-----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, WqIfni4K6ptcSonl2o5x1weQU2/I7kUreFx6AHbMi9x+YzcsRfGqmDUm/jUeg2xx uL5KpRMCn2juwj4tYWqZJQ== 0000950159-99-000122.txt : 19990510 0000950159-99-000122.hdr.sgml : 19990510 ACCESSION NUMBER: 0000950159-99-000122 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIGNA CORP CENTRAL INDEX KEY: 0000701221 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 061059331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08323 FILM NUMBER: 99613957 BUSINESS ADDRESS: STREET 1: TWO LIBERTY PLACE 48TH FLOOR STREET 2: 1601 CHESTNUT STREET CITY: PHILADELPHIA STATE: PA ZIP: 19192-1550 BUSINESS PHONE: 2157616211 MAIL ADDRESS: STREET 1: TWO LIBERTY PLACE 48TH FLOOR STREET 2: 1601 CHESTNUT STREET CITY: PHILADELPHIA STATE: PA ZIP: 19192 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 March 31, 1999 -------------- 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, 1650 Market Street Philadelphia, Pennsylvania 19192 -------------------------------- (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 March 31, 1999, 203,460,700 shares of the issuer's Common Stock were outstanding. CIGNA CORPORATION INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Income Statements 1 Consolidated Balance Sheets 2 Consolidated Statements of Comprehensive Income and Changes in Shareholders' Equity 3 Consolidated Statements of Cash Flows 4 Notes to Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURE 24 EXHIBIT INDEX 25 As used herein, "CIGNA" refers to one or more of CIGNA Corporation and its consolidated subsidiaries. Part I. FINANCIAL INFORMATION Item 1. Financial Statements - ----------------------------- CIGNA CORPORATION CONSOLIDATED INCOME STATEMENTS (In millions, except per share amounts)
Three Months Ended March 31, 1999 1998 ================================================================================================================================= REVENUES Premiums and fees $ 4,263 $ 3,901 Net investment income 858 937 Other revenues 237 514 Realized investment gains 42 59 ----------- ----------- Total revenues 5,400 5,411 ----------- ----------- BENEFITS, LOSSES AND EXPENSES Benefits, losses and settlement expenses 3,516 3,333 Policy acquisition expenses 246 228 Other operating expenses 1,208 1,082 ----------- ----------- Total benefits, losses and expenses 4,970 4,643 ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 430 768 ----------- ----------- Income taxes (benefits): Current 95 432 Deferred 56 (159) ----------- ----------- Total taxes 151 273 ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 279 495 Cumulative effect of accounting change for guaranty fund and other insurance-related assessments, net of taxes (91) 0 ----------- ----------- NET INCOME $ 188 $ 495 - -------------------------------------------------------------------------------------------------================================ BASIC EARNINGS PER SHARE Income before cumulative effect of accounting change $ 1.36 $ 2.30 Cumulative effect of accounting change (0.44) 0 ----------- ----------- NET INCOME $ 0.92 $ 2.30 - -------------------------------------------------------------------------------------------------================================ DILUTED EARNINGS PER SHARE Income before cumulative effect of accounting change $ 1.34 $ 2.27 Cumulative effect of accounting change (0.43) 0 ----------- ----------- NET INCOME $ 0.91 $ 2.27 - -------------------------------------------------------------------------------------------------================================ DIVIDENDS DECLARED PER SHARE $ 0.30 $ 0.29 - -------------------------------------------------------------------------------------------------================================
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 March 31, December 31, 1999 1998 ========================================================================================================================= ASSETS Investments: Fixed maturities, at fair value (amortized cost, $30,636; $30,614) $ 32,020 $ 32,634 Equity securities, at fair value (cost, $729; $746) 1,056 1,043 Mortgage loans 9,847 9,599 Policy loans 4,433 6,185 Real estate 807 733 Other long-term investments 181 205 Short-term investments 233 308 ----------- ----------- Total investments 48,577 50,707 Cash and cash equivalents 2,227 3,028 Accrued investment income 768 769 Premiums, accounts and notes receivable 4,664 4,469 Reinsurance recoverables 12,803 12,925 Deferred policy acquisition costs 1,075 1,069 Property and equipment 905 938 Deferred income taxes 2,022 1,861 Other assets 1,396 1,543 Goodwill and other intangibles 2,461 2,495 Separate account assets 35,555 34,808 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 112,453 $ 114,612 - ----------------------------------------------------------------------------------====================================== LIABILITIES Contractholder deposit funds $ 28,781 $ 30,864 Unpaid claims and claim expenses 17,848 18,017 Future policy benefits 12,290 12,510 Unearned premiums 1,933 1,990 ----------- ----------- Total insurance and contractholder liabilities 60,852 63,381 Accounts payable, accrued expenses and other liabilities 6,871 6,765 Current income taxes 28 56 Short-term debt 293 272 Long-term debt 1,404 1,431 Separate account liabilities 35,136 34,430 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 104,584 106,335 - ------------------------------------------------------------------------------------------------------------------------ CONTINGENCIES - NOTE 10 SHAREHOLDERS' EQUITY Common stock (par value, $0.25; shares issued, 266; 265) 67 66 Additional paid-in capital 2,788 2,719 Net unrealized appreciation, fixed maturities $ 495 $ 750 Net unrealized appreciation, equity securities 229 206 Net translation of foreign currencies (221) (114) --------- --------- Accumulated other comprehensive income 503 842 Retained earnings 6,873 6,746 Less treasury stock, at cost (2,362) (2,096) - ------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 7,869 8,277 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 112,453 $ 114,612 - ----------------------------------------------------------------------------------====================================== SHAREHOLDERS' EQUITY PER SHARE $ 38.68 $ 40.25 - ----------------------------------------------------------------------------------======================================
The Notes to Financial Statements are an integral part of these statements. 2 CIGNA CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND CHANGES IN SHAREHOLDERS' EQUITY (In millions)
Three Months Ended March 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Compre- Share- Compre- Share- hensive holders' hensive holders' Income Equity Income Equity ==================================================================================================================================== Common stock, January 1 $ 66 $ 66 Issuance of common stock for employee benefits plans 1 0 ----------- ----------- Common stock, March 31 67 66 ----------- ----------- Additional paid-in capital, January 1 2,719 2,655 Issuance of common stock for employee benefits plans 69 40 ----------- ----------- Additional paid-in capital, March 31 2,788 2,695 ----------- ----------- Accumulated other comprehensive income, January 1 842 758 Net unrealized depreciation, fixed maturities $ (255) (255) $ (29) (29) Net unrealized appreciation, equity securities 23 23 82 82 ----------- --------- Net unrealized appreciation (depreciation) on securities (232) 53 Net translation of foreign currencies (107) (107) 1 1 ----------- --------- Other comprehensive income (loss) (339) 54 ----------- ----------- Accumulated other comprehensive income, March 31 503 812 ----------- ----------- Retained earnings, January 1 6,746 5,696 Net income 188 188 495 495 Common dividends declared (61) (62) ----------- ----------- Retained earnings, March 31 6,873 6,129 ----------- ----------- Treasury stock, January 1 (2,096) (1,243) Repurchase of common stock (229) (111) Other treasury stock transactions, net (37) (23) ----------- ----------- Treasury stock, March 31 (2,362) (1,377) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL COMPREHENSIVE INCOME (LOSS) AND SHAREHOLDERS' EQUITY $ (151) $ 7,869 $ 549 $ 8,325 - ---------------------------------------------------------------------===============================================================
The Notes to Financial Statements are an integral part of these statements. 3 CIGNA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
