-----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, VHCg4+oPFznHF1dLkDfV/txDT1exjo9fqaZ8rz8FrMIFlNjEULmuVn7OsT7QGGkZ hcaMV3TTWnrDtPtkd+/qxw== 0000950159-97-000190.txt : 19970807 0000950159-97-000190.hdr.sgml : 19970807 ACCESSION NUMBER: 0000950159-97-000190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970806 SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIGNA CORP CENTRAL INDEX KEY: 0000701221 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061059331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08323 FILM NUMBER: 97652553 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: 2157616211 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 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 June 30, 1997, 74,014,308 shares of the issuer's Common Stock were outstanding. CIGNA CORPORATION INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income and Retained Earnings 1 Consolidated Balance Sheets 2 Consolidated Statements of Cash Flows 3 Notes to Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURE 21 EXHIBIT INDEX 22 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, 1997 1996 1997 1996 =========================================================================================== REVENUES Premiums and fees $ 3,482 $ 3,499 $ 6,870 $ 6,889 Net investment income 1,062 1,111 2,115 2,194 Other revenues 163 152 323 294 Realized investment gains (losses) 12 (31) 56 (1) ------- ------- ------- ------- Total revenues 4,719 4,731 9,364 9,376 ------- ------- ------- ------- BENEFITS, LOSSES AND EXPENSES Benefits, losses and settlement expenses 3,065 3,129 6,074 6,273 Policy acquisition expenses 270 322 534 594 Other operating expenses 973 935 1,908 1,806 ------- ------- ------- ------- Total benefits, losses and expenses 4,308 4,386 8,516 8,673 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 411 345 848 703 ------- ------- ------- ------- Income taxes: Current 124 36 234 112 Deferred 8 78 47 122 ------- ------- ------- ------- Total taxes 132 114 281 234 ------- ------- ------- ------- NET INCOME 279 231 567 469 Common dividends declared (62) (62) (123) (122) Retained earnings, beginning of period 5,082 4,219 4,855 4,041 - ------------------------------------------------------------------------------------------- RETAINED EARNINGS, END OF PERIOD $ 5,299 $ 4,388 $ 5,299 $ 4,388 - ---------------------------------------------============================================== EARNINGS PER SHARE $ 3.73 $ 3.00 $ 7.59 $ 6.10 - ---------------------------------------------============================================== DIVIDENDS DECLARED PER SHARE $ 0.83 $ 0.80 $ 1.66 $ 1.60 - ---------------------------------------------==============================================
The Notes to Financial Statements are an integral part of these statements. 1 CIGNA CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except per share amounts)
As of As of June 30, December 31, 1997 1996 ================================================================================================== ASSETS Investments: Fixed maturities, at fair value (amortized cost, $33,198; $33,404) $ 34,470 $ 34,933 Equity securities, at fair value (cost, $594; $573) 799 701 Mortgage loans 10,973 10,927 Policy loans 7,255 7,296 Real estate 1,040 1,102 Other long-term investments 238 255 Short-term investments 918 1,320 --------- --------- Total investments 55,693 56,534 Cash and cash equivalents 1,689 1,287 Accrued investment income 991 890 Premiums, accounts and notes receivable 4,415 4,229 Reinsurance recoverables 6,926 7,287 Deferred policy acquisition costs 1,298 1,230 Property and equipment 870 802 Deferred income taxes 1,937 1,998 Other assets 986 993 Goodwill and other intangibles 2,563 1,068 Separate account assets 26,294 22,614 - -------------------------------------------------------------------------------------------------- Total assets $ 103,662 $ 98,932 - --------------------------------------------------------------------------======================== LIABILITIES Contractholder deposit funds $ 30,046 $ 29,878 Unpaid claims and claim expenses 18,527 18,841 Future policy benefits 11,617 11,784 Unearned premiums 1,853 1,940 --------- --------- Total insurance and contractholder liabilities 62,043 62,443 Accounts payable, accrued expenses and other liabilities 5,598 5,326 Current income taxes 134 221 Short-term debt 735 289 Long-term debt 1,500 1,021 Separate account liabilities 26,104 22,424 - -------------------------------------------------------------------------------------------------- Total liabilities 96,114 91,724 - -------------------------------------------------------------------------------------------------- CONTINGENCIES - NOTE 9 SHAREHOLDERS' EQUITY Common stock (shares issued, 88) 88 88 Additional paid-in capital 2,610 2,572 Net unrealized appreciation, fixed maturities 433 539 Net unrealized appreciation, equity securities 136 88 Net translation of foreign currencies (73) (45) Retained earnings 5,299 4,855 Less treasury stock, at cost (945) (889) - -------------------------------------------------------------------------------------------------- Total shareholders' equity 7,548 7,208 - -------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 103,662 $ 98,932 - --------------------------------------------------------------------------======================== SHAREHOLDERS' EQUITY PER SHARE $ 101.98 $ 97.15 - --------------------------------------------------------------------------========================
The Notes to Financial Statements are an integral part of these statements. 2 CIGNA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
Six Months Ended June 30, 1997 1996 ================================================================================================ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 567 $ 469 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Insurance liabilities, net of reinsurance recoverables 143 (140) Premiums, accounts and notes receivable (36) (109) Accounts payable, accrued expenses, other liabilities and current income taxes (180) (343) Deferred income taxes 47 122 Realized investment (gains) losses (56) 1 Gain on sale of businesses and other equity interests -- (18) Other, net (132) (40) ------- ------- Net cash provided by (used in) operating activities 353 (58) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investments sold: Fixed maturities 3,128 3,447 Equity securities 148 218 Mortgage loans 322 265 Other (primarily short-term investments) 6,629 6,449 Investment maturities and repayments: Fixed maturities 1,974 1,992 Mortgage loans 241 357 Investments purchased: Fixed maturities (4,905) (4,528) Equity securities (193) (238) Mortgage loans (714) (906) Other (primarily short-term investments) (5,821) (6,463) Net cash from acquisitions and dispositions (1,288) 66 Other, net (69) (61) ------- ------- Net cash provided by (used in) investing activities (548) 598 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds 3,656 3,108 Withdrawals and benefit payments from contractholder deposit funds (3,576) (3,570) Net issuance (repayment) of short-term debt 146 (24) Issuance of long-term debt 600 -- Repurchase of common stock (55) (41) Repayment of debt (26) (8) Common dividends paid (122) (122) Other, net (3) 7 ------- ------- Net cash provided by (used in) financing activities 620 (650) ------- ------- Effect of foreign currency rate changes on cash and cash equivalents (23) (15) - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 402 (125) Cash and cash equivalents, beginning of period 1,287 1,559 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,689 $ 1,434 - ---------------------------------------------------------------------------==================== Supplemental Disclosure of Cash Information: Income taxes paid, net of refunds $ 311 $ 125 Interest paid $ 47 $ 55 - -----------------------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements. 