[X] |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
[
] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
Delaware |
06-1059331 |
(State
or other jurisdiction of |
(I.R.S.
Employer |
incorporation
or organization) |
Identification
No.) |
One
Liberty Place, Philadelphia, Pennsylvania |
19192 |
(Address
of principal executive offices) |
(Zip
code) |
Name
of each exchange on | |
Title
of each class |
which
registered |
Common
Stock, Par Value $0.25; |
New
York Stock Exchange, Inc. |
Preferred
Stock |
Pacific
Exchange, Inc. |
Purchase
Rights |
Philadelphia
Stock Exchange, Inc. |
Page |
| |
PART II |
||
Item
5. Market for Registrant’s Common Equity and Related Stockholder
Matters |
4 |
|
Item
6. Selected Financial Data |
6 |
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of |
||
Operations |
7 |
|
Item
8. Financial Statements and Supplementary Data |
46 |
|
Item
9A. Controls and Procedures |
101 |
|
PART
IV |
||
Item
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K |
101 |
|
Signatures |
102 |
|
Financial Statement Schedules |
FS-1 |
|
Index
to Exhibits |
E-1 |
|
(In millions,
except per share amounts) |
Three
Months Ended | |||||||||
March
31 |
June
30 |
Sept.
30 |
Dec.
31 |
|||||||
(As
Restated, See Note 16) |
||||||||||
Consolidated
Results |
||||||||||
2003 |
||||||||||
Total
revenues |
$ |
4,900 |
$ |
4,634 |
$ |
4,773 |
$ |
4,501 |
||
Income
(loss) from continuing operations before
income
taxes (benefits) |
281 |
(80) |
281 |
394 |
||||||
Net
income (loss) |
235 |
(1) |
(55) |
(2) |
195 |
(3) |
275 |
(4) | ||
Net
income (loss) per share: |
||||||||||
Basic |
1.68 |
(.39) |
1.40 |
1.97 |
||||||
Diluted |
1.68 |
(.39) |
1.39 |
1.95 |
||||||
2002 |
||||||||||
Total
revenues |
$ |
4,780 |
$ |
4,737 |
$ |
5,083 |
$ |
4,748 |
||
Income
(loss) from continuing operations before
income
taxes (benefits) |
280 |
340 |
(1,189) |
66 |
||||||
Net
income (loss) |
185 |
223 |
(5) |
(818) |
(6) |
55 |
(7) | |||
Net
income (loss) per share: |
||||||||||
Basic |
1.31 |
1.58 |
(5.85) |
.39 |
||||||
Diluted |
1.29 |
1.56 |
(5.85) |
.39 |
||||||
Stock
and Dividend Data |
||||||||||
2003 |
||||||||||
Price
range of common stock —
high |
$ |
46.69 |
$ |
57.41 |
$ |
50.00 |
$ |
58.58 |
||
—
low |
$ |
39.10 |
$ |
45.51 |
$ |
40.00 |
$ |
44.10 |
||
Dividends
declared per common share |
$ |
.33 |
$ |
.33 |
$ |
.33 |
$ |
.33 |
||
2002 |
||||||||||
Price
range of common stock —
high |
$ |
101.52 |
$ |
111.00 |
$ |
98.40 |
$ |
74.19 |
||
—
low |
$ |
87.76 |
$ |
94.85 |
$ |
69.20 |
$ |
34.15 |
||
Dividends
declared per common share |
$ |
.33 |
$ |
.33 |
$ |
.33 |
$ |
.33 |
(1) |
The
first quarter of 2003 includes a $4 million after-tax gain for other
postretirement benefits for employees terminated in the first quarter of
2003 under the 2002 restructuring
program. |
(2) |
The
second quarter of 2003 includes a $286 million after-tax charge related to
a review of assumptions underlying guaranteed minimum death benefit
contracts, a $9 million after-tax charge related to restructuring certain
corporate staff functions, a $10 million after-tax benefit reflecting a
reduction in costs associated with the 2002 restructuring program and a $2
million after-tax gain for other postretirement benefits for employees
terminated in the second quarter of 2003 under the 2002 restructuring
program. |
(3) |
The
third quarter of 2003 includes a $37 million after-tax charge to increase
the reserve for health care provider class action litigation, a $10
million after-tax charge to write off intangible assets related to certain
provider contracts, a $5 million after-tax gain on the sale of CIGNA's
interest in a Japanese pension operation and a $1 million after-tax gain
for other postretirement benefits for employees terminated in the third
quarter of 2003 under the 2002 restructuring
program. |
(4) |
The
fourth quarter of 2003 includes a $33 million after-tax benefit related to
a reduction in the allowance against amounts recoverable from
experience-rated pension policyholders and a $9 million after-tax benefit
reflecting a reduction in costs associated with the 2002 and 2001 health
care costs reduction programs (including gains on other postretirement
benefits). |
(5) |
The
second quarter of 2002 includes a $2 million after-tax accelerated gain
recognized on the sale of CIGNA’s life reinsurance
business. |
(6) |
The
third quarter of 2002 includes a $720 million after-tax charge to
strengthen reserves for guaranteed minimum death benefit contracts as well
as the impact of a program adopted by CIGNA to reduce equity market risks
related to these contracts, a $317 million after-tax charge for Unicover
and London reinsurance matters and a $9 million after-tax charge for a
Medicare cost reporting matter associated with Lovelace Health Systems
Inc., partially offset by a $1 million after-tax accelerated gain
recognized on the sale of CIGNA’s life reinsurance
business. |
(7) |
The
fourth quarter of 2002 includes a net $95 million after-tax restructuring
charge, a $50 million after-tax charge related to health care provider
litigation and an after-tax credit of $2 million reflecting the adjustment
of liabilities associated with events of September 11, 2001.
