CIGNA 10Q
  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from _____ to _____

Commission file number 1-08323

 CIGNA Corporation
(Exact name of registrant as specified in its charter)

 Delaware 
06-1059331 
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)

Two Liberty Place, 1601 Chestnut Street
Philadelphia, Pennsylvania 19192
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (215) 761-1000

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No _

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  X    Accelerated Filer __    Non-Accelerated Filer __
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _ No X

  As of March 31, 2007, 95,931,638 shares of the issuer's common stock were outstanding.


 
CIGNA CORPORATION
 
INDEX


   
Page No.
 
     
 
 
 
 
 
 
 
 
 
 
     
 
     
 
 
 
 
 

                     
As used herein, CIGNA refers to one or more of CIGNA Corporation and its consolidated subsidiaries.

 




CIGNA Corporation
         
Consolidated Statements of Income
 
   
Three Months Ended
 
 
 
March 31,
 
(In millions, except per share amounts)
 
2007
 
2006
 
Revenues
         
Premiums and fees
 
$
3,708
 
$
3,268
 
Net investment income
   
280
   
329
 
Other revenues
   
365
   
366
 
Realized investment gains
   
21
   
144
 
     Total revenues
   
4,374
   
4,107
 
Benefits and Expenses
             
Health Care medical claims expense
   
1,719
   
1,448
 
Other benefit expenses
   
836
   
788
 
Other operating expenses
   
1,406
   
1,343
 
    Total benefits and expenses
   
3,961
   
3,579
 
Income from Continuing Operations before Income Taxes
   
413
   
528
 
Income taxes (benefits):
             
Current
   
132
   
254
 
Deferred
   
4
   
(78
)
    Total taxes
   
136
   
176
 
Income from Continuing Operations
   
277
   
352
 
Income from Discontinued Operations, Net of Taxes
   
12
   
-
 
Net Income
 
$
289
 
$
352
 
Earnings Per Share - Basic:
             
   Income from continuing operations
 
$
2.86
 
$
2.93
 
   Income from discontinued operations
   
0.13
   
-
 
Net income
 
$
2.99
 
$
2.93
 
Earnings Per Share - Diluted:
             
   Income from continuing operations
 
$
2.80
 
$
2.87
 
   Income from discontinued operations
   
0.13
   
-
 
Net income
 
$
2.93
 
$
2.87
 
Dividends Declared Per Share
 
$
0.025
 
$
0.025
 
               
The accompanying Notes to the Financial Statements are an integral part of these statements.
   

1



CIGNA Corporation
                 
Consolidated Balance Sheets
(In millions, except per share amounts)
 
 As of March 31,
 
As of December 31,
 
 
 
2007
 
2006
 
Assets
                 
Investments:
                 
     Fixed maturities, at fair value (amortized cost, $11,510; $11,373)
       
$
12,267
       
$
12,155
 
     Equity securities, at fair value (cost, $111; $112)
         
130
         
131
 
     Mortgage loans
         
3,968
         
3,988
 
     Policy loans
         
1,419
         
1,405
 
     Real estate
         
67
         
117
 
     Other long-term investments
         
455
         
418
 
     Short-term investments
         
74
         
89
 
    Total investments
         
18,380
         
18,303
 
Cash and cash equivalents
         
1,589
         
1,392
 
Accrued investment income
         
271
         
255
 
Premiums, accounts and notes receivable
         
1,432
         
1,459
 
Reinsurance recoverables
         
7,832
         
8,045
 
Deferred policy acquisition costs
         
715
         
707
 
Property and equipment
         
603
         
632
 
Deferred income taxes
         
902
         
926
 
Goodwill
         
1,739
         
1,736
 
Other assets, including other intangibles
         
423
         
379
 
Separate account assets
         
8,492
         
8,565
 
    Total assets
       
$
42,378
       
$
42,399
 
Liabilities
                         
Contractholder deposit funds
       
$
9,042
       
$
9,164
 
Future policy benefits
         
8,286
         
8,373
 
Unpaid claims and claim expenses
         
4,264
         
4,310
 
Health Care medical claims payable
         
989
         
960
 
Unearned premiums and fees
         
558
         
499
 
    Total insurance and contractholder liabilities
         
23,139
         
23,306
 
Accounts payable, accrued expenses and other liabilities
         
4,461
         
4,435
 
Short-term debt
         
291
         
382
 
Long-term debt
         
1,792
         
1,294
 
Nonrecourse obligations
         
51
         
87
 
Separate account liabilities
         
8,492
         
8,565
 
    Total liabilities
         
38,226
         
38,069
 
Contingencies — Note 15
                         
Shareholders’ Equity
                         
Common stock (par value per share, $0.25; shares issued, 160; 160)
         
40
         
40
 
Additional paid-in capital
         
2,485
         
2,451
 
Net unrealized appreciation, fixed maturities
 
$
181
       
$
187
       
Net unrealized appreciation, equity securities
   
10
         
22
       
Net unrealized depreciation, derivatives
   
(16
)
       
(15
)
     
Net translation of foreign currencies
   
33
         
33
       
Postretirement benefits liability adjustment
   
(379
)
       
(396
)
     
Accumulated other comprehensive loss
         
(171
)
       
(169
)
Retained earnings
         
6,375
         
6,177
 
Less treasury stock, at cost
         
(4,577
)
       
(4,169
)
    Total shareholders’ equity
         
4,152
         
4,330
 
    Total liabilities and shareholders’ equity
       
$
42,378
       
$
42,399
 
Shareholders’ Equity Per Share
       
$
43.28
       
$
43.89
 
                           
The accompanying Notes to the Financial Statements are an integral part of these statements.
 

2




CIGNA Corporation
                 
Consolidated Statements of Comprehensive Income and Changes in Shareholders’ Equity
(In millions, except per share amounts)
Three Months Ended March 31,
   
 2007
 
2006 
 
 
 
 Compre-
hensive
Income
 
Share-
holders'
Equity 
 
Compre-
hensive
Income 
 
Share-
holders'
Equity 
 
Common Stock
       
$
40
       
$
40
 
Additional Paid-In Capital, January 1
         
2,451
         
2,385
 
Effect of issuance of stock for employee benefit plans
         
34
         
34
 
Additional Paid-In Capital, March 31
         
2,485
         
2,419
 
Accumulated Other Comprehensive Loss, January 1
                         
    prior to implementation effect
         
(169
)
       
(509
)
Implementation effect of SFAS No.155 (see Note 2)
         
(12
)
       
-
 
Accumulated Other Comprehensive Loss,
                         
   January 1 as adjusted
         
(181
)
       
(509
)
Net unrealized depreciation, fixed maturities
 
$
(6
)
 
(6
)
$
(95
)
 
(95
)
Net unrealized depreciation, equity securities
   
-
   
-
   
(4
)
 
(4
)
Net unrealized depreciation on securities
   
(6
)
       
(99
)
     
Net unrealized depreciation, derivatives
   
(1
)
 
(1
)
 
(1
)
 
(1
)
Net translation of foreign currencies
   
-
   
-
   
7
   
7
 
Postretirement benefits liability adjustment
   
17
   
17
   
-
   
-
 
    Other comprehensive income (loss)
   
10
         
(93
)
     
Accumulated Other Comprehensive Loss, March 31
         
(171
)
       
(602
)
Retained Earnings, January 1 prior to
                         
    implementation effects
         
6,177
         
5,162
 
Implementation effect of SFAS No. 155 (see Note 2)
         
12
         
-
 
Implementation effect of FIN 48 (see Note 2)
         
(29
)
       
-
 
Retained Earnings, January 1 as adjusted
         
6,160
         
5,162
 
Net income
   
289
   
289
   
352
   
352
 
Effects of issuance of stock for employee benefit plans
         
(72
)
       
(86
)
Common dividends declared
         
(2
)
       
(3
)
Retained Earnings, March 31
         
6,375
         
5,425
 
Treasury Stock, January 1
         
(4,169
)
       
(1,718
)
Repurchase of common stock
         
(576
)
       
(419
)
Other, primarily issuance of treasury stock for employee
                         
    benefit plans
         
168
         
207
 
Treasury Stock, March 31
         
(4,577
)
       
(1,930
)
Total Comprehensive Income and Shareholders’
                         
    Equity
 
$
299
 
$
4,152
 
$
259
 
$
5,352
 
                           
The accompanying Notes to the Financial Statements are an integral part of these statements.
                           

