Edgar Filing: CIGNA CORP

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

o 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 of incorporation or organization)		(I.R.S. Employer Identification No.)
900 Cottage Grove Road Bloomfield, Connecticut		06002
(Address of principal executive offices)		(Zip Code)
(860) 226-6000
Registrant’s telephone number, including area code
(860) 226-6741
Registrant’s facsimile number, including area code
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark				YES	NO
· 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.				R	o
· whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).				R	o
· 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 R	Accelerated filer o	Non-accelerated filer o	Smaller Reporting Company o
· whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).				o	R

As of October 15, 2012, 285,890,413 shares of the issuer’s common stock were outstanding.

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Cigna Corporation

INDEX

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Statements of Income	1
	Consolidated Statements of Comprehensive Income	2
	Consolidated Balance Sheets	3
	Consolidated Statements of Changes in Total Equity	4
	Consolidated Statements of Cash Flows	6
	Notes to the Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	85
Item 4.	Controls and Procedures	86


PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	87
Item 1.A.	Risk Factors	88
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	89
Item 6.	Exhibits	90
SIGNATURE		91
INDEX TO EXHIBITS		E-1

As used herein, “Cigna” or the “Company” refers to one or more of Cigna Corporation and its consolidated subsidiaries.

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Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Cigna Corporation

Consolidated Statements of Income

	Unaudited				Unaudited
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions, except per share amounts)	2012		2011		2012		2011
Revenues
Premiums and fees	$	6,637	$	4,748	$	19,464	$	14,267
Net investment income	283		297		854		860
Mail order pharmacy revenues	401		368		1,189		1,056
Other revenues	26		184		76		289
Realized investment gains (losses):
Other-than-temporary impairments on fixed maturities, net	-		(23)		(6)		(25)
Other realized investment gains	11		36		26		81
Total realized investment gains	11		13		20		56
Total revenues	7,358		5,610		21,603		16,528
Benefits and Expenses
Health Care medical claims expense	3,269		2,014		9,711		6,125
Other benefit expenses	1,203		1,272		3,521		3,324
Mail order pharmacy cost of goods sold	324		309		975		874
GMIB fair value (gain) loss	(53)		224		(33)		245
Other operating expenses	1,897		1,518		5,571		4,516
Total benefits and expenses	6,640		5,337		19,745		15,084
Income before Income Taxes	718		273		1,858		1,444
Income taxes:
Current	228		114		574		274
Deferred	24		(24)		67		182
Total income taxes	252		90		641		456
Net Income	466		183		1,217		988
Less: Net Income Attributable to Noncontrolling Interest	-		-		-		1
Shareholders’ Net Income	$	466	$	183	$	1,217	$	987
Shareholders’ Net Income Per Share:
Basic	$	1.64	$	0.68	$	4.27	$	3.67
Diluted	$	1.61	$	0.67	$	4.20	$	3.62
Dividends Declared Per Share	$	-	$	-	$	0.04	$	0.04

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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Cigna Corporation

Consolidated Statements of Comprehensive Income

	Unaudited				Unaudited
	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions, except per share amounts)	2012		2011		2012		2011
Shareholders’ net income	$	466	$	183	$	1,217	$	987
Shareholders’ other comprehensive income (loss):
Net unrealized appreciation on securities:
Fixed maturities	83		94		169		175
Equity securities	-		(3)		2		(3)
Net unrealized appreciation on securities	83		91		171		172
Net unrealized appreciation (depreciation), derivatives	(4)		13		(4)		3
Net translation of foreign currencies	31		(95)		23		(7)
Postretirement benefits liability adjustment	8		4		44		13
Shareholders’ other comprehensive income	118		13		234		181
Shareholders’ comprehensive income	584		196		1,451		1,168
Comprehensive income attributable to noncontrolling interest:
Net income attributable to noncontrolling interest	-		-		-		1
Total comprehensive income	$	584	$	196	$	1,451	$	1,169

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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Cigna Corporation

