CIGNA 3-04 10Q/A
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
(Amendment
No. 1)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March
31, 2004
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
for the
transition period from _____ to _____
Commission
file number 1-8323
CIGNA
Corporation
(Exact
name of registrant as specified in its charter)
|
|
Delaware |
06-1059331 |
(State
or other jurisdiction |
(I.R.S.
Employer |
of
incorporation or organization) |
Identification
No.) |
One
Liberty Place, 1650 Market Street
Philadelphia,
Pennsylvania 19192
(Address
of principal executive offices) (Zip
Code)
Registrant's
telephone number, including area code (215)
761-1000
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
_
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes x No
_
As of
March 31, 2004, 141,403,654 shares of the issuer's common stock were
outstanding.
Explanatory
Note
CIGNA is
filing this Amendment to Form 10-Q to reflect the restatement of its financial
statements of its unaudited consolidated financial statements for the periods
covered by this report. Please see Note 3 to the Financial Statements for
specific information related to the restatement.
CIGNA
historically accounted for stock option grants as fixed awards under Accounting
Principles Board (APB) No. 25 and disclosed in the footnotes to the financial
statements the expense based on the fair value of stock options pursuant to
Statement of Financial Accounting Standards (SFAS) No. 123. While reviewing
changes to its equity compensation plans and during the normal 2004 year-end
closing process, CIGNA determined that certain stock option grants under these
plans required variable rather than fixed accounting treatment under APB No. 25.
Variable accounting should have been used because participants were permitted to
elect to pay the option exercise price using restricted stock. As a result,
CIGNA determined on February 7, 2005 the need to restate its financial
statements included in the Form 10-K for the year ended December 31, 2003 and in
each of the Form 10-Q filings for the three quarters ended September 30, 2004.
CIGNA's management and the Audit Committee of CIGNA's Board of Directors
discussed the restatement with CIGNA's independent registered public accounting
firm.
This
amended Form 10-Q/A does not attempt to modify or update any other disclosures
set forth in the original Form 10-Q, except as required to reflect the effects
of the restatement as described in Note 3 to the Financial Statements included
in the amended Form 10-Q/A. Additionally, this amended Form 10-Q/A does not
purport to provide a general update or discussion of any other developments at
CIGNA after the date of the original filing. All information contained in this
amended Form 10-Q/A and the original Form 10-Q is subject to updating and
supplementing as provided in the periodic reports that CIGNA has filed and will
file after the original filing date with the Securities and Exchange Commission.
In addition, the filing of this amended Form 10-Q/A shall not be deemed an
admission that the original filing, when made, included any untrue statement of
material fact or omitted to state a material fact necessary to make a statement
made therein not misleading. This amended Form 10-Q/A does not include the items
from the original Form 10-Q that are not being amended.
Financial
information included in reports on Form 10-K, Form 10-Q and Form 8-K (except the
Form 8-K with the date of earliest event reported February 7, 2005) previously
filed by CIGNA should not be relied upon and are superseded by the information
in this Quarterly Report on Form 10-Q/A. CIGNA will also file amended quarterly
reports on Form 10-Q/A for each of the second and third quarters of 2004 and an
amended annual report on Form 10-K/A for the year ended December 31,
2003.
CIGNA
CORPORATION
INDEX
The
following Items of the original filing on Form 10-Q are amended as indicated by
this Amendment on Form 10-Q/A:
|
|
Page
No |
PART
I. |
FINANCIAL
INFORMATION |
|
|
|
|
|
Item
1. Financial Statements |
4 |
|
|
|
|
Consolidated
Income Statements |
5 |
|
Consolidated
Balance Sheets |
6 |
|
Consolidated
Statements of Comprehensive |
|
|
Income and Changes in Shareholders' Equity |
7 |
|
Consolidated
Statements of Cash Flows |
8 |
|
Notes
to the Financial Statements |
9 |
|
|
|
|
Item
2. Management's Discussion and Analysis |
|
|
of Financial Condition and Results of Operations |
26 |
|
|
|
|
Item
4. Controls and Procedures |
58 |
|
|
|
PART
II. |
OTHER
INFORMATION |
58 |
|
|
|
|
Item
6. Exhibits and Reports on Form 8-K |
58 |
|
|
|
SIGNATURE |
|
59 |
|
|
|
EXHIBIT
INDEX |
E-1 |
As used
herein, CIGNA refers to one or more of CIGNA Corporation and its consolidated
subsidiaries.
Part I.
FINANCIAL INFORMATION
Please
note that the information contained in this Amendment, including the
Consolidated Financial Statements and the Notes to the Financial Statements,
does not reflect events occurring after the date of the original filing. Such
events include, among others, the events described in our quarterly reports on
Form 10-Q for the periods ended June 30, 2004 and September 30, 2004 and the
events subsequently described in our current reports on Form 8-K. For a
description of these events, please read our Exchange Act reports filed since
the filing of the Original Form 10-Q.
Item 1.
Financial
Statements
CIGNA
CORPORATION |
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME |
|
|
|
|
|
(In
millions, except per share amounts) |
|
|
|
|
|
|
|
Three
Months Ended |
|
|
|
March
31, |
|
|
|
2004 |
|
2003 |
|
|
|
(As
Restated, See Note 3) |
|
REVENUES |
|
|
|
|
|
Premiums
and fees |
|
$ |
3,624 |
|
$ |
3,915 |
|
Net
investment income |
|
|
603
|
|
|
658
|
|
Other
revenues |
|
|
474
|
|
|
358
|
|
Realized
investment gains (losses) |
|
|
21
|
|
|
(31 |
) |
Total
revenues |
|
|
4,722
|
|
|
4,900
|
|
|
|
|
|
|
|
|
|
BENEFITS,
LOSSES AND EXPENSES |
|
|
|
|
|
|
|
Benefits,
losses and settlement expenses |
|
|
2,964
|
|
|
3,249
|
|
Policy
acquisition expenses |
|
|
64
|
|
|
59
|
|
Other
operating expenses |
|
|
1,375
|
|
|
1,311
|
|
Total
benefits, losses and expenses |
|
|
4,403
|
|
|
4,619
|
|
|
|
|
|
|
|
|
|
INCOME
FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
BEFORE
INCOME TAXES |
|
|
319
|
|
|
281
|
|
|
|
|
|
|
|
|
|
Income
taxes (benefits): |
|
|
|
|
|
|
|
Current |
|
|
142
|
|
|
(71 |
) |
Deferred |
|
|
(35 |
) |
|
165
|
|
Total
taxes |
|
|
107
|
|
|
94
|
|
|
|
|
|
|
|
|
|
INCOME
FROM CONTINUING OPERATIONS |
|
|
212
|
|
|
187
|
|
|
|
|
|
|
|
|
|
INCOME
FROM DISCONTINUED OPERATIONS |
|
|
-
|
|
|
48
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE CUMULATIVE EFFECT |
|
|
|
|
|
|
|
OF
ACCOUNTING CHANGE |
|
|
212
|
|
|
235
|
|
|
|
|
|
|
|
|
|
CUMULATIVE
EFFECT OF ACCOUNTING CHANGE, |
|
|
|
|
|
|
|
NET
OF TAXES |
|
|
(139 |
) |
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME |
|
$ |
73 |
|
$ |
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE - BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM CONTINUING OPERATIONS |
|
$ |
1.51 |
|
$ |
1.34 |
|
INCOME
FROM DISCONTINUED OPERATIONS |
|
|
-
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE CUMULATIVE EFFECT |
|
|
|
|
|
|
|
OF
ACCOUNTING CHANGE |
|
|
1.51
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
CUMULATIVE
EFFECT OF ACCOUNTING CHANGE, |
|
|
|
|
|
|
|
NET
OF TAXES |
|
|
(0.99 |
) |
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME |
|
$ |
0.52 |
|
$ |
1.68 |
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE - DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM CONTINUING OPERATIONS |
|
$ |
1.50 |
|
$ |
1.34 |
|
INCOME
FROM DISCONTINUED OPERATIONS |
|
|
-
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE CUMULATIVE EFFECT |
|
|
|
|
|
|
|
OF
ACCOUNTING CHANGE |
|
|
1.50
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
CUMULATIVE
EFFECT OF ACCOUNTING CHANGE, |
|
|
|
|
|
|
|
NET
OF TAXES |
|
|
(0.98 |
) |
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME |
|
$ |
0.52 |
|
$ |
1.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
DECLARED PER SHARE |
|
$ |
0.33 |
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral part of
these statements. |
CIGNA
CORPORATION |
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS |
|
|
|
|
|
|
|
|
|
(In
millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of |
|
|
|
As
of |
|
|
|
|
|
March
31, |
|
|
|
December
31, |
|
|
|
|
|
2004 |
|
|
|
2003 |
|
|
|
|
|
(As
Restated, See Note 3) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost, $16,754;
$15,772) |
|
|
|
|
$ |
18,249 |
|
|
|
|
$ |
17,121 |
|
Securities supporting experience-rated pension
policyholder |
|
|
|
|
|
|
|
|
|
|
|
|
|
contracts, at fair value (cost, $9,810 and $10,558) |
|
|
|
|
|
10,582
|
|
|
|
|
|
11,222
|
|
Equity securities, at fair value (cost, $121; $47) |
|
|
|
|
|
164
|
|
|
|
|
|
78
|
|
Mortgage loans |
|
|
|
|
|
8,563
|
|
|
|
|
|
8,655
|
|
Policy loans |
|
|
|
|
|
1,555
|
|
|
|
|
|
1,572
|
|
Real estate |
|
|
|
|
|
245
|
|
|
|
|
|
146
|
|
Other long-term investments |
|
|
|
|
|
453
|
|
|
|
|
|
717
|
|
Short-term investments |
|
|
|
|
|
116
|
|
|
|
|
|
147
|
|
Total investments |
|
|
|
|
|
39,927
|
|
|
|
|
|
39,658
|
|
Cash
and cash equivalents |
|
|
|
|
|
1,491
|
|
|
|
|
|
1,392
|
|
Accrued
investment income |
|
|
|
|
|
507
|
|
|
|
|
|
468
|
|
Premiums,
accounts and notes receivable |
|
|
|
|
|
2,710
|
|
|
|
|
|
3,026
|
|
Reinsurance
recoverables |
|
|
|
|
|
6,289
|
|
|
|
|
|
6,395
|
|
Deferred
policy acquisition costs |
|
|
|
|
|
612
|
|
|
|
|
|
580
|
|
Property
and equipment |
|
|
|
|
|
936
|
|
|
|
|
|
973
|
|
Deferred
income taxes |
|
|
|
|
|
1,119
|
|
|
|
|
|
1,040
|
|
Goodwill
|
|
|
|
|
|
1,620
|
|
|
|
|
|
1,620
|
|
Other
assets, including other intangibles |
|
|
|
|
|
427
|
|
|
|
|
|
447
|
|
Separate
account assets |
|
|
|
|
|
37,194
|
|
|
|
|
|
35,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
$ |
92,832 |
|
|
|
|
$ |
90,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder
deposit funds |
|
|
|
|
$ |
26,837 |
|
|
|
|
$ |
26,979 |
|
Unpaid
claims and claim expenses |
|
|
|
|
|
4,461
|
|
|
|
|
|
4,708
|
|
Future
policy benefits |
|
|
|
|
|
11,550
|
|
|
|
|
|
11,545
|
|
Unearned
premiums |
|
|
|
|
|
327
|
|
|
|
|
|
326
|
|
Total insurance and contractholder liabilities |
|
|
|
|
|
43,175
|
|
|
|
|
|
43,558
|
|
Accounts
payable, accrued expenses and other liabilities |
|
|
|
|
|
6,181
|
|
|
|
|
|
5,960
|
|
Long-term
debt |
|
|
|
|
|
1,513
|
|
|
|
|
|
1,500
|
|
Nonrecourse
obligations |
|
|
|
|
|
101
|
|
|
|
|
|
23
|
|
Separate
account liabilities |
|
|
|
|
|
37,194
|
|
|
|
|
|
35,393
|
|
Total liabilities |
|
|
|
|
|
88,164
|
|
|
|
|
|
86,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTINGENCIES
- NOTE 13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (par value per share, $0.25; shares issued, 276;
275) |
|
|
|
|
|
69
|
|
|
|
|
|
69
|
|
Additional
paid-in capital |
|
|
|
|
|
3,646
|
|
|
|
|
|
3,597
|
|
Net
unrealized appreciation, fixed maturities |
|
$ |
763 |
|
|
|
|
$ |
610 |
|
|
|
|
Net
unrealized appreciation, equity securities |
|
|
28
|
|
|
|
|
|
29
|
|
|
|
|
Net
unrealized depreciation, derivatives |
|
|
(5 |
) |
|
|
|
|
(12 |
) |
|
|
|
Net
translation of foreign currencies |
|
|
(5 |
) |
|
|
|
|
(14 |
) |
|
|
|
Minimum
pension liability adjustment |
|
|
(780 |
) |
|
|
|
|
(667 |
) |
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
1
|
|
|
|
|
|
(54 |
) |
Retained
earnings |
|
|
|
|
|
9,529
|
|
|
|
|
|
9,503
|
|
Less
treasury stock, at cost |
|
|
|
|
|
(8,577 |
) |
|
|
|
|
(8,557 |
) |
Total shareholders' equity |
|
|
|
|
|
4,668
|
|
|
|
|
|
4,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
|
|
|
|
$ |
92,832 |
|
|
|
|
$ |
90,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY PER SHARE |
|
|
|
|
$ |
33.01 |
|
|
|
|
$ |
32.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral part of
these statements. |
|
|
|
|
|
|
|
|
|
|
CIGNA
CORPORATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME AND CHANGES IN |
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, |
|
2004
|
|
2003
|
|
|
|
Compre-
hensive
Income |
|
|
|
Share-
holders'
Equity |
|
Compre-
hensive
Income |
|
|
|
Share-
holders'
Equity |
|
|
|
(As
Restated, See Note 3) |
|
(As
Restated, See Note 3) |
|
Common
stock |
|
|
|
|
|
|
|
$ |
69 |
|
|
|
|
|
|
|
$ |
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital, January 1 |
|
|
|
|
|
|
|
|
3,597
|
|
|
|
|
|
|
|
|
3,503
|
|
Issuance of common stock for employee benefits plans |
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
30
|
|
Additional
paid-in capital, March 31 |
|
|
|
|
|
|
|
|
3,646
|
|
|
|
|
|
|
|
|
3,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss, January 1 |
|
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
|
(202 |
) |
Net unrealized appreciation, fixed maturities |
|
$ |
153 |
|
|
|
|
|
153
|
|
$ |
68 |
|
|
|
|
|
68
|
|
Net unrealized depreciation, equity securities |
|
|
(1 |
) |
|
|
|
|
(1 |
) |
|
(3 |
) |
|
|
|
|
(3 |
) |
Net unrealized appreciation on securities |
|
|
152
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
Net
unrealized appreciation (depreciation), derivatives |
|
|
7
|
|
|
|
|
|
7
|
|
|
(2 |
) |
|
|
|
|
(2 |
) |
Net
translation of foreign currencies |
|
|
9
|
|
|
|
|
|
9
|
|
|
14
|
|
|
|
|
|
14
|
|
Minimum
pension liability adjustment |
|
|
(113 |
) |
|
|
|
|
(113 |
) |
|
-
|
|
|
|
|
|
-
|
|
Other comprehensive income |
|
|
55
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income (loss), March 31 |
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings, January 1 |
|
|
|
|
|
|
|
|
9,503
|
|
|
|
|
|
|
|
|
9,038
|
|
Net income |
|
|
73
|
|
|
|
|
|
73
|
|
|
235
|
|
|
|
|
|
235
|
|
Common dividends declared |
|
|
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
|
(46 |
) |
Retained
earnings, March 31 |
|
|
|
|
|
|
|
|
9,529
|
|
|
|
|
|
|
|
|
9,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock, January 1 |
|
|
|
|
|
|
|
|
(8,557 |
) |
|
|
|
|
|
|
|
(8,510 |
) |
Other treasury stock transactions, net |
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
(28 |
) |
Treasury
stock, March 31 |
|
|
|
|
|
|
|
|
(8,577 |
) |
|
|
|
|
|
|
|
(8,538 |
) |
TOTAL
COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY |
|
$ |
128 |
|
|
|
|
$ |
4,668 |
|
$ |
312 |
|
|
|
|
$ |
4,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral part of
these statements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CIGNA
CORPORATION |
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS |
|
|
|
|
|
|
|
(In
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, |
|
|
|
2004 |
|
|
|
2003 |
|
|
|
(As
Restated, See Note 3) |
|
CASH
FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Income
from continuing operations |
|
$ |
212 |
|
|
|
|
$ |
187 |
|
Adjustments
to reconcile income from continuing operations |
|
|
|
|
|
|
|
|
|
|
to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Insurance
liabilities |
|
|
(380 |
) |
|
|
|
|
(63 |
) |
Reinsurance
recoverables |
|
|
95
|
|
|
|
|
|
59
|
|
Deferred
policy acquisition costs |
|
|
(27 |
) |
|
|
|
|
(19 |
) |
Premiums,
accounts and notes receivable |
|
|
294
|
|
|
|
|
|
(16 |
) |
Accounts
payable, accrued expenses and other liabilities |
|
|
(78 |
) |
|
|
|
|
(6 |
) |
Current
income taxes |
|
|
174
|
|
|
|
|
|
227
|
|
Deferred
income taxes |
|
|
(35 |
) |
|
|
|
|
165
|
|
Realized
investment (gains) losses |
|
|
(21 |
) |
|
|
|
|
31
|
|
Depreciation
and amortization |
|
|
62
|
|
|
|
|
|
63
|
|
Gains
on sales of businesses (excluding discontinued operations)
|
|
|
(14 |
) |
|
|
|
|
(17 |
) |
Proceeds
from sales and maturities of securities supporting |
|
|
|
|
|
|
|
|
|
|
experience-rated pension policyholder contracts, |
|
|
|
|
|
|
|
|
|
|
net of purchases |
|
|
782
|
|
|
|
|
|
-
|
|
Other,
net |
|
|
9
|
|
|
|
|
|
(59 |
) |
Net cash provided by operating activities of continuing operations
|
|
|
1,073
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Proceeds
from investments sold: |
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
650
|
|
|
|
|
|
1,616
|
|
Equity securities |
|
|
3
|
|
|
|
|
|
7
|
|
Mortgage loans |
|
|
64
|
|
|
|
|
|
319
|
|
Other (primarily short-term investments) |
|
|
1,338
|
|
|
|
|
|
1,198
|
|
Investment
maturities and repayments: |
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
187
|
|
|
|
|
|
683
|
|
Mortgage loans |
|
|
361
|
|
|
|
|
|
217
|
|
Investments
purchased: |
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(1,482 |
) |
|
|
|
|
(2,258 |
) |
Equity securities |
|
|
(6 |
) |
|
|
|
|
(26 |
) |
Mortgage loans |
|
|
(331 |
) |
|
|
|
|
(498 |
) |
Other (primarily short-term investments) |
|
|
(1,277 |
) |
|
|
|
|
(1,027 |
) |
Proceeds
on sales of businesses |
|
|
-
|
|
|
|
|
|
209
|
|
Property
and equipment, net |
|
|
(18 |
) |
|
|
|
|
(26 |
) |
Other,
net |
|
|
(4 |
) |
|
|
|
|
-
|
|
Net cash provided by (used in) investing activities of |
|
|
|
|
|
|
|
|
|
|
continuing operations |
|
|
(515 |
) |
|
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Deposits and interest credited to contractholder deposit
funds |
|
|
1,677
|
|
|
|
|
|
1,679
|
|
Withdrawals and benefit payments from contractholder deposit
funds |
|
|
(2,108 |
) |
|
|
|
|
(1,993 |
) |
Net change in short-term debt |
|
|
-
|
|
|
|
|
|
(3 |
) |
Repayment of long-term debt |
|
|
-
|
|
|
|
|
|
(117 |
) |
Issuance of common stock |
|
|
19
|
|
|
|
|
|
-
|
|
Common dividends paid |
|
|
(47 |
) |
|
|
|
|
(46 |
) |
Net cash used in financing activities of continuing operations
|
|
|
(459 |
) |
|
|
|
|
(480 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents |
|
|
99
|
|
|
|
|
|
486
|
|
Cash
and cash equivalents, beginning of period |
|
|
1,392
|
|
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period |
|
$ |
1,491 |
|
|
|
|
$ |
2,061 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Information: |
|
|
|
|
|
|
|
|
|
|
Income taxes received, net |
|
$ |
(32 |
) |
|
|
|
$ |
(300 |
) |
Interest paid |
|
$ |
24 |
|
|
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral part of
these statements. |
|
|
|
|
|
|
|
|
|
|
CIGNA
CORPORATION
NOTES TO
THE FINANCIAL STATEMENTS
NOTE
1 - BASIS OF PRESENTATION
The
consolidated financial statements include the accounts of CIGNA Corporation, its
significant subsidiaries, and variable interest entities of which CIGNA is the
primary beneficiary, which are referred to collectively as “CIGNA.” Intercompany
transactions and accounts have been eliminated in consolidation. These
consolidated financial statements were prepared in conformity with accounting
principles generally accepted in the United States.