|
(Dollars
in millions, except per share amounts) |
|
2003 |
2002 |
2001 |
2000 |
1999 |
||||||||||
(As Restated, See Note
16) |
||||||||||||||||
Revenues |
||||||||||||||||
Premiums
and fees and other revenues |
$ |
16,063 |
$ |
16,870 |
$ |
15,940 |
$ |
16,579 |
$ |
15,304 |
||||||
Net
investment income |
2,594 |
2,716 |
2,842 |
2,940 |
2,958 |
|||||||||||
Realized
investment gains (losses) |
151 |
(238 |
) |
(175 |
) |
7 |
8 |
|||||||||
Total
revenues |
$ |
18,808 |
$ |
19,348 |
$ |
18,607 |
$ |
19,526 |
$ |
18,270 |
||||||
Results
of Operations |
||||||||||||||||
Segment
earnings (loss): |
||||||||||||||||
Health
Care |
$ |
447 |
$ |
455 |
$ |
671 |
$ |
706 |
$ |
582 |
||||||
Disability
and Life |
137 |
124 |
59 |
50 |
132 |
|||||||||||
Retirement
|
260 |
231 |
221 |
257 |
265 |
|||||||||||
International
|
55 |
31 |
95 |
48 |
(342 |
) | ||||||||||
Run-off
Reinsurance |
(359 |
) |
(1,070 |
) |
57 |
(119 |
) |
35 |
||||||||
Other
Operations |
73 |
74 |
76 |
93 |
104 |
|||||||||||
Corporate |
(109 |
) |
(44 |
) |
30 |
(345 |
) |
(119 |
) | |||||||
Total
segment earnings (loss) |
504 |
(199 |
) |
1,209 |
690 |
657 |
||||||||||
Realized
investment gains (losses), net of taxes |
98 |
(155 |
) |
(112 |
) |
4 |
4 |
|||||||||
Income
(loss) from continuing operations |
602 |
(354 |
) |
1,097 |
694 |
661 |
||||||||||
Income
(loss) from discontinued operations |
48 |
(1 |
) |
18 |
6 |
1,163 |
||||||||||
Cumulative
effect of accounting change, net of taxes |
— |
— |
— |
— |
(91 |
) | ||||||||||
Net
income (loss) |
$ |
650 |
$ |
(355 |
) |
$ |
1,115 |
$ |
700 |
$ |
1,733 |
|||||
Net
income (loss) excluding goodwill
amortization |
$ |
650 |
$ |
(355 |
) |
$ |
1,163 |
$ |
748 |
$ |
1,781 |
|||||
Income
(loss) per share from continuing operations: |
||||||||||||||||
Basic |
$ |
4.31 |
$ |
(2.52 |
) |
$ |
7.42 |
$ |
4.34 |
$ |
3.40 |
|||||
Diluted |
$ |
4.28 |
$ |
(2.52 |
) |
$ |
7.31 |
$ |
4.27 |
$ |
3.35 |
|||||
Net
income (loss) per share: |
||||||||||||||||
Basic |
$ |
4.65 |
$ |
(2.53 |
) |
$ |
7.54 |
$ |
4.38 |
$ |
8.91 |
|||||
Diluted |
$ |
4.62 |
$ |
(2.53 |
) |
$ |
7.43 |
$ |
4.31 |
$ |
8.78 |
|||||
Common
dividends declared per share |
$ |
1.32 |
$ |
1.32 |
$ |
1.28 |
$ |
1.24 |
$ |
1.20 |
||||||
Total
assets |
$ |
90,992 |
$ |
88,980 |
$ |
91,653 |
$ |
95,238 |
$ |
95,371 |
||||||
Long-term
debt |
$ |
1,500 |
$ |
1,500 |
$ |
1,626 |
$ |
1,162 |
$ |
1,357 |
||||||
Shareholders’
equity |
$ |
4,558 |
$ |
3,897 |
$ |
5,119 |
$ |
5,563 |
$ |
6,187 |
||||||
Per
share |
$ |
32.42 |
$ |
27.96 |
$ |
36.17 |
$ |
36.60 |
$ |
36.46 |
||||||
Common
shares outstanding (in thousands) |
140,591 |
139,370 |
141,553 |
152,005 |
169,697 |
|||||||||||
Shareholders
of record |
9,608 |
9,945 |
10,437 |
10,947 |
11,716 |
|||||||||||
Employees |
32,700 |
41,200 |
44,600 |
43,200 |
41,900 |
INDEX |
|
Overview |
7 |
Consolidated
Results of Operations (As Restated,
See
Note 16) |
9 |
Sale
of Retirement Business |
16 |
Other
Matters |
16 |
Health
Care |
21 |
Disability
and Life |
25 |
Retirement |
26 |
International |
28 |
Run-off
Reinsurance |
29 |
Other
Operations |
31 |
Corporate
(As
Restated, See Note 16) |
32 |
Discontinued
Operations |
33 |
Liquidity
and Capital Resources |
33 |
Investment
Assets |
40 |
Market
Risk |
42 |
Cautionary
Statement |
45 |
· |
cost
trends and inflation levels for medical and related
services; |
· |
patterns
of utilization of medical and other
services; |
· |
employment
levels; |
· |
the
tort liability system; |
· |
interest
rates and equity market returns; |
· |
regulations
and tax rules related to the provision and administration of employee
benefit plans; and |
· |
initiatives
to increase health care regulation. |
· |
the
absolute level of and trends in benefit
costs; |
· |
the
volume of customers served and the mix of products and services purchased
by those customers; |
· |
competitiveness
of CIGNA's product design and service quality relative to those of other
employee benefit providers; |
· |
the
ability to price products and services competitively at levels that
appropriately account for underlying cost inflation and utilization
patterns; and |
· |
the
relationship between administrative costs and
revenue. |
(In millions) |
||||||
Financial
Summary |
2003 |
2002 |
2001 | |||
|
(As
Restated, See Note 16) | |||||
Premiums
and fees |
$ |
15,441 |
$ |
15,737 |
$ |
14,860 |
Net
investment income |
2,594 |
2,716 |
2,842 | |||
Other
revenues |
622 |
1,133 |
1,080 | |||
Realized
investment gains (losses) |
151 |
(238) |
(175) | |||
Total
revenues |
18,808 |
19,348 |
18,607 | |||
Benefits
and expenses |
17,932 |
19,851 |
16,944 | |||
Income
(loss) from continuing
operations before taxes (benefits) |
876 |
(503) |
1,663 | |||
Income
taxes (benefits) |
274 |
(149) |
566 | |||
Income
(loss) from continuing
operations |
602 |
(354) |
1,097 | |||
Income
(loss) from discontinued
operations |
48 |
(1) |
18 | |||
Net
income (loss) |
650 |
(355) |
1,115 | |||
Adjustment
to exclude goodwill
amortization in 2001 |
— |
— |
48 | |||
Net
income (loss) excluding
goodwill amortization |
$ |
650 |
$ |
(355) |
$ |
1,163 |
Realized
investment gains (losses),
net of taxes |
$ |
98 |
$ |
(155) |
$ |
(112) |
SPECIAL
ITEMS |
||||
(In millions) |
Pre-Tax
Benefit
(Charge) |
After-Tax
Benefit
(Charge) | ||
2003 |
||||
Reserve
charge on guaranteed minimum
death benefit contracts (see page 29) |
$ |
(441) |
$ |
(286) |
Health
care provider litigation
(see page 19) |
(57) |
(37) | ||
Reduction
in allowance against amounts
recoverable from pension policyholders
(see page 26) |
51 |
33 | ||
Restructuring
items, net1
(see page 16) |
26 |
17 | ||
Intangible
asset write-off for provider
contracts (see Note 2(J) to the Financial
Statements) |
(16) |
(10) | ||
Gain
on sale of Japan pension
operations (see page 18) |
8 |
5 | ||
Total |
$ |
(429) |
$ |
(278) |
2002 |
||||
Reserve
charge on guaranteed minimum
death benefit contracts |
$ |
(1,108) |
$ |
(720) |
Charge
for Unicover and London
reinsurance matters |
(408) |
(317) | ||
Restructuring
costs, net2 |
(147) |
(95) | ||
Health
care provider litigation |
(77) |
(50) | ||
Accelerated
recognition of deferred gain
on sale of life reinsurance business |
4 |
3 | ||
Reduction
in charges for the events of
September 11, 2001 |
3 |
2 | ||
Total |
$ |
(1,733) |
$ |
(1,177) |
2001 |
||||
Restructuring
costs |
$ |
(96) |
$ |
(62) |
Accelerated
recognition of portion of
deferred gain on sale of life reinsurance
business |
107 |
69 | ||
Gain
on sale of interest in Japanese life
insurance operation |
54 |
35 | ||
Charges
for the events of September 11, 2001 |
(38) |
(25) | ||
Total |
$ |
27 |
$ |
17 |
· |
losses
recognized from futures and forward contracts, compared to gains in the
prior year, in connection with the program to reduce equity market risks
(see Run-off Reinsurance segment on page 29 for further discussion);
and |
· |
lower
premiums and fees in the Health Care segment primarily due to lower
membership. |
· |
gains
on sales of fixed maturities and equity securities compared with losses in
the prior year; |
· |
lower
impairments on equities, fixed maturities and real estate investments; and
|
· |
higher
gains on sales of real estate investments. |
· |
higher
losses on sales of fixed maturities; |
· |
losses
on sales of equity securities compared to gains in 2001;
and |
· |
higher
impairments on equity securities and real estate investments.