Consolidated Balance Sheets

(In millions, except per share amounts)	Unaudited As of September 30, 2012				As of December 31, 2011
Assets
Investments:
Fixed maturities, at fair value (amortized cost, $15,577; $14,257)			$	17,868			$	16,217
Equity securities, at fair value (cost, $121; $124)			109				100
Commercial mortgage loans			2,946				3,301
Policy loans			1,519				1,502
Real estate			83				87
Other long-term investments			1,197				1,058
Short-term investments			151				225
Total investments			23,873				22,490
Cash and cash equivalents			2,236				4,690
Accrued investment income			283				252
Premiums, accounts and notes receivable, net			1,714				1,358
Reinsurance recoverables			6,391				6,256
Deferred policy acquisition costs			1,022				817
Property and equipment			1,136				1,024
Deferred income taxes, net			407				803
Goodwill			5,878				3,164
Other assets, including other intangibles			2,229				1,750
Separate account assets			8,362				8,093
Total assets			$	53,531			$	50,697
Liabilities
Contractholder deposit funds			$	8,537			$	8,553
Future policy benefits			9,209				8,593
Unpaid claims and claim expenses			4,253				4,146
Health Care medical claims payable			1,581				1,095
Unearned premiums and fees			474				502
Total insurance and contractholder liabilities			24,054				22,889
Accounts payable, accrued expenses and other liabilities			6,373				6,627
Short-term debt			226				104
Long-term debt			4,986				4,990
Separate account liabilities			8,362				8,093
Total liabilities			44,001				42,703
Contingencies — Note 18
Shareholders’ Equity
Common stock (par value per share, $0.25; shares issued, 366; authorized, 600)			92				92
Additional paid-in capital			3,282				3,188
Net unrealized appreciation, fixed maturities	$	908			$	739
Net unrealized appreciation, equity securities	3				1
Net unrealized depreciation, derivatives	(27)				(23)
Net translation of foreign currencies	26				3
Postretirement benefits liability adjustment	(1,463)				(1,507)
Accumulated other comprehensive loss			(553)				(787)
Retained earnings			11,962				10,787
Less treasury stock, at cost			(5,253)				(5,286)
Total shareholders’ equity			9,530				7,994
Total liabilities and shareholders’ equity			$	53,531			$	50,697
Shareholders’ Equity Per Share			$	33.24			$	28.00

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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Cigna Corporation

Consolidated Statements of Changes in Total Equity

					Accumulated
Unaudited			Additional		Other
For the three months ended September 30, 2012	Common		Paid-in		Comprehensive		Retained		Treasury		Shareholders’		Noncontrolling		Total
(In millions, except per share amounts)	Stock		Capital		Loss		Earnings		Stock		Equity		Interest		Equity

Balance at July 1, 2012, as retrospectively adjusted	$	92	$	3,276	$	(671)	$	11,501	$	(5,176)	$	9,022	$	-	$	9,022
Effect of issuing stock for employee benefit plans			6				(5)		8		9				9
Other comprehensive income					118						118				118
Net income							466				466		-		466
Repurchase of common stock									(85)		(85)				(85)
Balance at September 30, 2012	$	92	$	3,282	$	(553)	$	11,962	$	(5,253)	$	9,530	$	-	$	9,530

For the three months ended September 30, 2011 (In millions, except per share amounts)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Shareholders’ Equity		Noncontrolling Interest		Total Equity
Balance at July 1, 2011, as retrospectively adjusted	$	88	$	2,556	$	(446)	$	10,336	$	(5,318)	$	7,216	$	-	$	7,216
Effect of issuing stock for employee benefit plans			5				(3)		16		18				18
Other comprehensive income					13						13				13
Net income							183				183		-		183
Balance at September 30, 2011	$	88	$	2,561	$	(433)	$	10,516	$	(5,302)	$	7,430	$	-	$	7,430

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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Cigna Corporation