The
interim financial statements are unaudited but include all adjustments
(including normal recurring adjustments) necessary, in the opinion of
management, for a fair statement of financial position and results of operations
for the period reported. The interim consolidated financial statements and notes
should be read in conjunction with the Consolidated Financial Statements and
Notes in CIGNA’s 2003 Annual Report to Shareholders and Form 10-K and as further
amended on the Form 10-K/A filed for the year ended 2003.
The
preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of
portions of the insurance business as well as competitive and other market
conditions, call for caution in estimating full year results based on interim
results of operations.
Certain
reclassifications have been made to prior period amounts to conform to the 2004
presentation.
NOTE
2 - RECENT ACCOUNTING PRONOUNCEMENTS
Derivative
Instruments. In April
2003, the Financial Accounting Standards Board (FASB) issued an amendment and
finalized an implementation issue related to Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (SFAS 133). Implementation of the SFAS 133 amendment and the
implementation issue in the third quarter of 2003 had no material effect on
CIGNA’s financial statements.
The
implementation issue and a Statement of Position issued in 2003 (described
below) address accounting for liabilities that provide contractholders with
returns based on pools of investments, and each permits a one-time accounting
reclassification of associated investment securities from available-for-sale to
trading. In the fourth quarter of 2003, CIGNA reclassified securities supporting
experience-rated pension policyholder contracts associated with its retirement
benefits business to trading, and now reports these securities in a separate
balance sheet caption. Under the experience-rating process, unrealized gains and
losses recognized for these securities accrue to policyholders. Accordingly, the
reclassification did not affect CIGNA's net income.
Long-Duration
Contracts. Effective
January 1, 2004, CIGNA implemented a Statement of Position (SOP 03-01),
“Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts.”
The SOP
addresses accounting for certain contractual features of investment-related and
universal life contracts and for separate accounts. The cumulative effect of
implementing the SOP in the first quarter of 2004 was a reduction to net income
of $139 million, of which $136 million resulted from recording liabilities for
certain experience-rated pension policyholder contracts based on the appreciated
value of associated pools of investments, primarily mortgage loans and real
estate. The remaining cumulative effect resulted from implementing the SOP’s
requirements applicable to universal life contracts. CIGNA recorded additional
benefit expense of $17 million pre-tax in the first quarter of 2004 to reflect
the ongoing effect of the SOP’s accounting requirements described above.
The sale
of CIGNA's retirement benefits business generally resulted in the transfer of
the pool of investments and securities supporting experience-rated pension
policyholder contracts discussed above. See Note 4 for information about this
sale.
CIGNA’s
accounting for reinsurance of guaranteed minimum death benefit contracts and
guaranteed minimum income benefit contracts was not affected by the provisions
of the SOP.
Consolidation. On March
31, 2004, CIGNA implemented FASB Interpretation No. 46, “Consolidation of
Variable Interest Entities,” as revised, that provides criteria for
consolidating certain entities based on majority ownership of expected losses or
residual returns. As a result, CIGNA recorded additional assets and liabilities,
primarily associated with real estate joint ventures, of $98 million each,
including $83 million of nonrecourse liabilities. Including the newly
consolidated entities, CIGNA has recorded real estate joint venture assets of
$165 million and liabilities of $98 million as follows: $13 million of variable
rate debt due by 2008; $79 million of nonrecourse obligations; and $6 million of
other liabilities.
At March
31, 2004, CIGNA also consolidated amounts associated with certain variable
interest entities that issue investment products secured by commercial loan
pools. CIGNA has recorded investments of $216 million and nonrecourse
liabilities of $38 million as follows: $22 million of nonrecourse obligations
and $16 million of other nonrecourse liabilities.
At
December 31, 2003, CIGNA had recorded variable interest entities as follows:
real estate joint ventures with assets of $20 million and nonrecourse
liabilities of $5 million and, for entities that issue investment products
secured by commercial loan pools, assets of $215 million and nonrecourse
liabilities of $40 million, including $23 million of nonrecourse obligations.
NOTE
3 - RESTATEMENT - STOCK COMPENSATION
Restatement. During a
review of CIGNA’s equity compensation plans it was determined that certain stock
option grants under these plans required variable accounting rather than fixed
accounting treatment under Accounting Principles Board (APB) No. 25. CIGNA
previously accounted for these stock option grants as fixed awards under APB No.
25. Variable accounting should have been used because participants were
permitted to elect to pay the option exercise price using restricted stock. As a
result, CIGNA recorded additional stock-based compensation under the variable
method of accounting and associated income tax adjustments.
A summary
of the significant effects of restatement is as follows:
|
|
|
|
|
|
Three
Months Ended
March 31 |
|
2004 |
|
2003 |
|
(In
millions) |
|
As
Reported |
|
As
Restated |
|
As
Reported |
|
As
Restated |
|
Other
Operating Expenses |
|
$ |
1,367 |
|
$ |
1,375 |
|
$ |
1,310 |
|
$ |
1,311 |
|
Income
from
Continuing Operations |
|
$ |
217 |
|
$ |
212 |
|
$ |
188 |
|
$ |
187 |
|
Net
Income |
|
$ |
78 |
|
$ |
73 |
|
$ |
236 |
|
$ |
235 |
|
Income
from
Continuing Operations
per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.55 |
|
$ |
1.51 |
|
$ |
1.35 |
|
$ |
1.34 |
|
Diluted |
|
$ |
1.54 |
|
$ |
1.50 |
|
$ |
1.34 |
|
$ |
1.34 |
|
Net
Income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.56 |
|
$ |
0.52 |
|
$ |
1.69 |
|
$ |
1.68 |
|
Diluted |
|
$ |
0.55 |
|
$ |
0.52 |
|
$ |
1.68 |
|
$ |
1.68 |
|
|
|
|
|
|
|
|
|
As
of
March
31, 2004 |
|
As
of
December
31, 2003 |
|
(In
millions) |
|
As
Reported |
|
As
Restated |
|
As
Reported |
|
As
Restated |
|
Deferred
Tax Asset |
|
$ |
1,079 |
|
$ |
1,119 |
|
$ |
1,001 |
|
$ |
1,040 |
|
Shareholders’
Equity |
|
$ |
4,628 |
|
$ |
4,668 |
|
$ |
4,519 |
|
$ |
4,558 |
|
Stock
compensation. CIGNA
uses the intrinsic value method of accounting for stock options granted to
employees. The following table illustrates the effect on CIGNA’s reported net
income and earnings per share (using the Black-Scholes option-pricing model for
stock options) if compensation expense was based on the fair value method of
accounting for all stock awards.
|
|
|
|
|
|
Three
Months Ended
March
31, |
|
(In
millions, except per share amounts) |
|
2004 |
|
2003 |
|
|
|
(As
Restated) |
|
Net
income as reported |
|
$ |
73 |
|
$ |
235 |
|
Compensation
expense for restricted
stock grants, net of taxes,
included in net income as reported |
|
|
4 |
|
|
4 |
|
Compensation
expense for stock options, net of
taxes, included in net income as reported |
|
|
5 |
|
|
1 |
|
Total
compensation expense for stock
options and restricted stock grants
under fair value method for all
awards, net of taxes |
|
|
(14 |
) |
|
(13 |
) |
Pro
forma net income |
|
$ |
68 |
|
$ |
227 |
|
Basic
- as reported |
|
$ |
0.52 |
|
$ |
1.68 |
|
Basic
- pro forma |
|
$ |
0.49 |
|
$ |
1.63 |
|
Diluted
- as reported |
|
$ |
0.52 |
|
$ |
1.68 |
|
Diluted
- pro forma |
|
$ |
0.48 |
|
$ |
1.62 |
|
NOTE
4 - ACQUISITIONS AND DISPOSITIONS
CIGNA may
from time to time acquire or dispose of assets, subsidiaries or lines of
business. Significant transactions are described below.
Sale
of Retirement Benefits Business. On April
1, 2004, CIGNA sold its retirement benefits business, excluding the corporate
life insurance business, for cash proceeds of $2.1 billion. The sale is expected
to result in an estimated after-tax gain of approximately $675 million, part of
which will be recognized in the second quarter of 2004. As this transaction is
primarily in the form of a reinsurance arrangement, approximately $475 million
of the after-tax gain will be deferred and amortized over future periods and
reported in results of continuing operations. These amounts are subject to
change pending final determination of the net assets sold, transaction costs and
other adjustments.
The sale
included reinsurance of approximately $50 billion of liabilities. As a result of
derivatives accounting requirements, a portion of the reinsurance liabilities
may be adjusted through net income for unrealized changes in the fair value of
the related investment portfolio through 2006. The resulting volatility may be
material to CIGNA's consolidated net income and shareholders’
equity.
Sale
of Lovelace Health Systems, Inc. In
January 2003, CIGNA sold the operations of Lovelace, an integrated health care
system, for cash proceeds of $209 million and recognized an after-tax gain of
$32 million, which is reported in discontinued operations.
Sale
of Brazilian Health Care Operations. In
January 2003, CIGNA sold its Brazilian health care operations. The sale
generated an after-tax gain of $18 million, primarily as a result of the
disposition of the net liabilities associated with these operations. The gain is
reported in discontinued operations.
Lovelace
and Brazilian Health Care Discontinued Operations. Summarized
financial data for discontinued operations (which includes Lovelace and the gain
on the sale of the Brazilian health care operations) are outlined
below:
|
|
|
FINANCIAL
SUMMARY
(In millions) |
|
Three Months Ended
March
31, 2003 |
Income
Statement Data |
|
|
|
|
Revenues |
|
|
$— |
Loss
before income tax benefits |
|
|
$(3) |
Income
tax benefits |
|
|
(1) |
Loss
from operations |
|
|
(2) |
Gains
on sales, net of taxes
of $25 |
|
|
50 |
Income
from discontinued operations |
|
|
$48 |
NOTE
5 - RESTRUCTURING PROGRAMS
Operational
effectiveness review. In the
first quarter of 2004, CIGNA adopted a restructuring program associated with
planned organizational changes to streamline functional support resources and to
adjust its operations to current business volumes. As a result, CIGNA recognized
in other operating expenses a total after-tax charge of $49 million ($75 million
pre-tax) in the Health Care segment and Corporate primarily for severance costs.
The table
below shows CIGNA’s restructuring activity (pre-tax) related to severance and
real estate for this program:
|
|
|
|
|
|
|
|
(In
millions) |
|
Health
Care |
|
Corporate |
|
Total |
|
First
quarter 2004 charge: |
|
|
|
|
|
|
|
Severance |
|
$ |
39 |
|
$ |
31 |
|
$ |
70 |
|
Real estate and other |
|
|
5 |
|
|
— |
|
|
5 |
|
Total |
|
|
44 |
|
|
31 |
|
|
75 |
|
First
quarter 2004 activity: |
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
(2 |
) |
|
(4 |
) |
|
(6 |
) |
Balance
as of March 31, 2004 |
|
$ |
42 |
|
$ |
27 |
|
$ |
69 |
|
Corporate
effectiveness initiative. In the
second quarter of 2003, CIGNA adopted a restructuring program to attain certain
operational efficiencies in its corporate staff functions and to achieve
additional cost savings. As a result, CIGNA recognized in other operating
expenses an after-tax charge in Corporate of $9 million ($13 million pre-tax)
for severance costs. As of March 31, 2004, $7 million ($11 million pre-tax) of
the severance has been paid.
NOTE
6 - GUARANTEED MINIMUM DEATH BENEFIT AND INCOME BENEFIT CONTRACTS
CIGNA's
reinsurance operations, which were discontinued in 2000 and are now an inactive
business in run-off mode, reinsured a guaranteed minimum death benefit under
certain variable annuities issued by other insurance companies. These variable
annuities are essentially investments in mutual funds combined with a death
benefit. CIGNA has equity market risks as a result of this product.
