Voluntary Filer
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
________________
(Mark
One)
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2005
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OR
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[
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from ______________ to
______________
Commission
file number 1-8323
CIGNA
Corporation
(Exact
name of registrant as specified in its charter)
________________
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Delaware
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06-1059331
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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Two
Liberty Place, Philadelphia, Pennsylvania
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19192
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code (215) 761-1000
________________
Securities
registered pursuant to section 12(b) of the Act:
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Name
of each exchange on
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Title
of each class
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which
registered
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Common
Stock, Par Value $0.25;
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New
York Stock Exchange, Inc.
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Preferred
Stock
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Pacific
Exchange, Inc.
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Purchase
Rights
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Philadelphia
Stock Exchange, Inc.
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Securities
registered pursuant to section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes X
No __.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes __ No X.
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. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer [X] Accelerated
filer [ ] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes _ No X.
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2005, was approximately $13.4 billion.
As
of
January 31, 2006, 121,068,516 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, 2005.
Part III of this Form 10-K incorporates by reference information from the
registrant’s proxy statement to be dated on or about March 24, 2006.
TABLE
OF CONTENTS
Page
PART
I
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PART II
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It
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PART
III
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PART
IV
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PART
I
CIGNA
Corporation had consolidated shareholders’ equity of $5.4 billion and assets of
$44.9 billion as of December 31, 2005, and revenues of $16.7 billion for the
year then ended. CIGNA Corporation and its subsidiaries constitute one of the
largest investor-owned health care and related benefits organizations in the
United States. Its subsidiaries are major providers of health care and related
benefits offered through the workplace, including health care products and
services, and group disability, life and accident insurance, and disability
and
workers’ compensation case management and related services. CIGNA’s major
insurance subsidiary, Connecticut General Life Insurance Company (“CG Life”),
traces its origins to 1865. CIGNA Corporation was incorporated in the State
of
Delaware in 1981.
As
used
in this document, “CIGNA” and the “Company” may refer to CIGNA Corporation
itself, one or more of its subsidiaries, or CIGNA Corporation and its
consolidated subsidiaries. CIGNA Corporation is a holding company and is not
an
insurance company. Its subsidiaries conduct various businesses, which are
described in this document.
CIGNA’s
revenues are derived principally from premiums, fees, other revenues and
investment income. The financial results of CIGNA’s businesses are reported in
the following segments, as shown:
| · |
Disability
and Life Segment
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| · |
Run-off
Reinsurance Segment
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| · |
Run-off
Retirement consists of:
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| · |
gain
recognition from the 2004 sale of the retirement benefits
business;
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| · |
net
results of modified coinsurance
arrangements;
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| · |
expenses
associated with the run-off of the business;
and
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| · |
results
of the retirement benefits business prior to the sale of the business
on
April 1, 2004.
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| · |
Other
Operations consists of:
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| · |
deferred
gains recognized from the 1998 sale of the individual life insurance
and
annuity business;
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| · |
corporate
life insurance (including policies on which loans are
outstanding);
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| · |
settlement
annuity business; and
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| · |
certain
investment management services (a significant portion of which were
sold
in 2004).
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Investment
results produced by CIGNA Investments on behalf of CIGNA’s insurance operations
are reported in each segment.
Available
Information
CIGNA’s
Internet address is http://www.cigna.com. CIGNA’s annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to those reports are available through CIGNA’s website as soon as reasonably
practicable after the filing or furnishing of such material with the Securities
and Exchange Commission. See “Code of Ethics and Other
Corporate Governance Disclosures” in Part III, Item 10 of this Form 10-K
regarding additional available information.
Financial
information in the tables that follow is presented in conformity with accounting
principles generally accepted in the United States of America (“GAAP”), unless
otherwise indicated. Certain reclassifications have been made to prior years’
financial information to conform to the 2005 presentation. Industry rankings
and
percentages set forth below are for the year ended December 31, 2004, 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.
Financial
data for each of CIGNA’s business segments is set forth in Note 19 to the
Financial Statements included in CIGNA’s 2005 Annual Report.
CIGNA’s
Health Care operations offer insured and self-funded medical, dental, behavioral
health, prescription drug and other products and services that integrate to
support the delivery of consumerism and health advocacy solutions. These
operations also provide disability and life insurance products which were
historically sold in connection with certain experience-rated medical products
and continue to be managed by CIGNA’s health care business. These
products and services are provided by subsidiaries of CIGNA
Corporation.
Industry
and Strategic Overview
CIGNA
believes that the health care business model is evolving to one that focuses
more directly on the health care consumer. Consumerism is designed
to help individuals be better consumers of health care by providing them the
information, support tools, health advocacy and incentives to make more
efficient and better informed health care decisions. CIGNA believes that
engaging consumers more closely in health care decisions can result in improved
health care outcomes and take unnecessary costs out of the system.
Consumerism
represents a transition from a cost-based business model to a value-based model,
under which CIGNA seeks to provide transparency about provider quality and
cost,
customer support tools and services, and health advocacy support, to assist
consumers in making decisions regarding their health care.
CIGNA
has
developed products, educational resources and customer support tools for
consumers and initial capabilities to
improve the quality and transparency of information to employers about the
health needs of their plan participants, intended ultimately, to assist
consumers in making more informed choices regarding their health care and
achieve better health outcomes.
The
shift in the business model toward consumerism is in the early stages, and
CIGNA
believes that its capabilities in consumerism, health advocacy and the ability
to provide useful information to consumers and employers position CIGNA to
meet
the emerging trend.
CIGNA
continually evaluates acquisitions and other transactions that present
opportunities to enhance its product capabilities and provide a basis for lower
medical costs. As part of that strategy, in 2005 CIGNA:
| · |
acquired
Choicelinx®, a consumer focused benefits and services company to further
strengthen its capabilities in consumerism and health
advocacy;
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·
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acquired
Managed Care Consultants to strengthen its provider network in
Nevada;
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| · |
formed
marketing affiliations with Health Alliance Plan in Michigan and
Tufts
Health Plan in Massachusetts and Rhode Island, designed to offer
national
products in these and other states;
and
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| · |
formed
a strategic alliance with NationsHealth, Inc. to actively market
CIGNATURE
RxSM,
its Medicare Part D program.
|
Principal
Products
The
customers of CIGNA’s Health Care operations range in size from some of the
largest United States corporations to small enterprises, and include employers,
multiple employer groups, unions, governmental entities and other groups.
Products are marketed in all 50 states, the District of Columbia and Puerto
Rico.
Products
and Services
Medical
CIGNA
provides a wide array of products and services to meet the needs of employers
and other groups sponsoring health benefit plans and the employees and
dependents participating in these plans, including consumer directed health
plans, health
maintenance organizations (“HMOs”), network only (“Network”) and
point-of-service (“POS”) medical plans, preferred provider plans (“PPOs”), and
traditional medical indemnity coverage. CIGNA offers a modular product
portfolio, including CIGNATURE® CareAlliesSM
and
CIGNA
Choice FundSM
Solutions that offers a choice of benefits network and various funding, medical
management, consumerism and health advocacy options for employers and consumers.
CareAllies provides medical management, disease management, and health advocacy
services to large, complex plan sponsors that allow their employees to choose
from among multiple health care vendors. CareAllies offers a consistent set
of
services to address the clinical and administrative inconsistencies that are
inherent in the multi-vendor approach.
As
a
means to improve health outcomes and take unnecessary costs out of the system,
it is CIGNA's
goal
to
provide customers that purchase more than one product, which might
include any combination of medical, dental, behavioral health,
pharmacy and medical care management, with: (1) a holistic and integrated
approach towards members' health that promotes consistent case
management; and (2) the integration of health care information through
predictive modeling and other tools, to provide targeted outreach and health
advocacy by CIGNA's clinical professionals to members.
CIGNA
also is developing tools to assist employers in choosing product designs to
achieve better health outcomes for their plan participants. For example, CIGNA’s
Hi Score®
tool
aggregates employee plan participant data (not identifiable by individual)
in
four categories: frequency and type of health care services provided; level
of
employee engagement in their health care decisions; effectiveness of existing
incentives in meeting employee population objectives; and opportunities for
outreach to employees. Hi Score ranks the employer in each of these categories
to show the employer’s current performance compared to the original baseline and
the employer’s industry peer group with the goal of enabling employers to modify
actions to potentially improve employee health outcomes and, consequently,
cost
trends.
HMOs.
HMOs
are
required by law to provide coverage for all basic health services. They use
various tools to facilitate the appropriate utilization of health care services
by members and providers and control unit costs through provider contracts.
Members typically choose a primary care physician from CIGNA’s provider network.
Primary care physicians are responsible for the member’s primary
medical
and preventive care. Members may be required to obtain referrals from their
primary care physicians to receive covered non-emergency services from
participating specialists or facilities. CIGNA also offers an open access HMO
product that allows members to obtain covered services from non-participating
providers and without the requirement of a referral from the primary care
physician.
Other
than CIGNA HealthCare of Arizona, Inc., a staff model HMO which employs some
physicians and other providers, all CIGNA HMOs are individual practice
association models utilizing networks of independent physicians, hospitals
and
other health care providers that have directly or indirectly contracted with
the
HMO.
As
of
December 31, 2005, CIGNA’s HMO networks included approximately 258,000
physicians and 2,000 hospitals.
Currently,
many contracted providers are compensated by CIGNA on a discounted
fee-for-service or other service-specific basis (such as hospital per diems
or
case rates) for covered health care services provided to the members. Certain
participating providers agree to provide covered services in consideration
for
receiving a monthly predetermined fee (capitation) from CIGNA. Capitation
arrangements shift some of the financial risk from CIGNA to the providers.
In
some
cases, capitated providers subcontract with other providers for certain health
care services. In the event that the capitated provider is paid but fails to
pay
its subcontracted providers, the subcontracted providers or regulators may
look
to CIGNA for payment. CIGNA may, in some cases, voluntarily make additional
payments directly to the subcontracted providers to ensure continuity of care
to
its members through the provider network. A few states have adopted laws or
regulations requiring payment to subcontracted providers in this situation.
CIGNA typically requires a satisfactory letter of credit or other financial
guarantee from the capitated provider entity to protect CIGNA from this possible
exposure, although not all capitated arrangements have this protection.
CIGNA
contracts with the federal Centers for Medicare and Medicaid Services (“CMS”) to
provide Medicare HMO coverage for eligible individuals in Arizona. The contract
provides for a fixed per member per month premium from CMS, based upon a formula
that calculates the projected cost of providing services for each Medicare
member. Premium amounts are updated annually. Members generally receive enhanced
benefits over standard Medicare fee-for-service coverage, including prescription
drug and vision coverage, and pay lower, fixed co-payments for services used.
Depending on
the
plan
benefits selected, members may be required to pay an additional premium to
CIGNA
for their HMO coverage.
Network,
POS and PPO Medical Products. CIGNA
offers Network products that cover non-emergency services provided only by
CIGNA
participating providers and emergency services provided by participating and
non-participating providers. CIGNA also offers POS medical plans that cover
health care services provided by participating and non-participating health
care
providers. This allows participants to determine at the “point of service”
whether to obtain covered services from a CIGNA participating provider
(“In-Network” services) or from a non-participating provider (“Out-of-Network”
services). Participants in POS plans generally pay a fixed co-payment or
co-insurance amount for In-Network covered services. Reimbursement for
Out-of-Network covered services is subject to deductibles and coinsurance,
which
result in a higher cost to participants than In-Network services. CIGNA offers
POS products that allow access to In-Network specialty care without the
requirement of a referral from the primary care physician.
CIGNA
also offers PPO plans. PPO plans are similar to POS plans except that
participants are required to pay coinsurance (a percentage of the charge) for
both In-Network and Out-of-Network covered services. The participant’s
coinsurance obligation is greater for Out-of-Network services.
Some
of
CIGNA’s POS products require that the participant receive a referral from a
primary care physician participating in the CIGNA provider network for coverage
of non-emergency specialty care services. Under this product, the participant
selects a primary care physician and the higher In-Network reimbursement for
specialty care services is available only if the participant has a referral
from
his or her primary care physician to a specialty care provider in the CIGNA
network.
As
of
December 31, 2005, CIGNA's Network, POS and PPO networks included approximately
843,000 physicians and 7,900 hospitals.
Traditional
Medical Indemnity Products. Traditional
medical indemnity products provide reimbursement for covered services without
regard to whether the provider of the covered service participates in the CIGNA
provider network. Participants are responsible for sharing in the cost of their
care by paying deductibles and coinsurance, subject to annual out-of-pocket
maximums. Some traditional indemnity products utilize CIGNA's network of
participating providers. Patients covered under these plans have an economic
incentive to use the CIGNA participating providers because their coinsurance
is
based upon the providers’ discounted charge.
CIGNA
HealthCare of Arizona, Inc. is also a participating provider in the
fee-for-service Medicare program, furnishing outpatient care to Medicare
beneficiaries. Reimbursement for inpatient and outpatient services is made
by
CMS pursuant to laws and regulations governing the Medicare program. Currently,
CMS reimburses outpatient services in accordance with payment classification
groups based on historical cost information filed by CIGNA HealthCare of
Arizona, Inc.
Dental
CIGNA
offers a variety of dental care products including managed care, PPO and
traditional indemnity products. Customers can purchase CIGNA dental products
as
stand alone products or integrated with CIGNA medical products. Customers have
access to live service representatives and 24 hour on-line assistance through
CIGNA's secure member website, myCIGNA.com.
Managed
dental care products are offered in 36 states and the District of Columbia
through a network of independent providers that have contracted with CIGNA
to
provide dental services to members. Most dentists in the CIGNA network receive
a
monthly predetermined fee (capitation) for each covered member in their patient
panel. Network dentists may also receive additional fees for certain services.
Generally, members are responsible for a fixed co-payment for certain covered
services provided by a network dentist.
CIGNA
also offers dental PPO products similar to the medical PPO products described
above. As of December 31, 2005, CIGNA’s national dental PPO network had
approximately 70,200 participating dentists.
Traditional
dental indemnity products also operate in a manner consistent with that
described with respect to medical indemnity products, above.
Behavioral
Health
CIGNA
provides behavioral health care benefit products, behavioral health care
management, employee assistance programs, and work/life programs to employer
sponsored benefit plans, HMOs, governmental entities and disability insurers.
CIGNA focuses on integrating its programs and services to provide the consumer
with customized, holistic care through such products as:
| · |
Custom
Network Solutions, introduced on January 1, 2006, that give employers
the
ability to select four different provider network options to meet
the
specific needs of their plan participants;
and
|
| · |
customized
on-line self-assessment and help tools for a variety of concerns,
including stress, grief, relationship issues and depression that
connect
consumers to a telephonic or face-to-face counselor as
appropriate.
|
As
of
December 31, 2005, CIGNA's behavioral care national network had approximately
40,000 independent psychiatrists, psychologists and clinical social workers
and
approximately 5,000 facilities and clinics that are paid on a contracted
fee-for-service basis.
Pharmacy
CIGNA
offers prescription drug coverage plans both on a stand alone basis as well
as
in conjunction with its medical products described above. CIGNA has a nationwide
network of contracted pharmacies that it utilizes in connection with its HMO,
Network, POS and PPO products. In addition, CIGNA provides managed pharmacy
benefit programs in connection with its HMO and POS products.