|
· |
the
effect of adopting a new accounting standard (see Note 2 to the Financial
Statements); |
· |
charges
related to expense reduction initiatives (see page 16);
and |
· |
effects
of the accounting for the sale of the retirement
business. |
· |
it
requires assumptions to be made that were uncertain at the time the
estimate was made; and |
· |
changes
in the estimate or different estimates that could have been selected could
have a material effect on CIGNA’s consolidated results of operations or
financial condition. |
Balance
Sheet Caption /
Nature
of Critical Estimate Item
|
Assumptions
/ Approach Used |
Effect
if Different Assumptions Used | ||
Future
policy benefits -
Guaranteed
minimum death benefits
Reserves
for these liabilities are estimates of the present value of net amounts
expected to be paid, less the present value of net future premiums
expected to be received. The amounts to be paid represent the excess of
the guaranteed death benefit over the values of annuitants’ accounts. The
death benefits coverage in force at December 31, 2003 (representing the
amount payable if all annuitants had died as of that date) was
approximately $12.9 billion. |
Management
estimates these reserves based on assumptions and other considerations,
including lapse, partial surrender, mortality, interest rates and
volatility. These are based on CIGNA’s experience and future expectations.
CIGNA monitors actual experience to update these reserve estimates as
necessary.
Lapse
refers to the full surrender of an annuity prior to an annuitant’s
death.
Partial
surrender refers to the fact that most annuitants have the ability to
withdraw substantially all of their mutual fund investments while
retaining any available death benefit coverage in effect at the time of
the withdrawal.
Volatility
refers to market volatility that affects the costs of the program adopted
by CIGNA to reduce equity market risks associated with these
liabilities.
CIGNA
completed a review of reserves in 2003 and recognized an after-tax charge
of $286 million ($441 million pre-tax) relating to both actual and
projected future partial surrenders, as well as updates to other
assumptions such as mortality.
In
addition, CIGNA recorded a $720 million after-tax charge ($1.1 billion
pre-tax) in 2002 in connection with stock market declines and
implementation of a risk reduction program for these liabilities.
See
page 30 for further discussion of these charges.
|
If
a 10% unfavorable change were to occur for the following assumptions, the
approximate after-tax decrease in net income would be as
follows:
·
Mortality
- $75 million ·
Volatility
- $55 million ·
Lapse
- $40 million ·
Interest
rates - $30 million ·
Future
partial surrenders - $10 million Management
believes the current assumptions and other considerations used to estimate
reserves for these liabilities are appropriate. However, if actual
experience differs from the assumptions and other considerations
(including lapse, partial surrender, mortality, interest rates and
volatility) used in estimating reserves, the resulting changes could have
a material adverse effect on CIGNA’s consolidated results of operations,
and in certain situations, could have a material adverse effect on CIGNA’s
financial condition.
The
amounts would be reflected in the Run-off Reinsurance
segment. |
Balance
Sheet Caption /
Nature
of Critical Estimate Item
|
Assumptions
/ Approach Used |
Effect
if Different Assumptions Used | ||
Unpaid
claims and claim expenses - Unpaid claims for guaranteed
cost
and minimum premium programs
and retrospectively experience-rated
health care products
Unpaid
claims and related liabilities for these health care products include both
reported claims and estimates for losses incurred but not yet
reported. |
Unpaid
claims and related liabilities for these health care products are
estimated using actuarial models based on historical data for payment
patterns, cost trends, product mix, seasonality, utilization of health
care services and other relevant factors.
Reserves
for these liabilities for the year ended December 31 were as
follows:
·
2003
- $1.9 billion ·
2002
- $1.8 billion ·
2001
- $1.5 billion The
above amounts reflect that portion of unpaid claims and claim expenses
included in CIGNA’s consolidated balance sheets, which are attributable to
these health care operations. It excludes amounts for administrative
services only business.
The
estimation process for determining liabilities for unpaid claims for
health care products inherently results in adjustments each year for
claims incurred (but not paid) in preceding years. During the year ended
December 31, CIGNA’s net income was increased for such adjustments for
prior year claims, as follows (amounts after-tax):
·
2003
- $48 million ·
2002
- $44 million ·
2001
- $36 million |
A
1% increase in the assumed medical cost trend would reduce net income by
approximately $45 million after-tax annually.
This
charge would impact the Health Care segment. | ||
Reinsurance
recoverables -
Reinsurance recoverables in
Run-off Reinsurance
Collectibility
of reinsurance recoverables requires an assessment of risks that such
amounts will not be collected, including risks associated with reinsurer
default and disputes with reinsurers regarding applicable
coverage. |
The
amount of reinsurance recoverables in the Run-off Reinsurance segment, net
of reserves, represents management’s best estimate of recoverability,
including an assessment of the financial strength of reinsurers. The
ultimate amounts received are dependent, in certain cases, on the
resolution of disputes with reinsurers, including the outcome of
arbitration and litigation proceedings.
Net
reinsurance recoverables in the Run-off Reinsurance segment for the year
ended December 31, were as follows:
·
2003
- $621 million ·
2002
- $765 million ·
2001
- $938 million |
A
10% reduction of net reinsurance recoverables at December 31, 2003, would
reduce net income by approximately $50 million after-tax.
