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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE LIBERTY PLACE, PHILADELPHIA, PENNSYLVANIA 19192-1550
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (215) 761-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, Par Value $1; New York Stock Exchange, Inc.
Preferred Stock Pacific Stock Exchange, Inc.
Purchase Rights Philadelphia Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 1, 1996, was approximately $9.0 billion.
As of March 1, 1996, 76,458,246 shares of the registrant's Common Stock
were outstanding.
Parts I and II of this Form 10-K incorporate by reference information from
the registrant's annual report to shareholders for the year ended December 31,
1995 (the "1995 Annual Report"). Part III of this Form 10-K incorporates by
reference information from the registrant's proxy statement dated March 19,
1996.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................................. 1
A. Description of Business............................................... 1
B. Financial Information about Industry Segments......................... 1
C. Employee Life and Health Benefits..................................... 2
D. Employee Retirement and Savings Benefits.............................. 6
E. Individual Financial Services......................................... 9
F. Property and Casualty................................................. 13
G. Investments and Investment Income..................................... 24
H. Regulation............................................................ 28
I. Ratings.............................................................. 30
J. Miscellaneous........................................................ 32
Item 2. Properties................................................................ 32
Item 3. Legal Proceedings......................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders....................... 33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 34
Item 6. Selected Financial Data................................................... 34
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 34
Item 8. Financial Statements and Supplementary Data............................... 34
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................ 34
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 34
A. Directors of the Registrant........................................... 34
B. Executive Officers of the Registrant.................................. 34
C. Compliance with Section 16(a) of the Securities Exchange Act.......... 34
Item 11. Executive Compensation.................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 35
Item 13. Certain Relationships and Related Transactions............................ 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 35
Signatures............................................................................ 36
Index to Financial Statement Schedules................................................ FS-1
Index to Exhibits..................................................................... E-1
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PART I
Item 1. BUSINESS
A. Description of Business
With shareholders' equity of $7.2 billion, revenues of $19.0 billion and
assets of $95.9 billion as of December 31, 1995, CIGNA Corporation and its
subsidiaries constitute one of the largest investor-owned insurance
organizations in the United States and one of the principal United States
companies in the financial services industry. Unless the context otherwise
indicates, the terms "CIGNA" and the "Company," when used herein, refer to one
or more of CIGNA Corporation and its consolidated subsidiaries. Although CIGNA
Corporation is not an insurance company, its subsidiaries are major providers of
group life and health insurance, managed care products and services, retirement
products and services, individual financial services, and property and casualty
insurance. CIGNA is one of the largest international insurance organizations
based in the United States, measured by international revenues, and one of the
largest investor-owned health maintenance organizations ("HMO") in the United
States, based on the number of members. CIGNA's major insurance subsidiaries,
Connecticut General Life Insurance Company ("CG Life") and Insurance Company of
North America ("ICNA"), are among the oldest insurance companies in the United
States, with ICNA tracing its origins to 1792 and CG Life to 1865. CIGNA
Corporation was incorporated in the State of Delaware in 1981.
CIGNA's revenues are derived principally from premiums and fees and
investment income. CIGNA conducts its business through the following operating
divisions, the financial results of which are reported in the following
segments:
Employee Life and Health Benefits Segment (beginning on page two)
CIGNA HealthCare
CIGNA Group Insurance: Life, Accident, Disability
Employee Retirement and Savings Benefits Segment (beginning on page six)
CIGNA Retirement & Investment Services
Individual Financial Services Segment (beginning on page nine)
CIGNA Individual Insurance
CIGNA Reinsurance: Life, Accident, Health
Property and Casualty Segment (beginning on page 13)
CIGNA Property & Casualty
CIGNA International
Investment results produced by CIGNA Investment Management on behalf of
CIGNA's insurance operations are reported in each segment's results or in Other
Operations. The other businesses of CIGNA Investment Management are described on
page 28, and financial results for these businesses are reported in Other
Operations.
B. Financial Information about Industry Segments
All financial information in the tables that follow is presented in
conformity with generally accepted accounting principles ("GAAP"), unless
otherwise indicated. Certain reclassifications have been made to 1994 and 1993
financial information to conform with the 1995 presentation. Industry rankings
and percentages set forth below are for the year ended December 31, 1994, unless
otherwise indicated. Unless otherwise noted, statements set forth in this
document concerning CIGNA's rank or position in an industry or particular line
of business have been developed internally, based on publicly available
information.
Revenues, income (loss) before income taxes, and identifiable assets
attributable to each of CIGNA's business segments and Other Operations are set
forth in Note 13 and those attributable solely to foreign operations are set
forth in Note 14 to CIGNA's 1995 Financial Statements.
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C. Employee Life and Health Benefits
Principal Products and Markets
CIGNA's Employee Life and Health Benefits operations offer a wide range of
traditional indemnity products and services and are a leading provider of
managed care and cost containment products and services. The following table
sets forth the principal products of this segment and their related net earned
premiums and fees.
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
------ ------ ------
(IN MILLIONS)
Indemnity:
Medical................................................... $1,973 $1,854 $1,875
Life...................................................... 1,754 1,813 1,627
Long-term Disability...................................... 388 422 427
Dental.................................................... 384 374 324
Accidental Death and Dismemberment........................ 249 253 260
Short-term Disability..................................... 86 93 91
Other..................................................... 20 17 18
------ ------ ------
Total................................................... 4,854 4,826 4,622
Prepaid Health and Dental Care.............................. 3,281 3,018 2,816
------ ------ ------
Total Premiums and Fees..................................... $8,135 $7,844 $7,438
======= ======= =======
-------------------
Amounts in table do not include "premium equivalents," which are described
below.
CIGNA's Employee Life and Health Benefits customers range in size from some
of the largest United States corporations to small enterprises, and include
employers, multiple employer groups, unions, professional and other
associations, government-sponsored Medicare and Medicaid programs, and other
groups. Products are marketed in all 50 states, the District of Columbia and
Puerto Rico.
The indemnity products named in the above table are available on an
experience-rated basis as well as through traditional insurance arrangements, in
which CIGNA assumes the full insurance risk for a set premium. Certain group
indemnity coverages, primarily medical and dental, also are available through
alternative funding programs under which the customer assumes all or a portion
of the responsibility for funding claims, with CIGNA providing combinations of
administrative and claim services and insurance for a fee or premium charge.
Alternative funding programs, primarily consisting of "minimum premium"
arrangements and administrative services only ("ASO") plans, constituted 54% of
business volume (premiums and fees plus premium equivalents) in 1995. Premium
equivalents generally represent paid claims and are additional premiums that
would have been earned under minimum premium and ASO contracts if they had been
written as traditional indemnity or health maintenance organization ("HMO")
programs. In minimum premium business, the policyholder funds claims up to a
predetermined aggregate amount and CIGNA funds claims exceeding that amount.
Under ASO plans, the policyholder is responsible for funding all claims and
CIGNA provides administrative services for a fee; CIGNA also may provide
stop-loss insurance for claims in excess of a predetermined amount. Alternative
funding programs and their effect on CIGNA's results are more fully described on
page 11 of the Management's Discussion and Analysis ("MD&A") section of CIGNA's
1995 Annual Report.
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CIGNA offers both group term life and group universal life insurance
products. Approximately 8,000 group life insurance policies covering
approximately 13.3 million lives were outstanding as of December 31, 1995. The
following table shows group life insurance in force and termination data.
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN ROUNDED MILLIONS)
In force, end of year.................................... $ 522,000 $ 523,000 $ 512,000
======== ======== ========
Cancellations (lapses and expirations)................... $ 51,000 $ 44,000 $ 53,000
======== ======== ========
CIGNA markets long-term and short-term disability products in all states
and statutorily required disability plans in certain states. These products
generally provide a fixed level of income to replace a portion of earned income
lost because of disability. Personal accident coverages, which consist primarily
of accidental death and dismemberment and travel accident insurance, are
provided to employers, associations and other groups.
Disability management and medical cost containment services provided by
CIGNA help insurers and employers reduce the cost of their benefit programs.
CIGNA provides managed mental health and substance abuse coverage and services
to HMOs, insurers and employers through a national network of mental health
specialists, some of whom are employees of CIGNA. CIGNA also offers managed
pharmacy benefit programs through CIGNA's HMOs.
To control their health care costs, many employers have changed and others
are changing their benefit plan design by introducing or expanding managed care
features. Managed care products promote effective, efficient use of health care
services by coordinating utilization of care and controlling unit costs through
provider contracts. While HMOs are generally the most cost-efficient form of
managed care, many employers offer their employees a choice of benefit and cost
options. CIGNA provides these options through HMOs, preferred provider
organizations ("PPOs") both with and without primary care gatekeepers and
traditional indemnity coverage as well as through integrated products, which may
include all four. Integrated products are available under alternative funding as
well as traditional insurance arrangements. These products may include contract
provisions under which CIGNA assumes the risk for costs exceeding specified
levels.
CIGNA's prepaid health care operations provide medical services through
HMOs. CIGNA's HMOs include staff models, in which physicians and other providers
are employees of the HMO, individual practice association ("IPA") models, in
which independent physicians and hospitals are under contract with CIGNA to
provide services, and mixed models, in which attributes of IPA and staff model
HMOs are combined. Staff model HMOs offer a greater opportunity for direct
influence over medical costs, quality and service, but require more capital
investment. IPAs may cover wider geographic areas with lower fixed costs, but
must rely on cost-effective contracts with providers and appropriate utilization
management to influence medical costs. Staff models generally offer lower costs
to the consumer, whereas IPAs may offer broader provider choice.
CIGNA's indemnity business includes arrangements with doctors, hospitals
and other independent providers to form PPOs. Under a typical PPO arrangement,
CIGNA reimburses PPO participants at a higher percentage for the costs of
medical care obtained from contracted providers (who charge on a discounted rate
basis) than it does for care obtained from non-contracted providers. When a PPO
has a gatekeeper, the higher reimbursement level is available if a participant
first consults a contracted primary care physician before consulting a
contracted specialist.
As of December 31, 1995, CIGNA's HMOs and PPOs served all or part of 42
states, the District of Columbia and Puerto Rico. The table below shows the
number of HMO networks and members in total and
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for each HMO model as well as the number of gatekeeper PPO networks and members
for the periods presented. Members include participants under traditional and
alternative funding programs.
AS OF DECEMBER 31,
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1995 1994 1993
-------------------- -------------------- --------------------
APPROX. APPROX. APPROX.
NO. OF NO. OF NO. OF NO. OF NO. OF NO. OF
NETWORKS MEMBERS NETWORKS MEMBERS NETWORKS MEMBERS
-------- --------- -------- --------- -------- ---------
HMOs:
Staff Models............... 4 633,000 4 668,000 3 634,000
IPA Models................. 37 2,488,000 37 2,138,000 40 1,630,000
Mixed Models............... 5 522,000 5 505,000 5 424,000
-- -- --
--------- --------- ---------
Subtotal HMOs................ 46 3,643,000 46 3,311,000 48 2,688,000
== == ==
Gatekeeper PPOs.............. 29 237,000 25 190,000 15 107,000
== == ==
--------- --------- ---------
Total Members................ 3,880,000 3,501,000 2,795,000
========= ========= =========
To maintain and enhance the quality of health care delivered in its HMOs,
CIGNA has initiated the development of standard performance measurements for
affiliated physicians, hospitals and other providers. CIGNA is in the process of
seeking accreditation of all of its HMOs by external accrediting agencies as
validation of its quality programs. To date, 27 of CIGNA's 46 HMOs have been
accredited.
The table below shows the number of PPO networks and participants for the
periods presented.
AS OF DECEMBER 31,
-------------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
APPROX. APPROX. APPROX.
NO. OF NO. OF NO. OF NO. OF NO. OF NO. OF
NETWORKS PARTICIPANTS NETWORKS PARTICIPANTS NETWORKS PARTICIPANTS
-------- ------------ -------- ------------ -------- ------------
PPOs (excluding Gatekeeper
PPOs)................... 79 1,027,000 74 914,000 67 742,000
======== ========== ======== ========== ======== ==========
CIGNA also offers prepaid dental coverage, using networks of independent
providers in most states, serving approximately 2.3 million, 2.0 million and 1.7
million participants as of December 31, 1995, 1994 and 1993, respectively.
Distribution
The indemnity products of this segment are distributed primarily by
employed group sales representatives through national and other insurance
brokers and insurance consultants. Sales of prepaid health care products are
made to employers by CIGNA's sales representatives and through insurance
brokers. In 1995, a dedicated sales force for the Medicare risk product began
operating in five markets. Salaried representatives sell disability management,
medical and disability cost containment, and managed mental health and substance
abuse services directly to insurance companies, HMOs and employer groups.
Salaried enrollment specialists enroll employees in group life insurance, HMOs
and related programs at the worksite. As of December 31, 1995, the field sales
force for the products of this segment consisted of approximately 530 sales
representatives in 112 field locations.
Pricing and Reserves
Premiums and fees charged for group indemnity and prepaid products reflect
assumptions about future claims, expenses, credit risk, investment returns,
competitive considerations and target profit margins. Premiums and fees charged
for prepaid health and dental products and PPOs also reflect assumptions about
the impact of provider contracts and utilization management. Most of the premium
volume for the indemnity business is established on an experience-rated basis,
in which premiums may be adjusted to reflect actual
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claims experience, administrative expenses and income from investable funds
attributable to a given policyholder. All other premiums are based on a
guaranteed-cost method, for which there is no retrospective adjustment for
actual experience. Both guaranteed-cost and experience-rated contracts generally
permit annual rate adjustments.
In addition to paying current benefits and expenses, CIGNA establishes
reserves in amounts estimated to be sufficient to settle reported claims not yet
paid, as well as claims incurred but not yet reported. Also, reserves are
established for estimated experience refunds based on the results of
experience-rated policies.
Interest on reserve and fund balances is credited to experience-rated
policyholders through rates that are either set at the Company's discretion or
based on actual investment performance. Generally, for interest-crediting rates
set at the Company's discretion, higher rates are credited to long-term funds
than to short-term funds, reflecting the fact that higher yields are generally
available on investments of longer maturities. For 1995, the rates of interest
credited ranged from 4.2% to 8.5%.
Approximately one-third of the reserves comprise liabilities that will be
paid within one year, primarily for group life, medical and prepaid health
claims. The remainder primarily includes liabilities for long-term disability
benefits and group life insurance benefits for disabled individuals.
The profitability of medical and dental indemnity and prepaid health care
products is largely dependent upon the accuracy of projections for health care
cost inflation and utilization, the adequacy of fees charged for administration
and risk assumption and, in the case of prepaid health care products, effective
medical cost management. The profitability of other indemnity products depends
on the adequacy of premiums charged relative to claims and expenses.
CIGNA reduces its exposure to large individual and catastrophe losses under
group life, disability and accidental death contracts by purchasing reinsurance
from unaffiliated insurers.
Competition
Group indemnity insurance and prepaid health care businesses are highly
competitive. No one competitor or small number of competitors is dominant across
the country, although in certain locations some HMOs dominate the sales of
traditional prepaid products. A large number of insurance companies and other
entities compete in offering similar products. Competition exists both for
employer-policyholders and for the employees in those instances where the
employer offers the products of more than one company. Most group policies are
subject to Company review and renewal on an annual basis, and policyholders may
seek competitive quotations from several sources prior to renewal.
The principal competitive factors that affect this segment are price;
quality of service; scope, cost-effectiveness and quality of provider networks;
product responsiveness to customers' needs; cost-containment services; and
effectiveness of marketing and sales. Being responsive to the needs of employee-
consumers as well as of employers is important. For certain products with
longer-term liabilities, financial strength of the insurer as indicated by
ratings issued by nationally recognized rating agencies is also a competitive
factor. For more information concerning insurance ratings, see "Ratings" on page
30.
The principal competitors of CIGNA's group insurance and prepaid health
care businesses are the large life and health insurance companies that provide
group insurance, numerous Blue Cross and Blue Shield organizations, stand-alone
HMOs, and HMOs sponsored by major insurance companies and hospitals. Competition
also arises from smaller regional or specialty companies with strength in a
particular geographic area or product line, administrative service firms and
self-insurers.
CIGNA is one of the largest investor-owned insurance company providers of
group life and health indemnity insurance, based on premiums and premium
equivalents, and one of the largest investor-owned HMOs, based on the number of
members. It is the leading provider of group accident insurance, and the second
largest provider of group long-term disability coverages, based on premiums.
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Health Care Reform
Federal and state proposals have been made (and, in some states, adopted)
to achieve some insurance reforms and to require managed care networks to admit
any willing providers and place other limitations on the ability of managed care
companies to form and operate efficient networks of doctors, hospitals and
pharmacies. Multiple layers of regulation would result if the states enacted
legislation different from federal standards. Because reform measures that may
ultimately be adopted are not known, CIGNA cannot predict the effect that health
care reform will have on its business operations.