Consolidated Statements of Changes in Total Equity

Unaudited For the nine months ended September 30, 2012 (In millions, except per share amounts)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Shareholders’ Equity		Noncontrolling Interest		Total Equity
Balance at January 1, 2012, as retrospectively adjusted	$	92	$	3,188	$	(787)	$	10,787	$	(5,286)	$	7,994	$	-	$	7,994
Effect of issuing stock for employee benefit plans			94				(31)		118		181				181
Other comprehensive income					234						234				234
Net income							1,217				1,217		-		1,217
Common dividends declared (per share: $0.04)							(11)				(11)				(11)
Repurchase of common stock							-		(85)		(85)				(85)
Balance at September 30, 2012	$	92	$	3,282	$	(553)	$	11,962	$	(5,253)	$	9,530	$	-	$	9,530

For the nine months ended September 30, 2011 (In millions, except per share amounts)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Retained Earnings		Treasury Stock		Shareholders’ Equity		Noncontrolling Interest		Total Equity
Balance at January 1, 2011, as previously reported	$	88	$	2,534	$	(614)	$	9,879	$	(5,242)	$	6,645	$	18	$	6,663
Cumulative effect of amended accounting guidance for deferred policy acquisition costs							(289)				(289)				(289)
Balance at January 1, 2011, as retrospectively adjusted	88		2,534		(614)		9,590		(5,242)		6,356		18		6,374
Effect of issuing stock for employee benefit plans			23				(50)		165		138				138
Effect of acquiring noncontrolling interest			4								4		(19)		(15)
Other comprehensive income					181						181				181
Net income							987				987		1		988
Common dividends declared (per share: $0.04)							(11)				(11)				(11)
Repurchase of common stock									(225)		(225)				(225)
Balance at September 30, 2011	$	88	$	2,561	$	(433)	$	10,516	$	(5,302)	$	7,430	$	-	$	7,430

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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Cigna Corporation

Consolidated Statements of Cash Flows

	Unaudited
	Nine Months Ended September 30,
(In millions)	2012		2011
Cash Flows from Operating Activities
Net income	$	1,217	$	988
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	406		252
Realized investment gains	(20)		(56)
Deferred income taxes	67		182
Gains on sale of businesses (excluding discontinued operations)	(14)		(20)
Net changes in assets and liabilities, net of non-operating effects:
Premiums, accounts and notes receivable	(20)		(133)
Reinsurance recoverables	50		8
Deferred policy acquisition costs	(106)		(106)
Other assets	166		(292)
Insurance liabilities	75		380
Accounts payable, accrued expenses and other liabilities	(394)		293
Current income taxes	141		(202)
Other, net	(11)		(51)
Net cash provided by operating activities	1,557		1,243
Cash Flows from Investing Activities
Proceeds from investments sold:
Fixed maturities	439		452
Equity securities	8		5
Commercial mortgage loans	325		166
Other (primarily short-term and other long-term investments)	649		999
Investment maturities and repayments:
Fixed maturities	1,030		943
Commercial mortgage loans	311		274
Investments purchased:
Fixed maturities	(1,907)		(2,309)
Equity securities	(8)		(18)
Commercial mortgage loans	(314)		(279)
Other (primarily short-term and other long-term investments)	(600)		(1,169)
Property and equipment purchases	(329)		(291)
Acquisitions and dispositions, net of cash acquired	(3,468)		1
Net cash used in investing activities	(3,864)		(1,226)
Cash Flows from Financing Activities
Deposits and interest credited to contractholder deposit funds	999		1,002
Withdrawals and benefit payments from contractholder deposit funds	(927)		(895)
Change in cash overdraft position	19		(57)
Net change in short-term debt	123		(222)
Issuance of long-term debt	-		587
Repayment of long-term debt	(326)		(2)
Repurchase of common stock	(85)		(225)
Issuance of common stock	58		100
Common dividends paid	(11)		(11)
Net cash (used in) / provided by financing activities	(150)		277
Effect of foreign currency rate changes on cash and cash equivalents	3		3
Net (decrease) / increase in cash and cash equivalents	(2,454)		297
Cash and cash equivalents, January 1,	4,690		1,605
Cash and cash equivalents, September 30,	$	2,236	$	1,902
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds	$	414	$	466
Interest paid	$	186	$	124