This
charge would impact the Run-off Reinsurance
segment. |
Balance
Sheet Caption /
Nature
of Critical Estimate Item
|
Assumptions
/ Approach Used |
Effect
if Different Assumptions Used | ||
Investments
- Fixed maturities
Recognition
of losses from “other than
temporary” impairments of public
and private placement fixed
maturities
Losses
for “other than temporary” impairments of fixed maturities must be
recognized in net income based on an estimate of fair value by
management.
Changes
in fair value are reflected as an increase or decrease in shareholders’
equity. A decrease in fair value is recognized in net income when the
decrease is determined to be “other than temporary.”
Determining
whether a decline in value is “other than temporary” includes an
evaluation of the reasons for and the significance of the decrease in
value of the security as well as the duration of the
decrease.
|
Management
estimates the amount of “other than temporary” impairment when a decline
in value is expected to persist, using quoted market prices for public
securities with active markets and the present value of future cash flows
for private placement bonds. Expected future cash flows are based on
historical experience of the issuer and management’s expectation of future
performance.
CIGNA
recognized "other than temporary" impairments of investments in fixed
maturities as follows (after-tax, excluding policyholder
share*):
·
2003
- $ 73 million ·
2002
- $ 84 million ·
2001
- $120 million See
Note 8(A) to the Financial Statements for a discussion of review of
declines in fair value.
|
For
all fixed maturities with cost in excess of their fair value, the excess
of cost which has not been recognized in net income as of December 31,
2003, was approximately $37 million, after-tax.
For
private placement bonds considered impaired, a decrease of 10% of all
expected future cash flows for the impaired bonds would reduce net income
by approximately $7 million after-tax.
|
· |
Investment
securities are attributable to CIGNA’s various business segments; amounts
noted are presented from a consolidated perspective and are net of
experience-rated pension policyholder share (i.e., these amounts exclude
the impact of losses in 2003, 2002 and 2001 on investment assets related
to experience-rated pension policyholder contracts because these amounts
generally accrue to the policyholders). As of October 1, 2003, investment
assets related to experience-rated pension policyholder contracts were
reclassified from fixed maturities to “Securities supporting
experience-rated pension policyholder contracts” on CIGNA's balance sheet
and CIGNA no longer recognizes other than temporary impairments because
changes in the fair values of these securities are reported in net income
in each period. See Note 8(B) to the Financial Statements for additional
discussion |
Severance |
|||||||
(Dollars
in millions) |
No.
of
Employees |
Cost |
Real
Estate |
Remaining
Liability | |||
Fourth
quarter 2002
charge |
3,890 |
$ |
116 |
$ |
38 |
$ |
154 |
Fourth
quarter 2002
activity: |
|||||||
Employees |
(713) |
(4) |
(4) | ||||
Lease
costs |
— |
— | |||||
Asset
write-downs |
(4) |
(4) | |||||
Balance
as of
December 31, 2002 |
3,177 |
112 |
34 |
146 | |||
2003 activity: |
|||||||
Employees |
(2,414) |
(75) |
(75) | ||||
Lease
costs |
(9) |
(9) | |||||
Reduction of
remaining balance |
(708)* |
(22) |
(1) |
(23) | |||
Balance
as of
December 31, 2003 |
55 |
$ |
15 |
$ |
24 |
$ |
39 |
Severance |
|||||||
(Dollars
in millions) |
No.
of
Employees |
Cost |
Real
Estate |
Remaining
Liability | |||
Fourth
quarter 2001
charge |
3,100 |
$ |
48 |
$ |
48 |
$ |
96 |
Fourth
quarter 2001
activity: |
|||||||
Employees |
(436) |
(5) |
(5) | ||||
Lease
costs |
(1) |
(1) | |||||
Asset
write-downs |
(11) |
(11) | |||||
Balance
as of
December 31, 2001 |
2,664 |
43 |
36 |
79 | |||
2002
activity: |
|||||||
Employees |
(2,366) |
(36) |
(36) | ||||
Lease
costs |
(2) |
(2) | |||||
Adjustment of
remaining balance |
(143) |
7 |
(11) |
(4) | |||
Balance
as of
December 31, 2002 |
155 |
14 |
23 |
37 | |||
2003
activity: |
|||||||
Employees |
(155) |
(14) |
(14) | ||||
Lease
costs |
(7) |
(7) | |||||
Reduction of
remaining balance |
— |
— |
(5) |
(5) | |||
Balance
as of
December 31, 2003 |
— |
$ |
— |
$ |
11 |
$ |
11 |
· |
additional
mandated benefits or services that increase costs without improving the
quality of care; |
· |
narrowing
of ERISA preemption of state laws; |
· |
changes
in ERISA regulations resulting in increased administrative burdens and
costs; |
· |
additional
restrictions on the use of prescription drug formularies;
|
· |
additional
privacy legislation and regulations that interfere with the proper use of
medical information for research, coordination of medical care and disease
management; |
· |
additional
rules establishing the time periods for payment of health care provider
claims that vary from state to state; and |
· |
legislation
that would exempt independent physicians from antitrust
laws. |
(In millions) |
||||||
Financial
Summary |
2003 |
|
2002 |
|
2001 | |
Premiums
and fees |
$ |
12,265 |
$ |
12,624 |
$ |
11,578 |
Net
investment income |
283 |
298 |
335 | |||
Other
revenues |
1,145 |
924 |
685 | |||
Segment
revenues |
13,693 |
13,846 |
12,598 | |||
Benefits
and expenses |
13,012 |
13,146 |
11,546 | |||
Income
before taxes |
681 |
700 |
1,052 | |||
Income
taxes |
234 |
245 |
381 | |||
Segment
earnings |
447 |
455 |
671 | |||
Adjustment
to exclude goodwill
amortization in 2001 |
— |
— |
48 | |||
Segment
earnings, excluding
goodwill amortization |
$ |
447 |
$ |
455 |
$ |
719 |
Realized
investment gains
(losses), net of taxes |
$ |
44 |
$ |
(34) |
$ |
(54) |
Special
items (after-tax) included
in segment earnings: |
||||||
Restructuring,
net |
$ |
26 |
$ |
(95) |
$ |
(59) |
Health
care provider litigation |
$ |
(37) |
$ |
(50) |
$ |
— |
Intangible
asset write-off for
provider contracts |
$ |
(10) |
$ |
— |
$ |
— |
Charges
for the events of
September 11, 2001 |
$ |
— |
$ |
— |
$ |
(5) |
(In millions) |
2003 |
2002 |
2001 | |||
HMO
operations |
$ |
422 |
$ |
365 |
$ |
428 |
Indemnity
operations |
25 |
90 |
291 | |||
Total |
$ |
447 |
$ |
455 |
$ |
719 |
Total
special items (after-tax)
for HMO and Indemnity
operations: |
||||||
HMO
operations |
$ |
(14) |
$ |
(90) |
$ |
(39) |
Indemnity
operations |
$ |
(7) |
$ |
(55) |
$ |
(25) |
· |
significantly
lower earnings in HMO Administrative Services Only (ASO) programs,
primarily resulting from higher operating expenses for customer service