3



    
         
Consolidated Statements of Cash Flows
         
(In millions)
 
Three Months Ended March 31,
 
   
2007
 
2006
 
Cash Flows from Operating Activities
         
Net income
 
$
289
 
$
352
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
    Income from discontinued operations
   
(12
)
 
-
 
    Insurance liabilities
   
74
   
(132
)
    Reinsurance recoverables
   
12
   
31
 
    Deferred policy acquisition costs
   
(12
)
 
(21
)
    Premiums, accounts and notes receivable
   
17
   
68
 
    Accounts payable, accrued expenses and other liabilities
   
(74
)
 
(165
)
    Current income taxes
   
100
   
222
 
    Deferred income taxes
   
4
   
(78
)
    Realized investment gains
   
(21
)
 
(144
)
    Depreciation and amortization
   
54
   
54
 
    Gains on sales of businesses (excluding discontinued operations)
   
(11
)
 
(17
)
    Mortgage loans originated and held for sale
   
-
   
(240
)
    Other, net
   
(42
)
 
(17
)
        Net cash provided by (used in) operating activities
   
378
   
(87
)
Cash Flows from Investing Activities
             
Proceeds from investments sold:
             
    Fixed maturities
   
188
   
535
 
    Equity securities
   
11
   
5
 
    Mortgage loans
   
28
   
136
 
    Other (primarily short-term investments)
   
143
   
611
 
Investment maturities and repayments:
             
    Fixed maturities
   
107
   
518
 
    Mortgage loans
   
62
   
69
 
Investments purchased:
             
    Fixed maturities
   
(440
)
 
(755
)
    Equity securities
   
(2
)
 
(30
)
    Mortgage loans
   
(69
)
 
(252
)
    Other (primarily short-term investments)
   
(185
)
 
(150
)
Property and equipment, net
   
(19
)
 
(30
)
Cash provided by investing activities of discontinued operations
   
31
   
-
 
Other, net
   
(6
)
 
-
 
    Net cash provided by (used in) investing activities
   
(151
)
 
657
 
Cash Flows from Financing Activities
             
Deposits and interest credited to contractholder deposit funds
   
141
   
141
 
Withdrawals and benefit payments from contractholder deposit funds
   
(142
)
 
(179
)
Change in cash overdraft position
   
12
   
4
 
Net proceeds on issuance of long-term debt
   
498
   
-
 
Repayment of long-term debt
   
(87
)
 
(100
)
Repurchase of common stock
   
(583
)
 
(400
)
Issuance of common stock
   
133
   
162
 
Common dividends paid
   
(2
)
 
(3
)
    Net cash used in financing activities
   
(30
)
 
(375
)
Net increase in cash and cash equivalents
   
197
   
195
 
Cash and cash equivalents, beginning of period
   
1,392
   
1,709
 
Cash and cash equivalents, end of period
 
$
1,589
 
$
1,904
 
Supplemental Disclosure of Cash Information:
             
    Income taxes paid, net of refunds
 
$
8
 
$
8
 
    Interest paid
 
$
20
 
$
22
 
               
The accompanying Notes to the Financial Statements are an integral part of these statements.
             


 
4



CIGNA CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of CIGNA Corporation, its significant subsidiaries, and variable interest entities of which CIGNA is the primary beneficiary, which are referred to collectively as “CIGNA.” Intercompany transactions and accounts have been eliminated in consolidation. These consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America.

The interim financial statements are unaudited but include all adjustments (including normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the period reported. The interim consolidated financial statements and notes should be read in conjunction with the Consolidated Financial Statements and Notes in CIGNA’s Annual Report to Shareholders and Form 10-K for the year ended December 31, 2006.

The preparation of interim financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business as well as competitive and other market conditions, call for caution in estimating full year results based on interim results of operations.

Beginning in 2007, CIGNA reports the results of the run-off retirement business in Other Operations. Prior periods have been restated to conform to this presentation.

Discontinued Operations. Discontinued operations represent realized gains on the disposition of certain directly-owned real estate investments in the first quarter of 2007 (see Note 9). Unless otherwise indicated, amounts in these Notes exclude the effects of discontinued operations.

NOTE 2 - RECENT ACCOUNTING
PRONOUNCEMENTS

Uncertain tax positions. Effective January 1, 2007, CIGNA implemented Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, "Accounting for Uncertainty in Income Taxes." This interpretation provides guidance for recognizing and measuring uncertain tax positions that are "more likely than not" to result in a benefit if challenged by the Internal Revenue Service (IRS). The guidance clarifies that the amount of tax benefit recognized should be measured using management's best estimate based on the most favorable expected benefit with greater than fifty percent likelihood of being realized. The interpretation also requires that interest expense and penalties be recognized for any reserved portion of an uncertain tax position beginning when the effect of that position is reported to tax authorities. The cumulative effect of implementing the interpretation for unrecognized tax benefits decreased opening Retained earnings by $29 million. See Note 12 for additional information.

Certain financial instruments.  Effective January 1, 2007, CIGNA implemented Statement of Financial Accounting Standard (SFAS) No. 155, "Accounting for Certain Hybrid Financial Instruments”, an amendment of FASB Statements No. 133 and 140. This Standard clarifies when certain financial instruments and features of financial instruments must be treated as derivatives and reported on the balance sheet at fair value with changes in fair value reported in net income. At adoption, CIGNA elected to fair value certain existing investments in preferred stock and debt securities with call or conversion features (hybrid securities) and future changes in the fair value of these investments will be reported in net income. As a result, CIGNA reclassified $12 million after-tax of unrealized appreciation from the opening balance of Accumulated other comprehensive loss to Retained earnings with no net change to Total shareholders' equity. In addition, this standard may affect future income recognition of certain future financial instruments if the fair value election is used or if additional derivatives are identified because any changes in their fair values will be
 
 
5

 
recognized in net income each period. See Note 9 for a review of instruments that CIGNA has elected to fair value.

Deferred acquisition costs. Effective January 1, 2007, CIGNA implemented the American Institute of Certified Public Accountants Statement of Position (SOP) 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts." The SOP requires that deferred acquisition costs be expensed in full when the original contract is substantially changed by election or amendment of an existing contract feature or by replacement with a new contract. There were no material effects to the financial statements at implementation. Although substantial contract changes are not expected to occur, the effect of this SOP in future periods may vary based on the nature and volume of any such contract changes.

Pension and other postretirement benefit plans. In 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Benefits Plans," requiring that the overfunded or underfunded status of all defined benefit postretirement plans be measured as the difference between the fair value of plan assets and the benefit obligation and recognized in the balance sheet. Changes in actuarial gains and losses and prior service costs are required to be recognized in accumulated other comprehensive income (loss), net of tax, each period. CIGNA implemented this standard effective December 31, 2006. Liabilities for pension benefits and other postretirement benefits are recorded in Accounts payable, accrued expenses and other liabilities on CIGNA’s balance sheet. The implementation of SFAS No. 158 did not impact CIGNA's pension expense, funding requirements or financial covenants. See Note 8 for further information on pension and other postretirement benefit plans.
 
Fair value option. In 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," to permit entities to choose to measure many financial instruments at fair value with subsequent changes in fair value to be reported in net income for the period. This choice is made for each individual financial instrument, is irrevocable and, after implementation, must be determined when the entity first commits to or recognizes the financial instrument. Implementation is required in the first quarter of 2008 with any changes in the measurement of existing financial instruments to be reported as an adjustment to the opening balance of Retained earnings. CIGNA is presently evaluating these new requirements to determine whether the fair value election will be used for various financial assets and liabilities at implementation or for financial assets and liabilities acquired subsequently.
 
Fair value measurements. In 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," to expand disclosures about fair value measurements and to clarify how to measure fair value by focusing on the price that would be received when selling an asset or paid to transfer a liability. Implementation is required in the first quarter of 2008 with any changes to the fair values of assets or liabilities to be reported generally in net income or, for fixed maturities and equity securities held for sale and derivatives that hedge future cash flows, in accumulated other comprehensive income (loss) for the period. CIGNA is presently evaluating these new requirements to determine whether any changes to the fair value measurements of its assets and liabilities will result at implementation.

6

 
NOTE 3 - ACQUISITIONS AND DISPOSITIONS

CIGNA may from time to time acquire or dispose of assets, subsidiaries or lines of business. Significant transactions are described below.

Star-HRG Acquisition. On July 11, 2006, CIGNA acquired the operating assets of Star-HRG, a leading provider of low cost health plans and other employee benefits coverage for hourly and part-time workers and their families, for $156 million, including assumed liabilities. The acquisition was accounted for as a purchase, and was financed through the issuance of a note payable to the seller for $151 million, of which $73 million was paid in 2006. The results of Star-HRG are included in the accompanying consolidated financial statements from the date of the acquisition.