AIDS
The impact of Acquired Immune Deficiency Syndrome ("AIDS") claims to date
has not been material for CIGNA. However, the U.S. Center for Disease Control
has projected substantial increases in the number of AIDS cases and related
deaths in the general population. If such projected increases occur, they will
result in higher life and health benefits claims. CIGNA anticipates that most
AIDS claims in its Employee Life and Health Benefits business should be
recoverable through the experience-rating process and appropriate rate increases
for guaranteed-cost and prepaid products.
D. Employee Retirement and Savings Benefits
General
CIGNA's Employee Retirement and Savings Benefits businesses provide
investment products and professional services primarily to sponsors of qualified
pension, profit-sharing and retirement savings plans. These products and
services are marketed through CG Life and certain other subsidiaries.
Net earned premiums and fees for, and deposits to, general, separate and
investment advisory accounts for this segment for the year ended December 31
were as follows:
1995 1994 1993
------ ------ ------
(IN MILLIONS)
Premiums and Fees:
General Account:
Guaranteed................................................... $ 113 $ 63 $ 151
Experience-rated............................................. 96 91 99
------ ------ ------
209 154 250
Separate Accounts.............................................. 49 47 46
------ ------ ------
Total Premiums and Fees...................................... $ 258 $ 201 $ 296
======= ======= =======
Deposits:
General Account:
Guaranteed................................................... $ 359 $ 166 $ 102
Experience-rated............................................. 1,492 1,104 1,271
------ ------ ------
1,851 1,270 1,373
Separate Accounts.............................................. 1,576 1,638 1,164
Investment Advisory Accounts................................... 85 61 75
------ ------ ------
Total Deposits............................................... $3,512 $2,969 $2,612
======= ======= =======
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Assets under management for this segment as of December 31 were as follows:
1995 1994 1993
-------- -------- --------
(IN MILLIONS)
General Account(1):
Guaranteed................................................ $ 4,345 $ 3,934 $ 4,259
Experience-rated.......................................... 16,815 16,380 17,281
-------- -------- --------
21,160 20,314 21,540
Separate Accounts........................................... 16,200 12,917 12,301
Investment Advisory Accounts................................ 823 651 628
-------- -------- --------
Total(1)................................................ $ 38,183 $ 33,882 $ 34,469
======== ======== ========
- ---------------
Assets under management include assets managed by third-party managers.
(1) General Account assets under management reflect unrealized appreciation
(depreciation) of $1.0 billion, ($233) million and $521 million as of
December 31, 1995, 1994 and 1993, respectively, as a result of SFAS No. 115.
Principal Products and Markets
CIGNA offers a broad range of products to both defined benefit and defined
contribution pension plans, profit-sharing plans and retirement savings plans.
CIGNA's primary marketing emphasis is on defined contribution plans, which
provide for participant accounts with benefits based upon the value of
contributions to, and investment returns on, the individual's account. This has
been the fastest growing portion of the pension marketplace in recent years.
Defined contribution plan assets amounted to approximately $19.3 billion, or 51%
of assets under management, for this segment as of December 31, 1995, compared
with $16.6 billion, or 49%, as of December 31, 1994. The balance of this
segment's assets under management relate to defined benefit plans, under which
annual retirement benefits are fixed or defined by a benefit formula.
CIGNA sells investment products and investment management services, either
separately or as full-service packages with administrative and other
professional services, to pension plan sponsors. Traditionally, CIGNA's
marketing emphasis has been on sales of full-service products that include
investment management and pension services to small and middle market customers
with plan assets of up to $50 million. In recent years, however, this emphasis
has expanded to include sales to sponsors of larger plans that look to CIGNA to
provide a full-service package or look to more than one entity to provide
actuarial, administrative or investment services and products, or combinations
thereof. For defined contribution plans, principally 401(k) plans, CIGNA markets
products that offer investment management services and plan level and
participant recordkeeping, as well as employee communications, enrollment, plan
design, technological support and other consulting services. For defined benefit
plans, CIGNA offers investment, administrative and professional services,
including recordkeeping, plan documentation, and actuarial valuation and
consulting. Investment management services for CIGNA's defined contribution and
defined benefit products are provided by CIGNA and by third-party managers. In
addition, CIGNA offers single premium annuities, both on guaranteed and
experience-rated bases, and guaranteed investment contracts ("GICs"), which
provide guarantees of principal and interest with a fixed maturity date.
Pension products are supported by the general asset account ("General
Account") and segregated accounts ("Separate Accounts") of CG Life. The General
Account supports both guaranteed and experience-rated contracts. Guaranteed
contracts comprise single premium annuities and GICs. As of December 31, 1995,
guaranteed single premium annuities accounted for $3.0 billion and GICs
accounted for $1.4 billion of General Account assets under management for the
Employee Retirement and Savings Benefits segment, compared with $2.6 billion and
$1.3 billion as of December 31, 1994.
For 1995, the interest rate on reserves for guaranteed single premium
annuities ranged from 3.25% to 12.75%, with a weighted average of 8.71%. The
rate of interest credited in 1995 on CIGNA's GICs ranged from 5.58% to 9.89%,
with a weighted average rate of 8.31%. CIGNA's single premium annuities and GICs
generally do not permit withdrawal by the plan sponsor prior to maturity, except
that GICs permit
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withdrawal at market value in the event of plan termination. None of the GICs
include renewal clauses. Payouts associated with GICs have not been material to
the Company's liquidity or capital resources.
Experience-rated contracts that are supported by the General Account have
no fixed maturity dates and provide for transfer of net investment experience
(including impairments and non-accruals) to policyholders through credited
interest and termination provisions.
Effective January 1, 1996, credited interest rates for pooled
experience-rated defined contribution contracts are declared in advance for six
months and may be changed at the expiration of the six month period. Credited
interest rates on other experience-rated contracts supported by the General
Account are generally declared annually in advance and may be changed
prospectively by the Company from time to time. Credited interest rates reflect
investment income and realized gains and losses. Credited interest rates for
1995 ranged from 6.00% to 9.50%, with a weighted average rate of 7.09%.
The termination provisions of $4.6 billion, or 100%, of the Company's
liability for experience-rated defined benefit contracts supported by the
General Account that are subject to withdrawal, and the termination provisions
of $4.1 billion, or 40%, of the Company's liability for experience-rated defined
contribution contracts supported by the General Account, provide the
policyholder with essentially two options for withdrawal of assets upon election
to terminate: (a) a lump sum at market value; or (b) annual installments. Under
the market value method, the Company determines the market value of the
underlying investments by discounting expected future investment cash flows from
investment income (including the effect of non-accruals) and repayment of
principal, including the effect of impaired assets. The discount rate assumed is
based on current market interest rates. Under the installment method, 100% of
the contractholder book value is paid, usually over not more than 10 years.
Interest is credited over the installment period under a formula derived to pass
investment gains and losses (reflecting non-accruals and impairments) through to
policyholders. Withdrawals under the installment method have not been material
to the Company.
The termination provisions of $6.3 billion, or 60%, of the Company's
liability for experience-rated defined contribution contracts (all of which are
pooled) supported by the General Account contain a book value mechanism for
withdrawal at policyholder termination. Under certain circumstances, payout of
book value is subject to deferral and the rate of interest credited may be
reduced for the recovery of investment losses (including non-accruals and
impairments).
The Separate Accounts allow customers the flexibility to invest in specific
portfolios and participate directly in the investment results. Investment
options include publicly traded bonds, private placement bonds, equities, real
estate, mutual funds and short-term securities. As of December 31, 1995,
approximately $11.5 billion, or 71%, of the assets in the Separate Accounts
support experience-rated contracts under which the risks and benefits of
investment performance generally accrue to the customers, compared to
approximately $8.4 billion, or 65% of assets as of December 31, 1994.
The remaining assets in the Separate Accounts are held under
experience-rated contracts that guarantee a minimum level of benefits. As of
December 31, 1995 and 1994, the amount of minimum benefit guarantees under these
contracts was $4.7 billion and $4.5 billion, respectively. Reserves in addition
to the Separate Account liabilities are established when CIGNA believes a
payment will be required under one of these guarantees. For additional
information, see Note 19 to CIGNA's 1995 Financial Statements.
CIGNA monitors contract termination experience on an ongoing basis. Of
those assets subject to withdrawal, persistency for 1995 and 1994 was 93%,
compared with 94% in 1993.
Distribution
CIGNA's retirement products and services are distributed primarily through
CG Life salaried retirement plan specialists, both directly and through career
agents, independent insurance agents and brokers, pension plan consultants,
investment advisors and other service providers. As of December 31, 1995, CG
Life had a
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field organization consisting of 59 retirement plan specialists and sales
associates and 91 client service representatives and administrative personnel
located in offices across the United States.
Pricing and Reserves
CIGNA establishes reserves for experience-rated contracts in an amount
equivalent to the contractholder funds on deposit with it, including liability
for estimated experience refunds based upon the results of each contract.
Profitability on these contracts is based primarily on margins included in
charges for investment and administrative services and risk assumption. Premiums
and fees for annuity products are based on assumptions as to mortality
experience, investment returns, expenses and target profit margins. For
guaranteed-cost contracts, the reserve established is the present value of
expected future obligations based on these assumptions, with a margin for
adverse deviation. Profitability on guaranteed-cost contracts is affected by the
degree to which future experience deviates from these assumptions.
Competition
The retirement plan marketplace is highly competitive. CIGNA's competitors
include mutual funds, other insurance companies, banks, investment advisors, and
certain service and professional organizations. No one competitor or small
number of competitors is dominant. Competition focuses on service, technology,
cost, variety of investment options, investment performance and insurer
financial strength as indicated by ratings issued by nationally recognized
agencies. For more information concerning insurance ratings, see "Ratings" on
page 30. Business growth, as measured by assets under management, is expected to
continue to be constrained, resulting from decisions by retirement plan sponsors
to diversify assets and fund management.
The largest single retirement plan manager holds less than a 5% market
share, as measured by assets under management. According to a survey published
in "Pensions & Investments," CIGNA ranked 4th among insurers, and 15th among
retirement plan managers overall, in terms of pension and employee retirement
savings plan assets under management.
E. Individual Financial Services
General
CIGNA's Individual Financial Services businesses market a broad range of
insurance and investment products and services to individuals and corporations.
They also assume reinsurance of certain risks under policies written by other
insurance companies.
The following table sets forth the net earned premiums and fees and
deposits for this segment.
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------ ------ ------
(IN MILLIONS)
Premiums and Fees:
Life................................................. $ 584 $ 568 $ 513
Health............................................... 56 55 55
Reinsurance.......................................... 241 201 246
------ ------ ------
Total premiums and fees............................ $ 881 $ 824 $ 814
======= ======= =======
Deposits, primarily for universal life products and
annuities............................................ $3,200 $3,008 $2,506
======= ======= =======
9
12
The following table provides data on sales of new policies and additions to
existing policies, terminations and life insurance in force for this segment,
including assumed reinsurance, and reinsurance ceded to other companies.
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- -------- --------
(DOLLAR AMOUNTS IN MILLIONS EXCEPT
AVERAGE SIZE POLICY IN FORCE)
In force, beginning of the year.................. $ 93,327 $ 81,273 $ 60,749
-------- -------- --------
Sales and Additions(1):
Permanent.................................... 18,186 15,248 23,542
Term......................................... 3,896 4,291 3,744
-------- -------- --------
Total.......................................... 22,082 19,539 27,286
-------- -------- --------
Less Terminations:
Surrenders and conversions................... 1,625 2,068 1,813
Lapses....................................... 2,961 3,352 2,433
Other........................................ 2,287 2,065 2,516
-------- -------- --------
Total.......................................... 6,873 7,485 6,762
-------- -------- --------
In force, end of the year:
Permanent...................................... 88,656 73,028 61,210
Term........................................... 19,880 20,299 20,063
-------- -------- --------
Total(2)..................................... $108,536 $ 93,327 $ 81,273
========= ========= =========
Reinsurance ceded included above................. $ 24,754 $ 15,664 $ 9,721
========= ========= =========
Number of policies in force:
Participating.................................. 149,639 113,382 79,042
Non-participating.............................. 392,507 393,818 403,335
-------- -------- --------
Total........................................ 542,146 507,200 482,377
========= ========= =========
Average size policy in force:
By type:
Participating.................................. $269,450 $256,491 $243,239
========= ========= =========
Non-participating.............................. $173,799 $163,136 $153,835
========= ========= =========
By division:
CIGNA Individual Insurance..................... $215,717 $195,636 $177,056
========= ========= =========
CIGNA Reinsurance: Life, Accident, Health...... $140,254 $142,978 $141,258
========= ========= =========
By segment:
Individual Financial Services.................. $200,200 $184,005 $168,485
========= ========= =========
- ---------------
(1) For 1995, 1994 and 1993, $11 billion, $10 billion and $17 billion of sales
and additions, respectively, were participating, with the remainder
non-participating. For 1995, 1994 and 1993, sales and additions included
assumed reinsurance of $2.4 billion, $3.3 billion and $3.6 billion,
respectively.
(2) For 1995, 1994 and 1993, total life insurance in force for this segment
included assumed reinsurance of approximately $16.4 billion, $16.6 billion
and $16.6 billion, respectively.
Individual Products
CIGNA's individual insurance products include term and permanent life
insurance, annuities and disability insurance. Term life insurance provides
coverage for a stated period and pays a death benefit only if the insured dies
within the period. Permanent life insurance, offered on a participating or
non-participating basis, provides coverage that does not expire after a term of
years and builds a cash value that equals the full
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13
policy amount if the insured is alive on the policy maturity date. In
participating insurance, policyholders directly participate in policy earnings
through dividends. Non-participating insurance does not pay dividends, but
deviations from assumed experience may be reflected in the policyholder's future
premium payments.
Products that provide permanent coverages include whole life, universal
life and variable universal life. Whole life provides fixed benefits and level
premium payments. For universal life and variable universal life, premiums and
benefits fluctuate with the design of the benefits being funded. Universal life
provides benefits that fluctuate with the amount of variable premiums paid,
mortality and expense charges made, and interest credited to the policy.
Variable universal life provides benefits that also fluctuate with the amount of
variable premiums paid and mortality and expense charges made and, in addition,
with the performance of underlying investments.
CIGNA offers both fixed and variable annuity products. Fixed annuities
accumulate value at a fixed rate of interest on the invested payments. Variable
annuities accumulate value at levels determined by the contractholder's
allocation of payments among a portfolio of mutual funds and fixed rate accounts
and the underlying investment performance of the selected funds (less applicable
expense and contract charges). Annuity sales totaled approximately $850 million
in 1995 and $660 million in 1994. CIGNA also markets a number of individual
investment products (including mutual funds) and fee-based financial planning
services.
Principal markets for life insurance products and services sold to
individuals are affluent executives, professionals and small business owners
(typically with income above $100,000 and net worth of $1.5 million or more).
Annuities are generally marketed to upper-middle to affluent customers of banks
and stock brokerage firms and clients of financial advisors.
Individual insurance products are also sold to corporations to provide
coverage on the lives of certain of their employees. Principal markets for
corporate-owned life insurance ("COLI") are Fortune 1000 companies. The market
and sales volume for COLI products tend to be volatile. In addition, future
premium and earnings growth of COLI business on which policy loans are
outstanding, including participating COLI universal life business, will be
affected by tax proposals now pending in Congress that, if enacted, would
eliminate the interest deduction for corporate-owned life insurance policy
loans. Because eventual passage of tax legislation, including the COLI
provision, is likely, the demand for this product essentially ceased in 1995.
While this could have a material adverse effect on the results of operations of
the Individual Financial Services segment, it is not expected to be material to
CIGNA's consolidated results of operations, liquidity or financial condition.
During 1995, 1994 and 1993, the face amount of new sales (as shown in the
preceding table) includes COLI universal life business issued on a participating
basis of approximately $11 billion, $10 billion and $17 billion, respectively.
Changes in permanent sales and in force, reinsurance ceded, and the number and
average size of participating policies are primarily attributable to COLI.
As of December 31, 1995 and 1994, approximately 57% and 63%, respectively,
of CIGNA's individual life insurance in force was non-participating permanent,
which includes interest-sensitive products such as universal life. This change
in business mix resulted from the sale of participating COLI mentioned above.
Interest credited on whole life products is equal to or above a minimum
guaranteed rate. For interest-sensitive products, credited interest rates vary
with the characteristics of each product and the anticipated investment results
of the assets backing these products. Where credited interest exceeds the
guaranteed rate, the excess is used to purchase additional insurance or increase
cash values. Credited interest rates on interest-sensitive products for 1995
ranged from 5.0% to 8.3%.
Interest rates for policy loans on individual life insurance products are
defined in the contract and are either variable or fixed. Variable interest
rates are tied to an external index and may be subject to a specified minimum
rate. The interest rates charged to the policyholder on borrowed funds ("loan
rates") are generally greater than the interest rates credited to the
policyholder on those funds, and such loan rates and the related credited
interest rates tend to move in tandem as interest rates fluctuate. A large
portion of the contracts that provide for fixed rates also provide for a
relatively constant spread between the policy loan rate and the related credited
interest rate.
