Item 1. BUSINESS
A. Description of Business
With shareholders' equity of $5.8 billion, revenues of $18.4 billion and assets of $86.1 billion as of December 31, 1994, CIGNA Corporation and its subsidiaries constitute one of the largest investor-owned insurance organizations in the United States and one of the principal United States companies in the financial services industry. Unless the context otherwise indicates, the terms "CIGNA" and the "Company," when used herein, refer to one or more of CIGNA Corporation and its consolidated subsidiaries. Although CIGNA Corporation is not an insurance company, its subsidiaries are major providers of group life and health insurance, managed care products and services, retirement products and services, individual financial services, and property and casualty insurance. CIGNA is one of the largest international insurance organizations based in the United States, measured by international revenues, and the largest investor-owned health maintenance organization ("HMO") in the United States, measured by number of enrollees. CIGNA's major insurance subsidiaries, Connecticut General Life Insurance Company ("CG Life") and Insurance Company of North America ("ICNA"), are among the oldest insurance companies in the United States, with ICNA tracing its origins to 1792 and CG Life to 1865. CIGNA Corporation was incorporated in the State of Delaware in 1981.
CIGNA's revenues are derived principally from premiums and fees and investment income. CIGNA conducts its business through the following operating divisions, the financial results of which are reported in the following segments:
Employee Life and Health Benefits Segment (beginning on page 3) CIGNA HealthCare CIGNA Group Insurance: Life, Accident, Disability(1)
Employee Retirement and Savings Benefits Segment (beginning on page 7) CIGNA Retirement & Investment Services
Individual Financial Services Segment (beginning on page 10) CIGNA Individual Insurance CIGNA Reinsurance: Life, Accident, Health
Property and Casualty Segment (beginning on page 14) CIGNA Property & Casualty CIGNA International
----------------------
(1) Portions of this division are reported in the Individual Financial Services and Property and Casualty Segments.
Investment results produced by CIGNA Investment Management on behalf of CIGNA's insurance operations are reported in each segment's results or in Other Operations. The other businesses of CIGNA Investment Management are described on page 33, and financial results for these businesses are reported in Other Operations.
CIGNA and certain of its insurance subsidiaries are rated by nationally recognized rating agencies. Insurance company ratings represent the opinions of the rating agencies on the financial strength of the Company and its capacity to meet the obligations of insurance policies. Corporate credit ratings are assessments of the likelihood that the Company will make timely payments of principal and interest. As of March 29, 1995, the principal ratings obtained through an active relationship with the agencies were as follows:
--------------- (1) Includes the rating assigned, the agency's characterization of the rating and the position of the rating in the applicable agency's rating scale (e.g., CG Life's rating by A.M. Best Company, Inc. ("A.M. Best") is the 2nd highest rating awarded in its scale of 15). (2) The New Domestic Pool Group consists of four of CIGNA's domestic property and casualty insurance subsidiaries that had formerly been rated by A.M. Best as part of a larger pool of companies. The A- rating is under review with "developing implications." (3) The INA Domestic Pool Group consists of CIGNA's domestic property and casualty insurance subsidiaries (other than those in the New Domestic Pool Group) that formerly had been rated by A.M. Best as part of a larger pool of companies. The B+ rating is under review with "negative implications." (4) Baa1 is the rating assigned by Moody's Investors Services ("Moody's") to the former pool that consisted of the companies now comprising the New Domestic Pool Group and the INA Domestic Pool Group.
Rating agencies generally assign ratings along a scale. While the significance of individual ratings varies from agency to agency, companies assigned ratings at the top end of the scale have, in the opinion of the rating agency, the strongest capacity for repayment of debt or payment of claims, while companies at the bottom end of the scale have the weakest capacity.
Insurance company rating scales of the principal agencies that rate the Company's insurance subsidiaries are characterized as follows: A.M. Best, A++ to F ("Superior" to "In Liquidation"); Moody's, Aaa to C ("Exceptional" to "Lowest"); Standard & Poor's ("S&P"), AAA to R ("Superior" to "Regulatory Action"); and Duff & Phelps, AAA to DD ("Highest" to "Order of Liquidation").
The rating scales of the principal agencies that rate CIGNA's senior and subordinated debt are characterized as follows: Moody's, Aaa to C ("Best" to "Lowest"); S&P, AAA to D ("Extremely Strong" to "Default"); and Duff & Phelps, AAA to DD ("Highest" to "Default"). The commercial paper rating scales for Moody's, S&P, and Duff & Phelps are as follows: Moody's, Prime-1 to Not Prime ("Superior" to "Not Prime"); S&P, A-1+ to D ("Extremely Strong" to "Default"); and Duff & Phelps, D-1+ to D-5 ("Highest" to "Default").
The ratings are reviewed routinely by the rating agencies and may be changed at their discretion. For more information concerning insurance company ratings, see "Employee Life and Health Benefits - Competition" on page 6, "Employee Retirement and Savings Benefits - Competition" on page 10, "Individual Financial Services - Competition" on page 14 and "Property and Casualty - Competition" on page 18.
B. Financial Information about Industry Segments
All financial information in the tables that follow is presented in conformity with generally accepted accounting principles ("GAAP"), unless otherwise indicated. Certain reclassifications have been made to 1993 and 1992 financial information to conform with the 1994 presentation. Industry rankings and percentages set forth below are for the year ended December 31, 1993, unless otherwise indicated. Unless otherwise noted, statements set forth in this document concerning CIGNA's rank or position in an industry or particular line of business have been developed internally, based on publicly available information.
Revenues, income (loss) before income taxes and cumulative effect of accounting changes, and identifiable assets attributable to each of CIGNA's business segments, other operations and foreign operations are set forth in Notes 12 and 13 to CIGNA's 1994 Financial Statements.
C. Employee Life and Health Benefits
Principal Products and Markets
CIGNA's Employee Life and Health Benefits operations offer a wide range of traditional indemnity products and services and are a leading provider of managed care and cost containment products and services. The following table sets forth the principal products of this segment and their related net earned premiums and fees.
-------------------
Amounts in table do not include "premium equivalents," which are described below.
CIGNA's Employee Life and Health Benefits customers range in size from some of the largest United States corporations to small enterprises, and include employers, multiple employer groups, unions, professional and other associations, government-sponsored Medicare and Medicaid programs, and other groups. Products are marketed in all 50 states, the District of Columbia and Puerto Rico.
The indemnity products named in the above table are available on an experience-rated basis as well as through traditional insurance arrangements, in which CIGNA assumes the full insurance risk for a set premium. Certain group indemnity coverages, primarily medical and dental, also are available through alternative funding programs under which the customer assumes all or a portion of the responsibility for funding claims, with CIGNA providing combinations of administrative and claim services and insurance for a fee or premium charge. Alternative funding programs, primarily consisting of "minimum premium" arrangements and administrative services only ("ASO") plans, constituted 55% of business volume (premiums and
fees plus premium equivalents) in 1994. Premium equivalents generally represent paid claims and are additional premiums that would have been earned under minimum premium and ASO contracts if they had been written as traditional indemnity or health maintenance organization ("HMO") programs. In minimum premium business, the policyholder funds claims up to a predetermined aggregate amount and CIGNA funds claims exceeding that amount. Under ASO plans, the policyholder is responsible for funding all claims and CIGNA provides administrative services for a fee; CIGNA may also provide stop-loss insurance for claims in excess of a predetermined amount. Alternative funding programs and their effect on CIGNA's results are more fully described on page 11 of the Management's Discussion and Analysis ("MD&A") section of CIGNA's 1994 Annual Report.
CIGNA offers both group term life and group universal life insurance products. Approximately 8,100 group life insurance policies covering approximately 13.7 million lives were outstanding as of December 31, 1994. The following table shows group life insurance in force and termination data.
CIGNA markets various disability products, including long-term and short-term disability, in all states and statutorily required disability plans in certain states. These products generally provide a fixed level of income to replace a portion of earned income lost because of disability. Personal accident coverages, which consist primarily of accidental death and dismemberment and travel accident insurance, are provided to employers, associations and other groups.
Disability management and medical cost containment services provided by CIGNA help insurers and employers reduce the cost of their benefit programs. CIGNA provides managed mental health and substance abuse coverage and services to HMOs, insurers and employers through a national network of mental health specialists, some of whom are employees of CIGNA. CIGNA provides managed pharmacy benefit programs through CIGNA's HMOs and to employers directly.
To control their health care costs, many employers have changed and others are changing their benefit plan design by introducing or expanding managed care features. Managed care products promote effective, efficient use of health care services by coordinating utilization of care and controlling unit costs through provider contracts. While HMOs are generally the most cost-efficient form of managed care, many employers offer their employees a choice of benefit and cost options. CIGNA provides these options through HMOs, preferred provider organizations ("PPOs") and traditional indemnity coverage as well as through integrated products, which include all three. Integrated products are available under alternative funding as well as traditional insurance arrangements. These products may include contract provisions under which CIGNA assumes the risk for costs exceeding specified levels.
CIGNA's prepaid health care operations provide medical services through HMOs. CIGNA's HMOs include staff models, in which physicians and other providers are employees of the HMO, individual practice association ("IPA") models, in which independent physicians and hospitals are under contract with CIGNA to provide services, and mixed models, in which attributes of IPA and staff model HMOs are combined. Staff model HMOs offer a greater opportunity for direct influence over medical costs, quality and service, but require more capital investment. IPAs may cover wider geographic areas with lower fixed costs, but must rely on cost-effective contracts with providers and appropriate utilization management to influence medical costs. Staff models generally offer lower costs to the consumer, whereas IPAs may offer broader provider choice.
To maintain and enhance the quality of health care delivered in its HMOs, CIGNA has initiated the development of standard performance measurements for affiliated physicians, hospitals and other providers in its HMOs. Thirteen of CIGNA's HMOs are accredited by the National Committee for Quality Assurance, and CIGNA is in the process of seeking accreditation for the remainder.
CIGNA's HMOs and PPOs serve all or part of 39 states, the District of Columbia and Puerto Rico. CIGNA had 46 HMO networks serving approximately 3.3 million members as of December 31, 1994, and 48 networks serving approximately 2.7 million and 2.3 million members as of December 31, 1993 and 1992, respectively. Members include participants under traditional and alternative funding programs. During 1994, CIGNA withdrew from three networks and added one, resulting in the net decrease of two HMO networks. As of December 31, 1994, 37 of CIGNA's HMO networks were IPA models (with 65% of total members); four were staff models (with 20% of total members); and five were mixed models (with 15% of total members).
CIGNA's indemnity business included arrangements with doctors, hospitals and other independent providers to form PPOs in 80 locations as of December 31, 1994, 71 as of December 31, 1993 and 53 as of December 31, 1992. Under a typical PPO arrangement, CIGNA reimburses PPO participants at a higher percentage for the costs of medical care obtained from contracted providers (who charge on a discounted rate basis) than it does for care obtained from non-contracted providers. CIGNA's PPOs served approximately 1.1 million individuals as of December 31, 1994, approximately 0.8 million as of December 31, 1993 and approximately 0.7 million as of December 31, 1992.
CIGNA also offers prepaid dental coverage, using networks of independent providers in most states, serving approximately 2.0 million, 1.7 million and 1.3 million participants as of December 31, 1994, 1993 and 1992, respectively.
Distribution
The indemnity products of this segment are distributed primarily by employed group sales representatives through national and other insurance brokers and insurance consultants and, to a lesser extent, by CIGNA's career agents. Sales of prepaid health care products are made primarily to employers by CIGNA's sales representatives and also through insurance brokers. Since 1993, CIGNA has developed a direct sales force to market traditional HMOs to smaller companies. Salaried marketing representatives sell disability management, medical and disability cost containment, and managed mental health and substance abuse services directly to insurance companies, HMOs and employer groups. Salaried enrollment specialists enroll employees in group life insurance, HMOs and related programs at the worksite. As of December 31, 1994, the field sales force for the products of this segment consisted of approximately 595 sales representatives in 114 field locations.
