period 4,219 4,289 4,041 4,052 - ------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS, END OF PERIOD $ 4,388 $ 4,439 $ 4,388 $ 4,439 - -----------------------------------------------------========================================================================== EARNINGS PER SHARE INFORMATION: Primary $ 3.00 $ 2.82 $ 6.10 $ 6.82 Fully Diluted $ 3.00 $ 2.74 $ 6.10 $ 6.59 - -----------------------------------------------------========================================================================== DIVIDENDS DECLARED PER SHARE $ 0.80 $ 0.76 $ 1.60 $ 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, 1996 1995 =================================================================================================================== ASSETS Investments: Fixed maturities: Available-for-sale, at fair value (amortized cost, $32,629; $33,275) $ 33,918 $ 36,241 Equity securities, at fair value (cost, $597; $565) 715 661 Mortgage loans 11,245 11,010 Policy loans 7,243 7,107 Real estate 1,262 1,283 Other long-term investments 246 295 Short-term investments 852 1,113 ----------- ----------- Total investments 55,481 57,710 Cash and cash equivalents 1,434 1,559 Accrued investment income 1,021 908 Premiums, accounts and notes receivable 4,254 4,268 Reinsurance recoverables 7,130 7,120 Deferred policy acquisition costs 1,161 1,109 Property and equipment, net 814 864 Deferred income taxes, net 2,058 1,866 Other assets 1,037 1,149 Goodwill 1,097 1,118 Separate account assets 20,412 18,232 - ------------------------------------------------------------------------------------------------------------------- Total $ 95,899 $ 95,903 - ----------------------------------------------------------------------------======================================= LIABILITIES Contractholder deposit funds $ 29,292 $ 30,055 Unpaid claims and claim expenses 19,004 19,303 Future policy benefits 11,750 12,007 Unearned premiums 2,059 2,176 ----------- ----------- Total insurance and contractholder liabilities 62,105 63,541 Accounts payable, accrued expenses and other liabilities 4,983 5,408 Current income taxes 174 187 Short-term debt 406 414 Long-term debt 1,037 1,066 Separate account liabilities 20,309 18,130 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 89,014 88,746 - ------------------------------------------------------------------------------------------------------------------- CONTINGENCIES - NOTE 7 SHAREHOLDERS' EQUITY Common stock (shares issued, 88; 87) 88 87 Additional paid-in capital 2,554 2,536 Net unrealized appreciation - fixed maturities 444 1,025 Net unrealized appreciation - equity securities 87 73 Net translation of foreign currencies (47) (27) Retained earnings 4,388 4,041 Less treasury stock, at cost (629) (578) - ------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 6,885 7,157 - ------------------------------------------------------------------------------------------------------------------- Total $ 95,899 $ 95,903 - ---------------------------------------------------------------------------======================================== SHAREHOLDERS' EQUITY PER SHARE $ 90.40 $ 93.76 - ---------------------------------------------------------------------------========================================
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, 1996 1995 =============================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 469 $ 495 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Insurance liabilities, net of reinsurance recoverables (140) (113) Premiums, accounts and notes receivable (109) (106) Accounts payable, accrued expenses, other liabilities and current income taxes (343) 210 Deferred income taxes, net 122 100 Realized investment (gains) losses 1 (206) Gain on sale of subsidiaries and other equity interests (18) -- Other, net (40) (78) -------------- -------------- Net cash provided by (used in) operating activities (58) 302 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investments sold: Fixed maturities - available for sale 3,447 2,980 Equity securities 218 1,417 Mortgage loans 265 197 Other (primarily short-term investments) 6,449 6,081 Investment maturities and repayments: Fixed maturities - available for sale 1,992 576 Fixed maturities - held to maturity -- 1,066 Mortgage loans 357 169 Investments purchased: Fixed maturities - available for sale (4,528) (5,480) Fixed maturities - held to maturity -- (728) Equity securities (238) (258) Mortgage loans (906) (708) Other (primarily short-term investments) (6,463) (6,992) Proceeds from sale of subsidiaries and other equity interests 66 -- Other, net (61) (75) -------------- -------------- Net cash provided by (used in) investing activities 598 (1,755) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds 3,108 4,145 Withdrawals from contractholder deposit funds (3,570) (2,680) Net change in commercial paper (24) (29) Issuance of long-term debt -- 88 Repurchases of common stock (41) -- Repayment of debt (8) (3) Issuance of common stock 7 5 Dividends paid (122) (108) -------------- -------------- Net cash provided by (used in) financing activities (650) 1,418 -------------- -------------- Effect of foreign currency rate changes on cash (15) 49 - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (125) 14 Cash and cash equivalents, beginning of period 1,559 1,693 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,434 $ 1,707 - ---------------------------------------------------------------------------------============================================== Supplemental Disclosure of Cash Information: Income taxes paid, net of refunds $ 125 $ 31 Interest paid $ 55 $ 60 - -------------------------------------------------------------------------------------------------------------------------------
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 1996 presentation. The interim financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments, except for the adjustments noted in the second quarter 1996 Management's Discussion and Analysis) 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 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires write-down to fair value when long-lived assets to be held and used are impaired. Long-lived assets to be disposed, including real estate held for sale, must be carried at the lower of cost or fair value less costs to sell. Depreciation of assets to be disposed of is prohibited. In the first quarter of 1996, CIGNA implemented SFAS No. 121. The effect of adoption of this standard was not material to CIGNA's results of operations, liquidity or financial condition. In 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which provides guidance on the accounting and disclosure for impaired loans. In 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which eliminates the income recognition requirements of SFAS No. 114. CIGNA adopted SFAS Nos. 114 and 118 in the first quarter of 1995. The effect of adoption of these standards was not material to CIGNA's results of operations, liquidity or financial condition. In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," effective for 1996. This statement provides guidance on the prospective accounting and reporting for the cost of stock-based compensation. The cost related to stock options is permitted to be recorded or disclosed, and such cost must be measured at the grant date based upon estimated fair values using option pricing models. CIGNA will disclose the effect of stock-based compensation in its 1996 annual financial statements. 4 7 NOTE 3-INVESTMENTS REALIZED 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) 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Realized gains (losses): Fixed maturities ($14) $4 ($3) $11 Equity securities 1 27 9 180 Mortgage loans (18) (7) (20) 2 Real estate (4) (4) 1 8 Other investments 4 4 12 5 ----------------------------------------------------------------- (31) 24 (1) 206 Income taxes (benefits) (10) 8 1 46 - ---------------------------------------------------------------------------------------------------------------------- Net realized gains (losses) ($21) $16 ($2) $160 - -----------------------------------------------------=================================================================
FIXED MATURITIES AND EQUITY SECURITIES During the second quarter and six months of 1996, proceeds from sales of available-for-sale fixed maturities and equities, including policyholder share, were $1.6 billion and $3.7 billion, respectively, compared with $1.9 billion and $4.4 billion for the same periods last year. The second quarter 1996 sales resulted in gross gains and gross losses of $14 million and $35 million, respectively, compared with gains of $93 million and losses of $49 million for the same period last year. Sales for the six months of 1996 resulted in gross gains of $94 million and gross losses of $80 million, compared with gains of $273 million and losses of $68 million for the same period last year. During the second quarter and six months of 1996, Net Unrealized Appreciation - Fixed Maturities included in Shareholders' Equity, which is net of policyholder-related amounts and deferred income taxes, decreased by $118 million and $581 million, respectively, compared with increases of $469 million and $682 million for the same periods last year. 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 thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Weighted average common shares - primary 76,821 72,616 76,854 72,529 Weighted average common shares - fully diluted 76,884 76,326 76,885 76,223 - ------------------------------------------------------------------------------------------------------------------------------
For purposes of computing fully diluted earnings per share for 1995, CIGNA's 8.2% Convertible Subordinated Debentures, which were converted in late 1995, are considered to have been converted to CIGNA common stock (3.6 million shares as of June 30, 1995) and the related interest expense, $4 5 8 million after-tax for the quarter and $7 million after-tax for the six months, has been excluded from net income. Common shares held as Treasury shares were 11,344,351 and 10,912,750 as of June 30, 1996 and 1995, respectively. NOTE 5-INCOME TAXES CIGNA's federal income tax returns are routinely audited by the Internal Revenue Service (IRS), and provisions are made in the financial statements in anticipation of the results of these audits. The IRS has completed audits of the years 1982 through 1990. One outstanding issue, which relates only to years prior to 1989, could result in an assessment of approximately $210 million. CIGNA is contesting this issue in court. Although the outcome is uncertain, management believes that CIGNA should prevail. In management's opinion, adequate tax liabilities have been established for all years. As of June 30, 1996, CIGNA had tax basis operating loss carryforwards of approximately $500 million. NOTE 6-REINSURANCE In the normal course of business, CIGNA's insurance subsidiaries enter into agreements, primarily relating to short-duration contracts, to assume and cede reinsurance with other insurance companies. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses, although ceded reinsurance does not relieve the originating insurer of liability. CIGNA evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of its reinsurers. Failure of reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies or disputes, could result in losses. Allowances for uncollectible amounts were $708 million and $700 million as of June 30, 1996 and December 31, 1995, respectively. 