CIGNA
also offers mail order, telephone and on-line pharmaceutical fulfillment
services through its CIGNA Tel-Drug® operation. In
addition, CIGNA has developed on-line decision support tools to provide
consumers with information to make their pharmacy-related decisions. The tools
include:
| · |
a
prescription drug price comparison tool that gives members price
comparisons on branded and generic drugs from pharmacy retailers
and mail
order, showing out-of-pocket as well as the total anticipated costs,
of
the prescription;
|
| · |
DrugCompare
and Medication Library where members can obtain detailed information
and
comparisons of medications; and
|
| · |
Prescription
Claim History Tool, which enables consumers to see their combined
retail
and home delivery prescription history to help plan for potential
out-of-pocket costs.
|
CIGNATURE
Rx.
In
2005,
CIGNA introduced CIGNATURE Rx, its Medicare Part D prescription drug program,
which provides a number of plan options as well as service and information
support. CIGNATURE Rx is provided in alliance with NationsHealth, Inc. and
combines CIGNA's pharmacy product capabilities with NationsHealth’s service and
distribution capabilities. CIGNATURE Rx is available in all 50 states and the
District of Columbia.
Care
Management
CIGNA
strives to help consumers make more informed health care decisions by providing
a number of care management and health advocacy programs and information support
tools that are designed to help improve health and cost outcomes. Some of these
include:
| · |
early
intervention by CIGNA's network of over 3,000 clinical
professionals;
|
| · |
targeted
outreach using CIGNA's predictive modeling capabilities through tools
such
as the CIGNA Health Advisor Portal;
|
| · |
the
integration of medical and specialty (pharmacy, dental and behavioral)
care to help with consistent case management; and
|
| · |
disease
management programs, including CIGNA Well Aware for Better
Health®
focusing
on chronic conditions such as asthma, diabetes, heart disease and
low back
pain as well as programs introduced in 2005 focusing on depression,
high
risk obesity, weight loss and smoking cessation.
|
CIGNA
has
developed a range of consumer decision support tools including:
| · |
MyCIGNA.com,
CIGNA’s
consumer Internet portal. The portal is personalized to each member’s
CIGNA medical, dental and pharmacy plan information;
and
|
| · |
a
number of interactive online cost and quality
information tools that compare hospital quality and efficiency
information, prescription drug choices and, beginning in 2006,
average
price
|
range
and member-specific estimates for average
out-of-pocket costs for certain medical procedures.
Quality
Outcomes
CIGNA's
commitment to promoting quality care is reflected in a variety of activities,
including: the development of the CIGNA Care Network®, described
below; the credentialing of medical providers and facilities that participate
in
CIGNA's managed care and PPO networks, using quality criteria which meet or
exceed external accreditation or state regulatory agency standards, or both;
a
national externally accredited Quality Program, that includes clinical
interventions and quality measurement; and participation in industry initiatives
that provide hospital and physician profiling information to members for more
educated decision making.
CIGNA
Care Network.
CIGNA
Care Network is a benefit design option available January 1, 2006, for CIGNA
plans in 16 service areas across the country. CIGNA
Care Network is a subset of participating physicians in certain specialties
who
are designated as CIGNA Care Network providers based on specific quality and
efficiency selection criteria. Consumers pay reduced co-payments for choosing
a
specialist designated as a CIGNA Care Network provider. This encourages
consumers to select a physician identified for participation in the CIGNA Care
Network based on quality and efficiency measures. CIGNA participating
specialists
are evaluated annually for inclusion in the CIGNA Care Network.
Provider
Credentialing. CIGNA
credentials physicians, hospitals and other health care providers participating
in its participating provider networks using quality criteria which meets or
exceeds the standards of external accreditation or state regulatory agencies,
or
both.
CIGNA's
practitioner credentialing criteria include verification of a current
unrestricted professional license, a valid and unrestricted license to prescribe
drugs (as appropriate), board certification or other appropriate training and
hospital privileges (as appropriate) at a CIGNA participating facility. In
addition, CIGNA queries the National Practitioner Data Bank to obtain
information about the practitioner’s malpractice experience and also obtains
Medicare sanction activity. CIGNA expects practitioners to demonstrate an
acceptable history of malpractice claim experience, adequacy of malpractice
insurance coverage and an acceptable work history. Typically, most practitioners
are recredentialed every three years.
To
be
credentialed, CIGNA requires the medical facilities with which it contracts
to
have an unrestricted state license, no sanctions by the Department of Health
and
Human Services, accreditation by an approved accrediting organization and
adequate malpractice and general liability coverage. Typically, most medical
facilities are recredentialed every three years.
NCQA
Accreditation. Accreditation
by the National Committee for Quality Assurance (“NCQA”) of CIGNA’s medical HMOs
validates CIGNA’s quality program. The NCQA is a nationally recognized
independent, not-for-profit organization dedicated to assessing, measuring
and
reporting on the quality of managed care plans.
As
of
December 31, 2005, 88% of CIGNA’s U.S. plan locations are NCQA accredited and,
as of January, 2006, 100% of these accredited plans have received Excellent
or
Commendable accreditation for HMO and POS products.
HEDIS®
Measures. In
addition, CIGNA participates in NCQA’s Health Plan Employer Data and Information
Set (HEDIS) Quality Compass Report. HEDIS Effectiveness of Care measures are
a
standard set of metrics to evaluate the effectiveness of managed care
organization clinical programs. CIGNA’s national results compare favorably to
industry averages.
Distribution
and Markets
CIGNA
has
organized the sales and distribution of its products in the following segments:
| · |
national
accounts, which are multi-site employers with more than 5,000
employees;
|
| · |
middle
market, generally defined as multi-site employers with more than
200 but
fewer than 5,000 employees;
|
| · |
small
business, which includes employers with 2 to 200 employees;
|
| · |
government,
which includes employees
in federal, state and local governments, primary and secondary schools,
and colleges and universities;
|
| · |
Taft-Hartley,
which includes members
covered by union trust funds; and
|
| · |
seniors,
which focuses on the health care needs of individuals 55 years and
older.
|
CIGNA
employs group sales representatives to distribute the products and services
of
this segment through insurance brokers, insurance consultants and directly
to
employers. CIGNA also employs representatives to sell medical cost containment,
managed behavioral health care and employee assistance services directly to
insurance companies, HMOs, third party administrators and employer groups.
As of
December 31, 2005, the field sales force for the products and services of this
segment consisted of approximately 525 sales representatives in 85 field
locations.
CIGNA
believes that the health care consumer will play an increasingly important
role
in the health care product purchasing process and has developed MyCignaPlans.com
as a tool to facilitate this change. MyCignaPlans.com allows prospective members
to access its website before enrolling to compare plan coverage and pricing
options based on a variety of factors. The application gives consumers
information on the total health care cost to them and their employer.
Funding
Arrangements
The
segment’s health care products and services are offered through guaranteed cost,
retrospectively experience-rated, administrative services only (“ASO”) and
minimum premium funding arrangements.
Under
guaranteed cost funding arrangements, CIGNA charges a fixed premium and bears
the risk for claims and costs in excess of the premium.
Under
retrospectively experience-rated funding arrangements, a premium that typically
includes a margin to partially protect against adverse claim fluctuations is
determined at the beginning of the policy period. CIGNA generally bears the
risk
for costs incurred in excess of premiums, but has the potential to recover
this
deficit from future policyholder renewal premiums. For additional discussion,
see “Pricing, Reserves and Reinsurance” below.
Under
ASO
funding arrangements, the employer or other plan sponsor self-funds all of
its
claims, and they assume the risk for claim costs incurred. CIGNA makes available
to ASO plans its participating provider network and typically provides claims
processing and other services and programs, including: health quality assurance,
utilization management, cost containment, health advocacy, 24-hour help line,
case management, disease management, pharmacy benefit management, behavioral
health care management services (through its provider networks), or a
combination of the above, in exchange for administrative service fees. The
employer/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 funding arrangements combine insurance protection with an element of
self-funding. The policyholder assumes the risk for, and self-funds, claim
costs
up to a predetermined aggregate, maximum amount, and CIGNA bears the risk for
claim costs incurred in excess of that amount. CIGNA has the potential to
recover this deficit balance from future policyholder renewal premiums.
Accordingly, minimum premium funding arrangements have a risk profile similar
to
retrospectively experience-rated funding arrangements.
Pricing,
Reserves and Reinsurance
Premiums
and fees charged for most insured health care products and for disability and
life insurance products are generally set in advance of the policy period and
are guaranteed for one year.
Premium
rates are established either on a guaranteed cost basis or on a retrospectively
experience-rated basis.
Charges
to customers established on a guaranteed cost basis at the beginning of the
policy period cannot be adjusted to reflect actual claim experience during
the
policy period. A guaranteed cost pricing methodology reflects assumptions about
future claims, expenses, credit risk, enrollment mix, investment returns,
competitive considerations and profit margins. Claim and expense assumptions
may
be based in whole or in part on prior experience of the account or on a pool
of
accounts, depending on the group size and the statistical credibility of the
experience. Generally, guaranteed cost groups are smaller and less statistically
credible than retrospectively experience-rated groups. In addition, pricing
for
health care products that use networks of contracted providers also reflects
assumptions about the impact of provider contracts on future claims. Premium
rates may vary among accounts to reflect the anticipated contract mix, family
size, industry, renewal date, and other cost-predictive factors. In some states,
premium rates must be approved by the state insurance departments, and state
laws may restrict or limit the use of rating methods.
Premiums
established for retrospectively experience-rated business may be adjusted for
the actual claim and administrative cost experience of the account through
an
experience settlement process subsequent to the policy period. To the extent
that the cost experience is favorable in relation to the prospectively
determined premium rates, a portion of the initial premiums may be credited
to
the policyholder as an experience refund. If claim experience is adverse in
relation to the initial premiums, CIGNA may recover the resulting experience
deficit, according to contractual provisions, through future premiums and
experience settlements, provided the contract remains in force.
CIGNA
contracts on an ASO basis with customers who fund their own claims. CIGNA
charges these customers administrative fees based on the expected cost of
administering their self-funded programs. These fees reflect anticipated or
actual experience with respect to claim volumes, expenses, competitive
considerations, and profit margins. In some cases, CIGNA provides performance
guarantees related to identified performance. If these standards are not met,
CIGNA may be financially at risk up to a percentage of the contracted fee or
a
stated dollar amount.
In
addition to paying current benefits and expenses under insurance policies and
HMO service agreements, 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, liabilities are established for estimated experience
refunds based on the results of retrospectively experience-rated policies and
applicable contract terms.
As
of
December 31, 2005, approximately $1.4 billion, or 62% of the reserves of this
segment comprise liabilities that are likely to be paid within one year,
primarily for medical and dental claims, as well as certain group disability
and
life insurance claims. Of the reserve amount expected to be paid within one
year, $320 million relates to amounts recoverable from certain ASO customers
and
from minimum premium policyholders, and is offset by a receivable. The remaining
reserves are primarily short term with a long tail and include liabilities
for
group long-term disability insurance benefits and group life insurance benefits
for disabled and retired individuals, benefits paid in the form of both life
and
non-life contingent annuities to survivors and contract holder deposit funds.
CIGNA
credits interest on fund balances to retrospectively experience-rated
policyholders through rates that are set at CIGNA’s discretion taking investment
performance and market rates into consideration. Generally, for
interest-crediting rates set at CIGNA’s discretion, higher rates are credited to
funds with longer terms reflecting the fact that higher yields are generally
available on investments with longer maturities. For 2005, the rates of interest
credited ranged from 2.75% to 4.32%, with a weighted average rate of
3.30%.
The
profitability of CIGNA's fully insured health care products depends on the
adequacy of premiums charged relative to claims and expenses. For medical and
dental products, profitability reflects the accuracy of cost projections for
health care (unit costs and utilization), the adequacy of fees charged for
administration and risk assumption and effective medical cost and utilization
management.
CIGNA
reduces its exposure to large catastrophe losses under group life, disability
and accidental death contracts by purchasing reinsurance from unaffiliated
reinsurers.
Competition
The
health care businesses described in this segment are subject to intense
competition. Recent industry consolidation has intensified an already
competitive business environment. While no one competitor or small number of
competitors dominates the health care market, CIGNA expects a continuing trend
of consolidation in the industry with the emergence of consumerism intensifying
this development.
Also,
in
certain geographic locations some health care companies may have significant
market share positions. A large number of health care companies and other
entities compete in offering similar products. Competition in the health care
market exists both for employer-policyholders and for the employees in those
instances where the employer offers its employees the choice of products of
more
than one health care company. Most group policies are subject to annual review
by the policyholder, which may seek competitive quotations prior to renewal.
The
principal competitive factors that affect this segment are quality of service;
scope, cost-effectiveness and quality of provider networks; effectiveness of
medical care management; product responsiveness to the needs of customers and
their employees; cost-containment services; technology; price; and effectiveness
of marketing and sales. In addition, 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” in Section K beginning on page 25.
CIGNA
believes that its national scope, integrated approach to consumerism, product
breadth, clinical care and medical management capabilities and funding options
are strategic competitive advantages. These advantages allow CIGNA to respond
to
the diverse needs of its customer base in each market in which it
operates.
The
principal competitors of CIGNA’s managed care and indemnity businesses
are:
| · |
other
large insurance companies that provide group health and life insurance
products;
|
| · |
Blue
Cross and Blue Shield
organizations;
|
| · |
stand-alone
HMOs and PPOs;
|
| · |
HMOs
affiliated with major insurance companies and hospitals;
and
|
| · |
national
managed pharmacy, behavioral health and cost containment services
companies.
|
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. In addition to these traditional competitors, a
new
group of competitors is emerging. These new competitors are focused on
delivering employee benefits and services through Internet-enabled technology
that allow consumers to take a more active role in the management of their
health. This is accomplished primarily through financial incentives and access
to enhanced medical quality data. Management believes that it has the
capabilities and appropriate strategy to allow it to compete against both the
traditional and new competitors.
The
effective use of web-based information tools and technology are critical to
success in the health care industry, and CIGNA believes they will be competitive
differentiators.
Financial
information about the Health Care segment is presented in the MD&A section
and Note 19 to CIGNA's 2005 Financial Statements included in its 2005 Annual
Report, which are incorporated herein by reference.
Principal
Products and Markets
CIGNA’s
Disability and Life operations provide the following insurance products and
their related services: long- and short-term disability insurance, disability
and workers’ compensation case management, group life insurance, and accident
and specialty insurance. These products and services are provided by
subsidiaries of CIGNA Corporation. CIGNA markets these group insurance products
and services to employers, employees, professional and other associations and
other groups.
The
following table sets forth the net premiums and fees for this segment by its
principal products.
| |
|
Year
Ended
December
31,
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
| |
|
(In
millions)
|
|
|
Disability
|
|
$
|
677
|
|
$
|
617
|
|
$
|
538
|
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
280
|
|
|
265
|
|
|
292
|
|
|
Total
Premiums
and Fees
|
|
$
|
2,065
|
|
$
|
1,923
|
|
$
|
1,807
|
|
Disability
Insurance
CIGNA
markets group long-term and short-term disability insurance products in all
states and statutorily required disability insurance plans in certain states.
These products generally provide a fixed level of income to replace a portion
of
wages lost because of disability. They also provide assistance to the employee
in returning to work and assistance to the employer in managing the cost of
employee disability.
CIGNA
also provides case management and related services to workers’ compensation
insurers and employers who self-fund workers’ compensation and disability
benefits.
CIGNA’s
disability insurance products may be coordinated with behavioral programs,
workers’ compensation, medical programs, social security advocacy, and the
Family and Medical Leave Act and leave of absence administration. This
integration provides customers with increased efficiency and effectiveness
in
disability claims management. CIGNA may receive fees for providing integration
services to clients.
