-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lc42L66iE06F7v/1yuOt6JaBaZmQE1sk9mlrMmyyIFCn4xtHV/HcrGg3uY2LNLXp iWx2AaZ1AXo8Z+VuI1VadQ== 0000950159-98-000084.txt : 19980327 0000950159-98-000084.hdr.sgml : 19980327 ACCESSION NUMBER: 0000950159-98-000084 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NYSE SROS: PHLX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIGNA CORP CENTRAL INDEX KEY: 0000701221 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061059331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08323 FILM NUMBER: 98574805 BUSINESS ADDRESS: STREET 1: TWO LIBERTY PLACE 48TH FLOOR STREET 2: 1601 CHESTNUT STREET CITY: PHILADELPHIA STATE: PA ZIP: 19192 BUSINESS PHONE: 2157616211 MAIL ADDRESS: STREET 1: TWO LIBERTY PLACE 48TH FLOOR STREET 2: 1601 CHESTNUT STREET CITY: PHILADELPHIA STATE: PA ZIP: 19192 10-K405 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ---------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 1-8323 CIGNA Corporation (Exact name of registrant as specified in its charter) ---------------- Delaware 06-1059331 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Liberty Place, Philadelphia, Pennsylvania 19192-1550 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (215) 761-1000 ---------------- Securities registered pursuant to section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, Par Value $1; New York Stock Exchange, Inc. Preferred Stock Pacific Stock Exchange, Inc. Purchase Rights Philadelphia Stock Exchange, Inc. Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 1998, was approximately $13.5 billion. As of February 28, 1998, 72,244,214 shares of the registrant's Common Stock were outstanding. Parts I and II of this Form 10-K incorporate by reference information from the registrant's annual report to shareholders for the year ended December 31, 1997. Part III of this Form 10-K incorporates by reference information from the registrant's proxy statement dated March 18, 1998. ================================================================================ TABLE OF CONTENTS Page Part I Item 1. Business A. Description of Business...................................... 1 B. Financial Information about Industry Segments ............... 2 C. Employee Life and Health Benefits............................ 3 D. Employee Retirement and Savings Benefits..................... 9 E. Individual Financial Services................................ 12 F. Property and Casualty........................................ 17 G. Investments and Investment Income............................ 28 H. Regulation................................................... 34 I. Ratings...................................................... 36 J. Miscellaneous................................................ 37 Item 2. Properties........................................................ 37 Item 3. Legal Proceedings................................................. 38 Item 4. Submission of Matters to a Vote of Security Holders............... 38 Executive Officers of the Registrant........................................ 38 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................... 39 Item 6. Selected Financial Data........................................... 39 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 39 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........ 39 Item 8. Financial Statements and Supplementary Data....................... 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................... 39 Part III Item 10. Directors and Executive Officers of the Registrant................ 39 A. Directors of the Registrant.................................... 39 B. Executive Officers of the Registrant........................... 39 Item 11. Executive Compensation............................................ 39 Item 12. Security Ownership of Certain Beneficial Owners and Management.... 39 Item 13. Certain Relationships and Related Transactions.................... 40 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 40 Signatures.................................................................. 41 Index to Financial Statement Schedules.....................................FS-1 Index to Exhibits.......................................................... E-1 PART I Item 1. BUSINESS A. Description of Business With shareholders' equity of $7.9 billion and assets of $108.2 billion as of December 31, 1997 and revenues of $20.0 billion for the year then ended, 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" refer to one or more of CIGNA Corporation and its consolidated subsidiaries. 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, and property and casualty insurance. CIGNA is one of the largest international insurance organizations based in the United States, measured by international revenues, and one of the largest investor-owned health maintenance organizations in the United States, based on the number of members. CIGNA's major insurance subsidiaries, Connecticut General Life Insurance Company ("CG Life") and Insurance Company of North America ("INA"), are among the oldest insurance companies in the United States, with INA 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 Employee Retirement and Savings Benefits Segment (beginning on page 9) CIGNA Retirement & Investment Services Individual Financial Services Segment (beginning on page 12) CIGNA Individual Insurance CIGNA Reinsurance Property and Casualty Segment (beginning on page 17) CIGNA Property & Casualty CIGNA International Investment results produced by CIGNA Investment Management on behalf of CIGNA's insurance operations are reported in each segment's results or in Other Operations. Recent Transactions On June 25, 1997, CIGNA acquired control of Healthsource, Inc. ("Healthsource"), when it completed its cash tender offer for all of Healthsource's outstanding common stock. The acquisition has been accounted for as a purchase of Healthsource. Therefore, CIGNA's consolidated results of operations include the results of Healthsource from the close of the tender offer. Healthsource's operations have become a part of CIGNA's health care operations reported in the Employee Life and Health Benefits segment. At the time of the acquisition, Healthsource operated health maintenance organizations in 15 states serving approximately 1.1 million members. Healthsource also provided medical and dental indemnity products, primarily self-insured products, which covered approximately 1.8 million and 2.5 million lives, respectively. These products included point of service plans, preferred provider organization plans, utilization review services, managed workers' compensation services, pharmacy benefit management services and other managed care consulting and administrative services. 1 Principally through an indemnity reinsurance transaction, CIGNA sold the individual life insurance and annuity business of its CIGNA Individual Insurance division to subsidiaries of Lincoln National Corporation effective January 1, 1998. The results of this business are included in the Individual Financial Services segment through year-end 1997. Because it was an indemnity reinsurance transaction, CIGNA is not relieved of liability for the reinsured business. Additional information about the sold business is provided below beginning on page 14. For further information about these transactions, see Note 3 to CIGNA's 1997 Financial Statements included in its 1997 Annual Report to Shareholders ("Annual Report"). Systems Considerations (including Year 2000) CIGNA's operations are highly dependent on automated systems and systems applications. CIGNA has security and backup policies and procedures for safeguarding critical corporate data. It routinely reviews and modifies, as appropriate, these policies and procedures, and also maintains disaster contingency plans, which include recovery services in the event of a disaster in a data center. If systems failures were to occur because of the inability to correctly process dates after December 31, 1999, or otherwise, until corrected they could adversely affect the delivery of services and the functioning of various processes. These could include processing of claims, billing and collection of premiums and other receivables, providing access to medical and dental care to members and managing investing activities. CIGNA is modifying or replacing its systems to make them ready for Year 2000. In addition, CIGNA's businesses bear risk associated with various third party entities' Year 2000 readiness. For example, CIGNA receives data from clients; depends on others, such as third party administrators and banks, for services; and bears credit risk on others, such as entities in which CIGNA invests. Systems or business failures on the part of these entities could adversely affect the delivery of services by CIGNA's businesses. All of CIGNA's businesses are assessing their risks from external sources and taking action to mitigate them. For further information, see page 11 of the Management's Discussion and Analysis ("MD&A") section of CIGNA's Annual Report. B. Financial Information about Industry Segments 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 1996 and 1995 financial information to conform with the 1997 presentation. Industry rankings and percentages set forth below are for the year ended December 31, 1996, unless otherwise indicated. Unless otherwise noted, statements set forth in this document concerning CIGNA's rank or position in an industry or particular line of business have been developed internally, based on publicly available information. Revenues, income (loss) before income taxes, and identifiable assets attributable to each of CIGNA's business segments and Other Operations are set forth in Note 17 and those attributable solely to foreign operations are set forth in Note 18 to CIGNA's 1997 Financial Statements included in its 1997 Annual Report. 2 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. As a result of the Healthsource acquisition described above, all of the financial information and other data reported in this section for 1997 include Healthsource from the purchase date of June 25, 1997. The following table sets forth the principal products of this segment and their related net earned premiums and fees.
Year ended December 31, ----------------------------------------- 1997 1996 1995 ------ ------- ------ (In millions) Indemnity: Medical.................................................... $2,188 $1,942 $1,973 Life ..................................................... 1,723 1,798 1,754 Long-term Disability....................................... 487 426 388 Dental..................................................... 367 397 384 Accidental Death and Dismemberment......................... 198 227 249 Short-term Disability...................................... 88 70 86 Other ..................................................... 10 15 20 ------ ------ ------ Total......................................................... 5,061 4,875 4,854 Managed Medical and Dental Care............................... 4,451 3,466 3,281 ------ ------ ------ Total Premiums and Fees....................................... $9,512 $8,341 $8,135 ====== ====== ====== - ---------- 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 segment's products are generally offered through traditional insurance and alternative funding arrangements, and through arrangements that combine features of both. Under traditional insurance funding arrangements, CIGNA charges a premium and bears the risk for costs incurred. Traditional insurance arrangements may include products offered on a retrospectively experience-rated basis. These are arrangements in which the premium may be increased (in some cases within limits) or decreased based on actual incurred costs of the policyholder over a certain period of time with either additional premium paid to CIGNA or premium returned to the policyholder. Further, traditional insurance arrangements include products offered on a guaranteed-cost basis for which there is no retrospective adjustment for actual incurred claims. Experience-rated business and guaranteed-cost business constituted approximately 67% and 33%, respectively, of CIGNA's traditional insurance business in 1997, as measured by premiums. Alternative funding arrangements consist primarily of administrative services only ("ASO") plans and "minimum premium" programs. Under ASO plans, CIGNA provides claims processing, health cost containment services (through its provider networks) or utilization management programs, or a combination of these services, in exchange for an administrative services fee. The plan sponsor is responsible for self-funding all claims, but may purchase stop-loss insurance from CIGNA or other insurers for claims in excess of some predetermined amount in total or for specific types of claims or both. Minimum premium programs combine traditional insurance protection with self-funding. The policyholder self-funds claims up to a predetermined aggregate, maximum amount and CIGNA bears the risk for claims in excess of that amount. Alternative funding programs constituted approximately 55% of business volume (premiums and fees plus premium equivalents) in 1997 and 1996. Premium equivalents generally represent paid claims under ASO and minimum premium plans and are additional premiums that would have been earned premium if they had been written as traditional insurance. Alternative funding programs and their effect on CIGNA's results are more fully described on page 13 of the MD&A section of CIGNA's Annual Report. 3 Health Care Products and Services Based on premiums, including premium equivalents, health care products are the segment's principal product line. CIGNA provides a wide array of health care products. This broad spectrum of products allows CIGNA to satisfy a customer's health benefit needs. The products offered include the following: o indemnity products; o comprehensive managed care products, such as: o health maintenance organizations ("HMOs"), o Medicare programs, o managed dental programs, o managed mental health and substance abuse products and services, and o managed pharmacy programs; o preferred provider organizations ("PPOs"); and o medical cost and utilization management products and services under ASO plans. Indemnity Products At one end of the product spectrum, CIGNA offers medical and dental indemnity products. These indemnity products place no restrictions on provider choice. However, because there are no prior arrangements with physicians or hospitals to control unit costs and limited management over the utilization of services, the costs of such products to participants are higher than managed care products. Indemnity products are offered through traditional insurance and alternative funding arrangements. Managed Care Products On the other end of the product spectrum, CIGNA offers managed care products, including medical, dental and mental health products. Managed care products promote effective, efficient use of health care services by coordinating utilization of care and controlling unit costs through provider contracts. Managed care products are offered on a guaranteed-cost basis (such as commercial HMOs), on an experience-rated basis and through alternative funding programs. Managed care products include those described below. Health Maintenance Organizations. HMOs are generally the most cost-efficient form of managed care. CIGNA's HMOs include individual practice association ("IPA") models, staff models and mixed models. The relationship between the HMO and the health care providers distinguishes the models. Under an IPA model, the HMO contracts with independent physicians and hospitals to provide services. Some physicians and hospitals receive a monthly fixed fee (capitation) for each HMO member, regardless of the medical services provided to each member, while most others are paid on a contracted fee-for-service basis. IPAs may cover wide geographic areas with low fixed costs, but must rely on cost-effective contracts with providers and the appropriate utilization management to influence medical costs. In a staff model, physicians and other providers are usually employees of the HMO, who receive their compensation from the HMO. The HMO either owns or contracts with the medical facilities where the services are performed. Staff models offer a greater opportunity for direct influence over medical costs, quality and service, but require more capital investment. Staff models generally offer lower costs to the consumer, whereas IPAs may offer broader provider choice. Mixed model HMOs offer participants a choice of staff and IPA providers. The table below shows the number of IPA, staff and mixed model HMOs as of December 31: 1997 1996 1995 ---- ---- ---- IPA Models..................................... 53 37 37 Staff Models................................... 3 3 4 Mixed Models................................... 5 5 5 - ------------ The increase in IPA models in 1997 was due to the Healthsource acquisition. 4 As of December 31, 1997, CIGNA's HMO networks included approximately 220,000 physicians and 3,100 hospitals. To maintain and enhance the quality of health care delivered in its HMOs, CIGNA continues to develop and enhance standard performance measurements for affiliated physicians, hospitals and other providers. CIGNA is also in the process of seeking accreditation of all of its HMOs by external accrediting agencies as validation of its quality programs. To date, 85% of CIGNA's HMOs have been accredited. CIGNA has contracted with the federal Health Care Financing Administration ("HCFA") to provide HMO coverage for Medicare beneficiaries. These contracts provide for a fixed per member per month premium from HCFA based upon a formula that calculates the projected cost of services for each Medicare member. These amounts are updated annually, and reflect differences in expected costs by location, age and other factors, which are predictive of medical costs. As required by HCFA, CIGNA uses providers who are part of its existing HMO networks to provide services to enrolled Medicare members. Other Managed Care Products. CIGNA offers managed care dental products through networks of independent providers in most states. CIGNA also 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. Further, CIGNA offers managed pharmacy benefit programs to HMO and indemnity customers. In addition to the indemnity and managed care products, CIGNA also offers products that combine features of both types of products. These products are PPOs and point-of-service plans. Preferred Provider Organizations CIGNA has contractual arrangements with doctors, hospitals and other independent providers to form PPOs. CIGNA has both medical and dental PPO networks. Under a typical PPO plan, a participant may choose any health care provider, and CIGNA reimburses PPO participants at a higher percentage for the costs of care obtained from contracted providers, who generally charge on a discounted rate basis, than it does for care obtained from non-contracted providers. As of December 31, 1997, 1996 and 1995, CIGNA had 118, 86 and 80 medical PPO networks, with the 1997 increase primarily due to the Healthsource acquisition. CIGNA has one national dental PPO network with approximately 38,500 participating dentists. When a medical PPO has a gatekeeper, a contracted primary care physician ("Gatekeeper PPO"), the higher reimbursement level is available only if participants first consult their contracted primary care physician before consulting a contracted specialist. As of December 31, 1997, 1996 and 1995, CIGNA had 38, 34 and 29 Gatekeeper PPO networks. Point-of-Service Product Point-of-service products permit participants to use CIGNA's network providers where services are received generally for a small, fixed payment (co-pay) or go directly, without a referral, to non-network providers, subject to certain deductibles and coinsurance that are generally less favorable to the participants than those offered under traditional indemnity arrangements. Participants in point-of-service plans are considered HMO members for purposes of the table below. 5 As of December 31, 1997, CIGNA's HMOs and PPOs (including Gatekeeper PPOs) served all or part of 43 states, the District of Columbia and Puerto Rico. CIGNA's managed care and indemnity products covered the following approximate number of lives for the periods presented. Covered lives includes participants under traditional and alternative funding programs.
Approximate number of covered lives As of December 31, - ----------------------------------- ----------------------------------------- 1997 1996 1995 ------ ------ ------ (In thousands) Medical Covered Lives HMOs: Guaranteed Cost: Commercial............................................... 2,140 1,130 1,137 Medicare................................................. 96 69 56 Medicaid................................................. 49 52 150 Experience-rated and alternative-funding (including Gatekeeper PPOs).............................. 3,576 3,046 2,537 ------ ------ ------ Total HMOs............................................. 5,861 4,297 3,880 ------ ------ ------ Indemnity (estimated): Medical.................................................... 3,365 3,392 3,719 Medical PPO (excluding Gatekeeper PPOs).............................. 2,481 1,178 981 ------ ------ ------ Total Indemnity..................................... 5,846 4,570 4,700 ------ ------ ------ Total Medical Covered Lives................................... 11,707 8,867 8,580 ====== ====== ====== Dental Covered Lives: Dental Managed Care........................................... 2,717 2,548 2,290 Dental Indemnity (estimated).................................. 9,827 7,901 8,032 ------ ------ ------ Total Dental Covered Lives.................................... 12,544 10,449 10,322 ====== ====== ====== - ------------ The increases in Commercial HMO, Medical PPO and Dental Indemnity covered lives in 1997 were primarily a result of the Healthsource acquisition.
Life, Accident and Disability Insurance Products and Services CIGNA also offers group life insurance, accidental death and dismemberment insurance, and long-term and short-term disability insurance products and services. These products are offered under traditional insurance plans and alternative funding arrangements. Group insurance products are marketed to employers, employees, professional and other associations and other groups. 6 Group life insurance products offered include both group term life and group universal life insurance. Approximately 7,000 group life insurance policies covering approximately 11.4 million lives were outstanding as of December 31, 1997. The following table shows group life insurance in force and termination data. Year ended December 31, ----------------------------- 1997 1996 1995 ---- ---- ---- (In billions) In force, end of year........................... $489 $519 $522 ==== ==== ==== Cancellations (lapses and expirations).......... $ 64 $ 55 $ 51 ==== ==== ==== CIGNA markets group long-term and short-term disability products in all states and statutorily required disability plans in certain states. These products generally provide a fixed level of income to replace a portion of wages lost because of disability. Disability management services provided by CIGNA help insurers and employers reduce the cost of their benefit programs. CIGNA provides personal accident coverages, which consist primarily of accidental death and dismemberment and travel accident insurance, to employers, associations and other groups. Distribution CIGNA's group sales representatives distribute the indemnity and managed health care products of this segment through national and other insurance brokers and insurance consultants. CIGNA also has a dedicated sales force to sell its Medicare product directly to consumers. Salaried representatives sell disability management, medical and disability cost containment, and managed mental health and substance abuse services directly to insurance companies, HMOs and employer groups. As of December 31, 1997, the field sales force for the products of this segment consisted of approximately 1,125 sales representatives in 147 field locations. Pricing and Reserves Premiums and fees charged for group indemnity and managed care products reflect assumptions about future claims, expenses, credit risk, investment returns, competitive considerations and profit margins, and in the case of experience-rated products, recovery of prior deficits. Premiums and fees charged for products utilizing networks of contracted providers also reflect assumptions about the impact of provider contracts and utilization management on future claims. HCFA determines reimbursements to CIGNA for Medicare-covered benefits, and its reimbursement decisions may affect the product's profit margin. Most of the premium volume for the indemnity business is established on an experience-rated basis. All other premiums are based on a guaranteed-cost method. Most contracts 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 retrospectively experience-rated policies. As of December 31, 1997, approximately $2.6 billion, or 40%, of the reserves comprise liabilities that will be paid within one year, primarily for medical and dental indemnity and managed care health claims, as well as group life and accident claims. The remainder primarily includes liabilities for group long-term disability benefits, group life insurance benefits for disabled and retired individuals, and benefits paid in the form of annuities to survivors. 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 with longer maturities. For 1997, the rates of interest credited ranged from 4.0% to 8.5%, with a weighted average rate of 6.1%. The profitability of medical and dental indemnity and managed 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 managed care products, effective medical cost management. The profitability of other indemnity products depends on the adequacy of premiums charged relative to claims and expenses, and also, for disability products, effective medical and rehabilitation management. 7 CIGNA reduces its exposure to large individual and catastrophe losses under group life, disability and accidental death contracts by purchasing reinsurance from unaffiliated reinsurers. Competition Group indemnity insurance and managed care businesses are highly competitive. No one competitor or small number of competitors is dominant across the country, although in certain locations some HMOs dominate the sales of commercial HMO 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 employees the choice of 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 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 also important. For certain products with longer-term liabilities, such as group long-term disability insurance, financial strength of the insurer as indicated by ratings issued by nationally recognized rating agencies is also a competitive factor. For more information concerning insurance ratings, see "Ratings" on pages 36 and 37. The principal competitors of CIGNA's group indemnity and managed care businesses are the large life and health insurance companies that provide group insurance, Blue Cross and Blue Shield organizations, stand-alone HMOs and PPOs, and HMOs affiliated with major insurance companies and hospitals, and provider sponsored organizations that are directly contracting with employer groups. Competition also arises from smaller regional or specialty companies with strength in a particular geographic area or product line, administrative service firms and, indirectly, self-insurers. CIGNA is one of the largest investor-owned providers of group life and health indemnity insurance, based on premiums and premium equivalents, and one of the largest investor-owned HMOs, based on the number of members. It is the leading provider of group accident insurance, and one of the largest providers of group long-term disability coverages, based on premiums. Health Care Regulation Efforts at the federal and state level to increase regulation of the health care industry could have an adverse effect on CIGNA's health care operations if they reduce marketplace competition and innovation or result in increased medical or administrative costs. Matters under consideration that could have an adverse effect include mandated benefits or services that increase costs without improving the quality of care, loss of the Employee Retirement Income Security Act of 1974 ("ERISA") preemption of state law and restrictions on the use of prescription drug formularies. Due to the uncertainty associated with the timing and content of any proposals ultimately adopted, the effect on CIGNA's results of operations, liquidity or financial condition cannot be reasonably estimated at this time. See pages 34 and 35 for further information about regulation of CIGNA's businesses. 8 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. Deposits for this segment for the year ended December 31 were as follows:
1997 1996 1995 ---- ---- ----- (In millions) Deposits: Defined Contribution....................................... $ 5,357 $ 3,895 $ 3,255 Defined Benefit............................................ 1,222 1,262 1,422 Other, including GICs...................................... 249 646 359 Investment Advisory Accounts............................... 10 41 85 ------- ------- ------- Total Deposits....................................... $ 6,838 $ 5,844 $ 5,121 ======= ======= =======
Assets under management for this segment as of December 31 were as follows:
1997 1996 1995 ---- ---- ---- (In millions) By Account: General Account(1): Guaranteed............................................. $ 4,172 $ 4,289 $ 4,489 Experience-rated....................................... 16,370 16,048 17,087 ------- ------- ------- 20,542 20,337 21,576 Separate Accounts........................................ 24,842 19,401 15,784 Investment Advisory Accounts............................. 901 849 823 ------- ------- ------- Total.................................................. $46,285 $40,587 $38,183 ======= ======= ======= By Plan Type: Defined Contribution..................................... $24,691 $20,017 $17,741 Defined Benefit.......................................... 19,211 18,182 18,077 Other, including GICs(2)................................. 1,482 1,539 1,542 Investment Advisory Accounts(2).......................... 901 849 823 ------- ------- ------- Total................................................ $46,285 $40,587 $38,183 ======= ======= ======= - ------------ Assets under management include assets managed by third-party managers. (1) General Account assets under management (Defined Contribution, Defined Benefit and Other, including GICs) reflect unrealized appreciation on fixed income securities of $560 million, $423 million and $1.0 billion as of December 31, 1997, 1996 and 1995, respectively. (2) Other, including GICs and Investment Advisory Accounts also support defined benefit and defined contribution plans.
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 53% of assets under management for this segment as of December 31, 1997, compared with 49% as of December 31, 1996. The second largest category 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. 9 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. CIGNA markets full-service products that include investment management and pension services to small, middle and large market customers. In addition, CIGNA sells products 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, including Fidelity Investments, Warburg Pincus and INVESCO. A broker-dealer operation also offers benefit plan participants a range of IRA rollover investments and retail brokerage services. 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. Both defined benefit and defined contribution 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. As of December 31, 1997, General Account supported contracts accounted for 44% and 43% of the underlying investments in the defined benefit plans and defined contribution plans, respectively, compared with 47% and 52% as of December 31, 1996. Guaranteed contracts comprise single premium annuities and GICs. As of December 31, 1997 and 1996, guaranteed single premium annuities accounted for $2.7 billion and $2.8 billion, respectively, of this segment's General Account assets under management, and GICs accounted for $1.5 billion as of December 31, 1997 and 1996. For 1997 and 1996, the interest rate on reserves for guaranteed single premium annuities and the interest rate credited on CIGNA's GICs ranged from 3.25% to 12.75%, with a weighted average of 8.55% in 1997 and 8.65% in 1996. CIGNA's single premium annuities and GICs 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 or capital resources. Experience-rated contracts that are supported by the General Account have no fixed maturity dates and provide for transfer of net investment experience (including impairments and non-accruals) to policyholders through credited interest and termination provisions. Credited interest rates for pooled, experience-rated defined contribution contracts are declared in advance for six months and may be changed at the expiration of the six-month period. Pooled contracts are contracts that are combined for purposes of crediting interest rates and tracking investment performance. Credited interest rates on other experience-rated contracts supported by the General Account are generally declared annually in advance and may be changed prospectively by the Company from time to time. Credited interest rates reflect investment income and realized gains and losses. Credited interest rates for 1997 ranged from 6.00% to 9.00%, with a weighted average rate of 6.80%. The termination provisions of $3.5 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 $3.4 billion, or 34%, 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 option, the Company determines the market value of the underlying investments by discounting expected future investment cash flows from investment income (including the effect of non-accruals) and repayment of principal, including the effect of impaired assets. The discount rate assumed is based on current market interest rates. Under the installment option, 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 designed to pass investment gains and losses (reflecting non-accruals and impairments) through to policyholders. 10 The termination provisions of $6.7 billion, or 66%, of the Company's liability for experience-rated defined contribution contracts (all of which are pooled) supported by the General Account contain a book value mechanism for withdrawal at policyholder termination. Under certain circumstances, payout of book value is subject to deferral and the rate of interest credited during the deferral period 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, short-term securities and funds managed by third-party managers, such as mutual funds and commingled trusts. As of December 31, 1997, Separate Account investments accounted for 56% and 57% of the underlying investments in defined benefit and defined contribution plans, compared with 53% and 48% as of December 31, 1996. As of December 31, 1997, approximately $20.4 billion, or 82%, of the assets in the Separate Accounts support experience-rated contracts under which the risks and benefits of investment performance generally accrue to the customers, compared with approximately $14.9 billion, or 77% of assets as of December 31, 1996. The remaining assets in the Separate Accounts are held under experience-rated contracts that guarantee a minimum level of benefits. As of December 31, 1997 and 1996, the amount of minimum benefit guarantees under these contracts was $4.4 billion and $4.5 billion, respectively. Reserves in addition to the Separate Account liabilities are established when CIGNA believes a payment will be required under one of these guarantees. For additional information, see Note 19 to CIGNA's 1997 Financial Statements included in its Annual Report. CIGNA monitors contract termination experience on an ongoing basis. Of those assets subject to withdrawal, persistency for 1997 was 93% compared with 92% for 1996 and 93% for 1995. Distribution CIGNA's retirement products and services are distributed primarily through salaried retirement plan specialists, independent insurance agents and brokers, pension plan consultants, investment advisors and other service providers. As of December 31, 1997, the sales organization consisted of 45 retirement plan specialists and sales associates and 69 client service representatives and administrative personnel located in offices across the United States. In addition, its broker-dealer operation also offers benefit plan participants a range of IRA rollover investments and retail brokerage services through 38 registered brokers. Pricing and Reserves CIGNA establishes reserves for experience-rated contracts in an amount equivalent to the contractholder funds on deposit with it, including, for non-pooled contracts, 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 the same assumptions, with a margin for adverse deviation. Profitability on guaranteed-cost contracts is affected by the degree to which future experience deviates from these assumptions. Competition The retirement plan marketplace is highly competitive. CIGNA's competitors include mutual fund companies, other insurance companies, banks, investment advisors, and certain service and professional organizations. No one competitor or small number of competitors is dominant. Competition focuses on service, technology, cost, variety of investment options, investment performance and insurer financial strength as indicated by ratings issued by nationally recognized agencies. For more information concerning insurance ratings, see "Ratings" on pages 36 and 37. Business growth, as measured by assets under management, is expected to continue to be constrained due to lack of growth in the defined benefit market. The largest single retirement plan manager holds less than a 6% market share, as measured by assets under management. According to a survey published in "Pensions & Investments," CIGNA ranked 4th among insurers, and 21st among retirement plan managers overall, in terms of pension and employee retirement savings plan assets under management. 11 E. Individual Financial Services Principal Products and Markets During 1997, CIGNA's Individual Financial Services businesses marketed a broad range of insurance and investment products and services to individuals and corporations. They also assumed reinsurance of certain risks under policies written by other insurance companies. As described above, principally through an indemnity reinsurance transaction, CIGNA sold the individual life insurance and annuity business of this segment to subsidiaries of Lincoln National Corporation, effective as of January 1, 1998. CIGNA retained the corporate-owned life insurance and reinsurance operations reported in this segment. The following table sets forth the net earned premiums and fees and deposits for this segment.
Year ended December 31, 1997 1996 1995 ---- ---- ---- (In millions) Premiums and Fees: Life....................................................... $ 606 $ 590 $ 585 Health..................................................... 59 59 56 Reinsurance................................................ 347 293 240 ------ ------ ------ Total premiums and fees.............................. $1,012 $ 942 $ 881 ====== ====== ====== Deposits: Life....................................................... $1,785 $1,407 $2,351 Annuity.................................................... 433 601 849 ------ ------ ------ Total deposits....................................... $2,218 $2,008 $3,200 ====== ====== ======
For the retained business, the total premiums and fees were $569 million and total deposits were $1.24 billion for the year ended December 31, 1997. 12 The following table provides data on sales of new policies and additions to existing policies, terminations and life insurance in force for this segment, including assumed reinsurance, and reinsurance ceded to other companies.
Year ended December 31, 1997 1996 1995 ---- ---- ---- (Dollar amounts in millions, except average size policy in force) In force, beginning of the year............................... $109,110 $108,536 $ 93,327 -------- -------- -------- Sales and additions (1): Permanent.................................................. 9,932 5,460 18,203 Term....................................................... 4,036 3,639 3,879 -------- -------- -------- Total sales and additions................................ 13,968 9,099 22,082 -------- -------- -------- Less Terminations: Surrenders and conversions................................. 1,592 4,043 1,625 Lapses..................................................... 2,938 2,744 2,962 Decrease in coverage....................................... 1,934 1,190 1,700 All other.................................................. 521 548 586 -------- -------- -------- Total.................................................... 6,985 8,525 6,873 -------- -------- -------- In force, end of the year..................................... $116,093 $109,110 $108,536 ======== ======== ======== In force, end of the year: Permanent.................................................. $ 95,970 $ 89,741 $ 88,672 Term....................................................... 20,123 19,369 19,864 -------- -------- -------- Total (2)................................................ $116,093 $109,110 $108,536 ======== ======== ======== Reinsurance ceded included above:............................................ $ 45,028 $ 41,251 $ 24,754 ======== ======== ======== Number of policies in force: Participating.............................................. 138,328 139,739 149,639 Non-participating.......................................... 380,389 391,896 392,507 -------- -------- -------- Total.................................................... 518,717 531,635 542,146 ======== ======== ======== Average size of policy in force: By Type: Participating............................................ $273,087 $270,806 $269,450 ======== ======== ======== Non-participating........................................ $204,770 $181,853 $173,799 ======== ======== ======== By Division: CIGNA Individual Insurance.............................................. $252,062 $227,324 $215,717 ======== ======== ======== CIGNA Reinsurance: Life, Accident, Health................................. $122,062 $127,236 $140,254 ======== ======== ======== By Segment: Individual Financial Services............................................... $223,808 $205,234 $200,200 ======== ======== ======== - ------------ (1) For 1997 and 1996, all sales and additions were non-participating. For 1995, $11 billion of sales and additions were participating corporate-owned universal life insurance, with the remainder non-participating. For 1997, 1996 and 1995, sales and additions included assumed reinsurance of $1.7 billion, $1.9 billion and $2.5 billion, respectively. (2) For 1997, 1996 and 1995, total life insurance in force for this segment included assumed reinsurance of approximately $14.6 billion, $15.0 billion and $16.4 billion, respectively.
For the retained business, total sales and additions were $6.01 billion and terminations were $3.35 billion for the year ended December 31, 1997, and life insurance in force at December 31, 1997 was $74.98 billion. 13 Corporate-Owned Life Insurance and Reinsurance Products Corporate-owned life insurance products are permanent life insurance contracts that are sold to corporations to provide coverage on the lives of certain of their employees. Permanent life insurance, which can be participating or non-participating, provides coverage when adequately funded that does not expire after a term of years and builds a cash value that may equal 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 future policy values. Corporate-owned life insurance products include whole life, universal life and variable universal life. Whole life policies provide fixed benefits and level premium payments for a specified period of time. Universal life policies typically provide flexible coverage and flexible premium payments. Universal life cash values fluctuate with the amount of the premiums paid, mortality and expense charges made, and interest credited to the policy. Variable universal life policies are universal life contracts where the cash values vary directly with the performance of the investments underlying the policy. Principal markets for corporate-owned life insurance are Fortune 1000 companies. The market and sales volume for corporate-owned life insurance products tend to be volatile. In 1996, Congress passed tax legislation that has affected premium and earnings growth of certain corporate-owned life insurance business on which policy loans are outstanding. The legislation phases out the interest deduction for affected corporate-owned life insurance policy loans through 1998 and eliminates it thereafter. CIGNA does not expect this legislation to have a material effect on its consolidated results of operations, liquidity or financial condition. There were no new sales of this product in 1997 or 1996. For additional information on the impact of the legislation, see page 14 of the MD&A section of CIGNA's Annual Report. As of December 31, 1997 and 1996, approximately 52% and 53%, respectively, of CIGNA's individual life insurance in force was corporate-owned life insurance. Of the corporate-owned life insurance in force as of December 31, 1997 and 1996, approximately 80% and 85% was corporate-owned life insurance affected by the legislation. The 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, health and annuity; and special risks, such as personal accident, catastrophe and workers' compensation coverages. The principal markets for these products are individual and group life, accident and health insurers; special risk and workers' compensation units of property-casualty insurers; companies that offer immediate and deferred annuities; health care providers; managing general underwriters of health care; 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. Individual Life Insurance and Annuity Products As stated above, CIGNA sold its individual life insurance and annuity business to subsidiaries of Lincoln National Corporation. Because it was an indemnity reinsurance transaction, CIGNA is not relieved of liability for the reinsured business. CIGNA's individual life insurance products included permanent and term life insurance. Term life insurance is issued only on a non-participating basis, and it provides coverage for a stated period and pays a death benefit only if the insured dies within the period. Individual life insurance coverages offered on a permanent basis included whole life, universal life and variable universal life. For a further description of these types of products, see "Corporate-Owned Life Insurance and Reinsurance Products" above. Principal markets for life insurance products and services sold to individuals include affluent executives, professionals and small business owners (typically with income above $100,000 and net worth of $1.5 million or more). Most life insurance products sold to individuals have surrender charges to recover policy acquisition costs and to encourage persistency. Persistency for these products was approximately 95% in 1997, 1996 and 1995. During 1997, CIGNA offered 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 14 contractholder's allocation of payments among a portfolio of mutual funds and fixed rate accounts and the underlying investment performance of the selected funds (less applicable expense and contract charges). Annuity sales totaled approximately $433 million in 1997 and $601 million in 1996. Annuities were generally marketed to upper-middle-class to affluent customers of banks and stock brokerage firms and clients of financial advisors. CIGNA also marketed a number of individual investment products (including mutual funds) and fee-based financial planning services. Distribution As of December 31, 1997, CIGNA sold individual insurance products primarily through approximately 530 full-time career agents and through independent agents and brokers. Investment products were sold through the career agents, who were also registered representatives of a CIGNA broker-dealer. Annuities were distributed through stockbrokers and banks as well as through the career agents and brokers. These producers are no longer selling these products on CIGNA's behalf. Corporate-owned life insurance products are sold primarily through a limited number of specialty brokers. Reinsurance products are sold principally in the United States, Canada, Europe, Asia and Latin America through a small sales force and through domestic and foreign intermediaries. Pricing, Reserves and Reinsurance Premiums for life and disability insurance, annuities and assumed reinsurance are based on assumptions about mortality, morbidity, persistency, expenses and target profit margins as well as interest rates and competitive considerations. The long-term profitability of individual products is affected by the degree to which future experience deviates from these assumptions. Fees for universal life insurance products consist of mortality, administrative and surrender charges assessed against the policyholder's fund balance. Interest credited and mortality charges for universal life, and mortality charges on variable premium products, may be adjusted prospectively to reflect expected interest and mortality experience. Dividends on participating insurance products may be adjusted to reflect prior experience. 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 the credited interest rate exceeds the guaranteed rate, the excess is used to purchase additional insurance or increase cash values. Credited interest rates on interest-sensitive products for 1997 ranged from 5.0% to 8.2%, with a weighted average rate of 6.8%. Interest rates for policy loans on individual life insurance products 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. For individual traditional and variable premium life insurance, disability insurance and annuities, and for 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 and deferred annuities, CIGNA establishes reserves for deposits received and interest credited to the policyholder, less mortality and administrative charges assessed against the policyholder's fund balance. In addition, for all individual and reinsurance products, CIGNA establishes loss reserves for claims received but not yet paid, based on the amount of the claim received, and for losses 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, accident 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 are able to meet their obligations. Competition The corporate-owned life insurance marketplace is highly competitive. The Company principally competes with a significant number of the largest domestic life insurance companies that may offer one or more corporate-owned 15 life insurance 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. CIGNA's reinsurance business operates in highly competitive markets. Approximately 40 companies may offer one or more reinsurance products similar to those offered by CIGNA. The Company competes against other insurance and reinsurance companies as well as brokers and other non-insurance financial organizations. Competition in this market focuses on product, service, price, distribution method and the financial strength ratings issued by internationally recognized agencies. For more information concerning insurance ratings, see "Ratings" on pages 36 and 37. CIGNA has benefited competitively from CG Life's financial strength and stability. 16 F. Property and Casualty CIGNA's Property and Casualty segment consists of international, domestic and run-off operations. Each of these operations is discussed below. International Operations Principal Products and Markets CIGNA's international operations provide the following insurance coverages and services outside the United States: property and casualty; individual and group life, accident and health; and health care and employee benefits. The international operations produced approximately 62% of total earned premiums and fees for the Property and Casualty segment during 1997. The international property and casualty operations are a specialist insurance organization offering capacity and technical expertise in the underwriting of large and unique risks for targeted commercial customer segments. Its property insurance products include traditional commercial fire coverage as well as energy industry-related and other technical coverages. Principal casualty products are commercial general liability and liability coverage for multinational organizations. Marine cargo and hull coverages are written in the London market as well as in marine markets throughout the world. The division also designs and implements risk financing alternatives for customers whose approach to risk management includes some form of self insurance. The international life, accident and health insurance operations provide products that are designed to meet the insurance, savings and investment needs of consumers outside of U.S. insurance markets. Life and accident and health insurance is provided to individuals and groups. Traditional life insurance products include term, whole life, endowment and products with variable investment return. Supplemental products include accidental death, medical, hospital indemnity and income protection coverages. The international health care and employee benefit operations provide government-mandated medical benefits in some markets and offer an alternative or supplement to governmental programs in others. To meet the needs of the group market, life and medical insurance products are provided through group and employee benefit programs, including managed care programs, providing employers with benefit options for their employees. The international operations have formed several joint ventures in developing markets, most recently in Poland, Brazil, Malaysia and the Philippines. These ventures, which are principally with major, local financial institutions, are intended to accelerate penetration into these markets. The international operations have also established representative offices in selected emerging markets to facilitate the development of profitable business opportunities. CIGNA's international operations are diversified by line of business and geographic spread of risk. A global approach to risk management allows each local operation to underwrite and accept large insurance accounts. Centrally controlled internal reinsurance mechanisms facilitate appropriate risk transfer and efficient, cost-effective use of external reinsurance markets. CIGNA reduces exposure to economic loss arising from foreign exchange in its international operations by maintaining invested assets abroad in the same currency as the related liabilities. For information on the effect of foreign exchange exposure, see pages 15 and 23 of the MD&A section and Notes 2(Q) and 18 to CIGNA's 1997 Financial Statements included in its Annual Report. Competition The principal competitive factors that affect the international operations are underwriting and pricing, relative operating efficiency, product differentiation, producer relations and the quality of claims and policyholder services. Perception of financial strength, as reflected in the ratings assigned to an insurance company, is also a competitive factor. CIGNA Insurance Company of Europe S.A.-N.V., which produced approximately 23% of the international operations' 1997 written premiums, is rated "A" ("good") by Standard & Poor's and "A-" ("excellent") by A.M. Best. For more information concerning insurance ratings, see "Ratings" on pages 36 and 37. A competitive strength of the international operations is its global network and breadth of insurance and benefit programs, which assist individuals and business organizations to meet their risk management objectives. 17 Based on revenues, the international operations are the second largest U.S.-based provider of foreign insurance products and services. Across all lines of business, the operations' primary competitors include U.S.-based companies with global operations, as well as other, non-U.S. global carriers and indigenous companies in regional and local markets. For the individual life and accident and health lines of business, locally based competitors include financial institutions and bank-owned insurance subsidiaries. Distribution The international operations maintain a sales or operational presence in major insurance markets around the world. The geographic distribution of written premiums and fees in 1997 for the operations' insurance products, which are sold through branches and subsidiaries of CIGNA entities, was: Japan (38%); United Kingdom (16%); Continental Europe (13%); Other Pacific (13%); and Americas (12%). The remaining 8% was written in other jurisdictions in which the international operations conduct business. The geographic distribution of written premiums and fees for the international operations' products in 1996 and 1995 was not materially different than in 1997. International property and casualty business is generally written, on both a direct and assumed basis, through major international and local brokers. Individual life and accident and health products are distributed through agents, financial institutions and various direct marketing channels. Health care and employee benefit programs are sold on a direct basis, as well as through brokers and agents. Domestic Operations Principal Products and Markets The domestic operations had approximately 38% of total earned premiums and fees for this segment during 1997. The domestic operations have become over the past several years a provider of specialist property and casualty products and services. In doing so, they have reunderwritten much of the business and focused on lines of business that have contributed to improved operating results. The table on page 20 lists the principal product lines of the domestic operations and their associated earned premiums and fees, and the table on page 21 shows their underwriting results and combined ratios. These operations are organized into three units: Special Risk Facilities, Specialty Insurance Services and Commercial Insurance Services. Special Risk Facilities provides multi-line and mono-line coverages to large-risk property and casualty customers. It focuses on loss sensitive casualty coverages, including workers' compensation, commercial auto and general liability programs for customers willing to retain significant risk and implement alternative risk financing programs. It also focuses on large, complex property coverages for petroleum, utility, independent power and industrial companies, as well as general property coverages. Special Risk Facilities also markets loss control, risk information and claims services to large corporate customers on a fee-for-service basis. Specialty Insurance Services provides insurance products and related services designed to meet the needs of businesses, groups and individuals with specialized insurance needs that require sophisticated underwriting and risk management expertise. Targeted markets include aviation, recreational and ocean marine, financial institutions, agribusiness, excess casualty, bonding and other programs in which specialist agents share underwriting and processing expertise with the division. Commercial Insurance Services provides insurance and related services to customers in the standard insurance market. It emphasizes mid-sized commercial insureds who value loss cost containment. Commercial Insurance Services seeks to increase writings of workers' compensation business that involves standard risk transfer in states with favorable regulatory climates. Competition The principal competitive factors that affect the domestic operations are pricing, underwriting, producer relations, quality of claims and policyholder services, operating efficiencies, and product differentiation and availability. Perception of financial strength, as reflected in the ratings assigned to an insurance company, especially by A.M. Best, is also a competitive factor. The domestic operations are rated "A-" ("excellent") by A.M. Best. For more information concerning insurance ratings, see "Ratings" on pages 36 and 37. Competition, particularly over price, remains intense because of the high level of capacity in the market resulting from growth in capital supporting the industry. In the highly competitive environment of the past several years, 18 the domestic operations reduced their premium volume in some lines rather than maintain business at inadequate prices, resulting in a decline in market share. The National Association of Insurance Commissioners ("NAIC") uses risk-based capital rules for domestic property and casualty companies. The property and casualty subsidiaries of CIGNA's ongoing domestic operations were adequately capitalized under the rules as of December 31, 1997. Additional information is contained on page 34. The domestic operations pursue a specialist strategy and focus on those market segments where they can compete effectively based on service levels and product design and achieve an adequate level of profitability. They offer experienced claims handling, loss cost control and risk management staffs with proven expertise in specialty fields, including large-risk property and casualty, recreational and ocean marine, and workers' compensation. A competitive strength of all of the domestic units, especially Special Risk Facilities, is the ability to deliver global products and coverages to large risk customers in concert with CIGNA's international operations. Special Risk Facilities has increased its competitive advantages by providing, with X.L. Insurance Company, Ltd., an unaffiliated insurer, multi-year, multi-line insurance packages for complex international and domestic risks. Property and casualty insurance can be obtained in the United States through national and regional companies that use an agency distribution system, direct writers (that may have an employed agency force) and brokers. Some potential customers elect to self-insure, which in the case of many corporations involves the use of subsidiary captive insurers. Over 3,000 companies compete for property and casualty business in the United States and no single company or group of affiliated companies is dominant. In 1997 and 1996, CIGNA's domestic property and casualty statutory net written premiums amounted to approximately 0.6% of the total market. Based on information published by A.M. Best, CIGNA's domestic property and casualty insurance subsidiaries rank 18th in annual net premiums written for commercial coverages. They are the 20th largest U.S. writer of commercial multiperil coverages, 14th of workers' compensation, 38th of commercial auto coverages, fourth of ocean marine, 12th of inland marine and third of aviation. Distribution Special Risk Facilities writes business mainly through brokers. Specialty Insurance Services and Commercial Insurance Services write business through independent agents and brokers. Specialty Insurance Services also markets its business through alternate distribution channels, including financial institutions and managing general agents. The top five states in which the domestic operations wrote premiums in 1997 were California (13%), New York (6%), Florida (6%), Texas (5%) and Pennsylvania (5%). The operations wrote business in all other states, with no one state constituting more than 4% of direct written premiums. The geographic distribution of premiums for the domestic operations' products in 1996 and 1995 was not materially different than in 1997. Run-off Operations Effective December 31, 1995, the Insurance Commissioner of Pennsylvania (the "Commissioner") approved a restructuring of CIGNA's domestic property and casualty businesses into two separate operations, ongoing and run-off. The run-off operations, which do not actively sell insurance products, manage run-off policies and related claims, including those for asbestos-related and environmental pollution exposures. For additional information on the restructuring, see Note 16 to CIGNA's 1997 Financial Statements included in its Annual Report. Certain competitors and policyholders of CIGNA are challenging the Commissioner's action. In March 1997, the Commonwealth Court of Pennsylvania ruled on certain procedural issues, including that the competitors lack standing in the matter and that certain issues be remanded to the Insurance Department for further proceedings. The ruling has been appealed. Pending resolution of the appeal, the Insurance Department has confirmed that CIGNA's restructuring remains in place. Although CIGNA expects the matter to be involved in litigation for some time, it expects to ultimately prevail. The risk-based capital ratios of the subsidiaries in the run-off operations are at the mandatory control level, as described on page 34. However, because the Commissioner determined that these subsidiaries have sufficient assets to meet their obligations, they are running off their liabilities consistent with the terms of an Order by the Commissioner, which include periodic reporting obligations to the Pennsylvania Insurance Department. 19 Pricing and Underwriting Results CIGNA's property and casualty insurance subsidiaries provide loss protection to insureds in exchange for premiums. If earned premiums exceed the sum of losses, commissions to agents or brokers, premium taxes, 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 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. 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 21. 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 table sets forth GAAP net earned premiums and fees for the operations of this segment for the year ended December 31.