3 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 1997 presentation. The interim financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the periods reported. The preparation of interim financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business as well as competitive and other market conditions, call for caution in drawing specific conclusions from interim results. NOTE 2-NEW ACCOUNTING PRONOUNCEMENT In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share (EPS)." SFAS No. 128 replaces primary EPS with basic EPS, which is computed using only weighted-average common shares outstanding without considering common stock equivalents. Diluted EPS under SFAS No. 128 is computed similarly to fully diluted EPS. SFAS No. 128 also requires dual presentation of basic and diluted EPS on the face of the income statement. Adoption is required as of December 31, 1997, at which time all prior periods must be restated. The effect on CIGNA's EPS of adopting SFAS No. 128 is not expected to be material. NOTE 3-ACQUISITIONS AND DISPOSITIONS On June 25, 1997, CIGNA acquired substantially all of the outstanding common stock of Healthsource, Inc. (Healthsource) for approximately $1.7 billion, including the cost of retiring Healthsource debt of approximately $250 million which is expected to occur in the third quarter. The acquisition was accounted for as a purchase, and was financed through the issuance of long-term debt of $600 million and a combination of internally generated funds and short-term debt. The effects on CIGNA's results of operations from acquiring Healthsource from the date of acquisition to June 30, 1997 were not material. Intangible assets and goodwill of $1.5 billion will be amortized on a straight-line basis over periods ranging from eight to 40 years. During the next several months, CIGNA will complete its fair value analysis of Healthsource's net assets and will finalize plans for integrating Healthsource with CIGNA. The effect on goodwill and net income from these initiatives is not reasonably estimable at this time; however, they are not expected to have a material effect on CIGNA's financial condition or liquidity, but could materially affect results of operations. Healthsource's total revenues were $971 million and $862 million for the six months ended June 30, 1997 and 1996, respectively. The pro forma effect on CIGNA's net income for the six months ended June 30, 1997 and 1996 was not material. 4 In July 1997, CIGNA entered into an agreement to sell its individual life insurance and annuity businesses, which are included in the Individual Financial Services segment, for cash proceeds of $1.4 billion. Revenues for these businesses were $242 million and $473 million for the second quarter and six months of 1997, respectively, compared with $221 million and $444 million for the same periods last year. Net income was $21 million and $48 million for the second quarter and six months of 1997, respectively, compared with $5 million and $24 million for the same periods of 1996. Completion of the sale, which is anticipated to occur by the end of 1997, is subject to regulatory approvals. The agreement to sell these businesses is generally in the form of a reinsurance arrangement, and will result in a gain on the sale of approximately $700 million, a significant portion of which will be deferred and amortized over future periods. Proceeds from the sale are expected to be used for internal growth, acquisitions, and share repurchases, with share repurchases being the expected use in the near term. CIGNA had other acquisitions and dispositions during the six months of 1997 and 1996, the effects of which were not material to the financial statements. NOTE 4-INVESTMENTS Realized Investment Gains and Losses Realized gains and losses on investments, excluding policyholder share, were as follows: - ---------------------------------------------------------------------- Three Months Six Months Ended Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ---------------------------------------------------------------------- Realized investment gains (losses): Fixed maturities $3 ($14) $29 ($3) Equity securities 9 1 14 9 Mortgage loans (1) (18) (14) (20) Real estate (1) (4) 17 1 Other 2 4 10 12 --------------------------------------------- 12 (31) 56 (1) Less income taxes (benefits) 3 (10) 19 1 - ---------------------------------------------------------------------- Net realized investment gains (losses) $9 ($21) $37 ($2) - -------------------------============================================= Fixed Maturities and Equity Securities Sales of available-for-sale fixed maturities and equity securities, including policyholder share, were as follows: - ---------------------------------------------------------------------- Three Months Six Months Ended Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ---------------------------------------------------------------------- Proceeds from sales $1,689 $1,534 $3,276 $3,665 Gross gains on sales 67 14 86 94 Gross losses on sales (49) (35) (60) (80) - ---------------------------------------------------------------------- Net unrealized appreciation for investments carried at fair value is included as a separate component of Shareholders' Equity, net of policyholder-related amounts and deferred income taxes. The net unrealized appreciation for these investments, primarily fixed maturities, during the second quarter and six months of 1997 increased by $209 million and decreased by $58 million, respectively, compared with decreases of $102 million and $567 million for the same periods last year. NOTE 5-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 Six Months Ended Ended June 30, June 30, (In thousands) 1997 1996 1997 1996 - ---------------------------------------------------------------------- Weighted average common shares 74,740 76,821 74,664 76,854 - ---------------------------------------------------------------------- There is no significant difference between earnings per share on a primary and a fully diluted basis. Common shares held as Treasury shares were 13,724,063 and 11,344,351 as of June 30, 1997 and 1996, respectively. 5 NOTE 6-COMMON AND PREFERRED STOCK On July 23, 1997, CIGNA's Board of Directors approved a new shareholder rights plan, which replaces the plan that expired on August 4, 1997. Under the new plan, which expires on August 4, 2007, Preferred Stock Purchase Rights (Rights) attach to all outstanding shares of CIGNA common stock. The Rights trade with the stock until the Rights become exercisable. They are exercisable only if a party acquires, or announces a tender offer to acquire, 10% or more of the outstanding common stock, unless CIGNA's Board of Directors approves the transaction. Each Right entitles the shareholder to buy for a $780 exercise price 1/100 of a share of Junior Participating Preferred Stock Series D, having dividend and voting rights approximately equal to one share of common stock. Upon the acquisition of 10% or more of the outstanding common stock by an acquirer, all Rights holders except the acquirer may, except under certain circumstances, purchase shares of common stock worth twice the exercise price. If, after the acquisition of 10% or more of the outstanding common stock, CIGNA is acquired in a merger or other business combination transaction, Rights holders may purchase the acquirer's shares at a similar discount. CIGNA may redeem the Rights for one cent each at