cigna10q.htm
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,
2008
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, a non-accelerated filer,
or
a smaller reporting company. See definitions of “large accelerated
filer”, “accelerated filer”, and “smaller
reporting
company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [X]
|
|
Accelerated
filer [ ]
|
|
Non-accelerated
filer [ ]
|
|
Smaller
Reporting Company [ ]
|
|
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 April 18, 2008, 280,813,911 shares of the issuer's common stock were
outstanding.
CIGNA
CORPORATION
INDEX
|
|
Page
No.
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
Item
1. Financial Statements
|
|
|
Consolidated
Statements of Income
|
|
|
Consolidated
Balance Sheets
|
|
|
Consolidated
Statements of Comprehensive Income and Changes in Shareholders'
Equity
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
Notes
to the Financial Statements
|
|
|
Item
2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market Risk
|
|
|
Item
4. Controls and Procedures
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
Item
1. Legal Proceedings
|
|
|
Item
1A. Risk Factors
|
|
|
Item
2. Unregistered Sales of Equity Securities
and
Use
of Proceeds
|
|
|
Item
6. Exhibits
|
|
SIGNATURE
|
|
|
EXHIBIT
INDEX
|
|
As used
herein, CIGNA refers to one or more of CIGNA Corporation and its consolidated
subsidiaries.
|
|
|
|
|
|
|
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(In millions,
except per share amounts)
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
Premiums
and fees
|
|
$ |
3,851 |
|
|
$ |
3,708 |
|
Net
investment income
|
|
|
265 |
|
|
|
280 |
|
Mail
order pharmacy revenues
|
|
|
296 |
|
|
|
271 |
|
Other
revenues
|
|
|
143 |
|
|
|
94 |
|
Realized
investment gains
|
|
|
14 |
|
|
|
21 |
|
Total
revenues
|
|
|
4,569 |
|
|
|
4,374 |
|
Benefits
and Expenses
|
|
|
|
|
|
|
|
|
Health
Care medical claims expense
|
|
|
1,744 |
|
|
|
1,719 |
|
Other
benefit expenses
|
|
|
928 |
|
|
|
836 |
|
Mail
order pharmacy costs of goods sold
|
|
|
239 |
|
|
|
219 |
|
Guaranteed
minimum income benefits expense
|
|
|
304 |
|
|
|
24 |
|
Other
operating expenses
|
|
|
1,281 |
|
|
|
1,163 |
|
Total
benefits and expenses
|
|
|
4,496 |
|
|
|
3,961 |
|
Income
from Continuing Operations
|
|
|
|
|
|
|
|
|
before
Income Taxes
|
|
|
73 |
|
|
|
413 |
|
Income
taxes (benefits):
|
|
|
|
|
|
|
|
|
Current
|
|
|
77 |
|
|
|
132 |
|
Deferred
|
|
|
(59 |
) |
|
|
4 |
|
Total
taxes
|
|
|
18 |
|
|
|
136 |
|
Income
from Continuing Operations
|
|
|
55 |
|
|
|
277 |
|
Income
from Discontinued Operations, Net of Taxes
|
|
|
3 |
|
|
|
12 |
|
Net
Income
|
|
$ |
58 |
|
|
$ |
289 |
|
Earnings
Per Share - Basic:
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.20 |
|
|
$ |
0.95 |
|
Income
from discontinued operations
|
|
|
0.01 |
|
|
|
0.05 |
|
Net
income
|
|
$ |
0.21 |
|
|
$ |
1.00 |
|
Earnings
Per Share - Diluted:
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.19 |
|
|
$ |
0.93 |
|
Income
from discontinued operations
|
|
|
0.02 |
|
|
|
0.05 |
|
Net
income
|
|
$ |
0.21 |
|
|
$ |
0.98 |
|
Dividends
Declared Per Share
|
|
$ |
0.040 |
|
|
$ |
0.008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
As
of March 31,
|
|
|
|
|
|
December
31,
|
|
(In millions,
except per share amounts)
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities, at fair value (amortized cost, $11,406;
$11,409)
|
|
|
|
|
$ |
12,033 |
|
|
|
|
|
$ |
12,081 |
|
Equity
securities, at fair value (cost, $140; $127)
|
|
|
|
|
|
144 |
|
|
|
|
|
|
132 |
|
Commercial
mortgage loans
|
|
|
|
|
|
3,291 |
|
|
|
|
|
|
3,277 |
|
Policy
loans
|
|
|
|
|
|
1,504 |
|
|
|
|
|
|
1,450 |
|
Real
estate
|
|
|
|
|
|
49 |
|
|
|
|
|
|
49 |
|
Other
long-term investments
|
|
|
|
|
|
541 |
|
|
|
|
|
|
520 |
|
Short-term
investments
|
|
|
|
|
|
36 |
|
|
|
|
|
|
21 |
|
Total
investments
|
|
|
|
|
|
17,598 |
|
|
|
|
|
|
17,530 |
|
Cash
and cash equivalents
|
|
|
|
|
|
2,850 |
|
|
|
|
|
|
1,970 |
|
Accrued
investment income
|
|
|
|
|
|
247 |
|
|
|
|
|
|
233 |
|
Premiums,
accounts and notes receivable
|
|
|
|
|
|
1,475 |
|
|
|
|
|
|
1,405 |
|
Reinsurance
recoverables
|
|
|
|
|
|
7,205 |
|
|
|
|
|
|
7,331 |
|
Deferred
policy acquisition costs
|
|
|
|
|
|
848 |
|
|
|
|
|
|
816 |
|
Property
and equipment
|
|
|
|
|
|
649 |
|
|
|
|
|
|
625 |
|
Deferred
income taxes, net
|
|
|
|
|
|
858 |
|
|
|
|
|
|
794 |
|
Goodwill
|
|
|
|
|
|
1,784 |
|
|
|
|
|
|
1,783 |
|
Other
assets, including other intangibles
|
|
|
|
|
|
883 |
|
|
|
|
|
|
536 |
|
Separate
account assets
|
|
|
|
|
|
6,591 |
|
|
|
|
|
|
7,042 |
|
Total
assets
|
|
|
|
|
$ |
40,988 |
|
|
|
|
|
$ |
40,065 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder
deposit funds
|
|
|
|
|
$ |
8,595 |
|
|
|
|
|
$ |
8,594 |
|
Future
policy benefits
|
|
|
|
|
|
8,083 |
|
|
|
|
|
|
8,147 |
|
Unpaid
claims and claim expenses
|
|
|
|
|
|
4,144 |
|
|
|
|
|
|
4,127 |
|
Health
Care medical claims payable
|
|
|
|
|
|
1,033 |
|
|
|
|
|
|
975 |
|
Unearned
premiums and fees
|
|
|
|
|
|
489 |
|
|
|
|
|
|
496 |
|
Total
insurance and contractholder liabilities
|
|
|
|
|
|
22,344 |
|
|
|
|
|
|
22,339 |
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
|
|
|
4,886 |
|
|
|
|
|
|
4,127 |
|
Short-term
debt
|
|
|
|
|
|
251 |
|
|
|
|
|
|
3 |
|
Long-term
debt
|
|
|
|
|
|
2,090 |
|
|
|
|
|
|
1,790 |
|
Nonrecourse
obligations
|
|
|
|
|
|
12 |
|
|
|
|
|
|
16 |
|
Separate
account liabilities
|
|
|
|
|
|
6,591 |
|
|
|
|
|
|
7,042 |
|
Total
liabilities
|
|
|
|
|
|
36,174 |
|
|
|
|
|
|
35,317 |
|
Contingencies
— Note 14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (par value per share, $0.25; shares issued, 351)
|
|
|
|
|
|
88 |
|
|
|
|
|
|
88 |
|
Additional
paid-in capital
|
|
|
|
|
|
2,488 |
|
|
|
|
|
|
2,474 |
|
Net
unrealized appreciation, fixed maturities
|
|
$ |
137 |
|
|
|
|
|
|
$ |
140 |
|
|
|
|
|
Net
unrealized appreciation, equity securities
|
|
|
8 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
Net
unrealized depreciation, derivatives
|
|
|
(27 |
) |
|
|
|
|
|
|
(19 |
) |
|
|
|
|
Net
translation of foreign currencies
|
|
|
55 |
|
|
|
|
|
|
|
61 |
|
|
|
|
|
Postretirement
benefits liability adjustment
|
|
|
(135 |
) |
|
|
|
|
|
|
(138 |
) |
|
|
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
51 |
|
Retained
earnings
|
|
|
|
|
|
|
7,142 |
|
|
|
|
|
|
|
7,113 |
|
Less
treasury stock, at cost
|
|
|
|
|
|
|
(4,942 |
) |
|
|
|
|
|
|
(4,978 |
) |
Total
shareholders’ equity
|
|
|
|
|
|
|
4,814 |
|
|
|
|
|
|
|
4,748 |
|
Total
liabilities and shareholders’ equity
|
|
|
|
|
|
$ |
40,988 |
|
|
|
|
|
|
$ |
40,065 |
|
Shareholders’
Equity Per Share
|
|
|
|
|
|
$ |
17.14 |
|
|
|
|
|
|
$ |
16.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income and Changes in Shareholders’
Equity
|
|
|
|
|
(In millions,
except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Three
Months Ended March 31,
|
|
2008
|
|
|
2007
|
|
|
|
Compre-
|
|
|
Share-
|
|
|
Compre-
|
|
|
Share-
|
|
|
|
hensive
|
|
|
holders’
|
|
|
hensive
|
|
|
holders’
|
|
|
|
Income
|
|
|
Equity
|
|
|
Income
|
|
|
Equity
|
|
Common
Stock
|
|
|
|
|
$ |
88 |
|
|
|
|
|
$ |
40 |
|
Additional
Paid-In Capital, January 1
|
|
|
|
|
|
2,474 |
|
|
|
|
|
|
2,451 |
|
Effect
of issuance of stock for employee benefit plans
|
|
|
|
|
|
14 |
|
|
|
|
|
|
34 |
|
Additional
Paid-In Capital, March 31
|
|
|
|
|
|
2,488 |
|
|
|
|
|
|
2,485 |
|
Accumulated
Other Comprehensive Income (Loss),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1 prior to implementation effect
|
|
|
|
|
|
51 |
|
|
|
|
|
|
(169 |
) |
Implementation
effect of SFAS No.155
|
|
|
|
|
|
- |
|
|
|
|
|
|
(12 |
) |
Accumulated
Other Comprehensive Income (Loss),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1 as adjusted
|
|
|
|
|
|
51 |
|
|
|
|
|
|
(181 |
) |
Net
unrealized depreciation, fixed maturities
|
|
$ |
(3 |
) |
|
|
(3 |
) |
|
$ |
(6 |
) |
|
|
(6 |
) |
Net
unrealized appreciation, equity securities
|
|
|
1 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Net
unrealized depreciation on securities
|
|
|
(2 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
Net
unrealized depreciation, derivatives
|
|
|
(8 |
) |
|
|
(8 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Net
translation of foreign currencies
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
Postretirement
benefits liability adjustment
|
|
|
3 |
|
|
|
3 |
|
|
|
17 |
|
|
|
17 |
|
Other
comprehensive income (loss)
|
|
|
(13 |
) |
|
|
|
|
|
|
10 |
|
|
|
|
|
Accumulated
Other Comprehensive Income (Loss), March 31
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
(171 |
) |
Retained
Earnings, January 1 prior to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
implementation
effects
|
|
|
|
|
|
|
7,113 |
|
|
|
|
|
|
|
6,177 |
|
Implementation
effect of SFAS No. 155
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
12 |
|
Implementation
effect of FIN 48
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(29 |
) |
Retained
Earnings, January 1 as adjusted
|
|
|
|
|
|
|
7,113 |
|
|
|
|
|
|
|
6,160 |
|
Net
income
|
|
|
58 |
|
|
|
58 |
|
|
|
289 |
|
|
|
289 |
|
Effects
of issuance of stock for employee benefit plans
|
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
(72 |
) |
Common
dividends declared
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(2 |
) |
Retained
Earnings, March 31
|
|
|
|
|
|
|
7,142 |
|
|
|
|
|
|
|
6,375 |
|
Treasury
Stock, January 1
|
|
|
|
|
|
|
(4,978 |
) |
|
|
|
|
|
|
(4,169 |
) |
Repurchase
of common stock
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(576 |
) |
Other,
primarily issuance of treasury stock for employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
plans
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
168 |
|
Treasury
Stock, March 31
|
|
|
|
|
|
|
(4,942 |
) |
|
|
|
|
|
|
(4,577 |
) |
Total
Comprehensive Income and Shareholders’ Equity
|
|
$ |
45 |
|
|
$ |
4,814 |
|
|
$ |
299 |
|
|
$ |
4,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
Unaudited
|
|
(In millions)
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
58 |
|
|
$ |
289 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
(3 |
) |
|
|
(12 |
) |
Insurance
liabilities
|
|
|
126 |
|
|
|
74 |
|
Reinsurance
recoverables
|
|
|
17 |
|
|
|
12 |
|
Deferred
policy acquisition costs
|
|
|
(43 |
) |
|
|
(12 |
) |
Premiums,
accounts and notes receivable
|
|
|
(72 |
) |
|
|
17 |
|
Other
assets
|
|
|
(341 |
) |
|
|
(28 |
) |
Accounts
payable, accrued expenses and other liabilities
|
|
|
596 |
|
|
|
(74 |
) |
Current income taxes
|
|
|
64 |
|
|
|
100 |
|
Deferred
income taxes
|
|
|
(59 |
) |
|
|
4 |
|
Realized
investment gains
|
|
|
(14 |
) |
|
|
(21 |
) |
Depreciation
and amortization
|
|
|
53 |
|
|
|
54 |
|
Gains
on sales of businesses (excluding discontinued operations)
|
|
|
(9 |
) |
|
|
(11 |
) |
Other,
net
|
|
|
(21 |
) |
|
|
(14 |
) |
Net
cash provided by operating activities
|
|
|
352 |
|
|
|
378 |
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from investments sold:
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
315 |
|
|
|
188 |
|
Equity
securities
|
|
|
- |
|
|
|
11 |
|
Commercial
mortgage loans
|
|
|
12 |
|
|
|
28 |
|
Other
(primarily short-term and other long-term investments)
|
|
|
115 |
|
|
|
143 |
|
Investment
maturities and repayments:
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
149 |
|
|
|
107 |
|
Commercial
mortgage loans
|
|
|
5 |
|
|
|
62 |
|
Investments
purchased:
|
|
|
|
|
|
|
|
|
Fixed
maturities
|
|
|
(499 |
) |
|
|
(440 |
) |
Equity
securities
|
|
|
(13 |
) |
|
|
(2 |
) |
Commercial
mortgage loans
|
|
|
(30 |
) |
|
|
(69 |
) |
Other
(primarily short-term and other long-term investments)
|
|
|
(142 |
) |
|
|
(185 |
) |
Property
and equipment sales
|
|
|
- |
|
|
|
22 |
|
Property
and equipment purchases
|
|
|
(68 |
) |
|
|
(41 |
) |
Cash
provided by investing activities of discontinued
operations
|
|
|
- |
|
|
|
31 |
|
Other
acquisitions/dispositions, net cash used
|
|
|
(7 |
) |
|
|
- |
|
Other,
net
|
|
|
- |
|
|
|
(6 |
) |
Net
cash used in investing activities
|
|
|
(163 |
) |
|
|
(151 |
) |
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Deposits
and interest credited to contractholder deposit funds
|
|
|
330 |
|
|
|
141 |
|
Withdrawals
and benefit payments from contractholder deposit funds
|
|
|
(280 |
) |
|
|
(142 |
) |
Change
in cash overdraft position
|
|
|
64 |
|
|
|
12 |
|
Net
change in short-term debt
|
|
|
248 |
|
|
|
498 |
|
Net
proceeds on issuance of long-term debt
|
|
|
298 |
|
|
|
- |
|
Repayment
of long-term debt
|
|
|
- |
|
|
|
(87 |
) |
Repurchase
of common stock
|
|
|
- |
|
|
|
(583 |
) |
Issuance
of common stock
|
|
|
33 |
|
|
|
133 |
|
Common
dividends paid
|
|
|
(3 |
) |
|
|
(2 |
) |
Net
cash provided by (used in) financing activities
|
|
|
690 |
|
|
|
(30 |
) |
Effect
of foreign currency rate changes on cash and cash
equivalents
|
|
|
1 |
|
|
|
- |
|
Net
increase in cash and cash equivalents
|
|
|
880 |
|
|
|
197 |
|
Cash
and cash equivalents, beginning of period
|
|
|
1,970 |
|
|
|
1,392 |
|
Cash
and cash equivalents, end of period
|
|
$ |
2,850 |
|
|
$ |
1,589 |
|
Supplemental
Disclosure of Cash Information:
|
|
|
|
|
|
|
|
|
Income
taxes paid, net of refunds
|
|
$ |
3 |
|
|
$ |
8 |
|
Interest
paid
|
|
$ |
22 |
|
|
$ |
20 |
|
|
|
|
|
|
|
NOTES TO
THE CONSOLIDATED
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 “the
Company.” 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 (GAAP).