Three Months Ended March 31, 1999 1998 ================================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Income before cumulative effect of accounting change $ 279 $ 495 Adjustments to reconcile income before cumulative effect of accounting change to net cash provided by (used in) operating activities: Insurance liabilities (194) 12 Reinsurance recoverables 158 167 Deferred policy acquisition costs (28) (33) Premiums, accounts and notes receivable (208) (167) Accounts payable, accrued expenses, other liabilities and current income taxes 47 119 Deferred income taxes 56 (159) Realized investment gains (42) (59) Depreciation and goodwill amortization 82 78 Gain on sale of businesses (26) (342) Other, net (2) (192) ------------ ------------ Net cash provided by (used in) operating activities 122 (81) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investments sold: Fixed maturities 1,265 1,594 Equity securities 96 92 Mortgage loans 51 345 Other 335 137 Investment maturities and repayments: Fixed maturities 1,024 940 Mortgage loans 115 232 Investments purchased: Fixed maturities (2,388) (2,616) Equity securities (79) (152) Mortgage loans (492) (479) Other (84) (792) Sale of individual life insurance and annuity business, net proceeds 0 1,296 Other, net (80) (60) ------------ ------------ Net cash provided by (used in) investing activities (237) 537 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds 1,838 1,604 Withdrawals and benefit payments from contractholder deposit funds (2,272) (1,774) Net change in short-term debt (6) (360) Repayment of long-term debt 0 (66) Repurchase of common stock (204) (108) Issuance of common stock 22 12 Common dividends paid (59) (60) ------------ ------------ Net cash used in financing activities (681) (752) ------------ ------------ Effect of foreign currency rate changes on cash and cash equivalents (5) (7) - ---------------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (801) (303) Cash and cash equivalents, beginning of period 3,028 2,625 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 2,227 $ 2,322 - ------------------------------------------------------------------------------------------======================================== Supplemental Disclosure of Cash Information: Income taxes paid, net of refunds $ 100 $ 204 Interest paid $ 24 $ 27 - ----------------------------------------------------------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements. 4 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 1999 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 estimating results for the full year based on interim results of operations. NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS CIGNA adopted Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" as of January 1, 1999. SOP 97-3, issued by the American Institute of Certified Public Accountants (AICPA), provides guidance on the recognition and measurement of liabilities for guaranty fund and other insurance-related assessments such as workers' compensation second injury funds, medical risk pools and charges related to operating expenses of state regulatory bodies. The cumulative effect of adopting the SOP was a reduction of net income of $91 million ($140 million pre-tax), and is primarily related to the property and casualty operations. In 1999, CIGNA adopted SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1, issued by the AICPA in 1998, specifies the types of costs that must be capitalized and amortized over the software's expected useful life and the types of costs which must be immediately recognized as expense. Implementation of this pronouncement did not have a material effect on results of operations, liquidity or financial condition. In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that derivatives be reported on the balance sheet at fair value. Changes in fair value are recognized in net income or, for derivatives that are hedging market risk related to future cash flows, in the accumulated other comprehensive income section of shareholders' equity. Implementation is required by the first quarter of 2000, with the cumulative effect of adoption reflected in net income and accumulated other comprehensive income, as appropriate. CIGNA has not determined the effect or timing of implementation of this pronouncement. In 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." SOP 98-7 does not apply to long-duration life and health contracts. Implementation is required by the first quarter of 2000, with the cumulative effect of adopting the SOP reflected in net income in the year of adoption. CIGNA has not determined the effect or timing of implementation of this pronouncement. NOTE 3 - ACQUISITIONS AND DISPOSITIONS In January 1999, CIGNA entered into an agreement to sell its domestic and international property and casualty businesses (which comprise the Property and Casualty segment) to ACE Limited for cash proceeds of $3.45 billion. The sale, which is subject to U.S. and international regulatory approval and other conditions to closing, is expected to be completed by mid-1999. Net assets of the 5 businesses to be sold were approximately $2.2 billion as of March 31, 1999. The gain on sale will be determined, in part, by the effects on net assets through closing of results of operations of, and dividends from, the businesses to be sold, as well as transaction costs and other adjustments. In April 1999, CIGNA sold a 29% interest in its Japanese life operations to Yasuda Fire & Marine Insurance Company Ltd., reducing CIGNA's ownership interest to 61%. Proceeds of the sale were approximately $100 million and the after-tax gain, which CIGNA will recognize in the second quarter, is approximately $40 million. As of January 1, 1998, CIGNA sold its individual life insurance and annuity business for cash proceeds of $1.4 billion. The sale resulted in an after-tax gain of approximately $770 million of which $202 million was recognized upon closing of the sale. Since the principal agreement to sell this business is in the form of an indemnity reinsurance arrangement, the remaining gain was deferred and is being recognized at the rate that earnings from the business sold would have been expected to emerge, primarily over fifteen years on a declining basis. CIGNA recognized $15 million and $17 million of the deferred gain in the first quarters of 1999 and 1998, respectively. CIGNA has recently invested in certain entities in connection with the expansion of its international operations. Most of these investments relate to the expansion of CIGNA's health care operations in Brazil. CIGNA has incurred losses in the Brazilian operations and expects to incur additional losses. Additional investments may be required in order for the Brazilian operations to achieve profitable operations. Risks are inherent in expanding operations in foreign countries. CIGNA routinely monitors its investments supporting international expansion for potential impairment, and management currently believes that these investments are recoverable. CIGNA had other acquisitions and dispositions during the three months of 1999 and 1998, 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 Ended March 31, (In millions) 1999 1998 - ---------------------------------------------------------------------- Fixed maturities $36 $32 Equity securities 5 4 Mortgage loans -- 12 Real estate (1) 1 Other 2 10 --------------------- 42 59 Less income taxes 14 21 - ---------------------------------------------------------------------- Net realized investment gains $28 $38 - ------------------------------------------------====================== Fixed Maturities and Equity Securities Sales of available-for-sale fixed maturities and equity securities, including policyholder share, were as follows: - ---------------------------------------------------------------------- Three Months Ended March 31, (In millions) 1999 1998 - ---------------------------------------------------------------------- Proceeds from sales $1,361 $1,686 Gross gains on sales 85 51 Gross losses on sales (42) (24) - ---------------------------------------------------------------------- The components of net unrealized appreciation (depreciation) on securities (excluding policyholder share) for the three months ended March 31 were as follows: - ------------------------------------------------------------------- (In millions) 1999 1998 - ------------------------------------------------------------------- Unrealized appreciation (depreciation) on securities held, net of taxes (benefits) of $(111) and $93, respectively. $(205) $179 Less gains realized in net income, net of taxes of $14 and $68, respectively. 