any time before an acquirer acquires 10% of its outstanding common stock, and thereafter under certain circumstances. NOTE 7-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 issue, which relates only to years prior to 1989, remains outstanding, and it could result in an assessment of approximately $210 million. CIGNA is contesting the assessment and believes that it should prevail. In management's opinion, adequate tax liabilities have been established for all years. As of June 30, 1997, CIGNA had no tax basis operating loss carryforwards. NOTE 8-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 and disputes, could result in losses. Allowances for uncollectible amounts were $716 million and $711 million as of June 30, 1997 and December 31, 1996, 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 1997, premiums and fees were net of ceded premiums of $589 million and $1.0 billion, respectively. For the second quarter and six months of 1996, premiums and fees were net of ceded premiums of $536 million and $980 million, respectively. In addition, benefits, losses and settlement expenses for the second quarter and six months of 1997 were net of reinsurance recoveries of $429 million and $687 million, respectively. Benefits, losses and settlement expenses for the second quarter and six months of 1996 were net of reinsurance recoveries of $503 million and $771 million, respectively. NOTE 9-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 and guarantees of a minimum level of benefits for certain separate account contracts. 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 6 expected to have a material adverse effect on CIGNA's liquidity or financial condition. Regulatory and Industry Developments CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: o revise the system of funding cleanup of environmental damages; o reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; o restrict insurance pricing and the application of underwriting standards; and o reform health care. In 1996, Congress passed legislation that phases out over a three-year period the tax deductibility of policy loan interest for most leveraged corporate-owned life insurance (COLI) products. The effect of the legislation on the Individual Financial Services segment's income is not expected to be material through 1998. Beginning in 1999, the effect of the legislation is uncertain; however, it could have a material adverse effect on the segment's income. CIGNA does not expect this legislation to have a material effect on its 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) assigning responsibility, 2) funding cleanup costs or 3) establishing cleanup standards could affect the liabilities of policyholders 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. Federal and state proposals have been made to place 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 (NAIC) 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 NAIC is currently developing standardized statutory accounting principles, which are scheduled to take effect in 1999. The effect on CIGNA's statutory net income, surplus and liquidity cannot be reasonably estimated at this time. 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 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 traditional 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. Reserving for property and casualty claims continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. CIGNA's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current law changes. 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. 7 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 (A&E) claims. While the outcome of all litigation involving CIGNA, including insurance-related litigation, cannot be determined, litigation (including that related to A&E 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. Restructuring Effective December 31, 1995, CIGNA restructured its domestic property and casualty businesses into two separate operations, ongoing and run-off. Certain competitors and policyholders of CIGNA are challenging the restructuring in court. Although CIGNA expects the matter to be in litigation for some time, it expects to ultimately prevail. 8 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, 1997, compared with December 31, 1996, and its results of operations for the quarter and six months ended June 30, 1997, compared with the same periods last year. This discussion should be read in conjunction with Management's Discussion and Analysis included in CIGNA's 1996 Annual Report to Shareholders (pages 8 through 21) and in CIGNA's report on Form 10-Q for the first quarter of 1997, 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. On June 25, 1997, CIGNA acquired substantially all of the outstanding common stock of Healthsource, Inc. (Healthsource) for approximately $1.7 billion, including the cost of retiring Healthsource debt of approximately $250 million which is expected to occur in the third quarter. The acquisition was accounted for as a purchase, and was financed through the issuance of long-term debt of $600 million and a combination of internally generated funds and short-term debt. The effects on CIGNA's results of operations from acquiring Healthsource from the date of acquisition to June 30, 1997 were not material. Intangible assets and goodwill of $1.5 billion will be amortized on a straight-line basis over periods ranging from eight to 40 years. During the next several months, CIGNA will complete its fair value analysis of Healthsource's net assets and will finalize plans for integrating Healthsource with CIGNA. The effect on goodwill and net income from these initiatives is not reasonably estimable at this time; however, they are not expected to have a material effect on CIGNA's financial condition or liquidity, but could materially affect results of operations. Healthsource's total revenues were $971 million and $862 million for the six months ended June 30, 1997 and 1996, respectively. The pro forma effect on CIGNA's net income for the six months ended June 30, 1997 and 1996 was not material. In July 1997, CIGNA entered into an agreement to sell its individual life insurance and annuity businesses for cash proceeds of $1.4 billion. These businesses, which are included in the Individual Financial Services segment, reported the following results: =================================================================== Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ------------------------------------------------------------------- Revenues $242 $221 $473 $444 Operating income* $22 $7 $44 $24 Net income $21 $5 $48 $24 =================================================================== Completion of the sale, which is anticipated to occur by the end of 1997, is subject to regulatory approvals. The agreement to sell these businesses is generally in the form of a reinsurance arrangement, and will result in a gain on the sale of approximately $700 million, a significant portion of which will be deferred and amortized over future periods. Proceeds from the sale are expected to be used for internal growth, acquisitions, and share repurchases, with share repurchases being the expected use in the near term. CIGNA continues to conduct strategic and financial reviews of its businesses in order to deploy its capital most effectively. CIGNA is currently modifying its information systems to ensure that they are capable of processing information for the year 2000 and beyond. Management expects its systems to be compliant for the year 2000, and the costs of these efforts are not expected to have a material effect on CIGNA's results of operations. As a result of the planned sale of CIGNA's individual life insurance and annuity businesses, Duff & Phelps Credit Rating Co. placed the claims paying ability rating of Connecticut General Life Insurance Company (AAA, "Highest," 1st of 18), one of CIGNA's principal life insurance company subsidiaries, on rating watch -- down. - -------- * Operating income (loss) is defined as net income (loss) excluding after-tax realized investment results. 