CIGNA 10Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended March
31, 2007
OR
[
]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
for
the
transition period from _____ to _____
Commission
file number 1-08323
CIGNA
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
|
06-1059331
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
Two
Liberty Place, 1601 Chestnut Street
Philadelphia,
Pennsylvania 19192
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone number, including area code (215)
761-1000
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
_
Indicate
by check mark whether the registrant is 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. (Check
one):
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
As
of
March 31, 2007, 95,931,638 shares of the issuer's common stock were
outstanding.
CIGNA
CORPORATION
INDEX
As
used
herein, CIGNA refers to one or more of CIGNA Corporation and its consolidated
subsidiaries.
|
|
|
|
|
|
Consolidated
Statements of Income
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(In millions,
except per share amounts)
|
|
2007
|
|
2006
|
|
Revenues
|
|
|
|
|
|
Premiums
and fees
|
|
$
|
3,708
|
|
$
|
3,268
|
|
Net
investment income
|
|
|
280
|
|
|
329
|
|
Other
revenues
|
|
|
365
|
|
|
366
|
|
Realized
investment gains
|
|
|
21
|
|
|
144
|
|
Total revenues
|
|
|
4,374
|
|
|
4,107
|
|
Benefits
and Expenses
|
|
|
|
|
|
|
|
Health
Care medical claims expense
|
|
|
1,719
|
|
|
1,448
|
|
Other
benefit expenses
|
|
|
836
|
|
|
788
|
|
Other
operating expenses
|
|
|
1,406
|
|
|
1,343
|
|
Total benefits and expenses
|
|
|
3,961
|
|
|
3,579
|
|
Income
from Continuing Operations before Income Taxes
|
|
|
413
|
|
|
528
|
|
Income
taxes (benefits):
|
|
|
|
|
|
|
|
Current
|
|
|
132
|
|
|
254
|
|
Deferred
|
|
|
4
|
|
|
(78
|
)
|
Total taxes
|
|
|
136
|
|
|
176
|
|
Income
from Continuing Operations
|
|
|
277
|
|
|
352
|
|
Income
from Discontinued Operations, Net of Taxes
|
|
|
12
|
|
|
-
|
|
Net
Income
|
|
$
|
289
|
|
$
|
352
|
|
Earnings
Per Share - Basic:
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.86
|
|
$
|
2.93
|
|
Income from discontinued operations
|
|
|
0.13
|
|
|
-
|
|
Net
income
|
|
$
|
2.99
|
|
$
|
2.93
|
|
Earnings
Per Share - Diluted:
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.80
|
|
$
|
2.87
|
|
Income from discontinued operations
|
|
|
0.13
|
|
|
-
|
|
Net
income
|
|
$
|
2.93
|
|
$
|
2.87
|
|
Dividends
Declared Per Share
|
|
$
|
0.025
|
|
$
|
0.025
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral
part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
(In millions,
except per share amounts)
|
|
As
of March 31,
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost, $11,510;
$11,373)
|
|
|
|
|
$
|
12,267
|
|
|
|
|
$
|
12,155
|
|
Equity securities, at fair value (cost, $111; $112)
|
|
|
|
|
|
130
|
|
|
|
|
|
131
|
|
Mortgage loans
|
|
|
|
|
|
3,968
|
|
|
|
|
|
3,988
|
|
Policy loans
|
|
|
|
|
|
1,419
|
|
|
|
|
|
1,405
|
|
Real estate
|
|
|
|
|
|
67
|
|
|
|
|
|
117
|
|
Other long-term investments
|
|
|
|
|
|
455
|
|
|
|
|
|
418
|
|
Short-term investments
|
|
|
|
|
|
74
|
|
|
|
|
|
89
|
|
Total
investments
|
|
|
|
|
|
18,380
|
|
|
|
|
|
18,303
|
|
Cash
and cash equivalents
|
|
|
|
|
|
1,589
|
|
|
|
|
|
1,392
|
|
Accrued
investment income
|
|
|
|
|
|
271
|
|
|
|
|
|
255
|
|
Premiums,
accounts and notes receivable
|
|
|
|
|
|
1,432
|
|
|
|
|
|
1,459
|
|
Reinsurance
recoverables
|
|
|
|
|
|
7,832
|
|
|
|
|
|
8,045
|
|
Deferred
policy acquisition costs
|
|
|
|
|
|
715
|
|
|
|
|
|
707
|
|
Property
and equipment
|
|
|
|
|
|
603
|
|
|
|
|
|
632
|
|
Deferred
income taxes
|
|
|
|
|
|
902
|
|
|
|
|
|
926
|
|
Goodwill
|
|
|
|
|
|
1,739
|
|
|
|
|
|
1,736
|
|
Other
assets, including other intangibles
|
|
|
|
|
|
423
|
|
|
|
|
|
379
|
|
Separate
account assets
|
|
|
|
|
|
8,492
|
|
|
|
|
|
8,565
|
|
Total
assets
|
|
|
|
|
$
|
42,378
|
|
|
|
|
$
|
42,399
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder
deposit funds
|
|
|
|
|
$
|
9,042
|
|
|
|
|
$
|
9,164
|
|
Future
policy benefits
|
|
|
|
|
|
8,286
|
|
|
|
|
|
8,373
|
|
Unpaid
claims and claim expenses
|
|
|
|
|
|
4,264
|
|
|
|
|
|
4,310
|
|
Health
Care medical claims payable
|
|
|
|
|
|
989
|
|
|
|
|
|
960
|
|
Unearned
premiums and fees
|
|
|
|
|
|
558
|
|
|
|
|
|
499
|
|
Total
insurance and contractholder liabilities
|
|
|
|
|
|
23,139
|
|
|
|
|
|
23,306
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
|
|
|
4,461
|
|
|
|
|
|
4,435
|
|
Short-term
debt
|
|
|
|
|
|
291
|
|
|
|
|
|
382
|
|
Long-term
debt
|
|
|
|
|
|
1,792
|
|
|
|
|
|
1,294
|
|
Nonrecourse
obligations
|
|
|
|
|
|
51
|
|
|
|
|
|
87
|
|
Separate
account liabilities
|
|
|
|
|
|
8,492
|
|
|
|
|
|
8,565
|
|
Total
liabilities
|
|
|
|
|
|
38,226
|
|
|
|
|
|
38,069
|
|
Contingencies
— Note 15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (par value per share, $0.25; shares issued, 160;
160)
|
|
|
|
|
|
40
|
|
|
|
|
|
40
|
|
Additional
paid-in capital
|
|
|
|
|
|
2,485
|
|
|
|
|
|
2,451
|
|
Net
unrealized appreciation, fixed maturities
|
|
$
|
181
|
|
|
|
|
$
|
187
|
|
|
|
|
Net
unrealized appreciation, equity securities
|
|
|
10
|
|
|
|
|
|
22
|
|
|
|
|
Net
unrealized depreciation, derivatives
|
|
|
(16
|
)
|
|
|
|
|
(15
|
)
|
|
|
|
Net
translation of foreign currencies
|
|
|
33
|
|
|
|
|
|
33
|
|
|
|
|
Postretirement
benefits liability adjustment
|
|
|
(379
|
)
|
|
|
|
|
(396
|
)
|
|
|
|
Accumulated
other comprehensive loss
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
(169
|
)
|
Retained
earnings
|
|
|
|
|
|
6,375
|
|
|
|
|
|
6,177
|
|
Less
treasury stock, at cost
|
|
|
|
|
|
(4,577
|
)
|
|
|
|
|
(4,169
|
)
|
Total
shareholders’ equity
|
|
|
|
|
|
4,152
|
|
|
|
|
|
4,330
|
|
Total
liabilities and shareholders’ equity
|
|
|
|
|
$
|
42,378
|
|
|
|
|
$
|
42,399
|
|
Shareholders’
Equity Per Share
|
|
|
|
|
$
|
43.28
|
|
|
|
|
$
|
43.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral
part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income and Changes in Shareholders’
Equity
|
(In millions,
except per share amounts)
|
Three
Months Ended March 31,
|
|
|
2007
|
|
2006
|
|
|
|
Compre-
hensive
Income
|
|
Share-
holders'
Equity
|
|
Compre-
hensive
Income
|
|
Share-
holders'
Equity
|
|
Common
Stock
|
|
|
|
|
$
|
40
|
|
|
|
|
$
|
40
|
|
Additional
Paid-In Capital, January 1
|
|
|
|
|
|
2,451
|
|
|
|
|
|
2,385
|
|
Effect
of issuance of stock for employee benefit plans
|
|
|
|
|
|
34
|
|
|
|
|
|
34
|
|
Additional
Paid-In Capital, March 31
|
|
|
|
|
|
2,485
|
|
|
|
|
|
2,419
|
|
Accumulated
Other Comprehensive Loss, January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior to implementation effect
|
|
|
|
|
|
(169
|
)
|
|
|
|
|
(509
|
)
|
Implementation
effect of SFAS No.155 (see Note 2)
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
-
|
|
Accumulated
Other Comprehensive Loss,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1 as adjusted
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
(509
|
)
|
Net
unrealized depreciation, fixed maturities
|
|
$
|
(6
|
)
|
|
(6
|
)
|
$
|
(95
|
)
|
|
(95
|
)
|
Net
unrealized depreciation, equity securities
|
|
|
-
|
|
|
-
|
|
|
(4
|
)
|
|
(4
|
|
Net
unrealized depreciation on securities
|
|
|
(6
|
)
|
|
|
|
|
(99
|
)
|
|
|
|
Net
unrealized depreciation, derivatives
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Net
translation of foreign currencies
|
|
|
-
|
|
|
-
|
|
|
7
|
|
|
7
|
|
Postretirement
benefits liability adjustment
|
|
|
17
|
|
|
17
|
|
|
-
|
|
|
-
|
|
Other comprehensive income (loss)
|
|
|
10
|
|
|
|
|
|
(93
|
)
|
|
|
|
Accumulated
Other Comprehensive Loss, March 31
|
|
|
|
|
|
(171
|
)
|
|
|
|
|
(602
|
)
|
Retained
Earnings, January 1 prior to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
implementation effects
|
|
|
|
|
|
6,177
|
|
|
|
|
|
5,162
|
|
Implementation
effect of SFAS No. 155 (see Note 2)
|
|
|
|
|
|
12
|
|
|
|
|
|
-
|
|
Implementation
effect of FIN 48 (see Note 2)
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
-
|
|
Retained
Earnings, January 1 as adjusted
|
|
|
|
|
|
6,160
|
|
|
|
|
|
5,162
|
|
Net
income
|
|
|
289
|
|
|
289
|
|
|
352
|
|
|
352
|
|
Effects
of issuance of stock for employee benefit plans
|
|
|
|
|
|
(72
|
)
|
|
|
|
|
(86
|
)
|
Common
dividends declared
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
(3
|
)
|
Retained
Earnings, March 31
|
|
|
|
|
|
6,375
|
|
|
|
|
|
5,425
|
|
Treasury
Stock, January 1
|
|
|
|
|
|
(4,169
|
)
|
|
|
|
|
(1,718
|
)
|
Repurchase
of common stock
|
|
|
|
|
|
(576
|
)
|
|
|
|
|
(419
|
)
|
Other,
primarily issuance of treasury stock for employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit plans
|
|
|
|
|
|
168
|
|
|
|
|
|
207
|
|
Treasury
Stock, March 31
|
|
|
|
|
|
(4,577
|
)
|
|
|
|
|
(1,930
|
)
|
Total
Comprehensive Income and Shareholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
299
|
|
$
|
4,152
|
|
$
|
259
|
|
$
|
5,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral
part of
these statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
(In millions)
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
Net
income
|
|
$
|
289
|
|
$
|
352
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
(12
|
)
|
|
-
|
|
Insurance
liabilities
|
|
|
74
|
|
|
(132
|
)
|
Reinsurance
recoverables
|
|
|
12
|
|
|
31
|
|
Deferred
policy
acquisition costs
|
|
|
(12
|
)
|
|
(21
|
)
|
Premiums,
accounts and notes receivable
|
|
|
17
|
|
|
68
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(74
|
)
|
|
(165
|
)
|
Current
income taxes
|
|
|
100
|
|
|
222
|
|
Deferred
income
taxes
|
|
|
4
|
|
|
(78
|
)
|
Realized
investment gains
|
|
|
(21
|
)
|
|
(144
|
)
|
Depreciation
and amortization
|
|
|
54
|
|
|
54
|
|
Gains
on sales of businesses (excluding discontinued operations)
|
|
|
(11
|
)
|
|
(17
|
)
|
Mortgage
loans
originated and held for sale
|
|
|
-
|
|
|
(240
|
)
|
Other,
net
|
|
|
(42
|
)
|
|
(17
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
378
|
|
|
(87
|
)
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
Proceeds
from investments sold:
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
188
|
|
|
535
|
|
Equity
securities
|
|
|
11
|
|
|
5
|
|
Mortgage
loans
|
|
|
28
|
|
|
136
|
|
Other
(primarily short-term investments)
|
|
|
143
|
|
|
611
|
|
Investment
maturities and repayments:
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
107
|
|
|
518
|
|
Mortgage
loans
|
|
|
62
|
|
|
69
|
|
Investments
purchased:
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
(440
|
)
|
|
(755
|
)
|
Equity
securities
|
|
|
(2
|
)
|
|
(30
|
)
|
Mortgage
loans
|
|
|
(69
|
)
|
|
(252
|
)
|
Other
(primarily short-term investments)
|
|
|
(185
|
)
|
|
(150
|
)
|
Property
and equipment, net
|
|
|
(19
|
)
|
|
(30
|
)
|
Cash
provided by investing activities of discontinued
operations
|
|
|
31
|
|
|
-
|
|
Other,
net
|
|
|
(6
|
)
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
(151
|
)
|
|
657
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Deposits
and interest credited to contractholder deposit funds
|
|
|
141
|
|
|
141
|
|
Withdrawals
and benefit payments from contractholder deposit funds
|
|
|
(142
|
)
|
|
(179
|
)
|
Change
in cash overdraft position
|
|
|
12
|
|
|
4
|
|
Net
proceeds on issuance of long-term debt
|
|
|
498
|
|
|
-
|
|
Repayment
of long-term debt
|
|
|
(87
|
)
|
|
(100
|
)
|
Repurchase
of common stock
|
|
|
(583
|
)
|
|
(400
|
)
|
Issuance
of common stock
|
|
|
133
|
|
|
162
|
|
Common
dividends paid
|
|
|
(2
|
)
|
|
(3
|
)
|
Net
cash used in financing activities
|
|
|
(30
|
)
|
|
(375
|
)
|
Net
increase in cash and cash equivalents
|
|
|
197
|
|
|
195
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,392
|
|
|
1,709
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,589
|
|
$
|
1,904
|
|
Supplemental
Disclosure of Cash Information:
|
|
|
|
|
|
|
|
Income
taxes paid, net of refunds
|
|
$
|
8
|
|
$
|
8
|
|
Interest
paid
|
|
$
|
20
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
The
accompanying Notes to the Financial Statements are an integral
part of
these statements.
|
|
|
|
|
|
|
|
NOTES
TO
THE FINANCIAL STATEMENTS
NOTE
1 - BASIS OF PRESENTATION
The
consolidated financial statements include the accounts of CIGNA Corporation,
its
significant subsidiaries, and variable interest entities of which CIGNA is
the
primary beneficiary, which are referred to collectively as “CIGNA.” Intercompany
transactions and accounts have been eliminated in consolidation. These
consolidated financial statements were prepared in conformity with accounting
principles generally accepted in the United States of America.
The
interim financial statements are unaudited but include all adjustments
(including normal recurring adjustments) necessary, in the opinion of
management, for a fair statement of financial position and results of operations
for the period reported. The interim consolidated financial statements and
notes
should be read in conjunction with the Consolidated Financial Statements and
Notes in CIGNA’s Annual Report to Shareholders and Form 10-K for the year ended
December 31, 2006.
The
preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of
portions of the insurance business as well as competitive and other market
conditions, call for caution in estimating full year results based on interim
results of operations.
Beginning
in 2007, CIGNA reports the results of the run-off retirement business in Other
Operations. Prior periods have been restated to conform to this presentation.
Discontinued
Operations.
Discontinued
operations represent realized gains on the disposition of certain directly-owned
real estate investments in the first quarter of 2007 (see Note
9). Unless otherwise indicated, amounts in these Notes exclude the effects
of discontinued operations.
NOTE
2 - RECENT ACCOUNTING
PRONOUNCEMENTS
Uncertain
tax positions. Effective
January 1, 2007,
CIGNA
implemented Financial Accounting Standards Board (FASB) Interpretation No.
(FIN) 48, "Accounting for Uncertainty in Income Taxes." This interpretation
provides guidance for recognizing and measuring uncertain tax positions that
are
"more likely than not" to result in a benefit if challenged by the Internal
Revenue Service (IRS). The guidance clarifies that the amount of tax benefit
recognized should be measured using management's best estimate based on the
most
favorable expected benefit with greater than fifty percent likelihood of being
realized. The interpretation also requires that interest expense and penalties
be recognized for any reserved portion of an uncertain tax position beginning
when the effect of that position is reported to tax authorities. The
cumulative effect of implementing the interpretation for unrecognized tax
benefits decreased opening Retained earnings by $29 million. See Note 12 for additional information.