Sale of the Brazilian Life Insurance Operations. During 2006, CIGNA entered into negotiations to sell its Brazilian life insurance business. The sale is expected to close in 2007 and as a result, CIGNA has classified this business as a discontinued operation.

NOTE 4 - EARNINGS PER SHARE

Basic and diluted earnings per share were computed as follows:
 
               
(Dollars in millions, except
 
 
 
Effect of
 
 
 
per share amounts)
 
Basic
 
Dilution
 
Diluted
 
Three Months Ended March 31,
             
2007
             
Income from continuing
             
   operations
 
$
277
   
-
 
$
277
 
Shares (in thousands):
                   
Weighted average
   
96,790
   
-
   
96,790
 
Options and restricted stock grants
         
1,994
   
1,994
 
Total shares
   
96,790
   
1,994
   
98,784
 
EPS
 
$
2.86
 
$
(0.06
)
$
2.80
 
2006
                   
Income from continuing
                   
   operations
 
$
352
   
-
 
$
352
 
Shares (in thousands):
                   
Weighted average
   
119,946
   
-
   
119,946
 
Options and restricted stock grants
         
2,567
   
2,567
 
Total shares
   
119,946
   
2,567
   
122,513
 
EPS
 
$
2.93
 
$
(0.06
)
$
2.87
 

The following outstanding employee stock options were not included in the computation of diluted earnings per share because their effect would have increased diluted earnings per share (antidilutive) as their exercise price was greater than the average share price of CIGNA's common stock for the period.
 
       
   
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(In millions)
 
2007
 
2006
 
Antidilutive options
   
0.5
   
0.7
 
               

CIGNA held 64,096,823 shares of common stock in Treasury as of March 31, 2007, and 40,269,674 shares as of March 31, 2006.
 
 
 
7

On April 25, 2007, CIGNA's Board of Directors approved a three-for-one stock split (in the form of a stock dividend) of CIGNA's common shares. The stock split is payable on June 4, 2007 for shareholders of record as of the close of business on May 21, 2007. Pro forma earnings per share figures for the effect of the stock split for the first three months of 2007 and 2006 have been provided below:
 
Treasury shares will not be affected by the stock split.
               
(Dollars in millions, except
 
 
 
Effect of
 
 
 
per share amounts)
 
Basic
 
Dilution
 
Diluted
 
Three Months Ended March 31,
             
2007
             
Income from continuing
             
operations
 
$
277
   
-
 
$
277
 
Shares (in thousands):
                   
Weighted average
   
290,370
   
-
   
290,370
 
Options and restricted stock grants
         
5,982
   
5,982
 
Total shares
   
290,370
   
5,982
   
296,352
 
EPS
 
$
0.95
 
$
(0.02
)
$
0.93
 
2006
                   
Income from continuing
                   
    operations
 
$
352
   
-
 
$
352
 
Shares (in thousands):
                   
Weighted average
   
359,838
   
-
   
359,838
 
Options and restricted stock grants
         
7,701
   
7,701
 
Total shares
   
359,838
   
7,701
   
367,539
 
EPS
 
$
0.98
 
$
(0.02
)
$
0.96
 
 
NOTE 5 - HEALTH CARE MEDICAL CLAIMS PAYABLE

Medical claims payable for the Health Care segment reflects estimates of the ultimate cost of claims that have been incurred but not yet reported, those which have been reported but not yet paid (reported claims in process) and other medical expense payable, which primarily comprises accruals for provider incentives and other amounts payable to providers. Incurred but not yet reported comprises the majority of the reserve balance as follows:
 
           
   
March 31,
 
December 31,
 
(In millions)
 
2007
 
2006
 
Incurred but not yet reported
 
$
847
 
$
820
 
Reported claims in process
   
95
   
95
 
Other medical expense payable
   
47
   
45
 
Medical claims payable
 
$
989
 
$
960
 
               
Activity in medical claims payable was as follows:
 
           
   
As of
 
As of
 
(In millions)
 
March 31, 2007
 
December 31, 2006
 
Balance at January 1,
 
$
960
 
$
1,165
 
Less: Reinsurance and other
             
     amounts recoverable
   
250
   
342
 
Balance at January 1, net
   
710
   
823
 
Incurred claims related to:
             
     Current year
   
1,785
   
6,284
 
     Prior years
   
(66
)
 
(173
)
     Total incurred
   
1,719
   
6,111
 
Paid claims related to:
             
     Current year
   
1,163
   
5,615
 
     Prior years
   
511
   
609
 
     Total paid
   
1,674
   
6,224
 
Ending Balance, net
   
755
   
710
 
Add: Reinsurance and other
             
     amounts recoverable
   
234
   
250
 
Ending Balance
 
$
989
 
$
960
 
               
 
Reinsurance and other amounts recoverable reflect amounts due from policyholders to cover incurred but not reported and pended claims for minimum premium products and certain administrative services only business where the right of offset does not exist.

For the three months ended March 31, 2007, actual experience differed from CIGNA's key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $66 million, or 1.1% of the current year incurred claims as reported for the year ended December 31, 2006. Actual completion factors resulted in a reduction in medical claims payable of $44 million, or 0.7% of the current year incurred claims as reported for the year ended December 31, 2006 for the insured book of business. Actual medical cost trend resulted in a reduction in medical claims payable of $22 million, or 0.4% of the current year incurred claims as reported for the year ended December 31, 2006 for the insured book of business. The favorable impact in 2007 relating to completion factor and medical cost trend variances is primarily due to the release of the provision for moderately adverse conditions, which is a component of the assumptions for both completion factors and medical cost trend, established for claims incurred related to 2006. This release was substantially offset by the establishment of the provision for moderately adverse conditions established for claims incurred related to 2007.
 
 
8


For the year ended December 31, 2006, actual experience differed from CIGNA's key assumptions, resulting in favorable incurred claims related to prior years’ medical claims payable of $173 million, or 2.6% of the current year incurred claims as reported for the year ended December 31, 2005. The favorable impact in 2006 is due to faster than expected completion factors and lower than expected medical cost trends, both of which included an assumption for moderately adverse experience.

For the year ended December 31, 2006, actual completion factors resulted in a reduction of the medical claims payable of $99 million or 1.5% of the current year incurred claims as reported for the year ended December 31, 2005 for the insured book of business. Completion factors in 2006 reflected better than expected time to process claims, driven by higher auto-adjudication rates, the impact of claim recoveries and more timely submissions of provider claims. For the year ended December 31, 2006, actual medical cost trend resulted in a reduction of the medical claims payable of $74 million or 1.1% of the current year incurred claims as reported for the year ended December 31, 2005 for the insured book of business. The better than expected medical cost trend in 2006 was driven by lower inpatient, outpatient and pharmacy service utilization and lower than expected unit cost trends. The lower than expected unit cost trends reflected provider contracting initiatives and the mix of services provided.

The corresponding impact of favorable prior year development on net income was $3 million for the three months ended March 31, 2007 and $54 million for the year ended December 31, 2006, or 0.1% in 2007 and 0.8% in 2006 of the current year incurred claims as reported for the years ended December 31, 2006 and 2005, respectively. The change in the amount of the incurred claims related to prior years in the medical claims payable liability does not directly correspond to an increase or decrease in CIGNA's net income recognized for the following reasons:

First, due to the nature of CIGNA's retrospectively experience-rated business, only adjustments to medical claims payable on accounts in deficit affect net income. An increase or decrease to medical claims payable on accounts in deficit, in effect, accrue to CIGNA and directly impact net income. An account is in deficit when the accumulated medical costs and administrative charges, including profit charges, exceed the accumulated premium received. Adjustments to medical claims payable on accounts in surplus accrue directly to the policyholder with no impact on CIGNA's net income. An account is in surplus when the accumulated premium received exceeds the accumulated medical costs and administrative charges, including profit charges.

Second, CIGNA consistently recognizes the actuarial best estimate of the ultimate liability within a level of confidence, as required by actuarial standards of practice, which require that the liabilities be adequate under moderately adverse conditions. As CIGNA establishes the liability for each incurral year, CIGNA ensures that its assumptions appropriately consider moderately adverse conditions. When a portion of the development related to the prior year incurred claims is offset by an increase deemed appropriate to address moderately adverse conditions for the current year incurred claims, CIGNA does not consider that offset amount as having any impact on net income.

The determination of liabilities for Health Care medical claims payable requires CIGNA to make critical accounting estimates. See Note 2(O) in CIGNA's 2006 Annual Report to Shareholders’ for additional information.
 