Life
Insurance
Group
life insurance products include group term life and group universal life. CIGNA
no longer markets variable universal life insurance but continues to administer
the products for existing policyholders. Group term life insurance may be
employer-paid basic life insurance or employee-paid supplemental life insurance.
Group
universal life insurance is a voluntary life insurance product in which the
owner may accumulate cash value. The cash value earns interest at rates declared
from time to time, subject to a minimum guaranteed rate, and may be borrowed,
withdrawn, or used to fund future life insurance coverage. With group variable
universal life insurance, the cash value varies directly with the performance
of
the underlying investments and neither the return nor the principal is
guaranteed.
Approximately
5,200 group life insurance policies covering approximately 5.8 million lives
were outstanding as of December 31, 2005.
Other
CIGNA
offers personal accident insurance coverage, which consists primarily of
accidental death and dismemberment and travel accident insurance to employers.
Group accident insurance may be employer-paid or employee-paid.
CIGNA
also offers specialty insurance services that consist primarily of life,
accident and disability insurance to professional associations, financial
institutions, schools and participant organizations.
Distribution
CIGNA
employs group sales representatives to distribute the products and services
of
this segment through insurance brokers and consultants. As of December 31,
2005,
the field sales force for the products and services of this segment consisted
of
approximately 160 sales representatives in 26 field locations.
Pricing,
Reserves and Reinsurance
Premiums
and fees charged for disability and life insurance products are generally
established in advance of the policy period and are often guaranteed
for
two
years to three years, but contracts may be subject to termination.
Premium
rates reflect assumptions about future claims, expenses, credit risk, investment
returns, competitive considerations and profit margins. Claim and expense
assumptions may be based in whole or in part on prior experience of the account
or on a pool of accounts, depending on the group size and the statistical
credibility of the experience.
Fees
for
universal life insurance products consist of mortality, administrative and
surrender charges assessed against the contractholder’s fund balance. Interest
credited and mortality charges for universal life, and mortality charges on
variable universal life, may be adjusted prospectively to reflect expected
interest and mortality experience.
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. For liabilities with longer-term
pay-out periods such as long-term disability, reserves represent the
present value of future expected payments. CIGNA
discounts these reserves based on interest rate assumptions. The annual
effective interest rate assumption used in determining reserves for most of
the
long-term disability insurance business is 4.25% for claims that were incurred
in 2005 and 5.10% for claims that were incurred in 2004 and prior years.
For
universal life insurance, CIGNA establishes reserves for deposits received
and
interest credited to the contractholder, less mortality and administrative
charges assessed against the contractholder’s fund balance.
The
profitability of this segment’s products depends on the adequacy of premiums
charged relative to claims and expenses. Profitability of disability insurance
products is impacted by the effectiveness of return to work programs as well
as
adequate return on invested assets. For life insurance products, profitability
is affected by the degree to which future experience deviates from mortality,
morbidity and expense assumptions.
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
The
principal competitive factors that affect the products of the Disability and
Life segment are underwriting and pricing, relative operating efficiency,
distribution methodologies and producer relations, variety of products and
services offered, and the quality of customer service and claims
management.
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” in
Section K beginning on page 25.
The
principal competitors of CIGNA’s group disability, life and accident businesses
are other large and regional insurance companies that market and distribute
these products.
CIGNA
is
one of the top five providers of group disability, life and accident insurance,
based on premiums.
Principal
Products and Markets
CIGNA’s
international operations (“International”) provide various coverages, products
and services in selected markets outside the United States, principally in
Asia
(mainly South Korea, Hong Kong and Taiwan) and Europe (mainly the United Kingdom
and Spain). In addition, CIGNA provides group benefits products in numerous
markets for expatriate employees of multinational companies.
The
coverages, products and services of this segment, which are provided by
subsidiaries of CIGNA Corporation, relate to individual and group life
insurance, accident and health insurance and health care products.
The
following table sets forth the principal lines of business of this segment
and
their related net earned premiums and fees:
| |
|
Year
Ended December 31,
|
|
| |
|
2005
|
|
2004
|
|
2003
|
|
| |
|
(In
millions)
|
|
| |
|
|
|
|
|
|
|
|
Life,
Accident and Health
|
|
$
|
677
|
|
$
|
545
|
|
$
|
430
|
|
|
Health
Care
|
|
|
566
|
|
|
481
|
|
|
425
|
|
|
Total
Premiums and Fees
|
|
$
|
1,243
|
|
$
|
1,026
|
|
$
|
855
|
|
____________________________________________
Life,
accident and health products are designed to meet the insurance, savings and
investment needs of consumers in selected markets outside of U.S. insurance
markets. These products
are marketed on both group and individual bases. Life insurance products include
term, whole life, endowment and variable universal life. Supplemental products
include accidental death, medical, hospitalization, cancer and other dread
disease coverages.
The
health care products the International segment provides are primarily indemnity
insurance coverage, with some products having managed care or administrative
service aspects. These products generally provide an alternative or supplement
to government programs. Health care includes life and medical insurance products
that are provided through group benefits programs as well as medical insurance
products that are marketed directly to individuals.
Health
care also includes global group benefits products for employees of multinational
companies (primarily U.S. and European multinational companies) who work outside
of their country of citizenship. This product group includes medical, dental,
vision, life, accidental death and dismemberment and disability coverage, as
well as primary medical and dental benefits for international travelers.
CIGNA
generally conducts its international businesses through foreign operating
entities that maintain assets and liabilities in local currencies, which reduces
the exposure to economic loss resulting from unfavorable exchange rate
movements. For information on the effect of foreign exchange exposure, see
“Market Risk” in the MD&A section, and Note 2R to CIGNA’s 2005 Financial
Statements included in its 2005 Annual Report.
International’s
healthcare and life, accident and health products include coverage for employees
and individuals who may be exposed to acts of terrorism, the events of a war
zone or natural disasters. These risks could result in a concentration of loss
if a single adverse event affected many covered individuals.
South
Korea represents the single largest geographic market for CIGNA's international
businesses. In 2005, South Korea generated 27% of International’s revenues and
41% of its segment earnings. International’s business in South Korea would be
vulnerable to adverse consumer credit conditions in that country. In addition,
geopolitical and economic events in South Korea could have a significant impact
on the International segment.
Distribution
International
distributes its products through a combination of independent brokers and
agents, agents of strategic partners, financial institutions and various direct
marketing channels. Life, accident and health products are primarily distributed
through direct marketing, including telemarketing and direct mail under a
variety of sponsored arrangements; the Internet; and financial institutions.
Health care products are distributed through independent brokers and agents
as
well as the company’s own sales personnel.
Pricing,
Reserves and Reinsurance
Premiums
for life, accident and health insurance products are based on assumptions about
mortality, morbidity, persistency, expenses and target profit margins, as well
as interest rates and competitive considerations. The profitability of these
products is affected by the degree to which future experience deviates from
these assumptions.
Fees
for
variable universal life insurance products consist of mortality, administrative
and surrender charges assessed against the contractholder’s fund balance.
Mortality charges on variable universal life may be adjusted prospectively
to
reflect expected mortality experience.
Premiums
and fees for health care products reflect assumptions about future claims,
expenses, investment returns, competitive considerations and profit margins.
For
products using networks of contracted providers, premiums reflect assumptions
about the impact of provider contracts and utilization management on future
claims. Most of the premium volume for the medical indemnity business is on
a
guaranteed cost basis. Other premiums are established on an experience-rated
basis. Most contracts permit rate changes at least annually.
The
profitability of health care products is dependent upon the accuracy of
projections for health care inflation (unit cost and utilization), the adequacy
of fees charged for administration and risk assumption and, in the case of
managed care products, effective medical cost management.
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.
Additionally, for some individual life insurance and supplemental health
products, CIGNA establishes policy reserves that reflect the present
value
of
expected future obligations less the present value of expected future premiums.
CIGNA
reduces its exposure to large and/or multiple losses arising out of a single
occurrence by purchasing reinsurance from unaffiliated reinsurers.
Competition
The
principal competitive factors that affect the International operations are
underwriting and pricing, relative operating efficiency, relative effectiveness
in medical cost management, quality of provider networks and relationships,
product innovation and differentiation, distribution methodologies and producer
relations, and the quality of claims and policyholder services. In most overseas
markets, perception of financial strength is also an important competitive
factor.
International’s
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 life, accident and health lines of business, locally
based competitors are primarily indigenous life insurance companies, but also
include financial institutions and insurance subsidiaries of banks. CIGNA
expects that the competitive environment will intensify as U.S. and Europe-based
insurance and financial services providers pursue global expansion
opportunities.
Other
Operations consists of:
| · |
deferred
gains recognized from the 1998 sale of the individual life insurance
and
annuity business;
|
| · |
corporate
life insurance (including policies on which loans are
outstanding);
|
| · |
settlement
annuity business; and
|
| · |
certain
investment management services (a significant portion of which were
sold
in 2004).
|
The
products and services related to these operations are offered by subsidiaries
of
CIGNA Corporation.
CIGNA
sold its individual life insurance and annuity business in 1998. A portion
of
the gain was deferred because the principal agreement to sell this business
was
an indemnity reinsurance arrangement. The deferred portion is being recognized
at the rate that earnings from the sold business would have been expected to
emerge, primarily over 15 years on a declining basis. Because it was an
indemnity reinsurance transaction, CIGNA is not relieved of primary
liability for the reinsured business.
CIGNA
sold its retirement business in 2004 but retained the corporate life insurance
business previously reported in that segment. Corporate life insurance products
are permanent life insurance contracts sold to corporations to provide coverage
on the lives of certain of their employees. Permanent life insurance, which
is
non-participating, provides coverage that when adequately funded 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. Non-participating
insurance does not pay dividends, but deviations from assumed experience may
be
reflected in future policy values.
Corporate
life insurance products include universal life and variable universal life.
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.
Interest
is credited on most nonvariable universal life products at a declared rate
equal
to or above a minimum guaranteed rate. 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 these products for 2005 ranged from
2.33% to 5.44%, with a weighted average rate of 4.61%, compared with a range
from 2.23% to 6.06% and a weighted average of 4.58% for 2004.
In
lieu
of credited interest rates, holders of certain nonvariable universal life
contracts may select the option of receiving credited income based on changes
in
an equity index, such as the S&P 500®. No such elections were
made in 2004 or 2005. If such an equity index is used, CIGNA may purchase
derivative options to minimize the effect of the income credited for such
contracts.
Federal
legislation enacted in 1996 eliminated the tax deduction for policy loan
interest for most leveraged corporate life insurance products. There have been
no sales of this product since 1997. As a result of an Internal Revenue Service
initiative to settle tax disputes regarding these products, some customers
have
surrendered their policies and management expects earnings associated with
these
products to continue to decline.
CIGNA’s
settlement annuity business is a run-off block of contracts. These contracts
are
primarily liability settlements with approximately half of the payments
guaranteed and not contingent on survivorship.
G. Investments
and Investment Income
CIGNA’s
investment operations provide investment management and related services in
the
United States primarily for CIGNA’s corporate invested assets and the
insurance-related invested assets in its General Account ("Invested Assets").
CIGNA acquires or originates, directly or through intermediaries, various
investments including private placements, public securities, mortgage loans,
real estate and short-term investments. CIGNA’s Invested Assets are managed
primarily by CIGNA subsidiaries and external managers with whom CIGNA's
subsidiaries contract.
CIGNA’s
Invested Assets under management at December 31, 2005 totaled $21.4 billion.
As
of
December 31, 2005, CIGNA's Separate Account funds consisted of:
| · |
$4.8
billion in separate account assets that are managed by the buyer
of the
retirement benefits business pursuant to modified coinsurance
arrangements; and
|
| · |
$3.8
billion in funds directly managed by CIGNA which support certain
health
care and disability and life products.
|
CIGNA
also managed, as of December 31, 2005, $73 million in customer assets for
which
the customer retains title. These customer assets together with the Separate
Account assets managed directly by CIGNA are referred to as “Advisory Portfolio
Assets.” The income, gains and losses for Advisory Portfolio Assets generally
accrue to contractholders and are not included in CIGNA's revenues and expenses,
although the assets in Separate Accounts and related liabilities are separately
presented on CIGNA's balance sheet.
Types
of Investments
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.
Domestic
Employee Benefits Investments
The
major
portfolios under management in CIGNA’s General Account consist of the combined
assets of the Health Care, Disability and Life, Other Operations, Run-off
Retirement and Run-off
Reinsurance segments
(collectively, “Domestic Employee Benefits portfolios”). As of December 31,
2005
the
Domestic Employee Benefits portfolios had $19.6 billion in Invested
Assets.
CIGNA
generally manages the characteristics of these 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
domestic insurance and contractholder liabilities as of December 31, 2005,
excluding liabilities of businesses sold through use of reinsurance, were
associated with the following products: fully guaranteed annuity, 27%;
interest-sensitive life insurance, 27%; and other life and health, 46%. These
products, and the investment assets supporting them, are described
below.
Fully
guaranteed products primarily include 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, 2005, the duration of assets that supported these liabilities was
approximately 13.6 years for settlement annuities and 7.2 years for single
premium annuities.
Interest-sensitive
products primarily consist of corporate life insurance products. 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.
Other
life and health insurance products consist of various group and individual
life,
health and disability insurance products and guaranteed minimum death benefits.
The supporting invested assets are structured to emphasize investment income,
and the necessary liquidity is provided through cash flow, short-term and fixed
maturity investments. Assets supporting longer-term group disability insurance
benefits and group life waiver of premium benefits are generally managed to
an
aggregate duration similar to that of the related benefit cash
flows.
Investment
Strategy
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
sector considerations for fixed maturity investments, and geographic and
property-type considerations for mortgage loan and real estate investments.
Fixed
Maturities
As
of
December 31, 2005, fixed maturity investments constituted 70% of the Domestic
Employee Benefits portfolios.
CIGNA
invests primarily in investment grade fixed maturities rated by rating agencies
(for public investments) and by CIGNA (for private investments). For information
about below investment grade holdings, see “Investment Assets” in the MD&A
section of CIGNA’s 2005 Annual Report.
Mortgages
and Real Estate
Mortgage
loan investments constituted 20% of the Domestic Employee Benefits portfolios
as
of December 31, 2005. Mortgage loan investments are subject to underwriting
criteria addressing loan-to-value ratio, debt service coverage, cash flow,
tenant quality, leasing, market, location and borrower’s financial strength.
Such investments consist primarily of first mortgage loans on commercial
properties and are diversified by property type, location and borrower. CIGNA
invests in mortgages on fully completed and substantially leased commercial
properties. Virtually all of CIGNA’s mortgage loans are balloon payment loans,
under which all or a substantial portion of the loan principal is due at the
end
of the loan term.
CIGNA
enters into joint ventures with local partners to develop, lease and manage
commercial real estate to maximize investment returns. CIGNA's portfolio of
real
estate investments consist of properties under development and stabilized
properties, and are diversified relative to property type and location. CIGNA
also acquires real estate through foreclosure of mortgage loans. CIGNA
rehabilitates, re-leases and sells foreclosed properties, a process that usually
takes from two to four years unless
management considers a near-term sale preferable. Additionally, CIGNA invests
in
third party sponsored real estate equity funds to maximize investment returns
and to maintain diversity with respect to its real estate related exposure.
CIGNA sold $11 million of foreclosed properties in 2005. Real estate investments
were not a significant portion of CIGNA’s Domestic Employee Benefits portfolios
as of December 31, 2005.