Certain
financial instruments. Effective
January 1, 2007, CIGNA implemented Statement of Financial Accounting Standard
(SFAS) No. 155, "Accounting for Certain Hybrid Financial Instruments”, an
amendment of FASB Statements No. 133 and 140. This Standard clarifies when
certain financial instruments and features of financial instruments must be
treated as derivatives and reported on the balance sheet at fair value with
changes in fair value reported in net income. At adoption, CIGNA elected to
fair
value certain existing investments in preferred stock and debt securities with
call or conversion features (hybrid securities) and future changes in the fair
value of these investments will be reported in net income. As a result, CIGNA
reclassified $12 million after-tax of unrealized appreciation from the opening
balance of Accumulated other comprehensive loss to Retained earnings with
no net change to Total shareholders' equity. In addition, this standard may
affect future income recognition of certain future financial instruments if
the
fair value election is used or if additional derivatives are identified because
any changes in their fair values will be
recognized
in net income each period. See Note 9 for a review of
instruments that CIGNA has elected to fair value.
Deferred
acquisition costs. Effective
January 1, 2007, CIGNA implemented the American Institute of Certified Public
Accountants Statement of Position (SOP) 05-1, "Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection With Modifications
or
Exchanges of Insurance Contracts." The SOP requires that deferred acquisition
costs be expensed in full when the original contract is substantially changed
by
election or amendment of an existing contract feature or by replacement with
a
new contract. There were no material effects to the financial statements at
implementation. Although substantial contract changes are not expected to occur,
the effect of this SOP in future periods may vary based on the nature and volume
of any such contract changes.
Pension
and other postretirement benefit plans. In
2006,
the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Benefits Plans," requiring that the overfunded or
underfunded status of all defined benefit postretirement plans be measured
as
the difference between the fair value of plan assets and the benefit obligation
and recognized in the balance sheet. Changes in actuarial gains and losses
and
prior service costs are required to be recognized in accumulated other
comprehensive income (loss), net of tax, each period. CIGNA implemented this
standard effective December 31, 2006. Liabilities for pension benefits and
other
postretirement benefits are recorded in Accounts payable, accrued expenses
and
other liabilities on CIGNA’s balance sheet. The implementation of SFAS No. 158
did not impact CIGNA's pension expense, funding requirements or financial
covenants. See Note 8 for further information on pension
and other postretirement benefit plans.
Fair
value option.
In 2007,
the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities," to permit entities to choose to measure many financial
instruments at fair value with subsequent changes in fair value to be reported
in net income for the period. This choice is made for each individual financial
instrument, is irrevocable and, after implementation, must be determined when
the entity first commits to or recognizes the financial instrument.
Implementation is required in the first quarter of 2008 with any changes in
the
measurement of existing financial instruments to be reported as an adjustment
to
the opening balance of Retained earnings. CIGNA is presently evaluating these
new requirements to determine whether the fair value election will be used
for
various financial assets and liabilities at implementation or for financial
assets and liabilities acquired subsequently.
Fair
value measurements. In
2006,
the FASB issued SFAS No. 157, "Fair Value Measurements," to expand disclosures
about fair value measurements and to clarify how to measure fair value by
focusing on the price that would be received when selling an asset or paid
to
transfer a liability. Implementation is required in the first quarter of 2008
with any changes to the fair values of assets or liabilities to be reported
generally in net income or, for fixed maturities and equity securities held
for
sale and derivatives that hedge future cash flows, in accumulated other
comprehensive income (loss) for the period. CIGNA is presently evaluating these
new requirements to determine whether any changes to the fair value measurements
of its assets and liabilities will result at implementation.
NOTE
3 - ACQUISITIONS AND DISPOSITIONS
CIGNA
may
from time to time acquire or dispose of assets, subsidiaries or lines of
business. Significant transactions are described below.
Star-HRG
Acquisition. On
July
11, 2006, CIGNA acquired the operating assets of Star-HRG, a leading provider
of
low cost health plans and other employee benefits coverage for hourly and
part-time workers and their families, for $156 million, including assumed
liabilities. The acquisition was accounted for as a purchase, and was financed
through the issuance of a note payable to the seller for $151 million, of which
$73 million was paid in 2006. The results of Star-HRG are included in the
accompanying consolidated financial statements from the date of the
acquisition.
Sale
of the Brazilian Life Insurance Operations.
During
2006, CIGNA entered into negotiations to sell its Brazilian life insurance
business. The sale is expected to close in 2007 and as a result, CIGNA has
classified this business as a discontinued operation.
NOTE
4 - EARNINGS PER SHARE
Basic
and
diluted earnings per share were computed as follows:
|
|
|
|
|
|
|
|
(Dollars
in millions, except
|
|
|
|
Effect
of
|
|
|
|
per
share amounts)
|
|
Basic
|
|
Dilution
|
|
Diluted
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Income
from continuing
|
|
|
|
|
|
|
|
operations
|
|
$
|
277
|
|
|
-
|
|
$
|
277
|
|
Shares
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
96,790
|
|
|
-
|
|
|
96,790
|
|
Options
and restricted stock grants
|
|
|
|
|
|
1,994
|
|
|
1,994
|
|
Total
shares
|
|
|
96,790
|
|
|
1,994
|
|
|
98,784
|
|
EPS
|
|
$
|
2.86
|
|
$
|
(0.06
|
)
|
$
|
2.80
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
$
|
352
|
|
|
-
|
|
$
|
352
|
|
Shares
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
119,946
|
|
|
-
|
|
|
119,946
|
|
Options
and restricted stock grants
|
|
|
|
|
|
2,567
|
|
|
2,567
|
|
Total
shares
|
|
|
119,946
|
|
|
2,567
|
|
|
122,513
|
|
EPS
|
|
$
|
2.93
|
|
$
|
(0.06
|
)
|
$
|
2.87
|
|
The
following outstanding employee stock options were not included in the
computation of diluted earnings per share because their effect would have
increased diluted earnings per share (antidilutive) as their exercise price
was
greater than the average share price of CIGNA's common stock for the period.
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Antidilutive
options
|
|
|
0.5
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
CIGNA
held 64,096,823 shares of common stock in Treasury as of March 31, 2007, and
40,269,674 shares as of March 31, 2006.
On
April
25, 2007, CIGNA's Board of Directors approved a three-for-one stock split (in
the form of a stock dividend) of CIGNA's common shares. The stock split is
payable on June 4, 2007 for shareholders of record as of the close of business
on May 21, 2007. Pro forma earnings per share figures for the effect of the
stock split for the first three months of 2007 and 2006 have been provided
below:
Treasury
shares will not be affected by the stock split.
|
|
|
|
|
|
|
|
(Dollars
in millions, except
|
|
|
|
Effect
of
|
|
|
|
per
share amounts)
|
|
Basic
|
|
Dilution
|
|
Diluted
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Income
from continuing
|
|
|
|
|
|
|
|
operations
|
|
$
|
277
|
|
|
-
|
|
$
|
277
|
|
Shares
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
290,370
|
|
|
-
|
|
|
290,370
|
|
Options
and restricted stock grants
|
|
|
|
|
|
5,982
|
|
|
5,982
|
|
Total
shares
|
|
|
290,370
|
|
|
5,982
|
|
|
296,352
|
|
EPS
|
|
$
|
0.95
|
|
$
|
(0.02
|
)
|
$
|
0.93
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
$
|
352
|
|
|
-
|
|
$
|
352
|
|
Shares
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
359,838
|
|
|
-
|
|
|
359,838
|
|
Options
and restricted stock grants
|
|
|
|
|
|
7,701
|
|
|
7,701
|
|
Total
shares
|
|
|
359,838
|
|
|
7,701
|
|
|
367,539
|
|
EPS
|
|
$
|
0.98
|
|
$
|
(0.02
|
)
|
$
|
0.96
|
|
NOTE
5 - HEALTH CARE MEDICAL CLAIMS PAYABLE
Medical
claims payable for the Health Care segment reflects estimates of the ultimate
cost of claims that have been incurred but not yet reported, those which have
been reported but not yet paid (reported claims in process) and other medical
expense payable, which primarily comprises accruals for provider incentives
and
other amounts payable to providers. Incurred but not yet reported comprises
the
majority of the reserve balance as follows:
|
|
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Incurred
but not yet reported
|
|
$
|
847
|
|
$
|
820
|
|
Reported
claims in process
|
|
|
95
|
|
|
95
|
|
Other
medical expense payable
|
|
|
47
|
|
|
45
|
|
Medical
claims payable
|
|
$
|
989
|
|
$
|
960
|
|
|
|
|
|
|
|
|
|
Activity
in medical claims payable was as
follows:
|
|
|
|
|
|
|
|
As
of
|
|
As
of
|
|
(In millions)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Balance
at January 1,
|
|
$
|
960
|
|
$
|
1,165
|
|
Less:
Reinsurance and other
|
|
|
|
|
|
|
|
amounts recoverable
|
|
|
250
|
|
|
342
|
|
Balance
at January 1, net
|
|
|
710
|
|
|
823
|
|
Incurred
claims related to:
|
|
|
|
|
|
|
|
Current year
|
|
|
1,785
|
|
|
6,284
|
|
Prior years
|
|
|
(66
|
)
|
|
(173
|
)
|
Total incurred
|
|
|
1,719
|
|
|
6,111
|
|
Paid
claims related to:
|
|
|
|
|
|
|
|
Current year
|
|
|
1,163
|
|
|
5,615
|
|
Prior years
|
|
|
511
|
|
|
609
|
|
Total paid
|
|
|
1,674
|
|
|
6,224
|
|
Ending
Balance, net
|
|
|
755
|
|
|
710
|
|
Add:
Reinsurance and other
|
|
|
|
|
|
|
|
amounts recoverable
|
|
|
234
|
|
|
250
|
|
Ending
Balance
|
|
$
|
989
|
|
$
|
960
|
|
|
|
|
|
|
|
|
|
Reinsurance
and other amounts recoverable reflect amounts due from policyholders to cover
incurred but not reported and pended claims for minimum premium products and
certain administrative services only business where the right of offset does
not
exist.
For
the
three months ended March 31, 2007, actual experience differed from CIGNA's
key
assumptions, resulting in favorable incurred claims related to prior years’
medical claims payable of $66 million, or 1.1% of the current year incurred
claims as reported for the year ended December 31, 2006. Actual completion
factors resulted in a reduction in medical claims payable of $44 million, or
0.7% of the current year incurred claims as reported for the year ended December
31, 2006 for the insured book of business. Actual medical cost trend resulted
in
a reduction in medical claims payable of $22 million, or 0.4% of the current
year incurred claims as reported for the year ended December 31, 2006 for the
insured book of business. The favorable impact in 2007 relating to completion
factor and medical cost trend variances is primarily due to the release of
the
provision for moderately adverse conditions, which is a component of the
assumptions for both completion factors and medical cost trend, established
for
claims incurred related to 2006. This release was substantially offset by the
establishment of the provision for moderately adverse conditions established
for
claims incurred related to 2007.
For
the
year ended December 31, 2006, actual experience differed from CIGNA's key
assumptions, resulting in favorable incurred claims related to prior years’
medical claims payable of $173 million, or 2.6% of the current year incurred
claims as reported for the year ended December 31, 2005. The
favorable impact in 2006 is due to faster than expected completion factors
and
lower than expected medical cost trends, both of which included an assumption
for moderately adverse experience.
For
the
year ended December 31, 2006, actual completion factors resulted in a reduction
of the medical claims payable of $99 million or 1.5% of the current year
incurred claims as reported for the year ended December 31, 2005 for the insured
book of business. Completion factors in 2006 reflected better than expected
time
to process claims, driven by higher auto-adjudication rates, the impact of
claim
recoveries and more timely submissions of provider claims. For the year ended
December 31, 2006, actual medical cost trend resulted in a reduction of the
medical claims payable of $74 million or 1.1% of the current year incurred
claims as reported for the year ended December 31, 2005 for the insured book
of
business. The better than expected medical cost trend in 2006 was driven by
lower inpatient, outpatient and pharmacy service utilization and lower than
expected unit cost trends. The lower than expected unit cost trends reflected
provider contracting initiatives and the mix of services provided.
The
corresponding impact of favorable prior year development on net income was
$3
million for the three months ended March 31, 2007 and $54 million for the year
ended December 31, 2006, or 0.1% in 2007 and 0.8% in 2006 of the current year
incurred claims as reported for the years ended December 31, 2006 and 2005,
respectively. The change in the amount of the incurred claims related to prior
years in the medical claims payable liability does not directly correspond
to an
increase or decrease in CIGNA's net income recognized for the following reasons:
First,
due to the nature of CIGNA's retrospectively experience-rated business, only
adjustments to medical claims payable on accounts in deficit affect net income.
An increase or decrease to medical claims payable on accounts in deficit, in
effect, accrue to CIGNA and directly impact net income. An account is in deficit
when the accumulated medical costs and administrative charges, including profit
charges, exceed the accumulated premium received. Adjustments to medical claims
payable on accounts in surplus accrue directly to the policyholder with no
impact on CIGNA's net income. An account is in surplus when the accumulated
premium received exceeds the accumulated medical costs and administrative
charges, including profit charges.
Second,
CIGNA consistently recognizes the actuarial best estimate of the ultimate
liability within a level of confidence, as required by actuarial standards
of
practice, which require that the liabilities be adequate under moderately
adverse conditions. As CIGNA establishes the liability for each incurral year,
CIGNA ensures that its assumptions appropriately consider moderately adverse
conditions. When a portion of the development related to the prior year incurred
claims is offset by an increase deemed appropriate to address moderately adverse
conditions for the current year incurred claims, CIGNA does not consider that
offset amount as having any impact on net income.
The
determination of liabilities for Health Care medical claims payable requires
CIGNA to make critical accounting estimates. See Note 2(O) in CIGNA's 2006
Annual Report to Shareholders’ for additional information.
NOTE
6 - GUARANTEED MINIMUM DEATH BENEFIT AND INCOME BENEFIT
CONTRACTS
CIGNA’s
reinsurance operations, which were discontinued in 2000 and are now an inactive
business in run-off mode, reinsured a guaranteed minimum death benefit under
certain variable annuities issued by other insurance companies. These variable
annuities are essentially investments in mutual funds combined with a death
benefit. CIGNA has equity and other market exposures as a result of this
product.
The
determination of liabilities for guaranteed minimum death benefits requires
CIGNA to make critical accounting estimates. CIGNA regularly evaluates the
assumptions used in establishing reserves and changes its estimates if actual
experience or other evidence suggests that earlier assumptions should be
revised. If actual experience differs from the assumptions (including lapse,
partial surrender, mortality, interest rates and volatility) used in estimating
these reserves, the resulting change could have a material adverse effect on
CIGNA’s consolidated results of operations, and in certain situations, could
have a material adverse effect on CIGNA’s financial condition. CIGNA had future
policy benefit reserves for guaranteed minimum death benefit contracts of $861
million as of March 31, 2007, and $862 million as of December 31,
2006.
The
following provides information about CIGNA’s reserving methodology and
assumptions for guaranteed minimum death benefits as of March 31,
2007:
· |
The
reserves represent estimates of the present value of net amounts
expected
to be paid, less the present value of net future premiums. Included
in net
amounts expected to be paid is the excess of the guaranteed death
benefits
over the values of the contractholders’ accounts (based on underlying
equity and bond mutual fund
investments).
|
· |
The
reserves include an estimate for partial surrenders that essentially
lock
in the death benefit for a particular policy based on annual election
rates that vary from 0-20% depending on the net amount at risk for
each
policy and whether surrender charges
apply.
|
· |
The
mean investment performance assumption is 5% considering CIGNA's
program
to reduce equity market exposures using futures contracts. In addition,
the results of futures contracts are reflected in the liability
calculation as a component of investment
returns.
|
· |
The
volatility assumption is 15-30%, varying by equity fund type; 3-8%,
varying by bond fund type; and 1% for money market
funds.
|
· |
The
discount rate is 5.75%.
|
· |
The
mortality assumption is 70-75% of the 1994 Group Annuity Mortality
table,
with 1% annual improvement beginning January 1,
2000.
|
· |
The
lapse rate assumption is 0-15%, depending on contract type, policy
duration and the ratio of the net amount at risk to account
value.
|
As
of
March 31, 2007, the aggregate fair value of the underlying mutual fund
investments was $34.6 billion. The death benefit coverage in force as of that
date (representing the amount that CIGNA would have to pay if all of the
approximately 900,000 contractholders had died on that date) was $4.6 billion.
The death benefit coverage in force represents the excess of the guaranteed
benefit amount over the fair value of the underlying mutual fund investments.
The
notional amount of futures contract positions held by CIGNA at March 31, 2007,
was $690 million. CIGNA recorded in other revenues pre-tax losses of $7 million
for the three months of 2007 and pre-tax losses of $40 million for the three
months of 2006 from futures contracts. Expense offsets reflecting corresponding
changes in liabilities for these guaranteed minimum death benefit contracts
were
included in benefits and expenses.
For
further information and details on these contracts and the program adopted
to
reduce related equity market risk, refer to Note 7 of CIGNA's 2006 Annual Report
to Shareholders.
CIGNA
has
also written reinsurance contracts with issuers of variable annuity contracts
that provide annuitants with certain guarantees related to minimum income
benefits. See Note 15 for further
information.
In
the
normal course of business, CIGNA’s insurance subsidiaries enter into agreements
with other insurance companies to assume and cede reinsurance. Reinsurance
is
ceded primarily to limit losses from large exposures and to permit recovery
of a
portion of direct losses. Reinsurance does not relieve the originating insurer
of liability. CIGNA evaluates the financial condition of its reinsurers and
monitors their concentrations of credit risk.
Retirement
benefits business.
CIGNA
had a reinsurance recoverable of $2.4 billion as of March 31, 2007, and $2.5
billion as of December 31, 2006 from Prudential Retirement Insurance and Annuity
Company resulting from the sale of the retirement benefits business, which
was
primarily in the form of a reinsurance arrangement. The reinsurance recoverable
is secured primarily by fixed maturities and mortgage loans held in a business
trust established by the reinsurer. This recoverable is reduced as CIGNA's
reinsured liabilities are paid or directly assumed by the reinsurer.