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14
Most individual life insurance products have surrender charges to recover
policy acquisition costs and to encourage persistency. Persistency for these
products was approximately 95% in 1995, 1994 and 1993.
Reinsurance Products
Reinsurance products sold through this segment include coverages for part
or all of the risks under policies written by other insurance companies for
group life and health, individual life and health, and special risks, such as
personal accident and workers' compensation catastrophe coverages. The principal
markets for these products are individual and group life, accident and health
insurers; special risk and workers' compensation units of property-casualty
insurers; companies that offer immediate and deferred annuities; health care
providers; managing general underwriters of healthcare; and self-insured
employers.
Reinsurance coverages generally extend for the same duration as the
underlying direct policies: from one year or less for group, special risk and
individual life term policies, to time of lapse or expiration at death for
permanent individual life and individual health policies. Most permanent
reinsurance coverages have recapture charges to recover policy acquisition costs
and to encourage persistency.
Distribution
As of December 31, 1995, CG Life sold individual insurance products
primarily through approximately 650 full-time career agents and through
independent agents and brokers. COLI products are sold primarily through a
limited number of brokers. The volume of COLI business from each of the brokers
with whom CIGNA has a relationship tends to fluctuate over time. Investment
products are sold through the career agents, who are also registered
representatives of a CIGNA broker-dealer. Annuities are distributed through
stockbrokers and banks as well as through career agents.
Reinsurance products are sold in the United States, Canada, Europe and
Latin America through a small sales force and through domestic and foreign
intermediaries.
Pricing, Reserves and Reinsurance
Premiums for life and disability insurance, annuities and assumed
reinsurance are based on assumptions about mortality, morbidity, persistency,
expenses and target profit margins as well as interest rates and competitive
considerations. The long-term profitability of individual products is affected
by the degree to which future experience deviates from these assumptions. Fees
for universal life insurance products consist of mortality, administrative and
surrender charges assessed against the policyholder's fund balance. Interest
credited and mortality charges for universal life, and mortality charges on
variable premium products, may be adjusted prospectively to reflect expected
interest and mortality experience. Dividends on participating insurance products
may be adjusted to reflect prior experience.
For individual disability, annuity, traditional and variable premium life
insurance, and individual life and health reinsurance in force, CIGNA
establishes policy reserves that reflect the present value of expected future
obligations less the present value of expected future premiums. For universal
life insurance, CIGNA establishes reserves for deposits received and interest
credited to the policyholder, less mortality and administrative charges assessed
against the policyholder's fund balance. In addition, for all individual and
reinsurance products, CIGNA establishes claim reserves for claims received but
not yet paid, based on the amount of the claim received, and for claims incurred
but not reported, based on prior claim experience.
CIGNA maintains a variety of ceded reinsurance agreements with
non-affiliated insurers to limit its exposure to large life and health losses
and to multiple losses arising out of a single occurrence. Although such
reinsurance does not discharge CIGNA from its obligations on insured risks,
CIGNA's exposure to losses is reduced by the amount of reinsurance ceded,
provided that reinsurers meet their obligations.
12
15
Competition
The individual insurance, annuity and investment businesses are highly
competitive. No one competitor or small number of competitors dominates. More
than 1,000 domestic life insurance companies may offer one or more individual
insurance and annuity products, and approximately 40 companies may offer one or
more reinsurance products, similar to those offered by CIGNA. In addition, some
of CIGNA's individual financial businesses compete with non-insurance
organizations, including commercial and savings banks, investment advisory
services, investment companies and securities brokers. Competition focuses on
product, service, price, distribution method and the financial strength of the
insurer as indicated by ratings issued by nationally recognized agencies. For
more information concerning insurance ratings, see "Ratings" on page 30. CIGNA
has benefited competitively from CG Life's financial strength and stability and
from the quality of its distribution systems.
The COLI marketplace is also highly competitive. The Company principally
competes with approximately half of the 25 largest domestic life insurance
companies that may offer one or more COLI products. Competition in this market
focuses primarily on product design, underwriting, price, administrative
servicing capabilities and insurer financial strength, as indicated by ratings
issued by nationally recognized agencies.
Based on information published by A.M. Best, CG Life was the 21st largest
U.S. individual life insurer in terms of aggregate individual life insurance in
force and the 6th largest in terms of direct premiums.
Other Matters
CIGNA does not expect AIDS claims, discussed on page six, to have a
significant effect on the results of operations of this segment. Where
appropriate, and to the extent permissible under applicable law, CIGNA tests for
AIDS antibodies and considers AIDS information in underwriting coverages and
setting rates.
F. Property and Casualty
Principal Products and Markets
CIGNA's property and casualty operations provide insurance in the United
States and international markets. CIGNA provides insurance coverage under
standard risk transfer arrangements and provides coverages and services for
customers who wish to increase their levels of risk retention or to self-insure.
In the domestic market, which produced approximately 40% of the total
earned premiums and fees for this segment during 1995, principal product lines
include workers' compensation, commercial packages, casualty (including
commercial automobile and general liability), property, and marine and aviation.
See page 14 for the geographic distribution of premiums and fees for the
products of this segment.
In 1995, CIGNA restructured its domestic property and casualty businesses
into two separate operations. One operation manages ongoing business and the
other run-off policies and related claims, including those for asbestos-related
and environmental pollution exposures. The restructuring is designed to create
business structures that enhance management's focus on its specialist strategy,
positioning the ongoing business for future profitable growth, while at the same
time providing dedicated, specialized resources to manage each operation
separately and effectively. In connection with the restructuring, CIGNA
contributed $375 million of additional capital to the run-off operations and the
ongoing operations will contribute an additional $50 million by December 31,
2001. In addition, the ongoing operations assumed $125 million of liabilities of
the run-off operations, and will reinsure up to $800 million of claims of the
run-off operations in the unlikely event that the statutory capital and surplus
of the run-off operations falls below $25 million. By making these financial
commitments and placing substantially all exposures associated with the run-off
businesses in a legal entity separate from the ongoing operations, CIGNA
enhanced the claims paying rating for its ongoing operations.
In the ongoing domestic operations, CIGNA continued to implement its
specialist strategy, which has contributed to improved operating results. In the
specialty market, CIGNA is focusing on aviation,
13
16
recreational and ocean marine, property coverage placed through mortgage
lenders, homeowners and other programs in which specialist agents and brokers
share underwriting and processing expertise with CIGNA. In the medium-sized risk
market, CIGNA is targeting individual risks, and increasing production of group
business, such as through affinity groups, associations and national broker
blocks of business. In addition, CIGNA is focusing on writings of inland marine
and workers' compensation business that involves standard risk transfer in
states with regulatory climates in which the Company believes it can operate
profitably. In the large-risk market, CIGNA continues to emphasize sales of
complex, loss-sensitive casualty coverages to customers choosing to increase
their risk retention; petroleum, technical and general property coverages to
large insureds; and claims, loss control and other risk management services.
CIGNA's domestic subsidiaries are members of, or participate in, various
voluntary associations and syndicates that facilitate the underwriting of large
or highly concentrated risks. The associations distribute the risks assumed
among the members, provide specialized inspection and engineering services and
may use special forms of coverage to control overall exposures. Regulatory
authorities also require the participation of CIGNA's domestic subsidiaries in
various joint underwriting authorities, pools and other arrangements created to
provide insurance coverage to the residual market, including workers'
compensation pools.
International markets, which produced 60% of the total earned premiums and
fees for this segment during 1995, include Japan, the United Kingdom,
Continental Europe, the Americas and other Pacific. Principal international
product lines include commercial property and casualty, accident and health,
life and employee benefits, auto, marine and other specialty lines.
CIGNA generally attempts to protect itself from economic loss arising from
foreign exchange exposure in its international operations by maintaining
invested assets abroad that are currency matched in support of its foreign
obligations. For information on the effect of foreign exchange exposure on
CIGNA, see Notes 2(Q) and 14 to CIGNA's 1995 Financial Statements.
The following table sets forth geographic distribution of GAAP net earned
premiums and fees for the products of this segment. Premiums and fees for
businesses in run-off are included in the table.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993
---------------- ---------------- ----------------
(DOLLAR AMOUNTS IN MILLIONS)
Domestic:
California.................................... $ 280 6% $ 372 7% $ 408 8%
New York...................................... 168 4 207 4 287 6
New Jersey.................................... 161 3 219 4 252 5
Texas......................................... 157 3 208 4 233 5
Pennsylvania.................................. 97 2 122 3 205 4
Florida....................................... 95 2 128 3 154 3
Illinois...................................... 76 2 100 2 115 2
Massachusetts................................. 75 2 99 2 122 2
All other..................................... 744 16 982 19 1,088 21
------ ---- ------ ---- ------ ----
Total Domestic.............................. $1,853 40% $2,437 48% $2,864 56%
------ ---- ------ ---- ------ ----
International:
Japan......................................... 1,146 25 989 20 810 16
United Kingdom................................ 504 11 468 9 412 8
Continental Europe............................ 395 8 417 8 463 9
Americas...................................... 329 7 288 6 254 5
Other Pacific................................. 306 7 276 6 229 4
All other..................................... 107 2 168 3 104 2
------ ---- ------ ---- ------ ----
Total International......................... $2,787 60% $2,606 52% $2,272 44%
------ ---- ------ ---- ------ ----
Total....................................... $4,640 100% $5,043 100% $5,136 100%
======= ==== ======= ==== ======= ====
- ---------------
For 1995, 1994 and 1993, earned premiums and fees were substantially the same as
written premiums.
14
17
Pricing and Underwriting Results
CIGNA's property and casualty insurance subsidiaries provide loss
protection to insureds in exchange for premiums. If earned premiums exceed the
sum of losses, commissions to agents or brokers, other operating expenses and
policyholders' dividends, underwriting profits are realized. The "combined
ratio" is a frequently used measure of property and casualty underwriting
performance. On a GAAP basis, this ratio is the sum of (i) the ratio of incurred
losses and associated loss expenses to earned premiums (the "loss and loss
expense ratio"), (ii) the ratio of expenses incurred for sales commissions,
premium taxes, administrative and other operating expenses to earned premiums
(the "expense ratio") and (iii) the ratio of policyholders' dividends to earned
premiums (the "policyholder dividend ratio"), each of these three ratios being
expressed as a percentage. The statutory combined ratio differs from the GAAP
ratio primarily in that the expense ratio and the policyholder dividend ratio
are calculated as a percent of written premiums, rather than earned premiums.
When the combined ratio is over 100%, underwriting results are not profitable.
The GAAP combined ratios for CIGNA's property and casualty product lines and
total property and casualty operations are shown in the table on page 16.
Because time normally elapses between the receipt of premiums and the
payment of claims and certain related expenses, funds become available for
investment by CIGNA. The combined ratio does not reflect investment income from
these funds, investment gains and losses, results of non-insurance business, or
federal income taxes. Such items, when added to underwriting profits or losses,
produce net income or loss. For information concerning investment income, see
"Investments and Investment Income -- Property and Casualty Investments" on
pages 27 and 28.
15
18
The following tables set forth GAAP net earned premiums and fees,
underwriting results, combined ratios and net investment income for the domestic
and international products of this segment (including those in run-off).
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993
---------------- ---------------- ----------------
(DOLLAR AMOUNTS IN MILLIONS)
Premiums and Fees/Percent of Total Premiums and Fees:
Domestic Lines:
Workers' compensation............................ $ 473 10 % $ 578 11 % $ 710 14 %
Commercial packages.............................. 292 6 456 9 611 12
Casualty......................................... 275 6 455 9 457 9
Property......................................... 334 7 338 7 338 7
Marine and aviation.............................. 238 5 195 4 181 3
Homeowners....................................... 78 2 86 2 102 2
Other(1)......................................... 123 3 206 4 223 4
------- ----- ------- ----- ------- -----
Total.......................................... 1,813 39 2,314 46 2,622 51
International Lines (excluding international
reinsurance):
Accident and health.............................. 626 14 528 10 461 9
Property......................................... 515 11 441 9 372 7
Casualty......................................... 252 5 231 4 203 4
Auto............................................. 244 6 233 5 203 4
Marine........................................... 151 3 152 3 152 3
Other............................................ 9 -- 5 -- 8 --
------- ----- ------- ----- ------- -----
Total.......................................... 1,797 39 1,590 31 1,399 27
Reinsurance (including international
reinsurance)..................................... 119 2 343 7 443 9
International life and employee benefits........... 911 20 796 16 672 13
------- ----- ------- ----- ------- -----
Total Premiums and Fees..................... $ 4,640 100 % $ 5,043 100 % $ 5,136 100 %
======== ====== ======== ====== ======== ======
Underwriting Gain (Loss)/Combined Ratios:
Domestic Lines:
Workers' compensation............................ $ (179) 137.8% $ (139) 123.9% $ (180) 125.3%
Commercial packages.............................. (82) 128.3 (196) 143.1 (255) 141.8
Casualty......................................... (107) 139.0 (120) 126.5 (265) 157.9
Property......................................... (16) 104.7 (51) 115.0 (108) 132.0
Marine and aviation.............................. -- 100.1 (16) 108.2 (30) 116.9
Homeowners....................................... (17) 121.3 (30) 135.2 (14) 113.9
Other(1)......................................... (22) 117.8 (92) 144.9 (69) 131.0
------- ------- -------
Total.......................................... (423) 123.3 (644) 127.8 (921) 135.1
International Lines (excluding international
reinsurance):
Accident and health.............................. 41 93.4 40 92.4 23 95.1
Property......................................... 73 85.8 1 99.9 (54) 114.5
Casualty......................................... 16 93.8 -- 99.9 (2) 101.0
Auto............................................. (6) 102.4 (12) 105.2 (26) 113.0
Marine........................................... -- 99.7 3 98.3 (8) 105.1
Other............................................ (17) 311.1 -- 94.8 1 85.5
------- ------- -------
Total.......................................... 107 94.0 32 98.0 (66) 104.8
Reinsurance (including international
reinsurance)..................................... (133) 211.1 (128) 137.2 (126) 128.2
------- ------- -------
Underwriting loss after policyholders'
dividends-operations............................. (449) 112.0 (740) 117.4 (1,113) 124.9
Asbestos and environmental losses(2)............... (1,210) 32.5 (275) 6.5 (565) 12.7
------- ------- -------
Underwriting Loss/Combined Ratio:
After Policyholders' Dividends.......... $(1,659) 144.5 $(1,015) 123.9 $(1,678) 137.6
======== ======== ========
Before Policyholders' Dividends......... $(1,603) 143.0 $ (925) 121.8 $(1,548) 134.7
======== ======== ========
Net investment income, pre-tax:
Domestic........................................... $ 478 $ 483 $ 496
International...................................... 251 207 186
Reinsurance........................................ 65 66 71
------- ------- -------
Total.......................................... $ 794 $ 756 $ 753
======== ======== ========
- ---------------
(1) Includes premiums and fees of $78 million, $125 million and $129 million for
the domestic personal automobile line that is being run off. Underwriting
results for this line were breakeven in 1995, compared with losses of ($62)
million and ($64) million for 1994 and 1993, respectively. The combined
ratio for 1995, 1994 and 1993 was 100.0%, 149.7% and 149.9%, respectively.
(2) Combined ratio amount represents the effect on GAAP combined ratio.
Asbestos-related and environmental pollution losses for 1995 include a third
quarter net reserve strengthening of $1.1 billion.
16
19
Competition
The principal competitive factors that affect the property and casualty
products of this segment are (i) pricing; (ii) underwriting; (iii) quality of
claims and policyholder services; (iv) operating efficiencies; and (v) product
differentiation and availability. In the highly competitive environment of the
past several years, CIGNA has reduced its premium volume in some lines rather
than maintain business at inadequate prices, and its share of domestic markets
has declined. Internationally, growth in profitable lines has offset reductions
in unprofitable lines. Competition has intensified due to increased capacity in
the insurance market resulting from growing capital supporting the industry.
Perception of financial strength, as reflected in the ratings assigned to
an insurance company, especially by A.M. Best, is also a factor in the Company's
competitive position. In early 1996, A.M. Best affirmed the ratings of A- for
the domestic ongoing operations and B+ for the domestic run-off operations.
These ratings reflect the restructuring of the domestic businesses into two
separate operations and the related financial commitments described on page 13
as well as the reserve strengthening for asbestos-related and environmental
pollution claims and reinsurance exposures described on pages 15 and 16 of the
MD&A section of CIGNA's 1995 Annual Report. For more information concerning
insurance ratings, see "Ratings" on page 30.
In the United States, property and casualty insurance can be obtained
through national and regional companies that use an agency distribution system,
direct writers (who may have an employed agency force) or brokers, or through
self-insurance, including the use by corporations of subsidiary captive
insurers. Approximately 3,300 companies compete for this business in the United
States and no single company or group of affiliated companies is dominant. In
1995 and 1994, CIGNA's domestic property and casualty statutory net written
premiums amounted to approximately 0.7% and 0.9%, respectively, of the total
market.