9 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: o revise the system of funding cleanup of environmental damages; o reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; o restrict insurance pricing and the application of underwriting standards; and o reform health care. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. For additional information, see Note 9 to the Financial Statements. Also, see Note 7 regarding a proposed IRS assessment of approximately $210 million. CIGNA is contesting the assessment and believes it should prevail. CONSOLIDATED RESULTS OF OPERATIONS =================================================================== FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ------------------------------------------------------------------- Premiums and fees $3,482 $3,499 $6,870 $6,889 Net investment income 1,062 1,111 2,115 2,194 Other revenues 163 152 323 294 Realized investment gains (losses) 12 (31) 56 (1) ----------------------------------------- Total revenues 4,719 4,731 9,364 9,376 Benefits and expenses 4,308 4,386 8,516 8,673 ----------------------------------------- Income before taxes 411 345 848 703 Income taxes 132 114 281 234 ----------------------------------------- Net income $279 $231 $567 $469 - ------------------------=========================================== Realized investment gains (losses), net of taxes $9 ($21) $37 ($2) - ------------------------=========================================== CIGNA's 1997 consolidated net income increased 21% for both the second quarter and six months, compared with the same periods last year. Operating income for the second quarter and six months of 1997 was $270 million and $530 million, respectively, compared with $252 million and $471 million for the same periods last year. These increases reflect improvement in most of the business segments. After-tax realized investment results improved for the second quarter and six months of 1997 from the same periods last year. These increases primarily reflect gains on sales of fixed maturities and equity securities and, for the six months, real estate. In addition, these increases reflect lower impairment losses. For additional information see Note 4 to the Financial Statements. Full year operating income for 1997 is expected to improve over 1996. However, such improvement could be adversely affected by the factors noted in the cautionary statement on page 18. EMPLOYEE LIFE AND HEALTH BENEFITS =================================================================== FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ------------------------------------------------------------------- Premiums and fees $2,117 $2,075 $4,220 $4,152 Net investment income 138 143 273 287 Other revenues 117 99 224 202 Realized investment gains (losses) 1 (7) 7 (9) -------------------------------------- Total revenues 2,373 2,310 4,724 4,632 Benefits and expenses 2,186 2,139 4,352 4,291 -------------------------------------- Income before taxes 187 171 372 341 Income taxes 59 54 123 114 -------------------------------------- Net income $128 $117 $249 $227 - ----------------------------====================================== Realized investment gains (losses), net of taxes $2 ($4) $6 ($6) - ----------------------------====================================== Net income for the Employee Life and Health Benefits segment increased 9% for the second quarter and 10% for the six months of 1997, compared with the same periods last year. Operating income was $126 million and $243 million for the second quarter and six months of 1997, compared with $121 million and $233 million for the same periods last year. Operating income for the Indemnity and HMO operations was as follows: =================================================================== Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ------------------------------------------------------------------- Indemnity operations $68 $69 $126 $125 HMO operations 58 52 117 108 - ------------------------------------------------------------------- Total $126 $121 $243 $233 =================================================================== Indemnity operating income for the second quarter and six months of 1997 was about even with the same periods last year. The second quarter and six months of 1997 include improvements of $8 million and $12 million, respectively, in the segment's long-term disability (LTD) business resulting from rate increases and strengthened underwriting. Also favorably affecting these periods was improved group life insurance claim experience. Offsetting these 1997 improvements were unfavorable medical claim experience, higher operating expenses primarily due 10 to customer service initiatives, and decreased investment income resulting from lower average assets and yields. HMO results for the second quarter and six months of 1997 include favorable after-tax adjustments of $9 million and $13 million, respectively, from certain reserve reviews compared with $5 million for the second quarter and six months of 1996. Results for the six months of 1996 also include a first quarter after-tax gain of $8 million from the sale of subsidiaries. Excluding these items, HMO earnings were $49 million and $104 million for the second quarter and six months of 1997, respectively, compared with $47 million and $95 million for the same periods last year. These improvements primarily reflect rate increases and membership growth, particularly for dental HMOs, partially offset by higher operating expenses associated with growth and customer service initiatives. Premiums and fees increased 2% for both the second quarter and six months of 1997, compared to the same periods last year. 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 7% since June 30, 1996 and 6% since December 31, 1996, primarily reflecting membership growth in CIGNA's HMO alternative funding programs. Under these programs, the customer assumes all or a portion of the responsibility for funding claims. CIGNA generally earns a lower margin on these programs 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 1997 were approximately $2.4 billion and $4.8 billion. These amounts represent an increase of 2% and a decrease of 1% compared with the same periods last year. Generally, premium equivalents for alternative funding programs reflect growth in HMOs offset by cancellations and conversions of medical indemnity business to HMOs. Premium equivalents are expected to continue to be constrained by competitive pressures in both the medical indemnity and HMO markets. Premium equivalents were 53% and 54% of total adjusted premiums and fees for the six months of 1997 and 1996, respectively. Administrative Services Only (ASO) plans accounted for 49% of total adjusted premiums and fees for the six months of 1997 and 1996. As discussed on page 9, the effects of the Healthsource acquisition since the acquisition date were not material. EMPLOYEE RETIREMENT AND SAVINGS BENEFITS ================================================================== FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ------------------------------------------------------------------ Premiums and fees $52 $50 $98 $88 Net investment income 397 431 799 859 Realized investment gains (losses) 2 (6) 14 10 --------------------------------------- Total revenues 451 475 911 957 Benefits and expenses 372 415 740 806 --------------------------------------- Income before taxes 79 60 171 151 Income taxes 25 20 55 50 --------------------------------------- Net income $54 $40 $116 $101 - ---------------------------======================================= Realized investment gains (losses), net of taxes $1 ($4) $9 $6 - ---------------------------======================================= Net income for the Employee Retirement and Savings Benefits segment increased 35% and 15% for the second quarter and six months of 1997, compared with the same periods of 1996. Results for the second quarter and six months of 1996 include an after-tax charge of $8 million for expected state guaranty fund assessments. Operating income was $53 million and $107 million for the second quarter and six months of 1997, compared with $52 million and $103 million for the same periods last year excluding the above charge. These increases reflect higher earnings from an increased asset base primarily in separate account equity funds, which generally have lower margins than general account investment vehicles, partially offset by lower investment yields. Premiums and fees increased 4% and 11% for the second quarter and six months of 1997, respectively, compared with the same periods last year, primarily reflecting higher annuity sales. Net investment income decreased 8% and 7% for the second quarter and six months of 1997, respectively, compared with the same periods last year. These decreases primarily reflect lower investment yields and customers' continued 11 redirection of a portion of their investments from the general account to separate accounts. 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) 1997 1996 - ------------------------------------------------------------------------ Balance -- January 1 $ 40,587 $ 38,183 Premiums and deposits 3,598 3,068 Investment results 1,200 1,360 Increase (decrease) in fair value of assets 1,711 (422) Customer withdrawals (1,220) (1,236) Other, including participant withdrawals and benefit payments (2,043) (2,481) - ------------------------------------------------------------------------ Balance -- June 30 $ 43,833 $ 38,472 ======================================================================== Premiums and deposits increased 17% in the six months of 1997, compared with the same period in 1996, primarily reflecting higher recurring deposits from existing customers. Sales to new customers and new plan sales to existing customers were approximately 52% and 57% of premiums and deposits for the six months of 1997 and 1996, respectively. The decrease in investment results reflects the absence of capital gains in 1997 compared with 1996 and lower investment yields. The increase for 1997 in the fair value of assets is due to market value appreciation of equity securities in separate accounts. The decrease in other compared with 1996 is due to lower scheduled maturities on guaranteed investment contracts. Management expects asset growth to continue to be constrained due to the lack of growth in the defined benefit market resulting from customers' preference for defined contribution products. In addition, assets under management will continue to be affected by market value fluctuations for fixed maturities and equity securities. INDIVIDUAL FINANCIAL SERVICES ================================================================= FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ----------------------------------------------------------------- Premiums and fees $249 $209 $483 $445 Net investment income 271 271 531 523 Other revenues 15 21 29 38 Realized investment gains (losses) (2) (2) 11 -- ------------------------------------- Total revenues 533 499 1,054 1,006 Benefits and expenses 461 437 897 892 ------------------------------------- Income before taxes 72 62 157 114 Income taxes 25 22 55 40 ------------------------------------- Net income $47 $40 $102 $74 - ----------------------------===================================== Realized investment gains (losses), net of taxes ($1) ($2) $7 $-- - ----------------------------===================================== Net income for the Individual Financial Services segment increased 18% and 38% for the second quarter and six months of 1997, 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. Operating income was $48 million and $95 million for the second quarter and six months of 1997, compared with $45 million and $77 million, excluding the above charge, for the same periods last year. These increases primarily reflect favorable mortality and, to a lesser extent, business growth. For the second quarter and six months of 1997, premiums and fees increased 19% and 9%, respectively, compared with the same periods of 1996. These increases primarily reflect growth in reinsurance and interest sensitive products. This growth was partially offset by lower leveraged corporate-owned life insurance (COLI) renewal premiums. In 1996, Congress passed legislation that phases out over a three-year period the tax deductibility of policy loan interest for most leveraged COLI products. Revenues of $286 million and operating income of $19 million for the six months of 1997 were from leveraged COLI products that are affected by this legislation. The effect of the legislation on the segment's operating income is not expected to be material through 1998. Beginning in 1999, the effect of the legislation is uncertain; however, it could have a material adverse effect on the segment's operating income. CIGNA does not expect this legislation to have a material effect on its consolidated results of operations, liquidity or financial condition. 12 A significant portion of this segment's businesses are expected to be sold by the end of 1997. See page 9 for further discussion. PROPERTY AND CASUALTY ================================================================= FINANCIAL SUMMARY Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ----------------------------------------------------------------- Premiums and fees $1,064 $1,165 $2,069 $2,204 Net investment income 189 208 384 405 Other revenues 65 60 137 113 Realized investment gains (losses) 11 (13) 24 -- -------------------------------------- Total revenues 1,329 1,420 2,614 2,722 Benefits and expenses 1,238 1,345 2,428 2,579 -------------------------------------- Income before taxes 91 75 186 143 Income taxes 25 24 55 42 -------------------------------------- Net income $66 $51 $131 $101 - ----------------------------===================================== Realized investment gains (losses), net of taxes $7 ($8) $15 $-- - ----------------------------===================================== Net income for the Property and Casualty segment increased 29% and 30% for the second quarter and six months of 1997, respectively, compared with the same periods last year. Operating income was level for the second quarter and increased 15% for the six months of 1997, compared with the same periods in 1996. Operating income for the ongoing and run-off operations was as follows: ================================================================= Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ----------------------------------------------------------------- Ongoing operations: International $36 $36 $69 $65 Domestic 23 20 46 32 ------------------------------------ Total ongoing operations 59 56 115 97 Run-off operations -- 3 1 4 - ----------------------------------------------------------------- Total $59 $59 $116 $101 ================================================================= Operating income for the second quarter and six months ended June 