Individual
life and annuity reinsurance. CIGNA
had
a reinsurance recoverable of $4.8 billion at March 31, 2007 and December 31,
2006, from The Lincoln National Life Insurance Company that arose from the
1998
sale of CIGNA’s individual life insurance and annuity business through an
indemnity reinsurance arrangement.
Unicover
and other run-off reinsurance. CIGNA's
Run-off Reinsurance operations reinsured workers’ compensation and personal
accident business in the United States and London markets. This included
participation in a workers’ compensation reinsurance pool formerly managed by
Unicover Managers, Inc.
CIGNA
purchased extensive retrocessional reinsurance for the Unicover contracts
(through the pool) and also purchased retrocessional coverage for its other
workers compensation and personal accident assumed risks. Although CIGNA is
involved in certain retrocessional enforcement arbitrations, most of the
disputes concerning the retrocessional contracts have been resolved. See Note 15 “Litigation and other legal matters” for more
information regarding these disputes.
CIGNA's
payment obligations under these contracts are based on ceding companies’ claim
payments relating to accidents and injuries. These claim payments can in some
cases extend many years into the future, and the amount of the ceding companies’
ultimate claims, and therefore the amount of CIGNA's ultimate payment
obligations and ultimate collection from retrocessionaires may not be known
with
certainty for some time.
CIGNA’s
reserves for underlying reinsurance exposures assumed by CIGNA, as well as
for
amounts recoverable from retrocessionaires, are considered appropriate as of
March 31, 2007, 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. CIGNA bears the risk of loss if its
payment obligations to cedents increase or if its retrocessionaires are unable
to meet, or successfully challenge, their reinsurance obligations to CIGNA.
Other
reinsurance. CIGNA
could have losses if reinsurers fail to indemnify CIGNA on other reinsurance
arrangements, either because of reinsurer insolvencies or contract disputes.
However, management does not expect charges for other unrecoverable reinsurance
to have a material adverse effect on CIGNA’s consolidated results of operations,
liquidity or financial condition.
Effects
of reinsurance. In
CIGNA’s consolidated income statements, premiums and fees were net of ceded
premiums, and benefits and expenses were net of reinsurance recoveries, in
the
following amounts:
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Premiums
and fees
|
|
|
|
|
|
Individual
life insurance
|
|
|
|
|
|
and annuity business sold
|
|
$
|
57
|
|
$
|
64
|
|
Other
|
|
|
54
|
|
|
45
|
|
Total
|
|
$
|
111
|
|
$
|
109
|
|
Reinsurance
recoveries
|
|
|
|
|
|
|
|
Individual
life insurance
|
|
|
|
|
|
|
|
and annuity business sold
|
|
$
|
92
|
|
$
|
75
|
|
Other
|
|
|
34
|
|
|
35
|
|
Total
|
|
$
|
126
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
NOTE
8 - PENSION AND OTHER POSTRETIREMENT BENEFIT
PLANS
Pension
benefits.
Components of net pension cost were as follows:
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Service
cost
|
|
$
|
19
|
|
$
|
19
|
|
Interest
cost
|
|
|
58
|
|
|
55
|
|
Expected
return on plan assets
|
|
|
(52
|
)
|
|
(52
|
)
|
Amortization
of:
|
|
|
|
|
|
|
|
Net loss from past experience
|
|
|
31
|
|
|
41
|
|
Net
pension cost
|
|
$
|
56
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
CIGNA
funds its qualified pension plans by at least the minimum amount required by
the
Employee Retirement Income Security Act of 1974, as amended (ERISA).
CIGNA
does not expect to make, nor is required to make domestic pension plan
contributions in 2007.
Other
postretirement benefits.
Components of net other postretirement benefit cost were as follows:
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Service
cost
|
|
$
|
1
|
|
$
|
1
|
|
Interest
cost
|
|
|
6
|
|
|
6
|
|
Amortization
of:
|
|
|
|
|
|
|
|
Net gain from past experience
|
|
|
(1
|
)
|
|
(1
|
)
|
Prior service cost
|
|
|
(4
|
)
|
|
(4
|
)
|
Net
other postretirement
|
|
|
|
|
|
|
|
benefit cost
|
|
$
|
2
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
Realized
Investment Gains and Losses
The
following realized gains and losses on investments exclude amounts required
to
adjust future policy benefits for certain annuities:
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Fixed
maturities
|
|
$
|
4
|
|
$
|
2
|
|
Equity
securities
|
|
|
10
|
|
|
3
|
|
Mortgage
loans
|
|
|
-
|
|
|
(6
|
)
|
Other
investments,
|
|
|
|
|
|
|
|
including derivatives
|
|
|
7
|
|
|
145
|
|
Realized
investment gains
|
|
|
|
|
|
|
|
from continuing operations,
|
|
|
|
|
|
|
|
before income taxes
|
|
|
21
|
|
|
144
|
|
Less
income taxes
|
|
|
8
|
|
|
50
|
|
Realized
investment gains
|
|
|
|
|
|
|
|
from continuing operations
|
|
|
13
|
|
|
94
|
|
Realized
investment gains from
|
|
|
|
|
|
|
|
discontinued operations
|
|
|
|
|
|
|
|
before income taxes
|
|
|
18
|
|
|
-
|
|
Less
income taxes
|
|
|
6
|
|
|
-
|
|
Realized
investment gains
|
|
|
|
|
|
|
|
from discontinued operations
|
|
|
12
|
|
|
-
|
|
Net
realized investment gains
|
|
$
|
25
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
For
the
three months ended March 31, 2007, realized investment results from discontinued
operations reflect gains on the sales of directly-owned real estate properties
held for the production of investment income. Proceeds on these sales have
been
separately disclosed in CIGNA's Consolidated Statement of Cash
Flows.
For
the
three months ended March 31, 2006, substantially all of the realized investment
gains in other investments were from sales of equity interest in real estate
limited liability entities.
Fixed
Maturities and Equity Securities
Securities
in the following table are included in fixed maturities and equities on CIGNA’s
balance sheet. These securities are carried at fair value with changes in fair
value reported in other revenues for trading securities and in realized
investment gains for hybrid securities, beginning after the implementation
of
SFAS No. 155 on January 1, 2007.
|
|
|
|
|
|
|
|
As
of
|
|
As
of
|
|
(In
millions)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Included
in fixed maturities:
|
|
|
|
|
|
Trading
securities
|
|
$
|
26
|
|
$
|
27
|
|
Hybrid
securities
|
|
|
8
|
|
|
10
|
|
Total
|
|
$
|
34
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
Included
in equity securities:
|
|
|
|
|
|
|
|
Hybrid
securities
|
|
$
|
104
|
|
$
|
105
|
|
Sales
of
available-for-sale fixed maturities and equity securities were as follows:
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Proceeds
from sales
|
|
$
|
199
|
|
$
|
540
|
|
Gross
gains from sales
|
|
$
|
15
|
|
$
|
16
|
|
Gross
losses from sales
|
|
$
|
(1
|
)
|
$
|
(12
|
)
|
Review
of Declines in Fair Value.
Management
reviews available-for-sale fixed maturities and equity securities (excluding
trading and hybrid securities) for impairment based on criteria that
include:
·
|
length
of time and severity of decline;
|
· |
financial
health and specific near term prospects of the issuer;
|
· |
changes
in the regulatory, economic or general market environment of the
issuer’s
industry or geographic region; and
|
· |
ability
and intent to hold until recovery.
|
As
of
March 31, 2007, fixed maturities (primarily investment grade corporate bonds)
with a decline in fair value from cost were as follows, including the length
of
time of such decline:
|
|
|
|
|
|
|
|
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
(In
millions)
|
|
Value
|
|
Cost
|
|
Depreciation
|
|
Fixed
Maturities:
|
|
|
|
|
|
|
|
|
|
|
One year or less:
|
|
|
|
|
|
|
|
|
|
|
Investment
grade
|
|
$
|
1,405
|
|
$
|
1,420
|
|
$
|
(15
|
)
|
Below
investment grade
|
|
$
|
88
|
|
$
|
89
|
|
$
|
(1
|
)
|
More than one year:
|
|
|
|
|
|
|
|
|
|
|
Investment
grade
|
|
$
|
1,298
|
|
$
|
1,331
|
|
$
|
(33
|
)
|
Below
investment grade
|
|
$
|
104
|
|
$
|
107
|
|
$
|
(3
|
)
|
The
unrealized depreciation of investment grade fixed maturities is primarily due
to
increases in interest rates since purchase.
CIGNA
recorded pre-tax impairments in fixed maturities of $9 million for the first
three months of 2006. There were no impairments in fixed maturities for the
first three months of 2007.
Mortgage
Loans
In
connection with CIGNA’s investment strategy to enhance investment yields by
selling senior participations, mortgage loans includes $124 million of mortgage
loans originated with the intent to sell as of March 31, 2007.
Other
Long-term Investments
As
of
March 31, 2007, CIGNA had commitments to contribute:
· |
$267
million to limited liability entities that hold either real estate
or
loans to real estate entities; and
|
· |
$228
million to entities that hold securities.
|
|
|
|
March
31,
|
|
December
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Short-term:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
291
|
|
$
|
376
|
|
Short-term
note payable
|
|
|
-
|
|
|
6
|
|
Total
short-term debt
|
|
$
|
291
|
|
$
|
382
|
|
Long-term:
|
|
|
|
|
|
|
|
Uncollateralized
debt:
|
|
|
|
|
|
|
|
7%
Notes due 2011
|
|
$
|
222
|
|
$
|
222
|
|
6.375%
Notes due 2011
|
|
|
226
|
|
|
226
|
|
5.375%
Notes due 2017
|
|
|
250
|
|
|
-
|
|
6.37%
Note due 2021
|
|
|
78
|
|
|
78
|
|
7.65%
Notes due 2023
|
|
|
100
|
|
|
100
|
|
8.3%
Notes due 2023
|
|
|
17
|
|
|
17
|
|
7.875%
Debentures due 2027
|
|
|
300
|
|
|
300
|
|
8.3%
Step Down Notes due 2033
|
|
|
83
|
|
|
83
|
|
6.15%
Notes due 2036
|
|
|
500
|
|
|
250
|
|
Other
|
|
|
16
|
|
|
18
|
|
Total
long-term debt
|
|
$
|
1,792
|
|
$
|
1,294
|
|
Under
a
universal shelf registration statement filed in 2006, CIGNA issued the following
securities in March 2007:
· |
$250
million of Senior Notes bearing interest at the rate of 5.375% per
year, which is payable on March 15 and September 15 of each year,
beginning September 15, 2007. The Notes will mature on March 15,
2017;
and
|
· |
$250
million of Senior Notes bearing interest at the rate of 6.150% per
year, which is payable on May 15 and November 15 of each year, beginning
May 15, 2007. The Notes will mature on November 15, 2036.
|
CIGNA may
redeem these Notes at any time, in whole or in part, at a specified redemption
price.
NOTE
11 - ACCUMULATED OTHER COMPREHENSIVE
LOSS
Accumulated
other comprehensive loss excludes amounts required to adjust future policy
benefits for certain annuities.
Changes
in accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
(Expense)
|
|
After-
|
|
(In
millions)
|
|
Pre-tax
|
|
Benefit
|
|
tax
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Net
unrealized depreciation, securities:
|
|
|
|
|
|
|
|
Implementation
effect of
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 155
|
|
$
|
(18
|
)
|
$
|
6
|
|
$
|
(12
|
)
|
Net
unrealized appreciation on securities
|
|
|
|
|
|
|
|
|
|
|
arising during the year
|
|
|
4
|
|
|
(1
|
)
|
|
3
|
|
Less:
reclassification adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
included in net income
|
|
|
(14
|
)
|
|
5
|
|
|
(9
|
)
|
Net
unrealized depreciation, securities
|
|
$
|
(28
|
)
|
$
|
10
|
|
$
|
(18
|
)
|
Net
unrealized depreciation,
|
|
|
|
|
|
|
|
|
|
|
derivatives
|
|
$
|
(1
|
)
|
$
|
-
|
|
$
|
(1
|
)
|
Net
translation of foreign
|
|
|
|
|
|
|
|
|
|
|
currencies
|
|
$
|
(1
|
)
|
$
|
1
|
|
$
|
-
|
|
Postretirement
benefits liability
|
|
|
|
|
|
|
|
|
|
|
adjustment:
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
|
|
|
|
|
|
|
|
|
|
|
amortization of net losses from past
|
|
|
|
|
|
|
|
|
|
|
experience and prior service costs
|
|
$
|
26
|
|
$
|
(9
|
)
|
$
|
17
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized depreciation, securities:
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized depreciation on securities
|
|
|
|
|
|
|
|
|
|
|
arising during the year
|
|
$
|
(147
|
)
|
$
|
51
|
|
$
|
(96
|
)
|
Less:
reclassification adjustment for gains
|
|
|
|
|
|
|
|
|
|
|
included in net income
|
|
|
(5
|
)
|
|
2
|
|
|
(3
|
)
|
Net
unrealized depreciation, securities
|
|
$
|
(152
|
)
|
$
|
53
|
|
$
|
(99
|
)
|
Net
unrealized depreciation,
|
|
|
|
|
|
|
|
|
|
|
derivatives
|
|
$
|
(2
|
)
|
$
|
1
|
|
$
|
(1
|
)
|
Net
translation of foreign
|
|
|
|
|
|
|
|
|
|
|
currencies
|
|
$
|
11
|
|
$
|
(4
|
)
|
$
|
7
|
|
As
discussed in Note 2, CIGNA implemented FIN 48 as of January
1, 2007. As a result, total unrecognized tax benefits at January 1, 2007 were
$245 million, including $120 million that would impact net income if recognized.
At March 31, 2007, total unrecognized tax benefits increased to $255 million,
including $129 million that would impact net income if recognized. For the
three
months ended March 31, 2007, the change in total unrecognized tax benefits
decreased net income by $10 million.
CIGNA
classifies net interest expense and any applicable
penalties as a component of income tax expense in Corporate. At January 1,
2007
CIGNA had $11 million of accrued interest with no material change in this amount
at March 31, 2007.
Management
has determined it is reasonably possible that the level of unrecognized tax
benefits could significantly decline over the next 12 months resulting from
a
possible settlement with the IRS of the examination of CIGNA's 2003 and 2004
consolidated federal income tax returns. This possible settlement could result
in a decline in the level of unrecognized tax benefits by as much as $50
million, of which CIGNA would expect not more than $30 million to affect net
income.
In
addition, the IRS recently completed substantive review of the 2003 and 2004
tax
years, for which two issues remain in dispute and are currently being addressed
at the Examination level. Review of the 2005 and 2006 tax years will commence
later in 2007. CIGNA conducts business in numerous State and Foreign
jurisdictions, and may be engaged in various audit proceedings at any given
time. Generally, no further State or Foreign audit activity for years prior
to
2001 is expected.
Compensation
cost and related tax benefits for stock options, restricted stock and deferred
stock units were as follows:
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Compensation
cost
|
|
$
|
13
|
|
$
|
12
|
|
Tax
benefits
|
|
$
|
5
|
|
$
|
4
|
|
Stock
options granted and the average fair value at the date of grant were as
follows:
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(Options
in thousands)
|
|
2007
|
|
2006
|
|
Options
granted
|
|
|
541
|
|
|
524
|
|
Weighted
average fair
|
|
|
|
|
|
|
|
value of options granted
|
|
$
|
48.04
|
|
$
|
43.97
|
|
CIGNA
calculated the average fair value using the Black-Scholes option pricing model.
The following assumptions were used:
|
|
|
|
|
|
As
of March 31,
|
|
|
|
2007
|
|
2006
|
|
Dividend
yield
|
|
|
0.1%
|
|
|
0.1%
|
|
Expected
volatility
|
|
|
35.0%
|
|
|
35.0%
|
|
Risk-free
interest rate
|
|
|
4.7%
|
|
|
4.6%
|
|
Expected
option life
|
|
|
4 years
|
|
|
4.5
years
|
|
The
expected volatility reflects CIGNA's past daily stock price volatility. CIGNA
does not consider volatility implied in the market prices of traded options
to
be a good indicator of future volatility because remaining maturities of traded
options are less than one year. In 2007, the expected option life reflects
CIGNA's historical experience excluding activity related to options granted
under a replacement option feature. Prior to 2007, CIGNA developed the expected
option life by considering certain factors, including assumptions used by other
companies with comparable stock option plan features and CIGNA's cancellation
of
a replacement option feature in June 2004.
Restricted
stock granted and the average fair value at the date of grant were as
follows:
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(Grants
in thousands)
|
|
2007
|
|
2006
|
|
Restricted
stock granted
|
|
|
216
|
|
|
193
|
|
Weighted
average fair value
|
|
$
|
140.49
|
|
$
|
122.50
|
|
NOTE
14
- SEGMENT INFORMATION
CIGNA's
operating segments generally reflect groups of related products, except for
the
International segment, which is generally based on geography. In accordance
with
accounting principles generally accepted in the United States of America,
operating segments that do not require separate disclosure may be combined.
CIGNA measures the financial results of its segments using “segment earnings
(loss)” which is defined as income (loss) from continuing operations excluding
after-tax realized investment gains and losses.
Beginning
in 2007, CIGNA reports the results of the run-off retirement business in Other
Operations. Prior periods have been restated to conform to this presentation.