 
9

 
NOTE 6 - GUARANTEED MINIMUM DEATH BENEFIT AND INCOME BENEFIT CONTRACTS

CIGNA’s reinsurance operations, which were discontinued in 2000 and are now an inactive business in run-off mode, reinsured a guaranteed minimum death benefit under certain variable annuities issued by other insurance companies. These variable annuities are essentially investments in mutual funds combined with a death benefit. CIGNA has equity and other market exposures as a result of this product.

The determination of liabilities for guaranteed minimum death benefits requires CIGNA to make critical accounting estimates. CIGNA regularly evaluates the assumptions used in establishing reserves and changes its estimates if actual experience or other evidence suggests that earlier assumptions should be revised. If actual experience differs from the assumptions (including lapse, partial surrender, mortality, interest rates and volatility) used in estimating these reserves, the resulting change could have a material adverse effect on CIGNA’s consolidated results of operations, and in certain situations, could have a material adverse effect on CIGNA’s financial condition. CIGNA had future policy benefit reserves for guaranteed minimum death benefit contracts of $861 million as of March 31, 2007, and $862 million as of December 31, 2006.

The following provides information about CIGNA’s reserving methodology and assumptions for guaranteed minimum death benefits as of March 31, 2007:

·  
The reserves represent estimates of the present value of net amounts expected to be paid, less the present value of net future premiums. Included in net amounts expected to be paid is the excess of the guaranteed death benefits over the values of the contractholders’ accounts (based on underlying equity and bond mutual fund investments).
·  
The reserves include an estimate for partial surrenders that essentially lock in the death benefit for a particular policy based on annual election rates that vary from 0-20% depending on the net amount at risk for each policy and whether surrender charges apply.
·  
The mean investment performance assumption is 5% considering CIGNA's program to reduce equity market exposures using futures contracts. In addition, the results of futures contracts are reflected in the liability calculation as a component of investment returns.
·  
The volatility assumption is 15-30%, varying by equity fund type; 3-8%, varying by bond fund type; and 1% for money market funds.
·  
The discount rate is 5.75%.
·  
The mortality assumption is 70-75% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January 1, 2000.
·  
The lapse rate assumption is 0-15%, depending on contract type, policy duration and the ratio of the net amount at risk to account value.

As of March 31, 2007, the aggregate fair value of the underlying mutual fund investments was $34.6 billion. The death benefit coverage in force as of that date (representing the amount that CIGNA would have to pay if all of the approximately 900,000 contractholders had died on that date) was $4.6 billion. The death benefit coverage in force represents the excess of the guaranteed benefit amount over the fair value of the underlying mutual fund investments.

The notional amount of futures contract positions held by CIGNA at March 31, 2007, was $690 million. CIGNA recorded in other revenues pre-tax losses of $7 million for the three months of 2007 and pre-tax losses of $40 million for the three months of 2006 from futures contracts. Expense offsets reflecting corresponding changes in liabilities for these guaranteed minimum death benefit contracts were included in benefits and expenses.

For further information and details on these contracts and the program adopted to reduce related equity market risk, refer to Note 7 of CIGNA's 2006 Annual Report to Shareholders.

CIGNA has also written reinsurance contracts with issuers of variable annuity contracts that provide annuitants with certain guarantees related to minimum income benefits. See Note 15 for further information.
 
 
 
10


NOTE 7 - REINSURANCE

In the normal course of business, CIGNA’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct losses. Reinsurance does not relieve the originating insurer of liability. CIGNA evaluates the financial condition of its reinsurers and monitors their concentrations of credit risk.

Retirement benefits business. CIGNA had a reinsurance recoverable of $2.4 billion as of March 31, 2007, and $2.5 billion as of December 31, 2006 from Prudential Retirement Insurance and Annuity Company resulting from the sale of the retirement benefits business, which was primarily in the form of a reinsurance arrangement. The reinsurance recoverable is secured primarily by fixed maturities and mortgage loans held in a business trust established by the reinsurer. This recoverable is reduced as CIGNA's reinsured liabilities are paid or directly assumed by the reinsurer.

Individual life and annuity reinsurance. CIGNA had a reinsurance recoverable of $4.8 billion at March 31, 2007 and December 31, 2006, from The Lincoln National Life Insurance Company that arose from the 1998 sale of CIGNA’s individual life insurance and annuity business through an indemnity reinsurance arrangement.

Unicover and other run-off reinsurance. CIGNA's Run-off Reinsurance operations reinsured workers’ compensation and personal accident business in the United States and London markets. This included participation in a workers’ compensation reinsurance pool formerly managed by Unicover Managers, Inc.

CIGNA purchased extensive retrocessional reinsurance for the Unicover contracts (through the pool) and also purchased retrocessional coverage for its other workers compensation and personal accident assumed risks. Although CIGNA is involved in certain retrocessional enforcement arbitrations, most of the disputes concerning the retrocessional contracts have been resolved. See Note 15 “Litigation and other legal matters” for more information regarding these disputes.

CIGNA's payment obligations under these contracts are based on ceding companies’ claim payments relating to accidents and injuries. These claim payments can in some cases extend many years into the future, and the amount of the ceding companies’ ultimate claims, and therefore the amount of CIGNA's ultimate payment obligations and ultimate collection from retrocessionaires may not be known with certainty for some time.

CIGNA’s reserves for underlying reinsurance exposures assumed by CIGNA, as well as for amounts recoverable from retrocessionaires, are considered appropriate as of March 31, 2007, based on current information. However, it is possible that future developments could have a material adverse effect on CIGNA’s consolidated results of operations and, in certain situations, could have a material adverse effect on CIGNA’s financial condition. CIGNA bears the risk of loss if its payment obligations to cedents increase or if its retrocessionaires are unable to meet, or successfully challenge, their reinsurance obligations to CIGNA.

Other reinsurance. CIGNA could have losses if reinsurers fail to indemnify CIGNA on other reinsurance arrangements, either because of reinsurer insolvencies or contract disputes. However, management does not expect charges for other unrecoverable reinsurance to have a material adverse effect on CIGNA’s consolidated results of operations, liquidity or financial condition.

Effects of reinsurance. In CIGNA’s consolidated income statements, premiums and fees were net of ceded premiums, and benefits and expenses were net of reinsurance recoveries, in the following amounts:


           
   
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(In millions)
 
2007
 
2006
 
Premiums and fees
         
Individual life insurance
         
    and annuity business sold
 
$
57
 
$
64
 
Other
   
54
   
45
 
Total
 
$
111
 
$
109
 
Reinsurance recoveries
             
Individual life insurance
             
    and annuity business sold
 
$
92
 
$
75
 
Other
   
34
   
35
 
Total
 
$
126
 
$
110
 
               
 
 
11


NOTE 8 - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

Pension benefits. Components of net pension cost were as follows:
 
       
   
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(In millions)
 
2007
 
2006
 
Service cost
 
$
19
 
$
19
 
Interest cost
   
58
   
55
 
Expected return on plan assets
   
(52
)
 
(52
)
Amortization of:
             
     Net loss from past experience
   
31
   
41
 
Net pension cost
 
$
56
 
$
63
 
               
 
CIGNA funds its qualified pension plans by at least the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended (ERISA).
 
CIGNA does not expect to make, nor is required to make domestic pension plan contributions in 2007.
 
Other postretirement benefits. Components of net other postretirement benefit cost were as follows:
 
       
   
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(In millions)
 
2007
 
2006
 
Service cost
 
$
1
 
$
1
 
Interest cost
   
6
   
6
 
Amortization of:
             
     Net gain from past experience
   
(1
)
 
(1
)
     Prior service cost
   
(4
)
 
(4
)
Net other postretirement
             
     benefit cost
 
$
2
 
$
2
 
               

NOTE 9 - INVESTMENTS

Realized Investment Gains and Losses

The following realized gains and losses on investments exclude amounts required to adjust future policy benefits for certain annuities:
 
           
   
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(In millions)
 
2007
 
2006
 
Fixed maturities
 
$
4
 
$
2
 
Equity securities
   
10
   
3
 
Mortgage loans
   
-
   
(6
)
Other investments,
             
     including derivatives
   
7
   
145
 
Realized investment gains
             
     from continuing operations,
             
     before income taxes
   
21
   
144
 
Less income taxes
   
8
   
50
 
Realized investment gains
             
     from continuing operations
   
13
   
94
 
Realized investment gains from
             
     discontinued operations
             
     before income taxes
   
18
   
-
 
Less income taxes
   
6
   
-
 
Realized investment gains
             
     from discontinued operations
   
12
   
-
 
Net realized investment gains
 
$
25
 
$
94
 
               

For the three months ended March 31, 2007, realized investment results from discontinued operations reflect gains on the sales of directly-owned real estate properties held for the production of investment income. Proceeds on these sales have been separately disclosed in CIGNA's Consolidated Statement of Cash Flows.
 
