CIGNA March 10Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended March
31, 2006
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.)
|
Two
Liberty Place, 1601 Chestnut 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
_
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes _ No x
As
of
March 31, 2006 119,758,787 shares of the issuer's common stock were
outstanding.
CIGNA
CORPORATION
INDEX
|
Page
No.
|
PART
I.
|
FINANCIAL
INFORMATION
|
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Item
1.
|
Financial
Statements
|
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Item
2.
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Item
3.
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Item
4.
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PART
II.
|
OTHER
INFORMATION
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Item
1.
|
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Item
1A.
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Item
2.
|
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Item
6.
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As
used
herein, CIGNA refers to one or more of CIGNA Corporation and its consolidated
subsidiaries.
Part
I. FINANCIAL INFORMATION
|
Item
1. Financial Statements
|
|
|
|
|
|
CIGNA
CORPORATION
|
|
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
March
31,
|
|
|
2006
|
|
2005
|
|
|
|
|
|
REVENUES
|
|
|
|
|
Premiums
and fees
|
$
|
3,268
|
$
|
3,362
|
Net
investment income
|
|
329
|
|
330
|
Other
revenues
|
|
366
|
|
636
|
Realized
investment gains
|
|
144
|
|
17
|
Total
revenues
|
|
4,107
|
|
4,345
|
|
|
|
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
Health
Care medical claims expense
|
|
1,448
|
|
1,456
|
Other
benefit expenses
|
|
788
|
|
868
|
Other
operating expenses
|
|
1,343
|
|
1,356
|
Total
benefits and expenses
|
|
3,579
|
|
3,680
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
528
|
|
665
|
|
|
|
|
|
Income
taxes (benefits):
|
|
|
|
|
Current
|
|
254
|
|
59
|
Deferred
|
|
(78)
|
|
170
|
Total
taxes
|
|
176
|
|
229
|
|
|
|
|
|
NET
INCOME
|
$
|
352
|
$
|
436
|
|
|
|
|
|
EARNINGS
PER SHARE - BASIC
|
$
|
2.93
|
$
|
3.34
|
|
|
|
|
|
EARNINGS
PER SHARE - DILUTED
|
$
|
2.87
|
$
|
3.28
|
|
|
|
|
|
DIVIDENDS
DECLARED PER SHARE
|
$
|
0.025
|
$
|
0.025
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral
part of
these statements.
|
CIGNA
CORPORATION
|
|
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
|
|
|
|
|
As
of
|
|
|
|
|
March
31,
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
Fixed
maturities, at fair value (amortized cost, $13,612;
$13,873)
|
|
|
$
|
14,328
|
|
|
|
$
|
14,947
|
Equity
securities, at fair value (cost, $146; $113)
|
|
|
|
163
|
|
|
|
|
135
|
Mortgage
loans
|
|
|
|
4,206
|
|
|
|
|
3,934
|
Policy
loans
|
|
|
|
1,341
|
|
|
|
|
1,337
|
Real
estate
|
|
|
|
95
|
|
|
|
|
80
|
Other
long-term investments
|
|
|
|
449
|
|
|
|
|
504
|
Short-term
investments
|
|
|
|
105
|
|
|
|
|
439
|
Total
investments
|
|
|
|
20,687
|
|
|
|
|
21,376
|
Cash
and cash equivalents
|
|
|
|
1,904
|
|
|
|
|
1,709
|
Accrued
investment income
|
|
|
|
289
|
|
|
|
|
282
|
Premiums,
accounts and notes receivable
|
|
|
|
1,482
|
|
|
|
|
1,598
|
Reinsurance
recoverables
|
|
|
|
6,719
|
|
|
|
|
7,018
|
Deferred
policy acquisition costs
|
|
|
|
644
|
|
|
|
|
618
|
Property
and equipment
|
|
|
|
626
|
|
|
|
|
638
|
Deferred
income taxes
|
|
|
|
1,215
|
|
|
|
|
1,087
|
Goodwill
|
|
|
|
1,622
|
|
|
|
|
1,622
|
Other
assets, including other intangibles
|
|
|
|
285
|
|
|
|
|
306
|
Separate
account assets
|
|
|
|
8,555
|
|
|
|
|
8,609
|
Total
assets
|
|
|
$
|
44,028
|
|
|
|
$
|
44,863
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Contractholder
deposit funds
|
|
|
$
|
9,423
|
|
|
|
$
|
9,676
|
Future
policy benefits
|
|
|
|
8,405
|
|
|
|
|
8,626
|
Unpaid
claims and claim expenses
|
|
|
|
4,272
|
|
|
|
|
4,281
|
Health
Care medical claims payable
|
|
|
|
1,065
|
|
|
|
|
1,165
|
Unearned
premiums and fees
|
|
|
|
523
|
|
|
|
|
515
|
Total
insurance and contractholder liabilities
|
|
|
|
23,688
|
|
|
|
|
24,263
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
|
5,029
|
|
|
|
|
5,127
|
Short-term
debt
|
|
|
|
85
|
|
|
|
|
100
|
Long-term
debt
|
|
|
|
1,253
|
|
|
|
|
1,338
|
Nonrecourse
obligations
|
|
|
|
66
|
|
|
|
|
66
|
Separate
account liabilities
|
|
|
|
8,555
|
|
|
|
|
8,609
|
Total
liabilities
|
|
|
|
38,676
|
|
|
|
|
39,503
|
|
|
|
|
|
|
|
|
|
|
CONTINGENCIES
- NOTE 12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
Common
stock (par value per share, $0.25; shares issued, 160;
160)
|
|
|
|
40
|
|
|
|
|
40
|
Additional
paid-in capital
|
|
|
|
2,419
|
|
|
|
|
2,385
|
Net
unrealized appreciation, fixed maturities
|
$
|
100
|
|
|
|
$
|
195
|
|
|
Net
unrealized appreciation, equity securities
|
|
20
|
|
|
|
|
24
|
|
|
Net
unrealized depreciation, derivatives
|
|
(15)
|
|
|
|
|
(14)
|
|
|
Net
translation of foreign currencies
|
|
9
|
|
|
|
|
2
|
|
|
Minimum
pension liability adjustment
|
|
(716)
|
|
|
|
|
(716)
|
|
|
Accumulated
other comprehensive loss
|
|
|
|
(602)
|
|
|
|
|
(509)
|
Retained
earnings
|
|
|
|
5,425
|
|
|
|
|
5,162
|
Less
treasury stock, at cost
|
|
|
|
(1,930)
|
|
|
|
|
(1,718)
|
Total
shareholders' equity
|
|
|
|
5,352
|
|
|
|
|
5,360
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
|
$
|
44,028
|
|
|
|
$
|
44,863
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY PER SHARE
|
|
|
$
|
44.69
|
|
|
|
$
|
44.23
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral
part of
these statements.
|
CIGNA
CORPORATION |
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
|
|
$
|
40
|
|
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital, January 1
|
|
|
|
|
|
2,385
|
|
|
|
|
|
2,360
|
|
Effect
of issuance of stock for employee benefits plans
|
|
|
|
|
|
34
|
|
|
|
|
|
(21
|
)
|
Additional
paid-in capital, March 31
|
|
|
|
|
|
2,419
|
|
|
|
|
|
2,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss, January 1
|
|
|
|
|
|
(509
|
)
|
|
|
|
|
(336
|
)
|
Net
unrealized depreciation, fixed maturities
|
|
$
|
(95
|
)
|
|
(95
|
)
|
$
|
(146
|
)
|
|
(146
|
)
|
Net
unrealized depreciation, equity securities
|
|
|
(4
|
)
|
|
(4
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Net
unrealized depreciation on securities
|
|
|
(99
|
)
|
|
|
|
|
(148
|
)
|
|
|
|
Net
unrealized depreciation, derivatives
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Net
translation of foreign currencies
|
|
|
7
|
|
|
7
|
|
|
3
|
|
|
3
|
|
Other
comprehensive loss
|
|
|
(93
|
)
|
|
|
|
|
(147
|
)
|
|
|
|
Accumulated
other comprehensive loss, March 31
|
|
|
|
|
|
(602
|
)
|
|
|
|
|
(483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings, January 1
|
|
|
|
|
|
5,162
|
|
|
|
|
|
3,679
|
|
Net
income
|
|
|
352
|
|
|
352
|
|
|
436
|
|
|
436
|
|
Effects
of issuance of stock for employee benefits plans
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
(42
|
)
|
Common
dividends declared
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
(3
|
)
|
Retained
earnings, March 31
|
|
|
|
|
|
5,425
|
|
|
|
|
|
4,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock, January 1
|
|
|
|
|
|
(1,718
|
)
|
|
|
|
|
(540
|
)
|
Repurchase
of common stock
|
|
|
|
|
|
(419
|
)
|
|
|
|
|
(240
|
)
|
Other,
primarily issuance of treasury stock for employee benefit
plans
|
|
|
|
207
|
|
|
|
|
|
123
|
|
Treasury
stock, March 31
|
|
|
|
|
|
(1,930
|
)
|
|
|
|
|
(657
|
)
|
TOTAL
COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY
|
$
|
259
|
|
$
|
5,352
|
|
$
|
289
|
|
$
|
5,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral
part of
these statements.
|
CIGNA
CORPORATION
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
Income
|
|
$
|
352
|
|
$
|
436
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Insurance
liabilities
|
|
|
(132
|
)
|
|
(216
|
)
|
Reinsurance
recoverables
|
|
|
31
|
|
|
(52
|
)
|
Deferred
policy acquisition costs
|
|
|
(21
|
)
|
|
(17
|
)
|
Premiums,
accounts and notes receivable
|
|
|
68
|
|
|
146
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(165
|
)
|
|
113
|
|
Current
income taxes
|
|
|
222
|
|
|
(42
|
)
|
Deferred
income taxes
|
|
|
(78
|
)
|
|
170
|
|
Realized
investment (gains)
|
|
|
(144
|
)
|
|
(17
|
)
|
Depreciation
and amortization
|
|
|
54
|
|
|
62
|
|
Gains
on sales of businesses
|
|
|
(17
|
)
|
|
(286
|
)
|
Mortgage
loans originated and held for sale
|
|
|
(240
|
)
|
|
-
|
|
Other,
net
|
|
|
(17
|
)
|
|
(26
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(87
|
)
|
|
271
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from investments sold:
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
535
|
|
|
594
|
|
Equity
securities
|
|
|
5
|
|
|
4
|
|
Mortgage
loans
|
|
|
136
|
|
|
151
|
|
Other
(primarily short-term investments)
|
|
|
611
|
|
|
25
|
|
Investment
maturities and repayments:
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
518
|
|
|
194
|
|
Mortgage
loans
|
|
|
69
|
|
|
76
|
|
Investments
purchased:
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
(755
|
)
|
|
(904
|
)
|
Equity
securities
|
|
|
(30
|
)
|
|
(5
|
)
|
Mortgage
loans
|
|
|
(252
|
)
|
|
(53
|
)
|
Other
(primarily short-term investments)
|
|
|
(150
|
)
|
|
(113
|
)
|
Property
and equipment, net
|
|
|
(30
|
)
|
|
(23
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
657
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Deposits
and interest credited to contractholder deposit funds
|
|
|
141
|
|
|
176
|
|
Withdrawals
and benefit payments from contractholder deposit funds
|
|
|
(179
|
)
|
|
(168
|
)
|
Change
in cash overdraft position
|
|
|
4
|
|
|
(193
|
)
|
Repayment
of long-term debt
|
|
|
(100
|
)
|
|
-
|
|
Repurchase
common stock
|
|
|
(400
|
)
|
|
(242
|
)
|
Issuance
of common stock
|
|
|
162
|
|
|
94
|
|
Common
dividends paid
|
|
|
(3
|
)
|
|
(3
|
)
|
Net
cash used in financing activities
|
|
|
(375
|
)
|
|
(336
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
195
|
|
|
(119
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
1,709
|
|
|
2,519
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,904
|
|
$
|
2,400
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Information:
|
|
|
|
|
|
|
|
Income
taxes paid (received), net
|
|
$
|
8
|
|
$
|
91
|
|
Interest
paid
|
|
$
|
22
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
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 of America.