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 1996, premiums and fees were net of ceded premiums of $350 million and $794 million, respectively. For the second quarter and six months of 1995, premiums and fees were net of ceded premiums of $542 million and $937 million, respectively. In addition, benefits, losses and settlement expenses for the second quarter and six months of 1996 were net of reinsurance recoveries of $317 million and $585 million, respectively. Benefits, losses and settlement expenses for the second quarter and six months of 1995 were net of reinsurance recoveries of $349 million and $629 million, respectively. NOTE 7-CONTINGENCIES AND OTHER MATTERS FINANCIAL GUARANTEES CIGNA, through its subsidiaries, is contingently liable for various financial guarantees provided in the ordinary course of business. These include guarantees for the repayment of industrial revenue bonds as well as other debt instruments. Although the ultimate outcome of any loss contingencies arising from CIGNA's financial guarantees may adversely affect results of operations in future periods, they are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. 6 9 REGULATORY AND INDUSTRY DEVELOPMENTS CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: revise the system of funding cleanup of environmental damages; reform the federal tax system; reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; restrict insurance pricing and the application of underwriting standards; reform health care; and expand regulation. In August 1996, Congress passed legislation that phases out over a three year period the tax deductibility of policy loan interest for most leveraged COLI products. The effect of the legislation on the Individual Financial Services segment is uncertain, but is not expected to be material over the next several years. However, over the longer term, a substantial portion of revenues and earnings from leveraged COLI are expected to be eliminated, which could have a material adverse effect on results of operations for the segment. The effect of this legislation is not expected to be material to CIGNA's consolidated results of operations, liquidity or financial condition. Proposed legislation for Superfund reform remains under consideration by Congress. Any changes in Superfund relating to 1) allocating responsibility, 2) funding cleanup costs, or 3) establishing cleanup standards could affect the liabilities of potentially responsible parties and insurers. Due to uncertainties associated with the timing and content of any future Superfund legislation, the effect on CIGNA's results of operations, liquidity or financial condition cannot be reasonably estimated at this time. CIGNA expects proposals for federal and state legislation seeking some health care insurance reforms and limitations on formation and operation of efficient health care networks. Due to uncertainties associated with the timing and content of any health care legislation, the effect on CIGNA's future results of operations, liquidity or financial condition cannot be reasonably estimated at this time. The National Association of Insurance Commissioners is currently addressing risk-based capital guidelines for health maintenance organizations (HMOs). CIGNA does not expect such guidelines to have a material adverse effect on its future results of operations, liquidity or financial condition. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. PROPERTY AND CASUALTY UNPAID CLAIMS AND CLAIM EXPENSE RESERVES AND REINSURANCE RECOVERABLES In summary, CIGNA's property and casualty loss reserves are an estimate of future payments for reported and unreported claims for losses and related expenses with respect to insured events that have occurred. The basic assumption underlying the many 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 are also considered. The process of establishing loss reserves is subject to uncertainties that are normal, recurring and inherent in the property and casualty business. CIGNA continually attempts to improve its loss estimation process by refining its process of analyzing loss development patterns, claims payments and other information, but there remain many reasons for adverse development of estimated ultimate liabilities. For example, unanticipated changes in workers' compensation laws have at times significantly affected the ability of insurers to estimate liabilities for unpaid losses and related expenses. Reserving for all property and casualty claims and related reinsurance recoverables continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. As additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current law changes, CIGNA's estimates and judgments may be revised. Any such 7 10 revisions could result in future changes in estimates of losses or reinsurance recoverables, and would be reflected in CIGNA's results of operations for the period in which the estimates are changed. While the effect of any such changes in estimates of losses or reinsurance recoverables could be material to future results of operations, CIGNA does not expect such changes to have a material effect on its liquidity or financial condition. In management's judgement, information currently available has been appropriately considered in estimating CIGNA's loss reserves and reinsurance recoverables. LITIGATION CIGNA is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of business, either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against it by its policyholders or other insurers. One such area of litigation involves policy coverage and judicial interpretation of legal liability for asbestos-related and environmental pollution claims. While the outcome of all litigation involving CIGNA, including insurance-related litigation, cannot be determined, litigation (including that related to asbestos and environmental pollution claims) is not expected to result in losses that differ from recorded reserves by amounts that would be material to results of operations, liquidity or financial condition. Also, reinsurance recoveries related to claims in litigation, net of the allowance for uncollectible reinsurance, are not expected to result in recoveries that differ from recorded recoverables by amounts that would be material to results of operations, liquidity or financial condition. OTHER POSTRETIREMENT BENEFITS PLANS In July 1996, CIGNA's Board of Directors approved an amendment to CIGNA's post-retirement medical benefit plan effective as of January 1, 1997. The plan amendment as well as a change in actuarial assumptions in connection with amending the plan is expected to reduce the accumulated benefit obligation by approximately $150 million and, beginning in the third quarter of 1996, this reduction will be amortized into income over the average remaining service period of 17 years. CIGNA does not expect the effect of this plan amendment and change in actuarial assumptions to be material to its results of operations, liquidity or financial condition. COST REDUCTION INITIATIVES During the third quarter of 1995, CIGNA implemented cost reduction initiatives in the Domestic Property and Casualty operations and the Employee Life and Health Benefits segment, which resulted in charges of $85 million ($55 million after-tax) and $30 million ($20 million after-tax), respectively. The cost reduction initiatives, when fully implemented, are estimated to result in annual after-tax savings of approximately $55 million and $40 million, respectively, primarily based on the elimination of certain payroll and payroll-related costs and, to a lesser extent, lease costs. The savings in the near term for the Employee Life and Health Benefits segment are expected to be partially offset by increased investments in business growth and service initiatives. As of June 30, 1996, there were no material changes to the costs associated with, or the anticipated annual savings related to, these initiatives. Through June 30, 1996, approximately $40 million of severance was paid to approximately 2,700 terminated employees of the Property and Casualty and Employee Life and Health Benefits segments. 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, 1996, compared with December 31, 1995, and its results of operations for the quarter and six months ended June 30, 1996, compared with the same periods last year. This discussion should be read in conjunction with the Management's Discussion and Analysis section included in CIGNA's 1995 Annual Report to Shareholders (pages 8 through 23) and in CIGNA's report on Form 10-Q for the first quarter of 1996, to which the reader is directed for additional information. Due to the seasonality of certain aspects of CIGNA's business, caution should be used in estimating results for the full year based on interim results of operations. CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: revise the system of funding cleanup of environmental damages; reform the federal tax system; reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; restrict insurance pricing and the application of underwriting standards; reform health care; and expand regulation. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. For additional information, 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 assessment and believes it should prevail. During 1995, CIGNA implemented cost reduction initiatives in the Domestic Property and Casualty operations and the Employee Life and Health Benefits segment. As of June 30, 1996, there were no material changes to the costs associated with, or the anticipated annual savings related to, these initiatives. For additional information, see Note 7 to the Financial Statements. CIGNA continues to conduct strategic and financial reviews of its businesses to deploy its capital most effectively. Such reviews could result in future actions, including strategic acquisitions and divestitures; however, no determinations have been made at this time. In June 1996, Standard & Poor's (S&P) assigned its BBB ("Adequate", 9th of 18) claims-paying ability rating to both the ongoing and run-off domestic property and casualty operations. This rating is within the "secure" range of S&P's claims-paying ability ratings. In July 1996, Duff & Phelps Credit Rating Co. assigned initial claims-paying ability ratings of A- ("High", 7th of 18) to the ongoing domestic property and casualty operations and BBB- ("Adequate", 10th of 18) to the run-off operations. Also in June, S&P raised its rating for CIGNA Corporation's senior debt to A- ("Strong", 7th of 22), and Fitch Investors Service, Inc assigned a rating of F-1 ("Very Strong", 2nd of 6) to CIGNA's commercial paper. In the first quarter of 1996, CIGNA adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The effect of implementing SFAS No. 121 on CIGNA's results of operations, liquidity and financial condition was not material. For additional information, see Note 2 to the Financial Statements. 9 12 CONSOLIDATED RESULTS OF OPERATIONS
=================================================================================================================================== Three Months Ended Six Months Ended FINANCIAL SUMMARY June 30, June 30, (In millions) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Premiums and fees $3,499 $3,514 $6,889 $6,932 Net investment income 1,111 1,085 2,194 2,112 Other revenues 152 130 294 257 Realized investment gains (losses) (31) 24 (1) 206 ---------------------------------- --------------------------------- Total revenues 4,731 4,753 9,376 9,507 Benefits and expenses 4,386 4,449 8,673 8,801 ---------------------------------- --------------------------------- Income before taxes 345 304 703 706 Income tax expense 114 99 234 211 ---------------------------------- --------------------------------- Net income $231 $205 $469 $495 =================================================================================================================================== Realized investment gains (losses), net of taxes ($21) $16 ($2) $160 ===================================================================================================================================