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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CIGNA CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 Basis of Presentation

Cigna Corporation is a holding company and is not an insurance company. Its subsidiaries conduct various businesses that are described in its Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”). As used in this document, “Cigna” or “the Company” may refer to Cigna Corporation itself, one or more of its subsidiaries, or Cigna Corporation and its consolidated subsidiaries. The Consolidated Financial Statements include the accounts of Cigna Corporation and its significant subsidiaries. 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 Company is a global health services organization dedicated to helping its customers improve their health, well-being and sense of security. Its insurance subsidiaries are major providers of medical, dental, disability, life and accident insurance and related products and services, the majority of which are offered through employers and other groups (e.g. governmental and non-governmental organizations, unions and associations). Cigna also offers Medicare and Medicaid products and health, life and accident insurance coverages primarily to individuals in the U.S. and selected international markets. In addition to its ongoing operations described above, the Company also has certain run-off operations, including a Run-off Reinsurance segment.

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 2011 Form 10-K filed on February 27, 2012 and as updated by Cigna’s Current Report on Form 8-K filed on August 8, 2012 (collectively, the “2011 Annual Report”).

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 current presentation.

As explained further in Note 3, on August 31, 2012, the Company acquired Great American Supplemental Benefits Group for approximately $310 million, and on January 31, 2012, the Company acquired HealthSpring, Inc. for approximately $3.8 billion.

Note 2 Recent Accounting Pronouncements

Fees Paid to the Federal Government by Health Insurers (Accounting Standards Update (“ASU”) 2011-06) In 2011, the Financial Accounting Standards Board (“FASB”) issued accounting guidance for the health insurance industry assessment (the “fee”) mandated by the Patient Protection and Affordable Care Act of 2010 (“Health Care Reform”). The fee will be levied on health insurers beginning in 2014 based on a ratio of an insurer’s net health insurance premiums written for the previous calendar year compared to the U.S. health insurance industry total. In addition, because these fees will generally not be tax deductible, the Company’s effective tax rate is expected to be adversely impacted in future periods. Under the guidance, the liability for the fee will be estimated and recorded in full each year beginning in 2014 when health insurance is first provided. A corresponding deferred cost will be recorded and amortized over the calendar year. The amount of the fees is expected to be material, although the Company is unable to estimate the impact of these fees on shareholders’ net income and the effective tax rate because guidance for these calculations has not been finalized.

Deferred policy acquisition costs. Effective January 1, 2012, the Company adopted the FASB’s amended guidance (ASU 2010-26) on accounting for costs to acquire or renew insurance contracts. This guidance requires certain sales compensation and telemarketing costs related to unsuccessful efforts and any indirect costs to be expensed as incurred. The Company’s deferred acquisition costs arise from sales and renewal activities primarily in its supplemental health, life and accident business reported in the International segment. This amended guidance was implemented through retrospective adjustment of comparative prior periods. As reported in the Consolidated Statement of Equity, the cumulative effect of adopting the amended accounting guidance as of January 1, 2011 was a reduction in Total Shareholders’ Equity of $289 million. Full-year 2011 shareholders’ net income on a retrospectively adjusted basis was reduced by $67 million, partially offset by increased foreign currency translation of $6 million, resulting in a cumulative impact on Total Shareholders’ Equity as of December 31, 2011 of $350 million. Summarized below are the effects of the amended guidance on previously reported amounts for the three months and nine months ended September 30, 2011. This implementation had no impact on the underlying economic value or cash flows of the Company’s businesses, nor did it impact the Company’s liquidity or the statutory surplus of its insurance subsidiaries.