30, 1997 for international operations includes a $6 million after-tax charge for cost reduction activities, primarily severance. Excluding this charge, the improvement for the second quarter and six months of 1997 in the international operations reflects improved international life insurance results and, for the six months, favorable claim experience in the international property and casualty operations. Improvement in the domestic operations' results for second quarter and six months primarily reflects lower catastrophes and, for the quarter, favorable prior year development, partially offset by lower premiums and fees in 1997. Results for the international and domestic operations continue to reflect a highly competitive pricing environment. Premiums and fees declined 9% and 6% in the second quarter and six months of 1997, compared with the same periods last year. These declines primarily reflect strict underwriting standards, continued competition (particularly in domestic casualty, large risk property and commercial package lines of business), and an unfavorable effect from foreign currency translation (approximately $50 million and $70 million, respectively). Strong growth in the international accident and health and, to a lesser extent, international property and casualty lines of business partially offset these declines. The domestic ongoing operations had pre-tax catastrophe losses of $2 million and $14 million, net of reinsurance, for the second quarter and six months of 1997, compared with $8 million and $31 million for the same periods of 1996. Catastrophe losses for the six months of 1996 include $18 million for East Coast winter storms. The international operations had no catastrophe losses in the second quarter and six months of 1997 and 1996. The effects of reinsurance on catastrophe losses for the periods presented were not material. Certain competitors and policyholders of CIGNA are challenging in court the restructuring of its domestic property and casualty business into two separate operations, ongoing and run-off. Although CIGNA expects the matter to be in litigation for some time, it expects to ultimately prevail. LOSS RESERVES AND REINSURANCE RECOVERABLES CIGNA's reserving methodology and significant issues affecting the estimation of loss reserves and reinsurance recoverables are described in its 1996 Form 10-K. CIGNA's property and casualty loss reserves of $16.0 billion and $16.5 billion as of June 30, 1997 and December 31, 1996, 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 traditional actuarial 13 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 refines its loss estimation process by improving the analysis of 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 and product liability laws have at times significantly affected the ability of insurers to estimate liabilities for unpaid losses and related expenses. Reserving for property and casualty claims continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. CIGNA's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current law changes. 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. CIGNA manages its loss exposure through the use of reinsurance. While reinsurance arrangements are designed to limit losses from large exposures and to permit recovery of a portion of direct losses, reinsurance does not relieve CIGNA of liability to its insureds. Accordingly, CIGNA's loss reserves represent total gross losses, and reinsurance recoverables represent anticipated recoveries of a portion of those losses. CIGNA's reinsurance recoverables were approximately $6.3 billion and $6.8 billion as of June 30, 1997 and December 31, 1996, net of allowances for unrecoverable reinsurance of $716 million and $711 million, respectively. 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 (favorable) pre-tax effects on the Property and Casualty segment's results of operations from prior year development, net of reinsurance, for the quarter and six months ended June 30: ================================================================= Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 - ----------------------------------------------------------------- By business operation: Ongoing operations ($7) $17 $14 $17 Run-off operations 47 36 100 72 - ----------------------------------------------------------------- Total $40 $53 $114 $89 ================================================================= By type of loss: Asbestos-related $27 $10 $48 $14 Environmental pollution 8 9 14 26 Unrecoverable reinsurance 3 14 9 18 Workers' compensation 6 7 18 19 Other (4) 13 25 12 - ----------------------------------------------------------------- Total $40 $53 $114 $89 ================================================================= The favorable effect on Other prior year development for the second quarter was primarily attributable to the commercial package line of business, while the unfavorable development for the six months of 1997 was primarily attributable to development on assumed reinsurance, commercial fire and long-term exposures. OTHER OPERATIONS Other Operations includes unallocated investment income, expenses (including debt service and new business initiatives), and taxes. Also included 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 of $16 million and $31 million for the second quarter and six months ended June 30, 1997, respectively, compared with net losses of $17 million and $34 million for the same periods in 1996. Net losses included after-tax realized investment losses of $3 million and $2 million for the second quarter and six months of 1996. There were no realized investment gains or losses for the second quarter and six months ended June 30, 1997. 14 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. For the six months of 1997, cash and cash equivalents increased $402 million from $1.3 billion as of December 31, 1996. The increase primarily reflects cash provided by operating activities ($353 million), reflecting earnings and the timing of operating cash receipts and disbursements, proceeds on the issuance of long-term debt ($600 million) and net proceeds on short-term debt ($146 million). The increase in cash flows was partially offset by cash used in investing activities ($548 million, which includes the $1.3 billion acquisition of Healthsource partially offset by net investment sales) and payments of dividends on and repurchases of CIGNA common stock ($177 million). For additional information regarding the funding of the Healthsource acquisition, see page 9. CIGNA's capital resources represent funds available for long-term business commitments. They 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 $1.5 billion of long-term debt outstanding at June 30, 1997, compared with $1.02 billion at December 31, 1996. This increase primarily reflects issuance in May 1997 of $300 million of 7.4% unsecured Notes due in 2007 and $300 million of 7.875% unsecured Debentures due in 2027. The proceeds from these issues were used to finance the acquisition of Healthsource. As of June 30, 1997, CIGNA had $200 million remaining under a shelf registration statement that may be issued as debt or equity securities, or both, depending upon market conditions and CIGNA's capital requirements. At June 30, 1997, CIGNA's short-term debt amounted to $735 million, an increase of $446 million from December 31, 1996. The increase includes the assumption of debt from Healthsource of approximately $250 million, which CIGNA expects to repay in the third quarter. 