The
interim consolidated 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 periods reported. The interim consolidated
financial statements and notes should be read in conjunction with the
Consolidated Financial Statements and Notes in the Company’s Form 10-K for the
year ended December 31, 2007.
The
preparation of interim consolidated financial statements necessarily relies
heavily on estimates. This and certain other factors, such as the
seasonal nature of portions of the health care and related benefits business as
well as competitive and other market conditions, call for caution in estimating
full year results based on interim results of operations.
All
weighted average shares, per share amounts and references to stock compensation
for all periods presented have been adjusted to reflect the three-for-one stock
split effective June 4, 2007.
Certain
reclassifications have been made to prior period amounts to conform to the
presentation of 2008 amounts.
Discontinued
operations for the three months ended
March 31, 2008 represented $3 million after-tax from the settlement of certain
issues related to a past divestiture. Discontinued operations for the
three months ended March 31, 2007 represent realized gains of $12 million
after-tax from the disposition of certain directly-owned real estate
investments.
Unless
otherwise indicated, amounts in these Notes exclude the effects of discontinued
operations.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
Fair value
measurements. Effective January 1, 2008, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value
Measurements.” This standard expands disclosures about fair value
measurements and clarifies how to measure fair value by focusing on the price
that would be received when selling an asset or paid to transfer a liability
(exit price). See Note 7 for information on the
Company’s fair value measurements including new required
disclosures.
The
Company carries certain financial instruments at fair value in the financial
statements including approximately $12 billion in invested assets at March 31,
2008. The Company also carries derivative instruments at fair value,
including assets and liabilities for reinsurance contracts covering guaranteed
minimum income benefits under certain variable annuity contracts issued by other
insurance companies and related retrocessional contracts. The Company also
reports separate account assets at fair value, however changes in the fair
values of these assets accrue directly to policyholders and are not included in
the Company’s revenues and expenses. At the adoption of SFAS No. 157,
there were no effects to the Company’s measurements of fair values for financial
instruments other than for assets and liabilities for reinsurance contracts
covering guaranteed minimum income benefits discussed below.
At
adoption, the Company was required to change certain assumptions used to
estimate the fair values of assets and liabilities for reinsurance contracts
covering guaranteed minimum income benefits. As a result, the Company
recorded a charge of $131 million after-tax, net of reinsurance ($202 million
pre-tax), in Run-off Reinsurance. This charge did not have an impact
on the Company’s cash flows.
Because there is no market
for these contracts, the assumptions used to estimate their fair values at
adoption were determined using a hypothetical market participant's view of an
exit price. The Company considered the following in determining the view
of a hypothetical market participant:
·
|
that
the most likely transfer of these assets and liabilities would be through
a reinsurance transaction with an independent insurer having a market
capitalization and credit rating similar to that of the Company;
and
|
·
|
that because this block of contracts is in
run-off mode, an insurer looking to acquire these contracts would have
similar existing contracts with related administrative and risk management
capabilities.
|
At
adoption, the assumptions used to estimate the fair value of these contracts
were determined using a hypothetical market participant’s view of an exit price
rather than using historical market data and actual experience to establish the
Company’s future expectations. For many of these assumptions, there
is limited or no observable market data so determining an exit price requires
the Company to exercise significant judgment and make critical accounting
estimates.
The
Company considers the various assumptions used to estimate fair values of these
contracts in two categories: capital markets and future annuitant and
retrocessionaire behavior assumptions. Estimated components of the
charge by category (net of reinsurance) are described below, including how these
updated assumptions differ from those used historically to estimate fair values
for these contracts.
Assumptions Related to Capital
Markets - $183 million of the $202 million pre-tax charge, net of
estimated receivables for reinsurance, reflects the impact of changes in capital
markets assumptions including market return, discount rate, the
projected interest rate used to calculate the reinsured income benefits at the
time of annuitization (claim interest rate), and volatility. These assumptions
were updated to reflect risk free interest rates (LIBOR swap curve) and
volatility consistent with that implied by derivative instruments in a
consistently active market, under the assumption that a hypothetical market
participant would hedge all or a portion of the net liability. The
capital markets charge is comprised of:
·
|
$131
million related to using risk free interest rates to project the growth in
the contractholders’ underlying investment accounts rather than using an
estimate of the actual returns for the underlying equity and bond mutual
funds over time. Risk free growth rates were lower than the
market return assumptions at December 31, 2007 which ranged from 5-11%
varying by fund type. The Company believes risk free
rates would be used by a hypothetical market participant who is expected
to hedge the risk associated with these contracts because they would earn
risk free interest returns from hedging instruments. However, the
Company’s actual payments will be based on, among other variables, the
actual returns that the contractholders’ earn on their underlying
investment accounts.
|
·
|
$23
million related to assuming implied market volatility as of January 1,
2008 for certain indices where observable in a consistently active
market. The Company believes that a hypothetical market
participant would use these market observable implied volatilities rather
than use average historical market
volatilities.
|
·
|
$20
million related to projecting the interest rate used to calculate the
reinsured income benefits at the time of annuitization (claim interest
rate) using the market implied forward rate curve and volatility as of
January 1, 2008. Claim payments are based on the 7-year
Treasury Rate at the time the benefit is elected, and the Company believes
that a hypothetical market participant would likely use the above
market-implied approach rather than projecting the 7-year Treasury Rate
grading from current levels to long-term average
levels.
|
·
|
$9
million related to using risk free interest rates as of January 1, 2008 to
discount the liability. The Company believes that a
hypothetical market participant would use current risk free interest rates
for discounting rather than a rate anticipated to be earned on the assets
invested to settle the liability. The impact of using risk free
interest rates to discount the liability is significantly less than the
impact of using these rates to project the growth in contractholders’
underlying investment accounts because risk free interest rates as of
January 1, 2008 are much closer to the discount rate assumption of 5.75%
used at December 31, 2007 prior to the adoption of SFAS No.
157.
|
Assumptions Related to Future
Annuitant and Retrocessionaire Behavior - $19 million of the $202 million
pre-tax charge, net of estimated receivables for reinsurance, reflects the
impact of the Company’s
view of a hypothetical market participant’s assumptions for future annuitant and
retrocessionaire behavior and primarily reflects incremental risk and profit
charges.
The
Company’s results of operations related to this business are expected to
continue to be volatile in future periods both because underlying assumptions
will be based on current market-observable inputs which will likely change each
period and because the recorded liabilities, net of receivables from
reinsurers, are higher after adoption of SFAS No. 157. See Note 7 for additional information.
The
Financial Accounting Standards Board (FASB) deferred the effective date of SFAS
No. 157 until the first quarter of 2009 for non-financial assets and liabilities
(such as intangible assets, property and equipment and goodwill) that are
required to be measured at fair value on a periodic basis (such as at
acquisition or impairment). The FASB expects to address
implementation issues during this delay. Accordingly, the Company
will adopt SFAS No. 157 for non-financial assets and liabilities in the first
quarter of 2009 and will evaluate the effects of adoption when the FASB provides
implementation guidance.
Fair value
option. Effective January 1, 2008, the Company adopted SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities,"
which permits entities to choose fair value measurement of many financial
instruments, including insurance contracts, 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. The adoption of SFAS No. 159 did not impact the Company's
consolidated financial statements, as no items were initially elected for
fair value measurement. For financial assets and liabilities
acquired in subsequent periods, the Company will determine whether to use the
fair value election at the time of acquisition.
NOTE
3 – ACQUISITIONS AND DISPOSITIONS
The
Company may from time to time acquire or dispose of assets, subsidiaries or
lines of business. Significant transactions are described
below.
Great-West
Healthcare Acquisition. On April 1, 2008, the Company acquired
the Healthcare division of Great-West Life and Annuity, Inc. (“Great-West
Healthcare”) through 100% indemnity reinsurance agreements and the acquisition
of certain affiliates and other assets and liabilities of Great-West Life and
Annuity, Inc. for a cash purchase price of approximately $1.5
billion. Great-West Healthcare primarily sells administrative service
medical plans with stop loss coverage to small and mid-size employer groups.
Great-West Healthcare's offerings also include the following products sold
through a variety of funding options: stop loss, life, disability, medical,
dental, vision, prescription drug coverage, and accidental death and
dismemberment insurance. The acquisition, which will be accounted for as a
purchase beginning in the second quarter of 2008, was financed through a
combination of available cash and the issuance of long-term debt and commercial
paper (see Note 11).
The
results of Great-West Healthcare will be included in the Company’s consolidated
financial statements from the date of acquisition.
Sale
of the Brazilian Life Insurance Operations. On April 29, 2008, the
Company completed the sale of its Brazilian life insurance operations. See
Note 3 to the Consolidated Financial Statements in the Company's 2007 Form 10-K
for additional information.
NOTE
4 – EARNINGS PER SHARE
Basic and
diluted earnings per share were computed as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars
in millions, except per share amounts)
|
|
Basic
|
|
|
|
|
|
Diluted
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Income
from continuing
|
|
|
|
|
|
|
|
operations
|
|
$ |
55 |
|
|
|
- |
|
|
$ |
55 |
|
Shares
(in
thousands):
|
|
|
|
|
|
|
|
|
|
Weighted
average
|
|
|
279,077 |
|
|
|
- |
|
|
|
279,077 |
|
Options
and restricted stock grants
|
|
|
|
3,401 |
|
|
|
3,401 |
|
Total
shares
|
|
|
279,077 |
|
|
|
3,401 |
|
|
|
282,478 |
|
EPS
|
|
$ |
0.20 |
|
|
$ |
(0.01 |
) |
|
$ |
0.19 |
|
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 |
|
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 the Company's common stock for the
period.
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
(Options
in millions)
|
|
2008
|
2007
|
Antidilutive
options
|
|
3.7
|
1.5
|
The
Company held 70,130,685 shares of common stock in Treasury as of March 31, 2008,
and 64,096,823 shares as of March 31, 2007.
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)
|
|
2008
|
|
|
2007
|
|
Incurred
but not yet reported
|
|
$ |
850 |
|
|
$ |
786 |
|
Reported
claims in process
|
|
|
138 |
|
|
|
145 |
|
Other
medical expense payable
|
|
|
45 |
|
|
|
44 |
|
Medical
claims payable
|
|
$ |
1,033 |
|
|
$ |
975 |
|
Activity
in medical claims payable was as follows:
|
|
For
the period ended
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
Balance
at January 1,
|
|
$ |
975 |
|
|
$ |
960 |
|
Less: Reinsurance
and other
|
|
amounts
recoverable
|
|
|
258 |
|
|
|
250 |
|
Balance
at January 1, net
|
|
|
717 |
|
|
|
710 |
|
Incurred
claims related to:
|
|
|
|
|
|
Current
year
|
|
|
1,797 |
|
|
|
6,878 |
|
Prior
years
|
|
|
(53 |
) |
|
|
(80 |
) |
Total
incurred
|
|
|
1,744 |
|
|
|
6,798 |
|
Paid
claims related to:
|
|
|
|
|
|
Current
year
|
|
|
1,156 |
|
|
|
6,197 |
|
Prior
years
|
|
|
526 |
|
|
|
594 |
|
Total
paid
|
|
|
1,682 |
|
|
|
6,791 |
|
Ending
Balance, net
|
|
|
779 |
|
|
|
717 |
|
Add: Reinsurance
and other
|
|
amounts
recoverable
|
|
|
254 |
|
|
|
258 |
|
Ending
Balance
|
|
$ |
1,033 |
|
|
$ |
975 |
|
Reinsurance
and other amounts recoverable reflect amounts due from policyholders to cover
incurred but not reported and pending 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, 2008, actual experience differed from the Company’s
key assumptions, resulting in favorable incurred claims related to prior years’
medical claims payable of $53
million,
or 0.8% of the current year incurred claims as reported for the year ended
December 31, 2007. Actual completion factors resulted in a reduction in medical
claims payable of $20 million, or 0.3% of the current year incurred claims as
reported for the year ended December 31, 2007 for the insured book of business.
Actual medical cost trend resulted in a reduction in medical claims payable of
$33 million, or 0.5% of the current year incurred claims as reported for the
year ended December 31, 2007 for the insured book of business.
For the
year ended December 31, 2007, actual experience differed from the Company's key
assumptions, resulting in favorable incurred claims related to prior years’
medical claims payable of $80 million, or 1.3% of the current year incurred
claims as reported for the year ended December 31, 2006. Actual
completion factors resulted in a reduction of the medical claims payable of $46
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 of the medical claims payable of $34
million, or 0.6% 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 2008 and 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 prior
years. This release was substantially offset by the establishment of
the provision for moderately adverse conditions established for claims incurred
related to current years.
The
corresponding impact of favorable prior year development on net income was not
material for the three months ended March 31, 2008. 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 the
Company's net income recognized for the following reasons:
First,
due to the nature of the Company'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 the Company 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 the Company’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,
the Company 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 the Company establishes the liability for each
incurral year, the Company 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, the
Company does not consider that offset amount as having any impact on net
income.
The
determination of liabilities for Health Care medical claims payable requires the
Company to make critical accounting estimates. See Note 2(O) to the
Consolidated Financial Statements in the Company’s 2007 Form 10-K.
NOTE 6 – GUARANTEED MINIMUM DEATH BENEFIT CONTRACTS
The
Company’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. The Company has equity
and other market exposures as a result of this product.
The determination of
liabilities for guaranteed minimum death benefits requires the Company to make
critical accounting estimates. The Company 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 the Company’s consolidated results of operations, and in certain
situations, could have a material adverse effect on the Company’s financial
condition. The
Company had future policy benefit reserves for guaranteed minimum death benefit
contracts of $899 million as of March 31, 2008, and $848 million as of December
31, 2007. The increase in reserves is due to
declines in the equity market driving down the value of the underlying mutual
fund investments.
Activity
in future policy benefit reserves for these guaranteed minimum death benefits
contracts was as follows:
|
|
For
the period ended
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Balance
at January 1
|
|
$ |
848 |
|
|
$ |
862 |
|
Less: Reinsurance
recoverable
|
|
|
16 |
|
|
|
17 |
|
Balance
at January 1, net |
|
|
832 |
|
|
|
845 |
|
Add: Incurred
benefits
|
|
|
60 |
|
|
|
61 |
|
Less: Paid
benefits
|
|
|
19 |
|
|
|
74 |
|
Ending
Balance, net |
|
|
873 |
|
|
|
832 |
|
Add: Reinsurance
recoverable
|
|
|
26 |
|
|
|
16 |
|
Ending
Balance
|
|
$ |
899 |
|
|
$ |
848 |
|
Benefits
paid and incurred are net of ceded amounts. Incurred benefits reflect
the favorable or unfavorable impact of a rising or falling equity market on the
liability. As discussed below, losses or gains have been recorded in
other revenues as a result of the program to reduce equity market
exposures.
The
following list provides information about the Company’s reserving methodology
and assumptions for guaranteed minimum death benefits as of March 31,
2008:
·
|
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 0-30% depending on the net amount at risk for each
policy and whether surrender charges
apply.
|
·
|
The
mean investment performance assumption is 5% considering the Company’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 2% 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, 2008, the aggregate value of the underlying mutual fund investments
was $26.3 billion. The death benefit coverage in force as of that
date (representing the amount that the Company would have to pay if all of the
approximately 720,000 contractholders had died on that date) was $5.6
billion. The death
benefit coverage in force represents the excess of the guaranteed benefit amount
over the value of the underlying mutual fund investments.
The
notional amount of futures contract positions held by the Company at March 31,
2008 was $925 million. The Company recorded in other revenues pre-tax
gains of $42 million for the first three months of 2008, compared with pre-tax
losses of $7 million for the first three months of 2007 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 to the Consolidated Financial
Statements in the Company’s 2007 Form 10-K.
NOTE 7 – FAIR VALUE MEASUREMENTS
The
Company carries certain financial instruments at fair value in the financial
statements including fixed maturities, equity securities, short-term investments
and derivatives. Other financial instruments are periodically
measured at fair value, such as when impaired, or, for commercial mortgage
loans, when classified as “held for sale.”
Fair
value is defined as the price at which an asset could be exchanged in a current
transaction between market participants. A liability’s fair value is
defined as the amount that would be paid to transfer the liability to a market
participant, not the amount that would be paid to settle the liability with the
creditor.
Fair
values are based on quoted market prices when available. When market
prices are not available, fair value is generally estimated using discounted
cash flow analyses, incorporating current market inputs for similar financial
instruments with comparable terms and credit quality (matrix
pricing). In instances where there is little or no market
activity for the same or similar instruments, the Company estimates fair value
using methods, models and assumptions that management believes a hypothetical
market participant would use to determine a current transaction
price. These valuation techniques involve some level of management
estimation and judgment which becomes significant with increasingly complex
instruments or pricing models. Where appropriate, adjustments are
included to reflect the risk inherent in a particular methodology, model or
input used.