CIGNA pursues a specialist strategy in both its domestic and international
property and casualty businesses and focuses on those market segments where it
can compete effectively based on service levels and product design, and achieve
an adequate level of profitability. Internationally, CIGNA competes directly
with foreign insurance companies as well as with other U.S.-based companies.
Based on information published by A.M. Best, CIGNA's domestic property and
casualty insurance subsidiaries rank 24th in annual net premiums written. CIGNA
is the eighth largest U.S. writer of commercial multi-peril coverages, 12th
largest of workers' compensation coverages and 19th largest of commercial auto
coverages. Based on revenues, CIGNA's international operations are the second
largest U.S.-based provider of international insurance products and services.
Distribution
In the United States, CIGNA markets its insurance products principally
through independent agents and brokers. In the medium-sized risk market, CIGNA
has reduced the number of agents through which it markets its products to focus
on those producers who historically have provided more profitable business, to
better pursue its specialist strategy and to reduce expenses associated with
writing the business. In addition, CIGNA has increased the use of brokers in an
effort to generate more business from medium-sized risks. In the large risk
market, CIGNA distributes its products primarily through national and regional
brokers.
In the international marketplace, property and casualty coverage is sold
primarily through brokers. A network of offices in about 45 jurisdictions
provides claims and account services to international customers and brokers.
Life, accident and health insurance products are sold in the international
marketplace through approximately 7,000 brokers and agents.
Ceded Reinsurance
To protect against losses greater than the amount that it is willing to
retain on any one risk or event, CIGNA purchases reinsurance from unaffiliated
insurance companies. The Company is not substantially dependent upon any single
reinsurer. The Company's largest aggregation of reinsurance recoverables as of
December 31, 1995 and 1994, at approximately 8% and 9%, respectively, was with
more than 100 syndicates affiliated with Lloyd's of London. Approximately 29% of
CIGNA's reinsurance recoverables as of December 31, 1995 relate to pools and
captives, under which CIGNA's assets are generally protected
17
20
through future industry assessments or by some form of collateral. In addition,
18% relate to international direct and reinsurance operations (excluding
recoverables with Lloyd's that relate to international operations). Of the
remaining recoverables, which relate primarily to domestic operations, 86%
relate to individual reinsurers that carry a very good or higher financial
rating from an independent rating agency. A significant portion of the
international and remaining domestic recoverables are due from reinsurers that
meet CIGNA's internal security standards and selection criteria, as described in
the following paragraph. Although reinsurance does not discharge CIGNA from its
obligations on insured risks, CIGNA's exposure to losses is reduced by the
amount ceded, and thus will be limited to the amount of risk retained, provided
that reinsurers meet their obligations.
The collectibility of reinsurance is largely a function of the solvency of
reinsurers. CIGNA cedes risk to reinsurers who meet certain financial security
standards and monitors their quality and financial condition. In its selection
and monitoring process, CIGNA examines its reinsurers' financial performance and
reserve adequacy; considers factors such as the quality of their management; and
considers ratings and reviews of them by independent sources. When deemed
appropriate, CIGNA seeks collateral from reinsurers; reassumes, in return for a
settlement, risks for which it had previously purchased reinsurance; and
establishes allowances for potentially unrecoverable reinsurance. Reinsurance
disputes can delay recovery of reinsurance and, in some cases, affect its
collectibility. Reinsurance disputes have increased in recent years,
particularly on larger and more complex claims such as those related to
professional liability, asbestos and London reinsurance exposures. Reinsurance
disputes may increase in the future, and are likely to include disputes related
to environmental pollution.
As of December 31, 1995, approximately 88% of CIGNA's reinsurance
recoverable balance relates to unpaid reported claims and incurred but not
reported claims, and the remaining 12% relates to paid losses. The timing and
collectibility of reinsurance recoverables have not had, and are not expected to
have, a material adverse effect on CIGNA's liquidity.
CIGNA's allowance for unrecoverable reinsurance was $700 million and $435
million at December 31, 1995 and 1994, respectively. Losses from unrecoverable
reinsurance were $273 million, $42 million and $28 million for 1995, 1994 and
1993, respectively, including losses from unrecoverable reinsurance related to
asbestos and environmental pollution losses of $94 million and $13 million for
1995 and 1994, respectively. In addition, losses from unrecoverable reinsurance
in 1995 included, for other than amounts related to asbestos and environmental
pollution, $135 million resulting from the reserve review and strengthening
recorded in the third quarter. Additional losses from unrecoverable reinsurance
may materially affect CIGNA's future results, although the amounts and timing
cannot be reasonably estimated. For additional information on reinsurance,
including on CIGNA's property catastrophe reinsurance program, see pages 14
through 17 of the MD&A section and Notes 16 and 17 of CIGNA's 1995 Annual
Report.
Reserves
General
Significant periods of time may elapse between the occurrence of an insured
loss, the reporting of the loss to the insurer and the insurer's payment of that
loss. To recognize liabilities for unpaid losses, insurers establish "reserves,"
which are liabilities representing estimates of future amounts needed to pay
claims and related expenses with respect to insured events that have occurred,
including events that have not been reported to the insurer.
After a claim is reported, except for a class of very small claims that
typically are settled quickly, a "case reserve" is established by claims
personnel for the estimated amount of the ultimate payment. The estimate
reflects the informed judgment of such personnel, based on their experience and
knowledge regarding the nature and value of the specific claim. Claims personnel
review and update their estimates as additional information becomes available
and claims proceed toward resolution.
18
21
"Bulk reserves" are established on an aggregate basis (i) to provide for
losses incurred but not yet reported to and recorded by the insurer; (ii) to
provide for the estimated expenses of settling claims, including legal and other
fees and general expenses of administering the claims adjustment process; and
(iii) to adjust for the fact that, in the aggregate, case reserves may not
accurately estimate the ultimate liability for reported claims. As part of the
bulk reserving process, CIGNA's historical claims data and other information are
reviewed and consideration is given to the anticipated impact of various factors
such as legal developments, economic conditions and changes in social attitudes.
Insurance industry experience is also considered.
The reserving process relies on the basic assumption that past experience
is an appropriate basis for predicting future events. The probable effects of
current developments, trends and other relevant matters are also considered.
Because the eventual deficiency or redundancy of reserves is affected by many
factors, some of which are interdependent, there is no precise method for
evaluating the adequacy of the consideration given to inflation or to any other
specific factor affecting claims payments. However, the reserving process
provides implicit recognition of the impact of inflation and other factors by
taking into account changes in historic claims reporting and payment patterns. A
number of analytical reserving techniques are used, which often yield differing
results. Accordingly, estimating future claims costs is a complex and uncertain
process. Because available claims data and other information are rarely
definitive, the evaluation of such data's implications with respect to future
losses requires the use of informed estimates and judgments.
CIGNA continually attempts to improve its loss estimation process by
refining its ability to analyze loss development patterns, claims payments and
other information, but there remain many reasons for adverse development of
estimated ultimate liabilities. For example, the uncertainties inherent in the
loss estimation process have grown because of changes in social and legal trends
that expand the liability of insureds, establish new liabilities and reinterpret
insurance contracts long after the policies were written to provide coverage
unanticipated by CIGNA. Such changes from past experience significantly affect
the ability of insurers to estimate liabilities for unpaid losses and related
expenses.
CIGNA changed its methodology for estimating asbestos-related and
environmental pollution reserves in the third quarter of 1995, as discussed on
pages 15 and 16 of the MD&A section of CIGNA's 1995 Annual Report. CIGNA's
reserves for asbestos-related and environmental pollution claims are a
reasonable estimate of its ultimate liability for these claims, based on
currently known facts, reasonable assumptions where the facts are not known,
current law and methodologies currently available.
Reserving for all property and casualty claims continues to be a complex
and uncertain process, requiring the use of informed estimates and judgments. As
additional experience and other data become available and are reviewed or, in
the case of asbestos-related and environmental pollution reserves, as new or
improved methodologies are developed or as current law changes, CIGNA's
estimates and judgments may be revised. Any such revisions could result in
future changes in estimates of losses 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 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.
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22
Prior Year Development
The adverse pre-tax effects, net of reinsurance, during 1995, 1994 and 1993
on CIGNA's results of operations from insured events of prior years (prior year
development) were $1.5 billion, $538 million and $789 million, respectively. Of
the prior year loss development during 1995, 81% was attributable to
asbestos-related and environmental pollution claims. Prior year development is
discussed on pages 15 and 16 of the MD&A section of CIGNA's 1995 Annual Report.
Reserve changes for asbestos-related claims before ("Gross") and after
("Net") the effects of reinsurance for the periods indicated were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
--------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
------ ------ ----- ----- ----- -----
(IN MILLIONS)
Asbestos Bodily Injury Claims:
Beginning reserves............................ $ 500 $ 213 $ 564 $ 216 $ 486 $ 166
Plus incurred claims and claim adjustment
expenses.................................... 226 194 49 48 186 111
Less payments for claims and claim adjustment
expenses.................................... (135) (73) (113) (51) (108) (61)
---- ---- ---- ---- ---- ----
Ending reserves............................... $ 591 $ 334 $ 500 $ 213 $ 564 $ 216
==== ==== ==== ==== ==== ====
Asbestos-in-Building Claims:
Beginning reserves............................ $ 94 $ 68 $ 168 $ 97 $ 70 $ 47
Plus incurred claims and claim adjustment
expenses.................................... 72 61 15 12 117 60
Less payments for claims and claim adjustment
expenses.................................... (8) (6) (89) (41) (19) (10)
---- ---- ---- ---- ---- ----
Ending reserves............................... $ 158 $ 123 $ 94 $ 68 $ 168 $ 97
==== ==== ==== ==== ==== ====
Total asbestos incurred claims and claim adjustment expenses for 1995
include the establishment of reserves of $255 million ($194 million, net of
reinsurance) related to CIGNA's comprehensive reserve review completed in the
third quarter of 1995. Incurred claims and claim adjustment expenses for 1993
include the establishment of reserves of $106 million ($72 million, net of
reinsurance) for future legal and associated expenses for reported claims.
Reserve changes for environmental pollution claims before ("Gross") and
after ("Net") the effects of reinsurance for the periods indicated were as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
--------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
------ ------ ----- ----- ----- -----
(IN MILLIONS)
Environmental Pollution Claims:
Beginning reserves............................ $ 707 $ 542 $ 593 $ 430 $ 252 $ 148
Plus incurred claims and claim adjustment
expenses.................................... 1,265 955 280 215 482 394
Less payments for claims and claim adjustment
expenses.................................... (307) (229) (166) (103) (141) (112)
---- ---- ---- ---- ---- ----
Ending reserves............................... $1,665 $1,268 $ 707 $ 542 $ 593 $ 430
==== ==== ==== ==== ==== ====
Incurred claims and claim adjustment expenses for 1995 include the
establishment of reserves of $1.2 billion ($861 million, net of reinsurance)
related to CIGNA's comprehensive reserve review completed in the third quarter
of 1995. Incurred claims and claim adjustment expenses for 1993 include the
establishment of reserves of $335 million ($268 million, net of reinsurance) for
future legal and associated expenses for reported claims.
20
23
Reserves for environmental pollution claims and related incurred expense
and payment activity include internal costs to manage such claims and disputes
with policyholders over insurance coverage issues as well as external
litigation-related costs for such disputes. Payments associated with disputed
coverage issues will decline in the future, and eventually end, as the disputes
or related issues are resolved. To present CIGNA's environmental pollution
reserves and related activity that more directly relates to indemnity costs and
costs to defend policyholders against environmental pollution claims, the
following table excludes internal costs and external litigation-related costs
for insurance coverage disputes.
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993
--------------- ------------ ------------
GROSS NET GROSS NET GROSS NET
------ ------ ----- ---- ----- ----
(IN MILLIONS)
Beginning reserves............................... $ 558 $ 397 $ 444 $285 $ 252 $148
Plus incurred claims and claim adjustment
expenses....................................... 1,144 836 207 142 295 211
Less payments for claims and claim adjustment
expenses....................................... (234) (158) (93) (30) (103) (74)
---- ---- ---- ---- ---- ----
Ending reserves.................................. $1,468 $1,075 $ 558 $397 $ 444 $285
==== ==== ==== ==== ==== ====
Since the mid-1980s, when CIGNA established a separate unit to handle its
asbestos-related and environmental pollution claims, it has followed an
aggressive resolution strategy for these claims. When appropriate, CIGNA has
settled claims with its policyholders, often obtaining full policy releases.
While CIGNA believes that its ultimate asbestos-related and environmental
pollution exposure has been reduced by this strategy, it also has resulted in
accelerating the recognition of incurred and paid claims and claim adjustment
expenses. A significant portion of the payments shown in the above table for
1995 are due to substantial settlements made pursuant to CIGNA's aggressive
resolution strategy. Paid asbestos-related and environmental pollution claims
are expected to continue to be significant for the foreseeable future, but will
vary depending on the level of settlement activity.
The principal federal statute that requires cleanup of environmental damage
is the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund"), passed in 1980. It imposes liability on "Potentially Responsible
Parties" ("PRPs"), subjecting them to liability for cleanup costs regardless of
fault, time period and relative contribution of pollutants. The tax authority of
Superfund expired in 1995, and proposals to change the law's method of
allocating responsibility for, or funding, cleanup are pending before Congress.
Any such changes could affect the liabilities of policyholders and insurers. Due
to uncertainties associated with the timing and content of any future Superfund
legislation, CIGNA is not able to determine what effect, if any, such
legislation would have on its results of operations, liquidity or financial
condition.
A reconciliation of total beginning and ending reserve balances of the
Property and Casualty segment for unpaid claims and claim adjustment expenses
for the years ended December 31, 1995, 1994 and 1993 is provided in Note 17 to
CIGNA's 1995 Annual Report.
The table on page 22 presents the subsequent development of the estimated
year-end property and casualty reserve, net of reinsurance ("net reserve") for
the 10 years prior to 1995. The first section of the table shows the estimated
net reserve that was recorded at the end of each of the indicated years for all
current and prior year unpaid claims and claim adjustment expenses. The second
section shows the cumulative percentages of such previously recorded net reserve
paid in succeeding years. The third section shows, as a percentage of such net
reserve, the re-estimates of the net reserve made in each succeeding year.
The cumulative deficiency as shown in the table represents the aggregate
change in the reserve estimates from the original balance sheet dates through
1995; an increase in a loss estimate that related to a prior year occurrence
generates a deficiency in each intervening year. For example, a deficiency
recognized in 1994 relating to losses incurred in 1987 would be included in the
cumulative deficiency amount for the years 1987 through 1993. Yet, the
deficiency would be reflected in operating results in 1994 only.
21
24
Conditions and trends that have affected the reserve development reflected
in the table may continue to change, and care should be exercised in
extrapolating future reserve redundancies or deficiencies from such development.
Historically, asbestos-related and environmental pollution losses have had a
significant effect on the net cumulative deficiency.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------- ------- ------- ------- ------- -------
(DOLLAR AMOUNTS IN MILLIONS)
Net reserve for unpaid claims and
claim adjustment expenses........ $7,299 $8,074 $8,832 $9,414 $9,789 $10,196 $10,272 $10,562 $10,660 $10,635 $11,159
====== ====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Cumulative percentage of net
reserve paid through:
One year later................. 30.5% 30.9% 30.2% 31.1% 34.3% 33.8% 34.0% 28.9% 24.7% 22.5%
Two years later................ 51.2 50.0 49.5 52.7 54.3 53.9 53.6 45.9 40.4
Three years later.............. 66.8 65.2 65.7 67.7 69.4 68.6 66.8 58.7
Four years later............... 79.5 78.8 77.0 78.9 80.8 78.9 77.3
Five years later............... 90.4 88.4 84.7 88.0 88.6 86.8
Six years later................ 99.1 95.1 92.8 94.4 95.4
Seven years later.............. 105.4 102.9 98.5 100.4
Eight years later.............. 112.9 108.3 104.4
Nine years later............... 118.2 114.5
Ten years later................ 124.8
Net reserve (percentage)
re-estimated as of:
One year later................. 101.7% 103.3% 102.6% 103.0% 103.1% 103.4% 106.4% 107.5% 105.0% 114.1%
Two years later................ 108.8 106.2 105.0 105.8 106.9 107.4 115.4 113.5 119.7
Three years later.............. 111.8 110.0 107.9 109.7 109.6 116.9 122.5 128.2
Four years later............... 116.2 114.8 111.3 112.3 119.5 123.5 138.9
Five years later............... 122.4 118.8 114.0 121.9 125.7 140.1
Six years later................ 126.7 122.1 123.9 127.9 142.9
Seven years later.............. 130.9 132.5 129.6 144.5
Eight years later.............. 142.1 138.1 146.6
Nine years later............... 148.1 156.7
Ten years later................ 167.8
Net cumulative deficiency: $4,946 $4,575 $4,115 $4,192 $4,199 $ 4,092 $ 4,000 $ 2,982 $ 2,095 $ 1,498
Gross reserve--December 31........ $17,926 $17,764 $16,825 $17,023
Less: Reinsurance recoverable..... 7,364 7,104 6,190 5,864
------- ------- ------- -------
Net reserve--December 31.......... $10,562 $10,660 $10,635 $11,159
======= ======= ======= =======
Gross re-estimated reserve........ $21,484 $19,979 $18,468
Less: Re-estimated reinsurance
recoverable...................... 7,940 7,224 6,335
------- ------- -------
Net re-estimated reserve.......... $13,544 $12,755 $12,133
======= ======= =======
Gross cumulative deficiency....... $ 3,558 $ 2,215 $ 1,643
======= ======= =======
For additional information about gross loss development, amounts ceded to
reinsurers and net loss development, see pages 14 through 17 of the MD&A section
of CIGNA's 1995 Annual Report. On a GAAP basis, which is before the effects of
reinsurance, CIGNA's 1995 year-end reserves totaled $17.0 billion. For GAAP
purposes, CIGNA's reserves are generally carried at the full value of the
estimated liabilities. For state regulatory purposes, reserves are reported in
accordance with statutory accounting procedures ("SAP"), which is net of the
effects of reinsurance, and, on that basis, totaled $9.7 billion.