Summarized
segment financial information was as follows:
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Premiums
and fees and other revenues
|
|
|
|
|
|
Health
Care
|
|
$
|
3,006
|
|
$
|
2,698
|
|
Disability
and Life
|
|
|
610
|
|
|
556
|
|
International
|
|
|
415
|
|
|
357
|
|
Run-off
Reinsurance
|
|
|
7
|
|
|
(25
|
)
|
Other
Operations
|
|
|
47
|
|
|
60
|
|
Corporate
|
|
|
(12
|
)
|
|
(12
|
)
|
Total
|
|
$
|
4,073
|
|
$
|
3,634
|
|
Income
(loss) from continuing operations
|
|
|
|
|
|
|
|
Health
Care
|
|
$
|
168
|
|
$
|
156
|
|
Disability
and Life
|
|
|
60
|
|
|
58
|
|
International
|
|
|
38
|
|
|
37
|
|
Run-off
Reinsurance
|
|
|
1
|
|
|
-
|
|
Other
Operations
|
|
|
23
|
|
|
25
|
|
Corporate
|
|
|
(26
|
)
|
|
(18
|
)
|
Segment
earnings
|
|
|
264
|
|
|
258
|
|
Realized
investment gains,
|
|
|
|
|
|
|
|
net of taxes
|
|
|
13
|
|
|
94
|
|
Income
from continuing
|
|
|
|
|
|
|
|
operations
|
|
$
|
277
|
|
$
|
352
|
|
NOTE
15
- CONTINGENCIES AND OTHER MATTERS
CIGNA,
through its subsidiaries, is contingently liable for various financial
guarantees provided in the ordinary course of business.
Financial
Guarantees Primarily Associated with the Sold Retirement Benefits
Business
Separate
account assets are contractholder funds maintained in accounts with specific
investment objectives. CIGNA records separate account liabilities equal to
separate account assets. In certain cases, CIGNA guarantees a minimum level
of
benefits for retirement and insurance contracts, primarily associated with
the
sold retirement benefits business (which was sold in April 2004), written in
separate accounts. CIGNA establishes an additional liability if management
believes that CIGNA will be required to make a payment under these guarantees.
Except
as
noted below, these guarantees are fully reinsured by an affiliate of the buyer
of the retirement benefits business:
· |
CIGNA
guarantees that separate account assets will be sufficient to pay
certain
retiree or life benefits. The sponsoring employers are primarily
responsible for ensuring that assets are sufficient to pay these
benefits
and are required to maintain assets that exceed a certain percentage
of
benefit obligations. This percentage varies depending on the asset
class
within a sponsoring employer’s portfolio (for example, a bond fund would
require a lower percentage than a riskier equity fund) and thus will
vary
as the composition of the portfolio changes. If employers do not
maintain
the required levels of separate account assets, CIGNA or an affiliate
of
the buyer has the right to redirect the management of the related
assets
to provide for benefit payments. As of March 31, 2007, employers
maintained assets that exceeded the benefit obligations. Benefit
obligations under these arrangements were $2.0 billion as of March
31,
2007. As of March 31, 2007, approximately 75% of these guarantees
is
reinsured by an affiliate of the buyer of the retirement benefits
business. There were no additional liabilities required for these
guarantees as of March 31, 2007.
|
· |
CIGNA
guarantees that separate account assets, primarily fixed income
investments, will be sufficient to pay retiree benefits for participants
under a certain group annuity contract. These guarantees are fully
reinsured by an affiliate of the buyer of the retirement benefits
business. These guaranteed benefit obligations were $31 million as
of
March 31, 2007. CIGNA had no additional liabilities for these guarantees
as of March 31, 2007.
|
Other
Financial Guarantees
Guaranteed
minimum income benefit contracts. CIGNA's
reinsurance operations, which were discontinued in 2000 and are now an inactive
business in run-off mode, reinsured minimum income benefits under certain
variable annuity contracts issued by other insurance companies. When annuitants
elect to receive these minimum income benefits, CIGNA may be required to make
payments based on changes in underlying mutual fund values and interest rates.
CIGNA
estimates the fair value of the assets and liabilities associated with these
contracts using assumptions as to market returns and volatility of the
underlying equity and bond mutual fund investments, interest rates, mortality,
lapse, credit risk and annuity election rates.
CIGNA
regularly evaluates each of the assumptions used in establishing these assets
and liabilities by monitoring actual experience as it emerges over time and
may
change its estimates if actual experience or other evidence suggests that
earlier assumptions should be revised. If actual experience differs from the
assumptions used in estimating these assets and liabilities, the resulting
change could have a material adverse effect on CIGNA’s consolidated results of
operations, and in certain situations, could have a material adverse effect
on
CIGNA’s financial condition.
The
following provides information about the assumptions used in calculating the
assets and liabilities for guaranteed minimum income benefits:
· |
These
liabilities represent estimates of the present value of net amounts
expected to be paid, less the present value of net future premiums
expected to be received. Included in net amounts expected to be paid
is
the excess of the expected value of the income benefits over the
values of
the annuitant’s accounts at the time of annuitization. The assets
associated with these contracts represent receivables in connection
with
reinsurance that CIGNA has purchased from third parties (see below).
|
· |
The
market return assumption is 8-11% varying by equity fund type; 6-7%
varying by bond fund type; and 5-6% for money market
funds.
|
· |
The
volatility assumption is 14-23%, varying by equity fund type; 5-7%,
varying by bond fund type; and 2-3% for money market
funds.
|
· |
The
discount rate is 5.75%.
|
· |
The
projected interest rate used to calculate the reinsured income benefits
at
the time of annuitization varies by economic scenario, reflects interest
rates as of the valuation date, and has a long-term mean rate of
5-6% and
a standard deviation of 12-13%.
|
· |
The
mortality assumption is 70% of the 1994 Group Annuity Mortality table,
with 1% annual improvement beginning January 1,
2000.
|
· |
The
lapse rate assumption is 3-12%, depending on policy
duration.
|
· |
The
annuity election rate assumption is that no more than 5% of the policies
eligible to annuitize their variable annuity contracts will do so
each
year.
|
As
of
March 31, 2007, CIGNA had liabilities of $126 million related to these contracts
and net amounts recoverable from reinsurers of $80 million (including $10
million for claims that have already been paid by CIGNA). CIGNA had an
additional liability of $46 million associated with the cost of reinsurance
as
of March 31, 2007. As of December 31, 2006, CIGNA had liabilities of $88 million
related to these contracts and net amounts recoverable from reinsurers of $51
million (including $2 million for claims that had already been paid by CIGNA).
CIGNA had an additional liability of $47 million associated with the cost of
reinsurance as of December 31, 2006. Management believes the current assumptions
used to estimate reserves for these liabilities are appropriate.
CIGNA
is
required to disclose the maximum potential undiscounted future payments for
guarantees related to minimum income benefits using hypothetical adverse
assumptions, defined as follows:
· |
No
annuitants surrendered their accounts;
and
|
· |
All
annuitants lived to elect their benefit;
and
|
· |
All
annuitants elected to receive their benefit on the next available
date
(2007 through 2014); and
|
· |
All
underlying mutual fund investment values remained at the March 31,
2007
value of $3.2 billion, with no future
returns.
|
The
maximum potential undiscounted payments that CIGNA would make under those
assumptions would aggregate $858 million before reinsurance recoveries. CIGNA
believes the likelihood of such payment is remote and expects the amount of
actual payments to be significantly less than this hypothetical undiscounted
aggregate amount. CIGNA has retrocessional reinsurance from third parties in
place which covers 55% of the exposures on these contracts.
Certain
Other Guarantees.
CIGNA
had indemnification obligations to lenders of up to $282 million as of March
31,
2007 related to borrowings by certain real estate joint ventures which CIGNA
either records as an investment or consolidates. These borrowings, which are
nonrecourse to CIGNA, are secured by the joint ventures’ real estate properties
with fair values in excess of the loan amounts and mature at various dates
beginning in the second quarter of 2007 through 2017. CIGNA’s indemnification
obligations would require payment to lenders for any actual damages resulting
from certain acts such as unauthorized ownership transfers, misappropriation
of
rental payments by others or environmental damages. Based on initial and ongoing
reviews of property management and operations, CIGNA does not expect that
payments will be required under these indemnification obligations. Any payments
that might be required could be recovered through a refinancing or sale of
the
assets. In some cases, CIGNA also has recourse to partners for their
proportionate share of amounts paid. There were no liabilities required for
these indemnification obligations as of March 31, 2007.
As
of
March 31, 2007 CIGNA guaranteed that it would compensate a lessor for a
shortfall of up to $44
million in the market value of certain leased equipment at the end of the lease.
Guarantees of $28 million expire in 2012 and $16 million expire in 2016. CIGNA
had no additional liabilities for these guarantees as of March 31,
2007.
CIGNA
had
indemnification obligations as of March 31, 2007 in connection with acquisition
and disposition transactions. These indemnification obligations are triggered
by
the breach of representations or covenants provided by CIGNA, such as
representations for the presentation of financial statements, the filing of
tax
returns, compliance with law or the identification of outstanding litigation.
These obligations are typically subject to various time limitations, defined
by
the contract or by operation of law, such as statutes of limitation. In some
cases, the maximum potential amount due is subject to contractual limitations
based on a percentage of the transaction purchase price, while in other cases
limitations are not specified or applicable. CIGNA does not believe that it
is
possible to determine the maximum potential amount due under these obligations,
since not all amounts due under these indemnification obligations are subject
to
limitation. There were no liabilities required for these indemnification
obligations as of March 31, 2007.
CIGNA
does not expect that these guarantees will have a material adverse effect on
CIGNA’s consolidated results of operations, liquidity or financial
condition.
Regulatory
and Industry Developments
Other
possible regulatory and legislative changes or judicial decisions that could
have an adverse effect on CIGNA’s employee benefits businesses
include:
· |
additional
mandated benefits or services that increase
costs;
|
· |
legislation
that would grant plan participants broader rights to sue their health
plans;
|
· |
changes
in public policy and in the political environment, which could affect
state and federal law, including legislative and regulatory proposals
related to health care issues, which could increase cost and affect
the
market for CIGNA's health care products and services; and pension
legislation, which could increase pension
cost;
|
· |
changes
in ERISA regulations resulting in increased application of varying
state
laws to benefit plan administration, thus increasing administrative
burdens and costs;
|
· |
additional
restrictions on the use of prescription drug formularies and rulings
from
pending purported class action litigation, which could result in
adjustments to or the elimination of the average wholesale price
or “AWP”
of pharmaceutical products as a benchmark in establishing certain
rates,
charges, discounts, guarantees and fees for various prescription
drugs;
|
· |
additional
privacy legislation and regulations that interfere with the proper
use of
medical information for research, coordination of medical care and
disease
and disability management;
|
· |
additional
variations among state laws mandating the time periods and administrative
processes for payment of health care provider claims;
|
· |
legislation
that would exempt independent physicians from antitrust laws;
and
|
· |
changes
in federal laws, such as amendments that could affect the taxation
of
employer provided benefits.
|
The
employee benefits industry remains under scrutiny by various state and federal
government agencies and could be subject to government efforts to bring criminal
actions in circumstances that could previously have given rise only to civil
or
administrative proceedings.
Concentration
of risk. South
Korea represents the single largest geographic market for CIGNA's international
businesses. For the three months ended March 31, 2007, South Korea generated
31%
of International’s revenues and 45% of its segment earnings. CIGNA
International’s business in South Korea would be vulnerable to adverse consumer
credit conditions and geopolitical and economic conditions in that country,
which could have a significant impact on CIGNA's consolidated results.
Litigation
and Other Legal Matters
Managed
care litigation. In 2004, a Florida federal court handling
multi-district health care litigation against CIGNA and several health care
industry competitors approved a settlement agreement between the physician
class
and CIGNA. A dispute over disallowed claims under the settlement submitted
by a
representative of certain class member physicians is proceeding to arbitration.
Separately, in April 2005, the court approved a settlement between CIGNA and
the
remaining plaintiffs, a class of non-physician health care professionals. In
the
fourth quarter of 2006, CIGNA received a $22 million pre-tax ($14 million
after-tax) insurance recovery related to this litigation. In the first quarter
of 2007, CIGNA received an additional $5 million pre-tax ($3 million after-tax)
insurance recovery related to this litigation. CIGNA seeks to pursue further
recoveries from one additional insurer.
Broker
compensation. Various
regulators, including the New York and Connecticut Attorneys General and the
Florida Office of Insurance Regulation, have been investigating insurance broker
compensation. Some regulators have brought suit against certain insurance
brokers, including Universal Life Resources (ULR), alleging, among other things,
that these brokers sought rigged bids from, and steered business to, insurers
with whom they had contingent compensation arrangements. Some of CIGNA's
subsidiaries are included in one such lawsuit seeking injunctive relief against
these contingent compensation practices. CIGNA is also providing
information about ULR in connection with investigations by the U.S. Attorney’s
Office for the Southern District of California and the San Diego District
Attorney. In addition, CIGNA provided information about another broker to the
U.S. Department of Labor. CIGNA is cooperating with the inquiries and
investigations.
Separately,
several purported class action lawsuits have been filed against brokers and
insurance companies, including certain of CIGNA’s subsidiaries, asserting that
contingent commissions are unlawful. These suits are now procedurally
consolidated in a multi-district litigation proceeding in federal court in
New
Jersey. On April 5, 2007, the court granted the defendants’ motion and dismissed
all of the federal antitrust, RICO and state law claims, leaving only certain
ERISA fiduciary claims.
The court has permitted plaintiffs to file an amended complaint by May 22,
2007.
Discovery is stayed until the court reaches a decision whether plaintiffs may
proceed regarding their anticipated amended antitrust and RICO claims. CIGNA
denies the allegations and will vigorously defend itself in these
cases.
CIGNA
Corporation securities litigation. During the fourth
quarter of 2006, CIGNA reached an agreement to resolve claims filed in federal
court in 2002 against former and current officers and members of the Board
of
Directors on behalf of a class of CIGNA shareholders. The settlement, which
specifies $93 million to be paid to the plaintiffs, was preliminarily approved
by the U.S. District Court for the Eastern District of Pennsylvania on January
25, 2007. A final fairness hearing before the Court was held on April 27,
2007 and final approval was received on April 30, 2007. In connection with
the settlement agreement, CIGNA recorded an after-tax charge of $25 million
($38
million pre-tax). The charge includes certain costs to defend and is net of
expected insurance recoveries.
In
addition, CIGNA and certain of its current and former Directors have reached
a
separate settlement with the Plaintiffs in the related derivative action. Under
that settlement, CIGNA's insurers will deposit and apportion, on behalf of
the
individual defendants, $6 million of the aforementioned $93 million class action
settlement, and have agreed to make a payment of not more than $720,000 for
Plaintiff’s attorney’s fees subject to court approval. On January 25, 2007, the
U.S. District Court for the Eastern District of Pennsylvania preliminarily
approved the settlement. A final fairness hearing before the Court was held
on
April 27, 2007 and final approval was received on April 30,
2007.
Amara
cash balance pension plan litigation. Plaintiffs representing
CIGNA Pension Plan participants affected by the 1998 conversion to a cash
balance formula filed a class action lawsuit against CIGNA and the CIGNA Pension
Plan in December 2001. The plaintiffs allege various ERISA violations including
among other things, that the Plan’s cash balance formula discriminates against
older employees; the conversion resulted in a wear away period (during which
the
pre-conversion accrued benefit exceeded the post-conversion benefit); and these
conditions are not adequately disclosed in the Plan. A non-jury trial began
on
September 11-15, 2006. Due to the court’s schedule, the proceedings were
adjourned and then
the
trial
was completed on January 25, 2007. The judge has ordered the parties to submit
post-trial briefs in advance of closing arguments to be held August 9,
2007.
Run-off
reinsurance litigation. In connection with CIGNA's
run-off reinsurance operations described in Note 7, CIGNA
purchased extensive retrocessional reinsurance for its Unicover contracts and
also for some other segments of its non-Unicover business. CIGNA is appealing
in
court an adverse award in a retrocessional enforcement arbitration. In addition,
CIGNA recently commenced another retrocessional enforcement arbitration. Other
disputes concerning retrocessional contracts have been substantially resolved
or
settled.
CIGNA
is
routinely involved in numerous claims, lawsuits, regulatory and IRS 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.
Item
2. Management’s
Discussion and Analysis of Financial
Condition and Results of Operations
In
this
filing and in other marketplace communications, CIGNA makes certain
forward-looking statements relating to its financial condition and results
of
operations, as well as to trends and assumptions that may affect CIGNA.
Generally, forward-looking statements can be identified through the use of
predictive words (e.g., “Outlook for 2007”). Actual results may differ from
CIGNA’s predictions. Some factors that could cause results to differ are
discussed throughout Management’s Discussion and Analysis, including in the
Cautionary Statement on page 44.
The
forward-looking statements contained in this filing represent management’s
current estimate as of the date of this filing. Management does not assume
any
obligation to update these estimates.
The
following discussion addresses the financial condition of CIGNA as of March
31,
2007, compared with December 31, 2006, and its results of operations for the
three months ended March 31, 2007, compared with the same period last year.
This
discussion should be read in conjunction with Management’s Discussion and
Analysis included in CIGNA’s 2006 Annual Report to Shareholders and Form 10-K,
to which the reader is directed for additional information.
The
preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of
portions of the insurance business as well as competitive and other market
conditions, call for caution in estimating full year results based on interim
results of operations.
OVERVIEW
CIGNA
Corporation and its subsidiaries constitute one of the largest investor-owned
health care and related benefits organizations in the United States. Key product
lines, offered through the workplace, include medical coverages and related
specialty health care products and services such as pharmacy, behavioral health,
dental benefits, and disease management; group disability, life and accident
insurance; and disability and workers’ compensation case management and related
services. In addition, CIGNA has an international operation that offers life,
accident and supplemental health insurance products and international health
care products and services to businesses and individuals in selected markets.
CIGNA also has certain inactive businesses, including a run-off reinsurance
operation.