The
Company's financial assets and liabilities carried at fair value have been
classified based upon a hierarchy defined by SFAS No. 157. The
hierarchy gives the highest ranking to fair values determined using unadjusted
quoted prices in active markets for identical assets and liabilities (Level 1)
and the lowest ranking to fair values determined using methodologies and models
with unobservable inputs (Level 3). An asset’s or a liability’s classification
is based on the lowest level input that is significant to its
measurement. For example, a Level 3 fair value measurement may
include inputs that are both observable (Levels 1 and 2) and unobservable (Level
3). The levels of the fair value hierarchy are as
follows:
·
|
Level 1 - Values are
unadjusted quoted prices for identical assets and liabilities in active
markets accessible at the measurement date. Active markets
provide pricing data for trades occurring at least weekly and include
exchanges and dealer markets.
|
·
|
Level 2
– Inputs include quoted prices for similar assets or
liabilities in active markets, quoted prices from those willing to trade
in markets that are not active, or other inputs that are observable or can
be corroborated by market data for the term of the
instrument. Such inputs include market interest rates and
volatilities, spreads and yield
curves.
|
|
Level 3 – Certain
inputs are unobservable (supported by little or no market activity) and
significant to the fair value measurement. Unobservable inputs
reflect the Company’s best estimate of what hypothetical market
participants would use to determine a transaction price for the asset or
liability at the reporting date.
|
Financial
assets and liabilities measured at fair value on a recurring basis
The
following table provides information as of March 31, 2008 about the Company’s
financial assets and liabilities measured at fair value on a recurring
basis. SFAS No. 157 disclosures for separate account assets, which
are also recorded at fair value on the Company’s Consolidated Balance Sheets,
are provided separately as gains and losses related to these assets generally
accrue directly to policyholders (see page
16).
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29 |
|
|
$ |
11,295 |
|
|
$ |
709 |
|
|
$ |
12,033 |
|
Equity
securities
|
|
|
5 |
|
|
|
122 |
|
|
|
17 |
|
|
|
144 |
|
Sub-total
|
|
|
34 |
|
|
|
11,417 |
|
|
|
726 |
|
|
|
12,177 |
|
Short-term
investments
|
|
|
- |
|
|
|
36 |
|
|
|
|
|
|
|
36 |
|
|
|
|
- |
|
|
|
- |
|
|
|
515 |
|
|
|
515 |
|
Total
assets at fair value, excluding separate accounts
|
|
$ |
34 |
|
|
$ |
11,453 |
|
|
$ |
1,241 |
|
|
$ |
12,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMIB
liabilities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
965 |
|
|
$ |
965 |
|
|
|
|
- |
|
|
|
33 |
|
|
|
- |
|
|
|
33 |
|
Total
liabilities at fair value
|
|
$ |
- |
|
|
$ |
33 |
|
|
$ |
965 |
|
|
$ |
998 |
|
|
As
of March 31, 2008, fixed maturities includes $416 million of net
appreciation required to adjust future policy benefits for certain
annuities including $3 million in appreciation from securities classified
in Level 3.
|
|
|
Guaranteed
Minimum Income Benefit (GMIB) assets represent retrocessional contracts in
place from two external reinsurers which cover 55% of the exposures on
these contracts. The assets are net of a credit of $21 million for
the future cost of reinsurance.
|
|
|
Derivatives
other than GMIB assets and liabilities are presented net of $12 million in
gross derivative assets.
|
|
Level
1 financial assets - $34 million
Given the
narrow definition of Level 1 and the Company's investment asset strategy,
a relatively small portion of the Company’s investment assets are
classified in Level 1. These assets include actively-traded U.S. government
bonds and exchange-listed equity securities. Unadjusted quoted
prices for these securities are provided to the Company by independent pricing
services.
Level
2 financial assets - $11.5 billion and liabilities - $33 million
Fixed maturities and equity
securities. Approximately 94% of the Company’s investments in fixed
maturities and equity securities are classified in Level 2 including most public
and private corporate debt and equity securities, federal agency and municipal
bonds, non-government mortgage and asset-backed securities and preferred
stocks. Fair values of fixed maturities and equity securities
reported in this category are largely provided by independent pricing services
($8 billion as of March 31, 2008), or are calculated by the Company using a
matrix pricing model ($3.5 billion as of March 31, 2008). Where
independent pricing services provide fair values, the Company has obtained an
understanding of the methods, models and inputs used in pricing, and has
controls in place to validate that amounts provided represent current exit
values.
Typical
inputs to models used by independent pricing services include but are not
limited to benchmark yields, reported trades, broker-dealer quotes, issuer
spreads, benchmark securities, bids, offers, reference data, and industry and
economic events. For mortgage and asset-backed securities, inputs may
also include characteristics of the issuer, collateral attributes, prepayment
speeds and credit rating. Because many fixed maturities and preferred
stocks do not trade daily, independent pricing services regularly derive fair
values using recent trades of securities with similar features. When recent
trades are not available, pricing models are used to estimate the fair values of
securities by discounting future cash flows at estimated market interest
rates.
If an
independent pricing service is unable to provide the fair value for a security
due to insufficient market information such as for a private placement
transaction, the Company will determine fair value internally using a matrix
pricing model. This model estimates fair value using discounted cash flows at a
market yield considering the appropriate treasury rate plus a
spread. The spread is derived by reference to a similar bond or
industry grid, and may be adjusted based on specific characteristics of the
security, including inputs that are not readily observable in the market.
The
Company
assesses the significance of unobservable inputs for each security priced
internally and classifies
that security in Level 2 only if the unobservable inputs are
insignificant.
Short-term investments. Short-term
investments are carried at fair value, which approximates cost. On a
regular basis the Company compares current prices for these securities as
published by an independent pricing service to recorded amounts to validate that
current carrying amounts approximate exit prices. The short-term nature of the
investments and corroboration of the reported amounts over the holding period
support their classification in Level 2.
Other derivatives. Amounts
classified in Level 2 represent over-the-counter instruments such as swap
contracts. Fair values for these instruments are determined
internally using market observable inputs including forward currency and
interest rate curves and widely published market observable indices. Credit risk
related to the counterparty and the Company is considered when estimating the
fair values of these derivatives. However, the Company is largely protected by
collateral arrangements with counterparties, and determined that no adjustment
for credit risk was required as of March 31, 2008. The nature and use
of these other derivatives are described in Note 10(F) of the Consolidated
Financial Statements in the Company’s 2007 Form 10-K.
Level
3 financial assets - $1.2 billion and liabilities - $965 million
The
Company classifies certain newly issued, privately placed, complex or illiquid
securities, as well as assets and liabilities relating to guaranteed minimum
income benefits in Level 3.
Fixed maturities and equity
securities. $726 million or approximately 6% of fixed
maturities and equity securities are classified in Level 3. Of this amount, approximately $504
million represent fixed maturities priced using indicative quotes from
independent securities brokers. Because brokers do not share the
specific pricing inputs and methods used to determine these quotes, and because
these quotes do not represent a firm commitment to transact at the prices
provided, the Company classifies the resulting values as Level 3 measurements.
Broker quotes are primarily used to price complex instruments including $384
million of structured securities and $120 million of primarily private corporate
bonds. Level 3 measurements may also include new public securities
before there is observable market activity. The Company expects
market observable data will become available for pricing these newly issued
securities in the future and therefore, would expect regular transfers out of
Level 3 to Level 2. Fair values for the remaining $222 million of fixed
maturities and the equity securities classified in Level 3 are derived
principally using unobservable inputs as there is little, if any, relevant
market data and include:
·
|
$133
million of predominantly private corporate and structured bonds valued
using internally-developed data to determine credit quality;
and
|
·
|
$89
million of subordinated loans and private equity investments
valued at transaction price in the absence of market data indicating the
carrying values may not be
recoverable.
|
Guaranteed minimum income benefit
contracts. The Company estimates the fair value of the assets
and liabilities for guaranteed minimum income benefit reinsurance contracts
using assumptions regarding capital markets (including market returns, interest
rates and market volatilities of the underlying equity and bond mutual fund
investments), future annuitant and retrocessionaire behavior (including
mortality, lapse, annuity election rates and retrocessional credit), as well as
risk and profit charges. At adoption of SFAS No. 157, the Company updated
assumptions to reflect those that the Company believes a hypothetical market
participant would use to determine a current exit price for these contracts and
recorded a charge to net income as described in Note 2. As
certain assumptions used to estimate fair values for these contracts are largely
unobservable, the Company classifies assets and liabilities associated with
guaranteed minimum income benefits in Level 3 (GMIB assets and GMIB
liabilities).
These
GMIB assets and liabilities are estimated using a complex internal model run
using many scenarios to determine the present value of net amounts expected to
be paid, less the present value of net future premiums expected to be received
adjusted for risk and profit charges that the Company estimates a hypothetical
market participant would require to assume this business. Net
amounts expected to be paid includes the excess of the expected value of the
income benefits over the values of the annuitant’s accounts at the time of
annuitization.
GMIB liabilities are reported in the Company’s Consolidated Balance Sheets in
accounts payable, accrued expenses and other liabilities. GMIB assets
associated with these contracts represent net receivables in connection with
reinsurance that the Company has purchased from two external reinsurers and are
reported in the Company’s Consolidated Balance Sheets in other
assets. Generally, market return, interest rate and volatility
assumptions are based on market-observable information. Assumptions
related to annuitant behavior reflect the Company’s belief that a hypothetical
market participant would consider the actual and expected experience of the
Company as well as other relevant and available industry resources in setting
policyholder behavior assumptions. The assumptions used to
value these assets and liabilities as of March 31, 2008 are as
follows:
·
|
The
market return and discount rate assumptions are based on the market
observable LIBOR swap curve.
|
·
|
The
projected interest rate used to calculate the reinsured income benefits is
indexed to the 7-year Treasury Rate at the time of annuitization (claim
interest rate) based on contractual terms. That rate was 2.9%
at March 31, 2008 and must be projected for future time periods. These
projected rates vary by economic scenario and are determined by an
interest rate model using current interest rate curves and the prices of
instruments available in the market including various interest rate caps
and zero-coupon bonds.
|
·
|
The
market volatility assumptions for annuitants’ underlying mutual fund
investments that are modeled based on the S&P 500, Russell 2000 and
NASDAQ Composite are based on the market implied volatility for these
indices for three to seven years grading to historical volatility levels
thereafter. For the remaining 53% of underlying mutual fund investments
modeled based on other indices (with insufficient market observable data),
volatility is based on the average historical level for each index over
the past 10 years. Using this approach volatility ranges from
14 to 32% for equity funds, 3 to 8% for bond funds and 1 to 2% for money
market funds.
|
·
|
The
mortality assumption is 70% of the 1994 Group Annuity Mortality table,
with 1% annual improvement beginning January 1,
2000.
|
·
|
The
lapse rate assumption varies by contract from 2%-17% and depends on the
time since contract issue, the relative value of the guarantee and the
differing experience by issuing company of the underlying annuity
contracts.
|
·
|
The
annuity election rate assumption varies by contract and depends on the
annuitant’s age, the relative value of the guarantee, the number of
previous opportunities a contractholder has had to elect the benefit and
the differing experience by company issuing the underlying variable
annuity contracts. Immediately after the expiration of the
waiting period, the assumed probability that an individual will annuitize
their variable annuity contract is up to 80%. For the second
annual opportunity to elect the benefit, the assumed probability of
election is up to 45%. For each subsequent annual opportunity to elect the
benefit, the assumed probability of election is up to 25%. With
respect to the second and subsequent election opportunities, actual data
is just beginning to emerge for the Company as well as the industry and
the estimates are based on this limited
data.
|
·
|
The
risk and profit charge assumption is based on the Company’s estimate of
the capital and return on capital that would be required by a hypothetical
market participant.
|
·
|
The
Company has considered adjustments for expenses, nonperformance risk (such
as credit risk for retrocessionnaires and the Company), and model risk and
believes that a hypothetical market participant would view these
adjustments as offsetting. Therefore the Company determined
that no adjustment for these risks was required as of March 31,
2008.
|
The
approach for these assumptions, including market observable reference points, is
consistent with that used to estimate the fair values of these contracts at
January 1, 2008. The Company regularly evaluates each of the
assumptions used in establishing these assets and liabilities by considering how
a hypothetical market participant would set assumptions at each valuation
date. Capital markets assumptions are expected to change at each
valuation date reflecting current observable market conditions. Other
assumptions may also change based on a hypothetical market participant’s view of
actual experience as it emerges over time or other relevant and available
industry data. If the emergence of future experience or future
assumptions differs from the assumptions used in estimating these assets and
liabilities, the resulting
impact
could be material to the Company’s consolidated results of operations, and in
certain situations, could be material to the Company’s financial
condition.
Changes
in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring
Basis
The
following table summarizes the changes in assets and liabilities classified in
Level 3 for the first three months of 2008. This table excludes
separate account assets which are discussed on page 16 as
changes in fair values of these assets accrue directly to policyholders. Gains
and losses reported in this table may include changes in fair value that are
attributable to both observable and unobservable inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
Fixed
Maturities
&
Equity
Securities
|
|
|
|
GMIB
Asset
|
|
|
|
GMIB
Liability
|
|
|
|
GMIB
Net
|
|
Balance
at 1/1/08:
|
|
$ |
732 |
|
|
$ |
173 |
|
|
$ |
(313 |
) |
|
$ |
(140 |
) |
Gains
(losses) included in income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of adoption of SFAS No. 157
|
|
|
- |
|
|
|
244 |
|
|
|
(446 |
) |
|
|
(202 |
) |
Results
of GMIB, excluding adoption effect
|
|
|
|
125 |
|
|
|
(227 |
) |
|
|
(102 |
) |
Other
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
gains (losses) included in income
|
|
|
(5 |
) |
|
|
369 |
|
|
|
(673 |
) |
|
|
(304 |
) |
Gains
(losses) included in other comprehensive income
|
|
|
(9 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gains
(losses) required to adjust future policy benefits for certain annuities
(1)
|
|
|
(18 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Purchases,
issuances, settlements
|
|
|
(6 |
) |
|
|
(27 |
) |
|
|
21 |
|
|
|
(6 |
) |
Transfers
in (out) of Level 3
|
|
|
32 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance
at 3/31/08
|
|
$ |
726 |
|
|
$ |
515 |
|
|
$ |
(965 |
) |
|
$ |
(450 |
) |
Total
gains (losses) included in income attributable to instruments held at the
reporting date
|
|
$ |
- |
|
|
$ |
369 |
|
|
$ |
(673 |
) |
|
$ |
(304 |
) |
|
Amounts
do not accrue to shareholders and are not reflected in the Company's
revenues.
|
|
As noted
in the table above, total gains and losses included in income are reflected in
the following captions in the Consolidated Statements of Income:
· realized
investment gains (losses) for amounts related to fixed maturities and equity
securities.
· guaranteed
minimum income benefits expense for amounts related to GMIB assets and
liabilities.
Reclassifications
impacting Level 3 financial instruments are reported as transfers in (out) of
the Level 3 category as of the beginning of the quarter in which the transfer
occurs. Therefore gains and losses in
income only reflect activity for the period the instrument was classified in
Level 3.
The Company provided reinsurance for other insurance companies
that offer a guaranteed minimum income benefit, and then retroceded a portion of
the risk to other insurance companies. These arrangements with third
party insurers are the instruments still held at the reporting date for GMIB
assets and liabilities in the table above. Because these
reinsurance arrangements remain in effect at the reporting date, the Company has
reflected the total gain or loss for the period as the total gain or loss
included in income attributable to instruments still held at the reporting
date. However, the Company reduces the GMIB assets and liabilities
resulting from these reinsurance arrangements when annuitants lapse, die, elect
their benefit, or reach the age after which the right to elect their benefit
expires.
In the
first quarter, losses on the GMIB liabilities and offsetting gains on the GMIB
assets were primarily the result of declines in equity markets and risk free
interest rates.
Separate
account assets
Fair
values and changes in the fair values of separate account assets generally
accrue directly to the policyholders and are not included in the Company’s
revenues and expenses. As of March 31, 2008 separate account assets
were as follows:
(In
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separate
account assets:
|
|
|
|
|
|
|
|
|
|
|
Guaranteed
separate accounts (See Note 14)
|
|
$ |
346 |
|
|
$ |
1,604 |
|
|
$ |
- |
|
|
$ |
1,950 |
|
Non-guaranteed
separate accounts (1)
|
|
|
1,598 |
|
|
|
2,632 |
|
|
|
411 |
|
|
|
4,641 |
|
Total
separate account assets
|
|
$ |
1,944 |
|
|
$ |
4,236 |
|
|
$ |
411 |
|
|
$ |
6,591 |
|
|
Non-guaranteed
separate accounts include $1.5 billion in assets supporting CIGNA's
pension plan, including $353 million classified in Level
3.
|
Separate
account assets in Levels 1 and 2 primarily include:
·
|
equity
securities and corporate and structured bonds priced by independent
pricing services as described
above,
|
·
|
actively-traded
institutional and retail mutual fund investments valued by the respective
mutual fund companies, and
|
·
|
separate
accounts managed and priced by an affiliate of the buyer of the retirement
benefits business using their daily net asset value which is the exit
price.
|
Separate
account assets classified in Level 3 include investments primarily in securities
partnerships and real estate generally valued at transaction price in the
absence of market data indicating the carrying values may not be
recoverable. Values may be adjusted when evidence is available to
support such adjustments. Evidence may include market data as well as
changes in the financial results and condition of the investment.