Derivative
Instruments
CIGNA
generally uses derivative financial instruments to minimize its exposure to
certain market risks. CIGNA has also written derivative instruments to minimize
insurance customers’ market risks. In addition, to enhance investment returns,
CIGNA invests in indexed credit default swaps. For information about CIGNA’s use
of derivative financial instruments, see Notes 2(B) and 10G to CIGNA’s 2005
Financial Statements included in its 2005 Annual Report.
See
“Investment Assets” in the MD&A section of, and Notes 2, 10, 11 and 14 to
the Financial Statements included in CIGNA’s 2005 Annual Report for additional
information about CIGNA’s investments.
Other
Investments
In
addition to the Domestic Employee Benefits portfolios, CIGNA has a portfolio
which includes the investments of the International segment and unallocated
corporate investments. Invested assets for International and unallocated
corporate investments totaled $1.7 billion as of December 31, 2005. Investments
include U.S. and international fixed maturities, policy loans, mortgage loans
and short-term investments.
On
April
1, 2004, CIGNA sold its retirement benefits businesses. CIGNA no longer sells
the products related to the sold businesses. For additional information about
the sale transaction, see “Sale of Retirement Benefits Business” in the MD&A
section, and Note 3 to CIGNA’s 2005 Financial Statements included in its 2005
Annual Report.
The
sale
of CIGNA's retirement benefits business was primarily in the form of a
reinsurance arrangement. Upon the sale, CIGNA reinsured with the buyer of the
retirement business $16.0 billion of general account contractholder liabilities
under an indemnity reinsurance arrangement and $35.3 billion of insurance,
contractholder and separate account liabilities under modified coinsurance
arrangements, including $32.0 billion in separate account liabilities, and
$2.0
billion related to the single premium annuity business described
below.
The
General and Separate Accounts
Since
the
sale in 2004, the buyer of the retirement business has entered into agreements
with many of the insured party contractholders relieving CIGNA of any remaining
contractual obligations to those parties (“novation agreements”). As a result,
CIGNA reduced reinsurance recoverables, contractholder deposit funds and
separate account balances for these obligations.
The
buyer
deposited assets associated with the reinsurance of general account contracts
other than the single premium annuity business into a trust (the "Ceded Business
Trust"), which provides security to CIGNA for the related reinsurance
recoverables. The buyer is permitted to withdraw assets from the Ceded Business
Trust equal to the reduction in CIGNA's reserves whenever such a reduction
occurs. For example, such reductions will occur when the buyer enters into
additional novation agreements and assumes the direct liability to the insured
party. As of December 31, 2005, assets totaling $1.7 billion remained in the
Ceded Business Trust.
Single
Premium Annuity Business
The
single premium annuity business consists primarily of single premium annuities
that are supported by CIGNA's general account. This business is reinsured on
a
modified coinsurance basis for the first two years following the sale. Assets
associated with this business are held in a trust of which the buyer is the
beneficiary (the "Trust").
The
buyer
has given notice that it intends to terminate its reinsurance of the single
premium annuity business effective April 1, 2006. Discussions between the two
parties continue. If the buyer terminates its reinsurance, CIGNA would retain
the single premium annuity business, including the trust assets and the
insurance liabilities. CIGNA does not expect the ultimate outcome of these
discussions to have a material adverse effect on its consolidated results of
operation, liquidity or financial condition.
As
of
December 31, 2005, CIGNA had approximately $1.9 billion in assets in the trust
for the single premium annuity business, consisting primarily of fixed
maturities and mortgage loans.
Principal
Products and Markets
Until
June of 2000, CIGNA offered reinsurance coverage for part or all of the risks
written by other insurance companies under life and annuity policies (both
group
and individual); accident policies (personal accident, catastrophe and workers’
compensation coverages); and health policies. These products were sold
principally in North America and Europe through a small sales force and through
intermediaries.
In
2000,
CIGNA sold its U.S. individual life, group life and accidental death reinsurance
business. CIGNA placed its remaining reinsurance businesses (including its
accident, domestic health, international life and health, and specialty life
reinsurance businesses) into run-off as of June 1, 2000, and stopped
underwriting new reinsurance business.
For
the
run-off reinsurance business, CIGNA has established policy reserves that reflect
the present value of expected future obligations less the present value of
expected premiums. In addition, 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.
Guaranteed
Minimum Death Benefit Contracts.
CIGNA’s
reinsurance operations reinsured a guaranteed minimum death benefit under
certain variable annuities issued by other insurance companies. These variable
annuities are essentially investments in mutual funds combined with a death
benefit. CIGNA has equity market risks as a result of this product.
For
additional information about guaranteed minimum death benefit contracts, see
“Other Matters” under “Run-off Reinsurance” in the MD&A section of, and Note
6 to CIGNA's 2005 Financial Statements included in its 2005 Annual Report.
Guaranteed
Minimum Income Benefit Contracts.
CIGNA’s
reinsurance business also wrote reinsurance contracts with issuers of variable
annuity contracts that provide annuitants with certain guarantees related to
minimum income benefits. When annuitants elect to receive these minimum income
benefits, CIGNA may be required to make payments based on changes in underlying
mutual fund values and interest rates.
For
additional information about guaranteed minimum income benefit contracts, see
“Other Matters” under “Run-off Reinsurance” and “Guaranteed minimum income
benefit contracts” under “Guarantees and Contractual Obligations” in the
MD&A section of, and Note 20C to CIGNA's 2005 Financial Statements included
in its 2005 Annual Report.
Unicover
and Other Run-off Reinsurance
The
Run-off Reinsurance operations participate in a workers’ compensation
reinsurance pool, which ceased accepting new risks in early 1999. This pool
was
formerly managed by Unicover Managers, Inc. The pool purchased significant
reinsurance (retrocessional) protection for its assumed risks. Disputes
concerning these retrocessional contracts have resulted in a number of
arbitrations, most of which have been resolved or settled. The remaining
disputes are expected to be resolved in 2006.
Run-off
Reinsurance also includes other (non-Unicover) workers’ compensation reinsurance
contracts, as well as personal accident reinsurance contracts, including
contracts assumed in the London market. CIGNA is in dispute and arbitration
with
some ceding companies over the amount of liabilities assumed under their
contracts, and expects that these disputes and arbitrations will be
substantially resolved by the end of 2007.
In
addition, CIGNA obtained retrocessional reinsurance coverage for a significant
portion of its liabilities under these contracts and some of these
retrocessionaires have disputed the validity of their contracts with
CIGNA. Many of these disputes with retrocessionaires have been resolved or
settled. Most of the remaining significant disputes relating to the
retrocessional reinsurance coverage are expected to be resolved in 2006.
CIGNA bears the risk of loss if the retrocessionaires are unable to meet their
reinsurance obligations to CIGNA.
Unfavorable
claims experience related to workers’ compensation and personal accident
exposures is possible and could result in future losses, including losses
attributable to the inability to recover amounts from retrocessionaires (either
due to disputes with the retrocessionaires or their financial
condition).
CIGNA’s
reserves for amounts recoverable from retrocessionaires, as well as for reserves
associated with underlying reinsurance exposures assumed by CIGNA, are
considered appropriate as of December 31, 2005, based on current
information. However, it is possible that future developments could have
a
material adverse effect on CIGNA’s consolidated results of operations, and, in
certain
situations,
could have a material adverse effect on CIGNA’s financial
condition.
For
more
information see
“Run-off Reinsurance” in the MD&A section of, and Note 7 to CIGNA's 2005
Financial Statements included in its 2005 Annual Report.
CIGNA’s
subsidiaries, depending on the type and location of their business activities,
may be subject to regulation by federal, state and non-U.S. jurisdictions.
CIGNA’s insurance subsidiaries and HMOs are licensed to do business in, and are
subject to regulation and supervision by, state regulatory authorities as well
as authorities in the District of Columbia, certain U.S. territories and various
non-U.S. jurisdictions.
The
extent of regulation of insurance subsidiaries and HMOs varies. Licensing of
insurers, HMOs and their agents and the approval of coverage and provider
contract forms are usually required.
All
states in which CIGNA's insurance and HMO subsidiaries do business regulate
their activities. State laws and regulations govern numerous aspects of their
businesses including policy forms, premium rates, claims and appeal processing,
solvency, underwriting practices and standards of care.
CIGNA's
focus on consumer directed products is driven, in part, by the availability
of
enhanced saving incentives under federal and state law and CIGNA's
ability to provide high
deductible health plans. The Medicare Prescription Drug Improvement and
Modernization Act of 2003 offered federal tax incentives for health savings
accounts. In 2005, seven states enacted legislation to provide tax incentives
for such accounts and seven other states are considering such incentives. While
a variety of state statutes currently limit the availability of high deductible
health plans, eleven states took legislative action in 2005 to remove such
impediments. Legislation is pending in other states to address statutory
restrictions on the use of high deductible plans.
The
financial condition of licensed insurance companies and HMOs is closely
monitored by state regulators. States regulate the form and content of statutory
financial statements and the type and concentration of investments. Each
insurance and HMO subsidiary is required to file periodic financial reports
with
regulators 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 certain non-U.S. jurisdictions require licensed insurance companies
to support guaranty
associations or indemnity funds, which are established to pay claims on behalf
of insolvent insurance companies. In the United States, these associations
levy
assessments on member insurers in a particular state to pay such claims. These
assessments are levied in proportion to the member insurers’ relative shares of
the lines of business that had been written by the insolvent insurer. The
maximum assessment permitted by law in any one year is generally 2% of annual
premiums written by each member in a particular state with respect to the
categories of business involved and may be offset in some states over a
five-year period against premium taxes payable.
In
addition, insurance companies are subject to a variety of assessments to fund
insurance-related activities such as medical risk pools and operating expenses
of state regulatory bodies.
Several
states also require HMOs to participate in guaranty funds, special risk pools
and administrative funds. CIGNA expects additional states to consider revising
their solvency standards and guaranty fund legislation to encompass HMOs. For
additional information about guaranty fund and other assessments, see Note
20 to
CIGNA’s 2005 Financial Statements included in its 2005 Annual Report.
Some
states require health insurers and HMOs to participate in assigned risk plans,
joint underwriting authorities, pools or other residual market mechanisms to
cover risks not acceptable under normal underwriting standards.
The
National Association of Insurance Commissioners (“NAIC”) has developed model
solvency-related laws that many states have adopted. The NAIC also has developed
risk-based capital rules (“RBC rules”) for life and health insurance companies
and HMOs that have been adopted by many states.
The
NAIC
is considering changing statutory reserving rules for variable annuities. Any
changes would apply to CIGNA’s specialty life reinsurance contracts.
The
RBC
rules recommend a minimum 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.
In
addition, various non-U.S. jurisdictions prescribe minimum surplus requirements
that are based upon solvency, liquidity and reserve coverage measures. CIGNA’s
life, health and non-U.S. insurance and HMO subsidiaries were adequately
capitalized during 2005 under applicable RBC and non-U.S. surplus
rules.
Certain
CIGNA 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.
State
and
federal regulatory scrutiny of life and health insurance company and HMO
marketing and advertising practices, including the adequacy of disclosure
regarding products and their administration, may result in increased regulation.
States have responded to concerns about marketing, advertising and
administration of insurance by increasing the number and frequency of market
conduct examinations and imposing larger penalties for violations of laws and
regulations pertaining to these functions.
Several
state regulatory inquiries have been made into broker compensation practices
for
property and casualty, disability, group insurance and health care products.
The
California Insurance Commissioner also filed suit against several insurance
holding companies, including CIGNA, regarding broker compensation practices.
This increased regulatory focus may lead to legislative or regulatory changes
that would affect the manner in which CIGNA and its competitors compensate
brokers. For more information regarding the state attorney general inquiries,
see “Legal Proceedings” in Item 3 on pages 33 and 34.
CIGNA
sells many of its products and services to sponsors of employee health care
benefit plans that are typically governed by the Employment Retirement Income
Security Act (“ERISA”) and, therefore, may be subject to requirements imposed by
ERISA on plan fiduciaries and parties in interest, including regulations
affecting claims and appeals procedures for disability, life and accident and
health care claims.
CIGNA
also offers a variety of products and services subject to federal Medicare
regulations. Subsidiaries offer individual and group Medicare Advantage (HMO)
coverage in Arizona. In addition, CIGNA has contractual arrangements with the
federal government by which CIGNA provides claims processing and other
administrative services to the government with respect to certain Medicare
claims. Beginning in 2006, new Medicare Part D products also increase CIGNA’s
exposure to federal Medicare regulations.
Participation
in government sponsored health care programs subjects CIGNA to a variety of
federal laws and regulations and risks associated with audits conducted under
the programs (which may occur in years subsequent to when CIGNA provides the
applicable services). These risks include reimbursement claims as well as
potential fines and penalties.
For
example, the
federal government requires Medicare and Medicaid providers to file detailed
cost reports for health care services provided. These reports may be audited
in
subsequent years. Also, under
Office of Personnel Management rules, CIGNA HMOs that contract to cover federal
employees may be required to reimburse the federal government if, following
an
audit, it is determined that a federal employee group did not receive the
benefit of a discount offered by a CIGNA HMO to one of the two groups closest
in
size to the federal employee group. See “Health Care” in Section C beginning on
page 3 for additional information about CIGNA’s
participation in government health-related programs.
The
Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and other
federal statutes subject health care insurers and HMOs to federal regulation.
HIPAA imposes electronic data security standards, guaranteed issuance (for
groups with 50 or fewer lives), renewal and portability requirements on health
care insurers.
In
addition, final regulations pursuant to HIPAA providing standards for the
assignment of a unique national identifier for providers must be implemented
by
May, 2007. CIGNA is implementing the administrative changes, systems
enhancements and training necessary to satisfy these requirements.
With
respect to privacy, federal and state lawmakers and regulators have imposed
privacy standards and an increasing number of non-U.S. jurisdictions are also
imposing privacy requirements. These standards affect how identifiable
information about individuals may be handled, used and disclosed. State
regulators review the
privacy law compliance of insurance companies. States are focusing on the
importance of maintaining privacy of personal information, with 23 states having
enacted privacy incident notification requirements intended to
combat
identity theft, and more are expected to follow.
The
business of administering and insuring employee benefit programs, particularly
health care programs, is heavily regulated by federal and state laws and
administrative agencies, such as state departments of insurance and the federal
Departments of Labor and Justice, as well as the courts. See “Regulatory and
Industry Developments” in the MD&A section of CIGNA’s 2005 Annual Report for
additional information.
The
extent of insurance regulation varies significantly among the countries in
which
CIGNA conducts its international operations. In many countries, non-U.S.
insurers are faced with greater restrictions than domestic competitors. These
restrictions 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.
Depending
upon their nature, CIGNA's investment management activities are subject to
U.S.
federal securities laws, ERISA, and other federal and state laws governing
investment related activities and products. In many cases, the investment
management activities and investments of individual insurance companies are
subject to regulation by multiple jurisdictions.
The
United States Treasury Department issued regulations in 2005 requiring insurance
companies offering specified products to implement appropriate anti-money
laundering compliance programs with respect to those products on or before
May
2, 2006. CIGNA is completing its risk assessment and is preparing to implement
anti-money laundering programs for its affected products to comply with the
regulations.
Federal
regulation and legislation may affect CIGNA’s operations in a variety of ways.
In addition to proposals discussed above related to increased regulation of
the
health care industry, current and proposed federal measures that may
significantly affect CIGNA’s operations include employee benefit regulation and
tax.