For the three months ended March 31, 2006, substantially all of the realized investment gains in other investments were from sales of equity interest in real estate limited liability entities.
 
 
12


Fixed Maturities and Equity Securities

Securities in the following table are included in fixed maturities and equities on CIGNA’s balance sheet. These securities are carried at fair value with changes in fair value reported in other revenues for trading securities and in realized investment gains for hybrid securities, beginning after the implementation of SFAS No. 155 on January 1, 2007.
 
           
 
 
As of
 
As of
 
(In millions)
 
March 31, 2007
 
December 31, 2006
 
Included in fixed maturities:
         
    Trading securities
 
$
26
 
$
27
 
    Hybrid securities
   
8
   
10
 
        Total
 
$
34
 
$
37
 
               
Included in equity securities:
             
    Hybrid securities
 
$
104
 
$
105
 

Sales of available-for-sale fixed maturities and equity securities were as follows:
           
 
 
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(In millions)
 
2007
 
2006
 
Proceeds from sales
 
$
199
 
$
540
 
Gross gains from sales
 
$
15
 
$
16
 
Gross losses from sales
 
$
(1
)
$
(12
)

Review of Declines in Fair Value. Management reviews available-for-sale fixed maturities and equity securities (excluding trading and hybrid securities) for impairment based on criteria that include:
 
·  
length of time and severity of decline;
·  
financial health and specific near term prospects of the issuer;
·  
changes in the regulatory, economic or general market environment of the issuer’s industry or geographic region; and
·  
ability and intent to hold until recovery.

As of March 31, 2007, fixed maturities (primarily investment grade corporate bonds) with a decline in fair value from cost were as follows, including the length of time of such decline:
               
   
Fair
 
Amortized
 
Unrealized
 
(In millions)
 
Value
 
Cost
 
Depreciation
 
Fixed Maturities:
                   
    One year or less:
                   
    Investment grade
 
$
1,405
 
$
1,420
 
$
(15
)
    Below investment grade
 
$
88
 
$
89
 
$
(1
)
    More than one year:
                   
    Investment grade
 
$
1,298
 
$
1,331
 
$
(33
)
    Below investment grade
 
$
104
 
$
107
 
$
(3
)
 
The unrealized depreciation of investment grade fixed maturities is primarily due to increases in interest rates since purchase.

CIGNA recorded pre-tax impairments in fixed maturities of $9 million for the first three months of 2006. There were no impairments in fixed maturities for the first three months of 2007.

Mortgage Loans

In connection with CIGNA’s investment strategy to enhance investment yields by selling senior participations, mortgage loans includes $124 million of mortgage loans originated with the intent to sell as of March 31, 2007.

Other Long-term Investments

As of March 31, 2007, CIGNA had commitments to contribute:

·  
$267 million to limited liability entities that hold either real estate or loans to real estate entities; and
·  
$228 million to entities that hold securities.
 
 
13

 
NOTE 10 - DEBT
 
   
March 31,
 
December 31,
 
(In millions)
 
2007
 
2006
 
Short-term:
             
Current maturities of long-term debt
 
$
291
 
$
376
 
Short-term note payable
   
-
   
6
 
Total short-term debt
 
$
291
 
$
382
 
Long-term:
             
Uncollateralized debt:
             
7% Notes due 2011
 
$
222
 
$
222
 
6.375% Notes due 2011
   
226
   
226
 
5.375% Notes due 2017
   
250
   
-
 
6.37% Note due 2021
   
78
   
78
 
7.65% Notes due 2023
   
100
   
100
 
8.3% Notes due 2023
   
17
   
17
 
7.875% Debentures due 2027
   
300
   
300
 
8.3% Step Down Notes due 2033
   
83
   
83
 
6.15% Notes due 2036
   
500
   
250
 
Other
   
16
   
18
 
Total long-term debt
 
$
1,792
 
$
1,294
 
 
Under a universal shelf registration statement filed in 2006, CIGNA issued the following securities in March 2007:

·  
$250 million of Senior Notes bearing interest at the rate of 5.375% per year, which is payable on March 15 and September 15 of each year, beginning September 15, 2007. The Notes will mature on March 15, 2017; and
 
·  
$250 million of Senior Notes bearing interest at the rate of 6.150% per year, which is payable on May 15 and November 15 of each year, beginning May 15, 2007. The Notes will mature on November 15, 2036.
 
CIGNA may redeem these Notes at any time, in whole or in part, at a specified redemption price.
 
NOTE 11 - ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss excludes amounts required to adjust future policy benefits for certain annuities.
 
Changes in accumulated other comprehensive loss were as follows:
               
   
 
 
Tax
 
 
 
 
 
 
 
(Expense)
 
After-
 
(In millions)
 
Pre-tax
 
Benefit
 
tax
 
Three Months Ended March 31,
             
2007
             
Net unrealized depreciation, securities:
             
Implementation effect of
                   
     SFAS No. 155
 
$
(18
)
$
6
 
$
(12
)
Net unrealized appreciation on securities
                   
     arising during the year
   
4
   
(1
)
 
3
 
Less: reclassification adjustment for gains
                   
     included in net income
   
(14
)
 
5
   
(9
)
Net unrealized depreciation, securities
 
$
(28
)
$
10
 
$
(18
)
Net unrealized depreciation,
                   
     derivatives
 
$
(1
)
$
-
 
$
(1
)
Net translation of foreign
                   
     currencies
 
$
(1
)
$
1
 
$
-
 
Postretirement benefits liability
                   
     adjustment:
                   
 Reclassification adjustment for
                   
     amortization of net losses from past
                   
     experience and prior service costs
 
$
26
 
$
(9
)
$
17
 
2006
                   
Net unrealized depreciation, securities:
                   
Net unrealized depreciation on securities
                   
     arising during the year
 
$
(147
)
$
51
 
$
(96
)
Less: reclassification adjustment for gains
                   
     included in net income
   
(5
)
 
2
   
(3
)
Net unrealized depreciation, securities
 
$
(152
)
$
53
 
$
(99
)
Net unrealized depreciation,
                   
     derivatives
 
$
(2
)
$
1
 
$
(1
)
Net translation of foreign
                   
     currencies
 
$
11
 
$
(4
)
$
7
 

NOTE 12 - INCOME TAXES

As discussed in Note 2, CIGNA implemented FIN 48 as of January 1, 2007. As a result, total unrecognized tax benefits at January 1, 2007 were $245 million, including $120 million that would impact net income if recognized. At March 31, 2007, total unrecognized tax benefits increased to $255 million, including $129 million that would impact net income if recognized. For the three months ended March 31, 2007, the change in total unrecognized tax benefits decreased net income by $10 million.

CIGNA classifies net interest expense and any applicable penalties as a component of income tax expense in Corporate. At January 1, 2007 CIGNA had $11 million of accrued interest with no material change in this amount at March 31, 2007. 
 
14


Management has determined it is reasonably possible that the level of unrecognized tax benefits could significantly decline over the next 12 months resulting from a possible settlement with the IRS of the examination of CIGNA's 2003 and 2004 consolidated federal income tax returns. This possible settlement could result in a decline in the level of unrecognized tax benefits by as much as $50 million, of which CIGNA would expect not more than $30 million to affect net income.

In addition, the IRS recently completed substantive review of the 2003 and 2004 tax years, for which two issues remain in dispute and are currently being addressed at the Examination level. Review of the 2005 and 2006 tax years will commence later in 2007. CIGNA conducts business in numerous State and Foreign jurisdictions, and may be engaged in various audit proceedings at any given time. Generally, no further State or Foreign audit activity for years prior to 2001 is expected.  
 