The
following table summarizes the change in separate account assets reported in
Level 3 for the first three months of 2008.
(In
millions)
|
|
|
|
|
|
|
|
Balance
at 1/1/08
|
|
$ |
403 |
|
Policyholder
gains (losses) (1)
|
|
|
17 |
|
Purchases,
issuances, settlements
|
|
|
(7 |
) |
Transfers
in (out) of Level 3
|
|
|
(2 |
) |
Balance
at 3/31/08
|
|
$ |
411 |
|
|
|
|
Included
in this amount are losses of $1 million attributable to instruments still
held at the reporting date.
|
Assets
and liabilities measured at fair value on a non-recurring basis
Certain
financial assets and liabilities are measured at fair value on a non-recurring
basis, such as commercial mortgage loans held for sale. In the first
quarter of 2008, the amount required to adjust these assets and liabilities to
their fair value was insignificant.
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)
|
|
2008
|
|
|
2007
|
|
Fixed
maturities
|
|
$ |
(26 |
) |
|
$ |
4 |
|
Equity
securities
|
|
|
- |
|
|
|
10 |
|
Other
investments,
|
|
|
|
|
|
|
|
|
including derivatives
|
|
|
40 |
|
|
|
7 |
|
Realized
investment gains
|
|
from
continuing operations,
|
|
before
income taxes
|
|
|
14 |
|
|
|
21 |
|
Less
income taxes
|
|
|
5 |
|
|
|
8 |
|
Realized
investment gains
|
|
from continuing operations
|
|
|
9 |
|
|
|
13 |
|
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
|
|
$ |
9 |
|
|
$ |
25 |
|
In 2008
and 2007, realized investment results from continuing operations primarily
reflect:
·
|
gains
from other investments on sales of equity interests in real estate limited
liability entities in 2008 ($38 million pre-tax) and 2007 ($5 million
pre-tax);
|
·
|
gains
on sales of equity securities in 2007 ($10 million
pre-tax);
|
·
|
losses
on sales of fixed maturities in 2008 ($10 million pre-tax) versus gains in
2007 ($4 million pre-tax); and
|
·
|
losses
on fixed maturities in 2008 due to asset write downs on securities where
the Company no longer has intent to hold until recovery of fair value ($12
million pre-tax) and credit related impairments ($4 million
pre-tax).
|
For the
first three months of 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 the Company’s Consolidated Statement of Cash
Flows.
Fixed
Maturities and Equity Securities
Securities
in the following table are included in fixed maturities and equities on the
Company’s balance sheet. These securities are carried at fair
value with changes in fair value reported in realized investment gains and
interest and dividends reported in net investment income. The Company
elected fair value accounting for certain hybrid securities to simplify
accounting and mitigate volatility in results of operations and financial
condition.
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
As
of
December
31, 2007
|
|
Included
in fixed maturities:
|
|
|
|
|
Trading
securities
|
|
|
|
|
|
|
(amortized
cost $17; $22)
|
|
$ |
17 |
|
|
$ |
22 |
|
Hybrid securities
|
|
|
|
|
|
(amortized
cost $8; $11)
|
|
|
8 |
|
|
|
11 |
|
Total
|
|
$ |
25 |
|
|
$ |
33 |
|
Included
in equity securities:
|
|
Hybrid securities
|
|
|
|
|
|
(cost
$127; $114)
|
|
$ |
122 |
|
|
$ |
110 |
|
Sales of
available-for-sale fixed maturities and equity securities were as
follows:
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Proceeds
from sales
|
|
$ |
315 |
|
|
$ |
199 |
|
Gross
gains from sales
|
|
$ |
2 |
|
|
$ |
15 |
|
Gross
losses from sales
|
|
$ |
(12 |
) |
|
$ |
(1 |
) |
Review of
Declines in Fair Value. Management reviews fixed
maturities and equity 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.
|
Excluding
trading and hybrid securities, as of March 31, 2008, fixed maturities with a
decline in fair value from cost (which were primarily investment grade corporate
bonds) were as follows, including the length of time of such
decline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Amortized
|
|
|
Deprec-
|
|
|
Number
|
|
(Dollars
in millions)
|
|
Value
|
|
|
Cost
|
|
|
iation
|
|
|
of
Issues
|
|
Fixed
Maturities:
|
|
|
|
|
|
|
|
|
|
|
One
year or less:
|
|
|
|
|
|
|
|
Investment
grade
|
|
$ |
2,184 |
|
|
$ |
2,298 |
|
|
$ |
(114 |
) |
|
|
438 |
|
Below
investment
|
|
|
|
|
|
|
|
|
|
grade
|
|
$ |
273 |
|
|
$ |
283 |
|
|
$ |
(10 |
) |
|
|
154 |
|
More
than one year:
|
|
|
|
|
|
|
|
|
|
Investment
grade
|
|
$ |
595 |
|
|
$ |
642 |
|
|
$ |
(47 |
) |
|
|
222 |
|
Below
investment
|
|
|
|
|
|
|
|
|
|
grade
|
|
$ |
33 |
|
|
$ |
36 |
|
|
$ |
(3 |
) |
|
|
10 |
|
The
unrealized depreciation of investment grade fixed maturities is primarily due to
increases in market yields since purchase. There were no equity
securities with a significant decline in fair value from cost as of March 31,
2008.
NOTE
9 – REINSURANCE
In
addition to the exposures for guaranteed minimum death benefit contracts
discussed in Note 6 above and for guaranteed minimum income
benefit contracts discussed in Notes 7 and 14, the Company’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. The Company evaluates the financial condition of its
reinsurers and monitors its concentrations of credit risk.
Retirement
benefits business. The Company had a
reinsurance recoverable of $2.0 billion as of March 31, 2008, and $2.1 billion
as of December 31, 2007 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
the Company’s reinsured liabilities are paid or directly assumed by the
reinsurer.
Individual life
and annuity reinsurance. The Company had a reinsurance recoverable of
$4.7 billion at March 31, 2008 and December 31, 2007, from The Lincoln National
Life Insurance Company that resulted from the 1998 sale of the Company’s
individual life insurance and annuity business through an indemnity reinsurance
arrangement.
Workers’
Compensation and Personal Accident Reinsurance. The Company's
Run-off Reinsurance operations reinsured workers’ compensation and personal
accident business in the London markets and the United States.
The
Company purchased retrocessional coverage in these markets to reduce the risk of
loss on these contracts. Disputes involving a number of these
reinsurance and retrocessional contracts have been substantially resolved and
some of the disputed contracts have been commuted.
The
Company's payment obligations for underlying reinsurance exposures assumed by
the Company 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 the Company's ultimate payment obligations
and ultimate collection from retrocessionaires may not be known with certainty
for some time.
The
Company’s reserves for underlying reinsurance exposures assumed by the Company,
as well as for amounts recoverable from retrocessionaires, are considered
appropriate as of March 31, 2008, based on current
information. However, it is possible that future developments could
have a material adverse effect on the Company’s consolidated results of
operations and, in certain situations, could have a material adverse effect on
the Company’s financial condition. The Company 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 the
Company.
Other
Reinsurance. The Company could have losses if reinsurers fail
to indemnify the Company 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 the Company’s consolidated results of operations, liquidity or
financial condition.
Effects of
reinsurance. In the Company’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)
|
|
2008
|
|
|
2007
|
|
Ceded
premiums and fees
|
|
Individual
life insurance
|
|
and
annuity business sold
|
|
$ |
58 |
|
|
$ |
57 |
|
Other
|
|
|
59 |
|
|
|
54 |
|
Total
|
|
$ |
117 |
|
|
$ |
111 |
|
Reinsurance
recoveries
|
|
Individual
life insurance
|
|
and
annuity business sold
|
|
$ |
89 |
|
|
$ |
92 |
|
Other
|
|
|
53 |
|
|
|
34 |
|
Total
|
|
$ |
142 |
|
|
$ |
126 |
|
NOTE
10 – PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Pension
benefits. Components of net pension cost were as
follows:
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
18 |
|
|
$ |
19 |
|
Interest
cost
|
|
|
61 |
|
|
|
58 |
|
Expected
return on plan assets
|
|
|
(59 |
) |
|
|
(52 |
) |
Amortization
of:
|
|
|
|
|
|
|
|
|
Net
loss from past experience
|
|
|
14 |
|
|
|
31 |
|
Prior
service cost
|
|
|
(2 |
) |
|
|
- |
|
Net
pension cost
|
|
$ |
32 |
|
|
$ |
56 |
|
Other
postretirement benefits. Components of net other postretirement benefit
cost were as follows:
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
1 |
|
|
$ |
1 |
|
Interest
cost
|
|
|
6 |
|
|
|
6 |
|
Amortization
of:
|
|
|
|
|
|
|
|
|
Net
gain from past experience
|
|
|
(2 |
) |
|
|
(1 |
) |
Prior
service cost
|
|
|
(4 |
) |
|
|
(4 |
) |
Net
other postretirement
|
|
benefit
cost
|
|
$ |
1 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Short-term:
|
|
|
|
|
|
|
Commercial
paper
|
|
$ |
250 |
|
|
$ |
- |
|
Current
maturities of long-term debt
|
|
|
1 |
|
|
|
3 |
|
Total
short-term debt
|
|
$ |
251 |
|
|
$ |
3 |
|
Long-term:
|
|
|
|
|
|
|
|
|
Uncollateralized
debt:
|
|
|
|
|
|
|
|
|
7%
Notes due 2011
|
|
$ |
222 |
|
|
$ |
222 |
|
6.375%
Notes due 2011
|
|
|
226 |
|
|
|
226 |
|
5.375%
Notes due 2017
|
|
|
250 |
|
|
|
250 |
|
6.35% Notes
due 2018
|
|
|
300 |
|
|
|
- |
|
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 |
|
|
|
500 |
|
Other
|
|
|
14 |
|
|
|
14 |
|
Total
long-term debt
|
|
$ |
2,090 |
|
|
$ |
1,790 |
|
|
|
|
|
|
|
|
|
|
Under a
universal shelf registration statement filed with the Securities and Exchange
Commission (SEC), the Company issued $300 million of Notes on March 4, 2008,
bearing interest at the rate of 6.35% per year, which is payable on March 15 and
September 15 of each year beginning September 15, 2008. The Notes
will mature on March 15, 2018.
The
Company may redeem the Notes, at any time, in whole or in part, at a redemption
price equal to the greater of:
·
|
100%
of the principal amount of the Notes to be redeemed;
or
|
·
|
the
present value of the remaining principal and interest payments on the
Notes being redeemed discounted at the applicable Treasury Rate plus 40
basis points.
|
On March
14, 2008, the Company entered into a new commercial paper program. Under
the program, the Company is authorized to sell from time to time
short-term unsecured commercial paper notes up to a maximum of $500
million. The proceeds will be used for general corporate purposes,
including working capital, capital expenditures, acquisitions and share
repurchases. The Company uses the credit facility entered into in
June 2007, as back-up liquidity to support the outstanding commercial
paper. If at any time funds are not available on favorable terms
under the program, the Company may use the Credit Agreement for funding. As
of March 31, 2008, the Company had $250 million in commercial paper outstanding,
at a weighted average interest rate of 3.14%, used in large part to finance
the Great-West Healthcare acquisition.
NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS)
Accumulated
other comprehensive income (loss) excludes amounts required to adjust future
policy benefits for certain annuities.
Changes
in accumulated other comprehensive income (loss) were as follows:
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
|
(Expense)
|
|
|
After-
|
|
(In
millions)
|
|
Pre-tax
|
|
|
Benefit
|
|
|
tax
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net
unrealized depreciation, securities:
|
|
Net
unrealized depreciation on
|
|
|
|
|
securities
arising during the year
|
|
$ |
(30 |
) |
|
$ |
11 |
|
|
$ |
(19 |
) |
Plus:
reclassification adjustment for
|
|
losses
included in net income
|
|
|
26 |
|
|
|
(9 |
) |
|
|
17 |
|
Net
unrealized depreciation, securities
|
|
$ |
(4 |
) |
|
$ |
2 |
|
|
$ |
(2 |
) |
Net
unrealized depreciation,
|
|
|
|
|
|
derivatives
|
|
$ |
(12 |
) |
|
$ |
4 |
|
|
$ |
(8 |
) |
Net
translation of foreign
|
|
|
|
|
|
|
|
|
|
currencies
|
|
$ |
(8 |
) |
|
$ |
2 |
|
|
$ |
(6 |
) |
Postretirement
benefits liability
|
|
|
|
|
|
adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
|
|
amortization of net losses from past
|
|
experience
and prior service costs
|
|
$ |
6 |
|
|
$ |
(3 |
) |
|
$ |
3 |
|
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 |
|
NOTE
13 – SEGMENT INFORMATION
The
Company’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 are combined. The Company 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.
Summarized
segment financial information was as follows:
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Premiums
and fees, mail order pharmacy
|
|
revenues
and other revenues
|
|
Health
Care
|
|
$ |
3,064 |
|
|
$ |
3,006 |
|
Disability
and Life
|
|
|
661 |
|
|
|
610 |
|
International
|
|
|
475 |
|
|
|
415 |
|
Run-off
Reinsurance
|
|
|
57 |
|
|
|
7 |
|
Other
Operations
|
|
|
46 |
|
|
|
47 |
|
Corporate
|
|
|
(13 |
) |
|
|
(12 |
) |
Total
|
|
$ |
4,290 |
|
|
$ |
4,073 |
|
Income
(loss) from continuing operations
|
|
Health
Care
|
|
$ |
114 |
|
|
$ |
168 |
|
Disability
and Life
|
|
|
68 |
|
|
|
60 |
|
International
|
|
|
52 |
|
|
|
38 |
|
Run-off
Reinsurance
|
|
|
(189 |
) |
|
|
1 |
|
Other
Operations
|
|
|
22 |
|
|
|
23 |
|
Corporate
|
|
|
(21 |
) |
|
|
(26 |
) |
Segment
earnings
|
|
|
46 |
|
|
|
264 |
|
Realized
investment gains,
|
|
net
of taxes
|
|
|
9 |
|
|
|
13 |
|
Income
from
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
$ |
55 |
|
|
$ |
277 |
|
NOTE 14 – CONTINGENCIES AND OTHER MATTERS
The
Company, 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. The Company records separate account liabilities equal to
separate account assets. In certain cases, primarily associated with
the sold retirement benefits business (which was sold in April 2004), the
Company guarantees a minimum level of benefits for retirement and insurance
contracts, written in separate accounts. The Company establishes an
additional liability if management believes that the Company will be required to
make a payment under these guarantees.
The
Company 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, the Company 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, 2008, employers
maintained assets that exceeded the benefit obligations. Benefit obligations
under these arrangements were $1.9 billion as of March 31, 2008. As
of March 31, 2008, approximately 75% of these guarantees are reinsured by an
affiliate of the buyer of the retirement benefits business. The remaining
guarantees are provided by the Company with minimal reinsurance from third
parties. There were no additional liabilities required for these guarantees as
of March 31, 2008. Separate
account assets supporting these guarantees are classified in Levels 1 and 2 of
the SFAS No. 157 fair value hierarchy. See Note
7 for further information on the fair value hierarchy.
Other
Financial Guarantees
Guaranteed
minimum income benefit contracts. The Company'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. A contractholder can
elect the guaranteed minimum income benefit within 30 days of any eligible
policy anniversary after a specified contractual waiting period. The Company’s
exposure arises when the guaranteed annuitization benefit exceeds the
annuitization benefit based on the policy’s current account value. At
the time of annuitization, the Company pays the excess (if any) of the
guaranteed benefit over the benefit based on the current account value in a lump
sum to the direct writing insurance company.
In
periods of declining equity markets or declining interest rates, the Company’s
liabilities for guaranteed minimum income benefits increase.
Conversely,
in periods of rising equity markets and rising interest rates, the Company’s
liabilities for these benefits decrease.
The
Company estimates the fair value of the assets and liabilities associated with
these contracts using assumptions for market returns and interest rates,
volatility of the underlying equity and bond mutual fund investments, mortality,
lapse, annuity election rates, and risk and profit
charges. Assumptions were updated effective January 1, 2008 to
reflect the requirements of SFAS No. 157. See Note
7 for additional information on how fair values for these liabilities and
related receivables for retrocessional coverage are determined.
The
Company is required to disclose the maximum potential undiscounted future
payments for guarantees related to minimum income benefits. Under
these guarantees, the future payment amounts are dependent on equity and bond
fund market and interest rate levels prior to and at the date of annuitization
election, which must occur within 30 days of a policy anniversary, after the
appropriate waiting period. Therefore, the future payments are not
fixed and determinable under the terms of the contract. Accordingly,
the Company has estimated the maximum potential undiscounted future payments
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
(2008 through 2014); and
|
·
|
All
underlying mutual fund investment values remained at the March 31, 2008
value of $2.2 billion with no future
returns.
|
The
maximum potential undiscounted payments that the Company would make under those
assumptions would aggregate $1.3 billion before reinsurance
recoveries. The Company expects the amount of actual payments to be
significantly less than this hypothetical undiscounted aggregate
amount. The Company has retrocessional coverage in place from two
external reinsurers which covers 55% of the exposures on these
contracts. The Company bears the risk of loss if its
retrocessionnaires do not meet their reinsurance obligations to the
Company.