The
economic and competitive effects on CIGNA’s business operations of the
legislative and regulatory proposals discussed above will depend upon the final
form any such legislation or regulation may take.
CIGNA
and
certain of its insurance subsidiaries are rated by nationally recognized rating
agencies. The significance of individual ratings varies from agency to agency.
However, 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 a company and its capacity to meet the obligations of insurance policies.
The
principal agencies that rate CIGNA’s insurance subsidiaries characterize their
insurance rating scales as follows:
| |
•
|
A.M.
Best Company, Inc. (“A.M. Best”), A++ to S (“Superior” to
“Suspended”);
|
| |
•
|
Moody’s
Investors Service (“Moody’s”), Aaa to C (“Exceptional” to “Lowest”);
|
| |
•
|
Standard
& Poor’s Corp. (“S&P”), AAA to R (“Extremely Strong” to
“Regulatory Action”); and
|
| |
•
|
Fitch,
Inc. (“Fitch”), AAA to D (“Exceptionally Strong” to “Order of
Liquidation”).
|
As
of
February 21, 2006, the insurance financial strength ratings for CG Life were
as
follows:
| |
CG
Life
|
| |
Insurance
Ratings(1)
|
| |
|
|
A.M.
Best
|
A-
|
| |
(“Excellent,”
|
| |
4th
of
16)
|
|
Moody’s
|
A3
|
| |
(“Good,”
|
| |
7th
of
21)
|
|
S&P
|
A-
|
| |
(“Strong,”
|
| |
7th
of
21)
|
|
Fitch
|
A
|
| |
(“Strong,”
|
| |
6th
of
24)
|
________________________
(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 4th
highest
rating awarded in its scale of 16).
As
of
February 21, 2006, the insurance financial strength rating for Life Insurance
Company of North America assigned by A.M. Best was A- (“Excellent,”
4th
of 16),
and by Moody’s was A3 (“Good,” 7th
of 21).
Debt
ratings are assessments of the likelihood that a company will make timely
payments of principal and interest. The principal agencies that rate CIGNA’s
senior debt characterize their rating scales as follows:
| |
•
|
Moody’s,
Aaa to C (“Exceptional” to
“Lowest”);
|
| |
•
|
S&P,
AAA to D (“Extremely Strong” to “Default”);
and
|
| |
•
|
Fitch,
AAA to D (“Highest” to “Default”).
|
The
commercial paper rating scales for those agencies are as follows:
| |
•
|
Moody’s,
Prime-1 to Not Prime (“Superior” to “Not
Prime”);
|
| |
•
|
S&P,
A-1+ to D (“Extremely Strong” to “Default”);
and
|
| |
•
|
Fitch,
F-1+ to D (“Very Strong” to
“Distressed”).
|
As
of
February 21, 2006, the debt ratings assigned by the following agencies were
as
follows:
Debt
Ratings(1)
CIGNA
CORPORATION
| |
|
Commercial
|
| |
Senior
Debt
|
Paper
|
|
Moody’s
|
Baa3
|
Prime-3
|
| |
(“Adequate,”
|
(“Acceptable,”
|
| |
10th
of
21)
|
3rd
of
4)
|
|
S&P
|
BBB
|
A-2
|
| |
(“Adequate,”
|
(“Good,”
|
| |
9th of
22)
|
3rd
of
7)
|
|
Fitch
|
BBB
|
F-2
|
| |
(“Good,”
|
(“Moderately
Strong,”
|
| |
9th
of
24)
|
3rd
of
7)
|
________________________
(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.
In
December 2005, Moody’s, S&P and A.M. Best affirmed the financial strength,
senior debt and commercial paper ratings of CIGNA and certain of its
subsidiaries and raised the outlook to positive from stable. CIGNA is committed
to maintaining appropriate levels of capital in its subsidiaries to support
ratings of CIGNA that meet customers’ expectations, and to improving the
earnings of the health care business. Lower ratings at the parent company level
increase the cost to borrow funds. Lower ratings of CG Life could adversely
affect new sales and retention of current business.
Portions
of CIGNA’s insurance business are seasonal in nature. Reported claims under
group health 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 2005. 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 28,000, 28,600 and 32,700 employees as of December 31, 2005,
2004
and 2003, respectively.
CIGNA’s
businesses face risks and uncertainties, including those discussed below and
elsewhere in this report. These factors represent risks and uncertainties that
could have a material adverse effect on CIGNA’s business, results of operations
and financial condition. These risks and uncertainties are not the only ones
CIGNA faces. Others that CIGNA does not know about now, or that the Company
does
not now think are significant, may impair its business or the trading price
of
its securities. The following are significant risks identified by CIGNA.
If
CIGNA does not execute on its strategic initiatives, there could be a material
adverse effect on CIGNA’s results of operations and in certain situations,
CIGNA's financial condition.
The
future performance of CIGNA’s business will depend in large part on CIGNA’s
ability to execute effectively and implement its strategic initiatives. These
initiatives include: executing CIGNA's consumerism strategy, including designing
products to meet emerging market trends and ensuring that an appropriate
infrastructure is in place to meet the needs of customers and members;
continuing to reduce medical costs; and further improving the efficiency of
operations, including lowering operating costs and enabling higher value
services.
Successful
execution of these initiatives depends on a number of factors including:
| · |
the
ability to gain and retain customers and members by providing appropriate
levels of support and service for CIGNA’s products, as well as avoiding
service and health advocacy related
errors;
|
| · |
the
ability to attract and retain sufficient numbers of qualified employees;
|
| · |
the
negotiation of favorable and standardized provider
contracts;
|
| · |
the
identification and introduction of the proper mix or integration
of
products that will be accepted by the marketplace;
and
|
| · |
the
ability of CIGNA’s products and services to differentiate CIGNA from its
competitors and of CIGNA to demonstrate that these products and services
(such as disease management and health advocacy programs, provider
credentialing and other quality care initiatives) result in improved
health outcomes and reduced costs.
|
Further,
CIGNA’s
success will depend upon its ability to develop new systems and enhance the
performance of its existing procedures and processes to adequately support
CIGNA's operations, strategies and business objectives.
If
CIGNA fails to properly maintain the integrity of its data or to strategically
implement new information systems, there could be a material adverse effect
on
CIGNA’s business.
CIGNA’s
business depends on effective information systems and the integrity and
timeliness of the data it uses to run its business. CIGNA’s business strategy
requires providing members and providers with internet or e-business related
products and information to meet their needs. CIGNA’s ability to adequately
price its products and services, establish reserves, provide effective and
efficient service to its customers, and to timely and accurately report its
financial results also depends significantly on the integrity of the data in
its
information systems. If the information CIGNA relies upon to run its businesses
was found to be inaccurate or unreliable or if CIGNA were to fail to maintain
effectively its information systems and data integrity, the Company could have
problems with, among other things: operational disruptions; determining
medical cost estimates and establishing appropriate pricing; customers,
physicians and other health care providers; regulators; increases in operating
expenses; and retention and attraction of customers.
CIGNA
requires an ongoing commitment of significant resources to maintain, protect
and
enhance existing systems and develop new systems to keep pace with continuing
changes in information processing technology, evolving industry and regulatory
standards, and changing customer preferences. There can be no assurance that
CIGNA’s process of improving existing systems, developing new systems to support
its operations, integrating new systems and improving service levels will
not
be delayed or that additional systems issues will not arise in the
future.
If
premiums are insufficient to cover the cost of health care services delivered
to
members, or if CIGNA’s estimates of medical claim reserves for its guaranteed
cost and experience-rated businesses based upon estimates of future medical
claims are inadequate, profitability could decline.
CIGNA’s
profitability depends, in part, on its ability to accurately predict and control
future health care costs through underwriting criteria, provider contracting,
utilization management and product design. Premiums in the health benefits
business are generally fixed for one-year periods. Accordingly, future cost
increases in excess of medical cost projections reflected in pricing cannot
generally be recovered in the contract year through higher premiums. Although
CIGNA bases the premiums it charges on its estimate of future health care costs
over the fixed premium period, actual costs may exceed what was estimated and
reflected in premiums. Factors that may cause actual costs to exceed premiums
include: medical cost inflation, the introduction of new or costly treatments
and technology and membership mix.
CIGNA
records medical claims reserves for estimated future payments. The Company
continually reviews estimates of future payments relating to medical claims
costs for services incurred in the current and prior periods and makes necessary
adjustments to its reserves. However, actual health care costs may exceed what
was estimated.
Unfavorable
claims experience related to workers’ compensation and personal accident
insurance exposures in CIGNA’s Run-off Reinsurance business could result in
losses.
Unfavorable
claims experience related to workers’ compensation and personal accident
insurance exposures in CIGNA’s run-off reinsurance business is possible and
could result in future losses. Further, CIGNA could have losses attributable
to
its inability to recover amounts from retrocessionaires or ceding companies
either due to disputes with the retrocessionaires or ceding companies or their
financial condition. If CIGNA’s reserves for amounts recoverable from
retrocessionaires or ceding companies, as well as reserves associated with
underlying reinsurance exposures are insufficient, it could result in
losses.
If
CIGNA fails to manage successfully its outsourcing projects and key vendors,
CIGNA’s financial results could be harmed.
CIGNA
takes steps to monitor and regulate the performance of independent third parties
who provide services or to whom the Company delegates selected functions. These
third parties include information technology system providers, independent
practice associations and specialty service providers. These arrangements,
however, may make CIGNA’s operations vulnerable if those third parties fail to
satisfy their obligations to the Company, due to CIGNA’s failure to adequately
monitor and regulate their performance, changes in their own operations,
financial condition, or other matters outside of CIGNA’s control. Certain
legislative authorities have in recent periods discussed or proposed legislation
that would restrict outsourcing and, if enacted, could materially increase
CIGNA’s costs. In recent years, certain third parties to whom CIGNA delegated
selected functions, such as specialty services providers, have experienced
legal
and other difficulties, which may subject CIGNA to adverse publicity, increased
costs, decline in quality of service and potential network disruptions, and
in
some cases cause the Company to incur increased claims expense. Further, CIGNA
may not fully realize on a timely basis the anticipated economic and other
benefits of the outsourcing projects or other relationships it enters into
with
key vendors which could result in substantial costs or other operational or
financial problems that could adversely impact the Company’s financial
results.
A
downgrade in the financial strength ratings of CIGNA’s insurance subsidiaries
could adversely affect new sales and retention of current business, and a
downgrade in CIGNA's debt ratings would increase the cost of borrowed funds.
Financial
strength, claims paying ability and debt ratings by recognized rating
organizations are an important factor in establishing the competitive position
of insurance companies and health benefits companies. Ratings information by
nationally recognized ratings agencies is broadly disseminated and generally
used throughout the industry. CIGNA believes the claims paying ability and
financial strength ratings of its principal insurance subsidiaries are an
important factor in marketing its products to certain of CIGNA’s customers. In
addition,
CIGNA
Corporation’s debt ratings impact both the cost and availability of future
borrowings, and accordingly, its cost of capital. Each of the rating agencies
reviews CIGNA’s ratings periodically and there can be no assurance that current
ratings will be maintained in the future. In addition, a downgrade of these
ratings could make it more difficult to raise capital and to support business
growth at CIGNA’s insurance subsidiaries.
As
of February 21, 2006, the insurance financial strength ratings for CG Life,
the
Company's principal insurance subsidiary, were as follows:
| |
CG
Life
|
| |
Insurance
Ratings(1)
|
| |
|
|
A.M.
Best
|
A-
|
| |
(“Excellent,”
|
| |
4th
of
16)
|
|
Moody’s
|
A3
|
| |
(“Good,”
|
| |
7th
of
21)
|
|
S&P
|
A-
|
| |
(“Strong,”
|
| |
7th
of
21)
|
|
Fitch
|
A
|
| |
(“Strong,”
|
| |
6th
of
24)
|
________________________
(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 4th
highest
rating awarded in its scale of 16).
A
description of CIGNA Corporation ratings, other
subsidiary ratings, as well as more information on these ratings, is included
in “Ratings” in Section K beginning on page 25.
If
CIGNA’s program for its guaranteed minimum death benefits contracts fails to
reduce the risk of stock market declines, it could have a material adverse
effect on the Company’s financial condition.
As
part
of its run-off reinsurance business, CIGNA reinsured a guaranteed minimum death
benefit under certain variable annuities issued by other insurance companies.
CIGNA adopted a program to reduce equity market risks related to these contracts
by selling domestic and foreign-denominated exchange-traded futures contracts
and foreign currency forward contracts. The purpose of this program is to reduce
the adverse effects of potential future domestic and international stock market
declines on CIGNA’s liabilities for these contracts. Under the program,
increases in liabilities under the annuity contracts from a declining market
are
offset by gains on the futures contracts. However, if CIGNA were to have
difficulty in entering into appropriate futures or forward contracts, or stock
market declines expose CIGNA to higher rates of partial surrender (which are
not
covered by the program), there could be a material adverse effect on the
Company’s financial condition. See “Run-off Reinsurance” in Section I on page 20 for more information on the program.
If
actual experience differs significantly from CIGNA’s assumptions used in
estimating CIGNA’s liabilities for reinsurance contracts that guarantee minimum
death benefits or minimum income benefits, it could have a material adverse
effect on CIGNA’s consolidated results of operations, and in certain situations,
could have a material adverse effect on CIGNA's financial condition.
CIGNA’s
management estimates reserves for guaranteed minimum death benefit and minimum
income benefit exposures based on assumptions regarding lapse, partial
surrender, mortality, interest rates, volatility, reinsurance recoverables
and
other considerations, and, for minimum income benefit exposures, annuity income
election rates. These estimates are based on CIGNA’s experience and future
expectations. CIGNA monitors actual experience to update these reserve estimates
as necessary. CIGNA regularly evaluates the assumptions used in establishing
reserves and changes its estimates if actual experience or other evidence
suggests that earlier assumptions should be revised.
Significant
stock market declines could result in increased pension plan expenses and the
recognition of additional pension obligations.
CIGNA
has
a pension plan that covers a large number of current employees and retirees.
Unfavorable investment performance due to significant stock market declines
or
changes in estimates of benefit costs, if significant, could adversely affect
CIGNA’s results of operations or financial condition by significantly increasing
its pension plan expenses and obligations.
Significant
changes in market interest rates affect the value of CIGNA's financial
instruments that promise a fixed return and, as such, could have an adverse
effect on CIGNA's results of operations.
As
an
insurer, CIGNA has substantial investment assets that support its policy
liabilities. Generally low levels of interest rates on investments, such as
those experienced in United States financial markets during recent years, have
negatively impacted the level of investment income earned by the Company in
recent periods, and such lower levels of investment income would continue if
these lower interest rates were to continue. Substantially all of the Company’s
investment assets are in fixed interest-yielding debt securities of varying
maturities, fixed redeemable preferred securities, mortgage loans and real
estate. The value of these securities can fluctuate significantly with changes
in market conditions.
CIGNA
faces risks related to litigation and regulatory
investigations.
CIGNA
is
routinely involved in numerous claims, lawsuits, regulatory audits,
investigations and other legal matters arising in the ordinary course of the
business of administering and insuring employee benefit programs, including
benefit claims, breach of contract actions, tort claims, and disputes regarding
reinsurance arrangements. In addition, CIGNA incurs and likely will continue
to
incur liability for claims related to its health care business, such as failure
to pay for or provide health care, poor outcomes for care delivered or arranged,
provider disputes, including disputes over compensation, and claims related
to
self-funded business. Also, there are currently, and may be in the future,
attempts to bring class action lawsuits against the industry. In addition,
CIGNA
is involved in pending and threatened litigation arising out of its run-off
reinsurance and retirement operations.