27 126 -------------------- Net unrealized appreciation (depreciation) $(232) $53 - -----------------------------------------------==================== 6 NOTE 5 - EARNINGS PER SHARE Three Months Ended March 31, - ------------------------------------------------------------------- Effect (Dollars in millions, of except per share amounts) Basic Dilution Diluted - ------------------------------------------------------------------- 1999 - ------------------------------------------------------------------- Net income $188 -- $188 - --------------------------------=================================== Shares (in thousands): Weighted average 204,881 -- 204,881 Options and restricted stock grants 2,827 2,827 - ------------------------------------------------------------------- Total shares 204,881 2,827 207,708 - --------------------------------=================================== Earnings per share $0.92 $(0.01) $0.91 - --------------------------------=================================== 1998 - ------------------------------------------------------------------- Net income $495 -- $495 - --------------------------------=================================== Shares (in thousands): Weighted average 215,637 -- 215,637 Options and restricted stock grants 2,118 2,118 - ------------------------------------------------------------------- Total shares 215,637 2,118 217,755 - --------------------------------=================================== Earnings per share $2.30 $(0.03) $2.27 - --------------------------------=================================== Common shares held as Treasury shares were 62,715,992 and 48,803,100 as of March 31, 1999 and 1998, respectively. NOTE 6 - 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 completed its audits for the years 1982 through 1993, and challenged CIGNA on one issue related to years prior to 1989. In April 1999, the U.S. Court of Appeals affirmed the Tax Court's ruling on this issue in favor of the IRS. The decision will not have an effect on results of operations or liquidity, as liabilities had been previously established and paid. In management's opinion, adequate tax liabilities have been established for all years. NOTE 7 - REINSURANCE RECOVERABLES 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. In connection with the sale of CIGNA's individual life insurance and annuity business (as discussed in Note 3), the reinsurance recoverable from Lincoln National Corporation at March 31, 1999 was $6.0 billion. Failure of reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies and disputes, could result in losses. Allowances for uncollectible amounts were $706 million and $705 million as of March 31, 1999 and December 31, 1998, respectively. Future charges for unrecoverable reinsurance may materially affect results of operations in future periods, however, such amounts are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. For the first quarters of 1999 and 1998, premiums and fees were net of ceded premiums of $448 million and $443 million, respectively. In addition, benefits, losses and settlement expenses for the first quarters of 1999 and 1998 were net of reinsurance recoveries of $255 million and $385 million, respectively. For these quarters, ceded premiums associated with the individual life insurance and annuity business sold were $63 million and $113 million, respectively, and reinsurance recoveries were $22 million and $56 million. 7 NOTE 8 - SEGMENT INFORMATION Operating segments are based on CIGNA's internal reporting structure and generally reflect differences in products; the International Life, Health and Employee Benefits segment is based on geography. CIGNA uses operating income (net income excluding after-tax realized investment results and, in 1999, the cumulative effect of an accounting change) to measure the financial results of its segments. Summarized segment financial information was as follows: - ---------------------------------------------------------------------- Three Months Ended March 31, (In millions) 1999 1998 - ---------------------------------------------------------------------- Premiums and fees and other revenues: Employee Health Care, Life and Disability Benefits $3,136 $2,866 Employee Retirement Benefits and Investment Services 62 71 International Life, Health and Employee Benefits 383 278 Property and Casualty 755 754 Other Operations 219 495 Corporate (55) (49) - ---------------------------------------------------------------------- Total $4,500 $4,415 - ---------------------------------------------------=================== Income before cumulative effect of accounting change: Operating income (loss): Employee Health Care, Life and Disability Benefits $157 $131 Employee Retirement Benefits and Investment Services 63 61 International Life, Health and Employee Benefits 3 9 Property and Casualty 18 41 Other Operations 30 233 Corporate (20) (18) ------------------- Total operating income 251 457 Realized investment gains, net of taxes 28 38 - ---------------------------------------------------------------------- Income before cumulative effect of accounting change $279 $495 - ---------------------------------------------------=================== NOTE 9 - COST REDUCTION INITIATIVES Property and Casualty Restructuring In the fourth quarter of 1998, CIGNA adopted a cost reduction plan to restructure certain of its domestic and international property and casualty operations, which resulted in a pre-tax charge of $28 million ($18 million after-tax). The charge consisted primarily of costs related to severance and vacated lease space. The cash outlays associated with these initiatives will be substantially completed by the end of 2000 with most occurring in 1999. As of March 31, 1999, approximately $6 million of severance was paid to approximately 300 employees. Employee Health Care, Life and Disability Benefits Restructuring In the fourth quarter of 1997, CIGNA adopted a cost reduction plan to restructure its health care operations, which resulted in a pre-tax charge of $32 million ($22 million after-tax) in the Employee Health Care, Life and Disability Benefits segment. The charge consisted primarily of costs related to severance and vacated lease space. The cash outlays associated with these initiatives will continue through 1999 with most having occurred in 1998. As of March 31, 1999, approximately $11 million of severance was paid to approximately 1,300 employees. 8 NOTE 10 - 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 municipal obligations and industrial revenue bonds. CIGNA also guarantees a minimum level of benefits for certain separate account contracts. In addition, CIGNA has entered into specialty life reinsurance contracts that guarantee payments for specified unfavorable changes in variable annuity account values based on underlying mutual fund investments if account holders expire or elect to receive periodic income payments. 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. 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 increase health care regulation; 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 revise federal tax laws. Some of the more significant issues are discussed below. Efforts at the federal and state level to increase regulation of the health care industry could have an adverse effect on CIGNA's health care operations if they reduce marketplace competition and innovation or result in increased medical or administrative costs. Matters under consideration that could have an adverse effect include mandated benefits or services that increase costs without improving the quality of care, loss of the Employee Retirement Income Security Act of 1974 (ERISA) preemption of state law through legislative actions and court decisions, changes in the ERISA regulations governing claim appeal procedures imposing increased administrative burdens and costs and restrictions on the use of prescription drug formularies. Due to the uncertainty associated with the timing and content of any proposals ultimately adopted, the effect on CIGNA's results of operations, liquidity or financial condition cannot be reasonably estimated at this time. Proposals for Superfund reform remain 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 consolidated results of operations, liquidity or financial condition cannot be reasonably estimated at this time. In early 1999, the Administration proposed a federal budget that would eliminate the deferral of taxation of certain statutory income of life insurance companies. CIGNA has not provided taxes on $450 million of such income. If the budget provision is enacted, CIGNA will record additional income tax expense of $158 million to reflect this liability. The proposed federal budget also would limit the deduction of interest expense on the general indebtedness of corporations owning non-leveraged corporate life insurance policies covering the lives of officers, employees