The
determination of reserves for guaranteed minimum death benefits requires CIGNA
to make critical accounting estimates. If actual experience differs from the
assumptions and other considerations (including lapse, partial surrender,
mortality, interest rates and volatility) used in estimating these reserves, the
resulting change could have a material adverse effect on CIGNA’s consolidated
results of operations, and in certain situations, could have a material adverse
effect on CIGNA’s financial condition. CIGNA describes the assumptions used to
develop the reserves for guaranteed minimum death benefits, and provides the
effects of hypothetical changes in those assumptions, on page 13 of CIGNA's 2003
Annual Report to Shareholders as restated. CIGNA regularly evaluates the
assumptions used in establishing reserves and changes its estimates if actual
experience or other evidence suggests that earlier assumptions should be
revised.
CIGNA is
providing the following information about its reserving methodology and
assumptions for guaranteed minimum death benefits in response to SOP 03-01,
described in Note 2, which is effective in the first quarter of 2004.
· |
The
reserves represent estimates of the present value of net amounts expected
to be paid, less the present value of net future premiums and investment
returns expected to be received. Included in net amounts expected to be
paid is the excess of the guaranteed death benefits over the values of the
contractholders’ accounts (based on underlying equity and bond mutual fund
investments). |
· |
The
reserves include an estimate for partial surrenders that essentially lock
in the death benefit for a particular policy based on annual election
rates that vary from 0-10% depending on the net amount at risk for each
policy. |
· |
The
mean investment performance assumption is 5% considering CIGNA's program
to reduce equity market exposures using futures and forward contracts
(described below). |
· |
The
volatility assumption is 16-31%, varying by equity fund type; 4-8%,
varying by bond fund type; and 1% for money market
funds. |
· |
The
mortality assumption is 70-75% of the 1994 Group Annuity Mortality table,
with 1% annual improvement beginning January 1,
2000. |
· |
The
lapse rate assumption is 0-15%, depending on contract type, policy
duration and the ratio of the net amount at risk to account
value. |
· |
The
discount rate is 5.75%. |
The table
below presents the account value, net amount at risk and average attained age of
underlying contractholders for guarantees in the event of death, by type of
benefit as of March 31, 2004 and December 31, 2003. The net amount at risk is
the death benefit coverage in force or the amount that CIGNA would have to pay
if all contractholders had died as of the specified date, and represents the
excess of the guaranteed benefit amount over the fair value of the underlying
mutual fund investments.
|
|
|
|
|
|
As
of |
|
(Dollars
in millions) |
|
March
31, 2004 |
|
December
31, 2003 |
|
Highest
annuity value |
|
|
|
|
|
Account value |
|
$ |
40,523 |
|
$ |
41,497 |
|
Net amount at risk |
|
$ |
10,057 |
|
$ |
10,951 |
|
Average attained age of contractholders |
|
|
65 |
|
|
65 |
|
Anniversary
value reset |
|
|
|
|
|
|
|
Account value |
|
$ |
3,188 |
|
$ |
4,474 |
|
Net amount at risk |
|
$ |
278 |
|
$ |
309 |
|
Average attained age of contractholders |
|
|
59 |
|
|
59 |
|
Other
|
|
|
|
|
|
|
|
Account value |
|
$ |
4,472 |
|
$ |
6,530 |
|
Net amount at risk |
|
$ |
1,277 |
|
$ |
1,660 |
|
Average attained age of contractholders |
|
|
63 |
|
|
64 |
|
Total |
|
|
|
|
|
|
|
Account value |
|
$ |
48,183 |
|
$ |
52,501 |
|
Net amount at risk |
|
$ |
11,612 |
|
$ |
12,920 |
|
Average attained age of contractholders
(weighted
by exposure) |
|
|
64 |
|
|
64 |
|
Number of contractholders |
|
|
1.3
million |
|
|
1.4
million |
|
CIGNA had
future policy benefit reserves for these guaranteed minimum death benefit
contracts of approximately $1.2 billion as of March 31, 2004 and December 31,
2003. For the three months ended March 31, 2004, benefits incurred were $12
million and benefits paid were $42 million, net of ceded amounts. For the three
months ended March 31, 2003, benefits incurred and benefits paid were $89
million each, net of ceded amounts.
CIGNA
maintains a program to substantially reduce the equity market exposures for
guaranteed minimum death benefit contracts by entering into exchange-traded
futures contracts and foreign currency forward contracts. CIGNA expects to
adjust these futures and forward contract positions and enter into other
positions over time, to reflect changing equity market levels and changes in the
investment mix of the underlying variable annuity investments. CIGNA recorded in
other revenues, pre-tax losses of $31 million for the first quarter of 2004 and
pre-tax gains of $56 million for the first quarter of 2003 from these futures
and forward contracts. Expense offsets reflecting corresponding changes in
liabilities for these guaranteed minimum death benefit contracts are included in
benefits, losses and settlement expenses. The notional or face amount of the
futures and forward contract positions held by CIGNA at March 31, 2004, was $1.7
billion.
CIGNA has
also written reinsurance contracts with issuers of variable annuity contracts
that provide annuitants with certain guarantees related to minimum income
benefits. See Note 13 for further information.
NOTE
7 - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Pension
benefits. CIGNA
funds its qualified pension plans at least at the minimum amount required by the
Employee Retirement Income Security Act of 1974 (ERISA). As a result of recent
changes in minimum funding requirements, CIGNA
expects to make domestic pension plan contributions of approximately
$175 million in 2004.
Components
of net pension cost were as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Service
cost |
|
$ |
22 |
|
$ |
20 |
|
Interest
cost |
|
|
55 |
|
|
55 |
|
Expected
return on plan
assets |
|
|
(48 |
) |
|
(50 |
) |
Amortization
of |
|
|
|
|
|
|
|
net
loss from past
experience |
|
|
18 |
|
|
6 |
|
Net
pension cost |
|
$ |
47 |
|
$ |
31 |
|
In
connection with the sale of the retirement benefits business and the operational
effectiveness review, CIGNA had a pension curtailment event, which required
CIGNA to remeasure the assets and obligations of its domestic qualified plan as
of March 31, 2004. As a result, CIGNA recorded an after-tax charge which
decreased equity by $113 million. This charge was primarily due to a reduction
in long-term interest rates (from 6.25% to 5.75%) used to determine the
accumulated benefit obligation, partially offset by the effect of stock market
appreciation on plan assets.
Other
postretirement benefits. Components
of net other postretirement benefit cost were as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Service
cost |
|
$ |
1 |
|
$ |
1 |
|
Interest
cost |
|
|
9 |
|
|
11 |
|
Expected
return on plan
assets |
|
|
(1 |
) |
|
(1 |
) |
Amortization
of prior
service cost |
|
|
(4 |
) |
|
(5 |
) |
Net
other postretirement
benefit cost |
|
$ |
5 |
|
$ |
6 |
|
In the
first quarter of 2003, CIGNA recognized gains of $4 million after-tax ($6
million pre-tax) for other postretirement benefits in connection with the 2002
health care restructuring program.
NOTE
8 - INVESTMENTS
Realized
Investment Gains and Losses
Realized
gains and losses on investments, excluding policyholder share, were as
follows:
|
|
|
|
|
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Fixed
maturities |
|
$ |
9 |
|
$ |
(23 |
) |
Equity
securities |
|
|
2 |
|
|
(16 |
) |
Mortgage
loans |
|
|
— |
|
|
(1 |
) |
Real
estate |
|
|
(2 |
) |
|
(1 |
) |
Derivatives
and other |
|
|
12 |
|
|
10 |
|
Realized
investment gains
(losses), before income
taxes (benefits) |
|
|
21 |
|
|
(31 |
) |
Less
income taxes
(benefits) |
|
|
7 |
|
|
(10 |
) |
Net
realized investment
gains (losses) |
|
$ |
14 |
|
$ |
(21 |
) |
Fixed
Maturities and Equity Securities
Sales of
available-for-sale fixed maturities and equity securities, including
policyholder share, were as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Proceeds
from sales |
|
$ |
653 |
|
$ |
1,623 |
|
Gross
gains on sales |
|
$ |
34 |
|
$ |
55 |
|
Gross
losses on sales |
|
$ |
(3 |
) |
$ |
(39 |
) |
Review
of Declines in Fair Value.
Management
reviews fixed maturities and equity securities for impairment based on criteria
that include:
· |
length
of time of decline; |
· |
financial
health and specific near term prospects of the issuer; and
|
· |
changes
in the regulatory, economic or general market environment of the issuer’s
industry or geographic region. |
As of
March 31, 2004, fixed maturities with a decline in fair value from cost
(primarily investment grade corporate bonds) were as follows, including the
length of time of such decline:
|
|
|
|
|
|
|
|
(In millions) |
|
Fair
Value |
|
Amortized
Cost |
|
Unrealized
Depreciation |
|
One
year or less: |
|
|
|
|
|
|
|
|
|
|
Investment
grade |
|
$ |
932 |
|
$ |
950 |
|
$ |
(18 |
) |
Below
investment grade |
|
$ |
102 |
|
$ |
107 |
|
$ |
(5 |
) |
More
than one year: |
|
|
|
|
|
|
|
|
|
|
Investment
grade |
|
$ |
111 |
|
$ |
117 |
|
$ |
(6 |
) |
Below
investment grade |
|
$ |
56 |
|
$ |
58 |
|
$ |
(2 |
) |
There
were no equity securities with a material decline in fair value from cost at
March 31, 2004.
NOTE
9 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes
in accumulated other comprehensive income (loss) (which exclude policyholder
share) were as follows:
|
|
|
|
|
|
|
|
(In
millions) |
|
Pre-Tax |
|
Tax
(Expense) Benefit |
|
After-Tax
|
|
Three
Months Ended March 31, |
|
2004 |
|
|
|
|
|
|
|
Net
unrealized appreciation, securities: |
|
|
|
|
|
|
|
Unrealized
appreciation on securities held |
|
$ |
244 |
|
$ |
(85 |
) |
$ |
159 |
|
Gains
realized on securities |
|
|
(11 |
) |
|
4 |
|
|
(7 |
) |
Net
unrealized appreciation, securities |
|
$ |
233 |
|
$ |
(81 |
) |
$ |
152 |
|
Net
unrealized appreciation, derivatives |
|
$ |
11 |
|
$ |
(4 |
) |
$ |
7 |
|
Net
translation of foreign currencies |
|
$ |
13 |
|
$ |
(4 |
) |
$ |
9 |
|
Minimum
pension liability adjustment |
|
$ |
(174 |
) |
$ |
61 |
|
$ |
(113 |
) |
2003 |
|
|
|
|
|
|
|
|
|
|
Net
unrealized appreciation,
securities: |
|
|
|
|
|
|
|
|
|
|
Unrealized
appreciation on securities held |
|
$ |
60 |
|
$ |
(20 |
) |
$ |
40 |
|
Losses
realized on securities |
|
|
39 |
|
|
(14 |
) |
|
25 |
|
Net
unrealized appreciation, securities |
|
$ |
99 |
|
$ |
(34 |
) |
$ |
65 |
|
Net
unrealized depreciation, derivatives |
|
$ |
(3 |
) |
$ |
1 |
|
$ |
(2 |
) |
Net
translation of foreign currencies:
Net
translation on foreign currencies held |
|
$ |
5 |
|
$ |
(2 |
) |
$ |
3 |
|
Foreign
currency translation losses realized
on sales of businesses |
|
|
17 |
|
|
(6 |
) |
|
11 |
|
Net
translation of foreign currencies |
|
$ |
22 |
|
$ |
(8 |
) |
$ |
14 |
|
NOTE
10 - EARNINGS PER SHARE
Basic and
diluted earnings per share (as restated) are computed as follows:
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts) |
|
Basic |
|
Effect
of Dilution |
|
Diluted |
|
Three
Months Ended March 31, |
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations |
|
|
|
|
$ |
212 |
|
|
|
|
$ |
— |
|
|
|
|
$ |
212 |
|
Shares
(in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average |
|
|
|
|
|
139,999 |
|
|
|
|
|
— |
|
|
|
|
|
139,999 |
|
Options
and restricted stock grants |
|
|
|
|
|
|
|
|
|
1,305 |
|
|
|
|
|
1,305 |
|
Total
shares |
|
|
|
|
|
139,999 |
|
|
|
|
|
1,305 |
|
|
|
|
|
141,304 |
|
EPS |
|
|
|
|
$ |
1.51 |
|
|
|
|
$ |
(0.01 |
) |
|
|
|
$ |
1.50 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations |
|
|
|
|
$ |
187 |
|
|
|
|
$ |
— |
|
|
|
|
$ |
187 |
|
Shares
(in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average |
|
|
|
|
|
139,691 |
|
|
|
|
|
— |
|
|
|
|
|
139,691 |
|
Options
and restricted stock grants |
|
|
|
|
|
|
|
|
|
369 |
|
|
|
|
|
369 |
|
Total
shares |
|
|
|
|
|
139,691 |
|
|
|
|
|
369 |
|
|
|
|
|
140,060 |
|
EPS |
|
|
|
|
$ |
1.34 |
|
|
|
|
$ |
— |
|
|
|
|
$ |
1.34 |
|
Common
shares held as Treasury shares were 134,370,451 as of March 31, 2004, and
133,952,466 as of December 31, 2003.
NOTE
11 - REINSURANCE
In the
normal course of business, CIGNA’s insurance subsidiaries enter into agreements
with other insurance companies to assume and cede reinsurance. Reinsurance is
ceded primarily to limit losses from large exposures and to permit recovery of a
portion of direct losses. Reinsurance does not relieve the originating insurer
of liability. CIGNA evaluates the financial condition of its reinsurers and
monitors their concentrations of credit risk.
Individual
life and annuity reinsurance. CIGNA had
a reinsurance recoverable of $5.3 billion at March 31, 2004, and $5.4 billion at
December 31, 2003, from Lincoln National Corporation that arose from the 1998
sale of CIGNA’s individual life insurance and annuity business through an
indemnity reinsurance arrangement.
Unicover
and other run-off reinsurance. The
Run-off Reinsurance operations participate in a workers’ compensation
reinsurance pool, which ceased accepting new risks in early 1999. This pool was
formerly managed by Unicover Managers, Inc. Although an arbitration over the
most significant reinsurance (retrocessional) contracts for the pool was
completed in 2002, some disputes over collection of amounts due CIGNA from the
retrocessionaires continue and may require further arbitration actions to
resolve. Also, disputes and arbitrations regarding other reinsurance
(retrocessional) contracts for the pool remain and may not be resolved for some
time.
Run-off
Reinsurance also includes other workers’ compensation reinsurance contracts, as
well as personal accident reinsurance contracts, including contracts assumed in
the London market. CIGNA obtained retrocessional reinsurance coverage for a
significant portion of its liabilities under these contracts. Some of these
retrocessionaires have disputed the validity of their contracts with CIGNA and
arbitration over some of these disputes has commenced.
The
retrocessional disputes are not expected to be resolved for some time. In
addition, unfavorable claims experience related to workers’ compensation and
personal accident exposures is possible and could result in future losses,
including losses attributable to the inability to recover amounts from
retrocessionaires (either due to disputes with the retrocessionaires or their
financial condition).
CIGNA’s
reserves for amounts recoverable from retrocessionaires, as well as for reserves
for liabilities associated with underlying reinsurance exposures assumed by
CIGNA, are considered appropriate as of March 31, 2004, based on current
information. However, it is possible that future developments could have a
material adverse effect on CIGNA’s consolidated results of operations, and, in
certain situations, could have a material adverse effect on CIGNA’s financial
condition.
Other
reinsurance. CIGNA
could have losses if reinsurers fail to indemnify CIGNA on other reinsurance
arrangements, whether because of reinsurer insolvencies or contract disputes.
However, management does not expect charges for other unrecoverable reinsurance
to have a material adverse effect on CIGNA’s consolidated results of operations,
liquidity or financial condition.
Effects
of reinsurance. In
CIGNA’s consolidated income statements, premiums and fees were net of ceded
premiums, and benefits, losses and settlement expenses were net of reinsurance
recoveries, in the following amounts:
|
|
|
|
|
|
Three
Months Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Premiums
and fees |
|
|
|
|
|
Individual
life insurance and
annuity business sold |
|
$ |
73 |
|
$ |
78 |
|
Other |
|
|
39 |
|
|
45 |
|
Total |
|
$ |
112 |
|
$ |
123 |
|
Reinsurance
recoveries |
|
|
|
|
|
|
|
Individual
life insurance and
annuity business sold |
|
$ |
79 |
|
$ |
75 |
|
Other |
|
|
38 |
|
|
32 |
|
Total |
|
$ |
117 |
|
$ |
107 |
|
NOTE
12 - SEGMENT INFORMATION
Operating
segments generally reflect groups of related products, but the International
segment is based on geography. CIGNA measures the financial results of its
segments using “segment earnings” which is defined as income (loss) from
continuing operations before realized investment gains (losses).