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 Annual Report to Shareholders and Form 10-K for the year ended
December 31, 2005.
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
2006
presentation, including the elimination of certain intercompany purchases and
sales of short-term investments in the investing activities section of the
statement of cash flows. This reclassification had no net impact on the prior
year net purchases and sales of short-term investments or the total cash flows
from investing activities.
NOTE
2 - RECENT ACCOUNTING
PRONOUNCEMENTS
Other-than-temporary
impairment.
Effective January 1, 2006, CIGNA implemented guidance provided by the staff
of
the Financial Accounting Standards Board (FASB) on evaluating fixed
maturities and equity securities for other-than-temporary impairment. Because
this guidance is largely a summary of existing accounting principles generally
accepted in the United States of America, there was no material effect in
accounting for fixed maturities and equity securities with other-than-temporary
impairments at implementation on January 1, 2006. See Note 9 for a review of
declines in fair value of fixed maturities and equity securities.
Deferred
acquisition costs. In
2005,
the American Institute of Certified Public Accountants issued a Statement of
Position (SOP), "Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection With Modifications or Exchanges of Insurance Contracts,"
for
implementation in the first quarter of 2007. The SOP requires that deferred
acquisition costs be expensed in full when the original contract is
substantially changed by election or amendment of an existing contract feature
or by replacement with a new contract. CIGNA expects to implement the SOP for
contract changes beginning in the first quarter of 2007 with no material effects
to the financial statements at implementation. Although substantial contract
changes are not expected to occur, the effect of this SOP in future periods
may
vary based on the nature and volume of any such contract changes.
Certain
financial instruments. In
2006,
the FASB issued an amendment related to Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivatives and Hedging Activities,"
for implementation in the first quarter of 2007. The amendment clarifies when
certain financial instruments and features of financial instruments must be
treated as derivatives and reported on the balance sheet at fair value with
changes in fair value reported in net income. CIGNA will implement the amendment
beginning with financial instruments acquired in the first quarter of 2007,
with
no material effects to the financial statements expected at adoption. However,
this amendment may affect future income recognition for certain financial
instruments if additional derivatives are identified because any changes in
their fair values will be recognized in net income each period.
Stock
compensation. SFAS
No.
123 (as revised in 2004 and referred to as SFAS 123R,) “Share-Based Payment” was
effective January 1, 2006. This standard, which CIGNA early adopted effective
October 1, 2004, requires companies to recognize in net income an estimate
of
expense for stock awards and options over their vesting periods typically
determined as of the date of grant. CIGNA records compensation expense for
stock
options over their vesting periods based on the estimated fair value of the
stock options, which is calculated using an option-pricing model. Compensation
expense is recorded for restricted stock grants and deferred stock units over
their vesting periods based on fair value, which is equal to the market price
of
CIGNA common stock on the date of grant. Compensation expense for stock options,
restricted stock grants and deferred stock units are recorded in Corporate.
Compensation
cost and related tax benefits for stock options, restricted stock and deferred
stock units were as follows:
|
|
|
|
|
|
|
|
|
Three
Months
Ended
March
31,
|
(In
millions)
|
|
|
|
2006
|
|
2005
|
Compensation
cost
|
|
|
$
|
12
|
$
|
6
|
Tax
benefits
|
|
|
$
|
4
|
$
|
2
|
CIGNA
calculated the average fair value using the Black-Scholes option pricing model.
The following assumptions were used for the periods
indicated:
|
|
|
|
|
Three
Months
Ended
March
31,
|
(Options
in thousands)
|
|
2006
|
2005
|
Dividend
yield
|
|
0.1%
|
0.1%
|
Expected
volatility
|
|
35.0%
|
35.0%
|
Risk-free
interest rate
|
|
4.6%
|
3.9%
|
Expected
option life
|
|
4.5
years
|
5.25
years
|
Options
granted
|
|
524
|
781
|
Weighted
average fair value of options granted
|
|
$43.97
|
$33.88
|
The
expected volatility reflects CIGNA's past daily stock price volatility.
Volatility implied in the market prices of traded options was not considered
a
good indicator of future volatility because remaining maturities of traded
options are less than one year. CIGNA developed the expected option life by
considering certain factors, including assumptions used by other companies
with
comparable stock option plan features and CIGNA's cancellation of a replacement
option feature in June 2004.
Restricted
stock granted and the average fair value at the date of grant were as
follows:
|
|
|
|
|
|
|
|
|
Three
Months
Ended
March
31,
|
(Grants
in thousands)
|
|
|
|
2006
|
|
2005
|
Restricted
stock granted
|
|
|
|
193
|
|
282
|
Weighted
average fair value
|
|
|
$
|
122.50
|
$
|
91.36
|
NOTE
3 - 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 resulted
in
an after-tax gain of $804 million, of which $267 million after-tax was
recognized immediately.
As
this
transaction was primarily in the form of a reinsurance arrangement under which
CIGNA retains the contractual obligation to pay these liabilities, $537 million
of the after-tax gain was deferred. Subsequent to the original reinsurance
transaction, the buyer of the retirement benefits business has entered into
agreements with most of the insured parties relieving CIGNA of any remaining
contractual obligation to those parties (novation). Additional such agreements
are expected.
The
deferred gain is amortized at the rate at which earnings from the sold business
would have been expected to emerge (primarily 15 years on a declining basis)
until CIGNA is relieved of any remaining contractual obligation. At the time
of
novation,
CIGNA accelerates amortization of a portion of the deferred gain and also
reduces the associated contractholder deposit funds, future policy benefits,
reinsurance recoverables and separate account balances. See Note 6 to the
Financial Statements for additional information on reinsurance recoverables
associated with the sale of the retirement benefits business.
CIGNA
recognized deferred gain amortization in other revenues in the Run-off
Retirement segment as follows:
|
|
|
|
|
|
(In millions)
|
|
Pre-Tax
|
|
After-Tax
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
2006
|
|
|
|
|
|
Accelerated
deferred gain amortization
|
|
$
|
4
|
|
$
|
1
|
|
Normal
deferred gain amortization
|
|
$
|
2
|
|
$
|
1
|
|
2005
|
|
|
|
|
|
|
|
Accelerated
deferred gain amortization
|
|
$
|
260
|
|
$
|
169
|
|
Normal
deferred gain amortization
|
|
$
|
14
|
|
$
|
9
|
|
The
remaining pre-tax deferred gain as of March 31, 2006 was $60 million.
In
2005,
in connection with a modified coinsurance arrangement, CIGNA received units
of
the buyer’s separate accounts and continues to carry those units as separate
account assets on its balance sheet for the business not yet directly assumed
by
the buyer. At March 31, 2006, there were approximately $3.5 billion of separate
account assets and liabilities associated with this business not yet directly
assumed by the buyer.
At
March
31, 2006, CIGNA had approximately $1.7 billion of invested assets, primarily
fixed maturities and mortgage loans, supporting a modified coinsurance
arrangement relating to the single premium annuity business sold to the buyer.
These invested assets were held in a business trust established by CIGNA. CIGNA
pays or receives cash quarterly to settle the results of the reinsured business,
including the investment results of the assets underlying the modified
coinsurance arrangement.
Effective
April 1, 2006, the buyer converted this modified coinsurance arrangement to
an
indemnity reinsurance structure and took ownership of the trust assets. As
a
result, CIGNA will decrease invested assets and will increase reinsurance
recoverables in the second quarter of 2006.
NOTE
4 - EARNINGS PER SHARE
Basic
and
diluted earnings per share were computed as follows:
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts)
|
|
Basic
|
|
Effect
of
Dilution
|
|
Diluted
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
352
|
|
|
—
|
|
$
|
352
|
|
Shares
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
119,946
|
|
|
—
|
|
|
119,946
|
|
Options
and restricted stock grants
|
|
|
|
|
|
2,567
|
|
|
2,567
|
|
Total
shares
|
|
|
119,946
|
|
|
2,567
|
|
|
122,513
|
|
EPS
|
|
$
|
2.93
|
|
$
|
(0.06
|
)
|
$
|
2.87
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
436
|
|
|
—
|
|
$
|
436
|
|
Shares
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
130,722
|
|
|
—
|
|
|
130,722
|
|
Options
and restricted stock grants
|
|
|
|
|
|
2,004
|
|
|
2,004
|
|
Total
shares
|
|
|
130,722
|
|
|
2,004
|
|
|
132,726
|
|
EPS
|
|
$
|
3.34
|
|
$
|
(0.06
|
)
|
$
|
3.28
|
|
The
following outstanding employee stock options were not included in the
computation of diluted earnings per share because their effect would have
increased diluted earnings per share (antidilutive) as the estimated proceeds
from their exercise was greater than the average share price of CIGNA's common
shares for the period.
|
|
|
Three
Months
Ended
March
31,
|
(In
millions)
|
2006
|
2005
|
Antidilutive
options
|
0.7
|
6.3
|
|
|
|
CIGNA
held 40,269,674 shares of common stock in Treasury as of March 31, 2006, and
29,141,097 shares as of March 31, 2005.
NOTE
5 - 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 and other market exposures as a result of this
product.
The
determination of liabilities for guaranteed minimum death benefits requires
CIGNA to make critical accounting estimates. CIGNA describes the assumptions
used to develop the reserves for these death benefits, and provides the effects
of hypothetical changes in those assumptions on page 26 of CIGNA’s 2005 Annual
Report to Shareholders. 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. If actual
experience differs from the assumptions (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.
During
the first quarter of 2005, CIGNA completed its normal review of assumptions
and
recorded an after-tax charge of $11 million ($17 million pre-tax). This charge
primarily resulted from an update to lapse assumptions based on emerging
experience. The charge also reflected updates to partial surrender assumptions,
reflecting the impact of stock market declines, as well as other assumptions.
CIGNA had future policy benefit reserves for guaranteed minimum death benefit
contracts of $915 million as of March 31, 2006, and $951 million as of December
31, 2005.
The
following provides information about CIGNA’s reserving methodology and
assumptions for guaranteed minimum death benefits as of March 31,
2006:
· |
The
reserves represent estimates of the present value of net amounts
expected
to be paid, less the present value of net future premiums. 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 0-24% depending on the net amount at risk for
each
policy and whether surrender charges
apply.
|
· |
The
mean investment performance assumption is 5% considering CIGNA's
program
to reduce equity market exposures using futures contracts. In addition,
the results of futures contracts are reflected in the liability
calculation as a component of investment
returns.
|
· |
The
volatility assumption is 15-30%, varying by equity fund type; 3-8%,
varying by bond fund type; and 1% for money market
funds.
|
· |
The
discount rate is 5.75%.
|
· |
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.
|
As
of
March 31, 2006, the aggregate fair value of the underlying mutual fund
investments was $39.8 billion. The death benefit coverage in force as of that
date (representing the amount that CIGNA would have to pay if all 1.0 million
contractholders had died on that date) was $6.0 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 amount of futures contract positions held by CIGNA at March 31, 2006,
was $1.0 billion. CIGNA recorded in other revenues a pre-tax loss of $40 million
for the first three months of 2006 and a pre-tax gain of $38 million for the
first three months of 2005 primarily from futures contracts. Expense offsets
reflecting corresponding changes in liabilities for these guaranteed minimum
death benefit contracts were included in benefits and expenses.