CIGNA’s
results are influenced by a range of economic and other factors,
including:
· |
cost
trends and inflation levels for medical and related
services;
|
· |
patterns
of utilization of medical and other
services;
|
· |
the
tort liability system;
|
· |
interest
rates and equity market returns;
|
· |
regulations
and tax rules related to the provision and administration of employee
benefit plans; and
|
· |
initiatives
to increase health care regulation.
|
CIGNA
generates revenues, net income and cash flow from operations by maintaining
and
growing its relationships with employers and consumers, charging prices that
reflect emerging experience and investing available cash at attractive rates
of
return for appropriate durations. CIGNA's ability to increase operating results
in terms of growth in revenues, net income and operating cash flow is directly
related to its ability to execute plans that address broad economic factors
as
well as company-specific drivers.
Key
company-specific drivers affecting CIGNA’s results include:
· |
competitiveness
of CIGNA's product design and service
quality;
|
· |
the
absolute level of and trends in benefit
costs;
|
· |
the
volume of customers served and the mix of products and services purchased
by those customers;
|
· |
the
ability to price products and services competitively at levels that
appropriately account for underlying cost inflation and utilization
patterns;
|
· |
the
relationship between administrative costs and revenue;
and
|
· |
the
ability to execute on key technology initiatives, particularly those
related to enhancing and developing consumer-directed health plan
products
and the related service model, and successfully managing outsourcing
arrangements with vendors, including International Business Machines
Corporation (IBM) (see “Contractual Obligations” on page 50 in CIGNA's
2006 Annual Report to
Shareholders).
|
CIGNA
regularly monitors trends in the above mentioned economic and other factors
and
the company-specific drivers of operating results. CIGNA develops strategic
and
tactical plans designed to improve performance and maximize its competitive
position in the markets it serves. CIGNA's ability to achieve its financial
objectives is dependent upon its ability to effectively execute these plans
and
to appropriately respond to emerging economic and company-specific
trends.
CIGNA
is
focused on continuing to improve the performance of and profitably grow the
health care operations; as well as continuing to profitably grow the disability
and life insurance and international businesses; and managing the risks
associated with the run-off reinsurance operations. In the health care
operations, CIGNA has initiatives in place to: (1) offer products that meet
emerging consumer and market trends; (2) strengthen underwriting and pricing
effectiveness; (3) improve medical membership results; (4) improve medical
cost
trends; (5) deliver quality member service; and (6) lower administrative
expenses (see pages 31-33
for
further discussion).
CIGNA
believes that the health care business model is evolving to one that focuses
more directly on the role of the health care consumer. The consumer-directed
environment presents particular challenges by requiring a more complex service
model and products specifically designed to meet the emerging market needs.
In
order to meet the emerging market challenges, CIGNA is investing in product
development, service, technology, educational resources and customer support
tools to assist consumers in making more informed choices regarding their health
care and to achieve better health outcomes. CIGNA
believes that its investments in these areas will position it more effectively
to meet this emerging market need.
CIGNA's
disability and life insurance operations continue to focus on profitable growth
in the disability business in both the middle market and national accounts.
The
international business is focused on profitable growth particularly in the
life,
accident and supplemental health insurance and international health care
benefits businesses.
In
the
run-off reinsurance operations, CIGNA maintains a program to reduce the equity
market risk associated with its guaranteed minimum death benefit reinsurance
exposures. CIGNA is also pursuing the resolution of disputes associated with
workers’ compensation and other reinsurance contracts through audits of claims
from assumed business and managing collections from retrocessionaires, including
issues relating to contract terms and coverage (see page 36 for further
discussion).
CONSOLIDATED
RESULTS OF OPERATIONS
|
|
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Premiums
and fees
|
|
$
|
3,708
|
|
$
|
3,268
|
|
Net
investment income
|
|
|
280
|
|
|
329
|
|
Other
revenues
|
|
|
365
|
|
|
366
|
|
Realized
investment gains
|
|
|
21
|
|
|
144
|
|
Total
revenues
|
|
|
4,374
|
|
|
4,107
|
|
Benefits
and expenses
|
|
|
3,961
|
|
|
3,579
|
|
Income
from continuing
|
|
|
|
|
|
|
|
operations before taxes
|
|
|
413
|
|
|
528
|
|
Income
taxes
|
|
|
136
|
|
|
176
|
|
Income
from continuing
|
|
|
|
|
|
|
|
operations
|
|
|
277
|
|
|
352
|
|
Income
from discontinued
|
|
|
|
|
|
|
|
operations, net of taxes
|
|
|
12
|
|
|
-
|
|
Net
income
|
|
$
|
289
|
|
$
|
352
|
|
Realized
investment gains,
|
|
|
|
|
|
|
|
net of taxes
|
|
$
|
13
|
|
$
|
94
|
|
Income
from continuing operations for the first three months of 2007, compared with
the
first three months of 2006, reflects:
· |
lower realized gains from the sales
of
investments (see Note
9 to the Financial Statements); |
· |
lower net investment income
primarily due to the impact of share repurchase activity (see page
37); and |
· |
higher earnings in the Health Care segment
(see page 29). |
Premiums
and fees for the first three months of 2007, compared with the first three
months of 2006, reflect:
· |
higher premiums and fees in the Health
Care
segment (see page 29) due to medical membership growth, rate increases
and
higher Medicare Part D premiums; and |
· |
higher premiums and fees in the Disability
and Life segment (see page 33) and in the International segment (see
page
34) due to business growth. |
Benefits
and expenses for the first three months of 2007, compared with the first three
months of 2006, reflect:
· |
higher medical claims expense in the
Health
Care segment (see page 29); and |
· |
higher benefits expense in the International
segment due to overall business growth, as well as higher loss ratios
in
the expatriate employee benefits business.
|
Outlook
for 2007
CIGNA
expects full year 2007 income from continuing operations, excluding realized
investment results and special items, to be slightly lower than the comparable
2006 amount, which included $54 million of favorable prior year claim
development. Excluding the favorable prior year claim development in 2006,
CIGNA
expects full year 2007 income from continuing operations, excluding realized
investment results and special items, to increase modestly from 2006 primarily
due to strong growth in the health care operations and the disability and life
insurance and international businesses, partially offset by lower earnings
in
the run-off businesses and Corporate. Corporate losses are expected to be higher
due to the absence of favorable expense and tax items that occurred in 2006.
CIGNA's outlook is subject to the factors cited in the Cautionary Statement
on
page 44.
Management
is not able to estimate 2007 income from continuing operations under generally
accepted accounting principles because it includes realized investment gains
(losses) and special items. Information is not available for management to
reasonably estimate future realized investment gains (losses) due, in part,
to
interest rate and stock market volatility and other internal and external
factors. Information is not available for management to identify or reasonably
estimate 2007 special items.
There
were no special items noted for the three months ended March 31, 2007 or
2006.
Critical
Accounting Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America (GAAP) requires management
to
make estimates and assumptions that affect reported amounts and related
disclosures in the financial statements. Management considers an accounting
estimate to be critical if:
· |
it
requires assumptions to be made that were uncertain at the time the
estimate was made; and
|
· |
changes
in the estimate or different estimates that could have been selected
could
have a material impact on CIGNA’s consolidated results of operations or
financial condition.
|
Management
has discussed the development and selection of its critical accounting estimates
with the Audit Committee of CIGNA’s Board of Directors.
CIGNA’s
most critical accounting estimates, as well as the effects of hypothetical
changes in material assumptions used to develop each estimate, are described
in
CIGNA’s 2006 Annual Report to Shareholders beginning on page 29 and are as
follows:
· |
future
policy benefits - guaranteed minimum death benefits;
|
· |
Health
Care medical claims payable;
|
· |
accounts
payable, accrued expenses and other liabilities, and other assets
-
guaranteed minimum income benefits;
|
· |
reinsurance
recoverables for Run-off Reinsurance;
|
· |
accounts
payable, accrued expenses and other liabilities - pension liabilities;
and
|
· |
investments
- recognition of losses from other-than-temporary impairments of
public
and private placement fixed
maturities.
|
For
the
three months ended March 31, 2007, actual experience differed from CIGNA's
key
assumptions, resulting in favorable incurred claims related to prior years’
medical claims payable of $66 million, or 1.1% of the current year incurred
claims as reported for the year ended December 31, 2006. Actual completion
factors resulted in a reduction in medical claims payable of $44 million, or
0.7% of the current year incurred claims as reported for the year ended December
31, 2006 for the insured book of business. Actual medical cost trend resulted
in
a reduction in medical claims payable of $22 million, or 0.4% of the current
year incurred claims as reported for the year ended December 31, 2006 for the
insured book of business. The favorable impact in 2007 relating to completion
factor and medical cost trend variances is primarily due to the release of
the
provision for moderately adverse conditions, which is a component of the
assumptions for both completion factors and medical cost trend, established
for
claims incurred related to 2006. This release was substantially offset by the
establishment of the provision for moderately adverse conditions established
for
claims incurred related to 2007.
For
the
year ended December 31, 2006, actual experience differed from CIGNA's key
assumptions, resulting in favorable incurred claims related to prior years’
medical claims payable of $173 million, or 2.6% of the current year incurred
claims as reported for the year ended December 31, 2005. The
favorable impact in 2006 is due to faster than expected completion factors
and
lower than expected medical cost trends, both of which included an assumption
for moderately adverse experience.
For
the
year ended December 31, 2006, actual completion factors resulted in a reduction
of the medical claims payable of $99 million, or 1.5% of the current year
incurred claims as reported for the year ended December 31, 2005 for the insured
book of business. Completion factors in 2006 reflected
better
than expected time to process claims, driven by higher auto-adjudication rates,
the impact of claim recoveries and more timely submissions of provider claims.
For the year ended December 31, 2006, actual medical cost trend resulted in
a
reduction of the medical claims payable of $74 million or 1.1% of the current
year incurred claims as reported for the year ended December 31, 2005 for the
insured book of business. The better than expected medical cost trend in 2006
was driven by lower inpatient, outpatient and pharmacy service utilization
and
lower than expected unit cost trends. The lower than expected unit cost trends
reflected provider contracting initiatives and the mix of services
provided.
The
corresponding impact of favorable prior year development on net income was
$3
million for the three months ended March 31, 2007 and $54 million for the year
ended December 31, 2006, or 0.1% in 2007 and 0.8% in 2006 of the current year
incurred claims as reported for the years ended December 31, 2006 and 2005,
respectively.
See
Note
5 to the Financial Statements for additional
information.
Summary.
In
addition, there are other accounting estimates used in the preparation of
CIGNA’s consolidated financial statements, including estimates of liabilities
for future policy benefits other than those identified above, as well as
estimates with respect to unpaid claims and claim expenses, post-employment
and
postretirement benefits other than pensions, certain compensation accruals
and
income taxes.
Management
believes the current assumptions used to estimate amounts reflected in CIGNA’s
consolidated financial statements are appropriate. However, if actual experience
differs from the assumptions used in estimating amounts reflected in CIGNA’s
consolidated financial statements, the resulting changes could have a material
adverse effect on CIGNA’s consolidated results of operations, and in certain
situations, could have a material adverse effect on liquidity and CIGNA’s
financial condition.
CIGNA
may
from time to time acquire or dispose of assets, subsidiaries or lines of
business. Significant transactions are described below.
Star-HRG
Acquisition.
On July
11, 2006, CIGNA acquired the operating assets of Star-HRG, a leading provider
of
low cost health plans and other employee benefits coverage for hourly and
part-time workers and their families, for $156 million, including assumed
liabilities. The acquisition was financed through the issuance of a note payable
to the seller for $151 million of which $73 million was paid in 2006. The
results of Star-HRG are included in the accompanying consolidated financial
statements from the date of the acquisition.
Sale
of the Brazilian Life Insurance Operations.
During
2006, CIGNA entered into negotiations to sell its Brazilian life insurance
business. The sale is expected to close in 2007 and as a result, CIGNA has
classified this business as a discontinued operation.
CIGNA
has
undertaken several initiatives to realign its organization and consolidate
support functions in an effort to increase efficiency and responsiveness to
customers. See page 33 for further information on lowering administrative
expenses.
In
the
fourth quarter of 2006, CIGNA completed a review of staffing levels in the
health care operations and in supporting areas. As a result, CIGNA recognized
in
other operating expenses a charge for severance costs of $37 million pre-tax
(Health Care - $24 million; Corporate - $13 million) and $23 million after-tax
(Health Care - $15 million; Corporate - $8 million). CIGNA expects to achieve
$45 million after-tax in estimated savings in 2007 and $68 million after-tax
in
annualized estimated savings from this specific program. A portion of these
savings will be reinvested to further enhance CIGNA's capabilities in the areas
of consumerism and health advocacy.
Regulatory
and Industry Developments
Other
possible regulatory changes or judicial decisions that could have an adverse
effect on CIGNA’s employee benefits businesses include:
· |
additional
mandated benefits or services that increase
costs;
|
· |
legislation
that would grant plan participants broader rights to sue their health
plans;
|
· |
changes
in public policy and in the political environment, which could affect
state and federal law, including legislative and regulatory proposals
related to health care issues, which could increase cost and affect
the
market for CIGNA's health care products and services; and pension
legislation, which could increase pension
cost;
|
· |
changes
in ERISA regulations resulting in increased administrative burdens
and
costs;
|
· |
additional
restrictions on the use of prescription drug formularies and rulings
from
pending purported class action litigation, which could result in
adjustments to or the elimination of the average wholesale price
or “AWP”
of pharmaceutical products as a benchmark in establishing certain
rates,
charges, discounts, guarantees and fees for various prescription
drugs;
|
· |
additional
privacy legislation and regulations that interfere with the proper
use of
medical information for research, coordination of medical care and
disease
and disability management;
|
· |
additional
variations among state laws mandating the time periods and administrative
processes for payment of health care provider claims ;
|
· |
legislation
that would exempt independent physicians from antitrust laws;
and
|
· |
changes
in federal tax laws, such as amendments that could affect the taxation
of
employer provided benefits.
|
The
employee benefits industry remains under scrutiny by various state and federal
government agencies and could be subject to government efforts to bring criminal
actions in circumstances that could previously have given rise only to
civil or administrative proceedings.
Litigation
and other legal matters.
Managed
care litigation. In 2004, a Florida federal court handling
multi-district health care litigation against CIGNA and several health care
industry competitors approved a settlement agreement between the physician
class
and CIGNA. A dispute over disallowed claims under the settlement submitted
by a
representative of certain class member physicians is proceeding to arbitration.
Separately, in April 2005, the court approved a settlement between CIGNA and
the
remaining plaintiffs, a class of non-physician health care professionals. In
the
fourth quarter of 2006, CIGNA received a $22 million pre-tax ($14 million
after-tax) insurance recovery related to this litigation. In the first quarter
of 2007, CIGNA received an additional $5 million pre-tax ($3 million after-tax)
insurance recovery related to this litigation. CIGNA seeks to pursue further
recoveries from one additional insurer.
Broker
compensation. Various regulators, including the New York and
Connecticut Attorneys General and the Florida Office of Insurance Regulation,
have been investigating insurance broker compensation. Some regulators
have brought suit against certain insurance brokers, including Universal Life
Resources (ULR), alleging, among other things, that these brokers sought rigged
bids from, and steered business to, insurers with whom they had contingent
compensation arrangements. Some of CIGNA's subsidiaries are included in
one such lawsuit seeking injunctive relief against these contingent compensation
practices. CIGNA is also providing information about ULR in connection
with investigations by the
U.S.
Attorney’s Office for the Southern District of California and the San Diego
District Attorney. In addition, CIGNA provided information about another broker
to the U.S. Department of Labor. CIGNA is cooperating with the inquiries and
investigations.
Separately,
several purported class action lawsuits have been filed against brokers and
insurance companies, including certain of CIGNA's subsidiaries, asserting that
contingent commissions are unlawful. These suits are now procedurally
consolidated in a multi-district litigation proceeding in federal court in
New
Jersey. On April 5, 2007, the court granted the defendants' motion and dismissed
all of the federal antitrust, RICO and state law claims, leaving only certain
ERISA fiduciary claims. The court has permitted plaintiffs to file an amended
complaint by May 22, 2007. Discovery is stayed until the court reaches a
decision whether plaintiffs may proceed regarding their anticipated amended
antitrust and RICO claims. CIGNA denies the allegations and will vigorously
defend itself in these cases.
CIGNA
Corporation securities litigation. During
the fourth quarter of 2006, CIGNA reached an agreement to resolve claims filed
in federal court in 2002 against former and current officers and members of
the
Board of Directors on behalf of a class of CIGNA shareholders. The settlement,
which specifies $93 million to be paid to the plaintiffs, was preliminarily
approved by the U.S. District Court for the Eastern District of Pennsylvania
on
January 25, 2007. A final fairness hearing before the Court was held on April
27, 2007 and final approval was received on April 30, 2007. In
connection with the settlement agreement, CIGNA recorded an after-tax charge
of
$25 million ($38 million pre-tax). The charge includes certain costs to defend
and is net of expected insurance recoveries.
In
addition, CIGNA and certain of its current and former Directors have reached
a
separate settlement with the Plaintiffs in the related derivative action. Under
that settlement, CIGNA's insurers will deposit and apportion, on behalf of
the
individual defendants, $6 million of the aforementioned $93 million class action
settlement, and have agreed to make a payment of not more than $720,000 for
Plaintiff’s attorney’s fees subject to court approval. On January 25, 2007, the
U.S. District Court for the Eastern District of Pennsylvania preliminarily
approved the settlement. A final fairness hearing before the Court was held
on
April 27, 2007 and final approval was received on April 30,
2007.
Amara
cash balance pension plan litigation.