initiatives; and |
· |
to a
lesser extent, lower Medicare earnings. |
· |
significantly
improved results in the specialty health care operations primarily due to
business growth; and |
· |
increased
earnings in the guaranteed cost HMO business reflecting rate
increases. |
· |
lower
membership and higher operating expenses per member in indemnity ASO
programs; |
· |
higher
payments under performance guarantees resulting from the service
disruptions discussed above; and |
· |
lower
results in the guaranteed cost business primarily reflecting higher unit
medical costs. |
· |
significantly
lower earnings in the experience-rated and guaranteed cost health care
businesses primarily due to lower margins on new business, poor
performance of certain large new accounts and margin deterioration on
renewal business; and |
· |
higher
expenses for the indemnity health care business primarily due to
technology and customer service
initiatives. |
(In millions) |
2003 |
2002 |
2001 | |||
HMO |
6.0 |
6.7 |
6.8 | |||
Indemnity
(estimated) |
5.5 |
6.3 |
6.4 |
2003 |
2002 |
2001 | |
HMO
medical and dental |
54% |
55% |
54% |
Medical
indemnity and PPO |
37% |
36% |
34% |
Life
and other insurance coverages |
5% |
5% |
7% |
Dental
indemnity and PPO |
4% |
4% |
5% |
· |
lowering
medical cost trends; |
· |
continuing
to deliver quality service; |
· |
lowering
administrative expenses; and |
· |
stabilizing
and growing membership. |
· |
sustaining
service and medical cost management
improvements; |
· |
communicating
those improvements to customers, key producers and benefit
consultants; |
· |
enhancing
product offerings; |
· |
demonstrating
the value of CIGNA's medical management and specialty health care
capabilities; and |
· |
improving
the capabilities of the health care sales
force. |
(In millions) |
||||||
Financial
Summary |
2003 |
2002 |
2001 | |||
Premiums
and fees |
$ |
1,807 |
$ |
1,712 |
$ |
1,881 |
Net
investment income |
250 |
260 |
264 | |||
Other
revenues |
— |
1 |
1 | |||
Segment
revenues |
2,057 |
1,973 |
2,146 | |||
Benefits
and expenses |
1,876 |
1,808 |
2,078 | |||
Income
before taxes |
181 |
165 |
68 | |||
Income
taxes |
44 |
41 |
9 | |||
Segment
earnings |
$ |
137 |
$ |
124 |
$ |
59 |
Realized
investment gains
(losses), net of taxes |
$ |
39 |
$ |
(50) |
$ |
5 |
Special
items (after-tax) included
in segment earnings: |
||||||
Charges
for the events of
September 11, 2001 |
$ |
— |
$ |
— |
$ |
(15) |
Restructuring
charge |
$ |
— |
$ |
— |
$ |
(3) |
(In millions) |
||||||
Financial
Summary |
2003 |
2002 |
2001 | |||
Premiums
and fees |
$ |
340 |
$ |
336 |
$ |
322 |
Net
investment income |
1,574 |
1,649 |
1,668 | |||
Other
revenues |
(126) |
— |
— | |||
Segment
revenues |
1,788 |
1,985 |
1,990 | |||
Benefits
and expenses |
1,411 |
1,658 |
1,681 | |||
Income
before taxes |
377 |
327 |
309 | |||
Income
taxes |
117 |
96 |
88 | |||
Segment
earnings |
$ |
260 |
$ |
231 |
$ |
221 |
Realized
investment gains
(losses), net of taxes |
$ |
29 |
$ |
(68) |
$ |
(61) |
Special
items (after-tax)
included in segment earnings: |
||||||
Reduction
in allowance against
amounts recoverable from
pension policyholders |
$ |
33 |
$ |
— |
$ |
— |
Charges
for the events of
September 11, 2001 |
$ |
— |
$ |
— |
$ |
(3) |
(In millions) |
2003 |
2002 | ||
Balance—January
1 |
$ |
53,757 |
$ |
55,306 |
Premiums
and deposits |
7,342 |
8,797 | ||
Investment
income |
2,433 |
2,519 | ||
Increase
(decrease) in fair value
of assets |
4,922 |
(4,207) | ||
Customer
withdrawals |
(4,007) |
(3,595) | ||
Other,
including participant
withdrawals and benefit
payments |
(6,900) |
(5,063) | ||
Balance—December 31 |
$ |
57,547 |
$ |
53,757 |
(In
millions) |
||||||
Financial
Summary |
2003 |
2002 |
2001 | |||
Premiums
and fees |
$ |
855 |
$ |
811 |
$ |
788 |
Net
investment income |
49 |
51 |
49 | |||
Other
revenues |
11 |
3 |
148 | |||
Segment
revenues |
915 |
865 |
985 | |||
Benefits
and expenses |
830 |
816 |
838 | |||
Income
before taxes |
85 |
49 |
147 | |||
Income
taxes |
30 |
18 |
52 | |||
Segment
earnings |
$ |
55 |
$ |
31 |
$ |
95 |
Realized
investment gains
(losses), net of taxes |
$ |
5 |
$ |
4 |
$ |
(3) |
Special
items (after-tax)
included in segment earnings: |
||||||
Gain
on sale of Japanese
pension operations |
$ |
5 |
$ |
— |
$ |
— |
Gain
on sale of interest in
Japanese life insurance
operation |
$ |
— |
$ |
— |
$ |
35 |
· |
premium
and fee growth in the expatriate employee benefit business;
and |
· |
the
positive impact of the divestiture of under-performing
businesses. |
· |
improved
results for the expatriate employee benefit business;
|
· |
improved
results in the life, accident and health operations (primarily in Asia);
and |
· |
lower
health care losses in 2002. |
· |
higher
premiums and fees for the expatriate employee benefit business due to rate
increases and membership growth; and |
· |
sales
growth primarily in the life, accident and health operations in
Asia. |
· |
higher
premiums and fees for health care and other expatriate benefit products;
and |
· |
growth
in the life, accident and health operations in
Asia. |
(In
millions) |
||||||
Financial
Summary |
2003 |
2002 |
2001 | |||
Premiums
and fees |
$ |
84 |
$ |
138 |
$ |
148 |
Net
investment income |
82 |
44 |
52 | |||
Other
revenues |
(551) |
91 |
120 | |||
Segment
revenues |
(385) |
273 |
320 | |||
Benefits
and expenses |
155 |
1,831 |
232 | |||
Income
(loss) before taxes
(benefits) |
(540) |
(1,558) |
88 | |||
Income
taxes (benefits) |
(181) |
(488) |
31 | |||
Segment
earnings (loss) |
$ |
(359) |
$ |
(1,070) |
$ |
57 |
Realized
investment gains
(losses), net of taxes |
$ |
13 |
$ |
(6) |
$ |
(9) |
Special
items (after-tax) included
in segment earnings: |
||||||
Reserve
charge on guaranteed
minimum death benefit
contracts |
$ |
(286) |
$ |
(720) |
$ |
— |
Charge
for Unicover and
London reinsurance matters |
$ |
— |
$ |
(317) |
$ |
— |
Accelerated
recognition of
deferred gain on sale of life
reinsurance business |
$ |
— |
$ |
3 |
$ |
69 |
(Charges)
reduction for the
events of September 11,
2001 |
$ |
— |
$ |
2 |
$ |
(2) |
· |
increases
in reserves for disputed contracts; |
· |
higher
losses in the personal accident business;
and |
· |
higher
losses in the workers’ compensation
business. |
· |
lower
amortization of the deferred gain on the sale of the life reinsurance
business; |
· |
reserve
strengthening associated with the workers’ compensation reinsurance
business; and |
· |
a
decline in premiums and net investment income.