Court
decisions and legislative activity may increase CIGNA’s exposure for any of
these types of claims. In some cases, substantial non-economic or punitive
damages may be sought. CIGNA currently has insurance coverage for some of these
potential liabilities. Other potential liabilities may not be covered by
insurance, insurers may dispute coverage or the amount of insurance may not
be
enough to cover the damages awarded. In addition, certain types of damages,
such
as punitive damages, may not be covered by insurance, and insurance coverage
for
all or certain forms of liability may become unavailable or prohibitively
expensive in the future.
A
description of material legal actions in which CIGNA is currently involved
is
included under “Legal Proceedings” in Item 3 on pages 33
and 34, and Note 20 to CIGNA’s 2005 Financial Statements
included in its 2005 Annual Report. The outcome of litigation and other legal
matters is always uncertain, and outcomes that are not justified by the evidence
can occur. CIGNA believes that it has valid defenses to the legal matters
pending against it and is defending itself vigorously. Nevertheless, it is
possible that resolution of one or more legal matters could result in losses
material to CIGNA’s consolidated results of operations, liquidity or financial
condition.
CIGNA’s
business is subject to substantial government regulation, which, along with
new
regulation, could increase its costs of doing business and could adversely
affect its profitability.
CIGNA’s
business is regulated at the international, federal, state and local levels.
The
laws and rules governing CIGNA’s business and interpretations of those laws and
rules are subject to frequent change. Broad latitude is given to the agencies
administering those regulations. Existing or future laws and rules could force
CIGNA to change how it does business, restrict revenue and enrollment growth,
increase health care, technology and administrative costs including pension
costs and capital requirements, and increase CIGNA’s liability in federal and
state courts for coverage determinations, contract interpretation and other
actions. CIGNA must obtain and maintain regulatory approvals to market many
of
its products, to increase prices for certain regulated products and to
consummate some of its acquisitions and divestitures. Delays in obtaining or
failure to obtain or maintain these approvals could reduce the Company’s revenue
or increase its costs.
For
further information on regulatory matters relating to CIGNA, see “Regulation” in
Section J on page 22, and “Legal Proceedings” in Item
3 on pages 33 and 34, as well as
“Regulatory and Industry Developments” in the MD&A section of CIGNA’s 2005
Annual Report.
CIGNA
faces competitive pressure, particularly price competition, which could reduce
product margins and constrain growth in CIGNA’s health care
businesses.
While
health plans compete on the basis of many factors, including service quality
of
clinical resources, claims administration services and medical management
programs, and quality and sufficiency of provider networks, CIGNA expects that
price will continue to be a significant basis of competition. CIGNA’s customer
contracts are subject to negotiation as customers seek to contain their costs,
and customers may elect to reduce benefits in order to constrain increases
in
their benefit costs. Such an election may result in lower premiums for the
Company’s products, although it may also reduce CIGNA’s health care costs.
Alternatively, the Company’s customers may purchase different types of products
from it that are less profitable, or move to a competitor to obtain more
favorable premiums.
In
addition, significant merger and acquisition activity has occurred in the health
care industry giving rise to speculation and uncertainty regarding the status
of
companies, which potentially can affect marketing efforts and public perception.
Consolidation may make it more difficult for the Company to retain or increase
customers, to improve the terms on which CIGNA does business with its suppliers,
or to maintain its position or increase profitability. Factors such as business
consolidations, strategic alliances, legislative reform and marketing practices
create pressure to contain premium price increases, despite increasing medical
costs. For example, the Gramm-Leach-Bliley Act gives banks and other financial
institutions the ability to affiliate with insurance companies, which may lead
to new competitors with significant financial resources in the insurance and
health benefits fields. If CIGNA does not compete effectively in its markets,
if
the Company sets rates too high in highly competitive markets to keep or
increase its market share, if membership does not increase as it expects, or
if
it declines, or if CIGNA loses accounts with favorable medical cost experience
while retaining or increasing membership in accounts with unfavorable medical
cost experience, CIGNA’s product margins and growth could be adversely
affected.
Public
perception of CIGNA's products and practices as well as of the health benefits
industry, if negative, could reduce enrollment in CIGNA’s health benefits
programs.
The
health benefits industry is subject to negative publicity, which can arise
either from perceptions regarding the industry or CIGNA's business practices
or
products. This risk may be increased as CIGNA offers new products, such as
products with limited benefits or an integrated line of products, targeted
at
market segments, beyond those in which CIGNA traditionally has operated.
Negative publicity may adversely
affect the CIGNA brand and its ability to market its products and services,
which could reduce the number of enrollees in CIGNA's health benefits programs
and
adversely affect CIGNA’s profitability.
Large-scale
public health epidemics and bio-terrorist activity could cause CIGNA’s covered
medical and disability expenses, pharmacy costs and mortality experience to
rise
significantly, and in severe circumstances, could cause operational disruption.
If
widespread public health epidemics such as an influenza pandemic or
bio-terrorist or other attack were to occur, CIGNA’s covered medical
and
disability expenses, pharmacy costs and mortality experience could rise
significantly, depending on the government’s actions and the responsiveness of
public health agencies and insurers. In addition, depending on the severity
of
the situation, a widespread outbreak could curtail economic activity in general,
and CIGNA's operations in particular, which could result in operational and
financial disruption to CIGNA, which among other things may impact the
timeliness of claims and revenue.
CIGNA
faces a wide range of risks, and its success depends on its ability to identify,
prioritize and appropriately manage its enterprise risk
exposure.
As
a
large company operating in a complex industry, CIGNA encounters
a variety of risks as identified in this Risk Factor discussion.
CIGNA devotes
resources to developing enterprise-wide risk management processes, in addition
to the risk management processes within its businesses. Failure to appropriately
identify and manage these risks, as well as the failure to identify and take
advantage of appropriate opportunities, can materially affect CIGNA’s
profitability, its ability to retain or grow business, or, in the event of
extreme circumstances, CIGNA’s financial condition.
None.
As
of
March 1, 2006 CIGNA's headquarters will be joining CIGNA Group Insurance, CIGNA
International, portions of CIGNA HealthCare and CIGNA's staff support operations
in leased premises of approximately 450,000 square feet at Two Liberty Place,
Philadelphia. CIGNA HealthCare is the primary occupant of a complex of buildings
owned by CIGNA, aggregating approximately 1.5 million square feet of office
space, located at 900-950 Cottage Grove Road, Bloomfield, Connecticut. In
addition, CIGNA owns or leases office buildings, or parts thereof, throughout
the United States and in other countries. CIGNA believes its properties are
adequate and suitable for its business as presently conducted. For additional
information concerning leases and property, see Notes 2(H) and 18 to CIGNA's
2005 Financial Statements included in its 2005 Annual Report. This paragraph
does not include information on investment properties.
Multi-district
health care litigation in a Florida federal court against CIGNA and several
competitors, included the federal cases Shane
v. Humana, Inc., et al.
(CIGNA
subsidiaries added as defendants in August 2000) and
Mangieri v. CIGNA Corporation
(filed
December 7, 1999 in the United States District Court for the Northern District
of Alabama), as well as the Illinois state suit
Kaiser and Corrigan v. CIGNA Corporation, et al.
(class
of health care providers certified on March 29, 2001). CIGNA previously
disclosed final, court-approved settlement agreements between CIGNA and both
classes of plaintiffs, the physician class and the non-physician health care
professional class. A dispute with a representative of certain physicians over
administration of their settlement is likely to be resolved in mid 2006.
Beginning
in 2004, CIGNA, other insurance companies and certain insurance brokers received
subpoenas and inquiries from the New York Attorney General, the Connecticut
Attorney General, the Florida Insurance Department and other state regulators
relating to their investigations of broker compensation. CIGNA received a
subpoena in October 2005 from the U.S. Attorney’s Office for the Southern
District of California and is providing information to that Office about broker,
Universal Life Resources (ULR). In January 2006, CIGNA received a subpoena
from
the U.S. Department of Labor and is providing information to that Office about
another broker. CIGNA is cooperating with the inquiries and investigations
by
regulators and the U.S. Attorney’s Office.
A
case
filed on October 14, 2004, United
Policyholders v. Universal Life Resources, Inc., et al.,
in the
Superior Court of the State of California for the County of San Diego was
withdrawn on April 26, 2005. This case sought injunctive and monetary relief
for
alleged fraudulent and deceptive business practices under section 17200 of
the
California Code in connection with purportedly undisclosed commissions paid
by
insurers to ULR, and named CIGNA Corporation and Life Insurance Company of
North
America as defendants. A case filed on October 20, 2004, Ronald
Scott Shirley, on behalf of himself and All Others Similarly Situated v.
Universal Life Resources, et al.,
which
was subsequently recaptioned Cynthia
C. Brandes, On Behalf of Herself and All Others Similarly situated vs. Universal
Life Resources, et. al.
was
dismissed by the plaintiffs on August 29, 2005. This case was a purported class
action suit filed in the United States District Court for the Southern District
of California under RICO. It alleged that hidden commissions increased the
cost
of employee benefit plans and sought treble damages and injunctive relief.
CIGNA
Corporation and its subsidiary, Life Insurance Company of North America, were
named among the defendants.
On
November 18, 2004, The
People of the State of California by and through John Garamendi, Insurance
Commissioner of the State of California v. Universal Life Resources, et
al.
was
filed in the Superior Court of the State of California for the County of San
Diego alleging that defendants (including CIGNA and several other insurance
holding companies) failed to disclose compensation paid to ULR and that, in
return for the compensation, ULR steered clients to defendants. The plaintiffs
are seeking injunctive relief only.
On
August
1, 2005, two CIGNA subsidiaries, Connecticut General Life Insurance Company
and
Life Insurance Company of North America, were named as defendants in a
consolidated amended complaint filed in In
re
Insurance Brokerage Antitrust Litigation,
a
multi-district
litigation proceeding consolidated in the United States District Court for
the
District of New Jersey. The complaint alleges that brokers and insurers
conspired to hide commissions, increasing the cost of employee benefit plans,
and seeks treble damages and injunctive relief. Numerous insurance brokers
and
other insurance companies are named as defendants.
A
shareholder derivative suit, Coustry
v. Hanway, et al. nominally
on behalf of CIGNA, filed on February 25, 2005 in the United States District
Court for the Eastern District of Pennsylvania was voluntarily dismissed by
the
plaintiff on January 10, 2006. The complaint alleged breach of fiduciary
duty in connection with alleged concealment of the fact that CIGNA paid
contingent commissions to brokers, and sought damages and equitable relief.
In
late
2002, several purported class action lawsuits were filed against CIGNA and
certain of its officers by individuals seeking to represent a class of
purchasers of CIGNA securities from May 2, 2001 to October 24, 2002. The
complaints allege, among other things, that the defendants violated Section
10(b) of, and Rule 10b-5 under, the Securities Exchange Act of 1934 by
misleading CIGNA shareholders with respect to the company’s performance during
the class period. Plaintiffs seek compensatory damages and attorneys’ fees. In
2003, these suits were consolidated in the United States District Court for
the
Eastern District of Pennsylvania as In
re
CIGNA Corp. Securities Litigation.
CIGNA’s
motions to dismiss certain claims were granted in 2004 and 2005. In January
2006, the lead plaintiff filed an amended complaint to conform to Court Orders
dismissing claims related to certain issues and statements.
On
November 7, 2002, a purported shareholder derivative complaint nominally on
behalf of CIGNA was filed in the United States District Court for the Eastern
District of Pennsylvania by Evelyn Hobbs. The complaint alleges breaches of
fiduciary duty by CIGNA’s directors, including, among other things, their
“failure to monitor, investigate and oversee Cigna’s management information
system” and seeks compensatory and punitive damages. A similar complaint, filed
on November 19, 2002 in the New Castle County (Delaware) Chancery Court by
Jack
Scott was dismissed by the plaintiff and refiled in the United States District
Court for the Eastern District of Pennsylvania. The Hobbs
and
Scott
cases
are being coordinated in the United States District Court for the Eastern
District of Pennsylvania by the same judge handling the In
re
CIGNA Corp. Securities Litigation.
On
December 18, 2001, Janice Amara filed a purported class action lawsuit in the
United States District Court for the District of Connecticut against CIGNA
Corporation and the CIGNA Pension Plan on behalf of herself and other similarly
situated participants in the CIGNA Pension Plan who earned certain Plan benefits
prior to 1998. The plaintiffs allege, among other things, that the Plan violated
ERISA by impermissibly conditioning certain post-1997 benefit accruals on the
amount of pre-1998 benefit accruals, that these conditions are not adequately
disclosed to plan participants, and that the Plan’s cash balance formula
discriminates against older employees. The plaintiffs were granted class
certification on December 20, 2002, and seek equitable relief.
On
August
4, 2004, a complaint captioned New
York v. Express Scripts, Inc., ESI Mail Pharmacy Service, Inc., Connecticut
General Life Insurance Company and CIGNA Life Insurance Company of New
York
was
filed in the Supreme Court of the State of New York. The complaint alleges
certain breaches of contract and violations of civil law in connection with
the
management of the prescription drug benefit program under New York State’s
principal employee health plan, the Empire Plan. CIGNA subsidiaries filed a
motion to dismiss all but the breach of contract claims.
See
“Unicover and Other Run-off Reinsurance” on page 20 for a
description of legal matters arising out of the run-off reinsurance
operations.
CIGNA
is
routinely involved in numerous claims, lawsuits, regulatory audits,
investigations and other legal matters arising, for the most part, in the
ordinary course of the business of administering and insuring employee benefit
programs. An increasing number of claims are being made for substantial
non-economic, extra-contractual or punitive damages. The outcome of litigation
and other legal matters is always uncertain, and outcomes that are not justified
by the evidence can occur. CIGNA believes that it has valid defenses to the
legal matters pending against it and is defending itself vigorously.
Nevertheless, it is possible that resolution of one or more of the legal matters
currently pending or threatened could result in losses material to
CIGNA’s
consolidated results of operations, liquidity or financial
condition.
None.
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.
MICHAEL
W. BELL, 42,
Executive Vice President and Chief Financial Officer of CIGNA beginning December
2002;
Chief
Financial Officer-elect from October 2002 until December 2002; and President
of
CIGNA Group Insurance from July 2000 until October 2002.
DAVID
M.
CORDANI, 40, President,
CIGNA HealthCare beginning July 2005; President, Health Segments, CIGNA
HealthCare from June 2004 until July 2005; Senior Vice President and Chief
Financial Officer, CIGNA HealthCare from October 2002 until June 2004; Senior
Vice President, Transformation and Program Management, CIGNA HealthCare from
April 2002 until October 2002; and Vice President, Corporate Accounting and
Planning, CIGNA Corporation from August 2000 until April 2002.
H.
EDWARD
HANWAY,
54,
Chairman of CIGNA since December 2000; Chief Executive Officer of CIGNA since
January 2000; President and a Director of CIGNA since January 1999; and
Chief Operating Officer of CIGNA from January 1999 until January 2000.
PAUL
E.
HARTLEY, 49, President of CIGNA International beginning June 2005; and
President and Chief Executive Officer, CIGNA International, Asia Pacific region
from June 1999 to June 2005.
JOHN
M.