For
further information and details on these contracts and the program adopted
to
reduce related equity market risk, refer to Note 6 of CIGNA's 2005 Annual Report
to Shareholders.
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 12 for further information.
NOTE
6 - 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.
Retirement
benefits business.
CIGNA
had a reinsurance recoverable of $1.0 billion as of March 31, 2006, and $1.2
billion as of December 31, 2005 from Prudential Retirement Insurance and Annuity
Company resulting from the sale of the retirement benefits business, which
was
primarily in the form of a reinsurance arrangement. The reinsurance recoverable
is secured primarily by fixed maturities and mortgage loans held in a business
trust established by the reinsurer. This recoverable is reduced as CIGNA's
reinsured liabilities are paid or directly assumed by the reinsurer.
Individual
life and annuity reinsurance. CIGNA
had
a reinsurance recoverable of $4.9 billion at March 31, 2006, and $5.0 billion
at
December 31, 2005, 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. The pool purchased significant
reinsurance (retrocessional) protection for its assumed risks. Disputes
concerning these retrocessional contracts have resulted in a number of
arbitrations, most of which have been resolved or settled. The remaining
disputes are expected to be substantially resolved in 2006.
Run-off
Reinsurance also includes other (non-Unicover) workers’ compensation reinsurance
contracts and personal accident reinsurance contracts, including contracts
assumed in the London market. CIGNA is in dispute and arbitration with some
ceding companies over the validity or amount of liabilities assumed under their
contracts and expects that these disputes and arbitrations will be substantially
resolved by 2008.
In
addition, CIGNA obtained retrocessional reinsurance coverage for a significant
portion of its liabilities under these contracts, and some of these
retrocessionaires have disputed the validity or amount of liabilities assumed
under their contracts with CIGNA. Many of these disputes with retrocessionaires
have been resolved or settled. Most of the remaining significant disputes
relating to the retrocessional reinsurance coverage are expected to be resolved
by 2008. CIGNA
bears the risk of loss if the retrocessionaires are unable to meet their
reinsurance obligations to CIGNA.
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 (due
to
disputes with the retrocessionaires or their financial condition).
CIGNA’s
reserves for amounts recoverable from retrocessionaires, as well as for
underlying reinsurance exposures assumed by CIGNA, are considered appropriate
as
of March 31, 2006, 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, either 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 and expenses were net of reinsurance recoveries, in
the
following amounts:
|
|
|
|
|
|
Three
Months Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Premiums
and fees
|
|
|
|
|
|
Individual
life insurance and annuity
business sold
|
|
$
|
64
|
|
$
|
67
|
|
Other
|
|
|
45
|
|
|
41
|
|
Total
|
|
$
|
109
|
|
$
|
108
|
|
Reinsurance
recoveries
|
|
|
|
|
|
|
|
Individual
life insurance and annuity
business sold
|
|
$
|
75
|
|
$
|
63
|
|
Other
|
|
|
35
|
|
|
43
|
|
Total
|
|
$
|
110
|
|
$
|
106
|
|
NOTE
7 - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Pension
benefits.
CIGNA
funds its qualified pension plans by at least the minimum amount required by
the
Employee Retirement Income Security Act of 1974, as amended (ERISA).
Components
of net pension cost were as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
19
|
|
$
|
17
|
|
Interest
cost
|
|
|
55
|
|
|
55
|
|
Expected
return on plan assets
|
|
|
(52
|
)
|
|
(46
|
)
|
Amortization
of:
|
|
|
|
|
|
|
|
Net
loss from past experience
|
|
|
41
|
|
|
36
|
|
Prior
service cost
|
|
|
—
|
|
|
(1
|
)
|
Net
pension cost
|
|
$
|
63
|
|
$
|
61
|
|
During
2005, CIGNA made pension contributions to the domestic pension plan totaling
$544 million which included an acceleration of expected contributions to meet
funding requirements in 2006 and 2007. Therefore, CIGNA does not expect to
make
domestic plan contributions in 2006, unless federal legislation currently being
discussed changes the minimum funding requirements and increases CIGNA's
required funding.
Other
postretirement benefits.
Components of net other postretirement benefit cost was as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
1
|
|
$
|
1
|
|
Interest
cost
|
|
|
6
|
|
|
9
|
|
Expected
return on plan assets
|
|
|
—
|
|
|
(1
|
)
|
Amortization
of:
|
|
|
|
|
|
|
|
Net
gain from past experience
|
|
|
(1
|
)
|
|
—
|
|
Prior
service cost
|
|
|
(4
|
)
|
|
(5
|
)
|
Net
other postretirement benefit cost
|
|
$
|
2
|
|
$
|
4
|
|
NOTE
8 - COST REDUCTION PROGRAMS
First
quarter 2005 program. In
the
first quarter of 2005, CIGNA implemented a plan to further streamline operations
in the health care business and in supporting areas. As a result, CIGNA
recognized in other operating expenses a total pre-tax charge of $51 million
($33 million after-tax) for severance costs during the first quarter of 2005.
The table below quantifies CIGNA's cost reduction activity (pre-tax) for
severance under this program:
|
|
|
|
|
|
|
|
(In
millions)
|
|
Health
Care
|
|
Corporate
|
|
Total
|
|
Balance
as of December 31, 2005
|
|
$
|
6
|
|
$
|
13
|
|
$
|
19
|
|
First
quarter 2006 activity
|
|
|
(5
|
)
|
|
(3
|
)
|
|
(8
|
)
|
Balance
as of March 31, 2006
|
|
$
|
1
|
|
$
|
10
|
|
$
|
11
|
|
First
quarter 2006 activity includes a $2 million pre-tax ($1 million after-tax)
reduction in the remaining liability.
NOTE
9 - INVESTMENTS
Realized
Investment Gains and Losses
The
following realized gains and losses on investments exclude amounts required
to
adjust future policy benefits for certain annuities:
|
|
|
|
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Fixed
maturities
|
|
$
|
2
|
|
$
|
13
|
|
Equity
securities
|
|
|
3
|
|
|
1
|
|
Mortgage
loans
|
|
|
(6
|
)
|
|
—
|
|
Other
investments, including derivatives
|
|
|
145
|
|
|
3
|
|
Realized
investment gains, before
income taxes
|
|
|
144
|
|
|
17
|
|
Less
income taxes
|
|
|
50
|
|
|
6
|
|
Net
realized investment gains
|
|
$
|
94
|
|
$
|
11
|
|
For
the
three months of 2006, substantially all of the realized investment gains in
other investments were from sales of equity interests in real estate limited
liability entities.
Fixed
Maturities and Equity Securities
Sales
of
available-for-sale fixed maturities and equity securities were as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Proceeds
from sales
|
|
$
|
540
|
|
$
|
598
|
|
Gross
gains on sales
|
|
$
|
16
|
|
$
|
15
|
|
Gross
losses on sales
|
|
$
|
(12
|
)
|
$
|
(6
|
)
|
Fixed
maturities included securities of $38 million at March 31, 2006 and $39 million
at December 31, 2005 classified as trading. These securities are carried at
fair
value with changes in fair value reported in other revenues.
As
of
March 31, 2006, CIGNA had commitments to purchase $140 million of fixed
maturities during the remainder of 2006.
Review
of Declines in Fair Value.
Management
reviews fixed maturities and equity securities for impairment based on criteria
that include:
·
|
length
of time and severity of
decline;
|
·
|
financial
health and specific near term prospects of the issuer;
|
· |
changes
in the regulatory, economic or general market environment of the
issuer’s
industry or geographic region; and
|
· |
ability
and intent to hold until recovery.
|
As
of
March 31, 2006, fixed maturities (primarily investment grade bonds) and equity
securities with a decline in fair value from cost were as follows, including
the
length of time of such decline:
|
|
|
|
|
|
|
|
(In millions)
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Unrealized
Depreciation
|
|
Fixed
Maturities:
|
|
|
|
|
|
|
|
One
year or less:
|
|
|
|
|
|
|
|
Investment
grade
|
|
$
|
4,188
|
|
$
|
4,312
|
|
$
|
(124
|
)
|
Below
investment grade
|
|
$
|
263
|
|
$
|
272
|
|
$
|
(9
|
)
|
More
than one year:
|
|
|
|
|
|
|
|
|
|
|
Investment
grade
|
|
$
|
1,063
|
|
$
|
1,109
|
|
$
|
(46
|
)
|
Below
investment grade
|
|
$
|
39
|
|
$
|
40
|
|
$
|
(1
|
)
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
$
|
93
|
|
$
|
97
|
|
$
|
(4
|
)
|
Greater
than one year
|
|
$
|
8
|
|
$
|
9
|
|
$
|
(1
|
)
|
The
unrealized depreciation of investment grade fixed maturities is primarily due
to
increases in interest rates since purchase.
CIGNA
recorded pre-tax impairments in fixed maturities of $9 million in the first
quarter of 2006 and $8 million in the first quarter of 2005.
Mortgage
Loans
In
connection with CIGNA's investment strategy to enhance investment yields by
selling senior participations, as of March 31, 2006, mortgage loans includes
$238 million of mortgage loans originated with the intent to sell. These
mortgage loans held for sale are carried at the lower of cost or market with
any
resulting valuation allowance reported in realized investment gains and losses.
Also in connection with this new strategy, as of March 31, 2006, CIGNA had
commitments of $115 million to extend credit under commercial mortgage loans
at
a fixed rate of interest. As these mortgage loans will also be held for sale,
these commitments are treated as derivatives and pre-tax decreases in their
fair
values of approximately $2 million are reported in realized investment gains
and
losses.
NOTE
10 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated
other comprehensive income (loss) excludes:
· |
amounts
required to adjust future policy benefits for certain annuities;
and
|
· |
amounts
required to adjust other liabilities after the initial reclassification
of
unrealized appreciation under a modified coinsurance
arrangement.
|
Changes
in accumulated other comprehensive income (loss) were as
follows:
|
|
|
|
|
|
|
|
(In
millions)
|
|
Pre-
Tax
|
|
Tax
(Expense)
Benefit
|
|
After-
Tax
|
|
Three
Months Ended March 31,
|
|
2006
|
|
|
|
|
|
|
|
Net
unrealized depreciation, securities:
|
|
|
|
|
|
|
|
Unrealized
depreciation on securities held
|
|
$
|
(147
|
)
|
$
|
51
|
|
$
|
(96
|
)
|
Gains
realized on securities
|
|
|
(5
|
)
|
|
2
|
|
|
(3
|
)
|
Net
unrealized depreciation, securities
|
|
$
|
(152
|
)
|
$
|
53
|
|
$
|
(99
|
)
|
Net
unrealized depreciation, derivatives
|
|
$
|
(2
|
)
|
$
|
1
|
|
$
|
(1
|
)
|
Net
translation of foreign currencies
|
|
$
|
11
|
|
$
|
(4
|
)
|
$
|
7
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized depreciation, securities:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
depreciation on securities held
|
|
$
|
(213
|
)
|
$
|
74
|
|
$
|
(139
|
)
|
Gains
realized on securities
|
|
|
(14
|
)
|
|
5
|
|
|
(9
|
)
|
Net
unrealized depreciation, securities
|
|
$
|
(227
|
)
|
$
|
79
|
|
$
|
(148
|
)
|
Net
unrealized depreciation, derivatives
|
|
$
|
(2
|
)
|
$
|
—
|
|
$
|
(2
|
)
|
Net
translation of foreign currencies
|
|
$
|
5
|
|
$
|
(2
|
)
|
$
|
3
|
|
NOTE
11 - SEGMENT INFORMATION
Operating
segments generally reflect groups of related products, but the International
segment is generally based on geography. In accordance with accounting
principles generally accepted in the United States of America, operating
segments that do not require separate disclosure may be combined. CIGNA measures
the financial results of its segments using “segment earnings (loss)” which is
defined as net income (loss) excluding after-tax realized investment gains
(losses).