Plaintiffs representing CIGNA Pension Plan participants affected by the 1998
conversion to a cash balance formula filed a class action lawsuit against CIGNA
and the CIGNA Pension Plan in December 2001. The plaintiffs allege various
ERISA
violations including, among other things, that the Plan’s cash balance formula
discriminates against older employees; the conversion resulted in a wear away
period (during which the pre-conversion accrued benefit exceeded the
post-conversion benefit); and these conditions are not adequately disclosed
in
the Plan. A non-jury trial began on September 11-15, 2006. Due to the court’s
schedule, the proceedings were adjourned and then the trial was completed on
January 25, 2007. The judge has ordered the parties to submit post-trial briefs
in advance of closing arguments to be held August 9, 2007.
Run-off
reinsurance litigation. In
connection with CIGNA's run-off reinsurance operations described in Note 7
to
the Financial Statements, CIGNA purchased extensive retrocessional reinsurance
for its Unicover contracts and also for some other segments of its non-Unicover
business. CIGNA is appealing in court an adverse award in a retrocessional
enforcement arbitration. In addition, CIGNA recently commenced another
retrocessional enforcement arbitration. Other disputes concerning retrocessional
contracts have been substantially resolved or settled.
CIGNA
is
routinely involved in numerous claims, lawsuits, regulatory and IRS audits,
investigations and other legal matters arising, for the most part, in the
ordinary course of the business of administering and insuring employee benefit
programs. An increasing number of claims are being made for substantial
non-economic, extra-contractual or punitive damages. The outcome of litigation
and other legal matters is always uncertain, and outcomes that are not justified
by the evidence can occur. CIGNA believes that it has valid defenses to the
legal matters pending against it and is defending itself vigorously.
Nevertheless, it is possible that resolution of one or more of the legal matters
currently pending or threatened could result in losses material to CIGNA’s
consolidated results of operations, liquidity or financial
condition.
Summary.
The
eventual effect on CIGNA of the changing environment in which it operates
remains uncertain. For additional information on contingencies that could affect
CIGNA’s results, see Note 15 to the Financial
Statements.
Accounting
Pronouncements
For
information on recent accounting pronouncements, see Note 2
to the Financial Statements.
Segment
Reporting
Operating
segments generally reflect groups of related products, but the International
segment is generally based on geography. CIGNA measures the financial results
of
its segments using “segment earnings (loss),” which is defined as income (loss)
from continuing operations excluding after-tax realized investment gains and
losses.
Beginning
in 2007, CIGNA reports the results of the run-off retirement business in Other
Operations. Prior periods have been restated to conform to this
presentation.
|
|
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Premiums
and fees
|
|
$
|
2,675
|
|
$
|
2,356
|
|
Net
investment income
|
|
|
54
|
|
|
71
|
|
Other
revenues
|
|
|
331
|
|
|
342
|
|
Segment
revenues
|
|
|
3,060
|
|
|
2,769
|
|
Benefits
and expenses
|
|
|
2,800
|
|
|
2,530
|
|
Income
before taxes
|
|
|
260
|
|
|
239
|
|
Income
taxes
|
|
|
92
|
|
|
83
|
|
Segment
earnings
|
|
$
|
168
|
|
$
|
156
|
|
Realized
investment gains,
|
|
|
|
|
|
|
|
net of taxes
|
|
$
|
8
|
|
$
|
60
|
|
The
Health Care segment includes insured and self-funded medical, dental, behavioral
health, prescription drug and other products and services that may be integrated
to support consumer-focused health care programs. This segment also includes
group disability and life insurance products that were historically sold in
connection with certain experience-rated medical products that continue to
be
managed within the health care business.
These
products and services are offered through guaranteed cost, retrospectively
experience-rated and service only funding arrangements. For a description of
funding arrangements, see page 10 of CIGNA's 2006 Form 10-K.
Results
Segment
earnings include favorable after-tax prior year claim development of $3 million
for the first three months of 2007, compared with $16 million for the first
three months of 2006.
Favorable
prior year claim development for the first three months of 2007 is lower,
compared with the first three months of 2006, reflecting actual completion
factors and actual medical cost trends that were in line with
assumptions.
Favorable
prior year claim development for the three months of 2006 is primarily due
to:
· |
higher
than expected completion factors reflecting better than expected
time to
process claims driven by higher auto-adjudication rates and more
timely
submission of provider claims; and
|
· |
lower
than expected medical cost trends driven by lower inpatient, outpatient
and pharmacy service utilization and lower than expected unit cost
trends
due to provider contracting initiatives and the mix of services
provided.
|
Excluding
prior year claim development, segment earnings for 2007 were higher than the
prior year reflecting:
· |
strong
renewal pricing execution in the guaranteed cost business reflecting
premium increases, which were greater than medical cost increases;
|
· |
higher
contributions from the specialty businesses;
and
|
· |
the
favorable impact of a $3 million after-tax insurance recovery related
to
the managed care litigation (see page
27).
|
These
factors were partially offset by lower earnings in the experience-rated
business.
Premiums
and Fees
Premiums
and fees increased by 14% for the first three months of 2007 primarily
reflecting:
· |
medical
membership growth including the voluntary and limited benefits
business;
|
· |
rate
increases in the guaranteed cost business;
and
|
· |
higher
Medicare Part D premiums.
|
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Medical:
|
|
|
|
|
|
Commercial HMO1
|
|
$
|
631
|
|
$
|
669
|
|
Other Guaranteed Cost
|
|
|
372
|
|
|
190
|
|
Voluntary/limited benefits
|
|
|
38
|
|
|
-
|
|
Experience-rated medical2
|
|
|
428
|
|
|
437
|
|
Dental
|
|
|
192
|
|
|
193
|
|
Medicare
|
|
|
88
|
|
|
81
|
|
Medicare Part D
|
|
|
94
|
|
|
52
|
|
Other medical3
|
|
|
262
|
|
|
225
|
|
Total medical
|
|
|
2,105
|
|
|
1,847
|
|
Life
and other non-medical
|
|
|
69
|
|
|
78
|
|
Total premiums
|
|
|
2,174
|
|
|
1,925
|
|
Fees4
|
|
|
501
|
|
|
431
|
|
Total premiums and fees
|
|
$
|
2,675
|
|
$
|
2,356
|
|
1
Includes
premiums of $29 million in 2007 associated with the health care members in
Tucson, Arizona (see Medical Membership below).
2
Includes minimum premium members, which have a risk profile similar to
experience-rated funding arrangements. The risk portion of minimum premium
revenue is reported in experience-rated medical premium whereas the self funding
portion of minimum premium revenue is recorded in fees.
3
Other
medical premiums include risk revenue for stop loss and specialty
products.
4
Represent administrative service fees for medical members and related specialty
products and include fees related to Medicare Part D.
Benefits
and Expenses
Health
Care segment benefits and expenses consist of the following:
|
|
|
|
|
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Medical
claims expense
|
|
$
|
1,719
|
|
$
|
1,448
|
|
Other
benefit expenses
|
|
|
64
|
|
|
78
|
|
Other
operating expenses
|
|
|
1,017
|
|
|
1,004
|
|
Total
benefits and expenses
|
|
$
|
2,800
|
|
$
|
2,530
|
|
|
|
|
|
|
|
|
|
Medical
claims expense for the first three months of 2007 increased reflecting higher
medical membership and the impact of increasing medical cost trend.
Other
operating expenses for the first three months of 2007 reflect increases related
to the pharmacy, disease management, Medicare Part D and the voluntary and
limited benefits businesses. Excluding these items, other operating expenses
for
the first three months of 2007 were level compared with the first three months
of 2006, reflecting productivity improvements offsetting the impact of
membership increases.
Medical
Membership
CIGNA's
medical membership includes any individual for whom CIGNA retains medical
underwriting risk, who uses a CIGNA network for services covered under their
medical coverage or for whom CIGNA administers medical claims. As of March
31,
estimated medical membership was as follows:
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Guaranteed
cost:
|
|
|
|
|
|
Commercial HMO
|
|
|
670
|
|
|
798
|
|
Medicare and Medicaid
|
|
|
32
|
|
|
32
|
|
Other
|
|
|
458
|
|
|
260
|
|
Total guaranteed cost excluding
|
|
|
|
|
|
|
|
voluntary/limited benefits
|
|
|
1,160
|
|
|
1,090
|
|
Voluntary/limited benefits
|
|
|
174
|
|
|
-
|
|
Total guaranteed cost
|
|
|
1,334
|
|
|
1,090
|
|
Experience-rated1
|
|
|
863
|
|
|
933
|
|
Service
|
|
|
7,633
|
|
|
6,995
|
|
Total
medical membership
|
|
|
9,830
|
|
|
9,018
|
|
1
Includes
minimum premium members, which have a risk profile similar to experience-rated
funding arrangements. The risk portion of minimum premium revenue is reported
in
experience-rated medical premium whereas the self funding portion of minimum
premium revenue is recorded in fees.
In
2006,
approximately 54,000 health care members in Tucson, Arizona were transitioned
to
CIGNA as the result of a Department of Justice requirement to divest certain
contracts in connection with the merger of two health care industry competitors.
Initially, CIGNA serves as a reinsurer and then works toward underwriting these
customers directly on CIGNA contracts at the time each contract is
scheduled for renewal (most of which are scheduled to renew on July 1,
2007). Given the unique nature of this transaction, CIGNA will not include
these
members in its reported medical membership until such customers renew on CIGNA
contracts. CIGNA has renewed 13,000 members as of March 31, 2007. These members
are included in the above medical membership results.
CIGNA
continues to focus on improving operational effectiveness and the financial
results of its health care operations. Operational effectiveness is often
dependent upon execution of systems and information technology initiatives
as
well as having an appropriate infrastructure in place. Executing on the
following areas of focus is critical to achieving success in a marketplace
that
is concentrated on the existing employer based offerings and one that is
evolving towards consumer-directed healthcare, both of which present unique
challenges. CIGNA believes that continued focus on the following key areas
will
result in improved operational effectiveness and position us better to meet
the
challenges of the current healthcare environment:
· |
offering
products that meet emerging market and consumer
trends;
|
· |
strengthening
underwriting and pricing
effectiveness;
|
· |
improving
medical membership results;
|
· |
improving
medical cost trends;
|
· |
continuing
to deliver quality member and provider service;
and
|
· |
lowering
administrative expenses.
|
Offering
products that meet emerging trends.
The
CIGNATUREsm, CareAllies, and CIGNA Choice Fund suite of products offer a choice
of benefit, participating provider network, funding, medical management,
consumerism and health advocacy options for employers and consumers. Through
the
CIGNA Choice Fund®, CIGNA offers a set of consumer-directed capabilities that
includes options for health reimbursement arrangements and/or health savings
accounts and enables consumers to make effective health decisions using
information tools provided by CIGNA. The evolution of the consumer-driven
healthcare market is driving increased product and service complexity and is
raising consumer’s expectations with respect to service levels, which is
expected to require significant investment, management attention and heightened
interaction with customers. CIGNA is in the process of developing and
implementing a new service model to meet these market challenges.
In
July
2006, CIGNA acquired Star-HRG, a leading provider of low cost health plans
and
other employee benefits coverage for hourly and part-time workers and their
families. This acquisition complements CIGNA's existing product portfolio by
giving CIGNA the capability to offer voluntary health insurance coverage. Also
in 2006, CIGNA acquired vielife, a U.K. based leading provider of integrated
online health management and coaching programs and entered into a long-term
agreement with the University of Michigan to access certain intellectual
property related to identification of health risks and employer worksite health
and wellness programs.
Strengthening
underwriting and pricing effectiveness. One
of
CIGNA's key priorities is to achieve strong profitability in a competitive
health care market. CIGNA is focused on effectively managing pricing and
underwriting decisions at the case level and for the overall book of business,
particularly for the guaranteed cost business.
Improving
medical membership results.
CIGNA is
continuing to improve medical membership by:
· |
providing
a diverse product portfolio that meets current market needs as well
as
emerging consumer-directed trends;
|
· |
developing
and implementing the systems, information technology and infrastructure
to
ensure that member service delivery keeps pace with the emerging
consumer-directed market trends;
|
· |
ensuring
competitive provider networks; and
|
· |
maintaining
a strong clinical quality in medical, specialty health care and disability
management.
|
CIGNA
continues to evaluate opportunities with regional health care companies. CIGNA
formed strategic alliances with New York-based MVP Health Care/Preferred Care
in
September 2006 and with Minnesota-based HealthPartners in April 2006. In
addition, CIGNA acquired Memphis-based Mid-South Administrative Group, LLC
in
January 2007 to give the Company an expanded local presence in Memphis and
western Tennessee.
These
strategic actions are designed to:
· |
strengthen
CIGNA's national provider network;
|
· |
enhance
CIGNA's ability to provide superior medical and disease management
programs;
|
· |
provide
administrative ease for multi-state employers;
and
|
· |
grow
membership in key geographic areas, as well as provide a basis for
lowering medical costs.
|
CIGNA
believes that its medical management model, focus on clinical quality and
ability to integrate health and related benefit solutions position the company
to continue to improve membership results.
Improving
medical cost trend. CIGNA
operates under a centralized medical management model, which helps facilitate
consistent levels of care for its members and reduces infrastructure expenses.
CIGNA
is
focused on improving its medical cost trend by managing unit medical costs
more
effectively. To help achieve this end, CIGNA continues to focus on renegotiating
contracts with certain facilities to limit increases in medical reimbursement
costs. In addition, CIGNA seeks to strengthen its network position in selected
markets and may pursue additional acquisitions and strategic alliances.
Continuing
to deliver quality member and provider service. CIGNA
is
focused on delivering competitive service to members, providers and customers.
CIGNA believes that quality service can
improve
member retention and, when combined with useful health information and tools,
help motivate members to become more engaged in their personal health, which
will promote healthy outcomes and remove cost from the system. CIGNA is also
focused on the development and implementation of a new service model that is
capable of meeting the challenges brought on by the increasing product and
service complexity and the heightened expectations of health care consumers.
CIGNA continues to invest in the development and implementation of systems
and
technology to improve the member and provider service experience, enhance its
capabilities and improve its competitive position.
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Premiums
and fees
|
|
$
|
577
|
|
$
|
508
|
|
Net
investment income
|
|
|
69
|
|
|
64
|
|
Other
revenues
|
|
|
33
|
|
|
48
|
|
Segment
revenues
|
|
|
679
|
|
|
620
|
|
Benefits
and expenses
|
|
|
596
|
|
|
540
|
|
Income
before taxes
|
|
|
83
|
|
|
80
|
|
Income
taxes
|
|
|
23
|
|
|
22
|
|
Segment
earnings
|
|
$
|
60
|
|
$
|
58
|
|
Realized
investment gains,
|
|
|
|
|
|
|
|
net
of taxes
|
|
$
|
2
|
|
$
|
7
|
|
The
Disability and Life segment includes group:
· |
disability
and workers’ compensation case
management;
|
· |
accident
and specialty association insurance.
|
Results
Disability
and Life segment earnings for the first
quarter of 2007 reflect strong disability management results and favorable
mortality experience in the accident insurance businesses.
Premiums
and Fees
Premiums
and fees reflect new business growth and strong customer retention in both
the
disability and life insurance businesses.
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Premiums
and fees
|
|
$
|
414
|
|
$
|
357
|
|
Net
investment income
|
|
|
20
|
|
|
16
|
|
Other
revenues
|
|
|
1
|
|
|
-
|
|
Segment
revenues
|
|
|
435
|
|
|
373
|
|
Benefits
and expenses
|
|
|
376
|
|
|
317
|
|
Income
before taxes
|
|
|
59
|
|
|
56
|
|
Income
taxes
|
|
|
21
|
|
|
19
|
|
Segment
earnings
|
|
$
|
38
|
|
$
|
37
|
|
The
International segment includes:
· |
life,
accident and supplemental health insurance products; and
|
· |
international
health care products and services including those offered to expatriate
employees of multinational
corporations.
|
Results
International
segment earnings reflect competitively strong margins.
Premiums
and Fees
The
increase in premiums and fees for the first three months of 2007, compared
with
the first three months of 2006, reflects new sales growth and improved customer
retention in the expatriate employee benefits business and in the life, accident
and health insurance operations, particularly in South Korea.
Other
Matters
South
Korea represents the single largest geographic market for CIGNA's international
businesses. For the three months ended March 31, 2007, South Korea generated
31%
of International’s revenues and 45% of its segment earnings. CIGNA
International’s business in South Korea would be vulnerable to adverse consumer
credit conditions and geopolitical and economic conditions in that country,
which could have a significant impact on CIGNA's consolidated results.
RUN-OFF
REINSURANCE
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Premiums
and fees
|
|
$
|
15
|
|
$
|
15
|
|
Net
investment income
|
|
|
24
|
|
|
24
|
|
Other
revenues
|
|
|
(8
|
)
|
|
(40
|
)
|
Segment
revenues
|
|
|
31
|
|
|
(1
|
)
|
Benefits
and expenses
|
|
|
38
|
|
|
(3
|
)
|
Income
before taxes
|
|
|
(7
|
)
|
|
2
|
|
Income
taxes (benefits)
|
|
|
(8
|
)
|
|
2
|
|
Segment
earnings
|
|
$
|
1
|
|
$
|
-
|
|
Realized
investment gains,
|
|
|
|
|
|
|
|
net
of taxes
|
|
$
|
2
|
|
$
|
14
|
|
CIGNA's
reinsurance businesses are in run-off. No new reinsurance business has been
underwritten since the sale of the U.S. individual life, group life and
accidental death reinsurance business in 2000.