Pro forma 1997 1996 1995(1) --------------- --------------- ---------------- (Dollar amounts in millions) Premiums and Fees/Percent of Total Premiums and Fees: International: Accident and health..................... $ 717 17% $ 647 15% $ 626 14% Property................................ 462 11 484 11 515 11 Casualty................................ 272 6 264 6 252 5 Auto.................................... 197 5 207 5 244 5 Marine.................................. 124 3 143 3 151 3 Other................................... 12 -- 12 -- 17 1 ------ --- ------ --- ------ --- Subtotal.............................. 1,784 42 1,757 40 1,805 39 International life and health............. 831 20 811 18 911 19 ------ --- ------ --- ------ --- Total International Ongoing........... 2,615 62 2,568 58 2,716 58 ------ --- ------ --- ------ --- Domestic: Property................................ 386 9 382 9 311 7 Workers' compensation................... 366 9 380 8 470 10 Casualty................................ 287 7 298 7 263 6 Marine and aviation..................... 270 6 258 6 237 5 Commercial packages..................... 178 4 228 5 274 6 Other................................... 106 3 125 3 194 4 ------ --- ------ --- ------ --- Total Domestic Ongoing................ 1,593 38 1,671 38 1,749 38 ------ --- ------ --- ------ --- Total Ongoing Operations.................. 4,208 100 4,239 96 4,465 96 Run-off operations........................ 22 -- 159 4 175 4 ------ --- ------ --- ------ --- Total Premiums and Fees............... $4,230 100% $4,398 100% $4,640 100% ====== === ====== === ====== === - ---------- (1) CIGNA's domestic property and casualty operations were restructured into ongoing and run-off operations effective December 31, 1995. Amounts shown for the Property and Casualty segment's ongoing and run-off operations for 1995 are reported on a pro forma basis as though the restructuring was in place at the beginning of 1995. These pro forma results are not necessarily indicative of the results that would have been reported had the restructuring actually occurred as of January 1, 1995. Consolidated Property and Casualty segment amounts, including International, did not change as a result of the restructuring.
20 The following table sets forth GAAP underwriting results, combined ratios and net investment income for the operations of this segment for the year ended December 31.
Pro forma 1997 1996 1995 (1) ----------------- ----------------- ---------------- (Dollar amounts in millions) Underwriting Gain (Loss)/Combined Ratios: International: Accident and health..................... $ 39 94.6% $ 57 91.2% $ 41 93.4% Property................................ 45 90.3 68 86.0 73 85.8 Casualty................................ 17 93.7 24 91.0 15 93.8 Auto.................................... (9) 104.7 (5) 102.5 (6) 102.4 Marine.................................. (5) 103.7 (10) 106.6 1 99.7 Other................................... 2 81.8 (14) 214.2 (16) 192.7 ----- ----- ------ Total International Ongoing........... 89 95.0 120 93.2 108 94.0 ----- ====== ----- ====== ------ ====== Domestic: Property................................ 20 94.9 (43) 111.3 (20) 106.4 Workers' compensation................... (28) 107.5 (22) 105.7 (130) 127.7 Casualty................................ (35) 112.2 (48) 116.2 (59) 122.5 Marine and aviation..................... 9 96.5 5 97.9 35 85.1 Commercial packages..................... (43) 124.4 (37) 116.3 (54) 119.6 Other................................... (3) 102.7 (28) 122.6 (27) 114.3 ----- ----- ------ Total Domestic Ongoing................ (80) 105.0 (173) 110.4 (255) 114.6 ----- ====== ----- ====== ------ ====== Total Ongoing operations..................... 9 99.8% (53) 101.6% (147) 104.1% ====== ====== ====== Run-off operations........................... (291) (317) (1,512) ----- ----- ------ Total underwriting loss: After Policyholders' Dividends............ $(282) $(370) $(1,659) ===== ===== ======= Before Policyholders' Dividends........... $(269) $(339) $(1,604) ===== ===== ======= Net investment income, pre-tax: International............................. $240 $243 $268 Domestic.................................. 239 259 240 Run-off................................... 282 302 286 ----- ----- ------ Total................................. $761 $804 $794 ===== ===== ====== - ---------- (1) CIGNA's domestic property and casualty operations were restructured into ongoing and run-off operations effective December 31, 1995. Amounts shown for the Property and Casualty segment's ongoing and run-off operations for 1995 are reported on a pro forma basis as though the restructuring was in place at the beginning of 1995. These pro forma results are not necessarily indicative of the results that would have been reported had the restructuring actually occurred as of January 1, 1995. Consolidated Property and Casualty segment amounts, including International, did not change as a result of the restructuring.
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. During 1997, the Company revised its reinsurance programs. CIGNA's domestic reinsurance programs now provide approximately 35% recovery for property catastrophe losses between $60 million and $375 million. Other reinsurance programs are in place which could provide for the recovery of up to an additional $300 million on a combination of catastrophe and other losses, depending on the aggregate annual level of losses incurred. These revisions are expected to result in little or no increase in earnings 21 volatility. CIGNA's international catastrophe reinsurance program provides approximately 95% recovery of losses between $75 million and $300 million. 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 Company is not substantially dependent upon any single reinsurer. The Company's largest aggregation of domestic and international reinsurance recoverables as of December 31, 1997 and 1996, at approximately 7% in both years, was with more than 100 syndicates affiliated with Lloyd's of London. Approximately 25% of CIGNA's reinsurance recoverables as of December 31, 1997 relate to pools and captives, under which CIGNA's assets are generally protected through future industry assessments or by some form of collateral. In addition, approximately 47% relate primarily to domestic ongoing and run-off operations (excluding their recoverables with Lloyd's noted above), of which approximately 81% relate to individual reinsurers that carry a financing rating characterized as "very good" or higher from an independent rating agency. The remaining 21% relate to international and reinsurance operations for which an independent rating agency evaluation may not be available. A significant portion of these recoverables is due from reinsurers that continue to meet CIGNA's internal security standards, selection criteria and other controls over collectibility, as described in the following paragraph. The collectibility of reinsurance is largely a function of the solvency of reinsurers. CIGNA cedes risk to reinsurers that meet certain financial security standards. It relies on independent ratings of reinsurers, when available, and otherwise examines its reinsurers' financial performance and reserve adequacy. 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. CIGNA's allowance for unrecoverable reinsurance was $720 million and $711 million at December 31, 1997 and 1996, respectively. Reinsurance disputes can delay recovery of reinsurance and, in some cases, affect its collectibility. Reinsurance disputes continue to increase, particularly on larger and more complex claims. As of December 31, 1997, approximately 84% of CIGNA's reinsurance recoverable balance related to unpaid reported claims and incurred but not reported claims, and the remaining 16% related 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. For additional information on reinsurance, including on CIGNA's property catastrophe reinsurance program, see page 16 of the MD&A section and Notes 13 and 14 to CIGNA's 1997 Financial Statements included in its Annual Report. Reserves 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. 22 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. CIGNA continually attempts to improve its loss estimation process by refining its process of analyzing loss development patterns, claims payments and other information, but there remain many reasons for favorable or adverse development of estimated ultimate liabilities. For example, unanticipated changes in workers' compensation and product liability laws have at times significantly affected the ability of insurers to estimate liabilities for unpaid losses and related expenses. CIGNA implemented a new methodology for estimating asbestos-related and environmental pollution reserves in 1995, as discussed on page 17 of the MD&A section of CIGNA's Annual Report. CIGNA's reserves for asbestos-related and environmental pollution claims are a reasonable estimate of its liability for these claims, based on currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Reserving for property and casualty claims continues to be a complex and uncertain process. Because available claims data and other information are rarely definitive, the evaluation of such data's implications with respect to future losses requires the use of informed estimates and judgments. CIGNA's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current law changes. Any such revisions could result in future changes in estimates of losses and would be reflected in CIGNA's results of operations for the period in which the estimates are changed. While the effect of any such changes in estimates of losses could be material to future results of operations, CIGNA does not expect such changes to have a material effect on its liquidity or financial condition. In management's judgment, information currently available has been appropriately considered in estimating CIGNA's loss reserves. The adverse pre-tax effects, net of reinsurance, during 1997, 1996 and 1995 on CIGNA's results of operations from insured events of prior years (prior year development) were $218 million, $177 million and $1.5 billion, respectively. Of the prior year loss development during 1995, 81% was attributable to asbestos-related and environmental pollution claims. Prior year development is discussed on pages 17 and 18 of the MD&A section of CIGNA's Annual Report. Reserve changes for asbestos-related claims before ("Gross") and after ("Net") the effects of reinsurance were as follows:
Year ended December 31, ------------------------------------------------------------- 1997 1996 1995 ------------------- ------------------- ------------------- Gross Net Gross Net Gross Net ------- -------- --------- ------- ---------- ------- (In millions) Asbestos Claims: Beginning reserves.......................... $771 $483 $749 $457 $594 $281 Plus incurred claims and claim adjustment expenses..................... 170 92 115 62 298 255 Less payments for claims and claim adjustment expenses..................... (95) (66) (93) (36) (143) (79) ---- ---- ---- ---- ---- ---- Ending reserves............................. $846 $509 $771 $483 $749 $457 ==== ==== ==== ==== ==== ====
Total asbestos-incurred claims and claim adjustment expenses for 1995 include reserve strengthening of $255 million ($194 million, net of reinsurance) related to CIGNA's comprehensive reserve review completed in the third quarter of 1995. 23 Reserve changes for environmental pollution claims before ("Gross") and after ("Net") the effects of reinsurance were as follows:
Year ended December 31, -------------------------------------------------------------- 1997 1996 1995 -------------------- --------------------- ------------------- Gross Net Gross Net Gross Net --------- --------- ----------- -------- ---------- ------- (In millions) Environmental Pollution Claims: Beginning reserves.......................... $1,492 $1,161 $1,665 $1,268 $707 $542 Plus incurred claims and claim adjustment expenses..................... 94 33 58 32 1,265 955 Less payments for claims and claim adjustment expenses..................... (182) (135) (231) (139) (307) (229) ------ ------ ------ ------ ------ ------ Ending reserves............................. $1,404 $1,059 $1,492 $1,161 $1,665 $1,268 ====== ====== ====== ====== ====== ======
Total environmental pollution incurred claims and claim adjustment expenses for 1995 include reserve strengthening of $1.2 billion ($861 million, net of reinsurance) related to CIGNA's comprehensive reserve review completed in the third quarter of 1995. Reserves for environmental pollution claims and related incurred expense and payment activity include internal costs to manage claims and disputes with policyholders over insurance coverage issues as well as external litigation-related costs for such disputes. Payments associated with disputed coverage issues will decline in the future, and eventually end, as the disputes or related issues are resolved. The following table excludes the internal costs to manage claims and disputes with policyholders and the external litigation-related costs for such disputes, in order to provide CIGNA's environmental pollution reserves and related activity that more directly relates to indemnity costs and costs to defend policyholders against environmental pollution claims.
Year ended December 31, -------------------------------------------------------------- 1997 1996 1995 ------------------- ---------------------- ------------------- Gross Net Gross Net Gross Net --------- -------- ----------- --------- ---------- ------- (In millions) Beginning reserves.......................... $1,319 $992 $1,468 $1,075 $ 558 $ 397 Plus incurred claims and claim adjustment expenses..................... 13 (38) 5 (15) 1,144 836 Less payments for claims and claim adjustment expenses..................... (101) (64) (154) (68) (234) (158) ------ ---- ------ ------ ------ ------ Ending reserves............................. $1,231 $890 $1,319 $ 992 $1,468 $1,075 ====== ==== ====== ====== ====== ======
Since the mid-1980s, when CIGNA established a separate unit to handle its asbestos-related and environmental pollution claims, it has followed an aggressive resolution strategy for these claims. When appropriate, it has settled claims with its policyholders, often obtaining full policy releases. While CIGNA believes that its ultimate asbestos-related and environmental pollution exposure has been reduced by this strategy, it also resulted in accelerating the recognition of incurred and paid claims and claim adjustment expenses. Paid asbestos-related and environmental pollution claims are expected to continue to be significant for the foreseeable future, but can vary from year to year, as seen in 1995, depending on the level of settlement activity. The principal federal statute that requires cleanup of environmental damage is the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund"), passed in 1980. It imposes liability on responsible parties, subjecting them to liability for cleanup costs regardless of fault, time period and relative contribution of pollutants. Proposals to change the law's method of assigning responsibility for, or funding, cleanup are pending 24 before Congress. Any such changes could affect the liabilities of policyholders and insurers. Due to uncertainties associated with the timing and content of any future Superfund legislation, CIGNA is not able to determine what effect, if any, such legislation would have on its results of operations, liquidity or financial condition. A reconciliation of total beginning and ending reserve balances of the property and casualty operations for unpaid claims and claim adjustment expenses for the years ended December 31, 1997, 1996 and 1995 is provided in Note 14 to CIGNA's 1997 Financial Statements included in its 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 1997. The first section of the table shows the estimated net reserve that was recorded at the end of each of the indicated years for all current and prior year unpaid claims and claim adjustment expenses. The second section shows the cumulative percentages of such previously recorded net reserve paid in succeeding years. The third section shows, as a percentage of such net reserve, the re-estimates of the net reserve made in each succeeding year. The cumulative deficiency as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through 1997; 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 1995 relating to losses incurred in 1988 would be included in the cumulative deficiency amount for the years 1988 through 1994. Yet, the deficiency would be reflected in operating results in 1995 only. Conditions and trends that have affected the reserve development reflected in the table are likely to continue to change, and care should be exercised in extrapolating future reserve redundancies or deficiencies from such development. Historically, asbestos-related and environmental pollution losses had a significant effect on the net cumulative deficiency. 25
Year Ended December 31, ------------------------------------------------------------------------------------------ 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (dollar amounts in millions) Net reserve for unpaid claims and claim adjustment expenses... $8,832 $9,414 $9,789 $10,196 $10,272 $10,562 $10,660 $10,635 $11,159 $10,647 $ 9,967 ====== ====== ====== ======= ======= ======= ======= ======= ======= ======= ======= Cumulative percentage of net reserve paid through: One year later............ 30.2% 31.1% 34.3% 33.8% 34.0% 28.9% 24.7% 22.5% 19.8% 19.9% Two years later........... 49.5 52.7 54.3 53.9 53.6 45.9 40.4 37.4 32.7 Three years later......... 65.7 67.7 69.4 68.6 66.8 58.7 51.8 48.6 Four years later.......... 77.0 78.9 80.8 78.9 77.3 67.8 61.0 Five years later.......... 84.7 88.0 88.6 86.8 84.6 75.5 Six years later........... 92.8 94.4 95.4 93.0 91.9 Seven years later......... 98.5 100.4 100.7 99.7 Eight years later......... 104.4 105.1 106.6 Nine years later.......... 108.7 110.3 Ten years later........... 113.8 Net reserve (percentage) re-estimated as of: One year later............ 102.6% 103.0% 103.1% 103.4% 106.4% 107.5% 105.0% 114.1% 101.6% 102.0% Two years later........... 105.0 105.8 106.9 107.4 115.4 113.5 119.7 115.6 103.7 Three years later......... 107.9 109.7 109.6 116.9 122.5 128.2 121.4 117.7 Four years later.......... 111.3 112.3 119.5 123.5 138.9 130.1 124.0 Five years later.......... 114.0 121.9 125.7 140.1 141.0 132.7 Six years later........... 123.9 127.9 142.9 142.5 144.1 Seven years later......... 129.6 144.5 145.0 145.6 Eight years later......... 146.6 146.4 147.9 Nine years later.......... 148.5 149.3 Ten years later........... 151.6 Net cumulative deficiency...... $4,560 $4,644 $4,688 $ 4,653 $ 4,529 $ 3,448 $ 2,556 $ 1,881 $ 416 $ 218 Gross reserve--December 31..... $17,926 $17,764 $16,825 $17,023 $16,482 $15,135 Less: Reinsurance recoverable.. 7,364 7,104 6,190 5,864 5,835 5,168 ------- ------- ------- ------- ------- ------- Net reserve--December 31....... $10,562 $10,660 $10,635 $11,159 $10,647 $ 9,967 ======= ======= ======= ======= ======= ======= Gross re-estimated reserve..... $22,224 $20,631 $19,043 $17,538 $16,691 Less: Re-estimated reinsurance recoverable................. 8,214 7,415 6,527 5,963 5,826 ------- ------- ------- ------- ------- Net re-estimated reserve....... $14,010 $13,216 $12,516 $11,575 $10,865 ======= ======= ======= ======= ======= Gross cumulative deficiency.... $ 4,298 $ 2,867 $ 2,218 $ 515 $ 209 ======= ======= ======= ======= =======
For additional information about gross loss development, amounts ceded to reinsurers and net loss development, see pages 16 through 18 of the MD&A section of CIGNA's Annual Report. On a GAAP basis, which is before the effects of reinsurance, CIGNA's 1997 year-end reserves totaled $15.1 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 discounting for certain lines of business, and, on that basis, totaled $8.6 billion. 26 The following table reconciles, as of year end, liabilities for unpaid claims and claim adjustment expenses determined in accordance with SAP to those determined in accordance with GAAP:
As of December 31, ------------------------------------------ 1997 1996 1995 ------- ------- ------- (In millions) Statutory reserve for unpaid claims and claim adjustment expenses, net of reinsurance............................... $ 8,630 $ 9,265 $ 9,704 Adjustments: Statutory Reinsurance Recoverable.......................... 4,848 5,465 5,384 Discounting of Gross Reserves(1)........................... 1,657 1,752 1,935 ------- ------- ------- GAAP reserve for unpaid claims and claim adjustment expenses................................................... 15,135 16,482 17,023 Less GAAP Reinsurance Recoverable............................. 5,168 5,835 5,864 ------- ------- ------- GAAP reserve for unpaid claims and claim adjustment expenses, net of reinsurance......................................... $ 9,967 $10,647 $11,159 ======= ======= ======= - ---------- (1) Primarily for workers' compensation reserves and certain asbestos-related and environmental pollution reserves. For SAP purposes, these reserves are discounted at 6%.
27 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 invested assets. In addition, the investment operations provide fee-based investment management and advisory services to large group pension plan sponsors, institutions, international investors and other clients. CIGNA acquires or originates, directly or through intermediaries, various investments including private placements, public securities, mortgage loans, real estate and short-term investments. It also develops and issues structured investment products. CIGNA's assets under management at year-end 1997 totaled $89.7 billion, comprising CIGNA corporate and insurance-related invested assets ("invested assets") of $56.6 billion and advisory portfolio assets of $33.1 billion. Advisory portfolio assets included $29.3 billion in Separate Accounts of CIGNA's life insurance subsidiaries. CIGNA's investment operations manage 100% of the invested assets and 51% of the advisory portfolios. Use of outside investment managers has increased, most significantly in retirement accounts where asset allocations have shifted in part from fixed income investments in CIGNA's General Account to equity securities in non-CIGNA managed advisory portfolios. For additional information about the General Account and the Separate Accounts, see "Employee Retirement and Savings Benefits--Principal Products and Markets" beginning on page 9. CIGNA invests in a broad range of asset classes, including domestic and international fixed maturities and common stocks, mortgage loans, real estate and short-term investments. Fixed maturity investments include publicly traded and private placement corporate bonds, government bonds, publicly traded and private placement asset-backed securities and redeemable preferred stocks. Asset-backed securities are primarily mortgage-backed securities and secondarily other asset-backed securities. Mortgage-backed securities include collateralized mortgage obligations ("CMOs"). CMO holdings are concentrated in securities with limited prepayment, extension and default risk, such as planned amortization class bonds. For additional information about CMOs, see Note 4(A) to CIGNA's 1997 Financial Statements included in its Annual Report. The major portfolios under management in CIGNA's General Account consist of the combined assets of the Employee Life and Health Benefits, Employee Retirement and Savings Benefits, and Individual Financial Services segments (collectively, "Employee Benefits and Individual Financial portfolios") and the assets of the Property and Casualty segment. CIGNA generally manages the characteristics of its invested assets to reflect the underlying characteristics of related insurance and contractholder liabilities, as well as regulatory and tax considerations pertaining to those liabilities. CIGNA's insurance and contractholder liabilities as of December 31, 1997 comprised the following: property and casualty 30%, fully guaranteed 12%, experience-rated 23%, interest-sensitive 20%, and other life and health 15%. Property and casualty claim demands are somewhat unpredictable in nature and require liquidity from the underlying invested 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 operating cash flows and shorter-term investments (less than two years) and, to a lesser extent, through publicly traded fixed maturities. For longer-term liabilities, liquidity requirements are met primarily through private and public fixed maturity investments. Fully guaranteed products primarily include GICs, single premium annuity products and settlement annuities. Because these products generally do not permit withdrawal by policyholders prior to maturity, the amount and timing of future benefit cash flows can be reasonably estimated. Funds supporting these products are invested in fixed income investments that generally match the aggregate duration of the investment portfolio with that of the related benefit cash flows. As of December 31, 1997, the duration of assets and liabilities for GICs, single premium annuities and settlement annuities was approximately 2 years, 8 years and 10 years, respectively. Experience-rated products primarily consist of defined benefit and defined contribution pension products. Investments for these products are selected to support the yield and liquidity needs of the products and are principally fixed income investments. Interest-sensitive products primarily include universal life insurance and corporate-owned life insurance. Invested assets supporting these products are primarily fixed income investments and policy loans. Fixed income investments emphasize investment yield while meeting the liquidity requirements of the related liabilities. 28 Other life and health products consist of various group and individual life and health products. The supporting invested assets are structured to emphasize investment income, and the necessary liquidity is provided through cash flow, short-term investments and common stocks. Investment strategy and results are affected by the amount and timing of cash available for investment, competition for investments (especially in private asset classes), economic conditions, interest rates and asset allocation decisions. 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 and real estate investments. Most international fixed maturity investments are government-backed. CIGNA's fixed maturity investments, including policyholder share, as of December 31, 1997 constituted approximately 55% of the Employee Benefits and Individual Financial portfolios and approximately 94% of the Property and Casualty portfolios. As of that date, approximately 29% of fixed maturity investments was attributable to experience-rated contracts. CIGNA reduces credit risk for the portfolios as a whole by investing primarily in investment grade fixed maturities rated by rating agencies (for public investments), by CIGNA (for private investments) or by the Securities Valuation Office of the NAIC (for both public and private investments). For information about below investment grade holdings, see page 20 of the MD&A section of CIGNA's Annual Report. CIGNA's mortgage loan investments, including policyholder share, constituted approximately 25% of the Employee Benefits and Individual Financial portfolios and less than 1% of the Property and Casualty portfolios as of December 31, 1997. As of that date, approximately 53% 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's real estate investments are either held for the production of income or held for sale. Real estate investments, including policyholder share, constituted approximately 2% of the Employee Benefits and Individual Financial portfolios and less than 1% of the Property and Casualty portfolios as of December 31, 1997. As of that date, 64% of real estate investments was attributable to experience-rated contracts. Real estate investments held for the production of income are actively managed to maximize operating income. These investments consist primarily of stabilized commercial properties and are diversified relative to property type and geographic location. Real estate investments held for sale are primarily properties acquired as a result of foreclosure of mortgage loans. The Company's general policy is to rehabilitate the foreclosed properties, re-lease them and sell them, which generally takes two to four years, or less if circumstances indicate that an immediate sale is in the best financial interests of the Company or policyholders. CIGNA sold $311 million of foreclosed properties in 1997 and $297 million in 1996 because of improved commercial real estate markets, and expects to sell additional foreclosed properties in 1998. In connection with its investment strategy, CIGNA's use of derivative instruments is limited to hedging applications to minimize market risk. Derivative instruments are not used for speculative purposes. See pages 20 through 23 of the MD&A section and Notes 2, 4 and 5 to CIGNA's 1997 Financial Statements included in its Annual Report 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. In connection with the sale of the individual life insurance and annuity business, CIGNA transferred approximately $5.4 billion of invested assets to subsidiaries of Lincoln National Corporation effective January 1, 1998. The 29 transferred invested assets, which are included in the following tables, consisted of approximately $3.3 billion of bonds, $1.4 billion of mortgage loans and $0.7 billion of policy loans.
As of December 31, ------------------------------------------ Investments 1997 1996 1995 - ----------- -------- ------- ------- (In millions) Fixed maturities Bonds: Finance.................................................. $ 3,387 $ 3,522 $ 3,726 Consumer products........................................ 2,917 2,776 3,102 Energy................................................... 2,678 2,598 2,470 Manufacturing............................................ 2,564 2,559 2,747 Public utilities......................................... 1,487 1,476 1,941 U.S. government and government agencies and authorities 1,238 364 407 Transportation........................................... 954 933 1,046 States, municipalities and political subdivisions........ 703 440 404 Foreign governments(1)................................... 196 158 164 Other.................................................... 245 326 401 ------- ------- ------- Total bonds............................................ 16,369 15,152 16,408 Asset-backed securities....................................... 6,755 6,195 5,925 Redeemable preferred stocks................................... 6 13 15 ------- ------- ------- Total fixed maturities................................. 23,130 21,360 22,348 ------- ------- ------- Equity securities Common stocks: Industrial and miscellaneous............................. 332 255 238 Banks, trust and insurance companies..................... 49 32 21 Public utilities......................................... 27 22 23 ------- ------- ------- Total common stocks.................................... 408 309 282 Non-redeemable preferred stocks............................ 16 6 11 ------- ------- ------- Total equity securities................................ 424 315 293 ------- ------- ------- Mortgage loans Commercial: Retail facilities........................................ 4,267 4,544 4,423 Office buildings......................................... 3,529 3,546 3,685 Apartments............................................... 1,396 1,315 1,281 Industrial............................................... 556 390 399 Hotels................................................... 497 681 692 Other.................................................... 249 94 98 ------- ------- ------- Total commercial....................................... 10,494 10,570 10,578 Agricultural............................................... 21 35 69 ------- ------- ------- Total mortgages........................................ 10,515 10,605 10,647 ------- ------- ------- Policy loans.................................................. 7,146 7,132 6,925 Real estate................................................... 737 1,010 1,138 Other long-term investments................................... 166 196 202 Short-term investments........................................ 61 478 359 ------- ------- ------- Total investments...................................... $42,179 $41,096 $41,912 ======= ======= ======= - ---------- See Note 2(D) to the Financial Statements of CIGNA's 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.
30
Net Investment Income Year ended December 31, - --------------------- ------------------------------------------- 1997 1996 1995 -------- ------- -------- (Dollar amounts in millions) Fixed maturities.............................................. $1,691 $1,686 $1,706 Equity securities............................................. 15 5 34 Mortgage loans................................................ 915 951 894 Policy loans.................................................. 532 548 499 Real estate................................................... 150 184 272 Other investments............................................. 81 75 117 ------ ------ ------ Total ..................................................... 3,384 3,449 3,522 Less investment expenses...................................... 142 163 258 ------ ------ ------ Net investment income, pre-tax................................ $3,242 $3,286 $3,264 ====== ====== ====== Net investment yield(1)....................................... 7.93% 8.40% 8.66% ====== ====== ====== - ---------- (1) The net investment yield is equal to (a) net investment income multiplied by two, divided by (b) the sum, at the beginning and end of the year, of cash, invested assets (at cost or amortized cost less impairments) and investment income due and accrued, less borrowed money, less net investment income.
31 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.
Investments As of December 31, ------------------------------------------ 1997 1996 1995 ------- ------ ------ (Dollar amounts in millions) Fixed maturities Bonds: Foreign governments(1)................................... $ 2,197 $ 2,256 $ 2,343 Finance.................................................. 1,430 1,484 1,655 States, municipalities and political subdivisions........ 1,283 1,300 1,373 Public utilities......................................... 892 945 906 Energy................................................... 832 936 835 Consumer products........................................ 732 749 679 Manufacturing............................................ 718 715 627 Transportation........................................... 366 368 310 U.S. government and government agencies and authorities.. 318 479 687 Other.................................................... 309 295 240 ------- ------- ------- Total bonds.......................................... 9,077 9,527 9,655 Asset-backed securities.................................... 1,729 1,894 1,921 Redeemable preferred stocks................................ 3 3 4 ------- ------- ------- Total fixed maturities............................... 10,809 11,424 11,580 ------- ------- ------- Equity securities Common stocks: Industrial and miscellaneous............................. 305 268 271 Banks, trust and insurance companies..................... 75 85 53 Public utilities......................................... 47 29 13 ------- ------- ------- Total common stocks.................................. 427 382 337 Non-redeemable preferred stocks............................ -- 1 16 ------- ------- ------- Total equity securities.............................. 427 383 353 ------- ------- ------- Other long-term investments................................... 216 237 320 Short-term investments........................................ 96 360 95 ------- ------- ------- Total investments.................................... $11,548 $12,404 $12,348 ======= ======= ======= - ----------- See Note 2(D) to the Financial Statements of CIGNA's Annual Report for a discussion of the method of valuation of investments. (1) Comprises fixed maturities of sovereign foreign governments.
32
Net Investment Income Year Ended December 31, - --------------------- ----------------------------------------- 1997 1996 1995 ------ ------ ------ (Dollar amounts in millions) Interest: Taxable.................................................... $749 $778 $782 Tax-exempt................................................. 58 66 70 ---- ---- ---- Total................................................ 807 844 852 Dividends from stocks......................................... 7 14 11 ---- ---- ---- Total investment income....................................... 814 858 863 Less investment expenses...................................... 53 54 69 ---- ---- ---- Net investment income, pre-tax................................ $761 $804 $794 ==== ==== ==== Net investment yield(1)....................................... 6.13% 6.21% 6.23% ==== ==== ==== - ---------- (1) The net investment yield is equal to (a) net investment income multiplied by two, divided by (b) the sum, at the beginning and end of the year, of cash, invested assets (at cost or amortized cost less impairments) and investment income due and accrued, less borrowed money, less net investment income.
Other Investments and Operations Invested assets for CIGNA's Other Operations totaled $2.9 billion and $2.6 billion as of December 31, 1997 and 1996. They include fixed maturities, mortgage loans, real estate and short-term investments. These assets primarily support the settlement annuity and non-insurance businesses. Net investment income for these investments and for cash and cash equivalents was $242 million for 1997, $243 million for 1996 and $238 million for 1995. 33 H. Regulation CIGNA's subsidiaries, depending on where they operate, are subject to federal, state and foreign 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. For additional information about guaranty fund assessments, see Note 19 to CIGNA's 1997 Financial Statements included in its Annual Report. The NAIC has developed model solvency-related laws that many states have adopted. The NAIC also uses risk-based capital rules (the "RBC rules") for life insurance and property and casualty insurance companies. The RBC rules 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: o If an insurance company's RBC ratio is between 75% and 100%, the "company action level," the company must submit a plan to the regulator detailing corrective action it proposes to undertake. o If a company's RBC ratio is between 50% and 75%, 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. o If a company's RBC ratio is between 35% and 50%, 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. o If the RBC ratio for a company is less than 35%, the "mandatory control level," the regulator must rehabilitate or liquidate the insurer. An insurance commissioner may allow a property and casualty company at or below the mandatory control level that is writing no business and is running off its existing business to continue its run-off. As of December 31, 1997, CIGNA's life insurance and ongoing domestic property and casualty insurance subsidiaries were adequately capitalized under the RBC rules, and the run-off subsidiaries were running off their liabilities as described on page 19. 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. CIGNA's insurance subsidiaries are subject to state laws regulating insurers that are subsidiaries of insurance holding companies. Under such laws, 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. 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 34 rates. Regulation of these entities also may include standards for quality assurance, minimum levels of benefits that must be offered and requirements for availability and continuity of care. A few states require HMOs to participate in guaranty funds, and several state legislatures have recently considered insolvency and guaranty fund legislation, a trend that is expected to continue. Some of CIGNA's HMOs are also federally qualified and subject to regulation as to benefits, solvency and rates under the federal HMO Act. CIGNA administers employee health care benefit plans governed by ERISA and, therefore, may be subject to requirements imposed on ERISA fiduciaries. CIGNA's mental health and substance abuse clinics are licensed by the states in which they operate for quality of treatment. In addition, the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the Mental Health Parity Act of 1996 ("MHPA"), which both became effective in the last 12 months, subject health care insurers to new federal regulation. HIPAA imposes guaranteed issuance, renewal and portability requirements on health care insurers, and MHPA generally prohibits group health plans from establishing separate aggregate annual or life-time dollar limits on mental health benefits. Federal and state efforts to increase regulation of the health care industry are expected to continue in 1998. Such proposals are discussed on page 8. Regulatory concerns with insurance risk selection have increased significantly in recent years. For example, some states have imposed restrictions on the use of underwriting criteria related to AIDS, domestic abuse and credit reports. Also, various interpretations under the Americans with Disabilities Act may affect the provision of insurance benefits under certain types of policies. Domestic property and casualty insurers are required to participate in assigned risk plans, joint underwriting authorities, pools and other residual market mechanisms to write coverages on risks not acceptable under normal underwriting standards. In addition, states have responded to concerns about the marketing, advertising and underwriting of property and casualty insurance by increasing the number and frequency of market conduct examinations, and by imposing increasingly large penalties for violations of laws and regulations pertaining to these functions. The extent of insurance regulation varies significantly among the countries in which CIGNA conducts its international operations. In many countries, foreign insurers are faced with greater restrictions than domestic competitors. These may 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 investment management activities and 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 increased regulation of the health care industry and Superfund, current and proposed federal measures that may significantly affect the insurance business include: pension and other employee benefit regulation; tax legislation (including a recent proposal that could restrict the ability of corporations that own life insurance policies on their officers, directors or employees from fully deducting interest they pay on debt); and Social Security legislation. Congress is also considering several measures that would change the traditional separation of financial services companies. These measures, if enacted, would allow bank affiliates to underwrite insurance and would allow insurance affiliates to perform functions similar to those now reserved for banks. The economic and competitive effects of the legislative and regulatory proposals discussed above would depend upon the final form any such legislation or regulation might take. 35 I. Ratings CIGNA and certain of its insurance subsidiaries are rated by nationally and internationally recognized rating agencies. While the significance of individual ratings varies from agency to agency, companies assigned ratings at the top end of the range have, in the opinion of the rating agency, the strongest capacity for repayment of debt or payment of claims, while companies at the bottom end of the range have the weakest capacity. Insurance ratings represent the opinions of the rating agencies on the financial strength of the company and its capacity to meet the obligations of insurance policies. Insurance rating scales of the principal agencies that rate the Company's insurance subsidiaries are characterized as follows: o A.M. Best Company, Inc. ("A.M. Best"), A++ to F ("Superior" to "In Liquidation"); o Moody's Investors Service ("Moody's"), Aaa to C ("Exceptional" to "Lowest"); o Standard & Poor's Corp. ("S&P"), AAA to R ("Superior" to "Regulatory Action"); and o Duff & Phelps Credit Rating Co. ("DCR"), AAA to DD ("Highest" to "Order of Liquidation"). As of March 10, 1998, the insurance rating for Life Insurance Company of North America obtained from A.M. Best was A+ ("Superior," 2nd of 15), and the insurance ratings for CIGNA Insurance Company of Europe S.A.- N.V. obtained from S&P and A.M. Best were A ("Good," 6th of 18) and A- ("Excellent," 4th of 15), respectively. The insurance ratings obtained for CG Life and the domestic property and casualty ongoing and run-off operations were as follows:
Insurance Ratings(1) -------------------- Life Property & Casualty ---- ------------------- Ongoing Run-off CG Life Operations(2) Operations(3) ------- ------------- ------------- A.M. Best.......................... A+ A- B+ ("Superior," ("Excellent," ("Very Good," 2nd of 15) 4th of 15) 6th of 15)(4) Moody's............................ Aa3 Baa1 Ba1 ("Excellent," ("Adequate," ("Questionable," 4th of 21) 8th of 21) 11th of 21) S&P................................ AA BBB BBB ("Excellent," ("Adequate," ("Adequate," 3rd of 18) 9th of 18) 9th of 18) DCR................................ AA+ A- BBB- ("Very high," ("High," ("Adequate," 2nd of 18) 7th of 18) 10th of 18) - ------------ (1) Includes the rating assigned, the agency's characterization of the rating and the position of the rating in the agency's rating scale (e.g., CG Life's rating by A.M. Best is the 2nd highest rating awarded in its scale of 15). (2) The rated Ongoing Operations consist of CIGNA's domestic ongoing property and casualty insurance subsidiaries. For further information, see "Domestic Operations" beginning on page 18. (3) The rated Run-off Operations consist of domestic insurance subsidiaries that manage run-off policies and related claims, including those for asbestos-related and environmental pollution exposures. For further information, see "Run-off Operations" on page 19. (4) Although this is the sixth highest rating in the A.M. Best rating scale, it is the second highest rating available for run-off operations.
Debt ratings are assessments of the likelihood that the Company will make timely payments of principal and interest. The rating scales of the principal agencies that rate CIGNA's senior debt are characterized as follows: o Moody's, Aaa to C ("Best" to "Lowest"); o S&P, AAA to D ("Extremely Strong" to "Default"); and o DCR, AAA to DD ("Highest" to "Default"). The commercial paper rating scales for Moody's, S&P, DCR and Fitch IBCA Inc. ("Fitch") are as follows: o Moody's, Prime-1 to Not Prime ("Superior" to "Not Prime"); 36 o S&P, A-1+ to D ("Extremely Strong" to "Default"); o DCR, D-1+ to D-5 ("Highest" to "Default"); and o Fitch F-1+ to D ("Exceptional" to "Default"). As of March 10, 1998, the debt ratings obtained from the following agencies were as follows:
Debt Ratings(1) CIGNA Corporation ----------------- Commercial Senior Debt Paper ----------- ---------- Moody's..................................... A3 Prime-2 ("Upper-medium-grade," ("Strong," 7th of 21) 2nd of 4) S&P......................................... A A-1 ("Strong," ("Strong," 6th of 22) 2nd of 7) DCR......................................... A D-1 ("Adequate," ("Very high," 6th of 18) 2nd of 7) Fitch....................................... Not rated F-1 ("Very Strong," 2nd of 6) - ------------ (1) Includes the rating assigned, the agency's characterization of the rating and the position of the rating in the applicable agency's rating scale.