Certain other
guarantees. The Company had indemnification obligations to
lenders of up to $201 million as of March 31, 2008 related to borrowings by
certain real estate joint ventures which the Company either records as an
investment or consolidates. These borrowings, which are nonrecourse to the
Company, 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 2008 through 2017. The Company’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, the Company 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, the Company 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,
2008.
To
enhance investment returns, the Company guaranteed principal payments for
issuers of investment grade corporate debt by entering into Dow Jones indexed
credit default swaps with a notional amount of $50 million as of March 31,
2008. The principal guarantee exposure is spread equally across 125
debt issuers. Under these contracts, the Company receives periodic
fees to provide future payment if an issuer of an underlying corporate bond
defaults on scheduled payments or files for bankruptcy through
2013. If a default or bankruptcy occurs, the Company will make
payment for its portion of par value of the underlying corporate bond and may
subsequently sell or hold that bond as an invested asset. The Company
has recorded an asset of less than $1 million for the fair value of these
indexed credit default swaps as of March 31, 2008.
As of
March 31, 2008, the Company guaranteed that it would compensate the lessors 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. The Company had no additional liabilities
for these guarantees as of March 31, 2008.
The
Company had indemnification obligations as of March 31, 2008 in connection with
acquisition and disposition transactions. These indemnification
obligations are triggered by the breach of representations or covenants provided
by the Company, 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. The Company 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, 2008.
The
Company does not expect that these guarantees will have a material adverse
effect on the Company’s consolidated results of operations, liquidity or
financial condition.
Regulatory
and Industry Developments
Employee benefits
regulation. The business of administering and
insuring employee benefit programs, particularly health care programs, is
heavily regulated by federal and state laws and administrative agencies, such as state departments of
insurance and the federal Departments of Labor and Justice, as well as the
courts. Regulation and judicial decisions have resulted in
changes to industry and the Company’s business practices and will continue to do
so in the future. In addition, the Company’s subsidiaries are
routinely involved with various claims, lawsuits and regulatory and IRS audits
and investigations that could result in financial liability, changes in business
practices, or both. Health care regulation in its various forms could
have an adverse effect on the Company’s health care operations if it inhibits
the Company’s ability to respond to market demands or results in increased
medical or administrative costs without improving the quality of care or
services.
Other
possible regulatory and legislative changes or judicial decisions that could
have an adverse effect on the
Company’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 the Company’s health care products and services; and pension
legislation, which could increase pension
cost;
|
·
|
changes
in Employee Retirement Income Security Act (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.
Concentration of
risk. South Korea represents the single largest geographic
market for the Company’s international businesses. As of March 31,
2008, South Korea generated 31%
of
International’s revenues and 36% of its segment earnings. Due to the
concentration of business in this region, the Company’s International business
in South Korea could be exposed to potential losses resulting from adverse
consumer credit conditions and geopolitical and economic conditions in that
country, which could have a significant impact on the Company’s consolidated
results.
Litigation and Other Legal
Matters
The
Company is routinely involved in numerous claims, lawsuits, regulatory and IRS
examinations, 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. The Company
believes that it has valid defenses to the legal matters pending against it, is
defending itself vigorously and has recorded accruals determined in accordance
with GAAP. Nevertheless, it is possible that resolution of one or
more of the legal matters currently pending or threatened could result in losses
material to the Company’s consolidated results of operations, liquidity or
financial condition.
Managed care
litigation. On April 7, 2000, several pending actions were
consolidated in the United States District Court for the Southern District of
Florida in a multi-district litigation proceeding captioned In re Managed Care
Litigation. The consolidated cases include Shane v. Humana, Inc., et.
al. (The Company’s subsidiaries added as defendants in August 2000),
Mangieri v. CIGNA
Corporation (filed December 7, 1999 in the United States District Court
for the Northern District of Alabama), Kaiser and Corrigan v. CIGNA
Corporation, et. al. (class of health care providers certified on March
29, 2001) and Amer. Dental
Ass’n v. CIGNA Corp., et. al. (a putative class of dental
providers).
In 2004,
the Court approved a settlement agreement between the physician class and the
Company. 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 the Company and a class of non-physician health care
providers. Only the Amer. Dental Ass’n case
remains unresolved. The Company intends to file a renewed motion to
dismiss the case.
In the
fourth quarter of 2006, pursuant to a settlement, the Company received a $22
million pre-tax ($14 million after-tax) insurance recovery related to this
litigation. In the first quarter of 2007, the Company received an
additional $5 million pre-tax ($3 million after-tax) insurance recovery related
to this litigation. The Company is pursuing recovery from two
additional insurers. In one of those cases, the court ruled on
March 19, 2008 that the Company is not entitled to insurance
recoveries. The Company has appealed that decision.
Broker
compensation. Beginning in 2004, the
Company, other insurance companies and certain insurance brokers received
subpoenas and inquiries from various regulators, including the New York and
Connecticut Attorneys General and the Florida Office of Insurance Regulation
relating to their investigations of insurance broker
compensation. The Company received a subpoena from the U.S.
Attorney’s Office for the Southern District of California in October 2005 and
the San Diego District Attorney in March 2006 and has provided information to
them about a broker, Universal Life Resources (ULR). On June 6, 2007,
the Company received a letter from the San Diego District Attorney, detailing
its potential claims and penalties against the Company subsidiaries, and
outlining potential civil litigation. On March 5, 2008, the District
Attorney advised that it will take no enforcement action against the
Company. In addition, in January 2006, the Company received a
subpoena from the U.S. Department of Labor and is providing information to that
Office about another broker. The Company is cooperating with the
inquiries and investigations.
On
November 18, 2004, The People
of the State of California by and through John Garamendi, Insurance Commissioner
of the State of California v. Universal Life Resources, et. al. was filed
in the Superior Court of the State of California for the County of San Diego
alleging that defendants (including the Company and several other insurance
holding companies) failed to disclose compensation paid to ULR and that, in
return for the compensation, ULR steered clients to defendants. The
plaintiff sought injunctive relief only. On July 9, 2007, the parties
to this lawsuit entered into a non-monetary
settlement
in which some of the Company’s subsidiaries agreed to maintain certain
disclosure practices regarding contingent compensation. This
settlement did not resolve the regulator’s claim for recovery of attorneys’ fees
and costs. On March 5, 2008 the Superior Court for the State of
California denied the regulator’s claim for attorneys’ fees and
costs. The regulator has until May 5, 2008 to appeal.
On August
1, 2005, two of the Company’s subsidiaries, Connecticut General Life Insurance
Company and Life Insurance Company of North America, were named as defendants in
a consolidated amended complaint captioned In re Insurance Brokerage Antitrust
Litigation, a multi-district litigation proceeding consolidated in the
United States District Court for the District of New Jersey. The
complaint alleges that brokers and insurers conspired to hide commissions,
increasing the cost of employee benefit plans, and seeks treble damages and
injunctive relief. Numerous insurance brokers and other insurance
companies are named as defendants.
The court
permitted plaintiffs to file an amended complaint, which plaintiffs did on May
22, 2007. The defendants filed a motion to dismiss the federal
antitrust, RICO and state law claims and a motion to dismiss and for summary
judgment regarding the ERISA fiduciary claims. On August 31, 2007,
the court granted the defendants’ motion to dismiss the federal antitrust
claims. On September 28, 2007, the court granted the defendants’
motion to dismiss plaintiffs’ RICO claims. On January 14, 2008, the
court granted summary judgment in favor of defendants as to plaintiffs’ ERISA
claims.
On
February 13, 2008, the court entered an order dismissing plaintiffs' state law
claims and the complaint in its entirety. The court ordered the clerk
to enter judgment against plaintiffs and in favor of the
defendants. Plaintiffs have filed a notice of appeal. The
Company denies the allegations and will continue to vigorously defend
itself.
Amara cash
balance pension plan litigation. On December 18, 2001, Janice
Amara filed a purported class action lawsuit, now captioned Janice C. Amara, Gisela R.
Broderick, Annette S. Glanz, individually and on behalf of all others similarly
situated v. CIGNA Corporation and CIGNA Pension Plan, in the United
States District Court for the District of Connecticut against CIGNA Corporation
and the CIGNA Pension Plan on behalf of herself and other similarly situated
participants in the CIGNA Pension Plan affected by the 1998 conversion to a cash
balance formula. 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. The plaintiffs
were granted class certification on December 20, 2002, and seek equitable
relief. A non-jury trial began on September 11-15,
2006. Due to the court’s schedule, the proceedings were adjourned and
the trial was completed on January 25, 2007. On February 15, 2008,
the court issued a decision finding in favor of CIGNA Corporation and the CIGNA
Pension Plan on the age discrimination and wear away claims and finding in favor
of the plaintiffs on many aspects of the disclosure claims. The court
ordered the parties to file briefs on remedies, if any, to be awarded
to the plaintiff on the claims on which plaintiff prevailed. Plaintiffs filed
their brief on March 17, 2008. The Company filed its reply brief on April
16, 2008 and plaintiffs filed a reply on April 25, 2008. Oral
argument was held on April 30, 2008. The Company will continue to
vigorously defend itself in this case.
Boon Insurance
Agency. On February 14,
2007, the Boon Insurance Agency and an affiliated company filed a complaint in
Texas state court against two CIGNA subsidiaries and a co-defendant alleging
breach of contract and fraudulent inducement in regard to several agreements
with plaintiffs in connection with the marketing, production and servicing of
voluntary health insurance policies. Plaintiffs seek compensatory
damages, punitive damages and declaratory relief against the
Company. Discovery is ongoing, and is scheduled to be completed by
June 23, 2008. The case is set for jury trial on September 22,
2008. Most recently, on April 18, 2008, the parties participated in a
mediation in an attempt to resolve the matter. These discussions
remain ongoing.
Katz Patent
Litigation. On September 1, 2006,
Ronald A. Katz Technology Licensing, L.P. (RAKTL) filed a lawsuit in the United
States District Court for the District of Delaware against numerous defendants,
including the Company
and
certain affiliates, alleging that defendants infringed on RAKTL’s automated call
processing patents. The lawsuit was transferred to a multi-district
litigation proceeding in United States District Court for the Central District
of California. Plaintiff seeks a declaration of infringement,
royalties and injunctive relief, and claims treble damages and attorneys fees
for alleged willful infringement. The Company denies the allegations
and will vigorously defend itself in this case.
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
INDEX
|
|
Introduction
|
|
Consolidated
Results of Operations
|
|
Critical
Accounting Estimates
|
|
Segment
Results of Operations:
|
|
Health
Care
|
|
Disability
and Life
|
|
International
|
|
Run-off
Reinsurance
|
|
Other
Operations
|
|
Corporate
|
|
Discontinued
Operations
|
|
Industry
Developments and Other Matters
|
|
Liquidity
and Capital Resources
|
|
Investment
Assets
|
|
Market
Risk
|
|
Cautionary
Statement
|
|
|
|
In this
filing and in other marketplace communications, CIGNA Corporation and its
subsidiaries (the Company) make certain forward-looking statements relating to
its financial condition and results of operations, as well as to trends and
assumptions that may affect the Company. Generally, forward-looking
statements can be identified through the use of predictive words (e.g., “Outlook
for 2008”). Actual results may differ from the Company’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 46. 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 the Company as of
March 31, 2008, compared with December 31, 2007, and its results of operations
for the three months ended March 31, 2008 compared with the same period last
year. This discussion should be read in conjunction with Management’s
Discussion and Analysis included in the Company’s 2007 Form 10-K, to which the
reader is directed for additional information.
The
preparation of interim consolidated financial statements necessarily relies
heavily on estimates. This and certain other factors, such as the
seasonal nature of portions of the health care and related benefits business as
well as competitive and other market conditions, call for caution in estimating
full year results based on interim results of operations.
Certain
reclassifications have been made to prior period amounts to conform to the
presentation of 2008 amounts.
Overview
The
Company constitutes one of the largest investor-owned health service
organizations in the United States. Its subsidiaries are major providers of
health care and related benefits, the majority of which are offered through the
workplace. In addition, the Company 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. The Company also has certain inactive businesses, including a
run-off reinsurance operation. The Company generates revenues, net income and
cash flow from operations by:
· maintaining
and growing its customer base;
· charging
prices that reflect emerging experience;
· investing
available cash at attractive rates of return for appropriate durations;
and
· effectively
managing other operating expenses.
The
Company’s ability to increase revenue, net income and operating cash flow is
directly related to its ability to address broad economic and industry factors
and execute its strategic initiatives,
the
success of which is measured by certain key factors as discussed
below.
Key
factors affecting the Company’s results include:
· the
ability to profitably price products and services at competitive
levels;
· the
volume of customers served and the mix of products and services purchased by
those customers;
· the
Company’s ability to cross sell its various health and related benefit
products;
· the
relationship between other operating expenses and revenue;
and
· the
effectiveness of the Company’s capital deployment
initiatives.
The
Company’s results are influenced by a range of economic and other factors,
especially:
· cost
trends and inflation for medical and related services;
· utilization
patterns of medical and other services;
· the tort
liability system;
· developments
in the political environment both domestically and
internationally;
· interest
rates, equity market returns and foreign currency fluctuations;
and
· federal
and state regulation.
The
Company regularly monitors the trends impacting operating results from the above
mentioned key factors and economic and other factors. The Company develops
strategic and tactical plans designed to improve performance and maximize its
competitive position in the markets it serves. The Company’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.
The
Company is continuing to improve the performance of and profitably grow its
businesses and manage the risks associated with the run-off reinsurance
operations.
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Premiums
and fees
|
|
$ |
3,851 |
|
|
$ |
3,708 |
|
Net
investment income
|
|
|
265 |
|
|
|
280 |
|
Mail
order pharmacy revenues
|
|
|
296 |
|
|
|
271 |
|
Other
revenues
|
|
|
143 |
|
|
|
94 |
|
Realized
investment
|
|
|
|
|
|
gains
|
|
|
14 |
|
|
|
21 |
|
Total
revenues
|
|
|
4,569 |
|
|
|
4,374 |
|
Benefits
and expenses
|
|
|
4,496 |
|
|
|
3,961 |
|
Income
from continuing
|
|
operations
before taxes
|
|
|
73 |
|
|
|
413 |
|
Income
taxes
|
|
|
18 |
|
|
|
136 |
|
Income from
continuing
|
|
operations
|
|
|
55 |
|
|
|
277 |
|
Income
from discontinued
|
|
operations,
net of taxes
|
|
|
3 |
|
|
|
12 |
|
Net
income
|
|
$ |
58 |
|
|
$ |
289 |
|
Realized
investment gains,
|
|
net
of taxes
|
|
$ |
9 |
|
|
$ |
13 |
|
Special
Items
In order
to facilitate an understanding and comparison of results of operations and
permit analysis of trends in underlying revenue, expenses and income from
continuing operations, discussed below are special items, which management
believes are not representative of the underlying results
of operations.
For the
first three months of 2008, special items consisted of charges related to
litigation matters in the Health Care segment of $37 million pre-tax ($24
million after-tax). There were no special items for the first three
months of 2007.
Overview of March 31, 2008
Results of Operations
Income
from continuing operations for the first three months of 2008, compared with the
first three months of 2007 decreased, primarily reflecting lower results in the
Run-off Reinsurance segment resulting from charges related to the guaranteed
minimum income benefits (GMIB) business, including the effect of adopting SFAS
No. 157 (see page 30) and lower earnings in the Health
Care Segment (see page 32), partially offset by higher
earnings
in the Disability and Life (see page 36) and
International (see page 37) segments.
The effective consolidated tax
rate was 25% for the first three months of 2008, compared with 33% for the first
three months of 2007. The decrease in the effective tax rate is due
to calculating tax benefits associated with the Run-off Reinsurance segment on a
discrete basis at the statutory rate because of the inability to estimate the
full year 2008 impact of applying SFAS No. 157.
Outlook for
2008
The
Company expects full year 2008 income from continuing operations, excluding
realized investment results, the results of the guaranteed minimum income
benefits (GMIB) business and special items, to be modestly higher than the
comparable 2007 amount due to earnings growth in the
Health Care, Disability and Life and International segments, primarily
offset by lower earnings in the Run-off Reinsurance segment. The GMIB business
includes the impact of adopting SFAS No. 157 effective January 1, 2008 (see Note 2 to the Consolidated Financial
Statements). The Company’s outlook is subject to the factors cited in
the Cautionary Statement on page 46.
Management
is not able to estimate 2008 income from continuing operations under generally
accepted accounting principles because it includes realized investment gains
(losses), the results of the GMIB business and special items. Information is not
available for management to reasonably estimate future realized investment gains
(losses), the results of the GMIB business under a new accounting standard (see
Note 2 to the Consolidated Financial Statements) or special
items due, in part, to interest rate and stock market volatility and other
internal and external factors.
Revenues
Total
revenue increased by 4% for the first three months of 2008, compared with the
first three months of 2007. Changes in the components of total
revenue are described more fully below.