22
25
The following table reconciles, as of year end, liabilities for unpaid
claims and claim adjustment expenses determined for state regulatory purposes in
accordance with SAP to those determined in accordance with GAAP:
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS)
Statutory reserve for unpaid claims and claim adjustment expenses,
net of reinsurance................................................ $ 9,704 $ 9,643 $ 9,700
Adjustments:
Statutory Reinsurance Recoverable................................. 5,384 5,764 6,584
Discounting of Gross Reserves(1).................................. 1,935 1,418 1,480
-------- -------- --------
GAAP reserve for unpaid claims and claim adjustment expenses........ 17,023 16,825 17,764
Less GAAP Reinsurance Recoverable................................... 5,864 6,190 7,104
-------- -------- --------
GAAP reserve for unpaid claims and claim adjustment expenses,
net of reinsurance................................................ $ 11,159 $ 10,635 $ 10,660
======== ======== ========
- ---------------
(1) Primarily for workers' compensation reserves and, beginning in 1995, certain
asbestos-related and environmental pollution reserves. For SAP purposes,
these reserves are discounted at 6%.
NAIC and Other Property and Casualty Regulatory Matters
The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital rules for domestic property and casualty companies. CIGNA's
ongoing domestic property and casualty subsidiaries were adequately capitalized
under the rules as of December 31, 1995. The risk-based capital ratios of the
subsidiaries in the run-off operation are at the mandatory control level, as
described on page 29. However, because the Insurance Commissioner of
Pennsylvania determined that these subsidiaries have sufficient assets to meet
their obligations, they are being allowed to run off their liabilities
consistent with the terms of an Order by the Commissioner, which include
periodic reporting obligations to the Pennsylvania Insurance Department.
Additional information is contained on page 29.
CIGNA's property and casualty insurance subsidiaries are members of
regulated advisory organizations that provide certain statistical, rate-making,
policy audit and similar services on a fee basis. In most states, these
subsidiaries may use rate filings or loss costs, which are estimated future
losses to which an insurer must add a profit and expense load to arrive at a
rate, developed by advisory organizations. They also use filings developed by
themselves, or combinations of both, thus enabling them to pursue an independent
course in certain areas while using advisory organization services in others.
23
26
G. Investments and Investment Income
CIGNA's investment operations primarily provide investment management and
related services in the United States and certain other countries for CIGNA's
corporate and insurance-related assets.
Assets under management at year-end 1995 totaled $79.9 billion, comprising
CIGNA corporate and insurance-related investment assets ("investment assets") of
$57.7 billion and advisory portfolios of $22.2 billion. Advisory portfolios
included $18.2 billion in Separate Accounts of CIGNA's life insurance
subsidiaries. For additional information about the General Account and the
Separate Accounts, see "Employee Retirement and Savings Benefits--Principal
Products and Markets" beginning on page seven.
CIGNA invests in a broad range of asset classes, including domestic and
international fixed maturities and common stocks, mortgage loans, real estate
and short-term investments. Fixed maturity investments include publicly traded
and private placement corporate bonds, government bonds, publicly traded and
private placement asset-backed securities and redeemable preferred stocks.
Asset-backed securities are primarily mortgage-backed securities and secondarily
other asset-backed securities. Mortgage-backed securities include collateralized
mortgage obligations ("CMOs"). CMO holdings are concentrated in securities with
limited prepayment, extension and default risk, such as planned amortization
class bonds.
The major portfolios under management in CIGNA's General Account consist of
the combined assets of the Employee Life and Health Benefits, Employee
Retirement and Savings Benefits, and Individual Financial Services segments
(collectively, "Employee Benefits and Individual Financial portfolios") and the
assets of the Property and Casualty segment. CIGNA generally manages the
characteristics of its investment assets to reflect the underlying
characteristics of related insurance and contractholder liabilities, as well as
regulatory and tax considerations pertaining to those liabilities. CIGNA's
insurance and contractholder liabilities as of December 31, 1995 comprised the
following: property and casualty 33%, fully guaranteed 12%, experience-rated
25%, interest-sensitive 16%, and other life and health 14%.
Property and casualty claim demands are somewhat unpredictable in nature
and require liquidity from the underlying investment assets, which are
structured to emphasize current investment income to the extent consistent with
maintaining appropriate portfolio quality and diversity. The liquidity
requirements for shorter-term liabilities are met primarily through cash flows
and shorter-term investments (less than two years) and, to a lesser extent,
through publicly traded fixed maturities. For longer-term liabilities, liquidity
requirements are met primarily through private and public fixed maturity
investments.
Fully guaranteed products primarily include GICs, single premium annuity
products and settlement annuities. Because these products generally do not
permit withdrawal by policyholders prior to maturity, the amount and timing of
future benefit cash flows can be reasonably estimated. Funds supporting these
products are invested in fixed income investments that generally match the
aggregate duration of the investment portfolio with that of the related benefit
cash flows. As of December 31, 1995, the duration of assets and liabilities for
GICs, single premium annuities and settlement annuities was approximately 2
years, 9 years and 11 years, respectively.
CIGNA's experience-rated products primarily consist of defined benefit and
defined contribution pension products. Investments for these products are
selected to support the yield and liquidity needs of the products and are
principally fixed income investments. Interest-sensitive products primarily
include universal life insurance and COLI. Investment assets supporting these
products are primarily fixed income investments and policy loans. Fixed income
investments emphasize investment yield while meeting the liquidity requirements
of the related liabilities.
Other life and health products consist of various group and individual life
and health products. The supporting investment assets are structured to
emphasize investment income, and the necessary liquidity is provided through
cash flow, short-term investments and common stocks.
Investment strategy and results are affected by the amount and timing of
cash available for investment, competition for investments (especially in
private asset classes), economic conditions, interest rates and asset allocation
decisions. For example, cash available from turnover of existing assets was
reinvested at
24
27
lower interest rates in 1995, resulting in reduced investment income, whereas
proceeds from common stock sales in 1995 generated realized capital gains, and
reinvestment of these proceeds in fixed income assets increased investment
income.
As noted above, CIGNA generally manages the characteristics of its
investment assets, such as liquidity, currency, yield and duration, to reflect
the underlying characteristics of related insurance and contractholder
liabilities, which vary among CIGNA's principal product lines. In connection
with its investment strategy, CIGNA uses derivative instruments through hedging
applications to manage market risk. Derivative instruments are not used for
speculative purposes. For additional information concerning CIGNA's use of
derivatives, see Note 4(F) to the 1995 Financial Statements that are included in
its 1995 Annual Report.
CIGNA routinely monitors and evaluates the status of its investments in
light of current economic conditions, trends in capital markets and other
factors. Such factors include industry segment considerations for fixed maturity
investments, and geographic and property-type considerations for mortgage loan
investments.
CIGNA's fixed maturity investments, including policyholder share, as of
December 31, 1995 constituted approximately 53% of the Employee Benefits and
Individual Financial portfolios and approximately 93% of the Property and
Casualty portfolios, respectively. As of that date, approximately 30% of fixed
maturity investments was attributable to experience-rated contracts. CIGNA
reduces credit risk for the portfolios as a whole by investing primarily in
investment grade fixed maturities rated by rating agencies (for public
investments), by CIGNA (for private investments) or by the Securities Valuation
Office of the NAIC (for both public and private investments). For information
about below investment grade holdings, see page 19 of the MD&A section of
CIGNA's 1995 Annual Report.
CIGNA's mortgage loan investments, including policyholder share,
constituted approximately 25% of the Employee Benefits and Individual Financial
portfolios and less than 1% of the Property and Casualty portfolios as of
December 31, 1995. As of that date, approximately 58% of mortgage loan
investments was attributable to experience-rated contracts. Mortgage loan
investments are subject to underwriting criteria addressing loan-to-value ratio,
debt service coverage, cash flow, tenant quality, leasing, market, location and
financial strength of the borrower. Such investments consist primarily of first
mortgage loans on commercial properties and are diversified relative to property
type, location and borrower. The Company invests in fully completed and
substantially leased commercial properties. Virtually all of the Company's
mortgage loans are bullet or balloon loans, under which all or a substantial
portion of the loan principal is due at the end of the loan term.
CIGNA manages properties obtained through foreclosure of mortgage loans
("foreclosure properties") until such properties are sold. The Company's general
policy is to rehabilitate the foreclosed properties, re-lease them and sell
them, which generally takes two to four years. CIGNA may hold certain
foreclosure properties for immediate sale if circumstances indicate that to do
so is in the best financial interests of the Company or policyholders.
See pages 18 through 23 of the MD&A section of CIGNA's 1995 Annual Report
and Notes 2, 4, 5 and 20 to CIGNA's 1995 Financial Statements for additional
information about CIGNA's investments.
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28
Employee Benefits and Individual Financial Investments
The following tables summarize the distribution of investments attributable
to CIGNA's Employee Benefits and Individual Financial portfolios and the related
net investment income from such investments. Approximately 53% of the
investments in the Employee Benefits and Individual Financial portfolios is
attributable to experience-rated contracts with policyholders.
AS OF DECEMBER 31,
-----------------------------
INVESTMENTS 1995 1994 1993
- ------------------------------------------------------------------------- ------- ------- -------
(IN MILLIONS)
Fixed maturities
Bonds:
Finance.............................................................. $ 3,726 $ 3,171 $ 3,627
Consumer products.................................................... 3,102 2,996 2,995
Manufacturing........................................................ 2,747 2,302 2,313
Energy............................................................... 2,470 2,041 1,853
Public utilities..................................................... 1,941 1,654 1,742
Transportation....................................................... 1,046 1,011 1,005
U.S. government and government agencies and authorities.............. 407 284 268
States, municipalities and political subdivisions.................... 404 327 368
Foreign governments(1)............................................... 164 208 183
Other................................................................ 401 334 397
------- ------- -------
Total bonds..................................................... 16,408 14,328 14,751
Asset-backed securities................................................ 5,925 4,827 4,931
Redeemable preferred stocks............................................ 15 33 26
------- ------- -------
Total fixed maturities.......................................... 22,348 19,188 19,708
------- ------- -------
Equity securities
Common stocks:
Industrial and miscellaneous......................................... 238 1,118 1,113
Public utilities..................................................... 23 122 162
Banks, trust and insurance companies................................. 21 115 121
------- ------- -------
Total common stocks............................................. 282 1,355 1,396
Non-redeemable preferred stocks........................................ 11 55 81
------- ------- -------
Total equity securities......................................... 293 1,410 1,477
------- ------- -------
Mortgage loans
Commercial:
Retail facilities.................................................... 4,423 3,744 3,483
Office buildings..................................................... 3,685 3,387 3,652
Apartments........................................................... 1,281 1,022 923
Hotels............................................................... 692 662 711
Industrial........................................................... 399 403 379
Other................................................................ 98 109 109
------- ------- -------
Total commercial................................................ 10,578 9,327 9,257
Agricultural........................................................... 69 88 118
------- ------- -------
Total mortgages................................................. 10,647 9,415 9,375
------- ------- -------
Policy loans............................................................. 6,925 5,237 3,623
Real estate.............................................................. 1,138 1,481 1,539
Other long-term investments.............................................. 202 137 108
Short-term investments................................................... 380 306 401
------- ------- -------
Total investments............................................... $41,933 $37,174 $36,231
======== ======== ========
- ---------------
See Note 2(D) of Notes to Financial Statements of CIGNA's 1995 Annual Report for
a discussion of the method of valuation of investments. The above amounts do not
include Separate Account assets.
(1) Comprises fixed maturities of sovereign foreign governments.
26
29
YEAR ENDED DECEMBER 31,
-----------------------------
NET INVESTMENT INCOME 1995 1994 1993
- ------------------------------------------------------------------------- ------- ------- -------
(DOLLAR AMOUNTS IN MILLIONS)
Fixed maturities......................................................... $1,700 $1,649 $1,610
Equity securities........................................................ 34 55 56
Mortgage loans........................................................... 894 839 948
Policy loans............................................................. 499 365 253
Real estate.............................................................. 272 284 244
Other investments........................................................ 123 63 69
------- ------- -------
Total........................................................... 3,522 3,255 3,180
Less investment expenses................................................. 258 277 248
------- ------- -------
Net investment income, pre-tax........................................... $3,264 $2,978 $2,932
======== ======== ========
Net investment yield(1).................................................. 8.66 % 8.44 % 8.80 %
======== ======== ========
- ---------------
(1) The net investment yield is equal to (a) net investment income multiplied by
two, divided by (b) the sum, at the beginning and end of the year, of cash,
invested assets (at cost or amortized cost less impairments) and investment
income due and accrued, less borrowed money, less net investment income.
Property and Casualty Investments
The following tables summarize the distribution of investments attributable
to CIGNA's Property and Casualty segment and the related net investment income
from such investments.
AS OF DECEMBER 31,
-----------------------------
INVESTMENTS 1995 1994 1993
- ------------------------------------------------------------------------- ------- ------- -------
(IN MILLIONS)
Fixed maturities
Bonds:
Foreign governments(1)............................................... $ 2,343 $ 1,757 $ 1,472
Finance.............................................................. 1,655 1,700 1,588
States, municipalities and political subdivisions.................... 1,373 1,266 1,525
Public utilities..................................................... 906 682 586
Energy............................................................... 835 547 806
U.S. government and government agencies and authorities.............. 687 802 1,025
Consumer products.................................................... 679 381 360
Manufacturing........................................................ 627 353 363
Transportation....................................................... 310 139 61
Other................................................................ 240 644 618
------- ------- -------
Total bonds........................................................ 9,655 8,271 8,404
Asset-backed securities................................................ 1,921 1,716 1,580
Redeemable preferred stocks............................................ 4 11 24
------- ------- -------
Total fixed maturities............................................. 11,580 9,998 10,008
------- ------- -------
Equity securities
Common stocks:
Industrial and miscellaneous......................................... 271 333 293
Banks, trust and insurance companies................................. 53 45 57
Public utilities..................................................... 13 3 9
------- ------- -------
Total common stocks................................................ 337 381 359
Non-redeemable preferred stocks........................................ 16 8 7
------- ------- -------
Total equity securities............................................ 353 389 366
------- ------- -------
Other long-term investments, principally mortgages....................... 320 693 643
Short-term investments................................................... 209 342 461
------- ------- -------
Total investments.................................................. $12,462 $11,422 $11,478
======== ======== ========
- ------------
See Note 2(D) of Notes to Financial Statements of CIGNA's 1995 Annual Report for
a discussion of the method of valuation of investments.
(1) Comprises fixed maturities of sovereign foreign governments.
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YEAR ENDED DECEMBER 31,
---------------------------
NET INVESTMENT INCOME 1995 1994 1993
- ------------------------------------------------------------------------- ----- ----- -----
(DOLLAR AMOUNTS IN MILLIONS)
Interest:
Taxable.............................................................. $ 750 $ 680 $ 643
Tax-exempt........................................................... 70 77 101
----- ----- -----
Total........................................................... 820 757 744
Dividends from stocks.................................................... 11 12 25
Other.................................................................... 32 46 34
----- ----- -----
Total investment income.................................................. 863 815 803
Less investment expenses................................................. 69 59 50
----- ----- -----
Net investment income, pre-tax........................................... $ 794 $ 756 $ 753
===== ===== =====
Net investment yield(1).................................................. 6.93% 6.92% 7.24%
===== ===== =====
- ---------------
(1) The net investment yield is equal to (a) net investment income multiplied by
two, divided by (b) the sum, at the beginning and end of the year, of cash,
invested assets (at cost or amortized cost less impairments) and investment
income due and accrued, less borrowed money, less net investment income.
Portfolio Management and Advisory Services
CIGNA's investment operations primarily focus on providing investment
services to CIGNA and its insurance subsidiaries. In addition, the investment
operations provide fee-based investment management and advisory services to
advisory clients, including large group pension sponsors, institutions and
international investors. CIGNA acquires or originates, directly or through
intermediaries, various investments including private placements, public
securities, mortgage loans, real estate and leveraged capital funds.