The ratings are reviewed routinely by the rating agencies and may be changed at their discretion. J. Miscellaneous Portions of CIGNA's insurance business are seasonal in nature. Reported claims under group health and certain property and casualty products are generally higher in the first quarter. 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 1997. CIGNA and its principal subsidiaries are not dependent on business from one or a few brokers or agents. In addition, CIGNA's insurance businesses are generally not committed to accept a fixed portion of the business submitted by independent brokers and agents, and generally all such business is subject to its approval and acceptance. CIGNA had approximately 47,700, 42,800 and 44,700 employees as of December 31, 1997, 1996 and 1995, respectively. Item 2. PROPERTIES CIGNA's headquarters are located in approximately 90,240 total square feet of leased office space at One Liberty Place, Philadelphia, Pennsylvania. CIGNA Property & Casualty, CIGNA Group Insurance: Life, Accident, Disability, and CIGNA International are located in a leased building of approximately 1.25 million total square feet at Two Liberty Place, Philadelphia. CIGNA HealthCare, CIGNA Reinsurance and CIGNA Investment Management are located in a complex of buildings owned by CIGNA, aggregating approximately 1.4 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 268,000 total square feet of leased office space at 280 Trumbull Street, Hartford, Connecticut. In addition, CIGNA owns or leases office buildings, or parts thereof, throughout the United States and in other countries. For additional information concerning leases and property, see Notes 2(H) and 15 to CIGNA's 1997 Financial Statements included in its Annual Report. This paragraph does not include information on investment properties. 37 Item 3. LEGAL PROCEEDINGS CIGNA is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of business, either as a liability insurer defending third-party claims brought against its insureds or an insurer defending coverage claims brought against it by its policyholders or other insurers. One such area of litigation involves policy coverage and judicial interpretation of legal liability for asbestos-related and environmental pollution claims. While the outcome of all litigation involving CIGNA, including insurance-related litigation, cannot be determined, litigation (including that related to asbestos and environmental pollution claims) is not expected to result in losses that differ from recorded reserves by amounts that would be material to results of operations, liquidity or financial condition. Also, reinsurance recoveries related to claims in litigation, net of allowance for uncollectible reinsurance, are not expected to result in recoveries that differ from recorded recoverables by amounts that would be material to results of operations, liquidity or financial condition. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Executive Officers of the Registrant Reference is made below to CG Life, which is an indirect subsidiary of CIGNA. All officers are elected to serve for a one-year term or until their successors are elected. Principal occupations and employment during the past five years are listed. H. EDWARD HANWAY, 46, President of CIGNA HealthCare beginning February 1996; and President of CIGNA International from February 1989 until February 1996. GERALD A. ISOM, 59, 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 Corporation is a major provider of financial and insurance products. THOMAS C. JONES, 51, President of CIGNA Investment Management since October 1997; President of CIGNA Individual Insurance from February 1995 through 1997; President of CG Life since March 1995; President of CIGNA Reinsurance Property & Casualty from March 1994 until February 1995; Executive Vice President, Chief Administrative Officer and member of the Boards of Directors of NAC Re Corporation and NAC Reinsurance Corporation from November 1985 until January 1994; and Chief Operating Officer of NAC Re Corporation and NAC Reinsurance Corporation from June 1993 and September 1990, respectively, until January 1994. NAC Re Corporation is the parent corporation of NAC Reinsurance Corporation, a major provider of property and casualty reinsurance products. JOHN K. LEONARD, 49, President of CIGNA Group Insurance: Life, Accident, Disability since March 1992. DONALD M. LEVINSON, 52, Executive Vice President of CIGNA since March 1988, with responsibility for Human Resources and Services. FRANCINE M. NEWMAN, 53, President of CIGNA Reinsurance since July 1984. BYRON D. OLIVER, 55, President of CIGNA Retirement & Investment Services since February 1988. B. KINGSLEY SCHUBERT, 52, President of CIGNA International beginning February 1996; Senior Vice President of CIGNA International (Asia-Pacific) from March 1995 until February 1996; President of CIGNA Insurance Company in Japan from June 1992 until February 1996. JAMES G. STEWART, 55, Executive Vice President and Chief Financial Officer of CIGNA since 1983. WILSON H. TAYLOR, 54, Chairman of CIGNA since 1989; and Chief Executive Officer and President of CIGNA since May 1988. THOMAS J. WAGNER, 58, Executive Vice President and General Counsel of CIGNA since January 1992. 38 PART II Item 5. MARKET FOR 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 Annual Report is incorporated by reference, as is the information from Note 8 to CIGNA's 1997 Financial Statements and the number of shareholders of record as of December 31, 1997 under the caption "Highlights" on page 1 of CIGNA's Annual Report. Item 6. SELECTED FINANCIAL DATA The five-year financial information under the caption "Highlights" on page 1 of CIGNA's Annual Report is incorporated by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information on pages 10 through 23 of CIGNA's Annual Report is incorporated by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the caption "Market Risk of Financial Instruments" on page 23 of CIGNA's Annual Report is incorporated by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CIGNA's Consolidated Financial Statements on pages 24 through 45 and the report of its independent accountants on page 46 of CIGNA's Annual Report are incorporated by reference, as is the unaudited information set forth under the caption "Quarterly Financial Data--Consolidated Results" on page 47. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A. Directors of the Registrant The information under the captions "Nominees for Election" and "Incumbent Directors to Continue in Office" on pages 5 and 6 of CIGNA's proxy statement dated March 18, 1998 are incorporated by reference. B. Executive Officers of the Registrant See PART I above. Item 11. EXECUTIVE COMPENSATION The information under the captions "Executive Compensation" on pages 13 through 18 and "Compensation of Directors" on pages 8 and 9 of CIGNA's proxy statement dated March 18, 1998 is incorporated by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Ownership of CIGNA Corporation Common Stock and Equivalents by Directors, Nominees 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 18, 1998, relating to security ownership of certain beneficial owners and management, is incorporated by reference. 39 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Certain Transactions" on page 9 of CIGNA's proxy statement dated March 18, 1998 is incorporated by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. (1) The following financial statements have been incorporated by reference from the pages indicated below of CIGNA's Annual Report: Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1997, 1996 and 1995 -- page 24. Consolidated Balance Sheets as of December 31, 1997 and 1996 -- page 25. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 -- 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, 1997, the registrant filed (1) a Report on Form 8-K dated October 1, 1997 containing a copy of a news release announcing its preliminary third quarter 1997 earnings estimates, and (2) a Report on Form 8-K dated October 30, 1997 containing a copy of a news release reporting its third quarter 1997 results. 40 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 26, 1998 CIGNA Corporation By:/s/ James G. Stewart ----------------------------------- James G. Stewart Executive Vice President and Chief Financial Officer (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 26, 1998. Principal Executive Officer: Directors:* Robert P. Bauman Robert H. Campbell Wilson H. Taylor* Alfred C. DeCrane, Jr. Chairman, Chief Executive Officer Bernard M. Fox and a Director Peter N. Larson Marilyn W. Lewis Paul F. Oreffice Charles R. Shoemate Louis W. Sullivan, M.D. Harold A. Wagner Principal Accounting Officer: Carol Cox Wait /s/ Gary A. Swords - ----------------------------------- Gary A. Swords Vice President and Chief Accounting Officer *By:/s/ Thomas J. Wagner ----------------------------------- Thomas J. Wagner Attorney-in-Fact 41 CIGNA CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENT SCHEDULES PAGE Report of Independent Accountants on Financial Statement Schedules........ FS-2 Schedules I Summary of Investments--Other Than Investments in Related Parties as of December 31, 1997.................................. FS-3 II Condensed Financial Information of CIGNA Corporation (Registrant)..................................................... FS-4 III Supplementary Insurance Information.............................. FS-8 IV Reinsurance...................................................... FS-10 V Valuation and Qualifying Accounts and Reserves................... FS-11 VI Supplemental Information Concerning Property-Casualty Insurance Operations............................................. FS-12 Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto, which are incorporated by reference from CIGNA's 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 10, 1998 appearing on page 46 of the 1997 Annual Report to Shareholders of CIGNA Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in the index on page FS-1 of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICE WATERHOUSE LLP Philadelphia, Pennsylvania February 10, 1998 FS-2 CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1997 (In millions)
Amount at which shown in the Fair consolidated Type of Investment Cost Value balance sheet - ------------------ ---- ------ ---------------- Fixed maturities Bonds: United States government and government agencies and authorities............................................ $ 1,816 $ 2,152 $ 2,152 States, municipalities and political subdivisions........ 1,835 2,023 2,023 Foreign governments...................................... 2,284 2,396 2,396 Public utilities......................................... 2,387 2,546 2,546 Convertibles and bonds with warrants attached............ 11 12 12 All other corporate bonds................................ 17,348 18,229 18,229 Asset-backed securities.................................... 8,594 8,991 8,991 Redeemable preferred stocks................................ 9 9 9 ------- ------- ------- Total fixed maturities................................. 34,284 36,358 36,358 ------- ------- ------- Equity securities Common stocks: Industrial, miscellaneous and all other.................. 493 639 639 Banks, trust and insurance companies..................... 79 124 124 Public utilities......................................... 53 73 73 Non-redeemable preferred stocks............................ 23 18 18 ------- ------- ------- Total equity securities................................ 648 854 854 Mortgage loans on real estate................................. 10,859 10,859 Policy loans.................................................. 7,253 7,253 Real estate investments (including $344 million of real estate acquired in satisfaction of debt)................... 769 769 Other long-term investments................................... 273 273 Short-term investments........................................ 212 212 ------- ------- Total investments...................................... $54,298 $56,578 ======= =======
FS-3 CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE II CONDENSED FINANCIAL INFORMATION OF CIGNA CORPORATION (REGISTRANT) STATEMENTS OF INCOME (In millions)
For the year ended December 31, ------------------------------------------ 1997 1996 1995 ------- ------ ------- Intercompany income........................................... $ 2 $ 2 $ 2 ------ ------ ------ Total revenues............................................. 2 2 2 ------ ------ ------ Operating expenses: Interest................................................... 118 93 109 Intercompany interest...................................... 20 30 29 Other...................................................... 6 10 5 ------ ------ ------ Total operating expenses................................. 144 133 143 ------ ------ ------ Loss before income taxes...................................... (142) (131) (141) Income tax benefit............................................ (39) (39) (34) ------ ------ ------ Loss of parent company........................................ (103) (92) (107) Equity in income of subsidiaries.............................. 1,189 1,148 318 ------ ------ ------ Net income.................................................... $1,086 $1,056 $ 211 ====== ====== ======
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)
As of December 31, ------------------------- 1997 1996 ------- ------- Assets: Cash and cash equivalents................................................. $ 1 $ -- Investments in subsidiaries............................................... 10,683 9,005 Other assets.............................................................. 77 178 Goodwill.................................................................. 39 56 ------- ------- Total assets............................................................ $10,800 $9,239 ======= ======= Liabilities: Intercompany.............................................................. $ 425 $ 422 Short-term debt........................................................... 687 286 Long-term debt............................................................ 1,371 853 Other liabilities......................................................... 385 470 ------- ------- Total liabilities....................................................... 2,868 2,031 ------- ------- Shareholders' Equity: Common stock (shares issued, 88).......................................... 88 88 Additional paid-in capital................................................ 2,633 2,572 Net unrealized appreciation-- fixed maturities............................ 752 539 Net unrealized appreciation-- equity securities........................... 132 88 Net translation of foreign currencies..................................... (126) (45) Retained earnings......................................................... 5,696 4,855 Less treasury stock, at cost.............................................. (1,243) (889) ------- ------- Total shareholders' equity.............................................. 7,932 7,208 ------- ------- Total liabilities and shareholders' equity.............................. $10,800 $9,239 ======= =======
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)
For the year ended December 31, -------------------------------------------- 1997 1996 1995 --------- --------- --------- Cash Flows from Operating Activities: Net Income.................................................... $ 1,086 $ 1,056 $ 211 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in income of subsidiaries......................... (1,189) (1,148) (318) Dividends received from subsidiaries..................... 847 926 545 Other liabilities........................................ (74) (148) 159 Other, net............................................... 104 6 27 ------- ------- ------- Net cash provided by operating activities.............. 774 692 624 ------- ------- ------- Cash Flows from Investing Activities: Capital contributions to subsidiaries......................... (1,124) (250) (16) Other, net.................................................... (10) (14) (6) ------- ------- ------- Net cash used in investing activities.................. (1,134) (264) (22) ------- ------- ------- Cash Flows from Financing Activities: Net change in intercompany debt............................... 3 253 (471) Net change in short-term debt................................. 358 (6) (13) Issuance of long-term debt................................. 600 -- 86 Repayment of long-term debt................................... (39) (157) -- Repurchase of common stock.................................... (335) (292) -- Issuance of common stock...................................... 19 12 21 Common dividends paid......................................... (245) (242) (222) ------- ------- ------- Net cash provided by (used in) financing activities.... 361 (432) (599) ------- ------- ------- Net increase (decrease) in cash and cash equivalents.......... 1 (4) 3 Cash and cash equivalents, beginning of year.................. -- 4 1 ------- ------- ------- Cash and cash equivalents, end of year....................... $ 1 $ -- $ 4 ======= ======= =======
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-- CIGNA acquired the outstanding common stock of Healthsource, Inc. (Healthsource) on June 25, 1997. The cost of the acquisition was $1.7 billion, reflecting the purchase of Healthsource common stock for $1.4 billion and the retirement of Healthsource debt of $250 million. As of January 1, 1998, CIGNA sold its individual life insurance and annuity businesses for cash proceeds of $1.4 billion. The sale resulted in a gain of approximately $800 million. Since the principal agreement to sell these businesses is in the form of an indemnity reinsurance arrangement, approximately $575 million of the gain will be deferred and amortized over future periods at the rate that earnings from the businesses sold would have been expected to emerge. Note 2-- Long-term debt, net of current maturities, consists of CIGNA's 8.16% Notes due 2000; 8 3/4% Notes due 2001; 7.17% Notes due 2002; 7.4% Notes due 2003; 6 3/8% Notes due 2006; 7.4% Notes due 2007; 8 1/4% Notes due 2007; 7.65% Notes due 2023; 8.3% Notes due 2023; 7 7/8% Debentures due 2027; and Medium-term Notes with interest rates ranging from 5 3/4% to 9 3/4%, and original maturity dates from approximately five to ten years. As of December 31, 1997 and 1996, the weighted average interest rate on Medium-term Notes was 8.3% and 8.4%, respectively. Maturities of long-term debt for each of the next five years are as follows: 1998--$82 million; 1999--$10 million; 2000--$53 million; 2001--$145 million; 2002--$36 million. In 1997, CIGNA issued $300 million of unsecured 7.4% Notes due in 2007 and $300 million of unsecured 7 7/8% Debentures due in 2027. During 1995, CIGNA's 8.2% Convertible Subordinated Debentures due in 2010 were converted through non-cash transactions into approximately 3.6 million shares of CIGNA common stock. In 1995, CIGNA issued $25 million of unsecured 8.16% Notes due in 2000; $25 million of unsecured 7.17% Notes due in 2002; and $36 million of Medium-term Notes. As of December 31, 1997, CIGNA had $1 billion remaining under effective shelf registration statements filed with the Securities and Exchange Commission that may be issued as debt securities, equity securities or both, depending upon market conditions and CIGNA's capital requirements. Interest paid on short- and long-term debt amounted to $113 million, $97 million and $113 million for 1997, 1996 and 1995, 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 $536 million, $285 million and $163 million during 1997, 1996 and 1995, respectively. Note 4-- On February 25, 1998, CIGNA's Board of Directors approved a three-for-one common stock split, an increase in the number of shares authorized for issuance from 200 million to 600 million and a decrease in the par value of common stock from $1 per share to $0.25 per share. These actions are subject to approval at the April 22, 1998 annual meeting of shareholders. FS-7 CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION (In millions)
Deferred Future policy Unpaid policy benefits and claims acquisition contractholder and claim Segment costs deposit funds expenses ------- ----------- --------------- --------- Year Ended December 31, 1997: Property and Casualty: International............................................ $ 518 $ 2,059 $ 2,552 Domestic................................................. 165 -- 6,099 Run-off operations....................................... -- 63 6,601 ------ ------- ------- Total Property and Casualty............................ 683 2,122 15,252 Employee Life and Health Benefits.......................... 21 4,273 2,266 Employee Retirement and Savings Benefits................... 106 18,944 -- Individual Financial Services.............................. 732 14,614 388 All Other.................................................. -- 2,705 -- ------ ------- ------- Total.................................................. $1,542 $42,658 $17,906 ====== ======= ======= Year Ended December 31, 1996: Property and Casualty: International............................................ $ 248 $ 2,094 $ 2,628 Domestic................................................. 174 -- 6,469 Run-off operations....................................... 2 73 7,503 ------ ------- ------- Total Property and Casualty............................ 424 2,167 16,600 Employee Life and Health Benefits.......................... 26 4,287 1,927 Employee Retirement and Savings Benefits................... 88 19,106 -- Individual Financial Services.............................. 692 13,612 314 All Other.................................................. -- 2,490 -- ------ ------- ------- Total.................................................. $1,230 $41,662 $18,841 ====== ======= ======= Year Ended December 31, 1995: Property and Casualty(3): International............................................ $ 203 $ 2,126 $ 2,569 Domestic................................................. 177 -- 6,121 Run-off operations....................................... 11 73 8,433 ------ ------- ------- Total Property and Casualty............................ 391 2,199 17,123 Employee Life and Health Benefits.......................... 29 4,410 1,914 Employee Retirement and Savings Benefits................... 76 20,233 -- Individual Financial Services.............................. 613 12,565 266 All Other.................................................. -- 2,655 -- ------ ------- ------- Total.................................................. $1,109 $42,062 $19,303 ====== ======= =======
FS-8
Benefits, Net losses and Policy Other Unearned Premiums investment settlement acquisition operating Premiums premiums and fees (1) income (2) expenses (1) expenses expenses written -------- ------------ ---------- ------------ ----------- --------- -------- Year Ended December 31, 1997: Property and Casualty: International......................... $ 798 $ 2,615 $ 240 $ 1,685 $ 538 $ 447 $ 1,834 Domestic.............................. 739 1,593 239 1,165 367 420 1,496 Run-off operations ................... 6 22 282 232 14 82 11 ------- ------- ------- ------- ------- ------- ------- Total Property and Casualty ........ 1,543 4,230 761 3,082 919 949 3,341 Employee Life and Health Benefits ...... 165 9,512 562 7,084 8 2,781 -- Employee Retirement and Savings Benefits -- 181 1,597 1,258 26 177 -- Individual Financial Services .......... 66 1,012 1,083 1,408 93 357 -- All Other .............................. -- -- 242 197 -- 49 -- ------- ------- ------- ------- ------- ------- ------- Total ............................. $ 1,774 $14,935 $ 4,245 $13,029 $ 1,046 $ 4,313 $ 3,341 ======= ======= ======= ======= ======= ======= ======= Year Ended December 31, 1996: Property and Casualty: International......................... $ 870 $ 2,568 $ 243 $ 1,631 $ 545 $ 435 $ 1,787 Domestic.............................. 862 1,671 259 1,298 383 356 1,637 Run-off operations ................... 17 159 302 332 58 100 76 ------- ------- ------- ------- ------- ------- ------- Total Property and Casualty ........ 1,749 4,398 804 3,261 986 891 3,500 Employee Life and Health Benefits ...... 139 8,341 567 6,229 12 2,313 -- Employee Retirement and Savings Benefits -- 235 1,680 1,419 21 181 -- Individual Financial Services .......... 52 942 1,039 1,363 119 333 -- All Other .............................. -- -- 243 201 -- 20 -- ------- ------- ------- ------- ------- ------- ------- Total .............................. $ 1,940 $13,916 $ 4,333 $12,473 $ 1,138 $ 3,738 $ 3,500 ======= ======= ======= ======= ======= ======= ======= Year Ended December 31, 1995: Property and Casualty(3): International......................... $ 956 $ 2,716 $ 268 $ 1,811 $ 561 $ 430 $ 1,817 Domestic.............................. 930 1,749 240 1,375 445 474 1,706 Run-off operations ................... 110 175 286 1,576 41 82 64 ------- ------- ------- ------- ------- ------- ------- Total Property and Casualty ........ 1,996 4,640 794 4,762 1,047 986 3,587 Employee Life and Health Benefits ...... 150 8,135 574 6,105 9 2,193 -- Employee Retirement and Savings Benefits -- 258 1,722 1,522 18 159 -- Individual Financial Services .......... 30 881 968 1,268 107 314 -- All Other .............................. -- -- 238 198 -- 16 -- ------- ------- ------- ------- ------- ------- ------- Total .............................. $ 2,176 $13,914 $ 4,296 $13,855 $ 1,181 $ 3,668 $ 3,587 ======= ======= ======= ======= ======= ======= ======= - ------------ (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. (3) CIGNA's domestic property and casualty operations were restructured into ongoing and run-off operations effective December 31, 1995. Amounts shown for the Property and Casualty segment's ongoing and run-off operations for 1995 are reported on a pro forma basis as though the restructuring was in place at the beginning of 1995. These pro forma results are not necessarily indicative of the results that would have been reported had the restructuring actually occurred as of January 1, 1995. Consolidated Property and Casualty segment amounts, including International, did not change as a result of the restructuring.
FS-9 CIGNA CORPORATION AND SUBSIDIARIES SCHEDULE IV REINSURANCE (Dollar amounts in millions)
Percentage Ceded to Assumed of amount Gross other from other Net assumed amount companies companies amount to net ------ --------- ---------- ------ ---------- Year Ended December 31, 1997: Life insurance in force....................... $543,241 $60,855 $152,031 $634,417 24.0% ======== ======= ======== ======== ==== Premiums and fees: Life insurance and annuities................ $ 3,189 $ 272 $ 595 $ 3,512 16.9% Accident and health insurance............... 8,569 404 574 8,739 6.6 Property and casualty insurance............. 3,534 1,368 518 2,684 19.3 -------- ------- -------- -------- Total..................................... $ 15,292 $ 2,044 $ 1,687 $ 14,935 11.3% ======== ======= ======== ======== ==== Year Ended December 31, 1996: Life insurance in force....................... $502,558 $54,850 $155,100 $602,808 25.7% ======== ======= ======== ======== ==== Premiums and fees: Life insurance and annuities................ $ 3,142 $ 252 $ 710 $ 3,600 19.7% Accident and health insurance............... 7,324 339 392 7,377 5.3 Property and casualty insurance............. 3,839 1,531 631 2,939 21.5 -------- ------- -------- -------- Total..................................... $ 14,305 $ 2,122 $ 1,733 $ 13,916 12.5% ======== ======= ======== ======== ==== Year Ended December 31, 1995: Life insurance in force....................... $506,313 $44,683 $158,414 $620,044 25.5% ======== ======= ======== ======== ==== Premiums and fees: Life insurance and annuities................ $ 2,978 $ 171 $ 591 $ 3,398 17.4% Accident and health insurance............... 7,030 336 719 7,413 9.7 Property and casualty insurance............. 4,115 1,745 733 3,103 23.6 -------- ------- -------- -------- Total..................................... $ 14,123 $ 2,252 $ 2,043 $ 13,914 14.7% ======== ======= ======== ======== ====
FS-10 CIGNA CORPORATION SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In millions)
Charged Charged (Credited) (Credited) Balance at to to other Other Balance beginning costs and accounts deductions at end Description of period expenses -describe(1) -describe(2) of period ----------- ---------- ---------- ------------ ------------ --------- 1997: Investment asset valuation reserves: Mortgage loans................................ $101 $ 16 $15 $ (82) $ 50 Real estate................................... 117 -- (6) (34) 77 Allowance for doubtful accounts: Premiums, accounts and notes receivable.................................. 98 61 -- (21) 138 Reinsurance recoverables...................... 711 23 -- (14) 720 Deferred tax asset valuation allowance..................................... 47 6 -- -- 53 1996: Investment asset valuation reserves: Mortgage loans................................ $ 88 $ 26 $ 37 $ (50) $101 Real estate................................... 109 18 11 (21) 117 Allowance for doubtful accounts: Premiums, accounts and notes receivable.................................. 105 13 -- (20) 98 Reinsurance recoverables...................... 700 31 -- (20) 711 Deferred tax asset valuation allowance..................................... 48 (1) -- -- 47 1995: Investment asset valuation reserves: Mortgage loans................................ $179 $ 3 $ 10 $(104) $ 88 Real estate................................... 104 5 10 (10) 109 Allowance for doubtful accounts: Premiums, accounts and notes receivable.................................. 115 16 -- (26) 105 Reinsurance recoverables...................... 435 273 -- (8) 700 Deferred tax asset valuation allowance..................................... 47 1 -- -- 48 - ------------ (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)
- ---------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - ---------------------------------------------------------------------------------------------------------------------- Reserves for Deferred unpaid claims Discount, Affiliation policy and claim if any, With acquisition adjustment deducted in Unearned Registrant costs expenses column C(1) premiums - ---------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997: Consolidated property-casualty entities....... $419 $15,135 $15 $1,352 Year Ended December 31, 1996: Consolidated property-casualty entities....... $409 $16,482 $18 $1,485 Year Ended December 31, 1995: Consolidated property-casualty entities....... $386 $17,023 $19 $1,632
FS-12
- ----------------------------------------------------------------------------------------------------------------------------------- Column F Column G Column H Column I Column J Column K - ----------------------------------------------------------------------------------------------------------------------------------- Claims and claim adjustment expenses incurred related to: Amortization Paid claims Net of deferred and claim Earned investment Current Prior policy acqui- adjustment Premiums premiums(2) income year(2) year(2) sition costs expenses(2) written - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997: Consolidated property-casualty entities..... $3,399 $647 $2,120 $ 218 $834 $3,018 $3,341 Year Ended December 31, 1996: Consolidated property-casualty entities..... $3,576 $687 $2,348 $ 177 $887 $3,037 $3,500 Year Ended December 31, 1995: Consolidated property-casualty entities..... $3,729 $674 $2,386 $1,498 $950 $3,360 $3,587 - ------------ (1) Discounts were computed using an annual interest rate of 9%. (2) Amounts presented are shown net of the effects of reinsurance.
FS-13 INDEX TO EXHIBITS
Number Description Method of Filing - ------ ----------- ---------------- 3.1 Restated Certificate of Incorporation of the Filed as Exhibit 3 to the registrant's registrant as last amended August 4, 1997 Form 10-Q for the quarter ended September 30, 1997 and incorporated herein by reference. 3.2 By-Laws of the registrant as last amended and Filed herewith. restated February 25, 1998 4 Description of Preferred Stock Purchase Rights, Filed as Item 1 and Exhibit 1 to the registrant's Form including the Rights Agreement dated as of July 8-A Registration Statement dated July 23, 1997 and 23, 1997 between CIGNA Corporation and incorporated herein by reference. First Chicago Trust Company of New York Exhibits 10.1 through 10.19 are filed as exhibits pursuant to Item 14(c) of Form 10-K. 10.1 Deferred Compensation Plan for Directors of Filed as Exhibit 10.1 to the registrant's Form 10-K for CIGNA Corporation, as amended and restated the year ended December 31, 1996 and incorporated as of January 1, 1997 herein by reference 10.2 Retirement and Consulting Plan for Directors Filed as Exhibit 10.12 to the registrant's Form 10-K for of CIGNA Corporation, as amended and the year ended December 31, 1993 and incorporated restated as of May 29, 1991 herein by reference. 10.3 (a) Restricted Stock Plan for Non-Employee Filed as Exhibit 10.15 to the registrant's Form 10-K for Directors of CIGNA Corporation effective as the year ended December 31, 1993 and incorporated of September 30, 1989 herein by reference. (b) Description of First Amendment to the Filed as Exhibit 10.16 to the registrant's Form 10-K for Restricted Stock Plan for Non-Employee the year ended December 31, 1993 and incorporated Directors of CIGNA Corporation herein by reference. 10.4 Description of Stock Compensation Plan for Filed as Exhibit 10 to the registrant's Form 10-Q for the Non-Employee Directors of CIGNA quarter ended June 30, 1997 and incorporated herein by Corporation, as amended and restated effective reference. July 1, 1997 10.5 CIGNA Corporation Stock Plan, as amended Filed herewith. and restated through January 1, 1998 10.6 (a) CIGNA Corporation Executive Stock Incentive Filed as Exhibit 10.4 to the registrant's Form 10-K for Plan, as amended and restated March 23, 1988 the year ended December 31, 1993 and incorporated herein by reference. (b) Amendment No.1 dated as of September 28, Filed as Exhibit 10.5 to the registrant's Form 10-K for 1988 to the CIGNA Corporation Executive the year ended December 31, 1993 and incorporated Stock Incentive Plan herein by reference. (c) Amendment No. 2 dated as of March 27, 1991 Filed as Exhibit 10.6 to the registrant's Form 10-K for to the CIGNA Corporation Executive Stock the year ended December 31, 1993 and incorporated Incentive Plan herein by reference. (d) Amendment No.3 dated as of July 31, 1996 to Filed as Exhibit 10.3 to the registrant's Form 10-Q for the CIGNA Corporation Executive Stock the quarter ended June 30, 1996 and incorporated Incentive Plan herein by reference. E-1 Number Description Method of Filing - ------ ----------- ---------------- 10.7 CIGNA Executive Severance Benefits Plan, Filed as Exhibit 10.11 to the registrant's Form 10-K for effective as of January 1, 1997 the year ended December 31, 1996 and incorporated herein by reference. 10.8 (a) CIGNA Executive Incentive Plan effective as Filed as Appendix A to the registrant's Definitive Proxy of January 1, 1997 Statement on Schedule 14A dated March 19, 1997 and incorporated herein by reference. (b) Amendment No. 1 to the CIGNA Executive Filed herewith. Incentive Plan dated as of February 25, 1998 10.9 CIGNA Long-Term Incentive Plan, as Filed herewith. amended and restated through January 1, 1998 10.10 (a) Deferred Compensation Plan of CIGNA Filed as Exhibit 10.15 to the registrant's Form 10-K for Corporation and Participating Subsidiaries, as the year ended December 31, 1995 and incorporated amended and restated as of January 1, 1996 herein by reference. (b) Amendment No. 1 dated as of December 16, Filed as Exhibit 10.9(b) to the registrant's Form 10-K 1996 to the Deferred Compensation Plan of for the year ended December 31, 1996 and incorporated CIGNA Corporation and Participating herein by reference. Subsidiaries 10.11 (a) CIGNA Supplemental Pension Plan, as Filed as Exhibit 10.1 to the registrant's Form 10-Q for amended and restated as of July 28, 1993 the quarter ended June 30, 1994 and incorporated herein by reference. (b) Description of July 26, 1995 Amendment to Filed as Exhibit 10.1 to the registrant's Form 10-Q for CIGNA Supplemental Pension Plan the quarter ended September 30, 1995 and incorporated herein by reference. 10.12 Description of CIGNA Corporation Financial Filed as Exhibit 10.9 to the registrant's Form 10-K for Services Program the year ended December 31, 1993 and incorporated herein by reference. 10.13 Description of the CIGNA Corporation Key Filed as Exhibit 10.7 to the registrant's Form 10-K for Management Annual Incentive Bonus Plan the year ended December 31, 1993 and incorporated herein by reference. 10.14 Agreement dated February 9, 1993 between Filed as Exhibit 10.14 to the registrant's Form 10-K for Mr. Isom and the registrant the year ended December 31, 1993 and incorporated herein by reference. 10.15 Form of Special Retention Agreement with Filed as Exhibit 10.3 to the registrant's Form 10-Q for Messrs. Taylor and Stewart the quarter ended March 31, 1995 and incorporated herein by reference. 10.16 Special Retention Agreement dated March 27, Filed as Exhibit 10.26 to the registrant's Form 10-K for 1996 with Mr. Levinson the year ended December 31, 1995 and incorporated herein by reference. 10.17 Non-Compete Agreement dated October 20, Filed herewith. 1997 between Mr. Taylor and the registrant E-2 Number Description Method of Filing - ------ ----------- ---------------- 10.18 Form of Non-Compete Agreement dated Filed herewith. December 8, 1997 with Messrs. Stewart, Isom, Hanway and Levinson 10.19 Description of Mandatory Deferral of Non- Filed as Exhibit 10.17 to the registrant's Form 10-K for Deductible Executive Compensation the year ended December 31, 1996 and incorporated Arrangement herein by reference. 12 Computation of Ratios of Earnings to Fixed Filed herewith. Charges 13 Portions of registrant's 1997 Annual Report to Filed herewith. Shareholders (Entire Annual Report bound in printed versions of Form 10-K) 21 Subsidiaries of the Registrant Filed herewith. 23 Consent of Independent Accountant Filed herewith. 24.1 Powers of Attorney Filed herewith. 24.2 Certified Resolutions Filed herewith. 27.1 Financial Data Schedule Included only in EDGAR version of the Form 10-K. 27.2 Restated Financial Data Schedule Included only in EDGAR version of the Form 10-K. 27.3 Restated Financial Data Schedule Included only in EDGAR version of the Form 10-K.
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, PA 19192-2378. E-3 EX-3.2 2 BY-LAWS CIGNA CORPORATION A Delaware Corporation Incorporated November 3, 1981 As Amended and Restated February 25, 1998 INDEX TO BY-LAWS ARTICLE I OFFICES Page Section 1. Registered Office 1 Section 2. Other Offices 1 ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. Place of Meetings 1 Section 2. Annual Meeting 1 Section 3. Special Meetings 2 Section 4. Notice of Meetings 2 Section 5. List of Shareholders 3 Section 6. Quorum, Adjournments 3 Section 7. Organization 4 Section 8. Order of and Rules for Conducting Business 4 Section 9. Voting 5 Section 10. Inspectors of Election 7 Section 11. Nomination of Directors 8 Section 12. Notice of Shareholder Business 10 ARTICLE III BOARD OF DIRECTORS Section 1. General Powers 12 Section 2. Number, Qualifications, Election and Term of Office 12 Section 3. Place of Meetings 13 Section 4. Annual Organization 13 Section 5. Regular Meetings 14 Section 6. Special Meetings 14 Section 7. Notice of Meetings 14 Section 8. Quorum and Manner of Acting 15 Section 9. Organization 16 Section 10. Resignations 16 Section 11. Vacancies 16 Section 12. Removal of Directors 16 Section 13. Compensation 17 Section 14. Committees 17 Section 15. Action by Consent 18 Section 16. Telephonic Meeting 19 -i- ARTICLE IV OFFICERS Page Section 1. Number and Qualifications 19 Section 2. Resignations 20 Section 3. Removal 20 Section 4. Chairman of the Board 20 Section 5. President 21 Section 6. Vice Presidents 21 Section 7. Treasurer 21 Section 8. Corporate Secretary 22 Section 9. Assistant Treasurer 23 Section 10. Assistant Corporate Secretary 24 Section 11. Designation 24 Section 12. Agents and Employees 24 Section 13. Officers' Bonds or Other Security 24 Section 14. Compensation 25 Section 15. Terms 25 ARTICLE V STOCK CERTIFICATES AND THEIR TRANSFER Section 1. Stock Certificates 25 Section 2. Facsimile Signatures 27 Section 3. Lost Certificates 27 Section 4. Transfers of Stock 28 Section 5. Transfer Agents and Registrars 28 Section 6. Regulations 28 Section 7. Fixing the Record Date 29 Section 8. Registered Shareholders 29 ARTICLE VI INDEMNIFICATION Section 1. General 30 Section 2. Derivative Actions 31 Section 3. Indemnification in Certain Cases 32 Section 4. Procedure 32 Section 5. Advances for Expenses 32 Section 6. Exclusion of Mandatory Indemnification and Advances in Certain Cases 33 Section 7. Rights Not Exclusive 33 Section 8. Insurance 34 Section 9. Definition of Corporation 34 Section 10. Definition of Other Terms 35 Section 11. Right of Indemnitee to Bring Suit in Certain Circumstances 35 -ii- ARTICLE VII GENERAL PROVISIONS Page Section 1. Dividends 38 Section 2. Reserves 38 Section 3. Seal 39 Section 4. Fiscal Year 39 Section 5. Contributions 39 Section 6. Borrowing, etc. 39 Section 7. Deposits 39 Section 8. Execution of Contracts, Deeds, etc. 40 Section 9. Voting of Stock in Other Corporations 40 Section 10. Form of Records 40 Section 11. Repurchase of Stock 41 ARTICLE VIII AMENDMENTS 42 ARTICLE IX DEFINITIONS 42 -iii- BY-LAWS OF CIGNA CORPORATION (A Delaware Corporation) ARTICLE I Offices SECTION 1. Registered Office. The registered office of the Corporation within the State of Delaware shall be in the City of Wilmington, County of New Castle. SECTION 2. Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors shall from time to time determine or the business of the Corporation may require. ARTICLE II Meetings of Shareholders SECTION 1. Place of Meetings. All meetings of the shareholders for the election of directors or for any other purpose shall be held at any such place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. SECTION 2. Annual Meeting. The annual meeting of shareholders, commencing with the year 1984, shall be held at 9:30 A.M. on the fourth Wednesday in April of each year, if not a legal -1- holiday, and if a legal holiday, then on the next succeeding day not a legal holiday, at 9:30 A.M., or on such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At such annual meeting, the shareholders shall elect, by a plurality vote, a Board of Directors and transact such other business as may properly be brought before the meeting. SECTION 3. Special Meetings. Special meetings of shareholders, unless otherwise prescribed by statute, may be called at any time by the Board of Directors or the Chairman of the Board. SECTION 4. Notice of Meetings. Except as otherwise expressly required by statute, written notice of each annual and special meeting of shareholders stating the place, date and time of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each shareholder of record entitled to vote thereat not less than ten nor more than sixty days before the date of the meeting. Business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice. Notice shall be given personally or by mail and, if by mail, shall be sent in a postage prepaid envelope, addressed to the shareholder at his address as it appears on the records of the Corporation. Such notice by mail shall be deemed given at the time when the same shall be deposited in the United States mail, postage prepaid. Notice of any meeting shall not be required to be given to any person who attends such -2- meeting, except when such person attends the meeting in person or by proxy for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, or who, either before or after the meeting, shall submit a signed written waiver of notice, in person or by proxy. Neither the business to be transacted at, nor the purpose of, an annual or special meeting of shareholders need be specified in any written waiver of notice. SECTION 5. List of Shareholders. The Corporate Secretary of the Corporation, or such other person who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city, town or village where the meeting is to be held, which place shall be specified in the notice of meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present. SECTION 6. Quorum, Adjournments. The holders of at least two-fifths of the issued and outstanding stock of the Corporation -3- entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of shareholders, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented by proxy at any meeting of shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented by proxy. At such adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than thirty days, or, if after adjournment a new record date is set, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. SECTION 7. Organization. At each meeting of shareholders, the Chairman of the Board, or, in his absence, a chairman designated by the Board of Directors, or in the absence of such designation a chairman chosen at the meeting, shall act as chairman of the meeting. The Corporate Secretary or, in his absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting shall act as secretary of the meeting and keep the minutes thereof. SECTION 8. Order of and Rules for Conducting Business. The order of and the rules for conducting business at all meetings of -4- the shareholders shall be as determined by the chairman of the meeting. SECTION 9. Voting. Except as otherwise provided by statute, the Certificate of Incorporation, or any resolution or resolutions adopted by the Board of Directors pursuant to the authority vested in it by the Certificate of Incorporation, each shareholder of the Corporation shall be entitled at each meeting of shareholders to one vote for each share of capital stock of the Corporation standing in his name on the record of shareholders of the Corporation: (a) on the date fixed pursuant to the provisions of Section 7 of Article V of these By-Laws as the record date for the determination of the shareholders who shall be entitled to notice of and to vote at such meeting; or (b) if no such record date shall have been fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given, or, if notice is waived by all shareholders, at the close of business on the day next preceding the day on which the meeting is held. Each shareholder entitled to vote at any meeting of shareholders may vote in person or may authorize another person or persons to act for him by a proxy authorized by an instrument in writing or by a transmission permitted by law delivered to the Inspectors of Election, but no such proxy shall be voted after three years from its date, unless the proxy provides for a longer period. Any copy, facsimile telecommunication or other reliable -5- reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A shareholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by delivering an instrument in writing or a transmission permitted by law revoking the proxy or constituting another valid proxy bearing a later date to the Inspectors. Any such proxy shall be delivered to the Inspectors, or such other person so designated to receive proxies, at or prior to the time designated in the order of business for so delivering such proxies. When a quorum is present at any meeting, the vote of the shareholders who are present in person or represented by proxy and who hold a majority of the voting power of the issued and outstanding stock of the Corporation represented at such meeting and entitled to vote thereon, shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute or of the Certificate of Incorporation or of these By-Laws, a different vote is required, in which case such express provision shall govern and control the decision of such question. -6- Unless required by statute, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the shareholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. SECTION 10. Inspectors of Election. The Board of Directors or the Chairman of the Board of the Corporation shall, in advance of any meeting of shareholders, appoint one or more Inspectors of Election to act at the meeting or at any adjournment and make a written report thereof, and may designate one or more persons as alternate Inspectors to replace any Inspectors who fail to act. If no Inspector or alternate is able to act at a meeting of shareholders, the chairman of the meeting shall appoint one or more Inspectors to act at the meeting. Each Inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of Inspector at such meeting with strict impartiality and according to his best ability. The Inspectors shall determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting and the validity of proxies and ballots, receive and count all votes and ballots, determine all challenges and questions arising in connection with the right to vote, retain for a reasonable period a record of the disposition of any challenges made to any determination by the Inspectors, and certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots and report the same to -7- the chairman of the meeting, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. The Inspectors may appoint or retain other persons or entities to assist the Inspectors in the performance of the duties of the Inspectors. The date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the Inspectors after the closing of the polls unless the Court of Chancery upon application by a shareholder shall determine otherwise. On request of the chairman of the meeting, the Inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an Inspector of an election of directors. Inspectors need not be shareholders. Section 11. Nomination of Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in -8- writing to the Corporate Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days prior to the meeting; provided, however, that in the event that less than 90 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was first given or such public disclosure was first made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving notice (i) the name and address, as they appear on the Corporation's stock ledger, of such shareholder, (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder and (iii) if the shareholder intends to solicit proxies in support of such shareholder's nominees, a representation to that effect. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the -9- Corporate Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election at any meeting of shareholders as a director of the Corporation unless nominated in compliance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in compliance with the procedures prescribed by the By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nominations shall be disregarded. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 11. SECTION 12. Notice of Shareholder Business. At the annual meeting of shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting business must be a proper subject for shareholder action under the Delaware General Corporation Law and must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder of the Corporation who is a shareholder of record at the time of -10- giving of notice provided for in this Section and who shall be entitled to vote at the meeting. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Corporate Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 90 days prior to the meeting; provided, however, that in the event that less than 90 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder, to be timely, must be so received not later than the close of business on the 10th day following the date on which such notice of the date of the annual meeting was first mailed or such public disclosure was first made. A shareholder's notice to the Corporate Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, (b) as to the shareholder giving such notice (i) the name and address, as they appear on the Corporation's stock ledger, of such shareholder, (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder, and (iii) if the shareholder intends to solicit proxies in support of such shareholder's proposal, a representation to that effect; and (c) any material interest of the shareholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at an -11- annual meeting except in compliance with the procedures set forth in this Section 12. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in compliance with the provisions of this Section 12, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. At any special meeting of shareholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors. ARTICLE III Board of Directors SECTION 1. General Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The Board of Directors may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute or the Certificate of Incorporation directed or required to be exercised or done by the shareholders. SECTION 2. Number, Qualifications, Election and Term of Office. The Board of Directors shall consist of not less than 8 nor more than 16 directors. The number of directors may be fixed, from time to time, by the affirmative vote of a majority of the entire Board of Directors. Any decrease in the number of directors -12- shall be effective at the time of the next succeeding annual meeting of shareholders unless there shall be vacancies in the Board of Directors, in which case such decrease may become effective at any time prior to the next succeeding annual meeting to the extent of the number of such vacancies. Directors need not be shareholders. The directors (other than members of the initial Board of Directors) shall be divided into three classes which shall be divided as evenly as practicable with respect to the number of members of each class; the term of office of those of the first class to expire at the annual meeting commencing in April, 1983; of the second class one year thereafter; of the third class two years thereafter; and at each annual election held after such classification and election, directors shall be chosen by class for a term of three years, or for such shorter term as the shareholders may specify to complete the unexpired term of a predecessor, or to preserve the division of the directors into classes as provided herein. Each director shall hold office until his successor shall have been elected and qualified, or until his death, or until he shall have resigned, or have been removed, as hereinafter provided in these By-Laws. SECTION 3. Place of Meetings. Meetings of the Board of Directors shall be held at such place or places, within or without the State of Delaware, as the Board of Directors may from time to time determine or as shall be specified in the notice of any such meeting. SECTION 4. Annual Organization. Following the Annual Meeting -13- of Shareholders, the Board of Directors shall elect officers and take such other actions as may be necessary or appropriate for the purpose of organization of the Corporation. SECTION 5. Regular Meetings. Regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors may fix. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day. Notice of regular meetings of the Board of Directors need not be given except as otherwise required by statute or these By-Laws. SECTION 6. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, or by one-third of the members of the Board of Directors of the Corporation. SECTION 7. Notice of Meetings. Notice of each special meeting of the Board of Directors (and of each regular meeting for which notice shall be required) shall be given by the Corporate Secretary as hereinafter provided in this Section 7. Any such notice shall state the place, date and time of the meeting. Except as otherwise required by these By-Laws, such notice need not state the purposes of such meeting. Notice of each such meeting shall be mailed, postage prepaid, to each director, addressed to him at his residence or usual place of business, by first-class mail, at least two days before the day on which such meeting is to be held, or shall be sent addressed to him at such place by telegraph, cable, -14- telex, telecopier or other similar means, or be delivered to him personally or be given to him by telephone or other similar means, at least twelve hours before the time at which such meeting is to be held. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting, except when he shall attend for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 8. Quorum and Manner of Acting. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and, except as otherwise expressly required by statute or the Certificate of Incorporation or these By-Laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present thereat may adjourn such meeting to another time and place. Notice of the time and place of any such adjourned meeting shall be given to all of the directors unless such time and place were announced at the meeting at which the adjournment was taken, in which case such notice shall only be given to the directors who were not present thereat. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The directors shall act only as a Board and the -15- individual directors shall have no power as such. SECTION 9. Organization. At each meeting of the Board of Directors, the Chairman of the Board, or, in the absence of the Chairman of the Board, another director chosen by a majority of the directors present shall act as chairman of the meeting and preside thereat. The Corporate Secretary or, in his absence, any person appointed by the chairman of the meeting shall act as secretary of the meeting and keep the minutes thereof. SECTION 10. Resignations. Any director of the Corporation may resign at any time by giving written notice of his resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 11. Vacancies. Any vacancy in the Board of Directors, whether arising from death, disqualification, resignation, removal for cause, an increase in the number of directors or any other cause, may be filled by the vote of a majority of the directors then in office, though less than a quorum, or by the sole remaining director. Each director so elected shall hold office until his successor shall have been elected and qualified. SECTION 12. Removal of Directors. Any director may be removed, only for cause, at any time, by the holders of a majority of the voting power of the issued and outstanding capital stock of -16- the Corporation entitled to vote at an election of directors. SECTION 13. Compensation. The Board of Directors shall have authority to fix the compensation, including fees and reimbursement of expenses, of directors, including the Chairman of the Board, for services to the Corporation in any capacity. SECTION 14. Committees. (a) The Board shall create an Executive Committee, which shall consist of no less than two nor more than seven members of the Board and shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it, except the Executive Committee shall not have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the shareholders, any action or matter expressly required by the General Corporation Law of the State of Delaware to be submitted to shareholders for approval or (ii) adopting, amending or repealing any By-Law of the Corporation. (b) The Board shall create an Audit Committee and a People Resources Committee, each of which shall consist of three (3) or more members of the Board of Directors of the Corporation, none of whom shall be employees of the Corporation or its subsidiaries. (c) The Board may also create such other committees, with such authority and duties, as the Board may from time to time deem advisable, and may authorize any of such committees to appoint one or more subcommittees. Each such committee or subcommittee, to the -17- extent provided in the resolution creating it, shall have and may exercise all the powers and authority of the Board of Directors and may authorize the seal of the Corporation to be affixed to all papers which require it but shall have no greater powers than those given the Executive Committee by these By-Laws and as restricted by statute or the Certificate of Incorporation. Each such committee or subcommittee shall serve at the pleasure of the Board of Directors or of the committee creating it as the case may be, and have such name as may be determined from time to time by resolution adopted by the Board of Directors or by the committee creating it. Each committee shall keep regular minutes of its meeting and report the same to the Board of Directors or the committee creating it. (d) The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In addition, in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not the member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. SECTION 15. Action by Consent. Unless restricted by the Certificate of Incorporation, any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and -18- the writing or writings are filed with the minutes of the proceedings of the Board of Directors or such committee, as the case may be. SECTION 16. Telephonic Meeting. Unless restricted by the Certificate of Incorporation, any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting. ARTICLE IV Officers SECTION 1. Number and Qualifications. The officers of the Corporation shall be elected by the Board of Directors and shall include the Chairman of the Board, the President, and one or more Vice Presidents. If the Board of Directors wishes, it may also elect other officers as may be necessary or desirable for the business of the Corporation; or the Board may authorize the Chairman of the Board to appoint one or more classes of officers with such titles (including the titles of Vice President, Corporate Secretary and Treasurer), powers, duties and compensation as may be approved by the appointing officer. Any two or more offices may be held by the same person, and no officer except the Chairman of the Board need be a director. Each officer shall hold office until his -19- successor shall have been duly elected or appointed and shall have qualified, or until his death, or until he shall have resigned or have been removed, as hereinafter provided in these By-Laws. SECTION 2. Resignations. Any officer of the Corporation may resign at any time by giving written notice of such resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon receipt. Unless otherwise specified therein, the acceptance of any such resignation shall not be necessary to make it effective. SECTION 3. Removal. Any officer of the Corporation may be removed, either with or without cause, at any time, by the Board of Directors at any meeting thereof. Any appointed officer of the Corporation may also be removed, either with or without cause, at any time, by the Chairman of the Board. SECTION 4. Chairman of the Board. The Chairman of the Board shall be a member of the Board of Directors, and shall preside at all meetings of the shareholders, of the Board of Directors, and of the Executive Committee at which he shall be present. He shall be the Chief Executive Officer of the Corporation and shall have general supervision over the business and operations of the Corporation, subject, however, to the control of the Board of Directors. He may serve as a member of any committee of the Board except as may otherwise be determined by the Board or provided in these By-Laws, provided, however, that in his capacity as Chief Executive Officer he shall have the right to attend all meetings of -20- any committee and to participate in its discussions. He shall perform all duties incident to the Offices of Chairman of the Board and Chief Executive Officer, and such other duties as may from time to time be assigned to him by the Board of Directors. SECTION 5. President. The President shall perform all duties incident to the Office of President, and such other duties as may from time to time be assigned to him by the Chairman of the Board or the Board of Directors. In the absence or disability of the Chairman of the Board, the President shall perform all other duties of the Chairman of the Board, except presiding at meetings of shareholders and Board of Directors, subject to the control of the Board of Directors; and when so acting, shall have all the powers of, and be subject to all the restrictions upon the Chairman of the Board. SECTION 6. Vice Presidents. Each Vice President shall perform such duties as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board, the President, or such other officer as may be designated by one of the foregoing. In the absence or disability of the Chairman of the Board, and the President, one of the Vice Presidents, in the order determined by the Board of Directors, shall perform all duties of the Chairman of the Board except presiding at meetings of shareholders and Board of Directors, and, when so acting, shall have the powers of and be subject to the restrictions placed upon the Chairman of the Board in respect of the performance of such duties. -21- SECTION 7. Treasurer. The Treasurer shall: (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (c) deposit all moneys and other valuables to the credit of the Corporation in such depositories as may be designated by the Board of Directors or pursuant to its direction; (d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and supervise the investments of its funds, taking proper vouchers therefor; (f) render to the Board of Directors, whenever the Board of Directors may require, an account of the financial condition of the Corporation; and (g) in general, perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board of Directors, or the Chairman of the Board, the President, or such other officer as may be designated by one of the foregoing. SECTION 8. Corporate Secretary. The Corporate Secretary shall: (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board of Directors, the committees of the Board of Directors and the shareholders; -22- (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all certificates for shares of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all duties incident to the office of Corporate Secretary and such other duties as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board, the President, or such other officer as may be designated by one of the foregoing. SECTION 9. The Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their seniority), shall, in the absence of the Treasurer or in the event of the inability or refusal of the Treasurer to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as from time to time may be assigned by the Board of Directors, the Chairman of the Board, the President, the Treasurer, or such other -23- officer as may be designated by one of the foregoing. SECTION 10. The Assistant Corporate Secretary. The Assistant Corporate Secretary, or if there be more than one, the Assistant Corporate Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their seniority), shall, in the absence of the Corporate Secretary or in the event of the inability or refusal of the Corporate Secretary to act, perform the duties and exercise the powers of the Corporate Secretary and shall perform such other duties as from time to time may be assigned by the Board of Directors, the Chairman of the Board, the President, the Corporate Secretary, or such other officer as may be designated by one of the foregoing. SECTION 11. Designation. The Board of Directors may, by resolution, designate one or more officers to be any of the following: Chief Operating Officer, Chief Financial Officer, General Counsel, or Chief Accounting Officer. SECTION 12. Agents and Employees. If authorized by the Board of Directors, the Chairman of the Board, the President, or any officer or employee of the Corporation may appoint or employ such agents and employees as shall be requisite for the proper conduct of the business of the Corporation, and may fix their compensation and the conditions of their employment, subject to removal by the appointing or employing person. SECTION 13. Officers' Bonds or Other Security. If required by the Board of Directors, any officer of the Corporation shall -24- give a bond or other security for the faithful performance of his duties, in such amount and with such surety as the Board of Directors may require. SECTION 14. Compensation. The compensation of all officers of the Corporation for their services as such officers shall be fixed from time to time by the Board of Directors unless by resolution of the Board that authority is delegated to a committee of the Board, Chairman of the Board, the President, or any other officer of the Corporation. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that he is also a director of the Corporation. SECTION 15. Terms. Unless otherwise specified by the Board of Directors in any particular election or appointment, each officer shall hold office, and be removable, at the pleasure of the Board. ARTICLE V Stock Certificates and Their Transfer SECTION 1. Stock Certificates; Uncertificated Shares. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such resolution by the Board of Directors, every holder -25- of stock represented by certificates, and upon request every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the Corporation by the Chairman of the Board, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Corporate Secretary or an Assistant Corporate Secretary, representing the number of shares registered in certificate form. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restriction of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of the State of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the Corporation shall send to the -26- registered owner thereof a written notice containing the information required or permitted to be set forth or stated on certificates pursuant to this section or otherwise pursuant to the Delaware General Corporation Law. Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated stock and the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. SECTION 2. Facsimile Signatures. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person was such officer, transfer agent or registrar at the date of issue. SECTION 3. Lost Certificates. The Corporation may issue a new certificate or certificates, or uncertificated shares, in the place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed. The Corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct sufficient to indemnify it against any claim that may be made against the Corporation on account of the alleged loss, theft or -27- destruction of any such certificate or the issuance of such new certificate or uncertificated shares. SECTION 4. Transfers of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority or transfer, or upon receipt by the transfer agent of a proper instruction from the registered holder of uncertificated shares, it shall be the duty of the Corporation to transfer such shares upon its records and, in connection with the transfer of a share that will be certificated, to issue a new certificate to the person entitled thereto and to cancel the old certificate provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. Whenever any transfer of stock shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the certificates are presented to the Corporation for transfer, or when proper instructions with respect to the transfer of uncertificated shares are received, both the transferor and the transferee request the Corporation to do so. SECTION 5. Transfer Agents and Registrars. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. SECTION 6. Regulations. The Board of Directors may make such additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the -28- Corporation. SECTION 7. Fixing the Record Date. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 8. Registered Shareholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments a person registered on its records as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. -29- ARTICLE VI Indemnification SECTION 1. General. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person (i) is or was a director, officer, or employee of the Corporation, (ii) or is or was a director, officer or employee of the Corporation or any of its subsidiaries serving at the request of the Corporation as a director, officer, employee, agent, trustee or partner of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests -30- of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the conduct was unlawful. SECTION 2. Derivative Actions. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, or employee of the Corporation, or is or was a director, officer or employee of the Corporation or any of its subsidiaries serving at the request of the Corporation as a director, officer, employee, agent, trustee or partner of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery -31- or such other court shall deem proper. SECTION 3. Indemnification in Certain Cases. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2 of this Article VI, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. SECTION 4. Procedure. Any indemnification under Sections 1 and 2 of this Article VI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer or employee is proper in the circumstances because such person has met the applicable standard of conduct set forth in such Sections 1 and 2. Such determination shall be made (a) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (b) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (c) by the shareholders. SECTION 5. Advances for Expenses. Expenses (including attorneys' fees) incurred in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer or employee to repay such amount if -32- it shall be ultimately determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VI. SECTION 6. Exclusion of Mandatory Indemnification and Advances in Certain Cases. Notwithstanding any other provision of this Article VI, the Corporation shall not be obligated to indemnify any person under Sections 1, 2 or 3 of Article VI or to advance expenses under Section 5 thereof to any person who has initiated any proceeding or part thereof, unless the initiation of such proceeding or part thereof was authorized or ratified by the Board of Directors. SECTION 7. Rights Not Exclusive. The indemnification and advancement of expenses provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any law, by-law, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in the official capacity of such person and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee and shall inure to the benefit of the heirs, executors and administrators of such a person. Any repeal, modification or amendment of this Article VI shall not adversely affect any rights or obligations then existing between the Corporation and any then incumbent or former director, officer, or employee with respect to any facts then or theretofore existing or any action, suit, or proceeding theretofore or thereafter brought -33- based in whole or in part upon such facts. SECTION 8. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, agent, trustee or partner of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of the status of such person as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article VI. SECTION 9. Definition of Corporation. For the purposes of this Article VI, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees and agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article VI with respect to the resulting or surviving corporation as such person would if such person had -34- served with respect to such constituent corporation if its separate existence had continued. "The Corporation" shall also include Connecticut General Corporation and INA Corporation for the period ending at the time that such corporations became subsidiaries of CIGNA Corporation. SECTION 10. Definition of Other Terms. For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes or penalties assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VI. SECTION 11. Right of Indemnitee to Bring Suit in Certain Circumstances. Any person entitled to indemnification under this Article VI is referred to in this section as an "indemnitee." If after the occurrence of a Change of Control (as defined in this section) a claim under Sections 1, 2, 3 or 5 of this Article VI is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the -35- case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its board of directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard -36- of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section or otherwise shall be on the Corporation. "Change of Control" shall mean that: (a) A corporation, person or group acting in concert as described in Section 14(d)(2) of the Securities Exchange Act of 1934 as amended (the "Exchange Act"), holds or acquires beneficial ownership, within the meaning of Rule 13d-3 promulgated under the Exchange Act, of a number of preferred or common shares of the Corporation having voting power which is either: (1) more than 50 percent of the voting power of the shares which voted in the election of directors of the Corporation at the shareholders' meeting immediately preceding such determination; or, (2) more than 25 percent of the voting power of common shares outstanding of the Corporation; or, (b) As a result of a merger or consolidation to which the Corporation is a party, either: (1) the Corporation is not the surviving corporation; or, (2) Directors of the Corporation immediately prior to the merger or consolidation constitute less -37- than a majority of the board of directors of the surviving corporation; or, (c) A change occurs in the composition of the Board at any time during any consecutive 24-month period such that the "Continuity Directors" cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence, "Continuity Directors" shall mean those members of the Board who either: (1) were directors at the beginning of such consecutive 24-month period, or, (2) were elected by, or upon nomination or recommendation of, at least a majority (consisting of at least nine directors) of the Board. ARTICLE VII General Provisions SECTION 1. Dividends. Subject to the provisions of statute and the Certificate of Incorporation, dividends upon the shares of capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property or in shares of stock of the Corporation, unless otherwise provided by statute or the Certificate of Incorporation. SECTION 2. Reserves. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors may, from time to time, in its absolute discretion, think proper as a reserve or -38- reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors may think conducive to the interests of the Corporation. The Board of Directors may modify or abolish any such reserves in the manner in which it was created. SECTION 3. Seal. The seal of the Corporation shall be in such form as shall be approved by the Board of Directors. SECTION 4. Fiscal Year. The fiscal year of the Corporation shall be fixed, and once fixed, may thereafter be changed, by resolution of the Board of Directors. SECTION 5. Contributions. The Board of Directors shall have the authority from time to time to make such contributions as the Board in its discretion shall determine, for public and charitable purposes. SECTION 6. Borrowing, etc. No officer, agent or employee of the Corporation shall have any power or authority to borrow money on its behalf, to pledge its credit, or to mortgage or pledge its real or personal property, except within the scope and to the extent of the authority delegated by resolution of the Board of Directors. Authority may be given by the Board for any of the above purposes and may be general or limited to specific instances. SECTION 7. Deposits. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board of Directors may approve or designate, and all such funds shall be -39- withdrawn only upon checks, drafts, notes or other orders for payment signed by such one or more officers, employees or other persons as the Board shall from time to time determine. SECTION 8. Execution of Contracts, Deeds, etc. The Board of Directors may authorize any officer or officers, agent or agents, in the name and on behalf of the Corporation to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances. SECTION 9. Voting of Stock in Other Corporations. If authorized by the Board of Directors, any officer of the Corporation may appoint an attorney or attorneys (who may be or include such officer), in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as a shareholder or otherwise in any other corporation any of whose shares or other securities are held by or for the Corporation, at meetings of the holders of the shares or other securities of such other corporation, or in connection with the ownership of such shares or other securities, to consent in writing to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its seal such written proxies or other instruments as such proxy may deem necessary or proper in the circumstances. SECTION 10. Form of Records. Any records maintained by the -40- Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. SECTION 11. Repurchase of Stock. Without the approval of the holders of a majority of the issued and outstanding stock of the Corporation entitled to vote at any meeting of shareholders, the Corporation shall not knowingly purchase, either directly or indirectly, any of the Corporation's Common Stock at a price materially in excess of its market price from any person, unless (i) such purchase is pursuant to the same offer and terms as made on a pro-rata basis to all holders of such shares, (ii) such purchase is made by the Corporation from an employee benefit or similar plan now or hereafter maintained by the Corporation or its subsidiaries or affiliates, or (iii) such purchase is made from a holder of less than one hundred shares. -41- ARTICLE VIII Amendments These By-Laws may be amended or repealed or new By-Laws may be adopted (a) by action of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock of the Corporation entitled to vote generally at any annual or special meeting of shareholders or (b) by action of the Board of Directors at a regular or special meeting thereof. Any By-Law or By-Laws made by the Board of Directors may be amended or repealed by action of the shareholders by the vote required by (a) above at any annual or special meeting of shareholders. ARTICLE IX Definitions The term "Certificate of Incorporation," as used herein, includes not only the original Certificate of Incorporation filed to create the Corporation but also all other certificates, agreements of merger or consolidation, plans of reorganization, or other instruments, howsoever designated, which are filed pursuant to the Delaware General Corporation Law, and which have the effect of amending or supplementing in some respect this Corporation's original Certificate of Incorporation. -42- EX-10.5 3 Exhibit 10.5 CIGNA CORPORATION STOCK PLAN (As Amended and Restated through January 1, 1998) ARTICLE 1 Statement of Purpose The CIGNA Corporation Stock Plan (the "Plan") is intended to reward and provide incentives for key employees of CIGNA Corporation and its Subsidiaries by providing them with an opportunity to acquire an equity interest in CIGNA Corporation, thereby increasing their personal interest in its continued success and progress. It also is intended to aid the Company in attracting key personnel of exceptional ability. ARTICLE 2 Definitions 2.1 Defined Terms. For all purposes of this Plan, except as otherwise expressly provided or defined herein or unless the context otherwise requires, the terms defined in this Article shall have the following meanings: "Board of Directors" means either the board of directors of CIGNA Corporation or any duly authorized committee of that board. "Change of Control" means: (i) a corporation, person or group acting in concert as described in Section 14(d)(2) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), holds or acquires beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act of a number of preferred or common shares of CIGNA Corporation having voting power which is either (i) more than 50% of the voting power of the shares which voted in the election of directors of CIGNA Corporation at the shareholders' meeting immediately preceding such determination, or (ii) more than 25% of the voting power of CIGNA Corporation's outstanding common shares; or (ii) as a result of a merger or consolidation to which CIGNA Corporation is a party, either (i) CIGNA Corporation is not the surviving corporation or (ii) Directors of CIGNA Corporation immediately prior to the merger or consolidation constitute less than a majority of the Board of Directors of the surviving corporation; or 1 (iii) a change occurs in the composition of the Board at any time during any consecutive 24-month period such that the "Continuity Directors" cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence "Continuity Directors" shall mean those members of the Board who either: (i) were directors at the beginning of such consecutive 24-month period; or (ii) were elected by, or on nomination or recommendation of, at least a majority (consisting of at least nine directors) of the Board. "Committee" means the People Resources Committee of the Board of Directors or any successor committee with responsibility for compensation. The number of Committee members and their qualifications shall at all times be sufficient to meet the requirements of Securities and Exchange Commission Rule 16b-3 as in effect from time to time. "Common Stock" means the common stock, par value $1 per share, of CIGNA Corporation. "Company" means CIGNA Corporation, a Delaware corporation, and/or its Subsidiaries. "Deferred Compensation Account" means a separate account established pursuant to a Deferred Compensation Plan. "Deferred Compensation Plan" means and refers to a deferred compensation plan of the Company which has been designated by the Committee as a "Deferred Compensation Plan" for purposes of this Plan. "Disability" means permanent and total disability as defined in Section 22(e)(3) of the Internal Revenue Code. "Early Retirement" means a Termination of Employment, after appropriate notice to the Company, (i) on or after age 55 and before age 65 with eligibility for immediate annuity benefits under a qualified pension or retirement plan of the Company, or (ii) upon such terms and conditions approved by the Committee or officers of the Company designated by the Board of Directors or the Committee. "Eligible Employee" means a salaried officer or other key employee of the Company who (i) occupies a position with the Company that has been designated by the Committee as an eligible position for participation in this Plan or (ii) has been specifically authorized or designated by the Committee to participate in this Plan. 2 "Fair Market Value" means the mean between the highest and lowest quoted selling prices as reported on the Composite Tape (or other successor means of publishing stock prices) on the date as of which any determination of such value is or is required to be made, or, if the Composite Tape or such successor publication is not published on such date, on the next preceding date of publication. In the absence of such sales, Fair Market Value shall be determined by the Committee, which shall take into account all relevant facts and circumstances. "Incentive Stock Option" means a stock option granted in accordance with Section 422A of the Internal Revenue Code. "Participant" means an Eligible Employee to whom any one or more of the awards authorized in this Plan shall have been granted. "Payment Date" means the date that payment of an award pursuant to a Qualifying Incentive Plan, or of a benefit pursuant to a Qualifying Supplemental Benefit Plan, is made or would have been made but for deferral pursuant to Section 3.7(b). "Qualifying Incentive Plan" means any Company bonus plan, short-term or long-term incentive compensation plan or any other incentive compensation arrangement, including but not limited to the Company's Performance Recognition Award Program. "Qualifying Supplemental Benefit Plan" means any plan of the Company pursuant to which benefits which would have been paid under a tax qualified retirement plan but for legal limitations are payable in cash to eligible employees of the Company. "Retirement" means a Termination of Employment, after appropriate notice to the Company, (i) on or after age 65 with eligibility for immediate annuity benefits under a qualified pension or retirement plan of the Company, or (ii) upon such terms and conditions approved by the Committee, or officers of the Company designated by the Board of Directors or the Committee. "Subsidiary" means any corporation of which more than 50% of the total combined voting power of all classes of stock entitled to vote, or other equity interest, is directly or indirectly owned by CIGNA Corporation; or a partnership, joint venture or other unincorporated entity of which more than a 50% interest in the capital, equity or profits is directly or indirectly owned by CIGNA Corporation. "Termination for Cause" means a Termination of Employment initiated by the Company on account of the conviction of Participant of a felony involving fraud or dishonesty directed against the Company. 3 "Termination of Employment" means the termination of the Participant's active employment relationship with the Company, unless otherwise expressly provided by the Committee, or the occurrence of a transaction by which the Participant's employing Company ceases to be a Subsidiary. "Termination Upon a Change of Control" means a Termination of Employment upon or within two years after a Change of Control (i) initiated by the Company or a successor corporation other than pursuant to Termination for Cause or (ii) initiated by the Participant and pursuant to the Participant's certification that the Change of Control has rendered him unable to perform the duties and responsibilities of the position he held immediately prior to the Change of Control by adverse changes in his authority, compensation, office location, duties, responsibilities, or title. 2.2 General. Certain terms are defined in other Articles of this Plan. The terms defined in this Article and elsewhere in this Plan shall include the feminine as well as the masculine gender and the plural as well as the singular, as the context in which they are used requires. ARTICLE 3 Authorized Stock Incentive Awards 3.1 Authorized Awards. The awards authorized are as follows: (a) stock options, (b) stock appreciation rights, (c) restricted stock grants, (d) dividend equivalent rights, and (e) Common Stock in lieu of cash or other awards payable under a Qualifying Incentive Plan or Qualifying Supplemental Benefit Plan. 3.2 General Powers of the Committee. Subject to the provisions of this Plan, the Committee is authorized and empowered in its sole discretion to select Participants and to grant to them any one or more of the awards authorized above in such amounts and combinations and upon such terms and conditions as it shall determine. 3.3 Stock Options. The Committee shall have the authority to grant Eligible Employees options to purchase Common Stock upon such terms and conditions as it shall establish, including restrictions on the right to exercise options, subject in all events to the following limitations and provisions of general application: 4 (a) The option price per share of any option shall not be less than the Fair Market Value on the date of grant. The option price may be paid in cash or, if the Committee so provides, in Common Stock (including Common Stock subject to a Restricted Period pursuant to Section 3.5(a)). Common Stock used to pay the option price shall be valued using the Fair Market Value on the date of exercise. To the extent the option price is paid in shares of restricted stock, an equal number of the shares of Common Stock purchased upon exercise of the option shall be subject to identical restrictions which shall continue in effect for the remaining part of the Restricted Period applicable to the restricted stock used to pay the option price. (b) No option shall be for a term of more than 10 years from the date of grant. (c) No option may be exercised during a leave of absence except to the extent exercisable immediately prior to commencement of the leave of absence, unless otherwise expressly provided by the Committee. (d) In the event of Termination of Employment (including termination during an approved leave of absence) of a Participant holding an outstanding option for any reason other than death, Disability or Upon a Change of Control (in case of an Incentive Stock Option) or for any reason other than death, Disability, Retirement or Upon a Change of Control (in case of any option other than an Incentive Stock Option), the term of the option shall expire on the earlier of the date of Termination of Employment or the expiration date set forth in the option. (e) In the event of Termination of Employment due to death or Disability (including death or Disability during an approved leave of absence) of a Participant holding an outstanding Incentive Stock Option, the option shall be fully exercisable immediately and the term of the option shall expire on the earlier of 12 months from the date of Termination of Employment or the expiration date set forth in the option. (f) In the event of Termination of Employment due to death, Disability or Retirement (including death, Disability or Retirement during an approved leave of absence) of a Participant holding an outstanding option other than an Incentive Stock Option, the option shall remain fully exercisable until the expiration date set forth in the option. (g) In the event of Termination of Employment Upon a Change of Control of a Participant holding an outstanding option, the term of the option shall expire on the earlier of 3 months from the date of Termination of Employment or the expiration date set forth in the option. (h) Notwithstanding the provisions of Section 3.3(d), in the event of a Termination of Employment due to Early Retirement (including Early Retirement during an approved leave of absence) of a Participant holding an outstanding option, the Committee or its designee may extend the exercise period of the option up to 3 months from the date of Termination of Employment (but not beyond the expiration date set forth in the option) in the case of an Incentive Stock Option or up to the 5 expiration date set forth in the option in the case of an option other than an Incentive Stock Option. 3.4 Stock Appreciation Rights. The Committee shall have the authority to grant stock appreciation rights to Eligible Employees who are granted options under this Plan upon such terms and conditions as it shall establish, subject in all events to the following limitations and provisions of general application: (a) Each right shall relate to a specific option granted under this Plan and shall be granted to the optionee either concurrently with the grant of such option or at such later time as determined by the Committee. (b) The right shall entitle an optionee to receive a number of shares of Common Stock, without payment to the Company, determined by dividing--(1) the total number of shares which the optionee is eligible to purchase as of the exercise date under the related option multiplied by the amount by which the Fair Market Value of a share of Common Stock on the exercise date of the right exceeds the Fair Market Value of a share of Common Stock on the date, as determined by the Committee, that the right or related option was granted to the optionee; by (2) the Fair Market Value of a share of Common Stock on the exercise date. (c) In lieu of issuing shares on an exercise of a right, the Committee may elect to pay the cash equivalent of the Fair Market Value on the date of exercise of any or all the shares which would otherwise be issuable pursuant to such exercise. (d) Shares under an option to which a right is related shall be used not more than once to calculate a number of shares or cash to be received pursuant to an exercise of such right. (e) The number of shares which may be purchased pursuant to an exercise of the related option will be reduced to the extent such shares are used in calculating the number of shares or cash to be received pursuant to an exercise of a related right. (f) In the event of Termination of Employment of a Participant holding an outstanding right, the right shall be exercisable only to the extent and upon the conditions that its related option is exercisable. 3.5 Restricted Stock Grants. The Committee shall have the authority to award Common Stock to Eligible Employees by grant (a "Grant") upon such terms and conditions as it shall establish, subject in all events to the following limitations, restrictions and provisions of general application: (a) Except as expressly provided below, the Common Stock awarded by a Grant shall not be sold, transferred, assigned, pledged or otherwise disposed of by the Participant during the period or periods established by the Committee (each such period, a "Restricted Period"). Common Stock subject to a Restricted Period may be used to exercise options pursuant to Section 3.3(a). The 6 Committee may establish different Restricted Periods applicable to such number of the shares of Common Stock evidenced by a single Grant as it deems appropriate. (b) The Common Stock awarded by a Grant shall be issued by the Company as of the date of the Grant. During the Restricted Period, the Participant shall be entitled to vote the shares. Shares issued as a consequence of stock dividends, splits or reclassifications shall be issued subject to the same limitations, restrictions and provisions applicable to the Common Stock with respect to which they are issued. (c) In the event of Termination of Employment of a Participant during a Restricted Period, except Termination Upon a Change of Control or termination by reason of death or Disability, ownership of the Common Stock subject to any Restricted Period at the date of Termination of Employment and all rights therein shall be forfeited to the Company, unless otherwise expressly provided by the Committee. In the event of Termination of Employment by reason of Retirement of a Participant during a Restricted Period, the Committee or its designee in the sole discretion of either may provide, before the Participant's Retirement, that the Restricted Period applicable to any outstanding Grant at the date of Retirement shall lapse immediately upon the Participant's Retirement. (d) In the event of Termination Upon a Change of Control or Termination of Employment by reason of death or Disability of a Participant during a Restricted Period, the Restricted Period applicable to any outstanding Grant at the date of Termination of Employment shall lapse immediately. (e) The effect of approved leaves of absence on the running of applicable Restricted Periods shall be determined by the Committee, provided, however, that no Restricted Period shall lapse during an approved leave of absence unless expressly provided by the Committee. (f) Notwithstanding the other provisions of this Section 3.5, options which have been granted under this Plan to any Company employees who become employed by Lincoln National Corporation or one or more of its subsidiaries or affiliates on or about January 1, 1998 as a result of the sale of the assets of the CIGNA Individual Insurance Division and which options remain unexercised and unexpired as of December 31, 1997, shall not expire before the earlier of (1) 10 years from the date of grant or (2) the later of the close of business on March 31, 1998 or ninety (90) days following the closing of such sale of assets. 3.6 Dividend Equivalent Rights. The Committee shall have the authority to grant dividend equivalent rights to Eligible Employees upon such terms and conditions as it shall establish, subject in all events to the following limitations and provisions of general application: (a) Each right may relate to a specific option granted under this Plan and may be granted to the optionee either concurrently with the grant of such option or at such later time as determined by the Committee, or each right may be granted independent of any option. 7 (b) The right shall entitle a holder to receive, for a period of time to be determined by the Committee, a payment equal to the quarterly dividend declared and paid by the Company on one share of Common Stock. If the right relates to a specific option, the period shall not extend beyond the earliest of the date the option is exercised, the date any stock appreciation right related to the option is exercised, or the expiration date set forth in the option. (c) The Committee shall determine at time of grant whether payment pursuant to a right shall be immediate or deferred and whether it shall be in the form of cash or Common Stock, or a combination of cash and Common Stock. If immediate, the Company shall make payments pursuant to each right within 90 days after the Company has paid the quarterly dividend to holders of Common Stock. If deferred, the payments shall accumulate (with interest computed in a manner to be determined by the Committee) until a date or event specified by the Committee and then shall be made within 90 days after the occurrence of the specified date or event, unless the right is forfeited under the terms of the Plan. (d) In the event of Termination of Employment (including termination during an approved leave of absence) of a Participant for any reason, any dividend equivalent right held by such Participant at Termination of Employment shall be forfeited, unless otherwise expressly provided by the Committee. 3.7 Common Stock in Lieu of Other Awards. The Committee shall have the authority to award an Eligible Employee Common Stock, including Common Stock awarded by a Grant under Section 3.5, (collectively referred to as a "Stock Payment") in lieu of all or a portion (determined by the Committee) of an award otherwise payable pursuant to a Qualifying Incentive Plan or Qualifying Supplemental Benefit Plan. The Stock Payment shall comprise the number of shares of Common Stock that have an aggregate Fair Market Value, determined as of the Payment Date, equal to the amount of the award in lieu of which the Stock Payment is made. All Stock Payments shall be subject to the following limitations and provisions of general application: (a) Unless the Committee, in its sole discretion, provides otherwise, a Stock Payment which has been awarded to a Participant who dies or whose employment otherwise terminates before the Payment Date, shall be paid in the form of Common Stock to the Participant (or to his spouse or estate). (b) The right to receive all or a portion of Stock Payments in the form of Common Stock shall be deferred if the Participant has elected to defer the award otherwise payable in cash under a Deferred Compensation Plan, subject to the provisions of such Deferred Compensation Plan. 8 ARTICLE 4 Shares Authorized under the Plan 4.1 Maximum Number Authorized. The number of shares of Common Stock Authorized to be issued pursuant to stock options, rights, Grants or Stock Payments awarded under this Plan is 3,500,000. 4.2 Maximum Number Per Participant. No more than 10% of the maximum number of shares of Common Stock authorized pursuant to this Plan shall be acquired by any one Participant by way of option (including Common Stock subject to option), right, Grant or Stock Payment under this Plan. 4.3 Unexercised Options, Grant Forfeitures and Options Exercised with Common Stock. (a) All Common Stock (1) under options granted under this Plan which expire or are canceled or surrendered or (2) which is forfeited pursuant to Section 3.5, shall be available for further awards under this Plan upon such expiration, cancellation, surrender or forfeiture; and (b) Any Common Stock which is used by a Participant as full or partial payment to the Company for the purchase of Common Stock acquired upon exercise of a stock option granted under this Plan, and any shares withheld by the Company to satisfy a Participant's tax withholding obligations, shall be available for further awards under this Plan. 4.4 No Fractional Shares. No fractional shares of Common Stock shall be issued pursuant to this Plan. 4.5 Source of Shares. Common Stock may be issued from authorized but unissued shares or out of shares held in CIGNA Corporation's treasury, or both. ARTICLE 5 Antidilution Provisions Except as otherwise expressly provided herein, the following provisions shall apply to all Common Stock authorized for issuance, and options, granted or awarded under this Plan: 5.1 Stock Dividends, Splits, Etc. In the event of a stock dividend, stock split, or other subdivision or combination of the Common Stock, the number of shares of Common Stock authorized under this Plan will be adjusted proportionately. Similarly, in any such event there will be a proportionate adjustment in the number of shares of Common Stock subject to unexercised stock options (but without adjustment to the aggregate option price) and in the number of shares of Common Stock then subject to Restricted Periods under a Grant. 5.2 Merger, Exchange or Reorganization. In the event that the outstanding shares of Common Stock are changed or converted into, exchanged or exchangeable for, a different number or kind of shares 9 or other securities of CIGNA Corporation or of another corporation, by reason of a reorganization, merger, consolidation, reclassification or combination, appropriate adjustment shall be made by the Committee in the number of shares and kind of Common Stock for which options, rights, Grants and Stock Payments may be or may have been awarded under this Plan, to the end that the proportionate interests of Participants shall be maintained as before the occurrence of such event, provided, however, that in the event of any contemplated transaction which may constitute a Change of Control of CIGNA Corporation, the Committee, with the approval of a majority of the members of the Board of Directors who are not then Participants, may modify any and all outstanding options, rights, Grants and Stock Payments (except those deferred pursuant to Section 3.7(b)), so as to accelerate, as a consequence of or in connection with such transaction, the vesting of a Participant's right to exercise any such options or stock appreciation right or the unqualified ownership of Common Stock subject to a Grant or the accelerated payment of any deferred dividend equivalent rights. ARTICLE 6 Administration of Plan 6.1 General Administration. The Plan is to be administered by the Committee, subject to such requirements for review and approval by the Board of Directors as the Board of Directors may establish. 6.2 Administrative Rules. The Committee shall have the power and authority to adopt, amend and rescind administrative guidelines, rules and regulations pertaining to this Plan and to interpret and rule on any questions respecting any provision of this Plan. 6.3 Committee Members Not Eligible. No member of the Committee shall be eligible to participate in this Plan. 6.4 Decisions Binding. Decisions of the Committee concerning this Plan shall be binding on CIGNA Corporation and its Subsidiaries and their respective boards of directors, and on all Eligible Employees and Participants. ARTICLE 7 Amendments All amendments to this Plan shall be in writing and shall be effective when approved by the Board of Directors, provided, however, that an amendment shall not be effective without the prior approval of the shareholders of CIGNA Corporation if such approval is necessary under Internal Revenue Service or Securities and Exchange Commission regulations, or the rules of the New York Stock Exchange or any applicable law. The Board of Directors may make any changes required to conform this Plan and option agreements with applicable provisions of the Internal Revenue Code or regulations thereunder pertaining to Incentive Stock Options. Unless otherwise expressly provided by an amendment or the Board of 10 Directors, no amendment to this Plan shall apply to grants of options, rights or Restricted Stock made before the effective date of the amendment. ARTICLE 8 Other Provisions 8.1 Effective Date. This Plan is effective on May 1, 1991 (the "Effective Date"). 8.2 Duration of the Plan. The Plan shall remain in effect until all options and rights granted under this Plan have been satisfied by the issuance of Common Stock, or terminated under the terms of this Plan, provided that options, rights, Grants and Stock Payments under this Plan must be awarded on or after the Effective Date. 8.3 Early Termination. Notwithstanding the provisions of Section 8.2, the Board of Directors may terminate this Plan at any time; but no such action by the Board of Directors shall adversely affect the rights of Participants which exist under this Plan immediately before its termination. 8.4 General Restriction. No Common Stock issued pursuant to this Plan shall be sold or distributed by a Participant until all appropriate listing, registration and qualification requirements and consents and approvals have been obtained, free of any condition unacceptable to the Board of Directors. 8.5 Awards Not Assignable. (a) No derivative security (as defined in rules promulgated under Section 16 of the Securities Exchange Act of 1934), including any right to receive Common Stock (such as options, stock appreciation rights or similar rights) or any right to payment pursuant to this Plan, shall be assignable or transferable by a Participant except by will or by the laws of descent and distribution. Any other attempted assignment or alienation shall be void and of no force or effect. Any right to receive Common Stock or any other derivative security (including options, stock appreciation rights or similar rights) shall be exercisable during a Participant's lifetime only by the Participant or by the Participant's guardian or legal representatives. (b) Notwithstanding the restrictions set forth above in Section 8.5(a), the Committee shall have the authority, in its discretion, to grant (or to sanction by way of amendment of an existing grant, including, without limitation, grants made before the effective date of this Section 8.5(b)) derivative securities which may be transferred without consideration by the Participant during his lifetime to any member of his immediate family, to a trust established for the exclusive benefit of one or more members of his immediate family, to a partnership of which the only partners are members of his immediate family, or to such other person as the Committee shall permit. In the case of a grant, the written documentation containing the terms and conditions of such derivative security shall state that it is transferable, and in the case of an amendment to an existing grant, such amendment shall be in writing. A derivative security transferred as contemplated in this 11 Section 8.5(b) may not be subsequently transferred by the transferee except by will or the laws of descent and distribution and shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant grant. However, the Committee, in its sole discretion at the time the transfer is approved, may alter the terms and limitations of the relevant grant and establish such additional terms and conditions as it shall deem appropriate. As used in this subparagraph, "immediate family" shall mean, with respect to any person, a spouse, any child, stepchild or grandchild, and shall include relationships arising from legal adoption. 8.6 Withholding Taxes. Whenever Common Stock is to be issued or delivered in satisfaction of options or other awards granted hereunder, the Company shall have the right to require the Participant to remit an amount sufficient to satisfy federal, state and local withholding taxes prior to delivery of any certificate for such shares. The Committee may require, or permit, the Participant to remit such amount in whole or in part in Common Stock. If the Committee permits a Participant to elect to remit such amount in Common Stock, any such election shall be made on or prior to the date the withholding obligation arises and be subject to the disapproval of the Committee. The Committee may establish such additional conditions as it deems appropriate. If the Participant remits such amount in Common Stock, the number of shares of Common Stock delivered to or on behalf of a Participant shall be reduced by the number of shares so remitted. Common Stock so remitted shall be valued using the Fair Market Value of Common Stock as of the date the withholding obligation arises. 8.7 Safekeeping of Certificates. The certificate evidencing Common Stock awarded by a restricted stock grant or purchased upon exercise of an option shall be retained for safekeeping by the Company, or by a custodian appointed by the Company, except the Committee may in its discretion cause the certificate to be delivered to the Participant after a restricted stock grant or a purchase upon exercise of an option. The Company will deliver any such retained certificates that are not subject to a Restricted Period to the Participant within a reasonable period after a Participant requests delivery of such certificates. 12 EX-10.8 4 Exhibit 10.8(b) Amendment No. 1 to the CIGNA Executive Incentive Plan dated as of February 25, 1998 The CIGNA Executive Incentive Plan shall be amended by adding a new sentence at the end of Section 4.4 to read as follows: In the event of a stock dividend, stock split, or other subdivision or combination of the Common Stock, the number of shares of Common Stock and/or Restricted Stock which a Participant may receive as an Award under this Plan will be adjusted proportionately. EX-10.9 5 Exhibit 10.9 CIGNA LONG-TERM INCENTIVE PLAN (As Amended and Restated through January 1, 1998) ARTICLE 1 Statement of Purpose The CIGNA Long-Term Incentive Plan (the "Plan") is intended to: (a) provide incentives for and reward key employees of the Company by providing them with an opportunity to acquire an equity interest in CIGNA Corporation, thereby increasing their personal interest in its continued success and progress; (b) aid the Company in attracting and retaining key personnel of exceptional ability; (c) supplement and balance the Company's salary and incentive bonus programs in support of CIGNA Corporation's long-term strategic plans; (d) motivate and reward the maximization of CIGNA Corporation's long-term financial results; and (e) encourage decisions and actions by senior level Company executives that are consistent with the long-range interests of CIGNA Corporation's shareholders. ARTICLE 2 Definitions For all purposes of this Plan, except as otherwise expressly provided or defined herein or unless the context otherwise requires, the terms defined in this Article shall have the following meanings: 2.1 "Board of Directors" or "Board" means the board of directors of CIGNA Corporation or any duly authorized committee of that board. 2.2 "CEO" means the Chief Executive Officer of CIGNA Corporation. 2.3 "Change of Control" means: (a) a corporation, person or group acting in concert, as described in Exchange Act Section 14(d)(2), holds or acquires beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act of a number of preferred or common shares of CIGNA Corporation having voting power which is either (1) more than 50% of the voting power of the shares which voted in the election of 1 directors of CIGNA Corporation at the shareholders' meeting immediately preceding such determination, or (2) more than 25% of the voting power of CIGNA Corporation's outstanding common shares; or (b) as a result of a merger or consolidation to which CIGNA Corporation is a party, either (1) CIGNA Corporation is not the surviving corporation or (2) Directors of CIGNA Corporation immediately prior to the merger or consolidation constitute less than a majority of the Board of Directors of the surviving corporation; or (c) a change occurs in the composition of the Board at any time during any consecutive 24-month period such that the "Continuity Directors" cease for any reason to constitute a majority of the Board. For purposes of the preceding sentence "Continuity Directors" shall mean those members of the Board who either: (1) were directors at the beginning of such consecutive 24-month period; or (2) were elected by, or on nomination or recommendation of, at least a majority (consisting of at least nine directors) of the Board. 2.4 "Code" means the Internal Revenue Code of 1986, as amended. 2.5 "Committee" means the People Resources Committee of the Board of Directors or any successor committee with responsibility for compensation. The number of Committee members and their qualifications shall at all times be sufficient to meet the requirements of SEC Rule 16b-3 and Code Section 162(m) as in effect from time to time. 2.6 "Common Stock" means the common stock, par value $1 per share, of CIGNA Corporation. 2.7 "Company" means CIGNA Corporation, a Delaware corporation, and/or its Subsidiaries. 2.8 "Deferred Compensation Account" means a separate account established pursuant to a Deferred Compensation Plan. 2.9 "Deferred Compensation Plan" means a deferred compensation plan or other arrangement of the Company which has been designated by the Committee as a "Deferred Compensation Plan" for purposes of this Plan. 2.10 "Disability" means permanent and total disability as defined in Code Section 22(e)(3). 2.11 "Early Retirement" means a Termination of Employment, after appropriate notice to the Company, (i) on or after age 55 and before age 65 with eligibility for immediate annuity benefits under a qualified pension or retirement plan of the Company, or (ii) upon 2 such terms and conditions approved by the Committee or officers of the Company designated by the Board of Directors or the Committee. 2.12 "Eligible Employee" means a salaried officer or other key employee of the Company. 2.13 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.14 "Fair Market Value" means the mean between the highest and lowest quoted selling prices as reported on the Composite Tape (or other successor means of publishing stock prices) on the date as of which any determination of such value is or is required to be made, or, if the Composite Tape or such successor publication is not published on such date, on the next preceding date of publication. In the absence of such sales, Fair Market Value shall be determined by the Committee, which shall take into account all relevant facts and circumstances. 2.15 "Incentive Stock Option" means a stock option granted in accordance with Code Section 422. 2.16 "Participant" means an Eligible Employee to whom any one or more of the awards authorized in this Plan shall have been granted. 2.17 "Payment" means the compensation due a Participant, or Participant's estate, under the provisions of the Plan on account of a Unit Award. 2.18 "Payment Date" means the date that payment of an award pursuant to a Qualifying Incentive Plan, or of a benefit pursuant to a Qualifying Supplemental Benefit Plan, is made or would have been made but for deferral pursuant to Section 9.3. 2.19 "Peer Group" means a group of companies, selected by the Committee, whose financial performance is compared to that of CIGNA Corporation to value Strategic Performance Units. 2.20 "Performance Period" means the period specified by the Committee with respect to which Unit Awards and Payments may be made. 2.21 "Performance Points" means the number of points assigned to a particular year of a Performance Period pursuant to Section 10.3 of the Plan. 2.22 "Plan" means the CIGNA Long-Term Incentive Plan, as it may be amended from time to time. 3 2.23 "Qualifying Incentive Plan" means any Company bonus plan, short-term or long-term incentive compensation plan or any other incentive compensation arrangement, including but not limited to the Company's Performance Recognition Award Program. 2.24 "Qualifying Supplemental Benefit Plan" means any plan of the Company pursuant to which benefits which would have been paid under a tax qualified retirement plan but for legal limitations are payable in cash to eligible employees of the Company. 2.25 "Restricted Period" means the period during which Common Stock awarded under Article 7 is subject to restrictions on sale, transfer, assignment, pledge or other disposition under Section 7.2. 2.26 "Restricted Stock" means Common Stock granted to a Participant under Article 7 while it remains subject to a Restricted Period. 2.27 "Retirement" means a Termination of Employment, after appropriate notice to the Company, (i) on or after age 65 with eligibility for immediate annuity benefits under a qualified pension or retirement plan of the Company, or (ii) upon such terms and conditions approved by the Committee, or officers of the Company designated by the Board of Directors or the Committee. 2.28 "SEC" means the Securities and Exchange Commission. 2.29 "Strategic Performance Unit" or "Unit" means the smallest amount of incentive opportunity available for award to a Participant for a specified Performance Period, with a target value of $75.00 per Unit unless a different target value is established by the Committee at the time a Unit Award is made. 2.30 "Subsidiary" means any corporation of which more than 50% of the total combined voting power of all classes of stock entitled to vote, or other equity interest, is directly or indirectly owned by CIGNA Corporation; or a partnership, joint venture or other unincorporated entity of which more than a 50% interest in the capital, equity or profits is directly or indirectly owned by CIGNA Corporation. 