or directors who are not 20 percent owners of the corporation. If this latter provision is enacted as proposed, CIGNA does not anticipate that it will have a material effect on its consolidated results of operations, liquidity, or financial condition, although it could have a material adverse effect on the results of operations of the Employee Retirement Benefits and Investment Services segment. In 1996, Congress passed legislation that phased out over a three-year period the tax deductibility of policy loan interest for most leveraged corporate life insurance products. CIGNA does not expect 9 this legislation to have a material adverse effect on its consolidated results of operations, liquidity or financial condition. In 1998, the National Association of Insurance Commissioners (NAIC) adopted risk-based capital guidelines for health maintenance organizations (HMOs). CIGNA expects its HMO subsidiaries to be adequately capitalized under these guidelines as they become effective in various jurisdictions in 1999. In 1998, the NAIC adopted standardized statutory accounting principles. Since these principles have not been adopted by most of the insurance departments of various jurisdictions in which CIGNA's insurance subsidiaries are domiciled, the timing and effects of implementation have not yet been determined. 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. 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. Property and Casualty 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. 10 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 March 31, 1999, compared with December 31, 1998, and its results of operations for the three months ended March 31, 1999, compared with the same period last year. This discussion should be read in conjunction with Management's Discussion and Analysis included in CIGNA's 1998 Annual Report to Shareholders (pages 10 through 24), 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. Acquisitions and Dispositions In January 1999, CIGNA entered into an agreement to sell its domestic and international property and casualty businesses (which comprise the Property and Casualty segment) to ACE Limited for cash proceeds of $3.45 billion. The sale, which is subject to U.S. and international regulatory approval and other conditions to closing, is expected to be completed by mid-1999. Net assets of the businesses to be sold were approximately $2.2 billion as of March 31, 1999. The gain on sale will be determined, in part, by the effects on net assets through closing of results of operations of, and dividends from, the businesses to be sold, as well as transaction costs and other adjustments. CIGNA's priorities for the use of capital, including proceeds from the sale are, in order, internal growth, acquisitions, and share repurchases. In April 1999, CIGNA sold a 29% interest in its Japanese life operations to Yasuda Fire & Marine Insurance Company Ltd., reducing CIGNA's ownership interest to 61%. Proceeds of the sale were approximately $100 million and the after-tax gain, which CIGNA will recognize in the second quarter, is approximately $40 million. As of January 1, 1998, CIGNA sold its individual life insurance and annuity business for cash proceeds of $1.4 billion. The sale resulted in an after-tax gain of approximately $770 million of which $202 million was recognized upon closing of the sale. Since the principal agreement to sell this business is in the form of an indemnity reinsurance arrangement, the remaining gain was deferred and is being recognized at the rate that earnings from the business sold would have been expected to emerge, primarily over fifteen years on a declining basis. CIGNA recognized $15 million and $17 million of the deferred gain in the first quarters of 1999 and 1998, respectively. CIGNA has recently invested in certain entities in connection with the expansion of its international operations and expects to pursue additional international growth opportunities. CIGNA anticipates start-up costs and initial losses as a result of this expansion. Most of the recent international investments relate to the expansion of CIGNA's health care operations in Brazil. CIGNA has incurred losses in the Brazilian operations and expects to incur additional losses. Additional investments may be required in order for the Brazilian operations to achieve profitable operations. Risks are inherent in expanding operations in foreign countries. CIGNA routinely monitors its investments supporting international expansion for potential impairment, and management currently believes that these investments are recoverable. CIGNA continues to conduct strategic and financial reviews of its businesses in order to deploy its capital most effectively. See Note 3 to the Financial Statements for additional information on acquisitions and dispositions. Cost Reduction Initiatives In the fourth quarter of 1998, CIGNA adopted a cost reduction plan to restructure certain operations which resulted in a pre-tax charge of $29 million ($19 million after-tax), including $18 million after- tax for restructuring certain of its domestic and international operations included in the Property and Casualty segment and $1 million after-tax for certain operations included in the International Life, Health and Employee Benefits segment. The 11 charge consisted primarily of costs related to severance and vacated lease space. The cash outlays associated with these initiatives will be substantially completed by the end of 2000 with most occurring in 1999. These initiatives are expected to result in annual after-tax savings of $20 million in the Property and Casualty segment. As noted above, CIGNA has entered into an agreement to sell the businesses that comprise this segment. In the fourth quarter of 1997, CIGNA adopted a cost reduction plan to restructure its health care operations, which resulted in a pre-tax charge of $32 million ($22 million after-tax) in the Employee Health Care, Life and Disability Benefits segment. The charge consisted primarily of costs related to severance and vacated lease space. The cash outlays associated with these initiatives will continue through 1999 with most having occurred in 1998. These initiatives are expected to result in annual after-tax expense savings of $50 million with approximately two-thirds having emerged in 1998 and the full amount in 1999. See Note 9 to the Financial Statements for additional information on cost reduction initiatives. Other Matters 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 increase health care regulation; 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 revise federal tax laws. In early 1999, the Administration proposed a federal budget that would eliminate the deferral of taxation of certain statutory income of life insurance companies. As discussed in Note 10 to the Financial Statements, CIGNA has not provided taxes on $450 million of such income. If the budget provision is enacted, CIGNA will record additional income tax expense of $158 million to reflect this liability. The proposed federal budget also would limit the deduction of interest expense on the general indebtedness of corporations owning non-leveraged corporate life insurance policies covering the lives of officers, employees or directors who are not 20 percent owners of the corporation. If this latter provision is enacted as proposed, CIGNA does not anticipate that it will have a material effect on its consolidated results of operations, liquidity, or financial condition, although it could have a material adverse effect on the results of operations of the Employee Retirement Benefits and Investment Services segment. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. For additional information, see Note 10 to the Financial Statements. Recent Accounting Pronouncements CIGNA adopted Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" as of January 1, 1999. SOP 97-3 , issued by the American Institute of Certified Public Accountants (AICPA), provides guidance on the recognition and measurement of liabilities for guaranty fund and other insurance-related assessments such as workers' compensation second injury funds, medical risk pools and charges related to operating expenses of state regulatory bodies. The cumulative effect of adopting the SOP was a reduction of net income of $91 million ($140 million pre-tax), and is primarily related to the property and casualty operations. In 1999, CIGNA adopted SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1, issued by the AICPA in 1998, specifies the types of costs that must be capitalized and amortized over the software's expected useful life and the types of costs which must be immediately recognized as expense. Implementation of this pronouncement did not have a material effect on results of operations, liquidity or financial condition. In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." 