Summarized
segment financial information was as follows:
|
|
|
|
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Premiums
and fees and other revenues |
|
|
|
|
|
Health
Care
|
|
$
|
2,698
|
|
$
|
2,758
|
|
Disability
and Life
|
|
|
556
|
|
|
557
|
|
International
|
|
|
357
|
|
|
300
|
|
Run-off
Retirement
|
|
|
6
|
|
|
274
|
|
Run-off
Reinsurance
|
|
|
(25
|
)
|
|
61
|
|
Other
Operations
|
|
|
54
|
|
|
57
|
|
Corporate
|
|
|
(12
|
)
|
|
(9
|
)
|
Total
|
|
$
|
3,634
|
|
$
|
3,998
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
Health
Care
|
|
$
|
156
|
|
$
|
191
|
|
Disability
and Life
|
|
|
58
|
|
|
59
|
|
International
|
|
|
37
|
|
|
30
|
|
Run-off
Retirement
|
|
|
—
|
|
|
166
|
|
Run-off
Reinsurance
|
|
|
—
|
|
|
(16
|
)
|
Other
Operations
|
|
|
25
|
|
|
30
|
|
Corporate
|
|
|
(18
|
)
|
|
(35
|
)
|
Segment
earnings
|
|
|
258
|
|
|
425
|
|
Realized
investment gains, net of taxes
|
|
|
94
|
|
|
11
|
|
Net
Income
|
|
$
|
352
|
|
$
|
436
|
|
NOTE
12 - CONTINGENCIES AND OTHER MATTERS
CIGNA,
through its subsidiaries, is contingently liable for various financial
guarantees provided in the ordinary course of business.
Financial
Guarantees primarily associated with the Sold Retirement Benefits
Business
Separate
account assets, primarily associated with the sold 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. Except as noted below,
these guarantees are fully reinsured by an affiliate of the buyer of the
retirement benefits business:
· |
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 or an affiliate
of
the buyer has the right to redirect the management of the related
assets
to provide for benefit payments. As of March 31, 2006, employers
maintained assets that exceeded the benefit obligations. Benefit
obligations under these arrangements were $2.1 billion as of March
31,
2006. As of March 31, 2006, approximately 80% of these guarantees
are
reinsured by an affiliate of the buyer of the retirement benefits
business. There were no additional liabilities required for these
guarantees as of March 31, 2006.
|
· |
CIGNA
guarantees that separate account assets, primarily fixed income
investments, will be sufficient to pay retiree benefits for participants
under a certain group annuity contract. These guarantees are fully
reinsured by an affiliate of the buyer of the retirement benefits
business. These guaranteed benefit obligations were $29 million as
of
March 31, 2006. CIGNA had no additional liabilities for these guarantees
as of March 31, 2006.
|
Other
Financial Guarantees
CIGNA
had
indemnification obligations to lenders up to $328 million as of March 31, 2006
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
beginning in the second quarter of 2006 through 2017. 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, 2006.
As
of
March 31, 2006, 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 at the end of 2006 and $28
million expire in 2012. CIGNA had additional liabilities for these guarantees
of
$2 million as of March 31, 2006.
CIGNA
guaranteed construction loans of $22 million as of March 31, 2006 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, 2006.
CIGNA
had
indemnification obligations as of March 31, 2006 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, compliance with law 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 obligations, since not all amounts due under
these indemnification obligations are subject to limitation. As of March 31,
2006, aggregate liabilities for these obligations were less than $5 million.
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's
reinsurance operations, which were discontinued in 2000 and are now an inactive
business in run-off mode, reinsured 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 market returns, volatility of the underlying
equity and bond mutual fund investments, interest rates, mortality, lapse,
credit risk and annuity election rates.
CIGNA
regularly evaluates the assumptions used in establishing these assets and
liabilities and changes its estimates if actual experience or other evidence
suggests that earlier assumptions should be revised. CIGNA describes these
assumptions and provides an estimate of the effects of the hypothetical changes
in those assumptions on page 27 of CIGNA's 2005 Annual Report to Shareholders.
If actual experience differs from the assumptions used in estimating these
assets and liabilities, 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.
The
following provides information about the assumptions used in calculating the
assets and liabilities for guaranteed minimum income benefits:
· |
These
liabilities represent estimates of the present value of net amounts
expected to be paid, less the present value of net future premiums
expected to be received. Included in net amounts expected to be paid
is
the excess of the expected value of the income benefits over the
values of
the annuitant’s accounts at the time of annuitization. The assets
associated with these contracts represent receivables in connection
with
reinsurance that CIGNA has purchased from third parties (see below).
|
· |
The
market return assumption is 8-12% varying by equity fund type; 6-9%
varying by bond fund type; and 5-6% for money market
funds.
|
· |
The
volatility assumption is 14-24%, varying by equity fund type; 6-7%,
varying by bond fund type; and 2-3% for money market
funds.
|
· |
The
discount rate is 5.75%.
|
· |
The
projected interest rate used to calculate the reinsured income benefits
at
the time of annuitization varies by economic scenario, reflects interest
rates as of the valuation date, and has a long-term mean rate of
5-6% and
a standard deviation of 12-13%.
|
· |
The
mortality assumption is 70% of the 1994 Group Annuity Mortality table,
with 1% annual improvement beginning January 1,
2000.
|
· |
The
lapse rate assumption is 3-12%, depending on policy
duration.
|
· |
The
annuity election rate assumption is that no more than 5% of the policies
eligible to annuitize their variable annuity contracts will do so
each
year.
|
CIGNA
is
required to disclose the maximum potential undiscounted future payments for
guarantees related to minimum income benefits using hypothetical adverse
assumptions, defined as follows:
· |
No
annuitants surrendered their accounts;
and
|
· |
All
annuitants lived to elect their benefit;
and
|
· |
All
annuitants elected to receive their benefit on the next available
date
(2006 through 2014); and
|
· |
All
underlying mutual fund investment values remained at the March 31,
2006
value of $3.4 billion, with no future
returns.
|
The
maximum potential undiscounted payments that CIGNA would make under those
assumptions would aggregate $945 million 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 55% of the exposures on these contracts.
As
of
March 31, 2006, CIGNA had liabilities of $71 million related to these contracts
and net amounts recoverable from reinsurers of $40 million. CIGNA had an
additional liability of $49 million associated with the cost of reinsurance
as
of March 31, 2006. As of December 31, 2005, CIGNA had liabilities of $88 million
related to these contracts and net amounts recoverable from reinsurers of $48
million. CIGNA had an additional liability of $49 million associated with the
cost of reinsurance as of December 31, 2005. Management believes the current
assumptions used to estimate reserves for these liabilities are
appropriate.
Regulatory
and Industry Developments
Other
possible regulatory changes that could have an adverse effect on CIGNA’s
employee benefits businesses include:
· |
additional
mandated benefits or services that increase
costs;
|
· |
legislation
that would grant plan participants broader rights to sue their health
plans;
|
· |
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
and disability management;
|
· |
additional
variations among state laws mandating the time periods and administrative
processes for payment of health care provider claims;
|
· |
legislation
that would exempt independent physicians from antitrust laws;
and
|
· |
changes
in federal tax laws, such as amendments that could affect the taxation
of
employer provided benefits.
|
The
employee benefits 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 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.
Concentration
of risk.
CIGNA’s
products in its International segment include coverages for employees and
individuals who may be exposed to acts of terrorism, the events of a war zone
or
natural disasters. These risks could result in a concentration of loss if a
single adverse event affected many covered individuals and, in certain
situations, could lead to losses that could be material to earnings for the
International segment and to CIGNA's consolidated results.
South
Korea represents the single largest geographic market for CIGNA's international
businesses. For the three months ended March 31, 2006, South Korea generated
29%
of International’s revenues and 37% of its segment earnings. International’s
business in South Korea would be vulnerable to adverse consumer credit
conditions in that country. In addition, geopolitical and economic events in
South Korea could have a significant adverse impact on the International
segment.
Litigation
and Other Legal Matters
In
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. A dispute with
a
representative of certain physicians over administration of the settlement
with
the physician class is likely to be resolved in 2006. In April 2005, the court
approved a settlement between CIGNA and the remaining plaintiffs, a class of
non-physician health care professionals.
Various
regulators, including the New York and Connecticut Attorneys General and the
Florida Office of Insurance Regulation, have been investigating insurance broker
compensation. Some regulators have brought suit against certain insurance
brokers, including Universal Life Resources (ULR), alleging, among other things,
that these brokers sought rigged bids from, and steered business to, insurers
with whom they had contingent compensation arrangements. CIGNA and some of
its subsidiaries are included in one such lawsuit seeking injunctive relief
against these types of contingent compensation arrangements. CIGNA is also
providing information about ULR in connection with an investigation by the
U.S.
Attorney’s Office for the Southern District of California. In addition, CIGNA is
providing information about another broker to the U.S. Department of Labor.
CIGNA is cooperating with the inquiries and investigations by regulators and
the
U.S. Attorney’s Office. Separately, several purported class action lawsuits have
been filed against brokers and insurance companies, including CIGNA and certain
of its subsidiaries, asserting that contingent commissions are unlawful.
These suits are now in a multi-district litigation proceeding in federal court
in New Jersey. CIGNA disagrees with the assertions against it in the
lawsuits.
A
purported class action lawsuit and a shareholder derivative lawsuit against
CIGNA and certain of its senior officers and directors allege securities law
violations and breach of fiduciary duty. These suits originated in 2002
and are likely to be resolved by 2007.
Plaintiffs
representing CIGNA Pension Plan participants who earned certain Plan benefits
prior to 1998 filed a class action lawsuit against CIGNA and the CIGNA Pension
Plan. 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 6 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.
|
Management’s
Discussion and Analysis of
|
|
Financial
Condition and Results of
Operations
|
In
this
filing and in other marketplace communications, CIGNA makes certain
forward-looking statements relating to its financial condition and results
of
operations, as well as to trends and assumptions that may affect CIGNA.
Generally, forward-looking statements can be identified through the use of
predictive words (e.g., “Outlook for 2006”). 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 37.
The
following discussion addresses the financial condition of CIGNA as of March
31,
2006, compared with December 31, 2005, and its results of operations for the
three months ended March 31, 2006, compared with the same period last year.
This
discussion should be read in conjunction with Management’s Discussion and
Analysis included in CIGNA’s 2005 Annual Report to Shareholders and Form 10-K,
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.
CIGNA
Corporation’s subsidiaries provide health care and related benefits offered
through the workplace. Key product lines include medical coverages and related
specialty health care products and services such as pharmacy, behavioral health,
dental benefits, and disease management as well as group disability, life and
accident insurance, and disability and workers’ compensation case management and
related services. In addition, CIGNA has an international operation that offers
products (that are generally similar to those offered domestically) to
businesses and individuals in selected markets, and has certain inactive
businesses, including a run-off retirement operation and a run-off reinsurance
operation.
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, net income and cash flow from operations 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
revenues, net income and cash flow from operations 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:
· |
competitiveness
of CIGNA's product design and service
quality;
|
· |
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;
|
· |
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.
|
CIGNA
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.
CIGNA
is
focused, in particular, on continuing to improve the performance of the health
care operations, profitably growing the disability and life insurance and
international businesses and managing the risks associated with the run-off
reinsurance operations. In the health care operations, CIGNA has initiatives
in
place to (1) offer products that meet emerging consumer and market trends;
(2)
strengthen underwriting and pricing effectiveness; (3) improve medical
membership results; (4) improve medical cost trends; (5) deliver quality
member service; and (6) lower administrative expenses (see pages 24 through
26
for further discussion).