CIGNA's 1996 consolidated net income increased 13% for the second quarter and decreased 5% for the six months, compared with the same periods last year. Excluding after-tax realized investment results, earnings for the second quarter and six months of 1996 were $252 million and $471 million, respectively, compared with $189 million and $335 million for the same periods last year. Growth in earnings for the quarter and six months of 1996 primarily reflects improved results in the Property and Casualty segment. After-tax realized investment results were lower for the second quarter and six months of 1996, compared to the same periods last year, primarily because of gains from the 1995 restructuring of a portion of the Employee Life and Health Benefits and Property and Casualty segments' equity investment portfolios into fixed income securities, as well as higher mortgage loan impairments in 1996. For additional information, see Note 3 to the Financial Statements. Full year earnings for 1996 are expected to improve, compared with 1995, excluding the effects of realized investment results and the 1995 third quarter charges for asbestos-related and environmental pollution exposures, unrecoverable reinsurance and cost reduction initiatives. However, such improvement could be adversely affected by the factors noted in the cautionary statements on page 23. 10 13 EMPLOYEE LIFE AND HEALTH BENEFITS
=================================================================================================================================== Three Months Ended Six Months Ended FINANCIAL SUMMARY June 30, June 30, (In millions) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Premiums and fees $2,075 $2,033 $4,152 $4,098 Net investment income 143 148 287 284 Other revenues 99 84 202 167 Realized investment gains (losses) (7) 29 (9) 117 -------------------------------------- --------------------------------- Total revenues 2,310 2,294 4,632 4,666 Benefits and expenses 2,139 2,073 4,291 4,199 -------------------------------------- --------------------------------- Income before taxes 171 221 341 467 Income tax expense 54 73 114 134 -------------------------------------- --------------------------------- Net income $117 $148 $227 $333 =================================================================================================================================== Realized investment gains (losses), net of taxes ($4) $19 ($6) $100 ===================================================================================================================================
Net income for the Employee Life and Health Benefits segment decreased 21% for the second quarter and 32% for the six months of 1996, compared with the same periods last year. Excluding after-tax realized investment results, income was $121 million and $233 million for the second quarter and six months of 1996, compared with $129 million and $233 million for the same periods last year. The segment's indemnity operations had after-tax earnings, excluding realized investment results, of $69 million and $125 million for the second quarter and six months of 1996, compared with $79 million and $126 million for the same periods in 1995. These declines reflect lower earnings primarily in the long-term disability (LTD) and group life lines of business due to unfavorable claim experience, and a $6 million after-tax charge in the long-term care line of business resulting from a review of account balances. Partially offsetting these declines were increased earnings primarily reflecting higher fees for Administrative Services Only (ASO) business, improved investment margins on certain experience-rated business and, to a lesser extent, higher earnings from medical rate increases. Results for the second half of 1996, compared with the same period last year, are expected to be lower due to the timing of medical rate increases and less favorable LTD experience. The segment's HMO operations had after-tax earnings, excluding realized investment results, of $52 million and $108 million for the second quarter and six months of 1996, compared with $50 million and $107 million for the same periods in 1995. Second quarter and six months of 1996 and 1995 include favorable after-tax adjustments of $5 million and $6 million, respectively, from certain reserve reviews. Results for the six months of 1996 also included a first quarter after-tax gain of $8 million from the sales of subsidiaries. Excluding the above, the improvement in results for the second quarter of 1996 reflects the favorable effects of membership growth and improved medical cost experience, partially offset by competitive pressures on rates. The decline in earnings for the six months of 1996 reflects competitive pressures on rates and higher operating expenses associated with business growth and customer service initiatives, which were partially offset by the favorable effects of membership growth and the improvement in medical cost experience. Results for the full year of 1996 are expected to be about level with 1995. 11 14 Premiums and fees increased 2% and 1% for the second quarter and six months of 1996, respectively. These improvements reflect membership growth in HMOs, partially offset by lower medical indemnity premiums resulting from the effect of favorable claim experience on premiums for experience-rated business and, to a lesser extent, cancellations and conversions to HMOs. Growth in premiums is expected to continue to be constrained by competitive pressures in both the medical indemnity and HMO markets. Total HMO membership increased 12%, compared with June 30, 1995 and increased 10%, compared with December 31, 1995. These increases primarily reflect membership growth in HMO alternative funding programs. Under these programs, the customer assumes all or a portion of the responsibility for funding claims and CIGNA generally earns a lower margin than under traditional HMO plans. Management believes that adding premium equivalents to premiums and fees (adjusted premiums and fees) produces a more meaningful measure of business volume. Premium equivalents for the second quarter and six months of 1996 were approximately $2.4 billion and $4.8 billion, compared with $2.4 billion and $4.9 billion for the same periods last year. Premium equivalents were about level year over year reflecting declines in medical premium equivalents due to cancellations and conversions to HMOs, partially offset by growth in HMO alternative funding programs. Premium equivalents, as a percentage of total adjusted premiums and fees, were 54% and 55% for the six months of 1996 and 1995, respectively. ASO plans accounted for 46% and 45% of total adjusted premiums and fees for the six months of 1996 and 1995, respectively. EMPLOYEE RETIREMENT AND SAVINGS BENEFITS
=================================================================================================================================== Three Months Ended Six Months Ended FINANCIAL SUMMARY June 30, June 30, (In millions) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Premiums and fees $50 $41 $88 $83 Net investment income 431 432 859 856 Realized investment gains (losses) (6) 1 10 4 -------------------------------------- --------------------------------- Total revenues 475 474 957 943 Benefits and expenses 415 405 806 799 -------------------------------------- --------------------------------- Income before taxes 60 69 151 144 Income tax expense 20 23 50 47 -------------------------------------- --------------------------------- Net income $40 $46 $101 $97 =================================================================================================================================== Realized investment gains (losses), net of taxes ($4) $-- $6 $2 ===================================================================================================================================
Net income for the Employee Retirement and Savings Benefits segment decreased 13% and increased 4% for the second quarter and six months of 1996, compared with the same periods of 1995. Results for the second quarter and six months of 1996 include an after-tax charge of $8 million for expected state guaranty fund assessments. Excluding this charge and after-tax realized investment results, income was $52 million and $103 million for the second quarter and six months of 1996, compared with $46 million and $95 million for the same periods last year. These improvements primarily reflect higher earnings from an increased asset base. Revenues, excluding realized investment results, increased 1% year over year, reflecting higher investment yields, offset by customers' redirection of investments to separate accounts. 12 15 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) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Balance -- January 1 $38,183 $33,882 Premiums and deposits 3,068 2,804 Investment results 1,360 1,329 Increase (decrease) in fair value of assets (422) 1,555 Customer withdrawals (1,236) (1,107) Benefit payments and other (2,529) (2,276) - ----------------------------------------------------------------------------------------------------------------------------------- Balance -- June 30 $38,424 $36,187 ===================================================================================================================================
Premiums and deposits increased 9% in the six months of 1996, compared with the same period in 1995, reflecting higher sales. Approximately 52% and 43% of the premiums and deposits for the six months of 1996 and 1995, respectively, were from new customers. The increase in investment results for the six months of 1996, compared with 1995, reflects separate account asset growth. The decrease for 1996 in the fair value of assets is due to market value depreciation for fixed maturities. The growth in benefit payments and other, compared with the prior year, primarily reflects higher scheduled maturities on guaranteed investment contracts. Management expects asset growth to continue to be constrained, resulting from decisions by plan sponsors to diversify assets and fund management. In addition, assets under management will continue to be affected by market value fluctuations for fixed maturities and equity securities. INDIVIDUAL FINANCIAL SERVICES
=================================================================================================================================== Three Months Ended Six Months Ended FINANCIAL SUMMARY June 30, June 30, (In millions) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Premiums and fees $209 $221 $445 $430 Net investment income 271 243 523 469 Other revenues 21 23 38 35 Realized investment losses (2) (5) -- (2) --------------------------------------- --------------------------------- Total revenues 499 482 1,006 932 Benefits and expenses 437 419 892 818 --------------------------------------- --------------------------------- Income before taxes 62 63 114 114 Income tax expense 22 21 40 39 --------------------------------------- --------------------------------- Net income $40 $42 $74 $75 =================================================================================================================================== Realized investment losses, net of taxes ($2) ($3) $-- ($1) ===================================================================================================================================