12 SFAS No. 133 requires that derivatives be reported on the balance sheet at fair value. Changes in fair value are recognized in net income or, for derivatives that are hedging market risk related to future cash flows, in the accumulated other comprehensive income section of shareholders' equity. Implementation is required by the first quarter of 2000, with the cumulative effect of adoption reflected in net income and accumulated other comprehensive income, as appropriate. CIGNA has not determined the effect or timing of implementation of this pronouncement. In 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk." SOP 98-7 does not apply to long- duration life and health contracts. Implementation is required by the first quarter of 2000, with the cumulative effect of adopting the SOP reflected in net income in the year of adoption. CIGNA has not determined the effect or timing of implementation of this pronouncement. CONSOLIDATED RESULTS OF OPERATIONS ================================================================== FINANCIAL SUMMARY Three Months Ended March 31, (In millions) 1999 1998 - ------------------------------------------------------------------ Premiums and fees $4,263 $3,901 Net investment income 858 937 Other revenues 237 514 Realized investment gains 42 59 --------------------- Total revenues 5,400 5,411 Benefits and expenses 4,970 4,643 --------------------- Income before taxes 430 768 Income taxes 151 273 --------------------- Income before cumulative effect of accounting change 279 495 Less realized investment gains, net of taxes 28 38 - ----------------------------------------------------------------- Operating income* $251 $457 - --------------------------------------------===================== CIGNA's first quarter 1998 consolidated operating income included a $202 million after-tax gain recognized upon closing of the sale of CIGNA's individual life insurance and annuity business. Excluding this gain, operating income was $251 million in 1999 compared with $255 million for the same period last year, a decrease of 2%. This decrease primarily reflects lower operating income in the Property and Casualty and International Life, Health and Employee Benefits segments, partially offset by improved results in CIGNA's Employee Health Care, Life and Disability Benefits segment. After-tax realized investment results decreased 26% in the first quarter of 1999 from the same period last year. This decrease primarily reflects lower gains on sales of mortgage loans and real estate partnerships. For additional information, see Note 4 to the Financial Statements. Excluding the $202 million after-tax gain recognized on the sale of CIGNA's individual life insurance and annuity business and the anticipated gain on the sale of CIGNA's property and casualty operations, full year operating income for 1999 is expected to improve over 1998; however, such improvement could be adversely affected by the factors noted in the cautionary statement on page 22. EMPLOYEE HEALTH CARE, LIFE AND DISABILITY BENEFITS ================================================================== FINANCIAL SUMMARY Three Months Ended March 31, (In millions) 1999 1998 - ------------------------------------------------------------------ Premiums and fees $2,976 $2,737 Net investment income 138 143 Other revenues 160 129 --------------------- Segment revenues 3,274 3,009 Benefits and expenses 3,030 2,801 --------------------- Income before taxes 244 208 Income taxes 87 77 --------------------- Operating income $157 $131 - --------------------------------------------===================== Realized investment gains, net of taxes $6 $18 - --------------------------------------------====================== Operating income for the Employee Health Care, Life and Disability Benefits segment increased 20% for the first quarter of 1999, compared with the same period last year. Operating income for the Indemnity and HMO operations was as follows: - -------- *Operating income (loss) is defined as net income (loss) excluding after-tax realized investment results. Operating income in 1999 also excludes the cumulative effect of adopting a new accounting pronouncement. 13 ================================================================== Three Months Ended March 31, (In millions) 1999 1998 - ------------------------------------------------------------------ Indemnity operations $63 $69 HMO operations 94 62 - ------------------------------------------------------------------ Total $157 $131 ================================================================== Indemnity operating income decreased 9% for the first quarter of 1999 compared with the same period last year. This decrease primarily reflects lower earnings from the experience-rated medical business resulting from higher medical costs and unfavorable claim experience in the group accident business. These decreases were partially offset by improved claim experience from guaranteed cost medical and group life businesses. HMO earnings increased 52% for the first quarter of 1999 compared with the same period last year. This improvement reflects rate increases for guaranteed cost HMO business, improved results in health care services operations, membership growth in HMO experience-rated and alternative funding business and lower operating expenses per member. Premiums and fees increased 9% for the first quarter of 1999 compared to the same period last year. This increase primarily reflects HMO and medical indemnity membership growth and rate increases. Net investment income decreased 3% for the first quarter of 1999 compared to 1998 due to a decrease in investment yields. As of March 31, 1999, total HMO membership was approximately 6.7 million, representing an increase of 6% since March 31, 1998 and 3% since December 31, 1998. These increases primarily reflect membership growth in experience-rated and alternative funding programs, partially offset by lower guaranteed cost HMO membership. Under alternative funding programs, the customer assumes all or a portion of the responsibility for funding claims, and CIGNA generally earns a lower margin than under traditional programs. 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 first quarters of 1999 and 1998 were $3.5 billion and $3.2 billion, respectively. This increase primarily reflects HMO membership growth. Premium equivalents were 54% of total adjusted premiums and fees for the first quarters of 1999 and 1998. ASO plans accounted for approximately 50% of total adjusted premiums and fees for the first quarters of 1999 and 1998. EMPLOYEE RETIREMENT BENEFITS AND INVESTMENT SERVICES ================================================================== FINANCIAL SUMMARY Three Months Ended March 31, (In millions) 1999 1998 - ------------------------------------------------------------------ Premiums and fees $62 $71 Net investment income 387 410 --------------------- Segment revenues 449 481 Benefits and expenses 356 392 --------------------- Income before taxes 93 89 Income taxes 30 28 --------------------- Operating income $63 $61 - --------------------------------------------====================== Realized investment gains, net of taxes $1 $6 - --------------------------------------------====================== Operating income for the Employee Retirement Benefits and Investment Services segment increased 3% for the first quarter of 1999, compared with the same period of 1998. This increase reflects higher earnings from an increased asset base, partially offset by a shift to lower margin products (separate account equity funds). Premiums and fees for the first quarter of 1999 decreased 13% compared with the same period last year, reflecting a decline in annuity sales and lower non-leveraged corporate life insurance premiums and fees, partially offset by higher fees from separate accounts. Net investment income decreased 6% for the first quarter of 1999, primarily reflecting lower investment yields and customers' continued redirection of a portion of their investments from the general account to separate accounts. 