2.31 "Termination for Cause" means a Termination of Employment initiated by the Company on account of the conviction of an employee of a felony involving fraud or dishonesty directed against the Company. 2.32 "Termination of Employment" means the termination of the Participant's active employment relationship with the Company, unless otherwise expressly provided by the Committee, or the occurrence of a transaction by which the Participant's employing Company ceases to be a Subsidiary. 4 2.33 "Termination Upon a Change of Control" means a termination of employment upon or within two years after a Change of Control (i) initiated by the Company or a successor other than a Termination for Cause or (ii) initiated by an Employee after determining in his reasonable judgment that there has been a reduction in his authority, duties, responsibilities or title, any reduction in his compensation, or any change caused by the Company in his office location of more than 35 miles from its location on the date of the Change of Control. 2.34 "Unit Award" means the assignment of a specific number of Strategic Performance Units to an Eligible Employee for a Performance Period. ARTICLE 3 Participation 3.1 Participation. The Eligible Employees who have been specifically authorized by the Committee pursuant to Section 4.2, or the CEO pursuant to Section 4.3, to receive awards under the Plan shall become Participants in the Plan. 3.2 Directors. Members of the Board of Directors who are not employed by the Company are not eligible to participate in the Plan. ARTICLE 4 Authorized Incentive Awards 4.1 Authorized Awards. The awards authorized are as follows: (a) stock options (including Incentive Stock Options), (b) stock appreciation rights, (c) restricted stock grants, (d) dividend equivalent rights, (e) Common Stock in lieu of cash or other awards payable under a Qualifying Incentive Plan or Qualifying Supplemental Benefit Plan, and (f) Strategic Performance Units. 5 4.2 General Powers of the Committee. Subject to the requirements of Delaware law, the Committee is authorized and empowered in its sole discretion to select Participants and to grant to them any one or more of the awards authorized above in such amounts and combinations and upon such terms and conditions as it shall determine. No power or authority delegated by the Committee to a designee hereunder may be exercised to affect the terms and conditions of an award made to anyone subject to the requirements of Exchange Act Section 16(a) or with respect to matters which have been reserved to the Board of Directors under the Delaware General Corporation Law. 4.3 General Powers of the CEO. Subject to the requirements of Delaware law, the CEO is authorized and empowered in his sole discretion to select Participants and to grant to them any one or more of the awards authorized in Section 4.1 above in such amounts and combinations and upon such terms and conditions as he shall determine, subject to the same limitations and provisions that apply to the Committee, and also subject to the following: (a) the CEO may not make any grants or awards to or for the benefit of (1) members of the Board of Directors or (2) anyone subject to the requirements of Exchange Act Section 16(a); (b) the CEO must be a member of the Board of Directors at the time he makes any grant or award under the Plan and must be properly empowered by the Board of Directors to make such grants and awards; and (c) the total number of shares of Common Stock which may be issued pursuant to grants or awards made under the authority of this Section 4.3 is limited to a maximum of ten percent (10%) of the number of shares of Common Stock authorized to be issued under the Plan. ARTICLE 5 Stock Options 5.1 General. The Committee shall have the authority to grant Eligible Employees options to purchase Common Stock upon such terms and conditions as it shall establish, including restrictions on the right to exercise options, subject in all events to the limitations and provisions of general application set forth in this Article 5. 5.2 Option Price. The option price per share of any option shall not be less than the Fair Market Value on the date of grant. The option price may be paid in cash or, if the Committee so provides, in Common Stock (including Restricted Stock). Common Stock used to pay the option price shall be valued using the Fair Market Value on the date of exercise. To the extent the option price is paid in shares of Restricted Stock, an equal number of the shares of Common Stock purchased upon exercise of the option shall be subject to identical restrictions which shall 6 continue in effect for the remaining part of the Restricted Period applicable to the Restricted Stock used to pay the option price. 5.3 Maximum Term. No option shall be for a term of more than 10 years from the date of grant. 5.4 Leave of Absence. No option may be exercised during a leave of absence except to the extent exercisable immediately prior to commencement of the leave of absence, unless otherwise expressly provided by the Committee. 5.5 Expiration of Options. (a) In the event of Termination of Employment (including termination during an approved leave of absence) of a Participant holding an outstanding option for any reason other than death, Disability, Retirement or Upon a Change of Control, the term of the option shall expire on the earlier of the date of Termination of Employment or the expiration date set forth in the option. (b) In the event of Termination of Employment due to death or Disability (including death or Disability during an approved leave of absence) of a Participant holding an outstanding Incentive Stock Option, the option shall be fully exercisable immediately and the term of the option shall expire on the earlier of 12 months from the date of Termination of Employment or the expiration date set forth in the option. (c) In the event of Termination of Employment due to death, Disability or Retirement (including death, Disability or Retirement during an approved leave of absence) of a Participant holding an outstanding option other than an Incentive Stock Option, the option shall become exercisable in accordance with conditions imposed by the Committee, at time of grant or thereafter, and shall remain fully exercisable until the expiration date set forth in the option. (d) In the event of Termination of Employment due to Retirement (including Retirement during an approved leave of absence) of a Participant holding an outstanding Incentive Stock Option or Termination of Employment Upon a Change of Control of a Participant holding an outstanding option, the term of the option shall expire on the earlier of 3 months from the date of Termination of Employment or the expiration date set forth in the option. (e) Notwithstanding the provisions of Section 5.5(a), in the event of a Termination of Employment due to Early Retirement (including Early Retirement during an approved leave of absence) of a Participant holding an outstanding option, the Committee or its designee may extend the exercise period of the option up to 3 months from the date of Termination of Employment (but not beyond the expiration 7 date set forth in the option) in the case of an Incentive Stock Option, or up to the expiration date set forth in the option in the case of an option other than an Incentive Stock Option. (f) Notwithstanding the other provisions of this Section 5.5, options which have been granted under this Plan to any Company employees who become employed by Lincoln National Corporation or one or more of its subsidiaries or affiliates on or about January 1, 1998 as a result of the sale of the assets of the CIGNA Individual Insurance Division and which options remain unexercised and unexpired as of December 31, 1997, shall not expire before the earlier of (1) 10 years from the date of grant or (2) the later of the close of business on March 31, 1998 or ninety (90) days following the close of such sale of assets. 5.6 Option Regrants. No option may, without the prior approval of the shareholders of CIGNA Corporation, be granted by the Committee if (a) it replaces in any manner an option previously granted by the Committee and (b) the option price of the newly granted option is lower than that of such previously granted and replaced option. 5.7 Automatic Option Grants. The Committee may provide that, to the extent a Participant pays the option price of options granted under the Plan in Common Stock, new options will automatically be granted to such Participant, subject to the following terms and conditions: (a) the option price per share of any such new option shall not be less than the Fair Market Value on the date of automatic grant; (b) the date of automatic grant of such new option shall be the date the former option is exercised; and (c) the term of the new option shall not extend beyond the original expiration date of the former option. 5.8 Incentive Stock Options. The following terms and conditions shall apply to any options granted under the Plan which are identified as Incentive Stock Options. (a) Incentive Stock Options may be granted only to Eligible Employees who are employed by CIGNA Corporation or a corporation which is either a direct Subsidiary or an indirect Subsidiary through an unbroken chain of corporations. (b) No Incentive Stock Option may be granted under this Plan after February 21, 2005. (c) No Incentive Stock Option may be granted to any person who, at the time the option is granted, owns (or is deemed to own under Code Section 424(d)) shares of outstanding Common Stock possessing more than 10% of the total combined voting 8 power of all classes of stock of CIGNA Corporation or a Subsidiary, unless the exercise price of such option is at least 110% of the Fair Market Value of the stock subject to the option and such option by its terms is not exercisable after the expiration of five years from the date such option is granted. (d) To the extent that the aggregate Fair Market Value of stock with respect to which the Incentive Stock Options first become exercisable by a Participant in any calendar year exceeds $100,000 (taking into account both Common Stock subject to the Incentive Stock Options under this Plan and stock subject to Incentive Stock Options under all other Company plans, if any), such options shall be treated as nonqualified stock options. For this purpose the Fair Market Value of the stock subject to options shall be determined as of the date the options were awarded. In reducing the number of options treated as Incentive Stock Options to meet the $100,000 limit, the most recently granted options shall be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Committee may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. (e) There shall be imposed upon any grant of Incentive Stock Options such terms and conditions as are required to meet the requirements of Code Section 422. ARTICLE 6 Stock Appreciation Rights 6.1 General. The Committee shall have the authority to grant stock appreciation rights to Eligible Employees who are granted options under this Plan upon such terms and conditions as it shall establish, subject in all events to the limitations and provisions of general application set forth in this Article 6. 6.2 Rights and Options. Each right shall relate to a specific option granted under this Plan and shall be granted to the optionee either concurrently with the grant of such option or at such later time as determined by the Committee. 6.3 Nature of Rights. The right shall entitle an optionee to receive a number of shares of Common Stock, without payment to the Company, determined by dividing: (a) the total number of shares which the optionee is eligible to purchase as of the exercise date under the related option multiplied by the amount by which the Fair Market Value of a share of Common Stock on the exercise date of the right exceeds the Fair Market Value of a share of Common Stock on the date, as determined by the Committee, that the right or related option was granted to the optionee; by 9 (b) the Fair Market Value of a share of Common Stock on the exercise date. 6.4 Cash Payments. In lieu of issuing shares on an exercise of a right, the Committee may elect to pay the cash equivalent of the Fair Market Value on the date of exercise of any or all the shares which would otherwise be issuable pursuant to such exercise. 6.5 Related Options. Shares under an option to which a right is related shall be used not more than once to calculate a number of shares or cash to be received pursuant to an exercise of such right. The number of shares which may be purchased pursuant to an exercise of the related option will be reduced to the extent such shares are used in calculating the number of shares or cash to be received pursuant to an exercise of a related right. 6.6 Termination of Employment. In the event of Termination of Employment of a Participant holding an outstanding right, the right shall be exercisable only to the extent and upon the conditions that its related option is exercisable. ARTICLE 7 Restricted Stock Grants 7.1 General. The Committee shall have the authority to grant Restricted Stock to Eligible Employees upon such terms and conditions as it shall establish, subject in all events to the limitations, restrictions and provisions of general application set forth in this Article 7. The consideration for a grant of Restricted Stock may be solely in the form of the recipient's services rendered to the Company, or may be such other lawful form of consideration as the Committee shall determine. 7.2 Restricted Period. Except as expressly provided below, Restricted Stock shall not be sold, transferred, assigned, pledged or otherwise disposed of by the Participant during the Restricted Period(s) established by the Committee. Restricted Stock may be used to exercise options pursuant to Section 5.2. The Committee may establish different Restricted Periods and different restriction terms applicable to such number of the shares of Restricted Stock evidenced by a single grant as it deems appropriate. 7.3 Issuance; Voting Rights; Dividends. Restricted Stock granted to a Participant shall be issued by the Company as of the date of the grant. During the Restricted Period, the Participant shall be entitled to vote the shares. The Committee may provide for the current payment of dividends on shares of Restricted Stock to the holders of such shares. Shares issued as a consequence of stock dividends, splits or reclassifications shall be issued subject to the same limitations, restrictions and provisions applicable to the Common Stock with respect to which they are issued. 10 7.4 Termination of Employment. (a) In the event of Termination of Employment of a Participant during a Restricted Period, except Termination Upon a Change of Control or termination by reason of death or Disability, ownership of the Restricted Stock at the date of Termination of Employment and all rights therein shall be forfeited to the Company, unless otherwise expressly provided by the Committee. In the event of Termination of Employment by reason of Retirement of a Participant during a Restricted Period, the Committee or its designee in the sole discretion of either may provide, before the Participant's Retirement, that the Restricted Period applicable to any outstanding Restricted Stock at the date of Retirement shall lapse immediately upon the Participant's Retirement. (b) In the event of Termination Upon a Change of Control or Termination of Employment by reason of death or Disability of a Participant during a Restricted Period, the Restricted Period applicable to any outstanding Restricted Stock at the date of Termination of Employment shall lapse immediately. 7.5 Leave of Absence. The effect of approved leaves of absence on the running of applicable Restricted Periods shall be determined by the Committee, provided, however, that no Restricted Period shall lapse during an approved leave of absence unless expressly provided by the Committee. ARTICLE 8 Dividend Equivalent Rights 8.1 General. The Committee shall have the authority to grant dividend equivalent rights to Eligible Employees upon such terms and conditions as it shall establish, subject in all events to the following limitations and provisions of general application set forth in Article 8. The consideration for stock issued pursuant to dividend equivalent rights may be solely in the form of the recipient's services rendered to the Company, or may be such other lawful form of consideration as the Committee shall determine. 8.2 Rights and Options. Each right may relate to a specific option granted under this Plan and may be granted to the optionee either concurrently with the grant of such option or at such later time as determined by the Committee, or each right may be granted independent of any option. 8.3 Nature of Rights. The right shall entitle a holder to receive, for a period of time to be determined by the Committee, a payment equal to the quarterly dividend declared and paid by the Company on one share of Common Stock. If the right relates to a specific 11 option, the period shall not extend beyond the earliest of the date the option is exercised, the date any stock appreciation right related to the option is exercised, or the expiration date set forth in the option. 8.4 Payments. The Committee shall determine at time of grant whether payment pursuant to a right shall be immediate or deferred and whether it shall be in the form of cash or Common Stock, or a combination of cash and Common Stock. If immediate, the Company shall make payments pursuant to each right within 90 days after the Company has paid the quarterly dividend to holders of Common Stock. If deferred, the payments shall accumulate (with interest computed in a manner to be determined by the Committee) until a date or event specified by the Committee and then shall be made within 90 days after the occurrence of the specified date or event, unless the right is forfeited under the terms of the Plan. 8.5 Termination of Employment. In the event of Termination of Employment (including termination during an approved leave of absence) of a Participant for any reason, any dividend equivalent right held by such Participant at Termination of Employment shall be forfeited, unless otherwise expressly provided by the Committee. ARTICLE 9 Common Stock in Lieu of Other Awards 9.1 General. The Committee shall have the authority to award an Eligible Employee either Common Stock or Restricted Stock, or both (collectively referred to as a "Stock Payment") in lieu of all or a portion (determined by the Committee) of an award otherwise payable pursuant to a Qualifying Incentive Plan or Qualifying Supplemental Benefit Plan. The Stock Payment shall comprise the number of shares of Common Stock (or Restricted Stock) that have an aggregate Fair Market Value, determined as of the Payment Date, equal to the amount of the award in lieu of which the Stock Payment is made. 9.2 Death; Termination of Employment. Unless the Committee, in its sole discretion, provides otherwise, a Stock Payment which has been awarded to a Participant who dies or whose employment otherwise terminates before the Payment Date, shall be paid in the form of Common Stock or Restricted Stock, as applicable, to the Participant (or to his spouse or estate). 9.3 Deferral of Payments. The right to receive all or a portion of Stock Payments in the form of Common Stock shall be deferred if the Participant has elected to defer the award otherwise payable in cash under a Deferred Compensation Plan, subject to the provisions of such Deferred Compensation Plan and paragraph 10.7(d) of this Plan. 12 ARTICLE 10 Strategic Performance Units 10.1 Award of Units. (a) The Committee shall in its sole discretion make Unit Awards to those Eligible Employees selected for participation for a Performance Period. (b) In accordance with guidelines approved by the Committee or actions subject to ratification by the Committee prior to any resulting Unit Award payment, the CEO or his designee may make a Unit Award to a person who becomes an Eligible Employee during a Performance Period. (c) The number of Units that may be awarded to any Eligible Employee during any calendar year may not exceed 20,000. 10.2 Financial Measures. At the time Unit Awards are made for a particular Performance Period, the Committee shall establish in writing the objective performance goals and the financial measurements which shall be used to measure the degree to which CIGNA Corporation attains those goals. The objective performance goals shall be in the form of an annual scoring formula or method and a Performance Period payout formula, as described in Sections 10.3 and 10.4 below. The financial measurements shall be one or more of the following: return on equity, adjusted return on equity, earnings, revenue growth, expense ratios or other expense management measures and total shareholder return. The Committee shall determine at the time Unit Awards are made whether the financial measurements require a comparison of CIGNA Corporation's financial results to the financial results of a Peer Group, in which case composition of the Peer Group shall be determined by the Committee. 10.3 Performance Points. Using an annual scoring formula or method approved by the Committee at the time Unit Awards are made and the applicable financial results, a number of Performance Points will be assigned to each year of a Performance Period. Based upon the Committee's assessment of factors which affected financial results, the Committee may adjust downward the number of Performance Points for each or any year in the Performance Period, but such adjustment shall not exceed 10 points. The Performance Points for each year of a Performance Period will be added to compute the total number of Performance Points to be used in valuing Units for the entire Performance Period. 10.4 Value of Units. The number of Performance Points computed for the Performance Period will determine, in accordance with a Performance Period payout formula approved by the Committee when Unit Awards are made, the preliminary dollar value of a Strategic Performance Unit for the Performance Period. The preliminary value may be adjusted downward by the Committee based upon the Committee's evaluation of CIGNA 13 Corporation's strategic accomplishments over the Performance Period. The maximum amount of the downward adjustment per Unit shall not exceed $25.00. The Committee shall certify in writing that the Unit value for a Performance Period is based on the degree of CIGNA Corporation's attainment of pre-established performance goals. The final value of each Strategic Performance Unit may not exceed $200.00. 10.5 Unit Award Payment. (a) As soon as practicable after the close of a Performance Period, the Units shall be valued and Unit Award payments shall be made to those Participants who are eligible to receive a Payment. (b) A Participant's Unit Award Payment with respect to a Performance Period shall equal the value of one Strategic Performance Unit, as determined in accordance with Section 10.4, multiplied by the number of Units in the Unit Award made to the Participant. (c) Notwithstanding the above, the Committee in its sole discretion may reduce the amount of any Payment to any Participant, eliminate entirely the Payment to any Participant, or defer the Payment until a later date or occurrence of a particular event. The Committee's authority under this Section 10.5(c) shall expire immediately upon a Change of Control. 10.6 Eligibility for Payments. (a) Except for Payments described in paragraphs (b) and (c) of this Section 10.6, and except in the event of a Termination Upon a Change of Control, a Participant shall be eligible to receive a Unit Award Payment for a Performance Period only if the Participant has been employed by the Company continuously from the date of Participant's Unit Award through the date of Payment. (b) For the purposes of this Section 10.6, a leave of absence of less than three months' duration with the approval of the Company is not considered to be a break in continuous employment. In the case of a leave of absence of three months or longer: (1) the Committee, based on the recommendation of the CEO, shall determine whether or not the leave of absence constitutes a break in continuous employment for purposes of a Unit Award Payment; and (2) if a Participant is on a leave of absence on the date that the Unit Award Payment is to be made, the Committee may require that the Participant return to active employment with the Company at the end of the leave of absence as 14 a condition of receiving the Payment, and any determination as to eligibility for a Payment may be deferred for a reasonable period after such return. (c) If the employment of a Participant is terminated by reason of Retirement, death or Disability after receipt of a Unit Award but before the related Payment is made, the Committee or its designee shall determine whether a Payment shall be made to or on behalf of such Participant, and whether the Payment, if made, shall be in full or prorated based on factors determined in the sole discretion of the Committee, or its designee. Any such Payment shall be made to the Participant or the Participant's estate. (d) In the event of a Termination Upon a Change of Control of a Participant after the Participant receives a Unit Award but before the related Payment is made, a Payment in cash shall be made to the Participant within 30 days following the Termination Upon a Change of Control. The amount of the Payment shall be an amount equal to the total number of Units contained in all Unit Awards held by the Participant as of the date of his Termination Upon a Change of Control multiplied by the greatest of: (1) the Unit target value; (2) the highest value established by the Committee for Unit Awards, including units awarded under the CIGNA Corporation Strategic Performance Plan, for which any Payments were made to any Participants during the twelve-month period immediately preceding the date of Participant's Termination Upon a Change of Control; or (3) the average of the highest values established by the Committee for the last two Unit Awards, including units awarded under the CIGNA Corporation Strategic Performance Plan, paid to any Participants prior to the date of Participant's Termination Upon a Change of Control. 10.7 Form of Payment. (a) Except as otherwise provided in Section 10.6(d), Unit Award Payments shall be made in cash, shares of Common Stock, Restricted Stock, options or a combination of these forms of Payment, as determined by the Committee in its sole discretion. (b) If the Committee requires a Payment to be made wholly or partially in shares of Common Stock or Restricted Stock as provided in paragraph (a) above, the Payment shall be made in whole shares, the number of which shall have an aggregate Fair Market Value which most closely approximates, but does not exceed, the dollar amount of the Payment if made in cash. 15 (c) A Participant's Payment may be deferred in accordance with the provisions of the Deferred Compensation Plan of CIGNA Corporation and Participating Subsidiaries or a similar or successor plan. (d) In case of any deferral under Section 9.3 or paragraph 10.7(c) of the Plan, the interest rate which may be credited upon such deferred compensation would be one that would produce a rate of return not considered to be an impermissible increase in compensation within the meaning of Code Section 162(m). ARTICLE 11 Shares Authorized under the Plan 11.1 Maximum Number Authorized. The number of shares of Common Stock authorized to be issued pursuant to stock options, rights, grants, Stock Payments or other awards under this Plan is 5,000,000. 11.2 Maximum Number Per Participant. Notwithstanding anything contained herein to the contrary, the aggregate number of shares of Common Stock subject to options and stock appreciation rights that may be granted during any calendar year to any individual shall be limited to 500,000. For purposes of this limitation, if an option is cancelled, such cancelled option shall continue to be counted during the calendar year of cancellation against the maximum shares for which options and stock appreciation rights may be granted to an individual. 11.3 Unexercised Options, Grant Forfeitures and Options Exercised with Common Stock. (a) All Common Stock (1) under options granted under this Plan which expire or are canceled or surrendered or (2) which is forfeited pursuant to Section 7.4, shall be available for further awards under this Plan upon such expiration, cancellation, surrender and forfeiture; and (b) Any Common Stock which is used by a Participant as full or partial payment to the Company for the purchase of Common Stock acquired upon exercise of a stock option granted under this Plan, and any shares withheld by the Company to satisfy a Participant's tax withholding obligations, shall be available for further awards under this Plan. 11.4 No Fractional Shares. No fractional shares of Common Stock shall be issued pursuant to this Plan. 16 11.5 Source of Shares. Common Stock may be issued from authorized but unissued shares or out of shares held in CIGNA Corporation's treasury, or both. ARTICLE 12 Antidilution Provisions Except as otherwise expressly provided herein, the following provisions shall apply to all shares of Common Stock authorized for issuance and all Restricted Stock and options granted or awarded under this Plan: 12.1 Stock Dividends, Splits, Etc. In the event of a stock dividend, stock split, or other subdivision or combination of the Common Stock, the number of shares of Common Stock authorized under this Plan will be adjusted proportionately. Similarly, in any such event there will be a proportionate adjustment in the number of shares of Common Stock subject to unexercised stock options (but without adjustment to the aggregate option price) and in the number of shares of Restricted Stock outstanding. 12.2 Merger, Exchange or Reorganization. In the event that the outstanding shares of Common Stock are changed or converted into, exchanged or exchangeable for, a different number or kind of shares or other securities of CIGNA Corporation or of another corporation, by reason of a reorganization, merger, consolidation, reclassification or combination, appropriate adjustment shall be made by the Committee in the number of shares and kind of Restricted Stock and Common Stock for which options, rights and Stock Payments may be or may have been awarded under this Plan, to the end that the proportionate interests of Participants shall be maintained as before the occurrence of such event, provided, however, that in the event of any contemplated transaction which may constitute a Change of Control of CIGNA Corporation, the Committee, with the approval of a majority of the members of the Board of Directors who are not then Participants, may modify any and all outstanding Restricted Stock, options, rights, and Stock Payments (except those deferred pursuant to Section 9.3), so as to accelerate, as a consequence of or in connection with such transaction, the vesting of a Participant's right to exercise any such options or stock appreciation right or the lapsing of the Restricted Periods for shares of Restricted Stock or the accelerated payment of any deferred dividend equivalent rights. ARTICLE 13 Administration of Plan 13.1 General Administration. The Plan is to be administered by the Committee, subject to such requirements for review and approval by the Board of Directors as the Board of Directors may establish. 17 13.2 Administrative Rules. The Committee shall have full power and authority to adopt, amend and rescind administrative guidelines, rules and regulations pertaining to this Plan and to interpret the Plan and rule on any questions respecting any of its provisions, terms and conditions. 13.3 Committee Members Not Eligible. No member of the Committee shall be eligible to participate in this Plan. 13.4 Decisions Binding. All decisions of the Committee concerning this Plan shall be binding on CIGNA Corporation and its Subsidiaries and their respective boards of directors, and on all Eligible Employees, Participants and other persons claiming rights under the Plan. ARTICLE 14 Amendments All amendments to this Plan shall be in writing and shall be effective when approved by the Board of Directors, provided, however, that an amendment shall not be effective without the prior approval of the shareholders of CIGNA Corporation if such approval is necessary under Internal Revenue Service or SEC regulations, or the rules of the New York Stock Exchange or any applicable law. The Board of Directors may make any changes required to conform this Plan and option agreements with applicable provisions of the Internal Revenue Code or regulations thereunder pertaining to Incentive Stock Options. Unless otherwise expressly provided by an amendment or the Board of Directors, no amendment to this Plan shall apply to grants of options, rights or Restricted Stock made before the effective date of the amendment. A Participant's rights with respect to outstanding options, rights, Restricted Stock grants or Unit awards, including without limitation rights under paragraph 10.6(d), and a transferee's rights with respect to transferred derivative securities, may not be abridged by any amendment, modification or termination of the Plan without his individual consent. ARTICLE 15 Other Provisions 15.1 Effective Date. This Plan is effective as of January 1, 1995 (the "Effective Date"), subject to approval by the shareholders of CIGNA Corporation. 15.2 Duration of the Plan. The Plan shall remain in effect until all options and rights granted under this Plan have been satisfied by the issuance of Common Stock, or terminated under the terms of this Plan, and all Performance Periods related to Unit Awards granted under the Plan have expired. 18 15.3 Early Termination. Notwithstanding the provisions of Section 15.2, the Board of Directors may terminate this Plan at any time; but no such action by the Board of Directors shall adversely affect the rights of Participants which exist under this Plan immediately before its termination. 15.4 General Restriction. No Common Stock issued pursuant to this Plan shall be sold or distributed by a Participant until all appropriate listing, registration and qualification requirements and consents and approvals have been obtained, free of any condition unacceptable to the Board of Directors. In no event shall the value, amount or form of consideration for any award under the Plan be less than the value or amount, or in other than the form, required by applicable Delaware law. 15.5 Awards Not Assignable. (a) No derivative security (as defined in rules promulgated under Exchange Act Section 16), including any right to receive Common Stock (such as options, stock appreciation rights or similar rights) or any right to payment pursuant to this Plan, shall be assignable or transferable by a Participant except by will or by the laws of descent and distribution. Any other attempted assignment or alienation shall be void and of no force or effect. Any right to receive Common Stock or any other derivative security (including options, stock appreciation rights or similar rights) shall be exercisable during a Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. (b) Notwithstanding the restrictions set forth above in Section 15.5(a), the Committee shall have the authority, in its discretion, to grant (or to sanction by way of amendment of an existing grant, including, without limitation, grants made before the effective date of this Section 15.5(b)) derivative securities which may be transferred without consideration by the Participant during his lifetime to any member of his immediate family, to a trust established for the exclusive benefit of one or more members of his immediate family, to a partnership of which the only partners are members of his immediate family, or to such other person as the Committee shall permit. In the case of a grant, the written documentation containing the terms and conditions of such derivative security shall state that it is transferable, and in the case of an amendment to an existing grant, such amendment shall be in writing. A derivative security transferred as contemplated in this Section 15.5(b) may not be subsequently transferred by the transferee except by will or the laws of descent and distribution and shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant grant. However, the Committee, in its sole discretion at the time the transfer is approved, may alter the terms and limitations of the relevant grant and establish such additional terms and conditions as it shall deem appropriate. As used in this subparagraph, "immediate 19 family" shall mean, with respect to any person, a spouse, any child, stepchild or grandchild, and shall include relationships arising from legal adoption. 15.6 Withholding Taxes. Upon the exercise of any option or stock appreciation right, the vesting of any Restricted Stock, or payment of any award described in Section 4.1(d), (e) or (f), or upon the exercise of an Incentive Stock Option prior to the satisfaction of the holding period requirements of Code Section 422, the Company shall have the right at its option to: (a) require the Participant (or personal representative or beneficiary) to remit an amount sufficient to satisfy federal, state and local withholding taxes; or (b) deduct, from any amount payable, the amount of any taxes the Company may be required to withhold with respect to such transaction. The Committee may require, or permit, the Participant to remit such amount in whole or in part in Common Stock. If the Committee permits a Participant to elect to remit such amount in Common Stock, any such election shall be made on or prior to the date the withholding obligation arises and be subject to the disapproval of the Committee. The Committee may establish such additional conditions as it deems appropriate. If the Participant remits such amount in Common Stock, the number of shares of Common Stock delivered to or on behalf of a Participant shall be reduced by the number of shares so remitted. Common Stock so remitted shall be valued using the Fair Market Value of Common Stock as of the date the withholding obligation arises. 15.7 Safekeeping of Certificates. The certificate evidencing Common Stock awarded by a Restricted Stock grant or purchased upon exercise of an option shall be retained for safekeeping by the Company, or by a custodian appointed by the Company, except the Committee may in its discretion cause the certificate to be delivered to the Participant after a Restricted Stock grant or a purchase upon exercise of an option. The Company will deliver any such retained certificates that are not subject to a Restricted Period to the Participant within a reasonable period after a Participant requests delivery of such certificates. 15.8 Participant's Rights Unsecured. The right of any Participant to receive future payments under the provisions of the Plan shall be an unsecured claim against the general assets of the Company. 15.9 Future Participation Not Guaranteed. Participation in the Plan with respect to a Performance Period is not in and of itself to be construed as evidence of a right to participate in any subsequent Performance Period. For each successive Performance Period, participation of an Eligible Employee shall be evidenced only by the grant to the Eligible Employee by the Committee of a Unit Award. 20 15.10 Termination of Employment. CIGNA Corporation and each Subsidiary retain the right to terminate the employment of any employee at any time for any reason or no reason, and an award or grant under the Plan to an Eligible Employee is not, and shall not be construed in any manner to be, a waiver of such right. 15.11 Successors. Any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of CIGNA Corporation, shall assume the liabilities of CIGNA Corporation under this Plan and perform any duties and responsibilities in the same manner and to the same extent that CIGNA Corporation would be required to perform if no such succession had taken place. 15.12 Construction. The terms used in this Plan shall include the feminine as well as the masculine gender and the plural as well as the singular, as the context in which they are used requires. 21 EX-10.17 6 Exhibit 10.17 NON-COMPETE AGREEMENT This Non-Compete Agreement ("Agreement") is dated as of October 20, 1997, and is between Wilson H. Taylor, who resides at _______________________________ ___________________ ("Executive") and CIGNA Corporation, 1650 Market Street, Philadelphia, Pennsylvania, 19192, a Delaware corporation ("CIGNA"). WHEREAS, as of October 20, 1997 CIGNA granted to Executive an option to purchase 150,000 shares of CIGNA Common Stock under the CIGNA Long-Term Incentive Plan (the "Option"), and the People Resources Committee of CIGNA's Board of Directors provided that the Option shall remain exercisable only until the earlier of the Option Expiration Date or the end of the period that the non-compete provisions of this Agreement remain in effect. NOW, THEREFORE, Executive and CIGNA, intending to be legally bound and in consideration of the Option grant and the promises in this Agreement, mutually agree as follows: 1. In addition to the terms defined above, the following definitions apply to the terms used in this Agreement: a. "Company" means CIGNA Corporation and its subsidiaries and affiliates. b. "Competitor" means any person or business entity that offers for sale to third parties, in markets that the Company at the relevant time either serves or is actively planning to serve, any products or services of a type then provided to customers by the Company. c. "Option Expiration Date" means October 20, 2007, or any earlier date that the Option expires under the terms of the Plan and the Option grant letter and Attachment. d. "Plan" means the CIGNA Long-Term Incentive Plan, as amended. e. "Restricted Area" means any geographic area where the Company is doing business as of the beginning of the Restricted Period or has, during the one-year period immediately before the beginning of the Restricted Period, been actively planning to do business. f. "Restriction Period" means the period(s) described in paragraph 3. g. "Retirement Date" shall mean the date of Executive's Retirement, as defined in Section 2.27 of the Plan. 1 2. Executive agrees that, during the Restriction Period in the Restricted Area, he will not: a. Become an owner (other than as a shareholder with less than a 2% interest), employee or independent contractor of any Competitor; b. Solicit or attempt to solicit, directly or indirectly, on behalf of any Competitor, any person, entity or business that at the time of the solicitation is (or as of the beginning of the Restriction Period was) a Company customer to purchase any products or services of a type then available from Company; or c. Directly or indirectly, solicit or hire, solicit the employment or engagement for hire, or otherwise attempt to employ or engage for hire, as an employee or independent contractor any person who, within the one-year period immediately before the beginning of the Restriction Period, has been an officer or employee of the Company, unless the employment of such officer or employee has been unilaterally terminated by the Company. 3. a. The Restriction Period shall begin on the Executive's Retirement Date. Initially, the Restriction Period shall end on the second anniversary of Executive's Retirement Date. b. On each anniversary of the Executive's Retirement Date (including the first anniversary), the Restriction Period shall automatically be extended for one additional year. c. The Executive shall, however, have the right to avoid the automatic extension by providing timely written notice to CIGNA. On the Retirement Date anniversary immediately following CIGNA's receipt of the Executive's written notice that he wishes to avoid automatic extension of the Restriction Period, the Restriction Period will not be automatically extended, but will end one year later. d. In any event the Restriction Period shall end no later than the Option Expiration Date. 4. The consequences of Executive's breach of any of the terms of this Agreement or of his exercise of the right to avoid the automatic extension of the Restriction Period shall be as set forth in the Option grant letter and Attachment to that letter. 5. In any proceeding in which the Executive (or anyone acting on his behalf) challenges the scope of the restrictions on Executive's post-Retirement activities under this Agreement (including without limitation any proceeding related to Executive's Option rights), if a court or arbitrator finds that such scope is too broad to be enforceable under relevant law, then it is the intent of both 2 parties that the court or arbitrator reduce the scope of the protections, but only to the extent necessary to make the restrictions legally enforceable. 6. This Agreement is not a contract of employment for any specified term, and nothing herein is intended to, nor shall be construed as, changing the nature of Executive's employment from an at-will relationship. This Agreement is limited to the terms and conditions set forth herein and does not otherwise address Executive's compensation or benefits, the duties and responsibilities of his position, or any of the Company's other rights as employer. 7. The Agreement is made and entered into in the Commonwealth of Pennsylvania, and at all times and for all purposes shall be interpreted, enforced and governed under its laws, without regard to principles of conflict of laws. 8. It is agreed that any controversy or claim arising out of or relating to this Agreement shall be settled exclusively by arbitration in Philadelphia, Pennsylvania, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. 9. CIGNA's rights and obligations under this Agreement will inure to the benefit of and be binding upon CIGNA's successors and assigns. Executive's rights and obligations under this Agreement shall not be assignable without CIGNA's express, written consent. 10. This Agreement, together with the Option grant letter, the Attachment to that letter and the Plan, contain the entire agreement between Executive and CIGNA with respect to the matters addressed herein and fully replaces and supersedes any and all other prior agreements or understandings between them related to such matters. Any amendment to this Agreement must be in writing and signed by both CIGNA and Executive. IN WITNESS WHEREOF, the persons named below have signed this Agreement on the dates shown below. CIGNA Corporation 11/21/97 /s/ Donald M. Levinson -------- --------------------------------------- Date By: Donald M. Levinson, Executive Vice President 11/21/97 /s/ Wilson H. Taylor -------- --------------------------------------- Date Wilson H. Taylor 3 EX-10.18 7 Exhibit 10.18 NON-COMPETE AGREEMENT This Non-Compete Agreement ("Agreement") is dated as of December 8, 1997, and is between_____________________________, who resides at ____________________________ ____________________________ ("Executive") and CIGNA Corporation, 1650 Market Street, Philadelphia, Pennsylvania, 19192, a Delaware corporation ("CIGNA"). WHEREAS, on December 8, 1997 CIGNA granted to Executive an option to purchase 75,000 shares of CIGNA Common Stock (the "Option"), and the People Resources Committee of CIGNA's Board of Directors provided that the Option grant was conditioned on Executive's entering into a non-compete agreement with CIGNA; NOW, THEREFORE, Executive and CIGNA, intending to be legally bound and in consideration of the Option grant and the promises in this Agreement, mutually agree as follows: 1. In addition to the terms defined above, the following definitions apply to the terms used in this Agreement: a. "Company" means CIGNA Corporation and its subsidiaries and affiliates. b. "Competitor" means any person or business entity that offers for sale to third parties, in markets that at the relevant time the Company serves or is actively planning to serve, any products or services of a type that are then provided to Company customers as part of the Company's Protected Business. c. "Protected Business" means those business activities that (1) have been conducted by the Company to the extent the Executive had any significant responsibilities for such business at any time during the twenty-four (24) month period ending on the date Executive's employment with the Company terminates or (2) have actively been planned by the Company to the extent Executive has been significantly involved in such plans at any time during the twelve (12) month period ending on the date Executive's employment with the Company terminates. d. "Restricted Area" means any geographic area where the Company is conducting any Protected Business. e. "Restriction Period" means the period beginning on the date Executive's employment with the Company terminates and ending on the first anniversary of that date. 1 2. Executive agrees that, during the Restriction Period in the Restricted Area, he will not without the advance written consent of a duly authorized officer of the Company: a. Become an owner (other than as a shareholder with less than a 2% interest), employee or independent contractor of any Competitor; b. Solicit or attempt to solicit, directly or indirectly, on behalf of any Competitor, any person, entity or business that at the time of the solicitation is (or as of the date of Executive's termination of employment was) a customer of the Company to purchase any products or services of a type then available from the Company; or c. Directly or indirectly, solicit or hire, solicit the employment or engagement for hire, or otherwise attempt to employ or engage for hire, as an employee or independent contractor any person who, within the one-year period immediately before the date of Executive's termination of employment, has been an officer or employee of the Company, unless the employment of such officer or employee has been unilaterally terminated by the Company. 3. Executive acknowledges that the Company will have no adequate remedy at law if Executive violates the terms of paragraph 2 above. In such event, notwithstanding paragraph 6 below, the Company shall have the right, in addition to any other rights it may have, to obtain in any court of competent jurisdiction injunctive relief to restrain any breach or threatened breach of specific performance of paragraph 2 of this Agreement. If, in any such proceeding, the court finds that the scope of protections afforded the Company is too broad to be enforceable under relevant law, then it is the intent of the parties that the court reduce the scope of the protections, but only to the extent necessary to make the protections enforceable, and then to enforce the protections as reduced in scope. 4. This Agreement is not a contract of employment for any specified term, and nothing herein is intended to, nor shall be construed as, changing the nature of Executive's employment from an at-will relationship. This Agreement is limited to the terms and conditions set forth herein and does not otherwise address Executive's compensation or benefits, the duties and responsibilities of his position, or any of the Company's other rights as employer. 5. The Agreement is made and entered into in the Commonwealth of Pennsylvania, and at all times and for all purposes shall be interpreted, enforced and governed under its laws, without regard to principles of conflict of laws. 6. It is agreed that any controversy or claim arising out of or relating to this Agreement, other than the Company's attempt to obtain injunctive relief under paragraph 3 above, shall be settled exclusively by arbitration in Philadelphia, Pennsylvania, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. 2 7. CIGNA's rights and obligations under this Agreement will inure to the benefit of and be binding upon CIGNA's successors and assigns. Executive's rights and obligations under this Agreement shall not be assignable without CIGNA's express, written consent. 8. This Agreement contains the entire agreement between Executive and CIGNA with respect to the matters addressed herein and fully replaces and supersedes any and all other prior agreements or understandings between them related to such matters. Any amendment to this Agreement must be in writing and signed by both CIGNA and Executive. IN WITNESS WHEREOF, the persons named below have signed this Agreement on the dates shown below. CIGNA Corporation __________ By:_______________________________ Date _______________________________ _______________________________ __________ _______________________________ Date [executive] 3 EX-12 8 Exhibit 12 CIGNA CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Year ended December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In millions) Income before income taxes ............................ $1,650 $1,601 $251 $805 $165 ------ ------ ---- ------ ---- Fixed charges included in income: Interest expense................................... 127 102 120 121 124 Interest portion of rental expense................. 94 86 99 102 114 ------ ------ ---- ------ ---- Total fixed charges included in income.......... 221 188 219 223 238 ------ ------ ---- ------ ---- Income available for fixed charges..................... $1,871 $1,789 $470 $1,028 $403 ------ ------ ---- ------ ---- Ratio of earnings to fixed charges..................... 8.5 9.5 2.1 4.6 1.7 ====== ====== ==== ====== ====
EX-13 9
HIGHLIGHTS - ------------------------------------------------------------------------------------------------------------------------- (Dollars in millions, except per share amounts) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- Revenues: Premiums and fees $14,935 $13,916 $13,914 $13,912 $13,712 Net investment income and other revenues 4,936 4,943 4,808 4,438 4,408 Realized investment gains 167 91 233 42 282 - ------------------------------------------------------------------------------------------------------------------------- Total $20,038 $18,950 $18,955 $18,392 $18,402 - ----------------------------------------------------===================================================================== Net Income (Loss): Employee Life and Health Benefits $441 $500 $597 $548 $589 Employee Retirement and Savings Benefits 233 222 194 190 159 Individual Financial Services 208 168 151 136 110 Property and Casualty 275 240 (673) (235) (530) Other Operations (71) (74) (58) (85) (94) - ------------------------------------------------------------------------------------------------------------------------- Total $1,086 $1,056 $211 $554 $234 - ----------------------------------------------------===================================================================== Earnings per share: Basic $14.79 $14.05 $2.90 $7.74 $3.28 Diluted $14.64 $13.91 $2.88 $7.50 $3.26 Common dividends declared per share $3.32 $3.20 $3.04 $3.04 $3.04 Total assets $108,199 $98,932 $95,903 $86,102 $84,975 Long-term debt $1,465 $1,021 $1,066 $1,389 $1,235 Shareholders' equity $7,932 $7,208 $7,157 $5,811 $6,575 Per share $109.66 $97.15 $93.76 $80.46 $91.30 Common shares outstanding (thousands) 72,332 74,198 76,332 72,225 72,015 Shareholders of record 12,953 14,027 15,131 16,408 17,491 Employees 47,700 42,800 44,700 48,600 50,600 - -------------------------------------------------------------------------------------------------------------------------