|
· |
$620
million after-tax, principally reflecting the reduction in assumed future
equity market returns as a result of implementing the program and, to a
lesser extent, changes to the policy lapse, mortality, market volatility
and interest rate assumptions used in estimating the liabilities for these
contracts; and |
· |
$100
million after-tax reflecting deterioration in equity markets that occurred
in the third quarter of 2002 (prior to implementation of the
program). |
(In millions) |
||||||
Financial
Summary |
2003 |
2002 |
2001 | |||
Premiums
and fees |
$ |
90 |
$ |
116 |
$ |
143 |
Net
investment income |
356 |
409 |
450 | |||
Other
revenues |
216 |
177 |
190 | |||
Segment
revenues |
662 |
702 |
783 | |||
Benefits
and expenses |
547 |
591 |
674 | |||
Income
before taxes |
115 |
111 |
109 | |||
Income
taxes |
42 |
37 |
33 | |||
Segment
earnings |
$ |
73 |
$ |
74 |
$ |
76 |
Realized
investment gains
(losses), net of taxes |
$ |
(32) |
$ |
(1) |
$ |
10 |
· |
deferred
gains recognized from the 1998 sale of the individual life insurance and
annuity business; |
· |
corporate
life insurance on which policy loans are outstanding (leveraged corporate
life insurance); |
· |
settlement
annuity business; and |
· |
certain
investment management services. |
· |
a
favorable adjustment to the gain recognized from the sale of the
individual life insurance and annuity business as a result of an account
review; and |
· |
improved
results from investment management
services. |
(In millions) |
||||||
Financial
Summary |
2003 |
2002 |
2001 | |||
|
(As
Restated, See Note 16) | |||||
Segment
loss |
$ |
(109) |
$ |
(44) |
$ |
30 |
Special
items (after-tax)
included in segment loss: |
||||||
Restructuring
charge |
$ |
(9) |
$ |
— |
$ |
— |
(In millions) |
||||||
Financial
Summary |
2003 |
2002 |
2001 | |||
Revenues |
$ |
— |
$ |
567 |
$ |
508 |
Income
(loss) before income
taxes (benefits) |
$ |
(3) |
$ |
1 |
$ |
28 |
Income
taxes (benefits) |
(1) |
2 |
10 | |||
Income
(loss) from operations |
(2) |
(1) |
18 | |||
Gains
on sales, net of taxes of
$25 |
50 |
— |
— | |||
Income
(loss) from discontinued operations |
$ |
48 |
$ |
(1) |
$ |
18 |
· |
$32
million related to Lovelace (see page 19); and
|
· |
$18
million related to the Brazilian health care operations (see page
19). |
(In millions) |
||||||
Financial
Summary |
2003 |
2002 |
2001 | |||
|
(As
Restated, See Note 16) | |||||
Short-term
investments |
$ |
147 |
$ |
86 |
$ |
137 |
Cash
and cash equivalents |
$ |
1,392 |
$ |
1,575 |
$ |
1,918 |
Short-term
debt |
$ |
— |
$ |
130 |
$ |
49 |
Long-term
debt |
$ |
1,500 |
$ |
1,500 |
$ |
1,626 |
Shareholders’
equity |
$ |
4,558 |
$ |
3,897 |
$ |
5,119 |
· |
maintaining
appropriate levels of liquidity in its investment
portfolio; |
· |
using
cash flows from operating activities; and |
· |
matching
investment maturities to the estimated duration of the related insurance
and contractholder liabilities. |
(In millions) |
2003 |
2002 |
2001 | |||
Operating
activities |
$ |
2,308 |
$ |
1,378 |
$ |
1,063 |
Investing
activities |
$ |
(796) |
$ |
(1,486) |
$ |
(2,011) |
Financing
activities |
$ |
(1,695) |
$ |
(235) |
$ |
671 |
· |
Net
proceeds from sales and maturities of securities supporting
experience-rated pension policyholder contracts of $867 million. Such
proceeds were used to fund most of the withdrawals from contractholder
deposit funds discussed below under
financing; |
· |
Tax
refunds of $245 million in 2003, compared with tax and related payments of
approximately $275 million in 2002. The tax refunds in 2003 related to
loss carrybacks. Current tax liability increased in 2003 for which cash
has not been disbursed; and |
· |
Lower
claim payments and amounts credited to policyholders of approximately $200
million, primarily in the reinsurance, retirement, and leveraged corporate
life insurance businesses. |
· |
Lower
cash revenues of approximately $600 million, resulting primarily from
losses of $550 million associated with futures and forward contracts
entered into as part of CIGNA's program to manage equity risks in the
Run-off Reinsurance segment compared with gains of $87 million in 2002;
and |
· |
Higher
paid expenses of approximately $40 million reflecting higher payments in
2003 for expenses associated with restructuring charges.