14 Assets under management are generally a key determinant of earnings for this segment. For the quarter ended March 31, assets under management and related activity, including amounts attributable to separate accounts, were as follows: ================================================================== (In millions) 1999 1998 - ------------------------------------------------------------------ Balance -- January 1 $52,929 $48,231 Premiums and deposits 2,088 2,191 Investment results 924 805 Increase (decrease) in fair value of assets (16) 1,875 Customer withdrawals (1,556) (875) Other, including participant withdrawals and benefit payments (1,264) (1,255) - ------------------------------------------------------------------ Balance -- March 31 $53,105 $50,972 ================================================================== Premiums and deposits decreased 5% in the three months of 1999, compared with the same period in 1998. For the three months of 1999 and 1998, approximately 64% and 53%, respectively, of premiums and deposits reflect recurring deposits from existing customers while the remaining amounts represent sales to new customers and new plan sales to existing customers. Investment results increased 15% in the three months of 1999, compared with the same period in 1998. This increase reflects higher capital gains and growth in assets, partially offset by lower investment yields. The decrease for 1999 in the fair value of assets is primarily due to market value depreciation of fixed maturities in the general account. The increase in customer withdrawals is primarily due to the effect of withdrawals under defined contribution business in the first quarter of 1999. Assets under management will continue to be affected by market value fluctuations for fixed maturities and equity securities. See Other Matters on page 12 for additional information regarding corporate life insurance. INTERNATIONAL LIFE, HEALTH AND EMPLOYEE BENEFITS ================================================================== FINANCIAL SUMMARY Three Months Ended March 31, (In millions) 1999 1998 - ----------------------------------------------------------------- Premiums and fees $378 $277 Net investment income 30 27 Other revenues 5 1 ---------------------- Segment revenues 413 305 Benefits and expenses 405 291 ---------------------- Income before taxes 8 14 Income taxes 5 5 ---------------------- Operating income $3 $9 - -------------------------------------------====================== Realized investment gains, net of taxes $-- $-- - -------------------------------------------====================== Operating income for the International Life, Health and Employee Benefits segment declined from the prior year. This decline is primarily attributable to losses of $7 million after-tax from Brazilian health care operations. CIGNA's health care operations in Brazil include a managed health care business, which is being consolidated, and investments in another health care operation, which are being accounted for under the equity method. Premiums and fees increased 36% for the first quarter of 1999, compared with the same period last year. Excluding premiums and fees from the Brazilian managed health care operation (which was acquired in the second half of 1998) and the effects of foreign currency changes, premiums and fees increased 23%. This increase reflects growth in Japanese life operations and, to a lesser extent, expansion of health care operations in other Latin American countries and higher premiums and fees from health care business related to expatriate employees of multinational companies. Net investment income for the first quarter of 1999 increased 11% from the same period last year. Excluding the effects of foreign currency changes, the increase was 4%. This increase reflects growth in invested assets partially offset by lower yields. 15 Operating income associated with the 29% interest in CIGNA's Japanese life operations that was sold in April 1999 was approximately $2 million in the first quarter of 1999 and $1 million in the first quarter of 1998. Operating income associated with this sold interest for full year 1998 was $10 million. PROPERTY AND CASUALTY ================================================================= FINANCIAL SUMMARY Three Months Ended March 31, (In millions) 1999 1998 - ----------------------------------------------------------------- Premiums and fees $676 $685 Net investment income 135 146 Other revenues 79 69 --------------------- Segment revenues 890 900 Benefits and expenses 867 841 --------------------- Income before taxes 23 59 Income taxes 5 18 --------------------- Operating income $18 $41 - --------------------------------------------===================== Realized investment gains, net of taxes $20 $12 - --------------------------------------------===================== In January 1999, CIGNA entered into an agreement to sell the businesses included in this segment. See page 11 for additional information. Operating income decreased 56% for the first quarter of 1999, compared with the same period in 1998. Operating income for the ongoing and run-off operations was as follows: ================================================================= Three Months Ended March 31, (In millions) 1999 1998 - ----------------------------------------------------------------- Ongoing operations: International $3 $22 Domestic 15 19 ---------------------- Total ongoing operations 18 41 Run-off operations -- -- - ----------------------------------------------------------------- Total $18 $41 ================================================================= The decline in the international operations for 1999 reflects unfavorable prior year loss development, primarily related to catastrophe losses, and lower property and casualty earnings due to the competitive environment. The decline in the domestic operations for 1999 primarily reflects unfavorable prior year development related to property losses, continued competitive market conditions and lower results from insurance-related service businesses. These decreases were partially offset by more favorable underwriting experience in selected lines of business. Results for the run-off operations primarily reflect prior year development on claim and claim adjustment expense reserves and investment activity. Premiums and fees declined slightly in the first quarter of 1999. These declines reflect continued price competition partially offset by the favorable effect of foreign exchange for international operations. Net investment income decreased 8% for the first quarter of 1999 compared with the same period of 1998. The decline reflects lower assets and a shift in the investment portfolio mix from fixed maturities to equity securities. Pre-tax catastrophe losses, net of reinsurance, were $23 million in the first quarter of 1999 compared with $9 million in the first quarter of 1998. CIGNA's future results of operations could be volatile, depending on the frequency and severity of future catastrophes. 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 1998 Form 10-K. CIGNA's property and casualty loss reserves of $14.3 billion and $14.6 billion as of March 31, 1999 and December 31, 1998, respectively, are estimates 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 16 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 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 property and casualty reinsurance recoverables were approximately $6.1 billion and $6.3 billion as of March 31, 1999 and December 31, 1998, net of allowances for unrecoverable reinsurance of $706 million and $705 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 pre-tax effects on the Property and Casualty segment's results of operations from prior year development, net of reinsurance, for the three months ended March 31: ================================================================= Three Months Ended March 31, (In millions) 1999 1998 - ----------------------------------------------------------------- By business operation: Ongoing operations $28 $2 Run-off operations 39 46 - ----------------------------------------------------------------- Total $67 $48 ================================================================= By type of loss: Asbestos-related $16 $18 Environmental pollution 25 7 Unrecoverable reinsurance 3 9 Workers' compensation 9 10 Other 14 4 - ----------------------------------------------------------------- Total $67 $48 ================================================================= OTHER OPERATIONS ================================================================= FINANCIAL SUMMARY Three Months Ended March 31, (In millions) 1999 1998 - ----------------------------------------------------------------- Premiums and fees $171 $131 Net investment income 161 198 Other revenues 48 364 --------------------- Segment revenues 380 693 Benefits and expenses 334 331 --------------------- Income before taxes 46 362 Income taxes 16 129 --------------------- Operating income $30 $233 - --------------------------------------------===================== Realized investment gains, net