Net income for the Individual Financial Services segment decreased 5% and 1% for the second quarter and six months of 1996, respectively, compared with the same periods last year. Results for the second quarter and six months of 1996 include a net after-tax charge of $3 million resulting from account reviews. This net charge comprises an unfavorable adjustment to deferred policy acquisition costs of $23 million ($15 million after-tax), a favorable policy loan investment income adjustment of $15 million ($10 million after-tax) and a favorable reinsurance loss reserve adjustment of $3 million ($2 million after-tax). Results for 1995 include a $4 million after-tax benefit from additional proceeds from 13 16 the 1992 sale of a substantial portion of CIGNA's mutual fund business. Excluding the above items and after-tax realized investment losses, income was $45 million and $77 million for the second quarter and six months of 1996, compared with $41 million and $72 million for the same periods last year. These increases primarily reflect higher earnings from interest-sensitive products, including leveraged corporate-owned life insurance (COLI), partially offset for the six months by unfavorable mortality experience. For the second quarter and six months of 1996, premiums and fees decreased 5% and increased 3%, respectively, compared with the same periods last year. The decrease for the quarter reflects lower leveraged COLI renewal premiums. The increase for the six months primarily reflects higher sales of reinsurance and interest-sensitive products, which were constrained by lower leveraged COLI renewal premiums. Net investment income, excluding the adjustment to policy loan investment income noted above, increased 5% and 8% from the same periods last year. These increases primarily reflect higher investment income from leveraged COLI policy loans and annuity business. Benefits and expenses, excluding the adjustment to deferred policy acquisition costs and reinsurance loss reserves noted above, decreased 1% in the second quarter and increased 7% for the six months of 1996, compared with the same periods last year. The decrease for the quarter reflects lower expenses for leveraged COLI, while the increase for the six months reflects business growth. In August 1996, Congress passed legislation that phases out over a three year period the tax deductibility of policy loan interest for most leveraged COLI products. The effect of the legislation on the Individual Financial Services segment is uncertain, but is not expected to be material over the next several years. However, over the longer term, a substantial portion of revenues and earnings from leveraged COLI are expected to be eliminated, which could have a material adverse effect on results of operations for the segment. The effect of this legislation is not expected to be material to CIGNA's consolidated results of operations, liquidity or financial condition. 14 17 PROPERTY AND CASUALTY
=================================================================================================================================== Three Months Ended Six Months Ended FINANCIAL SUMMARY June 30, June 30, (In millions) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Premiums and fees $1,165 $1,219 $2,204 $2,321 Net investment income 208 206 405 395 Other revenues 60 49 113 108 Realized investment gains (losses) (13) 4 -- 72 ------------------------------------ --------------------------------- Total revenues 1,420 1,478 2,722 2,896 Benefits and expenses 1,345 1,498 2,579 2,884 ------------------------------------ --------------------------------- Income (loss) before taxes 75 (20) 143 12 Income tax expense (benefit) 24 (10) 42 (4) - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $51 ($10) $101 $16 =================================================================================================================================== Realized investment gains (losses), net of taxes ($8) $2 $-- $47 ===================================================================================================================================
Effective December 31, 1995, CIGNA restructured its domestic property and casualty businesses into two separate operations, ongoing and run-off. The ongoing operations are actively engaged in selling insurance products and related services. The run-off operations, which do not actively sell insurance products, manage run-off policies and related claims, including those for asbestos-related and environmental pollution exposures. Insurance products that were actively sold in 1995 by subsidiaries that are now in run-off continue to be sold by the ongoing operations. Results for the run-off operations primarily reflect current year losses associated with unearned premiums as of December 31, 1995, prior year development on claim and claim adjustment expense reserves and investment activity. The restructuring is being contested by certain competitors and policyholders; however, management believes that its restructuring will not be affected. Financial data for the domestic and run-off operations for 1995 are prepared on a pro forma basis as though the restructuring occurred at the beginning of 1995. The pro forma amounts are not necessarily indicative of the amounts that would have been reported had the restructuring actually occurred as of January 1, 1995. Consolidated Property and Casualty segment amounts were not affected by the restructuring. Net income increased significantly for the second quarter and six months of 1996, compared with the same periods last year. Included in net income for the ongoing operations in the second quarter and six months of 1996 were after-tax realized investment losses of $1 million and gains of $11 million, respectively, compared with gains of $49 million for the six months of 1995. There were no net after-tax realized investment gains or losses for the ongoing operations in the second quarter of 1995. For the run-off operations, after-tax realized investment losses were $7 million and $11 million for the second quarter and six months of 1996, respectively, compared with gains of $2 million and losses of $2 million for the same periods in 1995. 15 18 Excluding after-tax realized investment results, Property and Casualty segment income (loss) for the second quarter and six months of 1996 and 1995, was as follows:
=================================================================================================================================== Three Months Ended June 30, Six Months Ended June 30, --------------------------------------- ------------------------------------- (In millions) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Ongoing operations: Domestic $20 ($2) $32 ($16) International 36 30 65 48 --------------------------------------- ------------------------------------- Total ongoing operations 56 28 97 32 Run-off operations 3 (40) 4 (63) - ----------------------------------------------------------------------------------------------------------------------------------- Total $59 ($12) $101 ($31) ===================================================================================================================================
The improvement in the domestic operations for the second quarter of 1996, compared with the same period last year, primarily reflects favorable claim experience, including lower catastrophe losses, and, for the second quarter and six months, lower expenses resulting from the 1995 cost reduction initiative. Improvement in the international operations for the second quarter and six months of 1996, compared with the same periods last year, primarily reflects favorable claim experience. Results for the domestic and international operations reflect a highly competitive pricing environment. The improvement in results for the run-off operations primarily reflects lower asbestos-related and environmental pollution losses. Premiums and fees for the Property and Casualty segment decreased 4% and 5% in the second quarter and six months of 1996, compared with the same periods last year. These declines primarily reflect the application of strict underwriting standards, continued competition (particularly in workers' compensation, commercial package and certain international lines of business), and, for the second quarter, an unfavorable effect from foreign currency translation of approximately $50 million for the international business. The quarter and six month declines also reflect lower premiums of $4 million and $54 million, respectively, for reinsurance and personal automobile products that are no longer being actively sold. These declines were partially offset by growth in the domestic property, casualty, and marine and aviation lines of business, as well as the international accident and health line of business. Current year catastrophes in the domestic operations were $8 million and $31 million, net of reinsurance, for the second quarter and six months of 1996. Catastrophe losses for the six months of 1996 include $18 million for winter storms. There were no catastrophe losses for the international operations in the second quarter and six months of 1996. Catastrophe losses for the second quarter and six months of 1995 were $27 million and $41 million, including losses of $27 million and $34 million for the domestic operations. The effects of reinsurance on catastrophe losses for the second quarter and six months of 1996 and 1995 were not material. LOSS RESERVES AND REINSURANCE RECOVERABLES CIGNA's reserving methodology and significant issues affecting the estimation of loss reserves are described in its Form 10-K. In summary, CIGNA's property and casualty loss reserves of $16.7 billion and $17.0 billion as of June 30, 1996 and December 31, 1995, respectively, are an estimate of future payments for reported and unreported claims for losses and related expenses with respect to insured events that have occurred. The basic assumption underlying the many 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 are also considered. The process of establishing loss reserves is subject to uncertainties that are normal, recurring and inherent in the property and casualty business. 16 19 CIGNA continually attempts to improve its loss estimation process by refining its process of analyzing loss development patterns, claims payments and other information, but there remain many reasons for adverse development of estimated ultimate liabilities. For example, unanticipated changes in workers' compensation laws have at times significantly affected the ability of insurers to estimate liabilities for unpaid losses and related expenses. As of June 30, 1996 and December 31, 1995, CIGNA's reinsurance recoverables were approximately $6.7 billion, net of allowances for uncollectible amounts of $708 million and $700 million, respectively. CIGNA expects to continue to have significant recoveries from its reinsurance arrangements, including recoveries of asbestos-related and environmental pollution losses. However, the extent of recoveries in the aggregate, including for asbestos-related and environmental pollution losses, will depend on future gross loss experience and the particular reinsurance arrangements to which future losses relate. Losses for unrecoverable reinsurance are principally due to the failure of reinsurers to indemnify CIGNA, primarily because of reinsurer insolvencies and disputes under reinsurance contracts. Reinsurance disputes have increased in recent years, particularly on larger and more complex claims such as those related to asbestos and London reinsurance market exposures. Reinsurance disputes may increase in the future and are likely to include disputes related to environmental pollution. Allowances have been established for amounts deemed uncollectible. Reserving for all property and casualty claims and related reinsurance recoverables continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. As additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current law changes, CIGNA's estimates and judgments may be revised. Any such revisions could result in future changes in estimates of losses or reinsurance recoverables, and would be reflected in CIGNA's results of operations for the period in which the estimates are changed. While the effect of any such changes in estimates of losses or reinsurance recoverables could be material to future results of operations, CIGNA does not expect such changes to have a material effect on its liquidity or financial condition. In management's judgment, information currently available has been appropriately considered in estimating CIGNA's loss reserves and reinsurance recoverables. The following table shows the adverse pre-tax effects on the Property and Casualty segment's results of operations from prior year development, net of reinsurance, for the second quarter and six months ended June 30:
=================================================================================================================================== Three Months Ended June 30, Six Months Ended June 30, --------------------------- -------------------------- (In millions) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Asbestos-related $10 $40 $14 $61 Environmental pollution 9 46 26 94 Workers' Compensation 7 29 19 40 Other 27 4 30 17 - ----------------------------------------------------------------------------------------------------------------------------------- Total $53 $119 $89 $212 ===================================================================================================================================
During the third quarter of 1995, CIGNA significantly increased its asbestos-related and environmental pollution (A&E) reserves (see CIGNA's 1995 Form 10-K for additional information) and, as a result, charges for A&E losses in 1996 are expected to be substantially lower than in prior years. The prior year development for A&E losses for the second quarter and six months of 1996 reflect revisions to previous estimates based upon recent experience. As additional loss experience develops, A&E losses for the remainder of 1996 are reasonably possible. Other prior year development for the six months of 1996 and 1995 was primarily attributable to 17 20 unfavorable development on long-term exposure claims, reinsurance exposures and unrecoverable reinsurance, partially offset by favorable development on commercial package and commercial fire lines of business. Total prior year development for the run-off operations was $36 million and $72 million in the second quarter and six months of 1996, respectively, compared with $100 million and $187 million for the same periods of 1995. Total prior year development for the ongoing operations was $17 million in the second quarter and six months of 1996, compared with $19 million and $25 million for the same periods of 1995. OTHER OPERATIONS Other Operations primarily includes unallocated investment income, expenses (principally debt service) and taxes. Also included in Other Operations are the results of CIGNA's settlement annuity business and non-insurance operations engaged primarily in investment and real estate activities. Other Operations had net losses for the second quarter of 1996 and 1995 of $17 million and $21 million, respectively, which included after-tax realized investment losses of $3 million and $2 million, respectively. Net losses for the six months of 1996 and 1995 were $34 million and $26 million, respectively, which included after-tax realized investment losses of $2 million and gains of $12 million, respectively. Excluding after-tax realized investment results, losses were $14 million and $19 million for the second quarters of 1996 and 1995, and $32 million and $38 million for the six months of 1996 and 1995. These decreases in losses primarily reflect lower net interest expense and higher investment management fees. 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 the first six months of 1996, cash and cash equivalents decreased $125 million from $1.6 billion as of December 31, 1995. This decrease primarily reflects withdrawals from contractholder deposit funds, net of deposits and interest credited, ($462 million); payments of dividends on and repurchases of CIGNA common stock ($163 million); and cash used for operating activities ($58 million), reflecting the timing of cash receipts and cash disbursements and earnings. The decrease in cash flows was partially offset by cash provided by investing activities ($598 million), primarily net investment sales and maturities ($593 million). CIGNA's capital resources represent funds available for long-term business commitments and primarily consist of retained earnings and proceeds from the issuance of long-term debt and equity securities. CIGNA's financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of such securities. CIGNA continues to be well capitalized, with sufficient borrowing capacity to meet the anticipated needs of its businesses. CIGNA had $1.04 billion of long-term debt outstanding at June 30, 1996, compared with $1.07 billion at December 31, 1995. As of June 30, 1996, CIGNA had approximately $800 million remaining under shelf registration statements that may be issued as debt or equity securities, or both, depending upon market conditions and CIGNA's capital requirements. At June 30, 1996, CIGNA's short-term debt, primarily commercial paper, amounted to $406 million, a decrease of $8 million from December 31, 1995. 18 21 In connection with the domestic property and casualty restructuring, CIGNA contributed additional capital of $250 million and $125 million to these property and casualty operations in the first quarter of 1996 and 1995, respectively. These contributions were funded through internal sources. In April 1996, CIGNA's Board of Directors authorized the purchase of up to $500 million of its common stock, depending on prevailing market conditions and alternative uses of capital. Under this authorization, approximately $66 million, or 592,000 shares, of common stock were purchased as of July 31, 1996. Shares have been, and are expected to continue to be, purchased with internal funds. In July 1996, CIGNA's Board of Directors approved an amendment to CIGNA's post-retirement medical benefit plan effective as of January 1, 1997. CIGNA does not expect the effect of this plan amendment as well as a change in actuarial assumptions in connection with amending the plan to be material to its results of operations, liquidity or financial condition. For additional information, see Note 7 to the Financial Statements. 19 22 INVESTMENT ASSETS
================================================================================================================================ June 30, December 31, (In millions) 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Fixed maturities $33,918 $36,241 Equity securities 715 661 Mortgage loans 11,245 11,010 Real estate 1,262 1,283 Other, primarily policy loans 8,341 8,515 - -------------------------------------------------------------------------------------------------------------------------------- Total investment assets $55,481 $57,710 ================================================================================================================================
Additional information regarding CIGNA's investment assets is included in Note 3 to the second quarter 1996 Financial Statements and Notes 2, 4, 5 and 20 to the 1995 Financial Statements as well as the 1995 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, 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Fixed maturities 28% 30% Mortgage loans 56% 58% Real estate 57% 57% ================================================================================================================================
FIXED MATURITIES Investments in fixed maturities (bonds) include publicly traded and private placement debt securities; asset-backed securities, including collateralized mortgage obligations (CMOs); and redeemable preferred stocks. As of June 30, 1996, fixed maturities had an aggregate fair value, including policyholder share, that was greater than amortized cost by $1.3 billion, compared with approximately $3.0 billion as of December 31, 1995. The decrease in unrealized appreciation primarily reflects the upward movement in interest rates since December 31, 1995. POTENTIAL PROBLEM BONDS Potential problem bonds are fully current but judged by management to have certain characteristics that increase the likelihood of problem classification. Potential problem bonds, including amounts attributable to policyholder contracts, were $142 million as of June 30, 1996, compared with $137 million as of December 31, 1995. There were no cumulative write-downs for potential problem bonds as of June 30, 1996 and December 31, 1995. PROBLEM BONDS Bonds that are delinquent or restructured as to terms, typically interest rate and, in certain cases, maturity date, are considered problem bonds. As of June 30, 1996 and December 31, 1995, problem bonds, including amounts attributable to policyholder contracts, were $189 million and $196 million, net of related cumulative write-downs of $154 million and $140 million, respectively. 20 23 CUMULATIVE WRITE-DOWNS FOR BONDS Cumulative write-downs for bonds as of June 30, 1996 and 1995 were $156 million and $131 million, including $55 million and $52 million attributable to policyholder contracts, respectively. Also, cumulative write-downs as of June 30, 1996 and 1995 included $2 million and $4 million, respectively, for bonds no longer classified as problem or potential problem bonds. During the six months of 1996 and 1995, write-downs of $25 million and $18 million, respectively, were established for problem bonds, including $8 million and $9 million, respectively, attributable to policyholder contracts. See the Summary on page 23 for the adverse after-tax effect of write-downs on policyholder contracts and on CIGNA's net income. EFFECT OF NON-ACCRUALS FOR BONDS Interest income is recognized on problem bonds only when payment is received. See the Summary on page 23 for the adverse effect of non-accruals for bonds on policyholder contracts and on CIGNA's net income. MORTGAGE LOANS
============================================================================================================================== June 30, December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Mortgage loans (in millions) $11,245 $11,010 By property type: Retail facilities 42% 42% Office buildings 34 35 Apartment buildings 12 12 Hotels 7 6 Other 5 5 Total 100% 100% ==============================================================================================================================
CIGNA's investment strategy requires diversification of the mortgage loan portfolio. This strategy includes guidelines relative to property type, location and borrower to reduce its exposure to potential losses. Adverse conditions in real estate markets and more stringent lending practices by financial institutions have affected scheduled maturities of mortgage loans. During the six months of 1996, $695 million of mortgage loans was scheduled to mature, of which $246 million was paid in full, $123 million was extended at existing loan rates for a weighted average of six months and $269 million was refinanced at current market rates. Mortgage loan extensions and refinancings are loans in good standing. The remaining scheduled maturities of $57 million were problem and potential problem mortgage loans. 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. 