Premiums
and Fees
Premiums
and fees increased 4% for the first three months of 2008, compared with the
first three months of 2007 reflecting growth and rate increases in the Health
Care and International segments as well as growth in the Disability and Life
segment. See individual segment discussions for additional detail and
drivers.
Net
Investment Income
Net
investment income for the first three months of 2008, compared with the first
three months of 2007 decreased 5% primarily due to lower yields due to lower
interest rates and lower income on security partnerships, partly offset by the
impact of higher assets due to a build-up of short-term investments to finance
the Great-West Healthcare acquisition.
Mail
Order Pharmacy Revenues
Mail
order pharmacy revenues for the first three months of 2008, compared with the
first three months of 2007 increased 9% due to increased script volume and rate
increases.
Other
Revenues
Other
revenues increased 52% primarily reflecting gains from futures contracts
associated with guaranteed minimum death benefit contracts (see page 38) of $42 million pre-tax for the first three months of
2008, compared with losses of $7 million pre-tax for the first three months of
2007.
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 the Company'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 the Company's Board of Directors.
The Company's most critical accounting estimates, as well as the
effects of hypothetical changes in material assumptions used to develop each
estimate, are described in the Company's 2007 Form 10-K beginning on page 42 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
– fixed maturities.
|
The
Company regularly evaluates items which may impact critical accounting
estimates. During the first three months of 2008, the Company updated
the following critical accounting estimates:
Accounts Payable,
Accrued Expenses and Other Liabilities, and Other Assets – Guaranteed Minimum
Income Benefits.
As
detailed in Note 2 to the Consolidated Financial Statements, during the first
quarter of 2008, the Company updated certain assumptions related to guaranteed
minimum income benefit contracts to comply with a new accounting pronouncement,
SFAS No. 157, “Fair Value Measurements.” After the adoption of SFAS
No. 157, the Company’s results of operations are expected to be more volatile in
future periods both because the liabilities, net of receivables from reinsurers,
are larger and because these assumptions will be based largely on
market–observable inputs at the close of each reporting period including risk
free interest rates and market implied volatilities. Accordingly, the
Company has updated the “Effect if Different Assumptions Used” section of
Critical Accounting Estimates as described on page 45 of the Company’s Form 2007
10-K.
With the
adoption of SFAS No. 157, the Company considers the various assumptions used to
estimate fair values of assets and liabilities associated with these contracts
in two categories. The first group of assumptions consists of future
annuitant and retrocessionaire behavior including annuity election rates, lapse
rates, and mortality rates, retrocessionnaire credit risk, as well as risk and
profit charges. The Company estimates a hypothetical market
participant’s view of these assumptions considering the actual and expected
experience of the Company and other relevant and available industry
resources. If an unfavorable change were to occur in these
assumptions, the approximate after-tax decrease in the Company's net income, net
of estimated amounts recoverable, would be as follows:
·
|
10%
decrease in mortality - $2 million
|
·
|
10%
increase in annuity election rates - $5
million
|
·
|
10%
decrease in lapse rates - $5
million
|
·
|
10%
decrease in amounts recoverable from reinsurers (credit risk) - $35
million
|
·
|
10%
increase to the risk and profit charge - $2
million
|
The
second group of assumptions used to estimate these fair values consists of
capital markets inputs including market returns and discount rates, claim
interest rates and market volatility. If the following unfavorable changes
were to occur, the approximate after-tax decrease in net income, net of
estimated amounts recoverable would be as follows:
·
|
50
basis point decrease in risk free interest rates (LIBOR swap curve) used
for projecting market returns and discounting - $15
million
|
·
|
50
basis point decrease in interest rates used for projecting claim exposure
(7 year Treasury rates) - $30
million
|
·
|
20%
increase in implied market volatility - $10
million
|
In
addition, if annuitants’ account values as of March 31, 2008 declined by 10% due
to the performance of the underlying equity and bond mutual fund investments,
the approximate after-tax decrease in net income, net of estimated amounts
recoverable, would be approximately $50 million.
These
estimated impacts due to unfavorable changes could vary from quarter to quarter
depending on the actual market conditions or changes in the anticipated view of
a hypothetical market participant as of any future valuation
date. The valuation process and assumptions at March 31, 2008 are
described in Note 7 to the Financial
Statements.
Health Care
Medical Claims Payable. For each reporting
period, the Company evaluates key assumptions by comparing the assumptions used
in establishing the medical claims payable to actual experience. When actual
experience differs from the assumptions used in establishing the liability,
medical claims payable are increased or decreased through current period net
income. Additionally, the Company evaluates expected future
developments and emerging trends that may impact key assumptions. The
estimation process involves considerable judgment, reflecting the variability
inherent in forecasting future claim payments. The adequacy of these
estimates is highly sensitive to changes in the Company’s key assumptions,
specifically completion factors, which are impacted by actual or expected
changes in the submission and payment of medical claims, and medical cost
trends, which are impacted by actual or expected changes in the utilization of
medical services and unit costs.
For the
three months ended March 31, 2008, actual experience differed from the Company’s
key assumptions, resulting in favorable incurred claims related to prior years’
medical claims payable of $53 million, or 0.8% of the current year incurred
claims as reported for the year ended December 31, 2007. Actual
completion factors resulted in a reduction in medical claims payable of $20
million, or 0.3% of the current year incurred claims as reported for the year
ended December 31, 2007 for the insured book of business. Actual
medical cost trend resulted in a reduction in medical claims payable of $33
million, or 0.5% of the current year incurred claims as reported for the year
ended December 31, 2007 for the insured book of
business.
For the
year ended December 31, 2007, actual experience differed from the Company’s key
assumptions, resulting in favorable incurred claims related to prior years’
medical claims payable of $80 million, or 1.3% of the current year incurred
claims as reported for the year ended December 31, 2006. Actual
completion factors resulted in a reduction of the medical claims payable of $46
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 of the medical claims payable of $34
million, or 0.6% 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 2008 and 2007 relating to completion factors 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 prior years. This release was substantially offset by the
establishment of the provision for moderately adverse conditions established for
claims incurred related to current years.
The
corresponding impact of favorable prior year development on net income was not
material for the first three months ended March 31, 2008.
See Note 5 to the Consolidated Financial Statements for additional
information.
Summary
There are
other accounting estimates used in the preparation of the Company’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 the
Company’s Consolidated Financial Statements are appropriate. However,
if actual experience differs from the assumptions used in estimating amounts
reflected in the Company’s Consolidated Financial Statements, the resulting
changes could have a material adverse effect on the Company’s consolidated
results of operations, and in certain situations, could have a material adverse
effect on liquidity and the Company’s financial
condition.
Operating
segments generally reflect groups of related products, but the International
segment is generally based on geography. The Company 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.
Segment
Description
The
Health Care segment includes medical, dental, behavioral health, prescription
drug and other products and services that may be integrated to provide consumers
with comprehensive health care solutions. 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 funding arrangements.
The
company measures the operating effectiveness of the Health Care segment using
the following key factors:
·
|
sales
of specialty products to core medical
customers;
|
·
|
changes
in operating expenses per member;
and
|
·
|
medical
expense as a percentage of premiums (medical cost ratio) in the guaranteed
cost business.
|
Results
of Operations
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Premiums
and fees
|
|
$ |
2,704 |
|
|
$ |
2,675 |
|
Net
investment income
|
|
|
47 |
|
|
|
54 |
|
Mail
order pharmacy revenues
|
|
|
296 |
|
|
|
271 |
|
Other
revenues
|
|
|
64 |
|
|
|
60 |
|
Segment
revenues
|
|
|
3,111 |
|
|
|
3,060 |
|
Mail
order pharmacy cost
|
|
of
goods sold
|
|
|
239 |
|
|
|
219 |
|
Benefits
and other expenses
|
|
|
2,696 |
|
|
|
2,581 |
|
Benefits
and expenses
|
|
|
2,935 |
|
|
|
2,800 |
|
Income
before taxes
|
|
|
176 |
|
|
|
260 |
|
Income
taxes
|
|
|
62 |
|
|
|
92 |
|
Segment
earnings
|
|
$ |
114 |
|
|
$ |
168 |
|
Realized
investment gains,
|
|
net
of taxes
|
|
$ |
9 |
|
|
$ |
8 |
|
Special
item (after-tax)
|
|
included
in segment earnings:
|
|
Charge
related to litigation matters
|
|
$ |
(24 |
) |
|
$ |
- |
|
Health
Care segment earnings for the first three months of 2008 included:
·
|
$4
million after-tax for integration costs related to the Great-West
Healthcare acquisition;
|
·
|
$4
million after-tax of incremental medical costs related to higher than
expected upper respiratory inpatient claims;
and
|
·
|
$7
million after-tax related to an adjustment to a large experience-rated
life and non-medical account in
run-out.
|
These
items had a combined unfavorable impact of $15 million after-tax.
Excluding
these items as well as the special item noted in the table above, segment
earnings were lower compared to the same period last year
reflecting:
·
|
lower
medical margins in the experience-rated business as well as higher
operating expenses, partially offset by higher specialty contribution due
to increased penetration;
|
·
|
lower
membership in the guaranteed cost business, partially offset by strong
performance in the voluntary
business;
|
·
|
lower
service earnings due to higher operating expenses primarily reflecting
investments in
|
|
information
technology to support infrastructure and strategic growth, partially
offset by increased membership and fee yield; and |
·
|
higher
other non-medical earnings resulting from an improved medical cost ratio
in the Medicare Part D business and strong performance in the direct
specialty business.
|
Revenues
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Medical:
|
|
|
|
|
|
|
|
|
$ |
395 |
|
|
$ |
631 |
|
Open
Access / Other
|
|
|
|
|
495 |
|
|
|
372 |
|
Voluntary/limited
benefits
|
|
|
50 |
|
|
|
38 |
|
Total
guaranteed cost
|
|
|
940 |
|
|
|
1,041 |
|
Experience-rated
medical3
|
|
|
493 |
|
|
|
428 |
|
Dental
|
|
|
199 |
|
|
|
192 |
|
Medicare
|
|
|
95 |
|
|
|
88 |
|
Medicare
Part D
|
|
|
103 |
|
|
|
94 |
|
|
|
|
289 |
|
|
|
262 |
|
Total
medical
|
|
|
2,119 |
|
|
|
2,105 |
|
Life
and other non-medical
|
|
|
36 |
|
|
|
69 |
|
Total
premiums
|
|
|
2,155 |
|
|
|
2,174 |
|
|
|
|
549 |
|
|
|
501 |
|
Total
premiums and fees
|
|
$ |
2,704 |
|
|
$ |
2,675 |
|
1
Premiums and/or fees associated with certain specialty products are also
included.
2
Includes premiums associated with other risk-related products primarily open
access products.
3
Includes minimum premium members, who 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. Also,
includes certain non-participating cases for which special customer level
reporting of experience is required.
4Other medical premiums include risk revenue for
stop-loss and specialty products.
5Represents administrative service fees for medical
members and related specialty product fees for non-medical members as well as
fees related to Medicare Part D of $24 million for the first three months of
2008 and $13 million for the first three months of 2007.
Premiums and
fees increased by 1% for the first three months of 2008, compared with
the same period of 2007, primarily reflecting:
|
·
|
increases
in the experience-rated business due to membership growth and rate
increases;
|
|
· |
higher
other medical premium due to increased penetration and rate increases in
specialty business; and
|
|
· |
higher
administrative service fees due to increased
membership.
|
These
factors were partially offset by a decrease in the guaranteed cost business due
to membership declines largely in commercial HMO business.
Net investment
income decreased 13% for the
three months of 2008, compared with the three months of 2007 primarily due to
lower yields due to lower interest rates and lower income on security
partnerships.
Benefits
and Expenses
Health
Care segment benefits and expenses consist of the following:
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Medical
claims expense
|
|
$ |
1,744 |
|
|
$ |
1,719 |
|
Mail
order pharmacy
|
|
cost
of goods sold
|
|
|
239 |
|
|
|
219 |
|
Other
benefit expenses
|
|
|
49 |
|
|
|
64 |
|
Other
operating expenses
|
|
|
903 |
|
|
|
798 |
|
Total
benefits and expenses
|
|
$ |
2,935 |
|
|
$ |
2,800 |
|
Medical claims
expense increased 1% for the first three months of 2008 compared with the
same period in 2007 due to higher flu-related medical claims.
Other operating
expenses include expenses related to:
·
|
both
retail and mail order pharmacy;
|
·
|
voluntary
and limited benefits;
|
·
|
Medicare
claims administration businesses;
and
|
·
|
integration
costs associated with Great-West
Healthcare.
|
Excluding
these items, other operating expenses increased for the first three months of
2008, compared with the same period last year, primarily reflecting membership
growth of 5% and higher spending on information technology supporting our growth
strategies, which was partially offset by expense initiatives.
Other
Items Affecting Health Care Results
Acquisition
On April
1, 2008, the Company acquired the Healthcare division of Great-West Life and
Annuity, Inc. (“Great-West Healthcare”) through 100% indemnity reinsurance
agreements and the acquisition of certain affiliates and other assets and
liabilities of Great-West Life and Annuity, Inc. for a cash purchase price of
approximately $1.5 billion. Great-West Healthcare primarily
sells administrative service medical plans with stop loss coverage to small
and mid-size employer groups. Great-West Healthcare's
offerings also include the following products sold through a variety of funding
options: stop loss, life, disability, medical, dental, vision, prescription drug
coverage, and accidental death and dismemberment insurance. The acquisition,
which will be accounted for as a purchase beginning in the second quarter of
2008, was financed through a combination of parent company cash and the issuance
of long-term debt and commercial paper (see Note 11 to the
Consolidated Financial Statements).
The
results of Great-West Healthcare will be included in the Company’s consolidated
financial statements from the date of acquisition.
Medical
Membership
The
Company’s medical membership includes any individual for whom the Company
retains medical underwriting risk, who uses the Company’s network for services
covered under their medical coverage or for whom the Company administers medical
claims. As of March 31, estimated medical membership was as
follows:
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Guaranteed
cost:
|
|
|
|
|
|
|
Commercial
HMO
|
|
|
411 |
|
|
|
670 |
|
Medicare
|
|
|
33 |
|
|
|
32 |
|
Open
access / Other guaranteed cost1
|
|
|
534 |
|
|
|
458 |
|
Total
guaranteed cost excluding
|
|
voluntary/limited
benefits
|
|
|
978 |
|
|
|
1,160 |
|
Voluntary/limited
benefits
|
|
|
205 |
|
|
|
174 |
|
Total
guaranteed cost
|
|
|
1,183 |
|
|
|
1,334 |
|
|
|
|
912 |
|
|
|
863 |
|
|
|
|
8,279 |
|
|
|
7,633 |
|
Total
medical membership
|
|
|
10,374 |
|
|
|
9,830 |
|
1 Includes membership associated with other
risk-related products, primarily open access products.
2
Includes minimum premium members, who 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. Also, includes
certain non-participating cases for which special customer level reporting of
experience is required.
3 Includes
approximately 327 thousand members related to Sagamore Health Network, which was
acquired on August 1, 2007.
For the
first three months of 2008, membership increased 6% compared to the same period
in 2007, reflecting growth in the experience-rated and service businesses,
partially offset by lower membership in the guaranteed cost
business.
Operational
Improvement Initiatives
The
Company continues to devote its efforts to becoming the leading health service
organization. As such, the Company is focused on several initiatives
including developing and enhancing a consumer focused service
model. This effort is expected to require significant investments
over the next 3-5 years. These investments are expected to enable the
Company to grow its membership and to improve operational effectiveness and
profitability by developing innovative products and services that promote
consumer engagement at a competitive cost. Executing on these
operational improvement initiatives is critical to attaining a leadership
position in the health care marketplace.
Offering products
that meet emerging consumer and market trends. The CIGNATURE®,
CareAlliesSM, and
CIGNA Choice Fund® suite of products offers various options to consumers and
employers and are key to our consumer engagement strategy. Offerings
include: choice of benefit, participating provider network, funding, medical
management, and health advocacy options. Through the CIGNA Choice
Fund®, the Company 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 the Company.
Underwriting and
pricing products effectively. One of the Company’s key
priorities is to achieve strong profitability in a competitive health care
market. The Company is focused on effectively managing pricing and
underwriting decisions at both the case and overall book of business level,
particularly for the guaranteed cost and experience-rated
businesses.
Growing medical
membership results. The Company continues to focus on growing its medical
membership by:
·
|
increasing
its share of the national and regional
segments;
|
·
|
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
deliver member service that 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.
|
The
Company is focused on segment expansion most notably in the voluntary,
individual and small employer (less than 200 employees) and senior
segments. As part of its effort to achieve these objectives, in April
2008, the Company completed its acquisition of Great-West Healthcare of Denver,
Colorado. This acquisition will enable the Company to broaden its distribution
reach and provider network, particularly in the western regions of the United
States, and expand the range of health benefits and products it
offers.
Effectively
managing medical costs. The Company operates under a
centralized medical management model, which helps facilitate consistent levels
of care for its members and reduces infrastructure expenses.