Earnings per share amounts for years 1993 - 1996 have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." For more information regarding the effect of adopting accounting pronouncements, see the Notes to Financial Statements. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED RESULTS OF OPERATIONS (In millions) - --------------------------------------------------------------- FINANCIAL SUMMARY 1997 1996 1995 - --------------------------------------------------------------- Premiums and fees $14,935 $13,916 $13,914 Net investment income 4,245 4,333 4,296 Other revenues 691 610 512 Realized investment gains 167 91 233 ------------------------------- Total revenues 20,038 18,950 18,955 Benefits and expenses 18,388 17,349 18,704 ------------------------------- Income before taxes 1,650 1,601 251 Income taxes 564 545 40 ------------------------------- Net income $1,086 $1,056 $211 - --------------------------------=============================== Realized investment gains, net of taxes $115 $54 $178 - --------------------------------=============================== CIGNA's consolidated net income increased 3% in 1997 reflecting improved results in all segments except for the Employee Life and Health Benefits segment, which included fourth quarter 1997 after-tax charges of $58 million for integration costs associated with the acquisition of Healthsource, Inc. (Healthsource) and $22 million for health care restructuring costs as discussed below. CIGNA's consolidated net income increased substantially in 1996 compared to 1995, reflecting third quarter 1995 charges of $774 million after-tax in the Property and Casualty segment, primarily for asbestos-related and environmental pollution (A&E) exposures, and a $75 million after-tax charge associated with cost reduction restructuring initiatives in the Property and Casualty and Employee Life and Health Benefits segments. Partially offsetting these charges were significant realized investment gains from the restructuring of the investment portfolio. CIGNA's operating income*, excluding the 1997 and 1995 charges noted above, was $1.1 billion, $1.0 billion and $882 million for 1997, 1996 and 1995, respectively. The 1997 increase reflects improvements in all business segments, while the 1996 increase primarily reflects improved results in the Property and Casualty segment. Net realized investment gains increased 113% in 1997, reflecting sales of real estate and fixed maturities. For 1996, realized investment gains decreased substantially due to the 1995 restructuring of a significant portion of the Employee Life and Health Benefits and Property and Casualty equity investment portfolios into fixed income securities. For additional information on net realized investment gains, see Note 5(B) to the Financial Statements. Consolidated revenues, excluding realized investment gains, were $19.9 billion, $18.9 billion and $18.7 billion for 1997, 1996 and 1995, respectively. The 1997 increase primarily reflects growth in the Employee Life and Health Benefits segment, principally from Healthsource and growth in the Individual Financial Services segment. Revenue growth for all years was constrained by continued price competition and strict underwriting standards. Operating income is expected to improve in 1998; however, such improvement could be adversely affected by the factors noted in the cautionary statement on page 23. OTHER MATTERS Acquisitions and Dispositions CIGNA acquired the outstanding common stock of Healthsource on June 25, 1997. The cost of the acquisition was $1.7 billion, reflecting the purchase of Healthsource common stock for $1.4 billion and the retirement of Healthsource debt of $250 million. The acquisition was accounted for as a purchase, and was financed through the issuance of long-term debt of $600 million and a combination of internally generated funds and short-term debt. In the fourth quarter of 1997, CIGNA recorded a pre-tax integration charge of $87 million ($58 million after-tax) in connection with its review of Healthsource operations. The charge primarily resulted from an analysis of Healthsource HMO medical reserves, receivable balances and contractual obligations. In addition, Healthsource goodwill and other intangibles of $1.5 billion, recorded at the time of acquisition, were increased by $24 million in the fourth quarter of 1997. This increase primarily reflects severance of Healthsource employees, vacated Healthsource lease space and adjustments to Healthsource net assets to conform to CIGNA's accounting policies. Cash outlays associated with the Healthsource severance and vacated lease space are expected to be completed in 1998 and will be funded through liquid assets with no material adverse effect on CIGNA's liquidity. These initiatives are expected to result in annual after-tax expense savings of $35 million, primarily resulting from the elimination of payroll costs and, to a lesser extent, lease costs. Approximately two-thirds of the savings are expected to emerge in 1998 and the full amount in 1999. As of January 1, 1998, CIGNA sold its individual life insurance and annuity businesses for cash proceeds of $1.4 billion. The sale resulted in an after-tax gain of approximately $800 million. Since the principal agreement to sell these businesses is in the form of a reinsurance arrangement, approximately $575 million of the gain will be deferred and amortized over future periods, with approximately $60 million expected to be recognized in 1998. Proceeds from the sale are expected to be used for internal growth, acquisitions and share repurchases, with share repurchases being the expected use in the near term. - -------- *Operating income (loss) is defined as net income (loss) excluding after-tax realized investment results. 10 The businesses sold, which are included in the Individual Financial Services segment, reported the following results: - --------------------------------------------------------------- (In millions) 1997 1996 1995 - --------------------------------------------------------------- Revenues $972 $926 $865 Operating Income $98 $64 $73 Net Income $102 $67 $74 =============================================================== CIGNA continues to conduct strategic and financial reviews of its businesses in order to deploy its capital most effectively. See Note 3 to the Financial Statements for additional information on acquisitions and dispositions. Cost Reduction Initiatives In the fourth quarter of 1997, CIGNA adopted a cost reduction plan to restructure its health care operations, which resulted in a pre-tax charge of $32 million ($22 million after-tax) in the Employee Life and Health Benefits segment. The charge consisted primarily of costs related to severance, real estate and other costs for office closings. The cash outlays associated with these initiatives will continue through 1999 with most occurring in 1998. CIGNA will fund the cash outlays through liquid assets, and such funding will not have a material adverse effect on its liquidity. These initiatives are expected to result in annual after-tax expense savings of $50 million with approximately two-thirds of the savings emerging in 1998 and the full amount in 1999. During 1995, CIGNA recorded a $30 million pre-tax charge ($20 million after-tax) for cost reduction restructuring initiatives in the Employee Life and Health Benefits segment. The charge consisted primarily of severance-related expenses. These initiatives were completed in 1997 with no material difference from original estimates. During 1995, CIGNA recorded an $85 million pre-tax charge ($55 million after-tax) for cost reduction restructuring initiatives in the Property and Casualty segment. The charges consisted primarily of costs related to severance, vacated lease space, and costs to exit certain lines of business. These initiatives were substantially completed in 1997 with no material difference from original estimates. See Note 16 to the Financial Statements for additional information on cost reduction initiatives. Other CIGNA is highly dependent on automated systems and systems applications in conducting its ongoing operations. Such systems are utilized for, among other things, processing claims, billing and collecting premiums from customers and managing investment activities. If these systems were unable to process data accurately because of failing to be Year 2000 ready, these activities would be interrupted and could have a material adverse effect on CIGNA's results of operations. By the beginning of 1999, CIGNA expects to substantially complete modifications or replacement of systems to ensure Year 2000 readiness, with the remainder being completed by the end of 1999. CIGNA is utilizing both internal and external resources to meet this timetable. The costs of these efforts are not expected to have a material adverse effect on consolidated results of operations. However, such costs could have a material adverse effect on certain segments' 1998 results of operations. In addition, CIGNA has relationships with various third party entities in its ordinary course of business. CIGNA is assessing and attempting to mitigate its risks with respect to the failure of these entities to be Year 2000 ready. The effect, if any, on CIGNA's results of operations from the failure of these entities to be Year 2000 ready is not reasonably estimable. Property and casualty indemnity losses for Year 2000 claims are not expected to be material, however, litigation costs to defend or deny such claims are not reasonably estimable at this time. In October 1997, Standard and Poor's raised its ratings on CIGNA's senior debt to A ("Strong," 6th of 22) from A- ("Strong," 7th of 22), and on CIGNA's commercial paper to A-1 ("Strong," 2nd of 7) from A-2 ("Satisfactory," 3rd of 7). As a result of the sale of CIGNA's individual life insurance and annuity businesses, Duff & Phelps Credit Rating Co. lowered the claims paying ability rating of Connecticut General Life Insurance Company, one of CIGNA's principal life insurance company subsidiaries, to AA+ ("Very High," 2nd of 18) from AAA ("Highest," 1st of 18). Effective December 31, 1995, CIGNA restructured its domestic property and casualty businesses into two separate operations, ongoing and run-off. The ongoing operations are actively engaged in selling insurance products and related services. The run-off operations, which do not actively sell insurance products, manage run-off policies and related claims, including those for A&E exposures. Insurance products that were actively sold in 1995 by subsidiaries that are now in run-off continue to be sold by the ongoing operations. The restructuring is being contested in the courts by certain competitors and policyholders. Although CIGNA expects the matter to be in litigation for some time, it expects to ultimately prevail. CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: o increase health care regulation; o revise the system of funding cleanup of environmental damages; o reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; o restrict insurance pricing and the application of underwriting standards; and o revise federal tax laws. 11 The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. For additional information, see Note 19 to the Financial Statements. ACCOUNTING PRONOUNCEMENTS The American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the recognition and measurement of liabilities for guaranty fund and other insurance-related assessments. Implementation is required by the first quarter of 1999, with the cumulative effect of adopting the SOP reflected in net income in the year of adoption. CIGNA has not determined the effect or timing of implementation of this pronouncement. See Note 2(B) to the Financial Statements for additional information regarding accounting pronouncements. EMPLOYEE LIFE AND HEALTH BENEFITS (In millions) - --------------------------------------------------------------- FINANCIAL SUMMARY 1997 1996 1995 - --------------------------------------------------------------- Premiums and fees $9,512 $8,341 $8,135 Net investment income 562 567 574 Other revenues 454 404 336 Realized investment gains 12 6 122 ------------------------------- Total revenues 10,540 9,318 9,167 Benefits and expenses 9,873 8,554 8,307 ------------------------------- Income before taxes 667 764 860 Income taxes 226 264 263 ------------------------------- Net income $441 $500 $597 - --------------------------------=============================== Realized investment gains, net of taxes $17 $3 $104 - --------------------------------=============================== Net income for the Employee Life and Health Benefits segment decreased 12% in 1997 and decreased 16% in 1996. Results for 1997 included after-tax charges of $58 million for Healthsource integration and $22 million related to cost reduction initiatives to restructure the health care operations. Also, results for 1995 included an after-tax charge of $20 million related to cost reduction restructuring initiatives. See pages 10 and 11 for additional information. Excluding the above charges, operating income was as follows: - ---------------------------------------------------------------- (In millions) 1997 1996 1995 - ---------------------------------------------------------------- Indemnity operations $301 $286 $311 HMO operations 203 211 202 - ---------------------------------------------------------------- Total $504 $497 $513 - -------------------------------------=========================== The increase in the indemnity operations in 1997 reflects improved claim experience from guaranteed cost medical and group life businesses. Partially offsetting this increase were higher medical costs, and lower earnings from Administrative Services Only (ASO) business resulting from higher operating expenses due to customer service initiatives. The decrease in the indemnity operations in 1996 reflects a declining book of medical business due to cancellations and conversions to HMOs and unfavorable claim experience. Partially offsetting these declines were improved investment margins, higher earnings from ASO business and expense savings from the 1995 cost reduction initiatives. HMO operating income for 1997 and 1996 includes favorable after-tax adjustments of $6 million and $17 million, respectively, resulting from tax and other account reviews. Operating income for 1996 also includes a net after-tax gain of $8 million from sales of subsidiaries. Excluding the above items, operating income for 1997 and 1996 was $197 million and $186 million, respectively. The 1997 improvement reflects rate increases, membership growth and lower dental costs. Partially offsetting these improvements were increased HMO medical costs, higher operating expenses associated with growth and customer service initiatives, and Healthsource goodwill and other intangibles amortization of $18 million. HMO operating income for 1996 and 1995 excluding the items noted above for 1996 and the favorable after-tax effect of account reviews of $39 million in 1995 was $186 million and $163 million, respectively. The increase reflects membership growth, improved per member medical costs and expense savings from the 1995 cost reduction initiatives. Partially offsetting these increases were competitive pressures on rates and higher operating expenses associated with business growth and customer service initiatives. Premiums and fees increased 14% in 1997 and 3% in 1996. The 1997 increase reflects $1.0 billion of Healthsource premiums and fees and $200 million from rate increases and non-Healthsource HMO membership growth. The 1996 improvement reflects growth of $185 million in HMOs, primarily due to increased membership, and growth of $95 million in group indemnity, primarily from life and long-term disability (LTD) business. The 1996 improvement was partially offset by a decrease of $74 million in medical indemnity and other health premiums resulting from lower rate increases for experience-rated business, and cancellations and conversions to HMOs. 12 Total medical HMO membership increased 36% in 1997 and 11% in 1996. Healthsource accounted for 76% of the increase in 1997. The remaining increase and the increase in 1996 primarily reflect membership growth in medical HMO alternative funding programs. Management believes that adding premium equivalents to premiums and fees (adjusted premiums and fees) produces a more meaningful measure of business volume. Premium equivalents generally represent paid claims under alternative funding programs, such as minimum premium and ASO plans, and are additional premiums that would have been earned if these coverages had been written as traditional indemnity and HMO programs. Under alternative funding programs, the customer assumes all or a portion of the responsibility for funding claims, and CIGNA generally earns a lower margin than under traditional programs. Premium equivalents were approximately $10.8 billion in 1997 compared with $9.6 billion in both 1996 and 1995. The 1997 increase of 13% reflects the Healthsource acquisition. Excluding Healthsource, 1997 premium equivalents were level with 1996 and 1995, with all years reflecting growth in HMOs offset by cancellations and conversions of medical indemnity business to HMOs. Premium equivalents, as a percentage of total adjusted premiums and fees, were approximately 55% in 1997, 1996 and 1995. ASO plans accounted for approximately 50% of total adjusted premiums and fees in 1997, 1996 and 1995. Business mix in 1997, measured by adjusted premiums and fees, was approximately 40% prepaid health and dental care, 39% medical insurance, 8% life insurance, 8% dental insurance, 3% LTD insurance and 2% other insurance coverages. Indemnity claims paid for insured plans and claims paid for all alternative funding programs, including ASOs, for the year ended December 31 were as follows: - ---------------------------------------------------------------- (In millions) 1997 1996 1995 - ---------------------------------------------------------------- Insured plans $3,842 $3,814 $3,720 Alternative funding programs 11,052 9,759 9,748 - ---------------------------------------------------------------- Total $14,894 $13,573 $13,468 - ----------------------------------============================== The 1997 increase in alternative funding programs primarily reflects the Healthsource acquisition. Growth in premiums is expected to continue to be constrained by competitive pressures in both the medical indemnity and HMO markets. EMPLOYEE RETIREMENT AND SAVINGS BENEFITS (In millions) - ---------------------------------------------------------------- FINANCIAL SUMMARY 1997 1996 1995 - ---------------------------------------------------------------- Premiums and fees $181 $235 $258 Net investment income 1,597 1,680 1,722 Realized investment gains 19 35 3 ------------------------------ Total revenues 1,797 1,950 1,983 Benefits and expenses 1,461 1,621 1,699 ------------------------------ Income before taxes 336 329 284 Income taxes 103 107 90 ------------------------------ Net income $233 $222 $194 - ----------------------------------============================== Realized investment gains, net of taxes $12 $21 $2 - ----------------------------------============================== Net income for the Employee Retirement and Savings Benefits segment increased 5% in 1997 and 14% in 1996. Results for 1997 include a favorable tax adjustment of $5 million and, for 1996, an after-tax charge of $8 million for state guaranty fund assessments. Operating income, excluding the items noted above, was $216 million, $209 million and $192 million in 1997, 1996 and 1995, respectively. The 1997 increase reflects higher earnings from an increased asset base, partially offset by a shift to lower margin products (separate account equity funds) and by higher operating expenses related to growth initiatives. The 1996 increase primarily reflects higher earnings from an increased asset base. Premiums and fees decreased 23% in 1997 and 9% in 1996, primarily reflecting a continued decline in annuity sales. Net investment income decreased 5% in 1997 and 2% in 1996. These decreases primarily reflect customers' continued redirection of a portion of their investments from the general account to separate accounts and, for 1997, lower investment yields. 13 Assets under management is generally a key determinant of earnings for this segment. For the year ended December 31, assets under management and related activity, including amounts attributable to separate accounts, were as follows: - --------------------------------------------------------------- (In millions) 1997 1996 - --------------------------------------------------------------- Balance -- January 1 $40,587 $38,183 Premiums and deposits 6,864 5,916 Investment results 3,241 2,951 Increase in fair value of assets 2,613 287 Customer withdrawals (2,428) (2,170) Participant withdrawals, benefit payments and other (4,592) (4,580) - --------------------------------------------------------------- Balance -- December 31 $46,285 $40,587 - --------------------------------------------=================== Premiums and deposits increased 16% in 1997 over 1996. Of this increase, approximately 70% reflects higher recurring deposits from existing customers while the remaining increase represents sales to new customers. Sales to new customers and new plan sales to existing customers were approximately 48% and 52% of the premiums and deposits for 1997 and 1996, respectively. The increase in investment results reflects continued asset growth and increased investment earnings from separate accounts. The increase in the fair value of assets reflects market value appreciation of equity securities in separate accounts and, to a lesser extent, market value appreciation in fixed maturities in the general account. Management expects asset growth to continue to be constrained due to the lack of growth in the defined benefit market. In addition, assets under management will continue to be affected by market value fluctuations for fixed maturities and equity securities. INDIVIDUAL FINANCIAL SERVICES (In millions) - --------------------------------------------------------------- FINANCIAL SUMMARY 1997 1996 1995 - --------------------------------------------------------------- Premiums and fees $1,012 $942 $881 Net investment income 1,083 1,039 968 Other revenues 68 81 70 Realized investment gains 13 12 1 ---------------------------- Total revenues 2,176 2,074 1,920 Benefits and expenses 1,858 1,815 1,689 ---------------------------- Income before taxes 318 259 231 Income taxes 110 91 80 ---------------------------- Net income $208 $168 $151 - -----------------------------------============================ Realized investment gains, net of taxes $8 $7 $1 - -----------------------------------============================ Net income for the Individual Financial Services segment increased 24% in 1997 and 11% in 1996. Results for 1997 include favorable after-tax adjustments of $9 million resulting from tax and other account reviews. Operating income, excluding the adjustments in 1997, was $191 million, $161 million and $150 million for 1997, 1996 and 1995, respectively. The increase for 1997 primarily reflects favorable mortality and growth in the individual life insurance and reinsurance, and annuity businesses. The increase for 1996 primarily reflects higher earnings from interest-sensitive products, including leveraged corporate-owned life insurance (COLI), and, to a lesser extent, favorable reinsurance claim experience. In 1997 and 1996, premiums and fees increased 7%. These increases primarily reflect growth in reinsurance and certain interest-sensitive products, partially offset by lower leveraged COLI renewal premiums. Net investment income increased 4% and 7% in 1997 and 1996, respectively. These increases primarily reflect asset growth in certain interest-sensitive products and in the annuity business. Deposits, which are not included in revenues, totaled $2.2 billion, $2.0 billion and $3.2 billion in 1997, 1996 and 1995, respectively. The 1997 increase primarily reflects asset growth in non-leveraged COLI, partially offset by lower leveraged COLI and annuity deposits. The 1996 decrease reflects lower leveraged COLI deposits, due to the legislation discussed below, and lower annuity sales. In 1996, Congress passed legislation that phases out over a three-year period the tax deductibility of policy loan interest for most leveraged COLI products. Revenues of $591 million and operating income of $44 million for 1997 were from leveraged COLI products that are affected by this legislation. CIGNA does not expect this legislation to have a material effect on its consolidated results of operations, liquidity or financial condition. A significant portion of this segment's businesses were sold as of January 1, 1998. See page 10 for further discussion. PROPERTY AND CASUALTY (In millions) - --------------------------------------------------------------- FINANCIAL SUMMARY 1997 1996 1995 - --------------------------------------------------------------- Premiums and fees $4,230 $4,398 $4,640 Net investment income 761 804 794 Other revenues 299 240 216 Realized investment gains 78 42 85 ------------------------------ Total revenues 5,368 5,484 5,735 Benefits and expenses 4,950 5,138 6,795 ------------------------------ Income (loss) before taxes 418 346 (1,060) Income taxes (benefits) 143 106 (387) ------------------------------ Net income (loss) $275 $240 $(673) - ---------------------------------============================== Realized investment gains, net of taxes $49 $27 $54 - ---------------------------------============================== 14 CIGNA's domestic property and casualty operations were restructured into ongoing and run-off operations effective December 31, 1995. Amounts shown below for the Property and Casualty segment's domestic and run-off operations for 1995 are reported on a pro forma basis as though the restructuring was in place at the beginning of 1995. These pro forma results are not necessarily indicative of the results that would have been reported had the restructuring actually occurred as of January 1, 1995. Amounts for the international operations and for the consolidated Property and Casualty segment were not affected by the restructuring. Results for 1995 reflect third quarter charges associated with reserve strengthening for asbestos-related and environmental pollution (A&E) claims ($686 million after-tax) and uncollectible reinsurance for non-A&E exposures ($88 million after-tax), and cost reduction initiatives ($55 million after-tax). Operating income (loss), excluding the third quarter 1995 charges, was as follows: - --------------------------------------------------------------- Pro Forma (In millions) 1997 1996 1995 - --------------------------------------------------------------- International $127 $135 $128 Domestic 98 76 0 --------------------------- Total ongoing operations 225 211 128 Run-off operations 1 2 (26) - --------------------------------------------------------------- Total $226 $213 $102 - ------------------------------------=========================== The decline in the international operations for 1997 reflects unfavorable claim experience primarily in the fire and casualty lines of business. Also, the decline reflects higher expenses resulting from business growth initiatives and charges for severance in both the property and casualty and accident and health operations. Partially offsetting the decline were higher earnings in the individual life insurance business, primarily in Japan, resulting from favorable business mix. The 1996 improvement reflects higher earnings from accident and health, individual life and employee benefits lines of business, primarily due to favorable claim experience. The improvement in the domestic operations for 1997 primarily reflects lower catastrophe losses partially offset by lower premiums and fees, lower investment income and an unfavorable tax adjustment of $7 million. The 1996 improvement reflects lower expenses, primarily resulting from the 1995 cost reduction initiatives, and higher investment income, primarily due to higher yields. Results for the run-off operations primarily reflect prior year development on claim and claim adjustment expense reserves and investment activity. The 1996 improvement in results for the run-off operations primarily reflects lower A&E losses. Premiums and fees for the segment decreased 4% in 1997. This decline primarily reflects 1) the unfavorable effect from foreign currency translation of approximately $145 million, 2) lower premiums of approximately $88 million for reinsurance and personal automobile products that are no longer being actively sold, 3) strict underwriting standards, and 4) the highly competitive pricing environment in certain domestic and international property and casualty lines of business. These declines were partially offset by increases in domestic specialty lines of business including marine and aviation coverages as well as growth in international accident and health business. Premiums and fees for the segment decreased 5% in 1996. This decline primarily reflects 1) the unfavorable effect from foreign currency translation of approximately $160 million, 2) lower premiums of approximately $85 million for reinsurance and personal automobile products that are no longer being actively sold, 3) a decrease of $90 million in workers' compensation premiums primarily reflecting conversions from standard risk transfer to high-deductible policies, 4) strict underwriting standards, and 5) continued price competition. These declines were partially offset by growth in the domestic property, casualty, marine and aviation lines of business, as well as the international accident and health line of business. Net investment income for 1997 decreased 5% from 1996, primarily reflecting a lower asset base and an unfavorable effect from currency translation of $11 million. Net investment income for 1996 was about level with 1995. Pre-tax catastrophe losses, net of reinsurance, were $17 million, $87 million and $71 million in 1997, 1996 and 1995, respectively. Substantially all the catastrophe losses occurred in the domestic operations. Net catastrophe losses included $21 million for Hurricane Fran and $22 million for East Coast winter storms in 1996, and $29 million for Texas hail storms in 1995. The effect of reinsurance on catastrophe losses was not material. 15 During 1997, CIGNA revised its reinsurance programs. CIGNA's domestic reinsurance programs now provide approximately 35% recovery for property catastrophe losses between $60 million and $375 million. Other reinsurance programs are in place which could provide for the recovery of up to an additional $300 million on certain losses, including property catastrophes, depending on the aggregate annual level of losses incurred. These revisions are expected to result in little or no increase in earnings volatility. CIGNA's international catastrophe program provides approximately 95% recovery of losses between $75 million and $300 million. CIGNA's future results of operations could be volatile, depending on the frequency and severity of future catastrophes. Loss Reserves and Reinsurance Recoverables CIGNA's property and casualty loss reserves of $15.1 billion and $16.5 billion as of December 31, 1997 and 1996, respectively, are an estimate of future payments for reported and unreported claims for losses and related expenses with respect to insured events that have occurred. The basic assumption underlying the many traditional actuarial and other methods used in the estimation of property and casualty loss reserves is that past experience is an appropriate basis for predicting future events. However, current trends and other factors that would modify past experience are also considered. The process of establishing loss reserves is subject to uncertainties that are normal, recurring and inherent in the property and casualty business. CIGNA continually attempts to improve its loss estimation process by refining its analysis of loss development patterns, claims payments and other information, but there remain many reasons for adverse development of estimated ultimate liabilities. For example, unanticipated changes in workers' compensation and product liability laws have at times significantly affected the ability of insurers to estimate liabilities for unpaid losses and related expenses. CIGNA implemented a new methodology for estimating A&E reserves in the third quarter of 1995, as discussed on page 17. CIGNA's reserves for A&E claims are a reasonable estimate of its liability for these claims, based on currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Reserving for property and casualty claims continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. CIGNA's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current law changes. Any such revisions could result in future changes in estimates of losses or reinsurance recoverables, and would be reflected in CIGNA's results of operations for the period in which the estimates are changed. While the effect of any such changes in estimates of losses or reinsurance recoverables could be material to future results of operations, CIGNA does not expect such changes to have a material effect on its liquidity or financial condition. CIGNA manages its loss exposure through the use of reinsurance. While reinsurance arrangements are designed to limit losses from large exposures and to permit recovery of a portion of direct losses, reinsurance does not relieve CIGNA of liability to its insureds. Accordingly, CIGNA's loss reserves represent total gross losses, and reinsurance recoverables represent anticipated recoveries of a portion of those losses. CIGNA's reinsurance recoverables were approximately $6.2 billion and $6.8 billion as of December 31, 1997 and 1996, net of allowances for unrecoverable reinsurance of $720 million and $711 million, respectively. CIGNA recognized significant recoveries in 1997, 1996 and 1995 from reinsurance arrangements, as shown in the table on page 17. Reinsurance recoveries for all periods presented, including recoveries for A&E claims, increased or decreased as a result of comparable changes in gross losses. Reinsurance recoveries are also affected by the factors noted below for "unrecoverable reinsurance." CIGNA expects to continue to have significant recoveries from its reinsurance arrangements, including recoveries of A&E losses. However, the extent of recoveries in the aggregate will depend on future gross loss experience and the particular reinsurance arrangements to which future losses relate. At December 31, 1997 and 1996, approximately 16% and 14%, respectively, of CIGNA's reinsurance recoverables related to paid claims. The timing and collectibility of such recoverables have not had, and are not expected to have, a material adverse effect on CIGNA's liquidity. In management's judgment, information currently available has been appropriately considered in estimating CIGNA's loss reserves and reinsurance recoverables. See CIGNA's Form 10-K for additional information on CIGNA's loss reserves and reinsurance recoverables. 16 The following table shows CIGNA's gross losses for incurred claims and claim adjustment expenses (Gross), amounts ceded to reinsurers (Reinsurance) and net losses for incurred claims and claim adjustment expenses (Net) for the year ended December 31. The table also categorizes those amounts as they relate to insured events of the current year and of prior years (prior year development).
- ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ (In millions) Gross Reinsurance Net Gross Reinsurance Net Gross Reinsurance Net - ------------------------------------------------------------------------------------------------------------------------------------ Current year $2,961 $(841) $2,120 $3,510 $(1,162) $2,348 $3,522 $(1,136) $2,386 - ------------------------------------------------------------------------------------------------------------------------------------ Prior year development: Asbestos-related 170 (78) 92 115 (53) 62 298 (43) 255 Environmental pollution 94 (61) 33 58 (26) 32 1,265 (310) 955 Assumed reinsurance exposures 16 (9) 7 114 (74) 40 73 (41) 32 Unrecoverable reinsurance -- 23 23 -- 23 23 -- 179 179 Other (71) 134 63 (26) 46 20 7 70 77 - ------------------------------------------------------------------------------------------------------------------------------------ Total prior year development 209 9 218 261 (84) 177 1,643 (145) 1,498 - ------------------------------------------------------------------------------------------------------------------------------------ Total incurred claims and claim adjustment expenses $3,170 $(832) $2,338 $3,771 $(1,246) $2,525 $5,165 $(1,281) $3,884 ====================================================================================================================================
During the third quarter of 1995, CIGNA evaluated newly emerging methods for estimating A&E liabilities and expanded its claims databases. Using these recent developments, CIGNA completed a comprehensive review of its A&E exposures and increased asbestos-related reserves by $255 million ($194 million, net of reinsurance) and environmental pollution reserves by $1.2 billion ($861 million, net of reinsurance). These amounts are included in the 1995 gross asbestos-related losses of $298 million ($255 million, net of reinsurance) and gross environmental pollution losses of $1.3 billion ($955 million, net of reinsurance) as shown in the above table. As a result of this reserve action, charges for A&E losses in 1997 and 1996 were substantially lower than in prior years. Losses for "assumed reinsurance exposures" for 1997 and 1996 resulted from a review of reserves for certain reinsurance lines of business, including London reinsurance exposures. For 1995, losses primarily reflect $31 million ($17 million, net of reinsurance) for London reinsurance exposures. Losses for "unrecoverable reinsurance" are principally due to the failure of reinsurers to indemnify CIGNA, primarily because of disputes under reinsurance contracts. Reinsurance disputes continue to increase, particularly on larger and more complex claims such as those related to asbestos and London reinsurance market exposures. Future reinsurance disputes are likely to include disputes related to environmental pollution. Allowances have been established for amounts deemed uncollectible. In the third quarter of 1995, CIGNA increased the allowance for uncollectible reinsurance by $210 million pre-tax, including $75 million reported as A&E prior year development in the table above. While future charges for unrecoverable reinsurance may materially affect results of operations in future periods, such amounts are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. 17 Losses for "other" prior year development in 1997 and 1996 reflect unfavorable development on workers' compensation and long-term exposures, partially offset by favorable loss reserve development on commercial packages and, for 1996, the commercial fire line of business. For 1995, "other" prior year development reflects unfavorable development on workers' compensation and long-term exposures, partially offset by favorable loss reserve development on commercial packages, commercial fire, and general and excess liability lines of business. OTHER OPERATIONS (In millions) - --------------------------------------------------------------- FINANCIAL SUMMARY 1997 1996 1995 - --------------------------------------------------------------- Net loss $(71) $(74) $(58) - -----------------------------------------====================== Realized investment gains (losses), net of taxes $29 $(4) $17 - -----------------------------------------====================== Other Operations primarily includes unallocated investment income, expenses (including debt service) and taxes. Also included in Other Operations are the results of CIGNA's settlement annuity business and non-insurance operations engaged primarily in investment and real estate activities, and certain new business initiatives. Operating losses were $100 million, $70 million and $75 million for 1997, 1996 and 1995, respectively. Increased losses for 1997 primarily reflect financing costs associated with the Healthsource acquisition and, to a lesser extent, costs related to certain new business initiatives. Operating losses for 1996 were lower than 1995, primarily reflecting higher income tax benefits in 1996. LIQUIDITY AND CAPITAL RESOURCES (In millions) - --------------------------------------------------------------- FINANCIAL SUMMARY 1997 1996 1995 - --------------------------------------------------------------- Short-term investments $212 $847 $510 Cash and cash equivalents 2,625 1,760 2,162 Short-term debt 690 289 414 Long-term debt 1,465 1,021 1,066 Shareholders' equity 7,932 7,208 7,157 - --------------------------------------------------------------- CIGNA's operations have liquidity requirements that vary among the principal product lines. Life insurance and pension plan reserves are primarily longer-term liabilities. Property and casualty, as well as accident and health reserves, including long-term disability, consist of both short-term and long-term liabilities. Life insurance and pension plan reserve requirements are usually stable and predictable, and are supported primarily by medium-term, fixed-income investments. Property and casualty claim demands are less predictable in nature, requiring greater liquidity in the investment portfolio. Accident and health claim demands are stable and predictable, but generally shorter term, requiring greater liquidity. Generally, CIGNA has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio and utilizing overall cash flows. Overall cash flows have been constrained by negative cash flows in the property and casualty business, resulting from claim payments related to insurance reserves established in prior periods. Liquidity for CIGNA and its insurance subsidiaries has remained strong, as evidenced by significant amounts of short-term investments and cash and cash equivalents. During 1997, cash and cash equivalents increased $865 million. This increase primarily reflects cash flows from operating activities ($1.2 billion), reflecting earnings and the timing of cash receipts and cash disbursements; proceeds on the issuance of long-term debt ($600 million); net proceeds on short-term debt ($358 million); and deposits and interest credited, net of withdrawals, to contractholder deposit funds ($579 million). The increase was partially offset by cash used in investing activities ($966 million, which reflects $1.3 billion used to acquire Healthsource), repayment of Healthsource debt ($250 million), and payments of dividends on and repurchases of CIGNA common stock ($580 million). 18 During 1996, cash and cash equivalents decreased $402 million. This decrease primarily reflects cash used in investing activities ($487 million); payments of dividends on and repurchases of CIGNA common stock ($534 million); and debt repayments ($158 million). The decrease was partially offset by cash flows from operating activities ($700 million) reflecting the timing of cash receipts and cash disbursements and earnings; and deposits and interest credited, net of withdrawals, to contractholder deposit funds ($93 million). During 1995, cash and cash equivalents increased $285 million from $1.9 billion as of December 31, 1994. This increase primarily reflects cash flows from operating activities ($1.1 billion) reflecting the timing of cash receipts and cash disbursements and earnings; deposits and interest credited, net of withdrawals, to contractholder deposit funds ($2.6 billion); and proceeds from the issuance of long-term debt ($88 million). The increase was partially offset by cash used in investing activities ($3.3 billion) and payments of dividends on CIGNA common stock ($222 million). Funds provided from premiums and fees, investment income and maturities of investment assets are reasonably predictable and normally exceed liquidity requirements for payments of claims, benefits and expenses. However, since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demand for funds exceeds those on hand. Also, a demand for funds may arise as a result of CIGNA taking advantage of current investment opportunities. CIGNA's insurance subsidiaries are subject to various regulatory restrictions that can limit the amount of internal dividends and other distributions, including loans, that can be utilized to manage liquidity needs. However, CIGNA's size and diversity generally provide the flexibility to manage liquidity needs, either internally or externally, through short-term borrowings. At December 31, 1997, CIGNA had available approximately $1.2 billion of committed and uncommitted lines of credit with banks. Subsequent to the sale of CIGNA's individual life insurance and annuity businesses, CIGNA canceled $500 million of lines of credit in January 1998. CIGNA's financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of long-term debt and equity securities. CIGNA continues to be well capitalized, with sufficient borrowing capacity to meet the anticipated needs of its businesses. CIGNA's capital resources represent funds available for long-term business commitments. They primarily consist of retained earnings and proceeds from the issuance of long-term debt and equity securities. Capital resources provide protection for policyholders and the financial strength to support the underwriting of insurance risks, and allow for continued business growth. The amount of capital resources that may be needed is determined by CIGNA's senior management and Board of Directors, as well as by regulatory requirements. The allocation of resources to new long-term business commitments is designed to achieve an attractive return, tempered by considerations of risk and the need to support CIGNA's existing businesses. CIGNA had $1.5 billion of long-term debt outstanding at December 31, 1997, including $600 million issued in connection with the Healthsource acquisition, compared with $1 billion at December 31, 1996. At December 31, 1997, CIGNA had $1 billion remaining under effective shelf registration statements filed with the Securities and Exchange Commission that may be issued as debt securities, equity securities or both, depending upon market conditions and CIGNA's capital requirements. CIGNA repurchased 2.1 million shares of its common stock for $340 million during 1997. From January 1, 1998 through February 25, 1998, an additional 230,000 shares were repurchased for $40 million. The remaining authorization of CIGNA's Board of Directors for share repurchases as of February 25, 1998 was $321 million. Decisions regarding share repurchases are subject to prevailing market conditions and alternative uses of capital. 19 INVESTMENT ASSETS Information regarding investment assets held by CIGNA is presented below. Additional information regarding CIGNA's investment assets and related accounting policies is included in Notes 2, 4 and 5 to the Financial Statements, and in CIGNA's Form 10-K. - --------------------------------------------------------------- (In millions) FINANCIAL SUMMARY 1997 1996 - --------------------------------------------------------------- Fixed maturities $36,358 $34,933 Equity securities 854 701 Mortgage loans 10,859 10,927 Real estate 769 1,102 Other, primarily policy loans 7,738 8,398 - --------------------------------------------------------------- Total investment assets $56,578 $56,061 - --------------------------------------------=================== Significant amounts of CIGNA's investment assets are attributable to experience-rated contracts with policyholders (policyholder contracts). Approximate percentages of investments attributable to policyholder contracts as of December 31 were as follows: - --------------------------------------------------------------- 1997 1996 - --------------------------------------------------------------- Fixed maturities 29% 28% Mortgage loans 53% 56% Real estate 64% 58% - --------------------------------------------------------------- Under the experience-rating process, net investment income and gains and losses on assets related to policyholder contracts generally accrue to the policyholders. Consequently, write-downs, changes in valuation reserves and non-accruals on investments attributable to policyholder contracts do not affect CIGNA's net income, except under unusual circumstances. Fixed Maturities Investments in fixed maturities (bonds) include publicly traded and private placement debt securities; asset-backed securities, including collateralized mortgage obligations (CMOs); and redeemable preferred stocks. As of December 31, 1997, the fair value of fixed maturities, including policyholder share, was greater than amortized cost by $2.1 billion, compared with approximately $1.5 billion as of December 31, 1996. The increase in unrealized appreciation primarily reflects the downward movement in interest rates since December 31, 1996. Quality Ratings As of December 31, 1997, $35.0 billion, or 96%, of bonds were investment grade, and $1.4 billion, or 4%, were below investment grade (BA and below, or equivalent). The quality ratings of CIGNA's below investment grade bonds are concentrated toward the higher end of the non-investment grade spectrum. Approximately 22% of below investment grade securities relate to policyholder contracts. All private placement investments are made after credit analysis and are diversified by industry and issuer. Private placement investments are generally less marketable than public bonds, and yields are generally higher for comparable credit risk. Further, private placement investments generally contain financial and other covenants that allow CIGNA to monitor the debtor for early signs of deteriorating financial strength so it can take remedial actions, if warranted. As a result of the higher yields and the inherent risk associated with below investment grade securities, gains or losses could significantly affect future results of operations, although such effects are not expected to be material to CIGNA's liquidity or financial condition. Potential Problem and Problem Bonds Potential problem bonds are fully current but judged by management to have certain characteristics that increase the likelihood of problem classification. CIGNA had $63 million of potential problem bonds, including amounts attributable to policyholder contracts, as of December 31, 1997, compared with $107 million as of December 31, 1996. These amounts are net of $10 million and $5 million of cumulative write-downs, respectively. Potential problem bonds attributable to policyholder contracts represented 45% and 26% of total potential problem bonds at December 31, 1997 and 1996, respectively. CIGNA considers bonds that are delinquent or restructured as to terms, typically interest rate and, in certain cases, maturity date, problem bonds. As of December 31, 1997 and 1996, CIGNA had problem bonds, including amounts attributable to policyholder contracts, of $137 million and $160 million, net of related cumulative write-downs of $30 million and $125 million, respectively. Problem bonds attributable to policyholder contracts represented 24% of total problem bonds at both December 31, 1997 and 1996. CIGNA recognizes interest income on problem bonds only when payment is received. See the Summary on page 22 for the adverse effect of non-accruals and write-downs for bonds on policyholder contracts and on CIGNA's net income. 20 Mortgage Loans - ---------------------------------------------------------------- As of December 31, 1997 1996 - ---------------------------------------------------------------- Mortgage loans (in millions) $10,859 $10,927 Property type: Retail facilities 40% 43% Office buildings 34 34 Apartment buildings 13 12 Industrial 5 4 Hotels 5 6 Other 3 1 - ---------------------------------------------------------------- Total 100% 100% - --------------------------------------------==================== CIGNA's investment strategy requires diversification of the mortgage loan portfolio. This strategy includes guidelines relative to property type, location and borrower to reduce its exposure to potential losses. CIGNA routinely monitors and evaluates the status of its mortgage loans through the review of loan and property-related information, including cash flows, expiring leases, financial health of the borrower and major tenants, loan payment history, occupancy and room rates for hotels and, for all commercial properties, significant new competition. CIGNA evaluates this information in light of current economic conditions as well as geographic and property type considerations. Potential Problem and Problem Mortgage Loans Potential problem mortgage loans include: o fully current loans that are judged by management to have certain characteristics that increase the likelihood of problem classification; o fully current loans for which the borrower has requested restructuring; and o loans that are 30 to 59 days delinquent with respect to interest or principal payments. CIGNA had potential problem mortgage loans, including amounts attributable to policyholder contracts, of $191 million as of December 31, 1997, and $384 million as of December 31, 1996, net of related valuation reserves of $41 million and $30 million, respectively. Potential problem mortgage loans attributable to policyholder contracts represented 61% and 63% of total potential problem mortgage loans at December 31, 1997 and 1996, respectively. CIGNA's problem mortgage loans include delinquent and restructured mortgage loans. Delinquent mortgage loans include those on which payment is overdue generally 60 days or more. Restructured mortgage loans are those whose basic financial terms have been modified, typically to reduce the interest rate or extend the maturity date. CIGNA had problem mortgage loans, including amounts attributable to policyholder contracts, of $152 million and $363 million, net of valuation reserves of $9 million and $71 million, as of December 31, 1997 and 1996, respectively. Problem mortgage loans attributable to policyholder contracts represented 51% and 53% of total problem mortgage loans at December 31, 1997 and 1996, respectively. For 1997 and 1996, the majority of problem mortgage loans related to office buildings and hotels in the Central and Middle Atlantic regions. CIGNA recognizes interest income on problem mortgage loans only when payment is received. See the Summary on page 22 for the effect of non-accruals and valuation reserves for mortgage loans on policyholder contracts and on CIGNA's net income. 21 Real Estate Investment real estate includes real estate held for the production of income and real estate held for sale, primarily properties acquired as a result of foreclosure of mortgage loans (foreclosure properties). As of December 31, investment real estate, including amounts attributable to policyholder contracts, and related cumulative write-downs and valuation reserves, were as follows: - --------------------------------------------------------------- (In millions) 1997 1996 - --------------------------------------------------------------- Real estate held for sale (primarily foreclosure properties) $513 $901 Less cumulative write-downs 129 227 Less valuation reserves 29 67 ---------------------- 355 607 ---------------------- Real estate held for the production of income 462 545 Less valuation reserves 48 50 ---------------------- 414 495 - --------------------------------------------------------------- Investment real estate $769 $1,102 - -----------------------------------------====================== Foreclosure properties attributable to policyholder contracts represented 60% and 62% of total foreclosure properties at December 31, 1997 and 1996, respectively. For 1997 and 1996, the majority of real estate held for sale related to office buildings and retail facilities in the Central and Middle Atlantic regions. See the Summary below for the effect of real estate write-downs and valuation reserves on policyholder contracts and on CIGNA's net income. Summary The adverse (favorable) effects of write-downs and changes in valuation reserves as well as of non-accruals on policyholder contracts and on CIGNA's net income for the year ended December 31 were as follows:
- -------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Policyholder Policyholder Policyholder (In millions) Contracts CIGNA Contracts CIGNA Contracts CIGNA - -------------------------------------------------------------------------------------------------------------------------------- Write-downs and valuation reserves: Bonds $15 $23 $18 $24 $26 $32 Mortgage loans 15 10 37 16 10 2 Real estate (5) 1 1 1 18 6 - -------------------------------------------------------------------------------------------------------------------------------- Total $25 $34 $56 $41 $54 $40 - ------------------------------================================================================================================== Non-accruals: Bonds $2 $9 $8 $15 $12 $13 Mortgage loans (5) (1) 1 -- 6 1 - -------------------------------------------------------------------------------------------------------------------------------- Total $(3) $8 $9 $15 $18 $14 - ------------------------------==================================================================================================
Additional losses from problem investments are expected to occur for specific investments in the normal course of business. Assuming no significant deterioration in economic conditions, including further significant deterioration in Asian economies, CIGNA does not expect additional non-accruals, write-downs and reserves to materially affect future results of operations, liquidity or financial condition, or to result in a significant decline in the aggregate carrying value of its assets. 22 MARKET RISK OF FINANCIAL INSTRUMENTS CIGNA's principal assets and liabilities are financial instruments, which are subject to the market risk of potential losses from adverse changes in market rates and prices. CIGNA's primary market risk exposures are: interest rate risk on fixed rate domestic medium-term instruments and, to a lesser extent, international medium-term and domestic and international short- and long-term instruments; foreign currency exchange rate risk, in particular the U.S. dollar to the Japanese yen, Canadian dollar and certain European currencies; and equity price risk for domestic and international stocks. CIGNA uses a variety of techniques to manage its exposures to market risk, as follows: o CIGNA generally selects investment assets with characteristics such as duration, yield, currency and liquidity to reflect the underlying characteristics of related insurance and contractholder liabilities. CIGNA selects medium-term, fixed rate investments to support interest-sensitive and experience-rated life and health liabilities subject to liquidity requirements, shorter- and longer-term investments to support generally shorter- and longer-term property and casualty and other life and health claim liabilities, and longer-term investments to support generally longer-term fully guaranteed products, primarily annuities. o CIGNA generally conducts its international businesses through foreign operating entities that maintain assets and liabilities in local currencies, substantially limiting exchange rate risk to net assets denominated in foreign currencies. o CIGNA uses derivative financial instruments to minimize market risk. Derivative instruments are not used for speculative purposes. See Notes 2(C) and 4(F) to the Financial Statements for additional information about financial instruments, including derivative financial instruments. Caution should be used in evaluating CIGNA's overall market risk from the information below, since actual results could differ materially because the information was developed using estimates and assumptions as described below, and because insurance contract liabilities and reinsurance recoverables on unpaid losses are not included in the hypothetical effects (insurance contract liabilities represent 61% of total liabilities and reinsurance recoverables on unpaid losses represent 7% of total assets, excluding separate accounts at December 31, 1997). The hypothetical effects of changes in market rates or prices on the fair values of financial instruments, excluding separate account assets and liabilities (because gains and losses of these accounts generally accrue to the policyholders), insurance contract liabilities and reinsurance recoverables on unpaid losses (because insurance contracts are not required for market risk disclosures), would have been as follows as of December 31, 1997: o An approximate $1.3 billion net decrease in the fair value of financial instruments would have occurred if interest rates had increased by 100 basis points. The change in fair values was determined by estimating the present value of future cash flows using various models, primarily duration modeling. o An approximate $450 million net decrease in the fair value of financial instruments denominated in foreign currencies would have occurred if the U.S. dollar had strengthened by 10% in comparison to each of the foreign currencies held by CIGNA. o An approximate $85 million decrease in the fair value of equity securities would have occurred if there had been a 10% decrease in the market prices of all equity securities. Equity securities at December 31, 1997, included domestic securities of $564 million, which are primarily managed to reflect the S&P 500, and international securities of $290 million, substantially all of which relate to issuers which are based in developed countries (primarily certain European countries, Japan and Australia). CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for historical information provided in this Management's Discussion and Analysis of Financial Condition and Results of Operations, statements made throughout this document are forward-looking and contain information about financial results, economic conditions, trends and known uncertainties. CIGNA cautions the reader that actual results could differ materially from those expected by CIGNA, depending on the outcome of certain factors (some of which are described with the forward-looking statements) including: 1) adverse catastrophe experience in CIGNA's property and casualty businesses; 2) adverse property and casualty loss development for events that CIGNA insured in prior years; 3) an increase in medical costs in CIGNA's health care operations, including increases in utilization and costs of medical services; 4) heightened competition, particularly price competition, reducing product margins and constraining growth in CIGNA's businesses; 5) significant changes in interest rates; and 6) the effect on CIGNA's international operations and investments from further significant deterioration in Asian economies. 23 CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
- ----------------------------------------------------------------------------------------------------------------------------- (In millions, except per share amounts) - ----------------------------------------------------------------------------------------------------------------------------- For the years ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- REVENUES Premiums and fees $14,935 $13,916 $13,914 Net investment income 4,245 4,333 4,296 Other revenues 691 610 512 Realized investment gains 167 91 233 ----------------------------------------- Total revenues 20,038 18,950 18,955 ----------------------------------------- BENEFITS, LOSSES AND EXPENSES Benefits, losses and settlement expenses 13,029 12,473 13,855 Policy acquisition expenses 1,046 1,138 1,181 Other operating expenses 4,313 3,738 3,668 ----------------------------------------- Total benefits, losses and expenses 18,388 17,349 18,704 ----------------------------------------- INCOME BEFORE INCOME TAXES 1,650 1,601 251 ----------------------------------------- Income taxes (benefits): Current 493 419 258 Deferred 71 126 (218) ----------------------------------------- Total taxes 564 545 40 ----------------------------------------- NET INCOME 1,086 1,056 211 Common dividends declared (245) (242) (222) Retained earnings, beginning of year 4,855 4,041 4,052 - ----------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS, END OF YEAR $5,696 $4,855 $4,041 - --------------------------------------------------------------------------------============================================= EARNINGS PER SHARE: Basic $14.79 $14.05 $2.90 - --------------------------------------------------------------------------------============================================= Diluted $14.64 $13.91 $2.88 - --------------------------------------------------------------------------------=============================================