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. Potential problem mortgage loans, including amounts attributable to policyholder contracts, were $348 million as of June 30, 1996, compared with $211 million as of December 31, 1995, net of related valuation reserves of $35 million and $29 million, 21 24 respectively. PROBLEM MORTGAGE LOANS CIGNA's problem mortgage loans include delinquent and restructured mortgage loans. Delinquent mortgage loans include those on which payment is overdue generally 60 days or more. Restructured mortgage loans are those whose basic financial terms have been modified, typically to reduce the interest rate or extend the maturity date. As of June 30, 1996, restructured mortgage loans with a carrying value of approximately $300 million had their original maturity date extended, with an average extension of approximately five years. Restructured mortgage loans generated annualized cash returns averaging approximately 8% as of June 30, 1996. During the six months of 1996, approximately $55 million of restructured mortgage loans were reclassified to loans in good standing since they were performing under the terms of the restructured loan agreement, and the terms were generally equivalent to terms that CIGNA was willing to accept for a comparable new loan at the time of restructure. As of June 30, 1996 and December 31, 1995, problem mortgage loans, including amounts attributable to policyholder contracts, were $514 million and $575 million, net of valuation reserves of $86 million and $59 million, respectively. VALUATION RESERVES FOR MORTGAGE LOANS Valuation reserves for mortgage loans at June 30, 1996 and 1995 were $121 million and $100 million, respectively, including $78 million and $68 million attributable to policyholder contracts. The increase (decrease) in valuation reserves established for problem and potential problem mortgage loans during the six months of 1996 and 1995 were $49 million and $(4) million, respectively. Such amounts included $29 million attributable to policyholder contracts for 1996 and no amount attributable to policyholder contracts in 1995. The net decrease in valuation reserves established in the six months of 1995 reflects the implementation of SFAS Nos. 114 and 118, which resulted in a decrease in reserves of $29 million, including $16 million attributable to policyholders. See the Summary on page 23 for the net after-tax effect of valuation reserves on policyholder contracts and on CIGNA's net income. EFFECT OF NON-ACCRUALS FOR MORTGAGE LOANS Interest income is recognized on problem mortgage loans only when payment is received. See the Summary on page 23 for the effect of non-accruals for mortgage loans on policyholder contracts and on CIGNA's net income. REAL ESTATE As of June 30, 1996 and December 31, 1995, investment real estate, net of reserves and write-downs, included: 1) real estate held for the production of income of $507 million and $563 million, respectively, and 2) real estate held for sale, primarily properties acquired as a result of foreclosure of mortgage loans, of $755 million and $720 million, respectively. REAL ESTATE WRITE-DOWNS AND RESERVES Cumulative write-downs and valuation reserves for real estate at June 30, 1996 and 1995 were $394 million and $433 million, respectively, including $200 million and $229 million attributable to policyholder contracts. See the Summary on page 23 for the adverse after-tax effect of write-downs and the net increase in valuation reserves on policyholder contracts and on CIGNA's net income. 22 25 SUMMARY The adverse (favorable) effects of write-downs and changes in valuation reserves as well as of non-accruals on policyholder contracts and on CIGNA's net income were as follows:
=================================================================================================================================== Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------------------- ---------------------------------------------------- 1996 1995 1996 1995 ------------------------ ---------------------- ------------------------- -------------------- Policy- Policy- Policy- Policy- (In millions) holder CIGNA holder CIGNA holder CIGNA holder CIGNA Contracts Contracts Contracts Contracts - ----------------------------------------------------------------------------------------------------------------------------------- Write-downs and valuation reserves: Bonds $5 $6 $6 $4 $8 $11 $9 $6 Mortgage loans 17 9 5 2 29 13 -- (3) Real estate -- -- 4 2 (1) 1 11 5 - ----------------------------------------------------------------------------------------------------------------------------------- Total $22 $15 $15 $8 $36 $25 $20 $8 =================================================================================================================================== Non-accruals: Bonds $2 $5 $3 $5 $5 $8 $6 $8 Mortgage loans 3 1 1 (1) 3 1 5 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total $5 $6 $4 $4 $8 $9 $11 $8 ===================================================================================================================================
Economic conditions, including real estate market conditions, have improved. However, additional losses from problem investments are expected to occur for specific investments in the normal course of business, particularly due to continuing weak conditions in certain office building markets. Assuming no significant deterioration in economic conditions, CIGNA does not expect additional non-accruals, write-downs and reserves to materially affect future results of operations, liquidity or financial condition, or to result in a significant decline in the aggregate carrying value of its assets. CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for historical information provided in this Management's Discussion and Analysis, statements made throughout this document are forward-looking and contain information about financial results, economic conditions, trends and known uncertainties. CIGNA cautions the reader that actual results could differ materially from those expected by CIGNA, depending on the outcome of certain factors (some of which are described with the forward-looking statements) including: 1) adverse catastrophe experience in CIGNA's property and casualty businesses; 2) adverse property and casualty loss development for events that CIGNA insured in prior years; 3) an increase in medical costs in CIGNA's health care operations, including increases in utilization and costs of medical services; 4) heightened competition, particularly price competition, reducing product margins in CIGNA's businesses; and 5) significant changes in interest rates. 23 26 Item 6. Exhibits and Reports on Form 8-K. (a) See Exhibit Index. (b) During the quarterly period ended June 30, 1996, and as of the filing date, CIGNA filed the following Reports on Form 8-K: - dated July 30, 1996, Item 5--containing a news release regarding its second quarter 1996 results. - dated April 30, 1996, Item 5--containing a news release regarding its first quarter 1996 results. -24- 27 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 9, 1996 -25- 28 Exhibit Index
Method of Number Description Filing - ------ ----------- ---------- 10.1 Amendment No. 1 to the Filed herewith. CIGNA Long-Term Incentive Plan effective as of August 15, 1996 10.2 Amendment No. 3 to the Filed herewith. CIGNA Corporation Stock Plan effective as of August 15, 1996 10.3 Amendment No. 3 to the Filed herewith. CIGNA Corporation Executive Stock Incentive Plan (as Amended and Restated as of March 23, 1988) effective as of August 15, 1996 10.4 Deferred Compensation Plan Filed herewith. for Directors of CIGNA Corporation as Amended and Restated as of August 15, 1996 11 Computation of Earnings Filed herewith. Per Share 12 Computation of Ratio of Filed herewith. Earnings to Fixed Charges 27 Financial Data Schedule Included only in the EDGAR version of the Form 10-Q.
-26- EX-10.1 2 AMENDMENT NO.1 CIGNA LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.1 Amendment No. 1 to the CIGNA LONG-TERM INCENTIVE PLAN 1. Section 11.3 of Article 11 of the Plan is amended in its entirety, to read as follows: 11.3 UNEXERCISED OPTIONS, GRANT FORFEITURES AND OPTIONS EXERCISED WITH COMMON STOCK. (a) All Common Stock (1) under options granted under this Plan which expire or are canceled or surrendered or (2) which is forfeited pursuant to Section 7.4, shall be available for further awards under this Plan upon such expiration, cancellation, surrender and forfeiture; and (b) Any Common Stock which is used by a Participant as full or partial payment to the Company for the purchase of Common Stock acquired upon exercise of a stock option granted under this Plan, and any shares withheld by the Company to satisfy a Participant's tax withholding obligations, shall be available for further awards under this Plan. 2. Section 15.6 of Article 15 is amended in its entirety to read as follows: 15.6 WITHHOLDING TAXES. Upon the exercise of any option or stock appreciation right, the vesting of any Restricted Stock, or payment of any award described in Section 4.1(d), (e) or (f), or upon the exercise of an Incentive Stock Option prior to the satisfaction of the holding period requirements of Code Section 422, the Company shall have the right at its option to: (a) require the Participant (or personal representative or beneficiary) to remit an amount sufficient to satisfy federal, state and local withholding taxes; or (b) deduct, from any amount payable, the amount of any taxes the Company may be required to withhold with respect to such transaction. The Committee may require, or permit, the Participant to remit such amount in whole or in part in Common Stock. If the Committee permits a Participant to elect to remit such amount in Common Stock, any such election shall be made on or prior to the date the withholding obligation arises and be subject to the disapproval of the Committee. The Committee may establish such additional conditions as it deems appropriate. If the Participant remits such amount in Common Stock, the number of shares of Common Stock delivered to or on behalf of a Participant shall be reduced by the number of shares so remitted. Common Stock so remitted shall be valued using the Fair Market Value of Common Stock as of the date the withholding obligation arises. 2 3. Article 15 of the Plan is amended by deleting Section 15.13. EX-10.2 3 AMENDMENT NO.3 CIGNA CORPORATION STOCK PLAN 1 EXHIBIT 10.2 Amendment No. 3 to the CIGNA CORPORATION STOCK PLAN 1. Section 4.3 of Article IV of the Plan is hereby amended in its entirety, to read as follows: 4.3 UNEXERCISED OPTIONS, GRANT FORFEITURES AND OPTIONS EXERCISED WITH COMMON STOCK. (a) All Common Stock (1) under options granted under this Plan which expire or are canceled or surrendered or (2) which is forfeited pursuant to Section 3.5, shall be available for further awards under this Plan upon such expiration, cancellation, surrender or forfeiture; and (b) Any Common Stock which is used by a Participant as full or partial payment to the Company for the purchase of Common Stock acquired upon exercise of a stock option granted under this Plan, and any shares withheld by the Company to satisfy a Participant's tax withholding obligations, shall be available for further awards under this Plan. 2. Section 8.6 of Article VIII is amended in its entirety to read as follows: 8.6 WITHHOLDING TAXES. Whenever Common Stock is to be issued or delivered in satisfaction of options or other awards granted hereunder, the Company shall have the right to require the Participant to remit an amount sufficient to satisfy federal, state and local withholding taxes prior to delivery of any certificate for such shares. The Committee may require, or permit, the Participant to remit such amount in whole or in part in Common Stock. If the Committee permits a Participant to elect to remit such amount in Common Stock, any such election shall be made on or prior to the date the withholding obligation arises and be subject to the disapproval of the Committee. The Committee may establish such additional conditions as it deems appropriate. If the Participant remits such amount in Common Stock, the number of shares of Common Stock delivered to or on behalf of a Participant shall be reduced by the number of shares so remitted. Common Stock so remitted shall be valued using the Fair Market Value of Common Stock as of the date the withholding obligation arises. EX-10.3 4 AMEND NO.3 CIGNA EXECUTIVE STOCK INCENTIVE PLAN 1 EXHIBIT 10.3 Amendment No. 3 to the CIGNA CORPORATION EXECUTIVE STOCK INCENTIVE PLAN Section 8.6 of Article VIII of the Plan is hereby amended in its entirety, effective as of August 15, 1996, to read as follows: 8.6 WITHHOLDING TAXES. Whenever Common Stock is to be issued or delivered in satisfaction of options or other awards granted hereunder, the Company shall have the right to require the Participant to remit an amount sufficient to satisfy federal, state and local withholding taxes prior to delivery of any certificate for such shares. The Committee may require, or permit, the Participant to remit such amount in whole or in part in Common Stock. If the Committee permits a Participant to elect to remit such amount in Common Stock, any such election shall be made on or prior to the date the withholding obligation arises and be subject to the disapproval of the Committee. The Committee may establish such additional conditions as it deems appropriate. If the Participant remits such amount in Common Stock, the number of shares of Common Stock delivered to or on behalf of a Participant shall be reduced by the number of shares so remitted. Common Stock so remitted shall be valued using the Fair Market Value of Common Stock as of the date the withholding obligation arises. EX-10.4 5 DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.4 DEFERRED COMPENSATION PLAN FOR DIRECTORS OF CIGNA CORPORATION (Amended and Restated Effective August 15, 1996) ARTICLE I. DEFINITIONS The following are defined terms wherever they appear in the Plan. 1.1 "Administrator" shall mean the person, or committee, appointed by the Chief Executive Officer of CIGNA Corporation, and charged with responsibility for administration of the Plan. 1.2 "Committee" shall mean the Committee on Directors of the Board of Directors of CIGNA Corporation, or the successor to such committee. 