NOTE 13 - STOCK COMPENSATION

Compensation cost and related tax benefits for stock options, restricted stock and deferred stock units were as follows:
           
 
 
Three Months
 
 
 
Ended
 
 
March 31,
 
(In millions)
 
2007
 
2006
 
Compensation cost
 
$
13
 
$
12
 
Tax benefits
 
$
5
 
$
4
 
 
Stock options granted and the average fair value at the date of grant were as follows:
       
   
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(Options in thousands)
 
2007
 
2006
 
Options granted
   
541
   
524
 
Weighted average fair
             
    value of options granted
 
$
48.04
 
$
43.97
 

CIGNA calculated the average fair value using the Black-Scholes option pricing model. The following assumptions were used:
       
   
As of March 31,
 
 
 
2007
 
2006
 
Dividend yield
   
0.1%
 
 
0.1%
 
Expected volatility
   
35.0%
 
 
35.0%
 
Risk-free interest rate
   
4.7%
 
 
4.6%
 
Expected option life
   
4 years
   
4.5 years
 

The expected volatility reflects CIGNA's past daily stock price volatility. CIGNA does not consider volatility implied in the market prices of traded options to be a good indicator of future volatility because remaining maturities of traded options are less than one year. In 2007, the expected option life reflects CIGNA's historical experience excluding activity related to options granted under a replacement option feature. Prior to 2007, CIGNA developed the expected option life by considering certain factors, including assumptions used by other companies with comparable stock option plan features and CIGNA's cancellation of a replacement option feature in June 2004.

Restricted stock granted and the average fair value at the date of grant were as follows:
           
 
 
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(Grants in thousands)
 
2007
 
2006
 
Restricted stock granted
   
216
   
193
 
Weighted average fair value
 
$
140.49
 
$
122.50
 
 
15

NOTE 14 - SEGMENT INFORMATION

CIGNA's operating segments generally reflect groups of related products, except for the International segment, which is generally based on geography. In accordance with accounting principles generally accepted in the United States of America, operating segments that do not require separate disclosure may be combined. CIGNA measures the financial results of its segments using “segment earnings (loss)” which is defined as income (loss) from continuing operations excluding after-tax realized investment gains and losses.

Beginning in 2007, CIGNA reports the results of the run-off retirement business in Other Operations. Prior periods have been restated to conform to this presentation.

Summarized segment financial information was as follows:
           
   
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(In millions)
 
2007
 
2006
 
Premiums and fees and other revenues
         
Health Care
 
$
3,006
 
$
2,698
 
Disability and Life
   
610
   
556
 
International
   
415
   
357
 
Run-off Reinsurance
   
7
   
(25
)
Other Operations
   
47
   
60
 
Corporate
   
(12
)
 
(12
)
Total
 
$
4,073
 
$
3,634
 
Income (loss) from continuing operations
             
Health Care
 
$
168
 
$
156
 
Disability and Life
   
60
   
58
 
International
   
38
   
37
 
Run-off Reinsurance
   
1
   
-
 
Other Operations
   
23
   
25
 
Corporate
   
(26
)
 
(18
)
Segment earnings
   
264
   
258
 
Realized investment gains,
             
      net of taxes
   
13
   
94
 
Income from continuing
             
      operations
 
$
277
 
$
352
 

NOTE 15 - CONTINGENCIES AND OTHER MATTERS

CIGNA, through its subsidiaries, is contingently liable for various financial guarantees provided in the ordinary course of business.
 
Financial Guarantees Primarily Associated with the Sold Retirement Benefits Business

Separate account assets are contractholder funds maintained in accounts with specific investment objectives. CIGNA records separate account liabilities equal to separate account assets. In certain cases, CIGNA guarantees a minimum level of benefits for retirement and insurance contracts, primarily associated with the sold retirement benefits business (which was sold in April 2004), written in separate accounts. CIGNA establishes an additional liability if management believes that CIGNA will be required to make a payment under these guarantees.

Except as noted below, these guarantees are fully reinsured by an affiliate of the buyer of the retirement benefits business:

·  
CIGNA guarantees that separate account assets will be sufficient to pay certain retiree or life benefits. The sponsoring employers are primarily responsible for ensuring that assets are sufficient to pay these benefits and are required to maintain assets that exceed a certain percentage of benefit obligations. This percentage varies depending on the asset class within a sponsoring employer’s portfolio (for example, a bond fund would require a lower percentage than a riskier equity fund) and thus will vary as the composition of the portfolio changes. If employers do not maintain the required levels of separate account assets, CIGNA or an affiliate of the buyer has the right to redirect the management of the related assets to provide for benefit payments. As of March 31, 2007, employers maintained assets that exceeded the benefit obligations. Benefit obligations under these arrangements were $2.0 billion as of March 31, 2007. As of March 31, 2007, approximately 75% of these guarantees is reinsured by an affiliate of the buyer of the retirement benefits business. There were no additional liabilities required for these guarantees as of March 31, 2007.
16


·  
CIGNA guarantees that separate account assets, primarily fixed income investments, will be sufficient to pay retiree benefits for participants under a certain group annuity contract. These guarantees are fully reinsured by an affiliate of the buyer of the retirement benefits business. These guaranteed benefit obligations were $31 million as of March 31, 2007. CIGNA had no additional liabilities for these guarantees as of March 31, 2007.

Other Financial Guarantees

Guaranteed minimum income benefit contracts. CIGNA's reinsurance operations, which were discontinued in 2000 and are now an inactive business in run-off mode, reinsured minimum income benefits under certain variable annuity contracts issued by other insurance companies. When annuitants elect to receive these minimum income benefits, CIGNA may be required to make payments based on changes in underlying mutual fund values and interest rates.

CIGNA estimates the fair value of the assets and liabilities associated with these contracts using assumptions as to market returns and volatility of the underlying equity and bond mutual fund investments, interest rates, mortality, lapse, credit risk and annuity election rates.

CIGNA regularly evaluates each of the assumptions used in establishing these assets and liabilities by monitoring actual experience as it emerges over time and may change its estimates if actual experience or other evidence suggests that earlier assumptions should be revised. If actual experience differs from the assumptions used in estimating these assets and liabilities, the resulting change could have a material adverse effect on CIGNA’s consolidated results of operations, and in certain situations, could have a material adverse effect on CIGNA’s financial condition.
 
The following provides information about the assumptions used in calculating the assets and liabilities for guaranteed minimum income benefits:

·  
These liabilities represent estimates of the present value of net amounts expected to be paid, less the present value of net future premiums expected to be received. Included in net amounts expected to be paid is the excess of the expected value of the income benefits over the values of the annuitant’s accounts at the time of annuitization. The assets associated with these contracts represent receivables in connection with reinsurance that CIGNA has purchased from third parties (see below).
·  
The market return assumption is 8-11% varying by equity fund type; 6-7% varying by bond fund type; and 5-6% for money market funds.
·  
The volatility assumption is 14-23%, varying by equity fund type; 5-7%, varying by bond fund type; and 2-3% for money market funds.
·  
The discount rate is 5.75%.
·  
The projected interest rate used to calculate the reinsured income benefits at the time of annuitization varies by economic scenario, reflects interest rates as of the valuation date, and has a long-term mean rate of 5-6% and a standard deviation of 12-13%.
·  
The mortality assumption is 70% of the 1994 Group Annuity Mortality table, with 1% annual improvement beginning January 1, 2000.
·  
The lapse rate assumption is 3-12%, depending on policy duration.
·  
The annuity election rate assumption is that no more than 5% of the policies eligible to annuitize their variable annuity contracts will do so each year.

As of March 31, 2007, CIGNA had liabilities of $126 million related to these contracts and net amounts recoverable from reinsurers of $80 million (including $10 million for claims that have already been paid by CIGNA). CIGNA had an additional liability of $46 million associated with the cost of reinsurance as of March 31, 2007. As of December 31, 2006, CIGNA had liabilities of $88 million related to these contracts and net amounts recoverable from reinsurers of $51 million (including $2 million for claims that had already been paid by CIGNA). CIGNA had an additional liability of $47 million associated with the cost of reinsurance as of December 31, 2006. Management believes the current assumptions used to estimate reserves for these liabilities are appropriate.
 
 
17

CIGNA is required to disclose the maximum potential undiscounted future payments for guarantees related to minimum income benefits using hypothetical adverse assumptions, defined as follows:

·  
No annuitants surrendered their accounts; and
·  
All annuitants lived to elect their benefit; and
·  
All annuitants elected to receive their benefit on the next available date (2007 through 2014); and
·  
All underlying mutual fund investment values remained at the March 31, 2007 value of $3.2 billion, with no future returns.

The maximum potential undiscounted payments that CIGNA would make under those assumptions would aggregate $858 million before reinsurance recoveries. CIGNA believes the likelihood of such payment is remote and expects the amount of actual payments to be significantly less than this hypothetical undiscounted aggregate amount. CIGNA has retrocessional reinsurance from third parties in place which covers 55% of the exposures on these contracts.
 