The
Company is focused on continuing to effectively manage medical utilization and
unit costs. To help achieve this, the Company continues to focus on
renegotiating contracts with providers and certain facilities to limit increases
in medical reimbursement costs. In addition, the Company seeks to
strengthen its network position in selected markets. For example, in 2007 the
Company acquired Sagamore Health Network, Inc. in Indiana. Sagamore provides
access to an extensive preferred provider network and offers access to a broad
range of utilization review and case management services to health claim payer
organizations, self-insured employers and third-party
administrators.
Delivering
quality member and provider service. The Company is focused on
delivering competitive service to members, providers and customers. The Company
believes that further enhancing quality service can improve member retention
and, when combined with useful health information and tools, can help motivate
members to become more engaged in their personal health, and will promote
healthy outcomes thereby removing cost from the system. The evolution
of the consumer-driven healthcare market is driving increased product and
service complexity and is raising consumers’ expectations with respect to
service levels, which is expected to require significant investment, management
attention and heightened interaction with customers.
The
Company is focused on the development and enhancement of a 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. The Company 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.
Maintaining and
upgrading information technology systems. The Company’s
current business model and long-term strategy require effective and reliable
information technology systems. The Company’s current systems
architecture will require continuing investment to meet the challenges of
increasing consumer demands from both our existing and emerging customer base to
support its business growth and strategies, improve its competitive position and
provide appropriate levels of service to consumers. The Company is
focused on providing these enhanced strategic capabilities in response to
increasing consumer expectations, while continuing to provide a consistent, high
quality consumer service experience with respect to the Company’s current
programs. Further integration of the Company’s multiple
administrative and customer facing platforms is required to support the
Company's internal needs and growth strategies, and to ensure reliable,
efficient and effective customer service both in today’s employer focused model
as well as in a consumer directed model. The Company’s ability to
effectively deploy capital to make these investments will influence the timing
and the impact these initiatives will have on its operations.
Reducing other
operating expenses. The Company operates in an intensely competitive
marketplace and its ability to establish a meaningful cost advantage is key to
achieving its initiatives. Accordingly, the Company continues to focus on
initiatives that will increase its operating efficiency and responsiveness to
customers.
The
Company’s health advocacy capabilities support its recent membership
growth. The Company must be able to deliver those capabilities
efficiently and cost-effectively. The Company must continue to
identify additional cost savings to further improve its competitive cost
position. Savings generated from the Company’s operating efficiency
initiatives provide capital to make investments that will enhance its
capabilities in the areas of consumerism, particularly product development, the
delivery of member service and health advocacy and related
technology.
Segment
Description
The
Disability and Life segment includes group disability, life, accident and
specialty insurance and case management for disability and workers’
compensation.
Key
factors for this segment are:
·
|
premium
growth, including new business and customer
retention;
|
·
|
benefits
expense as a percentage of earned premium (loss ratio);
and
|
·
|
other
operating expense as a percentage of earned premiums (expense
ratio).
|
Results of
Operations
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Premiums
and fees
|
|
$ |
631 |
|
|
$ |
577 |
|
Net
investment income
|
|
|
64 |
|
|
|
69 |
|
Other
revenues
|
|
|
30 |
|
|
|
33 |
|
Segment
revenues
|
|
|
725 |
|
|
|
679 |
|
Benefits
and expenses
|
|
|
629 |
|
|
|
596 |
|
Income
before taxes
|
|
|
96 |
|
|
|
83 |
|
Income
taxes
|
|
|
28 |
|
|
|
23 |
|
Segment
earnings
|
|
$ |
68 |
|
|
$ |
60 |
|
Realized
investment gains
|
|
(losses),
net of taxes
|
|
$ |
(2 |
) |
|
$ |
2 |
|
Segment
earnings increased 13% for the first three months of 2008, compared with the
same period last year reflecting:
·
|
the
favorable impact of reserve studies of $3 million
after-tax;
|
·
|
favorable
claims experience in the Disability insurance business primarily
attributable to strong disability management;
and
|
·
|
effective
operating expense management.
|
These
factors were partially offset by unfavorable claims experience in the life and
accident insurance business, as well as lower net investment income primarily
due to lower average assets and lower average yields.
Revenues
Premiums and
fees increased 9% for the first three months of 2008 compared to the same
period last year, reflecting new sales growth and strong customer
retention.
Benefits
and Expenses
Benefits
and expenses increased 6% for the first three months of 2008, compared with the
same period last year reflecting overall business growth partially offset by
lower loss and expense ratios. The lower loss ratio was driven by
favorable claims experience in the disability business and the net favorable
impact of reserve studies of $5 million pre-tax. This impact was
partially offset by higher average size of claims in the life and accident
businesses. The lower expense ratio was driven by strong operating
expense management.
Segment
Description
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.
The key
factors for this segment are:
·
|
premium
growth, including new business and customer
retention;
|
·
|
benefits
expense as a percentage of earned premium (loss ratio);
and
|
·
|
operating
expense as a percentage of earned premium (expense
ratio).
|
Results of
Operations
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Premiums
and fees
|
|
$ |
472 |
|
|
$ |
414 |
|
Net
investment income
|
|
|
20 |
|
|
|
20 |
|
Other
revenues
|
|
|
3 |
|
|
|
1 |
|
Segment
revenues
|
|
|
495 |
|
|
|
435 |
|
Benefits
and expenses
|
|
|
415 |
|
|
|
376 |
|
Income
before taxes
|
|
|
80 |
|
|
|
59 |
|
Income
taxes
|
|
|
28 |
|
|
|
21 |
|
Segment
earnings
|
|
$ |
52 |
|
|
$ |
38 |
|
International
segment earnings increased 37% for the first three months of 2008, compared to
the same period last year, reflecting substantial growth in the life, accident
and supplemental health insurance business, and the expatriate employee benefits
business as well as continued competitively strong margins.
Revenues
Premiums and
fees. The increase in premiums and fees of 14% for the first
three months of 2008 was primarily attributable to new sales growth in the life,
accident and supplemental health insurance operations, particularly in South
Korea, and membership growth in the expatriate employee benefits
business. These increases also reflect appropriate renewal pricing on
existing business.
Premiums
and fees, excluding the effect of foreign currency changes, were $464 million
for the first three months of 2008, and $400 million for the first three months
of 2007.
Benefits
and Expenses
Benefits
and expenses increased 10% for the first three months of 2008, primarily due to
business growth in all lines of business. While benefits and expenses
have increased, loss ratios and expense ratios have decreased for the first
three months of 2008, compared to the first three months of 2007, in the life
accident and supplemental health and expatriate benefits
businesses.
Other Items Affecting International Results
South
Korea represents the single largest geographic market for the Company’s
international businesses. As of March 31, 2008, South Korea
generated 31% of International’s revenues and 36% of its segment
earnings. Due to the concentration of business in this region, the
Company’s International business in South Korea could be exposed to potential
losses resulting from adverse consumer credit conditions and geopolitical and
economic conditions in that country, which could have a significant impact on
the Company’s consolidated results.
Run-off
Reinsurance Segment
Segment
Description
The
Company’s reinsurance operations were discontinued and are now an inactive
business in run-off mode since the sale of the U.S. individual life, group life
and accidental death reinsurance business in 2000. This segment is predominantly
comprised of guaranteed minimum death benefit, guaranteed minimum income
benefit, workers’ compensation and personal accident reinsurance
products.
Guaranteed
Minimum Death Benefits
The
Company reinsured a guaranteed minimum death benefit (GMDB) under certain
variable annuities issued by other insurance companies. These GMDB variable
annuities are essentially investments in mutual funds combined with a death
benefit. The Company has equity and other market exposures as a
result of this product.
The
determination of liabilities for GMDB requires the Company to make critical
accounting estimates. The Company describes the assumptions used to
develop the reserves for these death benefits and provides the effects of
hypothetical changes in those assumptions on page 43 of the Company’s 2007 Form
10-K.
See Note 6 to the Consolidated Financial Statements for additional
information about these assumptions and the reserve balances.
Guaranteed
Minimum Income Benefits
The
Company also reinsured a guaranteed minimum income benefit (GMIB) under certain
variable annuities issued by other insurance companies. All reinsured
GMIB policies also have a GMDB benefit that the Company
reinsured. The Company has equity and other market exposures as a
result of this product.
The
determination of liabilities for GMIB requires the Company to make critical
accounting estimates. The Company has updated these assumptions and
the effects of hypothetical changes in those assumptions in connection with the
implementation of SFAS No. 157. See page 30 for
additional information.
See Notes 7 and 14 to the Consolidated
Financial Statements for additional information about these assumptions and the
liability balances.
Workers’
Compensation and Personal Accident Reinsurance Products
The
Company’s Run-off Reinsurance operations reinsured workers’ compensation and
personal accident business in the London market and the United
States. In addition, the Company purchased retrocessional coverage in
these markets to reduce the risk of loss on these contracts. Disputes
involving a number of these reinsurance and retrocessional contracts have been
substantially resolved and some of the disputed contracts have been
commuted.
The
Company's payment obligations for underlying reinsurance exposures assumed by
the Company 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 the Company's ultimate
payment obligations and ultimate collection from retrocessionaires may not be
known with certainty for some time.
The
Company’s reserves for underlying reinsurance exposures assumed by the Company,
as well as for amounts recoverable from retrocessionaires, are considered
appropriate as of March 31, 2008, based on current
information. However, it is possible that future developments could
have a material adverse effect on the Company’s consolidated results of
operations and, in certain situations, could have a material adverse effect on
the Company’s financial condition. The Company 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 the
Company.
Results
of Operations
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Premiums
and fees
|
|
$ |
16 |
|
|
$ |
15 |
|
Net
investment income
|
|
|
22 |
|
|
|
24 |
|
Other
revenues
|
|
|
41 |
|
|
|
(8 |
) |
Segment
revenues
|
|
|
79 |
|
|
|
31 |
|
Benefits
and expenses
|
|
|
375 |
|
|
|
38 |
|
Loss
before income
|
|
tax
benefits
|
|
|
(296 |
) |
|
|
(7 |
) |
Income
tax benefits
|
|
|
(107 |
) |
|
|
(8 |
) |
Segment
earnings (loss)
|
|
$ |
(189 |
) |
|
$ |
1 |
|
Realized
investment gains,
|
|
net
of taxes
|
|
$ |
2 |
|
|
$ |
2 |
|
Results
of GMIB business (after-tax)
|
|
included
in segment earnings (loss):
|
|
Charge
on adoption of SFAS
|
|
No.
157 for guaranteed minimum
|
|
income
benefit contracts
|
|
$ |
(131 |
) |
|
$ |
- |
|
Results
of GMIB business
|
|
excluding
charge on adoption
|
|
$ |
(64 |
) |
|
$ |
(15 |
) |
Excluding
the charge on adoption of SFAS No. 157 (see Note 2 to the
Consolidated Financial Statements) and results of the GMIB business, segment
earnings for Run-off Reinsurance for the first three months of 2008, compared
with the same period last year, reflect the less favorable impact of settlements
and commutations related to personal accident and workers’ compensation lines of
business.
Other
Revenues
The
Company 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 gains from futures contracts of $42 million for the first three months
of 2008, compared with pre-tax losses of $7 million for the first three months
of 2007. 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 the Company at March 31, 2008 related to this program was $925
million.
Benefits
and Expenses
Included
in benefits and expenses is a pre-tax charge of $202 million for the adoption of
SFAS No. 157, which is discussed further in Note 2 to the
Consolidated Financial Statements. The GMIB business generated
additional pre-tax expenses of $102 million for the three months of 2008,
primarily due to declines in risk free interest rates and decreases in account
values of the underlying mutual funds.
The GMIB
liability and related asset are calculated using a complex internal model and
assumptions from the viewpoint of a hypothetical market
participant. This resulting liability (and related asset) is higher
than the Company believes will ultimately be required primarily
because risk free interest rates are used to project growth in account values of
the underlying mutual funds to estimate fair value from the viewpoint of a
hypothetical market participant. The Company’s payments for GMIB
claims are expected to occur over the next 15 to 20 years and will be based on
actual values of the underlying mutual funds and the 7-year Treasury rate at the
dates benefits are elected. The Company does not believe that current
risk free interest rates reflect actual growth expected for the underlying
mutual funds over that timeframe, and therefore believes that the recorded
liability and related asset are in excess of what will ultimately be required as
this business runs off.
Segment
Description
Other
Operations consist of:
·
|
non-leveraged
and leveraged corporate–owned life insurance
(COLI);
|
·
|
deferred
gains recognized from the 1998 sale of the individual life insurance and
annuity business and the 2004 sale of the retirement benefits business;
and
|
·
|
run-off
settlement annuity business.
|
Results of
Operations
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Premiums
and fees
|
|
$ |
28 |
|
|
$ |
27 |
|
Net
investment income
|
|
|
104 |
|
|
|
107 |
|
Other
revenues
|
|
|
18 |
|
|
|
20 |
|
Segment
revenues
|
|
|
150 |
|
|
|
154 |
|
Benefits
and expenses
|
|
|
117 |
|
|
|
120 |
|
Income
before taxes
|
|
|
33 |
|
|
|
34 |
|
Income
taxes
|
|
|
11 |
|
|
|
11 |
|
Segment
earnings
|
|
$ |
22 |
|
|
$ |
23 |
|
Realized
investment gains,
|
|
net
of taxes
|
|
$ |
- |
|
|
$ |
1 |
|
Segment
earnings for Other Operations for the first three months of 2008 were comparable
to the first three months of 2007, reflecting solid performance in the COLI
business, partially offset by the continuing decline in deferred gain
amortization associated with sold businesses.
Description
Corporate
reflects amounts not allocated to segments, such as interest expense on
corporate debt and on uncertain tax positions, net investment income on
unallocated investments, intersegment eliminations, compensation cost for stock
options and certain corporate overhead expenses such as directors’
expenses.
FINANCIAL
SUMMARY
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
March
31,
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Segment
loss
|
|
$ |
(21 |
) |
|
$ |
(26 |
) |
Corporate
results for the first three months of 2008, compared with the first three months
of 2007, primarily reflect lower directors’ expenses due to reduced deferred
compensation obligations caused by a decline in the Company’s stock
price.
Discontinued
operations for the three months ended
March 31, 2008 represented $3 million after-tax from the settlement of certain
issues related to a past divestiture. Discontinued operations for the
three months ended March 31, 2007 represent realized gains of $12 million
after-tax from the disposition of certain directly-owned real estate
investments.
The
industry is under continuing review by government agencies and regulators with
respect to payment practices. On February 13, 2008, State of New York
Attorney General Andrew M. Cuomo announced an industry-wide investigation into
the use of data provided by Ingenix – a system used to calculate payments for
services provided by out-of-network providers. The Company has
received subpoenas from the New York Attorney General’s office in
connection with this investigation and intends to fully cooperate and respond
appropriately. The Company is also a defendant in a putative class
action brought on behalf of members asserting that due to the use of Ingenix
data, the Company improperly underpaid claims. The Company denies the
allegations and will vigorously defend itself in the case.
In
addition to the above referenced development, there are certain other matters
that present significant uncertainty, which could result in a material adverse
impact on consolidated results of operations. See Note 14 in the Consolidated Financial Statements for further
information.
Liquidity
The
Company maintains liquidity at two levels: the subsidiary level and
the parent company level.
Liquidity
requirements at the subsidiary level generally consist of:
· claim and
benefit payments to policyholders; and
· operating
expense requirements, primarily for employee compensation and
benefits.
The
Company’s subsidiaries normally meet their 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.
|
The
Company’s subsidiaries generate most of the cash flow from operating
activities. They typically invest those cash flows in fixed income
securities with a duration that matches the liabilities.
Liquidity
requirements at the parent level generally consist of:
·
debt
service and dividend payments to shareholders; and
The
parent normally meets its liquidity requirements by:
·
|
maintaining
appropriate levels of cash, cash equivalents and
short-term investments;
|
·
|
collecting
dividends from its subsidiaries;
and
|
·
|
using
proceeds from issuance of debt and equity
securities.
|
Cash
flows for the three months ended March 31, 2008 were as follows:
(In
millions)
|
|
2008
|
|
|
2007
|
|
Operating
activities
|
|
$ |
352 |
|
|
$ |
378 |
|
Investing
activities
|
|
$ |
(163 |
) |
|
$ |
(151 |
) |
Financing
activities
|
|
$ |
690 |
|
|
$ |
(30 |
) |
Cash flow
from operating activities consists of cash receipts and disbursements for
premiums and fees, gains (losses) recognized in connection with the Company’s
program to manage equity market risk related to reinsured guaranteed minimum
death benefit contracts, investment income, taxes, and benefits and
expenses.
Because
certain income and expense transactions do not generate cash, and because cash
transactions related to revenue and expenses may occur in periods different from
when those revenues and expenses are recognized in net income, cash flow from
operating activities can be significantly different from net
income. The Company assesses cash flows from operating activities by
comparing it with adjusted income from operations, which is defined as income
from continuing operations excluding the results of GMIB and special items, and
further adjusted to exclude pre-tax realized investment results and depreciation
and amortization charges.
Cash
flows from investing activities generally consists of net investment purchases
or sales and net purchases of property and equipment, which includes capitalized
software.
Cash
flows from financing activities is generally comprised of issuances and
re-payment of debt at the parent level, proceeds on the issuance of common stock
resulting from stock option exercises, and stock repurchases. In
addition, the subsidiaries report net deposits/withdrawals to/from investment
contract liabilities (which includes universal life insurance liabilities)
because such liabilities are considered financing proceeds from
policyholders.