The
impact of the restatement as discussed in Note 3, is included in Corporate and
is not allocated to the operating segments.
In the
third quarter of 2003, CIGNA changed its segment presentation to report its
health care operations and its separately managed group disability and life
insurance operations as two discrete segments. Previously, results from these
operations were combined as a single segment. In addition, CIGNA renamed its
segments as Health Care, Disability and Life, Retirement, International, Run-off
Reinsurance and Other Operations.
Disability
and life insurance products which were historically sold in connection with
certain experience-rated medical accounts continue to be managed by CIGNA's
health care business and are reported in the Health Care segment.
Summarized
segment financial information was as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Premiums
and fees and other revenues |
|
Health
Care |
|
$ |
3,095 |
|
$ |
3,415 |
|
Disability
and Life |
|
|
475 |
|
|
423 |
|
Retirement |
|
|
250 |
|
|
90 |
|
International
|
|
|
241 |
|
|
214 |
|
Run-off
Reinsurance |
|
|
(9 |
) |
|
79 |
|
Other
Operations |
|
|
65 |
|
|
70 |
|
Corporate |
|
|
(19 |
) |
|
(18 |
) |
Total |
|
$ |
4,098 |
|
$ |
4,273 |
|
Income
(loss) from continuing
operations
|
|
|
|
Health
Care |
|
$ |
156 |
|
$ |
125 |
|
Disability
and Life |
|
|
35 |
|
|
34 |
|
Retirement
|
|
|
35 |
|
|
55 |
|
International
|
|
|
15 |
|
|
10 |
|
Run-off
Reinsurance |
|
|
(10 |
) |
|
(15 |
) |
Other
Operations |
|
|
10 |
|
|
20 |
|
Corporate
(restated) |
|
|
(43 |
) |
|
(21 |
) |
Segment
earnings (restated) |
|
|
198 |
|
|
208
|
|
Realized
investment gains (losses),
net of taxes |
|
|
14 |
|
|
(21 |
) |
Income
from
continuing operations (restated) |
|
$ |
212 |
|
$ |
187 |
|
NOTE
13 - CONTINGENCIES AND OTHER MATTERS
Financial
Guarantees
CIGNA,
through its subsidiaries, is contingently liable for various financial
guarantees provided in the ordinary course of business.
Separate
account assets, primarily associated with the retirement benefits business, are
contractholder funds maintained in accounts with specific investment objectives.
CIGNA records separate account liabilities equal to separate account assets. In
certain cases, CIGNA guarantees a minimum level of benefits for retirement and
insurance contracts written in separate accounts. CIGNA establishes an
additional liability if management believes that CIGNA will be required to make
a payment under these guarantees, which include the following:
· |
CIGNA
guarantees that separate account assets will be sufficient to pay certain
retiree or life benefits. The sponsoring employers are primarily
responsible for ensuring that assets are sufficient to pay these benefits
and are required to maintain assets that exceed a certain percentage of
benefit obligations. This percentage varies depending on the asset class
within a sponsoring employer’s portfolio (for example, a bond fund would
require a lower percentage than a riskier equity fund) and thus will vary
as the composition of the portfolio changes. If employers do not maintain
the required levels of separate account assets, CIGNA has the right to
redirect the management of the related assets to provide for benefit
payments. As of March 31, 2004, employers maintained assets that exceeded
102% to 132% of benefit obligations. Benefit obligations under these
arrangements were $3.5 billion as of March 31, 2004 and December 31, 2003.
There were no additional liabilities required for these guarantees as of
March 31, 2004, or December 31, 2003. |
· |
For
certain employer-sponsored savings and retirement plans, CIGNA guarantees
that participants will receive the value of their accounts at the time of
withdrawal. These guarantees could require payment by CIGNA in the event
that a significant number of plan participants withdraw their accounts
when the market value of the related separate account assets is less than
plan participant account values at the time of withdrawal. Participant
account values under these arrangements are invested primarily in fixed
income investments and were $1.9 billion as of March 31, 2004, and $2.0
billion as of December 31, 2003. There were no additional liabilities
required for these guarantees as of March 31, 2004, or December 31,
2003. |
· |
CIGNA
guarantees a minimum level of earnings (based on investment, mortality and
retirement experience) for a certain group annuity contract. If the actual
investment return is less than the minimum guaranteed level, CIGNA is
required to fund the difference. The guaranteed benefit obligation was
$303 million as of March 31, 2004, and $304 million as of December 31,
2003. CIGNA had additional liabilities for this guarantee of $16 million
as of March 31, 2004, and $15 million as of December 31, 2003. The fair
value of separate accounts assets for this group annuity contract were as
follows: |
|
|
|
|
|
|
(In
millions) |
|
March
31,
2004 |
|
December
31, 2003 |
|
Fixed
maturities |
|
$ |
354 |
|
$ |
342 |
|
Mortgage
loans |
|
|
132 |
|
|
134 |
|
Other |
|
|
2 |
|
|
3 |
|
Total |
|
$ |
488 |
|
$ |
479 |
|
CIGNA
guaranteed construction loans of $27 million as of March 31, 2004, and $26
million as of December 31, 2003, related to real estate joint venture
investments. The loans are secured by joint venture real estate property with
fair values in excess of the loan amounts and mature by 2008, including
extension options. CIGNA would be required to repay the construction loans if
permanent financing could not be obtained. There were no liabilities required
for these guarantees as of March 31, 2004, or December 31, 2003.
CIGNA had
indemnification obligations to lenders up to $340 million as of March 31, 2004,
and $329 million as of December 31, 2003, related to borrowings by certain real
estate joint ventures which CIGNA either records as an investment or
consolidates. These borrowings, which are nonrecourse to CIGNA, are secured by
the joint ventures’ real estate properties with fair values in excess of the
loan amounts and mature at various dates from 2004 to 2015. CIGNA’s
indemnification obligations would require payment
to
lenders for any actual damages resulting from certain acts such as unauthorized
ownership transfers, misappropriation of rental payments by others or
environmental damages. Based on initial and ongoing reviews of property
management and operations, CIGNA does not expect that payments will be required
under these indemnification obligations. Any payments that might be required
could be recovered through a refinancing or sale of the assets. In some cases,
CIGNA also has recourse to partners for their proportionate share of amounts
paid. There were no liabilities required for these indemnification obligations
as of March 31, 2004, or December 31, 2003.
As of
March 31, 2004 and December 31, 2003, CIGNA guaranteed that it would compensate
the lessor for a shortfall of up to $49 million in the market value of leased
equipment at the end of the lease. Guarantees of $21 million expire in 2006 and
$28 million expire in 2012.
CIGNA has
indemnification obligations as of March 31, 2004, and December 31, 2003, in
connection with acquisition and disposition transactions. These indemnification
obligations are triggered by the breach of representations or covenants provided
by CIGNA, such as representations for the presentation of financial statements,
the filing of tax returns or the identification of outstanding litigation. These
obligations are typically subject to various time limitations, defined by the
contract or by operation of law, such as statutes of limitation. In some cases,
the maximum potential amount due is subject to contractual limitations based on
a percentage of the transaction purchase price, while in other cases limitations
are not specified or applicable. CIGNA does not believe that it is possible to
determine the maximum potential amount due under these guarantees, since not all
amounts due under these indemnification obligations are subject to limitation.
There were no liabilities required for these indemnification obligations as of
March 31, 2004, or December 31, 2003.
CIGNA
does not expect that these guarantees will have a material adverse effect on
CIGNA’s consolidated results of operations, liquidity or financial
condition.
Guaranteed
minimum income benefit contracts. CIGNA has
written reinsurance contracts with issuers of variable annuity contracts that
provide annuitants with certain guarantees related to minimum income benefits.
When annuitants elect to receive these minimum income benefits, CIGNA may be
required to make payments based on changes in underlying mutual fund values and
interest rates.
CIGNA
estimates the fair value of the assets and liabilities associated with these
contracts using assumptions as to equity market returns, volatility of the
underlying equity and bond mutual fund investments, interest rates, mortality,
policy surrenders, credit risk and annuity election rates.
CIGNA is
required to disclose the maximum potential undiscounted future payments for
guarantees related to minimum income benefits using worst-case assumptions,
defined as follows:
· |
No
annuitants surrendered their accounts, and |
· |
All
annuitants lived to elect their benefits,
and |
· |
All
annuitants elected to receive their benefit on the first available date
(beginning in 2004 through 2014), and |
· |
All
underlying mutual fund investment values remained at the March 31, 2004
value of $3.3 billion, with no future
returns. |
The
maximum potential undiscounted payments that CIGNA would make under those
assumptions would aggregate $2.3 billion before reinsurance recoveries. CIGNA
believes the likelihood of such payment is remote and expects the amount of
actual payments to be significantly less than this hypothetical
undiscounted
aggregate amount. CIGNA has purchased reinsurance from third parties which
covers 80% of the exposures on these contracts. CIGNA has revised credit risk
assumptions for about 25% of the exposures on these contracts.
As of
March 31, 2004, CIGNA had liabilities of $90 million related to these contracts
and amounts recoverable from reinsurers of $63 million. CIGNA had an additional
liability of $39 million associated with the cost of reinsurance as of March 31,
2004. As of December 31, 2003, CIGNA had liabilities of $74 million related to
these contracts and amounts recoverable from reinsurers of $51 million. CIGNA
had an additional liability of $40 million associated with the cost of
reinsurance as of December 31, 2003. In the first quarter of 2003, CIGNA reduced
its amount recoverable from reinsurers by $9 million pre-tax related to revised
credit risk assumptions. Management believes the current assumptions used to
estimate reserves for these liabilities are appropriate.
Regulatory
and Industry Developments
CIGNA’s
businesses are subject to a changing social, economic, legal, legislative and
regulatory environment. Some issues that may affect CIGNA’s businesses
include:
· |
initiatives
to increase health care regulation; |
· |
efforts
to expand tort liability of health plans; |
· |
class
action lawsuits targeting large corporations, including CIGNA;
|
· |
initiatives
to restrict insurance pricing and the application of underwriting
standards; |
· |
efforts
to change risk-based capital and reserve requirements for variable
annuities, impacting run-off reinsurance operations;
and |
· |
efforts
to revise federal tax laws. |
Health
care regulation. The
business of administering and insuring employee benefit programs, particularly
health care programs, is heavily regulated by federal and state laws and
administrative agencies, such as state departments of insurance and the federal
Departments of Labor and Justice, as well as the courts. Regulation and judicial
decisions have resulted in changes to industry and CIGNA’s business practices
and will continue to do so in the future. In addition, CIGNA's subsidiaries are
routinely involved with various claims, lawsuits and regulatory audits and
investigations that could result in financial liability, changes in business
practices, or both. Health care regulation in its various forms could have an
adverse effect on CIGNA's health care operations if it inhibits CIGNA's ability
to respond to market demands or results in increased medical or administrative
costs without improving the quality of care or services.
The
United States Supreme Court heard arguments in March 2004 on a case involving a
CIGNA subsidiary in which the issue is preemption by the Employee Retirement
Income Security Act (ERISA) of a state law tort claim in circumstances involving
a determination, based on medical judgment, that benefits were not covered. A
determination that ERISA does not preempt state law would have an adverse effect
on the health care industry and on CIGNA.
The
Health Insurance Portability and Accountability Act of 1996 (HIPAA) and related
regulations have created significant regulatory requirements related to, among
other things, the privacy of individually identifiable health care information,
electronic data interchange and the security of electronic health information.
CIGNA has instituted systems enhancements and training, and has undertaken other
administrative efforts to satisfy these requirements.
Other
possible regulatory changes that could have an adverse effect on CIGNA’s health
care operations include:
· |
additional
mandated benefits or services that increase costs without improving the
quality of care; |
· |
narrowing
of ERISA preemption of state laws; |
· |
changes
in ERISA regulations resulting in increased administrative burdens and
costs; |
· |
additional
restrictions on the use of prescription drug formularies;
|
· |
additional
privacy legislation and regulations that interfere with the proper use of
medical information for research, coordination of medical care and disease
management; |
· |
additional
rules establishing the time periods for payment of health care provider
claims that vary from state to state; and |
· |
legislation
that would exempt independent physicians from antitrust
laws. |
The
health care industry remains under scrutiny by various state and federal
government agencies and could be subject to government efforts to bring criminal
actions in circumstances that could previously have given rise only to civil or
administrative proceedings.
Tax
benefits for corporate life insurance. Federal
legislation in 1996 eliminated on a prospective basis the tax deductibility of
policy loan interest for most leveraged corporate life insurance products, and
an Internal Revenue Service (IRS) initiative in 2001 encouraged policyholders to
settle tax disputes regarding these products. As a result, some customers have
surrendered their policies and management expects earnings associated with these
products to continue to decline.
Litigation
and Other Legal Matters
In
January 2004, a Florida federal court handling multi-district health care
litigation against CIGNA and several health care industry competitors approved a
settlement agreement between the physician class and CIGNA, and dismissed all
claims by class members against CIGNA. All appeals of the courts’ approval have
been withdrawn, which permits implementation of the settlement. The settlement
resolves for CIGNA and the plaintiffs class all physician claims reflected in
the litigation.
CIGNA
recorded an after-tax charge of $37 million ($57 million pre-tax) in the third
quarter of 2003 to increase the reserve for this settlement and other
non-physician provider health care litigation. CIGNA had previously recognized
an after-tax charge of $50 million ($77 million pre-tax) in 2002 for expected
costs associated with the multi-district litigation. The reserve reflects
expected insurance recoveries.
The U. S.
Attorney’s Office for the Eastern District of Pennsylvania is investigating
compliance with federal laws in connection with pharmaceutical companies’
marketing practices and their impact on prices paid by the government to
pharmaceutical companies for products under federal health programs. As part of
this investigation, CIGNA has responded to subpoenas concerning contractual
relationships between pharmaceutical companies and CIGNA’s health care
operations.
In 2002,
several purported class action lawsuits, as well as two shareholder derivative
complaints nominally brought on behalf of CIGNA, were filed in federal court in
the Eastern District of Pennsylvania against CIGNA and certain of its senior
officers and directors. These suits allege securities law violations and
breaches of fiduciary duty. Two other purported class action lawsuits asserting
violations of ERISA were filed against CIGNA and certain officers in the Eastern
District of Pennsylvania by individuals who seek to represent a class of
participants in the CIGNA 401(k) Plan who allegedly suffered losses on
investments in CIGNA stock.
During
2002, a Connecticut federal court certified a class action lawsuit against CIGNA
and the CIGNA Pension Plan. The plaintiffs are participants in the Plan who
earned certain Plan benefits prior to 1998. The plaintiffs allege, among other
things, that the Plan violated ERISA by impermissibly conditioning certain
post-1997 benefit accruals on the amount of pre-1998 benefit accruals, that
these conditions are not adequately disclosed to Plan participants, and that the
Plan’s cash balance formula discriminates against older employees.
See
“Unicover and other run-off reinsurance” in Note 11 for a description of legal
matters arising out of the run-off reinsurance operations.
CIGNA is
routinely involved in numerous claims, lawsuits, regulatory audits,
investigations and other legal matters arising, for the most part, in the
ordinary course of the business of administering and insuring employee benefit
programs. An increasing number of claims are being made for substantial
non-economic, extra-contractual or punitive damages. The outcome of litigation
and other legal matters is always uncertain, and outcomes that are not justified
by the evidence can occur. CIGNA believes that it has valid defenses to the
legal matters pending against it and is defending itself vigorously.
Nevertheless, it is possible that resolution of one or more of the legal matters
currently pending or threatened could result in losses material to CIGNA’s
consolidated results of operations, liquidity or financial
condition.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
As
discussed in Note 3 to the Financial Statements, CIGNA's Consolidated
Financial Statements for the periods covered by this report have been restated.
The accompanying Management’s Discussion and Analysis of Financial Condition and
Results of Operations gives effect to this restatement. For additional
information regarding the restatement, please refer to Note 3 to the
Financial Statements.
|
|
INDEX |
|
Introduction |
27 |
Overview |
28 |
Consolidated
Results of Operations (As
Restated,
See Note 3) |
29 |
Sale
of Retirement Benefits Business |
32 |
Other
Matters |
32 |
Health
Care |
37 |
Disability
and Life |
40 |
Retirement |
41 |
International
|
43 |
Run-off
Reinsurance |
44 |
Other
Operations |
46 |
Corporate
(As
Restated, See Note 3) |
47 |
Discontinued
Operations |
47 |
Liquidity
and Capital Resources |
47 |
Investment
Assets |
53 |
Market
Risk |
55 |
Cautionary
Statement |
57 |
|
|
INTRODUCTION
In this
filing and in other marketplace communications, CIGNA makes certain predictions
relating to its operations. Generally, forward-looking statements can be
identified through the use of predictive words (e.g., “Outlook for 2004”).