Certain Other Guarantees. CIGNA had indemnification obligations to lenders of up to $282 million as of March 31, 2007 related to borrowings by certain real estate joint ventures which CIGNA either records as an investment or consolidates. These borrowings, which are nonrecourse to CIGNA, are secured by the joint ventures’ real estate properties with fair values in excess of the loan amounts and mature at various dates beginning in the second quarter of 2007 through 2017. CIGNA’s indemnification obligations would require payment to lenders for any actual damages resulting from certain acts such as unauthorized ownership transfers, misappropriation of rental payments by others or environmental damages. Based on initial and ongoing reviews of property management and operations, CIGNA does not expect that payments will be required under these indemnification obligations. Any payments that might be required could be recovered through a refinancing or sale of the assets. In some cases, CIGNA also has recourse to partners for their proportionate share of amounts paid. There were no liabilities required for these indemnification obligations as of March 31, 2007.

As of March 31, 2007 CIGNA guaranteed that it would compensate a lessor for a shortfall of up to $44 million in the market value of certain leased equipment at the end of the lease. Guarantees of $28 million expire in 2012 and $16 million expire in 2016. CIGNA had no additional liabilities for these guarantees as of March 31, 2007.

CIGNA had indemnification obligations as of March 31, 2007 in connection with acquisition and disposition transactions. These indemnification obligations are triggered by the breach of representations or covenants provided by CIGNA, such as representations for the presentation of financial statements, the filing of tax returns, compliance with law or the identification of outstanding litigation. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential amount due is subject to contractual limitations based on a percentage of the transaction purchase price, while in other cases limitations are not specified or applicable. CIGNA does not believe that it is possible to determine the maximum potential amount due under these obligations, since not all amounts due under these indemnification obligations are subject to limitation. There were no liabilities required for these indemnification obligations as of March 31, 2007.

CIGNA does not expect that these guarantees will have a material adverse effect on CIGNA’s consolidated results of operations, liquidity or financial condition.
 
 
18

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 CIGNA’s business practices and will continue to do so in the future. In addition, CIGNA'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 CIGNA's health care operations if it inhibits CIGNA'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 CIGNA’s employee benefits businesses include:

·  
additional mandated benefits or services that increase costs;
·  
legislation that would grant plan participants broader rights to sue their health plans;
·  
changes in public policy and in the political environment, which could affect state and federal law, including legislative and regulatory proposals related to health care issues, which could increase cost and affect the market for CIGNA's health care products and services; and pension legislation, which could increase pension cost;
·  
changes in ERISA regulations resulting in increased application of varying state laws to benefit plan administration, thus increasing administrative burdens and costs;
·  
additional restrictions on the use of prescription drug formularies and rulings from pending purported class action litigation, which could result in adjustments to or the elimination of the average wholesale price or “AWP” of pharmaceutical products as a benchmark in establishing certain rates, charges, discounts, guarantees and fees for various prescription drugs;
·  
additional privacy legislation and regulations that interfere with the proper use of medical information for research, coordination of medical care and disease and disability management;
·  
additional variations among state laws mandating the time periods and administrative processes for payment of health care provider claims;
·  
legislation that would exempt independent physicians from antitrust laws; and
·  
changes in federal laws, such as amendments that could affect the taxation of employer provided benefits.

The employee benefits industry remains under scrutiny by various state and federal government agencies and could be subject to government efforts to bring criminal actions in circumstances that could previously have given rise only to civil or administrative proceedings.

Concentration of risk. South Korea represents the single largest geographic market for CIGNA's international businesses. For the three months ended March 31, 2007, South Korea generated 31% of International’s revenues and 45% of its segment earnings. CIGNA International’s business in South Korea would be vulnerable to adverse consumer credit conditions and geopolitical and economic conditions in that country, which could have a significant impact on CIGNA's consolidated results.
 
19


Litigation and Other Legal Matters

Managed care litigation. In 2004, a Florida federal court handling multi-district health care litigation against CIGNA and several health care industry competitors approved a settlement agreement between the physician class and CIGNA. A dispute over disallowed claims under the settlement submitted by a representative of certain class member physicians is proceeding to arbitration. Separately, in April 2005, the court approved a settlement between CIGNA and the remaining plaintiffs, a class of non-physician health care professionals. In the fourth quarter of 2006, CIGNA received a $22 million pre-tax ($14 million after-tax) insurance recovery related to this litigation. In the first quarter of 2007, CIGNA received an additional $5 million pre-tax ($3 million after-tax) insurance recovery related to this litigation. CIGNA seeks to pursue further recoveries from one additional insurer.

Broker compensation. Various regulators, including the New York and Connecticut Attorneys General and the Florida Office of Insurance Regulation, have been investigating insurance broker compensation.  Some regulators have brought suit against certain insurance brokers, including Universal Life Resources (ULR), alleging, among other things, that these brokers sought rigged bids from, and steered business to, insurers with whom they had contingent compensation arrangements.  Some of CIGNA's subsidiaries are included in one such lawsuit seeking injunctive relief against these contingent compensation practices.  CIGNA is also providing information about ULR in connection with investigations by the U.S. Attorney’s Office for the Southern District of California and the San Diego District Attorney. In addition, CIGNA provided information about another broker to the U.S. Department of Labor. CIGNA is cooperating with the inquiries and investigations.

Separately, several purported class action lawsuits have been filed against brokers and insurance companies, including certain of CIGNA’s subsidiaries, asserting that contingent commissions are unlawful.  These suits are now procedurally consolidated in a multi-district litigation proceeding in federal court in New Jersey. On April 5, 2007, the court granted the defendants’ motion and dismissed all of the federal antitrust, RICO and state law claims, leaving only certain ERISA fiduciary claims. The court has permitted plaintiffs to file an amended complaint by May 22, 2007. Discovery is stayed until the court reaches a decision whether plaintiffs may proceed regarding their anticipated amended antitrust and RICO claims. CIGNA denies the allegations and will vigorously defend itself in these cases.

CIGNA Corporation securities litigation. During the fourth quarter of 2006, CIGNA reached an agreement to resolve claims filed in federal court in 2002 against former and current officers and members of the Board of Directors on behalf of a class of CIGNA shareholders. The settlement, which specifies $93 million to be paid to the plaintiffs, was preliminarily approved by the U.S. District Court for the Eastern District of Pennsylvania on January 25, 2007. A final fairness hearing before the Court was held on April 27, 2007 and final approval was received on April 30, 2007. In connection with the settlement agreement, CIGNA recorded an after-tax charge of $25 million ($38 million pre-tax). The charge includes certain costs to defend and is net of expected insurance recoveries.

In addition, CIGNA and certain of its current and former Directors have reached a separate settlement with the Plaintiffs in the related derivative action. Under that settlement, CIGNA's insurers will deposit and apportion, on behalf of the individual defendants, $6 million of the aforementioned $93 million class action settlement, and have agreed to make a payment of not more than $720,000 for Plaintiff’s attorney’s fees subject to court approval. On January 25, 2007, the U.S. District Court for the Eastern District of Pennsylvania preliminarily approved the settlement. A final fairness hearing before the Court was held on April 27, 2007 and final approval was received on April 30, 2007.  

Amara cash balance pension plan litigation. Plaintiffs representing CIGNA Pension Plan participants affected by the 1998 conversion to a cash balance formula filed a class action lawsuit against CIGNA and the CIGNA Pension Plan in December 2001. The plaintiffs allege various ERISA violations including among other things, that the Plan’s cash balance formula discriminates against older employees; the conversion resulted in a wear away period (during which the pre-conversion accrued benefit exceeded the post-conversion benefit); and these conditions are not adequately disclosed in the Plan. A non-jury trial began on September 11-15, 2006. Due to the court’s schedule, the proceedings were adjourned and then
 

20

 
the trial was completed on January 25, 2007. The judge has ordered the parties to submit post-trial briefs in advance of closing arguments to be held August 9, 2007.

Run-off reinsurance litigation. In connection with CIGNA's run-off reinsurance operations described in Note 7, CIGNA purchased extensive retrocessional reinsurance for its Unicover contracts and also for some other segments of its non-Unicover business. CIGNA is appealing in court an adverse award in a retrocessional enforcement arbitration. In addition, CIGNA recently commenced another retrocessional enforcement arbitration. Other disputes concerning retrocessional contracts have been substantially resolved or settled. 

CIGNA is routinely involved in numerous claims, lawsuits, regulatory and IRS audits, investigations and other legal matters arising, for the most part, in the ordinary course of the business of administering and insuring employee benefit programs. An increasing number of claims are being made for substantial non-economic, extra-contractual or punitive damages. The outcome of litigation and other legal matters is always uncertain, and outcomes that are not justified by the evidence can occur. CIGNA believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously. Nevertheless, it is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to CIGNA’s consolidated results of operations, liquidity or financial condition.
 