Other Investments and Operations
Investment assets for CIGNA's Other Operations include fixed maturities,
mortgage loans, real estate and investments maturing in less than two years.
These assets support the settlement annuity and non-insurance businesses, and
also supported, until January 1994 when they were sold, CIGNA's California
personal automobile and homeowners insurance businesses that CIGNA retained from
the 1989 sale of the Horace Mann insurance companies. Net investment income for
these investments was $238 million for 1995, $212 million for 1994 and $217
million for 1993.
In addition, CIGNA has non-strategic equity investments in operating
businesses, primarily real estate operations.
H. Regulation
CIGNA's insurance subsidiaries are licensed to do business in, and are
subject to regulation and supervision by, the states of the United States, the
District of Columbia, certain U.S. territories and various foreign
jurisdictions. Although the extent of regulation varies, most jurisdictions have
laws and regulations governing rates, solvency, standards of business conduct,
and various insurance and investment products. Licensing of insurers and their
agents and the approval of policy forms are usually required. The form and
content of statutory financial statements and the type and concentration of
investments are also regulated. Each insurance subsidiary is required to file
periodic financial reports with supervisory agencies in most of the
jurisdictions in which it does business, and its operations and accounts are
subject to examination by such agencies at regular intervals.
Most states and the District of Columbia require licensed insurance
companies to support guaranty associations, which are organized to pay claims on
behalf of insolvent insurance companies. These associations levy assessments on
member insurers in a particular state to pay such claims on the basis of their
proportionate shares of the lines of business of the insolvent insurer. Maximum
assessments permitted by law in any one year generally range from 1% to 2% of
annual premiums written by each member in a
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particular state with respect to the categories of business involved, and may be
offset against premium taxes payable in some states. See Note 19 to CIGNA's 1995
Financial Statements.
The increase in the number of insurance companies that are impaired or
insolvent has prompted state and federal initiatives to enhance solvency
regulation. For example, the NAIC has developed model solvency-related laws that
many states have adopted. In addition, risk-based capital rules have been
adopted for life insurance and property and casualty insurance companies that
recommend a specified level of capital depending on the types and quality of
investments held, the types of business written and the types of liabilities
maintained. Depending on the ratio of the insurer's adjusted surplus to its
risk-based capital, the insurer could be subject to various regulatory actions
ranging from increased scrutiny to conservatorship.
Four levels of regulatory attention may be triggered if the ratio of
adjusted surplus to risk-based capital (the "RBC ratio") is insufficient. If a
property and casualty ("P&C") insurance company's RBC ratio is between 67.5% and
90% (75% and 100% for life insurance ("Life") companies), the "company action
level," the company must submit a plan to the regulator detailing corrective
action it proposes to undertake. If a P&C company's RBC ratio is between 45% and
67.5% (50% and 75% for Life companies), the "regulatory action level," the
company must also submit a plan, but a regulator may also issue a corrective
order requiring the insurer to comply within a specified period. If a P&C
company's RBC ratio is between 31.5% and 45% (35% and 50% for Life companies),
the "authorized control level," the regulatory response is the same as at the
"regulatory action level," but in addition, the regulator may take action to
rehabilitate or liquidate the insurer. If the RBC ratio for a P&C company is
less than 31.5% (35% for Life companies), the "mandatory control level," the
regulator must rehabilitate or liquidate the insurer. An insurance commissioner
may allow a property and casualty company at the mandatory control level that is
writing no business and is running off its existing business to continue its
run-off. As of December 31, 1995, CIGNA's life insurance and ongoing domestic
property and casualty insurance subsidiaries were adequately capitalized under
such rules, and the run-off subsidiaries are being allowed to run off their
liabilities as described on page 23.
Also, the NAIC is addressing risk-based capital guidelines for HMOs. CIGNA
does not expect such guidelines to have a material adverse effect on its future
results of operations, liquidity or financial condition.
In the past, federal oversight of insurer solvency has also been proposed.
Among proposals that have been discussed are optional federal chartering, which
would preempt most state insurance regulations; minimum federal solvency
standards, which would be supervised by the states; federal licensing of all
reinsurers; and establishment of a national guaranty fund.
Recent state and federal regulatory scrutiny of life insurers' sales and
advertising practices, including the adequacy of disclosure regarding products
and their future performance, may result in increased regulations in this area.
In 1993, the U.S. Supreme Court issued the John Hancock Mutual Life
Insurance Company v. Harris Trust decision, which held that certain funds held
under a general account group annuity contract were subject to ERISA fiduciary
standards. The Department of Labor is addressing compliance issues raised by the
decision and, depending on the outcome, CIGNA may make future changes to its
group annuity contracts or the operation of its general account.
CIGNA's insurance subsidiaries are subject to state laws regulating
insurers that are subsidiaries of insurance holding companies. Under such laws,
which are generally becoming more stringent, certain dividends, distributions
and other transactions between an insurance subsidiary and the holding company
or its other subsidiaries may require notification to, or be subject to the
approval of, one or more state insurance commissioners.
Federal and state proposals to reform health care are expected to continue
in 1996. Such proposals are discussed on page six.
CIGNA's HMOs are subject to regulation and supervision by various
government agencies in the states in which they do business. The extent of
regulation varies, but most jurisdictions regulate licensing, solvency,
29
32
contracts and rates. Regulation of these entities also may include standards for
quality assurance, minimum levels of benefits that must be offered and
requirements for availability and continuity of care. A few states require HMOs
to participate in guaranty funds, and several state legislatures have recently
considered insolvency and guaranty fund legislation, a trend that is expected to
continue. Many of CIGNA's HMOs are also federally qualified and subject to
regulation as to benefits, solvency and rates under the federal HMO Act. CIGNA's
mental health and substance abuse clinics are licensed by the states in which
they operate for quality of treatment.
Regulatory concerns with insurance risk selection have increased
significantly in recent years. For example, some states have imposed
restrictions on the use of underwriting criteria related to AIDS. Also, various
interpretations under the Americans with Disabilities Act may affect the
provision of insurance benefits under certain types of policies.
Domestic property and casualty insurers are required to participate in
assigned risk plans, joint underwriting authorities, pools and other residual
market mechanisms to write coverages on risks not acceptable under normal
underwriting standards. In addition, states have responded to concerns about the
availability and affordability of commercial casualty insurance by proposing or
adopting legislation, regulations or positions to, among other things, limit
rate increases, require rate reductions or refunds, restrict nonrenewal and
cancellation with respect to commercial lines coverages or require the refunding
of "excess" profits, and by expanding regulatory examination of the
appropriateness of rates, non-renewals and cancellations.
The extent of insurance regulation varies significantly among the countries
in which CIGNA conducts its international operations. As a foreign insurer,
CIGNA is, in many countries, faced with greater restrictions than domestic
competitors. Trade barriers include discriminatory licensing procedures,
compulsory cessions of reinsurance, required localization of records and funds,
higher premium and income taxes, and requirements for local participation in an
insurer's ownership. Where appropriate, CIGNA has incorporated insurance
subsidiaries locally to improve its position.
Depending upon their nature, CIGNA's investment management activities and
products with United States contacts are subject to the federal securities laws,
ERISA and other federal and state laws governing investment management
activities and products. Investments made by United States insurance companies
are subject to state insurance laws. Investment management activities and
products outside the United States, and investments made by non-United States
insurance companies outside the United States, are subject to local regulation.
Often, the investments of individual insurance companies are subject to
regulation by multiple jurisdictions.
Federal initiatives can have an impact on the insurance business in a
variety of ways. In addition to proposals discussed above related to Superfund,
COLI, health care reform and federal oversight of insurer solvency, current and
proposed federal measures that may significantly affect the insurance business
include: pension and other employee benefit regulation; tax legislation; Social
Security legislation; financial services regulation; amendment to the antitrust
exemption provided for the business of insurance by the McCarran-Ferguson Act;
and repeal of the Glass-Steagall Act.
The economic and competitive effects of the legislative and regulatory
proposals discussed above would depend upon the final form such legislation or
regulation might take.
I. Ratings
CIGNA and certain of its domestic insurance subsidiaries are rated by
nationally recognized rating agencies. While the significance of individual
ratings varies from agency to agency, companies assigned ratings at the top end
of the range have, in the opinion of the rating agency, the strongest capacity
for repayment of debt or payment of claims, while companies at the bottom end of
the range have the weakest capacity.
Insurance ratings represent the opinions of the rating agencies on the
financial strength of the company and its capacity to meet the obligations of
insurance policies. Insurance rating scales of the principal agencies
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33
that rate the Company's insurance subsidiaries are characterized as follows:
A.M. Best, A++ to F ("Superior" to "In Liquidation"); Moody's, Aaa to C
("Exceptional" to "Lowest"); Standard & Poor's ("S&P"), AAA to R ("Superior" to
"Regulatory Action"); and Duff & Phelps, AAA to DD ("Highest" to "Order of
Liquidation").
As of March 18, 1996, the insurance rating for CG Life obtained from S&P
was AA ("Excellent," 3rd of 18) and from Duff & Phelps was AAA ("Highest," 1st
of 18), and the insurance ratings obtained from A.M. Best and Moody's were as
follows:
INSURANCE RATINGS(1)
------------------------------------------------------------------------
LIFE
-----------------------------------
LIFE
INSURANCE PROPERTY & CASUALTY
COMPANY ---------------------------------
OF NORTH ONGOING RUN-OFF
CG LIFE AMERICA OPERATIONS(2) OPERATIONS(3)
---------------- --------------- -------------- --------------
A.M. Best.................. A+ A+ A- B+
("Superior," ("Superior," ("Excellent," ("Very Good,"
2nd of 15) 2nd of 15) 4th of 15) 6th of 15)(4)
Moody's.................... A1 not Baa1 Ba1
("Good," rated ("Adequate," ("Questionable,"
5th of 19) 8th of 19)(5) 11th of 19)(5)
- ---------------
(1) Includes the rating assigned, the agency's characterization of the rating
and the position of the rating in the applicable agency's rating scale
(e.g., CG Life's rating by A.M. Best Company, Inc. ("A.M. Best") is the 2nd
highest rating awarded in its scale of 15).
(2) The rated Ongoing Operations consist of CIGNA's domestic ongoing property
and casualty insurance subsidiaries. For further information, see "Property
and Casualty" on page 13.
(3) The rated Run-off Operations consist of domestic insurance subsidiaries that
manage run-off policies and related claims, including those for
asbestos-related and environmental pollution exposures. For further
information, see "Property and Casualty" on page 13.
(4) Although this is the sixth highest rating in the A.M. Best rating scale, it
is the second highest rating available for run-off operations.
(5) Moody's rates the principal insurance companies within the Ongoing
Operations and the Run-off Operations, whereas A.M. Best rates each such
operation collectively.
Debt ratings are assessments of the likelihood that the Company will make
timely payments of principal and interest. The rating scales of the principal
agencies that rate CIGNA's senior debt are characterized as follows: Moody's,
Aaa to C ("Best" to "Lowest"); S&P, AAA to D ("Extremely Strong" to "Default");
and Duff & Phelps, AAA to DD ("Highest" to "Default"). The commercial paper
rating scales for Moody's, S&P and Duff & Phelps are as follows: Moody's,
Prime-1 to Not Prime ("Superior" to "Not Prime"); S&P, A-1+ to D ("Extremely
Strong" to "Default"); and Duff & Phelps, D-1+ to D-5 ("Highest" to "Default").
As of March 18, 1996, the debt ratings obtained from the following agencies
were as follows:
DEBT RATINGS(1)
CIGNA CORPORATION
---------------------------------------
COMMERCIAL
SENIOR DEBT PAPER
---------------- -------------------
Moody's............................................ Baa1 Prime-2
("Medium- ("Strong,"
grade," 2nd of 4)
8th of 19)
Standard & Poor's.................................. BBB+ A-2
("Adequate," ("Satisfactory,"
8th of 22) 3rd of 7)
Duff & Phelps...................................... A D-1
("Adequate," ("Very high,"
6th of 18) 2nd of 7)
- ---------------
(1) Includes the rating assigned, the agency's characterization of the rating
and the position of the rating in the applicable agency's rating scale.
The ratings are reviewed routinely by the rating agencies and may be
changed at their discretion.
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J. Miscellaneous
Portions of CIGNA's insurance business are seasonal in nature. Reported
claims under group health and certain property and casualty products are
generally higher in the first quarter. Sales, particularly of individual life
products, are generally lowest in the first quarter and highest in the fourth
quarter.
CIGNA and its principal subsidiaries are not dependent on business from one
or a few customers. No customer accounted for 10% or more of CIGNA's
consolidated revenues in 1995. CIGNA and its principal subsidiaries are not
dependent on business from one or a few brokers or agents. In addition, CIGNA's
insurance businesses are generally not committed to accept a fixed portion of
the business submitted by independent brokers and agents, and generally all such
business is subject to its approval and acceptance.
CIGNA had approximately 44,700, 48,600 and 50,600 employees as of December
31, 1995, 1994 and 1993, respectively.
Item 2. PROPERTIES
CIGNA's headquarters are located in approximately 90,240 total square feet
of leased office space at One Liberty Place, Philadelphia, Pennsylvania. CIGNA
Property & Casualty, CIGNA Group Insurance: Life, Accident, Disability, and
CIGNA International are located in a leased building of approximately 1.25
million total square feet at Two Liberty Place, Philadelphia. CIGNA HealthCare,
CIGNA Individual Insurance, CIGNA Reinsurance: Life, Accident, Health and CIGNA
Investment Management are located in a complex of buildings owned by CIGNA,
aggregating approximately 1.15 million total square feet of office space,
located at 900-950 Cottage Grove Road, Bloomfield, Connecticut. CIGNA's
Retirement & Investment Services operations are located in approximately 230,000
total square feet of leased office space at Metro Center One, Hartford,
Connecticut. In addition, CIGNA owns or leases office buildings, or parts
thereof, throughout the United States and in other countries. For additional
information concerning leases and property, see Notes 2(H) and 15 to CIGNA's
1995 Consolidated Financial Statements of CIGNA's 1995 Annual Report. This
paragraph does not include information on investment properties.
CIGNA's information processing resources include large mainframe computers
in major data centers, a multitude of personal computers connected through local
area networks and a nationwide backbone network that provides desktop computing
and office automation to CIGNA employees. CIGNA's policies regarding the
safeguarding of critical corporate data are disseminated to all employees. The
policies require data security through the use of appropriate identification and
password practices and data backup through appropriate offsite storage
techniques. Protection of CIGNA's major data centers, which house large amounts
of critical corporate data, involves access controls, fire detection and
suppression systems, and other hazard elimination processes. In addition, CIGNA
maintains a formal disaster contingency plan, which includes recovery services
in the event of a disaster in a CIGNA data center. Critical files are stored
offsite, to be available for recovery in the event of a disaster.
Item 3. LEGAL PROCEEDINGS
CIGNA is continuously involved in numerous lawsuits arising, for the most
part, in the ordinary course of business, either as a liability insurer
defending third-party claims brought against its insureds or an insurer
defending coverage claims brought against it by its policyholders or other
insurers. One such area of litigation involves policy coverage and judicial
interpretation of legal liability for asbestos-related and environmental
pollution claims.
While the outcome of all litigation involving CIGNA, including
insurance-related litigation, cannot be determined, litigation (including that
related to asbestos and environmental pollution claims) is not expected to
result in losses that differ from recorded reserves by amounts that would be
material to results of operations, liquidity or financial condition. Also,
reinsurance recoveries related to claims in litigation, net of allowance for
uncollectible reinsurance, are not expected to result in recoveries that differ
from recorded recoverables by amounts that would be material to results of
operations, liquidity or financial condition.
32
35
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made below to CG Life, which is an indirect subsidiary of
CIGNA. All officers are elected to serve for a one-year term or until their
successors are elected. Principal occupations and employment during the past
five years are listed.
H. EDWARD HANWAY, 44, President of CIGNA HealthCare beginning February 1996;
President of CIGNA International from March 1994 until February 1996; and
President of CIGNA International: Property & Casualty from February 1989 until
March 1994.
GERALD A. ISOM, 57, President of CIGNA Property and Casualty since March 1993;
Group Vice President of Transamerica Corporation from 1990 until March 1993; and
Chief Executive Officer and President of Transamerica Insurance Group from
January 1985 until March 1993. Transamerica Insurance Group is a major provider
of property and casualty insurance products.
THOMAS C. JONES, 49, President of CIGNA Individual Insurance since February
1995; President of CG Life since March 1995; President of CIGNA Reinsurance
Property & Casualty from March 1994 until February 1995; Executive Vice
President, Chief Administrative Officer and member of the Boards of Directors of
NAC Re Corporation and NAC Reinsurance Corporation from November 1985 until
January 1994; and Chief Operating Officer of NAC Re Corporation and NAC
Reinsurance Corporation from June 1993 and September 1990, respectively, until
January 1994. NAC Re Corporation is the parent corporation of NAC Reinsurance
Corporation, a major provider of property and casualty reinsurance products.