Actual results may differ from CIGNA’s predictions. Some factors that could
cause results to differ are discussed throughout Management’s Discussion and
Analysis, including in the Cautionary Statement on page 57.
The
following discussion addresses the financial condition of CIGNA as of March 31,
2004, compared with December 31, 2003, and its results of operations for the
three months ended March 31, 2004, compared with the same period last year. This
discussion should be read in conjunction with Management’s Discussion and
Analysis included in CIGNA’s 2003 Annual Report to Shareholders, to which the
reader is directed for additional information.
The
preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of
portions of the insurance business as well as competitive and other market
conditions, call for caution in estimating full year results based on interim
results of operations.
OVERVIEW
CIGNA
Corporation’s subsidiaries provide health care and related benefits offered
through the workplace. Key product lines include health care products and
services (medical, pharmacy, behavioral health, clinical information management,
dental and vision benefits, and case and disease management) and group
disability, life and accident insurance. In addition, CIGNA has an international
operation that offers similar products to businesses and individuals in selected
markets, and has certain inactive businesses including a run-off reinsurance
operation. CIGNA sold its retirement benefits business on April 1, 2004 (see
page 32 for further discussion).
CIGNA’s
results are influenced by a range of economic and other factors,
including:
· |
cost
trends and inflation levels for medical and related
services; |
· |
patterns
of utilization of medical and other
services; |
· |
the
tort liability system; |
· |
interest
rates and equity market returns; |
· |
regulations
and tax rules related to the provision and administration of employee
benefit plans; and |
· |
initiatives
to increase health care regulation. |
CIGNA
generates revenues, income and cash flows by maintaining and growing its
relationships with employers and consumers, charging prices that reflect
emerging experience and investing available cash at attractive rates of return
for appropriate durations. CIGNA's ability to increase operating results in
terms of growth in revenue, net income and operating cash flow is directly
related to its ability to execute plans that address broad economic factors as
well as company-specific drivers.
Key
company-specific drivers affecting CIGNA’s results include:
· |
the
absolute level of and trends in benefit
costs; |
· |
the
volume of customers served and the mix of products and services purchased
by those customers; |
· |
competitiveness
of CIGNA's product design and service
quality; |
· |
the
ability to price products and services competitively at levels that
appropriately account for underlying cost inflation and utilization
patterns; and |
· |
the
relationship between administrative costs and
revenue. |
Management
regularly monitors trends in the above mentioned economic and other factors and
the company-specific drivers of operating results. CIGNA develops strategic and
tactical plans designed to improve performance and maximize its competitive
position in the markets served. CIGNA's ability to achieve its financial
objectives is dependent upon its ability to effectively execute these plans and
to appropriately respond to emerging economic and company-specific
trends.
Management
is focused, in particular, on improving the performance of the health care
operations and on the risks associated with the run-off reinsurance operations.
In the health care operations, CIGNA has initiatives in place to (1) lower
medical cost trends; (2) deliver quality member service; (3) lower
administrative expenses; and (4) grow membership (see page 44 for further
discussion). In the run-off reinsurance operations, CIGNA maintains a program to
reduce the equity market risk associated with its guaranteed minimum death
benefit reinsurance exposures.
The sale
of the retirement benefits business will improve parent company liquidity and
enhance CIGNA's financial flexibility but will reduce revenues, net income, cash
flows and invested assets.
CONSOLIDATED
RESULTS OF OPERATIONS
|
|
|
FINANCIAL
SUMMARY
|
Three
Months
Ended
March
31, |
|
(In
millions) |
2004 |
|
2003 |
|
|
|
(As
Restated, See Note 3) |
|
Premiums
and fees |
$ |
3,624 |
|
$ |
3,915 |
|
Net
investment income |
|
603 |
|
|
658 |
|
Other
revenues |
|
474 |
|
|
358 |
|
Realized
investment gains (losses) |
|
21 |
|
|
(31 |
) |
Total
revenues |
|
4,722 |
|
|
4,900 |
|
Benefits
and expenses |
|
4,403 |
|
|
4,619 |
|
Income
from continuing operations before taxes |
|
319 |
|
|
281 |
|
Income
taxes |
|
107 |
|
|
94 |
|
Income
from continuing operations |
|
212 |
|
|
187 |
|
Income
from discontinued operations |
|
— |
|
|
48 |
|
Income
before cumulative effect
of accounting change |
|
212 |
|
|
235 |
|
Cumulative
effect of accounting change, net
of taxes (See Note 2 to the Financial Statements) |
|
(139 |
) |
|
— |
|
Net
income |
$ |
73 |
|
$ |
235 |
|
Realized
investment gains
(losses),
net of taxes |
$ |
14 |
|
$ |
(21 |
) |
As
discussed in Note 3 to the Financial Statements, CIGNA’s consolidated financial
statements for all periods presented have been restated to reflect variable
accounting for stock compensation expense in accordance with Accounting
Principles Board (APB) No. 25. Management’s Discussion and Analysis of Financial
Condition and Results of Operations gives effect to these restatements in the
Corporate Segment. For additional information, refer to Note 3 to the Financial
Statements.
Income
from continuing operations includes special items, which are discussed below.
Absent these items, CIGNA's underlying results increased for the first quarter
of 2004, compared with the same period last year, primarily due to improvements
in the health care operations. See page 37 for discussion of the drivers of
these results. In addition, results reflect realized investments gains in the
first quarter of 2004, compared to losses in the prior year (see below for
further discussion).
In order
to facilitate an understanding and comparison of results of operations and
permit analysis of trends in underlying revenue, expenses and income from
continuing operations, the following table presents special items, which
management believes are not representative of the underlying results of
continuing operations.
|
|
|
|
|
|
SPECIAL
ITEMS
(In millions) |
|
Pre-Tax
Benefit
(Charge) |
|
After-Tax
Benefit
(Charge) |
|
Three
Months Ended March 31, |
|
|
|
|
|
2004 |
|
|
|
|
|
Restructuring
charge (see page 32) |
|
$ |
(75 |
) |
$ |
(49 |
) |
Effect
of new accounting pronouncement
(see page 41) |
|
|
(17 |
) |
|
(11 |
) |
Total |
|
$ |
(92 |
) |
$ |
(60 |
) |
2003 |
|
|
|
|
|
|
|
Restructuring
item* |
|
$ |
6 |
|
$ |
4 |
|
Revenues
Revenues
decreased for the three months of 2004 compared with the same period last year
primarily because of:
· |
lower
premiums and fees in the Health Care segment primarily due to lower
membership; and |
· |
losses
recognized from futures and forward contracts, compared with gains in the
prior year, in connection with the program to reduce equity market risks
(see guaranteed minimum death benefit contracts on page
44). |
These
decreases were substantially offset by higher other revenues in the Retirement
segment (see page 41).
Realized
Investment Results
Realized
investment results for the three months of 2004, compared with the same period
last year, improved primarily because of:
· |
gains
on sales of fixed maturities compared with losses in the prior year; and
|
· |
lower
impairments on equity securities and fixed maturities.
|
Outlook
for 2004
Subject
to the factors noted in the Cautionary Statement on page 57, management expects
full year 2004 income from continuing operations excluding realized investment
results and special items to be lower than the comparable first quarter on an
annualized basis. The Company’s full year consolidated outlook reflects lower
earnings resulting from the sale of the retirement benefits business. In
addition, CIGNA's outlook assumes that favorable prior year development and
certain expense items included in first quarter Health Care segment earnings
will not recur.
_____________
*
Represents gains on other postretirement benefits recognized in connection with
the 2002 health care restructuring program.
Information
is not available for management to reasonably estimate:
· |
realized
investment gains (losses); or |
· |
special
items for 2004 including: |
· |
a
portion of the gain associated with the sale of the retirement benefits
business; and |
· |
the
impact of any ongoing volatility associated with a portion of the
reinsurance liabilities from the sale of the retirement benefits business
(see Note 4 to the Financial Statements). |
Realized
investment gains, net of taxes, were $14 million for the three months of 2004;
however, realized investment results are not predictable and therefore this
amount is not necessarily indicative of full year results.
Special
items for the year will also include charges shown in the above
table.
Critical
Accounting Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect reported amounts and related disclosures in the
financial statements. Management considers an accounting estimate to be critical
if:
· |
it
requires assumptions to be made that were uncertain at the time the
estimate was made; and |
· |
changes
in the estimate or different estimates that could have been selected could
have a material impact on CIGNA’s consolidated results of operations or
financial condition. |
CIGNA’s
most critical accounting estimates, as well as the effects of hypothetical
changes in material assumptions used to develop each estimate, are described in
CIGNA’s 2003 Annual Report to Shareholders as restated beginning on page 12 and
include the following:
· |
future
policy benefits - guaranteed minimum death benefits;
|
· |
unpaid
claims and claim expenses for guaranteed cost and minimum premium programs
and retrospectively experience-rated health care products;
|
· |
reinsurance
recoverables for Run-off Reinsurance; and |
· |
investments
- recognition of losses from “other than temporary” impairments of public
and private placement fixed maturities. |
In
addition, there are other accounting estimates used in the preparation of
CIGNA’s consolidated financial statements, including estimates of liabilities
for unpaid claims and claim expenses and future policy benefits other than those
identified above, as well as estimates with respect to contracts that guarantee
a minimum level of income benefits (see page 52 for further discussion),
post-employment and postretirement benefits, certain compensation accruals and
income taxes.
Management
believes the current assumptions and other considerations used to estimate
amounts reflected in CIGNA’s consolidated financial statements are appropriate.
However, if actual experience differs from the assumptions and other
considerations used in estimating amounts reflected in CIGNA’s consolidated
financial statements, the resulting changes could have a material adverse effect
on CIGNA’s consolidated results of operations, and in certain situations, could
have a material adverse effect on liquidity and CIGNA’s financial
condition.
SALE
OF RETIREMENT BENEFITS BUSINESS
On April
1, 2004, CIGNA sold its retirement benefits business, excluding the corporate
life insurance business, for cash proceeds of $2.1 billion. The sale is expected
to result in an estimated after-tax gain of approximately $675 million, part of
which will be recognized in the second quarter of 2004. As this transaction is
primarily in the form of a reinsurance arrangement, approximately $475 million
of the after-tax gain will be deferred and amortized over future periods and
reported in results of continuing operations. These amounts are subject to
change pending final determination of the net assets sold, transaction costs and
other adjustments. Segment earnings for the sold business were approximately $27
million for the first three months of 2004.
The sale
included reinsurance of approximately $50 billion of liabilities. As a result of
derivatives accounting requirements, a portion of the reinsurance liabilities
may be adjusted through net income for unrealized changes in the fair value of
the related investment portfolio through 2006. The resulting volatility may be
material to CIGNA's consolidated net income and shareholders’ equity.
CIGNA
expects the acquirer of the retirement benefits business to enter into
agreements with the insured parties, relieving CIGNA of any remaining
obligations to those parties. CIGNA will accelerate recognition of the deferred
gain when these agreements are entered. CIGNA expects the majority of the
reinsured parties to enter into these agreements during the next two years.
OTHER
MATTERS
Restructuring
Programs
Operational
effectiveness review. In the
first quarter of 2004, CIGNA adopted a restructuring program associated with
planned organizational changes to streamline functional support resources and to
adjust its operations to current business volumes. As a result, CIGNA recognized
in other operating expenses a total after-tax charge of $49 million ($75 million
pre-tax) primarily for severance costs. This charge was related to the Health
Care segment and Corporate.
The table
below shows CIGNA’s restructuring activity (pre-tax) related to severance and
real estate for this program:
|
|
|
|
|
|
|
|
(In
millions) |
|
Health
Care |
|
Corporate |
|
Total |
|
First
quarter 2004 charge: |
|
|
|
|
|
|
|
Severance |
|
$ |
39 |
|
$ |
31 |
|
$ |
70 |
|
Real
estate and other |
|
|
5 |
|
|
— |
|
|
5 |
|
Total |
|
|
44 |
|
|
31 |
|
|
75 |
|
First
quarter 2004 activity: |
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
(2 |
) |
|
(4 |
) |
|
(6 |
) |
Balance
as of March 31,
2004 |
|
$ |
42 |
|
$ |
27 |
|
$ |
69 |
|
As
further plans are finalized, CIGNA expects to record additional charges in 2004
for vacating leased facilities and other costs. The total of all charges is not
expected to exceed $60 million after-tax for 2004. CIGNA estimates after-tax
savings from the current charge to be approximately $100 million annually.
Corporate
effectiveness initiative. In the
second quarter of 2003, CIGNA adopted a restructuring program to attain certain
operational efficiencies in its corporate staff functions and to achieve
additional cost savings. As a result, CIGNA recognized in other operating
expenses an after-tax charge in Corporate of $9 million ($13 million pre-tax)
for severance costs. As of March 31, 2004, $7 million ($11 million pre-tax) of
the severance has been paid. Annualized after-tax savings are estimated to be
$15 million reflecting the elimination of salary and benefits costs for
terminated employees.
Minimum
Pension Liability
In
connection with the sale of the retirement benefits business and the operational
effectiveness review described above, CIGNA had a pension curtailment event,
which required CIGNA to remeasure the assets and obligations of its domestic
qualified pension plan as of March 31, 2004. As a result, CIGNA recorded an
after-tax charge which decreased equity by $113 million. This charge was
primarily due to a reduction in long-term interest rates (from 6.25% to 5.75%)
used to determine the accumulated benefit obligation, partially offset by the
effect of stock market appreciation on plan assets.
Other
Acquisitions and Dispositions
CIGNA may
from time to time acquire or dispose of assets, subsidiaries or lines of
business. Significant transactions, other than the sale of the retirement
benefits business, are described below.
Sale
of Lovelace Health Systems, Inc. In
January 2003, CIGNA sold the operations of Lovelace, an integrated health care
system, for cash proceeds of $209 million and recognized an after-tax gain of
$32 million, which is reported in discontinued operations.
Sale
of Brazilian Health Care Operations. In
January 2003, CIGNA sold its Brazilian health care operations. The sale
generated an after-tax gain of $18 million, primarily as a result of the
disposition of the net liabilities associated with these operations. The gain is
reported in discontinued operations.
Regulatory
and Industry Developments
Health
care regulation. The
business of administering and insuring employee benefit programs, particularly
health care programs, is heavily regulated by federal and state laws and
administrative agencies, such as state departments of insurance and the federal
Departments of Labor and Justice, as well as the courts. Regulation and judicial
decisions have resulted in changes to industry and CIGNA’s business practices
and will continue to do so in the future. In addition, CIGNA's subsidiaries are
routinely involved with various claims, lawsuits and regulatory audits and
investigations that could result in financial liability, changes in business
practices, or both. Health care regulation in its various forms could have an
adverse effect on CIGNA's health care operations if it inhibits CIGNA's ability
to respond to market demands or results in increased medical or administrative
costs without improving the quality of care or services.
The
United States Supreme Court heard arguments in March 2004 on a case involving a
CIGNA subsidiary in which the issue is preemption by the Employee Retirement
Income Security Act (ERISA) of a state law tort claim in circumstances involving
a determination, based on medical judgment, that benefits were not covered. A
determination that ERISA does not preempt state law would have an adverse effect
on the health care industry and on CIGNA.
The
Health Insurance Portability and Accountability Act of 1996 (HIPAA) and related
regulations have created significant regulatory requirements related to, among
other things, the privacy of individually identifiable health care information,
electronic data interchange and the security of electronic health information.
CIGNA has instituted systems enhancements and training, and has undertaken other
administrative efforts to satisfy these requirements.
Other
possible regulatory changes that could have an adverse effect on CIGNA’s health
care operations include:
· |
additional
mandated benefits or services that increase costs without improving the
quality of care; |
· |
narrowing
of ERISA preemption of state laws; |
· |
changes
in ERISA regulations resulting in increased administrative burdens and
costs; |
· |
additional
restrictions on the use of prescription drug formularies;
|
· |
additional
privacy legislation and regulations that interfere with the proper use of
medical information for research, coordination of medical care and disease
management; |
· |
additional
rules establishing the time periods for payment of health care provider
claims that vary from state to state; and |
· |
legislation
that would exempt independent physicians from antitrust
laws. |
The
health care industry remains under scrutiny by various state and federal
government agencies and could be subject to government efforts to bring criminal
actions in circumstances that could previously have given rise only to civil or
administrative proceedings.
Litigation
and other legal matters.
In
January 2004, a Florida federal court handling multi-district health care
litigation against CIGNA and several health care industry competitors approved a
settlement agreement between the physician class and CIGNA, and dismissed all
claims by class members against CIGNA. All appeals of the court’s approval have
been withdrawn, which permits implementation of the settlement. The settlement
resolves for CIGNA and the plaintiff class all physician claims reflected in the
litigation.