Results
Segment
earnings of $1.0 million after-tax for the first three months of 2007 reflected
$15 million after-tax of unfavorable claim experience in the guaranteed minimum
income benefit product, which was more than offset by the impact of a series
of
commutations and settlements with reinsurers related to the personal accident
and workers’ compensation businesses for amounts greater than the net recorded
amount. The adverse claim experience was largely the result of higher than
expected annuitization election rates. As noted in the Critical Accounting
Estimates on page 33 of CIGNA’s 2006 Annual Report to Shareholders, the annuity
election rate is a key assumption in the determination of the liability for
guaranteed minimum income benefits. Due to waiting period provisions in the
underlying annuity contracts, individuals have recently been able to elect
the
guaranteed minimum income benefit for the first time, and actual election
rates
have been higher than expected. During the remainder of 2007, there will
be a
significant increase in the number of individuals who will have an opportunity
to elect the guaranteed minimum income benefit for the first time. CIGNA
will
continue to monitor the emerging experience to determine if any changes to
its
long-term annuity election rate assumptions are warranted.
Other
Revenues
CIGNA
maintains a program to substantially reduce the equity market exposures relating
to guaranteed minimum death benefit contracts by entering into exchange-traded
futures contracts. Other revenues included pre-tax losses of $7 million for
the
first three months of 2007 and pre-tax losses of $40 million for the first
three
months of 2006 from futures contracts. Expense offsets reflecting corresponding
changes in liabilities for these guaranteed minimum death benefit contracts
were
included in benefits and expenses. The notional amount of the futures contract
positions held by CIGNA at March 31, 2007 related to this program was $690
million.
Other
Matters
Guaranteed
minimum death benefit contracts.
CIGNA’s
reinsurance operations, which were discontinued in 2000 and are now an inactive
business
in run-off mode, reinsured a guaranteed minimum death benefit under certain
variable annuities issued by other insurance companies. These variable annuities
are essentially investments in mutual funds combined with a death benefit.
CIGNA
has equity and other market exposures as a result of this product.
The
determination of liabilities for guaranteed minimum death benefits requires
CIGNA to make critical accounting estimates. CIGNA describes the assumptions
used to develop the reserves for these death benefits, and provides the effects
of hypothetical changes in those assumptions on page 30 of CIGNA’s 2006 Annual
Report to Shareholders. CIGNA regularly evaluates the assumptions used in
establishing reserves and changes its estimates if actual experience or other
evidence suggests that earlier assumptions should be revised. If actual
experience differs from the assumptions (including lapse, partial surrender,
mortality, interest rates and volatility) used in estimating these reserves,
the
resulting change could have a material adverse effect on CIGNA’s consolidated
results of operations, and in certain situations, could have a material adverse
effect on CIGNA’s financial condition. See Note 6 to the
Financial Statements for additional information about the assumptions used
to
calculate reserves for these contracts. CIGNA had future policy benefit reserves
for guaranteed minimum death benefit contracts of $861 million as of March
31,
2007, and $862 million as of December 31, 2006.
As
of
March 31, 2007, the aggregate fair value of the underlying mutual fund
investments was $34.6 billion. The death benefit coverage in force as of that
date (representing the amount that CIGNA would have to pay if all of the
approximately 900,000 contractholders had died on that date) was $4.6 billion.
The death benefit coverage in force represents the excess of the guaranteed
benefit amount over the fair value of the underlying mutual fund investments.
For
further information and details on these contracts and the program adopted
to
reduce related equity market risk, refer to Note 7 of CIGNA's 2006 Annual Report
to Shareholders.
Guaranteed
minimum income benefit contracts.
CIGNA
has also written reinsurance contracts with issuers of variable annuity
contracts that provide annuitants with certain guarantees
related
to minimum income benefits. See page 40 for further information about these
contracts.
CIGNA
purchased extensive retrocessional reinsurance for the Unicover contracts
(through the pool) and also purchased retrocessional coverage for its other
workers compensation and personal accident assumed risks. Although CIGNA is
involved in certain retrocessional enforcement arbitrations, most of the
disputes concerning the retrocessional contracts have been resolved. See Note 15 to the Financial Statements “Litigation and other
legal matters” for more information regarding these disputes.
CIGNA's
payment obligations under these contracts are based on ceding companies’ claim
payments relating to accidents and injuries. These claim payments can in some
cases extend many years into the future, and the amount of the ceding companies’
ultimate claims, and therefore the amount of CIGNA's ultimate payment
obligations and ultimate collection from retrocessionaires may not be known
with
certainty for some time.
Summary.
CIGNA’s
reserves for underlying reinsurance exposures assumed by CIGNA, as well as
for
amounts recoverable from retrocessionaires, are considered appropriate as of
March 31, 2007, 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. CIGNA bears the risk of loss if its
payment obligations to cedents increase or if its retrocessionaires are unable
to meet, or successfully challenge, their reinsurance obligations to
CIGNA.
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Premiums
and fees
|
|
$
|
27
|
|
$
|
32
|
|
Net
investment income
|
|
|
107
|
|
|
142
|
|
Other
revenues
|
|
|
20
|
|
|
28
|
|
Segment
revenues
|
|
|
154
|
|
|
202
|
|
Benefits
and expenses
|
|
|
120
|
|
|
167
|
|
Income
before taxes
|
|
|
34
|
|
|
35
|
|
Income
taxes
|
|
|
11
|
|
|
10
|
|
Segment
earnings
|
|
$
|
23
|
|
$
|
25
|
|
Realized
investment gains,
|
|
|
|
|
|
|
|
net
of
taxes
|
|
$
|
1
|
|
$
|
13
|
|
Other
Operations consist of:
· |
deferred
gains recognized from the 1998 sale of the individual life insurance
and
annuity business;
|
· |
corporate
life insurance (including policies on which loans are outstanding);
|
· |
deferred
gains recognized from the 2004 sale of the retirement benefits business;
and
|
· |
settlement
annuity business.
|
Results
Segment
earnings for Other Operations decreased for the first three months of 2007,
compared with the first three months of 2006, primarily due to lower earnings
in
the corporate life insurance business.
Other
Matters
Tax
benefits for corporate life insurance. Federal
legislation in 1996 eliminated on a prospective basis the tax deductibility
of
policy loan interest for most leveraged corporate life insurance products,
and
an Internal Revenue Service initiative in 2001 encouraged policyholders to
settle tax disputes regarding these products. As a result, some customers have
surrendered their policies and management expects earnings associated with
these
products to continue to decline.
|
|
|
|
|
|
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Segment
loss
|
|
$
|
(26
|
)
|
$
|
(18
|
)
|
Corporate
reflects amounts not allocated to segments, such as interest expense on
corporate debt, interest expense on uncertain tax positions, net investment
income on unallocated investments, intersegment eliminations, compensation
cost
for stock options and certain corporate overhead expenses.
Corporate
results for the first three months of 2007, compared with the first three months
of 2006, primarily reflect higher net interest expense.
DISCONTINUED
OPERATIONS
Results
from discontinued operations for the first three months of 2007 represent
realized gains on the disposition of certain directly-owned real estate
investments (see Note 9 to the Financial
Statements).
Liquidity
CIGNA
normally meets its operating requirements by:
· |
maintaining
appropriate levels of cash, cash equivalents and short-term
investments;
|
· |
using
cash flows from operating activities;
and
|
· |
matching
investment maturities to the estimated duration of the related insurance
and contractholder liabilities.
|
Cash
flows from operations for the three months ended March 31 were as
follows:
|
|
|
|
|
|
(In
millions)
|
|
2007
|
|
2006
|
|
Operating
activities
|
|
$
|
378
|
|
$
|
(87
|
)
|
Investing
activities
|
|
$
|
(151
|
)
|
$
|
657
|
|
Financing
activities
|
|
$
|
(30
|
)
|
$
|
(375
|
)
|
Cash
flows from operating activities consist of cash receipts and disbursements
for
premiums and fees, gains (losses) recognized in connection with CIGNA's program
to manage equity market risk related to reinsured guaranteed minimum death
benefit contracts, investment income, taxes, and benefits and
expenses.
2007:
· |
Cash
flow from operating activities was affected by the following significant
items in 2007 and 2006:
|
· |
cash
outflows of $240 million in 2006 to originate mortgage loans held
for
sale;
|
· |
cash
outflows of $7 million in 2007, compared with $40 million in 2006,
associated with futures contracts entered into as part of a program
to
manage equity market risks in the run-off reinsurance segment;
and
|
· |
cash
outflows of $44 million in 2006 to settle liabilities associated
with the
single premium annuity business.
|
Excluding
these items, cash flow from operating activities in 2007 increased significantly
compared with the same period in 2006. The increase was primarily due to higher
cash revenues resulting from business growth in all of CIGNA's ongoing operating
segments, partially offset by higher paid losses, higher paid expenses and
lower
investment income due to the effect of the share repurchase
program.
· |
Cash
used in investing activities primarily consisted of net purchases
of
investments of $126 million and net purchases of property and equipment
of
$19 million.
|
· |
Cash
used in financing activities primarily consisted of dividends on
and
repurchase of common stock of $585 million and repayment of debt
of $87
million, partially offset by the proceeds on the issuance of debt
of $498
million and the proceeds from the issuance of common stock under
CIGNA's
stock plans of $133 million.
|
· |
Cash
provided by investing activities primarily consisted of net proceeds
of
investments ($687 million), partially offset by net purchases of
property
and equipment ($30 million).
|
· |
Cash
used in financing activities primarily consisted of dividends on
and
repurchases of common stock of $403 million, repayment of long-term
debt
($100 million) and net withdrawals of contractholder deposit funds
of $38
million, partially offset by proceeds from issuances of common stock
under
CIGNA's stock plans of $162
million.
|
Interest
Expense
Interest
expense was $29 million for the first three months of 2007, compared with $25
million for the first three months of 2006.
Capital
Resources
CIGNA’s
capital resources (primarily retained earnings and the proceeds from the
issuance of long-term debt and equity securities) provide protection for
policyholders, furnish the financial strength to underwrite insurance risks
and
facilitate continued business growth.
Senior
management, guided by regulatory requirements and rating agency capital
guidelines, determines the amount of capital resources that CIGNA maintains.
Management allocates resources to new long-term business commitments when
returns, considering the risks, look promising and when the resources available
to support existing business are adequate.
CIGNA
has
sufficient capital resources to:
· |
provide
capital necessary to support growth and maintain or improve the financial
strength ratings of subsidiaries;
|
· |
consider
acquisitions that are strategically and economically advantageous;
and
|
· |
return
capital to investors through share
repurchase.
|
CIGNA
maintains a share repurchase program. From January 1, 2007 through May 1, 2007,
CIGNA repurchased 4.9 million shares through this program at an average
price of $139.29 per share for an aggregate cost of $682 million. The total
remaining authorization as of May 1, 2007, was $303 million. See also the table
in Part II, Item 2 of CIGNA's Form 10-Q for more information on share repurchase
activity for the first quarter ended March 31, 2007.
Under
a
universal shelf registration statement filed in 2006, CIGNA issued the following
securities in March 2007:
· |
$250
million of Senior Notes bearing interest at the rate of 5.375% per
year, which is payable on March 15 and September 15 of each year,
beginning September 15, 2007. The Notes will mature on March 15,
2017; and
|
· |
$250
million of Senior Notes bearing interest at the rate of 6.150% per
year, which is payable on May 15 and November 15 of each year, beginning
May 15, 2007. The Notes will mature on November 15, 2036.
|
CIGNA may
redeem these Notes at any time, in whole or in part, at a specified redemption
price.
In
addition, CIGNA has $500 million remaining under an effective shelf registration
statement filed with the Securities and Exchange Commission (SEC), which may
be
issued as debt securities, equity securities or both. Management and the Board
of Directors will consider market conditions and internal capital requirements
when deciding whether CIGNA should issue new securities.
In
May
2006, CIGNA entered into a five-year revolving credit and letter of credit
agreement for $1.75 billion which replaced its previous credit agreement. Of
this amount, up to $1.25 billion may be used for letters of credit. CIGNA
entered into the agreement for general corporate purposes, including support
for
the issuance of commercial paper and to obtain statutory reserve credit for
certain reinsurance arrangements. There were no amounts outstanding under the
credit facility nor any letters of credit issued as of March 31, 2007.
Liquidity
and Capital Resources Outlook
The
availability of resources at the parent/holding company level is partially
dependent on dividends from CIGNA’s subsidiaries, most of which are subject to
regulatory restrictions and rating agency capital guidelines. CIGNA expects,
based on current projections for cash activity (including projections for
dividends from subsidiaries), to have sufficient liquidity to meet its
obligations, including:
· |
debt
service requirements and dividend payments to CIGNA shareholders;
and
|
· |
pension
plan funding requirements.
|
However,
if CIGNA's projections are not realized, the demand for funds could exceed
available cash if:
· |
management
uses cash for investment opportunities;
|
· |
a
substantial insurance or contractholder liability becomes due before
related investment assets mature;
|
· |
a
substantial increase in funding is required for CIGNA's program to
reduce
the equity market risks associated with the guaranteed minimum death
benefit contracts; or
|
· |
regulatory
restrictions prevent the insurance and HMO subsidiaries from distributing
cash to the parent company.
|
In
those
cases, CIGNA has the flexibility to satisfy liquidity needs through short-term
borrowings, such as revolving credit and line of credit agreements of up to
$1.75 billion.
Ratings
CIGNA
and
certain of its insurance subsidiaries are rated by nationally recognized rating
agencies. Ratings are always subject to change and there can be no assurance
that CIGNA’s current ratings will continue for any given period of time. As of
May 2, 2007, the current ratings of CIGNA and Connecticut General Life Insurance
Company (CG Life), CIGNA's principal subsidiary were as follows:
|
CG
Life Insurance Ratings
|
CIGNA
Corporation
Debt
Ratings
|
|
|
Senior
Debt
|
Commercial
Paper
|
A.M.
Best
|
A
|
—
|
—
|
Moody’s
|
A2
|
Baa2
|
P2
|
S&P
|
A
|
BBB+
|
A2
|
Fitch
|
A+
|
BBB+
|
F2
|
The
above
table reflects upgrades to financial strength and debt ratings issued during
the
first three months of 2007.
CIGNA
is
committed to maintaining appropriate levels of capital in its subsidiaries
to
support ratings that meet customers’ expectations, and to improving the earnings
of the health care business. Ratings downgrades of CG Life could adversely
affect new sales and retention of current business. Lower ratings at the parent
company level would increase the cost to borrow funds.
Guarantees
and Contractual Obligations
CIGNA,
through its subsidiaries, is contingently liable for various financial
guarantees provided and contractual obligations entered into in the ordinary
course of business.
Financial
guarantees primarily associated with the sold retirement benefits
business.
Separate
account assets are contractholder funds maintained in accounts with specific
investment objectives. CIGNA records separate account liabilities equal to
separate account assets. In certain cases, CIGNA guarantees a minimum level
of
benefits for retirement and insurance contracts, primarily associated with
the
sold retirement benefits business (which was sold in April 2004), written in
separate accounts. CIGNA establishes an additional liability if management
believes that CIGNA will be required to make a payment under these guarantees.
Except
as
noted below, these guarantees are fully reinsured by an affiliate of the buyer
of the retirement benefits business:
· |
CIGNA
guarantees that separate account assets will be sufficient to pay
certain
retiree or life benefits. The sponsoring employers are primarily
responsible for ensuring that assets are sufficient to pay these
benefits
and are required to maintain assets that exceed a certain percentage
of
benefit obligations. This percentage varies depending on the asset
class
within a sponsoring employer’s portfolio (for example, a bond fund would
require a lower percentage than a riskier equity fund) and thus will
vary
as the composition of the portfolio changes. If employers do not
maintain
the required levels of separate account assets, CIGNA or an affiliate
of
the buyer has the right to redirect the management of the related
assets
to provide for benefit payments. As of March 31, 2007, employers
maintained assets that exceeded the benefit obligations. Benefit
obligations under these arrangements were $2.0 billion as of March
31,
2007. As of March 31, 2007, approximately 75% of these guarantees
is
reinsured by an affiliate of the buyer of the retirement benefits
business. There were no additional liabilities required for these
guarantees as of March 31, 2007.
|
· |
CIGNA
guarantees that separate account assets, primarily fixed income
investments, will be sufficient to pay retiree benefits for participants
under a certain group annuity contract. These guarantees are fully
reinsured by an affiliate of the buyer of the retirement benefits
business. These guaranteed benefit obligations were $31 million as
of
March 31, 2007. CIGNA had no additional liabilities for these guarantees
as of March 31, 2007.
|
Guaranteed
minimum income benefit contracts. CIGNA's
reinsurance operations, which were discontinued in 2000 and are now an inactive
business in run-off mode, reinsured minimum income benefits under certain
variable annuity contracts issued by other insurance companies. When annuitants
elect to receive these minimum income benefits, CIGNA may be required to make
payments based on changes in underlying mutual fund values and interest rates.
CIGNA
estimates the fair value of the assets and liabilities associated with these
contracts using assumptions as to market returns and volatility of the
underlying equity and bond mutual fund investments, interest rates, mortality,
lapse, credit risk and annuity election rates.
CIGNA
regularly evaluates each of the assumptions used in establishing these assets
and liabilities by monitoring actual experience as it emerges over time and
may
change its estimates if actual experience or other evidence suggests that
earlier assumptions should be revised. CIGNA describes these assumptions and
provides an estimate of the effects of the hypothetical changes in those
assumptions on page 33 of CIGNA's 2006 Annual Report to Shareholders. If actual
experience differs from the assumptions used in estimating these assets and
liabilities, the resulting change could have a material adverse effect on
CIGNA’s consolidated results of operations, and in certain situations, could
have a material adverse effect on CIGNA’s financial condition. See Note 15 to the Financial Statements for additional
information on these assumptions.