|
· |
Net
purchases of investments of $920 million, reflecting the investment of
cash flows from operating activities; |
· |
Net
purchases of property and equipment of $107 million, which are
significantly lower than prior year due to less spending on technology and
customer service initiatives in the health care business;
and |
· |
Proceeds
on the sale of businesses of $231 million, which primarily consists of
Lovelace and the Japanese pension
operations. |
· |
Net
withdrawals from contractholder deposit funds of $1.4 billion, reflecting
persistency losses in the retirement business resulting from ratings
downgrades, the uncertainty of an impending sale and higher business
failures among customers; |
· |
Dividends
on common stock of $185 million, reflecting dividends per share of $1.32;
and |
· |
Repayment
of debt of $130 million, reflecting scheduled maturities of debt. CIGNA
does not have any scheduled debt maturities until
2006. |
· |
The
increase in cash flows from operating activities in 2002 primarily
reflects higher cash revenues of approximately $1 billion (due to price
increases and growth in the Health Care segment). This increase was
partially offset by: |
- |
Higher
cash expenses of approximately $470 million (primarily in the Health Care
segment) reflecting customer service and technology initiatives, growth in
the specialty lines of business as well as 2002 cash spending of
approximately $40 million for the 2001 restructuring
charge; |
- |
Higher
tax payments of approximately $100 million, primarily due to taxes paid in
2002 for the 2001 gain on sale of interest in the Japanese life insurance
operation; |
- |
Higher
paid claims of approximately $90 million due to medical cost inflation,
partially offset by membership declines, the absence of Medicare claim
payments that had been made in 2001 due to the exit of certain Medicare
markets and the timing of payment of claims;
and |
- |
Lower
collections of net investment income of approximately $30 million due to
declining yields and the continued run-off of the leveraged corporate life
insurance business. |
· |
Cash
used in investing activities consisted of net purchases of investments of
approximately $1.1 billion and net purchases of property and equipment of
$303 million. |
· |
Cash
used in financing activities consisted primarily of payments of dividends
on and repurchases of common stock ($540 million), partially offset by net
deposits to contractholder deposit funds ($282
million). |
· |
provide
any funding to subsidiaries needed to support growth and maintain or
improve their financial strength ratings; |
· |
provide
for the capital requirements of its
subsidiaries; |
· |
meet
debt service requirements and pay dividends to CIGNA shareholders;
|
· |
satisfy
pension plan funding requirements; and |
· |
fund
CIGNA's program to reduce the equity market risks associated with
guaranteed minimum death benefit contracts. |
· |
management
uses cash for investment opportunities; |
· |
a
substantial insurance or contractholder liability becomes due before
related investment assets mature; or |
· |
regulatory
restrictions prevent the insurance and HMO subsidiaries from distributing
cash. |
CG
Life Insurance
Ratings |
CIGNA
Corporation
Debt
Ratings | ||
Senior
Debt |
Commercial
Paper | ||
A.M.
Best |
A- |
— |
— |
Moody’s |
A3 |
Baa3 |
P3 |
S&P |
A |
BBB |
A2 |
Fitch |
A+ |
BBB+ |
F2 |
· |
CIGNA
guarantees that separate account assets will be sufficient to pay certain
retiree or life benefits. The sponsoring employers are primarily
responsible for ensuring that assets are sufficient to pay these benefits
and are required to maintain assets that exceed a certain percentage of
benefit obligations. This percentage varies depending on the asset class
within a sponsoring employer’s portfolio (for example, a bond fund would
require a lower percentage than a riskier equity fund) and thus will vary
as the composition of the portfolio changes. If employers do not maintain
the required levels of separate account assets, CIGNA has the right to
redirect the management of the related assets to provide for benefit
payments. As of December 31, 2003, employers maintained assets that
exceeded 102% to 132% of benefit obligations. Benefit obligations under
these arrangements were $3.5 billion as of December 31, 2003, and $3.3
billion as of December 31, 2002. There were no additional liabilities
required for these guarantees as of December 31, 2003 or
2002. |
· |
For
certain employer-sponsored savings and retirement plans, CIGNA guarantees
that participants will receive the value of their accounts at the time of
withdrawal. These guarantees could require payment by CIGNA in the event
that a significant number of plan participants withdraw their accounts
when the market value of the related separate account assets is less than
the plan participant account values at the time of withdrawal. Participant
account values under these arrangements are invested primarily in fixed
income investments and were $2.0 billion as of December 31, 2003, and $1.7
billion as of December 31, 2002. There were no additional liabilities
required for these guarantees as of December 31, 2003 or
2002. |
· |
CIGNA
guarantees a minimum level of earnings (based on investment, mortality and
retirement experience) for a certain group annuity contract. If the actual
investment return is less than the minimum guaranteed level, CIGNA is
required to fund the difference. The guaranteed benefit obligation was
$304 million as of December 31, 2003, and $313 million as of December 31,
2002. CIGNA had additional liabilities for this guarantee of $15 million
as of December 31, 2003 and 2002. |
· |
No
annuitants surrendered their accounts; and |
· |
All
annuitants lived to elect their benefit;
and |
· |
All
annuitants elected to receive their benefit on the first available date
(beginning in 2004 through 2014); and |
· |
All
underlying mutual fund investment values remained at the December 31,
2003, value of $3.3 billion, with no future
returns. |
(In
millions) |
Total |
|
Less
than
1
year |
|
1-3
years |
|
4-5
years |
|
After
5
years | |
On-Balance
Sheet: |
||||||||||
Long-term
debt |
$ |
1,500 |
$ |
— |
$ |
100 |
$ |
400 |
$ |
1,000 |
Other
long-term
liabilities |
881 |
653 |
166 |
41 |
21 | |||||
Off-Balance
Sheet: |
||||||||||
Purchase
obligations |
613 |
516 |
96 |
1 |
—
| |||||
Operating
leases |
559 |
134 |
211 |
106 |
108 | |||||
Total
|
$ |
3,553 |
$ |
1,303 |
$ |
573 |
$ |
548 |
$ |
1,129 |
· |
Other
long-term liabilities.
These items are presented in accounts payable, accrued expenses and other
liabilities in CIGNA's consolidated balance sheet. This table includes
approximately $325 million of nondiscretionary pension contributions and
$98 million of estimated benefit payments expected in 2004 for pension and
other postretirement benefit plans. This amount of nondiscretionary
pension contributions assumes that current minimum funding requirements
continue unchanged. If Congressional discussions currently underway are
finalized and provide rate relief similar to minimum funding requirements
used in 2003, nondiscretionary pension contributions expected to be made
in 2004 would
approximate $175 million. CIGNA expects to make additional benefit plan
payments subsequent to 2004, however these amounts have been excluded from
the table as the timing of such payments is based on plan assumptions
which may materially differ from actual plan activities (see Note 15 to
the Financial Statements for further information on pension and other
postretirement benefit obligations). This table also includes estimated
payments for deferred and supplemental compensation plans, interest rate,
foreign currency and forward swap contracts and certain reinsurance
liabilities. |
· |
Purchase
obligations.