of taxes $-- $2 - --------------------------------------------===================== Other Operations consist of: o gain recognition related to the sale of the individual life insurance and annuity business; o corporate life insurance on which policy loans are outstanding (leveraged corporate life insurance); o life, accident and health reinsurance operations; 17 o settlement annuity business; and o certain new business initiatives. Operating income for the first quarter of 1998 includes an after-tax gain of $202 million recognized on the sale of the individual life insurance and annuity business. On a pre-tax basis, the gain was $316 million and is reported in Other Revenues. Excluding this amount, operating income for the first quarter 1999 was $30 million, compared with operating income of $31 million in the first quarter 1998, reflecting comparable results for the businesses which comprise Other Operations. For the first quarter of 1999, premiums and fees increased 31% from the same period of 1998. This increase primarily reflects growth in accident and international reinsurance sales. Net investment income decreased 19% for the first quarter of 1999 compared with the same period of 1998. This decrease primarily reflects lower assets from leveraged corporate life insurance, and, to a lesser extent, lower yields. In 1996, Congress passed legislation that phased out over a three-year period the tax deductibility of policy loan interest for most leveraged corporate life insurance products. Revenues of $108 million and operating income of $10 million for the first quarter of 1999 were from leveraged corporate life insurance products that are affected by this legislation. CIGNA does not expect this legislation to have a material adverse effect on its consolidated results of operations, liquidity or financial condition. The specialty life reinsurance products of this segment include contracts that guarantee payments for specified unfavorable changes in variable annuity account values based on underlying mutual fund investments if account holders expire or elect to receive periodic income payments. Although these guarantees may adversely affect CIGNA's consolidated results of operations in future periods, they are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. The personal accident reinsurance business of this segment includes participation in a workers' compensation program managed by Unicover Managers, Inc. where disputes have arisen regarding retrocessional coverage. Resolution of these disputes is likely to take several years. CIGNA does not expect to incur losses material to its consolidated results of operations, liquidity or financial condition related to this program. CORPORATE ================================================================= FINANCIAL SUMMARY Three Months Ended March 31, (In millions) 1999 1998 - ------------------------------------------------------------------ Operating loss $(20) $(18) - --------------------------------------------===================== Realized investment gains, net of taxes $1 $-- - --------------------------------------------===================== Corporate is used to report amounts not allocated to segments, such as interest expense, certain goodwill amortization and intersegment eliminations. The increase in the operating loss in the first quarter of 1999 primarily reflects lower net investment income due to a reduction in investment assets. 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 first quarter of 1999, cash and cash equivalents decreased approximately $800 million from $3.0 billion as of December 31, 1998. This decrease primarily reflects net withdrawals from contractholder deposit funds ($434 million), payments of dividends on and repurchases of CIGNA common stock ($263 million), and cash used for investing activities ($237 million). These decreases were partially offset by cash provided by operating activities ($122 million), reflecting earnings and the timing of operating cash receipts and disbursements. 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 18 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 $1.4 billion of long-term debt outstanding at March 31, 1999 and December 31, 1998. As of March 31, 1999, CIGNA had approximately $1 billion remaining under effective shelf registration statements filed with the Securities and Exchange Commission that may be issued as debt securities, equity securities or both, depending upon market conditions and CIGNA's capital requirements. At March 31, 1999, CIGNA's short-term debt amounted to $293 million, an increase of $21 million from December 31, 1998. CIGNA has repurchased approximately 3,844,000 shares of its common stock for $314 million during 1999, including 990,000 shares repurchased for $85 million from April 1 through April 30, 1999. The remaining authorization of CIGNA's Board of Directors as of April 30, 1999 was $476 million. INVESTMENT ASSETS ================================================================== March 31, December 31, (In millions) 1999 1998 - ------------------------------------------------------------------ Fixed maturities $32,020 $32,634 Equity securities 1,056 1,043 Mortgage loans 9,847 9,599 Real estate 807 733 Other, primarily policy loans 4,847 6,698 - ------------------------------------------------------------------ Total investment assets $48,577 $50,707 ================================================================== Additional information regarding CIGNA's investment assets is included in Note 4 to the first quarter 1999 Financial Statements and Notes 2, 4 and 5 to the 1998 Financial Statements as well as the 1998 Form 10-K. Investment assets as of March 31, 1999 decreased 4% from December 31, 1998. This decrease primarily reflects a decline of approximately $1.7 billion in policy loans due to surrenders of leveraged corporate life insurance policies. 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: ================================================================== March 31, December 31, 1999 1998 - ------------------------------------------------------------------ Fixed maturities 30% 27% Mortgage loans 58% 57% Real estate 63% 63% ================================================================== 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 March 31, 1999, the fair value of fixed maturities, including policyholder share, was greater than amortized cost by $1.4 billion, compared with $2.0 billion as of December 31, 1998. The decrease is primarily attributable to an increase in interest rates during the first quarter of 1999. Potential Problem and 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 $95 million of potential problem bonds, including amounts attributable to policyholder contracts, as of March 31, 1999, compared with $69 million as of December 31, 1998. These amounts are net of cumulative write-downs of $7 million and $14 million, respectively. CIGNA considers bonds that are delinquent or restructured as to terms, typically interest rate and, in certain cases, maturity date, problem bonds. As of March 31, 1999 and December 31, 1998, CIGNA had problem bonds, including amounts attributable to policyholder contracts, of $118 million and $119 million, net of related cumulative write-downs of $29 million and $19 million, respectively. Problem bonds included $3 million related to emerging markets investments as of March 31, 1999 and December 31, 1998. CIGNA recognizes interest income on problem bonds only when payment is received. 19 Mortgage Loans ================================================================== March 31, December 31, 1999 1998 - ------------------------------------------------------------------ Mortgage loans (in millions) $9,847 $9,599 Property type: Office buildings 38% 37% Retail facilities 34 34 Apartment buildings 14 15 Industrial 7 7 Hotels 5 5 Other 2 2 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. Potential Problem and 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. CIGNA had potential problem mortgage loans, including amounts attributable to policyholder contracts, of $67 million as of March 31, 1999, and $55 million as of December 31, 1998. There were no valuation reserves related to these amounts in either period. CIGNA's problem mortgage loans include delinquent and restructured mortgage loans. Delinquent mortgage loans include those on which payment is overdue 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. CIGNA had problem mortgage loans, including amounts attributable to policyholder contracts, of $98 million, net of valuation reserves of $6 million, as of March 31, 1999 and December 31, 1998. CIGNA recognizes interest income on problem mortgage loans only when payment is received. Real Estate As of March 31, 1999 and December 31, 1998, investment real estate, net of reserves and write-downs, included: 1) $464 million and $390 million, respectively, of real estate held for the production of income, and 2) $343 million as of both dates of real estate held for sale, primarily properties acquired as a result of foreclosure of mortgage loans. Summary The effects of write-downs, changes in valuation reserves and non-accruals related to investment assets for the three months ended March 31, 1999 and 1998 were not material to CIGNA's policyholder contracts, results of operations, liquidity or financial position. 