MURABITO, 47, Executive
Vice President of CIGNA beginning August 2003, with responsibility for Human
Resources and Services; and Senior Vice President, Human Resources
and Corporate Services from March 2000 until August 2003 at Monsanto
Company.
KAREN
S.
ROHAN, 43, President
of CIGNA Group Insurance beginning November 2005; President of CIGNA Dental
& Vision Care beginning April 2004; President of CIGNA Specialty Companies
from November 2004 until November 2005; Chief Underwriting Officer, CIGNA
HealthCare from January 2003 until April 2004; and Vice President and Business
Financial Officer, CIGNA HealthCare from March 2000 until December
2002.
JUDITH
E.
SOLTZ, 59,
Executive Vice President and General Counsel beginning February 2001; and Senior
Vice President and Associate General Counsel from 1998 until February
2001.
SCOTT
A.
STORRER, 38, Executive Vice President, CIGNA Service Operations and Information
Technology beginning June 2005; Interim Head of CIGNA Information Technology
from November 2004 until June 2005; Senior Vice President of CIGNA HealthCare
Service Operations and CIGNA Information Technology from October 2002 until
November 2004; and Senior Vice President of Disability Management Solutions
and
Customer Service for CIGNA Group Insurance from May 2001 until October 2002.
PART
II
The
information under the caption “Quarterly Financial Data--Stock and Dividend
Data” and under the caption “Stock Listing” in CIGNA’s 2005 Annual Report is
incorporated by reference, as is the information from Note 15 to CIGNA’s 2005
Financial Statements and the number of shareholders of record as of December
31,
2005 under the caption “Highlights” in CIGNA’s 2005 Annual Report. CIGNA’s
common stock is listed with, and trades on, the New York Stock Exchange under
the symbol “CI.”
Issuer
Purchases of Equity Securities
The
following table provides information about CIGNA's share repurchase activity
for
the quarter ended December 31, 2005:
| |
|
Issuer
Purchases of Equity Securities
|
|
Period
|
Total
# of
Shares
purchased(1)
|
Average
price
paid
per share
|
Total
# of shares
purchased
as part of
publicly
announced
program
(2)
|
Approximate
dollar
value
of shares that may
yet
be purchased
as
part of publicly
announced
program (3)
|
|
October
1-31, 2005
|
1,123,353
|
$114.21
|
1,123,000
|
$698,126,310
|
|
November
1-30, 2005
|
1,670,752
|
$112.82
|
1,638,100
|
$513,263,468
|
|
December
1-31, 2005
|
2,236,719
|
$113.13
|
2,236,100
|
$260,303,106
|
|
Total
|
5,030,824
|
$113.27
|
4,997,200
|
N/A
|
__________________
| (1) |
Includes
shares tendered by employees as payment of the exercise price of
stock
options granted under the Company’s equity compensation plans. Employees
tendered 33,624 shares in October, November and December.
|
| (2) |
CIGNA
has had a repurchase program for many years, and has had varying
levels of
repurchase authority and activity under this program. The program
has no
expiration date. CIGNA suspends activity under this program from
time to
time, generally without public announcement. Remaining authorization
under
the program was approximately $260 million as of December 31,
2005.
|
| (3) |
Approximate
dollar value of shares is as of the last date of the applicable
month.
|
The
five-year financial information under the caption “Highlights” in CIGNA’s 2005
Annual Report is incorporated by reference.
The
information contained in the MD&A section of CIGNA’s 2005 Annual Report is
incorporated by reference.
The
information under the caption “Market Risk” in the MD&A section of CIGNA’s
2005 Annual Report is incorporated by reference.
CIGNA’s
Consolidated Financial Statements and the report of its independent registered
public accounting firm in CIGNA’s 2005 Annual Report are incorporated by
reference, as is the unaudited information set forth under the caption
“Quarterly Financial Data--Consolidated Results.”
None.
| A. |
Disclosure
Controls and Procedures.
|
Based
on
an evaluation of the effectiveness of CIGNA’s disclosure controls and
procedures, CIGNA’s Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, CIGNA’s
disclosure controls and procedures are effective to ensure that information
required to be disclosed by CIGNA in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms.
B. Internal
Control Over Financial Reporting.
Management's
Report on Internal Control Over Financial Reporting
CIGNA’s
management report on internal control over financial reporting under the caption
“Management’s Annual Report on Internal Control over Financial Reporting” in
CIGNA's 2005 Annual Report is incorporated by reference.
Attestation
Report of the Registered Public Accounting Firm
The
attestation report of CIGNA’s independent registered public accounting firm, on
management's assessment of the effectiveness of CIGNA’s internal control over
financial reporting and the effectiveness of CIGNA’s internal control over
financial reporting under the caption “Report of Independent Registered Public
Accounting Firm” in CIGNA’s 2005 Annual Report is incorporated by
reference.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in CIGNA’s internal control over financial reporting
identified in connection with the evaluation described in the above paragraph
that have materially affected, or are reasonably likely to materially affect,
CIGNA’s internal control over financial reporting.
None.
PART
III
The
information under the captions “The Board of Directors’ Nominees for Terms to
Expire in April 2009,” “Directors Who Will Continue in Office” and “Board of
Directors and Committee Meetings, Membership, Attendance and Independence” (as
it relates to Audit Committee disclosure) in CIGNA’s proxy statement to be dated
on or about March 24, 2006 is incorporated by reference.
See
PART
I - “Executive Officers of the Registrant.”
|
|
Code
of Ethics and Other Corporate Governance
Disclosures
|
CIGNA’s
Code of Ethics and Compliance is the Company’s code of business conduct and
ethics, and applies to CIGNA’s directors, officers (including the chief
executive officer, chief financial officer and chief
accounting officer) and employees. The Code of Ethics and Compliance policies
are posted on the Corporate Governance section of the Company’s website,
www.cigna.com. In the event the Company substantively amends its Code of Ethics
and Compliance or waives a provision of the Code, CIGNA intends to disclose
the
amendment or waiver on the Corporate Governance section of the Company’s website
as well.
In
addition, the Company’s corporate governance guidelines (Board Practices) and
the charters of its board committees (audit, corporate governance, executive,
finance and people resources) are available on the Corporate Governance section
of the Company’s website. These corporate governance documents, as well as the
Code of Ethics and Compliance policies, are available in print to any
shareholder who requests them.
The
information under the captions “Executive Compensation,” “2005 Non-Employee
Director Compensation” and “2006 Non-Employee Director Compensation” in CIGNA’s
proxy statement to be dated on or about March 24, 2006 is incorporated by
reference.
MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The
following table presents information regarding CIGNA’s equity compensation plans
as of December 31, 2005:
| |
|
|
|
|
|
(a)
|
(b)
|
(c)
|
|
Plan
Category
|
Securities To Be Issued
Upon
Exercise Of
Outstanding
Options,
Warrants
And Rights
|
Weighted Average
Exercise
Price Of
Outstanding Options,
Warrants And Rights
|
Securities Remaining
Available
For Future
Issuance Under Equity
Compensation
Plans
(Excluding
Securities
Reflected In Column (a))
|
|
Equity
Compensation Plans Approved By Security Holders
|
8,653,000
|
$82.57
|
11,457,000
|
|
Equity
Compensation Plans Not Approved By
Security
Holders(1)
|
219,000
|
$79.53
|
--
|
|
Total
|
8,872,000
|
$82.49
|
11,457,000
|
|
|
|
|
|
____________________
(1) Consists
of the CIGNA-Healthsource Stock Plan of 1997 discussed below under “Description
of the Equity Compensation Plan Not Approved by Security Holders.”
Description
of the Equity Compensation Plan Not Approved by Security
Holders.
The
CIGNA-Healthsource Stock Plan of 1997 was adopted by CIGNA’s Board of Directors
in 1997 in connection with the acquisition of Healthsource, Inc. The plan
provided for CIGNA stock option grants to replace prior Healthsource stock
option grants as well as new incentive compensation grants to Healthsource
employees after the acquisition. The plan had terms similar to those included
in
other CIGNA equity compensation plans existing at the time but provided only
for
the grant of stock options and restricted stock. No grants were made under
the
plan after 1999.
The
information under the caption “Stock Held by Directors, Nominees and Executive
Officers” and “Largest Security Holders” in CIGNA's proxy statement to be dated
on or about March 24, 2006 is incorporated by reference.
Item
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
information under the caption “Certain Transactions” in CIGNA’s proxy statement
to be dated on or about March 24, 2006 is incorporated by
reference.
The
information under the captions “Policy for the Pre-Approval of Audit and
Non-Audit Services” and “Fees Billed by Independent Auditors” in CIGNA’s proxy
statement to be dated on or about March 24, 2006 is incorporated by
reference.
PART
IV
(a) (1) The following financial statements have been incorporated by
reference from CIGNA’s 2005 Annual Report:
Consolidated
Statements of Income for the years ended December 31, 2005, 2004 and
2003.
Consolidated
Balance Sheets as of December 31, 2005 and 2004.
Consolidated
Statements of Comprehensive Income and Changes in Shareholders’ Equity for the
years ended December 31, 2005, 2004 and 2003.
Consolidated
Statements of Cash Flows for the years ended December 31, 2005, 2004 and
2003.
Notes
to
the Financial Statements.
Report
of
Independent Registered Public Accounting Firm.
(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.
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 on its behalf
by
its undersigned, thereunto duly authorized.
Date:
February 23, 2006
| |
CIGNA
Corporation
|
| |
|
| |
By: /s/
Michael
W. Bell
|
| |
Michael
W. Bell
|
| |
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 and on the dates indicated.
|
Principal
Executive Officer:
|
Directors:*
|
| |
|
|
H.
Edward Hanway*
|
Robert
H. Campbell
|
|
Chairman,
Chief Executive Officer
and
a Director
|
Isiah
Harris, Jr.
Jane
E. Henney, M.D
|
| |
Peter
N. Larson
|
| |
Roman
Martinez IV
Louis
W. Sullivan, M.D.
|
| |
Harold
A. Wagner
|
| |
Carol
Cox Wait
|
| |
Donna
F. Zarcone
William
D. Zollars
|
|
Principal
Accounting Officer:
|
|
| |
|
|
/s/
Annmarie
T. Hagan
|
|
|
Annmarie
T. Hagan
|
|
|
Vice
President and
|
|
|
Chief
Accounting Officer
|
|
|
Date:
February 23, 2006
|
|
| |
*By:
/s/ Carol
J. Ward
|
| |
Carol
J. Ward
|
| |
Attorney-in-Fact
|
| |
Date:
February 23, 2006
|
CIGNA
CORPORATION AND SUBSIDIARIES
INDEX
TO FINANCIAL STATEMENT SCHEDULES
| |
|
|
PAGE
|
|
Report
of Independent Registered Public Accounting Firm on Financial Statement
Schedules
|
FS-2
|
| |
|
|
|
|
Schedules
|
|
| |
I
|
Summary
of Investments--Other Than Investments in Related
|
|
| |
|
Parties
as of December 31, 2005
|
FS-3
|
| |
II
|
Condensed
Financial Information of CIGNA Corporation
|
|
| |
|
(Registrant)
|
FS-4
|
| |
III
|
Supplementary
Insurance Information
|
FS-9
|
| |
IV
|
Reinsurance
|
FS-11
|
| |
V
|
Valuation
and Qualifying Accounts and Reserves
|
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 2005 Annual
Report.
Report
of Independent Registered Public Accounting Firm
On
Financial Statement Schedules
To
the Board of Directors
of
CIGNA Corporation
Our
audits of the consolidated financial statements, of management’s assessment of
the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated February 22, 2006 appearing in the 2005 Annual Report to
Shareholders of CIGNA Corporation (which report, consolidated financial
statements and assessment are incorporated by reference in this Annual Report
on
Form 10-K) also included an audit of the financial statement schedules listed
in
Item 15(a)(2) 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/
PricewaterhouseCoopers LLP
Philadelphia,
Pennsylvania
February
22, 2006
CIGNA
CORPORATION AND SUBSIDIARIES
SCHEDULE
I
SUMMARY
OF INVESTMENTS —
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER
31, 2005
(In
millions)
|
Type
of Investment
|
|
Cost
|
|
Fair
Value
|
|
Amount
at which
shown
in the
consolidated
balance
sheet
|
|
| |
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
United
States government and government
|
|
|
|
|
|
|
|
|
agencies
and authorities
|
|
$
|
639
|
|
$
|
913
|
|
$
|
913
|
|
|
States,
municipalities and political subdivisions
|
|
|
2,387
|
|
|
2,512
|
|
|
2,512
|
|
|
Foreign
governments
|
|
|
780
|
|
|
818
|
|
|
818
|
|
|
Public
utilities
|
|
|
785
|
|
|
859
|
|
|
859
|
|
|
All
other corporate bonds
|
|
|
8,144
|
|
|
8,607
|
|
|
8,607
|
|
|
Asset-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
United
States government agencies,
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed
|
|
|
45
|
|
|
44
|
|
|
44
|
|
|
Other
mortgage-backed
|
|
|
490
|
|
|
503
|
|
|
503
|
|
|
Other
asset-backed
|
|
|
548
|
|
|
635
|
|
|
635
|
|
|
Redeemable
preferred stocks
|
|
|
55
|
|
|
56
|
|
|
56
|
|
|
Total
fixed maturities
|
|
|
13,873
|
|
|
14,947
|
|
|
14,947
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks:
|
|
|
|
|
|
|
|
|
|
|
|
Industrial,
miscellaneous and all other
|
|
|
2
|
|
|
23
|
|
|
23
|
|
|
Public
utilities
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
Non-redeemable
preferred stocks
|
|
|
110
|
|
|
111
|
|
|
111
|
|
|
Total
equity securities
|
|
|
113
|
|
|
135
|
|
|
135
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans on real estate
|
|
|
3,934
|
|
|
|
|
|
3,934
|
|
|
Policy
loans
|
|
|
1,337
|
|
|
|
|
|
1,337
|
|
|
Real
estate investments
|
|
|
80
|
|
|
|
|
|
80
|
|
|
Other
long-term investments
|
|
|
502
|
|
|
|
|
|
504
|
|
|
Short-term
investments
|
|
|
439
|
|
|
|
|
|
439
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
$
|
20,278
|
|
|
|
|
$
|
21,376
|
|
| |
|
|
|
|
|
|
|
|
|
|
CIGNA
CORPORATION AND SUBSIDIARIES
SCHEDULE
II
CONDENSED
FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
STATEMENTS
OF INCOME
(In
millions)
| |
|
For
the year ended
December
31,
|
|
| |
|
2005
|
|
2004
|
|
2003
|
|
| |
|
|
|
|
|
|
|
|
Other
revenues
|
|
$
|
7
|
|
$
|
6
|
|
$
|
--
|
|
|
Total
revenues
|
|
|
7
|
|
|
6
|
|
|
--
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
105
|
|
|
107
|
|
|
111
|
|
|
Intercompany
interest
|
|
|
162
|
|
|
73
|
|
|
64
|
|
|
Other
|
|
|
71
|
|
|
138
|
|
|
87
|
|
|
Total
operating expenses
|
|
|
338
|
|
|
318
|
|
|
262
|
|
|
Loss
before income taxes
|
|
|
(331
|
)
|
|
(312
|
)
|
|
(262
|
)
|
|
Income
tax benefit
|
|
|
(126
|
)
|
|
(138
|
)
|
|
(71
|
)
|
|
Loss
of parent company
|
|
|
(205
|
)
|
|
(174
|
)
|
|
(191
|
)
|
|
Equity
in income of subsidiaries from
continuing
operations
|
|
|
1,481
|
|
|
1,751
|
|
|
775
|
|
|
Income
from continuing operations
|
|
|
1,276
|
|
|
1,577
|
|
|
584
|
|
|
Income
from discontinued operations, net of taxes
|
|
|
349
|
|
|
--
|
|
|
48
|
|
|
Income
before Cumulative Effect of Accounting Change
|
|
|
1,625
|
|
|
1,577
|
|
|
632
|
|
|
Cumulative
Effect of Accounting Change, net of taxes
|
|
|
--
|
|
|
(139
|
)
|
|
--
|
|
|
Net
income
|
|
$
|
1,625
|
|
$
|
1,438
|
|
$
|
632
|
|
| |
|
|
|
|
|
|
|
|
|
|
See
Notes
to Condensed Financial Statements on pages FS-7 and FS-8
CIGNA
CORPORATION AND SUBSIDIARIES
SCHEDULE
II
CONDENSED
FINANCIAL INFORMATION OF CIGNA CORPORATION
(REGISTRANT)
BALANCE
SHEETS
(In
millions)
| |
|
|
|
As
of December 31,
|
|
| |
|
|
|
2005
|
|
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
1
|
|
|
|
|
$
|
3
|
|
|
Investments
in subsidiaries
|
|
|
|
|
|
12,204
|
|
|
|
|
|
12,153
|
|
|
Other
assets
|
|
|
|
|
|
510
|
|
|
|
|
|
583
|
|
|
Total
assets
|
|
|
|
|
$
|
12,715
|
|
|
|
|
$
|
12,739
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
|
|
|
|
|
$
|
4,711
|
|
|
|
|
$
|
4,384
|
|
|
Current
portion of long-term debt
|
|
|
|
|
|
100
|
|
|
|
|
|
--
|
|
|
Long-term
debt
|
|
|
|
|
|
1,324
|
|
|
|
|
|
1,424
|
|
|
Other
liabilities
|
|
|
|
|
|
1,220
|
|
|
|
|
|
1,728
|
|
|
Total
liabilities
|
|
|
|
|
|
7,355
|
|
|
|
|
|
7,536
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (shares issued, 160; 160)
|
|
|
|
|
|
40
|
|
|
|
|
|
40
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
2,385
|
|
|
|
|
|
2,360
|
|
|
Net
unrealized appreciation —
fixed maturities
|
|
$
|
195
|
|
|
|
|
$
|
390
|
|
|
|
|
|
Net
unrealized appreciation —
equity securities
|
|
|
24
|
|
|
|
|
|
17
|
|
|
|
|
|
Net
unrealized depreciation — derivatives
|
|
|
(14
|
)
|
|
|
|
|
(16
|
)
|
|
|
|
|
Net
translation of foreign currencies
|
|
|
2
|
|
|
|
|
|
2
|
|
|
|
|
|
Minimum
pension liability adjustment
|
|
|
(716
|
)
|
|
|
|
|
(729
|
)
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
|
|
|
|
(509
|
)
|
|
|
|
|
(336
|
)
|
|
Retained
earnings
|
|
|
|
|
|
5,162
|
|
|
|
|
|
3,679
|
|
|
Less
treasury stock, at cost
|
|
|
|
|
|
(1,718
|
)
|
|
|
|
|
(540
|
)
|
|
Total
shareholders' equity
|
|
|
|
|
|
5,360
|
|
|
|
|
|
5,203
|
|
|
Total
liabilities and shareholders' equity
|
|
|
|
|
$
|
12,715
|
|
|
|
|
$
|
12,739
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes
to Condensed Financial Statements on pages FS-7 and FS-8.