CIGNA
believes that the health care business model is changing to one that focuses
more directly on the consumer. CIGNA has developed product designs, educational
resources and customer support tools with a goal of enabling consumers to make
informed choices about their health care, to ultimately improve health outcomes
and to reduce costs. These changes in the business model are in the early
stages, and CIGNA
believes that its capabilities in consumerism, health advocacy and the delivery
of useful information position it to meet the emerging trend.
CIGNA's
disability and life insurance operations continue to focus on profitable growth
with a particular emphasis on middle market disability business. The
international business is focused on profitable growth particularly in the
life,
accident and health insurance and expatriate benefits businesses. 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.
CIGNA is also pursuing the resolution of disputes associated with workers’
compensation and other reinsurance contracts through audits of claims from
assumed business and managing collections from retrocessionaires (see page
29
for further discussion).
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Premiums
and fees
|
|
$
|
3,268
|
|
$
|
3,362
|
|
Net
investment income
|
|
|
329
|
|
|
330
|
|
Other
revenues
|
|
|
366
|
|
|
636
|
|
Realized
investment gains
|
|
|
144
|
|
|
17
|
|
Total
revenues
|
|
|
4,107
|
|
|
4,345
|
|
Benefits
and expenses
|
|
|
3,579
|
|
|
3,680
|
|
Income
before taxes
|
|
|
528
|
|
|
665
|
|
Income
taxes
|
|
|
176
|
|
|
229
|
|
Net
income
|
|
$
|
352
|
|
$
|
436
|
|
Realized
investment gains, net
of taxes
|
|
$
|
94
|
|
$
|
11
|
|
CIGNA’s
net income includes special items, which are discussed below. Excluding these
special items, net income in the first three months of 2006
reflected:
· |
higher
realized investment gains resulting from sales of equity interests
in real
estate limited liability entities; and
|
· |
lower
earnings in the Health Care segment (see page 23).
|
In
order
to facilitate an understanding and comparison of results of operations and
permit analysis of trends in underlying revenues, expenses and net income,
the
following table presents special items, which management believes are not
representative of the underlying results of operations. There are no special
items noted for the three months of 2006.
|
|
|
|
|
|
SPECIAL
ITEMS
(In millions)
|
|
Pre-Tax
Benefit
(Charge)
|
|
After-Tax
Benefit
(Charge)
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
2005
|
|
|
|
|
|
Accelerated
recognition of deferred gain on sale of retirement benefits business
|
|
$
|
260
|
|
$
|
169
|
|
Cost
reduction charge
|
|
|
(51
|
)
|
|
(33
|
)
|
Charge
associated with a modified coinsurance arrangement
|
|
|
(12
|
)
|
|
(8
|
)
|
Total
|
|
$
|
197
|
|
$
|
128
|
|
Outlook
for 2006
CIGNA
expects full year 2006 income from continuing operations excluding realized
investment results and special items to be lower than the comparable 2005 amount
primarily because of the significant amount of favorable prior year claim
development recognized in 2005. Excluding the favorable prior year claim
development in 2005 and in the first quarter of 2006, CIGNA expects 2006 income
from continuing operations excluding realized investment results and special
items to be slightly higher than 2005 primarily due to fundamental improvement
in the health care operations. CIGNA's outlook is subject to the factors cited
in the Cautionary Statement on page 37.
Information
is not available for management to reasonably estimate future realized
investment gains (losses). Special items for 2006 may include:
· |
additional
accelerated recognition of the deferred gain on the sale of the retirement
benefits business; and
|
· |
potential
charges associated with cost reduction
initiatives.
|
Other
than these items, information is not available for management to identify or
reasonably estimate 2006 special items.
Critical
Accounting Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America (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 2005 Annual Report to Shareholders beginning
on page 25 and are as follows:
· |
future
policy benefits - guaranteed minimum death benefits;
|
· |
Health
Care medical claims payable;
|
· |
accounts
payable, accrued expenses and other liabilities, and other assets
-
guaranteed minimum income benefits;
|
· |
reinsurance
recoverables for Run-off Reinsurance;
|
· |
accounts
payable, accrued expenses and other liabilities - pension liabilities;
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 future policy benefits other than those identified above, as well as
estimates with respect to unpaid claims and claim expenses, post-employment
and
postretirement benefits other than pensions, 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.
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 resulted
in
an after-tax gain of $804 million, of which $267 million after-tax was
recognized immediately.
As
this
transaction was primarily in the form of a reinsurance arrangement under which
CIGNA retains the contractual obligation to pay these liabilities, $537 million
of the after-tax gain was deferred. Subsequent to the original reinsurance
transaction, the buyer of the retirement benefits business has entered into
agreements with most of the insured parties relieving CIGNA of any remaining
contractual obligation to those parties (novation). Additional such agreements
are expected.
The
deferred gain is amortized at the rate at which earnings from the sold business
would have been expected to emerge (primarily 15 years on a declining basis)
until CIGNA is relieved of any remaining contractual obligation. At the time
of
novation, CIGNA accelerates amortization of a portion of the deferred gain
and
also reduces the associated contractholder deposit funds, future policy
benefits, reinsurance recoverables and separate account balances. See Note
6 to
the Financial Statements for additional information on reinsurance recoverables
associated with the sale of the retirement benefits business.
CIGNA
recognized deferred gain amortization in other revenues in the Run-off
Retirement segment as follows:
|
|
|
|
|
|
|
|
Pre-Tax
|
|
After-Tax
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
2006
|
|
|
|
|
|
Accelerated
deferred gain amortization
|
|
$
|
4
|
|
$
|
1
|
|
Normal
deferred gain amortization
|
|
$
|
2
|
|
$
|
1
|
|
2005
|
|
|
|
|
|
|
|
Accelerated
deferred gain amortization
|
|
$
|
260
|
|
$
|
169
|
|
Normal
deferred gain amortization
|
|
$
|
14
|
|
$
|
9
|
|
In
the
first quarter of 2006, accelerated deferred gain amortization was not reported
as a special item. The remaining pre-tax deferred gain as of March 31, 2006
was
$60 million.
In
2005,
in connection with a modified coinsurance arrangement, CIGNA received units
of
the buyer’s separate accounts and continues to carry those units as separate
account assets on its balance sheet for the business not yet directly assumed
by
the buyer. At March 31, 2006, there were approximately $3.5 billion of separate
account assets and liabilities associated with this business not yet directly
assumed by the buyer.
At
March
31, 2006, CIGNA had approximately $1.7 billion of invested assets, primarily
fixed maturities and mortgage loans, supporting a modified coinsurance
arrangement relating to the single premium annuity business sold to the buyer.
These invested assets were held in a business trust established by CIGNA. CIGNA
pays or receives cash quarterly to settle the results of the reinsured business,
including the investment results of the assets underlying the modified
coinsurance arrangement. During the first quarter of 2005, CIGNA recorded in
other operating expenses a pre-tax charge of $12 million ($8 million after-tax)
to offset realized investment results. This charge had no effect on CIGNA's
net
income.
Effective
April 1, 2006, the buyer converted this modified coinsurance arrangement to
an
indemnity reinsurance structure and took ownership of the trust assets. As
a
result, CIGNA will decrease invested assets and will increase reinsurance
recoverables in the second quarter of 2006. The net estimated effect will be
to
increase the remaining pre-tax deferred gain by approximately $10 million.
This
additional gain will be amortized in the same manner as described on page 20.
Cost
Reduction Programs
First
quarter 2005 program. In
the
first quarter of 2005, CIGNA implemented a plan to further streamline operations
in the health care business and in supporting areas. As a result, CIGNA
recognized in other operating expenses a total pre-tax charge of $51 million
($33 million after-tax) for severance costs during the first quarter of 2005.
The table below quantifies CIGNA's cost reduction activity (pre-tax) for
severance under this program:
|
|
|
|
|
|
|
|
(In
millions)
|
|
Health
Care
|
|
Corporate
|
|
Total
|
|
Balance
as of December 31, 2005
|
|
$
|
6
|
|
$
|
13
|
|
$
|
19
|
|
First
quarter 2006 activity
|
|
|
(5
|
)
|
|
(3
|
)
|
|
(8
|
)
|
Balance
as of March 31, 2006
|
|
$
|
1
|
|
$
|
10
|
|
$
|
11
|
|
The
first
quarter 2006 activity includes a $2 million pre-tax ($1 million after-tax)
reduction in the remaining liability. CIGNA expects to complete this program
by
mid-2006 and estimates annualized after-tax savings to be approximately $65
million.
Regulatory
and Industry Developments
Employee
benefits 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.
Other
possible regulatory changes that could have an adverse effect on CIGNA’s
employee benefits businesses include:
· |
additional
mandated benefits or services that increase
costs;
|
· |
legislation
that would grant plan participants broader rights to sue their health
plans;
|
· |
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
and disability management;
|
· |
additional
variations among state laws mandating the time periods and administrative
processes for payment of health care provider claims;
|
· |
legislation
that would exempt independent physicians from antitrust laws;
and
|
· |
changes
in federal tax laws, such as amendments that could affect the taxation
of
employer provided benefits.
|
The
employee benefits 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 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. A dispute with a representative
of certain physicians over administration of the settlement with the physician
class is likely to be resolved in 2006. In April 2005, the court approved a
settlement between CIGNA and the remaining plaintiffs, a class of non-physician
health care professionals.
Various
regulators, including the New York and Connecticut Attorneys General and the
Florida Office of Insurance Regulation, have been investigating insurance broker
compensation. Some regulators have brought suit against certain
insurance brokers, including Universal Life Resources (ULR), alleging, among
other things, that these brokers sought rigged bids from, and steered business
to, insurers with whom they had contingent compensation arrangements.
CIGNA and some of its subsidiaries are included in one such lawsuit seeking
injunctive relief against these types of contingent compensation
arrangements. CIGNA is also providing information about ULR in connection
with an investigation by the U.S. Attorney’s Office for the Southern District of
California. In addition, CIGNA is providing information about another broker
to
the U.S. Department of Labor. CIGNA is cooperating with the inquiries and
investigations by regulators and the U.S. Attorney’s Office. Separately, several
purported class action lawsuits have been filed against brokers and insurance
companies, including CIGNA and certain of its subsidiaries, asserting that
contingent commissions are unlawful. These suits are now in a
multi-district litigation proceeding in federal court in New Jersey. CIGNA
disagrees with the assertions against it in the lawsuits.
A
purported class action lawsuit and a shareholder derivative lawsuit against
CIGNA and certain of its senior officers and directors allege securities law
violations and breach of fiduciary duty. These suits originated in 2002
and are likely to be resolved by 2007.
Plaintiffs
representing CIGNA Pension Plan participants who earned certain Plan benefits
prior to 1998 filed a class action lawsuit against CIGNA and the CIGNA Pension
Plan. 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 29 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 12 to the Financial Statements.
Accounting
Pronouncements
For
information on recent accounting pronouncements, see Note 2 to the Financial
Statements.
Segment
Reporting
Operating
segments generally reflect groups of related products, but the International
segment is generally based on geography. CIGNA measures the financial results
of
its segments using “segment earnings (loss),” which is defined as net income
(loss) excluding after-tax realized investment gains (losses).
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Premiums
and fees
|
|
$
|
2,356
|
|
$
|
2,499
|
|
Net
investment income
|
|
|
71
|
|
|
68
|
|
Other
revenues
|
|
|
342
|
|
|
259
|
|
Segment
revenues
|
|
|
2,769
|
|
|
2,826
|
|
Benefits
and expenses
|
|
|
2,530
|
|
|
2,534
|
|
Income
before taxes
|
|
|
239
|
|
|
292
|
|
Income
taxes
|
|
|
83
|
|
|
101
|
|
Segment
earnings
|
|
$
|
156
|
|
$
|
191
|
|
Realized
investment gains,
net of taxes
|
|
$
|
60
|
|
$
|
2
|
|
Special
item (after-tax) included in segment
earnings:
|
|
|
|
|
|
|
|
Cost
reduction charge
|
|
$
|
—
|
|
$
|
(14
|
)
|
The
Health Care segment provides health care and related products and services.
Key
product lines include medical coverages and related specialty health care
products and services such as pharmacy, behavioral health, dental benefits
and
disease management. This segment also includes group disability and life
insurance products that were historically sold in connection with certain
experience-rated medical accounts and continue to be managed by the health
care
business.
These
product lines are offered through guaranteed cost, retrospectively
experience-rated and service only funding arrangements. For a description of
funding arrangements, see page 7 of CIGNA's 2005 Form 10-K.
Results
Segment
earnings include favorable after-tax prior year claim development of $16 million
in the first three months of 2006 and $67 million in the first three months
of
2005. Excluding prior year claim development and the special item in 2005 noted
above, segment earnings in 2006 and 2005 were level, primarily reflecting strong
medical management and solid operating expense execution, partially offset
by:
· |
lower
results in the guaranteed cost business due to lower pricing yields
reflecting, in part, a competitive pricing environment; and
|
· |
losses
in the Medicare Part D program.
|
Premiums
and Fees
Premiums
and fees decreased for the three months of 2006 primarily due to lower premiums
resulting from the loss of a large prescription drug contract ($286 million)
in
the experience-rated business. Excluding this loss, premiums and fees increased
for the three months of 2006 primarily due to rate increases.
|
|
|
|
|
|
Three
Months
Ended
March
31,
|
|
(In millions)
|
|
2006
|
|
2005
|
|
Commercial
HMO
|
|
$
|
669
|
|
$
|
656
|
|
Experience-rated
medical
|
|
|
437
|
|
|
650
|
|
Dental
|
|
|
193
|
|
|
226
|
|
Medicare
|
|
|
81
|
|
|
70
|
|
Medicare
Part D
|
|
|
52
|
|
|
—
|
|
|
|
|
415
|
|
|
343
|
|
Life
and other non-medical
|
|
|
78
|
|
|
108
|
|
Total
premiums
|
|
|
1,925
|
|
|
2,053
|
|
Fees
|
|
|
431
|
|
|
446
|
|
Total
premiums and fees
|
|
$
|
2,356
|
|
$
|
2,499
|
|
Benefits
and Expenses
Health
Care segment benefits and expenses consist of the following:
|
|
|
|
|
|
Three
Months
Ended
March
31,
|
|
(In millions)
|
|
2006
|
|
2005
|
|
Medical
claims expense
|
|
$
|
1,448
|
|
$
|
1,456
|
|
Other
benefit expenses
|
|
|
78
|
|
|
97
|
|
Other
operating expenses
|
|
|
1,004
|
|
|
981
|
|
Total
benefits and expenses
|
|
$
|
2,530
|
|
$
|
2,534
|
|
Medical
Membership
CIGNA's
medical membership includes any individual for whom CIGNA retains medical
underwriting risk, who uses a CIGNA network for services covered under their
medical coverage or for whom CIGNA administers medical claims. As of March
31,
estimated medical membership was as follows:
|
|
|
|
|
|
(In thousands)
|
|
2006
|
|
2005
|
|
Guaranteed
cost:
|
|
|
|
|
|
Commercial
HMO
|
|
|
798
|
|
|
794
|
|
Medicare
|
|
|
32
|
|
|
33
|
|
Other
|
|
|
260
|
|
|
160
|
|
|
|
|
933
|
|
|
1,194
|
|
Service
|
|
|
6,995
|
|
|
6,825
|
|
Total
medical membership
|
|
|
9,018
|
|
|
9,006
|
|
In
the
first quarter of 2006, approximately 84,000 members were reclassified from
experience-rated to service. This change had no impact on reported revenues
or
segment earnings. Since January 1, 2005, medical membership has been stable.
Operational
Improvement
CIGNA
continues to focus on improving operational effectiveness and the financial
results of its health care operations. Key areas of focus are:
· |
offering
products that meet emerging market and consumer
trends;
|
____________________
1 Other
medical premiums include risk revenue for other guaranteed cost medical and
specialty products.
2 Includes
minimum premium members, which have a risk profile similar to experience-rated
funding arrangements. The risk portion of minimum premium revenue is reported
in
experience-rated medical premium whereas the self funding portion of minimum
premium revenue is recorded in fees.
· |
strengthening
underwriting and pricing
effectiveness;
|
· |
improving
medical membership results;
|
· |
improving medical
cost trends;
|
· |
continuing
to deliver quality member service;
and
|
· |
lowering
administrative expenses.
|
Offering
products that meet emerging trends. CIGNA
offers the CIGNA Choice FundSM,
which
is a set of consumer-directed capabilities that includes options for health
reimbursement arrangements and/or health savings accounts and enables consumers
to make effective health decisions using information tools provided by CIGNA.
During 2005, CIGNA acquired Choicelinx, a benefits technology and services
company. This acquisition adds new technology capabilities for offering
personalized health care products and decision support tools to consumers.
The
CIGNATURESM
suite of
products allows employers to choose the funding arrangement that is appropriate
for the employer and level of medical management that is appropriate for their
employee population.
Also
in
2005, CIGNA announced its strategic alliance with NationsHealth, Inc. (a
distribution and services company) to jointly deliver Medicare Part D
prescription drug plans.
Strengthening
underwriting and pricing effectiveness. One
of
CIGNA's key priorities is to achieve strong profitability in a competitive
health care market. CIGNA is focused on effectively managing pricing and
underwriting decisions at the case level and for the overall book of business,
particularly for the guaranteed cost business.
Improving
medical membership results.
CIGNA is
working to improve medical membership with:
· |
a
diverse product portfolio that meets emerging consumer-directed
trends;
|
· |
consistent
and responsive member service
delivery;
|
· |
competitive
provider networks; and
|
· |
strong
clinical quality in medical, specialty health care and disability
management;
|
and
by
continuing to implement the other operational improvements described below.
CIGNA continues to form strategic alliances with regional health care companies,
most recently with Minnesota-based HealthPartners in April 2006. Also, in 2005,
CIGNA acquired Managed Care Consultants of Nevada. These strategic actions
are
designed to:
· |
strengthen
CIGNA's national provider network;
|
· |
enhance
CIGNA's ability to provide superior medical and disease management
programs;
|
· |
provide
administrative ease for multi-state employers;
and
|
· |
grow
membership in key geographic areas, as well as provide a basis for
lowering medical costs.
|
CIGNA
believes that its medical management model, focus on clinical quality and
ability to integrate health and related benefit solutions position the company
to improve membership results.
Improving medical
cost trend. CIGNA
operates under a centralized medical management model, which helps facilitate
consistent levels of care for its members and reduce infrastructure expenses.
CIGNA
is
focused on improving its medical cost trend by managing unit medical costs
more effectively. To help achieve this end, CIGNA continues to focus on
renegotiating contracts with certain facilities to limit increases in medical
reimbursement costs. In addition, CIGNA seeks to strengthen its network position
in selected markets and may pursue additional acquisitions and strategic
alliances.
Continuing
to deliver quality member and provider service. CIGNA
continues to deliver
competitive
service to members, providers and customers. CIGNA believes that quality service
can help motivate members to become more engaged in their personal health,
which
will promote healthy outcomes and remove cost from the system.
Lowering
administrative expenses.
Early in
2005, 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. CIGNA continues to perform operational
reviews in order to identify additional cost savings.
|
|
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Premiums
and fees
|
|
$
|
508
|
|
$
|
508
|
|
Net
investment income
|
|
|
64
|
|
|
66
|
|
Other
revenues
|
|
|
48
|
|
|
49
|
|
Segment
revenues
|
|
|
620
|
|
|
623
|
|
Benefits
and expenses
|
|
|
540
|
|
|
540
|
|
Income
before taxes
|
|
|
80
|
|
|
83
|
|
Income
taxes
|
|
|
22
|
|
|
24
|
|
Segment
earnings
|
|
$
|
58
|
|
$
|
59
|
|
Realized
investment gains, net
of taxes
|
|
$
|
7
|
|
$
|
1
|
|
The
Disability and Life segment includes group:
· |
disability
and workers’ compensation case
management;
|
· |
accident
and specialty association insurance.
|
Results
Disability
and Life segment
earnings
for the three months of 2006 reflect:
· |
favorable
mortality experience in the group life and accident insurance businesses;
and
|
· |
continued
strong disability claims
management.
|
Premiums
and Fees
Premiums
and fees reflect strong customer retention in both the life and disability
insurance businesses.
|
|
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Premiums
and fees
|
|
$
|
357
|
|
$
|
302
|
|
Net
investment income
|
|
|
16
|
|
|
14
|
|
Other
revenues
|
|
|
—
|
|
|
(2
|
)
|
Segment
revenues
|
|
|
373
|
|
|
314
|
|
Benefits
and expenses
|
|
|
317
|
|
|
268
|
|
Income
before taxes
|
|
|
56
|
|
|
46
|
|
Income
taxes
|
|
|
19
|
|
|
16
|
|
Segment
earnings
|
|
$
|
37
|
|
$
|
30
|
|
Realized
investment gains, net
of taxes
|
|
$
|
—
|
|
$
|
—
|
|
Results
International
segment earnings increased for the three months of 2006, primarily due to:
· |
earnings
growth in the expatriate employee benefits business; and
|
· |
strong
revenue growth in the life, accident and health insurance business,
particularly in South Korea.
|
Premiums
and Fees
Premiums
and fees increased for the three months of 2006 reflecting:
· |
new
sales growth and improved customer retention in the life, accident
and
health insurance operations, particularly in South Korea;
and
|
· |
higher
premiums and fees for the expatriate employee benefits business
resulting
from membership growth.
|
Other
Matters
International’s
products include coverages for employees and individuals who may be exposed
to
acts of terrorism, the events of a war zone or natural disasters. These risks
could result in a concentration of loss if a single adverse event affected
many
covered individuals, and in certain situations, could lead to losses that could
be material to segment earnings and CIGNA's consolidated results.
South
Korea represents the single largest geographic market for CIGNA's international
businesses. For the three months ended March 31, 2006, South Korea generated
29%
of International’s revenues and 37% of its segment earnings. International’s
business in South Korea would be vulnerable to adverse consumer credit
conditions in that country. In addition, geopolitical and economic events in
South Korea could have a significant adverse impact on the International
segment.
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Net
investment income
|
|
$
|
29
|
|
$
|
38
|
|
Other
revenues
|
|
|
6
|
|
|
274
|
|
Segment
revenues
|
|
|
35
|
|
|
312
|
|
Benefits
and expenses
|
|
|
36
|
|
|
52
|
|
Income
(loss) before taxes
|
|
|
(1
|
)
|
|
260
|
|
Income
taxes (benefits)
|
|
|
(1
|
)
|
|
94
|
|
Segment
earnings
|
|
$
|
—
|
|
$
|
166
|
|
Realized
investment gains (losses), net of taxes
|
|
$
|
(1
|
)
|
$
|
8
|
|
Special
items (after-tax) included in
segment
earnings:
|
|
|
|
|
|
|
|
Accelerated
recognition of
deferred
gain on sale of
retirement
benefits
business
|
|
$
|
—
|
|
$
|
169
|
|
Charge
associated with a
modified
coinsurance
arrangement
|
|
$
|
—
|
|
$
|
(8
|
)
|
Segment
earnings for Run-off
Retirement include:
· |
gain
recognition related to the sale of the retirement benefits
business;
|
· |
results
of a modified coinsurance arrangement;
and
|
· |
expenses
associated with the run-off of this
business.
|
Net
investment income represents amounts associated with the single premium annuity
business, which was reinsured under a modified coinsurance arrangement, and
is
offset by amounts included in benefits and expenses.