The Notes to Financial Statements are an integral part of these statements. 24 CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------- (In millions, except per share amounts) - -------------------------------------------------------------------------------------------------------------- As of December 31, 1997 1996 - -------------------------------------------------------------------------------------------------------------- ASSETS Investments: Fixed maturities, at fair value (amortized cost, $34,284; $33,404) $36,358 $34,933 Equity securities, at fair value (cost, $648; $573) 854 701 Mortgage loans 10,859 10,927 Policy loans 7,253 7,296 Real estate 769 1,102 Other long-term investments 273 255 Short-term investments 212 847 --------------------------- Total investments 56,578 56,061 Cash and cash equivalents 2,625 1,760 Accrued investment income 868 890 Premiums, accounts and notes receivable 4,265 4,229 Reinsurance recoverables 6,753 7,287 Deferred policy acquisition costs 1,542 1,230 Property and equipment 857 802 Deferred income taxes 1,788 1,998 Other assets 1,033 993 Goodwill and other intangibles 2,542 1,068 Separate account assets 29,348 22,614 - -------------------------------------------------------------------------------------------------------------- Total assets $108,199 $98,932 - -----------------------------------------------------------------------------------=========================== LIABILITIES Contractholder deposit funds $30,682 $29,878 Unpaid claims and claim expenses 17,906 18,841 Future policy benefits 11,976 11,784 Unearned premiums 1,774 1,940 --------------------------- Total insurance and contractholder liabilities 62,338 62,443 Accounts payable, accrued expenses and other liabilities 6,562 5,326 Current income taxes 60 221 Short-term debt 690 289 Long-term debt 1,465 1,021 Separate account liabilities 29,152 22,424 - -------------------------------------------------------------------------------------------------------------- Total liabilities 100,267 91,724 - -------------------------------------------------------------------------------------------------------------- CONTINGENCIES - NOTE 19 SHAREHOLDERS' EQUITY Common stock (shares issued, 88) 88 88 Additional paid-in capital 2,633 2,572 Net unrealized appreciation, fixed maturities 752 539 Net unrealized appreciation, equity securities 132 88 Net translation of foreign currencies (126) (45) Retained earnings 5,696 4,855 Less treasury stock, at cost (1,243) (889) - -------------------------------------------------------------------------------------------------------------- Total shareholders' equity 7,932 7,208 - -------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $108,199 $98,932 - -----------------------------------------------------------------------------------=========================== SHAREHOLDERS' EQUITY PER SHARE $109.66 $97.15 - -----------------------------------------------------------------------------------===========================
The Notes to Financial Statements are an integral part of these statements. 25 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) - ------------------------------------------------------------------------------------------------------------------------------ For the years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $1,086 $1,056 $211 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Insurance liabilities (665) (351) 550 Reinsurance recoverables 565 (140) 362 Premiums, accounts and notes receivable 85 23 (184) Deferred policy acquisition costs (217) (89) (66) Accounts payable, accrued expenses, other liabilities and current income taxes 328 23 589 Deferred income taxes 71 126 (218) Realized investment gains (167) (91) (233) Depreciation and goodwill amortization 255 227 224 Other, net (110) (84) (131) ---------------------------------------------- Net cash provided by operating activities 1,231 700 1,104 ---------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from investments sold: Fixed maturities 5,902 6,076 6,492 Equity securities 304 368 1,668 Mortgage loans 861 676 430 Other (primarily short-term investments) 4,305 4,222 8,491 Investment maturities and repayments: Fixed maturities 3,588 3,867 3,321 Mortgage loans 634 672 389 Investments purchased: Fixed maturities (10,309) (9,842) (11,696) Equity securities (383) (348) (348) Mortgage loans (1,527) (1,375) (1,829) Other (primarily short-term investments) (2,731) (4,659) (10,060) Healthsource acquisition, net cash used (1,305) -- -- Other, net (305) (144) (152) ---------------------------------------------- Net cash used in investing activities (966) (487) (3,294) ---------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds 7,622 7,261 8,472 Withdrawals and benefit payments from contractholder deposit funds (7,043) (7,168) (5,859) Net change in short-term debt 358 (6) (13) Issuance of long-term debt 600 -- 88 Repayment of long-term debt (318) (158) (9) Repurchase of common stock (335) (292) -- Issuance of common stock 19 12 21 Common dividends paid (245) (242) (222) ---------------------------------------------- Net cash provided by (used in) financing activities 658 (593) 2,478 ---------------------------------------------- Effect of foreign currency rate changes on cash and cash equivalents (58) (22) (3) - ------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 865 (402) 285 Cash and cash equivalents, beginning of year 1,760 2,162 1,877 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $2,625 $1,760 $2,162 - --------------------------------------------------------------------------------============================================= Supplemental Disclosure of Cash Information: Income taxes paid, net of refunds $620 $360 $233 Interest paid $123 $106 $123 - ------------------------------------------------------------------------------------------------------------------------------
The Notes to Financial Statements are an integral part of these statements. 26 NOTES TO FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF BUSINESS CIGNA Corporation's subsidiaries provide group life and health insurance, managed care products and related services, individual life and health insurance and annuity products, retirement and investment products and services, and property and casualty insurance throughout the United States and in many locations worldwide. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) Basis of Presentation: The consolidated financial statements include the accounts of CIGNA Corporation and all significant subsidiaries (CIGNA). These consolidated financial statements have been prepared in conformity with generally accepted accounting principles, and reflect management's estimates and assumptions, such as those regarding medical costs and interest rates, that affect the recorded amounts. Significant estimates used in determining insurance and contractholder liabilities and related reinsurance recoverables, and valuation allowances for investment assets and deferred tax assets are discussed throughout the Notes to Financial Statements. Certain reclassifications have been made to prior years' amounts to conform with the 1997 presentation. B) Recent Accounting Pronouncements: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (EPS) in 1997. This pronouncement replaces primary EPS with basic EPS, which is computed using only weighted average common shares outstanding without considering common stock equivalents. Also, SFAS No. 128 replaces fully diluted EPS with diluted EPS which is computed similarly to fully diluted EPS. This pronouncement requires dual presentation of basic and diluted EPS on the income statement. CIGNA implemented SFAS No. 128 as of December 31, 1997 and restated prior periods based on the new requirements. The effect of adopting this pronouncement was not material to EPS. See Note 12 for additional information. In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which could change the way segments are structured and require additional segment disclosure. Although CIGNA has not determined the timing of implementation of this pronouncement, it will be adopted no later than the required implementation date of December 31, 1998. The American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" in 1997. SOP 97-3 provides guidance on the recognition and measurement of liabilities for guaranty fund and other insurance-related assessments. Implementation is required by the first quarter of 1999, with the cumulative effect of adopting the SOP reflected in net income in the year of adoption. CIGNA has not determined the effect or timing of implementation of this pronouncement. In 1996, CIGNA implemented SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires write-down to fair value when long-lived assets to be held and used are impaired. Long-lived assets to be disposed of, including real estate held for sale, must be carried at the lower of cost or fair value less costs to sell. Depreciation of assets to be disposed of is prohibited. The effect of implementing SFAS No. 121 was not material to CIGNA. C) Financial Instruments: In the normal course of business, CIGNA enters into transactions involving various types of financial instruments, including investments such as fixed maturities and equity securities, debt, and off-balance-sheet financial instruments such as investment and loan commitments and financial guarantees. These instruments are subject to risk of loss due to interest rate and market fluctuations and most have credit risk. CIGNA evaluates and monitors each financial instrument individually and, where appropriate, uses certain derivative instruments or obtains collateral or other forms of security to minimize risk of loss. Financial instruments that are subject to fair value disclosure requirements (insurance contracts, real estate, goodwill and taxes are excluded) are carried in the financial statements at amounts that approximate fair value, except for Mortgage Loans, Contractholder Deposit Funds (non-insurance products) and Long-term Debt. For these financial instruments, the fair value was not materially different from the carrying amount as of December 31, 1997 and 1996. Fair values of off-balance-sheet financial instruments as of December 31, 1997 and 1996 were not material. Fair values for financial instruments are estimates that, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation. In cases where market prices are not available, estimates of fair value are based on discounted cash flow analyses which utilize current interest rates for similar financial instruments with comparable terms and credit quality. The fair value of liabilities for contractholder deposit funds was estimated using the amount payable on demand and, for those not payable on demand, discounted cash flow analyses. D) Investments: Investments in fixed maturities, which are classified as available-for-sale, include bonds; asset-backed securities, including collateralized mortgage obligations (CMOs); and redeemable preferred stocks. Fixed maturities are carried at fair value, with unrealized appreciation or depreciation included in Shareholders' Equity. 27 Fixed maturities are considered impaired and written down to fair value when a decline in value is considered to be other than temporary. Mortgage loans are carried principally at unpaid principal balances, net of valuation reserves. Mortgage loans are considered impaired when it is probable that CIGNA will not collect all amounts according to the contractual terms of the loan agreement. If impaired, a valuation reserve is utilized to record any change in the fair value of the underlying collateral below the carrying value of the mortgage loan. Fixed maturities and mortgage loans that are delinquent or restructured to modify basic financial terms, typically to reduce the interest rate and, in certain cases, extend the term, are placed on non-accrual status. Net investment income on such investments is recognized only when payment is received. Real estate investments are either held for the production of income or held for sale. Real estate investments held for the production of income are carried at depreciated cost less any write-downs to fair value. Depreciation is generally calculated using the straight-line method based on the estimated useful lives of these assets. Real estate investments held for sale are generally those which are acquired through the foreclosure of mortgage loans. CIGNA's policy is to rehabilitate, re-lease and sell foreclosed properties, which generally takes two to four years. At the time of foreclosure, properties are valued at fair value less estimated costs to sell and reclassified from mortgage loans to real estate held for sale. Subsequent to foreclosure, these investments are carried at the lower of cost or current fair value less estimated costs to sell and are no longer depreciated. Adjustments to the carrying value as a result of changes in fair value subsequent to foreclosure are recorded as valuation reserves. CIGNA considers several methods in determining fair value for real estate, with emphasis placed on the use of discounted cash flow analyses and, in some cases, the use of third-party appraisals. Equity securities, which include common and non-redeemable preferred stocks, are carried at fair value, with unrealized appreciation or depreciation included in Shareholders' Equity. Short-term investments are carried at fair value, which approximates cost. Equity securities and short-term investments are classified as available-for-sale. Policy loans generally are carried at unpaid principal balances. Realized investment gains and losses result from sales, investment asset write-downs and changes in valuation reserves. Realized investment gains and losses do not include amounts attributable to experience-rated pension policyholders' contracts and participating life policies (policyholder share). Realized investment gains and losses are based upon specific identification of the investment assets. Unrealized investment gains and losses for investments carried at fair value are included in Shareholders' Equity net of policyholder-related amounts and deferred income taxes. See Note 4(F) for a discussion of CIGNA's accounting policies for derivative financial instruments. E) Cash and Cash Equivalents: Short-term investments with a maturity of three months or less at the time of purchase are reported as cash equivalents. F) Reinsurance Recoverables: Reinsurance recoverables are estimates of amounts to be received from reinsurers. Allowances are established for amounts estimated to be uncollectible. G) Deferred Policy Acquisition Costs: Acquisition costs consist of commissions, premium taxes and other costs, which vary with, and are primarily related to, the production of revenues. Acquisition costs for: o property and casualty products are deferred and amortized over the terms of the insurance policies; o universal life products and contractholder deposit funds are deferred and amortized in proportion to the present value of total estimated gross profits over the expected lives of the contracts; o annuity and other individual life insurance products are deferred and amortized, generally in proportion to the ratio of annual revenue to the estimated total revenues over the contract periods; and o other products are expensed as incurred. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. If such costs are estimated to be unrecoverable, they are expensed unless such costs are estimated to be unrecoverable as a result of treating unrealized investment gains and losses as though they had been realized. In these cases a deferred acquisition cost valuation allowance may be established or adjusted, with a comparable offset in net unrealized appreciation (depreciation). H) Property and Equipment: Property and equipment are carried at cost less accumulated depreciation. When applicable, cost includes interest and real estate taxes incurred during construction and other construction-related costs. Depreciation is calculated principally on the straight-line method based on the estimated useful lives of the assets. Accumulated depreciation was $1.2 billion and $1.1 billion at December 31, 1997 and 1996, respectively. I) Other Assets: Other Assets consists of various insurance-related assets, principally ceded unearned premiums and reinsurance deposits. J) Goodwill and Other Intangibles: Goodwill represents the excess of the cost of businesses acquired over the fair 28 value of their net assets. Other intangible assets primarily represent purchased customer lists and provider contracts. Goodwill and other intangibles are amortized over periods ranging from eight to 40 years. CIGNA evaluates the carrying amount of goodwill and other intangibles by analyzing historical and estimated future income or undiscounted estimated cash flows of the related businesses. Goodwill and other intangibles are written down when impaired. Amortization periods are revised if it is estimated that the remaining period of benefit of the goodwill and other intangibles has changed. Accumulated amortization was $1.0 billion and $959 million at December 31, 1997 and 1996, respectively. K) Separate Accounts: Separate account assets and liabilities are carried at market value and represent policyholder funds maintained in accounts having specific investment objectives. The investment income, gains and losses of these accounts generally accrue to the policyholders and, therefore, are not included in CIGNA's revenues and expenses. L) Contractholder Deposit Funds: Liabilities for Contractholder Deposit Funds consist of deposits received from customers and investment earnings on their fund balances, less administrative charges and, for universal life fund balances, mortality charges. M) Unpaid Claims and Claim Expenses: Liabilities for unpaid claims and claim expenses are estimates of payments to be made on reported claims and incurred but not reported claims on property, casualty, health and dental coverages. Estimated amounts of salvage and subrogation are deducted from the liability for unpaid claims. N) Future Policy Benefits: Future policy benefits are liabilities for life, health and annuity products. Such liabilities are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed using premium assumptions for group annuity policies and the net level premium method for individual life policies, and are based upon estimates as to future investment yield, mortality and withdrawals that include provisions for adverse deviation. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from approximately 2.0% to 10.9%, generally graded down from one to 20 years. Mortality, morbidity and withdrawal assumptions are based on either CIGNA's own experience or various actuarial tables. O) Unearned Premiums: Premiums for property and casualty and group life, accident and health insurance are reported as earned on a pro-rata basis over the contract period. The unexpired portion of these premiums is recorded as Unearned Premiums. P) Other Liabilities: Other Liabilities consists principally of postretirement and postemployment benefits and various insurance-related liabilities, including amounts related to reinsurance contracts and guaranty fund assessments that can be reasonably estimated. Q) Translation of Foreign Currencies: Foreign operations primarily utilize the local currencies as their functional currencies, and assets and liabilities are translated at the rates of exchange as of the balance sheet date. The translation gain or loss on such functional currencies, net of applicable taxes, is generally reflected in Shareholders' Equity. Revenues and expenses are translated at average rates of exchange prevailing during the year. R) Premiums and Fees, Revenues and Related Expenses: Premiums for property and casualty insurance, group life, accident and health insurance, and prepaid health and dental coverages are recognized as revenue on a pro-rata basis over their contract periods. Benefits, losses and settlement expenses are recognized when incurred. Premiums for individual life insurance as well as individual and group annuity products, excluding universal life and investment-related products, are recognized as revenue when due. Benefits, losses and settlement expenses are matched with premiums. Revenues for universal life products consist of net investment income and mortality, administration and surrender fees assessed against the fund balances during the period. Net investment income represents investment income on assets supporting universal life products and is recognized as earned. Fees for mortality are recognized ratably over the policy year. Administration fees are recognized as services are provided, and surrender charges are recognized as earned. Benefit expenses for universal life products consist of benefit claims in excess of fund balances, which are recognized when claims are filed, and amounts credited in accordance with contract provisions. Revenues for investment-related products consist of net investment income and contract fees assessed against the fund balances during the period. Net investment income represents investment income on assets supporting investment-related products and is recognized as earned. Contract fees are based upon related administrative expenses and are assessed ratably over the contract year. Benefit expenses for investment-related products primarily consist of amounts credited in accordance with contract provisions. 29 S) Participating Business: Certain life insurance policies contain dividend payment provisions that enable the policyholder to participate in a portion of the earnings of the life insurance subsidiaries of CIGNA. The participating insurance in force accounted for approximately 6% of total life insurance in force at December 31, 1997, 1996 and 1995. T) Income Taxes: CIGNA and its domestic subsidiaries file a consolidated United States federal income tax return; foreign subsidiaries file tax returns in accordance with applicable foreign regulations. Included in tax returns for domestic subsidiaries are the taxable income and credits for taxes paid for certain foreign subsidiaries. Entities included within the consolidated group are segregated into either a life insurance or non-life insurance company subgroup. The consolidation of these subgroups is subject to certain statutory restrictions on the percentage of eligible non-life tax losses that can be applied to offset life company taxable income. Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes. See Note 9 for additional information. NOTE 3 -- ACQUISITIONS AND DISPOSITIONS CIGNA acquired the outstanding common stock of Healthsource, Inc. (Healthsource) on June 25, 1997. The cost of the acquisition was $1.7 billion, reflecting the purchase of Healthsource common stock for $1.4 billion and the retirement of Healthsource debt of $250 million. The acquisition was accounted for as a purchase, and was financed through the issuance of long-term debt of $600 million and a combination of internally generated funds and short-term debt. The results of operations of Healthsource are included in the accompanying consolidated financial statements from the date of acquisition. Healthsource revenues that are not included in CIGNA's results of operations were $971 million and $1.7 billion for the first six months of 1997 and for the full year 1996, respectively. The pro forma effect on CIGNA's net income was not material. Goodwill and intangible assets associated with the Healthsource acquisition of $1.5 billion are being amortized on a straight-line basis over periods ranging from eight to 40 years. In the fourth quarter of 1997, CIGNA recorded a pre-tax integration charge of $87 million ($58 million after-tax) in connection with its review of Healthsource operations. The charge resulted primarily from an analysis of Healthsource HMO medical reserves, receivable balances and contractual obligations. In addition, Healthsource goodwill was increased by $24 million, primarily for costs associated with the nonvoluntary termination of approximately 900 Healthsource employees in various positions and locations, vacated Healthsource lease space and adjustments to Healthsource net assets to conform to CIGNA's accounting policies. As of January 1, 1998, CIGNA sold its individual life insurance and annuity businesses for cash proceeds of $1.4 billion. The sale resulted in an after-tax gain of approximately $800 million. Since the principal agreement to sell these businesses is in the form of an indemnity reinsurance arrangement, approximately $575 million of the gain will be deferred and amortized over future periods at the rate that earnings from the businesses sold would have been expected to emerge. Revenues for these businesses were $972 million, $926 million and $865 million for the years ended December 31, 1997, 1996 and 1995, respectively, and net income was $102 million, $67 million and $74 million for the same periods. CIGNA had other acquisitions and dispositions during 1997, 1996 and 1995, the effects of which were not material to the financial statements. NOTE 4 -- INVESTMENTS A) Fixed Maturities: Fixed maturities are net of cumulative write-downs of $43 million and $131 million, including policyholder share, as of December 31, 1997 and 1996, respectively. The amortized cost and fair value by contractual maturity periods for fixed maturities, including policyholder share, as of December 31, 1997 were as follows: - -------------------------------------------------------------- Amortized Fair (In millions) Cost Value - -------------------------------------------------------------- Due in one year or less $1,777 $1,811 Due after one year through five years 9,561 9,895 Due after five years through ten years 8,921 9,394 Due after ten years 5,431 6,267 Asset-backed securities 8,594 8,991 - -------------------------------------------------------------- Total $34,284 $36,358 - -------------------------------------------=================== Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Also, CIGNA may extend maturities in some cases. 30 Gross unrealized appreciation (depreciation) for fixed maturities, including policyholder share, by type of issuer was as follows: - ------------------------------------------------------------------ December 31, 1997 - ------------------------------------------------------------------ Unrealized Unrealized Amortized Apprec- Deprec- Fair (In millions) Cost iation iation Value - ------------------------------------------------------------------ Federal government bonds $1,816 $336 $ -- $2,152 State and local government bonds 1,835 190 (2) 2,023 Foreign government bonds 2,284 157 (45) 2,396 Corporate securities 19,755 1,206 (165) 20,796 Asset-backed securities 8,594 418 (21) 8,991 - ------------------------------------------------------------------ Total $34,284 $2,307 $(233) $36,358 - -------------------------========================================= December 31, 1996 - ------------------------------------------------------------------ Federal government bonds $1,104 $181 $(10) $1,275 State and local government bonds 1,608 176 (8) 1,776 Foreign government bonds 2,272 177 (33) 2,416 Corporate securities 20,107 1,044 (195) 20,956 Asset-backed securities 8,313 285 (88) 8,510 - ------------------------------------------------------------------ Total $33,404 $1,863 $(334) $34,933 - -------------------------========================================= Asset-backed securities include investments in CMOs as of December 31, 1997 of $3.5 billion carried at fair value (amortized cost, $3.4 billion), compared with $3.4 billion carried at fair value (amortized cost, $3.4 billion) as of December 31, 1996. Certain of these securities are backed by Aaa/AAA-rated government agencies. All other CMO securities have high quality ratings through use of credit enhancements provided by subordinated securities or mortgage insurance from Aaa/AAA-rated insurance companies. CMO holdings are concentrated in securities with limited prepayment, extension and default risk, such as planned amortization class bonds. CIGNA's investments in interest-only and principal-only CMOs, which are subject to interest rate risk due to accelerated prepayments, represented less than 1% of total CMO investments at December 31, 1997 and 1996, respectively. At December 31, 1997, contractual fixed maturity investment commitments were $225 million. The majority of investment commitments are for the purchase of investment grade fixed maturities, bearing interest at a fixed market rate, and require no collateral. These commitments are diversified by issuer and maturity date, and it is estimated that approximately 85% will be disbursed in 1998. B) Mortgage Loans and Real Estate: CIGNA's mortgage loans and real estate investments are diversified by property type and location and, for mortgage loans, by borrower. Mortgage loans are collateralized by the related property and generally approximate 75% of the property's value at the time the original loan is made. At December 31, the carrying values of mortgage loans and real estate investments, including policyholder share, were as follows: - -------------------------------------------------------------- (In millions) 1997 1996 - -------------------------------------------------------------- Mortgage loans $10,859 $10,927 -------------------- Real estate: Held for sale 355 607 Held for the production of income 414 495 -------------------- Total real estate 769 1,102 - -------------------------------------------------------------- Total $11,628 $12,029 - ------------------------------------------==================== At December 31, mortgage loans and real estate investments comprised the following property types and geographic regions: - -------------------------------------------------------------- (In millions) 1997 1996 - -------------------------------------------------------------- Property type: Retail facilities $4,579 $4,822 Office buildings 4,191 4,498 Apartment buildings 1,460 1,420 Industrial 601 431 Hotels 513 684 Other 284 174 - -------------------------------------------------------------- Total $11,628 $12,029 - ------------------------------------------==================== Geographic region: Central $3,744 $3,762 Pacific 2,473 2,705 Middle Atlantic 1,918 2,025 South Atlantic 1,618 1,688 New England 1,180 1,213 Other 695 636 - -------------------------------------------------------------- Total $11,628 $12,029 - ------------------------------------------==================== Mortgage Loans At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998 -- $793 million; 1999 -- $1.1 billion; 2000 -- $1.4 billion; 2001 -- $1.2 billion; 2002 -- $1.8 billion; and $4.6 billion thereafter. Actual maturities could differ from contractual maturities because borrowers may have the right to prepay obligations, with or without prepayment penalties; the maturity date may be extended; and loans may be refinanced. During 1997 and 1996, CIGNA refinanced at current market rates approximately $139 million and $520 million, respectively, of its mortgage loans relating to borrowers that were unable to obtain alternative financing. 31 At December 31, 1997, contractual commitments to extend credit under commercial mortgage loan agreements amounted to approximately $170 million, all of which were at a fixed market rate of interest. These commitments expire within three months, and are diversified by property type and geographic region. At December 31, 1997, CIGNA's impaired mortgage loans were $393 million, including $170 million before valuation reserves totaling $50 million, and $223 million, which had no valuation reserves. At December 31, 1996, CIGNA's impaired mortgage loans were $848 million, including $462 million before valuation reserves totaling $101 million, and $386 million, which had no valuation reserves. During the year ended December 31, changes in reserves for impaired mortgage loans, including policyholder share, were as follows: - -------------------------------------------------------------- (In millions) 1997 1996 - -------------------------------------------------------------- Reserve balance - January 1 $101 $88 Transfers to foreclosed real estate (30) (30) Charge-offs upon sales (52) (20) Net increase in valuation reserves 31 63 - -------------------------------------------------------------- Reserve balance - December 31 $50 $101 - -------------------------------------------------============= During 1997 and 1996, impaired mortgage loans, before valuation reserves, averaged approximately $624 million and $885 million, respectively, and interest income recorded and cash received on these loans were approximately $35 million and $75 million in each year. Real Estate During 1997, 1996 and 1995, non-cash investing activities included real estate acquired through foreclosure of mortgage loans, which totaled $85 million, $114 million and $146 million, respectively. Valuation reserves and cumulative write-downs related to real estate, including policyholder share, were $206 million and $344 million as of December 31, 1997 and 1996, respectively. Net income for 1997 and 1996 included net investment income of $10 million and $15 million, respectively, for real estate held for sale. Write-downs upon foreclosure and changes in valuation reserves were not material for 1997 and 1996. C) Short-Term Investments and Cash Equivalents: Short-term investments and cash equivalents, in the aggregate, primarily included debt securities, principally federal government bonds of $682 million and corporate securities of $985 million at December 31, 1997 and, for 1996, principally corporate securities of $1.4 billion. D) Net Unrealized Appreciation (Depreciation) of Investments: Unrealized appreciation (depreciation) for investments carried at fair value as of December 31 were as follows: - -------------------------------------------------------------- (In millions) 1997 1996 - -------------------------------------------------------------- Unrealized appreciation: Fixed maturities $2,307 $1,863 Equity securities 284 198 ------------------------- 2,591 2,061 ------------------------- Unrealized depreciation: Fixed maturities (233) (334) Equity securities (78) (70) ------------------------- (311) (404) ------------------------- 2,280 1,657 Less policyholder-related amounts 946 723 ------------------------- Shareholder net unrealized appreciation 1,334 934 Less deferred income taxes 450 307 - -------------------------------------------------------------- Net unrealized appreciation $884 $627 - -------------------------------------========================= Net unrealized appreciation for investments carried at fair value is included as a separate component of Shareholders' Equity, net of policyholder-related amounts and deferred income taxes. The net unrealized appreciation (depreciation) for these investments, primarily fixed maturities, during 1997, 1996 and 1995 was $257 million, ($471) million and $1.1 billion, respectively. E) Non-Income Producing Investments: At December 31, the carrying values of investments, including policyholder share, that were non-income producing during the preceding 12 months were as follows: - -------------------------------------------------------------- (In millions) 1997 1996 - -------------------------------------------------------------- Fixed maturities $34 $82 Mortgage loans -- 14 Real estate 141 173 Other long-term investments 8 12 - -------------------------------------------------------------- Total $183 $281 - --------------------------------------------================== F) Derivative Financial Instruments: CIGNA's investment strategy is to manage the characteristics of investment assets, such as duration, yield, currency and liquidity, to reflect the underlying characteristics of the related insurance and contractholder liabilities, which vary among CIGNA's principal product lines. In connection with this investment strategy, CIGNA's use of derivative instruments, including interest rate and currency swaps, purchased options and futures contracts, is limited to hedging applications to minimize market risk. Hedge accounting treatment requires a probability of high correlation between the changes in the market value or 32 cash flows of the derivatives and the hedged assets or liabilities. Under hedge accounting, the changes in market value or cash flows of the derivatives and the hedged assets or liabilities are recognized in net income in the same period. If CIGNA's use of derivatives does not qualify for hedge accounting treatment, the derivative is recorded at fair value and changes in its fair value are recognized in net income without considering changes in the hedged asset or liability. CIGNA routinely monitors, by individual counterparty, exposure to credit risk associated with swap and option contracts and diversifies the portfolio among approved dealers of high credit quality. Futures contracts are exchange-traded and, therefore, credit risk is limited since the exchange assumes the obligations. CIGNA manages legal risks by following industry standardized documentation procedures and by monitoring legal developments. Underlying contract, notional or principal amounts associated with derivatives at December 31 were as follows: - -------------------------------------------------------------- (In millions) 1997 1996 - -------------------------------------------------------------- Interest rate swaps $316 $408 Currency swaps $276 $304 Purchased options $833 $632 Futures $80 $45 - -------------------------------------------------------------- Under interest rate swaps, CIGNA agrees with other parties to periodically exchange the difference between variable rate and fixed rate asset cash flows to provide stable returns for related liabilities. CIGNA uses currency swaps (primarily Canadian dollars, pounds sterling and Swiss francs) to match the currency of investments to that of the associated liabilities. Under currency swaps, the parties exchange principal and interest amounts in two relevant currencies using agreed-upon exchange amounts. The net interest cash flows from interest rate and currency swaps are recognized currently as an adjustment to net investment income, and the fair value of these swaps is reported as an adjustment to the related investments. Using purchased options to reduce the effect of changes in interest rates or equity indexes on liabilities, CIGNA pays an up-front fee to receive cash flows from third parties when interest rates or equity indexes vary from specified levels. Purchased options that qualify for hedge accounting are recorded consistent with the related liabilities, at amortized cost plus adjustments based on current equity indexes, and income is reported as an adjustment to benefit expense. Purchased options are reported in other assets, and fees paid are amortized to benefit expense over their contractual periods. Purchased options with underlying notional amounts of $82 million and $112 million at December 31, 1997 and 1996, respectively, that are designated as hedges, but do not qualify for hedge accounting, are reported in other long-term investments at fair value with changes in fair value recognized as realized investment gains and losses. Interest rate futures are used to temporarily hedge against the changes in market values of bonds and mortgage loans to be purchased or sold. Under futures contracts, changes in the contract values are settled in cash daily with the exchange on which the instrument is traded. These changes in contract values are deferred and recorded as adjustments to the carrying value of the related bond or mortgage loan. Deferred gains and losses are amortized into net investment income over the life of the investments purchased or are recognized in full as realized investment gains and losses if investments are sold. Gains and losses on futures contracts deferred in anticipation of investment purchases were immaterial at December 31, 1997 and 1996. The effects of interest rate and currency swaps, purchased options and futures on the components of net income for 1997, 1996 and 1995 were not material. As of December 31, 1997 and 1996, CIGNA's variable interest rate investments consisted of approximately $828 million and $1.5 billion of fixed maturities, respectively. As of December 31, 1997 and 1996, CIGNA's fixed interest rate investments consisted of $35.6 billion and $33.4 billion, respectively, of fixed maturities, and $10.9 billion of mortgage loans for both 1997 and 1996. G) Other: As of December 31, 1997 and 1996, CIGNA had no concentration of investments in a single investee exceeding 10% of Shareholders' Equity. NOTE 5 -- INVESTMENT INCOME AND GAINS AND LOSSES A) Net Investment Income: The components of net investment income, including policyholder share, for the year ended December 31 were as follows: - -------------------------------------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------- Fixed maturities $2,566 $2,613 $2,571 Equity securities 23 20 47 Mortgage loans 948 982 932 Policy loans 541 561 511 Real estate 147 223 317 Other long-term investments 78 65 77 Short-term investments 141 110 199 -------------------------------- 4,444 4,574 4,654 Less investment expenses 199 241 358 - -------------------------------------------------------------- Net investment income $4,245 $4,333 $4,296 - ------------------------------================================ Net investment income attributable to policyholder contracts, which is included in CIGNA's revenues and is primarily offset by amounts included in Benefits, Losses and Settlement Expenses, was approximately $1.7 billion for 33 1997, compared with $1.8 billion for both 1996 and 1995. Net investment income for separate accounts, which is not reflected in CIGNA's revenues, was $1.4 billion, $1.1 billion and $885 million for 1997, 1996 and 1995, respectively. As of December 31, 1997, fixed maturities and mortgage loans on non-accrual status, including policyholder share, were $141 million and $176 million, including restructured investments of $90 million and $137 million, respectively. As of December 31, 1996, fixed maturities and mortgage loans on non-accrual status, including policyholder share, were $166 million and $370 million, including restructured investments of $144 million and $312 million, respectively. If interest on these investments had been recognized in accordance with their original terms, net income would have been increased by $8 million, $15 million and $14 million in 1997, 1996 and 1995, respectively. B) Realized Investment Gains and Losses: Realized gains (losses) on investments, excluding policyholder share, for the year ended December 31 were as follows: - ------------------------------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------- Fixed maturities $57 $37 $26 Equity securities 38 24 187 Mortgage loans (15) (23) (3) Real estate 73 29 19 Other 14 24 4 -------------------------- 167 91 233 Less income taxes 52 37 55 - ------------------------------------------------------------- Net realized investment gains $115 $54 $178 - -----------------------------------========================== Realized investment gains and losses include impairments in the value of investments, net of recoveries, of $33 million, $51 million and $46 million in 1997, 1996 and 1995, respectively. Realized investment gains for separate accounts, which are not reflected in CIGNA's revenues, were $492 million, $305 million and $412 million for 1997, 1996 and 1995, respectively. Realized investment gains (losses) attributable to policyholder contracts, which also are not reflected in CIGNA's revenues, were $45 million, $82 million and ($7) million for 1997, 1996 and 1995, respectively. Sales of available-for-sale fixed maturities and equity securities, including policyholder share, for the year ended December 31 were as follows: - --------------------------------------------------------------- (In millions) 1997 1996 1995 - --------------------------------------------------------------- Proceeds from sales $6,206 $6,444 $8,160 Gross gains on sales $191 $239 $426 Gross losses on sales $(127) $(158) $(205) - --------------------------------------------------------------- NOTE 6 -- DEBT Short-term and long-term debt consisted of the following at December 31: - -------------------------------------------------------------- (In millions) 1997 1996 - -------------------------------------------------------------- Short-term Commercial paper $605 $247 Current maturities of long-term debt 85 42 - -------------------------------------------------------------- Total short-term debt $690 $289 - --------------------------------------------================== Long-term Unsecured Debt: 8.16% Notes due 2000 $25 $25 8 3/4% Notes due 2001 100 100 7.17% Notes due 2002 25 25 7.4% Notes due 2003 100 100 6 3/8% Notes due 2006 100 100 7.4 % Notes due 2007 300 -- 8 1/4% Notes due 2007 100 100 7.65% Notes due 2023 100 100 8.3% Notes due 2023 100 100 7 7/8% Debentures due 2027 300 -- Medium-term Notes 121 203 Secured Debt (principally by real estate) 94 168 - -------------------------------------------------------------- Total long-term debt $1,465 $1,021 - --------------------------------------------================== CIGNA issues commercial paper primarily to manage imbalances between operating cash flows and existing commitments, to meet working capital needs and to take advantage of current investment opportunities. Commercial paper borrowing arrangements are supported by various lines of credit. As of December 31, 1997 and 1996, the weighted average interest rate on commercial paper was 5.9% and 5.6%, respectively. Medium-term notes have original maturity dates ranging from approximately five to ten years and interest rates ranging from 5 3/4% to 9 3/4% . As of December 31, 1997 and 1996, the weighted average interest rate on medium-term notes was 8.3% and 8.4%, respectively. In 1997, CIGNA issued $300 million of unsecured 7.4% Notes due in 2007 and $300 million of unsecured 7 7/8% Debentures due in 2027. The proceeds from these issues were used for the purchase of Healthsource. During 1995, CIGNA's 8.2% Convertible Subordinated Debentures due in 2010 were converted through non-cash transactions into approximately 3.6 million shares of CIGNA common stock. In 1995, CIGNA issued $25 million of unsecured 8.16% Notes due in 2000, $25 million of unsecured 7.17% Notes due in 2002 and $36 million in medium-term notes. The proceeds from these issues were used for general corporate purposes. 34 As of December 31, 1997, CIGNA had available approximately $1.2 billion in committed and uncommitted lines of credit provided by U.S. and foreign banks. Subsequent to the sale of CIGNA's individual life insurance and annuity businesses, CIGNA canceled $500 million of lines of credit in January 1998. These lines of credit generally have terms ranging from one to three years and are paid for by using a combination of fees and bank balances. Interest that CIGNA would be charged for usage of these lines of credit is based upon negotiated arrangements. As of December 31, 1997, CIGNA had $1 billion remaining under effective shelf registration statements filed with the Securities and Exchange Commission that may be issued as debt securities, equity securities or both, depending upon market conditions and CIGNA's capital requirements. Maturities of long-term debt for each of the next five years are as follows: 1998 -- $85 million; 1999 -- $14 million; 2000 -- $56 million; 2001 -- $148 million; and 2002 -- $38 million. Interest expense was $127 million, $102 million and $120 million in 1997, 1996 and 1995, respectively. NOTE 7 -- COMMON AND PREFERRED STOCK - -------------------------------------------------------------- (Shares in thousands) 1997 1996 1995 - -------------------------------------------------------------- Common: Par value $1 200,000 shares authorized Outstanding -- January 1 74,198 76,332 72,225 Issued for stock option and other benefit plans 229 294 504 Issued upon conversion of 8.2% Convertible Subordinated Debentures -- -- 3,603 Repurchase of common stock (2,095) (2,428) -- ------------------------------- Outstanding -- December 31 72,332 74,198 76,332 Treasury shares 15,625 13,432 11,014 - -------------------------------------------------------------- Issued -- December 31 87,957 87,630 87,346 - -------------------------------=============================== Stock issued under stock option and other benefit plans resulted in increases in Additional Paid-in Capital of $61 million, $36 million and $41 million in 1997, 1996 and 1995, respectively. Such stock issuances also resulted in net increases in Treasury Stock of $14 million, $12 million and $14 million in 1997, 1996 and 1995, respectively. During 1997 and 1996, Treasury Stock increased by approximately $340 million and $300 million, respectively, as a result of repurchase of common stock. In 1995, conversion of CIGNA's 8.2% Convertible Subordinated Debentures resulted in an increase in Common Stock and Additional Paid-in Capital of $4 million and $247 million, respectively. In July 1997, CIGNA's Board of Directors adopted a shareholder rights plan which will expire on August 4, 2007. The rights attach to all outstanding shares of common stock and become exercisable upon an acquisition of (or announcement to acquire) 10% or more of CIGNA's outstanding common stock unless CIGNA's Board of Directors approves the acquisition. When exercisable, each right entitles its holder to purchase securities of CIGNA at a substantial discount or, at the discretion of the Board of Directors, to exchange the rights for CIGNA common stock on a one-for-one basis. In certain other circumstances, the rights also entitle the holders to purchase securities of an acquirer at a substantial discount. CIGNA's Board of Directors may redeem the rights for one cent each prior to an acquisition of 10% or more of its common stock, and thereafter under certain circumstances. CIGNA has authorized a total of 25 million shares of $1 par value preferred stock. No shares of preferred stock were outstanding at December 31, 1997, 1996 and 1995. On February 25, 1998, CIGNA's Board of Directors approved a three-for-one common stock split, an increase in the number of common shares authorized for issuance from 200 million to 600 million and a decrease in the par value of common stock from $1 per share to $0.25 per share. These actions are subject to approval at the April 22, 1998 annual meeting of shareholders. If approved, earnings per share will be adjusted retroactively to reflect the stock split and, on a pro forma basis, basic earnings per share would have been $4.93, $4.68 and $0.97, and diluted earnings per share would have been $4.88, $4.64, and $0.96, for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 8 -- SHAREHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS The insurance departments of various jurisdictions in which CIGNA's insurance subsidiaries are domiciled recognize as net income and surplus (shareholders' equity) those amounts determined in conformity with statutory accounting practices prescribed or permitted by the departments, which may differ from generally accepted accounting principles. As permitted by a state insurance department, certain of CIGNA's insurance subsidiaries discount certain asbestos-related and environmental pollution liabilities, which increased statutory surplus by approximately $217 million and $240 million as of December 31, 1997 and 1996, respectively. The amounts of statutory net income (loss) for the year ended, and surplus as of, December 31 were as follows: - -------------------------------------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------- Life Insurance Companies: Net income $634 $680 $471 Surplus $3,021 $2,683 $2,672 Property and Casualty Insurance Companies: Net income (loss) $192 $164 $(201) Surplus $1,542 $1,655 $1,589 - -------------------------------------------------------------- 35 CIGNA's insurance subsidiaries are subject to various regulatory restrictions that limit the amount of annual dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities. The maximum dividend distribution that may be made by CIGNA's insurance subsidiaries during 1998 without prior approval is approximately $1.1 billion. The amount of restricted net assets as of December 31, 1997 was approximately $6.7 billion. NOTE 9 -- INCOME TAXES CIGNA's net deferred tax asset of $1.8 billion and $2 billion as of December 31, 1997 and 1996, respectively, reflects management's belief that CIGNA's taxable income in future years will be sufficient to realize the net deferred tax asset based on CIGNA's earnings history and its future expectations. In determining the adequacy of future taxable income, management considered the future reversal of its existing taxable temporary differences and available tax planning strategies that could be implemented, if necessary. CIGNA's deferred tax asset is net of valuation allowances of $53 million and $47 million as of December 31, 1997 and 1996, respectively. The valuation allowance reflects management's assessment, based on available information, that it is more likely than not that a portion of the deferred tax asset will not be realized. Adjustments to the valuation allowance will be made if there is a change in management's assessment of the amount of the deferred tax asset that is realizable. Adjustments made to the valuation allowance for 1997, 1996 and 1995 were immaterial. As of December 31, 1997, CIGNA did not have any tax basis net operating loss carryforwards. At December 31, 1996, there was a benefit of $53 million resulting from $150 million of tax basis net operating loss carryforwards. In accordance with the Life Insurance Company Income Tax Act of 1959, a portion of CIGNA's life insurance companies' statutory income was not subject to current income taxation but was accumulated in an account designated Policyholders' Surplus Account. Under the Tax Reform Act of 1984, no further additions may be made to the Policyholders' Surplus Account for tax years ending after December 31, 1983. The balance in the account of approximately $450 million at December 31, 1997 would result in a tax liability of $158 million only if distributed to shareholders or if the account balance exceeded a prescribed maximum. No income taxes have been provided on this amount because, in management's opinion, the likelihood that these conditions will be met is remote. CIGNA's federal income tax returns are routinely audited by the Internal Revenue Service (IRS), and provisions are made in the financial statements in anticipation of the results of these audits. The IRS completed its audits for the years 1982 through 1993, and challenged CIGNA on one issue related to years prior to 1989. During the third quarter of 1997, the U.S. Tax Court ruled against CIGNA in connection with this issue. The decision did not have an effect on results of operations, as liabilities had been previously established. As a result of this ruling, CIGNA made payments of approximately $250 million during 1997. CIGNA has appealed the U.S. Tax Court decision to the U.S. Court of Appeals. In management's opinion, adequate tax liabilities have been established for all years. The tax effect of temporary differences which give rise to deferred income tax assets and liabilities as of December 31 were as follows: - ------------------------------------------------------------------ (In millions) 1997 1996 - ------------------------------------------------------------------ Deferred tax assets: Loss reserve discounting $705 $779 Other insurance and contractholder liabilities 689 607 Employee and retiree benefit plans 455 450 Investments, net 287 284 Operating loss carryforwards -- 53 Bad debt expense 152 122 Other 194 254 ----------------------- Deferred tax assets before valuation allowance 2,482 2,549 Valuation allowance for deferred tax assets (53) (47) ----------------------- Deferred tax assets, net of valuation allowance 2,429 2,502 ----------------------- Deferred tax liabilities: Unrealized appreciation on investments 450 307 Depreciation and amortization 183 112 Policy acquisition expenses 4 36 Other 4 49 ----------------------- Total deferred tax liabilities 641 504 - ------------------------------------------------------------------ Net deferred income tax asset $1,788 $1,998 - -------------------------------------------======================= The components of income taxes for the year ended December 31 were as follows: - --------------------------------------------------------------- (In millions) 1997 1996 1995 - --------------------------------------------------------------- Current taxes: U.S. income $424 $339 $185 Foreign income 69 80 73 ------------------------------------ 493 419 258 ------------------------------------ Deferred taxes (benefits): U.S. income 68 108 (212) Foreign income 3 18 (6) ------------------------------------ 71 126 (218) - --------------------------------------------------------------- Total income taxes $564 $545 $40 - --------------------------===================================== 36 Total income taxes for the year ended December 31 were less than the amount computed using the nominal federal income tax rate of 35% for the following reasons: - --------------------------------------------------------------- (In millions) 1997 1996 1995 - --------------------------------------------------------------- Tax expense at nominal rate $577 $560 $88 Tax-exempt interest income (30) (31) (34) Realized investment results (1) 1 (24) Dividends received deduction (8) (7) (8) Amortization of goodwill 26 17 16 Interest on provisions 15 7 10 Resolved federal tax audit issues (13) -- (7) Other (2) (2) (1) - --------------------------------------------------------------- Total income taxes $564 $545 $40 - -------------------------------------========================== NOTE 10 -- PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PLANS A) Pension Plans: CIGNA and certain of its subsidiaries provide retirement benefits to eligible employees and agents. These benefits are provided through a plan covering most domestic employees (the Plan) and by several separate pension plans for various subsidiaries, agents and foreign employees. The Plan is a non-contributory, defined benefit, trusteed plan available to eligible domestic employees. Generally, for employees whose service commenced prior to 1989, benefits are based on their years of service and eligible compensation during the highest three consecutive years of employment, offset by a portion of the Social Security benefit for which they are eligible. In 1997, CIGNA amended its Plan for employees whose service commenced after 1988. Under the new Plan provisions, eligible employees receive annual benefit credits based on an employee's age and credited service, and quarterly interest credits based on U.S. Treasury bond rates. The employee's pension benefit equals the value of accumulated credits, and may be paid at or after separation from service in a lump sum or an annuity. The amendment did not have a material effect on CIGNA's results of operations, liquidity or financial condition. CIGNA funds the Plan at least at the minimum amount required by the Employee Retirement Income Security Act of 1974 (ERISA). The following table summarizes the status as of December 31 of pension plans for which assets exceeded accumulated benefit obligations: - -------------------------------------------------------------------------- (In millions) 1997 1996 - -------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $2,244 $1,826 ------------------------ Accumulated benefit obligation $2,283 $1,867 ------------------------ Pension liability included in Other Liabilities: Projected benefit obligation $2,632 $2,244 Less plan assets at fair value 2,597 2,288 ------------------------ Plan assets (greater) less than projected benefit obligation 35 (44) Unrecognized net gain from past experience 1 72 Unrecognized prior service cost 20 (27) Unamortized SFAS 87 transition asset 38 48 - -------------------------------------------------------------------------- Pension liability $94 $49 - --------------------------------------------------======================== At December 31, 1997 and 1996, plans under which accumulated benefits exceeded assets had projected benefit obligations of $293 million and $296 million, respectively, and related assets at fair value of $34 million and $49 million for 1997 and 1996, respectively. The accumulated benefit obligation as of December 31, 1997 and 1996 related to these plans was $221 million and $211 million, respectively. The pension liability included in Other Liabilities related to these plans was $188 million and $172 million, respectively. Components of net pension cost for all plans for the year ended December 31 were as follows: - -------------------------------------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------- Service cost -- benefits earned during the year $96 $100 $83 Interest accrued on projected benefit obligation 188 174 163 Actual return on assets (388) (269) (392) Net amortization and deferral 203 106 231 - -------------------------------------------------------------- Net pension cost $99 $111 $85 - ------------------------------------========================== Determination of the projected benefit obligation was based on an estimated discount rate of 7.0% and 7.5% for 1997 and 1996, respectively, and an estimated long-term rate of compensation increase of 4.7% for 1997 and 1996. The estimated long-term rate of return on assets was 9% for 1997 and 1996. Substantially all Plan assets are invested in either the separate accounts of Connecticut General Life Insurance Company (CGLIC), which is a CIGNA subsidiary, or immediate participation guaranteed investment contracts issued by CGLIC. Plan assets also include 97,500 shares of CIGNA common stock at December 31, 1997 and 1996, with a market value of $17 million and $13 million at December 31, 1997 and 1996, respectively. 37 B) Other Postretirement Benefits Plans: In addition to providing pension benefits, CIGNA and certain of its subsidiaries provide certain health care and life insurance benefits to retired employees, spouses and other eligible dependents through various plans. A substantial portion of CIGNA's employees may become eligible for these benefits upon retirement. CIGNA's contributions for health care benefits depend upon a retiree's date of retirement, age, years of service and cost-sharing features, such as deductibles and coinsurance. Under the terms of the benefit plans, benefit provisions and cost-sharing features can be adjusted. In general, retiree health care benefits are not funded and are paid as covered expenses are incurred. Retiree life insurance benefits are paid from plan assets or as covered expenses are incurred. The following table summarizes the underfunded plans' benefit obligations reconciled with the amount included in Other Liabilities as of December 31: - ------------------------------------------------------------------------- (In millions) 1997 1996 - ------------------------------------------------------------------------- Actuarial present value of benefit obligations: Retirees $387 $379 Other fully eligible plan participants 13 11 Other active plan participants 78 72 ----------------------- Total accumulated benefit obligations 478 462 Less plan assets at fair value 59 54 ----------------------- Plan assets less than accumulated benefit obligations 419 408 Unrecognized net gain from past experience 216 234 Unrecognized prior service cost 236 254 - ------------------------------------------------------------------------- Other postretirement benefit liability $871 $896 - --------------------------------------------------======================= At December 31, 1997 and 1996, plan assets of $59 million and $54 million, respectively, represented partial funding for retiree life insurance plans with accumulated benefit obligations of $141 million and $129 million, respectively, and such plan assets were invested in the general account assets of CGLIC, with an estimated long-term rate of return of 7% for 1997 and 1996. Components of net other postretirement benefit cost for the year ended December 31 were as follows: - -------------------------------------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------- Service cost -- benefits earned during the year $6 $10 $14 Interest accrued on benefit obligation 32 38 44 Actual return on assets (7) (1) (9) Net amortization and deferral (25) (26) (13) - -------------------------------------------------------------- Net other postretirement benefit cost $6 $21 $36 - ------------------------------------========================== Determination of the accumulated other postretirement benefit obligation for 1997 and 1996 was based on an estimated discount rate of 7.0% and 7.5%, respectively, and an estimated long-term rate of compensation increase of 4.5% for 1997 and 1996. The estimated rate of future increases in per capita cost of health care benefits (the health care cost trend rate) was 9% decreasing ratably to 5.5% over four years, which reflects CIGNA's current claim experience and management's estimate that future rates of growth will decline. Increasing the health care cost trend rate by one percentage point for each future year would increase accumulated other postretirement benefit obligations by $42 million and the annual service and interest cost by $4 million, before taxes. C) Other Postemployment Benefits: CIGNA and certain of its subsidiaries provide certain salary continuation (severance and disability), health care and life insurance benefits to inactive and former employees, spouses and other eligible dependents through various employee benefit plans. Although severance benefits accumulate with additional service, CIGNA recognizes severance expense when severance is probable and the costs can be reasonably estimated. Postemployment benefits other than severance generally do not vest or accumulate; therefore, the estimated cost of benefits are accrued when determined to be probable and estimable, generally upon disability or termination. See Note 16 for additional information regarding severance benefits accrued as part of cost reduction plans. D) Capital Accumulation Plans: CIGNA sponsors various capital accumulation plans in which employee contributions on a pre-tax basis (401(k)) are supplemented by CIGNA matching contributions. These contributions are invested, at the election of the employee, in one or more of the following investments: CIGNA common stock fund, several CIGNA and non-CIGNA mutual funds, and a fixed-income fund. In addition, beginning in 1999, CIGNA may provide additional matching contributions, depending on its annual performance, which would be invested in the CIGNA common stock fund. CIGNA's expense for such plans totaled $42 million, $39 million and $37 million for 1997, 1996 and 1995, respectively. 38 NOTE 11 -- EMPLOYEE INCENTIVE PLANS The People Resources Committee of the Board of Directors can award to employees stock options, stock appreciation rights (SARs) only in tandem with stock options, restricted stock, dividend equivalent rights or common stock in lieu of cash payable under other incentive plans. As of December 31, 1997, 1996 and 1995, stock available for award aggregated 5,002,950 shares, 5,095,415 shares and 6,007,504 shares, respectively. Grants of restricted stock are awarded annually, with vesting periods ranging from three to five years. Although recipients are entitled to receive dividends and vote restricted stock during the vesting period, termination of employment prior to vesting results in forfeiture of the stock. Grants of restricted shares of CIGNA common stock during 1997, 1996 and 1995 totaled 142,628 shares, 143,278 shares and 321,494 shares, respectively, at a weighted average fair value per share of $157.03, $118.41 and $74.37, respectively. Restricted stock grants of 646,035 shares for 1,797 employees were outstanding at December 31, 1997. Compensation cost related to restricted stock grants was not material to CIGNA's results of operations, liquidity or financial condition. Options to purchase CIGNA common stock are awarded at market price on the date of grant, vest over periods ranging from one to five years and expire no later than 10 years after the date of grant. Certain outstanding options have a replacement option feature providing that when the underlying option is exercised by tendering stock a new option is granted covering shares equal to the number tendered. These options are exercisable at the market price on the date of the new grant and expire on the expiration date of the original option. The following table, which includes approximately one million options granted in connection with the 1997 Healthsource acquisition, summarizes the status of, and changes in, common stock options outstanding for the year ended December 31:
- -------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price - -------------------------------------------------------------------------------------------------------------------------------- Outstanding -- January 1 1,627,966 $97.26 1,608,889 $71.15 1,611,949 $65.60 Granted 2,803,411 164.49 871,320 121.15 536,823 79.05 Exercised (1,068,088) 101.62 (803,134) 71.33 (509,533) 61.87 Expired or canceled (18,271) 117.41 (49,109) 89.73 (30,350) 71.85 ----------- ---------- ---------- Outstanding -- December 31 3,345,018 152.10 1,627,966 97.26 1,608,889 71.15 - ---------------------------------=============================================================================================== Options exercisable at year-end 1,456,547 $139.22 664,784 $75.62 683,376 $64.80 - ---------------------------------===============================================================================================
The following table summarizes the range of exercise prices for outstanding common stock options at December 31, 1997: - ------------------------------------------------------------- Range of Exercise Prices - ------------------------------------------------------------- $16.71 to $151.00 to $150.00 $318.32 - ------------------------------------------------------------- Options outstanding 1,300,585 2,044,433 Weighted average remaining contractual life 7.0 years 8.7 years Weighted average exercise price $110.12 $178.81 Options exercisable 974,938 481,609 Weighted average exercise price $106.74 $204.98 - ------------------------------------------------------------- The weighted average fair value of options granted under employee incentive plans during 1997, 1996 and 1995 was $38.81, $29.98 and $18.16, respectively. Fair value of each option grant in 1997, 1996 and 1995 was estimated using the Black-Scholes option-pricing model with the following assumptions: - ------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------- Dividend yield 2.4% 3.5% 4.6% Expected volatility 23.7% 26.2% 25.5% Risk-free interest rate 6.1% 5.9% 7.1% Expected option life 4 years 6 years 6 years - ------------------------------------------------------------- CIGNA awards stock options under employee incentive plans with exercise prices equal to the market price at the date of grant and, therefore, does not record compensation expense related to stock options. Had CIGNA recorded compensation expense for stock options based on their fair 39 value at the grant date using the Black-Scholes option-pricing model, CIGNA's net income would have been reduced by $22 million, $10 million and $2 million in 1997, 1996 and 1995, respectively. Also, basic and diluted earnings per share would have been reduced by $0.30, $0.13 and $0.03 in 1997, 1996 and 1995, respectively. NOTE 12 -- EARNINGS PER SHARE Basic and Diluted EPS are computed as follows for the year ended December 31: - ------------------------------------------------------------------ (Dollars in millions, except per share Effect of amounts) Basic Dilution Diluted - ------------------------------------------------------------------ 1997 Net income $1,086 -- $1,086 - ------------------------------==================================== Shares (in thousands): Weighted average 73,421 -- 73,421 Options and restricted stock grants 750 750 - ------------------------------------------------------------------ Total shares 73,421 750 74,171 - ------------------------------==================================== EPS $14.79 $(0.15) $14.64 - ------------------------------==================================== 1996 Net income $1,056 -- $1,056 - ------------------------------==================================== Shares (in thousands): Weighted average 75,165 -- 75,165 Options and restricted stock grants 753 753 - ------------------------------------------------------------------ Total shares 75,165 753 75,918 - ------------------------------==================================== EPS $14.05 $(0.14) $13.91 - ------------------------------==================================== 1995 Net income $211 -- $211 - ------------------------------==================================== Shares (in thousands): Weighted average 72,655 -- 72,655 Options and restricted stock grants 664 664 - ------------------------------------------------------------------ Total shares 72,655 664 73,319 - ------------------------------==================================== EPS $2.90 $(0.02) $2.88 - ------------------------------==================================== NOTE 13 -- REINSURANCE In the normal course of business, CIGNA's insurance subsidiaries enter into agreements, primarily relating to short-duration contracts, to assume and cede reinsurance with other insurance companies. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses, although ceded reinsurance does not relieve the originating insurer of liability. CIGNA evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of its reinsurers. As of December 31, 1997 and 1996, approximately 7% of reinsurance recoverables were due from certain syndicates affiliated with Lloyd's of London. Failure of reinsurers to indemnify CIGNA, as a result of reinsurer insolvencies and disputes, could result in losses. Allowances for uncollectible amounts were $720 million and $711 million as of December 31, 1997 and 1996, respectively. During 1995, CIGNA increased the allowance for uncollectible reinsurance by $210 million pre-tax ($138 million after-tax) for asbestos-related and environmental pollution losses, assumed reinsurance and other commercial exposures. Future charges for unrecoverable reinsurance may materially affect results of operations in future periods, however, such amounts are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. The effects of reinsurance on net earned premiums and fees for the year ended December 31 were as follows: - ------------------------------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------- Short-duration contracts Premiums and fees: Direct $12,585 $11,577 $11,383 Assumed 1,143 1,099 1,448 Ceded (1,790) (1,904) (2,090) - ------------------------------------------------------------- Net earned premiums and fees $11,938 $10,772 $10,741 - --------------------------------============================= Long-duration contracts Premiums and fees: Direct $2,707 $2,728 $2,740 Assumed 544 634 595 Ceded (254) (218) (162) - ------------------------------------------------------------- Net earned premiums and fees $2,997 $3,144 $3,173 - --------------------------------============================= The effects of reinsurance on written premiums and fees for short-duration contracts were not materially different from the amounts shown in the above table. Benefits, losses and settlement expenses for 1997, 1996 and 1995 were net of reinsurance recoveries of $1.3 billion, $1.6 billion and $1.5 billion, respectively. 40 NOTE 14 -- PROPERTY AND CASUALTY UNPAID CLAIMS AND CLAIM EXPENSE RESERVES AND REINSURANCE RECOVERABLES As described in Note 2(M), CIGNA establishes loss reserves, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. Activity in the reserve for unpaid claims and claim adjustment expenses for the year ended December 31 was as follows: - ----------------------------------------------------------------------- (In millions) 1997 1996 1995 - ----------------------------------------------------------------------- Gross reserve -- January 1 $16,482 $17,023 $16,825 Less reinsurance recoverable 5,835 5,864 6,190 ------------------------------- Net reserve -- January 1 10,647 11,159 10,635 ------------------------------- Plus incurred claims and claim adjustment expenses: Provision for insured events of the current year 2,120 2,348 2,386 Increase in provision for insured events of prior years 218 177 1,498 ------------------------------- Total incurred claims and claim adjustment expenses 2,338 2,525 3,884 ------------------------------- Less payments for claims and claim adjustment expenses attributable to: Insured events of the current year 901 823 971 Insured events of prior years 2,117 2,214 2,389 ------------------------------- Total payments for claims and claim adjustment expenses 3,018 3,037 3,360 ------------------------------- Net reserve -- December 31 9,967 10,647 11,159 Plus reinsurance recoverable 5,168 5,835 5,864 - ----------------------------------------------------------------------- Gross reserve -- December 31 $15,135 $16,482 $17,023 - ---------------------------------------================================ The basic assumption underlying the many traditional actuarial and other methods used in the estimation of property and casualty loss reserves is that past experience is an appropriate basis for predicting future events. However, current trends and other factors that would modify past experience are also considered. The process of establishing loss reserves is subject to uncertainties that are normal, recurring and inherent in the property and casualty business. CIGNA implemented a new methodology for estimating asbestos-related and environmental pollution (A&E) reserves in the third quarter of 1995. CIGNA evaluated newly emerging methods for estimating A&E liabilities and expanded its claims databases. Using those recent developments, CIGNA completed a comprehensive review of its A&E exposures and increased asbestos-related reserves by $255 million ($194 million, net of reinsurance) and environmental pollution reserves by $1.2 billion ($861 million, net of reinsurance). CIGNA's reserves for A&E claims are a reasonable estimate of its liability for these claims, based on currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Reserving for property and casualty claims continues to be a complex and uncertain process, requiring the use of informed estimates and judgments. CIGNA's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current law changes. Any such revisions could result in future changes in estimates of losses or reinsurance recoverables, and would be reflected in CIGNA's results of operations for the period in which the estimates are changed. While the effect of any such changes in estimates of losses or reinsurance recoverables could be material to future results of operations, CIGNA does not expect such changes to have a material effect on its liquidity or financial condition. In management's judgment, information currently available has been appropriately considered in estimating CIGNA's loss reserves and reinsurance recoverables. Charges to income for increases in the Property and Casualty segment's liability for insured events of prior years (prior year development) for A&E losses and charges for unrecoverable reinsurance in the aggregate were $148 million, $117 million and $1.4 billion for 1997, 1996 and 1995, respectively. Prior year development for 1995 reflects the A&E charge noted above, as well as $135 million for unrecoverable reinsurance related to CIGNA's assumed reinsurance and other commercial exposures. CIGNA's reserves for A&E exposures as of December 31 were as follows: - -------------------------------------------------------------------- 1997 1996 ---------------------------------------------- (In millions) Gross Net Gross Net - -------------------------------------------------------------------- Asbestos $846 $509 $771 $483 Environmental $1,404 $1,059 $1,492 $1,161 - -------------------------------------------------------------------- Prior year development, other than for A&E claims and charges for unrecoverable reinsurance, was $70 million, $60 million and $109 million for 1997, 1996 and 1995, respectively. 41 NOTE 15 -- LEASES AND RENTALS Rental expenses for operating leases, principally with respect to buildings, amounted to $234 million, $214 million and $238 million in 1997, 1996 and 1995, respectively. As of December 31, 1997, future net minimum rental payments under non-cancelable operating leases were approximately $732 million, payable as follows: 1998 -- $155 million; 1999 -- $127 million; 2000 -- $95 million; 2001 -- $81 million; 2002 -- $65 million; and $209 million thereafter. NOTE 16 -- COST REDUCTION INITIATIVES AND OTHER RESTRUCTURING A) Employee Life and Health Benefits Restructuring: In the fourth quarter of 1997, CIGNA adopted a cost reduction plan to restructure its health care operations which resulted in a pre-tax charge of $32 million ($22 million after-tax) included primarily in Other Operating Expenses in the Employee Life and Health Benefits segment. The after-tax components of the charge were as follows: severance, $11 million, for costs associated with nonvoluntary terminations of approximately 1,300 employees in various functions and locations; real estate, $4 million, primarily related to vacated lease space; and other costs, $7 million, primarily related to the exit of certain operations. During 1995, CIGNA recorded a $30 million pre-tax charge ($20 million after-tax), included in Other Operating Expenses, for cost reduction restructuring initiatives in the Employee Life and Health Benefits segment. The charge consisted primarily of severance-related expenses representing costs associated with nonvoluntary terminations covering approximately 2,400 employees. These initiatives were completed in 1997 with no material difference from original estimates. B) Property and Casualty Restructuring: Effective December 31, 1995, CIGNA restructured its domestic property and casualty businesses into two separate operations, ongoing and run-off. The ongoing operations are actively engaged in selling insurance products and related services. The run-off operations, which do not actively sell insurance products, manage run-off policies and related claims, including those for A&E exposures. Insurance products that were actively sold in 1995 by subsidiaries that are now in run-off continue to be sold by the ongoing operations. Results for the run-off operations primarily reflect current year losses associated with unearned premiums as of December 31, 1995, prior year development on claim and claim adjustment expense reserves, and investment activity. The restructuring is being contested in the courts by certain competitors and policyholders; however, CIGNA expects to ultimately prevail. As part of its overall restructuring plan, CIGNA contributed $375 million of additional capital to the run-off operations. This contribution, which is reflected in the run-off operations' statutory surplus as of December 31, 1995, was funded in 1996 through internal sources. Also, the ongoing operations will contribute an additional $50 million to the run-off operations by December 31, 2001. In addition, the ongoing operations assumed $125 million of liabilities, primarily related to employee benefits of the run-off operations, and will reinsure up to $800 million of claims of the run-off operations in the unlikely event that the statutory capital and surplus of the run-off operations falls below $25 million. During 1995, CIGNA recorded an $85 million pre-tax charge ($55 million after-tax) for cost reduction restructuring initiatives which is included in Other Operating Expenses for the Domestic Property and Casualty operations. The charge consisted primarily of severance, representing costs associated with nonvoluntary terminations of approximately 1,600 domestic employees, and real estate, primarily related to vacated lease space. These initiatives were substantially completed in 1997 with no material difference from original estimates. 42 NOTE 17 -- SEGMENT INFORMATION CIGNA operates principally in four segments: Property and Casualty, Employee Life and Health Benefits, Employee Retirement and Savings Benefits, and Individual Financial Services. Other Operations primarily includes unallocated investment income, expenses (principally debt service) and taxes. Also included in Other Operations are the results of CIGNA's settlement annuity business, non- insurance operations engaged primarily in investment and real estate activities, and certain new business initiatives. CIGNA's Property and Casualty operations routinely insure various forms of property, including large property risks. A major catastrophe could have a material adverse effect on CIGNA's results of operations. However, because CIGNA, through its risk assessment and accumulation processes, monitors writings to avoid significant concentrations, it is not likely that such adverse effect would be material to CIGNA's liquidity or financial condition. CIGNA's operations are not materially dependent on one or a few customers, brokers or agents. As discussed in more detail in Note 16, CIGNA's domestic property and casualty operations were restructured into ongoing and run-off operations effective December 31, 1995. Amounts shown for the Property and Casualty segment's ongoing and run-off operations for 1995 are reported on a pro forma basis as though the restructuring was in place at the beginning of 1995. These pro forma results are not necessarily indicative of the results that would have been reported had the restructuring actually occurred as of January 1, 1995. Consolidated Property and Casualty segment amounts, including International, did not change as a result of the restructuring. Summarized segment financial information for the year ended and as of December 31 was as follows: - --------------------------------------------------------------- (In millions) 1997 1996 1995 - --------------------------------------------------------------- REVENUES Property and Casualty: International $2,927 $2,859 $3,005 Domestic 2,120 2,147 2,259 ---------------------------------- Ongoing operations 5,047 5,006 5,264 Run-off operations 321 478 471 ---------------------------------- Total Property and Casualty 5,368 5,484 5,735 Employee Life and Health Benefits 10,540 9,318 9,167 Employee Retirement and Savings Benefits 1,797 1,950 1,983 Individual Financial Services 2,176 2,074 1,920 Other Operations 157 124 150 - --------------------------------------------------------------- Total $20,038 $18,950 $18,955 - -----------------------------================================== INCOME (LOSS) BEFORE INCOME TAXES Property and Casualty: International $257 $248 $203 Domestic 168 111 (35) ---------------------------------- Ongoing operations 425 359 168 Run-off operations (7) (13) (1,228) ---------------------------------- Total Property and Casualty 418 346 (1,060) Employee Life and Health Benefits 667 764 860 Employee Retirement and Savings Benefits 336 329 284 Individual Financial Services 318 259 231 Other Operations (89) (97) (64) - --------------------------------------------------------------- Total $1,650 $1,601 $251 - -----------------------------================================== IDENTIFIABLE ASSETS Property and Casualty: International $7,430 $7,611 $7,603 Domestic 10,010 10,553 9,843 ---------------------------------- Ongoing operations 17,440 18,164 17,446 Run-off operations 7,255 8,043 8,872 ---------------------------------- Total Property and Casualty 24,695 26,207 26,318 Employee Life and Health Benefits 14,577 11,590 12,206 Employee Retirement and Savings Benefits 45,927 40,399 37,736 Individual Financial Services 20,024 17,581 15,913 Other Operations 2,976 3,155 3,730 - --------------------------------------------------------------- Total $108,199 $98,932 $95,903 - -----------------------------================================== 43 NOTE 18 -- FOREIGN OPERATIONS CIGNA provides international property and casualty and life and health insurance coverages on a direct and reinsured basis, primarily in Europe, the Pacific region, Canada and Latin America. For the year ended December 31, 1997 and 1996, the change in Net Translation of Foreign Currencies reflects decreases of $81 million (including a tax benefit of $43 million) and $18 million (including a tax benefit of $11 million), respectively. There was no change in Net Translation of Foreign Currencies for the year ended December 31, 1995. Summary financial data of CIGNA's foreign operations for the year ended and as of December 31 were as follows: - ---------------------------------------------------------------- (In millions) 1997 1996 1995 - ---------------------------------------------------------------- Revenues $3,078 $3,125 $3,240 Income before income taxes $292 $265 $82 Identifiable assets $9,341 $9,474 $9,256 - ---------------------------------------------------------------- CIGNA's income before income taxes included aggregate foreign exchange transaction losses of $1 million in 1997, 1996 and 1995. NOTE 19 -- CONTINGENCIES Financial Guarantees CIGNA, through its subsidiaries, is contingently liable for various financial guarantees provided in the ordinary course of business. These include guarantees for the repayment of industrial revenue bonds as well as other debt instruments. The contractual amounts of financial guarantees reflect CIGNA's maximum exposure to credit loss in the event of nonperformance. To limit CIGNA's exposure in the event of default of any guaranteed obligation, various programs are in place to ascertain the creditworthiness of guaranteed parties and to monitor this status on a periodic basis. Risk is further reduced primarily through reinsurance. The industrial revenue bonds guaranteed directly by CIGNA have remaining maturities of up to 18 years. The guarantees provide for payment of debt service only as it becomes due; consequently, an event of default would not cause an acceleration of scheduled principal and interest payments. The principal amount of the bonds guaranteed by CIGNA at December 31, 1997 and 1996 was $202 million and $234 million, respectively. Revenues in connection with industrial revenue bond guarantees are derived principally from equity participations in the related projects and are included in Net Investment Income as earned. During 1997, gains for industrial revenue bonds were $1 million. There were no such gains in 1996 and 1995. In addition, CIGNA is liable for municipal guarantee business of $816 million and $1.0 billion at December 31, 1997 and 1996, respectively, which have maturities of up to 33 years. Such amounts are fully reinsured through a subsidiary of MBIA Inc., a corporation that guarantees the scheduled payment of principal and interest for many types of municipal obligations, including general obligation and special revenue bonds. The nature of this guarantee business is similar to the reinsurance transactions described in Note 13. Municipal guarantees provide for payment of debt service only as it becomes due; consequently, an event of default would not cause an acceleration of scheduled principal and interest payments. As of December 31, 1997 and 1996, loss reserves and unearned premiums under these programs were not material. CIGNA also guarantees a minimum level of benefits for certain separate account contracts and, in the event that separate account assets are insufficient to fund minimum policy benefits, CIGNA is obligated to fund the difference. As of December 31, 1997 and 1996, the amount of minimum benefit guarantees for separate account contracts was $4.8 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. No such reserves were required as of December 31, 1997 and 1996. Guarantee fees are part of the overall management fee charged to separate accounts and are recognized in income as earned. Although the ultimate outcome of any loss contingencies arising from CIGNA's financial guarantees may adversely affect results of operations in future periods, they are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. 44 Regulatory and Industry Developments CIGNA's businesses are subject to a changing social, economic, legal, legislative and regulatory environment that could affect them. Some of the changes include initiatives to: o increase health care regulation; o revise the system of funding cleanup of environmental damages; o reinterpret insurance contracts long after the policies were written to provide coverage unanticipated by CIGNA; o restrict insurance pricing and the application of underwriting standards; and o revise federal tax laws. Some of the more significant issues are discussed below. Efforts at the federal and state level to increase regulation of the health care industry could have an adverse effect on CIGNA's health care operations if they reduce marketplace competition and innovation or result in increased medical or administrative costs. Matters under consideration that could have an adverse effect include mandated benefits or services that increase costs without improving the quality of care, loss of the ERISA preemption of state law and restrictions on the use of prescription drug formularies. Due to the uncertainty associated with the timing and content of any proposals ultimately adopted, the effect on CIGNA's results of operations, liquidity or financial condition cannot be reasonably estimated at this time. Proposed legislation for Superfund reform remains under consideration by Congress. Any changes in Superfund relating to 1) assigning responsibility, 2) funding cleanup costs or 3) establishing cleanup standards could affect the liabilities of policyholders and insurers. Due to uncertainties associated with the timing and content of any future Superfund legislation, the effect on CIGNA's consolidated results of operations, liquidity or financial condition cannot be reasonably estimated at this time. In 1996, Congress passed legislation that phases out over a three-year period the tax deductibility of policy loan interest for most leveraged corporate-owned life insurance (COLI) products. For 1997, revenues of $591 million and net income of $44 million for the Individual Financial Services segment were from leveraged COLI products that are affected by this legislation. CIGNA does not expect this legislation to have a material adverse effect on its consolidated results of operations, liquidity or financial condition. The National Association of Insurance Commissioners (NAIC) is currently addressing risk-based capital guidelines for health maintenance organizations (HMOs). CIGNA does not expect such guidelines to have a material adverse effect on its future results of operations, liquidity or financial condition. The NAIC is currently developing standardized statutory accounting principles, which are scheduled to take effect in 1999. Since these principles have not been finalized, the effect on CIGNA's statutory net income, surplus and liquidity cannot be reasonably estimated at this time. CIGNA is contingently liable for possible assessments under regulatory requirements pertaining to potential insolvencies of unaffiliated insurance companies. Mandatory assessments, which are subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states. CIGNA's insurance subsidiaries recorded pre-tax charges of $21 million for 1997 and $28 million for 1996 and 1995, respectively, for guaranty fund assessments that can be reasonably estimated before giving effect to future premium tax recoveries. Although future assessments and payments may adversely affect results of operations in future periods, such amounts are not expected to have a material adverse effect on CIGNA's liquidity or financial condition. The eventual effect on CIGNA of the changing environment in which it operates remains uncertain. Litigation CIGNA is continuously involved in numerous lawsuits arising, for the most part, in the ordinary course of business, either as a liability insurer defending third-party claims brought against its insureds or as an insurer defending coverage claims brought against it by its policyholders or other insurers. One such area of litigation involves policy coverage and judicial interpretation of legal liability for A&E claims. While the outcome of all litigation involving CIGNA, including insurance-related litigation, cannot be determined, litigation (including that related to A&E claims) is not expected to result in losses that differ from recorded reserves by amounts that would be material to results of operations, liquidity or financial condition. Also, reinsurance recoveries related to claims in litigation, net of the allowance for uncollectible reinsurance, are not expected to result in recoveries that differ from recorded recoverables by amounts that would be material to results of operations, liquidity or financial condition. 45 REPORT OF INDEPENDENT ACCOUNTANTS [LOGO] Price Waterhouse LLP TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CIGNA CORPORATION In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and retained earnings and of cash flows present fairly, in all material respects, the financial position of CIGNA Corporation and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Philadelphia, Pennsylvania February 10, 1998 46 QUARTERLY FINANCIAL DATA (Unaudited) The following unaudited quarterly financial data are presented on a consolidated basis for each of the years ended December 31, 1997 and 1996. Quarterly financial results necessarily rely heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business, require caution in drawing specific conclusions from quarterly consolidated results.
- ------------------------------------------------------------------------------------------------------------------------------ (In millions, except per share amounts) Three Months Ended - ------------------------------------------------------------------------------------------------------------------------------ March 31 June 30 Sept. 30 Dec. 31 - ------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED RESULTS 1997 * Total revenues $4,645 $4,719 $5,182 $5,492 Income before income taxes 437 411 427 375 Net income 288 279 279 240 Earnings per share: Basic 3.92 3.79 3.79 3.29 Diluted 3.89 3.76 3.75 3.26 1996 Total revenues $4,645 $4,731 $4,685 $4,889 Income before income taxes 358 345 434 464 Net income 238 231 281 306 Earnings per share: Basic 3.15 3.05 3.74 4.12 Diluted 3.12 3.03 3.71 4.08 STOCK AND DIVIDEND DATA 1997 Price range of common stock - high $161 3/8 $187 1/4 $200 3/4 $186 1/4 - low $135 1/4 $139 $175 5/16 $151 1/2 Dividends declared per common share $ .83 $ .83 $ .83 $ .83 1996 Price range of common stock - high $125 1/2 $117 7/8 $122 3/8 $143 3/8 - low $103 1/4 $100 3/4 $105 1/2 $119 1/2 Dividends declared per common share $ .80 $ .80 $ .80 $ .80 - ------------------------------------------------------------------------------------------------------------------------------ * The fourth quarter of 1997 includes after-tax charges associated with the integration of Healthsource and the restructuring of CIGNA's health care operations of $80 million.
47 Stock Listing CIGNA's common shares are listed on the New York, Pacific and Philadelphia stock exchanges. The ticker symbol is CI. EX-21 10 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Listed below are subsidiaries of CIGNA Corporation as of December 31, 1997 with their jurisdictions of organization shown in parentheses. Those subsidiaries not listed would not, in the aggregate, constitute a "significant subsidiary" of CIGNA Corporation, as that term is defined in Rule 1-02(w) of Regulation S-X. CIGNA Holdings, Inc. (Delaware) I. Connecticut General Corporation (Connecticut) A. CG Trust Company (Illinois) B. CIGNA Associates, Inc. (Connecticut) C. CIGNA Dental Health, Inc. (Florida) (1) CIGNA Dental Health of California, Inc. (California) (2) CIGNA Dental Health of Colorado, Inc. (Colorado) (3) CIGNA Dental Health of Delaware, Inc. (Delaware) (4) CIGNA Dental Health of Florida, Inc. (Florida) (5) CIGNA Dental Health of Illinois, Inc. (Illinois) (6) CIGNA Dental Health of Kansas, Inc. (Kansas) (7) CIGNA Dental Health of Kentucky, Inc. (Kentucky) (8) CIGNA Dental Health of Maryland, Inc. (Delaware) (9) CIGNA Dental Health of New Jersey, Inc. (New Jersey) (10) CIGNA Dental Health of New Mexico, Inc. (New Mexico) (11) CIGNA Dental Health of North Carolina, Inc. (North Carolina) (12) CIGNA Dental Health of Ohio, Inc. (Ohio) (13) CIGNA Dental Health of Pennsylvania, Inc. (Pennsylvania) (14) CIGNA Dental Health of Texas, Inc. (Texas) (15) CIGNA Dental Health Plan of Arizona, Inc. (Arizona) D. CIGNA Financial Advisors, Inc. (Connecticut) E. CIGNA Financial Services, Inc. (Delaware) F. CIGNA Health Corporation (Delaware) (1) Healthsource, Inc. (New Hampshire) (a) Healthsource Connecticut Ventures, Inc. (Connecticut) (i) Healthsource Connecticut, Inc. (Connecticut) (b) Healthsource Health Plans, Inc. (North Carolina) (i) Healthsource North Carolina, Inc. (North Carolina) (ii) Healthsource North Carolina Administrators, Inc. (North Carolina) (c) Healthsource Indiana, Inc. (New Hampshire) (i) Healthsource Indiana Insurance Company (Indiana) (ii) Healthsource Indiana Managed Care Plan, Inc. (Indiana) (d) Healthsource Insurance Group, Inc. (New Hampshire) (e) Healthsource Kentucky Ventures, Inc. (Kentucky) (i) Healthsource Kentucky, Inc. (Kentucky) (ii) Healthsource Kentucky Preferred, Inc. (Kentucky) (f) Healthsource Maine, Inc. (Maine) (g) Healthsource Maine Preferred, Inc. (New Hampshire) (h) Healthsource Management, Inc. (New Hampshire) (i) Healthsource Syracuse, Inc. (New York) (a) Healthsource New York, Inc. (New York) (i) Healthsource HMO of New York, Inc. (New York) (ii) Healthsource Preferred of New York, Inc. (New York) (ii) Healthsource Tennessee, Inc. (Tennessee) (iii)Healthsource Tennessee Preferred, Inc. (Tennessee) (i) Healthsource Massachusetts, Inc. (Massachusetts) (j) Healthsource Metropolitan New York Holding Company, Inc. (New Hampshire) (i) Healthsource New York/New Jersey, Inc. (New York) (k) Healthsource New Hampshire, Inc. (New Hampshire) (l) Healthsource Ohio Ventures, Inc. (Ohio) (i) Healthsource Ohio, Inc. (Ohio) (ii) Healthsource Ohio Preferred, Inc. (Ohio) (m) Healthsource Rhode Island, Inc. (Rhode Island) (n) Healthsource RX, Inc. (New Hampshire) (o) Healthsource South, Inc. (New Hampshire) (i) Healthsource Arkansas Ventures, Inc. (Arkansas) (70% with balance owned by non-affiliate) (a) Healthsource Arkansas, Inc. (Arkansas) (b) Healthsource Arkansas Preferred, Inc. (Arkansas) (ii) Healthsource Insurance Company (Tennessee) (iii)Healthsource Physicians Group of South Carolina, Inc. (South Carolina) (iv) Healthsource Texas, Inc. (Texas) (v) HS North Texas Ventures, Inc. (Texas) (a) Healthsource North Texas, Inc. (Texas) (vi) Provident Health Care Plans, Inc. (Tennessee) (a) Healthsource Georgia, Inc. (Georgia) (b) Provident Health Care Plan, Inc. of North Carolina (North Carolina) (c) Provident Health Care Plan, Inc. of Tennessee (Tennessee) (p) Physicians' Health Systems, Inc. (South Carolina) (i) Healthsource Insurance Services, Inc. (South Carolina) (72% with balance owned by another CIGNA subsidiary) (ii) Healthsource South Carolina, Inc. (South Carolina) (2) CIGNA HealthCare of Arizona, Inc. (Arizona) (a)CIGNA Community Choice, Inc. (Arizona) (3) CIGNA HealthCare of California, Inc. (California) (4) CIGNA HealthCare of Colorado, Inc. (Colorado) (5) CIGNA HealthCare of Connecticut, Inc. (Connecticut) (6) CIGNA HealthCare of Delaware, Inc. (Delaware) (7) CIGNA HealthCare of Florida, Inc. (Florida) (8) CIGNA HealthCare of Georgia, Inc. (Georgia) (9) CIGNA HealthCare of Illinois, Inc. (Delaware) (99.60% with balance owned by non-affiliate) (10) CIGNA Healthplan of Louisiana, Inc. (Louisiana) (11) CIGNA HealthCare of Massachusetts, Inc. (Massachusetts) (12) CIGNA HealthCare Mid-Atlantic, Inc. (Maryland) (13) CIGNA HealthCare of New Jersey, Inc. (New Jersey) (14) CIGNA HealthCare of New York, Inc. (New York) (15) CIGNA HealthCare of North Carolina, Inc. (North Carolina) (16) CIGNA HealthCare of North Louisiana, Inc. (Louisiana) (17) CIGNA HealthCare of Northern New Jersey, Inc. (New Jersey) (18) CIGNA HealthCare of Ohio, Inc. (Ohio) (19) CIGNA HealthCare of Oklahoma, Inc. (Oklahoma) (20) CIGNA HealthCare of Pennsylvania, Inc. (Pennsylvania) (21) CIGNA HealthCare of St. Louis, Inc. (Missouri) (22) CIGNA HealthCare of Tennessee, Inc. (Tennessee) (23) CIGNA HealthCare of Texas, Inc. (Texas) (24) CIGNA HealthCare of Utah, Inc. (Utah) (25) CIGNA HealthCare of Virginia, Inc. (Virginia) (26) Lovelace Health Systems, Inc. (New Mexico) (27) Temple Insurance Company Limited (Bermuda) G. CIGNA RE Corporation (Delaware) H. Connecticut General Life Insurance Company (Connecticut) (1) All-Net Preferred Providers, Inc. (Delaware) (2) CIGNA Life Insurance Company (Connecticut) I. Disability Claim Services, Inc. (Delaware) J. Global Portfolio Strategies, Inc. (Connecticut) K. INA Life Insurance Company of New York (New York) L. International Rehabilitation Associates, Inc. d/b/a Intracorp (Delaware) M. Life Insurance Company of North America (Pennsylvania) (1) CIGNA Direct Marketing Company, Inc. (Delaware) (2) CIGNA Life Insurance Company of Canada (Canada) (3) INA Himawari Life Insurance Co., Ltd. (Japan) (90% with balance owned by non-affiliate) N. MCC Behavioral Care, Inc. (Minnesota) (1) MCC Behavioral Care of California, Inc. (California) O. TEL-DRUG, INC. (South Dakota) II. INA Corporation (Pennsylvania) A. CIGNA International Holdings, Ltd. (Delaware) (1) Afia Finance Corporation (Delaware) (a) CIGNA Brasil Participacoes Ltda. (Brazil) (i) AMICO Assistencia Medica A Industria E Comercio Ltda. (Brazil) (50% with balance owned by non-affiliate) (ii) Excel CIGNA Seguardora S.A. (Brazil) (50% with balance owned by non-affiliate) (b) CIGNA Reinsurance New Zealand Limited (New Zealand) (c) P. T. Asuransi CIGNA Indonesia (Indonesia) (53.51% with balance owned by non-affiliates) (2) CIGNA Argentina Compania de Seguros S.A. (Argentina) (3) CIGNA Brasil Empreendimentos Ltda. (Brazil) (a) INA Seguradora S.A. (Brazil) (85.80% with 13.79% owned by another CIGNA affiliate and balance owned by non-affiliates) (4) CIGNA Compania de Seguros (Chile) S.A. (Chile) (99.13% with balance owned by non-affiliates) (5) CIGNA G.B. Holdings, Ltd. (Delaware) (a) CIGNA Reinsurance Company (UK) Limited (United Kingdom) (b) Insurance Company of North America (U.K.) Limited (United Kingdom) (6) CIGNA Insurance Asia Pacific Limited (Australia) (a) CIGNA Insurance Singapore Limited (Singapore) (7) CIGNA Insurance Company Limited (Rep. of South Africa) (8) CIGNA Insurance Company of Puerto Rico (Puerto Rico) (9) CIGNA Insurance New Zealand Limited (New Zealand) (a) CIGNA Life Insurance New Zealand Limited (New Zealand) (10) CIGNA International Corporation (Delaware) (a) CIGNA Eastern European Corporate Services Sp. z.o.o. (Poland) (11) CIGNA International Insurance Company of Hong Kong Limited (Hong Kong) (12) CIGNA Overseas Insurance Company Ltd. (Bermuda) (a) CIGNA Accident and Fire Insurance Company, Ltd. (Japan) (b) CIGNA China Investment Fund LDC (Cayman Islands) (67% with balance owned by another CIGNA subsidiary) (c) CIGNA Marketing Group, C.A. (Venezuela) (d) CIGNA Overseas Holdings, Inc. (Delaware) (i) CIGNA Insurance Company of Europe S.A.-N.V. (Belgium) (a) CIGNA Life Insurance Company of Europe S.A.-N.V. (Belgium) (b) CIGNA STU, S.A. (Poland) (49% with balance owned by non-affiliate) (c) CIGNA STU Zycie, S.A. (Poland) (51% with balance owned by non-affiliate) (13) CIGNA Worldwide Insurance Company (Delaware) (a) P.T. Asuransi Niaga CIGNA Life (Indonesia) (60% with balance owned by non-affiliate) (b) PCIB CIGNA Life Insurance Corporation (Philippines) (50% with balance owned by non-affiliate) (14) ESIS International, Inc. (Delaware) (15) INACAN Holdings, Ltd. (Canada) (a) CIGNA Insurance Company of Canada (Canada) (16) Inversiones INA Limitada (Chile) (98.6% with balance owned by another CIGNA subsidiary) (a) CIGNA Compania de Seguros de Vida (Chile) S.A. (Chile) (96.6% with balance owned by non-affiliate) (b) CIGNA Salud Isapre S.A. (Chile) (99.20% with balance owned by another CIGNA subsidiary) (17) LATINA Holdings, Ltd. (Delaware) (a) CIGNA Seguros de Colombia S.A. (Colombia) (85.76% with balance owned by other CIGNA subsidiaries and non-affiliate) (b) Empresa Guatemalteca CIGNA de Seguros, Sociedad Anonima (Guatemala) (97.375% with balance owned by non-affiliates) (18) Perdana CIGNA Insurance Berhard (Malaysia) (51% with balance owned by non-affiliate) (19) Seguros CIGNA, S.A. (Mexico) (92.98% with balance owned by non-affiliates) B. INA Financial Corporation (Delaware) (1) Brandywine Holdings Corporation (Delaware) (a) CIGNA International Reinsurance Company, Ltd. (Bermuda) (b) Century Indemnity Company (Pennsylvania) (i) Century Reinsurance Company (Pennsylvania) (ii) CIGNA Reinsurance Company (Pennsylvania) (a) CIGNA Reinsurance Company S.A.-N.V. (Belgium) (2) INA Holdings Corporation (Delaware) (a) Bankers Standard Insurance Company (Pennsylvania) (i) Bankers Standard Fire & Marine Company (Pennsylvania) (b) CIGNA Property and Casualty Insurance Company (Connecticut) (i) ALIC, Incorporated (Texas) (a) CIGNA Lloyds Insurance Company (Texas) (ii) CIGNA Fire Underwriters Insurance Company (Pennsylvania) (iii)CIGNA Insurance Company (Pennsylvania) (a) Pacific Employers Insurance Company (Pennsylvania) (i) CIGNA Insurance Company of Texas (Texas) (ii)Illinois Union Insurance Company (Illinois) (iv) CIGNA Insurance Company of the Midwest (Indiana) (c) ESIS, Inc. (California) (d) INAC Corp. (Delaware) (e) INAC Corp. of California (California) (f) INAMAR Insurance Underwriting Agency, Inc. (New Jersey) (i) INAMAR Insurance Underwriting Agency, Inc. of Massachusetts (Massachusetts) (ii) INAMAR Insurance Underwriting Agency, Inc. of Ohio (Ohio) (iii)INAMAR Insurance Underwriting Agency of Texas (Texas) (g) INAPRO, Inc. (Delaware) (i) Reinsurance Solutions International, L.L.C. (Delaware) (50% with balance owned by non-affiliate) (h) Insurance Company of North America (Pennsylvania) (i) Atlantic Employers Insurance Company (New Jersey) (ii) CIGNA Employers Insurance Company (Pennsylvania) (iii)CIGNA Insurance Company of Ohio (Ohio) (iv) Indemnity Insurance Company of North America (Pennsylvania) (a) Allied Insurance Company (California) (b) CIGNA Indemnity Insurance Company (Pennsylvania) (c) CIGNA Insurance Company of Illinois (Illinois) (v) INA Surplus Insurance Company (Pennsylvania) (i) Marketdyne International, Inc. (Delaware) (j) Recovery Services International, Inc. (Delaware) III. CIGNA Investment Group, Inc. (Delaware) A. CIGNA International Finance Inc. (Delaware) (1) CIGNA International Investment Advisors, Ltd. (Delaware) (a) CIGNA International Investment Advisors Australia Limited (Australia) (b) CIGNA International Investment Advisors K.K. (Japan) B. CIGNA Investment Advisory Company, Inc. (Delaware) C. CIGNA Investments, Inc. (Delaware) (1) CIGNA Advisory Partners, Inc. (Delaware) (2) CIGNA Leveraged Capital Fund, Inc. (Delaware) EX-23 11 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 33-65396 and No. 333-41011) and Form S-8 (No. 2-76445, No. 2-76444, No. 33-44371, No. 33-51791, No. 33-60053, No. 333-22391 and No. 333-31903) of CIGNA Corporation, of our report dated February 10, 1998 appearing on Page 46 of the 1997 Annual Report to Shareholders of CIGNA Corporation which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference in such Registration Statements of our report on the Financial Statement Schedules, which appears on page FS-2 of this Form 10-K. /s/ PRICE WATERHOUSE LLP Philadelphia, Pennsylvania March 26, 1998 EX-24.1 12 Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of February, l998. /s/ Robert P. Bauman ---------------------------------------- Robert P. Bauman Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 18th day of February, l998. /s/ Robert H. Campbell ---------------------------------------- Robert H. Campbell Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 19th day of February, l998. /s/ Alfred C. DeCrane, Jr. ---------------------------------------- Alfred C. DeCrane, Jr. Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of 1,000,000 shares of CIGNA Common Stock under the CIGNA Stock Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371 and 33- 60053); (iii) all amendments to CIGNA's registration statement on Form S-3 (Registration Number 33-65396) relating to $900 million of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l998. IN WITNESS WHEREOF, the undersigned has executed this document as of the 19th day of February, l997. /s/ Bernard M. Fox ---------------------------------------- Bernard M. Fox Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of February, l998. /s/ Peter N. Larson ---------------------------------------- Peter N. Larson Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as her own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 20th day of March, l998. /s/ Marilyn W. Lewis ---------------------------------------- Marilyn W. Lewis Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of 1,000,000 shares of CIGNA Common Stock under the CIGNA Stock Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371 and 33- 60053); (iii) all amendments to CIGNA's registration statement on Form S-3 (Registration Number 33-65396) relating to $900 million of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l998. IN WITNESS WHEREOF, the undersigned has executed this document as of the 26th day of February, l997. /s/ Paul F. Oreffice ---------------------------------------- Paul F. Oreffice Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of February, l998. /s/ Charles R. Shoemate ---------------------------------------- Charles R. Shoemate Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 18th day of February, l998. /s/ Louis W. Sullivan, M.D. ---------------------------------------- Louis W. Sullivan, M.D. Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director and Executive Officer of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of February, l998. /s/ Wilson H. Taylor ---------------------------------------- Wilson H. Taylor Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as her own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of February, l998. /s/ Carol Cox Wait ---------------------------------------- Carol Cox Wait Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, a director of CIGNA Corporation, a Delaware corporation ("CIGNA"), hereby makes, designates, constitutes and appoints THOMAS J. WAGNER, CAROL J. WARD and ROBERT A. LUKENS, and each of them (with full power to act without the other), as the undersigned's true and lawful attorneys-in-fact and agents, with full power and authority to act in any and all capacities for and in the name, place and stead of the undersigned (A) in connection with the filing with the Securities and Exchange Commission pursuant to the Securities Act of l933 or the Securities Exchange Act of l934, both as amended, of: (i) CIGNA's Annual Report on Form l0-K and all amendments thereto (collectively, "CIGNA's Form l0-K"); (ii) any and all registration statements pertaining to employee benefit or director compensation plans of CIGNA or its subsidiaries, and all amendments thereto, including, without limitation, a registration statement on Form S-8 for the offering of shares of CIGNA Common Stock under the CIGNA 401(k) Plan and CIGNA's registration statements on Form S-8 (Registration Numbers 2-76444, 2-76445, 33-51791, 33-44371, 33-60053, 333-31903 and 333-22391); (iii) all amendments to CIGNA's registration statements on Form S-3 (Registration Numbers 33-65396 and 333- 41011) relating to $1 billion of debt securities, Preferred Stock and Common Stock; and (B) in connection with the preparation, delivery and filing of any and all registrations, amendments, qualifications or notifications under the applicable securities laws of any and all states and other jurisdictions with respect to securities of CIGNA, of whatever class or series, offered, sold, issued, distributed, placed or resold by CIGNA, any of its subsidiaries, or any other person or entity. Such attorneys-in-fact and agents, or any of them, are also hereby granted full power and authority, on behalf of and in the name, place and stead of the undersigned, to execute and deliver all such registration statements, registrations, amendments, qualifications and notifications, and CIGNA's Form l0-K, to execute and deliver any and all such other documents, and to take further action as they, or any of them, deem appropriate. The powers and authorities granted herein to such attorneys-in-fact and agents, and each of them, also include the full right, power and authority to effect necessary or appropriate substitutions or revocations. The undersigned hereby ratifies, confirms, and adopts, as his own act and deed, all action lawfully taken by such attorneys-in-fact and agents, or any of them, or by their respective substitutes, pursuant to the powers and authorities herein granted. This Power of Attorney expires by its terms and shall be of no further force and effect on May l5, l999. IN WITNESS WHEREOF, the undersigned has executed this document as of the 23rd day of February, l998. /s/ Harold A. Wagner ---------------------------------------- Harold A. Wagner EX-24.2 13 EXHIBIT 24.2 Certified to be a true and correct copy of the resolutions adopted by the Board of Directors of CIGNA Corporation at a meeting held on February 25, 1998, a quorum being present, and such resolutions are still in full force and effect as of this date of certification, not having been amended, modified or rescinded since the date of their adoption. - -------------------------------------------------------------------------------- RESOLVED, That the Officers of the Corporation, and each of them, are hereby authorized to sign CIGNA Corporation's Annual Report on Form 10-K for the year ended December 31, 1997, and any amendments thereto, (the "Form 10-K") in the name and on behalf of and as attorneys for the Corporation and each of its Directors and Officers. RESOLVED, That each Officer and Director of the Corporation who may be required to execute (whether on behalf of the Corporation or as an Officer or Director thereof) the Form 10-K, is hereby authorized to execute and deliver a power of attorney appointing such person or persons named therein as true and lawful attorneys and agents to execute in the name, place and stead (in any such capacity) of any such Officer or Director said Form 10-K and to file any such power of attorney together with the Form 10-K with the Securities and Exchange Commission. Date: February 25, 1998 /s/ Carol J. Ward ------------------------------- Carol J. Ward EX-27.1 14 ARTICLE 7 FDS FOR CIGNA'S FORM 10-K
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCORPORATED BY REFERENCE IN ITEM 8 OF PART II TO CIGNA'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 36,358 0 0 854 10,859 769 56,578 2,625 6,753 1,542 108,199 11,976 1,774 17,906 30,682 2,155 0 0 88 7,844 108,199 14,935 4,245 167 691 13,029 1,046 4,313 1,650 564 1,086 0 0 0 1,086 14.79 14.64 10,647 2,120 218 901 2,117 9,967 218 AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES. AMOUNT REPRESENTS BASIC EARNINGS PER SHARE BASED ON SFAS NO. 128. AMOUNT REPRESENTS DILUTED EARNINGS PER SHARE BASED ON SFAS NO. 128. AMOUNT IS NET OF REINSURANCE RECOVERABLES.
EX-27.2 15 RESTATED ARTICLE 7 FDS FOR CIGNA'S FORM 10-K
7 This schedule contains summary financial information extracted from the financial statements contained on Form 10-K for the fiscal year ended December 31, 1997 for CIGNA Corporation and is qualified in its entirety by reference to such statements. 0000701221 CIGNA CORPORATION 1,000,000 9-MOS 6-MOS 3-MOS YEAR DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1996 SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996 35,630 34,470 34,320 34,933 0 0 0 0 0 0 0 0 937 799 683 701 10,813 10,973 11,066 10,927 1,023 1,040 1,087 1,102 56,773 55,693 55,969 56,534 1,470 1,689 1,223 1,287 6,938 6,926 6,859 7,287 1,291 1,298 1,303 1,230 106,428 103,662 98,752 98,932 11,896 11,617 11,587 11,784 1,852 1,853 1,946 1,940 18,434 18,527 18,400 18,841 30,271 30,046 29,800 29,878 1,943 2,235 1,343 1,310 0 0 0 0 0 0 0 0 88 88 88 88 7,903 7,460 7,029 7,120 106,428 103,662 98,752 98,932 10,795 6,870 3,388 13,916 3,172 2,115 1,053 4,333 81 56 44 91 498 323 160 610 9,433 6,074 3,009 12,473 797 534 264 1,138 3,041 1,908 935 3,738 1,275 848 437 1,601 429 281 149 545 846 567 288 1,056 0 0 0 0 0 0 0 0 0 0 0 0 846 567 288 1,056 11.50 7.71 3.92 14.05 11.37 7.64 3.89 13.91 0 0 0 11,159 0 0 0 2,348 0 0 0 177 0 0 0 823 0 0 0 2,214 0 0 0 10,647 0 0 0 177 AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES. AMOUNT REPRESENTS BASIC EARNINGS PER SHARE BASED ON SFAS NO. 128. AMOUNT REPRESENTS DILUTED EARNINGS PER SHARE BASED ON SFAS NO. 128. AMOUNT IS NET OF REINSURANCE RECOVERABLES.
EX-27.3 16 RESTATED ARTICLE 7 FDS FOR CIGNA'S FORM 10-K
7 This schedule contains summary financial information extracted from the financial statements contained on Form 10-K for the fiscal year ended December 31, 1997 for CIGNA Corporation and is qualified in its entirety by reference to such statements. 0000701221 CIGNA CORPORATION 1,000,000 9-MOS 6-MOS 3-MOS YEAR DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995 33,888 33,918 34,761 36,241 0 0 0 0 0 0 0 0 712 715 689 661 11,278 11,245 11,285 11,010 1,275 1,262 1,276 1,283 55,383 55,481 56,100 57,710 2,088 1,434 1,269 1,559 7,352 7,130 7,176 7,120 1,211 1,161 1,123 1,109 97,347 95,899 95,417 95,903 11,777 11,750 11,688 12,007 2,065 2,059 2,187 2,176 19,159 19,004 19,156 19,303 29,692 29,292 29,373 30,055 1,305 1,443 1,472 1,480 0 0 0 0 0 0 0 0 88 88 87 87 6,920 6,797 6,776 7,070 97,347 95,899 95,417 95,903 10,333 6,889 3,390 13,914 3,263 2,194 1,083 4,296 17 (1) 30 233 448 294 142 512 9,337 6,273 3,144 13,855 877 594 272 1,181 2,710 1,806 871 3,668 1,137 703 358 251 387 234 120 40 750 469 238 211 0 0 0 0 0 0 0 0 0 0 0 0 750 469 238 211 9.94 6.20 3.15 2.90 9.84 6.14 3.12 2.88 0 0 0 10,635 0 0 0 2,386 0 0 0 1,498 0 0 0 971 0 0 0 2,389 0 0 0 11,159 0 0 0 1,498 AMOUNT INCLUDES RECOVERABLES ON PAID AND UNPAID LOSSES. AMOUNT REPRESENTS BASIC EARNINGS PER SHARE BASED ON SFAS NO. 128. AMOUNT REPRESENTS DILUTED EARNINGS PER SHARE BASED ON SFAS NO. 128. AMOUNT IS NET OF REINSURANCE RECOVERABLES.
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