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Condensed Consolidated Statement of Income

Three Months Ended September 30, 2011

	As previously		Effect of amended		As retrospectively
(in millions)	reported		accounting guidance		adjusted
Revenues, excluding other revenues	$	5,426	$		$	5,426
Other revenues	187		(3)		184
Total revenues	5,613		(3)		5,610
Benefits and expenses, excluding other operating expenses	3,819				3,819
Other operating expenses	1,497		21		1,518
Total benefits and expenses	5,316		21		5,337
Income before income taxes	297		(24)		273
Current income taxes	114				114
Deferred income taxes	(17)		(7)		(24)
Total taxes	97		(7)		90
Net income	200		(17)		183
Less: net income attributable to noncontrolling interest	-				-
Shareholders’ Net Income	$	200	$	(17)	$	183
Earnings per share:
Basic	$	0.74	$	(0.06)	$	0.68
Diluted	$	0.74	$	(0.07)	$	0.67

Condensed Consolidated Statement of Income

Nine Months Ended September 30, 2011

	As previously		Effect of amended		As retrospectively
(in millions)	reported		accounting guidance		adjusted
Revenues, excluding other revenues	$	16,239	$		$	16,239
Other revenues	296		(7)		289
Total revenues	16,535		(7)		16,528
Benefits and expenses, excluding other operating expenses	10,568				10,568
Other operating expenses	4,454		62		4,516
Total benefits and expenses	15,022		62		15,084
Income before income taxes	1,513		(69)		1,444
Current income taxes	274				274
Deferred income taxes	201		(19)		182
Total taxes	475		(19)		456
Net income	1,038		(50)		988
Less: net income attributable to noncontrolling interest	1				1
Shareholders’ Net Income	$	1,037	$	(50)	$	987
Earnings per share:
Basic	$	3.85	$	(0.18)	$	3.67
Diluted	$	3.80	$	(0.18)	$	3.62

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Condensed Consolidated Balance sheet

As of December 31, 2011

	As previously		Effect of amended		As retrospectively
(in millions)	reported		accounting guidance		adjusted
Deferred policy acquisition costs	$	1,312	$	(495)	$	817
Deferred income taxes, net	632		171		803
Other assets, including other intangibles	1,776		(26)		1,750
All other assets	47,327				47,327
Total assets	$	51,047	$	(350)	$	50,697
Net translation of foreign currencies	$	(3)	$	6	$	3
Retained earnings	11,143		(356)		10,787
Other shareholders’ equity	(2,796)				(2,796)
Total shareholders’ equity	$	8,344	$	(350)	$	7,994

Condensed Consolidated Statement of Cash Flows

Nine Months Ended September 30, 2011

	As previously		Effect of amended		As retrospectively
(in millions)	reported		accounting guidance		adjusted
Net income	$	1,038	$	(50)	$	988
Deferred income taxes	201		(19)		182
Deferred policy acquisition expenses	(168)		62		(106)
Other assets	(299)		7		(292)

Note 16

Segment information: International

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
(in millions)	As previously reported		Effect of amended accounting guidance		As retrospectively adjusted		As previously reported		Effect of amended accounting guidance		As retrospectively adjusted
Premiums and fees and other revenues	$	771	$	(3)	$	768	$	2,219	$	(7)	$	2,212
Segment earnings	79		(17)		62		230		(50)		180

Presentation of Comprehensive Income. Effective January 1, 2012, the Company adopted the FASB’s amended guidance (ASU 2011-05) that requires presenting net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive statements. Neither measurement of comprehensive income nor disclosure requirements for reclassification adjustments between other comprehensive income and net income were affected by this amended guidance. The Company has elected to present a separate statement of comprehensive income following the statement of income and has retrospectively adjusted prior periods to conform to the new presentation, as required.

Amendments to Fair Value Measurement and Disclosure. Effective January 1, 2012, the Company adopted the FASB’s amended guidance on fair value measurement and disclosure (ASU 2011-04) on a prospective basis. A key objective was to achieve common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. The amended guidance changes certain fair value measurement principles and expands required disclosures to include quantitative and qualitative information about unobservable inputs in Level 3 measurements and leveling for financial instruments not carried at fair value in the financial statements. Upon adoption, there were no effects on the Company’s fair value measurements. See Note 8 for expanded fair value disclosures.