These items include estimated payments required under contractual
arrangements for future services and investment commitments. As of
December 31, 2003, CIGNA had commitments to purchase the following
investments: |
Fixed
maturities |
$ |
20
million |
Securities
supporting experience-rated
pension policyholder contracts |
$ |
35
million |
Mortgage
loans |
$ |
324
million |
Real
estate joint ventures and security
partnerships
(other long-term investments) |
$ |
135
million |
· |
Operating
leases. For
additional information, see Note 19 to the Financial
Statements. |
2003 |
2002 | |
Fixed
maturities |
— |
48% |
Securities
supporting experience-
rated pension policyholder
contracts |
100% |
— |
Mortgage
loans |
54% |
56% |
Real
estate |
46% |
54% |
Other
long-term investments |
24% |
46% |
(In millions) |
2003 |
2002 | ||
Federal
government and agency |
$ |
990 |
$ |
1,197 |
State
and local government |
2,390 |
1,761 | ||
Foreign
government |
884 |
825 | ||
Corporate
|
19,297 |
17,796 | ||
Federal
agency mortgage-backed |
847 |
1,669 | ||
Other
mortgage-backed |
2,000 |
2,265 | ||
Other
asset-backed |
1,935 |
2,290 | ||
Total |
$ |
28,343 |
$ |
27,803 |
(In millions) |
2003 |
2002 | ||
Problem
bonds |
$ |
132 |
$ |
182 |
Potential
problem bonds |
$ |
161 |
$ |
243 |
Problem
mortgage loans |
$ |
24 |
$ |
48 |
Potential
problem mortgage loans |
$ |
335 |
$ |
191 |
(In millions) |
2003 |
2002 | ||
Real
estate held for sale |
$ |
— |
$ |
47 |
Less
cumulative write-downs |
— |
8 | ||
Less
valuation reserves |
— |
21 | ||
— |
18 | |||
Real
estate held and used |
248 |
303 | ||
Less
cumulative write-downs |
102 |
68 | ||
146 |
235 | |||
Investment
real estate |
$ |
146 |
$ |
253 |
(In millions) |
2003 |
2002 |
2001 | |||
CIGNA |
$ |
103 |
$ |
150 |
$ |
139 |
Policyholder
contracts |
$ |
61 |
$ |
199 |
$ |
78 |
· |
Interest-rate
risk on
fixed-rate, domestic, medium-term instruments. Changes in market interest
rates affect the value of instruments that promise a fixed
return. |
· |
Foreign
currency exchange rate risk of
the U.S. dollar to the British pound, South Korean won, Hong Kong dollar,
Taiwan dollar, Chilean peso, Canadian dollar and New Zealand dollar. An
unfavorable change in exchange rates reduces the carrying value of net
assets denominated in foreign currencies. |
· |
Equity
price risk for
stocks and for specialty life reinsurance contracts that guarantee minimum
death or income benefits resulting from unfavorable changes in variable
annuity account values based on underlying mutual fund
investments. At
December 31, 2003, CIGNA’s investment in domestic equity securities (which
primarily consists of various mutual fund investments including large cap
global and balanced funds) was $68 million. At December 31, 2002
CIGNA's investment in domestic equity securities (which were primarily
managed to mirror the S&P 500) was $261 million. CIGNA held $10
million in international equities at December 31, 2003, and
$34 million at December 31, 2002. Substantially all of CIGNA’s
international equities were issued by entities based in developed
countries. |
· |
Investment/liability
matching. CIGNA
generally selects investment assets with characteristics (such as
duration, yield, currency and liquidity) that correspond to the underlying
characteristics of its related insurance and contractholder liabilities so
that CIGNA can match the investments to its obligations. Shorter-term
investments support generally shorter-term life and health liabilities.
Medium-term, fixed-rate investments support interest-sensitive,
experience-rated and health liabilities. Longer-term investments generally
support longer-term, fully guaranteed products like annuities and
longer-term life and health (principally long-term disability)
liabilities. |
· |
Use
of local currencies for foreign operations. CIGNA
generally conducts its international business through foreign operating
entities that maintain assets and liabilities in local currencies. This
substantially limits exchange rate risk to net assets denominated in
foreign currencies. |
· |
Use
of derivatives. CIGNA
generally uses derivative financial instruments to minimize certain market
risks. |
Market
scenario for certain
noninsurance
financial instruments |
Loss
in fair value | |||
(In
millions) |
2003 |
2002 | ||
100
basis point increase in interest rates |
$ |
1,280 |
$ |
1,110
|
10%
strengthening in U.S. dollar to
foreign currencies |
$ |
100 |
$ |
90 |
10%
decrease in market prices for
equity exposures |
$ |
30 |
$ |
50 |
· |
risks
and exposures associated with guaranteed minimum death benefit or income
benefit contracts (see page 30); |
· |
earnings
for the retirement business because changes in assets under management
affect asset-based fees (see page 26); and |
· |
minimum
pension liabilities since equity securities comprise a significant portion
of the assets of CIGNA’s employee pension
plans. |
1. |
increases
in medical costs that are higher than anticipated in establishing premium
rates in CIGNA’s health care operations, including increased use and costs
of medical services; |
2. |
increased
medical, administrative, technology or other costs resulting from
legislative and regulatory challenges to, and new regulatory requirements
imposed on, CIGNA’s health care business (see Health care regulation on
page 19 for more information); |
3. |
challenges
and risks associated with implementing the planned improvement initiatives
in the health care operations, the organizational realignment and the
reduction of overall CIGNA and health care cost structure, including that
operational efficiencies and medical cost benefits do not emerge as
expected; |
4. |
risks
associated with completing the sale of CIGNA's retirement benefits
business, final terms and timing of the sale and the amount of the gain;
|
5. |
risks
associated with pending and potential state and federal health care class
action lawsuits, purported securities class action lawsuits, disputes
regarding reinsurance arrangements, other litigation challenging CIGNA’s
businesses and the outcome of pending government
proceedings; |
6. |
heightened
competition, particularly price competition, which could reduce product
margins and constrain growth in CIGNA’s
businesses; |
7. |
significantly
greater than expected reductions in medical
membership; |
8. |
significant
changes in interest rates; |
9. |
downgrades
in the financial strength ratings of CIGNA’s insurance subsidiaries, which
could, among other things, adversely affect new sales and retention of
current business and the sale price of the retirement
business; |
10. |
limitations
on the ability of CIGNA's insurance subsidiaries to dividend capital to
the parent company as a result of downgrades in the subsidiaries’
financial strength ratings, changes in statutory reserve or capital
requirements or other financial
constraints; |
11. |
inability
of the program adopted by CIGNA to substantially reduce equity market
risks for reinsurance contracts that guarantee minimum death benefits
under certain variable annuities (including possible market difficulties
in entering into appropriate futures and forwards contracts and in
matching such contracts to the underlying equity
risk); |
12. |
adjustments
to the reserve assumptions and other considerations (including lapse,
partial surrender, mortality, interest rates and volatility) used in
estimating CIGNA's liabilities for reinsurance contracts that guarantee
minimum death benefits under certain variable
annuities; |
13. |
adjustments
to the assumptions used in estimating CIGNA’s assets and liabilities for
reinsurance contracts that guarantee minimum income benefits under certain
variable annuities; |
14. |
significant
stock market declines, which could, among other things, reduce results in
CIGNA's retirement business and result in increased pension expenses in
CIGNA’s pension plan in future periods and the recognition of additional
pension obligations; |
15. |
unfavorable
claims experience related to workers’ compensation and personal accident
exposures of the run-off reinsurance business, including losses
attributable to the inability to recover claims from
retrocessionaires; |
16. |
significant
deterioration in economic conditions, which could have an adverse effect
on CIGNA’s operations and investments; and |
17. |
changes
in federal income tax laws. |