Results
Run-off
Retirement segment earnings include the special items noted in the table above.
Excluding these items, segment earnings decreased for the three months of 2006
due to lower normal deferred gain amortization reflecting significant
acceleration of gains through early 2005 resulting from transfers of underlying
contracts to the buyer of the retirement benefits business.
Other
Revenues
Other
revenues include:
|
|
|
|
|
|
Three
Months Ended
March
31,
|
|
(In
millions, pre-tax)
|
|
2006
|
|
2005
|
|
Normal
deferred gain amortization
|
|
$
|
2
|
|
$
|
14
|
|
Accelerated
deferred gain amortization
|
|
$
|
4
|
|
$
|
260
|
|
See
page
21 for discussion on the conversion of the modified
coinsurance arrangement associated with the single premium annuity
business.
|
|
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Premiums
and fees
|
|
$
|
15
|
|
$
|
23
|
|
Net
investment income
|
|
|
24
|
|
|
24
|
|
Other
revenues
|
|
|
(40
|
)
|
|
38
|
|
Segment
revenues
|
|
|
(1
|
)
|
|
85
|
|
Benefits
and expenses
|
|
|
(3
|
)
|
|
110
|
|
Income
(loss) before income taxes (benefits)
|
|
|
2
|
|
|
(25
|
)
|
Income
taxes (benefits)
|
|
|
2
|
|
|
(9
|
)
|
Segment
loss
|
|
$
|
—
|
|
$
|
(16
|
)
|
Realized
investment gains, net
of taxes
|
|
$
|
14
|
|
$
|
1
|
|
CIGNA's
reinsurance businesses are in run-off. No new reinsurance business has been
underwritten since the sale of the U.S. individual life, group life and
accidental death reinsurance business in 2000.
Results
Segment
results for Run-off Reinsurance improved for the three months of 2006,
reflecting:
· |
absence
of reserve strengthening in 2006 for guaranteed minimum death benefit
contracts and personal accident and workers’ compensation lines of
business; and
|
· |
the
impact of stock market appreciation and interest rates on contracts
that
guarantee minimum income benefits, compared to stock market depreciation
in 2005.
|
Other
Revenues
CIGNA
maintains a program to substantially reduce the equity market exposures relating
to guaranteed minimum death benefit contracts by entering into exchange-traded
futures contracts. CIGNA expects to adjust these contract positions and may
enter into other contract positions over time, to reflect changing equity market
levels and changes in the investment mix of the underlying variable annuity
investments. The notional amount of the futures contract positions held by
CIGNA
at March 31, 2006 was $1.0 billion.
Other
revenues included a pre-tax loss of $40 million for the three months of 2006
and
a pre-tax gain of $38 million for the three months of 2005 primarily from these
contracts. Expense offsets reflecting corresponding changes in liabilities
for
these guaranteed minimum death benefit contracts were included in benefits
and
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 and other market exposures as a result of this
product.
The
determination of liabilities for guaranteed minimum death benefits requires
CIGNA to make critical accounting estimates. CIGNA describes the assumptions
used to develop the reserves for these death benefits, and provides the effects
of hypothetical changes in those assumptions on page 26 of CIGNA’s 2005 Annual
Report to Shareholders. 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. If actual
experience differs from the assumptions (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.
During
the first quarter of 2005, CIGNA completed its normal review of assumptions
and
recorded an after-tax charge of $11 million ($17 million pre-tax). This charge
primarily resulted from an update to lapse assumptions based on emerging
experience. The charge also reflected updates to partial surrender assumptions,
reflecting the impact of stock market declines, as well as other assumptions.
See Note 5 to the Financial Statements for additional information about the
assumptions used to calculate reserves for these contracts. CIGNA had future
policy benefit
reserves
for guaranteed minimum death benefit contracts of $915 million as of March
31,
2006, and $951 million as of December 31, 2005.
As
of
March 31, 2006, the aggregate fair value of the underlying mutual fund
investments was $39.8 billion. The death benefit coverage in force as of that
date (representing the amount that CIGNA would have to pay if all 1.0 million
contractholders had died on that date) was $6.0 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.
For
further information and details on these contracts and the program adopted
to
reduce related equity market risk, refer to Note 6 of CIGNA's 2005 Annual Report
to Shareholders.
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 34 for further information about
these contracts.
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. The pool purchased significant
reinsurance (retrocessional) protection for its assumed risks. Disputes
concerning these retrocessional contracts have resulted in a number of
arbitrations, most of which have been resolved or settled. The remaining
disputes are expected to be substantially resolved in 2006.
Run-off
Reinsurance also includes other (non-Unicover) workers’ compensation reinsurance
contracts and personal accident reinsurance contracts, including contracts
assumed in the London market. CIGNA is in dispute and arbitration with some
ceding companies over the validity or amount of liabilities assumed under their
contracts and expects that these disputes and arbitrations will be substantially
resolved by 2008.
In
addition, CIGNA obtained retrocessional reinsurance coverage for a significant
portion of its liabilities under these contracts and some of these
retrocessionaires have disputed the validity or amount of liabilities assumed
under their contracts with CIGNA. Many of these disputes with retrocessionaires
have been resolved or settled. Most of the remaining significant disputes
relating to the retrocessional reinsurance coverage are expected to be resolved
by 2008. CIGNA bears the risk of loss if the retrocessionaires are unable to
meet their reinsurance obligations to CIGNA.
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 (due
to
disputes with the retrocessionaires or their financial condition).
Summary.
CIGNA’s
reserves for amounts recoverable from retrocessionaires, as well as for
underlying reinsurance exposures assumed by CIGNA, are considered appropriate
as
of March 31, 2006, 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.
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Premiums
and fees
|
|
$
|
32
|
|
$
|
30
|
|
Net
investment income
|
|
|
113
|
|
|
112
|
|
Other
revenues
|
|
|
22
|
|
|
27
|
|
Segment
revenues
|
|
|
167
|
|
|
169
|
|
Benefits
and expenses
|
|
|
131
|
|
|
124
|
|
Income
before taxes
|
|
|
36
|
|
|
45
|
|
Income
taxes
|
|
|
11
|
|
|
15
|
|
Segment
earnings
|
|
$
|
25
|
|
$
|
30
|
|
Realized
investment gains (losses),
net of taxes
|
|
$
|
14
|
|
$
|
(1
|
)
|
Other
Operations consist of:
· |
deferred
gains recognized from the 1998 sale of the individual life insurance
and
annuity business;
|
· |
corporate
life insurance (including policies on which loans are outstanding);
and
|
· |
settlement
annuity business.
|
Results
Segment
earnings for Other Operations decreased for the three months of 2006 due to
lower earnings in corporate life insurance resulting from:
· |
the
absence of a favorable reserve adjustment recorded in 2005;
and
|
· |
less
favorable mortality experience.
|
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 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.
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months Ended
March
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Segment
loss
|
|
$
|
(18
|
)
|
$
|
(35
|
)
|
Special
item (after-tax) included
in segment loss:
|
|
|
|
|
|
|
|
Cost
reduction charge
|
|
$
|
—
|
|
$
|
(19
|
)
|
Corporate
reflects amounts not allocated to segments, such as interest expense on
corporate debt, net investment income on unallocated investments, intersegment
eliminations, compensation cost for stock options and certain corporate overhead
expenses.
Liquidity
CIGNA
normally meets its operating requirements by:
· |
maintaining
appropriate levels of cash, cash equivalents and short-term
investments;
|
· |
using
cash flows from operating activities;
and
|
· |
matching
investment maturities to the estimated duration of the related insurance
and contractholder liabilities.
|
Cash
flows from operations for the three months ended March 31 were as
follows:
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
Operating
activities
|
|
$
|
(87
|
)
|
$
|
271
|
|
Investing
activities
|
|
$
|
657
|
|
$
|
(54
|
)
|
Financing
activities
|
|
$
|
(375
|
)
|
$
|
(336
|
)
|
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 reinsured guaranteed minimum death
benefit contracts, investment income, taxes, and benefits and
expenses.
2006:
· |
Operating
activities in 2006 included cash outflows of $240 million to originate
mortgage loans held for sale (see page 35 for
additional information). Excluding this effect, cash flows from operating
activities were $153 million.
|
In
addition, cash flows from operating activities were affected by the following
significant items in 2006 and 2005:
· |
losses
of $40 million in 2006, compared to gains of $38 million in 2005,
associated with futures contracts entered into as part of a program
to
manage equity market risks in the run-off reinsurance segment;
and
|
· |
settlement
in 2006 of certain liabilities associated with the single premium
annuity
business of $44 million.
|
Excluding
these items, cash flows from operating activities in 2006 were level with 2005,
primarily reflecting lower cash revenues, (due in part to the loss of a large
prescription
drug contract in the first quarter 2006), offset by lower paid losses and lower
tax payments.
· |
Cash
provided by investing activities primarily consisted of net proceeds
of
investments ($687 million), partially offset by net purchases of
property
and equipment ($30 million).
|
· |
Cash
used in financing activities primarily consisted of dividends on
and
repurchases of common stock of $403 million, repayment of long-term
debt
($100 million) and net withdrawals of contractholder deposit funds
of $38
million, partially offset by proceeds from issuances of common stock
under
CIGNA's stock plans of $162
million.
|
2005:
· |
Cash
used in investing activities primarily consisted of net purchases
of
investments ($31 million) and net purchases of property and equipment
($23
million).
|
· |
Cash
used in financing activities primarily consisted of dividends on
and
repurchases of common stock of $245 million and change in cash overdraft
position of $193 million, partially offset by net deposits to
contractholder deposit funds of $8 million and proceeds from issuances
of
common stock under CIGNA's stock plans of $94
million.
|
Interest
Expense
Interest
expense was $25 million for the three months ended March 31, 2006 and $26
million for the three months ended March 31, 2005.
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.
CIGNA
has
sufficient capital resources to:
· |
provide
capital necessary to support growth and maintain or improve the financial
strength ratings of subsidiaries;
|
· |
consider
acquisitions that are strategically and economically advantageous;
and
|
· |
return
capital to investors through share
repurchase.
|
CIGNA
maintains a share repurchase program. From January 1, 2006 through May 3, 2006,
CIGNA repurchased 4.3 million shares through this program at an average price
of
$125.31 per share for an aggregate cost of $540 million. On April 26, 2006,
CIGNA's Board of Directors increased the repurchase authority by $500 million.
The total remaining authorization as of May 3, 2006, was $720 million. See
also
the table in Part II, Item 2 of CIGNA's Form 10-Q for more information on share
repurchase activity for the three months ended March 31, 2006.
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.
In
May
2004, CIGNA entered into a three-year syndicated revolving credit and letter
of
credit agreement for $1.0 billion. Of this amount, up to $600 million may be
used to support an internal reinsurance arrangement.
Liquidity
and Capital Resources Outlook
The
availability of resources at the parent/holding company level is partially
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 liquidity to meet its
obligations, including:
· |
debt
service requirements and payment of dividends to CIGNA shareholders;
and
|
· |
pension
plan funding requirements.
|
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;
|
· |
a
substantial increase in funding is required for CIGNA's program to
reduce
the equity market risks associated with the guaranteed minimum death
benefit contracts; or
|
· |
regulatory
restrictions prevent the insurance and HMO subsidiaries from distributing
cash to the parent company.
|
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
May 3, 2006, the ratings of CIGNA and Connecticut General Life Insurance Company
(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
|
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. 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.