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Note 3 Acquisitions

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

A. Joint Venture Agreement with Finansbank

During the fourth quarter of 2012, subject to regulatory approval, the Company expects to acquire 51% of the total issued and outstanding shares of Finans Emeklilik ve Hayat A.S (“Finans Emeklilik”) from Finansbank A.S. (“Finansbank”), a Turkish retail bank, for a purchase price of €85 million, or approximately $110 million. Finansbank would continue to hold 49% of the total issued and outstanding shares. Finans Emeklilik operates in life insurance, accident insurance and pension product markets. The transaction is expected to be financed with internal cash resources. The acquisition will provide Cigna opportunities to reach and serve the growing middle class market in Turkey through Finansbank’s network of retail banking branches.

B. Acquisition of Great American Supplemental Benefits Group

On August 31, 2012, the Company acquired Great American Supplemental Benefits Group, one of the largest providers of supplemental health insurance products in the U.S., for approximately $310 million in cash from internal resources. The acquisition provides the Company with an increased presence in the Medicare supplemental benefits market. It also extends the Company’s global direct-to-consumer retail channel as well as further enhances its distribution network of agents and brokers. Results of this business are reported in the supplemental health, life and accident business included in the International segment.

In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair value and may change as additional information becomes available over the next several months. Accordingly, approximately $95 million was allocated to intangible assets, primarily the value of business acquired (“VOBA”) that represents the present value of the estimated net cash flows from the long duration contracts in force. The VOBA asset will be amortized in proportion to premium recognized over the life of the contracts that is estimated to be 30 years. Amortization of the VOBA asset is expected to be higher in early years and decline as policies lapse. Goodwill has been provisionally allocated to the International segment; it has not yet been allocated to a reporting unit as of September 30, 2012. Substantially all of the goodwill is tax deductible and will be amortized over the next 15 years for federal income tax purposes.

The condensed balance sheet at the acquisition date was as follows:

(In millions)
Investments	$	211
Cash and cash equivalents		36
Reinsurance recoverables		448
Goodwill		161
Value of business acquired (reported in Deferred policy acquisition costs in Consolidated Balance Sheet)		71
Other assets, including other intangibles		36
Total assets acquired		963
Insurance liabilities		634
Accounts payable, accrued expenses and other liabilities		22
Total liabilities acquired		656
Net assets acquired	$	307

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The results of Great American Supplemental Benefits have been included in the Company’s Consolidated Financial Statements from the date of acquisition and were not considered material to the Company’s consolidated results of operations. The pro forma effect on total revenues and net income assuming the acquisition had occurred as of January 1, 2011 is not presented as they were not material to the Company’s total revenues or shareholders’ net income for the three months and nine months ended September 30, 2012 and 2011.

C. Acquisition of HealthSpring, Inc.

On January 31, 2012 the Company acquired the outstanding shares of HealthSpring, Inc. (“HealthSpring”) for $55 per share in cash and Cigna stock awards, representing a cost of approximately $3.8 billion. HealthSpring provides Medicare Advantage coverage in 11 states and the District of Columbia, as well as a large, national stand-alone Medicare prescription drug business. The acquisition of HealthSpring strengthens the Company’s ability to serve individuals across their life stages as well as deepens its presence in a number of geographic markets. The addition of HealthSpring brings industry leading physician partnership capabilities and creates the opportunity to deepen the Company’s existing client and customer relationships, as well as facilitates a broader deployment of its range of health and wellness capabilities and product offerings. The Company funded the acquisition with internal cash resources.