JOHN K. LEONARD, 47, President of CIGNA Group Insurance: Life, Accident,
Disability since March 1992; and Senior Vice President of CIGNA from March 1989
until March 1992, with responsibility for Corporate Marketing and Strategy.
DONALD M. LEVINSON, 50, Executive Vice President of CIGNA since March 1988, with
responsibility for Human Resources and Services.
FRANCINE M. NEWMAN, 51, President of CIGNA Reinsurance: Life, Accident, Health
since July 1984.
BYRON D. OLIVER, 53, President of CIGNA Retirement & Investment Services since
February 1988.
ARTHUR C. REEDS, III, 51, President of CIGNA Investment Management since March
1992; and Managing Director and Head of Portfolio Management, CIGNA's Investment
Division, from May 1986 until March 1992.
B. KINGSLEY SCHUBERT, 50, President of CIGNA International beginning February
1996; Senior Vice President of CIGNA International (Asia-Pacific) from March
1995 until February 1996; President of CIGNA Insurance Company in Japan from
June 1992 until February 1996; Senior Vice President of American International
Underwriters Corporation from September 1991 until April 1992; and Chief
Operating Officer of AIU Insurance Company, American Home Assurance Company and
ALICO from March 1986 until September 1991. American International Underwriters
Corporation, AIU Insurance Company, American Home Assurance Company and ALICO
are subsidiaries of American International Group, Inc., a major provider of
insurance products.
JAMES G. STEWART, 53, Executive Vice President and Chief Financial Officer of
CIGNA since 1983.
WILSON H. TAYLOR, 52, Chairman of CIGNA since November 1989; and Chief Executive
Officer of CIGNA since November 1988 and President of CIGNA since May 1988.
THOMAS J. WAGNER, 56, Executive Vice President and General Counsel of CIGNA
since January 1992; Corporate Secretary of CIGNA from January 1988 until April
1992; and Senior Vice President of CIGNA from January 1988 until January 1992.
33
36
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information under the caption "Quarterly Financial Data--Stock and
Dividend Data" on page 47 and under the caption "Stock Listing" on the inside
back cover of CIGNA's 1995 Annual Report is incorporated by reference, as is the
information from Note 8 to CIGNA's Consolidated Financial Statements and the
number of shareholders of record as of December 31, 1995 under the caption
"Highlights" on page one of CIGNA's 1995 Annual Report.
Item 6. SELECTED FINANCIAL DATA
The five-year financial information under the caption "Highlights" on page
one of CIGNA's 1995 Annual Report is incorporated by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information on pages eight through 23 of CIGNA's 1995 Annual Report is
incorporated by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CIGNA's Consolidated Financial Statements on pages 24 through 45 and the
report of its independent accountants on page 46 of CIGNA's 1995 Annual Report
are incorporated by reference, as is the unaudited information set forth under
the caption "Quarterly Financial Data--Consolidated Results" on page 47.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors of the Registrant
The information under the captions "Nominees for Election" and "Incumbent
Directors to Continue in Office" on pages five and six of CIGNA's proxy
statement dated March 19, 1996 are incorporated by reference.
B. Executive Officers of the Registrant
See PART I above.
C. Compliance with Section 16(a) of the Securities Exchange Act
The information under the caption "Compliance with Section 16(a) of the
Securities Exchange Act" on page 19 of CIGNA's proxy statement dated March 19,
1996 is incorporated by reference.
Item 11. EXECUTIVE COMPENSATION
The information under the captions "Executive Compensation" on pages 11
through 15 and "Compensation of Directors" on pages eight and nine of CIGNA's
proxy statement dated March 19, 1996 is incorporated by reference.
34
37
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions "Ownership of CIGNA Corporation Common
Stock by Directors and Executive Officers" on pages two and three and "Ownership
of CIGNA Corporation Common Stock by Certain Beneficial Owners" on page four of
CIGNA's proxy statement dated March 19, 1996, relating to security ownership of
certain beneficial owners and management, is incorporated by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" on page nine of
CIGNA's proxy statement dated March 19, 1996 is incorporated by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. (1) The following financial statements have been incorporated by
reference from the pages indicated below of CIGNA's 1995 Annual
Report:
Consolidated Statements of Income and Retained Earnings for the
years ended December 31, 1995, 1994 and 1993--page 24.
Consolidated Balance Sheets as of December 31, 1995 and 1994--page
25.
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1994 and 1993--page 26.
Notes to Financial Statements--pages 27 through 45.
Report of Independent Accountants, Price Waterhouse LLP--page 46.
(2) The financial statement schedules are listed in the Index to
Financial Statement Schedules on page FS-1.
(3) The exhibits are listed in the Index to Exhibits beginning on page
E-1.
B. During the last quarter of the fiscal year ended December 31, 1995, the
registrant filed (1) a Report on Form 8-K dated October 2, 1995, regarding an
increase in net reserves for asbestos-related and environmental pollution claims
and other exposures and the restructuring of the domestic property and casualty
companies, and (2) a Report on Form 8-K dated October 31, 1995 containing a copy
of a news release reporting its third quarter 1995 results.
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38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed by its
undersigned duly authorized officer, on its behalf and in the capacity
indicated.
Date: March 28, 1996
CIGNA Corporation
By: /s/ JAMES G. STEWART
----------------------------------------
James G. Stewart
Executive Vice President and
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 28, 1996.
PRINCIPAL EXECUTIVE OFFICER: DIRECTORS:*
Robert P. Bauman
Robert H. Campbell
Wilson H. Taylor* Alfred C. DeCrane, Jr.
Chairman, Chief Executive Officer James F. English, Jr.
and a Director Bernard M. Fox
Frank S. Jones
Gerald D. Laubach
Marilyn W. Lewis
Paul F. Oreffice
Charles R. Shoemate
Louis W. Sullivan, M.D.
PRINCIPAL ACCOUNTING OFFICER: Carol Cox Wait
Ezra K. Zilkha
/s/ GARY A. SWORDS
- --------------------------------------------
Gary A. Swords
Vice President and Chief Accounting Officer
*By: /s/ THOMAS J. WAGNER
--------------------------------------
Thomas J. Wagner
Attorney-in-Fact
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39
CIGNA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
-----
Report of Independent Accountants on Financial Statement
Schedules......................................................... FS-2
SCHEDULES
I Summary of Investments--Other Than Investments in Related
Parties as of December 31, 1995.......................... FS-3
II Condensed Financial Information of CIGNA Corporation
(Registrant)............................................. FS-4
III Supplementary Insurance Information........................ FS-8
IV Reinsurance................................................ FS-10
V Valuation and Qualifying Accounts and Reserves............. FS-11
VI Supplemental Information Concerning Property-Casualty
Insurance Operations..................................... FS-12
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
financial statements or notes thereto, which are incorporated by reference from
CIGNA's 1995 Annual Report.
FS-1
40
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of CIGNA Corporation
Our audits of the consolidated financial statements referred to in our
report dated February 13, 1996 appearing on page 46 of the 1995 Annual Report to
Shareholders of CIGNA Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedules listed in the index
on page FS-1 of this Form 10-K. In our opinion, these Financial Statement
Schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/S/ PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
February 13, 1996
FS-2
41
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS-- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
(IN MILLIONS)
AMOUNT AT WHICH
SHOWN IN THE
FAIR CONSOLIDATED
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- --------------------------------------------------------- ------- ------- ---------------
Fixed maturities
Bonds:
United States government and government agencies and
authorities....................................... $ 1,307 $ 1,650 $ 1,650
States, municipalities and political subdivisions... 1,594 1,816 1,816
Foreign governments................................. 2,354 2,508 2,508
Public utilities.................................... 2,829 3,097 3,097
Convertibles and bonds with warrants attached....... 39 41 41
All other corporate bonds........................... 17,310 18,855 18,855
Asset-backed securities................................ 7,813 8,254 8,254
Redeemable preferred stocks............................ 29 20 20
------- ------- ---------------
Total fixed maturities............................ 33,275 36,241 36,241
------- ------- ---------------
Equity securities
Common stocks:
Industrial, miscellaneous and all other............. 445 521 521
Banks, trust and insurance companies................ 64 74 74
Public utilities.................................... 34 36 36
Non-redeemable preferred stocks........................ 22 30 30
------- ------- ---------------
Total equity securities........................... 565 661 661
Mortgage loans on real estate............................ 11,010 11,010
Policy loans............................................. 7,107 7,107
Real estate investments (including $685 million of real
estate acquired in satisfaction of debt)............... 1,283 1,283
Other long-term investments.............................. 295 295
Short-term investments................................... 1,113 1,113
------- ---------------
Total investments................................. $54,648 $57,710
======= ==============
FS-3
42
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
STATEMENTS OF INCOME
(IN MILLIONS)
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
1995 1994 1993
----- ----- -----
Intercompany income...................................... $ 2 $ 2 $ 3
----- ----- -----
Total revenues......................................... 2 2 3
----- ----- -----
Operating expenses:
Interest............................................... 109 111 105
Intercompany interest.................................. 29 18 14
Other.................................................. 5 3 1
----- ----- -----
Total operating expenses............................ 143 132 120
----- ----- -----
Loss before income taxes................................. (141) (130) (117)
Income tax benefit....................................... (34) (34) (33)
----- ----- -----
Loss of parent company................................... (107) (96) (84)
Equity in income of subsidiaries......................... 318 650 318
----- ----- -----
Net income............................................... $ 211 $ 554 $ 234
====== ====== ======
See Notes to Condensed Financial Statements on FS-7.
FS-4
43
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
BALANCE SHEETS
(IN MILLIONS)
AS OF DECEMBER 31,
-------------------
1995 1994
------ ------
Assets:
Cash and cash equivalents........................................... $ 4 $ 1
Investments in subsidiaries......................................... 9,069 8,187
Other assets........................................................ 184 202
Goodwill............................................................ 70 82
------ ------
Total............................................................ $9,327 $8,472
====== ======
Liabilities:
Intercompany........................................................ $ 179 $ 650
Short-term debt..................................................... 410 267
Long-term debt...................................................... 892 1,211
Other liabilities................................................... 689 533
------ ------
Total liabilities................................................ 2,170 2,661
------ ------
Shareholders' Equity:
Common stock (shares issued, 87 and 83)............................. 87 83
Additional paid-in capital.......................................... 2,536 2,248
Net unrealized appreciation (depreciation) -- fixed maturities...... 1,025 (122)
Net unrealized appreciation -- equity securities.................... 73 141
Net translation of foreign currencies............................... (27) (27)
Retained earnings................................................... 4,041 4,052
Less treasury stock, at cost........................................ (578) (564)
------ ------
Total shareholders' equity....................................... 7,157 5,811
------ ------
Total............................................................ $9,327 $8,472
====== ======
See Notes to Condensed Financial Statements on FS-7.
FS-5
44
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1995 1994 1993
----- ----- -----
Cash Flows from Operating Activities:
Net Income......................................................... $ 211 $ 554 $ 234
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Equity in income of subsidiaries.............................. (318) (650) (318)
Dividends received from subsidiaries.......................... 545 523 308
Other liabilities............................................. 159 (162) 210
Other, net.................................................... 27 (87) (28)
----- ----- -----
Net cash provided by operating activities................... 624 178 406
----- ----- -----
Cash Flows from Investing Activities:
Capital contributions to subsidiaries.............................. (16) (158) (480)
Other, net......................................................... (6) -- 1
----- ----- -----
Net cash used in investing activities....................... (22) (158) (479)
----- ----- -----
Cash Flows from Financing Activities:
Change in intercompany debt........................................ (471) 164 37
Net change in commercial paper..................................... (13) (38) (48)
Issuance of long-term debt......................................... 86 112 327
Repayment of debt.................................................. -- (44) (36)
Issuance of common stock........................................... 21 5 6
Dividends paid..................................................... (222) (219) (219)
----- ----- -----
Net cash provided by (used in) financing activities......... (599) (20) 67
----- ----- -----
Net (decrease) increase in cash and cash equivalents............... 3 -- (6)
Cash and cash equivalents, beginning of year....................... 1 1 7
----- ----- -----
Cash and cash equivalents, end of year............................. $ 4 $ 1 $ 1
====== ====== ======
See Notes to Condensed Financial Statements on FS-7.
FS-6
45
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and the accompanying
notes thereto in the Annual Report.
Note 1-- In 1993, CIGNA implemented Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 required that debt and equity securities be
classified into different categories and carried at fair value if they
are not classified as held-to-maturity. During the fourth quarter of
1995, the Financial Accounting Standards Board issued a guide to
implementation of SFAS No. 115, which permits a one-time opportunity to
reclassify securities subject to SFAS No. 115. Consequently, CIGNA
reclassified all held-to-maturity securities of its subsidiaries to
available-for-sale as of December 31, 1995. The non-cash
reclassification of these securities resulted in an increase of
approximately $300 million, net of policyholder-related amounts and
deferred income taxes, in net unrealized appreciation included in
Shareholders' Equity as of December 31, 1995.
Note 2-- Long-term debt, net of current maturities, consists of CIGNA's 8.16%
Notes due 2000; 8 3/4% Notes due 2001; 7.17% Notes due 2002; 7.4%
Notes due 2003; 6 3/8% Notes due 2006; 8 1/4% Notes due 2007; 7.65%
Notes due 2023; 8.3% Notes due 2023; and Medium-term Notes with
interest rates ranging from 5 3/4% to 9 3/4%, and original maturity
dates from approximately five to ten years. As of December 31, 1995
and 1994, the weighted average interest rate on Medium-term Notes was
8.5% and 8.6%, respectively.
Maturities of long-term debt for each of the next five years are as
follows: 1996--$157 million; 1997--$39 million; 1998--$82 million;
1999--$10 million; 2000--$53 million.
During 1995, CIGNA's 8.2% Convertible Subordinated Debentures due in
2010 were converted through non-cash transactions into approximately
3.6 million shares of CIGNA common stock.
In 1995, CIGNA issued $25 million of unsecured 8.16% Notes due in
2000; $25 million of unsecured 7.17% Notes due in 2002; and $36
million of Medium-term Notes.
In 1994, CIGNA issued $100 million of unsecured 6 3/8% Notes due in
2006 and $12 million of Medium-term notes.
As of December 31, 1995, CIGNA had approximately $800 million
remaining under an effective shelf registration statement filed with
the Securities and Exchange Commission that may be issued as debt,
equity securities or both, depending upon market conditions and
CIGNA's capital requirements.
Interest paid on short and long-term debt amounted to $113 million,
$109 million and $95 million, for 1995, 1994 and 1993, respectively.
Note 3-- CIGNA Corporation files a consolidated U.S. federal income tax return
with its domestic subsidiaries. Net income taxes paid in connection with
the consolidated return were $163 million, $477 million and $75 million
during 1995, 1994 and 1993, respectively.
FS-7
46
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
DEFERRED FUTURE POLICY UNPAID
POLICY BENEFITS AND CLAIMS
ACQUISITION CONTRACTHOLDER AND CLAIM
SEGMENT COSTS DEPOSIT FUNDS EXPENSES
- -------------------------------------------------- ----------- -------------- ---------
Year Ended December 31, 1995:
Property and Casualty:
Domestic..................................... $ 187 $ 172 $12,481
International................................ 204 2,027 2,566
Other, primarily Reinsurance................. -- -- 2,076
----------- -------------- ---------
Total Property and Casualty................ 391 2,199 17,123
Employee Life and Health Benefits............... 29 4,410 1,914
Employee Retirement and Savings Benefits........ 76 20,233 --
Individual Financial Services................... 613 12,565 266
All Other....................................... -- 2,655 --
----------- -------------- ---------
Total...................................... $ 1,109 $ 42,062 $19,303
=========== =============== ==========
Year Ended December 31, 1994:
Property and Casualty:
Domestic..................................... $ 218 $ 179 $12,373
International................................ 185 1,654 2,401
Other, primarily Reinsurance................. 10 -- 2,134
----------- -------------- ---------
Total Property and Casualty................ 413 1,833 16,908
Employee Life and Health Benefits............... 28 3,909 2,125
Employee Retirement and Savings Benefits........ 71 19,493 --
Individual Financial Services................... 616 10,080 213
All Other....................................... -- 2,138 --
----------- -------------- ---------
Total...................................... $ 1,128 $ 37,453 $19,246
=========== =============== ==========
Year Ended December 31, 1993:
Property and Casualty:
Domestic..................................... $ 269 $ 129 $13,107
International................................ 167 1,162 2,350
Other, primarily Reinsurance................. 10 -- 2,370
----------- -------------- ---------
Total Property and Casualty................ 446 1,291 17,827
Employee Life and Health Benefits............... 28 3,833 2,168
Employee Retirement and Savings Benefits........ 62 20,404 --
Individual Financial Services................... 549 7,699 200
All Other....................................... -- 1,956 29
----------- -------------- ---------
Total...................................... $ 1,085 $ 35,183 $20,224
=========== =============== ==========
- ------------
(1) Amounts presented are shown net of the effects of reinsurance.
(2) The allocation of net investment income is based upon the investment year
method, the identification of certain portfolios with specific segments, or
a combination of both.
FS-8
47
BENEFITS,
PREMIUMS NET LOSSES AND POLICY OTHER
UNEARNED AND INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
PREMIUMS FEES(1) INCOME(2) EXPENSES(1) EXPENSES EXPENSES WRITTEN
-------- -------- ----------- ----------- ----------- --------- --------
$ 993 $ 1,813 $ 478 $ 2,679 $ 461 $ 525 $1,720
939 2,708 251 1,835 560 420 1,803
64 119 65 248 26 41 64
-------- -------- ----------- ----------- ----------- --------- --------
1,996 4,640 794 4,762 1,047 986 3,587
150 8,135 574 6,105 9 2,193 --
-- 258 1,722 1,522 18 159 --
30 881 968 1,268 107 314 --
-- -- 238 198 -- 16 --
-------- -------- ----------- ----------- ----------- --------- --------
$2,176 $13,914 $ 4,296 $13,855 $ 1,181 $ 3,668 $3,587
========== ========== ============ =========== =========== ========= ==========
$1,179 $ 2,314 $ 483 $ 2,441 $ 469 $ 484 $2,103
1,023 2,386 207 1,613 500 421 1,618
122 343 66 360 98 61 351
-------- -------- ----------- ----------- ----------- --------- --------
2,324 5,043 756 4,414 1,067 966 4,072
218 7,844 515 5,766 11 2,044 --
-- 201 1,722 1,469 17 162 --
33 824 741 1,065 70 292 --
-- -- 212 212 1 31 --
-------- -------- ----------- ----------- ----------- --------- --------
$2,575 $13,912 $ 3,946 $12,926 $ 1,166 $ 3,495 $4,072
========== ========== ============ =========== =========== ========= ==========
$1,403 $ 2,622 $ 496 $ 3,110 $ 531 $ 632 $2,482
965 2,071 186 1,446 465 448 1,444
112 443 71 477 117 64 412
-------- -------- ----------- ----------- ----------- --------- --------
2,480 5,136 753 5,033 1,113 1,144 4,338
188 7,438 503 5,543 13 1,985 --
-- 296 1,846 1,721 14 153 --
35 814 583 921 68 294 --
8 28 217 201 2 32 28
-------- -------- ----------- ----------- ----------- --------- --------
$2,711 $13,712 $ 3,902 $13,419 $ 1,210 $ 3,608 $4,366
========== ========== ============ =========== =========== ========= ==========
FS-9
48
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
(DOLLAR AMOUNTS IN MILLIONS)
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- ---------- -------- ----------
Year Ended December 31, 1995:
Life insurance in force............... $506,313 $44,683 $158,414 $620,044 25.5%
======== ======== ========= ======== =========
Premiums and fees:
Life insurance and annuities....... $ 2,978 $ 171 $ 591 $ 3,398 17.4%
Accident and health insurance...... 7,030 336 719 7,413 9.7
Property and casualty insurance.... 4,115 1,745 733 3,103 23.6
-------- --------- ---------- --------
Total......................... $ 14,123 $ 2,252 $ 2,043 $ 13,914 14.7%
======== ======== ========= ======== =========
Year Ended December 31, 1994:
Life insurance in force............... $496,373 $33,891 $152,334 $614,816 24.8%
======== ======== ========= ======== =========
Premiums and fees:
Life insurance and annuities....... $ 3,107 $ 341 $ 526 $ 3,292 16.0%
Accident and health insurance...... 6,566 310 646 6,902 9.3
Property and casualty insurance.... 4,591 1,894 1,021 3,718 27.5
-------- --------- ---------- --------
Total......................... $ 14,264 $ 2,545 $ 2,193 $ 13,912 15.8%
======== ======== ========= ======== =========
Year Ended December 31, 1993:
Life insurance in force............... $395,042 $26,268 $234,892 $603,666 38.9%
======== ======== ========= ======== =========
Premiums and fees:
Life insurance and annuities....... $ 2,378 $ 167 $ 893 $ 3,104 28.8%
Accident and health insurance...... 5,970 228 835 6,577 12.7
Property and casualty insurance.... 4,780 1,801 1,052 4,031 26.1
-------- --------- ---------- --------
Total......................... $ 13,128 $ 2,196 $ 2,780 $ 13,712 20.3%
======== ======== ========= ======== =========
FS-10
49
CIGNA CORPORATION
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
CHARGED CHARGED
(CREDITED) (CREDITED)
BALANCE AT TO TO OTHER OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES --DESCRIBE(1) --DESCRIBE(2) OF PERIOD
- -------------------------------------- ---------- --------- ------------- ------------- ---------
1995:
INVESTMENT ASSET VALUATION RESERVES:
Mortgage loans...................... $179 $ 3 $10 $(104) $ 88
Real estate......................... 104 5 10 (10) 109
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Premiums, accounts and notes
receivable........................ 139 36 -- (46) 129
Reinsurance recoverables............ 435 273 -- (8) 700
DEFERRED TAX ASSET VALUATION
ALLOWANCE........................... 47 1 -- -- 48
1994:
INVESTMENT ASSET VALUATION RESERVES:
Fixed maturities.................... $ 11 $ -- $-- $ (11) $ --
Mortgage loans...................... 216 8 24 (69) 179
Real estate......................... 98 6 6 (6) 104
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Premiums, accounts and notes
receivable........................ 120 62 -- (43) 139
Reinsurance recoverables............ 405 42 -- (12) 435
DEFERRED TAX ASSET VALUATION
ALLOWANCE........................... 53 (6) -- -- 47
1993:
INVESTMENT ASSET VALUATION RESERVES:
Fixed maturities.................... $ 29 $ (10) $(8) $ -- $ 11
Mortgage loans...................... 184 62 48 (78) 216
Real estate......................... 79 8 21 (10) 98
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Premiums, accounts and notes
receivable........................ 90 49 -- (19) 120
Reinsurance recoverables............ 381 28 -- (4) 405
DEFERRED TAX ASSET VALUATION
ALLOWANCE........................... 82 (29) -- -- 53
- ---------------
(1) Change in valuation reserves attributable to policyholder contracts.
(2) Reflects transfer of reserves to other investment asset categories as well
as charge-offs upon sales, repayments and other.
FS-11
50
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(IN MILLIONS)
[CAPTION]
- ------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------
RESERVES FOR
DEFERRED UNPAID CLAIMS DISCOUNT,
AFFILIATION POLICY AND CLAIM IF ANY,
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED
REGISTRANT COSTS EXPENSES COLUMN C(1) PREMIUMS
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995:
Consolidated property-casualty
entities............................. $ 386 $17,023 $19 $1,632
Year Ended December 31, 1994:
Consolidated property-casualty
entities............................. $ 406 $16,825 $20 $1,869
Year Ended December 31, 1993:
Consolidated property-casualty
entities............................. $ 437 $17,764 $22 $1,994
- ---------------
(1) Discounts were computed using an annual interest rate of 9%.
(2) Amounts presented are shown net of the effects of reinsurance.
FS-12
51
[CAPTION]
- -------------------------------------------------------------------------------------------------
COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- -------------------------------------------------------------------------------------------------
CLAIMS AND CLAIM AMORTIZATION
ADJUSTMENT EXPENSES OF DEFERRED PAID CLAIMS
NET INCURRED RELATED TO: POLICY AND CLAIM
EARNED INVESTMENT CURRENT PRIOR ACQUI- ADJUSTMENT PREMIUMS
PREMIUMS(2) INCOME YEAR(2) YEAR(2) SITION COSTS EXPENSES(2) WRITTEN
- -------------------------------------------------------------------------------------------------
$ 3,729 $674 $2,386 $1,498 $ 950 $ 3,360 $3,587
$ 4,247 $657 $3,093 $ 538 $1,054 $ 3,656 $4,072
$ 4,464 $674 $3,526 $ 789 $1,115 $ 4,217 $4,338
FS-13
52
CIGNA CORPORATION
One Liberty Place
Philadelphia, PA 19192-1550
53
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
CIGNA CORPORATION
-------------------------
EXHIBITS
TO THE
ANNUAL REPORT
ON
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
-------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
54
INDEX TO EXHIBITS
NUMBER DESCRIPTION METHOD OF FILING
- ------ --------------------------------------- ---------------------------------------
3.1 Restated Certificate of Incorporation Filed as Exhibit 3.1 to the
of the registrant as last amended registrant's Form 10-K for the year
October 2, 1990 ended December 31, 1993 and
incorporated herein by reference.
3.2 By-Laws of the registrant as last Filed herewith.
amended and restated January 24, 1996
4.1 Description of Preferred Stock Purchase Filed as Item 1 and Exhibit 1 to the
Rights, including the Rights Agreement registrant's Form 8-A Registration
dated as of July 23, 1987 between CIGNA Statement dated July 28, 1987, such
Corporation and Morgan Shareholder Exhibit 1 amended by the registrant's
Services Trust Company Amendment No. 1 on Form 8 dated August
11, 1987, and incorporated herein by
reference.
4.2 Amended description of Preferred Stock Filed as Item 1 and Exhibit 2 to the
Purchase Rights, including the First registrant's Amendment No. 2 on Form 8
Amendment to Rights Agreement dated as dated March 27, 1989 and incorporated
of March 22, 1989 between CIGNA herein by reference.
Corporation and Morgan Shareholder
Services Trust Company
Exhibits 10.1 through 10.27 are filed as exhibits pursuant to Item 14(c) of Form 10-K.
10.1 Deferred Compensation Plan for Filed herewith.
Directors of CIGNA Corporation, as
amended and restated as of January 1,
1996
10.2 Retirement and Consulting Plan for Filed as Exhibit 10.12 to the
Directors of CIGNA Corporation, as registrant's Form 10-K for the year
amended and restated as of May 29, 1991 ended December 31, 1993 and
incorporated herein by reference.
10.3 Restricted Stock Plan for Non-Employee Filed as Exhibit 10.15 to the
Directors of CIGNA Corporation registrant's Form 10-K for the year
effective as of September 30, 1989 ended December 31, 1993 and
incorporated herein by reference.
10.4 Description of First Amendment to the Filed as Exhibit 10.16 to the
Restricted Stock Plan for Non-Employee registrant's Form 10-K for the year
Directors of CIGNA Corporation ended December 31, 1993 and
incorporated herein by reference.
10.5 Description of Stock Compensation Plan Filed as Exhibit 10.3 to the
for Non-Employee Directors of CIGNA registrant's Form 10-K for the quarter
Corporation, as amended and restated ended September 30, 1995 and
effective July 1, 1995 incorporated herein by reference.
E-1
55
INDEX TO EXHIBITS
NUMBER DESCRIPTION METHOD OF FILING
- ------ --------------------------------------- ---------------------------------------
10.6 CIGNA Corporation Stock Plan effective Filed as Exhibit 10.1 to the
as of May 1, 1991 registrant's Form 10-K for the year
ended December 31, 1993 and
incorporated herein by reference.
10.7 Amendment No. 1 dated as of July 28, Filed as Exhibit 10.2 to the
1993 to the CIGNA Corporation Stock registrant's Form 10-K for the year
Plan ended December 31, 1993 and
incorporated herein by reference.
10.8 Amendment No. 2 dated as of February Filed as Exhibit 10.3 to the
24, 1994 to the CIGNA Corporation Stock registrant's Form 10-K for the year
Plan ended December 31, 1993 and
incorporated herein by reference.
10.9 CIGNA Corporation Executive Stock Filed as Exhibit 10.4 to the
Incentive Plan, as Amended and Restated registrant's Form 10-K for the year
as of March 23, 1988 ended December 31, 1993 and
incorporated herein by reference.
10.10 Amendment No. 1 dated as of September Filed as Exhibit 10.5 to the
28, 1988 to the CIGNA Corporation registrant's Form 10-K for the year
Executive Stock Incentive Plan ended December 31, 1993 and
incorporated herein by reference.
10.11 Amendment No. 2 dated as of March 27, Filed as Exhibit 10.6 to the
1991 to the CIGNA Corporation Executive registrant's Form 10-K for the year
Stock Incentive Plan ended December 31, 1993 and
incorporated herein by reference.
10.12 CIGNA Long-Term Incentive Plan Filed as Appendix A to the registrant's
definitive proxy statement on Schedule
14A dated March 20, 1995 and
incorporated herein by reference.
10.13 CIGNA Corporation Strategic Performance Filed as Exhibit 10.8 to the
Plan, as amended and restated March 25, registrant's Form 10-K for the year
1992 ended December 31, 1993 and
incorporated herein by reference.
10.14 Description of January 25, 1995 Filed as Exhibit 10.1 to the
Amendment to the CIGNA Corporation registrant's Form 10-Q for the quarter
Strategic Performance Plan ended March 31, 1995 and incorporated
herein by reference.
10.15 Deferred Compensation Plan of CIGNA Filed herewith.
Corporation and Participating
Subsidiaries, as amended and restated
as of January 1, 1996
10.16 CIGNA Supplemental Pension Plan, as Filed as Exhibit 10.1 to the
amended and restated as of July 28, registrant's Form 10-Q for the quarter
1993 ended June 30, 1994 and incorporated
herein by reference.
E-2
56
INDEX TO EXHIBITS
NUMBER DESCRIPTION METHOD OF FILING
- ------ --------------------------------------- ---------------------------------------
10.17 Description of July 26, 1995 Amendment Filed as Exhibit 10.1 to the
to CIGNA Supplemental Pension Plan registrant's Form 10-Q for the quarter
ended September 30, 1995 and
incorporated herein by reference.
10.18 CIGNA Corporation Severance Benefits Filed as Exhibit 10.2 to the
Plan for Members of the Executive registrant's Form 10-Q for the quarter
Group, as amended and restated as of ended June 30, 1994 and incorporated
July 27, 1994 herein by reference.
10.19 Description of January 25, 1995 Filed as Exhibit 10.2 to the
Amendment to the CIGNA Corporation registrant's Form 10-Q for the quarter
Severance Benefits Plan for Members of ended March 31, 1995 and incorporated
the Executive Group herein by reference.
10.20 Description of July 26, 1995 Amendment Filed as Exhibit 10.2 to the
to the CIGNA Corporation Severance registrant's Form 10-Q for the quarter
Benefits Plan for Members of the ended September 30, 1995 and
Executive Group incorporated herein by reference.
10.21 Description of CIGNA Corporation Filed as Exhibit 10.9 to the
Financial Services Program registrant's Form 10-K for the year
ended December 31, 1993 and
incorporated herein by reference.
10.22 Description of the CIGNA Corporation Filed as Exhibit 10.7 to the
Key Management Annual Incentive Bonus registrant's Form 10-K for the year
Plan ended December 31, 1993 and
incorporated herein by reference.
10.23 Agreement dated February 9, 1993 Filed as Exhibit 10.14 to the
between Mr. Isom and the registrant registrant's Form 10-K for the year
ended December 31, 1993 and
incorporated herein by reference.
10.24 Agreement dated May 24, 1995, between Exhibit omitted and filed separately
Mr. Isom and the registrant with the Securities and Exchange
Commission. Confidential treatment
requested.
10.25 Form of Special Retention Agreement Filed as Exhibit 10.3 to the
with Messrs. Taylor and Stewart registrant's Form 10-Q for the quarter
ended March 31, 1995 and incorporated
herein by reference.
10.26 Special Retention Agreement with Mr. Filed herewith.
Levinson
10.27 Form of Special Deferral Agreement with Filed as Exhibit 10.4 to the
certain executive officers registrant's Form 10-Q for the quarter
ended March 31, 1995 and incorporated
herein by reference.
11 Computation of Primary and Fully Filed herewith.
Diluted Earnings Per Share
E-3
57
INDEX TO EXHIBITS
NUMBER DESCRIPTION METHOD OF FILING
- ------ --------------------------------------- ---------------------------------------
12 Computation of Ratios of Earnings to Filed herewith.
Fixed Charges
13 Portions of registrant's 1995 Annual Filed herewith.
Report to Shareholders (Entire Annual
Report bound in printed versions of
Form 10-K.)
21 Subsidiaries of the Registrant Filed herewith.
23 Consent of Independent Accountants Filed herewith.
24.1 Powers of Attorney Filed herewith.
24.2 Certified Resolutions Filed herewith.
27 Financial Data Schedule (Included only Filed herewith.
in the electronic format of Form 10-K.)
28.1 Reconciliation of Schedule P to Total Filed herewith.
Statutory Reserves
28.2 (P) Schedule P to the Annual Statement Filed herewith in paper format under
for the Year 1995 of ICNA and its cover of Form SE.
Affiliates
The registrant will furnish to the Commission upon request a copy of any of
the registrant's agreements with respect to its long-term debt.
Shareholders may obtain copies of exhibits by writing to CIGNA Corporation,
Shareholder Services Department, Two Liberty Place, 1601 Chestnut Street, P.O.
Box 7716, Philadelphia, Pennsylvania 19192-2378.
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