2008:
Operating
activities
For the
three months ended March 31, 2008, cash flows from operating activities exceeded
adjusted
income
from operations by $39 million, primarily due to cash inflows of $42 million
associated with futures contracts used by the Run-off Reinsurance segment which
did not effect net income. Annual payments of incentive compensation
in the first quarter were largely offset by the absence of federal tax
payments.
Cash
flows from operating activities declined by $26 million compared with the same
period in 2007. Excluding the results of the futures contracts used
by the Run-off Reinsurance segment (which did not affect net income), the
decline was $75 million. This decline primarily reflects lower
adjusted income from operations of $12 million and unfavorable timing on
receivable collections.
Investing
activities
Cash used
in investing activities was funded from cash flow from operating activities, and
primarily consisted of net purchases of investments of $93 million and net
purchases of property and equipment of $68 million.
Financing
activities
Cash
provided from financing activities primarily consisted of proceeds from the net
issuance of short-term debt and long-term debt of $248 million and $298 million,
respectively. These borrowing arrangements were entered into for
general corporate purposes, including the financing of the acquisition of
Great-West Healthcare. Financing activities also included net
deposits to contractholder deposit funds of $50 million and proceeds from the
issuance of common stock under the Company's stock plans of $33
million.
2007:
Operating
activities
For the
three months ended March 31, 2007, cash flows from operating activities exceeded
adjusted income from operations by $53 million, primarily reflecting favorable
receivable collections and reserve growth in the ongoing operating
segments. Annual payments of incentive compensation in the first
quarter were largely offset by the absence of federal tax payments.
Investing
activities
Cash used
in investing activities was funded from cash flow from operating activities, and
primarily consisted of net purchases of investments of $126 million and net
purchases of property and equipment of $19 million.
Financing
activities
Cash used
in financing activities primarily consisted of dividends on and repurchases of
common stock of $585 million repayment of debt of $87 million,
partially offset by proceeds from the issuance of debt of $498 million and
proceeds from the issuance of common stock under the Company’s stock plans of
$133 million.
Interest
Expense
Interest
expense was $31 million for the first three months of 2008, compared with $29
million for the same period last year. The increase was primarily due
to the issuance of debt in connection with the Great-West Healthcare
acquisition.
Capital
Resources
The
Company’s capital resources (primarily retained earnings and the proceeds from
the issuance of debt and equity securities) provide protection for
policyholders, furnish the financial strength to underwrite insurance risks and
facilitate continued business growth.
Management,
guided by regulatory requirements and rating agency capital guidelines,
determines the amount of capital resources that the Company
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.
The
Company has the ability to raise 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.
|
On March
4, 2008, the Company issued $300 million of Notes bearing interest at the rate
of 6.35% per year, which is payable on March 15 and September 15 of each year
beginning September 15, 2008. The proceeds of this debt were used for
general corporate purposes, including financing the acquisition of Great-West
Healthcare. The Notes will mature on March 15, 2018. The
Company may redeem the Notes, at any time, in whole or in part, at a redemption
price equal to the greater of:
· 100% of
the principal amount of the Notes to be redeemed; or
· the
present value of the remaining principal and interest payments on the Notes
being redeemed discounted at the applicable Treasury Rate plus 40 basis
points.
On March
14, 2008, the Company entered into a new commercial paper program. Under
the program, the Company is authorized to sell from time to time
short-term unsecured commercial paper notes up to a maximum of $500
million. The proceeds will be used for general corporate purposes,
including working capital, capital expenditures, acquisitions and share
repurchases. The Company uses the credit facility described below as
back-up liquidity to support the outstanding commercial paper. If at
any time funds are not available on favorable terms under the program, the
Company may use the Credit Agreement for funding. As of March 31, 2008, the
Company had $250 million in commercial paper outstanding, at a weighted average
interest rate of 3.14%, used in large part to finance the Great-West
Healthcare acquisition.
In June
2007, the Company amended and restated its five year revolving credit and letter
of credit agreement for $1.75 billion, which permits up to $1.25 billion to be
used for letters of credit. The credit agreement includes options, which are
subject to consent by the administrative agent and the committing bank, to
increase the commitment amount up to $2.0 billion and to extend the term of the
agreement. The Company 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, 2008.
Liquidity and Capital
Resources Outlook
The
availability of resources at the parent/holding company level is partially
dependent on dividends from the
Company’s subsidiaries,
most of which are subject to regulatory restrictions and rating agency capital
guidelines. At March 31, 2008, there was approximately $1.6 billion
in cash available at the parent/holding company level. On April 1,
2008, the Company paid $1.5 billion to fund the Great-West Healthcare
acquisition. Dividends from subsidiaries will be reduced over the
next year to allow the subsidiaries to fund an additional $400 million of
investment in Great-West Healthcare without further capital infusion from the
parent. There are no scheduled long-term debt repayments in 2008 or 2009 and no
pension plan funding requirements in 2008. The
Company expects,
based on current projections for cash activity (including projections for
dividends from subsidiaries), to have sufficient liquidity to meet its
obligations. If the Company’s projections are not
realized, the demand for funds could exceed available cash
if:
·
|
regulatory
restrictions prevent the insurance and HMO subsidiaries from distributing
cash to the parent company; or
|
·
|
a
substantial increase in funding is required for the
Company’s program to reduce the equity market risks associated
with the guaranteed minimum death benefit
contracts.
|
In those
cases, the Company has the flexibility to satisfy liquidity needs through
short-term borrowings, such as the revolving credit and line of credit
agreements of up to $1.75 billion and the commercial paper program.
Guarantees and Contractual
Obligations
The
Company, through its subsidiaries, is contingently liable for various financial
guarantees provided and contractual obligations entered into in the ordinary
course of business. See Note 14 to the
Consolidated Financial Statements for additional information.
Contractual
obligations. The Company has updated its contractual
obligations previously provided on page 59 of the Company’s 2007 Form 10-K for
certain items as follows:
·
|
other
long-term liabilities associated with guaranteed minimum income benefits
contracts as a result of the unfavorable equity market and interest rate
environment during the first three months of
2008;
|
·
|
other
long-term liabilities for taxes
payable;
|
·
|
short-term
debt as a result of issuing commercial paper during the first three months
of 2008; and
|
·
|
long-term
debt, including scheduled interest payments, as a result of issuing $300
million in Notes during the first three months of
2008.
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
(In
millions, on an
|
|
|
than
1
|
|
|
1-3 |
|
|
4-5 |
|
|
After
5
|
|
undiscounted
basis)
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
On-Balance
Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
253 |
|
|
$ |
253 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Long-term
debt
|
|
$ |
4,228 |
|
|
$ |
106 |
|
|
$ |
854 |
|
|
$ |
216 |
|
|
$ |
3,052 |
|
Other
long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
$ |
996 |
|
|
$ |
467 |
|
|
$ |
280 |
|
|
$ |
89 |
|
|
$ |
160 |
|
The
Company’s investment assets do not include separate account
assets. Additional information regarding the Company’s investment
assets and related accounting policies is included in Notes 7, 8 and 12 to the Consolidated Financial Statements and in Notes 2,
10, 11 and 14 in the Company’s 2007 Form 10-K.
Investments
in fixed maturities (bonds) include publicly traded and privately placed debt
securities, mortgage and other asset-backed securities, preferred stocks
redeemable by the investor and trading securities. Fixed maturities
and equity securities include hybrid securities. Fair values for these
securities are determined internally using complex pricing models or are
obtained from independent pricing services or reputable securities brokers
(third parties). See Note 7 for further information
on investment assets carried at fair value.
The
Company performs ongoing analyses on prices received from third parties to
conclude that the prices represent reasonable estimates of fair value.
This process involves quantitative and qualitative analysis and is overseen by
the Company’s investment professionals. Examples of review procedures
performed include, but are not limited to, initial and on-going review of third
party pricing service methodologies, review of pricing statistics and trends,
and backtesting recent trades. The Company will challenge third party
pricing if it does not appear to be within a reasonable range, but does not
adjust a price without agreement from the third party.
The
Company’s commercial mortgage loans are diversified by property type, location
and borrower to reduce exposure to potential losses.
Problem and Potential
Problem Investments
“Problem”
bonds and commercial 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 commercial mortgage loans are
fully current, but management believes they have certain characteristics that
increase the likelihood that they will become “problems.”
These
characteristics include, but are not limited to, the following:
·
|
request
from the borrower for
restructuring;
|
·
|
principal
or interest payments past due by more than 30 but fewer than 60
days;
|
·
|
downgrade
in credit rating;
|
·
|
deterioration
in debt service ratio;
|
·
|
collateral
losses on asset-backed securities;
and
|
·
|
significant
vacancy in commercial rental mortgage property, or a decline in sales for
commercial retail mortgage
property.
|
The
Company recognizes interest income on “problem” bonds and commercial mortgage
loans only when payment is actually received because of the risk profile of the
underlying investment. The additional 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 three
months ended March 31, 2008 and 2007.
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, 2008
|
|
|
|
|
|
|
|
|
|
Problem
bonds
|
|
$ |
58 |
|
|
$ |
(40 |
) |
|
$ |
18 |
|
Potential
problem bonds
|
|
$ |
26 |
|
|
$ |
(1 |
) |
|
$ |
25 |
|
Potential
problem
|
|
|
|
|
|
|
|
|
|
|
|
|
commercial
mortgage loans
|
|
$ |
70 |
|
|
$ |
- |
|
|
$ |
70 |
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Problem
bonds
|
|
$ |
47 |
|
|
$ |
(30 |
) |
|
$ |
17 |
|
Potential
problem bonds
|
|
$ |
34 |
|
|
$ |
(9 |
) |
|
$ |
25 |
|
Potential
problem
|
|
|
|
|
|
|
|
|
|
|
|
|
commercial
mortgage loans
|
|
$ |
70 |
|
|
$ |
- |
|
|
$ |
70 |
|
Foreclosed
real estate
|
|
$ |
16 |
|
|
$ |
(3 |
) |
|
$ |
13 |
|
Summary
The
Company recorded $10 million after-tax for the three months ended March 31,
2008, 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 the Company cannot demonstrate the intent and ability to hold
until recovery. There were no realized investment losses associated
with asset write-downs or changes in valuation reserves for the three months
ended March 31, 2007.
Sustained
weaknesses in certain sectors of the economy and the possibility of rising
interest rates for an extended period may cause additional investment
losses. These investment losses could materially affect future
results of operations, although the Company does not currently expect them to
have a material effect on its liquidity or financial condition.
Market Risk of Financial
Instruments
The
Company’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.
The
Company 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 $90
million in the fair value of the futures contracts outstanding under this
program as of March 31, 2008. 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 Consolidated 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 the Company’s
businesses including on:
·
|
risks
and exposures associated with guaranteed minimum death benefit and
guaranteed minimum income benefit contracts (see page
38); and
|
·
|
pension
liabilities because equity securities comprise a significant portion of
the assets of the Company’s employee pension
plans.
|
CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR”
PROVISIONS OF THE
PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The
Company and its representatives may from time to time make written and oral
forward-looking statements, including statements contained in press releases, in
the Company’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, the Company’s productivity initiatives, litigation
and other legal matters, operational improvement in the health care operations,
and the outlook for the Company’s full year 2008
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. The Company 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 the Company’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 the Company’s employee
benefits businesses;
|
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, disputes regarding reinsurance arrangements, other litigation
and regulatory actions challenging the Company’s businesses and the
outcome of pending government proceedings and tax
audits;
|
5.
|
heightened
competition, particularly price competition, which could reduce product
margins and constrain growth in the Company’s businesses, primarily
the health care
business;
|
6.
|
risks
associated with the Company’s mail order pharmacy business which, among
other things, includes any potential operational deficiencies or service
issues as well as loss or suspension of state pharmacy licenses;
|
7.
|
significant
changes in interest rates for a sustained period of
time;
|
8.
|
downgrades
in the financial strength ratings of the Company’s insurance subsidiaries,
which could, among other things, adversely affect new sales and retention
of current business;
|
9.
|
limitations
on the ability of the Company’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;
|
10.
|
inability
of the program adopted by the Company 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);
|
11.
|
adjustments
to the reserve assumptions (including lapse, partial surrender, mortality,
interest rates and volatility) used in estimating the Company’s
liabilities for reinsurance contracts covering guaranteed minimum death
benefits under certain variable
annuities;
|
12.
|
adjustments
to the assumptions (including annuity election rates and reinsurance )
used in estimating the Company’s assets and liabilities for reinsurance
contracts covering guaranteed minimum income benefits under certain
variable annuities;
|
13. |
significant
stock market declines, which could, among other things, result in
increased expenses for guaranteed minimum income benefits contracts and
pension expenses for the Company’s pension plan in future periods as well
as the recognition of additional pension obligations; |
14. |
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; |
15. |
significant
deterioration in economic conditions, which could have an adverse effect
on the Company’s operations and investments; |
16. |
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 the Company’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; |
17. |
potential
public health epidemics and bio-terrorist activity, which could, among
other things, cause the Company’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; |
18. |
risks
associated with security or interruption of information systems, which
could, among other things, cause operational disruption; |
19. |
challenges
and risks associated with the successful management of the Company’s
outsourcing projects or key vendors, including the agreement with IBM for
provision of technology infrastructure and related services; |
20. |
the
ability to successfully integrate and operate the businesses acquired from
Great-West by, among other things, renewing insurance and administrative
services contracts on competitive terms, retaining and growing membership,
realizing revenue, expense and other synergies, successfully leveraging
the information technology platform of the acquired businesses, and
retaining key personnel; and |
21. |
the
ability of the Company's to execute its growth plans by
successfully managing Great-West Healthcare’s outsourcing projects and
leveraging the Company's capabilities and those of the business acquired
from Great-West to further enhance the combined organization’s network
access position, underwriting effectiveness, delivery of quality member
and provider service, and increased penetration of its membership base
with differentiated product offerings. |
This list
of important factors is not intended to be exhaustive. Other sections
of the Company’s most recent Annual Report on Form 10-K, including the “Risk
Factors” section, 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 the Company from realizing the
forward-looking statements. The Company 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 Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms and
that such information is accumulated and communicated to CIGNA's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
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
Item
1. Legal Proceedings
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.
In its
Form 10-K for the year ended December 31, 2007, CIGNA described the In re Managed Care
Litigation. With respect to the pending Amer. Dental Ass’n case, the
Company intends to file a renewed motion to dismiss the case. With
respect to CIGNA's pursuit of recovery from additional insurers following the
settlement of the multi-district litigation, the court ruled on March 19, 2008
that the Company is not entitled to insurance recoveries from one of the
insurers. CIGNA has appealed that decision.
In the
description of the Broker
Compensation litigation that appeared in CIGNA's Form 10-K for the year
ended December 31, 2007, the Company described a letter from the San Diego
District Attorney, detailing its potential civil claims and penalties against
the Company subsidiaries, and outlining potential civil
litigation. On March 5, 2008, the District Attorney advised that it
will take no enforcement action against the Company. The Company also
described The People of the
State of California by and through John Garamendi, Insurance Commissioner of the
State of California v. Universal Life Resources, which was
pending in the Superior Court of the State of California for the County of San
Diego. On March 5, 2008, the court denied the regulator’s claim for
attorneys’ fees and costs. The regulator has until May 5, 2008 to
appeal.
In its
Form 10-K for the year ended December 31, 2007, the Company described the Amara Cash Balance Pension Plan
Litigation in the United States District Court for the District of
Connecticut. The court ordered the parties to
file briefs on remedies, if any, to be awarded to the plaintiff on the claims on
which plaintiff prevailed. Plaintiffs filed their brief on March 17,
2008. CIGNA filed its reply brief on April 16, 2008 and plaintiffs
filed a reply on April 25, 2008. Oral argument was held on April 30,
2008.
CIGNA's
Annual Report on Form 10-K for the year ended December 31, 2007 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, 2008:
Issuer
Purchases of Equity Securities
|
Period
|
Total
#
of
shares
|
Average
price
paid
per
share
|
Total
# of shares
purchased
as part of
publicly
announced
|
Approximate
dollar
value of
shares that
may
yet be purchased
as
part of publicly
|
Jan
1-31, 2008
|
53,798
|
$54.09
|
0
|
$327,342,930
|
Feb
1-29, 2008
|
253,375
|
$47.13
|
0
|
$327,342,930
|
Mar
1-31, 2008
|
17,538
|
$47.15
|
0
|
$327,342,930
|
Total
|
324,711
|
$48.28
|
0
|
|
_______________
|
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 53,798
shares in January, 253,375 shares in February and 17,538 shares in
March.
|
|
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 $327 million as of March 31, 2008 and May 1,
2008. 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.
|
|
|
|
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
1, 2008
Number
|
Description
|
Method of
Filing
|
|
|
|
|
|
|
3.2
|
By-laws
of the registrant, effective as of April 23, 2008
|
Filed
as Appendix A (pages A-1 through A-17) to the registrant's definitive
proxy statement filed March 20, 2008 and incorporated herein by
reference.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-1