21

 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
INDEX
 
 
INTRODUCTION

In this filing and in other marketplace communications, CIGNA makes certain forward-looking statements relating to its financial condition and results of operations, as well as to trends and assumptions that may affect CIGNA. Generally, forward-looking statements can be identified through the use of predictive words (e.g., “Outlook for 2007”). Actual results may differ from CIGNA’s predictions. Some factors that could cause results to differ are discussed throughout Management’s Discussion and Analysis, including in the Cautionary Statement on page 44. The forward-looking statements contained in this filing represent management’s current estimate as of the date of this filing. Management does not assume any obligation to update these estimates.

The following discussion addresses the financial condition of CIGNA as of March 31, 2007, compared with December 31, 2006, and its results of operations for the three months ended March 31, 2007, compared with the same period last year. This discussion should be read in conjunction with Management’s Discussion and Analysis included in CIGNA’s 2006 Annual Report to Shareholders and Form 10-K, to which the reader is directed for additional information.

The preparation of interim financial statements necessarily relies heavily on estimates. This and certain other factors, such as the seasonal nature of portions of the insurance business as well as competitive and other market conditions, call for caution in estimating full year results based on interim results of operations.

OVERVIEW

CIGNA Corporation and its subsidiaries constitute one of the largest investor-owned health care and related benefits organizations in the United States. Key product lines, offered through the workplace, include medical coverages and related specialty health care products and services such as pharmacy, behavioral health, dental benefits, and disease management; group disability, life and accident insurance; and disability and workers’ compensation case management and related services. In addition, CIGNA has an international operation that offers life, accident and supplemental health insurance products and international health care products and services to businesses and individuals in selected markets. CIGNA also has certain inactive businesses, including a run-off reinsurance operation.

CIGNA’s results are influenced by a range of economic and other factors, including:
 
·  
cost trends and inflation levels for medical and related services;
·  
patterns of utilization of medical and other services;
·  
employment levels;
·  
the tort liability system;
·  
interest rates and equity market returns;
·  
regulations and tax rules related to the provision and administration of employee benefit plans; and
 
 
22


·  
initiatives to increase health care regulation.
 
CIGNA generates revenues, net income and cash flow from operations by maintaining and growing its relationships with employers and consumers, charging prices that reflect emerging experience and investing available cash at attractive rates of return for appropriate durations. CIGNA's ability to increase operating results in terms of growth in revenues, net income and operating cash flow is directly related to its ability to execute plans that address broad economic factors as well as company-specific drivers.

Key company-specific drivers affecting CIGNA’s results include:

·  
competitiveness of CIGNA's product design and service quality;
·  
the absolute level of and trends in benefit costs;
·  
the volume of customers served and the mix of products and services purchased by those customers;
·  
the ability to price products and services competitively at levels that appropriately account for underlying cost inflation and utilization patterns;
·  
the relationship between administrative costs and revenue; and
·  
the ability to execute on key technology initiatives, particularly those related to enhancing and developing consumer-directed health plan products and the related service model, and successfully managing outsourcing arrangements with vendors, including International Business Machines Corporation (IBM) (see “Contractual Obligations” on page 50 in CIGNA's 2006 Annual Report to Shareholders).

CIGNA regularly monitors trends in the above mentioned economic and other factors and the company-specific drivers of operating results. CIGNA develops strategic and tactical plans designed to improve performance and maximize its competitive position in the markets it serves. CIGNA's ability to achieve its financial objectives is dependent upon its ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends.

CIGNA is focused on continuing to improve the performance of and profitably grow the health care operations; as well as continuing to profitably grow the disability and life insurance and international businesses; and managing the risks associated with the run-off reinsurance operations. In the health care operations, CIGNA has initiatives in place to: (1) offer products that meet emerging consumer and market trends; (2) strengthen underwriting and pricing effectiveness; (3) improve medical membership results; (4) improve medical cost trends; (5) deliver quality member service; and (6) lower administrative expenses (see pages 31-33 for further discussion).

CIGNA believes that the health care business model is evolving to one that focuses more directly on the role of the health care consumer. The consumer-directed environment presents particular challenges by requiring a more complex service model and products specifically designed to meet the emerging market needs. In order to meet the emerging market challenges, CIGNA is investing in product development, service, technology, educational resources and customer support tools to assist consumers in making more informed choices regarding their health care and to achieve better health outcomes.  CIGNA believes that its investments in these areas will position it more effectively to meet this emerging market need.

CIGNA's disability and life insurance operations continue to focus on profitable growth in the disability business in both the middle market and national accounts. The international business is focused on profitable growth particularly in the life, accident and supplemental health insurance and international health care benefits businesses.

In the run-off reinsurance operations, CIGNA maintains a program to reduce the equity market risk associated with its guaranteed minimum death benefit reinsurance exposures. CIGNA is also pursuing the resolution of disputes associated with workers’ compensation and other reinsurance contracts through audits of claims from assumed business and managing collections from retrocessionaires, including issues relating to contract terms and coverage (see page 36 for further discussion).
 

 
23


CONSOLIDATED RESULTS OF OPERATIONS
           
FINANCIAL SUMMARY
 
Three Months
 
 
 
Ended
 
 
 
March 31,
 
(In millions)
 
2007
 
2006
 
Premiums and fees
 
$
3,708
 
$
3,268
 
Net investment income
   
280
   
329
 
Other revenues
   
365
   
366
 
Realized investment gains
   
21
   
144
 
Total revenues
   
4,374
   
4,107
 
Benefits and expenses
   
3,961
   
3,579
 
Income from continuing
             
    operations before taxes
   
413
   
528
 
Income taxes
   
136
   
176
 
Income from continuing
             
    operations
   
277
   
352
 
Income from discontinued
             
    operations, net of taxes
   
12
   
-
 
Net income
 
$
289
 
$
352
 
Realized investment gains,
             
    net of taxes
 
$
13
 
$
94
 
 
Income from continuing operations for the first three months of 2007, compared with the first three months of 2006, reflects:

 ·  lower realized gains from the sales of investments (see Note 9 to the Financial Statements);
 ·  lower net investment income primarily due to the impact of share repurchase activity (see page 37); and
 ·  higher earnings in the Health Care segment (see page 29).
  
Premiums and fees for the first three months of 2007, compared with the first three months of 2006, reflect:

 · higher premiums and fees in the Health Care segment (see page 29) due to medical membership growth, rate increases and higher Medicare Part D premiums; and
 · higher premiums and fees in the Disability and Life segment (see page 33) and in the International segment (see page 34) due to business growth.
   
Benefits and expenses for the first three months of 2007, compared with the first three months of 2006, reflect:

 · higher medical claims expense in the Health Care segment (see page 29); and
 · higher benefits expense in the International segment due to overall business growth, as well as higher loss ratios in the expatriate employee benefits business.
     
Outlook for 2007

CIGNA expects full year 2007 income from continuing operations, excluding realized investment results and special items, to be slightly lower than the comparable 2006 amount, which included $54 million of favorable prior year claim development. Excluding the favorable prior year claim development in 2006, CIGNA expects full year 2007 income from continuing operations, excluding realized investment results and special items, to increase modestly from 2006 primarily due to strong growth in the health care operations and the disability and life insurance and international businesses, partially offset by lower earnings in the run-off businesses and Corporate. Corporate losses are expected to be higher due to the absence of favorable expense and tax items that occurred in 2006. CIGNA's outlook is subject to the factors cited in the Cautionary Statement on page 44.
 
Management is not able to estimate 2007 income from continuing operations under generally accepted accounting principles because it includes realized investment gains (losses) and special items. Information is not available for management to reasonably estimate future realized investment gains (losses) due, in part, to interest rate and stock market volatility and other internal and external factors. Information is not available for management to identify or reasonably estimate 2007 special items.

There were no special items noted for the three months ended March 31, 2007 or 2006.
 
24


Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if:

·  
it requires assumptions to be made that were uncertain at the time the estimate was made; and
·  
changes in the estimate or different estimates that could have been selected could have a material impact on CIGNA’s consolidated results of operations or financial condition.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of CIGNA’s Board of Directors.

CIGNA’s most critical accounting estimates, as well as the effects of hypothetical changes in material assumptions used to develop each estimate, are described in CIGNA’s 2006 Annual Report to Shareholders beginning on page 29 and are as follows:

·  
future policy benefits - guarantee