Merger consideration: The estimated merger consideration of $3.8 billion was calculated as follows:

(In millions, except per share amounts)
HealthSpring, Inc. common shares outstanding at January 30, 2012	67.8
Less: common shares outstanding not settled in cash	(0.1)
Common shares settled in cash	67.7
Price per share	$	55
Cash consideration for outstanding shares	$	3,725
Fair value of share-based compensation awards	65
Additional cash and equity consideration	21
Total merger consideration	$	3,811

Fair value of share-based compensation awards. On the date of the acquisition, HealthSpring employees’ awards of options and restricted shares of HealthSpring stock were rolled over to Cigna stock options and restricted stock. Each holder of a HealthSpring stock option or restricted stock award received 1.24 Cigna stock options or restricted stock awards. The conversion ratio of 1.24 at the date of acquisition was determined by dividing the acquisition price of HealthSpring shares of $55 per share by the price of Cigna stock on January 31, 2012 of $44.43. The Cigna stock option exercise price was determined by using this same conversion ratio. Vesting periods and the remaining life of the options rolled over with the original HealthSpring awards.

Using fair value as of the acquisition date, the Company valued the restricted stock at Cigna’s stock price and stock options using a Black-Scholes pricing model. The assumptions used were generally consistent with those disclosed in Note 20 to the Company’s 2011 Consolidated Financial Statements included in the 2011 Annual Report, except the expected life assumption of these options ranged from 1.8 to 4.8 years and the exercise price did not equal the market value at the grant date. Because the exercise price at the acquisition date for substantially all of the options was significantly below Cigna’s stock price, fair value of the new stock options approximated intrinsic value.

The fair value of these options and restricted stock was included in the purchase price to the extent that services had been provided prior to the acquisition based on the grant date of the original HealthSpring awards and vesting periods. The remaining fair value not included in the purchase price will be recorded as compensation expense in future periods over the remaining vesting periods. Most of the expense is expected to be recognized in 2012 and 2013.

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The following table summarizes the effect of these rollover awards for former HealthSpring employees.

	Number of	Average exercise/		Fair value		Included in		Compensation expense
(Awards in thousands, dollars in millions, except per share amounts)	awards	award price		of awards		purchase price		post-acquisition
Vested options	589	$	14.04	$	18	$	18	$	-
Unvested options	1,336	$	16.21	37		28		9
Restricted stock	786	$	44.43	35		19		16
Total	2,711			$	90	$	65	$	25

Purchase price allocation. In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s preliminary estimates of their fair values and may change as additional information becomes available over the next several months. Goodwill has been allocated to the Medicare operating segment as of September 30, 2012 and is not deductible for federal income tax purposes. During the nine months ended September 30, 2012, the Company recorded $53 million pre-tax ($40 million after-tax) of acquisition-related costs in other operating expenses. The condensed balance sheet of HealthSpring at the acquisition date was as follows:

(In millions)
Investments	$	612
Cash and cash equivalents	492
Premiums, accounts and notes receivable	320
Goodwill	2,545
Intangible assets	795
Other	91
Total assets acquired	4,855
Insurance liabilities	505
Deferred income taxes	213
Debt	326
Total liabilities acquired	1,044
Net assets acquired	$	3,811

In accordance with debt covenants, HealthSpring’s debt obligation was paid immediately following the acquisition. This repayment is reported as a financing activity in the statement of cash flows for the nine months ended September 30, 2012.

The estimated fair values and useful lives for all intangible assets are as follows:

(Dollars in millions)	Estimated Fair Value		Estimated Useful Life (In Years)
Customer relationships	$	711	8
Other	84		3-10
Total other intangible assets	$	795

The fair value of the customer relationship and the amortization method were determined using an income approach that relies on projected future net cash flows including key assumptions for the customer attrition rate and discount rate. The estimated weighted average useful life reflects the time period and pattern of use that Cigna expects for over 90% of the projected benefits. Accordingly, amortization will be recorded on an accelerated basis in 2012 and decline in subsequent years.

The results of HealthSpring have been included in the Company’s Consolidated Financial Statements from the date of the acquisition. Revenues of HealthSpring included in the Company’s results for the nine months ended September 30, 2012 were approximately $4.0 billion.