Pricing and Reserves
Premiums and fees charged for group indemnity and prepaid products reflect assumptions about future claims, expenses, credit risk, investment returns, competitive considerations and target profit margins. Premiums and fees charged for HMOs and PPOs also reflect assumptions about the impact of provider contracts and utilization management. Most of the premium volume for the indemnity business is established on an experience-rated basis, in which premiums may be adjusted to reflect actual claims experience, administrative expenses and income from investable funds attributable to a given policyholder. All other premiums are based on a guaranteed-cost method, for which there is no retrospective adjustment for actual experience. Both guaranteed-cost and experience-rated contracts generally permit annual rate adjustments.
In addition to paying current benefits and expenses, CIGNA establishes reserves in amounts estimated to be sufficient to settle reported claims not yet paid, as well as claims incurred but not yet reported. Also, reserves are established for estimated experience refunds based on the results of experience-rated policies.
Interest on reserve and fund balances is credited to experience-rated policyholders through rates that are either set at the Company's discretion or based on actual investment performance. Generally, for interest-crediting rates set at the Company's discretion, higher rates are credited to long-term funds than to short-term funds, reflecting the fact that higher yields are generally available on investments of longer maturities. For 1994, the rates of interest credited ranged from 2.5% to 8.7%.
Approximately one-third of the reserves comprise liabilities that will be paid within one year, primarily for group life, medical and prepaid health claims. The remainder primarily include liabilities for long-term disability benefits and group life insurance benefits for disabled individuals.
The profitability of medical and dental indemnity and prepaid health care products is largely dependent upon the accuracy of projections for health care cost inflation and utilization, the adequacy of fees charged for administration and risk assumption and, in the case of prepaid health care products, effective medical cost management. The profitability of other indemnity products depends on the adequacy of premiums charged relative to claims and expenses.
CIGNA reduces its exposure to large individual and catastrophe losses under group life, disability and accidental death contracts by purchasing reinsurance from unaffiliated insurers.
Competition
Group indemnity insurance and prepaid health care are highly competitive, and no one competitor or small number of competitors is dominant across the country, although in certain locations some HMOs dominate the sales of traditional products. A large number of insurance companies and other entities compete in offering similar products. Competition exists both for employer-policyholders and for the employees in those instances where the employer offers the products of more than one company. Most group policies are subject to Company review and renewal on an annual basis, and policyholders may seek competitive quotations from several sources prior to renewal.
The principal competitive factors that affect this segment are price; quality of service; scope, cost-effectiveness and quality of provider networks; product responsiveness to customers' needs; cost-containment services; and effectiveness of marketing and sales. Being responsive to the needs of employee-consumers as well as of employers is important. For certain products with longer-term liabilities, financial strength of the insurer as indicated by ratings issued by nationally recognized rating agencies is also a competitive factor.
The principal competitors of CIGNA's group insurance and prepaid health care businesses are the large life and health insurance companies that provide group insurance, numerous Blue Cross and Blue Shield organizations, stand-alone HMOs, and HMOs sponsored by major insurance companies and hospitals. Competition also arises from smaller regional or specialty companies with strength in a particular geographic area or product line, administrative service firms and self-insurers.
CIGNA is one of the largest investor-owned insurance company providers of group life and health indemnity insurance, based on premiums and premium equivalents. It is the largest investor-owned HMO, based on the number of members and the second largest provider of group long-term disability coverages, based on premiums.
Health Care Reform
Congress recessed in 1994 without enacting health care reform. Comprehensive national reform is not likely to be proposed again in 1995. Instead, CIGNA expects federal and state proposals addressing modest insurance reform and requiring managed care networks to admit any willing providers and placing other limitations on the ability of managed care companies to form and operate efficient networks of doctors, hospitals and pharmacies. Multiple layers of regulation would result if the states enacted legislation different from federal standards. Because any reform measures that will ultimately be adopted are not known, CIGNA cannot predict the effect that health care reform will have on its business operations.
AIDS
The impact of Acquired Immune Deficiency Syndrome ("AIDS") claims to date has not been material for CIGNA. However, the U.S. Center for Disease Control has projected substantial increases in the number of AIDS cases and related deaths in the general population. If such projected increases occur, they will result
in higher life and health benefits claims. CIGNA anticipates that most AIDS claims in its Employee Life and Health Benefits business should be recoverable through the experience-rating process and appropriate rate increases for guaranteed-cost and prepaid products.
D. Employee Retirement and Savings Benefits
General
CIGNA's Employee Retirement and Savings Benefits businesses provide investment products and professional services primarily to sponsors of qualified pension, profit-sharing and retirement savings plans. These products and services are marketed through CG Life and certain other subsidiaries.
Net earned premiums and fees for, and deposits to, general, separate and investment advisory accounts for this segment for the year ended December 31, were as follows:
Assets under management for this segment as of December 31 were as follows:
--------------- (1) General Account assets under management reflect unrealized appreciation (depreciation) of ($233) million and $521 million as of December 31, 1994 and 1993, respectively, as a result of SFAS No. 115.
Principal Products and Markets
CIGNA offers a broad range of products to both defined benefit and defined contribution pension plans, profit-sharing plans and retirement savings plans. CIGNA's primary marketing emphasis is on defined contribution plans, which provide for participant accounts with benefits based upon the value of contributions to, and investment returns on, the individual's account. This has been the fastest growing portion of the pension marketplace in recent years. Defined contribution plan assets amounted to approximately $16.6 bil-
lion, or 49% of assets under management for this segment as of December 31, 1994, compared with $16.3 billion, or 47%, as of December 31, 1993. The balance of this segment's assets under management relate to defined benefit plans, under which annual retirement benefits are fixed or defined by a benefit formula.
CIGNA sells investment products and investment management services, either separately or as full-service packages with administrative and other professional services, to pension plan sponsors. Traditionally, CIGNA's marketing emphasis has been on sales of full-service products that include investment management and pension services to middle market customers with plan assets of up to $50 million. In recent years, however, this emphasis has expanded to include sales to sponsors of larger plans that look to more than one entity to provide actuarial, administrative or investment services and products, or combinations thereof. For defined contribution plans, principally 401(k) plans, CIGNA markets products that offer investment management services and plan level and participant recordkeeping, as well as employee communications, enrollment, plan design, technological support and other consulting services. For defined benefit plans, CIGNA offers investment, administrative and professional services, including recordkeeping, plan documentation, and actuarial valuation and consulting. Investment management services for CIGNA's defined contribution and defined benefit products are provided by CIGNA and by third-party managers. In addition, CIGNA offers single premium annuities, both on guaranteed and experience-rated bases, and guaranteed investment contracts ("GICs"), which provide guarantees of principal and interest with a fixed maturity date.
Pension products are supported by the general asset account ("General Account") and segregated accounts ("Separate Accounts") of CG Life. The General Account supports both guaranteed and experience-rated contracts. Guaranteed contracts comprise single premium annuities and GICs. As of December 31, 1994, guaranteed single premium annuities accounted for $2.6 billion and GICs accounted for $1.3 billion of General Account assets under management for the Employee Retirement and Savings Benefits segment, compared with $2.8 billion and $1.5 billion as of December 31, 1993.
For 1994, the interest rate on reserves for guaranteed single premium annuities ranged from 3.25% to 12.75%, with a weighted average of 8.37%. The rate of interest credited in 1994 on CIGNA's GICs ranged from 5.60% to 12.10%, with a weighted average rate of 8.63%. CIGNA's GICs and single premium annuities generally do not permit withdrawal by the plan sponsor prior to maturity, except that GICs permit withdrawal at market value in the event of plan termination. None of the GICs include renewal clauses. Payouts associated with GICs have not been material to the Company's liquidity and capital resources.
Experience-rated contracts that are supported by the General Account have no fixed maturity dates and provide for transfer of net investment experience (including impairments and non-accruals) to policyholders through credited interest and termination provisions.
Credited interest rates on experience-rated contracts supported by the General Account are generally declared annually in advance and may be changed prospectively by the Company from time to time. Credited interest rates reflect investment income and realized gains and losses. Credited interest rates for 1994 ranged from 5.00% to 9.50%, with a weighted average rate of 6.42%.
The termination provisions of $4.2 billion, or 100%, of the Company's liability for experience-rated defined benefit contracts supported by the General Account that are subject to withdrawal, and the termination provisions of $3.6 billion, or 37%, of the Company's liability for experience-rated defined contribution contracts supported by the General Account, provide the policyholder with essentially two options for withdrawal of assets upon election to terminate: (a) a lump sum at market value; or (b) annual installments. Under the market value method, the Company approximates the market value of the underlying investments by discounting expected future investment cash flows from investment income (including the effect of non-accruals) and repayment of principal, including the effect of impaired assets. The discount rate assumed is based on current market interest rates. Under the installment method, 100% of the contractholder book value is paid, usually over not more than 10 years. Interest is credited over the installment period under a formula derived to pass investment gains and losses (reflecting non-accruals and impairments) through to policyholders. Withdrawals under the installment method have not been material to the Company.
The termination provisions of $6.1 billion, or 63%, of the Company's liability for experience-rated defined contribution contracts supported by the General Account contain a book value mechanism for withdrawal at policyholder termination. Under certain circumstances, payout of book value is subject to deferral and the rate of interest credited may be reduced for the recovery of investment losses (including non-accruals and impairments).
The Separate Accounts allow customers the flexibility to invest in specific portfolios and participate directly in the investment results. Investment options include publicly traded bonds, private placement bonds, equities, real estate, mutual funds and short-term securities. Approximately $8.4 billion, or 65%, of the assets in the Separate Accounts support experience-rated contracts under which the risks and benefits of investment performance generally accrue to the customers.
The remaining assets in the Separate Accounts are held under experience-rated contracts that guarantee a minimum level of benefits. As of December 31, 1994 and 1993, the amount of minimum benefit guarantees under these contracts was $4.5 billion and $4.9 billion, respectively. Reserves in addition to the Separate Account liabilities are established when CIGNA believes a payment will be required under one of these guarantees. As of December 31, 1993, reserves of $6 million had been established to provide for the cost of interest guarantees. No additional reserves were required during 1994. For additional information, see Note 17 to CIGNA's 1994 Financial Statements.
CIGNA monitors contract termination experience on an ongoing basis. Of those assets subject to withdrawal, persistency for 1994 was 93%, compared with 94% and 93% in 1993 and 1992, respectively.
Distribution
CIGNA's retirement products and services are distributed primarily through CG Life salaried group pension representatives both directly and through career agents, independent insurance agents and brokers, pension plan consultants, investment advisors and other service providers. As of December 31, 1994, CG Life had a field organization consisting of 63 pension sales representatives and 161 service consultants and administrative personnel located in offices across the United States.
Pricing and Reserves
CIGNA establishes reserves for experience-rated contracts in an amount equivalent to the contractholder funds on deposit with it, including liability for estimated experience refunds based upon the results of each contract. Profitability on these contracts is based primarily on margins included in charges for investment and administrative services and risk assumption. Premiums and fees for annuity products are based on assumptions as to mortality experience, investment returns, expenses and target profit margins. For guaranteed-cost contracts, the reserve established is the present value of expected future obligations based on these assumptions, with a margin for adverse deviation. Profitability on guaranteed-cost contracts is affected by the degree to which future experience deviates from these assumptions.
Competition
The pension marketplace is highly competitive. CIGNA's competitors include other insurance companies, banks, mutual funds, investment advisors, and certain service and professional organizations. No one competitor or small number of competitors is dominant. Competition focuses on service, technology, cost, variety of investment options, investment performance and insurer financial strength as indicated by ratings issued by nationally recognized agencies. Business growth, as measured by assets under management, is expected to continue to be constrained by withdrawals and lower deposits resulting from decisions by pension plan sponsors to diversify assets and fund management.
The largest single pension manager holds less than a 5% market share, as measured by assets under management. According to a survey published in "Pensions & Investments," CIGNA ranked 5th among insurers, and 13th among pension managers overall, in terms of pension and employee retirement savings plan assets under management.
E. Individual Financial Services
General
CIGNA's Individual Financial Services businesses market a broad range of insurance and investment products and services to individuals and corporations. They also assume reinsurance of certain risks under policies written by other insurance companies.
The following table sets forth the net earned premiums and fees and deposits for this segment.
The following table provides data on sales of new policies and additions to existing policies, terminations and life insurance in force for this segment, including assumed reinsurance, and reinsurance ceded to other companies.
---------------
(1) For 1994 and 1993, $10 billion and $17 billion of sales and additions, respectively, were participating, with the remainder non-participating. For 1992, substantially all sales and additions were non-participating.
As of December 31, 1994, total life insurance in force for this segment included assumed reinsurance of approximately $18.2 billion, compared with $17.1 billion as of December 31, 1993 and $16.6 billion as of December 31, 1992. In 1994, assumed reinsurance (included in sales and additions) totaled $3.9 billion, compared with $3.6 billion and $4.3 billion in 1993 and 1992, respectively.
Individual Products
CIGNA's individual insurance products include term and permanent life insurance, annuities and disability insurance. Term life insurance provides coverage for a stated period and pays a death benefit only if the insured dies within the period. Permanent life insurance, offered on a participating or non-participating
basis, provides coverage that does not expire after a term of years and builds a cash value that equals the full policy amount if the insured is alive on the policy maturity date. In participating insurance, policyholders directly participate in policy earnings through dividends. Non-participating insurance does not pay dividends, but deviations from assumed experience may be reflected in the policyholder's future premium payments.
Products that provide permanent coverages include whole life, universal life and variable universal life. Whole life provides fixed benefits and level premium payments. Universal life provides benefits that fluctuate with the amount of variable premiums paid, and interest credits, mortality and expense charges made, to the policy. Premiums and benefits in universal life products vary with the design of the benefits being funded. Variable universal life provides benefits that also fluctuate, but with the performance of one or more investment accounts.
CIGNA offers both fixed and variable annuity products. Fixed annuities accumulate value at a fixed rate of interest on the invested payments. Variable annuities accumulate value at levels determined by the contractholder's allocation of payments among a portfolio of mutual funds and fixed rate accounts and the underlying investment performance of the selected funds (less applicable expense and contract charges). Annuity sales continue to grow; sales totaled $660 million in 1994 and $150 million in 1993. Full year 1995 annuity sales are expected to significantly exceed 1994 levels. CIGNA also markets a number of individual investment products (including mutual funds) and fee-based financial planning services.
Principal markets for life insurance products and services sold to individuals are affluent executives, professionals and small business owners (typically with income above $100,000 and net worth of $1.5 million or more). Annuities are generally marketed to upper-middle to affluent customers of banks and stock brokerage firms.
Individual insurance products are also sold to corporations to provide coverage on the lives of certain of their employees. Principal markets for corporate-owned life insurance ("COLI") are Fortune 1000 companies. The COLI market and sales volume for COLI products tend to be volatile. During 1994 and 1993, the face amount of new sales (as shown in the preceding table) includes COLI universal life business issued on a participating basis of approximately $10 billion and $17 billion, respectively. Changes in permanent sales and in force, reinsurance ceded, and the number and average size of participating policies are primarily attributable to COLI. 1993 was the first year CIGNA issued COLI universal life on a participating basis.
As of December 31, 1994 and 1993, approximately 63% and 70%, respectively, of CIGNA's individual life insurance in force was non-participating permanent, which includes interest-sensitive products such as universal life. This change in business mix resulted from the sale of participating COLI mentioned above.
Interest credited on whole life products is equal to or above a minimum guaranteed rate. For interest-sensitive products, credited interest rates vary with the characteristics of each product and the anticipated investment results of the assets backing these products. Where credited interest exceeds the guaranteed rate, the excess is used to purchase additional insurance or increase cash values. Credited interest rates on interest-sensitive products for 1994 ranged from 4.1% to 8.3%.
Interest rates for policy loans on individual life insurance products are defined in the contract and are either variable or fixed. Variable interest rates are tied to an external index and may be subject to a specified minimum rate. The interest rates charged to the policyholder on borrowed funds ("loan rates") are generally greater than the interest rates credited to the policyholder on those funds, and such loan rates and the related credited interest rates tend to move in tandem as interest rates fluctuate. A large portion of the contracts that provide for fixed rates also provide for a relatively constant spread between the policy loan rate and the related credited interest rate.
Most individual life insurance products have surrender charges to recover policy acquisition costs and to encourage persistency. Persistency for these products was approximately 95% in 1994, 1993 and 1992.
Reinsurance Products
Reinsurance products sold through this segment include coverages for part or all of the risks under policies written by other insurance companies for group life and health, individual life and health, and special risks, such as personal accident and workers' compensation catastrophe coverages. The principal markets for these products are individual and group life, accident and health insurers; special risk and workers' compensation units of property-casualty insurers; and self-insured employers.
Reinsurance coverages generally extend for the same duration as the underlying direct policies: from one year or less for group, special risk and individual life term policies, to time of lapse or expiration at death for permanent individual life and individual health policies. Most permanent reinsurance coverages have recapture charges to recover policy acquisition costs and to encourage persistency.
Distribution
As of December 31, 1994, CG Life sold individual insurance products primarily through approximately 725 full-time career agents and through independent agents and brokers. COLI products are sold primarily through brokers. Investment products are sold through the career agents, who are also registered representatives of a CIGNA broker-dealer. Annuities are distributed through stockbrokers and banks as well as through career agents.
The COLI marketplace is dominated by a limited number of brokers. The volume of business from each of the brokers with whom CIGNA has a relationship tends to fluctuate over time. Approximately 75% of COLI sales in 1994 were placed through one broker, the loss of which might have an adverse effect on new sales of corporate-owned participating universal life insurance.
Reinsurance products are sold in the United States, Canada, Europe and Latin America through a small sales force and through domestic and foreign intermediaries.
Pricing, Reserves and Reinsurance
Premiums for life and disability insurance, annuities and assumed reinsurance are based on assumptions about mortality, morbidity, persistency, expenses and target profit margins as well as interest rates and competitive considerations. The long-term profitability of individual products is affected by the degree to which future experience deviates from these assumptions. Fees for universal life insurance products consist of mortality, administration and surrender charges assessed against the policyholder's fund balance. Interest credits and mortality charges for universal life, and mortality charges on variable premium products, may be adjusted prospectively to reflect expected interest and mortality experience. Dividends on participating insurance products may be adjusted to reflect prior experience.
For individual disability, annuity, traditional and variable premium life insurance and individual life and health reinsurance in force, CIGNA establishes policy reserves that reflect the present value of expected future obligations less the present value of expected future premiums. For universal life insurance, CIGNA establishes reserves for deposits received and investment income credited to the policyholder, less mortality, administration and surrender charges assessed against the policyholder's fund balance. In addition, for all individual and reinsurance products, CIGNA establishes claim reserves for claims received but not yet paid, based on the amount of the claim received, and for claims incurred but not reported, based on prior claim experience.
CIGNA maintains a variety of ceded reinsurance agreements with non-affiliated insurers to limit its exposure to large life and health losses and to multiple losses arising out of a single occurrence. Although such reinsurance does not discharge CIGNA from its obligations on insured risks, CIGNA's exposure to losses is reduced by the amount of reinsurance ceded, provided that reinsurers meet their obligations.
Competition
The individual insurance, annuity and investment businesses are highly competitive. No one competitor or small number of competitors dominates. More than 1,000 domestic life insurance companies may offer one or more individual insurance and annuity products, and approximately 40 companies may offer one or more reinsurance products, similar to those offered by CIGNA. In addition, some of CIGNA's individual financial businesses compete with non-insurance organizations, including commercial and savings banks, investment advisory services, investment companies and securities brokers. Competition focuses on product, service, price, distribution method and the financial strength of the insurer as indicated by ratings issued by nationally recognized agencies. CIGNA has benefited competitively from CG Life's financial strength and stability and from the quality of its distribution systems.
The COLI marketplace is also highly competitive. The Company principally competes with approximately half of the 25 largest domestic life insurance companies that may offer one or more COLI products. Competition in this market focuses primarily on product design, underwriting, price, administrative servicing capabilities and insurer financial strength, as indicated by ratings issued by nationally recognized agencies.
Based on information published by A.M. Best, CG Life was the 22nd largest U.S. individual life insurer in terms of aggregate individual life insurance in force and the 5th largest in terms of direct premiums.
Other Matters
CIGNA does not expect AIDS claims, discussed on page 6, to have a significant effect on the results of operations of this segment. Where appropriate, and to the extent permissible under applicable law, CIGNA tests for AIDS antibodies and considers AIDS information in underwriting coverages and setting rates.
Legislation or regulatory action may be introduced that could change the policyholder tax treatment of certain of the Company's interest-sensitive products and, thus, adversely affect future sales and persistency of such products.
F. Property and Casualty
Principal Products and Markets
CIGNA's property and casualty operations provide insurance for customers in the United States and international markets, primarily Europe, the Pacific region, Latin America and Canada. During 1994, United States and international markets constituted approximately 48% and 52%, respectively, of the total earned premiums and fees for this segment. CIGNA provides insurance coverage under standard risk transfer arrangements and provides coverages and services for customers who wish to increase their levels of risk retention or to self-insure. In the domestic market, principal product lines include workers' compensation, commercial packages, casualty (including commercial automobile and general liability), property, and marine and aviation. In international markets, principal product lines include individual life, accident and health, and commercial property and casualty (primarily fire, general and excess liability, automobile, marine, energy and other specialty lines).
During 1994, CIGNA substantially withdrew from the domestic and international property and casualty reinsurance business because of continuing losses and the level of capital that would have been required to become sufficiently competitive in that business. Approximately $450 million of premiums and fees were earned from that business in 1994, of which $100 million in premiums will continue to be written on a direct basis through the domestic operation.
CIGNA continued in 1994 to implement strategic changes in its domestic operations in line with its specialist strategy and to improve operating results. Changes in the mix of business have continued. For example, in the specialty insurance market, CIGNA has discontinued writing insurance for the large domestic airline carriers and in 1993 divested its construction contract surety bond business. In the specialty market, CIGNA is focusing on recreational marine, property coverage placed through mortgage lenders and other
programs in which specialist agents and brokers share underwriting and processing expertise with CIGNA. Also, CIGNA has essentially eliminated writing domestic voluntary personal automobile insurance. In the medium-sized risk market, CIGNA is reducing the number of individual risks written, and increasing production of group business, such as through affinity groups, associations and national broker blocks of business. In addition, CIGNA is focusing its writings of workers' compensation business that involves standard risk transfer in states with regulatory climates in which the Company believes it can operate profitably. In the large-risk market, CIGNA continues to emphasize sales of petroleum, technical and general property coverages to large insureds as well as sales of complex, loss-sensitive casualty coverages to customers choosing to increase their risk retention.
Management of runoff lines of business in the Property and Casualty segment and of asbestos-related, environmental pollution and other long-term exposure claims is being consolidated in an effort to increase its efficiency.
CIGNA generally attempts to protect itself from economic loss arising from foreign exchange exposure in its international operations by maintaining invested assets abroad that are currency matched in support of its foreign obligations. For information on the effect of foreign exchange exposure on CIGNA, see Notes 1(Q) and 13 to CIGNA's 1994 Financial Statements.
CIGNA's domestic subsidiaries are members of, or participate in, various voluntary associations and syndicates that facilitate the underwriting of large or highly concentrated risks. The associations distribute the risks assumed among the members, provide specialized inspection and engineering services and may use special forms of coverage to control overall exposures.
Regulatory authorities also require the participation of CIGNA's domestic subsidiaries in various joint underwriting authorities, pools and other arrangements created to provide insurance coverage to the residual market, including workers' compensation pools that have historically been unprofitable and represent a cost of conducting business in certain jurisdictions. In recent years CIGNA has attempted to minimize the adverse financial effect of such pools through pricing actions.
The Company routinely provides property coverages that involve insuring large risks such as office buildings. Any major catastrophe, with or without giving effect to reinsurance, could have a material adverse effect on CIGNA's results of operations. However, because the Company, through its normal risk assessment and accumulation processes monitors writings to avoid significant concentrations, it is not likely that such adverse effect would be material to the Company's liquidity or financial condition.
The following table sets forth geographic distribution of GAAP net earned premiums and fees for the products of this segment.
---------------
For 1994, 1993 and 1992, earned premiums and fees were substantially the same as written premiums. Premiums and fees for the domestic and international reinsurance business from which CIGNA withdrew late in 1994 are included in the table.