Financial
guarantees primarily associated with the sold retirement benefits
business.
Separate
account assets, primarily associated with the sold 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. Except as noted below, these
guarantees are fully reinsured by an affiliate of the buyer of the retirement
benefits business:
· |
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 or an affiliate
of
the buyer has the right to redirect the management of the related
assets
to provide for benefit payments. As of March 31, 2006, employers
maintained assets that exceeded the benefit obligations. Benefit
obligations under these arrangements were $2.1 billion as of March
31,
2006. As of March 31, 2006, approximately 80% of these guarantees
are
reinsured by an affiliate of the buyer of the retirement benefits
business. There were no additional liabilities required for these
guarantees as of March 31, 2006.
|
· |
CIGNA
guarantees that separate account assets, primarily fixed income
investments, will be sufficient to pay retiree benefits for participants
under a certain group annuity contract. These guarantees are fully
reinsured by an affiliate of the buyer of the retirement benefits
business. These guaranteed benefit obligations were $29 million as
of
March 31, 2006. CIGNA had no additional liabilities for these guarantees
as of March 31, 2006.
|
Other
financial guarantees.
CIGNA
had indemnification obligations to lenders up to $328 million as of March 31,
2006 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
beginning in the second quarter of 2006 through 2017. 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, 2006.
As
of
March 31, 2006, 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 at the end of 2006 and $28
million expire in 2012. CIGNA had additional liabilities for these guarantees
of
$2 million as of March 31, 2006.
CIGNA
guaranteed construction loans of $22 million as of March 31, 2006, 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, 2006.
CIGNA
had
indemnification obligations as of March 31, 2006, 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, compliance with law 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 obligations,
since not all amounts due under these indemnification
obligations
are subject to limitation. As of March 31, 2006, aggregate liabilities for
these
obligations were less than $5 million.
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's
reinsurance operations, which were discontinued in 2000 and are now an inactive
business in run-off mode, reinsured 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 market returns, volatility of the underlying
equity and bond mutual fund investments, interest rates, mortaility, lapse,
credit risk and annuity election rates.
CIGNA
regularly evaluates the assumptions used in establishing these assets and
liabilities and changes its estimates if actual experience or other evidence
suggests that earlier assumptions should be revised. CIGNA describes these
assumptions and provides an estimate of the effects of the hypothetical changes
in those assumptions on page 27 of CIGNA's 2005 Annual Report to Shareholders.
If actual experience differs from the assumptions used in estimating these
assets and liabilities, 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. See Note 12
to the Financial Statements for additional information on these assumptions.
CIGNA
is
required to disclose the maximum potential undiscounted future payments for
guarantees related to minimum income benefits using hypothetical adverse
assumptions, defined as follows:
· |
No
annuitants surrendered their accounts;
and
|
· |
All
annuitants lived to elect their benefit;
and
|
· |
All
annuitants elected to receive their benefit on the next available
date
(2006 through 2014); and
|
· |
All
underlying mutual fund investment values remained at the March 31,
2006
value of $3.4 billion, with no future
returns.
|
The
maximum potential undiscounted payments that CIGNA would make under those
assumptions would aggregate $945 million 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 55% of the exposures on these contracts.
As
of
March 31, 2006, CIGNA had liabilities of $71 million related to these contracts
and net amounts recoverable from reinsurers of $40 million. CIGNA had an
additional liability of $49 million associated with the cost of reinsurance
as
of March 31, 2006. As of December 31, 2005, CIGNA had liabilities of $88 million
related to these contracts and net amounts recoverable from reinsurers of $48
million. CIGNA had an additional liability of $49 million associated with the
cost of reinsurance as of December 31, 2005. Management believes the current
assumptions used to estimate reserves for these liabilities are
appropriate.
Contractual
obligations.
As of
March 31, 2006, CIGNA's contractual obligations included commitments to purchase
$140 million of fixed maturities during the remainder of 2006. For additional
information on CIGNA's contractual obligations, see page 44 of CIGNA's 2005
Annual Report to Shareholders.
As
a
result of the contributions made in 2005 (see Note 7 to the Financial
Statements), CIGNA does not expect to make domestic plan contributions in 2006,
unless federal legislation currently being discussed changes the minimum funding
requirements
and increases CIGNA's required funding.
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, 10, 11 and 14 to the Financial Statements in CIGNA’s 2005 Annual
Report to Shareholders and Form 10-K.
Investments
in fixed maturities (bonds) include publicly traded and privately placed debt
securities, mortgage and other asset-backed securities and preferred stocks
redeemable by the investor. Fixed maturities also include securities classified
as trading.
In
connection with CIGNA's investment strategy to enhance investment yields by
selling senior participations, as of March 31, 2006, mortgage loans includes
$238 million of mortgage loans originated with the intent to sell. These
mortgage loans held for sale are carried at the lower of cost or market with
any
resulting valuation allowance reported in realized investment gains and losses.
Also in connection with this new strategy, as of March 31, 2006, CIGNA had
commitments of $115 million to extend credit under commercial mortgage loans
at
a fixed rate of interest. As these mortgage loans will also be held for sale,
these commitments are treated as derivatives and pre-tax decreases in their
fair
values of approximately $2 million are reported in realized investment gains
and
losses.
CIGNA’s
mortgage loans are diversified by property type, location and borrower to reduce
exposure to potential losses.
Problem
and Potential Problem Investments
“Problem”
bonds and mortgage loans are either delinquent by 60 days or more 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. The amount that would have been reflected in net income if interest
on non-accrual investments had been recognized in accordance with the original
terms was insignificant for the three months of 2006 and 2005.
The
following table shows problem and potential problem investments at amortized
cost, net of valuation reserves and write-downs:
|
|
|
|
|
|
(In
millions)
|
|
March
31,
2006
|
|
December
31,
2005
|
|
Problem
bonds
|
|
$
|
52
|
|
$
|
25
|
|
Potential
problem bonds
|
|
$
|
15
|
|
$
|
45
|
|
Problem
mortgage loans
|
|
$
|
—
|
|
$
|
10
|
|
Potential
problem mortgage loans
|
|
$
|
47
|
|
$
|
47
|
|
Foreclosed
real estate
|
|
$
|
9
|
|
$
|
—
|
|
Summary
CIGNA
recorded $9 million after-tax in the first quarter of 2006, compared with $6
million after-tax in the first quarter of 2005, in realized investment losses
for investment asset write-downs and changes in valuation reserves.
The
weakness in certain sectors of the economy and rising interest rates may 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 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 contracts as part of a program to substantially reduce the effect
of equity market changes on certain 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), EUROSTOXX and FTSE (British) equity indices and a
10%
weakening in the U.S. dollar to the Japanese yen, British pound and EURO would
have been a decrease of approximately $90 million in the fair value of the
futures contracts outstanding under this program as of March 31, 2006. A
corresponding decrease in liabilities for these 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
5
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 (see
page
28) or income benefit contracts (see page 34); and
|
· |
minimum
pension liabilities since equity securities comprise a significant
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, CIGNA's cost
reduction programs and activities, litigation and other legal matters,
operational improvement in the health care operations, and the outlook for
CIGNA's full year 2006 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. |
increased
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
new
legislative and regulatory requirements imposed on CIGNA’s employee
benefits businesses (see Employee benefits regulation on page 22
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 and that medical membership does not grow 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 class action
lawsuits, purported securities class action lawsuits, disputes regarding
reinsurance arrangements, other litigation and regulatory actions
challenging CIGNA’s businesses and the outcome of pending government
proceedings and federal tax audits;
|
6. |
heightened
competition, particularly price competition, which could reduce product
margins and constrain growth in CIGNA’s businesses, primarily
the
health care business;
|
7. |
significant
changes in interest rates;
|
8. |
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;
|
9. |
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;
|
10. |
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 contracts and in matching such
contracts to the underlying equity risk);
|
11. |
adjustments
to the reserve assumptions (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;
|
12. |
adjustments
to the assumptions (including annuity election rates and reinsurance
recoverables) used in estimating CIGNA’s assets and liabilities for
reinsurance contracts that guarantee minimum income benefits under
certain
variable annuities;
|
13. |
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;
|
14. |
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;
|
15. |
significant
deterioration in economic conditions, which could have an adverse
effect
on CIGNA’s operations and investments;
|
16. |
changes
in federal laws, such as amendments to income tax laws, which could
affect
the taxation of employer provided benefits, and pension legislation,
which
could increase pension cost;
|
17. |
potential
public health epidemics and bio-terrorist activity, which could,
among
other things, cause our covered medical and disability
expenses, pharmacy costs and mortality experience to rise
significantly, and cause operational disruption, depending on the
severity
of the event and number of individuals affected;
|
18. |
risks
associated with security or interruption of information systems,
which could among other things cause operational disruption;
and
|
19. |
risk
factors detailed in CIGNA's Form 10-K for the year ended December
31,
2005, including the Cautionary Statement in Management’s Discussion and
Analysis.
|
This
list
of important factors is not intended to be exhaustive. Other sections of the
annual report on Form 10-K, including the “Risk Factors” section and other
documents filed with the Securities and Exchange Commission include both
expanded discussion of these factors and additional risk factors and
uncertainties that could 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
3. Quantitative
and Qualitative Disclosures About Market Risk
Information
responsive to this Item 3 is included in Item 2 above, Management's Discussion
and Analysis of Financial Condition and Results of Operations.
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.
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
In
its
Form 10-K for the year ended December 31, 2005, CIGNA described the Amara
case. A
trial for the case is expected to begin in September 2006.
See
“Unicover and other run-off reinsurance” on page 29
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.
There
have been no material changes from the risk factors previously disclosed
in
CIGNA’s Annual Report on Form 10-K for the year ended December 31,
2005.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
(c)
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
The
following table provides information about CIGNA's share repurchase activity
for
the quarter ended March 31, 2006:
|
Issuer
Purchases of Equity Securities
|
Period
|
Total
# of
shares
purchased
(1)
|
Average
price
paid
per share
|
Total
# of shares
purchased
as part of
publicly
announced
program
(2)
|
Approximate
dollar value of
shares
that may yet be
purchased
as part of publicly
announced
program (3)
|
Jan
1-31, 2006
|
641,147
|
$114.85
|
635,200
|
687,326,747
|
Feb
1-28, 2006
|
785,212
|
$122.43
|
785,100
|
591,210,228
|
Mar
1-31, 2006
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2,072,590
|
$128.35
|
1,943,000
|
341,224,428
|
Total
|
3,498,949
|
$124.55
|
3,363,300
|
|
_______________
(1) |
Includes
shares tendered by employees as payment of taxes withheld on the
exercise
of stock options and the vesting of restricted stock granted under
the
Company’s equity compensation plans. Employees tendered 5,947 shares in
January, 112 shares in February and 129,590 shares in March.
|
(2) |
CIGNA
has had a repurchase program for many years, and has had varying
levels of
repurchase authority and activity under this program. The program
has no
expiration date. CIGNA suspends activity under this program from
time to
time, generally without public announcement. Remaining authorization
under
the program was approximately $341 million as of March 31, 2006 and
$720
million as of May 3, 2006.
|
(3) |
Approximate
dollar value of shares is as of the last date of the applicable
month.
|
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.
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CIGNA
CORPORATION
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By:
/s/ Michael W. Bell
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Michael
W. Bell
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Executive
Vice President and
|
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Chief
Financial Officer
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Date: May
3,
2006
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E-1