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,
|
|
| |
|
2005
|
|
2004
|
|
2003
|
|
| |
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
1,625
|
|
$
|
1,438
|
|
$
|
632
|
|
|
Adjustments
to reconcile net income
to
net cash provided by operating activities:
|
|
|
|
Equity
in income of subsidiaries
|
|
|
(1,481
|
)
|
|
(1,751
|
)
|
|
(775
|
)
|
|
Income
from discontinued operations
|
|
|
(349
|
)
|
|
--
|
|
|
(48
|
)
|
|
Cumulative
effect of accounting change, net of taxes
|
|
|
--
|
|
|
139
|
|
|
--
|
|
|
Dividends
received from subsidiaries
|
|
|
1,306
|
|
|
499
|
|
|
608
|
|
|
Other
liabilities
|
|
|
(290
|
)
|
|
106
|
|
|
(155
|
)
|
|
Cash
provided by operating activities of discontinued operations
|
|
|
222
|
|
|
--
|
|
|
--
|
|
|
Other,
net
|
|
|
(68
|
)
|
|
(10
|
)
|
|
53
|
|
|
Net
cash provided by operating activities
|
|
|
965
|
|
|
421
|
|
|
315
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Other,
net
|
|
|
(9
|
)
|
|
5
|
|
|
10
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(9
|
)
|
|
5
|
|
|
10
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in intercompany debt
|
|
|
327
|
|
|
364
|
|
|
(20
|
)
|
|
Repayment
of long-term debt
|
|
|
--
|
|
|
(76
|
)
|
|
(126
|
)
|
|
Issuance
of common stock
|
|
|
346
|
|
|
64
|
|
|
6
|
|
|
Common
dividends paid
|
|
|
(13
|
)
|
|
(100
|
)
|
|
(185
|
)
|
|
Treasury
stock repurchases
|
|
|
(1,618
|
)
|
|
(676
|
)
|
|
--
|
|
|
Net
cash used in financing activities
|
|
|
(958
|
)
|
|
(424
|
)
|
|
(325
|
)
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(2
|
)
|
|
2
|
|
|
--
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
3
|
|
|
1
|
|
|
1
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
1
|
|
$
|
3
|
|
$
|
1
|
|
| |
|
|
|
|
|
|
|
|
|
|
See
Notes
to Condensed Financial Statements on pages FS-7 and FS-8.
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—For purposes of these condensed financial statements, CIGNA Corporation’s
wholly owned subsidiaries are recorded using the equity basis of accounting.
Note
2—Short-term and long-term debt consisted of the following at
December 31:
| |
|
|
|
|
|
|
(In millions)
|
|
2005
|
|
2004
|
|
|
Short-term:
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
100
|
|
$
|
-
|
|
|
Total
short-term debt
|
|
$
|
100
|
|
$
|
-
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Uncollateralized
debt:
|
|
|
|
|
|
|
|
|
6
3/8% Notes due 2006
|
|
$
|
-
|
|
$
|
100
|
|
|
7.4%
Notes due 2007
|
|
|
291
|
|
|
291
|
|
|
8
¼% Notes due 2007
|
|
|
85
|
|
|
85
|
|
|
7%
Notes due 2011
|
|
|
222
|
|
|
222
|
|
|
6.375%
Notes due 2011
|
|
|
226
|
|
|
226
|
|
|
7.65%
Notes due 2023
|
|
|
100
|
|
|
100
|
|
|
8.3%
Notes due 2023
|
|
|
17
|
|
|
17
|
|
|
7
7/8% Debentures due 2027
|
|
|
300
|
|
|
300
|
|
|
8.3%
Step Down Notes due 2033
|
|
|
83
|
|
|
83
|
|
|
Total
long-term debt
|
|
$
|
1,324
|
|
$
|
1,424
|
|
In
May
2004, CIGNA entered into a three-year syndicated revolving credit and letter
of
credit agreement for $1.0 billion. Of this amount, up to $600 million may be
used to support an internal reinsurance arrangement and the remaining portion
will serve as an available line of credit commitment for CIGNA.
As
of
December 31, 2005 CIGNA Corporation had $500 million remaining under an
effective shelf registration statement filed with the Securities and Exchange
Commission, which may be issued as debt securities, equity securities or
both.
Maturities
of long-term debt are as follows (in millions): $100 in 2006, $376 in 2007,
none
in 2008 and 2009, and the remainder in years after 2010.
Interest
paid on short- and long-term debt amounted to $104 million, $109 million and
$114 million for 2005, 2004 and 2003, respectively.
Note
3—Intercompany liabilities consist primarily of loans payable to CIGNA Holdings,
Inc. of $4.8 billion and $4.1 billion as of December 31, 2005 and 2004,
respectively. Interest was accrued at an average monthly rate of 3.62% for
2005
and 1.76% for 2004.
Note
4—As
of
December 31, 2005, CIGNA Corporation had guarantees and similar agreements
in
place to secure payment obligations or solvency requirements of certain wholly
owned subsidiaries as follows:
| · |
CIGNA
Corporation has arranged for bank letters of credit in support of
CIGNA
Global Reinsurance Company, an indirect wholly owned subsidiary domiciled
in Bermuda, in the amount of $116 million. These letters of credit
secure
the payment of insureds’ claims from run-off reinsurance operations. CIGNA
Corporation has agreed to indemnify the banks providing the letters
of
credit in the event of any draw. As of December 31, 2005 approximately
$112 million of the letters of credit are
issued.
|
| · |
CIGNA
Corporation has provided a capital commitment deed in an amount up
to $185
million in favor of CIGNA Global Reinsurance Company. This deed is
equal
to the letters of credit securing the payment of insureds’ claims from
run-off reinsurance operations. This deed is required by Bermuda
regulators to have these letters of credit for the London run-off
reinsurance operations included as admitted
assets.
|
| · |
Various
indirect, wholly owned subsidiaries have obtained surety bonds in
the
normal course of business. If there is a claim on a surety bond and
the
subsidiary is unable to pay, CIGNA Corporation guarantees payment
to the
company issuing the surety bond. The aggregate amount of such surety
bonds
as of December 31, 2005 was $50
million.
|
| · |
CIGNA
Corporation is obligated under a $25 million letter of credit required
by
the insurer of its high-deductible self-insurance programs to indemnify
the insurer for claim liabilities that fall within deductible amounts
for
policy years dating back to 1994.
|
| · |
CIGNA
Corporation also provides solvency guarantees aggregating $34 million
under state and federal regulations in support of its indirect wholly
owned medical HMOs in several states.
|
| · |
CIGNA
Corporation has arranged a $150 million letter of credit in support
of
CIGNA Europe Insurance Company, an indirect wholly owned subsidiary.
CIGNA
Corporation has agreed to indemnify the banks providing the letters
of
credit in the event of any draw. CIGNA Europe Insurance Company is
the
holder of the letters of credit.
|
| · |
In
addition, CIGNA Corporation has agreed to indemnify payment of losses
included in CIGNA Europe Insurance Company’s reserves on the reinsurance
business transferred from ACE. As of December 31, 2005, the reserve
was
$452 million.
|
Through
December 31, 2005, no payments have been made on these guarantees and none
are
pending. CIGNA Corporation provided other guarantees to subsidiaries that,
in
the aggregate, do not represent a material risk to CIGNA Corporation’s results
of operations, liquidity or financial condition.
CIGNA
CORPORATION AND SUBSIDIARIES
SCHEDULE
III
SUPPLEMENTARY
INSURANCE INFORMATION
(In
millions)
|
Segment
|
|
Deferred
policy
acquisition
costs
|
|
Future
policy
benefits
and
contractholder
deposit
funds
|
|
Medical
claims payable and unpaid
claims
|
|
| |
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
Health
Care
|
|
$
|
27
|
|
$
|
794
|
|
$
|
1,478
|
|
|
Disability
and Life
|
|
|
12
|
|
|
973
|
|
|
2,835
|
|
|
International
|
|
|
491
|
|
|
870
|
|
|
171
|
|
|
Run-off
Retirement
|
|
|
--
|
|
|
2,808
|
|
|
1
|
|
|
Run-off
Reinsurance
|
|
|
--
|
|
|
980
|
|
|
826
|
|
|
Other
Operations
|
|
|
88
|
|
|
11,877
|
|
|
135
|
|
|
Corporate
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Total
|
|
$
|
618
|
|
$
|
18,302
|
|
$
|
5,446
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
Health
Care
|
|
$
|
26
|
|
$
|
857
|
|
$
|
1,941
|
|
|
Disability
and Life
|
|
|
12
|
|
|
1,022
|
|
|
2,796
|
|
|
International
|
|
|
420
|
|
|
746
|
|
|
146
|
|
|
Run-off
Retirement
|
|
|
--
|
|
|
10,203
|
|
|
--
|
|
|
Run-off
Reinsurance
|
|
|
--
|
|
|
1,016
|
|
|
894
|
|
|
Other
Operations
|
|
|
86
|
|
|
12,228
|
|
|
144
|
|
|
Corporate
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Total
|
|
$
|
544
|
|
$
|
26,072
|
|
$
|
5,921
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
Health
Care
|
|
$
|
25
|
|
$
|
915
|
|
$
|
2,563
|
|
|
Disability
and Life
|
|
|
15
|
|
|
1,012
|
|
|
2,833
|
|
|
International
|
|
|
311
|
|
|
610
|
|
|
136
|
|
|
Run-off
Retirement
|
|
|
146
|
|
|
19,173
|
|
|
--
|
|
|
Run-off
Reinsurance
|
|
|
--
|
|
|
1,210
|
|
|
894
|
|
|
Other
Operations
|
|
|
83
|
|
|
12,409
|
|
|
188
|
|
|
Corporate
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Total
|
|
$
|
580
|
|
$
|
35,329
|
|
$
|
6,614
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Unearned
premiums
and fees
|
|
Premiums
and
fees (1)
|
|
Net
investment
income
(2)
|
|
Benefit
expenses
(1)(3)
|
|
Amortization
of deferred policy
acquisition
expenses
|
|
Other
operating
expenses
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$
|
97
|
|
$
|
10,177
|
|
$
|
275
|
|
$
|
6,652
|
|
$
|
56
|
|
$
|
3,786
|
|
| |
|
|
43
|
|
|
2,065
|
|
|
264
|
|
|
1,587
|
|
|
4
|
|
|
617
|
|
| |
|
|
331
|
|
|
1,243
|
|
|
71
|
|
|
690
|
|
|
84
|
|
|
381
|
|
|
|
|
|
--
|
|
|
2
|
|
|
144
|
|
|
119
|
|
|
--
|
|
|
61
|
|
| |
|
|
1
|
|
|
92
|
|
|
99
|
|
|
150
|
|
|
--
|
|
|
69
|
|
| |
|
|
43
|
|
|
116
|
|
|
465
|
|
|
448
|
|
|
5
|
|
|
59
|
|
|
|
|
|
-- |
|
|
--
|
|
|
41
|
|
|
--
|
|
|
--
|
|
|
123
|
|
| |
|
$
|
515
|
|
$
|
13,695
|
|
$
|
1,359
|
|
$
|
9,646
|
|
$
|
149
|
|
$
|
5,096
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$
|
111
|
|
$
|
10,868
|
|
$
|
283
|
|
$
|
7,100
|
|
$
|
55
|
|
$
|
3,835
|
|
| |
|
|
39
|
|
|
1,923
|
|
|
253
|
|
|
1,529
|
|
|
6
|
|
|
590
|
|
| |
|
|
325
|
|
|
1,026
|
|
|
58
|
|
|
575
|
|
|
82
|
|
|
314
|
|
|
|
|
|
--
|
|
|
215
|
|
|
467
|
|
|
565
|
|
|
6
|
|
|
257
|
|
| |
|
|
1
|
|
|
80
|
|
|
92
|
|
|
82
|
|
|
--
|
|
|
36
|
|
| |
|
|
46
|
|
|
124
|
|
|
475
|
|
|
413
|
|
|
5
|
|
|
141
|
|
|
|
|
|
|