CIGNA's property and casualty insurance subsidiaries provide loss protection to insureds in exchange for premiums. If earned premiums exceed the sum of losses, commissions to agents or brokers, other operating expenses and policyholders' dividends, underwriting profits are realized. The "combined ratio" is a frequently used measure of property and casualty underwriting performance. On a GAAP basis, this ratio is the sum of (i) the ratio of incurred losses and associated loss expenses to earned premiums (the "loss and loss expense ratio"), (ii) the ratio of expenses incurred for sales commissions, premium taxes, administrative and other operating expenses to earned premiums (the "expense ratio") and (iii) the ratio of policyholders' dividends to earned premiums (the "policyholder dividend ratio"), each of these three ratios being expressed as a percentage. The statutory combined ratio differs from the GAAP ratio primarily in that the expense ratio and the policyholder dividend ratio are calculated as a percent of written premiums, rather than earned premiums. When the combined ratio is over 100%, underwriting results are not profitable. The GAAP combined ratios for CIGNA's property and casualty product lines and total property and casualty operations are shown in the table on page 17.
Because time normally elapses between the receipt of premiums and the payment of claims and certain related expenses, funds become available for investment by CIGNA. The combined ratio does not reflect investment income from these funds, investment gains and losses, results of non-insurance business, or federal income taxes. Such items, when added to underwriting profits or losses, produce net income or loss. For information concerning investment income, see "Investments and Investment Income -- Property and Casualty Investments" on pages 32 and 33.
The following tables set forth GAAP net earned premiums and fees, underwriting results, combined ratios and net investment income for this segment.
--------------- (1) Combined ratio amount represents the effect on GAAP combined ratio.
While the above table is presented on a GAAP basis, industry results are more readily available on a statutory basis. CIGNA's statutory combined ratio after policyholders' dividends was 121.6 for 1994. CIGNA's results have been adversely affected in recent years by environmental pollution, asbestos-related and other long-term exposure losses. These losses accounted for 7.1 points on the 1994 statutory combined ratio. In addition, the results of CIGNA's domestic operations continue to reflect the competitive pricing environment.
It is not known to what extent the types of losses reflected in CIGNA's combined ratio are also reflected in the combined ratios of other companies. The average statutory combined ratio for the nine months ended September 30, 1994 for companies that write at least 70% commercial coverage and file data with the
Insurance Services Office was 111.6%. However, caution should be exercised in using these data because it is not possible to compare meaningfully an individual company's combined ratio with an industry average due to numerous variables, including product mix and amounts of fee-for-service business, which differ among companies.
Competition
The principal competitive factors that affect the property and casualty products of this segment are (i) pricing; (ii) underwriting; (iii) quality of claims and policyholder services; (iv) operating efficiencies; and (v) product differentiation and availability. In the highly competitive environment of the past several years, CIGNA has reduced its premium volume rather than maintain business at inadequate prices, and its share of domestic markets has declined. Competition has intensified due to increased capacity in the insurance market resulting from growing capital supporting the industry.
Perception of financial strength, as reflected in the ratings assigned to an insurance company, especially by A.M. Best, is also a factor in the Company's competitive position. The Best downgrade of some of CIGNA's domestic property and casualty subsidiaries to B+ (see page 2 for additional information) could result in lower premiums in certain lines of business, but is not expected to have a material effect on CIGNA's results of operations.
In its international life insurance operations, CIGNA focuses on those market segments where it can compete effectively based on service levels and product design, and achieve an adequate level of profitability in the long term. It generally does not attempt to compete with large, entrenched local companies.
In the United States, property and casualty insurance can be obtained through national and regional companies that use an agency distribution system, direct writers (who may have an employed agency force) or brokers, or through self-insurance, including the use by corporations of subsidiary captive insurers. Approximately 3,900 companies compete for this business in the United States and no single company or group of affiliated companies is dominant. In 1994 and 1993, CIGNA's domestic property and casualty statutory net written premiums amounted to approximately 0.9% and 1.1%, respectively, of the total market. Internationally, CIGNA competes directly with foreign insurance companies as well as with other U.S.-based companies.
Based on information published by A.M. Best, CIGNA's domestic property and casualty insurance subsidiaries rank 19th in annual net premiums written. CIGNA is the sixth largest U.S. writer of commercial multi-peril coverages, 13th largest of workers' compensation coverages and 12th largest of commercial auto coverages. Based on revenues, CIGNA's international operations are the second largest U.S.-based provider of international insurance products and services.
Distribution
In the United States, CIGNA markets its insurance products principally through independent agents and brokers. In the medium-sized risk market, CIGNA has reduced the number of agents through which it markets its products to focus on those producers who historically have provided more profitable business, to better manage the change in business mix described on pages 14 and 15 and to reduce expenses associated with writing the business. In addition, CIGNA has increased the use of brokers in the medium-sized risk market in an effort to increase the amount of group business that is written.
In the international marketplace, property and casualty coverage is sold primarily through brokers. A network of offices in about 50 jurisdictions provides claims and account services to international customers and brokers. Life, accident and health insurance products are sold in the international marketplace through approximately 7,000 brokers and agents.
Ceded Reinsurance
To protect against losses greater than the amount that it is willing to retain on any one risk or event, CIGNA purchases reinsurance from unaffiliated insurance companies. The Company is not substantially dependent upon any single reinsurer. The Company's largest aggregation of reinsurance recoverables as of
December 31, 1994 and 1993, at approximately 9% for each year, was with syndicates affiliated with Lloyd's of London, with such recoverables spread over more than 100 syndicates. In addition, approximately 40% of CIGNA's reinsurance recoverables as of December 31, 1994 relate to individual reinsurers that carry a very good or higher financial rating from an independent rating agency, and approximately 20% and 10%, respectively, relate to pools and captives, under which CIGNA's assets are generally protected through future industry assessments or by some form of collateral. A large portion of the remaining recoverables are due from reinsurers that meet CIGNA's security standards and selection criteria described in the following paragraph. Although reinsurance does not discharge CIGNA from its obligations on insured risks, CIGNA's exposure to losses is reduced by the amount ceded, and thus will be limited to the amount of risk retained, provided that reinsurers meet their obligations.
The collectibility of reinsurance is largely a function of the solvency of reinsurers. CIGNA cedes risk to reinsurers who meet certain financial security standards and monitors their quality and financial condition. In its selection and monitoring process, CIGNA examines its reinsurers' financial performance and reserve adequacy; considers factors such as the quality of their management; and considers ratings and reviews of them by independent sources. When deemed appropriate, CIGNA seeks collateral from reinsurers; reassumes, in return for a settlement, risks for which it had previously purchased reinsurance; and establishes allowances for potentially unrecoverable reinsurance. Reinsurance disputes can delay recovery of reinsurance and, in some cases, affect its collectibility. Disputes resulting in such delays have increased in recent years, particularly on larger and more complex claims, such as those related to professional liability, asbestos and London reinsurance market exposures.
As of December 31, 1994, approximately 88% of CIGNA's reinsurance recoverable balance relates to unpaid reported claims and incurred but not reported claims, and the remaining 12% relates to paid losses. The timing and collectibility of reinsurance recoverables have not had, and are not expected to have, a material adverse effect on CIGNA's liquidity.
CIGNA's allowance for unrecoverable reinsurance was $435 million and $405 million at December 31, 1994 and 1993, respectively. Losses for unrecoverable reinsurance were $29 million, $28 million and $89 million for 1994, 1993 and 1992, respectively. Of the loss for 1992, $62 million related to CIGNA's London reinsurance market exposures. Additional losses from unrecoverable reinsurance are likely to affect CIGNA's future results adversely, although the amounts and timing cannot be reasonably estimated. For additional information on reinsurance, including on CIGNA's property catastrophe reinsurance program, see pages 13 through 16 of the MD&A section and Notes 15 and 16 of CIGNA's 1994 Annual Report.
Reserves
General
Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid losses, insurers establish "reserves," which are liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events that have occurred, including events that have not been reported to the insurer.
After a claim is reported, except for a class of very small claims that typically are settled quickly, a "case reserve" is established by claims personnel for the estimated amount of the ultimate payment. The estimate reflects the informed judgment of such personnel, based on their experience and knowledge regarding the nature and value of the specific claim. Claims personnel review and update their estimates as additional information becomes available and claims proceed toward resolution.
"Bulk reserves" are established on an aggregate basis (i) to provide for losses incurred but not yet reported to and recorded by the insurer; (ii) to provide for the estimated expenses of settling claims, including legal and other fees and general expenses of administering the claims adjustment process; and (iii) to adjust for the fact that, in the aggregate, case reserves may not accurately estimate the ultimate liability for reported
claims. As part of the bulk reserving process, CIGNA's historical claims data and other information are reviewed and consideration is given to the anticipated impact of various factors such as legal developments, economic conditions and changes in social attitudes. Insurance industry experience is also considered.
With respect to asbestos-related, environmental pollution and certain other long-term exposure claims, CIGNA does not establish bulk reserves, except for the estimated expenses of settling reported claims and except for claims related to certain major asbestos manufacturers' policies. See below for a more detailed discussion of reserving for these claims.
The reserving process relies on the basic assumption that past experience is an appropriate basis for predicting future events. The probable effects of current developments, trends and other relevant matters are also considered. Because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent, there is no precise method for evaluating the adequacy of the consideration given to inflation or to any other specific factor affecting claims payments. However, the reserving process provides implicit recognition of the impact of inflation and other factors by taking into account changes in historic claims reporting and payment patterns. A number of analytical reserving techniques are used, which often yield differing results. Accordingly, estimating future claims costs is a complex and uncertain process. Because available claims data and other information are rarely definitive, the evaluation of such data's implications with respect to future losses requires the use of informed estimates and judgments.
As additional experience and other data become available and are reviewed, the Company's estimates and judgments are revised and appropriate action is taken, which may include increases or decreases in CIGNA's estimate of ultimate liabilities for insured events of prior years. These increases or decreases, net of reinsurance, are reflected in results for the period in which the estimates are changed.
CIGNA continually attempts to improve its loss estimation process by refining its ability to analyze loss development patterns, claims payments and other information, but there remain many reasons for adverse development of estimated ultimate liabilities. For example, the uncertainties inherent in the loss estimation process have grown in the last decade as loss estimates have become increasingly subject to changes in social and legal trends that expand the liability of insureds, establish new liabilities, and reinterpret insurance contracts to provide unanticipated coverage long after the related policies were written. As noted in the discussion below of asbestos-related, environmental pollution and other long-term exposure claims, such changes from past experience significantly affect the ability of insurers to estimate liabilities for unpaid losses and related expenses.
In management's judgment, information currently available has been appropriately considered in estimating CIGNA's loss reserves.
Prior Year Development
The adverse pre-tax effects, net of reinsurance, during 1994, 1993 and 1992 on CIGNA's results of operations from insured events of prior years (prior year development) were $538 million, $789 million and $656 million, respectively. Of the prior year loss development during 1994, 57% was attributable to asbestos- related, environmental pollution and other long-term exposure claims, which are discussed below. The remaining prior year development is discussed on pages 14 through 16 of the MD&A section of CIGNA's 1994 Annual Report.
Asbestos-related, Environmental Pollution and Other Long-term Exposure Claims
CIGNA continues to receive claims related to asbestos, environmental pollution and other long-term exposure claims asserting a right to recovery under insurance policies issued by the Company.
Liabilities for these claims cannot be estimated using standard actuarial methods because developed case law and adequate claim history do not exist for such claims. In addition, these claims differ from almost all others in that it is generally not clear that an insured loss has occurred and which, if any, of multiple policy years and insurers may be liable. These uncertainties prevent identification of applicable policies and policy
limits until after a claim is reported to the Company and substantial time is spent (many years in some cases) resolving contract issues and determining facts necessary to evaluate the claim.
Estimating liabilities and recoveries for claims that will be asserted under assumed and ceded reinsurance policies is also subject to uncertainties similar to those affecting claims under direct policies. CIGNA expects its ceded reinsurance arrangements to continue to provide recoveries for future asbestos-related and environmental pollution losses. However, the extent of future recoveries will depend on future gross loss experience and the particular reinsurance arrangements to which future losses relate.
Under current law, CIGNA expects these types of claims will continue to be reported for the foreseeable future. The claims to be paid, if any, and timing of any such payments depend on resolution of the uncertainties associated with them, and are expected to extend over several decades.
For the reasons discussed above and further elaborated on below, CIGNA expects that its future results will continue to be adversely affected by losses and legal expenses for these types of claims. Because of the significant uncertainties involved, and the likelihood that they will not be resolved in the near future, CIGNA is unable to reasonably estimate the additional losses and expenses and, therefore, is unable to determine whether such amounts will be material to its future results of operations, liquidity or financial condition.
The American Academy of Actuaries has initiated a project to develop standards for estimating currently unquantifiable liabilities. The project may examine unreported claims for asbestos-related, environmental pollution and certain other long-term exposures. In addition, various industry-related parties are attempting to develop methods to estimate pollution liabilities, including estimates based on a market share analysis. CIGNA is evaluating these methods to determine if they could be used in establishing reasonable estimates of reserves for unreported claims for asbestos-related, environmental pollution or other long-term exposures. The outcome and effect, if any, of these initiatives on CIGNA are not determinable at this time.
Asbestos-related Claims
Since 1985, CIGNA has carried reserves related to certain insurance policies issued for certain major asbestos manufacturers ("targets"), under which CIGNA expects to pay the limits of liability in most cases. These reserves (which include amounts for unreported claims) are generally equal to the policy limits of liability, minus payments made to date, plus an estimate of the associated future legal expenses. In 1994, after a review based on additional information, CIGNA concluded that the limits of liability of certain policies may not be fully paid for asbestos-related claims. Also, over time, based on available data, CIGNA has changed, and in the future may change, its assumptions regarding legal expenses, the effect of asbestos-in-building cases and recoveries from other insurers and reinsurers. In 1994, CIGNA adjusted its reserves carried for the targets to reflect both the review and its changed assumptions, which resulted in a net increase of $18 million. Future changes in assumptions could result in additional changes in the level of reserves carried for the targets.
More recent asbestos bodily injury litigation has been filed against manufacturers and suppliers of diverse products that either contain asbestos or used it in the manufacturing process, as well as against contractors and building owners. There is inadequate history from which the Company can predict the number or types of policyholders that will receive asbestos-related claims, how many claims they will receive, the amounts of those future claims, the insurance coverages that might be called upon for defense and indemnification or the likelihood of those coverages having to respond to claims. Because the date of event for which insurance coverage might be determined is unclear, numerous policies with varying terms over many years may be involved.
In addition to bodily injury cases, damage suits have been brought seeking reimbursement for the diminution in value of buildings containing asbestos materials and for the expense of removing and replacing asbestos insulation material and other building components made of asbestos. The Company and the insurance industry generally dispute that coverage applies to these asbestos-in-building claims. The financial effect of these claims on CIGNA's future results of operations is not expected to be significant.
Within the various state and federal court systems, there have been conflicting decisions regarding the extent, if any, of the obligation of insurers to provide coverage and the method of allocation of costs among
involved insurers. Additional uncertainties are created by efforts to create novel dispute resolution procedures in response to the burden of asbestos litigation on the courts, such as the proposed global settlement of future asbestos bodily injury claims brought against certain asbestos producers, which is being contested in the courts.
The majority of CIGNA's losses and legal expenses for asbestos-related claims arise from its domestic property and casualty operations. As of December 31, 1994, 1993 and 1992, respectively, approximately 1,175, 1,200 (including 140 previously not counted) and 950 policyholders had asbestos-related claims outstanding with the domestic operations. The number of policyholders with claims pending decreased during 1994. In 1994, CIGNA reached settlement agreements that extinguished its liability for all asbestos-related claims from several policyholders. CIGNA continues to litigate certain asbestos-related coverage issues, with 37 lawsuits pending as of December 31, 1994, compared with 35 pending as of December 31, 1993.
It is not possible to determine the Company's potential liability for asbestos-related claims based on the number of policyholders with claims outstanding. Additional information (which is not known for unreported claims) would be needed for such determination, including the extent of coverage, the policyholder's liability for claims tendered to it, the injuries allegedly sustained by the policyholder's claimants and the number of claims pending against a policyholder. As discussed above, the lack of information on these and other matters prevents the estimation of liabilities for unreported asbestos-related claims.
CIGNA establishes case reserves for reported asbestos-related claims as information permits, including for future legal and associated expenses for such reported claims. However, except for claims under the target manufacturers' policies discussed above, CIGNA does not establish reserves for unreported claims or for legal and associated expenses related to unreported claims because of the uncertainties described above.
Reserve changes for asbestos-related claims before ("Gross") and after ("Net") the effects of reinsurance for the periods indicated are as follows:
The incurred claims and claim adjustment expenses for 1993 include the establishment of reserves of $106 million ($72 million, net of reinsurance) for future legal and associated expenses for reported claims.
Environmental Pollution Claims
The principal federal statute that requires cleanup of environmental damage is the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund"), passed in 1980. It imposes liability on "Potentially Responsible Parties" ("PRPs"), subjecting them to liability for cleanup costs regardless of fault, time period and relative contribution of pollutants. The tax authority of Superfund expires in 1995, and proposals to change the law's method of allocating responsibility for, or funding, cleanup are expected. Any such changes could affect the liabilities of policyholders and insurers. Due to uncertainties associated with the
timing and content of any future Superfund legislation, CIGNA is not able to determine what effect, if any, such legislation would have on its results of operations, liquidity or financial condition.
In addition to Superfund, other federal environmental statutes exist, and state environmental statutes are, in some cases, stricter than the federal statutes. In addition to cleanup costs, environmental pollution may give rise to claims for bodily injury and property damage.
Those identified as potentially responsible for environmental pollution typically assert that their liability is insured. As a result, CIGNA's environmental pollution claims have escalated rapidly since 1985, and a substantial and growing number of legal actions that involve insurers, including CIGNA, have been brought to determine insurance coverage issues.
CIGNA and other insurers dispute coverage for the environmental liabilities of policyholders. Fundamental legal questions that will ultimately determine whether or not insurers have an obligation to provide coverage are being vigorously litigated, and there is no consistency among the court decisions nationwide on these questions. Additional uncertainty arises because of the varying types and terms of policies, which may or may not provide for the costs of defense or contain a form of pollution exclusion. Pollution exclusions may be absolute or may allow coverage for certain sudden and accidental events.
The estimation of reserves for reported environmental pollution claims is difficult and likely to change as additional information emerges. Even if coverage issues on a particular claim are ultimately resolved in favor of the policyholder, that result may not be useful in setting reserves on other claims because of complex factual variations between sites, policyholders and policies. For example, at any given Superfund site, the allocation of liability varies greatly, depending on such factors as the amount and relative toxicity of the material contributed, extent of impairment to the environment and ability to pay. A PRP may have no liability, may share responsibility with others or may bear the cost alone. According to the Environmental Protection Agency, the average time period between issuance of initial notice of PRP status and determination of the method and cost of a site cleanup now averages about 10 years. The issues have been resolved for relatively few waste sites.
The majority of CIGNA's losses and expenses for environmental pollution claims arise from its domestic property and casualty operations. As of December 31, 1994, 1993 and 1992, respectively, the domestic operations had approximately 15,000, 13,300 and 9,200 environmental pollution files outstanding. During 1994, 1993 and 1992, new claim files opened were approximately 2,750, 4,500 (including approximately 1,300 files previously not counted) and 2,500, respectively, and pending claim files dismissed, settled or otherwise resolved were approximately 1,050, 400 and 300, respectively. Recognizing the disputed nature of these claims, files are not closed unless settlement terms are reached, a claim is withdrawn or a court interprets policy language favorably to CIGNA.
A file represents each policyholder involved at a site, regardless of the number or type of claims asserted against the policyholder or the number or type of insurance policies (primary or excess) under which coverage is asserted. CIGNA disputes coverage for essentially all environmental pollution claims, and is involved in 450 coverage lawsuits as of December 31, 1994, compared with 472 as of December 31, 1993. Accordingly, and because of the many unresolved legal and factual issues described above, liabilities cannot be estimated based on the number of environmental pollution files outstanding.
CIGNA establishes case reserves for reported environmental pollution claims as information permits, including for future legal and associated expenses for such reported claims. However, CIGNA does not establish reserves for unreported claims or for legal and associated expenses related to unreported claims because of the uncertainties described above.
Reserve changes for environmental pollution claims before ("Gross") and after ("Net") the effects of reinsurance for the periods indicated are as follows:
Incurred claims and claim adjustment expenses for 1993 include the establishment of reserves of $335 million ($268 million, net of reinsurance) for future legal and associated expenses for reported claims.
Beginning and ending reserve balances and related incurred expense and payment activity for environmental pollution claims include internal costs to manage environmental pollution claims and disputes with policyholders over insurance coverage issues as well as external litigation-related costs for such disputes. Costs associated with the disputed coverage issues will decline in the future, and eventually end, as the disputes or related issues are resolved. To present reserve changes that more directly relate to indemnity costs and costs to defend policyholders against environmental pollution claims, the following summary excludes internal costs and external litigation-related costs for insurance coverage disputes.
Other Long-term Exposure Claims
Other long-term exposure claims typically assert injuries from a substance, such as the drug DES, lead or breast implants, which are manifested over an extended period of time. These claims may involve multiple policies, policyholders and insurers, with uncertainties similar to those affecting asbestos-related claims, in resolving whether, and which, insurers may be liable. In addition, there are questions as to which, if any, injuries or damages are caused by the particular product or substance.
CIGNA's losses and legal expenses for other long-term exposure claims primarily arise from its domestic property and casualty operations. As of December 31, 1994, 1993 and 1992, respectively, approximately 1,020, 1,000 and 700 policyholders had other long-term exposure claims outstanding with the domestic operations. The 1993 amount includes approximately 250 policyholders previously not counted. CIGNA continues to litigate other long-term exposure coverage disputes, with 42 lawsuits pending as of December 31, 1994, compared with 47 pending as of December 31, 1993.
CIGNA establishes case reserves for reported long-term exposure claims as information permits, including for future legal and associated expenses for such reported claims. However, CIGNA does not establish reserves for certain classes of unreported claims or for legal and associated expenses related to certain classes of unreported claims because of the uncertainties described above.
The incurred claims and claim adjustment expenses, net of reinsurance, for other long-term exposures were $31 million, $76 million and $16 million for 1994, 1993 and 1992, respectively. The incurred claims and claim adjustment expenses in 1993 for other long-term exposure claims reflect the establishment of reserves of $35 million, net of reinsurance, for future legal and associated expenses for reported claims.
Reserve Analysis
A reconciliation of total beginning and ending reserve balances of the Property and Casualty segment for unpaid claims and claim adjustment expenses for the years ended December 31, 1994, 1993 and 1992 is provided in Note 16 to CIGNA's 1994 Annual Report.
The table on page 26 presents the subsequent development of the estimated year-end property and casualty reserve, net of reinsurance ("net reserve") for the 10 years prior to 1994. The first section of the table shows the estimated net reserve that was recorded at the end of each of the indicated years for all current and prior year unpaid claims and claim adjustment expenses. The second section shows the cumulative percentages of such previously recorded net reserve paid in succeeding years. The third section shows, as a percentage of such net reserve, the re-estimates of the net reserve made in each succeeding year.
The indicated deficiency as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through 1994. The amounts noted are cumulative; that is, an increase in a loss estimate that related to a prior year occurrence generates a deficiency in each intervening year. For example, a deficiency recognized in 1993 relating to losses incurred in 1987 would be included in the indicated deficiency amount for the years 1987 through 1992. Yet, the deficiency would be reflected in operating results in 1993 only.
Conditions and trends that have affected the reserve development reflected in the table may continue to change, and care should be exercised in extrapolating future reserve redundancies or deficiencies from such development.
In 1994, CIGNA performed an actuarial review of certain businesses, including captive insurance companies, that are substantially reinsured. Such review resulted in a reduction in gross loss reserves of approximately $250 million, with a corresponding decrease in reinsurance recoverables. There was no effect on the net indicated deficiency. For additional information about gross loss development, amounts ceded to reinsurers and net loss development, see pages 14 through 16 of the MD&A section of CIGNA's 1994 Annual Report. On a GAAP basis, which is before the effects of reinsurance, CIGNA's 1994 year-end reserves totaled $16.7 billion. For GAAP purposes, CIGNA's reserves are generally carried at the full value of the estimated liabilities. For state regulatory purposes, reserves are reported in accordance with statutory accounting procedures ("SAP"), which is net of the effects of reinsurance, and, on that basis, totaled $9.5 billion.
The following table reconciles, as of year end, liabilities for unpaid claims and claim adjustment expenses determined for state regulatory purposes in accordance with SAP to those determined in accordance with GAAP:
---------------
(1) Primarily for workers' compensation reserves. For SAP purposes, workers' compensation reserves are discounted at 6%. During 1993, CIGNA expanded the use of discounting for certain statutory loss reserves and modified the assumptions used to discount other reserves, which decreased statutory reserves by $388 million.
NAIC and Other Property and Casualty Regulatory Matters
The National Association of Insurance Commissioners ("NAIC") has adopted risk-based capital rules for property and casualty companies. CIGNA's property and casualty subsidiaries were adequately capitalized under the rules as of December 31, 1994. Additional information about the rules and their effect on CIGNA's property and casualty subsidiaries is contained on page 34 of this document, and on page 9 of the MD&A section and in Note 17 of CIGNA's 1994 Annual Report.
The NAIC calculates annually 12 financial ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. Departure from the benchmark "usual range" on four or more of the ratios could lead to inquiries from individual state insurance commissioners as to certain aspects of a company's business. For 1994, CIGNA's consolidated domestic property and casualty insurance subsidiaries fell outside the usual ranges for four of the ratios, as discussed below. Management believes that this departure from the usual ranges reflects the unfavorable insurance environment and will not result in any regulatory actions that would have a material adverse effect on the results of operations, liquidity or financial condition of CIGNA.
The consolidated subsidiaries fell outside the usual ranges for the two year overall operating ratio (119%), the one and two year reserve development to surplus ratios (21% and 65%, respectively) and the liabilities to liquid assets ratio (129%).
The two year operating ratio measures a company's overall profitability by relating cumulative underwriting losses net of investment income for the current and prior year to premium for that period. A ratio in excess of 100% falls outside the usual range. Significant factors contributing to this result include losses from catastrophes and asbestos and environmental pollution claims as well as a competitive pricing environment. Underwriting losses and steps taken to improve results are discussed on pages 13 and 14 of the MD&A section of the Company's 1994 Annual Report.
The one and two year reserve development to surplus ratios relate a company's loss reserve development for insured events of prior years for the most recent calendar year to 1993 surplus (for the one year ratio) and for the two most recent calendar years to 1992 surplus (for the two year ratio). A company falls outside the usual ranges if such development exceeds 20% of such surplus. The reasons for the Company's adverse loss development are discussed beginning on page 20 above and on pages 15 and 16 of the MD&A section of the Company's 1994 Annual Report.
The liabilities to liquid assets ratio measures a company's ability to pay its liabilities with cash, investment assets or receivables. A ratio in excess of 105% falls outside the usual range. As stated above on page 14, CIGNA provides coverages and services for customers who wish to increase their levels of risk retention or to self-insure. The receivables associated with certain of these products (with respect to which the Company typically obtains collateral) are separately classified in the financial statements and are not included in the NAIC definition of liquid assets. The inclusion of the liabilities associated with such products without the related receivables results in the Company falling outside the usual range.
As a result of property and casualty losses, CIGNA contributed $250 million of capital in 1994 and $150 million in 1993 to enhance the capital base of the domestic property and casualty operations. In 1995, CIGNA committed to contribute $125 million of capital to such operations by the end the year. Additional capital contributions may be needed depending upon the extent of property and casualty losses; however, the amount and timing of any such contributions are not reasonably estimable at this time.
CIGNA's property and casualty insurance subsidiaries are members of regulated advisory organizations that provide certain statistical, rate-making, policy audit and similar services on a fee basis. In most states, these subsidiaries may use rate filings or loss costs, which are estimated future losses to which an insurer must add a profit and expense load to arrive at a rate, developed by advisory organizations. They also use filings developed by themselves, or combinations of both, thus enabling them to pursue an independent course in certain areas while using advisory organization services in others. The continued operation of advisory organizations and their authority to set advisory rates is the subject of a variety of proposed regulatory restraints and legal challenges.
G. Investments and Investment Income
CIGNA's investment operations primarily provide investment management and related services in the United States and certain other countries for CIGNA's corporate and insurance-related assets.
Assets under management at year-end 1994 totaled $69.9 billion, comprising CIGNA corporate and insurance-related investment assets ("investment assets") of $50.9 billion and advisory portfolios of $19.0 billion. Advisory portfolios included $14.6 billion in Separate Accounts of CIGNA's life insurance subsidiaries. For information about Separate Accounts, see "Employee Retirement and Savings Benefits--Principal Products and Markets" beginning on page 7.
CIGNA invests in a broad range of asset classes, including domestic and international fixed maturities and common stocks, mortgage loans, real estate and short-term investments. Investments in fixed maturities (bonds) include publicly traded and private placement debt securities; securitized assets, including mortgage-backed securities, collateralized mortgage obligations (CMOs) and other asset-backed securities; and redeemable preferred stocks.
As of December 31, 1993, CIGNA adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, fixed maturities classified as held to maturity are carried at amortized cost, net of impairments, and those classified as available for sale are carried at fair value, with unrealized appreciation or depreciation included in Shareholders' Equity.
As of December 31, 1994, fixed maturities classified as available for sale had an aggregate fair value, including policyholder share, that was less than amortized cost by approximately $378 million. Fixed maturities classified as available for sale had an aggregate fair value, including policyholder share, that was greater than amortized cost by approximately $1.76 billion as of December 31, 1993. The decline in unrealized appreciation primarily reflects the upward movement in interest rates since December 31, 1993.
The major portfolios under management consist of the combined assets of the Employee Life and Health Benefits, Employee Retirement and Savings Benefits, and Individual Financial Services segments (collectively, "Employee Benefits and Individual Financial portfolios") and the assets of the Property and Casualty segment. CIGNA's investment assets are generally managed to reflect the underlying characteristics of related
insurance and contractholder liabilities, as well as regulatory and tax considerations pertaining to those liabilities. CIGNA's insurance and contractholder liabilities as of December 31, 1994 comprised the following: property and casualty 36%, fully guaranteed 12%, experience-rated 25%, interest-sensitive 14%, and other life and health 13%.
Property and casualty claim demands are somewhat unpredictable in nature and require liquidity from the underlying investment assets, which are structured to emphasize current investment income to the extent consistent with maintaining appropriate portfolio quality and diversity. The liquidity requirements for shorter-term liabilities are met primarily through cash flows and shorter-term investments (less than two years) and, to a lesser extent, through publicly traded fixed maturities. For longer-term liabilities, liquidity requirements are met primarily through private fixed maturity investments.
Fully guaranteed products primarily include GICs, single premium annuity products and settlement annuities. Because these products generally do not permit withdrawal by policyholders prior to maturity, the amount and timing of future benefit cash flows can be reasonably estimated. Funds supporting these products are invested in fixed income investments that generally match the aggregate duration of the investment portfolio with that of the related benefit cash flows. As of December 31, 1994, the duration of assets and liabilities for GICs, single premium annuities and settlement annuities was 2 years, 7 years and 11 years, respectively.
Experience-rated products include defined benefit and defined contribution pension products. The principal and liquidity requirements of experience-rated liabilities are met by investments that emphasize current yield, primarily fixed income investments.
Investment assets for interest-sensitive products, which include universal life insurance, primarily include fixed income investments, which emphasize investment yield while meeting the liquidity requirements of the related liabilities.
Other life and health products consist of various group and individual life and health products. The supporting investment assets are structured to emphasize investment income, and the necessary liquidity is provided through cash flow, short-term investments and common stocks.
Investment strategy and results are affected by the amount and timing of cash available for investment, competition for investments, especially in private asset classes, economic conditions and interest rates. For example, cash flows increased in 1993 due to higher principal repayments, primarily from prepayments of mortgage-backed securities, and decreased in 1994 due to a reduction in such principal repayments. Reinvestment of this cash at prevailing interest rates reduced investment income in 1993 and, to a lesser degree, in 1994. Investment results are also affected by asset allocation decisions.
As noted above, CIGNA generally manages its investment assets to reflect the underlying characteristics of related insurance and contractholder liabilities such as liquidity, currency, yield and duration, which vary among CIGNA's principal product lines. In connection with its investment strategy, CIGNA uses derivative instruments through hedging applications to manage market risk. Derivative instruments are not used for speculative purposes. For additional information concerning CIGNA's use of derivatives, see Note 3(F) to the 1994 Financial Statements which are included in its 1994 Annual Report.
CIGNA routinely monitors and evaluates the status of its investments in light of current economic conditions, trends in capital markets and other factors. Such factors include industry segment considerations for fixed maturity investments, and geographic and property-type considerations for mortgage loan investments.
CIGNA's fixed maturity investments, including policyholder share, as of December 31, 1994 constituted approximately 52% of the Employee Benefits and Individual Financial portfolios and approximately 88% of the Property and Casualty portfolios, respectively. As of that date, approximately 32% of fixed maturity investments was attributable to experience-rated contracts. CIGNA reduces credit risk for the portfolios as a whole by investing primarily in investment grade fixed maturities rated by rating agencies (for public investments), by CIGNA (for private investments) or by the Securities Valuation Office of the NAIC (for
both public and private investments). For information about below investment grade holdings and NAIC and agency ratings, see pages 18 and 19 of the MD&A section of CIGNA's 1994 Annual Report.
CIGNA's mortgage loan investments, including policyholder share, constituted approximately 25% of the Employee Benefits and Individual Financial portfolios and approximately 3% of the Property and Casualty portfolios as of December 31, 1994. As of that date, approximately 57% of mortgage loan investments was attributable to experience-rated contracts. Mortgage loan investments are subject to underwriting criteria addressing loan-to-value ratio, debt service coverage, cash flow, tenant quality, leasing, market, location and financial strength of the borrower. Such investments consist primarily of first mortgage loans on commercial properties and are diversified relative to property type, location and borrower. The Company invests in fully completed and substantially leased commercial properties. Virtually all of the Company's mortgage loans are bullet or balloon loans, under which all or a substantial portion of the loan principal is due at the end of the loan term.
CIGNA manages properties obtained through foreclosure of mortgage loans ("foreclosure properties") until such properties are sold. The Company's general policy is to sell foreclosure properties after rehabilitating the properties, re-leasing them and managing them for two to four years, although CIGNA may hold certain foreclosure properties for immediate sale if circumstances indicate that to do so is in the best financial interests of the Company or policyholders.
The adverse financial effect of problem bonds and problem mortgage loans on CIGNA declined substantially in 1994. Economic conditions, including real estate market conditions, have improved. However, additional losses from problem investments are expected to occur for specific investments in the normal course of business, particularly due to continuing weak conditions in certain office building markets. CIGNA does not expect additional non-accruals, write-downs and reserves to materially affect future results of operations, liquidity or financial condition, or to result in a significant decline in the aggregate carrying value of its assets.
See pages 18 through 23 of the MD&A section of CIGNA's 1994 Annual Report and Notes 1, 3, 4 and 18 to CIGNA's 1994 Financial Statements for additional information about CIGNA's investments.
Employee Benefits and Individual Financial Investments
The following tables summarize the distribution of investments attributable to CIGNA's Employee Benefits and Individual Financial portfolios and the related net investment income from such investments. Approximately 49% of the investments in the Employee Benefits and Individual Financial portfolios is attributable to experience-rated contracts with policyholders.
---------------
See Note 1 of Notes to Financial Statements beginning on page 27 of CIGNA's 1994 Annual Report for a discussion of the method of valuation of investments. The above amounts do not include Separate Account assets.
(1) Comprises fixed maturities of sovereign foreign governments.
---------------
(1) The net investment yield is equal to (a) net investment income multiplied by two, divided by (b) the sum, at the beginning and end of the year (excluding the effects of SFAS No. 115), of cash, invested assets and investment income due and accrued, less borrowed money, less net investment income.
Property and Casualty Investments
The following tables summarize the distribution of investments attributable to CIGNA's Property and Casualty segment and the related net investment income from such investments.
------------
(1) Comprises fixed maturities of sovereign foreign governments.
(2) Includes fixed maturities that are carried at market value of approximately $2.1 billion as of December 31, 1992.
---------------
(1) The net investment yield is equal to (a) net investment income multiplied by two, divided by (b) the sum, at the beginning and end of the year (excluding the effects of SFAS No. 115), of cash, invested assets and investment income due and accrued, less borrowed money, less net investment income.
Portfolio Management and Advisory Services
CIGNA's investment operations primarily focus on providing investment services to CIGNA and its insurance subsidiaries. In addition, the investment operations provide fee-based investment management and advisory services to advisory clients, including large group pension sponsors, institutions and international investors. CIGNA acquires or originates, directly or through intermediaries, various investments including private placements, public securities, mortgage loans, real estate and leveraged capital funds.
Other Investments and Operations
Investment assets for CIGNA's Other Operations include fixed maturities, mortgage loans, real estate and investments maturing in less than two years. These assets support the settlement annuity and non-insurance businesses, and also supported, until January 1994 when they were sold, CIGNA's California personal automobile and homeowners insurance businesses that CIGNA retained from the 1989 sale of the Horace Mann insurance companies. Net investment income for these investments was $212 million for 1994, $217 million for 1993 and $218 million for 1992.
In addition, CIGNA has non-strategic equity investments in operating businesses, primarily real estate operations.
H. Regulation
CIGNA's insurance subsidiaries are licensed to do business in, and are subject to regulation and supervision by, the states of the United States, the District of Columbia, certain U.S. territories and various foreign jurisdictions. Although the extent of regulation varies, most jurisdictions have laws and regulations governing rates, solvency, standards of business conduct, and various insurance and investment products. Licensing of insurers and their agents and the approval of policy forms are usually required. The form and content of statutory financial statements and the type and concentration of investments are also regulated. Each insurance subsidiary is required to file periodic financial reports with supervisory agencies in most of the jurisdictions in which it does business, and its operations and accounts are subject to examination by such agencies at regular intervals.
Most states and the District of Columbia require licensed insurance companies to support guaranty associations, which are organized to pay claims on behalf of insolvent insurance companies. These associations levy assessments on member insurers in a particular state to pay such claims on the basis of their proportionate shares of the lines of business of the insolvent insurer. Maximum assessments permitted by law in any one year generally range from 1% to 2% of annual premiums written by each member in a particular state with respect
to the categories of business involved, and may be offset against premium taxes payable in some states. The assessments against CIGNA's subsidiaries were $27 million, $28 million and $23 million for 1994, 1993 and 1992, respectively, before giving effect to premium tax offsets. The amounts of future assessments are not expected to have a material adverse effect on CIGNA's financial condition.
The increase in the number of insurance companies that are impaired or insolvent has prompted state and federal initiatives to enhance solvency regulation. For example, the NAIC has developed model solvency-related laws that it is encouraging states to adopt. In addition, risk-based capital rules have been adopted for life insurance and property and casualty insurance companies that recommend a specified level of capital depending on the types and quality of investments held, the types of business written and the types of liabilities maintained. Depending on the ratio of the insurer's adjusted surplus to its risk-based capital, the insurer could be subject to various regulatory actions ranging from increased scrutiny to conservatorship.
Four levels of regulatory attention may be triggered if the ratio of adjusted surplus to risk-based capital (the "RBC ratio") is insufficient. If a property and casualty ("P&C") insurance company's RBC ratio is between 60% and 80% (75% and 100% for life insurance ("Life") companies), the "company action level," the company must submit a plan to the regulator detailing corrective action it proposes to undertake. If a P&C company's RBC ratio is between 40% and 60% (50% and 75% for Life companies), the "regulatory action level," the company must also submit a plan, but a regulator may also issue a corrective order requiring the insurer to comply within a specified period. If a P&C company's RBC ratio is between 28% and 40% (35% and 50% for Life companies), the "authorized control level," the regulatory response is the same as at the "regulatory action level," but in addition, the regulator may take action to rehabilitate or liquidate the insurer. If the RBC ratio for a P&C company is less than 28% (35% for Life companies), the "mandatory control level," the regulator must rehabilitate or liquidate the insurer. As of December 31, 1994, CIGNA's life insurance and property and casualty insurance subsidiaries were adequately capitalized under the risk-based capital rules. See page 9 of the MD&A section of CIGNA's 1994 Annual Report for additional information.
Also, the NAIC is addressing risk-based capital guidelines for HMOs and is considering the adoption of a proposal that would limit the types and amounts of investment assets that can be held by an insurance company.
In the past, federal oversight of insurer solvency has also been proposed. Among proposals that have been discussed are optional federal chartering, which would preempt most state insurance regulations; minimum federal solvency standards, which would be supervised by the states; federal licensing of all reinsurers; and establishment of a national guaranty fund.
Recent state and federal regulatory scrutiny of life insurers' sales and advertising practices, including the adequacy of disclosure regarding products and their future performance, may result in increased regulations in this area.
In December 1993, the U.S. Supreme Court issued the John Hancock Mutual Life Insurance Company v. Harris Trust decision, which held that certain funds held under a general account group annuity contract were subject to ERISA fiduciary standards. The Department of Labor is addressing compliance issues raised by the decision and, depending on the outcome, CIGNA may make future changes to its group annuity contracts or the operation of its general account.
CIGNA's insurance subsidiaries are subject to state laws regulating insurers that are subsidiaries of insurance holding companies. Under such laws, which are generally becoming more stringent, certain dividends, distributions and other transactions between an insurance subsidiary and the holding company or its other subsidiaries may require notification to, or be subject to the approval of, one or more state insurance commissioners.
Both national and state proposals to reform health care are expected in 1995. Such proposals are discussed on page 6.
CIGNA's HMOs are subject to regulation and supervision by various government agencies in the states in which they do business. The extent of regulation varies, but most jurisdictions regulate licensing, solvency,
contracts and rates. Regulation of these entities may also include standards for quality assurance, minimum levels of benefits that must be offered and requirements for availability and continuity of care. A few states require HMOs to participate in guaranty funds, and several state legislatures have recently considered insolvency and guaranty fund legislation, a trend that is expected to continue. Many of CIGNA's HMOs are also federally qualified and subject to regulation as to benefits, solvency and rates under the federal HMO Act. CIGNA's mental health and substance abuse clinics are licensed by the states in which they operate for quality of treatment.
Regulatory concerns with insurance risk selection have increased significantly in recent years. Legislative, regulatory and judicial activity also continues regarding the use of gender in determining insurance benefits and rates, and some states have imposed restrictions on the use of underwriting criteria related to AIDS. Also, various interpretations under the recently enacted Americans with Disabilities Act may affect the provision of insurance benefits under certain types of policies.
Property and casualty insurers are required to participate in assigned risk plans, joint underwriting authorities, pools and other residual market mechanisms to write coverages on risks not acceptable under normal underwriting standards. In addition, states have responded to concerns about the availability and affordability of commercial casualty insurance by proposing or adopting legislation, regulations or positions to, among other things, limit rate increases, require rate reductions or refunds, restrict nonrenewal and cancellation with respect to commercial lines coverages or require the refunding of "excess" profits, and by expanding regulatory examination of the appropriateness of rates, non-renewals and cancellations.
The extent of insurance regulation varies significantly among the countries in which CIGNA conducts its international operations. As a foreign insurer, CIGNA is, in many countries, faced with greater restrictions than domestic competitors. Trade barriers include discriminatory licensing procedures, compulsory cessions of reinsurance, required localization of records and funds, higher premium and income taxes, and requirements for local participation in an insurer's ownership. Where appropriate, CIGNA has incorporated insurance subsidiaries locally to improve its position.
Depending upon their nature, CIGNA's investment management activities and products with United States contacts are subject to the federal securities laws, ERISA and other federal and state laws governing investment management activities and products. Investments made by United States insurance companies are subject to state insurance laws. Investment management activities and products outside the United States, and investments made by non-United States insurance companies outside the United States, are subject to local regulation. Often, the investments of individual insurance companies are subject to regulation by multiple jurisdictions.
Federal initiatives can have an impact on the insurance business in a variety of ways. In addition to proposals discussed above related to Superfund, health care reform and federal oversight of insurer solvency, current and proposed federal measures that may significantly affect the insurance business include: (a) pension and other employee benefit regulation; (b) Social Security legislation; (c) financial services regulation; (d) amendment to the antitrust exemption provided for the business of insurance by the McCarran-Ferguson Act; (e) tax legislation; (f) the Americans with Disabilities Act; and (g) repeal of the Glass-Steagall Act.
The economic and competitive effects of the legislative and regulatory proposals discussed above would depend upon the final form such legislation or regulation might take.
I. Miscellaneous
Portions of CIGNA's insurance business are seasonal in nature. Reported claims under group health and certain property and casualty products are generally higher in the first quarter. Sales, particularly of individual life products, are generally lowest in the first quarter and highest in the fourth quarter.
CIGNA and its principal subsidiaries are not dependent on business from one or a few customers. No customer accounted for 10% or more of CIGNA's consolidated revenues in 1994. CIGNA and its principal subsidiaries are not dependent on business from one or a few brokers or agents, except as noted on page 13 in
connection with sales of certain corporate-owned life insurance products. In addition, CIGNA's insurance businesses are generally not committed to accept a fixed portion of the business submitted by independent brokers and agents, and generally all such business is subject to its approval and acceptance.
CIGNA had approximately 48,300, 50,600 and 52,300 employees as of December 31, 1994, 1993 and 1992, respectively.
Item 2.
Item 2. PROPERTIES
CIGNA's headquarters are located in approximately 90,240 total square feet of leased office space at One Liberty Place, Philadelphia, Pennsylvania. CIGNA Property & Casualty, CIGNA Group Insurance: Life, Accident, Disability, and CIGNA International are located in a leased building of approximately 1.25 million total square feet at Two Liberty Place, Philadelphia. CIGNA HealthCare, CIGNA Individual Insurance, CIGNA Reinsurance: Life, Accident, Health and CIGNA Investment Management are located in a complex of buildings owned by CIGNA, aggregating approximately 1.15 million total square feet of office space, located at 900-950 Cottage Grove Road, Bloomfield, Connecticut. CIGNA's Retirement & Investment Services operations are located in approximately 230,000 total square feet of leased office space at Metro Center One, Hartford, Connecticut. In addition, CIGNA owns or leases office buildings, or parts thereof, throughout the United States and in other countries. For additional information concerning leases and property, see Notes 1(H) and 14 to CIGNA's 1994 Consolidated Financial Statements on pages 28 and 41, respectively, of CIGNA's 1994 Annual Report. This paragraph does not include information on investment properties.
CIGNA's information processing resources include large mainframe computers in major data centers, a multitude of personal computers connected through local area networks and a nationwide backbone network that provides desktop computing and office automation to CIGNA employees. CIGNA's policies regarding the safeguarding of critical corporate data are disseminated to all employees. The policies require data security through the use of appropriate identification and password practices and data backup through appropriate offsite storage techniques. Protection of CIGNA's major data centers, which house large amounts of critical corporate data, involves access controls, fire detection and suppression systems, and other hazard elimination processes. In addition, CIGNA maintains a formal disaster contingency plan, which includes recovery services in the event of a disaster in a CIGNA data center. Critical files are stored offsite, to be available for recovery in the event of a disaster.
Item 3.
Item 3. LEGAL PROCEEDINGS
CIGNA is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of business, either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against it by its policyholders or other insurers.
During 1988, a number of state attorneys general and private plaintiffs filed lawsuits against a number of insurance companies and others, including CIGNA, alleging violations of federal and state antitrust laws. One of the lawsuits, filed in Texas, was settled in March 1991 for an insignificant amount. All of the remaining lawsuits were dismissed by the trial court in 1989. The United States Court of Appeals reversed the trial court and the United States Supreme Court reversed in part and modified in part the ruling of the Court of Appeals and remanded the cases to the Court of Appeals for further proceedings in accordance with its opinion. The Supreme Court ruled that the insurance companies did not forfeit their McCarran-Ferguson protection when they acted with reinsurers to produce acceptable policy terms and defined the boycott exception to the McCarran-Ferguson exemption in a manner favorable to the insurance industry. The cases were remanded to the trial court for further proceedings. Subject to final approval by the trial court, an agreement in principle to settle these cases has been reached. CIGNA's portion of the settlement is not material to its results of operations.
While the outcome of all litigation involving CIGNA, including insurance-related litigation, cannot be determined, litigation (other than that related to asbestos, environmental pollution and other long-term exposure claims, which is discussed below) is not expected to result in losses that differ from recorded reserves
by amounts that would be material to results of operations, liquidity or financial condition. Also, reinsurance recoveries related to claims in litigation, net of allowance for uncollectible reinsurance, are not expected to result in recoveries that differ from recorded recoverables by amounts that would be material to results of operations, liquidity or financial condition.
CIGNA is involved in lawsuits regarding policy coverage and judicial interpretation of legal liability for asbestos-related, environmental pollution and other long-term exposure claims. As discussed beginning on page 20, reserving for these claims is subject to significant uncertainties, such as lack of developed case law or adequate claim history. Future results of the Company are expected to continue to be affected adversely by losses and legal expenses for asbestos-related, environmental pollution and other long-term exposure claims. Because of the significant uncertainties involved and the likelihood that these uncertainties will not be resolved in the near future, CIGNA is unable to reasonably estimate the additional losses and expenses and, therefore is unable to determine whether such amounts will be material to its future results of operations, liquidity or financial condition.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information under the caption "Quarterly Financial Data--Stock and Dividend Data" on page 47 and under the caption "Stock Listing" on the inside back cover of CIGNA's 1994 Annual Report is incorporated by reference, as is the information from Note 7 to CIGNA's Consolidated Financial Statements on pages 35 and 36 and the number of shareholders of record as of December 31, 1994 under the caption "Highlights" on page 1 of CIGNA's 1994 Annual Report.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The five-year financial information under the caption "Highlights" on page 1 of CIGNA's 1994 Annual Report is incorporated by reference.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information on pages 8 through 23 of CIGNA's 1994 Annual Report is incorporated by reference.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CIGNA's Consolidated Financial Statements on pages 24 through 45 and the report of its independent accountants on page 46 of CIGNA's 1994 Annual Report are incorporated by reference, as is the unaudited information set forth under the caption "Quarterly Financial Data--Consolidated Results" on page 47.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors of the Registrant
The information under the captions "Nominees for Election" and "Incumbent Directors to Continue in Office" on pages 5 through 7 of CIGNA's proxy statement dated March 20, 1995 are incorporated by reference.
B. Executive Officers of the Registrant
Reference is made below to CG Life, which is an indirect subsidiary of CIGNA. All officers are elected to serve for a one-year term or until their successors are elected. Principal occupations and employment during the past five years are listed.
LAWRENCE P. ENGLISH, 54, President of CIGNA HealthCare since March 1992; President of CIGNA's Individual Financial Services Division from April 1986 until March 1992; and President of CG Life from January 1991 until February 1992.
H. EDWARD HANWAY, 43, President of CIGNA International since March 1994; and President of CIGNA International: Property & Casualty from February 1989 until March 1994.
GERALD A. ISOM, 56, President of CIGNA Property and Casualty since March 1993; Group Vice President of Transamerica Corporation from 1990 until March 1993; and Chief Executive Officer and President of Transamerica Insurance Group from January 1985 until March 1993. Transamerica Insurance Group is a major provider of property and casualty insurance products.
THOMAS C. JONES, 48, President of CIGNA Individual Insurance beginning February 1995; President of CIGNA Reinsurance Property & Casualty from March 1994 until February 1995; President of CG Life beginning March 1995; Executive Vice President, Chief Administrative Officer and member of the Boards of Directors of NAC Re Corporation and NAC Reinsurance Corporation from November 1985 until January 1994; and Chief Operating Officer of NAC Re Corporation and NAC Reinsurance Corporation from June 1993 and September 1990, respectively, until January 1994. NAC Re Corporation is the parent corporation of NAC Reinsurance Corporation, a major provider of property and casualty reinsurance products.
JOHN K. LEONARD, 46, President of CIGNA Group Insurance: Life, Accident, Disability since March 1992; and Senior Vice President of CIGNA from March 1989 until March 1992, with responsibility for Corporate Marketing and Strategy.
DONALD M. LEVINSON, 49, Executive Vice President of CIGNA since March 1988, with responsibility for Human Resources and Services.
FRANCINE M. NEWMAN, 50, President of CIGNA Reinsurance: Life, Accident, Health since July 1984.
BYRON D. OLIVER, 52, President of CIGNA Retirement & Investment Services since February 1988.
ARTHUR C. REEDS, III, 50, President of CIGNA Investment Management since March 1992; and Managing Director and Head of Portfolio Management, CIGNA's Investment Division, from May 1986 until March 1992.
JAMES G. STEWART, 52, Executive Vice President and Chief Financial Officer of CIGNA since 1983.
WILSON H. TAYLOR, 51, Chairman of CIGNA since November 1989; and Chief Executive Officer of CIGNA since November 1988 and President of CIGNA since May 1988.
THOMAS J. WAGNER, 55, Executive Vice President and General Counsel of CIGNA since January 1992; Corporate Secretary of CIGNA from January 1988 until April 1992; and Senior Vice President of CIGNA from January 1988 until January 1992.
C. Compliance with Section 16(a) of the Securities Exchange Act
The information under the caption "Compliance with Section 16(a) of the Securities Exchange Act" on page 24 of CIGNA's proxy statement dated March 20, 1995 is incorporated by reference.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information under the captions "Executive Compensation" on pages 16 through 20 and "Compensation of Directors" on pages 8 and 9 of CIGNA's proxy statement dated March 20, 1995 is incorporated by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions "Ownership of CIGNA Corporation Common Stock by Directors and Executive Officers" on pages 2 and 3 and "Ownership of CIGNA Corporation Common Stock by Certain Beneficial Owners" on page 4 of CIGNA's proxy statement dated March 20, 1995, relating to security ownership of certain beneficial owners and management, is incorporated by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" on page 9 of CIGNA's proxy statement dated March 20, 1995 is incorporated by reference.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. (1) The following financial statements have been incorporated by reference from the pages indicated below of CIGNA's 1994 Annual Report:
Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1994, 1993 and 1992--page 24.
Consolidated Balance Sheets as of December 31, 1994 and 1993--page 25.
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992--page 26.
Notes to Financial Statements--pages 27 through 45.
Report of Independent Accountants, Price Waterhouse LLP--page 46.
(2) The financial statement schedules are listed in the Index to Financial Statement Schedules on page FS-1.
(3) The exhibits are listed in the Index to Exhibits beginning on page E-1.
B. During the last quarter of the fiscal year ended December 31, 1994, the registrant filed (1) a Report on Form 8-K dated October 31, 1994 containing a copy of a news release reporting its third quarter 1994 results; and (2) a Report on Form 8-K dated December 21, 1994 regarding revised ratings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by its undersigned duly authorized officer, on its behalf and in the capacity indicated.
Date: March 29, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 29, 1995.
CIGNA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto, which are incorporated by reference from CIGNA's 1994 Annual Report.
FS-1
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of CIGNA Corporation
Our audits of the consolidated financial statements referred to in our report dated February 13, 1995 appearing on page 46 of the 1994 Annual Report to Shareholders of CIGNA Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in the index on page FS-1 of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
The Company implemented certain new accounting pronouncements as discussed in Note 1 to the consolidated financial statements.
/S/ PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania February 13, 1995
FS-2
CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS-- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1994 (IN MILLIONS)
FS-3
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION (REGISTRANT) STATEMENTS OF INCOME (IN MILLIONS)
See Notes to Condensed Financial Statements on FS-7.
FS-4
CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE II CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION (REGISTRANT) BALANCE SHEETS (IN MILLIONS)
See Notes to Condensed Financial Statements on FS-7.
FS-5
CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE II CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION (REGISTRANT) STATEMENTS OF CASH FLOWS (IN MILLIONS)
See Notes to Condensed Financial Statements on FS-7.
FS-6
CIGNA CORPORATION AND SUBSIDIARIES
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION (REGISTRANT)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto in the Annual Report.
Note 1-- As of December 31, 1993, CIGNA implemented Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of implementing SFAS No. 115 resulted in an increase in net assets and shareholders' equity of approximately $900 million resulting from the classification of certain fixed maturities previously classified as held to maturity (carried at amortized cost) to available for sale (carried at fair value).
In 1992, CIGNA implemented SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"; No. 109, "Accounting for Income Taxes"; and SFAS No. 112, "Employers' Accounting for Postemployment Benefits." These accounting changes were implemented as of January 1, 1992 through cumulative effect adjustments. Prior year financial statements were not restated. The cumulative effect of implementing these accounting standards as of January 1, 1992 resulted in a non-cash after-tax charge to net income of $26 million. In addition, the implementation of these accounting standards decreased 1992 net income by $5 million.
Note 2-- Long-term debt, net of current maturities, consists of CIGNA's 7.4% Notes, due 2003; 7.65% Notes, due 2023; 8% Notes, due 1996; 8.2% Convertible Subordinated Debentures, due 2010; 8 1/4% Notes, due 2007; 8.3% Notes due 2023; 8 3/4% Notes, due 2001; 6 3/8% Notes due 2006 and Medium-term Notes with interest rates ranging from 5 3/4% to 9 3/4%, and original maturity dates from approximately two to ten years.
Maturities of long-term debt for each of the next five years are as follows: 1995--$2 million; 1996-- $157 million; 1997--$39 million; 1998--$82 million; 1999--$23 million.
In 1994, CIGNA issued $100 million of unsecured 6 3/8% Notes due in 2006 and $12 million of medium-term notes. In 1993, CIGNA issued $100 million of unsecured 7.4% Notes due in 2003, $100 million of unsecured 7.65% Notes due in 2023; $100 million of unsecured 8.3% Notes due in 2023 and $27 million of medium-term notes.
As of December 31, 1994, CIGNA had approximately $840 million remaining under effective shelf registration statements filed with the Securities and Exchange Commission that may be issued as debt, equity securities or both, depending upon market conditions and CIGNA's capital requirements.
Interest paid on short- and long-term debt amounted to $109 million, $95 million and $88 million, for 1994, 1993 and 1992, respectively.
Note 3-- CIGNA Corporation files a consolidated U.S. federal income tax return with its domestic subsidiaries. Net income taxes paid in connection with the consolidated return were $477 million, $75 million and $287 million during 1994, 1993 and 1992, respectively.
FS-7
CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION (IN MILLIONS)
------------ (1) Amounts presented are shown net of the effects of reinsurance.
(2) The allocation of net investment income is based upon the investment year method, the identification of certain portfolios with specific segments, or a combination of both.
FS-8
FS-9
CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE IV REINSURANCE (DOLLAR AMOUNTS IN MILLIONS)
FS-10
CIGNA CORPORATION
SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN MILLIONS)
--------------- (1) Change in valuation reserves attributable to policyholder contracts.
(2) Reflects transfer of reserves to other investment asset categories as well as charge-offs upon sales, repayments and other.
FS-11
CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE VI SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (IN MILLIONS)
[CAPTION]
--------------- (1) Discounts were computed using an annual interest rate of 9%.
(2) Amounts presented are shown net of the effects of reinsurance.
FS-12
FS-13
[THIS PAGE INTENTIONALLY LEFT BLANK]
INDEX TO EXHIBITS
E-1
INDEX TO EXHIBITS
E-2
INDEX TO EXHIBITS
The registrant will furnish to the Commission upon request a copy of any of the registrant's agreements with respect to its long-term debt.
Shareholders may obtain copies of exhibits by writing to CIGNA Corporation, Shareholder Services Department, Two Liberty Place, 1601 Chestnut Street, P.O. Box 7716, Philadelphia, Pennsylvania 19192-2378.
E-3