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, including further significant deterioration in Latin American and Asian economies, 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. 20 YEAR 2000 CIGNA is highly dependent on automated systems and systems applications in conducting its operations. These systems include information technology (IT) systems that are used for, among other things, processing claims, billing, collecting premiums from customers, managing investment activities and maintaining management information systems. If these systems were unable to function because of failing to be Year 2000 ready, CIGNA's business operations would be interrupted, which could have a material adverse effect on CIGNA's results of operations. CIGNA's Year 2000 efforts include: 1) identifying systems requiring remediation; 2) assessing what is required to remediate those systems; 3) remediating systems to be ready for the Year 2000 (by either modifying or replacing them); and 4) testing systems for Year 2000 readiness, including that they properly interface with systems of external parties, such as customers and third-party administrators. CIGNA has completed the identification and assessment phases with respect to its IT systems that are critical to maintaining operations or where the failure of those systems would result in significant costs or disruption of operations ("mission critical systems"). As of March 31, 1999, remediation and testing procedures had been completed for 96% of its mission critical systems. CIGNA expects to substantially complete the remediation and testing of its mission critical systems by the middle of 1999. In certain cases, CIGNA will perform additional testing to ensure that these systems appropriately interact with other systems. CIGNA's systems also include non-IT systems, such as telephone, facility management and other systems using embedded chips. The majority of non-IT systems are expected to be ready by mid- 1999. CIGNA is using both internal and external resources to meet the timetable established for completion of its Year 2000 efforts. The after-tax costs of Year 2000 efforts were approximately $100 million in 1998 and are expected to be approximately $50 million in 1999. Year 2000 after-tax costs for the first quarter of 1999 were approximately $10 million. Approximately 60% of total Year 2000 costs are attributable to existing systems resources which have been redirected to the Year 2000 efforts. The remaining amounts represent incremental costs for Year 2000 efforts. Although certain systems development efforts have been deferred in order to address Year 2000 issues, CIGNA does not expect that this deferral will have a significant adverse effect on its results of operations or financial condition. CIGNA has relationships with various third-party entities in the ordinary course of business. For example, CIGNA receives data from clients; depends on others, such as third-party administrators and banks, for services; and bears credit risk on others, such as entities in which it invests. CIGNA has identified third-party entities critical to its operations, and it is assessing and attempting to mitigate its risks with respect to the potential failure of these entities to be Year 2000 ready by, among other things, reviewing, where possible, their formal Year 2000 plans and obtaining Year 2000 readiness affirmations from certain third-party entities. The effect, if any, on CIGNA's results of operations from the failure of these entities (including entities on which CIGNA bears credit risk) to be Year 2000 ready is not reasonably estimable. While CIGNA expects that its Year 2000 efforts will be successful, it has begun, but not yet completed, a comprehensive analysis of the operational problems that would be reasonably likely to result from the failure by CIGNA and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. CIGNA has made substantial progress in completing this analysis and expects to complete it by the end of the second quarter of 1999. CIGNA has historically had security and backup policies and procedures for safeguarding critical corporate data. It is supplementing these policies by developing Year 2000 contingency plans to provide for the continuity of operations in the event of Year 2000 systems failures or the failure of third-party entities to be Year 2000 ready. These plans are expected to be completed and tested prior to the fourth quarter of 1999. The costs of CIGNA's Year 2000 efforts and the dates on which CIGNA believes it will complete such efforts are based on management's best 21 estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans, and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and costs of personnel trained in Year 2000 issues, the ability to identify, assess, remediate and test all relevant computer codes and embedded technology, the risk that reasonable testing will not uncover all Year 2000 problems, and similar uncertainties. Property and casualty indemnity losses for Year 2000 claims and litigation costs to defend or deny such claims are not reasonably estimable at this time. 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 of Financial Condition and Results of Operations, 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; 6) significant stock market declines resulting in payments contingent on certain variable annuity account values; 7) the effect on CIGNA's international operations and investments from further significant deterioration in Latin American and Asian economies; and 8) proposals to change federal corporate income taxes. 22 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) See Exhibit Index. (b) During the quarterly period ended March 31, 1999, and as of the filing date, CIGNA filed the following Reports on Form 8-K: * dated February 9, 1999, Item 5 - containing a news release regarding its fourth quarter 1998 results. * dated January 12, 1999, Item 5 - containing a news release regarding an agreement to sell CIGNA's international and domestic property & casualty operations. 23 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/ James A. Sears --------------------- James A. Sears Vice President and Chief Accounting Officer Date: May 7, 1999 24 Exhibit Index Method of Number Description Filing - ------ ----------- --------- 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 25 EX-12 2
CIGNA CORPORATION EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions) Three Months Ended March 31, 1999 1998 =================================================================================================================================== Income before income taxes and cumulative effect of accounting change $ 430 $ 768 -------------- ----------------- Fixed charges included in income: Interest expense 31 33 Interest portion of rental expense 16 20 -------------- ----------------- Total fixed charges included in income 47 53 -------------- ----------------- Income available for fixed charges $ 477 $ 821 - ---------------------------------------------------------------------------------------------====================================== RATIO OF EARNINGS TO FIXED CHARGES 10.1 15.5 - ---------------------------------------------------------------------------------------------======================================
EX-27 3 ARTICLE 7 FDS FOR CIGNA'S 1ST QUARTER FORM 10-Q
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 MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 32,020 0 0 1,056 9,847 807 48,577 2,227 12,803 1,075 112,453 12,290 1,933 17,848 28,781 1,697 0 0 67 7,802 7,869 4,263 858 42 237 3,516 246 1,208 430 151 279 0 0 (91) 188 0.92 0.91 0 0 0 0 0 0 0 AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES. REFLECTS THE CUMULATIVE EFFECT OF ADOPTING A NEW ACCOUNTING PRONOUNCEMENT FOR INSURANCE-RELATED ASSESSMENTS. AMOUNT REPRESENTS BASIC EARNINGS PER SHARE BASED ON SFAS NO. 128. AMOUNT REPRESENTS DILUTED EARNINGS PER SHARE BASED ON SFAS NO. 128.
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