CIGNA
recorded an after-tax charge of $37 million ($57 million pre-tax) in the third
quarter of 2003 to increase the reserve for this settlement and other
non-physician provider health care litigation. CIGNA had previously recognized
an after-tax charge of $50 million ($77 million pre-tax) in 2002 for expected
costs associated with the multi-district litigation. The reserve reflects
expected insurance recoveries.
The U. S.
Attorney’s Office for the Eastern District of Pennsylvania is investigating
compliance with federal laws in connection with pharmaceutical companies’
marketing practices and their impact on prices paid by the government to
pharmaceutical companies for products under federal health programs. As part of
this investigation, CIGNA has responded to subpoenas concerning contractual
relationships between pharmaceutical companies and CIGNA’s health care
operations.
In 2002,
several purported class action lawsuits, as well as two shareholder derivative
complaints nominally brought on behalf of CIGNA, were filed in federal court in
the Eastern District of Pennsylvania against CIGNA and certain of its senior
officers and directors. These suits allege securities law violations and
breaches of fiduciary duty. Two other
purported class action lawsuits asserting violations of ERISA were filed against
CIGNA and certain officers in the Eastern District of Pennsylvania by
individuals who seek to represent a class of participants in the CIGNA 401(k)
Plan who allegedly suffered losses on investments in CIGNA stock.
During
2002, a Connecticut federal court certified a class action lawsuit against CIGNA
and the CIGNA Pension Plan. The plaintiffs are participants in the Plan who
earned certain Plan benefits prior to 1998. The plaintiffs allege, among other
things, that the Plan violated ERISA by impermissibly conditioning certain
post-1997 benefit accruals on the amount of pre-1998 benefit accruals, that
these conditions are not adequately disclosed to Plan participants, and that the
Plan’s cash balance formula discriminates against older employees.
See
“Unicover and other run-off reinsurance” on page 45 for a description of
legal matters arising out of the run-off reinsurance operations.
CIGNA is
routinely involved in numerous claims, lawsuits, regulatory audits,
investigations and other legal matters arising, for the most part, in the
ordinary course of the business of administering and insuring employee benefit
programs. An increasing number of claims are being made for substantial
non-economic, extra-contractual or punitive damages. The outcome of litigation
and other legal matters is always uncertain, and outcomes that are not justified
by the evidence can occur. CIGNA believes that it has valid defenses to the
legal matters pending against it and is defending itself vigorously.
Nevertheless, it is possible that resolution of one or more of the legal matters
currently pending or threatened could result in losses material to CIGNA’s
consolidated results of operations, liquidity or financial
condition.
Summary. The
eventual effect on CIGNA of the changing environment in which it operates
remains uncertain. For additional information on contingencies that could affect
CIGNA’s results, see Note 13 to the Financial Statements.
Accounting
Pronouncements
For
information on recent accounting pronouncements, see Note 2 to the Financial
Statements.
Segment
Reporting
The
impact of the restatement as discussed in Note 3 to the Financial Statements is
included in Corporate and is not allocated to the operating segments.
In the
third quarter of 2003, CIGNA changed its segment presentation to report its
health care operations and its separately managed group disability and life
insurance operations as two discrete segments. Previously, results from these
operations were combined as a single segment. In addition, CIGNA renamed its
segments as Health Care, Disability and Life, Retirement, International, Run-off
Reinsurance and Other Operations.
Disability
and life insurance products which were historically sold in connection with
certain experience-rated medical accounts continue to be managed by CIGNA's
health care business and are reported in the Health Care segment.
Operating
segments generally reflect groups of related products, but the International
segment is based on geography. CIGNA measures the financial results of its
segments using “segment earnings,” which is defined as income (loss) from
continuing operations before realized investment gains (losses).
HEALTH CARE
|
|
|
|
FINANCIAL
SUMMARY |
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Premiums
and fees |
|
$ |
2,786 |
|
$ |
3,143 |
|
Net
investment income |
|
|
72 |
|
|
68 |
|
Other
revenues |
|
|
309 |
|
|
272 |
|
Segment
revenues |
|
|
3,167 |
|
|
3,483 |
|
Benefits
and expenses |
|
|
2,924 |
|
|
3,286 |
|
Income
before taxes |
|
|
243 |
|
|
197 |
|
Income
taxes |
|
|
87 |
|
|
72 |
|
Segment
earnings |
|
$ |
156 |
|
$ |
125 |
|
Realized
investment gains
(losses), net of taxes |
|
$ |
4 |
|
$ |
(8 |
) |
Special
items (after-tax) included
in segment earnings: |
|
|
|
|
|
|
|
Restructuring
charge |
|
$ |
(29 |
) |
$ |
— |
|
Restructuring
item |
|
$ |
— |
|
$ |
4 |
|
Results
Segment
earnings increased for the first quarter of 2004, compared to the same period
last year, reflecting lower operating expenses, improvement in the
experience-rated business, favorable prior year development and higher specialty
health care results, partially offset by the impact of lower
membership.
Medical
membership decreased from March 31, 2003, due to a decline in new business sales
and lower retention of existing accounts. These declines are in part,
attributable to CIGNA maintaining underwriting discipline in a competitive
pricing environment, while working to overcome the negative impact from 2002
service disruptions related to the migration to new systems platforms. See
“Operational Improvement” below for discussion of the key areas of focus in
improving the results of the health care operations.
CIGNA
reports the results of this segment in two parts, Health Maintenance
Organization (HMO) and Indemnity operations. HMO includes medical managed care
and specialty health care operations such as managed behavioral health, medical
cost and utilization management, managed dental, managed pharmacy programs and
pharmaceutical fulfillment services. Indemnity includes medical and dental
indemnity, and that portion of CIGNA's group disability and life insurance
business that continues to be managed by the health care business.
Segment
earnings for the HMO and Indemnity operations were as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
HMO
operations |
|
$ |
142 |
|
$ |
108 |
|
Indemnity
operations |
|
|
14 |
|
|
17 |
|
Total |
|
$ |
156 |
|
$ |
125 |
|
Total
special items (after-tax) for HMO
and Indemnity operations: |
|
|
|
|
|
|
|
HMO
operations |
|
$ |
(4 |
) |
$ |
2 |
|
Indemnity
operations |
|
$ |
(25 |
) |
$ |
2 |
|
HMO results,
excluding the special items noted above, increased in the first quarter of 2004,
compared with the same period last year, primarily reflecting:
· |
reduced
operating expenses due to lower spending and increased productivity
largely resulting from organizational changes and restructuring actions;
|
· |
favorable
prior year development compared to unfavorable development in the same
period last year; and |
· |
higher
earnings in pharmaceutical fulfillment and disease management
services. |
These
factors were partially offset by the impact of membership declines.
Indemnity results,
excluding the special items noted above, increased in the first quarter of 2004,
compared with the same period last year, primarily due to improved results
in:
· |
experience-rated
business, primarily reflecting margin improvement on renewal business, as
well as favorable prior year development resulting from underwriting
actions; and |
· |
guaranteed
cost business driven by an improved medical cost ratio and favorable prior
year development. |
Premiums
and Fees
Premiums
and fees decreased in the first quarter of 2004, compared with the same period
last year, because of membership declines partially offset by rate increases.
Premiums
and fees by funding arrangement type were as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Guaranteed
cost |
|
$ |
1,362 |
|
$ |
1,558 |
|
Experience-rated |
|
|
1,041 |
|
|
1,151 |
|
Administrative
services only |
|
|
383 |
|
|
434 |
|
Total
premiums and fees |
|
$ |
2,786 |
|
$ |
3,143 |
|
Experience-rated
premiums and fees include amounts associated with minimum premium funding
arrangements since the risk profiles are similar. See page 11 of CIGNA's 2003
Form 10-K as originally filed for a description of funding arrangement
types.
Medical
Membership
As of
March 31, medical membership was as follows for the HMO and Indemnity
operations:
|
|
|
(In
millions) |
2004 |
2003 |
HMO |
5.5 |
6.4 |
Indemnity
(estimated) |
4.7 |
5.9 |
The
decline in HMO medical membership is primarily due to lower membership in both
Commercial HMO plans and HMO ASO programs.
The
decline in Indemnity medical membership primarily reflects cancellations of and
lower enrollment in, Preferred Provider Organization (PPO) plans.
Operational
Improvement
CIGNA
continues to focus on improving operational effectiveness and the financial
results of its health care operations. Key areas of focus are:
· |
lowering
medical cost trends; |
· |
continuing
to deliver quality member service; |
· |
lowering
administrative expenses; and |
· |
growing
medical membership. |
Lowering
medical cost trend. In early
2003, CIGNA implemented a new centralized medical management model to help
facilitate consistent levels of care for its members and to reduce
infrastructure expenses. As a result, inpatient utilization rates, particularly
in the Commercial HMO line of business, continue to decline through the first
quarter of 2004.
CIGNA
also expects to reduce its medical cost trend by managing unit medical costs
more effectively. To help achieve this end, CIGNA is renegotiating contracts
with certain facilities to limit growth in medical reimbursement costs.
Continuing
to deliver quality member service. During
2002, CIGNA began transitioning to a new service and systems platform to improve
the level and quality of service to its customers. Approximately 65% of health
care members were serviced on this new platform by January 1, 2004. A recent
survey of CIGNA's new and existing customers who have moved to the new platforms
suggests strong satisfaction rates, continuing the positive momentum that began
in 2003. Migration to this new platform will continue into 2005.
Lowering
administrative expenses. Early in
2004, CIGNA took additional steps to realign its organization and consolidate
support functions in an effort to increase efficiency and responsiveness to
customers. Reducing costs and operating more efficiently are components of
CIGNA’s plan to improve profitability. See page 32 for further discussion
of a charge in the first quarter of 2004 related to this matter. CIGNA continues
to perform operational reviews in order to identify additional cost
savings.
Growing
medical membership. CIGNA is
working to grow medical membership with:
· |
a
diverse product portfolio; |
· |
consistent
member service delivery; |
· |
competitive
provider networks; |
· |
strong
clinical quality in medical, specialty health care and disability
management; and |
· |
an
effective suite of customer provider tools. |
CIGNA
believes these capabilities represent fundamental attributes of a leading
provider of health care and related benefit solutions.
DISABILITY
AND LIFE
|
|
|
|
FINANCIAL
SUMMARY |
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Premiums
and fees |
|
$ |
475 |
|
$ |
423 |
|
Net
investment income |
|
|
60 |
|
|
61 |
|
Segment
revenues |
|
|
535 |
|
|
484 |
|
Benefits
and expenses |
|
|
488 |
|
|
440 |
|
Income
before taxes |
|
|
47 |
|
|
44 |
|
Income
taxes |
|
|
12 |
|
|
10 |
|
Segment
earnings |
|
$ |
35 |
|
$ |
34 |
|
Realized
investment gains
(losses), net of taxes |
|
$ |
1 |
|
$ |
(9 |
) |
The
Disability and Life segment includes group accident and specialty association
business in addition to its disability and life insurance products.
Results
Disability
and Life segment earnings remained strong in the first quarter of 2004,
primarily reflecting continued solid execution in the disability, life and
accident insurance businesses.
Premiums
and Fees
Premiums
and fees increased in the first quarter of 2004 compared to the same period last
year primarily reflecting higher new business and strong customer retention in
both disability and life products.
RETIREMENT
|
|
|
|
FINANCIAL
SUMMARY |
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Premiums
and fees |
|
$ |
85 |
|
$ |
90 |
|
Net
investment income |
|
|
355 |
|
|
406 |
|
Other
revenues |
|
|
165 |
|
|
— |
|
Segment
revenues |
|
|
605 |
|
|
496 |
|
Benefits
and expenses |
|
|
560 |
|
|
419 |
|
Income
before taxes |
|
|
45 |
|
|
77 |
|
Income
taxes |
|
|
10 |
|
|
22 |
|
Segment
earnings |
|
$ |
35 |
|
$ |
55 |
|
Realized
investment gains
(losses), net of taxes |
|
$ |
6 |
|
$ |
(3 |
) |
Special
items (after-tax) included
in segment earnings: |
|
|
|
|
|
|
|
Effect
of new accounting
pronouncement (see Note 2 to the
Financial Statements) |
|
$ |
(11 |
) |
$ |
— |
|
Results
Retirement
segment earnings decreased in the first quarter of 2004, compared with the same
period last year, due in part to the quarterly effect of a new accounting
pronouncement (see Note 2 to the Financial Statements). Excluding this special
item, results decreased $9 million primarily due to higher compensation and
related benefit expenses to retain key employees associated with the sold
business.
Other
Revenues
Beginning
October 1, 2003, other revenues include changes in fair value for fixed
maturities and equity securities supporting experience-rated pension
policyholder contracts. Under the experience-rating process, gains and losses on
assets related to these contracts generally accrue to policyholders and are
offset by amounts included in benefits, losses and settlement expenses.
Assets
Under Management
Assets
under management consist of invested assets and separate account assets, as well
as third-party investment advisory account assets of the Retirement segment.
Assets under management are a key driver of earnings for this segment because a
significant portion of this segment’s revenues is based on asset values.
The
following table shows assets under management and the related activity for the
three months ended March 31.
|
|
|
|
|
|
(In millions) |
|
2004 |
|
2003 |
|
Balance—January
1 |
|
$ |
57,547 |
|
$ |
53,757 |
|
Premiums
and deposits |
|
|
2,070 |
|
|
2,371 |
|
Investment income |
|
|
574 |
|
|
617 |
|
Increase
(decrease) in fair value of assets |
|
|
1,098 |
|
|
(955 |
) |
Customer
withdrawals |
|
|
(890 |
) |
|
(846 |
) |
Other,
including participant withdrawals and benefit payments |
|
|
(1,895 |
) |
|
(1,295 |
) |
Balance—March
31 |
|
$ |
58,504 |
|
$ |
53,649 |
|
Changes
in assets under management are discussed below.
Premiums
and deposits. For the
three months of 2004, approximately 69% of premiums and deposits were from
existing customers, and 31% were from sales to new customers and new plan sales
to existing customers. For the three months of 2003, approximately 57% of
premiums and deposits were from existing customers, and 43% were from sales to
new customers and new plan sales to existing customers.
Fair
value of assets. The fair
value of assets under management fluctuates because of changes in the market
value of fixed maturities, securities supporting experienced-rated pension
policyholder contracts, related derivatives and equity securities. The increase
in fair value of assets for the three months of 2004 was primarily attributable
to market value appreciation of equity securities in separate accounts, compared
with depreciation of these securities in 2003.
Other. The
increase for the three months of 2004 includes higher withdrawals permitted by
lower required surplus assets supporting certain statutory
liabilities.
INTERNATIONAL
|
|
|
|
FINANCIAL
SUMMARY |
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Premiums
and fees |
|
$ |
239 |
|
$ |
214 |
|
Net
investment income |
|
|
12 |
|
|
11 |
|
Other
revenues |
|
|
2 |
|
|
— |
|
Segment
revenues |
|
|
253 |
|
|
225 |
|
Benefits
and expenses |
|
|
230 |
|
|
209 |
|
Income
before taxes |
|
|
23 |
|
|
16 |
|
Income
taxes |
|
|
8 |
|
|
6 |
|
Segment
earnings |
|
$ |
15 |
|
$ |
10 |
|
Realized
investment gains,
net of taxes |
|
$ |
1 |
|
$ |
— |
|
Results
International
segment earnings increased in the first quarter of 2004, compared to the same
period last year, primarily due to:
· |
improved
results in the life, accident and health insurance business, primarily in
Asia; and |
· |
the
positive impact of the divestiture of non-strategic
businesses. |
Premiums
and Fees
Premiums
and fees increased in the first quarter of 2004 compared to the same period last
year reflecting:
· |
sales
growth in the life, accident and health insurance operations, primarily in
Asia; and |
· |
higher
premiums and fees for the expatriate employee benefit business principally
resulting from membership growth. |
RUN-OFF
REINSURANCE
|
|
|
|
FINANCIAL
SUMMARY |
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Premiums
and fees |
|
$ |
21 |
|
$ |
23 |
|
Net
investment income |
|
|
24 |
|
|
15 |
|
Other
revenues |
|
|
(30 |
) |
|
56 |
|
Segment
revenues |
|
|
15 |
|
|
94 |
|
Benefits
and expenses |
|
|
24 |
|
|
117 |
|
Loss
before income tax benefits |
|
|
(9 |
) |
|
(23 |
) |
Income
taxes (benefits) |
|
|
1 |
|
|
(8 |
) |
Segment
loss |
|
$ |
(10 |
) |
$ |
(15 |
) |
Realized
investment gains (losses),
net of taxes |
|
$ |
1 |
|
$ |
(1 |
) |
Results
Segment
loss for the Run-off Reinsurance segment was lower in the first quarter of 2004,
compared with the same period last year, primarily due to lower losses from
contracts that guarantee minimum income benefits in part due to improvements in
the stock market.