1.3 "Board of Directors" or "Board" shall mean the Board of Directors of CIGNA Corporation. 1.4 "Change of Control" shall mean that: (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 percent 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 percent of the voting power of common shares outstanding of CIGNA Corporation; or, (b) As a result of a merger or consolidation to which CIGNA Corporation is a party, either: (1) CIGNA Corporation is not the surviving corporation; or, (2) Directors of CIGNA Corporation immediately prior to the merger or consolidation constitute less than a majority of the Board of Directors of the surviving corporation; or, (c) A change occurs in the composition of the Board at any time during any consecutive 24-month period such that the "Continuity Directors" cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence, "Continuity Directors" shall mean those members of the Board who either: (1) were directors at the beginning of such consecutive 24-month period, or, (2) were elected by, or upon nomination or recommendation of, at least a majority (consisting of at least nine directors) of the Board. 1.5 "CIGNA Common Stock" or "Common Stock" or "Stock" shall mean the common stock of CIGNA Corporation, par value of one dollar ($1.00) per share. 1.6 "Deferral Election" shall mean the instrument executed by a Participant which specifies amounts and items of compensation to be deferred. 2 1.7 "Deferred Compensation Account" or "Account" shall mean the separate account established under the Plan for each Participant, as described in Section 3.1. l.8 "Participant" shall mean each individual who as a director of CIGNA Corporation elects to participate in the Plan in accordance with the terms and conditions of the Plan. 1.9 "Payment Election" shall mean the instrument executed by a Participant which specifies the method of payment of compensation deferred. 1.10 "Plan" shall mean the Deferred Compensation Plan for Directors of CIGNA Corporation, as it may be amended or restated from time to time by the Board of Directors. 1.11 "Restatement Date" shall mean January 1, 1996, the effective date of the Plan, as amended and restated. 1.12 "Termination of Service" shall mean termination of services as a director of CIGNA Corporation. 1.12 "Valuation Date" shall mean the close of business on the last business day of each month. ARTICLE II. PARTICIPATION 2.1 Eligibility to Participate in the Plan. The individuals who are eligible to participate in the Plan are those persons who serve as directors of CIGNA Corporation. 2.2 Participation in the Plan. (a) A Participant may elect to defer receipt of all or a portion of those items of compensation for services as a director as are specified by the Administrator. (b) The election to defer is made by delivering a properly executed Deferral Election to the Administrator. The Deferral Election shall specify the item or items of compensation to be deferred, and the amount of such compensation to be deferred. The election for payment of compensation deferred is made by delivering a properly executed Payment Election to the Administrator. The Payment Election shall specify the method by which such deferred compensation is to be paid, and the date or dates for payment of such deferred compensation. (c) An election to defer compensation must be filed by the Participant prior to the commencement of a calendar year during which such compensation will be paid. -2- 3 (d) Notwithstanding Section 2.2(c), an election to defer compensation made by an individual who subsequently begins active service as a director of CIGNA Corporation, is filed prior to the date upon which such active service begins, shall be effective according to Section 2.2(e)(2), below. (e) An election to defer compensation is effective: (1) for the year beginning after the election, and for subsequent years, unless modified or revoked; or, (2) if Section 2.2(d) applies, for the remainder of the first year of active service, as of the first day of active service, and for subsequent years, unless modified or revoked. 2.3 Elections Pertaining to Payments. In executing a Payment Election, the Participant shall elect among the methods of payment as are specified by the Committee. (a) If a method of payment provides for periodic payments, the payments shall be made at least annually, over a period not to exceed 15 (fifteen) years. (b) If the payments are to commence after Termination of Service, no payments may be made before the first day of January following the calendar year during which the Participant terminates service. (c) The balance of a Participant's Account shall be paid, in all events, no later than January of the fifteenth year following Termination of Service. (d) If there is not in effect as of Participant's Termination of Service a valid Payment Election, the Participant's Account shall be paid annually over a period of 15 (fifteen) years. 2.4 Modification of Elections Pertaining to Payments. With respect to payment of deferred compensation following Termination of Service, a Participant may request modification of his existing Payment Election, for payment under another method among those specified by the Committee. Any request for modification of such Payment Election shall be made before the Participant terminates service. The Committee shall consider any such modification request. In determining whether the request should be allowed, the Committee shall consider the Participant's financial needs, including any changed circumstances, as well as the projected financial needs of CIGNA Corporation. If the Committee determines that the request should be allowed, the requested modifications shall be made. The Participant shall effect the modifications through execution of a new Payment Election, which shall constitute the only Payment Election which is outstanding and effective. Notwithstanding the foregoing, a Participant may not request modification of a fixed date elected for payment of deferred compensation invested in hypothetical Common Stock. -3- 4 2.5 Reduction or Termination of Future Deferral. (a) A Participant may elect to reduce or to revoke his deferral of compensation, but such election shall have effect only prospectively. A Participant shall effect an election to reduce his deferral of compensation by execution of a new Deferral Election, which shall constitute the only Deferral Election which is outstanding and effective. A Participant shall effect an election to revoke his deferral of compensation by informing the Administrator in writing. Only one election to reduce and one election to revoke may be made under this Section 2.5 by each Participant in a calendar year. (b) An election to reduce or to revoke deferral of compensation shall become effective in the second calendar month following receipt of such election by the Administrator. ARTICLE III. COMPENSATION DEFERRED 3.1 Deferred Compensation Account. A Deferred Compensation Account shall be established for each director when the director becomes a Participant. Compensation deferred by a Participant under the Plan shall be credited to the Account on the date such compensation would have been paid to the Participant. Hypothetical income on deferred compensation shall be credited to the Account as provided in Section 3.3, below. 3.2 Balance of Deferred Compensation Account. The balance of each Participant's Deferred Compensation Account shall include compensation deferred by the Participant, plus income and gains credited with respect to hypothetical investment. Losses from hypothetical investment shall reduce the Participant's Account balance. The balance of each Participant's Account shall be determined as of each Valuation Date. 3.3 Hypothetical Investment. (a) Compensation deferred under the Plan which would have been paid in cash shall be assumed to be invested, without charge, in one or more hypothetical investment vehicles as are specified from time to time by the Committee. With respect to such hypothetical investment: (1) Cash compensation deferred shall be deemed to earn income under the hypothetical investment vehicle. The Administrator shall credit such income to the Participant's Account, pursuant to Section 3.4 below. (2) The Committee, in its sole discretion, may provide that cash compensation deferred after the Restatement date is deemed invested in a different hypothetical investment vehicle or vehicles than the investment vehicle in which cash compensation deferred before the Restatement Date is deemed invested. -4- 5 (3) The Committee, in its sole discretion, may provide Plan Participants with options for one or more additional hypothetical investment vehicles for investment of cash compensation deferred under the Plan, with respect to which: (A) a Participant may modify his election of hypothetical investment, through a written request to the Administrator; provided that, (B) only one such modification shall be allowed during any calendar quarter. (C) any such modification shall be effective in the second calendar month following receipt of the request by the Plan Administrator. (D) such modifications will be in accordance with rules and procedures adopted by the Plan Administrator. (b) Compensation deferred under the Plan as an alternative to receipt of Common Stock shall be assumed to be invested, hypothetically and without charge, in whole shares of hypothetical Common Stock. Amounts equal to cash dividends which would have been paid on shares of Common Stock shall be deemed paid on whole shares of hypothetical Common Stock and credited and hypothetically invested pursuant to Section 3.3(a), above. Shares of hypothetical Common Stock shall be subject to adjustment in order to reflect Common Stock dividends, splits, and reclassification. Notwithstanding any other provision of the Plan, deferred compensation invested in hypothetical Common Stock must remain so invested (1) for a period of not less than six months, or (2) until death, disability, Termination of Service, or (3) until approval of the Board or Committee. Deferred compensation invested in hypothetical Common Stock must remain deemed invested in hypothetical Common Stock, and no other investment vehicle available hereunder may be substituted therefor. (c) In the event of a Change of Control, the Committee shall provide Participants with the option for investment in at least one hypothetical investment vehicle, the annual income earned on which must be not less than 50 basis points over the Ten-Year Constant Treasury Maturity Yield as reported by the Federal Reserve Board, based upon the November averages for the preceding year. 3.4 Time of Hypothetical Investment. (a) The balance of each Participant's Deferred Compensation Account shall be deemed hypothetically invested on each Valuation Date, and income shall accrue on such balance upon such date, from the previous Valuation Date. (b) Compensation which would have been paid in cash shall be deemed invested on the Valuation Date next following such hypothetical investment or credit. (c) Compensation hypothetically invested in Common Stock shall be deemed invested in whole shares of Common Stock as of the date such compensation otherwise would have been payable to the Participant. The number of whole shares of Common Stock in which -5- 6 compensation is deemed hypothetically invested shall be determined with respect to the last trade date in the month in which such compensation otherwise would have been payable, by reference to the last quoted transaction in such month as reported on the Composite tape (or successor means of publishing stock prices), provided, that in absence of such information, the Stock value shall be determined by the Committee. 