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 $350 million, or 2.8 million shares, of common stock were purchased as of June 30, 1997. Shares were purchased with internal funds. As a result of the Healthsource acquisition, CIGNA suspended stock repurchases. However, CIGNA expects to resume the repurchase program due to the agreement to sell its individual life insurance and annuity businesses. INVESTMENT ASSETS =================================================================== June 30, December 31, (In millions) 1997 1996 - ------------------------------------------------------------------ Fixed maturities $34,470 $34,933 Equity securities 799 701 Mortgage loans 10,973 10,927 Real estate 1,040 1,102 Other, primarily policy loans 8,411 8,871 - ------------------------------------------------------------------- Total investment assets $55,693 $56,534 =================================================================== Additional information regarding CIGNA's investment assets is included in Note 4 to the second quarter 1997 Financial Statements and Notes 2, 4 and 5 to the 1996 Financial Statements as well as the 1996 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, 1997 1996 - ------------------------------------------------------------------- Fixed maturities 29% 28% Mortgage loans 54% 56% Real estate 62% 58% =================================================================== 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. 15 As of June 30, 1997 and December 31, 1996, the fair value of fixed maturities, including policyholder share, was greater than amortized cost by $1.3 billion and $1.5 billion, respectively. The decrease in unrealized appreciation primarily reflects the upward movement in interest rates since December 31, 1996. Potential Problem Bonds Potential problem bonds are fully current but judged by management to have certain characteristics that increase the likelihood of problem classification. CIGNA had $78 million of potential problem bonds, including amounts attributable to policyholder contracts, as of June 30, 1997, compared with $107 million as of December 31, 1996. These amounts are net of $7 million and $5 million of cumulative write-downs, respectively. Problem Bonds CIGNA considers bonds that are delinquent or restructured as to terms, typically interest rate and, in certain cases, maturity date, problem bonds. As of June 30, 1997 and December 31, 1996, CIGNA had problem bonds, including amounts attributable to policyholder contracts, of $192 million and $160 million, net of related cumulative write-downs of $75 million and $125 million, respectively. Cumulative Write-Downs for Bonds CIGNA had cumulative write-downs for bonds as of June 30, 1997 and 1996 of $83 million and $156 million, respectively, including $25 million and $55 million attributable to policyholder contracts. Also, cumulative write-downs as of June 30, 1997 and 1996 included $1 million and $2 million, respectively, for bonds no longer classified as problem or potential problem bonds. During the six months of 1997 and 1996, CIGNA established write-downs of $19 million and $25 million, respectively, for problem and potential problem bonds. These amounts included $7 million and $8 million, attributable to policyholder contracts, for the six months of 1997 and 1996, respectively. See the Summary on page 18 for the adverse effect of write-downs on policyholder contracts and on CIGNA's net income. Effect of Non-Accruals for Bonds CIGNA recognizes interest income on problem bonds only when payment is received. See the Summary on page 18 for the adverse effect of non-accruals for bonds on policyholder contracts and on CIGNA's net income. Mortgage Loans =================================================================== June 30, December 31, 1997 1996 - ------------------------------------------------------------------- Mortgage loans (in millions) $10,973 $10,927 Property type: Retail facilities 42% 43% Office buildings 33 34 Apartment buildings 12 12 Hotels 6 6 Other 7 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. During the six months of 1997, $505 million of mortgage loans were scheduled to mature, of which $204 million were paid in full, $103 million were extended at existing loan rates for a weighted average of ten months and $69 million were refinanced at current market rates. Mortgage loan extensions and refinancings are loans in good standing. The remaining scheduled maturities of $129 million were 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: o fully current loans that are judged by management to have certain characteristics that increase the likelihood of problem classification; o fully current loans for which the borrower has requested restructuring; and o loans that are 30 to 59 days delinquent with respect to interest or principal payments. 16 CIGNA had potential problem mortgage loans, including amounts attributable to policyholder contracts, of $290 million as of June 30, 1997, and $384 million as of December 31, 1996, net of related valuation reserves of $33 million and $30 million, 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, 1997, restructured mortgage loans with a carrying value of $225 million had their original maturity date extended, with a weighted average extension of approximately five years. Restructured mortgage loans generated annualized cash returns averaging approximately 10.30% as of June 30, 1997. CIGNA had problem mortgage loans, including amounts attributable to policyholder contracts, of $284 million and $363 million, net of valuation reserves of $33 million and $71 million, as of June 30, 1997 and December 31, 1996, respectively. Valuation Reserves for Mortgage Loans CIGNA had valuation reserves for mortgage loans at June 30, 1997 and 1996 of $66 million and $121 million, respectively, including $43 million and $78 million attributable to policyholder contracts. During the six months of 1997 and 1996, CIGNA established valuation reserves of $13 million and $49 million, respectively, for problem and potential problem mortgage loans. These amounts included $6 million and $29 million attributable to policyholder contracts. See the Summary on page 18 for the adverse effect of valuation reserves on policyholder contracts and on CIGNA's net income. Effect of Non-Accruals for Mortgage Loans CIGNA recognizes interest income on problem mortgage loans only when payment is received. See the Summary on page 18 for the adverse effect of non-accruals for mortgage loans on policyholder contracts and on CIGNA's net income. Real Estate As of June 30, 1997 and December 31, 1996, investment real estate, net of reserves and write-downs, included: 1) $469 million and $495 million, respectively, of real estate held for the production of income, and 2) $571 million and $607 million, respectively, of real estate held for sale, primarily properties acquired as a result of foreclosure of mortgage loans. Real Estate Write-downs and Valuation Reserves CIGNA had cumulative write-downs and valuation reserves for real estate at June 30, 1997 and 1996 of $321 million and $394 million, respectively, including $175 million and $200 million attributable to policyholder contracts. See the Summary on page 18 for the adverse effect of write-downs and valuation reserves on policyholder contracts and on CIGNA's net income. 17 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, -------------------------------------------------------------------------------------------------------------- 1997 1996 1997 1996 ---------------------- ---------------------- ---------------------- ---------------------- Policy- Policy- Policy- Policy- holder holder holder holder (In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA Contracts CIGNA - ----------------------------------------------------------------------------------------------------------------------------------- Write-downs and valuation reserves: Bonds $1 $7 $5 $6 $7 $8 $8 $11 Mortgage loans 4 4 17 9 6 5 29 13 Real estate -- 1 -- -- 1 2 (1) 1 - ----------------------------------------------------------------------------------------------------------------------------------- Total $5 $12 $22 $15 $14 $15 $36 $25 =================================================================================================================================== Non-accruals: Bonds $1 $-- $2 $5 $3 $5 $5 $8 Mortgage loans -- -- 3 1 (1) -- 3 1 - ----------------------------------------------------------------------------------------------------------------------------------- Total $1 $-- $5 $6 $2 $5 $8 $9 ===================================================================================================================================
Additional losses from problem investments are expected to occur for specific investments in the normal course of business. 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 STATEMENT 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 and constraining growth in CIGNA's businesses; 5) significant changes in interest rates; and 6) charges associated with the Healthsource acquisition. 18 Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. The Annual Meeting of Shareholders of CIGNA Corporation was held on April 23, 1997. At the meeting, 64,353,016 shares of Common Stock were represented and entitled to vote, and 74,020,823 shares of Common Stock were outstanding and entitled to vote. CIGNA shareholders elected nominees to the Board of Directors, ratified the appointment of Price Waterhouse LLP as independent accountants for 1997, and approved the CIGNA Executive Incentive Plan. Votes Votes For Withheld ---------- --------- Election of nominees to Board of Directors for term expiring in April, 2000: Alfred C. DeCrane, Jr. 64,008,920 344,096 Paul F. Oreffice 64,005,024 347,992 Wilson H. Taylor 64,022,885 330,131 Harold A. Wagner 64,007,285 345,731 ------------------------------- Votes For Votes Against Abstentions ---------- ------------- ----------- Ratification of Price Waterhouse LLP as Independent Accountants 64,232,673 41,468 78,875 ------------------------------- Votes For Votes Against Abstentions ---------- ------------- ----------- Approval of the CIGNA Executive Incentive Plan 61,960,587 1,584,179 808,250 19 Item 6. Exhibits and Reports on Form 8-K. (a) See Exhibit Index. (b) During the quarterly period ended June 30, 1997, and as of the filing date, CIGNA filed the following Reports on Form 8-K: o dated April 30, 1997, Item 5 - containing a news release regarding its first quarter 1997 results. o dated July 30, 1997, Item 5 - containing a news release regarding its second quarter 1997 results. o dated August 4, 1997, Item 5 - containing a news release regarding the adoption of the Shareholder Rights Agreement. 20 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 6, 1997 21 Exhibit Index Method of Number Description Filing 4 Description of Preferred Stock Filed as Item 1 and Exhibit 1 Purchase Rights, including the to CIGNA Corporation's Form 8-A Rights Agreement dated as of Registration Statement dated July 23, 1997 between CIGNA July 23, 1997 and incorporated Corporation and First Chicago herein by reference. Trust Company of New York 10 Stock Compensation Plan Filed herewith. for Non-Employee Directors of CIGNA Corporation, as amended and restated effective July 1, 1997 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. 22 EX-10 2 Exhibit 10 Description of Stock Compensation Plan for Non-Employee Directors of CIGNA Corporation (as amended and restated, effective July 1, 1997) The Stock Compensation Plan for Non-Employee Directors of CIGNA Corporation, as amended (the "Plan"), provides certain stock compensation arrangements to members of CIGNA Corporation's Board of Directors (the "Board") who are not in the employ of the company. The Plan provides that at least $20,000 of the annual retainer paid to Directors for their services as Directors must be taken either in shares of CIGNA Corporation Common Stock or deferred pursuant to the terms of the Deferred Compensation Plan for Directors of CIGNA Corporation. If payment is made in shares of Common Stock, the shares are issued in four equal installments within 30 days of the end of each calendar quarter. The number of shares in each payment is determined by the closing price at which the Common Stock trades on the last trade date for Common Stock in the quarter for which payment is being made. In addition, the Plan provides that Directors may, with respect to any other retainers or fees paid to them for services as Directors, defer receipt of all or any portion thereof or elect to receive all or any portion thereof in either cash or an equivalent amount of Common Stock (provided that no fractional shares may be issued). EX-11 3 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, 1997 1996 1997 1996 ======================================================================================================= Primary Earnings Per Share NET INCOME AVAILABLE TO COMMON SHARES $ 279 $ 231 $ 567 $ 469 - --------------------------------------------=========================================================== WEIGHTED AVERAGE SHARES: Common shares 74,006,579 76,382,263 73,983,461 76,381,939 Common share equivalents applicable to stock options 733,535 439,160 680,658 471,801 - ------------------------------------------------------------------------------------------------------- Total 74,740,114 76,821,423 74,664,119 76,853,740 - --------------------------------------------=========================================================== PRIMARY EARNINGS PER SHARE $ 3.73 $ 3.00 $ 7.59 $ 6.10 - --------------------------------------------=========================================================== Fully Diluted Earnings Per Share NET INCOME AVAILABLE TO COMMON SHARES $ 279 $ 231 $ 567 $ 469 - --------------------------------------------=========================================================== WEIGHTED AVERAGE SHARES: Common shares 74,006,579 76,382,263 73,983,461 76,381,939 Common share equivalents applicable to stock options 785,061 501,985 706,421 503,214 - ------------------------------------------------------------------------------------------------------- Total 74,791,640 76,884,248 74,689,882 76,885,153 - --------------------------------------------=========================================================== FULLY DILUTED EARNINGS PER SHARE $ 3.73 $ 3.00 $ 7.59 $ 6.10 - --------------------------------------------===========================================================
EX-12 4 CIGNA CORPORATION EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions) Six Months Ended June 30, 1997 1996 =================================================================== Income before income taxes $848 $703 ---- ---- Fixed charges included in income: Interest expense 52 55 Interest portion of rental expense 38 44 ---- ---- Total fixed charges included in income 90 99 ---- ---- Income available for fixed charges $938 $802 - -----------------------------------------------=================== RATIO OF EARNINGS TO FIXED CHARGES 10.4 8.1 - -----------------------------------------------=================== EX-27 5
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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 34,470 0 0 799 10,973 1,040 55,693 1,689 6,926 1,298 103,662 11,617 1,853 18,527 30,046 2,235 0 0 88 7,460 103,662 6,870 2,115 56 323 6,074 534 1,908 848 281 567 0 0 0 567 7.59 0 0 0 0 0 0 0 0 AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES.
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