Other
Revenues
CIGNA
maintains a program to substantially reduce the equity market exposures for
guaranteed minimum death benefit contracts by entering into exchange-traded
futures contracts and foreign currency forward contracts. Other revenues include
losses of $31 million for the three months of 2004 and gains of $56 million for
the three months of 2003 from these contracts. Expense offsets reflecting
corresponding changes in liabilities for these guaranteed minimum death benefit
contracts are included in benefits, losses and settlement expenses.
Other
Matters
Guaranteed
minimum death benefit contracts. CIGNA’s
reinsurance operations, which were discontinued in 2000 and are now an inactive
business in run-off mode, reinsured a guaranteed minimum death benefit under
certain variable annuities issued by other insurance companies. These variable
annuities are essentially investments in mutual funds combined with a death
benefit. CIGNA has equity market risks as a result of this product.
To
support its program to reduce the equity market risks associated with these
contracts, CIGNA expects to adjust the futures and forward contract positions
and enter into other positions over time, to reflect changing equity market
levels and changes in the investment mix of the underlying variable annuity
investments. For further information and details on these contracts and the
program adopted to reduce related equity market risk, refer to Note 5 of CIGNA’s
2003 Annual Report to Shareholders as restated.
The
determination of reserves for variable annuity death benefits requires CIGNA to
make critical accounting estimates, as discussed on page 13 of CIGNA’s 2003
Annual Report to Shareholders as restated. If actual experience differs from the
assumptions and other considerations (including lapse, partial surrender,
mortality, interest rates and volatility as discussed in Note 6 to the Financial
Statements) used in estimating these reserves, the resulting change could have a
material adverse effect on CIGNA’s consolidated results of operations, and in
certain situations, could have a material adverse effect on CIGNA’s financial
condition.
CIGNA had
future policy benefit reserves for these guaranteed minimum death benefit
contracts of approximately $1.2 billion as of March 31, 2004 and December 31,
2003.
As of
March 31, 2004, the aggregate fair value of the underlying mutual fund
investments was approximately $48.2 billion. The death benefit coverage in force
as of that date (representing the amount that CIGNA would have to pay if all 1.3
million contractholders had died on that date) was approximately $11.6 billion.
The death benefit coverage in force represents the excess of the guaranteed
benefit amount over the fair value of the underlying mutual fund investments.
The notional or face amount of the futures and forward contract positions held
by CIGNA at March 31, 2004, was $1.7 billion.
Guaranteed
minimum income benefit contracts. CIGNA
has also written reinsurance contracts with issuers of variable annuity
contracts that provide annuitants with certain guarantees related to minimum
income benefits. See page 52 for further information.
Unicover
and other run-off reinsurance. The
Run-off Reinsurance operations participate in a workers’ compensation
reinsurance pool, which ceased accepting new risks in early 1999. This pool was
formerly managed by Unicover Managers, Inc. Although an arbitration over the
most significant reinsurance (retrocessional) contracts for the pool was
completed in 2002, some disputes over collection of amounts due CIGNA from the
retrocessionaires continue and may require further arbitration actions to
resolve. Also, disputes and arbitrations regarding other reinsurance
(retrocessional) contracts for the pool remain and may not be resolved for some
time.
Run-off
Reinsurance also includes other workers’ compensation reinsurance contracts, as
well as personal accident reinsurance contracts, including contracts assumed in
the London market. CIGNA obtained retrocessional reinsurance coverage for a
significant portion of its liabilities under these contracts. Some of these
retrocessionaires have disputed the validity of their contracts with CIGNA and
arbitration over some of these disputes has commenced. CIGNA also bears the risk
of the financial condition of its retrocessionaires and their ability to meet
their reinsurance obligations to CIGNA.
The
retrocessional disputes are not expected to be resolved for some time. In
addition, unfavorable claims experience related to workers’ compensation and
personal accident exposures is possible and could result in future losses,
including losses attributable to the inability to recover amounts from
retrocessionaires (either due to disputes with the retrocessionaires or their
financial condition).
Summary. CIGNA’s
reserves for amounts recoverable from retrocessionaires, as well as for reserves
for liabilities associated with underlying reinsurance exposures assumed by
CIGNA, are considered appropriate as of March 31, 2004, based on current
information. However, it is possible that future developments could have a
material adverse effect on CIGNA’s consolidated results of operations and, in
certain situations, could have a material adverse effect on CIGNA’s financial
condition.
OTHER
OPERATIONS
|
|
|
|
FINANCIAL
SUMMARY |
|
Three
Months Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Premiums
and fees |
|
$ |
18 |
|
$ |
22 |
|
Net
investment income |
|
|
80 |
|
|
97 |
|
Other
revenues |
|
|
47 |
|
|
48 |
|
Segment
revenues |
|
|
145 |
|
|
167 |
|
Benefits
and expenses |
|
|
129 |
|
|
134 |
|
Income
before taxes |
|
|
16 |
|
|
33 |
|
Income
taxes |
|
|
6 |
|
|
13 |
|
Segment
earnings |
|
$ |
10 |
|
$ |
20 |
|
Realized
investment gains,
(net of taxes) |
|
$ |
1 |
|
$ |
— |
|
Other
Operations consist of:
· |
deferred
gains recognized from the 1998 sale of the individual life insurance and
annuity business; |
· |
corporate
life insurance on which policy loans are outstanding (leveraged corporate
life insurance); |
· |
settlement
annuity business; and |
· |
certain
investment management services. |
Results
Segment
earnings for Other Operations declined in the first quarter of 2004 compared to
the same period last year primarily due to higher severance and employee
retention costs for investment operations supporting the sold retirement
benefits business. Revenues and benefits expenses continue to decline with the
run-out of the leveraged corporate insurance business.
Other
Matters
Tax
benefits for corporate life insurance. Federal
legislation in 1996 eliminated on a prospective basis the tax deductibility of
policy loan interest for most leveraged corporate life insurance products, and
an Internal Revenue Service (IRS) initiative in 2001 encouraged policyholders to
settle tax disputes regarding these products. As a result, some customers have
surrendered their policies and management expects earnings associated with these
products to continue to decline.
CORPORATE
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
Segment
loss (as restated) |
|
$ |
(43 |
) |
$ |
(21 |
) |
Special
items (after-tax)
included in segment
earnings: |
|
|
|
|
|
|
|
Restructuring
charge |
|
$ |
(20 |
) |
$ |
— |
|
Corporate
reflects amounts not allocated to segments, such as stock option expense,
interest expense on corporate debt, net investment income on unallocated
investments, intersegment eliminations and certain corporate overhead expenses.
The loss
increased for the first quarter of 2004, compared with the same period of the
prior year, primarily because of the effects of the restructuring charge in the
period (see page 32).
DISCONTINUED
OPERATIONS
|
|
FINANCIAL
SUMMARY
(In millions) |
Three
Months
Ended
March
31, 2003 |
Revenues |
|
$ |
— |
|
Loss
before income tax benefits |
|
$ |
(3 |
) |
Income
tax benefits |
|
|
(1 |
) |
Loss
from operations |
|
|
(2 |
) |
Gains
on sales, net of taxes of $25 |
|
|
50 |
|
Income
from discontinued operations |
|
$ |
48 |
|
Results
from discontinued operations primarily consist of after-tax gains on sales of
businesses (see page 33 for additional information).
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
CIGNA
normally meets its operating requirements by:
· |
maintaining
appropriate levels of liquidity in its investment
portfolio; |
· |
using
cash flows from operating activities; and |
· |
matching
investment maturities to the estimated duration of the related insurance
and contractholder liabilities. |
Cash
flows from continuing operations for the three months ended March 31, 2004 are
as follows:
|
|
|
|
|
|
(In
millions) |
|
2004 |
|
2003 |
|
Operating
activities |
|
$ |
1,073 |
|
$ |
552 |
|
Investing
activities |
|
$ |
(515 |
) |
$ |
414 |
|
Financing
activities |
|
$ |
(459 |
) |
$ |
(480 |
) |
Cash and
cash equivalents increased $99 million in 2004 and increased $486 million
in 2003. Cash flows from operating activities consist of cash receipts and
disbursements for premiums and fees, gains (losses) recognized in connection
with CIGNA's program to manage equity market risk related to guaranteed minimum
death benefit contracts, investment income, taxes, and benefits, losses and
expenses.
2004:
· |
The
increase in cash flows from operating activities primarily reflects 2004
net proceeds from sales and maturities of securities supporting
experience-rated pension policyholder contracts of $782 million. The
classification of such proceeds as operating began in the fourth quarter
of 2003; accordingly there was no comparable amount in the first quarter
of 2003. Such proceeds were used to fund most of the 2004 withdrawals from
contractholder deposit funds discussed below under financing. Partially
offsetting this item was a $268 million reduction in tax refunds compared
to 2003. |
· |
Cash
used in investing activities primarily consisted of net purchases of
investments ($493 million), and net purchases of property and equipment
($18 million). |
· |
Cash
used in financing activities consisted primarily of payments of dividends
on common stock ($47 million) and net withdrawals from contractholder
deposit funds ($431 million). |
2003:
· |
Cash
provided by investing activities consisted of net proceeds of investments
(approximately $231 million) and proceeds on sale of business ($209
million, partially offset by net purchases of property and equipment ($26
million). |
· |
Cash
used in financing activities consisted primarily of payments of dividends
on common stock ($46 million), net withdrawals from contractholder deposit
funds ($314 million) and repayment of debt ($120
million). |
Capital
Resources
CIGNA’s
capital resources (primarily retained earnings and the proceeds from the
issuance of long-term debt and equity securities) provide protection for
policyholders, furnish the financial strength to underwrite insurance risks and
facilitate continued business growth.
Senior
management, guided by regulatory requirements and rating agency capital
guidelines, determines the amount of capital resources that CIGNA maintains.
Management allocates resources to new long-term business commitments when
returns, considering the risks, look promising and when the resources available
to support existing business are adequate.
With the
net proceeds from the sale of the retirement benefits business (approximately
$1.6-$1.7 billion) and the dividends to the parent company that CIGNA
anticipates from its operating subsidiaries during 2004 (approximately $550-$600
million), CIGNA expects to:
· |
provide
capital necessary to support growth and maintain or improve the financial
strength ratings of its subsidiaries; |
· |
maintain
at least $500 million of uncommitted cash at the parent company level
through 2004; and |
· |
return
capital to investors through share repurchase and debt
retirement. |
Upon
closing the sale of the retirement benefits business, CIGNA reinitiated its
share repurchase program and repurchased 522,715 shares for $36 million in April
2004. CIGNA did not repurchase any shares during the first quarter of 2004 or
2003. The total remaining share repurchase authorization as of April 29, 2004,
was $536 million.
In
addition, CIGNA approved a new dividend policy. This policy, which reduces
CIGNA's quarterly dividend to shareholders to $.025 per share, is more
consistent with the dividend policies of other managed care companies.
CIGNA has
$500 million remaining under an effective shelf registration statement filed
with the Securities and Exchange Commission, which may be issued as debt
securities, equity securities or both. Management and the Board of Directors
will consider market conditions and internal capital requirements when deciding
whether CIGNA should issue new securities.
As of
March 31, 2004, CIGNA had available $260 million in committed lines of credit.
These lines are provided by U.S. banks and typically have terms ranging from one
to three years. Approximately $160 million of CIGNA’s available lines of credit
will expire within the next twelve months.
In May
2003, CIGNA entered into a syndicated bank letter of credit agreement for $433
million in support of an internal reinsurance arrangement. A letter of credit in
a nominal amount is currently issued under this new agreement.
Liquidity
and Capital Resources Outlook
The
availability of resources at the parent/holding company level is dependent on
dividends from CIGNA’s subsidiaries, most of which are subject to regulatory
restrictions and rating agency capital guidelines. CIGNA expects, based on
current projections for cash activity (including projections for dividends from
subsidiaries), to have sufficient resources to:
· |
provide
any funding to subsidiaries needed to support growth and maintain or
improve their financial strength ratings; |
· |
provide
for the capital requirements of its
subsidiaries; |
· |
meet
debt service requirements and pay dividends to CIGNA
shareholders; |
· |
satisfy
pension plan funding requirements; and |
· |
fund
CIGNA's program to reduce the equity market risks associated with
guaranteed minimum death benefit contracts. |
However,
if CIGNA's projections are not realized, the demand for funds could exceed
available cash if:
· |
management
uses cash for investment opportunities; |
· |
a
substantial insurance or contractholder liability becomes due before
related investment assets mature; or |
· |
regulatory
restrictions prevent the insurance and HMO subsidiaries from distributing
cash. |
In those
cases, CIGNA has the flexibility to satisfy liquidity needs through short-term
borrowings, such as lines of credit.
Ratings
CIGNA and
certain of its insurance subsidiaries are rated by nationally recognized rating
agencies. Ratings are always subject to change and there can be no assurance
that CIGNA’s current ratings will continue for any given period of time. As of
April 29, 2004, the current ratings of CIGNA and CG Life (CIGNA's principal
subsidiary) were as follows:
|
|
|
|
CG
Life Insurance
Ratings |
CIGNA
Corporation
Debt
Ratings |
|
|
Senior
Debt |
Commercial
Paper |
A.M.
Best |
A- |
— |
— |
Moody’s |
A3 |
Baa3 |
P3 |
S&P |
A- |
BBB |
A2 |
Fitch |
A |
BBB |
F2 |
Following
the close of the sale of the retirement benefits business, Standard and Poor’s
and Fitch reduced by one notch CG Life’s rating, and Fitch reduced by one notch
CIGNA's senior debt rating.
CIGNA is
committed to maintaining appropriate levels of capital in its subsidiaries to
support ratings that meet customers’ expectations, and to improving the earnings
of the health care business. While CIGNA does not expect the recent ratings
changes to have a material impact on its business, further ratings downgrades of
CG Life could adversely affect new sales and retention of current business.
Lower ratings at the parent company level would increase the cost to borrow
funds.
Guarantees
and Contractual Obligations
CIGNA,
through its subsidiaries, is contingently liable for various financial
guarantees provided and contractual obligations entered into in the ordinary
course of business.
Separate
account assets, primarily associated with the retirement benefits business, are
contractholder funds maintained in accounts with specific investment objectives.
CIGNA records separate account liabilities equal to separate account assets. In
certain cases, CIGNA guarantees a minimum level of benefits for retirement and
insurance contracts written in separate accounts. CIGNA establishes an
additional liability if management believes that CIGNA will be required to make
a payment under these guarantees, which include the following:
· |
CIGNA
guarantees that separate account assets will be sufficient to pay certain
retiree or life benefits. The sponsoring employers are primarily
responsible for ensuring that assets are sufficient to pay these benefits
and are required to maintain assets that exceed a certain percentage of
benefit obligations. This percentage varies depending on the asset class
within a sponsoring employer’s portfolio (for example, a bond fund would
require a lower percentage than a riskier equity fund) and thus will vary
as the composition of the portfolio changes. If employers do not maintain
the required levels of separate account assets, CIGNA has the right to
redirect the management of the related assets to provide for benefit
payments. As of March 31, 2004, employers maintained assets that exceeded
102% to 132% of benefit obligations. Benefit obligations under these
arrangements were $3.5 billion as of March 31, 2004 and December 31, 2003.
There were no additional liabilities required for these guarantees as of
March 31, 2004, or December 31, 2003. |
· |
For
certain employer-sponsored savings and retirement plans, CIGNA guarantees
that participants will receive the value of their accounts at the time of
withdrawal. These guarantees could require payment by CIGNA in the event
that a significant number of plan participants withdraw their accounts
when the market value of the related separate account assets is less than
plan participant account values at the time of withdrawal. Participant
account values under these arrangements are invested primarily in fixed
income investments and were $1.9 billion as of March 31, 2004, and $2.0
billion as of December 31, 2003. There were no additional liabilities
required for these guarantees as of March 31, 2004, or December 31,
2003. |
· |
CIGNA
guarantees a minimum level of earnings (based on investment, mortality and
retirement experience) for a certain group annuity contract. If the actual
investment return is less than the minimum guaranteed level, CIGNA is
required to fund the difference. The guaranteed benefit obligation was
$303 million as of March 31, 2004, and $304 million as of December 31,
2003. CIGNA had additional liabilities for this guarantee of $16 million
as of March 31, 2004, and $15 million as of December 31, 2003.
|
CIGNA
guaranteed construction loans of $27 million as of March 31, 2004, and $26
million as of December 31, 2003, related to real estate joint venture
investments. The loans are secured by joint venture real estate property with
fair values in excess of the loan amounts and mature by 2008, including
extension options. CIGNA would be required to repay the construction loans if
permanent financing could not be obtained. There were no liabilities required
for these guarantees as of March 31, 2004, or December 31, 2003.
CIGNA had
indemnification obligations to lenders up to $340 million as of March 31, 2004,
and $329 million as of December 31, 2003, related to borrowings by certain real
estate joint ventures, which CIGNA either records as an investment or
consolidates. These borrowings, which are nonrecourse to CIGNA, are secured by
the joint ventures’ real estate properties with fair values in excess of the
loan amounts and mature at various dates from 2004 to 2015. CIGNA’s
indemnification obligations would require payment to lenders for any actual
damages resulting from certain acts such as unauthorized ownership transfers,
misappropriation of rental payments by others or environmental damages. Based on
initial and ongoing reviews of property management and operations, CIGNA does
not expect that payments will be required under these indemnification
obligations. Any payments that might be required could be recovered through a
refinancing or sale of the assets. In some cases, CIGNA also has recourse to
partners for their proportionate share of amounts paid. There were no
liabilities required for these indemnification obligations as of March 31, 2004,
or December 31, 2003.
As of
March 31, 2004 and December 31, 2003, CIGNA guaranteed that it would compensate
the lessor for a shortfall of up to $49 million in the market value of leased
equipment at the end of the lease. Guarantees of $21 million expire in 2006 and
$28 million expire in 2012.
CIGNA has
indemnification obligations as of March 31, 2004, and December 31, 2003, in
connection with acquisition and disposition transactions. These indemnification
obligations are triggered by the breach of representations or covenants provided
by CIGNA, such as representations for the presentation of financial statements,
the filing of tax returns or the identification of outstanding litigation. These
obligations are typically subject to various time limitations, defined by the
contract or by operation of law, such as statutes of limitation. In some cases,
the maximum potential amount due is subject to contractual limitations based on
a percentage of the transaction purchase price, while in other cases limitations
are not specified or applicable. CIGNA does not believe that it is possible to
determine the maximum potential amount due under these guarantees, since not all
amounts due under these indemnification obligations are subject to limitation.
There were no liabilities required for these indemnification obligations as of
March 31, 2004, or December 31, 2003.
CIGNA
does not expect that these guarantees will have a material adverse effect on
CIGNA’s consolidated results of operations, liquidity or financial
condition.
Guaranteed
minimum income benefit contracts. CIGNA has
written reinsurance contracts with issuers of variable annuity contracts that
provide annuitants with certain guarantees related to minimum income benefits.
When annuitants elect to receive these minimum income benefits, CIGNA may be
required to make payments based on changes in underlying mutual fund values and
interest rates.
CIGNA
estimates the fair value of the assets and liabilities associated with these
contracts using assumptions as to equity market returns, volatility of the
underlying equity and bond mutual fund investments, interest rates, mortality,
policy surrenders, credit risk and annuity election rates. As annuitants begin
to become eligible to elect their income benefit annuity later in 2004 and
during 2005, CIGNA will monitor actual experience against its annuity election
rate assumptions.
CIGNA is
required to disclose the maximum potential undiscounted future payments for
guarantees related to minimum income benefits using worst-case assumptions,
defined as follows:
· |
No
annuitants surrendered their accounts, and |
· |
All
annuitants lived to elect their benefits,
and |
· |
All
annuitants elected to receive their benefit on the first available date
(beginning in 2004 through 2014), and |
· |
All
underlying mutual fund investment values remained at the March 31, 2004
value of $3.3 billion, with no future
returns. |
The
maximum potential undiscounted payments that CIGNA would make under those
assumptions would aggregate $2.3 billion before reinsurance recoveries. CIGNA
believes the likelihood of such payment is remote and expects the amount of
actual payments to be significantly less than this hypothetical undiscounted
aggregate amount. CIGNA has purchased reinsurance from third parties which
covers 80% of the exposures on these contracts. CIGNA has revised credit risk
assumptions for about 25% of the exposures on these contracts.
As of
March 31, 2004, CIGNA had liabilities of $90 million related to these contracts
and amounts recoverable from reinsurers of $63 million. CIGNA had an additional
liability of $39 million associated with the cost of reinsurance as of March 31,
2004. As of December 31, 2003, CIGNA had liabilities of $74 million related to
these contracts and amounts recoverable from reinsurers of $51 million. CIGNA
had an additional liability of $40 million associated with the cost of
reinsurance as of December 31, 2003. In the first quarter of 2003, CIGNA reduced
its amount recoverable from reinsurers’ by $9 million pre-tax related to revised
credit risk assumptions. Management believes the current assumptions used to
estimate reserves for these liabilities are appropriate.
Contractual
obligations. As of
March 31, 2004, CIGNA's contractual obligations included $101 million in
nonrecourse obligations due as follows: $60 million in 2004; $18 million in 2005
and 2006; and $23 million in 2007 and 2008. See Note 2 to the Financial
Statements for additional information.
CIGNA
funds its qualified pension plans at least at the minimum amount required by the
Employee Retirement Security Act of 1974 (ERISA). As a result of recent changes
in minimum funding requirements, CIGNA expects to make domestic pension plan
contributions of approximately $175 million in 2004.
INVESTMENT
ASSETS
CIGNA’s
investment assets do not include separate account assets. Additional information
regarding CIGNA’s investment assets and related accounting policies is included
in Notes 2, 8, 9, and 10 to the Financial Statements in CIGNA’s 2003 Annual
Report to Shareholders and Form 10-K.
Investments
in fixed maturities (bonds) include publicly traded and privately placed debt
securities, mortgage-backed and other asset-backed securities and redeemable
preferred stocks. Securities supporting experience-rated pension policyholder
contracts predominantly consist of fixed maturities.
CIGNA’s
mortgage loans are diversified by property type, location and borrower to reduce
exposure to potential losses.
A
significant portion of CIGNA’s investment assets is attributable to
experience-rated pension policyholder contracts associated with the retirement
benefits business. The following table shows the percentage of certain
categories of investment assets that are held under policyholder
contracts:
|
|
|
|
March
31, |
December
31, |
|
2004 |
2003 |
Securities
supporting
experience-rated pension
policyholder contracts |
100% |
100% |
Mortgage
loans |
54% |
54% |
Real
estate |
21% |
46% |
Other
long-term investments |
15% |
24% |
Problem
and Potential Problem Investments
“Problem”
bonds and mortgage loans are either delinquent or have been restructured as to
terms (interest rate or maturity date). “Potential problem” bonds and mortgage
loans are fully current, but management believes they have certain
characteristics that increase the likelihood that they will become “problems.”
For example, CIGNA considers mortgage loans to be potential problems if the
borrower has requested restructuring, or principal or interest payments are past
due by more than 30 but fewer than 60 days.
CIGNA
recognizes interest income on “problem” bonds and mortgage loans only when
payment is actually received because of the risk profile of the underlying
investment. This resulted in lower net income of $3 million for the first
quarter of 2004, compared to $2 million for the first quarter of 2003. These
amounts would have been recorded if interest on problem investments had been
recognized in accordance with the original terms of these
investments.
The
following table shows problem and potential problem bonds and mortgage loans as
well as foreclosed real estate, net of valuation reserves and write-downs
(including amounts attributable to policyholder contracts):
|
|
|
(In
millions) |
March
31,
2004 |
December
31,
2003 |
Problem
bonds |
$134 |
$132 |
Potential
problem bonds |
$113 |
$161 |
Problem
mortgage loans |
$35 |
$24 |
Potential
problem mortgage loans |
$331 |
$335 |
Foreclosed
real estate held and used |
$22 |
$23 |
Summary
The
effects of investment asset write-downs and changes in valuation reserves on
CIGNA’s net income and on amounts attributable to policyholder contracts were as
follows:
|
|
|
|
|
|
Three
Months Ended
March
31, |
|
(In
millions) |
|
2004 |
|
2003 |
|
CIGNA |
|
$ |
6 |
|
$ |
23 |
|
Policyholder
contracts |
|
$ |
1 |
|
$ |
36 |
|
CIGNA’s
portion of these losses is a component of realized investment results, which are
discussed on page 30. The 2004 amounts attributable to policyholder contracts
generally decreased because securities supporting experience-rated pension
policyholder business are now reported in a trading portfolio.
The
weakness in certain sectors of the economy is likely to cause additional
investment losses. These investment losses could materially affect future
results of operations, although CIGNA does not currently expect them to have a
material effect on its liquidity or financial condition, or to result in a
significant decline in the aggregate carrying value of its assets.
MARKET
RISK
Market
Risk of Financial Instruments
CIGNA’s
assets and liabilities include financial instruments subject to the risk of
potential losses from adverse changes in market rates and prices. The primary
market risk exposures are interest rate risk, foreign currency exchange rate
risk, and equity price risk.
CIGNA
uses futures and forward contracts as part of a program to substantially reduce
the effect of equity market changes on certain specialty life reinsurance
contracts that guarantee minimum death benefits based on unfavorable changes in
variable annuity account values. The hypothetical effect of a 10% increase in
the S&P 500, Russell 2000, NASDAQ, TOPIX (Japanese) and PAN-EURO equity
indices and a 10% weakening in the U.S. dollar to the Japanese yen and Euro
would have been a decrease of approximately $150 million in the fair value of
the futures and forward contracts outstanding under this program as of March 31,
2004. A corresponding decrease in liabilities for certain guaranteed minimum
death benefit contracts would result from this hypothetical 10% increase in
these equity indices and 10% weakening in the U.S. dollar. See Note 6 to the
Financial Statements for further discussion of this program and the related
guaranteed minimum death benefit contracts.
Stock
Market Performance
The
performance of equity markets can have a significant effect on CIGNA’s
businesses including on:
· |
risks
and exposures associated with guaranteed minimum death benefit contracts
(see page 44) and guaranteed minimum income benefit contracts (see page
52); and |
· |
minimum
pension liabilities since equity securities comprise a key portion of the
assets of CIGNA’s employee pension plans. |
CAUTIONARY
STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
CIGNA and
its representatives may from time to time make written and oral forward-looking
statements, including statements contained in press releases, in CIGNA’s filings
with the Securities and Exchange Commission, in its reports to shareholders and
in meetings with analysts and investors. Forward-looking statements may contain
information about financial prospects, economic conditions, trends and other
uncertainties. For example, this Management’s Discussion and Analysis includes
forward-looking information regarding, among other things, the use of proceeds
from CIGNA's sale of its retirement benefits business, CIGNA’s restructuring
programs and activities, litigation and other legal matters, operational
improvement in the health care operations, and the outlook for CIGNA’s full year
2004 results. You should not place undue reliance on these forward-looking
statements. CIGNA cautions that actual results could differ materially from
those that management expects, depending on the outcome of certain factors. Some
factors that could cause actual results to differ materially from the
forward-looking statements include:
1. |
increases
in medical costs that are higher than anticipated in establishing premium
rates in CIGNA’s health care operations, including increased use and costs
of medical services; |
2. |
increased
medical, administrative, technology or other costs resulting from
legislative and regulatory challenges to, and new regulatory requirements
imposed on, CIGNA’s health care business (see Health care regulation on
page 34 for more information); |
3. |
challenges
and risks associated with implementing the improvement initiatives in the
health care operations, the organizational realignment and the reduction
of overall CIGNA and health care cost structure, including that
operational efficiencies and medical cost benefits do not emerge as
expected; |
4. |
risks
associated with the amount and timing of gain recognition on the sale of
CIGNA's retirement benefits business; |
5. |
risks
associated with pending and potential state and federal health care class
action lawsuits, purported securities class action lawsuits, disputes
regarding reinsurance arrangements, other litigation challenging CIGNA’s
businesses and the outcome of pending government
proceedings; |
6. |
heightened
competition, particularly price competition, which could reduce product
margins and constrain growth in CIGNA’s
businesses; |
7. |
significantly
greater than expected reductions in medical
membership; |
8. |
significant
changes in interest rates; |
9. |
downgrades
in the financial strength ratings of CIGNA’s insurance subsidiaries, which
could, among other things, adversely affect new sales and retention of
current business; |
10. |
limitations
on the ability of CIGNA's insurance subsidiaries to dividend capital to
the parent company as a result of downgrades in the subsidiaries’
financial strength ratings, changes in statutory reserve or capital
requirements or other financial
constraints; |
11. |
inability
of the program adopted by CIGNA to substantially reduce equity market
risks for reinsurance contracts that guarantee minimum death benefits
under certain variable annuities (including possible market difficulties
in entering into appropriate futures and forward contracts and in matching
such contracts to the underlying equity risk);
|
12. |
adjustments
to the reserve assumptions and other considerations (including lapse,
partial surrender, mortality, interest rates and volatility) used in
estimating CIGNA's liabilities for reinsurance contracts that guarantee
minimum death benefits under certain variable annuities;
|
13. |
adjustments
to the assumptions (including annuity election rates) used in estimating
CIGNA’s assets and liabilities for reinsurance contracts that guarantee
minimum income benefits under certain variable
annuities; |
14. |
significant
stock market declines, which could, among other things, result in
increased pension expenses in CIGNA’s pension plan in future periods and
the recognition of additional pension obligations;
|
15. |
unfavorable
claims experience related to workers’ compensation and personal accident
exposures of the run-off reinsurance business, including losses
attributable to the inability to recover claims from
retrocessionaires; |
16. |
significant
deterioration in economic conditions, which could have an adverse effect
on CIGNA’s operations and investments; and |
17. |
changes
in federal income tax laws. |
This list
of important factors is not intended to be exhaustive. There may be other risk
factors that would preclude CIGNA from realizing the forward-looking statements.
While CIGNA may periodically update this discussion of risk factors, CIGNA does
not undertake to update any forward-looking statement that may be made by or on
behalf of CIGNA prior to its next required filing with the Securities and
Exchange Commission.
Item
4. Controls
and Procedures
Based on
an evaluation of the effectiveness of CIGNA’s disclosure controls and
procedures, CIGNA’s Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, CIGNA’s
disclosure controls and procedures are effective to ensure that information
required to be disclosed by CIGNA in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. In making this evaluation,
CIGNA has considered matters relating to its restatement of previously issued
financial statements for the periods covered by this report, including the
process that was undertaken to ensure that all material adjustments necessary to
correct the previously issued financial statements were recorded.
As set
forth in Note 4 to the Financial Statements, CIGNA restated its financial
statements for the periods covered by this report. The restatement resulted from
a deficiency that CIGNA identified in its internal controls over management
stock compensation processes. CIGNA has remediated the deficiency by
implementing corrective actions to its internal controls over these
processes.
There
have been no changes in CIGNA’s internal control over financial reporting
identified in connection with the evaluation described in the above paragraph
that have materially affected, or are reasonably likely to materially affect,
CIGNA’s internal control over financial reporting.
PART II.
OTHER INFORMATION
Item
6. Exhibits
and Reports on Form 8-K.
(a) See
Exhibit Index.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CIGNA
CORPORATION |
|
|
|
|
By:
|
/s/
Michael W. Bell |
|
|
Michael
W. Bell |
|
|
Executive
Vice President and |
|
|
Chief
Financial Officer |
|
|
|
Date:
February 24, 2005 |
|
|
Exhibit
Index
Number |
Description |
Method
of Filing |
|
|
|
12 |
Computation
of Ratios of Earnings |
Filed
herewith. |
|
to
Fixed Charges |
|
|
|
|
31.1 |
Certification
of Chief Executive Officer |
Filed
herewith. |
|
of
CIGNA Corporation pursuant to |
|
|
Rule
13a-14(a) or Rule 15d-14(a) |
|
|
of
the Securities Exchange Act of 1934 |
|
|
|
|
31.2 |
Certification
of Chief Financial Officer |
Filed
herewith. |
|
of
CIGNA Corporation pursuant to |
|
|
Rule
13a-14(a) or Rule 15d-14(a) |
|
|
of
the Securities Exchange Act of 1934 |
|
|
|
|
32.1 |
Certification
of Chief Executive Officer |
Furnished
herewith. |
|
of
CIGNA Corporation pursuant to Rule |
|
|
13a-14(b)
or Rule 15d-14(b) and 18 |
|
|
U.S.C.
Section 1350 |
|
|
|
|
32.2 |
Certification
of Chief Financial Officer |
Furnished
herewith. |
|
of
CIGNA Corporation pursuant to Rule |
|
|
13a-14(b)
or Rule 15d-14(b) and 18 |
|
|
U.S.C.
Section 1350 |
|
E-1