3.5 Statement of Account. The Administrator shall provide each Participant a statement of his Deferred Compensation Account at least annually. ARTICLE IV. PAYMENT OF DEFERRED COMPENSATION 4.1 Payment of Deferred Compensation. (a) The Administrator shall pay amounts from the Participant's Account, according to the Participant's Payment Election. (b) Compensation deferred under the Plan shall be paid to the Participant in cash pursuant to Section 4.1(a). 4.2 Financial Necessity Payment. Notwithstanding any other provision of the Plan, if the Board or Committee, after consideration of a Participant's application, determines that the Participant has a financial necessity beyond the Participant's control, and of such a substantial nature that immediate payment of compensation deferred under the Plan is warranted, the Board or Committee in its sole and absolute discretion may direct that all or a portion of the balance of the Participant's Deferred Compensation Account be paid to the Participant in cash. The amount of any such distribution shall be limited to the amount deemed necessary by the Board or Committee to alleviate or remedy the hardship. The payment shall be made in a manner and at the time specified by the Board or Committee. A Participant receiving a Financial Necessity Payment is deemed to have revoked his election for deferral of compensation under the Plan, as of the time of the Financial Necessity Payment. Any subsequent deferral of compensation under the Plan shall require that the Participant execute a new Deferral Election, subject to terms of Section 2.2(e)(1) hereof. 4.3 Certain Accelerated Payments. (a) If a Participant terminates service under circumstances which are such that the Committee deems it in the best interest of the Participant and of CIGNA Corporation that payment of the Participant's Deferred Compensation Account be accelerated, then the Committee, upon its own motion and in its sole discretion, may direct that the Participant's Account balance be paid to him immediately. -6- 7 (b) If, as a result of substantial and unforeseen changes affecting (1) the business of CIGNA Corporation, (2) the personal or professional circumstances of a Participant, or (3) operation or administration of the Plan, the Board or Committee determines that the interests of the Participant and of CIGNA Corporation are best served through accelerated payment of the Participant's Deferred Compensation Account, the Board or Committee on its own motion and in its sole discretion may direct that the Participant's account balance be paid to him immediately. (c) A Participant who is not entitled to payment of his Deferred Compensation Account under any other provision of Article IV may make a written request to the Board or Committee for an accelerated payment of his entire Deferred Compensation Account balance. If the Board or Committee receives such a request, it shall make a final valuation of the unrestricted portion of the Participant's Deferred Compensation Account and pay ninety per cent (90%) of the Deferred Compensation Account balance to the Participant. The Participant shall forfeit the remaining ten per cent (10%) of his Deferred Compensation Account balance to the Corporation. Payments under this Section 4.3(c) apply only to that portion of a Participant's Account, including hypothetical investment results, attributable to compensation deferred after 1995. 4.4 Payments of a Deceased Participant's Account (a) If a Participant dies before his entire Account has been paid to him, the Administrator shall pay the Account balance in a single lump sum payment to the person(s) or trust(s) designated in writing by the Participant as his beneficiary(ies) under the Plan. The Administrator is authorized to establish rules and procedures for designations of beneficiaries and shall have the sole discretion to make determinations regarding the existence and identity of beneficiaries and the validity of beneficiary designations. (b) Notwithstanding Section 4.4(a), the Administrator shall pay the Account balance, as soon as administratively feasible, in a single lump sum payment to the Participant's estate if: (1) The Participant dies without having a valid beneficiary designation in effect; (2) The Participant's designated beneficiary has predeceased him; (3) The Participant's designated beneficiary cannot be found after what the Administrator determines, in his sole discretion, has been a reasonably diligent search; or (4) The Administrator determines, in his sole discretion, that a payment in such form is in the best interest of the Corporation. -7- 8 ARTICLE V. GENERAL PROVISIONS 5.1 Committee Membership. A Participant who is also a member of the Committee shall take no part in any decision pertaining to a request by such Participant under Sections 2.4, 4.1(c), 4.2, and 4.3 hereof. 5.2 Participant's Rights Unsecured. The right of any Participant to receive payments under the provisions of the Plan represents an unsecured claim against the general assets of CIGNA Corporation, or against the general assets of any successor company which assumes the liabilities of CIGNA Corporation. 5.3 Assignability. No right to receive payments hereunder shall be transferable or assignable by a Participant. Any attempted assignment or alienation of payments hereunder shall be void and of no force or effect. 5.4 Administration. Except as otherwise provided herein, the Plan shall be administered by the Administrator who shall have the authority to adopt rules and regulations for carrying out the Plan, and who shall interpret, construe and implement the provisions of the Plan. 5.5 Amendment. The Plan may be amended, restated, modified, or terminated by the Board of Directors. No amendment, restatement, modification, or termination shall reduce the balance of a Participant's Deferred Compensation Account as of the Valuation Date immediately preceding such action. 5.6 Correction of Errors and Inconsistencies. The Committee upon its own motion, or at the request of the Administrator or of a Participant, shall have authority to effect consistency among deferral elections, payment elections, or hypothetical investment with respect to amounts deferred by a Participant under the Plan, so as to avoid or to rectify difficulties in Plan administration. In no event shall such action by the Committee reduce the dollar value of a Participant's Account balance existing on the Valuation Date immediately preceding such action, nor shall the Committee take action inconsistent with Section 3.3(b) hereof. The Committee may take such action with respect to a Participant's Account, regardless of whether such Participant may continue as a director of CIGNA Corporation, or whether he may have terminated service. Without limiting the generality of the foregoing, the Committee may take such action upon the request of the Administrator, in order to avoid deferral, or payment or other distribution of fractional shares of Stock. -8- 9 5.8 Construction. The masculine gender where appearing in the Plan shall be deemed to include the feminine gender. The singular shall be deemed to include the plural; and the plural the singular. -9- EX-11 6 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, 1996 1995 1996 1995 =================================================================================================================================== PRIMARY EARNINGS PER SHARE NET INCOME AVAILABLE TO COMMON SHARES $ 231 $ 205 $ 469 $ 495 - ----------------------------------------------------------========================================================================= WEIGHTED AVERAGE SHARES: Common shares 76,382,263 72,459,254 76,381,939 72,385,231 Common share equivalents applicable to stock options 439,160 156,283 471,801 143,414 - ----------------------------------------------------------------------------------------------------------------------------------- Total 76,821,423 72,615,537 76,853,740 72,528,645 - ----------------------------------------------------------========================================================================= PRIMARY EARNINGS PER SHARE $ 3.00 $ 2.82 $ 6.10 $ 6.82 - ----------------------------------------------------------========================================================================= FULLY DILUTED EARNINGS PER SHARE NET INCOME AVAILABLE TO COMMON SHARES: Net income $ 231 $ 205 $ 469 $ 495 Adjusted for: Interest expense (net of tax) on convertible debentures - 4 - 7 - ----------------------------------------------------------------------------------------------------------------------------------- Net income available to common shares $ 231 $ 209 $ 469 $ 502 - ----------------------------------------------------------========================================================================= WEIGHTED AVERAGE SHARES: Common shares 76,382,263 72,459,254 76,381,939 72,385,231 Common share equivalents applicable to stock options 501,985 240,331 503,214 211,660 Assumed conversion of convertible debentures - 3,625,956 - 3,625,956 - ----------------------------------------------------------------------------------------------------------------------------------- Total 76,884,248 76,325,541 76,885,153 76,222,847 - ----------------------------------------------------------========================================================================= FULLY DILUTED EARNINGS PER SHARE $ 3.00 $ 2.74 $ 6.10 $ 6.59 - ----------------------------------------------------------=========================================================================
EX-12 7 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, 1996 1995 ============================================================================================================================== Income before income taxes $703 $706 ---- ---- Fixed charges included in income: Interest expense 55 63 Interest portion of rental expense 44 46 ---- ---- Total fixed charges included in income 99 109 ---- ---- Income available for fixed charges $802 $815 - --------------------------------------------------------------------------------------------------========================= RATIO OF EARNINGS TO FIXED CHARGES 8.1 7.5 - --------------------------------------------------------------------------------------------------=========================
EX-27 8 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF PART I TO CIGNA'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 33,918 0 0 715 11,245 1,262 55,481 1,434 7,130 1,161 95,899 11,750 2,059 19,004 29,292 1,443 0 0 88 6,797 95,899 6,889 2,194 (1) 294 6,273 594 1,806 703 234 469 0 0 0 469 6.10 6.10 0 0 0 0 0 0 0 AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES
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