As
of
March 31, 2007, CIGNA had liabilities of $126 million related to these contracts
and net amounts recoverable from reinsurers of $80 million (including $10
million for claims that have already been paid by CIGNA). CIGNA had an
additional liability of $46 million associated with the cost of reinsurance
as
of March 31, 2007. As of December 31, 2006, CIGNA had liabilities of $88 million
related to these contracts and net amounts recoverable from reinsurers of $51
million (including $2 million for claims that had already been paid by CIGNA).
CIGNA had an additional liability of $47 million associated with the cost of
reinsurance as of December 31, 2006. Management believes the current assumptions
used to estimate reserves for these liabilities are appropriate.
CIGNA
is
required to disclose the maximum potential undiscounted future payments for
guarantees related to minimum income benefits using hypothetical adverse
assumptions, defined as follows:
· |
No
annuitants surrendered their accounts;
and
|
· |
All
annuitants lived to elect their benefit;
and
|
· |
All
annuitants elected to receive their benefit on the next available
date
(2007 through 2014); and
|
· |
All
underlying mutual fund investment values remained at the March 31,
2007
value of $3.2 billion, with no future
returns.
|
The
maximum potential undiscounted payments that CIGNA would make under those
assumptions would aggregate $858 million before reinsurance recoveries. CIGNA
believes the likelihood of such payment is remote and expects the amount of
actual payments to be significantly less than this hypothetical undiscounted
aggregate amount. CIGNA has retrocessional reinsurance from third parties in
place which covers 55% of the exposures on these contracts.
Certain
other guarantees. CIGNA
had
indemnification obligations to lenders of up to $282 million as of March 31,
2007 related to borrowings by certain real estate joint ventures, which CIGNA
either records as an investment or consolidates. These borrowings, which are
nonrecourse to CIGNA, are secured by the joint ventures’ real estate properties
with fair values in excess of the loan amounts and mature at various dates
beginning in the second quarter of 2007 through 2017. CIGNA’s indemnification
obligations would require payment to lenders for any actual damages resulting
from certain acts such as unauthorized ownership transfers, misappropriation
of
rental payments by others or environmental damages. Based on initial and ongoing
reviews of property management and operations, CIGNA does not expect that
payments will
be
required under these indemnification obligations. Any payments that might be
required could be recovered through a refinancing or sale of the assets. In
some
cases, CIGNA also has recourse to partners for their proportionate share of
amounts paid. There were no liabilities required for these indemnification
obligations as of March 31, 2007.
As
of
March 31, 2007 CIGNA guaranteed that it would compensate a lessor for a
shortfall of up to $44 million in the market value of certain leased equipment
at the end of the lease. Guarantees of $28 million expire in 2012 and $16
million expire in 2016. CIGNA had no additional liabilities for these guarantees
as of March 31, 2007.
CIGNA
had
indemnification obligations as of March 31, 2007, in connection with acquisition
and disposition transactions. These indemnification obligations are triggered
by
the breach of representations or covenants provided by CIGNA, such as
representations for the presentation of financial statements, the filing of
tax
returns, compliance with law or the identification of outstanding litigation.
These obligations are typically subject to various time limitations, defined
by
the contract or by operation of law, such as statutes of limitation. In some
cases, the maximum potential amount due is subject to contractual limitations
based on a percentage of the transaction purchase price, while in other cases
limitations are not specified or applicable. CIGNA does not believe that it
is
possible to determine the maximum potential amount due under these obligations,
since not all amounts due under these indemnification obligations are subject
to
limitation. There were no liabilities required for these indemnification
obligations as of March 31, 2007.
CIGNA
does not expect that these guarantees will have a material adverse effect on
CIGNA’s consolidated results of operations, liquidity or financial
condition.
Contractual
obligations.
CIGNA's
contractual obligations included commitments to purchase the following
investments:
|
|
|
|
|
|
|
|
As
of
|
|
As
of
|
|
(In
millions)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Fixed
maturities
|
|
$
|
75
|
|
$
|
31
|
|
Mortgage
loans
|
|
$
|
120
|
|
$
|
154
|
|
|
|
|
|
|
|
|
|
For
additional information on CIGNA's contractual obligations, see page 50 of
CIGNA's 2006 Annual Report to Shareholders.
INVESTMENT
ASSETS
CIGNA’s
investment assets do not include separate account assets. Additional information
regarding CIGNA’s investment assets and related accounting policies is included
in Notes 2, 10, 11 and 14 to the Financial Statements in CIGNA’s 2006 Annual
Report to Shareholders and Form 10-K.
Investments
in fixed maturities (bonds) include publicly traded and privately placed debt
securities, mortgage and other asset-backed securities and preferred stocks
redeemable by the investor. Fixed maturities also include trading securities.
Fixed maturities and equity securities include hybrid securities.
CIGNA’s
mortgage loans are diversified by property type, location and borrower to reduce
exposure to potential losses.
Problem
and Potential Problem Investments
“Problem”
bonds and mortgage loans are either delinquent by 60 days or more or have been
restructured as to terms (interest rate or maturity date). “Potential problem”
bonds and mortgage loans are fully current, but management believes they have
certain characteristics that increase the likelihood that they will become
“problems.” For example, CIGNA considers mortgage loans to be potential problems
if the borrower has requested restructuring or principal or interest payments
are past due by more than 30 but fewer than 60 days.
CIGNA
recognizes interest income on “problem” bonds and mortgage loans only when
payment is actually received because of the risk profile of the underlying
investment. The amount that would have been reflected in net income if interest
on non-accrual investments had been recognized in accordance with the original
terms was insignificant for the first three months of 2007 and 2006.
The
following table shows problem and potential problem investments at amortized
cost, net of valuation reserves and write-downs:
|
|
|
|
|
|
|
|
(In
millions)
|
|
Gross
|
|
Reserve
|
|
Net
|
|
March
31, 2007
|
|
|
|
|
|
|
|
Problem
bonds
|
|
$
|
67
|
|
$
|
(49
|
)
|
$
|
18
|
|
Potential
problem bonds
|
|
$
|
24
|
|
$
|
(1
|
)
|
$
|
23
|
|
Potential
problem mortgage loans
|
|
$
|
22
|
|
$
|
-
|
|
$
|
22
|
|
Foreclosed
real estate
|
|
$
|
16
|
|
$
|
(3
|
)
|
$
|
13
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
Problem
bonds
|
|
$
|
71
|
|
$
|
(50
|
)
|
$
|
21
|
|
Potential
problem bonds
|
|
$
|
15
|
|
$
|
(1
|
)
|
$
|
14
|
|
Potential
problem mortgage loans
|
|
$
|
22
|
|
$
|
-
|
|
$
|
22
|
|
Foreclosed
real estate
|
|
$
|
16
|
|
$
|
(3
|
)
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
CIGNA
recorded $9 million after-tax for the first three months of 2006 in realized
investment losses for investment asset write-downs and changes in valuation
reserves due largely to the impact of rising interest rates on investments
where
CIGNA cannot demonstrate the intent and ability to hold until recovery.
The
weakness in certain sectors of the economy and rising interest rates may cause
additional investment losses. These investment losses could materially affect
future results of operations, although CIGNA does not currently expect them
to
have a material effect on its liquidity or financial condition, or to result
in
a significant decline in the aggregate carrying value of its
assets.
Market
Risk of Financial Instruments
CIGNA’s
assets and liabilities include financial instruments subject to the risk of
potential losses from adverse changes in market rates and prices. The primary
market risk exposures are interest-rate risk, foreign currency exchange rate
risk and equity price risk.
CIGNA
uses futures contracts as part of a program to substantially reduce the effect
of equity market changes on certain reinsurance contracts that guarantee minimum
death benefits based on unfavorable changes in variable annuity account values.
The hypothetical effect of a 10% increase in the S&P 500, S&P 400,
Russell 2000, NASDAQ, TOPIX (Japanese), EUROSTOXX and FTSE (British)
equity
indices and a 10% weakening in the U.S. dollar to the Japanese yen, British
pound and euro would have been a decrease of approximately $70 million in the
fair value of the futures contracts outstanding under this program as of March
31, 2007. A corresponding decrease in liabilities for these guaranteed minimum
death benefit contracts would result from this hypothetical 10% increase in
these equity indices and 10% weakening in the U.S. dollar. See Note 6 to the Financial Statements for further discussion of
this program and the related guaranteed minimum death benefit
contracts.
Stock
Market Performance
The
performance of equity markets can have a significant effect on CIGNA’s
businesses including on:
· |
risks
and exposures associated with guaranteed minimum death benefit (see
page
35) and guaranteed minimum income benefit contracts (see page 40);
and
|
· |
pension
liabilities since equity securities comprise a significant portion
of the
assets of CIGNA’s employee pension
plans.
|
CAUTIONARY
STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CIGNA
and
its representatives may from time to time make written and oral forward-looking
statements, including statements contained in press releases, in CIGNA’s filings
with the Securities and Exchange Commission, in its reports to shareholders
and
in meetings with analysts and investors. Forward-looking statements may contain
information about financial prospects, economic conditions, trends and other
uncertainties. These forward-looking statements are based on management’s
beliefs and assumptions and on information available to management at the time
the statements are or were made. Forward-looking statements include but are
not
limited to the information concerning possible or assumed future business
strategies, financing plans, competitive position, potential growth
opportunities, potential operating performance improvements, trends and, in
particular, CIGNA's productivity initiatives, litigation and other legal
matters, operational improvement in the health care operations, and the outlook
for CIGNA's full year 2007 results. Forward-looking statements include all
statements that are not historical facts and can be identified by the use of
forward-looking terminology such as the words “believe”, “expect”, “plan”,
“intend”, “anticipate”, “estimate”, “predict”, “potential”, “may”, “should”, or
similar expressions.
You
should not place undue reliance on these forward-looking statements. CIGNA
cautions that actual results could differ materially from those that management
expects, depending on the outcome of certain factors. Some factors that could
cause actual results to differ materially from the forward-looking statements
include:
1. |
increased
medical costs that are higher than anticipated in establishing premium
rates in CIGNA’s health care operations, including increased use and costs
of medical services;
|
2. |
increased
medical, administrative, technology or other costs resulting from
new
legislative and regulatory requirements imposed on CIGNA’s employee
benefits businesses (see employee benefits regulation on page 27
for
more information);
|
3. |
challenges
and risks associated with implementing operational improvement initiatives
and strategic actions in the health care operations, including those
related to: (i) offering products that meet emerging market needs,
(ii)
strengthening underwriting and pricing effectiveness, (iii) strengthening
medical cost and medical membership results, (iv) delivering quality
member and provider service using effective technology solutions,
and (v)
lowering administrative costs;
|
4. |
risks
associated with pending and potential state and federal class action
lawsuits, purported securities class action lawsuits, disputes regarding
reinsurance arrangements, other litigation and regulatory actions
challenging CIGNA’s businesses and the outcome of pending government
proceedings and federal tax audits;
|
5. |
heightened
competition, particularly price competition, which could reduce product
margins and constrain growth in CIGNA’s businesses, primarily
the
health care business;
|
6. |
significant
changes in interest rates;
|
7. |
downgrades
in the financial strength ratings of CIGNA’s insurance subsidiaries, which
could, among other things, adversely affect new sales and retention
of
current business;
|
8. |
limitations
on the ability of CIGNA's insurance subsidiaries to dividend capital
to
the parent company as a result of downgrades in the subsidiaries’
financial strength ratings, changes in statutory reserve or capital
requirements or other financial
constraints;
|
9. |
inability
of the program adopted by CIGNA to substantially reduce equity market
risks for reinsurance contracts that guarantee minimum death benefits
under certain variable annuities (including possible market difficulties
in entering into appropriate futures contracts and in matching such
contracts to the underlying equity risk);
|
10. |
adjustments
to the reserve assumptions (including lapse, partial surrender, mortality,
interest rates and volatility) used in estimating CIGNA's liabilities
for
reinsurance contracts covering guaranteed minimum death benefits
under
certain variable annuities;
|
11.
|
adjustments
to the assumptions (including annuity election rates and reinsurance
recoverables) used in estimating CIGNA’s assets and liabilities for
reinsurance contracts covering guaranteed minimum income benefits
under
certain variable annuities;
|
12. |
significant
stock market declines, which could, among other things, result in
increased pension expenses of CIGNA’s pension plans in future periods and
the recognition of additional pension obligations;
|
13. |
unfavorable
claims experience related to workers’ compensation and personal accident
exposures of the run-off reinsurance business, including losses
attributable to the inability to recover claims from
retrocessionaires;
|
14. |
significant
deterioration in economic conditions, which could have an adverse
effect
on CIGNA’s operations and investments;
|
15. |
changes
in public policy and in the political environment, which could affect
state and federal law, including legislative and regulatory proposals
related to health care issues, which could increase cost and affect
the
market for CIGNA's health care products and services; and amendments
to
income tax laws, which could affect the taxation of employer provided
benefits, and pension legislation, which could increase pension
cost;
|
16. |
potential
public health epidemics and bio-terrorist activity, which could,
among
other things, cause CIGNA’s covered medical and disability
expenses, pharmacy costs and mortality experience to rise
significantly, and cause operational disruption, depending on the
severity
of the event and number of individuals affected;
|
17. |
risks
associated with security or interruption of information systems,
which could, among other things, cause operational disruption;
and
|
18. |
challenges
and risks associated with the successful management of CIGNA’s outsourcing
projects or key vendors, including the agreement with IBM for provision
of
technology infrastructure and related services.
|
This
list
of important factors is not intended to be exhaustive. Other sections of the
most recent Annual Report on Form 10-K, including the “Risk Factors” section and
the Cautionary Statement in Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and other documents filed with the
Securities and Exchange Commission include both expanded discussion of these
factors and additional risk factors and uncertainties that could preclude CIGNA
from realizing the forward-looking statements. CIGNA does not assume any
obligation to update any forward-looking statements, whether as a result of
new
information, future events or otherwise, except as required by law.
Item
3.
Quantitative
and Qualitative Disclosures About Market Risk
Information
responsive to this Item 3 is included in Item 2 above, Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Item
4. Controls
and Procedures
Based
on
an evaluation of the effectiveness of CIGNA's disclosure controls and procedures
conducted under the supervision and with the participation of CIGNA's
management, 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.
During
the period covered by this report, there have been no changes in CIGNA's
internal control over financial reporting that have materially affected, or
are
reasonably likely to materially affect, CIGNA's internal control over financial
reporting.
Part
II.
OTHER INFORMATION
In
its
Form 10-K for the year ended December 31, 2006, CIGNA described the In
re
Managed Care Litigation. In
the
first quarter of 2007, CIGNA received an additional $5 million pre-tax ($3
million after-tax) insurance recovery related to this litigation. CIGNA seeks
to
pursue further recoveries from one additional insurer.
In
its
Form 10-K for the year ended December 31, 2006, CIGNA described the Broker
Compensation litigation.
With respect to the multi-district litigation proceeding in federal court
in New
Jersey, on April 5, 2007, the court granted the defendants’ motion and dismissed
all of the federal antitrust, RICO and state law claims, leaving only certain
ERISA fiduciary claims. The court has permitted plaintiffs to file an amended
complaint by May 22, 2007. Discovery is stayed until the court reaches a
decision whether plaintiffs may proceed regarding their anticipated amended
antitrust and RICO claims. CIGNA denies the allegations and will vigorously
defend itself in these cases.
In
its
Form 10-K for the year ended December 31, 2006, CIGNA described the settlement
of the In
re
CIGNA Corp. Securities Litigation and
a
separate settlement among CIGNA, certain current and former directors and
the
plaintiffs in the related derivative action.
Final
fairness hearings before the Court were held on April 27, 2007 and final
approval was received on April 30, 2007.
CIGNA
described the Amara
Cash Balance Pension Plan Litigation in
its
Form 10-K for the year ended December 31, 2006. Following the completion
of the
trial on January 25, 2007, the judge has ordered the parties to submit
post-trial briefs in advance of closing arguments to be held August 9, 2007.
CIGNA
is
routinely involved in numerous claims, lawsuits, regulatory and IRS 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.
CIGNA's
Annual Report on Form 10-K for the year ended December 31, 2006 includes a
detailed description of its risk factors.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
(c)
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
The
following table provides information about CIGNA's share repurchase activity
for
the quarter ended March 31, 2007:
|
Issuer
Purchases of Equity Securities
|
Period
|
Total
# of
shares
purchased(1)
|
Average
price
paid
per share
|
Total
# of shares purchased
as
part of publicly
announced
program (2)
|
Approximate
dollar value
of
shares that may yet be
purchased
as part of publicly
announced
program (3)
|
Jan
1-31, 2007
|
1,462,802
|
$129.95
|
1,462,200
|
$795,277,622
|
Feb
1-28, 2007
|
1,295,079
|
$141.55
|
1,213,197
|
$623,615,710
|
Mar
1-31, 2007
|
1,509,980
|
$141.67
|
1,509,980
|
$409,694,472
|
Total
|
|
$137.62
|
4,185,377
|
N/A
|
_______________
(1) |
Includes
shares tendered by employees as payment of taxes withheld on the
exercise
of stock options and the vesting of restricted stock granted under
the
Company’s equity compensation plans. Employees tendered 602 shares in
January and 81,882 shares in February.
|
(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 $410 million as of March 31, 2007 and
$303
million as of May 1, 2007. CIGNA has effected in the past, and may
continue from time to time to effect, open market purchases of CIGNA
common stock through 10b5-1 plans, which allow a company to repurchase
its
shares at times when it otherwise might be prevented from doing so
under
insider trading laws or because of self-imposed trading blackout
periods.
|
(3) |
Approximate
dollar value of shares is as of the last date of the applicable
month.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CIGNA
CORPORATION
By:
/s/ Michael W. Bell
Michael
W. Bell
Executive
Vice President and
Chief
Financial Officer
Date: May 2,
2007
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