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Pro forma information. The following table presents selected unaudited pro forma information for the Company assuming the acquisition of HealthSpring had occurred as of January 1, 2011. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

	Three Months Ended		Nine Months Ended September 30,
(In millions, except per share amounts)	September 30, 2011		2012		2011
Total revenues	$	6,940	$	22,092	$	20,639
Shareholders’ net income	$	229	$	1,227	$	1,096
Earnings per share:
Basic	$	0.80	$	4.30	$	3.84
Diluted	$	0.79	$	4.23	$	3.78

D. Acquisition of FirstAssist

In November 2011, the Company acquired FirstAssist Group Holdings Limited (“FirstAssist”) for approximately $115 million, which was financed with cash. FirstAssist is based in the United Kingdom and provides travel and protection insurance services that the Company expects will enhance its individual business in the U.K. and around the world.

In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on management’s estimates of their fair values. During 2012, the Company updated its allocation of the purchase price based on additional information. Accordingly, the allocation to intangible assets was decreased by $18 million from $58 million reported at December 31, 2011 to $40 million. The allocation to goodwill was increased by $8 million from $56 million reported at December 31, 2011 to $64 million. Goodwill is reported in the International segment.

The results of FirstAssist are included in the Company’s Consolidated Financial Statements from the date of acquisition. The pro forma effects assuming the acquisition had occurred as of January 1, 2010 were not material to the Company’s total revenues, shareholders’ net income and earnings per share for the three months and nine months ended September 30, 2011.

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Note 4 Earnings Per Share (“EPS”)

Basic and diluted earnings per share were computed as follows:

			Effect of
(Dollars in millions, except per share amounts)	Basic		Dilution		Diluted
Three Months Ended September 30,
2012
Shareholders’ net income	$	466			$	466
Shares (in thousands):
Weighted average	284,891				284,891
Common stock equivalents			4,984		4,984
Total shares	284,891		4,984		289,875
EPS	$	1.64	$	(0.03)	$	1.61
2011
Shareholders’ net income	$	183			$	183
Shares (in thousands):
Weighted average	268,569				268,569
Common stock equivalents			3,491		3,491
Total shares	268,569		3,491		272,060
EPS	$	0.68	$	(0.01)	$	0.67

			Effect of
(Dollars in millions, except per share amounts)	Basic		Dilution		Diluted
Nine Months Ended September 30,
2012
Shareholders’ net income	$	1,217			$	1,217
Shares (in thousands):
Weighted average	285,247				285,247
Common stock equivalents			4,560		4,560
Total shares	285,247		4,560		289,807
EPS	$	4.27	$	(0.07)	$	4.20
2011
Shareholders’ net income	$	987			$	987
Shares (in thousands):
Weighted average	269,163				269,163
Common stock equivalents			3,721		3,721
Total shares	269,163		3,721		272,884
EPS	$	3.67	$	(0.05)	$	3.62

In 2012, the Company adopted, as required, amended accounting guidance for deferred acquisition costs by selecting retrospective adjustment of prior periods. See Note 2 for the effect of this new guidance on previously reported EPS amounts.

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		Nine Months Ended
	September 30,		September 30,
(In millions)	2012	2011	2012	2011
Antidilutive options	3.9	3.9	3.4	3.6

The Company held 79,439,106 shares of common stock in Treasury as of September 30, 2012, and 80,697,257 shares as of September 30, 2011.

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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 that have been reported but not yet paid (reported claims in process) and other medical expense payable, that primarily comprises accruals for incentives and other amounts payable to health care professionals and facilities. Incurred but not yet reported is the majority of the reserve balance as follows:

	September 30,		December 31,
(In millions)	2012		2011
Incurred but not yet reported	$	1,372	$	952
Reported claims in process	132		129
Physician incentives and other medical expense payable	77		14
Medical claims payable	$	1,581	$	1,095

Activity in medical claims payable was as follows:

	For the period ended
	September 30,		December 31,
(In millions)	2012		2011
Balance at January 1,	$	1,095	$	1,246
Less: Reinsurance and other amounts recoverable	194		236
Balance at January 1, net	901		1,010
Acquired HealthSpring balances, net	504		-
Incurred claims related to: